SPONSORED BY10th2016ADVANCEDPayments ReportEdgar, Dunn & Company

Global Experts inPayments ConsultingEdgar, Dunn & Company (EDC) is an independent global financial services and payments consultancy.Founded in 1978, the firm is widely regarded as a trusted advisor to its clients, providing a full range of strategyconsulting services, expertise and market insights.From offices in Frankfurt, London, Paris, San Francisco, Singapore and Sydney, EDC delivers actionable strategies,measurable results and a unique global perspective for clients in more than 45 countries on six continents.For more information contactSamee Zafar, Director, 44(0) 207 283 1114 [email protected] Cloninger, Director, 1 415 442 0545 [email protected]égoire Toussaint, Manager, 33 6 7026 9925 RANKFURT LONDON PARIS SAN FRANCISCO SINGAPORE SYDNEY

Industry SectionContentsEdgar, Dunn & CompanyAdvanced Payments Report 201601OverviewTowards invisible payments18Security - AuthenticationThe price of convenienceContactsSamee ZafarDirector, EDC [email protected] 44(0) 207 283 1114Jane CloningerDirector, EDC San [email protected] 1 415 442 0545Grégoire ToussaintManager, EDC [email protected] 33 6 7026 99252103Where Digital Meets PhysicalBlurring boundaries08Mobile WalletsHalf empty, half full11Personal PaymentsMaking money flowCorporate PaymentsFacilitating trade25Financial InclusionThe work is far from over29Virtual Currencies &Blockchain - Digitising valueEdgar, Dunn & [email protected] PaymentsIn the blink of an eye33The internet of thingsTOWARDS connected commercePublished April 2016Copyright 2016Edgar, Dunn & CompanyAll rights reserved. Reproductionby any method or unauthorisedSPONSORED BYcirculation is strictly prohibited,and is a violation of internationalCopyright law.SPONSORED ADVANCED PAYMENTS REPORT 3

Advanced Payments Report 2016OverviewTowards invisible paymentsThis year the report is sponsored byWirecard, the global financial servicesand technology company, which holds abanking license. Wirecard is a key playerand innovator in the digital paymentsworld and helps a number of companies,ranging from FinTech start-ups to largeentities, retailers and airlines meet theirdigital payments needs.The Advanced Payments Report (APR) combines viewsand perspectives obtained from industry executives,the results of an online survey, and continuous researchand monitoring of events in the payment industry.It highlights key advanced payment trends. While itsfocus is on payments, payments cannot be detachedfrom the broader fabric of integrated financial services intoday’s digitally connected world.A question that arises continuously in this interconnectedworld is whether the banking industry is ripe fordisruption? The answer to the question from many startups would be a resounding "yes" as they discover and fillthe gaps in products and services offered by traditionalfinancial institutions. “We actually are trying to changebanking entirely. We are trying to displace what we thinkis a fundamentally broken system,” said Mike Cagney, CEOof Social Financial or SoFi, a financial services start-up, in arecent interview with CNBC.But despite the billion dollar valuations, innovativebusiness models and promises to unlock an alternativefinancial universe, the impact of new players on thebanking industry has been relatively less disruptive.Unlike the travel industry where online booking enginesand mobile travel apps disrupted the agent assistedmodel and where new players continue to innovate,or the seismic shift caused by Uber, Lyft, or Didi in thetaxi industry, or the popularity of Airbnb which offersan affordable alternative to hotels, banking industrystalwarts have so far proven more difficult to displace.One reason for this resilience is that banks as custodiansof customer deposits and lenders of funds have highlydeveloped risk management systems that ensure they donot fall foul of rules and regulations designed to protectconsumers, the institutions themselves and the economyin general. As such many start-ups tend to partner withfinancial institutions to comply with licensing laws.They also do so to take advantage of the widespreaddistribution networks of banks and their access tocheaper sources of funding such as deposits.In payments, however, not only start-ups but also largetechnology companies are investing in innovations andnew technologies. Mobile wallets continue to cause astir in the payments industry. The wallets are designedto offer convenience to consumers by allowing them tostore their payment cards, loyalty vouchers and eventravel documents such as boarding cards for easy accessand use. But wallets have long been the subject of muchdebate, discussion and controversy. Wallets developedand rolled out by mobile network operators (MNOs)struggled to attract consumers, and some had to beclosed down with industry momentum now shifting tomobile device manufacturers such as Apple and Samsung.Apple Pay, introduced in late October 2014 in the UnitedStates, significantly revived the sagging interest in mobilepayments and was quickly followed by Samsung Pay (USand South Korea) and Android Pay (US only) in 2015. ApplePay has expanded in February 2016 in China and is set toroll out in additional countries in 2016. It is still early daysfor these wallets, and transaction volumes are not entirelyrepresentative of their future potential. Digital walletshave come a long way when it comes to ease of use andsimplicity of set-up. For example, it takes minutes - notdays - to ‘provision’ or register a customer to start usingone of these wallets and for some of these wallets, thereis no need to open the app in advance – your fingerprintdoes that.SPONSORED BY 1 Edgar, Dunn & Company

