Digital Wallet Report

REPORT

Banks faced with PSD2: around payments and beyond, digital wallets and new services September 2014

Banks faced with PSD2: around payments and beyond, digital wallets and new services

Contents Executive summary summar y .........................................................................................................3 Introduction ................................................................................................................... ................................................................................................................... 4 PSD2 ...........................................................................................................................6 The challenges for banks ...............................................................................................11 Digital wallets ..............................................................................................................15 Access to payment accounts and new services ser vices ................................................................. .................................................................24 24 Conclusion .................................................................................................................. .................................................................................................................. 27 Acknowledgements ......................................................................................................28 Contacts .....................................................................................................................30 About us ..................................................................................................................... ..................................................................................................................... 31

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Contents Executive summary summar y .........................................................................................................3 Introduction ................................................................................................................... ................................................................................................................... 4 PSD2 ...........................................................................................................................6 The challenges for banks ...............................................................................................11 Digital wallets ..............................................................................................................15 Access to payment accounts and new services ser vices ................................................................. .................................................................24 24 Conclusion .................................................................................................................. .................................................................................................................. 27 Acknowledgements ......................................................................................................28 Contacts .....................................................................................................................30 About us ..................................................................................................................... ..................................................................................................................... 31

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Executive summary Like many other business sectors, the banking industry is undergoing far-reaching changes which call into question the existing balances. This transformation is mainly driven by new technologies, changing consumer behaviour, regulatory changes and the need to cut costs. In adapting the legal framework governing payments in order to integrate market developments, successive European regulatory provisions (Payment Services Directives and related regulations) have transformed the business models of banks in this area. While payments are critical for their direct and indirect income, banks, the incumbent players on this market, are thus seeing their margins cut and the arrival on the market of new specialised entrants. The latter are attacking their positions, challenging their role in payments and intend to capture a significant market share by taking advantage of regulatory and technological changes. Some of these new entrants are able to draw on huge resources and can bring into play their expertise acquired in their core business. Given the inevitability and scope of this movement, any hope of containing it by attempting to oppose or halt it is purely illusory. Should banks therefore resign themselves to it? Or rather, is not the time right for banks to take initiatives in response to these “disruptors” and adapt or reinvent their models in order to protect their place in this new world of payments? In any event, with European regulatory provisions such as the new Payment Services Directive (PSD2), they will soon no longer have any choice: by adopting the status of payment institution, Third Party Providers (TPP) will have access to bank accounts to offer payment initiation services. To protect their income flows and continue to create added value, banks must explore new ideas very rapidly rapidly,, such as: • creating new offerings and services for their retail customers and merchants • pursuing collaborative community initiatives between banks to create innovative payment services • sharing value with Third Party Providers by designing services that they can sell to them. The success of these new approaches will involve banks entering a new era: that of opening up their systems, coopetition between players involved in the field of payment services, putting in place complex ecosystems focused on the end customer. To that end banks must give preference to a pragmatic approach, in order to keep moving forward and progress step by step on a test and learn basis. However, it is not that easy to break with old business models. Faced with the new entrants, banks will be able to rely on their many advantages in the area of payments. However, to compete more effectively with such players, they could also benefit from increasingly drawing on the methods they use. Therefore, although the opening-up of a market naturally generates uncertainty for market players, it is also conducive to a dynamic environment and helps to promote innovation. Banks are equipped to meet these challenges. They will have to adapt their offering to find growth drivers in this new world of payments, for example by relying on digital wallets and new services.

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Introduction New usages, new technologies, new regulations, new business models and new players: developments are accelerating and interacting. They are profoundly changing the world of financial services, in particular that of payments. Regulatory changes have significantly helped to transform the payment landscape. Several European regulations (Payment Services Directives and related regulations) have been adopted with the aim of establishing and adapting over time the necessary legal framework for the implementation of a single, open, secure and innovative European market in payment services. But by creating new types of status, the regulations have favoured the emergence of non-banking players on the payment market. Combined with changing consumer needs and technologies, they have therefore called into question existing balances. Who therefore are these new entrants and what is their field of activity? With the Payment Services Directive (PSD) and the second Electronic Money Directive (EMD2), the provision of payment services no longer falls under the scope of the banking monopoly. Such services can now be offered by new entrants having payment institution or electronic money institution status. These players form, together with credit institutions, the group of Payment Service Providers (PSP) authorised to offer payment services, including credit transfers, direct debits, card payments and money transfers. As soon as the second Payment Services Directive (PSD2) enters into force, payment initiation services will be added to these services. The Third Party Providers offering such services will have to be authorised as payment institutions and banks will then be obliged to allow them access to bank accounts to initiate payments. In the future, two different types of PSPs will co-exist: account servicing payment service providers (AS-PSP) and third party payment service providers (TP-PSP) which will be able to initiate payments from accounts that they do not manage. What do this new regulatory provisions involve? What challenges do they entail for banks? How can banks reduce the impact and make the most of the new situation? Those are the subjects addressed via the views developed in this report, which relies on the discussions of the Think-Tank which we coordinated with French banks for Efma between April and June this year.

