Where Now for the UK, Post-Referendum

July 2016 Issue 349 www.electronicpaymentsinternational.com

From EU to Où? Where now for the UK, post-referendum

•ANALYSIS: Is Asia real time ready? •COMMENT: The EU view on blockchain •REVIEW: Google’s payday lender ad ban •COUNTRY SURVEYS: Latvia, Czech Republic, Estonia

EPI 349subbed.indd 1 08/07/2016 15:03:43 Multichannel digital solutions for ﬁ nancial services providers

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IE RBI final design.indd 1 05/05/2016 10:36:41 EDITOR’S LETTER NEWS

CONTENTS Direct Access – the UK payments NEWS landscape just got more democratic 3: NEWS DIGEST

FEATURE he Bank of England has announced I would go further and argue that banks plans to offer access to central should not be allowed to call themselves a 6: ASIA bank settlement accounts to non- bank until such time as they actually have Asia’s move into real-time payments will open up convenience for consumers and banks. Payments industry lobbyists a licence, shining a light on what the main banks alike, but will it also make them T customer-facing difference is – that a licence have been campaigning for this for some vulnerable to threats? Xiou Ann Lim reports time and this announcement, although it protects customer deposits up to £80,000 8: REAL TIME PAYMENTS will take some time to be put into effect, ($103.900). Seeing off challenges of fragmentation will comes sooner than expected. Another strong argument to improve protect SEPA’s harmony and bring greater Currently, non-banks and small PSPs access industry competition for the end user plays speed and efficiency, writes Thomas Dolenga the UK’s payments systems via larger banks, into the drive to update the payments sys- 9: BREXIT paying high rates and subjecting themselves tems. Faster Payments is all well and good, Brussels is in shock and emotional at the news of Brexit. Anna Milne speaks to Monica to the constraints and risks of legacy systems. but Direct Debit (DD) is almost 50 years old Monaco for the view from the continent A report earlier this year, penned by one – 48 to be exact – and the system does not 10: BLOCKCHAIN Rich Wagner, in his role as chairman of the serve much of the population, including small Anna Milne talks to Monica Monaco, founder Emerging Payments Association, suggested businesses, at all well. of TrustEuAffairs, to get the inside track on an interim solution, until such time as his (and Those on irregular or low incomes often the EU’s position on blockchain others’) efforts in lobbying the Bank of Eng- choose to use cash if they cannot guarantee 11: BLOCKCHAIN land for access to settlement accounts at the funds being available at a given time each Blockchain and identity data intelligence go central bank for non-banks paid off. month. Therefore they miss out on electronic hand in hand, writes Gareth Stephens, head of proposition development at GBG Said solution was termed Direct Agency payment benefits, such as DD discount. In and was to replace the current Indirect Agen- turn, missed or delayed payments impact 12: BREXIT AND FINTECH The repercussions of Brexit for the UK’s cy model. The ideal, lest we forget, is of course small businesses. fintech sector are “really damaging”. Patrick Direct Access, which has now been granted. At least the conversation has not only Brusnahan speaks to industry experts This is great news indeed for non-banks gained momentum of late, but has deliv- and PSPs and answers the Payment Systems ered significant developments to open and SURVEY Regulator’s objective to promote competi- improve the landscape for all stakeholders – tion (its mandate is to “promote competi- even the banks. 13: LATVIA tion, innovation and the broader interests of And while there is still a long way to go, the 14: CZECH REPUBLIC service users”). different debates and developments do seem 15: ESTONIA Wagner himself marked the development to be converging on a payments ecosystem as “truly the ‘Holy Grail’ when it comes to that serves all parties better. < COMMENT access for alternative finance providers”. However, there is clearly still a long way As EPI went to press, the UK population’s shock 2: TOM HAY, ICON SOLUTIONS to go. For starters we need to wait until it vote to leave the EU was announced. We were able 16: DANIEL O’BOYLE, PROVENIR is actually implemented. We also need the to include some of our coverage in this issue; more challenger banks who offer nifty innovative in the next. digital budgeting services, such as Mondo, to actually acquire a banking licence. A NNA MILNE, [email protected]

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EPI 349subbed.indd 1 08/07/2016 15:03:45 Electronic Payments International COMMENT ICON SOLUTIONS

Is PSD2 a self-defeating regulation?

When the Payment Services Directive (PSD2) replaces the PSD in January 2018, it will have wider scope to cover new payment services created by a period of innovation. The legislation aims to improve consumer protection and competition, and drive innovation. Tom Hay, head of payments at Icon Solutions, writes

SD2 has created turbulence because it 10 months later than PSD2. Which begs the effect will be a similarly negative impact on mandates banks to provide customer question – why continue with a January the adoption and usage of these new pay- account access (XS2A) to third-party deadline? ment methods. payment providers (TPPs), transparen- Taking a wider view, the potential of API One alternative to imposing intrusive P technology has been overshadowed by a cy of payment charges, and strong customer security measures is innovation in risk man- authentication for all electronic transac- myopic focus on PSD2. Banks need to open agement. For example, Klarna has built a tions. up new revenue streams and the innovative $2.25bn business through dynamic risk Despite years of negotiations between the use of APIs is central to this. Rather than profiling to achieve frictionless checkout. European Parliament, Council and Com- exploring their transformative strategic Imposing a ‘one size (mis)fits all’ approach mission, critical parts of the legisla- potential, banks are increasingly fix- to authentication will remove any competition remain ill-defined. ated on PSD2 compliance. tive advantage afforded to those differentiat- For example, with XS2A a The counterproductive nature ing through cutting-edge approaches. bank that “provides a mech- of the regulation is most There are no commercial incentives for anism for indirect access apparent when we look at banks around PSD2. They will have to should allow direct access”. PSD2’s stated objective to invest millions to open up their infrastruc- None of the legal experts “make payments safer and ture to provide XS2A and make the myriad I have consulted have been more secure”. operational changes around pricing trans- able to explain the difference Central to this is the require- parency, authentication and liability. Once between “indirect” and “direct”. ment for PSPs to apply “strong again banks are being forced to manage Regarding authentication, anoth- customer authentication” when regulatory hurdles, rather than invest in er clause says: “Where the payee or PSP payers initiate “an electronic payment services to boost innovation. of the payee fails to accept strong customer transaction” – effectively two-factor authen- How will they recoup these costs? They authentication, it shall refund the financial tication. cannot, as PSD2 explicitly prohibits banks damage caused”. Given that security measures are growing from charging third parties for access, cre- However the payee does not determine in sophistication and that the drive is con- ating a massive free rider problem as TTPs the type of customer authentication and stantly towards a frictionless experience enjoy all the benefits without the costs. therefore can neither accept nor reject. for consumers, there will be some conflict And once established, PSD2 will reduce With legislation littered with perplexity between the direction that industry and reg- banks’ ongoing revenues. According to like these, rule makers have asked the Euro- ulators wish to travel in. It’s unclear whether Accenture, UK banks could lose up to 16% pean Banking Authority (EBA) to iron out consumers will benefit from these mandated of their online retail payments-based rev- the details by drafting Regulatory Technical security procedures given that existing lia- enues by 2020 – approximately £1.45bn Standards (RTS). The document covering bility provisions already protect consumers ($1.88bn). If combined with the recent strong customer authentication and secure from loss. On the contrary, it may provide reduction in interchange fees, customer communication is due in summer 2016. The a boon for fraudsters as consumers will accounts will become incredibly expensive EBA’s statement that it will need to “make need to provide banking security creden- to hold. It’s therefore highly likely that these difficult trade-offs between competing tials (rather than card security credentials) costs will be passed to consumers. demands” highlights the difficulties it faces. to initiate payments, which can easily be Voices calling for the end of free banking In any case, it is unrealistic to expect the stolen through phishing sites. After years of have been growing louder in recent years. RTS to resolve the ambiguities. After all, the telling consumers to keep bank credentials PSD2 may well be the tipping point that EBA’s discussion paper acknowledged that to themselves, rule makers are now asking turns words into action. the need to allow for innovation requires them to splash them all over the web. From where we stand today, far from har- high-level requirements that provide certain It’s also likely to reduce customer con - monising the payments market in Europe, flexibility. venience, as simple one-click checkouts PSD2 is more likely to create fragmentation, This continued uncertainty is stifling like Amazon and PayPal become outlawed. inequality and complexity with the consum- market progress. PSD2 is designed to boost Visa and MasterCard attempted to increase er paying as a result of less security, more innovation, but what we are actually seeing online security by introducing 3D Secure, friction and potentially higher charges. is ‘planning blight’. Market participants which is hated equally by customers who see With the voices of a few dissenters cannot plan innovative new products, ser- it as intrusive and difficult, and merchants drowned out by a wave of approval, there vice and features because they do not know who can measure the number of sales that is a major risk that instead of achieving its what will be allowed and what will be out- are abandoned at that stage. stated objectives to make payments more lawed. If PSD2 mandates the use of two-factor secure, boost innovation, create a level play- And even if the RTS rules are clear, they authentication, the majority of which relies ing field and reduce the cost of payments, do not come into force until October 2018, on cumbersome one-time-passwords, the PSD2 will result in exactly the opposite. <

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EPI 349subbed.indd 2 08/07/2016 15:03:46 Electronic Payments International DIGEST NEWS

