TO PAY OR NOT TO PAY, THAT’S A DIGITAL QUESTION WHITEPAPER 2015

THE MARCH OF HUMANITYINTO THE INFORMATION

/ ELECTRONIC AGE ISIRREVERSIBLE

02

03030303

CONTENTSExecutive Summary 04

The Opening Scene 06

Arguments and 07Counterarguments

How Did We Get Here? 08

Phase 5 is “the big shift” 10

Mode of Transaction: The Convenience 10 of Contactless Payments

Supporting Technology 11

Operator: The Less I Feel I Pay, 14 The Better I Feel

Substance: Money that Bypasses 18 Banks and Governments

Let’s Talk Regulation 22

Consumer Expectations: Dreaming 23about the Future of Money?

So What Did We Learn? 26

Developing a Strategy: 27How to Stay Relevant

Fundamentals and Priorities 32

Conclusion 33

Appendix/References 34

EXECUTIVE SUMMARYWe’ve clearly made theirreversible move into the digital age. It has already transformed the way we shop, work and play, which has led to rapidly changingconsumer expectations, thusupsetting all game plans. And banks, whose basic form andfunction as facilitators of payments has up to now been relativelyunscathed by new technologies,are not immune. It’s early days,but mounting evidence indicatesa growing number of consumersno longer assume banks areessential to purchasingtransactions. It’s time forexpansive thinking on the partof senior managers to defi ne and implement creative strategies to ensure banks remain relevant in the payments ecosystem in coming decades. Take nothing for granted.

Our management consulting team at Chappuis Halder & Co (CH&Co) has teamed up with bankingsoftware provider Misys andcrowdsourcing platform eYeka to bring you a glimpse of what lies ahead for payment serviceproviders. The days of visiting a bank in person may be over andit’s likely that cash and cards will disappear entirely as alternative forms of purchasing power emerge alongside digital money. At the same time, competitors outsidethe banking industry, mainlytelecommunication and technology fi rms, are making steady inroads into the payments arena. Thereis no time to lose. Customerattention is shifting

away from banks and revenue will be quick to follow. Our goal is to translate our fi ndings from this study into practical strategies that banks can adopt or adapt to secure market share in the digital age.

How Did We Get Here?

For the sake of simplicity, fi ve fundamental dimensions can be considered when defi ning a simple payment transaction: type oftransaction, mode of transaction, supporting technology, operator / issuer and substance. All have evolved in distinct phases over time, but what caught our attention at CH&Co and spurred this studyis that for the fi rst time, fourdimensions are simultaneouslyundergoing very rapid change, transforming the very natureof payments and money.

• Mode of transaction:Consumers now expect toconduct transactionselectronically through unwired electronic devices, regardlessof location and proximity toa physical bank.

• Supporting Technology:The pace of technology — with the rapid rise of smartphones and data-transmission capabilitiessupported by cloud computing, near fi eld communication,wearable technology andbiometric authentication — issurpassing banks’ established modes of transaction.

• Operator/Issuer:Market newcomers are usingtheir knowledge of consumerbehaviour and technological strength to enrich the customer’s purchasing journey by:

1. reducing friction in therelationship between customers and payment service providers;

2. increasing the inclusion ofcustomers by reaching outto a wider audience andreducing costs;

3. engaging customers byoff ering a strong userexperience and benefi ts; and

4. establishing trust by signingup validated new clients.

• Substance:New players are slowlyestablishing a system that doesn’t rely on legal tender regulated by banks and governments to provide customers with purchasing power. We refer to new forms of money, such as cryptocurrencies andloyalty points, as digital money.

Banks should act quickly toredress their traditional approachto fundamentals in the paymentecosystem. New players arebetter able to streamline payments, predict consumer wants and needs, and capitalise on the potential of digital money, threatening to push large fi nancial institutions outside the daily transactions perimeter.

0404

Dreaming about the Futureof Money

To better understand what adigital-savvy audience thinks about the form and function of money, CH&Co and Misys joined forces with crowdsourcing platform eYeka to launch an online contest in late2014 and asked participants:

“IF YOU HAD THE ABILITY TO DECIDE, HOW WOULD YOU WANT TO USEEVERYDAY MONEYIN THE FUTURE?”

Creativity was encouraged andthe answers (grouped into themes below) refl ect this. However, theoften unorthodox views should not be dismissed. Rather they should serve as a warning to banks that they also need to be thinkingcreatively about the futureof money — because theircustomers already are.

• Ease is king: An easy, frictionless payment process is necessary, even if it’s at the expense ofconsumer privacy.

• Death of physical money: Money needs to keep up with the times.Its function will only increase butits form is not a constant.

• New and evolving currencies: Currency should evolve to fi tsociety’s needs and allowconsumers to make themost of every exchange.

• Role of banks: The fi nancialservices industry is ripefor disruption by varioustechnological entrants, to the extent that banks may fi nd they

are no longer seen as vital to the fi nancial ecosystem.

• Trading privacy for convenience: Technology companies are pushing the boundaries of what’s possible and are seen as trusted managersof fi nancial services.

• Empowered customers:Consumers are aware of theirinfl uence and power and wish tobe acknowledged and appreciated.

We learned that consumers areeager to move forward. Notonly have they digested recenttechnological advancements in the digital age, but they want more— a lot more. From a singleglobal currency to an ethicalperspective inserted into theessence of money itself, thefundamentals are relevanceand zero friction.

What Can Banks Do toStay Relevant?

As non-banks continue to expand their off erings in payment services, slices of the pie can still be claimed by fi nancial institutions if they build a clear ‘digital money’ strategy. All fi ve dimensions of money discussed earlier — type of transaction,mode of transaction, supportingtechnology, operator/issuer and substance — have to beconsidered to ensure a successful digital transformation. Waysthat managers can develop adigital-capable bank include:

1. Leverage internal assets, enable partners: Strengthen back-end infrastructure and seek partners with a proven ability to focuson the client experience.

2. Build new engines for emerging ecosystems: Start fresh.

Make investments in building, rather than in transforming, newpayment-processing platforms.

3. Stand proud, claim back theclient relationship: Providemore value-added services to customers through smarterinsights into what they want, which could require bringing in experts.

4. Build new marketplaces, act as facilitators: Develop fresh teams that can break with the past (disturbing the status quo and potentially upsetting egos).

Fundamentals and Priorities

When it comes to day-to-daypayments, we believe banks have to make a choice between acting as processing entities and developing their own ecosystem. Staying in the middle won’t be sustainable. The rise of new entrants who not only possess a mindset that mimics that of the end user (the customer)but who also play the card oftechnology faster and smarter, are a real threat to traditional fi nancial institutions in the payment space.

In this context, digital shouldnot be seen as a chapter in thecompany strategy. It is actually the environment in which anymeaningful plans have to bedeveloped as it changes bothvalue propositions and interaction models within the completeecosystem (i.e. customers, partners and staff ). More importantly, no matter which strategies it deploys, a bank needs strong convictions that will serve as a compass during turbulent times. Long story short, winners in the payment spacewill be those who take risksand go bold.

05

Changes in customer behaviour and technology are continually testing traditional fi nancial institutions.The fi nancial services industry isalready taking steps to keep up in the digital age, but the biggestchange yet is still to come.

Consumers no longer want but expect to have fast, easy and secure access to banking services as an integrated step in their customer journey. Trying to impress clientswith a blackboard menu ofcustomer experience, socialconnectivity and on-the-gobanking is pointless. In fact a compelling digital off ering is now seen as a hygiene factor (referring to Herzberg’s motivation theory). But here’s the warning: As banks continue to cope (painfully) with these fundamentals they need to be aware of the fundamental changein the payments market to come.

Day-to-day payments havedramatically evolved over the past decade to a point where the use of coins or banknotes has become increasingly niche. In parallel, the substance itself, currency, ischallenged by alternatives where operators and issuers of money are no longer restricted to traditional players. New entities off er truesubstitutes to currency and plastic and can now bypass existingsettlement architectures.

The fact is, ownership of money is moving away from banks andgovernment. Entrants from the

telecommunications and technology sectors are absorbing the essence of banking, money issuance and management. The traditionaldefi nition of money where itsmanagement lies in the handsof a few is becoming outdated.

To sharpen that picture even further, imagine a world where money is generated, spent and settledwithout going through banks —a world with no cash. Looking at banks today it’s diffi cult to seetheir purpose in this future.

Our conclusions might strike some as farfetched, but recent history reminds us that ‘black swan’ events (referring to Nassim Nicholas Taleb theory) are not so rare and can beinstruments of serious disruption. This joint study, performed incollaboration with bankingsoftware provider Misys andcrowdsourcing platform eYeka,evaluates this change from ahistorical perspective. We willoutline the main underlying trends that support our convictions.We also off er insights into howcustomers say they want to use money in the future, which includesalternative mediums of exchange. The goal is to translate our fi ndings into strategies that banks can adopt or adapt to secure market sharein the digital age. While thisparadigm is new, we believeits impact will have a profoundimpact on established playersin the fi nancial services industry.It is time for bold moves.

THE OPENING SCENE

06

?

?

?

The evolution of fi nancial services is a vast subject so we’ve set some realistic parameters for this white paper and focus solely on payments and its ability to supporttransactions. We have considered the issue on a global scale. While wealthier countries have developedinfrastructure for fi nancial services to meet banking needs compared with other countries where a large numbers of the population are still ‘unbanked’, theongoing changes in the provision of fi nancial serviceswill have a signifi cant impact globally. From acustomer-segment perspective, this study mainly looks at retail clients but we believe that most of the fi ndings can be extrapolated to the industry as a whole.

