Payment Industry - Growth Prediction and Expectations

JPMorgan tests blockchain for dollar transfers; sets out digital progress

JPMorgan Chase is testing the use of distributed ledger technology to move US dollars between London and Tokyo, working with about 2200 clients on the trial ahead of possible live transactions later in the year.

The US banking giant is hoping that using blockchain tech for currency clearing and settlement will speed up the process for clients and reduce its risk, according to the Wall Street Journal.

Although CEO Jamie Dimon has poured scorn on Bitcoin, his bank has been enthusiastically exploring the cryptocurrency's underlying technology. The firm is part of the R3 consortium and has invested in Digital Asset Holdings - the startup helmed by its former head of commodities Blythe Masters. The pair are already testing blockchain technology for loan trading operations.

News of the latest experiment comes as JPMorgan affirms its commitment to technology on its annual investor day. During a time of cost cutting, the bank's tech budget for the year is rising from $9.2 billion to $9.4 billion, about a third of which is earmarked for investments.

The company has more than 40,000 technologists on its payroll, including 18,000 developers creating intellectual property, many of them now based at 13 special technology hubs around the world.

In addition, it is touting its engagement with the fintech community, claiming to have worked with more than 300 early stage firms, making around 30 investments over the last two years and piloting over 100 technology solutions in just 12 months.

The bank has made the transition to digital a strategic priority, which appears to be bearing fruit. Mobile user numbers have doubled since 2012 while teller transactions are down by 100 million, a trend likely to continue thanks to the rollout of new ATMs which should be able to carry out 90% of the functions carried out by tellers by the end of 2017.

The switch in consumer behaviour has enabled a 12,000 reduction in transactional staff headcount in the last three years while branch numbers fell by 189 to 5413 in 2015. Another 150 are slated to go in 2016.

On payments, the bank is betting on its partnership with retailer consortium MCX for Chase Pay, its new digital wallet leading the fight back against tech giants Apple, Google and Samsung in the increasingly crowded mobile money arena.

A new deal sees Chase Pay enabled for use at 7500 Starbucks locations across the US. Meanwhile, Chase Pay can also be used to reload a Starbucks card within the coffee giant's own app. Chase recently took on the role of Starbucks' processor from Square, which found its deal a massive loss maker

3 key actions for banks to learn from FinTechs

In today’s highly digitized and connected world, several lean and nimble organizations are making profound business impact challenging the traditional banking models in domains such as

• Payments,
• Lending and
• Wealth Management.

These firms collectively known as FinTechs or Financial Technology firms are disrupting the banking industry by dis-intermediating across a banking customer’s financial value chain.

While traditional banks continue to spend heavily on regulatory requirements and managing a longer running new product / service release cycle, the FinTechs are innovating at rapid scale and delivering capabilities with a delightful experience.

Examples include Lending Club and Zopa in lending, Nutmeg and Weathfront in Wealth Management; WePay and Stripe for Payments.

1. Simplify – Established banks, typically have a fairly sizable technology and operations organization to support a huge inventory of applications, infrastructure and processes that limit their agility and flexibility in delivering new services.   Simplification of the overall IT and Operations will help banks to not only become more lean and agile but also redirect the cost savings for digital transformation initiatives. Banks with heavy investments in their core banking systems must look at modernizing and selectively replacing domain capabilities with best of breed SaaS solutions only if modernization is not an option. Simplification efforts must be further accelerated by simplifying the business and operational processes aligned with their digital transformation focussed customer experience journeys. This will help maximize the impact and value for both topline growth and bottom-line optimization.
2. Integrate – Banks will need to become an active participant both as a consumer and provider of financial services in a sharing economy ecosystem that includes their customers, partners and also FinTech providers.   This will be an architecture led transformation to deliver an Open technologies based integration platform focused on driving agility and speed of integration. The core components of the integration architecture will be built leveraging a combination of API, microservices and SOA services based on functional and non-functional requirements. With such an integration platform, banks will be able to externalize its core products and service offerings through API enablement, while also exposing its customers to services from external marketplaces.
3. Scale – As banks simplify their applications, processes and infrastructure platforms, they must define a target Hybrid IT architecture with a Cloud first principle. This would require addressing the “how to cloud” first before deciding on alternative target platforms. Migration of the simplified application, processes and infrastructure to the private and public Cloud platforms must be addressed based on economic value and where needed banks must also work with their local regulatory bodies in increasing cloud adoption.   A DevOps led continuous delivery framework along with agile development principles is a must across the Hybrid IT footprint to scale the software development lifecycle (SDLC) in to a multi-speed SDLC.