MOBILE MOBILE Samsung Pay arrives Zapp to launch – at last in Spain After a number of pushbacks, VocaLink has Zapp believes the app will be considered Samsung has launched its mobile payment announced a partnership with Barclays and more convenient and trustworthy by cus- service, Samsung Pay, in Spain. It is the first Lloyds Banking Group to launch its Pay by tomers, as it is processed via their banking European market to introduce the service, Bank app. It is set to be first to be made avail- app, with which they are already familiar. following launches in the US, China and able to Barclays customers this autumn, and The app also allows users to view account South Korea. Lloyds, Halifax and Bank of Scotland in 2017. balances before they pay. The service will be supported by Caixa- Is the Barclays launch more definite than Zapp uses customers’ banks’ own security Bank and imaginBank at launch, the compa- this time last year, when an autumn launch methods to verify users, and users’ financial ny said. It will also be available for Abanca was also in the offing? details are never revealed to the merchant and Banco Sabadell customers soon. “Yes, in a word,” answered Gareth Thom- due to encryption via secure digital tokens. Samsung Pay only works on the Samsung as, spokesperson for Zapp. POS terminal payment in store will be the Galaxy S7, S7 Edge, Galaxy S6, S6 Edge, “Things have fundamentally changed [...] next priority for Zapp, likely to follow in and S6 Edge+. The Galaxy A5 2016 will they are at the stage of advertising,” Thomas 2017. “There will always be a five or six- also support the service in the coming weeks. added. month lag behind the e-commerce launch,” The South Korean company added that Lloyds, Halifax and Bank of Scotland are Thomas explained. the service will be available at all stores with in the “integrating and testing stage and David Yates, CEO of VocaLink, com - contactless terminals throughout Spain, and there is a strong hint they will launch next mented: “We’re delighted to announce our that a number of partnership deals with year”, said Thomas. partnership with four of the UK’s biggest leading businesses will be announced. Several major high street retailers have financial institutions, alongside the growing Samsung Pay Europe director Nathalie confirmed their support for the service as an number of retailers who are supporting the Oestmann said: “The Spanish market’s pro- easy and safe way for consumers to pay for Pay by Bank app”. gressive approach to digital payments makes good and services instantly. Darren Foulds, MD for Pingit at Barclays, it a logical launch market for Samsung Pay. The app enables consumers to make real- added: “With the introduction of the Pay by “We believe that the comprehensive sup- time payments on phones and tablets when- Bank app features, mobile payments to mer- port from telecom service providers, net - ever they see the Pay by Bank app paymark. chants are going to be even simpler and more works and processors, and banks and mer- The innovation team behind VocaLink cre- secure for customers.” chants will help to accelerate mobile pay- ated the app to allow money to move instant- Zapp is also in talks with HSBC, First ments adoption across Spain.” < ly from a customer account to a merchant Direct, Metro, Santander and Nationwide, account through real-time payments. with launch dates to be confirmed. < CARDS

PREPAID China opens up Sports Direct uses prepaid cards clearing market The People’s Bank of China has formally to ‘profit’ from workers’ wages opened its CNY55trn ($8.4trn) credit card clearing market to foreign companies. The prepaid card, issued by credEcard, Rules issued by the bank and the China has a number of fees attached. Sports Direct Banking Regulatory Commission require charges £10 ($13) for the card and a £10 foreign bank card firms to comply with the monthly fee, usually only £2 when through country’s national security and cybersecurity credEcard. There’s also a 10p charge for a standards, and be locally based. text notification when withdrawing cash. The move, which ends UnionPay’s monop- Prepaid debit cards have been revealed as a The practices contributed to some staff oly in one of the world’s largest card mar- vehicle for Sports Direct’s Mike Ashley to effectively being paid around £6.50 an hour, kets, follows long-standing demands from underpay employees. as compared to the statutory rate of £6.70. foreign payment card processors, especially Some workers at Sports Direct are effec- Chris Birkby, MD of agency group Trans- MasterCard and Visa which have been lob- tively paid less than the minimum wage line, which provides workers for Sports bying for more than a decade for direct through several fees, many associated with Direct, told the committee that the cards are access to the country’s cards market. prepaid cards. optional. Last year, the State Council said that Sports Direct, a UK-based retailer, and its He also defended them by describing the China would allow foreign companies to owner, Mike Ashley, face a probing from the prepaid cards as a way to receive wages clear electronic payments in the domes - Business, Innovations and Skills Parliamen- quickly and avoid high charges elsewhere. tic market, following a 2012 ruling by the tary committee after an investigation into its He added that the cards help workers with- World Trade Organization that found the warehouse at Shirebrook, Derbyshire. out bank accounts, and could be dropped at practice to be discriminatory against US One revelation from the investigation is any time. credit card companies. that some workers, mainly from Eastern However, he also admitted that the agency The new mechanism will offer more per- Europe, effectively earn less than the mini- makes a profit, or “rebate”, from the pre- sonalised services to consumers, and a more mum wage due to prepaid card fees. paid debit cards. < secure and efficient payment ecosystem. <

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EPI 349subbed.indd 3 08/07/2016 15:03:47 Electronic Payments International NEWS DIGEST

MOBILE iZettle celebrates ‘birthday’ with lower pricing and new features Sweden-headquartered mPOS vendor iZet- is currently signing up 1,000 new businesses Jacob de Geer, founder and CEO of iZet- tle has celebrated its fifth ‘birthday’ with to its service every day. tle said: “We’re obviously thrilled to see that the launch of a number of improvements Since its launch in 2011, iZettle has our service helps users grow their businesses designed to help small businesses to “sell expanded its operations to 12 countries and every year by more than five times the Euro- smarter and keep growing”. extended its range of services with the prima- pean average. At the same time, it rolled out a reduced ry aim of helping small businesses to improve “Whether we’re providing your business pricing model of 1% per transaction – the profitability. with capital, lowering your costs or building only cost levied on iZettle merchants. iZettle claims that its users grow their smart new tools that help you stay in touch According to iZettle, it will handle transac- businesses by more than 15% every year, as with customers, it all comes down to helping tion values of €3bn ($3.41bn) this year, and compared to the EU average of 3.3%. you work less, earn more and live better.” <

MERCHANT SERVICES Caixabank, Global Payments, Erste Group form joint venture in Central and Eastern Europe Global Payments, Erste Group Bank and strong expert companies in this field we will It operates 5,183 branches in Spain, which Spanish lender CaixaBank have formed a increase the focus on our acquiring business constitute its largest footprint. joint venture to offer merchant acquiring and further upgrade the quality service that Atlanta, Georgia-based Global Payments and payment services in the Czech Republic, we provide to merchants across Central and has merchants and partners in 30 countries Slovakia and Romania. Eastern Europe (CEE). in North America, Europe, Asia-Pacific and Global Payments and CaixaBank will own “The deal represents an important step for Brazil. The company employs more than a 51% stake in the joint venture; the remain- Erste Group in CEE and we expect it to lead 8,500 people worldwide. ing 49% will be owned by Erste Group. to further growth in our payments business.” Erste Group’s consumer banking footprint The joint venture was first announced by Majority-owned by la Caixa Banking includes over 2,700 branches in Austria, the the companies in July 2015. Foundation, CaixaBank offers Spanish retail Czech Republic, Slovakia, Romania, Hun- Announcing the deal, Erste Group board banking and insurance, an international gary, Croatia and Serbia. member responsible for retail banking Peter banking portfolio and industrial and real The bank has a client base of around Bosek said: “By joining forces with two estate assets. 15.8 million and over 2,700 branches. <

M&A TECHNOLOGY Visa receives RBI to set up committee to Brussels’ approval for Europe explore issues facing fintech firms in India, what type should be allowed to acquisition evolve, and how to create an ecosystem for Visa has obtained the necessary approvals the right type of fintech. from the European Commission for the pro- He added that the types of fintech cur- posed acquisition of Visa Europe. rently being promoted by RBI include the All other permissions – including approv- Unified Payments Interface and the Bharat als from the Jersey and Turkish competi - Bill Payments System. tion authorities – relating to the proposed Vishwanathan said that a key function of acquisition of Visa Europe have already been the committee would be to see that the devel- secured by Visa. opment of fintech is consistent with the risks In November 2015, Visa agreed to that the country’s financial system could bear. acquire Visa Europe in a transaction val - The Reserve Bank of India (RBI) is in the pro- “There are some risks involved,” he said ued at around €21.2bn ($23.9bn), as part cess of setting up a multidisciplinary panel to “What’s clear is that it will result in financial of a strategy to create a single global explore the use of fintech in the country. dis-intermediation, and we have to see how company. The committee will be headed by RBI exec- the banking system should handle that. As a result of the integration, European utive director NS Vishwanathan and will A recent report by KPMG India and Nass- clients will have greater access to Visa’s scale also include representatives from other regu- com projects the Indian fintech market to and resources, and global clients will have a lators such as the Securities and Exchange double in value from $1.2bn to $2.4bn in more seamless experience. Commission of India and the Insurance Reg- the next four years. Furthermore, European clients will ben- ulatory Authority of India, as well as banks The leap will be driven by increased pen- efit from direct access to Visa’s investments and other stakeholders. etration of digital banking services, smart- in innovative technology and differentiated Vishwanathan said the new panel would phone use, and rising investor interest in products and services.< assess the type of fintech currently evolving fintech firms, the report said. <

