The Ecosystem, Consumer & Wholesale Payments, and the Application of New Technologies

The Evolution of Channels and Means

Money and the idea of its exchange through payments have evolved a lot from the time of its inception. From goods to grain, from metal coins to paper, from bank accounts to e-wallets, money has taken various shapes, sizes, and forms. Payments evolved from a barter system (exchange of goods for grains) to the token system (exchange of coins and cash on paper) to cash pooling (bank accounts and deposits) to cashless payments (credit cards, checks, e-wallets). Over the last decade or so, payment technologies have grown at a dizzying pace.

Payments are now evolving at a rapid pace with new providers, new platforms, and new payment tools launching on a near-daily basis. As consumer behavior evolves, an expectation of omnicommerce emerges – that is the ability to pay with the same method whether buying in-store, online, or via a mobile device. This shift precipitates a need for retailers to adapt toward fast, simple, and secure mobile payments.

The payments industry would be in a transformational state in 2017. The ongoing war with alternative payment channels will intensify and challenges in emerging markets would force the incumbents to take drastic measures. Some key drivers would be:

1. Real-Time Payments: RTP represents a new phase of evolution within the payments industry, with several key features that differentiate them from current payment methods, specifically speed, value-added messaging capabilities, and immediate availability of transaction status. RTP will provide FIs with the functionality/features to innovate and meet customer demand.

2. Distributed Ledger Technology (DLT)/Blockchain: Blockchain has the potential to completely change the financial transaction processing cost model amongst its various applications. It also enables all processing to be done over a distributed system network or in the cloud, avoiding the usage of costly data centers or mainframes.

3. Expansion of Payments to Non-Physical Interfaces: Traditional interfaces are challenged by external stakeholders (Amazon, Google, Facebook, and Apple) in two ways – voice assistants and VR. Connected assistants become smarter and add functionality with the enhancement of NLP and image recognition. Betting on physical interfaces, and mobile, in particular, can no longer ensure long-term relevance as voice-first solutions evolve. With Facebook obsessed with killing the smartphone to own virtual spaces, classic interfaces and solutions developed for them will gradually fall out of grace.

4. Unified Platforms: The first Visa/Mastercard/SWIFT-free payments system – the Unified Payments Interface (UPI) by NPCI was launched in 2016. UPI is an open-source platform designed for the mobile age that helps with the easy integration of various payment platforms. UPI is powered by a single payment API and a set of supporting APIs. UPI offers a whole new model of the financial services industry ecosystem. UPI became a starting point of what SWIFT called a journey to a single payments platform. UPI is a benchmark to what the payments landscape should be moving towards given that oversaturated payments ecosystem, where too many ‘pay’s’ won’t let anyone win. Disjoint experiences across businesses create customer confusion, and, in the end, with a limited customer base, limit opportunities for every payment service provider – existing and new. Professionals from SWIFT emphasize that the payments industry must migrate from a plethora of aging and expensive systems and schemes to a single platform to process all payments. However, a single payment experience for customers (based on seamless system interoperability, comparable to mobile telephony) is a more probable future than a single payments platform.

Participants

Source: Overview of the Payments Ecosystem – Electronic Transactions Association

Channels

Here are three main payment channels based on market participants and underlying funding mechanisms:

• B2C
• C2C
• B2B

Regulation, demographics, and technology are affecting B2C and B2B in various ways. Technology is most actively shaping C2C payments while B2C and C2B have not been left behind with technology partnerships mushrooming across banks, enterprises, and startups. C2C payments have the highest potential to evolve as a result of several factors:

• Convenience and ease of use
• Lack of entrenched counterparties such as businesses, which are typically much slower to adopt new business processes
• Lack of stickiness for incumbent service providers such as offers and rewards

Processors for the payment systems can use different channels to make a payment and each has different operating characteristics, rules, and settlement mechanisms. All payment systems can be broadly placed into one of the following four payment channels:

• Paper-Based systems such as checks or drafts. Payments are initiated when one party writes an instruction on paper to pay another. These systems are one of the oldest forms of non-cash payment systems. Checks are a common paper-based channel and are still widely used in the United States and a few other countries.

• RTGS (Real Time Gross Settlement) or High-Value Payments, commonly called wire transfers. Wires came into being in the late 1800s with the invention of the telegraph but did not become widely used until the early 1900s.
• RTNS, or Real Time Net Settlement systems or Automated Clearing House (ACH) batch payments were introduced in the early 1970s and were designed to replace checks with electronic payments. Unlike wires, which are processed individually, ACH payments are processed in batches and were originally intended for small payments under $100,000 such as payroll and consumer transactions.
• Cards are a payment channel that includes credit, debit, and stored-value cards. They are a fast-growing segment of the methods for making and receiving payments.
• Mobile payment is defined as the use of the mobile phone to pay for the purchase of goods and services at a retail POS terminal or on the Internet. Payment may be initiated via SMS text message, mobile browser, downloadable app, contactless near-field communication (NFC), or quick response (QR) code. As more and more smartphone owners use their devices to pay for products online, mobile payment services are predicted to grow rapidly. At the same time, the emergence of one-touch checkout buttons, P2P payments, and the rise of sharing economies have created new opportunities for remote mobile payments.
• Real-Time Low-value payments provide consumers and businesses with the ability to conveniently send and receive immediate fund transfers directly from their accounts at FIs, anytime 24/7/365. Financial institutions can leverage a variety of features – enhanced speed, security, and messaging capabilities – to create unique offerings for their retail and corporate customers. RTP also provides a backbone on which new business models can be redefined.

Payments Schemes

Source: What does the payment ecosystem look like?, Ecommerce Foundation

OBeP Scheme

The Online Banking ePayments (OBeP) scheme is a type of payments network, developed by the local or international banking industry – in conjunction with technology providers – designed to facilitate online bank transfers or direct debits.

In an OBeP scheme, the consumer is authenticated in real-time by the consumer’s financial institution’s online banking infrastructure. The availability of funds is validated in real-time and the consumer’s financial institution provides a guarantee of the payment to the merchant in case the payment is made as a credit transfer (push payment): the consumer/buyer initiates the payment. In case the merchant initiates the payment – a debit transfer (pull payment) – the consumer is protected from wrong debits and has the right to reverse the payment depending on scheme regulation and market legislation.

OBeP schemes often allow for direct merchant integration and do guarantee payment to merchants. Other benefits are the relatively low transaction cost compared to card, wallet, or other alternative payments.

OBeP Types

Across markets, there are several OBeP scheme types to distinguish:

• Mono-Bank OBeP Scheme: Entails that a seller or Payment Service Provider has a separate connection to each participating financial institution.
• Multi-Bank OBeP Scheme: Entails that a seller or Payment Service Provider has one single connection to the OBeP network in order to accept payment from any participating financial institution (Ex.: the iDEAL scheme in the Netherlands and BankAxess in Norway)
• Overlay OBeP Scheme: Similar to the Multi-Bank or Mono-Bank scheme, however, there is a third party (the overlay provider) who sits between the payment network and the consumer. The overlay provider requires the consumer to share their online banking credentials with them in order to have access to the consumer’s bank account and to initiate the credit transfer to the merchant. (e.g. SOFORT banking, or SOFORT Überweisung)

Three-Party Model

A three-party scheme consists of three main parties whereby the issuer – who has the relationship with the cardholder – and the acquirer – who has the relationship with the merchant – is the same entity. The three parties consist of the consumer, the merchant and the scheme.

Often the three-party model is a franchise set-up, whereby there is only one franchisee in the market. There is no competition within the brand; however, there is competition with other card brands and other alternative payment methods. Some examples of three-party card schemes: Diners Club International, Discover, and American Express.

In the last few years, these schemes have also partnered with other issuers and acquirers to ensure the issuance and acceptance of their card brand. These schemes could be seen as ‘premium’ card schemes as they tend to have a strong cardholder focus and to provide additional privileges for cardholders. Merchants are often charged a relatively high merchant commission rate.

Four-Party Model

In a four-party scheme, the issuer – who has the relationship with the cardholder – and the acquirer, who has the relationship with the merchant, are different entities. The four parties consist of the consumer, the merchant, the issuer, and the acquirer. These four-party schemes are referred to as ‘open schemes’ as they allow banks and financial institutions to join, to start issuing their cards, and/or to acquire merchants for card acceptance. In principle, there is no limitation to who may join the scheme, as long as the scheme requirements are met. Some examples of a three-party card scheme: Mastercard, Visa, Maestro, UnionPay, JCB, and RuPay (India).

