Updated: 17 hours 29 min ago
US mobile wallets lack strong value proposition
Despite growing sharply off of a low base in recent years, consumer adoption of mobile wallets in the U.S. has developed at a much slower pace than most industry experts would have predicted.
According to MasterCard, nearly 85% of payment transactions globally are still made with cash, creating a significant growth opportunity for digital payment providers. Mobile wallets are a subset of this addressable market, which we define as payments made by consumers at a physical point of sale using a mobile device. There have been numerous constituencies that have invested heavily in recent years in mobile payment technologies. Among them are established and upstart technology companies, banks, payment networks, retailers, and wireless phone carriers. A primary driver behind this investment is the transaction data generated via a mobile device, which can provide highly valuable insights on consumers’ buying habits and preferences to merchants who can then better target customers with relevant and timely offers to drive sales. Digital payments can also help governments reduce illegal activities that involve cash payments and/or tax evasion.
An October 2015 report by eMarketer projects in-store mobile payments to reach over $27B in the U.S. in 2016, up over 200% from the prior year. That said, this figure still represents a quite modest 0.58% of the estimated $4.65 trillion of in-store retail sales for 2016. The slow adoption trend seems to mirror that of the U.S. retail sector, where despite mid-teen annual growth over a number of years, online sales still represented only approximately 8% of total retail sales in 2016 according to the U.S. Census Bureau.
Why have mobile wallets thus far failed to garner mass adoption by U.S. consumers? In Fitch’s view, the three primary hurdles preventing more widespread adoption of mobile wallets are the lack of compelling value propositions, an overcrowded market and cyber risk aversion.
The vast majority of mobile wallets have thus far been unable to offer an effective value proposition to consumers in the form of checkout speed and/or financial incentives such as merchandise discounts. Likewise, there does not appear to be a tangible financial benefit for merchants relative to the costs of accepting card-based payments, such as interchange fees and point of sale terminal installations.
Meanwhile, the launch of numerous mobile wallets into the marketplace has created added confusion for consumers as it relates to acceptance of the various wallets at the checkout line.
Lastly, Fitch believes that users are concerned with potential security risks of maintaining their card account information within their mobile device, although providers have made significant efforts to address these concerns by touting their enhanced security features such as tokenization.
Some examples of challenges mobile wallets have faced to date include:
- Apple Pay, which was launched in October 2014, was expected to catalyze the adoption of in-store mobile payments given its marketing and brand strength, loyal customer base, and ability to unify other participants in the payments ecosystem. However, adoption has been lower than expected thus far. According to a quarterly survey conducted by PYMNTS.com and InfoScout, only 4.5% of respondents used Apple Pay for a transaction in October 2016, with usage remaining in a fairly narrow range of 4%-6% since Apple Pay’s launch.
- The Merchant Customer Exchange (MCX), a consortium of some of the largest U.S. retailers including Walmart and BestBuy, terminated its development of a mobile payments solution/application (CurrrentC) earlier this year.
- Softcard, a near-field communication-based mobile payments application developed by the largest wireless phone networks including Verizon and AT&T, was sold and folded into Google Wallet in 2015 and was later discontinued. Google itself has also encountered challenges in its initial foray into mobile payments with its Google Wallet app, although the company appears to be having more success with the launch of Android Pay.
Ironically, among the most successful mobile wallets launched in recent years has been Starbucks’, which appears to have overcome the aforementioned adoption hurdles with 25% of its U.S. sales transactions in its most recent quarter came via mobile payments. Specifically, Starbucks’ mobile payment app adds value to the customer experience by reducing customers’ time spent waiting in line by allowing them to order/pay before entering the store, and also provides electronic storage for the reward points they earn for each purchase. Further, customer usage is encouraged and incentivized by Starbucks and cyber security concerns are reduced given the payment app is limited to Starbucks stores.
Fitch believes markets outside of the U.S. are better positioned for mobile wallet adoption, particularly in emerging markets in Asia and Africa where cash, rather than credit cards, remains the dominant form of payment. In this regard, mobile wallet adoption does not have to overcome the established payment infrastructure and relative convenience of cards exhibited in the U.S. and other developed countries. A case in point is Apple Pay, where despite launching first in the U.S., the majority of Apple Pay’s transactions now come from non-U.S. markets.
