Payments (R)evolution - Special Edition 2016 by bobsguide

EDITOR’S LETTER No doubt you’ve heard it before, but it bears repeating: this is an incredible time to be working in FinTech. Despite our decades of shared experience, my teams at bobsguide, GTNews and PaymentEye — all operating under the umbrella of our parent company, Contentive — have never known a more exciting time in this industry. That’s why we’re so proud to present Payments (R)evolution, a limited-edition magazine which will be distributed in both digital and print formats to a total of 140,000 subscribers and testament to the incredible advances this sector has made over the last 18 months. It’s fitting that Contentive brings this special publication to you. Our industry-leading FinTech titles reach more than 150,000 readers every day, giving Contentive one of the strongest digital finance portfolios in the world. And it’s only getting stronger. We’re actively building on our long history of connecting buyers and sellers in this exciting space, supporting innovation and highlighting the best and brightest players in this unparalleled industry. Payments (R)evolution is part of that. Please enjoy. Anne-Marie Rice CEO, bobsguide

2015 was the year that Apple moved into the UK payments sector, mobile-only banks sought licenses to launch and a raft of cyberattacks on massive companies made it clear that no organisation can be completely safe from a cyber threat. In this exclusive first edition of Payments (R)evolution the teams behind bobsguide and PaymentEye, two of the industry’s leading publications, shine a light on 2016. Here we investigate how current players are transforming their systems to keep up with new entrants and provide services to tomorrow’s customers. One trending topic which looks set to continue in the years ahead is regulation, and we explore whether the current wave will help or hinder innovation. We also address the impact of increased customer demand and the need for banks to install real-time payments infrastructures in order to provide the speed, mobile and online 24x7 access that consumers require, alongside necessary tracking and reporting features. But we don’t stop at 2016. We also take in-depth looks at the trends, politics and start-ups that will shape the future of FinTech in Europe. From how the refugee crisis will impact financial inclusion initiatives to the role of remittances, we look carefully at how money will move around the world. We also track the technology trends – from wearables to social media – that will transform the future of payments and ecommerce. And we keep one eye on innovation, speaking to the people responsible for keeping big companies one step ahead of their more nimble competition and examine how big banks can use blockchain technology to transform their operations. But it’s not all for the big players — we also look at how start-ups can stand out to venture capitalists and end with an exploration of what makes London, our home town, one of the most exciting places in the world for FinTech. This magazine is a celebration of Europe and the incredible people and companies putting it on the FinTech map. We’re so proud to call this continent home. Lucinda Beeman Editor, Payments (R)evolution

CONTENTS

investment 7

FinTech investment frenzy continues

Banking 8

Industry Insights: Traditional banking vs electronic payments

Excluded: Bringing Europe’s unbanked into the financial system

Banking for the next generation

Remaking the blockchain: What Europe’s banks can learn from bitcoin’s legacy

Payments 24

How does money move around Europe?

The future of remittances

Real-time payments: The time is now

Back to the future of payments

The death of the password

Money 20/20 Europe Editor and Publishing Director Lucinda Beeman

Editor

Nicole Miskelly Contributors Neil Ainger Graham Buck Rebecca Brace George Carey Madhvi Mavadiya Leonie Mercedes Tom O’Meara Benjamin Rabinovich Design Alex Panichi Production Manager Jabra Sayegh CEO Anne-Marie Rice Sales Director Stephen McMaugh Advertising Sales Stefano Perciballi Edward Drew Rhys Adams Marketing Deborah Roberto Copyright © 2016 Contentive. Copying and redistributing prohibited without permission of the publisher. This information is provided with the understanding that the publisher is not engaged in rendering legal, accounting or other professional services. If legal or other expert assistance is required, the services of a competent professional person should be sought. Contentive One Hammersmith Broadway Hammersmith W6 9DL UNITED KINGDOM Tel: +44 (0) 208 080 9167 Fax: +44 (0) 207 084 7783 sales@bobsguide.com news@bobsguide.com

Money 20/20 Europe: Sessions

Europe’s FinTech renaissance, 2.0

Why is paying for stuff so hard?

The customer-centric bank

Keeping up with the APIs

It’s the (new) economy, stupid

Fat sharks, silly seals and why banks can no longer afford not to be user centered

Can a great white change its bite?

Mobile money 2.0: How remittances are creating a global ecosystem for mobile payments

Cybersecurity 68

Cybercrime: The biggest security threats to the financial sector

Payment protection: Security and the cyber threat

Regulation and law 75

Regulation and innovation

Common compliance acts and regulations affecting the financial sector

PSD2 and beyond: The future of regulating Europe

Payment services laws: EU vs US

E-commerce 87

Tell your friends: Social commerce is coming

Scale and speed: Driving innovation in multinationals

Innovation 95

Millennials: The payments people

London calling: Why FinTech loves the Big Smoke

102

Euro vision: Europe’s most exciting initiatives

104

What are VCs looking for in FinTech startups?

INVESTMENT

FINTECH INVESTMENT FRENZY CONTINUES

Here Tom O’Meara, editorial director of Pivotl, outlines where FinTech investors are looking in 2016. Last year saw an explosion in FinTech investment. Venture capital poured in to the sector, hitting $7.3bn in 2015, up nearly 130% compared to $4.1bn in 2014. The investment world was in something of a FinTech frenzy. So what happens in 2016? More investment, for one — unless a couple of astronomical bets come out of nowhere, don’t expect it to ratchet upwards at quite the same eye-watering rate, but don’t expect it to stop, either. There will be plenty of investments. Consolidation is coming. Payments is currently a massive, confusing and unsustainably fragmented FinTech segment. So it’s no surprise that 47% of global FinTech M&A deals tracked by Pivotl last year were payments companies being eaten up. As it gets more cut throat some companies will be acquired and some will simply acquiesce and bow out. There will be more consolidation across the FinTech space, but payments will again attract the majority of activity. Scaling will be another theme in 2016. Many innovators have planted their respective flags in supposedly fertile territory. Now they need to prove their value, expand their presence and achieve scale. Partnerships may prove crucial in this context. Closer co-operation between traditional

banks and start-ups that began in 2014 and matured in 2015 will continue to drive them to coalesce in 2016. In Europe the effect of the PSD2 legislation will likely ramp up this burgeoning collaboration. But keep an eye out for challenger banks such as Atom, Mondo and Number26 and how they fit in to this tying together of the old and the new. It’s set to be a big year for bitcoin and blockchain. Criticised in some quarters as too volatile, slowly but surely it’s attracting more legitimacy from established digital brands, traditional banks and investors. This acceptance of crypto currencies will only increase in 2016. On the blockchain front many of the world’s biggest banks are now exploring the opportunity. Don’t expect to see the fruition of this flirtation straight away, but the fact these traditional players are exploring it all is a vindication of blockchain technology. More partnerships will be struck in 2016, there will be more investment in relevant startups and a broader applications of blockchain will emerge. Finally, expect an influx of capital into startups looking to shake up the insurance industry. A lot of backing is likely to come from the corporate investment arms of insurance companies, as well as traditional venture capitalists.

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INDUSTRY INSIGHTS:

TRADITIONAL BANKING VS. ELECTRONIC PAYMENTS Christophe Chazot

Group Head of Innovation HSBC

How is the electronic payments industry disrupting traditional banking? The rapid growth in the popularity of online and mobile banking has clearly changed the traditional banking model. The digital revolution and the increasing popularity of smart phones are changing how all generations interact with their banks, and are trends which are encouraging banks to become much more consumer centric than they have been in the past and ensure that they invest in technology that enables customers to access their money whenever and however they want. However, there are many areas of banking where traditional banks still do exceptionally well, such as keeping customers’ funds safe, securely moving money between accounts, identifying fraud and managing risk are all areas where banks have become incredibly proficient.

Is it important for traditional banks to implement technology platforms? The growth in the volume and value of electronic payments in both developed and more noticeably developing economies is unprecedented. Maintaining the integrity and security of these systems is fundamental to modern society and it is essential that banks capitalise on the data that they already own. Banks have a unique opportunity to improve the lives of their customers: by using their customers’ data more effectively banks have the chance to work with customers in understanding their businesses and in taking solutions to them that better meet their needs. Banks have a wealth of data that needs to be used to make our customers’ lives more efficient. We can help companies to do better and to measure their risk better.

Where do you see the internet banking space heading in comparison to the use of cash? There are sizable advantages to the electronic transfer of money in comparison to cash, not least in helping prevent financial crime. Transitioning to full digital will allow new services and innovation to be created. That aside, reducing and/ or removing physical cash from an economy can be cost effective for individual banks, their customers and the economy as a whole. While the use of electronic transfers has increased dramatically in recent years, notably in northern Europe and developing economies, we don’t expect to announce the end of cash any time soon.

In what ways have you adapted in order to serve the digital customer? Adapting to changing environments is something banks have historically done well. Traditionally, innovation in banks has been very product oriented, however, with the digital revolution and the change of customer behaviour we are seeing a new environment where everyone has the same challenges. Banks can no longer tackle customer interaction, leveraging data and security in separate silos, we need to look at how we operate more holistically. Without the customer expectations fuelled by innovative, customer centric technology companies, it is highly unlikely that innovations such as faster payments, mobile banking and contactless payments would have developed so quickly.

Liz Oakes Director KPMG UK

How is the electronic payments industry disrupting traditional banking? I think it depends on what country you’re in and whether you’re in the consumer or wholesale sector. The consumer area has seen a huge amount of change with new disruptive platforms such as Uber, Lift and Airbnb. All these systems want to embed payments and make transactions seamless and frictionless, so the consumer does not actually see it occurring. With businesses attempting to make these activities more convenient, more protection is required in the form of cyber security so that hacking, phishing and mule account activity disappear. In the EU, there is a lot of regulatory change that is imminent with the PSDII and Payment Accounts Directive. There is a massive amount going on and trying to keep track of all of it is hard.

Is it important for traditional banks to implement technology platforms? A move towards 24/7 and a harmonisation onto Extensible Markup Language (XML) will allow new competitors to come onto the marketplace and provide new services, therefore investment in these core platforms is critical. These systems are incredibly complex, expensive and risky to change. However, traditional players now have to make changes under risk based parameters and in a highly regulated environment. In the UK, we see lots of challenger banks establishing themselves, which is the most interesting thing. To see a platform that can start from scratch, acquire many new customers, go to market in a short period of time and become profitable is commendable. It’s taken traditional banks a long time to get to the stage of having a stable business and this is a pivotal moment, where big legacy banks can move into the new market with new participants, but are still servicing the big manufacturing base.

Where do you see the internet banking space heading in comparison to the use of cash? Ireland has just become the latest country to abolish the one and two cent piece, but if this is to continue in other countries, children and the elderly need to be taken into consideration and whether or not it is convenient for them. Personally, I would like to carry cash with me as a protection mechanism and that is partly psychological. Until we move to become fully biometric and where you can literally stand in front of something and your picture debits an account, we will need cash, especially for transactions that people do not want to be tracked. What’s legal today might not be legal tomorrow, and what is seen as being a good thing to be doing, may not be seen as a good thing in five or ten years. We haven’t thought through the ramifications and it’s easy for us to say that we’d love to move to digital everything, but I don’t think life is that simple.

In what ways have you adapted in order to serve the digital customer? We have seen banks, big financial institutions and insurance companies trying to figure out how to provide a digital transformation journey for their customers. Our organisation has helped banks to take a step back and look at how they can rationalise the customer journey and in turn, streamline it and build in a better model that memorises data. It has been fascinating to watch the upturn and the speed at which people adopt technologies that the bank didn’t consider possible in the past because they assumed these services were complex. I would argue that that in this day and age, it’s almost daft to have a chief digital officer because the entire thing is digital. Your whole lifestyle has moved and your entire day can be digital.

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Madhvi Mavadiya takes an inside look at how large institutions have adapted to suit the digitalisation of the payments industry.

Michelle Tinsley

Director Mobility & Payments Retail Solutions Division, Intel

How is the electronic payments industry disrupting traditional banking? We are seeing a bigger focus around customer experience and as a result, looking at reducing both wait times and the friction of payments. Banks can be part of the disruption but they need to be less focused on foisting products on people and really think more about what the consumer’s frustration points are and how these can be solved. Banks want to innovate around a seamless experience and do this by providing online banking at home or the ability to get quick balances on mobile devices.

Is it important for traditional banks to implement technology platforms? iZettle really caught our eye a few years ago as a leader in EMV technology in Europe because of their ability to keep price points low with their add-on dongle approach to consumer payments. Focusing on small businesses, they have used this payment capability as a beachhead to expand their services and earlier this year, announced their move into small business lending. It seems like a lot of the innovation today is centred around the consumer, and beyond next year, a lot of wearables for the worker will emerge and it will be great to see the consumer tapping to pay. However, the real questions are whether or not the retailer will accept this form of payment and whether the consumer will have the ability to pay on the spot.

Where do you see the internet banking space heading in comparison to the use of cash? I think cash is decreasing and leading countries like Sweden and Denmark are in a race to be the first to become “cashless”. Interesting technologies are coming to the surface, for example, Danske Bank is using a combo approach of contactless as well as QR codes, so regardless of what phone a consumer has, it will still allow them to onramp onto digital payments, without having to wait for change. I also see Europe leading in the contactless space, with new regulations coming into force, which will require terminals to have a contactless capability, but the US will still be ten years behind due to struggles with EMV adoption.

In what ways have you adapted in order to serve the digital customer? What we’ve seen a lot of in the mobile banking space is that it better services the client because you are not just opening an account: you are having a dialogue with the customer. The major banks need to embrace this change and be less fearful about cannibalising existing ways of payments. Setting up a little startup within the company is what works and this almost drives the charter of inventing the new future, as well as blending it with technical and business process experts. Again, there is a human adoption factor to this and those working at the bank need to feel as if the change is good for them and not that their jobs are being eliminated. From a banking perspective, these digital teams don’t need to be giant armies.

Michael Carbone

Director Sage Payments UK and Ireland

How is the electronic payments industry disrupting traditional banking? Electronic payments disrupt in many ways, from onboarding and customer acquisition to customer journey, financing and customer management in the form of newly equipped bank branches or branchless banks. New entrants to the industry are online first, and online only. There is a new way of banking that uses technology to help businesses to manage their financial affairs and making payments no longer requires people to go into their bank. Disruption will occur by using technology to help businesses manage their finances and have real control over their money, in a way that they haven’t had before. Real time and situation relevant solutions will therefore, be the standard.

Is it important for traditional banks to implement technology platforms? A fundamental priority should be the implementation of platforms that use real time customer data to improve the financial experience with added convenience and efficiency. For example, using real time dates to enable buyers and suppliers to authenticate each other is important so that speedier commerce can be delivered. Banks need to build faster ways for people to buy and settle. Buyers and suppliers want to interact quickly and securely in a fashion that enables speed of order, payment settlement and delivery. With cross border commerce expanding rapidly, the authentication of buyers and suppliers is a critical for underpinning and reducing friction in the purchase and payment process.

Where do you see the internet banking space heading in comparison to the use of cash? Tracking of money is vital to small and medium businesses and electronic payments result in tighter cost and working capital control. I believe that more and more businesses will turn to electronic payments and payment technology to track and manage their finances. Financial providers who manage internet banking portals, for example, could use more of the information that they hold to provide more timely offers to their end users so that they are responding to their real financial needs.

In what ways have you adapted in order to serve the digital customer? Mobile wallets that can support mobile payments with integration of those payments is where the future for payment providers will be. Your wallet will house most of your cash for both low value payments and B2B everyday payments to suppliers etc. We realise that the future of payments should bring real benefits to the end user. There are three key areas that we see for payment innovation: real time settlement, data rich payment transaction information and real time integration of sales and expense data into the company’s ERP and accounting systems.

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EXCLUDED: BRINGING EUROPE’S UNBANKED INTO THE FINANCIAL SYSTEM

With more than 165m Europeans locked out — by choice or necessity — of the official financial system, financial inclusion has become a pressing concern on the continent. Lucinda Beeman investigates.

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It’s a Monday morning and the rent on your flat — clean, comfortable and nestled in a desirable street in any European capital — is due. How do you pay it? For the majority of the European population this is a hurdle easily overcome. A simple bank transfer — from your desk at work, your living room sofa or even your phone during a commute — will ensure that your family has a roof over their heads for another month at least. But for 165m people from Iceland to Russia’s Pacific coast, the process is much more complex. These are the ranks of Europe’s financially excluded. Without a bank account, they operate in a cash-only environment where simple tasks like paying the rent are complex, dangerous and time consuming. As Louise Holden of MasterCard Europe explains: “When we talk about financial exclusion we think about Africa, Asia; those markets where it is a significant problem. But with 165m excluded people across Europe it’s a significant problem in our region, too.” While data from the Financial Exclusion Initiative indicates that rates of financial exclusion are much lower in Europe than in other geographies, just a single country — the Netherlands — can boast a financial inclusion rate of 100%. For countries in emerging Europe like Bosnia, Moldova and Georgia, less than 20% of the population uses financial services. In Albania just nine per cent of the population is financially included.

And that’s not the whole story. According to Aurora Ferrari of the World Bank, any discussion of financial exclusion must begin with a common definition. She says: “What we identify as financial inclusion is access as well as usage of basic financial services. In the Eurozone 90% of the population have an account, but another issue to understand is whether people really use these accounts.”

Opting Out

Just as the scale of financial exclusion in Europe is vastly different from Asia and Africa, so too are the underlying causes. While poverty is a determining factor worldwide – poor people are less likely to have a bank account, regardless of their geography – Europeans are more likely than their African or Asian counterparts to opt out of the financial sector. And, because maintaining a bank account incurs a cost in many European markets, it’s common to see spouses and families sharing one account between two or more people. Ferrari explains: “Even if the cost of an account is €20 per year, why would you spend that when you could have an account with your spouse? In many cases people will wonder that. The higher income a country is the more likely each individual is to have an account, but I think there may always be a percentage who do not.” The ranks of the unbanked are

made up, too, of some of Europe’s most marginalised populations, including the Roma. These groups are difficult to bring into the system, primarily because the odds are stacked against them. And, as would be expected on a continent as large and diverse as Europe, each market has unique factors at play. In Turkey, Ferrari says, the main priority is bringing women into the financial system; in Russia, on the other hand, the key challenge is ensure that safe financial services are available in the most remote and sparsely populated areas.

Threads of Change

While projects from a number of sources have made a significant dent in the number of unbanked across Europe over the last several years — according to Holden more than 35m people have been brought into the official banking sector since 2012 – a number of trends are impacting the future of financial exclusion in Europe. The highest profile of these are wrapped up in world events: ID cards and consumer protection. With more than 100,000 Syrian refugees crossing the European Union’s borders in July alone, this huge wave of humanity will need access to financial services. Holden says: “How do we make sure that [inbound refugees] have access to transactional banking, particularly if these are individuals entering the European geography

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without the paperwork and identification that other individuals have within the continent’s borders?” One challenge is reconciling Europe’s tough anti-money laundering regulations — which require ID checks — with the grim realities of facing the most vulnerable segments of the European and refugee populations. “India comes to mind,” Ferrari says. “They made a big push to give a biometrically linked ID card to everybody, allowing them to open accounts.” Consumer protection — highlighted by eastern Europe’s Swiss mortgage crisis, when hundreds of thousands of homeowners across central and Eastern Europe took out low interest rate mortgages with Swiss banks only to be stung when the Franc surged against their home countries’ currencies — has become a heated political topic in countries like Hungary, Croatia and Poland. Ferrari says: “This is an area where there is more to be done at the European Union level. After the crisis, Europe did a lot to support the creation of a banking union and to introduce laws to facilitate bank resolution, but they haven’t really done much in terms of consumer protection at the EU level. We would say that having a framework that ensures clear rules for consumer information disclosure and effective dispute resolution is a very important part of financial inclusion.” Europe also lags on mobile payments, she says. While initiatives like M-Pesa have made huge strides in Africa, the mobile payments system reached Europe relatively recently, with licences to operate in Romania and Albania secured in 2014 and 2015, respectively. The very technologies with potential to bring many into financial inclusion could put others off. With trust in traditional financial institutions already weak in some areas – Turkey included – the risk of cyberattacks could be a significant block to progress. Ferrari says: “This is becoming a serious issue. Who knows what could happen to customers’ details following a cyber-attack?” Individual governments also have a central role to play, Holden says. The way governments disburse benefits and pay their staff can be

an ideal entry point into the formal financial sector. Russia, for example, on-boarded 25m people when a group of cities switched their local welfare payments onto an electronic solution. Similarly, Italy was able to bring 1.3m of its citizens into the loop by distributing a welfare payment via prepaid card. Holden explains: “Many of our national governments recognise that by leveraging new technology and connected infrastructure they can deliver services more inclusively and cost-effectively.” Governments can also impact the future of financial exclusion through regulation. As Holden points out, regulations can either support or hamper the growth of inclusive financial products. For example, regulations that make it more expensive to run banks in Europe could spur the entrance of non-bank actors that deliver basic services in a more innovative and cost effective way, Ferrari says. “It’s important to have an ongoing conversation with individual regulators,” Holden says. “We’re always trying to make the right decision for the consumer.”

