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INNOVATIVE INTERMEDIARIES

02

The impact of innovation on intermediariesThe rapid shifts that the payments ecosystem is undergoing have an equally (if not more) fundamental impact on the processors, acquirers, PSPs and fintech providers that act as intermediaries, than any other player in the value chain.

In response, many intermediaries are taking proactive steps to capitalize on the combination of shifting customer expectations and purchasing preferences as well as the dramatic changes being brought about by new market infrastructures, regulation, and emerging technologies. Indeed, there are signs that many of the traditional boundaries between parts of the ecosystem are blurring, particularly as growing commoditization in some areas has created a need to develop higher-margin added-value services.

Like many “traditional” business models, long-standing approaches to innovation are breaking down in the face of more modern and agile techniques. Indeed, many intermediaries are now actively pursuing enterprise-wide initiatives in order to deliver the ongoing product and service innovation that their customers expect.

To understand exactly how banks, intermediaries, merchants, and corporates are approaching – and benefiting from – innovation, ACI Worldwide and Ovum have partnered to create the Culture of Innovation Index, a global and cross–value-chain view on the factors that drive success.

As could be expected, fintechs lead in innovation. However, the Index highlights that the complex intermediary segment has shown itself to be visionary. Intermediaries don’t wait to be fast followers; they have assessed the market shifts and carved out strategic plans that will create benefits in the payments value chain whether up- or down- stream.

As competition in financial services is disrupted by new entrants and mega-player consolidation, payments innovation is driven by a need to differentiate and increase operational efficiencies to better serve changing customer and regulatory requirements.

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03

ContentsThe Impact of Innovation on Intermediaries ......................................... 02

The Culture of Innovation Index .................................................................. 04

THE TWO TYPES OF DIGITAL TRANSFORMATION PROJECTS ............. 05

WHERE IS YOUR ORGANIZATION ON ITS INNOVATION JOURNEY? .....06

SCALING UP PAYMENTS INNOVATION ..................................................... 07

AI TECHNOLOGIES WILL BE KEY IN THE NEXT PHASE OF

INTERMEDIARY INNOVATION ................................................................... 09

ARTIFICIAL INTELLIGENCE AND CLOUD TECHNOLOGIES ARE AN

IMPORTANT FOCUS AREA FOR PLAYERS ACROSS THE

INTERMEDIARY SPECTRUM ......................................................................... 10

OPEN BANKING AND PSD2 DRIVE INTERMEDIARY INNOVATION .... 11

WHEN IT COMES TO THE CULTURAL DRIVERS OF A MODERN

APPROACH TO INNOVATION, INTERMEDIARIES IN EUROPE ARE

AHEAD OF THOSE IN ASIA-PACIFIC AND THE AMERICAS .................. 12

THE INNOVATION GAP ................................................................................. 13

7 CHARACTERISTICS OF HIGHLY INNOVATIVE INTERMEDIARIES ... 15

Delivering Revenue from Real-Time Payments ...................................... 17

CREATING NEW SERVICES ON TOP OF RTP LEADS THE

INNOVATION AGENDA FOR INTERMEDIARIES ...................................... 17

THE OPEN BANKING OPPORTUNITY ......................................................... 20

OPEN BANKING HAS CHANGED THE WAY THAT INTERMEDIARIES

APPROACH PRODUCT INNOVATION AS WELL AS THEIR FUTURE

DISTRIBUTION STRATEGY ............................................................................ 21

TRAILBLAZERS LOOK TO TAP INTO THE VALUE OF TRANSACTION

DATA ANALYTICS ........................................................................................... 22

NEXT STEPS – HOW TO BECOME A TRAILBLAZER ................................. 24

Methodology ....................................................................................................... 26

Appendix ............................................................................................................... 27

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04

The Culture of Innovation IndexThe Culture of Innovation Index is built upon a global program of research spanning players from across today’s payments ecosystem. Based on interviews with senior executives in 1,163 enterprises, we have scored each organization across a range of cultural, organizational and technology-centric factors. These span both the inputs to the process of driving innovation, as well as the outputs (in the form of new products and services).

The aim of this is simple: to identify not only the factors that separate the most innovative businesses from the laggards, but also what this means in terms of product innovation. In essence, how will today’s most innovative organizations convert their investments into future gains?

1,163 interviews

16 industry sub-segments

20 countries

438,000 datapoints

OVUM

INNOVATION INDEX

Cultural and organizational drivers of innovation

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How the organization responds to changing customer needs Banks

Merchants

Corporates

The results, with a focus on payment-related services

Intermediaries(110)

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05

THE TWO TYPES OF DIGITAL TRANSFORMATION PROJECTS

The term “digital transformation” is widely used to describe a range of large-scale projects with a wide array of objectives and outcomes. In practice, these sit on a continuum between two extremes.

