THE FUTURE OF PAYMENTS: WHO IS POSITIONED FOR ADVANTAGE?

2

What happens when the sale can be anywhere, at any time?

In business, perhaps nothing seems more prosaic, and less strategic, than payments and the

processes that support them. But our current model of settling accounts is coming under

increasing pressure. Merchants feel the squeeze on their profit margins, regulators challenge

the complexity and scope of current fees, and banks fear the short shrift in revenues and

brand. Most importantly, regulators favor processes that support consumer interest. Current

technologies have destabilized the retail landscape; with mobile devices and the vast reach

of the web, consumers expect the point of sale to be made on their turf, at any place they

desire, at any time they find convenient. When it comes to payments, they want processes

that are fast, simple and easy.

Today, new technologies have emerged that will disrupt — and are, in fact, now actively

disrupting — the complex network of relationships involved in most retail transactions. The

vast “middle” of payment processes, once an absolute necessity to banks and merchants, is

no longer so vital.

Change is in the wind. Players like PayPal and Apple Pay straddle existing systems while

offering a more consistent, more streamlined experience to consumers. Individual merchants

like Target and Starbucks are using proprietary credit and pre-purchase cards, empowered

with discounts and reward incentives, to reinforce their brands. You might be tempted to

regard these changes as new form factors with little consequence to core business, whether

you’re a banker or a merchant.

But you would be wrong.

Truth is, changing payment systems means deep changes to what banks and merchants

fundamentally are to consumers, how and why these consumers shop and what they

expect, and what brands and revenue streams will be — or can be — to banks and

merchants in the future.

This paper serves as both an exploration of the

changing landscape and a call to action. In it, we will

review the current payments ecosystem (and reveal

its instability), define the key features of the emerging

payment systems landscape and articulate the

strategic consequences of this new payments world.

Early movers will secure key advantages; by making

yourself better informed, you make yourself better

prepared to take charge of your own future.

EXECUTIVE SUMMARY

The Future of Payments: Who Is Positioned for Advantage?

And merchants, despite the fees imposed by card

transactions, welcome their customers’ cards.

According to The Nilson Report (February 2013 and

February 2018), between 2012 and 2017, Visa Debit

purchase volume for general purpose brands grew

37%, from $1,494B to $2,053B. Over the same period,

Visa Credit grew 79%, from $1,025B to $1,833B.

Mastercard Debit rose 38%, from $605B to $833B;

its credit card activity expanded 39%, growing from

$562B to $780B.

3

Contemporary technology has not just multiplied

the number of physical locations at which sales can

be made, but introduced new players, such as Apple

and PayPal, who have added new layers of customer

interaction over the old rails of the current payments

system. This dissolution of the point of sale can open

inconsistencies in the brand experience and lead to

merchant loss of control — an unacceptable state in a

world where the consumer’s attention and money are

constantly under siege by competitors.

In the card payments model that prevails today, a

great share of the profits goes to the players in the

middle. As long as payments remain complex, the

model may be justified. But today, new technologies

call the model into question: as practical processes

evolve that reduce or eliminate the volume of

intermediary transactions, value will shift away

from the tactical “nuts and bolts” of transactional

processing and toward the strategic rewards of

understanding and meeting consumer needs.

When technology emerges that removes the

longstanding rationale for the existence of so many

costly intermediaries, the question that’s asked is no

longer “why?” but “when?” And the answer is: now.

Today, the technology exists to facilitate any-to-any,

real-time payments. At the tactical level, this is what

these technologies can contribute:

SPEED: Under the old (and currently dominant

model), payments require two exchanges of messages:

the first to validate identification and verify ability

to pay, placing a “hold” on a set amount of money;

the second to confirm the final amount of the

actual transaction. Today, applications exist that can

authorize and settle transactions in a single message.

Real-time payments, in which funds are immediately

transferred from one account to another, closes other

delays. Customers accustomed to tracking their bank

accounts digitally, often by mobile app, will instantly

see an accurate account balance reflecting their most

recent debit card and/or check activity.