Advanced Payments Report 2016While these wallets are designedfor in-store point-of-sale (POS)environments, they will alsobe used for all types of digitalpurchases. Other wallets that storefunds (and not payment cards) haveprospered in markets like India andChina where use of payment cardsis still not mainstream. Prominentexamples include Alipay andWeChat Payment in China and Paytm in India.“The IoT will createa complex demandfor payments acrossindividuals & businesses”Making money flow better across the globe is still afocus for a number of start-ups. This has been thehistoric preserve of banks and money transfer operators(MTOs) but companies such as Worldremit, TransferWise,TransferGo, and Remitly have leveraged innovativebusiness models to play in an industry which carriesrisk and where traditionally it has been difficult todifferentiate other than on price.On the cutting edge of digital commerce are advancesrelated to the Internet of Things (IoT). The IoT is a termcoined by an MIT researcher to explain the next evolutionof the Internet, the super-connected Internet in whichnot only computers, mobile phones, or tablets will beconnected but all types of ‘things’; home appliances andmachines that we use every day, such as cars and evenplanes; things for sports, such as tennis rackets, cricketbats or golf clubs; and billions of other things, includingwearables such as clothes, watches and shoes.The IoT will create a complex demandfor payments across individuals andbusinesses because of the sheernumber of things connectedand the complexity of servicesthat will become available.Global commerce will expand.Commercial payments will rangefrom large transactions betweenbusinesses down to microtransactions between multipleindividuals located anywherein the world.Banks and payment intermediarieswill always have a role to play in payments,facilitating payments via bank accounts or credit cardsbecause consumers trust these mechanisms and theyprovide recourse should something go wrong.Or, perhaps, they may not? Whilebank transfer systems and credit cardservices are continually improvingin speed and security and adaptingwell to the evolving Internet, digitalcurrencies are designed specificallyfor the Internet and these may,in time, become more and morerelevant for digital micropayments asnew IoT services are rolled out.Innovations that validate transactions and confirmcontracts to support systems of value exchange will beequally important in the future. Blockchain, a technologyinherent to the concept of Bitcoin, for example, may finduse cases that go beyond digital payments to provideuniversal open standards for validating all types offinancial transactions.Wherever the future may lead us, one thing for certainis that in order for innovations and new services to besuccessful, regardless of how sophisticated or technicaltheir development or delivery may be, they will need to beintuitively simple for consumers to understand and use.Daniel Kahneman, the behavioural psychologist famousfor his work on how people think and make decisions, andwinner of the noble prize for economics in 2002, describesin his best seller, “Thinking Fast and Slow”, the key tohow consumers think. Most consumers are lazy - or inKahnemann’s polite scientific jargon - consumers tend tobe “cognitive misers” who make decisions and judgementcalls based on quick and instinctive impressions(intuitive or “fast” thinking), not wastingtheir cognitive resources on analyticaldeductions and logical thinking(deliberate or “slow” thinking).Future successful systems of valueexchange will be entirely digitaland in order to be successful,they will need to be designedfor the ultimate cognitive misers,operating quietly in the backgroundwhere, says Christian von HammelBonten, EVP Global Product Strategy atWirecard, the key challenge for paymentproviders will be “to make themselves invisiblebut not redundant. The key to success for all formsof commerce will be a seamless, efficient and securepayment experience.”SPONSORED Edgar, Dunn & Company 2