The four-party model is known for its interchange fee revenue model. The interchange fee is a fee – fixed or a percentage of the transaction – that is paid by the acquirer to the applicable issuer. The interchange fee represents a major share of the total commission charged to merchants.

SEPA Payments Scheme

The single euro payments area (SEPA) harmonizes the way cashless euro payments are made across Europe. It allows European consumers, businesses, and public administrations to make and receive the following types of transactions under the same basic conditions (credit transfers, direct debit payments, card payments). This makes all cross-border electronic payments in euros as easy as domestic payments. SEPA covers the whole of the EU. It also applies to payments in euros in other European countries: Iceland, Norway, Switzerland, Liechtenstein, Monaco, and San Marino.

The advantages of the SEPA Scheme include:

• A single system for both domestic and cross-border bank transfers
• Allowing cross-border transactions by direct debit, that is to charge directly an account in one country for services provided in another country
• Allowing people working or studying in another SEPA country to use an existing account in their home country to receive their salary or pay bills in the new country
• Ensuring cheaper, safer, and faster cross-border payments and more transparent pricing thanks to the single set of payment schemes and standards

SEPA is a collaborative process. The SEPA project was launched by the European banking and payment industry represented by the European Payments Council (EPC). The EPC has designed the SEPA schemes for credit transfers and direct debits and is developing a scheme for payment cards. It is also currently working on a new framework for mobile payments. The principle of equal charges both for national and cross-border payments applies to all electronically processed payments in euros – including credit transfers, direct debits, withdrawals at cash dispensers (ATMs), payments by debit and credit cards, and money remittance.

Countries outside the euro area may also extend the application of this regulation to their national currency. The SEPA vision is one of a harmonized European-wide standard payments environment using mandatory and consistent ISO 20022 XML messaging. Eventually, it will bring significant savings to companies by driving down transaction costs and cross-border charging practices.

Further benefits include:

• A reduction in the number of bank accounts needed to do business across Europe
• Faster settlements and simplified processing
• Increased transparency of pricing and fees
• Potential for the centralization of accounts and payment flows

Processes – How Transactions Work

Payments transactions are processed through a variety of platforms, including brick-and-mortar stores, e-commerce stores, wireless terminals, and phone or mobile devices. The entire cycle usually takes place within two to three seconds.

We will use a credit card payment as a model to demonstrate each step in the transaction process, which includes the following participants:\

• Cardholder: There are two types of cardholders: a transactor who repays the credit card balance in full and a revolver who repays only a portion of the balance while the rest accrues interest.
• Merchant: This is the store or vendor who sells goods or services to the cardholder. The merchant accepts credit card payments. It also sends card information to and requests payment authorization from the cardholder’s issuing bank.
• Acquiring Bank/Merchant’s Bank: The acquiring bank is responsible for receiving payment authorization requests from the merchant and sending them to the issuing bank through the appropriate channels. It then relays the issuing bank’s response to the merchant.
• Acquiring Processor/Service Provider: This third-party entity is sometimes an arm of the acquiring bank. A processor provides a service or device that allows merchants to accept credit cards as well as send credit card payment details to the credit card network. It then forwards the payment authorization back to the acquiring bank.
• Credit card Network/Association Member: These entities operate the networks that process credit card payments worldwide and govern interchange fees. Examples of credit card networks are Visa, Mastercard, Discover, and American Express. In the transaction process, a credit card network receives the credit card payment details from the acquiring processor. It forwards the payment authorization request to the issuing bank and sends the issuing bank’s response to the acquiring processor.
• Issuing Bank/Credit Card Issuer: This is the financial institution that issued the credit card involved in the transaction. It receives the payment authorization request from the credit card network and either approves or declines the transaction.

Stage 1: Authorization

• In the authorization stage, the merchant must obtain approval for payment from the issuing bank.
• The cardholder presents their credit card for payment to the merchant at the point-of-sale (POS).
• After swiping their credit card at a POS terminal, the customer’s credit card details are sent to the acquiring bank (or its acquiring processor).
• The acquiring bank or processor forwards the credit card details to the credit card network.
• The credit card network clears the payment and requests payment authorization from the issuing bank. The authorization request includes the following:
• Credit card number
• Card expiration date
• Billing address – for Address Verification System (AVS) validation
• Card security code – CVV
• Payment amount

Source: How Credit Card Transaction Processing Works: Steps, Fees & Participants

Stage 2: Authentication

In the authentication stage, the issuing bank verifies the validity of the customer’s credit card using fraud protection tools such as the Address Verification Service (AVS) and card security codes such as CVV, CVV2, CVC2, and CID.

• The issuing bank receives the payment authorization request from the credit card network.
• The issuing bank validates the credit card number, checks the amount of available funds, matches the billing address to the one on file, and validates the CVV number.
• The issuing bank approves or declines the transaction and sends back the appropriate response to the merchant through the same channels: credit card network and acquiring bank or processor.
• Once the merchant receives authorization, the issuing bank will place a hold on the amount of the purchase on the cardholder’s account. The merchant’s POS terminal will collect all approved authorizations to be processed in a batch at the end of the business day.
• The merchant provides the customer with a receipt to complete the sale.

Source: How Credit Card Transaction Processing Works: Steps, Fees & Participants

Stage 3: Clearing and Settlement

In the clearing stage, the transaction is posted to both the cardholder’s monthly credit card billing statement and the merchant’s statement. It occurs simultaneously with the settlement stage.

• At the end of each business day, the merchant sends the approved authorizations in a batch to the acquiring bank or processor.
• The acquiring processor routes the batched information to the credit card network for settlement.
• The credit card network forwards each approved transaction to \ the appropriate issuing bank.
• Usually, within 24 to 48 hours of the transaction, the issuing bank will transfer the funds less an interchange fee, which it shares with the credit card network.
• The credit card network pays the acquiring bank and the acquiring processor their respective percentages from the remaining funds.
• The acquiring bank credits the merchant’s account for cardholder purchases, less a merchant discount rate.
• The issuing bank posts the transaction information to the cardholder’s account. The cardholder receives the statement and pays the bill.

Source: How Credit Card Transaction Processing Works: Steps, Fees & Participants

Fees and Costs

Depending on the type of merchant and through which platform a good or service is delivered, credit card processing rates will vary. They usually are charged as flat fees, per-transaction fees, or volume-based fees. The major costs include:

• Merchant Discount Rate: Merchants pay this fee for accepting credit card payments and receiving services from acquiring processors. It’s usually between 2% and 3% (online merchants pay the higher end) – to as much as 5% – of the total purchase price after sales tax is added. Also known as a discount fee, this rate comprises several components:

• Interchange Fee: The acquiring bank and acquiring processor pay this fee to the issuing bank. It is market-based and set by each credit card network. Most interchange fees are assessed in two parts: a percentage to the issuing bank and a fixed transaction fee to the credit card network. Interchange fees vary and are categorized through a process called interchange qualification, which determines the rate based on several criteria:
• Physical presence or absence of the card during the transaction
• The processing method used (e.g., swiped, manually entered, or e-commerce)
• Credit card company
• Card type (e.g., regular, premium, commercial, rewards, or government-issued)
• Merchant’s business type (as determined by merchant category code)
• Assessments: Credit card networks (except American Express) charge this fee for transactions that are made with their branded cards. It usually is based on a percentage of the total transaction volume for the month. The fee usually is fixed, and the merchant’s acquiring bank may not charge a lower rate or negotiate a better deal with the merchant. Assessments generally are charged per transaction but can vary depending on the pricing model the merchant follows. Assessment amounts may change periodically. Combined with the interchange fee, assessments constitute between 75% and 80% of total card-processing costs.
• Markups: Acquiring banks and acquiring processors usually will include a markup over interchange fees and assessments partly as profit and partly to cover the cost of facilitating credit card transactions. It constitutes between 20% and 25% of total card-processing costs. Merchants generally can negotiate the markup with the entities that charge them. Markups vary by processor and pricing model. They may also include other types of fees.