The bottom line is that while growth in mobile wallet adoption within the U.S. has been robust in recent years, it comes off of a fairly low base and continues to lag adoption in many other countries. In order to accelerate the adoption of mobile wallets and create a sea change in payments, Fitch believes that banks and financial technology companies need to invest more toward improving the value proposition for both consumers and merchants.
“No running commentary” not sustainable for two years
The UK is on the verge of embarking on its biggest and most abrupt transition since the end of World War II with only a rudimentary public understanding of what it will entail. Nearly four months after the referendum confirmed a majority in favour of leaving the EU, there is no greater clarity on the alternative future the country has chosen, how it will materialise, or over what timeframe. Why? These are fundamental questions to remain unanswered for such a momentous change in direction.
Brexit referendum result came as surprise
Brexit confusion reigns in the UK primarily because the referendum result caught the government completely unprepared, as there was no meaningful contingency planning for it in the public sector outside the Bank of England. In addition, post-referendum political turmoil was highly disruptive, with all major political parties experiencing crises of sorts. As a result, neither the bureaucracy nor political leaders were well positioned to authoritatively grasp the mandate they were unexpectedly given.
The government of Prime Minister May has been in place since mid-July, and has taken a number of concrete steps toward launching the negotiations that will determine the future of UK-EU relations. The Department of Exiting the European Union has been created, the administration of government is being reoriented to focus on Brexit, and the Prime Minister has indicated that Article 50 of the Lisbon Treaty governing withdrawal from the EU will be triggered by end-March 2017. However, none of these developments sheds light on the critical details of the negotiations or the intended objectives of their outcome, and there are three reasons to expect a persistent absence of clarity.
To comment, or not to comment?
First and most importantly, the Prime Minister has stated there will be no “running commentary” on the government’s negotiating stance. This seems sensible, since specific objectives that were announced publicly would be more difficult and costly to achieve. But it also means businesses and investors – UK and foreign alike – will be without a read on possible limits on migration, preferential access to EU markets (including for financial services) and any transitional arrangements for an interim period between withdrawal from the Single Market, if that happens, and the implementation of a new UK-EU trade deal.
The implication is the government has concluded that the costs of revealed preferences with respect to negotiations exceed the costs of prolonged economic uncertainty. This is debatable, since the parameters of the UK’s positions on the biggest Brexit questions are clearly being drawn from the leadership’s interpretation of the referendum debate and outcome, and are thus already in the public domain. Moreover, the UK government can control only its own communications. If the EU finds it advantageous to provide a running commentary once negotiations begin, there is little the UK can do to stop it.
“Hard Brexit” vs. “Soft Brexit” debate to continue
Second, the ruling Conservative party is still without a unified view on Brexit. Academic research such as the Chapel Hill Expert Survey suggests the party is one of the most divided in Europe on EU issues, and the referendum has obviously not bridged those divisions. This would present challenges for consistent messaging even if the government were intent on being more open about its approach to Brexit. In the chosen less open approach, it contributes to continuing speculation on internal disagreement over policy and priorities. The most meaningful and consequential “hard Brexit” versus “soft Brexit” deliberations appear to be taking place within government, and even inside cabinet.
Third, there is a plethora of terms and concepts in the debate on Brexit that are unlikely to be fully understood. The “Norway model” and “Switzerland model” are put forward as post-Brexit options for the UK’s relations with the EU, as is the possibility of defaulting to World Trade Organisation rules for trade. The challenge that many commentators – let alone the general public – face is being able to identify and fully understand the differences between a free trade area, a customs union, and belonging to the single market. For example, in a European context, Iceland is in the single market but not the customs union, and Turkey is in the customs union but not the single market.
Despite no comprehensive articulation of what Brexit might entail, a majority in the UK voted for it. Now, there is a degree of collective apprehension, as several specific pre-referendum pro-Brexit claims by politicians prove undeliverable in the short term (additional funding for the National Health Service, most notably), and longer-term complexities and costs come into view.
For the government, having no running commentary on negotiations with the EU may not prove a viable communication strategy over a two year period. Consistent messaging would arguably help, as would an initiative to clarify the various options and trade-offs, allowing for open public debate and reflection. This should not be seen as a distraction from the business of negotiating Brexit; rather, it should be central to guiding it.
