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Global

Payments 2018
REIMAGINING THE CUSTOMER EXPERIENCE
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GLOBAL PAYMENTS 2018
REIMAGINING THE CUSTOMER EXPERIENCE

MOHAMMED BADI

STEFAN DAB

ALEXANDER DRUMMOND

SUSHIL MALHOTRA

FEDERICO MUXI

MAARTEN PEETERS

PRATEEK ROONGTA

MICHAEL STRAUß

YANN SÉNANT

October 2018 | The Boston Consulting Group


CONTENTS

3 INTRODUCTION

6 MARKET OUTLOOK
Global Trends
Regional Outlook

1 4 RETAIL PROVIDERS MUST EVOLVE THE PAYMENTS JOURNEY


Five Ways to Improve the Online Buying Experience
Three Ways Acquirers Can Improve the Broader Merchant Experience

2 0 WHOLESALE BANKS MUST ADDRESS THE EXPECTATIONS GAP


Unresolved Pain Points Erode Banks’ Trust Advantage
Wholesale Banks Can Close the Gap in Three Ways
Create a Roadmap for Change

2 6 IT’S TIME TO ACT

2 7 FOR FURTHER READING

2 8 NOTE TO THE READER

2 | GLOBAL PAYMENTS 2018


INTRODUCTION

P ayments remains one of the brightest spots in the financial


services universe. Propelled by positive macroeconomic tailwinds,
continuing technological advances, and expanding digital and non-
cash mechanisms, payments businesses globally are on track to add
$1 trillion in new revenue through 2027. That outlook presents
enormous opportunities for retail and wholesale payments institu-
tions. Capitalizing on those opportunities, however, requires that
banks and payments providers address lingering customer pain
points.

The quality of the payments experience matters not only because of


the strong projected growth across the transactions space but also be-
cause payments has an outsize influence on the banking relationship
overall. Payments interactions are the most frequent point of custom-
er engagement, giving banks, card issuers, and acquirers significant
opportunity to shape customer perceptions, capture valuable data,
and build loyalty. The relationships formed through those repeated in-
teractions allow institutions to deepen their customer understanding,
foster customer trust, and improve cross-selling and service, all of
which significantly influence the overall shopping experience.

As a result, payments companies have begun to play a more active


role across the buying journey, going beyond their traditional narrow
role in enabling acceptance to forging customer-centric shopping in-
teractions that reduce cart abandonment rates, create omnichannel
customer experiences, and make credit easier for customers to access.

These factors, combined with favorable economics, mean that the


payments space will be increasingly contested over the next decade.
This will lead to a number of fundamental disruptions, including the
following:

•• Leading retail banks will continue to reimagine the customer


experience in payments. They will do so by resolving remaining
pain points and further personalizing the customer experience. As
a result, digitally savvy first-mover banks will take share from
slower-moving competitors.

•• Online payments providers will expand into offline acquiring.


A structural shift is occurring in shopping, from in-store commerce
to e-commerce driven by digital marketplaces and online mer-
chants. With pockets flush from the expected surge in e-commerce
purchasing, providers of online solutions will take share from
incumbents that have been slow to address customer pain points.

The Boston Consulting Group • Swift | 3


We also expect increasing concentration within the online acquir-
ing space, as large acquirers with the capability to serve the
dominant, internationally active online retailers take share from
smaller ones. The growing dominance of Amazon-like market-
places and Netflix-like digital content providers will accelerate this
trend.

•• Consolidation across the broader payments space will acceler-


ate. Consolidation is picking up speed in the fragmented European
acquiring and processing market. This trend will spread to the US,
further condensing an already concentrated space, as providers
look for ways to address deteriorating margins and fund new
digital capabilities.

•• Rapidly developing economies (RDEs) will remain a hotbed of


innovation. We expect that many of the most disruptive payments
business models will come from players in Asia and Latin America
that target underserved populations and segments. Examples
include GrabPay, Paytm, Ant Financial, and Tenpay.

•• Card payments will continue to prosper despite threats. While


card payments will continue to benefit from cash conversion
tailwinds, the shift to real-time payments combined with the
second Payments Services Directive (PSD2) in Europe and the
United Payments Interface (UPI) in India have made account-
based payments players more competitive. Rapidly growing
merchant wallets such as Amazon Pay and MercadoPago and
emerging peer-to-peer (P2P) schemes could raise the stakes further
if they enter the account-based payments space. Card issuers and
networks could counter that threat by promoting contactless
payments and embracing initiatives that make authentication
easier.

•• The US market will become an increasingly attractive target


for attackers. Large Chinese players, many of which are keen to
expand abroad, are especially likely to target the US for its large
revenue pools.

•• New digital categories will be on the rise. Although e-retail is


still the largest vertical in online commerce with 40% to 60% of
spending, new digital categories are emerging. These include
subscription services for digital content, a category that is ex-
pected to account for approximately 10% to 20% of the global
e-commerce market. Other emerging categories include real-time,
contextual commerce in social platforms (such as booking a
restaurant from within Airbnb or by “searching nearby” on
Google Maps) and expanded direct-to-consumer (D2C) offerings
for products such as mattresses (Casper) or food (Blue Apron)
that were once considered too large or experience-driven to buy
without sampling.

Incumbents are in a vulnerable position because many have been


slow to address long-standing customer pain points. To hold onto valu-
able customer relationships and take advantage of the strong growth

4 | GLOBAL PAYMENTS 2018


potential in payments, banks and providers must focus their strategy
and resources on the following:

•• Improve the consumer payments experience. Providers focused


on the retail market must make both e-commerce and the physical
point of sale (POS) friction-free. That requires redesigning the
online buying journey, innovating smarter authentication stan-
dards, and promoting contactless payments to facilitate smoother
and faster interactions.

•• Provide merchants with integrated and omnichannel pay-


ments. Merchants are looking to transaction providers for plug-
and-play capabilities that make it easier to incorporate payments
systems and functionality within their own operations. This
requires merchant acquirers to invest in creating a better buying
experience and update their go-to-market models.

•• Rethink the wholesale business model to address treasurer


needs. Corporate treasurers face an expanding remit that has
exposed gaps in many wholesale-banking service portfolios. To
maintain treasurer trust, wholesale banks must define a clear
digital strategy and upgrade their service approach to optimize
human and virtual coverage on the basis of customer value and
needs.

•• Commit to making needed operational changes. Established


players need to mature their data and analytics capabilities,
embrace open-banking innovations, improve monetization oppor-
tunities, and provide more-tailored services and offerings. They
must also forge greater connectivity internally and use data-driven
insights to increase sales effectiveness.

These factors are likely to play out in different ways for retail and
wholesale payments providers. BCG’s Global Payments 2018 report ex-
amines the challenges and opportunities they will create over the
next ten years. We look at the state of the market, both globally and
in different geographic regions, and explore the pain points that pro-
viders must address to turn payments into a long-term avenue for
growth.

The Boston Consulting Group • Swift | 5


MARKET OUTLOOK

P ayments revenue has been growing at


a CAGR of 6.8% globally since 2010,
reaching $1.27 trillion in 2017. Projections for
such as interchange rate changes in certain
countries.

the next ten years look equally rosy. We


predict payments will generate more than Global Trends
$1 trillion in new revenue over the next While the payments outlook can vary across
decade, growing to $2.42 trillion by 2027. segments and providers, BCG data reveals
(See Exhibit 1.) several overarching patterns that could have
strategic implications for participants in the
That translates to a CAGR of 6.6%, outpacing global payments arena.
global nominal GDP growth. The ongoing
shift to noncash payments is driving that Noncash Use Is on the Rise
growth and creating a windfall for payments Some countries are rapidly becoming cash-
providers, despite mounting pricing pressure less, a trend fueled by contactless payments

Exhibit 1 | Payments Revenue Is Expected to Grow by $1.1 Trillion Through 2027


Payments revenue ($billions)
2,419 REVENUE GROWTH (CAGR)
2,500
2010–2017 2018–2027
+6.6%
2,000
1,778 1,465
(61%)
1,500 $370 billion $751 billion
+6.8% 1,362 (12.6%) (8.3%)
1,273 1,027
(58%)
1,000 657 714 –40%
805 (52%) (52%)
286
500 (36%) 953
752 $98 billion $305 billion
518 616 648 (39%) (2.5%) (4.4%)
(48%) (48%) (42%)
(64%)
0
2010 2017 2018 2022 2027 +80%

Rapidly developing Mature markets CAGR


economies
Source: BCG Global Payments Model 2018.

