#Bitcoin is notoriously volatile, making it dangerous to use it as a currency. That fraction of a coin that buys you a pizza this week might bring two the next (though you would starve if you waited that long.) Bitcoin’s value began 2017 around $ 430 and is now around $ 960. ThisRead More
Bank Innovation
#PSD2 is creating a new distinct species for retail digital payments in the EU. Shared by account servicing #banks and third party payment initiators, there will be a customer-triggered Credit Transfer for transferring funds from a customer’s account to that of the Merchant providing the goods or services. Upon receipt of payment, the merchant ships the goods/releases the service. By relying on bank security, this method of payment is hard for fraudsters to replay elsewhere, the speed is moving to “immediate,” and there is an irrevocable payment to the merchant. Unlike a credit card, the method does not offer any repudiation mechanism and does not facilitate reversals or refunds. This new species will only live in the EU. Much of the underpinnings for PSD2 comes from the SEPA elements of the Economic and Monetary Union project in the EU.
This newly bred species faces entrenched competition from a dominant older Card species that has ruled the consumer payments Savannah globally for over 50 years. The DNA of this species is from the US. There are US firms in leading positions globally in the main elements of the payment card value chain. US-born VISA and Mastercard as Card Schemes are effectively the franchisors of the card payment ecosystem.
Although banks across the globe issue payment cards to customers, the highest volume issuers are typically US banks. Issuers introduce consumers into the card payments ecosystem, under license from the card payment schemes. Acquirers are responsible for capturing the POS transactions and submitting these transactions to the card scheme for authorisation. If the consumer has the funds or the credit, this process leads to the merchant receiving the value of the goods or services sold. There is also an extensive and distinctive value chain supporting Merchants. Acquiring Processors provide sub-supply for Acquirers, and US firms are global leaders in this activity. There is a deep sub-supply value chain for Acquirers, with US expertise often to the forefront. The Point of Sale (POS) or Gateway providers offer hardware and software services for the secure capture of payment card details. POS or Gateway providers often innovate in adjacent categories to card payments such as retail inventory management and cash register software. US-led investment is also to the forefront in this area.
Within all these moving parts, there are processes that are relatively unique to the card schemes, such as #technology, rules, penalties, standards, procedures, brand guidelines, financial settlement platforms, security protocols, chargebacks, holds, stand-in processing, reserve accounts, minimum monthly payments, interest-free periods, etc.
It is interesting to speculate about what Merchants would ask for if they could pick and choose their best possible combination of features from both species. Here are a dozen simple and crude requests that a Merchant might make if they could define a hybrid payments collection service between ACH and Cards:
1. “If the customer pattern moves to bank-to-bank credit transfers after PSD2, as a Merchant I want to see the same share of my sales being funded by unsecured consumer credit as when I saw a Debit Card/Credit Card split. I want customers to have still the same opportunity to buy on credit if some or all of my product range is priced at high values. “
2. “Even if banks start to provide credit through unfunded bank accounts rather than card limits, I want my customers to have still the type of structured credit agreements that they liked with Cards, such as minimum monthly payments and interest-free periods. Ideally, they should get to choose the optional elements of their credit agreements.”
3. “I reluctantly accept that I have to carry the overhead of a trusted dispute resolution mechanism for higher value purchases. I want my provider to educate the customers properly on when this protection exists and when it does not exist. “
4. “I do not want any repudiation mechanism for the consumer for small value transactions. I have my statutory obligations built into my complaints and refund processes.”
5. “I want the low-value purchases made without credit paid to me immediately.”
6. “I want the simplicity and predictability of ACH pricing, not an array of fixed, variable, tiered and once-off card charges.”
7. “I do not want “holds” put on my money if the business is unexpectedly good compared to projections nor do I want to have money retained in “reserve accounts” in case of chargebacks. My bank should do all the due diligence on my activities, and that should be enough.”
8. “I do not want to store the digital credentials of my customers, and I do not want to have to comply with a “PCI” security standard that could bankrupt my business with fines and penalties. I am a retailer, not a professional cyber-security company or a bank.”
9. “If the customer is buying from me remotely on a mobile phone, I want minimal delays and friction but also strong customer authentication with the minimum of variation for transaction size and payment type. These security controls should be so elegantly designed that only thieves and fraudsters abandon transactions.”
