Mobile Wallets: Driving “at scale” adoption Lessons from ...
Transcript of Mobile Wallets: Driving “at scale” adoption Lessons from ...
Discussion Document | September 07, 2021
Mobile Wallets: Driving “at scale” adoption -
Lessons from China and Sweden
NATIONAL CONSULTATION ON “FRONTIER TECHNOLOGY POLICY EXPERIMENTATION AND
REGULATORY SANDBOXES FOR SUSTAINABLE DEVELOPMENT” FOR THE MALDIVES
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of McKinsey & Company is strictly prohibited
2McKinsey & Company
Context and objectives of the document
▪ This document briefly describes and contrasts how mobile
wallet adoption has rapidly accelerated in two different
markets – China and Sweden
▪ Initial growth in China occurred largely in the absence of
regulations with the regulator putting guidelines in place in
2017 well after the market had already taken off
– Growth led by 3rd party ecosystem players, with banks
taking a back seat
– QR the preferred form factor
– Digital payments stand alone remains loss making even
for very large players
– Monetization is done through a combination of financial
services and analytics services
▪ In contrast, in Sweden, the growth was led by a bank led
consortium Swish with a limited role played by Fintech’s
▪ As Maldives looks to accelerate adoption of mobile payments
and reduce cash usage, it will need to consider the
appropriate regulatory framework and potential
economics for key stakeholders
3McKinsey & Company
Contents
The China experience
The Sweden experience
Key considerations for Maldives
4McKinsey & Company
The China experience – Key Messages
▪ China third party payment players account for nearly half of the total retail payment volume – the
market is a clear duopoly between Alipay and WeChat Pay. Limited number of small players do
exist, which differentiate by building their niche in product offerings
▪ Both players adopted a largely similar journey to growth
– Leveraged large customer base and built capabilities outside of their core business – turning
into ecosystem players
– Entered payments business to make payments easy for their existing customers – a critical
success factor for their business model
– Followed up by rapid expansion through inclusion of multiple use cases e.g. mobility, red
envelope, telephone top ups, QR code payments etc.
– Used payments as a loss leader and offered additional services to further monetize the large
customer base, e.g. unsecured loan by Webank, consumer credit bureaus e.g. Zhima credit by Ali
▪ Achieved rapid growth owing to 5 factors – some of which are unique to China
▪ With the increasing penetration by third party players, regulators now casting more and more control
over the third-party payments market
– Payments regulation getting tighter and weeding out non-compliant small players
– Ensuring visibility of online transactions e.g. establishment of Nets Union as a central clearing
house for online payments
– Scope of payments regulation also becoming wider, expanding from license compliance to multiple
fields
1
2
3
4
5McKinsey & Company
Growth of third party players was driven by 5 reasons, some of which are unique to China3
Late mover
advantage
▪ China was overwhelmingly cash- based until the early 2000’s and
e-payments only took off with increasing penetration of the internet on mobile – leading
to leap frog from cash to digital
Platform play – building
a one stop shop
and its existing
high penetration
▪ Alibaba & Tencent ecosystems play offers a one stop shop and is critically enabled by
payments, also allowing cross-subsidizing (e.g. simultaneous scale-up of mobile payments
and the taxi-app wars)
▪ Alipay and Wechatpay leveraged their existing large customer base on their ecosystems
to scale up
Reason Details
Unique
infrastructure
▪ Quick onboarding of customers by linking of bank accounts and easy pull out of money
into the wallet enabled by -
– High penetration of debit cards (3.6 per person)
– Strict ID, phone number verification performed by banks and not the payment players
Adoption of
technology
advancements
▪ Adoption of technologies e.g. QR code and multiple innovations helped the Chinese players
to offer very high convenience compared to bank cards and cash
▪ QR codes also superior to NFC enabled payment methods
▪ Fee structure in China is low and closer to cash, hence enabling high adoption with
increase in convenience through mobile walletsFee structure
6McKinsey & Company
Adoption of QR code technology greatly increased the ease of transactions over traditional cards3
Prior to the rise of third-
party payment, online
payment with bank cards
was cumbersome consumers
usually need to go through
multiple steps of verification,
either by text messages. USB
dongles or other physical
