SME to consumer p2p payments – the next big (Western) payment behavioural shift?

This week the web was a buzz with the news Apple would be launching peer to peer payments. And while it’s hardly novel from an innovation perspective, the network effects of Apple could be the tipping point for mainstream mobile payments adoption.

While consumer innovations in the p2p space are surging ahead, one area that feels like it is well in truly in the dark ages – in Australasia anyway – is peer to peer payments between businesses and customers.

There are many dynamics at play that discourage innovation in this sector. One of those is the rich river of fees flowing from small businesses to banks in the form of interchange fees.

Unlike Europe, Australian regulators have been far more generous over the years when it comes to caps on weighted interchange fees. But, as of July of this year, the party will be well and truly over. Interchange fees will be limited to a maximum of 0.8 percent – a far cry from the giddy heights of 2.2 percent and above that some premium credit cards were able to garner.

But what if you could design a new system that removed interchange fees altogether? In fact, what if it removed merchant service fees altogether? Well, for a start, small businesses would love you – because they are the ones that face the brunt of these costs on a monthly basis.

That’s exactly what New Zealand entrepreneur Ben Lynch has set out to do with his payments prototype Jude. I caught up with Ben in Sydney yesterday and he took me through the app. And honestly, it seems like a no brainer.

The secret to how Jude works is that it eliminates cards altogether. After all, why do we really need them, if a small business’s bank account and a consumer’s can just talk to one another? Cards are the equivalent of a 90s middleman.

And if we can get two bank accounts to talk to each other, without breaking any banking T&Cs, even better.

So, at prototype stage, the Jude experience for a customer and a business looks like this. When in range of the store, the customer places an order on their Jude App. They then appear on Ben’s custom made point of sale tablet, perched on the merchant’s counter. The shop owner sees the order and the customer’s details, and prepares the order. The customer collects their order, and just walks out. No cards, no mobiles being waved in front of terminals. Beacons placed in the store register all the comings and goings.

And while we’ve seen PayPal and other industry players attempt to create a similar experience, more often than not, they’ve always been linked to an expensive payment transaction – that the merchant needs to foot. But with Jude, like the best things in life, the entire experience is free.

To replace plastic for p2p payments is a behavioural shift for consumers. But if those with the biggest pain point to solve – small business owners – help drive and facilitate this because it saves them a huge amount of money, then that is a golden channel to market. Not to mention the value add for a point of sale vendor as an upgrade feature within their subscription. And while Jude might not generate money from the transaction itself, the data stream of payments coupled with SKU data is a monetisation opportunity in itself.

You can read more about Ben and Jude’s journey here.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Cyber Attacks in Cashless India – Ransomware just the start


Image Source

In November last year India went through a demonetization drive when the government banned the Rupees 500 and 1000 notes. It caused a lot of near term pain with some serious liquidity crisis in a primarily cash driven economy. However, sanity returned in a few months with various private and public sector initiatives driving the move to a cashless economy. But the lack of governance and awareness on cyber has left the consumers and banks exposed to large scale cyber attacks. The recent ransomware attacks were very successful in India, and that feels like just the start.

Attacks by Country

Wannacry Ransomware attacks were reported across about 48000 computers in India with 60% of targeted victims being institutions and 40% being consumers. On investigation, it was revealed that the weak link that allowed many of the attacks was Windows XP and unpatched Windows operating systems used by institutions. However, about 70% of the country’s ATMs run on these operating systems and largely remain unpatched, hence posing a huge risk to consumer banking credentials.

During the attacks, Cyber Peace Foundation (CPF), which is running a research project monitoring cyber attacks, saw nearly a 56-fold increase in breach attempts at sensors installed across eight states in the country. Computer Emergency Response Team (CERT-In) asked the Reserve Bank of India (RBI), stock exchanges, the National Payments Corporation of India (NPCI) and other vital institutions to safeguard their systems against the ransomware.


Just a few weeks after the demonetization announcement, Prime Minister Mr.Narendra Modi announced the BHarat Interface for Money (BHIM) mobile application, which was downloaded 17 Million times within two months of launch. PayTM, India’s leading mobile payments service crossed the 200 Million users mark earlier this year, and have most recently launched PayTM bank with about $1.4 Billion raised from Softbank valuing the firm at $7 Billion. The “Jan Dhan Yojna” scheme successfully brought about 200 Million unbanked consumers into banking. Post demonetization, bitcoin has started to be more widely used.