Is MOBILE Everything?

Mobile is everything because just about everyone in the world now has a mobile device. About half of those devices are smartphones – the fastest selling gadget in the history of gadgets.

By the year 2020 – just four years from now – about 80 percent of the adult population will own one.

Mobile is also everything because those devices are a natural and essential extension of every aspect of our lives. We all know the anecdotes about

- How many emails are opened via mobile phones (54 percent),

- How many consumers check their phones within 15 minutes of opening their eyes in the morning (80 percent), and

- How many times a day the typical consumer checks their phone for messages or calls or texts (150 times).

Apple controls something like 65 percent of all of the traffic on mobile devices.

And they control everything that happens on their platform – from who gets access, to how much that access costs, to the standards that are used.

Multiple corporate players are fueling a single startup or are among the clients

In Fintech - Startups - Game changer in Banking Industry??

Fintech - Startups is a HOT topic in Banking and Financial Industry today.
Here's few banks and FIs fintech startups.

CITIBANK is an interesting case as the banking industry giant had put hands on some very promising ventures through its venture fund.

Citi Ventures’ portfolio has notable FinTech players
such as Ayasdi, Jumio, Square, Betterment, Chain, TradeIt and others.

Goldman Sachs went above and beyond with FinTech.
The bank has been extremely generous with investments and is open to collaboration.

Morgan Stanley, has been actively investing in various ventures, often overlapping with other banks.

10 ways Blockchain can change the Financial Services

1. Security – blockchain has the ability to improve edge security and encrypt data during transactions, rather than when the data is moving or at rest.
2. Cloud – Blockchain can remove the need for a trusted party in transactions taking place in the cloud.
3. Truly digital transactions — The blockchain enables secure microtransactions, still a developing area.
4. IoT – Blockchain can improve the security of automated transactions in the Internet of Things.
5. Settlement times — Blockchain can vastly improve settlement times of many payments transactions.
6. Government — Issuers of currency may leverage the blockchain, and very soon, according to some.
7. Health — Health records can be securely stored and shared via the blockchain.
8. Manufacturing — Blockchain can connect and automate processes between different factories (nodes).
9. Retail – Blockchain can drive down transaction costs at the point-of-sale.
10. Energy – Blockchain can change the way electrical use is billed.

Various Cards - Transaction Flows

Category	Description
On us	Transaction which is coming from own ATM or POS , and never routed outside.
Network On us	Transaction originates from a sharing network , such as STAR or Pulse , in which both the bank and the device owning bank are members of the same network.
Reciprocal Transaction	Cardholder initiates a Transaction at a device that is owned by bank which is member of different regional networks.
National Bridge Transactions	The card holder uses a device at a bank that is not their own, and the two banks belong to different regional networks that do not have any agreement. Both banks must belong to the same national network. The transaction is handed from the ATM or POS regional network to the national network, and finally to the authorizing bank’s regional network. In this case, there are three switches involved.

Both the regional and national networks are switching systems that, to a fair extent,
resemble the systems that are used within the financial institution. The switching systems
drive transactions from initiation to destination. We use the word "switches" to describe the
hand-off of a transaction from host-to network-to host:

-  An ATM or POS transaction is accepted by an acquiring device that can accept cards from
the issuing institution and either processed locally “On Us” or switched to one of the regional networks “Network On Us”.

- The Networks either switch the transaction to another institution host for processing
“Network On Us” or switch the transaction to a national network “National Bridge or Reciprocal".

- Responses are switched from the owning host of the device, “On Us”, to the device or switched to a network “Network On Us”.

