The Bank of England and the UK Treasury have announced a Central Bank Digital Currency (CBDC) Taskforce to coordinate the exploration of a potential British CBDC. But how could a digital Pound actually work? As it happens, this is something that Consult Hyperion knows rather a lot about. Apart from our work on the first British central bank digital currency (Mondex) back in the 1990s, our work on the first population-scale mobile money scheme (M-PESA) in the 2000s and our work on the most transformational contactless payment roll-out (Transport for London) in the 2010s, our practical experience across implementation platforms means that we understand the architectural options better than anyone.
When we look forward to 2021, it is no surprise that COVID-19 is the dominant factor. So far as the merchant payments world is concerned, the shape of the post-pandemic new normal transaction environment must be the key strategic consideration for stakeholders and I am desperately keen to hear the variety of informed opinion on this topic that I have come to expect at Merchant Payments Ecosystem every year. At Consult Hyperion we like to contribute to these conversations by providing a useful framework for discussion: our annual “Live 5”, our yearly set of suggestions for strategic focus. This year, we choose to look at the key issue of pandemic transformation and its impact of on the three key domains where our clients operate: Payment, Identity and Transit, together with (as is traditional!) a suggestion as to a technology that the POS world may not be thinking about but probably should be.
Guest blog post by Mirela Ciobanu, The Paypers
The topic of Central Bank Digital Currency (CBDC) is gaining momentum. Across the globe, many CBDC initiatives aim to digitalise payments, support financial inclusion, make cross border payments faster and cheaper, support fiscal transfer, etc. What is firing up discussions around CBDC and why is it important today?
Adoption of new technologies and understanding of their huge potential to support and stimulate our life has caused the world to change a lot in the last year. The current pandemic has triggered the decline of cash usage to avoid getting the virus and safeguard the most vulnerable ones (health-wise). Economic wise, as many governments wanted to protect their citizens and directly stimulate the economy down to every citizen, they offered ‘helicopter money’ via digital wallets.
What did you think of the US election? I don’t mean the candidates and the outcome. What did you think of the election process? Should it be possible for national elections of this type to be done online? Last week the IET published a paper on internet voting in the UK, led by our good friend at the University of Surrey, Professor Steve Schneider. It’s well worth a read. As the paper explains, internet voting for statutory political elections is a uniquely challenging problem. Firstly voting systems have exacting requirements and secondly, the stakes are high with the threat of state level interference.
The pandemic has revised interest in a topic that has surfaced repeatedly in Tomorrow’s Transactions events over the years, and that is the issue of local and complementary currencies. The Bristol Pound, the Brixton Pound, the Lewes Pound and many other experiments have sprung up around the country (indeed, around the world) to try to stimulate and regenerate local and regional trade and prosperity in response the changing economic circumstances. We tend to think of currencies as being instruments of the nation state but that’s actually a recent invention in the great scheme of things. There’s no reason to see optimal currency areas as inviolable laws of nature rather than transitional borders under prevailing monetary and financial arrangements.
We’ve just had an important anniversary. I’m sure you are all thinking of July 4th and, of course, who can forget it! It’s a date that is very important to many people because it is the anniversary of the birth of The Clash, who played their first live gig on 4th July 1976. But for me, there is a much more important and personal anniversary. Here is the front page of the Swindon Evening Advertiser from 4th July 1995. The day I finally made the front page of my home town newspaper. Got to see my picture on the cover, got to buy five copies for my mother…
Yes, I was there on 3rd July 1995 in Swindon town centre when the Swindon Evening Advertiser vendor Mr. Don Stanley (then 72) made the first ever live Mondex sale. And here is the photographic evidence of same — in case you don’t happen to have copy of that Swindon Evening Advertiser — as I emerge Zelig-style from the crowd to watch Don take the e-cash. It was a very exciting day because by the time this launch came, my colleagues at Consult Hyperion, who were instrumental in creating Mondex devices and software, had been working on the project for some years (and for the first three or four years it was entirely in secret).
