March 10, 2015
EQUITY RESEARCH
James Schneider, Ph.D.
917.343.3149
Goldman, Sachs & Co.
S.K. Prasad Borra
917.343.7293
Goldman, Sachs & Co.
PART 2
Redefining “The Way We Pay” in the Next Decade
The Future of Finance
The way we pay is changing. The plumbing connecting
banks, merchants, networks and consumers is being
reconsidered. From Square and Stripe to Apple and Alipay,
innovators are creating new ways to transact - forcing
incumbents to adapt. Witness Millennials trading personal
data for convenience and retailers backing new networks
like MCX to reduce fees. Analytics are helping cut interbank
payment delays from days to seconds, while cryptocurrencies
like Bitcoin are emerging. All the while, shifting international
regulations are creating an uneven global landscape.
The latest in our Future of Finance series lays out where
traditional prot pools in payments are being challenged with
a focus on where we are headed in the next decade.
Goldman Sachs does and seeks to do business with companies covered in its research reports. As
a result, investors should be aware that the rm may have a conict of interest that could affect the
objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision. For Reg AC certication and other important disclosures, see the Disclosure
Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US afliates are not
registered/qualied as research analysts with FINRA in the U.S.
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 2
Contents
PM Summary: Redefining “the way we pay” in the next decade 3
Thematic investment framework: Navigating payment futures 6
Key Shaping Trend #1: Technology 9
Key Shaping Trend #2: Regulation 13
Key Shaping Trend #3: Demographics 16
Key Shaping Trend #4: International 21
Connecting megatrends to payment channels 24
B2C Incumbents: An overview of today’s credit & debit ecosystem 25
B2C Payments: Mobile payments – evolution or revolution? 30
Apple Pay, Samsung Pay, and Google Wallet: Re-shaping - not disrupting - the existing credit card ecosystem 30
Payment Innovators – Working within the ecosystem to deliver value-added services 33
“Democratizing” payments and capabilities for small merchants 34
Using “big data” analytics to drive higher sales for merchants 35
Payment Disruptors – Could they disintermediate the credit/debit ecosystem? 38
ACH disruptors: Making ACH faster and easier for merchants 39
Crypto-currencies: Can Bitcoin gain broad merchant acceptance? 40
China case study: Where payment innovators are quickly gaining ground 44
C2C Payments: Convenience reshapes consumers’ payment lives 48
Faster and cheaper: Few economic victims in the “war on cash and checks” 48
The challengers: Venmo, Popmoney, and Square among the standouts in a crowded field 48
C2C Payments: International money transfer incumbents 50
International money transmitters: A large and complex market opportunity – still opportunities for new entrants 50
Mobile money transfers: making inroads among the under-banked 52
C2C Payments: International money transfer innovators & disruptors 53
Money transmitter innovators in the US and Europe 53
Cryptocurrencies: A potential value proposition for international FX 54
B2B Payments: Driving efficiency for the enterprise – A rare greenfield opportunity for the payments industry 58
Waste, fraud, and abuse: The cost penalty that corporations endure today from the use of paper checks 58
An incremental opportunity to transform the enterprise with IT in the “last bastion of paper” 62
Appendix I: Index of Emerging Payment Companies 66
Disclosure Appendix 68
Payments Financials Internet Software Management
James Schneider, Ph.D. Ryan M. Nash, CFA Heath Terry, CFA Greg Dunham, CFA Robert Boroujerdi
james.schneider@gs.com ryan.nash@gs.com heath.t[email protected]om greg.dunham@gs.com robert.boroujerdi@gs.com
S.K. Prasad Borra Eric Beardsley, CFA Debra Schwartz Frank Robinson
Jeffrey Chen Jeff Lengler, CFA Tina Sun Mark Grant
jeffrey.j.chen@gs.com jeffrey.lengler@gs.com tina.sun@gs.com mark.grant@gs.com
Jordan Fox Joon Lee
[email protected]om joon.lee@gs.com
Margarite Halaris Kevin Senet
margarite.halaris@gs.com kevin.senet@gs.com
Joe Delia
joe.delia@gs.com
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 3
PM Summary: Redefining “the way we pay” in the next decade
The level of debate around the $1.2 trillion global payments industry has never been
higher. Over the past 40 years, the payments industry has evolved into a complex
ecosystem comprised of financial institutions and intermediaries, technology vendors, and
service providers. Banks, payment networks, merchant acquirers, money transmitters, and
point-of-sale vendors all occupy unique positions in the ecosystem, and have developed
their own economic models and profit pools tied to it.
At the same time, multiple mega-trends – technological, regulatory, demographic, and
international – are converging that could potentially change or disrupt today’s payments
ecosystem. Innovations in network technology and cryptography could change the speed
and mechanics of moving money, with the UK ramping a network capable of real time (vs.
a 2-3 day time lag in the US system). Millennials have different payment habits than their
parents, with 60% regularly performing mobile financial transactions. Governments have
enacted legislation to reduce payment transaction fees such as interchange by 50% or
more in order to accelerate electronic payment adoption. And consumers around the
world have very different relationships with financial institutions than their counterparts
in the US, with 50% of the world’s population without access to formal financial services.
We examine each of these megatrends, analyze the business models of emerging players,
and look at the potential impact on the payments landscape across three channels:
Business-to-Consumer, Consumer-to-Consumer, and Business-to-Business. We also
analyze the various profit pools tied to each type of payment market, and whether
incumbents are likely to successfully adapt, or lose market share to emerging vendors.
Megatrends that are shaping the face of payments
Technology – We see four significant technologies impacting the future of payments:
(1) Faster payment networks which combine modern network technology with risk
scoring have seen adoption abroad, and could replace the US ACH network in the next
5-10 years; (2) Big data analytics which aggregate purchaser data can drive higher
sales for merchants; (3) New payment security methods help safeguard consumer
data; (4) Bitcoin and cryptocurrencies promise to change the mechanics of transactions.
Regulation – Regulation continues to play a vital role in determining the future
evolution of payments, in particular: (1) Consumer protection laws determine the level
of liability exposure for consumers, and can have a profound impact on the adoption
of payment methods by geography; (2) Compliance requirements (particularly Anti-
Money Laundering and fraud rules) have broad implications for consumer payments,
particularly money transfers; (3) Interchange rules govern the fees charged by banks.
Demographics – Multiple demographic factors are playing a role in the payment
choices people make: (1) Millennials are adopting mobile payments faster than other
age groups, but also rely more on cash, while baby boomers tend to use more credit
and electronic payments than other demographics; (2) Income also plays an important
role in consumer payment choices, with higher-income individuals skewing toward
credit and electronic payment usage, and low-income consumers using more cash.
International – Outside the US, multiple demographic, regulatory, and cultural factors
are driving very different evolution paths for payment methods. We examine the cases
of China (where online commerce is growing quickly and new services like Alipay are
gaining strong traction) and Africa (where a large under-banked population is turning
to mobile payments faster than the rest of the world).
Why read this report?
Trend #1: Technology
Faster networks
Big data analytics
Payment security
Bitcoin
Trend #2: Regulation
Consumer protection
Compliance costs
Interchange rules
Trend #3: Demographic
Generational
Income
Trend #4: International
Unbanked population
Credit vs. debit
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 4
Mapping profit pools and risks in the global payments ecosystem
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 5
Our takeaways for key payment channels: B2C, C2C, and B2B
B2C Payments:
Networks maintain a strong position, but emerging players have a fighting chance to
make inroads: Commanding $590 bn in fees globally, B2C payments is both the largest
and most widely debated market in terms of potential disruption. At the heart of B2C
payments are electronic payment networks including Visa, MasterCard, AmEx, and
UnionPay, as well as cash and checks. Electronic payments offer clear advantages to
consumers and merchants as evidenced by the rapid adoption of electronic payments
over the last 15 years. But more recently, two groups of new entrants have emerged in
the B2C payments market:
o Innovators (such as PayPal, Square, Stripe, and Cardlytics) are working within
the structure established by payment networks, providing value-added
services to merchants (such as analytics, financing, and e-commerce services).
o Disruptors (such as MCX, Seamless, Dwolla, Coinbase, and Bitpay) seek to
disintermediate payment networks in a bid to provide merchants with lower
cost electronic payments.
We believe there is real demand among merchants for many of the services offered by
Innovators, and think the technologies being explored by several Disruptors promise
to lower cost of payment acceptance. However, banks and payment networks have
built a powerful market position, reinforced by tangible benefits for consumers. In the
US, credit cards come with attractive rewards programs, allowing consumers to garner
benefits based on their spending pooled across all merchants, not just one. US
consumer credit and banking regulations also provide powerful protections for
consumers (such as zero liability in case of fraud and the ability to dispute payments
for unsatisfactory products) – protections unmatched by competitive payment methods.
Importantly, incumbent payment networks are innovating. From enabling mobile
payment systems like Apple Pay, Google Wallet, and Samsung Pay to developing
merchant analytics platforms like MasterCard Advisors and Visa Transaction Advisors,
payment networks are evolving their offerings to make them more competitive with
emerging players. We see the networks’ strong market position continuing for the
foreseeable future, so long as they remain nimble and innovative. However, we see the
opportunity for emerging players to make inroads – particularly outside the US and in
emerging markets where regulatory and cultural dynamics differ.
Given multiple factors, including potential changes in regulation as well as inroads
made by emerging vendors, we see potential risk of up to $84 billion or 14% of global
industry revenue.
Our analysis suggests:
1. The greatest benefit could accrue to non-traditional lenders (such as Lending Club
and others) if they capture substantial share of the credit card debt service market
from banks.
2. Consumers could capture substantial benefits in the form of lower overdraft and
other account service fees from new real-time bank payment networks, and from
lower rates charged by non-traditional lenders.
3. Merchants could also benefit from lower interchange rates if governments
legislate lower fees in other countries as has already been done in the US, the EU,
and Australia.
4. Finally, emerging players could gain market share (such as Square, MCX, Dwolla, and
Seamless) if they penetrate under-served markets like micro-merchants and compete
effectively against traditional merchant acquirers and networks.
B2C payments:
$590 bn globally in
revenue and fees
of which:
$84 billion (14%) is
potentially at risk
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 6
Thematic investment framework: Navigating payment futures
Exhibit 1: Our thematic investment framework for evaluating payment futures
Theme Emerging Trend
Public company
winners
Notable private
companies
At risk
Technology
Faster payment networks promise
to reduce the time required to move
money in US accounts to seconds,
from 2-3 days currently
Fiserv and FIS provide
“plumbing” to
connect banks to the
system
Dwolla is selling
real-time transfer
systems to banks
Retail banks may
see lower
overdraft and
late fees
Big Data allows merchants to drive
increased sales by combining
analytics and marketing
MasterCard and Visa
are starting to provide
analytics solutions to
merchants
Cardlytics, APT,
ShopKeep, and
Womply provide
analytics solutions
to merchants
Payment security techniques help
reduce payment fraud and merchant
losses
Verifone and Ingenico
outfit merchants with
more secure point-of-
sale solutions
Square, Revel,
ShopKeep are
providing EMV-
based point-of-sale
solutions for SMBs
Bitcoin and cryptocurrencies allow
for the de-centralized transfer of
assets without a central clearing
authority
Large merchants
benefit from lower
payment costs
Coinbase, Bitpay,
and Ripple Labs are
among the key
emerging vendors
Western Union,
Moneygram,
Xoom could see
share loss
Regulation
Consumer protections help insulate
consumers from fraudulent charges
and identity theft
Visa, MasterCard &
banks retain more
business given
consumer-friendly
rules
Payment interchange fees are
moving lower in many countries
driven by legislation
Large merchants
benefit from lower
payment costs
Banks, AmEx see
reduced fees
Visa, MasterCard
may see reduced
spreads
Anti-money laundering rules help
protect against illegal funds transfer
and fraud
Smaller-scale money
transmitters like
Xoom are subject to
less regulation
WorldRemit,
TransferWise, and
Currency Fair could
gain share
Western Union
and banks could
see higher
compliance costs
Demographics
Millennials adopt mobile payments
faster
Visa, MasterCard,
Popmoney (Fiserv)
benefit from mobile
p
a
y
ment ado
p
tion
Square provides
easy-to-use mobile
solutions; Stripe
p
rocesses online
Young adults are the most under-
banked age group
MPesa (Vodafone and
Safaricom) provide
mobile money
services for unbanked
International
50% of the world’s population is
unbanked
MPesa (Vodafone and
Safaricom) provide
mobile money
services for unbanked
Western Union
and others see
lower fees from
account transfer
Many emerging market cultures
prefer debit over credit
Banks see
reduced fees;
Visa, MasterCard
may see reduced
spreads
Source: Goldman Sachs Global Investment Research.
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 7
C2C Payments:
We see the potential for significant disruption ahead: Today, consumer-to-consumer
(C2C) payments represent an estimated $30 billion in fee revenue, mainly driven by
international money remittance. We believe C2C payments are most likely to see
significant disruption over the next 10 years for several reasons:
o Incumbent technologies for C2C payments (such as checks and ACH transfers)
are generally weak, and have been unresponsive to consumer needs due to
the lack of economic incentives for incumbent service providers like banks.
o Most consumers have a simple dual mandate for C2C payments – high speed
and low cost – which can be served by applying a mix of modern network
technology and smart analytics to drive faster, more efficient payments.
o There are relatively few barriers to entry for new players in the market.
Venmo, Popmoney, ClearExchange, Square Cash, and Dwolla make it easier to transfer
money between individuals by applying mobile technology. Making transfers faster
will require systematic changes to the system (known as ACH) operated by the US
Federal Reserve and banks. A US modernization initiative is still in the early stages, but
other countries such as the UK have already adopted systems for real-time money
transfer. Few – if any – domestic C2C services charge explicit fees (they are embedded
in standard consumer banking fees) – and thus there is no profit pool to disrupt.
However, there is a significant profit pool in international C2C payments and cross-
border remittance. New online approaches (like Xoom) plus new technology
approaches (like Bitcoin, TransferWise, and Ripple Labs) have the opportunity to
disrupt traditional in-person money transfer services provided by Western Union and
many large banks.
Given both the pricing pressure we see from traditional money transmitters, and the
potential for innovators to streamline the international money transfer industry with
new technology approaches, we see about $6 billion or 20% of industry C2C revenue
at risk over time, with benefits likely accruing to both innovative service providers (in
the form of market share gains) and consumers (due to lower fees) in the long run.
B2B Payments:
A rare greenfield opportunity for payments innovation: We believe B2B payments is a
large and exciting greenfield opportunity for the industry over the next 10 years. Today,
50% of the payments processed between businesses in the US are paper checks.
Enterprises around the world bear an estimated $550 bn in direct costs and
inefficiencies tied to the manual handling, processing, and reconciliation of corporate
payments. By digitizing the payment process, enterprises can reduce both their
processing costs and headcount tied to manual reconciliation of payments and receipts.
Moreover, digitization can help reduce systemic waste, fraud, and abuse – such as
vendors overbilling their customers. Relative to consumer-facing payments, B2B
electronic payments are still in their infancy – mainly due to the slow adoption of IT
systems among small- and medium-sized businesses worldwide. However, a number
of vendors are beginning to gain market traction as electronic B2B payments take hold.
New electronic payment methods called “virtual cards” offered by companies like
WEX and FleetCor target verticals like healthcare, construction, and hospitality, which
suffer from high levels of inefficiency.
We see the opportunity for businesses worldwide to reduce their total overhead costs
tied to B2B payments by $74 billion over time, with up to $17 billion of revenue
opportunity for emerging B2B payment vendors such WEX and FleetCor, and an
estimated $57 billion in net cost savings for companies worldwide.
C2C payments:
$30 billion globally in
revenue and fees
of which:
$6 billion (20%) is
potentially at risk
B2B payments:
$550 bn in costs for
companies globally
of which:
$17 billion is the
incremental revenue
opportunity for
payments companies
$57 billion is the cost
savings that
companies could
achieve
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 8
Did you know...?
50% of the world population is still
unbanked, and over 25% of the US
population is either unbanked or under-
banked. (Page 21)
80% of Bitcoin
volume is
exchanged into
and out of
Chinese yuan.
(Page 12)
Nearly 1 in 10 of all payments in
China are made using Alipay.
(Page 46)
Nearly 50% of
payments by US
businesses are still
made with paper
checks. (Page 58)
UNBANKED POPULATION
Less than 1% of consumer
transactions in Germany
are made with credit cards.
(Page 23)
GLOBAL DIVIDE: CREDIT VS. DEBIT
4,000
X
FASTER
INNOVATION IN EMERGING MARKETS
INNOVATORS GAINING GROUND IN CHINA
PAPERLESS SHIFT
BITCOIN HAS MOMENTUM IN CHINA
MILLENNIALS
Millennials in the US
use more cash –in
40% of transactions –
than any other age
group. (Page 17)
13 million
MOBILE PAYMENTS
Kenya has more mobile payments users
than any other country. (Page 52)
BABY BOOMERS
“Big box” merchants in
the US command over
50% of all purchase volume,
but pay just 10% of payment
processing fees. (Page 34)
BIG BOX / SMALL MERCHANT PAYMENTS DIVIDE
50
%
PAY
A bank account holder
in Nigeria can move
money to another
account in seconds, but
in the US this takes up
to 3 days. (Page 10)
2.5bn+
1
元
40
%
US consumers over
65 use credit cards
more than any other
group, 33% of the
time. (Page 16)
50
%
10%
1
<
%
10
80%
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 9
Key Shaping Trend #1: Technology
As in many industries, technology is rapidly evolving both at the core and the edge of
payments. We briefly examine four salient technology changes – faster network
technology, big data analytics, payment security, and Bitcoin – and assess the likely
impact of these technologies on the future of payments.
Technology Trend #1: Faster payment networks
What’s wrong with ACH, the current interbank payments network in the US? The
system which connects banks to each other and the US Federal Reserve is known as the
Automated Clearinghouse or ACH. Overseen by National Automated Clearinghouse
Association (NACHA), the ACH system links depository institutions together. During the
day, credit and debit transactions are forwarded between member banks on the network,
and these transactions are accumulated and settled in a batch process at the end of each
day. The ACH operator calculates the net debit and credits for each member bank, and each
bank’s reserve account is adjusted by an appropriate amount at the US Federal Reserve,
which acts as the settlement agent for member banks. In 2012, the ACH network processed
more than 22 bn transactions with a total value of $39 tn.
Currently, ACH network rules mandate that credit transactions settle between banks in two
business days, with debit transactions settling the next business day. However, it may take
up to three days for funds sent from one customer’s bank to be available for use by a
customer of another bank. Despite the fact that the ACH network has been in operation for
over 40 years, the long settlement times experienced by customers are not only technology
related, and can occur due to: (1) the large number of small financial institutions in the US
connected to the network; (2) procedures and policies instituted by banks to mitigate risk
and fraud; (3) regulatory measures mandated by the government (including Know Your
Customer and Anti-Money Laundering provisions) designed to prevent illegal activity.
Exhibit 2: Next-generation national payment networks use updated technology plus risk-scoring algorithms to transfer
money between consumers and business in seconds or minutes, compared to 2 - 3 days currently
Source: Goldman Sachs Global Investment Research.
Customer
Customer
bank
Chase, BofA, Wells Fargo,
Barclays, etc.
NextGen ACH
Service
Faster Payments
Merchant
Real-time
Merchant’s bank
is credited
Bank validates
the transaction
details
Bank
confirms the
payment and
reflects the
balance
Within minutes
Real-time Real-time
Merchant charges customer
Real-time
Merchant
bank
Chase, BofA, Wells Fargo,
Barclays, etc.
