THE FUTURE OF PAYMENTS: MARKERS FOR SUCCESS - MCKINSEY
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The future of payments: Markers for success 3
The future of payments:
Markers for success
The payments industry faces uncertainty on many fronts. Historically, it
has been a business in which the incumbents were strongly advantaged
and able to enjoy stable or growing revenue streams. Now, however, a
disruptive mix of regulatory and consumer behavioral changes, emerging
technologies and new competitive thrusts is presenting industry
incumbents with unprecedented challenges. These changes are catalyzing
new and shifting alliances, which in turn are creating fresh opportunities
for industry entrants.
Monica Adractas In our previous issue we presented several guide industry entrants in their efforts to
scenarios for how the payments industry make any new power shifts a sustainable re-
Dan Ewing
might unfold during the coming decade (see ality. For incumbents the attainment of these
Kausik Rajgopal “Payments 2020: Scenarios for dynamic evo- markers will also define the major barriers
lution,” McKinsey on Payments, March to market entry, enabling them to better as-
2011). In this shifting environment incum- sess any threat of displacement by entrants.
bents must consider how best to defend Instead of squandering management re-
hard-won market positions, and recent and sources to fend off upstarts that have little
prospective entrants must determine what
chance of attaining meaningful scale, they
they can do to successfully penetrate the
can employ the markers as building blocks
market and grow their businesses.
to help them more appropriately manage
Markers for success their respective partnership and acquisition
There are six markers that incumbents and activities. Each of these markers is soundly
newcomers alike can use to define position- anchored in our fundamental beliefs about
ing and strategies for success. They can help the enduring nature and dynamics of the
incumbents adapt current value proposi- payments business, as well as in our think-
tions (or create more defensible ones), and ing about current industry disruptions.4 McKinsey on Payments June 2011
Marker 1: Deliver significantly and not or chip cards (with which consumers are al-
just marginally more customer value ready comfortable) is marginal, and hardly
than the market alternatives sufficient to induce a meaningful shift in be-
Payments is a business with high inertia and havior. On the other hand, in unsecured
strong network effects. In such industries, consumer credit, new entrants such as Fer-
the marginally better customer propositions ratum Group and Wonga in Europe have
of new entrants usually lose ground to those seen success in providing consumers with
of incumbents that have already won broad immediate and convenient access to mi-
acceptance. The founder of a payments croloans through online and mobile chan-
start-up once poignantly said, “Building a nels, despite higher interest rates.
Marker 2: Build value propositions that
As the now ubiquitous
go beyond cost reduction
QWERTY keyboard illustrates, As noted above, new payments mechanisms
consumers tend to grow that generate cost savings for merchants, re-
gardless of the amount, will probably not
comfortable with secure, reliable gain broad consumer acceptance on their
and relatively commonplace own. Consumers simply cannot appreciate
just how much a decrease of a few basis
mechanisms, despite any points might reduce the merchants’—and ul-
drawbacks they may have. timately their own—costs; similarly, they
have little concern about merchants’ ability
marginally better payments mousetrap is a to shave microseconds from cash register
great way to lose money.” As the now ubiqui- transaction times. This hardly means that
tous QWERTY keyboard illustrates, con- cost-based propositions are irrelevant; only
sumers tend to grow comfortable with that success may also require delivering cus-
secure, reliable and relatively commonplace tomer value that is functionally a step above
mechanisms, despite any drawbacks they current alternatives. In the U.S., for exam-
may have, and payments systems are no ex- ple, Starbucks consumers can register their
ception. Consequently, consumers are reluc- pre-paid Starbucks cards online to receive
tant to adopt new technologies—though free drinks, add-ons and promotions. Con-
they may offer advantages for other stake- sumers can also download a Starbucks mo-
holders—if the value for them personally is bile application that enables them to pay
unclear or unappreciated. An excellent ex- with their registered cards using a quick-re-
ample of this is contactless cards, which sponse matrix barcode on their smart-
allow buyers to wave their cards near en- phones. These approaches enable the
abled point-of-sale terminals instead of company to guide its customers toward its
swiping them. While the benefits of contact- preferred payment option by using eco-
less cards may be clear for issuers, networks nomic and operational benefits, while also
and merchants, their advantages over swipe adding meaningful value for consumers.The future of payments: Markers for success 5
The Canadian market offers an elegant con- principal way to pay on eBay. The cost of
trolled experiment in added value. Canada’s customer acquisition during PayPal’s early
debit card system, Interac Direct Payment, growth, then, was essentially subsidized by
has historically been a zero-interchange sys- eBay. This was a critical strategy for build-
tem that charges consumers based on usage. ing PayPal’s user base cost-effectively and
By contrast, credit card interchange rates in gaining significant scale – among consumers
Canada are higher, similar to those seen in as well as eBay’s power-seller merchants.
