Re-Imagining Payments

Volume 2 Issue 4

TCS BaNCS Research Journal_Vol 2 Issue 4.indd 1 12-06-2014 AM 11:25:43 Neophyte’s serendipity (Beginner’s luck)

Be it a seasoned banking whiz or a business head at any bank—large or small, the pressure to get to grips with the changing times is growing at an ever-increasing pace. To begin with, the challenges posed by multiple delivery channels, disintermediation, dynamic business models, compliance with global and local regulatory changes, among others, are having profound implications on banks today.

At Tata Consultancy Services, we believe that the need of the hour is to ‘Uncomplicate’.

To cut through these perplexing and all-encompassing demands with a time-tested, market-ready and move-as-you-grow solution, TCS BaNCS—at any time and any place. With the right mix of interactive, intuitive and instantaneous technologies that deliver exibility, agility and greater operational control, this universal nancial services platform can help your bank drive customer growth, reduce Total Cost of Ownership(TCO) and enhance new product development—all together. How can we make such a promise? Some of our success stories will tell you how. TCS BaNCS enabled a leading bank in India with a network of over 18,400 branches, 25,000 ATMs and over 261 million customer accounts with a unied technology platform to create one of the largest homogeneous banking networks in the world. On the other hand, TCS BaNCS re-engineered a Taiwanese Bank with a network of 101 branches to run 24/7 with 99.9% up-time, bringing down its TCO by a staggering 58%. TCS BaNCS has scored leadership consistently in industry analyst reports.

Now, don’t you think it is time to uncomplicate?

Banking | Capital Markets | Insurance To nd out how TCS BaNCS can uncomplicate your business, visit http://www.tcs.com/OFFERINGS/BANCS

TCS BaNCS Research Journal_Vol 2 Issue 4.indd 2 12-06-2014 AM 11:25:47 Neophyte’s serendipity (Beginner’s luck)

At Tata Consultancy Services, we believe that the need of the hour is to ‘Uncomplicate’.

Now, don’t you think it is time to uncomplicate?

Banking | Capital Markets | Insurance To nd out how TCS BaNCS can uncomplicate your business, visit http://www.tcs.com/OFFERINGS/BANCS

TCS BaNCS Research Journal_Vol 2 Issue 4.indd 3 12-06-2014 AM 11:25:48 FOREWORD Omni-consumers, Omni-commerce and Payment skeletons…

The Payments domain is going transaction flows are on the Some are leveraging the cloud for through immense transformation rise and there is a definite on-demand processing capacity globally, and it is one area where need for banks to support their and to manage peaks beyond a innovation and re-imagination clients with offerings such as threshold; some are consciously is taking place. Firstly, it is also cash concentration, FX and cash creating a payments hub kind of perhaps the most noticeable area management type of offerings infrastructure to move volumes in which non-banking firms are to retain loyalty; (b) the rise away from core banking systems; positioning themselves to take a of point-of-sale/debit card and, a few others are segregating share of banks’ wallet, resulting transactions, mobile payments, high value and bulk payments. in banks becoming determined financial inclusion and government to protect their turf. Secondly, payments are placing enormous Irrespective of the above, a interest rate volatility implies challenges on the availability common thread we are seeing that banks depend increasingly of systems and infrastructure is increased “surveillance” on fee based income as opposed resilience; and, (c) regulations and and “intelligence” on payment to interest margins for growth, market initiatives are playing their transactions with the objectives leading to banks conceptualizing part in the form of SEPA, FATCA of understanding client behavior Payments as a “Product” as and AML/KYC. better and thereby creating opposed to being consumed by instantaneous and compelling clients as a granted “Service”. In this context, banks have been offers for customers. These re- Thirdly, a whole new or different at the forefront with the aim to configured infrastructures will not way of doing business is emerging, renew their technology options only help the bank understand i.e. that of ‘alternate/digital and excel in the race to offer client behavior better but also currencies’. just-in-time value. They are make the client feel understood. also reconfiguring their skeletal Unless banks do this, they are As if the above drivers are not (legacy) infrastructures to support bound to create high levels of enough, (a) global or regional availability and resilience concerns. customer dissatisfaction. Let me

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 4 12-06-2014 AM 11:25:48 share a real-life experience to At TCS BaNCS, payments, cash reflective of omni-changing device illustrate this very point. On one management and transaction features. of my trips abroad to an exotic (or banking have been and continue forbidden) country, I discovered to be a focus area of our product We are proud to partner with to my horror that my bank did not research and development some leading institutions in honor my card transactions there. activities. We evolved our creating world-class solutions, in I thanked the Almighty that I had payments processing capabilities the form of: carried another card with me. My from a solution that processed • a pan European Payments and efforts to reach out to my bank high value, international SWIFT Cash Management solution proved futile when I was told that I and domestic RTGS payments to for Societe Generale, which should have informed them about a standalone payments engine allows operations of 7 European my impending trip before I left the today-- one that manages a countries on a single application country. Now, well, for this, did variety of domestic and cross- and database; they point me to a web page or a border payments and integrates branch when I had used the very with commercial banking • a multi-market Single same card to process my tickets and financial institutions as a Application Payment Services and hotel accommodation before centralized payments processing Hub at American Express my trip? In fact, they should have hub at our customer organizations to enable SEPA Compliance sold their travel insurance or FX to in the advanced markets. for payables and receivable me. A lot can be gleaned by mining Needless to say, such an offering instructions (Credit Transfers payment transactions. Period. is helping banks gain a holistic and Direct Debits) well ahead view of their liquidity and that of of compliance deadlines in the So, what are we doing at TCS their customers. regulatory market place; Financial Solutions in this regard? We have also created innovative • a first-of-its-kind Enterprise We believe that the onus is on apps on the retail side, be it for Payments Hub for AXIS Bank in banks to ensure that they extract clients on the go or for small India, which enabled the bank as much value as possible from businesses such as restaurants to initiate unique offerings; the digitization and regulatory or multi-brand boutiques using • an end-to-end Money compliance related technology Surface and Touch technologies. Movement platform at Morgan investments they make and to Such solutions seamlessly Stanley Smith Barney in USA for look at the instant benefits of help integrate the ecosystem seamless money transfer among enhancing customer relationships. and its stakeholders and help accounts within the firm and Partnering with alternative deliver deliver ultimate client with other banks over NACHA; payments solutions providers is convenience. We have adopted and, definitely an attractive option cutting-edge tools and hybrid and for banks and is a much debated development infrastructure in our • a partnership with Mozido in topic today. pursuit to remain current and be the mobile payments space.

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 5 12-06-2014 AM 11:25:48 No doubt, we live in exciting interactive and integrated solutions times relative to payments. TCS to collaborate with our partners Financial Solutions is closely and customers in generating true watching market developments, value in the payments space. and continues to invest in intuitive,

N. Ganapathy Subramaniam (NGS as he is called) heads TCS Financial Solutions, a division of Tata Consultancy Services Limited (www. tcs.com/bancs). Part of TCS and the Indian IT Industry for more than 25 years, NGS has had numerous opportunities to perform a multitude of roles in delivering solutions to TCS customers globally, and especially, in the Banking and Financial Services sector. As a part of his current role, he is responsible for steering the financial products business, under the brand name, TCS BaNCS, globally. TCS BaNCS is a suite of products covering the banking, capital markets, and insurance domains.

NGS in-depth knowledge about IT trends and systems policies of leading global corporations, gleaned from international exposure, is evident in the leading role he has played in a number of mission-critical projects for the financial services industry. He actively participates in banking, technology and business forums in addition to specific knowledge streams in Straight-Through-Processing, risk management, front-office systems, back-office processing in capital markets and Six Sigma orientation.

N Ganapathy Subramaniam President – TCS Financial Solutions Tata Consultancy Services

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 6 12-06-2014 AM 11:25:50 Editorial Advisors

Dennis is the Chief Marketing Officer for TCS Financial Solutions – Tata Consultancy Services (TCS) Strategic Business Unit 100% focused on leveraging all of TCS business applications to the financial services marketplace around the world. Dennis is responsible for establishing and enhancing TCS Financial Solutions brand equity as a leading specialty IT solutions provider to the global financial services industry. His responsibilities include the entire range of marketing, communications and research activities including branding, media & public relations, industry analyst relations, lead generation, advertising, direct & telemarketing programs, collateral & websites development and event execution.

Dennis Roman Vice-President TCS Financial Solutions

Nitin works in the Product Management function of TCS BaNCS and is responsible for the areas of Payments Processing , Corporate Cash Management and Transaction Banking. Out of his 20 years of experience in TCS, he has spent more than 15 years working with TCS BaNCS. During these years he has worked across many functions in the product lifecycle. With a special interest in the payments domain, he has worked on building and implementing Payments and Cash management solutions around the TCS BaNCS product. This includes a refresh of the TCS BaNCS solution based on ISO20022 standards. He has worked closely with customers across multiple countries in North America, Europe, MEA and APAC. At present, he is engaged in a program with a leading banking institution to build a first-of-its-kind Payments Hub in India. He is a keen follower of Payments related innovations and evolution across the industry.

Nitin Sirohi Principal Consultant TCS Financial Solutions

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 7 12-06-2014 AM 11:25:55 Editorial

Finnish company, Uniqul, new players. In the payments alternative payments providers hopes to turn your face ecosystem today, it is delivering collaborate. Ainto a unique PIN and on the promise of speed and make it the mode of payments simplicity. Gareth Lodge, Senior Banking transactions in the future. Analyst from Celent, takes us This edition of the TCS BaNCS through his experiences in the Paypal’s owner recently tweeted – Research Journal is focused on challenges--and many nuances--of “My card got skimmed in the UK, exploring the many ways in which creating a true, real time payments ton of fraudulent txns. Wouldn’t the payments industry is going system. We also delve into how have happened if merchant through RE-IMAGINATION. the definition of a payments accepted Paypal” transaction has morphed into When traditional, big firms not just completing a transaction These examples illustrate—and don’t rule anymore, there is a within a stipulated time but also reiterate--the arrival of a new redefinition of the way financial having all information about the payments ecosystem wherein large relationships are looked at. We payment reach the recipients and scale, game-changing disruption is explore this aspect in greater regulators instantaneously. This taking place. depth in the article on Payments is what ISO 20022 standards are Transformation. seeking to achieve. - Where cash no longer is king, and digital payments (and Brett King, a leading evangelist The advent of biometric digital money) rule of digital banking and Founder, technology and the increasing CEO of Movenbank, whom we use of wearable technology have - Where you can manage money interviewed for our TCS BaNCS resulted in biometrics products with your face, or the sound of Research Journal, says that for creating a positive image in both, your voice, the touch of your those banks wanting to stay ahead the minds of payments players finger, or a wearable device of the curve in this space, it is not and users. When one has to - Where a host of new players in about innovation so much as a remember ten passwords, and the addition to banks and retailers more compelling user experience easiest and most used password is, are playing transformative roles wrapped around a payment. An ‘PASSWORD’, it is only natural that interesting point he mentioned digital footprints are tampered Disruptive innovation of any that I found worth pondering with. The more integrated the kind inevitably results in more about was that partnering forces applications are, the easier it is convenience, leading to a better you to think of user experience to create avenues for fraud. The way of doing things, or creating in a big way. And, this is what article on Biometric Technology newer business models and will happen when banks and takes you through the steps being

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 8 12-06-2014 AM 11:25:55 taken to curb fraud from a global most contentious and controversial have harmful effects on liquidity point of view. measures in the form of the resulting in increased market Volcker Rules came into effect on volatility, remains to be seen. With digitization assuming April 1, 2014. It was only natural significant thrust today, where that we took a small deviation To sum up… total customer is the micropayments industry experience is driving disruptive and understood what it meant. headed? Our article on the innovation in the payments space. By curbing banks from trading evolution of micropayments Services and solutions that assure for their own gain and allowing illustrates the many factors customers that financial services only what is designed to lessen that affect (and, sometimes, players are listening to their needs bank risk and serve clients, the impede) mass adoption. Digital and gathering insights to create ruling is meant to curb speculative micropayments, in many ways, are relevant, available and contextual behavior akin to the run-up to the spurring innovation to circumvent solutions are what will thrive in cost and complexity. financial crises. But does it have this hyper-connected era. the ability to differentiate between While we were exploring all proprietary and legitimate trading these changes happening in the functions of a bank, thereby, payments industry, one of the reducing incentives to gamble, or Happy Reading!

Anjana Srikanth

Editor/General Manager Marketing, Communications and Research TCS Financial Solutions

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 9 12-06-2014 AM 11:25:55 10 TCS BaNCS Research Journal

TCS BaNCS Research Journal_Vol 2 Issue 4.indd 10 12-06-2014 AM 11:26:02 what’s inside... VOLUME 2 ISSUE 4

12 impending Disruption in the Payment Marketplace - Should Retail Banks be Worried?

18 an Interview with Brett King on the Future of Payments

22 Real-time Payments Getting Real

28 Payments on ISO20022 – Time to on-board?

36 Revival of Biometrics in Banking: Heralding a New Era in mPayments

44 the Volcker Rule – Seeking to Shield banks’ customers

50 Payments in India – A Continuing Journey

56 Micropayments: The Case for Wider Market Participation By Banks

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 11 12-06-2014 AM 11:26:05 Impending Disruption in the Payment Marketplace - Should Retail Banks be Worried? - A Validation Using Porter’s Five Forces Framework

The decibel level in the payments industry marketplace. Perpetually connected wanting faster and easier ways of is high with payment related innovations customers are quickly reclaiming control doing banking. They are demanding a becoming commonplace. Ubiquitous of the banking relationship with how and transparent and convenient payments mobile devices, with always-on internet who they do business with. experience that is efficient, secure, access, supported by a number of path cheaper and faster. Making real time breaking technologies are providing a There is friction everywhere in the payments is still a pipe dream for many platform for disruption in the payment payments industry with customers in the advanced countries. Excessive

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 12 12-06-2014 AM 11:26:14 innovations collectively and separately Payment Digital Currency Analytics impact its future.

Force #1: Bargaining power of customers Payment Technology Disruption Smart Infrastructure Payment Industry ATM Consumers today live in a world that is always connected, with “always on” Pre-Paid Remittances Mobile Card messaging and social networks. They expect banking to work in that context. Consumers are also rapidly adapting to the new digital-led banking experience. Mobile Check Mobile Mobile Mobile Mobile Deposit Commerce P2P Wallet Bill Pay From a mainstream banking point of view, it is not a satisfying experience with detailed paperwork, manual transaction fees and delayed payment mainstream and disrupt the industry? interventions, longer processing time settlements continue to be big sore Should banks be worried about it and and excessive fees. Laxity in security and points. New technologies led by mobile what should be their response? frequent downtime deny a 24x7 banking computing, in particular, are bringing to experience. light these glaring inefficiencies. While it is not easy to predict if any of these could disrupt the payments industry Payments have become expensive, time- Is the payments industry in a dire state? soon, it is also certain that ignoring consuming and opaque. High churn, It depends. For many of the newcomers, them will be at one’s own peril. But one low switching costs and a plethora of this is an exciting place to be in, as there thing is clear - a correct understanding substitute solutions from alternate is an opportunity to solve some of the of this consumer-led, technology-driven providers are attracting consumers to perennial problems facing the industry payments landscape and how it will pan these newer players who are providing an through new, digital innovations. For a out in the future needs to be factored in alternate digital experience. retail bank, however, there are more while formulating a payment strategy. questions than answers. Are these The bargaining power of buyers is VERY innovations hyped? Will they move Analyzing the payments industry using HIGH. Michael Porter’s Five Forces Framework Force #2: Threat of substitute products or Porter’s “Five Forces” theory is a popular services framework for industry analysis and strategy development, designed by The mobile phone has become a Harvard professor Michael E. Porter, disruptive payments platform for new which posits that competitive intensity innovations and is attempting to replace and attractiveness of any market is cash and checks. Some of the recently determined by the bargaining power launched products have the potential to of customers, the threat of substitute disrupt the payments industry, namely products or services, the bargaining P2P payments, mobile wallets, mobile power of suppliers, the threat of new check deposits, pre-loaded cards, digital entrants and rivalry among existing currencies, smart ATMs, among others. competitors. By analyzing these forces in relation to the payments industry, one can P2P payments: After registering gather a clearer picture of the competitive with a bank or a trusted third-party environment and how the current organization, money transfers can be

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 13 12-06-2014 AM 11:26:26 Is the payments industry in a dire state? It depends. For many of the newcomers, this is an exciting place to be in, as there is an opportunity to solve some of the perennial problems facing the industry through new, digital innovations.