So for those of you who don’t remember what all of the fuss was about: Mondex was an electronic purse, a pre-paid payment instrument based on a tamper-resistant chip. This chip could be integrated into all sorts of things, one of them being a smart card for consumers. Somewhat ahead of its time, Mondex was a peer-to-peer proposition. The value was transferred directly from one chip to another with no intermediary and therefore no cost. In other words, people could pay each other without going through a third party and without paying a charge. It was true cash replacement, invented at National Westminster Bank (NatWest) in 1990 by Tim Jones and Graham Higgins. Swindon had been chosen for the launch because, essentially, it was the most average place in Britain. Since I’d grown up there, I was rather excited about this, and while my colleagues carried out important work for Mondex (software specification, development and testing for all of the core components), I watched as the fever grew out in the West Country.
Many of the retailers were quite enthusiastic because there was no transaction charge and for some of them the costs of cash handling and management were high. I can remember talking to a hairdresser who was keen to get rid of cash because it was dirty and she had to keep washing her hands, a baker who was worried about staff “shrinkage” and so on.
The retailers were OK about it.
“From a retailer’s point of view it’s very good,” said news-stand manager Richard Jackson. “But less than one per cent of my actual customers use it. Lots of people get confused about what it actually is, they think it’s a Switch card or a credit card.”
That’s if they thought about it all.
It just never worked for consumers. It was a pain to get hold of, for one thing. I can remember the first time I walked into a bank to get a Mondex card. I wandered in with 50 quid and had expected to wander out with a card with 50 quid loaded onto it but it didn’t work like that. I had to set up an account and fill out some forms and then wait for the card to be posted to me. Most people couldn’t be bothered to do any of this so ultimately only around 14,000 cards were issued.
So, why I am wallowing in this nostalgia again? Why do I think more people should be celebrating the Mondex Silver Jubilee? Well, look East, where the first reports have appeared concerning the Digital Currency/Electronic Payment (DC/EP) system being tested in four cities: Shenzen, Chengdu, Suzhou and Xiong’an. DC/EP is the Chinese Central Bank Digital Currency (CBDC).
with the kind permission of Matthew Graham @mattysino
The implementation follows the trajectory that I talk about in my book The Currency Cold War, with the digital currency being delivered to customers via commercial banks. The Deputy Governor of the People’s Bank of China, Fan Yifei, recently gave an interview to Central Banking magazine in which he expanded on the “two tier” approach to central bank digital currency (CBDC). His main points were that this approach, in which the central bank controls the digital currency but it is the commercial banks that distribute it, is that is allow “more effective exploitation of existing business resources, human resources and technologies” and that “a two-tier model could also boost the public’s acceptance of a CBDC”.
He went on to say that the circulation of the digital Yuan should be “based on ‘loosely coupled account links’ so that transactional reliance on accounts could be significantly reduced”. What he means by this is that the currency can be transferred wallet-to-wallet without going through bank accounts. Why? Well, so that the electronic cash “could attain a similar function of currency to cash… The public could use it directly for various purchases, and it would prove conducive to the yuan’s circulation”. How will this work? Well, you could have the central bank provide commercial banks with some sort of cryptographic doodah that would allow them to swap electronic money for digital currency under the control of the central bank. Wait a moment, that reminds me of something because… yep, that’s how Mondex worked.
That was the big difference between Mondex and other electronic money schemes of the time, which was that Mondex would allow offline transfers, chip to chip, without bank (or central bank) intermediation. Offline person to person transfers. Just like cash. That’s huge. Libra can’t do it, and never will be able to because, like Bitcoin, it needs to be online to check for “double spending”.
Mondex was a window into the future of money.