The philosophy of this study is forward-looking: What will happen to the bank-customer relationship in the coming decade and will banks remain relevant in the future fi nancial landscape?

There is no one exact answer for this, only predictions, however we have tried to ensure that our predictionis an informed one.

Our methodology is as follows:

- Examining industry trends (historical, actual and future) with a list of selected references in the appendix. Our objective is not to overwhelm the reader with data gathered from existing studies but to use theinformation as a starting point for refl ection.

- Using knowledge of fi nancial services that CH&Co,Misys and eYeka acquired in the areas of digitalbanking and digital money, based on projectsmanaged worldwide.

- Assessing technology, whether it exists today orwill soon emerge, without input by Misys expertswho are conducting research and developmentand delivering banking solutions across the world.

- Crowdsourcing creative ideas generated incollaboration with eYeka to better understand whatthe term money will mean to customers in the future and how the changing concept of money and its value will aff ect the way we live and consume.

- Interviewing industry experts to refi ne and confi rm our conclusions, including top managers in banking as well as technology companies, mobile carriers and retailers.

Rather than predicting a defi nitive future, we aim totrigger discussions surrounding our assumptionsand conclusions. If this study brings about newconsiderations in the meaning of money and thefuture role of banks — whether it’s in agreement ordisagreement — we shall consider the paper a success.

Our paper will expose the pressing need for banks to further explore the digital frontier, which will become the basis of the provision of fi nancial services in the coming years, and examine what strategies will allow banks to thrive if customers are to continue to perceive themas the defi nitive structure when it comes to moneymanagement.

Readers might consider the content and conclusionsof our study controversial; however we believe atransformation is taking place within the fi nancialcommunity, which motivated us to conduct thisstudy and share our convictions.

ARGUMENTS ANDCOUNTERARGUMENTS

07

H0W DID WE GET HERE?The payment landscape has radically changed since people first began conducting business. While entire books are dedicated to the historical analysis of finance, for our purposes we suggest the simplified version below. Defining a simple transaction, five fundamental dimensions are considered:

We see time (the time it takes to conduct the transaction) as a consequence of the five dimensions above. Depending on the stage of maturity (e.g. from using gold to using bitcoins), payments that used to require days or months to be processed can now be transacted in almost real time.

These dimensions have evolved over time and combined, characterising the financial environment in which transactions take place.

Phase 1: The simplest form of payment — bartering goods and services — is established.

Phase 2: Specific commodities representing the value of goods (e.g. precious metals) are introduced. The widely used medium is now the norm enhancing ‘market liquidity’.

Phase 3: Governments and banks begin to issue regular coins, banknotes and documents such as cheques. This confirms the power of states and regulation is introduced. Business becomes even more fluid and safe.

Phase 4: Limitations of physical money are solved and electronic currencies are vouched for by institutions. The globalisation of people, goods and transactions gets under way, fostered by the age of the Internet.

Phase 5: Today convenience is a prerequisite for any product or service offered on the market, including money. Financial institutions and digital players can provide advanced solutions via new platforms, such as money-management apps and payment services. Cheques and cash are disappearing. Not only are payments and the user experience changing, but also the very nature of money.

Dimension of a transaction Description Examples

Type of transaction• The logic of executing

a transaction• Barter

• Payment (including ledger)

Mode of transaction• The method used to execute

a transaction

• Material exchange (hand to hand)

• Electronic exchange

Supporting technology• The tool that has been

developed to facilitate the execution of a transaction

• Currency• Debit/credit cards and

card readers• eWallet (e.g. PayPal)• mWallet (e.g. M-Pesa)

Operator/issuer• The entity that facilitates the

execution of a transaction• Banks• Governments

Substance• The representation of

money that is used to execute a transaction

• Goods and commodities• Coins and banknotes• Electronic forms of currency• New digital money

(e.g. Bitcoins)

Figure 1: Dimensions of a transaction

The combination of these two perspectives, namely the fundamental process of transactions and the distinct phases in the evolution of transactions, explain the depth of change by highlighting its origins.

Figure 2: Changes taking place across each of the dimensions of money

The evolution of the fundamentals are linked : for example the rise of new technologies might trigger a change in the available mode of transaction, or a change in the substance could enable new players to enter the market. But at this stage, understanding the order isn’t relevant to our study. Rather we are tackling the larger question of why the time is ripe for the biggest change yet in the fi nancial services sector (Phase 5).

Our answer is this: For the fi rst time, out of the fi ve dimensions of money, four dimensions are transformingsimultaneously and the change is profound. Let’s review these in more detail.

Dimensions of money Phase 1 Phase 2 Phase 3 Phase 4 Phase 5

Type of transaction

Barter Paymentis madepossible

Payment Payment Payment

Mode of transaction

Materialexchange

Materialexchange

Materialexchange

Distancebecomeirrelevant with wire transfers

Electronic and contactlesspaymentsminimise the need for heavyinfrastructure

Supporting technology

N/A N/A

Printing (or minting) reduce dependencyon precious commodities

Computers and the Internetend physical constraints

eWallet and mWallets gain large market share thanks to mobile phones and NFC/HCE

Operator/ issuer

Individuals Individuals

Banks andgovernmentsare the main operators

Banks andgovernments

New operators emerge suchas telecommu-nications and technology fi rms

Substance GoodsPreciouscommodities

Coins and banknotes

Electronic representations of coins and banknotes

Digital money

09

O12009

200400600

8001,0001,2001,4001,600

1,800

2,0002,2002,4002,600

2,800

O22009

O12010

O22010

O32010

O42010

O12011

O22011

O32011

O42011

O12012

O22012

O32012

O42012

O12013

O22013

O32013

O42013

O12014

O22014

O32014

PHASE 5 IS“THE BIG SHIFT”We have already witnessed a deep transformation in the retail fi nancial services environment, but we believe ithas yet to reach its peak, as explained in the following sections. We will focus on the most recent phase(Phase 5) to better understand the underlyingtrends and their impact on money.

We will look at the question : “What is happeningto money?” in the context of the four changingfundamentals:

1. Mode of transaction

2. Supporting technology

3. Operator/issuer

4. Substance

MODE OF TRANSACTION:THE CONVENIENCE OFCONTACTLESS PAYMENTSThe method for the execution of transactions has evolved dramatically over the past decade. Previously consumers had to physically exchange goods orartefacts, with all the related limitations. Wire transfer through computers or credit card terminals thenbecame available but payments remained constrained by unwieldy underlying infrastructure.

Today, consumers have grown accustomed to conducting transactions electronically through unwired electronic devices. What used to be constrained by location and proximity has become available anytime, anywhere.

By the end of 2017, an estimated two billion people will make their purchases through their smartphones ortablets, up from 1.6 billion at the end of 2014. At thestart of 2015, mobile and tablets account for 32% ofvisits and 22% of transactions on websites and theaverage order value through mobiles is at par withthe desktop channels2.

The sharp increase in the use of smartphonesfor payments can be explained by:

• More mobile phones. There are nearly seven billion mobile subscriptions worldwide as of May 2014.This is equivalent to 95.5% of the world population.

• More smartphones. More than a quarter of the global population will use smartphones in 2015 3

• More bandwidth. Given the shift towards higher speed networks (the number of 2G subscribers dropped from 90% of total subscribers in 2008 to 67% in 2013,signifying the portion of 2G subscribers moving to 3G/4G networks), more consumers are now ableto tap into the advanced data functionalities oftheir smartphones.4

10

Global Mobile Data Growth

Average monthly mobile data per user 900MB

2 Economic Times Retail, Feb 2015.Extracted from http://articles.economictimes.indiatimes.com/2015-02-01/news/58675771_1_tablets-swan-life-style-company-jabong3 Marketer Intelligence, Dec 2014. http://www.emarketer.com/Article/2-Billion-Consumers-Worldwide-Smartphones-by-2016/10116944 Juniper Research, 2014. Extracted from http://www.cnet.com/news/mobile-transaction-users-to-jump-to-2-billion-by-2017/ on 07/02/2015 at 1812hrs

31%CENTRALAMERICA

57%SOUTH

AMERICA

34%MIDDLEEAST

85%WEST

EUROPE

53%EAST

EUROPE

21%CENTRALEUROPE

53%EASTASIA

8%SOUTHASIA

48%S.EASTASIA

16%AFRICA

84%OCEANIA38%

GLOBALAVERAGE:

85%NORTH

AMERICA

CLOUDCOMPUTING

MOBILE DEVICES

WEARABLES

BIOMETRICS

Active 3G/4G Connections, Compared to Total Active Mobile Connections (2014, Q4)

Source: “We are Social”, GSMA Intelligence Report, Q4 2014

• More time on mobile phones. The proportion of media time spent on mobile phones rose from 13% in 2012 to 17% in 2013, representing an increase of 10 hours and 15 minutes a month.5

The playing field for companies offering digital services — so that a customer can use a smartphone or tablet to transmit payment information — is already very competitive and will only become more so as the use of smartphones continues to rise.