Customer
instructs bank
to make
payment
Bank
verifies the
authenticity
of the
transaction
Faster Payments
Service verifies
funds are
sufficient
Customer bank
is debited
FIS and Fiserv provide
technology solutions
to small banks that
connect them to
payment processing
networks like ACH
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 10
New payments networks are driving nearly instant flow of funds between banks. By
using a mix of updated network technology – and more importantly, sophisticated risk-
scoring and analytics techniques – several countries have begun to transform their
interbank payment systems to provide for near-real-time (within minutes) transfers
between banks. Notably, the UK’s Faster Payments Service (FPS) began operations in 2008
and cleared over GBP 770 bn of transactions in 2013. Singapore, Poland, and Nigeria have
also established similar systems at a smaller scale. The US Federal Reserve is currently
developing a roadmap for payment system modernization in the US. Although still in the
consultation phase, we believe this process is likely to lead to the adoption of a more
modern, near-real-time system for electronic funds transfer between US banks. Given the
very large scale and complexity of the US banking system as well as our discussions with
industry participants, we believe that such a system could be implemented in the US in a 5-
10 year timeframe. In addition to providing greater convenience for consumers, we believe
it could significantly reduce late and overdraft fees currently levied by banks.
Technology Trend #2: Big Data - Using data to drive increased sales
Big data, when combined with loyalty programs, could deliver a sales lift of 2% - 5%
for merchants.
Big data solutions are clearly still in their infancy, but early results among
retailers are encouraging. McKinsey has noted that several of its clients in the grocery,
drugstore, and do-it-yourself retail verticals have achieved sales uplifts of up to 3% - 5%
with increased profit of 1% - 4% when using Big Data solutions. Dell reported that it
achieved incremental revenue of $200 mn in 2013, increased conversions by 30% and
increased customer satisfaction by 30% following use of Big Data applications. Applied
Predictive Technologies (APT), a provider of Big Data analytics software to the retail
industry, cites several customer case studies where retailers using big data solutions to
optimize retail space have achieved sales uplift of up to 2% with increased profit of up to
4%. We believe retailers will increasingly seek Big Data solutions to help boost sales and
customer retention.
Card-linked offers are one concrete way merchants are leveraging Big Data to drive higher
sales. Offers are tied directly a consumer’s debit or credit card (or mobile device), and
consumers shop normally with no slowdown at the register. Consumers avoid all the
hassle related to cutting and printing of paper coupons, mail-in rebates and related follow-
up. Merchants benefit from the precise targeting of customers based on purchase history
and enhancing sales and loyalty with high-value customers. Banks also see card-linked
offers as a way of enhancing customer engagement and increasing wallet share.
Exhibit 3: Big Data combines analytics & marketing with datasets to drive higher sales
Source: Goldman Sachs Global Investment Research.
Data
Integrated
Sales&
Marketing
BigData
Analytics
Sales
Uplift
Dwolla, FIS, and
Fiserv are providing
upgraded real-time
money transfer
capabilities to banks
Cardlytics, APT,
ShopKeep, and
Womply are equipping
merchants with
analytics
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 11
Technology Trend #3: Payment security and tokenization
Payment security has moved to a top priority for retailers following data breaches.
Cybersecurity became an extremely high-profile topic in 2013, and we believe interest has
accelerated further in 2014 following a series of high-profile consumer data breaches at
eBay, Target, Home Depot, and others. Given the magnitude of some of these breaches
and the significant erosion in consumer confidence experienced by some retailers, we
believe consumer data and transaction security has become a more prominent topic than
ever before in corporate boardrooms. What was once perceived as a “cost of doing
business” with an implementation timeline set by internal IT departments has now become
a business imperative for merchants – with security programs now closely monitored by
the C-suite.
Exhibit 4: EMV, tokenization, and encryption can enhance
payment security
Exhibit 5: Large merchants are leading EMV adoption
Percentage of merchants by category enabled with EMV
Source: Goldman Sachs Global Investment Research.
Source: Goldman Sachs Global Investment Research.
We believe three complementary pieces of technology are required to provide
maximum security in the payment ecosystem: EMV (chip cards), tokenization, and
encryption.
Each of these technologies addresses a different security vulnerability: 1) EMV
or chip card technology helps prevent the use of counterfeit cards; 2) tokenization
safeguards consumer data by breaking the link between a consumer’s identity and their
financial account data; 3) encryption ensures that account data cannot be “skimmed” or
stolen at the point of sale or between points in a merchant’s data network. Although each
of these technologies is helpful independently in reducing fraud and increasing data
security, we believe all three need to operate together to ensure the highest possible level
of security.
Tokenization is vital to new mobile payment methods like Apple Pay, and is being
provided by payment networks including Visa, MasterCard, AmEx, and banks. Instead of
providing the actual cardholder’s account number to the merchant, tokenization generates
a substitute number for the purpose of the transaction which is used to communicate with
the card network and member banks. Even if tokens are lost or stolen, they are of limited
value as tokens carry defined constraints such as maximum transaction value. Tokenization
is completely transparent to the consumer – and happens entirely in the software within
the payment network. We believe the primary beneficiaries of US EMV adoption are
traditional terminal vendors like Verifone and Ingenico which enable security at the point of
sale.
EMV
Tokenization
Encryption
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2013 2014 2015 2016 2017E 2018E 2019E 2020E
SME Midmarket Nationalmerchants Overallmarket
Square, Revel
Systems, and
ShopKeep provide
secure point-of-sale
software and
hardware solutions to
merchants
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 12
Technology Trend #4: Bitcoin - the era of “pervasive cryptography”
What is Bitcoin? Bitcoin is a decentralized, peer-to-peer network that allows for the proof
and transfer of ownership without the need for a trusted third party. The unit of the
network is bitcoin (with a little “b”), or BTC, which many consider a commodity or a form
of currency. The Bitcoin network was conceived in 2008 and launched in 2009. The network
is based on a series of mathematical computations, and people around the world called
“miners” who perform sophisticated computations to generate bitcoins. The formula and
software are freely available for anyone to use. There is a finite amount of bitcoins that can
be produced and as more bitcoins are created, the mathematical computations required to
create more become increasingly difficult. Bitcoin can be traded or used to buy goods and
services. Bitcoin transactions are recorded in the “block chain” – a massive and transparent
ledger of all bitcoin transactions maintained by miners. There is no central authority that
oversees Bitcoin. Importantly, there are many other cryptocurrencies that operate similarly
to Bitcoin and are used for a specific purpose, which we detail later in the report.
Exhibit 6: About 80% of Bitcoin exchange volume is now driven by the Chinese yuan
Bitcoin trading volume breakdown by the top 3 currencies
Source: Bitcoinity.org, Goldman Sachs Global Investment Research.
How could Bitcoin change the payments landscape? Rather than using a centralized
clearing system operated by a single authority (such as the government, a federation of
banks, or a single payment network), Bitcoin and other cryptocurrencies use distributed
computing power to clear and authenticate transactions between counterparties. In the
context of business-to-consumer purchase transactions, merchants would still likely need a
“merchant acquirer” or a processor to act as a service provider to handle payments.
Without a single large entity such as a large bank or payment network acting as an
intermediary for processing transactions, competition between payment processors could
in principle be increased significantly, potentially resulting in lower processing fees.
Similarly, in consumer-to-consumer money transmission, foreign exchange fees could also
be potentially reduced.
$0.00
$200.00
$400.00
$600.00
$800.00
$1,000.00
$1,200.00
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
7/12/2010
9/12/2010
11/12/2010
1/12/2011
3/12/2011
5/12/2011
7/12/2011
9/12/2011
11/12/2011
1/12/2012
3/12/2012
5/12/2012
7/12/2012
9/12/2012
11/12/2012
1/12/2013
3/12/2013
5/12/2013
7/12/2013
9/12/2013
11/12/2013
1/12/2014
3/12/2014
5/12/2014
7/12/2014
9/12/2014
11/12/2014
Bitcoin Trading Volume
CNY USD EUR Averageprice
Coinbase operates a
regulated Bitcoin
exchange in the US
Bitpay allows
merchants to accept
Bitcoin payments
online
Ripple Labs is
creating new
protocols for cross-
border FX transfers
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 13
Key Shaping Trend #2: Regulation
Over the years in developed markets, national governments have imposed significant
restrictions on banks and their ability to issue credit and debit card products. These
regulatory trends are detailed in each of our Future of Finance reports. In many cases,
they create a competitive gap in the costs at which banks can offer financial products
relative to smaller, less regulated peers including technology and internet companies.
Regulatory Trend #1: Consumer liability and fraud protection
Credit & debit incumbents offer significant consumer protection relative to most
emerging payments methods
Consumer fraud liability: Even though banks are subject to significant regulatory costs
related to the issuance of credit and debit cards, they also provide a number of important
protections that are attractive to consumers. Most important, US banks are subject to a
number of federal lending and electronic banking rules which limit consumers’ liability for
unauthorized or fraudulent use of their account (i.e., consumer liability). In many cases,
consumers in the US and other geographies are subject to zero liability on authorized or
fraudulent transactions made without their knowledge – although this varies by country.
Chargebacks: Consumers in the US and other geographies are also afforded significant
protections against merchants who do not deliver goods as advertised, or who deliver
unsatisfactory goods to the consumer. This is called a “chargeback,” and the transaction is
typically immediately credited to a consumer’s account pending an investigation by the
card-issuing bank. Relative to most other emerging payment forms, conventional credit
and debit cards offer consumers substantial financial protections – which we believe may
make them relatively difficult to displace, especially for longstanding users.
Exhibit 7: Conventional credit and debit cards afford substantial consumer protections
relative to some emerging payment forms
Source: Company data, Goldman Sachs Global Investment Research.
Credit/Debit PayPal ACH MCX*
UnitedStates
UK N/A
Australia N/A
India N/A
China N/A
Strongconsumerprotection Weakconsumerprotection
*MCXda taisbasedonCurrentCpilotprogramrules
Note:Factorsusedtogaugerelativeconsumerprotectionincludetermsrelatedto
consumerliabilityforunauthorizedchargesandchargeback/refunds
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 14
Regulatory Trend #2: Interchange fee rules
US debit interchange caps have changed the mix of payments. As part of the Dodd-
Frank financial reform legislation in the United States, Congress regulated the interchange
fees charged by banks for consumer card transactions (see B2C Payments section). Recall
that banks – not Visa and MasterCard – collect interchange fees. However, interchange
rates can impact the types and mix of cards banks issue – and hence the consumer
transaction behavior that results. The so-called “Durbin amendment” constrained
interchange fees for debit transactions (credit interchange was left untouched). The text of
the original legislation left the Federal Reserve to set specific fee caps, and the Fed
subsequently went through several iterations of fee rules. Although these rules were
challenged in court by merchants (led by Wal-Mart) as being excessive, they were
ultimately upheld by the US Supreme Court. Most notably, the rules cut debit interchange
fees by nearly 70% – capping debit interchange fees at $0.22 + 5 bps of transaction value.
Among other things, these fee reductions led US banks to largely eliminate “debit
rewards” designed to incentivize debit card use. Over time, US banks have gradually
shifted the mix of card usage toward credit, in part through the use of rewards programs.
Next stop: EU interchange and bundling rules. Interchange fees have received similar
scrutiny by the European Commission (EC). In January 2015, the European Parliament
endorsed draft rules that would cap the debit interchange fees at a flat rate 20 bps of
transaction value or 0.05 EUR, whichever is lower. Credit transactions would be capped at a
flat rate of 30 bps. This fee cap is constant across all forms of debit and credit, including
PIN debit, signature debit, and card-not-present (CNP) transactions. The European
Parliament will vote on the draft rules when it convenes in April 2015. These provisions
would take effect six months after the legislation is passed. Perhaps more important, the
proposed rules may impose “unbundling” requirements between card brand pricing and
switching/processing that could drive share shifts in processing revenue. These rules
would take effect 12 months after the legislation is passed.
Exhibit 8: US debit volume growth slowed post Durbin...
Includes estimated volume shifted to regional debit networks
Exhibit 9: Proposed EU rules would cut rates in half
Assumes a transaction value of 30 Euro
Source: Nilson, company data, Goldman Sachs Global Investment Research.
Source: Company data, Goldman Sachs Global Investment Research.
Further interchange regulation – particularly around US credit – represents a risk.
Although there has been no recent action in the US Congress to regulate credit interchange
rates, we recognize this as a long-term potential risk for banks and payment networks.
Although the card networks do not receive any portion of interchange fees, we believe the
network fees for US credit transactions are among the highest rates for different
transaction types – and thus a reduction in US credit interchange fees could result in a
long-term degradation in overall spreads they can capture in the future.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
USdebitvolumegrowth(YoY%)
FinancialcrisisslowedUSdebitto5%growth...
...andvolumesslowedpostDurbin,
potentially duetoseveralfactors
0.18
0.26
0.20
0.20
0.09
0.36
0.29
0.21
N/A
0.09
0.09
0.00
0.10
0.20
0.30
0.40
Spain U.K. Italy Germany France Proposal
EuroCents
Visa Mastercard
Avg.Credit Interchange:0.18
EuroCents
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 15
Regulatory Trend #3: Anti-money laundering (AML) and fraud rules
Over the past ten years, governments’ increasing focus on combating terrorism and drug
enforcement has driven significant regulatory scrutiny in the area of consumer-to-
consumer (C2C) payments, especially across international borders. Compliance with the
US Bank Secrecy Act as well as other international regulations has required that many
money transmitters enforce so-called “Know Your Customer” (KYC) protocols to ensure
proper identification and traceability for individuals moving money. These protocols have
driven regulatory burdens higher for many players in the space, most notably large banks
and established money transmitters.
Large money transmitters carry a higher regulatory burden than startups
As mentioned above, a variety of regulations on the national and state levels has driven
increased compliance costs for a variety of banks and established money transmitters. In
some cases, specific incidents involving affiliated local money transfer agents (affiliated
with Western Union) have resulted in additional ongoing regulatory and enforcement costs.
As a result, a notable “regulatory umbrella” has developed between large, established
money transmitters (such as Western Union and MoneyGram) and niche technology
startups who offer domestic or cross-border money transfer services. We estimate this
burden is as high as 4% of sales for Western Union, and below 1% for some emerging
money transfer players. As a result, we believe small-scale money transmitters may be
able to price more aggressively in the market.
Exhibit 10: Regulatory costs for larger money transmitters creates “regulatory umbrella”
below which emerging peers can offer more competitive pricing
Source: Company data, Goldman Sachs Global Investment Research.
4.0%
3.9%
1‐ 3%
0%‐ 1%
0%
1%
1%
2%
2%
3%
3%
4%
4%
5%
WesternUnion Moneygram Xoom Newentrants
Compliancecostsasapercentageofrevenue
300bpsof
incremental
pricingpower
Xoom, WorldRemit,
TransferWise,
Currency Fair, and
other emerging
remittance players are
innovating with new
approaches to money
transfer
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 16
Key Shaping Trend #3: Demographics
Perhaps even more than technology, one of the most compelling changes
impacting the payments industry is demographics. As technology evolves, so too
does the comfort level of different demographics with the latest technology –
from PCs to mobile devices such as smartphones and tablets, and from cash to
plastic to mobile payments. As consumers age, they become wealthier – and this
also impacts their spending capacity and credit worthiness. We examine some of
the potentially disruptive effects of these shifts.
Coming of Age: The story of Millennials, Gen X, and Baby Boomers
Consumers’ financial habits change as they age. As they get older, personal income grows
and personal wealth is gradually amassed – which drives differences in consumers’
interactions with banks over time. As a consumer’s relationship with a bank changes,
changes in payment preferences follow. A 2013 study of US consumers by the US Federal
Reserve yielded some surprising results. In contrast to the conventional wisdom that older
consumers use far more cash because they are not conditioned to use electronic payments,
younger consumers actually use the most cash (40% of transactions) relative to all other
age groups – and among the demographics using the largest fraction of electronic
payments is consumers ages 65 and up. Perhaps not surprisingly, consumers aged 65+ use
credit cards nearly 5X more often than ages 18-24. However, debit card usage is far greater
among consumers ages 18-34 (at 51%) relative to older consumers.
Exhibit 11: Somewhat surprisingly, consumers ages 18-24 use the most cash. Less of a
surprise is that younger consumers use more debit. Consumers ages 65+ use by far the
most credit.
Source: US Federal Reserve.
Not surprisingly, there are significant differences in adoption rates for the use of mobile
payment services by age – with over 60% of users aged 18-25 having made at least one
money-related transaction with their mobile device in the past month relative to just 13%
for consumers over 65 (as of 2Q14). However, even within age cohorts there have been
significant shifts that have occurred within just 30 months. For example, the fraction of
consumers using mobile payments methods has nearly doubled for ages 18-25 – and this
40%
31% 31%
32%
25% 25%
1%
6%
8%
7%
18%
18%
23%
23%
33%
51%
51%
48%
40%
41%
32%
2%
3%
4%
5%
2%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
18‐24 25‐34 35‐44 45‐54 55‐64 65&older
Cash Check Creditcard Debitcard Other
Venmo, Square, and
Popmoney (Fiserv)
provide mobile money
transfer services
which are popular
among Millennials
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 17
increase has been even more dramatic for other cohorts such as consumers aged 55-64,
where mobile payment usage has tripled to 21% (albeit from a low base) over that same
timeframe. This suggests to us that the adoption is technologies – even within age cohorts
– is rapidly evolving and is far from static.
Exhibit 12: Percentage of banked smartphone/tablet owners who have performed at least
one mobile money-related transaction in the past month
Source: AlixPartners.
The comfort with public availability of personal information is one area that is perhaps
driven more by generational and cultural factors than any other. A recent study of US
consumers by AlixPartners showed that about 55% of respondents under 35 were “very
comfortable” or “extremely comfortable” with sharing personal data with companies in
exchange for offers or rewards. This fraction drops significantly to 42% for ages 35-44 and
to 31% for ages 45-54. Perhaps most notably, this drop coincides with the generations
known as Millennials (born between 1980 and 2000) and Generation X (born between the
early 1960s and the early 1980s). This suggests to us that younger consumers, for reasons
beyond considerations of income, are more likely to respond to rewards and offers from
corporate advertisers or social media companies.
In terms of vendor preferences for mobile wallets and mobile payments, we believe recent
consumer survey work from Accenture yields some interesting observations. Consumers
still view credit card networks as top providers – with 72% of respondents preferring Visa,
MasterCard, or AmEx. However, emerging payment providers with scale such as PayPal
are not far behind (at 66% of respondents) – and notably are ahead of retail banks (at 59%),
large technology companies like Apple and Google (at 57%), retailers (at 52%), and wireless
carriers (at 48%).
34%
40%
30%
18%
7%
6%
28%
35%
45%
32%
18%
17%
10%
30%
46%
49%
31%
24%
15%
10%
31%
50%
44%
31%
23%
14%
10%
32%
56%
61%
43%
29%
23%
13%
41%
63%
56%
40%
27%
21%
13%
39%
0%
10%
20%
30%
40%
50%
60%
70%
18‐25 26‐34 35‐44 45‐54 55‐64 65and
above
Overall
Q42011 Q22012 Q42012 Q22013 Q42013 Q22014
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 18
Exhibit 13: Consumers under 35 display a significantly greater willingness to provide
personal data in exchange for rewards
Source: AlixPartners.
Exhibit 14: Traditional payment networks lead consumer preferences for mobile, but
PayPal and other challengers are not far behind
Source: Accenture, North America Consumer Payments Survey, 2014
Income: The wealthy, the unbanked, and the under-served
In the US, there is a notable divergence in payment preference by income group.
Even more than age, income dictates payment preferences among consumers in the US.