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We have chosen in this document to focus on expressing points of view rather than presenting figures, as they latter – above all when they are forward-looking – are controversial in a domain which is not yet mature. In addition, in this document, we have taken into account the latest changes made to the text of the directive during the summer of 2014. The points of view expressed in this document are those of Sopra Banking Software. They are based on the discussion of the Think-Tank but do not necessarily reflect the convictions of all its members.

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Patrick Desmarès

Bernard Ramé

Chief Executive Officer Efma

Head of Payments & Cards Business Line Sopra Banking Software

The business models of mobile payments and digital wallets are as yet unconfirmed. Beyond user-friendliness, the business models chosen will be a key factor in the proposed mobile payment solution. The new value created by mobile technology needs to be harnessed, in particular that derived from data, but also that derived from market efficiency. In addition this value has to be shared between the 6 major stakeholders, namely: the customer, the merchant, the telco, the Internet intermediary (Google, Apple, Amazon, etc.) which can become a TPP, the payment network and the bank (both the customer’s bank and the merchant’s bank). Each party will try and maximise its gain and the battle to share this value is already well underway. The m-wallet and m-payment business model must also now contend with the low prices of other widely tried and tested payment instruments, such as cards. The size of the technical and commercial investments is leading to partnerships being formed and coopetition. A member of the Think-Tank

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PSD2 To address developments on the e-payment market and make better use of the opportunities offered by the Single Market, the regulations governing payment services throughout the whole European Union have evolved constantly in recent years. In 2007, in order to establish a harmonised legal framework for the payment market with the aim of improving its functioning and encouraging its development, the European legislator adopted the first Payment Services Directive (PSD). This directive laid the foundations for a more secure, efficient and open market. Each country then had to transpose the directive into its national laws. This was done in France via the Ordinance of 15 July 2009 transposing the PSD of 13 November 2007. Since then, technological advances and new payment practices have paved the way for the emergence of new payment methods and new players, outside the scope of the PSD. In addition, a certain number of distortions have resulted from the transposition of the PSD into national laws. It was therefore appropriate to update the legislative f ramework. The publication by the European Commission in January 2012 of a Green Paper entitled “Towards an integrated European market for card, Internet and mobile payments” was an important stage in the development of a new directive. The points raised included the fact that third party service providers offered cheaper card payment solutions while falling outside the scope of regulatory supervision, as they were at no time in possession of the funds of the payer or the beneficiary. Although the provision of cheaper solutions was seen as a good thing, the lack of supervision of these players raised security, data protection and accountability issues. Accordingly, in order to be more responsive to market needs and combine in the same regime all payment methods, a new Payment Services Directive (PSD2) is due to be adopted. This directive reaffirms the regulator’s wish to boost innovation on this market and make it more efficient by encouraging competition, while guaranteeing security and the protection of data. The proposal for a directive was published in July 2013 by the European Commission within the framework of a “Payment Package”. A consultation of the stakeholders was organised during the second quarter of 2013. The proposal was amended in April 2014 by the European Parliament, without a vote, before a new text was proposed in July 2014 by the Presidency – Greek then Italian – of the Council of the European Union (“Presidency Compromise”). This version still has to be approved by the Council and the Parliament. To enter into force, the new PSD will then have to be transposed into the national laws of each Member State, within the next three years.

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The adoption process of PSD2

PSD2 introduces major changes: • new services enter within the scope of the regulatory framework: payment initiation services, • the providers of these services, i.e. Third Party Providers (TPP) must adopt payment institution status, • banks and the other account servicing PSPs are required to allow access to accounts to these third party service providers to initiate payments.

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The introduction in PSD2 of a new “Third Party Provider” (TPP) status is particularly noteworthy. As the TPP has a right to access accounts to initiate payments, financial institutions and payment providers will have to define new services faced with new entrants which will want to use them in growing numbers. A member of the Think-Tank