The Public-Private Partnership

With so many powerful stakeholders and complex trends governing the future of Europe’s unbanked, to whom does it fall to drive financial inclusion initiatives forward? Holden and Ferrari are in agreement: strong, mutuallybeneficial partnerships between governments and the private sector will do the most good for Europe’s financially excluded. Ferrari says: “On the one hand the government has to create an

environment where it is possible for innovation to happen. Then there has to be the private sector, because all of these operations are run privately for profit. A combination can help these solutions emerge.” Governments have much to gain from financial inclusion — higher rates of financial inclusion correspond to better economies, a more productive workforce and a more secure population. But what’s in it for the private sector? With 165m individuals excluded from financial services, it’s not hard to tell: market share. Holden explains: “MasterCard is a commercial organisation, and we’re very honest about that. We recognise that as more individuals who move into transactional banking — whatever solution they take — some may come onto the MasterCard Network. But there’s also the social imperative: this is the right thing to do.” And, as the world moves more and more online, the issue of financial inclusion will only become more urgent. Holden says: “The gap between the included and the excluded is getting bigger. Not only do they lack the same opportunities to create personal wealth, but also they may not have a digital identity. And the way the world is moving — more and more towards a digital presence being a core requirement of buying a house, getting a job, establishing your identity — being part of this connected world.” “The implications are so much more than being able to pay your bills online,” she concludes. “It’s fundamentally being able to be a part of the growth of the global economy.”

BANKING

BANKING FOR THE NEXT GENERATION

The banking industry is going through a huge upheaval, with new competitors threatening to take the livelihood of traditional banks. Nicole Miskelly investigates how new challenger banks are using mobiles, social media and data analytics to provide services for tomorrowâ&#x20AC;&#x2122;s customer.

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With traditional banks fighting for relevance and improved mobile banking experiences expected to be at the forefront of attracting new customers, the threat presented by challenger banks can no longer be ignored. “We are sitting at new frontier of enriched banking services,” says Travers Clarke-Walker, chief marketing officer at Fiserv. “Customers are moving towards digitisation in their entire lives, and from a quality perspective, banks should be questioning whether they are offering a digital experience that is best functional and worth customers’ end expectations.” Fiserv’s latest Software-as-aService (SaaS) offering Agiliti, is aimed at new entrants coming into the UK’s banking sector and smaller existing players. “We are expecting a number of digital and other style clients to follow on soon after Think Money which is planning to go live with its new core banking system using Agiliti early this year,” says Clarke-Walker. High street banks have not had it easy over the past few years and with financial services regulators keen to see new banks forming in the UK, this has created the perfect environment for new digital players to disrupt the market. These new banks are revolutionising banking by providing digital-only services, which Clarke-Walker says can be interpreted in different ways. “Some bank’s version of digital-only means they will not have any telephone call centres and others say that the main point of contact will be digital, but customers will still have access to staff and indirect access to branch networks through partnerships.” Today’s bank customer expects to be able to use banking services on their mobile wherever they are, with the ability to contact their bank through different channels such as social media, but what does this mean for brick and mortar banks? Clarke-Walker says that branches will still exist because there will be customers that will want shop virtually exclusively online and others that like the comfort and security of a physical environment. New digital challenger banks such as Fidor and Atom pride themselves on offering products and services that customers actually want and according to Katy Ringsdore, head of PR & internal comms at Atom

Bank, the bank intends on allowing customers to manage their money the way they want to. “We have been speaking to customers over the last 18 months and we are going to continue to listen to make sure we develop truly excellent products that our customers actually want and need,” says Ringdore. “It’s impossible to presume that all customers will want the same thing because everyone is different so we have created an app that will allow every customer to manage their money the way they want to – not the way we want them to,” she adds. Atom, which was established by Metro Bank founder Anthony Thompson, was the first mobile bank to acquire a banking licence from the Bank of England in June 2015 and according to Ringsdore, what makes them unique is the experience they offer, the culture, the brand and the all-important app, which is going to change the way people bank. Having the opportunity to start from scratch, without any legacy issues, Ringsdore says that Atom have been able to build the type of bank they believe customers want and in the process have learnt that customers want banking to be more

fun and reflective of the world we live in now. “Some of the things we have heard from customers are that they want managing their money to be quicker, more efficient, safe and secure, fun and personal to them. We have heard that they feel that banking is still very old fashioned and there is a need to bring banking up to date. We don’t want to punish people for not being financially ‘savvy’, we want to help our customers to make the most of their money and by that we mean we will help our customers to understand and manage their own money,” says Ringsdore. On the topic of what customers want from a bank today, Sophie Guibaud, VP European expansion at Fidor Bank says they have learnt that customers want to feel that the bank is really listening to them. “We have learnt that people like transparency and to feel close to their bank, customers also want to know that what they say has a real impact.” Since Fidor’s entry into the UK in September last year, Guibaud says that the bank, which is still in the early stages, is already seeing trends about UK customers and has plans to expand banking services from

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retail-only, to corporate, white label and API banking, in line with the services already offered by the bank in Germany. Guibuad says that with Fidor’s open API approach banks, telecom companies and fintech companies are able to launch their own financial services based on the bank’s infrastructure. “In Germany, we currently have several different partners in areas such as credit funding and currency investment in a bid to provide a one-stop shop banking experience and will be starting to on-board partnerships in the UK.” As VP European expansion at Fidor, Guibuad makes recommendations about which countries the bank needs to launch in, which products they need to launch, then recruits and train the teams responsible. According to Guibuad, the move into the UK market, which is dominated by very few players, meant that they had to start fresh with their product offering. “In terms of products, in the UK we started with a very limited offering because we wanted customers to tell us what they would like us to launch next,” says Guibaud. Challenger banks are taking advantage of the lack of innovative mobile services that traditional banks offer and Guibuad says that part of Fidor’s philosophy is to be where their clients want them to be and not to drive them on specific channels. “Therefore, we are in touch with them within the community and through social

media channels such as Facebook and Twitter.” Social media interaction is a huge part of people’s lives today, in particular the lives of 71% of millennials who reportedly check social media sites at least once per day. “We aim look into any channels clients want us to be available on in the future because we don’t want them to feel frustrated, we want them to be able to contact us when they want to and social media in particular, because it is so instant, enables us to reply quickly and be much closer to our clients,” says Guibuad. According to Ringsdore, as a digital bank, social media is the obvious medium of choice to communicate with customers. “For Atom specifically, social media offers an unrivalled way to engage with customers, to have real, open and honest dialogue that is mutually beneficial but most importantly, it is the right context to, in real time, demonstrate and bring Atom’s values to life for both Atom’s people and customers.” However, social media interaction with customers is not as easy for traditional banks, which ClarkeWalker says is due to regulatory restrictions. “Social media on the whole is quite difficult for banks. The regulations around marketing are particularly challenging in terms of the levels of information that need to be provided. Most banks will not allow their front line staff to communicate in social media around banking products and propositions.”

Clarke-Walker also warns challenger banks to ensure that they are competent of being a social media business if they are going to advertise themselves as such. “All new institutions and challengers will need to ensure that they really do have the infrastructure and competence to act in the way that they are promising to their customers.” Another way Fidor is encouraging customer interaction is through their community approach, which is made up of two parts. “The first part of the community is our personal finance section, which is where customers can ask questions about personal finance and we pay our community members to give their knowledge and advice about this subject, rather than employing banking advisers,” says Guibuad. “The second part is where members not only tell us what they would like us to launch next but where we treat them like comanagers and also ask them about pricing. Most recently we have spoken to community members about fair pricing for the Debit MasterCard we are launching next month. The idea of the community is really to design the products with our customers,” she adds. Many banks are focusing on using customer data to offer products, however, Ringsdore says that Atom is one of the few banks that are not intending to do this, and instead plan to use data to help customers manage their money better. “We won’t be doing any marketing in our

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app therefore, no sales! The data we use is of you and for you to use to help you manage your money. This becomes helpful and useful; it will help you to think about what you can do better to get what you want from your money. The orientation is about you as a customer and how you can improve your financial well-being, but we do not use data to sell you stuff, that is the massive difference.” It is evident from the rise in digital that the next generation are going to expect even more than the current one, and new banks such as Fidor are already anticipating what they will want from banking services. “We are looking into this because we want to stay relevant to our clients in the future. We think that the next generation will expect more advanced PFM tools and we want to be able to provide them with a smooth personalised banking experience, which is why we have started to aggregate fintech partner offerings onto the platform,” says Guibuad. Ringsdore agrees that the next generation are going to expect more and believes that banks will be under even more pressure to deliver in

terms of speed. “We can already see that the next generation will get bored easily. By bored I mean bored by slow decisions, delays, glitches, lack of answers. We are moving quickly in to world of the immediate or people move on. Banking right now is one of the few industries that still lags behind customer’s expectations and will feel more pressure from future generations.” There is currently an explosion of data and Clarke-Walker believes there are opportunities in everything from machines learning automatically, to people giving really good pre-determined analytically insight. If clients are willing to share social media data then Guibuad says that Fidor plans to personalise the customer experience by showing widgets that the customer will be most interested in according to their profile and pushing the financial apps that they will be most interested in according to their profile. “We think that the future of banking will be a true personalised experience, helping our customers to manage their finances better by using past and future analytical spending and relationship-based banking as

opposed to transactional banking.” According to Clarke-Walker, all banks have the ability to enrich transaction data today and should be focusing on the enrichment of mobile banking services. “With this enrichment, a set of data analytics or behaviour analytics can make predictions better than they are today. For example predictive balance can help you to forward plan and many online and mobile banking applications show customers historic information. However, very few do this in a predictive way which is something that we should expect in the future.” If, like Clarke-Walker says, we are sitting at the beginning of the next generation of engagement and services which will be much more engaging in the future than they are today, then he is also right to predict that technology will play an even greater part and banks will rely upon machine intelligence, behaviour analytics and the internet of things in order to provide the consumer with better, more engaged, more relevant and more insightful services than they receive today.

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REMAKING THE BLOCKCHAIN: WHAT EUROPE’S BANKS CAN LEARN FROM BITCOIN’S LEGACY

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Since it first emerged under mysterious circumstances in 2009, bitcoin has earned itself something of a reputation, with its wildly fluctuating value and role in transactions on the dark web. But the underlying structure that makes bitcoin work, the blockchain, a virtually infallible distributed ledger of transactions, has not gone unnoticed by the major banks. Leonie Mercedes investigates.

The bitcoin blockchain makes it possible for people who have never met to pay each other bitcoins without the involvement of a central authority. It’s a record of every bitcoin transaction ever made, distributed across a network of users who verify and approve every new transaction. Everyone on the bitcoin network can see the ledger, so it’s difficult — though not impossible — to tamper with. It’s this speed and efficiency that has banks interested in exploring distributed ledger systems. In the last 12 months, major banks including UBS, Barclays and Citi have announced that they’re looking into ways of using blockchain technologies in certain transactions. But what are the difficulties of integrating this new technology into banks’ legacy models, what role will regulation play in its development and how far will the blockchain’s applications go?

Reducing the drag

In many financial transactions, cash has a series of hurdles to clear in its journey from payer to payee. This is what makes transactions so slow: it takes time for banks to synchronise their internal ledgers, which ties up capital and introduces risk. Gideon Greenspan, founder of blockchain platform MultiChain, explains: “Most modern financial transactions involve ledgers being updated, rather than the physical movement of assets. “For example, a currency exchange transaction between two banks will be recorded in three ledgers – one for each of the two banks, plus a custodial bank who is actually

holding the assets on behalf of them.” Each of these steps is fallible, and creates drag on the transaction. Greenspan continues: “First, it takes time to verify that each organisation has an identical record of each transaction; second, the counterparties have to pay the custodian for this service; and third, discrepancies often need to be resolved manually.” Distributed ledgers can eliminate both the drag and the risk. In fact, Santander estimates that they can reduce the banks’ costs by up to $20bn a year by 2022. They have the potential to replace banks as financial intermediaries for transfers and exchanges of money, says Eric Benz, co-founder of blockchain framework Credits. “Either banks will look at ways blockchain technology can enable their current operations or they will ignore it and slowly become extinct,” he says.

Forging links

Last September, nine of the world’s largest banks partnered with FinTech company R3 to develop distributed ledger technologies for use in market transactions. By the next month, a total of 25 banks had signed up to the consortium, including JPMorgan, HSBC and Citi. Both UBS and Barclays have opened blockchain ‘labs’ in London to explore the technology’s potential. So far, the banks have been fairly closed-lipped about what they might use it for, but Mariano Belinky, head of Santander’s fintech division InnoVentures, told Business Insider last year that the fund had identified

20 to 25 use cases where blockchains could be applied. Sarah Martin, vice president of The Digital Currency Council, says that as more early movers openly show their interest in blockchain, financial institutions are now flocking together to keep up with the technology. “A certain FOMO [fear of missing out] has set in, best exemplified by the ballooning of R3 from nine to 13 to 25 member banks within just a couple of weeks,” she says.

A younger model

If developing the technology to disrupt the financial markets is one challenge, finding a way to seamlessly integrate it into the banks’ legacy systems is quite another. “Many difficulties will present themselves when integrating into legacy infrastructure, especially in capital markets,” Benz says. He continues: “Companies must understand how the hub and spoke model actually works in these real world environments before providing technology designed to improve or rather replace.” Martin agrees: “Not all big banks have the agility to swiftly adopt something like blockchain technology into legacy financial architecture. Moving from the blockchain buzz in the accelerators and R&D labs to actually implementing a distributed ledgerbased system will be a formidable challenge.” One stumbling block for the wide adoption of blockchain is the absence of regulatory guidance. “Regulators are just as flummoxed by the blockchain as everybody

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else,” Martin continues. “Banks are trying to get ahead of regulatory questions by working together to develop open standards and protocols for distributed ledger technology.” She says that one idea is to adopt more ‘permissioned’-based systems, managed by a group of banks. Accenture predicts that such a solution will run until regulation or legislation catches up with the technology, after which a ‘permissionless’ service can be offered to the public. Existing regulation would need to adjust classifications of currencies, property and commodities to be relevant, Benz says. He adds: “Existing regulatory frameworks will also need to evolve to address issues of taxation, national security and money laundering, since blockchain can seamlessly facilitate cross-border transfers.” Greenspan says that while public blockchains like bitcoin are fundamentally incompatible with financial regulation, private blockchains can achieve goals that regulators are favourable towards. “They tend to increase transparency in a marketplace, and they enable real-time monitoring by regulators,” he says. There are also questions about

the scalability of the blockchain model. Bitcoin’s blockchain is currently limited by the number of transactions it can handle per second – as the size of a block is capped at 1MB, bitcoin can process a maximum of seven transactions per second. By contrast, Visa handles about 2,000 transactions per second on average. Not a big problem now, but certainly something to consider when such platforms are called upon to bear higher volumes of transactions. Greenspan cites confidentiality as the biggest issue. Finding the right balance between enabling every party to verify each transaction, without every party seeing all of the activity of every other, will be crucial, he adds. However, he says, solving this dilemma is a very active area of research: “The most promising technology is called zero knowledge proofs. But I don’t believe it has been solved yet.”

Beyond cash

It isn’t just cash that can be expressed in a blockchain – it’s possible to code other assets, such as luxury goods and property. According to a report by The Economist, Honduran politicians have asked US startup Factom to

develop a prototype of a blockchainbased land registry to put an end to land disputes. Last July saw the launch of Ethereum, a decentralised platform that lets users issue “smart contracts” – essentially unbreakable contracts encoded in computer language. “There’s growing recognition that blockchain technology stands to transform financial services. But there’s equal ambiguity about precisely how it will play out,” Martin says. “2016 will be a year of experimentation into how blockchain technology can be used to make existing processes faster, cheaper, more transparent and more secure. But that’s just the first step. There’s an untold world of automation, record keeping, data storage and operations management for banks to explore.” Benz says that the technology presents significant opportunities, though these new applications present significant legal disruptions, not just in banking and finance, but also in intellectual property and general commercial contracts. “The moment blockchain becomes legally binding is the moment we will see true innovation with blockchain technology,” he says.

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HOW DOES MONEY MOVE AROUND EUROPE? The flow of money sent by residents of the European Union to a non-EU country in 2014

€29.3bn Inflows of money to EU countries from outside the Union in 2014

Which EU countries sent the most in 2014?

France €9.4Bn United Kingdom €6.8bn

€11bn Which countries received the most in 2014?

portugal €4.8bn poland €2.8bn

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How does money move within Europe?*

UK to Poland $1.2bn

Russia to Ukraine $3.9bn

Ukraine to Russia $2.2bn

poland

united kingdom

russia

germany ukraine

france

portugal

Turkey to Germany $1.5bn

France to Portugal $1.3bn

Sources: Eurostat; *The World Bank (estimated bilateral remittance matrix for 2014)

turkey

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THE FUTURE OF REMITTANCES

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As world economies grow more connected and travel more accessible, remittances become an ever more vital piece of the FinTech puzzle. Here Lucinda Beeman asks Michael Kent, founder and CEO of Azimo, what’s next for this vibrant market.

In your view, how healthy is the remittance market in Europe and worldwide? It’s certainly healthy for the incumbent money transfer players, but for customers it’s not. Remittance prices in Europe are some of the highest in the developed world, with fees reaching as high as 10% per transaction. No one, especially hard-working migrants, should have to pay that. It’s something we’re trying to fix. What are some of the major trends driving development of the space, now and going forward? We live in a world of hyperconnectivity, where the ways we live, work and interact with each other, especially remotely and across borders, have fundamentally changed thanks to digital, mobile and social technology. By 2020 there will be 6bn smartphone users worldwide – close to the number of people on the planet. That’s nearly everyone online, all the time. Social media is also a key driver of change. Over 2bn people are active on social media networks and, for migrants in particular, it’s become a vital way of staying connected to family and friends abroad. These changes are resulting in a huge shift in the way that people interact with their money: lending, borrowing, sharing, donating, paying and getting paid. While digital payments and transfers are rapidly overtaking cash it won’t render it obsolete as some predict. Cash will remain an important payout method, especially in developing nations. We will see mobile wallets gain more market share. By 2016, Juniper research predicts that mobile wallets will reach 200m - more than 100% growth from the end of 2014. According to the World Bank, remittance growth is set to slow in 2015. Has this been borne out, as far as you can tell, and what impact will the slowdown have on FinTech companies operating in the space? We’ve not seen it - Azimo continues to grow very fast. It’s hard to generalise, but having been in the industry for a while now, what tends to happen is that people send the same number of transactions but a bit less each time. That reflects the reality that for many people is essential spend: money that gets allocated before anything else for the sender.The slowdown also tends to make customers even more focused on value than usual, which has helped the adoption rates of the digital only players, who tend to be around 80% to 90% cheaper than the incumbents. Broadly speaking, it’ll have limited impact on the FinTech industry.

Has the anti-immigration rhetoric sweeping across Europe and turmoil within the EU impacted the remittance market? How do you see these trends playing out in the future? Not yet, to my knowledge, but it does worry me as it is likely to have long term negative consequences on how many people want to emigrate to Europe with their skills and expertise. It’s a shame, really — we should be welcoming migrants with open arms, not turning them away at the door. Their contribution is what makes a country thrive. What are some of the barriers to adoption you’ve seen for potential customers, particularly those who still use your more expensive competitors to send money? How can the industry help them overcome these obstacles? There are two key barriers. First is awareness; most people don’t know that you can send money abroad online, quickly and at a fraction of the cost. The second is trust in a new service. This is a challenge for any new business, but especially a financial one — handling people’s money is an emotional business. We work hard to overcome these with friendly and responsive customer support, driving down the cost of every transaction and encouraging our customers to share with friends and family. Word of mouth is one our greatest drivers of new customers. What’s next for the remittance market and for Azimo more specifically? Remittances have been at the fringe of the financial services industry for such a long time, and it’s finally having its moment in the sun. Over the next five to 10 years we’ll see greater visibility of remittances impact on the global economy. Mobile wallets will become ubiquitous, with nearly 2bn more people having smartphone-centric mobile wallets in Africa and Asia, a major step forward for financial inclusion. Given the rise in social media adoption, we’ll see FinTech players integrate more with messaging and chat features such as FB messenger, WhatsApp, Viber, WeChat, Google Hangouts and the like. Whether those services are native or offered using third parties, it’ll bring our finances closer to the digital apps we use every day. For Azimo, we’ll be looking to expand to new markets, such as Asia, and build even tighter social media integration.

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REAL-TIME PAYMENTS: THE TIME IS NOW

Real-time payment infrastructures are spreading around the world with projects in Australia, the US and EU set to join Singapore, UK, India, Denmark and many other countries. The time is now for these payment backbones, but why are they popular, can they help banks retain customers and are they standardised yet on ISO20022, asks Neil Ainger The key driver for the adoption of real-time payment infrastructures is customer expectation of a better, faster service that can handle mobile, online and data reporting in a modern electronic world. Closely linked is regulatory demand that banks provide this for citizens. “You cannot justify slow payments when consumers can order and get goods delivered in the same day,” says Carlo Palmers, Swift’s Market Infrastructures Manager. “The disintermediation threat from financial technology (FinTech) newcomers, challenger banks and alternative payment service providers (PSPs) – such as Venmo, Amazon, PayPal and so on – are also a driver because banks don’t want to lose customer immediacy and become

‘dumb plumbers’ without value-adding data, speed or convenience offerings.” National real-time payment infrastructures can meet these customer expectations. Whether to let PSPs on the shared national real-time payment infrastructure to encourage competition is another debate. Many regulators want to ensure open access so banks and newcomers can fight fairly in the services layer, not the infrastructure layer which banks often pay for and sometimes operate via a third-party collective that runs the technology back-end. Each country will decide the model based upon their finances, wants and needs.