6 | GLOBAL PAYMENTS 2018


and the expanding availability of digital pay- is led by a concentrated group of leading
ment methods. The Nordic countries, espe- banks. (See the sidebar “The Russian Mira-
cially Sweden and Norway, are a prime ex- cle.”) Our data show that the use of noncash
ample. There, the average number of card methods by these tigers has begun to rival—
transactions is substantially higher than that and even exceed—that of some mature mar-
in mature markets in general. kets. (See Exhibit 2.)

As comfort with noncash methods grows glob-


“Payments tigers” have ally, we expect that consumers will increasingly
use electronic means to pay for smaller trans-
made rapid progress toward actions, where coins and cash used to domi-
nate. By 2027, we expect average non-cash-
becoming cashless. transaction values for retail customers to fall to
about $54, compared with $97 in 2017.

While these and other mature markets rank RDEs Will Grow at Twice the Rate of
among the heaviest users of noncash pay- Mature Markets
ments, RDEs are catching up. An emerging More than 70% of global revenue growth
group of “payments tigers” has made espe- over the next ten years will come from
cially rapid progress toward becoming cash- RDEs—26% of it from China alone. Strong
less. Poland has its Cashless Poland collabora- macroeconomic performance, increasing
tion between government and key payments cash-to-noncash conversion, and high interest
players, while the move to cashless in Russia rates will combine to support average annual

THE RUSSIAN MIRACLE


In Russia, non-cash-payment transactions ers also helped support adoption, increas-
per capita grew from approximately 25 in ing the number of point-of-sale (POS)
2010 to roughly 150 in 2017, a 29% CAGR. terminals fourfold over 2010.
In 2010, Russia ranked 29th in Europe in
card transactions per capita. By 2017, it Customers liked the convenience and ease
had jumped to 14th place, ahead of of noncash transactions. They also enjoyed
Western European markets such as Spain innovations such as the instant and
and Germany. commission-free mobile-to-mobile pay-
ments that Sberbank offered. To boost
Several factors led to the transformation. consumer confidence, Russian card issuers
The first was that banks had some natural made a strong push to safeguard against
incentives. Russian banks were in need of fraud. Almost 100% of cards are chip-pin
cheap retail funding after the financial and conform to the security protocols
crisis, and noncash transactions provide a advanced by major card networks; all
stable source of fee income. The Russian payroll cards have free SMS notifications
banking market is also highly concentrated, for each transaction. As a result of these
so the actions of a few banks often set the changes, Russia has now become the
bar for the rest. Card issuers such as global leader in the number of tokenized,
Sberbank, with its 55% market share based contactless secured transactions and the
on payments transaction value, employed largest market for digital wallets.
10,000 meet-and-greeters in bank branches
to provide information and encourage
adoption. In addition, they invested heavily
in technology to improve the quality and
availability of contactless payments, digital
wallets, and mobile P2P payments. Acquir-

The Boston Consulting Group • Swift | 7


Exhibit 2 | Eastern Europe Has Seen Rapid Growth in Card Transactions Per Capita

IN 2010, MANY EASTERN EUROPEAN COUNTRIES WERE …BUT BY 2017, THESE EASTERN EUROPEAN LEADERS HAD
PRIMARILY CASH-BASED SOCIETIES… LARGELY CLOSED THE CASHLESS GAP WITH WESTERN EUROPE

Card transactions per capita, 2010 Card transactions per capita, 2017
500 500
Converging to Cash loyalists Approaching Converging to cashless Cash loyalists
Approaching
cashless cashless
cashless
400 400

300 300
Western
Europe
200 200 200
Western
Europe Eastern
115 100 Europe
100
80

30
0 0
Eastern

Norway
Denmark
Sweden
Ireland
Finland
Estonia
UK
Luxembourg
Netherlands
France
Switzerland
Portugal
Latvia
Russia
Belgium
Poland
Lithuania
Austria
Czech Republic
Spain
Slovenia
Slovakia
Hungary
Malta
Cyprus
Croatia
Ukraine
Turkey
Germany
Italy
Greece
Romania
Bulgaria
Norway
Sweden
Finland
Denmark
Netherlands
Estonia
Ireland
France
UK
Luxembourg
Portugal
Belgium
Switzerland
Slovenia
Austria
Latvia
Spain
Cyprus
Croatia
Germany
Malta
Lithuania
Turkey
Italy
Slovakia
Hungary
Poland
Czech Republic
Russia
Greece
Romania
Ukraine
Bulgaria
Europe

The names of the ten fastest -growing countries, on the basis of


Western Europe Eastern Europe card transactions per capita, are shown in green.

Source: BCG Global Payments Model 2018.


Note: “Approaching cashless” is defined as greater than 250 card transactions per capita; “converging to cashless” is defined as greater than 100
card transactions per capita. Card transactions per capita include retail transactions only.

growth of 8% in payments revenue through Absent a sudden spike in interest rates, pri-
2027. Although payments revenue is lower in mary revenue will account for 54% of total
mature markets than in RDEs, it is expected payments revenue growth over the next ten
to grow at a healthy CAGR of about 4% over years as rising transaction volumes fuel
the next ten years. Mature markets will ac- growth in interchange revenue flows. The ex-
count for approximately 39% of global pay- ception will be in Western Europe, where
ments revenue by 2027. As such, these mar- caps on interchange suggest that the balance
kets will remain crucial for global payments of primary- and secondary-revenue sources
players. will remain relatively unchanged over the
next decade despite the rapid growth in
non-cash-transaction volumes.
Mature markets will see strong It’s a different story in RDEs, where primary
growth and remain vital areas sources contribute only 24% of total pay-
ments revenue. We expect that the primary-
for global payments providers. payments revenue share will grow to 27% in
the years ahead, however, as consumers in
RDEs increasingly embrace fee-generating
The Mix Between Primary- and Second- noncash payments. Nevertheless, secondary
ary-Payments Revenue Is Shifting revenue will remain the primary growth driv-
Primary revenue comprises the fees that er, accounting for 73% of total revenue growth
are collected each time a payment is pro- in RDEs. (See Exhibit 3.)
cessed, and secondary revenue includes
non-transaction-related card revenue as well RDEs Continue to Drive Payments
as account revenue. The role that each plays innovation
in driving total payments revenue growth is Scrappy, young digital payments players—
shifting. Buoyed by non-cash-payment vol- propelled by strong investor backing—are
umes as well as a significant decline in inter- creating bold, new business models and tar-
est margins, primary-payments revenue now geting populations that traditional payments
accounts for 43% of total payments reve- providers have largely ignored. BCG’s Fintech
nue in the mature markets, up from 38% in Control Tower data reveals that large fintechs
2010. in the Asia-Pacific region account for almost

8 | GLOBAL PAYMENTS 2018


Exhibit 3 | Primary Sources Are Driving a Greater Share of Payments Revenue Growth

MATURE MARKETS RAPIDLY DEVELOPING ECONOMIES

Payments revenue ($billions) Payments revenue ($billions)


1,500 1,500 1,465

27%

1,000 953 1,000

616 47% 657


518 24% 73%
500 43% 500
38% 286
53% 22% 76%
62% 57%
78%
0 0
2010 2017 2027 2010 2017 2027

Primary Secondary

Source: BCG Global Payments Model 2018.


Note: Primary revenue includes revenue from transactions only; secondary revenue includes annual account maintenance fees, interest on
account deposits, card fees, and penalty fee revenue. Mature markets include Western Europe, North America, and Asia—mature (Australia, Japan,
New Zealand, and South Korea); all other regions are included under rapidly developing economies.

half of total equity funding in digital retail POS solutions tailored to the needs of online
payments. retailers and small merchants.