‘Nothing to be done’ again for UK commercial property funds [post-Brexit]
Vivian Mercier famously reviewed “Waiting for Godot” as the play in which “…nothing happens, twice.” We may well have just seen the very same effect in the UK commercial property fund market. Following on from the Brexit vote in June 2016 the vast majority of UK open-end commercial property funds closed to redemption – or gated. That is, they stopped investors from being able to withdraw money. This isn’t the first time this has happened. Following the financial crisis in 2009, many such funds also closed to redemption. But then, like now, the funds seem to be emerging from a crisis relatively unscathed.
So why did the funds stop redemptions in the first place when they were essentially taking a sensible precaution? By stopping investors from redeeming money, they avoided the risk of having to sell properties at distressed prices via fire sales into stressed market. While this may well help investor’s longer-term financial health, it is no good at all if an investor needed their money back then and there. For a money market fund, such an outcome would have been disastrous given the specific investor need served by such funds.
Fast forward to today and many of the funds have re-opened already or announced their intention to re-open. How have they achieved this?
First, there really wasn’t anything fundamentally wrong with the properties the funds were holding pre-Brexit. The funds had reasonably granular portfolios with some diversification by region or sector. The largest individual property we’ve seen represented just over 5% of a fund’s portfolio. Still properties are worth GBP125 – 175m, a formidable range but not necessarily large compared with the total amount of assets in a fund. The valuations too were based on standard, current, methodologies. So in effect, the Brexit vote drove a gulf between sentiment and fundamentals.
Second, the funds had quite a lot of cash to start with – and it is cash which serves as the bedrock for meeting investor redemption requests. The average cash holding immediately pre-Brexit was about 14%. Interestingly enough, all of the funds with less than 14% cash gated apart from one. And that fund had one very important differentiating factor. Unlike all of the other open-end UK commercial property funds it didn’t offer daily dealing. The fact that it was small probably didn’t hurt its cause either.
Over the summer, the funds were busy selling properties trying to build their cash buffers up. Many funds have announced successful property disposals which will have helped build cash. They have also implemented a helpful tool: they can adjust the value of units in the fund to reflect the “fair value” of the properties, and to take account of transaction costs. Such a fair value adjustment can make the fund more attractive to new investors – especially non-sterling investors seeking to take advantage of the fall in the value of the pound – and put existing investors off leaving the fund. Put the combination of sales, cash and fair value adjustments together and at some point you get to the “right” mix to allow the fund to re-open. Where is that precisely? Well, at some point between the cash you have today and 100% cash. There’ll be some art and, some science, to that decision. So far, at least, it seems that funds have gotten the mix right for the second time.
“Nothing to be done” as Estragon from “Waiting for Godot” might have said; or is there? The fact that this is the second time these funds have gated shows that something isn’t right.
Put simply, illiquid assets – like properties – do not make happy bedfellows with daily dealing funds. Even though the funds had quite high cash balances and other asset- and liability-management tools at their disposal, when sentiment collapsed the funds closed their doors. It was striking that the only fund with a relatively low level of cash which did not gate was a monthly dealing fund. In contrast, closed-end funds do not offer any liquidity. As such, so they do not suffer the same asset-liability mismatch as the open-ended funds. Instead, their price simply varies depending on supply and demand. Indeed, prices did fall quite sharply post-Brexit but have since recovered. Whether investors will choose to move away from the illusory liquidity of open-ended funds or providers will start offering funds with more appropriate asset-liability matches remains to be seen.
Sin City’s moves beyond gaming ensuring a better hand
Nearly half of Atlantic City’s resorts have closed in the past two years, a scene not altogether unlike the noted closures of the Las Vegas’ casinos of yesteryear like The Dunes and Sahara. Where the storyline differs, however, is in the fate awaiting that other casino resort city. In short, Sin City has a much brighter future ahead of it.
Why? Because Las Vegas has had the foresight to broaden its appeal beyond gaming. The city’s main entertainment cluster, the Strip, has positioned itself over the decades as a coveted leisure and convention destination. In contrast, Atlantic City has been too complacent being a gambling center for those living within a two-hour driving radius.
