Peter Davey, Robert Mau, Expert VP Payment Strategy & Industry · VP Payment Strategy & Industry ....

Alternative Payments Perspectives

Robert Mau, Expert

EastPay Information Interchange

February 26, 2015

Peter Davey,

VP Payment Strategy & Industry

2

Welcome to Gringotts Wizarding Bank… Established in 1474

SOURCE: http://harrypotter.wikia.com/

3

Has banking really changed that much over the past 541 years?

SOURCE(s): http://harrypotter.wikia.com/ & Peter Davey

4

The banking industry as a whole is moving at a much slower pace of change

than the rest of the payments industry

Circa 1950’s

Modern Branch Design

Circa 1980’s

SOURCE: http://commons.wikimedia.org/

5 5 5 5

In the US, Cash is still king when it comes to the volume of payments

transactions

0

20

40

60

80

100

120

140

US Payments Transactions Volume billions

Wire Transfer

13 14E 12 15E 2008

Check

10 11 17E 16E 2018E

Cash

Debit Card

Credit Card

Prepaid

ACH

09

SOURCE: McKinsey U.S. Payments Map, Release Q1-2015

6 6 6 6

Payment transaction dollars are dominated by ACH and Check

0

15,000

30,000

45,000

60,000

12

ACH

US Payments Transaction Dollars $ billions

Check

Prepaid

Wire Transfer

Debit Card

Cash

Credit Card

10 09 2008 11 2013


Average dollar amount per transaction by payment type

Cash Debit Card Credit Card ACH Check Prepaid Wire

$19 $39 $95 $2,267 $1,480 $25 $70,155

7 7 7 7

U.S. financial institutions and other providers generate

$289 billion in revenues; expected to grow at 4% annually


2008-2013

growth

Percent

64%

29%

2013-2018

growth

Percent

0 4

-1 4

-4 3

-1 4

8 7

4 4

6 9

6 4

62%

30%

2013 revenues

Billions

1 Includes Wholesale and Retail Lockbox

2 Money Services includes prepaid cards, electronic money transfer (EMT), non-bank check cashing and money orders.

3 Other includes armored transport, check verification/guarantee, travelers checks, and ISO ATM fees.

2018F revenues

Billions, Estimate

17

61

289

28

125

US Payment

Industry

Cons. DDA

Cons. Credit

Card Issuing

14

6 Other3

Merchant

Acquiring

Money

Services2

Bus/Gov DDA1 38

Bus./Gov Credit

Card Issuing

NII Fees

21

72

357

40

150

21

7

46

8

Seven Disruptions in the Payments Ecosystem

SOURCE: McKinsey Payments Practice

Merchant payments

is epicenter of

disruption

2

Digitization, data/

analytics critical to

win

3

B2B Payments is

growing faster than

consumer

4

Payment network

infrastructures are

being enhanced

5

Payments security

will remain at the

forefront

6

Convergence

occurring at digital

speed

1

Underbanked and

Millennial segments

driving change

7

Convergence occurring at digital speed

▪ Commerce, payments and loyalty are colliding

▪ “Payments” is being integrated into the search-shop-buy

consumer experience

▪ The mobile experience is connecting digital and physical

shopping

9



Merchant payments is the epicenter of disruption

▪ The POS terminal is being integrated into business

systems and put into the cloud

▪ Attackers are “giving away payments” as a way to sell

other services

▪ Traditional players faced with pricing compression and

need to adopt new distribution models

Square Register

Merchant payments

is epicenter of

disruption

2

Digitization, data/


win

3

B2B Payments is

growing faster than

consumer

4

Payment network

infrastructures are

being enhanced

5

Payments security

will remain at the

forefront

6

Convergence


speed

1

Underbanked and

Millennial segments

driving change

7

10



Payments businesses must increasingly leverage

digitization, data and analytics to win

▪ New entrants are better leveraging non-traditional data

for risk management

▪ The acquisition march from direct mail to digital has been

reinvigorated by data

▪ The next big thing will be data enabled marketing

engines

▪ Data sharing is transforming the cobrand card

partnership

Merchant payments