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Drivers for Real-time Infrastructures

“There is a significant drive towards real-time payment platforms everywhere,” says Lauren Jones, Head of Standards at the Payments UK trade body. “We’re seeing central payment infrastructures implementing realtime systems the world over. The need comes from increased customer demands – for greater speed, mobile and online 24x7 access and tracking and reporting desires. Consumers are far more digitally insistent and fast-paced. They want to have the ability to make payments to anyone, anywhere, at any time.” “Corporates are also beneficiaries of real-time systems in terms of immediate bill presentment and greater transparency over their cash flow,” adds Jones. “Central banks can use them to enable strategic and regulatory change, introducing more innovation and competition on the front-end, which sits atop the shared back-end platform.” According to Stig Korsgaard, engagement director for Nets, the Danish real-time platform which launched Q1 2015, such platforms are “good for banks” and “allow banks to participate fully in the on-demand economy and compete on service”. Speaking at SWIFT’s recent Sibos 2015 trade show in October, Korsgaard said that user case studies emerge as you roll out real-time infrastructures. “We’ve seen taxi drivers, florists and many others use Nets in Denmark,” he said, as he argued peer-to-peer (P2P) consumer demand led to merchant usage and, ultimately, corporate and widespread uptake. “Use cases have been strengthened and client demands increased,” agrees Michael Bellacosa, head of global payments, BNY Mellon Treasury Services. “Now that expectations are approaching critical mass, banks are beginning to put their effort - and considerable weight - behind the development of new, more rapid payment networks.” ISO20022 XML harmonisation on real-time platforms would help corporates get more out of such platforms because standardised messaging helps cross-border interoperability. As infrastructures roll out around the world in Poland, Mexico and elsewhere ISO20022 standardisation is becoming a hot topic. Efforts are underway to deliver a global

ISO20022 framework for real-time payments projects via the Londonbased Real Time Payments Group (RTPG) and other initiatives such as the Swift Harmonisation Charter which will map to it in this area. ISO 20022 XML messaging also offers data-rich payment information to treasuries and its extra characters – typically 140 against say 18 in Bacs payments at present in the UK – mean mobile phone numbers can be used to initiate a payment, aligning it against a bank number. A range of other data services become possible too. It is intended that new fast payment services in the US, under the auspices of the US Federal Reserve, and in the eurozone, under the auspices of the Euro Banking Association (EBA), will run on ISO20022 as they are rolled out in the next few years. Nigeria and India, with its extensive authentication services, and approximately 25 other countries already have a real-time payment platform in place with various levels of functionality. Instant confirmation of payment and, at the very least, same-day settlement is the bare requirement. Some countries run three settlement cycles per day, while others go for instant settlement. The originator, beneficiary, respective banks, clearing houses and others involved in the payment chain must all receive fast service to meet the definition of ‘real-time’, although the actual speed differs from country-tocountry. Australia is aiming for seven seconds, for instance, on its new platform, while others use 15 seconds as an operational parameter, with regular same-day settlements

to follow. Other big nations still to migrate to a real-time system, however you define it, include China and Russia.

Ubiquitous Access is Essential

According to George Evers, immediate payments services director at platform provider, VocaLink: “Ubiquitous access drives uptake.” When his firm launched the UK Faster Payment Service (FPS) technology back in 2008 it went live with 10 core banks covering 95% of the population, with each encouraging uptake. The UK FPS was one of the early pioneers in this field. Mediated corporate access has since been granted and discussions are underway about directly opening up the UK infrastructure to new challenger banks and PSPs that weren’t included in the core launch. More than 400 PSPs currently take part via a sponsor bank. A new mobile P2P payment platform, Paym, has also been launched off the back of the UK FPS technology platform. “Mobile commerce can be a big usage driver,” adds Evers. A fact backed up by the Danish Nets example and recent Swish mobile payment launch in Sweden. VocaLink has since gone on to provide technology and advice for the FAST real-time payment system in Singapore, which is also adding mobile functionality, and many other nations around the world. Other players are also contributing to the global roll out of real-time platforms. SWIFT, for instance, is involved in delivering Australia’s new payments platform (NPP). “This

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such projects face implementation challenges, however, and the benefit is that they can learn lessons from other early adopters. The pioneering UK FPS, for instance, was launched before ISO20022 messaging was on its present path towards becoming the de facto financial services XML standard. FPS instead used an old ATM and cards payment standard, utilizing VocaLink’s history as a provider in this area in the UK, to launch the service in 2008. It was convenient at the time and subsequent VocaLink projects around the world instead look to ISO20022.

Implementation challenges

is due to go live by Q2 2017 with the technology design by SWIFT signed off in July this year,” said David Brown, NPP program director at the Reserve Bank of Australia (RBA) during a presentation at the recent Sibos 2015 trade show. “We’re now doing the build out with mid-2016 the first delivery date, with testing to follow. RBA is a participant, but will act as ‘middleman’ between regulators and banks.” The key objectives of the NPP programme, as laid out by RBA’s Brown, are: ▪▪ A 24x7 payment system. ▪▪ Real time funds availability. ▪▪ Richer data with payments – “It’s why it’s ISO20022-enabled,” added Brown. ▪▪ Easier addressing of payments – “So you can send payments using a mobile number or email, and not rely solely on bank account numbers.” ▪▪ A modern platform for future innovation – an overlay services platform should enable new entrants, PSPs and others to take advantage of the new platform to drive payment and banking innovation. The above NPP objectives could act as a ‘how to’ guide for other real-time projects, although each project will differ slightly depending on individual nation’s particular needs. Not every country, for instance, will in effectively merge its Fast Settlement Service (FSS) with its central bank’s Real Time Gross Settlement (RTGS) solution with one backing the other up to ensure 24x7 out-of-office hours service

in Australia, but a common set of structural priorities and practices is discernible for all real-time platforms. Payment limits, access protocols and other characteristics will differ but all real-time platforms should offer: ▪▪ Confirmation in seconds: to reassure the consumer and provide certainty and trust. ▪▪ Instantaneous immediate transfer: the money should actually move quickly after procedural confirmation is sent. Some back-end platforms may move money in seconds, others run three payment cycles a day. But it must be same day and fast. ▪▪ Irrevocability: a payment must be final once it’s made. ▪▪ 24x7 Operation: this is important in an e-commerce world where customers are used to shopping, working, ordering goods in the supply chain and transacting outside of normal work hours. It does mean infrastructure providers and banks using it will have to think carefully about when and how they do upgrades and IT maintenance; relying on standby hubs, mirroring, back-up resiliency facilities and so forth. You cannot do upgrades over the weekend anymore. There will no doubt be many implementation challenges along the way to Australia’s NPP launch in 2017, especially as this is a new area for SWIFT, even with its historical background as a global financial messaging and payments hub for correspondent banks. All

As nations roll out real-time payment infrastructures there are bound to be implementation challenges, both of a technical and business case nature. Technologically, established banks may struggle to connect easily to a centralised modern real-time processing hub due to aging siloed IT systems that are inflexible and require an upgrade, or newcomer banks might not have sufficient security, resiliency or messaging standard capabilities to be allowed access to the core. There are always ways around such issues – a vendor aggregated solution could help FinTech newcomers or smaller banks gain access, or the core could cater more for their needs via an open access service orientated architecture (SOA) with simple application processing interfaces (APIs). In regard to the business case, each nation will have to decide for themselves who they want to let access the real-time platform but true competition dictates more is better. Service level agreements (SLAs) will have to be put in place for each platform participant and platform provider, especially if it’s an out-ofcountry third party. Most nations set up their own national real-time payment company to run a service and liaise with third-parties as required. Banks will also have to speed up their fraud monitoring capabilities. However, the essential elements of fraud monitoring in a real-time environment will not change drastically from present arrangements. The use of pattern spotting behavioural software, antimoney laundering (AML) checks and so forth will just have to get faster.

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BACK TO THE FUTURE OF PAYMENTS Here Ben Rabinovich explores what the next decade has in store for payments. The burning question of the moment is ‘What is the future of payments?’ Last year saw non-cash transactions overtake cash payments for the first time, but does that mean cash is on its way out? Do the underwhelming receptions of Apple Pay and Apple Watch mean people aren’t yet ready to move on to newer payment traditions? Here we explore what the next decade has in store for payments made using cards, mobile devices and wearables.

Cards

The future of cards is an intriguing one. When Apple Pay first went live it inevitably opened a Pandora’s Box from which slipped reports from every conceivable source saying ‘cards are on the way out’. The reality turned out to be different. A report by Payments UK forecasts that credit and debit cards will account for 60% of all non-cash purchases in 2024, up from 51% in 2014. It also predicts that the volume of debit card purchases is expected to grow from 9.2bn in 2014 to 16bn in 2024. This idea that card payments will actually increase is echoed by the fact that in the course of the next five years, we will see twice as many card-accepting card outlets in the world, spurred on partly by cards expanding to geographic areas and merchant sectors where they could not be used previously, but also because of the incredible popularity of contactless cards. The fact that we can use cards as contactless or debit shows why they’ll remain very popular: their

versatility and nigh-on universal acceptance means they cater to a myriad of different consumer needs. This is reflected in the European contactless card statistics. Mastercard’s 2015 research into its own Tap&Go contactless technology revealed that in the second quarter of 2015, tap transactions in Europe grew by almost 170% year on year and consumers already using contactless have tapped 20% more. Contactless spend (in Euros) tripled in Europe compared to Q2 2014. There is another reason why the future of cards appears promising. It’s not just because we physically use cards; it’s because we’re using them when we think we’re not. As Adrian Buckle, chief economist at Payments UK, points out when discussing Apple Pay: “At the end of the day, payment is being taken as a debit or credit card payment”. Whatever the mobile payments service, Buckle points out, it still needs a card. It’s a fine observation, and one that reveals how deep our attachment to cards goes.

Wearables

While our relationship with cards appears stable, our relationship with newer payment methods is less predictable. In that sense, it’s rather strange discussing the future of wearable technology when its present is unclear. The response to Apple Watch has been underwhelming, and initial predictions that it would sell 30m units in its first year now look like serious overestimates. According to Paul Pike, director at

Intelligent Venue Solutions, it’s not enough to merely allow payments to be made on wearable devices. “Consumers have to want them,” he stresses. If a recent poll by YouGov is anything to go by, that simply isn’t the case: just six per cent of the UK adult population currently own a wearable. However, it is important not to be hasty. YouGov caveats the research by pointing out that the uptake of wearables is similar to the uptake of tablets, suggesting that this will be a long game. Despite Apple Watch’s limited success, it played an important part in bringing wearables to mainstream attention. As Nick Mackie, head of contactless at Visa Europe, notes, “Because of their leadership position in the world of consumer devices, Apple drives interest in whatever they are doing. I think [the Apple Watch] has definitely helped increase interest in – and validation of – wearable technology, particularly around payments.” And corporate interest has not waned; Barclays released a range of wearable devices including a wristband, a fob and a sticker. Visa also remains interested in wearables, although its path is more sartorial, partnering with designer Henry Holland on a contactless ring and asking Central Saint Martins fashion students and graduates to consider how wearable payment devices could look and function by 2020. Even traditional watchmakers such as Swatch, Fossil and TagHeuer believe there is something important about wearables, while the ease with which startups like Kerv and Blocks

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are surpassing their fundraising targets on Kickstarter indicates a strong interest brewing amongst consumers. According to researchers this interest, bubbling on the surface, will soon reach boiling point. In 2015 76.1m wearable units will have been shipped, up 163.6% from 2014. By 2019, worldwide shipments will reach 173.4m million units, resulting in a five-year compound annual growth rate of 22.9%, according to IDC.

Mobile Payments

Mobile Payments have much in common with wearables, in particular the apathy they inspired in 2015 – as Apple can testify. Just like its watch, the company found the apparently burgeoning mobile payment market rather cold. In 2015, Tim Cook pronounced the year of Apple Pay. Instead, it turned

out to be the year of exaggeration. Apple Pay accounted for just one per cent of all retail transactions in the US after one year, according to research group Aite. In the UK, just 13% of people made a mobile payment in-store in 2015, according to Deloitte, which also said that just one per cent use their phone to make payments on a regular basis. According Adrian Buckle the problem with mobile is simple: people already have cards and “need a good reason to use mobile”. He points out that consumers struggle to work out where mobile payments are accepted, and that the public feel it takes longer to wave a phone around than to use a contactless or debit/credit card. And don’t expect people to use mobile payments because they are new or fun. As Buckley puts it: “People don’t pay because they enjoy paying.” But he does go on to say that the future of mobile payments isn’t

as bleak as the present suggests, emphasising it is more an “evolution than revolution”. People don’t like to change their habits, so any new payment method will be seen as “adding to the payment experience, rather than changing it”. This is enforced by research showing that mobile payments are gradually increasing in Europe. A quarter of European consumers are actively banking on mobiles, marking a significant increase from the nine per cent recorded in 2011, according to Forrester. The stupendous amount of options will also help technology in general. For those who do not like Apple there is Samsung Pay, which racked up $30m in transactions in its first month. If Samsung is still too constricting, Android Pay works on any Android phone. Even the networks and banks are getting in on the act with the likes of Orange Cash and Barclays’ Pingit.

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Cash: Last – but not least?

The future of cash is perhaps the most interesting. In a world of contactless cards, mobile payments and wearables, how can something as ancient as cash have a future? And yet the experts are nearly unanimous: cash will not disappear for the foreseeable future. The Bank of England said in autumn cash will be “resilient” and “not likely to die out any time soon”. Visa’s Nick Mackie also doesn’t think “we’ll be a cashless society within the next five years”. But why? The answer boils down to convenience and tradition. Physical money has been used for more than a thousand years; wearables have been around for mere months. People won’t change their payment behaviour just because a new method is available. Cash is extremely simple to use, whereas mobile payments and wearables require initial – and usually rather hefty – investments and set up.

While cash is almost universally accepted, mobile payment coverage is limited. Even countries dropping lower denomination of coins altogether do not believe cash is on its way out. The Republic of Ireland recently dropped 1c and 2c coins, but according to Ronnie O’Toole of the Central Bank of Ireland this does not spell the end for cash. Rather, he stresses that it was a way of making cash more efficient. “Cash will be around for a very long time,” he says. This is enforced by recent statistics from the European Central Bank that revealed cash still accounted for more than half (54%) of all payment transactions across Europe in 2014, showing that EU member states on the whole prefer to pay with banknotes. It is also interesting that, in the same report where Bank of England said cash will not go out any time soon, it pointed out that the UK population is hoarding

£3bn domestically – about £345 per hoarder. That may be the single most important reason why cash will not disappear into the annals of payment history: reliability. Cash is seen as a safety net, a back-up plan for when everything else ceases to work. Cards may fail, smartphones may run out of battery, but cash will always be there. The truth of the matter is that the future will likely be very similar to the present. Payments UK predicts that in 2024 cash will still account for one third of all transactions, while contactless technology has prolonged the lifespan of cards greatly, and experimentation with mobile and wearables will gradually become more appealing as awareness and acceptance increases. One thing remains certain: in terms of the number of ways in which people pay, the future is very bright, indeed.

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THE DEATH OF THE PASSWORD

2014 saw the introduction of payments being authenticated by fingerprint sensors with platforms such as Apple Pay. and this emergence caused biometrics to catapult into the banking industry. Madhvi Mavadiya explores how traditional banks have transformed their systems for consumers and corporates to suit the growing hunger for convenience, security and digitalisation. It can be questioned to what extent the depletion of the usage of passwords will affect banks as newer, simpler, technologies have come to the surface. More and more consumers will be able to use modalities, such as fingerprint sensors, voice recognition, iris scanners and palm vein readers to make payments, because of the lack of risk involved in using biological data. Conor White, president, Americas, at biometrics and identity assurance

software company Daon, believes that this form of technology will help the industry to move away from defining a person by their password. “If you’re authenticating a person and not something that represents a person like a token or a password, then it can remove most of the issues that we have with online commerce today,” White explained. Bob Reany, senior vice president of global products and services of identity solutions at MasterCard has a similar attitude to this issue. “Identity

solutions and understanding who a consumer is, is a really important part of business, not just to resolve fraud, but also for approval rates. A real focus for us is helping our banks understand who consumers are and biometrics is one of the layers that we use,” Reany said. A convenient way of banking has already been provided to consumers with the arrival of the internet and mobile phone transactions; but with biometric authentication and the replacement of security questions, it

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could mean that risk is eliminated. For example, Barclays launched their new online banking hub iPortal late last year, which helps corporate customers have direct access to services that the bank provides with the use of the Barclays Biometric Reader. Getting rid of older technology seemed to be the top priority for Barclays’s head of cash management, Michael Mueller, who highlighted that this was the right direction to move forward in. “Traditionally online banking systems have not always made life easy for businesses. Corporate banking solutions that bridge existing products produce disparate, complex and outdated systems that require multiple logins on a variety of platforms, making banking a time-consuming and disjointed process,” Mueller mentioned at the time iPortal was launched. With the use of Hitachi’s Finger Vein Technology (VeinID), which scans the user’s finger blood flow to confirm transactions, iPortal has the potential to present an overview of group balances across different business divisions in multiple countries, and therefore, revolutionise the worldwide economy. Barclays Wealth and Investment Management believe that memory is a thing of the past and voice biometric technology should be taken advantage of, such as FreeSpeech from Nuance Communications. This system operates by checking a customer’s voice and comparing it to the “voiceprints” that have been stored to authenticate the payment in 20 seconds. Bob Graham, senior vice president and head of banking and financial services at IT consultancy Virtusa, explains that we are only at the beginning stages of how financial institutions can use biometrics and are looking at the start of the decline of using passwords for authentication. “The next wave of biometrics in banking will focus on using voice as an authentication mechanism. Not only will we use this on mobile devices but we will also see it in call centre areas where users will be able to be identified and authenticated from their voice imprint rather than inputting or responding to a series of security questions,” Graham said. On the subject of the diminishing password, Graham responded to the situation by mentioning that the

“elements of what your password can contain and how frequently it must be changed have grown dramatically and this has led to significantly increased pain and friction with customers.” Wells Fargo is another bank that has utilised biometric technology to renew the way we bank using voice recognition, but in combination with facial recognition to, in turn, create a more efficient mobile banking security system. After working with SpeechPro, a global leader in biometrics, to develop their mobile banking application CEO Mobile, they were able to eradicate the tedious transaction process of entering a user ID, password, unique security token or PIN number. Secil Watson, head of wholesale internet solutions at Wells Fargo, highlights how when this mobile app was piloted, the bank combined biometric markers, in order to result in a confident assessment of the customer. Through this research, it was revealed that customers wanted choice, so a new biometric solution is set to be launched next year which operates by taking a video of a customer’s eye and will read the red vein and white part of the eye to authorise payments. Watson said that this solution will be well received because it is quicker than the selfie style voice biometric technology that provide at the moment. “Feedback from customers revealed that in very loud situations, voice authentication failed on some occasions,” Watson said. She continued to comment on biometrics as an alternative to passwords and how data breaches have contributed to vulnerability and insecurity at banks. “We realise that passwords have been around for more than 15 years but they have also been hacked quite often because they are not changed as frequently as they should be. But, as the hardware technology evolves and there are better cameras, better microphones and better touch sensors, biometric technology will also evolve,” Watson said. In 2009, it was announced that biometrics leader Sagem Sécurité (Safran group) had partnered with Hitachi to unveil the first ever multi-modal finger vein and fingerprint device called Finger VP. In this device, Hitachi’s VeinID finger vein imaging which detects the blood vessels under the skin is combined with Safran’s fingerprint

identification technology called Morpho. At the time, this was the only multi-modal device that was capable of processing two sets of biometric data at the same time and could be used for one to one or one to many verification. Chairman and CEO of Sagem Sécurité, Jean-Paul Jainsky believes that with Finger VP, biometrics will open up new opportunities for identification systems. “By combining Finger Vein Authentication with fingerprint analysis, security has never reached such a high level,” Jainsky commented. This questions whether multimodality when using biometric authentication increases security and in a recent whitepaper, “Implementing a Mobile Biometric Authentication Solution” published by Daon, this is explored. “You don’t want to have to rely on one single biometric factor, such as voice recognition or fingerprint. The partner you select should have experience in and support voice, face, and fingerprint authentication on a single platform. “Rolling out a biometric authentication program is complicated enough without having to engage multiple companies, each supporting a single factor,” the

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whitepaper explored. Daon’s system IdentityX has been implemented by financial services company USAA and a million users have signed up for the biometric login system since integration at the start of 2015. A case study which explains the partnership between Daon and USAA presents that although biometric identification had not yet gained traction in the financial sector, the bank realised how IdentityX’s facial authentication with liveness, voice recognition and PIN verification would bring them success. “The triumvirate of face, voice and PIN options allows members to select their desired means of identity verification based on the circumstances at the moment,” the case study said. Regardless of multi-modality solutions, security is always going to be an issue, but it is important to bear in mind the False Match Rate (FMR) and False Non-Match Rate (FNMR) when implementing any biometric authentication application. Daon’s whitepaper explains how FMR is the rate that measures how easy it is for someone to impersonate you, while the FNMR is the rate that measures how easy it is for you to successfully authenticate yourself. Alongside this, MasterCard also keep security as their top priority, as Reany explains.

