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.

[click to continue…]

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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 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 10,59th 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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Post image for Payments and the Internet of Things

As the Internet of Things (IoT) gains momentum, people are starting to speculate about how it will be monetized and where payments will fit in this world of the future. Some think what’s needed is already what their company does best. How fortunate for them! Others think Bitcoin was invented just in time to payment-enable the Internet of Things. And there are already early examples of how incumbents are combining payment technology with smart devices.

Let’s explore this and see what’s really going on. First, what do people mean by the Internet of Things? Generally, they are talking about the intersection of three unrelated trends.

  1. The march towards semiconductor miniaturization which enables sophisticated software intelligence to be embedded in very small devices.
  2. The ongoing proliferation of telecommunications technologies which can be used to connect these devices to one another and to the cloud.
  3. The vast amount of data and signals that the devices will generate which, when combined with “big data” analytics, may provide new, valuable insights into the world around us.

Put them all together, and it’s the Internet of Things.

In layman’s terms, and for the purposes of thinking about payments, what matters in the Internet of Things is that the actors are the “things” themselves and not the people using these connected devices. So a printer that reorders its own cartridges when running low is right in the bullseye — but a wirelessly-connected parking meter that takes patron-initiated payments is not. We’ll come back to this point later, but this hands-off notion is a key part of the model.

If you believe the devices will be smart, and able to take action when appropriate, how might they make purchases? And more importantly, how will they make payments in support of these purchases? Do the “things” need new payment methods that are optimized for the necessary lights-out (no humans involved) processing environment of connected devices? Or is the Internet of Things a new payment domain for existing payment methods? This is the key question.

Bitcoin Steps Forward

If you believe new payment methods are needed, Bitcoin seems like a good candidate. Some in the Bitcoin community believe that Bitcoin is ideally positioned to meet the requirements of this new world — largely due to the programmable nature of Bitcoin payment. The payment from one party (the device) to another party (perhaps a service provider) only happens when a pre-prescribed set of conditions becomes true. Bingo. The power of scriptable payments meets the intelligence of connected devices.

The canonical example seen in all the blogs is the smart washing machine of the future. Here’s the paraphrased scenario. “We know it will have intelligence, and it will likely be connected to the Internet. When it is installed, it shops online for its own maintenance contract. And when it finds the right contract, it will use Bitcoin to lock the service agreement in place and then automatically summon support when needed.”

I can see why Bitcoin advocates like this use case. But I’m not sure Bitcoin is really needed or required to make this vision work. Why make the smart-washing-machine-of-the-future that uses a shopping bot to find a service contract even more unlikely by marrying it to Bitcoin?

Amazon’s Not Waiting

A good example of how this is already playing out can be found with Amazon.com, which is all over the Internet of Things opportunity. They have released APIs that device manufacturers can use to embed ordering functionality into their device. Productized as the “Amazon Dash Replenishment Service (DRS)”, the company is working with device providers to integrated product replenishment into their Internet-connect devices.

DRS can be integrated with devices in two ways. Device makers can either build a physical button into their hardware to reorder consumables or they can measure consumable usage so that reordering happens automatically. For example, an automatic pet food dispenser made with built-in sensors can measure the amount of pet food remaining in its container and place an order before running out. Device makers can start using DRS with as few as 10 lines of code.”

This makes a ton of sense to me. It provides the gee-whiz convenience that early adopters love. Plus it’s a good fit between Amazon’s technology smarts and the opportunity to make money now using techniques that are known to work – card on file, default ship-to address, free shipping, expedited delivery, etc.

Where To Next?

So let’s go back to where we started. Does the Internet of Things need its own payment method? Probably not. I think the Internet of Things feels more like a new use case for existing payment methods than a new segment looking for its own unique payment methods.

My gut tells me that the IoT is likely to be service and usage driven. That smells a lot like the traditional card on file (or token on file!) subscription model. I think the payment “winners” in this new segment will be those that do the best job managing the ins and outs of a recurring billing relationship — managing plans, tracking enabled services, gracefully managing declines, etc. In fact, I would not be surprised to see some of the existing subscription enablers start to reposition for the Internet of Things. Where we might see some innovation from them is in the ability to meter usage of services.

