Biomertics Cards - 2

 End-to-end encryption 

An EMV card contains a microchip that stores and protects the user’s information. Communication between the user and merchant takes place during transactions only, making it nearly impossible for hackers to steal data such as bank details and personal cardholder information. POS readers authenticate the data offline to ensure the card is not counterfeit; then the user inputs a PIN number so cardholder verification can take place. Using cryptography, a unique code is generated to ensure personal details of the cardholder are never exposed. 

Up until recently, this level of security was 99.7% effective, and any attempts at stealing cardholder information were nearly impossible. In the US, counterfeit fraud dropped 76% in just over three years after the adoption of EMV technology.

Tokenization 

But as contactless payments have become more popular, extra layers of security have had to be introduced to prevent attempts at stealing cardholder data. Tokenization was introduced for card-not-present (CNP) transactions as a way of further disguising cardholder and transaction data. 

Most EMV card fraud occurs when the primary account number (PAN) details have been intentionally attacked and exposed. Tokenization adds an extra layer of security by replacing the PAN number with an encrypted code. This way, cardholder details are never transmitted. And even if token details are stolen, each code is unique and cannot be replicated or used again.

Biometric card security 

Biometric capabilities on EMV cards bring security features to a new level. Then the transaction can be authorized. Fingerprint reference data is stored directly on the card and can therefore never be stolen, hacked, or replicated.  

Benefits :-

1) Keeping merchants happy 

For merchants, the main benefit of biometric cards is ensuring no fraud liability can be placed on them, as these cards go above and beyond typical EMV standards. Also, there’s no need to buy new hardware, as POS readers in use today are compatible. Payment limits can be increased or done away with entirely with biometric cards; even if a card is stolen, no one else can use it

2) Increasing consumer satisfaction 

From a customer’s point of view, the extra layer of security is key. Anyone who has been the victim of card fraud, which had a global cost of $22.8 billion in 2016, will have no problem signing up for a new card. Although a small cost may be introduced to cover the manufacturing of these new cards, a one-off fee in return for years-long protection of your bank and personal details is an easy choice. 

What may put consumers off is having to visit their bank initially to register their fingerprint. This gets converted into an encrypted digital template to be stored on the card. Most providers at this stage don’t offer an alternative, so uptake may be slow initially. 

What’s holding EMV providers back from employing this technology? 

Production costs will be incurred, whether they’re passed on to consumers or swallowed by card providers. Instead of the $1 or $2 it takes to create a typical contactless EMV card, biometric cards can reach up to $20. Also, the typical placement of the CVV/CVC number on the back of EMV cards may need to be moved to allow space for the biometric scanner. 

Biometrics Cards

More than 7 Billion  EMV cards, both contact and contactless, in use today, and they're the preferred choice of payment for the majority of consumers.

Contactless payments – where no PIN number or signature is required to complete the sale – have grown in popularity due to their convenience especially in the COVID Times. Most of the banks/FIs increased the limit in contact less transactions. For example, In Netherlands, limit for Contactless Transactions got increased to 100 Euros.

Thanks to Apple Pay and Google Pay, mobile payments are increasingly common. But a lot of consumers are still wary of the security of these transactions and how easily credit cards and mobile phones can be stolen – along with the possibility that cardholder information could be intercepted during transactions.

Contactless payments are at the forefront of this trend, but security issues have slowed the adoption of 

• Contactless cards
• Contactless payments via mobiles 
• Wearable devices

Biometric card payments diminish consumers' fears of transaction security, whether online or in person, and are about to come out of beta testing. Adding biometric identification to EMV cards alleviates concerns about fraudulent activity while offering greater potential for profit by merchants and banks alike.

Security one step further by enhancing the card with a fingerprint-sized biometric sensor. Instead of entering a PIN number when the card is placed on a point of sale (POS) reader – or even having to write your signature on a receipt – all you have to do is place your finger on the sensor and the transaction will be verified and completed in a fraction of a second.  

What are the differences between EMV and biometric cards? 

The main difference between these cards is the level of security offered to consumers. 

• EMV cards use end-to-end encryption to hide user details and protect data from being stolen. 
• Contactless cards use tokenization for further encryption,
• while biometric cards go one step further and include a fingerprint scanner to confirm the identity of users.

Simplified AI Landscape

 

How The Traditional Bank Is Being Disrupted - From CBINSIGHTS

Traditional banking system is being disrupted across a wide variety of core revenue streams. For example: Bank of America is being disrupted by Fintechs.

Below, we take a look at how tech companies are unbundling Bank of America’s front office, from consumer deposits and payments to equity research and business credit cards. 

1. Consumer Payments
2. Investment Bankings
3. Consumer Deposits and Savings
4. SMB Lending
5. Business Creditcards
6. Wealth Investments
7. Consumer Lending
8. Business Banking

CONSUMER PAYMENTS

Startups here are using consumer payments products like money transfers and peer-to-peer payments to chip away at banks’ payments market share. 