PayPal, Square, Starbucks, Isis a joint at people who are unbanked, as well venture by AT&T, T-Mobile and Verizon as those who would like to avoid high made using just the receiver’s e-mail among others, have taken the lead in bank fees. These cards can be used address or mobile number. Major launching the mobile wallet. players in the fray include PayPal, Square, Google Wallet, Ribbon, Mobile check deposits: Mobile check Dwolla and ClearXchange. Paym was deposit is a technology that replaces A recent Javelin report launched in the UK recently with nine the inefficiencies prevalent in the participating banks to facilitate money world of paper checks. Customers found that mobile transfers using just a mobile phone deposit a check into their bank check deposits can number. Similarly, Tencent and Alibaba accounts by snapping a photo of it are battling it out in China. Vodafone with a smartphone. A 2012 Javelin cost the bank as led M-Pesa is a successful mobile report found that mobile check money system for the unbanked in deposits can cost the bank as little little as four cents Kenya, which lets customers pay bills, as four cents per check, while the per check, while the transfer money without any bank traditional branch-based deposits involvement. could cost anywhere between 75 traditional branch- cents and three dollars per deposit. based deposits Mobile wallets: Contactless payment According to Mitek, around 11% of US technologies allow banks and other consumers have already used mobile could cost anywhere providers to launch digital wallets that check deposits. between 75 cents can potentially replace physical wallets and also provide a number of add- Pre-loaded cards: Reloadable prepaid and three dollars per on services like ticketing, couponing, cards sold at retailers and banks deposit. loyalty offers, payments and banking. function like debit cards without the A number of non-banks like Google, checking account, and are targeted

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 14 12-06-2014 AM 11:26:30 The threat from the substitute products Force #4: Threat of new entrants is VERY HIGH. Countries like The payments industry has become a Force #3: Bargaining power of suppliers hotbed for innovation with new players Australia are building wanting to upstage the traditional ones new payment The several decade-old payment and dominate the market quickly. They infrastructures especially in advanced come from varied industries ranging platforms that will countries are an impediment to from startups, telcos, card companies, supporting real time payments. There supermarket chains, technology transition to a real is a lack of transparency in the current companies and de-nova banks, offering time system. Similarly, settlement process with the value of simpler functionality through an free float enjoyed by banks continues to exciting digital experience that appeals the Financial Conduct remain very high. to everyone including the millennials. Authority is planning Many see greater opportunities Unable to support innovation, various in the payments data to generate to open up the UK stakeholders are looking at alternate advertisement revenues. A number payment sector to approaches to improve the current of these players are today offering system. Countries like Australia are everything from debit cards, checking new companies to building new payment platforms that and savings accounts to money transfers improve competition. will transition to a real time system. and small business lending outside of Similarly, the Financial Conduct Authority traditional banking. is planning to open up the UK payment sector to new companies to improve competition. The Federal Reserve is also to withdraw cash at ATMs, purchase planning to overhaul the U.S. payments online and, at supermarkets, reload system to achieve faster payments than Cell phone carriers cash, with lower fees than that of bank is currently offered by ACH. On the other accounts. are pushing hard into hand, the emerging market countries Digital currencies: A digital currency is have leapfrogged with state-of-the-art mobile payments as a way to exchange money in real time national payment infrastructure and a natural extension without any chargeback and behaves are able to provide a better customer literally like cash. Bitcoin is one of the experience. of their services e.g. popular digital currencies without any Isis, Weve a similar physical borders, national sovereignty Without a modern payments or middlemen and is an internet-wide infrastructure at banks, the market venture of Vodafone, payment system where transactions is open for new players for greater either happen with no fees or very disruption, while also rapidly making the O2 and EE among low fees. Digital currencies have current systems redundant. A number others. Vodafone is the potential to disrupt the high-fee of players are already innovating in this world of banking through new ways of area such as Dwolla, Square, PayPal, successfully replicating paying for goods and services. ClearXchange and virtual currencies like the M-Pesa model in Bitcoin, all with the capability to build an The above innovations, amongst others, alternate payments infrastructure. the emerging markets address the current inefficiencies in the and even in Europe. payments marketplace and can provide a The bargaining power of suppliers is superior digital experience to consumers. HIGH.

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 15 12-06-2014 AM 11:26:30 Square, Stripe, YapStone, Xoom and PayNearMe lead a crowd of startups, many aiming to simplify how money changes hands. Giants such as PayPal, Apple, Amazon and Google top a list of big companies that already have substantial payments operations, with Facebook recently applying for an e-money license to enter the remittances market.

Cell phone carriers are pushing hard into mobile payments as a natural extension of their services e.g. Isis, Weve a similar venture of Vodafone, O2 and EE among others. Vodafone is successfully replicating the M-Pesa model in the emerging markets and even in Europe.

Supermarket chains like M&S, Sainsbury providers offering products such as credit to their customers in spite of the many and Tesco are becoming financial services cards, saving accounts, personal loans and frictions that exist in their offerings. insurance, among other services. Card companies like Visa, MasterCard, MCX , a consortium formed by retail and American Express are looking at Despite the looming giants Wal-Mart, Target, Home Depot, opening up their market through new 7-Eleven, Best Buy, CVS, Sears and Shell offerings based on pre-paid cards, mobile threat, banks continue will bypass the traditional payment wallets, among others. PayPal continues networks altogether. Starbucks’s to dominate the payments settlement to possess inherent spectacular success with its mobile business. clearXchange, a network of four strengths. They payment application, with several million of the seven largest U.S. banks operates a active users already, is an eye opener. P2P network for its member banks, while have large customer Digital currency Bitcoin and its offshoots Western Union and MoneyGram maintain bases; vast amounts are pursuing new ways of settling money their domination in the remittance globally and on a larger scale. business. of customer and transaction data; and The threat of new entrants is VERY HIGH. The rivalry amongst existing players is VERY HIGH. strong capabilities to Force #5: Rivalry amongst existing execute payments competitors What should banks do? securely – all of The competitive rivalry in payments As one can see, Porter’s five forces has intensified over the past year with analysis implies an approaching digital which are difficult to banks, card companies, telcos, de-nova disruption that could fundamentally replicate quickly by banks, payment companies, supermarket transform the payments industry. A chains and large technology companies number of players from diverse industries newcomers. all trying to engage with the consumer, are trying to influence the outcome of this with traditional players trying to hold on marketplace in the backdrop of a rising

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 16 12-06-2014 AM 11:26:37 the risk of being relegated to back-office fulfillment irrespective of what form utilities thereby losing their customer factors the future may take hold Build fundamental touch points. (Google Glass, smart watches, etc) thereby helping consumers make capability to support Despite the looming threat, banks optimal decisions on what to buy, continue to possess inherent strengths. multiple contexts of where, when and how to buy it – They have large customer bases; vast whether it’s dinner, a car or a new customer fulfillment amounts of customer and transaction home. data; and strong capabilities to execute irrespective of what payments securely – all of which 4. Continuously evaluate new form factors the future are difficult to replicate quickly by newcomers. Much will depend on their technologies to generate innovative may take hold (Google ability to leverage these competitive ideas for a superior digital customer Glass, smart watches advantages by providing greater customer experience, through dedicated fulfillment through rapid digital adoption. innovation labs or partnership etc) thereby helping Banks should consider the following. models.

consumers make 1. Build strong capabilities in (a) Finally, each bank will have to pick a optimal decisions on customer data consolidation (b) real strategy that leverages its strengths and time channel interfaces and (c) rapid what to buy, where, supports its business goals, but also creation of new payment products accept the changed context that they when and how to buy through a modern open banking have to strategize for. In the meantime, platform. it – whether it’s dinner, consumers are embracing mobile in large numbers and are clearly showing 2. Digitize business processes quickly, be a car or a new home. their preference for the convenience and it customer communications, channel interactions, marketing and selling, simplicity of transacting on the mobile amongst others. anywhere, anytime and on any device. customer preference for greater self- Banks need to rise up to that occasion service in an increasingly integrated digital 3. Build fundamental capability to and delight their customers in this new, and physical world. And banks are running support multiple contexts of customer digital world.

Thomas Mathew Principal Consultant, TCS Financial Solutions, Bangalore

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 17 12-06-2014 AM 11:26:37 An Interview with Brett King on the Future of Payments

Brett King is a bestselling author, The We present here an interview with Brett banks, in particular the payments industry, American Banker’s Innovator of the King, where he shares his insights about be doing to counter these developments Year for 2012 and the founder of the the payments industry. and stay ahead of the curve? direct mobile bank, Moven. A global thought leader in financial services and In your first book “BANK 2.0”, you talked The toughest thing to counteract or customer experience, King is a sought about disruptive customer behavior, the circumvent as an organization in the after-expert on innovation, technology rapid technology shift and emerging banking or payments space is the inertia new banking models. In the subsequent disruption, customer experience and and friction built into the current system. channel distribution strategy. He book titled, “BANK 3.0” you covered I think it is fair to say that a lot of banks publishes regularly in his role as industry latest trends that are redefining financial see the changes coming down the advisor on the Huffington Post, Internet services and payments and why the pipeline, but they have valid concerns Evolution, SeekingAlpha, American gap between customers and financial about turning their business on its Banker, FinExtra and his personal blog services players is rapidly growing, leaving Banking4Tomorrow.com and hosts a massive opportunities for new, non-bank head until it is absolutely necessary. weekly radio/podcast, Breaking Banks competitors to totally disrupt the industry. Unfortunately, this is the same with Brett King on Voice of America. In this context, what should traditional approach that organizations like Borders

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 18 12-06-2014 AM 11:26:47 be in a position to build from scratch, union has actually forced regulators to so acquisition and investment in new simplify, rather than add burden and As payments become technology developments and start-ups complexity. is a real possibility, but only for the larger faster, simpler and institutions. Friction is the big killer in all of this, and more efficient, the partnering forces you to think about For payments companies, the challenge the user experience in a fundamentally challenge will be will be the inherent value of the payment new way---one that you may not have payments simply network shrinking. As payments become come to within the confines of a bank. faster, simpler and more efficient, the The problem is that banks tend to won’t be differentiated challenge will be payments simply won’t think like banks, and not like start-ups. in and of themselves. be differentiated in and of themselves. Start-ups, however, often completely Staying ahead of this curve is not about underestimate the regulatory burden Staying ahead of this innovation so much as a more compelling and risk and compliance requirements. curve is not about user experience wrapped around the Thus the two need to work together. payment. If the payment becomes innovation so much invisible, the priority shifts to what Global Mobile Payments transactions as a more compelling happens before and after the payment are expected to rise to $945 billion in rather than the payment itself. This 2015 (IE Market Research). We are user experience requires broad collaboration. witnessing increasing growth in real- wrapped around the time payment tracking, development There is also the opinion about the of new applications for mobile devices, payment. alternative payments industry requiring mobile wallets, P2P payments, NFC & QR more regulation, especially with respect to code adoptions, and so also component- non-banking players. What are your views driven platform-agnostic technology on this? Should banks also be opening up architecture. What new technologies and Blockbuster took to disruption in their platforms for co-creation with third do you see becoming a part of the their industry, and they learned (as parties? mainstream payments space in the banks will) that these changes can occur coming years? What should banks do to so rapidly that if you haven’t already Banks have to open up their platforms re-engineer their payments processing committed to the future direction of for collaboration. We don’t need more and stimulate innovation for increased the industry, you rapidly lose relevance. regulation frankly; in fact, in the US customer intimacy? Let’s be clear, banks can’t counter these where Moven operates we need thinner developments, they have to adapt – and regulation. The problem with regulation The recent shift towards Host Card that’s the hard bit. now is that it is so complex that it tends to Emulation and Tokenization is creating a reinforce old structures, product silos and shift away from the card as an artifact, In the banking space the most recent approaches which prevent innovation as and from the PAN (Personal Account acquisition of Simple by BBVA is an a sector. These is why 2/3rds of all checks Number) as an identifier. Things like example of the sort of approach to are still written in the United States, and a signature on the back of a plastic this problem that we’re more and why the US has been so slow to adopt the card with a mag stripe make very little more likely to observe over the next EMV standard around card payments – sense moving forward. This is not about 3-5 years. As branch revenue retreats both putting them 10 years behind more shoving a debit card into a mobile wallet; and the economics of branch banking progressive markets. The EU (European however, this is about creating value day- starts to fail, banks in particular will Union) has an advantage in that the need to-day for an account holder. We’re just have a real crisis of identity, and won’t for regulation to fit across the entire starting to see this pivot in thinking.

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 19 12-06-2014 AM 11:26:50 control of their financial future and Rather than compete to be the “living better”. It is considered to be a primary bank, Moven is designed to Friction is the big customer platform offering insights about be the Primary Financial Application, money management and not a Bank. a tool consumers can use every day killer in all of this, and You use social media and gamification for managing their money. Instead of partnering forces you to encourage saving and other positive trying to incentivize customers to swtich behaviors. Can you share your vision for banks, and then trying to up-sell other to think about the Moven with us? products, Moven’s call to action is simply user experience in a to download the app. With mobile sign- Today the basic current account offers up, funding and IDV, onboarding is low fundamentally new limited value – it is a secure store for your friction, low cost and immediate. way---one that you cash, and gives you the utility to move money around. However, it’s limited to Moven starts by training users to use the may not have come to just about that. app daily (our best customers use the within the confines of App 3-5 times per day) through real- If you want day-to-day engagement on time notifications and financial wellness a bank. a smartphone, the value has to be much insights. more significant than a simple value store or a payments artifact. However, Within first 90-days, customers shift their whatever comes next has to also satisfy primary discretionary spending to Moven When it comes to customer intimacy, then another critical goal. (see Typical Moven Deposits), then armed the ability to offer context to payments, with behavioral data, aggregated data or give advice in real-time, will be a Margins on basic bank accounts have from other bank accounts and credit real staple of the future of banking and been declining for years, to the point cards, location and social media inputs, payments. Banks need to think about where almost half of US checking Moven adapts stimulating smart spending their processing capability as a messaging accounts are unprofitable today. The and savings behavior. architecture around the payment, not just solution lies in creating an app that a processing of payments. customers use everyday, one that We want to redefine the bank account delivers ongoing value, so that revenue as something you download, with day- Moven stands for values that empower moments can be easily presented, and to-day value. Where a branch has no your customers by helping them take executed in real-time. role or value…

Brett King Founder, Moven Bank and Author of Bank 3.0

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 20 12-06-2014 AM 11:26:55 TCS BaNCS Research Journal_Vol 2 Issue 4.indd 21 12-06-2014 AM 11:26:56 Real-time Payments Getting Real

As an analyst, we try to balance our there are certain trends that catch Much of these discussions were driven by time by gazing out to the horizon and even the most seasoned trend spotter two key events. anticipating what might happen in unawares. One of those has been real- the future and against focusing on the time payments. First, in June 2012, there was the public near term, advising on making the announcement by the Reserve Bank of right decision, today. As such, there That is not to say that Celent is unfamiliar Australia mandating that Australian banks are a number of trends that we, at with the topic - far from it. I worked on build a real-time system, and in a short, Celent, have correctly predicted, such several attempts at bringing such a system aggressive timeframe. This came as the as the inevitable move in the USA to to the UK market, starting in the early latest step in a long line of activities to adopt EMV, and the rise of payment 2000’s, up to and including the system stimulate competition and innovation services hubs. There are other trends, that went live in 2008, Faster Payments. in the Australian banking and payments where we have perhaps called the As part of that development, we spent market. trend too soon – adoption of cloud much time trying to find other countries computing is mainstream everywhere that might be interested in taking the September 2013 saw perhaps an even now. Everywhere, that is, but in bank solution that we developed, but with more surprising announcement from payments. E-invoicing is another limited success. Once I became an analyst, the US Federal Reserve in the form such trend, with wide-scale adoption discussions with clients were infrequent. of a consultation regarding future seemingly still just round the corner, Yet in 2013, it was one of the most improvements to the US payment rather than here today. Yet, occasionally frequent topics of conversation. systems. Central to the consultation was

