The Merchant’s Guide to Transactions, Cards & eCommerce
The future of FinTech ❱ The pulse of FinTech in Canada
❱ Canada among
leading digital payments markets worldwide
❱ Trends driving
transformation in global payments & regulation
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TableKey of Contents theme COLUMNS & DEPARTMENTS November/December 2016 Volume 7 Number 6 Editor-in-Chief Steve Lloyd email@example.com Managing Editor Sarah O’Connor firstname.lastname@example.org
Starting Points Payments News
FEATURES Industry Forecast
Publisher Mark Henry email@example.com Contributors Viki Patterson; Jan Pilbauer; Nick Senechal; Sanjay Tugnait; Stephanie Zee; Lian Zerafa
Photographer Gary Tannyan
For subscription, circulation and change of address information, contact firstname.lastname@example.org
Payments Canada plots modernization journey
Creative Direction Jennifer O’Neill email@example.com
President Steve Lloyd firstname.lastname@example.org
20 Events 22 Resolutions
What insights can we gain from U.S. payment system upgrades?
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The pulse of FinTech in Canada
FinTech right at home in York Region
Canada among leading digital payments markets worldwide
Trends driving transformation in global payments & regulation
Jan/Feb Industry disruptors • Alternative e-payment solutions • ATMs & ABMs • Cash & cheques November/December 2016
Q&A with Dr. Scott Zoldi, FICO’s chief analytics officer By Sarah O'Connor
rexel University’s LeBow College of Business and CIO.com have named Dr. Scott Zoldi, chief analytics officer at analytic software firm FICO, one of the winners of the first Analytics 50 Awards. The awards program honors 50 executives who are using analytics at their organizations to solve business challenges. Dr. Zoldi received the award for his leadership in developing new analytic technologies to reduce payment card fraud, by detecting rapidly changing criminal methods. Dr. Zoldi led the development of a patented adaptive analytics technology and multi-layered self-calibrating analytics, deployed in the company’s FICO Falcon Platform, which protects 2.6 billion payment cards worldwide. This solution can leverage a client’s fraud experience in near real-time to adjust model weights, without the need for time-consuming offline training. FICO also created a patented technology called
behavior-sorted lists, which identifies an individual cardholder’s specific spending patterns at preferred merchants and individualized transaction patterns By adding adaptive analytics, one large U.S debit card issuer realized an 18 per cent improvement in real-time fraud dollars detected and a relative reduction of 11 per cent in account false positive ratio, saving millions of dollars per year and improving the customer experience for its cardholders. One international card issuer has experienced a 17 per cent reduction in false-positive cases with no negative impact on real-time fraud dollars detection rate. For transactions that occur at a cardholder’s favorite merchants, bank clients have seen a reduction in false-positive occurrences of 35-50 per cent, contributing to significant increases in customer satisfaction. “These pioneering analytics have enabled card issuers and payment processors around
the globe to combat the evolving barrage of payment card fraud attacks,” Dr. Zoldi said. “I am honored that Drexel University’s’ LeBow College of Business and CIO.com have recognized me, my team and FICO for our work to improve the security of the global payments infrastructure.” “With the ever-growing threat of data breaches and identify theft, predictive solutions such as FICO’s use of adaptive analytics are exactly the types of innovate safeguards needed to protect the consumer," said Murugan Anandarajan, PhD, Department Head of Decision Sciences and MIS at Drexel University. Payments Business spoke to Dr. Zoldi following news of his award.
I think there is little doubt that predictive analytics are an extremely hot topic, particularly
Starting Points in the payments industry. In your opinion, what market forces are highlighting the importance of this new technology?
"Machine learning techniques enable the fraud detection models to continually keep or exceed pace of the fraudsters and their shifting tactics."
Fraud has been a problem that FICO has been combating since 1992 with predictive analytic models, and since that time we have continually seen the criminal element becoming increasing sophisticated and adjusting their tactics to circumvent fraud protections. The new advanced analytics associated with the Analytics 50 Award focus on self-learning analytics, a new breed of machine learning. These analytics continually adjust in real time, learning the ever-changing and sophisticated behavioral patterns behind fraudster attacks in the payments network. The payments industry relies on these adaptive behavioral analytic scores to make the best decisions on which transactions to block, whom to investigate and what to let through. Adaptive behavioral analytic technology is a key tool that protects consumers and minimizes fraud losses for issuers.
Are fraudsters also benefitting from these technological advances? In other words, are they also getting a lot better at what they do? Absolutely. The most sophisticated fraudsters make use of machine learning to determine how to stage their attacks. They gather information from the darkweb, conduct experimental design and sometimes build models to determine how to circumvent the issuer’s countermeasures. They’ve been doing this since the early 90s, but now the stakes are higher as the barrier to entry has essentially disappeared due to the increase in computing power and use of new easily accessible analytic tools. This is why our adaptive and self-learning technologies which adjust the model continually, in conjunction with the issuer’s strategies using these model scores, make it difficult for fraudsters to game the system and minimizes their financial take.
Since the analytic technology you have developed can detect rapidly changing criminal tactics without human interference, is it accurate to characterize it as “machine learning”? Why or why not?
Yes, technology behind selflearning analytics is a form of machine learning in which sophisticated analytic algorithms enable the computer to learn from fraud attempts and analyst feedback. The algorithm monitors subtle changes in features, distributions and recent attacks to retrain the model continually in response to the attacks. In today’s data-driven world, these types of technologies are key to solving problems in many different areas, such as cybersecurity threat detection, IoT security, risk management, compliance, model governance, operational optimization and many others. These machine learning techniques enable the fraud detection models to continually keep or exceed pace of the fraudsters and their shifting tactics.
One of the basic assumptions of predictive analytics is that the future will resemble the past, but of course that isn’t always the case. How does software you have developed at FICO use the past to accurately predict future behaviour?
FICO has the world’s largest payment fraud data consortium: We currently monitor about twothirds of the world’s payment cards for fraud. This is an incredible data set for data
scientists and it goes back more than 20 years. This payment card fraud consortium allows us to build models that incorporate a huge set of observed fraud attacks and normal cardholder behaviors from all over the world, to create the best feature detectors. The consortium is a vital research data resource for us; hence FICO’s 83 issued fraud detection patents and 47 patents still pending. The artificial intelligence models we deploy start with a base neural network model (or other deep learning model) trained on this consortium data. Then we employ the adaptive machine learning techniques that adjusts this base neural network score based on real-time shifts in behavioral feature distributions and recent attack attempts by fraudsters in the production environment. This allows for an optimal combination of the past and future fraud behaviors in tackling fraud.
As impressive as the patented adaptive analytics technology deployed in FICO’s Falcon Platform is, I can’t help but feel this is only the beginning. Are there other ways that you believe predictive analytics will impact the payments industry?
Agreed—we will see continued analytic innovations in the payments industry. For example, one area that I am really excited about is the application of advanced analytic models to anti-money laundering techniques. Today this area is largely driven by Know-YourCustomer (KYC) strategies and transaction rules based on KYC. We’ve developed new predictive analytic models in this space, focusing on identifying real-time learning of behavioral archetypes, and changes in these behavioral archetypes that may indicate subtle money laundering activity. Coupled with a behavioral analytic model looking for similarities of account transaction profiles to past filed SARs, I expect that this new approach to AML will really revolutionize how AML is tackled in the years to come.