International money transfers and remittances are expensive to complete, and they make up a massive market: Remittances are worth an estimated $743B, according to CB Insights’ Industry Analyst Consensus. 

• Remitly and TransferWise are digital platforms that facilitate international money transfers. TransferWise is valued at $5B, as of July 2020.

Products enabling peer-to-peer (P2P) payments are also targeting the traditional bank’s hold on payments systems. 

• Venmo, owned by PayPal, and Cash App, owned by Square, offer P2P payments as their primary offerings. However, both brands have expanded to additional products, such as Venmo’s credit card and Cash App’s stock investing offering. 

INVESTMENT BANKING

Investment banking services are more difficult to unbundle, given significant regulatory restrictions for the industry. However, some startups are enabling the digitization of traditional banks or are providing auxiliary services directly to banking clients like institutional investors. 

Though equity research services used to be offered for free to clients as part of a bundle with trading services, regulations like the EU’s MiFID II now require that banks must charge for research directly. This has provided an opportunity for other research providers to gain market share among banking clients.  

• Sentieo and Koyfin aim to help with investment decisions by providing data and equity coverage for a variety of assets, from stocks to currencies to fixed income.

Companies in the asset management arena are assisting with or replacing traditional asset management divisions by providing software and services for businesses, institutional investors, and more.  

• Companies like Fount and Liqid are digital asset managers with robo-advising capabilities. Liqid has raised a total of $44M in disclosed equity funding. 
• Addepar is a platform that helps financial advisors leverage data and customizable reports to communicate portfolio performance. Valued at $594M, Addepar most recently raised a $117M Series E round in November 2020.
• Ethic is a digital asset manager that helps institutions create custom sustainable investment portfolios.

Sales and trading operations within banks can be lucrative. Now, alternative brokerage platforms and software that provide access to stock market information and stock brokerage are gaining traction, potentially eating into bank revenues.

• For example, Trumid is an online trading platform providing corporate bond market professionals with direct access to liquidity. Trumid raised a $200M Series E round in July 2020 at a $1B valuation.

CONSUMER DEPOSITS & SAVINGS

Consumer deposits and savings are the bread and butter of any traditional bank, and Bank of America is no exception. The company is the second-largest lender in the US based on assets, and it made $3.3B in net income on deposits in the first 3 quarters of 2020. This makes the sector an attractive target for fintech companies. 

• There is no shortage of startups aiming to grab deposit market share from traditional banks. Companies like Chime, Monzo, N26, Revolut, Varo Money, Current, and Dave all offer digital banking services to consumers. 
• Other companies focus on savings accounts. Goldman Sachs’ Marcus offers savings accounts and personal loans — a departure for the investment bank, which did not have a consumer arm until recently.

SMB LENDING 

Companies in this category target small- and medium-sized businesses (SMBs) for business loans and working capital financing.   

• Capital Float is an India-based startup providing business loans through a lending platform. The company has raised $126M in equity funding from investors including Ribbit Capital and Amazon, which is also trying to break into the SMB lending space.  
• C2FO, Bluevine, and Fundbox provide working capital financing for small businesses, allowing them to buy inventory, expand operations, and cover expenses. 

BUSINESS CREDIT CARDS

Similar to the constraints on small businesses and startups looking for banking products, unproven companies have difficulty accessing credit. Startups here are targeting this demographic by leveraging alternative data for risk analysis. 

• Brex and Divvy provide corporate credit cards for tech companies and other early-stage businesses. Similarly, Ramp Financial provides a corporate credit card and an expense management platform.

WEALTH & INVESTMENTS

Banks are losing their edge in investing and wealth management as consumers flock to trade brokerages, personal finance management tools, and robo-advisors. Fintechs are catering to millennials and Gen Z consumers through digital, self-directed investment platforms that forgo the traditional financial advisor. 

Companies allowing individuals to trade stocks or alternative asset classes have long operated outside of traditional banks. Startups here are growing in popularity, especially as the Covid-19 pandemic has led to a significant increase in day-trading.  

• Companies like Robinhood create opportunities to buy and sell stocks and other assets without charging commissions on trades like traditional banks. In fact, the popularity of the app has forced more traditional trading businesses to remove commissions for their customers. 
• The rise of cryptocurrencies and digital assets, which currently operate outside of the traditional banking system, has led to the popularity of crypto trading apps like eToro and Coinbase. 

Personal finance apps work with banks as well as other financial institutions to provide a holistic view of an individual’s finances. 

• Personal finance managers like Mint, Personal Capital, and Qapital link to a user’s bank accounts, investment accounts, loans, and other financial products to track spending, assist with budgets and goals, and provide investment allocation and savings advice. Mint, owned by Intuit, claims over 20M users. 

Robo-advisors use technology to allocate investments for individuals, rather than depending on the user to choose their own stocks or on a wealth manager to allocate stocks on the user’s behalf.  

