Tomorrow's Transactions

PLEASE NOTE We are moving

Dave Birch — Thu, 30 Apr 2015 13:28:42 +0000

We’ve reintegrated Tomorrow’s Transactions into our main web site so please redirect your RSS feed to here.

This archive is going to be here for a long time, so none of the posts are going away if you’ve linked to them. But there won’t be any updates.

These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.

It’s time to do away with my dongle

Dave Birch — Wed, 29 Apr 2015 19:35:57 +0000

Banks are under pressure to do something abut security, so now that everyone has a smartphone it’s probably time to rethink the hodge-podge of measures we have now and standardise around the handset.

I just had to quickly log in to my online banking service to transfer some money to someone who doesn’t have PingIt, yawn. So I had to enter my sort code, account number and name and then use my bank’s 2FA dongle with my chip and PIN card to get a security code to enter in to the web site to log in to create a new payee and then send the money. I have to say that it all worked OK, but in an age of touchID it’s beginning to feel a little tired. While I was doing it, I started to think about the way that I could log in to my USAA account just by looking at my phone.

Biometric log-on is the latest effort by USAA to offer novel solutions to its members. The app is designed to heighten security as well as to improve the overall member experience.

[From Biometrics in Banking – PaymentsJournal]

Logging in by looking at your phone is, just as touchID is, about convenience before it is about security but it certainly does enhance the latter. The way in which different biometrics are combining with the smartphone to create a new security landscape is starting to shape the mass market and it is really interesting to be working with our clients on bringing the technology to market and exploiting it effectively in different sectors.

Voice biometrics, fingerprints, iris scans, and other authentication options are beginning to replace passwords as a means to verify a user’s identity and simplify the login process when banking online or via a mobile device. The key is to provide enhanced security against hackers while improving the overall user experience.

[From Biometrics: Fighting Fraud and Protecting Identity In Banking]

If you are interested in this sort of thing, there’s a terrific lunchtime roundtable on biometrics in banking coming up. It’s organised by the Centre for the Study of Financial Innovation at SWIFT in the City on 11th May. The panelists will be:

Rick Swenson, the USAA Executive responsible for Fraud Operational Excellence and Strategic Initiative who will share USAA’s experiences with biometrics and explain why their approach has been so successful.
Oran Cummings from MasterCard, who will give an international perspective on the use of biometrics in the financial sector.
Keith Gold, formerly with IBM Banking and Financial Services Europe, who has been helping the CSFI to understand the requirements of an ageing population, will talk about the importance of biometrics in the useability toolkit needed to this key segment of bank customers (or, why looking at a mobile phone is easier than remember a PIN for most of us!).

The usual well-informed and wide-ranging discussion will ensue, with wine and sandwiches for all. Don’t miss this opportunity to learn from Rick while he is visiting the UK. There may be a few places left at this free event, so if you’re interested in seeing how the biometric state of the art is advancing in banking, contact anna@csfi.org for further details and to reserve your place.

Banks could be sheepdogs (like Apple)

Dave Birch — Mon, 27 Apr 2015 10:37:28 +0000

As my good friend Andrew Curry (@nextwavefutures) says, Apple Pay is a sheepdog, not a wolf. It’s not disrupting or displacing anyone in the payments value chain. But that doesn’t mean that it couldn’t.

I saw a lot of comment on an article in Harvard Business Review that discussed Apple Pay and concluded that it is not a disruptive play.

By launching Apple Pay as a reseller instead of as a disruptor, Apple is helping to perpetuate a credit card payment system that is obsolete, overly expensive, and absolutely unnecessary in the present day.

[From Apple Pay Is Just a Big Giveaway to Credit Card Companies – HBR]

Well, that’s a little harsh and I’m not sure I’d agree that credit cards are obsolete, but you cannot help but agree with the core point about Apple Pay not being a disruptive technology. I’m hardly the only the person that thinks this and it’s not a new perspective. ApplePay is not disruptive because it cements in place the existing rails for retail payments. And there are good reasons for doing that (apart from anything else, they work) and it means that the service has immediate access to a mass market.

But truly disruptive new services don’t just digitize the familiar. They do away with it.

[From What Amazon, iTunes, and Uber teach us about Apple Pay – O’Reilly Radar]

This is a fair point.

In each of these cases, my payment information is simply a stored credential that is already associated with my identity. And that identity is increasingly recognized by means other than an explicit payment process.

[From What Amazon, iTunes, and Uber teach us about Apple Pay – O’Reilly Radar]

The point is, of course, that in time all services like Uber will use ApplePay, because they will want to switch from using stored payment card credentials under “card on file” rules and rates and instead use “cardholder present” rules and rates. This will turn all payments into push payments (which is a good thing) and greatly benefit retailers and consumers alike. What will vanish is the idea of a “point of sale”, since even in-store all payments will be made in-app, just like Uber.

Apple Pay optimizes for how the world does work. The real winner in payments will build for how the world should work.

[From What Amazon, iTunes, and Uber teach us about Apple Pay – O’Reilly Radar]

So how should payments work? Well, that depends on who you are. But if you are a merchant, for example, you want the money to come directly from the customer’s bank and into your bank (forget about what “bank” might mean for the moment) with no-one else in the loop.