is epicenter of

disruption

2

Digitization, data/


win

3

B2B Payments is

growing faster than

consumer

4

Payment network

infrastructures are

being enhanced

5

Payments security

will remain at the

forefront

6

Underbanked and

Millennial segments

driving change

7

Convergence


speed

1

11



B2B Payments is growing faster than consumer - and

poised to undergo its own digital revolution

▪ Digitization of the AR/AP value chain is creating

opportunities for e-invoicing

▪ The catalyst is often national infrastructure upgrades

sponsored by governments

Merchant payments

is epicenter of

disruption

2

Digitization, data/


win

3

B2B Payments is

growing faster than

consumer

4

Payment network

infrastructures are

being enhanced

5

Payments security

will remain at the

forefront

6

Underbanked and

Millennial segments

driving change

7

Convergence


speed

1

12



Payment network infrastructures are being enhanced in

the near term – and possibly poised for radical change

in the medium/long term

▪ Over 22 markets around the world (including the US) are

upgrading national payments infrastructures

▪ The enhanced capability can foster new product and

service innovation (micro-lending, real-time P2P)

▪ Point-to-point network architecture begins to take over

from the decades old hub-and-spoke architecture

Merchant payments

is epicenter of

disruption

2

Digitization, data/


win

3

B2B Payments is

growing faster than

consumer

4

Payment network

infrastructures are

being enhanced

5

Payments security

will remain at the

forefront

6

Underbanked and

Millennial segments

driving change

7

Convergence


speed

1

13



Payments security will remain at the forefront - with

acceleration in EMV adoption, encryption and

tokenization

▪ Target data breach and subsequent events puts Payments

security merchant and consumer radar.

▪ EMV addresses one security component but effective risk

and fraud management requires actions on encryption and

tokenization

▪ Accelerated EMV will open the door to NFC payments,

advantaging mobile OS players and digital wallet providers

Merchant payments

is epicenter of

disruption

2

Digitization, data/


win

3

B2B Payments is

growing faster than

consumer

4

Payment network

infrastructures are

being enhanced

5

Payments security

will remain at the

forefront

6

Underbanked and

Millennial segments

driving change

7

Convergence


speed

1

14



The growing underbanked and Millennial segments are

looking for simpler and seamless Payment and Banking

options

▪ ~20% of households in the US are “Underbanked”

▪ Simple, low-friction and easy to understand products have

strong appeal (e.g., prepaid)

▪ Trust in big banks has eroded opening the door to non-

banks with distribution and cost advantages

▪ Large retailers with adjacent economics are seeking to fill

the gap, as are smaller prepaid players and emerging

peer-to-peer lending platforms

Merchant payments

is epicenter of

disruption

2

Digitization, data/


win

3

B2B Payments is

growing faster than

consumer

4

Payment network

infrastructures are

being enhanced

5

Payments security

will remain at the

forefront

6

Underbanked and

Millennial segments

driving change

7

Convergence


speed

1

15

Payments has become the “hot sector” and is attracting investment and

activity from a number of different players

Mobile payments p2p payments

Network/processor Online payments Others

16

Non-financial institutions are playing a larger role in payments with a

different set of strategies (1/2)

Company Core business Strategic enabler

Networks

leveraged

P2P

BillPay

Merchant Services

Lending

Build a network of on-us

payments

FX revenue

Utilize purchase data for

marketing

Credit

Debit

ACH

On-Us Network

P2P

Merchant Services


payments


marketing

ACH

On-Us Network

Software provider

(search, maps, smart

phone)