We predict that RDEs will continue to be


Incumbents have missed a hotbed of payments innovation—raising
the bar for incumbents both locally and
out on the massive growth globally.

captured by attackers.
Regional Outlook
Factors propelling growth play out differently
While incumbents have not lost in absolute across countries and regions. Here is our re-
terms, they have missed out on the massive gional payments outlook.
growth that attackers have been able to cap-
ture by providing customers with compel- US
ling new features and services. In China, for Helped by favorable macroeconomic condi-
instance, companies such as Tencent and tions, US payments revenue grew at a 5%
Ant Financial have created a huge mobile- CAGR from 2015 through 2017. Card pay-
payments ecosystem that caters to the needs ments revenue grew 6% during the same peri-
of people not sufficiently covered by tradi- od. We project that growth will slow slightly
tional banks. Paytm has done the same in from 2018 through 2027, hovering at about
India, focusing on small merchants that fre- 4% for payments overall and 5% for card pay-
quently go underserved by traditional banks. ments. The shift to digital payments has been
Paytm’s innovations, including user-friendly particularly robust, with mobile commerce
QR codes that make it easy for shop owners becoming an increasingly important compo-
to enable acceptance along with Paytm’s nent of this growth. As an example, mobile
huge on-the-ground sales teams, have won purchases accounted for one-third of 2017
the company a wide following. Likewise, in Thanksgiving Day, Black Friday, and Cyber
Latin America, new players such as PagSeguro Monday online payments.
and Stone have disrupted business previously
dominated by big bank-owned acquirers by Still, while US consumers have shown a will-
offering innovative e-commerce and mobile ingness to buy online through apps, they

The Boston Consulting Group • Swift | 9


have been less inclined to use apps when Europe
making in-store purchases. Mobile wallets In Europe, total payments revenue grew at a
and device apps accounted for only about 2% CAGR from 2010 through 2017 to reach
1% of all in-store purchases during the $216 billion. Declining interest rates contrib-
Thanksgiving Day period. Another worry is uted to flat growth in payments revenue in
that growth in online sales and “card not Western Europe; this weighed down pay-
present” transactions could lead to an uptick ments revenue growth across Europe as a
in remote fraud, which can be easier to exe- whole. That should change going forward,
cute and scale than in-person fraudulent- and we expect payments revenue to maintain
card use. a CAGR of 6% through 2027, as transaction
growth in both Western and Eastern Europe
accelerates.
Fintechs and digital giants A number of factors are likely to reshape the
are raising the bar for payments space across the region over the
next several years. The first is consolidation.
traditional payments players. Several M&A deal announcements in the first
half of 2018 herald a new wave of buyouts in
the European merchant-acquiring landscape.
In addition, fintechs and digital giants are This builds on an earlier wave of private eq-
raising the bar for traditional payments uity (PE) acquisitions that were focused on
players. For example, the in-store credit snapping up undermanaged utilities. Those
space is rapidly innovating. Fintechs such as acquisitions helped PE owners generate tre-
Affirm, GreenSky, and Vyze are providing a mendous value—professionalizing manage-
credible alternative to traditional store ment and allowing them to gain new digital
cards, offering merchants simple integra- capabilities and serve as a platform for fur-
tions and providing customers with even ther acquisitions. We also see the emergence
more ways to pay. of pan-European payments providers, such as
Worldline and Nets, that are seeking to use
Others are experimenting with different earlier investments to build cross-border
pricing models and bundles. Fair Square, a scale over the next several years. This will
fintech specializing in near-prime lending, make it harder for subscale and bank-owned
achieved a 30% better response rate in a ma- assets to compete, which will spur further di-
jor marketing campaign as a result of ad- vestments, partnerships, and consolidation.
vanced machine-learning techniques that
sped test-and-learn cycles. Similar tech- Another factor is regulation. The European
niques also improved underwriting perfor- Commission launched a proposal to reduce
mance. the price of cross-border euro payments in
non-euro EU member states and increase
While fintechs and digital giants still com- transparency for customers when doing cur-
mand only about a 2% share of the overall rency conversions. This will likely lead to low-
payments market in the US, card issuers can’t er cross-border payments fees. Competition
afford to sit back. Many are using cobranded will also intensify. As PSD2 opens up the
opportunities to expand their base and devel- banking market, the payments arena will be-
op attractive customer value propositions. come increasingly crowded, with more play-
That push has led to shifts in some cobranded ers and a greater number of product choices
ventures, as well as major changes to program for customers.
economics and more-aggressive rewards.
Rather than view the disruption as a threat,
Finally, as real-time payments come to the however, leading banks will take advantage
US, banks will be pressed to upgrade their of the opportunities that open banking cre-
technology stack and find use cases that al- ates to augment existing services, build new
low them to gain a competitive edge over digital channels, and create disruptive new
peer banks and nonbank competitors. ventures of their own. In addition, banks can

10 | GLOBAL PAYMENTS 2018


use their trusted advisor status to become a South Korea, in particular, has become a
valued custodian and steward of customer world leader in cashless transactions, helped
data—something that will become increas- by a regulatory environment that has favored
ingly important in light of the General Data the growth of strong local card companies. In
Protection Regulation (GDPR) that mandates 2017, South Korea had approximately 436
stricter data governance rules. noncash payments per capita, almost double
the number in 2012.
Finally, the payments infrastructure is chang-
ing. In November 2018, the European Central Technology is one of the key drivers behind
Bank (ECB) will launch its TARGET Instant this growth in noncash payments in Asia; it is
Payment Settlement Service (TIPS) in an ef- being used to simplify the customer onboard-
fort to create a pan-European solution for the ing and transaction experiences. For example,
settlement of instant payments, alongside facial recognition and fingerprints are replac-
other initiatives such as EBA Clearing’s RT1 ing passwords and know-your-customer (KYC)
system, which was launched in 2017. We ex- authentication for financial transactions.
pect that 80% of European banks will be in a
position to accept pan-EU real-time credit Another trend is the speed at which non-
transfers by the end of 2018. banks are entering the payments arena. They
include a growing number of social media
Asia companies (for example, Line, Facebook, and
In Asia, total payments revenue grew at a KakaoTalk) as well as startups in sectors
12% CAGR from 2010 through 2017 to reach seemingly far removed from financial ser-
approximately $490 billion. And we expect vices. Grab, for instance, is a major Southeast
that it will continue to grow, increasing at a Asian transportation company with a rapidly
CAGR of 7% through 2027. While consider- growing payments and financial services
ably above the 4% annual growth rate in ma- portfolio for small merchants and entrepre-
ture markets, the rate of growth in Asia is neurs. The company’s digital payments ser-
slowing. That’s largely because of China, vice, GrabPay, now boasts a user base of 6
which drove more than half of the 12.6% million entrepreneurs with a target to in-
growth rate in RDEs since 2010. crease that number to 100 million by 2020.
Use of GrabPay credits has grown 80% month
to month since its launch in November 2016.
After stellar growth over the In China, digital giants such as Ant Financial
past seven years, China’s and Tencent dominate the fast-growing mo-
bile-payments space. They have a combined
payments space is maturing. market share of over 90% in mobile pay-
ments. Given the fierce competition between
these two players in domestic markets, both
As payments in China mature and transition are also looking to expand abroad. In doing
to alternative payments schemes, revenue so, they are taking a two-pronged strategy:
growth from traditional financial institutions trying to replicate their original model across
has begun to slow, particularly in debit cards. Asia-Pacific through investments in local digi-
After the stellar growth of the past seven tal wallets (for example, Alipay’s investments
years, the country’s payments space is matur- in Paytm in India) and seeking to expand ac-
ing. Annual card transactions per capita in ceptance at retailers in Europe and North
China will reach more than 200 by 2027, America by targeting Chinese tourists and the
which corresponds to the average number of Chinese diaspora. Together, these businesses
annual card transactions in mature econo- have attracted a staggering $18.5 billion in
mies in 2017. As payments growth in China equity funding—roughly 45% of total equity
cools, large economies such as India, Indone- funding in digital retail payments globally.
sia, and Vietnam will pick up some of that
slack. Each is on track to increase payments The sharp growth trajectory of Chinese digi-
by more than 9% over the coming decade. tal payments services Alipay and Tenpay over

The Boston Consulting Group • Swift | 11


the past several years matches a slower in- further as the UPI was extended in 2018 with
crease in debit card spending in the country, new features such as linking overdraft ac-
after staggering growth of 38% CAGR from counts, sending invoices directly to a custom-
2010 through 2015. er’s inbox, and scheduling payments.

In addition, the UPI’s open architecture has


The UPI could be a game encouraged tech giants such as Google and
Facebook as well as local e-commerce players
changer for the digital like Flipkart to build intuitive payment apps,
which could boost adoption of noncash pay-
payments space in India. ments for P2P as well as merchant trans-
actions.