That’s why this week’s special webinar is a Mondex reunion! Tim Jones, one of the co-inventors and Mondex CEO, will be joining with Debbie Gamble who was head of Mondex North America. On our side, our CEO, Neil McEvoy (who led the Mondex specification and implementation team) and Tim Richards (who designed the underlying portable, secure operating system), will join Tim and Debbie to reminisce and have a bit of fun, but much more importantly, to talk about the lessons learned from that incredible experiment, and to share ideas for the coming generation of digital currency innovators. And there may be one or two special guests…
It’s that time of year again. I’ve had a chat with my colleagues at Consult Hyperion, gone back over my notes from the year’s events, taken a look at our most interesting projects around the world and brought together our “live five” for 2019. Now, as in previous years, I don’t expect you to pay any attention to our prognostications without first reviewing our previous attempts, otherwise you won’t have any basis for taking us seriously! So, let’s begin by looking back over the past year and then we’ll take a shot at the future.
As we start to wind down 2018, let’s see how we did…
- 1. Open Banking. Well, it was hardly a tough call and we were bang on with this one. We’ve been working on open banking projects in the UK, on the continent and beyond. What seems to be an obviously European issue, is of course a global one and we’ve been helping the global payment brands understand the opportunities. Helping existing market participants and new market entrants to develop and implement responses to open banking has turned out to be intellectually challenging and complex, and we continue to build our expertise in the field. Planning for the unintended consequences of open banking and the potentially un-level playing field that’s been created by the asymmetry of data, was not the obvious angle of opportunity for traditional tier one banks.
- 2. Conversational Transactions. Yes, we were spot on with this one and not only in financial services. Many organisations are shifting to messaging channels for customer support and for transactions, in both the banking and retail sectors. The opportunity for this continues with the advancements of new messaging enablers, such as the GSMA backed RCS. But as new channels for support and service are introduced to the customer experience, so are new points of vulnerability.
- 3. The Internet of Cars. This is evolving although the security concerns that we spoke about before, continue to add friction to the development of new products and services in this area. Vulnerabilities to card payments or building entry systems are security threats, vulnerabilities to connected or autonomous vehicles are potentially public safety threats.
- 4. Artificial Intelligence. Again, this was an easy prediction because many of our clients were already active. Where we did add to thinking this past year, it was about the interactive landscape of the future (i.e. bots interacting with bots) and how the identity infrastructure needs to evolve to support this.
- 5. Tokens/ICOs. Well, we were right to highlight the importance of “tokens” (the basis of Initial Coin Offerings, or ICOs) and our prediction that once the craziness is out of the way, then regulated token markets will become significant looks to be borne out by mainstream commentary. At Money2020 Asia in Singapore, I had the privilege of interviewing Jonathan Larsen, Corporate Venture Capital Manager at Ping An and CEO of their Global Voyager Fund (which has a $billion or so under management). When I put to him that the tokenisation of assets will be a revolution, he said that “tokenisation is a really massive trend… a much bigger story than cryptocurrencies, initial coin offerings (ICOs), and even blockchain”.
As we said, 2018 has seen disruption because the shift to open banking, starting in the UK,has meant the reshaping of financial services while at the same time the advance of AI into the transaction flow (transactions of all types, from buying a train ticket to selling corporate bonds) begins to reshape the way we do business.
This year we are organising our “live five” in a slightly different way, listing them by priority to our clients rather than as a simple list. So here are the four key technologies that we think will be hot throughout the coming year together with the new technology that we are looking at out of the corner of our eyes, so to speak. The mainstream technologies are authentication,cross-sector digital identity, digital wallets for ticketing and secure IoT in the insurance sector. The one coming up on the outside is post-quantum cryptography.
So here we go…
- 1. With our financial services customers we are moving from developing strategies about open banking to developing implementation plans and supporting the development of new systems and services. The most important technology at the customer interface from the secure transactions perspective is going to be the technology of Strong Customer Authentication (SCA). Understanding the rules around which transactions need SCA or not is complicated enough, and that’s before you even start working out which technologies have the right balance of security and convenience for the relevant customer journeys. Luckily, we know how to help on both counts!
As it happens, better authentication technology is going to make life easier for clients in a number of ways, not only because of PSD2. We are already planning 3D Secure v2 (3DSv2) and Secure Remote Commerce (SRC) implementations for customers. Preventing “authentication friction” (using e.g. FIDO) is central to the new customer journeys.