• Chargebacks: Customers reserve the right to dispute a charge on their credit card billing statement within 60 days of the statement date. When the issuing bank receives a complaint from a customer, it charges the merchant between $10 and $50 as a penalty and for issuing a retrieval request. If the merchant doesn’t respond to the retrieval request within a certain timeframe, it could incur additional fees. The merchant may appeal, but the process is long and likely to favor the customer. If the merchant loses, the issuing bank will recover, or chargeback, the customer’s payment.

Types of Payments: Online/Digital and Offline

Offline Payments

The Definition

An offline transaction, also known as a signature debit transaction, is a payment method that uses a debit card to transfer funds from a checking account to a merchant across a digital credit card network.

How It Works

When a cardholder pays for goods or services with a debit card, he/she has an option to process the payment in one of two ways:

• as an offline transaction via a credit card processing network, or
• as an online transaction via an electronic funds transfer (EFT) system

Offline Transactions Are Processed Much Like Credit Card Transactions

They are sent over one of the major credit card networks – Visa, Mastercard, Discover, etc. – depending on which credit card network the bank is associated with as a member bank. The cost of the transaction, called an interchange fee, is charged to the vendor/merchant rather than the bank.

Mobile payments in offline mode are gaining popularity among consumers. With offline mode, consumers can make mobile payments when Internet service is temporarily unavailable. Offline payments are processed automatically when the device regains connectivity.

Making mobile payments in offline mode involves three distinct stages:

• Prepayment
• Making the payment
• Post-payment

Users are required to set funds for offline payments in advance to make use of the offline mode of mobile payments. The fund limit can be set in the prepayments stage along with expiry and number of transactions limit and it also enables the user to restrict the locations for the use of offline funds. For making payment in the offline mode, consumers can connect smartphone devices with retail POS terminals using Bluetooth or NFC means. Once the balance details are confirmed, the payment system processes the transaction in offline mode.

Major players in the mobile payments industry are coming up with offline mobile payments solutions for in-store payments. Leading players in the mobile payments industry like Square and Google Wallet provides offline mobile payments option for their users to make in-store payments.

Online/Digital Payments – The Evolution of Channels and Means

Source: Digital Payments 2020, BCG

Online/Digital Payments – Companies

Source: Value Chain for Payments Companies

Revenue Models

Transactional

• Interchange Reimbursement Fees and Assessments: The fees the card-issuing banks and the credit card associations charge for each transaction. They represent the largest expense merchants (should) pay per sale and per month.

Interchange fees typically consist of a % of each transaction accompanied by a flat per-transaction fee. Assessments are typically based on a % of the total transaction volume for the month.

Examples of these non-negotiable interchange and assessment merchant account fees include Merit 1/e-commerce/CNP fees, NABU/APF/data usage fees, dues, and assessments.

Each card association publishes its interchange and assessment fees online.

Note: These are the wholesale rates. With the interchange-plus pricing structure, the processor will quote a markup – the amount the processor will add to the wholesale rates. On a tiered pricing plan, the quote will be with the Qualified, Mid-Qualified, and Non-Qualified rates. Those quotes have the margin baked right into the quote, thus making it more difficult to tell what the processor’s margin is.

Flat Fees

• Terminal Fees: Charged to merchants who have physical stores, where they directly swipe a customer’s card.
• Payment Gateway Fees: Similar to terminal fees, but they are applied to e-commerce businesses instead.
• PCI Fees: The fees paid to the Payment Card Industry, either for noncompliance or compliance assurance.
• Annual Fees: The fees charged every year to cover the basic use of a provider’s services.
• Early Termination Fees: The fee that is charged in case of early cancellation.
• Monthly Fees: The fees that are charged each month, usually for the purpose of covering call center costs.
• Monthly Minimum Fees: The fees charged to merchants who do not reach a certain transaction total for the month or year. The minimums vary by provider.
• Statement Fees: The fees charged to cover printing and mailing costs for credit card statements. Can be bypassed with electronic bill statements.
• IRS Report Fees: The fees that merchant account providers charge in exchange for reporting transaction information to the IRS (1099-K).
• Online Reporting: Alternatives to statement fees. Charged to merchants who choose to view their statements online.
• Network Fees: The card networks charge certain non-negotiable fees that are passed through to the merchant, such as the Fixed Acquirer Network Fee (FANF).

Incidental Fees

• Address Verification Service (AVS): E-commerce/telephone order businesses are charged an AVS fee per transaction.
• Voice Authorization Fee (VAF): A fee charged for verification of certain information before a transaction is authorized. Made through a call to a toll-free number.
• Retrieval Request Fee: Every time a customer initiates a dispute on a charge from the business, it sets into motion the chargeback protocol. The fee covers any expense related to the retrieval request.
• Chargeback Fee: After the retrieval request, the actual chargeback may occur depending on the circumstances. If it does, there is a fee on top of losing the money from the sale.
• Batch Fee: Every time the business submits a batch of transactions, a batch fee (or batch header) is charged.
• NSF Fee: If the business doesn’t have enough funds in its bank account to cover merchant account expenses, it will be assessed an NSF (non-sufficient funds) fee.

Consumer and Retail Payments

Society as a whole is using less of the physical monetary medium, and more businesses are adapting by accepting credit and debit cards. The payments market is changing from cash to checks, from cards to online payments to payments using mobile devices. Businesses that didn’t accept credit cards a few years ago are now embracing the change to speed up the payments cycle and maintain or grow their customer base. Now you can even pay your rent, taxes, and monthly bills via credit cards. It’s predicted that by 2025, 75% of all transactions will be made without cash. Mobile payment applications and mobile banking are increasing in popularity, which is indicative of consumers’ willingness to use smart devices and cards.

Payments are now evolving at a rapid pace with new providers, new platforms, and new payment tools launching on a near-daily basis. As consumer behavior evolves, an expectation of omnicommerce emerges – that is the ability to pay with the same method whether buying in-store, online, or via a mobile device. This shift precipitates a need for retailers to adapt toward fast, simple, and secure mobile payments.

Mobile payments are defined as the use of mobile phones to pay for the purchase of goods and services at a retail point-of-sale (POS) terminal or on the Internet. Payment may be initiated via SMS text message, mobile browser, downloadable app, contactless near field communication (NFC), or quick response (QR) code. As more and more smartphone owners use their devices to pay for products online, mobile payment services such as Apple Pay, Android Pay, and Samsung Pay are predicted to grow rapidly. At the same time, the emergence of one-touch checkout buttons, peer-to-peer payments, and the rise of sharing economies have created new opportunities for remote mobile payments.

The Rise of Mobile Payments

• Smartphone penetration and mobile operating system market share are key indicators of potential mobile payment adoption. Smartphones have enabled consumers to connect to different channels, making it easy for consumers to use mobile devices for payments. Another key driver of mobile payment adoption is the growth of mobile commerce.
• Various industry stakeholders, including card networks, financial institutions, and merchants have shown heightened interest in the growing mobile payments industry – through launching proprietary solutions or enabling third-party players. Stakeholders are trying to adapt as quickly as the technology developments evolve. Startups and incumbents from the financial services industry and technology providers are developing new services that are helping to shape consumer preferences.
• Mobile Wallets: Consumers see the mobile wallet as a next-generation payment option. The technology offers ease of payment using an electronic wallet and avoids the use of cards or cash. Many countries are moving toward a near field communication (NFC) payment structure, which would allow consumers to pay for goods by moving smartphones within a few inches of a payment device through mobile payment services such as Apple Pay and Google Wallet. Mobile wallet initiatives are taken up by banks, telecom companies, financial technology providers, and also governments across the globe. Nearly 78% of US consumers are aware of mobile wallet capabilities and 32% of US consumers use a mobile wallet such as Apple Pay or Android Pay.
• Increased Security: The adoption of chip and signature chip cards does not go far enough towards reducing the impact of credit card fraud. Most mobile payments apps generate a unique barcode for each transaction instead of sharing card details with the merchant and the merchant’s bank. Both Apple Pay and Google Wallet, among many others, require unlocking through the second factor of authentication (E.g., biometric or PIN).
• Ease of Use: Compared to chip-and-signature cards, mobile transactions could speed up the checkout process which is beneficial for both consumers and merchants. For mobile payments, the phone is a proxy for a card. One can enter credit or debit card details in a mobile app ahead of time and use it anywhere for making payments or one can use a mobile payment app at a store and have the cashier scan it for payment or consumers can tap the phone on the pad for NFC payments. Mobile payments simply provide different ways of executing transactions at different locations.