Data from the US Federal Reserve shows that low-income consumers use far more cash
28%
33%
25%
22%
15%
16%
23%
27%
21%
17%
9%
8%
4%
14%
0%
10%
20%
30%
40%
50%
60%
18‐25 26‐34 35‐44 45‐54 55‐64 65and
above
Overall
Verycomfortable Extremelycomfortable
55% 54%
42%
31%
23%
20%
37%
36%
48%
52%
57%
59%
66%
72%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Techstart‐up
(Square)
LargeTelcos
(Verizon,
AT&T)
LargeRetailer
(BestBuy,
Walmart)
Largetech
Companies
(Apple,
Google)
RetailBank
(JPMorgan,
Bankof
America)
Emerging
Payment
Providers
(PayPal)
Payment
Networks
(Visa,
MasterCard,
AmEx)
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 19
than any other demographic, with 55% preferring cash. In part, we believe this reflects the
relatively large proportion of US consumers in this category who are unbanked or under-
banked. The preference for cash declines dramatically as income grows, to just 10% for
incomes over $200k. For many of the same reasons, there is a similar discrepancy for credit
card use, where just 5% of consumers with incomes under $25k expressed a preference for
credit cards, growing to 66% for incomes over $200k. Although debit preference is far more
stable across income groups (especially among those with moderate incomes), there is a
significant tail-off for both low-income consumers (just 31% for incomes under $25k) as
well as high-income consumers (just 15% for incomes over $200k). Among low-income
consumers, we would attribute this gap to a lack of banking services. However, among
high-income consumers, we would attribute this downshift to much higher yield consumer
incentives and rewards programs tier to credit card products vs. other payment forms.
Exhibit 15: Significant payment preference gaps exist among income levels in the US, with
low-income individuals expressing a strong preference for cash and high-income for credit
Source: US Federal Reserve.
28% of adults in the US are unbanked or under-banked.
Since the financial crisis, low-income individuals have been an increasing source of focus
for payments companies and the banking system. A 2013 FDIC survey shows that nearly
8% of adults in the US are unbanked, with no access to a retail banking account. Fully 20%
of US adults are under-banked, which is defined as individuals which have a bank account
but that rely heavily on non-traditional financial services such as payday loans and check
cashing services. When unbanked individuals were asked the reasons why they do not
have a bank account, the largest proportion – 39% - said that they do not have enough
money to maintain a bank account. 15% stated that they do not like dealing with banks as a
primary reason, and 13% cited high fees as the main reason.
55%
29%
22%
16% 16%
14%
10%
3%
2%
2%
1% 1%
4%
2%
5%
15%
24%
35%
37%
37%
66%
31%
51%
49%
46%
43% 40%
15%
6%
3% 3%
2%
3%
5%
7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Lessthan
$25
$25to$50k $50kto$75k $75kto
$100k
$100kto
$125k
$125kto
$200k
$200kplus
Cash Check Creditcard Debitcard Other
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 20
Exhibit 16: Approximately 28% of US consumers are either unbanked or under-banked
Source: FDIC.
Exhibit 17: Young adults are the most unbanked
US unbanked- by age group
Exhibit 18: Low income groups are the most unbanked
US unbanked- by income bracket
Source: FDIC.
Source: FDIC.
FullyBanked,
67.0%
Underbanked,
20.0%
Unbanked,7.7%
Statusunknown,
5.3%
15.7
12.5
9.0
7.5
5.6
3.5
0
2
4
6
8
10
12
14
16
18
15to24
years
25to34
years
35to44
years
45to54
years
55to64
years
65years
ormore
Unbanked(%)
27.7
11.4
5.1
1.7
0.5
0
5
10
15
20
25
30
Lessthan
$15,000
Between
$15,000and
$30,000
Between
$30,000and
$50,000
Between
$50,000and
$75,000
AtLeast
$75,000
Unbanked(%)
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 21
Key Shaping Trend #4: International
The US remains the global innovation leader in the technology sector, including in
payments. However, local conditions – including legacy infrastructure, regulation,
customer spending patterns, and cultural norms – will dictate the adoption of these
technologies. In emerging markets, large groups of unbanked and under-banked
individuals are driving the adoption of new technologies ahead of their counterparts
in the developed world. As a result, most payment solutions tend to be local or
regional in nature, except for a few cases like PayPal which enjoys wide acceptance in
many countries.
50% of the world population is without access to financial services
Access to a bank account is one of the most basic needs in developed markets like US and
Western Europe. However, the World Bank estimates that more than 50% of the global
population (over the age of 15) does not have access to basic financial services. In many
emerging markets, sizeable “shadow economies” exist which operate entirely on cash.
These “shadow economies” comprise legal activities – including retail sales and
employment – which are unreported or under-reported for the purposes of tax avoidance.
Exhibit 19: Africa and Asia remain the least penetrated financial services markets
Adults with an account at a formal financial institution
Source: World Bank.
.
.
81+
51 - 80
31- 50
16 - 30
0 - 15
No data
Adults with an account at a formal
financial institution (%)
MPesa (Vodafone and
Safaricom) provide
mobile money
services for the
world’s under-banked
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 22
Exhibit 20: Credit penetration remains low outside US and developed Europe
Adults with a credit card
Source: World Bank.
Exhibit 21: Africa and Asia have low debit card ownership
Adults with a formal account by debit card use
Exhibit 22: Credit dominates in the US, while debit
remains the primary method in EMEA
% of cards transactions by format
Source: World Bank.
Source: Eurostat.
Developed markets have highest adoption of electronic payments
In select economically developed markets such as the United States, Scandinavia, and the
UK, there has been a substantial shift away from paper forms of payment (cash and
checks) toward electronic payments – and in particular credit and debit cards – over the
past 20 years. However even today, we estimate that over 50% of global consumer
transactions are still conducted with paper payment methods.
The shift toward electronic payments in developed markets has been largely driven by
consumer-perceived benefits such as greater convenience relative to handling cash and
bank/merchant-financed rewards for using cards. Although the penetration of electronic
.
.
81+
51 - 80
31- 50
16 - 30
0 - 15
No data
Adults with a credit card (%)
8%
13%
5%
33%
37%
35%
61%
9%
6%
27%
8%
7%
20%
28%
1%
1%
1%
1%
1%
1%
1%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Middle‐East
&North
Africa
Sub‐Saharan
Africa
SouthAsia LatinAmerica
&Caribbean
Europe&
CentralAsia
EastAsia&
Pacific
High‐Income
Economies
Hasadebitcard Doesnothavedebitcard Adultswithanaccount
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Americas EMEA RoW
CreditCardTransactions DebitTransactions ATMtransactions
Pre‐PaidCardTransactions StoreCardTransactions ChargeCardTransactions
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 23
payments in emerging markets is still small, government-driven initiatives (for raising tax
revenue and reducing shadow economy) are accelerating the move.
We estimate that in 2014, about 30% of the growth in card-based payments came from
seven emerging markets within the top 20 largest economies by GDP, namely China, Brazil,
India, Russia, Indonesia, and Mexico. At the same time, over 50% of this growth was driven
by a mix of countries (both developed and emerging) which comprise the other 20% of
global GDP not captured by the top 20. Roughly 20% of this growth is coming from
traditional developed markets within the top 20 GDP countries.
Exhibit 23: Developed markets have high adoption of electronic payments
Transactions by payment format
Source: Eurostat.
The mix of credit and debit varies based on culture and regulation
Historical consumer spending patterns vary widely different across key geographies. While
the US is one of the biggest users of consumer credit, Europeans tend to largely use debit
for most consumer transactions.
Credit cards in the US offer more protection and less risk to consumers because funds are
not being directly withdrawn from the user’s bank account as they are with a debit card.
Along with bank- and merchant-financed rewards programs, we view these consumer
protection regulations as key reasons for the higher adoption of credit cards in the US.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
CreditCardTransactions DebitTransactions ATMtransactions Pre‐PaidCardTransactions Other
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 24
Connecting megatrends to payment channels
Although there are multiple ways to classify payments, we believe they are best
discussed in terms of commercial channels, each with its own characteristics and
participants. We identify B2C (Business to Consumer), C2C (Consumer to Consumer),
and B2B (Business to Business) as the three main payment channels based on market
participants and underlying funding mechanisms. In the context of the megatrends
we have identified (technology, regulation, and demographics), we see technology as
most actively shaping C2C payments, with regulation, demographics, and technology
impacting B2C and B2B in various ways.
B2C: Incumbents are deeply entrenched, but continue to innovate
The B2C payments market is perhaps the most difficult to predict because of the multiple
sets of competing incentives for merchants and consumers. On one hand, merchants seek
to maximize their sales while simultaneously minimizing their costs – making payments a
utility and a cost center for most. On the other hand, consumers want incentives in return
for their shopping dollar, as well maximum convenience and protection against fraud and
unauthorized charges – and these features largely explain the dominant market position
which banks and networks like Visa, MasterCard, and AmEx have in the market.
Demographics and technology are key trends that we believe could shift the B2B landscape
in the future, allowing for emerging players like Square, PayPal, and Seamless to gain
market share. However, we believe regulation is the main trend dictating the prospects of
incumbent payment providers in the long term. In the absence of significant regulatory
changes, we believe banks and networks remain well positioned in the market – especially
in light of their continued innovation with initiatives such Apple Pay.
C2C: A fast-moving market with significant disruption potential
C2C payments involve consumers directly transacting with each other using technology
infrastructure provided mainly by banks. Technology and demographics are shaping C2C
payments, with new technologies like “Instant ACH” allowing for real-time transfers
between consumer bank accounts, and mobile apps like Venmo and Square Cash being
adopted by tech-savvy Millennials for everyday transactions between friends. Disruptive
technologies provided by Dwolla promise to replace existing infrastructure to make
payments faster. Although Bitcoin and other cryptocurrencies are still in the early stages of
development, they could gain traction once clear use cases become more established.
International money transfers are the only real revenue opportunity for market disruptors
in C2C payments, with innovators like TransferWise and Bitcoin exchanges leading the way.
B2B: Slow-moving market, but a greenfield market for payments
B2B payments mainly involve businesses, and tend to move very slowly given the
significant time and cost required to change technology infrastructure. Although
technology and demographics have a very gradual impact, regulation is the biggest
potential catalyst of change in the segment. We see a significant shift from paper payments
(such as checks) to electronic formats in the long run. Integration challenges and a
shortage of IT resources for implementation are cited as key reasons for slower change in
B2B channels. As new electronic products like virtual cards come to market and as IT
Services and BPO vendors accelerate their investments in this space, adoption among
businesses should drive significant opportunities for WEX, FleetCor and various IT Services
vendors.
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 25
B2C Incumbents: An overview of today’s credit & debit ecosystem
How the four-party system works for credit and debit. In any merchant credit
transaction, the exchange of goods for payment involves the delivery of goods to the
consumer by the merchant, as well as delivery of payment to the merchant. Both activities
involve certain risks, such as product delivery risk (the merchant fails to deliver), credit risk
(the customer is unable to pay), and fraud risk (by either consumer or merchant). In the
event where the merchant itself is fraudulent or processes fraudulent transactions, the
merchant acquirer is responsible for the transaction cost. This happens most frequently
when an online merchant account is established with false documentation. If a counterfeit
physical credit card is used to make a purchase which is properly validated by the card
network, the issuing bank is liable for the amount due the merchant.
Exhibit 24: Overview of information and money flow in the four-party payment ecosystem
Information and money flow through the payments value chain
Source: Company data, Goldman Sachs Global Investment Research.
Consumer convenience and universal acceptance: keys to the early growth of the
payment networks.
The need for a system where banks can easily communicate and
process credit card transactions gave rise to credit card networks such as Visa and
MasterCard, which began as bank-owned associations facilitating authorization, clearing,
and settlement among member banks. As interstate and international travel grew, so did
the role of the credit card networks. The fact that credit card networks began as bank-
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 26
owned institutions is critical to understanding how credit cards gained such wide
acceptance among consumers and how they operate. Credit card networks operate as
associations of member banks, which “sponsor” their affiliates on the network. Merchant
acquirers are responsible for vetting the credibility of their merchant clients, and bear
ultimate financial responsibility if they behave improperly. Merchant acquirers can also use
ISOs (independent sales organizations) as a sales channel to recruit merchants. Similarly,
card issuing banks extend credit to consumers, and are financially responsible in the event
consumers are unable to pay for their purchases.
Perhaps more important, the card network associations established a number of rules
which bind merchants accepting credit cards, in order to ensure both consumer acceptance
of credit cards as a form of payment, as well as the equitable treatment of all banks that are
part of the network. Ultimately, these rules were key to the early expansion of credit card
acceptance in the United States given the convenience of using electronic payments and
the lack of additional charges for doing so (for consumers), the incremental sales (and
higher ticket rate per transaction) generated (for merchants), and fees and interest
generated from greater consumer credit balances (for issuing banks). In the US, this
system has resulted in a dramatic increase in electronic forms of payment over the past 20
years. We expect this to continue globally, with growth in electronic payments of about
13% through 2018.
Exhibit 25: US credit and debit card transactions continue to climb at high-single-digit
rates – with prepaid growing at double this rate – while checks are still in rapid decline
Number of US transactions, in billions
Source: United States Federal Reserve.
How does the credit and debit network ecosystem make money?
MDR feeds the ecosystem: The current electronic payment ecosystem is funded indirectly
through the Merchant Discount Rate (MDR), a fee embedded in the sales price of products
purchased at a retailer. The merchant discount rate encompasses all the transaction-related
fees associated with processing, settling, and clearing a transaction – and is subtracted
from the total amount paid by the consumer when payment is remitted to the merchant.
0.8
3.3
5.9
9.2
15.6
25
37.5
47
19
21.7
21.0
26.2
8.8
14.6
19.1
22.1
37.3
30.5
24.5
18.3
2003 2006 2009 2012
CAGR
2003‐12 2009‐12
Total 4.7% 4.4%
Checks ‐7.6% ‐9.2%
ACH 10.9% 5.1%
Credit card 3.7% 7.6%
Debitcard 13.0% 7.7%
Prepaidcard 30.7% 15.8%
81.4 95.2 108.1 122.8
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 27
The MDR is negotiated between a merchant acquirer and a merchant, and varies based on
the merchant’s purchase volume.
Exhibit 26: The merchant discount rate paid by merchants varies by volume
Source: Electronic Transaction Association (ETA), Goldman Sachs Global Investment Research.
The MDR is composed of the following fees:
Interchange –
Interchange typically comprises the largest portion of the MDR in a
transaction, and is intended to cover the cost of cardholder charge-offs and most
credit card fraud. At the low end, interchange ranges between a flat fee of $0.23
(for a debit transaction), and 2.95% at the high end (when a premium high-end
credit card is used). Interchange rates for various transaction and card types are
set by the card networks, although issuing banks receive the entire interchange fee
Visa and MasterCard do not receive any portion of the interchange fee.
Interchange received the greatest scrutiny of any aspect of the electronic payment
ecosystem. As part of the Dodd-Frank financial reform legislation in the US,
Congress regulated the fees charged by banks for consumer debit transactions.
Network and data processing fee –
The network fee is charged by the card
network for routing the transaction, typically 4 – 25 bps of the purchase price.
Merchant acquiring/processing fees – The processing fee is charged by the
merchant’s credit card processor for transaction handling and clearing on the
merchant side, and is typically assessed as a fixed fee (for example $0.003 - $0.10
per transaction). The acquiring fee is changed by the merchant’s acquiring bank
for handling and settling the transaction, and is intended to cover costs related to
settling transaction balances with merchants, as well as the cost of merchant fraud.
Players in the four-party system: Card networks and card issuers
The role of card networks is to seamlessly connect issuing and merchant acquiring
banks, and to securely process, route, and verify merchant transactions as quickly as
possible.
Payment network operators derive income from 1) transaction fees on purchase
volumes carrying their brand;
2) data processing fees on credit and debit transactions
routed through their network;
3) international transaction and foreign exchange fees on
cross-border transactions processed through the network:
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
0‐$100k $100k‐$250k $250k‐$500k $500k‐$1,000k Over$1,000k
MerchantDiscountRate
AnnualCardVolume
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 28
Visa: The largest card network, with 62% of worldwide transactions processed in
2013. Notably, Visa operates independently from Visa Europe, which operates as a
bank-owned network within Europe. Visa does not derive any transaction revenue
directly from Visa Europe, though their processing networks interoperate
seamlessly.
MasterCard: The second-largest card network with 26% of global volume,
MasterCard has significantly greater exposure to Europe (given Visa’s separation
from Visa Europe) than Visa.
UnionPay: UnionPay is a bank-owned card network based in China, the third
largest network globally. UnionPay has a reciprocal agreement with Discover that
accepts Discover at merchants in China which accept UnionPay, and accepts
UnionPay at merchants in the US and Canada which accept Discover.
Bank credit issuer & network operators derive revenue from the same sources as card
networks, as well as 1) interchange fees collected by issuing banks; 2) interest
charges on outstanding customer credit balances; 3) license fees paid by third-party
issuers of network-branded cards (for example, AMEX issued by Bank of America):
American Express: Operating as the largest card-issuing network globally, AMEX
also offers a range business and consumer financial products.
Discover: Discover offers a variety of consumer lending services (70% of sales) as
well as issuing branded credit cards (30% of sales). As noted above, Discover has a
reciprocal agreement with China’s UnionPay. Discover also has an agreement with
EBay’s PayPal to process PayPal transactions over Discover’s network.
Exhibit 27: Visa and Mastercard together held about 66%
of $20.6 trillion credit/debit transaction value in 2013...
Percentage share of global credit and debit transaction value
Exhibit 28: ...but process a far greater share of
transaction volume
Percentage share of global credit and debit transaction
volume
Source: The Nilson Report.
Source: The Nilson Report.
Players in the four-party system: merchant acquirers & processors
Merchant acquirers perform several basic functions for merchants: 1) Underwrite
merchants, allowing them to accept network-branded cards; 2) Sell or rent point-of-sale
equipment used to validate transactions; 3) Process transactions, which means facilitating
transaction authorization, clearing, and settlement. Different companies in the payment
ecosystem perform one or all of these services for merchants. In order to gain access to the
card networks, a merchant acquirer is either part a bank or sponsored by a bank. Merchant
acquirers often use ISOs (Independent Sales Organizations) to recruit new merchants.
Merchant acquiring and processing: Fixed costs dominate, so scale is critical. Processing
card transactions requires significant fixed infrastructure investment, including datacenter
Visa
46%
Mastercard
20%
UnionPay
28%
AMEX
5%
JCB
1%
DinersClub
0%
Visa
62%
Mastercard
26%
UnionPay
8%
AMEX
3%
JCB
1%
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 29
processing capacity, telecommunications lines, software, information security, and
regulatory compliance. However, once the infrastructure is built, the incremental cost to
process each additional transaction is low – making card processing a scale business.
Exhibit 29: The Top 10 merchant acquirers in the US
process 86% of all credit transaction volume...
Percentage share of US processed credit transaction value
Exhibit 30: ...and a similar share of transaction volume
Percentage share of US processed credit transaction volume
Source: The Nilson Report.
Source: The Nilson Report.
BankofAmerica(BAMS)
18%
ChasePaymentech
15%
FirstData
15%
Vantiv
10%
Elavon
8%
WellsFargoMerchant
Services
6%
CitiMerchantServices
5%
GlobalPayments
4%
HeartlandPayment
Systems
3%
WorldPay
2%
Allother
14%
BankofAmerica(BAMS)
18%
ChasePaymentech
13%
FirstData
13%
Vantiv
16%
Elavon
4%
WellsFargoMerchant
Services
3%
CitiMerchantServices
8%
GlobalPayments
3%
HeartlandPayment
Systems
4%
WorldPay
4%
Allother
14%
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 30
B2C Payments: Mobile payments – evolution or revolution?