Banks don’t orchestrate commerce… they are a dumb pipe payment service that cost far more than the value they provide. The greater they work to control the existing pipes, the greater the business case is for going around them, or regulating them into submission.

[From Money 2020: Tokens and Networks | FinVentures]

Well, Tom’s typically robust approach may aggravate some but there’s no denying that he has an informed perspective. Unless banks find some added value (spoiler alert: I have a feeling that this may be something to do with identity) then they won’t get anything out of this either. Time to start developing a strategic response to the falling net interest income, transaction fees asymptotic to zero, flat trading income future. Time to start growing the “other” piece of the pie shown this breakdown of bank revenues.

European Bank Revenues for 2014 (Source: Deutsche Bank, March 2015).

You don’t need to pay any attention to how I think payments should work. But you should pay attention to how Bill Gates said they should work in his closing address to SIBOS 2014. He said:

What should the marginal cost of a transaction be, if the identities are properly established, it is extremely low.

The banks role is to reduce the marginal cost of everyone else’s transactions as well as their own by delivering the trusted identification with strong authentication (where they could be the sheepdogs) that the new economy demands. This means more transactions, more commerce, more prosperity and it means a decent line of business for the banks themselves.

Markets and blockchains

Dave Birch — Thu, 23 Apr 2015 11:23:56 +0000

[Neil McEvoy] A blockchain solution, as many people have observed, is best suited to environments where there are a great many actors, some of whom may be untrustworthy. Such as, for example, financial services markets.

A British man, Mr Navinder Singh Sarao has been arrested, and faces extradition to the United States, accused of market manipulation, allegedly causing a 1,000 point drop in the Dow Jones index in 45 minutes and leading to personal enrichment to the tune of $40 million from that and similar incidents. Mr Sarao is a lone trader and was apprehended in his parents’ modest semi-detached house near Heathrow. He lives in a similar house across the street.

The profiteering is supposed to have occurred roughly like this:

Multiple sell offers were placed on the futures market, at low prices, which the offerer had no intention (and, in all probability, not the means) of fulfilling.
The primary market in the affected stocks, and perhaps others, fell on the flood of offers.
The manipulator bought shares at the depressed prices.
He withdrew the futures offers.
The primary market recovered and the manipulator sold his shares at a profit.

Leaving aside, of course, the question of Mr Sarao’s guilt or innocence, a couple of questions spring to mind:

When someone in London manipulates a market centred on New York, in what criminal jurisdiction is he acting?
To what extent does this kind of behaviour occur: is it possible that major market players indulge in such manipulations but at a more discreet level?

I’m not going to speculate further on those. To me, the more interesting questions are:

How could other market participants be so naive (it’s the politest word I can find) as to fall for such a scam?
What could be done to reduce the chance of this kind of thing happening again?

I’m by no means an expert in the particular markets involved here. But I do know that if I see my neighbour repeatedly put his house on the market, but never actually sell it, then he’s not exactly serious. If he puts it on the market for a first time, owning a similar property, and as a middle-class Englishman, I’m naturally interested in the price. If that price is wildly high, compared to actual recent deals for similar houses that are recorded on the publically available land registry database, then I’ll conclude that, as for a second marriage, my neighbour is suffering from the triumph of hope over experience. It’s about him, not the property and not the market. Similarly, if the price is unusually low, I’ll conclude that he has fallen upon hard times and is need of ready cash, rather than immediately supposing that conditions are such that there is a surfeit of such sellers that will move the market.

If another neighbour, who drives a modest car, suddenly auctions Bentleys I’ve never seen on eBay, my suspicions would be aroused. And so on and so on. What’s important in these examples, and applicable to wider markets, is not the absolute knowledge of a person’s identity, but of his standing and track record.

If somebody offers to sell stocks at a future date, he is more credible if it can be demonstrated that he actually owns them; or somewhat more credible if it can be demonstrated he has borrowed them. If neither of those can be demonstrated, then evidence that he owns lots of other stuff, to a much higher value than what he has offered, would be reassuring. Likewise, evidence that a reasonable proportion of his offers has been fulfilled.

How might any of that be achieved? One way would be for exchanges, registrars and so on to maintain central databases of offers, trades and holdings, query-able in realtime by market participants. That would raise a number of difficulties: for example, queries could place a massive strain on centralised systems, which might also present attractive targets to hackers working on behalf of manipulators.

An alternative approach could be to implement distributed ledgers using the blockchain technology that underpins BitCoin, or a variant thereof. There would be no single point of failure, and manipulation of the record is, for all practical purposes, impossible once a chain acquires new links (new offers, new transactions, new holdings, etc) and is widely replicated. For an in-depth view of how the blockchain can provide for efficient and secure financial transactions, beyond crypto-currencies, register for the excellent Payments Forward event on 11th May in London and listen to our very own Steve Pannifer demystify the technology before the panel session featuring Lloyds Banking Group, Eris Industries and others.