10. “I want value-added services that come with my point-of-sale payment collection services, such as inventory management software, cash drawers, and an App Store, especially for retailers. I want these value added services to work with all payment types.”
11. “I want working capital finance opportunities that capture all my trading process delivered seamlessly to my business at POS. I don’t want offers of finance that are specifically confined to Cards traffic or some other specific payment mechanism ”
12. “I want payment schemes with great brands that are recognised globally and entice consumers from all locations, not just EU.”
Producing a hybrid scheme of this agility and desirability is a very tall order, given that the most important suppliers tend to have their capital, infrastructure and knowledge tied up in one of the two models. The biggest EU banks that will handle most of the PSD2 payment initiation volumes are very mature organisations with monolithic software platforms. The major card processors and platforms are also large and mature organisations with monolithic software platforms. They also have very distinctive knowledge bases, focused on either Cards or ACH. They look out at the world from within this history, with a perspective of customer needs influenced by their current model.
Given these rigidities, is a hybrid model that might delight Merchants a pipedream? Perhaps not, if the theoretical promise of the “#API #Economy” becomes a reality. The API Economy is a set of business models and channels based on secure access to functionality and exchange of data between businesses through Open APIs. An Open API is a publicly available application programming interface. It provides third-party developers with programmatic access to a proprietary software application. APIs can also be used within businesses to clearly define automated methods of communication between various software components.
API advocates make many claims about their usefulness. They argue that APIs lower barriers to entry for programmers. They make designing complementary programs easier and faster. Modular design, enabled by APIs, allow software designers to create, modify and remove components. Modularity combines the standardisation needed for high volume processes with customisation required for bespoke design. APIs also enable measuring and metering the third-parties that are accessing and using these resources.
Both Banking and Card Processing specialists are in mature industries with many monolithic systems and divisional organisational structures. All mature industries face a range of challenges adapting to Open APIs. They will have to modify performance management and measurement systems. They have complicated and expensive investments to make to develop modular software with a microservices architecture. Open APIs are entirely different to own-brand products in mature industries. The monetisation goals for Open APIs will have to reconcile with the goals of own-brand products. Mature industries with very established patterns of pursuing profits at divisional level might struggle to see where they will capture value from Open APIs. Older businesses that were not born in the networked economy can be excessively focused on the downside risk of data travelling out to third-parties.
By definition, all of the service domains required for the market to assemble the Merchants wish list for “the ideal hybrid ACH/Card scheme” must already exist. In general, these services are locked inside the software architecture of the respective service providers, either banks or major card specialists. These service domains have Machine to Machine and Human to Machine interactions. Machine to Machine interactions has content suitable for data fields that can be passed between applications. The level of detail in the interactions influence the potential for Open APIs. These interactions contain identifiers and depictions that can be explicitly mapped to a data structure. The standard of detail is very high. Human to Machine interaction includes structured forms of information that are completed by a person during a service exchange. The API Economy has the potential to capture the Human input through more applications and more convenient applications.
In crude conclusion, notwithstanding the difficulties for mature firms in changing their business models, Open APIs could revolutionise how data and services are distributed. Given the regulatory intervention, the Card specialists in particular seem to have an incentive to make some or all of their characteristic and value adding service domains available to all models, whether there are 3 or 4 parties involved in a scheme. It could be a 2-model world with tighter margins, so they need to profit from both models. If the reality of the API Economy matches the theory, we could see some hybrid species in the future.
[linkedinbadge URL=”https://www.linkedin.com/pulse/api-economy-breed-credit-cardach-hybrid-after-psd2-paul-rohan” connections=”off” mode=”icon” liname=”Paul Rohan”] is Author, “PSD2 in Plain English” at Rohan Consulting Services Ltd.
Deep Blue Sea
Jack Ma, the founder of Alibaba Group, was famously cautious about competing head-to-head with the world’s largest player eBay: “eBay is a shark in the ocean. We are a crocodile in the Yangtze River. If we fight in the ocean, we will lose. But if we fight in the river, we will win,” he said.
