Payments

An Interview with the Chief Payments Officer at BankServAfrica on SA’s National Payment System

With the Fintech world immersed in events at Sibos, we at Daily Fintech had the opportunity to speak to Martin Grunewald, Chief Payments Officer at BankServAfrica. We discussed the future of National Payments System (NPS) with Martin, and he provided key insights on the approach, challenges and the work that remains to be done across Africa, not just South Africa.

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BankServAfrica is the largest automated payments clearing house in Africa. They process payments across 40 banks, about 34000 ATMs, with peak volumes in 2016 reaching R10.5 Trillion (includes electronic, POS and ATMs). The National Payment System is the infrastructure that BankServAfrica have been working on to facilitate interoperability between banks, ensure regulatory compliance and reduce complexity in the industry.

Martin has been at the forefront of the NPS redesign initiative and is hosting a community session with McKinsey at Sibos. The interview we did with him touched upon the following areas,

  • Drivers and Approach to modernising NPS
  • M-Pesa in South Africa
  • Impact on the unbanked
  • Fintech, Blockchain and NPS
  • Interoperability across Africa

What do you see as your role at Sibos this year?

Sibos is the gathering of about 8000 Financial Services and Fintech stakeholders across the globe. I will not only be representing BankServAfrica and South Africa, but also the whole African continent. I am keen to engage with the global community, share ideas and also learn from the rest of the world on how they are solving problems with the digital economy.

I would also be discussing and sharing ideas around addressing the unbanked and improving financial inclusion across the world. We will be flying the African flag and engaging with the globe.

Why do you need NPS to be modernised and what are the drivers?

NPS modernisation is a very interesting space and we are working closely with the Payments association of South Africa to make it happen. SA is a two-economy country where payments infrastructure has mostly served the middle class and the corporates.

Statistics are distorted when they claim that 70% are banked in SA, as they include 12 Million government grant earners who have bank accounts but are mostly unbanked. Without this population, the banked percentage falls to 57%.

We are redesigning the NPS so that it can be used by a wider audience. A redesigned NPS alone will not automatically provide financial inclusion for the unbanked. But we can definitely ensure that the design doesnt inhibit the process. 

For example, SA has had a real time payments system from 2008, for higher value transactions, that are priced that way. Even fraud detection is designed around high value transactions. A motorbike can be bought using real time payments, but not a 2 Rand transaction. NPS redesign problems such as this.

What was the approach to the NPS redesign?

We have taken a three staged approach to the NPS redesign.

First step involved looking at international markets. Countries like US, Canada, EU, UK and Australia act as comparable ecosystems economically, where there have been different approaches taken to address different functionalities. For example, RTGS has been addressed differently across these countries.

We also performed a comparison across developing economies such as Brazil, Mexico, Nigeria and India on how they are achieving modernisation of their payments infrastructure. For example, India is moving towards a pay by proxy style mobile payments infrastructure.

Second Step was to interview about 50 key stakeholders across these economies that included, banks, retailers, regulators, mobile operators and getting their views around the key problems we were trying to solve in SA.

Third Step was to arrive at actionable insights from the data gathering and execution of the actions. We have now kicked off modernisation of the NPS based on the results of the analysis.

What are your thoughts on M-PESA and its role in SA?

M-PESA has done well in West Africa, particularly in Kenya and Tanzania. However it has failed to penetrate SA, twice. From a SA perspective we need to open up the NPS system to other players. SA has an entrenched banking system. Kenya can’t be easily replicated in SA.

West Africa (Tanzania/Kenya) has closed loop systems running their course. Economies cant scale on closed loops systems. Payments for SA and for rest of Africa should be open and cater for other players that scale. 

How will the Fintech, Blockchain and Telecoms revolution influence NPS?

New Fintechs can create leap frog moments using new technologies, but when it comes to NPS the challenge is that there are legacy software and processes involved. They have to be open ecosystems that can interoperate, and not siloed. I see many tech solutions going into environments, without taking a top down approach.

Next generation of payments infrastructure cant ignore mobile. 10 years ago we couldnt have imagined a life without mobile. Its a key channel for transactions going forward. Informal set ups would depend on mobile for connections. Payment systems that do not make mobile friendly customer journeys will fail.

There is a lot of activity happening in the Blockchain space. While across other industries, applications are starting to emerge, within Financial Services it is still a great piece of technology looking for a problem to solve. 

How do you see your role across Africa?

I think Africa needs interoperability with the payments infrastructure. Financial inclusion has vastly improved in some countries, thanks to Fintech. However, they are currently quite closed ecosystems. We are working with the Gates Foundation and the World bank on our vision for Africa. We are working towards an open ecosystem that provides seamless interactions across Africa.

It was a very insightful conversation with Martin, who gave us time at short notice. An open payments ecosystem across Africa would be nirvana state, and if achieved would act as a template for other developing regions of the world to follow.

