volume 8, number 22 october 2015 mckinsey on payments

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

First, disruptors are taking advantage ofAsia’s highly diversified markets to identifyopportunities and attack existing bank-dom-inated models. The “killer apps” are remit-tances, transportation and m-commerce,each of which is helping to drive rapid adop-tion of digital payments instruments. The at-tackers include telecommunications firms(e.g., NTT DoCoMo in Japan, Telkomsel inIndonesia and Globe in the Philippines),transport companies (e.g., JR Rail in Japanand Octopus Cards in Hong Kong) and,most significantly, Internet companies, par-ticularly in China (e.g., Tencent with TenPayand Alibaba with AliPay).

These successful innovations have three keyelements in common: First, each is based ona well-defined “use case” with clear benefits;for instance, providing migrant workers(whether cross-border or in-country) withinexpensive and convenient ways to sendmoney to their families, enabling passengersto move faster through public transit turn-stiles and giving consumers a safe and se-cure way to make online purchases. Second,each model has a well-established user base,which enables the operator to achieve criti-cal mass quickly. Third, the frequency oftransactions makes the new payments proce-dure familiar and habitual. This stickiness

3Payments in Asia: At the vanguard of digital innovation

Chris Ip

Pine Kyaw

Akash Lal

Payments in Asia: At the vanguardof digital innovation

As elsewhere in the world, a wave of fintech innovation has hit the payments

industry in Asia. Digitization of business processes and the emergence of new

platforms for payments and finance bring both challenges and opportunities to

payments businesses operating within Asia or serving clients who trade with

firms in Asia. While developments in Asia reflect a worldwide evolution, five

major distinguishing trends set the region apart: the rise of local disruptors in a

highly diversified market, the extension of financial inclusion through mobile-

based solutions, new innovations reaching critical mass with increasing speed,

the role of digitization in creating new payments and lending models, and the

emergence of industry-wide platforms.

4 McKinsey on Payments October 2015

allows successful operators to launch newpayments tools and reach a tipping point ofusage and adoption with a speed that wasunheard of a decade ago.

In addition, these disruptors are also ex-panding beyond payments, building exten-sive financial services ecosystems. Forexample, Alibaba’s financial subsidiarytakes deposits, extends loans and, throughYu’E Bao, offers investments in money-market funds, which traditionally havebeen difficult for retail investors in Chinato access. Tencent, the social networkinggroup that operates QQ and WeChat, withabout 800 million subscribers across thetwo platforms, has its own digital bank—WeBank—and also provides micro loans.

Digital attackers have also spurred tradi-tional banks to innovate. A number of lead-ing banks around the region are buildingpayments-linked ecosystems for their cus-tomers. For instance, SCB’s Dash, DBS Pay-Lah and HDFC Bank’s PayZapp allowmobile payments across all categories (shop-ping, bill payments and peer-to-peer pay-ments), as well as access to discounts andreferrals, leveraging marketing alliances. Inaddition, a number of these institutions haveestablished standalone digital offerings (incontrast to classical branch-based checking

accounts) to create sub-brands catering tothe Gen Y market. An example is OCBC withits FRANK product targeting students andyoung professionals.

Second, in many parts of Asia, as in Africa,nonbank service providers, particularlytelecommunications companies, have suc-cessfully tapped into unbanked and under-banked segments of the population, oftenusing low-end phones and SMS technologyas the basis for conducting simple remit-tance transactions, such as Globe in thePhilippines. McKinsey estimates that in Asiathere are approximately 900 million peopleoutside the banking system (Exhibit 1).Most, however, have a mobile phone whichin most markets allows them to send and re-ceive money and purchase products.

Thus, telecommunications and digitalmedia companies have carved out a crucialrole as providers of basic financial servicesin a space where banks have found it hardto offer a suitable proposition. For thesedisruptors, the value is not in the fees orfloat generated from the payments them-selves. Rather, McKinsey research showsthat telecommunications firms that enrolltheir customers in payments applicationsreinforce customer loyalty, reducing churnby up to 80 percent. In some cases mobilepayments have been paired with simple,bank-like, mobile-based products, such asstored value and consumer credit, scoredon the basis of transaction history andother data accumulated over time. As gov-ernments seek to bring poorer segments ofthe population into the mainstream of fi-nancial services, these nonbank mobile in-novations are playing a vital role with asignificant social impact.

Digital attackers have spurred traditional banks to innovate.

A number of leading banks around the region are buildingpayments-linked ecosystems

for their customers.

Third, new innovations are growing at un-precedented speed and reaching critical massfaster than ever. In five years PayTm in Indiahas grown from a mobile app for rechargingtelephone accounts and paying utility bills toa broad e-commerce platform with 80 mil-lion registered users conducting an averageof 60 million transactions each month.WeChat payments, launched in 2013,processed approximately one billion hongbaoor “red packet” peer-to-peer transactionsduring this year’s Lunar New Year’s Eve holi-day alone. The payments app has helpedWeChat evolve into a comprehensive ecosys-tem centered on individual and group chatand encompassing diverse services such astaxi bookings and social media.