Elsewhere in the region, India has seen pay- Latin America


ments volumes rise significantly in the two Payments in Latin America continue to show
years since demonetization. In 2017, total strong growth, rising by a CAGR of 9% from
payments revenue equaled $20 billion, com- 2010 through 2017, and are expected to in-
pared with $17 billion in 2016. We expect crease by a further 11% annually over the
that payments revenue will increase at an next ten years. We see significant room for
11% CAGR over the next ten years. One factor growth in Latin America because non-cash-
behind this growth has been the availability payments penetration significantly lags that
of innovative payment methods such as Pay- in mature economies. While the macro-
tm and Google Pay (formerly Google Tez), economic picture for Latin America is mixed,
which have expanded payments access. An- noncash payments are gaining traction.
other factor has been the Indian govern- MercadoPago, the payments branch of the
ment’s push to advance noncash payments, marketplace giant MercadoLibre, now offers
an effort that included promoting payments mobile wallets, P2P, mobile POS, and mer-
infrastructure modernization and waiving the chant financing. Argentina’s Todo Pago is fol-
merchant service charges (MSCs) for debit lowing a similar path with P2P and QR-based
transactions below $30 through a subsidiza- mobile payments. In Chile, Banco Bci has
tion program. added an innovative P2P platform and
launched a prepaid card called MACH.
Winners from demonetization include the lo-
cal card scheme RuPay, whose volumes are The acquiring landscape is transforming rap-
up almost 2,000% over the past two years, idly and opening up to new competitors. In
driven by increased activation and use of Brazil, the historical stronghold of Cielo and
debit cards, and the digital wallet Paytm, Rede is under attack by Santander Getnet
whose volumes grew by 900% over the same and new entrants such as PagSeguro and
time period. Both succeeded in attracting un- Stone. Incumbents and large banks are com-
derbanked or inactive customer segments. peting on several fronts, including the sale of
POS terminals. In Argentina, regulators have
On the infrastructure side, the UPI that the been pushing for the sale of bank-owned Pris-
National Payments Corporation of India ma, while in Colombia regulators are trying
(NPCI) launched in 2016 could be a game to expand competition beyond the country’s
changer for the digital payments space in In- two payments processors/networks. In Chile,
dia and may lead to a drastic shift away from new player Multicaja received an acquiring
traditional cards and wallets to account-based license and is challenging the traditional in-
payments. The UPI has also made it easier cumbent, Transbank. And Compraqui, a new
for foreign attackers such as PayU and acquiring service offered by BancoEstado and
WhatsApp to enter the Indian market. SumUp, is making inroads against established
institutions by focusing on long-tail opportu-
In the two years since UPI launched, UPI vol- nities such as underserved small merchants.
umes have grown to 9% of total retail pay- In Mexico, Citibanamex sold its acquiring di-
ments in India; and they are set to increase vision to EVO Payments.

12 | GLOBAL PAYMENTS 2018


Across Latin America, new regulations are cryptocurrencies. In addition, the government
also having an impact. Brazil and Argentina and financial sectors are working together on
both introduced new interchange regulations. initiatives to improve noncash adoption, such
And Brazil’s central bank announced a plan as enabling the use of QR codes. While these
to develop a national instant-payments interventions create new challenges for pay-
scheme. In Mexico, regulators are working to ments players, they are also likely to drive the
mandate open banking and provide a regula- growth of noncash payments.
tory framework for other innovations such as

The Boston Consulting Group • Swift | 13


RETAIL PROVIDERS MUST
EVOLVE THE PAYMENTS
JOURNEY

R etail banks, merchant acquirers,


and payments providers have the oppor-
tunity to increase revenue significantly over
jarring. As digital giants and fintechs vie for
their share of the payments space, card
issuers must address key irritants in the
the coming years. Our data shows that retail purchasing process to retain existing custom-
revenue is on track to outpace wholesale ers and expand their base.
payments revenue. (See Exhibit 4.) Maintain-
ing strong growth, however, requires that
retail payments providers address crucial Five Ways to Improve the Online
customer pain points. In a “click of a button” Buying Experience
world, buying journeys that are riddled with We recommend that payments providers
manual processes and clicks feel especially focus most of their attention on the online

Exhibit 4 | Retail Payments Revenue Is Expected to Outpace Wholesale Payments Revenue


RETAIL PAYMENTS WHOLESALE PAYMENTS

Payments revenue ($billions) +7% Payments revenue ($billions)


41 1,850 +6%
119 600 25 568
263 5% 14
153 11%
13%
1,500 462 5%

30% 400 69
1,000 965 307
6% 59%
13% 11%
5%
31% 200
500 51% 60%

50% 25%
24%
0 0
2017 Credit card Account Debit card Non-card- 2027 2017 Credit card Account Debit card Non-card- 2027
revenue revenue revenue transaction revenue revenue revenue transaction
revenue revenue

CAGR 7% 7% 7% 5% CAGR 7% 6% 7% 6%

CAGR 2017–2027
Sources: BCG Global Payments Model 2018; BCG analysis.
Note: Credit and debit card revenue include transaction-specific fees (interchange fees, merchant-acquiring fees, and currency conversion fees for
cross-border transactions) and monthly or annual card membership fees. Credit card revenue also includes net interest income, penalty fees, and
other service fees (for example, cash withdrawal fees). Debit card revenue also includes fees for overdrafts and insufficient funds. Account revenue
consists of net interest income and maintenance fees on current accounts (such as demand deposit accounts). Non-card-transaction revenue
includes transaction-specific fees and, as applicable, fees for overdrafts and insufficient funds. Credit card revenue includes charge cards; prepaid
cards are included in non-card-transaction revenue. Totals and percentages may reflect rounding.

14 | GLOBAL PAYMENTS 2018


shopping experience. Not only is this the It’s an annoyance that is likely to get worse as
fastest-growing area in the consumer pay- PSD2 regulations take effect in Europe. Those
ments space, it’s also the one where the pain regulations are expected to double the num-
points are most pronounced. ber of transactions that require strong cus-
tomer authentication. To avoid losing share
E-commerce transactions account for close to to competitors such as PayPal and Amazon
12% of total retail sales. That percentage is like- Pay that have created one-click checkout
ly to increase to 20% by 2022 as the number of solutions, card issuers and card networks
digital channels and buying platforms prolifer- must come together and significantly revamp
ates. We estimate that more than 20% of the the authentication experience.
growth in acquiring revenue will be driven by
demand from global merchants and those that One promising approach is to advance the
are considering expanding internationally and use of biometrics. Given the widespread
need global payments solutions. Yet incumbent adoption of mobile phones, fingerprint and
players will face stiff competition. facial recognition methods could speed
checkout without compromising security. An-
other way to reduce cart abandonment rates
Time and tedium are a is to develop risk-based algorithms as an al-
ternative to PSD2’s strong customer authenti-
major driver of high cart cation requirements.

abandonment rates. Over the longer term, providers should push


for an industrywide authentication standard.
Authentication solutions that are limited to a
To attract and retain customers, providers single use case or a single bank won’t be
must address persistent problems. Data able to build critical mass; customers won’t
shows that the average e-commerce website be interested in juggling multiple authentica-
requires shoppers to click roughly 23 times tion protocols. Instead, banks should take
before completing their purchase.1 Cumber- their cue from the Nordic countries, where
some checkout processes often require cus- industrywide authentication has been
tomers to complete a series of microtasks, around for some time. One initiative that
such as keying in their billing address, credit could be particularly promising is the Secure
card number, shipping address, and other ba- Remote Commerce (SRC) standard being im-
sic information. The time and tedium are a plemented by Visa and Mastercard, which
major driver of high cart abandonment rates, could result in a single “buy” button across
especially in mobile commerce, where cus- card networks, merchants, and channels. (See
tomers are on the move and might not have the sidebar “A Card Network Initiative Could
the time or all the information required to Help Unify Authentication Standards.”)
finalize the payment. In the first quarter of
2018 alone, cart abandonment resulted in an Inject New Value into the Buying
estimated $236 billion in lost sales.2 Journey
Payments providers have several ways to dif-
Banks and payments service providers must ferentiate their service and add customer val-
address these issues or risk losing their share ue. One is to remove unnecessary process
of the sizable revenue growth that is forecast steps by redesigning and automating the
in the space. Rather than spreading their bud- e-commerce experience. For example, mer-
gets across a number of initiatives, retail pay- chants that offer Apple Pay, which automates
ments providers should focus on several cru- the entire purchasing journey, have sales con-
cial issues. version rates that are five times higher than
those that don’t use Apple Pay. Another way
Simplify and Harmonize payments providers can differentiate their ser-
Authentication vices is by offering personalized recommenda-
One major driver of online cart abandon- tions and improving site selection—and their
ment is a clunky authentication experience. extensive transaction data repositories give