- The network either switches a Host Response to the Transaction to the Host of member bank
"Network on us" or switches the response to another network "National Bridge" or "Reciprocal".

- The network switches the response to another network for later switches to the issuer Host.

Bank's Strategy VS Delivery - Just for Fun :)

Next Generation Bank

ACI's Product - ICE-XS

ICE-XS stands for Internet Communications for the Enterprise Cross System.

• It is a multi-protocol, multi-platform communications gateway with embedded message transformation capabilities, security services, and SOA technology.
• Allows dissimilar and heterogeneous networks, devices and applications to communicate.
• Designed for high-speed, high-volume, switching oftransactions in real-time.
• Provides four layered architecture:
– Communications protocols support, e.g. TCPIP, SNA, WMQ
– Device protocol support, e.g. HTTP, VISAII, MDS
– Message switching, e.g. TCPIP to SNA
– Message transformation, e.g. SOAP to ISO, Binary to XML

Typically ICE-XS is used to facilitate communications between networks, devices and applications, such as
– ATM’s
– POS devices
– Hardware Security Modules (HSM’s), such as Atalla, Thales etc
– Hosts, for CICS/IMS/MQ applications
– Switches/Interchanges, such as VISA, Mastercard
– Networks, such as French Interbank network e-RSB
• ICE-XS is typically deployed
– As a front end to ACI applications such as BASE24-eps, PRM, BASE24 (NSK), OCM24 (z/OS), but can be deployed standalone as a protocol/message switch or ESB SOA provider.

Supported Platforms

• Solaris, SunOS version 5.8 (Solaris 8) or greater, Sparc CPU
– Websphere MQ version 5.3
– TIBCO Rendezvous 7.5.3

• AIX version 5 or greater
– Websphere MQ version 5.3
– TIBCO Rendezvous 7.5.3

• zOS version 1.9 or greater
– Websphere MQ version 6.0

• HP Nonstop S-series G06.13 or greater
– Websphere MQ version 5.1

• HP Nonstop Integrity (Itanium) H06.03 or greater
– Websphere MQ version 5.3.1.2

Communication Protocols

Provides low-level connectivity to devices and applications.
• Connections established, managed and maintained by ICE-XS
and used as transports for higher layer protocols.
• Primary communication flavors available:

– TCP/IP

– SNA

– Websphere MQ (WMQ)

• Other more specialized communications options include Interprocess
Communication (IPC) using Unix-domain sockets,Publish/Subscribe using TIBCO Rendezvous messaging busand X.25 over TCPIP (XOT).

Device Protocols

• Provides higher-level connectivity to devices and applications.
• Device Protocol connections operate over Communication Protocol connections established, managed and maintained by ICE-XS.
• Primary device protocol flavors:
– HTTP – client and server
– GENERICx/CUSTOM
• simple messaging for streamed protocols (TCP/IP)
– GENERIC
• simple messaging for non-streamed protocols (WMQ)
– VISAII/ACISTD
• POS protocols
– MDS
• Message delivery for BASE24-eps

• Other specialized device protocols supported include:
– ATALLA (HSM access)
– VIPUSMG (Visa IP US Message Gateway)
– IMSCONNECT (IMS comms over TCP/IP)
– CBCOM (French interbank network eRSB comms)
– PIP (ACI PRM Interface Process)
– TPAD (Transaction Pad over TCPIP or XOT)
– EQUENS
– WSAPI (ACI Web Services API)
– PATHSEND (HP Nonstop TP Monitor API)
– CIFO (French ISO messaging over TIBCO)

ROUTING SERVICES

• Messages received on an ENDPOINT are routed to a destination ENDPOINT based upon selection of a route rulethat specifies where particular messages should be sent.
• Route rules are defined by the user and specify five main
things:
– The attributes used to match the message to this route
rule, eg. source ENDPOINT, client IP address, message
content.
– Any intermediate message processing that should be
applied before forwarding the message.
– The destination ENDPOINT for the message.
– The weight of the route rule.
– The Message Exchange Pattern (MEP) to apply to thismessage, eg. REQUESTONLY, REQUESTRESPONSE.
• These routing services allow for flexible routing of messages between ENDPOINTs.