Advanced Payments Report 2016Where Digital Meets PhysicalBlurring boundariesAdvances in the development of mobiledevices have created the phenomenonwhere consumers can easily researchproducts and shop at their convenience– anytime, anywhere. New technologieshave blurred the boundaries of physicaland online commerce, enabling new waysfor merchants to communicate with theircustomers.Leading retailers, technology companies and socialmedia platforms are continuing to explore opportunitiesto promote deeper engagement between businessesand consumers. For example, Facebook is working onbringing businesses onto its Messenger app, whichallows consumers to interact with a business throughconversation threads. Consumers can ask questions, makereservations or purchase products or services by textmessaging a merchant.Once the consumer opens a thread to communicate witha business, that thread will stay there forever. This allowsthat business to know its consumers better as well askeep in touch with them. While David Marcus, a formerpresident of PayPal and current VP of Messaging Productat Facebook suggests that Facebook is merely taking“the first baby steps” toward transforming interactionswith businesses, the Chinese messaging app, WeChathas already allowed its users to order taxis, check in forflights, pay utility bills, make doctors' appointments– all without leaving the app. Amazon, on the otherhand, allows its users to communicate with buyers inthe Amazon marketplace via email with its Buyer-SellerMessaging Service. While businesses on messenger ispopular in China, the concept is still fairly new elsewhere.Nonetheless, the potential impact of messaging oncommerce is great. It might blur the boundaries betweendifferent sales channels even further. 3 Edgar, Dunn & Company www.edgardunn.comOmni-channelOmni-channel, a multichannel approach to sales, usedto be a buzzword but now has become an expectationthat merchants cannot ignore. “An in-store transactionwill replicate the same customer experience as ane-commerce transaction: browsing for goods with asmartphone, a tablet or an in-store kiosk, adding itemsto the physical shopping cart or the virtual basket andthen checking out by paying with the smartphone. Thecustomer will not distinguish between online and POSexperiences as they will be completely blurred,” saysSusanne Steidl, Executive Vice President Issuing Servicesat Wirecard AG.Omni-channel capabilities bring a unique set ofopportunities for merchants, allowing them to provideconsumers a frictionless shopping experience regardlessof whether the customer is shopping in a store or onlineusing a desktop or a mobile device. Through thesechannels, merchants can also increase brand awarenessand loyalty. However, there are challenges. Providingdetailed product information and embedded paymentfunctionality over a number of distinct channels can bedifficult and expensive.All three key stages of the purchase transaction in whichmerchants engage with consumers – pre-purchase,purchase and Post-purchase – are being impacted bythe changing focus of retailers on providing a seamlessshopping experience across all channels.“64% of survey respondentsbelieve that mobileself-checkout apps will helpcreate a seamless shoppingexperience”SPONSORED BY

Advanced Payments Report 2016The future of payments for physical retail stores Large retailers will continue to move away from traditional POS terminalsto mobile ones and will include value added services Mobile self-checkout apps will help create a seamless shopping experience;it will win adoption from big-box retailers in the next 2-3 years More payments will be embedded in the commerce transaction and themerchant will own the payment experiencePre-purchasePurchaseConsumers may use the Internet to ‘channel-surf’, i.e.research an item through one channel and purchase it viaanother. 'Showrooming’ is a well-established practicein which consumers purchase items online, havingresearched and tested them out in a physical retail outlet.Purchasing is now being made easier through initiativeslike the ‘suspended basket’. Merchants such as Burberrywould like to introduce a facility through whichconsumers could order products via any channel (even instore), the products would be retained in the consumer’saccount basket for a pre-established period of time,and the consumer could amend the basket and initiatepayment via any other applicable sales channel.Interestingly, only 60% of webroomers have showroomedbut 90% of showroomers have webroomed according toMerchant Warehouse. The evidence therefore indicatesthat consumers – whether they are ‘channelsurfers’ or not – like to purchase ina physical retail environment.Both trends are frowned uponby retailers, although some– such as John Lewis in the UK– have embraced them byencouraging shoppersto check product detailsusing the retailer’s appwhile in-store.Another usefulcrossover betweenthe physical and onlineretail environments is the‘end-less aisle’ approach nowbeing adopted by some retailers.Consumers are provided with in-storekiosks that have access to the retailer’sfull product offering and stock levels sothat most out-of-stock scenarios are avoided.Staples and a number of other large omni-channelretailers use this approach to great effect.Payment at POS is no longer simply a matter of insertingor swiping a card at a fixed checkout location in a store.Use of Mobile POS (mPOS) terminals in-store isbecoming more widespread. This year’s surveyresults indicate that a high percentage (76%)of industry executives believe that retailerswill replace traditional POS terminals formobile devices that include additional valueadded services (VAS) such as data analyticsand inventory management applications.New models have emerged wherepurchasing in a physical environmentrequires limited interactionwith sales staff, either ata contactless kiosk or‘in-app in-store’, suchas using the PayPalapplication to pay for goodson a mobile handset while ina physical retail outlet. 64% ofsurvey respondents believe that mobileself-checkout apps will help create a seamlessshopping experience, especially from the largestretailers in the next 2-3 years.SPONSORED Edgar, Dunn & Company 4