the U.S. Despite the cost differential, credit Notably, eBay sales remain a significant con-
card acceptance in Canada significantly ex- tributor to PayPal’s business today. By con-
ceeds that for debit cards. Merchants seem trast, many rapid national introductions of
to find enough added value in credit cards to pre-paid e-purses in European countries did
offset the cost of interchange fees. not lead to success. In fact, after incurring
high rollout costs most European e-purse
It is generally advantageous programs have been discontinued.
for developers of new payments
Marker 4: Leverage established
systems to target niche market infrastructure
segments, where acquisition The high fixed cost of building a payments
infrastructure that will be reliable, secure,
costs are lower, before driving for ubiquitous and convenient can be an insur-
broad penetration. mountable barrier to entry. Most successful
payments solutions are therefore designed
Marker 3: Penetrate niche segments first to leverage existing infrastructures. This
It is generally advantageous for developers pattern tends to hold true for most markets
of new payments systems to target niche and applications around the world, whether
market segments, where acquisition costs applied to online payment modes in the U.S.
are lower, before driving for broad penetra- that leverage ACH infrastructure, parking
tion. Grandiose attempts to transform the payment systems in Europe that use SMS
global payments industry will likely lead to capabilities, or open-loop prepaid cards
slow (and occasionally spectacular) failure. elsewhere. A good example is Alipay, a large
Globally, more than 400 payments start-ups payments platform that facilitates cross-bor-
came and went during the dot-com boom 10 der online transactions in China and part-
years ago; fewer than five managed to sur- ners with Chinese banks for clearing and
vive. The most recognized of these is PayPal, settlement. While the leveraging of estab-
which early on grew by tethering itself to the lished infrastructure is frequently a neces-
e-commerce giant eBay, for whom a unique sity, its attainment is insufficient by itself for
payment mode with superior risk manage- success. Several cost-based point-of-service
ment was critically important to its success. ACH solutions in the U.S., for example,
In fact, PayPal displaced eBay’s own pay- clearly demonstrated this when they failed
ment solution, eventually becoming the to gain traction and scale.6 McKinsey on Payments June 2011
Marker 5: Adapt offerings to market ture phones or SMS-based technology pre-
context vail. In these markets, applications could
The payments industry varies significantly enable unbanked consumers to pay their
from one market to another, chiefly because utility bills or receive government payments
of differences in regulations, technology via mobile phones. Hybrid online and mo-
standards, consumer preferences and the bile solutions are also emerging to form new
relevance of established payment modes. ecosystems; for example, consumers can
Players that succeed in one market often purchase digital products within the context
risk failure by applying the same models in of games on social networks (Exhibit 1).
other markets, especially those that are in a
different stage of evolution. Success usually Marker 6: Tap adjacent profit pools to
requires that market entrants modify their differentiate offerings and add value
business models to reflect marketplace dif- Regulatory and technological disruptions
ferences. For example, mobile payments ap- will likely prompt an increase in business
proaches such as in-aisle shopping propositions that actually sacrifice payments
comparison and purchasing draw customers economics in favor of generating greater
in developed markets where smartphone value elsewhere. An example of this is Wal-
penetration is high and growing; however, mart’s MoneyCard. In the U.S., Walmart is a
approaches will probably have to differ con- sizeable and growing player in alternative fi-
siderably in emerging markets, where fea- nancial services, offering consumers core
Exhibit 1
Hybrid online-mobile ®
payments are
emerging as a
fast-growing
payment option for
purchasing digital
offerings
Overview Advantages
Situation: Social networking sites and gaming are No registration required
growing rapidly, and seeking ways to monetize their
More security steps, e.g., PIN text is sent to phone
digital offerings, which represent attractive revenue
and entered on Web site
sources
Potential for small-ticket payments
Complication: Entering and storing payment
information disrupts the user experience and raises
security concerns for those consumers who lack Challenges
credit cards or have other security issues Limited transaction size on carrier bill unless credit
Resolution: New providers are linking payments card or debit card account is linked, e.g., $20
to users’ mobile phone bills, streamlining the maximum charge
process and eliminating the need to enter and store Economics for developers may be challenging, e.g.,
credit card and debit card information on numerous carriers charge 20-50% of purchase price, and
Web sites require clear business case on monetization
Source: McKinsey analysis and company Web sitesThe future of payments: Markers for success 7
services at lower prices. The MoneyCard fees might even be eliminated. The reason
provides open-loop prepaid capabilities with for such changes is that many issuers have
pricing that is consistent with the company’s access to adjacent profit pools such as search,
well-established commitment to being a couponing, mobile applications and loyalty
low-priced leader. In this case, MoneyCard’s management programs that are closely tied
link to the company’s core retail business is a to payment mechanisms themselves.
