Fintech Finance presents: The Paytech Magazine Issue 02 by Fintech Finance

ISSUE #2

THE

PAYTECH MAGAZINE

INSTANT GRATIFICATION

With the cross-border Payoneers

SINGAPORE SWING

All to play for at the region’s Money20/20

GUEST EDITOR

FRAUD DAYLIGHT

A crimefighter’s guide from Tony Craddock of the EPA

BY GEORGE!

Innovative Erste Bank Group is 200 years young

HARD CASH CYCLE v4.0

BEYOND ASIA: TSUYOSHI NOTANI ON JCB’S GLOBAL AGENDA

GLORY polishes its crystal ball

FIDO ● ATMIA ● SMARTSTREAM ● ACI WORLDWIDE EY ● FITCH ● G+D ● SWIFT ● LLOYDS BANK ● RBR ● CITI ● BUD ● TRULIOO PLUS INSIGHTS FROM

The After Payment Emotional Experience. The After Payment Emotional Experience (APEX) is a retail phase that arises once payment for a product has been made. We discovered that retailers are currently ignoring APEX, putting customer acquisition and retention at risk. Go to www.valitor.com/reports to access our latest research and sign up to receive the APEX report at launch.

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CONTENTS

GUEST EDITOR 8

Conquering fraud through co-operation Payments-related fraud costs the UK economy more than £2.4billion annually. Guest Editor Tony Craddock, Director General of the Emerging Payments Association, explains how it’s playing a leading role in addressing the challenges

MONEY20/20 ASIA 14 Once upon a time in Singapore The Money20/20 Asia event will tell four stories, tracking key developments that are driving the agenda in financial services in what is probably the most diverse paytech region in the world

18 Where fortune favours the bold

THEPAYTECHVIEW

2019 ISSUE #2

Our Guest Editor for this issue of The Paytech Magazine is Tony Craddock (right), director general of the UK’s influential Emerging Payments Association. A lively public speaker, colourful social media commentator and avid networker, with a passion for payments and the difference the sector can make to lives everywhere, he was a natural choice to head up this edition. One of Tony’s key messages as he takes an in-depth look at financial crime in the emerging payments sector – what’s really going on, by whom and at what cost – is that nothing will be solved unless we work together. Which leads neatly on to another key theme of this issue – the payments ecosystem.

Partnership working is becoming an essential component of success, but there are many different approaches. Here, we explore some of them. Talking about getting together... check out our Money20/20 Asia section for who’s in Singapore this month. See you there!

Southeast Asia is emerging as the next big trophy when it comes to paytech, according to EY. But this complex melting pot of financial cultures will be no easy win

20 Do adjust your set! Consumers demand a Technicolor service but incumbent banks are, by and large, still working in monochrome. Citi Global Banks Research in Dubai believes it’s time they caught up

22 Lab Report SmartStream, the global software and managed services provider, set up the company’s innovation lab in Vienna less than a year ago. Here, we examine the data cultures it’s growing in the payments Petri dish

ECOSYSTEMS 24 JCB: Where East meets West You can't second guess what the paytech future might hold, which is why JCB, Japan’s only payments network, is keeping an open mind as to where it will go next… and with whom www.fintech.finance

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Always on your phone? So are your customers. • Instantly verify 5 billion customers & 250 million businesses worldwide • Automate customer due diligence with real-time AML/KYC checks • Reduce fraud with document verification, facial recognition & mobile ID technology

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CONTENTS

34 42

28 28 Buddying up over Open Banking A small team in London’s East End is attempting to turn the banking relationship on its head with a marketplace of services that helps banks put the customer in control

32 Halt! Who goes there? Trulioo provides instant personal identification and business verification. We discusses marketplaces, the power of partnerships and positive IDs

CROSS-BORDER PAYMENTS 34 Open minded Lloyds Bank was one of the first on the high street to share data through Open Banking APIs. Now it’s keen to turn that experience to its advantage in cross-border payments www.fintech.finance

36 Landing a payments punch! SWIFT's Global Payments Initiative (SWIFT gpi) is demonstrating that it’s not a simple playoff between traditional bank messaging systems and distributed ledger technology

38 Fast forward ACI Worldwide’s Universal Payments solution is helping propel banks towards a real-time reality

40 Staying in the loop With its 'closed loop’ transaction platform that avoids using the correspondent banking system, Payoneer has run rings around old cross-border payments for more than a decade – with dizzying results for SMEs in both developed and developing economies

DIGITAL PAYMENTS 42 How digital identity can help us face up to financial crime The UK is in danger of falling behind other countries in its limited and fragmented approach to identity, says Guest Editor Tony Craddock. The Emerging Payments Association believes it’s time the whole industry took joint action

48 Can you keep a secret? We’ve long relied on passwords to unlock sensitive and financially critical areas of our lives but now the secret is out: passwords are failing us. The FIDO Alliance scopes an elegant solution

Issue 2 | ThePayTechMagazine

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CONTENTS

56 51 58 51 Now you see it... Consumers are largely oblivious to the fiendishly clever technology enabling their mobile payments. Giesecke+Devrient can foresee a time when they won't even consciously have to make them

54 The paytech route to prosperity Erste Bank Group has been a pioneer in financial services for 200 years. But today’s payments technology has the power to disrupt like never before

54 60 Follow the money

POINT OF SALE 56 Solving the payments paradox: how to score a peak-end blinder! Seamless almost to the point of invisibility, payment still makes a powerful difference to the in-store experience, as branding and design agency FITCH demonstrates

HARD CURRENCY 58 Jumping into the pool?

GLORY looks at the evolution of the cash cycle from Version 0.0 to 4.0 and asks: what next?

64 Access to cash: The hard facts The British public isn’t alone in wanting to hang on to cash transactions, so why make it so hard to do so? asks ATMIA

LAST WORDS 66 Stu’s Reviews

Interest in ATM pooling has surged globally in the last two years. RBR considers why

Our man on the street kicks the tyres of the latest finance-related technology. This issue, he’s checking out an interesting addition to the growing number of smart watches

THEPAYTECHMAGAZINE2019 EXECUTIVE EDITOR Ali Paterson EDITOR Sue Scott ART DIRECTOR Chris Swales ONLINE EDITOR YASH HIRANI

PHOTOGRAPHER Jordan “Dusty” Drew SALES James Butcher Chloe Butler Tom Dickinson Shaun Routledge

VIDEO TEAM Douglas Mackenzie ● Lea Jakobiak ● Shaun Routledge Lewis Averillo-Singh ● Classic Dom Beasley ● Laimis Bilys FEATURE WRITERS David Firth ● Tracy Fletcher ● Natalie Marchant Sean Martin ● Fiona McFarlane ● Sue Scott Swati Sanyal Tarafdar ● Stuart Thomas

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All Rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, photocopying or otherwise, without prior permission of the publisher and copyright owner. While every effort has been made to ensure the accuracy of the information in this publication, the publisher accepts no responsibility for errors or omissions. The products and services advertised are those of individual authors and are not necessarily endorsed by or connected with the publisher. The opinions expressed in the articles within this publication are those of individual authors and not necessarily those of the publisher.

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Issue 2 | ThePayTechMagazine

Leading from the front: EPA director general Tony Craddock

Conquering fraud through co-operation

Payments-related fraud costs the UK economy more than ÂŁ2.4billion annually. Guest Editor Tony Craddock, Director General of the Emerging Payments Association, explains how itâ&#x20AC;&#x2122;s playing a leading role in addressing the challenges 8

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GUEST EDITOR: TONY CRADDOCK

Financial crime over the last two decades has become a significant concern to governments across the world. This stems from the direct losses incurred, the serious detriments for individuals and society - for example through human trafficking, tax avoidance or terrorist financing – and the impact on economic development of societies and on the rule of law. According to a survey in 2018 by Refinitiv, $1.45trillion is the estimated aggregate turnover lost as a result of financial crimes around the world. That represents 3.5 per cent of global turnover. The Emerging Payments Association (EPA) has produced a white paper to set out the nature of payments-related financial crime in the UK and to identify actions that should be taken collectively by industry players or together with regulators and policy makers to reduce criminals’ ability to exploit payments services and systems. The Financial Crime Working Group set up by the EPA has set out its recommendations in nine key areas including Training and Awareness, Access to Banking and Effective Deployment of Technology. Here, I’d like to take a

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more in depth look at three areas of focus: ‘Transaction Analytics’; ‘Information Sharing & Reporting of Financial Crime’; and ‘Know Your Customer’.

Transaction Analytics Machine learning and artificial intelligence (AI) techniques are increasingly being applied to large, complex datasets to solve problems in many fields. Some of these tools have been used to predict payer behaviour for more than 20 years, but with the increase in computing power and storage these are now being applied to ever larger databases. Identifying networks of criminals and irregular payments is a suitable application, however each payment services provider (PSP) is limited to its own narrow view of transactions. The Payment Strategy Forum, formed by the Payment Systems Regulator in the UK, recognised in its strategy in November 2016 that analysing payments transactions between all PSPs across a time period would be a powerful tool in the detection and prevention of financial crime. For the first stage of implementation, Pay.UK worked with infrastructure supplier

Vocalink, a Mastercard company, to provide an innovative network-level, anti-money laundering and mule account detection service. This service (Mule Insights Tactical Solution) enables suspicious payments to be tracked as they move between payment provider accounts. This is irrespective of whether the payment amount is split between multiple accounts, or if those accounts belong to the same or different financial institutions. This service creates a visual map (dispersion tree) of where and when money has moved, providing data-driven insights and new intelligence for financial institutions to act on quicker than ever before.

$1.45trillion is the estimated aggregate turnover lost as a result of financial crimes around the world

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GUEST EDITOR: TONY CRADDOCK The EPA is supportive of this initiative and will engage with industry in developing opportunities where the analytical capability could be extended and diversified across payments types. But criminals who find their inter-bank payments are tracked will inevitably use transfers via other payment mechanisms to conceal the flow of funds. In addition, with one analytic approach in place they may be able to develop measures to conceal some of their transactions. It is therefore suggested that broader data sets should be sourced from multiple payment instruments (including cross-border payments, to or from Europe and beyond) and analytic capability extended to support the development of innovative techniques by multiple providers of analytics. This will avoid a systemic risk and will prevent criminals gaming the analytics system. The approach of bringing together data and analytics to a secure, central set of resources, is one model that the EPA believes would ensure both continued progress and reliability.

EPA Recommendation: Support and facilitate approaches within the industry for transaction monitoring analytics, extended across payment types and using a wider range of data sources and analytic techniques.

Financial Crime Information Sharing The opportunity exists for enhanced information sharing on known and suspected financial crime, supporting closer working between industry, law enforcement and government. This would include more payments providers outside credit institutions and would deliver benefits in enabling greater prevention, detection and prosecution of financial crime. Furthermore, legitimate customers would experience less friction in carrying out their payments and society overall would benefit from more effective prevention. For tackling payments fraud, some parts of the industry have in place mechanisms for sharing information, for example through CIFAS and UK Finance. These have typically been constrained to confirmed cases and held in separate databases to protect data access, and participation is restricted to members paying a subscription. For sharing information on money laundering, the industry is required to submit suspicious activity reports (SARs) to the National Crime Agency (NCA) and currently receives limited feedback on the value or effectiveness of SARs raised. The SARs reform programme under way seeks to enable more information to be shared with

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The Criminal Finances Act is seen as not sufficiently incentivising institutions to share money laundering intelligence, and its complexity prevents wide usage law enforcement, developing the sharing model produced by the Joint Money Laundering Intelligence Taskforce (JMLIT). SARs reform is an opportunity to revolutionise the financial control framework in both effectiveness and efficiency, increasing the quality and enhancing the analytical capability while also achieving the right quantity of SARs. The EPA encourages its members to engage in the public/private partnership initiated by the Home Office with the banking industry to strengthen its impact in reducing financial crime. We welcome initiatives that address the concerns of the Financial Action Task Force (FATF) in relation to the UK Financial Intelligence Unit (FIU). Across law enforcement, industry, government and regulators, there is recognition that further work is required to

establish a more effective legal framework for sharing of financial crime information (both known crime and credible allegations). This would need to adhere with data protection and client confidentiality and have clear framework for liabilities. The Criminal Finances Act (CFA) 2017 contributed to moving this forward â&#x20AC;&#x201C; for example, enabling information sharing on a voluntary basis where there is suspicion of money laundering, generating better intelligence for law enforcement agencies and helping firms better protect themselves. However, the CFA is seen as not sufficiently incentivising institutions to share money laundering intelligence and its complexity prevents wide usage. Further work is underway to develop the necessary legal framework. The UK also is driving changes internationally www.fintech.finance

Be prepared: Clear principles for depositing and receiving information could help

through FATF requirements to enable greater sharing. Developments in information sharing can be between all payments-regulated and AML-regulated entities within the industry, and between industry and law enforcement. Payment service providers and operators are well placed to identify suspicious activities related to individual payments or account behaviours over time. With the growth in payment providers due to innovation and Open Banking standards, approaches to information sharing will need to encompass a wider range of payments providers, otherwise the criminals will be able to switch their activity to providers outside the sharing network. Many regtech companies to whom regulated entities could outsource are unable to obtain approval to hold the information. A mechanism for regtechs to be certified to participate could transform the effectiveness of shared information. The EPA is an www.fintech.finance

advocate of initiatives to share financial crime information in order to manage financial crime risks in the industry, where the sharing needs to be inclusive of all regulated payments companies irrespective of size. It needs to go beyond banks/credit institutions to include authorised payment institutions, electronic money institutions, the newly regulated third-party providers and regtech suppliers of data. The set-up and ongoing costs for smaller payments firms to access information sharing services must be set at a level to allow fair competition in capabilities to tackle financial crime. Following publication of the Government’s updated Serious and Organised Crime Strategy (November 2018), the EPA’s policy is to support sector-wide

activity to determine the level and extent of information that can be shared by government and law enforcement, and between industry players, for the benefit of regulated payments entities. The EPA with its members is exploring how to develop clear principles for depositing and receiving information via a sharing mechanism in ways that are viable for payments providers and operators.

Really know who the customer is Validating static identity documents like government IDs and passports against your name and date of birth is no longer enough to understand your customer. Location data, social interactions, phone habits, spending patterns and a variety of other attributes are now at the disposal of service providers, in and outside the payments space. To really know your customer, firms have to monitor behaviour. A step towards preventing fraud and money laundering is to prevent bad actors from initially entering the system, but this isn’t something done only at on-boarding. Ongoing behavioural monitoring is essential to knowing not only your customer, but their motivations, and the whole network. Firms with this overall view are understanding how criminals operate, identifying rogue participants and stopping the problem at source.

EPA Recommendations:

KYC isn’t a once-only exercise: You have to stay on top of it, says Craddock

■ Engage with EPA members to create a shared position on developing the case for a global approach to KYC standards ■ Support and facilitate a collaborative member-wide programme to create minimum standards for due diligence on suppliers of data services ■ Support and facilitate a collaborative member-wide programme to share models and learnings from analysing customer behaviour that members can use with their own data

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A combination of big data, machine learning, and human intervention is key to making sense of the criminal world. A wider variety of data points is being taken, from phone characteristics to spending habits and other public and private sector sources to build up a picture of how a typical customer acts, how you as an individual act, and crucially, how the wider financial network interacts. Machine learning and behavioural analytics create a model of the world and can then identify anomalies; spreadsheets should be obsolete when it comes to the scale required to uncover the increasingly complex networks where criminals hide. But what is normal? Customers now demand a frictionless journey, but the digital-led world has provided criminals with more tools to open accounts and easily make payments. APIs, scripts, bots and other technology are allowing the creation of essentially false environments that interact for some time, until the illegal funds are ready to be moved. Then when it happens, itâ&#x20AC;&#x2122;s not unusual because the framework has already been created. The industry now understands this practice, but it highlights not only the balance required between friction and security, but the level of sophistication required to identify sources of wealth coming into the system and then following the money. Even with all this automation, computers alone arenâ&#x20AC;&#x2122;t enough. The modern world still needs that human touch to decipher it. Context, feedback and fine-tuning are essential to training these models, to determine whether a trend is relevant. Secondly, a system will only be as good as the data fed into it, so when combining multiple sources, a data cleansing stage is also essential to reduce false positives. Finally,

Facing up to Financial Crime white paper Sponsored by a syndicate of EPA members led by Refinitiv and Barclays, this paper will enable the emerging payments industry to address the underlying causes of financial crime and protect everyone from the criminals behind it. You can access the white paper online at www.emergingpayments.org

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following up alerts by making a phone call or some other contact with the customer, will always require human involvement. The above principles apply whether the customer is a consumer or a business. Specialised KYC analysts are still needed, as the fragmentation and UBO concealment highlights the need to make sense of these layered referral models, especially in how merchants are approved for accepting card payments. Indeed, while machine learning can uncover patterns without any preconceptions, PSPs should still use a risk-based approach using known indicators when deciding whether to apply additional scrutiny for a customer. Sometimes, human intuition is required to validate any red flags arising from an alert or risk assessment, or to personally visit company locations, which may belong to a fiduciary or incorporation service, or a generic rentable office, rather than the principal place of business. Lines can be blurred as top companies increasingly recognise the benefits of co-location spaces like WeWork. Machine learning technology has been around for some years now, but the EPA can help promote its appropriate use. Duplication in validating customers and modelling data sources is inefficient and with the increased burden of compliance put on financial services firms, resource available to innovate is at a premium. The EPA can encourage members to share data sources within their own network, so that data only needs obtaining and sanitising once, to an agreed format. EPA members can decide on minimum supplier standards within their group so that vendors used among members are effectively endorsed.

We know youâ&#x20AC;&#x2122;re out there: But can you identify bad actors quickly enough?

The pretence of normal: New technology is in itself creating a false framework

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GUEST EDITOR: TONY CRADDOCK

ABOUT THE EPA... The Emerging Payments Association (EPA), established in 2008, connects the payments ecosystem, encourages innovation and drives profitable business growth for payments companies. Its goals are to strengthen and expand the payments industry to the benefit of all stakeholders. The EPA has more than 130 members and is growing at 30 per cent annually. Its members come from across the payments value chain, including payments schemes, banks and issuers, merchant acquirers, PSPs, retailers, and more. These companies have come together, from across the UK and internationally, to join our association, collaborate, and speak with one voice. www.emergingpayments.org

Economies of scale could also be leveraged when seeking new data sources. Indeed, as part of its commitment to reducing corporate fraud, the EPA is already in discussions to promote a global company database where subscriber fees will be reduced, based on the amount of fraudulent activity reported. The lack of a harmonised global approach to KYC standards is also seen as a barrier to conducting effective compliance. The EPA can support members in raising the profile of this issue by developing and projecting a consistent message from its members for engaging with regulators. Simply using more data sources is not the complete story because of the difficulty in scaling labelled data. Instead, the predictive nature of machine learning will need to be exploited to determine how customer behaviour will evolve. Transfer learning allows the creation of behaviour models that can then be used www.fintech.finance

APIs, scripts, bots and other technology are allowing the creation of essentially false environments elsewhere, so EPA members could fine-tune those models with their data and directly benefit from them. We also support peer recommendations to broadcast trend activity (such as new methods of fraud) in an anonymous manner to alert members to active threats, in line with our information sharing policy. This must be done in a way that does not jeopardise commercial information or liability. We consider that blockchain solutions having the potential to record incorrect outcomes permanently need further legislation to resolve liability concerns.