Advanced Payments Report 2016The future of payments for online commerce Fraud will remain a top concern for online commerce The use of social media by businesses will continue toincrease for marketing and communication purposes More people will shop using apps as well as makepayments inside the apps Security concerns may further drive consumer adoption ofdigital wallets Social media platforms will capture a larger share of theonline commerce spendingPost-purchaseMany pre-omni-channel retailers did not have centralisedpayment management systems; i.e. they had separateordering platforms, sales reconciliation systems andpayment service providers for each channel. Processing arefund in-store of goods purchased online was thereforea challenge if both channels had different merchantacquirers and sales reconciliation platforms were locatedin different countries.However, omni-channel retailers are now benefitting froma consolidation of service providers and are selectingthose that provide integrated back-office solutionscombining the ordering, payment and reconciliationfunctions into a single platform.The Amazon book storeAmazon opened its first physical retail store in Seattle,USA, at the end of 2015 and has introduced someinnovative policies there that place it firmly within theblurred boundary of where physical retail meets the onlineenvironment.The Amazon Book Store is stocked with books thathave been selected using Amazon’s recommendationsalgorithms, so that post-purchase feedback from otherconsumers is put to good use. Consumers can scanbook barcodes at a kiosk or use their amazon apps toprice check potential purchases or to read customerreviews. Webrooming is therefore actively encouragedand consumers can get dynamic pricing based uponthe current price of the book in Amazon’s online store,ensuring that the pricing is competitive against physicalbook store competitors as well as online retailers.Amazon recently filed for a patent for a physical retailstore in which consumers could purchase items (booksor potentially an extended range of products that areavailable) simply by lifting them from the shelf and exitingthe store. Although it is not yet known how the consumermaking the purchase would be identified, once they havebeen identified in-store and made their way through the‘transition zone’ (check-out) with their selected item,the item would be identified through an RFID tag andregistered as sold. The consumer would then receive anemail notification from Amazon that the purchase hasbeen logged in their Amazon account, and that paymenthas been processed using their preferred paymentmethod.The patent for this approach is still pending but it wouldbe an interesting development for a retailer to introduceexiting a retail location with a product as a paymentauthorisation from the consumer.Proliferation of digital payments optionsAccording to eMarketer, retail e-commerce sales areexpected to reach 1.9 trillion in 2016 and consumers areexpecting an ever-smoother payment process. Whilepayment cards are commonly used for digital payments insome markets, there are hundreds of payment methodsworldwide, and many seek to bypass the card rails usingalternative forms such as online bank transfers, mobilecarrier billing and virtual currencies.SPONSORED BY 5 Edgar, Dunn & Company