Cash is king, for now, Payments Canada report OTTAWA -- Payments Canada has released new research that reveals the changing payment behaviours of Canadian consumers and businesses. The latest Canadian Payment Methods and Trends (CPMT) report shows that cash and other paper transactions, such as cheques, are still leading, but in Canada new payment channels are a growing share of the market. These trends reinforce the need for Canada to adapt its payment systems as the global payments ecosystem changes, which is what Payments Canada is doing with its Modernization Initiative. "The Canadian Payment Methods and Trends report is an important window into the future of payments technology in Canada," says Carol Ann Northcott, Payments Canada's chief risk officer and vice-president of risk, security and research. "While paper-based payment methods continue to decline, emerging technology is shaping the Canadian payment landscape of the future."
The CPMT research uncovered several trends between 2008 and 2015 that are relevant to Canadian consumers: • In 2015, the payments market in Canada grew to 20.9 billion transactions, worth more than $8.9 trillion. • Consumer demands for speed, convenience and rewards are driving many of the trends at merchant locations, including credit card, contactless (tapping your payment card or mobile device to pay) and e-commerce. In 2015, contactless payments grew by 70 per cent in both volume and value of transactions. • Cash continues to account for the most transaction volume, but cash use is on a downward trend. Since 2011, cash use has declined by 20 per cent. • Online transfers are the fastest growing, reaching an estimated 120 million transactions worth $45 billion in 2015. • The use of cheques continues to decline with a 25 per cent decrease since 2011, but the value has been buoyed by continuing use by Canadian commercial enterprises, growing by more than two per cent on average each year. The CPMT report was compiled by Payments Canada with the help of payment service providers, payments consultants and researchers to help build comprehensive understanding of the Canadian payment landscape in 2015. 6
Introducing American Express Installments: A new way to pay for purchases over time This innovative credit card installment plan helps Cardmembers better manage their big-ticket purchases TORONTO -- American Express Installments launched on November 1, giving Cardmembers the control, convenience and flexibility to use this built-in feature of their credit card to pay for their larger purchases in equal monthly installments. "We designed this feature with our customers' needs at the core," said Aileen Kheraj, vice president, lending products & partnerships, American Express Canada. "Whether our Cardmembers are getting married, planning a trip, starting a family or renovating their home, our research shows that they could definitely use this type of solution when managing larger purchases." Today, almost half (47 per cent) of Canadians say they have trouble saving for large purchases, according to a recent omnibus survey conducted by American Express. Over the next year, many Canadians are planning to travel (47 per cent), move or conduct renovations (29 per cent), or buy expensive electronics (21 per cent) and 42 per cent of these people say they prefer to pay for large purchases over time. To help Canadians better manage their upcoming purchases, American Express Installments will give Cardmembers the ability to pay for large purchases in equal monthly installments, while still earning rewards points. Instead of being charged interest common on credit card balances, they are charged a small fee based on the length of the installments they choose. "With Installments we put the Cardmember in control of their finances. Customers have certainty over when their purchase will be paid off, they will always know the total cost including any fees, and can cancel the installment at any time," said Kheraj. Eligible customers have the ability to enrol in this feature and set their preferences. Here's how it works: • Select a minimum purchase amount of $250, $500 or $1,000. Eligible purchases over the chosen amount will automatically be set up as installment plans in the program; • Select a repayment term of three, six or 12 months; • Make a purchase over your selected minimum purchase amount on your existing Card. Installment plans have a small fee of two per cent to five per cent, based on the length of the term selected. For instance, if an enrolled Cardmember purchased a new piece of furniture for $600, here's what they would owe depending on their chosen repayment plan: • Three months: Total Installment Fee of two per cent on $600 purchase equals $12 • Cardmember pays $204 per month for three months, for a total cost of $612 • Six months: Total Installment Fee of three per cent on $600 purchase equals $18 • Cardmember pays $103 per month for six months, for a total cost of $618 • 12 months - Total Installment Fee of five per cent on $600 purchase equals $30 • Cardmember pays $52.50 per month for 12 months, for a total cost of $630 The option is easy to enroll in and customers can manage their installments through the Amex mobile app or online account.
Mastercard, BMO bring biometric payment technology to North America TORONTO -- Mastercard began the North American rollout of Identity Check Mobile, a new payment technology application that uses biometrics, including fingerprint and facial recognition, to verify a cardholder’s identity and simplify online shopping. BMO Financial Group (BMO) will be the first bank in the U.S. and Canada to offer Identity Check Mobile to its corporate customers starting in the first half of 2017. The rollout of Identity Check Mobile follows a successful soft launch that Mastercard and BMO tested earlier this year. The post-soft launch survey of BMO biometric program participants found: • Three of every four (74 per cent) of participants strongly agree that biometrics are easier to use than passwords. • Nine out of 10 participants anticipate using biometrics for online payment security in the future. “The pilot tested the potential of delivering
greater security and convenience using biometric technology. Our goals were to understand the attitudes and perceptions of our participants toward biometrics as an online payment security solution,” said Steve Pedersen, vice president, head, North American Corporate Card Products at BMO. “After using Identity Check Mobile, our program participants gave strong reviews on biometric security and ease of use, especially as compared with passwords. We are looking forward to bringing this same experience to our clients in 2017.” Existing BMO commercial customers who optin to using Identity Check Mobile will use an app provided by BMO and Mastercard to verify their online purchases. While shopping the cardholder will be notified instantly by the app when he or she needs to verify an online purchase by swiping a fingerprint or snapping a selfie photo. Often, existing identity verification methods take shoppers away from a retailer’s website or
mobile app where a password is required. The process can be time consuming and can result in a shopper abandoning his/her purchase or having the transaction declined if the password is incorrect. Mastercard Identity Check Mobile minimizes the need for passwords, dramatically speeding the digital checkout process while also improving security. A cardholder can verify his/ her identity by using the fingerprint scanner or facial recognition technology (aka taking a selfie photo) on his/her smart phone with the Identity Check app. The U.S. and Canada availability of Identity Check Mobile follows the recent European rollout across 12 markets, including: Austria, Belgium, Czech Republic, Denmark, Finland, Germany, Hungary, the Netherlands, Norway, Spain, Sweden and the U.K. The technology will continue to be made available worldwide in phased rollouts throughout 2017.
