Post image for Biometrics, Big Data, and Tossing the Password

Digital identity is the black hole of the internet. Our online lives simply aren’t protected by a system without strong authentication. Killing the password is Mission One for security professionals because they’re so readily stolen through phishing attacks and malware. Users, warned to make passwords complex and unique, have no hope of remembering them. And a password is simply one factor of secure authentication. Biometrics and data, when used in combination, can relieve password fatigue and, for the relying party, increase security substantially, bringing some light to that dark place on the internet.

We talk with MasterCard’s biometrics and authentication leader, Bob Reany, about where biometrics work and the intersection of device-based tools with what the cloud provides through Big Data, particularly device profiling and behavioral analytics. Your fingerprint’s not just for unlocking the phone anymore.

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Post image for The Merchant’s Challenge with Chargebacks

Chargebacks are one of the card system’s great consumer benefits. If fraud happens, the merchant doesn’t deliver on what was promised, or you’re charged six times for something you bought just once, the chargeback mechanism returns your money or restores your credit. What’s not to like? Well, if you’re a merchant, a lot. While there are plenty of legitimate chargebacks, there are also consumers who take advantage of the system through “friendly fraud,” the “I didn’t do it” chargeback category abused by all too many.

Chargebacks are expensive for merchants. There’s a chargeback handling fee from the acquirer. There’s the cost of disputing the chargeback. There’s the cost if, at the network’s discretion, the merchant loses the chargeback. And then there’s the small matter of the cost of the goods or services. Take a listen to this audio primer on chargebacks with Glenbrook’s George Peabody and Chargeback.com’s CEO Dave Wilkes. Hear how they work, what the trends are, and how Chargeback.com assists merchants in the chargeback dispute process.

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MobileMoney

Over the past several years, my colleagues and I at Glenbrook have been working on a variety of projects focused on bringing low-cost financial services to the poor in developing countries. While there has been a lot written on how mobile or eMoney payments systems such as M-PESA in Kenya have grown in many developing countries—and how they have brought much-needed electronic payments to the poor and underserved—there’s a critical missing piece that demands attention.

Specifically, few are talking about the criticality of merchant acceptance of eMoney payments.  At Glenbrook, we believe this is a problem, that the lack of widespread acceptance has both inhibited growth in these systems and remains a roadblock to “digital liquidity” in even the more successful of implementations.

Without exception in the developing world, the vast majority of transactions in mobile payment systems are person-to-person (P2P).  That’s fine since poor people, those at the bottom of the pyramid, derive meaningful benefits from the shift of cash to mobile transactions. Those benefits include reducing the theft risk of carrying cash—which can be very dangerous—and the efficiency of being able to send money to someone without losing half a day of work to travel across town. For someone able to afford it, the mobile eMoney service can also provide a safe place to store value but few poor people have the luxury of idle balances in their mobile money accounts.

However, since most merchants don’t accept eMoney as payment, their customers must “cash out” their mobile monies in order to spend, a relatively expensive conversion.  Those cash-out costs work against the goal of providing low-cost payment services to the poor.

We are fortunate to be part of an ongoing working group on digital financial services at the ITU, the United Nations agency for information and communication technologies[1].  One of our working group’s findings is that “digital liquidity” and the associated network effect are critical to the overall goals and growth of any electronic payment system. Keeping electronic money “in the system” creates transaction volume and velocity that keeps costs low, true not just within the processing system itself but also when calculating the “all in” costs of cash-out conversions. In short, digital liquidity reduces the expense of cash-out services.

A shift to fully electronic commerce to achieve those savings won’t be easy. Based on our experience in these developing economies, and affirmed by numerous studies, we have concluded that there just isn’t a silver bullet or a “waive the magic wand” solution to eMoney merchant acceptance.

In developed markets, merchants are happy to “pay to be paid” for a variety of reasons. While each merchant has its priorities—and many complain about the cost of accepting electronic transactions—merchants also realize that electronic payment acceptance produces incremental sales. And that they risk losing sales if they don’t. Incremental sales are driven by the expanded purchasing power made available by credit-based products and services, sales that would not have been made had customer spending been limited to the cash in their pockets. Other merchants understand they could lose sales to competitors if they don’t accept the customer’s preferred payment method (think rewards cards).  And of course, merchants selling to online buyers rely almost entirely on electronic payments.

