PAYMENTS TRANSFORMATION
A Merchant’s View
of Card Payments
in Asia Pacific
Harry
Hughes
Manager
Payments Transformation
Matthew
Ding
Partner
Performance & Technology
James
Mckeogh
Senior Manager
Simon
Gleave
Partner in Charge
Asia Pacific Financial Services
Thomas J.
DeLuca
Managing Director
Advanced Merchant
Payments Ltd.
Nigel
Hobler
Partner
Tax
Jeremy
Fearnley
Director
Payments M&A
Egidio
Zarrella
Asia Pacific Partner,
Payments
A Merchant’s View of Card Payments in Asia Pacific | 1
Contents
1
2
6
11
12
15
16
18
20
23
24
25
Our contributors
Introduction
1 Layers of complexity in the payments chain
- Managing multiple card brands
- Fragmentation and sales channels
- Systems
- Geography
- Treasury and bank reconciliation
- Implications
Case study: Next generation hotels
2. System strategy and channel architecture
Case study: Airline industry innovation in onboard retail
3. Cash management across the payments silos
4. Cross border and repatriation issues
5. Innovation, M&A and future states in payments ecosystem
Case Study: A cautionary tale for online retail
C-suite considerations
Contact us
While there are signs of a gradual recovery globally, many businesses, including
those in Asia Pacific, are still focused on cost control and building business resilience.
Executives are continuously looking for new ways to enhance their company’s bottom
line and gain a competitive advantage. In China and other parts of Asia Pacific, they
also need to consider whether they have effective and unified platforms in place that
will allow them to meet relatively ambitious growth targets.
For companies that rely upon credit card and other electronic systems for their sales to customers, there may be substantial opportunities to reduce costs by improving the performance of payments platforms. Doing so can yield other benefits in the form of improved cash flow, higher sales volumes, reduced opportunity costs (for example the cost of lost sales) and tax efficiencies.
In KPMG’s first paper on the Asia Pacific retail payment sector, Card payments
in Asia-Pacific: The state of the nations,
published in July 2009, we discussed how different stakeholders in the card payments ecosystem were interacting and noted the evolving pressures on each of these participants. From there we explored several potential ‘future states’ for the industry.
A Merchant’s View of Card Payments in Asia Pacific | 3
Among other things, we noted how retail payment sectors in many parts of Asia Pacific have historically lagged behind other regions in terms of advances in technologies, regulations, and business practices. The result is payment processes that are fragmented and inefficient relative to markets in many other parts of the world. However, we also noted that there are many examples of innovation and that in many ways the payments ecosystems in Asia Pacific have been rapidly catching up with, and some cases surpassing, more mature markets.
This paper is specifically dedicated to the position of the merchant in the value chain. We believe that almost any business which accepts cards for payment has an opportunity to improve its bottom line by focusing attention on its payment practices and treating electronic payments as a core element of business and strategic planning, not merely a by-product of everyday
The issues are largely irrespective of business category or size, although they can become more pressing as a business grows. They are applicable to retail outlets, airlines, hotels, restaurants, telecom companies or e-commerce businesses. In many respects, an airline selling tickets on its website has more in common with a small online bookstore than with other points of sale in its own business (for example, the airline’s retail desks at various airports around the world). It is by focusing upon the channel through which payment is effected that opportunities for increased efficiencies and improvements to the bottom line are most easily recognised.
We cannot assume that a sophisticated multinational corporation has adequately controlled its payment processes for maximum benefit, particularly in these days of ever-more-powerful technologies and more demanding regulatory transparency. It may have,
The traditional payments cycle
Card holders
Merchants
Issuing banksCard schemes Acquiring banks
can benefit from a thorough review of their payment channels, sizing these up against overall strategic objectives. Some organisations have built their competitive advantage on the back of payments processing efficiency, but that advantage may erode over time as they expand into new markets and new technology starts to render existing platforms obsolete.
Ownership is also critical, since responsibility for the payment channels is shared between various parts of the business. The finance function will always remain a key stakeholder, but IT or operations, treasury and often, sales, marketing and customer-service functions are also stakeholders. As a result, it is rare that a company can definitively point to one person who ‘owns’ the payment channel, and this can determine whether payments systems are really handled in a strategic and proactive manner.
At best, such situations result in inefficiencies in technologies and financial costs, the financial significance of which can be measured in real sales or savings not attained. At worst, such situations expose the business to dramatic and systemic financial risk, such as a business facing a customer service and PR nightmare of negative news headlines when the database of its best customers’ credit card details has been compromised.