Just a decade ago, the two cities were vying for number one gaming market status in terms of gaming revenues, with both markets generating around $5 billion each in annual gaming revenues. In contrast to Las Vegas Strip, where gaming revenues managed to grow 5% in the past 10 years, Atlantic City’s gaming revenues declined by half during the same timeframe. The Strip’s other businesses are doing much better. Food and beverage sales at larger resorts grew 55% and RevPAR (the main operating metric for lodging) improved by 21%.
Gaming expansions in Pennsylvania and New York deserve a fair amount but not all of the blame for this diversion. Las Vegas, itself, was under siege from national proliferation of gaming in the 1990s and 2000s, especially the surge in Native American casinos in the neighboring states of Arizona and California. But unlike Atlantic City, the Strip persevered. In addition to Las Vegas’ 37-year head start as a gambling destination, ironically, its more remote location has proven to be its lifeline.
Location, Location, Location
Las Vegas’ more remote location drove more urgent need for hotel rooms and a major airport. By the time Atlantic City’s first casino opened in 1978, Las Vegas had 42,650 hotel rooms citywide and its airport was handling over nine million annual enplanements. The hotels supporting Atlantic City’s casinos never reached half the number of Las Vegas’ in 1978, while Las Vegas’ room count almost increased four-fold since then. The primary reason is entrepreneurs such Sheldon Adelson, Steve Wynn and Kirk Kerkorian, who successfully tested the “build it and they will come” mantra. Their visions culminated in a critical mass of “integrated” resorts loaded with shopping, star chef restaurants, entertainment venues and convention venues.
In 2005, prior to the Great Recession and a major spike in casino competition across U.S., the Strip’s resorts generated 60% of their revenues from non-gaming sources. Atlantic City’s non-gaming mix, by contrast, was 20% at the time. By the time the recession and new competition came, it was too late to diversify. Caesars Entertainment and Trump Entertainment, which together operated more than half of Atlantic City’s casinos, were highly leveraged and financially constrained. Others including Pinnacle Entertainment and Morgan Stanley abandoned their multi-billion dollar casino projects.
Even if the Atlantic City stakeholders had the foresight to build more amenities in an effort to diversify away from gaming, it’s uncertain that they would be successful. Building a world-class airport would be redundant with four major airports supporting the surrounding Philadelphia and New York City areas. Same goes for other praised amenities available in Las Vegas. Both major cities flanking Atlantic City have extensive convention facilities, hotel room inventory and nightlife options. Revel, Morgan Stanley’s project, finally opened in 2012 under different ownership after securing help from the state, but had to close two years later as its non-gaming focus proved ineffective.
With the bulk of the ramp up in regional gaming competition now a thing of the past, Las Vegas can look towards a bright future. Regional gaming markets face an adverse demographic shift and a difficult fight for millennials’ share of the wallet. The Strip is different and can make up for the millennials’ tepidness towards gambling by attracting convention and club goers as well as international gamblers and leisure seekers. In fact, while 77% of Las Vegas Strip visitors gamble, 90% are there mainly for reasons besides gambling according Las Vegas Convention and Visitor Authority’s survey.
While Atlantic City’s prospects look less bright, the worst could be behind. New competition is largely in the past. New Jersey’s referendum to allow additional casinos outside Atlantic City appears to be heading for a high margin loss, according to recent polls. The rising economy and reduced competition from the recent closures should lift revenues and margins for the survivors. The seven remaining casinos are on pace to exceed $1 billion of gross operating profit for 2016 and in 2015 Atlantic City’s slots win on average about $280 per day, a healthy level relative to other U.S. gaming markets including Las Vegas.
Meanwhile, Las Vegas continues to redefine itself with the corporations such as Caesars and MGM Resorts repurposing assets to fit millennial tastes. Caesars rebranded Bill’s Gamblin’ Saloon into a boutique hotel with a night and day club on the roof. MGM got rid of the legendary lions at MGM Grand to make room for Hakkasan, another giant club. In the last three years Las Vegas got The LINQ party district and TopGolf, a driving range equipped with bars and pools. A $2.3 billion convention expansion, a $450 million rebranding of Monte Carlo, an NFL stadium and two new major resorts are slated to open over the next several years.