What do you think?

This post was written by Glenbrook’s Russ Jones.

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Post image for Fake Out – You Can’t Put Your Card in that EMV Slot

Visa’s CEO recently reported that more than 750,000 locations, representing 17% of the U.S. face-to-face card-accepting merchant base, are accepting EMV chip cards. While everyone in the industry agrees that it will be quite a while before the numbers reach “critical mass” (whatever that means to you), there are two key questions for today. The first is pretty easy to answer; the second, perhaps, not so much:

  1. Why haven’t more merchants installed EMV-capable devices?
  2. Why are there so many EMV-capable devices already installed that have not been enabled to actually accept chip cards?

The first question has been discussed more extensively and the answer is a combination of factors:

  • Almost every new terminal deployed these days is EMV-enabled, but the millions and millions of terminals at “mom and pop merchants” have a very long useful life – 7 years gets quoted quite often. Why incur the expense and hassle of upgrading when you are highly unlikely to ever see a counterfeit card? I don’t think the local dry cleaner, daycare center, or dog groomer is particularly worried. Having said that, Glenbrook has had many conversations with our larger merchant clients who have chosen to implement EMV because they are worried their customers might think they don’t take security seriously. Reasonable people can disagree whether their customers will even notice or care (with the likely exception of Target customers), but one can certainly respect the position of these merchants.
  • ISOs and acquirers have only recently been out there in force, trying to get their installed base of merchant terminals upgraded. But the timing has been off. Smaller merchants who had never heard of EMV didn’t quite get the message until September, a month before the liability shift, or when they received chip cards of their own. By then, there were reports of terminal shortages (since resolved).

Fair enough.  But what about my second question?  Why do I encounter so many terminals that have the EMV hardware installed (pretty much anything deployed in the last few years) but have not yet been enabled to accept chip transactions?  You don’t have to look too hard to find them – they’re at McDonald’s, Safeway, and a slew of other merchants huge and small.  Why are they not performing EMV transactions? There are a number of reasons:

  • Make Someone Else the Trainer. Some merchants, particularly the large ones, don’t want to “educate America” on how to perform an EMV transaction. This was especially acute during the holiday season. They see EMV as just slowing down lines and chose to wait until consumers learned what to do—and do it quickly—at someone else’s store.
  • Big Effort. EMV deployment is a big project for large merchants. POS systems need to be modified and often upgraded and always certified (no small nor quick task). Clerks have to be trained. These POS change projects usually span years, not months. Many pieces to the EMV puzzle, particularly regarding debit, were not in place in time for the liability shift deadline.
  • Hurry Up and Wait. Many, many, many integrated POS systems (IPOS), especially the electronic cash register software for these systems, were just not ready in time. Even if the software was ahead of the game, they faced long certification queues at many acquirers. I believe this is going to be a problem for a while.
  • Waiting Tables. Restaurants pose unique challenges. There are staggering numbers of large and small restaurants with terminals capable of taking chip cards, but unfortunately, the software is way behind, often due to the added work needed to deal with tips and tip adjustments. Many in the industry believe the POS software firms serving the restaurant industry simply underestimated the time and effort required to accommodate EMV. These are many of the same companies, mind you, that already support EMV in Europe and beyond. And of course, once complete, each still needs to be certified by a plethora of acquirers. And that takes time as one of our huge national restaurant chain clients knows. They won’t have an EMV-enabled solution ready until late 2016.

I think it’s interesting to talk to fellow payment geeks who simply shrug their shoulders and say “whatever, who cares about cards? we’ll all be using our phones to pay soon enough.”

I’m definitely not in that camp, but some of my colleagues at Glenbrook do joke that if you really want to make contactless look good, make the alternatives look worse. I think we’ll all get used to dipping and waiting at the POS, but the truth in that humor points directly at the spread of contactless in Canada and the UK.

Let me know your thoughts!

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Post image for Bitcoin 3.0 – Permissioned Blockchains

Blockchain. Is it the most revolutionary technology in value exchange ever or just the latest fintech buzzword enjoying its peak on the hype cycle? Or both? These young techniques are undergoing swift evolution, going from bitcoin and money transfer into new use cases such as identity management.

