October 2015Volume 8, Number 22

McKinsey on Payments

Foreword

Payments in Asia: At the vanguard of digital innovationDigitization of business processes and the emergence of new platforms for paymentsand finance bring both challenges and opportunities to payments businessesoperating within Asia or serving clients who trade with Asia.

Supply-chain finance: The emergence of a new competitive landscapeFintechs are changing how buyers and suppliers think about the supply-chain financemarket, and starting to command a sizeable proportion of the value pool.

16 in 2016: Trailblazing trends in global paymentsA look at the topics that are top of mind for global payments executives, from EMVmigration to the battle for the “digital customer.”

Digital wallets in the U.S.: Minding the consumer adoption curveDigital wallets seem poised to enter the mainstream. Now is the time for providers toidentify which strategic market approaches will lead to success.

The new rules for growth through customer engagementFor banks, digital engagement with customers has become an imperative forpreserving relationships. Five rules can help them thrive in the digital landscape.

No time for U.S. bank complacency over liquidity compliance Basel III’s liquidity coverage ratio is no cause for panic for U.S. commercial banks.However, banks should not wait to define their strategic approach to the regulation.

The Singapore payments industry at a glance

1

3

10

17

26

32

39

46

26 McKinsey on Payments October 2015

To better understand how that curve willlikely work for digital wallets, McKinseyturned to advanced data analytics and othersophisticated tools to understand how con-sumers think and feel about mobile pay-ments products in the U.S. The findings ofthis research identify several relevant mar-ket segments and reveal how each integrateswith the consumer adoption process. Thisinsight can be a useful aid in developingmore effective market-entry strategies for adiverse range of potential market entrants,and provides learnings that can also be ap-plied across other geographies.

How fast will the digital walletsmarket grow?

Recent activity by mobile wallet providers inthe U.S. has grown considerably. Chiefamong these activities are product an-nouncements (Samsung Pay, Chase Wallet,

Android Pay, MasterPass and Visa Check-out), product launches (Apple Pay, Citi Wal-let) and acquisitions (LoopPay by Samsungand Softcard by Google). On the consumerside, however, progress has been relativelyslow, with mobile payments still represent-ing less than 2 percent of consumer spend-ing. Even market participants like PayPal,who have achieved higher online marketshares, are still struggling to make progressin the broader pool of in-store purchasing.Popular peer-to-peer (P2P) services, such asVenmo (or PingIt and MobilePay in Europe)have also made little headway in this arena.

All this prompts the question: Will con-sumers ultimately adopt digital wallets on awidespread basis, and if so, when and atwhat rate? Recent research suggests that mo-bile payments will approach 9 percent ofconsumer spending by 2020, with certain

Digital wallets in the U.S.: Mindingthe consumer adoption curveDigital wallets have been slow to capture consumer attention, but finally seem

poised to enter the U.S. mainstream. For would-be digital wallet players, then,

the key questions are: How fast will consumers adopt digital wallet products,

and how is the market likely to unfold? The answers, of course, depend on the

nature of the products offered and consumers’ willingness to adopt them. This

article provides insight into the market-entry process by exploring how the

consumer adoption curve relates to mobile payments technology.

Jocelene Kwan

Marie-Claude Nadeau

Jon Steitz

27Digital wallets: Minding the consumer adoption curve

consumer segments leading that advance.Most of the early volume will probably occurin online and mobile payments, rather thanin point-of-sale (POS) transactions. In fact,almost half of e-commerce volume alreadyflows through stored credentials—either dig-ital wallets or cards on file. Such findingssuggest that digital wallet providers will needto offer value propositions that are com-pelling to specific market segments that can,in turn, ignite more widespread adoption.

To estimate the potential for digital walletadoption in the U.S. during the next fiveyears, McKinsey employed predictive analyt-ics technology in conjunction with data mod-els aimed at estimating the growth potentialunder various market scenarios. The models

drew on data from other digital wallet intro-ductions, including the Starbucks smart-phone app, M-Pesa (Kenya) and Alipay(China), as well as on data related to proba-ble U.S. market drivers, such as e-commerceand smartphone penetration levels. Based onthe projections of these models and other re-search findings, McKinsey estimates that ap-proximately $200 billion in transactions arealready flowing through digital wallets in theU.S. And the base-case scenario indicatesthis volume should reach 18 million transac-tions by 2020, or a total of $1.2 trillion. Thisrepresents about 18 to 20 percent of totalU.S. retail spending. Approximately $1 tril-lion of that will come from mobile and e-commerce transactions (Exhibit 1).