This is all great news, but it feels like the country is doing it all too fast, without the right governance, and more importantly consumer awareness on cyber risks. Over the last few years, India has consistently been identified as one of the most vulnerable countries to cyber attacks as the digital infrastructure was growing at a crazy pace without the necessary controls in place. The country has about 300 Million internet users of which about 150 Million are only using mobile internet. However many of these phones use vulnerable operating systems and are easily hacked.

One of the common modes of cyber attacks in the country happens through malicious applications on smart phones. This occurs when users download mobile applications that come with some online offers, and allow access levels to the applications that in turn allow the hacker to ask the users’ contacts to make payments using mobile wallets. With a booming e-commerce industry projected to reach $64 Billion by 2021, banks and payments providers lack the capability to keep Cyber attackers at bay.


Challenges in handling cyber attacks are different depending on if the victim was a bank/firm or a consumer. The problem with banks is the secrecy they maintain about cyber attacks on their systems. A few months ago, data of about 3.2 million debit cards was lost in what is claimed to the India’s biggest breaches. SBI, HDFC Bank, ICICI, YES Bank and Axis were all hit by the breach of debit cards. RBI has hence mandated banks to reveal any cyber attacks that banks have had to suffer. Cyber attacks cost Indian businesses about $4 Billion every year as per latest estimates.

Banks in India have also managed to set up shadow or decoy systems which resemble the actual systems and have developed honey pots to trap such hack attempts. However, they still lag behind their western counterparts in sophisticated techniques and forensics needed to counter cyber attacks.

Still, banks are much more prepared to handle cyber attacks than consumers who are easily manipulated. This is primarily because consumers lack awareness of cyber attacks and social engineering techniques by the hackers are getting more and more sophisticated. There are measures from the government (unlike old times) to bring awareness to people on Cyber risks. 90% of the consumers are unaware that the government runs a 24X7 TV channel “Digi-Shala” that focuses on digital payments.

When Demonetization was announced, the Modi supporter in me felt super thrilled about the possibilities as the economy accelerated towards a cashless state. Even the near term pains faced by the common man felt justified in some ways, but it feels like India is ill-prepared to take on cyber risks inspite of efforts from the government and central bank. Watch this space.

Arunkumar Krishnakumar is a Fintech thought-leader and an investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.


China Face-Off America – Battle of Global Payments between Tech Titans



Earlier this year Daily Fintech did a China week, and there were several interesting topics and key insights discussed. We analysed how the three Chinese Tech giants (Baidu, Alibaba and Tencent) have led the Fintech boom in China and what the favourable factors that helped were. However, over the past few weeks, we have had some developments with WeChat expanding into Europe, and almost as a reaction (perhaps not), Facebook ramping up group payments on messenger, Android pay collaborating with Paypal and more. We have Ant Financial’s bid for Moneygram and there is also a rumour that Whatsapp was ramping up to launch payments in India. That feels like a heated battle between Tech giants of the east and the west (really Chinese vs Americans, such a cliche) for Global Payments Glory. 

While we immerse ourselves in Fin and tech in the west, we often tend to forget that there is a whole new world out there in Asia that completely dwarfs what we have achieved in the west with regards to Fintech. FinTech financing in Asia-Pacific was almost US$10 billion in the first half of 2016, eclipsing the aggregate of North America’s (US$4.6b billion) and Europe’s (US$1.85 billion). WeChat sent 32 billion digital red envelopes over Chinese New Year in 2016 and 46 Billion in 2017. Paypal did 4.9 billion transactions in the whole of 2015 and 6.1 billion in 2016. This list could go on, but you get the point. The dragon really dwarfs the west!!

China Fintech

Stats aside, Chinese tech giants have had tremendous success in their local Fintech market. In comparison, Apple, Facebook, Google and Amazon (the Fantastic Four) have had mixed results in the west.

I am fascinated by what Alipay(from Alibaba) and Wechat (from Tencent) have managed to achieve in China. A good story about the growth of these firms is how WeChat created a highly localised product to compete with Alipay. WeChat had been lagging Alipay upto the launch of “Lucky Money” during the Chinese New Year of 2014. It combined the Chinese tradition of “Red Pocket” with conventional peer-to-peer transaction, and achieved huge success by adding a fun flavor of luck into its payment function. During the New Year holiday of 2014, approximately 10 million users engaged and bundled their bank cards, and 40 million red pockets were dispatched. In 2016 these numbers on WeChat further increased to 420 million, and reached a massive 8 billion that same year. Jack Ma called this strategy by WeChat the “Pearl Harbour Attack” on Alipay.




