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Integrated Mobile Payments and Commerce

The Key to Making Mobile Profitable at Financial Institutions and Retailers

The Mobile Opportunity (and Challenge)


Mobile Strategically Important for Financial Institutions and Retailers Alike Consumers around the world are increasingly looking to manage aspects of their lifestyle, social interaction and financial activity on their mobile phones and tablets. As a result, mobile banking, payments and commerce are all growing at a staggering pace and are predicted to grow even faster over the next few years. (See Exhibit 1 below.) Providing consumers with secure mobile convenience and functionality, therefore, is rapidly becoming a strategic must for banks and retailers alikeone of the many examples of increasing similarity, or convergence, between the financial services and retail industries. Driven by the fast-changing preferences of consumers, mobile banking, mobile commerce and mobile payments initiatives are now proliferating across all regions.

EXHIBIT 1

Growth of Mobile Payments and Commerce


Mobile Payments and Money Transfers Worldwide ($ billions) Mobile Commerce Growth in the United States ($ billions)
$31.0

$670

$165 $3.5

2010

2015

2010

2015

Source: eMarketer

INTEGRATED MOBILE PAYMENTS AND COMMERCE

Mobile Can Help Differentiate and Improve Overall Performance Successful mobile initiatives can contribute to competitive differentiation and improved operational and financial performance in several ways. For banks, mobile banking applications provide a convenient and lower-cost channel for customer account access,

inquiries and funds transfers. Mobile payments can also generate incremental revenue as well as incremental cost savings, as illustrated below in the case of mobile NFCs potential impact on credit card issuer economics.

EXHIBIT 2

Potential Cumulative Impact of Mobile NFC on Credit Card Issuer Income


Pre-Tax Net Income in $ millions; 7.5 Million Active Accounts Potential Level 1 Customer Wow Factor
> Activation rate lift > Attrition rate reduction

Potential Level 2 Spend Stimulation


> Activation rate lift > Incremental purchase transactions > Modest cash advance lift

Potential Level 3 Cash Displacement


> POS cash displacement > Incremental fee revenue > Person-to-person transfers

$62 Million Incremental Net Income

$124 Million Incremental Net Income

$256 Million Incremental Net Income

$1,811 $1,679 $1,616 $1,554 $1,554 $1,554

Base Case Source: Kurt Salmon

Level 1 Impact

Base Case

Level 1 + 2 Impact

Base Case

Level 1 + 2 + 3 Impact

INTEGRATED MOBILE PAYMENTS AND COMMERCE

For retailers, successful mobile initiatives can also contribute in important ways to omnichannel goals and objectives, enhanced customer experience and loyalty, and operational efficiency, both in-store and along the supply chain.

Challenge Is Knowing What to Do and in What Sequence The mobile challenge for both banks and retailers is determining what to do (and what not to do) and when. With all the hype, technological advances and new capabilities surrounding mobile, the challenge is to stay in step with what is possibleand affordable. Investing

EXHIBIT 3

Mobiles Evolving Role in Achieving Retailer Omnichannel Success


Distinctive, Integrated Omnichannel Customer Experience

1.

MOBILE ACCESS, MARKETING

2.

MOBILE LOYALTY, INCENTIVES

3.

MOBILE GIFTING, PAYMENTS

4.

MOBILE DATA, ADVANCED ANALYTICS

Remote

> > > > > > > > > > > > > > >

Mobile Web access SMS/MMS push Mobile-ready app Location targeting Social integration In-store Wi-Fi access UPC/QR scanning Location-based o ers Smart posters Mobile sales support Mobile sign-up Instant promotions Post-sale o ers POS scans Mobile receipts

> > > > > > > > > > > > > > >

Mobile acct access Mobile loyalty card Mobile loyalty wallet OTA loyalty points OTA vouchers/coupons Wi-Fi account access Loyalty-based o ers Premium sales support Smart posters Exclusive events Mobile acct updates Instant incentives Instant rewards QR code redemption NFC redemption