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 22 12-06-2014 AM 11:26:57 the hypothesis that the US needed to and can use the value instantly, and the have a near real-time payment system. sender has confirmation of the status of the transaction. Both announcements sparked significant debate. One thing that has been clear Such a simple sentence, but so many to Celent in the ensuing debates and nuances, and so many challenges in conversations was that there is a actually delivering that significant lack of understanding of what a real-time payment system is, and what it For example, by retail payments, we mean entails. And equally, what it isn’t. those that are low in value rather than defined by the purpose or participants Defining Real-time of the payment. In a number of markets, there is an assumption that the systems In our definition, real-time payments refer are purely for person-to-person to retail payments that move between transactions, such as the oft quoted (but, accounts at different organizations rarely and actually done) splitting of bills (and, therefore, precluding closed-loop for a meal. Yet, in the UK for example, in systems) and where the recipient receives the Faster Payments system, corporates can pay other suppliers, and have a daily aggregate limit of £100,000. Other systems, such as SPEI in Mexico, have no systems are generally designed to operate limits at all. Therefore, we define retail “24/7”, every day of the year – but September 2013 saw as much as “not wholesale” as anything most RTGS systems are bank run. As a else. RTGS (Real Time Gross Settlement perhaps an even result, Monday to Friday 7am-330pm Systems) systems continue to have an are the typical operating hours. As a more surprising important role, but, we believe, for result, a multitude of solutions have increasingly high values. Many RTGS announcement from been found, to suit market practice systems today have surprisingly low and requirements. Poland and Sweden average values. CHAPS, the UK RTGS the US Federal Reserve have sophisticated shadow accounting system, for example, have average values in the form of a systems, and delegated authority for the around £10,000, whereas European management of settlement accounts. The consultation regarding legislation considers a high value to be UK and Singapore have pre-set settlement future improvements typically above €50,000. windows, but with rules allowing the trigger to additional settlements to One important thing to note is the to the US payment prevent imbalances. One interesting thing real-time notification. Both the sender to note is that, at the time of writing, systems. Central to the and receiver need to know that the is in proposing a market first, with the consultation was the transaction is complete, and, in the RTGS system also working “24/7”. This majority of cases, the receiver has the makes sense on paper to an extent, hypothesis that the US value from that point. Note that this but has numerous, technical challenges needed to have a near is not the same as settlement taking associated with it. place. Whilst there are exceptions to real-time payment every rule, in many cases, settlement in Myth busting system. real-time systems takes place at a later time. There are some very practical There are many myths surrounding real- reasons for this. For example, real-time time payments. Strangely, considering

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 23 12-06-2014 AM 11:27:03 time payments. This is based on criteria field is beginning to be considered as too ranging from presence of an ACH, to small to include the increasingly levels ISO20022 is becoming economic factors such as the relative of precision required. In some cases, levels of GDP per capita. From this, Celent 8583 has been adapted – after all, few the default format, estimates that there are 115 countries standards exist in the real world without because of the that are candidate countries, and virtually some adaptation. But there comes a point all the countries we have outlined fall where a standard is no longer standard flexibility of the into this group. This then puts adoption enough for long-term use. As a result, underlying XML in a very different light. Rather than the ISO20022 is becoming the default format, countries which have systems being because of the flexibility of the underlying message format. For “Innovators”, at the bleeding edge of countries that are adoption (the first 5% of the market), or even “Early Adopters”, 35 countries would still using heritage suggest that actually we’re somewhere Elixir Express in Poland message formats, this between late early and early- late adoption i.e., accelerating to the top of is a good example. will require significant a typical adoption Bell Curve. For many, the question around real-time has (and A Polish IT company changes across the should) moved from an “if” to “when” created their own value chain. to adopt, with the recent consultation in the USA being just one example. Yet, solution, effectively from the responses published to the US consultation, many would seem not to using correspondent agree. the volume of myths, one of the first banking principles. to be addressed and corrected, is a Real-time payments is about far more The banks were so belief that there are only a handful of than payments systems globally, thus implying that slow to respond this is something banks and banking Real-time payments is more than just – indeed, they communities need to consider only in speeding up clearing cycles though, and initially tried to stop the future. Certainly, there have been has profound implications for a bank and some very public examples, such as Faster its IT architecture. For example, real- the service, not Payments in the UK, and G3 in Singapore. time systems typically operate on single Yet the reality is that there are far more messages, and operate 24/7, yet most compete with it – countries that already have such systems, banks in non-real-time countries operate but the millions of or that have committed to building batch systems and rely on off-peak hours such solutions. Using the Celent criteria for maintenance. Early systems typically transactions going outlined earlier, we easily identified utilized the 8583 card standard to re-use through this alternate over 35 systems, and the real number is parts of the cards value chain, but there probably higher. are challenges in using that format. system showed that For example, in Europe the new IBAN they couldn’t afford to This puts real-time in a rather different numbers that are required often exceed place on the classic adoption cycle model. the 16 characters allowed. This is certainly ignore it. Celent has used a variety of assumptions is the case in Poland, for example. and data points to identify countries Additionally, with payment cycles that are candidates for adopting real- measured in seconds, the timestamp

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 24 12-06-2014 AM 11:27:03 Eating the bank’s own lunch?

Some questions fall somewhere between a myth and a worry. The key question for many banks is what will be the impact on other payment types. Will it, as feared in the USA, cannibalize their wire volumes, and therefore wire revenues? Inevitably, there is no simple answer, and, certainly, no universal answer. The answer varies from country to country because the payment systems in each country that it will compete with differ. In the UK, there seems to have been no visible impact on other payment types, including CHAPS. In fact, CHAPS volumes have grown slightly over the period, though not because of Faster Payments. But, it has uncovered other issues. One leading bank lost a significant sum of money via Faster Payments. However, the issue was not Faster Payments itself, but the authentication of users. As a result of poor authentication, money was simply XML message format. For countries that lost faster. A new payment scheme is a are still using heritage message formats, learning curve for all, and, unfortunately, this will require significant changes Zapp (UK) is seeking for fraudsters as well. across the value chain. A good case in point is Canada. Real-time payments are to effectively build an The danger is that if banks don’t create being put on hold whilst the industry alternative to the card a solution, the others will. Elixir Express plans a move to adopt 20022 first. in Poland is a good example. A Polish system, by allowing IT company created their own solution, Another obvious challenge is availability, effectively using correspondent banking though from the work we’ve done, ways for a consumer principles. The banks were so slow to it still seems to surprise a number of to initiate payments respond – indeed, they initially tried to banks about how many systems are stop the service, not compete with it – required in the process---all of which directly from their but the millions of transactions going in theory no longer have any downtime bank account. The through this alternate system showed that (and of course, real-time, themselves). they couldn’t afford to ignore it. The corollary to this is that traditional model has also been customer support hours will also need designed to try to Swish (Sweden) is a mobile wallet, built to change. As customers seek to take by a consortium of Swedish banks. It’s a advantage of the extended availability, reward all participants response to the wallet, WyWallet, created they will expect to resolve any issues by the three dominant mobile operators that arise at that same time (and speed) in the system. in the country. Consumers are used to as well. everything being instant (such as the

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 25 12-06-2014 AM 11:27:04 many markets, adoption of real-time The IMPS system in India puts electronic payments has been mandated. Here, payments into the hands of millions the benefit is in the future. Payment of consumers. It works on any phone, systems are created once in a lifetime and on any network. It’s designed to on this scale, and so the benefits ought be account-to-account, and it’s very to be measured over the long term. For simple for merchants to set themselves example, debit cards are the overnight up. At its most basic, they have to success that took nearly three decades register for the scheme, and publish to happen. It’s therefore important to their mobile phone number and ID on think of the opportunities as well, and to their webpage. In theory at least, small envision what this enables. One feature merchants could be up and running of the proposed Australian system is within minutes. the view that the real-time payment system should be the platform on which Conclusion innovative new offerings could be built. Consumers are increasingly used to Real-time payments are, well, real. The “anytime, anywhere”, particularly with adoption of RTGS systems may provide mobile shaping their experiences. clues as to what might happen. The earliest systems date back decades. But Systems in other countries are showing in the late 1980’s, what was once an how that might work. Zapp (UK) is seeking unusual feature, saw rapid adoption, instant updating and availability of their to effectively build an alternative to and in a few short years, few countries pre-pay phone balances). Whilst not yet a the card system, by allowing ways for a of note were without them. Whilst we’re threat, it’s plain to see how it could easily consumer to initiate payments directly not sure that the adoption will follow become one. from their bank account. The model has also been designed to try to reward all quite the same pattern, we do believe Platform for Growth participants in the system. That is, rather that in a relatively short period of time, than the merchants effectively paying the many countries will feel that they too After the talk of competitors, the banks, both banks and merchants share can’t afford not to have one. Future realization of the cost of potential the value. Both the merchant and the Celent reports are planned exploring this investments required and the potential consumer see the transaction in real-time. topic in much more detail, but one thing impact on existing revenue, it’s For a very small merchant who may wait is clear - I may have spent a lot of time important that we point out that it’s days for their settlement, this has a direct, on real-time on 2013. 2014 is only going not all bad news. It is true that in positive impact on their cash flow. to be busier.

Gareth Lodge Senior Analyst - Banking

Gareth Lodge, a senior analyst in the banking group at Celent, focuses on research in payments. He has been widely quoted in the media, including The Financial Times, BBC News, CNBC, Bloomberg, Computer Weekly, CardLine, Silicon, and European Card Review. He is a frequent speaker at such events as Sibos, EBADay, NACHA Payments, and the Global Payments Forum.

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 26 12-06-2014 AM 11:27:26 TCS BaNCS Research Journal_Vol 2 Issue 4.indd 27 12-06-2014 AM 11:27:34 Payments on ISO20022 – Time to on-board?

Stakeholders in the payments value chain intermediaries facilitating this transfer. and its ecosystem have always been In today’s world of financial services, this innovating to deliver new products and definition has to be extended to – not The challenge of services. Interestingly, in today’s world, only having the payment completed in they stand at the threshold of a global a stipulated time but also having the a successful and payments situation, which can deliver information relevant to the payment complete hand-off of value manifold. ISO20022 standards are reach relevant stakeholders in its entirety one such vehicle that will help realize this with regulatory authorities being one a Payment (money as leap into future. among them. well as information) is

Traditionally, a Payment transaction The challenge of a successful and addressed holistically was considered as complete, when the complete hand-off of a Payment (money in ISO20022 standards. transaction amount has reached the as well as information) is addressed seller from the buyer, and through the holistically in ISO20022 standards.

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 28 12-06-2014 AM 11:27:44 Figure 1: Diverse Standards Landscape : High risk of loss of Payment Information

Payment Payments Payments Confirmation / Exceptions Order Clearing Clearing Statement ?

Buyer Bank 1 Clearing Bank 2 Seller (Customer System (Customer of Bank1) of Bank2)

An interesting use case described below There are still challenges; e.g., in the ISO20022 standards are: proves its advantage: interbank space regarding the size of data to be transmitted, which we will look at 1. Being adopted by banks, corporate Party A is making a cross-border payment later in this article. institutions and communities playing to Party B against an Invoice for a gross a significant role in the payments and amount. Party A is also sending to party Mass Adoption of ISO 20022 has the cash management domain B the break-up of items (multiple items, potential to revolutionize the integration e.g. > 10 in number, of various amounts of market participants throughout the 2. Already confirmed as the de-facto adding up to the gross amount) in the banking and financial services industry standards for the future for SWIFT same transaction. In the traditional set and realize multiple benefits across up of Payment systems, Party A will send business, operations and IT. 3. Taken as the standard for building this payment instruction to their Bank A National Payment Systems in multiple in a format, which is proprietary , as in countries a MT101 or a similar message, only 140 As in the adoption curve of any salient characters (4*35X) of information can be We are in the era evolution, inertia against change is a accommodated. Even if this information significant barrier. There are leaders in is sent by Party A to Bank A, it will not be of ‘apps’ today and some pockets and both adopters and possible to send this information along the future of ‘apps’ naysayers abound in the industry – be it with the payment over a MT103 message banks or customers. to Bank B owing to the restrictions on and collaborative the size and structure of the Remittance platforms look bright. We believe that there are compelling information. ISO20022 has addressed this reasons (and leading to compelling with 140 Characters* n occurrences as An app will very soon business cases) for the adoption of part of the payment initiation and clearing ISO2022. messages with provision for structured analyze the payment and unstructured information. Having this information available Collaboration type of a remittance Information field in the customer instruction, pain.001, in the in an organization The ISO2002 standard is more seen as a interbank clearing message, pacs.008 and set of payment messages, which tends to in account statement, camt.053 greatly and deliver valuable hide the immense potential associated simplifies the complexity of managing outputs. with it. When looking at adopting reconciliations, statutory/regulatory ISO20022, one needs to adopt the whole reporting for payment transactions. framework – business model concept,

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 29 12-06-2014 AM 11:27:47 Figure 2: Homogeneous ISO2002 Landscape : Efficient and complete transport of Payment Information

Confirmation / Payment Order Payments Clearing Payments Clearing Statement High STP (ISO20022) (ISO20022) (ISO20022) ISO20022 ***

Buyer Bank 1 Clearing Bank 2 Seller (Customer System (Customer of Bank1) of Bank2)

associated data and process model, the Integration becomes much more efficient Efficiency implementation guidelines, and the and seamless when different teams are messaging. Once a team is trained in all speaking the same language such as in Global, long-standing banking and of aforementioned areas, they will be EndToEndIdentification, UltimateCreditor, financial institutions work with a able to deliver value consistently over Remittance Information (Structured or plethora of formats for payments and a longer period of time, specifically Unstructured) and more so when these Cash management services that they when conversations take place about conversations take place over email or the deliver electronically to their customer onboarding/connecting/exchanging data phone. in different countries. Multiple versions between bank and clients or a bank’s and layers of mapping, truncating, We are in the era of ‘apps’ today and partners. expanding overlaying payments and the future of ‘apps’ and collaborative platforms look bright. An app will very soon analyze the payment information available in an organization and deliver ISO20022 is valuable outputs. Multiple versions and becoming the ISO20022 is becoming the standard of layers of mapping, choice for new payments applications/ standard of choice solutions being built---thanks to the truncating, expanding for new payments prudent choice of XML (Extended Markup overlaying payments Language) as the de-facto standard for applications/solutions payment message exchange. Needless to and cash management being built---thanks say, no-one should be lagging behind or fields have built up in left out from creating or consuming these to the prudent choice solutions simply because they are not part IT systems of a bank of XML (Extended of ISO20022 standards. rendering even small Markup Language) as XML being a language which is easily changes for business understood by both computers and or regulatory reasons, the de-facto standard human beings, is increasingly being for payment message used for development of web-based complex and time- applications. Payments Data in the form exchange. of XML files can be rapidly integrated into consuming. web and mobile based applications.