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EPI 349subbed.indd 4 08/07/2016 15:03:48 Electronic Payments International DIGEST NEWS

CONTACTLESS Britons’ card spending up 10% in 2015

Britons spent £660bn ($860bn) on debit and increase in the payment limit to £30 and the which saw spending of £102bn, equivalent credit card purchases in 2015, an increase of growth of contactless transport ticketing. to one in every seven pounds spent on cards. 10% compared to £602.3bn in 2014, accord- UK Cards Association CEO Graham The average supermarket shop on a card is ing to a report by the UK Cards Association. Peacop said: “With the amount spent using now £24.55, down from £26.11 in 2014. The report points out that card spending contactless cards almost trebling between The food and drink sector represented a online was up 20%, to £210bn from £175bn 2014 and 2015 and the payment limit third of all card purchases, and was the most in 2014, indicating that nearly a third of increasing to £30, it’s clear 2015 was the year common category for card payments. The plastic spending now takes place online. contactless went mainstream. entertainment sector accounted for 15% By the end of 2015, half of online spending “Whether buying a sandwich on the go, or of purchases and saw a 20% growth in the took place on tablets and smartphones, up paying for a round of drinks or a tube jour- number of payments, with 26% more card from 37% in 2014. ney, contactless has become the default way payments in restaurants. The latest figures reveal that £7.75bn was people choose to pay for everyday shopping.” The association forecast that debit cards spent using contactless cards in 2015, com- The report adds that supermarkets were will be used for 21 billion payments in the pared to £2.32bn in 2014, reflecting the the most popular destination for shoppers, UK, worth £856bn, by 2025. <

INNOVATION Raphaels banks on SIA to push payment innovation

After a recent partnership with Avuba for an The SIA EasyPay Platform, which supports aels Bank hope to consolidate their estab- alternative payment account in early May, SIM-based and host card emulation technol- lished positions in the prepaid cards market. Raphaels Bank has now decided to launch ogy, will be introduced to allow Raphaels SIA currently processes 3.3 billion card trans- an alliance with electronic payment clients to benefit from contactless actions, while Raphaels settles over £6bn operator SIA. payments on smartphones, in the ($7.8bn) annually across its portfolio of pre- The partnership agreement hope of simplifying access to paid, credit and debit cards. will offer new end-to-end pay- mobile payments. Christina Astore, head of SIA North ment solutions in the UK and SIA will also provide its Pay- West Europe, commented: “The partner- across Europe, with SEPA payment Gateway platform to ship with Raphaels Bank represents an ideal ments made available to both connect multiple channels and combination between our respective areas SIA and Raphaels Bank clients. give customers a wide choice of expertise.” The deal will also ensure that of payments. John Box, head of strategic partnerships at European businesses are able to To further improve the client pay- Raphaels Bank, added: “The complementary access Step2, EBA Clearing’s pan-European ment experience, innovative person-to-per- strengths of SIA’s proven technical capabili- technology infrastructure for retail payments son payment service Jiffy was developed by ties and Raphael’s reputation for industry- in euros managed by SIA, which currently SIA to allow consumers to send and receive leading issuing and sponsoring solutions will processes over 40 million operations a day money in real time via a smartphone. enable a new wave of payment service provid- on average. Through the partnership, SIA and Raph- ers to bring their products to the market.” <

SECURITY Fears over trust and identity are stifling the sharing economy More than a third (34%) of consumers will ing “with a degree of reservation” without 74% who will “not at all” trust, and 69% not conduct a sharing economy transaction checking identity. who are “uncertain” about trusting without without assurance about the identity of the The HooYu survey analysed the partici- checking identity. other party in the transaction, according to a pation and attitudes to trust in the sharing Despite 60% of potential customers want- recent survey conducted on behalf of HooYu economy of 2,000 respondents, both in the ing to see assurance on participant iden - by Atomik Research. UK and the US. tity before they will transact, most sharing The report identifies consumer fear as the It found that consumers in the UK are economy platforms focus on the principle of primary factor restricting growth in the shar- more prudent than in the US when it comes ‘buyer beware’. ing economy. to peer-to-peer transactions. Approximately In contrast, HooYu aims to grow trust and In recent years, companies taking part 67% of UK respondents do not participate participation in sharing economies with the in the sharing economy have seen figures in the sharing economy, compared to 31% help of its global identify-verification plat- rise; eBay for example, now has in excess of in the US. form, after finding out that 79% of consum- 158 million active buyers. Furthermore, not all sharing transactions ers are more likely to trust a stranger online However, customers remain cautious and require the same levels of trust. Renting a after being sent an in-depth email verifying the overall level of participation in the shar- personal item to another person is ranked the person’s identity. ing economy is still relatively low, with only as the most mistrusted form of peer-to-peer HooYu can be used by both business or 39% of consumers “happy to trust” or trust- transaction both in the US and the UK, with individual consumers. <

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EPI 349subbed.indd 5 08/07/2016 15:03:49 Electronic Payments International FEATURE ASIA

Is the East real-time-ready?

Asia’s move into the real time payments space will open up a whole new world of convenience for consumers and banks alike, but will it also make them vulnerable to threats? Xiou Ann Lim reports

t has been an interesting and rocky tools and processes currently utilised by he continues. 2016 so far for the payments space in banks are not equipped to manage real time Given the evolving and growing nature of Asia. Recent developments in Bangla- payment fraud. financial crime, Bellens says that a proactive desh, Vietnam and the Philippines have “You cannot have faster payments without AML capability with centralised control I orchestrating a very careful fraud risk man- exposed vulnerabilities within the SWIFT and standardised investigation processes network. agement programme,” he says. as well as advanced analytics with expertly The Monetary Authority of Singapore’s Facilitating almost instantaneous fund defined rules and custom-trained neural (MAS) decision to shut down operations of transfer presents new challenges for manag- network models are also critical to detect Swiss private bank BSI in the city-state fol- ing fraud risk. and respond to increasingly complex cross- lowing its involvement with scandal-ridden “For instance, banks would no longer channel fraud and AML cases. Malaysian fund 1MDB through money laun- have time to filter through transactions to Meanwhile, Chrisol Correia, director of dering activities has also uncovered weak- identify those that need to be reviewed international AML compliance at Lexis- nesses within the system despite having anti- manually for potential fraud, as customers Nexis Risk Solutions, says it is increasing money laundering (AML) checks in place. now expect almost instant confirmation dialogues with banks, payments compa- Coming at a time when Asia is on the cusp that their funds have been sent or received,” nies and other financial services businesses of a purported revolutionary real time pay- Bellens explains. about the global need for economic inclu- ments era, this begs the question of whether “The better banks are obviously cognisant sion and transparency. “They are two sides the industry is ready for it. of the associated risks and paying attention of the same coin,” according to him. Brett King, author of Bank 3.0 and found- in ensuring that their people, processes and “When more people – and non-human er of Movenbank, is of the opinion that technologies are scaling up – and in integrat- entities such as small businesses – are includ- the industry is consumer-driven and will ing their risk controls and protocols for real ed in the financial system, financial services remain so. time payments with the rest of their existing companies are better able to identify bad Comparing the convenience and immedi- fraud infrastructure,” he observes. players,” says Correia. acy of M-Pesa in Kenya to writing cheques He adds that payments companies must that take three to five days to clear in the US, Risk mitigation be able to identify and assess risks promptly he says consumers look for efficiency gains In order to deploy faster – but still secure – and effectively without causing avoidable and technology that “takes friction out of payments, Bellens believes that comprehen- customer friction to accomplish the goal of the system”. sive monitoring and detection are needed to economic inclusion and transparency. “The basic ecosystem has to be real time,” identify unusual financial activity and then “Using proven technology and data ena- he emphasises. That may be so, but is secu- fast-track compliance. bles these processes to take place in seconds, rity keeping pace with innovation to ensure “This includes usage of strong dual-factor allowing payments to customers to trans- that all parties are protected? authentication along with comprehen - act quickly,” he elaborates, adding that the According to Jan Bellens, EY Asia-Pacific sive tools for real time behavioural analy- ability to link people together and people to banking and capital markets and global sis against customer’s typical historical businesses through the use of analytics also emerging markets leader, typical anti-fraud activity to identify suspicious activities,” helps to mitigate risks.