There’s still truth in the cartoon’s joke that, online, no one knows you’re a dog. The challenge goes beyond discerning hacker activity from the permitted. It’s also about the release of just the data necessary to satisfy the needs of both parties in a transaction – and no more. How much better that would be than sharing a full suite of personally identifiable information when simply asking the question “are you over 21?”

Take a listen to my discussion with Matthew Commons, CEO, of Cambridge Blockchain on how his company’s blockchain-based approach can be used to address one of the internet’s remaining fundamental concerns. You’ll also learn about the state of play in this new stage of permissioned blockchains.

 

[click to continue…]

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Post image for Election cycles and payments systems development

It’s election time here in the United States and potentially big changes are ahead. Elections define the beginning and end of political eras.  Walter Dean Burnham, the distinguished professor of American Politics, elaborated a theory of party change and realignment.[1] Burnham’s theory noted that critical issues bubble up from time to time and their impact is significant enough that business as usual in politics is changed.

Relax, everyone, I’ve not turned into a political blogger nor am I proposing a theory of payment system change in the U.S. or elsewhere. But I would like to offer some thoughts on two key trends that are bubbling up that may indeed affect payments as usual:

Payment System Visioning & Coordination

More and more countries and regions are devoting time and resources to defining an ideal state for their payment systems.  This is not new. Countries which have higher levels of central bank planning and payment system involvement have traditionally elaborated 3-5 years plans. The Reserve Bank of India, for example, develops a payments vision document every three years. Now others are getting on board:

  • The Canadian Payments Association is spearheading a national conversation on payments system modernization in the hopes of reaching consensus on changes to existing systems and what additional systems or functionality are needed
  • The Federal Reserve’s Faster Payments Task Force is a forum for industry dialogue on how to achieve faster payments, more secure payments, increasingly electronic payments, better cross-border payment options, through participatory input to payment system development
  • Launched in 2002, the European Payments Council is an elaborate and on-going initiative to develop and improve payments options for the Euro area

Payment System Speed

Deferred payments like traditional ACH and check are receding further into the background of these conversations. Their main focus is centered on the development of cheaper, real time options for retail payments.  Countries which already have real time payment projects underway include:

  • The Kenya Bankers Association will launch a real time interbank switch in 2016.
  • Banks in Australia will launch the New Payments Platform in 2017 that promises “faster, more flexible, data-rich payments”
  • The clearing arm of the Euro Banking Association is planning to launch a pan European instant payments infrastructure in 2017
  • The bank-owned collaborative called The Clearing House is developing a real time payments rail here in the U.S., in part based on the VocaLink technology behind both the U.K.’s Faster Payments and Singapore’s FAST systems.
  • And, while not in the real time category but certainly at a faster pace, we also see countries like the U.S. (2016) and Peru (2015) implementing same day settlement of ACH payments

Globally, we are moving into a new era of improved payment options. Of course, the past decade has been a period of tremendous payments system innovation that extends well beyond this short trend list. However, many of those innovations were technologies or techniques that solved particular problems for the particular clients of a specific company.  Examples include the proliferation of faster payment solutions that use debit rails to transfer funds between individuals and businesses. Another example would be the practice of using contractual arrangements and rule sets to create the effect of real time payments without actually having a real time payment system.

We don’t yet know how the landscape will be redefined. New payment rails like the one being built by The Clearing House will certainly initiate a defining period of payment change in the U.S. Of course, this is not to say that each payment system improvement solves all problems but they do, over time, tend to enhance the overall system and create opportunities for innovation and performance.

Just as in politics, new challenges and needs continue to rise into the collective consciousness of the payments industry. This is the really, really exciting part: to think about the potential of these new systems and how they will improve payment options for consumers, business and governments. And then there will be the work of building the future’s nextgen systems!

You surely have noticed that I did not include Bitcoin, other virtual currencies, or ledger based payments processing. This omission was intentional. We’d love to hear from you how these new technologies will influence payments as usual.

[1] If you’re interested, check out Walter Dean Burnham’s book Critical Elections and the Mainsprings of American Politics (1970).