Advanced Payments Report 2016Social commerce and buy buttonsAny business without a social media presence in 2016is certainly lagging and 89% of our respondents believethat the use of social media platforms by businesses willcontinue to increase for marketing and communication.However, only 51% think that these same platforms willcapture a larger share of the online commerce spending.Facebook, the leading social network is looking to do justthat by transforming its ‘pages’ for businesses from aplace to grab business information and interact, to a placeto buy. If successful, Facebook could become a socialnetwork filled with mini shopping websites or ‘pages’.“Buy buttons” look set to be the key facilitators for thisintegration. Developed only a few years ago, they alreadyhave made significant inroads in 2015. Buy buttonsenable consumers to buy directly within a webpage orapp without having to leave the site. Google, Twitter andFacebook are running trials with them and PayPal’s firstacquisition as an independent company was Modest, astart-up that develops them.Pinterest is a visual discovery app, where consumerscan explore anything from clothes to furniture. Itlaunched buy buttons or “buyable pins” in mid-2015 andis considered the perfect social network forsocial commerce. Shopify’s 2015 surveyhighlighted that 96% of users go tothat site to research a productbefore buying. While theidea may be great, thereare difficulties withimplementation,such as merchantshaving to providereal-time inventoryupdates. Also a largenumber of pins maybe unobtainable dueto no longer stockeditems, which may lead tocustomer confusion.Google, Twitter, amongstother social platforms are alllooking for a way to get a pieceof the e-commerce pie and it is notsurprising to see why. According to ForresterResearch, consumers spend 14% of their smartphone timeon social media and 5% on shopping. The integrationof these two activities by the tech giants would enablethem to share a portion of the trillions of dollars to bespent online in the coming years, as well as increasing theinherent value of their ads.In-app payments88% of our respondents believe that more people willshop using apps in the future as well as make paymentsinside the apps. According to a 2014 consumer behavioursurvey by Forrester, consumers spend 85% of their timeon smartphones in apps so the opportunity for in-apppayments is significant.Uber is gaining popularity with its streamlined orderingand seamless payment process in which the payment cardis registered initially, sometimes with a simple photo, andthen automatically charged after delivery of the service.Apps like Uber have revolutionised the way we order andpay for taxis, and the model continues to gain traction inother on-demand industries. Apps such as Delivery Hero(Germany) and Deliveroo (UK) are reshaping the takeawaybusiness, while Washio (US) and Laundrapp (UK) targetthe laundry business. The rising success of these appsproves the value consumers place on convenience,of which in-app payment is a core feature.Digital walletsare growing mobile67% of respondents believethat online security concernswill drive adoption of digitalwallets. The convenienceand recognised securityof these wallets havehelped drive their growth,especially the familiarbrands such as MasterPass,Visa Checkout (which hasmoved away from the “wallet”connotation), PayPal and Alipay.PayPal parted ways with eBay, andthe renewed independent focus isworking for the company as total paymentvolume grew 27% to 282 billion in 2015.Alipay, set up by Alibaba in 2004 before being spun offSPONSORED Edgar, Dunn & Company 6

Advanced Payments Report 2016under Ant Financial, processed an estimated 778 billionin 2014. This reported figure, already dwarfing PayPal’s2015 number, is likely to be significantly larger in 2015 as itboasts a 65% market share of the Chinese online paymentsmarket.Interestingly, both wallets have seen significant growthin mobile with 28% and 65% of transactions initiated via amobile device for PayPal and Alipay respectively in 2015.Battling on against fraud92% of our survey respondents believe fraud will remaina top concern in the future of online commerce. Thisconcern is well noted when you consider that largee-commerce and m-commerce merchants lose 1.4% and1.7% of revenues respectively to fraud according to the2015 True Cost of Fraud Study.3D secure continues to be one of the key defences foronline card payments but the mechanism is dated andprovides a poor shopping experience, reducing conversionrates and negatively impacting merchant revenues. Theuser experience becomes even worse on mobile deviceswith many merchants simply refusing to install it ontheir apps, which could be problematic, as 21% of totale-commerce in the US in 2016 is expected to be via mobile.New ways for securing card payments online are beingpiloted across the world. Getin Bank in Poland and BPCE inFrance have both launched pilots for cards with dynamiccard verification codes (DCVC). The DCVC replaces thestatic three-digit security code on the back of the cardwith a changeable code that is altered electronically everyhour. Other methods to tackle fraud involving devicefingerprinting, biometrics, geo locating and behaviouralanalytics continue to be developed.SPONSORED BY 7 Edgar, Dunn & Company