Now, lets take a look at what the Fantastic Four have achieved in Payments.

Facebook, apart from hiring David Marcus (from Paypal) haven’t really had much joy with its payments business. Its payments revenue (for 2016) of $753 Million is tiny when compared to ads revenue of about $28 Billion. And the payments revenues were down 11% from 2015.

Google’s Wallet project didn’t go anywhere at all, however it had a much better uptake with its Android Pay. By end of 2017, Android pay is projected to have about 27 Million users. Android Pay have just agreed to integrate Paypal to it, which would mean customers can use Paypal through Android Pay.

Amazon’s “Pay by Amazon” has been a good story from the time it was launched. It has now 33 Million users which is almost a 50% annual growth from 23 Million users last year. Amazon managed to get its Wallet License in India last week (watch this space).

Apple pay has been the leader of the pack in the payments world. With about 84 Million users projected by end of 2017, Apple have so far done well in this space, however still lags behind Paypal.

All these numbers from the Fantastic Four are tiny when compared to the numbers achieved by WeChat and AliPay.

Alibaba have been quite active in expanding through acquisitions. Investment into PayTM in India, provides them a hold into PayTM’s 200 Million user base in India. However the most recent news on Moneygram is an ambitious step into the remittance market, and if the deal did happen (post all the drama), it would provide Alibaba a 5% share of the 600 Billion pound remittance market.

'The Americans aren't objecting in principal to a merger down the line as long as we build a Chinese wall to keep a couple of things secret from the Chinese.'

WeChat have more recently started global expansion into South Africa, set up its European offices in Italy and planning a London launch soon. While they are behind Alipay with their global expansion, their customer acquisition strategy has worked better (than Alipay’s) so far.

When I talk to innovators in India, I often tell them to create a simple solution to an existing problem without overengineering it. That’s generally true for most developing nations. There are ample problems to solve and a half decent solution can see massive growth if executed well.  In the case of China a few hundred million users went from Cash to Mobile Payments and it was a classic leapfrog moment. Most likely Alipay and WeChat wouldn’t see this again in their Global expansion adventures.

I believe they would have better success through acquisitions, investments and partnerships with key payment players in their target markets, rather than trying to lift and shift their business model in China elsewhere. I also think that the winner of the East vs West payments war would be decided by key battlegrounds in India, LATAM and Africa. If Alipay and WeChat could expand into these regions quickly, then the Fantastic Four would struggle to gain ground. However, you don’t write off the likes of Apple, Amazon, Google and Facebook that easily. Watch this space!!

Arunkumar Krishnakumar is a Fintech thought-leader and an investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

ClearBank: a MSFT Azure B2B Fintech

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A well kept secret of the UK B2B banking sector, is now public. Clear Bank, a clearing Bank in the UK, is ready to compete with the four UK clearing banks,

  • Barclays
  • HSBC
  • Lloyds
  • Royal Bank of Scotland (RBS).

Clear Bank is the fifth UK clearing bank and the only one that is pure B2B since it does not offer services direct to the consumer.

Don’t confuse Clear Bank in the UK, with Clear in the US an early stage startup offering banking services to startups. Or Bank Clearly, a digital banking start-up in the Middle East similar to Moven (i.e. no banking license but offering banking services to startups by partnering with CBW Bank).

Back in the 60s there were 16 clearing banks in the UK. Consolidation in this part of transactional banking has left the UK currently with 4 clearing banks that process over 80 Trillion pounds annually worth of payments in the UK. This is a fee business for settling payments between institutions and individuals.

Clear Bank has no plans to offer services directly to consumers. Clear Bank’s value proposition is to make processing payments in the UK via systems like Bacs, Chaps etc, Faster & Cheaper.

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Who cares?

Clear Bank will be helping Challenger banks to access the payment system at the Bank of England level, at the same level as incumbents.

Clear Bank will help the 44 UK Building societies offer current account services in a cost effective way. Right now, only 2 out of the 44 offer such capabilities to their members due to prohibitive costs.