Mobile Wallets: Apple Pay, Samsung Pay, and Google Wallet:
Re-shaping - not disrupting - the existing credit card ecosystem
In September 2014, Apple introduced Apple Pay, its mobile payments service. Apple Pay
allows iPhone 6 and 6 Plus users (and later, owners of the Apple Watch) to make one-touch
payments for goods and services with their Apple devices at retail locations with NFC-
enabled terminals. The solution works with payment and technology incumbents
(including networks and banks) to bring ease-of-use and increased security features to
consumers, issuers, and merchants. Over 90% of US credit card issuers, the payment
networks, and several merchants have already signed up to support Apple Pay, which we
believe signals the early impact Apple Pay is having on the industry. In addition we believe
Apple Pay will serve as a slight catalyst for merchant NFC adoption, with many large
merchants already accepting Apple Pay payments.
Previous launches of mobile payments systems in the US — including Softcard (formerly
ISIS), and Google Wallet – have gained limited traction, either because participants
attempted to significantly change the economics of the existing credit/debit card system
(limiting issuer support), focused on collecting user data, or because of limited adoption at
merchant locations. Apple Pay does not attempt to disrupt the existing payment system,
but rather works with payment and technology incumbents (including networks and banks)
to bring ease-of-use and increased security features to consumers, issuers, and merchants.
Exhibit 31: Overview of token provisioning for Apple Pay transactions
Source: Goldman Sachs Global Investment Research.
Customer
Apple TouchID/
NFC
Merchantor
DigitalWallet
Merchant
Acquirer
Payment
Network
Issuing Bank
Token ServiceAPIInterface
ExistingInteraction
PAN:PrimaryAccountNumber
ID&V:Identification&Verification
PAN/Token
TokenPresentment
(Server)
TokenAssurance
(ID&V)
Token
Request
Token Service
Provider
Optional
Cloud‐based
dataexchange
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 31
Assessing the market opportunity for Apple Pay
Apple Pay addresses counterfeit card fraud and consumer data theft, two of today’s most
prevalent security threats. It combines EMV, NFC, and Touch ID to ensure the credit card
information used is protected, and is being properly authorized by the cardholder. Apple
Pay uses tokenization provided by Visa, MasterCard, AmEx, and banks to ensure that
consumer identity and credit card information is never stored on merchants systems and
hence not subject to data breaches. The main reason why we believe Apple Pay can
succeed is because Apple is not trying to capture an outsized share of the economics. With
Apple Pay, we believe
Apple effectively establishes a payments infrastructure with a
balanced cost-benefit for consumers, card issuers, retailers, and networks
. Consumers
pay virtually nothing to be able to benefit from the service. Retailers must invest significant
capital in upgrading to NFC, but hope to gain increased consumer wallet share. Card
issuers sacrifice a moderate amount of margin, which they hope will be mostly offset by
reduced fraud charges and increased purchase volume. Considering that a group of banks
accounting for 90% of US credit card purchase volume have already partnered with Apple
Pay at launch, we believe Apple Pay will not significantly impact the underlying economics
of the payments industry.
We think Apple Pay is unlikely to have a material impact on Apple’s financials
To arrive at our forecast for Apple Pay’s revenue impact, we assessed a number of inputs,
including the percentage of total credit card terminals with NFC capability the purchase
TAM for the US, Canada/Latin America, Europe, and Asia, and several other factors. In the
US (where credit card interchange rates charged by banks are highest, typically over 150
bps of purchase volume), we expect Apple will receive 5 – 15 bps for credit transactions
(depending on the size of the issuer, with very large issuers such as Chase likely paying
toward the lower end of this range) but significantly less for debit transactions. If we
assume that Apple earns 10 bps – the midpoint of our scenario analyses – on every credit
transaction in the US, Apple Pay would contribute $210 million to the company’s revenues
in 2016, which represents a mere 0.21% of our forecasted total gross profits for the fiscal
year. At the high end, if Apple collects 15 bps on credit card transactions, Apple Pay could
generate $290 million or 0.29% of gross profits.
The bottom line: it will be hard for Apple
Pay to ever have a meaningful, direct impact on Apple’s financials.
Exhibit 32: Apple Pay customer adoption is likely to be
led by the US
Estimated consumer adoption rates by region
Exhibit 33: Expect the US to constitute the vast majority
of Apple Pay adoption
Potential Apple Pay transactions as a % of purchase TAM
Source: Goldman Sachs Global Investment Research.
Source: Goldman Sachs Global Investment Research.
Loyalty and rewards integration:
There have been intermittent press reports suggesting
that Apple Pay will integrate loyalty and rewards programs with mobile payment through
beacons and Bluetooth. In principle, the service would allow loyalty and rewards programs
to activate automatically based on the customer’s location when visiting a merchant.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2014E 2015E 2016E 2017E 2018E 2019E 2020
E
Customeradoptionrates(%)
US Canada/LatAm EMEA/APAC
0%
5%
10%
15%
20%
25%
30%
35%
2014E 2015E 2016E 2017E 2018E 2019E 2020E
Applepayasa%ofpurchaseTAM
US Canada/LatAm EMEA APAC
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 32
Purchases could be linked to rewards programs via Bluetooth after payments instead of
scanning rewards codes, creating a more seamless transaction for the customer. We
believe the integration of loyalty and rewards will be a key catalyst to push consumer
adoption of mobile wallets, and we will be closely monitoring developments in this area.
Samsung Pay: An opportunity to leapfrog Apple Pay adoption?
Still early, but Samsung Pay offers significantly greater merchant acceptance at
launch:
On March 1, 2015, Samsung launched Samsung Pay, a mobile payment system
running on top of Google’s Android OS, along with the introduction of its flagship
Samsung Galaxy S6 smartphone. Samsung Pay is different from Apple Pay in that it relies
on two alternate hardware methods to transmit payment information. In addition to
incorporating NFC wireless functionality (similar to Apple Pay), Samsung Pay also uses
another wireless magnetic technology (based on Samsung’s February 2015 acquisition of
private vendor LoopPay) which allows the phone to transmit the user’s credit card
information via magnetic field to most standard magnetic stripe point-of-sale terminals. In
both cases, the user’s transaction is verified by the smartphone’s fingerprint reader. As
with Apple Pay, Visa and MasterCard are enabling Samsung Pay’s security by providing
tokenization services. Although we believe Samsung Pay’s security protocol is less tight
than the fully NFC- and EMV-compliant stack offered by Apple Pay, it is still more secure
than traditional physical magnetic stripe cards because of the presence of fingerprint
authentication technology. In principle, Samsung Pay could allow significantly faster
merchant adoption than Apple Pay as we estimate that over 80% of merchants already
possess POS hardware that is compatible with Samsung Pay (vs. 13% of US merchants
with Apple Pay compatible POS hardware in 2015). As such, we believe Samsung Pay
could shape the default wallet offering for Samsung devices. Samsung announced
confirmed issuer partnerships including Citi, USBank and Synchrony; it is in talks with
Chase, B of A, and AmEx. Samsung Pay will launch in the US in the summer of 2015.
Google Wallet: We expect a competitive response in 2015
The state of play: Launched in September 2011, Google Wallet is a free digital wallet app
provided by Google. Google Wallet is available for Android phones and iPhones, and it
allows customers to make in-store payments via a linked credit or debit card or by using
their Wallet balances. Google Wallet users can also store loyalty programs in their phones,
use a Google Wallet Card to pay at MasterCard locations, send money to each other via the
app or a Gmail account, and pay online with Wallet balances. Google Wallet uses NFC
technology to enable customers to “tap and pay” at the point of sale. Google recently
retired its Google Wallet API for Digital Goods, which supported payment processing for
purchases of select digital items excluding content and in-app purchases.
What’s next for Google Wallet: As we mentioned above, we believe the introduction of
Apple Pay will serve as a moderate catalyst for NFC adoption. We think 2015 will be an
opportune time for Google to respond to moves from Apple and others. In February 2015,
Google acquired assets from Softcard (formerly ISIS), and announced an agreement with
US carriers including AT&T, Verizon, and T-Mobile to pre-load Google Wallet (with NFC
functionality) on smartphones distributed by those carriers. Our software and select
Internet analyst Heather Bellini expects Google to enhance Google Wallet and potentially
re-launch the product in conjunction with its Google I/O Conference in May 2015. Although
the direct financial opportunity related to payment processing is limited, we believe the
prospect of gaining access to consumer data makes the market very attractive for Google
to the extent that it could monetize consumer transaction data through advertising.
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 33
Payment Innovators – Working within the ecosystem to deliver
value-added services
New technology capabilities, including big data analytics and mobile devices like
tablets, are creating the opportunity for new services for merchants, and offer the
promise of driving higher sales, enabling an e-commerce presence, and streamlining
operations. These capabilities are being rapidly “democratized” – and are now being
offered to small- and medium-sized merchants as well as large merchants.
Online innovators: PayPal and Amazon
PayPal: Strong traction in e-commerce, but offline adoption remains modest. PayPal
has become one of the most successful payment systems for m-commerce transactions,
processing $27 billion in volume in 2013. Our Internet analyst Heath Terry estimates that
PayPal processes 55% of its volume with the traditional card networks, with 30% via ACH,
and 15% funded by stored balance (including sales on EBay). We would also note PayPal’s
partnership with Discover, which enables broad PayPal acceptance at merchants which
accept Discover cards. We expect EBay to continue its strong growth trajectory in e-
commerce given its solid acceptance with many online merchants. We believe that a
portion of these transactions will continue to be done via ACH, which in our view
represents an immaterial headwind for the card networks given the share of EBay
transactions processed via ACH. Although this headwind could grow significantly if PayPal
were to gain substantial acceptance among offline merchants, PayPal has thus far gained
minimal traction in this arena – partly for reasons related to the slow adoption of offline
mobile payments we examine below. We would point out that more recently, Visa
Checkout and MasterPass have emerged as competitive offerings from payment networks.
Exhibit 34: Mobile commerce is still small today relative to total card transaction volumes,
but could reach 3% - 4% of total card volume by 2018
Includes products and services ordered in the internet using mobile devices; excludes travel and
event ticket sales. Dollars in billions.
Source: Goldman Sachs Global Investment Research, Euromonitor.
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
2013 2014E 2015E 2016E 2017E 2018E
Totalvalue(in$bn)
Retailsales E‐commerce GlobalM‐commerce
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 34
Amazon Payments: Competition heats up in online payments. I
n October 2013,
Amazon introduced its “Login and Pay with Amazon” service to partner e-commerce sites,
allowing users to pay with credit card information attached to an Amazon ID (Amazon
currently has about 240 mn monthly active users with stored credit card information). In
June 2014, Amazon extended its Amazon Payments service to small- and medium-sized
businesses to accept recurring payments made by consumers or other businesses with
credentials tied to an Amazon ID (including credit and debit cards as well as bank accounts
via ACH). Amazon’s standard payment processing fee is 2.9% plus $0.30 per transaction for
the lowest transaction volume, and this fee is reduced to as little as 1.9% plus $0.30 for
merchants with $1.2 mn or more in annual volume (similar to those charged by PayPal).
Our internet analyst Heath Terry believes that Amazon’s moves in this area put it in more
direct competition with PayPal in the online payments space. However, he believes that
Amazon is also likely to face challenges as it expands in payments, as many merchants
view Amazon as more of a potential competitor than a partner. In January 2015, Amazon
shut down its beta Wallet. As with PayPal, we believe Amazon could gain some level of
traction in online payments – but think it is likely to rely mainly on conventional credit/debit
card transactions for purchases.
“Democratizing” payments and capabilities for small merchants
Merchants with relatively low credit card volume (under $50k) have been under-served by
incumbent payment vendors, in part because of the low absolute profit levels associated
with handling very small merchants. As a result, the penetration rate of electronic
payments within this category has significantly lagged the broader market. However,
vendors like Square have targeted the micro- and small merchant segments using mobile
point of sale terminals (mPOS) based on standard consumer tablet hardware in order to
significantly reduce fixed and setup costs. From being a vendor originally focused on
mobile POS terminals, Square has extended its positioning to become a merchant
aggregator offering a wide variety of value-added products and services including
merchant analytics tools, scheduling and calendaring, and merchant financing services. In
Europe, a similar effort is being led by vendors including iZettle, SumUp and Payleven.
Exhibit 35: Micro merchants represent an untapped market
Customer segmentation of the merchant acquiring industry
Source: First Annapolis (2010 estimates).
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 35
Breadcrumb (acquired by Groupon) provides attractive payment processing rates (1.99% +
15¢ per transaction) for SME merchants, along with a POS offering integrating ERP and
analytics ($99 - $399 per month, depending on the merchant size and number of terminals).
The monthly fee can be reduced or waived when merchants initiate Groupon campaigns.
Establishing an e-commerce presence and accepting payments online remains a
cumbersome and expensive process for small merchants due to high set up fees, monthly
fees, and charges for failed payments. Vendors like Stripe offer a set of unified APIs and
tools to allow websites to more easily accept payments (without requiring a merchant
account). Stripe has a seven-day waiting period for transactions to be completed so that
Stripe can profile the businesses involved and detect fraud. Stripe charges 2.9% + 30¢ per
transaction (or less, based on volume). In the US, Stripe accepts payments in 100+
currencies (an additional fee of 2% fee plus FX charges for foreign transactions). In
February 2015, Stripe launched support for Bitcoin, charging 0.5% per Bitcoin transaction.
Using analytics to drive higher sales for merchants
Card linked offers (CLOs)
New analytics platforms can be of significant value for merchants who are increasingly
focused on enhancing customer loyalty and generating higher sales and profits. Card
linked offers and rewards are transaction-based marketing programs based on the usage
and purchase patterns for credit, debit, and prepaid cards. Although in principle card linked
offers are a win-win for consumers and merchants, many card linked offers have
historically been difficult to use, lacking good analytics to deliver relevant offers.
Digital coupons are tied directly a consumer’s debit or credit card (or mobile device), and
consumers shop normally with no slowdown at the register. Upon making a purchase, the
consumer can see the discount applied on his or her card account statement. In the case of
mobile payments, the consumer can see the discount applied at the merchant point of sale
in real time. Card linked rewards are typically simple – a percentage or a fixed discount
applied to a shopper’s purchase. Key vendors in the card linked offers and rewards space
include Cardlytics, Edo, CardSpring (Twitter), Free Monee, Shopkick, Cartera Commerce,
Reward Insight, and SavingStar. CardLinx operates as an industry group coordinating a
series of technical and business standards related to card-linked offers.
Exhibit 36: Card linked offers provides value to all participants in the value chain
Card Linked Offers (CLO) value chain
Source: Goldman Sachs Global Investment Research.
Card Linked Offer
(CLO)
Value Chain
- New revenue channels
- Increased transactions
- Merchant specific
reward programs
- Attractive incentives
- Cost savings
-Better service
- Increased ticket size
- Increased customers
- Increased loyalty
- Lower footprint
- Seamless integration
- Outcome based pricing
models
Benefits Benefits
Success
Factors
Benefits
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 36
For consumers, the clear benefit is avoiding all the hassle related to cutting and
printing of paper coupons
, mail-in rebates and related follow-up processes. Once a
consumer registers a card with a CLO, all processes are automatic. The increased use of
mobile wallets and payment applications is likely to help merchants more effectively target
consumers with offers, and “close the loop” between offer and redemption. We believe
improved analytics tools, increased ease of use, and the adoption of mobile platforms are
key to the increased adoption of card linked offers.
For merchants, the key benefit is precise targeting of customers based on purchase
history and enhancing sales and loyalty with high-value customers.
Merchants also
benefit from reach of its bank or loyalty program account partner. A merchant can easily
track the performance of its offer, and pay the bank or loyalty program a commission for
only offers that are actually redeemed. Since card-linked offers generally require no
changes to merchant point of sale systems, and little training to implement discounts,
merchants typically see a rapid ROI from card-linked offers.
Exhibit 37: Customers who use card linked offers have an
overall higher spend on their cards with usage
Impact to total monthly spend after first redemption
Exhibit 38: Better ability to reach loyal customers is seen
as the most important benefit from card-linked offers
Perceived benefits of card-linked marketing
Source: Cardlytics.
Source: Cardlytics.
For banks, card linked offers are a good way to engage customers and incentivize
them to spend more.
Increased card usage for the bank leads to increased interchange
revenues and reduced customer attrition. According to a Cardlytics study, a customer’s first
redemption drives a 5% increase in their total spending for that month and a sustained lift
in spending over successive months.
Exhibit 39: Key vendors in the card linked offers landscape
Key vendors and their respective partners in card linked offers landscape
Source: Company data.
97%
98%
99%
100%
101%
102%
103%
104%
105%
106%
Redemption
Month
Month2Month3Month4
Noredemption Maderedemtion
+5.0%
+0.9% +0.8% +0.7%
27%
33%
41%
43%
45%
47%
49%
0% 20% 40% 60%
Precisemeasurementofmarketing
campaignresults
Improvedcustomersatisfactiondueto
morerelevantads
Betterabilitytotargetnewcustomers
Increasedsalesforretailers
Abilitytotargetoffersbasedonconsumer
purchasehistory
Helpscustomerssavemoney
Betterabilitytoreachloyalcustomers
Company Domicile Partners Targetsegmentsandcustomers
Cardlytics U.S BofA,PNCbank,LlyodsBank,integrateswith400+banks
edoInteractive
U.S VisaEurope 6ofthetop10cardissuers,1000+retailers
CardSpring(Twitter) U.S FirstData,Verifone Financialinstitutions,Merchants(Starbucksetc.)
Truaxis(Mastercard)
U.S TSYS Financialinstitutions
CarteraCommerce
U.S Groupon 4ofthetop10cardissuers,5ofthe6airlines,merchants
Reward
Insight U.K
Financialinstitutions,Merchants
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 37
Using analytics to enhance customer loyalty
Customer loyalty remains one of the key concerns for retailers. Retailers are launching
multiple loyalty programs to enhance customer loyalty. According to the Aberdeen Group,
the top three reasons why retailers develop loyalty programs are to generate repeat visits
(61%), boost incremental sales (58%) and increase overall customer satisfaction (57%).
Although daily deals are an option, they come with a number of challenges including
consumer email fatigue.
Merchant-centric analytic platforms are an easy way to provide timely, accurate insight and
analysis of the consumer buying behavior – which facilitates better forecasting,
benchmarking and business decisions for merchants. On the merchant side, analytics tools
help track and measure the benefits from a new loyalty or rewards program. Consumers
can also benefit as these tools can spot credit and debit card transactions at participating
merchants, and push cash credits directly back to credit and debit card accounts.
Key vendors in the space include Womply and Swipely.
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 38
Payment Disruptors – Could they disintermediate the credit/debit
ecosystem?
Over the past few years, several alternatives to the conventional credit and debit card
ecosystem have developed. These systems seek to lower the cost of payment
acceptance for merchants by replacing the existing credit/debit card networks
operated by Visa, MasterCard, and AmEx with either existing payment infrastructure
(such as ACH) or distributed network technology (such as Bitcoin). We call them
Disruptors, since their success (unlike the Innovators) would mean the
disintermediation of conventional payment networks. Although we think these
alternatives have a chance to succeed, they will have to overcome several
disadvantages including less consumer protection plus a lack of loyalty and rewards
programs compared with traditional credit/debit card networks.
Exhibit 40: ACH-based payment transaction system
Average payment clearing time of 1-4 days
Source: Goldman Sachs Global Investment Research.
MCX: Merchants attempt to disrupt the credit & debit networks
We expect Merchant Customer Exchange (MCX), a JV formed by the nation’s largest
retailers, to launch its own mobile payments solution in 2015.
MCX was formed in 2012
as a joint venture among over 70 national merchants including WalMart, Target, Best Buy,
CVS. These merchants account for an estimated $1 trillion of annual purchase volume over
111,000 merchant locations. As a payments organization created by merchants, MCX seeks
to
(1) reduce or eliminate interchange fees charged on purchases – typically 2% for
credit cards or $0.23 for debit cards – in order to lower merchant costs;
(2) provide
Customer
(Receiver)
RDFI
(Customer’s Bank)
Chase, BofA, Wells Fargo,
Barclays, etc.