Digital wallets in the U.S.: Value of payments $ trillion, 2015-2020

CAGRPercent

2016F

0.3

0

2015

0.2

0

0

2018F

0.7

0.1

0

2017F

0.5

0.1

Mobile

Online

Point of sale

Peer to peer

2020F

1.2

0.2

0

2019F

0.9

0.1

~60%

~40%

0.5

0.4

0.6

0.1

0.1

0.4

0.2

0.1

0.3

0.2

0.2 0.3

~40%

~50%

00

0

0

Source: CrowdANALYTIX 2015; McKinsey analysis

Exhibit 1

Mobile and online payments will drive digital wallets adoption

28 McKinsey on Payments October 2015

While the base case conservatively projectsin-store mobile wallet transactions willreach $50 billion by 2020, some scenariosforecast significantly greater volumes. Themost critical factor will be the ability to at-tain broad merchant acceptance and themerchants’ willingness to offer consumerssufficient incentives to motivate substantialdigital wallet use, as Starbucks succeeded indoing. Historically, merchant reluctance toaccept new payments forms resulted fromunclear adoption incentives and the highcost of altering POS infrastructures. But re-cent projections show that high adoptionrates by brick-and-mortar merchants, asStarbucks licensees demonstrated, couldcreate a four-fold increase in digital walletuse, reaching $200 billion by 2020. Becausethe U.S. market is in the early stages of mo-bile wallet use at retail, it is difficult to pre-dict whether this accelerated growth willoccur across the broader marketplace.

Who will adopt digital wallets, andwhen?

Anticipating substantial growth of digitalwallets in the U.S. might be unsurprising inlight of the increase of activity noted earlier.However, marketplace success still demandsthat participants better understand which

consumer segments and product attributeswill most likely drive growth, and designingrelevant entry strategies. To address thesequestions, McKinsey turned to its latestGlobal Mobile Payments consumer survey, astudy of 1,000 consumers that is designed tosegment markets based on consumers’ needsand attitudes regarding mobile paymentsand digital wallets. Needs-based segmenta-tion helps identify which product attributeswill probably drive consumer decisions in se-lected target markets, enabling marketers todesign compelling value propositions thatalign with segment needs. Needs-based seg-mentation is often a stronger indicator ofconsumers’ near-term decisions than demo-graphic data and behavior-based segmenta-tion. This is an important distinction forrapidly growing market categories such asdigital wallets (Exhibit 2).

Consumer segment 1: Mobileenthusiasts

People in this segment tend to be earlyadopters of mobile wallets. They enjoy try-ing new things with their mobile phones,including making payments. If they haveconcerns about security or are interested inpromotional offers, the concerns are typi-cally minor. More important are conven-

Digital wallet defined

The term digital wallet has been loosely used in reference to a diverse range of financial services,

products and technologies. For clarity, McKinsey defines a digital wallet as software that enables

consumers to conveniently store various types of payments credentials, such as information about

credit and debit cards, bank accounts, and prepaid or gift cards. Wallet owners can then use their

stored credentials to digitally pay various parties and merchants for transactions being made online

or with their mobile device at brick-and-mortar merchants equipped with NFC terminals; and they

can even make peer-to-peer money transfers.

29Digital wallets: Minding the consumer adoption curve

ience and the prospect of being able toleave their wallets and cards at home. Asthe youngest group in survey (47 percentare under the age of 35), mobile enthusiastsvalue traditional credit card attributes, in-cluding fraud alerts, low interest rates andhigh credit limits. Product attributes likelyto attract this segment include a seamlessmobile payments experience coupled withintuitive new features and interfaces. Acompelling wallet offering might integratemerchant and peer payments, as well as astorage capability for personal credentials,such as a driver’s license.

Segment 2: Deal hunters

Deal hunters seek promotional offers, re-wards and discounts. Their primary motiva-tion is not necessarily budget constraints;

they’re the wealthiest consumer segment,with 28 percent reporting household incomegreater than $100,000. But getting a dealmakes them feel good. They are somewhatmore skeptical about digital wallets and mo-bile payments than mobile enthusiasts, butnonetheless will likely adopt them within thenext few years. This group prefers wallet of-ferings that integrate loyalty programs withrewards for supporting specific merchants,or with spending in certain categories.