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.

 

 

 

An Interview with CEO of collectAI – for working capital management

Fintech for too long has been focusing on UX, and with the advent of AI, there have been many firms focusing on customer journeys, that would lead to closure of a transaction. However, in recent times, the focus has shifted to back office operations, and adding efficiencies to these processes.

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Germany based collectAI ​​automates ​and digitizes ​invoices, ​dunning ​and ​debt ​collection ​processes ​and ​is ​the ​first ​digital ​end-to-end provider ​in ​receivables ​management. They have achieved significant traction in Europe by processing €25 Million since launch in 2016.

We had a chance to talk to Mirko Krauel, CEO of the firm on their progress and plans, and here are the key points he mentioned about his journey with collectAI.

What led you to collectAI?

After a Diploma in Business Administration, I was working as a management consultant within digital innovation of Banking and Payments industry. During my corporate experience, I noticed inefficiencies in various back office processes. I also noticed that the Fintech startups at that time were mostly focusing on customer experience. I chose the problem to solve and I felt AI would have to be my go-to technology for the problem.

What was the best part of the journey and what were the challenges?

The best part of the journey was getting the team together, the initial days of getting the product design and getting to the MVP. We had quite a few challenges with the Go-To-Market strategy and our sales cycle was also too long. So we had to sit down and work out a way of going after mid-sized clients to have a few closures and build credibility. We also employed a few project managers who were able to bring deployments to closure on a plan.

The other challenge we had was getting access to quality data to build the software, but with time, we are getting better at that too. 

Tell us about the AI software you have developed

The AI software has got better over time as we have learnt and the software has done so too. It now evaluates

  • The best timing to send a message for the payment collection
  • Payment methods to include
  • The tone to be included (friendly, neutral, strict tone)
  • If SMS, Post, Email is better for a customer
  • If a payment plan should be offered

And as a result we end up with a customized communication strategy for every customer.

How do you measure performance of your AI program?

I think it would have to be based on the efficiencies achieved. We have introduced an intelligent​ email ​functionality that led ​to ​an ​increase ​of ​the ​collection ​rate ​of ​33%, ​while ​processing ​costs have ​been ​reduced ​by ​up ​to ​41%. 

It is a big market in Europe alone where about 23% of debts are not paid on time. We have managed £25 Million processed through collectAI in the last 12 months.

Those are big milestones that we have achieved within 12-18 months, and they wouldn’t have happened without the hard work of the team in building a capable software.

Where do you go from here, what is in pipeline?

We need to scale the team across various functions. We need a bigger IT team, enrich our operations team and also get a few PMs. I have also plans for developing some self service features within the product, which will help customer experience and conversion. 

There are a number of AI startups coming up across Europe focusing on back office operations. However collectAI are well funded by their parent company Otto Group, Germany’s largest online retailer, and they have also demonstrated execution in the last 12 months. There is serious competition across the Atlantic, however, they seem to have the advantage in the European markets.

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.

 

The Battle for the Billion – Payments in India heats up with Google Tez

A week ago Google launched “Tez” (meaning “fast” in Hindi), as yet another player in the payments segment in India. Indian payments industry has seen major growth over the last few years, thanks to the e-commerce boom. And e-payments is projected to be $500 Billion by 2025 – a market that can definitely accommodate multiple winners.

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A few questions I have been trying to find answers to since the launch are,

  • How does Google Tez stack up against the first movers, and the major players in this segment?
  • Is it too little too late for Google?
  • Will it help/hurt Google?
  • Will Google be satisfied with just the conquering the payments on smart phone market?

Before getting into these questions lets discuss the two key payment services in play here.

Unified Payments Interface (UPI) and UPI based apps: UPI is a feature that allows consumers to perform funds transfer, where the sender doesn’t need the bank details of the receiver. The funds transfer happens between two virtual payment address. Key differences between UPI and the other key methods of payments (NEFT/RTGS) are described here. UPI is currently used by 50 Indian Banks.

Apps that are predominantly UPI based, just act as a pass through layer for payments to happen. Examples are Google Tez, BHIM, PhonePe

e-Wallets: These are apps that store money and act as digital wallets, and will need to be topped-up from time to time with cash from either bank accounts or credit cards. When a money transfer is made, it moves from the sender’s e-Wallet to the receiver’s e-Wallet. PayTM is an Example.

 

BHIM was launched by the Government of India, and had quite a lot of success due to its simplistic design and interface. It is an app that supports only UPI transactions.

PhonePe, since its launch has been giving BHIM tough competition. It has richer functionalities for consumers from sending money to paying bills.

PayTM, ofcourse, is the one to beat in the Payments sector in India. PayTM is an e-Wallet, and has a different use case, as explained above. It has the first movers advantage and big money via investors such as Alibaba, and the might to take on Google at this stage.

