DIGITAL DISRUPTION
 

How FinTech is Forcing Banking to a Tipping Point 

Citi GPS: Global Perspectives & Solutions 

March 2016 

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Ronit Ghose, CFA Yafei Tian, CFA 

Head of Global Banks Research European Banks Team 

Citi Research Citi Research 

+44-20-7986-4028 | ronit.ghose@citi.com +44-20-7986-4100 | yafei.tian@citi.com 

Sandeep Dave 

Director, Global Digital Strategy, Citi 

Ashwin Shirvaikar, CFA 

US Computer Services & IT Consulting 

Research 

Citi Research 

+1-212-816-0822 | ashwin.shirvaikar@citi.com 

Keith Horowitz, CFA 

US Banks and Brokers Research 

Citi Research 

+1-212-816-3033 | keith.horowitz@citi.com

Includes Interviews with 

Greg Baxter 

Global Head of Digital, Citi 

Jonathan Larsen 

Global Head of Retail and Mortgage, Citi 

Josh Levin, CFA 

European FinTech & Frontier Market Banks 

Research 

Citi Research 

+44-20-7508-3020 | josh.levin@citi.com 

Simon Ho, CFA 

Head of Asian Regional Banks Research 

Citi Research 

+852-2501-2798 | simon.ho@citi.com 

Aditya Menon 

Managing Director, Global Digital Strategy, 

Citi 

 

 

Citi GPS: Global Perspectives & Solutions March 2016 

With thanks to Morgan McKenney from Citi Treasury & Trade Solutions, Huy Nguyen 

Trieu (Markets), Johan Lundberg (NFT Ventures) and from Citi Research: Craig With thanks to: Williams, Robert Kong, Aditya Narain, Haley Tam, Jim Suva, Mark May, Thomas 

Chong and Charles Russell for their contributions to the note 

0B
 

 

 

 

 

 

 

 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 3 

Kathleen Boyle, CFA 

Managing Editor, Citi GPS 

DIGITAL DISRUPTION 

How FinTech is Forcing Banking to a Tipping Point 

When I was growing up there was a weekly ritual in our house. My Dad would bring 

home a check on a Thursday night and leave it under the clock on the mantelpiece. 

Then by hook or by crook, my Mom would make it to the local bank branch on 

Friday, deposit the check, get cash, and return a few dollars back under the clock 

for Dad for the coming week. To my Dad, the clock was the first automated teller 

machine. 

With advances in technology, the relationship that customers have with their bank 

and with their finances has changed. Customers rely less and less on walking into a 

branch for their banking needs, and instead have digital options to help them — 

ATMs, on-line chat, mobile phones, and Internet banking. So far these have been 

seen more as additive to a customer's banking experience but when do we go over 

the digital disruption tipping point and see a change in the fundamental banking 

business? 

Investments in financial technology have growth exponentially in the past decade — 

rising from $1.8 billion in 2010 to $19 billion in 2015 — with over 70% of this 

investment focusing on the "last mile" of user experience in the consumer space. 

The majority of this investment has also been concentrated in the payments area 

and this is where banks are seeing the most competition with new entrants. 

Competitors already established in new marketplaces, such as PayPal for ecommerce payments in the US, or emerging in client segments traditionally 

underserved by banks (such as micro and small businesses) are starting to gain 

traction and ramp up their scale. 

Despite all of the investment and continuous speculation about banks facing 

extinction, only about 1% of North American consumer banking revenue has 

migrated to new digital models. Although FinTech companies have the advantage of 

new innovation, incumbent financial institutions still have the upper hand in terms of 

scale and we have not yet reached the tipping point of digital disruption in either the 

US or Europe. Given the growth in FinTech investment, this isn't likely to continue 

for long. 

In China, Internet giants have moved into financial services and gained 

considerable market share in e-commerce and third-party payments. These new 

entrants were faster than the banks to offer convenient, reliable, fast and costefficient alternatives to traditional bank payments. China's FinTech companies often 

have as many, if not more, clients than the top banks and their FinTech players 

often have well-resourced parent companies in e-commerce and finance that can 

sustain larger and more balance sheet intensive businesses that Western venture 

capital funded rivals. 

As customers shift their behavior and move more towards digital solutions, banks 

will need to rethink their digital strategy. The authors believe an omni-channel 

strategy is the winning solution for incumbent banks over the next decade. This 

should be built around a competitive digital offering, a reduced and modernized 

branch network, and lastly, a targeted channel strategy for different segments of 

customers. 

I wonder if I can put a digital folder with digital money under the clock on my mobile 

phone? 

© 2016 Citigroup 
Disruption Tipping Point 

Already past the point in China and getting close in the rest of the world 

INVESTMENT IN PRIVATE FINTECH COMPANIES 2015

INCREASED x10 IN THE PAST 5 YEARS 

Private Investment in Global FinTech 

Source: Citi and CB Insights 2014

2013

2012

2011 2010 

 $1.8 billion $2.1 billion $2.4 billion 

 $4.0 billion 

 $12 billion 

$19 billion 

FINTECH INVESTMENT HAS TARGETED THE MOST 

PROFITABLE AREAS OF GLOBAL BANKING 

Capital deployment in FinTech sector Global Banking profit by segment 

Source: CB Insights , KPMG, Crunch Base and Citi Research Source: Company reports & Citi Research 

73% 10% 10% 46% 35% 

Personal/SME Asset Management Insurance Personal/SME Corporate Banking 

4% 3% 19% 

Investment Banking Large Corporations Investment Banking/Markets 

© 2016 Citigroup 
THE US AND EUROPE ARE AT THE TIPPING POINT IN TERMS OF FINANCIAL INNOVATION 

Impact of digital disruption on US Consumer Banking Revenue 

 $1,200 billion 

 $1,050 billion

 $870 billion $850 billion

1.1% 5% 10% 17% 

Total banking
�

consumer revenue 

Revenue impact from 

digital disruption 

Source: Citi Digital Strategy 2015 2017 2020 2023 

UK 

CHINA IS PAST THE TIPPING POINT WITH FINTECH COMPANIES HAVING 

SIMILAR NUMBER OF CLIENTS AS THE MAJOR BANKS US 

China 

$5.4

billion 

$16.6 

billion China is currently the 

biggest Peer-to -Peer (P2P) 

lender in the world $66.9

Source: Citi Research billion 

Global 2015 2018 

$1,700 $3,000

billion billion 

China also has the largest 

e -commerce system China in the world (gross 

merchandise volume) $672 $1,600

billion billion 

Source: eMarketer, Citi Research 
 

6 Citi GPS: Global Perspectives & Solutions March 2016 

Contents 

How FinTech Changes Finance 7
 

Disruption Tipping Point 14
 

Silicon Valley Is Coming 14
 

"Hundreds of Startups with a Lot of Brains and Money" 15
 

Where Are the FinTech Dollars Going? 16
 

Different Is Better than Cheaper 17
 

Revenue Risks for Incumbents by Customer 18
 

Digital Disruption Tipping Point 19
 

Disruption Tipping Point 23
 

A Strategists View: Q&A with Greg Baxter 23
 

Disruption Tipping Point 27
 

A Venture Capitalist's View: Q+A with Johan Lundberg 27
 

Revenue Risks: Country Analysis 28
 

What's Chinese for Unicorn? 29
 

Payment & E-Commerce: China Leads 30
 

China's Vibrant Payment Innovations 33
 

Alipay: China's PayPal and More 39
 

Tenpay: Leader in P2P Payments 41
 

Online Payments and Digital Wallets in the US 43
 

Mobile Money: A FinTech Revolution 45
 

Mobile Money Still in Infancy 46
 

Mobile Money Case Study: Kenya, Nigeria & South Africa 48
 

India at the Tech Frontier: The Next Kenya or China? 49
 

Emerging Market Mobile Money 52
 

A Case Study: Q+A with Aditya Menon 52
 

Marketplace Lending: The Challenges Are High 54
 

China: The Largest P2P Market in the World 56
 

P2P Lending in the US and Europe 61
 

Risks to Marketplace Lending Platforms 62
 

Banking's Uber Moment 64
 

Connectivity Replaces Physical Assets 64
 

Shifting Customer Behavior 64
 

Branches Halved Already in the Nordics 66
 

Digitization to Drive Cost Efficiency 68
 

Branch of the Future: 71
 

Q+A with Jonathan Larsen 71
 

In South and South East Asia, More Branches 74
 

Why Are Branches Blossoming in US Cities? 77
 

People: Automation Tipping Point 80
 

Early Stage of Headcount Reduction 82
 

Investment Bank Headcount Reduction: Talk High 84
 

Not East to Be a Tech Company 85
 

Legacy IT System Costs: Australian Banks Study 87
 

Blockchain: The Next Big Thing? 89
 

Blockchain Use Cases 91
 

Winners and Losers of Blockchain 94
 

Robo-Advisors: Complementary, not Substitutional 96
 

Complementary Not Substitutional 99
 

Appendix: Citi's Digital Money Index 103
 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

Figure 1. Private Investment in Global FinTech Companies ($bn) 

20 

15 

10 

5 

0 

Source: Citi and CB Insights; Includes first around and subsequent private investments 

2010 2011 2012 2013 2014 2015 

 

March 2016 Citi GPS: Global Perspectives & Solutions 7 

FinTech investment has grown exponentially 

in recent years 

How FinTech Changes Finance 

FinTech is changing the world of finance. In the US and Europe, we are at a tipping 

point, especially in consumer banking. The banks have clients and scale but the 

new FinTech entrants usually have the innovation edge, especially at the "client 

experience" interface. To remain competitive, banks need to get innovation before 

the FinTech companies get scale. In China, by contrast, we are past the tipping 

point: FinTech companies have both scale and innovation. India is the next biggest 

opportunity. 

In this report we (1) identify where FinTech investments are being made by financial 

product and client segment; (2) assess where we are in the Disruption Cycle by 

segment and geography; (3) take a deeper look at innovation in each of the key 

product segments - payments, lending and savings; and (4) assess what banks can 

do to improve the efficiency of their businesses, both in terms of current headcount 

and distribution as well as long-dated options such as Blockchain. 

Follow the Money 

From California to China, the banking industry is increasingly being challenged by 

digital disruption. As Jamie Dimon, CEO of JPMorgan has noted: “Silicon Valley is 

coming. There are hundreds of startups with a lot of brains and money working on 

various alternatives to traditional banking.” FinTech investments have grown 

exponentially in recent years: $19 billion of investment in 2015 was up two-thirds 

from $12 billion in 2014 and from low single-digit billions of dollars per year earlier in 

the decade. Given the recent shakeout in public equity markets, especially for 

marketplace lenders but also financial and technology companies in general, we 

may have a spill-over chill in private markets in 2016. This is not least from 

incumbent banking-funded Ventures units (see for example the February 2016 

announcement by BBVA that it will increase its original $100 million FinTech fund to 

$250 million, now invested via Propel Venture Partners). 

New entrants are targeting Personal and 

SME banking which account for about half of 

banking industry's profit pool 

All About the Consumer 

FinTech new entrants are targeting some of the most attractive and valuable profit 

pools in banking today. Citi Research analysts estimate that Personal and small and 

medium enterprise (SME) banking account for about half of the banking industry's 

profit pool and a higher proportion of the sector's equity value. Sifting through over a 

hundred FinTech private investments, we calculate that over 70% of the FinTech 

investments to date have been in the Personal/SME business segments. Why does 

© 2016 Citigroup 
 

 

 

 

 

 

Figure 2. Capital Deployed in Private FinTech Companies By Segment	 Figure 3. Capital Deployed in Private FinTech Companies By Business 

Area 

Investment Large Equity Digital Currency Banking Corporate Crowdfunding 

4% 3% Insurance 3% 2% 10% Insurance Institutional 

10% Savings & Tools 

Wealth 3% 

10% 

Asset
 

Management &
 

Wealth
 

10%
 

Lending Payment 

23% 46%

Personal & 

SME 

73% Money Transfer 

3% 

 

 

 

 

 

 

8 Citi GPS: Global Perspectives & Solutions	 March 2016 

Business-to-Consumer (B2C) dominate? Firstly, consumer client behavior has 

changed. Smartphones have revolutionized information and content delivery in 

general and are now becoming important in financial services transactions across 

multiple continents. B2C solutions can "win" new clients with a better experience 

whereas Business-to-Business (B2B) solutions need to jump several more hurdles, 

including corporate clients' greater product/service customization and corporate 

procurement department's focus on safety and supplier risk, all of which increase 

switching costs. 

Source: CBInsights, KPMG, Crunch Base and Citi Research; Based on c120 private companies from CBInsights FinTech Periodic table Dec 2014; KPMG’s top 50 most 

prominent FinTech innovators Dec 2015; Valuation based on Crunch Base Total Equity Funding for private companies and exit value for acquired companies 

Only a small fraction of the consumer 

banking wallet has been disrupted so far in 

the US and Europe... 

At the Tipping Point in the West 

In the US and Europe, only a very small fraction of the current consumer banking 

wallet has been disrupted by FinTech so far. However, this is likely to rise. Greg 

Baxter, Citi's Global Head of Digital Strategy, notes that we are not even at "the end 

of the beginning" of the consumer disruption cycle in Western Europe and the US. 

Greg's team estimates that currently only about 1% of North American consumer 

banking revenue has migrated to new digital business models (either at new 

entrants or incumbents) but that this will increase to about 10% by 2020 and 17% 

by 2023. We are in the early stages of the US and European consumer banking 

disruption cycle, therefore we note that this estimate is subject to considerable 

forecast risk. However, an open question remains as to whether incumbent banks in 

the US and Europe can embrace innovation, not just talk about Blockchain and 

hack-a-thons, before FinTech competitors gain scale and distribution. 

© 2016 Citigroup 
 

$1,050 bn

Figure 4. North America Consumer Bank Case Study 

Current 2023 2020 

1.1% 10% 

Total Digital 

90% 

Total Digital
 

Disruption
 

98.9% 

Disruption 

Total Market 

Total Digital 

Disruption Total Market
 

Value
 Value Total Market 

Value 83% 

17% 

$850 bn $1,050 bn $1,200 bn 

Source: Citi Digital Strategy 

 

 

 

Figure 5. Global E-Commerce Mainly Comes from China & US, 2015Figure 6. Alipay Total Payment Volume Bigger than PayPal, 2015($bn) 

Global 

$1.7tr 

China 

$0.67tr 

(40%) US 

$0.34tr 

(20%) 

Alibaba 

$0.45tr (26%) 

1000 

900 

800 

700 

600 

500 

400 

300 

200 

100 

0 

Alipay $931bn 

PayPal $282bn 

Alipay

3.3x 

PayPal 

Source: eMarketer, Citi Research; Based on Gross Merchandise Value (GMV) Source: Company Reports, Citi Research. Alipay TPV 2015 is estimated based on 

disclosure in 2014 adjusted for growth in Alibaba's gross merchandise volume 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 9

...but China is well past the tipping point 

with FinTech companies having as many 

clients as top banks and financial players 

Past the Tipping Point in China 

In China, unlike the US or Europe, we are well past the tipping point of disruption. 

China’s e-commerce ecosystem is now larger than any other country in the world in 

terms of transaction volume. China’s top FinTech companies (such as Alipay or 

Tencent) often have as many, if not more, clients than the top banks. China's top 

FinTech players (such as Ant Financial or Lufax) often have well-resourced parent 

companies in e-commerce or finance that can sustain larger and more balancesheet intensive businesses than Western venture capital funded rivals. China's 

FinTech companies have grown fast due to a combination of: (1) high national 

Internet and mobile penetration, (2) a large e-commerce system with domestic 

Internet companies focused on payments, (3) relatively unsophisticated incumbent 

consumer banking, and (4) accommodative regulations. While the US and Europe 

also share high mobile Internet savvy, their local Internet leaders have not as yet 

strategically focused on payments/finance and their local consumer banks are more 

sophisticated. 

© 2016 Citigroup 
 

 

 

 

Figure 7. Percentage of Population (15+) with a Bank Account (2014) Figure 8. Distribution of Unbanked Population By Region (2014) 

Middle East High-income 100 Other economies OECD economies 4% 4% 3% 

Europe & Central 80 Asia 

5% South Asia 

32% 

60 Latin America &
 

Caribbean
 

10%
 

40 

20 

Sub-Saharan 

Africa 0 17% Euro area United States East Asia & World Europe & Latin America South Asia Sub-Saharan Middle East
 

Pacific Central Asia & Caribbean Africa (Developing
 East Asia & (developing (developing (developing (developing only) 

only) only) only) only) Pacific 

25% 

Source: World Bank Financial Development Index, Citi Research Source: World Bank Financial Development Index, Citi Research 

 

 

 

10 Citi GPS: Global Perspectives & Solutions March 2016 

High unbanked population, weak consumer 

banks and high mobile phone penetration 

make emerging markets ripe for FinTech 

disruptions 

Emerging Market Financial Inclusion Revolution 

Emerging markets often have a high percentage of unbanked population, relatively 

weak consumer banks, and a high penetration of mobile phones. Hence, they are 

ripe for FinTech disruptions. Kenya has led the way for almost a decade now with 

M-PESA launching in Kenya in 2007 with currently 23 million active customers in 11

countries. In next door Somalia — associated in the past few decades with political

instability instead of financial innovation — mobile money is having an arguably

even more profound impact with about 40% of adults using mobile money. Similarly,

in the giant Asian countries such as India, Indonesia and the Philippines with an

almost 400 million unbanked population, mobile money can also help solve a

societal problem. Not surprisingly, policymakers look favorably at FinTech as part of

the solution to financial inclusion.

India is likely to be a big opportunity for 

FinTech 

After Kenya and China, Is India the Next Frontier in Digital Finance? 

Emerging markets do not follow a single path to digital finance growth. The success 

of mobile money in Kenya was driven by a significant investment in mobile money, 

the growth of a viable non-bank agent network, as well as proportional regulation. 

By contrast, China has seen growth driven by a few Internet giants, such as the 

Alibaba ecosystem. In India, the adoption of the AADHAR national biometric identity 

program and the opening of over 200 million new bank accounts, have dramatically 

increased the customer base. India, by its sheer population size (1.2 billion and 

counting), low level of banking penetration, policy initiatives (such as the AADHAR 

program), and the ubiquity of mobile phones (~80% penetration), is one of the big 

opportunity spaces for FinTech. The latest data shows India's mobile banking 

transaction value increased 4x year-over-year in December 2015. 

© 2016 Citigroup 
 

 

Figure 9. India – Rising Number of Mobile Banking Transactions 

Mobile transaction value (RHS, Rs bn) Mobile transaction volumes (million, LHS) 

-

100.00 

200.00 

300.00 

400.00 

500.00 

600.00 

0.00 

5.00 

10.00 

15.00 

20.00 

25.00 

30.00 

35.00 

40.00 

45.00 

May 09

Dec 09Dec 10Dec 11Dec 12Dec 13Dec 14

Mar 15

Dec 15 

Source: Citi Research, RBI 

 

 

 

 

 

 

 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 11 

Payments have been most challenged by 

tech-driven new entrants 

Marketplace & P2P lending have grown 

quickly in China where they could make up 

9% of total system retail loans by 2018 

Payment Space Intensely Contested 

The payment space is the segment of finance that has been most challenged by 

tech-driven new entrants to date. From M-PESA in Kenya, Tencent’s WeChat red 

envelope in China, and the PayTM wallet in India, non-bank payment options are 

increasingly well adopted in their home markets. Alipay and PayPal are leaders in ecommerce online payments. Although payment is a relatively small part of banks’ 

revenue pool (~7%), the incumbent banks are at risk of losing important customer 

transaction data and client relationships. In the Nordic region, banks have been 

successful to date in innovating and defending the P2P consumer payment 

segment (e.g. DNB and VIPPS or Danske and MobilePay). So far, US Internet 

giants (e.g. Google, Apple, Facebook, and Amazon) lag their Chinese counterparts 

on payments and financial services. But given their consumer client reach and 

brand strength, it would be dangerous for incumbent banks to ignore their potential 

threats. 

Marketplace or P2P Lending 

Online platforms that match borrowers and lenders have been around for a decade 

but have grown quickly in the last couple of years. Total loans lent by online 

platforms remain small at less than 1% of total loans outstanding in markets such as 

China, the US, and the UK. However, the Chinese market is growing fast – it is 

about 4x the absolute size of marketplace lending in the US and over 10x the UK. In 

China, peer-to-peer (P2P) cumulative lending volumes today amount to about 3% of 

system retail loans — but if we were to extrapolate the recent growth rate through 

the end of 2018, the Chinese P2P market would be about 9% of total retail loans. 

By contrast, the US P2P market is equivalent to just 0.7% of total retail loans and 

even if we extrapolate recent loan growth to the end of 2018, the US P2P 

penetration rate would only be slightly above the current Chinese level. 

© 2016 Citigroup 
 

 

 

 

Figure 10. Commercial Bank Branches per 100k Adults By Region 

­

5

 10

 15

 20

 25

 30

 35

 40 

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2018 2020 ... 2025 

Euro area United States 

East Asia & Pacific (all income levels) Latin America & Caribbean (all income levels) 

Nordics 

Forecasts 

-33% 

-45% 

-50% 

Source: World Bank, Citi Researech 

 

 

 

 

 

 

 

12 Citi GPS: Global Perspectives & Solutions March 2016 

Bank branch levels are forecast to fall 

significantly given their high cost, the 

increased ubiquity of mobile Internet, 

increasing FinTech competition and a 

sluggish revenue and profitability 

environment 

Banking's Uber Moment 

Antony Jenkins, the former CEO of Barclays, talks about banks being at an "Uber 

moment" and argues that pressure from new technology-based competitors "will 

compel banks to significantly automate their business" and "that the number of 

branches and people may decline by as much as 50% over the next years." Mr. 

Jenkins may well be right. The consumer banks in the US and Europe are at a 

tipping point in terms of branch distribution. Northern Europe has already done a lot 

— Nordic and Dutch banks have cut total branch levels by around 50% from recent 

peak levels. We believe that from 2013 levels (the last reported branch/population 

data from the World Bank), developed market banks could cut branch numbers by 

another 30-50%. DNB, already operating in the developed market with the lowest 

branch penetration/population ratio, announced in late 2015 that they will further 

halve their branch network in 2016. The US banks have up to now lagged their 

Nordic and European peers on branch reductions. But with the increased ubiquity of 

the mobile Internet, increasing FinTech competition, and a sluggish revenue and 

profitability environment, we expect US banks to follow their EU peers in cutting 

branches. 

A reduction in banks' physical networks 

could lead to a 40-50% decline in staffing 

levels from pre-crisis levels 

Halving Staff Numbers 

As noted by Jonathan Larsen, Global Head of Retail and Mortgages at Citi, the 

value of consumer banking will be in connectivity and not physical assets, which 

Jonathan also refers to as banking’s “Uber moment” (page 71). The future of 

branches in banking is about focusing on advisory and consultation rather than 

transactions. The return on having a physical network is diminishing. Branches and 

associated staff costs make up about 65% of the total retail cost base of a larger 

bank and a lot of these costs can be removed via automation. The pace of staff 

reductions so far has been gradual (~2% per year or ~11-13% from peak levels precrisis). We believe there could be another 30% reduction in staff between 2015 and 

2025, shifting from the recent 2% per year decline to 3% per year, mainly from retail

© 2016 Citigroup 
 

 

 

Figure 11. At the Tipping Point of Full-Time Employee Reduction (million) 

4.00 

3.00 

2.00 

1.00 

0.00 

2.93 

3.26 

2.57 

2.89 

1.80 1.82 

US Europe 

Peak 2015 2025 

-40% -45%

Source: ECB, United States Bureau of Labor Statistics, Citi Research estimates 

 

 

 

 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 13 

banking automation. From peak staffing levels pre-crisis, this would result in a 40­

50% decline, not far off Antony Jenkins' forecast. If the banking system in Europe, 

Japan, and the US operated with the same cost/income ration as the best-in-class 

Nordic region, it would remove $175 billion from their cost base (or 23%) and add 

39% to the pre-tax profit of the banks in 2016. 

Blockchain could be a catalyst for 

transforming existing legacy systems but it's 

still a "bleeding edge" technology 

Blockchain: The Next Big Thing? 

So far a lot of payments innovation has been focused on the "last mile", i.e. the user 

experience at the point of sale. The existing payment infrastructure remains the 

backbone. But Blockchain technology could be different. It could replace the current 

payment rail of centralized clearing with a distributed ledger for many aspects of 

financial services, especially in the B2B world. Blockchain positives are based 

around its characteristics including decentralization, programmability, and 

immutability. It could also be a catalyst for the transformation of many existing 

legacy systems that operate with a high degree of robustness but may not be the 

most cost or capital efficient way of doing business. However, there are also 

considerable negatives associated with the technology, not least of which is that it is 

currently still "bleeding edge" and lacks the robustness of existing payment systems 

such as Visa or SWIFT. But even if Blockchain does not end up replacing the core 

current financial infrastructure, it may be a catalyst to rethink and re-engineer legacy 

systems that could work more efficiently. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

 

 

 

14 Citi GPS: Global Perspectives & Solutions March 2016 

The death of banks has been foretold for 

years 

Mobile Internet and smartphone penetration 

have been a game changer in consumer 

and SME finance and payments 

The incumbent banks are aware of the 

change underway 

Disruption Tipping Point 

Silicon Valley Is Coming 

As far back as 1994 (BusinessWeek, October 31), Bill Gates argued that the world 

needed banking services but not necessarily banks and described banks as 

dinosaurs. In October 1994 Microsoft announced the purchase of Intuit Inc, the 

maker of Quicken personal finance software. BusinessWeek noted that "Eventually, 

Microsoft hopes to offer everything from mutual funds to brokerage services over its 

network" (BW, Oct 31, 1994). This initiative was however short lived and was called 

off in 1995 due to a long-winded and complex regulatory approval process. 

The death of banks has been much foretold in recent decades. Bill Gates and 

Microsoft in the 1990s were clearly ahead of their time when it came to predicting 

the demise of the bank sector. About a decade later, several US, UK and European 

banks did collapse and get bailed out by the Government or bought by peers. 

However, this was typically due to aggressive lending, funding or M&A and not due 

to competition from tech companies. 

Almost two decades after Bill Gates foresaw banks facing extinction, the growth of 

the Internet has led to financial services facing new competitive threats. The growth 

of the Internet has created an e-commerce ecosystem with its own online payment 

systems, such as PayPal or Alipay. It has provided a platform for a new generation 

of credit intermediators, the P2P or Marketplace lenders. "Technology is at a turning 

point," noted BBVA’s Chairman Francisco Gonzalez several years ago (Economist, 

May 2012). 

The recent mobile Internet and smartphone revolution has created a game changer 

in consumer and SME finance and payments. Smartphones in the US and Europe 

are increasingly part of the SME and micro-enterprise payment space (e.g. Square 

or iZettle). Apple Pay and Android Pay debuted in 2014 and 2015 respectively and 

allow consumers to make payments via phones, tablets or watches. The original 

mobile device based payment service, M-PESA, launched in Kenya as far back as 

2007. 

Technology does not just change distribution models and service patterns. It is not 

just a question of fewer branches and more apps, albeit we will come back to that 

topic later in this report. The definition of financial products themselves may need to 

be rethought. John Stumpf, Wells Fargo CEO, noted in late 2015: “...we’ll probably 

be the last generation to use the term credit card and debit card. It will probably be 

debit access and credit access and it will be likely loaded on to a mobile device.” 

The incumbent banks are aware of the change underway. In his 2015 Annual 

Shareholder Letter, JP Morgan CEO Jamie Dimon noted: “Silicon Valley is coming. 

There are hundreds of startups with a lot of brains and money working on various 

alternatives to traditional banking. The ones you read about most are in the lending 

business, whereby firms can lend to individuals and small business very quickly and 

(these entities believe) effectively by using Big Data to enhance credit underwriting.” 

In the same Shareholder letter, Jamie Dimon also noted: “Competitors are coming 

in the payments area. You have all read about Bitcoin, merchants building their own 

networks, PayPal and PayPal look-alikes .... there is much for us to learn in terms 

of real-time systems, better encryption techniques, and reduction of costs and “pain 

points” for customers”. On repeated occasions, Jamie Dimon has noted that “Silicon 

Valley is good at getting rid of pain points. Banks are good at creating them.” 

© 2016 Citigroup 
 

Figure 12. Private Investment in Global FinTech Companies ($bn) 

20 

15 

10 

5 

0 

Source: Citi and CB Insights; Includes first around and subsequent private investments. 

2010 2011 2012 2013 2014 2015 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 15 

Global FinTech investment was $19bn in 

2015, up from $12bn in 2014 

"Hundreds of Startups with a Lot of Brains and Money" 

Former Wall Street CEOs, leading policymakers and storied Silicon Valley venture 

capital firms have all invested in FinTech. And the volumes are growing. Between 

2010 and 2013, global FinTech investments per year amounted to low single digit 

billions of dollars. In 2014, this jumped to $12 billion – and then up two-thirds to an 

estimated $19 billion in 2015. 

75% of FinTech capital deployed to date has 

been in the Personal or SME banking 

segments 

So where are the FinTech dollars — and yuan, pounds and kroner — going to? 

1. By client segment, consumer and SME are the focus.

2. By product, payments and P2P lending are active.

3. By geography, the US, China, the UK, and Sweden lead the way.

Based on our analysis of the business mix of top FinTech private companies, as set 

out in Figure 13 - Figure 14 below, we estimate that ~75% of the capital deployed to 

date has been to new ventures targeting the Personal or SME banking segments. In 

terms of the number of companies, just under 60% of our sample were focused on 

Personal and SME banking. 

© 2016 Citigroup 
 

 

 

 

Figure 13. Capital Deployed in Private FinTech Companies By Segment Figure 14. Number of Private FinTech Companies By Segment 

Investment Large Large Banking Corporate Corporate 4% 3% 8% 

Insurance Investment
 10%
 Banking 

12% 

Asset 

Management & Insurance
 

Wealth
 5%
 

10%
 

Personal & 

SME 

59% 

Asset 

Personal & Management & 

SME Wealth 

73% 16% 

Source: CBInsights, KPMG, Crunch Base and Citi Research; Based on c120 private companies from CBInsights FinTech Periodic table Dec 2014; KPMG’s top 50 most 

prominent FinTech innovators Dec 2015; Valuation based on Crunch Base Total Equity Funding for private companies and exit value for acquired companies 

 

 

 

 

Figure 15. Dollar Invested in Private FinTech Companies By Product and Customer Segments 

Payments Savings and 

Investment Lending Capital Markets Insurance Overall 

Personal/SME 26% 10% 0% 10% 92% 

Corporate 3% 0% 4% 

47% 

IB/Markets 4% 4% 

Overall 29% 10% 47% 5% 10% 100% 

Source: CBInsights, KPMG, Crunch Base and Citi Research; Based on ~120 private companies from CBInsights 

FinTech Periodic table Dec 2014; KPMG’s top 50 most prominent FinTech innovators Dec 2015; Valuation based 

on Crunch Base Total Equity Funding for private companies and exit value for acquired companies 

 

16 Citi GPS: Global Perspectives & Solutions March 2016 

Payments are the most contested area for 

banks with competitors already stabled in 

new marketplaces 

Where Are the FinTech Dollars Going? 

By screening around 120 prominent FinTech investments, we have taken a more 

granular approach to the business segments and products where new capital is 

being allocated to potentially “disruptive” competitors that may be a threat to the 

current incumbents, either in terms of market share or margin shifts. So far FinTech 

investments have a clear bias towards the consumer and SME segment. 

