Payments disrupted
The emerging
challenge for
European retail
banks
June 2016
Financial forum Innovations,
Sofia
Key messages
1. The status quo is under threat
2. Regulation is acting as a key enabler
3. The market is primed for a wave of technology-enabled
innovation
4. Banks will face a challenge to grow their payments
revenues
2
Payments disrupted | The emerging challenge for European retail banks
Key messages: the one we’ll focus on
1. The status quo is under threat
2. Regulation is acting as a key enabler
3. The market is primed for a wave of technology-enabled
innovation
4. Banks will face a challenge to grow their payments
revenues
All other points are described in the Appendix
3
Payments disrupted | The emerging challenge for European retail banks
Payments are a key revenue stream – retail
payments generated c.€128bn in 2015
EU bank revenues from payments, 2015
Source: ECB, national central banks, Deloitte analysis
4
Payments disrupted | The emerging challenge for European retail banks
Payments are of strategic
importance as CA
relationship anchor, used
to identify other product
needs
The impact of regulatory change on banks’ payments
revenues is modest, and offset by volume growth
Regulatory impact on bank payments-related revenues in seven major EU markets
€bn
Source: Deloitte analysis
5
Payments disrupted | The emerging challenge for European retail banks
EU regulators’ opening up of payments to greater
competition will grow in impact…
Source: Deloitte analysis
6
Payments disrupted | The emerging challenge for European retail banks
Payments leaders are relaxed about the
prospect of more non-bank competition
(Deloitte survey 4Q 2015)
…as will fintech- and innovation-led changes on
consumer behaviour
1. The trend to electronic payment methods is well established across Europe
2. In the UK, cash now accounts for less than half of all payments by volume
3. This shift is being accelerated by:
• the increasing popularity of enabling contactless technology (e.g. TfL)
• the continued strong growth in remote (e-commerce) transactions
• the massive forecast investment in fintech
Payments are the most popular destination for fintech investment: < 50%
Banks are playing catch-up, increasingly participating through co-investments in
independents: 42% CAGR in banks funding of Fintech fully or partially
The consequence:
Banks will face a challenge to grow
or even sustain their payments
revenues
© 2015 Deloitte MCS Limited. All rights reserved.
Our view is that software-initiation of retail payments
is likely to become the dominant model
UK POS retail payments by initiation method
£bn, 2015 – 2030F
(1) Spend value is total electronic payments market
Source: Deloitte analysis
9
Payments disrupted | The emerging challenge for European retail banks
The impact on banks depends on customers’ adopting
new models, and how open payments are to non-banks
Alternative emerging payments landscapes
10
Payments disrupted | The emerging challenge for European retail banks
Banks are pursuing a variety of responses – industry
collaboration is the dominant strategy (82% of banks)
 In Kabbage, clients
link their accounts
(credit, debit,
current, PayPal, et
al) so that a preapproval algorithm
measures customer
cash flow and
approves
immediate shortterm loans for small
businesses.
 This is similar to
bank pre-approval
engines, but using
data from other
banks which the
client has linked in.
11
Kabbage is now is partnering with Santander UK
Payments disrupted | The emerging challenge for European retail banks
Our view is that banks will lose their pre-eminent
position in the payments value chain
MOBILE APPS KILL COUNTERTOP CHECKOUT
In less than 3 months time, Starbuck’s Mobile Order & Pay drove 5 million
transactions a month, and more than 20 percent of Starbuck’s transactions are
taking place this way now.
Taco Bell has seen 2 million downloads of its mobile app just because of that
functionality. Consumers who order that way spend more, on average, about 17
percent more. It’s easy to click “yes” to the question “do you want to add side of
beans to the order” online. Order ahead makes impulse buying a sport and that’s
huge.
Walmart Pay just launched its mobile payments app which essentially mimics an
eCommerce transaction at checkout – linking the consumer’s app to a QR code
that not only triggers payment but also applies coupons, promotions and gift card
balances. The phone can be inside a consumer’s pocket or purse – it isn’t even
material to “checkout” once the consumer has been checked in via the app.
Source: Deloitte analysis
12
Payments disrupted | The emerging challenge for European retail banks
Our view is that banks will lose their pre-eminent
position in the payments value chain
DATA-DRIVEN PAYMENT CONCEPTS WILL RISE AS CONTEXT BECOMES
THE VALUABLE ASSET
Apple Pay works with Visa and MasterCard: the reason is that Apple wants the
data on spending, not the transactional rails. This will leave banks blind in terms
of data mining.
Will it succeed?
Invisible payments, a la the
“Uber” experience, will
influence the direction of
digital payments, as users
make payments in the
context they find themselves
in, with the app of that
context.
Source: Deloitte analysis
13
Payments disrupted | The emerging challenge for European retail banks
Our view is that banks will lose their pre-eminent
position in the payments value chain
The payment architecture is antique and complex and is not adequate to support
the digital economy.
Merchants are struggling with digitalisation and demanding omni-channel
solutions. This is making payments more strategic and is a large opportunity.
Payment vendors are increasingly adding additional “banking services” like P2P
payments, lending and remittance which is expanding disruption via FinTech.
Regulation is holding back incumbents hit by interchange caps, but also PSD2:
this will force banks to open their systems to approved 3rd party vendors, which
seems to actively encourage new entrants into payments.