Google Tez Features:

Tez takes a different approach to the Payments customer journey, perhaps to steer clear of the competition with PayTM. Tez is built on top of UPI, so users transfer money from one bank account (connected to their Tez app) to another, without storing money within Tez.

Tez supports a “Cash” mode that allows money to be transferred from one Tez user to another using Audio QR technology (AQR), which is supposedly more user friendly and secure. This is what one would need to pay the shop keepers in the local market.

Apart from this Tez supports several Indian Regional languages, has a fraud prevention feature called Tez Shield, and also provides a chat like interface.

Are they late?

Why would Sundar Pichai, someone who understands the Indian market come to the party so late? And is there hope?PaymentsTrend

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I believe, Google has the following advantages,

  • They have positioned themselves cleverly in the UPI space which is not the strategy that PayTM are currently taking.
  • As a feature within Google Tez, they support “Cash Mode“- which allows users to transfer money to nearby Tez users through a QR Code. India loves cash and this approach differentiates Google from the rest of the UPI lot.
  • As a further advantage, google has better data about every smart phone user than the Government of India or PayTM. If they put that to good use, they would be able to provide more contextual customer journeys.
  • Sundar Pichai’s understanding of the market, and Google’s might is a definite advantage on top of these.

It remains to be seen if they can accelerate from here, to conquer the UPI segment first, and eventually the smart phone payments segment in India.

The Next Billion

There are ONLY 300 million smart phone users in India. There are close to 650 Million mobile users (including smart phone users) and about a Billion who don’t have a smart-phone in India.

That is one mammoth market that Google would not want to miss out on.  But the advantages Google have with smart phone users (consumer data), is not something they can extend into the next Billion. So, one way to do it is through acquiring a key player in that market.

There are a few trying to conquer this space that shouts out for M-Pesa like innovation, and MoneyOnMobile is one key player. When I met the CEO of MoneyonMobile earlier this week, I was surprised to learn (inspite of knowing the Indian market) about the amount of efforts and capital it took to get the Next Billion on board. However, as Bernard describes in his article on MoneyOnMobile, the winner will make it big. And to me, Google might have to conquer that market through acquisition.

Google are not the first movers, so they are always going to play catch up. But they could do it right first time. 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.

 

Key Trends in Q2 Fintech M&A activity – Payments lead the way

Fintech deal activity hit a peak in Q4 2015, and as discussed in a previous post, steadily went down through most of last year. However, this year after a good start in Q1, there was a strong rebound in Q2 2017, and recent news have been pointing to some big ticket deals happening within the payments space.

As per KPMG’s quarterly report, globally Fintech investments hit a healthy $8.4 Billion across 293 deals. Rebounds were particularly noticeable in both Europe and UK. Fintechs in Europe managed to attract $2 Billion (in investments) in Q2, which is more than double the Q1 number ($880 Million).

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Some of the key trends from the report,

  • Corporate Venture Capital continue to increase their involvement in Fintech deals
  • Asia sees a dip in Q2 investments due to low China deal activity
  • Regtech deals could create a record year 2017. At the current pace its likely to surpass 2015 and 2016 activity (in size and count)
  • Focus moves from B2C (customer experience) to B2B (mid and back office efficiencies)

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Apart from the VC activity, Private Equity firms have turned their attention to Payments, as the deal sizes within payments start to increase. In the last eight weeks we have had some M&As and private equity deals announced within payments.

  • Igenico acquires Bambora for $1.5 Billion. This happened after Ingenico tried a hostile takeover of WorldPay assets
  • Worldpay merged with Vantiv with a £9.1 Billion deal. The new firm will be jointly led by Vantiv’s Charles Drucker and Worldpay’s Philip Jansen.
  • Worldline acquires Digital River World Payments and First Data Baltics, giving them operational positions in the Nordics and in the Baltics.
  • Visa invested in Klarna – how much they invested and at what Valuation is not disclosed.
  • Blackstone and CVC announce acquisition of Paysafe for £2.9 Billion

These are some of the top stories, but the key takeaway is that money is flowing the Fintech way, again!! Both in the VC and the PE 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.

 

Fraud Detection using AI and Mastercard’s acquisition spree

“Progress is made by the improvement of people, not the improvement of machines.”

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As more consumers turn to digital banking for their everyday transactions they will generate huge amounts of data that banks can use to identify trends and highlight suspicious behavior.

As digital transaction volumes increase, and real-time payments become the norm, banking solutions to identify frauds are often inadequate. In most cases these systems will need to determine if a transaction is genuine or not in a fraction of a second. Thanks to the AI wave, as fraudsters get better, machines spotting them get better too.

Cybercrime is estimated to cost the global economy 400 billion dollars. Credit card fraud accounts for a large proportion of this cost. Artificial Intelligence (AI) can provide faster, cheaper and more accurate fraud detection.