“The big difference between data and the biometric business model is that there is no massive database full of fingerprints, it’s all on your device and it’s your device. The bad guys would have to break into your house, steal your phone and learn your buying behaviours, so it’s not just the biometric technology, it’s biometric and other layers that keep it secure,” Reany said. MasterCard have also launched a new program that intends to turn customer products, in the automotive, fashion and wearables industries, into payments devices. The Commerce for Every Device program includes companies like Bluetooth locator TrackR, smart jewellery company Ringly and Nymi. Nymi, the creator of the Nymi band which is a wristband capable of monitoring cardiac rhythms, provides continuous authentication through the heartbeat of the wearer; security is confirmed here as cardiac rhythm is unique to each person. It has been reported that the Nymi Band’s HeartID technology was used with NFC technology to process a MasterCard payment on a contactless payment terminal, so it could become an effective form of payment. Peter O’Neill, CEO and President of FindBiometrics, explores

how because of past data breaches and because the password is a useless way of identifying someone, it is important to include privacy professionals in the discussion. “Within two years, the password will be pretty much dead, but the work that the FIDO Alliance is doing will make biometrics seamless and it will be more secure than it is right now. BYOI (Bring Your Own Identity) will play a big factor,” O’Neill states. The FIDO Alliance was formed in 2012 in order to ensure that strong authentication was carried across all devices and address the problem that people were forgetting usernames and passwords. With this new standard, browser plugins and security devices will let websites and cloud applications be interfaced with all FIDO-enabled devices. PC operating system Windows 10, which became available last year, features a biometric security platform named Windows Hello, which allows for multi-modal user authentication. This system does comply with FIDO Alliance requirements and provides evidence for the growing demand and convenience of use for this form of technology. When it comes to whether or not biometrics will kill passwords off, it’s not a question of if, but when.

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EUROPEâ&#x20AC;&#x2122;S FINTECH RENAISSANCE, 2.0

The European financial services industry is in the midst of a transformation. Pat Patel, content editor, Europe, at Money2020 uncovers the roots of this revolution.

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The European financial services industry is undergoing a massive change, coupled with an accelerated product development phase likely to continue for many years to come. The barriers to entry are reducing, creating a plethora of opportunities. Combined with the fallout from the financial crisis —risk, regulatory compliance, debts, consumer apathy — it’s clear to see that the financial services market is in a state of flux. Opportunities for startups within financial services have never been greater, especially in the application of new technology to improve upon existing services and models and overcome legacy challenges (whether they be technology, processes or people). This certainly goes some way towards explaining the confidence investors have placed in the industry, as investments in the FinTech sector throughout Europe grew 215% to $148bn in 2014, with growth continuing throughout 2015 and into 2016. Europe has unique domestic and regional forces creating change unlike any other place in the world. With a wide variety of cultures, languages, behaviour and regulatory environments, growing businesses and scaling across the region is a challenge. This is slowly easing as a result of a number of regulatory and collaborative measures to reduce inefficiencies, support commerce and create opportunities, such as the creation of SEPA (the Single Euro Payment Area), a payment-integration initiative for the simplification of bank transfers; the forthcoming Payment Services Directive II, which is aimed at consumer protectionism and creating a level playing for both banks and non-banks (including an interesting proposal around third party access to bank accounts); and the emerging

Single Digital Market, which will reduce regulations and combine 28 national markets. The Single Digital Market seeks to enable better access to digital goods and services, provide the right conditions for innovation to flourish and promote open standards, collaboration and interoperability. When combined with the Payment Services Directive II, the potential impact on financial services and commerce across the region could be substantial. The opportunity for home-grown talent is immense — innovators will, in theory, be able to effectively and efficiently scale their business across the region.

The start of a home-grown movement

The allure of Silicon Valley for a European tech startup is very compelling. In the past, Europe struggled to support its tech community in any meaningful way. This is slowly changing at a national and international level, and is one of the drivers for the Single Digital Market initiative. The UK still leads the way in Europe, with 60% of all European FinTech startups based in the UK and British companies attracting half the total investment in FinTech businesses across Europe. The FinTech industry is worth an estimated £20bn in revenue to the UK economy. Level39 in London is one of the most successful initiatives in Europe and since 2013 has attracted over 170 startups and forged strong relationships across the banking, investor and government communities. It has successfully supported a number of startups, from eToro to TransferGo, and continues to deliver innovative approaches in developing

Funds alone are not enough. To move to the next phase of evolution in financial services, banks are actively working with FinTechs within the industry, even inside our own businesses. That means investing in funding but also giving access to our expertise, as well as utilising our client base and our own innovation initiatives.

the community, from hackathons to educational and networking events. The recent success in London has acted as a catalyst for other major cities to respond to the challenge, with the goal of creating a hotbed of FinTech innovation. In Denmark, the Copenhagen FinTech Innovation Research Association (CFIR) has been initiating a number of projects to create an ecosystem to support established and emerging companies within financial services, which includes building relationships with universities. CFIR has aspirations to collaborate with associations and the wider industry across the Nordic and the Baltic regions to support the development of FinTech. Holland FinTech is similar to CFIR in nature, but as a commercial company is seeking to create an internationally connected ecosystem enabling maximum acceleration and adoption of FinTech. Within a year it has created a network of over 100 member companies, as well as partnerships with several other countries, which come together and share knowledge. One initiative currently being explored is how administrative barriers can be reduced to allow entrepreneurs to set up a business within a short timeframe, rather than months or years, through using digital tools to accelerate requirements from a legal, financial and administrative standpoint. One of the more recently formed associations, FinTech France, is seeking to capitalise on the renowned finance and mathematicalbased engineering specialists within the country. Within a few months, membership has risen to 50 FinTech companies across a whole spectrum of sub-verticals. Government help has been forthcoming, with ministers supporting the initiative and seeking to help reduce barriers to development and growth. Each association hopes to leverage its historical, cultural and geographical environment to gain an advantage. It took Silicon Valley many years to reach its current position as a global phenomenon. Collaboration across the hubs in Europe is essential to the continent’s competitiveness, as is government support to provide a regulatory environment which reduces barriers to entry. Support from the industry is also essential, whether through investment or collaboration with other stakeholders. This is beginning

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to occur across Europe, primarily through accelerator programs and incubator units.

Towards outsourced innovation

In 2015 alone there were a number of new accelerator programs and incubator units launched from either established companies within banking, retail and payments enablers (e.g. METRO Group, Temenos, Visa Europe, Deutsche Bank) or independent companies and associations (e.g. Emerging Payments Association). This is in addition to the established programs such as those initiated by Barclays and Accenture, and this is beginning to create real momentum and support for the startup ecosystem. In most cases hosting an accelerator program is viewed as a way to outsource and accelerate innovation, as the goal is to partner with the most pioneering startups to generate value and develop new products. One of the early initiatives, main incubator —based in Frankfurt and founded by Commerzbank — seeks to provide investment, access to the banks’ customers, insight and IT and infrastructure support. It also seeks to build companies to address opportunities and challenges within Commerzbank. This is a model that is gaining traction across Europe. Another

interesting collaboration is between the retailer METRO GROUP and Techstars, an accelerator program, focused on supporting top technology startups able to add value to any part of the hospitality and food ecosystem. This includes the areas of payments technology, big data and marketing solutions. METRO GROUP is the only retailer in Europe seeking to capitalise on the potential for outsourced innovation. Early signs from its first intake have been positive, as is the growing number of impressive mentors from across a number of verticals. These initiatives are largely in the early stages of generating tangible value and as a consequence there are very few real examples of major success. Many accelerator programmes aspire to be a FinTech equivalent of Y Combinator (successes include Stripe, Uber and Airbnb), but recognise that this takes time and continual program development. One challenge is the level of global competition for the best startups. Demonstrating successful outcomes for startups from accelerators’ initiatives will be crucial to attract those with the most promise. Of equal importance is the ability to form real partnerships with the corporates involved to generate value. So far, early indications reveal that on average from an intake of 10

startups in a programme, most will not survive beyond six months and only two or three will be in operation beyond a year with some degree of success (as measured by investment and customers). This will gradually improve over time and with maturity of the programme.

Vive la (r)evolution

It is an exciting time in Europe for the established and emerging FinTech industry. Collaboration between FinTech companies will be a key feature defining the future of financial services in Europe. According to Mariano Belinky, Managing Partner of Santander InnoVentures, “Funds alone are not enough. To move to the next phase of evolution in financial services, banks are actively working with FinTechs within the industry, even inside our own businesses. That means investing in funding but also giving access to our expertise, as well as utilising our client base and our own innovation initiatives.” At present, most banks are just scratching the surface in achieving the ‘art of the possible’. With the advent of FinTech associations, accelerator programs, incubator units and regulatory support, the industry is set to capitalise on its revolutionary heritage and innovative mind-set.

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WHY IS PAYING FOR STUFF SO HARD?

The last four years has seen an upheaval in the world of payments. Eric Bovee, general partner and founder of SpeedInvest, imagines a world where paying for things is easy.

Uber changed my life, and it had very little to do with the availability of drivers, the sweet mobile app and the little taxi icons that tell you where your driver is. It was a matter of sheer laziness meeting convenience: I didn’t have to shift my butt up from my seat and fish for my wallet, and then spend two minutes fumbling with a point-of-sale (POS) terminal while my driver eyed me suspiciously. The simple act of digging my wallet out of a pocket was so uncomfortable, and yet so familiar, that I didn’t realize how much I hated it until I took my first Uber ride. I was a different person afterwards. This led me to think about a new world where paying for stuff is easy. Because today, it isn’t. Paying for stuff is really, really hard in the way that getting up off the couch in the middle of a TV binge to get something from the fridge is hard. Which is to say so, so hard. Of course, digital payment has some sweet spots today, including Uber and Amazon 1-Click Ordering™ — patent still pending— or Apple stores, Warby Parker and

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Birchbox, where you can do all the easy online stuff like read product reviews and information on an iPad, and then have the thing you really need right there in your hand two seconds later. Stripe and Square are sort of making their respective online and offline experiences better, but the two worlds still aren’t close enough to meeting.I hope that will change very soon. Here’s how it might happen. The last four years have seen upheaval in mobile payments and POS solutions as things slowly began to get a little less terrible. Traditional POS players like NCR and Bematech have had to sprint to keep up with agile market entrants who used things like iPads, iPhones and cloud services to offer flexible solutions for merchants; players like Square and iZettle built the foundation for integration of brick-and-mortar commerce and the Web (and mobile) that basically eliminates the fishing-credit card-frompocket-horrible-UX-on-a-1999-pixelated-touchscreenproprietary-terminal-where-the-hell-is-my-plastic-loyaltycard-after-queuing-in-a-checkout-line-for-two-hours sort of experience. POS seems like the place where a lot of quick evolution might be happening and, if recent developments are any cue, we will be seeing more and more brick-and-mortar retail experiences like Apple Stores and the lovely Warby Parker. Case in point: recently, a number of 800-pound gorillas have moved aggressively into this space because the world of bricks-and-mortar shopping is still nine times larger than e-commerce. It will shortly be a very different place, with the participation of Amazon, PayPal, Groupon, Apple and a host of others vying for control of the POS and, consequently, the consumer experience. So where is this market headed? Merchant service providers (MSPs) are increasingly building consumer experience-focused, multi-channel retail applications that marry POS with delivery, product information, ticketing, loyalty and many other systems. In non-marketing jargon

this means the elimination of all the waiting in line, fumbling and searching frantically for Amazon reviews on your iPhone. Essentially, everything turns into the Apple Store. One particularly good example comes from payworks and Stripe, which made it possible to have the full Web shop experience on a POS mobile app. payworks supplies an SDK, allowing developers to integrate multiple, brickand-mortar payment types — including EMV-enabled card readers — into their apps. And now they can do it within Stripe. Card readers on the payworks platform support both contact-based and contactless transactions and work with Magstripe, EMV and NFC cards as well as smartphone-based solutions like Apple Pay and LoopPay. This means that any merchant can now build its own Square (or iZettle)-type app in a very short period of time, but with custom applications that specifically address consumer experience. Product reviews, loyalty, curated shopping, one-click checkout and, perhaps one day, drone delivery, are right there in the app. payworks is helping merchants like luxury clothier Alexander Wang, restaurant tech provider Orderbird and ShopKeep to offer physical payments, POS features and everything else together in a much, much better customer experience. And payworks supports traditional POS vendors such as Verifone and Barclays, helping them move gently from the mid-1990s to the increasingly Web-based and multichannel requirements of their customers. This doesn’t mean we are yet living in a world where an iPad click on an Instagram photo leads to a summary of product reviews, price comparison, one-click checkout, instant reward points redemption and quick delivery from the stockroom —or, dare to dream, same-day drone delivery —but it’s close. So, so tantalizingly close. Now, if only I could reach the fridge from here.

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THE CUSTOMERCENTRIC BANK

What could we expect if we were to use a digital perspective to redesign a bank? Alessandro Hatami, digital payment and innovation director, Group Digital at Lloyds Banking Group, imagines a customer-centric future for the industry.

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RETAIL CUSTOMERS’ BASIC FINANCIAL NEEDS ▪▪ ▪▪ ▪▪ ▪▪ ▪▪

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Direct Debit Current Accounts Cheques Foreign Exchange Bank Transfers

Loans Mortgages Overdrafts Credit Cards Leasing

Most agree that digital innovation is going to change the financial services and banking industries as we know them today. What could we expect if we were to use a digital perspective to redesign a bank to be truly customer-centric? A first step could be to go back to first principles. A truly customer-centric bank would not be concerned with selling products but with meeting their customers’ basic financial needs. Customers’ basic financial needs are only three: ▪▪ They need to pay someone ▪▪ They want to buy something but they don’t have enough money ▪▪ They have a surplus of cash and they want to protect it When the first modern banks were created in 13th Century Tuscany, they knew that they were there to address these three basic needs – providing loans to entrepreneurial merchants and returns to wealthy landowners. But in time things got complicated. Banks started moving from customised solutions to standardised banking products. They started seeing themselves less as enablers of their customers’ objective and more as retailers of financial products. It’s not surprising that today many banks call their branches ‘stores’. To support this structure banks started to target their staff to maximise the profitability of each product. The banks started to become an aggregation of ‘siloed’ businesses that were often linked together by little more than a shared brand and sales outlets. The complexity of this offering led most customers to depend upon and trust the banks’ advice in selecting the right product for them. But some banks did not fulfil this trust. Banks started introducing product incentives to the channels — branch, telephone, online— that led to customers being offered products that weren’t always the best match to their needs. With the advent of digital technology everything changed. Firstly, as online banking took hold it became very easy for customers to compare and contrast the characteristics of different banking products. Secondly, search capability and aggregators made it extremely easy for customers to compare products across the market.

▪▪ ▪▪ ▪▪ ▪▪

Savings Investments Insurance Pensions

Inferior or poorly priced products became simple to spot. This transparency led customers to realise that they were being sold to, making the banks seen less of a trusted advisor and more of a profit-focused retailer. The financial crisis and a general mistrust of corporations led many consumers to stop trusting their banks. Digital has contributed to this but, used well, it could also help banks rebuild their relationship with the customer. Banks could leverage today’s digital revolution – both the new technological capabilities and new customer attitudes and behaviours – to redesign the way they operate. These are some of the initiatives they could introduce:

Regain the Role of Trusted Advisor

The product-centric approach has made the banks extremely profitable, but it has led to a clear customer decline in trust – a survey by PwC says that only 32% of customers trust their banks. A truly customer-centric bank could use technology not to sell products but to help customers decide on the right product for them. This would not need to be an advice proposition, but the illustration of a set of scenarios – not telling customers what to do but demonstrating the likely outcome of different choices. The bank could capture a customer’s precise needs through a set of simple questions and then illustrate the outcome for any product that is relevant to that need. For example, when a customer comes to the bank get a loan for a holiday, her aim is the holiday — not the financial product. The bank could illustrate the potential outcomes of choosing the different lending products available to her. While the pros and cons of each choice would be illustrated with her actual data, the bank would not advise her on which one to choose. The customer could then make her choice based on this data. The bank would simply ensure that the product choice is affordable. For this approach to work, the channel should not be incentivised for specific product sales. The bank would have to stop managing for product profitability and focus on real customer outcomes – a major shift in the way most banks are run.

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Develop Bespoke Pricing

Bank customers feel increasingly disconnected from their bank. A recent survey by the Collinson Group, a market research firm, revealed that 83% of UK banking customers feel that their bank does not know or understand them. Today banks have access to large amounts of data on how their customers use their money. They could use this information to dynamically design and price their products at the point of sale. With today’s technology, a bank could create products that reflect their understanding of their customers’ needs, expectations and aspirations. A bank could move away from specific price points to a pricing ‘continuum’ that reflects a customer’s history with the bank, their financial standing and even their perceived lifetime value. This bespoke pricing could then be combined with additional features incorporated into the offering to match the customer’s specific requirements. For this approach to work, banks would have to treat products as manufacturing cost centres, with profits and losses managed along customer segments. This would potentially require accepting lower return on investment for a specific product to benefit the lifetime value of the whole customer relationship. Most banks attempt to measure a customer lifetime value, but none manage their business based on it. This bespoke manufacturing approach would be hard to replicate by competitors, enabling the bank to create an offering that not only reflects their understanding of customer needs, but also clearly rewards those customers for their loyalty – a real improvement to current bank loyalty programmes.

Treat New Customers as Old Customers

With the arrival of PSD2, the latest instalment of the EU Payments Services Directive (and in particular the XS2A rule), customers will be able to share detailed financial information with trusted third parties. By 2017all EU

banks will need to provide API access to their customers’ accounts. Most banks feel PSD2 will be an important milestone. In a recent survey by FIS and Finextra of banks across the globe, 54% of all respondents agreed that banking API and financial data sharing will lead to a rethinking their retail banking customer relationship and revenue/business model. PSD2 will be a boost to the effectiveness of the challengers, but it could also be a unique differentiator for a customer-centric bank. Combined with the two initiatives proposed above, banks could use APIs to gain access to enough information on their prospective customer, to not only enable them to provide scenarios on the outcome of their prospective customers’ choices but also with unique personalised products. This initiative could ensure that the bank is not only able to propose better products and services to existing customers, but will be able to do so for new ones as well. The customer-centric bank could deliver a fair, customised offering to all customers – new and existing alike. All banks aim to be customer-centric. But this goal is often incompatible with the way most banks are designed and run. Digital has provided the technical capabilities and the customer appetite to justify a complete rethink of the way banks operate. The ‘product silos’ design that has made the banks so profitable is not fit-for-purpose in the digital age, and will eventually be challenged by new business models. But banks are still very profitable by operating the way they always have, making it hard to justify change. Becoming a customer–centric bank would have significant costs, impacting the bottom line in the short-term to benefit the business in the long- and medium- term. Today most banks are focusing their investment in short-term UX improvements and capacity growth with core processes, leaving procedure and IT largely unchanged. Let’s hope that in the long-term they will not regret this decision.

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KEEPING UP WITH THE APIS

Here Sanjib Kalita, chief marketing officer of Money2020, explores the fascinating and dynamic world of APIs, and how theyâ&#x20AC;&#x2122;re reshaping payments.

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Evolution of APIs

APIs have been around for decades. When APIs first arrived on the technology scene, they resided lower in the technology stack and were primarily used by software applications to access the operating system or underlying hardware. For example, a program could use APIs in the OS to generate 3D images via software or hardware acceleration. With the advent of the web, the software experience was shaped by variables beyond the local machine. In 2000, APIs moved up the technology stack when Salesforce introduced web-based XML APIs as part of their service. Ecommerce sites, such as Amazon and eBay, introduced APIs to enable third party developers to incorporate content from their sites. Previously, this content was usually displayed via scraping or similar methods. In 2004, APIs went social when the photo sharing site, Flickr, launched an API that enabled users to embed images stored on Flickr into their own websites or social streams. Google Maps launched their APIs within six months of launching because the application was so popular and so many developers were hacking the application to create their own focused versions (DSFSDF). In 2006, Amazon pushed the API market forward with the launch of their S3 and EC2 services, enabling developers to access storage and compute resources in the cloud. These services enabled businesses to run missioncritical applications via APIs.

First steps into commerce and financial services

With the advent and adoption of broad services via API, this opened minds about how this technology could be extended into new domains. In a parallel revolution, innovations in commerce and financial services became less about catering to the needs of Wall Street and malls and more about catering to the needs of Silicon Valley and supply chains. Increasingly, development teams rather than business teams decided winners and losers. A couple of the leading companies competing with APIs in the payments space were Braintree and Stripe. Both of these companies offered payments services and more via APIs. The simplicity of incorporating previously complicated processes via APIs led to their adoption by upstarts, like Uber and Airbnb. Companies were able to push payment technology into the background and instead focus limited engineering resources on improving user experiences. According to Mike Dudas, co-founder and chief revenue officer of Button, an API provider focused on loyalty, “A simple, robust, well-documented API that allows read and/or write access with careful permissions to critical data is essential to the growth of the best financial technology companies and is a key differentiator versus their competitors.”

Established players move to APIs in line with the market

As new API entrants began to gain traction and volume, established players in the industry took note and recognised that they needed to modify their technology models in order to keep pace. The payments industry historically tailored their offerings for bankers and businesspeople - the key decision makers. As commerce moved towards mobile and distributed platforms, the new key decision makers became the developers who were innovating at accelerating rates.

The payment networks have aggressively been modifying existing offerings for an API-centric world. MasterCard has developed several APIs including SimplifyCommerce, enabling brand-agnostic payments for mobile and e-commerce, MoneySend, enabling money multi-channel money transfer services and MasterPass, enabling online checkout by retrieving card information from digital wallets. Visa has developed V.me, which also enables seamless checkout and access to payment card information across platforms once a user has signed in.

