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Payments' major opportunity

Three key points should be understood when it comes to what I call the "virtuous circle of financial capability": The new regulatory environment presents an opportunity to lead consumers from payments into lifelong prosperity. With deep customer ties and reserves of trust, tech-savvy banks operating as payments providers have a major opportunity. Well-managed payments leads to good budgeting, which leads to wealth accumulation. Taken in isolation, and compared with other products along the financial services spectrum, the business of payments would seem to be relatively low risk from a supplier perspective, with minimal implications in terms of regulatory compliance in the area of customer welfare. Hence, payments in this respect offers a relatively attractive business proposition. That may be true to a point but to regard payments in this light is ultimately self-defeating and betrays a regrettable lack of ambition. Payments are both the source and the DNA of an individual's financial profile and consequently are the building blocks of the sometime mythical — but always aspirational — '360° view of the customer'. It is possible to trace a line from the series of financial scandals that culminated in the crisis that began in 2007 and the influx of new entrants into the payments business. Banking misdeeds rooted in the capital markets nonetheless had direct impact on customer welfare. The crisis prompted a wave of consumer protection regulation in tandem with the more liberal access to the payments business we have today. The crisis has also made customers in general more keenly aware of the impact the once-remote financial system can have on their financial well-being and cast incumbent banks in a negative light such that new entrants could conceivably prosper. The story up to the crisis is that for too long too many banks traded on customer ignorance. The propensity of the financial services business to profit on this was openly recognised by the Protection Principle of the G20 Financial Inclusion Action Plan, which states that "the mix of innovation, new service providers and inexperienced consumers brings new risks of consumer fraud and abuse, as well as the possibility of technical or human error around financial services". Hence "an equitable and transparent consumer protection infrastructure is a vital part of a broad financial inclusion framework". Against that background, regulators have implemented reams of legislation to counter customer vulnerability. But instead of seeing such compliance issues in negative terms, more enlightened providers should spot a major opportunity. Financial capability Financial access and inclusion is one ingredient necessary for optimising customer interaction with the financial system. The other is financial capability. The deficit in financial capability brings the opportunity to extend the reach and sophistication of the customer proposition with all of the business rewards that entails. This is about bringing millions of individuals — many of whom reside in highly developed economies with highly sophisticated banking systems — who cannot identify and cater for their own financial needs onto a path of increasing awareness of the possibilities financial products and services bring. Some of these are people who find it impossible to make and stick to a budget and who flounder into insolvency; who have poorly structured balance sheets; who fail to protect themselves through insurance; and who lack the confidence to take on appropriate levels of risk in investment. But the vast majority are simply those who lack the engagement and/or motivation to apply themselves or cultivate habits that can make such a material difference to their lives. With their deep customer ties and reserves of trust, banks operating as payments providers, armed with new technological know-how, are ideally placed to lead in this regard. The above is an excerpt from the Lafferty thought leadership report Payments Power: How digital payments will unlock massive latent demand in consumer banking. The report is the culmination of a year of research by Peter Kinahan, a veteran expert in payments, supported by the renowned Lafferty team. To find out more or to order a copy visit the Lafferty Reports Store.

