3EDITORS LETTER

No doubt youve heard it before, but it bears repeating: this is an incredible time to be working in FinTech.

Despite our decades of shared experience, my teams at bobsguide, GTNews and PaymentEye all operating under the umbrella of our parent company, Contentive have never known a more exciting time in this industry. Thats why were so proud to present Payments (R)evolution, a limited-edition magazine which will be distributed in both digital and print formats to a total of 140,000 subscribers and testament to the incredible advances this sector has made over the last 18 months.

Its fitting that Contentive brings this special publication to you. Our industry-leading FinTech titles reach more than 150,000 readers every day, giving Contentive one of the strongest digital finance portfolios in the world.

And its only getting stronger. Were actively building on our long history of connecting buyers and sellers in this exciting space, supporting innovation and highlighting the best and brightest players in this unparalleled industry. Payments (R)evolution is part of that. Please enjoy.

Anne-Marie RiceCEO, bobsguide

2015 was the year that Apple moved into the UK payments sector, mobile-only banks sought licenses to launch and a raft of cyberattacks on massive companies made it clear that no organisation can be completely safe from a cyber threat.

In this exclusive first edition of Payments (R)evolution the teams behind bobsguide and PaymentEye, two of the industrys leading publications, shine a light on 2016. Here we investigate how current players are transforming their systems to keep up with new entrants and provide services to tomorrows customers.

One trending topic which looks set to continue in the years ahead is regulation, and we explore whether the current wave will help or hinder innovation.

We also address the impact of increased customer demand and the need for banks to install real-time payments infrastructures in order to provide the speed, mobile and online 24x7 access that consumers require, alongside necessary tracking and reporting features.

But we dont stop at 2016. We also take in-depth looks at the trends, politics and start-ups that will shape the future of FinTech in Europe. From how the refugee crisis will impact financial inclusion initiatives to the role of remittances, we look carefully at how money will move around the world. We also track the technology trends from wearables to social media that will transform the future of payments and ecommerce.

And we keep one eye on innovation, speaking to the people responsible for keeping big companies one step ahead of their more nimble competition and examine how big banks can use blockchain technology to transform their operations.

But its not all for the big players we also look at how start-ups can stand out to venture capitalists and end with an exploration of what makes London, our home town, one of the most exciting places in the world for FinTech.

This magazine is a celebration of Europe and the incredible people and companies putting it on the FinTech map. Were so proud to call this continent home.

Lucinda BeemanEditor, Payments (R)evolution

CONTENTS5

Editor and Publishing DirectorLucinda Beeman

EditorNicole Miskelly

ContributorsNeil Ainger Graham Buck Rebecca Brace George Carey Madhvi Mavadiya Leonie Mercedes Tom OMeara Benjamin Rabinovich DesignAlex PanichiProduction ManagerJabra Sayegh

CEOAnne-Marie Rice

Sales DirectorStephen McMaugh

Advertising SalesStefano Perciballi Edward Drew Rhys Adams

MarketingDeborah Roberto

Copyright 2016 Contentive. Copying and redistributing prohibited without permission of the publisher. This information is provided with the understanding that the publisher is not engaged in rendering legal, accounting or other professional services. If legal or other expert assistance is required, the services of a competent professional person should be sought.

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investment

7 FinTech investment frenzy continues

Banking

8 Industry Insights: Traditional banking vs

electronic payments

11 Excluded: Bringing Europes unbanked into the

financial system

15 Banking for the next generation

20 Remaking the blockchain: What Europes banks

can learn from bitcoins legacy

Payments

24 How does money move around Europe?

27 The future of remittances

31 Real-time payments: The time is now

36 Back to the future of payments

39 The death of the password

Money 20/20 Europe

43 Money 20/20 Europe: Sessions

48 Europes FinTech renaissance, 2.0

51 Why is paying for stuff so hard?

53 The customer-centric bank

56 Keeping up with the APIs

58 Its the (new) economy, stupid

62 Fat sharks, silly seals and why banks can no longer

afford not to be user centered

64 Can a great white change its bite?

66 Mobile money 2.0: How remittances are creating

a global ecosystem for mobile payments

Cybersecurity

68 Cybercrime: The biggest security threats to the

financial sector

71 Payment protection: Security and the cyber threat

Regulation and law

75 Regulation and innovation

78 Common compliance acts and regulations affecting

the financial sector

81 PSD2 and beyond: The future of regulating Europe

84 Payment services laws: EU vs US

E-commerce

87 Tell your friends: Social commerce is coming

91 Scale and speed: Driving innovation in multinationals

Innovation

95 Millennials: The payments people

97 London calling: Why FinTech loves the Big Smoke

102 Euro vision: Europes most exciting initiatives

104 What are VCs looking for in FinTech startups?

INVESTMENT 7

FINTECH INVESTMENT FRENZY CONTINUES

Last year saw an explosion in FinTech investment. Venture capital poured in to the sector, hitting $7.3bn in 2015, up nearly 130% compared to $4.1bn in 2014. The investment world was in something of a FinTech frenzy. So what happens in 2016? More investment, for one unless a couple of astronomical bets come out of nowhere, dont expect it to ratchet upwards at quite the same eye-watering rate, but dont expect it to stop, either. There will be plenty of investments.

Consolidation is coming. Payments is currently a massive, confusing and unsustainably fragmented FinTech segment. So its no surprise that 47% of global FinTech M&A deals tracked by Pivotl last year were payments companies being eaten up. As it gets more cut throat some companies will be acquired and some will simply acquiesce and bow out. There will be more consolidation across the FinTech space, but payments will again attract the majority of activity.

Scaling will be another theme in 2016. Many innovators have planted their respective flags in supposedly fertile territory. Now they need to prove their value, expand their presence and achieve scale. Partnerships may prove crucial in this context. Closer co-operation between traditional

banks and start-ups that began in 2014 and matured in 2015 will continue to drive them to coalesce in 2016. In Europe the effect of the PSD2 legislation will likely ramp up this burgeoning collaboration. But keep an eye out for challenger banks such as Atom, Mondo and Number26 and how they fit in to this tying together of the old and the new.

Its set to be a big year for bitcoin and blockchain. Criticised in some quarters as too volatile, slowly but surely its attracting more legitimacy from established digital brands, traditional banks and investors. This acceptance of crypto currencies will only increase in 2016.

On the blockchain front many of the worlds biggest banks are now exploring the opportunity. Dont expect to see the fruition of this flirtation straight away, but the fact these traditional players are exploring it all is a vindication of blockchain technology. More partnerships will be struck in 2016, there will be more investment in relevant startups and a broader applications of blockchain will emerge.

Finally, expect an influx of capital into startups looking to shake up the insurance industry. A lot of backing is likely to come from the corporate investment arms of insurance companies, as well as traditional venture capitalists.

Here Tom OMeara, editorial director of Pivotl, outlines where FinTech investors are looking in 2016.

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How is the electronic payments industry disrupting traditional banking?I think it depends on what country youre in and whether youre in the consumer or wholesale sector. The consumer area has seen a huge amount of change with new disruptive platforms such as Uber, Lift and Airbnb. All these systems want to embed payments and make transactions seamless and frictionless, so the consumer does not actually see it occurring. With businesses attempting to make these activities more convenient, more protection is required in the form of cyber security so that hacking, phishing and mule account activity disappear. In the EU, there is a lot of regulatory change that is imminent with the PSDII and Payment Accounts Directive. There is a massive amount going on and trying to keep track of all of it is hard.

Is it important for traditional banks to implement technology platforms?A move towards 24/7 and a harmonisation onto Extensible Markup Language (XML) will allow new competitors to come onto the marketplace and provide new services, therefore investment in these core platforms is critical. These systems are incredibly complex, expensive and risky to change. However, traditional players now have to make changes under risk based parameters and in a highly regulated environment. In the UK, we see lots of challenger banks establishing themselves, which is the most interesting thing. To see a platform that can start from scratch, acquire many new customers, go to market in a short period of time and become profitable is commendable. Its taken traditional banks a long time to get to the stage of having a stable business and this is a pivotal moment, where big legacy banks can move into the new market with new participants, but are still servicing the big manufacturing base.

