Bitcoin alternatives could provide a green solution to energy-guzzling cryptocurrencies
The cryptocurrency bitcoin now uses up more electricity a year than the whole of Argentina, according to recent estimates from the University of Cambridge. That’s because the creation of a bitcoin, in a process called mining, is achieved by powerful computers that work night and day to decode and solve complex mathematical problems.
The energy these computers consume is unusually high. Police in the UK recently raided what they believed to be an extensive indoor marijuana-growing operation, only to discover that the huge electricity usage that had aroused their suspicions was actually coming from a bitcoin-mining setup.
Thousands of similar setups, around 70 per cent of which are currently based in China, continue to demand more and more energy to mine bitcoins. This has understandably prompted environmental concerns, with Elon Musk tweeting in May 2021 that Tesla would no longer accept bitcoin as payment for its vehicles on account of its poor green credentials.
But there are thousands of other forms of cryptocurrency, collectively termed “altcoins”, which are far greener than bitcoin – and to which investors are now turning. Many of them are attempting to use less environmentally damaging technology to produce each coin, which may ultimately herald a greener future for cryptocurrencies.
Of the thousands of “altcoins” in the market, ethereum, solarcoin, cardano, and litecoin have shown promising potential as greener alternatives to bitcoin. Let us take the example of litecoin as an example of how they’re doing it.
Litecoins are very similar to bitcoins, except that they reportedly only require a quarter of the time to produce. Where sophisticated and powerful hardware with a colossal energy demand is needed to mine bitcoins, litecoins can be mined with standard computer hardware which requires far less electricity to run.
Other alternatives, such as solarcoin, aim to encourage real-world green behaviours. One solarcoin is allocated for every megawatt hour that’s generated from solar technology, rewarding those who’ve invested in renewable energy.
Different cryptocurrencies also use different processes to complete transactions. Bitcoin uses what’s called a “proof-of-work” protocol to validate transactions, which requires a network of miners to compete to solve mathematical problems (the “work”). The winner – and the person who mints a new bitcoin – is usually the competitor with the most computing power.
While proof-of-work is credited for being relatively secure, making it difficult and costly to attack and destabilise, it’s incredibly power-hungry. The way it forces bitcoin miners to compete with an ever-expanding arsenal of high-tech computers means it has inevitably come to demand more and more electrical power.
But there are alternatives to this form of mining. Ethereum, which is the world’s second largest cryptocurrency behind bitcoin, now uses a different protocol, called “proof-of-stake”. This protocol was specifically designed to address environmental concerns about the proof-of-work system, and it does this by eliminating competition between miners. Without the competition, there’s no computing power arms race for miners to participate in.
Given the increasing environmental scrutiny that cryptocurrency is now facing, it’s likely that any new altcoins will adopt ethereum’s system over bitcoin’s. Investors will likewise look to the green credentials of altcoins when deciding which cryptocurrency they’ll convert their bitcoin into.
Still the future of finance?
Despite the criticisms levelled against bitcoin for its shocking energy inefficiencies, the traditional financial system is far from green itself.
In the five years since the Paris Agreement on climate change, for instance, it’s reported that 60 of the world’s biggest banks have provided $3.8 trillion (£2.7 trillion) to fossil fuel companies – not very planet-friendly. One report found that 49 per cent of financial institutions don’t conduct any analysis of how their portfolio impacts the climate.
Then there’s the sector’s electricity use. Where cryptocurrencies have the potential to run without the oversight of large financial institutions, the banking sector is built upon a huge amount of infrastructure which naturally burns through a great deal of electricity.
Banks themselves use plenty of computers and servers, as well as thousands of air-conditioned offices and fuel-guzzling vehicles. It’s difficult to estimate exactly how much energy is required to support all this activity, but one recent report found that the banking system consumes more than twice the electricity that bitcoin does.
So while bitcoin is rightly getting a battering for its outrageous energy consumption, there’s ultimately a need for all our financial systems to be green and sustainable. Banks can do this by reconsidering their portfolios and working towards net zero carbon emissions. But cryptocurrencies offer a different path to greener finance – and the altcoins that concentrate on their environmental credentials may well clean up the technology’s reputation for excessive energy use.
Sankar Sivarajah, Head of School of Management and Professor of Technology Management and Circular Economy, University of Bradford and Kamran Mahroof, Assistant Professor, Supply Chain Analytics, University of Bradford
Bank from anywhere
John Federman, CEO, JRNI
Customer behaviour has changed enormously over the past year. As customers, and as humans, we don’t just want to buy products or services – we want a truly unique experience. And providing that unique, human-to-human customer engagement is at the very core of where the financial industry is headed. The transition to experiences and a more adaptable, virtual world was already happening – the pandemic just made it happen that much faster.
As many companies have adapted their work policies to include working from home and working from anywhere, many customers now bank on the go – and expect to. Here are a few key things for you to know:
The empowered customer
The truth is the need for banking services has not changed. People still want to deposit cheques, open accounts, get a new debit card, refinance their homes and more. What has changed is the way technology enables customers to manage these services on their terms, and the empowered customer wants convenience, simplicity and options.
With flexible appointment modes from virtual technologies, you can give your customers the services they need anytime, anywhere, via any device, and this is exactly what the empowered, hybrid customer expects.
Physical branches aren’t going away
There will always be customers who prefer to bank in person. People value in-person, human-to-human connections. That’s why physical branch locations should supplement with a digital strategy, including remote video- and voice-based appointments.
A recent survey reports that 73 per cent of customers still prefer in-person interaction when receiving financial advice. So, while there might be less dependence on physical branches moving forward, they are still an important part of your business.
Embrace the right technology
That’s where appointment scheduling technology comes in. It can give your customers an unmatched level of service and the personalisation that keeps them coming back for more. Additionally, virtual queuing and capacity management can help your branch staff manage lobbies while simultaneously improving the customer experience.
Appointment scheduling helps banks run safely and efficiently, reach a broader audience and provide the unique, personalised experience customers want and need.
There is a slew of appointment scheduling use cases for financial institutions and many ways to provide memorable experiences, but a couple worth mentioning are:
With virtual appointments, you get the benefits of providing your services during non-traditional hours. The after-hours availability could be the difference between a customer staying loyal and moving to a competitor.
Another way banks can significantly improve the customer experience is through lobby management. Virtual queuing and capacity management technologies are helping banks do this at scale.
With virtual queuing, customers and members have the choice to go online, check-in and be notified regardless of their location when it is time for their appointment or to meet with a staff member. And capacity management can be used to set a limit, manage walk-ins at peak times and ensure there is enough space and distance in bank lobbies.
So, as we look to the future, it is important to embrace digital transformation and technology such as bank scheduling software to exceed your customers’ expectations. By giving your customers the option to do business with you on their terms and give them expert guidance, you will be well on your way to improving customer satisfaction and loyalty.
Click here to learn more about leveraging JRNI for your financial institution.
Podcast series: why you need Instnt for managed customer onboarding
Sunil Madhu, founder and CEO of Instnt, had the opportunity to share his experience and perspectives on the financial services industry and managed customer onboarding in this four-part podcast series. Here’s a recap of the Future of Payments podcast, hosted by Georgie Frost with guests Anil Aggarwal, CEO of Fintech Meetup, Ajay Hans, CEO and founder of Mobetize and Adam Moelis, co-founder of Yotta Savings.
Episode 1: fraud as the new normal
Anil Aggarwal, CEO of Fintech Meetup, joined Sunil on the first episode, discussing digital transformation that will be ongoing now that the pandemic is receding.
AI and automation can be used for many aspects of the onboarding process, including KYC and anti-money laundering (AML). Not only does AI essentially automate compliance, but it can also address customers’ impatience with having to wait or jump through hoops while signing up for a new financial service. If the user journey is not customer-friendly and is causing delays, new customers will leave.
The customer experience improves, but the business can actually grow faster because more clients are quickly signing up.
Unfortunately, fraud is the new normal. To address and combat it, financial services firms buy a range of tools for know your customer (KYC), AML and other compliance measures, but it’s an imperfect process at best.
Instead, firms should consider a shared services model, leaving the onboarding process to a provider with access to wide amounts of aggregated data. In this way, the stack can be minimised and firms don’t need to manage a range of vendors that only provide one component, such as phone number verification.
There will soon be an institutionalised way of doing things. Regulators, legislators and industry bellwethers might prefer a wait-and-see approach, but managed customer onboarding will soon be the industry norm.