token generating devices
Online shopping
Pay specific amount in online ecommerce website or
public area shopping
Quick Pay – scanned
by merchant
Pay offline merchants by provide user’s QR code for
them to scan
Quick Pay – scanning merchant
Pay offline merchant by scanning their QR code and
input the amount
P2P Payment
Using QR code for P2P payment e.g. paying a friend the
lunch money
Various Payment methods
7McKinsey & Company
QR codes pose multiple benefits compared to traditional cards or NFC enabled payment
methods
3
QR code Traditional card NFC
Consumer
Convenience –
widespread usage of
smartphone
Security – two-factor
authentication
Convenience
Internet connection
required
Inconvenience – need for
PIN input and physical
card
Metal materials may
trigger disturbance
Merchant
Cheap and easy to set up Requires POS terminals /
merchant bank set up
Cheaper than debit card
but higher than QR code
3rd party
Rich amount of user data
being collected
Data limited to card
transaction details
Substantial amount of
data collected
Ease of usage – quick
scan functionality
Fast process
Able to integrate with
wearables
Adoption driven by
consumer use
Credit option
Rewards program
8McKinsey & Company
Contents
The China experience
The Sweden experience
Key considerations for Maldives
9
Case study: In Sweden, the creation of Swish accelerated the adoption of mobile payments
using A2A
Source: Press search; Company website; Riksbank
0
20
40
100
80
60
SwishDebit cardCash
2014 2016 2018
Which means of payment have you used in the past month? Percent of Swedish population
Swish user flow:
1. Open app and enter recipient’s phone number and
account number
2. Authenticate payment once redirected to mobile banking
app (using electronic ID issued by consortium of banks
that links to national ID system)
3. Swish confirms and sends the money in real time via text
to the recipient
ImpactTrend
of Swedish
population uses
Swish
>77%
users as of July
20208.0M
has been
exchanged on the
platform in
December 2019
SEK
30.5B
Transactions in
December 201958M
Swish facilitates free, real-time direct-to-
account payments by linking bank accounts
to mobile phones
Swish was started in 2012 by a consortium
of banks (SEB, Danske Bank, Handelsbanken,
Norea, Swedbank, Sparbankerna, and
Länsförsäkringar Bank) in collaboration with the
Riksbank
It began as a P2P platform, but expanded to
B2C in 2014, eCommerce in 2016, in-store
payments with the launch of QR codes in
2017
Consumers can quickly, securely, and easily
send money to mobile numbers
Merchants are charged a yearly fee and 2
SEK per payment which can vary depending
on company size and requirements.
Swish has grown rapidly (in 2010, 10% of the
population had used Swish in the past month;
by 2016, this had growth to 60%); however,
debit cards remain the most popular
payment method
In 2018, 7 out of 10 Swedes uses Swish
Deep-dive > Full merchant channel focus
2nd most positively viewed brand in Sweden
behind Volvo but ahead of Ikea
10McKinsey & Company
Ownership structure for SWISH – a consortium of banks that deal with merchants and customers –
SWISH merely provides the technology
SOURCE: Expert interviews; company information
1 Listed banks are the owners, additional banks are connected to Swish
▪ Each bank1 responsible for issuing Swish to its customers, enabling
them to send and receive Swish payments
▪ Each bank1 responsible for acquiring online and offline merchants to
Swish, enabling them to receive Swish payments from consumers
(i.e. one bank may act as both issuer and acquirer with respect to the
same transaction)
▪ SEB, Nordea, Handelsbanken and Swedbank each own 20% and
Danske Bank and Länsförsäkringar each own 10% of Swish. Owners
provide capital, know-how, distribution, etc. and receive part of the
revenue generated by Swish. May also receive dividend from Swish
(has never happened yet)
▪ Each Swish payment is initiated by a consumer, connected to Swish
through the issuing bank, and processed by Swish and will either be
forwarded by Swish to another consumer or to an online or offline
merchant
▪ If the payment is forwarded to a merchant, the merchant will send
goods / services in the other direction (and issue a repayment of the
funds through Swish if goods / services are returned by the
consumer)
1
2
3
4
5
Consumer Merchant
1 2
5
Issuing Acquiring
3
Ownership
Payment
Payment
Payment
4
4A
4B
Goods / services
Transactions
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Contents
The China experience
The Sweden experience
Key considerations for Maldives
12McKinsey & Company
Key considerations for Maldives
1
What is the expectation around the dominant payment form
factor – QR or NFC? If QR, will you have one standard QR or
multiple closed loop QRs?