Mobile Payments – Challenges

• Mobile payments are gaining momentum (mobile P2P payments in the US only are forecasted to grow to nearly $175 billion by 2019), yet still represent a small portion of total consumer payments. The main barriers to consumer adoption are security and privacy concerns. It is critical for new mobile payments schemes to address this issue and earn consumers’ trust from the start with secure schemes and straightforward use cases.
• Aside from privacy and security concerns, one of the key challenges presently facing the mobile payments market is the high level of market fragmentation defined both by the multiplicity of platforms/solutions technologies being deployed and the increasing range of service configurations being offered. This slows down merchant acceptance and makes it difficult for providers to gain scale.
• While security and POS compatibility are the major concerns for the expansion of the mobile payments market, the industry is gaining momentum with key players and financial institutions coming up with new and innovative strategies like including additional store and loyalty cards giving consumers more reasons to ditch physical wallets.

Mobile Payments – Opportunities

• Due to adoption challenges resulting from high fragmentation, the market will reach a point where consolidation among players and solutions becomes the best way to drive address adoption issues.
• Value-added models are becoming popular in the mobile payments arena. Companies are starting to monetize data-driven campaigns engines. Some of the value-added offerings take the form of white-label applications development for vertical industries. This type of model is expected to proliferate given the benefits it brings to all parties.
• The key to successful m-payment applications is the ability to make them pervasive, so users grow to rely on them. Partnerships with ecosystem participants from all sectors (banks, retail, service providers, and the public sector) are essential to building a ubiquitous network of acceptance points. In addition, having a well-defined pipeline of compelling use cases is key for mobile payment providers to leverage the ecosystem to grow their user base and drive transaction volume.
• Mobile point-of-sale (mPOS) startups like Square have pioneered a whole new payments niche – accepting payments via tablets and smartphones. Coupling their transactions capabilities with new apps can revolutionize a small business’ inventory management, marketing, loyalty, and payroll.
• With smartphone usage on the rise and a plethora of mobile apps, consumers and businesses are using mobile devices in new and innovative ways. There is already a dynamic competitive environment for mobile banking, and now for mobile payments.

Mobile Payments – Key Players

• Mobile payments is an evolution made possible by omnipresent mobile platforms and always-on Internet connections, fueled by companies like Square and Stripe, and propelled by Mastercard and Visa. Traditional credit card brands, online payment companies, carriers, and smartphone manufacturers are all getting into the market in various ways by joining to form coalitions, buying up mobile payment startups, and providing innovative security solutions.
• Apple Pay: Launched in 2014 in the US, Apple Pay offers an easy, secure and private way to pay using iPhone, iPad, and Apple Watch. Apple Pay is supported by 500+ banks in the US and it can be used in over a million stores that now accept contactless payments in the US. Apple Pay holds approximately 1% of the share of US retail transactions. In June 2017 Apple Pay introduced a P2P payment service through iMessage with its iOS 11.
• Samsung Pay: Samsung Pay works with all POS systems like near field communication (NFC), magnetic stripe, and EMV terminals for chip-based cards. Samsung Pay does not store the account or credit card numbers of cards on the device; instead, it uses tokenization for transactions. Samsung Pay was launched in South Korea and the United States in 2015 and is giving tough competition to existing players in the market. The smartphone manufacturing company is all set to launch Samsung Pay in Australia, Brazil, Singapore, Spain, China, and the United Kingdom in the first quarter of 2016.
• Android Pay: Google’s Android Pay is a way to pay directly from the phone. Android Pay is the same tap-to-pay feature as Google Wallet, except Android Pay is built into the devices. It does not require any app installation.
• Google Wallet: Google Wallet also provides a P2P payment functionality wherein consumers can transfer money to friends and family over the Internet using Google Wallet.
• PayPal: PayPal is one of the safest and most convenient ways to perform monetary transactions online. Payments (money) can be sent in two ways: either as online purchases or personal payments; a transaction fee is applied to some transactions. Currently, more than 164 Million accounts are in use worldwide by Internet users who prefer to use PayPal to send money to each other via email or make online purchases. PayPal provides international peer-to-peer payment services to its users using its PayPal app.

P2P Mobile Payments

• P2P Mobile Payments: Globally, the market for peer-to-peer transfers and remittances is worth over $1 trillion. A new generation of apps makes transferring money faster, less expensive, and more precise. They also reduce the hassle of going to a money transfer agency, remembering a checkbook, or finding an ATM.
• In 2013, Google launched Gmail integration with Google Wallet allowing users to send money through Gmail attachments.
• PayPal is one of the oldest and most established players in the online payments space and has a large, established user base. PayPal allows users to send money directly from a checking account, from a PayPal account balance, or using credit and debit cards. Sending from a credit or debit card carries a fee of 2.9% plus $0.30 per transaction, and the sender has the option of deciding which party pays this fee. Unlike any of the other peer-to-peer mobile money transfer services currently available in the US, PayPal allows users the ability to transfer funds internationally. Users can receive payments from 203 different countries and in 26 currencies and international transactions are subject to different fees.
• Snapchat, the photo-sharing app, has partnered with Square to allow its users to make payments through the app called Square Cash. Users can connect a Visa or MasterCard debit card to the account and send up to $250 per week and receive up to $1,000 per week (these numbers increase with time, use, and after proving one’s identity, as with other apps). Square Cash app does not charge fees and allows users to link a debit card to the account. The app also enables users to link directly to their bank account for fee-free transactions.
• Venmo is a streamlined, simple-to-use mobile payments app that can be downloaded for free on Android and iOS. Users can both send and request money simply by inputting the person’s name, the dollar amount, and a brief description of the transaction using Venmo. Users are able to receive money instantly through the app and transfers to bank accounts and transactions are processed within one business day.

Remittances

• Cross-border payments have become a critical part of millions of lives as we have become a more globalized world. As cross-border payments have become more common, customers of remittance products/solutions are looking for the most convenient, cost-efficient, and transparent options. Digital and mobile-based solutions, new cost-efficient models in the back-end and even the use of virtual currencies are being tried out by providers.
• In 2015, worldwide remittance flows are estimated to have exceeded $601 billion. Of that amount, developing countries are estimated to receive about $441 billion, nearly three times the amount of official development assistance. The true size of remittances, including unrecorded flows through formal and informal channels, is believed to be significantly larger. High-income countries are the main source of remittances. The United States is by far the largest, with an estimated $56.3 billion in recorded outflows in 2014. Saudi Arabia ranks as the second-largest, followed by Russia, Switzerland, Germany, the United Arab Emirates, and Kuwait. The six Gulf Cooperation Council countries accounted for $98 billion in outward remittance flows in 2014.
• High-income countries are the main source of remittances. The United States is by far the largest, with an estimated $56.3 billion in recorded outflows in 2014. Saudi Arabia ranks as the second-largest, followed by Russia, Switzerland, Germany, the United Arab Emirates, and Kuwait. The six Gulf Cooperation Council countries accounted for $98 billion in outward remittance flows in 2014.

The market is highly fragmented, with market growth attracting additional participants.

Source: FinTech Outlook 2017 – Focus on Payments, Remittance and Blockchain

Online Remittances

• New online players have emerged and have raised the bar in terms of customer experience (digital/mobile channel) and costs of remittance.
• Almost all major players successfully raised new funding rounds in the past six months: WorldRemit – $45M (total – $192,7M), TransferWise – $26M (total – $117M), Remitly – $38.5M (total – $61M), Azimo – $15M (previous round – $20M).
• High scope for mergers as customer acquisition is quite expensive.
• Social remittance hasn’t picked up except WeChat.

Democratization of Remittances

• Non-bank market players in the financial services industry are disrupting almost every segment – the cross-border money transfer industry is one of those segments where traditional institutions have suffered significantly. In the UK, for example, the top 20 non-bank money transfer providers account for over £40 billion of foreign exchange per year, saving customers over £900 million annually.
• FinTech players like TransferWise and World First have increased the pressure on banks in terms of fees for the transfer service. Non-bank providers charge an average of 0.9% on £10,000, which is one-fourth of the average for banks.
• This outstanding achievement of FinTech could have had a significant impact on the situation with global remittance prices reported by the World Bank. According to the data of Q4 2015, the average global cost of sending remittances fell to 7.37% as of December 2015, from 7.52% in the previous quarter. It’s possible to send money for the average cost of 10% or less in 80% of the world’s country corridors. For comparison, six years ago, only 50% of the corridors had a cost of 10% or less.

