Payments Business Magazine Sept/Oct 2018

Sep/Oc t 2018

The Merchant’s Guide to Transactions, Cards & e-Commerce

Mobilizing Canadian payments ❱ Realizing Canadian Payments 2.0

❱ Cheques: the payments cornerstone

❱ Blockchain means business

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TableKey of Contents theme

Mobile Wallet 4

September/October 2018 Volume 9 Number 5 Editor-in-Chief Steve Lloyd steve@paymentsbusiness.ca

Mobilizing Canadian payments

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Editor Brendan Read brendan@paymentsbusiness.ca

Invisible payments are taking the lead Consumers are driving it forward

Publisher Mark Henry mark@paymentsbusiness.ca Contributors John Armstrong; Derek Colfer; Steve Doswell; Jeff Hempker; Hans Kelso; Jason Oxman; Paul Parisi; Normand Provost; Jonathan Razi; Michael Rhodes; Jason Schwabline; Wally Vogel; Derek Wood Creative Direction Jennifer O’Neill jennifer@paymentsbusiness.ca Photographer Gary Tannyan President Steve Lloyd steve@paymentsbusiness.ca For subscription, circulation and change of address information, contact subscriptions@paymentsbusiness.ca Publications Mail Agreement No. 40050803 Return undeliverable Canadian addresses to: Circulation Department 302-137 Main Street North Markham ON L3P 1Y2 t: 905.201.6600 f: 905.201.6601 info@paymentsbusiness.ca www.paymentsbusiness.ca Subscriptions available for $40.00 year or $60.00 two years. ©2018 Lloydmedia Inc. All rights reserved.

The contents of this publication may not be reproduced by any means, in whole or in part, without the prior written consent of the publisher. Printed in Canada.

Reprint permission requests to use materials published in Payments Business should be directed to the publisher.

Made possible with the support of the Ontario Media Development Corporation

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A sound solution for mobile payments

Payments Modernization 10 Realizing Canadian Payments 2.0 FinTech 11 The AI payments revolution 12 Innovation can't come at the expense of trust Cash & Cheque Handling Equipment 13 Cheques: the payments cornerstone 14 Cheque versus check

Understanding Canada/U.S. differences

Industry updates 16 Electronic Transactions Association expands

Canadian advocacy

17 Removing global payments barriers 19 Major settlements will reverse credit card fees Alternative Currencies 20 Blockchain means business 21 Staying ahead of blockchain and cryptocurrency Next issue…

Nov/Dec 2019 Payments Forecast • Acquirers • B2B • EMV card technology • Points & Rewards September/October 2018

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Mobilizing Canadian payments

By Hans Kelso

T

he financial marketplace in Canada is a fundamentally conservative environment, with the majority of Canadians conducting their business with a small number of large institutions, buttressed by the near universal accessibility of the Interac network.

It should then be no surprise that mobile payments, and more generally digital payments, have failed to catch fire in Canada like they have in other parts of the world. For example, according to Visa Canada only six per cent of Canadian consumers report using mobile wallets frequently1.

What makes Canadians so reluctant?

The slow uptake of new mobile and digital payment methods in Canada is likely a result of three factors.

1. Comfort with existing methods. Canadians have come to rely on their existing debit and credit cards for most if not all of their day to day 4

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September/October 2018

Mobile Wallet purchases. This creates enormous inertia that alternative payment methods will need to overcome.

2. Lack of perceived value. Customers don’t currently feel that pulling out and using their phones is any more convenient or useful than using debit or credit cards for conducting purchases. This directly limits the available value of mobile payment methods.

3. Perceived lack of security. According to Visa only 35 per cent of Canadian respondents felt virtual wallets are very secure and worries persist among consumers about criminals accessing payment information over the air2.

With time the idea of paying for goods with your phone either in-store or online will be seen as increasingly normal.

Mobility drivers With these obstacles in mind, changes are coming in the next few years that will shake up the marketplace and move Canadian consumers closer to the global average of mobile payment and digital payment utilization: • The comfort of familiarity. Mobile payments are, at this point, quite new to the Canadian landscape. With time the idea of paying for goods with your phone either in-store or online will be seen as increasingly normal. Canadians went through the same process with the launch of Interac Flash. When Flash launched in 2011 it was met with an overwhelming shrug by Canadian consumers, to the point that articles such as “Interac Flash: Why aren’t more people using it?” in The Globe and Mail3 were being written. Today, Flash and other contactless options have been embraced by consumers with 52 per cent reporting regular use of the feature4; • Value expansion. As the market for new applications and services continues to develop, the fundamental value proposition of using mobile and digital payment channels will grow with it.