By product, payments are the most contested area for banks with competitors 

already established in new market places (such as PayPal for e-commerce 

payments in the US) or emerging in client segments traditionally underserved by 

banks (such as micro and small business, the target segment for Square in the US 

and iZettle in Europe and Latin America). 

In the private market, of the capital invested in the leading FinTech companies, 26% 

of the total has been allocated to companies focused on consumer payments 

versus a massive 47% for consumer/SME lending. By number of companies, the 

payments and lending space is broadly similar in number. 

© 2016 Citigroup 
 

Figure 16. Number of FinTech Companies By Product and Customer Segments 

Payments Savings and 

Investment Lending Capital Markets Insurance Overall 

Personal/SME 28% 15% 29% 1% 5% 79% 

Corporate 8% 1% 9% 

IB/Markets 13% 13% 

Overall 36% 15% 29% 15% 5% 100% 

Source: CBInsights, KPMG, Crunch Base and Citi Research; Based on c120 private companies from CBInsights 

FinTech Periodic table Dec 2014; KPMG’s top 50 most prominent FinTech innovators Dec 2015 

Figure 17. Capital Deployed in Private FinTech Companies By Business Figure 18. Number of Private FinTech Companies By Business Area 

Area 

Equity Digital Currency Crowdfunding Insurance Digital Currency Insurance 3% Equity 2% 5% 8% 10% Crowdfunding 

10% Institutional
 

Tools
 

8%
 

Payment
 

23%
 

Money Transfer 

10% 

Institutional 

Tools 

3% 

Lending 

46% 

Money Transfer 

3% 

Savings & 

Savings & 

Wealth 

Lending 

28% 

Payment 

19% 

16% 

6% Wealth 

Source: CBInsights, KPMG, Crunch Base and Citi Research; Based on c120 private companies from CBInsights FinTech Periodic table Dec 2014; KPMG’s top 50 most 

prominent FinTech innovators Dec 2015; Valuation based on Crunch Base Total Equity Funding for private companies and exit value for acquired companies 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 17 

Companies that are different are harder for 

incumbents to compete with 

Less capital-intensive activities are more 

likely to be disrupted by FinTech 

Different Is Better than Cheaper 

A lot of FinTech dollars are being invested in consumer banking and finance, with 

payments and lending attracting particular attention. However, not all FinTech new 

entrants will have a sustainable competitive advantage. Companies that are trying 

to solve a financial need in a different rather than simply a cheaper way are more 

likely to maintain their innovation edge for longer. 

Business models that are based on a lower cost-to-serve may be easier to replicate 

by incumbents, albeit the new entrants may have several years before incumbents 

copy (or buy) them. It is harder for incumbents to compete with companies that are 

different. This does not need to be technologically different. It can be a different 

target market (iZettle) or a new business model (Credit Karma and Funding Circle). 

Similarly, activities that are less capital intensive — such as online payment of pointof-sale (PoS) — are also more likely to be disrupted by FinTech-based business 

models. For small and medium enterprises or higher risk consumer credit lending, 

Marketplace lenders can provide an alternative for clients often under-served by 

traditional banks. However, lending activities are balance sheet intensive and more 

exposed to credit risk appetite. 

© 2016 Citigroup 
 

 

Figure 19. For FinTech Competitive Edge, Different and Capital Light Is Key Capital Light Capital Intense 

Robo Advisors Credit Scoring (Credit 

(Nutmeg) Karma) 

Payments (Klarna) 

PoS/ Card 

Acceptance (iZettle) 

Marketplace Lending 

(Funding Circle) 

Mortgage Lending 

Corporate Lending Lending Platforms 

(Kabbage) 

Wholesale Banking 

Cheaper Different 

Source: Citi Research 

 

 

 

 

 

 

18 Citi GPS: Global Perspectives & Solutions March 2016 

The greatest challenge for incumbent 

institutions is in the consumer and SME 

space 

Retail banking is a large share of 

incumbents’ profits... 

Revenue Risks for Incumbents by Customer 

As of today, the greatest challenge for incumbent institutions, both in terms of 

potential market share loss to new entrants, share shift between traditional 

competitors or margin pressure from increased competition is in the consumer and 

SME space, especially in payments and unsecured lending (as we saw in Figure 13 

- Figure 18). By contrast, there have to date been relatively limited new startup

investments in corporate and wholesale banking.

So first for the bad news: at a segment level, retail banking is a large share of 

incumbents’ profits. Globally, we estimate that retail banking accounts for about 

35% of the normalized profits of Citi Research's bank coverage universe. For US 

and European banks in Citi Research's coverage universe, it is around 40% of 

profits and closer to half of the market value of these companies given the higher 

price/earnings (PE) multiples accorded by investors to retail versus wholesale 

banking. 

© 2016 Citigroup 
 

Figure 20. Global Banks – Profit Split by Business Segments 

Retail 

35% 

Source: Company Reports and Citi

Asset 

Management, 

Private Banking 

and Insurance 

11% 

Investment 

Banking 

Markets 

19% 

Corporate 

Commercial 

Banking 

35% 

 Research Estimates 

Figure 21. Banks Profit Split By Region 

100%
 

90%
 

80%
 

70%
 

60%
 

50%
 

40%
 

30%
 

20%
 

10%
 

0% 

18% 15% 20% 17% 19% 18% 

43% 

26% 24% 20% 

43% 35% 

49% 

33% 

13% 20% 24% 

6% 11% 

4% 

43% 40% 6% 36% 35% 35% 28% 

19% 

Europe LatAM US Asia ex Global China Japan 

Retail Japan/China 

Asset Management, Private Banking and Insurance 

Corporate Commercial Banking 

Investment Banking Markets 

Source: Company Reports and Citi Research Estimates 

 

 

 

 

 

 

Figure 22. Global Banks Profit Breakdown By Product and Customer Segments 

Payments Savings and 

Investment Lending Capital Markets Overall 

Personal/SME 4% 12% 29% 1% 46% 

Corporate 3% 6% 21% 5% 35% 

IB/Markets 0% 3% 6% 10% 19% 

Overall 7% 21% 56% 16% 100% 

Source: Citi Research Estimates; Based on the banks under Citi coverage; The profit split by customer segments 

are based on company reports or analyst estimates; the profit is then allocated across products; the profit splits by 

product segments is estimated base on selected banks that discloses revenue splits by products. 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 19 

...but most of the FinTech competition has 

been in the relatively new ecosystem of ecommerce 

And is there good news? So far, most of the market value in FinTech has been 

created by companies that are embedded in the still relatively new ecosystem of ecommerce, such as Alipay in China or PayPal in the US. For banks in many 

countries, this is an opportunity lost rather than a loss of existing earnings. The 

payment segment is only ~7% of the income of our sample of leading banks, with 

personal/SME payments only half of that share. 

Of course, as e-commerce grows (two of the three largest retailers in the world by 

market are online companies) banks are giving up future growth opportunities. In 

addition, while the current profit loss may be small, letting other intermediaries get in 

between the bank and their clients opens up risks for the future. 

On other industries, there has been a 44% 

share-shift from physical to digital business 

models over a 10-year period 

Digital Disruption Tipping Point 

Time and again, we have seen digital disruption fundamentally erode value across 

many industries including: music sales, video rentals, travel booking, and 

newspapers. In each of these cases, incumbents either transformed or became 

marginalized. According to Citi’s Digital Strategy team, digital disruption in these 

industries resulted on average in a 44% share-shift from physical to digital business 

models over a 10-year period. Further, digital disruption accelerates over time – 

market share shifts gradually (~1.6%/year) until an inflection point around year 4 

when traditional share declines rapidly accelerate to >6% per year. (Figure 23) 

© 2016 Citigroup 
 

 

 

Figure 23. Digital Disruption Could Result in 30% Decline in Core Revenues 

100
 

90
 

80
 

70
 

60
 

50
 

40
 

30
 

20
 

10
 

44% 

Average 

Share 

Shift 

Music 

Video 

Digital disruption 

accelerates over time 

(Inflection point marks an average 

acceleration of share shift from 

~1.6% to >6% per year) 

(Founded) 

(Streaming) 

Physical Market Share

(Launch) 

(%, value) 

Industry shakeout – 

share shift of 44% 

over a decade 

30% decline in core 

revenues 

Profits increased (for 

winners) 

0 1 2 3 4 5 6 7 8 9 10 Newspapers

Year of Disruption Travel 

Source: Citi Digital; Citi Research; Investor presentations & annual reports 

 

 

 

20 Citi GPS: Global Perspectives & Solutions March 2016 

Further, Citi's Digital Strategy team also concluded in their analysis that digital 

segments are significantly more concentrated than traditional segments with an 

average of ~80% top-3 share vs. ~45% top-3 share in physical segments. 

Similar disruptive forces have already begun to impact the Financial Services 

industry particularly in consumer banking and payments. We are starting to see 

significant investment in this space and are also witnessing the emergence of new 

business models resulting in unbundling of Financial Services. 

Yet for all the attention being garnered by FinTech propositions, disruption is still at 

the periphery. Lending Club’s loan volume is less than 0.5% of total loans in the US 

while assets under management at the robo-advisers are only scratching the 

surface of the wealth industry. At the present, there is limited revenue loss in 

developed market banks’ core business from FinTech. 

However in China, unlike the US or Europe, we are well past the tipping point of 

disruption, especially in the e-commerce ecosystem. China’s top FinTech players 

often have as many – if not more – clients than their top banks. And unlike in the 

West, China’s top FinTech players often have well-resourced parent companies that 

can sustain larger and more balance-sheet intensive businesses than VC funders. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

 

 

$1,050 bn

Figure 24. North America Consumer Bank Case Study 

Current 2023 2020 

1.1% 10% 

Total Digital 

90% 

Total Digital
 

Disruption
 

98.9% 

Disruption 

Total Market 

Total Digital 

Disruption Total Market
 

Value
 Value Total Market 

Value 83% 

17% 

$850 bn $1,050 bn $1,200 bn 

Source: Citi Digital Strategy 

Payments, lending and personal finance 

management have been the most active in 

terms of investment activity and could be 

where disruption manifests itself 

While it’s impossible to say exactly how this disruption will manifest itself, based on 

current tail winds, the Digital Strategy team estimates that certain products are likely 

to see a greater share of disruption than others (Figure 25). For example, 

payments, lending and personal finance management have been the most active in 

terms of investment activities. We have seen exponential growth in P2P lending 

with several leading players such as Lending Club having recently gone public. 

Emerging payments have attracted not only upstarts but tech giants, telcos, and 

large retailers. Just in the last 18 months, we have seen the launch of wallets by 

several wallet proponents including Apple, Samsung, Chase and Citi MasterPass. 

SamsungPay boasts of five million registered users who have processed over $500 

million in the first six months (across Korea and the US). 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 21 

In the US, only a small portion of consumer 

banking industry revenues has migrated to 

new digital business models so far...but that 

is expected to grow 

Disruption Tipping Point: Where Are We in the US? 

According to Citi's Digital Strategy team, the revenue impact from digital disruption 

is peripheral today but is growing rapidly and will be substantial in the medium term. 

Only a small fraction of the North American consumer banking industry's revenues 

have migrated to new digital business models so far — just 1% today forecast to 

rise to 10% of revenue by 2020. But the migration should accelerate from here. By 

2023, around 17% of US consumer bank revenue could migrate to digitally-enabled 

business models, according to their analysis. This estimate is based on an 

aggregation of bottom-up product-by-product level distribution forecasts. 

© 2016 Citigroup 
 

 

Figure 25. Impact of Digital Disruption – By Business Line 

Impact of Digital Disruption – By Business Line 

Potential for Disruption

What will be the extent of disruption at its peak?

High 

Medium 

Low 

Far out Medium Term Near-term 

Ability to Disrupt 

How soon will it happen?

9% 

Deposits 

13% Wealth Mgmt. 

9% 

In-store pmts. 

13% Digital pmts. 

6% 

International Remittances 

13% 

Personal Loans 

SMB loans 13%

3% Mortgage 

Bubble represents extent of share shift to digitally enabled business models by 2020 

Source: Citi Digital Strategy 

22 Citi GPS: Global Perspectives & Solutions March 2016 

Finally, it must be highlighted that there are several factors at play, and it’s 

extremely difficult to estimate how disruption will play out or the extent to which it 

will be realized. This analysis provides a directional lens to the extent of potential 

share shift to digitally enabled business models and highlights revenues “at risk”. 

We are already starting to see evidence of bank-led digital-only propositions and 

partnerships between traditional financial institutions and FinTech players. We have 

witnessed several banks partnering with payment providers, P2P lenders being 

funded by traditional financial institutions, banks leveraging white-labelled banking, 

robo advisory capability from FinTech’s to launch their own digital proposition — to 

name a few examples. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 23 

Disruption Tipping Point 

A Strategists View: Q&A with Greg Baxter 

Greg Baxter is the Global Head of Digital Strategy at Citi, leading Citi’s digital 

agenda across businesses and geographies. Greg has held a number of senior 

technology, consulting, and business roles across Asia, Europe, and North America. 

Prior to joining Citi, Greg was a Partner and UK Board member at Booz & 

Company, where he held leadership roles across the financial services, public 

sector, and technology practices. 

For a universal, diversified bank in the US or Europe, what are the products 

and client segments most at risk from disruption from FinTech new entrants? 

The digital revolution represents a power shift from corporations to consumers, and 

so it is no surprise that the consumer business, and particularly the digitally native 

segments, represent the most attractive and responsive target for disruptors. Within 

that, disruption has focused more on “front office” (or experience-based) services, 

such as origination, both because it represents a more profitable part of the value 

chain (approximately 60% of value-chain revenue against 40% of the cost base) 

and because it does not require the regulation, scale, capital, or infrastructure 

associated with middle and back-office services. In terms of specific products, 

payments disruption is a great example of transforming a consumer experience, 

either through aggregation, simplicity, or even making the payment disappear into 

another experience (think Uber). Following payments, personal financial 

management and lending are leading the pack. Interestingly, lending is crossing 

from its consumer base to the first rung of corporate segments and small and 

medium sized enterprises. However, one thing we should remember, digital 

disruption will not discriminate. It is a pervasive technology that will eventually 

transform every business model for every product and every segment. While we 

may debate where it starts, the end-game is a lot clearer. 

Why are VC investments in FinTech focused on B2C? 

The costs and propensity to switch are much lower for consumers versus 

corporates – which means faster adoption for B2C FinTech. For corporates, exit 

costs and disruption can be substantial, with contractual commitments, balance 

sheet implications, and solutions that are often integrated into their systems, 

processes, and human capabilities. B2C solutions can also “win” with a better 

experience, whereas B2B solutions need to jump several more hurdles, including 

productivity, efficiency, functionality, safety, scalability, and maybe most challenging 

of all, the corporate procurement department. Procurement folks are appropriately 

concerned about startup “supplier risk”. All of this makes B2B a tougher disruption 

space than B2C. All that said, while B2C is the most mature of the FinTech markets, 

B2B is clearly accelerating now. And, we should not forget the third and maybe 

larger wave coming with “industrial FinTech” – where financial transactions and 

ultimately decisions will become incorporated into “things”. If we think the playing 

field is yet to settle in the B2C space, industrial FinTech is unchartered territory. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

 

 

24 Citi GPS: Global Perspectives & Solutions March 2016 

Where are we in the disruption cycle for consumer banking? How does this 

differ in the US vs. other developed markets such as the UK, Australia or 

Europe? 

We are not even at “the end of the beginning”. While fiendishly hard to estimate, we 

don’t think fundamentally new business models have displaced more than 2-3% of 

consumer banking revenue in the US, and corporate displacement is even lower. 

The good news is that there is time for established players to get their business 

models right. But, there are two important considerations. First, there is an inflection 

point coming — I suspect it is still a few years out — and players had better be 

ready before that tipping point arrives. The second observation is that the disruption 

will initially eat industry growth, taking new segments (e.g. underbanked) and new 

product categories before ultimately turning on traditional revenues. The first sign of 

disruption is stagnant growth in the “old world”, predictably followed by the second 

and more concerning one — shrinkage. While the timing may vary around the 

world, the trends will be consistent — incumbents that adapt will thrive, those that 

don’t face a challenging future. On global differences, I expect FinTech disruption 

will expand from its West Coast focus on “experience” into content and platform 

disruption, driven largely by financial centers with deep expertise – London and 

New York being the two leading examples. There are also some differences in 

Government approaches which may impact the rate of FinTech disruption. 

European Governments, and more specifically the UK, are adopting a pro-FinTech 

philosophy, whether through open banking application program interfaces (APIs) or 

new challenger licenses. 

Is China furthest ahead in terms of digital disruption in consumer 

banking/finance and why is that? 

The transition from physical to digital financial flows has been breathtaking in China 

— a perfect storm based on a fundamentally better product, experience and 

distribution platform, and driven by new digital communication and commerce 

platforms. E-commerce is just one example, where 96% of sales are conducted 

without a bank. There are a few reasons why China has taken off. The traditional 

banks lacked competition and coverage, resulting in limited or no choice for most 

people. Against that, consumers were being exposed to far better experiences, real 

time communication, commerce, and connectivity. As the growth of mobile platforms 

exploded, it was a natural extension to build finance products on top, starting with 

P2P and then e-commerce. These new products reflected the underlying platform: 

real time, client centric, hyper connected – a big change from the traditional banks. 

To add fuel to the fire, the Government trialed lighter regulations that allowed these 

new companies to offer better interest rates on deposits than the traditional banks – 

it was a stampede from old to new. Another market well worth watching this year is 

India. The Government has been busy putting in place critical enablers which have 

set the stage for a revolution in financial inclusion and innovation: a national identity 

program, a financial inclusion program which has added close to 200 million 

accounts, a national payment network, a peer-to-peer payment platform, and new 

“light” banking licenses in payments and smaller finance to encourage new entrants. 

© 2016 Citigroup 
 

 

 

 

 

 

 

Figure 26. PayPal Outperformed Lending Club by ~100% Since IPO 

210 

190 

170 

150 

130 

110 

90 

70 

50 

30 

Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 

PayPal Lending Club PayPal vs Lending Club 

Source: DataStream, Citi Research; Share price indexed to 100 on 6th July 2015, the 

date of PayPal IPO 

Figure 27. FinTech Company Share Price Performance Since IPO 

40%
 

30%
 

20% 14% 

6% 3%
 

0%
 

-20% 

-40% 

-60% 

-67% 

-75% 

Markit Worldpay PayPal Square Lending Club OnDeck 

-80% 

Source: DataStream, Citi Research; Price since IPO. Priced as of 28 March 2016 

 

 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 25 

Looking at the equity market values of quoted FinTech companies, the largest 

value is accorded to the payment companies while the marketplace lenders 

have in recent months sold off heavily: why is this? 

Payments are an attractive market for disruptors. At a macro level the global market 

continues to grow at a healthy margin. At a micro level, you can create meaningful 

value for consumers by delivering a better experience, whether through aggregation 

of underlying products, faster payment options, more convenience, or integrating 

payments into other experiences. One-touch payments being the hottest of those 

trends today. For merchants, anything that reduces friction and abandoned 

shopping carts (physical or digital) addresses one of their great challenges. These 

payment solutions typically sit on top of the existing infrastructure, which means the 

FinTech disruptors do not carry the costs of onboarding, fraud, network 

infrastructure, or credit risk. As banks start to launch their own payment platforms 

with better experiences, tighter integration to the client’s financial life, and 

tokenization, the competition in this space will get hotter. 

For lending platforms, I think the market is reacting to three concerns. First question 

is how well the business model stands up to increases in interest rates and a more 

difficult credit cycle. The second is the influx of competition and the corresponding 

impact on margins and risk profile of the loan book. And third is the regulation risk, 

and how it may impact client targeting, capital requirements, and risk retention. 

Added together, the market is wondering if these business models should be 

subjected to the same scrutiny as regular financial institutions, rather than 

technology companies. 

Will the relationship between FinTech companies and Banks be more one of 

competition or collaboration? 

There will continue to be competition, particularly at the “experience” layer where 

players compete over the customer relationship. However I believe collaboration will 

be the dominant trend, as FinTech moves into content and platform innovation. The 

reason is that each participant needs what the other has, but has found it extremely 

hard to replicate. The “Industrialists” need innovation, and the “Innovators” need 

industrialization. In finance, industrialization means customer base, capital, liquidity, 

© 2016 Citigroup 
 

 

 

 

 

 

26 Citi GPS: Global Perspectives & Solutions March 2016 

distribution, regulatory expertise, risk management, reputation for safety, and 

banking licenses. Innovation means agility, speed, creativity, focus, technology 

skills, and an entrepreneurial cultural. The two capability sets are almost 

asymmetrical. 

If you were a VC investor or an entrepreneur, what area of FinTech would you 

focus on investing in or helping set up a new venture? 

Ask any bank what their fastest growing cost is and the answer will be regulation, 

compliance, and cyber-security. I believe there is a significant and largely 

unaddressed need for “reg-tech” solutions to tackle compliance and regulation with 

new techniques and tools. I think that big data and advanced analytics will be key to 

solving this, so that’s my intersection: regulation and big data. 

After a successful launch, I would reinvest in my other three ideas. (1) creating the 

“fit-bit” of your financial life, so that your collective financial well-being is being 

monitored, managed and personally trained continuously; (2) focusing on financial 

inclusion, by developing simpler and consumption based (on-demand) financial 

products for under/un-banked segments; and (3) payment enabled sensors that 

allow anything to become a sensor-driven, rules-based payment device. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 27 

Disruption Tipping Point 

A Venture Capitalist's View: Q+A with Johan Lundberg 

Johan Lundberg is an experienced payment professional, previously an advisor to 

Nordic banks regarding next generation payment solutions. He has co-founded 

payment startups such as Betalo (the first bill payment engine to combine card 

infrastructure with Nordic Giro systems) and Zignsek (a security verification 

platform). In 2014 Johan founded NFT Ventures (Next Financial Technology), a VC 

firm that invests in FinTech companies in Northern European countries. 

Why did Stockholm emerge as one of the largest FinTech centers in Europe? 

The Nordics are a front runner in the overall transformation of banking. There are a 

number of factors that make Stockholm a strong innovation hub for FinTech: (1) 

High efficiency within traditional banks - focus on cost, this has led to increased 

focus towards electronic solutions and innovative services; (2) High penetration of 

mobile/Internet banking and customers’ receptiveness to new services makes it 

easy to adapt new services; (3) Highest degree of electronic payments on a global 

perspective. Sweden hasn’t had cheques since late 1980s; and (4) Heritage of 

innovation and building international corporations both within traditional business 

and within the new economy (e.g. Spotify). 

Nordic banks are already very efficient and are leaders in digital innovation 

among global banks. So what is the value proposition of FinTech companies? 

The Nordic FinTech startups have a clear focus on cost efficiency and customer 

experience. This combination is outstanding and will always be needed in the 

development of all industries. FinTech companies are using strong industrial 

knowledge in combination with latest successes in other sectors, such as the 

gaming industry (“bidding technology”). The banks have an important role to fill in 

the future, but the landscape will change. We see a divide of the revenue streams 

between customer interfacing service providers and specialist product-focused “box 

companies”. Banks, and others, will serve as aggregators of client volume. 

What works and what doesn’t among FinTech startups? Could you please 

give us some example of companies you have invested in? 

I would say that all services/products that a bank offers could be a potential FinTech 

company. It’s more about the way the service contributes to a better customer 

experience and/or lowers the cost base. The Nordic FinTech entrepreneurs are a bit 

unique, they are more mature (average entrepreneur aged between 38-45), they 

have been active in the payment/banking industry, have delivered before, and are 

realistic in their plans and predictions. NFT Ventures has invested in a company 

founded by experienced bankers in their mid-50s who have built a trading platform 

that allows efficient trading of small ticket bond trades ignored by traditional banks. 

What are the exit strategies for investments? Is there a bubble in FinTech? 

We have many options: business partners, banks, insurance companies, media 

groups, industry leaders, second tier competitors, and other private equity/venture 

capital companies. 

If FinTech investments are no more than 4% of the total IT spend within the 

banking/financial industry it is NOT a bubble. The valuation of FinTech has gone 

down since August 2015. We see more healthy valuations today, which is good for 

FinTech investors. 

© 2016 Citigroup 
 

 

 

 

 

 

 

Figure 28. Mapping the Risk of Digital Disruption 

Belgium 

Netherlands 

Austria 

France 

Germany 

Greece 

Spain 

Israel 

Italy 

Sweden 

Russia 

United Kingdom 

USA 

Brazil 

Mexico 

Japan 

China 

South Korea 

Hong Kong 

India 

Singapore 

Malaysia 

Philippines 

Taiwan 

Thailand 

0.1 

0.2 

0.3 

0.4 

0.5 

0.6 

0.7 

0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 

Retail Banking Penetration 

Risk of losing existing revenue pool Risk of losing new revenue pool 

New Entrants 

Led Disruptions 

Incumbent Led 

Evolutions 

Future Growth 

Areas 

Digital

Followers 

Innovation 

Frontier
 

Smart Phone Penetration 

Digital Followers Digital leaders 

Source: Consumer Barometer with Google (smart phone penetration), Company Reports and Citi Research; Retail bank penetration is measured as retail loans% total loans. 

Size of the bubble is retail bank loans, the larger the bubble, the higher the retail bank loans. 

 

 

 

28 Citi GPS: Global Perspectives & Solutions March 2016 

Emerging market banks are most at risk of 

market share shift and lost future retail 

growth opportunities from FinTech disruption 

Chinese banks are among those with the 

biggest risk of digital disruption 

Revenue Risks: Country Analysis 

So which countries are most at risk from FinTech disruption? In our view, new 

entrants have a greater chance of success in markets with underdeveloped or 

fragmented banking systems accompanied with a high level of digital readiness. 

Emerging market banks are more at risk of market share shift – or more likely lost 

future retail growth opportunity. Smartphone penetration is higher than banking 

penetration in many emerging market countries and many emerging markets are 

digital leaders while they are banking laggards. 

Banks, emerging market banks in particular, often tend to focus on the wealthy and 

mass affluent segment of the population. Where wealth is concentrated in a small 

segment of the population there is a long tail of lower value bank customers that 

can be captured by FinTech companies with a lower cost to serve model. Another 

important factor is the more pragmatic regulatory environment in some emerging 

market countries such as China and Kenya towards FinTech innovators. 

In Figure 28, we identify Chinese banks as being among those with the biggest risk 

of digital disruption. China’s smartphone penetration is as high as in developed 

markets but the banking system is focused on large corporates. Technology giants 

such as Alibaba and Tencent are leveraging on their ecosystems and vast customer 

bases to venture into financial services through the provision of efficient payment 

systems and Internet banking. China’s P2P lending market which focuses on 

personal and small business is now the largest in the world, several times bigger 

than the US or UK. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 29. Top FinTech 'Unicorns' Worth Over $1 Billion Ranked by Value 

Company Name Business Area Target Customer Category Country of Domicile Type Raised Valuation 

Ant Financial Payment Personal & SME Online payment China Private $45-50bn 

Lufax Lending Personal & SME Peer-to-peer loan China Private $1.7bn $19bn 

Stripe Payment Personal & SME Online payment US Private $280m $5.0bn 

Zenefits Institutional Tools SME HR software US Private $583.6m $4.5bn 

Credit Karma Lending Personal Credit scoring US Private $368m $3.5bn 

Adyen Payment Personal Online payment processor Netherland Private $266m $2.3bn 

Klarna Payment Personal Online payment Sweden Private $291m $2.25bn 

One97 Payment Personal Online payment India Private $585m $2.0bn 

Prosper Lending Personal Peer-to-peer loan US Private $354.9m $1.9bn 

Oscar Health Insurance Personal Online health insurance US Private $727.5m $1.75bn 

Zuora Payment Corporate Subscription payment US Private $242.5m $1.5bn 

FinancialForce.com Institutional Tools SME Cloud-based accountancy software US Private $186.3m $1.5bn 

iZettle Payment SME Card reader for small businesses Sweden Private $244m $1.4bn 

SoFi Lending Personal P2P student loan refinancing US Private $766.2m $1.3bn 

Housing.com Lending Personal Home loans China Private $154.2m $1.3bn 

Qufenqi Lending Personal Consumer purchase financing China Private $225m $1.3bn 

Funding Circle Lending Personal & SME Peer-to-peer loan UK Private $273.2m $1bn 

Jimubox Lending Personal & SME Peer-to-peer loan China Private $131.2m $1bn 

TransferWise Money Transfer Personal International money transfer UK Private $90.4m $1bn 

Mozido Payment Personal Mobile payment and wallet provider US Private $307.2m $1bn 

Source: Business Insider (Aug 21 2015), Financial Times; Crunch Base, CBInsights, Citi Research; Capital raised updated on 26 Feb 2016 based on Crunchbase. Valuation 

based on CBInsights or Business Insider. 

 

 

 

 

 

 

 

 

 

March 2016	 Citi GPS: Global Perspectives & Solutions 29 

What's Chinese for Unicorn? 

US and Chinese companies dominate in the Among non-quoted FinTech companies, US and Chinese firms dominate. The two 

FinTech world	 largest FinTech unicorns are Chinese. Outside the Chinese giants, the majority of 

the next ten most highly valued private FinTech companies are based in the US, 

interspersed with a few firms based in the UK, Sweden and India (see Figure 29). 

Ant Financial is in a league of its own with a valuation similar to Uber or the quoted 

PayPal. It is “focused on serving small and micro enterprises as well as consumers” 

(alibabagroup.com) and is the online payments and finance affiliate of Alibaba. Ant 

Financial completed a funding round last year that valued it at around $45-50 billion 

(Financial Times, June19, 2015; Wall Street Journal, July 3, 2015). Ant Financial 

and Alipay are discussed in greater detail in the Alipay: China’s PayPal and More 

section. 

Ant Financial has a much broader range of businesses than PayPal. It is part of the 

Alibaba ecosystem and businesses operated by Ant Financial include Alipay 

(launched in 2004, an online payments company similar to PayPal), Alipay Wallet (a 

digital wallet that is integrated with Alipay to enable eCommerce and P2P 

payments), Yu’e Bao (the largest money market fund in China), Zhao Cai Bao (a 

platform that offers investment products such as loans to personal and SME 

customers), Ant Micro Loan (offering loans to SMEs) and Sesame Credit (a big 

data-based credit ratings provider). Ant Financial is also expanding outside China 

with its significant ownership in PayTM, India’s largest digital wallet. 

The next largest FinTech unicorn is Lufax. Starting in 2011 as a P2P lender, Lufax 

has diversified into a broader range of products, including wealth management and 

fund distribution. As Lufax’s CEO Gregory Gibb notes, “retail lending in China (by 

the incumbent banks) is still very early stage” (WSJ, 16 April 2015). In its March 

2015 funding round Lufax was valued at “nearly $10 billion” (WSJ, April 16, 2015). 

In the more recent January 2016 funding round, Lufax raised $1.2 billion at “a 

valuation of $19 billion” (FT, January 2016). 