Source: The Cost of Sending Remittances December 2015 Data, The World Bank

The International Perspective

The Cost of Sending Money From and to G20 Countries

• The cost of sending money from G20 countries was recorded at 7.46%, remaining substantially stable compared to the last quarter.
• At 16.59%, South Africa remains the most costly G20 country to send money from.
• Russia is the least expensive country at 1.95%, followed by Saudi Arabia at 5.05%.
• The cost to send money to G20 countries that are included in RPW as receiving markets decreased to 7.10%.
• It’s most expensive to send money to China, 9.72%, and South Africa, 8.89%.
• Mexico and India are the cheapest receiving markets, at 4.75% and 5.95%, respectively.

The Cost of Sending Money to Different Regions

• The most meaningful change in Q4 2015 was a decline in the cost of sending remittances to the Middle East and North Africa region, which decreased from 8.37 to 7.42%.
• At 5.43%, South Asia is still the least costly region to send money to.
• Sub-Saharan Africa remains the most expensive region to send money to at 9.53%.
• In East Asia & the Pacific, the cost was recorded at 7.97%.
• In East Europe and Central Asia, the average cost excluding Russia is 7.51%. If Russia is included in the calculation, the cost is 6.48%.
• Latin America & the Caribbean experienced a slight decrease to 6.04%.

Efficient Channels and Products

The Cost of Using Different Channels to Send Money

• Sending money through a post office remains the least expensive while going through a commercial bank is still the most costly.
• Post offices’ remittance charges slightly declined to 5.88%.
• Using banks to send money remained most expensive at 11.12%.
• Sending money through Money Transfer Operators decreased to 6.24%.

Types of Products

• Cash services remain the most widely available and one of the cheapest ways to send money at 6.54%.
• Online products are the cheapest product type at 5.57%.
• Account-to-account services remain the most expensive at 10.86%. However, the cost of transfer within the same bank or to a partner bank in the receiving country is significantly cheaper at 5.67%.

Overall, global remittance is going through a positive change. There could be a variety of factors to that. However, with a certain confidence, it is impacted by the technological advancements within FinTech, and, blockchain technology, in particular. A significant number of banks are involved in relationships with FinTech companies in one way or another.

Microtransactions

In modern economic transactions where goods or services are transferred from a seller to a buyer, the payment commonly represents half of the transaction: the part used to provide compensation to the seller. The cost of doing transactions affects the structure and organization of the economy. If the cost of doing a particular type of transaction in the market is higher than doing them within an organization they will not occur in the market. Instead, these transactions will occur within companies or structures that will form and grow from being more efficient than the market. This now-established thinking began with the influential *Nature of the Firm *article by Ronald Coase in 1937.

In transaction cost economics, various origins of transaction costs are considered – such as the cost of finding the right product, price, and legal terms before making a trade. When parties engage in large or complex transactions the cost of payment is usually too small to be significant in this context. However, for microtransactions, transactions where the value is small, the cost of performing the payment can represent a major part of the transaction cost. A second, often-ignored cost for small transactions is the mental cost. This is the cognitive effort required by the buyer, and seller, to decide if an offered transaction is beneficial and the effort to perform the steps needed to make the payment. To conclude, if transaction costs are pushed low enough, small internet transactions can become useful and profitable in the open market. New business models will emerge and existing business models will need to change.

What Are Microtransactions (MTX)?

• Microtransactions occur when users purchase goods through micropayments, a commerce transaction involving a very small amount of money, usually on the order of a few cents or pennies. This small sum of money could be anything from game points, customer loyalty points, and digital coupons. In a typical microtransaction-based monetization model, consumers are allowed to use an application for free, but then pay for incremental in-app content using the application’s branded points or virtual currency.
• App-based virtual coins, points, and tokens that can be used to fulfill microtransactions are experiencing rapid growth, thanks to the proliferation of mobile and social network games and applications. In the Microtransactions Monetization model, consumers are allowed to use the application for free and only pay for the in-app content they want by using application-branded points.
• The microtransactions (MTX) APIs offer a full suite of monetization solutions for online and mobile applications. MTX provides a set of APIs that let developers create payment solutions using points, promotional rewards, or virtual currency and coupons. MTX provides access to in-app microtransactions on top of a highly capable, hosted environment for application developers to offload the heavy transaction burden.

Many modern user engagement models have a reward transaction associated with almost every action that a user takes. For example, a user can earn points for checking into the application, spending time in the application, participating in a survey, posting comments in the forum, or sharing product information with friends over social networks. Once earned, points can be expended when the user employs certain features of the application, plays a game, or purchases some in-app digital items or entertaining gadgets. The volume of microtransactions that can be generated by a modern application using this model to keep users engaged can be very large.

Examples of interesting use cases for microtransactions include:

• Attracting users to play games using free points
• Providing an in-application store relevant to users
• Rewarding customers with loyalty points for their purchases
• Allowing customers to earn points based on their behavior, such as opening an account, sharing products with friends, or writing reviews
• Letting customers redeem points when purchasing products
• Attracting customers using coupons that contain points or price discounts
• Promoting product sales with product bundles and sales campaigns

MTX enables service providers to tap into one of the fastest-growing monetization models in the online and mobile industries: the in-app microtransaction. The use of app-based virtual coins, points, and tokens that can be used to fulfill microtransactions is growing rapidly, thanks to the proliferation of mobile and social network games and applications.

With MTX, Service Providers Can:

• Focus on content by offloading the high-volume micropayment processing to the MTX platform
• Use microtransactions as another source of revenue, different from traditional advertising and paid content models, by providing users the ability to pay with virtual currency
• Engage, convert, and retain users with contextual product offerings, coupons, and sales campaigns

Real-Time Payments

Real-time payments enrich the payment ecosystem – not only do they provide alternative means of payment, but they also provide ample opportunities to develop new consumer and business services. Real-time payments (RTP) provide consumers and businesses with the ability to immediately send and receive funds directly from their accounts at financial institutions anytime 24/7/365. RTP represents a new phase of evolution within the payments industry, with several key features – specifically speed, dependability, and immediate availability of transaction status. RTP will provide FIs with the functionality and features to innovate for the future. Many countries are developing faster payments systems to expedite the movement of money and increase the speed that transferred funds are made available to recipients.

What Are Real-Time Payments (RTP)?

Real-time payments provide consumers and businesses with the ability to conveniently send and receive immediate fund transfers directly from their accounts at FIs, anytime 24/7/365. Financial institutions can leverage a variety of features – enhanced speed, security, and messaging capabilities – to create unique offerings for their retail and corporate customers. RTP also provides a backbone on which new business models can be redefined.

Characteristics of RTP

• 24/7/365: The RTP system will operate on a 24/7/365 model, which means the system will be available for customers to send or receive payments at any time.
• Immediate Availability: Recipients will receive the payment within seconds of the Sender initiating the transaction; the FI is required to make funds available immediately, except where necessary for risk management or legal compliance purposes.
• Payment Certainty: Senders will not be able to revoke or recall a payment once it has been authorized and submitted to the RTP system.
• Ubiquity: The RTP system will be accessible by all financial institutions, regardless of size or charter type, and will reach the vast majority of US account holders.
• Extensibility: Rich, flexible messaging functionality will be included to support value-added products.

RTP Use Cases

Business-to-Business (B2B) Payments

• A small business paying an invoice in order to get a deep discount from the buyer.
• A restaurant making payments to a supplier after finding a good deal.

Business-to-Consumer (B2C) Payments

• A retail bank distributing personal loan proceeds to a dealership on behalf of a customer who is at the showroom buying a new car.
• An insurance company adjuster reviewing a claim, determining a settlement amount, and immediately providing funds to the policyholder who’s at the hospital waiting for the surgery.

Person-to-Person (P2P)

• Friends splitting monthly rent and utility payments.
• A father sending emergency funds to his daughter to pay the school fees.