To merchants in the developing world these benefits aren’t compelling, neither for small sellers (who may be poor themselves) or larger ones, for a range of reasons:

  • Their consumers are largely unbanked and don’t have access to credit products
  • Cash is the traditional payment method. Everyone is used to it. Cash is “good enough”
  • There aren’t enough merchants accepting eMoney to warrant concern of lost sales to competitors who do accept it
  • eMoney transactions are often viewed as costly to accept
  • Merchants usually incur costs of cashing out themselves since there isn’t a robust B2B ecosystem in place, i.e., for supplier payments. The alternative costs of transferring funds from mobile operators’ eMoney systems to a traditional bank account—if the option is even available—are high
  • Remote commerce, our online or mobile commerce model, doesn’t exist or isn’t on anyone’s radar screens
  • It costs a lot of money to develop a merchant ecosystem with uncertain economics
  • Merchants may be concerned that revenues would now be visible to tax authorities
  • Many merchants would have to buy equipment dedicated to eMoney acceptance, such as a dedicated phone for the store or at each checkout till

It’s a tough problem, so where do we go from here?  Is there hope?

I believe that it’s critical that eMoney systems develop a robust merchant business. I also believe it’s achievable if done right. But it’s important to understand that, while merchants will pay to garner new customers or generate more visits and revenue from existing customers, there isn’t a single factor that in itself will be sufficiently compelling to drive merchant adoption.  In my opinion, success will be driven by a combination of factors:

  • Credit History Development. By accepting eMoney payments, merchants can create a “digital history” that enable prospective lenders to extend all-important working capital and other forms of credit to merchants. Recognizing that traditional credit bureaus simply don’t exist in most of the developing world, coupled with the fact that many small merchants don’t have access to credit, we are starting to see an explosion in alternative credit decisioning, of which eMoney transaction history is an important factor. In addition, some lenders could be more likely to extend credit given access to an electronic settlement stream they could tap into for regular or ad hoc loan repayments
  • Contextual Ecommerce. The notion of remote payments is hitting more and more radar screens and it doesn’t need to look like traditional developed-world web and app-based ecommerce. Remote transactions for bottom of the pyramid customers could be a merchant taking payment for goods now that will be picked up or delivered later
  • Merchant-provided Credit. Merchants could increase sales by extending small amounts of credit to their own customers, knowing that repayment isn’t necessarily tied to when the customer happens to next visit the store
  • Embedded Payments. As in the developed world, payments will eventually become an embedded part of commercial or community relationships, providing benefits to payment acceptors
  • Cash Reduction. Reduction of cash on hand to reduce theft and loss risk
  • Light Regulation. Government entities are viewing a robust eMoney systems as a priority, often under the financial inclusion umbrella. Relaxed or grandfathered tax policies could go a long way in the critical, early years of building a robust merchant ecosystem
  • Social Messaging and Payments. Social networks with commerce-enabling capabilities using eMoney are turning toward the developing world and could quite conceivably enable merchants of all sizes
  • Broad Payment Method Acceptance. There is increasing focus on the notion of interoperability at the payment acceptor level, the ability to accept multiple forms of electronic payment. Open payment platforms based on standards, APIs, etc. are key components to not only help achieve digital liquidity, but also to help ensure payments providers compete on both price and innovation
  • System Interoperability. Some eMoney players are increasingly open to cooperating – pursuing the notion of working together to bring up a merchant business by sharing the cost of some non-strategic functions, creating merchant joint ventures, etc. The network effect could build ubiquity, benefiting all participants in the ecosystem

My colleagues at Glenbrook and I will continue to participate in many developing world projects, helping to bring affordable financial services to bottom of the pyramid people and businesses. We do this with incredible optimism and enthusiasm. It doesn’t get much better than this for “payments geeks” like us!

[1] See http://www.itu.int/en/ITU-T/focusgroups/dfs/Pages/default.aspx

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Post image for Shoptalk Conference 2016

This episode of Glenbrook’s Payments on Fire podcast comes from the Shoptalk conference, mid-May 2016. Focused on the entire customer engagement cycle, the attendees are all about influencing consumer behavior, the processes of moving customers through that cycle, about making some portion of enterprise IT work more smoothly, or, yes, even about payments.