Intermediate Message Processing

• Messages routed between ENDPOINTs can be modified (transformed) by Intermediate Message Processors (IMPs) within ICE-XS.
• Two IMPs are currently supported:
– Simple Object Access Protocol (SOAP)
– Data Transformation Engine (DTE)
• The SOAP IMP provides transformation between SOAP XML messages and binary message formats such as ISO8583. This allows host applications to present an SOA interface to clients
without change to their underlying message formats.
• The DTE IMP provides more general purpose message transformation services for transformation between different binary formats, or binary and XML formats.
• Both IMPs employ user-defined Data Sync Repository (DSR) files to describe the message formats and required transformation. These files are cached in memory and can be
reloaded by operator command at runtime.

CSM(Clearing and Settlement Mechanism) - Part II and Final

There are also national initiatives that not only take the domestic interbank traffic but also have aspirations to go global or at least regional. One of these is in Brazil and demonstrates the innovation that exists in developing countries. The country's interbank funds transfer system, Camara Interbancaira de Pagamentos (CIP, translates as Interbank Payment Clearing House), has been around since 2001 and is an integral part of the payment infrastructure. It is a non-profit entity which comprises 42 shareholder banks. It is also a board member of the International Payments Framework Association (IPFA). 

'Brazilian banks position themselves as service providers to industries, not just lenders and borrowers of money,' said Joaquim Kiyoshi Kavakama, CIP's CEO. 'So our interbank payments industry is very strong.' A unique payment instrument for commercial collections was introduced in Brazil a few years ago and is still the only one of its kind in the world today. 'It looks like an invoice but it is an instruction for payment. And we were able to make that the standard for the entire country. Its distinct feature is that it can be paid at any bank in the country. In this arrangement, there is a clear need for interbank settlement, and this is where CIP comes in.

We actually manage the money between a bank that issues a payment and a bank that receives it.' In
2009, there were around two billion invoices issued through the system.In October 2009, CIP introduced Debito Directo Autorizado (DDA), a country-wide electronic system for billing and invoicing. Around the same time it joined Swift, taking Alliance Lite. The technology behind DDA is provided by Sterling Commerce, now part of IBM. On the first day alone, DDA had 1.2 million customers.

A notable feature of the set-up is that it covers both business to business (B2B) and business to consumer (B2C), the latter, for example, being around insurance and e-commerce. CIP is now bringing utility bills payment onto the solution and is collaborating with the Brazilian Banking Association on working out the details.

Kavakama believes that the DDA concept can be applied in other countries across the world, so too the wider payments system set-up created in Brazil. 'We are the only country that has integrated the whole payment industry, including central counterparty clearing and central bank.' The country's financial crisis in the 1990s, he noted, resulted in establishing 'a sound payment system, with strong risk practices in place, which is more crisis-proof than its counterparts in other countries'. DDA has the potential of becoming a global solution, 'for any invoice anywhere in the world', he believes.

More generally, in terms of threats to Swift, the lower-cost alternative bank-to-bank and bank-to-corporate messaging protocol, Ebics (Electronic Banking Internet Communication Standard), is gaining ground. It is based on an exchange of keys between counterparties and was defined by the German banking community.

Adoption is now under way in France and there has been activity elsewhere, particularly from German-speaking Europe and French-speaking North Africa.

In Germany, banks were contractually obliged to support the old protocol until the end of 2010. Some banks, particularly government-owned ones, including Ebics advocate, Deutsche Bundesbank, decided that support would end on 1st January.

However, others showed more flexibility, with continued support for both. For bank-to-bank messaging, Ebics is heavily used in Germany. In France, CFONB, the standardisation office in the banking sector, designated Ebics as the follow-up standard for the discontinued Etebac protocols. A number of vendors have worked with the protocol in Germany and France. In the latter
country, Clear2Pay, for instance, has worked with five or six clients, including several Japanese banks and La Banque Postale.

The most secure form of the Etebac protocol (Etebac5, as opposed to Etebac3), using electronic signatures, is due to be discontinued in mid-2011.