SUPPORTING TECHNOLOGYMoney transactions have long been aided by technology, making payments easier, faster and more convenient over time. Now, however, the pace of technology is surpassing banks’ established modes of transaction. With the rapid rise of smartphone computing and data-transmission capabilities — supported by cloud computing, Host Card Emulation, Near Field Communication (NFC), wearable technology, biometric authentication and distributed protocols/open ledger — consumers want their mobile devices to be the means by which they achieve an even more efficient and timely payment journey.

Cloud Computing

The development of cloud computing has effected game-changing advancements in data transmission and storage. The centralised storage of data coupled with increasing data transmission rates (3G to 4G) makes current smartphones/mobile devices essential tools for transactions and payments. Digital wallets rely on cloud storage of credit card information for security and it is the easy and fast access of this information that is the basis of digital payments. Dependency on unwieldy and costly infrastructure owned by large institutions has dropped, lowering the entry barrier to unprecedented levels. The rise of Fintech (start-ups developing new solutions to address financial services) illustrates the ability to create in couple of months a payment intermediary that is there to succeed, or fail, fast.

Figure 3: Technology layers

“TECHNOLOGY IS THE ANSWERTO USERS’ EXPECTATIONS”

Tamas Braun, Director of Global Sales and BusinessDevelopment (Digital Channels), Misys

12

2013

200

400

600

800

1,000

1,200

1,400

2014 2015 2016 2017 2018

Near Field Communication

With cloud technology underpinning the evolution of the payments system, smartphones use NFC technology for improved user experience with transactions. NFC allows smartphones and other electronic devices to establish radio communication with each other by touchingthem together or being in close proximity.

NFC-capable devices provide:

1) secure transactions — this happens throughdata encryption

2) ease of use — no need to carry multiple cards

3) versatility — seamless transfer of data

By adding NFC technology to their smartphones and other electronic devices, Apple was able to create an internal payment system that improves the customer experience within its retail realm. Google created a free digital wallet app called Google Wallet that can be used to make store purchases with a NFC-enabled device.

Beyond the ability to push customer experience tonew levels, NFC is a means by which to bypasscurrent networks owned by fi nancial Institutions.Device-to-device payments are now available,making the use of cash or cards unnecessary.

Wearable technology

Smartphones are hardly the end of the road. Goingforward, mobile devices are likely to play a much larger role in the life of their owner, as demonstrated by therising popularity of miniature electronic componentsthat can be worn by consumers. Wearable gadgetsthat track information related to health have alreadypenetrated the medical-device and fi tness markets,with 33 million units shipped globally in 2014.

The wearables market is projected to grow at acompound annual rate of 35% over fi ve years, reaching 148 million units shipped annually by 2019.* Giventhat wearables can provide real-time information ontransactions, locations and customers, we think it willonly be a matter of time before these gadgetsprovide fi nance-related services.

Source : businessinsider.sg – The wearable computing market report 2014

13

World Shipments of NFC-enabled Cellular Handsets(in Millions of Handsets Shipped)

Source: IHS Inc., Feb 2014http://www.nfcworld.com/2014/02/12/327790/two-three-phones-come-nfc-2018/

HCE enhanced by NFC, a central innovation in payments.

Near Field Communications has made ‘contactless’payment a reality. By allowing short-range, two-waycommunication between devices and using a mobile phone’s SIM card for identifi cation and authentication, NFC makes it possible for consumers to securelytransfer money from one device to another.

Host Card Emulation is a cloud-based security platform that allows the easy adoption of contactless payments by consumers and vendors. With HCE, customers can transact with merchants regardless of the type of mobile carrier service they use. Instead of needing to ‘rent’hardware space on each carrier’s SIM card, HCE allows NFC applications to be hosted in the cloud, making iteasier for companies to implement contactlesspayment solutions.

BANKINGPRODUCTS

ANDSERVICES

Clienttouchpoint

PRODUCT/ SERVICE

AS ASUPPORT

Clienttouchpoint

Clienttouchpoint

Clienttouchpoint

Biometric Authentication

With respect to cloud and device-to-device data transmission, consumers consider security and ease of use of paramount importance. Biometrics, which uses recognition software that measures human features such as fingerprints, face, retina and hand geometry and odour /scent, will be the future of authentication, allowing hassle-free, data-rich transfers for seamless payment transactions. Today, increased security means increased inconvenience, with manual, multi-factor authentication. Tomorrow, you’ll be able to instantly confirm you are who you say you are.

OPERATOR: THE LESS I FEEL I PAY, THE BETTER I FEELBanks and credit card companies have long dominated the payments market, but the environment is rapidly changing and traditional players are facing increasingly stiff competition.

Yesterday’s payment providers merely provided processing services as an additional and isolated event to support the actual transaction. Today’s market newcomers promise to enrich the customer’s purchasing journey, hiding the basic process of payment within a satisfactory overall experience. Consumers want intuitive payment systems that not only offer choices in methods and recipient but that also help them to select the most appropriate alternative via which they can generate benefits such as discounts or vouchers. Banks remain entrenched in traditional payment-processing methods and are thus lagging behind dynamic new entrants — upcoming players that pride themselves on innovative approaches to the user experience when making a payment.

The new leaders focus on:

I. Reducing friction in the relationship between customers and payment service providers. In common with Uber — a mobile app-based transport network developed in the U.S. that revolutionised the way people travel by creating a dependable carpooling system — new operators focus on providing an entirely different service where payments are no longer at the heart of the experience but are reduced to a simple email summarising the service and related fees.

Il. Increasing the inclusion of customers by reaching out to a wider audience and reducing costs. Largely used by people in cities to send money to family and relatives living in rural areas, mobile wallet transactions have tripled over the past two years on the back of cost effectiveness and ease of access.

Ill. Engaging customers by offering a strong user experience and benefits. For example, Apple’s digital wallet service Apple Pay provides a mutually beneficial system. In its closed ecosystem, merchants offer customers convenience as well as better deals (such as discounts and loyalty points), which in turn encourages customers to stick with the service to make payments.

lV. Establishing trust by signing up validated new clients. U.S. lodging-service company Airbnb gives peace of mind with its stringent validation procedures of clients who want to rent out their properties as well as customers who are looking for a place to stay. Travellers are more at ease using Airbnb, which has translated into increased service uptake.

Non-Banks as Payment Providers

Unlike retail banks, which are highly regulated and conventionally focused on financial products and services, non-banks are firms whose core business does not typically handle payments or other global money transactions. As an example, telecommunications firms such as Bharti Airtel and Vodafone, retailers such as the Future Group, and large groups like Reliance Industries are looking to tap a market of 937 million mobile subscribers in India. Realising this potential for revenue growth, non-banks are quickly shifting their focus to take advantage of their knowledge of consumer behaviour and technological strengths. Adding payment transactions to their core business is an organic extension, providing an enriched customer experience. While the ability to generate direct revenues from payments is inversely correlated to the level of competition and regulation, players see the chance to make profits by using customer data to cross-sell and in targeted marketing. The approach taken by non-banks falls outside the normal banking perspective.

Banks are going from products towards client experience

GAFA are going from client experience to product/services

Figure 4: Two groups of players with different approaches to business

We can see the payments landscape becoming highly competitive with new entrants crowding the field. Non-bank service providers benefit from the increased use of mobile in this space, with the number of mobile-payment transactions expected to grow about 60% a year.

2010

MOBILE PAYMENT TRANSACTIONS (b) CAGR 2010 - 14F

92.3%

55.4%

0

5

10

15

20

25

30

35

2010 2010 2010 2010

Banks Non-Banks

The surge in volume of non-bank mobile transactions shows that customers are already looking beyond thetraditional payment providers. And the mere fact that non-bank competitors are gaining traction againstestablished fi nancial institutions exposes the widening gap in their ability to provide a seamless and convenient payment experience, with new entrants better able to meet market demand. This is illustrated in the U.S.where a group of retailers have developed theirown digital payment system (see box below).

Will CurrentC Take Over from Credit-Card Processors?

The Merchant Customer Exchange (MCX) was createdby a consortium of about 70 U.S. retail companies(including Wal-Mart, 7-Eleven and Best Buy) todevelop a merchant-owned mobile-payment system. Called CurrentC, the system is expected to belaunched this year. The stakes are high: combined,the partners own more than 110,000 stores nationwide and process more than $1 trillion in payments annually.

CurrentC is a mobile wallet app that allows customersto use their phone to make purchases within theclosed group of retailers and automatically savemoney from coupons and special off ers, and earnrewards from loyalty programmes, while off eringthem a simpler and safer way to pay.

Unlike Apple Pay, which uses NFC technology,CurrentC customers punch a security code into their phone to launch the app, and then use QR codes— a machine-readable code consisting of black andwhite squares — to complete a purchase with theirdevice. Payment options include chequing accounts, store gift cards and select store debit and credit cards registered with the digital wallet.

The merchants are not only able to make salestransactions more convenient for their customers but they will also be able to take credit card companies out of the equation, eliminating the 2-3% transaction fee charged by credit card companies for each purchase.

For now, the world’s tech giants — Google, Apple,Facebook and Amazon (GAFA) — and other majornon-bank players are still dependent on banks and credit card companies to process and clear payments for their products and services. But they have given us a glimpse of a world where traditional payment providers are no longer essential to the value chain of commerce. As we wait to see if MCX (see dedicated box) is successful asa standalone payment ecosystem, it’s clear the day ofa global cashless society will come. It’s already happening in Africa : Mobile-money service M-Pesa has provenvery successful in meeting the needs of theunbanked population.