To me, it is incredible, and seriously worrying, that major players in the financial markets underpinning our economic system are not alert to basic warning signals that any dealer in second-hand goods would recognise. Indeed, they cannot be, given the current infrastructure. Fortunately, technology is at hand to rectify that. Who will move?

Mobile payments will shortly be mainstream (really – this time)

Dave Birch — Thu, 16 Apr 2015 16:05:42 +0000

Mobile payments are fun again. Now that Apple have said that they paying with your phone is OK, all the cool kids want to do it. But how exactly are mobile payments going to work in the mass market?

We’ve all been to countless mobile payments conferences over the last few years and we’ve all been involved in countless discussions about who would use mobile payments and why. Why, in particular, would anyone bother messing around setting up stuff on their phone when a €1 plastic card works perfectly well? Apple Pay has legitimised the space and there is now a new push to deliver mobile payments into the mass market. It was very interesting to me to note that the mere announcement of Apple Pay was sufficient to drive up the Google Pay volumes, for example. But for me, the aspect of the industry that has changed most over the past couple of years is the recognition that in-app payments deliver the overall best experience for retailers and consumers.

But a recent trip to a franchise of Chipotle Mexican Grill in Manhattan was a rare and shining moment where paying with a phone was frictionless and actually sped things up.

[From Test Run: What Mobile Payments Companies Can Learn From Chipotle – NYTimes.com]

Since I love a) Manhattan, b) Chipotle and c) mobile payments, I thought I would try this out for myself. Next time I was at our New York office I downloaded the Chipotle app, powered it with my Simple account and ordered. Woo hoo! I remember thinking at the time (and possibly tweeting too) that I failed to see how a bank wallet or a telco wallet or a scheme wallet could have made this a better experience.

I was reminded of this at the Payments International pre-conference day on Mobile Payments, where I had the good fortune to chair a discussion between Ian Sayers (the CTO at Zapp), my good friend (and Consult Hyperion Associate) Masha Cilliers and John van der Heyden (Payments Development at BNP Paribas Fortis) on the new business models around mobile payments and the potential role(s) for banks in the mobile payments space. It was an interesting discussion and I really enjoyed the variety of questions from the audience that made us think throughout. My own opinion, well-known to blog readers, is that the new mobile payments space is all about apps not wallets and that the bank wallet strategy should be to create infrastructure and APIs for retailer and service providers to use.

It will work through either the Shell Motorist app or the PayPal app itself. When drivers pull up to the pump, they will be able to select the corresponding pump on either app – which are available for Android and iOS. They can then just fill up their vehicle safe in the knowledge that they will be automatically charged through PayPal.

[From Pay by PayPal at the pump: Shell garages accept mobile payments without leaving your car – Pocket-lint]

I picked on this example because I remember that Consult Hyperion did a study on the forecourt use of a mobile app for one of the big petrol companies a few years ago. I think the outcome was quite positive (it centred on building a relationship with the customer “through” the franchised forecourt operators, which I guess the idea of the Shell Motorist app here) but I also remember that at the time there was a question about whether mobile phones could be used on the forecourt at all! It all seems so last decade now!

My point is that the retailers’ own apps are always going to deliver the best experience, so it is incumbent on the mobile payment industry to deliver a better solution into this app world. Card-on-file isn’t good enough, for a whole raft of reasons. Much better to give the retailers direct access to payments through an API as Shell have done with PayPal (who were, remember, one of the first players in the payments API game). This works rather well in the Apple Pay world, where the retailers can integrate Apple Pay into their own app and use it to get secure, tokenised card payments up and running, immediately bringing chip and PIN levels of security into a hitherto card-not-present space. I wonder if this might be a more important part of the Apple Pay story than the stuff about tapping and paying in store? Dunkin’ Donuts don’t have NFC, but they do have Google Wallet integrated into their app and that, in the great sweep of things, might be far more important.

As well as Apple and Google and Samsung, Visa and MasterCard are have been developing “wallets” that will deliver more functionality to the retailer than simply executing payment transactions.

For now, the main focus is online, but you can see how this will also eventually link up with Visa’s ambitions in mobile payments — which include a strong emphasis on NFC embedded in mobile devices and a set of APIs to take its solutions anywhere that commerce happens — as well.

[FromVisa Adds Overstock.com, Its Biggest Retail Catch Yet, To Its V.me Digital Wallet | TechCrunch]

Masterpass and V.Me are both great, but will they have enough leverage? Who ends up shaping this market? Can the schemes generate enough value-added to be the natural choice? Will the wallet turn into a set of APIs and vanish from customer view into in-app solutions? Will the retailers be able to get traction for a solution of their own (like MCX in the US)? Will direct-to-account solutions like Zapp chip away at scheme market share? And what about the MNOs? In her review of Q1, Sirpa Nordlund of Mobey Forum was blunt:

With Apple controlling its own ecosystem and HCE putting power in the hands of service providers, MNOs have been unceremoniously ousted from the top table.