Anil Aggarwal, CEO of Fintech Meetup, and Sunil Madhu, Founder & CEO, Instnt
Episode 2: fintechs might be nimble, but credit unions have an opportunity
Ajay Hans, CEO and founder of Mobetize, joined Sunil on the second episode, discussing the challenges for instant digitisation by banks brought on by the pandemic.
Fintech newcomers are not bound by geography, time zones or real estate. Without significant capital expenditures, start-up financial services organisations can put their brand into the hands – literally – of millions of potential customers.
The market is demanding a fast and frictionless experience when signing up and creating accounts. However, compliance, including the handling of KYC and ID verification, is a competing priority that must still be handled quickly in the background, so as not to disrupt the onboarding process and turn away potential customers eager to get started with an app.
However, smaller banks and credit unions are challenged to compete with such start-ups, because most still use older, clunky legacy systems and inefficient, manual processes. Such systems do not meet the needs of – and might even turn away – younger customers who might be swayed by the convenience and user-friendly interfaces of digital and mobile-first experiences offered by fintech newcomers.
Credit unions are realising that they can’t go through this alone, as innovation is needed for customer onboarding and the complete customer journey. They will soon adopt the idea of “open banking,” which is about adopting technologies to make it easier for customers to do business with them.
Ajay Hans, CEO and founder of Mobetizeand, Sunil Madhu, Founder & CEO, Instnt
Episode 3: fraudsters know how and when to play
Adam Moelis of Yotta Savings joined Sunil for the third episode, to discuss the increase in fraud sophistication and what banks need to do to encourage new sign-ups while keeping information safe.
It seems logical that larger financial services firms, holding a significant volume of customer assets, would be more vulnerable to fraud than would younger fintech start-ups, but this is not always the case.
Fraudsters know that start-ups don’t always have the technology and processes in place to stop them. Many start-ups underestimate the effects of fraud and often experience massive losses early on before they learn their lessons.
Additionally, fighting fraud is not a core strength for companies more concerned with building great products and providing great services. As such, ensuring privacy and security, especially in the onboarding process, should be outsourced to a shared service whose core competency is keeping out bad actors. This is possible because that shared service has learned from the collective experience from several customers.
While each firm might have its own rules and processes for judging the veracity of new accounts, customers, markets and technologies are constantly changing and evolving. A shared service with built-in AI that not only keeps up with industry rules but also leans on the collective experience of several firms can provide the best defence in the onboarding process.
Adam Moelis, Co-Founder of Yotta Savingsand, Sunil Madhu, Founder & CEO, Instnt
Episode 4: industry disruption
There has been a constant evolution of bundling and unbundling of services in the financial services industry. Fintechs are great at this disruption, and their products, including payments, often disrupt multiple industries at once.
Rather than subscribing or licensing the product offered by a fintech startup, often the larger institution will invest in the smaller company to minimise the risk exposure to a less mature business.
A managed service can offer value on multiple levels: reduction of costs (CapEx, OpEx), but also faster top-line growth, generating more customers and more revenue in a shorter amount of time.
A medium-sized enterprise might spend £350,000, on technology associated with onboarding customers and opening new accounts, whereas a solution might be 30 to 40 per cent cheaper if they outsource it.
Most businesses want to keep their fraud losses below 1 per cent. In order to do this, the business will need to use a range of technologies and services to vet the people they’re signing up. However, the trade-off is that when bad people are kept out, the good people are kept out as well. A managed service can address this and does not give away the user experience or the sign-up journey.
Sunil Madhu, Founder & CEO, Instnt
Instnt is the first fully managed digital customer onboarding solution for businesses with up to $100MM annually in fraud loss insurance. See how we can help your business safely onboard good customers today!
Business banking reimagined for the digital age
Rho’s tech-forward, integrated banking solution helps high-growth companies scale and save in a changing economy.
In today’s on-demand, global economy, business leaders need finance solutions that are instant, comprehensive, and collaborative without compromising on quality and security – capabilities beyond what many legacy banks can provide.
This is especially true in the wake of Covid-19, as e-commerce has soared and remote operations have become not only normalised but expected. Research from McKinsey shows that the pandemic has accelerated the adoption of digital tools and services across business sectors by as many as seven years, and these changes are here to stay.
With that in mind, innovative solutions such as Rho have rebuilt a business banking platform from the ground up. Rho’s integrated platform unites commercial banking, corporate cards, AP, global payments and capital markets in a smart financial ecosystem, streamlining digital finances for the modern corporate team.
Here are some ways banking solutions like Rho are responding to emerging trends and helping high-growth companies overcome the challenges of doing business in a post-pandemic digital world.
Fee-free global payments
Increasingly global business models mean more electronic and international payments – and with them, more fees.
Typically, every wire, ACH transfer and foreign transaction carries its own separate fee, not to mention service fees, late fees and interest piled on top. These costs add up fast, which is why they’re the bread and butter of traditional banks. It’s not uncommon for businesses to lose tens of thousands of dollars or more each year in fees alone, a sum that can make a real difference for a budding startup.
In a perfect world, you shouldn't have to spend money to manage money. Rho stands behind this principle and doesn't believe in charging companies for service, corporate cards or payment delays. Rho also offers no-fee global transactions and a market-leading 0.5 per cent foreign exchange rate.
This is ideal. In our truly global system, businesses should be able to pay anyone, anywhere, anytime – without any extra price tags.
Remote work was already growing in popularity before Covid-19, and the pandemic has only hastened its arrival into the mainstream. According to the Pew Research Center, 83 per cent of employers have developed a favorable view of remote work over the past year, and the majority of workers expect to keep working remotely post-pandemic.
But to operate remotely, companies need a secure and reliable way to share financial data and records between dispersed employees. Historically, this has meant manually typing, scanning and sending documents – a disorganised process that leads to miscommunication and an inability to thoroughly track and analyse company spend.
Anticipating this shift, Rho designed its platform for maximum visibility, accessibility and control, making collaborating on finances safer and more efficient than ever before.
Rho’s corporate cards, for instance, whether physical or virtual, have preset spending limits. Charges are reported in real-time on a centralised dashboard – encouraging greater transparency and accountability among business teams, even (or especially) from a distance.
Financial software has grown increasingly specialised in recent years, meaning many companies handle their banking, bills, cards and accounting functions on separate platforms. But with each new service comes a new set of logins to remember, apps to maintain and data points to reconcile at the end of the day.
The fewer platforms you have to juggle to settle finances quickly and accurately the better. Rho understands this and has put a stop to banking in silos, enabling teams to work together on a single platform from which multiple, integrated finance solutions are just a click away.
That means keeping accounts, cards, budgets and payables all in one place and syncing directly with external accounting software for easy reconciliation. On an interconnected platform such as Rho’s, multi-step workflows such as invoice approvals and expense reports are fully automated, taking the friction and guesswork out of corporate finance.
No two businesses are alike. Companies run differently, manage their cash differently and have different demands throughout the fiscal year – especially during periods of high growth. But until now they’ve all been bound by the same rigid credit terms.
Rho offers the first-ever corporate card that lets companies adjust their cashback and credit terms each quarter to account for seasonality and optimise cash flow. Companies can earn up to 1.75 per cent cash back to improve their bottom line or flex up to a total of 60 days to pay (one month statement period + one month repayment period). Rho’s underwriting process also finds businesses high credit limits that scale along with them, making Rho the solution that truly keeps pace with growing companies.
At big traditional banks, smaller companies often get lost in the mix and are made to feel their business isn’t lucrative enough to warrant individual attention. And with many newer platforms going fully digital, it’s easy to think that person-to-person customer service is a thing of the past.
The best banking solutions don't ask companies to sacrifice personalised service for a top-rate digital experience. While Rho is fully digital, a dedicated account manager is still assigned to every client, getting to know their business and ensuring attentive support around the clock.
It’s not just about good service. It’s about putting trust and good faith in growing organisations. While many financial institutions make clients sign a personal guarantee – meaning applicants are personally liable for repaying corporate debt – Rho bases credit limits on company performance, giving every founder and business owner a chance to thrive.
Want to learn more about Rho’s integrated business banking solutions? Visit Rho.co to explore products and partners, check out the Rho blog, and get in touch.
by Sebastian Morales, VP of Finance, Rho
Revolutionising ethical investment through AI
There is strong evidence of individuals and institutions divesting from so-called “sin stocks” or funds – those with dubious ethical provenance that investors are reluctant to highlight within their portfolios. There is a demand for emphasis on ethical investing.