- 2. Forward thinking jurisdictions such as Canada and Australia have already started to deliver cross-sector digital identity (where in both cases we’ve been advising stakeholders). New technologies such as machine learning, shared ledgers and self-sovereign identity, if implemented correctly, will start to address the real issues and improvements in know your customer (KYC), anti-money laundering (AML), counter-terrorist financing (CTF) and the management of a politically-exposed person (PEP). The skewed cost-benefit around regtech and the friction that flawed digitised identity systems cause, mean that there is considerable pressure to shift the balance and in the coming year I think more organisations around the world will look at models adopted and take action.
- 3. In our work on ticketing around the world, we see a renewed focus on the deployment of real digital wallets. Transit and other forms of ticketing (such as for sporting events) are the effective anchor tenants of the digital wallet, not payments. In the UK and in some other countries there has been little traction for the smartphone digital wallet because of the effectiveness of the deployment and use of contactless cards. If you look in your real wallets, most of what your find isn’t really about payments. In our markets, payments alone do not drive consumers to digital wallets, but take-up might be about to accelerate. It’s one thing to have xPay put cards into a digital wallet but putting your train tickets, your sports rights and your concert passes into a digital wallet makes all the difference to take-up and means serious traction. Our expertise in using the digital wallets for applications beyond payments will give our clients confidence in setting their strategies.
- 4. In the insurance world we see the business cases building around the Internet of Things (IoT). The recent landmark decision of John Hancock, one of the oldest and largest North American life insurers, to stop selling traditional life insurance and instead sell only “interactive” policies that track fitness and health data through wearable devices and smartphones is a significant step both in terms of business model and security infrastructure. We think more organisations in the insurance sector will develop similar new services. Securing IoT systems becomes a priority. Fortunately, our very structured risk analysis for IoT and considerable experience in the practical assessment of countermeasures, deliver a cost-effective approach.
- 5. In our core field of security, we think it’s time to start taking post-quantum cryptography (PQC) seriously not as a research topic but as a strategic imperative around the development and deployment of new transaction systems. As many of you will know, Consult Hyperion’s reputation has been founded on the mass-market deployments of new transactions systems and services and this means we understand the long-term planning of secure platforms. We’re proud to say that we have helped to develop the security infrastructure for services ranging from the Hong Kong smart identity card, to the Euroclear settlement system and from contactless payments to open loop ticketing in major cities. Systems going into service now may well find themselves overlapping with the first practical quantum computer systems that render certain kinds of cryptography worthless, so it’s time to add PQC to strategies for the mass market.
And there you have it! Consult Hyperion’s Live 5 for 2019. Brexit does not mean the end of SCA in the UK (since PSD2 has already been transcribed into UK law) and SCA means that secure digital identities can support transactions conducted from digital wallets, and those digital wallets will contain things other than payment instruments. They might also start to store transit tickets or your right to travel, health and fitness data for your insurance company. Oh, and all of that data will end up in the public sphere unless the organisations charged with protecting it start thinking about post-quantum cryptography or,as Adi Shamir (one of the inventors of public key cryptography) said five years ago, post-cryptographysecurity.
The Chinese were first with the great transition from commodity money to paper money. They had the necessary technologies (you can’t have paper money without paper and you can’t do it at scale without printing) and, more importantly, they had the bureaucracy.
“In 1260, Genghis’ grandson Kublai Khan became Emporer and determined that it was a burden to commerce and taxation to have all sorts of currencies in use, ranging from copper ‘cash’ to iron bars, to pearls to salt to specie, so he decided to implement a new currency. The Khan decided to replace copper, iron, commodity and specie cash with a paper currency. A paper currency! Imagine how crazy that must have sounded! Replacing stuff with printing!”
Just as Marco Polo and other medieval travellers returned along the Silk Road breathless with astonishing tales of paper money, so commentators (e.g., me) are tumbling off of flights from Shanghai with equally astonishing tales of a land of mobile payments, where paper money is vanishing and consumers pay for everything with smartphones. China is well on the way to becoming a cashless society, with the end of its thousand year experiment with paper money in sight.