Eighty percent of adults in Africa do not use traditional fi nancial services but almost everyone has a phone. In 2007, Kenya’s largest mobile-network provider Safaricom and Vodafone launched an initiative that allows Kenyans to use their mobile phones to set up an account to send and withdraw money and make payments.

Today it is used by more than 17 million people inKenya and has expanded to Afghanistan, India andEastern Europe, giving millions of people an alternativeto a physical bank.

Given the extent and pace of changes taking place in e-commerce, banks could be pushed aside, forcing their position in the fi nancial ecosystem to evolve. And as the role of banks evolves so too will the payment industryas a whole, with the emergence of open platforms and Application Programme Interfaces (APIs) that canprovide mix-and-match services to customers. Theability of new entrants simply to leverage existingpayment processing capabilities could turn banksand credit card companies, such as Visa andMasterCard, into basic utilities.

15

Likely Winners in the New Digital Payments Landscape

We classify the landscape of operators according to their primary/core activity:

• Banks and credit card companies, such as MasterCard and Visa (from a customer perspective)

• Telecommunications fi rms/mobile carriers, such as T-Mobile in the U.S and M-Pesa in Kenya

• Technology-driven multinationals, such as Apple and Google

• Retailers, such as Starbucks and Amazon

It is interesting to see how these diff erent players stack up in their ability to become convenient and widelyacceptable payment-service providers.

With each player adding specifi c value, it’s diffi cult to say who the big winners will be but it will be a clear departure from the current bank-dominated environment.

Advantages Challenges

Banks

• Historical entities owning the market

• Established payments-processing infrastructure

• Large customer base that is likely to stick with the status quo rather than change payment habits

• Recognised as secure and regulated

• Lack of understanding ofcustomer behaviour

• Provide payment services in isolation from the overall experience

• Remain largely dependent on physical cards (credit/debit cards)

• Lack of convenience due tosecurity layers

• Need to make payment disappearbehind the true client goal(e.g. acquiring a product)

Telecoms

• Wireless networks 3G and 4Gprovide large bandwidth anddata transmission capability

• Mobile phones are ubiquitouswith high penetration rate among unbanked populations (emerging economies) as well as entrenched distribution networks

• Enhanced visibility duringpayment transactions

• Not allowed to maintain deposits

• Consumer trust mostly based on brand name and confi dence inproduct/service

• Unlikely to see fi nancial services as a revenue driver so may pass onexpanding niche business

• Rely on traditional telecommunication network for connecting people

Techcompanies

• Own the device, such as NFC-capable smartphones, that enables mobile payments

• Able to tap into large pool ofcustomers and merchants

• Wide knowledge of customers that goes beyond payment behaviours

• Enhanced visibility during payment transactions as real-time information is captured and provided tocustomers

• Mainly the intermediary betweencustomers and merchants

• Face stiff competition as illustrated by the market erosion due to new players such as Apple Pay and Google Wallet

Retailers

• Own the end objective of thecustomer (i.e. the targeted product)

• Can take advantage of cross-selling opportunities to off er customersbetter deals

• Need to partner up for volume to achieve substantial revenue frommobile payments

• Do not own the individual customer experience as much as tech players (e.g. Apple Pay)

16Figure 5: Advantages and Challenges of competitors

Apple Pay Goes from Strength to Strength

In September 2014, Apple rolled out a mobile payment and digital wallet called Apple Pay, which allows certain Apple mobile devices to make contactless paymentsat retail and online checkouts (Equipped with NFCtechnology the Apple devices can communicatewirelessly with point-of-sale systems).

More than one million credit cards were registeredon Apple Pay in the fi rst three days of availability. It has since become the largest contactless payments service in the U.S., outpacing other digital providers (including Google Wallet) that have been on the marketfor years.

Points of Comparison Apple Pay Why

Security High

Encompasses multi-factor authenticationincluding a security Touch ID (a fi ngerprintidentity sensor) and tokenisation (replacingthe actual credit card number with a specialnumber to make payments).

Acceptance Medium

Apple is a neutral non-bank that is globallyrecognised and trusted by its huge base ofusers, including 800 million customers whoput their credit cards on fi le with the company.

At launch, Apple had more than 220,000in-store/in-app partners and strong ties with top U.S. banks including Citibank, Wells Fargo and Bank of America.

Value-add(novelty and cost) High

No cost/fee for users.

Apple reportedly takes a 0.15% cut from each Apple Pay transaction, which is marginalcompared with the 1.7% per transaction cutabsorbed by banks managing card transactions.

Enhancement (synergyfor convenience and

ease of use)High

Focuses on customer experience, which isenhanced through an integration of existingplatforms that enable payments: iTunes,Passbook, iCloud, iSight, iBeacon and TouchID.

17Figure 6: Apple Pay analysis

Characteristics Description Examples

Free from physicalconstraints (portable)

• No physical representation of value is necessary. No specifi c device neededto eff ect transaction

• Virtual wallets• No need of coins/banknotes

Free from geographicalconstraints

• Transactions enabled across geographies• Minimal restrictions on convertibility,

if any

• Transboarder transactions• Loyalty points

Free from accessibilityconstraints

• No necessary travel /physical eff ort• No necessary ‘warm body’ intermediary• Transactions enabled from multiple

devices/touch points• Front end managed by the consumer

• No need to go a bank branch• Self-service• Cryptocurrencies

Free from delays

• Allows real-time transactions (unlessconstrained by the number ofintermediaries and the currentinfrastructure)

• Fast transfer of money from one bank accountto another

SUBSTANCE: MONEY THAT BYPASSES BANKS AND GOVERNMENTSAlthough money has existed in electronic form for some time, it has remained backed by the physical existenceof currencies issued by banks and governments. Closelycorrelated with the rise of new operators, innovative forms of money have surfaced over the past decade.

Today the emergence of cryptocurrencies and theincreasing acceptance that loyalty points can be usedas online payment for goods and services are the fi rst indications of the next industry shift: Banks andgovernments might still be at the forefront of issuingand managing money but other players are materialising who are able to command suffi cient trust from buyers and sellers and have put forward compelling alternate value propositions.

They are slowly establishing a system that does not rely on legal tender regulated by banks and governments to provide customers with purchasing power.

We use the term ‘digital money’ to describe new formsof money such as cryptocurrencies and loyalty points.

Digital money exhibits the following characteristics:

• It is free from physical constraints.

• It is free from geographical constraints.

• It is free from accessibility constraints.

• It is free from delays.

The table below provides a brief description of thecharacteristics of digital money and examplesof each.

18Figure 7: Characteristics of digital money

$1,000

$750

$500

$250

$0

Week from Monday, Nov 26,2000 UTCCoinDesk BPL: $979.45

www.coindesk.com

2011 2012 2013 2014 2015

1h 12h 1d 1w 1m 3m 1y All Jul 18, 2010 Feb 04, 2015to

Cryptocurrencies

Essential to the discussion of the current digitalmoney landscape is the emergence of cryptocurrencies. Since the creation of Bitcoin in 2009 and its relative uptake, numerous cryptocurrencies have surfaced for

trade in online markets. Today, there are more than 1,200 cryptocurrencies with a market capitalisation of nearly US$3.6 billion. Although the price of cryptocurrencies is still relatively volatile, over the past four years they have increased in value, pointing towards a widespread and growing demand for such forms of money.

Cryptocurrencies allow people to send and receivemoney without using banks as intermediaries.Their inherent qualities are appealing:

• Users can send and receive money instantly.

• Fees are reduced for processing transactions.

• They ensure greater privacy and anonymity.

• They empower the customer, who no longer hasto rely on government or banks.

In order for any form of money to become successful (i.e. become widely used as a medium of exchange for the buying and selling of goods and services), not only must consumers be willing to use it, there also needs to be merchants who are willing to accept it as a form of payment. By that measure, Bitcoin is a success. Some of the biggest merchants in the U.S., including Target, Subway and Victoria’s Secret, accept bitcoins. Major payments-service provider PayPal has partnered with Bitcoin processors BitPay, Coinbase and GoCoin to allow its merchants to accept the cryptocurrency for digital goods such as online games and song downloads.

We still do not know how regulation of Bitcoin orcryptocurrencies will be put in place or whether that will aff ect their unique value compared with central bank-regulated currencies. But putting aside thequestion of whether regulation is required for any form of money to be successful, it’s important to note that a signifi cant number of governments have become interested in the digital marketplace. A few have even acknowledged cryptocurrencies as a form of money, including the U.S. Treasury Department, which in March 2013 recognised Bitcoin as a “decentralized convertible virtual currency”. Regulatory acceptance would only lend more weight to the legitimacy of cryptocurrencies.As cryptocurrencies gain momentum and become anincreasingly accepted form of payment, we thinkgovernments will look to administer the issuance and pool of cryptocurrencies, so that trade and consumption using these currencies doesn’t upset the management of traditional currencies (in terms of infl ation for example).

It took PayPal, which was founded in Palo Alto,California, in 1998, less than a decade to becomea key player in the payments industry. PayPalsucceeded where other dot-coms failed because itwas able to solve a problem that merchants wereexperiencing: Small businesses were fl ocking online to sell goods (e.g. eBay) but the banks couldn’t give thema way to accept electronic payment. The typicalacquiring industry (i.e. credit cards providers) was not able to support small business — not from a business

Figure 8: Bitcoin Price Index

point of view but rather from a technologicalperspective. PayPal provided the solution because it enabled any individual to start an online business and accept e-payments. Boosted by e-commerce, PayPal grew to become the industry giant we know today.

