Vegas Postcard: BCG's Takeaways from Money 20/20

Money 20/20 has just wrapped up after a dizzying number of presentations, start-up pitches, keynote speakers, and exhibit-hall conversations. While many presenters passionately asserted the need for “frictionless payments” and for “unlocking customer value,” what do these things really mean for the strategies of financial institutions (FIs)? In this short perspective, we attempt to cut through the Vegas noise and lay out what we believe are the key takeaways.    

1. The importance of collaboration — If you can’t beat them, join them

One clear theme from Money 20/20 is the importance of partnerships. The fact that fintechs, digital giants, and FIs are in a more cooperative mood is old news. More interesting are the actions being taken by leading players. For example, PayPal, after announcing partnerships with “frenemies” such as MasterCard and Visa, as well as with AliPay, unveiled a collaboration with Facebook Messenger, signaling its interest in serving "contextual commerce," and broadcasted thinly-veiled overtures to FIs. PayPal was not alone. We also learned about Google's partnerships with Visa Checkout and Masterpass and the launch of a multibank P2P platform, Zelle, (formerly clearXchange). 

Drowned out, but potentially the most important “news,” was the Consumer Finance Protection Bureau's hint that regulation might be on the way to force FIs to share their customer data.  In Europe, where bankers are dealing with this prospect as a result of PSD2 regulation, the implications are proving profound and are requiring bankers to be proactive in developing an open banking strategy. A few forward-looking U.S. FIs have already begun to embrace open banking and APIs.

As demonstrated by the myriad partnerships, FIs are hedging their bets by undertaking multiple initiatives, hoping that a few will scale and that their learnings will better inform future projects. Those that have invested in making their infrastructure more flexible, and that have reengineered their operating models to better enable partnerships, will achieve competitive advantage.

2. Fraud and underwriting in Digital — The arms race is in full swing, now time to consolidate and collaborate

As we walked around the Money 20/20 exhibit hall, we were struck by the prevalence (roughly a third of the booths) of companies addressing fraud and risk issues, covering the full spectrum from proprietary data, fraud or risk scores, to full-service solution providers.

This comes as no surprise. FIs are experiencing real pain points in their digital channels, coming from two directions. First, EMV is pushing more fraud to these channels, and second, these channels often experience adverse selection and lower-quality applications. Lower approval rates, lower credit lines, and suboptimal customer experiences are resulting in hundreds of millions of dollars of lost revenue for large FIs.

The arms race is in full swing: many third-party providers highlighted promising solutions based on alternative data sets. Not all of them will be successful, however. For example, “social media” has fallen short of its promise in the face of regulatory scrutiny and restrictions imposed by social networks. Given the importance of scale, as more transactions and/or applications enrich databases and drive more fraud screening efficacy, we expect this industry to consolidate over time and spawn a variety of collaborations. As FIs ponder the best possible partners and try to stay ahead of fraudsters, the key will be to institute a strong culture of test and learn, and the ability to run pilots effectively at a high frequency. 

3. Data analytics — Approaching the nirvana of translating insights into value

Nirvana for both FIs and merchants is the ability to market to a 'segment-of-one' and deliver highly contextual, personalized customer experiences. At Money 20/20, BCG and Morgan Stanley shared their findings on what it takes to reach this data-analytics nirvana (see the BCG/MS report) .Many of our conversations at Money 20/20 supported our findings on the most important actions:

• Engineer customer interactions to generate fair-value data exchange
• Develop a structured program to manage ecosystem partnerships
• Ensure execution excellence by organizing the data & analytics function as a center of excellence
• Ingrain data-based decision making and a “test & learn” culture
• Make trust an asset and proactively manage consumer privacy

We saw examples of how customer journeys can be tracked with greater precision and how fair- value data exchange can be achieved, allowing a granular understanding of context-specific behaviors and more-accurate prediction of leakage points (i.e., customer abandons the journey). Ultimately, these improvements will enable FIs to realize a return on their investment. For example, Converto helps FIs optimize their marketing mix by shifting spend across customer touch points. Persado supports FIs in delivering tailored messages to customers, using machine learning to determine the optimal words, formats, and images to trigger customer engagement.

4. Mobile wallets — Could large retailers drive the adoption?

We've been waiting a long time for m-wallets to hit the adoption tipping point. The factors holding back adoption are twofold. First, consumers don't want a better payment experience — they want a better shopping experience. Second, retailers have limited incentives to invest in new payment methods unless there is a positive impact on costs and/or incremental sales.

At Money 20/20, we saw indicators that mobile apps developed by large retailers show real potential to generate value. Their aim is to improve consumer engagement through an alchemy involving loyalty and rewards, digital content, easier checkout, and other features (e.g., alerts on new products). Several discussed this alchemy: Walmart, Target, Kohl's, Sephora, Walgreens, and Dunkin' Brands. While large retailers can create a proprietary app, smaller retailers will have to take a different approach. IBM has spotted this opportunity and announced IBM Pay, a white-label merchant wallet.

5. B2B cross-border payments — A perennial Money 20/20 topic with no winners yet

While the pain points of B2B cross-border payments (slow, opaque, and expensive) point to significant gains for the winners, no clear winners are yet in sight. What was clear in our Money 20/20 conversations is that the promise has shifted away from bitcoin to blockchain, and, more specifically, to permissioned distributed ledgers (aka blockchain networks).  Visa and Chain announced a partnership to build Visa B2B Connect, a platform enabling FIs to exchange "assets" with an initial focus on high-value, cross-border payments (pilot slated for 2017). Visa will act as a validator and co-sign each transaction. The promise of permissioned distributed ledgers is stymied, however, by the need to achieve the network effect and interoperability. In the mid-term, there will be numerous blockchain islands with many having common FI partners and most not scaling.

While a solution for high-value, cross-border B2B is years out, there are a variety of players solving the pain today, in particular for small businesses. Several stood out at Money 20/20. Align Commerce differentiates itself by running new and old rails: one bitcoin/blockchain enabled and one that runs on traditional bank rails when the bitcoin rails don't work. Hyperwallet has successfully built an interface and network to support the gig economy. Modo and BoA announced a partnership to support a similar use-case.

6. And finally, two startup ideas we really liked

Two startups in particular caught our attention in the Earlier Stage StartupPitch180. Debitize takes a very simple yet effective approach to financial management. The solution sets money aside every time a credit card is used (to avoid overspending), and automatically optimizes credit utilization and FICO scores by paying the balance down the day before the card issuer reports to the bureaus. Hence, it provides a debit card experience with credit card points and thereby creates tangible value for consumer with minimal or no effort. PINN Technologies combines an experienced team in security with the mission of passively validating a person’s identity through the analysis of hundreds of attributes (e.g., keystroke data, images, audio). The passive nature of the validation promises to increase security without compromising the experience. 

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By: Mohammed Badi, Alex Drummond, Alenka Grealish, Pierre-Marie Despontin, Luke Dobrzynski, Berk Hizir, Jaro Snajdr and Fabrizio Tiso

If you would like to get together to discuss any of these themes (or on Payments more broadly), please feel free to reach out to any of us. We would be excited to get the right experts together and exchange perspectives.