“14% of China’s population relies on mobile payments to get around, carrying no cash, according to a survey conducted by Renmin University of China”
The natural step from here is to create digital currency so that settlement is in central bank money and there are no credit risks. Last year, the Governor of the People’s Bank of China (PBOC), Zhou Xiaochuan, set out their thinking about digital currency. He said:
[Zhou] said that “it is an irresistible trend that paper money will be replaced by new products and new technologies.”
He went on to say that as a legal tender, digital currency should be issued by the central bank and after noting that he thought it would take a decade or so for digital currency to completely replace cash in cash went to state clearly that “he has plans how to gradually phase out paper money”. As I have written before, I don’t think a “cashless society” means a society in which notes and coins are outlawed, but a society in which they are irrelevant. Under this definition the PBOC could easily achieve this goal for China. But should they do this? Yao Qian, from the PBOC technology department wrote on the subject earlier this year.
To offset the shock to the current banking system imposed by an independent digital currency system (and to protect the investment made by commercial banks on infrastructure), it is possible to incorporate digital currency wallet attributes into the existing commercial bank account system so that electronic currency and digital currency are managed under the same account.
I understand the rationale completely. The Chinese central bank wants the efficiencies that come from having a digital currency but also understands the implications of removing the exorbitant privilege of money creation from the commercial banks. If the commercial banks cannot create money by creating credit, then they can only provide loans from their deposits. Imagine if Bitcoin were the only currency in the world: I’d still need to borrow a few of them to buy a new car, but since Barclays can’t create Bitcoins they can only lend me Bitcoins that they have taken in deposit from other people. Fair enough. But here, as in so many other things, China is a window into the future.
Alipay, WeChat Wallet, and other Chinese third party payment platforms use financial incentives to encourage users to take money out of their bank accounts and temporarily store it on the platform itself.
You can see the potential problem with digital currency created by the central bank. If commercial banks lose both deposits and the privilege of creating money, then their functionality and role in the economy is much reduced. Whether you think that is a good idea or not, you can see that it’s a big step to take and therefore understand the PBOC position.
Following this line of thinking, then, central banks are not going to issue cryptocurrencies and they are not going to issue digital currencies either (at least in the foreseeable future). But what they might do is to allow commercial banks to create digital currency under central bank control. You could have the central bank provide commercial banks with some sort of tamper-resistant smart chip that would mint commercial bank money under the control of the central bank. Wait a moment, that reminds me of something…
Would a central bank go for this? Some form of digital cash that can be passed directly from person to person like Bitcoin rather than some form of digital money like M-PESA, using hardware rather than proof-of-work to prevent double spending? Well…
“It’s not that you use the phone to order money transfers, as is done today, but having bills in the cellular and being able to pass them on from one user to another,” he said.
Clearly at least one of them would! So here’s a “what if” and I’m genuinely curious as to your comments…
What if we dust off the old Mondex specifications (not difficult for us because some of the people who wrote them still work at Consult Hyperion) but this time implement it in SIMs and Secure Elements instead of contactless smart cards? Then we would have genuine digital currency that could work online and offline, work for inter-personal transactions as well as business transactions and allow things to pay other things. With the 20th anniversary of Multos just gone, maybe Mondex’s time has finally come!
I must say, I tend to agree with Andy Haldane on the wisdom of crowds. These are crowds which, in the UK at least, are wrong about almost everything*. There is no hope, to be honest, unless the robots take over pretty sharpish. But that’s by the by. Andy is once again on the money (literally – he’s the Executive Director, Monetary Analysis & Statistics at the Bank of England) commenting on the public’s opinion on matters of high finance:
“The public should not have a direct say in setting interest rates because they can show ‘madness’ when making collective decisions – just look at Boaty McBoatface, the Bank of England’s chief economist has warned.”
Now, as a general rule, I don’t think that the general public should have a direct say in anything at all, including who should run the country. More evidence for the triumph of shameless populism over the reasoned arguments of actual experts came at the recent CityChain17 event in London.