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 30 12-06-2014 AM 11:27:47 cash management fields have built up Remittance information in structured and in IT systems of a bank rendering even unstructured formats traverse without small changes for business or regulatory loss, from originating customer (Creditor reasons, complex and time-consuming. or a Debtor) to their banks and over Also, fixed length formats are complex to interbank clearing over to the bank of the maneuver with higher risks of regression, beneficiary and, finally, to the beneficiary- when making a change. ISO20022 -enabling a true end-to-end reconciliation standards have captured the essence of of information and closure of an open the payments experience from multiple payable or receivable without manual markets and formats. They provide a intervention in major percentage of the more comprehensive set of data types payment volumes. and sizes. Making a change in XML-based For corporates, even bigger efficiency data exchange formats is comparatively gains can be expected in the form easier with XML also lowering the cost of of improved liquidity controls and IT changes and risks of regression. reconciliations based on enhanced For retail customers, information and intra-day frequency The case I had mentioned earlier in this in Payment Status and Cash Reporting ISO2002 standards article is a good example of enhancing based on ISO20022 messages. As the STP. The structure and organization of will benefit in a cross- adoption of ISO20022 gains momentum data is greatly improved in ISO20022. across financial institutions in multiple channel experience countries, corporates will also have an on initiation and added advantage of better flexibility in changing banking relationships as per the follow-up of their For Corporates, even business priorities and needs. Today, it is payment instructions. extremely difficult to move out of locked- bigger efficiency gains in proprietary formats. Infrastructures such can be expected in as real-time clearing ISO20022 has included additional the form of improved information about parties –- including are expected to be liquidity controls actual and on-behalf initiation, beneficial to retail intermediate and receiving roles-- and reconciliations which participate in payments clearing customers. Such based on enhanced and settlement. This makes the task of infrastructures extracting and sharing information with information and regulatory and compliance authorities are being built on intra-day frequency easier compared to traditional payment ISO20022 standards data and process models. in Payment Status and are appearing on and Cash Reporting As an upcoming area of higher levels national economic of automation, ‘Exceptions and based on ISO20022 Investigation’ are heavily leveraging a set agendas across the messages. of 16 ISO20022 XML messages to deliver globe. superior efficiencies. These new standards are in the phase of implementation by

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 31 12-06-2014 AM 11:27:52 Status and Account Statement reports. case to undertake such a massive Existing EDI formats are seriously transformation. S.W.I.F.T. has been challenged in providing better reporting For retail customers, ISO2002 standards playing the role of and reconciliation, and this is being recognized by industry participants, will benefit in a cross-channel experience an anchor in the leading to continuous adoption of new on initiation and follow-up of their promotion and standards. payment instructions. Infrastructures such as of real-time clearing are adoption of ISO2002 While SEPA implementation has been expected to be beneficial to retail standards. The the flagship example, ISO2002 has customers. Such infrastructures are being seen adoption in Nordic countries built on ISO20022 standards and are roadmap of the roll in Customer to Bank and Interbank appearing on national economic agendas out of MX is underway, Clearing. CBI in Italy has adopted the across the globe. standards for transformation of customer and S.W.I.F.T. is driving to bank space; the National Payment Much needed acceleration of the the migration of the Infrastructure in India has moved firmly adoption of ISO20022 needs to be with the new RTGS and ACH being triggered by the originators and National Payments implemented on ISO20022 standards; recipients of payments and government Infrastructure on to Switzerland has adopted ISO20022 and corporate institutions have a big role in transformation of domestic Swiss to play here. ISO20022 in multiple Franc payments in Interbank and Postal countries. payments; Singapore is doing the same For corporates, rather than looking only for G3 real time clearing; among others. at processing of Payment instructions, There are many more cases showing a the business case needs to include continuously expanding base of users improved yield in liquidity and cash banking institutions and the number of of ISO20022 payments standards. reserves. Upcoming evolutions and adopters is increasing slowly but steadily. Recently, the Federal Reserve Bank of trends such as e-Invoicing and electronic USA has initiated a dialogue on the Bank Account Management (eBAM), Adoption of ISO20022 transformation of Payment Infrastructure which will bring tangible returns on and Landscape of USA for the future. investment in short periods of time can Common Global Implementation This can be another opportunity for the also form the premise for the business (CGI) Working Group, which was adoption of ISO20022 standards, which case. established in 2009 by major global can provide a boost to global payment banks, corporates, ERP vendors and processing. Central Banks or National Payment S.W.I.F.T has been a determined step Authorities can take best practices towards providing implementation It be gross ignorance to give an and lessons learnt from the European guidelines for the adoption of the impression that the velocity of payments Council, which have led the new standards by banks and financial adoption of the new standards has implementation of SEPA in difficult institutions, as well as corporates. CGI reached desirable levels. There are still market conditions. has published implementation guidelines challenges in the path of full adoption for Customer to Bank Instructions and of ISO2002. One of the most critical It is not possible to conclude without Bank to Customer reports like Payment issues is the viability of the business mentioning S.W.I.F.T. in this context.

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 32 12-06-2014 AM 11:27:52 S.W.I.F.T. has been playing the role of an The Way Forward National Governments and Central anchor in the promotion and adoption of banks would have to holistically review ISO2002 standards. The roadmap of the Institutions with payments at the core and promote ISO2002 standards and, roll out of MX is underway, and S.W.I.F.T. of their business strategy need to build wherever possible, incentivize the is driving the migration of the National urgency in developing competence adoption, with an understanding that the payments Infrastructure on to ISO20022 on ISO2002 standards by leveraging new standards will provide the required in multiple countries. internal resource pools or engaging with assurance to the overall regulatory, consulting partners. New standards need statutory and economic wellbeing of the Myths and confusion exist about ISO2002 to form the fulcrum of the IT application standards, which need to be clarified commercial ecosystem. and integration strategy in the payments or resolved. As mentioned earlier, and Cash Management domain. This may ISO20022 payments standards should With market practice groups and need specific awareness and training not be seen as only a payment message communities engaging with multiple programs to be conducted inside the format change, which in turn completely stakeholders in defining and refining organization. undermines its value proposition. XML ISO20022 standards, the industry is being performance unfriendly is another making a serious effort to make ISO20022 Software solution providers need to misunderstanding. Innovation and as the standard for future of payments adopt ISO2002 standards at the level of evolution of technology has proven that Processing and Clearing and Cash the business process and data models the cost of storage, network bandwidth Management. Now, whether it makes to deliver true value for the investments and processing power are non-issues business sense to delay adoption is their customers make in procuring IT as far as the adoption of XML-based anybody’s guess, indeed. solutions are concerned. solutions.

Nitin Sirohi Principal Consultant, TCS Financial Solutions

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 33 12-06-2014 AM 11:27:54 Members of an avian species of identical plumage tend to congregate (Birds of a feather ock together)

What makes the life of a business head of a capital markets rm challenging? The easy access to global markets, sophisticated investment tools, growing transaction volumes, new investment avenues, among many other factors.

At Tata Consultancy Services, we believe that the need of the hour is to ‘Uncomplicate’.

And, that these same challenges can be transformed into opportunities for growth. This demands a time-tested, market-ready and move-as-you-grow solution such as TCS BaNCS. A universal nancial platform, it seamlessly integrates front-, mid- and back-oce operations of capital markets businesses, any place and any time, while also delivering enhanced Straight-Through-Processing capabilities. Its comprehensive multi-asset class, multi-entity solutions help rms implement STP- enabled, scalable Strate is the Central Securities Depository for South Africa. Strate desired to move from processes for custody, brokerage, clearing and settlement, corporate actions and market infrastructure physical settlement to electronic settlement of securities. Tata Consultancy Services (TCS) operations. From enabling a customer to consolidate its custody and asset servicing business to developed a unique clearing and settlement system based on multilateral netting, to ensure processing more than 150,000 corporate events annually, to helping another customer join global stock a smooth transition. All within record time and allocated budgets. As one of the world’s exchanges in seven months straight, the solution has rede ned the way rms operate. In fact, four out of fastest growing technology and business solutions providers, and a trusted partner of Strate the top ve securities rms in the world use TCS BaNCS. for over 15 years, TCS delivered an e cient and cost-eective platform enabling them to benchmark their solution against global best practices and standards. Also, helping Strate stay competitive by playing a signicant role as its solution partner for all asset classes. Now, don’t you think it is time to uncomplicate? Visit www.tcs.com/bancs to learn more or write to us at [email protected]

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 34 12-06-2014 AM 11:28:06 Members of an avian species of identical plumage tend to congregate (Birds of a feather ock together)

At Tata Consultancy Services, we believe that the need of the hour is to ‘Uncomplicate’.

Banking | Capital Markets | Insurance To nd out how TCS BaNCS can uncomplicate your business, visit http://www.tcs.com/OFFERINGS/BANCS

TCS BaNCS Research Journal_Vol 2 Issue 4.indd 35 12-06-2014 AM 11:28:14 Revival of Biometrics in Banking: Heralding a New Era in mPayments

Banking is now living in an omni channel (CAGR) from the USD 12.8BN spent in is a common perception that mobile world. Changing avenues for customers 20121. Gartner projects that over the payments platforms are less secure than make banking easier, but nevertheless next four years the mobile payments e-commerce or traditional payment also potentially riskier. The transition industry will experience an average methods1. Using 2012 industry market of money --- from physical money to annual growth of 35 percent, creating projections on e-commerce sales in North e-money -- has also transformed the a market of more than 450 million America, CyberSource, a provider of 2 world of crooks as well; where petty users worth USD 721 billion by 2017 . payment processing and risk management thieves are now capable of committing Parallel to this phenomenal growth, services, has estimated that total fraud online fraud. the fraud matrix is also growing. There revenue loss translates to approximately USD3.5 billion3. Fraud incidents within Forrester Research forecasts that US 1 Denee Carrington et al, US Mobile Payments a span of five years may account for 1.5 Forecast, 2013 To 2017, Forrester, 16 January mobile payment transactions will 2013 3 Paul Demery, Internet Retailer, 28 March, 2013 reach USD 90BN in 2017, registering 2 Janessa Rivera and Rob van der Meulen, : Source: http://www.internetretailer.com/ Mobile Payment, Worldwide, 2013 Update, mobile/2013/03/28/online-fraud-costs-e- a 48% compound annual growth rate Gartner, 4 June 2013 retailers-35-billion-2012

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 36 12-06-2014 AM 11:28:21 comes into play, and has many bankers particularly iris patterns and fingerprints, excited about its potential. Don Callahan, are unique enough to distinguish a Using 2012 industry Citigroup CTO, says, “The idea of single individual from the entire global biometrics is something that I am excited population. market projections about. Having digital print is very good. on e-commerce sales Accessibility to biometrics information Biometrics in banking has evolved over is extremely important to us....having the years, starting from the 1970s, and in North America, an organized back-end process to make has attained some level of maturity. CyberSource, a sure you are who you say you are, is On analyzing various press releases on terrific for the banking industry.”6 Central the Finextra portal, a specific trend is provider of payment Banks around the world are also in the seen emerging. Until 2005, the financial processing and risk process of formulating strategies to services world used fingerprints, signature mitigate this risk. The Governor of the recognition, vein pattern, and hand management services, Central Bank of Nigeria (CBN) is in the geometry; and after that (post 2005), the has estimated that process of capturing biometric data technology extended to include Voice of bank customers to ensure better Biometrics, Iris Scan, Face recognition, total fraud revenue services. Amidst all these happenings, among others. loss translates to Apple launched the iPhone 5S and, subsequently, Samsung launched its 5S Hosseini and Mohammadi of Iran, in their approximately USD3.5 model using fingerprint biometrics for analysis of 121 global banks in 2012 had concluded that fingerprints are the most billion user authentication. This article aims to bring out the relevance of biometrics technology in the banking world, and suggest why percent of all mobile transactions, says Until 2005, the biometrics should be the basis of multi- Avivah Litan, an analyst at technology factor authentication; diagnose fraud financial services research company, Gartner.4 The most prevalent in mobile channels; and, review common threat being that almost world used the effect of new mobile devices being 70 percent of mobile phones aren’t released in the mass market that are fingerprints, signature protected by passwords5. embedded with fingerprint technology for mobile payments. recognition, vein Bankers across the world are grappling with ways to find a lever to plug these pattern, and hand Evolution and Prevalence of Biometrics losses. How can a banker establish in Banking geometry; and after the fact that the person transacting is actually a client and not a fraudster? that (post 2005), the Biometric technologies analyze unique This is where the biometrics science biological traits that differentiate one technology extended human being from another, such as 4 Olga Kharif, Fraud threatens mobile payment to include Voice system, Bloomberg BusinessWeek, 7 October fingerprints, the retina or iris or the 2012. accessed fromhttp://www.stltoday. pattern of an individual’s voice. Data Biometrics, Iris Scan, com/business/local/fraud-threatens-mobile- payment-system/article_e49cfb01-9cbe-5b68- gathered by some of these technologies, 93f2-38578183fc5b.html Face recognition, 5 Carole Theriault, Sophos Naked Security 6 http://economictimes.indiatimes.com/opinion/ blog,, 9 August , 2011. Accessed from: http:// interviews/weve-changed-banking-the-way- among others. nakedsecurity.sophos.com/2011/08/09/free- google-changed-search-don-callahan-citigroup- sophos-mobile-security-toolkit/ cto/articleshow/16816195.cms

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 37 12-06-2014 AM 11:28:23 Biometrics in Banking - The Spread

Dynamic Signature 4% Facial Keystroke 3% 1% Voice 9%

Iris 5% Biometrics in Action Fingerprint 41% Hand Vein Employee- 7% Focused 30% Client- Hand Focused Geometry 70% 14% Fingervein 10% Fingerprint and Hand Fingerprint Geometry and Iris 2% 4%

USA: Biometrics in Action Surveyed Banks and Their Geography

MENA Client- 19% Focused 22% Americas Europe 39% Employee- 10% Focused 78%

APAC 32% USA (n=55)

Global Banking Survey on Biometrics; N=184

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 38 12-06-2014 AM 11:28:24 Biometrics Type Applications Covered Countries Dynamic Signature Internet banking, Branch banking, Document Estonia, Israel, USA, China, UK processing, Workflow automation Facial Branch banking, Fraud Recognition, Access control USA, UK, China, Switzerland (Data center), Access control (Physical, Treasury), Access control (Building, Time and attendance) Fingerprint ATM, POS, ePayments, Access control (Applications), Costa Rica, Egypt, Mexico, Singapore, USA, Branch banking, online banking, Fund Transfer, Bangladesh, Benin, Bolivia, Brazil, Brunei, Access control (Physical), Access control (Network), Cambodia, Chile, China, Colombia, Germany, Checking transaction history, Check Cashing, Access India, Indonesia, Kazakhstan, Kenya, Malaysia, control (safe deposit box), Access control (Time & Mauritius, Mexico, Netherland, Nigeria, Attendance), Biometric card, Online purchase, Loan Pakistan, Panama, Philippines, Puerto Rico, Origination, Debit card, Access control(customer Russia, Saudi Arabia, South Africa, Trinidad, information) UAE, Uganda, USA, Vietnam Fingerprint Plus Iris Access Control (attendance), Access control Oman, India (Network, Treasury), ATM, epayments Fingerprint Plus Hand Access control (Safe deposit), ATM USA, Japan Geometry Finger Vein ATM, Access control (Server room), POS, Branch Poland, USA, Turkey, Japan banking Hand Geometry ATM, Access control (Safe deposit), Access USA, UAE, Puerto Rico, Saudi Arabia, Ukraine control(Time and attendance) Hand Vein Access control (Data center), ATM, ATM, Branch USA, Turkey, Japan, Switzerland banking, Access control(Vaults Access) Iris Branch banking, ATM, Internet banking, Access Jordan, Yemen, USA, Italy, Turkey, Lebanon, control(Time and Attendence) Egypt, Norway, Yemen Keystroke Internet banking Ecuador, USA Voice Telephone banking, Branch banking, Password/PIN Australia, Israel, Indonesia, USA, Brazil, reset, Telephone banking, high-risk transactions, Pakistan, China, Netherland, Canada, New Mobile banking Zealand

popular biometric technology7. We have technology and is used in more than 35 applications, including attendance extended this study to include 184 banks countries. Other important indicators are: registration with the results being displayed above: • Customer facing adoptability varies • The USA has the most diverse use of across countries and technology Our study also concludes that fingerprint biometrics technology. However, most continues to be the most popular • Mobile banking related adoptability is of USA-based adoption is employee- rare, with a few banks piloting voice focused, rather than client-focused, 7 Seyyede Samine Hosseini, Shahriar biometrics which is in variance with the rest of Mohammadi, Review Banking on Biometric in the World’s Banks and Introducing a Biometric • Most of the employee-focused usage the world, where the technology is Model for Iran’s Banking System, J. Basic. Appl. Sci. Res., 2(9)9152-9160, 2012 is for access to various facilities and client-focused.

