Payment skunkworks

Where should banks be looking?

This is going to be a big year for those of us in the retail payments world. Apple has legitimised the nascent mobile sector, so with their mindshare blessing we will see soon begin to see the phone as our core financial services device. We have the Bitcoin and cryptocurrency crowds snapping at the heels of (as they see it) the banking industry dinosaurs. In the UK we have services live on top of the immediate settlement system that provides inter-bank settlement for 98% of all mobile and internet transfers, unlike anything in the US, and we have a rash of startups coming out of the Fintech scenes in London and New York.

So, with all of this going on, where should the financial institutions’ payments skunkworks be sniffing around for the coming year? Well, here are five suggestions based on the work that that I see my colleagues at Consult Hyperion doing right now, suggestions as to areas where I think financial services organisations should pay serious attention to technology decisions that are being made in the short term because of what they mean for business in the long term. These are five areas where fundamental business strategy decisions need to be made. Bank leaders! Please don’t see these as nerdy computer science issues and please don’t leave them to the IT department!

“App and pay” rather than “tap and pay”

The first area is in-app payments. Some countries (e.g., UK, Australia) already have very well-developed contactless infrastructure and the use of contactless payments is now mainstream. Naturally, much of the discussion around Apple Pay, Google Wallet and Samsung in retail has focused on the “tap and pay” simplicity of the mobile phone using contactless technology. However, there are lots of reasons for thinking that this will be a sideshow rather than the main event. The introduction of new security infrastructure (“tokenisation”) means that in-app payments (“app and pay”) can now be more secure than chip and PIN payments and since I rather imagine that most retailers would prefer no POS (point-of-sale) at all to enhanced POS, there will be pressure from them to shift. As far as they see it, tills and chip and PIN machines and cash drawers are waste of good retail space: chuck all of that stuff onto mobile phones and they’ll be more than happy.

Given the experiences that we already see around us from Uber to AirBnB and KFC, I think that in-app payments will become the norm, the most frictionless way to pay. Once again, this is hardly a wild prediction, given the number of organisations in the US that have already implemented Apple Pay inside their apps. As Google and Samsung and others shift their offerings into the same space, I predict that it will become natural to pay with your Walmart app, your Shell app and your Burger King app (collecting your rewards as you go) rather than use something from your bank.

Think global act… no, wait…

This leads on to my second suggestion as to where to look for change. This what I’ve clumsily labelled re-localisation. We’ve lived through a period where there is been great pressure for internationalisation and the globalisation of payment solutions. Nobody wants to travel with 100 different cards in their pocket and when I get off the plane in the US or Australia or anywhere else I expect to be able to use my Visa, MasterCard or American Express card just as I do at home. But a combination of factors ranging from interchange regulation to in-app payments to non-bank players means that we will see a swing back toward more domestic solutions. In many parts of the world national payment solutions are seeing a resurgence, many of them looking at China Unionpay as an exemplar. Look at Poland where the banks have just launched their own domestic mobile payment scheme or Ecuador where the government is introducing a national mobile payment scheme (somewhat similar to Kenya’s M-PESA). But I think the trend toward multiple three-party systems instead of a small number of four-party systems means that we may see a return to payment systems that are owned and operated by retailers (as Starbucks has already done), brands and perhaps even local communities.

One interesting categorty of community, in this context, is the city. With the growing power and confidences of cities, it will be only a matter of time before foreign visitors landing at Heathrow will download their London app, put their banks details in and set off to tap their way around the tube, buses, cafes and shops of the great city. And when they go to Paris, they’ll download a Paris app, so if Paris has a different transit ticket, different money, different payment systems they won’t care.

Private lives

The third area is privacy. This is rising in the public consciousness, but no-one knows what to do about it. As a society we’re not sure whether people should be allowed to have privacy or not. My observation is that have privacy, you need security. Here again, the mass market use of smartphones is changing the landscape and Apple have done us a great favour by making biometric authentication against local tokens held in tamper-resistant hardware a convenient, secure platform.

Once we have that kind reasonable identification and authentication technology in widespread use then we can begin an intelligent discussion about how to use it. One of the first uses will be privacy. I think that for many stakeholders in the payments industry, the opportunity to make privacy a key part of their customer proposition, something that must be founded on strong security, is now a feasible business strategy. Privacy, as can already been seen in the actions of Apple and Google, is moving from a back-office hygiene factor to an integral component of consumer products.

It’s the blockchain, stupid

The fourth is the blockchain. This is the technology behind Bitcoin. Now, I’m on the sceptical side of the fence when it comes to Bitcoin becoming a currency and I’m not the only one. Bitcoin has an uncertain future. But the technology it is built on, the open, distributed public ledger known as the blockchain, well that is something different. It represents a class of technologies (which is why people talk about “blockchain technologies”) that are a new way of solving an old problem.

Why is blockchain so interesting? Well, in parallel with a demand for privacy there is a growing demand for transparency. When you look at how a product like Venmo is evolving you can see that certain groups within the population are opting for their own notions of privacy and transparency and I think this represents an underlying and more general demand for transparency from institutions and control for individuals. This is where blockchain technology scores. Whether you think much about Bitcoin as a currency or not, trading digital assets using an open distributed public ledger means a new kind of commerce that can combine privacy and transparency to create new and trusted markets, fulfilling the “incentive function” that has been the remit of banks for the last few hundred years.

Everything a sensor, everyone a spy (as they say)

The uniqueness of blockchain assets (the end of what we technologies call “double-spending”) may mean that the impact of the technology is also felt in the physical. Eric Schmidt of Google said that this is the real technological breakthrough. Blockchain technology means that you can have only one of a digital asset, that means that it can correspond to a physical asset (I call this virtual-mundane homomorphism, but then I’m not in marketing). This leads me on to the fifth area of focus: the Internet of Things. I agree with the predictions I see all around about 2015 being a turning point in the evolution of the Internet of Things and I see examples of new collectivity and new devices around me all the time. What I don’t see is a security infrastructure emerging to manage those connections and manage those devices and this is where I think we may see intellectual effort rewarded in 2015. In fact, I can see that this might become the key focus area of the coming year as the Internet of things comes together from digital assets that are traded transparently, previously for the people involved in the training, in-app transactions using a variety of local identity and payment systems make for a seamless new environments of interaction and transaction.

Where next?

The new era of payments isn’t all about you tapping your iPhone at Marks & Sparks. It’s about your stuff paying other stuff, and it’s an incredible opportunity for the payments industry to expand and deliver.