The difference between projects that are focused on digitizing existing products and processes and those that are aimed at creating a truly digital business may seem small, but it is central to the shift emerging in the market between those organizations that are truly forward looking and those that continue to operate with a more traditional approach toward product and service innovation.

Optimize the existing business

SHORT TERM/TACTICAL:

Driving improvement in the current business and model

Enhance the customer experience and core product

Efficiency and improvement in the core product

New digital-led products, services and business models

LONGER TERM/STRATEGIC:

Becoming a fully digital-led business

Agile in the face of competitive, customer and

wider market change

Creation of net-new sources of revenue

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06

WHERE IS YOUR ORGANIZATION ON ITS INNOVATION JOURNEY?

The Culture of Innovation Index identifies five types of organization as defined by their approach to innovation and business transformation.

EMERGING

• Strong cultural and structural emphasis on innovation

• Clearly articulated technology strategy and focus on business transformation

• Behind the market in terms of execution and delivery

LAGGARDS

• Behind the curve in both culture and technology, often with a preference for outsourcing services

• Generally aware of the challenges they face but not actively responding

• Falling behind the market when it comes to innovation in the customer experience

ADVANCED

• Strong focus on the importance of ensuring innovation is an enterprise-wide activity

• Clear strategy and roadmaps around technology adoption and product innovation

• Among the leaders in product development

TRAILBLAZERS

• Digital-led or strongly digital organizations

• Business is structured around driving innovation

• Leaders in adoption of technology and delivering new products/services

TECH-LED

• Weak when it comes to an enterprise-wide approach to innovation

• Strong focus on investing in technology, but rarely a market leader in product innovation

• Ideas and technology strategy tend to be centrally driven

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07

SCALING UP PAYMENTS INNOVATION

Despite great diversity in business models and geographies, intermediaries have common challenges: pressure from new entrants, the need for scale, and a growing customer preference for an increasingly cross-channel digital-led purchasing experience.

The intermediary business areas featured in the Culture of Innovation Index are spread across the Advanced, Emerging, and Laggard categories. Unsurprisingly, it is the fintech ecosystem (a group that includes both those providing B2B and those offering direct-to-consumer offerings) that emerges as the highest-ranked vertical. In many cases, the businesses in this group have been formed relatively recently, and many have been launched on the back of a strong focus on both leveraging modern technology and sophisticated approaches to innovation.

It will come as a surprise to some that it is payment processors that, along with retail banks, sit close to fintech in the advanced category. Recent investments have prioritized creating competitive differentiators in today’s saturated processing landscape, in which product breadth and scalability are table stakes. Innovation is now where there are opportunities to operate at a higher margin and redefine what it means to be an intermediary.

Acquirers face similar challenges, and many of those that have been slow to respond to the demand from merchants for integrated cross-channel services are now playing catch-up. As a sector, merchant acquirers fall into the emerging group within the Index, highlighting the fact that many are taking steps toward driving innovation in their organizations but have yet to reap the rewards.

Perhaps surprisingly, PSPs fall into the laggard category. This is an area of the market that has long since been defined by scale (much as in payment processing). While there are many large PSPs that continue to drive product and service innovation at pace, there are many more that have not kept pace with the wider changes in the industry.

65%Sixty-five percent of fintechs and 56% of merchant acquirers attach a very high level of importance within their organizations to bringing innovative new products and services to market; this figure is only 38% among PSPs.

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QUANTIFYING THE DRIVERS AND OUTPUTS OF INNOVATION

Innovation, by its nature, is highly subjective. However, by comparing enterprise attitudes, behaviors and outputs across a number of areas relating to the process of innovation and enterprise transformation, we have been able to provide a comparative view on where each sector is today.

Each enterprise has been scored across a number of individual input and output factors, with “best practice” delivering the highest score. These have then been combined to provide a blended total for overall inputs and outputs, both with a maximum score of 1.0.

Healthcare services

Hospitality

Digital goods

Insurance

Government

Higher education

Consumer finance

PSP

Merchant acquirer

Payment processor

Fintech

Average

Corporate banking

Retail banking

Retail

Utilities

Telecoms

EMERGING

LAGGARDS

ADVANCED

TECH-LED

ADOPTION OF TECHNOLOGY TO ADDRESS BUSINESS CHALLENGES (OUTPUTS)

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45% 50% 55% 60% 65%

30%

35%

40%

45%

50%

55%

MANY INTERMEDIARIES ARE ON A TRANSFORMATION JOURNEY, BUT FINTECH AND PAYMENT PROCESSORS ARE AHEAD OF PSPS AND MERCHANT ACQUIRERS

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09

AI TECHNOLOGIES WILL BE KEY IN THE NEXT PHASE OF INTERMEDIARY INNOVATION

At the technology level, some of the most important distinctions between the individual business areas and their banking counterparts are the degree of investment and future roadmaps around areas such as cloud and artificial intelligence (AI) technologies.

