Overview of Business Models in Retail...

EDC Council Frankfurt

November 2012

© Edgar, Dunn & Company, 2012

Overview of Business Models in Retail Payments

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San Francisco

Sydney

London

Atlanta

Frankfurt

Singapore

Paris

Edgar Dunn – Deep Experience with Global Reach

Management consultancy focused on payments since 1978

Deep expertise in over 30 countries including Germany, France, Spain, Italy, Benelux, UK, USA, Asia Pacific

We help providers to develop their payment business

We help merchants to optimize payment costs and revenues

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Why is a bank / payment service provider in retail payments?

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Role of Payments: Philosophical Continuum

Cost of Business Operational function

“Necessary evil” to support lending and deposit taking for retail banks

Relationship Building

Retention of broader relationship

Account acquisition

Cross-selling to existing customers

Defensive Offensive

Profit Generation

Own Services

Others’ Services

Own P&L

Stand-alone profitability*

Distribution channel

*There are different manners to evaluate profitability for products such as debit cards: (1) stand-alone profitability (as a « stand-alone product ») (2) and/or cash and cheque substitution economics (3) and/or current account economics

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A. Value chain role Profits driven by the role played

in the value chain (where?)

B. Product set Profits driven by the types of

offering (what?)

C. Focus / niche Profits driven by a focus

on specific segments (who?)

D. Business processes Profits driven by internal processes

(how?)

Assuming that most banks / providers want to increase payments-related profitability, it is important to understand successful profit models

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Profit Model A2

Provider of customized

solutions

Business model description

Upfront investment to develop a customer-specific solution

Ensuring long-lasting and sticky relationship

Examples

IBM Payment Systems , positioned as « solution integrator »

Profit Model A3

Value Chain Position


In payments, most profits are typically derived from distribution / managing the customer relationship and not from “production”

Examples

Woolworths (large Australian retailer) set up a Joint Venture with a retail bank (Commonwealth Bank of Australia and then HSBC)

There are 3 profit models related to value chain role – where?

Profit Model A1 Network Profits


Central intermediary that switches communications from multiple end points

Connect large numbers of buyers and of sellers and benefit from « network effect » (each new connection makes the whole network more valuable)

Examples

MasterCard, Visa

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A1. Network profits – International card schemes play a central role and benefit from “network effects”

Value proposition

Connect large numbers of buyers and of sellers and benefit from « network effect » (each new connection makes the whole network more valuable)

Offer global acceptance to cardholders and a large number of users to sellers

International Schemes Sources of revenue

Domestic assessment fees: Fees charged to issuers and

acquirers

Based primarily on the domestic volume of activity of cards

Cross-border volume fees: Fees charged to issuers and

acquirers

Based on the inter-country volume of activity of cards

Transaction processing fees: Fees charged for both domestic

and cross-border

Based on the number of transactions

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IBM Payment system

Positioned as « solution integrator » focused on large corporations

Provides « payment sub-ledged » / accounting (ERP-like) package integrated with payment gateway functionalities

Provides integration tools and consulting support for integration across multiple channels

A2. Customized solutions provider – IBM provides services and integration options around the core service of a “payment gateway”

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A3. Value Chain Position – Woolworths focuses on payment distribution, one of the most profitable parts of the value chain

Gift Cards

Credit cards

Prepaid cards

A large Australian retailer set up a Joint Venture with

HSBC

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Profit Model B1

Value Added Services


No or limited profit from « base » products but higher profits from ancillary services

Examples

Google Wallet strategy (see next slides)

Other example: CyberSource charge a low basic txn fee, plus fees for optional services such as tax calculation, delivery address verification, etc.

Profit Model B2 After-sales profit


Limited profit from initial sale and higher profits from follow-on product sales

Examples

Acquirers that enable services beyond card acceptance via the installed POS terminal

Amazon sells its tablet (Kindle) at cost, and users can then buy digital content on Amazon’s website

Profit Model B3

Product portfolio


Portfolio of products including mass-market / low-margin products and niche / high-margin products

Examples

Banks in countries like Australia or USA have started issuing Amex (e.g. companion card) to specific segments of existing customers to obtain higher share of wallet and higher margins

There are 3 profit models related to product sets - what?