Mobile, online and

physical wallet

P2P

Drive ad spend and

marketing opportunities

Further reliance on android

and other Google software

Primary Wallet

Credit

Debit

ACH

On-Us Network

Merchant Services

Inventory

Management &

Fulfillment

P2P


payments


marketing

Credit

Debit

17

Non-financial institutions are playing a larger role in payments with a

different set of strategies (2/2)

Company Core business Strategic enabler

Networks

leveraged

Hardware & software

provider

Mobile, Online Wallet

Digital Commerce

Ecosystem

Pass through

Merchant Services

Own the customer

experience

Sell more handsets

Attract different customers

(e.g., merchants)

Build an on-us network

Credit

Debit

Seller and re-seller of

goods and services

Merchant Services

and fulfillment

Ecommerce front end

Marketing engine

Online wallet

Enable eCommerce and

dominate sales

Make revenue on

transactions and order

fulfillment

Credit

Debit

On-Us

ACH

Social network of

consumers and

businesses

Marketing engine

Utilize consumer data to

monetize business

relationships

Facilitate social commerce

transactions (P2P)

TBD

18

Infrastructure players are evolving while new alternative networks are

gaining momentum

▪ Non-FI’s like Fiserv and FIS have leveraged their size and position in the payment

ecosystem to build their own private networks

▪ Traditional networks are evolving their offerings beyond credit and debit card payments

▪ Others like Coinbase and Ripple have developed networks leveraging leaner technology

stacks and more sophisticated security features

“About a year ago, we

started working with

MasterCard and Amex

to reinvent the

account number,

known in the industry

as tokenization”

- Ryan McInerney,

President Visa, Nov

2014

“There are more than 2 billion people in the

world, and 70 million in the US, that are poorly

served by the traditional financial system”

- Dan Schulman, AMEX, Oct 2014

“Today we're simplifying access for our traditional

partners but we're also enabling a much broader set of

partners to access these platforms in ways we have not

allowed historically so, they can build experiences that

use our payment of capabilities”

- Charles Scharf, CEO Visa, Nov 2014

19

Finally, crypto currencies like Bitcoin provide an entirely new approach to

payments

▪ Is used to conduct transactions

across the globe largely by US,

China, Germany and UK

▪ Daily transaction volume of

~$70M1

Bitcoin as a

currency

Bitcoin as a

secure,

distributed

public ledger

▪ All bitcoin transactions are

maintained in a public ledger

called the “block chain”

Bitcoin as a

transaction

network

▪ Merchants and consumers can

directly transact

▪ Exchanges facilitate

purchases/sales into other

currencies

1 2014 average daily volume in USD, blockchain.info 7/8/2014

20

There are four key components to any currency or payment mechanism

1

Core attributes Negative forces Positive forces

4

Ledger of record

▪ The log or record keeping of an

event or transaction

▪ Cheap and reliable

▪ Global in nature

▪ Fast transaction time

▪ Decentralized

▪ Lack of Regulator

controls

▪ Complete paradigm shift

required

3

Network

▪ Enabling a transaction or transfer

including settlement and

verification

▪ Frictionless transactions

▪ Simpler network leveraging

existing infrastructure

▪ Safe and secure transactions

▪ No single point of failure

▪ Fraud opportunity

inherent in protocol

(51% problem)

▪ Ability to grow, expand

and sustain

2

Currency

▪ Trading for goods and services

with bitcoins

▪ Easy cross border trade

▪ Very low cost of acceptance

▪ Merchants like finality of

transaction (irreversible)