Across all intermediary segments, 21% on average plan to invest further in their use of cloud technologies in 2019/20. This is lower than in sectors such as retail banking but nevertheless demonstrates a focus across the sector toward greater innovation and operational efficiency among many. Merchant acquirers and PSPs are those planning the biggest moves toward the use of cloud in the coming year. In both cases, the current use of cloud technologies is low relative to other sectors.

Indeed, a high proportion of payment processors and the majority of fintechs are already making considerable use of cloud technologies, which is what drives their relatively low prioritization for this year. Across all segments, 79% of intermediaries plan to move further mission-critical workloads into public cloud infrastructure: merchant acquirers (89%) and fintechs (84%) lead the way here, demonstrating the moves they are making toward cloud adoption.

When it comes to investments in AI technologies in the coming year, PSPs lead the way, with fintechs also heavily focused on further leveraging AI. For PSPs and processors, prioritizing innovations around intelligent transaction routing and stronger fraud detection are key to complement a range of services, particularly those based around real-time payments (RTP). Indeed, 56% of PSPs are planning to launch or deepen projects in these areas.

At the same time, 43% of fintechs are planning to deepen their investments in AI. The specific project areas will differ depending on the proposition of the competitor, of course, but service personalization, loyalty, and transaction analytics are all important areas of innovation.

79%79% of intermediaries plan to move further mission-critical workloads into public cloud infrastructure in the coming year. Merchant acquirers (89%) and fintech (84%) lead the way here.

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0% 10% 20% 30% 40% 50% 60%

Merchant Acquirer

Fintech

Payment Processor17%

31%

PSP

All intermediaries21%

38%

56%

50%

33%

43%

20%

33%

WHAT ARE YOUR PLANS TO USE THESE DIGITAL ENABLING TECHNOLOGIES OVER THE NEXT 12 MONTHS? THOSE PLANNING FURTHER INVESTMENTS.

SOURCE: OVUM CULTURE OF INNOVATION INDEX

Artificial Intelligence technologies (including machine leaning and bots) Cloud technologies (eg containers, microservices, and serverless computing)

ARTIFICIAL INTELLIGENCE AND CLOUD TECHNOLOGIES ARE AN IMPORTANT FOCUS AREA FOR PLAYERS ACROSS THE INTERMEDIARY SPECTRUM

The narrow margins faced by many traditional intermediaries, particularly payment processors, explain the strong underlying shift toward public cloud. Advancements in cloud technology have made this a viable option for delivering operational efficiencies today as well as supporting future scalability needs. In the fraud space, challenges such as PSD2 SCA in Europe, increases in attacks, and the growth in adoption of real-time payments, make initiatives to reduce false positives a potential differentiator. In turn, this is encouraging investment in AI and ML, with exciting service opportunities for the future.

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11

OPEN BANKING AND PSD2 DRIVE INTERMEDIARY INNOVATION

Looking at the cultural and organizational inputs to the innovation process, we see it is intermediaries in Europe that stand ahead of their peers in Asia-Pacific and the Americas. Intermediaries in this region scored 0.50 on average on the Index, compared to 0.46 in the Americas and 0.44 in Asia-Pacific.

At the vertical level, each intermediary segment in Europe is either level with or ahead of its peers in other regions. With Europe at the forefront of developments in open banking as well as seeing rapid developments in real-time payments, this should perhaps not be too surprising. Certainly, the influence of open banking in creating new opportunities for third parties to begin to innovate around push payments should not be understated.

Players of all sizes have had to respond to this new competitive threat, most notably the emergence of new competitors and services. Perhaps more interesting here, though, is the more subtle competition that organizations now find themselves in to present themselves as attractive partners for innovative startups and talented developers.

But, when it comes to tangible outputs from the innovation process, intermediaries in Asia-Pacific lead the pack. This regional dominance is led by the local fintech scene, which is some distance ahead of the rest of the market. As with other areas, particularly in the merchant space, Asia-Pacific will be a key region to watch when it comes to product and service innovation in the future. However, Europe will follow relatively closely behind by virtue of the stronger focus on the cultural and organizational drivers of innovation.

European payment processors lead the pack when it comes to their cultural approach to innovation. This reflects the changes many have made in order to take advantage of the new opportunities opened by regulation. Intermediaries are seeing opportunities to create competitive differentiators and broader service offerings in a number of areas. Even if we see varying levels of maturity in the transformation journey within the intermediary sub-segments, the common focus on the platformization of payments is sharp and closely aligned with growth ambitions.