In this paper, we focus upon payments from a ‘top-down’ perspective and challenge the reader to consider how their company’s reliance on cards as a method of payment fits with the company’s objectives in terms of growing the business, performance and IT infrastructure, treasury and cash-flow management, and appropriate tax structures.
“We believe that almost any business which
accepts cards for payment has an opportunity
to improve its bottom line... treating electronic
payments as a core element of business and
strategic planning”
Layers of complexity in the
payments chain
From the moment a cardholder tenders their card account details for payment to final deposit of hard currency into a merchant’s bank account, there have traditionally been five major stakeholders in the payments ecosystem: issuing banks, cardholders, merchants, acquiring banks and card schemes. The process can also involve other entities. Different entities will be involved according to the environment in which the transaction occurred, the card brand tendered for payment and by jurisdiction.
For this reason, an alternative way to consider the payment chain is as a series of ‘silos’, which facilitate the movement of transactions from point A (where the merchant exchanges goods for the customer’s promise to pay) to point B (where the merchant has ready access to the funds for such
transaction), with various stops and diversions along the way.
Complexities are evident in the sheer number of payment silos which arise as a business grows, particularly across sales channels, currencies, and geographically disparate markets. This can inevitably translate into some inefficiency or lost opportunity when viewed from the perspectives of sales, processing costs, technology and systems costs, tax structures and treasury management.
To better appreciate this complexity, it is helpful to consider the nature of the basic payment silo, a process which will be familiar to anyone who has made a purchase with a credit card.
Section or Brochure name | 7
Bank
Geography
System
Channel
Card
Customer
Complexity Efficiency HighHigh Number of silos High Low
Managing multiple card brands
Our first silo involves a merchant with one point-of-sale (POS) device, attached to the world both by electric cord and telephone line, and programmed with a specific merchant account number associated with the merchant, such that transactions processed through that device are ultimately funded to the merchant. The POS device would have been issued to the merchant by the local bank with the merchant’s overriding consideration likely being to obtain the lowest merchant discount rate (MDR) for its transactions. To simplify we can simply regard the silo as a ‘Card’ going into a ‘Box’ which is linked to a ‘Bank’. As payment silos operate, the merchant account obtained from the local bank permits the merchant to accept Visa® and MasterCard® branded card products, but likely no others. However, most merchants appreciate the customer-service element of permitting a willing customer to pay with the card of their preference, even if that entails the extra cost of a higher MDR on some card brands. Consequently, this merchant will have likely signed up for merchant accounts with American Express®, Diners®, JCB® and ChinaUnionPay®. As a result, we can view the merchant’s payment channel (or silos around Cards), starting with the retail POS device (the ‘Box’), and running to each merchant account relationship with the specific scheme (the ‘Card’) (perhaps five such accounts in our example, as Visa/Mastercard run on the same account). Each of these deposits transaction proceeds into the merchant’s designated bank accounts (the ‘Bank’), and each requires its own reconciliation. Bank Geography System Channel Card Customer Complexity Efficiency High
High Number of silos High Low
Bank Geography System Channel Card Customer Complexity Efficiency High
High Number of silos High Low
Fragmentation of sales channels
In the same way that a merchant elects to accept multiple card brands in the name of customer-service, so too does it suit the merchant to allow customers to complete their purchases through ‘card not present’ (CNP) environments. These include payments made over a phone (mail-order/telephone-order, or MOTO), through the Internet, and increasingly, using mobile devices. Reflecting the higher risk of CNP transactions, the MDR typically increases by 0.5 percent. In relative terms, this is akin to a 20-30 percent increase in the cost of card acceptance.
To minimise the risk of a chargeback situation arising for unauthorised transactions and to maintain favourable terms for transactions through traditional channels, the merchant needs to bifurcate the business by sales channel and seek a new set of merchant accounts from each card scheme specific to the CNP business.
Another necessary sales channel for any merchant is an Internet-based sales channel, from which people can order and pay directly. In doing so the merchant must recognise that there are several available paths to choose from, which need to be assessed for their relative costs and benefits. As a result, we can now identify a second and third payment silo, replete with POS systems, or payment gateways, specially designed to accept card account numbers in accordance with card industry account data encryption requirements, and another set of merchant accounts, which all require reconciliation.