Some of the key considerations of a payments infrastructure (using AI) while solving the fraud detection problem are,

  1. Initiate the payments safely
  2. Handle billions of transactions
  3. Identify relationships through graph maps
  4. Social media integration and Sentiment analysis
  5. Behavioural analysis
  6. Adapt quickly as fraudsters evolve their modus operandi

An AI system can use thousands of data points in every transaction and do a fuzzy lookup to billions of other transactions to identify patterns, coincidences and anomalies.

Most payment giants are increasingly turning to AI and Mastercard is no exception. They have been acquiring firms focusing on fraud detection as AI deal activity hit all time highs in Q1 2017. In March 2017 Mastercard announced the acquisition of NuData Security to deliver online and mobile anti-fraud solutions using session and biometric indicators.

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“Our unprecedented use of artificial intelligence on our network is already proving successful. With the acquisition of Brighterion, we will further extend our capabilities to support the consumer experience.”

– Ajay Bhalla, President of Enterprise risk and security for Mastercard

 

Earlier this month, Mastercard announced the acquisition of Brighterion. Brighterion’s portfolio of AI and machine learning technologies provide real-time intelligence from all data sources regardless of type, complexity and volume. Its smart agent technology will be added to Mastercard’s suite of security products already using AI.

“Progress is made by the improvement of people through the improvement of machines.”

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.

 

IRS Subpoena to Coinbase and the broken US Fintech regulatory regime

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There is nothing certain in life except death and taxes! In March 2004 the IRS issued guidance on taxation of crypto-currencies. The gist of the message to consumers and corporates were the following:

  • Digital currency payments must be reported to IRS.
  • Gains from the sale of digital currencies are treated like those from a real estate investment.
  • Wages paid to employees in digital currencies are taxable and must be reported.

In November 2016, the IRS sent a “John Doe” Summons to Coinbase, asking for a complete dump of all transactions that happened on the platform from 2013 to 2015. Now, this sets a bad precedent when governing agencies demand such data that hurts data privacy of consumers. This could be because, the IRS has no clue what the taxation on crypto-currencies should be. And the intention behind the blanket data request is perhaps to understand what the thresholds for taxation should be.

Fintechs in the US have generally struggled with the regulatory landscape, primarily because of structural challenges and overlapping regulations. Unlike the UK where the regulations are pretty centralised, the US has state and federal agencies coming up with regulations that can be painful for startups to navigate through. There is little coordination between these regulatory bodies. Also, the regulations are very rules based and not considered as principles, which means they are inflexible.

'We heard that laughter is the best medicine, so beginning Monday we'll be regulating it.'

Moreover serious criminal penalties may be imposed on an entrepreneur who chooses to take a liberal interpretation of when an activity is a money transmission. There can also be serious implications under the Bank Secrecy Act if an entrepreneur naively chooses to seek forgiveness rather than permission. This liability regime also extends to investors, managers and employees in some cases.

At the moment, crypto-currency transactions are treated like property transactions, irrespective of the size of the transaction. The taxation policy on foreign exchange is slightly better where there is a threshold on gains(of $200) above which one needs to report the transaction. However, if I bought a cup of coffee using bitcoins it is a taxable event. And if I managed a gain between the time I acquired a Satoshi and spent it, I must report it to the IRS irrespective of the size of the gain.

The coinbase summon from IRS has triggered some republican congressmen to lobby for better tax laws around crypto-currencies. Coincenter, a non-profit is leading the efforts on getting better clarity on taxation of crypto-currency transactions and has seen positive responses from some members of the congress. With bitcoins starting to get recognised across various government bodies in developed economies, some clarity from Washington DC would be more than welcome.

While taxation on crypto-currencies seem to be one area where the rules are still unclear, Fintech/Payments regulations in the US need ground up thinking too. Earlier this week, Coincenter sent out a letter to the “Office of the Comptroller of the Currency” (OCC) asking for an innovation friendly regulatory regime.

In the letter they praised the UK’s Financial Conduct Authority (FCA) for making it easy and quick for innovative startups and entrepreneurs to comply with consumer protection regulations. They have recommended that the US replicate the UK regulatory regime to promote innovation.

'Well, the boss told us to launder the money, didn't he?!'

There is the other issue of governance of crypto-transactions to avoid terrorism financing. A recent assessment by the Center for a New American Security acknowledges that there is only anecdotal evidence that terrorism is being financed by crypto-currencies. This is primarily because the financial crime and money laundering controls at banks are still incomplete or insufficient to stop terrorist financing. However, congress may soon commission a study in this regard which will further influence the regulatory landscape of crypto-currencies in the US.

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.

 

Cyber Attacks in Cashless India – Ransomware just the start

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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.

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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.

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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.