Source: Deloitte analysis
14
Payments disrupted | The emerging challenge for European retail banks
Banks’ revenue pool will be squeezed
Projected EU banks’ payments revenue pool disruption
€bn 2015 – 30
Source: Deloitte analysis
15
Payments disrupted | The emerging challenge for European retail banks
Banks face a significant challenge to capture the
underlying growth in the payments market
16
1
Innovate to stay in the game
2
Drive YoY cost efficiencies to protect ROE
3
Decide on strategic stance: block or participate in disruption
Payments disrupted | The emerging challenge for European retail banks
Payments disrupted
Supplementary
material
June 2016
Bank Of The Year Forum
Sofia
Key messages
1. The status quo is under threat
2. Regulation is acting as a key enabler
3. The market is primed for a wave of technology-enabled
innovation
4. Banks will face a challenge to grow their payments
revenues
18
Payments disrupted | The emerging challenge for European retail banks
The status quo is under threat
Payments are a key revenue stream – retail
payments generated c.€128bn in 2015
EU bank revenues from payments, 2015
Source: ECB, national central banks, Deloitte analysis
20
Payments disrupted | The emerging challenge for European retail banks
Payments are of strategic importance: relationship
anchor; data used to identify other product needs
Source: Deloitte analysis
21
Payments disrupted | The emerging challenge for European retail banks
Forces disrupting European banks are most acute in
payments, threatening banks’ hegemony
Source: Deloitte analysis
22
Payments disrupted | The emerging challenge for European retail banks
Regulation is acting as a key enabler
The direct impact of regulatory change on banks’ payments
revenues is modest, and is offset by volume growth
Regulatory impact on bank payments-related revenues in seven major EU markets
€bn
Source: Deloitte analysis
24
Payments disrupted | The emerging challenge for European retail banks
EU regulators’ opening up of payments to greater
competition may be more important
Source: Deloitte analysis
25
Payments disrupted | The emerging challenge for European retail banks
Payments leaders are relaxed about the prospect of
more non-bank competition
Expected impact of increased competition on banks’ payments revenues
Percentage of respondents choosing a level of impact
Source: Deloitte analysis, Interviews with 24 European payments experts, March to May 2015
26
Payments disrupted | The emerging challenge for European retail banks
The market is primed for a wave of
technology-enabled innovation
© 2015 Deloitte MCS Limited. All rights reserved.
The trend to electronic payment methods is well
established across Europe
Growth in usage of payment instruments by volume in Europe
CAGR %, 2009-2013
Source: Deloitte analysis, Payment Statistics for 2013
28
Payments disrupted | The emerging challenge for European retail banks
In the UK, cash now accounts for less than half of all
payments by volume
Percentage share of payment instruments in the UK
By volume, 2008 – 2014
Source: Deloitte analysis, Ofcom and Payment Systems Regulator, Payments Council
29
Payments disrupted | The emerging challenge for European retail banks
This shift is being accelerated by the increasing
popularity of enabling contactless technology…
Number of contactless transactions in the UK
Million, Dec’13 – Jun’15
30
Payments disrupted | The emerging challenge for European retail banks
…and the continued strong growth in remote – or
eCommerce – transactions
UK online retail sales
£bn, 2009 – 2019F
Drivers of future growth: convenience
Source: Mintel
31
Payments disrupted | The emerging challenge for European retail banks
•
Click and collect
•
Smartphones enabling on-the-go shopping
•
In-app purchases
•
Etc.
We see this overall trend being supported by the
massive forecast investment in fintech
Total fintech investment
$bn, 2008 – 2020F
Source: Deloitte analysis, MarketResearch.com
32
Payments disrupted | The emerging challenge for European retail banks
Historically, payments have been the most popular
destination for fintech investment
Share of global fintech deal volumes by category
2008 – 2013
Source: Deloitte analysis, Information Venture Partners
33
Payments disrupted | The emerging challenge for European retail banks
Banks are playing catch-up, increasingly
participating through co-investments in independents
Distribution of fintech investments by origin
2014E – 2020F
Source: Deloitte analysis, MarketResearch.com
34
Payments disrupted | The emerging challenge for European retail banks
Banks will face a challenge to grow
their payments revenues
© 2015 Deloitte MCS Limited. All rights reserved.
Our house view is that software-initiation of retail
payments is likely to become the dominant model
UK POS retail payments by initiation method
£bn, 2015 – 2030F
(1) Spend value is total electronic payments market
Source: Deloitte analysis
36
Payments disrupted | The emerging challenge for European retail banks
The impact on banks depends on customers’ appetite to
adopt new models, and how open payments are to non-banks
Alternative emerging payments landscapes
37
Payments disrupted | The emerging challenge for European retail banks
Banks are pursuing a variety of responses – industry
collaboration is the dominant strategy
Preferred strategic responses for banks in the face of increased non-bank competition
% of respondents choosing each strategic option
Note: Respondents could choose more than one option
Source: Deloitte analysis, Interviews with 24 European payments experts, March to May 2015
38
Payments disrupted | The emerging challenge for European retail banks
Our view is that banks will lose their pre-eminent
position in the payments value chain
UK electronic retail payments initiation
By value, 2015 – 2030F
Source: Deloitte analysis
39
Payments disrupted | The emerging challenge for European retail banks
Banks’ revenue pool will be squeezed
Projected EU banks’ payments revenue pool disruption
€bn 2015 – 30
Source: Deloitte analysis
40
Payments disrupted | The emerging challenge for European retail banks
Banks face a significant challenge to capture the
underlying growth in the payments market
41
1
Innovate to stay in the game
2
Drive YoY cost efficiencies to protect ROE
3
Decide on strategic stance: block or participate in disruption
Payments disrupted | The emerging challenge for European retail banks
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