Executives photo JCB
The CEO interview: Ichiro Hamakawa of JCB

Ask a sports fan about the "Tokyo Olympics" and it's likely that he or she will mention Tokyo 2020. Fewer will recall the profound impact of the 1964 Games on Japanese society. Prior to that year, travel from Japan was restricted mostly to businesspeople, sports teams and government officials. But following the games of 1964, the government opened the way for Japanese people to travel abroad. By 1980, that number grew to more than two million Japanese travelling overseas, but that was only the start. By the late 1990s, almost 17 million Japanese tourists travelled abroad. Many of them carried JCB credit cards. JCB was established in 1961 and began its international expansion in 1981 with a focus on markets popular with Japanese tourists, although the company has moved into several non-tourist markets in recent years. It has grown into being a payment network and a proprietary card issuer. JCB issues proprietary cards as well as JCB-branded cards in cooperation with financial institutions and their affiliates in Japan. As the leading merchant acquirer in the country and with a large acceptance network, it has been open to doing deals with foreign players. JCB has also been a pioneer in terms of technology, particularly with contactless cards and lately with its NFC-based technology, J/Speedy. The company's home market, however, has its own peculiarities. Credit cards are more popular than debit cards at the POS, but Japanese cardholders also prefer to pay off their outstandings at month's end, with only about 15 to 16 percent rollover on a monthly basis in 2016, according to Lafferty Research. Inside Japan, merchant services charges account for 47 percent of credit card revenues, with a further 27 percent coming from non-interest revenues. Technologically advanced as both country and company are, Japan and JCB see roles for themselves in exporting some of that technology to countries elsewhere in Asia and beyond hoping to increase and develop their payment industries. The company believes it has plenty of room to expand internationally. Earlier this year, Lafferty News met with JCB chief executive Ichiro Hamakawa in London (pictured, left) to speak about the Tokyo-headquartered company's plans for the future. Appointed to the role in 2014, Mr Hamakawa had previously spent ten years at The Bank of Tokyo-Mitsubishi UFJ Ltd, which is one of the major shareholders of JCB along with Sumitomo Mitsui Banking Corporation and Toyota. JCB's organisational structure is divided into issuing and acquiring, and also the brand business, which is separated into domestic and international businesses. Within that international business, there are overseas branches and headquarters. JCB puts emphasis on partnerships When we met Mr Hamakawa, he was in the middle of a tour of the business' overseas operations. As he turns his attention to international expansion, he says the success of the business will depend on building solid partnerships, and using JCB's strengths in technology development. "Japan is an important market but we also think it's important to work in other countries, especially in Asia," he says. "We started from China, Taiwan and Korea and now ASEAN, India and also Russia are important for us. We are different from the other schemes. We form alliances with other players and regional schemes. For example, with Discover we open up the Japan market, and Discover opens up the US market for us. This alliance is expanding, so JCB is planning to open up the Asian market for Discover, and Discover is planning to open up some of their strong countries for JCB." JCB has some 100 million cardholders globally, with 75 percent of those being Japanese card members and the remaining 25 percent overseas. Unlike Visa and Mastercard, says Mr Hamakawa, JCB is very much in the alliance business. "We already have alliances for local schemes and we intend to expand on that. Whenever we talk with them, we feel that people are thinking about making local schemes in each country. JCB's approach might be different from ones of Visa and Mastercard. JCB is very flexible to our partners. We co-badged cards last year, in Pakistan and Myanmar, and also we've started a discussion with local schemes in other countries. We'd like to have a win-win situation with these partners." Twenty of the 25 percent of JCB's business overseas is in its original overseas markets of China, Korea and Taiwan, with the remaining five percent in the ASEAN countries, Russia, and Pakistan. "That five percent is expanding rapidly," he adds. Mr Hamakawa has also been watching developments in India with interest. "The strong leadership under Prime Minister Modi means that India is changing from a cash society towards a cashless society, so it's a really good time for us to be starting business there. In India, we are starting with debit cards. We also have an alliance with NPCI in India and MPU [Myanmar Payments Union] in Myanmar." Myanmar, incidentally, is a very new arrival to the cards business — with more than 99 percent of transactions still being done in cash. A technological edge? But Mr Hamakawa stresses that JCB's partnerships extend beyond issuing and acceptance deals. JCB is also keen to impress with its technological credentials. "We think alliances with partners in the technology area are very important as well," he says. "We are putting a very large portion of our investment into technology and we think we will do so in the future." While contactless has been making inroads in Europe only in the last two years, Japan has been using contactless technology since 2005, when JCB launched QUICPay. That early start in contactless has also made JCB a world leader in NFC, leading an NFC-based mobile payments system pilot project in the Netherlands in 2006, which is still the pre-smartphone era. But the technological advances aren't always easy to integrate, with the Japanese having to adapt to imports from places where technology is less advanced — and trying to convince overseas buyers of the superiority of Japanese technology. Mr Hamakawa explains that many Japanese people have been using 'mobile wallets' before the term became popular in the rest of the world. "In Japan, we have our own kind of mobile which is still used by a lot of the population," he says. "This is the Japanese phone with a mobile wallet called Osaifu-Keitai ." This wallet, which is near ubiquitous in Japan, is operated using NFC Type-F (or FeliCa) technology that was developed by Sony. Osaifu-Keitai is used on transport networks, with its ubiquity forcing overseas manufacturers to adapt to Japanese tastes. When Apple was pushing for access to Japanese markets, it decided to develop a second system based on FeliCa's Suica , which is widely used in Japan as a contactless card for transport. The iPhone's TouchID is disabled when using Suica so as not to hold up other travellers unnecessarily. It was important for Apple and Japan to adapt to one another. "Japanese people like iPhones" says Mr Hamakawa. "The iPhone has more than a 50 percent share of the smartphone market. Since October 2016, Apple introduced Apple Pay in Japan, and its use is increasing. Apple Pay also supports Type-F, which is FeliCa-based technology used [throughout the] Japanese transportation network. That means Apple Pay can support all transportation NFC in the market. With that unique aspect, the speed of Apple Pay's expansion in the market will be faster than in other countries." JCB's contactless acceptance infrastructure J/Speedy is not based on Type F standard, but JCB began expanding J/Speedy technology as early as 2006, when it began offering J/Speedy in Taiwan. That expansion has continued steadily, with a recent partnership between JCB and NETS in Denmark. "The Dankort scheme is a good example where they use J/Speedy technology in their business," says Mr Hamakawa. "This kind of arrangement, to use our own contactless scheme with a local scheme, will be key to success." Japan remains fond of cash Despite its technological prowess, Japan remains a country rather fond of cash, and Mr Hamakawa believes that a variety of payment methods will survive. "The mobile phone will definitely expand and increase in number," he says, "but the plastic card will still remain in some portion. Ten years ago somebody said cards would disappear in ten years, but it has not happened. Seventy percent of the settlement in Japan is cash so we have to leapfrog to something. I think there will still be a channel for cards, and for cash." Mr Hamakawa reflects that major changes are underway in the types of alliances that card networks make, and the partners they work with. "The number of and the kinds of players are changing, and that's especially true in North America and Europe. It used to be that there were card schemes, and banks controlling all the issuing and acquiring business. The new technology means that the profitability of the card business is changing. That function is now divided, so newcomers are taking new roles in that market. Banks cannot control everything so each area is more specific, and has its own specific players." This is particularly true in the acquiring business. Many banks have voluntarily or involuntarily sold their acquiring businesses, and regulation and market forces have opened up new relationships in the world of e-commerce acquiring. "We used to have partnerships with banks as licensees, but now we are having conversations with new players," says Mr Hamakawa. "These new players have different agendas than banks, and we think of that as an opportunity for us." What other immediate opportunities does he see ahead? "One of the big issues is the possibility that the transaction processing of the existing scheme is changing. Maybe the role of the brand will be changed. The final picture of the role of the brand in five or ten years or in the new world is not clear. We think partnerships are very important, therefore we always have to consider what kind of partners we should work with." As a privately owned company, JCB is less transparent than Visa and Mastercard — but also has less access to capital markets. "We are thinking that access to markets can be both an advantage and a disadvantage," says Mr Hamakawa. "Of course taking the company public would give us access to capital markets, but the cards business sometimes requires a long-term decision on top of a short term profit. So at the moment we do not consider an IPO. Financial performance and profitability over recent years remain on track." However, people inside the industry say that they know very little about JCB and find it hard to get information about the company, a point that Mr Hamakawa concedes. "It is important for JCB that people know about us and our unique position," he says. "In the past, we haven't done enough to inform people about JCB. However, we have started endeavours to change. For instance, this year we will be a key sponsor of Money2020 Europe." Expect then to see a more public face of JCB in the near future.