Take a listen to my conversations with start-ups Tuku (in-store digital content delivery), Belly (in-store loyalty), Bold Financial Technologies (payout management for Treasury) and established fintech provider ACI Worldwide.

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Post image for A Large Merchant Focuses on its Payments Strategy

Payments industry professionals naturally have a hard focus on the industry’™s own dynamics. So, it’s not uncommon to lose sight of who the customer is and who pays the freight. In retailing, yes, the consumer pays, but payments is a direct cost to the merchant. With all of the changes underway in the U.S. payments landscape, merchants now address payments as a complex, strategic element of their business, both as a way to drive new sales as well as a cost component to be tightly managed.

To learn what’s top of mind for a large scale retailer, take a listen to Dean Sheaffer, SVP of Financial Services at Boscov’€™s Inc., the U.S.’s largest family-owned department store. In this Payments on Fire podcast, Dean addresses payments as a sales tool (Dean and his team have upped usage of the Boscov private label card to 40% of tender!), payments and data security, and the potential of Faster Money.

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Post image for Five Answers – Sort of – to the Big Questions on Blockchain and Bitcoin

I’m back from two days at Consensus 2016 in NYC, and reporting as promised into my investigation of the Five Big Questions.

1. Bitcoin technology: will the problems (versions, processing time, scalability) be  resolved?

Yes. My belief that we are all writing this off too soon in favor of “all things blockchain” was reinforced. Glenn Hutchins of Silver Lake Partners drew a parallel between private blockchains and intranets in the early internet days: important for enterprises but not radical or transformative in and of itself. He headlined his talk “Blockchain good, Bitcoin better”. Balaji Srinivasan of 21 spoke persuasively about how Bitcoin is the mechanism which will “free API’s to be API’s” and interact with other machines (my paraphrasing…)

2. Big banks: will they join hands in a single (or several) new blockchain-based networks? Will there be a new SWIFT? Will it be SWIFT? One of the currently formed consortia? Someone new?

Hard to tell. David Rutter of R3 bragged about 46 large financial institutions, and Chris Larsen of Ripple talked about the opportunity, but I didn’t hear from SWIFT, and there are other players out there…

3. Central banks: will they issue digital versions of fiat? Other digital currency? Support Bitcoin?

Yes. Fabulous panel with David Andolfatto of the St. Louis Fed (I’ve been reading his blogs on “Fedcoin”, MIT Media Lab, others – the energy on the topic is strong and clearly central banks of all kinds and stripes are thinking about it… but perhaps the most fascinating thought is that we could go back 100 years to a pre-central bank world, with central banks, commercial banks and other players issuing their own currencies…

4. Private blockchains: how many are there going to be? Thousands? Millions? Just how different is a private blockchain from a plain old secure database?

Millions. See above re: intranet. Not that different…

5. Interledger – incredibly cool, but how will it play out?

Not clear at all, but multiple private blockchains (or non blockchain ledgers) may need to interconnect. Interledger was referred to but not in detail; other options (Chain, Hyperledger) were more visible but we’re still in theory-land here. I wish there had been more on this.

 

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Post image for Data Analytics, Lending, and the Next 100 Million Borrowers

Extension of credit to people in developing markets has been a long time challenge. Banks, of course, look to repayment history to make such determinations but in much of the world, banking relationships and repayment track records are few. But history has demonstrated that extension of credit in developing markets can be effective and profitable. Just look at the Grameen Bank’€™s high micro-loan repayment rates.

To address this repayment data dearth, Lenddo.com built a lending data set in multiple developing countries, having gone into the lending business just to generate the data it needed to tune its machine learning capability. Lenddo then built its algorithms
that examine some 1,000 characteristics in the data drawn from social, mobile, and other sources. This Payments on Fire podcast with Lenddo.com’€™s founder Jeff Stewart takes a look at lending in developing countries, social and mobile data sources, and examines the algorithmic “black box” that is at the heart of the company’€™s approach to making credit decisions in “thin file” markets.

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Post image for Five Big Questions on Bitcoin and Blockchain

I’m headed to New York next week for the CoinDesk Consensus conference…”Making Blockchain Real”. I’m going because I’m trying to get my head around some big questions. I normally have a sense, even with new things, of the path forward. Not in this case!