Growth in African Sukuk Shows Positive Momentum, but Structural Challenges Remain
Many African countries are working to develop their legislative and regulatory frameworks to establish Islamic finance and sukuk as a sustainable funding alternative. With Africa’s demand for infrastructure financing solutions and its significant Muslim population, such an opportunity might be well received.
Islamic finance is already present in more than 20 African countries, with Sudan having a fully-fledged 100% Islamic financial system. However, the size of the Islamic finance industry in Africa is still small in relation to the industry as a whole. Fitch estimates around USD1bn of sukuk total issuance from the whole of Africa in 2016 compared to USD21.74bn in 1H16 across the Gulf Cooperation Council, Malaysia, Indonesia, Turkey, Singapore and Pakistan.
When considering the reasons Why? Africa is less developed in its Islamic financial system, two common themes emerge. The first theme is the complexities of sukuk. Second is the emerging capital market infrastructure of African countries. Both factors pose significant challenges for sukuk in general, particularly in establishing a legal structure and legislation that is acceptable to governments, investors and the Sharia boards. Also, structuring sukuk compared to issuing a traditional Eurobond remains a relatively complex and time consuming process.
Two main examples of these sukuk complexity challenges can be tax neutrality for sukuk and the ability to establish a special purpose vehicle (SPV) that acts as a single issuer for the sukuk. Although this is not Africa-specific, taxation is often challenging for sukuk due to their asset-backed/based nature. What this means is several asset transfers for a sukuk transaction, creating a dense tax load for issuers when there is not special sukuk legislation in place.
Regulations often need to be amended to provide some sort of exemption to taxable gains on the transfer of assets and tax on rental income earned by a sukuk issuing SPV. This is also true for withholding taxes linked to the transfer of underlying assets in sukuk transactions.
In most African countries, there are no specific comprehensive sukuk laws, though some initiatives have now materialized. One example is South Africa, which has introduced Islamic compliant financial structures with further amendments to the Taxation Act to widen the definition of sukuk. This comes following the issuance of its sovereign sukuk during 2014.
Regarding the second theme of the nature of Africa burgeoning capital markets, there are encouraging signs. That said, the development is still modest relative to their potential and compared to more developed countries. There are numerous limitations and challenges in developing bonds and sukuk alike. However, the regional/local currency sukuk market is an area where we have seen increased sukuk activity.
The choices in issuance are usually domestic versus international and the currency denomination of their sukuk (or bonds) are local versus foreign. These two features are often interlinked, as many issuances are denominated in the currency of the market in which they are issued.
Africa has seen success in issuing sukuk in sub-Saharan Africa, and West Africa in particular in the West African CFA franc (XOF), which minimises exposure to FX risk for domestic issuers and investors.
The continuation of sukuk activity this year is a positive development that allows the sukuk footprint to widen and foster greater acceptance of this instrument globally. Reuters reported that in 2016, Togo’s initial sukuk was XOF 150 billion (USD255 million). This comes after Senegal launched its second XOF200 billion (USD341.5 million) sukuk towards the end of June and Côte d’Ivoire’s second phase of its XOF300 billion (USD510 million) sukuk program. Similarly, it has been reported by Reuters that Nigeria has convened multi-agency meetings to organize its maiden sovereign sukuk issuance, expected by in 2017.
With global financial reform, we have seen the transformation of banks’ willingness and ability to lend. This, combined with recent events and uncertainties globally like about interest rates increase and appetite of investors to emerging market, has highlighted the limitations of heavily relying on foreign investments alone and regional and local currency could make this complex process easier.
Challenges lie ahead for the sukuk market despite continued momentum. The time needed to tackle these obstacles will in turn lead to a longer time frame of Islamic finance implementation and potentially higher costs in relation to more conventional forms of funding until a standardised framework is established. However, several important trends could provide the necessary impetus for the development of Islamic finance in Africa. This includes growing government support for Islamic finance, increasing acceptance of Sukuk and Islamic finance more broadly and existing large investment and financing requirements in Africa.