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Furthermore, the scope of PSD2 is not limited to these provisions. The other provisions include: • the integration into the scope of the directive of “one-leg” payment transactions, that is to say when only one of the payment services providers is located in the EU • the non-discriminatory access to payment systems for all payment services providers • the non-discriminatory access to account opening in a credit institution for all payment services providers • the review of surcharging rules: costs capped at the level borne by the beneficiary for the use of a given payment instrument; prohibition for payment instruments for which interchange fees are regulated • the customer’s unconditional refund right where a direct debit is contested, unless the beneficiary has already discharged its contractual obligations or if the goods or services have been consumed • the updating and strengthening of security rules: strong customer authentication is required for remote payments; moreover, the TPP must identify itself to the account servicing PSP. The proposed new directive has prompted a large amount of feedback from various stakeholder representatives, whose interests do not always coincide. Although the proposal contains indispensable clarifications, certain points have been questioned by market participants who have highlighted points that need to be improved, require further interpretation or clarification or which give rise to concerns, in the hope that their comments will be reflected in the final version of the text. Our objective in this report is neither to stigmatize certain players nor to communicate the content of all the discussions, but simply to illustrate their content via certain points raised during the consultation phase. Thus, although banks welcome that fact that new entrants proposing payment initiation services will fall within the scope of application of PSD2, they are focusing on the absolute need to maintain customer confidence and to ensure a level playing field between service providers. All markets participants, incumbents and new entrants alike, must comply with the same security and transparency requirements with regard to customers, and be subject to the same rights, duties and supervisory criteria. A balanced sharing of responsibilities must be implemented, based on contractual relations. In addition, banks want to be the sole judges of whether it is appropriate to allow access to the payment account information of their customers. For them, this subject also raises issues relating to security (confidentiality of logins, protection of personal data) and remuneration for the service provided. In contrast, other market participants have emphasised that they want it to be clearly stipulated that banks will not charge TPPs for providing the information needed to initiate payments. Moreover, while there is broad support from most market participants for the use of strong authentication, this principle is contested by players who could be penalised by it (e.g. large e-retailers). Lastly, whereas account information services were included in the initial proposal, some market participants had wanted them to be excluded, arguing that aggregators did not touch the funds since they did not carry out any transactions. The latest version of the text has finally excluded these services from the framework of the directive, even if this did not meet with unanimous approval.

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The outlook for electronic nancial transactions in the SEPA and PSD2 context Hervé SITRUK, MANSIT SAS, President of the SEPA Club (Paris)

With the end of migration to SEPA, which was completed in mid-summer, with Europe’s switch to the new instruments, Credit Transfers and Direct Debits, and the proposal for a new directive, or even with the New European Commission which is gradually being put in place, the debate has resumed on the construction of the European payment market. The creation of SEPA, as a single euro payments area, cannot be regarded as finished. There is still a lot to be done, especially as regards electronic financial transactions. Europe needs to address three major challenges, which are far from settled: • First of all, that of the unification of e-money issuing areas, since, despite the directive, the applicable rules continue to differ from one country to the next, as a result of the diversity of local schemes and even of domestic regulations. The European Commission has maintained the debit/credit distinction via differentiated interchange fees. International schemes are firmly established, in particular in the area of credit, with global interoperability. However, they are not as firmly established in the case of debits, and more especially as, for some, the international events of the summer, with the case of BNP Paribas or in Eastern Europe, are stark reminders of the importance of European independence, even sovereignty, above all in payments. The debate on the creation of a European debit card issuance scheme has been re-opened and for some is inevitable over the medium or long term • Secondly, that of acceptance and acquisition, since even with different cards from one country to the next, it should be possible in theory to have a single acquisition or acceptance area, as desired by retailers and central banks: “any card

at any terminal” was the initial ambition of SEPA. However, the construction of such an area is long and very expensive, and it is not the reductions in interchange fees imposed by the European Commission that will stimulate increased investment. The unification of the European area and the adoption of the EPAS standard is the only way of ensuring, on the one hand, for merchants, the centralised management of payments in Europe, and on the other hand, for banks and other acquirers, the possibility of offering a cross-border service, with the same rules for everyone. The question of a European acceptance scheme, for all cards, in the same way as the CB scheme in France, has therefore been advanced as a means of ensuring this interoperability • Lastly, innovation in payments, since it is this innovation that will shape the future of electronic financial transactions. Europe has not been left behind in terms of innovative projects and innovative technologies, but the solutions are often confined to one or several countries, since Europe remains a patchwork of payment schemes, with even multiple and rival schemes in some cases, as in France, with the various wallets. The projects need to reach their critical mass rapidly, via the adoption of several benchmark European solutions. Over and above the operational challenges, there is also the question of the regulatory framework: as things stand, the European Commission’s legislative package is a threat to banks and card systems, regarded as uncooperative in the construction of the European payment market and not sufficiently innovation-driven, to the benefit of new entrants. In addition, it puts cards in competition with the other instruments, by taking away the resources they need to ensure their future development and by favouring transfer-based continued...