> > > > > > > > > > > > > > >

Mobile gift/prepaid card Mobile store/GP card OTA card provisioning NFC/SE functionality Secure integrated wallet Wi-Fi card acct access Mobile card exchange Mobile card top-up Smart posters Mobile pmt acceptance QR code redemption Mobile NFC payment Mobile NFC o ers PayPal, other acct pmt Mobile receipts, updates

> Search behavior insights > Promotion, o er insights > Product preference insights > Spend behavior insights > Time and location insights > Payment behavior insights

In-Store

POS

Source: Kurt Salmon

INTEGRATED MOBILE PAYMENTS AND COMMERCE

Four Keys to Optimizing Mobile Success in mobile pilots or initiatives too soon or in the wrong sequence can be costly and unproductive. Investing too late or in the wrong sequence can result in competitive disadvantage and potential loss of customers, sales, or both. This balancing act is further complicated while keeping abreast of, and deciding how to interact with, the various mobile ventures and cross-industry collaborations developing in the market, most of which are aimed at mobile payments, mobile commerce or mobile transit. These include:
Isis (AT&T, Verizon, T-Mobile, Discover, others) in the U.S.initially payments focused Google Wallet (Google, Sprint, MasterCard, Citibank, retailers) in multiple regionspayments and commerce focused PayPal Here (PayPal, Ingenico, Home Depot, Office Depot) in the U.S.payments acceptance and issuance focused EnStream (Rogers Wireless, TELUS, Bell Mobility) in Canadainitially payments focused Oyster (Orange-Barclaycard) in the U.K.payment and transit focused Visa-Vodafone in the U.K.initially payments focused Project Oscarinvolving several telecoms in Europe Six Pack (3 banks, 3 telcos) in the Netherlands initially payments focused Payfone (American Express) globallyinitially payments focused Walmart, Target and other retailers in the U.S. payments and commerce focused Dwolla, FaceCash, Zumongo in multiple regions payments and commerce focused WAON and Nanaco in Japanloyalty, commerce and payments focused Moneta in Koreatransit and payments focused Maybank, Maxis and Touch 'n Go in Malaysiatransit and payments focused Nice city mobile NFC consortium in Francetransit and payments focused BKM-led mobile NFC consortium in Turkeyinitially payments focused

1. Develop a Thoughtful, Sequenced Mobile

A carefully crafted mobile vision and roadmap can be extremely valuable for guiding mobile decisions and investments, particularly if grounded in strategic priorities, aimed at desired mobile end states, and tied to specific performance targets and milestones along the way. Developing an effective mobile vision and roadmap will likely require cross-organizational involvement of Marketing, Product, e-Commerce, Loyalty, Branch or Store Operations, Customer Service, Technology, Finance, Credit Risk, Compliance, and potentially other areas. A clear mobile vision and roadmap can also help to build understanding and consensus, both internally and externally, with regard to What are we really trying to accomplish with mobile? After all, mobile is a means, not an end, and having the end clearly definedin strategic, operational and financial termscan help to ensure smart mobile decisions and effective mobile implementation.
2. Strive for Enabling Integrated Mobile Functionality and Convenience

Vision and Roadmap

One important lesson emerging from mobile experiences and activities around the world is that it is consumers who ultimately determine what is desired and what will be used on mobile devices. When it comes to mobile, consumers are and will continue to be the drivers of innovation. Experience is also revealing that consumers increasingly want integrated, convenient functionality on their mobile devices. That is, they want multiple features and services such as coupons, loyalty accounts and credit cardsjust as they have in their walletthat can be easily accessed and integrated at their convenience, with privacy and security a key consideration as well. This is why in Japan, Korea and elsewhere in Asia, the use of payment cards on mobile phones began to take off once they were integrated with transit cards and other daily functionalities, such as secure building access. This is also why the municipal mobile pilots launched in France with government support over the past few years have