Systems
Even within one sales environment, different POS technology systems may be required. A hotel, for example, will feature a property-management system at the front desk, and perhaps at several restaurants, retail outlets, spas or golf course. For each of these there are specialised systems designed to serve a specific function (for one example, support for tipping in some cases). Add to this the increasing efforts to cater to consumers’ demand for on-the-go customisation, whether through kiosk or mobile phone. Even a single physical store location may support multiple payment silos, rendering significant challenges in integrating the payment process into the business’ management information systems.
This complexity, however, becomes exponentially greater when viewed not from a single location, but from a broader regional perspective. Banks in different markets impose different requirements for POS systems (for example, different certification standards for Internet payment gateways), with the resulting inefficiencies for the merchant of operating multiple POS systems in parallel. Bank Geography System Channel Card Customer Complexity Efficiency High
A Merchant’s View of Card Payments in Asia Pacific | 9
Geography
For multinational merchants, it can be convenient to have all the card transactions from their various Asia locations linked to a single regional merchant account. However, this is made impossible by card scheme rules against ‘cross-border acquiring’, which mandate that, for each country of operation, the merchant must have a distinct merchant account relationship with a bank in the specific country. As a result, the multinational merchant faces a multiplier effect compounding the complexity of dealing with different card brands, sales channels, and technologies.
Geography, however, does not always have a negative effect on our payment silos as efficiencies can be found by reviewing the business structure and adopting appropriate regional strategies for servicing sales channels. For channels including telesales and e-commerce, it has become common practice for multinational merchants to set up shared services facilities. As a result, merchants have realised benefits in terms of tax, wage arbitrage and processing efficiency.
Treasury and bank reconciliation
The level of reporting provided from banks, within a market and on a regional basis, provides different levels of information, some more helpful than others. This can often lead to an inordinate amount of time being dedicated to reconciliation of the business’ various payment silos. This information asymmetry can readily lead to significant inefficiencies, whether in effective cash management on a ‘cost of funds’ basis or managing FX reserves. Though not exclusively a problem reserved for e-commerce and other CNP sales channels, these environments may offer particular opportunities for improvements among merchants.
Implications
Considering the various silos we have identified – by card brand, sales channel, technology, geography and treasury – the opportunities for mismanagement of sensitive customer data ought to be readily apparent. Certainly, after several years of concentrated effort by the card schemes, most merchants are aware of the requirements for protection of cardholder information. Most major payment related systems are certified as Payment Card Information Data Security Standard (PCI DSS) compliant, and in most places within the merchant organisation, any card account details in the company’s databases are fully encrypted. This, however, creates its own complexities, in terms of providing more proactive customer-service in response to customer complaints or in mining the data to market better to customers. Bank Geography System Channel Card Customer Complexity Efficiency High
High Number of silos High Low
Bank Geography System Channel Card Customer Complexity Efficiency High
A Merchant’s View of Card Payments in Asia Pacific | 11
Case study: Next generation hotels
Having endured the challenges of the global economic downturn and influenza pandemics, 2010 saw a strong recovery for the hospitality sector globally. In line with global economic trends, the greatest level of investment in the hotel industry is ocurring in Asia, with 444 hotel projects, comprising more than 100,000 rooms, expected to open during 2011.1 We also see hotel operating and delivery models
evolving rapidly, with Asia leading the way in adopting new technologies and practices.
The hospitality industry continues to remain in the spotlight for innovation due to the need to be constantly doing more to maintain customer loyalty. With the rise of social media portals and new software, guests are increasingly expecting a one-on-one personalised interaction when dealing with merchants. In order to do this, the hotel revenue and inventory management systems will come under greater pressure to provide functionality for every amenity in the hotel to be chosen, customised, packaged and paid for on demand.
As this customer interface becomes increasingly virtualised, guests will demand the same experience from the payments infrastructure. While the process of billing may appear blissfully seamless to the hotel guest, this will mask some complexities and risks concerning the transfer and treatment of data.
Challenges, therefore, lie ahead for hotel groups as they confront the complexity created by the current payment ecosystems and chart their course to a more virtualised state. The traditional methods employed by card issuers, schemes and acquirers will need to evolve in line with the technology requirements of the modern traveller. If they do not, the hotel industry will increasingly look to bring such functionality in-house with the use of mobile, application based technology and peer-to-peer (P2P) payments. However, such a future scenario is fraught with risk for an industry where customer interaction and data privacy are key.