The investment industry continues to undergo a sustained transformation as industry challenges intensify. Inadequate organic growth, volatile capital market returns and fee/margin compression have created a more challenging context. Furthermore, investors are demanding to find ethical and sustainable investments.
Machine learning will reshape quantitative investing over the next few years. Applying non-financial factors in investing is going to be vitally important. In this shifting paradigm, the investment industry is facing significant challenges to profitability. The value of investment management has become shakier in a market where returns are narrowing, and data is growing exponentially, making it impossible for humans to extract corroborated insights. There is a need to create an integrated target-state vision for data and investment intelligence.
The industry has a lot to gain from artificial and augmented intelligence. AI can facilitate automated research, include ESG and impact investment metrics, and provide predictive analytics on growing information in real-time. There is an imperative to seamlessly integrate ESG, sentiment, and metadata directly into your quantitative and traditional models.
We have seen a rise in robo quants on trading floors – this operationalises trading but is not capable of looking beyond numbers. Nor does it cater to the needs of passive, mid-to-long-term investments, let alone ethical investing. It is necessary to employ nonlinear metrics to identify ethical investment opportunities. Ethical or impact investing needs to look beyond traditional analysis to find sustainable investment opportunities. This is required to couple ESG and alternate data with generally detached fundamental, quant, macro and technical data, to Intuitively derive insights from usually detached investment styles. AI is the catalyst here – it can help us find hidden nuggets of information in massive unstructured data, which would normally not be possible for humans to see in real-time.
It is time to arm research analysts with bots that can appropriate real-time data for market and financial analysis and device reports, recommendations and signals. The current research and analysis process is incomplete, fragmented and expensive, and in need of modernisation. We can make it more efficient and accurate by combining it with an AI element, while enriching the research with alternate or digital data.
The investment industry is looking to transform and adapt. A synthesised approach to investment strategies is the future for asset and wealth management. It is possible to find investments that are good for the planet while providing users with a further edge that will intensify the returns over a long period.
Laborious and expensive analysis can be transformed with machine learning and natural language processing algorithms, while also considering the environmental, social and ethical impact of the investment. All investment research and decisions can be AI-driven, leaving asset and wealth managers free to focus more on portfolio management, client relationships and business strategy.
AI is accelerating and reshaping the asset and wealth management industry. The devil is in the detail, and AI can provide an edge. AI can analyse magnitudes of data, foretell corrections in supply and demand imbalances and forecast market drift to help make better tactical decisions. Strategies are the byproduct of crunching billions of data points and learning how to adjust to markets in real-time – explaining how returns are generated is pushing the boundaries of human comprehension.
There is a significant rise in the number of conscious investments. It is imperative to build ethics into AI. It’s time to find positive profitability.
by Hamsa Bharadwaj, Founder and CEO, Pecten
How would you redesign payments from the ground up?
Ciaran O’Malley, Vice President of Partnerships, Trustly
What would a new payments system, designed from scratch, need to look like? The question isn’t purely hypothetical. A fast-digitising retail market has reset the expectations of both consumers and merchants. Consumers now expect payments to demonstrate the same immediacy and fluidity as their other apps and services. Merchants expect security and cost-effectiveness as standard.
Innovation in UK payments hasn’t always been easy. Payments systems were traditionally a patchwork of legacy technology, with innovation hampered by the need for cross-industry agreement on standards before infrastructure could be changed.
Open Banking has sped innovation up, while the pandemic has changed consumer behaviour. Rebuilt from scratch, what would a new payments infrastructure need to look like to suit the changing needs of merchants?
You would start by making it frictionless. Reducing friction (or the points in a payment process that slow things down) is not just about making customers’ lives easier – it’s also about engendering trust.
At the counter in a physical store, removing your card from your wallet and touching the card reader has almost zero friction. But online, any steps that make things harder can cause suspicion. Some consumers will question a request to type in their card details in an unfamiliar checkout environment, particularly if unexpected steps are added.
Suspicion can lead to cart abandonment, particularly in the case of high-value purchases. This is an opportunity for open banking solutions, where consumers use their bank directly to transfer money for purchases and, simultaneously, have full visibility of their account balance. Quite often, the perception of security is as important as the reality.
The second fix would be to ensure faster refunds. Counter-intuitively, the faster merchants pay refunds for returned items the greater the overall revenue opportunity. This is for two reasons. First, a customer is more likely to buy a replacement item from the same retailer if the refund is instantaneous because it will more easily be perceived as part of the same purchase. With card payments, a refund can take several days to arrive after the returned goods have been received by the merchant.
The second reason is trust. Consumers are much more likely to buy from websites they perceive to be trustworthy. Holding on to refunds for days has the opposite effect of engendering trust.
Finally, a new rebuilt payments system would be cost-effective for retailers to grow their business. The pandemic has opened up the possibility of truly global retail, but Brexit has introduced higher costs in the form of both new taxes and tariffs and the rising cost of handling European cards. The more complex merchants’ card costs are, the harder it is to forecast the cost of sales accurately. Without accurate forecasting, it’s hard to build a global business. Trustly has created a network of banks across Europe and North America that bypasses the card system, enabling over 525 million consumers to pay at 8,100 merchants in 30 countries. It means payments are fast, free and frictionless for consumers and up to 50 per cent cheaper for merchants. Starting from scratch is actually much easier than you think.
INDUSTRY VIEW FROM TRUSTLY
Why are banks key enablers in fighting climate change?
Monika Liikamaa, CEO and Co-Founder, Enfuce
Banks have a crucial role in advocating CO2-conscious lifestyles among consumers. CO2 emissions are derived from consumption, consumption is enabled by spending money and money is handled by banks. Because the drastic impacts of climate change have already been seen, banks need to take responsibility and act to fight it.
Studies have estimated that 70 per cent of CO2 emissions are driven by consumer behaviour. Banks and financial institutions can be key enablers in fighting climate change because they see and process all our transactions. This provides them with a wealth of information about consumption patterns and preferences.
If banks can calculate customers’ carbon emissions based on transaction data, they can show them their individual carbon footprint. However, it is not enough to tell consumers how their lifestyle choices affect climate change – they must also advise them on how they can reduce their emissions, incorporating sustainability into personal finance management.
To do this, banks can build a range of products. For example, they can offer their customers dynamic credit interest depending on what their sustainability score is. Another way for banks to incorporate sustainability into their services is by offering carbon-cutting loyalty schemes that incentivise consumers to buy environmentally friendly products and services.
Incorporating sustainability into banking services
Banks can help consumers change their lives towards a more sustainable world by giving financial advice that is good for the bank, the consumer and the environment – and make a real impact.
For example, banks can advise homeowners to choose geothermal heating instead of district heating. This would not only decrease the emissions of the house but also increase the property’s value and decrease the bank’s collateral risk.
That being said, every time banks meet their customers, they have the opportunity to help them live a more sustainable life. This does not mean that banks would be helping their customers to spend less but enabling them to consume more responsibly and sustainably.
Enfuce was born to enable change within the payment industry. Helping fintechs and merchants, on top of banks and financial institutions, to issue payment methods better and faster in a globally scalable process is at the core of Enfuce. And when companies can issue payment methods, they are helping people to spend.
By wanting to build a company that has a long-term positive impact, sustainability has been at the core of Enfuce since day one. This made the Enfuce founders think about what the company can offer its customers to help in the fight against climate change and make an impact. Since Enfuce is allowed to store and process sensitive data, the company decided to turn it into impactful insights for the greater good of the planet, and that is how My Carbon Action was born.
The time to talk is over; the time to act is now
My Carbon Action is a digital tool that allows banks and financial institutions to instantly calculate the carbon footprint of individual transactions. It’s a turnkey solution based on a country-specific scientific data model and user input on individual lifestyle choices (e.g., diet, housing and mode of transportation) – a combination that makes My Carbon Action different from any other carbon footprint calculator on the market.
Banks can use these APIs flexibly and easily integrate them into their apps and services. My Carbon Action is also powered by over 100 personalised tips on how to reduce the carbon footprint and live a more sustainable life.
How can banks be a part of fighting climate change? A large Dutch banking corporation learned that their customers want to understand how their lifestyles impact the climate and how they can change their lifestyles towards a more sustainable world.
Having integrated sustainability into all of its business operations, the bank started using My Carbon Action to help with providing insights to its customers about their impact on the environment.