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instruments. Furthermore, even after PSD2, it will still be necessary to truly harmonise the regulatory frameworks of the various European countries, to avoid costly local specificities, as is the case with the SDD in some countries. It is to be hoped that the new European Commission, currently being formed, will succeed in rectifying this vision, with a more positive approach from banks and a more forwardlooking vision of the challenges. We must therefore pursue the construction of the European payment market and revert to a common reference scenario, with the

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same standards and the same timeframe, since only a shared pan-European approach can create a level playing field and fair competition between all European players. It is also important to set a common, ambitious but realistic deadline: 2020 could be a target with strong media impact, with 2022 a reasonable target, because of the investment needed and the depreciation of existing infrastructures. Plastic and virtual cards are still for the present and future the reference instrument for payments in Europe but they must continue to demonstrate their vitality and durability.

The challenges for banks The new developments on the payment market are disrupting established positions. They are having an impact on the income of banks and enlarging their competitive environment, by encouraging new non-banking competitors to enter the market with different business models. A large number of players, whether they are start-ups or tech giants, companies looking for new markets or wanting to optimise costs, may find it worthwhile to take advantage of these trends in order to develop their services activities and position themselves in particular on the payment value chain. Some can count on solid financial resources and key advantages derived from their core business. This context is conducive to innovative initiatives and has given rise to countless attractive offerings in terms of content, price or user-friendliness, all of which hope to become market benchmarks. However, the proliferation of value propositions is creating some confusion which holds back their adoption. While payments are essential for the direct and indirect income of banks and for customer knowledge purposes, how long will banks be able to protect their place and retain their legitimacy in the intermediation of payment flows? How can they maintain the customer relationship, secure deposits and find new sources of direct income?

The payments revenue issue

While it may be argued that PSD2 poses a major threat to banks and that, accordingly, they should hold out against it, that is not the question, because banks no longer have the choice. Today, it is very much a question for them of finding their place in this new world of payments, in a context where all the players tend to want to expand their offering. So, what can they do? What innovative services can they devise? How should they position themselves in relation to Third Party Providers?

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To protect their income and create ever more added value for their customers, banks must explore new avenues: • devising new offerings and new services for retail customers and merchants, by positioning themselves in a support role throughout the purchase journey • proposing their own payment information services to their customers • pursuing collaborative, community initiatives between banks in order to create innovative payment services • devising services that they will be able to sell to Third Party Providers • proposing their services via players that also want to position themselves all along the purchase journey. The success of these strategies involves banks entering a new era: that of opening up their systems to external players, coopetition between participants in the payment services sector and putting in place genuine ecosystems that are end customer-oriented. Like biological ecosystems, this living environment, open to the outside world and constantly evolving, will enable banks to interact with the various stakeholders and create the right conditions to boost agility and creativity.

Building an ecosystem

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Banks will also have to devise ways of cooperating with non-banking players in order to ensure equitable value sharing. Lastly, they will also have to adopt a pragmatic approach: making concrete progress while learning along the way from their experiences and front-line feedback with regard to technical feasibility and customer adoption in order to maximise the chances of success. The following aphorism of a member of the Think-Tank sums up very well this approach: “We cannot afford to wait to know the truth before committing ourselves”. However, it is not that easy to break with old models. Faced with the new entrants, banks will be able to rely on their many advantages in the area of payments: strong market share, legitimacy, expertise in the area, a high level of trust, etc. However, to compete more effectively with these new entrants, they will also benefit from drawing increasingly on the methods used by the latter: understanding what drives customers and makes them happy so as to anticipate their future needs, constantly adapting offerings to remain in step – even one step ahead – of market expectations, stimulating creativity and innovation, developing agility and reactivity, and betting on the customer experience. Lastly, rather than acting in isolation or in a scattered manner, the implementation of a coopetition strategy will enable banks to better confront the challenges that lie ahead by: • completing the value chain and enhance their own value proposition • benefitting from the industrial experience and/or agility of a partner • relying on the experience of a given market, competences or specific know-how • achieving savings on investment and economies of scale • encouraging adoption by consumers and merchants. They must be part of genuine innovation networks, possibly composed of very diverse participants: • other banks facing the same challenges with a view to building critical mass more rapidly • start-ups contributing not only their dynamism in the innovation process, but also highly relevant responses to a large number of the challenges that banks face • players from other industries with a fresh perspective and having successfully trialled certain innovative approaches in their core business. The recent and more distant past is full of examples that illustrate the benefits of coopetition in the area of payments with other players, and the diverse forms that it can take. Examples of banking community initiatives include: in France the development of the bank card or services such as Sepamail or wallets such as Paylib, Paym in the United Kingdom and MyBank, a panEuropean initiative. Collaboration with start-ups is often a way for large groups to develop brand new solutions. The agility and reactivity that they contribute are instrumental in developing creativity and accelerating the time to market. Some banks have chosen to welcome them into their ecosystem, sometimes by financing them (acquiring a stake or providing them with resources), sometimes by integrating their offerings via white-labelling. In all these contexts, the use of open, collaborative and participatory innovation makes it possible to progress more quickly and cost-effectively.