C-suite considerations
• Do my revenue, inventory and payment systems talk to each other? • Can my current payment providers meet my guest requirements? • As my payment systems evolve, can I be sure that my customer data is adequately protected? 1 STR Global, July 2010processing, this can mean considering everything from the card processing terminals and POS solutions through to back end reconciliation applications and management reporting capabilities. However, it is often difficult to justify to business leaders the benefits that can be achieved from such advances since the return on investment can often take a considerable amount of time to materialise. It may be difficult to quantify benefits that centre on customer experience and value-added services. In other areas it is much easier to understand the potential benefits. Although the need to improve on legacy environments is a key driver of this initiative, it is also worth remembering that Asia is in a leading position when it comes to adopting new technologies. The low-value payment market is growing fast in Asia, with China Mobile reporting payment processing volumes
System strategy and channel
architecture
With the payments ecosystem currently in a period of change and growth across Asia, those responsible for providing the underlying technology infrastructure for payment processing have many opportunities to respond. Technology companies can consider how years spent augmenting legacy IT environments has affected the overall delivery of an efficient and effective payments business.
Realising benefit
Most organisations across Asia, not just those involved in the provision of card payment services to consumers, are currently considering the suitability of their IT environments. The current economic climate and desire for market expansion are making CIOs assess how they can improve on their legacy IT systems and position themselves for the increasing business potential
A Merchant’s View of Card Payments in Asia Pacific | 13
When these transaction volumes are combined with the size of the domestic and regional markets, there is clear potential for huge growth at faster rates than in other areas of the world. The processing of these smaller payment amounts has driven the need for more efficient processing due to low recovery margins. Asia is commonly seen as a follower in global initiatives, but in the development and progression of the payment ecosystem, Asia has the potential to lead the way in delivering value-adding services to merchants and consumers. While not the only factor, this vision of how technology can be used is partly a factor when you consider the differences in investment that occur across the world, with Visa announcing investments of USD 142 million in the mobile payments arena compared to USD 5.83 billion by China Mobile.3
Demanding more from
existing relationships
As well as looking at an organisation’s own processing capability, merchants are no longer beholden to the
technologies of their acquiring banks and should consider alternatives. The increasing number of payment processing intermediaries that provide online services as well as physical devices is creating a competitive and lucrative market globally. Companies such as feefighters. com4 have responded by providing a
comparative analysis of several players in the payments processing field. The online environments provided by their registered suppliers and ease of integration with off the shelf POS solutions makes it possible for cheaper and more efficient payment processing solutions to become even cheaper. Feefighters.com is using Internet technologies to allow payment processors to bid for new merchants
Speed is key
The secret to success in Asia will be how quickly new technologies can integrate with existing business processes in order to deliver the new functionality and products that consumers are demanding. The increasingly affluent young population has a high degree of technological awareness and expect to be able to spend at any time and in any way that they want. Being able to offer integrated payment services across multiple delivery channels is critical to merchants, and in turn merchants must start demanding more from the services provided by technology vendors.
Don’t forget about
security
Whilst technology is assisting Asian organisations in expanding their reach and developing new payment solutions, recent security incidents should also be a warning sign. The increase in what appear to be targeted attacks on gaming network users, including Sony, Nintendo and CodeMasters, and also on the providers of security solutions such as RSA and Comodo, are all signs that the value of information continues to increase and the technical capability of criminals is growing. Any new payments network or method for providing financial transfers is more than likely to be a target of such criminal and destructive activity, which makes ensuring the security of transactions a key priority.
Responsibility for this security lies with all parties involved in the transaction, from the security of the card used in the payment through to the systems used by the merchant to process it, and even the payment processor’s own settlement systems. In most cases, when things go wrong, it is the merchant that bears
innovations
Many of the recent developments in the technology industry
are directly impacting the way in which we are or will be
able to complete payments. Below are some current market
developments that are enabling payment providers to try
new things.
Cloud computing
The creation of payments processing has normally required upfront investments in technology, security and sheer processing power. With Cloud providers now delivering off-the-shelf payment solutions through the Internet and computing power houses able to ramp up and ramp down as transaction volumes dictate, the cost of using or establishing payment processing hubs is falling. ‘Software as a Service’ solutions, where payment functionality is provided to the merchant as a web application across the Internet, are also enabling providers to offer feature-rich, value-added services. This is becoming increasingly part of the processors’ arsenal of differentiators and many merchants will now be looking for real-time reporting on payment processing times, full disclosure and transparency of costs incurred, and automatching between payments services and funds received.
Near Field Communications
Just as the ‘chip’ in current credit cards began the demise of the ‘magstripe’ in many countries, so the introduction of ‘Near Field Communication’ (NFC) chips will do the same. Allowing the benefit of providing contactless payment facilities and allowing payment cards to be virtually any size and integrated within any device, this new technology shows a lot of promise. Organisations such as Apple, Samsung, NFC and many others are all keen to adopt it in order to enable tap-to-pay capabilities and, more importantly, potential mainstreaming of P2P transactions.