Advanced Payments Report 2016SPONSORED Edgar, Dunn & Company 8

Advanced Payments Report 2016Mobile WalletsHalf empty, half fullIndustry surveys in developed marketsreport slow adoption or decliningusage rates of mobile payments amongconsumers. The industry is divided in itsevaluation of this data. Some observerssay that the low usage rates are indicativeof a weak consumer value propositionand are very sceptical for the future ofmobile wallets. Others, however, aremore optimistic and believe the glass ishalf full, not half empty.Mobile wallet taxonomyA mobile wallet – also called an mWallet, digital wallet,or eWallet – refers to an application used on a mobiledevice that can store payment credentials that enablea customer to make payments online, or in stores viacontactless technologies.Consumers have no shortage of choices today, and moreoptions are expected to be introduced over the next fewyears. EDC has segmented the mobile wallet offeringsinto four categories, as depicted in the diagram below: Third party wallets: provided by entities outside thebanking system such as mobile device providers andmobile network operators (MNOs)Third partyMerchantFinancial institutionMulti-merchantNote: consumers may choose to use more than one walletThey conclude that it is only the beginning for the mobilewallet and the opportunity to achieve its potentialcan be realised as the consumer value proposition isstrengthened, negative perceptions of security areaddressed, and widespread acceptance is finally achieved.Edgar, Dunn & Company (EDC) 2016 survey resultsreflect both perspectives but respondents in general areoptimistic with 66% indicating that mobile wallets willcontinue to grow significantly, despite a complex andalready competitive landscape. Merchant wallets: proprietary to a single merchant andtypically tightly integrated into that merchant’s onlinedigital strategy Multi-merchant wallets: designed to be accepted bymultiple merchants who have opted into the programme.They include merchant-specific loyalty capabilities as wellas payments Financial institution (FI) wallets: offered by Financialinstitutions to address the needs of consumers whoprefer to use the payment services from their trustedFI and do not really trust other entities to protect theirpayment credentials. Both open (multiple FIs) and closed(single FI) models existSPONSORED BY 9 Edgar, Dunn & Company

Advanced Payments Report 2016Third party walletsMerchant walletsSince the launch of Apple Pay in 2014, followed by AndroidPay and Samsung Pay in 2015, wallet solutions have beenprovided to users across most operating systems withenhanced security and usability. As noted in the tablebelow, the solutions have many elements in commonbut which differ in key areas, including the ability toincorporate loyalty programmes and related incentives:Merchants view the mobile wallet as a way to enhancerelationships with customers and to interact with themon a much more direct and personal level. For many,the mobile platform is key to their digital strategy andtheir omni-channel approach. Integrating paymentswithin their mobile apps is a logical development towardreducing the friction in the payment process. Merchantsare actively investing in the development of proprietarywallets, targeting their most loyal customers, in whichthey can provide incentives that deepen relationships withthose customers. The Starbucks app, the leading exampleof a merchant wallet, demonstrates the positive impact ofa wallet on a company’s brand.Apple PayAndroid PaySamsung PayLaunch Date(initial market)Oct. 2014 (US)Sept. 2015 (US)Sept. 2015(South Koreaand US)# of POS Locations 2M 2M 30M worldwideNFC/HCENFC/HCE andMST (mag stripetransmission)ConnectionNear FieldCommunication(NFC)/Secure isationTokenisation,FingerprintLoyalty ProgrammeSupport rewardprogrammes andstore-issued cardsTie intoretailer’s loyaltyprogramme;coupons/discountsTie intoretailer’s loyaltyprogramme;coupons/discountsIn-app AcceptanceYesYesYesFeeCharges issuer atransaction fee(US)No feearrangementNo feearrangementAdditional wallet solutions include: PayPal: expected to launch NFC capabilities within itsmobile app in the latter part of 2016. The US and Australiaare expected to be its initial markets Vodafone wallet: launched in 2013, it has enabled usersto make NFC payments via their Visa and MasterCardcards since 2015. It is available in Germany, Italy, theNetherlands, Spain and the UK. PayPal has announced apartnership that will enable PayPal to be used within theVodafone wallet Alipay wallet and WeChat wallet: Serving the needsof Chinese consumers, both enable users to makee-commerce and face-to-face purchases. Both wallets areexpanding to provide purchasing options for travellingChinese consumers. Alipay is ac

wirecard, the global financial services and technology company, which holds a banking license. wirecard is a key player and innovator in the digital payments world and helps a number of companies, ranging from FinTech start-ups to large entities,