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EPI 349subbed.indd 6 08/07/2016 15:03:50 Electronic Payments International ASIA FEATURE

LexisNexis Risk Solutions recently Meanwhile, Correia thinks that differ- for domestic and cross-border payments. deployed intelligence tools through Terra – ent regions around the world and different Apart from that, he thinks some other a mobile-first payment network – to monitor industries are at different maturity levels in initiatives that will help include channel- transactions for risk in real time. terms of the technology and data that they ling investments towards payment security The LexisNexis financial crime control are using. research and sharing the results with pay- framework enables payment companies to “Asia is no different, in that there are insti- ment stakeholders, as well as expanding on onboard and service customers by providing tutions with very advanced AML controls publicly available payment fraud data. risk insights to comply with international and others that are just starting to imple - compliance regulations. ment this compliance infrastructure,” he The prescription This capacity enables payments compa- says. Correia says companies offering payment nies to address global opportunities in pro- But he also believes that some Asian services must fully understand their compli- viding payment services to customers that banks may have a strategic advantage in that ance obligations. do not participate fully in the formal bank- they are unencumbered by old systems that “Fintech firms entering this space often ing system in a way that prevents criminals are difficult to manage. assume that banks are responsible for ensur- or terrorists from abusing its products – in ing compliance with AML regulations, but other words, economic inclusion and trans- this is not the case: best practice is that all parency. customers must be checked for AML risk before they start to transact,” he adds. The cost of compliance “Fintech firms entering this But not only do all parties have to chip in, Will real time AML checks add on to the there must be collaboration too – and “the already escalating compliance costs? space often assume that core issue is in getting payments providers AML compliance spend is set to increase banks are responsible for and institutions to collaborate”, according 20% in Asia this year, according to Lexis- ensuring compliance with to Bellens. Nexis Risk Solution’s True Cost of AML AML regulations, but this is “I think mandates or regulation can kick- Compliance: Asia Edition. start that integration, so regulators need to “But that spend enables companies to oper- not the case: best practice is encourage payment stakeholders to initiate ate more efficiently, which will reduce costs that all customers must be discussions on how they can collectively over time,” counters Correia. checked for AML risk before undertake improvements to their payment “It’s more costly to not invest in compliance, systems”, he advises. when you think about enforcement fines – they start to transact” Correia also emphasises that the Asian which we’ve seen reach into the billions of Chrisol Correia, LexisNexis Risk landscape is very complex and that the reg- dollars, as well as reputational risk,” he adds. Solutions ulators are stepping up enforcement: “Just With real time payments, authenticating look at the recent BSI situation in Singa - and verifying all the information before a pore,” he points out. payment is approved has to be done quickly “Asian banks are investing in compli - – but security cannot be compromised for ance technology, data and analytics so that speed. “Some institutions have started to develop they can operate more efficiently and be “Therefore, increased compliance expens- their own tools using in-house IT resources, more productive,” he observes, adding that es are unavoidable if the country’s banking while other companies are looking to proven they also see some very positive regional sector wants to move toward faster pay - technology that is already being used by the initiatives aimed to support more interna- ment and keep pace with the global mar - biggest banks in the world and that regula- tional regulatory cooperation and the cross- ket and countries like Sweden, Singapore tors already know and trust,” Correia adds. border transfer of data, so that financial and the UK that already offer that option,” crimes can be detected more quickly and says Bellens. How regulators in Asia can help efficiently. Bellens believes that if markets are pushing Bellens agrees: “This requires collabora- Asia’s readiness for faster and more secure payments, respec- tion along every part of the payments value Bellens thinks there are a number of hurdles tive central banks need to expand their oper- chain – from the issuers to the acquirers, to clear before Asia is really ready for real ational oversight where required. processors, switches and merchants. time monitoring. He says: “There are infra- “We’d like to see regional regulators active- “One way to reduce fraudulent transac- structure challenges from legacy technologies, ly engage with payment stakeholders – for tions and further refine fraud strategies in a funding issues, perhaps even a lack of senior example via a faster payment or payment more cost-effective manner is by collectively executives’ buy-in, limitations in direct con- security task force – to incorporate their engaging a data-sharing service provider to nection to the automated clearing house rails, feedback on payment system improvements,” support multiway, near-real time exchange and the sheer volume of various payments Bellens adds. “Discussions should cover of information for faster detection and transactions that have to be monitored.” core infrastructure, security and operational response to suspicious transactions.” Bellens believes these issues make real changes to interface with the infrastructure, But whatever the remedy, real time pay- time AML checks impractical even in devel- projected cost, and time to implement.” ments are here to stay. As King puts it: “As a oped countries – let alone emerging markets. Bellens also says regulators need to coor- consumer, I don’t care about AML until my “We would expect this to be a measured dinate with the security task force to focus funds are stolen. process, especially as banks also need to on solutions for fraud risk reduction and “Most people are not going to be affected deal with internal friction, talent shortages, support the adoption of relevant payment by it most of the time, so the utility is going and factor in challenges with organisational security standards, such as the ISO 20022 to outweigh concerns on security and these culture and acceptance,” he says. standard for greater end-to-end efficiency concerns will not slow its adoption.” <

www.electronicpaymentsinternational.com July 2016 y 7

EPI 349subbed.indd 7 08/07/2016 15:03:50 Electronic Payments International FEATURE REAL TIME PAYMENTS

Standardisation and convenience hold the key as the payments revolution goes real time

The development of real time payments schemes, both in and outside Europe, has raised concerns of fragmentation to Europe’s payments landscape. Seeing off the challenge will protect the harmony established by SEPA and bring greater speed and efficiency, says UniCredit’sThomas Dolenga he shift towards faster payments cre- must also find a solution for providing this payments, businesses can make real time ated by the digital revolution and enhanced service on weekends and other salary payments to staff on short-term con- straight-through processing is set to non-working days, when they will have only tracts, or offer customers almost instant gather pace as interest mounts in the limited resources at their disposal. refunds on faulty or unwanted products. T Banks are already working on a number latest development: instant payments. These Advances such as these will help companies bring the potential for faster and more effi- of solutions for this. One proposal suggests build greater trust and loyalty among clients cient processes, yet standardisation and con- that banks could adjust the relevant account and employees alike. venience will be essential in realising such balances as normal, but wait until the next Such incentives are already driving strong benefits while maintaining a harmonised business day to carry out the inter-bank set- adoption rates in countries such as Sweden landscape. tlement underpinning the transaction. and Denmark, and we can expect similarly The concept of processing and con - This approach enables banks to cir- strong uptake for a wider, pan-European, firming payments within seconds of cumvent the problem of limited system. Initially, however, adoption will authorisation has already taken resources on non-working days, likely be gradual. In part, this is due to the off, with a number of schemes but it also exposes them to set - need to change existing payments habits. At taking shape around the world. tlement risk. There are hopes, first, instant payments will only be available Mexico and Singapore are both however, that this side-effect in the SEPA Credit Transfer (SCT) format, already operating real time pay- can be mitigated through the yet in some countries – Germany, for exam- ments systems, while Denmark use of central bank funds. ple – the majority of payments are made and Sweden are running similar Beyond these execution dif - via SEPA Direct Debit (SDD). Uptake for operations in Europe. ficulties, a further challenge comes instant payments is therefore initially likely While the prospect of instant payments from the need to ensure a smooth and easy to be limited to urgent transactions in these promises to bring greater speed and effi - transition from previous payments process- countries, but we can expect it to pick up ciency to payments processes, it also brings es. This will be a crucial element in driving speed as habits change. the risk of fragmentation if countries are left adoption – and convenience, for both busi- What’s more, instant payments will also to develop systems independently. This is a nesses and individuals, must be the guiding be subject to an upper limit for transaction risk that Europe must take seriously – with principle. size when they are first made available – rul- the Single Euro Payments Area (SEPA) only To this end, banks are looking to intro- ing out the possibility of making larger pay- recently having brought harmony to the duce instant payments through an easy-to- ments in real time and further contributing continent’s payments landscape. use application that can be integrated direct- to the likelihood of slow initial uptake. Given the momentum already behind the ly into companies’ existing payments setups Yet we can expect adoption to gain concept, the need for a standardised Euro- – eliminating the need to invest in new hard- momentum after a while. The upper limit pean system for instant payments is clear. ware or infrastructure and simplifying the on instant payments is due to be in force for This was the rationale behind the European transaction process for buyers. at least the first year, but it could be raised Central Bank’s 2014 white paper, which Indeed, increased convenience is at the as soon as November 2018 – embracing a calls for real time euro payments available heart of instant payments’ value. Take the much greater share of the payments market at all hours of the day, every day of the year. e-commerce industry, for example. Online and encouraging increased adoption. This is an essential goal, but it will require vendors can derive a number of benefits Furthermore, an easy transition and a great deal of work – with the inherent from the fact that instant payments eliminate simple user interface will help encourage difficulties of implementing new technol- the time gap between customer authorisation many to change their habits in favour of the ogy complicated by the need to coordinate and bank confirmation of a payment. instant SCT, while it’s likely that a further efforts across Europe. With immediate confirmation, sellers are solution for instant SDDs will be imple - For banks, the main difficulty stems no longer exposed to the settlement risk mented at a later date – providing a strong from the need to book transactions in real arising during this window. This not only incentive for those who still prefer to trans- time. While payments are currently booked makes e-commerce companies more finan- act via direct debit. en masse at the end of each working day, cially secure, it also enables them to begin Certainly, there’s considerable appetite instant payments will require this process preparing and shipping goods as soon as a for real time payments – as demonstrated to be carried out separately for each indi- customer authorises a payment – resulting by the success of existing systems in Europe vidual transaction – and within seconds of in drastic reductions in delivery times. and around the world. In the long term, we the buyer authorising the payment. Instant payments also lay the groundwork can expect adoption to be comprehensive – What’s more, the requirement for 24-hour, for improving payments from businesses helping maintain harmony in Europe, while year-round coverage means that banks to individuals. For example, with instant ushering in greater speed and efficiency. <

8 y July 2016 www.electronicpaymentsinternational.com

EPI 349subbed.indd 8 08/07/2016 15:03:51 Electronic Payments International BREXIT FEATURE

How did Brussels really feel about Brexit?