Mobile Apps
It is clear that consumers are demanding more from their payment experience. Greater functionality and flexibility in mobile devices is driving the development of software and applications for smart phones and tablets, which sees the social and gaming experiences of consumers being integrated with payments technology in order to provide a unified experience. Facebook Payments, AliPay and PayPal are integrating with the social networking and virtual gaming worlds in order to process transactions between participants and generate new revenue streams. As the content we access gets richer, so the ease of charging and storing payments will become more integrated with our online life.
A Merchant’s View of Card Payments in Asia Pacific | 15
Case study: Airline industry innovation in
onboard retail
In an industry looking to broaden its revenue-generating abilities, airline operators have a significant opportunity to harness technology to deliver more extensive in-flight retail formats. At least one recent study estimated that onboard sales had the potential to become a USD 100 billion per annum business, providing goods and services as diverse as theatre tickets or car rental.5
As a result, bespoke technology providers are entering the market to capture this opportunity with advances in onboard Internet and mobile telephony driving such developments.
We are seeing an increased focus on in-flight retail as a result of the unique nature of air travel and the captive shopping environment that it provides. Vendors and airlines are moving quickly to upgrade their capabilities in this space in order to take advantage of this opportunity for increased revenue.
A greater emphasis is being placed on individual passenger requirements and buying patterns. Pre-existing customer loyalty schemes at the major carriers provide a great deal of information regarding the behavioural patterns of their customers. This information provides a unique opportunity for the airlines to personalise sales strategies in order to maximise onboard profits and enhance the customer’s in-flight experience.
For premier airlines on premium routes, there is potential for the range of onboard products and services to be contextualised to fit with the destination and nature of the trip. Be it for a vacation or business trip, airlines are beginning to allow their passengers to purchase local goods and services which are ready on arrival at their destination.
With the greater emphasis on onboard sales, airlines need to address the systems and processes required to support growth. As transaction value and volume of sales increase from this business unit, carriers must pay close attention to issues concerning fraud, processing capacity and distribution.
C-suite considerations
• Am I taking full advantage of my potential sales channels?
• Do my customers have a personalised and contextualised interface for interacting with me?
• Are my payment interfaces interacting with my wider business?
Cash management across
payment silos
In any business, poor visibility over cash flow is often caused by inadequate linkages between sales, operations, treasury and finance functions. With so many stakeholders involved, the payments chain is an aspect of the business particularly prone to miscommunication.
Cash management concerns most commonly result from the level of complexity within the system and need for manual intervention when issues arise – for example when transaction reporting does not match bank records as a result of manual reconciliation processes. Without clearly defined processes and interfaces between systems, such issues can rapidly escalate. Attempts to forecast cash flow or develop cash-focused performance indicators become futile.
Varying technology and processes within each silo can also cause a significant impact on the time it takes for the transaction to arrive in company accounts. This can often be linked to the type of card that has been used as each provider (in each country) employs alternative methods (technology and process) for execution. In turn, there can be a significant financial impact caused by the speed to deliver each of these credit card payments.
Aside from the financial impact caused, we also experience a number of difficulties arising from a reporting and planning perspective. Without a clear view of expected receivables across silos, reaching an accurate assessment of liquidity can be problematic. The importance of such cash visibility and control can be seen when organisations
A Merchant’s View of Card Payments in Asia Pacific | 17
attempt to plan future growth,
forecast their cash and working capital needs, and ultimately measure their profitability.
In order to address these difficulties, there are opportunities to implement standardised procedures to perform daily reconciliation between sales
records and credit card payment records. Vendors have an opportunity to increase the visibility of transaction details through the use of technology while centralising bank/acquirer relationship management at group level to enhance bargaining power for improved service levels and reduced costs.
C-suite considerations
• What is the level of manual intervention in my payment infrastructure? • How long does it take for transactions to hit my bank account? • Can I extract meaningful information from my payment silos? • Do I have a centralised relationship with my acquiring bank?Cross border and
repatriation issues
As a retailer or merchant grows to a certain scale, certain cross-border issues arise. The ways in which revenue is recognised and repatriated between jurisdictions can have tax and other regulatory implications, which need to be addressed proactively as part of the growth agenda.
