Commentaries and insightful analyses on the world of finance, technology and IT.

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October 26, 2015

EMV in the US: 'Swipe' Out, 'Dip' In

Losses originating purely from the use of magnetic or 'swipe' cards are pegged at $8.6 billion per year and many experts believe this figure could touch $10 billion or higher this year. Given this background, businesses shouldn't need much convincing to move to a more secure alternative. However, considering the figures above are that of US and it is the last major economy to move to EMV, that is,  chip cards that need to be 'dipped' into a machine for transaction, it seems to have taken  a lot more convincing than one would have deemed necessary. Better late than never, the US officially adopted EMV on Oct 1, 2015. It is a welcome decision as the US is home to about a quarter of all of the world's credit card transactions.

What took the US so long? If we look back, there have been two main causes that led markets towards EMV - the first being the objective to combat increasing card fraud, and the second, the lack of a robust telephony network. The latter presented the need for a system that could operate offline, such that the card and the terminal are able to allow settlements, without the constraints of the bank's system.

In the yesteryears, America was immune to both those factors. Fraud was more prominent in other markets and connectivity was better in the US than in most other places. However, over time, as other markets began to plug the holes in their defenses, fraudsters shifted their attention to the path that did not only offer the least resistance, but was also very lucrative - the US market. Thus, the US went from being impregnable, to most vulnerable.

Now that it is here, one aspect that is being largely discussed is the 'liability shift.' This essentially means that in case of a fraud, the party with the lesser technology would have to bear the brunt of the liability. From the 'carrot and stick' analogy, the liability is the 'stick', being used to encourage parties to adopt new technology and bring more harmony into the market through better coordination. This has made both the issuers and the merchants invest in the migration, simultaneously. If one migrates and the other doesn't, it would just lead to fraudulent activities shifting within the ecosystem, thus making the entire exercise inefficacious.

The associated costs and consumer adoption are two of the biggest impediments in the transition to EMV. The terminals that read chip cards can cost up to $1000 apiece, which may force smaller players to decide against adoption. However, issuers, such as American Express, have pledged financial aid to help smaller businesses defray the costs. Meanwhile, Square, a Silicon Valley startup, has announced that it is working on developing more affordable chip readers. Sooner these effort bear fruit that reaches the smaller businesses, the better it would be for the cause of secure transactions.

Additionally, there is the problem of customer behavior. However, they can be encouraged to move to new cards through demonstrations and offering certain benefits.

Yet another, but much bigger elephant in the US stores is Apple Pay that requires around 220,000 retail stores to add NFC capable terminals. For these merchants - having already adopted the Apple Pay terminal - the adoption of EMV terminal would be counterintuitive.

In spite of these challenges, EMV has started making headways in the US. But that doesn't mean it is the end - in fact, it is the beginning of a new struggle as fraudsters are likely to move to ecommerce and omnichannel merchants. Merchants' solutions to ward off these challenges and fraudsters fighting to disrupt such efforts should make this battle worth watching.


October 20, 2015

The future of utilities

Industry utilities are emerging as a welcome innovation in the financial services value chain. Their core proposition of disintermediating non-core functions to allow banks to focus on pure business-generating activities is resonating with an industry coping with siege on multiple fronts. But the path to large-scale adoption is still beset with a few key challenges, like regulatory approval for instance.

Regulatory consensus on the value of utilities is still to emerge, especially when it comes to functions like compliance and risk management, which are still viewed as core responsibilities of banks. Then there is the allied concern of defining liability and accountability in this new disintermediated model. It is clear that the pace of utilities evolution will be a function of the industry's ability to engage and collaborate with the regulatory community.

Concurrently, utilities will have to back up their proposition with strategies and structures that account for the practical concerns that still prevail. The focus will have to be on demonstrating that they can balance risk and value through well-governed organizations built on collaborative partnerships, clearly defined roles and responsibilities, and compliance with contemporary principles of security and privacy.