© 2016 Citigroup 
 

 

 

 

 

 

Figure 30. GAFA vs. BAT 

GAFA Number of Users 

2015 

Business Model Finance Products Volume 

Google Around 200m monthly

unique users 

Apple 800m (iTunes) 

Facebook 1,550m 

Amazon 304m 

data monetization 

data, software and hardware 

data monetization 

E-Commerce 

* Google Wallet (2011)

*Android Pay (2015) 

* ApplePay (2014) 

* Messenger Payments (2015) 

* Amazon Lending (2012): Loan to sellers 

* Amazon Payments (2007): Online payment 

* Around 20m devices have Google Wallet installed in 

the US; 1-2 million active users in the US 

* Around 24m Apple Pay compatible devices in the 

US;~4m users have used Apple Pay at least once and 

1-2m users are 'active' users 

* Globally more than 23 million customers (<10% of

customers) have used the 'Pay with Amazon' service 

since 2013 

* Payment volume from 'Pay with Amazon' increased 

150% year-over-year in 2015 

BAT Number of Users 

2015 

Business Model Finance Products Volume 

Baidu 590m 

Alibaba 407m (number of

active buyers over

LTM) 

Tencent 697m (WeChat) 

Source: Company reports, Citi Research 

data monetization 

E-Commerce 

data monetization 

* Baidu Wallet (2014) 

* Baidu Finance (2013): Including consumer

credit, marketplace lending, wealth etc. 

* Alipay (2004) 

* Yu'e Bao (2013) 

* Mybank (2015) 

* Zhima Credit (2015) 

* Tenpay (2005) 

* WeBank (2015): online/mobile bank 

* Wilidai (2015): consumer credit 

* 45m Baidu Wallet users 

* < 2% of third party payment (online + offline market share) 

* 33% third-party transactions (online + offline) market

share 

* Around RMB17trn ($2.6trn) transactions in 2015 

* 10% third-party transactions (online + offline) market

share 

* Around RMB 5trn ($0.8trn) transactions in 2015 

 

 

 

 

30 Citi GPS: Global Perspectives & Solutions March 2016 

China's Internet giants have been 

successful in financial services 

Payment & E-Commerce: China 

Leads 

China has some of the world’s largest FinTech companies. They benefit from the 

distribution power of the Internet giants of China – Baidu, Alibaba, and Tencent. The 

successes of China’s Internet giants in financial services may provide a road map to 

US/global Internet giants such as Amazon, Apple, Facebook, Google and Microsoft. 

But as we will read in this section, China also has some unique features. Chinese 

technology giants Baidu, Alibaba, and Tencent (collectively referred to as "BAT") are 

ahead of western peers (Google, Apple, Facebook, and Amazon, often referred to 

as "GAFA") when it comes to venturing into financial services. The market share of 

Alibaba and Tencent in Chinese third-party payments, at 33% and 10% respectively, 

is past the tipping point. By contrast, GAFA's market share in non-cash payments is 

estimated to be less than 2% in the US. 

China's internet giants have found success 

due to (1) early entry; (2) the e-commerce 

ecosystem, (3) their large user base and (4) 

the strategic importance of finance to their 

business models 

We attribute the FinTech success of the "BATs" in China to the following factors: 

 Early Entry: Alipay and Tenpay were created over a decade ago by their Internet

parents initially to facilitate e-commerce or online gaming payments. Among the

GAFA's, Google was the first to venture into payments in 2011, seven years after

Alipay.

 The E-commerce Ecosystem: Global e-commerce is growing rapidly with a

gross merchandise volume (GMV) of $1.7 trillion globally in 2015 and is expected

to grow to $3.0 trillion by 2018 according to eMarketer estimates. China has by

far the largest e-commerce ecosystem in the world ($672 billion or 40%) and is

expected to grow 133% to $1.6 trillion by 2018 — over half of global ecommerce. Alibaba’s GMV is close to $500 billion in 2015, more than double that

of Amazon. Alipay is hence the largest on-line payment gateway, with total

payment volume (TPV) in 2015 over 3x that of PayPal.

© 2016 Citigroup 
 

 

 

Figure 31. Global E-Commerce Mainly Comes from China & US, 2015 Figure 32. China E-Commerce Market Share is Growing, 2018 

Global 

$1.7tr 

China 

$0.67tr 

(40%) US 

$0.34tr 

(20%) 

Alibaba 

$0.45tr (26%) 

Global 

$3.0tr 

China 

$1.6tr 

(53%) 

US 

$0.52tr 

(17%) 

Alibaba $1.1tr 

(36%) 

Source: eMarketer, Citi Research; Based on Gross Merchandise Value (GMV) Source: eMarketer, Citi Research; Based on Gross Merchandise Value (GMV) 

Figure 33. Alibaba GMV Larger than Amazon, eBay Combined 2015 

500 

450 

400 

350 

300 

250 

200 

150 

100 

50 

-

Alibaba $448bn 

Amazon 

$214bn 

eBay $22bn Alibaba 

>2x 

Amazon 

Source: Company Reports, Citi Research; Amazon GMV estimated to be 2x of Net 

Sales as around half of the sales on Amazon are from third-party merchants 

Figure 34. Alipay Total Payment Volume Bigger than PayPal 2015 ($bn) 

1000 

900 

800 

700 

600 

500 

400 

300 

200 

100 

0 

Alipay $931bn 

PayPal $282bn 

Alipay

3.3x 

PayPal 

Source: Company Reports, Citi Research; Alipay TPV 2015 is estimated based on 

discloser in 2014 adjusted for growth in Alibaba’s GMV. 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 31

 The Large User Base: China is ahead of developed markets in monetizing the

social network for payments. Tencent has developed a leading P2P payment

system in China, leveraging on the 550 million users in its social network WeChat

(a messaging app that integrates messaging and blogging, similar to WhatsApp

and Facebook combined).

© 2016 Citigroup 
Figure 35. Retail Customer Numbers at Banks and Internet Companies, 2014 

in mn 

465 456 

314 

63 56 45 

549 

350 

270 

149 

0 

100 

200 

300 

400 

500 

600 

ICBC

ABC

CCB

BoCom

CMB

CNCB

Wexin&

WeChat*

Alibaba*

Alipay

Wallet*

Yu Bao 

Banks Internet Cos. 

Source: Research; *Number of active users 

 

 

 

 

 

 

 

Figure 36. Finance Is Likely to be More Strategic for Amazon than Facebook 

Facebook Apple Google Amazon 

Least likely to be Most likely to be 

major player in major player in 

financial services financial services 

Source: disruptivefinance.co.uk 

 

32 Citi GPS: Global Perspectives & Solutions March 2016 

 Strategic Importance of Finance to BATs vs. GAFAs: Finance is strategically

important for the BATs. Having started online to facilitate e-commerce or gaming,

in a country with a relatively under-developed consumer banking system,

payment is now also seen as core to their online-to-offline (O2O) strategy. In the

last two years, Alipay has recruited over 130,000 offline merchants including

restaurants, supermarkets, taxis, and hospitals. While this is a small number vs.

the 17 million point-of-sale terminals in China, the number is rapidly growing.

Similar to BATs, the leading US Internet companies have a massive user base.

However, they operate in an existing, well-developed consumer payments

system and financial services are not as strategically integral or important for the

leading Internet companies as it is for their Chinese counterparts. Among their

financial peers, Amazon is more likely to be a major player in financial services

due to its focus on e-commerce. For Google and Apple, Android Pay and Apple

Pay are part of their broader strategy to further enhance customer stickiness to

their operating system ecosystem.

© 2016 Citigroup 
 

 

 

’ 

 

-

 

-

-

-

 

- -

-

Figure 37. Key Parties in China's E-Payment Industry 

The People s 

Bank of China CBRC Payment & Clearing 

Association of China 

Supervision & 

Regulation 

Payment Software and 

Hardware Provider 

Acquiring Agent 

Acquiring Service 

Provider 

Prepaid Card 

Issuer, etc. 

Telecom 

Operator 

Provide network 

facilities, 

communication 

channel and 

payment channel 

Commercial Bank 

Provide non cash 

payment instruments 

based on bank account 

such as check, promissory 

note, draft and bank card 

Third-party 

Payment 

(online) 

Provide online 

inter bank 

payment service 

and derivative 

services for users 

and merchants 

Third party 

Online Payment 

Company 

Third party 

Mobile Payment 

Company, etc. 

Payment 

System of 

Central Bank 

UnionPay 

Payment & 

Clearing 

Build and run 

inter bank e 

payment system 

and provide inter 

bank capital 

clearing 

User Merchant 

Third-party 

Payment 

(offline) 

Source: iResearch 

 

 

 

 

 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 33 

Key players dominate the Chinese payment 

industry 

China's Vibrant Payment Innovations 

China’s payment industry is dominated by a few key players including the traditional 

commercial banks, the monopolistic card scheme UnionPay, and the third-party 

payment companies. Leaving the third-party payment companies aside, the 

payment ecosystem is very similar to the “four party” payment system in the US or 

Europe that involves: the card holder, the card issuing bank, the merchant, and the 

merchant acquiring bank. These parties are connected together using a payment 

network. In China, UnionPay is the monopolistic card network. 

Third-party payment companies facilitate 

payments on e-commerce platforms 

Recently, these third-party payment 

companies have diversified from ecommerce into P2P payments and offline 

payments 

What's Third-Party Payment? 

Third-party payment is an authorized (licensed) non-bank organization that 

facilitates payment. The third-party payment companies are licensed by the 

People's Bank of China (PBoC). There are three types of licenses 1) online/mobile 

payment 2) point of sale license and 3) pre-paid card issuance. As of end of 2014, 

there were 269 licensed third-party payment companies in China, of which 117 

companies have online/mobile payment licenses, 62 have point of sale licenses and 

166 are licensed for pre-paid card issuance. A company can have multiple licenses 

to perform more than one function. Alipay for example has two and a half licenses 

enabling it to do the online/mobile payment, the point of sale as well as issuance of 

pre-paid card (online only – hence half) licenses. 

The third-party payment companies were initially created to facilitate payment on ecommerce platforms. The ‘third-party’ serves as a middle man and provides escrow 

between the buyers and sellers. When a buyer purchases an item online, the 

money is transferred from the buyer to the ‘third-party’. The third-party will then 

notify the seller to ship the goods. Only when the goods are received and accepted 

by the buyer, is the money transferred from the third-party to the seller. 

In recent years, the third-party payment companies have diversified beyond ecommerce and expanded to P2P payments and offline payments. Third-party 

payment companies have accounts open with a network of commercial banks and 

act as an intermediary for interbank payments. The payment flow from a payer’s 

Bank A account to a beneficiary’s account in Bank B is illustrated in Figure 38. 

Payments done this way have far higher success rates than traditional interbank 

payments. 

© 2016 Citigroup 
Figure 38. Illustrative Diagram of Third-Party Payments in China 

Source: Citi Research 

 

 

 

 

 

 

 

 

 

 

 

34 Citi GPS: Global Perspectives & Solutions	 March 2016 

Why Is It Successful? 

Third-party payment is the most popular payment method by Internet users for 

many reasons. 

1.	 Under-Developed Banking System – China’s commercial banks were slow to 

adapt to digital banking and online payments. The rapid developments in ecommerce allowed third-party payment companies to offer convenient, reliable, 

faster, and cost efficient alternatives to traditional bank payments. 

2.	 Relaxed Regulation – Regulation had been relaxed in the third-pay payment 

with no Know Your Client (KYC) requirement or transaction limit until recently 

(August 2015). In July 2015, the PBoC announced in a draft proposal to tighten 

regulations in the payment space, to introduce KYC requirements, and to 

impose daily and annual transaction limits. The initial proposal set a daily 

transaction limit in the range of RMB5k-200k (~$1-$31k). Despite the 

toughened regulatory stance on third-party payments, we doubt regulators will 

be able to protect the banks from digital disruptions in China because of the 

consumer behavioral shift that has occurred. 

3.	 Convenience – Similar to developed markets, third-party payments improve 

the user experience. Alipay is the most used payment method for e-commerce 

platforms. The integration of Tenpay to WeChat, the largest social networking 

platform, simplifies the P2P payment. 

4.	 Security – With the third-party payment companies acting as escrow, it 

significantly reduces potential e-commerce fraud. Hence, third-party payment is 

the most preferred on-line payment method for Internet users. 

5.	 Lower Fees – P2P payments are usually not free of charge for interbank or 

inter-city transfers in China. Third-party payments provide a cheap alternative 

for small ticket money transfers. Maybe partially due to the pressure from 

alternative payments, Chinese banks are modernizing their digital offerings and 

reducing/eliminating transfer fees to maintain market share. ICBC, the largest 

bank in China, announced in February 2016 that it would provide free P2P 

money transfers through its Internet banking platforms. Tencent’s Tenpay, on 

the other hand, announced around the same time that it was going to charge 

10 basis points for cash in and cash out (transfer digital money in and out of 

bank account) on its digital wallets. 

© 2016 Citigroup 
 

 

 

Figure 39. Most Often Used Payment Methods by Internet Users (2014) Figure 40. Most Important Reason for Internet Users’ Choice of EPayments (2014) 

Company's Third-party online payment reputation Complete 6% Third-party mobile payment functions
 

9%
 

E-bank
 

POS Machine Low fee Security 12% 44% Mobile banking 

WeChat Bank 

Prepaid card payment 

Convenience 

29% 

Note: Data is collected from an online survey of 3,462 users conducted via Note: Date is collected from an online survey of 4,141 users conducted via 

iUserSurvey and iClick from Jan to Febr 2015 iUserSurvey and iClick from Jan to Feb 2015 

Source: iResearch Source: iResearch 

8.5% 

12.7% 

26.1% 

36.7% 

46.8% 

49.8% 

62.0% 

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

 

 

 

 

 

 

 

Figure 41. China Third-Party Payment (Online + Offline (Trillion Yuan)) Figure 42. China Third-party Payment (Online + Offline Market Share) 

60 

Other 

9.9% 

50 

40 

53.0 

32.1 

6.7 7.3 8.3 9.9 10.4 12.2 14.4 

99bill 

6.7% 

30 

Tenpay 

9.6% 20 

10 

0 Alipay 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 20142015E* 33.2% 

Source: analysys, Citi Research estimates Source: analysys; Data as of 3Q15 

ChinaUMS 

35.9% 

ChinaPnR 

4.8% 

 

March 2016 Citi GPS: Global Perspectives & Solutions 35 

Total third-party transaction volume in China 

is likely to have reached $8.1 trillion 

Sizing the Pie 

According to data collected by analysis until the third quarter of 2015 and Citi 

estimates, total third-party transaction volume is likely to have reached RMB53 

trillion ($8.1trn). This includes both traditional offline payment business, as well as 

the rapidly growing online and mobile payment business. ChinaUMS, a subsidiary 

controlled by UnionPay, is the dominant player in offline payments, while Alipay and 

Tenpay have higher market share in online and mobile payment thanks to the 

rapidly expanding e-commerce ecosystem. 

Overall, ChinaUMS has a market share of 36%, only slightly higher than the number 

two player, Alipay, at 33%. As Alipay and Tencent expand to offline payments 

through partnerships with supermarkets and convenience stores, the leading 

position of ChinaUMS could be eroded further. 

© 2016 Citigroup 
 

 

 

 

Figure 43. China Third-party Online Payment Volumes 

66.0% 50.0% 46.9% 

Figure 44. China Third-party Mobile Payment Volumes 

707.2% 

3.7 

5.4 

8.1 

11.9 

15.8 

19.5 

23.1 

26.9 

45.9% 32.8% 23.4% 18.5% 16.5% 

0.2 1.2 

6.0 

9.5 

12.9 

16.0 

18.9 

21.6 

89.2% 

391.3% 

59.0% 35.0% 24.2% 18.2% 14.4% 

2012 2013 2014 2015e 2016e 2017e 2018e 2019e 

GMV (Tr. Yuan) % YoY Growth 

Note: Online payment refers to money transfers made on the Internet under the 

payment command of users via equipment such as desktop or laptop computer; Only 

non-financial payment companies above designated size are considered in calculation 

of GMV, excluding banks and UnionPay. 

The data were calculated and estimated based on the financial results published by 

enterprises and interviews with experts by iResearch statistical mode 

Source: iResearch 

2012 2013 2014 2015e 2016e 2017e 2018e 2019e 

GMV (Tr. Yuan) % YoY Growth 

Note: Only third-party payment companies are counted in China third-party mobile 

payments GMV, excluding banks and UnionPay; MMS payment hasn't been counted 

in calculation of the GMV since Q3 2014. 

The data were estimated based on the financial results published by enterprises and 

interviews with experts in iResearch statistical forecast model 

Source: iResearch 

 

 

 

 

 

 

 

36 Citi GPS: Global Perspectives & Solutions March 2016 

Third-party payment volume is expected to 

grow exponentially due to a vibrant 

Internet/e-commerce culture 

Moreover third-party payment volume is experiencing exponential growth thanks to 

a vibrant Internet/e-commerce culture. Payment volume (PC and mobile combined) 

grew 52% in 2015 to Rmb21.4trn ($3.3trn) mainly on the back of e-commerce 

growth and the adoption of mobile payments. After an explosive growth in the 

mobile payment space, the sector is also expected to return to a more sustainable 

and stable growth (Figure 43-Figure 44). To the incumbent banks, the growth of 

online and mobile payments may not be a big loss of their existing profit pool but an 

opportunity lost in a new and growing business. 

Alipay leads in the online and mobile 

payments area with Tenpay, the number two 

player 

Online and mobile payments are led by Alipay, Alibaba’s payment company. Alipay 

benefits from Alibaba’s e-commerce ecosystem and commands 48% market share 

of online payment volume. Tencent controlled Tenpay is the second largest player 

with 20% online payment market share. In the mobile payment space, Alipay has a 

dominate position with market share close to 80%. Tenpay currently only has an 

11% market share in mobile payments but is growing rapidly because of the 

success of WeChat’s Red Envelope, which enables P2P payments between 

WeChat contacts. Alipay is investing heavily on its own version of Red Envelope in 

Lunar New Year 2016 to hold on to its leading position in mobile payments. 

© 2016 Citigroup 
 

Figure 45. Players in Third-party Online Payments by Volume (3Q15) Figure 46. Players in Third-party Mobile Payments by Volume (1Q15) 

Ping An Pay 99bill YeePay Jdpay YeePay IPS 

1.8% Others LianLianpay 0.5% 0.5% 0.4% 1.9% 

ChinaPnR
 

4.9% UMPay
 

0.6%
 99bill
 Lakala 7.0% 3.0% 

Tenpay 

Alipay 11.3% 

47.6% 

ChinaUMS 

11.1% 

78.3% 

Alipay 

Bestpay 

0.6% 

0.5% JD wallet 

0.3% 

Others 

4.0% 

3.4% 2.2% 

Tenpay 

20.1% 

Note: Banks and UnionPay are excluded. Only third-party payment companies are Note: Banks and UnionPay are excluded. Only third-party payment companies are 

included. Data were calculated and estimated according to the interviews with experts included; Data were calculated and estimated according to the interviews with experts 

and enterprises. and enterprises. 

Source: iResearch Source: iResearch 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 37 

Both companies are expanding from C2C 

and B2C e-commerce to O2O payments 

Increasingly, Alipay and Tenpay are expanding beyond consumer-to-consumer 

(C2C) or business-to-consumer (B2C) e-commerce. Online-to-offline (O2O) 

payments through mobile and QR codes have been expanding mainly led by Alipay, 

Tenpay, and Lakala for areas like taxi rides, restaurants, supermarkets, medical 

treatments, and traffic payments. Third-party payment companies also offer P2P 

payments and are also expanding into B2B supply chain payments for SMEs. In the 

fourth quarter of 2015, the breakdown of online payment volumes were: online 

shopping 24%, fund purchases 21%, air ticket purchases 9%, B2B e-commerce 5%, 

telecom fees 3%, and online gaming 2% (see Figure 44). 

© 2016 Citigroup 
Figure 47. China Third-party Online Payment Market Structure 

100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

29% 31% 30% 33% 35% 

4%2% 

4%

3% 4%2% 

4% 

2% 

3%2% 7% 7% 6% 6% 5% 

11% 11% 12% 11% 9%

15% 

19% 21% 21% 21% 

31% 

24% 25% 24% 24% 

4Q14 1Q15 2Q15 3Q15 4Q15 

Online shopping Fund purchase Air ticket booking 

B2B e-commerce Payment for telecom Online games
 Others
 

Note: Online payment refers to money transfers made on the Internet under the payment command of users via 

equipment such as desktop or laptop computer; Only non-financial payment companies above designated size are 

are considered in calculation of GMV, excluding banks and UnionPay. 

The data were calculated and estimated based on the financial results published by enterprises and interviews with 

experts by iResearch statistical model 

Source: iResearch 

 

 

 

 

 

38 Citi GPS: Global Perspectives & Solutions March 2016 

More than just payments for online shopping 

Banks are being disintermediated 

Not only is the customer relationship at 

stake, low cost deposit balances are also at 

risk 

Impact to Banks 

China’s third-party payment system is effectively a “banking system” that sits on top 

of the traditional banking system; an added layer between banks and the customer. 

Transparency of the transactions inside a third-party payment company say 

between a merchant and an individual is low and banks lose sight of customers’ 

transaction information and is thereby distanced from the customer relationship. 

Moreover, many third-party payment companies use payment as a gateway to get 

access to customers to gradually provide other auxiliary financial services such as 

deposit taking and wealth management (Yu-e Bao), lending (Ant Micro Loan) and 

on-line banking (MYBank). Payment gives them valuable access to customers and 

their transaction data. 

Financially, banks face reduced fee income as the number of interbank payment 

transactions may be reduced – third-party payment companies have their own 

treasury and transactions can be netted off or grouped. Banks could also be forced 

to reduce or remove entirely payment fees. ICBC announced in February 2016 that 

all P2P payments through online banking will be free of charge. The bigger financial 

loss (since fees tend to be low for payments anyway) could be low cost customer 

deposit balances as they are no longer determined by the banks’ relationship with 

the customer but instead are driven by the designated partner banks by the thirdparty payment company. 

© 2016 Citigroup 
 

 

 

Figure 48. Alibaba Group E-Commerce Ecosystem 

Source: Company Presentation 

 

 

 

 

 

Figure 49. Alipay Volume vs. ICBC, CMB 

Credit Cards (2014) 

Rmb bn 

6,000 

4,825 5,000 

4,000 

3,000 

1,869 2,000 1,331 

1,000 

0 

Alipay ICBC credit CMB credit 

payment card card 

volume transaction transaction 

* Alipay payment volumes for 12mos to June 2014 

Source: Company Reports, Citi Research 

 

March 2016 Citi GPS: Global Perspectives & Solutions 39 

Alipay is backed by Alibaba, the largest ecommerce company in China 

Alipay: China's PayPal and More 

Alibaba is the largest e-commerce company in China and also the largest ecommerce company in the world. Its gross merchandise value (GMV) is close to 

half a trillion in 2015, more than double that of Amazon and similar to the GDP of 

Norway or Austria. Alibaba has three e-commerce brands: Taobao.com for C2C, 

Tmall for B2C and Alibaba.com for B2B. Each has a dominant market share in its 

segment. The leading position of Alibaba in e-commerce, together with its 350 

million active users, created the perfect ecosystem for financial services such as 

online payment. Alipay is at the heart of the ecosystem to provide a secure and 

convenient payment between buyers and sellers. 

Ant Financial is the holding company for Alibaba’s financial products, most notably, 

Alipay. Alipay, often called the PayPal of China, is much bigger than its American 

peer with a total payment value estimated above $900 billion, ~3.5x that of PayPal. 

Alipay has an almost 50% market share in third-party online payments and over 

80% market share in third-party mobile payments in China (Figure 45 - Figure 46). 

The success of Alipay depends on the e-commerce ecosystem of Alibaba and its 

large user base. Tmall — Alibaba’s B2C shopping website — has 56% of the 

market share. Taobao – Alibaba’s C2C shopping website — has around three 

quarters of market share. Alipay is the preferred payment solution on these 

platforms. Furthermore, Alibaba has around 350 million of active retail customers 

that rival the large banks in China (Figure 35). The leading position of Alipay in thirdparty payment is hard to be replicated or shifted due to the strong backing of 

Alibaba group. 

Alipay aims to be more than just online payment processing for e-commerce. With 

the launch of an upgraded mobile application, Alipay offers an integrated payment 

platform to consumers and small businesses to enable payments for food, holidays, 

utility bills, managing payment transactions as well as P2P payments. But the 

application has been less successful than Tencent’s Tenpay as Tencent’s WeChat 

application is much more frequently used. Alipay invested heavily on its version of 

“Red Packet” in Chinese New Year 2016, hoping to build a social network on its 

payment application. 

© 2016 Citigroup 
 

 

 

 

Figure 50. How to Use Alipay to Pay Offline 

Source: pconline 

 

 

 

Figure 52. Financial Products Under Ant Financial Figure 51. Yu'e Bao AUM (RMB bn) 

AM/Wealth 

Lending 

Source: Tianhong Asset Management Disclosures 

4 

56 

185 

541 574 

535 

579 

712 

613 604 621 

0 

100 

200 

300 

400 

500 

600 

700 

800 

2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 

Source: Company Website; Citi Research 

 

40 Citi GPS: Global Perspectives & Solutions March 2016 

Another area that Alipay is targeting to grow is the offline payment space. As 

mentioned earlier, the offline payment space has much higher transaction value 

than online payment. In China, Alipay mobile payment (e-wallet) is accepted by 

restaurants, supermarkets, drug stores, and hotels. Customers can now use their 

unique Alipay QR code or barcode in the Alipay apps to pay. The expansion to O2O 

payment is a big potential threat to the existing payment network UnionPay, the only 

authorized interbank network linking the major banks’ card operations in China. 

In our view, Alipay is the anchoring product for Alibaba to play a bigger role in 

financial services. Under the Ant Financial family, Alibaba has started to offer a full 

range of products including savings, lending and online banking. Yu'e Bao is a 

savings account that invests in money market funds. Zhao Cai Bao is a platform 

that offers investment products such as loans to personal and SME customers. 

Sesame Credit is an online credit scoring service. Ant Micro provides micro loans to 

small businesses. Ant Check is for consumer purchase financing and MYBank is a 

fully-fledged Internet-only bank. All these products are supported by Ant Financial 

Cloud, a cloud banking and financial service infrastructure. 

© 2016 Citigroup 
 

 

 

Figure 53. Tencent Online Payment Ecosystem 

Source: Company Presentation 

 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 41 

Tenpay is backed by Chinese Internet giant 

Tencent 

Tenpay: Leader in P2P Payments 

Similar to Alipay that is backed by the Alibaba ecosystem, Tenpay is backed by 

Internet giant Tencent, which is best known for the most widely used messaging 

system in China named QQ (PC & mobile) and WeChat (mobile). Tenpay was 

initially created to allow Tencent users to pay for online gaming and subsequently 

evolved into a comprehensive third-party online payment network. It has an almost 

20% market share in online payments but a smaller 10% market share in mobile 

payments. Tenpay is gaining market share in mobile payment thanks to the wide 

adoption of WeChat Red Envelope and success of Didi Taxi (largest taxi hailing app 

in China). 

The success of Tenpay comes from its large user base. WeChat is the most popular 

mobile messaging application in China with 550 million active users, more than the 

number of retail customers at ICBC. WeChat is China’s version of WhatsApp and 

Facebook combined. WeChat Red Envelope was launched just before Chinese 

New Year 2014 to allow users to send Red Envelopes of money to friends and 

families, a tradition of Chinese festivals. It has quickly gone viral because it’s free of 

charge and convenient to use. Figure 54 shows how money can be transferred 

between friends with a few button clicks. 

© 2016 Citigroup 
Figure 54. Simple Steps to do P2P Payments 

Source: Citi Research 

 

 

 

 

 

 

 

 

 

Figure 55. Fully Integrated Services on 

WeChat Platform 

Source: Citi Research 

 

42 Citi GPS: Global Perspectives & Solutions March 2016 

WeChat Red Envelope has transformed P2P payments in China. WeChat offers 

more convenience than just sending money to peers. It’s a digital wallet integrating 

other financial services such as wealth management, utility bill payment, taxi 

booking, and so on. WeChat users can book a taxi and pay through WeChat thanks 

to the integration of Didi Taxi, an Uber-like app with about 60% market share for 

taxi-hailing applications. To battle with the leading position of Alipay in e-commerce, 

Tencent now allows WeChat users to open online stores. Many WeChat users use 

the WeChat platform to promote small products to friends. All these initiatives 

should allow the market share gap between Tenpay and Alipay to narrow in the 

mobile payment space. 

Similar to Alipay, Tencent is also venturing into other areas of finance. Tencent 

opened its online bank Webank end of 2014. It launched their first product “Weilidai 

(微粒贷)” in May 2015 to offer personal loans to online customers with an average 

loan size of Rmb20k to RMB200k ($3k-$30k) and 7-18% annualized interest rate. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 2016	 Citi GPS: Global Perspectives & Solutions 43 

Online Payments and Digital Wallets in the US 

High credit and debit card penetration in the High credit and debit card penetration in the US have made it difficult for newer 

US has made it difficult for new systems to systems to overcome. 

enter 

Traditional credit- and debit-card based payment systems have had decades to 

establish themselves as the go-to standard for payment at the physical point-of-sale 

(POS) in many developed markets. A high card penetration rate among consumers, 

widespread card acceptance by merchants (including the presence of relatively 

expensive POS infrastructure and their integration into far more expensive back-end 

IT systems) and card loyalty schemes have all helped build "muscle memory" that is 

difficult for newer systems to overcome. 

Thoughts on Alternative Digital Wallets 

1.	 In the US, the only two non-bank entities that have managed to build scale 

against this backdrop have been PayPal (for online payments) and Starbucks 

(specific to its coffee shops). Why is this? Firstly, the User Interface (UI) is 

simple and easy-to-follow and the User Experience (UX) is positive in the 

sense it allows for a range of payments choices and in the case of Starbucks, a 

seamless omnichannel experience. Secondly, they both solve for ubiquity – the 

repeatable experience breeds “muscle memory”. Thirdly, there are nonpayments benefits that build the relationship with the consumer. For example, 

Starbucks brings users its music store (in collaboration with Spotify). 

2.	 Various other initiatives on mobile payments have failed to get off the ground in 

recent years. The telecom industry's SoftCard initiative (previously called ISIS, 

unfortunately) never got past a multi-year pilot phase thanks to several 

strategic and operational missteps. Its assets were eventually purchased in 

2015 by Google and integrated into Google Wallet, a P2P payment service that 

had failed to reach ubiquity, and developed into Android Pay. The retailer-led 

initiative MCX never got off the ground in spite of what seemed like significant 

initial advantages — after all, merchants have access to individual store-level 

information, strong brands, foot traffic, and MCX seemed to have set up good 

technology relationships with the likes of Gemalto and FIS. A “remnant” form of 

this initiative may live on in the form of the Chase Pay and Walmart Pay 

initiatives. 

3.	 It is too early to declare Apple Pay/Android Pay/Samsung Pay clear successes 

or failures. The latter two launched less than six months ago and while Apple 

Pay has launched nearly a year-and-a-half back, US merchants are currently in 

the process of upgrading their POS infrastructure to accept chip-based cards 

(due to the EMV liability shift instituted by Visa, MasterCard, etc.) and many are 

simultaneously upgrading to accept NFC-based payments as well. Due to 

these infrastructure upgrades, we expect the recent introduction of Apple Pay, 

Android Pay and Samsung Pay to accelerate this shift to mobile-payment 

acceptance. Ubiquity can help the process of behavior change needed to drive 

mobile payments. 