Ebics is less expensive than Swift and banks are tending to offer both. At present, given the limited geographical coverage, Swift remains prevalent for cross-border messaging. Vendors have reported interest from beyond Germany and France. This includes Austria, particularly among banks that do a lot of business with German corporates, and Switzerland. Frédérique Saint-Denis, sales and marketing director for Clear2Pay France, said in September 2010 that some banks in France had been considering Ebics for other countries, as it is an easy and secure protocol which does not involve a major project or cost. One UK-based client was evaluating it for European adoption, so too one Japanese client, for its UK operation.

Clear2Pay had also received one request from Spain. An Algerian bank, an existing Clear2Pay client, had signed and there had also been requests from Morocco.

One reaction by Swift to the pressure has been its Lean programme, with a big push to improve efficiency and reduce headcount, combined with its 2015 Strategy. Lean was a two-year McKinsey driven project to cut 17 per cent from Swift's cost base. When Swift was able to announce in October 2010 at Sibos a 15 per cent rebate for 2010, following on from a recent average 20 per cent price cut for FIN messaging, it was a 'reflection that Lean is kicking in', said Swift's head of marketing,
Gottfried Leibbrandt.

Swift has also made a big push for new participants, having gone after the securities sector for a number of years and more recently turning to corporates, after some of the bank-imposed shackles came off. There were 700+ on board by Sibos 2010 and Swift had ambitions to push this number to 5000 by 2015. To a degree, the corporates' reignited enthusiasm for multi-bank relationships plays into Swift's hands. Corporate-derived FIN traffic is increasing 50 per cent, year on year, with FileAct
volumes doubling.

In Swift's next SwiftNet release, R7 (the first for a few years and due to be implemented in June 2011), corporates will be able to directly send FileAct messages. This is perhaps a bit worrying for those banks that still fear a loosening of the traditional ties to their corporate customers but most have concluded that connectivity is not an area of differentiation.

The diversification of Swift, part of the 2015 roadmap, was seen most clearly in its afore-mentioned acquisition of Sungard's Ambit Messaging Hub in mid-2010. The resultant subsidiary competes directly with some long-established suppliers.

Leibbrandt pointed out that Swift had always competed with its interface devices, but the arrival of a solution intended for more complex banks clearly extends the overlap with partners.
Swift's consulting arm is also moving into new sectors, bringing it into competition with existing consultants. And Swift's noises about offering outsourcing have become clearer. It will focus on taking over the Swift infrastructure of high-end customers, a move that was touted as a direct response to customer requests, with the claim at Sibos 2010 that a number were close to
signing.

Swift is seeking to emphasise that this complements the existing third-party service bureaux and that partners are an integral part of the overall 2015 plan. Nevertheless, Swift's decentralisation, within which it is seeking to move closer to its customers, has seen the abrupt termination of a number of long-term partnerships of late.

The ever heightened challenge of meeting and staying in line with regulatory requirements would look to add weight to the argument to outsource. Clearly some banks do delegate but it is surprising in some ways the extent to which so many banks still do everything themselves. To a degree, the fragmentation and 'spaghetti interfaces' described above are reasons for this. It is difficult to outsource in such an instance because there will still need to be interfaces from the outsourcer back into the customer and there are unlikely to be efficiency gains if the internal processes and architecture are not streamlined.

The likes of Equens, Vocalink and SIA in Italy (the latter also has software) have set out their outsourcing stalls, so too individual banks (Deutsche Bank has made a big play of its SDD service, for instance). However, announcements of deals have been few so this looks to be another area where there is a gap between theory and reality.

CSM(Clearing and Settlement Mechanism) - Part 1

There has been a blurring of definitions within the ACH and payment card landscape. Among the ACHs are the likes of Vocalink, SESP, STET, GSIT and RPS. Among the card processors are the likes of Visa and MasterCard themselves, plus American Express, Atos Worldwide, Experian, First Data, Sermepa, Sinsys and TSYS. Spanning both areas are entities such as Equens, NETS in the Nordic region, PBS, SIA-SSB in Italy and Telekurs Multipay.

