Q3 2021

PAYMENTS PLUS

Best regards, Pablo Tramazaygues Partner, Madrid

PAYMENTS GROWTH IS ACCELERATINGAs the world begins to navigate out of the global pandemic, we expect the payments market to return to robust growth. The underlying factors that have driven expansion still hold — and the pandemic has amplified some trends, such as the shift to omni-channel and contactless payments. With secular tailwinds and asset-light business models in place, the payments sector will continue to support attractive valuation multiples in the quarters to come.

In our client work, we are witnessing significant disruption across the payments value chain, as formidable new competitors scale up and new business models emerge.

Buy Now Pay Later (BNPL) programs are addressing pain points in the way customers shop and pay online, and are becoming well established in many markets. Crypto is entering the mainstream, with activity spanning from consumers to central banks. Open banking is very much a market-by-market phenomenon, with rapid adoption of payment initiation services in some markets, such as Europe and Brazil.

In a sector as dynamic and rapidly changing as payments, every provider in the value chain needs a strategy that contemplates both organic and inorganic growth, including acquisitions, strategic alliances, and active participation in collaborative initiatives.

Oliver Wyman is helping companies navigate through this complexity. In this issue of Payments Plus, we outline a selection of recent client work from around the world.

As always, we welcome your thoughts and feedback.

Payments Plus / Market Developments

MERCHANT SERVICES BUSINESS MODELS

Q3 2021

+Strategic partnership +Value proposition differentiation

The European merchant acquiring space has evolved significantly in recent years. Traditional providers, notably banks, have experienced a gradual loss of share in several mature markets, ceding ground to specialist acquirers with more defined propositions targeting certain segments. After a wave of consolidation, third-party processors have the scale to further commoditize core acquiring and focus on value-added services. Companies with niche targets, such as micro-businesses, are also gaining share.

In this context, banks have been forced to reinvent their acceptance businesses to stay relevant and competitive. Some of the largest European banks have partnered with international specialists or have acquired key capabilities.

Oliver Wyman was recently engaged by a leading bank to review its merchant acquiring business. The goal was to assess strategic options to reshape the bank’s value proposition and improve its financial performance. We reviewed the bank’s competitive positioning and the investments required to achieve parity, along with the direct and indirect value of business customers that use merchant services.

The bank decided to adopt a different business model: It will retain its customer relationships but will partner with a specialist for access to its more cost-effective processing platform and innovative capabilities. We supported the bank in the process to find the optimal partner for this new venture.

Payments Plus / Market Developments

CHALLENGER BANKS

Q3 2021

+Payments innovation+Debit card

Challenger banks have exploded onto the global scene. Startups such as N26, Revolut, and Starling Bank have gained strong traction in Europe, while Chime leads in the United States with a nearly $15 billion valuation — greater than that of several US regional banks. Unconstrained by legacy technology, these startups have outmaneuvered traditional banks with a laser focus on a compelling user experience, and often tailor their proposition to underserved market segments.

In the United States, many digital banks have leveraged their exemption from Regulation II’s interchange rate cap to fund expansive marketing and strong value propositions. Despite the rise of early leaders, the market remains unsettled and new entrants continue to emerge.

Oliver Wyman worked with a US challenger bank to refine its new debit card go-to-market strategy. We developed a set of scenario-based financial projections to illustrate the trade-offs between different product, pricing, marketing, and operational approaches. This analysis, together with working sessions focused on operating model decisions, helped the company coalesce around a product strategy for launch.

With more companies securing bank charters, and various brands looking to “bank their customers,” we expect this area to become even more competitive in the future.

Payments Plus / Market Developments

BANK PAYMENT PROCESSING

Q3 2021

+Cost benchmarking +Business model design

Ever since the European Union capped interchange rates on intra-region credit and debit card transactions, the revenue European banks receive on most of their digital payments volume has been curtailed. The rise of BNPL and card-not-present transactions, as well as newer developments such as the announcement of the European Payments Initiative (EPI), has put even more financial pressure on banks’ payment back-offices.

In this environment, some banks have decided to outsource all or part of their payment processing activities in order to benefit from their partner’s greater scale. Conversely, in light of the recent bankruptcy of a large European payments outsourcer, other banks are committed to retaining control over this critical infrastructure.

A leading bank tapped Oliver Wyman to assess the cost efficiency of its payment systems. We benchmarked the bank’s processing costs against peers, evaluated the system’s current functionality, and assessed whether or not the platform will remain fit-for-purpose as the industry evolves.

