impact of emerging technologies on payments

Impact of Emerging Technologies on Payments

Peter TaplingManaging Director, PTap Advisory, LLC

October 14, 2021

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Source: https://www.riaa.com/u-s-sales-database/

Out With The Old, In With The New

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CDs took 9 years to reach 50% of market

CD market share drops from a peak of 95.5% to 35% by 2011

Digital distribution is now over 83% of music

sales

But Not Always…

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Some things will go away(8-tracks died out by 1984)

Others will never quite go away (LPs still available – and growing!)

Source: https://www.riaa.com/u-s-sales-database/

What Emerging Technologies Were at Play?

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High Def Digital(various formats, 1995-2000)

Source: https://www.riaa.com/u-s-sales-database/

3G à 4G 2001–2008

144kbps/s à 100 Mb/s

iPhone 3G2007 5G

201910 Gb/s

Back to Payments – From What to What?

• Emerging technologies can lead to revolutionary changes

• What are “traditional” forms of payment? – Cash– Check– Credit Card– Debit Card

• Is ACH traditional?• Is “chip and sig”/”chip and PIN” traditional?

• What about “Faster”? Is that a technology?

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Demystifying “Revolutionary”

• Most revolutionary payments technologies do not actually affect the flow of a payment through the bank – they are on- and off-ramps

• Understanding where these technologies fit is key to helping understand their strategic value

• Many of them work together throughout a payment experience

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https://www.driverseducationusa.com/resources/how-to-enter-the-freeways/

THOUGHT EXERCISE

• What means of payment do you personally have at your disposal today which employ what you would consider “emerging technologies”?

• TYPE YOUR RESPONSES INTO THE CHAT

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Here’s What I Have…

• MC/Visa “tap to pay”• Starbucks• BofA Erica; mobile ATM • Zelle, PayPal, Venmo, Cash• ApplePay

– iPhone, iWatch, MacBook

• Walmart Pay• Crypto

– Coinbase, PayPal, Venmo• Rideshare (Uber, Lyft)

– Scooter rental (Bird)• Meal delivery (DoorDash, UberEats)

How often do you use these?Has COVID changed your behaviors?

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MAPPING TECHNOLOGY TO THE PAYMENTS ECOSYSTEM

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Where Do They Fit?

• These technologies all fit within the “4-Corners”

• What innovations will create a fundamentally better “experience”? Network

FI A

ReceiverSender

FI B

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Where Do Customers Develop Their Experience Expectations?

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REVOLUTIONARY PAYMENT TECHNOLOGIES

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Thought Exercise

• Write down 3 technologies you’d like to discuss

• TYPE YOUR TOP RESPONSE INTO THE CHAT

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Let’s Start with These…

• ISO 20022• Faster• API• AI/ML

• Blockchain• Tokenization

• NFC• Bluetooth• QR• 5G• IoT

• Chatbot

And nothing has gone away!“More than 70% of banking corporate data still resides on the mainframe.”

https://www.allerin.com/blog/why-do-banks-still-use-mainframes

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Technology Elements

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• Any mechanism or system that enables the exchange of funds between banks on behalf of bank customers where the availability of funds is “faster” than through traditional methods. (US FPC definition)

• “Instant” or “real time” payments are faster payments where funds are deducted from the senders account and and reflected in the receivers account in [near-]real time

• RTGS – Real Time Gross Settlement (BIS definition)• A system where funds transfers are cleared and settled in real time on a transaction-

by-transaction basis• Adoption requires the systems that make and receive payments to adapt• See: https://fasterpaymentsplaybook.org

Faster

Technology Elements (cont’d)

• International Organization for Standards • International standard for the exchange of electronic information between financial

institutions or for financial transactions• ISO 20022 specifies a data dictionary and message sets to be used consistently across

many financial domains• Given domains can define their own message descriptions (e.g., payments messages

are different than equity trading messages)• Support evolution with versions and variants

• Same concept as ISO 8583• See: https://www.iso20022.org

ISO 20022

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Technology Elements (cont’d)

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• Application Programing Interface• Definition of a function to be performed, the data

required as input and the expected output• When used in the context of banking and payments,

these are not functions the bank will consume, but rather functions the bank will publish to other parties

• The idea of “open banking” is inseparable from the use of APIs• PSD2; Open Banking UK; Open Banking Europe • Afinis, Phixius, FDX

API

Technology Elements (cont’d)

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• Blockchain is a term used generically to refer to: • Any form of distributed ledger technology (DLT)

• Blockchain enables the distributed storage of information in an immutable ledger with agreement among a collection of different parties about the “correctness” of the data (consensus)

• Specific implementations of DLT which enable a public exchange of value (e.g. Bitcoin; Ethereum)• DeFi, STO, DAO, NFT are all permutations

Blockchain

• "Central bank digital currency (CBDC) is the digital form of fiat money.” 1• CBDCs may not necessarily use distributed ledger• CBDC implementations can support either wholesale or retail payments• A search for CBDC publications at BIS yields 61 publications 2• WEF highlights balance needed between technology, policy and features 3

CBDC

1 – July, 2020; https://en.wikipedia.org/wiki/Central_bank_digital_currency2 – September, 2021; Bank for International Settlements, https://www.bis.org/search/index.htm?srchpage=cT1jYmRjJnNmPW9uJmNhdGVnb3J5PWNhdF9wdWJsJmxhbmc9ZW4mbXA9YWxsJnBhZ2U9JnNvcnRfbGlzdD0x

3 – February, 2021; World Economic Forum,, “Vision for 2021 deliverables”; http://www3.weforum.org/docs/WEF_Digital_Currency_Governance_Consortium_2021.pdf

Technology Elements (cont’d)

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• Near Field Communication• A radio communication protocol which allows

devices to communicate when within very close range (~4mm max.)