The Boston Consulting Group • Swift | 15


A CARD NETWORK INITIATIVE COULD HELP UNIFY
AUTHENTICATION STANDARDS
EMVCo, an organization established and ing experience offered by Amazon and
managed by six major card networks, PayPal.
announced the creation of Secure Remote
Commerce (SRC), a set of digital authenti- If the effort proves successful, adoption
cation standards designed to work across could also reduce complexity and costs for
all card schemes and issuers. merchants, many of whom today must
integrate a wide assortment of checkout
The aim is to create a simpler and more and authentication options. Customers will
secure checkout process for web and register for the authentication program
mobile shopping. In addition to establish- using their online banking app, and card
ing uniform authentication standards, the issuers will enable SRC within their own
SRC initiative includes digital process online apps. In addition, SRC is designed to
enhancements. When the SRC system work within EMVCo’s wider portfolio of
goes live—expected at the end of 2018— security technology, including EMV Pay-
customers will be able to press a single ment Tokenization, which should make it
“buy” button during online or mobile easier for merchants to store card tokens
checkout, similar to the one-click purchas- securely.

them a distinct advantage in this area. A third able purchasing bigger-ticket items online.
way to inject value is to offer innovative pay- This will fuel demand for online financing. In
ment options through features such as instant response, we expect the consumer finance
financing and flexible payback terms and to business to move online as well. Fintechs
improve the postpurchase period through such such as Klarna and Affirm and large card is-
things as real-time chargebacks—all of which suers such as Synchrony already have their
are likely to have wide customer appeal. eyes on this opportunity. But rather than cede
this area to them, incumbent issuers should
Reinforce Leadership in Card-on-File partner with acquirers or merchants and cap-
Payments ture this emerging opportunity in online
At the physical POS, consumers decide which credit.
card they wish to use each time they make a
transaction. The online space is different. Develop Payments Solutions That
There, the ability to preselect a card on file Work Globally
means one card tends to become the default. While e-commerce is becoming increasingly
The largest card issuers understand these dy- global, consumers often still want to pay
namics. Many have begun to partner actively using their familiar, local payment methods.
with large merchants in offering incentives With the rapid growth that’s occurring in
and promotions to make their card the prima- cross-border e-commerce, online merchants
ry card-on-file choice. Smaller issuers are at a are looking for providers that can help them
disadvantage in this area because many do accept a variety of local payments solutions
not have digital teams to promote card activa- by supporting alternative payment methods
tion and partnerships with retailers. With dig- and making authentication easier for card
ital payments likely to account for up to 50% payments. Leaders in this area have the
of payments revenue growth, the battle for potential to generate significant new reve-
primary-card status in digital payments is one nue flows. To avoid being left behind, other
that issuers cannot afford to lose. payments providers need to focus on the
merchant segments where they have the
Embrace the Move to Online Financing strongest market opportunities and need to
As e-commerce becomes more mature, cus- invest in digital cross-border payments
tomers are becoming increasingly comfort- solutions.

16 | GLOBAL PAYMENTS 2018


Three Ways Acquirers Can airlines, for instance, that have integrated
Improve the Broader Merchant payment and booking systems can spare cus-
Experience tomers the hassle of reentering or supplying
Although merchant acquirers have invested their credit card number to buy extras for a
in improving service and outreach, most hav- flight or check out of a hotel.
en’t made the deep, structural adjustments
needed to address lingering pain points. The need for these capabilities has opened
That’s giving fintechs and new digital en- the door to integrated software vendors
trants an unnecessary advantage. (ISVs) that provide payments integration and
vertical industry specialization. ISVs now ac-
Payments providers focusing on mobile POS count for 5% to 10% of total card transaction
solutions for small retailers or online pay- volume in the US, and their share of the mar-
ments solutions for e-commerce players are ket is expected to grow significantly over the
using their digital capabilities to provide mer- coming decade, especially among small to
chants with enhanced offerings that are de- midsize enterprises. Verticals with a relatively
signed to slot easily into a merchant’s exist- large penetration of integrated payments
ing systems. They are increasingly providing today include online marketplaces, quick-
the capabilities that allow merchants to deliv- service restaurants, personal services, health
er an omnichannel customer experience care, and B2B. As this market grows, we ex-
without being limited by geographic bound- pect vertical specialization will expand to in-
aries. clude many other sectors.

The combination of innovative tactics, the


growth in M&A, and the arrival of e-wallet
providers—some of which are bypassing tra-
Successful ISV partnerships
ditional acquirers and bundling merchants require a heavy investment in
directly into their proprietary wallets—is
causing price compression in the industry. In
service and technology.
the US, for instance, we predict these factors
will lead to a roughly 3% decrease in acquirer
margins. As ISVs gain scale and expand along the val-
ue chain, acquirers need to defend their base.
We are also witnessing an evolution in how While some may choose to invest in building
digital mobile POS companies and e-com- their own integrated payments capabilities,
merce players go to market. New players are others will focus on forming strategic partner-
finding innovative ways to expand their mer- ships with ISVs or acquiring ISVs outright.
chant base, using a multichannel distribution These arrangements would allow merchant
model that includes direct online sales as acquirers to gain access to needed functional-
well as sales through partnerships. This ap- ity and provide customers with a comprehen-
proach allows new players to rapidly scale up sive payments offering.
sales across geographic areas and extend ser-
vice to small and midsize enterprises. Forging successful ISV partnerships requires a
heavy investment in service and technology.
To meet the changing needs of merchants In the technology industry, leaders such as
and grow in the face of pricing headwinds, Microsoft succeed in wooing desirable ISV
merchant acquirers need to address three partners by demonstrating that they have
crucial areas. leading technologies and by making it easy
for an ISV developer to quickly and cost-
Deliver Integrated Payments effectively integrate its products into their
Merchants increasingly want payments func- systems. This practice of demonstrating a
tionality to be integrated into their core sys- company’s “partner of choice” credentials is
tems, such as their ERP and accounting sys- on its way to the acquirer space, where tech-
tems, and they want that functionality to be nical capability and customer centricity are
tailored to their particular industry. Hotels or becoming paramount.

The Boston Consulting Group • Swift | 17


To attract the most promising ISV partners, greater productivity and growth. In
merchant acquirers must upgrade their core high-performing B2B sales teams, for
technology stack to support collaboration instance, the inside sales force drives as
and develop APIs to simplify data connec- much as 70% of all sales, according to
tions. They also should create mechanisms BCG data.
to evaluate verticals and partners systemati-
cally in order to ensure that the arrange- •• Align sales coverage with customer
ment satisfies return on investment. Finally, value. To improve sales effectiveness and
acquirers need to develop a competitively customer service, leading players segment
advantaged, customized offering for their their coverage models. They match their
target verticals so that they can reduce the top-performing relationship managers
pressure to share a larger portion of their with high-value accounts or those that
revenue with ISVs. have the most complex needs; they
migrate lower-value customers or those
with basic needs to an online sales model
Acquirers must develop a backed by top-notch digital processes that
allow customers to manage most needs
competitive, customized using convenient, self-service tools.
Merchant acquirers can adopt a similar
offering for target verticals. approach. In addition, they should
integrate the postsales team into the
coverage model to improve communica-
Adopt a New Go-to-Market Approach tion and collaboration across the sales
While the ISV channel will expand signifi- cycle and identify cross-selling opportuni-
cantly in the US and beyond, direct sales ties. These steps can help acquirers
channels will remain important. For exam- increase customer satisfaction, retention,
ple, large merchants will continue to demand and renewals.
direct acquirer relationships. While digital
technology companies such as Salesforce. •• Shift from inbound to outbound leads.
com, Box, and Amazon Web Services have Feeding the inside and outside sales
evolved their B2B sales and marketing mod- teams with potential customers requires
els considerably over the past decade, most an investment in next-generation data-
merchant acquirers have not. That means driven lead generation. Marketing plays a
they’re leaving value on the table. By emulat- much larger role now in B2B sales, and
ing the practices of fast-growing technology leading marketing teams use data to
vendors, merchant acquirers can improve identify excellent lead candidates and
both sales effectiveness and service quality. spot opportunities to help merchants
Here’s how: more successfully implement merchant
acquirer services.
•• Develop an inside sales force. Tradition-
ally, merchant acquirers have relied on •• Introduce flexible pricing models. In
field representatives to manage all aspects contrast to traditional merchant acquirer
of the sales cycle. But that approach can pricing models, which tend to be fixed and
result in too much time spent on adminis- tiered with complex structures and
trative tasks and too little time in front of layered fees, the new pricing models
customers and prospects. Leading players developed by digital leaders emphasize
relieve that load by creating an inside simplicity, flexibility, and transparency.
sales force to partner with field sales. Merchant acquirers can take a similar
While field reps focus on building high- approach and offer a mix of pricing
value relationships, the inside sales team bundles and payment plans, such as
focuses on sourcing and qualifying leads, pay-as-you-go or subscription services that
using lead-scoring algorithms to vet and feature “no hidden charges” guarantees,
prioritize promising targets. That im- no monthly minimums, and flat merchant
proved division of labor contributes to service charge (MSC) rates.