Brussels is in shock and emotional– losing patience with the UK and not prepared to stand back and have European economies adversely affected while Britain takes its sweet time to navigate the landscape it has so recklessly created for itself. Anna Milne speaks to Monica Monaco for the Brussels view from within onica Monaco, founder of TrustEU Part of what makes London and the UK UK Prime Minister David Cameron asked to Affairs, consults large international so attractive for the banking and payments negotiate a special status. financial services organisations on industry is the forward-looking and pro- “The European Commission noted the EU regulation. Her schedule has business innovation position of the Financial euro’s decline against the dollar [on 27 June] M Conduct Authority (FCA). A financial ser- and the impact on European banks – it cer- ramped up tenfold since the UK stunned Europe, and the world, by voting to leave the vice business can complete registration with- tainly doesn’t want panic to set in, and will EU. The tone from the Commission hard- in a few months in the UK; in other member do what it takes to ensure the problem is a ened since the result was announced, with states this could take years. UK problem, not the EU’s,” adds Monaco. Jean Claude Juncker saying there will be “no As Monaco puts it: “In the EU, when it 28 June marked the last day on the job for notification, no negotiation”. comes to payments regulation we love the UK financial Commissioner (Jonathan) Hill. On 29 June, European leaders Angela UK, as a lot of the pro-industry and pro- Juncker thanked him for his service. There is Merkel and François Hollande were in agree- innovation negotiation has been driven by consequently no UK financial services rep- ment that the UK could not have the benefits the UK. The UK has very often been the first resentation in Brussels. And as of 29 June, of free trade without free movement of peo- member state to implement European regula- there was no UK representation at the Coun- ple. An offer was suggested whereby the UK tion, and the FCA the first authority to issue cil either; the Council met for the first time in would have European Economic Area (EEA) very detailed guidance. We wished on many 40 years without one of its members. membership with controlled migration in occasions that the FCA detailed guidance It’s not panic stations yet, however, but return for relinquished passporting rights could be duplicated in the other 27 countries. this limbo period cannot go on endlessly. As and the power to trade and clear in euros, to “But this referendum seems to indicate that long as there’s uncertainty, there will be neg- which the UK controversially won the right the UK does not love us,” Monaco adds. ative impact, and as long as the UK stalls to last year. Financial organisations all around want to try and pull together a semblance of leader- In effect – if this were agreed – it would know what’s going on in the UK. They will ship, the more uncertainty there will be. mean London relocating to the EU, a shrewd stall decisions. The uncertainty gives them lev- “Europe is in shock that the UK voted for move there on behalf of Hollande. erage in acquisition processes in that the entity this,” Monaco says. “And is it true that the The banking and payments industries rely they buy may no longer have a passporting British people were googling ‘what is the EU?’ on passporting rules, which may vary from licence, for example. And then employment the day after the referendum? I read it in the one area to another after legal Brexit. law comes into it. Staff that may soon need a press, but I can’t believe it.” For banks under the Capital Requirements work permit to work in the UK may be better An option for the UK could be to be part of Directive, for example, the Bank of England placed in an EU member state. the EEA, like Norway, Iceland and Liechten- Prudential Regulation Authority may no To convey the extent to which the tone stein. All EU legislation applies in EEA coun- longer be a National Competent Authority from the Commission changed since the tries, and EEA countries are merely notified and will not, consequently, be able to issue a statement on 24 June, on 28 June an extraor- of new legislation; there is no involvement in valid passport; for other directives, the Com- dinary session was called in the European the legislative process. EU law will not apply mission may need to issue a positive equiva- Parliament at the last minute – and the ple- in EEA countries as far as fishery and agri- lence decision about the rules of a third coun- nary was full. When Brussels wants to, it can culture sectors are concerned. Being part of try – by then the UK – before passporting is move fast. the EEA also means free movement of people, permitted. “It may be an emotional reaction, which is goods and services. Passporting in the payments industry not the best, but still there was a very high Another option could be to implement means that where an authorised payment turnout in the European Parliament on 28 World Trade Organization rules, also known institution would like to provide services in a June and a resolution on the way forward as bilateral trade agreements, negotiation member state other than its home state, it can after the UK referendum on 23 June was of which can take years (per agreement) do so. The rules allow services to be provid- adopted with a large, nearly two-thirds between the UK and Europe. ed on a cross-border basis once the relevant majority. The resolution stresses that the UK Monaco cites Switzerland as an example, licence is obtained in the home state. If valid- must respect the majority of its citizens and which voted by referendum to not be part of ity for the passporting of UK licences were has to withdraw officially from the EU by the EEA, and has bilateral agreements with to cease, organisations would likely have to directly triggering Article 50 of the Treaty on the EU. Swiss regulation on financial matters, set up subsidiaries in EU member states to European Union. This will allow withdrawal including payments, however, is very similar operate in Europe. And as obtaining licences negotiations to start as soon as possible and to European regulation in many aspects. in some member states can be cumbersome, prevent prolonged uncertainty for businesses As for Britain’s prospects in choosing this reductions in the creation and growth of new and citizens alike. The tone was: You’re out, pathway and negotiating decent deals? payment businesses are to be expected. now get on with it,” Monaco explains, after “Good luck,” says Monaco. <

www.electronicpaymentsinternational.com July 2016 y 9

EPI 349subbed.indd 9 08/07/2016 15:03:51 Electronic Payments International FEATURE BLOCKCHAIN

The EU view on blockchain and AML

In the hope of untangling truths from lies, Anna Milne speaks to Monica Monaco, founder and president of TrustEuAffairs, who advises clients on EU legislative initiatives. Having worked for ten years as a senior manager at Visa Europe in Brussels, Monaco offers crucial insight into the EU’s regulatory framework lockchain technology has grown in of a sound legal framework that keeps up future VC users. both reputation and popularity, at a with innovation, ensuring a timely and pro- Monaco explains that criticisms of block- time when the UK is planning Brexit. portionate response if and when the use of chain’s transparency centre on the fact The EU has been at the forefront some DLT applications becomes systemi- that ‘dark’ versions of the main blockchain, B cally relevant. of all discussions, examined closely by both which may by undecryptable, could enable Brexiters and Bremainers, and the heated Monaco says: “The report is what they the blurring of money movement. debate has overshadowed some of the main call an ‘INI’ which is an own initiative The novelty of a decentralised system of EU decisions. But what exactly is the EU report: it was prepared by the Economic payments might also be seen as a problem planning in terms of regulating blockchain? Committee on its initiative due to the inter- to regulators, especially in terms of supervi- Monica Monaco explains that although ests of the members of the Committee in the sion. Monaco stresses, however, that block- blockchain is being discussed and debated matter, and not, as happens for the majority chain, in terms of customer authentication by European institutions, this is mainly in of the reports, to respond to a draft legis - procedures, seems to meet the security the context of virtual currencies (VCs). Cur- lative proposal coming from the European requirements set in the PSD2. rently, the EU is not planning to regulate the Commission. This means we are at a very The counter-argument is that blockchain new technology, but is trying to understand early stage in terms of possible regulation.” might actually be too transparent, and that its potential uses. The report portrays blockchain technol- extensive data protection is needed for users. There is, for example, a preliminary ogy in a largely positive light, saying it can “This reminds me of Article 79 of the reflection in the European Commission help to organise data and relate it to other PSD1, which stated that the processing of Directorate General for Communications data types. The communiqué suggests that it personal data by payment systems and pay- Networks, Content and Technology about is interesting to investigate the possible uses ment service providers should be permitted the social uses of the blockchain, including of blockchain technology: it can not only be when this is necessary to safeguard the pre- tracing provenance in the food supply chain. applied to money transfers but also to smart vention, investigation and detection of pay- Rather than focusing on regulation, this contracts, land registers and different types ment fraud,” says Monaco. reflection seems to focus on possible stand- of inventory. According to Monaco, block- The main obstacle, according to Monaco, ardisations needs, and it is at a very early chain can allow for the provision of compre- is a lack of technical expertise from the regu- stage; the first meeting about this strand of hensive, rich information and for automated lators surrounding the new technology. She work was on 21 June 2016. verification and reconciliation. believes it is fundamental to better educate The Virtual Currencies report, written by However, of the 128 amendments to the European institutions on VCs’ functioning German MEP Jakob von Weizsäcker, result- European Parliament Report published on and the uses of blockchain. These institu - ed in the adoption of a resolution by the 13 March and voted on on 26 April, several tions are at the stage of discovery, a similar European Parliament on 26 May highlight- convey the worries of several MEPs regard- stage that the financial services industry ing the opportunities and risks that VCs and ing the transparency behind blockchain encountered with VCs in 2013. distributed ledger technology (DLT) pose in technology. Monaco says if regulators are made aware the payment technological landscape, and According to Monaco, blockchain enthu- of the different uses of DLT technology and states that VCs and DLT have the potential siasts see it as an opportunity with multiple of VCs, it’s likely they will forge their own to contribute positively to citizens’ welfare uses that benefit both businesses and con- ideas and make sensible choices. and economic development, including in sumers, while sceptics believe people should She also praises the benefits of this new the financial sector, by lowering transac- tread more carefully. technology, and believes that too much regu- tion and operating costs for payments and The resolution calls for the creation of lation could stifle the innovation in its course. especially cross-border transfer of funds, a horizontal task force on DLT led by the “Starting to regulate before the full develop- and reducing the cost of access to finance, Commission, with technical and regulatory ment of the product doesn’t allow the sector potentially contributing to financial inclu- experts to analyse the benefits and risks of to fully develop and, consequentially, could sion. DLT and develop stress tests for all relevant destroy its full potential,” Monaco says. However, according to the resolution, aspects of VCs and other DLT schemes that However, Monaco believes that regu - VC and DLT schemes entail risks due to reach a level of use that would make them lation should not be completely ignored, the absence of a governance structures, the systemically important for stability. but turned towards anti-money laundering high volatility of VCs, and the absence of The report also asks the Commission to (AML) solutions. traditional forms of regulatory supervision, develop, in cooperation with the member As EPI went to press, in line with Monaco’s safeguards and protection, issues which are states and the VC industry, guidelines to forecast, the Commission published a proposal especially challenging for consumers. guarantee that correct, clear and complete on AML within VC exchange platforms, which The resolution proposes the development information is provided for existing and will be covered in the next issue. <