In conclusion It is clear from research for this report that payments service providers and payments

systems operators are positioned to play critical roles in the fight against financial crime. They can directly stop fraudulent and laundering transactions from being executed across the services they provide. Across the payments industry, the threats faced from financial crime are varied, large-scale and continually evolving. The industry has done much in recent years to tackle this, for example Chip & PIN, tokenisation of card details, and now confirmation of payee and strong customer authentication. However, there is widespread acceptance that much more needs to be done. This needs to encompass prevention, reduction of impact, detection and prosecution, based on robust understanding and evidence of the nature and scale of threats faced today. The key requirement is collective action, involving all parties in the payments supply chain. Going beyond the industry, there should be active collaboration across stakeholders, including customer groups, law enforcement, government and regulators. As a trade association, the EPA can articulate a balanced view, across many payment companies, of the challenges faced from payments financial crime, and opportunities to conquer them. Issue 2 | ThePayTechMagazine

MONEY20/20 ASIA

Once upon a time in Singapore The Money20/20 Asia event will tell four compelling ‘stories’ that are driving the region’s agenda in financial services. Are you sitting comfortably? Then we’ll begin with Pat Patel, Global Content Director for Money20/20 and Rebecca Martin, Content Director for Asia Pacific, talking to Ali Paterson ALI PATERSON: This is the second Money20/20 Asia event and you’ve introduced a fun retro gaming theme to this year’s event… as if there wasn’t enough to keep us all amused! PAT PATEL: There certainly won’t be time to get bored! The retro gaming theme is essentially there to create a different

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on-site experience for the attendees, while the 'stories' (see page 16) will frame what’s going on in the industry. There twill also be insights provided by high level, senior speakers, as well as domain experts, including Tan Hooi Ling, co-founder of Grab; Wendy Sun, senior director Fintech Group at Tencent; Patrick

Cao, president of Tokopedia, and Andy Maguire, group MD and chief operating officer at HSBC. At last year’s Money20/20 Asia show, we were really overwhelmed – in a positive way! – by the fact that so many meetings and serendipitous conversations took place between likeminded individuals,

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that are separated by geographies. Having our US and European audiences come together with similar thinkers from the Asia region was certainly one of the highlights. We expect to see the same this year, with speakers from multiple regions sharing great ideas and lessons learned during the days, and getting together again for evening networking. AP: One of the things I love at these conferences is when you accidentally eavesdrop on conversations that just would not happen anywhere else. What would you like to overhear being talked about at the show? PP: Potential collaborations between some of the large Chinese tech players and maybe some of the banks. Or conversations that are going on around mergers and acquisitions. We get to hear quite a bit in the run-up to the event and onsite. Then, six months down the line, hey presto, an acquisition is made or a merger announced and we’re in a privileged position of having been privy to these conversations. REBECCA MARTIN: I think there’s a kind of secret sauce that happens in the VIP speakers’ lounge and in our greenrooms, where you just feel so fortunate to be part of it. You’re overhearing people meeting for the first time, industry legends, that you may have worked with for a while and know very well, that haven’t connected with someone you also know very well. It’s kind of mind blowing and you can see, instantly, the synergies and partnerships that could happen out of those meetings. This year, we’re working with Melissa Guzy, managing partner of Arbor Ventures, who is our host for the main stage. We were really keen to get an industry insider, a big venture capital name that’s able to help with some of those connections happening backstage, and make sure that everyone’s having those private meetings throughout the event. Melissa is that person. Onstage, however, you rarely see direct competitors or companies with similar business models, coming together into the same sessions, which is something we’ve been working really hard on. It involves a lot of negotiation and discussion with teams to make sure it’s done in the right way.

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One of our sections, called the Business Model World, I’m really excited about, because it’s bringing together KakaoPay, WeChat Pay and AirAsia’s mobile wallet, BigPay – the leading wallets of Malaysia, China, and Korea. Arguably, they have the same business models, but they may not have looked at each other’s models so closely before. The audience might not have had the opportunity to compare and contrast them in this way, either, so it’s a way of giving them the experience of those insider conversations that we were talking about. AP: We’re expecting an announcement on the Hong Kong Virtual Banking Licence to happen around the time of the show. That’s quite a big deal, isn’t it? RM: Exactly right. A number of the players taking part – tech giants, startups and banks – are in the running for the Virtual Banking Licence.

definitely high up on the agenda in Singapore. Why was that? RM: The most exciting blockchain projects are happening across the APAC region but there were certain constraints that we faced around talking about them in China. This time, we really want to showcase the rising stars across the Association of Southeast Asian Nations (ASEAN) and Asia Pacific regions, and Singapore is exactly the right place to bring that to life. There is a Token Day (on the first day of the show) that looks at stable coins, digital currencies, and digital fiat currencies. There’s a really interesting debate happening at the moment between regulators and industry practitioners, about how tokens get incorporated into our everyday life, and that’s something we can really focus on here in Singapore, given it’s where the world’s biggest exchanges are.

KakaoPay, WeChat Pay and AirAsia’s BigPay – the leading wallets of Malaysia, China, and Korea – which arguably have the same business models – may not have looked at each other’s so closely before, and the audience might not have had the opportunity to compare and contrast them The big question is whether an incumbent bank, such as Standard Chartered, which we know is in the running for one of these licences, has the talent, skills and technological know-how to make it work, given it’s used to legacy infrastructure. And, even if a bank does get it right, what’s the long term play? Is the aim to move its core customer base to this digi bank and cannibalise the business it already has? These are the sorts of questions that we want to tease out – to look at the challenges the incumbents are facing and understand how they’re trying to address them. AP: There was a noticeable lack of discussion topics around crypto at Money20/20 China event and yet it is

AP: Singapore appears to be key in many ways to the development of financial services in the wider Asia region. RM: You’re right. Singapore is that melting pot. A lot of Southeast Asian and global businesses have their headquarters in Singapore, or at the very least have an office there. And lot of people use it as a hub. Money20/20 Asia is ideal for people to have meetings around the event, so they’re getting more value out of coming half way across the world. We also see Singapore as our home from which we can represent the full APAC region, but, crucially, the event also allows us to bring in our expertise and insight from running the US and the European events.

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MONEY20/20 ASIA

What to expect at Money20/20 Asia 2019 The Challenger Bank Playbook While challenger banks have been around for a few years now, there are three types of emerging playbooks, or strategies, that are relevant for the Asia show. The first playbook is the startup or digi bank – the Revoluts, the Monzos, the Number26s, the Starling Banks – all incredible fintechs that have gained a lot of scale in Europe and are slowly looking to expand their propositions into Asia. Many are looking to set up headquarters here, in Singapore. They are familiar names to many of us now and they’ve certainly raised a lot of cash, but many are still struggling to gain scale in retail banking, so we’re starting to see them evolving their strategies, whether that be offering a SME proposition or a banking-as-a-service one, such as Starling Bank’s recent tie-up with RBS. The second group in the Challenger Bank Playbook are the tech giants. We’ll be examining how the Ant Financials, Tencents, Grabs and ZhongAns of this world are starting to build out their super apps with mobile wallet, lending and insurance, all on their existing platforms. But what’s really new for this year, is the third chapter in this part of the story: the incumbent banks. We’re seeing many of them trying to set up their own challenger banks as completely separate units. Standard Chartered and the virtual bank it’s building in Hong Kong is just one topical example. We’ll question what this model looks like and if incumbent banks have the right talent to succeed.

The Platform Ecology Model This ‘story’ considers the super app model that we’ve seen come out of China from tech giants like Ant Financial and Tencent,

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Rebecca Martin, Money20/20 Content Director for Asia Pacific, talks through the four key themes of this year’s show in Singapore which are building hyper scale through their platforms by integrating multiple products and services into one app, with a frictionless payment layer underneath. Within these platforms, they’ve built massive ecosystems of their own and third-party products to offer to consumers, enabling those third parties to see each other as partners rather than competitors. These ecosystems encourage them to work together to deliver contextualised and seamless experiences for customers. We’ll look at the economics behind this super app model and how it’s expanding outside of China. How regulators in Europe and the US approach it and what the opportunities and challenges are. The Platform Ecology Model is a major disruption for the incumbent players in financial services; it threatens the loss of their touchpoint with the customer and their data. What should they do? Partner or compete? Listen out at the show for some exciting announcements from Grab, Southeast Asia’s dynamic ride hailing service, about its plans for the financial space.

Token Day Our whimsically entitled Token Day, which takes place on the first day of the show, is where we concentrate on blockchain and tokenisation, and ask what the future of a tokenised economy might look like. We’ve seen the rise and fall of initial coin offerings (ICOs) and the crypto phase fading out, but we’re starting to see some at-scale, successful blockchain projects come to the

fore in the cross-border payment space, in the supply chain and in supply chain financing. We’ll shine a spotlight on some of these, what’s working, what’s not, where the value is and how we bring young, entrepreneurial talent from the blockchain world together with our core financial services and payments community. Headlining Token Day is a huge announcement from IBM’s blockchain division around cross-border payments, delivered by its head of blockchain solutions Jesse Lund alongside Jed McCaleb, founder of Ripple and Stellar.

Cybersecurity and Identity Deep Dive ‘The next financial crisis will be a security crisis. If you think you haven’t been hacked, you probably just don’t know it yet’. That’s a phrase that should stick in the mind. No-one can shy away from this topic. So, for this part of the story, we look at the technologies being used to address hacking and cybercrime, security and data protection concerns, including artificial intelligence (AI), machine learning and analytical services. Then we’ll consider the different approaches to regulation, privacy and protection laws across Asia, which are different again from the rest of the world. So, how do you even build an identity that’s interoperable across regions? And should you even try? ■ Money20/20 Asia takes place in Singapore from March 19-21. Go to https://asia.money2020.com www.fintech.finance

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MONEY20/20 ASIA

Opportunity knocks: But you’ll need more than luck to penetrate Southeast Asian markets

Where fortune favours the bold Southeast Asia is emerging as the next big trophy in paytech. But this complex melting pot of financial cultures will be no easy win, says James Lloyd, Asia-Pacific FinTech and Payments Leader at EY

2019 is shaping up to be an interesting year in financial services in Southeast Asia. We’ll see a huge amount of activity around challenger banks, some of it driven by the incumbents themselves. DBS Bank, for example, has already launched digital banks in the growth markets of Indonesia and India; CIMB Group has recently announced the same in the Philippines and Vietnam. In Hong Kong, Standard Chartered has announced its intention

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to build a ‘greenfield’ digital bank. We can also expect to hear further announcements from more global and large regional financial players in the coming months. But these challenger banks and other financial services providers will not necessarily take the form we recognise in the West. One of the big differences between some of these markets and elsewhere is the presence of large technology platforms and distribution partner

arrangements. KakaoBank, launched in 2017, has generated a huge amount of traction. It’s a consortium bank, built on top of Korea’s largest messaging platform. There are other examples of this type of activity across the region, such as in Taiwan where Line Corporation, another of Asia’s large messaging services, is also building a bank with the help of established regulated entities in the form incumbent bank shareholders. In Hong Kong, there has been a regulatory www.fintech.finance

initiative to issue full retail bank licences to new players, with the banking regulator currently in the final phase. The types of applications and authorisations we can expect will involve large Chinese and international players, as well as joint ventures between technology, banking and distribution partners. Hong Kong is already a highly profitable retail banking market, but it’s also a jumping-off point. If you were inclined to build a regional proposition, this would be a good place to do it from.

Opposites attract All of this is giving rise to an interesting dynamic, given that cutting-edge payment services, like Alipay and WeChat Pay, still require users to have an associated bank account to enjoy full functionality. Historically in China, getting access to a bank account has been straightforward, but getting access to cards or basic wealth management investment products has not. Going back 10 years, Alibaba created Alipay as an escrow payment service to enable people to transact online because they didn’t have credit cards, and, for the most part, credit card penetration remains very low, relative to the West. So, Alipay became a wallet with a very real function: to address a market gap,– similarly with WeChat Pay. They both effectively became stored value facilities that enabled users to move money from bank accounts into a wallet, and then, once in the wallet ecosystem, use it to pay for ecommerce or conduct peer-to-peer transactions. As we know, they’ve grown that functionality to allow people to do all kinds of things, both online and offline. However, these services are not banks; they sit on top of bank rails. There is still an account in the background, not least because that’s where, ultimately, know your customer (KYC) and anti-money laundering (AML) is initiated. These wallets not only need to be associated with a bank account but also, typically, with a telephone number – multiple identifiers from a regulatory perspective. As some of the big Chinese players go outbound, we expect to see more fully licenced bank versions of that type of proposition.

Lands of opportunity Compared to China, bank account penetration is very low in the developing markets of Southeast Asia, such as www.fintech.finance

Indonesia, the Philippines and Vietnam. So, can you really take the China model and replicate it there? Organisations are quickly learning that the answer to that is ‘no’, because there isn’t the underlying financial infrastructure of bank accounts, clearing and settlement systems. They need to build much of that infrastructure themselves. This is what makes the development of financial services in Asia so interesting and such a challenge. You have a unique combination of markets: highly developed global financial services centres like Hong Kong, Tokyo and Singapore; the rapid growth of developing markets in the Southeast; and China, which is of a size and speed that is unparalleled. All of these are beginning to intermix, due to the other defining characteristic of this region – a huge amount of cross-border movement of people, trade and money. Each market has a different currency, regulatory regime, financial infrastructure and capital controls, so interoperating at a regional level in Asia is an order of magnitude harder than in the Eurozone or the US. Some Asian markets are fully banked, some are fully carded, some are fully banked with low card penetration, while others have a limited financial services market. What does this mean for a new entrant into Asia, particularly when, overall, a majority of the population of Southeast Asia is unbanked, with no formal, electronically verifiable transaction history from which to extend credit? There’s a huge informal economy based on non-bank lenders here but, ultimately, for technology-driven services, you need electronically verifiable information about someone’s borrowing and payment history, in a format you can assess systematically. We are beginning to see an infrastructure emerging in Southeast Asia – but it’s not necessarily coming in the form of banks. It may be provided by online-to-offline (O2O) services, such as ride hailing firms Grab and Go-Jek, both of which have moved into finance. Using ecommerce, ride sharing and

social networking – basically, anywhere people are transacting or interacting with online services – we can begin to build their digital footprint and better understand their relative financial status. In other words, develop a credit score and thereby offer additional services.

Infrastructure first Everyone sees the top-line figures in this region and thinks ‘the opportunity is huge’, and that’s correct. But it won’t look the same as a developed market. There is still a requirement to build the kind of logistics and financial infrastructure that will enable scale for credit and other financial services provision. It’s definitely not a case of putting bank branches on every corner. In an archipelago like the Philippines, for example, that’s just not practical. It’s more a question of edging people towards online financial services by moving an increasing number of their daily engagements and transactions offline to online. One example of the way in which this could be achieved is through the ‘warungs’, or stalls that you find at the side of the road in Indonesia and Malaysia. These are currently points of physical engagement but some of those relationships and transactions could start to have an online component to them as on and off-ramps to digital financial services, such as payments. For example, people could go to a warung to put cash onto a wallet, and then use that wallet for ecommerce or digital services. It’s technology players like ride sharing and on-demand services that are being forced to figure out workarounds like this. Meanwhile, the incumbent players will increasingly think about fintech as an opportunity for partnership as well as investment and acquisition in Southeast Asia. New financial institutions are appearing across many of these different markets and we anticipate multiparty joint ventures, partnerships or other equity shareholder arrangements between incumbent and non-traditional players.

Everyone sees the top-line figures in this region and thinks ‘the opportunity is huge’, and that’s correct. But it won’t look the same as a developed market

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MONEY20/20 ASIA

Consumers demand a Technicolor service but incumbent banks are, by and large, still working in monochrome, says Ronit Ghose, Head of Citi Global Banks Research in Dubai. It’s time they caught up “Do you remember black and white TV?” asks Ronit Ghose, head of global banks research at Citi. “Banks’ technology is that old. It’s not Netflix.” And yet it’s the streaming generation that the

incumbent banking industry must court if, after years of firefighting and rationing investments, it intends to stay relevant – and in business. “One of the challenges of banks, particularly in the UK or Europe, is that banks don’t make a lot of money,” says Ghose. “That’s a problem because, if we want the banks to be private sector companies, they actually need to make a decent return. That’s less of an issue in Asia or America, but it’s a real issue in parts of Europe.” Ghose is at this moment speaking in China, fresh from a presentation at the country’s first Money20/20, where he was bookended by the Deputy Mayor of London, Rajesh Agrawal, promoting one of the oldest financial capitals in the world, and Eric Jing, CEO of Ant Financial, whose platform, Alipay, is the world’s largest mobile and online payments platform with 700 million active users. “It’s a cliché to say ‘China’s a big country’, we know that, but the speed at which these companies can operate, I think that blows away many observers from so-called

advanced or developed markets,” says Ghose. “The bigger fintech platforms in China, or, more accurately techfin platforms, have several hundred million clients, often in the high hundreds of millions, and they can service them in nanoseconds. You can feel and live how digitised this society has become.” Few banks can aspire to the scale of an Alipay, but they should aspire to its speed, says Ghose. To achieve it, just like those black and white terrestrial TV services, banks must decide which new operating model they wish to adopt: launch a fleet of speedboat companies in an attempt to broaden their product offering; do away with silos and migrate their core banking system to the Cloud; layer up legacy with in-house application programming interfaces (APIs); or partner with fintechs. These are just some of the options facing them. “No-one wakes up saying ‘I love my bank’,” says Ghose. “They wake up saying ‘I want to spend some money’ or ‘I’m going somewhere, I need some foreign exchange’.”