4.	 Apple Pay is now seeking growth in Europe and Asia where people are more 

comfortable with the contactless payments. The UK market ticks all the right 

boxes for successful Apple Pay adoption following its launch in the summer of 

2015. First, the contactless payment infrastructure is in place and well accepted 

by customers. Secondly, it launched in the UK with the widespread support of 

merchants (something it did not have right away in the US due to MCX). Lastly, 

as in the US, Apple Pay had the support of major banks. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

Figure 56. Klarna Key Statistics 

Total end-customers 45,000,000 

Total number of merchants 65,000 

Number of transactions per day 400,000 

Total transactions from start 315,000,000 

Number of employees 1,400 

Revenue (2014) $320 million 

Transaction volume per year $10 billion 

E-commerce market share - 10% 

Northern Europe 

Source: Company reports, Citi Research 

 

44 Citi GPS: Global Perspectives & Solutions March 2016 

A possible sticking point for the future roll-out of Apple Pay is that Apple is unlikely 

to get the type of favorable economics it got in the US, as it is rolled out in countries 

with a lower interchange fee — a portion of the fee is used to subsidize Apple’s 

interest. Of course, these payment choices also require the use of specific hardware 

(the latest Apple or Samsung phones) which are not exactly inexpensive. 

Klarna: The Most Successful FinTech Company in Sweden 

Klarna is an alternative payment solution that facilitates a smooth online shopping 

experience. Founded in 2005 in Sweden, it now operates in 18 countries. 

What is their unique selling proposition? According to Klarna, of 100 people that 

make it to the check-out in online shopping, only one-third finalize their deal. And for 

mobile users, this number drops to just 5-10%. What stops the user from completing 

the transaction is a combination of forgotten card details and passwords/user name 

or other issues such as insufficient available credit. Klarna says it kills all of these 

pain points by creating a smooth user experience with minimal user inputs and also 

offers credit at the point of sale. 

Klarna has 65,000 merchants and 45 million customers today. For an existing 

Klarna user, everything is prefilled during the checkout process. Klarna owns the 

frame in the website browner and also acts as a merchant acquirer and charges 

merchants a couple of percent per transaction. The majority of the company's 

payments (70-80%) go through Automated Clearing House (ACH). 

Klarna process around $3.4 billion in transaction volume per year in the Nordic 

region, about 15% of e-commerce market share, and around $6.5 billion in the 

DACH markets (European territories where German is an official language), or 10% 

of e-commerce market share. The company currently is expanding to the UK and 

the US. 

Despite their high transaction volume, the bigger part of Klarna's revenue comes 

from its consumer lending business. The company extends credit to selected 

customers at the checkout point and is therefore effectively a white-labeled credit 

card. Klarna sees its credit decision engine as its "secret sauce" and it maintains a 

low fraud rate at an average of 3.7 basis points. 

The yield on the credit is in the high teens to low 20's and the company is currently 

working on a loyalty module as part of its expansion into the US market. Its lending 

is funded through online retail deposits in multi-currencies as well as bank credit 

lines and their balance sheet turnover is high (3x revenue). 

Klarna's next stage is to focus on increasing its share with existing merchants, 

exploring new verticals and geographies, credit innovation and further leveraging 

their customer base and data. 

© 2016 Citigroup 
 

 

 

 

 

 

Figure 57. Percentage of Population (15+) with a Bank Account (2014) Figure 58. Distribution of Unbanked Population By Region (2014) 

Middle East High-income 100 Other economies OECD economies 4% 4% 3% 

Europe & Central 80 Asia 

5% South Asia 

32% 

60 Latin America &
 

Caribbean
 

10%
 

40 

20 

Sub-Saharan 

Africa 0 17% Euro area United States East Asia & World Europe & Latin America South Asia Sub-Saharan Middle East
 

Pacific Central Asia & Caribbean Africa (Developing
 East Asia & (developing (developing (developing (developing only) 

only) only) only) only) Pacific 

25% 

Source: World Bank Financial Development Index, Citi Research Source: World Bank Financial Development Index, Citi Research 

 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 45 

Digital money had been eliminating 

customer frictions in developed markets, but 

it is in emerging markets where is could lead 

to a revolution in financial inclusion 

Mobile Money: A FinTech Revolution 

Digital money, the migration from cash and checks to credit/debit cards, stored 

value instruments, and other non-paper based mechanisms, is now part of the 

fabric of the modern world. In the developed world, the financial innovations that 

promote a cashless society have been around eliminating customer frictions. 

Braintree, the underlying payment processor behind Uber, makes payments easy 

for customers. But it is in emerging markets that digital money could have an even 

more far reaching impact. Mobile and digital money is a revolution in financial 

inclusion. 

 Increase Financial Inclusion - There are 2 billion unbanked or underbanked 

people in the world, mainly — but not solely — in developing countries in Africa 

and Asia (Figure 57 - Figure 58). Banks only capture the wealthy part of the 

population, but mobile payment could help the poor have access to basic 

financial services. In Kenya, 45% (2014) of the population are unbanked vs. 88% 

(2015) of the population holding mobile phones. There are a number of countrylevel examples of successful financial inclusion initiatives in Kenya (M-PESA), 

the Philippines (via Amdocs) and Mexico. In emerging markets, the technology 

solutions are simple and often work with feature phones and SMS, i.e., they do 

not need an expensive smart phone to work. 

 Cross-border Connectivity - The world is more connected than before. 

International payments are not only for large corporates. It’s also an increasing 

need by individuals and small businesses. $580 billion remittances are sent 

cross-border every year. This appears to be a pain-point that some companies 

(Currency Cloud, Saxo Payments, and Earthport) are trying to solve for. 

 Digitalize SME Collection - Cash still accounts for the majority of SME point of 

sale transactions, especially in the developing markets. Cash accounts for 75% 

of corporate receivables and disbursements in emerging markets, and 25% in 

developed markets according to IFC Mobile Money (2011). FinTech companies 

such as Square and iZettle provide card acceptance for micro and small 

enterprises. Basware and Tradeshift provide invoice and payment automation. 

© 2016 Citigroup 
 

Figure 59. Mobile Money 101: What is Mobile Money 

Money Transfer Mobile Banking Payments 

Bank access via a mobile phone. 

Although to date, mobile banking 

has focused largely on basic P2P money transfers, both services (i.e. checking account domestically and internationally balances), some banks now allow 

clients to borrow through a moblie 

phone 

Source: Citi Research 

Use of a mobile phone for financial 

transactions related to purchases 

of goods and services 

 

Figure 60. Global Mobile Money Product Mix by Value, 2014 Figure 61. Global Mobile Money Product Mix by Volume, 2014 

Merchant 

Remittance Payment Airtime Top-up 3% P2P Transfer 3% 1% 

25% 

Bulk
 

Disbursement
 

8%
 

Bill Payment 

12% 

Bill Payment 

9% Airtime Top-up Bulk 62% Disbursement 

P2P Transfer 2% 

73% Merchant 

Remittance Payment 

0% 2% 

Source: Citi Research, GSMA Source: Citi Research, GSMA 

 

 

 

46 Citi GPS: Global Perspectives & Solutions March 2016 

Mobile Money Still in Infancy 

Digital money in the developing markets manifests itself in the form of mobile 

money. Broadly speaking, mobile money can be defined as any monetary 

transaction executed with a mobile phone. These transactions typically fall into one 

of three categories. 

Mobile money is still in its infancy both in 

terms of overall usage and the mix of 

transactions executed 

It is important to note that in many respects, mobile money is still in its infancy both 

in terms of overall usage and the mix of transactions executed. 

As shown below, when measured by transaction value, P2P transfers (i.e., 

transferring money from one person to another) dominate mobile money usage. 

When measured by volume, airtime top-up (i.e., purchasing pre-paid mobile phone 

airtime) dominates mobile money usage. That these two types of relatively basic 

transactions dominate mobile money usage reflects the fact that mobile money’s 

potential has yet to be fully tapped. 

Within the broad FinTech and banking spaces, mobile money is somewhat of a 

conundrum. The conundrum centers on the uneven usage rates of mobile money in 

various countries. Unlike traditional banking penetration, mobile money usage does 

not appear to be driven by wealth or technological sophistication. 

© 2016 Citigroup 
 

 

 

 

Figure 62 below shows there is no direct correlation between traditional banking 

penetration and usage among the OECD countries and for four developing regions. 

Although the traditional banking penetration of the high income OECD countries is 

close to 100%, mobile money usage for these countries is only ~22%. That usage is 

roughly on par with that of Sub-Saharan Africa. Within the group of developing 

countries, there appears to be no discernible relationship between traditional 

banking penetration and mobile money usage. It is noteworthy that Sub-Saharan 

Africa is an outlier: it has low traditional banking penetration but relatively high 

mobile money usage. 

Figure 62. % of Population with Bank Account (x-axis) vs. % of Population with Bank Account 

that Made Transaction Using Mobile Phone (y-axis), 2014 

25% 

20% 

15% 

10% 

5% 

East Asia (Developing) 

Europe & Central Asia (Developing) 

LATAM (Developing) 

Sub-Saharan Africa (Developing) 

OECD (High Income) 

20% 40% 60% 80% 100% 

Source: Citi Research, World Bank 

-

One explanation for the low correlation could One likely explanation for the relatively low mobile banking usage in high income 

be related to bank access OECD countries and relatively high mobile banking usage in Sub-Saharan Africa is 

related to bank access. More specifically, consumers in high oncome OECD 

countries have ample access to traditional bank channels whereas the opposite is 

true for consumers in Sub-Saharan African countries. 

Figure 63. Traditional Bank Channels by Region per 100k People 

OECD (High Income) Sub Sahara Africa LatAm Europe/Central Asia East Asia 

Developing 

ATMs 75.8 5.2 43.3 52 23 

Bank Branches 25.6 3.9 19 21.4 9.5 

Total 101.4 9.1 62.3 73.4 32.5 

Source: Citi Research, World Bank 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 47 

There is no direct correlation between 

traditional banking penetration and the 

usage of mobile money 

With ample access to banking services through traditional channels, consumers in 

high income countries may lack the incentive to set up and use a mobile money 

channel. For example, physically paying with a credit or debit card may not 

constitute a problem that needs “fixing.” 

Providers of mobile money services need to convince consumers why they would 

benefit from mobile money (convenience, savings, etc.), and it appears this has 

largely not been the case so far. In contrast, in Sub-Saharan Africa mobile money 

has filled the void left by the pronounced lack of traditional bank channels. 

© 2016 Citigroup 
 

 

Mobile money usage in Sub-Saharan Africa 

has been among the highest in the world 

Mobile Money Case Study: Kenya, Nigeria & South Africa 

Mobile money usage in Sub-Saharan Africa has been among the highest in the 

world despite the lack of wealth in that region. We partially attribute this fact to the 

lack of traditional banking channels in that part of the world. Within Sub-Saharan 

Africa, however, there are notable differences in mobile money usage rates 

between countries. Kenya and Nigeria are examples of such differences. 

Figure 64. Population with Mobile Money Figure 65. Made Transaction from Bank 

Account, 2014 Account via Mobile Phone, 2014 

Kenya, 

58% 

South 

Africa, 

14%
 Nigeria, 

2% 

Kenya, 

40% South 

Africa, 

29% 

Nigeria, 

14% 

Source: Citi Research, World Bank Source: Citi Research, World Bank 

 

 

 

 

 

 

48 Citi GPS: Global Perspectives & Solutions March 2016 

Kenya has an advantage of a single mobile 

operator which allowed mobile money users 

to benefit from a positive network effect 

And regulations in Kenya were favorable 

upon mobile operators handling financial 

transactions 

As shown above, mobile money usage is much higher in Kenya than in Nigeria. 

(This is despite the fact that Kenya’s GDP per capita is roughly half that of 

Nigeria’s.) Indeed, Kenya’s M-PESA is considered the poster child for mobile money 

success. 

Why has Kenya been much more successful in this regard than its Sub-Saharan 

peer Nigeria? Both countries suffer from very low traditional banking channels, so in 

both countries mobile money should solve the problem of lack of access. However, 

Kenya enjoys one advantage that Nigeria lacks: it has a single mobile operator. 

Safaricom’s dominant market share (~70%) allows Kenyan mobile money users to 

benefit from a positive network effect. In contrast, Nigeria has multiple mobile 

money services, none of which has been able to achieve critical mass. 

“I think the Kenyan model was very different, I think around the same Safaricom 

started M-PESA, there were no other ways of paying or transferring money. In 

Nigeria to-date even if you were to give the telcos the licenses, you would never see 

another M-PESA because today we have... all kinds of other money transfer 

mechanisms... So honestly I don't think there's ever going to be another M-PESA 

success story in Africa.” --- CEO of Guaranty Trust Bank, 2Q15 Earnings Call 

Another key difference between the countries is the regulatory environment. Kenyan 

regulators have looked more favorably upon mobile operators handling financial 

transactions whereas in Nigeria regulators have required that banks custody funds. 

This creates a lack of incentive for mobile operators to develop mobile money 

services. 

The M-PESA concept arrived in South Africa, Sub-Saharan Africa's largest banking 

market by profit, in 2010 as Vodacom and Nedbank partnered to try to replicate the 

success of Safaricom in Kenya. Eighteen months after the launch, the partnership 

had signed up in excess of 1 million customers, but has since removed all M-PESA 

commentary from investor reports. We can only conclude that this partnership failed 

to deliver sustainable returns. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 49 

In South Africa, credit/debit card penetration 

is a big hurdle to mobile money success 

India is a big opportunity space for FinTech 

The acceleration of smartphones and rising 

broadband connectivity is making the 

ecosystem more favorable to digital 

disruption 

One of the biggest hurdles to mobile money success in South Africa is highcredit/debit card penetration (~3 cards per adult and ~11 card-accepting devices per 

adult). Unlike in Kenya, prior to the Safaricom success, there is already strong 

uptake of traditional transacting mechanisms, likely due to well-developed urban 

and rural branch networks. We suspect that functioning existing infrastructure in 

South Africa unlike most of the rest of the continent, is an inhibitor to new disruptive 

technology. 

South Africa and Nigeria are, however, quite similar in terms of smart-device 

penetration. We estimate that for both countries, 36-37% of SIM cards are used in a 

smart device. This means that the technology is available but mobile transactional 

usage is still in its infancy. 

Standard Bank, Africa's largest bank, has claimed recent success in mobile 

transactions. In 2015, 490 million transactions were processed via mobile devices, 

compared to 247 million in 2014 (+99%). This compares to 515 million transactions 

processed via physical channels (ATMs/branches) and 947 million transactions 

originated via Internet banking. Mobile is not yet the dominant channel (only ~10% 

of volumes currently) for transaction origination, but evidence suggests that this 

trend is changing quickly. 

India at the Tech Frontier: The Next Kenya or China? 

India is, by its sheer population (1.2 billion and counting), its low level of banking, 

and digital penetration, one of the big opportunity spaces for FinTech. But this mix is 

converging rapidly with a changing ecosystem, a mix of technology, Government 

intervention in infrastructure creation, and rising economics. India might not get to 

Kenya levels in terms of share of prepaid or digital money (90%+ payments still 

cash), but in scale and size, it should be many times larger. 

The Indian market can be viewed as a combination of: (1) A large opportunity 

(demographics, economics); (2) Enablers: What the government calls the ‘J.A.M.’ 

trinity of Jan Dhan (Financial inclusion), Aadhaar (National Identity card) and Mobile 

(the ubiquity of mobile phones in India); (3) Players: Along with traditional banks, the 

Reserve Bank of India's (RBI’s) push to widen reach through the recent issuance of 

licenses for payments banks, small banks and the push for more ‘Banking 

correspondents'; (BC) and (4) New Payments system. There’s a lot going on at the 

same time. 

The ecosystem is changing. There is fairly natural expansion into mobile phones 

(~80% penetration), an acceleration into smartphones (~100m sold per year, +40% 

yoy), and rising broadband connectivity (100% access targeted by 2018). But the 

game changer lies in what have been historical challenges to banking access, and 

financial inclusion. This lies in two significant successes: (1) the Aadhar Identity 

platform which now covers over 900 million people, provides online identification 

and KYC, and has rapidly covered large segments of the population and (2) the Jan 

Dhan Initiative – which advocates bank deposits for all. Over the last 18 months 

almost 200 million new accounts have been opened, significantly enhancing reach. 

This is now being built on by the RBI issuing multiple new bank licenses for 

payments Banks (11) and Small Finance Banks (10) – all of which will expand reach 

and offer networked access. That India now has over 600 million debit cards 

suggesting there’s now a very large market, that’s accessible, and increasingly 

inclusive. That the Government has increasingly started routing its social payments 

through these bank accounts - should further boost the use and comfort of these 

platforms. 

© 2016 Citigroup 
 

Figure 66. India – Rising number of Mobile Banking transactions 

Mobile transaction value (RHS, Rs bn) Mobile transaction volumes (million, LHS) 

-

100.00 

200.00 

300.00 

400.00 

500.00 

600.00 

0.00 

5.00 

10.00 

15.00 

20.00 

25.00 

30.00 

35.00 

40.00 

45.00 

May 09

Dec 09Dec 10Dec 11Dec 12Dec 13Dec 14

Mar 15

Dec 15 

Source: Citi Research, RBI 

 

 

 

 

 

Figure 67. India Transaction Volumes - Prepaid Payment Instruments Figure 68. India Transaction Value - Prepaid Payment Instruments and 

and Mobile Banking Mobile Banking 

Transaction Volume (million) per month Transaction value (INR bn) per month 600 

80 

70 

60 

50 

40 

30 

20 

10 

2 3 3 4 5 5 7 7 7 7 8 9 9 8 7 9 11 11 13 13 14 14 16 17 19 21 21 23 28 24 

46 

67 

40 47 54 

43 49 50 50 54 

5 6 6 7 7 7 101011 11121414101011 13 14 

16161617192023 

31 2629 3330 

54 

74 

47 

55 

65 

53 

586263 

69 

Sep-12

Nov-12

Jan-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13

Jan-14

Mar-14

May-14

Jul-14

Sep-14

Nov-14

Jan-15

Mar-15

May-15

Jul-15

Sep-15

Nov-15 

2012 2013 2014 2015 

Paper vouchers PPI cards M-Wallet Mobile banking 

500 

400 

300 

200 

100 

0 1 1 2 1 1 2 2 2 2 2 2 2 2 2 2 2 3 3 4 4 5 6 6 7 7 7 8 9 9 11 12 12 13 14 13 18 15 19 21 

7 7 8 8 5 5 6 6 6 6 6 6 6 7 6 7 7 7 9 10 10 11 13 14 18 18 19 23 24 24 30 28 28 32 38 39 41 38 43 44 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 

2012 2013 2014 2015 

Paper vouchers PPI cards M-Wallet Mobile banking 

0 

0 

Source: Citi Research, RBI Source: Citi Research, RBI 

 

 

 

50 Citi GPS: Global Perspectives & Solutions March 2016 

Payments has been the primary sphere of 

activity with mobile wallets and mobile 

banking accelerating 

The primary sphere of activity revolves around payments: there is mobile pre-paid 

money that has made some progress, there is much more activity with mobile 

wallets (competitive, scaling up fast), and the expansion of broader mobile banking 

is accelerating at a rapid pace. There is however a long way to go. While the 

infrastructure has made significant strides – the user case, especially for financial 

transactions, has yet to gain hold. 

E-commerce payments are still dominated by ‘Cash on Delivery’ (50%+): 

significantly more expensive for sellers, with high rates of return — even as the 

payments infrastructure is in place. The user case has not been established for 

payments — perhaps due to convenience, cultural, or economic factors. That Uber 

has started offering ‘cash payments’ for its services in India (its second largest 

market now) reflects the relatively slower adoption of digital payments in India 

versus other markets, such as China or Europe/US. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

 

 

Figure 69. India – How the Payments Landscape Is Evolving 

Segment Progress 

Immediate Payment Service IMPS transactions went up 2X over the last one year from ~9.5 million transactions a month to ~20 million transactions a month 

(IMPS) In value terms, IMPS transactions went up 135% too (more than doubled) 

Mobile Banking Transactions 

Number of mobile banking transactions are up 135% (more than doubled) in the last one year (2015) 

In value terms, mobile banking transactions are up more than 300% (~4+ times yoy): about Rs490bn ($7.3bn) transacted per month on 

mobile phones in India 

Mobile Wallets Mobile wallet transactions by value also more than doubled (+149% yoy) 

Credit card usage (at POS terminals) is still growing smartly: number of transactions are up 24% in the last one year (2015) Credit Cards Number of credit cards are growing much slower at 12% but credit card transactions by value are growing much faster at 23% 

Debit card usage is also growing fast: 23% increase in transactions, but of that, the velocity is quicker in POS terminals (+47% yoy) vs. at 

Debit Cards ATMs (still a strong +20% yoy) 

The number of debit cards in the system grew a strong 27% over the year – much quicker than credit cards. 

Source: Citi Research, RBI Data 

 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 51 

Payments adoption has been low as 

conventional and regulated banks have a 

material starting advantage but there is an 

aggressive push to digital 

That payments adoption has been relatively slow probably reflects a cultural/safety 

aspect, that the conventional and regulated (and safe, in public perception) banks 

have a material starting advantage. They have continued to dominate the savings 

market for deposits and payments: and the new environment is both an opportunity 

and a risk. The Indian banking market is split into two: the newer private banks, and 

the larger (nearly 70% market share) Government Banks. The private banks are 

leading the charge with aggressive push, product and marketing, and cognizance of 

both opportunity and risk. With the private banks positioned as universal banks with 

a large retail (asset and liability) focus and with the landscape still evolving, there is 

a carpet bombing approach that most banks are following. 

We do see this approach continuing – with banks wanting to ensure that they do not 

miss any opportunity, or become vulnerable to a changing landscape. This is 

particularly so with the new payment/ mall bank licenses: including some to telecom 

operators and mobile wallet players, who could be a disruptive force for incumbents, 

who otherwise are in a sweet spot in the ongoing financial sector and FinTech 

disintermediation. The Government banks are selectively also upping their game, 

but will likely lag, and potentially be victims. 

As significant numbers come into the 

mainstream, we see significant growth in the 

financial sector 

We see significant growth in the financial sector as significant numbers come into 

the mainstream, progressively become more active, and the economics continually 

improve for the banks. As they access these newer customers at lower costs, and 

as volumes rise we would expect the private banks to, as a group, consolidate their 

positions. But we do expect the market to widen out significantly: the ecommerce 

players will likely make a dent in the lending markets, mobile wallets should see 

some dominant players, the small and payments banks could surprise with some 

successes and a few Finco franchises could position themselves well. But most of 

all, we believe the velocity of financial activities and flows, will surge, offering more 

opportunities than risks to those who get it right. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

 

52 Citi GPS: Global Perspectives & Solutions March 2016 

Emerging Market Mobile Money 

A Case Study: Q+A with Aditya Menon 

Aditya Menon is a co-founder member of Citi’s Global Digital Strategy Team and leads the 

teams' digital capabilities initiatives. Prior to joining Citi, he was a three-time entrepreneur, 

twice in the transaction banking space (in payments and trade-finance) and once in the 

mobile payments space with Obopay. He helped to start a bank as the first CIO for Yes 

Bank in India, and served as group CIO for mPhasis, prior to its acquisition by EDS/HP. 

Why has mobile money been so successful in some emerging markets such as 

Kenya? 

To quote my former CEO at Obopay Carol Realini in her book “Financial inclusion at the 

bottom of the pyramid” – “M-PESA is an early success story that demonstrates that basic 

banking services — keeping cash safe and facilitating cash transactions —can be provided 

to vast numbers of customers who once lived at the bottom of the pyramid and who now 

can be said to inhabit an open and accessible financial platform.” In my discussions with 

the Hon. Prof. Njuguna Ndung’u former Governor of the Central Bank of Kenya, he stated 

that between 2006 and 2013 the percentage of population excluded from formal financial 

services shrank from 39% to 25%. I had first-hand experience launching Yu-Cash in Kenya 

as M-PESA’s first competitor and my view is that a number of key factors contributed to the 

run-away success of M-PESA. Firstly, a significant investment of over $15m in building out 

a scalable mobile money and agent servicing platform. Secondly, the growth of a viable 

non-bank agent network backed by significant investments in a “paint Kenya green” 

campaign that saw the number of agents grow to over 25,000 in the years between 2007 

and 2013. In speaking with Michael Joseph (CEO of M-PESA) in Kenya, he attributed a 

key factor of success to effective training and cash management policies in handing 

agents and utter simplicity in the user experience for the customer. In June 2014, there 

were120,000 agents across all bank and non-bank providers in Kenya that conducted 74 

million transactions valued at $2.2 billion. (Prof Ndung’u). The third key factor is 

proportional regulation that enabled a number of schemes including M-PESA and notably 

Equity Bank’s agent model to thrive. 

Do you think large Asian markets such as Indonesia or Philippines could be the next 

Kenya for mobile money? 

Philippines and Indonesia both share a geographical topology that has a highly distributed 

population spread across thousands of islands. In the Philippines, SMART Telecom 

occupies a pride of place with 50+ million subscribers across a population of 93 million. 

They have SMART money which offers mobile banking as well as a prepaid Master-card to 

millions of subscribers and also successfully partnered with a number of financial 

institutions to offer a variety of payment services. Globe Telecom focused on the worker 

remittance market and has seen great success with G-Cash, which has a small but highly 

profitable franchise due to the emphasis on inward remittance to fund mobile wallet 

accounts. Although both these products have been in play since 2007, they have not seen 

the explosive growth of M-PESA, I believe due to my earlier observation of the number of 

agents per-capita being far lower. Transposing this theme onto Indonesia, we can observe 

that Indonesia has regulatory barriers that require every agent to obtain a money 

transmitter license in order to cash-out whereas cash-in is permitted without this licensing. 

This has been a severe barrier to the creation of a distribution network, even for 

established m-wallet players like TELCEL. A more fragmented telecom market in both 

Indonesia and the Philippines will require the growth of inter-operable networks for mobile 

money to flourish, a role that the central bank can certainly facilitate in the respective 

markets with the facilitation of a real-time 24x7 cross bank / cross payment provider 

network. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 53 

Why is China so far ahead of India for digital finance? Is China unique or will its 

experience in other emerging markets? 

China has seen the growth of a few whales – Alibaba group that controls ~50% of 

online and ~75% of mobile payments and Tencent that controls 20% of online and 10% 

of mobile payments in China. The growth of on-line mutual funds offering 5-7% interest 

as compared to 3.3% for time deposits and 0.35% for demand deposits saw a huge 

flight of capital from traditional banks and providers to on-line investment products. In 

the off-line space the virtual monopoly of one player – China Union Pay is also a 

unique situation. India has seen a huge growth in e and m commerce in the past 24 

months (90% growth 2015-2016 and 44% CAGR 2015-2020) fuelled by a few key 

players, Amazon, SnapDeal, FlipKart and PayTM, as well as a huge inflow of 

investments into the space notably from Softbank, Alibaba and others. As we can 

observe, there appears to be balanced but slower growth of P2P and P2M payment 

growth in India when compared to China, however India remains more fragmented and 

from a digital money perspective India is making the transition from need to value 

whereas China is already playing the more advanced market experience game with a 

GDP per capita of ~$12.8K compared to India’s ~$5.8K, as well as a larger middle 

class that can participate in the digital economy. 

Who leads mobile money innovations in emerging markets? The banks, telecom 

companies or it is government led initiatives? 

Ability to innovate and succeed is highly local to each market. We saw the conditions 

for lift-off in Kenya, and moderate success in the Philippines with Globe and Smart, 

however we have not seen any runaway success in India, despite attempts by Nokia, 

Airtel and others. Telcel in Indonesia has plateaued due to their agent distribution 

problem and other players are yet to achieve lift-off. In India we have seen the steady 

growth of government supported inter-bank mobile payment volumes though IMPS 

from 10.2 million transactions in Jan 2015 to 24.4 million transactions in Jan 2016. 

Other factors in India such as AADHAR biometric identity program and the opening of 

over 200 million new bank accounts have also dramatically increased the base, 

especially for government disbursements. Banks have seen limited success in their 

mobile-money endeavors to date in emerging markets, with some notable exceptions 

being Equity Bank Kenya and FNB South Africa. The Indian regulator has recently 

licensed 11 or so payments banks in an effort to energize mobile money adoption, but 

these organizations will face significant headwinds with restrictive regulations that don’t 

allow them to undertake any lending activities. 

How important can mobile money and digital finance be for the financial 

inclusion agenda in emerging markets? 

Citi partnered with Imperial College London to examine this space and some of the key 

findings from our third annual symposium in Jan 2016 show that a 10% increase in 

digital money adoption can lead to 220 million people coming into the formal financial 

sector resulting in $1 trillion in net new flows in the formal economy, $100BN in 

increased tax collections, a reduction of $120 billion in lower costs of cash handling at 

retail, $185 billion in benefits from digitizing government benefits and so on. It’s 

therefore imperative to understand the role of governments, and industry in growing 

digital money adoption in emerging markets starting with need and then rapidly 

transitioning the support to value and experience, each of the stages requiring the 

growth of an overall ecosystem. 

© 2016 Citigroup 
 

Figure 70. Marketplace Lending 

China US Europe 

Source: Citi Research 

 

 

 

 

 

 

 

 

 

54 Citi GPS: Global Perspectives & Solutions March 2016 

Despite marketplace lending being around 

for over a decade, it has only really taken off 

in the last few years 

Marketplace Lending: The 

Challenges Are High 

Marketplace lending or P2P lending offers online platforms to match borrowers and 

lenders with the aim of lowering the borrowing cost for borrowers and increasing 

returns for lenders. Marketplace lending has been around for over a decade but has 

only seen a take-off in growth over the last few years. Zopa, founded in 2005 in 

London, is the world’s first P2P lending platform. 

Total loans lent by P2P platforms are less 

than 1% of total loans outstanding but the 

market has been growing exponentially 

We are still at an early stage of development for marketplace lending. Total loans 

lent by the P2P platforms are less than 1% of total loans outstanding. Nevertheless, 

the market has been growing exponentially, especially in the last three years. In the 

US, P2P lending is dominated by two players Lending Club and Prosper, which 

together account for over 90% of cumulative lending. The UK has the largest P2P 

lending market in Europe and China has the largest P2P market in the world. 

China’s cumulative lending of RMB440 billion ($67bn) is close to 4x that of US and 

over 10x that of UK. In China, P2P cumulative lending volumes today amount to 

about 3% of system retail loans — and if we were to extrapolate the recent growth 

rate out to end-2018, the Chinese P2P market would be about 9% of total retail 

loans. By contrast, the US P2P market is equivalent to 0.7% of total retail loans and 

even if we extrapolate recent loan growth out to end-2018, the US P2P penetration 

would be only slightly above the current Chinese level. 

© 2016 Citigroup 
 

 

Figure 71. China Has the Biggest P2P Lending Market in the World, 2015 

80 

70 

60 

50 

40 

30 

20 

10 

0 

66.9 

16.6 

5.4 

0.5% 

0.2% 

0.2% 

0.006 

0.005 

0.004 

0.003 

0.002 

0.001 

0 

China US UK 

P2P Loans ($bn) % Total (RHS) 

Source: Citi Research; Company Reports and Central Bank Data. % Total system loans (including both corporate 

and retail loans). 