Several drivers are increasing the speed of in-novation and adoption, resulting in the rapidgrowth of national digital giants:

• Ambiguity in regulations. Industry stan-dards and rules have yet to catch up withdisruptive new models, opening a windowof opportunity for rapid innovation, some-times unregulated.

• Low barriers to entry. The costs of IT andmobile development have declined signifi-cantly, and companies of all sizes haveready access to talented IT specialists andmobile developers.

• Critical mass. Innovators have focused onuse cases comprising repeat usage, clearuser benefits and a large base of semi-cap-tive users.


2014 unbanked population versus mobile phone penetration

Percent of total population

Mobile phone penetration

Millions

Unbanked adult population1

Country

Percent of adults

India

China

Indonesia

Vietnam

Philippines

Thailand

Malaysia

Developing Asia Total2

Developed Asia3 Total2

73

92

127

146

113

144

148

423

235

116

49

46

12

4

47

21

64

69

69

22

19

92

120

37

4

885

7

1 Aged 15 and over, with no formal bank account

2 Percents are weighted average by adult population

3 Including Japan, South Korea, Hong Kong, Singapore

Source: Global Financial Inclusion Database April 2015; WCIS World Cellular Information Service

Exhibit 1

Developing Asian countries have large unbanked populations, which can benefit from innovations in mobile banking


• Winner take all. First-movers have reacheda tipping point of adoption and usage, es-tablishing the de facto standard and mak-ing it difficult for a new entrant to mount achallenge (see Octopus in Hong Kong, Ali-pay and Yu’E Bao in China).

Fourth, digitization is creating new pay-ments and lending models for businesses ofall sizes. Most large corporates in Asia havebeen operating in a fully electronic environ-ment for several years, conducting all pay-ments electronically and managingaccounts, payments and liquidity throughtreasury modules integrated with enterprise

resource planning systems. Banking tech-nology is a priority for these companies,with 80 percent of corporate treasurers cit-ing technology platforms as a key factor inselecting a bank. In recent years, bothglobal and local banks have built cash man-agement platforms, and the capabilities oflocal banks now match those of globalbanks in many markets. In addition, nearlythree-quarters of banks in Asia offer mo-bile-based cash management tools, whichare used heavily by 70 percent of large cor-porates to manage accounts and, in manycases, to initiate payments.

Exploration and development

Production Refining and processing

Liquidity management

LCs purchase of crude

Forex hedging

Structured trade-finance products

Letters of credit (LCs) with foreign exchange (FX) hedging

Bid bonds

Trust and retention account

Payments to vendors (e.g., well site service vendors)Payroll processing

tran

sact

ion

Bank

ing

Fina

ncin

g

Credit against receivables – commodity financing, warehouse financing and bill discounting

Integrated solution across working capital, FX and financing

Primary distribution and storage

Cash collections from retail stations

Excess funds deployment in overnight money market

Performance guarantee

Secondary distribution

Vendor financing

Retail

Dealer financing

Collection from dealers

Current accounts

Bank guarantees

Pre-project advisory

Debt capital raising

E2E risk management

Insurance

Working capital

Interest rate hedging on loans

Term loans for maintenance and expansion with rate hedging

Source: McKinsey & Company

Exhibit 2

A leading bank offers an integrated solution across the energy value chain

A number of banks are distinguishingthemselves by introducing proprietary busi-ness-to-business (B2B) commerce plat-forms. For example, some have developedintegrated solutions across supply chains,automating the order-to-payment processand optimizing cash flow efficiency be-tween large corporates and their suppliers,dealers and sub-dealers (Exhibit 2). Onebank has created a client-centric solutionwhere relationship managers benchmarkthe efficiency of the supply chain for theirclients and identify solutions to help themunlock cash trapped in the supply chain.With over $5 trillion trapped across supplychains in Asia, these innovations allow thebank to create significant value for theirclients, reinforce client loyalty and buildnew revenue streams.

While large corporates have eagerly em-braced digital channels, small and medium-sized enterprises (SMEs) in Asia continue torely heavily on cash and branches, with asignificant impact on the region’s mix ofpayments. Cash accounts for 90 percent ofB2B transaction volume in Asia; cash andchecks together account for approximately40 percent of B2B transaction value. Bankshave introduced a variety of initiatives todraw SMEs to digital payments. For exam-ple, Axis Bank in India has launched Swipe

On, which allows merchants to receive cardpayments using lower-end “feature phones”as well as smartphones, providing a step-ping-stone to non-cash alternatives for a va-riety of small and micro businesses, fromretail merchandisers to taxi drivers. In addi-tion, many consumer-oriented companiesare already benefiting from the new levels ofspeed, efficiency and transparency madepossible by recent infrastructure upgradesin various markets, such as IMPS in Indiaand FAST in Singapore. Research indicatesthat these efforts are paying off. For exam-ple, a McKinsey survey of more than 750SME customers in India shows that onlineand mobile channels are, for the first time,overtaking the branch channel in terms ofnumber of interactions.