DO ADJUST ! T E S R YOU 20

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How fast and how seamlessly a bank can facilitate those desires are key. But it’s fair to say they’ve struggled. As chief data and transformation officer at Singapore’s DBS bank, Paul Cobban, once overheard a taxi driver observe: “DBS? – you mean damn bloody slow”. Ghose was one of a series of analysts who sought to address how such banks could future-proof their businesses in last year’s Citi Global Perspectives & Solutions Bank Of The Future report. It looked at how traditional banks could use new technology and business models to improve the client experience and, hopefully, make them more profitable. The report’s analysts identified what they called the ‘ABCs of digital disruption’. In this lexicon for change, the first entry was ‘A for artificial intelligence (AI) and automation’. The financial sector was one of the leading early adopters of AI, which promises to reduce payment processing times, cut costs and boost efficiency. But for the intelligent software to work effectively, it needs massive data sets to ‘learn’ from. “Banks are all about data. That’s the heart of banking,” says Ghose. However, the problem for traditional banks is that much of this data is siloed and inaccessible due to both regulatory constraints and decades-old mainframe technology, which is product-based rather than customer-focussed. Challengers, on the other hand, can acquire, sort and store big data from the very start of the onboarding process.

AI in payment processing Spanish bank BBVA has successfully addressed this discrepancy by putting data at the heart of its modernisation programme. By the end of 2017, 92 per cent of its entire product and service offering was available on its mobile app, allowing it to learn about its customers’ specific needs across the group. This data could then be used to offer AI-driven solutions, such as categorising purchases to aid budgeting, to help make its customers’ financial lives simpler and easier to manage. Although it is worth noting that other banks often cited as being at the forefront of digital transformation are typically single-country focussed, or run along simple business lines, such as Capital One. AI and automation also have the www.fintech.finance

potential to reduce payment processing times and speed up product cycles while simultaneously boosting operational efficiency, particularly in labour-intensive areas such as compliance. It is useful in fraud detection, too. Traditional systems may consider a range of variables, including location, amount and merchant type in determining fraudulent transactions, but they can lead to false positives. AI can reduce this number of false positives by between 60 and 80 per cent, according to studies by Citi Global Banks Research. B in the ABCs of digital disruption stands for ‘big tech’ (not blockchain – Ghose believes ‘actual transformation’ through distributed ledger technology is some way off ’). The big in this instance refers to established global giants such as Facebook, Alibaba and Amazon. Many incumbent banks struggling with innovation and speed have sought to ‘buy innovation’ by teaming up with new entrants such as fintechs. But the real threat today comes from the big tech players, which often have an existing scale and client reach that matches, or even surpasses, those of the banks themselves. Web-based platform companies, aided by favourable government policies and a growing middle class, are beginning to make their mark in the payments sector – particularly in emerging markets like China. However, their endgame is less about disrupting the financial system and more about seeking to be all things to all people as part of a broader, holistic customer engagement drive. Tencent’s WeChat social messaging app, which has more than a billion active monthly users and also offers payments services, is a prime example. As such, incumbents would benefit from examining and learning from the business models of big tech firms, ‘particularly the idea of platform companies, and putting the client, not the product, at the heart of everything you do’, says Ghose. But if banks really want to use AI, or big data, and become more like the big tech companies, they have to rely on C: ‘core banking, the Cloud and challengers’. “If you want to be more like the big tech companies, you have to transform

your core banking services, because that’s the underlying foundation on which most of banking sits,” says Ghose, referring to the often 50-year-old legacy systems of many incumbents. The Bank Of The Future report forecast that core infrastructure overhauls were likely to become more common as integration of older systems became too expensive. Faced with increased competition, evolving customer expectations and greater regulatory burdens, incumbents will need to address system limitations to successfully compete with new entrants and boost profitability, it added. US and Australian banks, which were less hindered by the fall-out of the financial crisis than their European equivalents, have led the way in doing this. But as the financial ecosystem is becoming increasingly integrated, thanks largely to technological innovations and the influence of big tech players, banks are no longer guaranteed their spot at the top of a disrupted system. This is particularly the case in markets such as India, where WhatsApp is seeking to capitalise on its 210 million monthly users with the launch of a digital payments feature. To stay relevant in the fast-changing financial services sector, incumbent banks will need to become faster, smarter and more efficient, and achieving this will involve learning from new entrants such as challenger banks and big tech companies, argues Ghose. Not only will more traditional financial institutions have to update their core infrastructure, they will also need to learn vital lessons on business model, company culture and organisational structure from their rivals. Change is possible. DBS is now a prime example of a bank that made a successful, not to mention profitable, digital transformation. So much so, it was named Best Bank in the World in Global Finance World’s Best Global Banks Awards 2018. Euromoney also awarded it World’s Best Digital Bank and World’s Best SME Bank. Technology is all about making lives easier and banks need to transform services from the bottom up to stay relevant in the digital age, says Ghose. It’s no use staring at the screen until the picture clears.

If you want to be more like the big tech companies, you have to transform your core banking services

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Appliance of science: SmartStream is pushing the frontiers of paytech

LAB REPORT

Andreas Burner, Chief Innovation Officer at SmartStream, the global software and managed services provider, set up the company’s innovation lab in Vienna less than a year ago. Here, he examines what’s in the payments Petri dish FINTECH FINANCE: We’ve talked previously about your lab and its work. But before we get into your research and development projects, could you remind us of the lab’s purpose? ANDREAS BURNER: We created the Innovation Lab in 2018 because we realised the growing role that blockchain, artificial intelligence (AI) and machine learning will have in the financial world. Banks are required to store data for many years for audit purposes and there is a wealth of knowledge locked in that data. With the right tools, you can draw a great deal of useful information and insights from it, all of which helps with straight-through processing. Not least, machine learning allows you to automate exception processing. The innovation Lab is exploring the potential of such technologies, with the

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aim of bringing the best solutions to market as soon as possible. FF: First, for the sake of clarity, what’s the difference between machine learning and artificial intelligence (AI)? The terms often seem interchangeable. AB: In the Innovation Lab, we use machine learning to look at data and learn from it. This leads to predictions. Artificial intelligence is the next evolution – the ability to work on data without human intervention. Algorithms for that will be here one day. AI is more a philosophical than a technical term, because it refers to technology that understands why it is doing something. Currently, we can emulate what people do, what workflows do, but we don’t yet have technology that is truly self-aware and self-reliant. Maybe

in the near future, we’ll see the first real AI technology surfacing – and it will be very interesting in the banking space. FF: So what, specifically, are you applying these technologies to in digital payments? AB: The interesting thing about digital payments is that there are so many data formats, which means it takes a long time to onboard a new bank. So, this is a good area in which to apply machine learning. We’ve worked on a project to automatically detect data formats and streamline and accelerate the onboarding process. It’s very much new territory and I think we’re the only company developing it at the moment. Certainly, it’s the kind of R&D work where we are looking to take out patents. The technology will save our clients a www.fintech.finance

MONEY20/20 ASIA lot of money, because they won’t need to perform such things as data mapping and transformation. There is a real need to standardise and rationalise – with SWIFT, for example, and the many ATM data formats. Each ATM writes different formats but they all contain the same data, so the idea is to automatically detect the data you need, such as amounts, currencies and bank account. While it’s pretty easy for the human brain to identify all this information in a data stream, it’s not so easy for a machine using conventional technology. Machine learning can overcome the problem and address the lack of standardisation. We’ve spent a lot of time defining formats and loading and matching them to automate and improve exception management. We are working on a number of proofs of concepts that will surface this year, but this is still work in the lab so not live in the marketplace yet. FF: Can you describe how you might use machine learning with your Reference Data Utility (RDU)? AB: RDU is a managed service that provides complete, accurate and timely reference data for use in regulatory reporting, trade processing and risk management operations. It dramatically simplifies processes and reduces costs, and it’s a natural both for machine learning and blockchain. Because RDU is largely about data quality, machine learning can make a significant contribution by automating and streamlining processes. If you look at the SmartStream product suite, the most human input is needed in the exception management area. That includes working on exceptions that have been raised by other banks, classifying them, answering them automatically, as well as working on exceptions that have been raised by our own products. Our product managers believe that 80 per cent of the responses we get are for exceptions, so it means there’s huge potential to automate there. FF: Does machine learning help you manage your service level agreements? AB: Service level agreements are part and parcel of managed services. However, the problem with SLAs is that even if we do a good job in SmartStream, if we don’t get www.fintech.finance

the right quality of data, or don’t receive the data at the right time, it’s a problem both for our customers and for us. In the managed services space, we need to track if processes are on time and machine learning can be used to track the interfaces, to see whether the data arrives in the right format, the right quantity and at the right time. If it isn’t on time, it needs to be escalated to the department where the data originated, because it doesn’t help if SmartStream understands that there is a problem, that problem needs to be raised with the original data source. This is where machine learning increases the overall data quality in our managed services. FF: Where else will machine learning improve operational efficiency? AB: When a machine learning process understands the nature of data, it can predict a wide range of things, for example in our cash and liquidity product. It will know if a weekend is coming up and how that might affect a balance. You could pose a question such as ‘what will be the balance tomorrow at two o’clock?’ and it will be able to determine the figure for that day and that time. With machine learning, you can train the algorithm on many levels. You could run it on your bank’s balance or a particular department, or focus on currencies or countries. It works on thousands of different levels that would otherwise require huge numbers of people and huge amounts of time to handle. Not only can you use it to make informed predictions, but also to screen for exceptions on any of those levels, so ‘there was a problem in the Asian market with the US currency on that account’, for example. It’s very, very specific. Another thing for the near future is machine learning applied to news feeds and social media, with that data then being used to make more sophisticated predictions on balances.

FF: What about blockchain? Are there any concrete developments you can talk about? AB: For us, 2017 was the first big step in our blockchain development. It was the year we integrated Ripple as a payment gateway into cash and liquidity management. The next step is to use its smart contract features. If you look at the reasons why you use blockchain, it’s always where you have different parties working together on the same data, but nobody should own it. It’s decentralised data and you want to optimise workflows. We’ve seen that it could really optimise workflows in the trade finance space and there is significant potential for many SmartStream products. We ran a prototype in the lab, creating a SmartStream-specific blockchain. We can use it to exchange data between products – and if you look at the SmartStream portfolio, there’s a lot of data exchange between products. Now that we have this technology in the lab, we’ll begin pushing it out to those products.

We’ve worked on a project to automatically detect data formats and streamline and accelerate the onboarding process. It’s very much new territory

FF: How do you see the future of the Innovation Lab? Where’s the creative focus leading? AB: Our data scientists do amazing work combining financial data knowledge with machine learning knowledge. However, the potential of machine learning for fintech has yet to be fully grasped, and AI even more so, so we’re really pushing the frontiers. For example, a lot of data within banks is still written and in text form, and we are exploring NLP (natural language processing) and deep learning algorithms to understand this data and include it into structured workflows in our products. Also, it is amazing what information can be gathered by using analytics machine learning tools on financial data to understand the clients better and personalise the products accordingly. One thing’s for sure: our lab team is never short of projects. Issue 2 | ThePayTechMagazine

Transferable asset: Notani sees a payments future where systems overlap seamlessly for the benefit of consumers

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ECOSYSTEMS: JCB COVER STORY

WHERE EAST MEETS WEST You can’t second guess what the paytech future might hold, which is why JCB, the only international payment brand in Japan, is keeping an open mind as to where it will go next and with whom, says Tsuyoshi Notani, Managing Director of JCB International (Europe) and Andrew Mitchell, VP for Development and Infrastructure Support at JCB It’s not often you hear a card scheme operator acknowledging the importance of cash as a payment choice. But, after almost 60 years in financial services, with virtually worldwide acceptance and issued in 23 countries and territories, Japan’s JCB is relaxed about who it shares the payments ecosystem with. “In second or third world economies trying to modernise, governments would probably prefer to go cashless. Perhaps the best option in that case is for us to work with the central bank to proliferate card payments,” says Andrew Mitchell, vice president for development and infrastructure support at JCB. “But in a mature economy where people want the option of cash, there are ATMs on every street corner, everyone has a bank account and financial inclusion isn’t such an issue, they just want more flexible payment options. For us, it comes down to consulting with stakeholders in each market and having a clear strategy that takes into account its idiosyncrasies and nuances. We don’t look to obliterate

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cash – certainly not. We just want to make sure that the front-end users are definitely satisfied with what we can provide.” And 123 million of them clearly are. Although the majority of those are still in Asia, JCB card issuance outside Japan has grown 42 per cent in the last four years, while its footprint for card acceptance is pretty much global, making it one of the top five biggest payments systems in the world. In 2017, JCB processed transactions worth $280billion via card, contactless and mobile wallet in Asia, North America, Europe, the Middle East and South America. The breadth of its payment options demonstrates the discrete differences between the countries it operates in and

Global PSPs like Stripe are looking for Asian consumption growth and JCB can be a gateway to the East

the complex nature of the partnership programme it must manage to facilitate them. There is always room to expand, of course, and particularly in Europe. It recently teamed up with iZettle to enable merchants to accept JCB cards over the iZettle point of sale (POS) device. In October, it rolled out contactless in Austria with licencee partner card complete for card and mobile phone payments, this year also embarking on a joint licencing agreement with its licensee partner JCC, enabling its cards to be used with POS systems, ATMs and online touchpoints across Cyprus and Greece. Explaining its recent expansion strategy, Tsuyoshi Notani, managing director of JCB International (Europe), says it’s simply a case of meeting cardmembers’ expectations: “JCB has predominantly focussed on Asia, but it also has a strong issuing portfolio in Russia. The eastern Mediterranean and countries around the Black Sea are top travel destinations for Russian and Asian cardmembers, so we’re enhancing our acquiring business in these locations to ensure coverage for these customers.”

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ECOSYSTEMS: JCB COVER STORY While cardmembers can enjoy using their JCB card for local Greek delicacies, it also helps the company raise its profile in areas of the world where it was previously regarded as purely ‘a Japanese card scheme’. “Traditionally, people would look at us and say ‘you’re serving one particular customer base’. We want to counter that message,” says Mitchell. “And in doing so we’re fairly open-minded in terms of the type of partner we choose to work with.” In fact, alongside issuing banks, JCB is actively engaging with mPOS, Cloud POS and omni-channel payment service providers (PSPs), allocating resource to developing mobile solutions in particular, such as biometric authentication. On a world heat map of JCB’s global presence, Europe is still somewhat cool, while Asia glows red. But that’s likely to change as Open Banking and Europe’s revised Payment Services Directive (PSD2) open up the market for new payment partnerships. And JCB’s historically strong presence in Asia also creates another kind of opportunity for PSPs in the West – this time to share in the ecommerce-driven tiger economies, particularly with the opportunities offered by 5G technology.

Boundless opportunity It’s predicted there will be a total of 1.4 billion ecommerce users in Southeast Asia by 2021, each spending on average $738 a year, and companies like Stripe, the US-based online payment processing platform that signed a memorandum of understanding (MOU) to receive payments from JCB cardmembers in May last year, would like a slice of it. “China is number one and Japan the fourth biggest ecommerce market in the world,” says Notani. “Global PSPs like Stripe are looking for Asian consumption growth and JCB can be a gateway to the East for them.” Six months after the MOU, in fact, Stripe announced it had raised $24million to fund its entry into new markets, specifically Southeast Asia and India. Around the same time, it also announced a tie-up with tech platforms Alipay and WeChat Pay, both of which could be seen as a threat to predominantly card-based payment networks. But not JCB; it sees it as another opportunity. “Alipay and WeChat Pay for China, Paytm in India, LINE Pay and Merpay from Japan, they are providing

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consumer-oriented services on mobile and some of those are looking to start partnerships that link mutual ecosystems,” says Notani. And let’s not forget that Asia is a big and culturally diverse place; not everyone buys into the same model, says Mitchell. The number of merchants that accept card payments around the world jumped 13 per cent in 2017, according to RBR, and some of the biggest growth rates were in Asia Pacific (APAC). “We’ve seen incredible expansion of payment platforms in APAC. Country by country, there’s a huge amount of difference,” says Mitchell. In China, such has been the popularity of QR codes, hugely accelerated by Alipay and WeChat Pay, that it’s led to a government-imposed cap on spending to tackle fraud, in much the same way as NFC contactless payments are capped in the UK. “The market dynamic in China changed at the point of sale, which was the clever thing about Alipay and WeChat Pay – they took a simple form of payment method in QR and evolved their marketplace very rapidly,” says Mitchell. In fact, JCB launched its own QR code payment service in Asia in December, via its subsidiary JCB International, which allows cardmembers to scan QR codes at the point of sale. Starting in Taiwan and Vietnam, the scheme will roll out during 2019, putting it in the unusual position of being a card payment provider supported by Alipay and WeChat Pay online, while at the same time providing an alternative to those platforms’ QR pay at the physical checkout. Similarly, JCB has also introduced the Smart Code initiative in Japan, which allows for the widespread acceptance of QR or barcodes to pay. Notani says he sees Smart Code as ‘encouraging other payment providers to enhance new payment methods’ – and encourage interoperability. “Next-generation infrastructure and security with reasonable interoperability is crucial to implementing a secure and open payment ecosystem everywhere,”

he says. “We’re talking ISO 20022, open application programming interfaces (APIs), strong customer authentication, QR/contactless and faster payments.” For Mitchell, looking out over a rapidly changing payments landscape in Europe from the perspective of a global operator based in Asia, seamless and interoperable payment mechanisms are pertinent. “APIs and open banking are opening up a new frontier,” he says. “We look at Europe as a hive of innovation but don’t forget the rest of the world. “We’re a global business; we have to look at the interoperability of everything and that’s a really big headache when it comes to the new Open Banking environment. OK, it’s a new frontier, but is it really transferable?” On the upside, he says ‘everybody seems to be watching what the regulators are doing in Europe’. “The Asian countries are aware that EU regulation is there to protect consumers and I think we’ll see a greater push towards mirroring that on a global level,” says Mitchell. JCB itself isn’t pinning its colours to the mast of any one particular technology. “We have to be all things to all people,” says Mitchell. “Whether it’s a mobile payment today or a biometric payment in the future, we have to provide the front-end service to customers, banks, fintechs or whoever is providing the vehicle for that particular payment service, and make sure we are the reliable engine sitting behind it. “It comes back to a market-specific approach, analysing and understanding what is a good value proposition for partners in any given territory.” That presumably means that QR is now dead in Europe? Well, never say never. “It might make a strong comeback,” says Mitchell. “It’s certainly a particularly easy form of payment to deploy at point of sale and it would be interesting to consider as a means for push payment. There might yet be a case for returning to the simplicity of what we’re seeing the Chinese doing at the moment with QR.”