Segment 3: Bank loyalists

Members of this segment focus on carefullymanaging their finances. Beyond that, theyare generally ambivalent about digital wal-lets, preferring to use debit cards and otherbank-focused payments solutions. Thesemiddle-income consumers consider deal-

Key defining attitudes Like faster, simpler ways to make purchases

Love rewards and loyalty programs

Like bank-focused wallets, avoid credit cards

Conerned about privacy and technical reliability

Have no interest in mobile payments

Mobileenthusiasts

Deal hunters

Bank loyalists

Securityskeptics

Budgetconscious

Percent of U.S. consumers

Percent greater than65 years old

Percent less than 35 years old

Household income greater than $100,000

Household income less than $25,000

Percentage that use smartphones

Self-described “early adopters” of mobile payments

Self-described “resistant” users of mobile payments

26%

12%

47%

18%

15%

73%

17%

6%

24%

7%

32%

28%

23%

73%

5%

6%

17%

15%

32%

15%

25%

66%

7%

18%

16%

34%

15%

18%

25%

47%

3%

39%

17%

31%

20%

16%

31%

54%

1%

30%

Source: McKinsey Global Mobile Payments Consumer Survey, 2014-2015

Exhibit 2

In digital payments, consumer segments differ significantly

30 McKinsey on Payments October 2015

focused wallets and offers as bothersomedistractions. Bank-focused wallets that facil-itate tracking of account balances and ex-pense management will therefore have thestrongest appeal.

Segment 4: Security skeptics

These consumers are highly concernedabout privacy and product reliability. Theyare less inclined than others to own a smart-phone or even have a mobile device with In-ternet access. Security skeptics are also themost mature segment (34 percent are 65 orolder). Their skepticism means they are themost likely to resist digital wallets. Fortypercent say they have no interest in mobilepayments. Identity theft and security areprime concerns for these consumers, who

will avoid any form of mobile payments un-less these concerns are addressed.

Segment 5: Budget conscious

Like bank loyalists, the budget conscioussegment is function-centered. Its membersemploy various payments methods to man-age their modest budgets. They comprisethe lowest-income group, with 31 percentreporting household incomes of $25,000 orless. The budget conscious also have thelowest mobile-payments adoption rate.They are also deal seekers (38 percent areinterested in deal-centered wallet offer-ings), although they are motivated more bytheir need to manage limited resourcesthan by the thrill of the chase. Wallets likelyto entice this segment will offer cash back

Product features

Highest-priority features, by segment

Mobileenthusiasts

Segment

Deal hunters

Bank loyalists

Securityskeptics

Budgetconscious

Rewards

Loyalty programs

Identification

Peer-to-peer transfers

In-person retail (POS)

Social connectivity

IT reliability

Technical performance

Mobile banking and bill pay

Low interest borrowing/credit

Speed/ease of “check-out”

Digital goods Source: McKinsey Global Mobile Payments Consumer Survey, 2014-2015

Exhibit 3

Appeal of digital wallet attributes varies by segment

31Digital wallets: Minding the consumer adoption curve

or deliver other forms of significant con-sumer value.

Developing an effective multiphasemarketing strategy

Understanding how each consumer segmentprioritizes its needs will enable digital walletparticipants to tailor their marketing strate-gies and offerings to maximize adoption andusage (Exhibit 3). However, given the limitedsize of individual market segments, winningwidespread product adoption could requiredesigning products that will appeal to multi-ple segments. More specifically, wallets willneed to include more than just basic pay-ments capabilities, and offer convenience-centered value propositions, which are fastbecoming table stakes. Being device-centeredproducts, Apple Pay and Android Pay, for ex-ample, attract mostly mobile enthusiasts.Other product attribute options include fi-nancial management and control capabilitiesthat might appeal to the bank loyalist seg-ment, or rewards and loyalty program linksto pursue the deal hunter segment.

Players who target bank loyalists will needto leverage or build deep trust with theircustomers, and motivate them to migratefrom bank cards to digital wallets. Adaptingcurrent card benefits, such as credit andspending controls to digital wallets could fa-cilitate this transition. This approach mightalso include offering credit within wallets, orpartnering with banks to integrate such anoffering. On the other hand, those who de-cide to pursue the deal hunter segment

might need to invest in features and infra-structure that enhance the shopping experi-ence and offer meaningful rewards. Thesemight be partnerships with merchant orcredit card loyalty programs, integrationwith POS infrastructure to enable automaticredemption or pay-with-points features, aswell as continuous sourcing of compellingmerchant offers.

* * *

Although consumer trends are difficult topredict, in the U.S. digital wallets seemready to move onto the fast track. So now isthe time for current and would-be partici-pants in this potentially vast arena to iden-tify which strategic market approaches arelikely to maximize their chances for success.McKinsey’s research and observation of digi-tal wallets and other leading-edge paymentsapproaches around the globe strongly sug-gest that a consumer-needs market segmen-tation strategy should be a major focus forall types of players. The segments identifiedhere are based on research findings for U.S.consumers, and consumer needs and finan-cial habits certainly differ from market tomarket; however, experience suggests that asimilar needs-based approach offers the bestopportunity for long-term success regardlessof the target market.

Jocelene Kwan is a consultant, Marie-Claude

Nadeau is an associate principal and Jonathan

Steitz is a principal, all in the San Francisco office.