In a short time, the response was positive. What users found the most insightful was the environmental impact of green energy, meat and plastic packaging. Over 90 per cent of new users answered the lifestyle questions in the My Carbon Action app, and it already had a positive effect on the lifestyles of 30 per cent of users.
People are becoming more informed about climate change, which will drive change towards a more sustainable world where people make more sustainable choices.
Seeing the floods, wildfires and other extreme weather conditions become worse and more common, there is no denying climate change anymore and giving up is not an option. Banks can either be a part of the solution or a part of the problem.
Learn how banks can fight climate change with My Carbon Action!
Why every company needs an embedded finance strategy now
Dr Ozan Ozerk, Founder, OpenPayd
Embedded finance is getting a lot of attention as the biggest technology platforms and consumer services embrace it. While this is fuelling the momentum right now, the biggest impact this important trend will have is within business-to-business interactions.
The rise of embedded finance has been fuelled by a combination of friendly regulation, acceleration towards a cashless society and e-commerce growth around the world. These factors have opened opportunities for any company with a large, engaged consumer base to embed financial products and services in the context of their customer experience.
Embedded finance can have a much greater benefit for businesses than just improving the way they interact with customers, though. It can also help them to improve internal financial management by scaling payment flows and simplifying treasury, as well as laying a new foundation for data-enabled innovation in the future.
E-commerce fuels the need for embedded finance
Over the past ten years, a couple of important trends have helped make embedded finance so relevant today.
The first has been the move by various regulators across the world to open up finance by using technology to make services more accessible to consumers and third-party providers. A good example is the Open Banking or Second Payment Services Directive (PSD2) that exists in the UK and Europe.
The second significant trend is the gradual but seemingly unstoppable move from a cash society to a digital one that is occurring around the world. In China, where superapps such as WeChat and AliPay dominate, cash has almost disappeared, and we are seeing a similar trend occurring virtually everywhere else.
As this occurs, the frictions of digital payments within e-commerce are exposed, both for consumers using these services and companies that have built their business models in this industry. These frictions are numerous but they essentially boil down to having to interact with multiple payment providers and banks when you sell to customers, buy from suppliers or pay your staff.
Embedded finance eases these frictions by providing API connections to financial infrastructure, so that financial products and services can be accessed easily within your existing user experience.
Offering finance to customers in context
Embedded finance offers service providers the opportunity to improve their experience, to increase the stickiness of their products and to offer more services for customers to buy.
Many of the biggest tech companies are taking this opportunity, with Chinese superapps showing the way as to what is possible. These apps are marketplaces for lifestyle services but they run on a financial backbone that you don’t really see.
This is an important factor in why consumer service providers choose to adopt an embedded finance strategy. It’s about embedding financial services to improve the experience for customers by offering them what they need in a context they understand.
This could mean an e-commerce provider offering options such as buy-now-pay-later at the checkout, a car dealership offering insurance when a customer buys a car, or a real estate agent offering a mortgage when someone wants to buy a house.
Shopify, the online store platform for e-commerce merchants, is a standout example of an API-enabled tech company that is embracing this trend to improve the experience for its customers by offering a whole range of embedded finance services.
Better management of business finances
Although there is a lot of focus put on the enhanced consumer experience that embedded finance can enable, the significance of this important trend does not end with offering financial products and services to customers.
In fact, embedded finance may have the most significant impact within the business-to-business setting. This is because there are so many improvements to be made in how companies transact and how they manage their internal finance operations.
Embedded finance offers a solution to all sorts of big issues for globally oriented businesses that want to increase their sales and cut their costs. It can help them to improve everything from payment processing to payroll, insurance, compliance and many other internal finance functions.
If you take the example of a large, global retail business with a significant high street and online presence, embedded finance can do a huge amount to solve complex operational issues. That’s because, even though these businesses may generate impressive sales, they may well have lots of internal finance processes that are done manually and which could be improved enormously.
Embedded finance provides these businesses with the opportunity to plug into finance infrastructure and locally regulated services in markets across the world, so the process of transacting across various countries is made much easier. APIs make this possible, allowing businesses to settle funds, reduce FX losses and improve cash flow.
How data will fuel embedded finance’s growth
The dual benefits of being able to offer more services to customers while also improving a wide range of internal finance processes are why so many businesses are adopting an embedded finance strategy.
These are the benefits that businesses can see straight away but, by embracing embedded finance, they are also setting themselves up to capitalise on this important trend over the long term. That’s because, by simply getting started with it now, they can take advantage of the rich data it provides to build innovative services in the future.
The apps of the future, which will be built on the foundations that embedded finance enables, will know who their users are, what they want and how they spend their money better than anyone else. This might sound scary but it can benefit both the company and its users.
On the one hand, consumers get faster, easier access to services, as well as suggestions about which financial product is the best fit for their particular needs. On the other hand, businesses are able to streamline processes and use better data to improve internal processes around FX, cash flow and compliance.
This is why embedded finance is gaining momentum and why businesses should embrace it now to benefit long into the future.
Contact OpenPayd today to learn more about embedded finance.
Bitcoin is now ‘legal tender’ in El Salvador – here’s what that means
The government even went a step further in promoting the cryptocurrency’s use by giving US$30 in free bitcoins to citizens who sign up for its national digital wallet, known as “Chivo,” or “cool” in English. Foreigners who invest three bitcoins in the country – currently about $140,000 – will be granted residency.
Panama is considering following El Salvador’s lead.
Does making bitcoin legal tender mean every store and merchant in El Salvador will now have to accept digital payments? If more countries do the same thing, what will this mean for consumers and businesses around the world?
What is legal tender?
Legal tender refers to money – typically coins and banknotes – that must be accepted if offered in payment of a debt.
The front of every U.S. banknote states “This note is legal tender for all debts public and private.” This statement has been enshrined in federal law in various forms since the late 1800s.
The greenback is not legal tender in just the U.S. El Salvador, for example, switched from the colon, its previous currency, to the U.S. dollar in 2001. Ecuador, Panama, East Timor and the Federated States of Micronesia also all use the dollar as legal tender.
Do merchants have to accept legal tender?
But despite the definition above, legal tender doesn’t mean all businesses must accept it in payment for a good or service.
That requirement applies only to debts owed to creditors. The ability for a store to refuse cash or other legal tender is made explicit on the websites of both the U.S. Treasury, which is in charge of printing paper money and minting coins, and the Federal Reserve, which is in charge of distributing currency to the nation’s banks.
As the U.S. Treasury points out, there is “no federal statute mandating that a private business, a person or an organization must accept currency or coins as payment for goods or services. Private businesses are free to develop their own policies on whether to accept cash unless there is a state law which says otherwise.”
And this would be no different if the U.S. made bitcoin legal tender. Private businesses would not be required to accept it.
There is clearly some confusion in El Salvador over the issue, however. Its original bitcoin law, passed in June 2021, states that “every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service.”
Why did El Salvador make bitcoin legal tender?
El Salvador is betting that being the first to open its doors completely to bitcoin will help boost its economy.
President Bukele said he believes this will encourage investors with cryptocurrency to spend more of it in his country. He even has a plan to have El Salvador’s state-run geothermal utility use energy from the country’s volcanoes to mine bitcoin.
The $30 given to every citizen who joins the cryptocurrency craze will temporarily stimulate the economy. However, the overall impact will likely be a short-term boost. The impact of similar payments in other countries, like Covid-19 stimulus payments, appear to end after people have spent the money. Moreover, it’s unclear El Salvador’s increasingly indebted government can even afford it.
And the widespread adoption of bitcoin will likely take years. El Salvador has been installing 200 bitcoin ATMs to allow people to convert cryptocurrency into dollars.
Since just 30 per cent of the Central American country’s population even has a bank account, I believe the U.S. dollar will still be used in El Salvador for a long time, even if its president wants to move toward bitcoin.
Banking, business and blockchain: expanding financial access
Denelle Dixon, CEO and Executive Director at Stellar Development Foundation
Billions of people around the world lack access to financial services. Even as technology has rapidly advanced over the past decade, the global payments system hasn’t kept pace.
The reasons are many – lack of accessible banking infrastructure, the expense involved, methods of establishing identity and authentication – but they all affect the broader health of the world economy, especially in emerging markets. The difficulty, or outright inability, to make payments inhibits the growth of businesses (in particular, the millions of SMEs in emerging markets lacking access to financial tools) that form a vital backbone of the economy. The barriers to access also hinder remittances, another important instrument of economic growth in developing countries as well as essential income for millions of families.