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12

WHEN IT COMES TO THE CULTURAL DRIVERS OF A MODERN APPROACH TO INNOVATION, INTERMEDIARIES IN EUROPE ARE AHEAD OF THOSE IN ASIA-PACIFIC AND THE AMERICAS


0.77Analysis of the Index scores for the outputs from the innovation process shows fintechs in Asia-Pacific lead the way on a global level (with 0.77) compared to 0.67 for fintech in Europe and 0.59 in the Americas.

AMERICAS

0.47

0.47

0.46

0.30

ASIA-PACIFIC

0.48

0.42

0.42

0.38

EUROPE

0.53

0.47

0.54

0.43

Fintech Merchant Acquirer Payment Processor PSP

WHEN IT COMES TO THE CULTURAL DRIVERS OF A MODERN APPROACH TO INNOVATION, INTERMEDIARIES IN EUROPE ARE AHEAD OF THOSE IN ASIA-PACIFIC AND THE AMERICAS

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13

THE INNOVATION GAP

Intermediaries are the most likely of all payments organizations to fall into the emerging category and have a smaller proportion of businesses in the “tech-led” group. This certainly suggests that organizations across the intermediary spectrum are making clear steps toward building the internal structures to best drive innovation in products and services.

The Americas have the highest number of laggards: 25% of all intermediaries are classified in this way. Payment processors in this region are particularly behind their global peers, with 33% falling in the laggard category. This points to further challenges in this sector in the year ahead, especially among those already struggling to maintain their revenue in the face of competition from more digitally led competitors.

In contrast, intermediaries in Asia-Pacific are highly focused on investing in technology: 26% fall into the tech-led group, while 41% fall into the advanced category, and only 15% are laggards.

Despite some competition in terms of Asia-Pacific’s success in innovation outputs, Europe intermediaries lead the way when it comes to “Trailblazers.” In this region, 26% of intermediaries fall

into this category, including 50% of fintechs. It should be noted that some of the most advanced organizations in the Index are from the intermediary segment, and this has been driven by the fintechs.

The split between those that are actively innovating and those that are moving more slowly will manifest itself in growing competitive differentiation in the near future, even more strongly in the intermediary sector than among banking peers. Those in the laggard or tech-led categories should urgently pivot toward a fast-follower approach as a minimum and look to develop strategies that can accelerate their move to close the innovation gap.

Smaller, nimbler, and tech-led fintech companies continue to drive innovation in the payments industry. They have a culture and a platform approach that sets them apart from traditional payments intermediaries. While many fintechs are focused on the productization of innovation, the large payment processors – the experts in delivering at scale – need to rapidly adapt to an open and real-time payments ecosystem. There is an incredible synergy of opportunity among intermediaries, one which innovative businesses need to capitalize upon.

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0.0 0.1

-0.1

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ADOPTION OF TECHNOLOGY TO ADDRESS BUSINESS CHALLENGES (OUTPUTS)

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● AMERICAS

● ASIA-PACIFIC

● EUROPE

EMERGING (19%) ADVANCED (32%)

LAGGARDS (16%) TECH-LED (24%)

TRAILBLAZERS (9%)

THERE IS A CLEAR SPLIT BETWEEN INDIVIDUAL INTERMEDIARIES WHEN IT COMES TO THEIR STRATEGY AROUND INNOVATION


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7 CHARACTERISTICS OF HIGHLY INNOVATIVE INTERMEDIARIES

There is no single path to enterprise transformation, but there are some emerging examples of best practice that we can identify from the Culture of Innovation Index. Among the fintechs, merchant acquirers, payment processors, and PSPs that make up the intermediaries segment, there are seven characteristics of the Trailblazer group – the most innovative enterprises – that stand out from the rest of the market.

In practice the degree to which intermediaries realize digital transformation will rest on their putting the right cultural and organizational pillars in place.

01: A STRONG CENTRAL FUNCTION TASKED

WITH DRIVING INNOVATION

The presence and influence of central innovation and/or digital teams within the organization with the resourcing, responsibility, and senior sponsorship to coordinate and support innovation is becoming increasingly important.

Arrow-circle-left This is the most important source of innovation for 64% of Trailblazer intermediaries, compared with 27% on average.

02: AN AGILE CULTURE THAT IS RESPONSIVE

TO CUSTOMER NEEDS

One of the most important differentiators for the most innovative companies is the ability to respond quickly to changing customer needs and/or market opportunities. This is partly about technology but is increasingly about also having an open and collaborative culture.