Working with the bank’s payments, technology, and strategy leads, we evaluated the merits of different operating models. Recognizing strength in payments processing as a competitive advantage, the board approved a plan to invest and expand the bank’s payments footprint.

Payments Plus / Market Developments

INVESTING IN PAYMENTS

Q3 2021

+Commercial diligence+Next-gen merchant acquiring

Investors continue to search for opportunities in the payments and fintech sectors, attracted by strong macroeconomic tailwinds and continued outperformance relative to most other areas. Within payments, one subsector — merchant acquiring — is garnering special attention because multiple facets of the business are being disrupted simultaneously.

The provision of payment acceptance services to small businesses is the most profitable segment of the market, and the one that’s changing most quickly. Businesses are moving away from banks and independent sales organizations (ISOs) to tech firms and independent software vendors (ISVs). And the product is migrating from acceptance via “dumb” point-of-sale terminals to smart devices with software subscriptions, often customized to a particular vertical.

Oliver Wyman recently worked with an investment company to evaluate dynamics in the merchant acquiring market. As these trends play out, which companies are best positioned to be the long-term winners?

Drawing on our intellectual capital, we sized the addressable market, evaluated market dynamics, and analyzed the competitive landscape. We concluded with a three to five year outlook, informed by extensive primary research with more than 500 small business merchants that detailed the path to purchase, pain points, and evolving payments needs.

Payments Plus / Market Developments

MERCHANT FINANCING

Q3 2021

+Lending+Marketplaces

The pandemic led to a surge in ecommerce, including transactions on marketplaces — online sites that match buyers and third-party sellers. In order to meet this demand, a number of sellers required loans to finance an increase in their inventory.

Marketplaces are ideally positioned to serve this need, using their privileged access to seller data to underwrite loans. By introducing merchant lending, marketplaces can deepen their engagement with sellers, drive inventory and incremental revenues on the platform, and develop a new revenue stream — lending commissions.

Oliver Wyman supported a leading marketplace to explore a range of options to best meet this need. The work began with proposition design, customer (merchant) journey mapping, and business case development. This led to engaging a number of potential financial services partners via an RFP process and, ultimately, selecting the preferred partner.

The merchant financing offer has now been successfully launched, receiving very strong adoption and feedback.

Payments Plus / Perspectives

PerspectivesCrypto is tiptoeing into retail banking, driven primarily by fintechs such as Square, Coinbase, and Robinhood. Banks have an opportunity to compete by making retail banking applications that include crypto more mainstream, with the potential to generate additional revenue in the meantime. Banks can do this relatively easily through white label offerings, but need to be aware of the risks.

Cryptocurrency is becoming increasingly mainstream, with market activity and consumer demand at record levels. Financial services providers and governments have legitimized crypto, and consumers increasingly view it as a means to earn, save, spend, and borrow. As a result, crypto user growth has accelerated.

Established platforms such as Coinbase and Robinhood have spurred retail consumers' interest in crypto. Now, a new wave of fintechs — such as BlockFi and Celsius — have begun to offer new products, enabling consumers to earn cryptocurrency through credit and debit cards, and savings accounts. They also allow consumers to use their currency either to trade on margin or as collateral for other lending purposes.

Consumers are adjusting their spending

Growth in crypto users (Millions)

OPPORTUNITIES IN CRYPTO FOR BANKS

Square saw 1 million users buy bitcoin for first time during January's upswing, CFO says — CNBC

Crypto traders on Robinhood jump six-fold to 9.5 million in Q1 — Reuters

Bitcoin in your bank account? FIS, NYDIG partner to enable banks to offer their customers the ability to buy, sell, and hold Bitcoin — BusinessWire

Q3 2021

Explosion of participants in the crypto ecosystem

1 NYDIG Bitcoin & Banking Survey (2021).

2 Cornerstone Advisors Survey (2020).

3 Basel committee announcement on capital treatment of crypto assets (https://www.bis.org/press/p210610.html).

While fintechs have been first to market retail crypto offerings, there is an opportunity for banks to make these offerings mainstream. Research suggests that existing crypto holders lean toward buying crypto services from banks, and would be willing to switch their primary bank based on its crypto offering. If banks offered bitcoin products, it could open up a large market of customers who are not holding bitcoin today but would if they could do so through a trusted, existing financial relationship.1 2

Banks have experienced outflows to crypto-native startups but have the opportunity to flip the narrative and generate more engagement with their customers and a new way to boost revenue. Emerging white-label crypto solutions, such as the one announced by FIS and NYDIG, mean that banks can avoid long and costly internal builds and instead rely on their existing core or online banking providers. In this way, banks do not have to provide technology or hold crypto on their balance sheets, avoiding the potential 1,250 percent risk weighting of crypto assets.3 The crypto arena is not without risks; banks and other providers should carefully consider these before entering any market.