[FromMobile Payments in Q1 – Five key takeaways – PaymentsJournal]

Vodafone will want to quibble, having just launched their mobile wallet with Visa Europe. Look, I have no more idea where this all going than than anyone else, but I’m looking forward to discussing these and similar issues at Mobile Commerce and Banking 2015 on Monday, where I’ll be giving a kick-off talk on “app and pay” and will also be chairing a discussion panel looking at investment in the field. See you all there.

Another report on falling cash usage in the UK

Dave Birch — Tue, 14 Apr 2015 09:10:02 +0000

My son and I have been out and about, living the life of normal folk who don’t care about payments. We made a couple of cash payments and we made a couple of non-cash payments. We didn’t, however, make any chip and PIN or contactless or swipe payments.

The Halifax, part of the Lloyds Banking Group, just released some interesting figures about trends in customer use of payments. One of the more noticeable trends is the steady fall in the use of cash, a fact that was picked up on by a a number of news outlets.

Cash withdrawals now account for just £18.33 of every £100 spent, a £1.82 decline since 2013.

[From Finextra: Finextra news: Card is king as cash usage continues to fall – Halifax]

This got me on to BBC Wake Up To Money and subsequently a number of other BBC Radio interviews about the rise of electronic payments and the decline of cash. One of the questions I was asked was about places where you have to use cash. I couldn’t think of one off the top of my head. I was thinking of using the example of giving money to beggar in the street (which I never do, I but I’ve heard of the phenomenon), but then I remembered that beggars are ahead of this particular curve.

A professional beggar who travels hundreds of miles from his home in Lancashire to London’s Mayfair has been using a credit card reader to accept payments from wealthy tourists. Damien Preston-Booth, 37, commutes from his rented home in the north-west, but pretends to be homeless when he asks passers-by for money on the streets of London. As well as taking cash from wealthy tourists in the exclusive Mayfair area, he also has a mobile card reader and accepts payments to his PayPal account.

[From Beggar uses card reader to take donations – Telegraph]

I think this is pretty forward-thinking of him, and despite the underhand nature of his enterprise, applaud his willingness to try exciting new forms of payments at the heart of Europe’s FinTech capital.

The reader is linked by Bluetooth to his smartphone and the donor receives a receipt for the donation via email.

[From Beggar uses card reader to take donations – Telegraph]

If you want to donate to another worthy cause, the Dave Birch Holiday Home in the South of France Emergency Appeal, you can PingIt the money to @dgwbirch and I will, of course, be only to happy to e-mail you a receipt on request. But back to the point. Where do you have to use cash? On one of the shows (I apologise for forgetting which one) someone said that they had to pay cash at they local Chinese restaurant. This made me wonder: why do people go to cash-only restaurants? Apparently I’m not the only person that thinks about this.

Either we didn’t know it was cash-only, and are now furious about this fact for all the reasons examined above; or we did know it was cash-only, and we chose it anyway because it made us feel bohemian, in-the-know, and capital-C Cool.

[From Why the Cash-Only Restaurant Must Die]

Yeah, well. I don’t buy the hipster curve on this. If I am out for lunch and I see a restaurant with “cash only” in big letters on the door then I will walk straight past it. The only reason that I’ll go in is because they don’t tell you they are cash-only until it is too late. I have the same problem with taxis. I suddenly decide to hail a black because I’m in a street full of them and so can’t be bothered to use Hailo or Uber or whatever. So I put my arm out, the cab stops, I jump in and… I see a sign saying “cash only”.

At that point I should of course tell the driver to stop and let me out, but because I’m English I find it very difficult to do that and so instead sit fuming in the back until we approach my destination and then jump out to run to an ATM. It looks as if some other drivers recognise and anticipate that problem too, because it’s presumably a problem for them that the machines often have only £10 and £20 notes in them.

In a modern city such as London, this is unacceptable. Either ban taxis from cash-only operation or make them paint the cash-only taxis a different colour so that normal law-abiding citizens can avoid hailing them. Anyway: it’s a minor point. Hailo, Uber and whatever mean that none of us will be hailing taxis for very much longer and #appandpay will again triumph over #tapandpay. Meanwhile, still scratching my head about where I might last have used cash, I remembered my day out in Woking last week. I picked up my son from his friend’s house, where he regaled me with (quite unprompted) tales of his night out at Wagamama in Camberley, where he tried out their nearly new QKR! implementation. He loved it, and thought that the #appandpay convenience of the service was an absolute winner. Why wait for a server to come over to the table with a chip and PIN machine when you can just pay via the app and go?

He was telling me this as we were strolling down to check out Woking’s newest wargamesshop, the excellent “ibuywargames”. Having had a look around and decided to buy a couple of things, I noticed a PayPal chip and PIN reader in the store. I took this to mean that they would accept all forms of PayPal so, since I had my phone in my hand but my cards were in my wallet, we both fired up PayPal and I paid in-app. Another #appandpay triumph, but this time over #chipandpay. So, no need for cash there either.

But then I remembered: I did use cash after all that day. We stopped for a burrito at the truly fabulous Aracelis stall in the old Woking market. I was lured there by my son’s tales of their fantastic Mexican food. I am sorry to report that when I got there I found that they were cash-only, so I was about to walk away on principle but my son forced me to suppress my conscience and order. It was amazing. All they need is a contactless reader and I might never leave.