Arrow-circle-left 89% percent of Trailblazer intermediaries agree that their company culture is truly responsive to market changes, compared with 51% for the rest of the market.

03: TAKING ADVANTAGE OF EMERGING

TECHNOLOGIES IS A HIGH PRIORITY

A focus on experimentation and testing new concepts is an important part of the wider innovation process, including building PoCs and launching pilots to test solutions leveraging technologies such as blockchain and AI.

Arrow-circle-left 61% of Trailblazer intermediaries report that this is given a high degree of importance by their institution, compared with 60% for the rest.

51%

89%

60%

61%

27%

64%

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04: BRINGING INNOVATIVE PRODUCTS AND

SERVICES TO MARKET IS A HIGH PRIORITY

A key indicator is the degree to which delivering new products and services is treated as a core company focus, be that through external messaging and investment in these areas or softer measures such as internal recognition, rewards, and promotion.

Arrow-circle-left All Trailblazers report that this is a core business objective, compared with 55% on average.

05: EMPLOYEES ARE TRAINED TO SUPPORT

NEW PRODUCT/SERVICE DEVELOPMENT

The emphasis placed on ensuring that employees are given the opportunity to be trained and involved in the process of identifying product/service gaps is an important element of driving change in the organizational culture around innovation.

Arrow-circle-left 64% of Trailblazers educate their employees to support innovation, compared with 48% on average.

06: AN IT FUNCTION CAPABLE OF DELIVERING

INNOVATION

The presence of a strong IT group, with the ability to work with the wider business while leveraging modern development approaches and architectural principles, is key to delivering on the business need for agility and continuous innovation.

Arrow-circle-left Among the Trailblazers, 73% have an IT function capable of delivering against these needs, compared with 40% of all intermediaries on average.

07: FOCUS INVESTMENT ON THE CUSTOMER

EXPERIENCE

The organization’s budgets for investing in “change the company” priorities are targeted at directly driving improvements in the customer experience. In many cases, this has been achieved through technology and transformation investments in previous years.

Arrow-circle-left Investing in launching innovative new products and services is one of the top three drivers of investment in payments technology for 60% of Trailblazer intermediaries, compared with 40% for the sector overall.

55%

100%

40%

73%

40%

60%

48%

64%

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Delivering revenue from real-time paymentsCREATING NEW SERVICES ON TOP OF RTP LEADS THE INNOVATION AGENDA FOR INTERMEDIARIES

The majority of intermediaries plan to leverage real-time payment infrastructures to bring new products and services to market in 2019 and 2020, both to generate new services and revenue and to compensate for decreasing volumes across other payment types.

Globally, 57% of intermediaries are planning to invest in new propositions around RTP as one of their top three payment investment priorities for the coming year, even more than both corporate banks (53%) and retail banks (47%). In an industry built on scale and volume, it is a strong indicator of their confidence in uptake of RTP services and their commitment to bring new value to their customers.

Asia-Pacific will be an important region to watch in this regard, with 70% of intermediaries viewing innovations around RTP as a top-three IT priority. Given the pace of change in the retail payments landscape in many markets across Asia-Pacific, this will come as no surprise; the rapid take-up of new payment initiation services such as QR codes, digital wallets, and social media/chat apps is a clear driver for new service development around RTP.

PSPS AND PROCESSORS ARE PARTICULARLY FOCUSED ON

INNOVATION AROUND RTP

When it comes to innovation around RTP, perhaps unsurprisingly, it is PSPs and payment processors that are more focused here. Sixty-seven percent of payment processors are investing in services around real-time payments as a top-three priority, while among acquirers the figure is 56%. Delivering on the needs of a range of merchants and corporates for lower payment costs and potentially a more rapid time to settlement are both important considerations here.

Beyond digital overlay services, the other leading priority area is enhancing the capabilities around fraud and security with respect to real-time payments. This is a leading priority for 47% of all intermediaries and 51% of fintechs; clearly ensuring an acceptable risk profile around any new payment service is going to be key to the ability to be truly innovative.

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Leveraging transaction data to enhance the customer experience is high on the agenda for 44% of intermediaries including 49% of fintechs. Open banking initiatives are an important driver here, and it is no surprise to see that 63% of European fintechs are focused on developing new services around transaction data.

Intermediaries are tackling the challenge of delivering new RTP services in a seamless way. Removing friction from the customer payment experience for digital and in-app payments is a further important priority for intermediaries. This is a top-three investment project for 41% of all players, and 69% of PSPs, as they look to drive consumer adoption alongside meeting the business needs of their direct customers.