We’ve seen incredible expansion of payment platforms in APAC. Country by country, there’s a huge amount of difference

In the palm of their hand: JCB's growth stems from grasping opportunities others might see as threats

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Issue 2 | ThePayTechMagazine

ECOSYSTEMS

Buddying up ov A small team in London’s East End is attempting to turn the banking relationship on its head. Alan Walsh, Head of Networks & Partnerships at Bud is one of them The slow walk of Europe’s revised Payment Services Directive and Open Banking concept cast a long shadow of uncertainty on financial services for years. Waiting in excited expectation were the startups, panting at the opportunity to gain access to banking data. Among the sceptics were the banks, unsure of the merits or impact on their revenue. In the UK, the die for change was cast in 2016 by the Competition and Markets Authority (CMA) which had accused the banks of preventing smaller firms from entering their market far too bullishly for regulators to let it pass. The CMA’s decision to mandate UK banks to adopt the UK’s Open Banking Standard forced the nine largest to publish data reports and create their own Open Banking application programming

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interface (API), through which trusted and authorised third parties could then, with the data holder’s permission, access specific data from their account. Though compliance from the banks dragged for the first few months, according to the Open Banking Implementation Entity (OBIE), there’s been a marked shift in attitude. The positive aspects of increased speed, innovation and big data analytics that the new entrants bring with them has persuaded banks to move on from a compliance-led approach to embracing Open Banking as a powerful tool to fuel growth. More than 100 regulated third-party providers have registered under Open Banking in the past year, offering everything from product comparison to debt aid. And then there is Bud, a Shoreditch-based concept, poised to become the largest Open Banking team in the world.

Launched in 2015, initially as a B2C platform dedicated to helping individuals improve their financial wellbeing, the startup really took off when founders Edward Maslaveckas and George Dunning decided to implement a B2B platform aimed at helping financial institutions with their biggest digital pain point –mobile apps. The success of its first deal, in October 2017, with mega-brand HSBC/First Direct to help develop its Open Banking APIs and pilot mobile banking app artha, created a domino effect. Startups rushed to be featured on the Bud financial network and firms like Banco de Sabadell and Investec stumped up an initial £1.5million of growth funding in a heartbeat. Today, the Bud team is in talks with more than 40 banks globally and

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ver Open Banking has recently closed a second $20million round, co-led by HSBC and Goldman Sachs, involving Investec and the Australia and New Zealand Banking Group (ANZ). Bud has said it will use the money to create ‘the world’s largest team dedicated to the development of open banking technology, connecting customers’ bank data with third party applications and products’. In the process, it aims to double its team of 62. CEO Maslaveckas isn’t surprised by its success. “The banks have seen quite a lot of positivity from investing in us. Our enriched Open Banking API enables banks to build world-class digital products. We increase the functionality of new or existing apps by letting customers securely link their bank accounts and more. We then allow banks to integrate products and services into existing apps or launch new products. “For the fintechs and service providers, Bud provides single point access to millions of customers through our network of banks. And with so many connections being piped through

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the Bud marketplace, we’re able to enrich bank data to make user journeys more meaningful and less time consuming.”

Championing consumers The company offers a range of 15 service categories and has close to 90 partnerships with fintechs. Simplicity and availability is what it offers to banks. Visibility and a community ethos is brought to the Open Banking cohort. But perhaps the most impact is felt by customers. Bud’s ingenious positioning as the guardian of a customer’s entire financial archive, means they not only better understand their own finances but

There’s no existing blueprint for success here. That’s what we, as an organisation, are trying to create

can be advised expertly and offered products tailored to their life. “The way Bud is structured, we distribute our technology within the banking apps and the marketplace is created by us through our partner network,” explains Alan Walsh, head of network and partnerships. “The bank can decide what to offer within that – credit cards or loans, for example – but it’s the Bud engine that automates what is relevant to you as an individual, based on your current requirements. That keeps it completely consumer-focussed and consumer-friendly. It’s about being fair and transparent – and that’s the longer term play here for any organisation, whether you’re an Uber or a bank. There’s huge benefit in being seen more as a consumer champion and taking the approach ’let’s give the customer what they want, rather than what’s right for us’.” Bud has pulled off what Ollie Betts, co-founder of OpenWrks, the first provider to connect to all available participating UK banks, predicted for Open Banking technology.

Issue 2 | ThePayTechMagazine

ECOSYSTEMS “There’s no existing blueprint for success here. That’s what we are trying to create,” says Walsh. The firm intends to expand not just by targeting those countries that are fast followers of Open Banking, but also by offering new ways for individuals to gain financial loyalty and support from banks. It has the advantage of being able to use the B2C Bud channel as a live testing environment to better understand partner APIs and how they could benefit the customers of its B2B banking partners. “When you’re plugging into bank accounts, you learn a lot about pools of individuals and how they spend. That information is a powerful and valuable tool to funnel back to customers,” says Walsh. “It’s all about getting the right solution to the right person at the right time. For example, we don’t live in the same era as our parents, where credit or loans were given in a flash, which means that generations today find themselves at a disadvantage. So, our Rent Recognition pilot is a key project that we have been working on for the past 18 months, in collaboration with the UK government. “Rent is not routinely recognised in credit scores, making it difficult for tenants to qualify for a mortgage. We attempted to remedy that by building an artificial intelligence (AI)-driven rental recognition tool that would allow banks to integrate it

into their apps so that people could rely on their rental history to help with obtaining credit score ratings or a mortgage.“ Bud plans to use the same model to ‘engineer further support services centred around spending, in particular utilities such as gas and electricity’. “Credit reference agencies will still have a place,” says Walsh, ”but with Open Banking data there are more levels of credibility attached. It’s about being able to provide that wider picture.” That might at some point even include gathering data built up from loyal use of entertainment subscription services. “Why not use data from Netflix, Spotify, etc, to benefit the consumer?” adds Walsh.

A power for social good Though undeniably exciting for businesses and individuals, the digital bazaar that Bud is simultaneously instigating and guarding raises acknowledged concerns about trust and data privacy. After all, the act of using past experiences to predict future behaviour and using that to tailor financial products to an individual could just as easily turn into something far more sinister: surveillance. “There’s a delineation between what you can do from an aggregated, anonymised data set, and what you can do from an individual identifiable data set, and we definitely work on the former,” says Walsh.

“We aggregate and anonymise along the way. We just see a pattern of transactions that prompts a response.” That is powerful in its own right. “When we sit in a room with multiple different organisations and they understand what the potential of that can be, they come up with these amazing ideas around how this is going to help the customer in the long term more than just the short term. That’s really different from what we’ve seen in the recent past,” adds Walsh. The potential to contribute to this social good has acted as a recruitment tool for the company, which admits it doesn’t have the sexy pulling power of a Google or an Apple. “It’s about being part of the change,” says Walsh. “There’s a real pride in being part of this vehicle that is really going to change the way people engage with their finances globally.” Bud is currently engaged in research into people’s anxiety around personal finance, the results of which are due out soon, but all the indications are that it’s a serious issue that’s limiting people’s lives. “There has to be a simpler way to manage your money – in a way that benefits you, not the provider which is trying to sell you the product,” says Walsh. “Everybody here at Bud is first and foremost a consumer who wants to manage their money better. We’re not trying to be the Uber of banking; we are just trying to be who we are.”

When organisations understand what the potential can be, they come up with amazing ideas around how this is going to help the customer in the long term rather than shorter term. We haven’t seen that before Part of the change: Bud is targeting fast followers of Open Banking

ThePayTechMagazine | Issue 2

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It’s all about customer experience. Digitalization and customer expectations are driving the future of financial services. Put your customers first by offering state of the art ID management solutions and digital payments services that will make you “top of wallet”. G+D Mobile Security is a part of the G+D Group with more than 11,000 employees worldwide. Our 5,700 experts in over 40 sales and partner offices all over the world are glad to advise and support you with years of experience and comprehensive solutions that let you meet the challenges of a connected financial industry and capitalize on its opportunities. For more information, please contact mobilesecurity@gi-de.com Follow us on:

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Trulioo provides instant personal identification and business verification. General Manager Zac Cohen discusses marketplaces, the power of partnerships and positive IDs

Halt! Who Goes There? 32

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‘Verify customers online, anywhere, in seconds’. That’s the business proposition and promise that greets you on the Trulioo website. In just four years, this Vancouver-based company has gone from a startup to a global provider that can verify the identity of up to five billion people and 250 million businesses through a single application programming interface (API). Moreover, Trulioo can verify identities in countries where there are few of the traditional means of identification, such as passports and birth certificates. Indeed, it was the fact that millions of people lack such official means of proving their identity, particularly in developing countries, that inspired the launch of the company. From an initial focus on individuals who were all but invisible for the purposes of know-your-customer (KYC) and anti-money laundering (AML) checks, Trulioo has built a solution that solves challenges associated with international regulatory compliance, fraud prevention and online trust and safety. The first of those has been one of the main drivers for more sophisticated verification, due to a pressing need to catch up with technological developments that have both created as well as solved problems. As Trulioo’s general manager Zac Cohen says: “Identity is a mosaic. It’s always changing, and it’s distinct from

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ECOSYSTEMS

demographic to demographic, from country to country. Those differences, and those changes, are difficult to capture. “New payment solutions have opened the doors to a truly borderless marketplace, but if these solution providers want to enter new markets, especially uncharted and unfamiliar ones, they need to build a layer of trust between them and their new customers. You have a duty to know your customer and follow anti-money laundering measures that satisfy regulatory requirements, but you have to ensure a level of due diligence that is proportionate to the risks.” And therein lies the problem. Cohen uses the example of a payments company in the UK attempting to enter the Peruvian market. Cohen says it would struggle to form relationships with local data partners and would likely end up signing multiple contracts in order to gather enough identity information. That would take a great deal of time and resources, as well as requiring knowledge of the local players. “Even from a technology standpoint, it would be a lengthy and costly process,” says Cohen. “You must have a variety of trusted and reliable data sources to comply with cross-border regulations, KYC and AML. However, the data that is being sought to verify the identity of a particular business in a particular market is often available exclusively through local data vendors and very difficult to source if you're not local yourself. “Could you build an API for every data source that the company wished to access? And just imagine the challenge in trying to integrate a plethora of data sources from not just one, but numerous countries. That’s much too demanding. These companies need an identity verification process that can scale quickly, efficiently and cost-effectively,” says Cohen. This is where Trulioo’s single API solution comes in. Known as GlobalGateway, it provides secure access to more than 400 data sources worldwide, including government, credit bureaux, utilities, consumer files and mobile, all of which can confirm IDs electronically, but clients have only one contract to sign – with Trulioo. “We’re often in a market even before the service or the client is there, and we do this to try and engage those markets and provide

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the right foundation so that banks, new payment providers and other marketplaces can launch there,” says Cohen. “Many of our customers can operate in dozens of countries at the same time – and within just a week. That happens because we’ve normalised and standardised the marketplace to a certain set of information that our customers can interpret and harness quickly, regardless of the market that they’re active in.” In fact, Cohen says that one of the world’s leading cross-border payroll solutions uses GlobalGateway to verify the identity of payees in 52 countries. Finding partners is crucial, says Cohen. “A lot of people go into the market looking for vendors, but what you need are partners who can interpret and understand what’s happening today and prepare you for what might happen tomorrow. Equally, it’s important to have interoperability and a global perspective. If you just focus on one system, one market, you won’t have flexibility to adapt and grow.” That’s particularly relevant for fintechs and challenger banks, which want to achieve scale quickly. As Cohen puts it: “Most of these tech-driven companies evaluate products and go to market differently. They don’t want to speak to a sales rep over the phone, they want to see your API.” So, to make the process even smoother, Trulioo has recently launched EmbedID in beta for select customers – it’s a front-end tool that enables businesses to use GlobalGateway by simply embedding a snippet of code into their website. “It’s the quickest and easiest way to use our API that, in essence, gives you the power to verify the entire globe,” says Cohen. Trulioo takes a marketplace approach to offering an identity solution, giving clients access to different tools and services within the same technology suite. Cohen describes it as a ‘platform for compliance technologies’ where businesses pick what they need, when they need it, but with a

single integration. “The most effective way to stop fraudsters from penetrating your service is to apply agile and adaptable verification tools and technology,” he explains. “We’ve built our marketplace with that in mind, to expand and evolve with the changing mosaic that is identity.” You could say that what Trulioo provides is versatility allied with visibility. And visibility, of course, is what matters to the millions of people who are marginalised through lack of an identity. Which is why so many worldwide remain unbanked. “Identity verification in hard-to-reach markets is a huge challenge,” says Cohen. “Not everyone can sign up for a bank account or make a payment in the way we take for granted in many countries. It’s important to us that we enable these people to join the global economy and the online economy.” It’s mainly here that Trulioo leverages the data possessed by mobile network operators (MNOs). “We partner with MNOs worldwide, giving us access to data covering 1.8 billion mobile users,” says Cohen. “When traditional KYC-compliant data sources are combined with MNO data, you have far more insight into the identity you’re trying to verify.” In developing markets, mobile phone use hit 98.7 per cent in 2017, according to the International Telecommunications Union; more people have access to mobile phones there than to clean water and electricity. Cohen points out that more than a billion mobile accounts have been opened just since Trulioo launched four years ago, dwarfing the number of bank accounts opened in the same period. It’s that comparison that continues to propel Trulioo towards its ultimate goal of economic empowerment. “Today,” says Cohen, “merchants around the world can transact online as free agents of the digital economy. Our dream is to see a world where they are able to transact as equals in a financially inclusive ecosystem.”

Identity is a mosaic. It’s always changing, and it’s distinct from demographic to demographic, from country to country. Those differences are difficult to capture

Issue 2 | ThePayTechMagazine

CROSS-BORDER PAYMENTS Payment pioneers: UK experience in improving domestic payments should now translate to cross-border

OPENMINDED Lloyds Bank was one of the first on the high street to share data through Open Banking APIs. Now the bank is keen to turn that experience to its advantage in cross-border payments, says its Head of Payment Products, Gavin Maclean

It’s just over a year since Open Banking went live in the UK – at least, in theory. In reality, only four out of the nine high street banks that were supposed to have the technology in place from day one, did. Lloyds Banking Group was among them. You might argue they needn’t have bothered: polls tell us the average Brit is

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unlikely to have noticed that Open Banking even exists. There's been no popular cultural shift, no bombardment of TV adverts from third parties offering personal finance insights using bank account data and only a low-key government information campaign. Critics have even accused the big banks of attempting to stifle the project, since at

first glance they have everything to lose and little to gain from data sharing with non-banking organisations keen to nibble away at their services. But Gavin Maclean, head of payment products at Lloyds Bank, says the bank now sees more than six million requests for data via application programming interfaces (APIs) per month and its core systems are www.fintech.finance

being redesigned from the ground up to Heart of the matter: facilitate the sharing of data with Banks are undergoing customers, clients and partners. Open surgery “I get the great job of designing and building new payment products that allow our customers to pay, get paid and understand what’s going on with their bank accounts,” he says. “Having been through DOS to Windows migration, and dial-up to TCP/IP and internet, with all the things that have happened since, the opportunities over the next three to five years make it genuinely the most exciting time I’ve experienced.” Meeting that UK deadline for Open Banking last year was just the start. “For January 13, 2018, we had to get ready to support our customers who wanted to take advantage of allowing third-party providers to access their bank account information and make payments from their accounts. And we did that on time,” says Maclean. “What we’ve been doing since is working within our business and within the transformation division at Lloyds to create propositions of our own for our customers. “The more obvious use cases of Open Banking are for individual retail customers. But, actually, we are seeing lots of exciting opportunities in the that reflects aspace growing commercial as well.” understanding that customer expectations of counts the banking Experience industry arepart changing. In 2017, as of its preparations for “Consumer connectivity to thepartnership Open Banking, Lloyds signed world of assets andtechnology their volumegroups agreements with of interactions within the digitala new cash Finastra and SAP to develop world are dramatically increasing, ” he says. management and payments platform “This meanscustomers consumers across are hyper-connected to support the entire and hyper-informed. Their group. Finastra’s input is expectations focussed on are being set by Google and Amazon – they are enabling faster, frictionless cross-border truly the ‘now theySAP want payments forgeneration’ customers,and while is instant gratifi cation, which is challenging working on improved trade finance, to deal with. invoice fi”nance and client monies As such, AIB has will been working to a range platforms. Lloyds then roll out embrace fintech-enabled of digitalaself-service tools future: aroundone cash that’s as frictionless and user-friendly management and payments for its as annancial Amazon Prime delivery or a last-minute fi sector and corporate clients. Uber cab-share. the realmit’sofconsumers payments Maclean says:In “Whether processing, has occasional overseen the who need toCoburn make the curation of friction-free payments cross-border payment to pay for athrough holiday, AIB’s open payments platform firstUK for example, or whether you’re– athe large of its kind in Ireland. organisation paying salaries or collecting “Within AIB mobile banking today, payments from your customers, this we new do Apple gives Pay and Paynow, – but we’re platform us Google resilience but also the bank to frictionless with thefiflrst exibility todo innovate and open adapt payments ” saystake Coburn. “So, AIB as changeson inmobile, the market place.

customers now, within theservices mobile “Lookingcan at Open Banking banking app, payment of up to running now,make thereaare upwards of 100 €1,000 without any authentication, without third-party providers on the Financial any friction as far as register. they’re concerned. Conduct Authority About half” new(account technology essentially drapes a areThe AISPs information service layer of skinonly over[retrieving the organsbalance that process, providers) and authorise and secure customer transaction data fromAIB’s accounts], the payments, hiding what Coburninformation calls the other half are doing account ‘uglypayment side of the shopping experience’ and initiation. under processing. “Forsmooth a number of years there have been Where Openthat Banking is the throbbing organisations have sought to combine heart, the payments might aggregated views of sector account information, accurately depicted the circulatory along withbe things such as purchase ledger, system through which the majority or accounts payable information, and those of useful data flows. It’s projected to have been achieved through a number experience signifi cant growthbanks in theand of proprietary links between post-PSD2 banking era. providers. But accountancy or software “If we lookfound at payments we what we’ve since thewithin OpenAIB, Banking probablywent process than 60by per cent systems live,more accelerated the of all value movement Ireland today,to ” proliferation of APIs, is in that the ability says Coburn. “That makes usseamlessly a huge, critical exchange that information is financial arteryup fornew the Irish economy,” really opening opportunities. especially business partners. ” of Macleanamong says that, given the amount The bank’s aortic function theinIrish change the banking industrywithin will face the economy that has impressive near term,means it is vital toAIB operate on a system nationwide penetration intoresilient’ bundles. of that is ‘flexible, scalable and data which third parties, as well as AIB’s internal analysis platforms, can transform

Open Banking provides thethan We process more opportunity work 60 per cent oftoall value with partners that are movement in Ireland. That in other markets, makesstrong us a critical financial propositions arteryto forjoin theup Irish economy for our clients