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 39 12-06-2014 AM 11:28:24 Banking Channels

Kiosk ATM Web Mobile IVR Branch

Access through First Biometrics level Authentication

Second level Authentication Pin/Password/OTP for Transaction

• Localization of technology: fingerprint correlation between biometric adoption and iris In India and Oman; finger vein, and the flexibility of the core banking hand vein, finger print, hand geometry system. Emerging market banks were It is a strategic in Japan; keystroke in Ecuador and able to leverage client-focused biometrics USA technology as they run on modern imperative to fall back platforms, whereas their counterparts in • Japanese banks have shown a high the developed world could not do so. For on the multi-factor level of maturity by offering their example, Capitec Bank of South Africa customers bank cards with a chip, that authentication with has been a pioneer in that geography and carries biometric data has been using fingerprint biometrics biometrics at the All of the above point to the fact that technology to reach economically less front. It is all about client-focused biometrics technology privileged citizens since 2006. It moved on in banking is yet to converge globally, to implement biometric ATMs in 2012. combining the facts and has evolved differently in different geographies. We also observe a However, many times, banks have of “what you have”, pioneered biometrics in a particular “what you know” and geography and not been able to sustain the momentum. For example, “what you are”. Our study also Nationwide, gave up on iris biometrics in 2003 after embarking on the same in concludes that 1998. Lack of business benefits and high fingerprint continues costs were cited as reasons; e.g., for the ATM project the iris recognition alone It may also be noted that many cases to be the most popular was 25 per cent of the cost of the ATM, included in our study take into account meaning it would not be cost-effective for POC stage implementations, and there technology and is a wider rollout8. was no follow-up information available. used in more than 35 A few IT solution providers have tied up 8 Andy McCue, Nationwide ditches iris and with third parties and white-labelled fingerprint biometrics, ZNet, 23 September, countries. 2003. Accessed from: http://www.zdnet. biometrics products for employee-focused com/nationwide-ditches-iris-and-fingerprint- biometrics-3040126657/ applications. However, the focus must

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 40 12-06-2014 AM 11:28:24 mobile device and know the transaction pin, but if you are not authenticated by We now have an ISO personal traits, such as fingerprint, you may not be able to access the device to standard 19092:2008 complete the transaction. related to biometrics While we encounter technology security framework in sophistication in what we have and what we know, we still are far from achieving the financial industry. industry best practices on what you are, It clearly establishes i.e. biometrics, across channels.

the security We now have an ISO standard 19092:2008 requirements for the related to biometrics security framework in the financial industry. It clearly implementation and establishes the security requirements for the implementation and management of management of state- state-of-the-art biometric identification of-the-art biometric technology. As per the framework, the enrolment repository is connected to a identification management console that helps configure titled “Planning Your Cross-Channel technology. biometric parameters for enrolment, Future” published in December 2012; authenticates users and allows system mobile banking transactions in the USA access privileges. DB Research also states are projected to grow by 240% between that biometric authentication methods 2010 and 2015. In the same period, enjoy a remarkable degree of acceptance online transactions are expected to soon shift to client-focused applications among the European population. Hence, grow at 10%, ATM transactions by 7.3%, such as channels. there is a growing probability that whereas the contact center and the biometric technologies could also be branch are expected to see a decline in Future growth of biometrics mooted applied in banking 9. transactions10. around multi factor authentication

Changing Channel Priorities: Growth of This changing channel priority has put The banking world has seen the Mobile Banking and Challenges additional pressure on banks. Banks prevalence of two-factor authentication are not equipped to handle the fraud for some time now; but fraudulent In an omni channel world, banks need instances related to mobile banking. transactions are growing year-on- to adopt a “bricks, clicks and touch” Access control is the first level of security year. When we transact virtually, our strategy, revolving around the concept and this has generally been managed identities are determined by IP addresses, of security, accessibility, personalization well through two-factor authentication various “keys” and passwords, most and convenience. Achieving this is a of Password, OTP/PIN in an online of which are susceptible to tampering Herculean task amid changing customer channel scenario, but in the case of and fraud. Therefore, it is a strategic channel adoption trends. Taking the mobile banking, the threats are not imperative to fall back on the multi-factor trends from the CEB TowerGroup Report clear. Each passing day, new malware authentication with biometrics at the are being identified, and many devices front. It is all about combining the facts of “what you have”, “what you know” 9 Thomas F. Dapp, Growing need for security in online banking, DB Research, 2012. Accessed 10 Nicole Sturgill, et al, Planning Your Cross- and “what you are”. To carry out a mobile from: http://www.dbresearch.com/PROD/DBR_ Channel Future: The Impact of Retail Banking INTERNET_EN-PROD/PROD0000000000284825. Delivery Channel Volumes in North America, payment transaction, you may have the pdf CEB Towergroup, December 2012

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 41 12-06-2014 AM 11:28:28 are not password protected3. As per the • Fujitsu Disney-branded F-07E Android Third Annual Mobile Threats Report, device, launched with fingerprint mobile malware has grown by 614% As per the Third sensors from March 2012 to March 2013 and • Motorola, working on phone with 73% of all malware exploit holes in Annual Mobile fingerprint sensor mobile payments by sending fraudulent Threats Report, premium SMS messages, each generating • Microsoft Windows 8.1, offering 11 around 10 USD in immediate profit . mobile malware enhanced support for fingerprint The technology platforms, iOS, Android, sensors Symbian, BlackBerry, Java ME have varied has grown by 614% threat indications. The most disturbing from March 2012 • Diebold has launched a new line of fact is that the popular platforms are fingerprint ATMs in Kenya threat prone. The Internet Security to March 2013 and • The Indian government has given Threat Report 2014 reported that 97% of 73% of all malware a go-ahead for fingerprint or eye malicious threats by platform is reported scan enabled ATMs to leverage the for the Android platform. However, it exploit holes in mobile biometric-based Aadhaar number, was intriguing to note that 102 (82%) which establishes uniqueness of every documented mobile vulnerabilities by payments by sending individual on the basis of demographic platform for 2013 was recorded for the fraudulent premium and biometric information iOS platform12. The threat is increased when access is not secured, and if a SMS messages, each • Biometric ATMs are being filed for device is used to access unwanted generating around a new patent application by Bank content, there is a greater possibility of of America. This patent application malware infesting the system. 10 USD in immediate outlines a system for authenticating profit. users with a combination of a pin-code A paradigm shift in Mobile Payments: and fingerprint biometrics Fingerprint biometrics securing access control Mobile devices with biometrics will help provide the first level of security, The launch of the iPhone and the iPad are payments. The availability of biometrics which Symentec calls traditional access highly disruptive trends in banking. With authentication at the source is certainly a control. If the voice biometrics based pilot the launch of iPhone 5S and Samsung 5S giant change in the banking world. being carried out by ING Direct Canada with a fingerprint scanner, embedded and ANZ is successful and the Bank of within the phone’s hardware, the world A few instances reported during 2013 America patent for authenticating mobile of biometrics will open up, especially in and early 2014 suggest that fingerprint transactions through voice biometrics biometrics is gaining mainstream mobile payments. Internally, Apple allows gains mainstream acceptance, we may acceptance: biometrics-authentication for iTunes, and soon see biometrics playing a role in this has a huge potential for the future of • iPhone 5S, launched with fingerprint replacing OTP/Pins. sensor that allows users to unlock 11 Juniper networks Mobile Threat Center Third Annual Mobile Threats Report: March 2012 their phone with their fingerprint, and This development may be termed through March 2013. Accessed from: http:// verify purchases on iTunes without disruptive, not because mobile-based www.juniper.net/us/en/local/pdf/additional- having to input a password resources/3rd-jnpr-mobile-threats-report-exec- payments may potentially get safer, but summary.pdf also because this change must be looked • Samsung 5S, launched with a 12 Paul Wood, et al, Internet Security Threat from a liability perspective. The fraud Report 2014 (appendix pp 32-33), Symantec fingerprint scanner Corporation, April 2014 Accessed from liability at self-service channels lies with http://www.symantec.com/content/en/us/ • HTC has launched One Max with 5.9- the clients. In the biometrics scheme of enterprise/other_resources/b-istr_appendices_ v19_221284438.en-us.pdf inch display and fingerprint scanner things the customer has to be present

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 42 12-06-2014 AM 11:28:29 in person, while making a transaction. We must, however, remain cautious, as And, in this context, customers are we have seen the failure of Motorola’s safer if biometrics evolve to the core of Atrix Smartphone with fingerprint reading the mobile payment scheme of things. technology due to its inconvenient Customers are an important part of the position at the back of the phone and mPayments value chain and the recent its slow processing. The current phase wave of fingerprint biometrics being must be seen as a resurrection, where circulated in the mass market embedded biometrics technology is poised to occupy within the phones will, in all possibility, trim down the fraud matrix. a central position in fraud prevention.

It assures the convenience of use and The Biometric Research Group expects introduce biometric technology to the that worldwide mobile payment global smartphone mass market. delivers the prospect of fraud prevention transactions will reach USD 250 BN in at the customer end — a secure first 2014, reaching USD 750 BN in annual Conclusion level access point to facilitate safe and transactions with more than 700 seamless mobile transactions. While 13 million users by 2020 . Biometrics The detrimental factors in the growth a few analysts still remain sceptical will accelerate mobile commerce, of biometrics have been higher cost, about the role of biometrics in future especially in North America, because ambiguity related to standards, and the fraud-prevention capabilities, it looks the technology can offer a higher level proliferation of diverse technologies. like banking consumers are gradually of security, while providing an intuitive It was also a bank-led activity, where embracing it. A survey commissioned customer experience. It also expects banks had to invest in costly biometrics by ANZ showed that 79 percent of that over 90 million smartphones with technology. The world needs simplicity Australians said that they are comfortable biometric technology will be shipped in and ubiquity for a technology to succeed. with fingerprint technology replacing 2014. The Group predicts that Apple will And, probably we are in one such 14 initially lead in the deployment of such watershed moment, where biometric banking PINs. We may soon be seeing a devices, due to fact that the firm is the standards are in place, and where mobile safer world of mobile banking , heralding first consumer electronics provider to devices with fingerprint biometrics a new era in mPayments. technology can shift the cost burden from 13 Rawlson King, Mobile commerce will drive millions of biometric smartphone shipments, bankers to the consumer. Fingerprint billions in transactions, Biometric Update, biometrics seems to be the new buzzword 14 Spandas Lui, NFC to stick finger in biometrics 13 September, 2013 Accessed from: http:// banking, ZDNet, 8 October , 2012. www.biometricupdate.com/201309/mobile- that will bring in disruption in the mobile Accessed from http://www.zdnet.com/au/ commerce-will-drive-millions-of-biometric- banking transactions space. nfc-to-stick-finger-in-biometrics-banking- smartphone-shipments-billions-in-transactions expert-7000005295/

Biplav Panda Associate Consultant TCS Financial Solutions

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 43 12-06-2014 AM 11:28:34 The Volcker Rule – Seeking to Shield banks’ customers

Today, Wall Street faces a 4.3 billion dollar protection act. The Rule, which was The Rule attempts to reduce risk and challenge as it will be forced to implement initiated by former Federal Reserve banking instability by restricting US the Volcker rule, which imposes curbs to Chairman, Paul Volcker, in response to the banks from taking part in proprietary prevent a financial meltdown. With this 2007-2008 financial crises, will prohibit and speculative trading by imposing Rule, banks may be forced to focus on banks (financial institutions) from: strict frameworks to justify exemptions their core business lines while minimizing for certain activities like market trading, systemic risks and ensuring and enforcing • Engaging in short-term proprietary underwriting, hedging, trading in other forms of reform. trading of securities, derivatives, government obligations and organizing commodity futures and options on and offering a hedge or private equity On December 10, 2013, The Federal these instruments for their own fund.ii The Final Rules limit these Reserve, Federal Deposit Insurance account exemptions if they involve a conflict of Corporation and three other agencies interest, an exposure to high-risk assets formally adopted the Final Rules, • Owning, sponsoring or having or trading strategies and are a threat to implementing section 619 of the Dodd – beneficial elationshipsr with hedge the safety and stability of the banking and Frank Wall Street Reform and Consumer fund/private equity managersi financial system in the US.

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 44 12-06-2014 AM 11:28:44 Banks, in short, will not be allowed Proprietary Trading Prohibition: They are also permitted, in limited to invest in funds that have not been circumstances, to engage in registered with the SEC and from The Rule prohibits proprietary trading proprietary trading in obligation to a partaking in hedging activities that do not by banking entities; however, there are foreign sovereign and/or its political have a definite, identified risk. This will exemptions for: subsets. lead to a number of changes in a bank’s investment and hedging strategies. 1. Underwriting: Banking entities that 5. Trading activities oforeign f banking act as underwriters for distribution institutions: The Rules do not prohibit What do the Rules say? of securities and the trading desk’s trading by foreign banking entities, underwriting position being related so long as the trading decisions and The Final Rules have defined and to that distribution are exempt as principal risks are held outside of the identified the characteristics of prohibited long as the position does not exceed United States. Transactions could and permitted activities and investments. the reasonably expected demands of involve US institutions but only under customers. specific circumstances.

2. Market making and related activities: Covered Fund Prohibitions: A trading desk is required to purchase The Rule attempts and sell one or more financial The Rules, as stated earlier, prevent instruments; however, they would financial institutions from owning or to reduce risk and need to be designed such that they do sponsoring hedge and private equity banking instability by not exceed the expected demands of funds, which are referred to as “covered customers based on historical demand funds”. Under the Final Rules, the restricting US banks and market factors. The market- definition of covered funds was clarified from taking part making desk can hedge the risks of and it included any issuer that is an its market-making activity only if it is investment company. However, the Rule in proprietary and in accordance with risk management excludes covered funds of certain entities speculative trading procedures that are a requirement with more general corporate purposes, under the final Volcker rules. for example, wholly owned subsidiaries, by imposing strict joint ventures, SEC-registered investment frameworks to justify 3. Risk-mitigating hedging: A banking companies and business development entity would be required to conduct companies. exemptions for certain analyses to support its hedging strategy and be able to evaluate its Compliance Requirements and how the activities like market effectiveness and recalibrate the rule will affect information technology trading, underwriting, strategy. Under the Rules, financial institutions would be required to The Rules hand out compliance hedging, trading record their transactions in real-time requirements based on the size and in government and identify the hedging rationale for amount of activity conducted by a bank, certain transactions that could present to reduce the burden on smaller entities. obligations and a compliance risk. Banks will be required to set up an organizing and internal program designed to ensure and 4. Trading in government obligations: monitor compliance with the final Rules. offering a hedge or A financial institution can continue Banks that do not engage in activities private equity fund. to engage in proprietary trading only specified under the Rules do not have under a US government, agency, such compliance program requirements. state and municipal obligations. The program will aim to monitor

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 45 12-06-2014 AM 11:28:48 Under the Rules, financial institutions would be required to record their transactions in real- time and identify the hedging rationale for certain transactions that could present a compliance risk.

compliance activities as well as ensure The program will require larger financial that the trading bans and restrictions institutions to establish a detailed will be able to detect and record areas defined under the Rule are complied with. compliance dictate, which would include of non-compliance and submit to the the requirement of the CEO’s attestation regulating agencies on request. The while smaller banks will require a biggest challenge of such a system is that simplified compliance program. The it would have to be able to differentiate entities would be required to maintain between those activities that are documentation so that agencies can A trading desk is permitted and those that are prohibited. monitor their activities in case of evasion. Many financial regulations have been required to purchase Banks that perform significant trade implemented in recent years that have and sell one or more operations need to be able to report quantitative measurements, which are pushed banks to add new controls, but financial instruments; designed to monitor these activities. with the Rule, which came into effect on The requirement would be calibrated 1st April 2014, the number of changes however, they would depending on the type and size of firms’ to be implemented has now become need to be designed trading activities. more urgent. These include the need to improve data quality, reducing end-user such that they do not Implementing these compliance developed applications and spreadsheets exceed the expected programs under the Volcker rule and improving front-office systems.iv regulation embodies significant changes demands of customers to the banking IT infrastructure, Impact of Volcker Rule on Investment data processing and record-keeping banks, hedge and private equity funds based on historical procedures.iii New, internal banking demand and market policies will need to be developed to With the Volcker Rule now law, document, describe and track trading investment banks and securities dealers factors. and investment fund activities. Controls are the most affected. Brian Moynihan, will have to be set up such that they CEO of Bank of America Corporation,