So why aren’t payment systems more inclusive? And what can we do to address long-standing problems in processing payments, so we can meet the needs of populations left out today?
Let’s break down the problem by looking at costs. Billions of dollars are transferred cross-border annually through personal remittances when foreign workers send money to family members in their home country. While a typical transaction usually runs around $200 to $300, the average retail costs of these transfers run 7 to 8 per cent – and sending costs as high as 15 per cent when transferring money to people in developing economies. To cover these additional costs, remittance service providers hike up transaction fees, making customers foot the bill. That’s taking money away from the people who need it most.
But fees are only the start of the problem. Consumers find themselves stuck paying a premium for a service that is also slow because today’s financial systems are not interoperable. Given the patchwork of financial institutions and intermediaries along the value chain, connecting these disparate systems creates friction, leading to long delays and high fees at each link of the chain.
At its best, today’s system is slow, cumbersome and expensive. At its worst, it leaves millions of people marginalised – more than 1.7 billion unbanked in the world and many more underbanked.
To achieve greater financial inclusion, we need to reduce friction in the current financial system. People shouldn’t have to struggle to access financial services, or be stuck with slow, expensive options when technology can enable better solutions.
Stellar is looking to set a new global payment standard where you can send money anywhere in the world just as you would an email. Thanks to the speed and scale of the Stellar blockchain to transfer value, moving money and processing payments takes seconds rather than days, and costs only fractions of a cent.
Global businesses realise the strengths of Stellar and build products and services on top of the network to bring financial solutions to their respective regions. With just two lines of code, businesses can sustainably represent their home currency on Stellar, allowing it to be exchanged with other world currencies on the platform. They can also set up their own payment rails all on one network, bringing interoperability to cross-border payments.
The key to interoperability is Stellar’s global network of anchors. Anchors are financial institutions that serve as on- and off-ramps, connecting the network to the local banking system and handling regulatory compliance. They also maintain fiat reserves equivalent to the value of issued digital currencies, so users can redeem them back to their usual bank account at any time.
More importantly, anchors open markets to new remittance and payments corridors, like between Europe and Nigeria. Cowrie Integrated Systems, a fintech company based in the UK and Nigeria, works with Tempo, a French-based payment institution, to support a bi-directional corridor for customers to redeem and trade USDC (US dollar) and EURT (euro) digital currencies right away. For companies such as Cowrie and Tempo, the cost-savings of building on Stellar apply not just to capital saved, but to time as well. Payments on Stellar average under 10 seconds per transaction – compared with five business days with an MTO – and settle for a fraction of the typical cost.
Stellar’s features are also versatile enough that businesses can work on use cases beyond just payments. Businesses are building products for investments, mobile savings accounts, e-signatures, and more on Stellar. For instance, fintech company DSTOQ makes it possible for anybody in the world to invest in US-grade securities on its mobile app – all by tokenising shares on Stellar and transacting them on the network’s decentralised exchange. It’s incredible how DSTOQ has brought cross-border investing to emerging markets in a way that’s affordable, fast, and accessible.
The more businesses collaborate with each other and use-cases expand, the greater the positive network effects for all Stellar partners. Blockchain technology such as Stellar is modernising the financial system, proving we can connect financial infrastructure so that, no matter where you are in the world, systems and forms of value can interoperate with each other.
Banking on cloud: the future of payments infrastructure
Payments are a fundamental part of society and the global economy. It is estimated that the global digital payments industry will hit $6.6 trillion in transaction value in 2021, almost a 22 per cent increase year-on-year. In the next four years, the digital payments market is set to reach a staggering $10.5 trillion value.
Yet despite the extraordinary growth, recent innovations in payments have taken place in the frontend, with mobile apps and e-commerce models delivering new ways in which to initiate a payment. But there has been little innovation in the backend – the processing engine that forms the core payments infrastructure.
The systemic shift in the way payments are initiated globally means real-time (millisecond) transaction processing is now deemed the new standard. Gone are the days of batching payments to the end of the day, or clunky legacy systems that mean your payment arrives a few hours later.
New European initiatives such as open banking and request to pay mean that real-time payment processing is accelerating globally and will continue to do so.
So the pressure is now on for legacy providers to overhaul their technology and business models, not only to handle increasing transaction volumes and enable real-time processing brought on by the rapid shift to account-based payments, but also to remain competitive against digital challengers and specialist providers.
Payments will not get simpler – there will be more ways to pay, and challenging distributed payment types will be typical in the future. Flexible technology is something all financial institutions will need to take advantage of.
Technology no longer needs to be owned, managed and deployed by financial institutions: it does not make sense for them to continue managing their own tech stack in a very opaque manner.
Cloud native technology provides speed, scale, resilience and repeatability. The new building blocks for enabling rapid change and scaling for financial institutions are APIs, microservices and containers. The shift in the way banks think about platforms is growing, and the direction of travel is towards a mutalised payments environment.
Fintechs and payment technology providers enable easy integration to standardised API-driven platforms which also plug into central banking infrastructures for universal access to payments schemes.
An easy way to adopt complicated services for customers.
Certainly in the UK, banks are now accelerating their payments modernisation programmes, partnering up to transition their payments infrastructure to a cloud-based platform model. Europe is poised to follow, making the shift to capitalise on the cost, risk, scale and resilience advantages that only cloud infrastructure brings.
Gone are the days of heavily customised, bespoke platforms that lock in customers and biannual release schedules and disruptive migrations. Today, mutualisation and streamlined, shared API-based functionality for the benefit of all is the future of payments.
Find out more about transitioning to a cloud based payments infrastructure here.
by Steve Cook, CTO, Form3
What today’s extraordinary payments experiences will evolve into tomorrow
The recent increase in consumer adoption of digital payments is an important hurdle cleared towards further payments innovation, yes. But the floodgates are yet to open. Barring more unprecedented external forces, most consumers will not suddenly adopt new payments experiences, especially if their primary added value is novelty alone. However, many consumers and merchants alike have graduated to a new level of digital payments maturity.
What we’ve collectively experienced – in the changing of our payments habits this past year especially, but also in years prior – is that payments are the invisible invaluable. Invisible because the best payment experiences are quick, painless and, increasingly, barely perceptible. Invaluable because merchants depend on payments, to, well, make money, and also because it is one of the most emotionally potent moments of the customer experience (most evidently when something goes wrong).
Let’s look at a few of the coolest experiences in payments today and explore what they may show us about what’s possible tomorrow.
The present: merchants are getting creative with payments and currency in campaigns to drive sales and improve other experiences. When IKEA Dubai launched a new store – on the outskirts of a city as they often are – it ran a “Pay With Your Time” campaign to drive traffic to the store. The customer would share the time it took them to get to the store in their Google Maps app, then IKEA would use the average salary of a Dubaian citizen to calculate the value of their travel time and discount their purchase by that amount. Or take Dominos, whose finance and payroll system is now partnering with challenger bank Branch to enable instant payouts for employees’ and drivers’ wages and tips in addition to offering other financial services.
The future: the emotional potency of payments and payments-like experiences become the battleground for competitive differentiation. Merchants will use APIs, automation, virtual currencies, digital issuing and real-time payments to inject payments and payments-like experiences into more customer journeys and to improve more of their internal processes. (Employee experience is the new frontier of customer experience improvement after all.) Expect more partnerships with big tech and fintechs to deliver on these more creative and payments-immersive experiences.
The present: more payments players and fintech firms are stepping up to support customers and merchants in unique scenarios. Take Apple Cash Family and Splitwise, which both, in their own ways, support shared finances among connected consumers and whose capabilities align to the complicated realities of our financial lives (caring for children or parents, shared custody agreements or roommates, for example). Or take PayPal Extend, which supports the secure portability of consumer PayPal data across PayPal merchants to support more seamless payments across its merchant ecosystems.
The future: payments innovations will converge with distributed digital identity management and distributed ledger technology to support authentication, value accrual and redemption within multi-merchant and partner ecosystems. For merchants, this will enable, for example, loyalty programmes to break out from the walled gardens in which they exist and let consumers organise and orchestrate rewards across an open portfolio of programmes.
Some merchants still treat the payments experience as perfunctory: a necessary but unremarkable threshold. They see the payments team and technology as a cost centre. This modus operandi will go the way of the dodo. The companies laying the foundation today for payments as invisible and invaluable will likely stick around long enough to see the future we see in the extraordinary payments experiences of today.