10 y July 2016 www.electronicpaymentsinternational.com

EPI 349subbed.indd 10 08/07/2016 15:03:52 Electronic Payments International BLOCKCHAIN FEATURE

Identity: the missing link in the chain

When it stands alone, blockchain is a very clever piece of technology, yet a huge amount of work needs to be built on top for it to reach its full potential. Blockchain and identity data intelligence go hand in hand, writes Gareth Stephens, head of proposition development at GBG lockchain has fast become the buz- if they are old enough, and so on, cannot be zword of 2016, promising to trans - answered without an identity layer. form how banks and financial insti- The concept of having a single federated Btutions function. identity that is verified once and used many It is essentially a new type of database that times has been around for years, but with is open-source and, because of this, no one the evolution of technology in mobile, biom- person or organisation ‘owns’ the technology. etrics and, of course blockchain, perhaps However, there are many flavours of now will be the time when it finally comes blockchain, which makes the question of to fruition. ‘what is it?’ complex to answer and also leads This could mean an end to filling in to a lot of misunderstanding. long forms when onboarding and hav - For example, it’s possible to have a dis - ing to remember multiple usernames and tributed blockchain where there are thou- passwords for each website, instead being sands of copies all over the world hosted by replaced with a more secure and convenient many different people and organisations; or Without the banks arbitrating this whole alternative. a private blockchain can exist, where only a process, the passing of value between people smaller subset of people can write to it. would not have been possible at the scale and Fighting fraud The most popular use of blockchain, so speed we require today. This ability to replace passwords is particu- far, has been in crypto-currencies such as bit- The introduction of blockchain is, there- larly important when fighting fraud. coin. One of the most interesting features of fore, seen as the method of value exchange Worryingly, today a third of fraud comes blockchain to make a crypto-currency pos- that would have been built if the internet had from account takeover, with the most com- sible is the fact that once a record is written existed when we first built our payments eco- mon reason for a breach being the password. to it, that specific transaction can never be system. If the password can be replaced with some- changed. Pre-blockchain, to set up a bank would be thing more secure and convenient to use, There is no central override or back door expensive and you would have to work with such as a single federated identity built on that could allow something to be edited or the existing industry protocols. However, the blockchain, then account takeover fraud deleted; every transaction is there forever post-blockchain, anyone can set up a bank could be significantly reduced. Hence, the and can be audited by anyone who wishes and begin trading in an ecosystem separate challenge of identity is just as crucial here to look. to the traditional one. as it is with robust anti-money laundering Before blockchain, this simple yet very In fact, today, we have a whole new set of checks to protect the mass market from the powerful feature of a database had to be innovators and pioneers looking to build bet- fraudsters that take advantage of any loop- entrusted to a select group of organisations ter solutions than we have today and block- holes. to act as arbitrator and ensure the transac- chain has been a key enabler in making this When it comes to payments and the finan- tions were all correct and protect its integrity. possible. cial industry, blockchain and identity data In the case of payments, these central arbitra- intelligence go hand in hand. tors are the banks. However, in the world of The missing identity layer As well as determining who has made cer- blockchain, no central arbitrator is required. There is, however, a danger that we begin tain transactions and whether that transac- to think of blockchain as a panacea to all tion is transferred to the rightful recipient, A positive disruption payment situations. This is because when blockchain’s decentralising attribute also The entire banking ecosystem was built pre- it stands alone, blockchain is a very clever significantly removes the potential riskiness internet, over decades at incredible expense, piece of technology, yet a huge amount of surrounding large databases that are vulner- to ensure people can have bank accounts work needs to be built on top for it to reach able to cyberattack. that allow us to transact with each other all its full potential. Embracing blockchain technology will across the globe. One example of what blockchain is cur- undeniably open up the potential to trans- To do this, there are a number of databases, rently missing is the ‘identity layer’, and this form how we pay for things for the better. or ledgers, that hold all these transactions is fundamental to many of the potential solu- But identity needs to be at front of that occur within each bank. tions that are being built. mind to unleash the full benefits of block- These ledgers need to be constantly rec- Blockchain can determine a transaction chain, and this missing layer is what could onciled to ensure they match, and that pay- occurred and hold the detail of that transac- make a clever piece of technology some - ments made from one place, genuinely arrive tion, but questions over who made the trans- thing which could be a catalyst for some at the correct destination. action, whether they are the account holder, revolutionary change.<

www.electronicpaymentsinternational.com July 2016 y 11

EPI 349subbed.indd 11 08/07/2016 15:03:53 Electronic Payments International FEATURE EU REFERENDUM

Brexit “damaging” for the fintech sector

While financial and political analysts continue to rack their brains on what could happen to the UK’s big banks following Brexit, there are also repercussions for the country’s fintech sector. Tom Blomfield, CEO of Mondo, believes ‘Brexit is really damaging, especially for fintech’.Patrick Brusnahan writes from EU countries. We employ literally zero Investors need to believe it’ll be OK. people from outside the EU, since the visa “Banks are going to be completely absorbed requirements are too burdensome for an for the next two years and fintechs need to early stage company.” fill the gap.” The British Banking Association’s annual Burbidge adds: “The best businesses are retail banking conference covered similar created despite the climate. peaking exclusively to EPI, Blomfield themes. “This will improve the quality of what says: “First, start-up investors are Eileen Burbidge, fintech envoy for the comes through. People will hold back in being a lot more cautious because of UK Treasury, says: “I personally believed funding, but hopefully it’s temporary.” the huge uncertainty that [Brexit] has we were better off in the EU, but if this had Daryl Wilkinson, CEO of DWC, says: “A S lot will be retracted and there will be a lot created. happened two years ago, it would have been “Second, financial passporting rules meant worse.” more caution.” we could previously access a market of 500 Chris Dunne, market development direc- “I’ve already seen people have funding million people. That’s now potentially been tor at Vocalink, also believed that fintech pulled post-Brexit,” Blomfield concludes, reduced to 65 million. funding could be affected. signifying tough times ahead for the plucky “Third, about 25% of our staff come He says: “Brexit introduced uncertainty. UK start-up scene. <

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DigitalEPI 349subbed.indd touch briefings 12ad copy - CI 18042016.indd 1 08/07/201618/04/2016 15:03:58 11:17:37 Electronic Payments International SURVEY COUNTRY SURVEY: LATVIA COUNTY

Baltic state weans consumers off cash

While cash accounts for 52.7% of Latvia’s transaction volume, payment cards have gained popularity over the past decade and consumers are moving towards cashless adoption. Financial literacy programmes and an improved labour market have also played key roles in the Baltic state’s progress