 

 

 

Figure 72. US P2P Finance Cumulative Lending 

($bn) 

180 

160 

140 

120 

100 

80 

60 

40 

20 

0 

% Loans* 0.7% 3.3% 

Forecasts 

118 

22 

1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 

Source: Company Reports, Citi Research; As % of Retail 

Loans (Mortgage and Consumer Credit ) in US 

Figure 73. UK P2P Finance Association 

Members Cumulative Lending (£bn) 

16.0 

14.0 

12.0 

10.0 

8.0 

6.0 

4.0 

2.0 

0.0
 

1Q103Q101Q113Q111Q123Q121Q133Q131Q143Q141Q153Q151Q163Q161Q173Q171Q183Q18
 

£8 

£11 

£14 

£4.4 

Forecasts 

1.5% % Loans* 4.9% 

P2P business lending P2P consumer lending 

Source: P2P Finance Association, BoE, BBA, Citi 

Estimates; As a % of credit cards, consumer and SME 

loans (Total £290bn in 2015) 

Figure 74. China P2P Finance Cumulative 

Lending (RMB bn) 

3000 

2500 

2000 

1500 

1000 

500 

0 

Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 May-17 Oct-17 Mar-18 Aug-18 

439 

978 

1,519 

2,177 

Forecasts 

% Loans* 3.0% 9.3% 

Source: Wangdaizhijia; As % of Retail Loans in China 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 55

P2P lending platform targets consumer 

credit and small & micro business lending 

which is currently unserved or under-served 

by the existing banking system 

P2P lending platforms target segments that are unserved or under-served by 

existing banking system such as consumer credit and small and micro business 

lending. Traditional banks are not particularly good at serving this customer 

segments due to tougher Know Your Client/Anti-Money Laundering (KYC/AML) 

requirements as well as tightened lending standard post global financial crisis. 

Like any marketplace platform, liquidity is crucial for the functioning of P2P lending 

platforms. The increasing participation of institutional money on these platforms 

could increase funding liquidity and enable the P2P lenders to take on a bigger 

market share. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

 

 

The drivers of China's P2P lending includes 

under-served consumer and SME 

customers, search for yield, tighter 

regulations in banking and overall, 

consolidation and china's unique O2O 

model 

But the marketplace lending business model is yet to be tested through the credit 

cycle. As the platform gets bigger, increasing regulatory scrutiny and requirements 

could increase the operating costs of such platforms. 

China: The Largest P2P Market in the World 

The booming of China’s P2P lending is underscored by a state controlled banking 

system that directs credit towards State Owned Enterprises, a tightly regulated 

banking sector which created regulatory arbitrage, and savers searching for higher 

returns than bank deposits. Below we take a closer look at some of these drivers: 

 Under-Served Consumer & SME Customers – China’s banking system is 

dominated by the state owned banks, which have the tendency to lend to state 

owned enterprises. The SME sector, which accounts for ~60% of GDP, is 

massively underserved. According to China MSME Finance Report 2014 by 

Mintai Institute of Finance and Banking, almost 80% of SMEs were not served by 

the banks. The explosive growth in the P2P lending has met the needs of SMEs 

which cannot get formal financing. Equally, China’s retail loan penetration is 

among the lowest in the world at ~20%. Part of the consumer credit demand is 

met by the P2P lending companies and also increasingly being met by payment 

companies such as Ant Financial through Ant Check Later. 

 Investors Search for Yield – The financial markets in China are under 

developed and offer limited choices for retail investors. Traditionally, bank 

deposits and property investments are popular investment choices. As the yield 

on bank deposits has lagged inflation in recent years, some retail investors are 

searching for higher-yielding products offered by P2P platforms. The guaranteed 

return offered by some P2P platforms such as Lufax and my089.com are very 

attractive investment alternatives to bank deposits. 

 Tightly Regulated Banking Sector – Chinese banks are under tight regulations 

such as reserve requirement, loan-to-deposit ratios (LDR), KYC, AML, and so on. 

There was however little regulations for the P2P lending sector. There is also no 

capital requirement. This reduces the entry barrier and has resulted in a 

proliferation of homogeneous P2P lending platforms in China (over 2,600), many 

of which lack a credible business model. The lack of regulation in the P2P space 

in China has also resulted in high failure rate and fraud rate. The failure rate of 

the platforms is about 3-5% every month (Figure 75). Recently a high profile P2P 

lender Ezubao (one of the larger P2P lenders in China), defaulted on its investors 

amounting ~$7.6 billion. The founders used the platform to create fictitious 

borrowers and sold the loans to investors (mainly retail individuals) seeking 

higher return. This incident has alarmed officials to increase the regulation in the 

P2P lending space. 

 

56 Citi GPS: Global Perspectives & Solutions March 2016 

© 2016 Citigroup 
 

Figure 75. Number of P2P Lending Platforms in China Figure 76. Cumulative P2P Lending in China (RMB Billion) 

4500 

4000 

3500 

3000 

2500 

2000 

1500 

1000 

500 

0 

500 

RMB440bn 

450 

400 

350 

300 

250 

200 

150 

100 

50 

0 

416404169941760418214188341944420054206442125421864224842309 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 

Cumulative Problem Platforms Cumulative Platforms 

Source: Wangdaizhijia Source: Wangdaizhijia 

 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 57 

 Increased Regulatory Scrutiny – There is increasing regulatory scrutiny on the 

P2P lending space in China as the sector grows. In December 2015, the State 

Council issued a consultation paper on P2P lending that tightened the regulatory 

control of the sector, requiring that: (1) platforms must be registered with the local 

finance authorities; (2) borrowers and investors must use real names; (3) 

platforms must use banks as custodians for customers funds; and (4) platforms 

be banned from taking deposits from the public, setting up asset pools, giving 

guarantees, selling wealth management products, financing stock purchases or 

engaging in equity/real asset crowdfunding. Furthermore, the paper encourages 

platforms to reduce concentration risk and issue mainly small loans and set 

single borrower limits. We believe increased regulation will be beneficial for the 

long-term healthy development of the sector. 

 Consolidation Expected – Regulation creates higher barriers to entry and 

investors are more likely to be selective when choosing a platform in light of the 

high platform failure rate and fraud levels. Hence, we expect China's P2P lending 

platforms to consolidate in coming years. Platforms with sustainable business 

models, prudent lending practices and adequate risk management are likely to 

be the winners in the long term. 

 Unique O2O Model – The P2P lending model in China is mostly a hybrid offlineonline model, where investors are sourced online but loan acquisition is done 

offline either by partnering with non-bank financial institutions or by the platform’s 

own agents or staff. Due to the lack of credit information, P2P lenders have to 

rely on offline traditional credit assessment methods. Many platforms actually 

don't have their own risk management system and rely on third-party loan 

originators to assess credit risks. This model, in our view, is prone to credit 

problems in a credit downturn. Eventually, we believe P2P lending will have to 

migrate to a purer online model in order to gain a sustainable competitive 

advantage over traditional banks and financial institutions. Lufax is an example of 

the hybrid model. Another important difference between the China model and the 

developed market model is that the O2O platforms are subject to credit risk. Most 

platforms in China guarantee investor returns and mitigate credit risk through 

third-party guarantees. 

© 2016 Citigroup 
Figure 77. Lufax Business Model 

Source: Company Website 

 

 

Figure 78. P2P Business Model Compared - Online and O2O 

On line Offline to Online (O2O) 

Role Facilitate matching of investors and 

borrowers 

On-line for investors, off-line for 

borrowers 

Capital Retention 

Strength 

Weakness 

No or little capital retention 

Fast processing time 

No credit risk 

Lack of credit data 

More prone to fraud (fake 

identify/documents) 

Higher risk of money laundering 

Platform retain part of the credit risk 

(guaranteed investor returns) or through 

third-party guarantee 

Better risk control especially when lack of 

credit history 

Post-lending management 

Higher human cost 

Time consuming 

Geographic limitation 

Source: Citi Research 

 

 

 

 

 

 

 

 

58 Citi GPS: Global Perspectives & Solutions March 2016 

$6.8 trillion of consumer credit potentially up 

for grabs even before counting the 

underbanked segment 

 Potential Markets Across Asia – P2P lending is relatively new and small across 

Asia with the exception of China. In the rest of the region, startup P2P lenders 

are mostly in developed Asia where consumers are better banked and credit 

information is more readily available. Digital infrastructure is more mature in 

developed Asia and so it is easier to replicate the highly automated and online 

P2P lending models seen in the US and the UK. Some of the P2P lending 

marketplaces in the region include: Society One in Australia, Monexo in Hong 

Kong, Money Auction/Pop Funding in Korea, and Faircent in India. While most of 

these are focused on unsecured consumer lending, a handful of P2P lenders 

(such as MicroGraam in India and MEKAR in Indonesia) are also engaged in 

socially responsible lending to the unbanked, aimed at increasing financial 

inclusion. 

 Outlook - In the coming years, we believe P2P lending will disintermediate a 

portion of the existing consumer credit and small business lending in Asia. We 

estimate that there is $6.8 trillion of consumer credit in Asia ex Japan, which 

overall accounts for 38% of GDP and 32% of total loans in the banking system – 

not an insignificant size. Our consumer credit figure includes mortgage lending, 

consumer credit (e.g. credit cards, personal loans) and also lending by non-bank 

financial institutions. 

© 2016 Citigroup 
 

 

 

 

 

 

Bank consumer loans ex-mortgage 

Bank mortgage Loans 

1,286 

991 

404 316 284 269 222 191 104 20 

Figure 79. Asia Household Debt in USD (2014) 

US$ bn
 

2,683
 NBFI consumer loans 2,700
 

2,400
 

2,100
 

1,800
 

1,500
 

1,200
 

900
 

600
 

300
 

0 

CN AU KR TW TH IN MY SG HK ID PH 

 

Source: Central Bank & Statistical Office Websites, CEIC, Citi Research 

Figure 81. Asia Household Debt as Percent of GDP (2014) 

105% 98% NBFI consumer loans

Bank consumer loans ex-mortgage 90% 88% 86% 

79% Bank mortgage Loans 

75% 75%
 73%

66%
 

60% 

45% 

30% 26% 

20% 

15% 20%

19% 

0% 

AU MY TH TW SG KR HK CN IN ID PH 

Source: Central Bank & Statistical Office Websites, CEIC, Citi Research 

Figure 80. Asia Household Debt Mix by Country (2014) 

Hong Kong Indonesia Philippines 3% 1% 0% 

3% 

Singapore 

Malaysia
 

4%
 India China 4% 40% Thailand
 

5%
 Taiwan
 

6%
 

Korea
 

15%
 

Household Debt 

$6.8 trillion 

Australia 

19% 

Source: Central Bank & Statistical Office Websites, CEIC, Citi Research 

Figure 82. Asia Household Debt as Percent of Banking Loans (2014) 

107% NBFI consumer loans 

Bank consumer loans ex-mortgage 

87% Bank mortgage loans 77% 

70% 

58% 

48% 

35% 

28% 

20% 20% 19% 

100% 

80% 

60% 

40% 

20% 

0% 

TH KR AU MY TW SG ID IN HK PH CN 

Source: Central Bank & Statistical Office Websites, CEIC, Citi Research 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 59 

Higher yielding lending is most susceptible, 

mortgages in HK and Singapore unattractive 

Not all types of consumer credit will be disintermediated – higher yielding unsecured 

consumer credit will be more susceptible in general whilst low-yielding mortgages in 

HK and Singapore will be unattractive for lenders. In underbanked countries, the 

potential addressable market could be significantly larger than our figures, which 

ignore future potential as banking penetration deepens. In China for example, a 

leading non-bank financial institutions estimates that the potential market for 

unsecured small business lending is around Rmb20trn, this is larger than the 

existing stock of consumer lending in the country of Rmb16 trillion ($2.5trn). We 

believe this potential is enormous in countries like the Philippines, India, and 

Indonesia where even the official penetration of consumer credit is very low at only 

just 10-15% of GDP. 

© 2016 Citigroup 
 - - 

 

Figure 83. Asian Household Debt 

Figures in USD bn

(2014) 

Bank 

Mortgage Loans 

Bank Consumer Loans ex Mortgage Non Bank 

Consumer Loans 

China 1,919 594 170 

Australia 1,078 83 125 

Taiwan 187 42 175 

India 95 87 103 

Singapore 134 45 44 

Indonesia 26 59 20 

Asia Pacific x-JP 4,065 1,299 1,406 

Korea 333 140 518 

Thailand 51 64 201 

Malaysia 108 110 51 

Hong Kong 127 64 n.a. 

Philippines 9 11 n.a. 

Total 

Household Debt 

Total Household 

Debt as Percent of 

GDP 

2,683 26% 

1,286 98% 

404 79% 

284 16% 

222 75% 

104 13% 

6,771 38% 

991 73% 

316 86% 

269 88% 

191 66% 

20 7% 

Note: NBFI consumer loans include: - in Korea: loans from non-bank depository corp., mutual credits, credit union, other financial corporations, and pensions funds, - in 

Taiwan: credit co-operatives, Chunghwa Post, insurance, and pension funds - in Thailand: personal loan companies, co-operatives, insurance and securities companies 

Source: Central Bank & Statistical Office Websites, CEIC, Citi Research 

 

 

 

 

 

 

60 Citi GPS: Global Perspectives & Solutions March 2016 

Lufax (陆金所) Case Study 

Lufax is Ping An Group’s Internet finance platform and the largest online P2P or financial 

marketplace in China. Being a part of Ping An’s financial ecosystem has helped Lufax 

develop rapidly, in particular Lufax leverages on Ping An’s rich customer database of 89 

million for risk control and the Ping An brand has enabled Lufax to quickly establish a safe 

and strong brand image. Lufax’s goal is more ambitious than other P2P lenders in that it 

aims to be an open marketplace for loans and non-standard financial assets, for 

individuals, companies and institutions. Investors are sourced online while borrowers are 

sourced offline. As of December 2015, Lufax’s total active users reached 3.6 million. 

Lufax raised $1.2 billion in January 2016 from investors including Bank of China, Guotai 

Junan Securities and Minsheng Bank that would value the company around $19 billion 

according to FT (January 18, 2016). Lufax is also eyeing an IPO in Hong Kong in the 

second half of 2016 (Bloomberg, January 27, 2016) 

Products – Lufax offers unsecured and secured consumer loans. Unsecured consumer 

loans are on average Rmb60-70k ($9-$11k) in size, 1-3 years in duration and guaranteed 

by a third-party guarantee company. Secured consumer loans are usually collateralized 

by real estate and are 3-12 months in duration. Investors in unsecured consumer loans 

typically receive 8.4% and 7-8% for secured consumer loans. 

For Lufax’s consumer business: investors are all individuals; borrowers are all individuals 

with insurers, AMCs and micro enterprises also providing assets on the platform. 

For Lufax’s corporate business: asset providers and investors mainly include banks, 

insurers, trust companies, asset management companies, securities and fund companies. 

Major assets placed on the platform include universal life insurance, mandated pension 

products, enterprise creditor rights and bank acceptance drafts. 

Lufax charges borrowers and investors service fees and management fees. Lufax also 

receives an information service fee from guarantee companies. The cost of credit 

guarantee is borne by borrowers. Lufax also receives a fee for the transfer of 

loans/assets in the secondary market by investors. Bad debt ratio of unsecured P2P 

loans is 5-6% annualized; credit risk is borne by the guarantee companies and Lufax acts 

only as an information platform, i.e. it takes no credit or liquidity risks. 

© 2016 Citigroup 
 

 

 

 

Figure 84. Interest Spreads at Traditional Banks vs. Lending Club 

Borrower pays Borrower pays 

12.6%^ 12.2%^^ 

Spread 

5.4% 

Spread Lender 11.2% 

gets
 

7.2%*
 Lender 

gets 

1.0%** 

Lending Club Traditional Banks 

* Based on median return of investments over time horizon of 12-18m 

^ Based on lastest average lending rate in 4Q15 

** FDIC 12m return on Non-Jumbo Deposits (< $100,000) Dec 2015 

^^ Commercial bank credit card rate Dec 2015 

Source: Company Website, Fed, FDIC and Citi Research 

Figure 85. US Consumer Credit vs. Lending Club Target Market 

US$ bn 

3,500 3,169 

3,000 

2,500 

2,000 

1,500 

1,000 

500 254 

0 

Lending Club target market # US consumer credit ^ 

# Based on Citi's estimate (in report Lending Club Corp.) after considering US 

revolving consumer credit ($882bn)and loans under made to small business ($298bn). 

^ Consumer credit in US excluding mortgages 

Source: Havers, Citi Research Estimates 

 

March 2016 Citi GPS: Global Perspectives & Solutions 61 

In developed markets, the driver of P2P 

lending is higher efficiency than traditional 

banks 

P2P Lending in the US and Europe 

In the developed markets, P2P lending is almost based entirely on an online 

business model. It offers a slightly different value proposition of higher efficiency 

than traditional banks. 

 Value Proposition – Apart from faster processing times and lower borrowing 

costs (due to branchless model), P2P lenders help service customer segments 

that are not ordinarily viable for banks. On the other hand, lenders enjoy higher 

returns vs other traditional bank products and have the opportunity to diversify 

their investments (as a single lender can choose to invest in multiple projects, 

thereby funding only a part of the whole project and diversifying his risk). 

 Market Size – Prominent P2P platforms in the West are Lending Club and Prosper in 

the US and Zopa in the UK. They currently account for a miniscule share in the total 

credit pie (<1% of US and UK consumer lending), but they’ve been growing 

exponentially – Lending Club and Prosper originated loans of over $8 billion in 2015 

alone. 

The addressable market for P2P lending potentially includes revolving credit card 

loans, student loans, and loans to small and medium businesses. We estimate in the 

US, this market totals $3.2 trillion, of which $1.3 trillion is held by commercial banks 

and the rest by non-bank financial institutions. Citi analyst Mark May estimates the 

target market for Lending Club’s and its peers is about $254 billion – around 8% of total 

addressable US total consumer credit market (see Figure 85). 

 How it Works? – Potential borrowers submit applications on the digital platform, 

similar to any traditional loan application. The platform staff then verifies borrower 

information (such as credit history, revenue sources) and assesses loan risk, 

before setting a grade and interest rate. Potential lenders review available 

applications and select borrowers they want to fund. Once confirmed, the website 

passes the money from the lender to the borrower. Subsequently the platform 

also facilitates repayments from the borrower to the lender. On Lending Club’s 

© 2016 Citigroup 
 

 

 

Company 

Target

customers Economics Transacted volume 

Avg Loan

Size 

Avg

Interest 

Rate 

Avg Return

to Lender 

Historical Bad 

Debts 

Lending Club (US) Individuals and 

small institutions 

Earns 1-5% as origination fee from the 

borrower depending on loan grade, 

tenure. 

Lenders pay a service fee of 1% for each 

repayment received from the borrower 

Originated over US$16bn loans 

since 2007. Growth in recent 

years has been strong with 

loans originated in 2015 totaling 

US$8.4bn 

US$14,000 12.6% 5.6 – 9.1% 5.53% 

Figure 87. Key Players in US and UK P2P Lending Space 

Prosper (US) Individuals	 Earns 1-5% as origination fee from the 

borrower depending on loan grade, 

tenure. 

Lenders pay a service fee of 1% p.a. for 

outstanding principal balance of loan 

Originated over US$5bn loans US$11,400 15.30% 9.33% 6.60%
 after starting in 2006.
 

Originations in LTM to 3Q15 

exceeded US$3.1bn.
 

Zopa (UK) Individuals and 

business 

Lent more than GBP1.34bn to 

over 150,000+ UK borrowers 

since its founding in 2005. 

GBP 7,300 8.00% 5.00% 1.79% 

Funding Circle 

(UK)

*also available in 

US 

Small 

businesses 

Borrowers pay 2-5% as origination fees. 

Lenders pay an annual 1% service fees 

on loan outstanding for each loan 

GBP1.12bn lent to more than 

40,000 British businesses 

GBP15,000 10.90% 6.30% 1.50% 

Source: Company Websites and Citi Research; Last update: Feb 2016 

Borrowers pay an origination fee of 1.2% 

- 4.4%, while lenders pay an annual fee of

1.0% on the amount they lend. 

 

 

Figure 86. Lending Club Loan by Type (2014) 

Home 

Source: Company Reports and Citi Research 

Refinancing 

52% 

Credit card 

payoff 

19% 

Home 

improvement 

5% 

Major 

purchase 

2% 

Business 

2% 

Car 

financing 

1% 

Medical 

1% 

buying 

0% Others 

18% 

 

62 Citi GPS: Global Perspectives & Solutions	 March 2016 

platform, nearly 80% of lending volumes now come from institutional investors 

like hedge funds and other businesses entities. 

 Types of Loans – Primarily unsecured consumer loans for refinancing, credit 

card payoffs, and home improvements with durations of 3-5 years. A few P2P 

lenders like Funding Circle in the UK specialize in lending to small businesses 

only. 

 Revenue Model – P2P platforms generate revenue from origination fees 

charged to borrowers (usually 1-5% of loan granted) and service fees charged to 

lenders (usually 1% per year of principal borrowed). 

 Secondary Market – Key players in the US and the UK offer secondary markets 

where lenders can liquidate current outstanding loans. 

 Counterparty Risks – Unlike banks, P2P marketplaces do not undertake any 

risk in case of borrower default as they do not lend or borrow directly and also do 

not set aside any capital reserve. All risks are borne by the lender. However, a 

few P2P lenders, particularly in the UK, feature protection funds designed to 

compensate lenders exposed to loan defaults. 

With a large number of competitors in the 

space, success will increasingly be based 

on a company's marketing and branding 

Risks to Marketplace Lending Platforms 

Competition 

Given the growth and outlook for the online alternative lending sector, there are a 

large number of companies and significant venture capital invested in this space. 

While there are increasing institutional money seeking P2P as an alternative asset 

class, which provide valuable liquid funding for the platforms, the long term success 

of the companies would increasingly be based on the efficacy of a company’s 

marketing and branding. 

In addition, there is increased bank participation in the space to broaden its 

customer base (e.g. collaboration between JPM and OnDeck). In China, the number 

of P2P platforms backed by banks has increased from 3 in early 2014 to 14 at the 

end of 2015. In developing markets such as China, the bank backed P2P 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

 

Figure 88. Share Price Change of US P2P 

Lenders 

140 

130 

120 

110 

100 

90 

80 

70 

60 

50 

40 

Dec-15 Dec-15 Jan-16 Feb-16 Feb-16 Mar-16 

OnDeck Lending Club LendingTree 

Source: Citi Research; Indexed to 100 at 1 Dec 2015 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 63 

Increased regulatory pressure could be a 

burden if the asset class exhibits meaningful 

underperformance of sizeable defaults 

The UK has created a clear set of laws 

tailored to the P2P industry 

Relaxed regulation in P2P lending vs. the 

traditional banking was a driver of China's 

P2P platforms 

companies have competitive advantages over privately owned P2P platforms as 

investors believe they have the ‘implicit’ government guarantee for investments 

through banks. Ping An backed Lufax is one of the largest P2P platform in China. 

Other Internet companies such as Amazon, which have large user bases, may also 

want to monetize their user data to grow into the lending business. Many payment 

companies, as explained in the payment section, are growing consumer and SME 

lending. 

Interest Rate and Credit Cycle 

The marketplace lenders have only been around for a decade. They are currently 

benefitting from a record low interest rate environment that resulted in 

lenders/investors in search of yield and drawn them to its marketplace. The 

borrowers are also enjoying the lower debt servicing cost in a low rate environment. 

But the business model is yet to be tested against interest rates and credit cycles. 

There is concern that higher rates resulting from Fed tightening could negatively 

impact business models levered to consumer credit such as Lending Club. The Fed 

rate hike in December 2015 already resulted in a correction in the share price of US 

P2P lenders. 

It is possible the market is over reacting to the Fed’s rate decision. An examination 

of the historical performance of stocks levered to the consumer credit markets, 

namely the current card companies and as well as monolines such as MBNA, 

Providian, and Metris suggested that these stocks have tended to perform well both 

in a Fed tightening cycle and a loan growth cycle. Nevertheless, the business model 

of P2P lending is much less established than the traditional banks. The impact of 

credit and rate cycle is yet to be tested. 

Regulatory Pressure 

As it stands currently, the alternative lending space has generally avoided falling 

subject to restrictive regulation that would impede alternative lending business 

models. That said, it is difficult to rule out increased regulatory burden for Lending 

Club and similar business models, especially if the asset class was to exhibit 

meaningful underperformance or sizeable defaults. We think likely impacts of 

increased legislation could include: (1) risk retention requirements, similar to those 

made of sponsors of asset-backed securities under Dodd-Frank; (2) minimum 

capital requirements to help alternative lending platforms withstand financial shocks, 

which are required in the UK; and (3) heightened disclosure and reporting 

requirements that could become more burdensome and expensive. 

While the US regulatory environment with respect to the alternative lending market 

remains unclear, with multiple governing bodies and numerous laws that are not 

fully applicable to these platforms, we note that the UK has created a clear set of 

laws tailored to the industry. Notable rules established by this legislation mandate 

minimum capital requirements to help alternative lending platforms withstand 

financial shocks, procedures to prevent commingling of client funds, arrangements 

for back-up loan servicing, requirements for useful and accurate disclosures that are 

not overly burdensome, and ongoing reporting procedures. 

Historically, China’s tight regulation in the traditional banking sector and relaxed 

regulation in P2P lending have created regulatory arbitrage, which fostered the 

rapid growth of China’s P2P platforms. The high level of platform default rate (3-5%) 

and the subsequent social hazard warrants increased regulation in China’s P2P 

sector. In developing markets such as China, regulation can be a positive catalyst 

for the long term growth of the sector to instill trust in the system. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

64 Citi GPS: Global Perspectives & Solutions March 2016 

The shift to mobile means a 

disintermediation of bank branches rather 

than banks themselves 

The adoption of smartphones and mobile 

devices has changed the way customers 

interact with their banks today 

We believe an omni-channel strategy is the 

winning solution for incumbent banks over 

the next decade 

The role of branches is changing from 

transactional to advisory and banks are 

resizing, repositioning and re-energizing 

branches to meet customer needs 

Banking's Uber Moment 

Connectivity Replaces Physical Assets 

Antony Jenkins, the former CEO of Barclays, in a Chatham House speech recently 

argued that banks were facing their Uber-moment: "The incumbents risk becoming 

merely capital-providing utilities that operate in a highly regulated, less profitable 

environment, a situation unlikely to be tolerated by shareholders." 

He added: "In my view only a few [incumbent banks] will have the courage and 

decisiveness to win in this new field. We will see massive pressure on incumbent 

banks, which will struggle to implement new technologies at the same pace as their 

new rivals. That will make it increasingly challenging for them to deliver the returns 

and profitability that their shareholders demand. Ultimately, those forces will compel 

large banks to significantly automate their business. I predict that the number of 

branches and people employed in the financial services sector may decline by as 

much as 50% over the next 10 years, and even in a less harsh scenario I expect a 

decline of at least 20%”. 

Banks’ Uber moment will mean a disintermediation of bank branches rather than the 

banks themselves. Specifically, it will mean the shift to mobile distribution being the 

main channel of interaction between customers and the bank. The return of having 

a physical branch network is diminishing. The concept of retail banking profitability 

equaling outlet profitability will no longer be valid. Branches will be only one of the 

distribution channels. They will still play an important albeit diminishing role. 

Shifting Customer Behavior 

The adoption of smartphones and other mobile devices have fundamentally 

changed the way consumers interact with their banks today. According to the 

Accenture Banking Customer Survey 2015 (Figure 89), a customer interacts with 

their main bank about 17 times a month on average across multiple-channels. Nonhuman contact such as Internet and mobile banking, ATM, and social media 

accounts for 15 of those interactions. 

This shift in customer behavior is making banks rethink their channel strategy. In our 

view, an omni-channel strategy is the winning solution for incumbent banks over the 

next decade because customer interact with their main bank via multiple channels 

rather than a single channel. The omni-channel strategy should be built around a 

competitive digital banking offering, a reduced and modernized branch network and 

lastly, a targeted channel strategy for different segments of customers. 

Banks will follow consumer behavior and close branches as they see their 

consumers shift away from branches to digital. The shift is happening at a faster 

pace in Europe than in the US. Digital adoption (and most importantly, digital-only 

banking) varies by country along a maturity curve. The role of the branches is also 

changing from transactional to advisory. Rather than closing branches outright, 

banks are resizing, repositioning, and re-energizing branches to meet changing 

customer needs. 

Customers may largely stop visiting branches for transaction-related services, but 

still prefer human contact for handling complicated issues or life changing events 

(e.g. their first mortgage loan). In the UK, some banks are installing self-service 

machines in the branches to handle transaction related services but at the same 

time banks such as Virgin Money are transforming their branches into “lounges”, a 

place where customers can meet, relax, and even have a cup of coffee. 

© 2016 Citigroup 
 

Figure 89. Number of Interactions with Main Bank Every Month By Channels 

Source: Accenture, Banking Customer 2020, Rising Expectations Point to the Everyday Bank, 2015 

 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 65 

As not every customer has the same level of 

digital competency, it is important to 

incorporate an omni-channel strategy 

Given customer behavioral change happens 

gradually, traditional banks have time to 

adapt 

The diverse nature of a banks’ customer base underlines the importance of an 

omni-channel strategy. Not every bank customer has the same level of digital 

competency. Take the US market for example, in 2014, according to Mercator 

Advisory Group customer survey, 70% of customers still visited a branch. Branches 

remain the most important communication channel to the US customers. Other 

channels serve as complements to branches rather than substitutions. We think a 

successful channel strategy should cater for the differentiated customer segments. 

Banks could promote digital awareness among their branch visiting customers and 

offer alternative channels of interaction. 

The positive news for banks is that customer behavioral change happens gradually, 

which allows the traditional banks time to adapt and develop a digital channel 

strategy to meet new customer needs. Furthermore, in many developed markets, 

where retail banking is well penetrated, the incumbents have leading digital channel 

offerings. Many ‘digital only’ challenger banks have a high entry barrier and struggle 

to differentiate in these markets (e.g. Scandi, UK). 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

Figure 90. Banking Communication Channels of Importance to US Banking Customers 

Banking Communication Methods Used in Past Year 

(Base = All respondents) 

Went into branch and spoke with a teller
 

Through an ATM
 

Went into branch and spoke with a customer service rep*
 

Called 800 service number and spoke to a person*
 

Spoke with my personal financial advisor, banker, or broker*
 

Called 800 service number and used the phone menu*
 

Accessed FI website using a mobile device*
 

Use customer service from FI website*
 

Accessed a special mobile app using my smartphone*
 

By mail*
 

Sent an email to a bank rep or inquiry address*
 

Accessed a special mobile app using my tablet computer*
 

Used a remote teller system*
 

Responded to a SMS text from FI*
 

Used online chat on customer service website*
 

Sent an SMS text to bank rep or inquiry address*
 

Spoke with advisor or service rep using video conferencing*
 13% 

12% 

15% 

16% 

16% 

23% 

21% 

29% 

31% 

31% 

37% 

38% 

36% 

40% 

45% 

63% 

70% 

7% 

9% 

11% 

12% 

12% 

17% 

19% 

25% 

25% 

28% 

31% 

32% 

32% 

35% 

42% 

62% 

70% 

1% 

2% 

6% 

4% 

9% 

9% 

15% 

22% 

15% 

24% 

21% 

31% 

34% 

36% 

47% 

60% 

76% 

3% 

3% 

8% 

4% 

15% 

20% 

10% 

34% 

35% 

39% 

62% 

61% 

79% 

2011 

2012 

2013 

2014 

0% 20% 40% 60% 80% 

Note: * Statistically significant difference 2013-2014 at the 95% level 

Source: Mercator Advisory Group Customer Monitor Survey Series, Banking and Channels, 2011– 2014, Question 10 

 

 

 

 

66 Citi GPS: Global Perspectives & Solutions March 2016 

Branch strategy will vary by region, with the 

US and European markets seeing reduction 

but emerging markets could see branches 

continue to grow 

The Nordic region has already halved the 

number of branches since their peak in 

2008-09 

Branches Halved Already in the Nordics 

We agree with Antony Jenkins’ comment that the number of branches could well 

halve over the next decade – however, while we believe that this will be the case in 

some European markets, it would be overly simplistic to assume a reduction of 

branches globally at the same rate because of regional differences in customer 

digital acceptance and demographic mix. In an emerging market where retail 

banking penetration is low, branches will continue to grow – for example, in India. In 

developed markets, branch numbers will likely shrink. But in certain areas, such as 

wealthy cities such as New York, or rapidly growing suburbs, branch numbers could 

continue to increase. 