This developing trend is evident both with the introduction of new entrants, such as peer-to-peer app Venmo and the expansion into Canada of large international players, such as Chinese giants Alipay and WeChat Pay. With increasing options Canadians will find it easier to transition from single purpose payment applications to a more holistic embrace of the technological possibilities; • Consumer education. As part of their movement into mobile and digital payments, Canadian financial institutions are educating their customers about the safety and reliability of mobile payments. As consumers receive reassurances from their trusted financial institutions about the security features embedded in the payment applications, as well as the business rules which protect everyone involved in the transactions, consumer confidence in the overall payment channel will grow and friction to adoption will decrease; and September/October 2018

• New channels. Digital payments will soon be extended to a huge number of Internet-connected self-ordering devices that will use the new tokenized mobile credential infrastructure. In parallel with the continued digitalization of consumer experiences in banking and many other verticals, digital payments will become a fundamental and core function of mobile and other digitally enabled devices. The first of these steps will come to market in the form of online card payments using mobile credentials, which will substantially reduce Card Not Present fraud and enhance the consumer buying experience.

Mobile payments will, like Interac Flash payments before it, gain broader acceptance from the Canadian market as the population grows accustomed to the technology and the new payment options that have been made possible. A new generation of consumers for whom paying with their phones is a common or even default method of conducting transactions is coming of age. What form of mobile payment will be dominant is still to be decided with the plethora of firms and methods competing for spending primacy.

Is your business future proofed?

Digital and mobile payments will reach a takeoff point in the Canadian market in the next few years and it behooves all participants in the payments ecosystem to consider several questions before that point is reached: • How will you determine which digital payment methods you will support?

• What partnerships do you have available to navigate this payments transition?

• Will your company be best served by adopting a leading edge approach to digital payments or waiting until the environment stabilizes before investing?

• What steps will your company need to take to remain part of your customers’ value chain as preferred payment methods diversify?

• What strategic investments will your company need to make to participate in the next wave of mobile and digital payment offerings?; and • How will your company interact with the next generation of payment options that eschew the traditional banking infrastructure?

Understanding where, how and with whom your firm will integrate with in the new payments ecosystem will be a key success factor for firms as the mobile and digital payments avalanche gains momentum even with conservative Canadian consumers.

Hans Kelso is a senior analyst and the mobile payment product owner with Cardtronics Canada. He is focused on delivering effective and affordable mobile solutions for Canadian financial institutions. Cardtronics Canada (www.cardtronics.ca) has been providing payment and ATM solutions to the Canadian market since 1999.

1 Visa Canada, “Canadian consumers trust familiar payment methods; may be slower to adopt emerging forms of payment, according to Visa study”, press release, March 28, 2018.

2 Visa Canada, “Canadian consumers”, ibid.

3 Rob Carrick, “Interac Flash: Why aren’t more people using it?”, The Globe and Mail, May 12, 2018.

4 Visa Canada, “Canadian consumers”, ibid.

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Mobile Wallet

Invisible payments are taking the lead Consumers are driving it forward

By Paul Parisi

C

onvenience has long been the driver of payments innovation. As customers crave greater ease in the ways they pay, the industry has responded with fast, easy, secure and seamless payment options.

These factors have combined to usher in invisible payments.

Invisible payments take traditional payment methods such as cash, debit and credit cards and card readers out of the equation. In their place customers are able to use digital wallets for purchases.

Invisible payments are fast becoming the preferred way to pay for many consumers because they are quick and take place behind the scenes. Anyone who has taken a ride with Uber or Lyft has experienced an invisible payment. The friction that customers have long encountered when paying—whether waiting in line at stores, fumbling for the right cards or manually entering payment information on point-of-sale (POS) machines—is now reduced with invisible payments.

Smartphones have changed consumer expectations in how they experience the world around them through literally putting the world at people’s fingertips. These devices have also changed the way we shop and pay for things. They have accelerated the adoption 6

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of invisible payments by increasing access to online and mobile commerce. According to an eMarketer report, mobile commerce will account for 30 per cent of the $17.1 billion retail e-commerce market in Canada in 20181.