Securing Mobile Life. Creating Confidence. Giesecke & Devrient offers a comprehensive range of secure payment products and solutions based on the latest EMV, Mobile and Cloud technologies. The G&D solutions portfolio includes state-of-the-art operating systems for secure elements and payment applications for m-commerce and transit. G&D provides personalization services, system integration, project management and technical consulting from a single trusted source. www.gi-de.ca
Payments Canada plots modernization journey By Jan Pilbauer
arlier this year, Canadians told us what they want from payments in the future. It’s no surprise that “faster” topped the list of needs— it’s a common theme around the world. Payments Canada also heard loud and clear the need for more data traveling with payments, easier addressability, transparency in payments tracking and support for future innovation. Now, Payments Canada has put a stake in the ground, outlining what it will take for the broader industry to deliver on those needs and bring Canada one step closer to a first-rate payments system that strengthens the country’s competitive position. Developed with considerable industry consultation, research and analysis, Payments Canada recently released a Modernization Industry Roadmap & High-Level Plan that outlines five key changes to the country’s payments infrastructure and rules framework, starting with the replacement of Canada’s existing core clearing and settlement system, the Large Value Transfer System (LVTS). The LVTS was launched in 1999 to facilitate irrevocable settlement payments between Canadian financial institutions and transfer highvalue wire payments. It was the first model of its kind—a hybrid that combined the benefits of the two main models for current payment systems: real-time gross settlement (RTGS) and netting. In 2015, $171 billion in Canadian dollar payments passed through the LVTS each business day. Clearly, the LVTS has played an important role in the history of Canadian payments, but its aging infrastructure cannot accommodate payments of the future. The technology performs well in a static environment but, as we know, payments in 2016 and beyond are anything but static. The LVTS will be replaced with a new core clearing and settlement system that is more efficient, interoperable, adaptable and compatible with ISO 20022 messaging standards. This means that more data can travel with payments, something businesses and financial institutions asked for during our consultation work to develop the Vision for the Canadian Payments Ecosystem. ISO 20022 will increase efficiency for corporate treasurers and accounting departments across the country. Over time, it will also enhance domestic and cross-border interoperability. The new core clearing and settlement system will continue to meet international standards for managing risk, have modern technical architecture and employ modern liquidity savings mechanisms. It will form the foundation for delivering on all the needs identified in the Vision, so it must take priority. Canadians want faster payments, which is why the second pillar 8
for Modernization is the introduction of faster payments capability in the form of a real-time payment clearing rail—an RTR. The global payments industry commonly refers to real-time payments as payments that are available 24/7/365 and that clear and make funds available in less than 60 seconds. Canadians have already embraced faster payment options where they are available, such as Interac e-transfer—a fast, low-value money transfer service offered to retail customers by most financial institutions in Canada. Our research shows that the online transfer market segment is growing exponentially. While still a small factor in the overall payments landscape, online transfers are growing at a rate of about 43 per cent per year—there were 120 million of them in 2015. Some financial institutions have extended e-transfer offerings to their small business customers. Funds are typically available to the recipient within 30 minutes. For higher value transfers and business-to-business payments, the only fast payment option is a wire transfer, which can take several hours to reach the recipient, requires detailed bank account information for routing and is perceived by users as more expensive than cheques or batch electronic payments, such as automated funds transfers (AFTs). Clearly there is a demand for better options. Payments Canada’s vision for the future RTR puts us in the operator role, developing the rules and legal framework for the system, including access criteria and defining the risk and settlement model. Being the RTR operator doesn’t mean that Payments Canada would need to run the service itself. A capable third party, selected and controlled by us, could act as the service provider. Our Vision consultation identified the need for a first-rate RTR that serves as a platform for future innovation. The RTR needs to include real-time clearing and rich remittance information through ISO 20022, which will ensure that business data can travel with payments, reducing the need for manual reconciliation and increasing efficiency. While the RTR ensures the “behind the scene” clearing of real-time payments, it will enable market participants to introduce overlay services and various customer-facing applications, such as new and exciting ways to pay for goods and services. We look forward to seeing the innovative ways in which players in the Canadian payments space will leverage this core functionality that we will deliver. The third pillar of Canada’s Modernization journey is to enhance the legacy batch electronic payments (AFTs)—used for payments like payroll—making them faster and ultimately introducing ISO 20022 as the only message standard. Our international research November/December 2016
Industry Forecast indicated that in most countries with modernized payment systems, batch payments continued to operate alongside newer expedited payments with continued growth in transaction volumes. In Canada, these payments are expected to become ISO 20022-enabled by the end of 2019, with continued enhancements that will make batch payments faster and more available in multiple Canadian time zones, as we move further along the modernization journey. We also identified the need to facilitate changes to our retail system in order to meet new regulatory requirements. This year, Canadaâ€™s retail system was designated as a Prominent Payment System. This means it must adhere to global risk management standards defined by the Bank of Canada. To meet these standards, items like collateralization, same-day settlement and open risk-based access will be addressed through modernization. Finally, it is part of Payments Canadaâ€™s mandate to establish the rules and broader legal framework that apply to our systems. This framework needs to be modernized along with our systems to remain relevant and reflect current market practices. The appropriate balance between flexibility and compliance will foster competition and innovation. This is a powerful way in which Payments Canada will support industry innovation and continued evolution. Canada has had the opportunity to learn from the modernization of payments systems around the world, such as the United Kingdom,
Sweden or Australia and Singapore. In 2016, Payments Canada published research examining the global trend toward infrastructure enhancements that support faster payments, including the addition of a real-time rail system, building or enhancing batch retail payments, greater access and upgrading large-value payments systems. But there is no one-size-fits-all solution. We had to choose our own path that is right for Canada and one that brings the best to Canadians and our economy. Thanks to our consultation, research and analysis, we now have a clear view of what future payments systems should look like and how to deliver them. The modernization is not a technology replacement project, but rather an industry-wide transformation that involves multiple stakeholders. We have now progressed into detailed planning and requirements gathering with our clients and industry partners. While we have only just begun the journey to Modernization, we know it will be an ambitious and comprehensive transformation of Canada's core clearing and settlement systems. Our collaborative, research-driven approach will drive innovation in the competitive space and position Canada well for the future. Jan Pilbauer is Payments Canadaâ€™s executive director of modernization and chief information officer. In this role, he leads the modernization of the Canadian core clearing and settlement payment infrastructure, including implementation of ISO 20022. He also sets the strategic direction for the information technology at Payments Canada.
To learn more: www.yorklink.ca/marc November/December 2016
What insights can we gain from U.S. payment system upgrades? By Viki Patterson
oday’s consumers seek faster and more secure payments and quick access to funds, a demand which has been attributed to faster bill presentment and payment, online and mobile transactions, direct consumer sales, etc. However, most of the infrastructure we use today operates on the demands of the pre-digital era. Consequently, we find ourselves witnessing an infrastructure modernization wave around the globe. Domestic payment systems are moving rapidly to modernize their infrastructure. According to McKinsey’s 2015 Global Payments Map, more than 15 countries, representing 45 per cent of global credit transfers, have already migrated to modernized infrastructure. If countries currently building or designing new infrastructure are added to the mix, more than 90 per cent of today’s credit transfers could benefit from modernized “rails” within the next few years. Canada is in the exploratory phase, with Payments Canada (formerly known as Canadian Payments Association) currently undertaking a multi-year initiative to modernize Canada’s payments system. As we look ahead to the future of Canada’s payments system, it can be 10
helpful to look at how others, including our neighbours to the south, are handling these same challenges. In 2013, the U.S. Fed recognized the need to upgrade the U.S. payment system and laid out a plan with five desired outcomes for improvements, including speed, security, efficiency, international and collaboration. The Fed also created the Faster Payments Task Force to engage with industry players to identify and assess alternative approaches for implementing changes to payments capabilities that met these goals in the U.S. In January 2015, the task force published a white paper titled “Strategies for Improving the U.S. Payment System” that laid out a 36-point set of criteria for evaluating such proposals, with industry participants invited to come up with solutions. The automated clearing house (ACH) network is central to commerce in the U.S., moving money and information from one bank account to another through direct deposit and direct payment via ACH transactions, including ACH credit and debit transactions; recurring and one-time payments; government, consumer and business-to-business transactions; international payments; and payments plus payment-related information. For decades there had November/December 2016