The Nordic region remains one of the leading laboratories for change in retail 

banking distribution. The number of branches has already halved in major Nordic 

banks since their peak in 2008-2009 (Figure 91). And this Nordic trend is expected 

to continue. DNB announced on its investor day on November 25, 2015 that they 

will halve the number of retail branches in 2016, driven by the digitization of retail 

banking and shift in customer behavior. Of course the Nordic banks are ahead of 

other developed countries in branch reduction but interestingly for them efficiency 

begets further efficiency gains. 

© 2016 Citigroup 
 

Figure 91. Nordic and Benelux Banks Number of Branch Reduction from Peak (3Q15) 

10% 

0% 

-10% 

-20% 

-30% 

-40% 

-50% 

-60% 

-70% 

Source: Company Reports and Citi Research; ABN based on reduction since 2009 to 1H15. 

SHB DNB Nordea Swed ABN SEB Danske 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 92. Commercial Bank Branches Per 100k Adults By Country and Region 

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Chg 14

vs 04 

Euro area 33.6 31.9 33.9 37.3 36.6 35.4 34.2 35.5 32.0 29.6 28.0 -17% 

United States 32.5 33.1 33.7 34.6 35.0 35.7 35.3 35.0 34.8 33.6 32.4 0% 

East Asia & Pacific 13.9 12.5 11.4 10.7 10.4 10.6 10.5 10.0 9.7 9.9 10.8 -22% 

LatAM & Caribbean 12.5 12.6 13.2 13.3 14.4 13.7 14.2 14.2 15.1 15.0 15.7 26% 

Nordics 25.0 25.1 25.8 26.0 25.5 23.7 22.5 21.6 19.9 18.2 17.4 -30% 

Netherlands 33.7 28.1 27.7 28.6 27.6 25.2 23.0 21.3 19.7 17.4 14.8 -56% 

Denmark 50.1 50.2 50.5 51.8 50.4 45.8 40.9 38.7 34.1 30.1 27.9 -44% 

Ireland 35.9 34.6 33.9 33.1 33.7 34.4 28.2 27.2 24.6 22.9 21.4 -40% 

Qatar 23.6 21.9 20.3 19.3 19.0 18.6 18.4 13.3 13.2 12.5 14.4 -39% 

Norway 13.1 12.1 12.0 12.3 11.6 10.9 11.0 10.7 9.9 9.0 8.6 -35% 

United Arab Emirates 17.3 15.0 14.0 13.1 12.9 12.2 11.9 11.8 11.9 12.4 11.9 -32% 

Spain 97.7 99.5 102.0 104.4 104.0 99.3 96.1 88.5 84.1 74.0 70.2 -28% 

Malaysia 13.9 12.5 11.6 11.4 11.2 11.1 10.9 11.2 11.1 10.9 10.9 -22% 

Portugal 66.6 68.3 70.8 61.5 64.2 65.8 66.0 64.1 61.3 58.3 53.6 -19% 

Greece 33.6 34.7 37.5 39.5 41.9 41.7 40.9 39.4 37.4 32.3 28.0 -17% 

United Kingdom 29.0 28.3 26.4 26.4 26.0 25.4 24.7 24.1 22.1 25.2 25.2 -13% 

Sweden 23.6 23.6 23.7 23.6 24.0 23.0 22.5 21.7 21.8 21.6 21.1 -10% 

Finland 13.2 14.4 16.9 16.1 16.1 15.0 15.5 15.1 13.6 12.2 12.1 -8% 

Italy 64.1 64.8 66.3 67.8 71.6 68.8 67.8 67.5 65.9 62.7 59.6 -7% 

Australia 30.7 30.6 31.2 31.7 31.5 31.2 30.7 30.3 30.9 30.2 29.2 -5% 

Israel 19.8 19.6 19.4 19.4 19.8 19.6 19.4 20.1 20.1 19.6 19.1 -2% 

Canada - - 24.6 24.7 24.6 24.2 24.1 24.2 24.3 24.2 24.0 -2% 

Japan 34.6 34.4 34.1 33.9 33.8 33.8 33.8 33.9 33.9 33.9 33.9 -2% 

Argentina 13.5 13.2 13.2 13.2 13.1 13.0 13.0 13.2 13.3 13.3 13.3 -1% 

Philippines 8.3 8.0 7.9 7.6 7.7 7.6 7.7 7.9 8.1 8.4 8.8 7% 

Brazil - - - 40.9 43.1 43.9 44.0 45.4 46.5 47.0 47.3 16% 

Saudi Arabia 7.9 7.6 7.7 7.9 8.0 8.4 8.5 8.6 8.6 8.8 9.2 16% 

Nigeria 4.7 4.1 3.7 5.2 6.2 6.4 6.5 6.4 5.8 5.9 5.6 19% 

Egypt, Arab Rep. 3.9 3.9 4.1 4.4 4.6 4.8 4.8 4.8 4.8 4.8 4.8 23% 

Poland 26.6 26.5 27.6 29.6 32.7 32.8 32.1 32.5 33.9 33.0 33.0 24% 

Kuwait 12.7 13.5 14.4 15.3 15.5 16.0 16.1 16.6 15.7 16.7 16.9 33% 

Chile 12.5 13.1 13.8 14.9 15.3 16.9 17.3 17.2 17.1 17.0 16.8 34% 

Russian Federation 26.7 28.4 30.4 33.7 35.6 34.7 35.2 36.8 38.3 38.5 37.0 39% 

Mexico 10.6 10.7 11.1 12.2 13.1 13.7 14.2 14.2 15.1 15.0 14.9 40% 

India 9.0 9.0 9.0 9.1 9.4 9.7 10.1 10.6 11.3 12.0 13.0 44% 

Turkey - 13.0 14.1 15.3 17.1 17.3 17.9 18.3 18.7 19.8 19.8 53% 

Thailand 7.8 8.4 9.2 9.8 10.4 10.9 11.2 11.5 11.8 12.2 12.7 62% 

France 21.6 22.0 45.9 44.9 44.5 41.9 41.5 41.3 38.9 38.6 38.0 76% 

Kenya 2.7 2.6 2.7 3.5 4.1 4.4 4.7 5.0 5.3 5.4 5.8 115% 

China - - - - - - - - 7.7 7.8 8.1 -

Source: WorldBank; Citi Research 

 

March 2016 Citi GPS: Global Perspectives & Solutions 67 

© 2016 Citigroup 
 

 

 

 

 

Figure 93. Commercial Bank Branches Per 100k Adults By Region 

40 

35

 30

 25

-33% 

20

-45% 

15

 10 -50% 

5

 ­

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2018 2020 ... 2025 

Euro area United States 

East Asia & Pacific (all income levels) 

Forecasts 

Latin America & Caribbean (all income levels) 

 

 

 

 

 

68 Citi GPS: Global Perspectives & Solutions March 2016 

We expect the gap in branch density to 

narrow between developed and emerging 

markets as developed markets close 

branches and emerging markets maintain or 

open branches 

Digitization to Drive Cost Efficiency 

Over the next decade, we expect the gap in branch density between developed 

markets and emerging markets to narrow as developed market banks close 

branches and emerging market banks maintain or open more branches. We believe 

the consumer banks in the US and Europe are at a tipping point in terms of branch 

distribution. Northern Europe has already done a lot. Nordic and Dutch banks have 

cut total branch levels by ~50% from recent peak levels. We believe that from 2013 

levels (last reported branch/population penetration data from the World Bank), 

developed market banks could cut branch numbers by another 30-50%. DNB, 

already operating in the developed market with the lowest branch 

penetration/population ratio, announced in late 2015 that they will further halve their 

branch network in 2016. 

The US banks have up to now lagged their Nordic and European peers on branch 

reductions. But with the increased ubiquity of the mobile Internet, increasing 

FinTech competition and a sluggish revenue and profitability environment, we 

expect US banks to follow their European peers on cutting branches. The US banks 

on average appear to be about 5 years behind European banks who are in turn 

about a decade behind the Nordic banks. 

Nordics 

If banking systems in the US, Europe and 

Japan operated at the same operating levels 

as the Nordic region it would remove $175 

billion from their 21016 cost base and add 

39% to 2016 pre-tax profit 

Source: WorldBank, Citi Research 

Nordic banks are ahead of other regions in branch reduction and cost efficiency 

driven by digitalization. The average cost-to-income ratio of Nordic banks is around 

45% and the best in class Nordic banks such as DNB and Swedbank’s cost to 

income ratio is close to 40% and improving. 

If the cost-to-income ratio of global banks under Citi Research's coverage reaches 

the level of Nordic banks (assuming constant income), that will result in about a 

10% reduction in the cost base. The developed market banks in Japan, the US, and 

Europe have the most upside from cost reduction. If the banking system in Europe, 

Japan, and the US operated with the same cost/income ratio as the Nordic region it 

would remove $175 billion from their cost base (or 23% of 2016 costs) and add 39% 

© 2016 Citigroup 
 

 

 

 

Figure 94. Developed Market Banks: Lower Branch Density, Better Cost Efficiency 

65% 

60% 

55% 

50% 

45% 

40% 

Number of Branches for Every 100k Adults 

Source: Company reports, Citi Research; Spain is an outlier as it has a lot of small branches Cost/Income 2015 

US 

Nordic 

Benelux 

UK 

Australia 

Spain 

Italy 

0 10 20 30 40 50 60 70 80 

Figure 95. Global Banks Cost to Income Ratio 2016E 

Japan US Europe Global LatAM Asia ex Nordics China 

Japan/China 

0% 

10% 

20% 

30% 

40% 

50% 

60% 

70% 

Source: Citi Research Estimates 

 

Europe has done a better job of lowering In a world of low growth, low rates, and low profitability, cutting costs is an obvious 

their branch density vs. the US response. European and US banks had similar branch density pre-global financial 

crisis but the number of branches in the Euro Area is down 20% from the peak level 

 

March 2016 Citi GPS: Global Perspectives & Solutions 69 

to the 2016 pre-tax profit of the banks. Of course, this is a hypothetical simplification 

but illustrates the upside from better use of technology, efficient operations and an 

oligopoly market structure that the Nordic banks benefit from. 

© 2016 Citigroup 
 

 

Figure 96. Global Banks’ ROE by Region (2009 vs 2015) 

0% 

5% 

10% 

15% 

20% 

2009 2015

LatAm Asia x Canada Australia CEE US Western 

JP Europe 

Source: Citi Research Estimates 

Figure 97. Number of Branches Per 100k Adults in DM (2014) 

80.0 

70.0

 60.0

 50.0

 40.0

 30.0

 20.0

 10.0

 ­

Figure 98. Branch Reduction Potential to Reach Nordic Density (2014) 

-80% 

-60% 

-40% 

-20% 

0% 

20% 

40% 

Netherlands 

Nordics 

Canada 

United Kingdom 

Euro area 

Australia 

United States 

Japan 

France 

Italy 

Spain 

Netherlands

Nordics

Canada

United Kingdom

Euro area

Australia

United States

Japan

France

Italy

Spain 

Source: World Bank; Citi Research Source: World Bank; Citi Research 

 

70 Citi GPS: Global Perspectives & Solutions March 2016 

in 2007, while branch density in US is largely flat during the same period. This could 

be due to European banks’ greater cost cutting efforts to improve lower profitability. 

European banks’ 2015 return on equity (RoE) of 7% is at the bottom of the pack 

among global peers. More sticky US branch numbers could also reflect 

demographic and economic variety – branches are being opened in the faster 

growing parts of the US. 

As more customer shift to digital only, we 

expect banks to gradually reduce their 

branch footprint 

As more and more customers move to a digital only channel, we expect banks to 

gradually reduce their branch footprint. Of the developed banking markets, the 

Dutch and Nordics have the lowest branch density. The Spanish, Italian, and French 

banks have much higher branch density. The shift in customer behavior in these 

markets could result in significant cost take out opportunities. The Spanish and 

Italian banks need to cut 70% of the current branch network to reach the same 

density as the Nordic banks. Banks in France and the US would have to halve their 

branch numbers to reach Nordic density levels. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

Figure 99. Moscow, Avia Park Figure 100. New York, Fifth Avenue 

Source: Citi Source: Citi 

 

March 2016 Citi GPS: Global Perspectives & Solutions 71 

Branch of the Future: 

Q+A with Jonathan Larsen 

Jonathan Larsen runs Citi’s Global Retail and Mortgage business, including the US, 

which spans 19 countries. Previously, he was the Global Head of Retail Banking 

and Head of Consumer Banking in Asia Pacific. 

I can't remember the last time I visited a branch. Why is the branch an 

important part of banks' distribution channel when most client interactions 

can be performed online? 

Fifteen years ago, there were confident predictions that the bank branch will 

disappear altogether. That didn’t happen. Instead, we see a consolidation of 

existing branch networks. Today, with the ever increasing adoption of mobile 

banking, we have incremental additional channels rather than the replacement of 

the branch channel. People are living their lives on mobile today. Mobile banking is 

the fastest growing channel in retail banking. 

However, as of today, mobile banking penetration remains low. Less than 50% of 

developed market customers are using mobile. Even in the US, the mobile 

penetration is less than half. But the growth is phenomenal. 

Banks have been slow in creating the user experiences to completely eradicate the 

branch channel. There are functions that as of today can’t be done through mobile 

channels. Things like password reset, high value payments, change of address, and 

so on. 

Lastly, the concept of physical presence still has resonance among mass market 

consumers today. Many customers still value the consultative experience when 

getting a mortgage product or receiving investment advice. The human interaction 

component won’t go away. The branches may not look like what we see today. 

Instead, there will be premises and hubs where customers can meet advisors. 

That’s why we still have branches around as of today. 

What does the Branch of the Future look like? 

The future of the branches is about advisory and consultation rather than 

transactions. Many banks have done a good job in automating transactions in 

branches. Here are some photos of Citi’s new generation of branches. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

72 Citi GPS: Global Perspectives & Solutions March 2016 

My take is that, first of all, banks need to rethink their distribution channel strategies. 

The concept of retail bank profitability equals outlet profitability is no longer valid. A 

branch is only one of the distribution channels. It’s playing an important but 

diminishing role. 

Secondly, segmentation of customers is extremely important. Mass market 

customers generally have lower profitability relative to affluent and emerging 

affluent customer segments and are more efficiently served through channels such 

as digital and mobile. Moreover, clients’ profitability increases as they increase the 

number of products held with the institution. There should be increased focus on 

client depth. 

Lastly, clients over time will move almost entirely to mobile channels. Banks will look 

like Uber. 

It is a very interesting comparison of Banks to Uber. What are the similarities? 

Do you mean banks won’t have a balance sheet going forward? 

Uber has nothing to do with cars. It created an entirely new user experience. It 

tracks all your transaction histories, expenses, drivers’ ratings and so on. It created 

needs you never had. What it means to banks is first and foremost the centrality of 

mobile as the main channel of interaction between customers and the bank. More 

importantly, there is a diminishing return on physical assets – especially the branch 

network. I won’t say that banks won’t have a balance sheet in the future, but the 

way customers interface with the bank will be revamped. 

As the branch footfall declines, it's only natural to see a reduction in number 

of branches. But the US banks seems to be behind European peers when it 

comes to branch reduction. Why is that? Could we expect an acceleration in 

US branch closures? 

It’s right that some US banks are very slow when it comes to closing branches. The 

number of branches is often associated with deposit market share. Some banks 

have been very aggressive in building branch networks until as recently as one year 

ago. Over the past one year, US banks have started to cut back, as they have 

realized that interest rates are unlikely to increase any time soon. Banks need to be 

more efficient to sustain and grow profitability. Even if rates do increase, banks will 

be on a more efficient model than today. In my view, some banks in the US will 

more than halve their branches over the next 5 years. For that to happen, banks 

need to have a high conviction of delivering a new mobile/digital driven user 

experience. 

How much of the cost base of a typical retail bank comes from the branch 

network? What is the percentage of staff cost and non-staff cost tied up with 

physical distribution in a retail bank? 

Branch and associated staff costs make up 60-65% of a total cost base for a bank 

with an extensive branch distribution network. The inefficient processes associated 

with manual processing add to the cost of running a physical network. It is more 

error prone and there is a long process of human decisions involved. 

In a typical developed world retail bank what percentage of staff today work in 

client vs non-client facing functions? How much can the latter be automated? 

Roughly 60-70% of retail banking employees are doing manual processing-driven 

jobs. If all the current manual processing can be replaced by automation, these jobs 

can disappear or evolve. Headcount reduction can happen quite fast for digital 

© 2016 Citigroup 
 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 73 

leaders and might never happen for some banks. It’s all about transactional 

efficiency. Those that can deliver transactions quickly and efficiently are set to win. 

What is the future of the FinTech companies in your view? 

There are three main categories of FinTech challengers out there. The first are the 

robo-advisors (.e.g.: Betterment) targeting the wealth space. At the moment, the 

new startups are finding it hard to find customers. It’s not easy to build a brand, 

trust, relationship and the advisory capabilities. 

The second category is the lenders, which have a good business model. The main 

limitation is funding capacity, even with institutional money participation. These firms 

need banks to extend balance sheet. Hence, we see increasing collaboration 

between banks and P2P or Marketplace lenders. 

Lastly, we see really interesting developments in the payment space. In developed 

markets, FinTech in the payment space is focused around e-commerce. It’s a small 

part of banks' profit pool. To banks, it’s an opportunity lost rather than loss to 

existing profit pool. 

© 2016 Citigroup 
 

Figure 101. Branches are Increasing in A Large Part of Asia 

Source: Citi Research 

 

 

 

 

 

 

74 Citi GPS: Global Perspectives & Solutions March 2016 

In South and South East Asia, More Branches 

Branch density is increasing in developing In contrast to developed countries such as the Netherlands, Denmark, and Norway 

countries due to the need for financial where branch density is down 40-50% over the last decade, branch density is 

inclusion and uneven smartphone increasing in many developing countries due to the need for higher financial 

penetration inclusion and uneven smartphone/technology penetration. 

The main branch growth is expected to 

come from Asia over the next decade 

The wide adoption of mobile money doesn't 

preclude the opening of more bank 

branches 

We expect the main branch growth over the next decade to come from Asia, as a 

result of the high level of unbanked population. Asia is estimated to have ~850 

million unbanked population (35% of adults), mainly in India, China, and Indonesia. 

The number of branches in India, Indonesia, and Philippines are likely to grow 5­

15% compound annual growth from current levels in the medium term. In developed 

Asian markets such as Korea and Japan, there will likely be a decline in the total 

number of branches, a trend similar to other developed markets in Europe and the 

Americas. 

Admittedly, technologies such as mobile money dramatically help to improve 

banking accessibility. However, we note that the wide adoption of mobile money 

doesn’t preclude the opening of more branches. For example, the branch density in 

Kenya has doubled over the past decade, albeit from a low level, despite being a 

global pioneer in mobile money (M-PESA). On balance, we still expect more 

branches opening in developing markets albeit at a gradual pace. 

© 2016 Citigroup 
 

765 

660 

133 118 

60 58 44 33 25 20 15 12 7 3 3 

IN CN ID US VN PH JP TH UK KR MY TW AU HK SG 

200 

150 

100 

50 

0 

Figure 102. Asia — Est. Adult Population (Millions): No Bank Accounts	 Figure 103. Asia — Estimated Adult Population (Millions): No Formal 

Savings 

in in mn 450 422 900 

400 800 

350 700 

300 600 

236 250 500 

400 

116 300 

200 49 49 

17	 12 100 4.4 3.7 2.4 1.7 0.3 0.2 0.2 0.2 

0 

IN CN ID PH VN US TH MY JP KR TW UK HK AU SG 

Source: World Bank Global Findex Database 2014, Citi Research estimates Source: World Bank Global Findex Database 2014, Citi Research estimates 

 

 

- 

Figure 104. Indian Banks – Branch Opening Plans 

Bank name 

Existing branches

(end 2015) Plans Comments 

Axis Bank 2,743 Opened 154 branches in 1HFY16, will Believe have under-invested in branches, 

open 250-300 branches in FY16. Will will increase branch expansion in FY16. 

continue growing branches at 10-12% Operate with much smaller branches now 

(3 people instead of 8) 

ICICI Bank 4,054 Will do 300-400 branches every year for

the next couple of years i.e. ~10% growth 

per year. Opened only 4 branches in 1H16 

HDFC Bank 4,227 Opened 213 branches in 1H16 300-400 branches per year. Had done 600 

branches in FY15 

Kotak Mahindra Bank 1,298 Target 1400 branches by CY17 Recently acquired ING-Vysya Bank, so 

limited need for branches 

Indusind Bank 905 Target is to get to 1200 branches by FY17 

Yes Bank 700 Targeting 15-20% branch growth. Target 

100-150 branches in FY16. Already done 

70 so far in 1H16 

Source: Company Reports and Citi Research Estimates 

 

March 2016	 Citi GPS: Global Perspectives & Solutions 75 

India has the highest unbanked population 

in Asia and Indian banks are expected to 

expand branches at around 10-15% per 

year 

India has the highest total unbanked population in Asia of around 400 million (2014). 

Low branch density is a key factor that hinders banking penetration. There are 

about 120 branches for every one million people in India. As Prime Minister Modi 

makes financial inclusion his top commitment, banks are opening more branches 

with at least 25% of the newly opened branches located in unbanked rural regions. 

The Indian banks will in coming years continue to expand branches at around 10­

15% per year (Figure 104). The number of unbanked population in India almost 

halved to 233 million in 2015. 

© 2016 Citigroup 
 

 

 

 

 

Figure 106. Philippines – Banks Are Opening More Branches 

1200
 

1000
 

800
 

600
 

400
 

200
 

0
 

2005 2007 2009 2011 2013 2015F
 

CHIB
 BPI MBT BDO Total (RHS) 

Source: Company Reports and Citi Research Estimate; Total is a sum of the large four banks in Philippines 

4000
 

3500
 

3000
 

2500
 

2000
 

1500
 

1000
 

500
 

0
 

Figure 105. Number of Branches in Indonesia 

(in 000) 

25
 

20
 

15
 

10
 

5
 

0 

Source: Company Reports, Citi Research 

23% 

2012 2013 2014 2015
 

 

76 Citi GPS: Global Perspectives & Solutions March 2016 

In Indonesia, a “branchless banking” program was launched in March 2015 to reach 

out to the unbanked. The aim is financial inclusion as currently only an estimated 

20% of population has access to banking. New regulations allow the appointment of 

third-party agents (for the banks) equipped with new technology to spread banking 

services. The local telcos with their large network and some other FinTech 

companies (Payment Gateways) are also offering limited financial services 

(transfers/remittances). But the incumbent banks in Indonesia are also expanding in 

the traditional way: since 2012, the number of branches in Indonesia grew by ~20%. 

The Philippines has one of the lowest banking penetration in Asia, with over 70% of 

adults (aged 15+ years) unbanked. Central bank survey data suggests that outside 

Metro Manila, the unbanked is 80%+. BPI Globe BanKO Inc. is the first mobilebased, microfinance-focused savings bank in the Philippines. BanKO has a network 

of over 4,000 partner outlets equipped with information and communication 

technologies from BPI and Globe, and also taps on Globe’s “GCash” mobile money 

(1.9m active users, 15,000 partner outlets). This enables BanKO to provide cashin/cash-out transactions for its customers and conduct customer identification (KYC) 

for savings or loan applications. 

The banks in Philippines are expanding their branch network with increased focus in 

Metro Manila to generate more current account & savings account (CASA) deposits 

as well as to tap the SME and retail market. Numbers of branches of the largest four 

banks are up c40% in the last decade. We expect the branches to grow at around 

5% CAGR in coming years. 

© 2016 Citigroup 
 

Figure 107. US Top 20 Cities Change in Number of Branches Last 5Ys (2011-2015) 

18% 

16% 

14% 

12% 

10% 

8% 

6% 

4% 

2% 

0% 

Seattle

Denver

San Jose

Dallas

Detroit

Baltimore

Los Angeles

Atlanta

Miami

Minneapolis

Washington

Houston

Phoenix

Top 20 Cities

Portland

Chicago

Philadelphia

San Diego

San Francisco

NY

Boston 

Source: SNL, Citi Research; Top 20 based on 2014 GDP 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 77 

Why Are Branches Blossoming in US Cities? 

Branch openings in top US cities has The other area of branch openings has been large cities in the US. Over the past 

increased between 2% and 17% in the past five years, the number of branches in the top 20 US cities increased between 2% 

5 years and 17% (Figure 107).The fastest growing branch numbers in the US top cities are 

also in locations that are economically dynamic. 

A key function of physical branch presence 

is client acquisition 

Client Acquisition 

A key function of physical branch presence is client acquisition. Many traditional 

banks as well as Internet only banks have digital onboarding, which allows you to 

open an account online. But often, many banks still require a physical visit to the 

branch for identity verification due to regulations such as KYC and AML. A survey 

conducted by Forrester showed that in the United States, two-thirds of the 

consumers open an account in person. Branches remain the most important 

channel for client acquisition. That’s precisely why challenger banks (such as Metro 

Bank in London) are opening up branches to increase market share to reach critical 

mass. 

© 2016 Citigroup 
Figure 108. Two-Thirds of Consumers Opened their Checking Account In Person 

Online (cell Online (tablet) phone) 

3% 3% By mail 

By phone 2% 

5% 

Online 

(desktop/laptop) 

21% 

In person 

66% 

Source: "How US Consumers Research And Buy Checking Accounts", Forrester Research, Inc., November 30, 

2015 

Source: SNL, Citi Research	 Source: Bureau of Economic Analysis; Citi Research 

 

78 Citi GPS: Global Perspectives & Solutions	 March 2016 

Deposit Acquisition 

States with higher GDP output also have Another interesting observation is that, where the money goes, the branches follow. 

higher branch density	 In the United States, the states with higher GDP output also have higher branch 

density. Branches are used to capture both corporate and retail deposits from these 

wealthy states. The benefits of operating branches in these locations such as brand 

recognition and easy of customer access far exceed the costs. 

Figure 109. United States Branch Density By State	 Figure 110. US GDP by State – All Industry Total, 2014 ($millions) 

© 2016 Citigroup 
 

 

Figure 111. Branches Share in Top 20 US Cities are Increasing 

7,000 

6,000 

5,000 

4,000 

3,000 

2,000 

1,000 

-

2002 2003 

Source: SNL, Citi

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 

Top 20 Cities % Total Banches in US (RHS) 

 Research; The 20 cities used is shown in Figure 113 

Figure 112. Top 20 US Cities Contribute to 25% of Total US Deposits 

($bn) 

6.8% 2500 

$bn 

6.4% 

6.6% 

2000 

6.2% 1500 

6.0% 

1000 

5.6% 

5.8% 

500 

5.4% 0 

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 

Total Deposits in Top 20 Cities % Total Deposits in US (RHS) 

Source: SNL, Citi Research; The 20 cities used is shown in Figure 113 

0.3 

0.25 

0.2 

0.15 

0.1 

0.05 

0 

Figure 113. Top 20 US Cities Have Much Higher Deposits Per Branch Than National Average 

389 

103 

-

200 

400 

600 

800 

1,000 

1,200 

1,400 

NY

Minneapolis

Boston

San Francisco

Top 20 Avg

Atlanta

Los Angeles

Detroit

Dallas

Chicago

San Jose

Houston

Washington

Denver

Miami

Seattle

Philadelphia

Phoenix

Baltimore

San Diego

Portland

US Avg 

Source: SNL, Citi Research; Top 20 based on 2014 GDP 

 

March 2016 Citi GPS: Global Perspectives & Solutions 79 

With wealth concentrated in the top cities in 

the US, a strong branch presence in these 

cities allows banks to capture wealth 

In the United States, wealth is concentrated in the top cities. Having a strong branch 

presence in these cities allows banks to capture the wealth. The top 20 cities 

(ranked by 2014 GDP) host a quarter of total deposits in the United States with less 

than 7% of the total branches (Figure 111 - Figure 112). There should be no surprise 

that the number of branches in these cities are up more than 50% from less than 

4000 at the turn of the millennium to 6000 by 2015 and continue to increase. 

The average deposits per branch in the top 20 cities are close to $400 million, 

almost four times the national average. New York City alone is 9% of national 

deposit market share with around $1.3 billion deposits per branch (Figure 113). 

© 2016 Citigroup 
 

 

Figure 114. At the Tipping Point of FTE Reduction (millions) 

4.00 

3.00 

2.00 

1.00 

0.00 

2.93 

3.26 

2.57 

2.89 

1.80 1.82 

US Europe 

Peak 2015 2025 

-40% -45% 

Source: ECB, United States Bureau of Labor Statistics, Citi Research estimates 

 

 

 

 

 

80 Citi GPS: Global Perspectives & Solutions March 2016 

We see another ~30% reduction in staff 

during 2015-2025 with a 3% decline per 

year (up from the current 2% decline), 

resulting in a 40-45% decline from peak 

staffing levels pre-crisis 

People: Automation Tipping Point 

The future of the branch is about advisory and consultation rather than transaction. 

The return on having a physical network is diminishing. Branches and associated 

staff costs make up about 65% of the total retail cost base of a larger bank and a lot 

of these costs can be removed via automation. The pace of staff reduction so far 

has been gradual (~2% per year or ~11-13% from peak levels per-crisis). We 

believe that there could be another ~30% reduction in staff during 2015-2025, 

shifting from the recent 2% per year decline to 3% per year, mainly from retail 

banking automation. From peak staffing levels pre-crisis, this would result in a 40­

45% decline, not far off from Antony Jenkins' forecast. 

For countries that have gone through more severe financial crisis and consolidation 

such as Greece, Ireland, and Denmark, recent full time employee (FTE) reduction 

ranges between 3%-5% per year. Low interest rates and increased automation are 

catalysts for faster full-time employee (FTE) reduction. 

As banks reduce the number of branches, 

the number of transaction-based employees 

will decline 

We are at an inflection point for retail banking driven by automation and 

digitalization. As banks reduce the number of branches, naturally the number of 

transaction based employees such as branch tellers will decline. In the US, the 

number of bank tellers is already down 15% from the peak in 2007. As we noted in 

the Branch of the Future section (see page 71) in a branch heavy retail bank around 

65% of banks’ staff are doing processing work that could be automated in the long 

term. In the coming years, the recent trend of branch teller staff reduction should 

accelerate (e.g. in the US go up from the 2 percentage point reduction per year 

since 2007). 