Get more insights into Forrester’s Predictions for 2021 here
by Lily Varon, senior analyst, Forrester
Why perpetual KYC is the future of due diligence
Nick Ford, VP for Strategic Alliances at Encompass and Chris Laws, VP, Product, Strategy and GTM at Dun & Bradstreet
Traditionally, Know Your Customer (KYC) has provided a framework by which organisations can carry out due diligence on existing and potential customers, enabling ratification of issues such as beneficial ownership and identity verification. This process has evolved over time from a largely back-office manual function, managed by analysts and administrators, to an increasingly automated one, whereby software can be used to complete KYC within a short space of time, saving time and money.
Today, KYC is conducted at specified intervals – at onboarding, then traditionally at one, three and five years – for the duration of a customer relationship. The time between these periodic reviews is dependent on the level of perceived risk posed by that customer, which is determined during the onboarding process. This means that information is immediately out of date, and banks and regulated entities are exposed to significant risk until a review is conducted.
Digital transformation is rapidly changing the face of due diligence, with many organisations committing to ongoing and digitally enabled data reporting or client onboarding, often facilitated by RegTech. Perpetual KYC (pKYC), an emerging concept in financial crime compliance, is the next step in this evolution.
Also known as continuous KYC, event-driven KYC or dynamic KYC, pKYC is based on the dynamic refresh of customer data in response to key triggering events. It represents a more innovative approach to KYC processes than the traditional, reactive ways of updating information by providing financial institutions with an accurate and up-to-date view of their regulatory risk at all times.
A successful transition, though, depends on critical factors.
Firstly, the organisation in question must have reached an advanced level of data maturity and system integration across an ecosystem of technology, data and partners. Secondly, its compliance team must have a good understanding of what constitutes a meaningful change that would represent a trigger for KYC processes.
Even when these conditions have been met, with intelligent process automation playing a crucial role with the digital KYC profile it generates, it is plausible that pKYC could take several years to be fully implemented. It is for these reasons, and the embryonic nature of a concept that has not yet been fully explored by regulators and requires extensive cultural buy-in, that the extent and speed of widescale adoption remains unknown.
However, the positive impact to an institution would outweigh the perceived challenges, with pKYC driving down operational costs and ensuring the auditability of compliance processes in the long run. Not only that, but the digital operating model that enables it could reduce compliance costs by increasing straight-through processing, enabling more management by exception and minimising out-of-date records – impacting on spend and resources.
To build up the systems necessary for this evolution, financial institutions are starting to take the first steps by developing and deploying more automation of processes throughout their organisations. It is a foundational change and, while we are at the very start of the journey, the benefits realised by the pioneers of this new way of working will be long lasting.
Watch the video above to see Nick Ford, VP for Strategic Alliances at Encompass and Chris Laws, VP, Product, Strategy and GTM at Dun & Bradstreet, offer their insight into why due diligence is so essential for regulated entities and how institutions could realise some of the benefits of pKYC.
To find out more about the issues discussed, and how KYC automation could transform your processes, visit www.encompasscorporation.com
A revolution in the syndicated loan market
Axel Coustere and Stephen Ong, Co-Founders, HUBX
Over the past two decades technology has revolutionised several key areas of the banking infrastructure such as digital payments, mobile banking and back-office systems. However, despite the syndicated lending market running at $4.5 trillion per annum, it remains a puzzle as to why syndicate desks have continued to operate largely manually, until now.
Traditionally, loan syndication is a complex and slow endeavour, with numerous stakeholders, disconnected data sources and de-centralised communications resulting in disorganised deal management and inefficiencies. These issues have been exacerbated as deals have become bigger, more complex in structure, and involved much larger number of participants.
HUBX, a London based fintech, has partnered with Finastra and integrated its Syndicated Loan Solution with Fusion Loan IQ - the market leading back-office solution. The partnership delivers a truly digitised end to end solution for syndicated loans.
With pre-defined workflows, built-in communication tools and process automation, HUBX reduces manual front office processes of syndicated desks by 75 per cent.
Matching algorithms allow Arrangers to instantly conduct market sounding for a particular deal by accurately identifying which lenders are best suited to each particular deal. In-app communication tools allow seamless interaction between stakeholders, eradicating the need for email chains and offline conversations, while capturing valuable feedback from lenders to service them better in future deals.
HUBX believes that lenders should not only be in be in full control of their data but that data should be utilised to provide a better and more effective service. With advanced real time analytics for deal management, Arrangers will better understand their liquidity and distribution risk, optimise their lender network and be able syndicate more efficiently with other banks.
HUBX solves the complexity of protecting sensitive data while allowing specific deal data to be shared between banks, agents and lenders with its advanced user access permission system.
Realising the importance of interconnectivity to other internal systems within the bank, HUBX provides full flexibility to integrate across all systems through several APIs . This includes integrations with deal origination, KYC and asset servicing systems offering instant digital transformation and delivering a true end-to-end solution.
HUBX offers syndicate desks an easy to use, cutting edge technology solution that can be deployed and configured in hours. Arrangers will be able to manage all their clients, connect and work on deals with any bank, agent or lender in the market, all from a single platform.
The syndicated loan market is being revolutionised by digitisation, automation and the sophisticated use of data, driving a new direction for the way in which syndicated lending is managed.
HUBX and Finastra are revolutionising the syndicated loan market. Be part of it: visit www.hubx.capital
INDUSTRY VIEW FROM HUBX
Global e-commerce increases during Covid-19 – and with it, fraud
Online shopping rose rapidly during the pandemic, providing fraudsters the perfect cover to attack. But there are ways to counteract.
2020 changed many aspects of our daily lives. How we work, travel and shop transformed as soon as Covid-19 was declared a pandemic. One of the more significant changes occurred in online shopping sales, which shot up by 81 per cent between May 2019 and May 2020. This was great news for struggling economies, but concerning for those forced to shop online for the first time, unaware of the potential threats posed by fraudsters lying in wait.
Global e-commerce booms and purchasing behaviours change
The way in which people shopped changed drastically during the initial stages of the pandemic. Although e-commerce retail sales were already rising and forecast to grow further over the next five years, the effects of lockdowns across the world hastened all prognoses as brick-and-mortar shops closed, forcing shoppers and merchants online.
Initially, shoppers focused on cautious purchases of facemasks, disinfectants and other supplies, followed by panic buying of non-perishable foods and personal hygiene products. As lockdowns extended, people paid for digital entertainment services, exercise equipment and sporting goods to stave off boredom and stay fit. When lockdown and travel restrictions eased in some countries, online purchases of luggage and summer clothing rose as people hoped for a normal holiday. Despite a dip in global online sales as the pandemic progressed, figures remained above pre-pandemic levels , with e-commerce accounting for 19 per cent of all retail sales in 2020 (up from 16 per cent in 2019).
During the pandemic-induced rise in e-commerce, consumers – including older generations and those less tech-savvy than more experienced web surfers – were forced to adapt. Unaware of the potential dangers of buying and selling online, many shoppers and merchants became the ideal targets for fraudsters using old tricks to exploit their victims, especially at a time when genuine fear of a virus led to panicked purchases.
Fraud rates are decreasing, but fraudsters search for weak points...
While global fraud rates appear to be going down, reported at 3.8 per cent in May 2019 and 3.4 per cent in May 2020, it is easy to trumpet this as a measure of success.
However, the sheer increase in e-commerce transactions during this period has hidden the full scale of criminality. An ocean of genuine transactions provides the perfect hiding place for fraudsters to use professional tools to employ all manners of attacks, many of them tried and tested, on the vast number of new online shoppers.
For example, the number of phishing sites tripled between January and March 2020, as the pandemic took hold, and by the end of 2020, Google reported that two million were active – a 19 per cent increase from 2019. It is therefore unsurprising that account takeovers (ATO) through phishing have risen sharply, but what is surprising is that many merchants admit they do not have the measures to combat ATO, or even identify it has occurred, unless a customer has informed them.
As shopping behaviours have adapted during the past two years, so have payment methods, with many shoppers preferring credit/debit card payments and e-wallets such as PayPal. Even in Germany, the EU’s third largest e-commerce market, e-wallet payments have been gaining traction where for decades buying on account has dominated (and remains popular). This payment method involves consumers placing an order on invoice, receiving goods and deciding within 14 or 28 days whether to keep or return them.