The primary task will be to develop a detailed implementation and operationalization roadmap. At the level of strategy this must address issues like shared vision, governance, risk management / transfer, to name a few. Then there are the technical and functional considerations of defining a utility's scope of service, its product/service strategies and the structural frameworks that will ensure privacy and security.

The roadmap must also include a coherent technology strategy including the expected evolution, say, from an enterprise platform to full-fledged utility via private cloud and SaaS phases. Continuous innovation must be an ingrained functionality, with the roadmap clearly demonstrating how customer value can be enhanced by adopting robotic process automation, robot advisors, NLP-based tools, self-service portals, self-learning systems, thin-trades, open technology platforms for regulatory reporting, and more.

Finally, utilities should offer a business case to customers that emphasizes the real and extended benefits of adoption over and above immediate cost savings. The long-term view should not only highlight the possibilities for accelerating cost savings but also the opportunities to enable productive financial engineering and strategic enterprise outcomes. But the most critical driver of adoption will be the industry's ability to engage with and accommodate the requirements of all stakeholders - banks, product vendors, infrastructure players, technology partners and regulators.

October 14, 2015

'Ification' of Games: Fiction, Fad, or Fact?

The year was 2011 and when scientists were trying to solve the puzzle - find the structure of an enzyme that helps AIDS-like viruses reproduce, for decades - in walked a few online gamers and lo! Behold! In three short weeks, they achieved what eluded scientists for decades. In essence, gamers found the required structure through their gaming skills. This is the most acclaimed example to exemplify the virtues of Gamification.

It was in 2004 that 'ification' was suffixed to 'game' and Gamification has continued to gain currency ever since. It is fundamentally, the art and science of applying mechanics of games to non-game situations, to elicit certain desired behaviors from users. It is used in businesses to make the scenarios more fun, to increase engagement.

Companies are using Gamification to change user behavior, solve real-world problems, and extend brands. It is also being promoted as a tool to keep the employees engaged so that their skills can be enhanced. The ultimate desire is to have these skills drive innovation.
With the emanations and evolution of gesture control technologies, along with augmented reality, Gamification is predicted to become an everyday thing in the years to come.

Even now, whether or not we notice it, Gamification is becoming ubiquitous. Most of us have profiles on social media channels such as Yammer, LinkedIn, Facebook, and Twitter. On these sites, we are encouraged to complete our profile details; the progress is shared as a bar on our profile page. The profile bar is a virtual representation of how complete your profile is, to not only inform us about our profile, but also motivate us to complete the profile; in essence, induce the desired behavior.

Traditional 'push' communication impact has been dwindling in terms of motivating the customer to take note and act. With Gamification, engagement is increased, through the elements and excitement of games, which helps in carrying the organization's message to the customer.

The engagement that is produced with Gamification is not only effective, but also sustainable because gaming is addictive. As customers become players, putting their energy and time into achieving goals, such as winning reward points, they are more likely to stay longer, which in-turn increases the possibility of bringing in more engagement with the brand.

Some might be fighting the doubt that such contests and promotions have been a part and parcel of businesses since the time they came into existence - so why is there the need for Gamification? Is it not just a fancy term to existing practices? The answer to this is, no. It is not an old practice in the cloak of a new term. It is actually an organic next-step or evolution. While promotion tries to entice audience through bait to trigger a desired activity, for instance, "Open an account, and get a chance to win an iPhone", the goal of Gamification on the other hand, is to entrench the products and services in the lifestyle of consumers. 

Thus, Gamification, as a tool of customer engagement, has transcended the fiction and fad stage a long time ago and is now a fact of life; as it is the shared purpose on the part of businesses and customers. This shared purpose is the driving force that strengthens this trend - and as long as the purpose of remaining shared exists, this crescendo will continue.

Blockchain Technology: Is it the next Wheel and Fire?

-by Kiran Kalmadi and Souna Uthappa

Wheels and fire are said to be the most important inventions in the history of mankind. Though we missed the events that led to these inventions, we are a witness to the events unfolding, which many call equally significant - the events that have made the blockchain, the most in-vogue term these days. The banking industry, which is no exception to this, has taken avid interest in this space. The who's who of banking is exploring and embracing blockchain - the technology behind bitcoin. Although bitcoins haven't made much headway in enticing the banking industry, the same can't be said of blockchain.