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Therefore, if the development of an open market naturally generates uncertainty for market players, it is also likely to make their environment more dynamic and encourage innovation. Banks have considerable advantages to meet these challenges and adapt their offering. Because of their innovative nature and the added value that they contribute, there are in our opinion two main areas which are capable of serving as growth drivers in this new world of payments: • the new generation digital wallets which create payments-based value and are a way of renewing and enhancing the customer relationship • new services aimed at not only consumers and merchants, but also Third Party Providers.

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Digital wallets Digital wallets are a way to engage heavy online users in their day-to-day life. They combine several services to form offerings with an enticing content, perfectly in synch with consumer expectations with regard to banking, shopping and payment services. Their success lies above all in the creation and development of a seamless, interactive customer experience, as well as the skilful choice of the valueadded services that make up the offering. After an initial wave of electronic wallets generally limited to a payment function (dematerialisation of cash or debit cards, alternative means of payment generally based on the 3-corner model) and a single payment instrument, the focus now is on the new generation digital wallets which create value around and beyond payments, since the payment function alone is not enough to encourage widespread, lasting customer adoption. This therefore requires a paradigm shift: switching from a “Payment” focused approach to a “Purchase” focused approach, by multiplying the opportunities to enhance and transform the purchase process during all stages of the journey – before, during and after the purchase – and via multiple channels: preparing purchases online, a personalised in-store welcome, m-payments, etc.

Accompanying the omnichannel buying journey

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The “2014 Advanced Payments Report”, written by strategy consultancy Edgar, Dunn & Company (EDC) focuses on key factors for successful wallets, including but not limited to: • Considering the whole purchase process and value-added services beyond payments are key for mobile wallets. Value added services for mobile wallets include services before, during and after the payment • Consumers expect a frictionless customer experience and incentives to move away from existing payments to mobile • Security is a key concern with mobile and online payments but it must be balanced with the consumer experience.

Choosing the appropriate technology is also key for actors as it may significantly impact the customer experience: • Multiple mobile technologies have the ability to successful drive mobile commerce at the point of sale. NFC is considered as the most likely to drive mobile proximity commerce but there has been a major shift towards cloud based software solutions Host Card Emulation (HCE) • Bluetooth Low Energy (BLE) has attracted significant attention among merchants and payment providers.

Therefore, if a digital wallet must dematerialise everything that a physical wallet can contain (cash, debit cards, loyalty cards, etc.), the range of services offered goes beyond simply transposing only its content. Creating a renewed, attractive customer experience presupposes including other value added services: viewing account activity, tracking spending, managing personal finances, shopping help, insurance, financing, etc. Packaging these services in a customised way will enable wallets to be specialised according to the consumer’s profile.

The new generation of digital wallets

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The potential offered by digital wallets has whetted appetites. This has led to more and more initiatives, although none has yet established a strong market foothold. Existing and new players alike, regardless of their size and business sector, are all attempting to successfully position themselves on this market.

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“The digital wallet-based payments industry” is a nascent, fast-moving market. The arrival of Third Party Providers on the market is one of the new givens of the payment universe. All the stakeholders are trying to ensure that they are “well” positioned, in particular with regard to BtoC (experience and customer value), BtoB (partners/merchants value proposition), and/or BtoBtoC (intermediate model, value chain of financial and non-financial services via the customer and purchase experience specific to each (e)-retailer). Given what is likely to be an accelerated learning curve (Test & Learn , Proof of Concept, understanding of business models, etc.), taking the initiative – by testing different innovative approaches – could represent a decisive advantage, not only as regards Go-To-Market but above all as regards the Time-To-Market. A member of the Think-Tank

Faced with mobile operators, card networks, web giants, merchants, etc. banks have real advantages which they can leverage to establish their place on this market: number of customers, consumers trust them to manage their money and they have a greater capacity to offer other accountrelated financial services, etc. For them, digital wallets are an opportunity to enhance the customer relationship, increase the potential for interaction and generate new income streams.

The bank wallets universe in France All the large French banks have now chosen to offer their wallet. For example: • Crédit Agricole has launched its own initiative with Kwixo • BNP Paribas, La Banque Postale and Société Générale have teamed up to offer a joint wallet, Paylib. They have recently been joined by Crédit Mutuel

Arkéa, which has abandoned Pay2You, its mobile payment solution which it had launched in 2009 • For their part, BPCE and LCL have opted for V.me, the Visa network’s wallet and plan to enhance it with their own valueadded services. BPCE intends in particular to integrate S-Money, a mobile payment and transfer solution launched in 2012.