The point here is that one of the key reasons why cash is in decline for retail transactions (as I mentioned on several radio stations) is the rise of the mobile phone as a alternative not only to the card but also to the terminal. As has been observed here many times before, it is the mobile phone (rather than the plastic card) that it is leading down the road to cashlessness, and this is the point I wanted to reinforce. Oh, and that half of the payment experiences I’ve spoken about here were in-app.

What did the blockchain ever do for us?

Dave Birch — Thu, 09 Apr 2015 14:39:58 +0000

The narrative around Bitcoin has, if you hadn’t noticed, shifted toward the blockchain in recent times. So if that’s case, what is the technology and what are we going to do with it?

Interest in Bitcoin as a currency, or indeed as money of any kind, is waning whereas the animal sentiments around the underlying technology are waxing. Judd Bagley of Overstock.com (a famous early adopter of Bitcoin) recently said that:

Longer term, we need to develop more non-currency applications for decentralized ledgers such as the Blockchain, and let the public get comfortable with the ease and security of it. Once that’s happened, cryptocurrency will seem an obvious next step.

[From Overstock Unveils Bitcoin-Only Discounts, Wider Adoption Strategy]

I’m not so sure. It is not clear to me at all that a blockchain is the best way to implement a currency. And while my opinion doesn’t much matter, significant financial institutions seem similarly more interested in the idea of trading on distributed public ledgers (and thus avoiding clearing and settlement costs) than they are in overthrowing the Federal Reserve and the US Dollar. I couldn’t help but notice when one of the world’s biggest banks specifically mentioned blockchain when talking about their new London-based research initiative.

Swiss banking giant UBS is to open a technology lab in London to explore how blockchain technology can be used in financial services.

[From UBS to Open Blockchain Research Lab in London – Digits – WSJ]

The very kind people at techUK invited me along to take part in a discussion about the blockchain and what the practical applications of the technology might be. It was called Beyond the Hype: Delivering on Blockchain’s Potential.They had a great lineup for the event and unsurprisingly a great turnout of people who came along to be educated about the latest developments in this fascinating space. The panel was chaired by Keith Saxton, the Chair of techUK Financial Services Council, and included:

Richard Brown, Executive Architect for Banking Industry Innovation, IBM UK.
Simon Bailey, Director of Payments and Transaction Banking, CGI.
Me.

What made it a great panel (in my opinion) was that a) we didn’t all agree on everything and b) none us actually knows where any of this is going. It was an opportunity to hear different perspectives and “battle test” some ideas and arguments with well-informed people.

For my part, since I have no more idea than anyone else what the blockchain will be used for, and following my Gibson-esque “look out of the corner of your eye” meme, I chose to give three very different examples of blockchain use and I thought I’d present them here too in order to invite further comment.

Leanne Kemp hopes bitcoin will spell the end for diamond thieves. Edgelogic, her Australian peer-to-peer software company, is using the digital currency to create an online record book called Blocktrace, which allows insurers and purchasers to check the history of a precious stone — and what crimes or claims have been made against it.

[From Bitcoin: possible bane of the diamond thief – FT.com]

It’s a shame this wasn’t up and running in time for this weekends massive London heist (incidentally, whoever uses the word “heist” outside of newspapers?). I included this example because I wanted to illustrate my theory (and Eric Schmidt’s, it has to be said) that the nexus of the “Internet of Things” and the blockchain might well be the technology sector’s sweet spot for the next few years. The second example I used was to illustrate the strong relationship between the blockchain and identity.

Ellis has built software that lets anyone create what he calls a “World Citizenship” passport. Using PGP encryption software and the bitcoin blockchain—a cryptographically secured public ledger that runs on machines across the internet—the project creates a mathematically iron-clad identification paper that would be extremely difficult, perhaps impossible, to fake.

[From Hacker Dreams Up Crypto Passport Using the Tech Behind Bitcoin | WIRED]

It seems logical to me that one of the key “off-chain” assets that you might want to demonstrate ownership of via the magic of the blockchain is your own identity, never mind the identity of your web site or dog. Then I deliberately chose a controversial third case study to illustrate how in some circle the blockchain has become the magic unicorn that can fix anything.

But how can consentual sex be proven without a shadow of a doubt even if one of the parties decided to say they did not consent after the act took place?
How about recording the consent to blockchain?

[From Could the blockchain be used to prove consensual sex? Rape prevention? : Bitcoin]

I won’t repeat my critique of this idea except to present my conclusion:

I had a more important (to my mind) observation on the blockchain as a record of sexual consent in this way: it won’t work.

[From Distributed proof of jerk — Medium]

There is an ongoing discussion and evolution of serious thought around what the distributed ledger can be used for, whether proof-of-work or proof-of-stake scales best and whether blockchain or consensus protocols are the best decentralised option. All I will say here is that in our work with clients (large financial institutions) on the topic, currency is probably the least interesting use of the ledger that gets discussed.