Here are the questions I’m thinking about:

  1. Bitcoin technology: will the problems (versions, processing time, scalability) be resolved?
  2. Big banks: will they join hands in a single (or several) new blockchain-based networks? Will there be a new SWIFT? Will it be SWIFT? One of the currently formed consortia? Someone new?
  3. Central banks: will they issue digital versions of fiat? Other digital currency? Support Bitcoin? Support big bank blockchain networks? Is what is happening going to fundamentally change the role of central banks in the economy? Do we go back to pre-central bank economies?
  4. Private blockchains: how many are there going to be? Thousands? Millions? Just how different is a private blockchain from a plain old secure database?
  5. Interledger – incredibly cool, but how will it play out? Is this just a small (albeit important) bit of infrastructure, or does it fundamentally change the way payments systems work? The whole Bitcoin/blockchain conversation over the past few years has made everyone think about what money is – and realize that often (not always!) it is a ledger balance representing a claim on someone (bank, carrier, store…). An electronic transfer is simply an instruction that tells one ledger to go up, and the other down, in a way agreed upon by the ledger owners (and their accountants!) A settlement transaction is another version of the same thing. Can this all be restructured? What about the business rules? Do they need to migrate from their three ring binders into the transfer message itself?

I promise I’ll report back if I discover the answers to any of these questions….

 

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Post image for Coachella Takes Payment Cards – Mostly

I spent the weekend in Indio, California at the Coachella Music and Arts Festival (often referred to as the “Modern Day Woodstock” for you Boomers). Over the few weeks leading up to the event, Square and Apple advertised quite a bit about how every single vendor on the festival grounds would have a new contactless Square reader to accept Apple Pay and payment cards.

In the past at Coachella, paying for a bottle of water or a slice of pizza could only be done with cash. The ATMs at the festival grounds were hard to find, charged high fees, and often broke down. A news release from Square a couple of weeks ago explained that there was going to be no reason to bring any cash to the festival or even a wallet. Hearing such news is a dream come true for festival goers who want to keep track of as few personal belongings as possible.

For the first half of Friday, I was able to easily buy anything I wanted using my chip-enabled credit card and it was a painless process. I simply asked for a bottle of water and the seller took my card and proceeded to insert it into the EMV slot. I chose to abstain from using Apple Pay because smartphone battery life is an extremely precious commodity at the festival—which makes me wonder how those relying on the NFC“Pays”alone got along.

The vendors had their staff swipe or insert the cards, rather than having us do it ourselves, because many people still get confused over when to swipe or dip. With over one hundred thousand people attending this festival, even the smallest hold-up can cost a lot in time and money. Beyond that bottle of water, I also purchased chicken strips and a beer with ease that afternoon.

By early evening on Friday, however, some vendors began stating that the “system was down” and they could no longer accept cards – only cash. I asked a few more of those nearby vendors throughout the day and was met with the same issue. By Saturday and Sunday, I had given up asking altogether and simply came with cash on hand.

Driving home with friends on Monday morning, I asked how they paid for food and beverages throughout the weekend. They all responded that they used their cards whenever they could, but were met with some resistance by certain vendors here and there.

Now, none of my friends are nearly as fascinated by the payments industry as I am, so they were not paying (no pun intended) very close attention. But after digging a little deeper, we realized that we heard “the Square system was down” excuse at only the small tents that exclusively sold bottled water. Those tents get a tremendous amount of traffic, with people of all ages pushing and shoving to get to the front (it is very hot out there!)  I imagine those vendors all agreed to abandon the Square readers in order to boost throughput. I highly doubt that there were actual technical difficulties at just those tents while all the others selling food, beer or merchandise were unaffected. Since these tents sold only one product at one price, it is much faster to collect cash $2 at a time because, let’s be honest, dipping an EMV card can be a tad slow.

All in all, Coachella and Square teamed up to offer a much easier payment experience than in the past. Although I ended up using cash the rest of the weekend at all vendors – water or not – many people throughout the festival grounds were able to buy their meals, merchandise or beer with their cards.

And despite having to carry cash in my pockets, I was still able to enjoy some of the best acts of the weekend—from hard-hitting rapper Ice Cube to soft-spoken singer BORNS to DJ duo Disclosure. Who knows what incredible new artists and different forms of payment acceptance will be there next year!