Interface to the Future

Currently, the majority of API integrations follow two paths: white-labelled experiences or direct data calls and access. White-labelled experiences are created when the API provider delivers a ‘fully functional’ interface and experience. The API provider manages the display functionality and experience via an Iframe that can simply be inserted in an application. This typically requires the least amount of work for a developer. Direct data calls and access require the developer to access the data or functionality from the API provider. The destination application will then need to include the logic of what to display and how, as well as the navigation flow. The evolution from desktop Internet to mobile Internet has revolutionised how users interact with applications. This revolution will continue with the proliferation of devices and form factors. Entering a 16-digit credit card number is acceptable on a desktop PC, very annoying on a touchscreen smartphone and extremely risky via voice interaction into a wearable device in a public space. Ironically, the drive to simplify end-user experiences will dramatically complicate the technology required. Development cycles would become unnecessarily long if businesses are unable to use APIs to simplify processes and move them to the background. If we follow the trajectory of the evolution of technology applications in commerce and financial services, we can expect them to be more connected across platforms, create user experiences that are dependent upon context and able to deliver real-time intelligent results. These trends should increase the profile of APIs as a key component in applications design. We can anticipate APIs moving further up the stack as even more friction gets removed from transactions. From that future point, if we looked back to today, we could appreciate that we are in the dawn of the planet of the APIs.

Allowing important data to enter and leave the walls of one company easily for the benefit of that company, third parties and end users can create a sustainable competitive advantage and is a prerequisite for any financial organisation that wants to define itself as a financial technology organisation.

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ITâ&#x20AC;&#x2122;S THE (NEW) ECONOMY, STUPID The Internet of Things will herald a transformation far bigger than most realise, argues Philip Clarke of Hunch. Is it time to start paying attention?

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Amara’s law tells us that we overestimate the speed of change and underestimate its impact, but it’s 16 years since Kevin Ashton coined the phrase ‘The Internet of Things’ (IoT) and most mainstream businesses are yet to give it more than a cursory look. This needs to change. We believe the IoT agenda will herald a commercial transformation far bigger than most realise. It will transform much more than technology – re-engineering value chains, service delivery, competition and customer relationships across manufacturing, services and the third sector. Depending on whether you prefer your forecasts from IDC, Cisco or McKinsey this is a $7tr, $11tr, or $19tr transformation in the making. Perhaps it’s time to pay attention?

Did you say Economy of Things?

You probably know about the IoT. Simply put, this is the concept that everyday, mundane objects will be connected to the Internet, from dishwashers to coffee makers, Christmas lights to alarm systems. It’s not just consumer goods - components embedded in industrial products and manufacturing processes will be a part of the IoT, things like assembly robots or crop harvesting equipment. As the cost of putting processing power into devices has radically fallen, more and more ‘things’ are gaining the ability to sense, think and communicate – Gartner estimates over 26bn devices by the end of the decade. Connect them through ubiquitous wireless connectivity and aggregated cloud services and you have a mesh of connected, contextually aware things, alongside the people that own and use them. There’s a fairly basic formula here: contextually aware devices streaming rich data via ubiquitous connectivity equals the Internet of Things. So far, so good. Tech vendors, academics and politicians have been getting very excited about this new IoT age, but it has resulted in a conversation that has failed to engage many mainstream businesses – it’s seen as a tech-led agenda, or too futuristic. As we’ve been engaging with business leaders across

major service sectors to work through the implications of IoT, it’s become clear that this isn’t really about the Internet or, indeed about the things. Rather, the commercial implications of turning over great swathes of decision making to 20bn+ connected devices will end up being much more interesting than the devices themselves. This isn’t about new tech; it’s about a new economy. This emerging commercial paradigm, in which physical things participate in real-time marketplaces on our behalf is what we call the the ‘Economy of Things’ and it changes everything.

WHY DOES IT MATTER?

If you need convincing that this isn’t a technology challenge, then you just need to take a look at how much smart infrastructure already surrounds us. Let’s compare a before and after version of an everyday scenario: You have to work late to complete a project and, unbeknownst to you, your partner has bought tickets for a movie this evening that they hope you’ll like. Your car is parked at the wrong end of the car park, it’s short on fuel and the traffic on your usual route home is backing up. You don’t realise it but, you’re dehydrated – affecting your mood, health and concentration. Today, this would probably lead to a tense phone call, frustration and misunderstanding, continued ill health, wasted time and money. You and your partner both lose, and are left with a bitter taste towards your employer, the multiplex or the city council. So far, it doesn’t sound like there’s anything smart going on. But dig a bit deeper and you realise that the smart infrastructure around you already ‘knows’ plenty about your circumstance: it’s just not authorised to do anything about it yet. LOCATION. Intelligent environments are already with us, in the latest built environments and emerging smart cities. What started as an energy and efficiency agenda will quickly become an opportunity to enhance utilisation and user experience – with knock-on implications for landlords, employers and facilities providers.

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Your office probably uses building control systems which know who’s in the building, and who’s left. They even know which room you’re in – which is why the air conditioning and lights are still on. The roll-out of smart metering and intelligent home infrastructure will do the same for home environments. Your company network or broadband provider knows you’re connected to the network and what you’re up to, while your mobile phone provider, search provider and myriad app providers also know exactly where you are. PREFERENCE. Predictive commerce is already with us in its basic forms via recommendations and curated content. Tastemapping and intention analytics are a growing science being pursued by payment networks, retailers and loyalty schemes. Many of these same companies know your movie preferences better than you do and have sophisticated algorithms to nudge and recommend. None of them yet has the authority to correct your partners’ poor taste, though! MOBILITY. Navigation providers know your preferred routes home, and already aggregate real time traffic flows from their customers so that they can proactively make routing recommendations. Car manufacturers are well on the way to becoming mobility providers, not heavy industrials;

Teslas can already be configured and upgraded over the air, Waze already tracks live geo-information to reroute travellers and the new BMW flagship recalibrates its powertrain to ensure you can complete your journey despite depleted fuel – without being asked. HEALTH. As for dehydration, many of us are already using smart wearables that track and recognise potential ailments early and prompt us to act. Increasingly healthcare providers are looking to provide free wearable devices to nudge improved behaviours and improve patient outcomes, with 25m ‘smart’ wearables shipping in 2015. We can see now that it’s not a technology challenge, nor a challenge of service provision. It’s about the commercial glue that joins up these services – the market mechanisms to incentivise service providers to share information beyond their own boundaries, the legal constructs to delegate authority (and liability) in decision making. It’s also to a great extent about our perceptions of risk in handing over control to a faceless cloud of benign service providers. But it’s not the transformed experience, the improved lifestyle or the seamless serendipity that’s important here. It’s the new roles, business models and service providers that will connect to join up your life, without requiring any intervention from you. This isn’t a brave new world; it’s simply joining-up of technology and information that is already with us, already prevalent or on the cusp of scaling.

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WHAT SHOULD WE DO ABOUT IT?

No matter what industry you’re in, this new Economy of Things matters to you and will herald many fresh opportunities and challenges. As we continue to explore this emerging economy, we’ve identified four key challenges that every business needs to grapple with: CUSTOMER. Recognise that the companies and organisations that pose the biggest threat to you and your customer relationships probably aren’t your traditional competitors. They are information service providers who are looking to intermediate your customer relationships. In financial services think Simple or Xero, in energy think Nest or Hive. In every sector be mindful of Apple, Google et al — this battle will take place in the information layer. ROLE. Being in business will require you to be in the information business, whether you like it or not. More than that, you’ll need to get comfortable taking on roles and developing expertise well beyond the boundaries of your existing business. Don’t fall for the idea that being a big incumbent today gives you a right to maintain that role tomorrow – future success will require agility, openness and the intent to become partner of choice to other service providers. Don’t expect to own the whole value chain.

BUSINESS MODEL. Recognise that powerful businesses outside of your industry have the ability and often the willingness to rewrite its commercial rules. If I make my money from hardware platforms or from advertising, I don’t need to play by the existing rules of legacy industries. We’re already seeing financial services dynamics being rewritten in payments, lending, savings, investments and foreign exchange. Great advice and preferential access will always be valued, but transactional services and generic brokered models are all inevitably in a race to zero. STRATEGIC RESPONSE. In the last five years we’ve seen big businesses invest big sums in noisy, but ultimately myopic, ‘innovation’ activity. The hype of lean startups and the co-opting of Agile thinking from IT into business strategy has left many businesses ill-equipped to effectively establish their own bold and brave growth agendas. Those who win in the Economy of Things will be those with a cool head and commercial savvy to develop a clear north-star agenda and mobilise the business around it, not those who showboat and burn funds on superficial initiatives. New roles, new profit pools, new experiences and new competitors. This is seismic change, a long-time in the making. Underestimate it at your peril.

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FAT SHARKS, SILLY SEALS AND WHY BANKS CAN NO LONGER AFFORD NOT TO BE USER CENTERED

Here David Brear, chief thinker at Think Different Group, asks whether legacy banking organisations can become truly customer-centric.

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For the last 300 years most banks have been the top predators in their food chain. They have been the great white sharks happily prowling their coastlines, with no challengers to the bountiful resources of customers strewn across the beaches of most major countries like the blubberrich seals they most favour. These years have left most major banks unable to deal with sudden changes in their environment: challenges from newly-formed predators and technologies, along with seals wising up to how the great whites’ game is causing them issues. Can legacy banking organizations really become truly customer centric, and deliver experiences as rich as those of newer banks?

Balancing Leaky Buckets

It was explained to when I was just starting out in financial services it doesn’t matter how bad banks are: there are no alternatives and always a fresh supply of customers. At the time I found this astounding — as I do today — but could understand the macro strategic view that this banker was taking: so long as we keep filling up the bucket as fast as it is leaking, we will be fine. Today, banks are among the least popular businesses. They are not in a position to provide attractive returns on savings accounts and have become reliant on fees to keep retail banking profitable. Meanwhile, they haven’t done enough to improve or enhance the banking experience. In short, the same waters that these great whites once found smooth have become a different prospect. But why? Firstly, governing bodies have made it easier for people to switch banks. In addition, European governing bodies and governments are doing everything they can to foster innovation and competition, introducing new predators into the waters. And these same governments have also made it very clear to the public that the legacy banks have not had the customer’s interests at heart. These three factors have stoked the fires of competition to a level that the banks have not seen before.

Changing Tides

With these changing waters comes a new predator onto the market: one that is user-centered and uninhibited by legacy technology or thinking. These new predators have not evolved to be like the great whites. They have been created with the purpose of righting the wrongs great whites have evolved to embody. Over the next 12 months in the UK alone we will see the rise of 15 new banks, most of which are user-centric by design. The capabilities they have and experiences they desire to deliver are akin to those the public has grown to expect from the retail market than the banking one. Back to my old banker friend’s decree: if the customers now have a new option, as well as regulators making it easier for them to switch, the great whites will have neither a captive audience nor a fresh supply of naive victims.

Don’t panic

Before we start professing the end of the world for legacy banks, we should understand three main things they still have in their favour: 1. Seals, for the most part, are stupid Even if customers could be treated better and be significantly better off by moving, inertia and a short memory mean they don’t. If you build it, they won’t necessarily come. 2. Customer Base Most banks already have a base of customers that can sustain them. Their size is their protection. 3. Investment Scale Despite the huge amounts of investment into FinTech and new banks, we all know that the banks have more money to invest than any new startup. Combining these three points completes a trifecta defense strategy that only the most ambitious attempts would disrupt. So while there are huge amounts of disruption attempts, it feels like the legacy banks will only be disrupted if they allow it, or don’t make the effort to evolve.

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CAN A GREAT WHITE CHANGE ITS TEETH? While the old adage tells us that a leopard can’t change its spots, will the great whites change their bite? David Brear speaks with Michal Panowicz of Nordea and Roberto Ferrari of CheBanca! to learn how the old guard can breathe new life into its offerings. How can legacy banks defend themselves from the new wave of startup banks? Michal: There is one proven solution: run faster, jump higher, dream bigger, reach further. Banks have to focus primarily on revamping the digital experiences in their everyday banking services. Unless you fix that and drop the ‘table based online banking’ and ‘mobile banking 1.0’ services in favour of digital renditions aligned with the expectations of modern digital life, banks will continue to be exposed to new players. This change is not only imaginable but also possible to implement. Look at Turkey, Poland or Spain and you’ll find the future there. Roberto: I agree. Banks need to open up their architecture. In the future one of the leading models will Banking as a Service (BaaS). Incumbent banks need to think and behave like challengers, focusing on key core business and customer relationships and experience. Do you feel legacy banks can deliver customer experiences as compelling as startup banks and FinTech players? Roberto: Why not? I don’t see major obstacles if banks behave smartly.The name of the game over the next five years will be cooperation; Paym in the UK and Blik in Poland can show the way banks can cooperate and fight against new digital competition. Also, there are already several examples in Europe of collaboration between incumbent banks and digital. The second key point is knowing your customers. I usually say that this must be seen as a business opportunity to drive banks’ relevancy in customers’ lives and not just a regulatory task. How many banks really know their customers, one-toone? Business-oriented analytics will be a key factor to differentiate and build a compelling, relevant customer experience. Michal: I agree with Roberto. First, there is nothing hardwired in legacy banks that prevents them from delivering compelling user experiences. Transactional products and a lot of liquidity

management products are already digitised in most banks. This is not a big issue anymore, as many claim. If you only add services like transactions aggregation and semantics engine, some notion of analytics/CRM, marketing automation, convenient authentication and revamped front-end experiences — none of which requires meddling with core banking systems or heavy-lifting of process reengineering — then you already have something that is more robust than any of the digital banks. All of the above components are additive, so the legacy argument is an excuse, not reality. Start-up banks and FinTech players are not as uninhibited as many claim. Neo-banks have in many cases a microscopic service offering that creates flipside trouble for customers as they are forced to continue existing relationships to have access even to rudimentary credit or savings, not mentioning any other needs. New organizations also lack distribution, brand, the convenience multiple touchpoints provide and the equity of trust which is still so important for consumers. The regulatory arbitrage that many FinTech players may still enjoy is likely to be eliminated once a certain class reaches critical mass. How can user centricity be embedded into a legacy banking organization? Michal: This is one of the most crucial components of the digital transformation in banks. If you are in catch-up mode then the fastest accelerator is to apply know-how arbitrage from leading digital banks who have already tested out digital innovations on millions of their customers, choosing the successful features. Reverse engineer a few hundred features their services are built of, select the ones you like most, re-assemble them together, apply slight localizations and boom! You have the best in class bank in your country — which at the same time is ultimate level of digital customer centricity. You can have a detailed design for you customer-centric bank within a matter of three to six months. Implement it in 12 and you have just completed the first wave of your digital transformation. This is a playbook that is quite realistic to implement.

Roberto: Banks need to turn from compliance-driven processes to customer-driven design thinking. To do so they have to start from the very top management, looking critically at organisational silos and fragmented, consumerdistant business processes. The competition will not be on products but on service and experiences that ultimately drive brand preference and, therefore, customer acquisition and retention. Profits will come from this if it’s done well. What’s the best way to improve and digitize the company culture of a legacy bank? Roberto: It depends on the culture, the size and on the geographical extension of the bank. The bigger and more extended those are, the harder transformation will be. Having said that, every organization is made by people. There are people who will take the lead. What banks, in their different organisational shapes, will need to do is to select and hire — if needed — the leaders, and then empower them and break the barriers that stop people from working in the right direction. Michal: It boils down to a change in mind-set across the organisation. It is the essence of transformation’s heavy lifting, but I have led this twice already in unlikely candidates — large and complex universal banking institutions — and can only attest that it works magic and can be done without changing a single member of your existing team. What you need is to have your bank’s executives realising is that it is the ‘change the business’ dynamic, not the ‘run the business’ one. You need to put a crossorganisational team together, empowered to make decisions on behalf of the bank, streamline your robust committee decision making instinct, co-locate, create frameworks for innovative yet structured work – and you have a shot at digitally transforming your bank. It’s not easy but one thing is guaranteed: it’s such a fun ride.

Any advice for startup banks? Michal: Follow Alior Bank in Poland: ‘Go big or don’t go at all’. Structure yourself and get funding sufficient to create a true minimum viable product needed for consumers to have a compelling reason to choose you. Rudimentary transactional banking with limited touchpoint choice and weak branding are likely to be insufficient. Not only on analytical but also from track record perspective: ask Simple, Moven or Fidor how many customers they acquired over the years. Not many, nominally, and even fewer on relative terms – whichever way you cut it. Unless your product and service factory has breadth compelling enough for consumers to switch, you are likely to find out that your cool mobile app with an absolutely innovative layer of services that traditional banks definitely don’t do is still not winning the hearts of the customers you need to reach financial sustainability. On the other hand – please do not slow down! Keep innovating, keep pushing progress. We all need that progress – to service the customers in the best possible way, which at the end of the day is an obligation that we all share. Roberto: Oh yes! Don’t think about your next VC round or your exit strategy. Think about how you really want to gain and retain your customers in five to 10 years. This is real business vision. The battle out there will be tough. It took us more than seven years to be profitable with a good critical mass, whilst also investing in branding and technology. We made it, but we know we are just at the beginning of the journey. Think about how technology has changed in the last seven years, how regulation has changed, how completion has changed. The best advice to give is always try to be a step ahead in your thinking; there is no other better way to succeed.

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MOBILE MONEY 2.0:

HOW REMITTANCES ARE CREATING A GLOBAL ECOSYSTEM FOR MOBILE PAYMENTS

To many, ‘mobile payments’ may merely mean ApplePay or iZettle. But in some nations this technology is transforming lives, businesses and entire economies. Ismail Ahmed, CEO and founder of World Remit, explores this quiet revolution.

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The success of mobile money, especially in East Africa, is now welldocumented. Whereas in developed economies ‘mobile payments’ usually means products like Apple Pay or iZettle, which are incremental improvements to existing payments methods, mobile money in emerging economies has had a far more transformative impact on lives, businesses and whole economies. Mobile money is a basic digital account linked to your mobile number. With an ordinary feature phone, mobile money allows you to securely store money, send it to other people, pay for goods and services and even pay your bills. M-PESA, the pioneering mobile money service launched in Kenya in 2007, is the most prominent in the world, but is by no means the only service with a significant user base. In places like Bangladesh, Uganda and Zimbabwe, mobile money has been similarly successful, in part because most of the adult population lacks access to traditional bank accounts. Mobile money is a way for the unbanked or underbanked to access digital financial services for the first time. In fact, mobile money has seen considerable uptake in emerging economies across South America, Africa, Asia and now even Europe. By the end of 2014, there were over 100m active mobile money users worldwide, with more than 260 live services. Up until recently however, mobile money had been primarily a domestic phenomenon. In certain countries we have seen additional financial products – such as bill payments, savings and insurance built around a mobile money service, but all within the boundaries of that country. As we move into 2016, we are now entering the second age of mobile money where we see a truly global ecosystem of services emerging around it. Global players such as US-based Off Grid Electric – which delivers solar power to people in emerging economies on a pay-asyou-go basis, and M-Changa – an international fundraising platform —utilise mobile money to deliver services where previously they would have been unavailable or required manual processes. But it is remittances in particular that are transforming mobile money into a global platform. Remittances matter because money sent by

people working abroad plays a vital role in supporting families around the world. They are also one of the principal sources of income for many developing economies. In many countries, remittances make up a fifth or more of GDP. Digital remittance services are now connecting with telcos that operate mobile money services through sophisticated APIs, enabling the seamless movement of money from one country to another, directly into a mobile money account. In turn, migrant workers and consumers in general are demanding financial services that mirror how they communicate with their friends and families. Twenty years ago, migrant workers would typically speak to their families once a week or even once a month, travelling to a specialist shop to make international calls or buying expensive phone cards. Now they are communicating with their friends and family back home on a daily basis through instant messaging services like WhatsApp and Skype. Indeed, at WorldRemit we know that many of our customers use instant messaging to discuss their money transfers – its part of the conversation. Services such as WorldRemit allow migrant workers to send remittances instantly from a mobile app to the mobile money

accounts of their friends and family back home. Sending money crossborder from one mobile to another is mirroring the speed and ease of instant messaging. This is transforming how people actually send money. The availability of low-cost, instant transfers is enabling people to send smaller amounts, more often. People who send to mobile money accounts send, on average, around $100 per transfer vs more than $200 for people collecting cash at an agent location. However, mobile money senders transfer around three times per month, as opposed to people sending for cash pickup, who transfer money just over 1.5 times per month. Migrants are sending smaller amounts more frequently because they can. They are able to do so instantly, at little cost and in response to a conversation about a specific need for money. In short, they are more involved in the recipient’s life. Money has never just been about the simple transmission of value. It is part of a conversation, a promise from one person to another, and now mobile money increasingly is being used as means of communication. As mobile money enters its second age, further convergence between mobile money, remittances and instant messaging is inevitable.

Money has never just been about the simple transmission of value. It is part of a conversation, a promise from one person to another, and now mobile money increasingly is being used as means of conversation.

CYBERSECURITY

CYBERCRIME: THE BIGGEST SECURITY THREATS TO THE FINANCIAL SECTOR The current landscape

In 2015 there was an increase in the number of cyber attacks Over the last year there have been 2.5 million reported incidents of cybercrime. Source: The Office for National Statistics

SMEs are also at risk 90% of large businesses and 74% of smaller organisations in the UK have suffered a security breach of some kind in the last year. Source: The Office for National Statistics

New viruses are being discovered every day 160,000 new malware strains are released every day.