n terms of transaction volume, the share n LATVIAN CARD TRANSACTION VOLUMES BY n NUMBER OF ATMS AND POS TERMINALS IN of payment cards in Latvia’s cards and CHANNEL (MILLION), 2011-2020 LATVIA (THOUSAND), 2011-2020 payments industry grew from 16.4% in Year ATM POS Year ATM POS 2011 to 27.8% in 2015. I 2011 51.0 114.0 2011 1.21 24.72 Payment cards are mostly used for in-store payments, indicating that consumers are 2012 50.8 128.0 2012 1.27 24.61 moving towards cashless transactions. This 2013 52.5 151.6 2013 1.18 25.92 is also evidenced by the fact that the number 2014 56.1 191.0 2014 1.07 28.47 of card transactions at POS terminals stood 2015 55.2 215.2 2015 1.06 30.97 at 215.2 million in 2015 – almost four times the number of ATM transactions. 2016 54.5 241.8 2016 1.05 33.58 To facilitate non-cash transactions and 2017 54.3 270.4 2017 1.03 36.31 improve the card payment infrastructure, 2018 54.9 300.8 2018 1.02 39.18 participants are focusing on reducing the 2019 56.0 333.8 2019 1.00 42.23 number of ATMs and increasing the number of POS terminals. This led to a decline in 2020 57.3 368.9 2020 0.97 45.47 the number of ATMs from 1,207 in 2011 to Source: Central Bank of Latvia, Timetric S o u r c e : C e n t r a l B a n k o f L a t v i a , T i m e t r i c 1,058 in 2015. In contrast, the number of POS terminals n LATVIAN PAYMENT CARDS BY TYPE n LATVIAN CARD TRANSACTION VALUES BY increased at compound annual growth rate (MILLION), 2011-2020 CHANNEL ($BN), 2011-2020 of 5.8% from 24,716 in 2011 to 30,973 in Year Debit Cards Pay Later Cards Year ATM POS 2015, encouraging more card-based transac- 2011 1.84 0.50 2011 6.8 3.3 tions. Latvia recorded its highest growth in terms 2015 1.71 0.68 2012 6.4 3.5 of transaction volume in 2014, the year it 2016 1.67 0.78 2013 6.8 4.3 joined the eurozone, with 21%. 2020 1.72 1.13 2014 7.3 5.1 Don’t have online account details? Source: Central Bank of Latvia, Timetric 2015 6.2 4.7 Inclusion programmes increase uptake Financial literacy programmes play a key insurance. SEB, Swedbank and Nordea Bank 2016 6.3 5.2 You and your associates may be entitled to online role in driving growth in the debit card mar- are also making efforts to improve financial 2017 6.5 5.8 ket in Latvia, as the government and central literacy. 2018 6.6 6.5 login credentials. The benefits of full online bank have taken initiatives to bring more The focus on financial inclusion has led 2019 6.8 7.2 access are as follows: people into the formal banking system. to a rise in bank accounts: according to The Financial and Capital Market Com- the Bank of Latvia, 3.4 million payment 2020 6.9 8.0 mission, Ministry of Education and Sci - accounts were opened in 2015. According to S o u r c e : C e n t r a l B a n k o f L a t v i a , T i m e t r i c • Timely daily news updates ence, National Centre for Education, the BA the World Bank, the percentage of the popu- • Access the latest analysis School of Business and Finance, the Con- lation aged 15 or above with a bank account consumer disposable income continues to sumer Rights Protection Centre, the Asso- reached 90.2% in Latvia in 2014 – higher grow with constant improvements in the • Monthly editions sent directly to your inbox ciation of Commercial Banks of Latvia and than neighbouring Lithuania (77.9%). labour market – the unemployment rate fell the Latvian Insurers Association collectively from 16.2% in 2011 to 10.2% in 2015. • News alerts direct to your inbox formulated the National Strategy for Finan- Labour market improvement During the first six months of 2015, the • Comments from key industry influencers and leaders cial Literacy 2014–2020, to create aware- Despite improvements in consumer purchas- average gross wage rose by 6.6% year-on- ness of the benefits of financial products and ing power, credit cards have been slow to year – the highest rate in the Baltic region. • Search for specific, relevant content services. The strategy is also supported by take off in Latvia, due to the debt-conscious As a result, real household consumption rose the Ministry of Finance and the Ministry of nature of consumers and the popularity of from $15.5bn in 2011 to $17.3bn in 2015. • Access the archive Economics. cash. In terms of transaction value, credit Improved consumer purchasing power The Bank of Latvia also introduced finan- cards accounted for just 11.5% of the cards and declining rates of household financial cial education websites such as naudasskola. and payments industry in 2015. liability are expected to encourage consumer To create or activate your account please contact: lv and manapensija.lv to promote aware - Household financial liabilities in Latvia spending on luxury products; this is forecast ness of financial services including invest- decreased by $281.3m year-on-year dur- to drive the use of credit cards and personal [email protected] ments, deposits, borrowing, settlements, and ing the second quarter of 2015. In contrast, loans in Latvia.< www. www.privatebankerinternational.com www.electronicpaymentsinternational.com July 2016 y 13

Digital touch briefings ad copy - CI 18042016.indd 1 18/04/2016 11:17:37 EPI 349subbed.indd 13 08/07/2016 15:04:02 Electronic Payments International SURVEY COUNTY COUNTRY SURVEY: THE CZECH REPUBLIC

EU growth leader embraces contactless

The EU’s fastest-growing economy has benefitted from falling oil prices and government policies to stimulate exports and domestic demand. With more investment expected, how will this affect the Czech Republic’s cards and payments industry?

he Czech Republic is the fastest-grow- in February 2015, Czechs use contactless n CZECH REPUBLIC PAYMENT CARDS BY TYPE ing economy in the EU, supported by (MILLION), 2011-2020 payments for 3.3 transactions per month per falling oil prices, increased invest - card on average – the highest in the EU, fol- ment activity, and government policy Year Debit Cards Pay Later Cards lowed by Poland (2.6) and Slovakia (1.3). T 2011 7.5 2.6 to encourage exports and domestic demand. Economic growth and disposable incomes 2015 9.3 2.4 E-commerce growth paves the way are expected to accelerate in the period The Czech Republic’s e-commerce market’s 2016 9.7 2.4 2016–2020; in turn, more investments can total transaction value posted a CAGR from be expected in the country’s cards and pay- 2020 11.1 2.9 2011 to 2015 of 16.11%, from $2.5bn in ments industry. Source: Bank Card Association – Czech Republic, Timetric 2011 to $4.1bn in 2015. A high mobile pen- The Czech payment card market grew sig- etration rate, consumer confidence in online nificantly from 2011 to 2015 as consumers According to the Czech National Bank, the transactions, and the presence of a secure spent more on cards. number of cards with contactless functional- online gateway drove the growth during this The total number of payment card transac- ity was 8.7 million, accounting for 75% of period. tions increased in the period 2011-2015 at a the total 11.6 million cards in 2015. According to Ecommerce Europe, 80% of compound annual growth rate (CAGR) of The contactless card transaction value the Czech population above the age of 14 14.8% from 437.9 million in 2011 to 760.4 registered annual growth of 63.5% to reach years – equivalent to 7.1 million individuals million in 2015. $8.5bn in 2015. The number of contactless – use the internet, and 3.7 million shop online. The Czech Republic’s payment card pen- transactions reached 369.2 million in 2015 – Banks and other card participants are etration – the number of cards per inhabitant accounting for 48.5% of the country’s total introducing innovative payment options to – was 1.1 in 2015 – higher than peers Poland payment card transactions. encourage electronic payments and improve (0.97), Slovakia (0.95) and Hungary (0.92). According to Visa Europe, the Czech online shopping convenience. Merchant card acceptance also increased, Republic was the third-largest market For example, UniCredit Bank launched a with 108,000 merchants and retailers for Visa contactless cards in Europe with Pay button on its internet banking platform accepting payment cards in 2015, an 18.5% 13.9 million transactions conducted in in December 2015. The bank, in association increase over 2014. March 2015. with online payment service provider PayU, Only the UK (52.6m) and Poland (49.7m) offers the new option when consumers make Uptake of contactless technology recorded higher values. payments at e-commerce website and price Contactless cards were first introduced in In addition, according to a 2015 report by comparison websites, including mall.cz and the Czech Republic by Citibank in 2011, MasterCard, nearly 52% of MasterCard and heureka.cz. followed by other banks; now, all domestic Maestro in-store transactions are contactless Similarly, MasterCard launched the Mas- banks except Sberbank allow customers to in the Czech Republic. terPass system in the Czech Republic in make contactless payments. According to data reported by Visa Europe November 2014. <

n CZECH REPUBLIC CARD TRANSACTION n CZECH REPUBLIC CARD TRANSACTION VALUES n NUMBER OF ATMS AND POS TERMINALS IN VOLUMES BY CHANNEL (MILLION), 2011-2020 BY CHANNEL ($BN), 2011-2020 THE CZECH REPUBLIC (THOUSAND), 2011-2020 Year ATM POS Year ATM POS Year ATM POS 2011 167.9 270.0 2011 35.4 15.2 2011 4.08 77.65 2012 172.4 308.2 2012 32.2 14.5 2012 4.30 86.98 2013 175.8 377.9 2013 32.8 16.4 2013 4.43 94.91 2014 181.0 479.7 2014 33.3 18.1 2014 4.48 110.31 2015 185.7 574.8 2015 30.2 17.3 2015 4.52 124.95 2016 189.9 670.2 2016 32.0 19.3 2016 4.55 138.59 2017 193.8 766.4 2017 33.8 21.3 2017 4.58 151.25 2018 197.1 864.5 2018 35.6 23.3 2018 4.60 162.85 2019 199.9 954.7 2019 37.2 25.0 2019 4.62 171.70 2020 202.0 1,035.8 2020 38.7 26.6 2020 4.62 178.36 Source: Bank Card Association – Czech Republic, Timetric Source: Bank Card Association – Czech Republic, Timetric Source: Bank Card Association – Czech Republic, Timetric

14 y July 2016 www.electronicpaymentsinternational.com

EPI 349subbed.indd 14 08/07/2016 15:04:06 Electronic Payments International SURVEY COUNTRY SURVEY: ESTONIA COUNTY

Millennials drop cash for payment cards

Cards have overtaken cash as the dominant payment instrument, and nearly 90% of the population used cards for daily purchases in 2015. What else does the industry have to offer in Estonia?