Up to this point PayPal was ‘just’ another channel for banks as customers linked their bank or their credit card details to their PayPal account. PayPal added a layerto manage security and risk and improve the userexperience, similar to what Apple Pay is doing withmobile payments. In this model, banks are still partof the payments process, providing the underlyinginfrastructure while using PayPal (or Apple Pay) asan additional channel to address the market andtherefore increase the use of their services.

We believe PayPal’s key impact on the banking industry is not with payment itself, as banks are still required in the processing chain, but the transfer of money. Withthe borderless world of the Internet, PayPal hascreated a completely separate clearing system thatallows customers to send and receive digital moneyfrom one PayPal account to another — irrespectiveof location — by mobile phone or email. This is doneinstantly whereas a money-transfer agent such asWestern Union can take several days to send money from Washington, D.C. to Singapore, for example. Asa result, banks and other traditional payment providers have seen their combined remittance market sharedrop to less than 10% in the U.S.

We expect more day-to-day transactions to becryptocurrency-based as the benefi ts are morewidely recognised. While still new, the potentialimpact on banks is signifi cant, including potentiallylower revenues, a lower average account balanceand a drop in deposits.

Bitcoin versus traditional currencies.

Bitcoin is a virtual currency (and a cryptocurrency) but not a digital currency because it is notregulated according to the European Central Bank defi nition. And it is not a real currency accordingthe U.S. Department of Treasury because it lacks the key attributes of legal tender (for reasons outlined below). However, Bitcoin shares other attributesof a currency: it’s scarce, divisible, portable,durable and recognisable. Bitcoin can’t currently replace traditional currency because:

1. It is not a dependable medium of exchange.There are about eight million bitcoins comparedwith about US$2961 billion in circulation. Tosubstitute the cryptocurrency for dollars wouldgive each bitcoin a value of US$370,125. Inaddition, the maximum number of bitcoins is 21 million (due to its fundamental construction logic), which would not be su� cient to drive economies.

2. It does not provide a unit of market value.Because of volatile fl uctuations in Bitcoin value, it cannot be used to value assets and debts. As the supply of bitcoins is fi xed, its value can rise or fall dramatically compared with traditional currencies, where issuance is controlled to maintain value.

3. It lacks security. Bitcoins have no physicalrepresentation and they could easily beexpunged in the digital world.

To its advantage, Bitcoin allows anonymity during transactions and its management can be handledby whoever is involved in the payment process,ensuring democratisation of money andtransparent money fl ow (open ledger).

The success of Bitcoin will depend on its evolution into a secure medium of exchange with a stable market value.

20

DRUG

5.2

80 9078

135129

162177

137

191

254277

325

239

422429

422429

287

153174

106

133

93

114

74

98

LOYALTY MEMBERSHIPS BY INDUSTRY SECTORMILLIONS OF MEMBERS

CAGRPERCENT

DEPARTMENTSTORE

6.1

GAMING

14.3

GROCERY

6.6

HOTEL

8.2

HOME APPAREL& HARDLINES

20.3

AIRLINE

6.4

FINANCIALSERVICES

15.7

2006

2008

2010

LOYALTY AND REWARDS POINTS Loyalty programmes were intended as a means for companies to build brand loyalty and retain customers through rewards. This retail strategy can be traced back to 1793 when a U.S. merchant gave out copper tokens that could be collected by customers and exchanged

for items in the store. Frequent fl yer miles wereintroduced in May 1981 when American Airlines began the fi rst mileage-based loyalty scheme, Advantage.

Since then, retailers across industries and geographies have launched loyalty memberships that awardpoints to customers.

While loyalty points aren’t a new concept, they havenever been as closely associated with money as theyare today. Loyalty points previously represented a low-value proposition for consumers. Members werelimited to redeeming goods and services sold by the same merchant, resulting in relatively poor redemption rates. Even worse — from the consumer’s perspective— loyalty points usually came with an expiry date. Asa result it wasn’t uncommon for a member to be either unable to accumulate enough loyalty points to redeem the good or service of choice or to have the time to redeem the points and enjoy the programme’s benefi ts. Over time, however, loyalty and rewards programmes have become more expansive and have the potential to become a new form of money by providing purchasing power to customers.

Cross-Company Redemptions

It is now possible for members of a particular merchant’s loyalty programme to redeem the goods and services of another merchant. Airlines and hotels have teamed up to reward each other’s loyalty programme members, such as the joint programme between Delta Air Linesand Starwood Hotels and Resorts that allows select(i.e. top tier) loyalty members to receive such additional benefi ts as priority boarding or late check-out.

Loyalty Points Exchange Platforms

It’s now also possible for the loyalty points of aparticular merchant’s programme to be swapped for those of another. For example, loyalty points gained ata supermarket can now be exchanged to be redeemed at a café (see the following box).

Loyalty Points as a Form of Payment

Beyond enabling customers to select rewards, new market entrants are looking to encompass loyalty points into their payment options. Shift, a Californian start-up, is developing a debit card that will help consumers pay for regular goods and services using fi at currencies, digital currencies, mobile minutes and loyalty miles, among others. Loyalty andrewards points can also be monetised: The Apple Paysystem allows consumers to use air miles or hotel loyalty points in exchange for goods and services from othermerchants in the Apple Pay ecosystem. It potentiallyopens up a range of ways in which people canexchange one form of payment for another.

Points.com is a Toronto-based trading platform that off ers members access to a range of loyalty programmes, from frequent fl yer miles to hotel points to retail and credit card rewards. Subscribers can source, earn and spend the pointsof more than 50 merchants just like traditional currencies.Through the site’s ‘loyalty wallet’ members can:

- track their mile or point balance- exchange points between loyalty programmes- trade with other Points.com users- redeem points- top up to buy extra miles/points with cash

Although the value of digital money transactions remains a fraction of total transactions globally, the trend towards digital is growing and an increasing number of players are entering the space in an attempt to streamline payments and capitalise on the market’s potential. In our view, this threat is largely underestimated by fi nancial institutions, which could fi nd themselves pushed outside the daily transactions perimeter.

LET’S TALK REGULATIONThe shift of payments into thedigital realm gives customers added simplicity and mobility, but thereis a pressing need to developcompliance and regulations for new non-bank entrants in the payments arena to extend the protections that customers take for granted withtraditional fi nancial institutions.Today, the rules are not thesame for all the players.

Banking regulations have tightened considerably since the 2008fi nancial crisis through existing compliance frameworks such as Know Your Customer (the process of a business verifying the identity of its clients) and Anti MoneyLaundering (controls to detect and report money laundering). These due diligence exercises weredeveloped with traditional fi nancial institutions in mind however, and are not designed to keep up with the entry of non-bank companies (such as telcos and tech fi rms)into the fi nancial services sector.

On one hand, digital players still navigate with a lighter compliance burden, allowing them full adoption of new technologies (thanks to less stringent selection criteria) anda faster and cheaper time tomarket. As a result, the diff erencein the cost of doing businesscreates a bias in the market towardsnon-banks. Faster and cheaper might be seen as an advantage from a customer perspective,but it would mean discounting fi nancial security.

On the other hand, unclearapplicable regulation coupled with extensive and costly authorisation procedures (building the fi rst cases) forces new entrants to adopt a doit fi rst approach, leaving regulators to react. This not only createsconfusion on the market among professionals but also amongcustomers, impeding the mid-term stability of the ecosystem.

In this context, the debate around restructuring regulations forfi nancial service providers is just starting. Considering the totalmarket value, in our view existing regulations will be adapted and better aligned to non-bank entrants sooner rather than later.

Illustrating this trend, the British government has made clear itsintention to apply anti-moneylaundering regulation to digitalcurrency exchanges. The newregulation would support innovation and aim to prevent criminal useof digital currencies. With anadditional £10 million allocated in the 2015 budget, the government said it would work to develop a set of standards to protect consumers.

We see three major factors in astable framework of regulationsfor new operators:

1. The rules. A modular (layered and customisable) approach is required by relevant governing bodies to oversee paymentsservices and digital monies that

have a similar mission to central banks with regulated currencies.

2. The players. All non-bank companies providing any sort of fi nancial service should be required to implement andfollow standard compliancerules. Today, compliance for fi nancial services is largelyrestricted to banks and insurance companies. However, with theincreasing number ofnon-fi nance operators moving into the payments business,the systems in place must beextended to ensure newoperators meet legal obligations.

3. The payments ecosystem.Payment providers who host small and medium-size fi rms or larger merchants will have to make sure their clients alsocomply with relevant rulesand regulations.

There is still a long way to go before market practice and applicable regulation reaches maturity. Until then, the current regulations neither aff ord banks the opportunity to be nimble in the digital marketplace nor shield them from competitors who are. As much as customers recognise the importance ofsecurity and protection, they enjoy the enhanced experience provided by non-bank players and willprobably only react whena breach has occurred.

22

Russian Federation /// 4

France /// 4

Philippines /// 4

Singapore /// 3

United States of America /// 3

China /// 2

Norway /// 1

Argentina /// 1

Kazakhstan /// 1

Australia /// 1

Brazil /// 1

Italy /// 1

Ukraine /// 5

Indonesia /// 8

CONSUMER EXPECTATIONS: DREAMING ABOUT THE FUTURE OF MONEY?Banks have hardly been standing still in the digital age. Today our banks provide us with a multitude of options that make money management tactile, real-time and effortless. But as we have already established, other symbiotic platforms are quickly emerging that empower the consumer to explore an alternative to conventional money transactions. To understand what the money might mean to tomorrow’s consumers, we took

a creative journey. CH&Co and Misys joined forces with a leading crowdsourcing platform eYeka to set up an online contest in late 2014 to better understand what consumers thought money should be like and what it should allow them to do in the future. Creativity was encouraged. Some of the key themes are not new; however we think the unconstrained convergence of customers’ views crystallises these trends.