2
Should mobile payment growth be left to market forces or
actively triggered by the government? If so to what extent
should the government be involved e.g. setting up a national
QR (Codi Mexico), or facilitating a utility creation?
3
How will customers be persuaded to rapidly adopt digital
payment solution and move away from cash? Are there
transactions that can be mandated to be electronic only?
4 How will MDRs be priced compared to card schemes? Will
this be left to market forces or prescribed?
5 Who will onboard merchants to mobile payments? How will
you address small merchant concerns around taxes?
6 What is the potential role for foreign players to accelerate
market development?
13McKinsey & Company
Reet Chaudhuri
www.mckinsey.com
linkedin.com/in/reet-chaudhuri-b1b635/
15McKinsey & Company
Economics of QR payments for Alipay and WeChat Pay are not compelling given
incentives provided both to users and merchants
$100 transaction Payment flow internal transfer/ ops cost
SOURCE: McKinsey Payments Practice, expert interviews
▪ Alipay and WeChat Pay have historically handled the transaction process with banks, instead of working with networks such as
UnionPay; however, this changed with recent regulation that created NUCC to clear all 3rd-party payments
▪ Timing-wise, merchant receives $100 real-time; T+1 (or with an agreed time frame), 3PP deducts MDR from merchant’s account
▪ Once the consumer sets up 3rd party payment, they can choose to use a bank card or e-wallet as the default payment option
Scenario 2:
Payment with E-
wallet balance
Scenario 1:
Payment with
directly linked
credit or debit
cards
Merchant 3rd Party Payment Issuer
MerchantPays $100
Consumer
3PP revenue = ~$0.3
Merchant
account
~$99.4
(MDR 0.6%)
Issuer
fee ~$0.3
$100.00~$99.4
3PP negotiates rate
with banks
Consumer’s
E-wallet3PP revenue = ~$0.6
$100.00Merchant’s
account
~$99.4
(MDR 0.6%)
~$99.4
ILLUSTRATIVE2
Frequently waived as part of ongoing promotions
Frequent
cashbacks
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Payments remains a loss leader, even for the ‘best of the best’ – financial services and analytics
have emerged as the monetization engine
Ant Financial (AFS) net profits by source of revenue
USD bn, 2017
SOURCE: Expert interview, Annual reports, McKinsey surveys and analysis
-0.8
Payments Financial services
2 - 3
Total net revenue
2.2
Analytics services1
3.5 - 4.5
▪ Take rate on
payments (MDR)
▪ Withdrawal fees
▪ Float
▪ High yield
deposits
▪ Consumer lending
(micro-loans)
▪ Credit scoring
▪ Insurance lead
generation
▪ Merchant services
▪ Advertising /
campaigns
Data generated
by payments…
… is used to drive financial
services and analytics services
1 Assuming that 20-30% of Alibaba analytics revenue is on account of ANT Financial. Currently largely booked in Alibaba
2
17McKinsey & Company
Alipay and WeChat Pay invested heavily in QR code payment development to acquire merchants
and fueled the growth of mobile payments in China
3
Stage 1 QR code
▪ Customers need to initiate a
payment transaction by scanning
the QR code
▪ The cost for the payment token
is as low as a few yuan
2013
Stage 2 scanner
▪ Every 3rd party payment
company, such as
AliPay, needs to
purchase the scanner by
itself and this scanner
only works for it
2014
Stage 3 mPoS
▪ Agents help to integrate all
major 3rd party payment
company systems and acquire
merchants
with providing free devices to
merchants
▪ Although mPoS machine is
free, agents will charge ~0.3%
per transaction to merchants
accordingly
2015
Stage 4
▪ mPoS will be more
prevailing due
to the advent
of NUCC1
▪ NUCC is tentatively
operating and will centrally
process all dispersed 3rd
party payment transactions
▪ Respective 3rd party
company is not going to
share the revenue as
a role of clearing party
anymore
2017/18
Four main development stages of QR code payment in China
18McKinsey & Company
Payments regulations in China have been getting tighter, weeding out non-compliant small
players and ensuring visibility to online transactions
4
▪ PBOC set up “Nets Union Cleaing
Corp”, a central clearing bank for
online payment services
▪ Regulators can thus keep track of capital
flows and capture online financial
transaction data
▪ All 3rd party payment companies are
required to comply by Jun 18
2014.04 2016.04 2016.07 2016.12 2017.01 2017.08
▪ PBOC classified all payment
institutions into 5 grades by 6
dimensions, in order to
– protect high-performers by imposing