The RTP Ecosystem

There are primarily three players in the RTP Ecosystem:

• Financial Institutions: Financial Institutions of all sizes will have the ability to directly connect to the RTP core infrastructure to provide real-time payments capability and value-added services to their customers and clients. FIs may also connect through third-party service providers.
• Clearing Houses: The Clearing House hosts the RTP core infrastructure for the US that provides:
• Payment processing and settlement services: The RTP system will clear and settle payments and transmit value-added, payment-related messages to and from FIs.
• Anti-fraud: The RTP system will centrally monitor for network-level fraudulent activity and provide fraud alerts to FIs. This capability will augment and support the FIs’ own automated real-time fraud detection capabilities with respect to transactions they send to and receive from the RTP system.
• Third-Party Service Providers: Third-party service providers will provide connectivity to RTP providing access to FIs that may not want to connect directly to the RTP system. They will also integrate RTP into their existing and new payments products for the benefit of these FIs’ account holders.

Source: Real-Time Payments – Experience & Adoption

Drivers for RTP

• Customer Demand: In today’s world of sophisticated computing devices, information is moving in real-time. With high-speed data networks, customers expect everything – including payments – to keep up with their pace of life.
• Convenience: Customers are moving away from cash and checks in favor of the convenience associated with newer banking channels, like online and mobile. Growth rates of non-cash transactions in mature markets (North America, Europe, mature Asia-Pacific) have accelerated in the past few years, accounting for almost three-quarters of the payments market.
• Increased Transparency: A faster pace of life means making sure payment information is transparent and readily available. Customers are looking for robust, real-time payment information, including payment status and immediate confirmation of funds availability.
• Greater Value: Banks and non-bank payment service providers are creating value-added services such as automated matching of purchase orders to invoices for businesses or geolocation-based in-store promotions for consumers. These value-added services can span the entire purchasing experience beyond the payment itself. They enrich the basic payment data with a wider set of information to create added value. The RTP system addresses consumer demands in the digital age – providing a way for consumers to make immediate payments to merchants and vendors in a safe and convenient manner.

RTP Adoption Obstacles

What Stands in the Way of Creating a Real-Time Payments System?

• One-off investment costs and ongoing costs: Real-time projects require relatively high levels of investment. One-off costs cover the development (or modification) of the central RTP system; the banks’ internal IT infrastructures; and the banks’ core operations processes. Ongoing costs cover the investment needed for the daily operations, annual maintenance, and support of these systems. The changes can be sizable. Historically, retail bank processing has been dominated by the overnight batch, while a real-time service, demands continuous processing, with 24/7 uptime, without interruption. This has a knock-on effect on the associated operational and risk management processes, which must manage higher transaction volumes with richer and more complex data, whilst ensuring adequate AML and fraud detection, and customer support.
• The cost of a fragmented landscape: If multiple RTP solutions, with different operational and network requirements, co-exist in a given currency market or region, then banks may need to join several RTP systems to respond to their customers’ needs. This requirement to comply with a fragmented landscape will result in additional expense unless true business, legal and technical system interoperability has been achieved.
• Uncertain revenue potential: In most cases, retail consumers do not expect to be charged a premium for real-time payments. Business-to-business transactions typically can be monetized, but this may inhibit wide adoption. The Federal Reserve Bank estimated implementation costs would be in the range of USD 0.9 to 1.8 billion and that per-transaction costs would reduce from USD 0.47 to USD 0.27. The net result is that the overall business case would be neutral or negative.
• A lot of the reasons cited can be attributed to the inability to visualize the benefits coming from RTP, and the fear of losing existing revenue from delayed payments.

Global Adoption of RTP

As of September 2016, there were 18 countries ‘live’ with RTP systems – 12 countries that are ‘exploring/planning/building,’ and an additional block of 17 countries that are ‘exploring’ through a pan-Eurozone initiative. Several of these countries are considering how best to implement real-time payments but have yet to publish the way forward. At least 12 countries have implemented 24/7 retail RTP systems supporting immediate low-value account-to-account transfers, and work is well underway in Australia, Europe, and the United States.

The European Retail Payments Board has agreed on the need for at least one pan-European instant payment solution. In the United States, the Federal Reserve Board has called for the implementation of a safe, ubiquitous, faster payments capability and The Clearing House has announced that it will create a national RTP system. The diagram below illustrates the global span of 24/7 retail RTP systems to date. There is a clear trend towards more and more countries either having the ability to conduct faster payment transactions or starting the process of developing a system that allows them to do so.

Wholesale and Corporate Payments

B2B (business-to-business) is the exchange of products, services, or information (e-commerce) between businesses, rather than between businesses and consumers.

B2B2C is a business model were online, or e-commerce, businesses, and portals reach new markets and customers by partnering with consumer-oriented product and service businesses. A business developing a product, service, or solution partners with another business to use a particular service, such as an e-commerce website, portal, or blog.

The B2B2C model combines business to business (B2B) and business to consumer (B2C) for a complete product or service transaction. B2B2C is a collaborative process that, in theory, creates mutually beneficial service and product delivery channels.

An explanatory example of the B2B2C model:

• Business A pays Business B for users, leads, or sales generated by Business B’s business or website.
• Business A then uses Business B’s channels to locate prospective customers.
• Business B provides its customers with new and relevant services, facilitating an increased customer base and earned revenue for sold products and services.

API Banking

What are APIs?

Originally developed 15 to 20 years ago in the era of enterprise systems and service-oriented architecture (SOA), Application Programming Interfaces (APIs) are software tools that enable different systems and applications to talk to each other and share processing and data. In their early days, APIs were largely internally-focused, proprietary, and non-standardized, meaning they were inaccessible to the outside world and that substantial customization work was needed to link to them. But today, with the emergence of open APIs, their role and importance have escalated to a whole new level.

• The concept of open API

Historically, banks competed against each other on the strength of their own services and technology portals – which, until recently, were almost invariably developed, owned, and managed internally. Now, however, they’re moving to a world where the basis of differentiation has shifted to two other criteria: first, their core transaction banking services and fees – essentially the transactional engine into which third-parties can integrate their customer-focused front-ends; and secondly the quality of the open APIs they offer to enable third-parties to achieve this integration. In this context, the quality of the APIs comes down to the accuracy, timeliness, and comprehensiveness of the information they can share. Open APIs are visible externally, easier and simpler to access. Their emergence over the past decade or so reflects the rise of the developer as a force in corporate IT. Open APIs emerged to enable new software to be developed on top of other products and platforms. To meet these needs, open APIs share a number of characteristics:

• Developer-friendly and developer-centric,
• Accessible from outside the corporate firewall,
• Built using web-based programming,
• Fine-grained and standardized, enabling developers to take advantage of multiple APIs from multiple vendors and attach new utility to existing systems quickly and easily.

These qualities have seen open APIs take off rapidly in industries such as technology and social media. Now, these same attributes are positioning them as a disruptive and potentially revolutionary force in banking and payments.

The Benefits of Open APIs

The development and implementation of an open API standard for banking will permit authorized intermediaries to access information about bank services, prices & service quality, and customer usage. This will enable new services to be delivered that are tailored to customers’ specific needs.

Source: The Magic of Open APIs

The benefits of open APIs are positioning them as a disruptive and potentially revolutionary force in banking and payments. Traditionally, banks have built, owned, and controlled the channels and applications through which customers access their services – be a retail customer checking their balance online or undertaking a mobile transfer, or a corporation initiating a batch of cross-border payments. With open APIs, third-party developers can gain access to banks’ systems and build their own channels and interactive screens for customers to use. The result is that customers are able to see and manage their banking transactions and accounts through portals that the banks haven’t set up and can’t directly control.

A variety of banking API providers have expanded opportunities for entrepreneurs to build solutions for different segments of the financial services industry:

• Payments gateways APIs providers (Braintree, Dwolla, Stripe, Wirecard, Adyen, etc.),
• Trading APIs (Xignite, Zerodha, etc.),
• Authentication/verification APIs (Prove),
• Remittance APIs (Uphold, PayCommerce, etc.),
• Data aggregation APIs (Kontomatik, Fidor, Figo, etc.)

Banking APIs are known to enable banking customers – through a single application – to manage accounts held with several providers. They also allow customers to authorize the movement of funds between current and deposit accounts to help avoid overdraft charges or to benefit from higher interest payments. They let customers make simple, safe, and reliable price and service quality comparisons tailored to their own usage patterns.