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into better services for customers. “We’re in a great starting space, inis a bit “Maintaining a payment system terms of the datasets we hold and the like painting the Sydney Harbour Bridge,” trust we “It hold withstops; consumers, ” says he says. never as soon as you Coburn, who sees a huge of his fi nish, you’ve got to startpart again, andwork you as an shut attempt create the ‘ultimate can’t the to thing down. The amount of consumer experience’ That means bringing traffi c going over the. bridge – or the load in chatbots for high-volume andto on the payments platform –tasks is likely targeting the painAnd points the journeys keep increasing. thatinmeans you’ve of regular banking customers. got to have platforms and systems in That’s not toable mention the large place that are to adapt to those element ofclient AIB’s digital transformation changing expectations. Now is a that’s focussed ontime nurturing SMEs in really opportune to upgrade.” less-than-steady, Ireland, by Maclean arguespost-Brexit that the UK has long injecting new, streamlined been a pioneer in paymentsservices. and account management – from the launch of the As simple as… Faster Payments Service a decade ago, to In 2015, AIB announced its partnership the regulator’s Current Account Switch with global trade credit insurer Euler Service in 2013 – and expertise in operating Hermes, leading to the creation its within those systems can now beofshared creditclients insurance app, Simplicity. app with and partners across The the world.

off“We’ve ers the seen risk-free of fiaround ve lotsassessment of innovation potential or existing overseas clients the payment journey,” says Maclean. to service all-at-sea the exporting “For the consumer, processSMEs. should Introduced a year before the Brexit vote appear simpler, it should be seamless. in 2016, was means a prescient move on in the But whatitthat for providers the part of AIB. The next Coburn, background, and thefrontier, varioussays organisations is SME lending. that are involved in providing that “Today, almost 80 per cent ofisall end-to-end payment journey, that our delineation consumer lending is automated: the between what one end-to-end, ourand digital party in thatthrough chain does thechannels other – aincreasingly very significant achievement, ” he says. is becoming blurred.” “We’ve now followed that with SME lending – aworld more complex lending proposition. A of possibilities So, at the end of 2017, we went live Returning to the UK’s experience of with the first strand end-to-end SME lending domestic fasterofpayments, Maclean says withmakes up to €60,000 for quicker a SME loan this the needavailable to develop for a certain cohort. ” cross-border transactions all the more As Coburn explains, it’s a system crucial. Because, in a world where that more requires more cutting-edge technology than 50 per cent of consumers are buying the more cashsellers is involved. from foreign across the web, difficult when we get his“It’s andmuch othermore UK banking customers intolikely higher-value, complex, multi-party, are to be baffl ed when they first limited-company lending. So, we’re actively encounter the friction posed by the working on that,banking and we expect correspondent system.some signifi cant deployments bygrown the endvery of the Maclean says: “We’ve all year,” he says.to being able to transfer accustomed Enriched datasets, disparate money instantly and gathering I think that’s led to an data throughthat third parties access towill expectation this type with of capability multi-banked customer information, is part travel cross-border. So we’re now starting of the to see answer. initiatives that are going to enable “Open and PSD2 give us access that typeBanking of proposition for clients. to “The a far wider dataset, ” Coburn says. “But challenges this poses to market it’s because AIB’s share inthose Ireland participants whomarket are providing is alreadyare so fairly large that we have been services traditional ones – able to automate SME settlement cut-offsome times andlending working decisions already. ” actually, I would say cross-currency. But, The otherthe accelerating factor SME it provides opportunity to for work with lending isthat the adoption partners are strongofindistributed other markets, ledger (DLT) for as aour means to to join technology up propositions clients. streamline large, complicated loans “So, for example, in the UK we areand very payments. R3,toaproviding consortium of major accustomed access to the banks payments and big players within ntech faster network for the our fioverseas revolution, is lookingcustomers. at enactingLikewise, precisely fi nancial institution that, and it’s AIB’s stated aim to begins involveto itself as instant payments capability in the vanguard ofcross-border, interbank DLTwe payments. become available will look such major changes forThe theenactment right set ofof partners to reciprocate is, forcapability, Coburn, something requirescan a that so that ourthat customers change ofbenefi heart ts from some of the biggest enjoy the of transmitting those institutionscross-border. in the industry payments ” that are still processing to a different beat. activism More demanding customers, “There are more 15,000 fitechnology ntechs from regulators andthan improving in the world today, ” hecatalyst says, “and banks cycles have been the for payments are beginning tothat see them as is huge reform and now the ball rolling there opportunities for creative, will be no stopping it, says problem-solving Maclean. collaboration. We’re using them tokeep solve “Payments will keep evolving, pinpointed problems and knitting that into transforming, keep changing,” he says. ourAnd core banking ” Lloyds willcapabilities. keep painting Hisbridge… finger is firmly on the pulse. that Issue21 | ThePaytechMagazine Issue ThePayTechMagazine

CROSS-BORDER PAYMENTS

LANDING

A PAYMENTS

PUNCH!

SWIFT’s Global Payments Initiative is demonstrating that it’s not a simple playoff between traditional bank messaging systems and distributed ledger technology. Harry Newman, Head of Banking, explains SWIFT’s tactics January’s public head-to-head between Gottfried Leibbrandt and Brad Garlinghouse, respectively the CEOs of SWIFT and Ripple, was billed as fintech’s rumble in the Paris jungle. The southpaw was definitely Ripple (the young blockchain beefcake) with the more experienced switch hitter SWIFT (46 years in the bank messaging ring) attempting to unsettle its rival by announcing during the debate that it was entering a proof of concept (PoC) with the R3 blockchain platform, Corda. Called gpi Link, the PoC aims to connect multiple trade platforms that need to enable payments to Swift gpi thereby benefitting from ‘gpi payment initiation, end-to-end payment tracking, payer authentication and credit confirmation’ while enabling ‘continuous monitoring and control of payment flow’. Promising integration and interoperability, the POC will support application programming interfaces (APIs), as well as SWIFT and ISO standards. SWIFT has made it clear it’s in no hurry to adopt distributed ledger technology (DLT),

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declaring last year that ‘further progress is needed before it [DLT] will be ready to support production-grade applications in large-scale, mission-critical global infrastructures’. The statement followed a year-long trial involving 28 banks in SWIFT’s DLT sandbox. In something of a pyrrhic victory for DLT, SWIFT concluded that, while the trial had been a success, it ended up requiring the creation of 528 sub-ledgers – a huge maintenance challenge if scaled up to all 11,000 SWIFT users across 200 countries. Not only that, but the industry would have to make a considerable commitment to modernisation before such a system could be adopted. For instance, all account servicers would first need to migrate from batch to real-time liquidity reporting and processing, and back office applications would need to be upgraded to feed the platform with real-time updates, it said. Meanwhile, in February, SWIFT announced that the share of cross-border messages handled over gpi had soared to 56 per cent by the end of 2018. Processes that had taken days prior to the

introduction of gpi in 2017 are now being completed in seconds with full transparency between correspondent banks. Overall, 40 per cent of SWIFT gpi payments are credited to end beneficiaries within five minutes and almost 100 per cent within 24 hours. SWIFT had earlier revealed that another PoC with Australia’s New Payments Platform (NPP) and three Southeast Asian domestic payment systems, had proved it could speed up the last leg of that payments journey, too – the sticky moment when a payment that’s successfully been transmitted across the world in real time hits the domestic payments corridor only to find the recipient’s local clearing system is still fast asleep. Involving a group of banks from Australia, China, Singapore and Thailand, the trial sought to establish whether, by integrating and enabling the service via gpi members into a domestic instant payment system, such as the NPP, payments could reach end beneficiaries’ accounts, even outside normal business hours. The answer was ‘yes’. The fastest SWIFT gpi payment in the trial went from its originating account in China to its www.fintech.finance

end beneficiary account in Australia in 18 seconds. From Singapore and Thailand, payments to Australian end beneficiaries took less than 30 seconds. The trial simulated real-world requirements and tested performance on the basis of screening, payment validations, liquidity management, message transformation and real-time status updates to the SWIFT gpi Tracker. Findings from the trial are being used to finalise a new SWIFT gpi instant cross-border payments service, designed to scale and integrate with other real-time domestic payment systems. Harry Newman, head of banking at SWIFT, says: “SWIFT gpi is heading for new things. Our first goal is global adoption. It’s running at more than a million payments a day already. Over the next two years, we expect that every single SWIFT payment will be a gpi payment.” In this process, SWIFT will be helping its partners add a lot more value to their offerings, building high levels of trust, transparency and efficiency into their cross-border dealings. “To achieve speed and transparency, first of all, all the institutions agree to a service level. They will all operate in a standard way and process in a certain timeframe, which gives that end-to-end speed,” says Newman. “And then, over the top, we layer a Cloud-based service, which is API-enabled, so all of the institutions can update, via a tracker, the status of a payment. Every single payment will be traceable to the beneficiary bank, which will provide a platform for a far better service for every single payment.” And that’s true not only for banks signed up to gpi. Rather, all SWIFT members, gpi-enabled or not, are required to include a unique end-to-end transaction reference (UETR) in their payment instructions. This reference number will enable users to identify the status of the payment. Operators can then pull it from the Cloud and examine where it got stalled and do what is necessary to resolve the issues. “You now have a real-time database that can tell a bank in a payment chain what the status of the payment is – information about whether the beneficiary has been credited and report that back through an application programming interface (API). The bank can then integrate that into its offering to its clients. So, you don't have all the relay of my system to your system in www.fintech.finance

the way we used to. It’s quite a different approach,” says Newman. “This is not something we are doing on our own. This is SWIFT and the banking community coming together to do this as a brand new approach to international payments, because that is what it takes to reach all these countries.” And since here we are talking about seconds or minutes instead of days, Newman expects that ‘trade will move faster. You now have the ability to have near real-time global payments, inter-countries, and less capital employed by corporates in maintaining their payment flow. It’s a radical change’. “We are working with a whole host of solution and software providers to help banks incorporate this new way of working into their back offices,” he explains. “We work with local market infrastructures and central banks, for example, NPP in Australia, the European Central Bank in Europe and other national payment systems in all the major countries, to help the flow of payments. It’s about us all talking to each other and linking up in a cooperative way, to make this flow as easy and smooth as possible.

This is SWIFT and the banking community coming together on a brand new approach to international payments “We will be adding more value,” says Newman. “We’re working on gpi for corporates, which is about standardising the access from big corporates to their financial institutions, making that whole process smooth, so that corporates can get the information they need and integrate it more easily in to their back office systems. “We are also launching pre-validation because there are still some issues between different jurisdictions that have different rules. It’s just a few per cent [of payments] but, nevertheless, we’d rather eliminate those before we start by pre-validating how a payment will flow through the system.” Errors and omissions in payment data are a major cause of processing delays. Hence,

SWIFT is working with the banks on a gpi pre-validation pilot to prevent incorrect or missing beneficiary information and incomplete regulatory information, to remove preventable holdups. Based on a real-time API mechanism, the pilot will enable sending banks to send and receive API calls over SWIFT to seamlessly check beneficiary account information with the ultimate receiving banks. This will allow banks to speedily remedy any inaccurate or missing information, thereby reducing delays and costs. The pre-validation pilot involves 14 banking partners that include Bank of America Merrill Lynch, Bank of China, Barclays, BNP Paribas, Citi, Deutsche Bank, J.P. Morgan, National Australia Bank, and Wells Fargo. Transparency and uniformity across the correspondent banking network have been the ground rules for SWIFT since its inception. SWIFT gpi will push those even further. Newman suggests that when banks implement gpi, they will have fewer enquiries about payment status because clients will know via the gpi Tracker exactly where the payment is. “Based on that information, banks can start to offer better cash management services, while corporates can reconcile more easily,” he says. In the last three years, the alternative payments industry has prospered, its popularity largely driven by the greater transparency in remittance that it offers and faster processes. Among them, distributed ledger technology-based services, such as Ripple, are perceived to pose the biggest disruption to traditional cross-border payment models. Even banks that had collaborated to give rise to SWIFT in 1973 are now also involved in building blockchain projects. But in this playoff between payment services, SWIFT’s major advantage lies in its legacy. Banks – tens of thousands of which rely on it to deliver trillions of dollars a day – have built their systems around it. In gpi, which SWIFT credits with ‘almost total transformation’ of the cross-border payments landscape in just two years, it appears to have found a way to respond to the blockchain challenge, for now at least. Depending on how fast and how far banks adapt to and adopt DLT, the question is whether the two systems will be rivals or sparring partners. Issue 2 | ThePayTechMagazine

CROSS-BORDER PAYMENTS

Fast forward

ACI Worldwide’s Universal Payments solution is helping propel banks towards real-time reality, as Craig Ramsey, VP, Head of Real-Time Payments, explains Real time is key to the future of cross-border payments processing and banks shouldn’t delay getting on board.

So says Craig Ramsey, VP, head of real-time payments at ACI Worldwide, a global provider of real-time electronic payment and banking products for financial institutions, retailers and processors. It’s been at the forefront of the industry for 40 years, during which time it’s been involved in the debate around the introduction of the Euro and the Single European Payments Area (SEPA) and developments in automated clearing house (ACH) processes, to name but a few of the trends propelling payments towards a real-time reality. The only conversation out there nowadays is about open and instant payments, says Ramsey, and banks should see it as an opportunity to have a board-level rethink about how they catch up – specifically how they can work with third-party providers to deliver the added-value services ‘instant’ inspires. “No-one expects anything other than real time and the ‘always-on’ mentality, being part of the future,” says Ramsey. “We won’t be going back to batch systems, we won’t be going back to legacy payment types. With that comes innovation and innovation can be expensive, so we need to look at how we ensure there’s an appropriate business case to generate the margins and the revenues required to pay for it.” Instant cross-border payments do not exist in isolation. They’re tied up with digital identity verification; the holy grail of error-free reconciliation; the entry into the market of legacy-free providers; the emergence of ‘request to pay’ services (also called real-time debit); the trend towards moving domestic automated clearing house payments to instant payment rails; the adoption of Open

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Banking frameworks across the world; and the relentless increase in retail spending, especially online and much of it inter-country. All of this is putting a strain on banks. To quote ACI Worldwide’s recent payments white paper: “The requirement for real-time payments to support all payment types… is forcing radical change to legacy systems that have reached their limits.”

A joined up approach It’s estimated that over half the global population can now send cash in real time – at least as far as a recipient in their home country – thanks to advances made by legislators, regulators and payment service providers. But achieving the same speed across borders is proving a harder nut to crack. Territories that share the same banking culture and, crucially, also have regulatory synergies, are exploring instant cross-border payments. Europe’s SEPA Inst, now supported by 50 per cent of payment service providers in 16 countries, is a quasi international real-time payment scheme, based on a single currency. Meanwhile, members of Asian Payment Network (APN), including those in Vietnam, Thailand, Indonesia, Malaysia and Singapore, are now a little over a year into enabling their own real-time cross-border payments scheme. They aim to connect their respective infrastructures using payment routing and addressing via mobile numbers, as well as real-time request-to-pay for cross-border payment collections, all based on ISO 20022. “We are also seeing the likes of SWIFT’s gpi and Ripple starting to offer better services around or in competition with

the traditional correspondent banking model, improving the speed of the payments, improving the information flow that’s going between correspondents and, of course, the originator and the beneficiary of the payment,” says Ramsey. “But you can’t just turn real time on. You must have the back end systems, back end processes and the bank mentality of that always-on environment. You need to do things thousands of times every second, with very low latency, and very low end-to-end transaction times. We can’t be looking at a transaction that takes a minute, 30 seconds; we need a transaction that goes through the bank, fully secure, in less than a second.” And that’s where ACI Worldwide steps in with its Universal Payments (UP) solution, which connects licensed or tenant users of its API-driven platform to acquirers, networks, emerging schemes, and local and alternative payment types. In effect, it wraps the payments function around those ‘legacy systems that have reached their limits’ as well as providing paytechs with a way to connect to major institutions that still a perform a vital function in the settlement of cross-border payments. “Sometimes a bank’s core banking system needs to be taken offline for maintenance, but the services can’t be,” says Ramsey, “they have to be 24/7. So, the Universal Payments technology that we provide to banks is aimed at that true 24/7 operation – no downtime, even for upgrades – while ensuring that the payments can happen fast, end to end, including all of the core banking checks, the fraud checks and any exception handling checks.” Real-time risk scoring to meet internal due diligence and external regulatory requirements is something ACI has

We will see a hypergrowth in real-time payments over the next few years

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been offering in the credit card space for years, says Ramsey. “One of the elements of real-time payments is that some of the processes are more akin to how the back offices of the banks’ real-time gross settlement (RTGS) or wire systems have operated. But those systems don’t typically do real-time scoring.” In his view: “If you bring the back office processes from the wholesale side and the real-time scoring from the retail side together, banks have a formidable opportunity to be successful.” Ramsey stresses that, in the case of real-time payments, it is about more than knowing your originating customer: you also need to know who the payment is going to. As more real-time payment systems are launched around the world, there is an increasing number of centralised and proxy databases. Consumers and commercial bodies can register on these databases, with account details and phone numbers held securely. So, when a customer originates a transaction, they can see where the money is destined to go. “They don’t need the account details; they see an account, they see a phone number which corresponds to the account number details and, most importantly, the beneficiary name.” This ensures the originating customer knows exactly where their money is going. While real-time payments on their own are a major change, combined with Open Banking (driven by the revised Payment Services Directive in Europe and being adopted under different guises elsewhere), the pressure for, and potentially the volume of, instant cross-border payments exponentially increases. In New Zealand, where proofs of concepts are being built with banks to provide Open Banking services, it‘s seen as not only a way to increase banking traffic but also to take payments out of the black market and bring them into the banking sector. While some banks have ‘dipped their toe in the water’ of real-time and Open Banking, there is still more work to be done. Many have failed to approach their adoption from a strategic perspective, says Ramsey. Instead, they have looked at

www.fintech.finance

how they can be used from a tactical perspective, to ensure they are live on day one with receive-only. But if everyone is receive-only, not many people will be sending. “So, we will certainly see a hypergrowth in real-time payments over the next few years,” he predicts. There has already been a 17 per cent year-on-year increase in faster payments in the UK and ACI expects to see a 25 per cent increase over the next two years, largely driven by Open Banking. In the end, banks will finally real time everything, Ramsey says: “The new normal is now, not some time tomorrow.”

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CROSS-BORDER PAYMENTS

Staying in the loop

Payoneer has run rings around old cross-border payment systems for more than a decade with dizzying results for SMEs, says Iain McNicoll, US Country Manager What do a Sri Lankan freelance video editor, a Malaysian retailer of luxury goods and a globetrotting CEO have in common? They are all customers of the financial service provider Payoneer.