But that convenience comes at a cost. To connect

many thousands of banks and merchants, a vast

intervening body of processors, integrators and

networks serve as the necessary intermediary

between every transaction. While their work makes

contemporary card payments possible, it also imposes

costs that cut into profits. Merchants, struggling with

often razor-thin profit margins, resent losing 1.5%-3%

in swipe fees for every card sale. Consumers resent the

high interest rates and/or the “gotcha” fees their cards

may carry. Although regulators have capped the fees

intermediaries can charge for each transaction, banks

would prefer to pay even less.

Despite these ambivalent attitudes, however, cards

have continued to dominate the retail payments

environment as the most favorable payments option.

But three recent trends have increased the pressure

for reform:

COST: Regulators are becoming increasingly less

patient with a system that imposes usurious fees;

recent rule changes threaten the viability of payment

transactions as an attractive way of earning revenues.

The Credit Card Accountability Responsibility and

Disclosure Act of 2009 (Credit CARD Act) restricted

fees. In 2011, the Durbin Amendment to the Dodd-

Frank Wall Street Reform and Consumer Protection

Act imposed further limits on interchange/swipe

fees. Despite these reforms, transaction costs remain

a challenge to merchants — and a cause for further

change.

SPEED: Consumers expect quick and easy

transactions that are immediately reflected in their

accounts. Today, dual message debit transactions, in

which the first authorizes payment and the second

settles it, means account balances lag purchases. In

our “always-on” world, this discrepancy is becoming

intolerable. While older generations have become

accustomed to the float, millennials raised in a digital

landscape expect instant, and accurate, updates.

ACCESS: Today, the point of sale can be anywhere

that a consumer has access to the digital world, via

desktop, laptop, kiosk, mobile device or whatever

point-of-sale system a merchant has in place.

1MONEY IN THE MIDDLE — WHY THE STATUS QUO IS ABOUT TO GO

CONVENIENCE IS KING.

CONSUMERS APPRECIATE THE

FREEDOM THAT COMES WITH

NOT HANDLING CASH.

4

Once the middlemen are removed, payments are no

longer just about “payments” but about customer

communications, customer insights and customer

relationships. Without intermediaries who impose

interference, customers assume their rightful place at

the center of any retail transaction.

Consider the strategic implications of any-to-any, real-

time payments processing:

BRANDING: Everyone has heard of Visa, Mastercard

and American Express, and every transaction

with one of their cards reinforces their brands.

Disintermediation means banks and merchants can

shift attention to their own brands, rather than carry

luggage for the cards.

3 POWER TO THE PARTIES

Short answer: No and yes.

No: Apple Pay leverages the current underlying system

of relationships, including processors like Visa and

Mastercard, to facilitate payments. There’s nothing

inherently disruptive in its structure.

Yes: On one level, it’s about security — Apple applies

a unique token, or scrambled identification, for each

2 IS APPLE PAY THE WAY OF THE FUTURE?

ACCESS: Customers want to be free to make the

purchases they want, anywhere and anytime they

want, through the means most convenient to them.

By fulfilling any-to-any transactions, customers can

pay, and merchants can receive payment, through

any channel (ATM, POS device, non-branded cards,

etc.), in any electronic payments type, in any format or

currency, on any network or system anywhere in the

world.

COST: Direct connections between merchants and

financial institutions, facilitated by new network

applications, remove the intermediaries from the

middle. From a tactical point of view, this means lower

fee costs for merchants and greater fee income for

banks. But as we’ll see in the next section of this paper,

direct connectivity opens strategic opportunities

that had been inhibited by the presence of so many

intermediaries.

THE “NOW” GENERATION…

WHEN THE TOP FIVE U.S. BANKS

ACCOUNT FOR APPROXIMATELY

46%1 OF DOMESTIC DEPOSITS,

AND THE MARKET IS SIMILAR

IN EUROPE, IT WOULD SEEM

ONLY NATURAL THAT SMART

BANKERS MIGHT WONDER,

“WHY CAN’T WE DO BUSINESS

DIRECTLY WITH OUR

MERCHANTS AND CUSTOMERS?”

transaction. Even if a hacker were to sniff Apple’s

near-field communications, the information received

would be worthless; tokenization provides excellent

security, regardless of the point of sale. By promoting

biometrics — in this case, thumbprint identification

— Apple adds another important layer of security to

deter credit fraud through use of its phones.