Some nonbank service providers, however,are ahead of banks in end-to-end digitiza-tion for SMEs. Visa, for example, has part-nered with Invapay and Kofax to create anautomated invoicing and payables platformfor SMEs across 11 markets in the Asia-Pa-cific, with the goal of helping them makethe transition from document-intensiveprocesses to electronic invoicing, paymentsand reconciliation. Amazon India recentlylaunched pilots for B2B procurement andselling, to help both SMEs source suppliesand manufacturers and distributors sell In-dian goods abroad. In China, Alibaba hasleveraged its B2B e-commerce platforms tobuild a full financial system to serve SMEs.Nearly one in ten of the seven million mer-chants selling goods on Alibaba’s TMall hasreceived a small loan, for a total of $2 bil-lion in outstanding loans. Furthermore, Al-ibaba’s Ant Financial Micro Loan programhas extended $64 billion in micro loanssince 2011. Even business-to-consumer


While large corporates have eagerlyembraced digital channels, small andmedium-sized enterprises in Asia

continue to rely heavily on cash andbranches, with a significant impact on

the region’s mix of payments.


companies such as Snapdeal and Flipkartin India are beginning to target SMEs sell-ing on their platforms for digital lendingand payments.

The success of the credit aspect in e-platformsin Asia deserves special attention, as it relieson customer transaction history in order tounderwrite loans to small merchants aboutwhich there is little or no public informa-tion. In Australia, OnDeck has partneredwith MYOB to lend on the basis of account-ing data. In China, e-commerce site JD.comrecently partnered with U.S.-based ZestFi-nance to offer micro loans to SMEs and en-trepreneurs, using machine learningtechnology to score small businesses on thebasis of diverse data, with faster processing,higher approval rates, reduced collateral re-quirements and lower risk of default—allamounting to convenient, accessible loans atfavorable interest rates. By contrast, banks

across Asia have traditionally neglected theSME segment, due largely to the difficulty ofassessing risk. If they are not able to supportend-to-end digitization of SME businessprocesses in combination with improved ac-cess to credit, incumbent banks risk cedingdominance of this profitable segment to dig-ital innovators.

Fifth, the emergence of industry-wide plat-forms is bringing new competitive chal-lenges and opportunities to incumbentbanks. Various nonbank entities (includingfintech innovators, third-party serviceproviders and industry organizations) arebuilding new platforms to streamline pay-ments clearing and digitize the exchange ofpayments-related information (Exhibit 3).Either as competitors or service providers toincumbent banks, many of these entities di-rectly attack important profit pools, includ-ing current accounts, cross-border payments

Approach to technology Examples

Bill.comCash management solution for SMEs

Currencyfair.comPeer-to-peer online transaction solution

Acquire solutions from tech start-ups

SWIFT’s EBAMElectronic account management

Bolero ExchangeCloud-based multibank trade platform

Thomson Reuters ACCELUSShared KYC and compliance database

Partner with service providers

SyncadaIntegrated, fully-automated supply chain platform

EarthportLow-cost straight-through processing international payments

RippleOpen payment protocol for real-time international payments

Partner with third-party platforms

Source: Web sites; McKinsey interviews

Exhibit 3

Fintech providers are both competing and collaborating with banks

and foreign exchange. Transferwise, for ex-ample, provides a low-cost foreign exchangeremittance platform, which enables clientsto transfer money overseas with the best ex-change rates by matching the remittancewith people sending money in the other di-rection. Ripple has created an open pay-ments protocol for international payments,enabling real-time settlement and clearingand reducing the need for intermediaries.Innovations introduced by entities that workclosely with banks can also erode revenues.For example, Bill.com provides a payablesand receivables solution for SMEs, andSWIFT has introduced EBAM (ElectronicBank Account Management) and the TSU(Trade Services Utility), a workflow enginethat supports the bank payment obligation,a paperless trade instrument supported bythird-party clearing.

Streamlined processing architectures andreal-time integration of diverse types of dataare making it easier for corporate and SMEclients to replace one solution with another.While in-house platforms offer clear advan-tages in terms of control, customization andbranding, the cost to service providers forrefreshing proprietary technology can bevery high. With these considerations in

mind a number of banks are partnering withfintech start-ups as well as third-party serv-ice providers to create a seamless channelexperience for their clients. Banks must,therefore, consider carefully where to ad-vance their own solutions and where to part-ner, even if it means forming an alliancewith a potential competitor or giving uphitherto strong sources of revenue.

* * *The five trends discussed above show thatnonbank innovators are well-positioned tobenefit from the rapid growth of digitalcommerce in Asia. Indeed, it is these pay-ments innovations launched by nonbank fin-tech companies that have the potential todisrupt existing business models and marketdynamics and shape the next generation ofcorporate and consumer behaviors. Giventhe importance of Asia in driving tradegrowth around the globe, the evolution ofcorporate, small business and consumer pay-ments in Asia presents challenges and op-portunities for counterparties and theirservice providers in diverse regions.

Chris Ip is a director in the Hong Kong office, Pine Kyaw is a consultant in the Singapore officeand Akash Lal is a principal in the Mumbai office.


volume 8, number 22 october 2015 mckinsey on payments

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