ACH operator
(Processing: $0.01)
Federal Reserve Bank
Merchant
Originator
(Receives $99.75)
Consumer
pays bill
RDFI
makes
funds
available
ACH operator
distributes
ACH file to
RDFI
Clearing &
settlement
Clearing &
settlement
Sorts and
transmits file to
ACH operator
Merchant charges customer ($100)
Customer provides
authorization to merchant
Third party processor
(Processing: $0.24)
Dwolla, FiServ, PaySimple,
Bluepay
ODFI
(Merchant’s Bank)
Chase, BofA, Wells Fargo,
Barclays, etc.
Request is
generated and
sent to a
processor
0 - 1 days
Real-time 1 - 3 days
Real-time
Real-time
Real-time
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 39
merchants with granular consumer data (which it does not receive when consumers pay
with standard credit or debit cards transactions) to drive increased sales. MCX has
partnered with Fidelity National Information Services (FIS), which has built a system to
connect merchants to banks to enable direct debits from consumer bank accounts. Based
on press reports, we believe MCX has also partnered with Paydiant to develop point-of-sale
infrastructure for merchants.
CurrentC, MCX’s mobile wallet product, has been launched through a private pilot program
in select locations across the country which is expected to continue to expand – and we
believe regional and national rollouts are likely to follow in mid-2015. Unlike Apple Pay and
Google Wallet transactions which use NFC, MCX uses QR codes to present a secure
transaction token. CurrentC is currently limited to debit, gift card, and ACH transactions,
but recent company press releases suggest it will ultimately support credit transactions as
well (potentially with store-branded credit cards issued by third parties). We would
highlight that many large MCX members, including WalMart, CVS, Best Buy, and Target
and Walmart, are not supporting NFC-based payments such as Apple Pay and Google
Wallet in anticipation of the MCX launch.
We believe MCX’s success will hinge on the effectiveness of payment and data
security, consumer policies, and rewards programs.
We recognize that MCX offers some
compelling advantages to merchants both in terms of potential cost reduction from lower
transaction costs, as well as potential sales upside if merchants are able to fully exploit
customer data. However, we also believe MCX faces several potential challenges to gaining
market traction. First, despite the fact that MCX reportedly uses tokenization to ensure
transaction security, we believe some consumers may be reluctant to provide their bank
account information in light of recent merchant data breaches. Second, according to MCX’s
initial terms of service, consumers are liable for instances of transaction fraud – making
MCX less “consumer friendly” than traditional credit cards which afford attractive terms to
consumers regarding fraud liability and chargebacks. Third, MCX retailers will need to fund
alternate rewards programs to compete with rewards programs offered by card issuers –
which could potentially dilute the interchange cost savings afforded by MCX. Some press
reports had speculated about the possibility of MCX consolidating its members’ reward
programs under one universal platform. However, speaking at the Money 20/20 trade show
in November 2014, MCX CEO Dekkers Davidson indicated that MCX members will maintain
separate, merchant-specific rewards programs such as the Target Red program. We will be
closely monitoring MCX and the CurrentC pilot as it prepares to launch into the broader
market.
ACH disruptors: Making ACH faster and easier for merchants
Seamless and Dwolla: Improving upon and replacing ACH in the US. Seamless provides a
mobile payment platform for both merchants and consumers which functions using direct
account transfers, outside of the traditional credit and debit card networks. This approach
is attractive to merchants because Seamless offers a ~50% discount to the processing rates
charged by traditional credit card networks and merchant acquirers. The Seamless system
operates by using optical QR codes that can be read by most standard smartphones.
Seamless is already operating in several countries throughout Europe and has partnerships
with a number of large retailers and QSRs – and the company has begun to forge
partnerships to prepare for expansion to the US.
Dwolla is focused on quickening the pace of payments between banks in the US by
providing a real-time replacement for ACH transfers between participating banks. Currently,
many standard money transfers in the US take 2-3 business days to clear via the ACH
(Automated Clearing House) system. This is driven in part by significant delays introduced
in overnight batch processing of transactions, as well as AML, risk-scoring, and other
compliance processes used by banks. By charging a fixed fee for moving money ($0.25 for
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 40
transactions over $10), Dwolla allows for the near-real-time transfer (using FiSync
technology) of money between accounts at participating institutions. Dwolla has forged a
number of key partnerships to date, including with BBVA. Dwolla is currently focused on
expanding its service for individuals (C2C) and businesses (B2B) at participating banks in
the US – but it believes it could expand to serve the B2C market over time. In February 2015,
as part of its objective to move to move away from paper-based processes, the US Federal
Government payment portal (pay.gov), will begin accepting digital wallet payments
through PayPal and Dwolla.
Crypto-currencies: Can Bitcoin gain broad merchant acceptance?
Bitcoin - Solving the “trust problem” between online buyers and sellers?
Over the past two years, merchants have begun to investigate – and in some cases adopt –
Bitcoin and other cryptocurrencies as alternative means of payment to fiat currency, and
several merchant processing services have risen to fill this demand. Currently, the two
largest names in Bitcoin merchant processing services are BitPay and Coinbase. As with
other processors of Bitcoin transactions, both companies allow merchants to accept Bitcoin
as a form of payment. Processing costs are typically charged to merchants as a flat
subscription fee, or as a percentage transaction fee. Merchants also have the option to
settle transactions in local fiat currency based on spot rates, which allows them to support
Bitcoin payments without having to hold bitcoin balances. While bitcoin balances are
commonly updated for a transaction within minutes, fiat currency settlements can take
multiple days and may be subject to charges.
Exhibit 41: Bitcoin-based payment transaction system
Average payment clearing time: 0-4 days
Source: Goldman Sachs Global Investment Research.
Customer
Customer
Bitcoin client
(Processing: $1.00)
Coinbase, BitPay
Miners
(Receives $0.005)
N/A
Merchant
(Receives: $99.00)
Optional:
Client
converts
FIAT to
BTC for
customer
Customer
submit
transfer
request
Real-time
Client signs
transaction
request and
forwards details
The miner
bundles the
transaction with
other incoming
transactions into
a block
The miner
verifies the
transaction
Client
reflects new
balance in
merchant’s
wallet
Optional:
Client
converts
BTC back
to FIAT for
Merchant
0-4 business days
Real-time
About 10 minutes
Merchant
Bitcoin client
Coinbase, BitPay
Merchant charges customer ($100)
Real-time
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 41
Merchant acceptance is still in its infancy, but early indicators are mixed. Although
actual merchant adoption is still in its infancy, a meaningful number of merchants have
expressed an interest in accepting Bitcoin and other cryptocurrencies. Among merchant
acquirers and ISOs surveyed in our recent survey conducted with the Electronic
Transactions Association (ETA), approximately 2% of merchants already accept Bitcoin –
but beyond this level, 23% have plans to begin accepting Bitcoin within the next two years,
which we see as meaningful. Although there is no readily available public data on the
number of merchants accepting Bitcoin today, based on anecdotal disclosures we believe
the number of merchant accepting Bitcoin is now well over 100k.
Among major e-commerce retailers, there have been several retailers of size which have
begun accepting Bitcoin for online purchases including Overstock.com (started Jan. 2014),
TigerDirect.com (started Jan. 2014) and Expedia (started Jun. 2014). In addition, a number
of other major retailers have been testing bitcoin payment in specific areas of their
business, including Dell, which is accepting Bitcoin for digital goods purchases. Despite
optimism among some merchants, there has been little evidence of strong sales traction
among consumers. For example, Overstock.com had originally projected that it would
reach $10 - $15 mn in Bitcoin sales in 2014, but achieved just $3 mn (0.2% of total revenue).
Even though early traction has been uneven for merchants, we would point out that Bitcoin
remains in its infancy – and we will be closely monitoring the situation in the coming
quarters.
Thus far, most merchant Bitcoin activity has been concentrated among US and European-
based merchants. Despite China’s higher trading activity, restrictions enacted by the PBoC
to limit Chinese Bitcoin companies’ access to traditional Chinese payment processors have
prompted many large Chinese companies to stop accepting Bitcoin. However, in light of a
somewhat stabilizing Bitcoin economy in China, a few payment processors have re-
emerged, such as BTC China’s JustPay.
Exhibit 42: Fee structures for Bitcoin services can vary
BitPay vs. Coinbase merchant services comparison
Exhibit 43: A majority of respondents in our fall 2014 ETA
survey have no plans, but adopters have increased from
our last survey
Do you plan to enable the acceptance of Bitcoin for your
merchants?
Source: Company data.
Source: ETA, Goldman Sachs Global Investment Research.
BitPay Coinbase
Merchantprocessingfee
Monthlyfeebasedon3tiers.
Processingfeeappliesto
BusinessandEnterprisetiers.
Noprocessingfee
FIATsettlementfee
Nofee,unlessminimum
settlementamountisnot
met.
Freeforfirst$1mnthen1%
feeafter
Keydifferentiators
Quickbookintegration/payroll
services
Offerssubscriptionservices
Conversiontime Instant I nstant
CashSettlementtime 1‐
2businessdays 2‐3businessdays
Numberofmerchants 50,000+ 38,000+
Countriesavailable 33 24
No,
62.5%
Yes,Ialready
supportit
Yes,likelyin
thenext6
months
Yes,likelyin
thenext6‐12
months
Yes,likelyin
the13‐24
months
Yes,likelyin3
ormoreyears
Other
10.4%
10.4%
6.3%
6.3%
2.1%
2.1%
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 42
A look at bill payment: Why bank fees aren’t what they used to be
with “instant ACH”
We believe the emergence of alternative payment systems could have a meaningful
impact on overdraft fees.
Traditionally, bank revenue generated from personal current
accounts comes in three forms: interchange, interest and fees. Although fees related to
core services are generally either nonexistent or relatively low, fees associated with
outstanding credit/overdraft balances in these accounts has historically been much higher.
However, we believe banks have experienced an overall decline in the total revenue
generated from these fees in the past few years. While part of the decline can be attributed
to increase scrutiny on fee transparency from regulatory entities, we believe the
emergence of alternative payment systems have also played a significant role and could
potentially lead to further revenue decay.
We point out that for most personal current account structures, overdraft charges account
for a substantial portion of revenue. In addition to the incremental interest charged for the
outstanding balance, excess transaction and recurring services fees are commonly charged.
Studies conducted by the UK Office of Fair Trading (now known as the Competition &
Markets Authority) estimated total overdraft charges account for 36% of total revenue from
personal current accounts (PCA) in the UK vs. interchange at 10.5% in 2013.
Exhibit 44: Total overdraft charges accounted for 36% of PCA revenue in 2013
2013 breakdown of UK bank revenue from personal current accounts
Source: UK Competition & Markets Authority.
We note that declines in overdraft revenue in the past years have been partially offset by
adjustments in the banks overdraft fee structures. In response to increased regulatory
scrutiny on banks post the financial crisis in 2008, many banks have been pressured to
increase customer transparency in their fees. Banks subsequently reduced their
unarranged charges (late fees, monthly interest fee, etc.), but typically combated the
impact by raising arranged fees (fixed annual and maintenance fees). Nevertheless,
arranged fixed fees are often far less lucrative and are still vulnerable to declines in
overdraft accounts. In the UK, while revenue from arranged maintenance charges
increased by approximately 14%, total overdraft revenue decline by 3% in 2013.
Netcredit
interest
40%
Overdraft
charges
36%
Interchange
12%
Account
fees
12%
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 43
Exhibit 45: Comparison of arranged vs. unarranged overdraft fees
Source: UK Competition & Markets Authority, Goldman Sachs Global Investment Research.
We believe the introduction of new payment options, such as Faster Payments in the
UK, as an alternative to traditional payment models have directly impacted consumer
demand for overdraft services.
For many newer and more consumer-friendly payment
options, usage not only reduced the likelihood of incurring a overdraft/credit balance due
to increased transparency, but also reduces late fees on PCA accounts through quicker
processing. The implication is a direct hit to overdraft revenue for banks. In the UK,
outstanding overdraft balances have declined by approximately 30% since the introduction
of Faster Payments in 2008, whereas Faster Payment volume grew roughly 30% in 2013
alone. If similar advances in payment options continue to be made and overall customer
usage accelerates as a result, we believe bank fees are vulnerable to further declines.
Exhibit 46: Overdraft balances have declined by ~30%
since the introduction of Faster Payments…
UK outstanding overdraft balance (at the end of the period)
vs. Faster Payments volume
Exhibit 47: …while Faster Payments volume grew 30% in
2013
Revenue from unarranged overdraft charges vs. Faster
Payments volume
Source: BBA, Payments Council.
Source: UK Competition & Markets Authority, Payments Council.
$0
$10
$20
$30
$40
$50
$60
0
2
4
6
8
10
12
2008 2009 2010 2011 2012 2013 2014
FasterPaymentsvolume(in£bn)
Overdraftbalance(in£bn)
Overdraftoutstandingbalance FasterPaymentsvolume
0
100
200
300
400
500
600
0
1
1
2
2
3
3
2006 2007 2008 2009 2010 2011 2012 2013 2014
FasterPaymentsvolume(in£bn)
Unarrangedoverdraftcharges(in£bn)
Unarrangedoverdraftcharges FasterPaymentsvolume
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 44
China case study: Where payment innovators are quickly gaining
ground
Although the adoption of disruptive payment solutions has been relatively muted to date in
the US, similar innovative payment methods have thrived in China where conventional
payment methods are both less entrenched and less lucrative for consumers. Given the
rapid volume growth experienced by many third party payment companies like Alipay and
Tenpay, we believe China’s payment system may be better suited for disruption.
Fewer rewards by incumbents translate to less stickiness...
In contrast to the US, credit card incentives/rewards are essentially nonexistent in China –
and this in part has resulted in the relatively low credit card usage (approximately 23% of
card transaction volume in 2013 vs. 44% for the US). While Chinese payment innovators
like Alipay and Tenpay do to not substantially differ operationally from PayPal, we believe
the lack of conventional rewards programs tied to credit cards in China may translate to
more rapid adoption of alternative payment methods.
Exhibit 48: How does Alipay work?
Source: Company data.
...while new incentives and rewards are driving fast adoption for innovators.
By offering incentives (such as interest-bearing escrow deposit accounts) and solid
consumer protections (accounts are debited only on delivery of products), Chinese
payment innovators have been able to achieve quicker and stronger consumer adoption
than most foreign competitors. In addition to increased sales volumes, the ability to track
customer behavior has made the payment space in China very attractive, especially to
China’s ecommerce giants. According to iResearch, online third party payment GMV grew
46.8% to 5.4 tn RMB in 2013, representing approximately 15% of total consumer payments
volume in China. Alipay and Tenpay lead the market with 49% and 19% market share,
respectively.
Consumer
Alipay
Merchant
System
Integrator
Merchant
Bank
1. Shopping
2. Confirm payment in RMB/CNY
3. Deliver Goods
2. Confirm payment
2. Confirm payment
4. Transfer funds in foreign currency
5. Bank statement
6. Commission back
Not real-time
Real-time
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 45
Exhibit 49: Alipay has outpaced PayPal in user growth
User count (in mn)
Exhibit 50: Alipay TPV is expected to grow significantly
faster than PayPal
Total payment volume (in $ bn)
Note: Registered Alipay users does not mean active.
Note: “Active” PayPal users means a customer has conducted 1 transaction in the past
12 months
Source: Company data, Mercator Advisory Group.
Source: Company data, Goldman Sachs Global Investment Research.
Alipay has outpaced EBay by volume, but traction outside China remains a wildcard.
Mirroring the early success of PayPal within EBay, Alipay initially grew within China
internet giant Alibaba (since its inception in 2004) as a way of facilitating payment between
buyers and sellers where there is limited trust and no physical contact. Although Alipay
separated from Alibaba in 2011, it remains a very significant payment mechanism both on
and off Alibaba. According to iResearch Consulting Group, “third party” channels
constitute about 60% of online payment volume – much higher than other geographies
such as the US – and Alipay is currently capturing just over 50% of total third-party online
payment volume in China (where “third party” is defined as transactions not handled by a
bank, credit card network, or traditional merchant acquirer). Alipay does have significant
competition in online payments, with Tenpay, UMS (the merchant acquiring arm of China
UnionPay), 99Bill, and ChinaPnR all capturing at least 5% of online volume.
Exhibit 51: Online third party payments have grown
rapidly in the past few years
China third-party online payment GMV (in CNY bn)
Exhibit 52: Only ~35% of Alipay’s volume comes from
Alibaba’s China Retail Marketplaces
Alipay total payment volume breakdown
Source: iResearch Consulting Group.
Source: Company data.
0
100
200
300
400
500
600
700
800
900
2008 2009 2010 2011 2012 2013
Totaluserbase(inmn)
PayPal Alipay
0
500
1,000
1,500
2,000
2,500
2013 2014E 2015E 2016E
Totalpaymentvolume(in$bn)
Alipay Paypal
0
1,000
2,000
3,000
4,000
5,000
6,000
2009 2010 2011 2012 2013e
Chinathird‐partyonlinepaymentGMV
(inbnCNY)
ChinaRetail
Marketplaces
35%
Other
Merchants
65%
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 46
Exhibit 53: Alipay and Tenpay have led the charge in online payments
2013 online third party payment GMV share
Source: iResearch Consulting Group, Euromonitor.
On the mobile side, Alipay’s mobile wallet, Alipay Wallet, has significant mobile
penetration with 136 mn mobile active users, 46% of its total user base. Perhaps more
significantly, we estimate that Alipay has a significant lead with its mobile platform in
China, and is currently capturing as much as 80% of mobile payment volume. While third-
party payment processors and Alipay in particular have significant traction online, the
adoption of these platforms have gained limited traction offline in brick-and-mortar retail.
Although Alipay does not disclose the volume of its offline payments, we estimate that it
remains relatively small and less than 10% of Alipay’s total volume. Alipay claims to have
been integrated at 30,000 retail locations within China. Offline retailers can integrate Alipay
using either a QR code or an audio code which is generated by the consumer’s smartphone.
As with PayPal, it may be some time before Alipay gains significant traction with offline
retailers. However, given the proportion of e-commerce relative to all retail sales in China is
much greater than in most geographies like the US, we would expect Alipay to make more
sizeable inroads in China rather than in the US.
Sizing the risk in B2C payments from innovators and disruptors:
What does it all mean?
We see multiple potential crosswinds at play over the next 10 years that could drive risk to
revenue and profit pools in the existing B2C payments market. Below we list the key
assumptions driving our view that in the worst case, about $84 billion (14%) of today’s
$590 billion B2C payments market could be at risk.
In B2C credit:
Credit card interest fees and charges ($42 bn at risk): Of the estimated $232 bn in
interest and fees charged by global retail banks on outstanding consumer credit
card balances, we see 18% risk to the market, assuming that non-traditional
lenders such as Lending Club, Prosper, and others could capture about 14% of the
market over 10 years, with consumers also seeing some level of savings (about
4%) due to somewhat lower rates offered by these players.
Account fees and unscheduled overdraft charges ($30 bn at risk): Of the estimated
$197 bn in fixed credit card account fees (including annual fees) and unscheduled
late fees charged by issuing banks worldwide, we assume a 30% reduction in late
fees (with no change in account fees) as a result of faster interbank transfer
Alipay
49%
Tenpay
19%
ChinaUMS
11%
99Bill
7%
ChinaPnR
6%
Yeepay
3%
IPS
3%
Others
2%
Online
thirdparty
payments
15%
Total
China
consumer
payments
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 47
systems. This reduction is roughly in line with the ~30% reduction in overdraft fees
seen in the five years following the establishment of the Faster Payments system
in the UK.