• Investment managers like Betterment, Wealthfront, and Wealthsimple automatically allocate investments based on a user’s goals and risk profile.  
• Similarly, Ellevest is an investment advisor that is targeted toward women, creating investment strategies that reportedly factor in pay gaps or potential career breaks in order to build wealth.

Unlike traditional brokerages, which require that investments are made in whole shares, micro-investing apps offer fractional share investments — some for as little as $1 investments into a stock. These enable new demographics to invest. 

• Stash offers subscription plans for users to invest in fractional shares of stock and earn stock-based rewards on spending through the Stash debit card. Similarly, Acorns allows users to round up their purchases to the nearest dollar amount and invests the spare change.

CONSUMER LENDING

• Companies in this category provide credit and loans to consumers. 

  Traditional banks require certain credit scores to qualify consumers for credit lines or credit cards. By assessing credit risk through alternative measures, startups may have an opportunity to gain consumers typically overlooked by traditional banks. 

  • Companies like Mission Lane and Petal provide credit cards for younger consumers or those without a substantial credit history by analyzing existing spending patterns and banking history. Petal raised a $55M Series C in September 2020. 
  • San Francisco-based Aven provides users with a credit card that pulls from an individual’s home equity line. 

  Some consumer fintech companies are using personal loans to help consolidate credit card debt, finance large purchases, and provide cash advances.

  • Fintech companies SoFi and MoneyLion provide individuals with personal loans. SoFi offers larger personal loans and loan refinancing to over 1M members, while MoneyLion provides cash advances of up to $250 in near real time.

  Although mortgage rates are hitting all-time lows, mortgages remain a money-maker for traditional banks. Bank of America saw over $35B in residential mortgage loan production in the first 3 quarters of 2020.

  • Companies like Landbay and Better offer digital mortgage platforms to help purchase or refinance homes. Better has reportedly funded $25B in loans since 2016.  
  • Blend provides software to financial institutions to help streamline their digital mortgage lending businesses. The company has raised a total of $385M in equity funding since 2012, including a Series F in August 2020 that valued the company at $1.7B.

  BUSINESS BANKING

  Companies using new methods to evaluate the health of small businesses and unproven startups are gaining traction among a typically underbanked segment.  

  • Mercury, Novo, and Rho Business Banking specifically target startups and entrepreneurs, which may be unable to take advantage of traditional banking due to lack of assets and credit history. 
  • UK-based Tide and Starling Bank are digital banks that each serve over 200,000 businesses.

BaaS - Banking as a Service

BaaS allows third parties to tap into existing banking systems through application development interfaces (APIs) that allow communication between banks’ software and the third parties’. These open APIs expose the banks’ functionalities to anyone intending to access them, which includes 

• Independent developers, 
• Fintechs, 
• Non-financial institutions like restaurants and welfare clubs; enabling them to build their own features on top of the banks’.  

On the other hand, the Banking as a Service relationship does not always work one way, banks can also tap into the unique capabilities of fintechs. For example, remittance company TransferWise’s tech works not by sending money from one country to the next but by rerouting money from a bank account within the receipt’s country so that it doesn’t have to cross the border. This makes its international money transfer service cheaper, UK’s Monzo bank partnered with TransferWise to integrate the service into its banking app.

Furthermore, as open banking becomes industry standard, you should be able to plug and play different financial capabilities like lego pieces to birth a new service without ever having to own the infrastructure behind it. For example, to cook up a PayPal-like service, you’d just plug in mobile wallet capabilities, sprinkle in a little electronic virtual card functionality and season it with Peer to peer cross-border transfer features, ideally, BaaS should make it that easy to cook up a PayPal

IMPACT OF PSD2 ON BANKING AS A SERVICE

The European Union set 14th September 2019 as the deadline for financial companies to comply with the Payment Service Directive II (PSD2); which forces banks with online accounts to provide access to their customers’ account information to registered third parties. However, the account holder has to give consent first.

Additionally under the PSD2, a fintech company (third-party provider) can be licensed as an  

• Account Information Service Provider (AISP); who is permitted to access and consolidate account information from a user’s different banks accounts, or/and 
• as a Payments Initiation Service Provider (PISP): who can initiate a payment request from a user’s bank account at their request. 

This broadens the range of services they can create out of the access they receive.

HOW DOES THIS AFFECT BANKING? 

Well, just imagine your favourite bank being forced to avail information to a company that can use it to launch a competing product. A great example of such a product is Mint, a financial planning an app where you can read all your information (and make payments) from different bank accounts instead of going into each bank individually. Such a service reduces the amount of contact between banks and their customers.

According to a research/survey, banks risk losing 25-40% of their income from the disruption. Additionally, banks that previously invested little in IT infrastructure will have to ramp up their budget to avail the open APIs needed to provide customer information to third parties. 

One way for banks to tackle the revenue drop will be to embrace BaaS and avail more of their capabilities to third parties under revenue-sharing deals. In such a circumstance, PSD2 will eventually become an accelerator of Banking as a Service making it a necessity rather than an option.