Clear Bank will boost indirectly retail banking by reducing the substantially processing costs, which will facilitate competition for incumbents in the UK.

Clear Bank will help Fintechs by providing Banking as a service through the Cloud at a very low cost. Clear Bank will be offering an API so that Fintechs can interconnect to the ClearBank Fabric.

Who is behind this innovation?

Clear Bank has been built on the Microsoft Azure Cloud. I spoke to Richard Peers, Director of Financial services at MSFT in the UK, last week and he clarified the hybrid approach: “The application and business logic of Clear Bank is in the public cloud; connectivity to payment schemes and customer data is local in the private cloud.”

Clear Bank is built on the Azure public cloud and the Azure Service Fabric (hybrid approach). No need to understand the technical details here. What is important to know is that Clear Bank’s business model is in the category known as PaaS (Platform as a service). Most of us are mainly familiar with Saas. Microsoft has been working with financial services providers on various projects whose value proposition is delivered via Paas or Iaas. The infographic below captures the main differences. This is where we start understanding how the technology has lowered the cost and also how the Banking As a service offering is secure.

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Clear Bank’s platform includes authentication of the parties involved using a combination of voice, biometrics and face recognition. As Richard pointed out “The Iaas is a technical model that delivers a business model that allows a different scale, agility, security, cost model.”

He also explained in clear business language about Azure Service Fabric, the micro services “kitchen” of MSFT:

“The current world has been operating with applications that are still client/server many tiered and typically needing significant engineering and testing across the full stack before they can be deployed, with huge dependencies between layers. So think about having to get everyone in a company as complex as Microsoft on board with a decision before you can act. In the microservices world, you can focus on a component, get it right and deploy without total dependency on everything else.”

 My last question to Richard, was about the nature of the True innovation in Clear Bank’s case? I always thought of MSFT as a cloud computing player focused more on the Blockchain tech potential and now I realize that is has been instrumental in launching a clearing bank (we all expected blockchain to be the tech disrupting this part of the stack) that is NOT Blockchain powered?

The true innovation is in the fundamentals of the business model and the scalability of the cloud when applied at its highest potential.   Banks need to operate at real-time, based on an API model with the ability to reason over data at low cost, resiliently and securely.  Their use of the cloud allows this, delivering a faster and more cost efficient model with the agility to add new services as the market moves. ClearBank provides a Banking as a Service (BaaS) model to other Financial institutions and Fintechs, allowing them to focus on their own products and core businesses. ClearBank provides the underlying banking infrastructure and software all as a service.”

 On our radar screen

We will be watching Clear Bank’s role in the digitization of financial services. What microservices will be built on it, how much will the UK payment system save, how much will the global system interact through Clear Bank? Which of the multiple banking services that ClearBank offers, will prove to be the key by impacting the payment ecosystem?

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.

The New Zealand economy’s $45 million credit card brake

In October of this year the New Zealand Government’s Ministry of Business, Innovation & Employment (MBIE) released an issues paper outlining the current state of the country’s retail payment systems. The paper is part of a broader conversation about payments, technology and banking efficiency that many governments are starting to take a keener interest in as they look for economic growth levers.

The MBIE identified 5 key issues facing the local market, many of which some of you will notice resonate with conclusions government bodies in Australia and the European Union have also reached. These issues were:

  • Market incentives that drive credit card use over and above low cost alternatives are adding $45 million per year in additional costs to the economy. The number represents approximately 5% of the total resource cost for processing electronic card payments.
  • Increased card processing costs have seen merchants increase their prices to all consumers (high and low income earners alike) by around $187 million per year. This has led to low-income households cross-subsidising high-income households credit card reward programs to the tune of $59 million per year.

NB: There is growing evidence of banks ‘flipping’ credit card users to higher cost premium cards, that offer higher rewards. These cards incur higher charges for merchants, who are faced with steeper interchange fees.

  • Scheme debit cards are steadily encroaching on the market share of New Zealand’s free and proprietary domestic EFTPOS network. This could result in similar market distortions occurring in the future, as has been seen in credit card markets.
  • The interchange model is blocking innovation and new entrants to the market, by giving card issuing banks significant financial incentives to favour payment systems that offer interchange income.
  • Interchange fees charged to small businesses can be up to two and a half times as great as those charged to large businesses. Any increase in this spread could harm retail competition.