Recognising revenue
Typically, sales transacted through a regional office are recorded as revenue for the merchant in that country, with income derived from these transactions subject to tax there as well. If some revenue can be attributed to services or intellectual property deriving from (or risks borne by) the parent location, then profits can be shared between it and the local office.This generally entails the local office paying a license fee or other similar fee to the parent. The parent may
charge the subsidiaries management fees for administrative and back office functions performed centrally. These types of related-party
transactions will typically attract scrutiny in both the local jurisdiction and the parent location. Transfer pricing rules exist across Asia, although levels of scrutiny and enforcement vary. Some countries authorities (China being a notable example) are becoming more proactive.
Revenue authorities share a common expectation that any allocation of profits across jurisdictions is done on an arms-length basis and supported with proper documentation. This is particularly likely where profits are being allocated to a relatively low tax jurisdiction (Hong Kong’s corporate tax rate is currently 16.5 percent, compared to 17 percent
A Merchant’s View of Card Payments in Asia Pacific | 19
in Singapore, 25 percent in China and 30 percent in Australia). The basis of allocation should be supported by a transfer pricing study, which compares the risks and functions undertaken by the parent vis-à-vis the local subsidiaries.
Repatriation of income
via dividends
Profits derived by local subsidiaries are often repatriated back to the parent in the form of dividends. The payment of dividends from local subsidiaries to the parent could attract different levels of withholding tax, depending on the payer’s jurisdiction.
As an example, Singapore does not impose withholding on dividends. In this case, there should be no further Singapore tax leakage on payment of dividends to any parent location. In addition, tax rules in different locations may offer various forms of incentives on taxation of dividends. Hong Kong does not tax received dividends.
Double taxation agreements between the local jurisdiction and parent location can also assist in reducing the withholding tax imposed in certain circumstances. For example, provided that substantive activities are carried out in Hong Kong, the PRC authorities should allow the withholding tax rate to be reduced from 10 to five percent under the tax treaty between Hong Kong and China.
Indirect tax issues
A number of jurisdictions in Asia have indirect tax regimes. Any supply of goods and services in these jurisdictions by the local subsidiaries is likely to attract indirect taxes (such as GST, VAT, and Business Tax). The indirect taxes on these merchant transactions should be borne by the customers. Importantly, profits allocated to the parent by way of a management fee may also subject to indirect tax in these jurisdictions under a reverse charge or similar mechanism. However, the local subsidiary (with the exception of a Business Tax of five percent in China) should technically be entitled to an equivalent recovery such that no net charge should arise from the management fee.
Foreign exchange
Any foreign exchange gains and losses relating to the trading activities of the merchant -- such as conversion of trading balances as at year end from local currency to the parent currency -- should generally be taxable in the parent country. Other currency conversion gains and losses of the parent company, such as those arising from bank
deposits, should generally be non taxable/ nondeductible.
Innovation, M&A and future
states in the payments
ecosystem
When we published our last KPMG paper in 2009, we noted three possible future states for the payment ecosystem, each driven by the bank stakeholders and their willingness to relinquish certain traditional roles as they jockey for position and relevancy within the evolving payment chain. Rather than highlighting a particular scenario as having dominated the future convergence of the market, we have seen examples of each starting to materialise.
Although these three states did not explicitly discuss the merchant’s role with respect to these evolving states – both in terms of driving the evolution towards these states and in coping with the resulting complexities of the shifting sands as the evolution reaches its next phases – it should nonetheless be clear that the merchant will continue to be
a key driver of change in the payments ecosystem.
Indeed, the role of the merchant is so significant that we are inclined to add a fourth potential future state, wherein the merchant absorbs the role of the acquiring bank and/or payment processor, perhaps by corporate acquisition, but equally plausibly by technological obsolescence of the acquirer’s traditional role of merchant distribution and financial settlement. We are already seeing examples of this in developed markets such as the US, Europe and Australia as larger merchants including Wal-Mart, Tesco and Coles have looked to create their own closed-loop payment systems as a way to pare costs associated with the traditional payments chain. With the huge reach and client base that many
Section or Brochure name | 21
Drivers
• Banks recognise greater investment needed in payments infrastructure • Questioning whether increased complexities and risks associated with payments processing lie within their core competencies • Specialised payments solution providers building their presence in regionState 1: Acquiring banks
collaborate with niche or regional card schemes, exchanging a broader footprint of merchant locations for card acceptance for lower interchange costs and competitive differentiation.
Card holders
Merchants Issuing banks
TPPs
Card schemes Acquiring
banks
TPPs
State 2: Issuing and acquiring
banks explore closer collaboration in order to minimise or bypass interchange fees.