• NFC devices can have self-contained computational capability

• Communication protocol behind contactless payments

NFC

Technology Elements (cont’d)

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•Quick Response codes –2D BAR CODE which encode information•Information exchange is “one way” – one device displays the code, another device reads it

•QR Codes support ~4K of data – more than enough to support a payment instruction

•Closed loop identifier•E.g., EBC QR Code Guidelines for SEPA Credit Transaction (SCT)*, routing/account numbers, transaction identifiers, payment token, payment alias

•Used for crypto addresses, bill payment, some ATMs

QR

* – https://www.europeanpaymentscouncil.eu/document-library/guidance-documents/quick-response-code-guidelines-enable-data-capture-initiation

Version 3 QR Code

Technology Elements (cont’d)

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• A networking protocol which allows devices to communicate over a range of 30 feet

• Part of what powers Amazon Go stores• BLE – Bluetooth Low Energy – Limits range to ~3 feet

Bluetooth

• The latest evolution in cellular technology bandwidth• Combines ultra-high-speed capabilities with low-latency• Greater density• Security improvements

5G

Technology Elements (cont’d)

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• Internet of Things• The connection of everyday objects to the Internet • Many applications in data collection driving masses of data for further analytics• Events triggered by IoT devices could initiate payment activities

IoT

• A process by which sensitive data is substituted with information which is meaningless outside of the ecosystem• Contrast with encryption – service provider translation rather than key exchange

• Used in payments to protect card information in certain applications• e.g., ApplePay, chip and pin

Tokenization

Technology Elements (cont’d)

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• Computer systems which can imitate cognitive decision-making processes• AI systems evaluate a given transaction against a history of similar transactions and the context of

the current situation to make a decision that is intended to mimic a human response• AI requires massive amounts of historical data• AI requires training, monitoring and re-training

Artificial Intelligence

• Systems which use training data to ascertain from a variety of outcomes which is most likely to be the “best” outcome • To be effective, ML systems need a feedback mechanism to understand successful/non-successful

transactions• Machine Learning systems are used in conjunction with Artificial Intelligence systems with the goal

of enabling the best automated outcome

Machine Learning

Products Which Combine Technologies

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• Automated systems which react to human input in a manner which mimics a human response

• Could be via voice (telephone) or online (chat/email)• Generally employ AI/ML and NLP (Natural Language Processing)

Chatbot

• Virtual Reality (VR) creates a rich sensory experience of a fictitious world.• Augmented Reality (AR) supplements real world experience with

computer generated elements• With regard to payments – these are different access mechanisms

VR/AR

Products Which Combine Technologies (cont’d)

• A mobile app which combines several consumer services –financial and non-financial – onto one platform• In addition to payment capabilities, includes retail, P2P, chat,

social, etc.• Focus is on consumer convenience and engagement• Platforms deliver reams of data about consumer behaviors to

the operator• WeChat from Alibaba is the quintessential example

Super App

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WeChat and Walmart

“Wallet” section of WeChat app

”Money” section of Walmart app

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Did We Get Them All?

• OF COURSE NOT!

• What others would you like to discuss? – (I wish we were in person for a live Q&A! but I’ll pick some ideas up from the earlier chat

question…)

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BUSINESS CONSIDERATIONS

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Features and Capabilities

• Using new technologies creates a web of considerations– Some things must be done

• e.g., Tokenization with Apple Pay (NFC)– Some things can’t be done

• e.g., Anonymous Faster• Look at the technologies with a “product” lens

– How can you improve the customer experience?– Can you improve operational efficiency?

• Now that you understand a bit about what these technologies do: – How do they fit together? – Where do they fit in a payments architecture?– How can you derive value?

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Risk and Regulatory

• Any solution should maintain or improve your ability to stay in compliance

• Novel technologies risk not being understood by regulators

• Beware of “combination risk” – something alone is well understood, but in combination becomes a different animal

• Look at all risks, not just fraud– E.g., AI for fraud against multiple card

users • There is no “do over”!

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https://www.itbusinessedge.com/slideshows/grc-programs-building-the-business-case-for-value-05.html

Using This Information

• Think of emerging technologies in context • Use an understanding of underlying

technologies can inform your product decisions– Features and capabilities – Risk management– Regulatory compliance

• Even things you don’t “do” will affect you– Think of customer service experiences

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https://www.telusinternational.com/articles/digital-transformation-banking-pioneers

THANK YOU!

Peter Tapling, Managing DirectorPTap Advisory, LLC

847-226-2038peter@ptapadvisory.com

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