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 46 12-06-2014 AM 11:28:54 the implementation of the Rule are market-wide risk which increased as expected to gain huge profits. IBIS world banks exposed themselves to more The Rules do not reports that, over the next five years, the risk through diversification. A very revenue for the private equity, hedge real concern of the implementation of prohibit trading by funds & investment vehicles industry will this Rule is its inability to differentiate foreign banking increase at an annualized rate of 3.8% to between proprietary trading and the USD 107.7 billion.viii legitimate function a financial institution entities, so long as should partake in to remain profitable. the trading decisions A Rule surrounded by skepticism While some activities are clearly defined as proprietary trading there Since the ruling, many commentators and principal risks are significant questions surrounding have been writing about the lack of activities related to market making and are held outside of necessity for such a Rule. The biggest hedging of risks. Regulators will have to criticism being that far from stabilizing the United States. keep a close eye on how banks change the economy, the implementation of now that the Rule is implemented. Transactions could this rule would send it into a tailspin. involve US institutions The ultimate goal of the Rule is to build financial institutions and also prevent but only under specific any future crisis. To minimize the need circumstances. for the government to act as a safety net during a crisis, regulars will need to Implementing these create tools that: compliance programs i. Internalize the cost that arises during a under the Volcker released a statement that ending trading crisis, including insurance activities under the Volcker Rule costs the Rule embodies banks near USD 500 million of revenue ii. Introduce more supervision of banks significant changes per quarter.v Stephen Hoopes of IBIS through capital requirements World opines that the Volcker Rule is to the banking IT anticipated to further harm both revenue iii. Limit the sort of activities that banks and profit for large investment banks. He can do infrastructure, data notes that a number of large banks have processing and record- already witnessed losing some of their The Volcker Rule only addresses the third best traders to hedge funds.vi Hoopes, component, and for the market to stay keeping procedures. however, also opines that the general stable only three will have to work in New, internal banking increase in corporate profits and the tandem. improving US economy can more than policies will need make up for the negative trends related to Banks diversified their income streams to be developed to the Rule.vii by introducing more business lines in the hope of making the financial document, describe The impact on the hedge fund and private system more stable. However, there is and track trading equity industry is not as severe. With no evidence to back up such a claim. In banks being restricted from speculative fact, as per financial theory, the risk to and investment fund activity, non-banking institutions now an individual firm should be recorded activities. have access to a wider market with lower separate to that of the broader market. competition. The firms that remain after The economic crisis was a result of a

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 47 12-06-2014 AM 11:28:54 (CLOs) that fall under the Volcker rule. impact on banking activities in the near (CLOs are used by banks to remove loans future as banks work to carve out new The impact on the from their balance sheets by selling the profitable operating models in what will exposure as some form of securitization.) now be a high regulated and scrutinized hedge fund and ix Beginning June 30, 2014, banking environment.x entities with USD 50 billion or more in private equity industry i Final Rules to Implement Volcker Rule Board consolidated trading assets and liabilities of Governors of the Federal Reserve System; is not as severe. With will be required to report quantitative Commodity Futures Trading Commission; Federal Deposit Insurance Corporation; Office of banks being restricted measurements. Banking entities with at the Comptroller of the Currency; Securities and least USD 25 billion, but less than USD Exchange Commission 50 billion in consolidated trading assets ii Final Rules to Implement Volcker Rule Board from speculative of Governors of the Federal Reserve System; and liabilities, will be subject to this Commodity Futures Trading Commission; activity, non-banking Federal Deposit Insurance Corporation; Office of requirement on April 30, 2016. The same the Comptroller of the Currency; Securities and institutions now have Rule comes into effect on December Exchange Commission 21, 2016, for those with at least USD 10 iii http://searchcompliance.techtarget.com/ access to a wider guides/FAQ-How-would-Volcker-Rule- billion, but less than USD 25 billion, in regulations-affect-compliance-programs consolidated trading assets and liabilities. market with lower iv http://searchcompliance.techtarget.com/ guides/FAQ-How-would-Volcker-Rule- competition. A major concern for banks is that regulations-affect-compliance-programs compliance with the new regulations v http://www.valuewalk.com/2013/12/volcker- rule-ripple-effect/ will cost them billions of dollars just vi http://www.valuewalk.com/2013/12/volcker- Ahli Brokerage wished to launch to continue to engage in permissible rule-ripple-effect/ Conclusion activities under the Rule. The Rule’s vii http://www.ibisworld.com/media/2013/12/20/ ultimate impact will depend on how volcker-rule-financial-sector-2/ innovative trading products for the The final Rules came into effect on April closely the banks are scrutinized with viii http://www.ibisworld.com/media/2013/12/20/ volcker-rule-financial-sector-2/ 1, 2014. The Federal Reserve Board has regards to permissible trades and the ix http://www.reuters.com/article/2014/04/07/us- Qatar market. They found a certain way. extended the conformance period until tolerance limit to speculation. Financial fed-volcker-idUSBREA361R820140407 July 21, 2015. Recently, the Federal institutions should begin preparation of x http://www.lexisnexis.com/communities/ Reserve gave banks two more years to compliance programs in adherence to corporatecounselnewsletter/b/newsletter/ archive/2014/01/06/the-volcker-rule-s-impact- divest their collateralized loan obligations the Final Rule. The Rule will have a huge on-financial-institutions-and-companies.aspx Ahli Brokerage Company was looking at tapping into brokerage opportunities presented in the Qatar market. To gain rst mover advantage and stay ahead of the competition, Ahli Brokerage selected Tata Consultancy Services (TCS), the world’s fastest growing technology and business solutions providers as its technology partner. TCS implemented the Securities Trading solution from TCS BaNCS, a comprehensive and integrated front-to-back oce brokerage system, to oer innovative trading products such as algorithmic trading and a sell-side interface to partner brokers over ‘Reuters Order Routing’ for the Qatar market execution. The Securities Trading solution from TCS BaNCS, being completely parameterized, reduced customization needs to a large extent. And with its breadth and depth of functionality and sophisticated implementation methodology, Ahli Brokerage went operational in just four months.

Visit www. tcs.com/bancs to learn more or write to us at [email protected] Priyanka Sondur Associate TCS Financial Solutions

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 48 12-06-2014 AM 11:29:08 Ahli Brokerage wished to launch innovative trading products for the Qatar market. They found a certain way.

Ahli Brokerage Company was looking at tapping into brokerage opportunities presented in the Qatar market. To gain rst mover advantage and stay ahead of the competition, Ahli Brokerage selected Tata Consultancy Services (TCS), the world’s fastest growing technology and business solutions providers as its technology partner. TCS implemented the Securities Trading solution from TCS BaNCS, a comprehensive and integrated front-to-back oce brokerage system, to oer innovative trading products such as algorithmic trading and a sell-side interface to partner brokers over ‘Reuters Order Routing’ for the Qatar market execution. The Securities Trading solution from TCS BaNCS, being completely parameterized, reduced customization needs to a large extent. And with its breadth and depth of functionality and sophisticated implementation methodology, Ahli Brokerage went operational in just four months.

Visit www. tcs.com/bancs to learn more or write to us at [email protected]

TCS BaNCS Research Journal_Vol 2 Issue 4.indd 49 12-06-2014 AM 11:29:16 Payments in India – A Continuing Journey

It has been more than three years since on which economic activity rides, past we covered Indian Payments in volume 4 trends often serve as a reliable indicator of the TCS BaNCS Research Journal. Over of future direction. this period RBI (Reserve Bank of India) India has seen RTGS and NPCI (National Payments Council Progress over the Last Few Years volumes grow at 21% of India) have taken progressive strides in further modernizing the payments India has seen RTGS volumes grow at CAGR for the last infrastructure in India. In addition, 21% CAGR for the last four years with the four years with the since then, there has been increased number of participant banks increasing availability of new payment instruments, from around 100 to nearly 170. This number of participant especially in the P2P (Person to Person) growth in itself is spectacular, but is banks increasing from and P2B (Person to Business) space. It is even more significant considering that worthwhile to take a closer look at some the minimum threshold for RTGS was around 100 to nearly of these key advancements achieved in doubled from Rupees One Hundred the last few years. Payments being an Thousand to Rupees Two Hundred 170. integral part of the core infrastructure Thousand, thanks to a mass adoption of

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 50 12-06-2014 AM 11:29:28 the Next Generation Real Time Gross opportunities to further strengthen Settlement (NG-RTGS) system, which not their liquidity management as far as The aim of NACH only places India comfortably in meeting collections are concerned. increasing payment volumes, but also is to centralize provides a platform that will enable Keeping pace with global payment trends different regional advanced liquidity management services and developments in Europe (SEPA), and future date functionality. the payment infrastructure in India is clearing schemes and also being modernized by adapting to The NPCI (National Payments newer and more robust standards. This standardize processes Corporation of India) has introduced is best demonstrated by the adoption of a National Automated Clearing House ISO 20022 standards for NG-RTGS and and practices therein. (NACH) scheme to support high volume NACH-Debit. By enforcing ISO 20022 Besides supporting electronic transactions efficiently. compliance, RBI and NPCI have enabled The aim of NACH is to centralize the flexibility of offering value-added NACH credit different regional clearing schemes and services, and also built a standardized transactions, the standardize processes and practices platform for improved efficiencies and therein. Besides supporting NACH Straight-Through-Processing. system also enables credit transactions, the system also enables financial inclusion with the Consumers in India are emerging as financial inclusion AADHAR Payment Bridge that has rapid adopters of alternative channels enabled benefits and subsidies to be like mobile, kiosks and through with the AADHAR passed onto beneficiaries based on business correspondents. They expect Payment Bridge a unique identification number for the relationship with their banks to residents of India. The NACH is today become more conversational, and are that has enabled used for Old Age Pension Payments, demanding real time and complete Student Scholarships and a host of other servicing capabilities. Features like the benefits and subsidies Government Welfare Schemes. In the ability to make utility payments from to be passed onto last three financial quarters alone, the the mobile, receive alerts when the payment volumes on NACH have grown beneficiary is credited are now par for beneficiaries based on exponentially from close to 1 million per the course. The corporate treasurer is month to over 20 million per month. now more aware and expects the same a unique identification NPCI expects these volumes to grow level of services as provided by the number for residents significantly as more regional clearing best global transaction banks. Seamless transactions move to the NACH, and it payment initiation, real-time status of India. has displayed far-sightedness in building reporting, easier reconciliation and a system capable of handling 10 million the optimal use of liquidity are all now transactions per day. Additionally, NACH- standard expectations from a corporate Debit is ready to be launched shortly, customer who is now interested in the alternative scheme, NEFT (National which will not only promote digitization exploring the flexibility that hand-held Electronics Fund Transfer). Remarkably, and centralized management of debit devices can provide. Kiosks and business in terms of the value of the total mandates, thereby reducing the risk of correspondents have played a key role in transactions in a year – more than 75% frauds, but also provide a high degree providing economical servicing channels of growth was observed (only customer of control to the payer with regards to expand financial inclusion. transactions) between the years 2011- to modifications/ cancellations. This 12 and 2012-13. Due credit needs to system will also serve to expand the The last three years have witnessed the be given to the RBI (Reserve Bank of service network by including corporate near doubling of the number of ATMs, India) for having the foresight to launch customers and providing them with and PoS machines increasing by more

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 51 12-06-2014 AM 11:29:33 have also provided India with a platform by enabling unprecedented customer to meet future needs in this key area. connectivity and developing sound By enforcing ISO back-office systems, thereby reducing The role played by supportive and the overall cost of ownership and 20022 compliance, enabling regulatory and government transforming accessibility parameters RBI and NPCI have institutions like the RBI and NPCI cannot across the ecosystem. be overstated. These institutions have enabled the flexibility modernized systems, standardized Security and risk management of offering value- processes and built scale to ensure improvements have been continuous that India has a sound and stable with examples like the introduction of PIN added services, payments infrastructure. The RBI has based chip cards and enforcing two factor also enabled an inclusive and structured authorizations for online transactions, and also built framework in the form of facilitative making card based transactions more a standardized regulation in addition to advisory to secure. provide impetus to these important Gazing Into The Crystal Ball platform for improved changes. These developments have been all encompassing and designed efficiencies and The only thing that can be said with keeping in mind the challenges thrown certainty is that the transformation is Straight-Through- up by the diverse nature of banking in not yet complete. This is evident from India. The directive and focus towards Processing. indicators like the value of transactions (as Socially Inclusive Banking has further a multiple of GDP) of electronic payments necessitated the need for efficient – India is still at a figure of 12-13 times payment solutions catering to all social GDP compared to a figure of more than strata of Indian society. than 75%, and card based transactions 50 times in some of the more mature economies. increasing by 66% in value. RBI has The opening up of the payment also issued licenses to non-banking ecosystem has allowed for new players to Further standardization of processes institutions to offer services that would introduce a differentiated set of products and reference data is on the anvil. The enrich the ecosystem, and further and services. This has also increased Northern, Southern and Western CTS increase usage of these electronic competition and traditional banks have (Cheque Truncation System) grids have payment modes that ultimately benefit been proactively working on improving now adopted a uniform holiday calendar. the end consumer. RBI has allowed for and expanding their payments portfolios. In the coming years, it is expected that white labelled ATM service providers efforts will be made to standardize the and issued licenses to five companies The transition from paper-based to various bank codes being used in India. in the last year (2013-2014). Nearly 25 electronic payments in the Central and Similarly, a uniform account numbering companies have been granted licenses State Government bodies offered a scheme on the lines of International Bank for issuing pre-paid payment instruments huge confidence boost to the electronic Account Number (IBAN) may also be and close to 10 of them are offering payments infrastructure and the implemented. mobile wallets. capabilities of banks. This has given banks the much needed impetus to Focus on interoperability with the ability The Main Forces Behind the Progress modernize their payment systems, with to switch over from one payment system many banks having readily embarked on to another based on availability will The progress made by the Indian this journey. be a key driving force. This has already payments industry has been the result been achieved in areas like ATMs and of some key forces that have not only Information Technology has been an is expected to be a principle applied to transformed the payments landscape but invaluable contributor to this progress relevant payment systems. The concept

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 52 12-06-2014 AM 11:29:33 RBI has allowed for white labelled ATM service providers and issued licenses to five companies in the last year (2013-2014). Nearly 25 companies have been granted licenses for issuing pre-paid payment instruments and close to 10 of them are offering mobile wallets.

of inter-operability will also extend to the customer servicing channels with the ability to initiate, modify, view or cancel transactions across all channels. India will continue to see new payment clearing schemes and payment types. There has been a concerted effort Implementation of a GIRO system in to increase efficiency through the The directive and India is already on the drawing board. promotion of electronic payments, This is expected to provide much needed focus towards Socially with more and more government automation for low value payments bodies willing to use electronic in the P2B (Person to Business) space. Inclusive Banking has payments for pensions, subsidies, Evolving Person to Person (P2P) and grants, loans and other purposes. further necessitated Person to Merchant (P2M) payments Educational institutions are moving using the mobile phone are expected the need for efficient from traditional cheque or DD to grow further. A whole host of banks, payment solutions (Demand Draft) payments towards including various small, co-operative NEFT/RTGS payments. Increasing banks today offer P2M solutions. In catering to all social number of service providers are, and fact, today individuals can even make will further continue to, demand faster, donations to religious institutions using strata of Indian society. hassle- and paper-free payments. mobile payments.

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 53 12-06-2014 AM 11:29:43 that the IT infrastructure inside the continue their efforts towards migrating institutions serving financial products customers to lower cost electronic Focus on and services will need to become more automated channels and enhancing robust. Hence, further growth and operational efficiencies in back-office interoperability modernization of payments in India systems to reduce human intervention. will happen under the ask of increasing Scintillate, with the ability to Government business would be adherence to new regulations. The cost switch over from one another area especially for the larger of regulatory compliance is a given banks centered on multiple format file and banks will look at means and ways scintillate payment system to handling, reconciliation enablement and to optimally adhere to incremental easy exception management. another based on enhancements in payments related availability will be regulations. India has gone through a variety of asteroid minim payment infrastructure changes in a key driving force. Conclusion the last few years, and a period of This has already been consolidation is expected where benefits A lot of banks are seeing payments from these changes will be reaped. The achieved in areas like as a growing business and an area for (Twinkle, twinkle little star) number of players in the payments space ATMs and is expected differentiation. They perceive value in being able to increase transaction- is bound to increase with new banks, What keeps CXOs of nancial institutions awake at night? More than a handful of concerns, apparently. to be a principle based revenues and not purely rely on MNOs (Mobile Network Operators), pre- The proliferation of digital channels, emerging technologies, constantly changing slew of regulations, applied to relevant the traditional credit spread business paid instrument providers participating, customer retention worries, rising channel conicts... the list is endless. model. Offering-specialized, value-added, but the Indian market is large enough payment systems. corporate payment services are now for various banks to succeed in the At Tata Consultancy Services, we believe the answer lies in one simple word – ‘Uncomplicate’. seen as a tenable strategy to grow the payments area. wholesale banking business. The focus is We can help you unravel the maze of complexity through a time-tested, market-ready and going to be on revenue through cross- The key to success will be the ability to move-as-you-grow solution, TCS BaNCS—at any time and any place. An award-winning, universal As the adoption of electronic payments channel operability, real-time reporting, clearly identify addressable segments in nancial services platform for banking, capital markets and insurance organizations, it drives customer increases, the legal framework will segregated pricing and flexible bulk file the market space and align the business growth, reduces Total Cost of Ownership, and enhances new product development. In short, it takes your need to provide coverage to address handling. In the retail space, the thrust model and related IT and operations to company on a journey of innovation, notching up higher levels of customer delight. Banks of varying exceptions and disputes. It is expected is going to be on costs as banks will serve those segments. sizes and complexity are using TCS BaNCS and have bene tted from its growth, eciency and innovation paradigm. Four of the top ve securities rms in the world run on its capital markets suite. A leading insurance company processes more than 40,000 policies a day across 1,000+ locations with its insurance products. The solution has enabled the world’s most pro table micro- lender to run its business with outstanding reach and pro tability. Not surprising, considering that it has surpassed established benchmarks in scalability, processing speeds and customer expectations.