18 | GLOBAL PAYMENTS 2018


Invest in Adjacent Services acceptance. In particular, we estimate that
Acquirers enjoy a strong and trusted position two-thirds of card-not-present payments in
in a merchant’s supplier stack. The strongest the US are related to nonretail transactions
acquirers leverage that trusted position, as such as bill payments. As competition for
well as the extensive data and expertise they merchant business intensifies, innovative
have in the payments space, to offer a suite of acquirers will develop capabilities that focus
valuable services to their customer base. on these untapped areas to expand their cus-
tomer base.
The mobile payments company and mer-
chant services aggregator Square earns al-
most 30% of its adjusted revenue from
adjacent services. In addition to same-day
deposits, Square’s offerings include the abili- Notes
ty to provide loans, invoice services, and pay- 1. Checkout Conversion Index, Payments.com, April
2018 https://www.pymnts.com/checkout-conversion-
roll for small and midsize businesses. Square index/
has adopted a VC-style approach to launching 2. Checkout Conversion Index, Payments.com, April
these new businesses, with the goal of driving 2018 https://www.pymnts.com/checkout-conversion-
index/
both revenue and customer loyalty.

We believe acquirers also have a significant


opportunity to develop services that go be-
yond traditional e-commerce transaction

The Boston Consulting Group • Swift | 19


WHOLESALE BANKS
MUST ADDRESS THE
EXPECTATIONS GAP

C orporate treasurers are being


pulled in two directions. On one hand,
they must manage core cash flow and
Faced with a more challenging remit, corpo-
rate treasurers are looking for their whole-
sale-banking partners to improve the quality
liquidity operations with greater speed and and convenience of their service. They want
efficiency. On the other, they must address a digital tools and data that make it easier to
growing number of strategic business issues manage financial flows, resolve reconcilia-
at the enterprise level. Wholesale banks have tion problems, and issue proactive alerts,
not kept up with these evolving demands. and they want plug-and-play connectivity
Not only have they been slow to innovate between their transaction service provider
their product and service offerings, but they offerings and their own internal financial
have been slow to address basic shortcomings systems.
in the customer experience. Those gaps have
opened the door to nonbanks. While ERP
providers, treasury management systems
(TMSs), and fintechs lack the institutional
It’s essential to treasurers
expertise and full-service capabilities of that wholesale banks deliver
wholesale banks, they are taking share in a
number of areas. Wholesale banks must close
well on the basics.
the expectations gap or find themselves
sidelined.
But while treasurers are clamoring for stron-
ger digital solutions, what they want most is
Unresolved Pain Points Erode for banks to deliver well on the basics. A sur-
Banks’ Trust Advantage vey at one large European bank found that
Many treasurers view wholesale banks as a more than a quarter of all customers said
valued extension of their own business, re- managing international and domestic pay-
garding them with the same level of trust as ments with the bank was difficult to very dif-
they do many internal corporate functions. ficult. Real-time payments will resolve some
Yet a BCG treasurer survey in partnership of these issues, but compelling end-user ap-
with BNP Paribas found fissures emerging. plications remain a few years out. (See the
Wholesale banks are failing to meet customer sidebar “Enabling Faster B2B Payments.”)
expectations on a number of fronts. (See Cor-
porate Treasury Insights 2018: A Game of Trust, Persistent complaints include long lead times,
BCG and BNP Paribas Focus, June 2018.) too many process steps and interactions, and

20 | GLOBAL PAYMENTS 2018


ENABLING FASTER B2B PAYMENTS
Real-time payment (RTP) systems are for control processes, liquidity manage-
becoming increasingly well established ment, and accounting protocols). RTPs will
across the globe: more than 25 countries also need to be integrated with ERPs, and
have RTPs in place, with some notable industrywide collaboration may be required
systems including the New Payments to embrace ISO20022. In addition, inertia
Platform in Australia and The Clearing could delay adoption—organizations may
House’s Real-Time Payments network in be reluctant to invest in change because
the US, coming online in the past year. many have passable workarounds for
current pain points.
While these new systems are still in their
infancy, they offer significant potential for That shouldn’t stop banks from taking
B2B payments. Faster speeds, payment advantage of RTPs, however. In the short
certainty, and payment finality will enable term, banks should focus on using RTPs to
just-in-time deliveries and time-critical offer new and innovative services that can
disbursements and will expedite the shift improve their corporate customers’ client
away from paper in payment-on-delivery experience, differentiate their offerings, and
situations. RTPs can also provide organiza- reduce paper. These opportunities are likely
tions with richer contextual data. Newer to emerge in the business-to-customer
RTPs are set up to transmit more-detailed domain (insurance claim payouts, for
remittance information than legacy example), where customers value faster
payments systems, adhere to international access to funds; and in new customer-
(ISO20022) message standards, and make centric services, such as RTP payments that
it possible to attach PDF files with invoices can be made at the push of a button directly
or other payment information to the from a payments app. First movers will likely
payment message, which can enable a enjoy a short window of opportunity before
more seamless, straight-through-processing these services become mainstream.
experience in accounts receivable.
To foster long-term adoption, banks can
There are challenges to overcome, however, take part in industry initiatives to encour-
before RTPs become mainstream in B2B. age standardization. They can also partner
Organizations will need to adjust current with fintechs to develop industrywide
processes (for example, move from batch solutions such as proprietary AP/AR
processing to real time, with implications platforms that connect buyers and sellers.

too little clarity on timing, approvals, and oth- With banks struggling to meet treasurer expec-
er items. Treasurers continue to be frustrated tations, nonbanks are working hard to position
by what they see as a lack of transparency on themselves as alternative providers. BCG’s trea-
pricing structures, which brings uncertainty sury survey found that treasurers in North
and occasionally annoyance. In addition, or- America rated ERP vendors and payments pro-
ganizations are not served in a holistic way viders higher than wholesale banks on a trust
because of product and structural silos within index. Fueled by massive investments, the
the banks, and treasury teams are often number of fintechs specializing in B2B pay-
asked to provide documents multiple times ments has grown by more than 33% since 2010,
when opening new accounts because of in- according to BCG’s Fintech Control Tower data.
consistent banking requirements across re- That growth has led to a rich variety of pay-
gions. Likewise, wholesale-banking models ments solutions, including procure-to-pay, ac-
are generally not optimized for specific indus- counts payable (AP) and accounts receivable
try or business characteristics, which means (AR) automation, cross-border payments, and
customers don’t get the tailored advice or ser- specialized working-capital offerings such as
vice they would like. dynamic discounting and supply chain finance.