ard transactions in Estonia record - accounted for 90.4% of the total value of n ESTONIAN PAYMENT CARDS BY TYPE ed robust growth from 2011 to (MILLION), 2011-2020 payment card transactions in 2015. 2015, surpassing cash to become Debit card penetration in Estonia is the the dominant payment instrument. Year Debit Cards Pay Later Cards highest in the Baltic region, with 114 cards C 2011 1.42 0.37 In terms of transaction volume, payment per 100 inhabitants, compared to peers cards accounted for 42.2% of the total cards 2015 1.50 0.35 Latvia (86.8) and Lithuania (93.3). and payments industry in 2015, while cash Debit cards remain a key retail payment 2016 1.52 0.35 accounted for 34.8%. mode, and are generally provided as a com- Use of payment cards for daily purchases 2020 1.60 0.38 plementary product when opening a bank increased considerably in the last decade: Source: Central Bank of Estonia, Timetric account. The large banked population has nearly 90% of individuals used payment therefore resulted in high adoption of debit cards for daily purchases in 2015, as com- structure among its Baltic peers. ATM pen- cards in the country; banking penetration in pared to just 33% in 2001. etration – the number of ATMs per 100,000 Estonia was 97.7% in 2014, according to the Payment card penetration – the number of inhabitants – in the country was 62.7, higher World Bank’s Global Findex survey. cards per inhabitant – in the country is high- than Latvia (53.6) and Lithuania (44.6). est among its Baltic peers at 1.4, compared to In addition, POS terminal penetration – Contactless to drive card transactions Latvia (1.21) and Lithuania (1.18). the number of terminals per 100,000 inhab- Europe has the world’s highest adoption of Moreover, Estonia’s young population are itants – was 2,294.2, higher than Latvia contactless payments, and Estonian banks the most prolific users of payment cards in (1,568.2) and Lithuania (1,469.1). plan to embrace this technology aggressively the Baltic region. According to a survey by To further increase access to banking to emulate their European counterparts and SEB in 2015, 76% of the population aged services among rural consumers, the state- provide payment convenience to customers. 18 to 25 years in Estonia uses payment cards owned Eesti Post launched a cash with - All ATMs are expected to be equipped for all purchases, in comparison to 59% in drawal service through its mail carriers in with contactless functionality by 2020, while Latvia and 40% in Lithuania. May 2015. The service allows consumers to new POS terminals are expected to have Low rates of fraud and a high card use withdraw up to $444.3 per transaction using contactless functionality by 2017, in accord- rate make Estonia a prominent country in cards at mobile POS terminals provided by ance with MasterCard requirements. Europe’s cards and payments market. A mail delivery personnel. To expedite the process, Swedbank and 2015 report by the European Central Bank LHV Bank plan to launch contactless cards indicates that at five instances of card fraud Debit cards continue to dominate by the end of 2016, and Swedbank will con- per 1,000 people, Estonia ranked lowest in Debit cards remained the most widely used vert all its payment terminals to contactless the SEPA region, where the average was 20 payment card during the period 2011 to technology this year. instances of card fraud per 1,000 people. 2015, accounting for 91.5% of the total SEB plans to introduce contactless cards Estonia also has a robust banking infra- transaction volume in 2015. Debit cards by 2017. <

n ESTONIAN CARD TRANSACTION VOLUMES BY n ESTONIAN CARD TRANSACTION VALUES BY n NUMBER OF ATMS AND POS TERMINALS IN CHANNEL (MILLION), 2011-2020 CHANNEL ($BN), 2011-2020 ESTONIA (THOUSAND), 2011-2020 Year ATM POS Year ATM POS Year ATM POS 2011 42.4 197.8 2011 4.44 4.39 2011 0.99 29.77 2012 41.1 214.1 2012 4.41 4.61 2012 0.93 27.16 2013 40.1 230.2 2013 4.78 5.25 2013 0.88 27.46 2014 38.8 246.3 2014 4.89 5.71 2014 0.85 28.76 2015 37.5 261.6 2015 4.18 5.16 2015 0.82 30.04 2016 36.3 276.8 2016 4.26 5.57 2016 0.80 31.30 2017 35.1 291.1 2017 4.37 6.02 2017 0.79 32.52 2018 34.1 305.1 2018 4.45 6.45 2018 0.78 33.71 2019 33.2 318.0 2019 4.53 6.90 2019 0.77 34.86 2020 32.3 330.2 2020 4.61 7.37 2020 0.77 35.97 Source: Central Bank of Estonia, Timetric Source: Central Bank of Estonia, Timetric Source: Central Bank of Estonia, Timetric

www.electronicpaymentsinternational.com July 2016 y 15

EPI 349subbed.indd 15 08/07/2016 15:04:09 Electronic Payments International COMMENT PROVENIR

Does Google’s advertising ban herald a turning-point for payday lenders?

Google’s decision to ban payday loan adverts could be a development milestone in the alternative lending market. The move has caused ripples through the industry, with Google stating the change is “designed to protect our users from deceptive or harmful financial products”.Daniel O’Boyle, director at Provenir, writes

n implementing its ban, Google has case in most industries. Where this has been to customers who cannot repay their debts. made a judgement on lenders that offer the case, under the regulator’s watchful eye The business models at work within the short-term loan products, yet with a some significant fines have been imposed. industry have evolved. The £100 ($129) loan number of regulatory measures having over 28 days synonymous with payday loans I is not so prevalent now. Having given rise been introduced in the past few years that Plugging a gap target the industry specifically, why should Payday lenders came about because there to a new type of lending, and enfranchised Google need to take this stance? was a gap in the market to be filled; this was market segments that struggled to secure tra- The ban, which comes into force on to provide a much-needed line of credit to ditional finance, it has perhaps not proven to 13 July, applies to advertisements promoting those consumers who get overlooked by tra- be sustainably profitable. loans that have to be repaid within 60 days; ditional lenders such as banks. Now, the movement is away from single- in the US, it also extends to loans with an Two and a half billion people, it’s been term products to line-of-credit products, and APR of 36% or higher. estimated, do not have a credit rating. This this is blurring the lines between short-term Of course, Google is not the only one to means they cannot turn to a bank for a loan lenders and traditional lending products. So have had doubts about payday loans: the and cannot apply for a credit card. much so, that some alternative lenders have industry has always had its critics. Reports These are not only people struggling to begun looking into product development of irresponsible lending practices and heavy- make ends meet, or those having difficulty through prime lending. handed debt collection procedures have managing their money. They also include made for negative headlines in recent years, people who need quick funding to cover an Milestone and landed the industry with a reputation unexpected expense, who do not have time Google’s ad ban is a milestone move; one that reputable member companies would to wait for a bank to assess their application. which will likely impact the ongoing devel- wish to shake. They also include people relocating who opment of this industry. only have credit history in their country of New entrants into the market and exist- Transparent, fair, affordable birth. For these borrowers, short-term loans ing smaller players are likely to be hit hard- A range of targeted and stringent regulations are a practical, quick and clearly-communi- est by the decision: they are more reliant on were introduced to make the industry more cated way of accessing much-needed credit. being discoverable through Google ads. The transparent and to address concerns about In their short history, alternative lenders big-name companies that control the major- its practices. have built product portfolios and business ity market share already enjoy strong brand These include the Financial Conduct models to meet the particular needs of this awareness and have the resources to achieve Authority’s cap on interest charges and fees, segment. Short-term lenders are among the effective search engine optimisation in their announced in late 2014. Companies with industry disruptors that are bringing about online content. business models that do not support respon- change in financial services. In the short term, it’s likely that lenders sible lending are hindered by the enforce- Their business model is built around will ‘buy in’ more traffic through lead gen- ment of such measures. And central to the returning rapid credit decisions on individu- erators. Longer term, we can expect to see regulatory standards is the issue of customer als who may not meet the prerequisites of a gradual reduction in start-up companies affordability. traditional models largely used by estab - challenging the position of the larger players. So, if legitimate short-term lenders are lished lenders, such as banks. Consolidation is already in evidence in the measured up against regulatory demands, To do this, they have had to be open to market. As the gap that had existed in the why is Google not satisfied? tools and techniques that enable them to har- market passes beyond satisfaction to satura- From the early days, Google’s code of con- ness relevant data quickly, and feed it into tion, so the market matures, insubstantial duct included the intriguing phrase: “don’t automated credit risk analytics systems for brands fade, and the more solid, customer- be evil”. It was a doctrine that stimulated rapid risk decision-making. centric businesses remain. considerable debate. Then in 2015, new Innovations in credit risk analytics are The demand for the solution that short- parent company Alphabet elected instead to instrumental in providing an all-round term lending provides prevails. In the include the wording “do the right thing” in improved customer experience in financial evolving environment of financial service its code of conduct. While this may be open services, and in supporting products to reach provision the providers that meet it – and to wider interpretation, it does still make a the underbanked. how they do so – will undergo changes and public declaration about the company’s com- Pressure from regulators is not the only Google’s move will play a part in this. mitment to business ethics. factor that has reshaped the short-term But it’s unlikely that the market will dis- Although, no doubt, there have been loan market. Lenders themselves have been appear. There are just too many consumers instances of undesirable practices within the quick to recognise that, in order to have who have learnt to rely on and value these short-term lending industry, this is surely the long-term success, they cannot risk lending services. <

16 y July 2016 www.electronicpaymentsinternational.com

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