Blockchain is defined as a distributed public ledger, where all the activity is recorded across a decentralized network. Blockchain is made up of 'blocks' wherein the blocks are files where data is permanently recorded. As each block is completed, it makes way for the next block, and a block records all of the most recent transactions that haven't entered any previous blocks. A blockchain is therefore a perpetual store of records. These features of a blockchain can assist banks in many ways - reducing cost and risks, improving efficiency, increasing transaction speed, improving product offerings, and eventually improving customer experience. Banks are now looking at various use cases of this technology, independent of the bitcoin.

The current focus areas among banks remain mainly in the payments space (real-time payments, cross-currency transactions, P2P fiat currency payments, etc.), Trading and settlement, Securities asset servicing, Back-office operations, and B2B services. Banks across regions are exploring the blockchain technology space and the use cases are only going to expand with each passing day. For instance, Santander InnoVentures  (Fintech Investment fund of Santander) has identified around 25 use cases where blockchain technology can be applied.

Few of the banks currently exploring this space include Deutsche Bank, BNP Paribas, UBS, Barclays, Citigroup, USAA, Goldman Sachs, ANZ, Commonwealth, and Westpac. In addition, banks are also entering into agreement with Fintech startups or are investing in accelerator programs (Barclays, UBS, etc.) to launch new services or products that leverage blockchain. Very recently, nine of the world's biggest banks joined forces with New York-based Fintech startup R3 (R3CEV LLC) to create a framework for using blockchain technology in the financial markets.

The widespread interest that blockchain is attracting today, assures us of one definite trend - all major banks now believe that blockchain can add lot of business value. This is forcing banks to invest in blockchain technology and we believe that in the years to come, the adoption of this technology will be more widespread. It is no more a matter of 'If', but merely of 'when'. History alone is the best judge about the significance of an event and same is true of blockchain as well. However, it certainly has set the wheels of major change in motion and only time will tell if it can sustain the fire, which many claim has begun with this invention.


October 1, 2015

The value of financial utilities

There is straightforward value in financial service providers delegating mundane non-core activities to an emerging set of financial utilities. That was the key takeaway from my first post.

But financial utilities have the potential to enable a range of benefits extending beyond mere "chore-broking". For instance, they can deliver significant cost reduction, which in our own experience, could be as high as 60 percent of the cost per trade. More importantly, utilities enable banks to shift to a variable cost model where pricing may be linked to simple transaction volume, or to more complex business outcome-related metrics. Going forward, there is a huge business opportunity in such gain-share models.     

By taking on the stewardship of non-core activities, financial utilities enable banks to hone focus on pure business-generating activities such as sales, marketing, relationship management, bank-specific pricing, risk management and value-adding services. Banks are free to concentrate on building competitive advantage by accelerating time to market, improving service delivery and enhancing quality of output. Once the utility model reaches maturity, banks will also be able to simplify their technology architecture by leveraging "bank-in-a-box" standardized workflows.

As the utility model evolves, expect to see a variety of formats - from the inclusive and comprehensive SWIFT model to lighter 'single platform-single bank' variations. We will also see strategic variations in the way these utilities are conceptualized, developed and deployed. There is already the cooperative bank-driven strategy that created Clarient. Then there is also the possibility that a single institution will take on the onus of development and then offer it to the larger ecosystem. Or a third-party technology vendor might offer the technical backbone directly to a leading market player like say, DTCC. New utility models could even emerge from partnerships between technology service providers and leading product vendors.

But irrespective of the variations in partnership and structure, every utility will eventually be ratified on its ability to enable productive collaboration between all stakeholders including banks, product vendors, market infrastructure players, leading technology companies and probably even regulators. But given the fact that most regulators are still circumspect about how much utilities should be allowed to do, especially in areas like compliance and risk management, it will be interesting to see how their future unfolds.

We'll talk about that in my concluding post.