Industry Forecast been talk of adopting a same day solution, and with the Fed’s task force, the ACH network took their cue that the time was right to make a change. Historically U.S. ACH has been a core low-value, high-volume, low cost, payment instrument with one- to two-day settlement. But the ever increasing demand from the global market on shorter settlement times led National Automated Clearing House Association (NACHA) to announce approval of a same day ACH amendment to the NACHA Operating Rules to move payments faster; a rule was enacted enabling ubiquitous same day capability for ACH transactions (the “rule”). Under the rule, movement of funds between financial institutions will increase from once per day to three times per day. Same day ACH is a premium product offering where originating depository financial institutions (ODFI) will be charged network fees to be paid to receiving depository financial institutions (RDFIs) for same day ACH items. The rule mandates all RDFIs receive same day transactions, creating value for end-users through its reach to all bank accounts. The rule also mandates that RDFIs provide faster funds availability to customers, making new options available for faster bill payment and receipt of funds. Finally, the rule mandates a roll-out of core functionality over three phases, the first beginning on September 23, 2016. The first phase of NACHA’s timeline includes all RDFI’s guaranteeing funds by end of their processing day and states that ODFI’s may offer origination for credits only. The second phase (to be implemented September 15, 2017) calls for all RDFI’s guaranteeing funds by end of processing day and that ODFI’s may offer origination for credits and debits. Finally, the third phase, set for March 16, 2018, states that all RDFI’s must guarantee funds by 5 p.m. their local time and ODFI’s may offer origination for credits and debits. Eventually, both credit and debit transactions valued at $25,000 and less, not coded as IAT (international ACH) or ENR (automated enrollment entry) are expected to be eligible for same day settlement. ACH credits will be made available to the receiver by 5 p.m. their RDFI’s local time. Erin Moore, VP and Citi product specialist for ACH, notes that it is important to understand that the U.S. Treasury will not originate or receive same day transactions at the outset of Phase 1. Any entry originated from, or received by, the federal government will not be eligible for same day settlement and will continue to settle on a future date. Information regarding the federal government’s participation in later implementation phases will be forthcoming; however, state and local governments will be participating. Same day ACH can benefit all ACH network users through a variety of use cases. In their same day ACH Guide, NACHA market research identified a total of 63 potential use cases, with 10 primary use cases, projected to generate 1.4 billion dollars of same day ACH transactions. These uses will eventually benefit individuals and industries in a variety of situations and almost every transaction type. In the category of business to consumer, payroll is expected to be a popular use for same day ACH capabilities, allowing for faster payroll payments for hourly or temporary workers and faster options for off-cycle payments such as bonuses or emergency payments. November/December 2016
Urgent claims payments and refunds, including quick payout of insurance claim payments, disaster assistance payments and other rebates, refunds and reimbursements are also a primary use. Within business to business, an expected primary use is the ability to complete faster payment of invoices on or after the due date and same day remittance of tax payments. Customer to customer transactions including person-to-person payments transferring funds among family members or friends will be a main use, as will account-to-account payments, moving funds between accounts at different financial institutions, or funding of a prepaid or mobile account. Common customer to business payments are expected to take the form of bill payment, allowing faster payment of bills on or after the due date, online/internet payments for e-commerce, point-ofsale cheque conversions, with quicker collection of funds, collection payments, enabling same day payoff of past-due accounts, and merchant debit payments, creating faster returns for consumer payments. Among respondents to the NACHA Request for Comment (RFC) Survey, the top five most commonly cited use cases include payroll (cited by 87 per cent of survey respondents) business-to-business (72 per cent) account-to-account transfers (59 per cent) person-toperson payments (57 per cent) and bill payments (53 per cent). With use cases and volume projections in mind, Citi’s clients are thinking about the options that same day ACH could open up for their organizations. As you examine possible new opportunities, you want to ask yourself the following questions: 1. How can I leverage same day ACH to create competitive advantage and differentiate my organization? 2. How will same day ACH solve for business pain points? 3. How can I use same day ACH in my organization? 4. How will same day ACH support my customers? 5. Which of my customers and prospects will most benefit from same day ACH? 6. Should I charge customers for same day ACH or pass on the fee? At this point it is unclear whether or not same day ACH, called electronic funds transfer (EFT) in Canada, will make it into Canada’s payments modernization roadmap. “To maintain Canada’s competitive position, and to support innovation at home, we need to proactively and appropriately respond to the external forces that are currently reshaping the global payments ecosystem,” says Gerry Gaetz, president and CEO, Payments Canada. “We must ensure that our payments infrastructure, and our regulatory system, are equipped to leverage innovation for Canada’s gain.” One thing that is certain is that Canadians in the payments industry will be watching closely to see what they can learn from the success of the same day ACH three-phase roll out in the U.S. Viki Patterson is director, global sales solutions, treasury & trade solutions for Citi Canada. Viki is a multi-lingual cash management professional with 12 years of experience managing Citi Canada’s top corporate relationships for the TTS business
FinTech right at home in York Region
Tom Di Emanuele, partner, Ernst & Young, delivers the keynote address at the first annual York Region FinTech Summit.
The audience listens to The Future of FinTech panel discussion at the York Region FinTech Summit.
By Sarah O'Connor
n October 28th, York Region hosted the first annual York Region FinTech Summit in the Town of Richmond Hill. The Summit’s keynote was provided by Tom Di Emanuele, partner, Ernst & Young, who spoke about the state of FinTech in Canada. The Future of FinTech panel featured Alexander Peh, head of market development and mobile, PayPal Canada; Bianca Lopez, Bioconnect; Deepak Chopra, Clearbridge Mobile; and Eva Wong, Borrowell. Other topics addressed included the FinTech revolution and an investors’ perspective on FinTech. When asked whether he was excited about the potential for FinTech to take off in York Region, panelist Peh replied “Absolutely! The region already has a number of successful FinTech companies including Clearbridge Mobile and with the support of organizations like The Regional Municipality of York, I think it’s only a matter of when, not if.” Innovative FinTech companies are located throughout the Greater Toronto Area with a significant number in York Region. These firms employ thousands of highly skilled people who are developing new technologies, processes, products and business models to benefit global businesses and consumers. Representatives of many of these firms were present at the summit to network and share their insights. “Overall the feedback was extremely positive and York Region businesses appear to be excited about the opportunity FinTech provides them, not only locally, but internationally,” continued Peh. “As a global FinTech company, PayPal not only powers the payments for over 250,000 businesses in Canada, we are also passionate supporters and advocates of the Canadian FinTech industry. Unlike other industries, FinTech knows no boundaries, so we look forward to seeing success stories sprout up and flourish across Canada.” Doug Lindeblom, director of economic development for York Region, says the event was conceived in response to trends that his team had been observing for some time. “[York Region has] one of the largest information communications technology (ICT) clusters in Canada,” he notes. “What we were finding was that a lot of the technology companies we were running into, more and more were saying, ‘we’re in the FinTech business’ or ‘we’re heading into the FinTech business.’ There’s this growing area of activity that is starting to cross over between the ICT side and the financial services side.” Lindeblom says that the Region has identified about 60 local companies that are directly involved in the FinTech sector and he expects that number to grow. “York Region has a strong financial services base and its got a very strong ICT base, so we weren’t surprised [to see FinTech growth take off]. I think its been evolving over the last number of years as of course that business has grown up. We’re seeing research and we are hearing it from our businesses and so that’s really where [the Summit] came from—ground up, grassroots.” November/December 2016
Companies involved with the York Region FinTech Summit include: Paymate Software Corp. provides Payroll, HR and Time and Attendance software solutions to organizations. Paymentus provides payment platform services, including paperless billing and payment solutions. Securter is developing a payment platform that enables making convenient and safe online payments. The company has patent pending payment platform adapting and extending conventional EMV payments of physical Point of Sales (POS) to secure for contactless EMV web payments. SmartworX capital provides foreign exchange trade services. The company researches and develops algorithmic models which are used to automate trading of futures. Its proprietary suite of models, Tempo runs on the NinjaTrader trading platform and can be applied in most market environments. Tempo could automatically manage trades in multiple instruments simultaneously and takes both long and short positions. STJ Retail provides consulting services, software development and support services to retailers and payment clients using POS systems. Strategic Information Technology develops software for banking companies such as RBC, CIBC and Scotiabank and FinTech software to help its customers disrupt their markets. Its software, used to lend, collect and manage money, is also used by credit unions, automotive lenders, mortgage companies, trust companies, government lending programs and more. Terminal Management Concepts provides Point of Purchase terminal technology solutions, offering debit and credit application software for major terminal providers, host interfaces to major retail and hospitality systems and enabling integration with POS switches. For ISPs and banking institutions seeking secure payment technology, its secure hardware/software solutions integrate pinpad technology with Active-X controls for ease of integration to the PC application environment. XE provides online money quotes and easy online transfer options. The company serves over 22 million unique visitors monthly, using tools such as XE Currency Converter, forex market analysis, and XE Currency App, which has over 40 million downloads. Since 2002, XE Trade Money Transfers has processed more than $10 billion in global payments. XE Currency Data is used by thousands of businesses from SMEs to Fortune 500 companies. ZOMARON provides payment technology solutions, using Ingenico terminals.