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Post image for Really Big Questions in Payments

Glenbrook’s Allen Weinberg wrote a few weeks ago about his view of the Grand Challenges in payments…. a daunting list, and one I agree with.  But I want to extend his discussion on one of his challenges:  “Realigned value chain economics in a push payment world”, and add two more: “What is the proper role for government in the issuance of money?” and “Who owns the payment address?”

Warning – these are just questions – not answers!

The Economics of Credit Push

The credit and debit card industries, as they evolved, created a number of new businesses – one of which derives from the merchant discount fee (MDF) revenue which card acquirers, and their partners, receive.  This business was a fairly radical departure from the past: merchants previously simply deposited checks and cash into their bank accounts, paying perhaps a deposit fee but nothing like a merchant discount fee.

Now, this is a complicated subject, and you may think I’m talking about interchange – but I’m not.  Interchange, of course, is a part of the MDF which is passed on to the issuer, to cover various of the issuer’s costs.  This is a tendentious subject in countries around the world.  Although I think one can make a case that debit interchange is on a trajectory to zero, that’s not my point here, or what I’m asking you to think about.  Consider instead the rest of the MDF: the money that the merchant’s acquirer and their partners keep.  Why does that exist, when no comparable amount exists in a straight deposit scenario? Here’s my take – (which I have written about before):

The rationale for the acquirer’s portion of the MDF was sound:  significant new costs needed to be covered.  These included the merchant-side cost of managing (asking for, receiving) the good-funds authorization; the cost of the merchant-good-behavior guaranty; and the costs of supporting the hardware and connectivity requirements for online payments.   In exchange, the merchant received all of the manifold benefits of electronic payments.  A good deal – not at any price, but clearly value to the merchant for which they were willing to pay.

But the new world of credit push payments looks very different.  This is unfolding in two variations around the world.  Developed nations are introducing new, or enhancing old, ACH-type systems for real-time “push” payments.  Developing nations are introducing various forms of mobile money wallets – also capable of doing real-time “push” payments.  These look a lot more like a direct deposit of payroll transaction than they do a card transaction.  The costs mentioned above are more or less gone: there is no need for a good funds authorization; the rules are generally written so that the receiving bank (or financial services provider) is not making any behavior guarantees to the sending bank; and the hardware and connectivity is probably a phone and the internet.

These credit push systems are being introduced for P2P, B2B and bill pay use cases, and not, generally speaking, for merchant payments.  But it is inevitable that they will expand into this: we see this with the introduction of “Pay By Bank” in the U.K., and by products such as Kopo Kopo in Kenya.  Many people assume that a commercial business model similar to that used for cards will prevail – but will it?  Does that make sense?  Or will it look more like a simple deposit into a merchant account?

There is, of course, one important additional source of cost in these payments – the need on the part of both the sending bank and the receiving bank to perform AML compliance.  This is complex because both the risks are new (what exactly are bad guys going to do with these new capabilities?) and because the regulatory environment around them is not yet settled.  But banks will need to price their costs in managing this – both to the sending party and to the receiving party.  Where merchants are the receiving party, they will need to pay some of this.  What is not clear is if card-like interchange will exist on these systems which will entail a merchant’s bank compensating a consumer’s bank for some portion of the consumer’s bank’s costs.  There is no such interchange in the U.K.’s Faster Payment system, although (as I understand it) the “Pay By Bank” merchant payment service offered on top of this will have a component of merchant revenue shared back to the consumer’s bank.

One final thought on this question.  A simple, direct, party-to-party electronic message.  That’s what we’re talking about, right?  Think about email – and the cost of email to the end-users.  That may be the way we are heading.

Government and Money Issuance

“Issuance” is a funny word.  We use it in the card industry – to mean the entity (usually a bank) which issues a card to a consumer – but we hardly think of it as the issuance of money.  A debit card bank, instead, has a deposit liability to the customer – representing money in the bank that has been issued by the central bank of the country.  (A credit card issuer has a willingness to extent credit; again, not an issuance of money.)  But in the developing world, so-called “mobile money” is created when, typically, an MNO accepts a cash deposit at an agent and creates an electronic balance for the depositing customer. The MNO is deemed to have “issued” the mobile money (sometimes called “eMoney”).  What’s really the difference?  Not much.  The MNO has created a liability, just like the debit card bank did.  The balance at the bank is backed by the bank’s cash on hand, and, usually, guarantees of the government.  The balance at the MNO is backed by a deposit the MNO has made at a bank.