Interchange fees in particular dominate the conversation when it comes to retail payment networks, and it is no different in this paper. And while the report notes these fees are a ‘perfectly rational profit maximising mechanism from the perspective of the network owner’ and useful in the context of first growing a two sided market, the question remains as to whether they continue to be the best pricing mechanism for today’s mature market.

The Reserve Bank of Australia seems to be leaning towards no when it comes to answering that one. In May of this year it released a report reviewing card payment regulation in Australia. It states ‘there is little justification for significant interchange fees in mature card systems’, calling for continued regulatory intervention in the market to keep interchange fees at acceptable levels. No doubt the MBIE will be taking note of this finding.

Regulation and possible government intervention isn’t the only battle issuers have on their hands when it comes to protecting their margins. In Australia, several of the largest banks are attempting to collectively stare down Apple Pay in its battle for a share the interchange fee income. However, in a blow to the negotiations, just last week Apple announced it had struck a deal with payments provider Cuscal, allowing the 31 credit unions and smaller banks Cuscal serves to shortly begin offering Apple Pay to customers. Locally they’ll join ANZ and American Express who have already come on board. Given Apple Pay is a carrot for acquiring deposits, a much needed source of bank funding, the last remaining banks will no doubt be looking to reach a resolution with Apple as soon as they can to avoid churn.

Innovation is certainly picking up speed. Last week Paymark, the company responsible for maintaining the local debit network in New Zealand launched Online EFTPOS, allowing customers to pay for goods online directly from their cheque or savings account. If this is cheaper for merchants compared to traditional online payment methods of scheme debit and credit, they will do their best to steer merchants towards this payment method.

Payments innovation is a rising tide that will lift all ships – merchants and consumers alike. Could that same tide seem more like a tsunami to issuers and schemes? Undoubtedly they will still have a role to play, however the writing seems to be on the wall that it will possibly be a more marginalised one.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Ripple may become real competition for SWIFT in cross border payments

Best Internet Concept of global business from concepts series


Image source.

Next week, 8,000 bankers and their vendors fly into Geneva for 4 days of talking about FinTech. Last year I had to fly to Singapore. This year, I can just hop on a train from Bern (sayonara jet lag).

Last year Emergent Fintech started to move onto the main stage at SIBOS and this year it really is center stage in a way that resonates with the people who come to SIBOS; there is less talk about disruptive business models replacing incumbent banks and more about how disruptive technology can help Banks make a quantum leap in processing efficiency.

However one Emergent Fintech venture that is active at SIBOS could give SWIFT (which owns SIBOS) some cause for agita. Ripple is emerging as a real contender in cross border payments, which is a business that SWIFT has dominated for decades.

Ripple Basics and Recent Momentum

To quote from Ripple information on SIBOS (Stand F60):

“As bank-grade distributed financial technology, Ripple delivers instant, certain, and low-cost settlement for all banks via a global network of banks and market makers.

 Ripple offers a real-time cross currency settlement solution and a FX market making solution, both available for license. These solutions enable you to settle cross-currency payments efficiently, by connecting your bank directly to other banks around the globe for direct bank-to-bank settlement.”

Ripple recently closed a $55m Series B and in today’s market, a Series B is a good proxy for momentum. The investors are mainly banks, which makes sense as they will be the users.

More importantly, they are making the first live payments on the network, talking about transactions completing in 20 seconds.

The recent problems with Ethereum play into Ripple’s hands. For a long time, many people said that Ripple might be easy to implement but that it was a commercially controlled currency. The Ethereum problems show that all new digital currencies have their issues.

Visa has also just thrown in its hat into the cross border SWIFT alternatives.

The cybersecurity challenges that SWIFT suffered earlier this year must be making banks more willing to look seriously at alternatives.

Whether cross border payments use Ripple, Ethereum or Bitcoin Sidechains remains to be seen, but it seems clear that we can expect cross border payments completed within seconds in the not too distant future. It is pretty clear where the puck is headed.

SWIFT’s own Blockchain initiative 

SWIFT announced they were looking at Blockchain almost a year ago. Since then there has not been a lot of news. SWIFT can certainly buy whoever gets traction, but will face a cannibalization challenge as new entrants will be cheaper as well as faster. Cheaper payments will increase volumes so I envisage a future where SWIFT still dominates cross border payments but using Blockchain technology, with lower prices and increased volumes.