The pulse of FinTech in Canada By Lian Zerafa
hese are transformative days for the world of financial technology. With echoes of the dotcom era, the FinTech market is filling quickly with innovative players intent on changing the industry or helping the industry change itself. Canada is emerging as an important player in the space, but it is not alone. This last year saw venture capital (VC) investments remain steady in FinTech companies in markets across the globe; most notably in Asia, where FinTech startups saw funding totals of $1.2 billion in Q3, up from $800 million in Q2. This total represented nearly half of global FinTech investments and has positioned the region as a leader in the FinTech space. Closer to home, FinTech investments in the U.S. and the UK have remained equally promising, albeit tempered in the latter half of 2016 by reservations over the latest U.S. election and UK Brexit vote. Nevertheless, these markets are expected to remain FinTech powerhouses as doubts subside and the competition for VC dollars intensifies with more smaller sized deals in play. Canada is also making its mark. In KPMG and H2 Venture's 2016 FinTech 100, two Canadian companies were listed among the top 50 established FinTechs from around the world and four were listed as emerging stars. This is an improvement over 2015's results, which found Canadian companies listed only twice each among the top 50 and the up-and-coming startups. It's an impressive standing, to be sure—especially considering our relatively small market size, heavily regulated environment and the competition our startups face 14
worldwide. For the record, Chinese FinTech ventures represented four of the top five companies, once more signaling a clear leader in the FinTech industry. Driving Canada's momentum in this space are the “herbivores” of the FinTech community. These are the players who are not as much interested in carving off a piece of the market for themselves (aka the “carnivores”), but eager to have their technologies become part of a financial institution's ecosystem. Granted, it's the carnivores who typically dominate the headlines, but it's the herbivores working in quieter partnerships with financial institutions that continue to fuel the FinTech sector's momentum, perhaps more so in Canada than elsewhere. We've already seen a number of collaborations between FinTech companies and the big banks. High-profile examples include the partnerships between CIBC and Thinking Capital, RBC and League, or TD for Me and Flybits—partnerships that have succeeded in giving banks instant access to greater efficiencies and modern solutions, while exposing their FinTech collaborators to an established customer base. These partnerships are also proof that banks are not only noticing the FinTech industry, but actively supporting it and working with its innovators. This May, for example, TD Bank entered a collaboration with Plug and Play Tech Center, a California-based FinTech accelerator, to provide mentorship and development support to 23 FinTech startups. Elsewhere, a number of Canadian banks have created highly speculative investment funds for FinTech, patterned largely off the risk return profile of the dotcoms. The appetite for new and innovative financial technology is no November/December 2016
FinTech doubt strong; and one need only look to the FinTech clusters forming in hotspots like the Greater Toronto Area, Waterloo, Vancouver and Montreal to see that there is no lack of players. Yet as promising as Canada's FinTech market may be, there are challenges ahead. Working within one of the more regulatory controlled regimes in the world means Canada's startups face more restrictions than their international peers. For example, requirements laid out in Investment Industry Regulatory Organization of Canada (IIROC)’s CRM2 regulations set a regulatory bar that impedes our industry's ability to enter the wealth management services space as opposed to players in the U.S. who are not beholden to the same rules in their market.
It's an instant, mobile, cashless world and FinTech companies are its architects. Even with these restrictions, Canada's FinTech players are holding their own. This is despite an overall drop in VC funding across the globe owed to a mix of political shifts and the natural ebb and flow of the FinTech hype cycle. Certainly, while there was once a day when the pool of VC investments was big enough for every FinTech startup willing to take the plunge, the rising tide of market entrants is creating a new era of intense competition. That said, while the volume of available deals may be down, opportunities still exist for herbivores and carnivores alike.
Evolving the standards It's an instant, mobile, cashless world and FinTech companies are its architects. Nowhere is this more apparent than in the realm of payments, where the likes of PayPal, Apple Pay, Stripe, Square and Amazon (which is itself large enough to be a bank) are reshaping established systems and consumer expectations. The result is a movement towards real-time payments and a strong desire to reduce existing friction which impedes participating parties’ ability to execute payments efficiently. That movement, however, is being hindered by current legacy platforms that were never designed to handle real-time demands. Herein, countries are undertaking modernizations of their payment systems with help from innovators in the FinTech space. This includes Payments Canada, which recently began a modernization journey to rethink the fabric of payments in Canada to accommodate a mix of faster, agiler and real-time payment schemes that not only work together but with the world. For payment modernization to occur, we must all be on the same page. That's why moving forward, it will be solutions like the emerging ISO 20022 standard that will help establish a common ground between the current and incoming wave of different payment models. For its part, Payments Canada announced it will November/December 2016
be adopting ISO 20022 as part of its modernization; and while it will require significant re-platforming in the years ahead, those efforts will open up a wealth of new possibilities in terms of how differing transaction parties will be able to interact. On a related note, it would be unwise to underestimate blockchain technology. With the potential to bypass central monitoring and control mechanisms, blockchain has the potential of circumventing current financial systems and changing the relationship between the consumer and bank. For this reason, payment authorities are now working to create a supportive eco-system which will allow for alternative payment technologies such as blockchain into the mainstream environment. No one has the answer yet, but it won't be a one size fits all solution. It will, however, allow for multiple payment schemes to coexist in a controlled way. With the FinTech industry growing and new innovations entering the market at faster speeds, the question moving forward will be how to balance the need to innovate against the very real risks of cybercrime and online vulnerabilities. Do we wait until one FinTech solution causes an incident, or do we tighten down the industry now and risk suffocating the next big idea? These are the questions regulators are asking as solutions like blockchain present great potential, and corresponding risk, to deal with some of the crime elements from a payment ecosystem, but can also facilitate crime in cases, as in the case of using bitcoin to make illegal and untraceable purchases on the now dismantled Silk Road. It's a double-edged sword and one that will challenge stakeholders to balance the need for protection against that of innovation. Regulatory apprehensions notwithstanding, it's a good forecast for the FinTech market. The appetite for innovation among banks, insurance, and wealth management players is high; as is the appetite to engage differently with customers directly and provide services and products that offer an alternative from the norm. It may be crowded, and there may be speed bumps, but if 2016 is any indication both Canada and the world are on track to bring the FinTech industry into the fore. Lian Zerafa is the national consulting financial services industry leader at KPMG in Canada. He is a senior advisory leader in banking and securities with three decades of experience helping over 30 global financial institutions navigate through complex technology, strategy and regulatory issues.