So why do I bring this up?  I’m fascinated by the discussions around the idea of central banks issuing virtual currency – using some variation of the blockchain schemes that abound.

Let’s think about cash for a moment.  The government is the issuer – the creator – of cash.  The government bears the expense of creating the cash, and, along with the banks in the country, the cost of distributing, collecting, and safeguarding cash[1]. The government, of course, also has a strong interest in its role as issuer of money because of its interest in controlling the monetary supply and through this controlling some aspects of the economy.

Although merchants and consumers undoubtedly incur costs in the use of cash, many people, and many small merchants, perceive that the use of cash is free to them.  So thought of this way, cash is a national utility – perhaps what economists call a “public good” – provided by the government to its citizens.

Within the payments industry, we’ve been focused on replacing cash with electronic payments for a long time.  There are very good reasons to do this, which I don’t need to elaborate on here. But does it necessarily follow that what had been a government function (issuing cash) suddenly becomes a commercial function (enabling electronic payments)?  Why doesn’t the government start issuing “eMoney” – perhaps in virtual (blockchain-like) form?  And can this be done with some of the attributes of cash today – so that it’s use is essentially free to consumers?  If the government issues “eMoney” – how are banks involved?  Are they even necessary?

It will be fascinating to watch.

Payments Addresses

How will you address a payment you send to someone (or some business)? A simple question, one would think.  But there are myriad options.  First of all, let’s clear the air about the differences (yes, yet again) between “pull” and “push” payments.  In a “pull” payment (like a card transaction, or a check), the payer has to give the payee their account number (or a token to it) – so the payee can send this data through the value chain and accomplish the “pull”.  That’s what a check number or a card account number does – you give it to a merchant, the merchant gives the number to their bank, who uses it to pull money out of your account.   By the way, very bad things can happen when that number is stolen – hence the move to tokenization in the card world.

But in a “push” world, the reverse is true.  The payee has to give the payer some kind of account information, so that the payer’s bank (or institution) can send it to the correct place.  It’s an addressing issue, like a physical street address, a URL, or a phone number.  Generally speaking, the bad things that can happen with a “pull” account number can’t happen with a “push” address.[2]

So “push” addresses aren’t secret – they should be freely and easily given to anyone you want payment from.  It makes a lot of sense that they be something that is easy to remember – some commonly known item (phone number, email address) or some easy-to-remember-and-use code.  A good example of this is the BPAY code used in Australian bill payments.  More recently, in the U.S., Square has introduced this with their “$Cashtag” concept and PayPal with “PayPal.Me”.

But in the United States, we are looking at a universe where in all probability there will be multiple credit-push payments networks: Square and PayPal and The Clearing House and Visa and FIS Paynet, etc.  Will each network use its own addressing system?  How inconvenient will that be for payers and payees to remember and manage? Or might these competing networks agree to collaborate on a common naming protocol – and the underlying directory/discovery/routing infrastructure that can support network interoperability?

If there is a common protocol, who will “own” that?  Is that a government function, like ZIP codes?  A non-profit organization with that as it’s purpose, like ICANN? A banking industry association, like the ABA and bank account routing codes?  Or will each network persist in “owning” its own naming scheme, putting the burden of managing the inefficiencies of this on its own customers?  That sounds crazy, but remember each network is hoping that it will be come the network, and control of the naming scheme may help with that….

Important discussions along these lines are currently going on in the U.S. payments industry – but it is far from clear that common sense will prevail.  I’ve been advocating for a concept I call “PayCodes” – let me know if you want to know more about that!

So that’s my list of the biggest questions facing our industry.  Comments welcome!

[1] The government’s costs in doing this are to some extent offset by the mysterious phenomenon of seignorage.

[2] Unless that “push” address can also be used to “pull” payments – like a bank account number.

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