 

 

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Post image for On Internet Money – Talking Circle.com with Jeremy Allaire

The world of moving money is changing. And faster is the theme. Domestic real time payment systems are showing up across the planet. Today’s discussion is full of bitcoin, open and permissioned blockchain approaches to speed asset exchange. But the competitive balance between proprietary and open systems is in flux.

The view that moving money is or should be an internet-wide capability is a guiding principle for Jeremy Allaire, founder and CEO of Circle. Take a listen to Jeremy on how Circle is connecting US dollars to British pound sterling, his plans for the euro, and how multiple technologies – blockchain and machine learning among them – enable money movement for Circle’s customers.

Read the transcript below.

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Post image for Faster Payments Survey – Your Immediate Reply Requested

It’s been just over two years since we first reached out and asked for your views on the question of faster payments. There have been a number of interesting developments in that period – the launch of FAST in Singapore, the announcement of the New Payments Platform in Australia, development of an instant payment scheme in Europe, a new platform in Kenya as well as multiple initiatives in the United States, among others.

We also have several different adjectives in use to describe how payments should be:  faster, real time, immediate, and instant. By any name, decreasing the end-to-end time to execute a funds transfer has become a top discussion in the industry.

We invite you to take the survey and add your voice to the evolving industry discussion. At Glenbrook, we are keenly following the issue and will host our second Insight Workshop on Faster Payments on May 12. We’ll breakdown the key concepts and look at case studies of how the concepts are being implemented around the world. And we’ll also share our views on how faster payments fits in other industry dynamics underway. The workshop will also be the first opportunity to discuss these survey results in depth.

Click here to take the survey now. Many thanks!

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Post image for What Blocks the Blockchain

Given the high rate of press releases and articles on fintech applications of blockchain technology – and the growing number of financial institutions expressing interest in its potential – I’ve been considering this high signal to noise ratio. A few thoughts:

Hype cycle inflection point

We are, hopefully, cresting the top of the blockchain hype cycle. In recent months, a number of bitcoin technology efforts shifted their focus from bitcoin to blockchain technology as the step most likely to gain positive attention, the theory being that blockchain beauty shines brighter when extracted from bitcoin’s murk. So, in 2016, both hype and serious discussion of blockchain technology are plentiful. Sometimes this serious exploration flirts with flights of fancy.

Welcome to the pilot stage

Almost all of the blockchain initiatives today, especially those looking to automate back office functions, are pilot programs—some just requirements documents, others are early iterations of software running across a handful of devices. This is exactly what we should be doing—but remember how far away from production this stage can be.

Blockchain built for Bitcoin

Glenbrook partner and my colleague Russ Jones said to me “the best blockchain use case I’ve seen so far is bitcoin itself.” Bingo. The blockchain data structure and the cryptography that secures it is optimized for the open, permissionless nature of the bitcoin protocol. I could make the argument that we’re only now seeing interesting bitcoin uses now that third parties are using it within their own operations to effect value transfers.

This is going to take a lot of work

Reading through these articles and press releases, a common theme of technical experimentation emerges. Blockchain experiments are underway, testing the performance and scalability of permissioned blockchains built for specific use cases. There are plenty of applications where bitcoin’s 10 minute transaction confirmation timing is too slow, never mind its current inability to scale up in transaction volume. (We’ve spoken with developers testing blockchain designs capable of processing transactions at Visa-like scale, beyond 20,000 transactions per second.)

That’s as it should be. Every new technology needs to be thoroughly vetted to determine its optimum employment.

But the harder work lies elsewhere, in the domains of governance, rules development, regulatory change, back office optimization, and standards development.

Governance and rules

In our blockchain workshop, we make the point that the bitcoin protocol is rules-based. Its rules are enforced in software rather than by a contract or rule book. New block creation intervals of 10 minutes and the 21M bitcoin maximum are examples of its rules, each choice made and defined by human beings. Subsequent rule changes impact not only the system’s functions but the philosophical and economic lives of those affected.

The current division within the bitcoin development community over expanding the size of each block, in order to accommodate today’s higher transaction rates, is an example of the challenges that governance and rule change represent. Bitcoin adherents have celebrated the protocol’s lack of a central authority as a signal characteristic and advantage. While that may be true at the level of each bitcoin transaction, the keepers of the code are a de facto central authority responsible for rules evolution. Their governance struggles could limit bitcoin’s future. The wide open, largely permissionless internet succeeded because of rules and standards that evolve to address changes in the environment. Bitcoin, or its successors, can be no different.

