Managing Director & Senior Partner
This is an excerpt of Global Payments 2015: Listening to the Customer’s Voice.
A new world of consumer digital payments is coming into view, spawned by an increasingly connected landscape of people, devices, and social-media platforms. Ubiquitous connectivity, biometrics, tokenization, cloud computing, and the Internet of Things are just a few of the digital trends that will affect the way consumers transact and interact with their banks. These dynamics, moreover, will spur new value propositions that, in turn, will alter the competitive landscape.
To better understand how banks can advance in digital payments, BCG carried out a survey of nearly 5,500 consumers in four countries—France, Germany, the U.K., and the U.S. Our objective was to grasp why the adoption of digital payments has been relatively slow to date, as well as to identify current consumer needs, preferences, and pain points. Based on our findings and extensive client work, we are able to outline actions that banks should take to unlock the potential of consumer digital payments, and at the same time successfully adapt to the entry of new and powerful nonbank players into the market. Overall, banks must first understand why traditional payment methods remain resilient, then determine how best to seize the digital opportunity.
Over the past ten years, there have been myriad digital-payment initiatives. Few have achieved sufficient scale. Traditional payment methods, notably cards, remain predominant. For example, BCG estimates that barely 1 percent of global retail sales originate from mobile phones. Even online, where the use of new payment forms has been greatest, general-purpose cards continue to prevail with a share of roughly 70 percent.
The primary reasons for the slow uptake of digital payment methods are threefold: a lack of compelling value propositions that outperform traditional payment methods and reward structures; persistent data privacy and security concerns; and, as a consequence, insufficient merchant acceptance and consumer comfort.
Lack of Compelling Value Propositions. There have been few cases of value propositions strong enough to alter consumer behavior in payments. In our survey, three-quarters of respondents, on average, were generally satisfied with currently available means of payment for POS purchases. (See Exhibit 1.) Continued enhancements of card products—such as tighter security with EMV, improved online authorization, tokenization, and innovative reward programs—as well as ever-increasing consumer penetration and merchant acceptance have enabled cards to remain dominant even in new channels (such as in-app).
Indeed, it’s only when banks and payments networks have ignored consumer and merchant pain points that alternative payment methods have managed to take off. PayPal, for example, has gained traction in countries where credit-card penetration is relatively low, where there is no online debit facility (such as Germany), or where small e-merchants have struggled to obtain an acquiring account that enables them to accept cards (such as France and the U.S.).
Data Privacy and Security Concerns. Our survey confirmed that worries about data privacy and security remain significant barriers to digital adoption. (See Exhibit 2.) Moreover, we found that if providers do not alleviate these concerns, consumers will not be interested in taking advantage of adoption incentives (such as deals and offers) or trying value-adding functionality (such as spending-management tools), even though they find such features attractive.
To be sure, when it comes to consumer trust with regard to security and payment privacy, our survey found that banks were the clear winners. This finding has important implications for the leadership role that banks can play—and the negotiating power they can wield—with potential partners.
Insufficient Merchant Acceptance and Consumer Comfort. As both incumbents and new nonbank entrants know, it is very difficult to generate a virtuous consumer-adoption and merchant-acceptance circle. Important lessons have been learned over the past decade, however. In the online world, achieving sufficient merchant acceptance requires either the ownership of a popular marketplace (such as eBay with Paypal, or Alibaba with Alipay) around which to build a strong value proposition, or a consortium of banks deciding early on to cooperate in developing a specific solution (such as iDEAL in the Netherlands). In the physical world (in mature markets), sufficient merchant acceptance requires partnering with card issuers and infrastructure providers.
Yet merchant acceptance alone will not drive greater consumer adoption. Consumers must find value in using a new payment type or form factor and feel comfortable using it. Even if providers devise compelling value-adding features and alleviate security concerns, adoption will be gradual. As the continued use of cash demonstrates, consumers do not rapidly switch to a new payment type, no matter how attractive it is. Recent large entrants such as Apple Pay, Android Pay, and Samsung Pay have clearly taken note of these lessons. They are offering advanced security, striving to achieve broad acceptance across POS channels, and partnering with banks and global card networks to leverage the existing payments infrastructure. Their future plans include loyalty rewards and broader shopping-related services. Their go-to-market and user-experience expertise, combined with deep funding and a strong drive to expand their broader ecosystems, will help them succeed in spurring adoption (although uptake will likely vary by country).
Looking ahead, new nonbank entrants do not appear to present a significant competitive threat to banks in Europe and North America in the short term because their priorities are not to capture payments revenue streams or to become full-fledged banking-service providers. Their entrance could, however, disrupt the competitive landscape, enabling issuers that excel at harnessing m-wallets’ potential to gain greater market share. By contrast, in China, nonbank entrants into the payments arena pose a significant threat to incumbents. Major e-commerce players such as Alibaba and Tencent, for example, are rapidly expanding their financial-services offerings.
There are longer-term risks in mature markets, however, and they are potentially high. For example, if an m-wallet provider becomes a dominant player, it could try to control customer access and influence behavior. The provider could add functionality that enables customers to optimize their use of banking products (such as those related to credit, savings, and rewards), resulting in weaker relationships between customers and their banks and higher switching rates. An m-wallet provider could also offer a reward program superior to those of banks. What’s more, it could use the threat of exclusion from its m-wallet to raise its revenue share requirement—say, from 15 to 20 basis points in the U.S.
Banks must take decisive action along several dimensions in order to ensure their place as key providers of digital payments and related value-added services. First, the banking industry as a whole must retain a leadership position in standards adoption, advanced security measures, and customer education. Second, banks as individual providers must differentiate themselves.