There has been consolidation as national entities have sought to expand their geographical presence, take advantage of economies of scale and broaden their services. Tying much of the payments market together on the cross-border front has been Swift. Bank-owned and highly influential in the standards-making process, it has been highly successful over several decades but times are changing. A fall in 2009 of 2.4 percent in FIN traffic, largely stemming from the financial crisis, came as a shock to Swift.

The Society already looked to be in a rather more precarious position than in the past, with an increasing number of alternatives to its own network. The likes of BT Radianz and Travelex are gunning for Swift.

BT Radianz is an 'additional service specifically for the financial services sector that sits on top of BT's global physical platform', in the words of Chris Pickles, head of marketing, financial markets and wholesale banking at BT. 170 countries are covered by the BT network, while BT Radianz is available in about 64 of those. It competes head to head with Swift. Both provide secure messaging to Euroclear users, for instance. Out of 1700 member-firms of Euroclear, 1600 use BT, according to
Pickles. At the same time, Swift is also a client of BT. While the core part of the network in Belgium and America is managed by Swift, all the connections between Swift customers and that Swift network are managed by four different communications companies, one of which is BT. Over 1000 Swift users have BT to connect to Swift.

Swift's core business has traditionally been in servicing the cross-border payments industry. UK banks, for example, use Vocalink, not Swift, for their domestic payments. 'About 90 per cent of transactions, as a rule of thumb, are domestic,' so the market segment addressed by Swift is 'very, very small and is not sizeable in business terms', observed Pickles. Swift can point to some uptake for domestic traffic and intends to increase this, in part reflected in the decentralisation and 'go local' aspects of its current strategy.

Travelex is less established in this domain but has announced a service called Geo for Financial Institutions, which uses its existing payments network, with its links to local clearing houses around the world. Travelex's first taker is Rakuten, an online marketplace in Japan and one of the largest e-commerce companies in the world. It is using Geo to provide an international payments platform for its bank customers in Japan, integrating its online system with Geo on a white label basis.

Today's Payments Systems Market: Theory and Reality :)

A typical payments architecture, in theory at least, will comprise a central retail and/or wholesale payments engine. Usually, these will be distinct, except for relatively low-end universal banks. The different requirements – high volume, low complexity versus low volume, high complexity – has meant that the operations and systems that support them have tended to be kept separate. Nevertheless, there is a line of thought, often encapsulated within the term 'Payment Services Hub', that they could be brought together.

The retail engine will link outwards to ATMs, point of sale (POS) terminals, delivery channels (payment initiation), to internal systems (back office) and to a range of external clearing systems. The engines will handle the management of those payments, including validation and authorisation, routing, settlement, reconciliation, exceptions handling, repair, and dispute management.
That functionality might reside within the engine itself or in satellite systems, perhaps with a role as well for workflow engines and Business Process Management (BPM) offerings. There will also be account management activities, including balance management, billing, statements and reporting. Layered on top are the compliance and regulatory requirements, including antimoney
 laundering (AML) and fraud detection.

On the wholesale side, many of the requirements at the back-end are similar, albeit with different interfaces for clearing. The front-end will include links to e-banking/cash management systems and into the corporate treasury management and ERP systems. The systems will ideally need to handle bulk files, allowing customers to send a range of payments, with the system
handling the routing based on pre-defined rules.

So much for the theory. In reality, most banks' payments processing has become highly fragmented, typically along silo lines. It is not unusual for a bank to end up processing payments in 20+ areas, resulting in duplicated effort, diluted investment, inefficiency and an incomplete picture for reporting and control. The picture becomes even more complex when the bank has multiple international operations and other subsidiaries, then more complex again where there have been mergers and
acquisitions. Those pockets of payment processing might be on dedicated systems but there is also payment processing within more general applications, including the core banking systems or narrow back office applications in areas such as securities.

It is common for banks to become bogged down in the logistics of moving from this complexity to a cleaner payments architecture. The separate payment processing systems are firmly entwined, from a technical aspect with multiple interfaces but also from an organisational aspect, with strong departmental divides and fiefdoms.