Merchants move into payments space and begin to compete with
Card holders Merchants Issuing banks TPPs Card schemes Acquiring banks TPPs
State 3: Partnering between card
schemes and issuing banks alters the competitive landscape and increases the interoperability of networks in certain markets.
Card holders Merchants Issuing banks TPPs Card schemes Acquiring banks TPPs
Emerging
states
Card holders Merchants Issuing banks TPPs Card schemes Acquiring banks TPPs A fourth stateA slew of recent payments processor acquisitions — Advent/Bain’s acquisition of RBS WorldPay (August 2010), Global Payments joint venture with Spain’s largest retail bank, La Caixa (November 2010), First Data’s purchase of the ICICI portfolio (December, 2009); and State Bank of India’s joint venture with Elevon (US Bankcorp) and Visa International (May 2010) — to name but a few, illustrates the changing landscape in which merchants must acquiesce or adapt.
Though we may be entering a period of reduced M&A activity among merchant acquiring portfolios given many of the most strategically valuable assets have been taken off the market over the past decade, M&A in the near term is likely to be driven by companies which view payments processing a non-core activity.
The apparent dearth of the most strategic payments processors on the market has enabled bank owners of remaining portfolios to command a scarcity premium, pushing valuations to the points where big processors find it hard to justify the deals. Indeed, it may be that the comparatively quiet landscape of merchant portfolio sales to the major processors is a result of these same processors evaluating the more recent deals to ascertain whether these portfolios merited the rather lofty valuations being sought.
In the meantime, such merchants — whether piggybacking off established payments providers or providing an in-house solution — will need to do a significant amount of strategic analysis to understand whether they can generate the volume of transactions
required to make in-house payments capabilities a viable option, especially as payment system functionality and charging schedules come under a great deal of scrutiny.
In the immediate term, we are already seeing alliances forming between these new entrants, card schemes and banks to gain a better understanding of the potential for this market. Particular focus has been on the Asia Pacific region where volumes have increased 33.3 percent since 2008 and are forecast to surpass the US by 2012.7 Given
its dynamics and rapid growth rates though, participants will need to react quickly to survive.
However, there remains a lack of consensus as to where the significant revenue and strategic opportunities exist in the value chain, and more time will be required to see which of the emerging business models will retain traction.
Whatever the outcome, the merchant can be assured of more, not less, complexity as these changes gather pace, unless the role of the payments process is more carefully viewed as a core strategic function, with potential benefits and risks in mind.
such merchants command, if they were to enter this space they have the potential to offer formidable competition to the banking elite.
This burgeoning competition from non-traditional financial institutions is set to develop as merchants seek to provide a more dynamic and vibrant offering to customers. Telecoms and logistics companies, for example, have been making acquisitions in this regard — most recently Australia Post followed the precedent set by Canada Post in acquiring a payment service provider to strengthen its e-commerce capabilities. This allows it to not only control logistics considerations, but also to manage payment aspects, adding an extra layer of fraud prevention to otherwise more expensive entities that eschew such cards or e-options.
Similarly, online merchants and social media portals have entered the fray: Google and Apple (via iTunes) have each launched new payment systems to allow online and mobile publishers to charge for digital content. Facebook, Twitter and China Mobile, for example, can also respectively leverage a formidable network of customers as they look for innovative ways to increase revenues and reduce costs. China Mobile, for example, purchased a 20 percent stake in Shanghai Pudong Bank in March, 2010, to expand its electronic payments business by offering wireless finance services including mobile bank cards and payment services. The vertical integration has permitted China Mobile to penetrate this new and quite different sector. China will soon be the largest mobile payments market in the world — one where the mobile payments market is expected to soar 48 percent year on year to 410 million users by 2013.6
A Merchant’s View of Card Payments in Asia Pacific | 23
Case study: A cautionary tale for online retail
As merchants in Asia look to increase their distribution and take advantage of growth markets, they have sought out new and innovative sales channels. In recent years we have seen an uptake of Internet and application-based sales with the Asia market expected to be valued at USD 212 billion by 2014.8 We see huge
opportunities for such business models in the region as merchants take on new platforms to interact with their customers using both desktop and mobile devices. In doing this, merchants have faced very real issues relating to the complexity of the infrastructure, which lies behind the often simple and user-friendly interfaces which their customers operate. It is often characterised by a complex web of corporate structuring, supply chain, regulatory and payment requirements. As a result, what is a seemingly a simple, low cost opportunity for doing business can bring a great deal of risk to the merchant group. Unless closely aligned, core business technologies (or distribution systems), Internet portals and payment channels can quickly become business inhibitors.