Where do you see the internet banking space heading in comparison to the use of cash?Ireland has just become the latest country to abolish the one and two cent piece, but if this is to continue in other countries, children and the elderly need to be taken into consideration and whether or not it is convenient for them. Personally, I would like to carry cash with me as a protection mechanism and that is partly psychological. Until we move to become fully biometric and where you can literally stand in front of something and your picture debits an account, we will need cash, especially for transactions that people do not want to be tracked. Whats legal today might not be legal tomorrow, and what is seen as being a good thing to be doing, may not be seen as a good thing in five or ten years. We havent thought through the ramifications and its easy for us to say that wed love to move to digital everything, but I dont think life is that simple.

In what ways have you adapted in order to serve the digital customer?We have seen banks, big financial institutions and insurance companies trying to figure out how to provide a digital transformation journey for their customers. Our organisation has helped banks to take a step back and look at how they can rationalise the customer journey and in turn, streamline it and build in a better model that memorises data. It has been fascinating to watch the upturn and the speed at which people adopt technologies that the bank didnt consider possible in the past because they assumed these services were complex. I would argue that that in this day and age, its almost daft to have a chief digital officer because the entire thing is digital. Your whole lifestyle has moved and your entire day can be digital.

How is the electronic payments industry disrupting traditional banking?The rapid growth in the popularity of online and mobile banking has clearly changed the traditional banking model. The digital revolution and the increasing popularity of smart phones are changing how all generations interact with their banks, and are trends which are encouraging banks to become much more consumer centric than they have been in the past and ensure that they invest in technology that enables customers to access their money whenever and however they want. However, there are many areas of banking where traditional banks still do exceptionally well, such as keeping customers funds safe, securely moving money between accounts, identifying fraud and managing risk are all areas where banks have become incredibly proficient.

Is it important for traditional banks to implement technology platforms?The growth in the volume and value of electronic payments in both developed and more noticeably developing economies is unprecedented. Maintaining the integrity and security of these systems is fundamental to modern society and it is essential that banks capitalise on the data that they already own. Banks have a unique opportunity to improve the lives of their customers: by using their customers data more effectively banks have the chance to work with customers in understanding their businesses and in taking solutions to them that better meet their needs. Banks have a wealth of data that needs to be used to make our customers lives more efficient. We can help companies to do better and to measure their risk better.

Where do you see the internet banking space heading in comparison to the use of cash?There are sizable advantages to the electronic transfer of money in comparison to cash, not least in helping prevent financial crime. Transitioning to full digital will allow new services and innovation to be created. That aside, reducing and/or removing physical cash from an economy can be cost effective for individual banks, their customers and the economy as a whole. While the use of electronic transfers has increased dramatically in recent years, notably in northern Europe and developing economies, we dont expect to announce the end of cash any time soon.

In what ways have you adapted in order to serve the digital customer?Adapting to changing environments is something banks have historically done well. Traditionally, innovation in banks has been very product oriented, however, with the digital revolution and the change of customer behaviour we are seeing a new environment where everyone has the same challenges. Banks can no longer tackle customer interaction, leveraging data and security in separate silos, we need to look at how we operate more holistically. Without the customer expectations fuelled by innovative, customer centric technology companies, it is highly unlikely that innovations such as faster payments, mobile banking and contactless payments would have developed so quickly.

INDUSTRY INSIGHTS:

TRADITIONAL BANKING VS. ELECTRONIC PAYMENTS

Christophe ChazotGroup Head of InnovationHSBC

Liz OakesDirectorKPMG UK

BANKING 9

How is the electronic payments industry disrupting traditional banking?We are seeing a bigger focus around customer experience and as a result, looking at reducing both wait times and the friction of payments. Banks can be part of the disruption but they need to be less focused on foisting products on people and really think more about what the consumers frustration points are and how these can be solved. Banks want to innovate around a seamless experience and do this by providing online banking at home or the ability to get quick balances on mobile devices.

Is it important for traditional banks to implement technology platforms?iZettle really caught our eye a few years ago as a leader in EMV technology in Europe because of their ability to keep price points low with their add-on dongle approach to consumer payments. Focusing on small businesses, they have used this payment capability as a beachhead to expand their services and earlier this year, announced their move into small business lending. It seems like a lot of the innovation today is centred around the consumer, and beyond next year, a lot of wearables for the worker will emerge and it will be great to see the consumer tapping to pay. However, the real questions are whether or not the retailer will accept this form of payment and whether the consumer will have the ability to pay on the spot.

Where do you see the internet banking space heading in comparison to the use of cash?I think cash is decreasing and leading countries like Sweden and Denmark are in a race to be the first to become cashless. Interesting technologies are coming to the surface, for example, Danske Bank is using a combo approach of contactless as well as QR codes, so regardless of what phone a consumer has, it will still allow them to onramp onto digital payments, without having to wait for change. I also see Europe leading in the contactless space, with new regulations coming into force, which will require terminals to have a contactless capability, but the US will still be ten years behind due to struggles with EMV adoption.

In what ways have you adapted in order to serve the digital customer?What weve seen a lot of in the mobile banking space is that it better services the client because you are not just opening an account: you are having a dialogue with the customer. The major banks need to embrace this change and be less fearful about cannibalising existing ways of payments. Setting up a little startup within the company is what works and this almost drives the charter of inventing the new future, as well as blending it with technical and business process experts. Again, there is a human adoption factor to this and those working at the bank need to feel as if the change is good for them and not that their jobs are being eliminated. From a banking perspective, these digital teams dont need to be giant armies.

How is the electronic payments industry disrupting traditional banking?Electronic payments disrupt in many ways, from onboarding and customer acquisition to customer journey, financing and customer management in the form of newly equipped bank branches or branchless banks. New entrants to the industry are online first, and online only. There is a new way of banking that uses technology to help businesses to manage their financial affairs and making payments no longer requires people to go into their bank. Disruption will occur by using technology to help businesses manage their finances and have real control over their money, in a way that they havent had before. Real time and situation relevant solutions will therefore, be the standard.

Is it important for traditional banks to implement technology platforms?A fundamental priority should be the implementation of platforms that use real time customer data to improve the financial experience with added convenience and efficiency. For example, using real time dates to enable buyers and suppliers to authenticate each other is important so that speedier commerce can be delivered. Banks need to build faster ways for people to buy and settle. Buyers and suppliers want to interact quickly and securely in a fashion that enables speed of order, payment settlement and delivery. With cross border commerce expanding rapidly, the authentication of buyers and suppliers is a critical for underpinning and reducing friction in the purchase and payment process.

Where do you see the internet banking space heading in comparison to the use of cash?Tracking of money is vital to small and medium businesses and electronic payments result in tighter cost and working capital control. I believe that more and more businesses will turn to electronic payments and payment technology to track and manage their finances. Financial providers who manage internet banking portals, for example, could use more of the information that they hold to provide more timely offers to their end users so that they are responding to their real financial needs.

In what ways have you adapted in order to serve the digital customer?Mobile wallets that can support mobile payments with integration of those payments is where the future for payment providers will be. Your wallet will house most of your cash for both low value payments and B2B everyday payments to suppliers etc. We realise that the future of payments should bring real benefits to the end user. There are three key areas that we see for payment innovation: real time settlement, data rich payment transaction information and real time integration of sales and expense data into the companys ERP and accounting systems.

Madhvi Mavadiya takes an inside look at how large institutions have adapted to suit the digitalisation of the payments industry.

Michelle TinsleyDirectorMobility & Payments Retail Solutions Division, Intel

Michael CarboneDirectorSage Payments UK and Ireland

BANKING 11

EXCLUDED: BRINGING EUROPES UNBANKED INTO THE FINANCIAL SYSTEM

With more than 165m Europeans locked out by choice or necessity of the official financial system, financial inclusion has become a pressing concern on the continent. Lucinda Beeman investigates.

12 BANKING

Its a Monday morning and the rent on your flat clean, comfortable and nestled in a desirable street in any European capital is due. How do you pay it?