The same need for rules and clear governance holds true in the domain of permissioned blockchains, where a closed group of parties, such as a collection of financial institutions or asset traders, transact among themselves. While satisfying the needs of a limited set of participants may constrain rules scope and governance complexity, it would be foolish to underestimate the difficulty of getting even a small community to agreement. After all, most are composed of competitors looking for advantage over one another.

Regulation

We’ve all observed how local, state, and national regulations struggle to keep up with technology-driven change. Uber’s multi-jurisdiction confrontations is just one example. As blockchain applications and smart contracts spread into traditional custodian-based businesses such as bank trust departments, law firms, and insurance, expect similar push back from incumbent businesses and the regulators guiding them. Regulations that grow over decades like the U.S. Uniform Commercial Code don’t change overnight.

Back office applications

Many blockchain startups are looking to automate back office functions of enterprise scale business. Most know something about blockchain and very little about the back office functions they propose to support. Complex back office processes make the maths of blockchain protocols look straightforward. Blockchain proponents could well heed Abraham Maslow’s caution:“I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” In the back office, an entire tool chest in the hands of process craftspeople is what’s required.

Standards development

The internet succeeded because smart people came together to write standards for email, FTP, HTTP, DNS and the other tools that form its foundation. That foundation has enabled the innovation we enjoy today largely because it is not proprietary to an individual company or platform. The future foundation of bitcoin and/or its permissionless successors should be built along similar lines. The Linux Foundation’s Hyperledger project is an example.

Be critical

At its simplest, we can think of a blockchain as an unalterable ledger, a permanent database of transaction flows. Just remember, database technology is already highly evolved. While there are plenty of functions that could be served by a blockchain, record keeping functions for example, such uses have to be demonstrably better than current database tools to win.

So when you see the next flurry of blockchain stories, keep in mind that the technology of blockchains could be the least of the challenges.

Let me know your thoughts!

This post was written by Glenbrook’s George Peabody.

 

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Post image for Expanding the Smart Card’s Role

The Smart Card Alliance has been educating payments, government, and security professionals since 2008 on the fundamentals of smart card technology and how smart cards are put work across a range of use cases. In this Payments on Fire podcast, Randy Vanderhoof, Executive Director of the SCA and the EMV Migration Forum, talks about the organization’s training programs, their evolution and the establishment of the new National Center for Advanced Payments and Identity Security, an expansion supported by a grant from Heartland Payment Syhttps://www.heartlandpaymentsystems.com/stems.

Talking with Randy is always refreshing. He lays out the important elements of payment security and speaks directly about how they interrelate. Hardware-based security is always at the core of his mission but he’s well up on the expanded use of data and mobile devices in authentication and payments security.

 

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Post image for Scheming and Processing – Faster

Last week’s news that MasterCard was exploring an investment or outright acquisition of VocaLink really lit up the “News” channel on our Slack system at Glenbrook.

For those unfamiliar, VocaLink is a company currently owned by 17 large U.K. financial institutions, which operates the U.K.’s main ATM network (Link), its ACH-equivalent system (Bacs), and most interestingly, its Faster Payments system, an “immediate” payment service for account-to-account transfers. Of course, immediate payments are a very hot topic in global banking and VocaLink’s leadership in this area (U.K. Faster Payments has existed since 2008) is what has raised the company’s profile and captured the attention of the likes of MasterCard.

These kinds of immediate payment systems are making their way around the globe as developed market banking associations and central banks modernize their systems. VocaLink has already developed the FAST system in Singapore, and was recently hired by The Clearing House (TCH) in the U.S. to build its forthcoming offering. There is even growing discussion and effort around the idea of making these systems compatible across borders, with consensus on a credit push model with associated remittance information carried by the ISO 20022 data standard. At the same time, mobile money and other closed loop wallet programs in emerging markets are starting to create similar capabilities and interoperability. With this growing momentum, MasterCard’s interest in VocaLink is easy to understand.