The back office guys are getting ready

In my core banking days, the SWIFT module was critical. It still is. However we can see the vendors, consultants and oursourcers getting ready for payments via Blockchain. This announcement by Ripple, Deloitte and Temenos is an example of an industry positioning around a possible new value chain.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

The opportunity to disrupt the credit card rails may finally be opening up


Image source

The transition to Chip and PIN credit cards in America currently looks like just a big conversion cost – good for vendors and consultants and a big extra cost and time suck for everybody else. 

However, below the surface something bigger is brewing.  Chip on plastic is incremental change, but Chip on mobile phone is a game-changer. 

Payments has been the boulevard of broken dreams for entrepreneurs, but there is a reason it attracted so much attention – it is a massive market. According to Boston Consulting Group:

“In 2013, payments businesses generated $425 billion in transaction revenues, $336 billion in account-related revenues, and $248 billion in net interest income and penalty fees related to credit cards. The total represented roughly one-quarter of all banking revenues globally. Banks handled $410 trillion in noncash transactions in 2013, more than five times the amount of global GDP.” 

The accepted wisdom is that dreams of disrupting those credit card rails is foolish. You can see that wisdom baked into the stock price of Visa and Mastercard (just shy of $300 billion as I put keys to pixel).For a while, the disruptive crowd looked to Bitcoin but that hope has faded. The accepted wisdom now is that you can only make money within the existing credit card rails.

That maybe about to change (and it is nothing to do with Bitcoin). 

First, lets look at the big switch from mag stripe to chip cards in America

The big switch from mag stripe to chip cards in America

To the rest of the world, America moving from mag stripe to chip cards merits this reaction – “what took you so long?”

AITE Group has run the numbers. Here is one of the headlines from their report:

“the cost to implement PIN for all cards at merchants with PIN pads already installed is low, the costs are much higher for merchants that have yet to install PIN capability”

That is why many merchants in America are currently implementing a strange variant called Chip and Signature – you know, those signatures that nobody ever checks! Signatures are a relic of the past, useless in the digital age. That is why in countries that went to Chip cards a long time ago, it is all now Chip + PIN (but there was a period of transition where check out staff were clearly trained to look at the signature, although what they could actually check is unclear). That combo of Chip + PIN is pretty secure and that is a big deal for retailers because they now have the liability for fraud.

Chip cards alone are more secure than mag stripe cards. A criminal can steal the PAN (Primary Account Number) if they have your mag stripe card for a minute (one crooked waiter is enough) but with a Chip card they need the card itself to get cash or goods and consumers know when they have lost a card and will report it lost to the bank/issuer, so the time window for a criminal is less. This is a better Single Factor Authentication – something you have.

However Two Factor Authentication – something you have  + something you know is better. That is Chip + PIN.

Where the puck is headed. At some point merchants must start saying “if we are responsible for fraud and all the costs to prevent fraud, why are we paying such a big transaction fee?” Credit Card networks rely on all the parties – consumers, merchants, banks – having aligned interests. If one or more starts to question “whats in  it for me” the network starts to break down,

The next headline focusses on the issuers/banks:

“Issuers would also face significant incremental expense, including the costs to reissue cards, establish and maintain a PIN management system, educate customers, and modify ATMs and interactive voice response platforms. Issuer costs total more than US$2.6 billion, which would result in a five-year fraud-avoidance benefit of about US$850 million”. 

Well that sounds like a lousy ROI argument – invest US$2.6 billion and get back US$850 million! Pass, thanks. Of course one can argue with those numbers, but even if they are wrong by a lot, the ROI still looks lousy. Maybe those numbers are so far off that the ROI is viable. Common sense says that they maybe way off, because issuers did all that in other countries and they would not have done that if the ROI was that bad. Does anybody have better data?

Where the puck is headed. To Issuers (aka Banks), credit cards are the way to to do unsecured consumer lending at the point of need aka point of sale. A consumers is at a store and wants to buy a $1,000 item and  not confident I have $1,000 in their account so they opt for credit.  Unsecured consumer lending is what Marketplace Lenders do. Banks want to be there at the point of need/sale because that means low Customer Acquisition Cost (CAC). So Banks will tighten up limits and be more selective on who they give credit to. That has happened in countries that moved to Chip + PIN. That means that Issuers will implement Chip + PIN no matter what it costs because it it is way to stay at the front end of unsecured consumer lending. Any vendors helping them reduce those costs will do well. However the big picture is that while we use the term issuer and bank interchangeably, because most issuers are banks, you do not need to be a bank to be an issuer. You could be an Altfi Lender or MarketPlace Lender or a Merchant.