The Brief:

Money is essential in our life. We want it to be easily accessible. With Apple Pay and Google Wallet, Bitcoin and social currency, digital technology provides quicker and better access to money than ever before. But our relationship with money is also affected by other solutions. Air miles are now playing a significant role in the way we pay for travel, and are becoming a new form of currency. Social sharing models are disrupting and improving traditional structures (Airbnb, Uber, etc.). The world is changing and only the user-friendly and innovative models will last.

The brief is meant to inspire a global Creative Labs approach to the future of money. They want to hear from you and therefore your opinion matters. What is your current experience and what do you think you will want to use tomorrow? From transactions and payments (PayPal), to loaning, saving, trading and investing (e.g. a social investment platform), we want to know which options you want to survive in the future and what you want in your life. We also want your thoughts on which new technologies should be implemented, whether currently existing or completely original. You decide which device, platform and currency you want. This brief is all about your wishful thinking — so we want you to put yourself in the shoes of a finance superpower. If you had the ability to decide, how would you want to use everyday money in the future and what would you do?

Be creative and whacky and send us your vision. So let’s get started. Time is money!

49 Participants from 24 countries

Figure 9: Participation to the eYeka survey

THEME 1: EASE IS KING

An easy, frictionless payment process is necessary, even if it’s at the expense of consumer privacy (a willingness to share personal data with merchants).

Respondents shared concepts they believed would allow greater ease in handling money, including;

• a solar-powered USB bracelet that includes account information such as credit card details, frequent flyer miles and promotion codes

• a digital glove that allows payment with a handshake

• a chip inserted in the finger that allowed the consumer to tap and pay

These concepts highlight the importance that consumers attach to effective use of technology to make payments/handling money easier in the future. They assume money and related transactions will be digital and don’t consider privacy a major issue, believing continued advancements in technology will ensure secure transactions. As such, the respondents indicated they would be willing to allow companies to access to their data — therefore allowing a frictionless journey — in exchange for better service or coupons and discounts.

“I believe everything that comes ahead will have to be able to simplify people’s lives... Nowadays we’re living a fast life, where spending time on unnecessary things is not an option”- Divina, Philippines

THEME 2: DEATH OF PHYSICAL MONEY

Money needs to keep up with the times. Its function will only increase but its form is not a constant and the physical nature of money might very well be moving towards extinction.

“In the future cash and plastic cards will no longer be in use. In the future to make a purchase you will need absolutely nothing.” - Equant, Russia

While the function of money will remain essential to commerce, most respondents agree the three Cs — cash, currency and cards — will disappear. Why carry cash if it can be lost or stolen? Why possess a currency that becomes worthless due to a fluctuation in value? Why have cards that can be stolen or used in unauthorised transactions? Consumers of tomorrow expect the purchasing process will be devoid of such issues.

THEME 3: NEW & EVOLVING CURRENCIES

Currency should evolve to fit society’s needs and allow consumers to make the most of every exchange.

In tandem with respondents’ view of a shift away from physical money, they also strongly promoted the idea of a single global currency that is universally convenient to consumers, regardless of the country they reside in, and

which is monitored by a global institute such as the World Bank. However, they also envisage a future where entirely new currencies will be formed. These currencies could be based on social behaviour or be backed by the barter of goods and services:

• An eco-friendly, behaviour-dependent currency. One respondent postulated flower points, a currency where people accrue money (money equals ‘flowers’) by participating in environmental or ecological activities.

“Flowers to encourage green behaviour. ‘Flowers’ is a green worldwide currency that can be used to buy ecological products.” - Limonade, France

• Skills as a currency, where skills are exchanged for other skill sets

Many of the ideas were literally out of this world (see box below), and implausible in context of today’s established monetary systems. That said, future financial leaders will need to think expansively as the next generations of consumers will no longer be constrained by physical money and will expect the function of money to be multi-faceted.

Case Study from eYeka: “Stars and Stripes” By Anduze, France It was a Friday morning in December 2028. I woke up and received the news. People around my bed are telling me that I’m allowed to leave this place where I’m staying. I’m in a clean room with a bed, some lamps, a nice painting and a huge screen, like a window. There I can see the sky, but also watch movies and games. A few days ago they told me that I was hospitalised for a long time and that they had taken care of me during the long period that I was unconscious. Apparently until this week I had been in a coma for 14 years. They were unable to tell me exactly what had happened before I ended up here. Most of the staff are new and could only explain that I survived head injuries. Nobody could tell me what caused this. They took off all the wires on my body, wished me good luck and shook hands. One of them, a tall guy, stayed with me in the room. He sat down in a chair and said he wanted to give me a message. I have no idea why, but he tried to inform me about drastic changes in the outdoor world. There would be cars without drivers, he said, air corridors for drones, outdoor screens to guide people and much, much more. With a smile on my face, I listened but I had difficulty believing him and imagining how big the impact might be. He also said that via an institution called the ‘Milky Way’, everyone received virtual stars. The number could differ from place to place and among countries, based on the economic circumstances and the need. A certain amount of stars would become stripes. So there were stars and stripes and you were able to collect these stars and stripes in different ways. The stars could be used for purchasing goods or services or travelling. In return, it was possible to earn stars by studying, caring for the environment, for rating movies, programmes, services and so on, an almost endless list of possibilities. For example if my host paid for my drinks, he would have earned stars for helping me and that means he would not have to spend anything! In a secure and simple way, communication devices would take care of registering for activities, earning and spending. These would be based on personal needs and on one’s profile. Being inventive, innovative, active and helpful could help you earn more stars and stripes for a relaxed life. Even with a basic amount of stars, one would be able to have housing, food and also an education.

This exercise led to some interesting perspectives that we grouped into six major themes.

THEME 4: ROLE OF BANKS IN THE FUTURE

The financial services industry is ripe for disruption by various technological entrants, to the extent that banks may find they are no longer vital to the financial ecosystem.

Many participants in the eYeka exercise believe the role of banks will become more peripheral and limited, shifting their current dominant position in the value chain. Here’s a sample of views along this line of thinking:

• Once a biometrics-powered payment process aided by chip technology, is in place, the role of banks will be constricted to analysing trends in payment transactions.

• Banks will no longer be at the centre of the payment ecosystem, but rather one player in a crowded field and of limited relevance.

• With an influx of new digital currencies, the economics of money and its availability will not be managed by either banks or governments but rather by a multinational such as Google or Apple.

From a more general perspective the relationship with money goes beyond payments and participants in the contest highlighted:

• Help consumers save/spend effortlessly based on the detection of consumer behaviours

• Act as advisors or experts in the management of money, investment advice and budgeting - Prevent clients from spending too much, especially as the purchase process is made easier and easier - Provide information on financial products

“Have the bank tailor a product for me. It will no longer be a fixed financial product offered by the bank and I can either take it or leave it. Instead it represent a true collaboration so we can both grow financially.” - Maja, Serbia

THEME 5: TRADING PRIVACY FOR CONVENIENCE

Technology companies are pushing the boundaries of what’s possible — deepening their involvement in our daily life in the process — and are seen as a trusted manager of financial services.

The idea of an experience-centric ecosystem of payment transactions will only gain traction as related technologies continue to advance. While banks still believe that confidentiality is a value cherished by their clients, consumers appear increasingly willing to trade privacy for

ease of use. Apple Pay and Google Wallet are successful examples of customers trusting their credit card details to the companies’ servers in exchange for a powerful payment experience. In that sense, Google, Apple and other technology giants are influencing consumer behaviour. Customers are willingly placing increasing trust in these players to help manage their finances, leading them away from banks.

THEME 6: EMPOWERED CUSTOMERS

Consumers around the world are aware of their influence and power. They wish to be acknowledged and appreciated.

This is propelled by a guiding philosophy of ‘What’s in it for me?’

• If nature and the environment win – I need to win

• If the banks win – I need to win

• If brands win – I need to win

• If I am loyal – I need to win

This attitude fits perfectly with the Generation Y mindset, which is more focused on personal gain and benefit. Several eYeka respondents indicated they should be recognised and compensated no matter what the activity or transaction. One posited that gamers should be paid by the gaming companies as playing games and forming online gaming communities help the companies gain traction and earn advertising revenue. Another respondent envisaged getting paid for being eco-friendly and recycling. Others focused on social currency — earning more when saving more and customised shopping experiences — forming the outline of a financial ecosystem where different currencies based on enhanced customer experience evolve.

By Anduze, France

26

SO WHAT DID WE LEARN?Banks’ services have been critical to world economic development throughout history and consumers stillregard them as the most secure means of managing their fi nances. Safety processes that are governed by strong regulatory functions and a robust bureaucratic approach have positioned banks as the primaryinstitutions for services such as compliance, licensing and risk mitigation. Coupled with long-standinginformation systems and stable back-end procedures, banks’ relative stability in operations has shown this trust is not misplaced.

