#Banks have been fairly active in tapping into new technologies recently, either through partnerships or with internal innovation groups. But with the rapid acceleration of the #fintech space, how should banks decide if a new space or #tech is worth pursuing? An old-school #cost #analysis will do, according to MichaelRead More
Bank Innovation
#Chatbots and AI—what makes them so engaging? How can #banks and FIs utilize bots to improve the relationship with consumers, while driving engagement? This was the penultimate question during the Bank Innovation Twitter Chat today. We’ve summarized some of the best responses, and most intriguing questions, below. #Experts weighed in on whatRead 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.
#Chase and #Intuit may have just solved the main issues with account aggregators. The companies signed an agreement this morning, giving customers the option to authorize Chase to electronically share financial #data securely with Intuit’s financial management applications, such as Mint, TurboTax Online and QuickBooks Online. #Banks, and Chase inRead More
Bank Innovation
BMO #Harris seems to be on (digital) track. The bank announced the launch yesterday of People Pay – an instant peer-to-peer money transfer service for its mobile app users. The service is free, as it is with every #payments offering from #banks on the clearXchange network, and doesn’t require recipients toRead More
Bank Innovation
#Zelle, the peer-to-peer payments platform formerly known as clearXchange, will put #customers #back in #banks’ #hands, PNC CEO Bill Demchak said Friday. P2P has been a notable success of nonbank players such as PayPal, which offers a host of consumer-facing payments products, perhaps most notably Venmo. In October, PayPal CEORead More
Bank Innovation
As it turns out, this past week was the wrong week to quit sniffing glue. You will be mistaken if you think I am alluding to various political gatherings that occurred first in the United States then all over the world. Nothing could be further from my mind. Of course I am alluding to the itsy-bitsy bit of news the Telegraph planted in this article. And before you believe I allude to the momentous piece of news where we learn President Trump refers to Prime Minister May as “my Maggie”, then you shall have to guess again.
Let me put you out of your misery. I am referring to the &8220;#passporting&8221; system bombshell, and no, I am not referring to the EU passporting system. Let me put me out of my misery. I am referring to the US-UK passporting system bombshell, and I quote the Telegraph: &8220;Donald Trip is planning a new deal for Britain… The historic trip comes as: – A deal to reduce barriers between American and British #banks through a new &8220;passporting&8221; system was considered by Mr Trump’s team&8230;&8221;
Try that #gambit on for size.
I did and the thoughts swirling in my mind at the speed of light ended up making me dizzy.
First, given this is the Telegraph, I discounted the possibility of fake news. Second, we all know Trump has not been tender with the EU, so the possibility of sticking it to European countries by weakening them and creating further uncertainty cannot be discounted entirely. Third, Trump has now put the world on notice we have entered a new era of bilateral deals and America first, and a special deal with the UK, on the back of the Brexit vote and what can only be tense negotiations with the EU certainly fits the bill. Fourth, such a passporting system may benefit US banks in light of the threat Brexit poses them by coupling London and NYC as capital markets brethren &8211; do note that several Trump nominees are former Goldman Sachs partners, most notably the Treasury Secretary nominee. Fifth, the US and EU have had recent trade disagreements, notably around the safe harbor agreement on overseas data transfers, thusly a banking passporting system threat may be a useful bargaining chip with the EU in the near future. Sixth, any weakening of the EU may further Trump&8217;s plan for rapprochement with Russia &8211; arguably the UK &8220;elite&8221; is not on the same wavelength. Seventh, we may be witnessing a Trump judo move aimed at softening the EU intransigent stance and, indirectly, secure more favorable Brexit terms for the UK, especially for the financial services industry &8211; this would indeed be masterful. Eighth, could this move be part of the upcoming currency wars &8211; surely this piece of news has the potential of strengthening the pound and weakening the Euro this coming week. I am sure we can come up with many more potential meta reasons for this move and I am looking forward to your comments and ideas.
