Bridging the divide between legacy and mobile payments

Editor's Notes

• #3: We are going to start with a little test. I have some Distra 4 GB USB sticks here for the lucky winners. That’s right, shameless advertising for Distra – but you get something too. 1) First person to show me a mobile phone. How many people here have a mobile phone on them? 2) First person to show me a credit card. How many people here have a wallet on them? 3) First person to show me a check book. How many people here have a checkbook on them? 4) How about cash? Who can show me $1.50 in coins for the Coke machine (sorry the bill reader is broken)? How many have $1.50 in coins on them? 5) OK last one for $10 – can anyone show be a pair of those Google glasses?I am going to talk about today is the growing divide that is occurring between what I call the old payments world and the new payments worldI’ll discuss some of the trends that are creating this divideWe’ll discuss why it’s essential for survival that banks and processors bridge this divide between the old and new worlds, that innovation enabling the adoption of new business models, new partnerships and new products and services is absolutely criticalDespite being encumbered by legacy payment technologies, which can at times be inflexible and unresponsive, rapid payments innovation is indeed possible without having to rip and replace existing investments. I will give you a number of examples to highlight how payments market leaders are doing just this
• #4: If we look back 20 years the payments landscape was relatively simple.. Customer expectations were not what they are today. The banks had the power – push marketing approach – determined how and when customers would and could engage in payments transactionsATM and POS main channelsBatch processing was sufficientLegacy payment technologies could easily do the job – did so with high levels of security and reliabilityShare a story/example about payments 20 years ago
• #5: If we look back 5 years not a lot had changedE-commerce had become more mainstream, yet web payments were still a relatively small proportion of total payment transactionsPayPal was around however didn’t have significant share, still not considered a serious player by banks and others in the payments chainThings were still relatively simple, banks were still calling the shotsLegacy systems could still do the job
• #6: Yet in the last couple of years things have changed considerably. The power has shifted from banks to customers. Customers now decide how and when they will participate in payments transactions and they have a variety of channels to choose fromMobile payments have skyrocketedPayPal has gained critical mass and is seen as a serious threat to traditional playersSocial payments have escalatedFacebook and Google have become serious players in the payments marketFacebook has more than 600M users and they like gaming –Zynga’s Cityville reached 100M users in just six weeks. In Jan 2012 there were 53.3M monthly active users playing Farmville – and it has been mandatory to use Facebook credits since July 2011. Zynga transacted $7B in 2011In May 2011 Google launched Google Wallet - an app that makes your phone your wallet—with Citi, MasterCard, Sprint and First DataAs a result, consumers have unprecedented options and choices. The payments market has moved from a push to a pull marketing model, creating the need for a totally different way of engagement for traditional payment players, and creating the need for totally different payment systems to support new world requirements
• #9: In financial services it could be argued that some of the biggest changes we’re seeing are in the area of paymentsThis presents a significant opportunity for banks and processors that are proactive and innovative
• #10: The payments industry is certainly at an inflection point. It could be said that we are seeing more change now than we have in the history of payments. This change is creating the divide I spoke about – the divide between the old payments world and the new payments world.The main areas for change are:Technological change – smart phones and associated technologies have opened up a whole raft of new payment options, social media has also significantly changed the game, as has cloud – making it possible for small payments players to rival the big players and making it possible to launch new service offerings and business models very quickly for relatively little costNew Entrants – non-bank players moving into the payments space aggressively, also new markets opening up, Brazil, Russia, India, China included, and in many ways leap-frogging developed markets in terms of the way they consume payments servicesCustomer Expectations – these new technology options and the “always on” mentality has created a more demanding consumer, a consumer who expects everything instantlyRegulation – and to a lesser extent regulation.Let’s explore some of these dynamics in a little more detail….