Now, don’t you think it is time to uncomplicate?

Jojoe Cherian Consultant TCS Financial Solutions

Banking | Capital Markets | Insurance To nd out how TCS BaNCS can uncomplicate your business, visit http://www.tcs.com/OFFERINGS/BANCS 54 TCS BaNCS Research Journal

TCS BaNCS Research Journal_Vol 2 Issue 4.indd 54 12-06-2014 AM 11:29:44 Scintillate, scintillate asteroid minim (Twinkle, twinkle little star)

What keeps CXOs of nancial institutions awake at night? More than a handful of concerns, apparently. The proliferation of digital channels, emerging technologies, constantly changing slew of regulations, customer retention worries, rising channel conicts... the list is endless.

At Tata Consultancy Services, we believe the answer lies in one simple word – ‘Uncomplicate’.

We can help you unravel the maze of complexity through a time-tested, market-ready and move-as-you-grow solution, TCS BaNCS—at any time and any place. An award-winning, universal nancial services platform for banking, capital markets and insurance organizations, it drives customer growth, reduces Total Cost of Ownership, and enhances new product development. In short, it takes your company on a journey of innovation, notching up higher levels of customer delight. Banks of varying sizes and complexity are using TCS BaNCS and have bene tted from its growth, eciency and innovation paradigm. Four of the top ve securities rms in the world run on its capital markets suite. A leading insurance company processes more than 40,000 policies a day across 1,000+ locations with its insurance products. The solution has enabled the world’s most pro table micro- lender to run its business with outstanding reach and pro tability. Not surprising, considering that it has surpassed established benchmarks in scalability, processing speeds and customer expectations.

Now, don’t you think it is time to uncomplicate?

Banking | Capital Markets | Insurance To nd out how TCS BaNCS can uncomplicate your business, visit http://www.tcs.com/OFFERINGS/BANCS

TCS BaNCS Research Journal_Vol 2 Issue 4.indd 55 12-06-2014 AM 11:29:44 Micropayments: The Case for Wider Market Participation By Banks

Evolution of Micropayments and W3C) as well as tech startups such user interface and scalability. However, as DigiCash and CyberCash. However, these systems had to deal with increased The evolution of micropayments has been these initial systems suffered from competition and regulatory oversight. characterized by the cyclical emergence limited scalability and lack of customer Some of the niche players that were 1 and collapse of different generations , as trust. Thus, by end of the decade, most unable to adapt, were shelved or sold presented in Exhibit 1. The first generation of these systems went bankrupt or out – triggering the second wave of of micropayment systems were initiated were terminated. For example, IBM did collapse in the history of micropayments. in the early 1990s – with the entry of not operationalize its micropayments A prominent example is PayStone – a top brands (IBM and Compaq), premier platform, while DigiCash and CyberCash Canadian provider, who closed its online institutions (Carnegie Mellon University filed for bankruptcy. micropayments business in 2009 due 1 Párhonyi Róbert, Nieuwenhuis Lambert J.M., The next generation emerged around to non-compliance with regulatory PrasAiko.The Fall and Rise of Micropayment Systems. University of Twente, Enschede 2000-2001 with significant advances in directives.

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 56 12-06-2014 AM 11:29:51 Exhibit 1: Evolutionary Stages - Micropayment Systems

Micropayments Time Period Definition Key Highlights Regulatory Governance Generation

Gen 1.0 1994-1999 Token or 1. Entry of top-notch tech firms - IBM Sales of Goods Act - no account-based & Compaq separate provision for systems, aimed at electronic transactions 2. Challenges - Scalability, lack monetizing digital of customer trust & machine- content dependent user interfaces 3. Collapse by way of bankruptcy/ public trial. E.g. Digicash (Bankruptcy: 1998), NetBill (closed in 2005) and CyberCash (Bankruptcy: 2001)

Gen 2.0 2000-2006 Web interface- 1. Addressing challenges of Gen 1.0: 1. Federal Internet Privacy based systems Account-based systems, increased Protection Act, 1997 linked to real- scalability & alliances with top 2. Directive 46/EC on world financial banks helped gain customer trust e-money 2000 repositories of 2. Increase in competition & customers 3. Uniform Money Service regulatory costs triggering collapse Act 2000 E.g. Beenz (2008), PayStone (2009) 4. Electronic Fund Transfer Act 2001

Gen 2.5 2006-2007 Channel- 1. Shifts in Consumer Habits – 1. EU eMoney directive onwards agnostic systems Increased adoption of mobile 2009 targeted at all devices & digital payments 2. CEPAS (Contactless low-value real- 2. Tech Innovations - NFC (2006), e-Purse Application) world & virtual Peer-to-peer standards (2009), Singapore transactions Smartphones (2006-7) 3. Explosion of channels (viz. mobile, point-of-transaction, TV gaming consoles) and use cases – including games, transport and social media payments

Gen 3.0 Yet to Arrive Systems New business models to work around Global & national regulations characterizied the present-day challenges of high to enable & ensure inter- by global fixed costs and system fragmentation operability inter-provider operability

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 57 12-06-2014 AM 11:29:51 Exhibit 2: Evolution of the Micropayments Ecosystem

Regulatory Waves

EU eMoney Consumer Directive Protection 2013: Off-chain MPC UK: micro-transactions mWallet 2007: Launch Sale of Auditing of MPesa CePAS 2000: Birth Goods Act Standards of PayPal DI-3 Singapore DI-2 eCommerce Open DI-1 Directive mWallet: Kenya

Market Drivers Application Space Payor MCI/PCI Mobile 1 Real-world eCommerce Online Commerce Universality 2 Boom Commerce Mobile Social 13 Sell-side: 6 Commerce Payments Digital eContent e-Gaming Gaming P2P & G2P 12 Content Sale Customer 9 Payments Loyalty 7 Product 11 Payee 3 Digital Social Digitization Cash Goods Network 4 5 Digitization Transport 8 10 Issuer Payment Technology Drivers Gateway

Participants in the Micropayment System Digital MFA & RFID Wallet Generation 1.0 Social Internet Mobile Micro- Media payment Generation 2.0 & Digital Telephony Generations Signature Cloud Hosting Generation 2.5 Web Content/Product Flow NFC Application Process Flow for Payments Technology Process Flow for Authorization

CEPAS: Contactless ePurse Application DI: Disruptive Innovation G2P: Government-to-Person Legend MCI: Merchant User Interface MFA: Multi-factor Authentication mWallet: Mobile Wallet NFC: Near-Field Communication PCI: Payment processor User Interface RFID: Radio Frequency Identification

1. Payor requests for product/online content or payment in the user 2. Payor shares card/wallet/account credentials through the user interface interface 3. User interface forwards these credentials to the payment gateway 4. Payment gateway sends credential to issuer (bank/provider) of the payor Process 5. Issuer sends authorization and confirmation for the payment to gateway 6. Payment gateway passes on this information to the interface Flow 7. Payee requests the payment gateway to initiate payment transaction 8. Payment gateway forwards transaction information to the issuer 9. Issuer debits the account of payor and sends the information to payor 10. Issuer sends these funds to the payment gateway 11. Payment gateway routes these funds to the acquirer of the payee 12. Acquirer credits the account of payee with the funds & informs payee 13. Upon receipt of the payment, the payee either sends the goods/content promised or simply informs the payor (in case of P2P or G2P payments

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 58 12-06-2014 AM 11:29:51 Meanwhile, in 2006-07, the industry A majority of incumbent providers witnessed a set of unique disruptive managed to survive the new market market forces – including shifts in conditions. However, the fundamental For instance, in the consumer mindset, government policies, challenges of interoperability and high technological breakthroughs and business fixed costs2 remain unaddressed till second generation, innovations. They created a dynamic today: Over the last decade, a large ecosystem with expansion in channels variety of micropayment providers have user convenience was and applications and cross-industry emerged, resulting in a multitude of a motivation factor participants. We have presented the payment systems and standards. evolution of this ecosystem in Exhibit 2. – simple, web-based While some central governments are working towards nationwide, interfaces increased interoperable platforms (such as the CEPAS in Singapore), there have been the adoption of In 2006-07, the very few initiatives towards industry- micropayment wide standardization. This has resulted industry witnessed in a fragmented market, with limited systems. compatibility among competing providers. a set of unique Subsequently, the disruptive market Moreover, the industry also suffers birth of digital wallet forces – including from prohibitively high fixed overhead costs. While top market players and mobile payments shifts in consumer are experimenting with innovative techniques, these initiatives are yet to redefined user mindset, government gain scale. For example, Apple introduced convenience, making policies, technological back-end aggregation to distribute fixed cost over a large number of transactions, this a hygiene factor. breakthroughs and while PayPal developed a new pricing business innovations. model with low fixed costs exclusively for micropayments. They created a the new wave of market innovation and dynamic ecosystem This demonstrated that the universality government participation, we could of micropayments may not be addressed say that a sub-generation Gen 2.5 for with expansion completely in the near future. The next micropayments that originated in 2006- generation of micropayments, Gen 3.0, 07 continues till date. This Gen 2.5 is in channels and when it arrives will have to address the distinctly different from Gen 2.0, but the applications and, pressing challenges of interoperability change is not significant enough for us to and cost management. However, given believe that Gen 3.0 of micropayments thus, cross-industry has arrived.

participants. We 2 Birch Dave. (1997, June). Micropayments and While the different generations Microprofits – Can banks extend their payments have presented the franchise to the net. for micropayments evolved from While some central governments are working a continuous interaction between evolution of this towards nationwide, interoperable platforms regulatory directives, market forces and (such as the CEPAS in Singapore), there have been very few initiatives towards industry- technology drivers, Gen 2.5 is notable ecosystem in Exhibit 2. wide standardization. This has resulted in a on multiple counts as illustrated above fragmented market, with limited compatibility among competing providers. (shown in Exhibit 2):

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 59 12-06-2014 AM 11:29:52 Exhibit 3: Factors Affecting User Adoption of Micropayments

Motivation Factors for User Hygiene Factors for User Challenges to User Adoption Adoption Adoption

• L: Extensive use of low-latency • C2: Real-time user interaction systems • C3: Mobile payments redefined • R1: Some governments (e.g. UK, user convenience • C1: Innovation in transaction Singapore, USA) are promoting pricing • P: Complete anonymity & micropayments privacy • S3: Linking wallet currency to

GEN 2.5 • S1: Hosted data centers have fiat currency • R2: Participation of top- increased scalability at lower notch cross-industry cost brands – technology firms, • S2: Fraud & Risk Analytics communication providers, etc.

• C3: Superior web interfaces • C1: Use of aggregation: Front • L: Higher computing power • C2: High degree of control and Back end integration of • R1: Enactment of regulations orf offered in peer-to-peer transfers individual transactions licensing/operation of MPS • P: Complete anonymity against • S3: Interoperability amongst

GEN 2.0 • R2: Alliances with banks merchants & protection of user consortium of banks & payment details providers • S2: Multifactor authentication Micropayments - Micropayments

Evolutionary Stages Evolutionary • S1: Account-based systems

• C1: Fixed transaction cost >> Value of each transaction • C3: Supported by dedicated software • P: Anonymity from merchants • L: Low speed due to online validation and limited • R2: Tech startups had reputation C2: Balance update computing power • S2: Variation in nature of after every transaction GEN 1.0 • R1: Lack of regulation orf security offered consumer/merchant • S1: Poor scalability of token- based systems • S3: Lack of collaborative efforts Legend

C1 C2 C3 L P R1 R2 S1 S2 S3

User Cost User Control Latency Privacy Regulation Reputation Scalability Security5 Standardization Convenience

Regulatory Waves – Various national micropayments in Singapore, is a shining other related drivers. Starbucks realized governments are legislating to example of the impact of government the significance of these emerging promote and encourage the growth of endorsement on the health and success trends and benefitted from its multiple micropayments. The Payments Council in of micropayments. initiatives. In 2012, it partnered with UK will bring in regulation to allow mobile Square and started accepting digital numbers as proxy for bank accounts. Market Drivers - The emergence of micropayments from its customers using Similarly in Kenya, the government has customer loyalty schemes has created Square’s mobile app. Moreover, in Oct directed mWallet providers to develop the need for micropayments in the 2013, it launched “Tweet-a-Coffee” open systems to ensure interoperability. retail space. The increasing universality campaign to leverage social media-based, CEPAS, a nationwide system for of mobile devices and social media are Peer-to-Peer payments. The campaign

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 60 12-06-2014 AM 11:29:52 was highly popular, triggering purchases and points of transaction. Similarly, cloud- worth USD 180,000 for two months. More based mobile payments promise to bring importantly, the success of this USD 5 gift forth a massive reduction in operational When premium card shows that loyalty programs will be costs. a key driver for digital micropayments in features offered by future. Adoption of Micropayments certain providers Some retailers are also leveraging User adoption has been affected by cannot be provided these trends to boost sales volume. For 3 factors3: motivating user adoption, instance, UK-based, fast-food retailer, barriers to adoption and hygiene factors on a large scale, such Greggs had been battling a shrinking (with the absence of hygiene factors factors continue topline since 2012. To counter this, it causing user dissatisfaction). started developing a digital loyalty app to motivate user based on PayPal technology, allowing User Adoption of Micropayments: These adoption. For instance, transactions of GBP 50 or less. This app factors have been presented in Exhibit was launched in Feb 2014. 3 as ‘Challenges4 to User Adoption’, even in generation 2.5, ‘Motivation Factors for User Adoption’ and ‘Hygiene Factors for User Adoption’. providers that use low- Exhibit 3 depicts the evolutionary stages latency systems and of micropayments vertically, starting from More than for Gen 1.0 and moving up to Gen 2.5. make use of cloud- based operations their market size, Cross-Factor Transition: Sudden micropayments are technological innovations and systematic (for lower cost), are efforts from industry participants convert critical because of the individual factors from one type to able to differentiate demand for innovation another - redefining customer experience themselves in the across generations. to circumvent cost market. Based on our observations, there are two disadvantages that kinds of cross-factor transitions: cannot be addressed a. Challenges arising from one for consumers. For instance, latency by conventional generation transforming into was a major challenge in the first payment systems. Motivation Factors of the next generation. In the second generation, generation: Challenges which are this was addressed by some of the addressed partially or by a small set of providers using offline validation, providers, become motivation factors which has proven to be a significant attraction for customers. Technology Drivers – The widespread popularity of mobile payments and digital 3 Párhonyi Róbert, Nieuwenhuis Lambert J.M., Pras Aiko. The Fall and Rise of Micropayment b. Motivation Factors of one generation wallet solutions have offered a low-cost Systems. University of Twente, Enschede transmuting into Hygiene Factors of alternative platform for the growth of 4 Gonville, Michelle Baddeley and Caius College, the next generation: When premium micropayments. In the next few years, Faculty of Economics and Politics, Cambridge, UK (2004). Using E-Cash In The New Economy: and innovative, first-of-a-kind features NFC-enabled contactless payments An Economic Analysis of Micropayment Systems. offered in selected systems/markets Journal of Electronic Commerce Research, VOL. will open up newer use cases for are replicated on a large scale in 5 Clark, Brent (2001). Electronic Wallets: Past, micropayments such as in public transport Present and Future. White paper, GPayments. the subsequent generation, they