For businesses/institutions, banking APIs allow to monitor a current account and forecasting a customer’s cash flow. Using businesses’ transaction history, API providers allow a potential lender to reliably assess a business’s creditworthiness and offer better lending deals than they would without this information.

Main Adoption Drivers

For both banks and the third parties tapping into their systems, open APIs is a seismic shift that’s being driven by a number of forces. A specific driver in Europe – and one that may have wide implications globally, depending on how the rules are interpreted – is the European Union’s second Payments Services Directive (PSD2), which mandates that banks must open up access to accounts, payment flows, and end-customer data to third-parties approved by those customers. But even without such regulations, the global move towards open APIs in banking is unstoppable for two main reasons:

• Rapid Worldwide Emergence of the FinTech Industry

The first is the rapid worldwide emergence of the FinTech industry, delivering a constant stream of innovation focused on meeting customers’ financial services needs more effectively – especially in areas like payments, mortgages, and financial management for small and medium-sized enterprises (SMEs). All bank customers – including major corporations – are now demanding payments, cash management, and treasury service experiences that mirror the speed, ease, and convenience provided by consumer applications and devices. They don’t mind whether these solutions are provided by their bank or a non-bank third-party – and the rise of FinTech means the latter is increasingly the case.\ \ Banks are eager to harness this innovation quickly and flexibly within their own offerings to win and retain customers. To help them do this, they’re moving away from purpose-built solutions to an environment where they assemble solutions from a series of vendors, using open APIs as the glue to link all the components together and create the customer experience they’re seeking to deliver. This approach generally involves using software-as-a-service (SaaS) platforms, where applications can be provisioned easily at a low upfront cost and then dialed up and down as needed.

• Growing Need for Real-Time Service Experiences and Information

The second key driver for the adoption of open APIs is the growing need for real-time service experiences and information, including the ongoing implementation of real-time or immediate payments infrastructures across the world. This trend means the traditional model of creating batch files of transactions and sharing them via an FTP site is no longer fit for purpose, with organizations and applications needing to exchange data in real time – a requirement ideally suited to the use of publicly-available APIs. Among banks, a leader in this area is BBVA, which has effectively published its entire banking platform on the Internet for other organizations to innovate around. This move reflects the wider pivot in the software industry from products to platforms, enabling problems to be solved faster, more efficiently, and more holistically.

Implementation Options

• On-Premise Deployment

With on-premise deployment, banks integrate their preferred API technology into the payment services hub. This model should ideally allow for real-time payment initiation and inquiry all the way from the point of demand by the end-user in the third-party application to the execution in the payment hub. Banks should also look for a solution that offers an extended suite of highly granular services for everything from debit authorization to fee calculation to payment submission.

• Hosted Applications

With this approach, the bank utilizes a hosted service that houses all the software and hardware required to run its payments operation, under either a multi-tenant service bureau or dedicated managed service model. In an open API world, the solution should enable third parties – payment initiation service providers (PISPs) and account information service providers (AISPs), in the language of the EU’s PSD2 – to connect directly to secure, controlled APIs housed within the infrastructure. Ideally, the chosen solution should combine the benefits of pay-per-use provisioning of best-in-class technology for payments processing and execution, with one-stop access to the world of open APIs.

• With Either Approach – Security Is Critical to Successful Implementation

Organizations across all industries are moving from a world where security was defined in terms of guarding to one where effective security can only be accomplished through sharing. The best example of this shift is the disruptive power of blockchain technology, where strong security can be achieved through a capability that’s both open and public. So while opening up systems through APIs does present risks, these can be overcome through the right technologies and collaborative approaches.

The Requirements

The oversight of payment instruments should be aimed at ensuring the soundness and efficiency of payments made with such instruments. The soundness of payment instruments may be exposed to various risks, as is any payment system. Therefore, all schemes offering payment instruments covered by the scope of the oversight activity should comply with the following standards:

• The scheme should have a sound legal basis under all relevant jurisdictions
• The scheme should ensure that comprehensive information, including appropriate information on financial risks, is available for all actors
• The scheme should ensure an adequate degree of security, operational reliability, and business continuity
• The scheme should implement effective, accountable, and transparent governance arrangements
• The scheme should manage and contain financial risks in relation to the clearing and settlement process

Harmonization of Payments Standards

• What Is ISO 20022?

ISO 20022: Universal financial industry message scheme – is the international standard that defines the ISO platform for the development of financial message standards. ISO 20022 is seen as a way to improve payments efficiency, to create a common, level playing field.

The first focus of ISO 20022 is on international (cross-border) financial communication between financial institutions, their clients, and the domestic or international ‘market infrastructures’ involved in the processing of financial transactions. There is, however, a strong opportunity to use ISO 20022 for the development of new domestic financial messages as well, thereby streamlining all communications for financial institutions.

• The Necessity for ISO 20022

The need for an ISO 20022 standard arose in the early 2000s with the widespread growth of Internet Protocol (IP) networking, the emergence of XML as the ‘de facto’ open technical standard for electronic communications, and the appearance of a multitude of uncoordinated XML-based standardization initiatives, each having used their own XML dialect. The ISO 20022 standard offered a common way of using XML and a way to shield investments from future syntax changes by proposing a common business modeling methodology to capture, analyze and syntax-independently describe the business processes of potential users and their information needs.

The ISO 20022 flexible framework will encourage users to build business transactions and message models under an internationally agreed-upon approach and to migrate to the use of a common vocabulary and a common set of syntaxes. In ISO 20022, the models and the derived XML or ASN.1 (a data specification and encoding technology jointly standardized by ISO, IEC, and ITU, and widely used across several industries, such as cellular telephony, signaling, network management, directory, public key infrastructure, video conferencing, aeronautics, intelligent transportation, etc.) outputs are stored in a central financial repository serviced by a registration authority. The ISO 20022 repository offers industry users and developers free access to a Data Dictionary of business and message components and a Business Process Catalogue containing message models and corresponding XML and/or ASN.1 schemas.

If there are no ISO 20022 messages to cover a specific transaction, standards initiatives can be launched to define new models and messages and submit the new solution for approval by the ISO 20022 registration bodies. If the messages exist in the ISO 20022 repository but do not address all requirements of a new community, it can be agreed upon to update the existing models and messages and create a new version that will accommodate the needs of all.

“By taking a standardized global approach to ISO 20022 implementation, the industry as a whole will be in a much better place to manage and lower costs, ensure efficient implementation, and most importantly, keep the focus where it should be – serving our customers.” – MARCUS SEHR, Global Head – Institutional Cash, Deutsche Bank

The ISO 20022 message dashboard gives an overall picture of the five financial business domains in the scope of ISO 20022. Its purpose is to show which business processes are already supported either by existing ISO 20022 message definitions or by candidate message definitions covered by an approved business justification.

• Payments: Messages supporting cash account management, payments initiation, clearing and settlement, and cash management, etc.
• Securities: Messages supporting pre-trade, trade, post-trade, clearing and settlement, securities management, securities account management, reconciliation, asset servicing, collateral management, etc.
• Trade Services: Messages supporting procurement, trade finance products, and services, forecasting, reconciliation, accounting, remittance information, etc.
• Cards: Messages supporting card transactions between acceptor and acquirer, acquirer and issuer, sale system and POI, terminal management, clearing and settlement, fee collection, etc.
• FX: Messages supporting pre-trade, trade, post-trade, notification, clearing and settlement, reporting, and reconciliation of FX products.

Financial institutions will convert their systems to ISO 20022 by the end of 2017. Corporate customers will change over by mid-2018.

The Application of New Technologies in Payments

• Distributed Ledger Technology

Distributed Ledger Technology (DLT), or blockchain technology, will have a beneficial impact on each of the four parts comprising the global payments structure: relationship investment, funds transfer, funds delivery, and proof of payment.

• Cryptocurrency

A cryptocurrency-based global payment solution would thus work very differently from credit cards and other online transfers. Instead of the payment being authorized by the owner and then taken from the account by the recipient, the owner transfers the coins directly to the recipient – a push model, rather than an authorize and pull model. Cryptocurrency-based global payment solutions offer the possibility of vastly improving the speed and security of international payments while reducing transaction costs. However, as cryptocurrencies become more attractive as international payment solutions, businesses may need to fundamentally rethink the way they manage their cash flow.