Staff related breaches are rising 75% of large organisations suffered a staff related breach this year, alongside 31% of small businesses.

Source: 2014 Panda Quarterly Report

Source: PwC report

Internet enabled devices are most at risk The most common incident is where the victimâ&#x20AC;&#x2122;s computer or other internet enabled device was infected by a virus.

The financial sector is a prime target The financial sector suffered the second highest annual cybercrime cost behind energy and utilities.

Source: The Office for National Statistics

Source: Hewlett Packard-sponsored study

The number of cyber attacks in Europe are rising The majority of attacks are aimed at targets in the United States, however DDoS attacks in Europe, specifically among those directed at Web hosting businesses, are trending up. Source: Level 3 Communications Threat Research Labs

REGIONAL CYBERCRIME ATTACKS

Source: The Office for National Statistics

CYBERSECURITY

Cybercrime is increasing, and it’s not just large businesses that are at risk. What are the biggest threats to the financial sector, and what can companies do to better protect themselves?

3 security threats to the finance/banking sector:

What can you do to better protect your company?

1. Network and application layer Denial of Service (DoS) attacks ▪▪ Disruption or suspension of servers and network resources connected to the Internet ▪▪ Easy attack for anyone to launch, very difficult for banks to resolve on their own

1. Understand your potential attack surface Maintain a detailed, evergreen inventory of your hardware, software, networks and data assets. You can’t protect it unless you know it’s there

2. Social engineering / Phishing ▪▪ Bank customers and employees frequently targeted by phishing attacks and spoofed (fake) emails used to acquire access to internal systems, customer accounts or acquire personal information ▪▪ Fake emails to customers are carefully written to mirror actual emails normally sent out by banks and are very difficult to detect 3. Advanced Persistent Threats (APT) ▪▪ Gather administrative credentials and exfiltrate valuable data Source: Level 3 Communications Threat Research Labs

Attacks are costing companies more: In 2015 cybercrime caused $445 billion in damages globally Source: The Office for National Statistics

2. Acquire threat intelligence systematically Assess what’s happening externally against who you are, what you do, and how you do it. Adapt your defensive paradigm accordingly. 3. Incorporate cyber-attack scenarios into your business continuity plans Test regularly with your internal teams, your vendor community, and industry groups that sponsor exercises. 4. Cultivate a broad set of law enforcement contacts. To ensure there will be parties who already know you and your business at the other end of the phone when you need them. 5. Plan communication strategy and tactics you would employ under cyber-attack conditions In advance of need, plot the roles and responsibilities of your response team, retain and brief any third party resources you would tap, identify the constituencies you would need or want to reach, and draft general templates that could accelerate your response to foreseeable cyber-attack scenarios. Source: Murray Walton, Chief Risk Officer & and Cyber Crime Fighter, Fiserv

CYBERSECURITY

PAYMENT PROTECTION: SECURITY AND THE CYBER THREAT

‘No organisation is safe from the cyber threat’. This UK press headline appeared in the wake of well-publicised security breaches at telecoms group TalkTalk and power utility British Gas in October and sums up a widely-held view on the vulnerability of all organisations to determined hackers, says Graham Buck.

The list of cyberattack casualties includes some of the biggest multinational corporations, proving that size offers no protection, while the reputational damage that follows a successful attack can extend far beyond financial loss. Shortly after the TalkTalk attack, Britain’s electronic spy chief suggested that it was time for the government to intervene in the cybersecurity industry. “It is time to take a hard look at whether the international market for cyber security is working sufficiently well,” Robert Hannigan, director of GCHQ, told business leaders. “Something is not quite right here.” Over the other side of the Atlantic, US organisations have proved equally vulnerable to attack. In late 2013, just before the post-Thanksgiving and pre-Christmas shopping season, a hacker installed malware in the securities and payments system of the Target retail chain, designed to capture the credit card details of shoppers at all of its 1,800 stores. A similarly audacious attack on the Home Depot chain in September 2014 saw hackers steal 56m credit card numbers and millions of email addresses.

CYBERSECURITY

In the same month, JP Morgan Chase revealed that a data breach discovered by the bank’s security team in late July (but only halted in mid-August) had compromised the data of 76m US households and 7m small businesses. Late November saw the most publicised security breach of all, when a hacking attack from North Korea forced Sony Pictures Entertainment to shut down its computer systems, although in this instance the primary objective was not to steal money. These episodes have at least persuaded the US that it is time to adopt Chip and PIN technology, more than 10 years after its launch in Europe. A deadline of 1st October 2015 was set for all US merchants to instal credit card machines that accept Chip and PIN and for credit card companies to issue chip-enabled cards to all consumers and business customers. However, reports ahead of the deadline suggested that up to half of the US population didn’t know what a Chip and PIN card was. Meanwhile, the limits of protection provided by PINs are reflected in card fraud losses by the UK banking sector, which in 2014 lost nearly £480m - a figure only surpassed over recent times in 2008. There are predictions that PINs will be obsolete in the UK by the end of the decade; David Webber of mobile payments software firm Intelligent Environments says that their demise will be because consumers are losing faith in the ability of PINs to protect their money. Fingerprint vein reading, iris scanning and wristbands that read a customer’s heartbeat are already among alternative security measures either being trialed or used for high-value transactions by UK banks. In addition, the July 2015 UK launch of Apple Pay suggests that this contactless payment method will become increasingly popular for low-value transactions, helped by the maximum limit per payment being increased from £20 to £30 in September. More innovation is also needed to address online bank fraud, currently the UK’s fastestgrowing area of crime with losses escalating from £60m in 2014 to an expected £130m-plus in 2015.

A void at board level

The GCHQ chief’s caustic assessment of the cybersecurity market has, not surprisingly, received a mixed response. “The market is providing the solutions there is some incredibly sophisticated technology out there just waiting to be integrated into bank systems and rolled out to the public,” says Thomas Bostrøm Jørgensen, chief executive of Encap Security. “The solutions are there, but banks lack the impetus to roll these out as soon as possible.” PSD2 (Europe’s revised Payment Services Directive) will mean that they have to implement at least two-factor authentication, but it seems banks aren’t keen to go beyond what they’ve been mandated to implement. Ken Munro, senior partner, Pen Test Partners, also believes that the market is adequate but there is a lack of understanding at board level about the security threat and associated issues. A recent study published by Accenture supports this view; it found that nearly half of the world’s 109 biggest banks lacked a board member and one in four had only a single tech-savvy director. “Very few banks have technologists on their boards and yet when you look at the big strategic challenges facing their business, particularly from financial technology companies, a lot of banks’ revenue is under threat from this area,” says Richard Lumb, Accenture’s head of financial services.

Seth Ruden, a senior fraud consultant at ACI Worldwide agrees. “It takes a specific skillset to understand threats to cybersecurity, which aren’t always best understood by individuals with a background in finance. You really need certified information systems security professionals (CISSPs).” Munro also cites a lack of accreditation and qualification within the security industry, so that companies aren’t always certain the organisations offering them advice are wholly credible. As an ethical hacker, Pen Test provides penetration testing tools enabling companies to test the security of their systems. “Everyone claims to be a cybersecurity expert, but we and others are members of the Council of Registered Ethical Security Testers (CREST), which has stringent validation for the quality of tests.” He also urges company treasurers and CFOs to check with the company’s risk manager to confirm whether there the business has a first party cyber liability policy in force. “If the company has been the subject of a hacking breach through invoice fraud or bank account details have been stolen it’s highly likely that the incident won’t be covered by a standard commercial theft policy,” adds Munro. Cyber liability insurance coverage (CLIC) has been available for the past decade and is offered by a growing number of insurers, although many are unaware of its existence. Faced with a growing burden of responsibilities

CYBERSECURITY

since the 2008-09 global crisis, financial professionals might understandably be reluctant to get involved in cybersecurity risk. However, they should at least be involved in detecting and preventing business email compromise says Mark Clancy, CEO of Soltra; a joint venture between Financial Services Information Sharing & Analysis Centre FS-ISAC and the Depository Trust & Clearing Corporation (DTCC). This scam refers to bogus email communications; for example one purporting to be from the CEO when he is away from the office. Typically, the email will instruct the CFO or another senior individual to make an urgent payment via wire transfer to a third party. If the requested amount appears reasonable, funds will be wired accordingly. As the bank has no reason to challenge the request only later will it be exposed as malicious and the original instruction as fake. An alternative scam involves fraudsters accessing the company’s email account and sending a bogus message in the guise of a company email.

Protection and response

In recent times, more security experts have suggested that the determined hacker will always find a means of breaching a company’s security - no matter how sophisticated. Defence strategy should therefore focus

less on defence and more on the company’s response immediately after an attack, with an emphasis on minimising losses. However, Encap’s Jørgensen is adamant that focusing on response shouldn’t be at the expense of protection. “Hackers and security experts will be perpetually in an arms race, and just because some skirmishes may be lost in the battle against hackers we shouldn’t stop trying to thwart their attacks,” he comments. Clancy adds that making attacks expensive for the perpetrator and devoting more time to the handful of threats that represent more than a minor irritation are among the measures that can improve security. “We typically face around 100 attacks in the course of a month, of which 80 don’t pose a core threat yet still take up 80% of our time,” he says. “We’d prefer to reduce that to 20% for these minor threats, so the remaining 80% can be focused on the few that are significant.” Munro offers one final piece of advice for treasurers and CFOs. “If you think that you understand security, do you use the same password for all of your online accounts?” he asks. “If the answer is ‘yes’, you need to get and instal a password manager application. There are several very good ones, including LastPass, Dashlane, Roboform, Digipass and 1Password.”

REGULATION AND LAW

REGULATION AND INNOVATION

Will the current wave of regulation help or hinder innovation in the payments industry? Rebecca Brace investigates the most notable developments and reflects on the arrival of new players in the payment services sector.

The payments landscape has undergone a considerable shift in the last few years – and this period of change is still underway. Following rapid technological innovation, regulatory developments are set to have a significant impact on payment service providers and their customers in the year ahead. “The regulatory agenda is certainly very full right now, particularly across the EU,” says Andy Copeman, an analyst at Aite Group. “The full impact of this torrent of regulation will be felt over a period of time, but it is certainly

changing the banking and payments landscape, and also stimulating some thinking on innovation.” Among the most notable developments is the arrival of PSD2, which is due to be published by the end of the year. Replacing the existing Payment Services Directive, PSD2 has a wider scope than the original regulation, reflecting the arrival of new players in the payment services sector. “This will be a major game changer, given the new services and providers introduced, such as payment initiation and account information,”

comments Ruth Wandhöfer, global head regulatory & market strategy, Citi Treasury and Trade Solutions. Other topics include interchange fee regulation, with the arrival of fee caps in December 2015 prompting significant uncertainty in the market. “Issuers are having to rationalise the number of cards they issue per customer, and direct cardholders to revolve balances if possible, to counter lost transaction fee income,” says Copeman. “Loyalty scheme benefits are being cut back, or repositioned across the entire bankcustomer relationship. Portfolios may reduce in size as a consequence – particularly credit cards.” Meanwhile, the Single Euro Payments Area may be up and running, but development continues with the European Payment Council (EPC) working on the design of a SEPA credit transfer instant payment scheme. Other significant changes include the arrival of the fourth AntiMoney Laundering Directive, which came into effect in June.

REGULATION AND LAW

IMPLICATIONS OF THE NEW REGULATIONS

For the European payments market as a whole, the new regulations present a variety of collective challenges. As Wandhöfer points out, “complexity, crossimplications and strategic impacts will have to be absorbed both by banks and their customers.” The relationship between innovation and regulation is particularly interesting. Debate continues about whether the combined impact of the upcoming regulatory changes will be to hinder innovation or to help it to thrive. Arguably it will do both. “Regulatory upheaval is both stifling and spurring payment innovation as it creates an unequal playing field for banks, non-bank players and the unregulated companies,” says Alex Mifsud, co-founder & CEO of Ixaris. “Previously, regulatory efforts were mainly focused on containing risks in the framework, but the regulatory system has since shifted focus,” adds Jeroen Holscher, head global payments practice at Capgemini. “Today, standardisation and innovation are underpinning the regulatory and industry initiatives. As a result, regulators are increasingly open up the payments market to new competitors.” Holscher says that over 50% of the regulations assessed in Capgemini’s recent World Payment Report saw innovation as a key objective. “This is because regulators mainly want to protect customer interest and value added services,” he adds. In terms of specific developments, Copeman believes that PSD2 and the interchange regulation, combined with other regulations, will stimulate innovation in areas such as mobile payments. “Mobile payments is an opportunity that sits well with the development of real time, or ‘Faster Payment’ initiatives around Europe,” he adds. “Mobile sits at the heart of the proposition for real-time payments in Sweden, and is a beneficiary in other markets. In Italy, the Jiffy service that SIA have launched is designed with the smartphone in mind, and can be integrated with existing banking apps and online services. I expect these two areas of innovation will move forward together.” At present, Copeman argues that too many systems and services are national in scope. However, this could change – and Copeman predicts that the next wave of

development will be to integrate or build interoperability between platforms so that the services built on the real-time core can be extended internationally.

NEW MARKET PLAYERS

One of the most important areas of interest for regulators is the growth of non-bank players. Enabled by developments in technology, many new providers have entered the market in the last few years. Regulators are working to bring these into the scope of regulation, as well as opening up the payments market to new competitors. One example is PSD2’s Access to Accounts (XS2A) rule, which will require banks to allow customers to access their accounts via Application Based Interfaces (APIs). Dr David Andrieux, strategy consultant at IT services company Sopra Group, observes that the arrival of new entrants is favoured by the regulatory framework of PSD2 – a regulation “which seeks to increase competition and transparency while accelerating innovation, thus lowering the banking sector’s barriers to entry.” At the same time, following the fallout from the financial crisis, Mifsud says that regulators have

been determined to address the dominance banks once held. This has “encouraged the proliferation of new regulated financial institutions, such as challenger banks, payment institutions and e-money institutions, as well as unregulated payment companies who found they can deliver payments innovation on bitcoin and other cryptocurrencies without the need for anyone’s permission.” In the meantime, Mifsud points out, banks have been feeling the strain of tightening regulation with impacts such as increased capital requirements and the dramatic reduction of merchant interchange fees in Europe. “It would seem that the playing field is tilted against the established banks and in favour of the new entrants,” he comments. Inevitably, the arrival of nonbank players is causing banks some concern. Research published by Finextra and FIS in January 2015 found that 55% of respondents believed that significant competition would come from new entrants enabled by PSD2. However, the survey also found that the danger is not universally seen as imminent: 43% felt it was hype that new market entrants would achieve any relevant market share in the next three to five years, while 48% felt only their next

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generation clients were a possible target for non-bank providers. It should also be noted that new entrants to the market are not the only ones benefiting from recent developments. “Innovation can significantly help to cut costs,” says Wandhöfer. “It can also open opportunities for banks in new areas, such as financing trade in the open account space where there is traditionally no space for banks.” Wandhöfer adds that innovation may also remove the revenues traditionally earned by players in the system, prompting the development of new solutions and services. “If we look for example at the potential of Blockchain technology in the financial services space, it becomes clear that there is potential to transform processes and business models.”

WORKING TOGETHER

It’s clear that both banks and non-bank providers have much to gain by focusing on innovation – and in many cases there may be an argument in favour of greater levels of collaboration amongst different types of provider. “While competition is generally good for innovation, in payments, coopetition might be a more efficient model,”

says Mifsud. “The new players are starting with green fields, highly flexible technology and greater nimbleness but lack the reach, while the established banks have the brands and distribution channels but are struggling to innovate.” Mifsud argues that a more collaborative and open model would enable unregulated companies to continue to innovate and build increasingly diverse and intuitive applications that address every payment need imaginable. “Banks and other regulated financial entities would be able to tap into these innovations and generate new revenues both by underwriting the transaction services required to power the new applications, and also by using their distribution channels to offer the innovative services that result from such collaboration,” he adds. However, the importance of banks in this picture should not be underestimated. Ovum’s 2015 Global Payments Insight Survey found that banks were regarded as the most capable providers for all of the payment technologies surveyed, ranging from real-time clearing and settlement to mobile QR codes. The survey also revealed the willingness of banks to collaborate in order to maintain this position, with

up to 90% of financial institutions expressing the desire to work more closely with retailers and billing organisations.

LOOKING FORWARD

Much has changed in the world of payments – and it is likely that further developments will follow as new technologies continue to evolve. For example, in addition to the regulatory changes already underway, regulators are asking more questions about the risks and opportunities relating to digital currencies such as bitcoin. In the 2015 budget, the UK government announced that new regulation would be introduced focusing on this area. The announcement was welcomed as bringing legitimacy and supporting innovation for digital currencies, as well as greater control. In this climate of continuing change, no one can afford to rest on their laurels. New and established players face a range of risks and opportunities – and for many banks and non-bank providers, working together may provide greater opportunities to build innovative new services and bring them to customers successfully.

REGULATION AND LAW

COMMON COMPLIANCE ACTS AND REGULATIONS AFFECTING THE FINANCIAL SECTOR UK

Data Protection Act 1984, amended 1988 (UK) Imposes legal obligations on anyone processing personal data to ensure there is good practice and management of that data. In part 1 of the Act there are 8 enforceable principles of good personal information handling, which states that any organisation that carries personal data must ensure this data is accurate and up to date, secure, processed in line with a person’s rights and only kept for as long as necessary. Source: Bloor Research

The Financial Services Act 2012 An act of parliament that introduced and implemented a regulatory framework design to replace the Financial Service Authority with three new regulatory bodies: ▪▪ Financial Conduct Authority (FCA) – An agency designed to maintain the integrity of financial markets and regulating retail and wholesale financial firms that offer services to consumers. ▪▪ Prudential Regulation Authority (PRA) – A part of the Bank of England responsible for the supervision and regulation of banks, insurers, building societies, major investment firms, and credit unions. The PRA sets the standards for financial firms and monitors the conduct of each individual firm. ▪▪ Financial Policy Committee (FPC) – A committee modelled after the Monetary Policy Committee, given the responsibility of monitoring economic activity in the United Kingdom. Any risks identified by the committee are passed on to the PRA for further investigation. Source: Real Business Rescue

Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 As part of the development of the EU this legislation has been put in place to harmonise data protection laws across the EU. The law focuses on seven key principles concerning the use of and access to personal data. Member states of the EU have generally implemented their own local data protection laws that enshrine the principles of Directive 95/46/EC; for example the UK has implemented the Data Protection Act and Germany has The Federal Data Protection Act. Source: Bloor Research

MiFID - The Markets in Financial Instruments Directive The directive affects the way in which some share trades are undertaken. Instead of using exchanges, banks are able to deal “off-book”; buying and selling shares through customers directly. This is seen to be easier than using a share exchange. It is an update to the Investment Services Directive, which was not successful, and is often referred to as ISD 2. Source: Bloor Research

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Global

Payment Card Industry Data Security Standards (PCI DSS) PCI DSS is a worldwide Payment Card Industry Data Security Standard, which was set up to help businesses process card payments securely and reduce card fraud through tight controls surrounding the storage, transmission and processing of cardholder data that businesses handle. PCI DSS is intended to protect sensitive cardholder data and features 12 high level requirements, that fall into the six categories below: 1. Build and Maintain a Secure Network 2. Protect Cardholder Data 3. Maintain a Vulnerability Management Program5. Use and regularly update anti-virus software 4. Implement Strong Access Control Measures 5. Regularly Monitor and Test Networks 6. Maintain an Information Security Policy Source: theukcardsassociation

Capital Requirements Directive/Basel II Accord The Basel Committee on Banking Supervision’s revised capital requirements framework, commonly known as Basel II, is a revision of the 1988 / 1996 Accord (Basel I) affecting banks, building societies and certain types of investment firms. Basel II is designed to create an international standard that can be used by banking organisations when creating regulations concerning the amount of capital banks need to set aside to guard against operational risks. The accord is designed to prevent international financial problems being created by collapsed banks, and sets rules on the amount banks need to keep in reserve based on their exposure.

• • •

credit risk market risk operational risk

•

The framework consists of three pillars

Pillar 1

sets out the minimum capital requirements banks will be required to meet for credit, market and operational risk.

Pillar 2

requires that firms and supervisors (the FCA/PRA in UK) take a view on the amount of additional capital that should be held against Pillar 1 risks, and those risks not covered by Pillar 1, and take action accordingly.

Pillar 3

aims to improve market discipline by requiring banks to publish certain details of their risks, capital and risk management practice.

bank’s own capital adequacy assessment fsa review & supervisory actions

•

disclosure to allow banks adequacy to be compared with each other

International Financial Reporting Standards (IFRS) A single set of accounting standards designed to provide investors and other users of financial statements with the ability to compare the financial performance of publicly listed companies on a like-for-like basis with their international peers. IFRS are now mandated for use by more than 100 countries, including the European Union and by more than two-thirds of the G20. Source: IFRS

REGULATION AND LAW

PSD2 AND BEYOND:

THE FUTURE OF REGULATING EUROPE

The second version of the Payments Services Directive passed by the European Council late last year is set to transform legislation and regulation for the payments industry. Madhvi Mavadiya questions what the future holds for Europe depending on how this directive is adopted, and how it will operate when aligned with SEPA and laws that are specific to each country.