“it was Gideon Greenspan CEO CoinSciences and brains behind MultiChain that for me stole the show, although Dave Birch at Consult Hyperion was the audience’s favourite “
As I said, it is important not to listen to the wisdom of crowds. Had I paid to go to the event, it would have been to listen to Gideon, not me. His excellent presentation on the difference between a blockchain and database and the niches that the former ought to fill stole the show for me, and illustrated clearly why Multichain is growing in the corporate market.
The point of my presentation, on the other hand, wasn’t to discuss which particular shared ledger architecture was best or which particular kind of blockchain implementation of a shared ledger architecture might be most appropriate in different circumstances, but to draw on Consult Hyperion’s practical experiences advising clients in the financial sector to ask where the biggest impact of shared ledger technologies might be.
I used the example of supply chain applications in my talk because it was something that I happened to write about a few days ago and made the point that shared ledger technologies make more sense as a regtech rather than as a fintech, Since these technologies are about sharing information between companies, and between companies and regulators, then it seems to me that they will be more effective at reducing the aggregate costs of a market than the private costs of individual stakeholders.
How, though, can we create a new kind of market where competitors can share sensitive information yet keep it confidential? The idea of translucent transactions is key to all of this. Companies trading with each other may not want the details of those trades to be public, but the public may want to know that those trades are legal. Hence we need to find a way to audit information that remains hidden from us. This is an idea that I first heard expressed a couple of decades ago by one of the cypherpunk founding fathers, Eric Hughes.
I had the pleasant experience of having dinner with Nicholas Negroponte, John Barlow and Eric Hughes, author of the cypherpunk manifesto, at a seminar in Palm Springs. This was in, I think, 1995. I can remember Eric talking about ‘encrypted open books’, a topic that now seems fantastically prescient.
And here’s the off-chain proof…
Eric’s ideas date back to 1993. A decade on, Nick Szabo was inspired by these ideas to write about confidential auditing, which in turn inspired my colleagues and I to explore ideas of ambient accountability a decade later. Now in the 1990s and 2000s, techniques such as homomorphic encryption and zero-knowledge proofs may have seemed for the lab only, but shared ledgers need these technologies and can exploit them to create new ways to solve old problems. And the business case is there too. For all the talk of the blockchain being instant and free (it isn’t), the ability to send money across the internet as quickly and as cheaply as, say, M-PESA doesn’t create anything like the cost-benefit disruption as the ability to reduce compliance costs does.
RegTech has been supplying some of the best use cases in banking. From the early customer engagement stages like KYC and Identity to compliance management, risk and reporting, the potential to reduce costs and create new customer engagement opportunities is tremendous for RegTech. Banks are also actively looking for solutions to better interfaces with regulators.
This idea makes sense to me much more than using a blockchain for (for example) payments. The idea of shared ledger that allows the FCA to continually monitor a bank’s books to see that it is solvent without being able to see the private information of creditors or debtors is very, very appealing. And it doesn’t shoehorn this fascinating new technology into emulating existing structures but allows us instead to create new and more efficient markets.
By the way, the blockchain as a regtech is something that will be explored at Consult Hyperion’s 20th (yes, twentieth) annual Tomorrow’s Transactions Forum in London next week where my colleague Steve Pannifer and our good friend Vasily Suvorov from Luxoft will be presenting a white paper on the use of shared ledger technology to cut KYC costs and reduce the risks of fraud. And that’s not all. Thanks to the generous support of our Platinum sponsors Vocalink and Worldpay, our Gold sponsor Paysafe and our Silver sponsor CMS (and with the help of our superb communication partner ccgroup) we will be continuing our tradition of information discussion, expert comment and honest debate with a variety of leading-edge perspectives on topics ranging from W3C web payments and KYC in developing markets to zero-knowledge proofs and PSD2. And, thanks to those sponsors once again, the closing keynote on the first day will be Professor Lisa Servon from the University of Pennsylvania, a leading thinker on financial inclusion and the author of “The Unbanking of America”. There are also speakers and panelists from Lloyds, Visa, IBM, Discover, Onfido, Omidyar Network, SecureKey, QED-it, the Cabinet Office, HSBC, Sovrin, MasterCard, Masabi, Transport for the North, the Dutch Payment Association, Zopa and Yandex.