2016 FinTech milestones
• Global investment in FinTech reached US$17.8B billion in funding by Q3 2016 • North American FinTech companies raised more but smaller late-stage deals: median late-stage FinTech deal size in North America dropped to $21.9M, the second lowest quarter in the five-quarter trend, and a 73 per cent drop compared to the same quarter last year • FinTech funding fell below $1 billion in North America in Q3 • Corporates participate in more than half of all deals to VCbacked FinTech startups in Q3 2016
Canada among leading digital payments markets worldwide By Sanjay Tugnait
he World Payments Report (WPR) is the leading source for data, trends and insights on global and regional non-cash payments and the key regulatory and industry initiatives (KRIIs) that govern them. Codeveloped by Capgemini and BNP Paribas, the WPR 2016 explores how digital innovation is infusing the corporate world and its implication for banks and corporates. In this article, we focus on the data provided by Canadian participants in the global survey on which this primary market research is based and its significance for financial institutions in this market.
Digital payment transactions on the rise Global digital payment volumes continue to increase, with annual growth projected to be more than 10 per cent for the first time since the report was first published to reach 426 billion transactions in 2015, up from 8.9 per cent growth in 2014 (387.3 billion transactions). Overall, North America recorded a decelerated, but positive, year-on-year growth rate of 4.4 per cent in 2014 for the total digital payments volume for the region. Cards continue to remain the fastest growing digital payments instrument since 2010, while cheque usage continues to decline. In Canada, digital payments volume grew by a CAGR of 5.2 per cent from 2010 to 2014. This growth was driven primarily by the increase in card transactions. Technological enhancements related to security and infrastructure—and also innovations in consumer convenience such as tap-and-go credit cards—supported this growth. Consequently, Canada also is now among the top 10 markets in digital payments growth (Figure 1). The number of non-cash transactions per inhabitant for Canada also grew significantly at the rate of 5.5 per cent as compared to the CAGR of 3.7 per cent during 2010-13. While growth in digital payments occurred across all regions, developing markets experienced the highest rates of 16.7 per cent with mature markets growing at six per cent, although mature markets —including Canada—still account for 70.9 per cent of total global volumes. Immediate payments, enabled by wireless mobile payments networks in geographically remote/isolated regions, have the potential to drive growth in digital transactions as an alternative to 16
cash and checks, but efforts are needed to educate stakeholders, provide more value-added services and upgrade infrastructure at merchants and corporates.
Banks everywhere need to ‘think digital’ to compete for market share The core theme for World Payments Report 2016 is the challenges and opportunities that exist in transaction banking. Amidst multiple internal and external challenges, including those from FinTech players, banks face increasing demand for seamless, secure digital transaction services for digital products and services (such as support processes of account management, compliance tracking and fraud detection and prevention) from corporate treasurers. This will require banks to accelerate investments and adopt a collaborative mindset with FinTechs to thrive in the increasingly digitized transaction banking environment. Adding to this context is the fact that transaction-banking revenue is under pressure from a multitude of internal and external challenges such as lower fee income, lower interest income, pressure on foreign exchange service fees and corporate demand for digital payment services. Finally, FinTechs have raised the standard for retail-payment services and therefore corporate treasuries now expect similar digital products and services for their transaction-banking operations. Banks have multiple levers they can use to close the ‘digital capabilities gap’ that FinTechs have created. These include the development of application program interfaces (APIs) that open up their ecosystem in order to take advantage of the innovation of FinTechs, which builds their credibility as customer-focused businesses as it supports their market continuity. A number of banks have started to adopt this ‘digital-first’ mindset, leveraging the requirements of the Payment Services Directive II (PSD II) in Europe with a view to improving and enlarging their value proposition. PSD II also provides focus for the development of the technology infrastructure needed to make immediate payments a reality.
International regulatory environment pressuring all banks The multiple new and existing regulatory initiatives have added considerable operating complexity for banks and there are two key themes emerging in regulatory compliance around payments. First, November/December 2016
FinTech Figure 1: Number of non-cash transactions in the top 10 markets (billions) 2013-2014
The way forward: Collaboration and innovation
in partnership with FinTechs. According to the first World FinTech Report (WFTR), published by Capgemini and LinkedIn in collaboration with Efma, half of banking customers across the globe are using the products or services of at least one FinTech firm. The WFTR found that traditional firms are increasingly pursuing a wide range of strategies in response to FinTechs. A majority of financial institutions (60 per cent) now view FinTechs as potential partners, but nearly the same percentage (59.2 per cent) are also actively developing their own in-house capabilities. To help traditional firms accelerate innovation and address current and future market disruptions, the WFTR has defined a four-step framework to assess and respond to a growing number of prospective threats to the financial services business. Traditional FS firms can unlock innovation by: discovering new technologies, devising ideas and insights into business models, deploying aligned executives to support innovation, and sustaining innovation by improving efficiency and implementing best practices. The primary market research published in the annual WPR and this new WFTR speaks to the ongoing Capgemini commitment to serve the business-information and technology needs of the financial services industry and its constituencies. Leveraging its network of Applied Innovation Exchange locations, Capgemini is also working with traditional firms and FinTechs to support individual company initiatives, advancing digital payments capabilities to help them better serve their customers in Canada, North America and around the world.
Canada is on the verge of 'catching up' in terms of payment infrastructure in the move to instant payments (initiated by Payments Canada). As a result, banks need to upgrade their payment rails, which will allow innovative payment solutions provided by banks or
Sanjay Tugnait is the CEO for Capgemini Canada and the Chairman for the Canada Country Board. Sanjay has 24 years of experience in global leadership roles in strategically transforming leading corporations and is recognized as an industry leader for his professional contributions.
the increased use of technology to ensure compliance and second, a facilitation approach that is being adopted by some regulators to enable businesses to accelerate their time-to-innovate within a ‘safe’ environment. The use of technology in support of regulatory compliance is being advanced by a niche set of FinTechs (aka “RegTechs”). They are making use of emerging, advanced technologies by providing services to automate more tactical compliance tasks and to help reduce operational risks associated with regulatory compliance. At the same time, the innovation environment is being developed through initiatives such as that of the UK Financial Conduct Authority’s Project Innovate. This initiative introduced the concept of a Regulatory Sandbox where the businesses can test their products and services in real-world scenarios without being subject to the usual regulatory consequences. In response, banks are taking steps toward holistic compliance; however, to date the implementation of these applications remains tactical rather than strategic and progress is often slow. In the U.S., several banks are adding “open APIs” to their existing systems for payment processors and RegTechs. They are also working with the Open Financial Exchange (OFX) standard. A transformative approach to holistic compliance will help banks to implement best practices, mitigate the threat of heavy sanctions-related fines and provide the value-added services demanded by corporate treasurers.
Trends driving transformation in global payments & regulation By Stephanie Zee
eer-to-peer payments, faster payments, enhanced data, straight through processing and straight through reconciliation—the expectations and demands of today’s corporate clients simply can’t be met by the legacy infrastructure we are still using today. Consequently, we find ourselves witnessing extensive change across all aspects of the payments ecosystem. Four key trends are driving transformation in global payments and regulation: infrastructure modernization, cyber security, new entrants and technology and regulatory diversity.