But the battle is tough since all players are trying to position themselves along the whole of the value chain. That is particularly true as regards card networks and merchants, whose strategic choices are likely to influence the positioning of banks with regard to digital wallets.

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The value chain positioning evolution

In order to maintain their leadership in an area at the heart of their business and to improve the relevance and use of their services in e-commerce and m-commerce, card networks have launched their digital wallets (e.g. Visa’s V.me, Mastercard’s Masterpass). This development has even been accompanied by the openingup of payment infrastructures and an attempt to monetize payment-related information. These players have the necessary clout to enable them to establish themselves rapidly on this market: brand power, the network’s size and international dimension, solid security experience, investment capacity, etc. They are very alert to any attempt to call into question the 4-corner model and want in particular to avoid direct access to a bank account resulting in payment being settled by a credit transfer. They also see wallets as a weapon against the initiatives of other Internet giants such as Google and Paypal, or even those of certain major retailers. Not to be outdone, the retail sector has also entered the fray (for example, the MCX consortium in the USA and Auchan in France). Payment has long been regarded by merchants as a “necessary evil”: it did not fall within their natural scope of activity and increasing payment costs were a source of conflict with banks and card networks. The arrival of wallets and the possibility to integrate the payment function in a series of other services related to the purchase process offers an enticing opportunity for major retailers to play a new role in the area of payments. In concrete terms this strategy should enable them, via the launch of innovative digital wallet offerings: • to boost their sales • to enhance customer loyalty by offering customers greater value, while retaining control over their data • to reduce the costs incurred for the acceptance of means of payment and to enjoy greater bargaining power when dealing with payment services providers.

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In the era of ‘coopetition’

How can banks position themselves with regard to these initiatives? Some banks have adopted card network offerings in order to be able to launch very rapidly cobadged wallets, by capitalising on a recognised brand and benefitting from a large acceptance network, while retaining the possibility, in a second phase, to enhance their wallets with their own value-added services. However, this alignment with the initiatives of card networks could potentially reduce the bargaining powers of banks, in particular those of the smallest banks, with modest marketing budgets. Without abandoning cards, one possible response for banks could be to accelerate the development of models in which they play a more central role: online payment systems based on credit transfers, but also real-time payment systems. While the major retailers aspire to have their own wallet and are reluctant to share the customer relationship and data, banks could turn to smaller retailers that are more likely to be interested in bank offerings. Among potential avenues for cooperation in the area of wallets the idea of a whitelabelled platform would be a means of sharing value with them. Banks have several strategic options in the area of digital wallets: 1. to offer financial services within third party wallets 2. to form alliances with other players to propose a joint “basic” wallet 3. to propose their own wallet with their own services 4. to propose their own wallet, while opening it to third party services

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If no option seems to be an obvious winning solution, some seem to be in principle less attractive than others. For example, the first two options are easier to implement but offer fewer product differentiation possibilities than the two other so-called “rich” wallet options. For their part, the last two options are more complex and more expensive to roll out since they require a sufficiently large acceptance network to allow optimal use of wallets. It is also noteworthy that with the last option it is possible to embed wallets with more limited features, for example solely payment, into feature-rich wallets.

The strategic options

Over and above these four options, other solutions are conceivable, such as the choice of a turnkey solution offering a certain number of native services or offering a white-label wallet to merchants. Whatever option banks choose, it is fundamental for them to make the transition from a productoriented approach to an approach which focuses above all on building an experience. Moreover, in a context where no standard, brand, etc. has yet established itself on the market, banks must not remain monolithic. The possibility of trialling several options (at least two) would enable them to build momentum.

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The choice of a given option depends ultimately on the strategy and cultures of the various players. The decisive factors in this regard include: • the environment of the offering: online or online + offline world, with the difficulty in the case of this option of having to invest in the creation of a physical acceptance network and the need to convince the merchant ecosystem • the market: its development dynamics, the capacity to reach critical size, its nature (mature, emerging) • the wish to have total control of the ecosystem or to adopt a coopetition approach, • the existence in-house of the necessary competences (technical, marketing, commercial, e-payment) and an appropriate structure to coordinate them, with a complex change management project • the existence of a trusted brand.

Because they combine all the advantages – rapidity of implementation, a large acceptance network, established brand and additional differentiation capacities based on additional value-added services, in the end perhaps the ideal solution is a mix of the above solutions, that is to say offering within a bank’s wallet: • payment services based on a community or third party solution • differentiated services for an enhanced customer experience. In this regard, it is to be noted that, among others, solutions as diverse as Paylib (bank), V.me (card network) and Orange Cash (telco) can constitute all or part of the basis of these differentiated wallets.