One of the unknowns, at least in the U.S., is the economic arrangement that will accompany these new immediate payments (as my colleague, Carol Coye Benson, recently discussed). While we assume that participating financial institutions (FIs) will set the price of the new service to its own customers (likely as part of a checking account package of services), the internal network pricing is still to be worked out. How much will FIs be charged for their use of the service? What value limits, if any, will apply to these payments? Perhaps most important, will use of the service involve any mandatory fee payments between the banks involved? Card networks have a long required an interchange payment between the banks involved in a transaction, and recently the U.S. ACH announced that its new same-day payment service would include an interbank fee of 5.2 cents from the originating FI to the receiving one for each transaction.

These musings led us to review just who gets to make these kinds of decisions in payment systems. In our Payments Boot Camps, we use the following simple chart to explain the three critical functions in any payment system:

pretzel

 

The assignment of these functions can vary from one payment system to the next. Card-based payments are typically highly centralized, with a large entity like Visa, for example, simultaneously overseeing the rule making, processing and branding functions, with rule making obviously strongly influenced by law and regulation. Other systems allocate these roles to different entities. In the U.S. ACH system, for example:

  • Rule making is handled by NACHA, an organization consisting largely of the FI users of the ACH system
  • Processing is spread across two “operators” – the Federal Reserve and EPN, a unit of The Clearing House
  • Branding is not a major focus of the ACH system; those decisions are generally left to the participating FIs and other users of the system, who employ a variety of names for different ACH use cases such as “direct deposit”, “auto debit” and “e-check”.

In recent years, European regulators have sharpened this distinction, calling for a separation in each payment system of the Processor, the company mechanically operating the system infrastructure, from the Scheme, essentially the rule making body governing the system. The word “scheme” sounds nefarious to the American ear (as in Ponzi Scheme), but in this case it simply describes a specific payment system, particularly its commercial rules and pricing structures. In fact, one of the reasons that VocaLink may be for sale surrounds concerns by U.K. regulators that the company is not sufficiently separated in ownership from the schemes that it serves.

So, while VocaLink plays a critical role in the operation of the U.K. Faster Payments system, it does so as the processor for the system, which is managed by the U.K. Faster Payments scheme, a non-profit membership organization whose Board of Directors consists of representatives from most of the U.K.’s major FIs and a few independent directors. In effect, the Faster Payments Scheme has hired VocaLink to provide central infrastructure for the operation of its payment system.

So, how would all of this be affected if MasterCard, or another commercial entity, acquired VocaLink? The potential impact of immediate payments on card payments is already the subject of some debate, but it seems presumptuous, and probably simply wrong, to assume that a new owner of VocaLink (a Processor) would exert any special influence over the commercial attributes of the payment systems (Schemes) it supports.

The centralized and privatized governance model of the card networks seems unlikely to prevail in the immediate payments arena, even here in the U.S. As noted above, TCH has decided to create an immediate payments scheme — even as the Federal Reserve continues its process to define the requirements for immediate payments — and it has hired VocaLink to help build and operate its system on an outsourced basis. TCH is owned by a consortium of large banks that would be the largest users of the system; I believe TCH will want to retain the rule making responsibilities for their system.

In fact, the U.S. is headed for multiple immediate payment schemes as Early Warning Systems (another company owned by a group of large banks) recently acquired clearXchange, a bank-owned company that had built infrastructure designed mainly to support very low value immediate payments geared to the person-to-person use case. That system is expected to become operational later this year, with no apparent involvement by VocaLink, even though there is a substantial overlap of ownership between TCH and Early Warning.

So, while MasterCard (or another owner of VocaLink) would likely not be able to dictate the rules of a new immediate payments scheme, I still believe VocaLink represents an increasingly important asset in the processing space. Immediate payment systems seem likely to proliferate across both the developed and developing worlds. Given that VocaLink enjoys a leadership position, and is already demonstrating an ability to scale technology on a global basis, its growth prospects would be appear to be strong. Other processors are also active in immediate payments and could also become acquisition targets for the large, global payment processors.

The interesting question that we will be monitoring as these systems develop is how they find their place among other payment methods and compete for the volume available in a range of payment domains, from P2P to consumer bill payment, to business payments and even onto POS and remote commerce transactions.

It should be fascinating to watch this evolution. How do you see it playing out?

 

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Post image for Reflections: Back to the Future

Today, Glenbrook celebrates its 15th birthday. It’s been quite a journey – an amazing one in so many ways – yet it also sometimes feels like we’re still on Day One! There’s so much happening in payments – and, more broadly, in commerce, financial inclusion, and crypto currencies!