The New York-based fintech, which was founded in 2005, specialises in international business-to-business (B2B) payments. It now boasts a four million-strong client base across 200 countries and last year started to appear on the unicorn lists. Its customers can send and receive payments through its application programming interface (API)-powered global platform, which holds the funds locally until the recipient is ready to withdraw them into a bank account, a Payoneer, or move them onto a Mastercard debit card. And, judging by the glowing testimonies on its website, it’s the best thing since sliced bread for SMEs. “Payoneer has reduced my transaction time by more than 90 per cent,” says one Sri Lankan freelancer, whose main business challenge was the severe delay he experienced in receiving his clients’ payments. “Payoneer’s Global Payment Service has given us access to millions of customers within the Amazon network,” writes another happy online trader. The ecommerce giant Amazon requires sellers to own a bank account in the US – a condition that this small business simply could not fulfil. Since signing up

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to Payoneer, however, the company has seen a ‘300 per cent growth in payments’. “Without Payoneer, we would probably still be jumping through hoops to get our hard-earned money,” adds a third client, who is the founding CEO of a global web hosting provider. These three case studies are just a few examples of the SMEs that Payoneer’s low-cost international payment service has empowered in global trade. According to Payoneer’s country manager for the US, Iain McNicoll, it is the platform’s ‘closed loop’ system that has allowed the company to deliver such a game-changing service around the world. “There’s no cost to be in our ecosystem – once you’re in, you’re a part of it,” he says. “You can then send funds to other users and you don’t have to take those funds off the system until you’re ready to pull them back to your local bank.” This unorthodox system allows for greater flexibility, which McNicoll illustrates using the example of paying VAT, using the platform’s VAT payment facility for authorities in the EU and UK, with zero fees. “Say you’re a US business selling on a marketplace in Europe, and you’re being paid in euros. Where normally you were used to receiving dollars back into your account, now they can just send those euros straight back to the tax authority and never have a double conversion plus fees for the wire. All in all, it’s a dramatic difference in cost.”

These conversions and handling fees, which are attached to traditional cross-border payment methods, prove to be the hardest barrier to global trading for SMEs to overcome. By circumventing them, Payoneer claims to save the customer more than 70 per cent in some cases. “The average US business wants to pay in USD because they feel comfortable with USD,” says McNicoll. “Once they see that there is a decent mark up being added just for the luxury of paying USD, they come to a provider like us to close the gap.” The fees are not applied to a Payoneer transaction until the point at which the funds are withdrawn and there is an enormous reduction in transaction time. “The closed loop payment is nearly instant,” says McNicoll. “And since the funds are already in the local region, it becomes a same-day or next-day payment withdrawal, depending on the time of day that the payment was initiated.” The system is also more secure, standing it in good stead to compete against established cross-border payment services. “That closed loop allows for greater transparency of the payment,” McNicoll remarks. “We spend a lot of time on know your customer (KYC). We know both ends of the payment because we know where the payment started and where it’s going. Traditional payment companies either know the sender or the receiver, but seldom do they know both,” he adds. www.fintech.finance

“So, that’s one area that allows us to breathe a little easier.” Global monopolies such as Amazon, Google, Upwork and Airbnb are also among Payoneer’s customers. By connecting SMEs with these omnipotent platforms, the former can leverage the global reach of the latter to expand their businesses. It’s a thoroughly modern way to do business around the world, according to McNicoll. “It gives a greater flexibility for the client,” he says, “which is something that today’s audience expects.”

Unlikely allies In spite of all the positive press, however, Payoneer’s status as a modern alternative to traditional cross-border payment methods continues to be a barrier to its uptake. Non-banking services are still approached with caution by potential clients. The key issue here is trust, which is tied up in the incumbent financial institutions. To overcome this problem, Payoneer has teamed up will local banks. “The financial institutions already have a lot of legacy data on clients,” says McNicoll. “We have the product and the technology to make that work. So, the synergies work well when it comes to sending payments. “We have local bank relationships in almost every region we operate in,” he continues, “but we don’t actually use the correspondent banking network when we’re sending internationally, because we are sending within our own ecosystem. “It’s really important to work closely with these banks to make withdrawals possible,” points out McNicoll. “They’re doing a lot of the marketing of the product and we’re doing a lot of the heavy lifting for the bank.” This mutually beneficial partnership hasn’t come without its tensions, though. “I think the banks were threatened by us at first,” acknowledges McNicoll. “Banks make a lot of money on crossborder payments – especially on the exchange rates. But with the lower-cost alternatives, the banks see us as partners as opposed to competitors now.” Payoneer is just one of a growing number of non-banking fintechs that have teamed up with financial institutions to empower SMEs and reshape the global trading landscape. www.fintech.finance

Reflecting on these changes, McNicoll predicts the future will only see more collaboration. “The industry has seen a lot of expansion. I would imagine there’s going to be some consolidation happening here,” he says. “Every provider is trying to show they can provide multiple products, not just a single standalone product,” he continues. “You’re no longer just going to one place to do one piece, and one place for another piece. You’re now going to a single platform, to have all the products available to you.” Payoneer is ahead of the curve in this respect. “I think the industry will move more towards the ecosystem model that we’ve been running with,” says McNicoll. “A client will integrate into an ecosystem where payment services are core to the supply chain, but where there are also other products that are bolted on.” Such products on the Payoneer platform include a billing facility that allows customers to send invoices to a client, and a service called Capital Advance, which is a cash flow management solution for ecommerce sellers. “We’ve just launched Capital Advance to give small

businesses the ability to take an early advance on an incoming payment, which gives them more financial flexibility,” explains McNicoll. Paypal, which is the longest standing alternative to the correspondent banking system, has been offering similar working capital loans to its small business account holders since 2013, and has just this month extended the service to Mexico. Perhaps it’s no coincidence that Payoneer has also recently set its sights on the emerging South American market. “We help clients grow their business globally, by introducing them to new markets and helping to set them up with the banking relationships they need,” says McNicoll. “It takes away the fear of not knowing how the currencies work, which might scare the average business in the US. “Now they can go overseas and feel a little more comfortable that they are in control of their currency. It’s not necessarily going to be such a scary adventure.”

We have local bank relationships in almost every region we operate in, but we don’t actually use the correspondent banking network

Taking the fear out of cross-border trading: Smaller companies struggle with currency calculations

Issue 2 | ThePayTechMagazine

DIGITAL PAYMENTS

How digital identity can help us face up to financial crime

Behind the digital mask: Are you who you say you are?

ThePayTechMagazine | Issue 2

www.fintech.finance

Guest Editor Tony Craddock, Director General of the UK’s Emerging Payments Association, summarises its recent white paper recommendations From a long time before the now-defunct Identity Cards Act 2006, UK payments executives have been searching for a way to answer the biggest question facing those involved with processing a transaction: how do we know you are who you say you are? If everyone had a digital identity, it would really help to answer this question, accurately, every time. But what is digital identity, how does it work and where has it been successfully adopted? And what will it take for the UK to adopt an approach to digital identity that frustrates the criminals behind payments-related financial crime? In February 2019, the Emerging Payments Association (EPA) published a white paper, Facing Up To Financial Crime. After extensive research and analysis, we have identified what’s really going on, by whom and at what cost. And we have developed a set of recommendations for action that are clear, timely and impactful. In this extract from the white paper, I focus on one of the nine areas where action is required: digital identity.

Why identity matters and what it costs Compromise of identity is a central factor in many types of payments fraud. It allows criminals to misuse payment services to obtain funds, goods or services, deposit or move illicit funds, or evade sanctions. Identity-based payments fraud includes card-not-present ecommerce transactions (which accounted for £310million of losses in 2017) and direct debit mandate fraud, both of which target the identity of the payer. Then there are push payment scams (which racked up £236million of losses in 2017), which target the recipient’s identity. The difficulty of identifying either the payer or recipient is a weakness that launderers exploit. www.fintech.finance

Making the case for a digital identity The UK is world-leading in financial services and in fintech innovation. The payments industry itself innovates ambitiously in electronic/digital payment services, providing greater speed and convenience for users. But the industry also needs to innovate to keep customers safe by delivering secure payments. At present, customers are exposed to risks of identity abuse without having the tools to protect themselves fully and the UK is in danger of falling behind other countries in its limited and fragmented approach to managing their digital identity. A coherent approach is required across the payments industry (and broader financial services) for digitally identifying and authenticating customers. While this is particularly pertinent for remote or digital channels, it should apply across all payment channels. The EPA believes that the financial services industry should work collaboratively to drive a broad consortium of banks, payments providers and operators, innovation hubs, governments and regulators to create a world-leading open digital identity solution. This would define and build on agreed industry standards, together with defining operating models and codes of practice for how payments providers manage digital identity verification and authentication for customer onboarding, customer authentication and transaction authorisation.

Different potential architecture approaches and business models exist. In one example, specialist providers of digital identity could assume the role of assuring the authentication of a service user for a payments provider as its client. Whatever the successful approach, it needs to be based on a commercially viable model for digital identity services, designed around compelling consumer use cases, enabling widespread take up. Payments and financial services providers need to be at the forefront of defining the requirement, while ensuring the approach is valid for use not just in financial services, but other key sectors, such as healthcare and aviation, too. Interoperability at domestic and international levels is a key consideration. There should be proportionate regulation of identity providers, reflecting the vital nature of the service and building close cooperation with law enforcement and the legal sector.

The UK is in danger of falling behind other countries in its limited and fragmented approach to digital identity

What role should governments be playing? Government support should underpin this as a vital area for facilitating the digital economy. Payments firms would be responsible for meeting the standards and deciding on their own operational approach, and the EPA could engage through its members to advise on a standard approach that is appropriate and pragmatic for firms of different sizes and roles across the supply chain.

Six common components of identity management, irrespective of company, customer type or payment service or channel

Identity information gathering The user asserts an identity, which is based on a set of identity-related attributes Identity proofing Independent checking of identity attributes to establish that an asserted identity is valid Identity verification Connecting the validated identity to the user claiming it Identity assurance Establishing a usage profile of the identity Authentication Risk-based mechanisms for the user of an assured identity to authorise transactions/account activity securely Secure transmission and storage of identity attributes

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Digital transformation for todayâ&#x20AC;&#x2122;s challenging landscape

Our customers tell us that they need to use transformative digital strategies to remain relevant in todayâ&#x20AC;&#x2122;s challenging financial landscape. Strategies that will allow them to improve operational control, reduce costs, build new revenue streams, mitigate risk and comply accurately with regulation. To help you make the journey towards digital transformation, we provide a range of solutions for the transaction lifecycle. AI and Blockchain technologies are now embedded in all of our solutions, which are also available in a variety of deployment models. Digital transformation. Reaching the summit just got a little easier.

DIGITAL PAYMENTS

Making its mark: Open Banking demands greater confidence

What’s happening already The EPA supports the industry’s goal of confirming payee details more strongly in electronic payments. The commitment to ‘confirmation of payee’ (CoP) capability is a valuable step forward to be introduced in mid-2019, to protect customers against misdirections and push payment scams. Looking ahead, as Open Banking services grow, there need to be measures to give customers confidence that the receiving account is the correct one when triggering a bank transfer payment to a merchant on an app or website. For businesses using payments services, there are initiatives to make more extensive use of legal entity identifiers (LEIs) in transactions between companies, to reduce the opportunity for payments to be fraudulent. Furthermore, following the Financial Action Task Force’s evaluation of the UK’s anti-money laundering regime, the Government’s recent Serious and Organised Crime Strategy publication commits to improving the accuracy and integrity of the register held by the UK’s Companies House, building on steps

already taken to improve sharing between Companies House and law enforcement. We acknowledge that initiatives on digital identity need to be addressed in ways that are aligned with cultural, societal and political attitudes, for example concerning the relationship between citizens and government and the protection of personally identifiable information (PII). The emphasis should be on facilitating the digital economy by improving convenience and security.

Biometrics and behavioural analytics Effective management of digital identity is inherently a technology-led capability, where biometrics and behavioural analytics can have a huge impact in disrupting the methods that criminals use. Biometric recognition is defined by the International Standards Organisation as the ‘automated recognition of individuals based on their biological and behavioural characteristics’, and is centred on the inherent personal characteristics of an individual.

We acknowledge that initiatives on digital identity need to be addressed in ways aligned with cultural, societal and political attitudes www.fintech.finance

The Scandinavian experience BankID is an electronic identification (‘eID’) issued by banks in Norway and Sweden which can be used for payment authorisation and, more broadly, by banks, government agencies and other providers, to confirm agreements with individuals via digital channels. ■ In Sweden, eight million people use BankID and more than 95 per cent of Swedes aged 21-50 have a BankID ■ In Norway, four million people have a BankID BankID is deployed primarily on smartphones, but also works on a card or PC. The smartphone BankID enables the smartphone to be used as a standalone authentication device for accessing apps and browser-based websites. Instead of having to remember numerous usernames and passwords, it means users only need to remember one password to access all participating services. Issue 2 | ThePayTechMagazine

DIGITAL PAYMENTS

The eyes have it: Multi-modal biometrics could be the next logical step

Want to be involved in solving the problem?

The financial services industry should work to drive a broad consortium of banks, payments providers and operators, innovation hubs, governments and regulators to create a world-leading open digital identity solution Consumer services today widely use facial images or videos, voice or fingerprints to provide greater confidence in authenticating users. Furthermore, behavioural analytics can include assessing how the customer is moving through the screens of an app and comparing that to other authenticated customers, or to known characteristics of criminal usage. These can be combined with other data points from the phone on battery life, location, or angle of tilt during usage. Multi-modal biometrics is a further advance, whereby authentication systems are based on a combination of different biometric measures. This could be the capture of two individual factors, such as a fingerprint and face or voice, but technology is evolving to combine multiple biometrics into single authentication stages, such as â&#x20AC;&#x2DC;face plus audioâ&#x20AC;&#x2122; with random challenges and lip synchronisation analysis to

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confirm itâ&#x20AC;&#x2122;s a real person. This is harder to compromise at authentication, though a critical requirement to avoid compromise is to capture the different biometrics at one stage during onboarding.

Make it inclusive Inclusivity is an important consideration, allowing all users to benefit from this convenience and protection. With multi-modal biometrics, the user can have a choice of biometric features that she/he wishes to use, extending applicability to people with different or restricted physical capabilities. The EPA will establish a member-led working group to showcase developments in biometric and behavioural analytics technologies, and advocate that its members understand fully the approaches and benefits available in tackling crime.

To find out more about the EPA Financial Crime Working Group and how to get involved, contact Thomas Connelly at thomas.connelly @emergingpayments.org

Collaboration is key No single solution can enable the payments industry to answer the identity question. It will require us to work together across the industry, as we did to publish our white paper, and to push ahead on several fronts to get to the root causes of payments-related financial crime. Thank you to Barclays, Refinitiv and the six other syndicate members (AimBrain, Banking Circle, Entersekt, Napier, Paysafe and PXP Financial) for investing time and resource to make the Facing Up To Financial Crime white paper possible. It will help us to address the underlying causes of financial crime and protect everyone from the criminals behind it.

Get the Facing Up To Financial Crime white paper To download the full white paper for free, visit the resources section of the EPA website at www.emergingpayments.org www.fintech.finance

The RegTech for AML Forum

2nd May 2019 London

Boutique event for senior representatives from global, challenger and digital banks. Exclusive opportunity to address: •

New Methods for Getting Ahead on AML

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Reducing False Positives and Transaction Monitoring

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Using AI to Combat Financial Crime

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Know Your Customer and Onboarding Improvements

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Shared Ledgers for High Risk Customers

Only 18 places remaining! Key Speaker Highlights:

Zainab Atta Senior Financial Crime / CDD Specialist

Erik Morgan MD, Head of Global Due Diligence

Stephen Newman Head of Financial Crime Risk

Ionela Emmett VP - AML Monitoring & Investigations

“The banking sector is very much in need of specialist events now and an event series like this is useful to navigate through all that is happening and provide an opportunity to take it to meaningful levels.” Devie Mohan, Global Top 10 FinTech Influencer

Reserve your complimentary place at

finance.transformindustries.com

DIGITAL PAYMENTS

p e e k u o y n Ca a secret?

We’ve long relied on passwords to unlock sensitive and financially critical areas of our lives but now the secret is out: passwords are failing us. Andrew Shikiar, Chief Marketing Officer at FIDO Alliance, spills the beans and scopes an elegant solution Passwords have been with us for millennia – long before they came paired with a username. The Romans developed the use of ‘watchwords‘ for soldiers to identify themselves by utterance of a word or sentence. Fast forward to 1961 and computer scientists at the Massachusetts Institute of Technology decided they needed something similar to keep their own work secure on the multi access Compatible Time-Sharing System, which had a single mainframe and lone disk file. Today, the request for a username and password is universal – and universally prone to being compromised. According to FIDO (Fast Identity Online) Alliance, the password is no longer fit for purpose and is the root cause of 80 per cent of data breaches. “The underlying cause of data breaches is a continued dependence on passwords,

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otherwise known as ‘shared secrets‘,” says Andrew Shikiar, chief marketing officer at FIDO Alliance. “Historically, security has been provided through high friction activities, such as providing very complex passwords or requiring people to use an external hardware that’s not very intuitive, such as a OTP [one time password] generator. “But even OTPs are actually secrets that are stored on a server, and so are susceptible to being hacked. The industry has realised this and rallied behind groups like FIDO Alliance, which is creating open standards for strong authentication that avoids shared secrets. “FIDO instead relies on user-friendly public key cryptography that leverages devices that people use every day – with no authentication attributes needing to be shared with the service provider.” According to FIDO's statistics, the

average consumer has 90 online accounts and 51 per cent of the passwords they create are reused between those websites. That means the theft of password data from one source has the potential to cause harm to others – the hacker knows that though a user may change the password on a breached site, he or she may keep using the now-known password elsewhere. Even those who should know better have been caught out. Facebook founder Mark Zuckerberg had his Pinterest account hacked with a password he reportedly used for his LinkedIn page, which had been stolen during a major hack of the website four years earlier. It’s said there are 2.2 billion stolen credentials circulating on the Dark Web from hacks as far back as 2008 – many of them passwords that are still in regular use. FIDO says passwords aren‘t only bad for security, they ‘re bad for business too, with www.fintech.finance

one third of online purchases failing because the user has forgotten his/her details. If they can be bothered to go to the trouble of requesting another password rather than abandoning the transaction, there‘s a labour cost associated with that, too, for the vendor.