• #11: PayPal continues to grow rapidly, keeping no secret about it’s ambition to dominate the global payments market, growing 25%+ year on year, with innovation and will span geographies and continue to affect usage patternsPayPal says that it saw $3,650 in Total Payment Volume every second in Q2 2011. That means PayPal is processing around $315.3 million in payments per day. On average, the payments platform is seeing upwards of over 5 million transactions a day. PayPal’s Total Payment Volume in 2010 represented nearly 18 percent of global e-commerce. PayPal and Google continue to take share from major debit and credit cardsPrepaid cards are taking more shareWe’ve already talked about the phenomenon of Cityville and Farmville on Facebook. Facebook are quickly moving into the payments space. Not only can you buy Facebook credits for gaming, but you can gift someone an icecream cone from Coldstone Creamery or send them a virtual bunch of flowers for Valentine’s Day. Millions of micropayments are being transacted via social channels each day. No longer is batch payments processing sufficient, everything is happening in real-time
• #12: 4+ billion phones globallyAccording to a report by IEMR, global mobile payments transactions to rise to $1.13 trillion in 2014, with a CAGR of 94.8% (value of mobile payments transactions was $37.4 billion in 2009), the number of mobile payments users will rise to 1.06 billion in 2014NFC uptake growing rapidly, according to IEMR in 2009, there were 861 million NFC transactions globally, forecast to rise to 35.6 billion transactions in 2014, with a CAGR of 106.4%Smart devices rapidly changing behavior of all demographic groups – “always on”Most of the growth in bill payment will come from the mobile channel – according to Aite Group mobile bill payments is forecast to grow 377% between 2010-2013Mobile being used for pre-paid top ups- according to IEMR prepaid top-ups using mobile payments to reach $286.4 billion in 2014, with a CAGR of 76.7%Existing payment chain participants being disrupted, telcos threatening banks’ incumbent position“Closed Loop” major threat to interchange revenueE-wallets and mobile encroaching on PrepaidMobile payment interaction offers lucrative source of new revenue opportunities, and biggest growth in mobile payments coming from non-bank providers – for example 2008-2012 forecast growth of 72% versus bank provider growth of 43% Opportunity for major players to drive payments infrastructure convergence across channelsUnderbanked/Underserved major target – rapidly growing segment in many parts of AsiaConsumers demanding more choice, better security and ease of use
• #13: Gartner estimate cloud computing will grow from a market worth $36 billion in 2009 to over $160 billion by 2015, with around a fifth of all companies relying on the cloud for significant parts of their technology operations by 2012Cloud is enabling payments as a service, enabling improved innovation and enabling business agilityCloud computing is a great way to test and trial services without feeling any limitation of scale. Eg - you can have an idea one day and it can be live and available by the next.Cloud is an equaliser for small to medium sized companies to compete, as they can target large firms with the same level of technology capability, without having to invest in the infrastructure and capital expenditure they would have required in the past
• #14: With rapidly emerging market segments and new channels and new technologies changing the way consumers and corporations transact, the volume of payments transactions is increasing exponentiallyAccording to the World Payments Report 2011 (RBS, EMFA, Cap Gemini) the global volume of non-cash payments transactions grew to 260B in 2009 and BCG are estimating that the global payments market will be worth $782 trillion in noncash transaction value and $492 billion in transaction revenues by 2020.The fastest growing regions are of course the developing countries, with Asia experiencing growth of 23% in 2010, and BRIC (Brazil, Russia, India & China) growing 14%, versus global growth of 7.8%As the large unbanked populations of these developing regions become banked they are leap-frogging traditional banking and payments models, fueling growth of mobile payments in particular and putting Asia and other developing regions in a position to leap-frog the rest of the world in terms of payments infrastructure and technology adoptionIn developed markets a new segment of consumers emerging —the “debanked”, which is largely a result of recent U.S. banking regulation (Dodd Frank) which has put significant pressure on banks’ revenue and fees. Many banks have responded by increasing or creating fees on their products and services creating backlash, with consumers who are looking to escape the traditional banking system not because they have to, but because they want to– according to Aite this presents a Us$1B revenue opportunity for prepaid debit cardsWith the growth of developing markets, mobile and social channels, not only is the payment volume going up, but the type of payment transactions are changing. Increasingly there are more and more micropayments, which demand real-time processing.