INTEGRATED MOBILE PAYMENTS AND COMMERCE

involved educational, commercial and geolocational services in addition to payment and transit applications. In a nutshell, the more integrated and convenient the functionality on a mobile device, the more likely the consumer is to use it. Some banks, retailers and other mobile players such as wireless carriers, device manufacturers, digital service providers (e.g., Google) and payment networks fully understand this and are battling hard to influence or control what can be enabled and managed on mobile devices, whether their own services/functionalities or those of others. Three key ways to do this are by owning or controlling: i The mobile wallet, which is used to conveniently access
and manage various services/functionalities on mobile devices (Google Wallet, for example, can serve as a gate

keeper with regard to whose services, payment cards, coupons, etc. can be integrated into its wallet and used on mobile devices), or

ii

The secure element (smart chip, SIM card or attachment) on mobile devices into which certain secure services or accounts, such as MasterCard or Visa payment card accounts, must be provisioned in accordance with secure industry standards and specifications (chip makers, device makers and wireless carriers that order and distribute mobile devices have all put forth claims that they should be in control of the secure elements in mobile devices), or The operating system, which enables (or blocks) the interactions and data capture on mobile devices, for example, related to customer characteristics, purchase behavior at multiple levels (I, II, III) and payment performance. The monetizable value of the treasure trove of mobile data, if accessed within the context of consumer security and privacy, should not be underestimated.

iii

EXHIBIT 4

Alternative Secure Element Approaches to Integrated Mobile Convenience

Alternative Mobile Secure Elements

SWP SIM

Embedded

Dual I/F SIM

Micro SD

Bluetooth w/SE

iCarte

INTEGRATED SECURE MOBILE WALLET

Source: Kurt Salmon

INTEGRATED MOBILE PAYMENTS AND COMMERCE

For banks and retailers, enabling secure, convenient and integrated functionality for customers on mobile devices will be important to overall mobile success. Figuring out with whom to align for this purpose is also importantfor the battle over integrated functionality on mobile devices is already fully engaged!
3. Partner Proactively, but Selectively

Emerging mobile collaborations and cross-industry partnering opportunities are continuously evolving, as illustrated in Exhibit 5. The increasing number of mobile service and technology providers calling on banks and retailers can be overwhelming. However, it is important to avoid simply going along with the latest pitch or the newest or trendiest capability. We suggest three helpful guidelines to ensure smart mobile partnering decisions and successful partnership development: i
First, proactively determine specific partnering needs in the context of an overall mobile roadmap (as described in Exhibit 5) that will help to answer the question, What do we really need/want to do with mobile, what can we best do ourselves and what specifically do we need a partner for? Then, rigorously research and screen potential partner candidates who could potentially meet those specific needs, based on their detailed capabilities, services and technologies, as well as a proven track record and recommendations from others who have worked with them.

Almost without exception, banks, networks and retailers will need partners to achieve their mobile objectives. While larger enterprises may be able to develop in-house capabilities in some areas, as with mobile website and application development or mobile offers and promotions, there are certain mobile technologies and capabilities that are probably best leveraged via specialized partners. These technologies and capabilities include over-the-air (OTA) provisioning to mobile devices of card accounts and other secure functionalities which must be performed in compliance with strict industry and network specifications; point-of-sale acceptance technology, which is evolving rapidly to incorporate contactless, scanning and EMV capability; and in-store wireless technology, which can now be integrated with location-based and other services. EXHIBIT 5

ii

Emerging Mobile Collaborations and Potential Partner Opportunities

1.

MOBILE ACCESS, MARKETING

2.

MOBILE LOYALTY, INCENTIVES

3.

MOBILE GIFTING, PAYMENTS

4.

MOBILE DATA, ADVANCED ANALYTICS

Others Source: Kurt Salmon

INTEGRATED MOBILE PAYMENTS AND COMMERCE

Perhaps the most important aspect of ensuring mobile success is developing a rigorous financial framework for linking mobile decisions, initiatives and investments to bottom-line financial impact and results.

iii

Finally, structure partnership arrangements carefully to ensure clearly defined roles, optimal working arrangements, intellectual property ownership, data and information rights, and favorable or at least acceptable economics. After all, mobile is about making money!