Incidentally, if you are from the banking and finance world and want to learn just why so much investment money is going in to blockchain, there is a super Payments Forward afternon tea discussion with a pre-briefing coming up on this topic in London on 11th May 2015. Consult Hyperion’s Head of Consultancy Steve Pannifer will be running the pe-briefing on “Demystifying cryptocurrency and the blockchain for the uninitiated” with cryptoeconomist Jonathan Levin (you can listen to Jonathan on our podcast here). After the briefing, Izabella Kaminska from FT Alphaville will be chairing a discussion on “How far can cryptocurrencies go to heralding a new way of transacting?” with representatives from, amongst others, Lloyds Banking Group and the UK Digital Currency Association. You’d be mad to miss it – see you there.

The new PSR’s priorities

Dave Birch — Tue, 07 Apr 2015 14:44:37 +0000

The UK’s new Payment Systems Regulator is now open for business. I imagine that their highest priority work stream will be around access to payment systems, because this is what “challenger” banks need in order to create the more competitive environment that the UK Treasury wants.

The payment systems regulator (PSR) has published their report on a new regularly framework for payment systems in the UK and, as I’m sure many other people did, I spent the weekend reading through it so that our clients can feed it into their product and service roadmaps where appropriate. It’s important to understand the pressures that the new framework will bring to bear and have some realistic ideas about where it will have an impact in the short, medium and long-term. We’ve all understood the big picture for some time. A couple of years ago, I wrote that

The Chancellor’s decision to go down this route clearly re-frames payments as a utility.

[From Consultation on a new payments regulator for the UK]

What most interests me at the moment, however, because of the projects that we happened to be involved in at the moment, is the high level strategic direction of travel. In the report, the regulator outlines three key areas of concern: governance, innovation and access.

The first of these, governance, has long been a concern and it was clear from the government’s earlier consultations that there was a (perfectly legitimate) requirement to involve more stakeholders in the decisions that need to be made and more transparency around the decisions. I don’t think anyone would disagree with this and the proposed actions (such as publishing the minutes of meetings) seem reasonable. Note as an aside that the reconstitution of the Payments Council as a trade association for the industry is a direct result of the desire to split governance from “implementation”.
Following the original Treasury consultation (the one where the Treasury essentially ignored all of the actual consultation input, or as our friends at Celent put it at the time “Our understanding is that the Treasury feels that the responses (56 in gave the wrong answer“) it was clear that the issue of the pace of innovation in payment systems was going to be added to the proposed regulators casebook. I have commented a couple of times that is not entirely clear to me how this is to be achieved but that’s not the point of this post.
The third area of concern, and this is the one where all of the trouble will come, is the ability of new players to get access to the core payment systems. In most of the fora where I hear such talk, access is the nexus between stable, boring and legacy infrastructure and the challenges, up and comers and next big things.

It is this last point about access that is key to achieving the Treasury’s goals for more competition in the banking sector and it is exactly what one of the more interesting (in my opinion) challengers was complaining about in the press this very weekend.

The lender, Fidor Bank, had planned to launch in the UK by the end of March, but has been held up with the country’s difficult payments infrastructure. The big four – Barclays, HSBC, Lloyds and RBS – act as sponsor banks with direct access to payments systems. None has accepted Fidor as a customer.

[From UK launch of digital bank Fidor hamstrung by payments providers – Telegraph]

With respect to this point about the need for “sponsor banks”, who can access the payment system and under what circumstances, the PSR says that they propose an “Access Rule” .

This would require these Operators to have “objective, risk-based and publicly- disclosed Access Requirements, which permit fair and open access”. We proposed requiring these Operators to be compliant with our proposed Access Rule by 30 June 2015. LINK, MasterCard and Visa are already subject to an obligation to provide objective, proportionate and non-discriminatory access under Regulation 97 of the PSRs 2009.

The devil, as it always is with these things, will be in the details. People who want direct access to the payment networks are somewhat suspicious that while the operators will comply with the requirement to publish objective, risk-based and publicly disclosed access requirements, they will insist on non-proportionate countermeasures. The regulator has clearly said (in section 4.14) that their access rule will ensure that operators access requirements are proportionate to the actual risk that will be incurred by adding the new participant. I hope that they are militant in enforcing this because the actual risks, or should I say the marginal increase in actual risks, associated with the addition of direct access by low-value payment systems seems to me to be fairly small.

One specific “access” where I imagine industry participants were vocal is the case of access to the UK’s Faster Payment Service, FPS, to provide immediate settlement. Faster Payments (the scheme that operates FPS) had already put out a White Paper on their vision for the access model of the future in which they say that their goal is absolutely to provide such access to enable a level playing field for the Payment Service Providers (PSPs) that want to offer such immediate settlement services to their customers through FPS.

To show how this might achieved, they set out an architecture to offer open and fair access on “reasonable commercial terms” to the PSPs through accredited technology vendors. You can see why they want to go down this accreditation route and it makes a lot of sense because none of the participants would want to risk technology problems disrupting the operation of what is, in essence, a piece of critical national infrastructure.