This is one key reason why so many payment system projects end in complete or partial failure. It is not so much the target application as the starting point that appears to be the problem. Without strong senior management that is able to cut across departmental lines, such projects will start on the wrong footing and will struggle to recover.

However, the existing architectures are becoming ever less sustainable. There are serious risk management considerations, with an inability to see the full picture in terms of credit, market and liquidity risk. There is also operational risk with such a set-up. There is a direct cost implication because the fragmentation hinders efficient liquidity management. Similarly, it is difficult to
meet service level agreements and cut-off times. Too often there is manual processing around the systems, with particular inefficiencies where there are breaks and hand-overs of processes between departments. Understandably, the regulators take a dim view of such weaknesses and, without a complete picture, it is difficult to do fraud detection and AML (this is also often
done on a silo basis).

Another aspect of the unsustainability is technology. Many of the systems are on legacy platforms. At the time they were installed, there was probably a very good reason why they needed to run on, for instance, an IBM mainframe or a Tandem server. However, as the scalability and resilience that set those platforms apart have become standard within lower cost offerings, so there is the opportunity to significantly reduce the cost of ownership. In addition, support of those legacy platforms and legacy systems becomes ever more difficult, in part due to the dwindling resources within the bank and on the market. PL/1 programmers, for instance, do not get any younger.  

There are also competitive implications. Those banks that have a streamlined, centralised payments infrastructure that is flexible, automated and robust are pulling away from the masses who are still hampered by legacy. In today's difficult markets, where the rallying cry for some time has been 'back to basics', many banks see payments as one of their foundation stones. And today's financial sector is clearly only becoming more competitive, with payments one of the battlegrounds. It is a cliché, but
true nonetheless, that customers are becoming more demanding. We live in impatient times, where in our personal and public lives we are not used to waiting and, certainly when it comes to information, expect things to happen in real-time.

A common analogy in the payments sector is to the tracking services of the courier companies, whereby customers can see where their packages are at any point in time (online retailers provide a similar service for orders). Which banks can provide anything like this for payments at present?
Indeed, it is understandable if there is frustration. The payments space over the years seems to have been beset by too much talk by banks and too little action, arguably more so than any other area of financial services.

Meanwhile, other participants have been forging ahead. The agendas for bank-oriented payments conferences are filled with speakers who are strong on the theory but light on practical examples. Too few institutions have a good story to tell.

The heightened competition, as discussed in the previous section, is partly to do with the pace of technical change, opening up many new opportunities, particularly around micro-payments, cards, and mobile. There is a lot of innovation and there are opportunities for new entrants, with these typically in a better position to harness the new technology than the banks. Regulatory
change can also bring new competition, most clearly seen in the PSD in Europe. 

Evolution: Cards, mobile, contactless

The card and mobile markets (the lines between the two are increasingly becoming blurred) are evolving rapidly and it is difficult for participants to keep up. Much of the drive is from new technology but there are other factors as well, particularly regulation and consumer behaviour (with the latter influenced of late by the financial and economic climate).

According to the 2010 World Payments Report, non-cash payments constituted about 270 billion, of which 157 billion were card payments. The number of cards in circulation was put at around five billion by the Nilsson Report in mid-2009, although 3.15 billion of these were China Union Pay. There are 1.1 billion EMV cards, according to EMVCo. Europe has around 700 million cards. According to the ECB, the average number of transactions per head per year is 58, although the difference in use ranges from Greece (twelve per year) to Finland (350). The ECB also estimated there were more than 175 million prepaid cards in circulation in the EU by late 2010. Payments specialist and author, Mike Hendry, estimated contactless cards at this time stood at around 15 million in Europe, of which around two-thirds were in the UK.

An estimate from Equens is that there will be 30 million contactless bank cards in the UK alone by the end of 2011, driven by the MasterCard PayPass and Visa PayWave contactless initiatives, readiness for the 2012 London Olympics, and general market acceptance through experience with existing cards, particularly Oyster. Around 26,000 merchants were accepting contactless by
late 2010 but there was no one single major retailer in the UK that had taken the leap (unlike Carrefour in France with over 20,000 contactless POS terminals by mid-2010).
A survey of European payment participants carried out in 2010 by Equens, IBM and Fraunhofer asked about innovations that would drive future growth in the payment business. Most commonly cited (by 85 per cent of respondents) were e-payments (online-based) followed by e-invoicing (69 per cent), e-billing (65 per cent), contactless m-payments (52 per cent), contactless cards (50 per cent), prepaid cards (40 per cent), risk management services (e.g. fraud prevention) (39 per cent) and biometric payments (15 per cent). Such a spread and such relatively high percentages reflect the anticipated rate of change.  