For the majority of the European population this is a hurdle easily overcome. A simple bank transfer from your desk at work, your living room sofa or even your phone during a commute will ensure that your family has a roof over their heads for another month at least.

But for 165m people from Iceland to Russias Pacific coast, the process is much more complex. These are the ranks of Europes financially excluded. Without a bank account, they operate in a cash-only environment where simple tasks like paying the rent are complex, dangerous and time consuming.

As Louise Holden of MasterCard Europe explains: When we talk about financial exclusion we think about Africa, Asia; those markets where it is a significant problem. But with 165m excluded people across Europe its a significant problem in our region, too.

While data from the Financial Exclusion Initiative indicates that rates of financial exclusion are much lower in Europe than in other geographies, just a single country the Netherlands can boast a financial inclusion rate of 100%. For countries in emerging Europe like Bosnia, Moldova and Georgia, less than 20% of the population uses financial services. In Albania just nine per cent of the population is financially included.

And thats not the whole story. According to Aurora Ferrari of the World Bank, any discussion of financial exclusion must begin with a common definition. She says: What we identify as financial inclusion is access as well as usage of basic financial services. In the Eurozone 90% of the population have an account, but another issue to understand is whether people really use these accounts.

Opting OutJust as the scale of financial

exclusion in Europe is vastly different from Asia and Africa, so too are the underlying causes.

While poverty is a determining factor worldwide poor people are less likely to have a bank account, regardless of their geography Europeans are more likely than their African or Asian counterparts to opt out of the financial sector.

And, because maintaining a bank account incurs a cost in many European markets, its common to see spouses and families sharing one account between two or more people.

Ferrari explains: Even if the cost of an account is 20 per year, why would you spend that when you could have an account with your spouse? In many cases people will wonder that. The higher income a country is the more likely each individual is to have an account, but I think there may always be a percentage who do not.

The ranks of the unbanked are

made up, too, of some of Europes most marginalised populations, including the Roma. These groups are difficult to bring into the system, primarily because the odds are stacked against them.

And, as would be expected on a continent as large and diverse as Europe, each market has unique factors at play. In Turkey, Ferrari says, the main priority is bringing women into the financial system; in Russia, on the other hand, the key challenge is ensure that safe financial services are available in the most remote and sparsely populated areas.

Threads of ChangeWhile projects from a number of

sources have made a significant dent in the number of unbanked across Europe over the last several years according to Holden more than 35m people have been brought into the official banking sector since 2012 a number of trends are impacting the future of financial exclusion in Europe.

The highest profile of these are wrapped up in world events: ID cards and consumer protection. With more than 100,000 Syrian refugees crossing the European Unions borders in July alone, this huge wave of humanity will need access to financial services.

Holden says: How do we make sure that [inbound refugees] have access to transactional banking, particularly if these are individuals entering the European geography

BANKING 13

without the paperwork and identification that other individuals have within the continents borders?

One challenge is reconciling Europes tough anti-money laundering regulations which require ID checks with the grim realities of facing the most vulnerable segments of the European and refugee populations.

India comes to mind, Ferrari says. They made a big push to give a biometrically linked ID card to everybody, allowing them to open accounts.

Consumer protection highlighted by eastern Europes Swiss mortgage crisis, when hundreds of thousands of homeowners across central and Eastern Europe took out low interest rate mortgages with Swiss banks only to be stung when the Franc surged against their home countries currencies has become a heated political topic in countries like Hungary, Croatia and Poland.

Ferrari says: This is an area where there is more to be done at the European Union level. After the crisis, Europe did a lot to support the creation of a banking union and to introduce laws to facilitate bank resolution, but they havent really done much in terms of consumer protection at the EU level. We would say that having a framework that ensures clear rules for consumer information disclosure and effective dispute resolution is a very important part of financial inclusion.

Europe also lags on mobile payments, she says. While initiatives like M-Pesa have made huge strides in Africa, the mobile payments system reached Europe relatively recently, with licences to operate in Romania and Albania secured in 2014 and 2015, respectively.

The very technologies with potential to bring many into financial inclusion could put others off. With trust in traditional financial institutions already weak in some areas Turkey included the risk of cyberattacks could be a significant block to progress. Ferrari says: This is becoming a serious issue. Who knows what could happen to customers details following a cyber-attack?

Individual governments also have a central role to play, Holden says. The way governments disburse benefits and pay their staff can be

an ideal entry point into the formal financial sector. Russia, for example, on-boarded 25m people when a group of cities switched their local welfare payments onto an electronic solution. Similarly, Italy was able to bring 1.3m of its citizens into the loop by distributing a welfare payment via prepaid card.

Holden explains: Many of our national governments recognise that by leveraging new technology and connected infrastructure they can deliver services more inclusively and cost-effectively.

Governments can also impact the future of financial exclusion through regulation. As Holden points out, regulations can either support or hamper the growth of inclusive financial products.

For example, regulations that make it more expensive to run banks in Europe could spur the entrance of non-bank actors that deliver basic services in a more innovative and cost effective way, Ferrari says.

Its important to have an ongoing conversation with individual regulators, Holden says. Were always trying to make the right decision for the consumer.

The Public-Private Partnership With so many powerful

stakeholders and complex trends governing the future of Europes unbanked, to whom does it fall to drive financial inclusion initiatives forward?

Holden and Ferrari are in agreement: strong, mutually-beneficial partnerships between governments and the private sector will do the most good for Europes financially excluded.

Ferrari says: On the one hand the government has to create an

environment where it is possible for innovation to happen. Then there has to be the private sector, because all of these operations are run privately for profit. A combination can help these solutions emerge.

Governments have much to gain from financial inclusion higher rates of financial inclusion correspond to better economies, a more productive workforce and a more secure population. But whats in it for the private sector?

With 165m individuals excluded from financial services, its not hard to tell: market share.

Holden explains: MasterCard is a commercial organisation, and were very honest about that. We recognise that as more individuals who move into transactional banking whatever solution they take some may come onto the MasterCard Network. But theres also the social imperative: this is the right thing to do.

And, as the world moves more and more online, the issue of financial inclusion will only become more urgent.

Holden says: The gap between the included and the excluded is getting bigger. Not only do they lack the same opportunities to create personal wealth, but also they may not have a digital identity. And the way the world is moving more and more towards a digital presence being a core requirement of buying a house, getting a job, establishing your identity being part of this connected world.

The implications are so much more than being able to pay your bills online, she concludes. Its fundamentally being able to be a part of the growth of the global economy.

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BANKING 15

BANKING FOR THE NEXT GENERATION

The banking industry is going through a huge upheaval, with new competitors threatening to take the livelihood of traditional banks. Nicole Miskelly investigates how new challenger banks are using mobiles, social media and data analytics to provide services for tomorrows customer.

16 BANKING

With traditional banks fighting for relevance and improved mobile banking experiences expected to be at the forefront of attracting new customers, the threat presented by challenger banks can no longer be ignored.

We are sitting at new frontier of enriched banking services, says Travers Clarke-Walker, chief marketing officer at Fiserv. Customers are moving towards digitisation in their entire lives, and from a quality perspective, banks should be questioning whether they are offering a digital experience that is best functional and worth customers end expectations.

Fiservs latest Software-as-a-Service (SaaS) offering Agiliti, is aimed at new entrants coming into the UKs banking sector and smaller existing players. We are expecting a number of digital and other style clients to follow on soon after Think Money which is planning to go live with its new core banking system using Agiliti early this year, says Clarke-Walker.

High street banks have not had it easy over the past few years and with financial services regulators keen to see new banks forming in the UK, this has created the perfect environment for new digital players to disrupt the market.

These new banks are revolutionising banking by providing digital-only services, which Clarke-Walker says can be interpreted in different ways. Some banks version of digital-only means they will not have any telephone call centres and others say that the main point of contact will be digital, but customers will still have access to staff and indirect access to branch networks through partnerships.

Todays bank customer expects to be able to use banking services on their mobile wherever they are, with the ability to contact their bank through different channels such as social media, but what does this mean for brick and mortar banks? Clarke-Walker says that branches will still exist because there will be customers that will want shop virtually exclusively online and others that like the comfort and security of a physical environment.