Let&8217;s us now switch to more practical matters. How easy would it be to build a financial services passporting system between the US and the UK. Fairly easy on the UK side given there is only one financial regulator, the FCA. Less so on the US side given we are dealing with several federal regulators (the OCC, the Federal Reserve, the FDIC, the CFPB, FinCen to name the main ones) and 50 state regulators on the banking side, as well as 50 state examiners on the insurance side. Quite a complicated landscape. For those who have followed the push back state regulators made recently once the OCC revealed its plans for a #fintech charter, think of the issues raised by a federal level passporting system pushed by the Trump administration. Obviously, we will need to figure out the details of a potential passporting system. Will it cover only banks, and if so apply only to national charters on the US side? Will it cover broker/dealers, asset managers, payments companies and even startups too, let alone insurers? How wide will be the mandate, how deep? The devil will be in the details, as usual.
It is a truism to state that trade deals covering products are &8220;easy&8221; to ink, not so with services and last I checked banks or insurers are in the financial services industry. I am no expert but I suspect current international trade treaties will have to be scrutinized to analyze potential conflicts or limits &8211; to be broken or renegotiated? We should also think of any implication and consequences, intended or not, with Basel III and other global financial services accords.
Further, UK financial regulators have historically had a principles based approach vs the US regulators&8217; rules based one. Two things to note here: a) UK financial regulation is based off of and integrated with EU directives and laws, and b) US regulators have recently toyed with the idea of moving towards principles. Be that as it may, it is clear a US-UK deal that includes a passporting system for financial services industry participants will have to wait for the UK to disentangle itself from the EU.
A few other thoughts intrigue me. We all know the FCA&8217;s ground breaking initiative with its approach to fintech and financial innovation in general and its sandbox in particular. If a passporting system allows for a transfer of knowledge and purpose and US regulators espouse new ways to engage with #technology and innovation, then I am all for it &8211; note to all, US regulators abhor the word &8220;sandbox&8221;. As my friend Mariano Belinky from Santander InnoVentures stresses, the US banking market is saturated, certainly so on the retail side. It is also fragmented. The UK banking market is highly concentrated. What would be the consequences of passporting for both markets on the retail side? The US banking market has seen few if not any new banking licenses granted of late. New entrants spur innovation and competitions is, in my opinion, somewhat stale in the US. On the other hand, the FCA has now allowed a certain number of challenger banks in the UK to foster innovation and enable competition. If another byproduct of passporting means the US shores will see more challenger banks, I am all for it. Finally, if passporting talks usher an era of simplification and integration between US regulators, as well as be the impetus for global regulatory rethinking, then I will become a huge fan &8211; London+NYC is a rather formidable financial services axis. The deregulation touted by Trump may not be enough alone to usher a new regulatory era in the US. Add a new alliance to the anticipated demise of Dodd Frank and all bets are off. On the other hand, I wonder if the FCA is or will be a champion of deregulation for deregulation&8217;s sake. If smart deregulation ends up permeating both sides of the Atlantic while speaking a different but common language &8211; regulatory and linguistically speaking &8211; then I am all for it.
Be that as it may, and we need to be cautious given we know so little, we can say the possibilities are as endless as the volatility created by this announcement is high. On the other hand, this may turn out to be one of many crazy ideas without a future. Welcome to a fascinating 4 years trip.
In this episode of #Breaking #Banks, host #Brett King reports from the CES 2017 conference. He talks to bestselling author (and former Apple Chief Evangelist) Guy Kawasaki; Robert Scoble; Michael Hafner, head of Mercedes Benz autonomous and assisted driving systems; Melisa Cefkin, principal scientist for Nissan Research Centre; and Itoki Fujita, who developsRead More
Bank Innovation
When it comes to #banks, only 26% of Americans strongly agreed with the statement that banks had their best interests well in hand according to a recent report conducted by Salesforce—and unfortunately, the survey respondents do not seem to be making the same clear-cut distinctions between banking and #fintech thatRead More
Bank Innovation
The time when #banks feared #fintechs has (mostly) been left behind. Today, many banks have formed innovation arms or incubators in order to facilitate the #fintech/bank relationship. However, scoring a match is still complex. What can fintech startups do, to boost their chances? TD Bank’s Julie Pukas, head of U.S.Read More
Bank Innovation
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