Raising the bar The FIDO Alliance was created as an open industry association in 2012 by founding members PayPal, Lenovo, Nok Nok Labs, Validity Sensors, Infineon and Agnitio, to create a password-free authentication protocol. Shikiar says its progression has been accelerating due to emerging regulatory requirements coupled with the growing sophistication of technology carried in the pockets of most adults – the mobile phone.. He says: “Financial institutions have an opportunity and an imperative to provide users with a more seamless user experience to authenticate to online services. This imperative is being driven by regulation and the opportunity is being driven by modern devices that are literally at the fingertips of users every day. “The revised Payment Services Directive (PSD2) requires financial institutions to have two factors of authentication for online payments. FIDO helps them comply with this in a very elegant way, in that you can leverage device biometrics, for example, to provide two factors in a single motion. So, you have possession of the device and you are proving who you say you are through the biometric provided when you authenticate. “Biometrics has come a long way fast. It wasn’t that long ago that it was only seen on high-level, niche applications. But it’s hard, if not impossible, to find a smartphone these days that doesn’t have a fingerprint reader or a camera for customer biometric intake. Now, the same action that a consumer uses to unlock their phone can be taken to log in to an account – and that’s what FIDO enables through its standards.” Shikiar explains that passwords have endured because consumers are resistant to complex security solutions and online service providers don’t want the cost of developing their own dedicated ones. FIDO is tackling that by providing open standards that are free for providers to adopt and are familiar to consumers. In February, Samsung's Galaxy S10 and S10+ smartphones became the first to pass www.fintech.finance

FIDO's new biometric component certification testing. Days later came an announcement that Android is now FIDO2 certified. This means any device running Android 7.0 or later is FIDO2 certified out of the box or after an automated Google Play Services update. So users can employ their device’s built-in fingerprint sensor and/or FIDO security keys for secure, passwordless access to websites and native applications that support the FIDO2 protocols. Such high profile developments are possible because FIDO‘s board level members include giants such as Google, Bank of America, Alibaba Group, American Express, Amazon, Visa, Facebook, Microsoft and Mastercard. “FIDO is comprised of three types of companies,” says Shikiar. “First of all we have device manufacturers, people who are creating PCs, handsets and security tokens. Secondly, we have software and technology providers – the firms that create the products that are powering the modern authentication ecosystem. Then finally, and perhaps most importantly, FIDO is comprised of companies whose existence depends on the ability to deliver high value, high assurance services to customers in a secure way. “It is those companies – the payment networks, the banks, the large service providers – that help bring market requirements for customer authentication to the FIDO Alliance. FIDO's technical working groups then build these requirements into actionable, open standards.” FIDO creates technical standards for secure user authentication, then certifies products against those standards. The Alliance also carries out market education, helping companies understand how they can deploy FIDO authentication to meet regulation and better satisfy customers. Shikiar cites payment technology firm Giesecke+Devrient (G+D) Group as an example. “To a company like G+D, this is an industry standard being scoped by their customers. Many of the inputs for FIDO standards have come from financial services institutions, from payments networks and from merchants that have very specific ideas of how they want to deploy user authentication. G+D can simply build these standards into its product. And, by taking

part in the FIDO Alliance, G+D can network with other peers in the industry. There’s a lot of co-opetition inside FIDO where companies with similar objectives can collaborate on ideas to sharpen their own products. All this lifts the industry.”

Keeping it local The core of the FIDO approach is authenticating users locally to their device, which overcomes the risk of centralised authentication repositories being hacked. Similarly, keeping biometric data securely on the individual‘s device allays fears that a fingerprint or facial data can be used covertly – such as intelligence agencies tracking people through facial recognition cameras, or the same technology being used to present people with tailored advertising on public electronic advertising hoardings, which is entirely possible. Shikiar says: “It seems that every week we hear about a data breach, we hear of user credentials being spilled and then sold on the Dark Web. That’s because people have relied on shared secrets with centralised authentication repositories. “With the FIDO approach, the user credentials never leave the device, so whether that’s your PIN, your fingerprint or other biometric, they are always secure on the device, which makes it impossible for hackers to attack.” The past year has been a significant one for the Alliance. FIDO2, the latest release of its specifications, has standardised its approach to authentication in leading operating systems. “Just this year we've announced that more than a billion added devices are able to support FIDO authentication,” says Shikiar. “Consumers can use these devices for services that support FIDO authentication with the added comfort of knowing that their biometric credentials will never leave their device. “In the future, I think we‘ll be authenticating through all sorts of devices. It won‘t just be smartphones. We‘ll use fitness trackers, wearables, connected cars with voice authentication and so on. “Having a standards-based mechanism to allow them to securely authenticate on all those is absolutely critical.”

More than a billion devices are able to support FIDO authentication

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DIGITAL PAYMENTS

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Consumers are largely oblivious to the fiendishly clever technology enabling their mobile payments. Giesecke+Devrient Mobile Security’s Vice President Jukka Yliuntinen sees a time when they won’t even consciously have to make them While the mainstream media discusses the emergence of a cashless society, the payments industry is already talking about the disappearance of payments completely. Not disappearing in the sense that vendors will give away their goods for free, but that the act itself will slip into the background, unnoticed. Identity verification systems such as biometrics mean we can do away with PIN numbers and clumsy online platform password systems. And one of the biggest companies the public has never heard of is at the forefront of making the dream a reality for banks. Giesecke+Devrient Mobile Security (G+D) technology is unconsciously used by billions of people every day, and the firm, which is headquartered in Munich, is a global powerhouse in payments, be they via cash, card or smartphone. “Payment is simply a means of acquiring something, and if consumers www.fintech.finance

can carry out the process in a frictionless way that is invisible to them, that is where we will go,” says Jukka Yliuntinen, director of sales at G+D Mobile Security. “We can have cash, take notes from a wallet, hand it over, get coins in change and a physical receipt. Or we can use a card or mobile, but with this there‘s no longer anything physical being exchanged, and the receipt could be sent electronically. The next step is the consumer walks into a shop, they are identified and payment happens in the background.” G+D was founded in 1852 in Leipzig as a printer of bank notes – in which it is still a world leader. Its Mobile Security business unit supplies original equipment manufacturers, mobile network operators and financial services, focussing on ID management and safe payments technology, as well as seamless customer experiences throughout the whole customer journey. Yliuntinen says: “One of the solutions

we offer to industry is a seamless payment experience, which could be a payment wallet, including authentication and security, such as a biometric process. Beneath that is a strong cryptography system – invisible to the user – that‘s connected to our systems, the bank‘s systems and the networks, so that payment can be made with digital credentials. “Our aim is to look beyond our customers, to understand what our customer‘s customer needs. We can provide our client with the user interface, such as an app on a mobile device with a wallet, then the server infrastructure, the management of the credentials on those wallets and lifecycle management. An example of considering the consumer would be providing a feature so that a wallet can be locked if a phone goes missing, then unlocked when it is found. “The management of our partners is also important for our customers,” says Yliuntinen. Issue 2 | ThePayTechMagazine

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DIGITAL PAYMENTS

The paytech route to prosperıty Erste Bank Group has been a pioneer in financial services for 200 years. But today’s payments technology has the power to disrupt like never before, says Birte Quitt, Head of Retail Strategy When what is now the Erste Bank Group handed over 100 savings books in 1819 to ‘deserving children of the lower class’, each credited with a little nest egg, a 12-year-old Austrian girl called Marie Schwarz became its first customer. She was born into an industrial revolution that had robbed people of their worth. Poverty was widespread. Lives were miserable. And a savings bank was unheard of. Whether Marie heeded the founder’s advice to ‘save for your future’ is unknown, but what is self-evident is that the bank’s vision of creating financial independence and promoting prosperity was a success. Because 200 years later, it’s still doing it. Now one of the leading financial institutions in Central and Eastern Europe with a presence in seven countries, it still operates by the same motto – to make the future possible, to be more than just a bank. But it’s using technology now to achieve it by harnessing the powers of paytech.

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The future is hers: Erste Bank Group takes a pioneering attitude to paytech

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Its most public tool in this process is George, a banking platform available both on desktop and as a mobile app. Simple to use and to personalise, it handles payments, provides spending analysis and has a variety of customisable plugins. It was one of the earliest platforms of its type to emerge in the region in 2015 and has been progressively rolled out across the Group’s territories. So far live in four countries with four million customers, it is already the largest pan-European banking platform. George will reach Hungary and Croatia this year and Serbia in 2020. “In those first four countries, we were already rated as the best app, which we are quite proud of,” says Birte Quitt, who leads the Group’s retail strategy. “George is perceived very well by our customers. We even see quite a high number of customers in countries like Romania, who have never used online banking before, switching to George because it’s so convenient to use.” George was developed as a standardised platform for all of the banking group’s regions, rather than allowing each to develop its own – which in itself is rare for a big, multi-country bank. But at the same time, it allows for an unusually high degree of local customisation. “We collaborate with our countries in a way that, to my mind, is unique in Europe,” says Quitt. “On the one hand, we have our George Labs team in Vienna, who are passionate about developing new functionalities. But we also have ‘George people’ in every single country that bring in their ideas, their creativity, their knowledge of their customers, and sometimes add a local understanding of how their customers like to do things. “So, it comes down to a great combination of a strong core with a lot of functionalities that we offer to all of our customers, with that local addition that is sometimes really needed,” explains Quitt. But George is not the only way in which the Erste Bank Group is pioneering paytech. It was one of the first banks in Europe to implement instant payments under the new European standard developed by the European Payments Council (EPC). Before 2017 ended, the Group had started executing payments of

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up to €15,000 per transfer within 10 seconds. It was also ready to go with its application programming interfaces, required under the revised Payment Services Directive (PSD2), a year before the deadline. Meanwhile, Erste Bank Hungary (EBH) collaborated with ACI Worldwide, a leading global provider of real-time electronic payment and banking solutions, to leverage its Universal Payments portfolio to drive its Open Banking strategy. The technology allowed it to support new revenue streams while simultaneously meeting every PSD2 and instant payments compliance requirement. With this collaboration, EBH made real-time balance data available to all its customers across all banking channels, which was also crucial to comply with Hungary’s own domestic instant payment scheme, which goes live in 2019. EBH also took advantage of the

Digital payments is one of the areas where probably the most innovation is happening right now, and we want to offer our customers as many different options as possible latest version of ACI Worldwide’s Proactive Risk Manager (PRM) with real-time prevention and detection capabilities to strengthen fraud protection around instant payments. “PSD2 is obviously offering us a lot of new and exciting opportunities,” says Quitt. “We were one of the first in Europe to publish our own APIs at the beginning of last year and now we’re developing the first services for our customers. For example, we’ve released multi-banking account aggregation in Austria, which is something quite new here. We will soon launch it in the Czech Republic, where we also see good uptake of Open Banking facilities. “We tested, researched, prototyped, and A/B tested a lot with our customers

around Open Banking last year. For a huge chunk of our customers, the topic of data privacy and transparency – ‘do I really understand what’s happening to my data?’ – is incredibly important, so we work hard to provide our customers with that transparency, so that they really see what is happening. For example, in the Czech Republic, whenever customers ask us to share their personal data with external parties, we offer a data statement, where they can see what’s happening to their data and can also decide if they still want to use this or not. We also promise our customers that we will never sell or share their data without their very explicit consent, because we want to reassure customers that with us their data is safe. “Digital payment is one of the areas where probably the most innovation is happening right now, and we want to offer our customers as many different options as possible. So we obviously have our own wallet, we already work together with Google Pay, and we’ve just started Garmin Pay here in Austria, so you can go out for a run and then pay for the drink that you‘re going to need afterwards with your watch!” It’s also working with Apple Pay, which has just begun to roll-out in the Czech Republic, in order to allow those customers who are iOS device users to register their credit and debit cards with the mobile payments service. But in Quitt’s opinion, those who really stand to benefit from its pioneering work in paytech will be its micro customers and small businesses. “They stand to gain from digitising that whole banking experience,” she says. “And it’s what we’re focussed on this year. George has its own squad for developing services for micro customers. For our merchant customers, we are working with Global Payments on an emergent ecosystem, where we’ve been piloting things like microfactoring. We already have very good feedback from our customers.” Erste Bank Group has a new motto for its 200th anniversary year: ‘the future is yours’. And it intends to be around for another 200 years to see just what the Maries of today make of their new financial freedoms.

Issue 2 | ThePayTechMagazine

POINT OF SALE

Solving the payments paradox: how to score a peak-end blinder! Even when it’s almost invisible, payment has a powerful effect on in-store experience, says Aaron Shields, Executive Strategy Director at branding and design agency FITCH How can you make an experience out of something that, when performed at its absolute best, is effectively invisible? That’s the payments paradox – the more seamless or invisible the payment process, the better the retail experience becomes. We’re aware that society is digital, mobile-first and increasingly cashless. The concern for retailers is that the more consumers retreat into the digital ether, the less relevant the physical retail experience becomes. Such concerns are not unfounded. Two-thirds of retail sales growth over the last 15 years has been down to online channels and footfall in store has fallen 10 per cent as a result. But this is not the end of physical retail. Research has projected that 80 per cent of sales will still take place offline in 2019. And if everything in the online garden is rosy, how do we explain ecommerce titans such as Amazon working so hard to create offline experiences like Amazon Go and fashion pop-ups? The challenge lies in understanding the relevance of the offline retail experience in the omnichannel mix; and much of that relevance can be created – or destroyed – in the payment experience.

Value in invisibility Removing payments friction is something banks and merchant services have largely been very successful in doing. From contactless cards to wallets and app payments, a simple tap-and-go is already a well-understood mechanic.

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The problem is that the retailers themselves often conspire to undermine this invisible experience. Queuing and paying is the most frustrating part of the shopping experience for 39 per cent of shoppers, way ahead of the 22 per cent who are enervated by finding products, putting it at the top of the list of five biggest frustrations. A further 79 per cent of shoppers are unwilling to wait more than five minutes before ‘dropping the basket’. Self checkouts are certainly an improvement but what about taking that one step further to no checkouts? The Amazon Go scenario of checking into the store and then never actually checking out, with sensors detecting purchases as you load your bag, is still very much in development. But why aren’t roaming checkout assistants in the style of Apple Geniuses more prevalent? Why are the scan-and-go facilities now commonplace in major supermarket chains not eliminating the final pass through the checkout? The human assistant, even in our artificial intelligence/bot-driven world, will never go out of fashion completely. Monsoon offers mobile readers where staff can check stock, place orders and take payment, with 87 per cent of customers rating it an excellent experience. Some customers will want help and advice, as in the Monsoon example. Some customers will want to shop with purpose. They have a goal – they know what they want, where to get it and simply want to pay and leave. Others will come, happy to browse and open to ideas then want to check out with a bag in hand – but arrange for the rest to be delivered

(who hasn’t walked into the supermarket with a basket and left needing a trolley?).

Dream, Explore, Locate At FITCH, we positioned these varying needs into a framework of ‘Dreaming, Exploring and Locating’. When Dreaming, shoppers look for new ideas and inspiration and want to have fun while doing it. They are more interested in quirky in-store experiences and Monsoon’s roaming assistants can merge the inspiration and payment convenience in one, smooth action. When the customer is Exploring, they have a product in mind but are open to alternatives. The moment is ripe to put new ideas in front of the customer with payment incentives attached – vouchers or loyalty points, for example.

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Locating is the most pragmatic of the three states, but still one in which payments has a role to play in defining the experience. The customer knows what they want and is on a mission to retrieve it. Seamlessness is the order of the day, with some added reassurance that they have made the best decision on price. The point is that all of us are each of those customers at any given time, switching from one to the other, and sometimes in the same shopping trip. Being able to recognise these states and cater for them when required underpins the retailer’s ability to deliver on the customer experience.

Peak-end rule

Research has projected that 80 per cent of sales will still take place offline in 2019

The defining element of the retail experience, and why physical retail has continued relevance, is explained by the peak-end rule, a heuristic principle where people judge their experience at only two defined points. The first, the peak, is when their emotional state during the experience was at its strongest. The second, as the name suggests, is when that experience ends. Unless the retailer has adopted some very innovative approaches to payments, the point of purchase is unlikely to generate the highest emotional impact (although I’m willing It’s a breeze: Or shopping could be if retailers rethink payment

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to revise this at the point of purchase of, say, a Tesla). The end of the experience almost always revolves around payment. If this is seamless and simple, it will contribute to one of the two positive moments required for the peak-end rule to work in the retailer’s favour. However, if it becomes convoluted or annoying, it will negatively impact the whole journey. Even at conventional point of purchase, in their desperation to ‘do it all’, many retailers are torpedoing their peak-end experience. Take the shop assistant instructed to gather an email address under pain of death. The benefit of being sent an ereceipt might be clear but the value exchange for even the slightest hold up at the till is tiny for the customer. Where is the point of tap-and-go if you’re then held to ransom for your contact details? It’s a lot of pester for little power.

Subvert the checkout One of the most successful ways to improve the payments experience pre-checkout is by applying loyalty points in store. We all hate planning for shopping. While vouchers certainly increase intent to buy in store compared to online, the pain of having to remember to pick them up, check they’re in date, decide if they’re for something you want, and then the inevitable frustration of being in store and discovering you’ve left them at home… well, you can kiss goodbye to your peak or your end. With the digital capabilities literally at our fingertips, why can’t we apply joined-up thinking to the payments and loyalty mechanisms? Coffee chain Harris & Hoole already allows for a prepaid app to automatically pay for an order once the customer is checked into a location. If the same were to be applied to a supermarket, taking, for instance, 15 per cent off mince at the point of scanning, applying it to the total and automatically deducting the whole lot from the pre-approved card or ewallet would turn the weekly shop into both a breeze and a pleasant surprise. Critically, the future of payments in physical retail is always going to be about choice. That choice is almost never going to include standing in a queue. Retailers have to cater for the different ways customers want to transact and help them to shop on their terms. Payment may work best under a cloak of invisibility, but when it’s successful, its influence is hard to miss.

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HARD CURRENCY

JUMPING INTO THE POOL?

The concept of ATM pooling is not new; it dates back 40 years. However, the last couple of years have seen renewed interest in several markets across the world, resulting in new ATM pooling arrangements and plans to set them up in a number of countries. So what exactly is it? Pooling means that deployers cooperate to a high level, giving up at least some aspects of individual control over their ATMs. Full pooling sees banks hand over their machines to a single body that acts like a conventional ATM deployer. Other arrangements are looser, with cooperation only extending to certain aspects of ATM operation. ATMs in a pool might have unified branding. There may also be centralised site selection. Machines might have standardised functionality, where the extent of facilities or features offered to customers is centrally mandated. There may be consolidated purchasing. ATMs belonging to a pool might also have shared hardware and software.

Interest in ATM pooling has surged globally in the last few years. Alex Maple, Senior Research Analyst at RBR, considers why

Prior to the 2010s only three notable ATM pooling arrangements had been established. In Austria in 1978 a national ATM network named Bankomat was developed, with all ATMs connected to the same central hardware. Most banks have since withdrawn from Bankomat, with the operator now only switching not-on-us ATM transactions for Austrian ATMs. The two other pooling initiatives, the Multibanco network in Portugal and Automatia in Finland, are still very much alive. All Portuguese ATMs in the SIBS International-run Multibanco network carry its logo, while many also carry the deploying bank’s branding. SIBS negotiates directly with suppliers and passes on the equipment charges to the banks. Multibanco machines are connected

Why has interest in pooling grown? ATMs are expensive to run, but historically banks have been content to operate their own estates of machines as demand for cash was sufficient to make the ATM channel profitable. Banks could differentiate between their respective ATM offerings and make them a point of competition between them. In recent years, however, many countries have seen demand for cash fall and that of electronic payments rise. In addition, authorities in many countries have tried to incentivise the use of the latter over the former. Also, in many markets there has been downward pressure on interchange fees and the ability of deployers to charge for withdrawals. The result is that deployers are increasingly looking to join forces to provide ATMs at lower cost and with greater efficiency.