New digital challenger banks such as Fidor and Atom pride themselves on offering products and services that customers actually want and according to Katy Ringsdore, head of PR & internal comms at Atom

Bank, the bank intends on allowing customers to manage their money the way they want to. We have been speaking to customers over the last 18 months and we are going to continue to listen to make sure we develop truly excellent products that our customers actually want and need, says Ringdore. Its impossible to presume that all customers will want the same thing because everyone is different so we have created an app that will allow every customer to manage their money the way they want to not the way we want them to, she adds.

Atom, which was established by Metro Bank founder Anthony Thompson, was the first mobile bank to acquire a banking licence from the Bank of England in June 2015 and according to Ringsdore, what makes them unique is the experience they offer, the culture, the brand and the all-important app, which is going to change the way people bank.

Having the opportunity to start from scratch, without any legacy issues, Ringsdore says that Atom have been able to build the type of bank they believe customers want and in the process have learnt that customers want banking to be more

fun and reflective of the world we live in now.

Some of the things we have heard from customers are that they want managing their money to be quicker, more efficient, safe and secure, fun and personal to them. We have heard that they feel that banking is still very old fashioned and there is a need to bring banking up to date. We dont want to punish people for not being financially savvy, we want to help our customers to make the most of their money and by that we mean we will help our customers to understand and manage their own money, says Ringsdore.

On the topic of what customers want from a bank today, Sophie Guibaud, VP European expansion at Fidor Bank says they have learnt that customers want to feel that the bank is really listening to them. We have learnt that people like transparency and to feel close to their bank, customers also want to know that what they say has a real impact. Since Fidors entry into the UK in September last year, Guibaud says that the bank, which is still in the early stages, is already seeing trends about UK customers and has plans to expand banking services from

BANKING 17

retail-only, to corporate, white label and API banking, in line with the services already offered by the bank in Germany.

Guibuad says that with Fidors open API approach banks, telecom companies and fintech companies are able to launch their own financial services based on the banks infrastructure. In Germany, we currently have several different partners in areas such as credit funding and currency investment in a bid to provide a one-stop shop banking experience and will be starting to on-board partnerships in the UK.

As VP European expansion at Fidor, Guibuad makes recommendations about which countries the bank needs to launch in, which products they need to launch, then recruits and train the teams responsible. According to Guibuad, the move into the UK market, which is dominated by very few players, meant that they had to start fresh with their product offering. In terms of products, in the UK we started with a very limited offering because we wanted customers to tell us what they would like us to launch next, says Guibaud. Challenger banks are taking advantage of the lack of innovative mobile services that traditional banks offer and Guibuad says that part of Fidors philosophy is to be where their clients want them to be and not to drive them on specific channels. Therefore, we are in touch with them within the community and through social

media channels such as Facebook and Twitter.

Social media interaction is a huge part of peoples lives today, in particular the lives of 71% of millennials who reportedly check social media sites at least once per day. We aim look into any channels clients want us to be available on in the future because we dont want them to feel frustrated, we want them to be able to contact us when they want to and social media in particular, because it is so instant, enables us to reply quickly and be much closer to our clients, says Guibuad.

According to Ringsdore, as a digital bank, social media is the obvious medium of choice to communicate with customers. For Atom specifically, social media offers an unrivalled way to engage with customers, to have real, open and honest dialogue that is mutually beneficial but most importantly, it is the right context to, in real time, demonstrate and bring Atoms values to life for both Atoms people and customers.

However, social media interaction with customers is not as easy for traditional banks, which Clarke-Walker says is due to regulatory restrictions. Social media on the whole is quite difficult for banks. The regulations around marketing are particularly challenging in terms of the levels of information that need to be provided. Most banks will not allow their front line staff to communicate in social media around banking products and propositions.

Clarke-Walker also warns challenger banks to ensure that they are competent of being a social media business if they are going to advertise themselves as such. All new institutions and challengers will need to ensure that they really do have the infrastructure and competence to act in the way that they are promising to their customers.

Another way Fidor is encouraging customer interaction is through their community approach, which is made up of two parts. The first part of the community is our personal finance section, which is where customers can ask questions about personal finance and we pay our community members to give their knowledge and advice about this subject, rather than employing banking advisers, says Guibuad.

The second part is where members not only tell us what they would like us to launch next but where we treat them like co-managers and also ask them about pricing. Most recently we have spoken to community members about fair pricing for the Debit MasterCard we are launching next month. The idea of the community is really to design the products with our customers, she adds.

Many banks are focusing on using customer data to offer products, however, Ringsdore says that Atom is one of the few banks that are not intending to do this, and instead plan to use data to help customers manage their money better. We wont be doing any marketing in our

18 BANKING

app therefore, no sales! The data we use is of you and for you to use to help you manage your money. This becomes helpful and useful; it will help you to think about what you can do better to get what you want from your money. The orientation is about you as a customer and how you can improve your financial well-being, but we do not use data to sell you stuff, that is the massive difference.

It is evident from the rise in digital that the next generation are going to expect even more than the current one, and new banks such as Fidor are already anticipating what they will want from banking services. We are looking into this because we want to stay relevant to our clients in the future. We think that the next generation will expect more advanced PFM tools and we want to be able to provide them with a smooth personalised banking experience, which is why we have started to aggregate fintech partner offerings onto the platform, says Guibuad.

Ringsdore agrees that the next generation are going to expect more and believes that banks will be under even more pressure to deliver in

terms of speed. We can already see that the next generation will get bored easily. By bored I mean bored by slow decisions, delays, glitches, lack of answers. We are moving quickly in to world of the immediate or people move on. Banking right now is one of the few industries that still lags behind customers expectations and will feel more pressure from future generations.

There is currently an explosion of data and Clarke-Walker believes there are opportunities in everything from machines learning automatically, to people giving really good pre-determined analytically insight.

If clients are willing to share social media data then Guibuad says that Fidor plans to personalise the customer experience by showing widgets that the customer will be most interested in according to their profile and pushing the financial apps that they will be most interested in according to their profile. We think that the future of banking will be a true personalised experience, helping our customers to manage their finances better by using past and future analytical spending and relationship-based banking as

opposed to transactional banking. According to Clarke-Walker, all

banks have the ability to enrich transaction data today and should be focusing on the enrichment of mobile banking services. With this enrichment, a set of data analytics or behaviour analytics can make predictions better than they are today. For example predictive balance can help you to forward plan and many online and mobile banking applications show customers historic information. However, very few do this in a predictive way which is something that we should expect in the future.

If, like Clarke-Walker says, we are sitting at the beginning of the next generation of engagement and services which will be much more engaging in the future than they are today, then he is also right to predict that technology will play an even greater part and banks will rely upon machine intelligence, behaviour analytics and the internet of things in order to provide the consumer with better, more engaged, more relevant and more insightful services than they receive today.

20 BANKING

REMAKING THE BLOCKCHAIN: WHAT EUROPES BANKS CAN LEARN FROM BITCOINS LEGACY

BANKING 21

Since it first emerged under mysterious circumstances in 2009, bitcoin has earned itself something of a reputation, with its wildly

fluctuating value and role in transactions on the dark web. But the underlying structure that makes bitcoin work, the blockchain, a

virtually infallible distributed ledger of transactions, has not gone unnoticed by the major banks. Leonie Mercedes investigates.

The bitcoin blockchain makes it possible for people who have never met to pay each other bitcoins without the involvement of a central authority. Its a record of every bitcoin transaction ever made, distributed across a network of users who verify and approve every new transaction. Everyone on the bitcoin network can see the ledger, so its difficult though not impossible to tamper with.

Its this speed and efficiency that has banks interested in exploring distributed ledger systems. In the last 12 months, major banks including UBS, Barclays and Citi have announced that theyre looking into ways of using blockchain technologies in certain transactions.

But what are the difficulties of integrating this new technology into banks legacy models, what role will regulation play in its development and how far will the blockchains applications go?