I was very fortunate to make a career change thirty years ago which took me out of the world of big iron mainframe computers and into the world of consumer payments. I left IBM to join Visa in 1985 – and the last 30+ years have been a splendid experience. As I look back, I wouldn’t want to change a thing!

For my first fifteen years in payments I enjoyed some great work experiences at both Visa and, later, at First Data Corp.

At Visa, we were changing the world of consumer payments – moving from paper-based card acceptance to electronic POS acceptance – striving to be faster and better than cash. Success with credit card electronic acceptance was soon followed by success with debit – or, as we called them back then, check cards. Within a few years, debit cards became our favorite way to pay.

At First Data, we were present at the start of commerce – working to enable the use of cards at online merchants. We also saw an opportunity to work with major US acquirers as joint venture partners, creating a number of merchant bank alliances that enabled the FDC platforms to deliver scale economies and, along the way, to create the electronic replacement for the gift certificate, with the first widely available gift cards.

Then, fifteen years ago, three of us somewhat coincidentally decided to leave the life of corporate executives to become entrepreneurs – and we started Glenbrook.

Allen, Carol and I had all had successful careers working for major players in payments. But together we opted to shed the burdens of being corporate executives – with all of those big company responsibilities – to focus instead on the most rewarding opportunities we could find to be involved and collaborate in the evolution of electronic payments. We wanted to share what we’d learned while continuing to explore and learn even more from our work with a series of clients who challenged and stimulated us.

Our “why” at Glenbrook has been a belief in the ability of electronic payments to help accelerate economic – and social – progress. We sought out opportunities to get involved in client projects where we could help accelerate that progress. We now look back with fondness at many very satisfying client engagements which provided us with both great work and new learnings. We’ve been humbled by the opportunities that have come our way.

Along our journey, we wanted to share our excitement about electronic payments with others. We were very early bloggers – starting our PaymentsNews and PaymentsViews blogs over ten years ago. We sought to provide a curated “read over our shoulder” look at what we found interesting in payments each business day – and, periodically, our rants and opinions about industry trends. We continue doing both today and are often surprised at the serendipity that results.

Ten years ago we began exploring how we might share our knowledge more broadly, not just through client-specific engagements but by establishing a payments-centric education curriculum. This effort proved very successful – with over 10,000 payments professionals having participated – but also, importantly, it has helped keep us sharp and excited as we needed to stay on the cusp of the payments evolution, initially in the US but increasingly in countries around the world.

After having a few years of teaching experience, we thought it might be useful to further share some of our knowledge and experience in book form so we wrote and self-published our book “Payments Systems in the U.S.” Once again, we were delighted with the response, as our book has been read far and wide and continues to be a source of delight as we meet new payments professionals who have been able to benefit from it.

So, on Glenbrook’s fifteenth birthday, it’s with that combination of pride and humility that I reflect back on those years and what we’ve experienced together. But I’m even more convinced that we’re still on Day One – as the years ahead look even more exciting that those wonderful years gone by. Glenbrook is perfectly positioned to continue to play a vital role in this on-going evolution of electronic payments. That’s what we love – and why we get excited about what we get up to do every morning.

As I close, let me share my quick take on that future. In another post a few months ago I mentioned how we’re now hurtling toward a new world of payments and commerce – being closer to 2030 now than to 2000 – which feels like just a few years ago, at least to an old guy like me! In 2030, Glenbrook will be almost 25 years old, our silver anniversary How fitting that it’s a monetary metal!

As we move toward that future, the trends which seem significant to me are the increasing importance of faster payments, the emergence of global currencies, and the opportunity for new forms of value exchange between and among smart devices over the Internet of Things.

Mobile payments feels like a solved problem – after years of “science fair” experiments – but we may see some new surprises there as well. Expanded use of biometric authentication, artificial intelligence and voice applications are also like to be important steps into that future. And the protection of our personal information will be fundamental to a future where we can be confident about our rights and liberties.

March 1, 2030 will be the 10,592th day since we founded Glenbrook back in 2001. So far, the journey has indeed been the reward. As we look to forward to that milestone, I’m confident that reward will continue to be why we do what we do every day at Glenbrook.

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