FTA Congress 29 October 2015 Stream 3 Disruptive Technologies State of Play: Payments Innovation, Disruption or.. Tim Hart tim.hart@infactconsulting.com 30 October 2015
Agenda • High Level View of Payments • Quick presentation and commentary on Low Value Payments (LVP) • More detail and commentary on High Value Payments (HVP) • Conclusions
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FinTech • FinTech has become a ubiquitous term for any technology applied to financial services, typically where a technology is sold into the financial services sector working for the back office functions of these customers. But recently the term has started to be used for broader applications of technology in the space – to front end consumer products, to new entrants competing with existing players, and even to new paradigms such as Blockchain. • OtherTech: Note underlying many recent apps e.g. Airbnb and Uber, to name just two, are payment systems.
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Types - Payments • High Value Payments (HVP): High value payments are generally made between financial institutions either for themselves or for corporate customers. As indicated by "high value", these types of payments are typically for large amounts and are time critical. The average high value payment, in Australia, is close to $5 million, but smaller-medium sized payments are also processed through the high value system such as property conveyancing. Around $100 billion or 70% by value of the total non-cash payments made in Australia each day are high value payments (source: APCA). Clearing systems such as Austraclear also use RTGS (RBA RITS).
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Types - Payments • Low Value Payments (LVP): Low value payment systems, having evolved from a single country perspective to serve a domestic customer base, are very diverse from country to country. This diversity is apparent across all dimensions, including standards, clearing and settlement arrangements, mix of payment products, service levels, technology and extent of direct participation.
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LVP - Established Payment Platforms
RBA LVSS DIRECT ENTRY (DE) FTA Congress 2015
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Functionality and advances in technology • These are primarily networks e.g. Visanet, MasterCard Network etc. that facilitate authorisations, security and payment data transmission. • Merchant->Acquirer->Network->Issuer->Cardholder. • Issuers, debit and credit cards, are primarily banks other than for example AMEX that is both a network and an issuer. • Merchant “terminals” are provided by banks, third parties. PayPal has one in the U.SA. Start ups like Square are competing in this space. • There has been continuous improvement in the technology in line with developments in infrastructure, encryption and security technology. • Issuers have embraced technologies included the chip card, NFC and Contactless (Paypass) again as a process of continuous improvement. • Paypal however could be termed the first of the newer generation of dis-intermediated payment approaches and given size and scale is now well established globally. FTA Congress 2015
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LVP – Newer Payment Platforms
NPP Chase QuickPaySM
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Observations • Essentially the non-bank apps (Apple Pay etc.) operate as another layer over the credit card or bank account providing another layer of disintermediation. How do they work: • http://arstechnica.com/gadgets/2014/10/how-mobile-payments-really-work/ • Interestingly: Of 4000 smartphone users in the US and Canada quizzed by Accenture, 52% are aware that they can use their handsets to make payments, up 10 percentage points on the previous year. Yet, despite the high-profile arrival of Apple Pay and Android Pay, only 18% use their phones to make at least one payment a week, a rise of only one per cent on 2014. • Observation: it is a very crowded space? • In Australia the NPP will provide near real time payments with multiple methods of access with what effect on overall market. Also see: Euro Retail Payments Board for overseas example: • http://www.ecb.europa.eu/paym/retpaym/governance/eu/html/index.en.ht ml FTA Congress 2015
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Apple Pay and Alipay • Apple Pay has received most publicity – what are their plans: • • • • • • •
Mobile payments. Merchant apps. Global footprint. Network – why bother, better to buy one. Having the data. HVP – unlikely. Bank – possibly but regulation challenges.
• Note however that Alipay has over 800m accounts. Alibaba is also backing a digital bank Mybank aimed primarily at SMEs.
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Bitcoin • Bitcoin observations : • Issues with fraud, accusations of money laundering, Bitcoin exchanges. • However these will subside as it gets regulated and matures. • Regulation so far has varied in different jurisdictions e.g. defined as commodity elsewhere currency, tax, treatment banned etc. This will become an issue for global usage. • Growth in usage in countries with unstable currencies and Bitcoin volatility not an issue because near real time transaction. • Interest and evaluation by major banks but more interest in the Blockchain technology. • HVP – possibly.
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HVP - Established Payment Platforms
CIPS?