Reducing the dragIn many financial transactions,

cash has a series of hurdles to clear in its journey from payer to payee. This is what makes transactions so slow: it takes time for banks to synchronise their internal ledgers, which ties up capital and introduces risk.

Gideon Greenspan, founder of blockchain platform MultiChain, explains: Most modern financial transactions involve ledgers being updated, rather than the physical movement of assets.

For example, a currency exchange transaction between two banks will be recorded in three ledgers one for each of the two banks, plus a custodial bank who is actually

holding the assets on behalf of them.

Each of these steps is fallible, and creates drag on the transaction. Greenspan continues: First, it takes time to verify that each organisation has an identical record of each transaction; second, the counterparties have to pay the custodian for this service; and third, discrepancies often need to be resolved manually.

Distributed ledgers can eliminate both the drag and the risk. In fact, Santander estimates that they can reduce the banks costs by up to $20bn a year by 2022.

They have the potential to replace banks as financial intermediaries for transfers and exchanges of money, says Eric Benz, co-founder of blockchain framework Credits.

Either banks will look at ways blockchain technology can enable their current operations or they will ignore it and slowly become extinct, he says.

Forging linksLast September, nine of the

worlds largest banks partnered with FinTech company R3 to develop distributed ledger technologies for use in market transactions. By the next month, a total of 25 banks had signed up to the consortium, including JPMorgan, HSBC and Citi.

Both UBS and Barclays have opened blockchain labs in London to explore the technologys potential. So far, the banks have been fairly closed-lipped about what they might use it for, but Mariano Belinky, head of Santanders fintech division InnoVentures, told Business Insider last year that the fund had identified

20 to 25 use cases where blockchains could be applied.

Sarah Martin, vice president of The Digital Currency Council, says that as more early movers openly show their interest in blockchain, financial institutions are now flocking together to keep up with the technology.

A certain FOMO [fear of missing out] has set in, best exemplified by the ballooning of R3 from nine to 13 to 25 member banks within just a couple of weeks, she says.

A younger modelIf developing the technology

to disrupt the financial markets is one challenge, finding a way to seamlessly integrate it into the banks legacy systems is quite another.

Many difficulties will present themselves when integrating into legacy infrastructure, especially in capital markets, Benz says.

He continues: Companies must understand how the hub and spoke model actually works in these real world environments before providing technology designed to improve or rather replace.

Martin agrees: Not all big banks have the agility to swiftly adopt something like blockchain technology into legacy financial architecture. Moving from the blockchain buzz in the accelerators and R&D labs to actually implementing a distributed ledger-based system will be a formidable challenge.

One stumbling block for the wide adoption of blockchain is the absence of regulatory guidance.

Regulators are just as flummoxed by the blockchain as everybody

22 BANKING

else, Martin continues. Banks are trying to get ahead of regulatory questions by working together to develop open standards and protocols for distributed ledger technology.

She says that one idea is to adopt more permissioned-based systems, managed by a group of banks. Accenture predicts that such a solution will run until regulation or legislation catches up with the technology, after which a permissionless service can be offered to the public.

Existing regulation would need to adjust classifications of currencies, property and commodities to be relevant, Benz says. He adds: Existing regulatory frameworks will also need to evolve to address issues of taxation, national security and money laundering, since blockchain can seamlessly facilitate cross-border transfers.

Greenspan says that while public blockchains like bitcoin are fundamentally incompatible with financial regulation, private blockchains can achieve goals that regulators are favourable towards. They tend to increase transparency in a marketplace, and they enable real-time monitoring by regulators, he says.

There are also questions about

the scalability of the blockchain model. Bitcoins blockchain is currently limited by the number of transactions it can handle per second as the size of a block is capped at 1MB, bitcoin can process a maximum of seven transactions per second. By contrast, Visa handles about 2,000 transactions per second on average. Not a big problem now, but certainly something to consider when such platforms are called upon to bear higher volumes of transactions.

Greenspan cites confidentiality as the biggest issue. Finding the right balance between enabling every party to verify each transaction, without every party seeing all of the activity of every other, will be crucial, he adds.

However, he says, solving this dilemma is a very active area of research: The most promising technology is called zero knowledge proofs. But I dont believe it has been solved yet.

Beyond cashIt isnt just cash that can be

expressed in a blockchain its possible to code other assets, such as luxury goods and property.

According to a report by The Economist, Honduran politicians have asked US startup Factom to

develop a prototype of a blockchain-based land registry to put an end to land disputes.

Last July saw the launch of Ethereum, a decentralised platform that lets users issue smart contracts essentially unbreakable contracts encoded in computer language.

Theres growing recognition that blockchain technology stands to transform financial services. But theres equal ambiguity about precisely how it will play out, Martin says.

2016 will be a year of experimentation into how blockchain technology can be used to make existing processes faster, cheaper, more transparent and more secure. But thats just the first step. Theres an untold world of automation, record keeping, data storage and operations management for banks to explore.

Benz says that the technology presents significant opportunities, though these new applications present significant legal disruptions, not just in banking and finance, but also in intellectual property and general commercial contracts. The moment blockchain becomes legally binding is the moment we will see true innovation with blockchain technology, he says.

24 PAYMENTS

HOW DOES MONEY MOVE AROUND EUROPE?

The flow of money sent by residents of the

European Union to a non-EU country in 2014

29.3bn

Which EU countries sent the most in 2014?

France 9.4Bn United Kingdom 6.8bn

Inflows of money to EU countries from

outside the Union in 2014

11bn

Which countries received the most

in 2014?

portugal 4.8bn poland 2.8bn

portugal

france

united kingdom

germany

poland

russia

ukraine

turkey

UK to Poland $1.2bn

France to Portugal

$1.3bn

Turkey to Germany

$1.5bn

Ukraine to Russia$2.2bn

Russia to Ukraine

$3.9bn

24 PAYMENTS

PAYMENTS 25

portugal

france

united kingdom

germany

poland

russia

ukraine

turkey

UK to Poland $1.2bn

France to Portugal

$1.3bn

Turkey to Germany

$1.5bn

Ukraine to Russia$2.2bn

Russia to Ukraine

$3.9bn

PAYMENTS 25

How does money move within Europe?*

Sources: Eurostat; *The World Bank (estimated bilateral remittance matrix for 2014)

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PAYMENTS 27

THE FUTURE OF REMITTANCES

28 PAYMENTS

In your view, how healthy is the remittance market in Europe and worldwide?Its certainly healthy for the incumbent money transfer players, but for customers its not. Remittance prices in Europe are some of the highest in the developed world, with fees reaching as high as 10% per transaction. No one, especially hard-working migrants, should have to pay that. Its something were trying to fix.

What are some of the major trends driving development of the space, now and going forward?We live in a world of hyperconnectivity, where the ways we live, work and interact with each other, especially remotely and across borders, have fundamentally changed thanks to digital, mobile and social technology. By 2020 there will be 6bn smartphone users worldwide close to the number of people on the planet. Thats nearly everyone online, all the time. Social media is also a key driver of change. Over 2bn people are active on social media networks and, for migrants in particular, its become a vital way of staying connected to family and friends abroad. These changes are resulting in a huge shift in the way that people interact with their money: lending, borrowing, sharing, donating, paying and getting paid. While digital payments and transfers are rapidly overtaking cash it wont render it obsolete as some predict. Cash will remain an important payout method, especially in developing nations. We will see mobile wallets gain more market share. By 2016, Juniper research predicts that mobile wallets will reach 200m - more than 100% growth from the end of 2014.

According to the World Bank, remittance growth is set to slow in 2015. Has this been borne out, as far as you can tell, and what impact will the slowdown have on FinTech companies operating in the space?Weve not seen it - Azimo continues to grow very fast. Its hard to generalise, but having been in the industry for a while now, what tends to happen is that people send the same number of transactions but a bit less each time. That reflects the reality that for many people is essential spend: money that gets allocated before anything else for the sender.The slowdown also tends to make customers even more focused on value than usual, which has helped the adoption rates of the digital only players, who tend to be around 80% to 90% cheaper than the incumbents. Broadly speaking, itll have limited impact on the FinTech industry.