The new Payments Services Directive (PSD2) will replace the initial version proposed in 2013 and will aim to standardise card, internet and mobile payments. This will reduce barrier to entry for these electronic payments and having this regulation in place will ensure that there is consistent application across the EU and includes newer payments services that are emerging within the regulation. The proposal document explained how the electronics payments market in Europe offers great opportunities for innovation: “Consumers have already significantly changed their payment habits in recent years. In addition to the ever growing number of credit and debit card payments, the rise of ecommerce and the increasing popularity of smart phones have paved the way for the emergence of new means of payments. The benefits of

better market integration and reduced fragmentation in this field at European level are substantial.” Paul Thomalla, senior vice president, global corporate relations and business development at payments systems company ACI Worldwide, highlights that regardless of how many regulations emerge, they are made more complicated by how they are implemented. “Although the EU defines each directive and regulation in principle, directives are interpreted and enforced on a country by country basis, while regulation is implemented as stated. This, in terms of directives, can cause inconsistency, with some countries choosing to interpret the legislation in significantly different ways to others depending on local payments practices,” Thomalla explains. In October 2015, the European Parliament adopted the revised PSD and

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reports had a similar attitude to Thomalla. It was recognised that the law needs to be officially endorsed by separate EU member states before it can be implemented, as most European countries are still coming to terms with the two previous major regulations. In 2012, the Single Euro Payments Area (SEPA) was introduced and required banks to comply with the SEPA rules so that their clients have the ability to make euro payments on a cross border basis to and from all EU states, as well as Iceland, Liechtenstein, Norway, Switzerland and Monaco. The significance of this regulation is that payments are made faster and there would be no difference between national and cross-border payments. Alongside this, 2014 saw the capping and surcharging of interchange fees for consumer cards under the Multilateral Interchange Fees (MIF) regulation. These caps will come into effect at the end of 2015 and the UK government proposes that businesses will take on the rule in June 2016. As is expected with all new regulations, it is easier said than done and Peter Howitt, director of the Ramparts European Law Firm, comments on how he believes PSD2 will increase costs and complexity of doing business in the regulated payments space: “It further limits many of the exemptions, e.g. limited network and commercial agent exemptions. This will increase the attractiveness and use of unregulated payments such as bitcoin. It will encourage the growth of alternative players in the payments sector who do not manage money but who provide useful financial data tools enabling aggregated data analysis for customers on their spending patterns (third-party payment service providers - TPPPs).” Although, the UK may be in

need of alternative players and bitcoin may become more popular as a method of making cross border payments. Another aspect that must be considered is how the EU Payments Regulation network is also working to combat and investigate money laundering and terrorist financing, which is something that other European countries are also applying. Money laundering can be defined by the exchange of money or assets that were obtained criminally for profit and it is of paramount importance that all money service businesses comply with the requirements. This is part of what the EU Payments Regulation sets out in the instructions that detail how funds can be transferred electronically, using payments services such as SWIFT. Despite money laundering prevention processes put in place, Hannah Nixon, managing director and payments systems regulator at the UK Financial Conduct Authority (FCA) explores how important it is for structure to be in place. “Payment systems are the means by which people and institutions move money. They are vital to the smooth running of the UK economy. They underpin our day-today lives from high value payments between firms, to receiving your pension into your bank account,” Nixon states. As Nixon advises, changes are being made to the regulatory payments structure and a new anti-money laundering (AML) directive took effect in 2015. EU countries have been given up to two years to ensure that laws are created with these rules in mind. Germany is one of the countries that focuses on AML more closely, therefore in future, this country will see the AML directive

REGULATION AND LAW

being applied to a range of businesses that are involved in making or receiving cash payments for goods that are worth at least €10,000. Christian Bächmann, director at ONPEX S.à r.l, explains what effect SEPA had on their company and this raises the question of whether it would evoke the same reaction when other payments regulations are applied. “As SEPA had the highest possible impact on German customers in Europe and they weren’t really ready and aware of the changes, we saw a lot of confusion within the existing systems. It made things even more complicated when the authorities prolonged the specific last starting date for SEPA.” While Germany concentrates on the immediate risk, Sweden is focused on transforming payment systems to enable them to be more secure. The settlement system that is operated by Riksbank, RIX, which settles payments both in Swedish kronor and euros, works under the national regulation for Sweden, “Rules and Regulations for settlement of payments in RIX”. This regulation requires three agreements between Riksbank and the user, which includes an agreement on credit and deposits and a pledge agreement for credit in RIX. With the electronic payments industry rapidly growing, it questions the role of cash and whether there is a future for this form of payment as Niklas Arvidsson, a researcher at KTH Royal Institute of Technology in Stockholm, explores when discussing the popularity of mobile payment system Swish. “Cash is still an important means of payment in many countries’ markets, but that no longer applies here in Sweden. Our use of cash is small, and it’s decreasing rapidly.” Like in Sweden, the Dutch payments industry has also

been embracing technology and innovation. Since the system was introduced, more than 500 million online payments were made using the iDEAL service and interestingly, this is made up of a collection of technical agreements between banks and transaction processes. These services are regulated in the Netherlands by infrastructures such as the Netherlands Authority for the Financial Markets (AFM) and the Netherlands Bank (DNB). The DNB is responsible for controlling the clearing and settlement services in the payments and securities industries and with its mandate, which is based on a combination of national law and EU treaties, it aims to promote smooth transactions. Moving across to digital payments was easier for Luxembourg, because, as Bächmann explained, “the Luxembourg regulatory body has a very strong technology and data protection aspect in their guidelines.” A large number of citizens work within the financial industry and banks that are located there have experience dealing with ecommerce from working with giants such Skype, Amazon and PayPal, which are all headquartered there. Luxembourg is known to be the first country to define an innovative legal framework for payment companies and ensure that they follow the EU’s Payment Services Directive and Electronic Money Directive. It is yet to be seen how these countries will continue to comply with their existing country laws and EU requirements such as SEPA and soon to be mandatory, PSD2. Needless to say, as payments become more streamlined through EU regulation, anti-money laundering efforts will still be a top priority for all countries.

REGULATION AND LAW

PAYMENT SERVICES LAWS: EU VS US The payments industry is subject to a number of rapidly emerging laws surrounding internet and mobile banking, digital currencies, marketplace lending and antimoney laundering. In this interview with Nicole Miskelly, Kevin Taylor, partner at Taylor & Associates in the US and Ronnie Preiskel, managing partner at Preiskel & Co LLP in the UK, discuss the differences between payment services laws in the EU and the US. How do current laws surrounding payment services in the EU (including e-money, money transfers and mobile payments) differ to the US? Kevin Taylor: Compared to the US, payments in the UK and EU are more streamlined because there are fewer regulators. In areas such as money transfers and payments, if you a payment provider or processor in the US you can be regulated at national level and also on a state by state basis. In order to find ways around this, some companies will partner with others that are already registered in that particular state. The requirements are similar in all states, however, each state has itwws own specific requirements. Ronnie Preiskel: The position in the EU has been streamlined by virtue of the ‘passporting’ arrangements within the EU which allow for or facilitate the provision of an entity licensed in one EU country to provide financial services in another member state. What about electronic fraud, identity theft, and anti– money laundering, what are the laws and who is liable? Kevin Taylor: Know your Customer (KYC) is designed to make sure that you are not keeping money from your clients, or using money for illegal activities. KYC makes sure that banks verify who it is they are doing business with and they understand where the funds are coming from. KYC prevents anti-money laundering and fraud by identifying that the money is not stolen, derived from fraud or any other illegal activities. In the US, KYC is a national law and Europe has very similar requirements to what we have in the US. Ronnie Preiskel: Electronic fraud and Identity theft in the UK are covered by the Fraud Act 2006, the Identity Documents Act 2010 and the Forgery and Counterfeiting Act 1981. These Acts provide for identity related offences

such as fraud by false representation, making or supplying articles for use in fraud and using a copy of a false instrument. Other legislation also apply in online crimes such as the Computer Misuse Act 1990, which provides for offences such as unauthorised access with intent to commit or facilitate commission of further offences. The prevention of money laundering is regulated by the Money Laundering Regulations 2007, which apply to a range of business including financial and credit institutions, accountants, estate agents and trust or company service providers. How can a bank or a mobile service provider be held liable for any data loss or tampering when they are complying with regulation? Kevin Taylor: Firms can still be negligent in other ways, even if they are following regulations, which would create liability. There is the possibility of a rogue employee tampering with the data, which would constitute as a management issue but I believe that generally complying with regulations protects firms to a large degree. Ronnie Preiskel: Complying with the principles of the Data Protection Act 1998 and the regulations on financial services could avoid enforcement and sanction being imposed by regulators. However, the service provider may still be liable for negligence or for breach of clauses included the agreements with its customers. Marketplace lending has become a big trend – what laws are alternative finance platforms subject to? Kevin Taylor: Generally I have seen a proliferation of alternative finance platforms and I believe that banks are going to have a lot of competition in this area. Marketplace lending is subject to laws which outline the maximum interest rate that can be charged and also KYC requirements to combat fraud and anti-money laundering. Ronnie Preiskel: The UK Government is keen to promote the UK as a leading location for fintech start-ups and innovation. Therefore, the approach seems to be to try find a balance between not overly regulating alternative finance platforms and ensuring that customers are adequately protected. What impact do current regulations in place in the EU have on negotiation and liability if privacy and data protection laws have been breached? Ronnie Preiskel:According to the Data Protection Act 1998, data controllers must take appropriate technical and organisational measures against unauthorised or unlawful processing or accidental loss or destruction of or damage

REGULATION AND LAW

to personal data. They must also take reasonable steps to ensure that employees who have access to personal data are reliable. According to the Privacy and Electronic Communications (EC Directive) Regulations 2003, in case of data security breach, data controllers who are providers of public electronic communications services must notify the Information Commissioner’s Office (ICO), notify the data subjects where the breach is likely to adversely affect them and maintain a data breach log. The Financial Services and Markets Act 2000 introduce certain security requirements for providers of financial services, which are required to maintain adequate systems to prevent financial crime. Are cryptocurrencies and digital currencies subject to the same laws and regulations as other currencies? Kevin Taylor: The Bank of England has declared that bitcoin is not money which has put it outside of regulation at the moment and the US has a similar stance on this, however, it can’t be used for illegal transactions like it was previously. I believe cryptocurrencies and distributed ledger technology are still something that regulators and the marketplace are still trying to get their heads around and are trying to find alternative applications for. Although digital currency is quite revolutionary at the moment, I think it will become more mainstream in the future. Ronnie Preiskel: It seems that the legal status of digital currency remains undefined. The UK Government has signalled its intention to apply anti-money laundering measures to digital currency and ensure that the authorities have systems in place to identify and prosecute crimes related to digital currency. The Government has announced that it will work with the British Standards Institution (BSI) and members of industry to develop voluntary standards for consumer protection. How much responsibility do third parties have in maintaining the security of company and client data? Kevin Taylor: Financial institutions have a general obligation to make sure that if they hire a third party to provide a service for them, then they have to make sure that third party does not to do anything that would disclose data or cause the financial institution to violate its regulations. Ronnie Preiskel: Financial institutions have to maintain in place systems and controls to prevent data security breaches by third party suppliers. The FSA published guidance on data security in financial services in respect of data loss by employees and third party suppliers (Data Security in Financial Services: Firms’ controls to prevent data loss by their employees and third party suppliers). The guidance clarifies that financial institutions should

Kevin C. Taylor Kevin C. Taylor is founding partner, Taylor & Associates. Mr. Taylor focuses his practice on complex outsourcing, technology, commercial, and intellectual property transactions. He handles the negotiation of technology and corporate transactions involving computer systems, financial technology (“fintech”) applications, outsourcing, e-commerce, patent licenses, intellectual property, content distribution, and computer hardware.

exercise data security due diligence before entering into an agreement in which data will be shared with third parties suppliers and audit suppliers to ensure that they are compliant with such agreement. Which fintech trends do you think will be hot in 2016 and what laws do you think will have the most impact in the years ahead? Kevin Taylor: Payments is still and will continue to be a very hot topic, and in the future I think we will start to see a consolidation in the payments area. There are so many payment systems out there offering the same thing, which is why I believe we will start to see the consolidation of these systems through mergers and acquisitions. I predict that we will see more and more large financial institutions either making these acquisitions or developing their own systems so that they do not lose out to new competitors. Data security and the laws around data breeches are still the biggest legal issues. There are laws around liability from data breaches and privacy which will still be prominent in 2016 and in the future with the adoption of the Internet of Everything (IoE), which may enable us to make payments through house hold items such as TV remote controls, and eventually allow us to use these items to make other financial service decisions such as to invest and buy insurance. There has not been a lot of assurance around data security with IoE, which inevitably means that there will be data breaches and companies will still be trying to mitigate the risks of the these breaches, meaning there will be a greater need for cyber security insurance. The US has recently adopted Europay, MasterCard and Visa (EMV) card security - a global standard for cards equipped with computer chips and the technology used to authenticate chip-card transactions - which merchants have to comply with, however, they are reluctant to comply at the moment due to the high costs involved. In the future they will have to comply to this standard because there will be breaches which will spur compliance. Ronnie Preiskel: At the consumer level the trend will continue to be towards increased mobile banking, mobile payments, and other forms of contactless payments. We can also expect to see the continuing rise of peer-to-peer lending and further acceptance of Bitcoin. Big banks will be severely affected by the UK’s proposed ring-fencing rules (that could require a full separation of the retail bank from other parts of the bank), solvency rules and other regulations. There might also be new regulation stemming from the recent LIBOR and FX scandals. An issue for the wider financial services sector will relate to protecting their customers’ financial information from unauthorised access and hacking. It would not be surprising to see new regulations or standards introduced to try and ensure that consumer’s personal information is adequately protected by the financial institutions.

Ronnie Preiskel Ronnie Preiskel is a co-founder of the telecoms and technology specialist law firm, Preiskel & Co LLP. He has over 20 years’ experience working in the telecoms, media and technology sectors in a wide variety of roles. Ronnie is ranked in various guides such as Chambers & Partners. Ronnie advises a number of clients in the fintech sector including the leading South American payment processing company on corporate, commercial and regulatory matters.

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TELL YOUR FRIENDS:

SOCIAL COMMERCE IS COMING

Social media platforms have been dipping their toes into ecommerce for a little while now, but recently they seem more committed to taking the plunge in these potentially lucrative waters. What does this mean for the future of payments? George Carey asks the experts.

Ecommerce has moved rapidly in recent years as an increasing number of people go online to shop, pay bills and transfer money to friends and family. With consumersâ&#x20AC;&#x2122; voracious appetite for innovation showing no sign of abating, there has been a steady flow of new and exciting ways to manage money online. The latest development in this never-ending conveyor belt of progress is the integration of payments with social media platforms. While the capability has been around for a couple of years now, it is only through refinements over time and increased user uptake that social media payments are making their presence felt in the ecommerce environment.

Increasing consumer confidence

With any new type of payment solution there will, of course, be some reticence as consumersâ&#x20AC;&#x2122; worries about security and efficacy come to the fore. But having had the

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past couple of years to let the idea percolate, people are coming around to the potential of social payments. Indeed, a third of shoppers (32%) polled said they were ready to buy via social media, in a YouGov study – Are We Ready to Use the Social ‘Buy’ Button – published by Bronto Software in September 2015. Furthermore, the study revealed that consumers are willing to spend an average of £55.68 on a single item via social channels, equating to a social commerce marketplace of 16m UK adults spending an estimated £900m. This enthusiasm for social commerce is sweeping Europe, with potentially significant consequences for the payments industry. One man who has been watching the ascent of social media payments with great interest is Nitin Mangtani, founder of Predict Spring. “People are using it but it’s still early days,” he says, adding: “consumer behaviour takes time to change.” He estimates it will take another 12 to18 months for buy buttons to be material for a brand, so they can identify the percentage of revenue gained from Twitter or Google. Comparing the rise of social commerce to the ad tech industry, Mangtani says: “That took about 15 years to be material. It will go through the same phase and then it will undergo a rapid adoption curve. The thing with innovation is that what looks hard today will just look like common sense three years from now.”

Room for improvement

While enthusiasm abounds in some quarters, not everyone in the industry is so excited. Payments specialist Jonathan Jensen, for example, remains to be convinced by something that he doesn’t see as a particularly functional development. Jensen doesn’t see social commerce as fitting into his payments philosophy that methods need to be “frictionless and frustration-free”. Indeed, he thinks it can only add a layer difficulty, saying: “If you put another intermediary like a social network in there, you’re just creating another point of friction in the whole thing. I guess with social media networks trying to get into payments they’ll be looking for the value to sit in their world.” Friction is an issue that Mangtani acknowledges in this teething stage of social payments, but he

doesn’t see it as an insurmountable obstacle. He explains: “The biggest problem is that most brands have 10 or 15 different systems to enable ecommerce. They have a product catalogue system, a payment system, a shipping and logistics system, and so on. These are complex integrations, so it’s very difficult for a brand to integrate with 30 different apps all trying to link up with their systems. The last mile connectivity has been the biggest thing holding things up.” However, with the emergence of apps offering one platform through which brands can integrate with every social media network or other intermediary, integration is a concern that’s rapidly moving into the rear view mirror.

And the winner is…

With consumers realising the virtues of this new way of paying, the race is on for the big social networks to make themselves the shopping network. So far there seems to be one in particular that’s excelling in this regard. “I think Pinterest is one of the more innovative networks because it’s such an inspiring way to shop. It’s actually a really interesting platform for companies to sell their product on,” enthuses Emmanuel Leroy, online marketing & social media expert at AXA Bank Europe.

Leroy sees the way Pinterest handles fashion as the network’s crowning achievement because of how it makes suggestions for purchases with its boards and collections, as well as pictures of people wearing the latest trends. “I think it also stimulates impulsive buying more because it makes it so easy to pay” he adds. “You don’t have to leave the platform, which makes the whole thing a lot more frictionless.” Mangtani is in agreement that the ‘trailblazer’ title belongs to the good folks digitising pin boards: “Right now Pinterest is leading the drive towards social commerce in a big way. They were the first to launch buy buttons. I think now there is a series of factors which are coming together to make mass use of buy buttons a reality.” The key element for him is mobile, as he explains: “On desktop you can see a product, open it in a new tab and purchase it but on mobile that whole experience of going

What looks hard today will just look like common sense three years from now.

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from a native app to a browser on a responsive site – which takes eight to ten seconds to load – has a very complex checkout process.” It is complications such as filling out three to four forms of credit card information, billing and shipping that he blames for conversion rates being a mere quarter of those on desktops. “If you download the Pinterest app, there are a lot of products that you can browse through and being able to pay with one click through Apple Pay is really beautiful,” Mangtani says. So-called ‘buy buttons’ seem to be doing the most to narrow the gap “between discovery and commerce” as Mangtani puts it, and catalysing this very social movement in payments. “From a consumer perspective there’s the discovery phase and then the actual purchase funnel, and the buy buttons are trying to merge those two phases into one,” he says. It’s this ease of transition from seeing a product to purchasing that the tech mogul sees as the big advantage of buy buttons. “Now you can just make the purchase right there and then. And it can happen for several reasons – maybe a friend recommended that product or perhaps you’re following a celebrity on Twitter or Pinterest and she posts a picture of her new dress. If you can purchase at the moment of discovery, it increases conversion rates dramatically.”

Exciting times ahead

Naturally, these payment innovations don’t occur in a vacuum and as online validation and security measures continue to evolve, it can only mean good things for the sustainability of this exciting form of ecommerce. “There are a couple of significant changes coming down the line from the Payment Services Directive (PSD2), which will undoubtedly impact e-commerce merchants,” says Head of Analysis at CMSpi Steve Glover. He continues: “Firstly, a new mandate for ‘strong authentication’ will have to replace the prevailing 3D-Secure model of static passwords. This will not only apply to card payments, but most other forms, including digital wallets and bank transfers.” The other development Glover sees as key is ‘Access to Account’, or XS2A, which will require banks to

Payments need to be frictionless and frustration free. share APIs with third parties, giving them access to customer account information. This means that banks will no longer have a monopoly on how and where customers view and use their financial information. It also opens up the potential for a new breed of ventures to revolutionise the payments market and give a huge boost to web and mobile payments innovation. Glover adds: “This has the potential to disrupt not only the banks’ business models but card schemes such as Visa and MasterCard, too.” This brave new world of social payments is one that Mangtani is keen to embrace, and he has some predictions of his own: “I think you’ll see a major shift from what we call traditional ads to ‘commerce’, so every piece of ad unit or content on

social media will become shoppable and that will completely change the way consumers shop.” He also sees a considerable smoothing in the payments process moving forward, with consumers no longer encumbered by the monotonous process of entering credit card details and shipping addresses; everything will be done through a digital wallet. “Whether it’s Apple Pay, Android Pay, MasterCard, Visa or whatever, I think we will move away from the traditional credit card model, although it will be supported by a credit card in the back end. But for the consumer it will all happen in one click, with the digital wallet enabling the transactions. I estimate that by 2017 the majority of commerce will be done through digital wallets,” he concludes. So it seems social media payments are here to stay. With every platform constantly improving their processes and consumer confidence rising as people become more comfortable with the concept, it looks like a fascinating development in the everchanging ecommerce space.

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SCALE AND SPEED: DRIVING INNOVATION IN MULTINATIONALS

With tech startups regularly creating the next big thing in FinTech, it could be easy for large consumer-facing companies to get left behind in the never-ending finance arms race. So how do the behemoth businesses of the world ensure that they keep pace when it comes to innovation? George Carey speaks to the purveyors of progress at five major companies.