You’d be mad to miss it, so head on over here and grab yourself one of the few remaining delegate places. See you first thing next Wednesday, 26th April for another great Forum.
I stuck my head around the corner of a conference session, and to my surprise found that it was people talking about the blockchain again. Someone said that putting identity on the blockchain would help refugees and I said that I thought that might well be true, but I couldn’t be sure as no-one had defined what they meant by “identity” or “the blockchain”. I wasn’t entirely sure what they meant by “refugees” either. Talking of which, I found one wandering aimlessly through the corridors of the Venetian. Since I couldn’t offer him an identity, I decided to offer him breakfast instead.
Mr X, as I shall call him, was a refugee from IBM’s World of Watson. I’d been sent an invitation for this and had registered, but I never got a confirmation. I’m not sure why, but it might have been something to do with the form I had to fill in. The form said that if you told Watson the reason for your visit, then Watson would set up an agenda for you at the event. So I told Watson that the reason for my visit was to overthrow the United States government and to set up a workers and peasants’ anarcho-syndicalist commune. So not only did I not get my invite, but now I’m on the no-fly list as well. Anyway, Mr. X told me that there was a lot of fun stuff going on over in the AI world and I don’t doubt it. But I didn’t have time to stay and chat because I was off to the theatre.
It turns out that I couldn’t get a ticket for the actual theatre so I decided to set up a security theatre instead. All week, I kept getting asked for “photo ID”. The first time it happened, I explained to the young woman that carrying identity around with you is something that I associate with continental socialism and that since I came from the Disunited Kingdom and not North Korea I was not in the habit of carrying and presenting my papers. In fact, as I further explained to her, since my identity is important and valuable and hard to replace, I had locked it up in the safe in my hotel room. She remained unmoved and demanded photo ID. So I showed her the expired building pass for CHYP Tower in New York. This is apparently perfectly acceptable as proof of identity throughout the continental United States and the woman was happy to charge my card following its presentation. Throughout the rest of my visit, every time I was asked for photo ID I presented by expired building pass and every time it was accepted without question. Every. time.
Meanwhile, it was time to go downtown and get involved in some serious fintech shenanigans. I decided to sniff around payments, but most of the camp fire talk was about the transition to in-app and the use of tokenisation to move chip and PIN security online (see the MasterCard announcement, for example) and I read one of the chaps from Bell ID talking about “in-apptitude” (which I rather like) to describe the new strategies for secure and convenient remote payments. But this is old hat. I’ve been boring our clients to death with this stuff for years. And no-one would disagree that #appandpay is going to be more important than #tapandpay. Right?
I decided to seek out more controversial opinions. Here I am engaged in a heated debate with a noted retail banker over the likely future identity and verification ecosystem. He said that given the dynamics of the space, and given that banks already have to carry out rigorous KYC, it makes sense for banks to develop a co-operative sector-wide kind of financial services passport that could be used cost-effectively by third-parties while the underlying identities are strongly protected by tried and tested cryptographic techniques including tokenisation and blinding. I said “wha-hey you’re my best mate you are! Up the Blues!” and we agreed that Terry Phelan was a great player.
By the final morning, I was going about my normal business, albeit in a persistent vegetative state, when I ran into the shy and retiring head of the Emerging Payments Association. We had a fruitful discussion about using strong biometric authentication against revocable tokens to use pseudonyms (with strongly-attested attributes) in transactional environments and making it the de facto model that will deliver both security and privacy for transactions of many kinds. He said that he thought that this might be where the blockchain makes sense because the transparency around shared reputation management was a positive, whereas sharing private transactions was a negative and would require complex strategies to maintain commercial confidence. I said “stop shouting”.