What is also interesting to me about this proposed model is that for organisations that are not eligible for a Bank of England Reserve Account for settlement purposes they propose to provide an alternative to finding a sponsor bank. Organisations (such as for example Google or Tesco or Apple) might want to participate in the scheme and can easily afford to set aside the cash for what is known as “pre-funding” collateral but they might not be able to, or not want to obtain either a banking licence or a Reserve Account. What’s more, sponsor banks may not want to handle the accounts of such organisations for a variety of reasons (one of them being AML regulations) and the organisations might not want to have sponsor banks either.

Right now one of the main complaints (from, e.g., Fidor) about sponsor access is the opacity of the commercial relationships with sponsor banks, which is one of the things that the PSR intends to address. The regulator has also set out some changes on indirect access to make the sponsor banks open up their services by publishing service descriptions, eligibility criteria and costs. So for organisations who want to use sponsor banks, the menu and pricing of the sponsor banks would allow them to quickly choose the right partner and get down to business.

At high level, then, the alternative to using a sponsor bank to gain access to FPS will be to gain access through one of the accredited vendor but with liquidity guaranteed by a sponsor (in return for a fee, obviously). The settlement must be guaranteed in this way otherwise you would have to wait for it to actually occur rather make the funds available immediately. This should be cheaper, quicker and simpler than going through the sponsor.

Faster Payments see a competitive market emerging through the accredited technology venders operating aggregation services to the PSP’s (which I think is probably right) but also say that over the time they intend to work with the Bank of England to identify new models and these could potentially open more participation to non-banks (such as retailers for example). Although they don’t say what these new settlement models will be, it is certainly possible to imagine models that will allow PSPs to offer new products and services to their customers. I’m sure this is one of the areas that the PSR will be looking at in their innovation work stream.

One other point. The White Paper also talks about how the new access model will connect with non-UK markets and I can certainly see that integration into other European immediate settlement services and perhaps even in the longer term interconnection with immediate settlement services in other countries (e.g., Australia) and perhaps one day even the United States will deliver a payments infrastructure that is a world away from the 1960s legacy models that still constrain innovation today.

Biometrics are already mass-market for banking

Dave Birch — Thu, 02 Apr 2015 20:25:44 +0000

Biometrics aren’t really futuristic any more, and even in as conservative a sector as banking they are being deployed in the mass market. I’ve helped to organise a CSFI roundtable on the topic to share some practical experiences. (Revised 22nd April 2015 with updated roundtable details.)

Hey, how fun is this! Logging on to things by tapping your contactless bank card to your phone! I remember demonstrating this (using, if I recall correctly) WAP on a Nokia 6131 to some of our clients about six years ago, when they were getting ready to start issuing the first European contactless bank cards for pilots and trials in (I think) the UK and Italy.

Bank customers currently use dedicated passcode generator devices to access their accounts, but the new system will see them authenticating by simply tapping a contactless bank card to their NFC phone,

[From Korea shifts to NFC authentication for mobile banking – BayPay Members Blogs]

Of course, I will never, ever, do this at any time between now and the heat death of the universe because like everyone else on the planet I will use biometrics to authenticate myself to my mobile phone and thereby to service providers of all kinds. We’ve been playing around with biometrics and FIDO in the office on a couple of projects, and I can tell you that the combination works well now and will only get better in the future as the biometric sensors improve and become more sophisticated, as they mobile phone processors become more integrated with the sensors and as people become more intolerant of username and passwords and goodness knows what else.

This is why I was so interested to see USAA Bank (based in San Antonio, Texas), a bank that is well-known for being highly focused on customer service and innovative in the use of new technology to improve the customer experience, roll-out face-recognition for mobile phones using the technology of one of Consult Hyperion’s clients, Daon. Earlier this year, American Banker called their adoption of biometrics a “tipping point”. They use voice, face and (soon) fingerprint biometrics to provide security and convenience across their customer base. You can log in to your account by looking at your mobile phone: perfect for the young who are impateient with PINs and passwords, perfect for the rest of us who can’t remember them anyway.

The San Antonio financial services company has rolled out facial recognition technology across its entire membership base that lets them access its mobile app with a tap of their smartphone camera and a blink when prompted (to prove they’re a live person and not a photo).

[From Biometric Tipping Point: USAA Deploys Face, Voice Recognition|American Banker Article]

In a stroke of astonishing good luck, Rick Swenson from USAA (who is the Strategic Initiatives Executive quoted in this American Banker article) is going to be in London in May and has kindly agreed to join a lunchtime roundtable organised by the Centre for the Study of Financial Innovation at SWIFT on 11th May. Joining Rick will be a couple other speakers adding to your knowledge of the practical use of biometrics in mass-market retail financial services and, of course, me. So the full lunchtime line up will be:

Rick Swenson, the USAA Executive responsible for Fraud Operational Excellence and Strategic Initiative who will share USAA’s experiences and explain why their approach has been so successful.
Oran Cummings from MasterCard, who will give an international perspective on the use of biometrics in the financial sector.
Keith Gold, IBM Banking and Financial Services Europe (retired), who has been helping the CSFI to understand the requirements of an ageing population, will talk about the importance of biometrics in the useability toolkit needed to this key segment of bank customers (or, why looking at a mobile phone is easier than remember a PIN for most of us!).