On January 27 the crocodile finally swam out of the confines of the river and into the open seas of global finance. Ant Financial, Alibaba’s financial services arm, the “PayPal of China”, and the world’s largest financial #technology firm, agreed to acquire #MoneyGram, which along with Western Union, is one of the two “big” global money transfer operators (MTOs) for a price that represents a 11.5% premium over its share price and assumption of MoneyGram’s nearly 1-billion-dollar debt.
Size Matters
The #acquisition has massive potential for the Alibaba Group. In one fell swoop it positions Ant Financial as a global player capable of handling multichannel payments over a network that reaches out to the far corners of the world spanning 200 countries and 350K agents. Well entrenched in China, Ant Financial, will now be able to offer payments and related financial services on a global basis. Only Western Union has as expansive a reach as MoneyGram. Other large MTO’s have wide agent presence too but they tend to be more geographically specialised than the big 2.
Remittances
Remittances, funds sent to family and friends by migrant workers, are still heavily cash based. Over the past few years, innovative online players have developed disruptive business models via the internet and mobile channels to play in the $700 billion plus market for remittances. But the old fashioned cash-based remittance industry continues to be at the heart of the money flows and relies on agent networks (for cash pay-in and pay-outs).
Though MoneyGram also serves over online and mobile channels, the new players have developed fast, user friendly, digital services that are more intuitive and easier to use. Companies such as Xoom (acquired by PayPal), focus on a few corridors but provide a better more efficient service. Remity and WorldRemit have achieved significant early success. Other disruptors such as Transferwise and Azimo have promise but are still relatively small.
So, Ant Financial through MoneyGram will have the ability to transfer funds electronically from one end of the earth to the other – for customers who have bank accounts or payment cards – but also, through its agent network, equally well for customers who prefer to deal in cash.
Challenges Ahead
In addition to having a wide payment network, the most valuable core assets of an MTO are its anti-money laundering procedures and controls embedded in the entity’s processes, platforms, and above all, its people and culture. Money laundering is a perennial headache for MTOs who are fined heavily not only for helping illegal flow of funds, wittingly or unwittingly, but for simply for having lax AML controls.
Large fines can cripple companies. In 2012 MoneyGram was handed a penalty for $100 million in the United States because, as Assistant Attorney General Lanny Breuer described, “MoneyGram knowingly turned a blind eye to scam artists and money launderers who used the company to perpetrate fraudulent schemes targeting the elderly and other vulnerable victims.”
Of-course MTOs are not alone in finding themselves penalised for aiding and abetting illegal money flows. The fines in those cases have been much larger. HSBC and Standard Chartered were fined billions of dollars for their part in money laundering and for not doing enough to root out and report such activities.
Analysts have indicated that such risks represent the biggest hurdle to the acquisition of remittance behemoths like MoneyGram by potential large investors and puts their business viability into question as a big event triggering another big fine could cripple a company financially or cause it to be shut down by the regulators. This is true. But it is not specific to MoneyGram. In fact, big companies like MoneyGram are better positioned than smaller rivals to make “critical mass investments” in such controls.
Ant Financial has the financial muscle to ensure MoneyGram’s AML controls evolve and ensure that it stays clear of trouble. But it will require continuous investment and a significant culture change not just in MoneyGram but also in its new parent, Ant Financial – a culture of transparency and regulatory compliance.
Alibaba’s marketplace businesses have been warned a number of times for not doing enough to prevent sellers from hawking fake products. But its response has been dismissive. Jack Ma’s famous remark implying that some fakes are better than the real products has been taken to illustrate the casual attitude the group has towards ethical best practices. This attitude should not extend to global money flows. The risks are much higher.
Ant Financial has other perception issues to face as well. For example, it is still recovering from the trouble in China over Cosun, a phone maker which defaulted on $166 million worth of bonds which were sold over Ant’s financial marketplace.
Trump Trouble
A new problem threatening to impede industry growth is the Trump victory in the United States and the Trump administration’s aggressive stance on migration which ultimately could have a negative impact on global remittance flows. The Trump administration with its protectionist rhetoric and anti-Chinese sentiments may even try to block the deal. The deal may be viewed under the “Exon-Florio” Amendment, the “touchstone law that lets the president block foreign acquisitions that threaten national security.” The New York Times quotes a 2009 case when a Chinese company was stopped from buying a gold mine in the United States because the mine was too near a military base and reminds its readers that the Chinese telecommunications equipment giant, Huawei was repeatedly blocked from acquiring American companies because of its ties with the Chinese military / government.