I think that for our clients and friends in the USA, the most important commercial announcement was the launch of Zelle by EarlyWarning. Zelle will launch in 2017, the equivalent of Paym/PingIt in the UK: instant account-to-account payments. It launched with 19 banks: Ally Bank, Bank of America, Bank of the West, BB&T, BECU, Capital One, Citi, Fifth Third Bank, FirstBank, First Tech Federal Credit Union, Frost Bank, JP Morgan Chase, Morgan Stanley, PNC, USAA, U.S. Bank and Wells Fargo. Pretty impressive. If you look at Venmo’s hockey stick, it’s clear that a P2P proposition has a ready market. But my sense of Venmo is that it suceeded because of social media integration so I suspect that Zelle’s long term role will be as an API for other platforms (e.g., Facebook) to use rather than as a standalone app or something that is tucked away in bank apps. This is the sort of thing that is best considered with a Mai Tai, by the way.
I was left trying to work out exactly how much I lost in the casinos. I think it might have been as much as $80, because I’m pretty much of a high roller, especially when egged on by VocaLink Vixens and Money2020 Molls. It’s well known that men take risks in the presence of attractive women and I have a suspicion that this may form part of the casinos’ business model. Just a suspicion. Still. Vegas.
It’s amazing who you bump into at Money2020. I caught up with a great many old friends and made quite a few new ones. It’s hard for me to say what the key takeaways from the event were this year but I’ll try to name a top three and then see if any of you agree with me via the comments section!
Fintech isn’t the wild west any more and the use of new technologies to drive new business models in financial services is mainstream. Yes, legacy profit pools will be attacked, but unless the incumbents are totally stupid (and the ones that Consult Hyperion works for are, I can assure you, not) they will assimilate them: biometrics, chatbots, AI etc. The threats to my clients’ businesses are not their traditional competitors and not the fintechs, but Amazon, Apple, Google, Facebook and Alipay because these are where customers check in but may well never check out. Bumper sticker: It’s the discovery, stupid.
The ramifications of the shift to instant payments (of one form or another) and the switch to low cost push payments in retail remain unexplored. Although I can’t prove it with bar charts or spreadsheets, I have an uneasy feeling that the incumbents in developed markets are overconfident about the status quo and the regulatory times are a changin’ (© Nobel Committee 2016). The transaction margins in payments remain asymptotic to zero in the medium term, so new business models are needed. I tend to focus on the business models around identity, but I’m sure there are others in big data, analytics, risk management and so on. Bumper sticker: The bank is place to store your identity, not your money.
People talk a lot of rubbish about the blockchain. Bumper sticker: They’re not smart and they’re not contracts.
On which topic, one last tale.
The Tale of the Emporer’s New Blockchain
Once up time, there was an Emperor. He ran a marvellous financial institution. One day, a stranger came to town and she went to see the Emperor and showed him a blockchain. The Emperor said “I can’t see anything”. The stranger told him that only very clever people and management consultants could see the blockchain. The Emperor didn’t want to seem stupid, or provincial, or behind the times, so he told himself that he could see the blockchain after all and that it was beautiful.
The Emperor went and told all of the people about his blockchain and the people were very happy.
After a while, though, the people shouted that they wanted to see the blockchain, so the Emperor decided that he would show it to them and impress them. And he took out the blockchain that the stranger had given him and showed it to the crowed.
But then one small boy consultant standing at the back said “I can’t see a blockchain. And you have only one node so there is no need for a consensus mechanism”. And then everyone in crowd realised that was the boy said was true. There was no blockchain, just a database run by the Emperor as before.
The Emperor was upset at first, because everyone else had a blockchain and he didn’t. But then he realised that no-one else had one either, so he cheered up and started to invest in artificial intelligence chatbots instead and he lived happily ever after because he had a defined benefit pension.
Thinking about it, almost all of the interesting things I saw or heard about weren’t really about fintech and payments, they were about regtech and identity. It’s almost as if Identity2020 is the new Money2020, so to speak. See you next year.