For some online shops, it is still enough to provide only a name and a date of birth to process a transaction. For fraudsters, armed with personal details gained from ATOs, Germany is seen as a perfect target. All a fraudster needs to do is place an order to a delivery point of their choice (addresses added to an order are often unchecked). The seller loses merchandise and individuals (whose details have been stolen) could face problems with debt collection agencies and a negative “schufa”, or German debt history record.
How to protect against fraudsters
Education is key. For individuals, simply being aware of the risks and getting into the routine of employing basic security measures, such as having strong passwords, updating software regularly, and not clicking on links in suspicious emails, can have a positive effect.
But merchants need to be educated – to continue increasing online sales and maintain a good reputation with customers, top-level protection of payment methods must be in place. This is where fintech companies such as Poland’s Nethone step in, with dedicated teams scouring the very online communities where fraudsters share information.
This wealth of knowledge, along with other variables, is used to continually adapt Nethone’s proprietary know your user (KYU) machine learning (ML) profiling model, which employs passive behavioural biometrics to identify more than 5,000 unique digital attributes of users making payments. With a 95.3 per cent success rate at preventing account takeovers, fraudsters are weeded out and false positives are kept to a minimum – a win-win for customers and merchants.
Such is the effectiveness of Nethone’s model that in 2021 its Series A fundraising efforts resulted in a $6.7m boost from Polish and international growth and venture funds and angel investors, allowing the company to expand its fraud-fighting capabilities with its KYU profiling technology.
If e-commerce continues to grow beyond the pandemic, as expected, consumers and businesses need to be ready to beat the fraudsters – and the solutions are already available. The alternative is to face the potential nasty reality of becoming a fraud statistic.
If you liked this article and would like to learn more about expert e-commerce anti-fraud analysis and solutions, visit Nethone’s website.
by Patrick Drexler, Head of Business Development, Nethone
Confronting the hard truths and easy fictions of a CBDC
As global central bankers study whether they can issue a central bank digital currency (CBDC), the question of whether they should do so has received relatively less attention. At the Federal Reserve, though, a cost-benefit analysis appears to be underway, and the results are not encouraging for CBDC acolytes.
Any CBDC comes with a fundamental, grievous flaw that its proponents generally seek to elide: currency held in a digital wallet is unavailable for lending. It is thus unlike commercial bank money – the digital dollars you hold in your bank account – which can be loaned out, with only a fraction of the deposit held in reserve. (Hence: fractional banking.) CBDC is a digital mattress. Given that the average loan-to-deposit ratio for banks is generally around 1:1, every dollar that migrates from commercial bank deposits to CBDC is one less dollar of lending.
In good times, banks could seek to retain those deposits by paying higher interest rates, but of course, that permanent rise in funding costs would translate into a permanent rise in borrowing costs for businesses and consumers. However, the larger problem is what happens in bad times like 2009 and 2020, when corporations and money managers seek to de-risk as much as possible. Last March, that meant selling trillions of dollars of risk assets and holding them as bank deposits. With a CBDC, that would mean transferring trillions of dollars of bank deposits to CBDC – with the loss of a few months’ interest on that deposit of no consequence (at least in part because rates would be plummeting). Lending would have ceased; lines of credit could not have been funded. As Randal Quarles, Vice Chairman of the Fed, recently summarised, “[A] Federal Reserve CBDC could create considerable challenges for the structure of our banking system, which currently relies on deposits to support the credit needs of households and businesses. An arrangement where the Federal Reserve replaces commercial banks as the dominant provider of money to the general public could constrict the availability of credit, fundamentally alter the economy and expose the public to a host of unanticipated, and undesirable, consequences.”
No one has suggested any solution to this fundamental problem. To stop the potential bleeding, European Central Bank Executive Board Member Fabio Panetta has proposed capping CBDC at €3,000. But with any cap of that size in place, a digital euro would be useless as a commercial payments vehicle: even consumers would need a bank account for larger transactions.
Meanwhile, any potential benefits from a CBDC appear to fade away under analysis:
An answer to the threat of China to the dollar’s hegemony? Fed Chair Jerome Powell dismissed this notion at a recent Federal Open Market Committee press conference: “We’re the world’s reserve currency… because of our rule of law; our democratic institutions, which are the best in the world; our economy; our industrious people; all the things that make the United States the United States… And, of course, we have open capital accounts, which is essential if you’re going to be the reserve currency.”
An antidote to the rise of cryptocurrencies? As Vice Chairman Quarles observed, “Bitcoin and its ilk will… almost certainly remain a risky and speculative investment rather than a revolutionary means of payment, and they are therefore highly unlikely to affect the role of the US dollar or require a response with a CBDC.”
Stablecoins? They are not a risk to the dollar, as they are denominated in dollars and backed by dollar assets. Of course, stablecoins in their current form do pose massive consumer protection problems and potential financial stability risks, as most are in substance opaque prime money market mutual funds. But the solution to that problem is regulation, not a new US currency, and multiple regulators are quite focused on being part of that solution.
A need to modernise the payments system? Vice Chairman Quarles recently noted an ongoing revolution in faster payments, stating, “[The] general public already transacts mostly in digital dollars –by sending and receiving electronic balances in our commercial bank accounts… The Federal Reserve provides a digital dollar to commercial banks, and commercial banks provide digital dollars and other financial services to consumers and businesses. This arrangement serves the nation and the economy well… In summary, the US payment system is very good, and although it is not perfect, work is already underway to significantly improve it.”
Thus, as Governor Christopher Waller recently concluded, “After exploring many possible problems that a CBDC could solve, I am left with the conclusion that a CBDC remains a solution in search of a problem.” And, one might add, a solution with potentially massive costs for the US economy.
To learn more, visit our website.
by Greg Baer, President and CEO, Bank Policy Institute
How machine learning is powering a financial services revolution
The promise of machine learning brings new opportunities and new questions to many facets of life, from autonomous vehicles to the media and marketing algorithms that present content to us online.
These technologies are now gaining momentum in the financial services sector, most prominently in areas of application that include analysing credit risk and detecting illegal activity such as money laundering and fraud.
At the Institute of International Finance (IIF), we’ve analysed our member financial institutions’ applications of machine learning through a series of surveys. Focused on machine learning applications in credit risk, surveys in March 2018 and August 2019 provide insights into the continuing evolution and progress of techniques such as gradient boosting and random forests.
The latest survey shows a sharp increase in the number of banks running pilot projects with these techniques, up from 20 per cent to 45 per cent. Although there has only been a modest increase in the number of banks using machine learning in production (up from 38 per cent to 42 per cent), the sophistication of these models has increased markedly.
Equally significant is the progress in the breadth of application across customer segments. In 2018, machine learning was primarily used for credit decisioning in retail portfolios, and with some other applications in credit monitoring in the wholesale and large corporate segments. This represented something of a bimodal distribution, where banks had large pools of existing structured data on retail customers, while there are new sources of unstructured data (such as external news services and supply-chain data) available for large corporates, where natural language processing can be applied.
But while there hadn’t previously been activity in the segments in between, 2019 has seen a sharp increase in usage for small and medium-sized enterprises (SME) portfolios, up from 8 per cent to 40 per cent of banks (see Figure 1).
More broadly across all customer segments, credit scoring and decisioning remains the most prominent area of application, but we’ve also seen significant growth in credit monitoring and the early warning signals for deteriorating credits, up from 13 per cent to 57 per cent of respondents, including the 25 per cent of surveyed firms that are using this in production. One notable initiative is at Scotiabank, where machine learning is used to identify credit card customers that may have trouble making their next payment. This is then used as the basis for proactively approaching those customers and offering them alternate arrangements, a move that has reduced arrears by 10 per cent.
The benefits (both expected and realised) of machine learning have been stable across years, including improved model accuracy, overcoming data deficiencies and inconsistencies, and discovery of new risk segments or patterns. However, banks’ perceptions of the key challenges in implementation have evolved considerably, encountering and identifying more challenges as their knowledge and familiarity with the technology has increased.
While data management (specifically bringing data from disparate sources into a single data lake), IT infrastructure and competition for the necessary human talent all remain challenges to completing a successful implementation, there is increased emphasis on supervisors’ understanding and consent to use new processes.
This reflects the fact that while banks have been becoming more mature with the technology, so have regulators, and so the nature of their scrutiny has matured with that. While the added scrutiny may intensify the challenges that banks could face in innovating, the fact that supervisors are increasingly able to ask the right questions is welcome and is beneficial for the future of safe innovation within the broader ecosystem.