key part of the business model. When con-
Tapping adjacent profit pools, however,
sumers cash their paychecks and replenish
could effectively transform the physical
their MoneyCard balances at Walmart’s in-
point-of-sale in several ways, blurring and
store MoneyCenters they typically spend
eventually erasing the lines between pay-
part of those higher balances before they
ments and adjacent businesses. A catalyst
leave the store (Exhibit 2).
for this type of change could be new busi-
More likely than not, we will see a continuing ness models that we now see emerging to
emergence of business models that sacrifice improve the mobile commerce experience.
payments economics in various ways, Their focus ranges from demand generation
whether to consumers, merchants or both. to post-transaction loyalty management (Ex-
Prepaid card pricing, for example, could hibit 3, page 8). Although several are still in
change further as issuers experience addi- their infancy, the blending of technological
tional pressures, while monthly and other developments enabled by smart or enhanced
Exhibit 2
Broad impact
Walmart is Walmart and prepaid cards
Walmart launched its American Express,
reshaping prepaid MoneyCard in June 2007 in Green Dot, and
card pricing partnership with GE Money nFinanSe recently
Bank and Visa lowered and simplified
their fees
In February 2009, Walmart
significantly reduced its Today’s prepaid card
MoneyCard pricing to pricing suggests a
stimulate usage and improve maturing industry, as
its ability to cross-sell established players
MoneyCard with its check- compete on price, not
cashing and other services just size and scale
• Issuance fee reduced from
$8.94 to $3
• Reload fee reduced from
$4.64 to $3
• Monthly maintenance fee
reduced from $4.94 to $3
Source: McKinsey analysis and company Web sites8 McKinsey on Payments June 2011
Exhibit 3
Pre-purchase Decision-making Transaction Post-purchase
Adjacent profit
pools let players Purchase
Generate Identify Compare Contact Finalize Make Review Build
decision
discount payments process demand merchants merchants merchant decision payment promptly loyalty
economics
How Enhances Consumers Review Ability to Can Pay via Ability to Can trigger
m-commerce merchants’ can do apps help contact compare mobile immediately couponing
can change ability to local users to merchants prices, device send and other
buyer target and searches find best for store obtain peer reviews and loyalty
behavior personalize anytime local locations, advice and location to programs
marketing merchants hours, browse users’
communi- directions, competitor social
cations etc. offerings networks
Examples
Sign up for Find nearby Read Use Google Use product Pay Share Post-
specific stores with reviews to Local to get barcodes to restaurant comments purchase
deals and product and find the business find nearby bill without about local offer
receive compare best information sellers, waiting for venues redemption
coupons prices merchant compare server linked
Use Google
based on out of all prices directly to
Maps to
triggers (e.g., local bankcard
map route Publish and
location) options
read reviews
Source: McKinsey analysis and company Web sites
phones with changing customer behavior networks, acquirers and processors that
make this space well worth watching. Mo- have historically “owned” the payments
bile-enabled consumer behavior shifts would business. The six markers for success de-
bring new and difficult challenges for indus- fined here will help. They can serve not
try incumbents, partly because it is generally only as reliable markers to guide incum-
easier to compete with industry entrants bents as they evolve their business strate-
than with well-established rivals who use gies and create new value propositions to
their payments products as loss leaders. maintain their hold on the payments busi-
ness, but also to guide those entrants eager
*** to tilt at the payments windmill.
Industry entrants will continue to find it
extremely challenging to compete effec- Monica Adractas and Dan Ewing are associate prin-
tively with well-established incumbents— cipals, and Kausik Rajgopal is a principal, all in the
especially with the banks, payment San Francisco office.You can also read