Has the anti-immigration rhetoric sweeping across Europe and turmoil within the EU impacted the remittance market? How do you see these trends playing out in the future?Not yet, to my knowledge, but it does worry me as it is likely to have long term negative consequences on how many people want to emigrate to Europe with their skills and expertise. Its a shame, really we should be welcoming migrants with open arms, not turning them away at the door. Their contribution is what makes a country thrive.

What are some of the barriers to adoption youve seen for potential customers, particularly those who still use your more expensive competitors to send money? How can the industry help them overcome these obstacles?There are two key barriers. First is awareness; most people dont know that you can send money abroad online, quickly and at a fraction of the cost. The second is trust in a new service. This is a challenge for any new business, but especially a financial one handling peoples money is an emotional business. We work hard to overcome these with friendly and responsive customer support, driving down the cost of every transaction and encouraging our customers to share with friends and family. Word of mouth is one our greatest drivers of new customers.

Whats next for the remittance market and for Azimo more specifically?Remittances have been at the fringe of the financial services industry for such a long time, and its finally having its moment in the sun. Over the next five to 10 years well see greater visibility of remittances impact on the global economy. Mobile wallets will become ubiquitous, with nearly 2bn more people having smartphone-centric mobile wallets in Africa and Asia, a major step forward for financial inclusion. Given the rise in social media adoption, well see FinTech players integrate more with messaging and chat features such as FB messenger, WhatsApp, Viber, WeChat, Google Hangouts and the like. Whether those services are native or offered using third parties, itll bring our finances closer to the digital apps we use every day. For Azimo, well be looking to expand to new markets, such as Asia, and build even tighter social media integration.

As world economies grow more connected and travel more accessible, remittances become an ever more vital piece of the FinTech puzzle. Here Lucinda Beeman asks Michael

Kent, founder and CEO of Azimo, whats next for this vibrant market.

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REAL-TIME PAYMENTS: THE TIME IS NOW

Real-time payment infrastructures are spreading around the world with projects in Australia, the US and EU set to join Singapore, UK, India, Denmark and many other countries. The time is now for these payment backbones, but why are they popular, can they help banks retain customers and are they standardised yet on ISO20022, asks Neil Ainger

The key driver for the adoption of real-time payment infrastructures is customer expectation of a better, faster service that can handle mobile, online and data reporting in a modern electronic world. Closely linked is regulatory demand that banks provide this for citizens.

You cannot justify slow payments when consumers can order and get goods delivered in the same day, says Carlo Palmers, Swifts Market Infrastructures Manager. The disintermediation threat from financial technology (FinTech) newcomers, challenger banks and alternative payment service providers (PSPs) such as Venmo, Amazon, PayPal and so on are also a driver because banks dont want to lose customer immediacy and become

dumb plumbers without value-adding data, speed or convenience offerings.

National real-time payment infrastructures can meet these customer expectations. Whether to let PSPs on the shared national real-time payment infrastructure to encourage competition is another debate. Many regulators want to ensure open access so banks and newcomers can fight fairly in the services layer, not the infrastructure layer which banks often pay for and sometimes operate via a third-party collective that runs the technology back-end. Each country will decide the model based upon their finances, wants and needs.

32 PAYMENTS

Drivers for Real-time Infrastructures

There is a significant drive towards real-time payment platforms everywhere, says Lauren Jones, Head of Standards at the Payments UK trade body. Were seeing central payment infrastructures implementing real-time systems the world over. The need comes from increased customer demands for greater speed, mobile and online 24x7 access and tracking and reporting desires. Consumers are far more digitally insistent and fast-paced. They want to have the ability to make payments to anyone, anywhere, at any time.

Corporates are also beneficiaries of real-time systems in terms of immediate bill presentment and greater transparency over their cash flow, adds Jones. Central banks can use them to enable strategic and regulatory change, introducing more innovation and competition on the front-end, which sits atop the shared back-end platform.

According to Stig Korsgaard, engagement director for Nets, the Danish real-time platform which launched Q1 2015, such platforms are good for banks and allow banks to participate fully in the on-demand economy and compete on service. Speaking at SWIFTs recent Sibos 2015 trade show in October, Korsgaard said that user case studies emerge as you roll out real-time infrastructures. Weve seen taxi drivers, florists and many others use Nets in Denmark, he said, as he argued peer-to-peer (P2P) consumer demand led to merchant usage and, ultimately, corporate and widespread uptake.

Use cases have been strengthened and client demands increased, agrees Michael Bellacosa, head of global payments, BNY Mellon Treasury Services. Now that expectations are approaching critical mass, banks are beginning to put their effort - and considerable weight - behind the development of new, more rapid payment networks.

ISO20022 XML harmonisation on real-time platforms would help corporates get more out of such platforms because standardised messaging helps cross-border interoperability.

As infrastructures roll out around the world in Poland, Mexico and elsewhere ISO20022 standardisation is becoming a hot topic. Efforts are underway to deliver a global

ISO20022 framework for real-time payments projects via the London-based Real Time Payments Group (RTPG) and other initiatives such as the Swift Harmonisation Charter which will map to it in this area. ISO 20022 XML messaging also offers data-rich payment information to treasuries and its extra characters typically 140 against say 18 in Bacs payments at present in the UK mean mobile phone numbers can be used to initiate a payment, aligning it against a bank number. A range of other data services become possible too.

It is intended that new fast payment services in the US, under the auspices of the US Federal Reserve, and in the eurozone, under the auspices of the Euro Banking Association (EBA), will run on ISO20022 as they are rolled out in the next few years. Nigeria and India, with its extensive authentication services, and approximately 25 other countries already have a real-time payment platform in place with various levels of functionality. Instant confirmation of payment and, at the very least, same-day settlement is the bare requirement. Some countries run three settlement cycles per day, while others go for instant settlement. The originator, beneficiary, respective banks, clearing houses and others involved in the payment chain must all receive fast service to meet the definition of real-time, although the actual speed differs from country-to-country. Australia is aiming for seven seconds, for instance, on its new platform, while others use 15 seconds as an operational parameter, with regular same-day settlements

to follow. Other big nations still to migrate to a real-time system, however you define it, include China and Russia.

Ubiquitous Access is Essential According to George Evers,

immediate payments services director at platform provider, VocaLink: Ubiquitous access drives uptake.

When his firm launched the UK Faster Payment Service (FPS) technology back in 2008 it went live with 10 core banks covering 95% of the population, with each encouraging uptake. The UK FPS was one of the early pioneers in this field. Mediated corporate access has since been granted and discussions are underway about directly opening up the UK infrastructure to new challenger banks and PSPs that werent included in the core launch. More than 400 PSPs currently take part via a sponsor bank.

A new mobile P2P payment platform, Paym, has also been launched off the back of the UK FPS technology platform. Mobile commerce can be a big usage driver, adds Evers. A fact backed up by the Danish Nets example and recent Swish mobile payment launch in Sweden. VocaLink has since gone on to provide technology and advice for the FAST real-time payment system in Singapore, which is also adding mobile functionality, and many other nations around the world.

Other players are also contributing to the global roll out of real-time platforms. SWIFT, for instance, is involved in delivering Australias new payments platform (NPP). This

PAYMENTS 33

is due to go live by Q2 2017 with the technology design by SWIFT signed off in July this year, said David Brown, NPP program director at the Reserve Bank of Australia (RBA) during a presentation at the recent Sibos 2015 trade show. Were now doing the build out with mid-2016 the first delivery date, with testing to follow. RBA is a participant, but will act as middleman between regulators and banks.

The key objectives of the NPP programme, as laid out by RBAs Brown, are:

A 24x7 payment system. Real time funds availability. Richer data with payments Its

why its ISO20022-enabled, added Brown.

Easier addressing of payments So you can send payments using a mobile number or email, and not rely solely on bank account numbers.

A modern platform for future innovation an overlay services platform should enable new entrants, PSPs and others to take advantage of the new platform to drive payment and banking innovation.

