The Impact of Fintech on the Traditional Payments Participant › Events › d5811865-de4c-495… · Fintech on the Traditional Payments Participant Peter Tapling Managing Director,

©2019 PTap Advisory, LLC; All Rights Reserved1

The Payments InstituteJuly 21-24, 2019 • Emory University, Atlanta GA

The Impact ofFintech on the Traditional

Payments ParticipantPeter Tapling

Managing Director, PTap Advisory, LLC

1©2019 PTap Advisory, LLC; All Rights Reserved


DRAFT


Today’s Objective

• Avoid this …

July, 2017; Timo Elliot; https://timoelliott.com/blog/innovation-cartoons


Agenda

• Innovation and industry change

• Define Fintech

• Other “non bank” competitors

• Incubators

• Innovating from within


INNOVATION AND PAYMENTS?


Source: https://www.riaa.com/u-s-sales-database/Idea to use the slide borrowed from Peter Davey

Out With The Old, In With The New

CD took 10 years to reach 50% of market

CD market share drops from a peak of 93.4% to 39% in just 3 years

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


Source: https://www.riaa.com/u-s-sales-database/Idea to use the slide borrowed from Peter Davey

But Not Always…

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

1984)

Others will never quite go away (LPs still available –

and growing!)

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


A Macro Backdrop

• World Economic Forum 4th Industrial Revolution research– https://www.weforum.org/agend

a/2016/01/the-fourth-industrial-revolution-what-it-means-and-how-to-respond/

– https://toplink.weforum.org/knowledge/explore

https://www.weforum.org/agenda/2016/01/the-fourth-industrial-revolution-what-it-means-and-how-to-respond/

https://toplink.weforum.org/knowledge/explore


What is the Payment Landscape?

December 2018, Business Insider, https://www.businessinsider.com/payments-ecosystem-report

But this is really only the CARD ecosystem

https://www.businessinsider.com/payments-ecosystem-report


Evolving Business Models

https://investor.firstdata.com/financial-news/2019/01-16-2019-120649159


And New Business Models

• Blockchain is certainly “new”

– But “traditional payment participants” seem to be all in!

July 2019; https://www.jpmorgan.com/global/news/digital-coin-payments

https://www.bloomberg.com/news/articles/2019-06-18/visa-mastercard-paypal-join-facebook-in-forming-crypto-effort

https://www.jpmorgan.com/global/news/digital-coin-payments



Pick a broken payments process…

What could you do to improve the process?

WORKSHOP


DEFINING FINTECH


What is Fintech? Financial technology, often shortened to fintech, is the technology and

innovation that aims to compete with traditional financial methods in the delivery of financial services. It is an emerging industry that uses technology to improve activities in finance. The use of smartphones for mobile banking,

investing services[3] and cryptocurrency are examples of technologies aiming to make financial services more accessible to the general public. Financial technology companies consist of both startups and established financial

institutions and technology companies trying to replace or enhance the usage of financial services provided by existing financial companies.

July 2019, https://en.wikipedia.org/wiki/Financial_technology

• What’s wrong with “traditional financial methods”? • Is there a need for financial services to be “more

accessible to the general public”?


BUT WAIT!!!

• The last line was:

Many existing financial institutions are implementing Fintech solutions and technologies in order to improve

and develop their services, as well as gaining an improved competitive stance.

• Does your institution/company have an innovation “function”?


Focus on Startups

• Many financial technology firms are startups

• Why do founders start companies?

• Opportunities exist where current needs are not being served


Evidently, many companies see LOTS of opportunities to fulfill unmet needs!!

July 2019, https://www.bankingtech.com/files/2017/10/Fintech-Landscape-VentureBeat.pdf

https://www.bankingtech.com/files/2017/10/Fintech-Landscape-VentureBeat.pdf


Startups Have Assets

• They are laser focused on solving the problem they have identified

• Small teams

• They hold the “veto rights”

• Flexible funding

• A startup has limited “guard rails”

• Broad market for whatever they build


FIs Have Assets

• Customers

• Business process knowledge

• Relationships

• Capital

• Resources (people, data centers, etc)

• “Whole system” knowledge

• Why doesn’t innovation happen here?


Starkly Different Approaches

• Economic flexibility

– Short/long term view

• Non-linear thinking

• Willingness to fail

• Desire to change the market structure

• Feature thinking

• Market for whatever is built


• “Digital Natives” may never enter a branch or visit traditional on-line (web) channels

• Mobile is not a “feature” – it is the branch of tomorrow

– Or is it the BANK of tomorrow?

• Develop mobile around a cohesive strategy for customer engagement

Building for a New Generation


• Who is your customer?

– How will you engage with them?

The Prize is Large

Source: https://www.statista.com/statistics/283261/annual-expenditure-of-us-millennials/

This represents $800 BILLION in

payments of some sort!



Recent experience

List new bank services you have seen succeed and fail.

Is there a pattern?