Interchange ($8 bn at risk): Of the estimated $88 bn in credit card interchange fees
collected by issuing banks worldwide, we believe about 9% is at risk if lower credit
card interchange rates are legislated, particularly in the US. We assume that on
average, US credit interchange would come down by 15% in total (140 bps on a
gross basis in line with proposed EU levels, but 40 bps net of the estimated 100
bps which consumers see today in the form of rewards programs).
Payment network fees ($900 mn at risk): Payment network fees are about $17 bn
globally. If lower credit interchange rates were to be legislated in the US over time,
we believe it could result in lower payment network fees for Visa and MasterCard
over time, which we estimate could be in the 5% range if either gross spreads
decline or rebate/incentive levels to issuers move directionally higher.
Merchant acquiring fees ($1 bn at risk): We believe increased competition from
both traditional competitors and innovators such as Square and PayPal (as well
as market expansion into underserved segments like micro-merchants) could
result in a shift of ~10% of merchant acquiring revenue or about $1 bn over time.
In B2C debit:
Interchange ($2 bn at risk): Of the estimated $37 bn in debit card interchange fees
collected by issuing banks worldwide, we believe about 5% is at risk if disruptive
ACH-based providers like MCX, Seamless, and Dwolla gain significant traction in
the market. We assume that the greatest penetration could come in the ~50% of
retail sales driven by big-box retailers, and assume a 30% adoption rate of these
systems (vs. traditional debit, cash, and checks) over time to arrive at our estimate.
Merchant acquiring fees ($700 mn at risk): As in the case of B2C credit e believe
increased competition from both traditional competitors and innovators such as
Square and PayPal (as well as market expansion into underserved segments like
micro-merchants) could result in a shift of ~10% of merchant acquiring revenue or
about $700 mn over time.
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 48
C2C Payments: Convenience reshapes consumers’ payment lives
Faster and cheaper: Few economic victims in the “war on cash and
checks”
Few areas of payment technology are changing as rapidly as consumer-to-consumer
transactions, also known as C2C. Here we define C2C payments as any payment made
from one person to another for any purpose (to split a bill, to settle a debt, to give a gift,
etc.) other than in exchange for goods and services. Because cash payments between
individuals are virtually impossible to track, the exact size of the C2C payment market in
the US is difficult to estimate. However, according to the most recent Federal Reserve
Payments study, cash dominates C2C payments today, comprising 67% of transactions –
with electronic payments making up just 9% of transactions. However, C2C payments in
the US made through financial institutions or money transfer organizations have grown
relatively quickly over the last several years – with value transferred reaching $92 bn in
2012 and growing at a CAGR of 26.4%. However, checks and other clearing mechanisms
(including those provided by money transfer institutions) comprise nearly 80% of all
transactions, followed by cash and book transfers, ACH, and credit/debit cards. About 60%
of C2C transfers are originated in person (such as at a bank branch or money transfer
agent), with about 30% of transfers occurring on a website and less than 5% on a mobile
device.
Relative to other payment forms, we believe C2C payments have the potential to
evolve much more rapidly as a result of several factors: (1) convenience and ease of
use; (2) lack of “entrenched” counterparties
such as businesses, which are typically
much slower to adopt new business processes;
(3) lack of “stickiness” for incumbent
service providers
such as offers and rewards.
Exhibit 54: C2C payment mechanisms continue to be dominated by cash
Source: US Federal Reserve.
The challengers: Venmo, Popmoney, and Square among the
standouts in a crowded field
A number of C2C payment services have developed over the past five years, and user
adoption has grown dramatically over that period. We estimate that in 2014, about $10 bn
of value was transferred using various C2C payment services, most notably Venmo (owned
Cash
67%
Credit
10%
Debit
4%
Checks
9%
Electronic
9%
Other
1%
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 49
by EBay), Popmoney (owned by Fiserv), ClearXchange (owned jointly by Bank of America,
Capital One, Chase, and Wells Fargo), Square Cash, Dwolla and Obopay. In most cases,
these services provide users with the ability to send money to another user using a mobile
app, email, or SMS message (see table below). Nearly all these services give users the
ability to fund their transfer with a bank account transfer linked to their account, and many
offer the ability to use a credit or debit card to fund the transfer. Given the convenience and
ease of use of many of these methods, we expect rapid growth in this segment to continue.
Not surprisingly, we would note that anecdotally, the heaviest adoption of C2C (especially
mobile) payment services has been among younger demographic groups such as
Millennials – while adoption among older users has remained relatively low.
Exhibit 55: Comparison of various C2C payment providers by features and cost
Source: Company data, Goldman Sachs Global Investment Research.
GoogleWallet PayPal SquareCash Venmo Popmoney Dwolla ClearXchange
Platforms iOS,Android
iOS,Android,
WindowsPhone
iOS,Android iOS,Android
iOS,Android,
WindowsPhone
iOS,Android,
WindowsPhone
iOS,Android
CreditCardPayments 2.9%fee 2.9%fee+$0.30 N/A 2.9%fee $0.95 N/A N/A
DebitCardPayments 2.9%fee 2.9%fee+$0.30 Free Free $0.95 N/A N/A
BankAccountTransfers Free Free N/A Free $0.95
$0.25for
transactionsover
$10
Free
Cashouttime 3‐10businessdays 3‐4businessdays 1‐2
businessdays 1businessday 1‐3businessdays 2‐3businessdays
3businessdays,
dependsonbank
Transferamountlimit
$10,000per
transaction
50,000per5 day
period
$10,000per
transaction
$2,500perweek
$2,999per
transaction
$2,000frombank
accountperday
$500fromdebit
cardperday
$5,000perday
$1,000perday
$2,500per
week
$10,000permonth
Differentiators
Canattacha
paymenttoany
Gmailmessage
Worksoverseas;
mostcommonly
usedservice
Noaccount
required;inputdebit
cardnumberto
receiveyourmoney
Newsfeedlistsyour
friends'transactions
Flatfeeper
transaction
Flatfee(chargedto
recipient)
Customersupport
directlyfrombanks
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 50
C2C Payments: International money transfer incumbents
International money transmitters: A large and complex market
opportunity – but still opportunities for new entrants
Money transmission is a large, but fragmented business at $580 bn annually. The $580 bn
money transmission market (amount of principal sent in 2014) exists mainly to facilitate
sending funds 1) from traveling and migrant workers at their place of work to their families;
2) between unbanked and under-banked individuals in different geographies. Aite Group
forecasts the total value of remittances to grow by 5.4% - 6.2% over the next three years.
We estimate the fees generated from international money transfer today at roughly $30 bn,
which equates to roughly 6% of the total principal amount.
Exhibit 56: Principal sent via transmitters is growing steadily at 4% - 6% annually
Dollars in billions
Source: World Bank, Goldman Sachs Global Investment Research.
Pricing disruption led by market incumbents. Money transmitters charge a percentage
commission of the transmitted value in order to cover fixed costs such as agent overhead
(most money transmitters operate through independent agents), network operating costs,
and compliance, as well as variable costs related to cross-border FX conversion. Pricing
has become more challenged over the past several years, with a global weighted yield
declining to 6.03% in 4Q14. We see pricing pressure coming from two areas:
1) Aggressive pricing by incumbents. In April 2014, WalMart announced that it will offer
inter-store money transfers of up to $900 at rates 30%-40% lower than prior rates by
partnering with Ria (a subsidiary of Euronet) rather than its traditional service provider
Moneygram. Although this has no impact on the international money transfer market,
this highlights aggressive pricing by market incumbents.
2)
Global shift from unbanked to banked. Vendors like Xoom (founded in 2001) focus
on the banked population and enable international money transfer through the internet.
Although transactions are initiated online (and require bank accounts), the recipient
has the option to receive cash at home, collect the cash at a merchant, or have it
$0
$100
$200
$300
$400
$500
$600
$700
2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E
Principal$billions)
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 51
deposited into a bank account. For the most part, Xoom offers lower prices (~1-3% and
comparable rates to WU.com) on international money transfers than agent-based
Western Union transfers because it does not have the overhead of paying
commissions to physical agents as does Western Union. As more people worldwide
get access to bank accounts and use services from vendors like Xoom and WU.com,
we expect further pricing pressure. According to the World Bank, around 50% of the
world’s population is unbanked, and assuming 0.5% reduction per annum (2.5% over
five years), we believe 5% of the global $29bn (~$1.5bn) remittance market will be at
risk over the next five years. According to World Bank, cutting remittance prices by at
least 5 percentage points can save up to $16 billion a year.
Exhibit 57: The US dominates the money transmission
market in terms of cross-border share...
Share of outbound cross-border remittances, 2013
Exhibit 58: ...but India and China lead the way among
recipient countries
Share of inbound cross-border remittances, 2013
Source: World Bank.
Source: World Bank.
0%
2%
4%
6%
8%
10%
12%
14%
16%
0%
2%
4%
6%
8%
10%
12%
14%
16%
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 52
Mobile money transfers: making inroads among the under-banked
Non-financial institutions with distribution strength are tapping into the unbanked and
under-banked population. Historically, wireless telecom carriers have had a negligible role
in payments, but the emergence of mobile as the primary growth channel for payments is
creating interesting new opportunities for telcos. We expect telcos to successfully tap into
money transfer opportunities in emerging markets. Ventures like M-Pesa serve as an
example of the opportunity related to unbanked customers in emerging markets given high
mobile penetration rates. M-Pesa (JV between Vodafone, Safaricom) has over 12.8 million
active customers. According to the GSMA, there are 150 live mobile money deployments,
and an additional 110 deployments are being planned.
Although non-financial entities like M-Pesa have grown in part due to a lack of regulation,
this situation is slowly changing as regulators in countries like India and Nigeria have put
regulations in place to align mobile payment systems with existing financial systems. In
countries like India, Nigeria, Ghana, Colombia and South Africa, financial regulators are
reluctant to grant mobile money licenses to mobile carriers, forcing them into partnerships
with banks to tap the opportunity in emerging markets.
Exhibit 59: Higher access to a bank account reduces the
propensity to use mobile money
Exhibit 60: Customers with better access to financial
instruments are limited users of mobile money
Source: World Bank’s Global Findex Database, 2012
Source: World Bank’s Global Findex Database, 2012
Exhibit 61: Significant gap between mobile and banking
penetration creates attractive opportunities
Mobile penetration (%), access to financial services (%)
Exhibit 62: M-Pesa has seen strong growth over the years
supporting growth of other non-financial initiatives
M-Pesa active customers
Source: GSMA Mobile Money Tracker.
Source: Safaricom.
0%
10%
20%
30%
40%
50%
60%
70%
80%
0% 20% 40% 60% 80% 100% 120%
%Adultsusingmobilemoney
%Adultswithbankaccount
U.S.
China
Japan
Germany
U.K.
Brazil
Italy
Russia
India
Canada
Australia
Spain
Algeria
Gabon
Kenya
Somalia
Congo
Chad
Nigeria
SouthAfrica
Philippines
Sudan
Albania
France
Taiwan
0%
10%
20%
30%
40%
50%
60%
70%
80%
0% 10% 20% 30% 40% 50% 60% 70%
%Adultsusingmobilemoney
%Adultswithcreditcard
U.S.
China
Japan
Germany
U.K.
Brazil
Italy
Russia
India
Canada
Australia
Spain
Algeria
Gabon
Kenya
Somalia
Congo
Chad
Nigeria
South
Africa
Philippines
Sudan
Albania
France
Taiwan
61%
59%
70%
118%
85%
127%
74%
112%
80%
155%
145%
5%
16%
12%
28%
18%
43%
41%
27%
20%
43%
38%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Mobile Financial
7.76
9.08
10.54
12.16
0
2
4
6
8
10
12
14
2011 2012 2013 2014
Customers(mn)
30‐dayactiveM‐PESAcustomers
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 53
C2C Payments: International money transfer innovators &
disruptors
We see two primary areas of potential disruption in the cross-border C2C remittance
market. One group of innovators is taking advantage of two-way remittance flows
between certain corridors (taking advantage of lower FX risk) in order to deliver
lower rates to consumers. Bitcoin and other virtual currencies offer the promise of
lower rates by maintaining commodity value independent of fiat currency, and
converting to fiat currency only when funds are needed.
Money transmitter innovators in the US and Europe
New C2C money transfer players are operating currency marketplaces which match
users who seek to buy or sell the same currency.
By matching one user selling currency
to another user buying it, emerging C2C providers are able to offer attractive transfer rates
comparable to retail bank rates. Money destined for transfer never actually “leaves” the
country, resulting in lower international bank and intermediary fees. If no internal match is
available, most platforms will provide the required liquidity to make up the shortfall and
complete customer orders. Notable vendors in the space include CurrencyFair,
TransferWise, Midpoint and Kantox (focused more on medium to large organizations).
Since C2C FX vendors (who roughly charge ~0.5%) still rely on traditional rails to transfer
money, we see marginal impact on vendors like Western Union in the near term. However,
we see potential threat to mainline retail banks which charge 2% - 5%.
Exhibit 63: C2C FX vendors reduce transaction costs using a currency marketplace
Total cost of sending £1000 from UK to Germany
Source: TransferWise (survey conducted by Charterhouse Research).
6.8%
5.8%
5.1%
4.5%
4.2%
3.3%
0.5%
0%
1%
2%
3%
4%
5%
6%
7%
8%
HSBC(branch) Santander
(branch)
RBS(branch) Average(excl.
TransferWise)
Lloyds(branch) WesternUnion
(online)
TransferWise
Transferfees
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 54
Exhibit 64: Key C2C with significant European exposure
Listing of key C2C vendors
Source: Company data.
Cryptocurrencies: A potential value proposition for international FX
In 2014, the European Banking Authority (EBA) defined “virtual currencies” as "a digital
representation of value that is neither issued by a central bank or a public authority, nor
necessarily attached to a fiat currency, but is accepted by natural or legal persons as a
means of payment and can be transferred, stored or traded electronically" (see also our
section on key technology shaping trends and Bitcoin earlier in this report).
Most virtual
currencies are based on distributed networks, and are not owned or controlled by anyone.
Distributed networks are, in principle, more secure and reliable due to their open source
nature, and there is no single point of failure.
Exhibit 65: Bitcoin and Ripple are the major virtual currencies in use today
List of world’s top 10 biggest virtual currencies
Updated as of 3/6/15
Source: Coinmarketcap.com
With a significant opportunity in the form of the existing $580bn money transmission
market, remittance is an attractive market opportunity for virtual currencies.
According to the World Bank, most conventional money transfer services charged 6.03%
on average (weighted) in 4Q14 (inclusive of FX translation and service fees) to send $200 in
most major international corridors. Given the low transaction fees associated with money
transfer using virtual currencies, there is potential for significant dislocation in the profit
pools associated with money transfer.
More than 100 virtual currencies exist today with
Bitcoin and Ripple being the largest.
Vendor
Year
founded
Amount
exchanged
Usersavings Geographicalpresence Businessdescription
CurrencyFair 2009 Euro1,200mn 4%‐5% 37%UK,20%Australia Onlinepeer‐to‐peercurrencyexchangemarketplace
TransferWise 2010 ‐‐ 4%‐5% UK,Germany,France,Spain P2Pmoneytransfersevice,whichcharges0.5%pertransfer
WeSwap 2012 ‐‐ 2%‐7% 15currenciesacrosstheglobe MulticurrencyaccountandprepaidMasterCard
Weeleo 2013 ‐‐ ‐‐ USA,U.K.,
Belgium,Switzerland,Brazil P2Pcashcurrencyexchange(free)
Midpoint 2013 ‐‐ 2%‐5% UK,Europe,USA+more P2Pinternationalcurrencymatching&paymentsplatform
Kantox 2011 $1,000mn 2%‐5% 35countries ComprehensiveFXmanagementsolutionforSMEs
Name MarketCap(mn) Price AvailableSupply Volume(24h)
Bitcoin $3,782 $271.88 13,910,575BTC $40,816,500
Ripple $353 $0.01 99,999,325,327XRP $1,673,550
Litecoin $70 $1.89 37,023,804LTC $1,893,060
BitShares $25.3 $0.01 2,502,967,184BTS $68,688
PayCoin $9 $0.65 13,799,140XPY $65,488
Dogecoin $14 $0.0001 98,508,011,200DOGE $28,317
Stellar $11 $0.003 3,624,283,900STR $24,158
MaidSafeCoin $13 $0.03 452,552,412MAID $7,973
Darkcoin $18 $3.41 5,177,888DRK $106,141
Nxt $13 $0.01 999,997,096NXT $13,605
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 55
Bitcoin offers the potential for lower international money transfer
fees
Bitcoin and other cryptocurrencies enable the potential for faster transactions with lower
transaction fees. Any two users with access to the internet and appropriate software can
send bitcoin to each other for a zero or minimal fee. The Bitcoin network can charge as
little as zero for processing transactions if there is no time constraint for confirmation.
However, for transfers to be confirmed in a matter of minutes, miners typically charge fees
of approximately 5 - 20 bps. However, converting fiat currency to bitcoin (and vice versa)
does carry associated fees.
For sophisticated users with bank accounts, money transfer involves the following
key steps:
Buying bitcoin (sending user) – One can buy bitcoin from exchanges like Coinbase,
itBit, Circle, Trucoin and CoinCorner using a bank account or debit/credit cards.
Typically, these exchanges verify the transaction first and charge ~1% for converting
cash to bitcoin. In the most mature markets competition has driven the cost to less
than 1%, and vendors like Circle have begun offering conversion between bitcoin and
US dollars at no cost.
Storing and transferring bitcoin – Once one receives bitcoin, it can be stored on a
computer or in an online wallet. Trading and transfer services are provided by
exchanges or simple wallet services including Coinbase (US), Bitfinex (Hong Kong),
Bitstamp (US), CoinJar (US) and BTC China. The Bitcoin network can charge as little as
zero for processing transactions if there is no time constraint for confirmation.
However, for transfers to be confirmed in a matter of minutes, miners typically charge
fees of approximately 5 - 20 bps.
Selling bitcoin (receiving user) – If the user receiving bitcoin wishes to convert it back
to fiat currency for use offline, she will typically need to pay a 1% charge.
For customer without bank accounts, vendors can take care of the process for a small
fee.
Bitcoin-based remittance vendors like Bitspark (Hong Kong) are solely focused on the
remittance market and charge around ~1% of the transaction for transferring money. They
further simplify the process by taking cash and handling bitcoin for those customers
without the necessary technology or skills.
Customers can deposit cash with these vendors, who convert the cash into bitcoins which
gets re-converted to local currency by partners in receiving countries. Receiving customers
can pick cash at various locations through banks, pawnbrokers, and remittance agent
locations. The potential for fluctuations in bitcoin price are less of a concern in these
models as the transactions happen quickly and customers are given an agreed rate in
advance.
The key concerns related to using Bitcoin for money transfers are related to lack of
traceability and high volatility associated with Bitcoin.
Despite the proof of identity
requirements, exchanges and wallets are not regulated as banks are and hence there is no
security for one’s account if the exchange goes out of business or is robbed by hackers,
such as may have been the case with Mt. Gox.
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 56
Exhibit 66: Cryptocurrencies like Ripple have significant potential to disrupt the
international money transfer market
How monetary flow systems work using Ripple
Source: Cryptoinnews.com
Ripple network enables real time international payments
At its core, the Ripple protocol is a shared public database. This database includes a
ledger, which tracks accounts and associated balances. It is continually and automatically
updated by the Ripple Transaction Protocol (RTXP) so that an identical ledger exists on
thousands of servers around the world. When changes are made to the ledger, computers
connected to the Ripple protocol will mutually agree to the changes via a process called
“consensus”. The Ripple protocol reaches “consensus” globally within seconds of a
change being made.