© 2016 Citigroup 
 

 

Figure 115. US Number of Bank Tellers Declined by 15% From Peak in 2007 

700 

600 

500 

400 

300 

200 

100 

0 

-15% 

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 

Source: Bureau of Labor Statistics; Citi Research 

 

Figure 116. The Share of Customer-Facing FTEs Continues to Rise 

Customer-facing 

FTE’s (%)* 

85 

82 

71 

69 

Q1 

2014 

Q1
 

2012
 

Median
 

2014
 

Median
 

2012
 27 

31 

29 

20 

29 10 14 4 12 2 

41 

22 

24 

8 

7 

7 

13 

13 

13 

2 

1 

6 

5 

2 

20 

20 

12 

3 

2 

1 

0 20 40 60 80 100 

Customer-facing FTEs Non-customer-facing FTEs 

Advisor Service FTEs Branch Sales and product management 

Non-branch-based sales Call center, Internet Operations Operations management 

Source: BCG, Operational Excellence in Retail Banking 2015, Four Trending Practices of the Leading Banks; Q1 = top quartile 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 81

We see a rebalancing of staff from 

transaction-based roles to advisory-based 

roles 

As more transactions are automated and done on a mobile phone, we believe there 

will be a rebalancing of staff from transaction-based roles to advisory-based roles. 

The higher the percentage of customer-facing employees, the higher the retail 

bank’s operating efficiency according to BCG retail banking operational excellence 

benchmarking. The banks in the top quantile have on average 85% of customer 

facing FTEs (including advisor, service, non-branch based sales and call center 

staff) in 2014, relative to the median of 71%. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

Figure 117. The Higher Number of Customers Per FTE, the More Figure 118. The Higher Number of Customers Per FTE, the More 

Profitable A Retail Bank (Measured By Risk Adjusted Income/FTE) Profitable A Retail Bank (Measured By Revenue/FTE) 

450 450 

Risk Adjusted Income/FTE 5Y Avg ($000) 

400 

350 

300 

250 

200 

150 

100 

50 

0 

US 

Nordic 

Benelux 

UK 

Australia 

Spain 

Italy 

150 200 250 300 350 400 450 

Italy Spain 

US 

Nordic 

UK 

Australia 

Benelux 

400 

Revenue/FTE 5Y Avg ($000) 

350 

300 

250 

200 

150 200 250 300 350 400 

Number of Customers Per FTE Number of Customers Per FTE 

Source: Company Reports, SNL, Citi Research; Based on companies under Citi’s Source: Company Reports, SNL, Citi Research; Based on companies under Citi’s 

coverage; Risk adjusted income is calculated as total income minus loan loss coverage 

provisions. 

Figure 119. The Higher Number of Customers Per FTE, the More Figure 120. The Higher Number of Customers Per FTE, the More 

Profitable A Retail Bank (Measured By PBT/FTE) Profitable A Retail Bank (Measured By GOP/FTE) 

250 

US 

Nordic 

Benelux 

UK 

Australia 

Spain Italy 

-

20 

40 

60 

80 

100 

120 

140 

160 

180 

200 

PBT/FTE 5Y Avg ($000) 

Italy 

Spain US 

Nordic 

UK 

Australia 

Benelux 

200 

GOP/FTE 5Y Avg ($000) 

150 

100 

50 

-

150 200 250 300 350 400 450 150 200 250 300 350 400 450 

Number of Customers Per FTE Number of Customers Per FTE 

Source: Company Reports, SNL, Citi Research; Based on companies under Citi’s Source: Company Reports, SNL, Citi Research; Based on companies under Citi’s 

coverage coverage; GOP stands for Gross Operating Income and is calculated as Total Income 

minus Total Expenses. 

450 

 

 

 

 

 

82 Citi GPS: Global Perspectives & Solutions March 2016 

There is a strong positive correlation 

between employee productivity and the 

banks' profitability 

Improving employee productivity is a key determinant of bank profitability. In our 

sample of developed market banks, there is a strong positive correlation between 

employee productivity (measured by number of customers per FTE) and the banks’ 

profitability (measured by Revenue per FTE, gross operating profit per FTE, riskadjusted income per FTE or pre-tax profit per FTE) (Figure 117 - Figure 120). 

Nordic, Australian and Benelux banks are ahead of the Spanish and Italian banks in 

per FTE profitability. We believe the higher unit labor cost in the Nordic and Benelux 

countries forced the banks to adopt a higher level of automation and digitalization – 

a strategy other developing market banks should follow. 

Headcount reduction in the US has been 

stickier than in Europe while in Asia and 

Latin America, headcount is increasing 

Early Stage of Headcount Reduction 

At a system level, cost and the number of employees have proven to be stickier: the 

number of people employed by banks is down 11% in Europe or 13% in US from 

the peak. In the US, most of the FTE reduction happened between 2006 and 2009 

and since then the number of US bank FTEs has been relatively stable. In Europe, 

the number of FTEs peaked in 2008 and since then there has been a gradual and 

slow paced reduction over the past six years. In Asia and Latin America, the number 

© 2016 Citigroup 
 

 

 

 

0 

Figure 121. Number of FTE – European Banks (in '000s) Figure 122. Number of FTE – US Banks (in '000s) 

0 

500 

1,000 

1,500 

2,000 

2,500 

3,000 

3,500 -11% 

0 

500 

1,000 

1,500 

2,000 

2,500 

3,000 

3,500 

-13% 

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014	 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 

Source: ECB, Citi Research; Based on the total FTEs of 28 EU member state	 Source: United States Bureau of Labor Statistics, Citi Research; Total employment by 

Credit intermediation and related activities (NAICS 522) 

Figure 123. Number of FTE – Asia Pacific Banks (in '000s)	 Figure 124. Number of FTE – Latin American Banks (in '000s) 

6,000 1,200 

5,000 1,000 

4,000 800 

3,000 600 

2,000 400 

1,000 200 

0 

2008Y 2009Y 2010Y 2011Y 2012Y 2013Y 2014Y 2009Y 2010Y 2011Y 2012Y 2013Y 2014Y 

Source: SNL; Based on sum of FTEs for the banks covered by SNL financials for Source: Source: SNL; Based on sum of FTEs for the banks covered by SNL financials 

banks headquartered in the region for banks headquartered in the region 

 

 

 

March 2016	 Citi GPS: Global Perspectives & Solutions 83 

of bank employees is still understandably growing as the banking system expands 

together with the economy. 

For markets that didn't go through structural 

shifts in their banking industries, the 

reduction of staff is slower 

At an aggregate level, the annual FTE reduction seems small in developed markets 

(~2% per year), but some European countries are shrinking at a much faster pace. 

These markets have either experienced more severe financial crisis (Greece, 

Ireland, and Spain) or went through consolidation in the banking system (UK, 

Denmark, and Benelux). Since 2008, countries like Denmark, Greece, Ireland or 

Spain have experienced almost 30% headcount reductions (see Figure 125). 

For the markets that didn’t go through such structural shifts, the FTE reduction is 

much slower. The number of bank employees in Germany is down only 8% over the 

past decade while that in France is only down 3% from the peak. There remains a 

considerable opportunity to reduce headcount via increased digitization and use of 

automation. The push factor or catalyst for further headcount cuts could come from 

the need to increase profitability as interest rates and growth stay lower for longer. It 

could also come from competitive pressures from FinTech entrants. 

© 2016 Citigroup 
 

 

 

 

Figure 125. Number of Bank Employees in EU By Country 

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2014 vs 08 2014 vs 05 

Greece (GR) 61,295 62,171 64,720 66,165 65,682 63,408 59,958 57,006 51,242 45,654 -31% -26% 

United Kingdom (GB) 534,437 521,423 503,235 491,262 471,129 455,594 453,971 439,873 421,508 402,561 -18% -25% 

Ireland 37,702 39,154 41,865 40,507 38,178 36,438 35,612 31,773 29,832 28,871 -29% -23% 

Denmark 47,579 46,394 49,644 52,830 50,101 47,739 47,224 44,900 36,367 37,201 -30% -22% 

Netherlands 120,165 116,500 114,424 116,000 110,000 108,000 105,408 103,447 96,423 94,000 -19% -22% 

Spain 252,831 261,890 275,506 276,497 267,383 261,389 245,956 234,292 215,953 201,643 -27% -20% 

Belgium 69,481 67,957 67,080 65,985 63,723 61,861 61,197 60,068 58,237 56,611 -14% -19% 

Italy 335,726 339,091 340,443 338,035 323,407 321,081 316,360 309,478 306,607 299,684 -11% -11% 

Latvia 10,477 11,656 12,826 13,905 12,365 11,534 11,188 10,565 10,029 9,374 -33% -11% 

Slovenia 11,726 11,838 12,051 12,284 12,188 11,995 11,813 11,498 11,218 10,682 -13% -9% 

Germany 705,000 692,500 691,300 685,550 673,500 667,900 663,800 659,100 655,600 647,300 -6% -8% 

Finland 23,644 24,769 25,025 25,699 24,879 23,353 23,188 22,510 22,402 22,019 -14% -7% 

Slovakia 19,773 19,633 19,779 20,598 18,750 18,234 18,452 18,655 18,540 18,656 -9% -6% 

Estonia 5,029 5,681 6,319 6,144 5,693 5,497 5,516 5,563 4,861 4,860 -21% -3% 

Austria 75,303 76,323 77,731 78,754 77,246 78,098 78,085 77,424 75,980 74,110 -6% -2% 

Portugal 54,035 58,213 60,979 62,377 61,593 61,504 59,911 57,348 55,820 53,888 -14% 0% 

Cyprus 10,799 10,845 11,286 12,554 12,513 12,643 12,825 12,853 11,142 10,956 -13% 1% 

Hungary 37,527 39,302 41,905 43,620 42,609 41,526 41,305 41,103 40,642 39,456 -10% 5% 

France 387,118 411,172 424,732 424,536 416,772 412,933 426,336 421,037 416,262 411,012 -3% 6% 

Czech Republic 37,943 37,825 40,037 39,882 38,394 38,359 39,461 40,147 39,742 40,334 1% 6% 

Sweden 37,448 39,132 39,698 40,929 40,193 40,792 40,002 39,284 39,816 40,609 -1% 8% 

Romania 52,452 58,536 66,039 71,622 67,898 66,753 65,772 61,769 58,612 57,732 -19% 10% 

Luxembourg 23,224 24,752 26,139 27,208 26,416 26,255 26,696 26,534 26,237 25,816 -5% 11% 

Poland 158,130 162,125 173,955 188,969 183,064 184,858 186,331 181,991 179,385 175,972 -7% 11% 

Lithuania 7,637 8,624 10,303 11,080 10,902 9,993 8,707 8,671 8,392 8,952 -19% 17% 

Malta 3,383 3,450 3,670 3,872 3,836 3,914 4,026 4,007 4,197 4,427 14% 31% 

Bulgaria 23,636 25,633 30,953 33,258 34,290 34,133 33,897 33,527 32,756 31,715 -5% 34% 

EU 28 (fixed composition) 3,074,907 3,100,357 3,240,403 3,259,308 3,161,767 3,114,791 3,092,779 3,027,325 2,963,284 2,889,320 -11% -6% 

Source: ECB, Sweden Banker’s Association (2005 Sweden FTE pro-forma for SEB IT and Enskilda Securities consolidation with parent); Citi Research 

 

 

 

 

 

84 Citi GPS: Global Perspectives & Solutions March 2016 

Investment banks are also reducing 

headcount 

Investment Bank Headcount Reduction: Talk High 

Of course, another major source of headcount reduction remains the need for banks 

to recover profitability damaged by the aftershocks of the recent financial crisis and 

the new regulatory regime that has been ushered in. Ever since the 2008 financial 

crisis, newspapers have been full of headlines on job cuts by the world's major 

banks. The Financial Times reported that the big banks in the US and Europe 

announced almost 100,000 job cuts in 2015 alone, or about 10% of the total 

workforce (FT, December 2015). This is in addition to the cuts already made since 

2007-08. The latest round of FTE reduction targets came after leadership changes 

of several European banks in 2015, including Standard Chartered, Deutsche Bank, 

Credit Suisse and Barclays. 

© 2016 Citigroup 
 

Figure 126. Major Global Banks FTE Reduction Since 2010 

RBS BoAML HSBC BARC MS CS UBS DB WFC JPM GS 

5% 

0% 

-5% 

-10% 

-15% 

-20% 

-25% 

-30% 

-35% 

-40% 

Source: Company Reports and Citi Research 

Figure 127. FTE Reduction Targets Over Next Few Years 

RBS BARC CS DB HSBC 

0% 

-2% 

-4% 

-6% 

-8% 

-10% 

-12% 

-14% 

-16% 

-18% 

-20% 

Source: Company Reports and Citi Research 

 

 

 

 

 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 85 

Banks also employ a lot of technology 

employees 

IT expenses of global banks was close to 

$200 billion in 2015 

Not Easy to Be a Tech Company 

Goldman Sachs’ CEO Lloyd Blankfein said “we are a tech company”. According to 

Business Insider (April 2015), 9,000 or close to 30% of Goldman’s 33,000 

employees are engineers and programmers, a level similar to Facebook’s total 

employee base and larger than the entire payroll of Twitter or LinkedIn. Goldman is 

not alone in this. Banks’ executives have long realized the importance of technology 

and have invested heavily in IT. More than a decade ago, the Chairman of 

Swedbank, the largest retail bank in Sweden, told analysts that Swedbank was an 

IT company. 

There is no doubt that banks need to invest in IT to become more efficient through 

automation and digitalization, therefore there will be over the long term a reduction 

in staff expenses and an increase in IT expenses. However, in the near term, there 

is often a double running of operating expenses from an increase in new 

development expenses and double running of legacy systems/processes, resulting 

in a near term higher cost level for banks. 

Celent estimates the IT expenses of global banks in 2015 is close to $200 billion 

and is expected to grow by ~5% per year to reach over $215 billion by 2017. IT is a 

large portion of banks’ total expenses, accounting for 10-15% of a bank’s total 

expenses and increasing. The high level of IT investments in the sector creates 

entry barriers for new entrants. The annual IT expenses of the financial industry is 

almost 10x the total capital deployed into FinTech industry in 2015. 

© 2016 Citigroup 
Figure 128. Estimated Bank IT Expenses 2015 (in $bn) Figure 129. IT Expenses of Global Banks (in Billion) 

$56.9 $59.5 $62.2 $64.8 $67.5 

$60.3 $62.1 $64.3 $67.1 $70.1 

$62.8 $66.5 $70.3 $74.1 $77.9 

2013 2014 2015 2016E 2017E 

North America Europe Asia-Pacific 

Asia-Pacific 

$70.3 

36% 

Source: Celent 

North America 

$62.2 

31% 

Europe 

$64.3 

33% 

$250 

$200 

$150 

$100 

$50 

$0 

Source: Celent 

 

Figure 130. Global Banks Spend More on Maintenance than New Investments 

$180 

$160 

$140 

$120 

$100 

$80 

$60 

$40 

$20 

$0 

$17.2 

Maintenance New Investment Maintenance New Investment 

2015 2015 2017 2017 

North America Europe Asia-Pacific 

Source: Celent 

$45.0 $47.6 

$19.9 

$50.0 

$14.3 

$54.8 

$15.3 

$47.0 

$23.3 

$55.8 

$22.1 

 

86 Citi GPS: Global Perspectives & Solutions March 2016 

Over 70% of IT expenses at existing banks 

are maintenance related to support existing 

legacy systems 

The problem for the existing banks is that they are not very good in running large IT 

projects. Over 70% of the IT expenses are maintenance related to support the 

running of existing legacy system. Only around $50 billion invested in 2015 globally 

was for new developments — that’s only 2.5x the level of total FinTech investments 

in the same year. The FinTech companies are much more agile in developing new 

products based on new technology plus FinTech companies also do not have the 

concerns of integrating with legacy systems. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 131. Bank IT Systems in 1984 at 2014 Replacement Costs, A$m 

Teller Systems 

Middleware and Other Systems 

Integration 

Management Accounting 

General Ledger and Statutory Accounting 

Payments Interbank and RBA 

Retail and Business Transaction 

Management Systems 

Institutional Cash, Trade and Transaction 

Systems 

Business Loans 

Mortgage Loans 

0 100 200 300 400 

Source: Citi Research Estimates ( shaded boxes show 1984 systems generally 

considered as “core banking” 

Figure 132. Bank IT Systems in 2014, Replacement Costs, A$m 

Subsidiary retail banks 

Middleware and other systems integration 

Insititutional Cash, Trade and Transactions Systems 

Retail and business deposits 

Retail and Business Transaction management... Generally would be Business and Mortgage Loans designated "core 

Markets productsystems - all products - trading,... banking" using 

Teller systems 1980s/90s 

Risk Management Systems terminology 

Credit Cards- consumer, fraud, collections, loyalty 

Mortgages - approvals, fulfillment, servicing, high... 

Internet banking - separate for retail , business and... 

Customer analytics across retail business and insto 

ATM/EFTPOS networks
 

Call centre systems
 

Trading platforms
 

Management accounting
 

General Ledger and Statutory accounting
 

Retail Merchant Systems
 

Business Leasing/Floor Plan systems
 

Consumer Loans and Collection
 Total replacement 

Mobile banking - trade costs 

Mobile banking - merchant acquiring ~ $5,500 m 
 

Mobile banking - consumer
 

Capital Management
 

Payments interbank and RBA
 

Human Resources Management
 

Sales Management
 

Retail customer management systems
 

0 200 400 600 800 1000 1200 1400 

Source: Citi Research 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 87 

Legacy IT System Costs: Australian Banks Study 

Australian banks, some of which are perceived to be leaders in the use of IT, give 

us some insight on the age and cost of replacing these legacy systems. This topic 

has been well analyzed by our Australian bank analyst colleagues, led by Craig 

Williams. 

Many of the very oldest legacy IT systems in Australian banks date from the 1970s 

and 1980s – the era of the first round of digital transformation. In 1984 the main 

systems digitization was centered around teller entry of deposit and lending 

transactions, and preparation of customer and general ledgers. We show at Figure 

132 our estimate of the original costs of these systems shown in 2014 dollars. The 

largest and most expensive of these systems, and those which handled by far the 

largest volume of transactions, were the deposit, basic lending and transaction 

systems. These comprised about 60% of the total installed costs of all systems then 

in place. It is these large legacy systems that banks are referring to when they talk 

about “core banking system” replacement. 

By comparison, the total replacement costs of installed software in one of the major 

banks is now likely to be at least A$5 billion, versus the perhaps A$600 million in 

today’s dollars to replace their systems in 1984. Not only are there vastly more 

mission critical systems (Figure 131 - Figure 132), and their individual functionality 

much richer than the 1980s models, but the costs of integrating these many more 

systems into a stable “ecosystem” have increased exponentially. We estimate that 

the replacement costs of the original legacy critical systems is now only 20% to 25% 

of the total replacement costs of all systems now installed. 

When Commonwealth Bank of Australia (CBA) announced the replacement of its 

core IT system in 2008, it was estimated that the cost of the replacement was 

A$580 million over 4 years. The key driver was replacing a 40-year old system that 

ran on a language which very few people in the industry was familiar with and 

therefore could operate. By adopting a new system, CBA has generated some 

competitive advantages including real time processing, superior customer 

experience, reductions in branch staff errors, and speed to market with new 

products. There have been some areas that haven’t been as successful. The 

© 2016 Citigroup 
 

 

 

 

 

 

Figure 133. Capitalized Software Balances at the Major Banks, A$m	 Figure 134. Amount Capitalized Less Amount Amortized per Year as % 

of Operating Expense 

3,500 

3,000 

2,500 

2,000 

1,500 

1,000 

500 

0 FY03 FY05 FY07 FY09 FY11 FY13 2H14E FY15E FY03 FY05 FY07 FY09 FY11 FY13 2H14E FY15E 

ANZ 

CBA 

NAB 

WBC 

0% 

1% 

2% 

3% 

4% 

5% 

6% 

7% 

8% 

9% 

10% ANZ 

CBA 

NAB 

WBC 

Source: Company Reports, Citi Research	 Source: Company Reports 

 

88 Citi GPS: Global Perspectives & Solutions	 March 2016 

mortgage loan book has not been migrated over to the new system due to cost and 

complexity. Australian mortgages are a customized product that wouldn’t naturally fit 

a vanilla global banking platform. 

National Australia Bank (NAB) attempted a similar core IT system replacement with 

Oracle, rather than SAP. This project has been hampered by serious issues with 

both the vendor system and the NAB IT infrastructure supporting the system. NAB 

ended up delaying the migration of existing customer files to the new system due to 

cost and complexity. New customers are entered into the new Oracle system, while 

existing customer remain on the existing 40-year old system. The costs of this IT 

project are also expected to be multiples of the original estimate and the timeframe 

has moved from a 5 year project to a 15 year project. 

There are valuable lessons to learn from the forerunner Australian banks: 

 Check the proven ability of the purchased system. NAB was the first customer 

globally to purchase Oracle’s Banking Platform and it suffered considerable 

teething problems. 

 The complexity and strength of the underlying IT infrastructure. This is important 

for the cost of getting the information into the new system from both a migration 

perspective as well as an on-going business usage perspective. 

IT Expense Capitalization – Below the Cost Line 

The actual IT expenses of these projects could also be higher than the company 

reports due to capitalization. At Australia and New Zealand Bank (ANZ), National 

Australia Bank (NAB), and Westpac Banking (WBC) the amount of software being 

capitalized (net of software amortization expenses) has been running at around 8% 

of operating expenses in the last few years (Figure 133 - Figure 134). By contrast at 

CBA the amount peaked at 6% with the completion of the SAP banking project and 

has since fallen back to 5%. The ongoing high levels of software capitalization at all 

of the Australian banks vs historical levels reflects the complexity and number of IT 

systems now installed. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 135. Blockchain Positives and Negatives 

Source: Citi Research 

Positives (+) Negatives (-) 

• Decentralization: Direct transfer of digital 

assets based on a distributed ledger. Allows 

counterparties to transact without the need of 

(multiple) intermediaries. 

• Programmability: Enables pre-programmed 

contracts to be executed once agreed 

conditions are met (e.g. smart contracts in 

insurance/hedging) 

• Immutability: Maintain an audit trail. that 

tracks the ownership of the asset from 

origination (e.g. property rights). 

• Cost/Capital Efficiency: Could be a catalyst 

to drive a transformation in existing 

processes that would ultimately result in 

lower cost and higher capital efficiency from 

new business models. 

• Lack of Scale: High marginal cost 

relatively to existing systems (e.g. Visa or 

SWIFT) because of a lack of scale and 

network effects at the moment. 

• Bleeding Edge: The technology is not 

mature relative to the current financial 

infrastructure. Robustness for large 

volume transactions is yet to be 

developed. 

• Inherently More Costly: A distributed 

ledger system is more costly to operate 

than a centralized system (higher 

computation power required). 

• Consensus: Without an intermediary, a 

super majority is required to reach 

consensus. The design of the consensus 

mechanism affects transaction speed 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 89 

A lot of innovation has been focused on the 

"last mile"... 

Blockchain: The Next Big Thing? 

Looking to the long term, the new generation of technology could generate cost 

savings as well as extra investment spend. So far a lot of payments innovation has 

been focused on the “last mile”, i.e., the user experience at the point of sale. The 

existing payment infrastructure remains the backbone. But Blockchain technology 

could be different. It could replace the current payment rail of centralised clearing 

with a distributed ledger for many aspects of financial services, especially in the 

B2B world. 

Blockchain positives are based around its characteristics, including decentralization, 

programmability, and immutability. It could also be a catalyst for the transformation 

of many existing legacy systems that operate with a high degree of robustness but 

may not be the most cost or capital efficient way of doing business. However, there 

are also considerable negatives associated with the technology, not least that it is 

currently still "bleeding edge" and lacks the robustness of existing payment systems 

such as Visa or SWIFT. But even if Blockchain does not end up replacing the core 

current financial infrastructure, it may be a catalyst to rethink and re-engineer legacy 

systems that could work more efficiently. 

.... and blockchain technology in the longer 

term 

What Is Blockchain? 

Blockchain is a distributed ledger database that uses a cryptographic network to 

provide a single source of truth. Blockchain allows untrusting parties with common 

interests to co-create a permanent, unchangeable, and transparent record of 

exchange and processing without relying on a central authority. In contrast to 

traditional payment model where a central clearing is required to transfer money 

between the sender and the recipient, Blockchain relies on a distributed ledger and 

consensus of the network of processors, i.e. a super majority is required by the 

servers for a transfer to take place. 

© 2016 Citigroup 
Figure 136. Blockchain’s Distributed Ledger Model has Potential to Take Steps, Time and Cost out of Financial Flows 

Financial Intermediaries (Today) Financial Protocol (Emerging) 

Requires trusted, centralized intermediaries No (or fewer) intermediaries required 

Batch clearing and settlement Near real-time processing and management 

Higher fees and costly infrastructure Lower fees and reduced infrastructure cost 

Source: Citi Research 

 

 

 

 

 

 

 

 

 

 

 

Figure 137. Attractions of Blockchain Offering 

Disintermediation Speed & Efficiency Automation Certainty 

Enables direct ownership 

and transfer of digital 

assets without need for an 

intermediary 

Source: Citi 

Faster settlement on a 

relatively cost effective and 

efficient network 

Programmability enables 

automation of capabilities 

on the ledger (e.g. smart 

contracts) 

Provides irrefutable proof of 

existence, proof of process 

and proof of provenance 

 

90 Citi GPS: Global Perspectives & Solutions March 2016 

Blockchain disintermediates the middle man 

Advantages of Blockchain 

If the Internet is a disruptive platform designed to facilitate the dissemination of 

information, then Blockchain technology is a disruptive platform designed to 

facilitate the exchange of value. Blockchain has a few clear advantages relative to 

the current system. First of all, it disintermediates the middle man. It enables direct 

transfer of digital assets without the need for an intermediary. Moreover, since no 

middle man is required, a Blockchain system has the likely benefit of fast and low 

cost settlement. Blockchain. Another promising innovation that leverages the 

Blockchain is smart contracts and tokenization. Smart contracts automate and 

execute pre-agreed conditions once they are met. And lastly, Blockchain provides 

irrefutable proof of existence, an important feature to maintain an audit trail that 

tracks the ownership of the valuable asset being transferred – this is crucial from a 

business and a regulatory perspective. 

© 2016 Citigroup 
 

 

 

 

Figure 138. Blockchain Is Bigger than Bitcoin 

Source: Citi Research 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 91 

Blockchain Use Cases 

Blockchain technology could be applied more broadly than crypto-currencies. In the 

currency space, the Bitcoin rail could be used to facilitate cross border payments or 

supply chain and trade finance. Because virtually any type of information can be 

digitized and placed onto Blockchain, theoretically any information of value could be 

transferred in the Blockchain world. The programmability of Blockchain makes it 

suitable for smart contracts: a contract that executes once pre-agreed conditions 

are met. Blockchain could also be used for data management such as identity 

management. Determining the optimal Blockchain use case is often the most 

challenging part of Blockchain adoption, especially as an ecosystem needs to be 

developed for the adoption of the new system. The technology is not industrial 

grade yet in the view of many in the banking industry. 

In the financial world, Blockchain can be used in a wide range of applications 

including payments and trade as seen in Figure 139, even though for many of these 

use cases, it could take decades to reach industrial scale. 

Cross border payments and remittances can be very successfully adopted in the 

near to medium term. Bitcoin is only one crypto-currency. Other well-known ones 

include Ripple and Ethereum. These Blockchain rails can also be used for foreign 

exchange and cross boarder payments. 

Blockchain for markets and securities could take a long time to reach industrial 

scale. There is no common protocol that participants agree on. Even when a 

common protocol is established, investment and time will be required to build the 

Blockchain network to industrial scale. The power of Blockchain comes from wide 

adoption, hence banks have formed consortiums to collectively research and 

develop use cases in the financial industry. 

© 2016 Citigroup 
Figure 139. Blockchain Financial Use Cases 

Source: Citi Research 

 

 

 

 

 

 

 

92 Citi GPS: Global Perspectives & Solutions March 2016 

The application of Blockchain in trade could take even longer time than markets and 

securities, not least because the current legacy system works, but also because 

‘trust’ is often required for a trade to occur. The dealing parties could prefer a trusted 

intermediary. Banks will continue to play a key role in this trade process. 

Blockchain Use Cases: Abra Case Study 

The international remittances market could be revolutionized using the BitCoin 

technology. There were $580 billion of cross border C2C remittances sent in 2014 

and that is expected to grow to $700 billion by 2020 according to World Bank. The 

existing cross border payment system is slow (takes a few days to settle), costly, 

and often requires a bank account between the transaction parties. 

Abra was founded in 2014 with the aim to digitalize cash and enable P2P money 

transfer through Abra’s network, which is essentially a Bitcoin network. With Abra, 

one can convert physical money to ‘digital’ money (essentially Bitcoin but pegged to 

the US dollar for three days guaranteed by Abra) and send to other people 

anywhere in the world with the recipients’ phone number. The transaction is secure 

and instant with no transfer fees. The recipient can withdraw ‘physical’ cash through 

Abra Tellers. The Abra tellers then charge a spread for converting the ‘digital cash’ 

($ value) to local currency. 

American Express is a key investor in Abra. Harshul Sanghi, Managing Partner, 

American Express Ventures explains the rationale behind the investment: “As 

people and businesses transact more globally, there’s a need for more convenient 

and affordable ways to move money, and we think the Blockchain could play an 

important role in the evolution of money transfer and commerce, especially in 

emerging markets.”

1 

1 Forbes "American Express Invests in Bitcoin Venture, Abra, Which announces U.S., 

Philippines Launch", October 22, 2015. 

© 2016 Citigroup 
 

Figure 140. How Abra Works

Source: Company Website 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 93 

Blockchain has garnered attention because 

of its potential to replace multiple ledgers 

that exist today into a single distributed 

ledger 

Blockchain Use Cases: Securities Trading and Settlement 

Banks’ current trading systems comprise of a few completely separate systems in 

charge of trading, settlement, and order management. Back office is needed to 

resolve any exceptions, which is complex and inefficient. Consequently, Blockchain 

has garnered attention because of its potential to replace the multiple ledgers that 

exist today with a single distributed ledger that clearly displays ownership of 

securities. While the near/intermediate term impact seems to be more hype than 

substance, we do identify some interesting business use cases to watch. 

 Syndicated loans are one area where we see Blockchain having an impact. We 

also anticipate syndicated loans benefiting from the technology, especially since 

there is mounting regulatory pressure to reduce settlement times. Settlement 

times are long due to certain manual processes related to legal procedures and 

due diligence. While we do not believe that Blockchain can eliminate these 

issues entirely, we do see its potential to reduce the friction and costs associated 

with manual labor and capital held during the settlement period. 

 Commodities trading are another area. Difficult to move assets like gold could 

also benefit. Tokenizing physical assets like gold and placing them on the 

Blockchain may increase liquidity by facilitating and speeding up the settlement 

of these assets. 

 Cash Settlement could benefit significantly from significantly lower costs 

(“cheaper”), real time settlement (“faster”), and potentially freeing up 

liquidity/capital thanks to lower settlement risk (“better”). Cash products could 

include equities, fixed income, and repo. These products are currently cleared 

and settled through a central clearinghouse (also known as a central 

counterparty or CCP). The process is already highly automated with over 90% of 

© 2016 Citigroup 
 

 

 

 

 

94 Citi GPS: Global Perspectives & Solutions March 2016 

The main benefit of Blockchain is in 

reducing friction in the financial market 

the trades happening on a “straight-through processing”. But the complex system 

means back and middle offices exists to handle “exceptions". 