The PayM example, UK

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Given all the markets initiatives, it is difficult for now to say what is the viable business model. Practical difficulties underestimated? An inadequate value proposition? Despite all the efforts by its promoters to sign up consumers and merchants, the recent demise of Buyster, the online payment system integrating an m-payment function, supported by three major French telcos, could well dampen enthusiasm. This example underlines the importance of a high value-added and differentiated proposition in order to convince customers and achieve long-term market adoption. In this regard, it is vitally important to be part of a purchase cycle, since it is not so much payment as such but the related services that will generate the additional income and offset income shortfalls due to the reduction of interchange fees. The new potential income streams include, for example, data monetization (with the customer’s consent).

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The wallets market is still an early market and although digital wallet initiatives abound, the business model still needs to be determined. In an environment where payment is only part of the mobile purchasing cycle, or even invisible, banks will have to offer services which go beyond the simple payment function. Offering marketing campaign, prospection and loyalty building tools combined with mobile payment and the data collected, with marketing fees instead of interchange fees is clearly an avenue worth exploring to develop a sustainable business model for wallets. Another possibility is to propose platforms to support private ecosystems. I am not convinced by the idea of a universal payment system, I believe more in the proliferation of multiple private payment ecosystems targeted by brand (Starbucks, McDo, etc.) and by type of utilisation (transport, ticketing, catering, etc.). In this context, banks can play a role by providing brands and communities with white label mobile payment platforms. A member of the Think-Tank

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Digital banking and digital wallets

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Access to payment accounts and new services No matter how attractive they may be digital wallets must not, however, detract from other opportunities for innovation and the creation of new services for consumers and merchants. The emergence of Third Party Providers and the possibility for them, with PSD2, to access accounts to initiate payments may also create opportunities for new bank offerings. How can banks position themselves? How can they maintain their relationship with the payer? What offering can they develop for merchants? Some initiatives launched by banks show that they can offer their own payment initiation, information and other additional banking services to their customers. Why not do so by integrating and whitelabelling apps already proposed in this area by a certain number of companies already positioned in these new niche markets? The creation of these new services has often been the result of community and collaborative dynamics such as MyBank and SEPAmail. This type of initiative is therefore worth continuing. In addition, banks can also explore the idea of integrating TPPs in their communities, once the TPP in question has obtained payment institution status, for a positioning in the model close to that of a merchant’s bank. This integration would enable the payers’ banks to retain control by offering services to TPPs.

Opening up of e-SEPA systems to TPPs

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Should, therefore, banks wait until they are obliged to open up accounts or would it not be better to anticipate that situation and take the lead in the opening-up of accounts? The second option seems better. Banks need to start concentrating, without delay, on how they can retain a privileged place in this new context. That is also the view of Michaël Salmony – Executive Adviser at Equens – who was quoted in the EPC Newsletter of Januar y 2014, as saying: “It’s better to disrupt yourself rather than let others disrupt you”. He wants to encourage banks to take the initiative and open access to bank accounts for payment services but recommends for that the use of a “Controlled Access to Payment Services (CAPS)”, in other words a solution that is more secure and controlled than the free access to bank accounts (XS2A) which would be imposed on them: they must define an open standard interface. In such a context, banks could give thought to creating services with several levels of fees depending of the type of service provided. The basic services could be free or invoiced as cost based fees, whereas premium services could by systematically invoiced as value based fees. By way of illustration, a free basic service could consist in indicating whether an account balance is sufficient, whereas a more elaborate service could consist in indicating the account balance. Access to accounts opens the door to online or proximity payment services based on a scheme other than cards, namely credit transfers. As mentioned above, this may be a threat for card networks, but also for banks in terms of income. If this trend is confirmed, the business model would have to be adapted and structured around stocks and account management rather than around flows. Other than the services that they could offer to their customers and Third Party Providers, banks could also open up their systems via APIs (Application Programming Interface), with an appropriate level of remuneration.

Toward an API world

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History has shown that all the players that have adopted this type of open approach have always benefitted ultimately. The obligation for banks to provide access to accounts to third party providers to enable them to initiate payments will accelerate the development of open banking and, as a result, innovation. However, although some banks have already taken the plunge, the players f rom other sectors have a head start when it comes to APIs and app store technologies. Opening up APIs would enable external partners to use data and banking services autonomously in order to run third party apps or develop new apps. This would help banks to: • become more agile and attractive, by bringing relevant and innovative offerings to market faster, thereby boosting their competitiveness • develop and rationalise their range of apps and cut app development and maintenance costs. For many, APIs are a new lever for creating value, a way of enabling banks to broaden their ecosystem and boost innovation. Some studies have already estimated that 75% of the world’s biggest banks will have launched an A PI platform by 2016.