But on a deeper level, Apple gains the strategic edge,

reinforcing customer loyalty by offering an ease of

use that should be a model for others to emulate.

Apple Pay’s success demonstrates the way a brand

with a better payments process can build bonds with

consumers that strengthen its role in the marketplace.

CONSISTENT OMNI-CHANNEL EXPERIENCE: Why

should making a purchase online look and feel any

different from a purchase in a store — and vice versa?

A streamlined payments system facilitates a consistent

(and controllable) brand experience at any point of

sale the consumer chooses.

BIG DATA INSIGHTS: Too much important information

hides behind the intermediary transaction layers.

But with direct connectivity, banks and merchants

can reclaim the customer data they need. By

connecting transaction data to other data sets, such

as demographic and location information, bankers and

merchants can run sophisticated analyses to inform

the creation of new products, real-time marketing, and

more relevant and more targeted offers.

5

CUSTOMER LOYALTY: One of the big deals about big

data is the ability to drive better loyalty programs.

Real-time transactional data can be applied to real-

time rewards, encouraging more frequent customer

activity.

SECURITY: Every security breach, especially when it

receives media attention, can become a black mark on

the brand. Direct, single-message transactions reduce

the “surface area” available to hacker attack, increasing

security and increasing confidence in the brand.

Any-to-any, real-time payments may sound promising,

but are they practical? For a long time, implementation

has been the obstacle to advancement. Invested

in vast legacy systems supported with a complex

network of data centers and intricate software

applications, many otherwise interested players faced

an implementation rollout that could be measured

not in months but in years. But payments software

has advanced enormously over the previous decade,

removing the last impediments to progress. Moving

forward, the industry can take advantage of new

developments that improve access to sophisticated

technology, reduce installation and management costs,

and accelerate the transition to any-to-any, real-time

payments:

BETTER INTEGRATION: No longer confined to stand-

alone solutions, contemporary payment applications

can work seamlessly with installed digital platforms.

Many of the biggest banks and merchants can take

advantage of sophisticated payment solutions that

integrate with their current systems with minimal or no

disruption.

SaaS OPTIONS: For banks and merchants without the

sufficient architecture to host a payments system, nor

the business case for building one, the cloud is the

natural vehicle for delivering the power of any-to-any

payments through SaaS solutions.

4 THE PROMISE OF STRATEGIC PAYMENTS

Through Universal Payments®, ACI offers a complete

payments software solution that eliminates the

messy middle, reduces transaction costs and builds

lightning fast connections between players — while

building new opportunities for reinforcing loyalty with

customers.

Is your organization prepared for the future of

payments? Where are you now? What do you need

to move forward? How can you leverage any-to-any

payments for strategic advantage? An informed

consultation with a payments system expert will

help you answer these questions, giving you the

customized insights you need to prepare for the future

and open a new channel for strengthening customer

relationships.

5 ARE YOU READY FOR THE FUTURE?

1 Source: St. Louis Federal Reserve Bank

6

ACI Worldwide®, the Universal Payments®

(UP®) company, powers electronic

payments for more than 5,100 organizations

around the world. More than 1,000 of

the largest financial institutions and

intermediaries, as well as thousands of

global merchants, rely on ACI® to execute

$14 trillion each day in payments and

securities. In addition, myriad organizations

utilize our electronic bill presentment

and payment services. Through our

comprehensive suite of software solutions

delivered on customers’ premises or

through ACI’s private cloud, we provide

real-time, immediate payments capabilities

and enable the industry’s most complete

omni-channel payments experience.

Americas +1 402 390 7600 Asia Pacific +65 6334 4843 Europe, Middle East, Africa +44 (0) 1923 816393

© Copyright ACI Worldwide, Inc. 2017 ACI, ACI Worldwide, ACI Payment Systems, the ACI logo, ACI Universal Payments, UP, the UP logo, ReD, PAY.ON and all ACI product names are trademarks or registered trademarks of ACI Worldwide, Inc., or one of its subsidiaries, in the United States, other countries or both. Other parties’ trademarks referenced are the property of their respective owners.

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