Infrastructure modernization Infrastructure modernization is occurring across the value chain, not just within banks, and is all encompassing. It is truly end-to-end, stemming from both push and pull market activity. Clients are actively updating internal enterprise resource planning (ERP) platforms, payment systems and processes; in many cases centralizing accounts payable and creating a payments hub that often includes several or all countries. Clients are insisting on enhanced data, transparency and ubiquity of process and file type across their payment providers, while new entrants are challenging banks to abandon legacy systems and undertake their own infrastructure transformation to keep up. At the same time, financial market infrastructures are adopting the new messaging standard (ISO 20022), enabling the transfer of richer data, launching faster payment schemes and opening access to nonbank organizations adding to the pressure on banks. As payment infrastructures are being modernized in the domestic landscape, these solutions are creating momentum for neighbouring jurisdictions to also change and impacting cross-border schemes. Infrastructure modernization and faster payment systems have proven to be an enabler of business growth in such countries as the United Kingdom, Singapore and Australia which have already gone live with these faster systems. Many other countries including Canada are in the planning/exploring phase. Payments Canada (formerly known as Canadian Payments Association) is currently undertaking a multi-year initiative to modernize Canada’s payment infrastructure utilizing ISO20022 as the de facto standard. At the same time, the banks have come together to overhaul 18
the cross-border payment experience. SWIFT’s Global Payments Innovation Initiative (GPII) is one of the ways that banks are collectively responding to improve cross border payments and address key client pain points. Launched in January 2016, the goal of GPII is to modernize the messaging system and improve transparency and predictability of fees, end-to-end payments tracking and transfer of rich payment information. More than 70 banks channeling payments into 227 countries have signed up. The results of a small pilot are expected in the coming months with a broader roll-out in 2017.
The risk of cyber-attacks continues to increase, with the estimated global cost of cybercrime at $445 billion. Cyber security The World Wide Web is now 25 years old and has transformed consumers’, businesses’ and governments’ approaches to shopping, procuring and paying. It has opened new markets and trade near and far, and has made a massive amount of information and data accessible to anybody and everybody. Global systems have been integrated and have enabled straight-through processing. At the same time, we have created the perfect environment for pseudoanonymity and cyber-attacks. A cyber-attack is an attempt by criminals to access or damage a computer network/system in order to cause disruption or for monetary gain. The risk of cyber-attacks continues to increase, with the estimated global cost of cybercrime at $445 billion, as of February 2015 according to Computer Weekly. In 2016 we have seen a marked rise in attacks targeting financial institutions, with the payoff in the millions of dollars for each attack. The rising financial impacts, the pace of change in the payments industry, and local and global system interdependencies have put cyber security high on the agenda of banks, financial market utilities and regulators. Implementing robust practices for system access such as multi-factor authentication, use of biometrics, and segregation of data and November/December 2016
FinTech information are important elements of a security program. But cyber security is not just about technology. Investment in and execution of an organization-wide strategy to understand and combat cyberattacks is critical. Effective strategies include governance combined with a culture of prudent business control and risk management, including training, communications, documented business processes and being vigilant over different infiltration points such as email or access to company WiFi.
New entrants For several years FinTechs have been quietly and now loudly and explosively leading the charge to address the gaps identified by our clients to capture market share. New entrants and technology developments are driving business model disruptions where VBProfiles found that investments in FinTech reached more than $38 billion in 2015. The extensive scope of activities across the new entrants makes it difficult to know what to focus on and where the greatest threats or opportunities may be. Small but successful startups can pose legitimate threats to even the strongest companies by disintermediating the banks or relegating them to being the “dumb pipes.” Further, non-traditional financial services companies like PayPal, Google and Apple are leveraging cloud and mobile technologies as well as viral distribution to quickly start and scale business at low cost to address the friction clients experience. New technologies like distributed ledger or blockchain enable new paradigms for exchange of value and create new “rails” that sit outside of the traditional bank to Financial Market Utilities (FMU) payment infrastructure. Banks have stepped off the sidelines with many having set up innovation centres to experiment with new business models and technologies. Some banks have invested in a range of different startups, and are collaborating and partnering with FinTech players.
Institutions (OSFI), The Bank of Canada, The Department of Finance, The Canada Deposit Insurance Corporation and the Office of the Privacy Commissioner of Canada. The regulatory environment is complex with new requirements emanating from the different bodies to revitalize and address outdated legislation and regulation, and to address the payment market conditions. Heightened capital and liquidity requirements through BASEL III, operational resiliency and “living will” requirements, ongoing anti-money laundering and terrorist financing efforts, and cyber risk management controls are just a few of the topics impacting the payment world. To address the rise of cybercrime in particular, in 2016 The European Union adopted the Network and Information Security (NIS) Directive and General Data Protection Regulation; and in the U.S. the Cybersecurity Information Sharing Act was signed into law December 2015. In Canada the Government has articulated a cyber-security strategy and has created the Canadian Cyber Incident Response Centre (CCIRC) and is also considering legislation. For regulators and banks a conundrum exists with respect to FinTechs: Is a FinTech a technology company or is it a payment provider that should be governed similar to a bank? If so, which regulations apply and which ones do not and what falls under the regulations? In the case of new technologies like Blockchain or virtual currencies like Bitcoin who do you regulate (FinTechs, exchanges, programmers, originators, beneficiaries)? How should they be regulated (legislation, acts, common law, civil law, codes of conduct, and what jurisdiction)? Many of these questions have yet to be answered. Regulations on FinTechs are nascent and vary greatly creating uncertainty for financial institutions that bank these firms and this uncertainty may constrain innovation among FinTechs. Various jurisdictions have introduced “regulatory sandboxes,” relaxing some of the regulatory requirements to encourage exploration and innovation in a flexible environment in which FinTechs can test technology and business models. Once the application has reached defined thresholds, commercialization generally requires full adherence to regulatory obligations. In some cases new regulations may be needed to ensure safety and security that reflect the unique characteristics of the new technology or business model. Examples of regulatory sandboxes include the United Kingdom’s Financial Conduct Authority, the Monetary Authority of Singapore, and the Australian Securities and Investments Commission. Systemic infrastructure change, new risks, new entrants and heightened regulatory pressure… it’s a frenzied pace but payments is the most exciting business to be in. Opportunities are everywhere to innovate, to deliver greater value to our clients, to enhance the client experience, create efficiency, effectiveness and transparency, reduce costs, drive new revenue, and enable a stronger, safer and more secure operating environment. Partnership and collaboration between the banks, FinTechs and regulators are the best way forward through these unprecedented times of change.