• #15: Whilst the new players are very agile and nimble, innovating with comparative ease, security and compliance can be a challenge.Global fraud is on the rise with the financial services and payment services sectors major phishing targets, and increasingly social media is becoming a targetJust as I was preparing this presentation news crossed my desk that Google has put the brakes on the use of its prepaid cards for Google Wallet after two hacks were discovered that could steal money from a user's account.According to Javelin Strategy & Research’s new fraud report mobile and social media are forming the new fraud frontier. The number of identity fraud incidents increased 13 percent over the past year. They cite higher risk individuals as smart phone users (a 33% higher incident rate of identity fraud) and social media users with public profiles. The fraud concern is real. Unlike traditional payments networks which demand strict compliance with a complex range of security, reliability and performance standards, the investment in time and money to achieve specialised compliance does not fit with these "fast to market” models of new players. Traditional networks rarely have open standard interfaces and demand strict compliance with a complex range of security, reliability and performance standards meaning new payments players can’t easily and securely access traditional payments networks to gain critical mass. Yet their businesses are dependent on traditional payments processing. For example, although Facebook only allows transactions with Facebook credits, traditional networks need to be access in order for customers to purchase credits. Similarly, Paypal still needs their customer accounts to link to a bank account for payments to be made and accepted.
• #16: Traditional payment systems may be secure, yet they struggle to keep up with these new market dynamics.As we’ve just discussed, the payments world is moving quickly – new players, new business models, new services, new channels, new technologies, new delivery models, new opportunities. The industry has moved from a push to a pull model, demanding “always on” payment services offering immediate authentication, routing and settlement; demanding payments services through a variety of new channels and demanding customised service offerings.Yet existing payments systems that have long met the needs of banks, schemes and processors are becoming, to quote the FSTC, “increasingly expensive to maintain and isolated from mainstream advances in technology.”They are inflexible and cumbersome and can be cost, time or technologically prohibitive to innovation to quickly meeting new customer and market demands. For example, when it comes to enabling split payment options and personalized offers, which requires not only capturing financial data associated with each transaction but also enriching it with non-financial data, they can’t respond. Traditional payments systems don’t have what it takes to meet new market needs. Banks may even be considering at worst, ripping and replacing their legacy systems so they can be more responsive to new market needs, or at best, considering lengthy and costly development projects to facilitate innovation and transformation. Are there any examples we can give here???The good news is that system replacement is not required, and nor are lengthy development projects. More about this in a moment.
• #17: Market leaders are realising that they can have security, performance, innovation and flexibility without ripping and replacing existing systems, but simply by augmenting them. Let’s take a look at some of the cool initiatives organisations have implemented to bridge the divide between the old and new worlds
• #18: Medical Insurer benefits:Large front office infrastructure required to process patient and benefits claims forms and receipts.Forms are legal documents and need to be stored for seven years, this results in the need for back office staff, offices plus warehouse storage/image processing system requirementsPatient ID need to be validated prior to payments being made.Cash is held at the front office for emergency payments to customers (patients). Fraud is a significant issueSettlement with doctors is slow due to these manual processesCheques are posted to patients as benefit settlementBenefits to Insurer:Automates the benefits claims process Automates the benefits payments processOpportunity to Improve fraud detectionReduces the need for offices and staff to manage the claims processNo need to process or store patient claims forms or receipt hard copyNo need to store patient financial institutions detailsFully Integrated with Claims Management SystemsOpportunity for improved business practicesDoctor benefits:Doctors:.Overnight payment and improved cash flowFinancial institutions relationship independentNo need to store patient financial institutions detailsIntegration with Practice Management SystemsOpportunity for improved business practicesOpportunity to Develop New ApplicationsIncreased revenue via service fee from insurerPatient benefits:Real – time payment of benefitAbility to withdraw cash from ATM immediately after leaving doctorMedicare claiming completed at doctor’s practice, no visit to Medicare offices requiredPortable across all doctors due to Debit and Credit card account recognition at the point of service.Bank benefits:Increased Card and ePayments transaction volume Increased transaction services fees at POS and ATM’sOpportunity for new card product co-branding with Insurer and doctorAutomation of benefits payments life cycleCards Claims at POS, Cash at ATMPayments with all partiesSettlement with all parties