In recent months we have seem a number of tax authorities cracking down on Internet-based retailers for avoidance of sales tax and huge fines having been already levied in the US as well as Japan. Compounding this, doing business in Asia Pacific brings with it regulatory requirements and foreign exchange controls which need to be addressed as part of a robust business strategy. Ultimately, questions will continue to be asked regarding the ‘physical presence’ of the POS, distribution, technology hosting and production.
As technologies continue to evolve and the opportunities for Internet and
application-based retail develop, merchants in Asia Pacific will need to keep a close eye on their key business requirement: how and where are my customers going to pay me?
C-suite considerations
• How is my customer interface receiving and processing payments? • Where is the ‘physical presence’ of my business?
• Is this channel aligned with my core strategy?
This publication highlights a number of strategic considerations for a merchant assessing
their payment channels. In Asia Pacific, our story is framed by the challenges companies
are facing in managing their growth and controlling rising costs. The complexity and
fragmentation of existing systems means there are various inflexion points along a
company’s payment channels, providing many potential opportunities for improvement of
the bottom line.
CEOs and other senior executives can address a number of considerations, from
the perspective of strategies for growing the business, performance of IT and
infrastructure, treasury and cash-flow management, and appropriate tax structures:
• Are your customers able to use their preferred payment method with you? Could
you be losing sales due to the poor performance of your payments platform?
• Is your payments related technology providing you with business enabling
functionality?
• Can you get a real-time picture of your sales and cash flow position?
• Are you able to generate meaningful payment related information for
budgets and forecasting?
• Are there opportunities to standardise and consolidate your
systems and processes across channels and geographies?
• Are your banks allowing you to process payments in a cost and
tax efficient manner on a regional basis?
• Is complexity across the various layers of your payment
environment creating a risk to your organisation in terms
of reconciliation and data security?
Who is reponsible within your team for answering
these questions?
Contact us
Edge Zarrella
Asia Pacific Partner Payments Transformation +852 2847 5197
egidio.zarrella@kpmg.com
Simon Gleave
Partner in Charge
Asia Pacific Financial Services +86 (10) 8508 7007
simon.gleave@kpmg.com
Nick Debnam
Partner in Charge
Asia Pacific Consumer Markets +852 2978 8283
nick.debnam@kpmg.com
Ning Wright
Partner in Charge
Information, Communications & Technology KPMG China
+86 (21) 2212 3602 ning.wright@kpmg.com
kpmg.com/cn
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
© 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Hong Kong.
kpmg.com/cn
Chengdu
18th Floor, Tower 1, Plaza Central 8 Shuncheng Avenue
Chengdu 610016, China Tel : +86 (28) 8673 3888 Fax : +86 (28) 8673 3838
Nanjing
46th Floor, Zhujiang No.1 Plaza 1 Zhujiang Road
Nanjing 210008, China Tel : +86 (25) 8691 2888 Fax : +86 (25) 8691 2828
Guangzhou
38th Floor, Teem Tower 208 Tianhe Road
Guangzhou 510620, China Tel : +86 (20) 3813 8000 Fax : +86 (20) 3813 7000
Fuzhou
25th Floor, Fujian BOC Building 136 Wu Si Road
Fuzhou 350003, China Tel : +86 (591) 8833 1000 Fax : +86 (591) 8833 1188
Hangzhou
8th Floor, West Tower, Julong Building 9 Hangda Road
Hangzhou 310007, China Tel : +86 (571) 2803 8000 Fax : +86 (571) 2803 8111
Qingdao
4th Floor, Inter Royal Building 15 Donghai West Road Qingdao 266071, China Tel : +86 (532) 8907 1688 Fax : +86 (532) 8907 1689
Xiamen
12th Floor, International Plaza 8 Lujiang Road
Xiamen 361001, China Tel : +86 (592) 2150 888 Fax : +86 (592) 2150 999
Shenzhen
9th Floor, China Resources Building 5001 Shennan East Road
Shenzhen 518001, China Tel : +86 (755) 2547 1000 Fax : +86 (755) 8266 8930
Hong Kong
8th Floor, Prince’s Building 10 Chater Road
Central, Hong Kong Tel : +852 2522 6022 Fax : +852 2845 2588
Macau
24th Floor, B&C, Bank of China Building Avenida Doutor Mario Soares
Macau Tel : +853 2878 1092 Fax : +853 2878 1096 FINANCIAL SERVICES