▪ Psydononymous, traceability

of all transactions

▪ Challenges sovereign

currency independence

▪ Poor store of value

▪ Lack of consumer

protections

Store of value

▪ Buy and hold bitcoins as an

investment

▪ Long term increase in value

▪ Cross border investment

▪ No exchange needed for

investments

▪ Lack of backing or

standard of value

▪ Speculatory behavior

▪ Questions on tax

treatment

21

ALT ALT

Goods

and services

‘Miner’ node ‘Miner’ node Ledger

Blockchain

On/off ramp,

e.g., Coinbase

exchange

Online exchanges

enable 24/7 trading

Online wallets store

Bitcoins which can then

be received or sent

Bitcoin ‘miner’ computers

act as nodes

Online wallet Online wallet

A typical Bitcoin transaction has a complicated value chain

On/off ramp,

e.g., Coinbase

exchange

22

The application of Crypto technology could have far-reaching roles and

relevance particularly in the commercial or intra bank landscape


New

payments

protocol

Description Critical aspects

▪ Merchants and consumers

can directly transact with

much lower friction

▪ Exchanges facilitate

purchases/sales into other

currencies, remittances

▪ Low fees (50-80% lower

than existing solutions)

▪ Rapid confirmation

▪ No single point of failure

▪ Almost frictionless

Secure,

distributed

public ledger

▪ All transactions maintained

in public ledger aka

“blockchain”

▪ Opportunity to conduct

other types of transactions

(e.g., escrow services,

medical records)

▪ Permanent time-stam-

ped proof of existence

▪ Pseudo-anonymous

▪ Distributed across the

globe

▪ Secure

Unlikely to be

a currency or

store of value

▪ Used to conduct global

transactions, led by US,

China, S America and

Western Europe

▪ Daily transaction volume of

~$90MM

▪ Instant global transfer

▪ No charge-backs

▪ Anti-inflationary

▪ Infinitely divisible

▪ …but volatile

23

What role could crypto currencies have in the next evolution in network

architecture?

Hub and spoke clearing Direct clearing via distributed IP

Clearing

model

▪ Banks clear directly with one another;

clearinghouses may see roles shift

managing settlement “ledger”

▪ Banks clear through a central

clearinghouse with only select

direct clearing relationships

Architecture ▪ Leverage open Internet IP architecture ▪ Hub and spoke architecture

Confirmation

of Good

Funds

▪ Confirmation of good funds in real-time ▪ No confirmation of good funds

prior to clearing (ACH)

Settlement ▪ Intraday settlement windows ▪ Next day or end of day settlement

Funds

Availability

▪ Real-time availability of funds ▪ Next day availability of funds

24

Ripple labs has taken the blockchain concept and developed a different take

on distributed network and ledgers

SOURCE: Ripple Labs

25

Traditional players are making investments in these new networks based on

the promise of the technologies

Who accepts Bitcoins?

Over 30,000 merchants accept Bitcoin including

companies with ~$1B in revenue

“It’s a new disruptive technology, so, yeah, we’re looking at

Bitcoin closely.” – John Donahue CEO, Ebay

WASHINGTON, Feb. 10, 2015 /PRNewswire/ -- UATP has

teamed up with Bitnet as a payment processing partner. This

relationship will allow UATP to offer its Network of 260+ airlines

the ability to accept bitcoin payments in a simplified manner.

"We are very happy to be partnering with Bitnet to add bitcoin to

our payment platform. We are always looking for skilled partners

to bring additional forms of payment to the UATP processing

platform and Bitnet fits the bill well," said Ralph Kaiser, president

and CEO, UATP.

Coinbase Raises $75M from DFJ Growth, USAA, NYSE, and

More

Today we are pleased to announce that Coinbase has raised

$75 million in Series C financing, the largest funding round to

date for a Bitcoin company. This brings our total capital raised to

$106 million.

The round was led by DFJ Growth, with participation from our

existing investors, including Andreessen Horowitz, Union Square

Ventures, and Ribbit Capital.

26

Other established providers like FIS, FiServ, Visa and MasterCard have been

evolving their products and networks as well

SOURCE: FIS

Peter Davey, Robert Mau, Expert VP Payment Strategy & Industry · VP Payment Strategy & Industry ....

Documents

Transcript of Peter Davey, Robert Mau, Expert VP Payment Strategy & Industry · VP Payment Strategy & Industry ....