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Jonathan Vaux

Marc Lien

Executive Director, Innovation and Partnerships at Visa Europe

Innovation & Digital Development Director at Lloyds Banking Group

How do you foster an atmosphere of innovation and free ideas? We have had to adapt and refine our operations to meet the evolving demands of today’s tech-savvy, experiencefocused consumers. Fostering an atmosphere of innovation and free ideas has been absolutely essential as we work towards this goal. Over the past few years, we’ve made the decision to put innovation at the very centre of our organisation, looking at the exploration of new technologies and emerging market trends to gain insight. One example of this is our ongoing investment in the establishment of innovation hubs across Europe, where we aim to find new technologies that will ultimately transform consumers’ interactions with governments, businesses and retailers via better payments. We’ve also restructured and streamlined the way we work to ensure that we have the required nimbleness and flexibility to respond to an ever-changing marketplace. We’ve found that an openplatform approach, where we work collaboratively with a variety of partners of all sizes, has been essential in allowing innovation to thrive, which in turn has helped our members build meaningful, relevant propositions that serve their customers.

What are the unique challenges of driving payment innovation in such a big organisation? The scale of our business presents both a benefit and a challenge. The benefit is that when we launch an innovation it is easy to see how that positively impacts millions of people. The challenge comes from the absolute need to ensure the robustness and resilience of the payments infrastructure if we are to have a proposition that benefits all our customers, and not just an ‘alpha’ testing population during early experimentation. With an existing and established customer base our approach has to be focused on prioritising the innovations that create the greatest positive impact for the greatest number of people, which ultimately leads to a demand pull, rather than a supply push, model.

What are the unique challenges of driving payment innovation in such a big organisation? Driving payment innovation in such a big organisation is a challenge in itself because of the regulations, rules and processes in place to mitigate risk — innovation is inherently risky. Traditionally, as the size of the company increases, the ability to move quickly often decreases. At Visa we recognise this, and that’s exactly why we took the decision to make the changes to the businesses that I outlined previously – namely, the restructuring and streamlining of the organisation to drive greater flexibility and quicker response times. This has been further aided by an open-platform approach, where we work with external partners both big and small, to foster innovation and allow great ideas to be more readily turned into reality.

A POTTED HISTORY OF PAYMENTS

How do you see payment methods for consumers evolving over the next five years? The payments sector has seen a surge in both startups and user base across 2014. We have also seen strong growth in P2P lending, equity crowdfunding and wealth management, with some large funding rounds and IPOs taking place. We see this trend continuing. There is a trend to create frictionless experiences for customers both in store and in app, so it will be crucial to manage the risk of proliferation of payments solutions, which has the potential to confuse consumers. Ultimately, though, the primary beneficiary from any financial services and FinTech innovation will be the customer. That has to be a good thing.

Conor Pierce

Vice President, IT & Mobile, UK & Ireland at Samsung How do you ensure a great payment idea turns into a reality for customers? It’s key that retailers, manufacturers and finance organisations work together to make payment ideas work for customers. In the mobile payment space there are lots of different parties that need to collaborate to ensure

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customers have the best service possible. As a business, we put customers’ needs first and carefully select partners that focus on customer service to make sure that any payment solution is safe, easy to use and gives people the freedom and choice to use it as and when they need. How do you see consumer payment methods evolving over the next five years? In such a globally connected and digital world, mobile phones transcend their original function of merely making calls. We now rely on them to update our social media platforms, shop online and even control our appliances, so paying for things via your mobile is the natural next step in this evolution. Over the next five years, we anticipate that making mobile payments will become an everyday action in people’s lives, and anticipate a world where consumers will pay for virtually everything using their mobile or wearable devices.

Elliott Goldenberg

Head of Digital Payments at MasterCard UK & Ireland What are the unique challenges of driving payment innovation in such a big organisation? In a large organisation like MasterCard we want to create, endorse and implement innovations which are going to provide scale, adoption and ultimately bear relevance to the modern day world. The challenge is to work with our partners to ensure that they see the benefits of using technology to make a consumer’s life more convenient, safe and secure. A good example of this is our partnership with Transport for London (TfL), along with other schemes to bring contactless technology to Londoners. During the summer of 2015, TfL revealed that it is seeing 1.2m contactless transactions every day, a figure it expects to grow following the arrival of Apple Pay and anticipated arrival of Android Pay in the UK. Contactless on card is now seen as the norm. Soon we will see more and more consumers adopt mobile devices to make contactless payments in transit and also in shops such as M&S, where the halo effect of contactless has had a huge impact on influencing payment behaviour. All of these proof points help negate any barriers which could suffocate innovation at MasterCard, as all stakeholders can see the end result.

How do you see payment methods for customers evolving over the next five years? The Internet of Things – the hyper-connected world where every device from the phone to the washing machine will be connected to the Internet – is transforming the way consumers interact and transact. According to Cisco, there will be 50bn connected devices by 2020. We will see more ‘things’ become connected and consumers will have endless possibilities when it comes to how they pay, and so we anticipate that they will need all of their devices to work seamlessly together.

Jan Gonnissen

Senior Payments Consultant at iGTB How do you foster an atmosphere of innovation and free ideas? Payments and transaction banking in general are, typically, the bread and butter of any commercial bank. Inviting customer feedback and reacting to their wants and needs swiftly and in an agile manner are key to improving the customer experience. Satisfied customers tend to be loyal customers, and it is fundamental to instil an ethos of striving for the continuous improvement of customer experience across the organisation. Changing with and in tune with your customer base makes your organisation future proof for a digital world. How do you ensure a great payment idea turns into a reality for customers? New ideas in the payments area will thrive when there is good and expedient customer adoption, i.e. when transaction volumes and reach make for a viable proposition. A short time-to-market is vital, and banks need a suitable platform in order to achieve it. Whereas ambitious FinTech companies generally believe that time-to-market is more critical than launching a 100% tried and tested product, this goes against the grain of traditional banks, which are encumbered with the legacy of inflexible and outdated payment infrastructures.

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MILLENNIALS: THE PAYMENTS PEOPLE The world is in the midst of a payments revolution. How are people in the prime of their lives reacting?

Millennials Are Everywhere

40% of global adult population is under 35 Source: Deloitte

First Things First

Always Mobile

86% have a smartphone, compared to 76% of the adult population Source: Pew, Deloitte

90% check their mobile phones within 15 minutes of waking

Three Quarters

Source: Deloitte

Source: YouGov

Online, All the Time

Finance Savvy

90% have made an online purchase Source: Statista

Want More

57% would swap their existing bank for a more tech-savvy player Source: Deloitte

On the Cards

80% plan to use cards as their main payment method in 10 years

75% use mobile to make purchases

Four in 10 want to save money, while 84% seek financial advice Source: Nielsen, Deloitte

More Than Half

52% would like to manage their finances on wearable technology Source: Intelligent Environments

Cashing Out

Just 11% plan to use primarily cash Source: Compass Plus

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LONDON CALLING: WHY FINTECH LOVES THE BIG SMOKE

Here Leonie Mercedes takes a look at what makes London one of the worldâ&#x20AC;&#x2122;s highest profile FinTech hotspots.

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Last September, UK Trade and Investment brought 10 Australian FinTech companies to the capital in time for London Fintech Week, to mingle at the UK capital’s accelerators, meet the mentors and trade information with industry experts. One of those 10 was Lend2Fund, a Sydney-based peer-to-peer lending platform connecting borrowers to lenders in commercial real estate. By October the startup had announced it was moving its headquarters from Sydney to London. Sydney is one of the world’s thriving FinTech hubs, so what was it about the Big Smoke that made Lend2Fund decide to up sticks?

Centre of the world

Fintech has some strong roots in London, particularly on the finance side. After the “Big Bang” of 1986, when the government deregulated the financial markets, hundreds of large banks, both domestic and from overseas, sprung up all over the City of London. Those banks set up in a longestablished trading centre that goes

back centuries: for hundreds of years Britain traded extensively inside its vast empire, of which London was the capital. The ‘tech’ in FinTech got a boost in 2010, when the government, noticing the cluster of innovative technology companies flourishing around the Old Street roundabout in east London, established Tech City, an initiative to nurture startups in the area. In 2015, Tech City received £2.2m funding from the UK Department of Business and Skills to continue its efforts. Separated by a mere tube stop, the inevitable occurred: the East End’s innovative tech minds met the financial stronghold of the City and a world-class FinTech centre was born. Elizabeth Lumley, MD of London FinTech at accelerator Startupbootcamp, calls London the FinTech capital of the world: “No other city has every sector in financial services – investment banking, retail banking, corporate banking, asset management, insurance and non-bank entrants — all in one city, in addition to the tech talent.” London’s geography on a global

scale doesn’t hurt, either – with the US to the West and Europe and Asia to East, the Big Smoke’s uniquely central position allows it to speak easily to major overseas markets at almost any point in its working day. The city not only has homegrown tech and finance talent, but attracts the talent from around the world, adds Lumley. Talent such as Lend2Fund. This could be down to the country’s “soft power” – the ability to coax and persuade. Last year the UK topped an index of 30 countries ranked by their soft power, scoring particularly well on culture, digital and global engagement – it’s the second most popular destination for international students after the US.

Goodbye Silicon Valley

In 2010, former stockbroker Nick Hungerford had an idea. He envisioned an online platform where users could pay to have their money invested in transparent, riskadjusted portfolios. He set up series of meetings with investors in Silicon Valley to get funding for the project, though no one was willing to invest. So he pitched it again. And again. After 45 investors had turned him down, he finally secured financing and Nutmeg was born in 2011. But Hungerford chose to launch his venture in London, despite landing that first investment in the US. “We’re better connected here than we would be in Silicon Valley,” Hungerford told PaymentEye, adding that the Nutmeg team had found regulatory regime in the UK to be “very supportive and flexible”. He continues: “The Financial Conduct Authority (FCA) was in the process of conducting a regulatory review of the investment industry — the Retail Distribution Review— which was designed to flush out the hidden fees and opacity that are rife within investment firms. “The spur from a regulator who is committed to putting customer interests first was important. The backdrop and market forces suited us perfectly.” What’s more, the UK is a great testing ground for new FinTech ideas. According to a government study, the UK has been an early adopter of many different business models in financial services, including financial aggregators (think CompareTheMarket.com), e-commerce (Asos) and peer-to-peer

INNOVATION

THE DATA

251 foreign banks and 588 financial services companies are based in London

£1.35bn raised by tech firms in the capital in 2014 Source: London and Partners

Source: UK Trade and Investment

39,614 tech businesses are based in London

36 business accelerators, and more than 70 co-working spaces in the capital

Source: Stirling Ackroyd

Source: TechCityUK.com

251,590 people working at digital companies in London

1.1 million people in the capital work in financial services

Source: TechCityUK.com

Source: UK Trade and Investment

44,000 people employed in FinTech sector - 1,000 more than in New York

£20bn estimated worth of the UK’s FinTech market Source: EY

Source: TechCityUK.com

lending (Funding Circle, amongst others). “The population here is probably the most advanced when it comes to financial services technology usage,” Hungerford continues. “For example, we have the second highest internet banking adoption rate.” Where Silicon Valley is big and well-established, London can be nimble and responsive. And FinTech companies with a good idea will have the government’s support. “The UK government is very proFinTech and has been working hard to promote this sector,” Lumley says. For example, the government offers generous tax breaks for UK residents backing seed or startup companies. “The UK’s regulators [the FCA and the Payment Systems Regulator] are also far more progressive than those in the EU and US,” Lumley adds, “especially when it comes to competition and new entrants.”

Accelerating innovation

Since the establishment of Tech City, accelerator spaces have been appearing up and down the Big Smoke. Accelerators help startups get a leg up by offering funding, mentoring and an inspiring workspace. They also foster collaboration by facilitating chance meetings across the field, so they’re far more than the sum of their parts. Lumley continues: “All of our startups benefit from our contacts and access in this space. Accelerators also help startups focus on their core business models. The main mission shouldn’t just be funding – it should be around building and shaping a sustainable business.” Jean-Stephane Gourevitch, a mentor at Startupbootcamp FinTech, adds: “Startups, even if very disruptive, can much more easily find the combination of funding, scale, support and encouragement

that is lacking in many other cities. There is also a tight cooperation between public authorities, private market players and academia. “It is this ecosystem and the convergence of these different elements that are making the FinTech revolution so powerful and successful in London.”

Where next?

Although London has enjoyed a rapid rise as a FinTech centre, its high rents and travel costs might spell its eventual undoing. Toward the end of last year, accountancy firm UHY Hacker Young found that the number of new startups setting up at Silicon Roundabout had fallen by a third in a year. It blamed the decline on rising rents in the area – a classic case of being a victim of your own success. Should the trend continue, we may well see

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INNOVATION

FinTech startups migrating to other areas of the UK, such as Edinburgh, Manchester and Birmingham, each of which boast strong finance centres of their own. As new companies disperse throughout the country and UK’sFinTech scene becomes less centralised, London’s power may start to fade. So where is London’s closest rival when it comes to FinTech? What global city might take its crown? Despite concerns around the high cost of living, Hungerford believes London remains a FinTech powerhouse. “San Francisco and New York aside, London doesn’t have any serious rivals,” he says. “Berlin is aspiring to be a competitor, and we’re excited about plans to increase the strength of UK FinTech in the north of England. But, right now? London is far ahead, and is very well

placed to extend its lead.” Lumley says that Singapore has an ecosystem with the potential to nurture a FinTech centre to rival London. Meanwhile, emerging markets are proving some of the most innovative when it comes to FinTech. Where London’s strongest capabilities lie in software, data analytics and platforms — for functions including peer-to-peer lending and personal wealth management — innovations from emerging markets, which encompass mobile payments, money transfers and microfinance, have the potential to touch millions in meaningful ways. Ismail Ahmed, founder of mobile money company WorldRemit, has observed that some of the most innovative financial technologies are emerging in countries including Zimbabwe, Uganda and Bangladesh.

The FinTech innovations coming out of Nairobi are becoming more widely recognised. Last July Hong Kong venture capital firm Nest opened an office in the Kenyan capital with a view to scale businesses across the continent, and in May two Nairobi-based FinTech startups, Umati Capital and Kybatu, bagged two of the four $25,000 prizes available in Citi Mobile Challenge EMEA, an initiative to find and showcase new financial innovations. Gourevitch also has his eyes set on the Kenyan capital. He says: “With some support, a number of African capitals like Nairobi, where so many exciting developments have been taking place — in payments, for instance — could become successful hotspots.”

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EURO VISION: EUROPE’S MOST EXCITING INITIATIVES The FinTech market is dominated by several key players, but many exciting companies and products are flying under the radar. Here are the best and brightest initiatives coming out of Europe today.

The UK

Kerv The contactless payment ring Kerv made an instant impact on the burgeoning wearables market. The contactless ring captured the imagination of the media and investors alike, raising £110,182 (143%) of its £77,000 target on Kickstarter. It’s not hard to see why: the ring doesn’t need to be charged or paired with a phone to work. In addition it’s scratch and waterproof, light and works at 38mn locations around the world.

Scandinavia

Safello (Sweden) Safello is a Swedish bitcoin retailer working to make the cryptocurrency more popular by increasing the ease and safety with which it can be used. The company processes bitcoin transactions and allows users to buy and sell the currency, and last summer worked with Barclays on ‘proof of concepts’ to see how large financial institutions could incorporate blockchain technology.

Eastern Europe

Yandex.Money (Russia) This mobile payment app, from the largest search engine in Russia, allows its users to pay for phone topup, internet, utility bills, taxes and

fines without signing up. With roughly 22 million user accounts and about 12,000 new accounts opened daily, it is the largest electronic payment service in Russia.

Western Europe

Rocket Internet (Germany) Rocket, one of the world’s largest e-commerce focused venture capital firms, identifies and builds startups before transferring them to new, under-served or untapped markets. It focuses on three sectors: e-commerce, marketplaces and financial technology. Rocket’s companies include popular food delivery service Foodpanda, Paymill — which allows card payments to be accepted on any website — and Lazada, an online retailer and marketplace.

Southern Europe

SetPay (Spain) SetPay is a mobile payment solution company aimed at SMEs and freelancers, enabling them to accept card payments anywhere. Last summer, the company started working with mPOS developer payworks to release its new debit and credit card device which allows merchants and SME owners to accept EMV payments instantly.

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WHAT ARE VCS LOOKING FOR IN FINTECH STARTUPS?

The FinTech space is fiercely competitive, particularly in London, which employs more than 40,000 people in the sector. If you’re lucky enough to secure an appointment with a VC, how can make enough of an impact to get an investment? Leonie Mercedes asked three top FinTech investors to share their secrets, tips and bugbears, and found out where they’ll be investing next.

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Dan Cobley

Matteo Rizzi

What are the first things you want to know about a start-up before you decide to invest? First, are they in a space we want to be in? And for us that means can we materially add value, beyond money, to their chances of success. Second, what has motivated the founding of the business? We are much more attracted to a company that is trying to solve a customer pain or address an injustice than one that just sees an opportunity to make money. Third, who are the team? Are they people we want to work with, who are smart enough to set a clear agenda and humble enough to take advice? Fourth, are they at the right stage? As venture builders, we come in at the beginning where we can add the most value.

What are the first things you want to know about a start-up before you decide to invest? The way start-ups introduce themselves is pretty standard. We need to know what problem they’re trying to solve, what the solution is, the market size, route to market, their strategy, who’s in the team and whether the idea has traction.

CEO and Co-Founder of Brightbridge Ventures (London)

What kind of experience are you looking for in an executive team? Experience is less important than skills, attitude and ideas. I’m looking for a great business brain with a clear vision to solve a problem, and a technical genius who knows how to build the technology to support doing it. They don’t need decades of experience, but they do need to demonstrate that they really understand the problem space they plan to address. What is more important to you – the start-up’s product or the team? The team is most important. A good team will morph its product based on new learnings - usually many times between idea and launch. It’s harder to morph the team. Is there anything that would put you off in a pitch? Waffle. Bullshit. Complacency. What areas are you interested in investing in at the moment? Fintech ideas that will solve major consumer and SME pain points in new and novel ways, especially in the credit and lending areas. What tips do you have for start-ups looking to get funded? Research the VC you are approaching and make sure what you have meets what they want. Most will say a lot on their website, in interviews and in public presentations about what they are looking for. Show that you have done your research and that your sector, space, size, maturity and the like meet what they like. If you do not tick all their boxes, then explain why that’s not a problem. If the VC thinks you have been lazy in your approach, or worse still, you are doing a blanket mail merge, they will reject you cold.

General Partner at SBT Venture Capital (Brussels)

What is more important to you – the start-up’s product or the team? While I’m not saying that team is more important than the product, it’s true that if the team is good, they’ll be able to adapt the product to the market. There are many cases where the product that you invested in is not the product that leads the start-up to grow. So you need a very reactive, knowledgeable, held together type of team. What kind of experience are you looking for in an executive team? It depends on what start-up we’re talking about. Start-ups who are working with financial institutions need to know how a bank works. Having a network – the ability to link yourself with the market – is also important. Start-ups who link themselves to the market find it easier to get a mentors, which means they’ll sell their product better, and are more likely to be called on to speak at conferences, which is free marketing. Founders who have experience in a start-up is something we value a lot. Being multi-skilled is also important. One of the main reasons start-ups fail is because they can’t manage their money. It’s important for a startup’s group of founders to have skills across the disciplines, including management, creativity and finance. Is there anything that would put you off in a pitch? The lack of personality and clarity in a pitch turns me off immediately – I like to understand what the start-up does within five to 10 seconds. Single founders put me off because they’re not as resilient. Finally, start-ups that are a solution looking for a problem put me off: if you’re a solution looking for a problem, you’re probably still waiting for the first customer to come. What areas are you interested in investing in at the moment? I think the time has come to start investing in alternative banking models. At the moment, the UK is the flagship of this new idea, but we are looking at them closer. What tips do you have for start-ups looking to get funded? Try to be original. If you don’t know the investors you’re pitching to, try to be original in the way you approach them. If you start from scratch, the best way to get your start-up visible is to set up in an incubator or co-working space. It’s not worth taking an office or building a start-up in the garage anymore.

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Jeppe Zink General Partner at Northzone (London)

What are the first things you want to know about a FinTech start-up to help you decide whether to invest? There are three key areas we look at. Firstly, is the market valuable, demand clear, present and scalable with strong unit economics? Secondly, does the company have strong momentum? Lastly, but by no means the least important: is the team kickass? What kind of experience are you looking for in an executive team? We look for hungry, mission-driven people who have strong affinity with the market they are targeting. That doesn’t necessarily mean they come from that particular industry, but they have to have a passion for it. What is more important to you – the start-up’s product or the team? Strong teams will always a find a way to the right product. Is there anything that would put you off in a pitch? There are many things that would put me off. Poor quality is usually a symptom of something else, but a shiny pitch is not necessarily a good one. The content is what matters. What areas are you interested in investing in at the moment? I am particularly interested in mobile-first user experiences; where such an approach suits the service, we normally see high engagement. SME-targeted services are also attractive, as they address a large segment of the market. I am also currently looking at models around valuable assets such as property and cars. What tips do you have for start-ups looking to get funded? Do your research on the VCs and only approach those where there is an obvious strong fit with the style, competence and investment strategy.