King Consumer is OK with the big switch

So much for merchants and issuers. What about the critical third player in this network – you and I?

Consumers find Chip + PIN easy enough (spoken as somebody who lived in America for many years and then moved to Europe). Sure, it is a muscle memory change, but it really is not that hard.

Retailers will make the switch because they have to and Issuers/Banks will make the switch because they have to. There will be lots of debate about who pays and how much, but the switch has to happen. The mag stripe alternative is simply not viable  – it is a relic like a fax machine.

But lets consider the other switch, the ones that the criminals do.

The criminal big switch

After Chip + PIN is introduced, fraud in Card Present transactions (aka physical retail) becomes too hard, so criminals shift attention to Card Not Present (CNP aka e-commerce).

Again, who has liability is key. If retailers have liability, they will impose one more step on consumers.

Both Visa and Mastercard have a solution. MasterCard has SecurePay. Visa has Custom Payment Service.

Using myself as a market panel of one, I can tell you that it is no more than a minor irritant, like learning to use a PIN.

So far, the 4 cornered marketplace – consumers, merchants, and issuers and payment networks – is intact and the credit card companies sit in the middle earning their fees as the 4th corner.

However, the big change is when we go to mobile transactions.

Three factor authentication is better

Chip is better than mag stripe for single factor. Chip + PIN is better two factor than Chip + Signature. But 3 factor is best and that is what mobile phones enable:

  • Factor 1: something I own (can be a chip on a card or a chip in a phone)
  • Factor 2: something I know (PIN)
  • Factor 3: something you know about me (location in a mobile phone, not possible with a Chip card).

If the payment authoriser (basically what a credit card company does) knows all three, the chance of fraud is very low. If you reduce fraud costs, the actually costs of making a payment are a blip of attention in one of your servers i.e. so close to zero that you might as well count it that way.

The Mobile Payment tipping point.

If this data from eMarketer is even close to right, we are at the Mobile Payment tipping point:


When Merchants move into Payments via Tokenisation

Shh, don’t tell, but Uber is really a payments company with an e-commerce skin. So is Amazon. So is AirBnB. People make a big deal about Uber, Amazon and AirBnB not owning the actual physical stuff/service that we buy – as if vertical integration was an issue in the 21st century. What is much more critical is when a when Merchants become payments businesses through Tokenization.

Tokenization 101

Tokenization is the one time password that a student of cold war espionage stories would recognize. If you steal the token/one time password, you can steal the contents of that message/payment and only that message. That is fundamentally different from stealing the Primary Account Number (PAN). If you steal the PAN (by physically stealing a card or reading the mag stripe encoded data from a merchant) you can steal a lot of money.

Remember those merchants upset by the cost of switching to Chip + PIN? They would like to do this as well. Any entrepreneur who figures out how to offer that to small merchants will do well – maybe Square?

It is an aggregation job. If you aggregate a large number of tokens (ie consumers who trust you enough to do payments through you) you have a valuable business.

Think about these giant commerce players – Uber and Amazon and AirBnB – in terms of the 4 cornered marketplace:

  • King Consumer – well somebody has to pay
  • Merchant – tick
  • Issuer – Merchants can also be Issuers. They can lend (the often do, calling it Supply Chain Finance or something)
  • Payment processor. This is where we need to look at Debit Interchange Fees & Mobile Wallets.

Interchange fees & Mobile Wallets.

If you pay via Debit from your bank account, it is simply a blip in a server somewhere i.e. cost is close to zero and where regulation around Interchange Fees come into the picture.

If you pay via Debit from your bank accountDebit from cash in your mobile wallet, the cost should be zero. It is like paying in folding notes and coins, with no intermediary. If a merchant who already has your consumer trust, offers you mobile cash as an option at a lower cost it is an easy call. Even in a drunken Uber cab ride home you can peek into your mobile wallet and see if you have enough cash. This is where mobile wallet interoperability and the leapfrogging to mobile money in the Rest (which is a big theme on Daily Fintech) is key.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.