In recognition of the uncertainty, Ant Financial has reportedly agreed to pay MoneyGram $17.5 million if the deal gets blocked by a US security review.
Strong Core Business Prospects
The group is likely to do everything in its power to grow the remittance business especially targeting the significant remittance in-flows to China and also aiming to capture the “informal” remittances that flow through unregistered private networks and have continued to operate under the radar for decades. It can expand and consolidate the network in developing markets. Today, half of the total global money remittance flows take place between developing countries. As China expands its global influence, constructing ports on the Arabian Sea and building infrastructure in far flung African markets, MoneyGram will provide a payment infrastructure that keeps pace with the needs of this expanding footprint.
The Real Benefits
The future focus of Ant Financial, however, is not likely to be on remittances alone but on payments that support online and mobile ecommerce through the Alipay brand. Ant Financial now also offers a whole host of financial services to Chinese consumers and online retailers such as personal consumer loans and small business finance. It has also ventured abroad cautiously through investments such as its $ 680 million injection in paytm, India’s popular payment service widely used for ecommerce in the country. The main inhibitor to online payments in developing markets is buyers’ preference for cash payments on delivery due to a hesitation to use cards online or because of lack of trust that the goods received will be damaged or not up to standard. MoneyGram’s vast cash in/out network will enable consumers to pay cash if they cannot pay online and also act as pick up points for goods ordered online. It will also provide the infrastructure to make Alipay become the payment instrument of choice for global ecommerce payments particularly in emerging markets where ecommerce has not taken off yet or where cash is still used to pay for goods ordered over the internet.
Open Seas
MoneyGram will provide Ant Financial global reach for remittances and for ecommerce and all other types of payments. And, if all goes well and there are no issues with the United states authorities, Ant Financial will also be able to provide financial services in the US.
But it is clear that the crocodile that was afraid to battle the shark has now ventured out and has already evolved and adapted itself to the new environment and ready to compete in the open seas.
(Image: Fine Art America)
[linkedinbadge URL=”https://www.linkedin.com/in/sameezafar/” connections=”off” mode=”icon” liname=”Samee Zafar”] is Director at Edgar, Dunn & Company
Should banking #expect the end of Dodd-Frank? Maybe, but probably later rather than sooner. President Trump’s stance on financial regulation has been clear from the campaign trail. Though the President has expressed a wish for the overhaul or even the removal of regulation—promising to cut 75% of the existing ones—whenRead More
Bank Innovation
You may have seen the buzz last week about Scotiabank’s newest workspace in Toronto – our Digital Factory, home to some of Canada’s top #technology and creative talent. Many stories focused on the impressive working space that is becoming the Bank’s Canadian digital headquarters. But there is more to the story as #Scotiabank continues its journey to digitize banking for its 23 million customers around the world. Here are five little known facts about Scotiabank’s #Digital Factory:
1. It’s not *quite* as new as you think. While the space opened in Toronto in January, the team has been hard at work since October 2015 when the Digital Factory was first created. Since then, teams launched formative projects such as our new digital banking app that allows customer to apply for a chequing or savings account within minutes; a partnership with global fintech player Kabbage to re-invent small business lending – shifting processing time for entrepreneurs to get approved on a loan from weeks to mere minutes. When at its full size, the Scotiabank’s flagship Digital Factory in Toronto will house more than 350 of Canada’s top technology talent under one enterprise-wide mission: to help Scotiabank provide a seamless, personalized experience to its customers, so they can be served how, when and where they want.
2. It transcends global borders. The Digital Factory in Toronto is Scotiabank’s first fully-dedicated physical location for digital talent to work together under one roof, but this movement is actually happening around the world. We have opened Digital Factories in Mexico, Chile, Colombia and Peru, and each Digital Factory will be led by one of five Digital Banking leaders responsible for driving our digital strategy in the diverse markets we serve as Canada’s most international bank: Jeff Marshall (Canada), Fuencis Gomez (Mexico), Luis Torres (Peru), Daniel Kennedy (Chile), and Marcelino Herrera Vegas (Colombia).