The usual well-informed and wide-ranging discussion will ensue, with wine and sandwiches for all. Don’t miss this opportunity to learn from Rick while he is visiting the UK. There may be a few places left so if you’re interested in seeing how the biometric state of the art is advancing in banking, do come along. Contact anna@csfi.org for further details and to reserve your place at this excellent (free) event. A couple of years ago, some people might have thought statements like this were speculative:

Within 10 years. “The economic payments system will begin to ‘know us,’ either through biometrics, optical sensor or facial recognition,” says Joshua Siegel, managing principal of StoneCastle Partners, a New York-based asset management firm that invests in banks.

[From Here’s What Banking And Money Will Be Like 30 Years From Now – Business Insider]

Who now seriously thinks that this isn’t true?

Account number portability is on the PSR’s agenda. Sorted.

Dave Birch — Mon, 30 Mar 2015 09:23:19 +0000

The UK’s new Payment System Regulator has just published its policy statement and it contains references to Account Number Portability. I hope they go down the sensible path of virtual account numbers and “paynames” because, as I’ve been banging on about for years, bank account numbers and mobile phone numbers are not the same thing.

The Economic Secretary to the Treasury, Andrea Leadsom, has been consistent in calling for bank account portability as a way to do something about increasing competition.

Wouldn’t it be great if you could change your bank account from one bank to another at the touch of a button? So if you were fed up with the service your bank was providing or you wanted to take advantage of a great offer at another bank you would be able to switch without having to worry about changing all your direct debits, standing orders, cheque books, cards, account number etc.

Ever since I was first elected I have been campaigning to ensure customers can change their bank accounts as easily as a customer can change their mobile phone provider.

[From Andrea Leadsom | Working For You | Andrea’s Blog]

I asked Andrea about this when she was kind enough to drop in to techUK recently. With my chair-of-the-payments-group hat on, I thanked her for her plain speaking on the waste of money that was the Current Account Switching System (CASS) and enquired as to why account switching was still below it’s peak. I’m paraphrasing greatly, but she said that in essence it wasn’t worth switching because the banks are all the same. Other people have made the same point.

Customers may also not be able to make meaningful (to them) distinctions between financial services brands

[From New banks fight giants, but public still not switching]

However, there is a strand of thinking that says that switching might be reinvigorated through a solution with no impact on employers, utilities, friends, charities and so, and that is Account Number Portability (ANP) for UK banks. I notice that ANP has shown up in the new UK Financial Conduct Authority’s Payment System Regulator’s policy statement “A new regulatory framework for payment systems in the UK” (March 2015). The regulator says it will look at “current developments and innovations in the sector such as Account Number Portability”. Personally, I don’t think it’s a current development (there are no plans even for plans for ANP), but it could be an innovation to make Andrea proud. But how?

Well, as I mentioned to Andrea at techUK (I was the nutter at back who kept going on about “7-0” solutions, Angela) the best way to do this is with virtual account numbers (VANs) and virtual payment names (“paynames”). What’s more, an odd quirk of British numbering systems suggests a fun way to do this.

All mobile phone numbers in the UK begin with a “7”. Well, what if all VANs in the UK began with “70”? How cool would this be? The two main portable numbers that a consumer needs would both begin with a “7”.

[From Guest post: One virtual account number to rule them all | FT Alphaville]

I made this point in public three years ago when I was explaining why the Current Account Switching Service (CASS) would be a waste of money. I said at the time

In the general case, payers should enter the payee’s “Pay Name” (e.g., £dgwbirch or £chip.com or £donations@oxfam or whatever) rather than a mobile phone number…

[From E-ASS about face]

Square have just introduced the “cashtag”, which is basically this idea except doing something about it rather than just blogging about it. I’ve already bagged my cashtag. It is, as you might expect, $dgwbirch. The idea of the cashtag is so good and so obvious, even at the time of CASS planning, that, as my good friend Carol Benson observed… why isn’t my bank doing this?

Well, why indeed? I have no idea why they set about building CASS instead of developing the VAN idea, because it’s obviously a better use of industry money and a more effective long-term solution. The cashtag shows just where the VAN could go in terms of consumer convenience. I’ve been testing mine by inviting people to send money to the Dave Birch Holiday Home in the South of France Emergency Appeal Fund and so far I’ve got $4. So I can tell you unequivocally that it works, and that it is better than giving out bank account name, bank account number and bank sort code. And, of course, it’s portable. Right now it’s linked to my Simple account, but I can change it at any time to link to a different account.

Incidentally, I even explained how to fund the scheme, something I hope that the PSR’s management consultants will find when googling around for ideas in the coming months.

The Payments Council should sell vanity Pay Names to fund the development of the system and to keep it free to users. I’m sure some far eastern oligarch will cheerfully stump up a million or two to own £007 and I’m sure that even in these straightened times the forward-thinking finance director of Consult Hyperion could be persuaded to spend a few quid on £chyp.com and so on.

[From E-ASS about face]

So there you go, PSR, sorted. One less thing for your team to deal with. I’ll ask the team down at CHYP End to deal with your “Identity Assurance” thing next…