People now expect the same seamless experience in their payment methods as is commonly offered by companies like Starbucks with its Mobile Order and Pay functionality. This payment method accounts for more than 10 per cent of all Starbucks’ transactions and in peak hours at those stores the order ahead mobile orders are approaching 20 per cent of a store’s transactions2. Invisible payments deliver on this desire for payments to happen instantly and behind the scenes rather than at the POS terminals.

Invisible payments in action Customers don’t want too many steps in the payment process. They want simplicity, speed and security and they want it in the palms of their hands.

People don’t engage in a transaction for the joy of the payment experience. People pay to experience the joy and the value in the things that they covet, want and need. Innovation that improves customer payment experiences and overcomes friction while also increasing security will be critical for payments, now and in the future.

September/October 2018

Mobile Wallet Reducing friction to create invisible payments is a top priority for payment innovation. For example, PayPal’s One Touch feature helps remove barriers to online shopping by allowing users to remain logged in for easier and faster checkouts while keeping their full financial information secure. Powered by machine learning, detailed usage tracking and user device habits are captured to enable companies to successfully identify customers by matching their patterns.

Consumers continue to reinforce the value of this feature. PayPal’s One Touch has become one of the most rapidly adopted products in our history. 92 million consumers have opted in for the innovative checkout experience globally and at the end of the first fiscal quarter of 2018 more than 8.6 million merchants offered One Touch.

Reducing friction to create invisible payments is a top priority for payment innovation.

Examples of invisible payments have already been incorporated into commonly used services and products. Contextual commerce applications like Pinterest and Instagram buy now buttons and voiceassistants like Amazon’s Alexa are other examples of payments that are removing friction from the payment process. They enable users to purchase things they want within the platforms they’re on, with no interruption to their experiences.

In the automotive space, Internet-enabled connected cars are starting to communicate with gas pumps to pay for fuel. Mobile apps have revolutionized the way people pay for parking. With the GreenP parking app in Toronto, Ontario they don’t have to dash to the meters in the snow or rain to pay for or extend their parking: they can now do it remotely from their phones.

What’s next for the payments industry?

The future of payments will be largely influenced by the following technologies:

September/October 2018

• Artificial intelligence (AI). AI and machine learning are being explored in the FinTech industry to deliver richer, data-driven insights that allow businesses to focus on delivering highly personalized purchase experiences; • Virtual Reality (VR). Payment platforms are already being used inside virtual reality environments. Companies are exploring how VR technology can seamlessly let us explore and shop but also pay through VR technology with simple gestures; • Blockchain. Blockchain technology will go beyond financial services by creating opportunities for data on the sources, identities, credentials and digital rights to be securely stored with distributed ledgers in many different industries from aerospace to retail; and • Biometrics. Biometric identifiers, like voice recognition, fingerprint scanners and facial identification, are rapidly being adopted into payment technologies. And consumers are on board: 22 per cent said they would use facial recognition or retinal scans to pay for items in stores3.

For now, invisible payments are enabling transactions to take place in the background as payment providers and merchants prioritize experience and find more ways to reduce barriers to purchase.

The payments industry will continue to be disrupted by consumer demand for ease and convenience.

Technological advancements will provide the tools the industry needs to respond to these demands. It will allow for the creation of innovative solutions that meet and exceed consumer expectations, ultimately leading the industry to the next-generation of payment innovation.

Paul Parisi is the president of PayPal Canada. Paul has more than 17 years’ experience in the payments industry. He holds a bachelor’s degree from the University of Guelph.

1 eMarketer, “Ecommerce in Canada 2018: eMarketer’s Latest Forecast, with a Focus on Grocery”, report, January 25, 2018.

2 “Starbucks drinkers embrace the Mobile Order & Pay program”, Internet Retailer, April 22, 2016.

3 Lisa Wright, “Canadian shoppers eager for new payment technology: report”, Toronto Star, October 8, 2014.

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Mobile Wallet

A sound solution for mobile payments

By Steve Doswell

M

obile payments have come a long way in a relatively short amount of time and have solidified their place amongst mainstream payment methods. Their share of the payments market will now quickly accelerate. Here’s why.

Consumer comfort. Mobile bill payment has gone from exclusively serving the tech-savvy community to universal, everyday use, with millions of active users. Banks have fueled this phenomenon, offering a wide array of services available through mobile apps, including cheque cashing, balance transfers and foreign exchange. We are nearing the point at which every service offered by a traditional in-person bank teller will be available via mobile banking. Mobile payments represent a logical progression of everyday banking activities going mobile.