However, as we saw earlier in this paper, money both as a concept and as a form of payment is evolving fast. The reason for and enabler of this shift: technology.

Shortened technology and innovation cycles have allowed other players to challenge the hierarchy in the fi nancial services sector. Banks have their stable and established infrastructures, but their complexity and inertia to change has enabled the infl ux of tech players to position themselves as primary payment-service providers that are better able to cater to customers’ rapidly evolving expectations. Going beyond the way payments are processed, the construct of money itself becomes unclear. Alternatives to traditional currencies are gaining traction, which could soon enable complete ecosystems to function without banks.

While the rules applied to new entrants and new forms of money are still maturing, regulators will catch up. Most countries have launched studies to establishapplicable compliance policies to protect consumers, but while this will raise the entry barrier it will not shield the banks against change and challengers will adapt to function within the applicable guidelines.

Finally, we saw that consumers are eager to moveforward. Not only have they digested recenttechnological advancements in the digital age,they want more — a lot more. From a single global

currency to ethical perspective in the essence ofmoney, the fundamentals are relevance andzero friction.

Having in mind the role of banks in today’s payment landscape, these trends seem to indicate a futurewithout them. Short of a rapid reaction, established fi nancial institutions could see their stronghold inthe current value chain diminished if notextinguished altogether.

PERCEIVEDVALUE BY END

CUSTOMERS

TIME

Reclaim client ownership- Develop CX strategy- Create own ecosystem

Provide servicesto CX owners- Clear new currencies- Provide infrastructure

Loose control

A B

CUSTOMERSEXPERIENCE(CX)

PROCESSING

C D

27

DEVELOPING A STRATEGY: HOW TO STAY RELEVANT

As discussed earlier, both objective data and subjective opiniondemonstrate a decline in theperceived added value of banks. In the retail payment landscape, ownership of the customer is being lost as other players champion the customer experience. That said, we think fi nancial institutions that adopt a clear strategy can stillclaim their place.

We see the world of payments evolving in two main directions :In one direction, electroniccurrencies will further supportthe way people are conducting business and in the other,

open-ledger-type digital monies (e.g. Bitcoin) will gain market share. Financial institutions must integrate both into their retail strategy.

Ripple Makes Waves

U.S.-based Cross River Bank ispioneering the Ripple protocol(a payment system developedby San Francisco start-up RippleLabs to connect disparate fi nancialnetworks) to off er real-timeinternational banking between the U.S. and Western Europe. Ripple off ers an advanced settlementinfrastructure for instant, secure, compliant and aff ordablecross-border transaction services.

In building a ‘digital money’strategy, all fi ve dimensions ofmoney discussed earlier — typeof transaction, mode of transaction, supporting technology, operator/issuer and substance — have to be considered. Banks need to assess each of these dimensions to ensure a successful digital transformation.

Appetite and investment abilityin each of these dimensions willdictate how much banks willbe able to infl uence theirmarketplace position.

Figure 10: Evolution of perceived added value by customers

BUILD USEREXPERIENCE(INTERNALPROCESSINGSTILL REQUIRED)

FOCUS ONPROCESSING

INTERNAL ORGANISATION &BRANDING

EXTERNAL

POSITIONING

3 4

1 2

Invest in developing customer anduser relationships by improving

existing assets

Launch a new value propositioncompeting with user experience

experts from digital space

Organisation & BrandingTransform existing IT to supportpartners and competitors andfocus on B2B for retail market

Create an IT/infra-service providerto support partners and competitors.Define new o�erings and packaging

of the IT solution

• Lose control and abandonday-to-day payments. Leavethis we see diff erent fundamental alternatives for banks to consider when it comes to payments:area to other players to focus on larger transactions or bundled products where payment iscombined with other fi nancial products and services.

• If you can’t beat them,partner with them. Focus onprocessing capabilities byinvesting in infrastructure and core banking competencies to support partners (e.g. retailers or tech companies) or complete ecosystems by forming largeplatforms with uniform andregulated processes.

• Move up the chain. Reclaimthe client relationship byshifting focus to where the value for end-users lies (ease, speed of execution, user co-creation and empowerment). Compete directly with new entrants by leveraging expertise in fi nancial adviceand more complex moneytransactions (investments and loans) to dominate the niche.

Whatever the selected option, banks’ ability to cope with new forms of money will rest on their becoming either front-end players managing digital money transactions orback-end enablers and/orguarantors of future regulatory frameworks, including controls against risk and fraud, e.g. incryptocurrency transactions.

But the challenge does not endwith defi ning the business model. Largely underestimated, it’s the ability to execute strategy that brings success or failure. Following so-called iceberg logic, 90 percent of the eff ort resides in translating ideas into results.

The matrix shown below proposesa pragmatic view of ways to createa digitally advanced organisationable to compete in a multi-money,real-time, mobile andconsumer-centric world.A combination of these options is possible, but we believe that limits the chance of success in a world of scarce resources. The power lawsuggests large achievements arethe result of uncompromisedinvestments rather than being

triggered by diversifi cation. If you don’t go all in one direction, some else will do it and gain the right to win. On a similar note, there are grey zones between the options described here. Progressive business and operating models are possible, each of these placing the cursor between internal and external, between utilityand end-client ownership.

The vertical dimension looks at the off ering (external). It is critical to defi ne how the service is positioned in the chain and who the targeted customers are. Value can either be extracted by owning and retaining the client or by enabling partners with expertise in back-endinfrastructure andprocessing capabilities.

The horizontal dimension looks at the operating model (internal). Two macro scenarios exist: either the existing institution tries to go through a transformation exercise by enhancing its existing digital channels or an independent entityis created or acquired with theability to grow as a start-up.

28

Figure 11: Possible strategies for banks

“BANKS POSSESS INFRASTRUCTURE, SOLUTIONS AND ESTABLISHED PROCESSES.

THESE ARE STRENGTHS THAT THEY SHOULD

BUILD ON”

Akos Turny, Head of Product Management (Digital Channels), Misys

“NEITHER GAFA NOR BANKS CAN ACHIEVE MARKET SUCCESS

ON THEIR OWN AS THEY CANNOT PERFORM THE WHOLE

VALUE CHAIN OF RETAIL BANKING INDEPENDENTLY”

Olivier Crespin, Head of Digital Bank, DBS

1. Leverage internal assets,enable partners:

Strengthening back-endinfrastructure is an effi cient way for banks to gain a competitive edgein the digital age. Given that banks today operate in an environment that spans geographies andlanguages as well as diff erentregulatory regimes, their systemsalready allow them to build andtransact complex products.

Pushing these abilities forward, an extension to cloud computing would not only help banks remove some constraints from legacy IT systems but also enable them tointegrate new technologies. With this strategy, payments — and toa certain extent digital money— could be processed, keeping banks at the heart of the system, even if their medium i.e. money, changes form.

This strong value propositioncould be packaged and off eredto partners that have demonstrated their focus on the client experience. Unity bringing strength, aconsortium between banks and retailers could represent thewinning combination.

2. Build new engines for merging ecosystems:

Following a similar valueproposition as option one,option two represents the viewthat transforming the existingentity is not realistic.

The complexity of currentarchitectures means even a small change can be a challenge.Considering the magnitude ofadaptation required to become acredible player building the nextgeneration of payments, technicalrigidity makes it impossiblefor traditional institutions tomanoeuvre fast enough.The logical workaroundis to start fresh.

Companies are being createdwith new technologies at their core. NoSQL databases, the latest coding languages, cloud and distributed central processing unit power all join

forces to constitute next-generation payment-processing platforms.With option two, investments are made in building rather than intransforming.

3. Stand proud, claim back the client relationship:

Customer experience, including the quality of service and ease of use,is a key diff erentiator in anyorganisation. A large number ofU.S. banks have invested in personalfi nance management (PFM)software coupled with customer data mining (to consider bothsmall and big data).

The aim is to provide morevalue-added services tocustomers through smarter insights into what they want and therefore to strengthen their relationship with the bank. Mobile-banking apps such as Standard Chartered’s Breeze mobile have provensuccessful in enhancingcustomer interaction and stickiness.

Banks are sharpening their focus,but they still have some way to go before understanding customersas individuals (as opposed tosegments) — their emotions, their stage of life, their employmentand their hobbies and routines.Enhancing the user experience is a continuous process that involves regular updates and improvements to refi ne operations and strategies.

At the moment, payments as a standalone component is not much valued by customers looking forend-to-end journeys such asshopping (including managing vouchers and miles/rewards)or entertainment (includingmanaging bookings).

Owning the payment component, banks could facilitate the complete experience though regulatorylimitations might force them todo this through links withmerchants. Moving up the value chain requires restructuring anorganisation in such a way thatdigital teams are intrinsic to theexisting business.

This requires bringing in experts who can introduce the overused ‘outside-in’ transformation in the traditional banking culture.Innovative banks should move away from multi-channel off erings tryingto marry legacy and new clientinteractions models.

From our perspective, omni-channel means the right channel available any time anywhere, rather thanall possible channels.

4. Build new marketplaces,act as facilitators:

While option four follows thebusiness objective outlined option three, it diff ers in two key aspects. On top of the limitations due tolegacy architectures, it takes into consideration a major roadblock often faced by banks in reclaiming the client relationship – people.

Systems are diffi cult to change and the clients themselves even more so, consciously or subconsciouslyresisting a new direction.

The reason relates to the fact that banks are traditionally risk-averse. However, evolution means change, and change implies risk.