The Boston Consulting Group • Swift | 21


Wholesale banks cannot afford to ignore sure on wholesale banks to create a more sat-
these issues. They must take stock of the isfying digital experience will only increase.
changing digital landscape and define a clear
strategy and approach. We see four emerging digital models that
wholesale banks can follow—either individu-
ally or in combination—to address customer
Wholesale Banks Can Close the needs and avoid disintermediation. (See Ex-
Gap in Three Ways hibit 5.)
We believe three areas can play an outsize
role in helping wholesale banks address the Transform the online-banking platform into
expectations gap and provide significant cli- an open-aggregator platform. While bank
ent value. They include building out a strong platforms provide rich functionality, treasur-
digital channel presence, rethinking service ers don’t want to be wedded to one solution.
delivery, and making smarter use of data and Transforming a bank’s proprietary platform
analytics. into an open-banking aggregator platform
could help banks retain control of the valu-
Embrace a Clear Digital Strategy able client interface while giving clients an
Wholesale banks should rethink their digital extended 360-degree view of their positions
channel strategy so that it fits better with across multiple banks. In doing so, banks
evolving treasurer needs. Better aggregation should allow clients to access information
capabilities, for instance, would allow treasur- across banks; provide greater transaction
ers to track transaction activity across banks functionality; enable easy ERP integration;
without having to access multiple systems. and offer liquidity forecasting, working-
Likewise, designing services that integrate capital optimization advice, and other data-
easily with corporate ERP and accounting enabled add-ons.
systems would allow treasurers to avoid
time-consuming process steps and improve Launch an independent-aggregator venture.
their productivity. As PSD2 and other regula- Wholesale banks could also choose to devel-
tions open up the banking market, the pres- op a nonproprietary market-leading platform

Exhibit 5 | Four Emerging Digital Models for Wholesale Banks

TRANSFORM INTO AN OPEN- LAUNCH AN INDEPENDENT- PURSUE INTEGRATION ORCHESTRATE BUYER-


AGGREGATOR PLATFORM AGGREGATOR VENTURE EXCELLENCE SELLER INTERACTIONS

The Create a new


primary Extend product and Extend product and service Own the access point to
distribution channel
benefit service offerings to offerings to current clients corporate clients for own
leveraging the bank’s
for the bank’s current clients and clients from other banks and third-party solutions
banks product competencies

Key
risks
Preference of corporations Potential synergy loss Loss of control of Difficulty
for bank-neutral platforms and cannibalization client interface achieving scale

• Client acquisition • Client acquisition • API channel • Client and supplier


• Interface design • Interface design management acquisition
Critical • Partnership • Interface design
capabilities • Integrations • Integrations
development • Integrations
• Partnership • Partnership
development development

Source: BCG analysis.

22 | GLOBAL PAYMENTS 2018


that features the same type of multibank investment and cross-sell other products (in-
aggregation and third-party ecosystem cluding giving third parties the option to sell
offerings catalogued in the above option but on the platform, with banks taking a percent-
run it as an independent initiative. That age of the sale). The marketplace model
structure might appeal to treasurers who are would also give banks ongoing access to fresh
wary of monobank solutions, especially data that they could use to improve credit
because BCG’s survey data shows treasurers scoring and liquidity forecasting as well as for
increasingly want bank-neutral offerings. other purposes.
Therefore, such a move could be in a bank’s
enlightened self-interest.

Pursue integration excellence. Rather than


The orchestrator model lets
try to control the client interface, banks could banks directly monetize their
instead elect to integrate their offerings into
third-party systems and compete on product
platform investment.
and service quality. This option could allow
banks to face what is already a growing
reality, given that only approximately 12% of To succeed with this model, wholesale banks
corporate treasurers currently rely solely on need scale. Focusing on a specific industry
proprietary banking platforms. Success vertical and collaborating with other banks to
requires that banks enable key products and gain critical mass in specific geographic mar-
services with APIs that can be reused across kets are two ways to build scale in the short
channels in a cost-effective and scalable way. term. This model can be difficult for banks to
One leading bank, for instance, created a advance on their own because the skills and
dedicated API channel with its own P&L to reach required often go beyond the capabili-
commercialize its banking products and ties and networks of traditional banks.
services through third parties. Banks could
also engineer solutions that make it easy for Determine the right model. These four
clients to integrate bank offerings into the options are not mutually exclusive. In choos-
most commonly used accounting or ERP ing the type of engagement model to pursue,
systems. In addition, they could look to banks should consider their client base, their
commercialize payment functionality for the market, their starting position, and their
emerging B2B fintech players that don’t have scale. Banks that service a substantial num-
a direct connection to the payments infra- ber of large caps, for instance, may want to
structure. focus on integration opportunities because
large organizations tend to be heavy users of
Orchestrate buyer-seller interactions. This TMS. Mid caps, on the other hand, generally
approach would allow banks to defend the lack the scale to implement top-end software
customer interface in two ways: by offering solutions and may be more interested in
attractive payments solutions and by creating aggregation solutions with sophisticated
a convenient bank-managed buyer-seller working-capital functionality. Small caps
ecosystem. usually are satisfied with a bank portal and
have less need for aggregation.
Under this model, buyers and suppliers could
upload their invoices, integrate payments, With respect to geography, banks in mature
and access working-capital solutions. Invoice markets such as the US, for instance, face
reconciliation would become significantly greater urgency to digitize their models than
easier because both buyer and supplier banks in Asia-Pacific.
would be on the same platform. And given
that the invoice would also be on the plat- Finally, a bank’s size and market position
form and confirmed by the buyer, the model matter. Large banks can afford to invest in
would make it easier to offer working-capital several options, while smaller, domestic
solutions. This orchestrator model would al- banks need to be more selective. Likewise,
low banks to directly monetize their platform incumbent banks have scale but must cater

The Boston Consulting Group • Swift | 23


to a broad set of needs, while attackers all-digital solution tailored to the needs of its
have more limited reach but can be more small-business clients.
focused.
The changes meant revamping a number of
Get Strategic with Service Delivery back-end processes, but the bank lowered
Wholesale banks must also improve service costs while sharply improving customer satis-
delivery. While longer-term structural chang- faction. Although small businesses with more
es are important, banks can take several steps basic service needs might be the heaviest us-
immediately. We recommend that they start ers of self-service functionality, large organi-
by applying value-based segmentation. (This zations would also value the ability to man-
is already used in wholesale banks for cover- age routine needs independently. Simple
age models and in determining a relationship enhancements such as tools that can upload
manager’s client load.) Widely used in other KYC documents and then automatically vali-
industries, this model would allow banks to date them against a third-party database
align their service with the importance, size, don’t require change-the-bank budgets and
complexity, and preferences of different cus- can deliver an outsize return on investment
tomer segments—providing corporate clients in terms of customer convenience and cost
with a superior customer experience while efficiency.
lowering the cost to serve.
At the same time, banks should also plan for
Under this approach, banks would tailor the deeper changes to their IT architecture. The
mix of hands-on and virtual service that trea- goal should be to structurally revise their IT
surers receive. They’d provide high-value cus- systems to reach full automation and move
tomers and those that have more complex to a zero-interaction, straight-through-
wholesale-banking needs with a greater share processing model. This longer-term solution
of one-on-one human-guided interaction would enable banks to create the digital
while enabling those with routine service backbone needed to offer robust, digitally
needs to conduct a greater share of their enabled personalization, proactive advice,
banking activities using automated self- and end-to-end automation. “Smart” auto-
service. Advances in technology mean that mation would also help treasurers address
many customer issues and requests can now mundane annoyances, such as the handling
be handled electronically using digital solu- of stopped payments, which would reduce
tions such as tracking tools for issue identifi- errors and complexity.
cation, self-service modules to address simple
problems, and chatbots—with generalist rela- Enrich the Customer Experience with
tionship support teams providing backup by Data-Driven Insights
phone or email. Banks sit on troves of valuable transaction
data. While many banks already leverage this
data for enhanced credit scoring or identifica-
To improve results, banks tion of cross-selling opportunities, they can
also use the data to improve service and ad-
need to tailor the mix of vice. Cash flow forecasting tools, working-
capital efficiency analytics, peer group bench-
hands-on and virtual service. marks, and payments analytics are among
the areas that would, according to BCG sur-
vey data, be especially attractive to treasur-
Early adopters have seen positive results. One ers. Superior data management and connec-
European bank recently rolled out a platinum- tivity would also allow banks to improve
service offering that assigned the bank’s best service quality, giving relationship managers
cash management customers its most senior the ability to examine their corporate clients’
sales people and provided priority service for complete transaction histories and provide
such things as cash pool implementations or tailored recommendations. That could help
extended hours for issue resolution or ques- banks increase client satisfaction and reve-
tions. In parallel, the bank also launched an nue growth.