What is the cost and benefit of enabling loyalty accounts on mobile devices? If integrated with promotions, payment or other functionality? How will enabling gift cards on mobile devices increase purchase and redemption rates (and sales)? If integrated with promotions, payment or other functionality? What further integration of online and mobile channel functionality/experience is worth investing in? Does building your own mobile wallet for integrating branded functionality on mobile devices make sense? Is the cost of upgrading laser scanners to image scanners at point of sale likely to be covered by the incremental sales and operational benefits from scanning mobile cards, coupons, loyalty points, etc.? Is now the time for piloting or rolling out contactless (or EMV) terminals at point of sale? What further in-store wireless infrastructure, scanning technology or devices would be a worthwhile investment? Could fraud or shrinkage be reduced by leveraging mobile technology or capabilities, and if so, at what cost? How can mobile commerce revenue-sharing partnerships be structured in a manner that works well economically for you as well as for your partners?

4. Link Mobile Initiatives/Investments to Bottom-Line Financial Results

Perhaps the most important aspect of ensuring mobile success is developing a rigorous financial framework for linking mobile decisions, initiatives and investments to bottom-line financial impact and resultsand then using that framework in a disciplined manner throughout all mobile planning, decision-making, implementation and results tracking. If well developed, a rigorous mobile financial framework can help to answer important questions such as:
Will over-the-air provisioning of credit cards to mobile phones lead to higher activation, usage and other financial benefits as well as reduce card production and replacement costs?

EXHIBIT 6

Relative Potential Impact of Mobile on Retailer Bottom Line


1. MOBILE ACCESS, MARKETING 2. MOBILE LOYALTY, INCENTIVES 3. MOBILE GIFTING, PAYMENTS 4. MOBILE DATA, ADVANCED ANALYTICS

Remote

$$$

$$

$$$

$$

In-Store

$$$

$$

POS

$$

$$$

$$$

$$

Source: Kurt Salmon

INTEGRATED MOBILE PAYMENTS AND COMMERCE

Mobilizing for Mobile Success


A Suggested Approach Most financial institutions and retailers are already taking steps toward increased participation and involvement with mobile banking, payments or commerce. However, because mobile initiatives tend to be evolutionary and somewhat fragmented, we would suggest stepping back for a moment and taking a mobile breath. In the context of overall strategic objectives and business priorities, think about the four keys to mobile success outlined in Exhibit 7 and whether some adjustments or additions to your current mobile approach are advisable. EXHIBIT 7 For example, has a thoughtful, sequenced mobile roadmap been developed? Are integrated mobile offerings and functionalities targeted? Is collaboration with a few effective partners progressing under favorable commercial terms and conditions? Has a rigorous mobile financial framework been developed and is it being applied across all mobile planning and activity? Whether just getting started with mobile or advancing toward mobile leadership, here is a suggested program approach, or progression, that can help lead to mobile success:

Suggested Mobile Program Approach


1. MOBILE ACCESS, MARKETING 2. MOBILE LOYALTY, INCENTIVES 3. MOBILE GIFTING, PAYMENTS 4. MOBILE DATA, ADVANCED ANALYTICS

Establish a Rigorous Mobile Financial Framework

> Identify specic revenue/cost impacts and timing of di erent mobile initiatives > Quantify impacts and relate to nancials of di erent groups and the company > Put into place nancial models to support ongoing mobile decision-making > Prioritize initiatives/investments based on objective assessment of costs/benets > Factor in market/competitor intelligence and insights around mobile economics > Build clarity/consensus regarding mobile goals, objectives, overall roadmap > Cut through noise and clutter from proliferation of mobile tech/service providers > Establish clear view of capabilities needed and specic partner requirements > Identify/engage potential partners and structure appropriate collaboration > Ensure cross-organizational teaming, coordination with ongoing initiatives > Develop detailed project plans including costs, benets, resources, IT, risks, etc. > Establish a mobile program o ce to facilitate/accelerate implementation > Put into place ongoing methodology for tracking/reporting mobile metrics/progress > Continuously link progress to nancial impacts/results using framework above > Rene priorities, sequencing, implementation approaches, etc. as needed