 Derivatives Trading could enhance liquidity. Shorter settlement times have the 

potential to reduce liquidity risk, as well as the cost of liquidity, which could have 

a positive impact on the size of banks’ balance sheets. Blockchain also be used 

to automate manual processes associated with ledger reconciliation, which could 

reduce costs. Today derivatives rely on some manual intervention, both when it 

comes to writing up the contract, as well as monitoring the positions. On payment 

dates, both counterparties must reconcile their ledgers and agree on the 

amounts owed. 

Winners and Losers of Blockchain 

Blockchain’s main benefit is reducing friction in the financial market. Currently there 

are many third-party services that “sell efficiency”, and we believe that these 

businesses are the most at risk if Blockchain takes off and removes the friction that 

these companies profit from. 

Clearing House Revenue May Modestly Suffer 

Clearing house revenue may modestly suffer from the technology allowing banks to 

settle trades between themselves, subject to regulatory approval. Blockchain 

provides a common ledger that is visible and trusted by all network participants. 

This characteristic of the Blockchain competes with the clearinghouse function of 

providing a trusted record of security ownership. It is possible that Blockchain will 

allow two counterparties to settle trades with each other directly, bypassing the 

need for a clearinghouse, with the counterparties simply notifying the central 

securities depository to move the securities between clearing member accounts. 

However, we believe that although this is technologically feasible, it will require a 

network of counterparties to belong to the same Blockchain. Additionally, regulators 

will need to be involved to monitor these types of trades. Regulators like the CCP 

model because it allows them to view flows and keep track of risk in one central 

location. Furthermore, these bilateral trades may decrease some of the benefits of 

netting provided by the CCPs, specifically with respect to liquidity. Instant settlement 

would require instant payment in full, which may make liquidity management more 

complex. 

Custody Banks Will Endure 

The custody bank handles the receipt and delivery of cash and securities. Custody 

banks add another layer of cost to the transaction by charging for book entry, wire 

transfers, principal paydowns, and surcharges for manual instructions. The custody 

bank interfaces with the clearinghouse on behalf of the broker and manages 

securities and cash for a fee. The custodian must then transmit all the information 

back to the broker so that the broker can reconcile its records. Custody banks also 

handle corporate actions. For example, an issuer will allocate a lump sum to the 

DTCC for dividends, which must then be allocated to the different custodians of the 

stock. Each custodian must then repeat this process, and the chain continues until 

the beneficial owner of the security is identified. The DTCC uses a system called 

Omgeo to synchronize the brokers and custodians so that they can be ready to 

exchange securities and payment, and update their accounts. 

We believe custodian banks can benefit from operational efficiencies. Custody 

banks are proactively working to experiment with Blockchain. Northern Trust has 

announced that it is on the verge of formalizing a proof of concept agreement with a 

third-party, while BNY Mellon and State Street are also looking to internally 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

 

 

March 2016	 Citi GPS: Global Perspectives & Solutions 95 

Blockchain is primarily a cost play for 

financial institutions in the long run 

experiment with the technology. Custody banks benefit from a history of reliability 

when it comes to handling and safekeeping assets, as well as providing a certain 

degree of comfort to regulators. We believe regulators will require progress to move 

slowly in order to ensure the transition to a new infrastructure is smooth. There will 

therefore likely be a role for custodians. 

In our view, custody banks will initially benefit from the efficiencies brought about by 

Blockchain, which could contribute to a reduction in operational costs. Their 

systems are already prepared for faster settlement times, and the market is 

expected to adjust to the shorter clearing cycle. Custodians will have the ability to 

expediently reclaim securities that have been lent out. However, in the much longer 

term, custody banks could see a reduced role as custody and back-office services 

are rendered obsolete by the technology. 

Investment Banks Could Be a Key Beneficiary from Cost Take Outs 

We view Blockchain as primarily a cost play for financial institutions in the long run. 

Lower costs would come from removing intermediaries in the trading process, who 

charge fees and contribute to a more complex infrastructure. A secondary benefit is 

faster settlement times, which could shrink the size of the balance sheet (we 

estimate for the large bank it could be in the tens of billions of dollars) and modestly 

free up capital for banks constrained by the supplementary leverage ratio. 

 Potential for Lower Costs - Blockchain could conceptually enable banks to 

settle a transaction without having to go through exchanges or CCPs. We 

consequently see potential for some brokerage, clearance and exchange fees 

(BC&E) expense reduction, similar to the cost savings banks get from 

internalization, whereby a broker fills an order from its own inventory, which 

results in lower transaction costs. 

 Lower Capital - Blockchain could be utilized to shorten the settlement cycle and 

subsequently can potentially free up capital by reducing the size of the balance 

sheet. We believe that the capital release is beneficial but not game changing. 

We do see some small benefit from reduced operational risk thanks to fewer 

trade fails and reduced counterparty risk from shorter exposure. The shortened 

settlement cycle is expected to reduce counterparty risk, decrease clearing 

capital requirements, reduce pro-cyclical margin and liquidity demands, and 

increase global settlement harmonization. 

–	 Faster settlement would reduce required liquidity buffers – Shorter settlement 

times would reduce the amount of liquidity banks need to hold, which would 

shrink the size of the balance sheet. 

–	 Capital related to settlement risk is relatively small due to trade date 

accounting. As long as the trade is expected to settle within a few days, we 

believe the capital requirements are relatively low. Because most securities 

settle on T+3, the capital freed up from faster settlement is fairly limited. 

However, we do again see a benefit from a smaller balance sheet driven by a 

reduction in the total amount of receivables and payables, benefitting SLRconstrained banks. 

–	 There is potential for Blockchain to enable less capital to be held with financial 

market utilities – Clearing members must contribute to default funds for central 

counterparties by posting collateral. The amount of collateral is determined by 

market price volatility using a 99% confidence level over a three-day risk 

horizon. If the amount of time to settle is reduced, then less collateral will be 

needed for the default fund. 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

 

 

 

96 Citi GPS: Global Perspectives & Solutions March 2016 

Robo-advisors leverage the Internet to offer 

customized investment portfolios to clients 

by employing algorithms 

Earn management fees of 0.25-0.50% 

(i) lower costs and ease of use, 

(ii) portfolio diversification & rebalancing, 

(iii) tax harvesting 

(iv) widens potential investor base. 

Robo-Advisors: Complementary, not 

Substitutional 

Robo-advisors refers to the digital breed of investment managers that leverage the 

Internet to offer customized investment portfolios to clients by employing algorithms. 

The rise of robo-advisors provides individual investors more choices around getting 

financial and investment advice at a fraction of the costs associated with traditional 

portfolio managers and financial advisors. 

 How it Works – Investors fill in an online questionnaire detailing their investment 

amount, risk tolerance and expected returns. The platform then uses algorithms 

to place investment into various buckets (usually low-cost ETFs). In return, the 

platform charges a management fee plus fund expenses. The platform also helps 

routinely rebalance the portfolio in-line with set allocations and can also offer 

other additional services – such as automatic tax loss harvesting. 

 Revenue Model – In the US the platform earns management fees of 0.25-0.50% 

per year which varies based on the value invested on the platform. Investors also 

pay ETF expense fees in cases where applicable which range from 0-0.15%. 

European robo offerings (so far) tend to charge higher fees. 

 Limited Service Offering – Currently, robo-advisor offerings are restricted to 

basic planning and investment (primarily investing in ETFs). We think it will 

appeal to individuals with less to invest. 

 Value Proposition – Robo-advisors offer a unique proposition to investors with 

low account minimums, low fees and investments mostly in ETFs. Aside from 

lower costs and ease of use owing to automation, they also help – (1) diversify 

and efficiently rebalance portfolios in-line with desired allocations on a regular 

basis – ideal for conservative investors who have little market experience; (2) 

incorporate tax-harvesting strategies that were previously offered only to high net 

worth investors; and (3) widen the potential investor base by including lower net 

worth investors in the portfolio management market. 

© 2016 Citigroup 
 

 

 

Figure 141. Cost of Investing with Traditional Asset Managers vs. Robo Advisors 

Mgmt fee: 1.0%++,
 

ETF fee: 0.2-0.4%.
 

+ other fees
 

Mgmt fee: 0.25-0.50% 

ETF fee: 0.0-0.15%. 

Traditional asset managers Robo Advisors 

Source: Citi Research 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 97 

 Market Size – The global asset management industry is sizeable with assets 

under management (AUM) of over $69 trillion spread across different asset 

classes (see Figure 142). Of the total pie, active and passively managed 

investments account for the bulk $41 trillion, and include equities, fixed income, 

commodities, and forex. However, since robo-advisors only primarily tend to 

invest in managed funds, we believe a like-for-like comparison would be to look 

at the mutual fund and ETF industry which measures $30.4 trillion and $2.6 

trillion respectively. Geographically, ETF assets are predominant in the US with 

AUM of $1.9 trillion (73% of total) (see Figure 143). 

In contrast, robo-advisors presently own a fraction of the market, estimated at 

$20 billion (see Figure 144). The larger independent US robo-advisors include 

Schwab Intelligent Portfolios (manages around $4bn); Betterment (reached $3bn 

in Nov 2015) and Wealthfront (which manages an AUM of $2.6bn). While roboadvisors service a niche presently, their growing prominence amongst younger 

millennial and Gen X investors is certain to continue for the foreseeable future as 

they get richer. With the fast pace of new sign-ups, Schwab estimates roboadvisors US market potential to be worth $400 billion in the coming years. 

© 2016 Citigroup 
 

 

Figure 145. Potential Growth of US Robo AUM, Starting at $14B end- Figure 146. US AUM by Product 

2014 

$15T 

$10T 

$5T 

$0T 

Potential AUM 

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 

AUM $ trillion $14,336 

$20 

$16.6 trn 

$14.1 trn $15 

$10.6 trn 

$10 

$3,771 $5.9 trn $5.6 trn $3,402 

$5 

$807 $2.4 trn $1.7 trn 

$0.0 trn $0 

Global ETF RIA IRA DC Plans Other LT Retail Retail 

1.50x 1.75x 2.00x Blended Robo Retirement Assets Assets 

AUM 

Source: Citi Research Source: CFA Institute Magazine (March/April 2015), Cerulli, ICI Fact Book 2014, 

Strategic Insight Simfund, Citi Research 

 

 

Figure 142. Global AUMs by Products (2014) 

Passives & 

ETFs
 

$10 trn 

Alternatives 

46% 

4% 

25% 

15% 

10% 

Global AUM $69trn 

Traditional 

$7 trn active core 

assets 

$31 trn 

Active 

specialties Solutions 

$17 trn and LDIs 

$3 trn 

Based on BCG Global Asset Management 2014 

Source: BCG Perspectives, Citi Research 

Figure 143. ETF Assets by Region (2014) 

Japan Canada LatAm 

3% 3% 0% 

4% 

Asia Pac 

Europe
 

17%
 

US 

73% 

Global ETF Assets 

$2.6trn 

Source: ETFGI, Citi Research 

Figure 144. Global AuMs of Robo-Advisors vs 

ETF and Mutual Fund Industry 

$30.4 trn 

$2.6 trn 

Robo-Advisors^ ETF assets # Mutual fund assets* 

^ Based on estimate by The Economist 

# ETF industry size from ETFGI 

* Mutual fund assets sourced from ICI 

Source: ETFGI, ICI, Citi Research 

 Global: $13.5 trillion total addressable market. In a June 2015 report, McKinsey 

estimated the potential value of personal financial assets that could be served by 

virtual advice at $13.5 trillion, split into $6.4 trillion in North America, $3.4 trillion 

Asia, $3.3 trillion Europe, $0.4 trillion Australia and $0.1 trillion Latin America. 

This assumes that 25% of affluent households ($100k to $1 million in financial 

assets) and 10% of high net worth households ($1to $30 million) are prime 

candidates for virtual advice. Once again, this is a figure for all virtual advice, not 

just robo-advice. 

 

98 Citi GPS: Global Perspectives & Solutions March 2016 

© 2016 Citigroup 
 

 

 

 

 

 

 

 

 

Figure 147. Robo Advisors – SWOT Analysis 

Strengths Weaknesses 

■ Low cost, highly scalable, solid margins ■ Subject to glitches/cyber attacks 

■ Can be a tool used by a Financial Adviser or do-it-yourself investor ■ Challenges around tactical allocations 

■ Easy to use, understand ■ Uncertainty around cash sweep/economics 

■ Better returns (supposedly) vs. passive/index ■ Not yet tested 'through the cycle' 

Opportunities Threats 

■ Huge AUM target addressable market ■ Can be copied and replicated without additional fees 

■ Essentially a lower fee TDF/Asset Allocation Fund ■ Unless offering a continued service (rebalancing) 

■ Millenials want online products ■ Pushback from tenured Financial Advisors 

■ Rising affluence in younger generations ■ Fiduciary responsibility? 

Source: Citi Research 

 

 

 

 

 

 

 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 99 

Traditional players join forces with digital 

disruptors 

Always a place for human interaction 

Technology as a client acquisition tool 

Complementary Not Substitutional 

We see the advent of robo-advice as an example of automation improving the 

productivity of traditional investment advisers, and not a situation where there is 

significant risk of job substitution. We note that in the US Personal Financial 

Advisors jobs doubled between the year 2000 to 2010, however they are expected 

to increase by only 27% between 2012-2022. Financial Analysts grew by 38% 

between 2000 and 2010, but are only expected to increase by 16% between 2012 

and 2022. 

Higher net worth or more sophisticated investors will, in our view, always demand 

face-to-face advice. However, we believe the services offered by advisors have the 

potential to be augmented by virtual and robo-advice tools, increasing individual 

adviser productivity, and ability to service more clients, or in more user-friendly 

and/or sophisticated ways. 

For the mass-market, or investors whose wealth levels preclude them from seeking 

more costly high-touch investment advice, we see technology, in the form of “RoboAdvice” offering a useful solution. For many advice firms, the provision of a roboadvice offering could be a useful “loss-leader” tool for future client acquisition: 

allowing them to provide a service to younger/less affluent customers, many of 

whom are likely to see their wealth expand such that they need a full personalized 

advice service in the future. 

US Case Study 

First mover advantage for robo-advisors such as Wealthfront and Betterment has 

seen them quickly gather significant AUM, of around $2.5 billion each. But bigger 

industry incumbents have moved swiftly to head off this perceived threat, either 

acquiring the technology for themselves, or offering alternative low cost alternatives. 

In the US, incumbents are responding to the threat of new technology and adapting 

it for themselves 

Recent examples include: BlackRock announced the acquisition of FutureAdvisor in 

August 2015, taking the robo-advisor’s platform, with plans to offer this to banks, 

brokerages and other clients of BlackRock Solutions. In May 2015, Vanguard 

launched a hybrid service, offering clients access to robo-services and human 

advisors for just 30bp, a very similar pricing level to ‘pure’ robo-advisors. Schwab 

Intelligent Portfolios (launched March 2015) offers an automated investment 

advisory service at no charge (no advisory fees, account fees or commissions) – the 

fee revenue to Schwab comes from management fees and/or cash feature charges 

on client funds allocated to Schwab ETFs. 

© 2016 Citigroup 
Figure 148. Selection of US Robo-Advisors and Competing Offerings from Incumbent Financial Institutions 

Robo Advisor AUM Founded Platform Fee Investment Types Description 

0% up to $10k ETFs tracking 11 $2.6bn Dec-11 0.25% above $10k major asset classes 

0.35% up to $10k ETFs tracking 12 $3.0bn 2008 0.25% above $10k asset classes 0.15% above $100k 

Similar offerings. Both claim to be the "largest automated 

investment service" offering diversified, continually 

rebalanced portfolios of ETFs, automated tax loss 

harvesting, and both IRA and non retirement accounts. 

Wealthfront ($5k account minimum) manages $2.6bn 

AUM, Betterment (no minimum account size) cites over 

143,000 customers with more than $3bn AUM. 

0.89% up to $1m 

$1.9bn Sep-11 

For investors with more 

than $1m: 

0.79% first $3m, 0.69% 

next $2m, 0.59% next 

Combination of single 

stocks and fixed 

income / alts ETFs 

$5m, 0.49% over $10m 

900,000 registered users, $200bn tracked assets, $1.9bn 

AUM. Offers free online financial tools, coupled with a 

phone / virtual meeting-based financial advice service. 

$100,000 account minimum 

5-6 ETFs available on 

each of its partner Proposes optimal portfolios based on risk questionnaire. 0% up to $10k $70mn 2011 brokerage platforms Allocates across 6 key asset classes. Automatic 0.25% above $10k (TD Ameritrade, rebalancing. $2,000 account minimum. 

Fidelity and Schwab) 

Mixture of single 0.75% up to $50k. stocks, ETFs and Lower fees for larger Automated, low cost risk managed investing, no account $35mn 2009 alternatives (private accounts. 0.30% above minimum. equity, bitcoin, real $1m estate, commodities) 

0.30% up to $5m Build portfolio using low cost funds, rebalance, minimise 

0.20% above $5m taxes. Minimum $50k investment with a team of $4.2bn Apr-15 Vanguard ETFs 0.10% above $10m advisers. More than $500k to have a dedicated advisor. 

0.10% above $25m Not automated Personal Advisor Services 

54 ETFs, 14 Schwab, $5,000 investment minimum. Offers risk-based 

$4.1bn Feb-15 None 8 OneSource, the rest investment strategies, with automatic rebalancing, tax 

third party loss harvesting (minimum $50,000 balance) 

Source: Citi Research 

 

 

 

100 Citi GPS: Global Perspectives & Solutions March 2016 

In response to this, the robo-advisors’ are building the hybrid model themselves e.g. 

Financial Engines recently announced its acquisition of The Mutual Fund Store, a 

RIA with ~$10bn AUM, 125 retail locations and 300-plus advisers. Betterment offers 

its digital investment technology to advisors through its Betterment Institutional arm. 

UK Case Study 

In the UK, the Financial Advice market underwent significant upheaval following the 

implementation of the key proposals of the FCA’s (Financial Conduct Authority) 

Retail Distribution Review (RDR). These included more onerous qualification 

requirements, and a change in the economic model for many advisers (a move from 

upfront commissions / share of the front-end load on funds, to directly charging 

retail investors for advice services). The chart below shows how the number of 

advisers in the UK changed over this period. 

© 2016 Citigroup 
 

Figure 149. Estimated Numbers of Retail Investment Advisers in the UK, Pre- and Post- RDR 

45,000 

40,000 

35,000 

30,000 

25,000 

20,000 

15,000 

10,000 

5,000 

-

Financial Bank / Wealth Discretionary Other Total 

Advisor Building Manager / Investment 

Society Stockbroker Manager 

2011 Mid 2012 12/31/2012 1/10/2014 10/31/2014 

Source: FCA. RDR = Retail Distribution Review. Key proposals arising out of the RDR were implemented end 2012 

 

 

 

March 2016 Citi GPS: Global Perspectives & Solutions 101 

In the UK, technology should act as an 

agent for industry recovery and change 

We see Technology and Automation helping the financial advice industry recover, 

and become more productive, following the upheaval caused by the RDR. However, 

so far, the success of “pure” robo-advice offerings has been very limited. 

We believe regulatory action could be a trigger for change. The FCA’s “Financial 

Advice Market Review”, launched in August 2015 and recently closed (22 Dec 2015, 

findings expected in Spring 2016), is examining how financial advice could work 

better for consumers, including looking at whether there is an advice gap for those 

people who think they cannot afford to get financial advice. Amongst other aims, the 

review intends to come forward with a package of reforms to: 

 Empower and equip all UK consumers to make effective decisions about their 

finances; 

 Facilitate the establishment of a broad based market for the provision of financial 

advice to all consumers; and 

 Create a regulatory environment which gives firms the clarity they need to 

compete and innovate to fill the advice gap. 

We believe this industry review could act as a trigger for greater growth in lower 

cost “robo” advice, or hybrid advice offerings in the UK. Proposals are expected 

ahead of Budget 2016 (Spring 2016). 

© 2016 Citigroup 
Figure 150. Selection of UK Robo-Advisors and Competing Offerings from Incumbent Financial Institutions 

Robo Advisor AUM Founded Platform Fee Investment Types Description 

1.00% above £1k 

2011 

0.90% above £25k 

0.75% above £50k 

0.60% above £100k 

0.50% above £250k 

53 ETF's tracking 9 

asset classes 

£1,000 investment minimum. Offers 10 risk-based 

portfolios having bonds, equities and other asset class 

ETF's. 

0.30% above £500k 

Wealth Horizon 

2014 

Initial fee of 0.25% 

plus annual fee of 

0.75% 

Range of funds from 

Legal& General, 

Threadneedle, 

Vanguard, Ignis etc. 

£1,000 investment minimum. Risk assesment based on 

number of questions. Offers risk-based portfolios having 

mix of equities, bonds, property and cash. 

1% annual fee (min 

2012 

£3) plus 0.49% 

underlying fund 

charges. 

Additional charges 

25 funds (Collective 

funds, active and 

passive funds) 

£1,000 investment minimum. Offers 6 risk-based 

portfolios managed by CPN Investment Management 

(parent). 

on pensions 

Annual fee of 

0.45% above £1k 

0.25% above £250k 

0.10% above £1m 

HL Multi-manager 

funds , 1.50% TER 

£1,000 investment minimum. Offers 6 risk-based 

portfolios managed by Hargreaves Lansdown investing in 

shares, bonds and other assets. 

HL Portfolio+ 0% above £2m 

Source: Citi Research 

 

102 Citi GPS: Global Perspectives & Solutions March 2016 

© 2016 Citigroup 
 

 

 

 

 

Figure 151. Map the Risk of Digital Disruption 

0.7 

Incumbent Led 

Followers 

Digital 

Evolutions 

Belgium United Kingdom 

Netherlands 

Austria 

France 

Germany 

Greece 

Spain 

Israel 

Italy Sweden 

Russia 

USA 

Brazil 

Mexico 

China Japan 

South Korea 

Hong Kong 

India 

Malaysia 

Philippines 

Thailand 

20 30 40 50 60 70 80 90 100 

New Entrants 

Led Disruptions 

Future Growth 

Areas 

Retail Banking Penetration 

Risk of losing existing revenue pool Risk of losing new revenue pool 

0.6 

0.5 

0.4 

0.3 

0.2 

0.1 

Citi Digital Money Index 

Innovation
 

Frontier
 

Digital Followers Digital leaders 

Source: Company Reports and Citi Research; Retail bank penetration is measured as retail loans% total loans. Size of the bubble is retail bank loans, the larger the bubble, the 

higher the retail bank loans 

 

March 2016 Citi GPS: Global Perspectives & Solutions 103 

Appendix: Citi's Digital Money Index 

One measure of digital leadership is the Citi Digital Money Index, an index that 

measures a countries’ propensity to adopt digital money (See Appendix for more 

details on Digital Money Index). The US and UK stand out on the innovation frontier. 

Sweden, Netherlands and Hong Kong are also among the digital leaders. Countries 

in the top right hand quadrant of the chart below are likely to be characterized by 

incumbent bank led evolution rather than get disrupted by new entrants as they 

already have banks that are heavily geared to consumer banking. New entrants in 

these markets are likely to focus in profitable niches that they can mine (eg crossborder retail payments in the UK). 

By contrast, many EM countries such as India, Philippines, Russia, Thailand – or 

even China as noted previously – have banks with relatively small consumer 

operations. These EM banks usually are not consumer experts. And while the digital 

infrastructure of their countries is often under-developed (as measured by the Citi 

Digital Money index) they have an army of smart-phone wielding consumers that 

are open for FinTech challengers to capture before the banks can. 

© 2016 Citigroup 
 

 

 

 

Figure 152. Framework to Measure Digital Money Readiness 

Source: Citi Digital Money Report 2014 

 

104 Citi GPS: Global Perspectives & Solutions March 2016 

Citi’s Digital Money Readiness Index 

segments the 90 countries we survey into 

four quartiles 

Measuring Digital Money Readiness 

Citi’s Digital Money readiness index measures how ready a given country is to 

adopt digital money. We believe the readiness is supported by four key pillars 

including institutional environment, enabling infrastructure, solution provisioning and 

propensity to adopt. 

 Institutional environment: This pillar considers the national institutional 

characteristics within which digital money needs to operate – this includes factors 

such as property rights and the government’s support for innovation. 

 Enabling infrastructure: This pillar considers technological and financial 

infrastructure which underpins the deployment and operation of digital money. 

Both regulatory and operational aspects are considered. 

 Solution provisioning: This pillar consists of industries and functions that drive the 

provision of digital money solutions (and the most frequent use cases). 

 Propensity to adopt: This pillar captures the rate at which consumers and 

corporates adopt new innovation. 

To measure the digital money readiness, we created a composite score consisting 

of four pillars that drive readiness and measured these with data collected across 

15 indicators illustrated in Figure 150. 

A specific index score as well as detailed breakdown is available for each of the 90 

countries studies. Click here for the Digital Money Index rankings of 90 Countries. 

© 2016 Citigroup 
 

 

 

 

Figure 153. Improving Digital Money Readiness 

Source: Citi Digital Money Report 2014 

 

March 2016 Citi GPS: Global Perspectives & Solutions 105 

Understanding Digital Money Readiness 

Citi’s analysis of the readiness scores yielded four distinct clusters measuring 

stages of readiness based on aforementioned pillars and indicators. The four stages 

are: incipient, emerging, in-transition and materially ready. 

 Incipient: Countries in this stage are characterized by a lack of affordable (and 

basic) infrastructure and expensive / limited financial services. Countries in this 

stage include Vietnam, Greece, Kenya, Mexico and so on. 

 Emerging: There is basic regulation and infrastructure exists in these countries, 

but they often have a large informal economy underpinned and perpetuated by 

people’s love of cash. 

 In-Transition: Digital money is starting to make its presence felt in these 

countries, often in the form of government disbursements. But In-Transition 

countries still require significant investment in e-commerce initiatives, or the 

relaxation of regulations to encourage private enterprise. 

 Materially Ready: People in this group of countries are familiar with digital 

solutions, and live in a regulatory environment that encourages digital innovation. 

Citi Money Index not only ranks the countries in its financial readiness, it also 

identifies the bottlenecks that affect each countries readiness score, with a view to 

provide a roadmap to becoming digitally ready over time. Figure 153 shows how 

each country could move from one stage to the next. 

© 2016 Citigroup 
 

 

 

 

 

The Coming Pensions Crisis 

Recommendations for Keeping 

the Global Pensions System 

Afloat 

March 2016 

Global Political Risk 

The New Convergence 

between Geopolitical and Vox 

Populi Risks 

January 2016 

2016 Corporate Finance 

Priorities 

January 2016 

The Global Art Market 

Perspectives on Current 

Drivers & Future trends 

November 2015 

Energy Darwinism II 

Why a Low Carbon Future 

Doesn’t Have to Cost the 

Earth 

August 2015 

Public Wealth of Nations 

Unlocking the Value of Global 

Public Assets 

June 2015 

Car of the Future v2.0 

Mobility Transformation: Full 

Steam Ahead 

May 2015 

Technology at Work 

The Future of Innovation and 

Employment 

February 2015 

Corporate Finance Priorities 

2015 

Driving Corporate Growth in 

Divergent Markets 

January 2015 

Technology at Work v2.0 

The Future is Not What It Used 

To be 

January 2016 

Investment Themes in 2016 

New Normal or No Normal 

January 2016 

Energy 2030 

Financing A Greener Future 

November 2015 

The Curtain Falls 

How Silicon Valley is 

Challenging Hollywood 

October 2015 

Disruptive Innovations III 

Ten More Things to Stop and 

Think About 

July 2015 

Women in the Economy 

Global Growth Generators 

May 2015 

Beyond China 

The Future of the Global 

Natural Resources Economy 

March 2015 

Investment Highlights in 2015 

Dealing with Divergence 

January 2015 

The Re-Birth of Telecom 

Monopoly 

Is the Industry Broken & Heading 

Back to its Monopolistic Roots 

November 2014 

Citi Global Perspectives & Solutions (Citi GPS) is designed to help our clients navigate 

the global economy’s most demanding challenges, identify future themes and trends, and 

help our clients profit in a fast-changing and interconnected world. Citi GPS accesses the 

best elements of our global conversation and harvests the thought leadership of a wide 

range of senior professionals across the firm. 

All Citi GPS reports are available on our website www.citi.com/citigps 
 

 

 

 

 

Energy 2020: Out of America Asset Allocation for a New Era 

The Rapid Rise of the US as a Diversification, Not Rotation, is 

Global Energy Superpower the New Watchword 

November 2014 October 2014 

Future Opportunities, Future 

Shocks 

Key Trends Shaping the 

Global Economy and Society 

October 2014 

The Car of the Future 

Transforming Mobility As We 

Know It 

May 2014 

Upwardly Mobile III 

Mobility Unchained: From 

Mobile Commerce to IoT 

January 2014 

Abenomics 

Four Arrows to Target Four 

Challenges 

October 2013 

Call of the Frontier II 

On the Right Track to be 

Tomorrow’s EMs 

September 2013 

The Global Search for Yield 

How Today’s Markets Shape 

Tomorrow’s Companies 

May 2013 

Energy 2020 

Independence Day: Global 

Ripple Effects of the N. 

American Energy Revolution 

February 2013 

2013 Year Ahead 

Corporate Finance Priorities 

January 2013 

China in Transition 

What We Know, What We 

Don’t Know 

November 2012 

Taking It To The Streets 

The New Vox Populi Risk 

May 2014 

Disruptive Innovations II 

Ten More Things to Stop and 

Think About 

May 2014 

2014 Year Ahead 

Investment Themes 

January 2014 

Energy Darwinism 

The Evolution of the Energy 

Industry 

October 2013 

Energy 2020 

Trucks Trains & Automobiles: 

Start your Natural Gas Engines 

June 2013 

Disruptive Innovation 

Ten Things to Stop and Think 

About 

April 2013 

2013 Year Ahead 

Investment Themes 

January 2013 

Upwardly Mobile II 

A Long and Winding Road for 

Mobile Payments 

November 2012 

Global Debt 

Mr. Macawber’s Vindication 

November 2012 

Sub-Saharan Africa China & Emerging Markets 

The Route to Transformative China is About to Rebalance. 

Growth How Will EM be Affected? 

September 2012 July 2012 
 

108 Citi GPS: Global Perspectives & Solutions March 2016 

© 2016 Citigroup 
 

 

March 2016 Citi GPS: Global Perspectives & Solutions 109 

© 2016 Citigroup 
 

 

 

 

 

110 Citi GPS: Global Perspectives & Solutions March 2016 

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TECHNOLOGY	 FinTech investments have grown exponentially in recent years, growing by twothirds year-over-year in 2015 to $19 billion. / New digital business models are 

expected to grow from just 1% of North American consumer banking revenues to 

almost 17% by 2023 pushing the region close to a disruption tipping point. 

INNOVATION	 The majority of FinTech spend has been in the personal and SME business segments 

with focus on the user experience at the point of sale, competing directly with banks 

in their highly profitable consumer segment. / FinTech investment in Blockchain 

technology could be revolutionary as it replaces the core financial infrastructure 

and allow banks to rethink and re-engineer legacy systems that could work more 

efficiently and yield cost savings. 

SOCIAL CHANGE 	 Globally, a customer interacts with their main bank on average about 17 times a 

month across multiple channels. Non-human contact ----- Internet or mobile banking, 

ATMs, and social media ----- accounts for 15 for those interactions. / The shift in 

consumer behavior is making banks rethink their channel strategy and banks will 

close branches as they see their consumers shift away from branches to digital. 

March 2016 	 Citi GPS: Global Perspectives & Solutions 111

NOW / NEXT 

Key Insights regarding the future of Banking 

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