Ripple Labs (formerly OpenCoin) developed the Ripple protocol. The company provides a
network that enables real-time cross-border payments in different currencies, including in
flat currencies, its own ripple currency, as well Bitcoin and ad hoc currencies created by
users. As evident by the recent partnerships announced by Ripple labs with UK based
technology vendor Earthport and banks (Germany based Fidor, Kansas-based CBW Bank
and New Jersey based Cross River Bank), the Ripple protocol is finding acceptance by
financial institutions and other enterprise clients. Most small banks which rely on larger
partner banks for international money transfer can now use virtual currencies to
facilitate international money transfer.
Payment
Funds
Payment
Funds
Funds Flow: Ripple
Funds Flow: Current
Sending
Institution
US
Sending
Institution
US
Receiving
Institution
EU
Receiving
Institution
EU
Payment Matching & Instructions
Correspondent Bank Relationship
Swift
Nostro Debit & FX
ACH
SEPA
Federal Reserve ECB
Receiving
Institution
EU
Market Maker
Payment Matching & Instructions
Funds Transfer & FX
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 57
Sizing the risk in C2C payments from emerging players: What does
it all mean?
We see a number of secular factors at in the international money remittance market over
the next 10 years that could drive risk to revenue and profit pools in the existing C2C
payments market. Note that we do not provide risk estimates for domestic money transfer,
as most incumbents receive little or no fees for account transfers, as these as typically
included in retail banking fees. Below we list the key assumptions driving our view that
about $6 billion (20%) of today’s $30 billion C2C money transfer market could be at risk:
Lower rates from the move to account-based international remittance: As the
world’s population gradually becomes more penetrated with traditional banking
services and more remittance recipients gain access to bank accounts, we believe
money transfer will shift from agent-to-agent transfers to account-to-account
services, which carry lower fees. We expect up to a 20 percentage point market
share shift in the coming 10 years, with average remittance rates moving from
6.0% of principal (current average) to 2.5% (average for online-based services like
Xoom and WesternUnion.com). We assume the remaining 10% - 12% of the
market accrues to consumers in the form of lower fees.
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 58
B2B Payments: Driving efficiency for the enterprise – A rare
greenfield opportunity for the payments industry
Business to business (B2B) payments refers to payments made between companies
for goods or services rendered. Paper checks remain the dominant payment form for
B2B payments today, with nearly 50% of payments still made by check in the US. We
estimate the cost of reconciling expenses and processing payments at roughly $550
bn globally today, which is largely in the form of operating expenses borne by
businesses of all sizes. However, electronic forms of payment offer the potential for
significant cost savings for businesses – and increased revenue for payments
companies. We believe electronic formats of B2B payments such as virtual cards,
payment cards (known as PCards) and ACH transfer will see significant adoption over
the next 10 years, resulting in significant cost savings.
Waste, fraud, and abuse: The cost penalty that corporations endure
today from the use of paper checks
Paper checks remain the dominant form of B2B payments in the US. One of the
implications of the financial crisis has been the increasing need for automated systems
which improve traceability and enhance working capital efficiencies. B2B payments are
typically disconnected from underlying commercial transactions, creating problems for
reconciliation and increasing the time needed to process transactions.
Nearly 50% of the B2B payments in the U.S. still made by check (according to the
Association of Financial Professionals), in part because many businesses have been slow
to adopt electronic systems. Paper processes are expensive, time consuming, and subject
to significant errors – the direct cost of writing a check includes supplies, postage costs and
bank charges for processing. According to the National Clearing House Association
(NACHA), the true cost of processing a paper check is about $8 (ranging between $3 and
$9), not including the cost of processing paper, hardware, exception handling, or fraud.
Creating payments automation that replaces paper processes is beneficial but requires up-
front investment to implement. The cost to process a card payment is ~$2 compared to the
$3 - $9 needed to process a check – and thus the potential savings that can be derived from
automating payments is significant.
Exhibit 67: Checks are most prevalent in C2B payments
Number of checks written by counterparty (billions)
Exhibit 68: Paper checks continue to decline, with ACH
and cards largely replacing checks
U.S. B2B payment mix % of total number of transactions
Source: 2013 Federal Reserve Payments Study.
Source: BOK Financial Corporation.
5
11
1
4
2
2
2
6
P2P/
C2C
B2C
B2B
C2B
2006
6
9
1
2
1
2
3
5
2009
5
7
0
1
1
2
2
3
2012
Bill&Invoice
POS
Bill&Invoice
Other
81%
73%
57%
46%
10%
15%
25%
33%
7%
9%
13%
14%
2%
3%
4%
7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2004 2007 2010 2013
Check ACH Wire Card
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 59
Exhibit 69: ACH and Virtual/Pcards are the most effective B2B payment options
Types of B2B payment formats
Source: AOC Solutions Inc.
Electronic purchasing cards, ACH, and wire transfers are gaining
traction to help reduce overhead with electronic payments
Automating the accounts payable process with electronic payments helps optimize
working capital management by improving visibility into cash flow using a combination of
real time data updates, error and fraud reduction, administrative cost savings, and the
opportunity for early payment discounts. According to Ardent Partners, most organizations
(51% of those surveyed) see cost savings as the key benefit of electronic payments.
There are numerous ways to implement automated payments, but one of the simplest and
most effective is commercial purchasing cards.
A basic Purchasing Card (P-Card) is a debit-like replacement for petty cash for low-value
goods, and can simplify everyday purchases. P-Card programs help reign in everyday
spending levels, provide transparency on reporting and controls as well as provide a basis
for improved supplier negotiation.
Automated Clearing House (ACH) transfers are aggregated into batches by a third party,
allowing banks to process them more efficiently and inexpensively relative to paper checks.
Companies which have undertaken the integration of ACH transfers with their accounting
systems typically see significant cost reduction, and ACH is seeing very strong traction in
B2B payments. However, ACH transfers typically take 2-4 days to process and clear, and
thus do not result in the same level of working capital improvement as other electronic
payment methods.
Wire transfers are one of the most common ways for businesses to pay each other, but are
expensive to process (typically incurring a fee over $10) since banks have to deal with each
transfer individually. Wire transfers typically clear on the same day they are sent, and thus
companies who are willing to pay wire fees (typically for urgent, high-value transfers)
typically see working capital early payment benefits. We would point out that in the US,
both ACH and wire transfers could move to an “instant ACH” system over the next 10
years if the US Fed implements its payment modernization roadmap.
ACH Check Virtual/Pcard Wire
Payment Float
none 1 day 20 days none
Payment cost
Free-$0.25 $3.67-$8.00
Interchange refund
to sender
$20-$35
Process/Effort
Auto/Low Manual/High Auto/Low Manual/High
Payment maintenance
Either Buyer Either Buyer
YesYesNoYes
Payment set-up
Payment Details/Accounting
Matching details None Very detailed None
LowVery lowHighLow
Payment risk
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 60
Exhibit 70: The top benefits of ePayments for AP
departments
The top benefits of ePayments for AP departments
Exhibit 71: ACH and PCards are being increasingly
adopted commercially for enhanced cost savings
Payment integration with A/P (%)
Source: Ardent Partners.
Source: BOK Financial Corporation.
Exhibit 72: Cost of processing increases with decreasing
size
Average cost to process by company size
Exhibit 73: Costs and lack of IT resources are key reasons
for slow adoption of ePayments
Top barriers to ePayment adoption in 2014
Source: PayStream Advisors.
Source: Ardent Partners.
20%
23%
45%
51%
Straight‐throughprocessingofpayments
Increasedaccuracyandcontrolof
paymentdelivery
Moreefficientandstreamlined
processing
Costsavings
50%
35%
66%
42%
77%
56%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
ACH P‐Card
2007 2010 2013
14.85
10.02
9.57
14.04
9.7
8.322
$0
$2
$4
$6
$8
$10
$12
$14
$16
Small Medium Large
Averagecosttoprocessaninvoiceby
companysize
2012 2013
21%
22%
24%
30%
46%
Difficulttoconvincesupplierstoaccept
electronicpayments
Internalchangemanagement
Lackofstandardformatforremittance
information
Suppliersdon'tposesstechnology/
resourcestoparticipate
Costsbornbythesupplier
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 61
Exhibit 74: Increased demand for electronic payments
Payment split across various formats
Exhibit 75: Purchasing card spending in North America
Purchasing card spending in North America ($bn)
Source: BOK Financial Corporation.
Source: Purchasing Card Benchmark Survey, RPMG Research.
Exhibit 76: P-card enables float improvement for clients
Float improvement due to P-card usage
Exhibit 77: P-card growth has been driven by process and
working capital savings for clients
Days following request of goods/services
Source: First National Bank of Omaha.
Source: First National Bank of Omaha.
Exhibit 78: P-Card/One card acceptance by B2B suppliers by geographic market
Source: 2013 NAPCP supplier acceptance survey, First Annapolis.
6%
78%
31%
48%
26%
21%
59%
51%
68%
1%
10%
1%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Check ACH Wire P‐Cards
Increased Stayedthesame Decreased
$1 $1
$3
$8
$11
$17
$28
$40
$57
$80
$89
$98
$110
$123
$137
$149
$161
$176
$196
$217
$245
$267
$293
$318
$347
$377
$0
$50
$100
$150
$200
$250
$300
$350
$400
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014E
2015E
2016E
2017E
2018E
Actuals Expected
A/P paid by ACH / Check / Wire
7/1 7/15 8/1 8/25
7/1
7/15
8/1
8/25
7/1 – 7/31
Transactions paid via ACH/check
Average payment made on 15
th
of the month
Clients pay by ACH/check/wire
0-3 days float benefit
Float Period
A/P paid by P-Card
7/1 – 7/31
Transactions posited to card line
Average float = 15 days during month
8/25
Client pays using P-card*
40 TOTAL days of float benefit
Float Period
P-Card
ACH
Check
Receive
Approval
Approve
Invoice
Initiate
Payment
Supplier
Cash
Inflow
Buyer
Cash
Outlay
AcceptanceRate U.S. Canada
Latin
America
Europe
Middle
East
Africa
Asia
Pacific
75%ofmore 47% 11% 2% 4% 0% 0% 3%
50to74% 19% 8% 1% 3% 0% 0% 2%
25‐49% 12%5%4%8%4%1%2%
Lessthan25% 7% 15% 3% 10% 3% 4% 5%
2013Average 68% 47% 42% 38% 26% 17% 43%
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 62
Virtual cards: Gaining ground quickly & outweighing costs by
delivering value
For larger, more sophisticated purchasing, virtual cards are particularly attractive. Virtual
card payments are a way to automate the accounts payables process by using non-physical
credit card numbers – or “virtual cards” for payments. A virtual card is a single-use
account number that processes against a master card account. The virtual card is created
by an application that can be hosted by the bank or the card networks. The virtual card
application provides a secure, convenient, and smart way for users to sign in, request a
card and specify how it will be used (including things like amount, timeframe, supplier
name, number of transactions). While virtual payments have been in existence for the last
10-15 years, the market is seeing an inflection in growth driven by increased focus on cash
management, product maturity and regulation driven demand in verticals like healthcare.
Virtual cards, specifically single-use ghost accounts (SUGA), are a secure payment method
that can create pre-determined closure for orders/invoices for the merchant. As evident in
their name, single-use ghost accounts can only be used once. There are two popular forms
of virtual or e-payments that are used to pay merchants – pull pay and push pay. Pull pay is
a merchant-initiated electronic payment method that allows for the processing of payments
on SUGA accounts, and the merchant controls when and how to process the payment.
Push pay or “straight-through processing” is a buyer-initiated purchase similar to ACH.
Virtual cards have gained significant traction in online travel. A virtual credit card offers a
secure payment method by which online travel agents pay their suppliers, such as hotels,
car rental agencies or tour operators. It provides global supplier acceptance via their
existing credit card terminals. Each authorization request is evaluated against a range of
transaction controls that provides additional security, but can also generate processing
complexities.
Exhibit 79: The travel sector has seen strong adoption of virtual cards
Virtual credit cards for travel suppliers
Source: Company data.
IT Services and BPO providers: An incremental opportunity to
transform the enterprise with IT in the “last bastion of paper”
The key challenge for a much wider adoption of virtual payments has been suppliers’
reluctance to accept virtual payments and the associated costs. Integration challenges and
shortage of IT resources for implementation are cited as other key reasons for slower
adoption. We believe as products mature and more vendors like WEX, FleetCor and IT
services/BPO vendors accelerate their focus and investments in the space, integration and
IT staff concerns should subside and further accentuate the demand in the segment. We
1
Booking
2
Request: Issue
single use con
3
Con sent to the
supplier
Consumer
4
Good service
delivered
Travel Co
6
Reconciliation
Virtual Credit
Card System
Supplier
Processes
5
Supplier charges
Credit card
Supplier
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 63
would point out that the earliest market traction made by these vendors has been in
verticals with significant payments complexity and cash usage currently, such as
construction and hospitality.
Other notable vendors include NVoicePay, Paymode-X, US Bank, Ariba (with Discover) and
Basware (with MasterCard).
Exhibit 80: Commercial Expenditure is growing at 5%
CAGR
U.S. Commercial Opportunity
Exhibit 81: Small and mid-markets remain significant
opportunities
Segmentation by revenue
Source: Visa Commercial Consumption Expenditure Index
Source: Visa Commercial Consumption Expenditure Index
Exhibit 82: Construction, wholesale, retail trade, and hotels are the sectors with highest
shadow economies – represent the most attractive segments for electronic payments
Shadow economies as a % of GDP by sector
Note: Examples are based on data for six focus countries: Germany, Spain, Italy Poland, Romania and Turkey
Source: A.T. Kearney “The Shadow Economy in Europe,” 2013.
$20.6
$21.3
$18.6
$20.1
$21.7
$22.8
$23.8
$25.0
$26.2
$27.5
$28.8
$0
$5
$10
$15
$20
$25
$30
$35
2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E
$11.4
50%
$1.6
7%
$5.5
24%
$4.4
19%
Largemarket Government Smallbusiness Middlemarket
0%
5%
10%
15%
20%
25%
30%
35%
40%
Construction Wholesaleand
retailtrade,etc.
Hoteland
restaurants
Manufacturing Transport
storageand
communication
Agriculture,
hunting.
forestry,and
fishing
Community,
social,and
personalservice
activities
Healthcareand
socialwork
Realestate,
rentingand
business
activities
Mining
electricity,
financial
services,etc.
%ofGDP
Average
Distribution
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 64
We estimate the US B2B virtual card market to grow to $6.9bn by 2025
Checks as a percentage of the total US commercial payments mix have declined from 81%
in 2004 to 46% in 2013, implying a decrease in mix of 3.9% per year. ACH has been the
biggest gainer and contributed to 33% of the total US commercial payments mix in 2013
compared to 10% in 2004. Virtual/PCards has been the other gainer and accounted for 7%
of the payments mix in 2013.
We assume the shift in payments mix continues to move in favor of ACH and cards going
forward. Assuming, the proportion of checks continues to decline at roughly half the pace
of previous 10 years (given the significant shift in recent years); we estimate checks to
represent 22% of the payments mix by 2025. We expect ACH to be the main beneficiary of
this trend and account for 2/3
rd
of the gains with cards making up for the remaining 1/3
rd
.
Based on the above assumptions, we forecast $16 bn of cost savings in the US from a shift
to electronic payments over 2013 to 2025. On a global basis, $74 bn of cost savings can be
realized if the structural shift to electronic payments continues.
Assuming the cost per transaction for virtual/Pcards is $2.78 for an average transaction size
of $2,186 transaction, we estimate a $6.9 bn market opportunity for virtual/PCards by 2025E.
On a global basis, this represents a $31bn market opportunity.
Exhibit 83: We expect ACH and cards to gain at the expense of checks
Payments mix as a % of total B2B transactions
Source: Goldman Sachs Global Investment Research.
Sizing the nascent B2B opportunity for card-based payments:
What does it all mean?
As we have laid out above, we believe a significant opportunity exists for corporates to cut
both transactional and OpEx costs through a move to increased use of electronic payments,
including card-based payments, ACH, and wire transfers. We believe this could result in a
cost savings of $16 bn in the US and $74 bn globally. In addition, we believe the B2B
payments space represents a significant opportunity for emerging card-based B2B
payment vendors like FleetCor, WEX, NVoicePay, Paymode-X, US Bank, Ariba (with
Discover) and Basware (with MasterCard). We size the incremental card-based payment
22%
49%
14%
15%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2004 2025E
Check ACH Wire Card
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 65
market at $4 bn in the US and $17 bn globally, based on the payment mix shift
assumptions outlined below.
Exhibit 84: We see a $7 bn ($4 bn incremental) commercial card opportunity in US B2B payments
US B2B card payments market opportunity, $ bn
Source: Ardent Partners, Visa Commercial Index, Goldman Sachs Global Investment Research.
Transaction
cost,$
Transaction
cost,$
Check 8.00 8.00
ACH 5.00 5.00
Wire 12.50 12.50
Card 4.00 2.78
Blendedcostpertransaction 7.36 6.38
$valuepertransaction 2,186 2,186
2025transactioncosts($bn) 122.8 106.4
Costsavingsfrommovetoepayments($bn)
16.4‐
Costsavingsfrommovetoepaymentsperannum($bn)
1.4‐
2013 2025E
TotalUScommercialOpportunity,$bn 23,800 36,483
%oftransactionsfrom
Virtual/PCards 7.0% 15.0%
$valuepertransaction 2,186 2,186
Costpertransaction,$ 4.00 2.78
TransactionvalueVirtual/Pcard($bn) 3.0 6.9
Incrementalmarketopportunity($bn)
2025B2BPaymentMix%
(Similarto2013)
2025B2BPaymentMix%
(ongoingmixshift)
46.0% 22.0%
33.0% 49.0%
14.0% 14.0%
7.0% 15.0%
3.9
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 66
Appendix I: Index of Emerging Payment Companies
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 67
Exhibit 85: Comprehensive list of innovative and incumbent payment vendors globally
List of payment vendors
Source: TechCrunch, company data.