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directly to SIBS’ central host with SIBS also providing the software for the terminals. Automatia in Finland was created in the 1990s. Like its more recently established Swedish cousin, Bankomat, it is a full ATM pool with responsibility for all aspects of ATM operation. Banks transfer their machines to the respective pools in Portugal and Finland and the vast majority of ATMs in both countries are now deployed by these two organisations. In Brazil, banks have transferred operation of their non-branch ATMs to TecBan, the company that runs the country’s shared ATM network. This initiative means that at sites where there were multiple bank ATMs, these have been replaced by one TecBan machine. Operational costs for banks have been reduced and efficiency improved. In Indonesia, the four state-owned (Himbara) banks are in the process of integrating their ATMs so that one machine can serve all their customers. There are a number of other pooling arrangements that have either recently been, or are currently being, established in countries including Australia, Japan, Malaysia, the Netherlands, Switzerland and Thailand. Banks in other European markets have held less formal discussions about pooling their ATMs.

Revenue will determine pooling strategy

Deployers are increasingly looking to join forces to provide ATMs at lower cost and with greater efficiency

Regardless of the growth of electronic payments in many markets, the need for banks to provide access to cash will continue. Not all banks and competition authorities believe full ATM pooling is right for every market. However, the prospect of lower ATM channel revenue in many countries means deployers may be forced to increasingly look for ways to share aspects of ATM operation to reduce costs, while maintaining adequate coverage. www.fintech.finance

HARD CURRENCY

Followthemoney Glory has been involved in the cash cycle for more than a century. During this time, we have witnessed much change and the pace of this change has accelerated significantly in the past 20 years. But what we have seen so far is nothing compared to the game changing disruption that is to come. Carl Sagan wrote ‘you have to know the past to understand the present’. So, an understanding of how we reached the current position and a knowledge of the pressures for change will inform our discussion of how the cash cycle is likely to evolve going forward. Let’s start by looking at what the cash cycle is and what it does. Although cash as a medium of exchange has been around for more than a millennium, the cash cycle, whereby cash is distributed and managed in a well structured marketplace, is a more recent innovation. It involves five key players: the central bank as the government issuer of cash, consumers and retailers as the primary users of currency, commercial banks as key distribution points, and secure transportation companies to move cash from place to place. The key players have remained the same and the cash cycle has remained an enabler of commerce. So, what changed and how can we classify the most significant changes?

GLORY’s Chief Marketing Officer Mike Bielamowicz looks at the evolution of the cash cycle from Version 0.0 to 4.0 and asks ‘what next?’

exchange point, all cash was counted manually, often by more than one party. We can categorise this highly manual, inefficient mode of operation as Cash Cycle Version 0.0.

A MANUAL APPROACH: CASH CYCLE VERSION 0.0

A number of innovations between 50 and 20 years ago reduced and replaced many manual cash handling tasks in the banking industry. These included the introduction of ATMs, cash sorters at the banks’ cash centres and teller cash dispensers at bank branches. The result was a radically reduced burden for bank staff who were handling cash, but the interaction between retailers, CITs and banks remained largely unchanged. This period of rapid improvement in bank cash handling efficiency and security created the basis for fundamental changes in bank branch design and consumer-to-bank interactions that persist today. The back-end technologies created the impetus for faster deposit recognition and acceleration of business banking services. This period can be referred to as Cash Cycle Version 1.0, and it lasted until around 20 years ago.

The cash cycle involves the flow of physical currency from the central bank, through commercial banks to buyers and sellers and back to the central bank for replacement. Let’s consider how this has evolved. Up until just over 50 years ago, cash was primarily handled manually and automation was limited. For larger retailers, surplus cash was picked up by a cash in transit (CIT) company. For smaller companies, it was typical for staff to pay cash into a bank branch. In many countries, cash had to be returned to the central bank for verification before it could be redistributed. At every cash

INCREASED BANK AUTOMATION: CASH CYCLE VERSION 1.0

The money-go-round: Key players in the cash cycle remain the same, but the challenges are changing

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A CHANGE IN FOCUS BY CITS: CASH CYCLE VERSION 2.0 The move to what we will call Cash Cycle Version 2.0 was driven by the CIT companies. Where previously business staff would self-deliver deposits to their local bank branch, CITs introduced a concept whereby the retailer could keep cash on-site securely for longer periods of time. The new concept reduced the need for frequent armoured car pick-ups and lowered the cost to the retailer. As intended, it expanded the market for CITs. Once again, cash handling technology enabled the change, centred around a rather simple application called the smart safe. CITs guaranteed that the contents of an on-site, secure, cash counting safe would be deposited at the bank. And the result? Increased safety and deposit accuracy combined with reduced labour costs involved with trips to the bank.

from ‘smart’ safes and the resulting deposit data transferred to the bank. As CITs already guaranteed the physical delivery of cash deposits, the cash could be credited to retailer accounts prior to actual physical deposit at the bank. This effort was called provisional or same day credit and aligned well with other rapidly rising technologies for remote deposit cheque processing and verified credit payment terminals. Commercial deposit automation had fully arrived by the mid 2000s. There was a curious downside to this change in process, though. Less urgency to deliver physical cash to the bank resulted in an increase in the amount of cash in circulation. Operational efficiency between banks and retailers had improved, and new revenue opportunities had been created for CITs, but the system overall was now becoming less ‘cash efficient ‘.

THE CONCEPT OF PROVISIONAL CREDIT: CASH CYCLE VERSION 2.5

A MORE EFFICIENT USE OF CASH: CASH CYCLE VERSION 3.0

The benefits of Cash Cycle 2.0 were limited by the fact that most retailers wanted cash in their bank accounts quickly in order to pay suppliers. The smart safe idea was significantly enhanced by improved communication technology through cooperation between CITs and key commercial banks. Deposit data could now be extracted remotely

A more significant change occurred around 10 years ago when hardware suppliers that had previously focussed on financial services recognised the need for improvement in on-site systems in the retail sector. More recently, they have added recycling capability at retail outlets and have automated tasks such as

preparing tills and reconciling bank deposits. The most important change has been the potential to re-use cash that was previously idle in safes. This includes the provision of cashback at the point of sale. At the same time, banks and CITs have worked together to optimise the back-end processing of cash. They have stitched together a very efficient network of cash centres, largely operated by the CITs, with higher levels of productivity than the highly fragmented network of the past, reducing transportation and re-handling requirements and hence reducing the amount of idle cash in the overall cash cycle. This change was possible due to improvements in data sharing and improvements in process. This last impact is largely due to smarter, one touch deposit processing systems that allow a single vault teller to completely manage count, document and sort processes that previously required multiple staff members and very expensive sorting systems. The result of this innovation is a significantly more cash efficient infrastructure where these solutions are employed. We note, however, that Cash Cycle Version 3.0 is still a work in progress, with such solutions in place for less than 10 per cent of the total cash cycle around the world. Like most new technology, it is spreading rapidly and at a faster pace relative to any previous evolution in the cash cycle.

The cash cycle remains, at its core, radically inefficient and ripe for disruption

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Issue 2 | ThePayTechMagazine

HARD CURRENCY So, what comes next? We have achieved significant and lasting improvements to the security and efficiency of the cash cycle and a redistribution of work between the same participants. With the adoption of Cash Cycle Version 3.0, cash efficiency is improving through the local redistribution of cash at retailers but the cash cycle remains, at its core, radically inefficient and ripe for disruption.

DRIVERS FOR CHANGE: CASH CYCLE VERSION 4.0 There are still two basic issues to manage to fully optimise the cash cycle. Both occur in the interchange of value between sellers and buyers. ISSUE 1: Revenue is generated in exchange for goods, so there is a constant influx of cash. This must be reused to purchase more goods, so it naturally flows to banks and into merchant accounts. The banks, in turn, reissue the cash to consumers through their accounts via ATMs and bank branches. ISSUE 2: Cash is exchanged inefficiently. There is a mismatch between the cash received and the cash needed for change, which requires replenishment of change for the retailer. Put simply, people find it easier to pay with large denominations and will normally require small denomination change as a result. Therefore, retailers will need to have change from banks and CITs. These issues result in inefficiency of two types: cost and convenience. The existence of these inefficiencies in what is effectively a universal monopoly system – only a central bank can issue cash – means it is a system overdue for disruption. If we can, in some way, address these mismatches (reducing demand for change and increasing cash distribution to consumers by retailers) then we could directly reduce the requirement for CITs and the involvement of commercial banks. This would also further reduce the amount of idle cash in the system and lessen the pressure on central banks to provide more cash in the economy overall.

Can we learn from the experience of other markets? Could there be an equivalent of Airbnb (matching supply and demand in the short term housing market) for cash? The first common sense idea is electronic payments. Unfortunately, electronic

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payments in themselves do not provide a solution, because they do not have the immediacy and ubiquity of cash. They are also, at least today, less efficient than cash for the majority of retail transactions when you consider the systemic transactional costs. Addressing issue one – encouraging cashback for consumers at retail locations – is relatively simple, and will likely be directly driven by the economics of maintaining large networks for cash disbursement. ATM and branch networks are expensive and inefficient. Bank investment in marketing cashback alliances with key cash sources (retailers) will be much more efficient than maintaining these networks.

suggested have included consumer initiatives to return change to retailers: ■ Pricing adjustments to lessen the likelihood of change ■ Encouraging social responsibility, for example doubling the change given to charity ■ Creating incentives for consumers when they participate in a sharing approach to change We should also consider the involvement of technologies like data mining, deep learning, blockchain and the Internet of Things to optimise supply and demand in the right place at the right time.

Evolution of the cash cycle: Version 4.0 could bear fruit

For the retailer, the direct benefit is lower transactional banking costs. For both parties, the additional infrastructure investment is almost nil, particularly for those cases where the parties are already participating in Cash Cycle 3.0. Solving issue two is a bit more difficult. Can consumers be encouraged to use their lower denomination change? Encouraging optimal consumer behaviour will undoubtedly be a challenge. Measures

Could there be an equivalent of Airbnb (matching supply and demand in the short term) for cash?

What would greater ‘matching‘ achieve? For retailers, there would be lower CIT and bank charges. Meanwhile, CITs would play an increasing role in balancing cash between retailers, and banks would not need such a large, unprofitable cash handling infrastructure. And there would be less pressure on the central bank’s cash supply. Disruption is inevitable in a vibrant market. The core challenge of cash and an efficient cash cycle is matching supply and demand as close as possible to endpoint users and endpoint receivers. The challenge for Glory and our partners is to drive the evolution of the cash cycle to ensure the stability of the cycle while at the same time radically reshaping it to improve cost and experience. www.fintech.finance

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HARD CURRENCY

Winds of change: Hard cash is increasingly hard to come by in the UK

ACCESS TO CASH: THE HARD FACTS The British public isn’t alone in wanting to hang on to cash transactions… so why make it so hard to do so? asks Ron Delnevo, ATMIA’s Executive Director for Europe On 19 December 2018, the UK Access To Cash Review published its interim report. It carried the title Is Britain Ready To Go Cashless? This title, of course, begs the question: why would Britain want to go cashless? In fact, early indications are that the British public doesn’t. The interim report reveals that 97 per cent of UK citizens continue to carry cash and 64 per cent prefer to use it for small purchases. Most telling of all, perhaps, is the finding that for 25 million members of the UK public, cash is ‘not a choice, but a necessity’. This interim report is 60 pages long. Many will think it spends rather too much time mithering about the possibilities of digital innovation. It is certainly to be hoped that the final report, due to be released in early 2019, devotes itself to very specific recommendations to ensure cash use and cash access in the UK are fully safeguarded for the foreseeable future. So what are the real issues? Let’s deal

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with the relatively easy one first. Namely, the ability to use cash. Stories are starting to emerge in the UK for the first time of bars and cafes refusing to accept cash for purchases. This is completely unacceptable. What is the point of cash being called legal tender if businesses are permitted to refuse it for in-person payments? How can this be stopped? Quite simple. The Bank of England could intervene. If the Old Lady needs to be stirred, she need look no further than the latest pronouncement from the People’s Bank of China. In August 2018, the People’s Bank announced that any vendor found to have rejected cash would be punished, without elaborating on what kind of penalties offenders would face. It also urged consumers to report to the central bank if their cash payments were rejected. The statement went on to make clear that ‘merchants that refuse to accept cash payment have infringed upon the

legal status of renminbi and hurt the rights of consumers’. Nearer to home, both Denmark and Norway have laws in place, compelling most shops and restaurants to accept cash. It will be interesting to see whether the Access To Cash Review in its final report will ask the Bank of England to intervene – or perhaps even ask for a new law to be passed in Parliament. The right of the UK public to use cash is quite simple to safeguard, if the regulatory and political will is there to achieve this objective. Turning to the question of access to cash, this is a thornier problem. The UK public and businesses used to be able to deposit and withdraw cash at bank branches. Sadly, two thirds of branches have been lost in the UK since the dawn of the millennium. So a new solution is required. Smart ATMs can be a major part of that solution. In many countries, ATMs already www.fintech.finance

allow the deposit, recycling and withdrawal of cash â&#x20AC;&#x201C; but not yet in the UK. In fact, rather than seeing ATM innovation in the UK, we are seeing a reduction in ATM services, to the extent that around 10 per cent of the UK ATM estate has been lost in the last 18 months. Switzerland provides some good lessons on ATMs â&#x20AC;&#x201C; and, indeed, the availability of cash in general. In the autumn of 2017, the Swiss National Bank (SNB) conducted a survey on payment methods for the first time. It revealed that cash is the most common method of payment for households in Switzerland. Of the payments recorded, 70 per cent were processed with cash. When measured in terms of value, cash accounted for 45 per cent of the recorded expenditure. This difference is attributable to the fact that cash is a particularly popular payment method for small transactions. That said, the survey showed that cash is also often used when larger sums are involved: 35 per cent of non-recurring payments that involve amounts of more than www.fintech.finance

CHF 1,000 are settled with cash. In a summary of the findings of the survey, the SNB concluded that Switzerland is a country with perfect payment choice. The Swiss experience is, by the way, rather typical of markets where vested interests have not been allowed to manipulate that choice. Look at Italy. The report from the Italian Central Bank, published in November 2017 (The Role Of Cash In Payment Transactions) revealed that where the public benefits from unfettered payment choice, cash is used for a staggering 86

What is the point of cash being called legal tender if businesses are permitted to refuse it for in-person payments?

per cent of payments at point of sale by number and 68 per cent by value. In the UK, curiously perhaps, the Bank of England does not produce payment statistics. Commercial organisations that do so currently estimate that cash purchases account for less than half that recorded in Switzerland. Why? Because cash access is becoming a major issue. In cash-loving Switzerland, ATMs average only 1800 cash withdrawals per month but are not being removed, whereas, in the UK, where ATMs are at least twice as busy on average, our ATM estate is threatened with decimation. In the first six months of 2018, more than 4,000 ATMs were closed in the UK. That is in excess of 20 every day. It is absolutely vital that the Access To Cash Review, in its final report, identifies exactly how cash deposit and withdrawal facilities are going to be provided in every community in the UK. It can safely leave speculation on digital innovation to others. It must be fearless in its recommendations, putting the public interest first, second and third, well ahead of the narrow commercial interests of payment market manipulators. Issue 2 | ThePayTechMagazine

LAST LAWORDS ICEPS AISA 02/02 YENOM

T h is tick-tock rocks! Tech Titan and Payments Racer, Stu Thomas, our ‘man on the street’, gives honest reviews on the latest finance-related technology. This issue, he checks out a new addition to the growing number of smart watches I bet most of you reading this are adorned with some form of smart wrist wear, and those who aren’t are feeling left out… or you soon will be. In the four years since launch, just one brand has roughly matched the output of all the traditional watchmakers in Switzerland. Almost a quarter of 18 to 34 year olds in the US own a smart watch of some kind and sales there increased 61 per cent last year. But I feel there’s an elephant in the room that we need to address; this wrist candy might be ‘smart’ in the technical sense – it’s anything but when it comes to fashion sense. I’m speaking as a bloke here, but I mean a FitBit or a Garmin might look cool with sweatpants… can you honestly say the same when it’s partnered with a fine-tailored business suit? Enter the hybrid smart watch by NYSW. Let me say at the outset that this is very much positioned as a man’s brand and, yes, I recognise that they aren’t the first hybrid smart watches ever made, but these NYSW smart tickers have some killer features, unlike any I’ve tested before. Let’s start with the basics. There are three models available – Manhattan, Soho and Times Square – all with slightly different looks but very similar features. So, let’s focus on the Soho. Under a remarkably hard sapphire crystal

glass, there’s a 43mm face, with a large analogue movement and three smaller sub-dials alongside a perpetual calendar of the kind only normally seen on more expensive watches. Like most, it tracks your steps and calories burned during your day, but instead of a digital screen, it displays this data on the lower two analogue dials. It has a rechargeable battery that lasts up to two weeks (a definite improvement on some of the others) and a vibration alert that can be customised for different types of notification. This is where the top dial on the watch face comes into play. When your phone receives a notification, the dial spins like something possessed, pointing to the type of notification that has just dropped. Most are indicated by their

NYSW has succeeded in making a time machine that brings past, present and future together 66

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usual symbols – Facebook, Instagram, WhatsApp, Skype, Twitter, WeChat, phone, text, email… and lastly N (I guess for ‘n’ything else). This is the secret sauce; something I’ve never seen in a hybrid. Because of the serious amount of tech sitting inside this watch, it is quite thick, at 14.5mm, which might not suit everyone. But the only thing I found wanting was the app design. It looks dated, with big fonts, even bigger buttons and lots of wasted space on the screen. It does, however, function as intended. At just under $250, I think the NYSW has succeeded in making a time machine that brings past, present and future together in an elegant piece of tech that’ll look classy, no matter what you wear. For an in-depth video review of the Soho by NYSW, meet me over on the Stu’s Reviews channel at www.youtube.com/StusReviewsUK. You can also get there by scanning in the QR code below (and don’t forget to subscribe while you’re there). Find me ranting about terrible tech and being an A* keyboard warrior over on Twitter at @StusReviewsUK. And, if you think you have (or know of) a sweet piece of technology, a fantastical financial service or just a great gadget that you’d like to see in this column or on my YouTube show, feel free to email me at hellostus reviews.co.uk. www.fintech.finance

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