The above NPP objectives could act as a how to guide for other real-time projects, although each project will differ slightly depending on individual nations particular needs. Not every country, for instance, will in effectively merge its Fast Settlement Service (FSS) with its central banks Real Time Gross Settlement (RTGS) solution with one backing the other up to ensure 24x7 out-of-office hours service

in Australia, but a common set of structural priorities and practices is discernible for all real-time platforms.

Payment limits, access protocols and other characteristics will differ but all real-time platforms should offer:

Confirmation in seconds: to reassure the consumer and provide certainty and trust.

Instantaneous immediate transfer: the money should actually move quickly after procedural confirmation is sent. Some back-end platforms may move money in seconds, others run three payment cycles a day. But it must be same day and fast.

Irrevocability: a payment must be final once its made.

24x7 Operation: this is important in an e-commerce world where customers are used to shopping, working, ordering goods in the supply chain and transacting outside of normal work hours. It does mean infrastructure providers and banks using it will have to think carefully about when and how they do upgrades and IT maintenance; relying on standby hubs, mirroring, back-up resiliency facilities and so forth. You cannot do upgrades over the weekend anymore.

There will no doubt be many implementation challenges along the way to Australias NPP launch in 2017, especially as this is a new area for SWIFT, even with its historical background as a global financial messaging and payments hub for correspondent banks. All

such projects face implementation challenges, however, and the benefit is that they can learn lessons from other early adopters. The pioneering UK FPS, for instance, was launched before ISO20022 messaging was on its present path towards becoming the de facto financial services XML standard. FPS instead used an old ATM and cards payment standard, utilizing VocaLinks history as a provider in this area in the UK, to launch the service in 2008. It was convenient at the time and subsequent VocaLink projects around the world instead look to ISO20022.

Implementation challenges As nations roll out real-time

payment infrastructures there are bound to be implementation challenges, both of a technical and business case nature. Technologically, established banks may struggle to connect easily to a centralised modern real-time processing hub due to aging siloed IT systems that are inflexible and require an upgrade, or newcomer banks might not have sufficient security, resiliency or messaging standard capabilities to be allowed access to the core. There are always ways around such issues a vendor aggregated solution could help FinTech newcomers or smaller banks gain access, or the core could cater more for their needs via an open access service orientated architecture (SOA) with simple application processing interfaces (APIs). In regard to the business case, each nation will have to decide for themselves who they want to let access the real-time platform but true competition dictates more is better.

Service level agreements (SLAs) will have to be put in place for each platform participant and platform provider, especially if its an out-of-country third party. Most nations set up their own national real-time payment company to run a service and liaise with third-parties as required.

Banks will also have to speed up their fraud monitoring capabilities. However, the essential elements of fraud monitoring in a real-time environment will not change drastically from present arrangements. The use of pattern spotting behavioural software, anti-money laundering (AML) checks and so forth will just have to get faster.

36 PAYMENTS

BACK TO THE FUTURE OF PAYMENTSHere Ben Rabinovich explores what the next decade has in store for payments.

The burning question of the moment is What is the future of payments? Last year saw non-cash transactions overtake cash payments for the first time, but does that mean cash is on its way out? Do the underwhelming receptions of Apple Pay and Apple Watch mean people arent yet ready to move on to newer payment traditions? Here we explore what the next decade has in store for payments made using cards, mobile devices and wearables.

CardsThe future of cards is an intriguing

one. When Apple Pay first went live it inevitably opened a Pandoras Box from which slipped reports from every conceivable source saying cards are on the way out. The reality turned out to be different.

A report by Payments UK forecasts that credit and debit cards will account for 60% of all non-cash purchases in 2024, up from 51% in 2014. It also predicts that the volume of debit card purchases is expected to grow from 9.2bn in 2014 to 16bn in 2024.

This idea that card payments will actually increase is echoed by the fact that in the course of the next five years, we will see twice as many card-accepting card outlets in the world, spurred on partly by cards expanding to geographic areas and merchant sectors where they could not be used previously, but also because of the incredible popularity of contactless cards.

The fact that we can use cards as contactless or debit shows why theyll remain very popular: their

versatility and nigh-on universal acceptance means they cater to a myriad of different consumer needs.

This is reflected in the European contactless card statistics. Mastercards 2015 research into its own Tap&Go contactless technology revealed that in the second quarter of 2015, tap transactions in Europe grew by almost 170% year on year and consumers already using contactless have tapped 20% more. Contactless spend (in Euros) tripled in Europe compared to Q2 2014.

There is another reason why the future of cards appears promising. Its not just because we physically use cards; its because were using them when we think were not. As Adrian Buckle, chief economist at Payments UK, points out when discussing Apple Pay: At the end of the day, payment is being taken as a debit or credit card payment.

Whatever the mobile payments service, Buckle points out, it still needs a card. Its a fine observation, and one that reveals how deep our attachment to cards goes.

WearablesWhile our relationship with cards

appears stable, our relationship with newer payment methods is less predictable. In that sense, its rather strange discussing the future of wearable technology when its present is unclear. The response to Apple Watch has been underwhelming, and initial predictions that it would sell 30m units in its first year now look like serious overestimates.

According to Paul Pike, director at

Intelligent Venue Solutions, its not enough to merely allow payments to be made on wearable devices. Consumers have to want them, he stresses. If a recent poll by YouGov is anything to go by, that simply isnt the case: just six per cent of the UK adult population currently own a wearable. However, it is important not to be hasty. YouGov caveats the research by pointing out that the uptake of wearables is similar to the uptake of tablets, suggesting that this will be a long game.

Despite Apple Watchs limited success, it played an important part in bringing wearables to mainstream attention. As Nick Mackie, head of contactless at Visa Europe, notes, Because of their leadership position in the world of consumer devices, Apple drives interest in whatever they are doing. I think [the Apple Watch] has definitely helped increase interest in and validation of wearable technology, particularly around payments.

And corporate interest has not waned; Barclays released a range of wearable devices including a wristband, a fob and a sticker.

Visa also remains interested in wearables, although its path is more sartorial, partnering with designer Henry Holland on a contactless ring and asking Central Saint Martins fashion students and graduates to consider how wearable payment devices could look and function by 2020.

Even traditional watchmakers such as Swatch, Fossil and TagHeuer believe there is something important about wearables, while the ease with which startups like Kerv and Blocks

PAYMENTS 37

are surpassing their fundraising targets on Kickstarter indicates a strong interest brewing amongst consumers.

According to researchers this interest, bubbling on the surface, will soon reach boiling point. In 2015 76.1m wearable units will have been shipped, up 163.6% from 2014. By 2019, worldwide shipments will reach 173.4m million units, resulting in a five-year compound annual growth rate of 22.9%, according to IDC.

Mobile PaymentsMobile Payments have much

in common with wearables, in particular the apathy they inspired in 2015 as Apple can testify. Just like its watch, the company found the apparently burgeoning mobile payment market rather cold.

In 2015, Tim Cook pronounced the year of Apple Pay. Instead, it turned

out to be the year of exaggeration. Apple Pay accounted for just one per cent of all retail transactions in the US after one year, according to research group Aite. In the UK, just 13% of people made a mobile payment in-store in 2015, according to Deloitte, which also said that just one per cent use their phone to make payments on a regular basis.

According Adrian Buckle the problem with mobile is simple: people already have cards and need a good reason to use mobile. He points out that consumers struggle to work out where mobile payments are accepted, and that the public feel it takes longer to wave a phone around than to use a contactless or debit/credit card. And dont expect people to use mobile payments because they are new or fun. As Buckley puts it: People dont pay because they enjoy paying.

But he does go on to say that the future of mobile payments isnt

as bleak as the present suggests, emphasising it is more an evolution than revolution. People dont like to change their habits, so any new payment method will be seen as adding to the payment experience, rather than changing it.

This is enforced by research showing that mobile payments are gradually increasing in Europe. A quarter of European consumers are actively banking on mobiles, marking a significant increase from the nine per cent recorded in 2011, according to Forrester.

The stupendous amount of options will also help technology in general. For those who do not like Apple there is Samsung Pay, which racked up $30m in transactions in its first month. If Samsung is still too constricting, Android Pay works on any Android phone. Even the networks and banks are getting in on the act with the likes of Orange Cash and Barclays Pingit.