ASX Austraclear System
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Functionality and advances in technology • The implementation of RTGS systems by central banks throughout the world is driven by the goal to minimize risk in high-value electronic payment settlement systems. In an RTGS system, transactions are settled across accounts held at a central bank on a continuous gross basis. Settlement is immediate, final and irrevocable. Credit risks due to settlement lags are eliminated. The best RTGS national payment systems cover up to 95% of high-value transactions within the national monetary market. • RTGS (RBA RITS) is used also by clearing systems e.g. ASX Clear. • It is difficult to see challenges to RTGS at the core but more likely that technology such as Blockchain will be utilised in the overall end to end process.
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Functionality and advances in technology • CLS plays a fundamental role in the foreign exchange (FX) market – it operates the largest multicurrency cash settlement system to mitigate settlement risk for the FX transactions of its Members and their customers. Owned by the world's leading financial institutions, CLS settles payment instructions relating to underlying FX transactions in 17 major currencies and certain other transactions that result in one-way payments in a subset of those currencies. • CLS is working with LCH Clearnet, a global multi-asset clearing house, to develop a service to facilitate the settlement of cleared foreign exchange products. The new service is consistent with goals set out by the G20 to promote clearing of standardised derivatives. It will be open to all central counterparties (CCPs) and apply to a range of cleared FX products, including OTC and exchange-traded FX options, FX futures and cross-currency swaps. The service will provide a specialised payment-versus-payment (PvP) settlement in all CLS-eligible currencies and will operate separately from CLS's main PvP settlement service. CLS settles an average of USD5 trillion a day for the world’s largest financial institutions. The service will deliver a number of risk benefits to industry participants. In the event of a clearing member failure, payment netting will substantially reduce the size of the participating CCP’s potential liquidity shortfall, mitigating systemic liquidity disruption. The service is designed to work on an all-or-nothing settlement basis, which minimizes the risk arising from partial or incomplete settlement. CCPs using the • Again, there has been continuous improvement in the global HVP infrastructure through technology improvement, security and functional and asset class enhancement.
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Corporate FX Solutions Providers • Routinely offered by domestic e.g. NAB and international banks e.g. HSBC, JP Morgan and Citibank. • Variations in levels of functionality e.g. cash management. • Third party solutions (a few examples): •A
International Payments
e2FX
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Corporate FX Solutions – Vendor Systems • These are in the form of a portal. A configurable transaction entry and reporting app or web client is provided to the users. • The FX deal accesses a pricing engine that gains best price from a selection of banks and/or FX venues. • The result is passed to a (may have a book of these transactions) or ERP. • The TMS or ERP can make the actual payment.
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FinTech that will impact Corporate Payments • Predominately FinTech will enhance or modify the existing payments infrastructure. • National Payments Platform (NPP) and similar overseas. • Blockchain - What is a Blockchain? Essentially, just a record, or ledger, of digital events — one that’s “distributed,” or shared among many different parties. It can only be updated by consensus of a majority of the participants in the system and, once entered, information can never be erased. • Blockchain examples – Bitcoin, Ripple Labs, Bank Innovation Labs, B2B apps, Chess, Compliance, IBM Smart Contracts, MIT Enigma data encryption, Nasdaq…....
• However, there is also considerable ongoing development in automation including reconciliation of payables and receivables. FTA Congress 2015
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KPMG 50 Best Innovators Report • Interesting: • “KPMG are happy to present to you the inaugural ‘50 Best Fintech Innovators’ report. A collaborative effort between AWI, KPMG Australia and the Financial Services Council (FSC), the report provides deep analysis of the rapidly evolving Fintech industry worldwide and identifies the global ‘50 Best’ performers. • The ‘50 Best’ companies are those using technology to the best advantage and driving disruption within the financial services industry. These companies have a commitment to excellence and a superior customer experience and a demonstrated ability to do one thing in a market better than anyone else.” (Source: KPMG). • Majority of these are mobile or web, wealth management, peer to peer consumer lending and payments, crowd funding but not corporate.
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Conclusions • Underlying networks are in place – will improve resilience, security, bandwidth in line with advances in technology. • Providers of payment functionality unlikely to change fundamentally very quickly. With many new choices need care in picking winners. • However smarter technology will drive innovation in how these two aspects function and interact. • Main issues will remain around security, fraud, confidentiality and payment risks e.g. The rate of fraud on all Australian-issued payment cards rose from 43.6 cents to 48.7 cents in every $1,000 transacted in 2014 . The overall amount of fraud on payment cards increased by 16% to $304 million. This is against an increase of 4% to $624 billion on the total amount spent by Australians on their cards. (Source: APCA) FTA Congress 2015
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