Develop a Thoughtful, Integrated Mobile Roadmap

Determine Optimal Technology/Service Partners

Operationalize in Coordinated, Sequenced Manner

Track Results, Adjust to Ensure Bottom-Line Impact


Source: Kurt Salmon

INTEGRATED MOBILE PAYMENTS AND COMMERCE

Importance of Senior Management Guidance and Commitment The success of mobile initiatives requires guidance, involvement and commitment from senior management as these initiatives typically cut across the organization and require clear direction from the top to help each group understand the objectives, including, what is required of them. This helps to ensure that mobile initiatives are aimed at important strategic priorities such as enhancing customer experience and loyalty, as well as profitability. What could be more important than this! Kurt SalmonYour Partner for Achieving Mobile Success Kurt Salmon is a leading global management advisory firm with a 75-year track record of helping financial services and retail clients achieve success through strategic, organizational and operational innovations.

We bring specialized capabilities and expertise in customer profitability, loyalty and rewards, product development and lifecycle management, cards and payments, credit and risk management, retail merchandising and planning, branch and store operations, and physical and financial supply chainin addition to mobile banking, mobile payments and mobile commerce. Kurt Salmons consultants have also served in senior executive roles at banks, retailers, payment networks, mobile companies and technology firms. Our hands-on experience and practical, bottom-line orientation contribute to implementable and profitable solutions for our clients. We look forward to an opportunity to help you make mobile a success. v

Allen Merrill leads Kurt Salmons Global Financial Services practice. Previously, Mr. Merrill was a Principal at McKinsey & Company, a Director at Bain & Company, and Head of A.T. Kearneys Global Financial Services business. He has also served as Group Executive and Head of Global Payments Consulting at MasterCard Worldwide and, most recently, was President of CASSIS Americas, a mobile payments and commerce company. Mr. Merrill has extensive experience working with banks, networks, retailers, payment processors and others on strategies and initiatives related to mobile commerce, mobile cards and payments, and mobile loyalty with a distinctive focus on the profitability of mobile banking, payments and commerce. He received his Bachelor of Arts with honors from the University of North Carolina at Chapel Hill and holds graduate degrees from Harvard University in Finance and Oxford University in International Economics. Michael Archer is a Partner leading Kurt Salmons Consumer Financial Services practice. Prior to joining Kurt Salmon, Mr. Archer was Principal and founding partner of the Manhattan Innovation Lab, LLC, an early stage business accelerator and consulting services company. He applies three decades of multi-national and cross industry experience to refine, reshape, and reengineer his clients business operations. His business and marketing management acumen were developed in leadership positions at Citibank, Colgate-Palmolive, and MasterCard Worldwide. Mr. Archer has successfully built and launched new products and businesses, consulted to the leading financial services organizations in the U.S. and Latin America, established and rebuilt sales territories, and forged critical partnerships often extending successful strategies and functions across borders and industries to grow businesses.

INTEGRATED MOBILE PAYMENTS AND COMMERCE

AUTHORS
Allen K. Merrill President, Global Financial Services 650 Fifth Avenue, 30th Floor, New York, NY 10019, USA D 212.521.0212 F 212.319.9476 C 631.742.2040 allen.merrill@kurtsalmon.com Michael Archer Partner, Consumer Financial Services 650 Fifth Avenue, 30th Floor, New York, NY 10019, USA D 212.521.0249 F 212.319.9476 C 917.270.9813 michael.archer@kurtsalmon.com Kurt Salmons Global Financial Services practice works with the worlds leading retail, corporate and investment banks, consumer finance companies, asset managers and investment funds, insurance companies, payments businesses and financial sector regulators. Our global team brings deep industry knowledge and experience, strategic insight and operational expertise, and a passion for delivering measurable bottom-line results. For more information, go to www.kurtsalmon.com.

2012

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