38 PAYMENTS

Cash: Last but not least?The future of cash is perhaps

the most interesting. In a world of contactless cards, mobile payments and wearables, how can something as ancient as cash have a future?

And yet the experts are nearly unanimous: cash will not disappear for the foreseeable future. The Bank of England said in autumn cash will be resilient and not likely to die out any time soon. Visas Nick Mackie also doesnt think well be a cashless society within the next five years. But why?

The answer boils down to convenience and tradition. Physical money has been used for more than a thousand years; wearables have been around for mere months. People wont change their payment behaviour just because a new method is available. Cash is extremely simple to use, whereas mobile payments and wearables require initial and usually rather hefty investments and set up.

While cash is almost universally accepted, mobile payment coverage is limited.

Even countries dropping lower denomination of coins altogether do not believe cash is on its way out. The Republic of Ireland recently dropped 1c and 2c coins, but according to Ronnie OToole of the Central Bank of Ireland this does not spell the end for cash.

Rather, he stresses that it was a way of making cash more efficient. Cash will be around for a very long time, he says. This is enforced by recent statistics from the European Central Bank that revealed cash still accounted for more than half (54%) of all payment transactions across Europe in 2014, showing that EU member states on the whole prefer to pay with banknotes.

It is also interesting that, in the same report where Bank of England said cash will not go out any time soon, it pointed out that the UK population is hoarding

3bn domestically about 345 per hoarder. That may be the single most important reason why cash will not disappear into the annals of payment history: reliability. Cash is seen as a safety net, a back-up plan for when everything else ceases to work. Cards may fail, smartphones may run out of battery, but cash will always be there.

The truth of the matter is that the future will likely be very similar to the present. Payments UK predicts that in 2024 cash will still account for one third of all transactions, while contactless technology has prolonged the lifespan of cards greatly, and experimentation with mobile and wearables will gradually become more appealing as awareness and acceptance increases.

One thing remains certain: in terms of the number of ways in which people pay, the future is very bright, indeed.

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THE DEATH OF THE PASSWORD

2014 saw the introduction of payments being authenticated by fingerprint sensors with platforms such as Apple Pay. and this emergence caused biometrics to catapult into the banking industry. Madhvi Mavadiya explores how traditional banks have transformed their systems for consumers and corporates to suit the growing hunger for convenience, security and digitalisation.

It can be questioned to what extent the depletion of the usage of passwords will affect banks as newer, simpler, technologies have come to the surface. More and more consumers will be able to use modalities, such as fingerprint sensors, voice recognition, iris scanners and palm vein readers to make payments, because of the lack of risk involved in using biological data.

Conor White, president, Americas, at biometrics and identity assurance

software company Daon, believes that this form of technology will help the industry to move away from defining a person by their password. If youre authenticating a person and not something that represents a person like a token or a password, then it can remove most of the issues that we have with online commerce today, White explained. Bob Reany, senior vice president of global products and services of identity solutions at MasterCard has a similar attitude to this issue. Identity

solutions and understanding who a consumer is, is a really important part of business, not just to resolve fraud, but also for approval rates. A real focus for us is helping our banks understand who consumers are and biometrics is one of the layers that we use, Reany said.

A convenient way of banking has already been provided to consumers with the arrival of the internet and mobile phone transactions; but with biometric authentication and the replacement of security questions, it

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could mean that risk is eliminated. For example, Barclays launched their new online banking hub iPortal late last year, which helps corporate customers have direct access to services that the bank provides with the use of the Barclays Biometric Reader.

Getting rid of older technology seemed to be the top priority for Barclayss head of cash management, Michael Mueller, who highlighted that this was the right direction to move forward in. Traditionally online banking systems have not always made life easy for businesses. Corporate banking solutions that bridge existing products produce disparate, complex and outdated systems that require multiple logins on a variety of platforms, making banking a time-consuming and disjointed process, Mueller mentioned at the time iPortal was launched. With the use of Hitachis Finger Vein Technology (VeinID), which scans the users finger blood flow to confirm transactions, iPortal has the potential to present an overview of group balances across different business divisions in multiple countries, and therefore, revolutionise the worldwide economy.

Barclays Wealth and Investment Management believe that memory is a thing of the past and voice biometric technology should be taken advantage of, such as FreeSpeech from Nuance Communications. This system operates by checking a customers voice and comparing it to the voiceprints that have been stored to authenticate the payment in 20 seconds. Bob Graham, senior vice president and head of banking and financial services at IT consultancy Virtusa, explains that we are only at the beginning stages of how financial institutions can use biometrics and are looking at the start of the decline of using passwords for authentication.

The next wave of biometrics in banking will focus on using voice as an authentication mechanism. Not only will we use this on mobile devices but we will also see it in call centre areas where users will be able to be identified and authenticated from their voice imprint rather than inputting or responding to a series of security questions, Graham said. On the subject of the diminishing password, Graham responded to the situation by mentioning that the

elements of what your password can contain and how frequently it must be changed have grown dramatically and this has led to significantly increased pain and friction with customers.

Wells Fargo is another bank that has utilised biometric technology to renew the way we bank using voice recognition, but in combination with facial recognition to, in turn, create a more efficient mobile banking security system. After working with SpeechPro, a global leader in biometrics, to develop their mobile banking application CEO Mobile, they were able to eradicate the tedious transaction process of entering a user ID, password, unique security token or PIN number. Secil Watson, head of wholesale internet solutions at Wells Fargo, highlights how when this mobile app was piloted, the bank combined biometric markers, in order to result in a confident assessment of the customer.

Through this research, it was revealed that customers wanted choice, so a new biometric solution is set to be launched next year which operates by taking a video of a customers eye and will read the red vein and white part of the eye to authorise payments. Watson said that this solution will be well received because it is quicker than the selfie style voice biometric technology that provide at the moment. Feedback from customers revealed that in very loud situations, voice authentication failed on some occasions, Watson said. She continued to comment on biometrics as an alternative to passwords and how data breaches have contributed to vulnerability and insecurity at banks. We realise that passwords have been around for more than 15 years but they have also been hacked quite often because they are not changed as frequently as they should be. But, as the hardware technology evolves and there are better cameras, better microphones and better touch sensors, biometric technology will also evolve, Watson said.

In 2009, it was announced that biometrics leader Sagem Scurit (Safran group) had partnered with Hitachi to unveil the first ever multi-modal finger vein and fingerprint device called Finger VP. In this device, Hitachis VeinID finger vein imaging which detects the blood vessels under the skin is combined with Safrans fingerprint

identification technology called Morpho. At the time, this was the only multi-modal device that was capable of processing two sets of biometric data at the same time and could be used for one to one or one to many verification. Chairman and CEO of Sagem Scurit, Jean-Paul Jainsky believes that with Finger VP, biometrics will open up new opportunities for identification systems. By combining Finger Vein Authentication with fingerprint analysis, security has never reached such a high level, Jainsky commented.

This questions whether multi-modality when using biometric authentication increases security and in a recent whitepaper, Implementing a Mobile Biometric Authentication Solution published by Daon, this is explored. You dont want to have to rely on one single biometric factor, such as voice recognition or fingerprint. The partner you select should have experience in and support voice, face, and fingerprint authentication on a single platform.

Rolling out a biometric authentication program is complicated enough without having to engage multiple companies, each supporting a single factor, the

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whitepaper explored. Daons system IdentityX has been implemented by financial services company USAA and a million users have signed up for the biometric login system since integration at the start of 2015. A case study which explains the partnership between Daon and USAA presents that although biometric identification had not yet gained traction in the financial sector, the bank realised how IdentityXs facial authentication with liveness, voice recognition and PIN verification would bring them success. The triumvirate of face, voice and PIN options allows members to select their desired means of identity verification based on the circumstances at the moment, the case study said.

Regardless of multi-modality solutions, security is always going to be an issue, but it is important to bear in mind the False Match Rate (FMR) and False Non-Match Rate (FNMR) when implementi