Small but successful startups can pose legitimate threats to even the strongest companies by disintermediating the banks or relegating them to being the “dumb pipes.” Regulatory diversity As if infrastructure transformation, cybersecurity challenges and FinTech disruption were not enough, the industry continues to experience an amplification of regulatory oversight with increasing requirements aimed to protect the payment ecosystem, build resiliency of payment providers and utilities, and encourage innovation and competition. Multiple layers of governance over the ecosystem are in place from global oversight bodies such as the Bank of International Settlement, the Basel Committee on Banking Supervision, and the Financial Stability Board, to regional and local oversight such as Office of the Superintendent of Financial November/December 2016
As TTS Payments Regulatory Head, Stephanie Zee leads a team responsible for creating and driving Citi’s strategy to meet regulator expectations and is responsible for the management of emerging risks across Global Payments. PAYMENTSBUSINESS
2017 Industry Events
January January 15-17 National Retail Federation Retail’s Big Show 2017 New York, NY nrfbigshow.nrf.com January 29 – February 1 Retail Solutions Providers Association INSPIRE 2017 St. Kitts, West Indies gorspa.org/event/inspire January 30-31 American Conference Institute 17th National Forum on Prepaid Card Compliance Washington, DC AmericanConference.com/ PrepaidCard
February February 8-9 InfoTech Canadian Financing Forum 2017 Vancouver, BC financingforum.com February 14-16 ATMIA ATMIA US Conference 2017 Orlando, FL atmia.com February 22 – March 2 WB Research eTail West 2017 Palm Springs, CA etailwest.wbresearch.com February 22 – March 2 GSMA Mobile World Congress Barcelona, Spain mobileworldcongress.com
March March 27-30 ICMA 2017 Card Manufacturing & Personalization EXPO Orlando, FL icma.com
March 27-30 Smart Card Alliance Payments Summit Orlando, FL scapayments.com March 27-28 U.S. Payments Forum All Member Meeting Orlando, FL uspaymentsforum.org
April April TBD Payments eXchange Payments Awards 2017 Toronto, ON www.paymentseXchange.ca April 10-13 NAPCP Commercial Card and Payment Conference Houston, TX napcp.org April 13-14 Conference Board of Canada Canadian Privacy Summit 2017 Toronto, ON conferenceboard.ca April 23-26 NACHA Faster Payments 2017 Austin, TX payments.nacha.org/what-ispayments April 26-27 Central 1 2017 Conference and Trade Show TBD central1.com April 26-27 Finovate FinovateSpring 2017 San Jose, CA spring2017.finovate.com April 28 Central 1 Annual General Meeting TBD central1.com
May May TBD Payments Canada 2017 Payments Panorama Toronto, ON payments.ca May 1-3 ACT Canada Cardware 2017 Niagara Falls, ON cardware.ca May 10-12 Electronic Transactions Association TRANSACT Las Vegas, NV etatrasact.com May 16-19 WB Research eTail Canada Toronto, ON etailcanada.wbresearch.com
June June 6-9 Internet Retailer Conference + Exhibition Chicago, IL irce.com June 14-16 FEI Canada 2017 Annual Conference Whistler, BC feicanada.org/2017/Annual/ Conference June 28-29 InsuranceNexus 3rd Annual Insurance Analytics Canada Summit Toronto, ON events.insurancenexus.com/ canada
August August 22-23 The Prepaid Press tppEXPO’17 Las Vegas, NV prepaidpressexpo.com
Visit us online www.paymentsbusiness.ca 20
November/December September/October 2016
August 28-30 Mobile Payments Conference Chicago, IL mobilepaymentconference.com
September September 27-28 Western States Acquirers Association 2017 Conference Rancho Mirage, CA westernstatesacquirers.com
October October 4-5 BAI BAIBeacon17 Atlanta, GA bai.org/baibeacon October 12-14 CAMA EXPO 2017 Quebec City, QC vending-cama.com October 15-17 Association for Financial Professionals 2017 AFP Annual Conference San Diego, CA afponline.org October 16-19 Sibos Sibos 2017 TBD sibos.com October 22-25 Money20/20 Las Vegas, NV money2020.com
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The future of RTGS Nick Senechal specializes in payments strategy for VocaLink, having over 28 years experience across many areas of the industry.
he introduction of real-time gross settlement (RTGS) systems has been a uniform process in most of the world’s major economies over the last 30 years. RTGS ensures wholesale obligations between financial institutions, typically high in value and low in volume, are settled in a way that eliminates risk between those institutions, whilst through more complex processing (such as scheduling and liquidity management) ensures that the flow of funds between these organizations is managed intra-day to optimze efficiency and avoid a national cash flow crisis. RTGS is essentially electronic book keeping of funds held on behalf of the FIs by the Central Bank. Traditionally RTGS has been used to settle “bulk” retail payments in aggregate. Such systems used either a “settle before release” (SBR) or “deferred net settlement” (DNS) model where the aggregate sum of all transactions in a “batch” was settled together as single RTGS debits and credits either before (SBR) or after (DNS) the batch of payments were paid into individual beneficiary accounts. Such systems operate on a periodic cycle of between several hours and several days. Both processes have shortcomings: SBR creates a delay in funding beneficiary accounts and inhibits multilateral netting (a process used to maximize efficient use of liquidity), whilst DNS payments create a “settlement risk” between participants until the corresponding bulk settlement has occurred. Various means of dealing with this risk are put in place such as guarantees, loss sharing agreements “unwinding” facilities, etc. Few have ever been called into operation and it is not even clear that they would work. As retail payments meet the 21st 22
century, the requirement has been for speed, robustness, 24/7 availability and certainty. This has led to the rise of real-time payments. Typically smaller in value and higher in volume, such services meet the need for digital transfer of value instantly and irrevocably from bank customer to bank customer. Such payments cannot be conveniently batched and settled across RTGS in the old way as they have no concept of a “payments cycle.” Early adopters used a “quick-fix approach” to solve this problem: in the UK a “loss sharing model” was put into place which was tied into hard caps in the risk management of the real-time retail faster payments (FP) system. This ensured that settlement would always occur on a DNS basis, by calling on assets of the surviving banks. In Mexico, the SPEI system, with relatively low volumes, has adapted the RTGS system to accommodate retail payments during working hours. Neither of these settlement methods has proved ideal or promises to be scalable. The UK has now moved to a much more flexible model of “pre-funding” by which sums deposited by banks into a central bank account are reflected in values within the FPs risk management system, providing banks with a retail balance. From that point on, the FP system records the change in ownership of these balances between participants— effectively acting as a delegated mini RTGS system (although operating much faster and with much higher volumes). Designated settlement points enable banks to re-set their positions, either extracting excess value or inputting to re-set working balances. In Sweden this model has been developed even further, such that the BiR real-time retail system operated by Bankgirot has its risk management functionality more tightly integrated with that of the Swedish Riksbank’s RIX RTGS system—to the degree that it is effectively legally recognized as part of that system. Recently both the Bank of England (BoE) and the ECB have put into place reviews of their respective
RTGS services. One key question is how far should they go in supporting real-time retail or instant payments. Whilst the BoE has recently said that whilst extending opening hours may be on the cards (to enable working balances to be adjusted more frequently), they have also indicated that settling each retail transaction separately is not for their RTGS system—effective connection to ancillary retail systems will enable these huge volumes to be managed effectively elsewhere leaving the RTGS system to manage the more systemically significant fund flows between institutions. But the systems will be much more tightly connected, closer to the Swedish model. Such a model, if priced attractively, could have the capability to replace all Euro area CSMs, as effectively this would replace significant elements of existing CSM functionality (the risk management element and network addressability). Some areas (e.g. messaging and network, the equivalent of a retail version of the UK’s current CHAPS scheme) may be left to the existing national clearing organizations. It would also be a massive undertaking for the ECB, if, as VocaLink expects, many existing transactions migrate to a real-time model— perhaps as many as 44 billion across Europe by 2027. Contrastingly in Canada, a recent review of payments services has suggested that a new system be built which treats replacement RTGS as an extension to a new real-time retail service. The actions of Central Banks in reviewing their RTGS systems will shape the future retail payments landscape. Tighter integration between retail and wholesale systems will be a certain outcome. Whether this is achieved by greater centralization by central banks or by an approach which enables better interoperation with a synchronized commercial system will depend on decisions within each community, but the need to provide effective and irrevocable instant payments in high volumes will be top of the list of required outcomes.
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Published on Dec 5, 2016