The risks of having a negativeimpact on the current customer base, disturbing employees,shaking egos or highlightingconfl icting agendas are oftenconsidered unbearable andtherefore annihilate the abilityof traditional institutions toevolve to the extent necessary.

Given that, building fresh teams without past limitations is the right approach. Venture capitalists tend to think that the team makes the diff erence and incentives mustbe aligned. Huge teams and themillion-dollar salaries of bankingexecutives might be seen as aweakness rather than a strength when it comes to breaking with current behaviours.

30

Strategy Opportunities and Benefits Challenges and Risks

1. Leverage internal assets, enable partners

Medium

- Considers existing abilities and therefore does not require large transformation

- Leverages a strong, secure and reliable banking infrastructure

- Enables cross-selling with other products and services

- Takes place in a clearly regulated environment

Medium

- Adapts current B2C model to a B2B2C model- Produces limited revenues generated from

processing simple payments- Compounds retention issues of customers

due to a reduced engagement- Requires a strong brand already positioned

as innovative to appear credible- Necessitates the optimisation of processes

to enhance productivity and efficiency

2. Build new engines for emerging ecosystems

Medium

- Creates a more nimble entity able to cope with the digital environment

- Allows real outside-in perspective in developing business and operating models

- Uses new technologies at the core of the offering with a dedicated architecture that will fully enable the value proposition with no compromise to existing services

Medium

- Requires striking the right balance between full independence (and potential conflicting agendas) and leveraging synergies with the mother company

- Increases group governance complexity- Implies efforts linked to the development

of new branding- Calls for the definition of an applicable

regulatory landscape- Entails building a new talented team with

limited pressure to transfer staff from the mother company

3. Stand proud, claim back client relationship

Medium

- Defines new revenue streams to compensate for a drop in existing products and services

- Generates client stickiness through end-to-end customer journeys leveraging partners to bring in the rationale (e.g. shopping)

- Repositions the complete organisation as a customer-centric entity

- Limits efforts required to get buy-in as this is the existing strategy for most banks

High

- Fosters extreme competitiveness and leaves limited room for partnerships

- Implies a significant amount of investments with unclear payback calendar

- Slows down implementation speed compared with new players (buy or build)

- Requires building on existing legacy architecture

- Demands a very high ability to change- Forces play within the banking regulatory

landscape while new competitors have more ‘room’

4. Build new marketplaces, act as facilitators

High.

- Looks at new client needs and behaviours with a fresh perspective. Existing products and services are only considered in a second stage

- Concentrates fully on new strategies with no or limited dependency on legacy and internal constraints

- Increases control over customer journeys and partners

- Enables generating revenues from different sources, with payment a subcomponent in the offering

- Helps appropriate brand positioning

High.

- Requires identifying the right value proposition in a confusing environment

- Necessitates a very strong partnership model with a large number of entities; the bank will play the role of facilitator

- Requires understanding the applicable regulatory landscape

- Implies the development of an open platform based on latest technologies allowing easy connectivity

- Needs a complete branding strategy

Figure 12: Details on possible strategies for banks

FUNDEMENTALSAND PRIORITIESIn day-to-day payments, we believe banks have to make a choice between acting as processingentities and developing their own ecosystem. Staying in the middle will probably not be sustainable.

Game plans will depend on diff erent factors but payments will be the domain of the big players.Today a number of companies have entered this space but consolidation is the only way forwardin our opinion.

All the strategies described above share some fundamentals that have to be considered and which should drive a large part of a bank’s project portfolio over the next two years:

• (Next six months)

Clarify current and future positioning of the bankin the next decade, which requires understandingthe market and the challenges, strengths andopportunities to explore potential scenarios.

To avoid the status quo, banks have to make surethe team responsible for these views includes not only traditional bankers but also those with amindset shaped by the digital age.

• (Next 12 months)

Work very hard on culture and governanceto implement a lean environment with a fastdecision-making process (i.e. it should takea maximum of four meetings to reacha decision) and which tolerates somefailure. Stay open-minded and fosterexperimentation.

• (Next 18 months)

Develop partnership models to easily join or create ecosystems where the value propositionis a combination of products and services.

Whether banks will own the customer journeyis a larger question, but in the short term theycan leverage various data points to improvetheir knowledge of customers.

• (Next 24 months)

Improve back-end platforms: Open APIs toincrease fl exibility and integration withexternal parties and develop fl exibilityin IT/infrastructure/processes.

• (Continuous)

Bring in external perspectives from other industries and leverage crowdsourcing initiatives to identify ideas (not just incremental evolutions).

Decentralise innovation projects and establish‘vertical teams’ to foster an unhinderedskills-and-knowledge sharing culture.Don’t discount the ‘black swan’(referring to Nassim Nicholas Taleb theory).

• (Continuous)

Get close to solution providers (start-ups or large companies) to contribute and absorb innovation thanks to user groups, conferences or evendirect investments.

In this changing landscape, the ability to be partof idea creation and early stage execution is keyto staying ahead of the game.

32

CONCLUSIONTechnology has always supported the evolution ofcommercial off erings by enhancing quality, reducing prices and increasing reach to ever-wider geographies.

In the digital age, the border between business and technology has almost disappeared and it’s becomeimpossible to say whether it’s IT innovation or newvalue propositions that came fi rst. On the edge ofthis rhetorical question, new monies that don’trequire banks to operate have emerged.

They pioneer architectures and valuation logics that open the door to a world of opportunity or threat, depending on the perspective. The rise of new entrants who not only possess a mindset that mimics that ofthe end user (the customer) but who also play thecard of technology faster and smarter, have movedbeyond being a threat to traditional institutions toowning large shares of the market, crystallised byGAFA’s increasing presence.

The time has come for bold moves. In this context,digital should not be seen as a chapter in company strategy but as the environment in which anymeaningful plans have to be developed, as it both changes value propositions and interaction modelswithin the complete ecosystem (i.e. customers,partners and staff ).

We believe the payments market will be polarised between the two points described earlier: processing entities at one end with companies owning the end customer at the other.

While most banks think they have chosen the latter, the ‘me too’ strategy will have very limited impact. Success in this space will require vision and the ability to take risk in defi ning the future. Our research shows that this future considers new monies as a credible alternativeto traditional currencies.

No matter which of the four main strategies (discussed in the previous section) it selects, a bank needs strong conviction to help steer it during turbulent times. But under the cover of trying to provide customers with what they want or what they need, most fi nancialinstitutions lack conviction (an opportunisticstrategy usually means no strategy).

Their approach most often involves market surveysand other lengthy consultant assignments, supposedly to discover what people want, but breakthroughinnovation cannot be achieved by using averagemarket perceptions. The mean (as in maths) opinion might save banks from big mistakes as much as itwill prevent them from creating value.

We think winners in the payment space will bethose who take risks and are bold.

Lukewarm value propositions trying to appeal tothe average will likely separate the winners fromthe losers in the near future.

33

34

APPENDIX/REFERENCES1) http://www.forbes.com/sites/ryanmac/2014/09/23/paypal-takes-small-step-toward-bitcoin-partners-with-cryp-

tocurrency-processors/

2) http://www.cryptocoincharts.info/coins/info

3) http://gtnews.afponline.org/Articles/2014/Virtual_Currencies__Learning_to_Live_in_the_Physical_World.html

4) http://www.businessinsider.com/the-wearable-computing-market-report-2014-10#ixzz3QvofyJRD

5) ‘World Payments Report, 2012’

Welcome to the world biggest creative playground! eYeka is a crowdsourcing agency that delivers fresh ideas by leveraging the power of collectiveintelligence of 300,000 creators that are spanning across the world.Crowdsourcing is an entrenched communication tool for some of theblue-chip clients such as Coca-Cola, Danone, Hyundai, Mondelez, Nestlé, P&G, PepsiCo and Unilever. We enable marketers and their agencies to accelerate the creation and marketing of more relevant products by leveraging a wealth of creative ideas developed by our community.

Eyeka Asia Pacifi c Pte. Ltd.24 Duxton RoadSingapore 089488Tel: +65 6423 0771

Misys is a global software provider for fi nancial services with more than 2,000 customers across 130 countries. Since 1979, Misys has been providing broad and fl exible software solutions too cater to diff erent banking domains such as retail, corporate, lending, treasury, capital markets, investment management and enterprise risk. With innovative and unparalleled architecture to address industry requirements, Misys is a trusted solution provider to 47 of the top50 banks worldwide.

Misys Singapore2 Shenton Way#14-01 SGX Centre 1Singapore 068804Tel: +65 6226 6022

Chappuis Halder & Co. is a management consulting fi rm that is focused on providing strategic insights for the fi nancial services sector. With a global presence across three continents and consultants with deep expertise in the various domains of fi nance, Chappuis Halder & Co. has been able to render its capabilities to high level executives of the top fi nancial institutions aroundthe world, including banks such as HSBC, JP Morgan, DBS and BNP Paribas.

Chappuis Halder & Co60 Tras Street #03-01Singapore 078999Tel: +65 6222 8664

Website: www.en.eyeka.com

email: alexandre.olmedo@eyeka.net

Website: www.misys.com

email: mukul.agrawal@misys.com

Website: www.chappuishalder.com

email: mchaille@chappuishalder.com pbucquet@chappuishalder.com

Chappuis Halder & Co. 60 Tras Street #03-01 Singapore 078999Tel: +65 6222 8664 Web: www.chappuishalder.com