Given its power and potential impact, machine learning requires a collaborative effort between the industry and the supervisory community to ensure that it protects customers without stifling its adoption or stalling innovation in the financial sector. Pilot projects that explore and test new innovations warrant encouragement from policymakers and supervisors, and it is heartening that the 2019 survey shows both the dramatic expansion of such pilots, and significant engagement between banks and their supervisors.
For more information please see the IIF Machine learning in Credit Risk 2nd Edition report here.
by Brad Carr, Senior Director, Digital Finance, IIF
Why governments should embrace the power of Fintech
When the World Wide Web was born, it was an incredible development with immense power to change the world as we knew it, even though we were limited by 56k dial-up connections that meant even simple text-based pages could take several minutes to load.
Right now, fintech is like this early internet, while the banking sector is the dial-up connections that both enable and constrain its development and applications. The main difference is that some of the most impactful fintech developments can be implemented entirely without traditional banks.
Digital currencies and the impact they can have on the public sector are strong examples.
There is a perception that digital currencies are a tool of criminals and terrorists. This view is widely propagated in banking circles where there is real concern that digital currencies threaten to make traditional banking services obsolete. Like all the best deceptions, this characterisation is based on a few grains of truth. Of course, criminals and terrorists do use digital currencies, but that’s not the point. They also use smartphones, but no one is arguing against them. And like smartphones, digital currencies provide law enforcement and counter-terrorism agencies with new tools to track, trace and convict.
Setting aside these misconceptions, digital currencies have the potential to do immense good in the world. But while major companies are embracing them, the same cannot be said for governments and the wider public sector.
We see a perfect example of this in the controversial cuts to foreign aid that the UK government recently pushed through. We know that the government needs to start pulling back on spending after the huge financial impact of the COVID-19 pandemic, but wouldn’t it have been better if the savings needed could have been achieved without the humanitarian impact caused by simply reducing the aid budget?
In fact, the government did have that option.
Long before Facebook dreamed up its digital currency, a UK firm had created a safe and regulated digital currency, BiPS. An expert delegation to the government met with officials from the now-disbanded Department for International Development and showed them exactly how a digital currency like BiPS could be used to eliminate fraud, theft and excessive transaction costs. Better results could be delivered for the people who needed the aid, and the savings would run to billions of pounds per year.
In other words, the UK could have restructured its aid programme to give greater impact for the communities it helps while at the same time saving the Treasury significant sums. More than that, by using digital currency in this way, the UK would have immediately become a genuine world leader in the delivery of foreign aid, potentially multiplying the benefits many times as other developed countries followed suit.
And the benefits are far from limited to the delivery of foreign aid. Using a digital currency like BiPS could also eliminate benefit fraud, establish local currencies that keep more money circulating in local economies, drive community investments in social or environmental projects and almost entirely wipe out the high cost of moving money around.
The reasons for government reluctance to embrace digital currencies are unclear. Perhaps ministers don’t understand the full potential of the technology, or perhaps it’s simply politics and the influence of lobbying.
Regardless of the reasons, tides of change can’t be held back forever. From climate change and child poverty to pandemic management, the world is facing greater challenges than ever before and digital currencies and hundreds of other fintech developments are powerful weapons we can’t afford to ignore.
Many countries have embraced these technologies so enthusiastically they have not just overtaken the UK but have left us so far behind that our infrastructure is at real risk of slipping from a Champions League contender to the relegation zone of League 2.
Fintech initiatives like digital currencies provide transformational opportunities that will undoubtedly change the financial landscape dramatically. Banks that resist the change and concentrate on “fighting the threat” to traditional practices will become obsolete. Only those that embrace the technology may survive and even thrive. So far, most seem to be sitting on the fence and trying to do both.
What’s really needed is for government to finally consider the benefits offered by fintech and how it can protect public money and change citizens’ lives for the better.
by Richard Hallewell, CEO, CIPFA CPRAS Technology Procurement Association
What is decentralized finance? An expert on bitcoins and blockchains explains the risks and rewards of DeFi
Fervent proponents of cryptocurrencies and the blockchains they run on have promised a lot.
So what are cryptocurrencies and blockchain good for?
As an expert on emerging technologies, I believe that decentralized finance, known as DeFi, is the first solid answer to that question. DeFi refers to financial services that operate entirely on blockchain networks, rather than through intermediaries like banks.
But DeFi comes with a host of risks as well that developers and regulators will need to address before it can go mainstream.
What is DeFi?
Traditionally, if you want to borrow US$10,000, you first need some assets or money already in the bank as collateral.
A bank employee reviews your finances, and the lender sets an interest rate for the repayment of your loan. The bank gives you the money out of its pool of deposits, collects your interest payments and can seize your collateral if you fail to repay.
Everything depends on the bank: It sits in the middle of the process and controls your money.
The same is true of stock trading, asset management, insurance and basically every form of financial services today. Even when a financial technology app such as Chime, Affirm or Robinhood automates the process, banks still occupy the same intermediary role. That raises the cost of credit and limits borrower flexibility.
DeFi turns this arrangement on its head by re-conceiving of financial services as decentralized software applications that operate without ever taking custody of user funds.
Want a loan? You can get one instantly by simply putting cryptocurrency up as collateral. This creates a “smart contract” that finds your money from other people who made a pool of funds available on the blockchain. No bank loan officer necessary.
Everything runs on so-called stablecoins, which are currencylike tokens typically pegged to the U.S. dollar to avoid the volatility of bitcoin and other cryptocurrencies. And transactions settle automatically on a blockchain – essentially a digital ledger of transactions that is distributed across a network of computers – rather than through a bank or other middleman taking a cut.
Moreover, DeFi eliminates the distinction between ordinary customers and wealthy individuals or institutions, who have access to many more financial products. Anyone can join a DeFi loan pool and lend money to others. The risk is greater than with a bond fund or certificate of deposit, but so are the potential returns.
And that’s just the beginning. Because DeFi services run on open-source software code, they can be combined and modified in almost endless ways. For example, they can automatically switch your funds among different collateral pools based on which currently offers the best returns for your investment profile. As a result, the rapid innovation seen in e-commerce and social media could become the norm in traditionally staid financial services.
These benefits help explain why DeFi growth has been meteoric. At the recent market peak in May 2021, over $80 billion worth of cryptocurrencies were locked in DeFi contracts, up from less than $1 billion a year earlier. The total value of the market was $69 billion as of Aug. 3, 2021.
That’s just a drop in the bucket of the $20 trillion global financial sector, which suggests there is plenty of room for more growth.
At the moment, users are mostly experienced cryptocurrency traders, not yet the novice investors who have flocked to platforms like Robinhood. Even among cryptocurrency holders, just 1 per cent have tried DeFi.
While I believe the potential of DeFi is exciting, there are also serious causes for concern.
Blockchains can’t eliminate the risks inherent in investing, which are the necessary corollary of the potential for returns. In this case, DeFi can magnify the already high volatility of cryptocurrencies. Many DeFi services facilitate leverage, in which investors essentially borrow money to magnify their gains but face greater risk of losses.
Moreover, there isn’t any banker or regulator who can send back funds transferred in error. Nor is there necessarily someone to repay investors when hackers find a vulnerability in the smart contracts or other aspects of a DeFi service. Almost $300 million has been stolen in the past two years. The primary protection against unexpected losses is the warning “investor beware,” which has never proved sufficient in finance.
Some DeFi services appear to violate regulatory obligations in the United States and other jurisdictions, such as not barring transactions by terrorists, or allowing any member of the general public to invest in restricted assets like derivatives. It’s not even clear how some of those requirements even could be enforced in DeFi without traditional intermediaries.
Even highly mature, highly regulated traditional financial markets experience shocks and crashes because of hidden risks, as the world saw in 2008 when the global economy nearly melted down because of one obscure corner of Wall Street. DeFi makes it easier than ever to create hidden interconnections that have the potential to blow up spectacularly.
Regulators in the U.S. and elsewhere are increasingly talking about ways to rein in these risks. For example, they are starting to push DeFi services to comply with anti-money laundering requirements and considering regulations governing stablecoins.
But so far they have only begun to scratch the surface of what may be required.
From travel agents to car salespeople, the internet has repeatedly undermined the bottleneck power of intermediaries. DeFi is another example of how software based on open standards can potentially change the game in a dramatic way. However, developers and regulators will both need to up their own performance to realize the potential of this new financial ecosystem.