Company Year Business Latest Series Capital TotalCapital
Name Domicile Founded Model Financing Round Raised(mn) Raised(mn)
Directbankdebittransfersystem
Dwolla U.S. 2008 ElectronicpaymentsplatformusingACH Sep‐14 SeriesD $9.7 $32.5
Euronet(public,uncovered) U.S. 1994 OffersEFTprocessingandmoneytransferservicesusingACH N/A N/A N/A N/A
MoneyGram(public,uncovered) U.S. 1998 OffersomnichannelmoneytransferservicesusingACH N/A N/A N/A N/A
NVoicePay U.S. 2009 ElectronicaccountspayablesolutionusingACH Jan‐15 SeriesE $6.0 $10.3
Paymode‐X U.S. 2000 ElectronicaccountspayablesolutionusingACH N /A N/A N/A N/A
PayPal(public,
uncovered) U.S. 1998 Digitalwallet /moneytransfersolutionusingACH N/A N/A N/A N/A
Popmoney(partofFiServ) U.S. 2010 P2PmoneytransfersolutioninpartnershipwithbanksusingACH N/A N/A N/A N/A
Xoom(public,uncovered) U.S. 2 001 DigitalmoneytransferservicesusingACH N/A N/A N/A N/A
Internationalmoneytransfer
CrowdTransfer Chile 2014 Socialnetworkforpeer‐to‐peerinternationalmoneytransfer Jun‐14 Seed $0.04 $0.04
CurrencyFair U.S. 2009 Peer‐to‐peerFXmoneytransfer Nov‐13 Seed $2.5 $4.8
Earthport(public,uncovered) U.K. 2010 Cross‐border
remittancesolution N/A N/A N/A N/A
Kantox U.K. 2011 ComprehensiveFXmanagementsolutionforSMB Feb‐14 SeriesA $8.7 $10.2
Midpoint U.K. 2013 Peer‐to‐peerFXmobilematchingplatform N/A N/A N/A N/A
TRANSFAST U.S. 1988 Mobileinternationalmoneytransfer N/A N/A N/A N/A
TransferWise U.K. 2010 Peer‐to‐peerFXmoneytransfer Jan‐15 SeriesC $58.0 $94.4
WeSwap U.K. 2010 Peer‐to‐peermoneytransferproductusingnetworkrails Oct‐14 SeriesA $7.5 $10.0
WorldRemit U.K. 2010 Onlineandmobilemoneytransferplatform Feb‐15 SeriesB $100.0 $147.7
Loyalty&rewards
Cardlytics U.S. 2008 Advertisingtechnology
connectingbuyers/sellersviaonlineban kingchannels Oct‐14 SericesC $70.0 $143.0
Carteracommerce U.S. 2005 Deliversperformance‐basedplatformofoffersforcardissuers May‐12 SeriesD $12.2 $44.1
FreeMonee U.S. 2009 Card‐linkpersonalizedloyaltyandrewardofferings Jan‐13 Serie sC $11.0 $45.0
RewardInsight U.K. 2001 Card‐linkrewardofferingsfocusedonretailersandfinancialinstitutions N/A N/A N/A N/A
SavingStar U.S. 2010 Shoppersearnsavingswithofferslinkedtoretailloyaltycards Apr
‐13 SeriesD $9.1 $18.3
Shopkick U.S. 2 009 Mobileappwithrewardoff eringsforpatronsofparticipatingvendors Jul‐10 SeriesB $15.0 $20.0
Truaxis(partofparent) U.S. 2007 Providerofloyaltyrewardsandpersonalizedstatementsolutions N/A N/A N/A N/A
Mobilepaymentssolution
LevelUp U.S. 2011 MobilenetworkwithQRcodesand loyalty/rewardsofferings Aug‐12 Venture $21.0 $40.0
MCX U.S. 2 014 Merchant‐ownedmobilecommercenetwork N/A N/A N/A N/A
Obopay U.S. 2005 Mobilemoneytransfersolutionviamobile,online,emailortext Jul‐11 Series
F $8.8 $144.8
Seamless(public,uncovered) Sweden 2001 MobilenetworkusingQRcodes/NFCchipsthatoffersloyalty/rewards N /A N/A N/A N/A
SoftCard U.S. 2011 MobilewalletwithNFCchipandloyalty/rewardsofferings N/A N/A N/A N/A
Znap HongKong 2010 MobileplatformusingQRcodesforomnichannelpayments N/A N/A N/A N/A
M‐Pesa(partofparent) U.S. 2007 Mobilebasedmoneytransferandmicrofinancingservices N/A N/A N/A N/A
edo U.S. 2007 Personalizedoffersconnectedtomobilewallet Feb‐14 SeriesD $7.5 $73.5
Venmo(partof
parent,uncovered) U.S. 2009 Peer‐to‐peerpaymentsapplicationforiPhoneandAndroidusingACH Aug‐11 SeriesA $1.2 $1.3
ClearXchange U.S. 2011 Peer‐to‐peerpaymentsapplicationthroughthenetworks N/A N/A N/A N/A
99Bill China 2 005 Providese‐mailandmobilepaymentsolutions Dec‐12 SeriesE 27 81.6
Paymentserviceprovider
AliPay China 2004 OnlinepaymentsolutioninChina N/A N/A N/A N/A
AmazonPayments(public,uncovered) U.S. 2007 PaymentprocessingandinlinecheckoutservicesintegratedintoAmazon N/A N/A N/A N/A
Ariba(part
ofparent,uncovered) U.S. 1996 Providerofcollaborativebusinesscommercesolutions N/A N/A N/A N/A
Basware(public,uncovered) Finland 1985 Offersenterprisesoftwareforfinancialprocesses N/A N/A N/A N/A
Cardspring(partofparent,uncovered) U.S. 2012 Platformenablingappdevelopmentsforpayments Jan‐12 SeriesA $10.0 $10.0
ChinaPnR China 2006 Providerofintegratedpaymentservices Sep‐11 SeriesB $6.7 $6.7
FasterPayment U.K. 2011 Paymentnetworkbetweenbankstofacilitatefasterremittance N/A N/A N/A N/A
Justpay China 2011 Providerofwebsolutionstoenhancee‐commerce
infrastructure N/A N/A N/A N/A
PayNearMe U.S. 2009 E‐commerceplatformforconsumerswithout credit or debitcards Feb‐14 SeriesE $20.0 $56.5
Paytm India 2010 E‐commerceplatformthatoffersmobilewalletso lutions N/A N/A N/A N/A
Square,Inc. U.S. 2009 Paymentsaggregator /POSproviderformicromerchants Oct‐14 SeriesE $150.0 $590.5
Stripe U.S. 2010 Providerofonlinepaymentsinfrastructure Dec‐14 SeriesC $70.0 $190.0
TenPay China 1998 OnlinepaymentsolutioninChina N/A N/A N/A N/A
WePay U.S. 2008 ProviderofpaymentsAPIforplatformbusinesses Jan‐14 SeriesC $15.0 $34.2
POS/analytics
solution
GoPago(partofAmazon) U.S. 2009 MobilePOSsystemthatallowsforoutside‐storepayments N/A N/A N/A N/A
Izettle Sweden 2010 MobilepaymentPOSsolutioncompatiblewithEMV Jul‐14 SeriesC $6.8 $108.5
PowaTechnologies U.K. 2007 MobilePOSsolutionandpaymentenablementapplication(PowaTag) Nov‐14 SeriesC $80.0 $ 176.7
RevelSystems U.S. 2010 POSsolutionprovidercompatiblewithEMV Nov‐14 SeriesC $100.0 $115.0
ShopKeep U.S. 2008 POSsolutionproviderdesignedforSMB Apr‐14 SeriesC $25.0 $37.2
Womply U.S. 2011 Offlineto‐
onlinecardprocessingserviceandanalyticssolution N/A N/A N/A N/A
SumUp U.K. 2011 POSsolutionformobiledevices Aug‐14 SeriesC $13.0 $33.0
Payleven Germany 2012 MobilePOSdevicethatattachestosmartphone Feb‐13 SeriesB $2.7 $15.2
Virtualcurrencysolution
Bitcoin.de Germany 2011 BitcoinmarketplaceinEurope N/A N/A N/A N/A
BitPay U.S. 2011 LargestmerchantprocessorforBitcoincurrency May‐14 SeriesA $30.0 $32.5
Bitstamp U.K. 2011 Bitcoinmarketplace(thirdlargestbyvolumeglobally)inUK Dec‐13 Seed $10.0 $10.0
BTCChina China 2011 Bitcoinmarketplace(secondlargestby
volumeglobally)inChina Nov‐13 SeriesA $5.0 $5.0
Circle U.S. 2014 ProductsuitedesignedtofacilitatetheexchangeofBitcoin Mar‐14 SeriesA $17.0 $26.0
Coinbase U.S. 2012 Bitcoinmarketplacewithbanktransfercapabilities Jun‐12 SeriesC $75.0 $106.7
CoinCorner U.K. 2014 OnlinesourcewhereoncecanpurchaseBitcoincurrencyinUK N/A N/A N/A N/A
CoinDesk U.K. 2013 Newsandanalyticsdatabaseforvirtualcurrencyinvestors N/A N/A N/A N/A
CoinJar U.K. 2013 BitcoinmarketplaceinUK Dec‐13 Seed $0.5 $0.5
Coinsetter U.S. 2 012 ECNforforeignexchangetrad ing Oct
‐14 SeriesB $1.3 $3.1
FastMatch U.S. 2014 ECNforforeignexchangetrading N/A N/A N/A N/A
itBit U.S. 2012 GlobalexchangeplatformforinstitutionalandretailBitcoininvestors Nov‐13 SeriesA $3.3 $5.5
RippleLabs U.S. 2012 Opensourcepaymentnetwork(secondlargestvirtualcurrencyafterBitcoin) Nov‐13 Seed $3.5 $9.0
Stellar U.S. 2014 Non‐profit,decentralizedcurrencysystem Aug‐14 Seed $3.0 $3.0
TruCoin U.S. 2 014 OnlinesourcewhereoncecanpurchaseBitcoincurrencyinUS N/A N/A N/A N/A
VirtEx(Canada) Canada 2011 BitcoinmarketplaceinCanada N/A N/A N/A N/A
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 68
Disclosure Appendix
Reg AC
We, James Schneider, Ph.D., S.K.Prasad Borra, Ryan M. Nash, CFA, Heath P. Terry, CFA, Eric Beardsley, CFA, Richard Ramsden, Greg Dunham, CFA,
Jeffrey Chen, Jordan Fox and Margarite Halaris, hereby certify that all of the views expressed in this report accurately reflect our personal views
about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or
indirectly, related to the specific recommendations or views expressed in this report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.
Investment Profile
The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and
market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites
of several methodologies to determine the stocks percentile ranking within the region's coverage universe.
The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:
Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate
of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend
yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.
Quantum
Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for
in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.
GS SUSTAIN
GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list
includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and
superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate
performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the
environmental, social and governance issues facing their industry).
Disclosures
Coverage group(s) of stocks by primary analyst(s)
James Schneider, Ph.D.: America-IT Consulting and Outsourcing, America-Transaction Processors. S.K.Prasad Borra: America-ATM/POS and Self-
Service, America-IT Consulting and Outsourcing, America-Transaction Processors. Ryan M. Nash, CFA: America-Credit Cards, America-Regional
Banks. Heath P. Terry, CFA: America-Internet. Eric Beardsley, CFA: America-Specialty Finance. Richard Ramsden: America-Large Banks. Greg
Dunham, CFA: America-Analytics & Infrastructure Software, America-Software-as-a-Service.
America-ATM/POS and Self-Service: NCR Corp., VeriFone Systems, Inc..
America-Analytics & Infrastructure Software: CommVault Systems Inc., Hortonworks Inc., Informatica Corp., Nuance Communications, Inc., Qlik
Technologies Inc., SolarWinds, Inc., Splunk, Inc., Tableau Software, Teradata Corporation, Verint Systems, Inc..
America-Credit Cards: Alliance Data Systems Corp., American Express Co., Capital One Financial Corp., Discover Financial Services, Synchrony
Financial.
America-IT Consulting and Outsourcing: Accenture Plc, Amdocs Limited, CGI Group Inc., CGI Group Inc. (US), Cognizant Technology Solutions
Corporation, Computer Sciences Corp., ExlService Holdings, Inc., Fidelity National Information Services, Inc, Fiserv Inc., Genpact Limited, Performant
Financial Corporation, Sabre Corporation, West Corporation, WNS (Holdings) Ltd..
America-Internet: Amazon.com Inc., AOL Inc., Bankrate Inc., Coupons Inc., Criteo SA, eBay Inc., Endurance International Group Inc, Expedia Inc.,
Groupon Inc., GrubHub Inc., HomeAway, Inc., IAC/InterActiveCorp, LendingClub Corp., LinkedIn Corporation, Netflix Inc., Orbitz Worldwide, Inc.,
Pandora Media, Inc., Priceline.com Inc., RetailMeNot, Inc., Rocket Fuel Inc, Shutterfly, Inc., The Rubicon Project Inc, TripAdvisor, Inc., TrueCar, Twitter
Inc., Wayfair Inc., WebMD Health Corp., Yahoo! Inc., Yelp Inc., Zillow Group, Zulily Inc, Zynga Inc..
America-Large Banks: Bank of America Corporation, Citigroup Inc., J.P. Morgan Chase & Co., Morgan Stanley & Co., PNC Financial Services, U.S.
Bancorp, Wells Fargo & Company.
America-Regional Banks: BB&T Corp., Citizens Financial Group, City National Corp., Comerica Inc., EverBank Financial Corp., Fifth Third Bancorp,
First Horizon National Corp., First Niagara Financial Group, Inc., First Republic Bank, Huntington Bancshares Inc., KeyCorp, M&T Bank Corp., Regions
Financial Corp., Signature Bank, SunTrust Banks Inc., Synovus Financial Corp., Zions Bancorporation.
America-Software-as-a-Service: Bazaarvoice, Inc., Benefitfocus Inc., ChannelAdvisor Corp, Cornerstone OnDemand, Inc., Cvent, INC., Demandware,
Inc., Intuit Inc., Marin Software Inc., Marketo Inc., NetSuite Inc., Opower Inc., ServiceNow Inc., Ultimate Software Group Inc., Yodlee Inc., Zendesk,
Inc..
America-Specialty Finance: Ally Financial Inc, American Capital Agency Corp., Annaly Capital Management, Inc., CIT Group Inc., Colony Financial Inc.,
Essent Group Ltd, Fidelity National Financial Inc., First American Financial Corp., MGIC Investment Corporation, Navient Corp., PennyMac Financial
Services Inc., Radian Group Inc., Santander Consumer USA Holdings, Inc., SLM Corporation, Starwood Property Trust, Inc., Two Harbors Investment
Corp..
America-Transaction Processors: Automatic Data Processing Inc., Blackhawk Network Holdings. Inc., Evertec Inc., FleetCor Technologies, Inc., Global
Payments Inc., Heartland Payment Systems Inc., Mastercard Inc., Paychex Inc., Total System Services, Inc., Vantiv, Inc., Visa Inc., Western Union Co.,
WEX Inc..
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution Investment Banking Relationships
Buy Hold Sell Buy Hold Sell
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 69
Global 33% 54% 13% 44% 38% 32%
As of January 1, 2015, Goldman Sachs Global Investment Research had investment ratings on 3,483 equity securities. Goldman Sachs assigns stocks
as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell
for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.
Regulatory disclosures
Disclosures required by United States laws and regulations
See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager
or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-
managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs usually makes a
market in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities.
The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts,
professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of
coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking
revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their
households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S.
Analysts:
Non-U.S. analysts may not be associated persons of Goldman, Sachs & Co. and therefore may not be subject to NASD Rule 2711/NYSE
Rules 472 restrictions on communications with subject company, public appearances and trading securities held by the analysts.
Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in
prior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the Goldman Sachs
website at http://www.gs.com/research/hedge.html.
Additional disclosures required under the laws and regulations of jurisdictions other than the United States
The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws
and regulations. Australia: Goldman Sachs Australia Pty Ltd and its affiliates are not authorised deposit-taking institutions (as that term is defined in
the Banking Act 1959 (Cth)) in Australia and do not provide banking services, nor carry on a banking business, in Australia. This research, and any
access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act, unless otherwise agreed by Goldman
Sachs. In producing research reports, members of the Global Investment Research Division of Goldman Sachs Australia may attend site visits and
other meetings hosted by the issuers the subject of its research reports. In some instances the costs of such site visits or meetings may be met in part
or in whole by the issuers concerned if Goldman Sachs Australia considers it is appropriate and reasonable in the specific circumstances relating to
the site visit or meeting. Brazil: Disclosure information in relation to CVM Instruction 483 is available at
http://www.gs.com/worldwide/brazil/area/gir/index.html. Where applicable, the Brazil-registered analyst primarily responsible for the content of this
research report, as defined in Article 16 of CVM Instruction 483, is the first author named at the beginning of this report, unless indicated otherwise at
the end of the text. Canada: Goldman Sachs Canada Inc. is an affiliate of The Goldman Sachs Group Inc. and therefore is included in the company
specific disclosures relating to Goldman Sachs (as defined above). Goldman Sachs Canada Inc. has approved of, and agreed to take responsibility for,
this research report in Canada if and to the extent that Goldman Sachs Canada Inc. disseminates this research report to its clients. Hong
Kong:
Further information on the securities of covered companies referred to in this research may be obtained on request from Goldman Sachs
(Asia) L.L.C. India: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs
(India) Securities Private Limited. Japan: See below. Korea: Further information on the subject company or companies referred to in this research
may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. New Zealand: Goldman Sachs New Zealand Limited and its affiliates are neither
"registered banks" nor "deposit takers" (as defined in the Reserve Bank of New Zealand Act 1989) in New Zealand. This research, and any access to it,
is intended for "wholesale clients" (as defined in the Financial Advisers Act 2008) unless otherwise agreed by Goldman Sachs. Russia: Research
reports distributed in the Russian Federation are not advertising as defined in the Russian legislation, but are information and analysis not having
product promotion as their main purpose and do not provide appraisal within the meaning of the Russian legislation on appraisal
activity. Singapore: Further information on the covered companies referred to in this research may be obtained from Goldman Sachs (Singapore)
Pte. (Company Number: 198602165W). Taiwan: This material is for reference only and must not be reprinted without permission. Investors should
carefully consider their own investment risk. Investment results are the responsibility of the individual investor. United Kingdom: Persons who
would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of the Financial Conduct Authority, should read this
research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that
have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report,
are available from Goldman Sachs International on request.
European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is available
at http://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection with
Investment Research.
Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer registered with the Kanto Financial Bureau under registration number Kinsho
69, and a member of Japan Securities Dealers Association, Financial Futures Association of Japan and Type II Financial Instruments Firms
Association. Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specific
disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese
Securities Finance Company.
Ratings, coverage groups and views and related definitions
Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy
or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as
a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a
global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage
group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment
recommendations focused on either the size of the potential return or the likelihood of the realization of the return.
Return potential represents the price differential between the current share price and the price target expected during the time horizon associated
with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each
report adding or reiterating an Investment List membership.
Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at
http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment outlook
on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12
months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the
March 10, 2015 Americas: Technology
Goldman Sachs Global Investment Research 70
following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation.
Cautious (C). The investment outlook over
the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.
Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an
advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman
Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for
determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and
price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended
coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The
information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.
Global product; distributing entities
The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global
basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on
macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd
(ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; in Canada by either Goldman Sachs
Canada Inc. or Goldman, Sachs & Co.; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in
Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs
New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in
the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in
the United Kingdom and European Union.
European Union: Goldman Sachs International authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority
and the Prudential Regulation Authority, has approved this research in connection with its distribution in the European Union and United Kingdom;
Goldman Sachs AG and Goldman Sachs International Zweigniederlassung Frankfurt, regulated by the Bundesanstalt für
Finanzdienstleistungsaufsicht, may also distribute research in Germany.
General disclosures
This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we
consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as
appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large
majority of reports are published at irregular intervals as appropriate in the analyst's judgment.
Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have
investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research
Division. Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org).
Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our
proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our
proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views
expressed in this research.
The analysts named in this report may have from time to time discussed with our clients, including Goldman Sachs salespersons and traders, or may
discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity
securities discussed in this report, which impact may be directionally counter to the analyst's published price target expectations for such stocks. Any
such trading strategies are distinct from and do not affect the analyst's fundamental equity rating for such stocks, which rating reflects a stock's
return potential relative to its coverage group as described herein.
We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in,
act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research.
The views attributed to third party presenters at Goldman Sachs arranged conferences, including individuals from other parts of Goldman Sachs, do
not necessarily reflect those of Global Investment Research and are not an official view of Goldman Sachs.
Any third party referenced herein, including any salespeople, traders and other professionals or members of their household, may have positions in
the products mentioned that are inconsistent with the views expressed by analysts named in this report.
This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be
illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of
individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if
appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them
may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.
Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.
Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at
http://www.theocc.com/about/publications/character-risks.jsp. Transaction costs may be significant in option strategies calling for multiple purchase
and sales of options such as spreads. Supporting documentation will be supplied upon request.
All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all
research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our
research by third party aggregators. For research, models or other data available on a particular security, please contact your sales representative or
go to http://360.gs.com.
Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY
10282.
© 2015 Goldman Sachs.
No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior
written consent of The Goldman Sachs Group, Inc.