The digital reformation

To serve your clients, don't think like an impressionable consumer. One defining characteristic of machines, not often remarked upon, is that they never sleep. Once upon a time we used to impose our circadian rhythms on computers, turning them off at night as though they too needed seven or eight hours of slumber. Now the tide has turned, and we reluctantly bid our favourite device farewell as it chugs on through the night, gathering messages and updates with no cease. Having submitted to our biological imperative for unconsciousness, we turn to our devices again for updates when we awake, often attending to their needs (urgent security patch) before our own (brushed teeth). But our IT systems are not as idle as we might suppose while our weary heads dream on their pillows: every minute of every day, every nanosecond indeed, these networked machines are building and refining their picture of us both as individuals and as a species. How we tend to hold our screen has become a data point for biometrics, for example. Human beings, despite often wishing otherwise, need a good night's rest to renew themselves before returning to the daily fray. But, as Seth Godin pointed out in a typically stimulating article last week, IT never stops "nibbling". The variety of ways in which this tendency manifests itself are now numberless. Over twenty years ago I was, for a spell, part of a standing army of clerks and paralegals that scoured and summarised documents in law case discovery: aggregated decades of labour that can now be accomplished in minutes. The haulage industry, starting in the United States, is now looking at an automated future in which millions will find their judgment skills supplanted by electronic processors, once safety and insurance issues have been resolved. As humans we lose interest in particular subjects: bitcoin was all the rage for a while, then the blockchain, then cybersecurity fears. But, whether we are engaged or not, the technology is whirring ever onward, indifferent to our fads. Investment may wax or wane as our motivations and interests change, but the underlying trend seems inexorable. Take some recent stories: "Uber plans to test on-demand flying cars network by 2020" "Facebook interface may allow individuals to 'speak' using nothing but their thoughts" "New app uses AI to create neural face transformations" The future is not only already here; it is fast vanishing in our rear-view mirror. A reshaping force The seeming stability of the smartphone in our lives for ten years now can easily blind ourselves to this dynamic of constant iteration. In life and in business, we tend to think in terms of tangible plateaus: first came cinema and radio, then television, then computers, then smartphones. Primed by the original iPhone launch in particular, we are constantly on the look-out for the next plateau: will it be Google Glass? Apple Watch? Amazon Echo? But this, essentially consumerist view is too crude to do justice to the upending currently underway. In fact a more accurate understanding would be to constantly bear in mind that digital is more like a gravitational force, reshaping how things are done all around us — and, increasingly, within us. To understand our customers and clients, we must realise that whatever their personal disposition — from selfie-mad to luddite — their behaviours en masse are all being reordered by digitalisation. How we eat, dress, move and think are in the midst of transformation. To explain why IQ scores have been increasing from one generation to the next, the theory has been advanced that people before World War I did not care for hypothetical notions. By contrast, we have become ever more adept at abstractions, a process that has been accelerated by the tools now at our disposal. In recent weeks there has been a fuss on social media about FaceApp, which with a few clicks produces a retouched photo showing us as we might have been had we been born into the opposite sex, or as we might appear when elderly. Simulation-running, whether we partake of it directly or via our policy-makers or innovators, is affecting how we think — and the expectations we have of our money. The challenge is to keep this gravitational force in view, even when it is disguised as a series of consumer tech wonders.

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