Intermediaries have a reputation for being primarily concerned with scale, and the enablement of new payment types always comes with considerations about transaction volumes. What’s notable is that intermediaries across the spectrum have truly grasped the unique opportunity offered by RTP, from replacing cash and checks through to delivering added value services. The second leading investment priority for the segment is optimizing security and fraud prevention, illustrating the fact that not only are intermediaries embracing more ways to pay, they also consider the potential risks of introducing new payment methods. A holistic approach to payments innovation will define winning strategies.

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0% 60%40% 50%30%20%10%

PROPORTION OF RESPONDENTS

Developing new services around real-time payments

Leveraging transaction data to improve the customer experience and loyalty/rewards

Improving the customer authorization process for seamless/in-app payments

Supporting third-party wallets and related digital payment types for merchant acquiring

Optimizing security and fraud prevention including for real-time payments

Supporting micro transactions from connected devices (IoT)

Upgrades/improvements to card management system

Upgrades/improvements to payment hub/orchestration platform

Supporting our API/open banking strategy

3% 3%

2%

15%

15%

15%

15%

10%

9%

9%

11%

7%

5%

9%

18%

15%

17%

14%

6% 8%

5%

16%

19%

12%

35% 8%

SOURCE: OVUM PAYMENT INNOVATION SURVEY

Top Second Third

THINKING ABOUT YOUR INVESTMENT PLANS AROUND NEW PAYMENT SERVICES, WHAT ARE YOUR HIGHEST PRIORITY AREAS OVER THE NEXT 12 MONTHS?

OVERLAY SERVICES ON TOP OF REAL-TIME INFRASTRUCTURE WILL BE AT THE HEART OF PRODUCT INNOVATION IN 2019/20

57%57% of intermediaries are planning to invest in new propositions around RTP as one of their top three payment investment priorities for the coming year, even more than both corporate banks (53%) and retail banks (47%).

At the same time, 47% of intermediaries are focusing on optimizing their security and fraud detection capabilities around RTP, demonstrating the critical role that this plays in payment innovation.

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THE OPEN BANKING OPPORTUNITY

One of the most important changes that open banking has brought to the industry has been to catalyze entirely fresh thinking about both product innovation and how payment services should be delivered.

Across all areas of the financial services industry included in the Culture of Innovation Index study, a majority of retail banks, corporate banks, and intermediaries have indicated that open banking has helped to change the way that their organizations approach delivering new products and services. Among intermediaries, 96% report that this describes the change that has taken place in their organizations in recent years, with all the PSPs interviewed by Ovum and 94% of payment processors in agreement. Just over 95% of retail banks are in the same position, highlighting the industry-wide shift that has occurred.

There are multiple aspects to the change that this describes, but one of the most fundamental is to move product development and innovation beyond being a purely internal activity toward something that can (and in many cases should) be broadened out to bring in data, services, and even entire products or services from outside the organization.

OPEN BANKING WILL AID THE SHIFT IN CARD VOLUMES TO RTP

A more direct change, particularly for those active in Europe, is the impact of open banking regulations on the retail payment market. Just under 91% of intermediaries believe that the combination of open banking and real-time payments will see the importance of payment cards reduce over time. That there will be a migration of transaction volume from cards to real-time rails is a view held by 94% of payment processors and all the PSPs interviewed, and this highlights the degree to which open banking is directly driving product and service innovation in a bid to capitalize on these opportunities.

Open banking also seems set to drive change in product distribution. We are yet to see the scale of the impact that open banking will have on the value chain, but 89% of intermediaries are considering moving to some form of platform strategy, in which they will look to provide the products and services of third parties alongside their own. Merchant acquirers are the most positive in this regard, with 100% of those interviewed confirming that this is something their organization is exploring. While forming distribution partnerships with third parties is far from a new concept in the industry, it is the change in mindset brought about by open banking that has helped to push this up the agenda.

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OPEN BANKING HAS CHANGED THE WAY THAT INTERMEDIARIES APPROACH PRODUCT INNOVATION AS WELL AS THEIR FUTURE DISTRIBUTION STRATEGY

89%89% of intermediaries are considering moving to some form of platform strategy, in which they will look to provide the products and services of third parties alongside their own. Merchant acquirers are the most positive in this regard, with 100% of those interviewed confirming that this is something their organization is exploring.

0% 20% 40% 60% 80% 100%

PSP

Merchant Acquirer

Payment Processor

FintechWE ARE ACTIVELY EXPLORING A PLATFORM STRATEGY, THAT WILL SEE THIRD PARTIES TO DISTRIBUTE THEIR PRODUCTS ALONGSIDE OUR OWN

PSP

Merchant Acquirer

Payment Processor

FintechTHE MOVE TO OPEN BANKING HAS HELPED CHANGE THE WAY WE APPROACH DELIVERING NEW PRODUCTS AND SERVICES

90%

88%

100%

100%

86%

86%

89%

94%


PLEASE INDICATE YOUR LEVEL OF AGREEMENT WITH THE FOLLOWING STATEMENTS ABOUT OPEN BANKING. ALL THOSE WHO AGREE.