WORKSHOP


• Assets

• Speed to market

• Regulatory requirements

• Risk appetite

• Brand value/risk

• Product focus

• Cost of failure

Some Ways to Compare


• Assets– Monetary, people, facilities, relationships

• How is the enterprise willing to use them?

• Regulatory requirements– Is the focus living within the guardrails or moving

them?

• Product focus– If you build something really useful, would you be

willing to sell it to your competitors?

Each of These Have Tentacles


• You don’t have to “be” a startup

• Innovation can happen at many different scales

• Fintechs can be partners, too

– Focus on services you want to offer to your highest value customers

Innovating from Within


Where Do You Fit?

Assets

Speed to Market

Regulatory flexibility

Risk Appetite



What is your Organizational Flexibility?

Use the last chart – Are these the right categories?

DISCUSSION


• Let’s focus on two areas

1. Faster payments

2. Libra

• We’ll discuss each to some depth, then see how we might innovate

Deeper Discussion


FASTER PAYMENTS


• What is a “Faster Payment”?

– Once the payment instruction is given by the sender, value is instantly available to recipient

– Payment is “safe”

– Payment is irrevocable

– First focus tends to be person-to-person, but there is no reason to limit to P2P

• Digital is central to “Faster”

“Faster” Money Movement


• Why “faster”?

– Better availability of value for businesses and consumers

– Modernize payments

– Macro economic value in faster movement of money


“Payments Are Moving To Real-Time In Countries Around The World”

Forbes, October 5, 2017https://www.forbes.com/sites/tomgroenfeldt/2017/10/05/payments-are-moving-to-real-time-in-countries-around-the-world/#4021b7d5128d

https://www.forbes.com/sites/tomgroenfeldt/2017/10/05/payments-are-moving-to-real-time-in-countries-around-the-world/#4021b7d5128d


• Faster Payments in the United States

– Taking a look at a few initiatives


Federal Reserve

Payments Improvement Initiative

Early Warning Services

ZelleSM

The Clearing House

Real Time Payments

NACHA

Same Day ACH


• When will a “faster payment” just be a “payment”?

• Considerations for you digital initiatives– Clarity/certainty of sender/receiver is paramount

– Need protections against unintended payments

– Risk management cannot be back office

• Faster may not always be better




How will you expand on “Faster”?

Will your focus be business or consumer?

WORKSHOP


LIBRA


Libra is a global, digitally native, reserve-backed cryptocurrency built on the foundation of

blockchain technology. People will be able to send, receive, spend, and secure their money, enabling a

more inclusive global financial system. July 16; https://libra.org/en-US/vision/#how_it_works

• Sounds pretty much like a central bank, doesn’t it!?!

Have You Heard of Libra?

https://libra.org/en-US/vision/#how_it_works


• No central authority

• Immutable

• Consensus

• Balanced economic incentives

What Characteristics Make Blockchain Special?


• A stablecoin is a cryptocurrency structured to minimize price volatility

• Generally, this is done by pegging the value of the currency to the value of an asset

– Usually a currency, but that’s not strictly necessary

Libra is a “Stablecoin”


Who “Owns” Libra?

• While funded by Facebook, Libra seeks to be an independent entity governed by the Libra Association

– Libra Association founding members are a who’s who of non-bank providers


Structure of Libra

The Currency

• The unit of currency is called Libra. The aim is to make Libra as widely accepted and as easy to use as possible to create a currency that people can use with confidence and convenience in their everyday lives.

The Reserve

• Unlike the majority of cryptocurrencies, Libra is fully backed by a reserve of real assets. A basket of currencies and assets will be held in the Libra Reserve for every Libra that is created, building trust in its intrinsic value.


• It appears each of the Currency and the Reserve operate their own blockchain– The currency runs on a blockchain available to participants

to trade in Libra– The reserve operates only between “authorized resellers”

(likely the Association members at the beginning)

• The reserve operates on a separate cryptocurrency denominated in Investment Tokens– “Users of Libra do not receive a return from the reserve.”– But don’t worry…

• “Users do not need to worry about the association introducing inflation into the system or debasing the currency.”

Two Separate Blockchains


There is a Lot to Learn

• Beneficial characteristics

– “Universal” access

– Seemless cross border transfers

– Inexpensive small value transactions

• Challenges

– AML/KYC/CDD

– Global regulatory compliance

– Conversion to fiat



Let’s assume Libra comes to market and WORKS!

What related services could you offer to your customers?

How would you pitch this to management?

WORKSHOP


• How do you bring today’s session back to your institution?

• Innovation can happen at different scale

• Must tolerate some failure

• Build on your strengths

What Do We “DO” With This?


• None of this relieves you of your regulatory obligations

• Regulators do want to “learn” about new technologies– But new guidance will not occur until there is

some maturity

• Stop by the “Intersection of Innovation” session!

Regulatory Considerations


THANK YOU!

Peter Tapling, Managing DirectorPTap Advisory, LLC

[email protected]

Documents

The Impact of Fintech on the Traditional Payments Participant › Events › d5811865-de4c-495… · Fintech on the Traditional Payments Participant Peter Tapling Managing Director,