no additional regulations
– Limit poor-performers business area
to force them for improvement
▪ To lower the risk of QR code
application and to unify it:
– CUP specified the
standardization of QR
code payment by defining
its coding method
– CUP justified the validity
of QR code application
▪ To lower the risk
of embezzlement, PBOC aimed
to regulate all non-payment
companies to deposit
provisions in contracted
financial institutions
▪ The first deposit ratio will
be 20% and eventually 100%
▪ To protect commercial bank clients
information , CBRC and PBOC specified
requirement for both banking and 3rd
party payment companies on:
– Client data storage
– Transaction account authorization
– Business risk assessment and
management
▪ Real-name registration
is required for all payment
accounts
▪ Specifies 3 types of payment
accounts: type I, II and III, from
basic to high level registration
requirements
▪ Higher level account has more
payment functionality
Recent changes in China payments regulation
2018.04
▪ New regulations
came into force
that capped the
payment amount
for static QR
code transactions
to RMB 500 per
person per day
19McKinsey & Company
The PBOC introduced a new rule that limits static QR code payment amount but this did not have
a large impact on digital third party payments
4
Static QR code
The consumer uses
smartphone to scan the
fixed QR code provided
by the merchant
Affected by the rule
Dynamic QR code
The merchant scans the
QR code dynamically
generated by consumer’s
digital wallet mobile app
Not affected
▪ PBoC announced a new rule to limit the
payment by static QR codes to RMB 500 per
person per day, which took effect from Apr 1,
2018
▪ It aims to reduce the risk of payment fraud by
illegally tampered QR codes
▪ The impact on offline digital 3rd party payment such as Alipay or WeChat
Pay is, however, limited
– For large/medium merchants such as chain supermarkets, most are
already using dynamic QR code scanning device
– For small merchants, the average ticket size is small anyway (e.g.
RMB 7-8 for grocery purchase). Even if over-limit occurs, the
shopkeeper can offer to use P2P transfer to his/her personal account
as a walkaround
New limit on payment by static QR code Impact on 3rd party payment was limited
“Statistics shows that 95% of QR code transactions are below RMB500.
The average ticket size is around RMB100 only.”
-- 21st Century Business Herald
20McKinsey & Company
The scope of payment regulation in China has become ever wider, expanding from license
compliance to multiple fields
4
Core content Policy implications
▪ Centralized provisions custody system: established for
customers of payment institutions
▪ Online clearing platforms: all transactions must be wired
through centralized platform (NetsUnion) after June 2018
▪ Payment institutions deposit provisions pro rata are
required to the designated account, and interests on the funds
of such an account are not prepaid
▪ Correct and prevent payment institutions from
embezzling and occupying customer provisions, and urge
third-party payment institutions to return
to the original payment business
▪ License application: established a comprehensive market
entry system and a rigid regulatory management mechanism
▪ License renewal: renewal application shall be filed 6 months
ahead of expiration, and audited by Central Bank
▪ Due to the rigorous market entry mechanism, enterprises
which have already been approved
for entry must meet detailed regulatory requirements
▪ User identification mechanism through “real-name”
customer registration: users are required to input and
validate their basic identity information continuously, so as to
ensure customer identities and their true intentions are
effectively verified
▪ The real-name system serves as the baseline to
guarantee account security, maintain normal economic
order, effectively prevent money laundering, etc.
▪ Introduce refined administrative measures, defining
the responsibilities of payment institutions in aspects such
as customer identification, storage of customer identity
information and transaction records, suspicious transaction
report, anti-money laundering and anti-terrorist financing
investigations, as well as supervision and management
▪ Refine responsibilities, clarify obligations, and maintain
normal economic order
Centralized
custody
system
License
compliance
Real-name
registration
Anti-Money
Laundering
China’s third-party mobile payment regulatory scope (till 2017)