• #19: Faster Payments is “same day” (real-time) clearing requirement, legislated by the U.K. Government for various ACH payments. VocaLink was responsible for providing the Faster Payments network for major clearing banks, other financial institutions and corporationsIn 2007, VocaLink, a payments processors in Europe,entered into an agreement with Distra to utilize its unique real-time, high-reliability, high performance payment solution as a core component of its Faster Payments Gateway (FPG)Distra delivered its real-time platform both to VocaLink and major U.K. Banks including Barclays, Citi and NationwideVocaLink utilized Business Intelligence (BI) tools to exploit the real-time access to transaction data. Monitors and controls provided by Distra’s solution provide banks with new real-time insights including intra-day settlement positions By the end of 2008 around two-thirds of phone and internet payments were processed through Faster Payments and since the start of 2012, all internet and phone payments have been sent via Faster PaymentsIn its first 18 months of service, FPS processed more than 290 million payments totaling over £107 billion. At peak times, VocaLink is now processing up to ten million transactions a day
• #20: Barclays Pingit is an innovative new P2P payments services which bridges the divide between old and new – a mobile app that utilises a powerful backend payments processing engine to enable money to be moved instantly with high levels of securityTalk through points on chartThe service is powered by the UK Faster Payments Gateway - Let’s have a look at how they have made it work…
• #21: It is not sufficient just to have a fancy mobile payments app. Mobile payments requires a high performance back-end processing system that offers: Real-time authentication, validation, routing & settlementProcess transactions in seconds 24/7 availabilityIn-built fault tolerance ScalableProcess high volumes of micro-payments simultaneously FlexibleCapture financial & non-financial data to enable customized offers & couponsOpen, interfaces with multiple systems, applications and/or devices for ease of collaborationEnable rapidly deployment of new servicesSecureTokenized securityBarclays Pingit combines an innovative front end with a powerful, secure, and reliable back end. The VocaLink Connex switch has been augmented by the Distra Universal Payments platform to provide the agility to be able to process mobile payments transactions instantly, while offering the performance and security features mentioned
• #22: So I have to have one chart which tells you how good Distra is! Distra is passionate about transforming payments and in particular, bridging the divide between the old and new payment worlds. We work with both traditional payments players and new worlds payments players, enabling collaboration and innovation. Our clients include some of the biggest names in financial services and payments globally, some of which I’ve talked about today, others of which I haven’t, and others of which we have strict confidentiality agreements with so cannot mention.We have a real-time payments platform, called the Distra Universal Payments Platform, which enables organisations to augment their existing payments infrastructure to drive rapid innovation and immediate business benefits in a low-risk, low-cost way, including:Increased flexibility and reduced time to market with new payments services and business modelsImproved profitability through reduced costs and new revenue streamsIncreased customer satisfaction through leverage of real-time intelligence and no downtimeMeeting compliance requirements with easeThe Distra UPP offers:Real-time wholesale and retail payments processingFlexibility, agility, speedSecurity, reliability, performance (> 3000 TPS)Traditional (POS, ATM) and new payment transactions (web, social media, mobile, kiosk)Financial and non-financial message captureHaving a flashy mobile or social media application is just the beginning, the real value is in integrating it with a powerful back end processing system which is flexible enough to enable collaboration with other players in the payments value chain, and to enable the rapid deployment of new and innovative offerings and business models in the future, because one thing’s for certain… The payments world will continue to evolve quickly.