3. We’re aligning ourselves with the right partners. We have collaborated with organizations in the design, technology and #FinTech communities to explore unique opportunities and to change the way people feel about the future of banking. That’s why Scotiabank is partnering with a number of leading technology groups such as Georgian Partners, QED Investors, and Kabbage, and academic institutions including OCAD U, Ivey Business School, MaRS, Queen’s University, Rotman School of Management, Ladies Learning Code and more.
4. The Digital Factory Space has been designed to maximize collaboration. The space is a techie haven, completely outfitted with everything you’d need from an inspiring workspace. It’s a space that has been thought out; a technology-forward design enabling scrum teams across the bank’s footprint to work together. In fact, all resident desks are sit-stand, and monitors include single connection for PC, Mac, and double monitor. We also recognize the need for balance. There’s a cafeteria onsite that serves many healthy food options, a gym with instructor-led classes and a health consultant onsite. There’s various team building zones in the facility including a games tables and even a bowling alley!
5. You do not require banking experience to work here. The Digital Factory is currently recruiting for dozens of roles – product managers, front and back end developers, designers, agile scrum masters and many more. In fact, we are looking for people with non-traditional backgrounds to continue to build a diverse and strong team as possible.
About the Digital Factory:
The Digital Factory is a hub for creation and incubation of new and partner-led ideas to deliver game-changing solutions for Scotiabank customers. The Digital Factories are a cornerstone of Scotiabank’s digital transformation, and are focused on reinventing how banking serves people by first reinventing the way we work.
[linkedinbadge URL=”https://www.linkedin.com/in/natalie-hickes-3765235″ connections=”off” mode=”icon” liname=”Natalie Hickes”] is Recruitment Lead at Digital Factory
In early 2016, as part of the London Market Target Operating Model Programme (see http://isupporttom.london for details), an initiative began to investigate #blockchain and the opportunity for its adoption in the London Commercial Insurance Market.
When the work started there was limited knowledge (or even awareness) of blockchain across the market and there were, to the best of the author’s knowledge, no active investigation into the #technology by the community.
The intention of the initiative was to increase awareness in the market, generate support for exploring the opportunity, with representation from the broking and underwriting community, and to learn more about it.
A series of Proof of Concept’s (POC’s) were undertaken to explore the use of blockchain – using business processes that provided representative use cases. These were used to validate that it could provide an alternative approach and to explore what benefits it could offer. Additionally, independent research by Z/Yen was commissioned to investigate the potential of smart contracts for wholesale insurance.
It was very timely that, on the same day as the 3rd London Blockchain Week began, a series of reports about the work undertaken were published. Details can be found here.
[linkedinbadge URL=”https://www.linkedin.com/in/garynuttall” connections=”off” mode=”icon” liname=”Gary Nuttall MBCS CITP”] is Managing Director at Distlytics Ltd
PayPal, Venmo, Google Wallet, Apple Pay, IBM Pay, Walmart Pay, Samsung Pay—the #mobile wallet market just keeps on going and going, but according to #Visa’s new CEO, that’s not necessarily what consumers want. Alfred F. Kelly, Visa’s new CEO, said on the company’s earnings call on Feb. 2: My personal viewRead More
Bank Innovation
#BBVA Compass, the U.S. subsidiary of the Spanish banking giant BBVA, purchased the neobank Simple almost three years ago for $ 117 #million. Since then, it has written down $ 89.5 million of that investment. $ 60 million of that came in a “goodwill impairment” in 4Q 2016. BBVA Compass held an earnings callRead More
Bank Innovation
In the more than 170 pages of #Snap’s IPO draft, its P2P #payments service, Snapcash, received a mere paragraph. Snapchat’s parent company will look to apply for a payments #license in order to “mitigate regulatory uncertainty,” according to an S-1 filing. Although we currently use the service of a third partyRead More
Bank Innovation
Kevin O’Leary of #Shark #Tank, the favorite TV show of entrepreneurs everywhere, made a return visit to Notre Dame University in South Bend, Ind., in January. It was his first trip back since 2014, when he hosted a Shark Tank-style event for university students. O&8217;Leary was treated to a surprise: a #video fromRead More
Bank Innovation
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