Intermediaries have rapidly adapted to the new open banking way of thinking. It is possible that their current place in the payments value chain positions them well to pivot to platform payments, whether as the provider of the platform or as a key partner. Whereas most banks initially focused on the competitive challenges introduced by new entrants, many larger intermediaries have seized upon the opportunity to expand their business services. Trailblazers, in particular in Asia-Pacific, are leveraging RTP and open banking to fundamentally reshape their proposition.

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TRAILBLAZERS LOOK TO TAP INTO THE VALUE OF TRANSACTION DATA ANALYTICS

The Trailblazer organizations are characterized by taking the most modern approaches to product innovation, and in the intermediary sector that means largely focusing on two areas. The first is leveraging transaction data to provide new value-added services. Across all intermediaries, 72% of Trailblazer intermediaries (including 77% of fintechs) are focusing on this as a top-three investment priority this year, compared with 44% across the sector as a whole. While this is a broad theme covering a wide range of services including loyalty propositions and data as a strategic resource for large corporates, it nevertheless highlights the degree to which this will become a differentiator in the coming 12 months.

However, innovation is not just about delivering new services; the most successful organizations are the ones that also invest to create and leverage a strong foundation for sustainable innovation. As well as focusing on overlay services, intermediaries in the Trailblazer category are more heavily focused on enhancements to the security and fraud systems that can support new propositions. Among the Trailblazer intermediaries, 50% cite this as a top-three priority for 2019/20, compared with 47% for the market overall.

With trailblazing payments innovation comes the need to fully understand that modernization includes non-functional requirements for real-time payments and digital overlay services, orchestrating with traditional product lines as well as adapting fraud prevention strategies. Beyond securing transactions, the right fraud solutions can equally support the development of transaction data services, using machine learning to analyze and contextualize information in the payments stream. Intermediaries are accelerating their time to revenue with enterprise innovation.

72%72% of Trailblazer intermediaries (including 77% of fintechs) are focusing on leveraging transaction data to provide new value-added services as a top-three investment priority this year, compared with 44% across the sector as a whole.

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0% 80%60%50% 70%40%30%20%10%

PROPORTION OF RESPONDENTS

Optimizing security and fraud prevention including for real-time payments

Leveraging transaction data to improve the customer experience and loyalty/rewards

Developing new services around real-time payments

Supporting our API/open banking strategy

Improving customer authorization process for seamless/in-app payments

Supporting third party wallets and related digital payment types for merchant acquiring

Supporting micro transactions from connected devices (IoT)

Upgrade/improvements to card management system

Upgrade/improvements to payment hub/orchestration platform

� 0%

50%50%

57%

50%39%

47%

72%44%44%

33%33%

41%

50%56%

32%

17%22%

30%

17%33%

25%

11%10%

11%11%

15%


Trailblazers Tech-led Average

THE INTERMEDIARIES THAT GET THEIR APPROACH TO INNOVATION RIGHT WILL SEE THE BENEFITS OVER THE MEDIUM TERM

Thinking about your investment plans around new payment services, what are your highest priority areas over the next 12 months?

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NEXT STEPS – HOW TO BECOME A TRAILBLAZER

While many organizations feel that theirs does not have the necessary technology and/or financial resources to become a market leader, product innovation is now far less about IT investment than it used to be.

For those that see the opportunity in innovation (and understand the danger in lagging behind) there are some important steps that need to be taken in order to become a Trailblazer.

For those intermediaries that have yet to achieve Trailblazer status, the window of opportunity to onboard the learnings of the Index is closing fast. They are flanked by peers, competitors, and partners that are radically transforming. Succeeding in innovation for intermediaries means keeping pace with competitor developments, platforming for partnerships, and continuously driving new value into the ecosystem.

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LAGGARDS EMERGING TECH-LED ADVANCED TRAILBLAZER

CHALLENGEIntermediaries in this category are behind the curve and risk losing their market position as competitors and new entrants to the value chain offer superior products and services.

ACTIONS• Take steps to determine your

future strategy and business model.

• Consider whether your senior product and IT management resources have the skills and appetite to drive real change in the organization.

• View your IT function as a potential enabler and driver of innovation rather than a cost center.

CHALLENGEThose in the emerging group typically have a strong culture within the organization around innovation but have yet to convert this into a consistent series of outputs.

ACTIONS• Ensure full alignment between IT,

product, and central innovation functions, restructuring the IT function if necessary.

• Encourage active collaboration across the whole organization with strong executive sponsorship.