24 | GLOBAL PAYMENTS 2018


Create a Roadmap for Change banks should consider expanding their
Many of the recommendations described in use of robotics; these tools can reduce
this chapter will take time to implement, es- labor requirements and serve as an
pecially given the sizable agenda that whole- effective transitional solution as banks
sale banks are already managing. But banks plan a deeper, more comprehensive IT
can do three things immediately: transformation and future-proof solutions
powered by artificial intelligence as well
•• Fix the basics. Many customer journeys as data and analytics.
offer quick-win opportunities for banks to
address chronic customer frustrations. •• Partner with third parties. Wholesale
These include improving business partner banks should also look at forming selec-
management, KYC processes, and technical- tive partnerships with fintechs. The right
client onboarding within the account- collaborations would allow banks to
opening process. The customer service, access needed capabilities faster and more
incident resolution, and cross-border cost-effectively than building them in-
payments journeys also contain a number house. With more than 10,000 fintechs to
of process issues that basic automation choose from, banks will need to develop
and account data integration could formal evaluation criteria, taking into
address. Taken together, these improve- consideration such factors as reliability,
ments have the potential to deliver ease of integration, monetization, and
substantial benefits in terms of customer customer value. This will require a strong
satisfaction and efficiency. governance structure to ensure that banks
select partnerships that offer clear added
•• Fund the transformation. Wholesale value to customers and that they manage
banks need to free up investment re- those partnerships effectively. Outsourcing
sources to enable open banking, support can be another option, one that may be
advanced data and analytics, adopt especially helpful to small and midsize
real-time payments, and develop other banks as a way of gaining scale in needed
innovations. Combining and reducing the areas.
number of daily banking portals that
banks maintain, decommissioning legacy By focusing on these three near-term actions,
channels, and eliminating redundant or banks can make significant performance
lower-value systems can generate import- gains and lay the groundwork for their larger
ant run-the-bank savings without requir- transformation journeys.
ing a deep IT restructuring. In addition,

The Boston Consulting Group • Swift | 25


IT’S TIME TO ACT

I n the retail and wholesale payments


business, customers are becoming impa-
tient with clumsy interactions and inefficien-
To stay relevant, banks must respond faster
and more strategically to the altered pay-
ments environment by focusing on the pain
cies. Consumers, treasurers, and merchants points that matter most. With the growing
are looking for automated, integrated buying appetite for payments services expected to
journeys and tailored service. They have generate $1 trillion in new revenue over the
made it clear that convenient, personalized coming decade, banks and payments provid-
service both online and offline is essential for ers have an extraordinary opportunity to ex-
doing business. And they are increasingly pand their business. Success will rest on how
willing to take their business elsewhere, using willing and committed they are to making
digital wallets, fintechs, ERPs, and other the needed business and operating-model
services and providers if those needs are not changes.
met adequately.

26 | GLOBAL PAYMENTS 2018


FOR FURTHER READING

The Boston Consulting Group has Banking’s Cybersecurity Blind How Pricing Can Solve European
published other reports and articles Spot—and How to Fix It Banking’s Earnings Crisis
that may be of interest to senior A Focus by The Boston Consulting An article by The Boston Consulting
financial executives. Recent Group, August 2018 Group, February 2018
examples include those listed here.
Global Asset Management 2018: How Banks Can Thrive as Digital
The Digital Metamorphosis Payments Grow
A report by The Boston Consulting An article by The Boston Consulting
Group, July 2018 Group, December 2017

Global Wealth 2018: Seizing the The Power of Digital in


Analytics Advantage Commercial Banking
A report by The Boston Consulting An article by The Boston Consulting
Group, June 2018 Group, December 2017

Global Capital Markets 2018: Why Aren’t Banks Getting More


Embracing the Digital Migration from Digital?
A report by The Boston Consulting A Focus by The Boston Consulting
Group, May 2018 Group, December 2017

Global Retail Banking 2018: Global Payments 2017:


The Power of Personalization Deepening the Customer
A report by The Boston Consulting Relationship
Group, May 2018 A report by The Boston Consulting
Group, October 2017
Global Corporate Banking 2018:
Unlocking Success Through Getting Bank Automation
Digital Beyond the Pilot Phase
A report by The Boston Consulting An article by The Boston Consulting
Group, March 2018 Group, August 2017

Global Risk 2018: Future-Proofing The Seven Rules of Cost


the Bank Risk Agenda Excellence in Banking
A report by The Boston Consulting An article by The Boston Consulting
Group, February 2018 Group, August 2017

The Boston Consulting Group • Swift | 27


NOTE TO THE READER

About the Authors Antoon Schneider, Niclas Storz, Stefan Dab


Mohammed Badi is a senior Tammy Tan, Tjun Tang, Ricardo Senior Partner and Managing Director
partner and managing director in Tiezzi, Stefano Valvano, Pieter Van BCG Brussels
the New York office of The Boston den Berg, Jody Visser, André Xavier, +32 2 289 02 02
Consulting Group and the global and Nadjia Yousif. dab.stefan@bcg.com
leader of the payments and trans-
action banking segment of the In addition, the authors are Alexander Drummond
Financial Institutions practice. extremely grateful to core members Partner and Managing Director
Stefan Dab is a senior partner and of the BCG Global Payments Model BCG New York
managing director in the firm’s team: Keith Bussey, Nikhil +1 212 446 2800
Brussels office and cofounder of the Dangayach, Pearl Gupta, and drummond.alexander@bcg.com
payments and transaction banking Shenan Kalra. Also, Petra Demski,
segment of the Financial Insti- Rohit Mathur, Jens Mündler, and Sushil Malhotra
tutions practice. Alexander Amit Sukhija provided helpful Partner and Managing Director
Drummond is a partner and support, as did numerous local BCG New York
managing director in BCG’s New analysts from the Financial +1 212 446 2800
York office. Sushil Malhotra is a Institutions knowledge team and malhotra.sushil@bcg.com
partner and managing director in data & research services.
the firm’s New York office. Federico Federico Muxi
Muxi is a partner and managing Sincere appreciation also goes to Partner and Managing Director
director in BCG’s Buenos Aires BCG’s Financial Institutions global BCG Buenos Aires
office. Maarten Peeters is a former management team with Vassilis +54 11 4317 5900
senior knowledge expert and global Antoniades, Marie Laure Barbe, muxi.federico@bcg.com
manager of BCG’s payments and Kilian Berz, Gerold Grasshoff, Anna
transaction banking segment in the Haug, Huib Kurstjens, Debbie Maarten Peeters
firm’s Brussels office. Prateek Lovich, Jürgen Rogg, Aymen Saleh, Former Senior Knowledge Expert
Roongta is a partner and managing Yasushi Sasaki, Jean-Werner de and Global Manager
director in BCG’s Mumbai office. t’Serclaes, Steve Thogmartin, and BCG Brussels
Michael Strauß is a partner and Saurabh Tripathi. The authors are +32 2 289 02 02
managing director in the firm’s also deeply thankful to Luc peeters.maarten@bcg.com
Cologne office. Yann Sénant is a Meurant, Pedro Mullor, Harry
partner and managing director in Newman, and Wim Raymaekers Prateek Roongta
BCG’s Paris office. from SWIFT. Partner and Managing Director
BCG Mumbai
Acknowledgments Finally, we thank Marie Glenn +91 22 6749 7000
The authors thank their BCG for her writing assistance and roongta.prateek@bcg.com
colleagues for their valuable Katherine Andrews, Gary Callahan,
contributions to the development of Philip Crawford, Siobhan Donovan, Michael Strauß
this report, particularly Francien Kim Friedman, Abby Garland, Sean Partner and Managing Director
Akkerman, Markus Ampenberger, Hourihan, and Shannon Nardi for BCG Cologne
Romary Barbey, Radko Bartunek, their editorial and production +49 221 55 00 50
Ola Bennerholm, Jean Clavel, Jean support. strauss.michael@bcg.com
Dobbeni, Tom Dye, Andrew Dyer,
Philip Evans, Deepak Goyal, Max Yann Sénant
For Further Contact
Hauser, Cristina Henrik, Nicole Partner and Managing Director
Mohammed Badi
Hildebrandt, Yeonhee Kim, Yunjoo BCG Paris
Senior Partner and Managing Director
Kim, Ankit Mathur, Dimitriy +33 1 40 17 10 10
BCG New York
Panyavin, Pierre Paoli, Perry Peng, senant.yann@bcg.com
+1 212 446 2800
Ilya Privin, Max Pulido, Sukand badi.mohammed@bcg.com
Ramachandran, Theodore Roos,

28 | GLOBAL PAYMENTS 2018


© The Boston Consulting Group, Inc. 2018. All rights reserved.

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