• Internet of Things (IoT)

The Internet of Things (IoT) is changing payments; that is, in the IoT, payments disappear behind devices or become invisible. There are a few technologies that are highly relevant to financial institutions that need to happen to make the payments piece of the puzzle come together: tokenization, embedded commerce, and APIs.

• Tokenization: Tokenization allows the credit card number to be replaced with a limited use token to be used for authorization for payments. Limited use tokens can only be used by a specific device for a specific task to secure the execution and private information.
• Embedded commerce: Devices require embedded applications to enable payments.
• APIs: Application Programming Interfaces (APIs) are required to communicate the request from the device for a service, and, more importantly, to receive the payment.
• Artificial Intelligence (AI)

Online payments fraud is the space for a machine learning technique that uses historical and live data to create patterns for customers’ behavior. These patterns allow the system to make accurate fraud predictions. Machine learning is now used to prevent, or at least limit, fraud attempts.

How Blockchain Will Change Global Payments

Distributed Ledger Technology (DLT), or blockchain technology, will have a beneficial impact on each of the four parts comprising the global payments structure.

Source: How Blockchain Technology Will Change Global Payments

How Blockchain Will Change Global Payments

Cryptocurrency payments work in much the same way as cash. The owner keeps their coins in a secure digital wallet to which only he/she has the key – a digital signature that only the owner knows. The wallet can receive payments without being opened, but to make a payment the owner must open the wallet with the key.

To make things extra safe, some wallets have multiple keys: for example, a wallet might have three digital signatures, one held by the owner, a second held by a trusted third party, and a third in offline (cold) storage. Making a B2B payment from one of these multisig wallets requires two or more keys, not just one. This is not unlike business checks that must be countersigned to be valid for payment.

A cryptocurrency-based global payment solution would thus work very differently from credit cards and other online transfers. Instead of the payment being authorized by the owner and then taken from the account by the recipient, the owner transfers the coins directly to the recipient – a push model, rather than an authorize and pull model. To make the payment, of course, the owner must have enough coins in the wallet.

Cryptocurrency payments typically clear much faster than today’s international B2B payments, since there are no intermediaries. And as the wallet must contain enough coins for the payment to be made at all, in theory, the payment cannot fail.

Broadly, there are two types of verification protocols employed by cryptocurrencies vying to be the next big global payments solution:

• Bitcoin’s proof of work is a highly innovative solution to the verification problem, and it remains the most popular protocol. It involves solving cryptographic puzzles. When a puzzle is solved, a new block of transactions is confirmed and the user, or miner, is rewarded with new coins and transactions fees. As more coins are created, the puzzles become progressively more difficult, requiring larger and larger amounts of computing power. However, proof-of-work verification is relatively slow (at least 10 minutes), and its energy-intensive nature encourages the formation of mining pools or miner oligarchs which can monopolize verification. Effectively, this creates central intermediaries that may be corrupt or become a target for malicious attacks.
• Because of this, some cryptocurrencies are adopting proof-of-stake, where the ability to verify transaction blocks is determined by the size of the miner’s investment. Proof-of-stake is less vulnerable to monopolization and malicious attacks, but on its own, it encourages fragmentation of the system, so it is usually combined with some other mechanism to discourage excessive mining. Nextcoin, for example, randomly selects the verifier for a new block using a lottery-type mechanism. Clearly, the more coins a user holds, the more likely they are to be selected as the verifier.

Applications and Companies

IoT Payments

The rapid expansion of the Internet of Things (IoT) offers payments companies an opportunity to expand beyond mobile phones, cards, and point-of-sale devices, to a broad and diverse ecosystem of internet-connected devices. Some estimates suggest that there will be 24 billion connected devices installed globally by 2020, up from nearly 7 billion today. And >5 billion will be consumer-connected devices by 2020, representing a massive expansion of touchpoints that could eventually offer payments functionality.

IoT is changing payments, that is, in the IoT, payments disappear behind devices or become invisible. Payments are becoming a component of every connected device and object on the market – ranging from the Amazon Echo to fitness trackers and smartwatches, to automobiles. As this occurs, increased emphasis is being placed on the overall commerce experience, with a noted drive toward frictionless and seamless transactions. Recent innovations such as tokenization have buoyed the industry’s drive toward connected commerce, helping support the payments status quo for some value-chain participants, while disintermediation threatens others. With the framework for the ‘Internet of (payment) Things’ now falling into place, the next wave of commerce innovation will come increasingly from ‘things buying things’ – building on top of ambient and frictionless payments.

Card networks have developed a basic framework to enable commerce in everyday devices. Visa and Mastercard are creating the underlying infrastructure to support the standardization of payments integration and stake themselves out as the key connected payments gatekeepers. Their payment platforms are universal, allowing digital payments to grow without being tied to the success of a particular manufacturer.

Consumer-facing IoT companies have much to gain from enabling payments in their devices, including improving the value of the device, being able to cross-sell products through the device, and laying the groundwork for future opportunities to earn incremental revenue. For payments companies, connected payments offer a new revenue stream and an opportunity to gain market share ahead of competitors. Wearables, connected cars, and smart home devices are expected to be the top connected payments product categories.

Opportunities

• Distribution: IoT will break the non-secure, inefficient payment-card model by enabling a more advanced distribution network that eliminates the need for physical cards. At the same time, IoT will increase the speed and efficiency of consumers’ purchasing.
• Acceptance: Early IoT deployments show the opportunity for ‘things’ such as automobiles, appliances, and wearables to become platforms for commerce. These deployments underscore the way in which IoT is expanding commerce to a plethora of channels. IoT significantly expands the payment-acceptance network by converting any connected device into an endpoint for commerce. Expansion of the acceptance network will drive the industry’s goal of displacing cash and expanding card volume.
• Conversion: Eliminating friction in the purchasing process is a critical goal in commerce – the easier it is to purchase goods and services, the higher the likelihood for conversion and repeat business. IoT plays to this goal by expanding the number of environments in which commerce can occur. In a world of connected things, commerce is no longer limited to traditional channels and contexts. IoT allows commerce to happen at the time and place of consumers’ choosing – be it over interactive voice response in cars, an Amazon Dash button on washing machines, or during a commercial on smart TVs. Successful IoT commerce experiences will require simplicity, immediacy, and context.
• Loyalty: The IoT world also offers a unique opportunity to drive loyalty with its user base that can be tailored to a specific device category. For example, a wearable device that can identify the type of rewards suitable for its user, such as a free water bottle at a nearby store for every 10 miles run; a connected car that autonomously activates a discount coupon from a gas station nearby based on location and brand loyalty; a smart meter that automatically detects usage and provides discounts to homeowners for optimal use of heating during the winter.

AI/ML in Payments

Accelerated innovations in the online payments industry perpetuate the sophistication of methods to steal sensitive data. Fraudsters are constantly changing their tactics to make their efforts more effective. And for online businesses, it’s getting harder to determine which transaction looks good and which one should be rejected. Well-known fraud management systems based on rules require more manual reviews so the entire purchasing process could take longer. Today, while e-commerce and m-commerce are is constantly growing, retailers have less time to detect fraudsters manually. Moreover, fraudsters are getting cleverer and they are utilizing new technology to launch more complex attacks.

Meanwhile, the cost of fraud continues to rise. At the beginning of 2015, less than $2 out of $100 was subjected to a fraud attack, but by Q1 2016, it was $7.3 out of every $100. Online payments fraud is the space for a machine learning technique that uses historical and live data to create patterns for customers’ behavior. These patterns allow the system to make accurate fraud predictions. Machine learning is now used to prevent, or at least limit, fraud attempts.

Advanced algorithms evaluate every transaction for fraud risk and take appropriate action. The system creates deep profiles based on gathered data and analyzes it to make the most accurate predictions and prevent fraud attempts. Machine learning integrates historical data with streaming information and is able to make the analysis in real-time. When a machine has more data, its accuracy will improve + a machine can check larger amounts of data in a much more efficient manner than humans. With machine-based processes, a person could check just one transaction in about five minutes.

Another major use case of AI in payments is Smart Wallets that are able to monitor and learn users’ spending habits and needs, analyze them, and based on the results, alert and coach users, when appropriate, to show restraint and to alter their personal finance spending and saving behavior.

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