Furthermore, Islamic finance could enable African sovereigns to broaden their investor base while providing some diversification away from traditional Eurobond investors and towards regional/local market participants. As African governments tap the Islamic finance market, it is anticipated that other issuers such as state-owned companies and African banks could, in time, benefit from this additional source of funding.
New ‘Core Four’ emerges amid questions around Tiger’s return to the PGA
The Safeway Open, which begins today and effectively kicks off the 2016-17 PGA TOUR season, was supposed to mark the return of one of golf’s most recognizable names, Tiger Woods. Tiger withdrew from the event on Monday citing vulnerabilities with his game. This reignites questions around Tiger’s return and, specifically, ‘When?' or 'Will he ever return’, ’In what form?’ and ‘Will we ever see the early 2000’s Tiger?’. Which raises another overarching question: ‘Is the PGA stronger today with or without the presence of one of golf’s marquee players?’
A new ‘Core Four’
Whether or not we’ve seen the last of Tiger Woods, the PGA TOUR has seen the re-emergence of a new ‘Core Four’ that has materialized over the past few years since Tiger’s last win in 2013 and recent inactivity. We saw this roughly a decade ago, when Tiger made up one-fourth of the core alongside Ernie Els, Phil Mickelson and an interchangeable fourth of Vijay Singh, Retief Goosen, David Duval and Sergio Garcia before Woods became the breakout star of the organization and asserted his dominance for the better part of a decade.
Flash forward to today, his time away from the PGA spotlight has marked a return to a new ‘Core Four’ which now includes young, dynamic players like Jordan Spieth, Rory McIlroy, Jason Day and Dustin Johnson (crowned 2016 PGA TOUR Player of the Year). The new ‘Core Four’ also comes with a very deep bench of young talent and notable journeymen through the top-25 golfers in the world.
Marketing around this next generation of golfers amid Tiger’s absence has certainly undergone a rather dramatic transition as well.
From ‘Just Do It’ to ‘I Will’
Case in point, the emergence of companies like UnderArmour that now pose a legitimate threat to the long-standing dominance of Nike, which made Woods the world’s highest paid face of the PGA through the numerous multimillion dollar contracts he signed dating back to his 1996 debut. Nike recently announced they’re no longer producing ‘hard equipment’ including clubs (drivers, irons and putters), balls and bags to focus on apparel and footwear. Flash ahead to today and what you are seeing is young golfers gravitating towards UnderArmour and other brands such as Puma and Vineyard Vines. In the process, they are challenging perennial powerhouse golf apparel brands such as Titleist, Adidas / TaylorMade, Cutter & Buck, Ashworth, Ping and Callaway (to name a few) for that highly coveted youth brand alliance and recognition.
Golf has always been an international sport, as evidenced by legends like Gary Player (South Africa) Greg Norman (Australia), Nick Faldo (England) and Seve Ballasteros (Spain) as well as the growth in international events such as the World Golf Championship (WGC) in Shanghai, China later this month to remarkable growth in popularity in Ryder Cup and President Cup tournaments, which was played in South Korea in 2015. The breadth of nations housing PGA TOUR professional golfers has widened notably throughout South America and Asia Pacific in addition to more players from the aforementioned nations.
Golf has a long history of legends, most of whom are recognized by one name from Hagen, Jones, and Sarazen to Hogan, Palmer, Player and Nicklaus to Watson, Faldo and Normanand, of course, Tiger. During their respective reigns, there was some uncertainty around the future path of the game. The PGA TOUR has gone through another relative sea change during Tiger’s inactivity. Names like Speith, McIlroy, Johnson and Day will undoubtedly change the game once again in their unique way.
But how will the sport be marketed throughout the world with the emergence of new brand names (UnderArmour, Puma) challenging the long-standing supremacy of the old guard (Nike, Titleist)? Will international growth spur new markets, youth movements and new superstars? Has the sport and marketing around it changed permanently even if Tiger returns to the top of golf’s upper ranks?
With constant debate over the future participation levels and interest from millennials and future generations, will Tiger’s core fan base remain interested over the long term? Are the new Core Four and supporting cast willing and able to carry the torch? With Tiger now serving as an elder statesman of sorts among this new crop of golf superstars, whether he returns to the sport and, if so, how the PGA will be marketed upon his return will be something worth watch in the coming months and years.