• Consider partnering with vendors or consultancies to test and launch new concepts.

CHALLENGEIT investment and product innovation is typically led or managed by the IT group with relatively little cross-company collaboration or input.

ACTIONS• Build or enhance the internal

functions that shape and coordinate the process of product and service innovation.

• Ensure that activities around product development and opportunity identification are truly cross organization and that employees are given the opportunity to participate and receive training where necessary.

• Bring together stakeholders from across the business to collaboratively shape a clear product strategy.

CHALLENGEIntermediaries in this group are performing more strongly than many in the market but are still beginning to fall behind the most innovative competitors and some new entrants.

ACTIONS• Invest time and resources in

setting the right culture around innovation to ensure that all employees are encouraged to participate in the process.

• Continue to empower IT groups to experiment with new ideas and technologies.

• Take risks with new products, and do not be afraid to fail. Learning from mistakes is essential to becoming truly innovative.

Discover use cases for innovation on real-time rails and open banking at every stage of the payments value chain.

Download the whitepaper “Get More From Real-Time Payments”.file-pdf

Learn how you can better support your merchants.

Download the eguide “How PSPs can Become Problem-Solving Partners”.file-pdf

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https://www.aciworldwide.com/cmp/how-psps-can-become-problem-solving-partners?utm_source=ebook&utm_medium=infographic&utm_campaign=PP-2019-ECOM-GLOBAL&utm_content=ovum-ebook-intermediaries

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MethodologyThe purpose of Ovum’s Culture of Innovation Index is to investigate how enterprises today consider the concept of innovation and how each organization is responding to the opportunities and challenges in today’s market.

The research is based upon a global survey of 1,163 enterprises, which was conducted in 2Q19. These interviews covered a range of topics relating to two broad themes:

01: INPUTS TO THE INNOVATION PROCESS

The cultural and organizational drivers of innovation, particularly the way that the organization is structured with respect to identify changing customer needs, competitive challenges, and new market opportunities.

02: OUTPUTS FROM THE INNOVATION PROCESS

The outcomes from the process, in terms of factors such as the adoption and investment in emerging technologies as well as specific product innovation relating to the business area in question.

THE CULTURE OF INNOVATION INDEX

Across the study, the responses to more than 100 individual questions were scored and weighted to produce combined scores for each of the input and output categories. While the input scores are fully comparable across each sector, the output group includes a dedicated focus on product innovation relative to the specific business area.

Ovum conducted 110 interviews with senior management, payments, strategy, and IT directors in fintech, merchant acquirers, payment processors, and PSPs.

REGIONAL COVERAGE SECTOR COVERAGE

INTERMEDIARIES 110

Americas 44

Asia-Pacific 27

Europe 39

INTERMEDIARIES 110

Fintech 49

Merchant acquirer 9

Payment processor 36

PSP 16

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OVUM CONSULTING

Ovum is a market-leading data, research, and consulting business focused on helping digital service providers, technology companies, and enterprise decision-makers thrive in the connected digital economy.

Through our 150 analysts worldwide, we offer expert analysis and strategic insight across the IT, telecoms, and media industries.

We create business advantage for our customers by providing actionable insight to support business planning, product development, and go-to-market initiatives. Our unique combination of authoritative data, market analysis, and vertical industry expertise is designed to empower decision-making, helping our clients to profit from new technologies and capitalize on evolving business models.

Ovum is part of Informa Tech, a B2B information services business serving the technology, media, and telecoms sector. The Informa group is listed on the London Stock Exchange.

We hope that this analysis will help you make informed and imaginative business decisions. If you have further requirements, Ovum’s consulting team may be able to help your company identify future trends and opportunities.

AUTHOR

Kieran Hines

Head of Industries [email protected]

Kieran Hines is Head of Industries at Ovum, leading the technology research and portfolio development across its three pillars: financial services (retail banking, corporate banking, payments, and insurance), public sector (government and education), and telecoms & media technology.

He also leads the Financial Services Technology team. Within this, his personal research area is payments, particularly bank technology strategy around areas including real-time payments, open banking and digital commerce.

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ACI WORLDWIDE

ACI Worldwide®, the Universal Payments® (UP®) company, powers electronic payments for more than 5,300 organizations around the world. More than 1,000 of the largest financial institutions and intermediaries, as well as thousands of global merchants, rely on ACI® to execute $14 trillion each day in payments and securities. In addition, myriad organizations utilize our electronic bill presentment and payment services. Through our comprehensive suite of software solutions delivered on customers’ premises or through ACI’s private cloud, we provide real-time, immediate payments capabilities and enable the industry’s most complete omni-channel payments experience.

ACI WORLDWIDE

E [email protected]

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