Forecasts from Edgar Dunn & Company related to global advanced payments show online payments at $1,842 billion in 2015, contactless cards at $395 billion and mobile at $510 billion. While still dominant, the growth rate for online payments is expected to be considerably slower in relative terms than for the other two categories. For online payments, within the same timescales, the company predicts relatively slow growth for credit and debit cards, with prepaid and non-card payments
becoming a more important part of the mix (the latter are predicted to account for 15 per cent of online payments in 2015).  Hurdles for new forms of payment are being broken down. For instance, the lack of phones with NFC has been a hindrance (a pilot by Paypal, with S1, in Poland a couple of years ago failed to take off for this reason) but this is changing as new devices are shipped and as the likes of Google with Android add NFC capabilities.

There is innovation elsewhere. For instance, Travelex and ICE have a card that offers dynamic currency conversion so that a customer using the card abroad can know the actual cost of a purchase in his or her home currency. The operators make money on the FX.Hendry pointed out a number of challenges. The gradual disappearance of national schemes and interests means the loss of
'protected' markets. The credit card's loss of favour means interest is no longer a reliable source of income for issuers, while the increase in regulation means interchange fees are heading the same way and regulation also controls direct charges in some countries.

The demand for unbundling and 'interchange-plus' pricing are challenges for many legacy systems. However, the economic climate means it is difficult to gain approval for major new investments. 'It is bad timing to ask for a major slug of investment,' said Hendry. Much of the growth is in less traditional markets, either from a geographical perspective (Asia, central Europe) or
a sector perspective (e-commerce) but by far the largest volumes are still in developed and traditional markets, so this gives participants a dilemma when trying to define their strategy.

Contactless interfaces are likely to become increasingly prevalent. This will not only be on a proximity basis but also over wide area networks. Currently particularly pioneered by the transport sector, they often work more efficiently than contact ones and are easier to maintain. Forms of prepaid will multiply, with this type of payment becoming a general purpose one, with
potentially a significant impact on cash payments. Citi has had a contactless pilot in Banglalore, using mobile proximity for contactless transactions.  

The banks are trying to forge a role but it is hard not to argue with Birch's observation that payment initiatives driven by mobile operators are much more successful at present than those launched by banks. 'It could be where friction will occur.' The wellknown success of M-Pesa in Kenya (see below) would look to back up this assertion. John Maynard, lead business development manager at the operator behind M-Pesa, Vodafone, has said the aim is not to cut out the banks. 'Don't fight against us, no one benefits, work with us.'

Emerging (or increasingly established) players in the mobile payments space include also Coinstar, Obopay, Luup, Xoom, iKobo, iDeal (part-owned by KLM), Wizzit and Zapa Technologies. Some heavyweights are also moving in, particularly Google and with Apple also expected to do so. Not all initiatives will succeed and, indeed, the sector already has its casualties, including BillPoint, Citibank's C2it and Yahoo PayDirect. The remarkable rise of social networks cannot be ignored and these sites are developing e-money or some form of credit exchange to enable payments.

Thus, much of the discussion when talking about innovation centres on retail payments but the corporate banking space could certainly do with some innovation as well. Of course, some of the breakthroughs will be applicable to both but there is often a chasm between retail and B2B, suggested Colin Digby, EMEA head of treasury solutions and markets at Deutsche Bank. There
is still old technology around, including DOS-based green screens, and even in newer e-banking offerings there is seldom the personalisation capabilities that were available with Yahoo even in the late 1990s. The offerings are often disjointed, based on siloes. 'If a client can figure out your organisation chart by how you present your products on your website then you have failed,'
he observed.