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 61 12-06-2014 AM 11:29:52 web-based interfaces increased the prohibitive costs and regulatory oversight. adoption of micropayment systems. However, at present, the market offers With the advent of Subsequently, the birth of digital a huge opportunity in terms of market wallet and mobile payments redefined growth as well as the underlying demand digital payments, user convenience, making this a for innovation. banks are competing hygiene factor. head-on with Unless triggered by specific market conditions and collective industry efforts, digital payment and these factors continue to move in the By linking bank technology providers same category across generations. accounts with (such as PayPal and a. Motivation Factors: When premium micropayment Google) as well as features offered by certain providers cannot be provided on a large scale, offerings, banks can communication such factors continue to motivate offer an end-to-end user adoption. For instance, even service providers. in generation 2.5, providers that payments solution, These players use low-latency systems and make broadening their use of cloud-based operations (for are constantly lower cost), are able to differentiate transaction base. innovating to create themselves in the market.

new combinations b. Hygiene Factors: Even when of digital financial fundamental hygiene factors Market Size and Growth: The total are addressed differently across value of the European micropayments services – e.g. the generations, they remain a part of market stood at EUR 6 Billion in 2011. debit card from basic service expectations in the Furthermore, under the aegis of the consumer mind space. For example, European Payments Council (EPC), the Google Wallet and the user control is one of the basic market is expected to grow to EUR 15 expectations from micropayment Billion by 2015 6. On the other hand, Smartphone-based systems. Users should be able to micropayments (transactions values

The industry is still unable to address Market Relevance: More than for their prohibitive fixed transaction costs in market size, micropayments are critical comparison with transaction value. because of the demand for innovation constitute hygiene factors, becoming to circumvent cost disadvantages that a part of basic consumer expectations Gen 2.5 – Why Should Banks Enter the cannot be addressed by conventional from the service. Technological Micropayments Space? breakthroughs are major contributors 6 Hernandez –Verme, Paula L, and Valdes in this process. For instance, in the Till date, banks have been mostly wary of Benavides, Ruy A. Virtual Currencies, second generation, user convenience launching a full-fledged micropayments Micropayments & The Payments Systems: A Challenge To Fiat Money & Monetary Policy. was a motivation factor – simple, product – owing to smaller market size, Universidad de Guanajuato, Mexico

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 62 12-06-2014 AM 11:29:52 payment systems. This demand is three- a greater adoption of micropayment pronged and comes from: systems. For example, the European Consortium Rules Payments Council (EPC) is driving 1. Consumers: High fixed transaction the acceptance of digital payments costs associated with micropayments resulted in the and micropayments to circumvent 7 prove to be a significant hindrance . adoption of a unified the complex, highly expensive cash Even though providers use aggregation generation process. techniques at present, these do not micropayment fit a one-time purchase. They are On the other hand, in emerging also inconvenient in cases where the standard and set markets, micropayment systems offer customer has to pay upfront for the of instruments a powerful means to achieve financial products/services. inclusion9. The success of M-PESA in The emergence of mobile and social- throughout the globe. Kenya is a case in point. media based payments is also driving Alternatively, we see consumer demand for real-time low- Market Dynamics - Role of Banks vis-à-vis value transactions. the emergence of a Other Market Participants: 2. Business: Merchants are battling global Micropayment Banks: In those markets where we see a against existing market fragmentation. regulatory push towards micropayments The micropayments industry is Exchange, with and payments innovation, top-notch characterized by a large number interoperability and variety of providers, each banks have successfully launched controlling a small part of the market. among multiple micropayment services. For example, Buy side customers can use any Barclays launched Pingit – a mobile of these micropayment providers. systems/currencies. app that allows person-to-person (P2P) Few providers allow interoperability payments of minimum GBP 1. However, among themselves. For instance, as is evident in this case, the approach Facebook Credits incorporated PayPal has been indirect, leveraging popular payments to increase user adoption of micropayments and developed consumer trends such as P2P (person- in 2010. Later, it also adopted PayPal’s CEPAS 2.0, a standard to allow to-person) payments and social media micropayments service launched for interoperability of different payment payments. Moreover, most of these digital goods. However, the alliance schemes. Globally, the emergence initiatives have been launched in relatively was short-lived, with Facebook of digital currency exchangers, mature markets such as the UK and The eventually phasing out its digital which provide interoperability Netherlands. payments platform. Facebook today is among different digital currencies, preparing to join the mobile payments is a move towards addressing this Beyond these few instances, banks race again with its own payments fragmentation. haven’t participated in micropayments. system. The industry has been dominated mostly Thus, merchants have to tie-up 3. Government: Public institutions by non-banking participants. The first with a large number of operators to across the globe are taking active generation was driven by technology ensure payment acceptance for a interest in the micropayments start-ups and venture capitalists. substantial volume of customers. In industry.8 There are regional nuances Generations 2 and 2.5 have produced a Singapore, the government recognized in their underlying objectives though. wider spectrum of players. this challenge towards universality However, all these objectives favor

9 The World Bank (2012, Oct). Innovation In Retail 7 McGrath, James C. (2006, June). Payments Worldwide: A Snapshot. Outcomes Micropayments: The Final Frontier for Electronic 8 Analysis Mason (2010, Dec). The marketplace of The Global Survey on Innovations In Retail Consumer Payments. Discussion paper from for and regulation of micropayment services in Payment Instruments And Methods. Research Payments Card Center. the UK. PhonepayPlus from Payment Systems Worldwide.

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 63 12-06-2014 AM 11:29:52 Digital Payment Providers 10: In the Social Networking Providers: The payments, banks are competing head- second generation, digital payment consumer-led proliferation of social on with digital payment and technology processors such as PayPal, Allopass and media and the rise of social gaming providers (such as PayPal and Google) as Square came into existence. They have paved the way for two important trends - well as communication service providers. been instrumental in the creation of commercialization of content exchanged These players are constantly innovating new services and in introducing pricing over social networks and peer-to-peer to create new combinations of digital innovation, such as transaction tier pricing payments on social media. These trends financial services – e.g. the debit card from Google Wallet and the Smartphone- in the market. in turn created a unique opportunity for micropayments in social media. To exploit based credit card reader launched by Square Inc. Mobile Network Operators: The advent this market, some social networking of mobile payments was another major providers started partnered with third- In some cases, non-banking payment development for micropayments. The party payment providers, such as Twitter’s providers are part of the communication popularity and widespread adoption of alliance with Twitpay, Twollars and Flattr. Others explored the opportunity to launch loop linking merchants, payer and banks mobile devices helped mobile operators (e.g. PayPal), while in others, they are virtual payment currencies and platforms, in gaining market traction. This wide offering payment portals, bypassing banks such as Facebook Credit (2011). This customer base helped in spreading altogether. M-Pesa in Kenya is an example market segment is still evolving, with infrastructure costs, while the absence of a mobile network operator (MNO) Facebook switching back to real-world of specific regulations helped maintain providing a cheaper and more efficient currencies and Twitter dropping some of profitability. In some of the emerging alternative to banks for financial inclusion. its partners. markets, such as Africa, telecom providers The end result is that multiple are playing a pivotal role in reaching Traditional Payment Processors12 : competitors are eating up parts of the out to the unbanked population and Payment intermediaries such as Visa banking value chain 13 and banks face the thereby helping increase GDP and lower have made a late entry into the market risk of being reduced to the limited role transaction costs. – primarily because the overall market of offering basic transactional features. size is much smaller compared to macro- Given the huge interest of governments The rapid adoption of mobile payments payments. The high cost associated with across the world, the micropayments also prompted other market players, card-based systems caused another market will play a significant role in such as the digital payment providers, to hindrance. However, gradually these defining payment systems of the future. leverage mobile as part of their digital providers launched the digital wallet and channel mix for micropayments. micropayment services. For e.g. Visa Diversifying Revenue Pipeline: Banks are launched Payclick in 2010 and American exploring alternative means of revenue 11: Apple forayed into Technology Giants Express launched Serve in 2011. generation and micropayments offer the market of micropayments primarily multiple opportunities for this. Even to support its products. Nevertheless, To sum up, the inability of banks to without direct market participation, banks the revenue-sharing model with the app respond in the near future can prevent can rely on their existing infrastructure seller was an instant success, driving the them from playing a dominant role in such as channels, IT applications, among adoption of micropayments. Google, micropayments in the future. Moreover, others, and earn revenue by leasing them Amazon and Microsoft are the technology banks will lose out on a huge opportunity to participants from other industries. By players of mark in this space. to reposition themselves. linking bank accounts with micropayment offerings, banks can offer an end-to-end Preventing Erosion of the Banking payments solution, broadening their 10 Bradford, Terri, and Keeton, William R (2012). New Person-to-Person Payment Methods: Have Value Chain: With the advent of digital transaction base. Checks Met Their Match. Economic Review, Third Quarter 2012 12 McGrath, James C. (2006, Jun). Micropayments: 13 Dapp Thomas F, Stobbe Antje, Wruuck Particia 11 Analysis Mason (2010 Dec) The marketplace for The Final Frontier orf Electronic Consumer (2012 Dec). The Future of (Mobile) Payments and regulation of micropayment services in the Payments. Discussion Paper from Payments Card – New (online) players competing with banks. UK, PhonepayPlus Center. Deutsche Bank Research

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 64 12-06-2014 AM 11:29:53 Marketing and Restoring Market However, the specific nature of bank However, based on the development of Reputation: In recent times, the participation will depend upon the the payments industry and specific market reputation of banks has suffered due evolution of micropayments and the events in the past, we envision three to multiple litigations and regulatory course of action taken by market probabilistic scenario14 for the global fines. Customer trust is also at an all- participants and regulators. micropayments industry, which are:- time low. In this situation, by actively participating in the micropayments Guidance: What Banks Can do in Scenario 1 - Consortium Rules resulting in the adoption of a unified market, and helping various Response to the Evolving Scenario of micropayment standard and set of governments in establishing financial Micropayments?

inclusion, banks can regain consumer 14 Párhonyi Róbert, Quartel Dick, Pras Aiko (2004). confidence and recover some of their The market for micropayments continues Collaborative Micropayment Systems. University of Twente, the Netherlands. 19th World lost reputation. to evolve differently across regions. Telecommunications Congress (WTC).

Exhibit 4: Scenario Analysis for Micropayments

Consortium Rules (1)

Regional Rules (2)

RA1 RA2 ... RAN RA1 RA2 ... RAN

MPE MPE MPE MPE MPE 1 MPE2 N 1 2 N MPSPs

MM & R M & T M & DC Buyers Sellers Enterprise Rules (3) FIN-EC TV NP

M&T: Mobile & Telecommunication Legend MM&R: Micro-Merchants & Retailers M&DC: Media & Digital Content Providers Providers FIN-EC: Participants from Financial TV: Technology Vendors NP: Niche Players, specializing in MPSP Ecosystem (including start-ups) micropayments Interaction MPE: Micropayment Ecosystem RA: Regulatory Authority of the economy MPSP: Micropayment System Providers in an economy

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 65 12-06-2014 AM 11:29:57 Exhibit 5 – Future of Micropayments and the Strategic Positioning of Banks

Scenario Consortium Rules Regional Rules Enterprise Rules

Market 1. Adoption of a single micropayment 1. Emergence of nationwide and 1. Lack of global/regional consensus Evolution standard and instrument – with regional micropayment standards among market participants global operations and platform 2. Strong regulatory governance 2. Market Fragmentation independence and regional co-operation – with 3. Partial interoperability based on 2. Worldwide Micropayments governments defining market space, vendor alliances Exchange: Interoperability participation and interoperability among multiple systems & digital currencies across the globe – e.g. foreign exchange markets

Present-Day Gen 1.0 : Microtransaction Standards CEPAS (Contactless e-Purse M-PESA in Kenya: Enterprise-centric Simulative from World Wide Web Consortium Application) in Singapore: market in the absence of government Cases (W3C) 1. e-Payment initiative by IDA - regulations 1. Birth of Mircopayment Markup Infocomm Development Authority 1. 2007: Mobile payment launched by Working Group (MPM-WG) of Singapore Kenyan network operator, Safaricom 2. Common applications programming 2. Single MPSV (Multi-Purpose Stored 2. Penetration of unbanked rural interface (API) & interoperable Value) card for micro-payments markets – growing to 17 Mn language across Singapore accounts 3. The initiative was aborted later due 3. Enforcing interoperability in 3. Banking system bypassed by to operational challenges the fragmented micropayments engaging airtime resellers/retail market dominated by NETS (retail outlets and monitoring space) & EZ-Link 4. Failure of mobile banking systems Gen 2.0: Digital Currency (transport) Exchangers(DCEs) launched by banks to replicate 4. CEPAS can lead an ASEAN-level M-PESA's success E.g. Eazzy 24/7 1. DCEs offer interoperability among market integration from Equity Bank different digital currencies 5. Other banks have successfully 2. Exchange of digital currencies for teamed up with Safaricom E.g. CFC conventional fiat money Stanbic Bank 3. Instances: EcurrencyZone in US; Exchange Plus; Kraken Digital Asset Trading Platform

Strategic 1. Single Universal Framework: 1. Strong regulations favor Stiff competition from incumbents with Positioning for Adoption of a unified global market competition & uniform strong credibility & market presence Banks micropayment standard: with interoperability standards help in platform/channel independence market entry Banking Strategy: 2. Worldwide Micropayments 2. Banks work in similar conditions 1. Marketing Alliances: Mutual Exchange: Interoperability under the Central Bank of a nation alliances -> low-cost strategy of among multiple systems & digital penetrating the target audience. currencies Banking Strategy: Promoting banking services through 1. Minority Stake/Acquisition: Minority 3rd party micropayment websites/ Banking Strategy: stake in leading micropayment channels 1. Cross-Regional Acquisitions & providers, followed by full-fledged 2. Cross-Industry Alliances: Client- Alliances: Global banks acquiring acquisition. Mutual synergy sharing partnerships with regional micropayment provider from payments infrastructure micropayment providers of other OR regional banks partnering with and customer set of banks & industries – telecom operators, global micropayment providers micropayment providers technology providers, etc. 2. Revenue Generation: Investment 2. Channel Expansion: Banks 3. Leasing/Outsourcing: Indirect banking services for access to global introducing newer channels for revenues from existing physical/ markets, linking trading accounts micropayments – such as ATMs and digital infrastructure E.g. Leasing with micropayments to offer micro- bill payment kiosks. In an integrated out banking channels; Outsourcing trading transactions, generating fee- regional/national micropayment engagements bagged by in-house IT based revenues by offering market system, such innovative moves help teams infrastructure services in enhancing visibility to customers and gaining market share

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 66 12-06-2014 AM 11:29:58 instruments throughout the globe. Scenario 3 - Enterprise Rules creating worldwide micropayment consortium. Alternatively, we see the emergence of a lack of a consensus across nations Alternatively, governance by regional/ a global Micropayment Exchange, with or regions, which can in turn hinder national regulatory authorities will result interoperability among multiple systems/ interoperability, leading to market in regional clusters of micropayment currencies. fragmentation and the emergence of systems. In the absence of any such closed ecosystems. collaborative efforts, the market of Scenario 2 - Regional Rules causing the micropayments will mostly likely be emergence of nationwide and regional Exhibit 4 provides a visual summary of dominated by individual enterprises standards for micropayments, alongside these future scenarios: Collaboration from various industries. The Exhibit $ is a strong regulatory governance. at a global level is expected to drive a representative micropayment ecosystem with buyers and sellers interacting with multiple cross-industry players, including technology vendors, retailers and financial service providers.

In order to win banks will have to chart out a strategy and take up specific actions to penetrate the micropayments space. Natasha Roy In Exhibit 5, we illustrate each of the Corporate Research Group scenarios with present-day cases and Tata Consultancy Services recommendations for positioning.

Himadri Sikhar Pramanik Lead, Corporate Research Group, Tata Consultancy Services

Manish Kirtania Manish - Global Corporate Research and Campaign Support Service Tata Consultancy Services

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TCS BaNCS Research Journal_Vol 2 Issue 4.indd 67 12-06-2014 AM 11:30:06 Consulting

TCS BaNCS Research Journal_Vol 2 Issue 4.indd 68 12-06-2014 AM 11:30:18