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B1. Value Added Services – Google does not focus on payment revenues but is trying to pursue value added services

$

& Mobile Contactless / Proximity

Mobile Money Transfers & Bill Payments

Mobile as POS

Mobile Online Payments (Goods & Services)

Mobile Online Payments (Digital Goods)

Loyalty Transit & Access Couponing & Offers

Value Added Services

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B2. After-sales profit – ANZ is enabling “Extra Services” via its installed POS terminals and a partnership with Touch Networks

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Australian banks analyzed their card portfolio profitability to identify segments requiring pricing / product initiatives, and decided to offer American Express cards as Companion cards

B3. Product portfolio – Australian banks offer American Express cards as “Companion cards”

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Profit Model C1

Specialisation profits


Profits driven by a focus on specific customer segments that have unique needs

Therefore requiring sector-specific knowledge and products

Examples

Wright Express (WEX) focused on niche B2B products (e.g. fuel cards, virtual cards for travel)

Acquirer Chase Paymentech developed a leading CNP platform , and got a 50% market share in US e-commerce

Profit Model D2

Cross-sell into installed

base


Primary focus on cross-selling more products to existing customers (as opposed to recruiting new customers)

Examples

Wells Fargo has had a single minded focus for many years to increase its number of products (debit cards, credit cards, etc.) from 4 to 8 per customer

There are tw0 profit models related to a targeted focus on specific segments

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C1. Specialisation profits – Wright Express offers niche B2B payment solutions for specific industries

Single-use virtual cards for travel industry

Fleet cards

Wright Express (renamed WEX), an American issuer focused on niche B2B products

E-payments in healthcare

About WEX Fleet cards Travel solutions Hospital solutions Education solutions Investors

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Vision developed by their CEO (Richard Kovacevich) in 1992 and updated in 2003, including a list of 10 strategic initiatives

Most important initiative: single-minded focus on cross-selling from 4 to 8 products per customer. Results (end of 2010): achieved 6.1 products per customer

C2. Cross-sell into installed base – Wells Fargo’s single-minded focuses on cross-selling

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Profit Model D1

Transaction scale


Profits driven by higher volumes of transactions that generate economies of scale

Examples

Processors like First Data pursue transaction volume across multiple geographies in order to obtain economies of scale

Profit Model D3

Low-cost Internal

Structure


Profits driven by a structural difference (e.g. single plane type for RyanAir, direct marketing for Dell) creating a sustainable cost advantage

Examples

Players like ING or Boursorama only use remote channels (no or very limited branch network) to market and service their customers

Profit Model D2

Process Innovation


Profits driven by innovative processes that generate value for buyers and/or lower comparative costs

Examples

Intuit provides integration between payments and business softwares

BillMeLater (credit at POS) delivered convenient processes for consumers and for merchants

Three profit models related to business processes

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D1. Transaction scale – First Data’s company size gives it a critical edge against smaller processors

First Data – Key figures in 2011 First Data has business operations in 34 countries and 6 continents

Serves over 6.2 million merchant locations, over 2,000 card issuers and their customers and approximately 24,000 employees

Manages over 56 billion transactions worldwide

Supports 4000 financial institutions

Key Observations Processors are experiencing margin pressure due to the cost of multiple technology platforms and industry consolidation

First Data has set a strategic focus on profit and growth drivers: international expansion and merchant services

First Data maintains several gateways and more than seven merchant acquiring platforms

Thanks to its global expansion, First Data is still very competitive

Payment processing

M-commerce Fraud management

Loyalty

Debit and credit cards

Reporting tools E-commerce

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D2. Process Innovation – Intuit integrates payment acceptance with invoicing and accounting software

Reporting software

Accounting software

Payment acceptance

Pay employees (Payroll services)

Intuit has created an innovative eco-system integrating payment acceptance with invoicing accounting software and reporting tools

4.5 million active QuickBooks customers

Global net revenues reached $4 billion with $350 million from payment solutions (equivalent to 9% of total revenues)

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D3. Low-cost internal Structure– ING Direct as one example of low cost online bank offering attractive consumer pricing

ING Direct is an example of online low-cost bank without local branches (except ING café)

ING Direct offers a current account and a Mastercard gold card free of charge (under the condition of users deposit €700 per month)

Innovative services:

Comprehensive mobile banking app

User-friendly expenditure management tool (Budgetizer application)

ING Direct Café: check your bank accounts via Ipads in a pleasant environment (coffee place with sofa…)

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Do you want to be a full service provider like Lufthansa ?

Do you want to sell more services around your core activity like Virgin ?

(e.g. limousine services)

Do you want to focus on a profitable niche like Heli - Air (Nice –Monaco by helicopter)?

Do you want to « reinvent » industry processes like Ryanair (low cost airline)?

JetBlue

Can bank / payment service provider make a profit in retail payments? Yes, if there is a clear focus on specific business model(s)

Value chain Product

Niche Process

Contact us

Edgar, Dunn & Company 42 rue Vignon 75009 Paris France

Tel +331 4007 9224 Mobile +336 7937 5547

[email protected]

Pascal Burg Associé France

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Overview of Business Models in Retail...

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