The Banking Industry as a Whole. Banks (along with card networks and clearing and settlement systems) remain at the center of the payments universe. They bring critical infrastructure, valuable experience (especially in areas such as fraud detection and regulatory compliance), and customer contact. At the highest level, banks need to educate consumers about digital payments and their added value. In BCG’s survey, 55 percent of respondents either found no value in m-wallets or had never heard of them. Working with card networks, the banking industry has an important role to play in ensuring that security and communication standards are implemented, protocols are followed, and platforms are open with full transaction visibility.
Security is paramount, of course. Banks, along with card networks and merchant acquirers, need to drive the securing of cards on file through tokenization, create better 3D Secure customer flows, and educate consumers on security and privacy features. While advanced biometric-based security is a powerful tool, our survey found that only 45 percent of respondents found the “pay using biometric identification” option as “rather attractive” or “attractive.” Hence, biometrics will require further promotion by m-wallet providers and other stakeholders.
Banks as Individual Providers. In order to sufficiently differentiate themselves and prosper in the new digital world, individual banks need to form smart partnerships, enhance consumer engagement linked to payments, optimize the overall consumer banking experience, and experiment with next-generation technology.
Form smart partnerships. In our view, banks should focus on smart partnering rather than going it alone. How banks approach partnering will vary by country, depending on each nation’s specific ecosystem, innovation level, customer pain points, and consumer willingness to change payments behavior. In markets with concentrated banking sectors, banks could succeed by working together to build a superior domestic m-wallet or collaborating with a global card network to leverage the latter’s experience and global platform. Joint ventures work best in markets where banks have a history of positive collaboration (such as in the Netherlands), and would likely have a strong advantage over third-party wallets. Yet even in these markets, success will depend highly on the ubiquity of NFC and effective customer promotion.
Banks in an increasing number of markets have an opportunity to partner with Apple Pay, Android Pay, and Samsung Pay. While such partnerships enable customers to make their preferred m-wallet choices, banks need to establish a strong negotiating position, leveraging their assets (such as established customer trust and longstanding relationships) to ensure that they deliver value where their partner cannot. In markets where banks have been mobile-payments innovators (such as Australia), they will have a relatively strong negotiating position.
In fragmented markets with low bank concentration and multiple mobile networks, partnering with a dominant network or a device manufacturer may be the best path. Accords with device manufacturers tend to be less challenging than those with mobile network operators because there is less conflict of interest and less ambiguity regarding who “owns” the customer.
Enhance consumer engagement linked to payments. The advent of smartphones and mobile apps is providing banks with a unique opportunity to address evolving customer needs, both enhancing and increasing the frequency of interactions and thereby strengthening relationships. Indeed, BCG’s survey showed that consumers are hungry for more control over their transactions and greater visibility with regard to their finances. To meet such needs, banks could offer advanced mobile features, such as the ability to dispute or flag a transaction as potentially fraudulent, receive personalized alerts, have flexible rewards redemption, or turn a card on or off. Affluent consumers, in particular, are seeking preferential treatment (for example, promotions for successful mobile apps such as Uber) and unique offers (for example, privileged access to an event) that can be readily delivered through a mobile app.
Banks also have access to valuable new data—such as location-based and context-aware information generated by the use of m-wallets and mobile apps—that they can leverage to improve fraud detection and provide more personalized loyalty programs. Such data can be extremely useful, but banks must be careful not to overstep customer-privacy preferences. BCG estimates that two-thirds of the total value potential of big data is at risk if stakeholders fail to establish proper restrictions and abide by them.
Optimize the overall consumer-banking experience. As long as banks provide the current account (DDA), they have a critical competitive advantage over nonbank players in helping customers manage their finances and maximize their rewards. Banks must ensure, however, that their mobile app delivers a superior mobile experience (such as actionable alerts) and is not merely a miniaturization of online banking. Banks will be required to observe usage patterns and solicit customer input to continually enhance their apps. Our recent work with major banks has demonstrated that there remains vast potential to enhance the consumer offering in mobile daily banking.
Banks can, for example, add various functions to enable customers to readily manage their cash flow and credit needs, including budget management tools such as customized overspending alerts as well as easy calculators to determine the best way to finance a big-ticket item. Banks could also link products, rewards, and offers together in an all-encompassing value proposition. Further, they could deliver new credit products, including consumer loans at the point of sale, through better and faster data analytics that can produce a credit decision in less than 30 seconds.
In addition to mobile banking apps, the digitization of card credentials and biometric authentication have profound implications for banks. Banks can leverage biometric authentication to facilitate origination across products such as credit cards, consumer loans, and insurance. They can also issue digital credentials directly into select m-wallets and mobile applications.
Whether an issuer should have a stand-alone app (dedicated to credit cardholders) or leverage a broader mobile-banking app will depend upon each bank’s payments strategy. A combined app could be optimal for issuers that have built their business primarily through cross-selling to retail banking customers. Stand-alone apps coupled with biometric log-ins have the advantage of providing a strong user experience early in the customer adoption phase, with no competition from other products in determining the app’s enhancements. Improvements that offer differentiation—such as fraud detection, personalized alerts, and flexible rewards redemption at the point of sale—will be critical to long-term usage and customer retention.
Some banks have effectively established an innovation lab aimed not just at experimenting with new ideas but also at commercializing them. Banks must take an enterprise-wide approach to innovation to assure that all resources and businesses are leveraged and that investments are optimized. Moreover, they must adopt an entrepreneurial approach to product development and marketing. While they still need multiyear technology road maps, they also need to adopt a more agile development approach that allows them to adapt to a shifting competitive landscape and launch new features and functions on a quarterly basis. Many banks are well equipped to be at the forefront of payment innovation—and a few will become disrupters.