Payments Plus / Insights

InsightsOliver Wyman conducts an annual study of US debit issuers, collecting data from a representative set of financial institutions on the most critical developments in debit payments. The 2021 data set includes 48 financial institutions, from large national banks to regional and community banks and credit unions. Collectively, these organizations represent about 40 percent of the entire banking market in terms of debit card transactions.

THE DEBIT CARD TRANSFORMATION2020 was the year of many firsts as the pandemic radically changed the debit payments market. Debit transaction volumes contracted for the first time as cardholders made fewer but larger purchases. Card-not-present purchases exceeded card-present activity for front-of-card networks for the first time, highlighting a secular shift to digital.

Contactless PaymentsThe number of tap-and-go contactless debit card transactions increased by more than six times in 2020, driven by both higher penetration of contactless cards and more tap-and-go transactions performed on these cards. However, total near-field communication (NFC) use remains low overall.

Q3 2021

The interplay between contactless cards and mobile wallets is a hotly debated topic among card issuers. While some issuers believe greater penetration of contactless cards will have a positive impact on mobile wallets due to consumer familiarity and adoption, others think contactless cards are likely to cannibalize mobile wallet transactions.

Mobile PaymentsAbout 20 percent of consumers have enrolled their debit cards in mobile wallets. Approximately two billion mobile wallet transactions were made using the three Pays (Apple Pay, Samsung Pay, and Google Pay) in 2020 in the United States, 57 percent of which were made in-app, with the rest being in-store contactless transactions.

Across every metric — enrollment, active rate, and usage — Apple Pay leads Samsung Pay and Google Pay.

Payments Plus / Oliver Wyman Reports

Oliver Wyman publishes a broad range of points-of-view across industries. A sample of our recently released intellectual capital is shown here.

The report images are hyperlinked. Please click to view or download the document.

Competing For Growth Central Bank Digital Currencies

Caught In The Prisoner's Dilemma

Reset4Value: Four Unconventional Actions For Insurers To Improve Growth

OLIVER WYMAN REPORTS

Q3 2021

Have We Come Far Enough? Managing Change Risk A New Dawn For Digital Currency

Oliver Wyman ForumGlobal Cyber Risk LiteracyAnd Education Index

Climate TransitionAnd The Fed

Is E-Commerce Good For Europe?

Payments Plus / Celent Reports

Celent, a division of Oliver Wyman, is the leading subscription research and advisory firm focused on financial services technology.

Demystifying Embedded Finance: Promise And Peril For Banks

Expectation Versus Reality For Payments Data Monetisation

AI Driving Game-Changing Competitive Differentiation

Experian Verify

CELENT REPORTS

Q3 2021

P27: A Nordic Payments Revolution

Magiccube I-Accept: Reinventing Payments Acceptance With Software Defined Trust

State Of Digital Customer Acquisition: Much Work Remains

Oaknorth Credit Intelligence: Reinventing Credit Analysis And Monitoring With Machine Learning

Becoming An Agile Bank Ensuring Payment Systems Resilience: Mission Critical, Not Mission Impossible

Payments Plus / Events

The Merchant Advisory Group (MAG) is the leading payments-focused association for merchants in the United States.

In August, Beth Costa and Neeko Gardner will host a webinar on how younger consumers (Gen Z) prefer to pay and shop, and the implications for merchants. They will preview proprietary data and insights during the webinar.

Oliver Wyman will also present at the MAG Annual Conference in September. Rob Mau will lead a session on managing payments partnerships, while Beth Costa will moderate a merchant-only Special Interest Group (SIG) on customer experience.

EVENTS

Money 20/20 is the largest industry event focused on the payments, banking, and fintech sectors. Oliver Wyman will share perspectives at the conferences in Europe and the United States.

September 21-23 | Amsterdam Tony Hayes will moderate a panel discussion on the Future of Payments Infrastructure in Europe. His panelists will include Martina Weimert, CEO of The European Payments Initiative (EPI), together with leading European banks and payment processors.

PAYMENTS + Brand

PAYMENTS + Digital

PAYMENTS + Strategy

PAYMENTS + Operations

PAYMENTS + Technology

PAYMENTS + Partnerships

PAYMENTS + Due diligence

PAYMENTS + Data & Analytics

PAYMENTS + Risk management

PAYMENTS + Customer Experience

PAYMENTS + Organizational effectiveness

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