Digitalization is blurring the boundaries between industries to the point where some of them will cease to exist. Will banking be one of them? Anyone can build a bank. For example, peer-to-peer lending turns everyone into a bank. Banks may have to compete against every individual, because each person could be a lender. Banking CxOs and line-of-business leaders will need to purposely disrupt their own business models in order to succeed in

a digital business world. Open banking is already enabling this disruption, but most banks have yet to become more open due to regulatory compliance and security concerns, and due to their cultural tendencies to remain closed and controlled. However, regulators in some regions may actually force open banking. In addition, new competitors are using open banking technologies (such as APIs and app stores) and ecosystems (such as partners and third-party developers) to disrupt the industry faster than ever before.

Gartner Hype Cycle for Open Banking APIs, Apps and App Stores, Kristin R. Moyer, 17 July 2014

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Conclusion Although the opening-up of the payment market may naturally cause some uncertainty for banks, it is also conducive to a dynamic environment and helps promote innovation. Today, the question for them is very much to find their place in this new payment world, in a context where all the players tend to want to expand their offering. Banks are equipped to meet these challenges. They will have to adapt their offering to find growth drivers in this world, for example by relying on digital wallets and new services. The success of these strategies involves banks entering a new era: that of opening up their systems to external players, coopetition between participants in the payment services sector and putting in place genuine ecosystems that are end customer-oriented. We can safely bet that banks will seize all opportunities in this market to reinvent their model and create ever more added value. In France and throughout Europe.

“

Ignore the PSD2 at your peril! The long wait for this revised European Directive is nearly over and like its mother (PSD1) it will have far-reaching impacts on those involved in payments as it now starts its journey to be transposed into local law(s) in each member-state. Preparation, understanding and making it simple for customers will be key to its smooth delivery. Ian Smith, Head of Payments, TSB Bank, UK

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Acknowledgements Sopra Banking Software would like to thank all the members and participants in the Think Tank sessions, on which this report is based: • Marc Alaurent, LaSer • Laurent Bailly, Visa Europe • Laurent Berbinau, Groupama Banque • Ilhame Boirie, Société Générale Consumer Finance • Francesca Casadei, BNL Gruppo, BNP Paribas • Alexis Casado Bolivar, Société Générale • Cédric Coiquaud, Axa Banque • Laurent de Teneuille, BNP Paribas Personal Finance • Béatrice Delanau, La Banque Postale • Fabrice Denèle, BPCE • Valérie Feignant, BPCE • Hedi Hayouni, Paypal • Pierre Kapron, La Banque Postale • Olivier Laborde, Natixis • Antoine Leroux, Société Générale • Rémy Lesellier, Crédit Agricole Normandie • Sébastien Trankiem, BPCE • Sylvie Trupin, BNP Paribas Cardif • Christophe Van Cauwenberghe, Société Générale • Dominiek Vanwynsberghe, Fortuneo. For their introductory briefing during one Think Tank session, Sopra Banking Software would like to also thank: • Olivier Laborde (Natixis) • Grégoire Toussaint (Edgar, Dunn & Company). For expressing their view in this report, we also thank: • Hervé Sitruk (Mansit SAS, President of the Sepa Club, Paris) • Ian Smith (TSB Bank, London)

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Notes

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Contacts Bernard Ramé

Head of Payments & Cards Business Line [email protected] + 33 1 55 91 71 10 Valérie Bellec

Business Analyst [email protected] + 33 5 34 56 26 09 For marketing and press queries: Coralie Ghnassia

Marketing Communication Manager [email protected] + 33 1 55 91 71 68 Muriel Arthaud-Berthet

Marketing Communication Manager [email protected] + 33 1 55 91 39 84 Karine Coutinho

Head of Content Management [email protected] + 33 1 47 42 69 82

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About us

As a global not-for-profit organisation, Efma brings together more than 3,300 retail financial services companies from over 130 countries. With a membership base consisting of almost a third of all large retail banks worldwide, Efma has proven to be a valuable resource for the global industry, offering members exclusive access to a multitude of resources, databases, studies, articles, news feeds and publications. Efma also provides numerous networking opportunities through working groups, online communities and international meetings. For more information: www.efma.com or [email protected]

Sopra Banking Software is a global leader in software, integration, support and advice services for over 500 banks and financial institutions in over 70 countries. Its goal is to accompany clients in their business growth and international strategies through a long-term partnership approach, supported by the dedication of close to 2,000 skilled experts. Sopra Banking Software is a subsidiary of the Sopra group – a leader in consulting, IT services and software development in Europe – which employs more than 16,000 people and generated a turnover of 1.349 billion euro in 2013.

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Digital Wallet Report

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