Incorporating biometrics for security. While biometrics security-based technology has been around since before the Internet, it has only recently started playing a key role in the lives of consumers.

Biometric recognition has become the standard for smartphones via features like facial recognition and fingerprint scanning. App developers have followed closely by implementing biometric security features such as fingerprint-authenticated gateways on their apps, which helps with authentication by eliminating hackable passwords as well as improve access speed.

Mobile wallet prevalence. Apple was the pioneer in mobile wallet technology, opening the floodgates with Apple Pay on its smartphones. Competitors followed closely behind, with Samsung Pay, Microsoft Wallet and Android Pay. Most major financial institutions now offer their own branded wallets. Anyone with a smartphone thus has multiple wallet adoption options.

Near Field Communication (NFC) universality. NFC is the technology that facilitates mobile payments by allowing two electronic devices to exchange selected bits of information. This technology is most recognizable in mobile transactions like tap payments and scan payments. NFC technology creates a transaction code which allows the customer’s payment card information to be directly hidden from the transaction. This technology has become readily available at merchants and points of sale (POS) globally. It is also the technology utilized by most mobile wallets in North America and has become the backbone of the mobile payment industry on this continent.

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Transactional friction reduction. As more devices become equipped with mobile payment functionality, the distances between buyers and sellers continues to decrease. Virtual home assistants through Google and Amazon’s Alexa offer commands to purchase goods with payment card information readily on file. Retailers are seeing the benefits and are opting to offer their customers mobile payment options designed to provide convenience as well as satisfying the digital and mobility expectations of their customers.

Mobile payment impediments In spite of the positive results to date and the energy which is driving the use of mobile devices for purchases, there remain certain market obstacles that are limiting the rate of growth and use of mobile payments.

• Data security. A key issue with mobile payments has been safeguarding user data against hackers and data breaches.

Besides hacking databases containing users’ payment and banking information, the “man-in-the-middle” scenario remains a threat.

In such cases the hacker intercepts communication between buyer and seller or bank and recipient and uses the information to their advantage; and • The adoption paradox. Consumers want to use their phones as their standard payment device. Paradoxically, most of today’s September/October 2018

Mobile Wallet “mobile payment” offerings are largely limited to in-store at the POS. Thus, mobile payments today are actually not very mobile at all. They compete with debit and credit card taps and offer the consumer little advantage to use the phone over cards when already standing at a POS. For payments to be truly mobile, customers must be able to download payment carts outside of store POS such as at home (in front of TVs or computers), outside from digital signs or billboards, from posters on buses and trains and from signage in stadiums. But to date no existing technology offers instant gratification by purchasing or responding to a call-to-action directly from an ad or broadcast content, wherever one may be.

Enter Soundpays mobile wallet solution Soundpays offers ultrasonic sound wave technology via an SDK (software development kit) to deliver product purchase or call-toaction information directly from advertising or broadcast content to mobile devices. The solution facilitates mobile payments for enterprises on two levels: 1. It can convert a simple third-party mobile app into a mobile wallet, without the app brand having to go through any of the significant effort to create a secure and reliable wallet.

2. It can enhance the reach and relevance of mobile wallets by creating transaction carts from non-POS environments and serving these transactions to the wallets for processing.

that someone would duplicate one of our sound waves, it would be functionally impossible for a hacker to shift the destination account in the transaction. The fact that it is functionally impossible to force unwanted transactions onto a user’s account effectively nullifies the risk of fraud. Every party involved in each transaction must be authenticated on Soundpays' payment server.

Mobile payments have risk, just like most anything else in life does.

The Soundpays SDK has been designed to be inherently secure while offering its customers the ability to provide both their consumers and retailers the opportunity to take full advantage of the power and convenience of mobile payments.

Steve Doswell is CEO of Soundpays (www.soundpays.com). Steve has 20-plus years as an executive with tech companies including co-founder or early member of executive teams with three start-ups collectively raising almost $200 million (including two successful IPOs) prior to being acquired. He has held executive positions with Ericsson Canada and AOL Canada.

Upgrading an app to a fully-functional wallet The Soundpays SDK uses advanced security encryption and tokenization to provide a highly secure mobile wallet back end.

When the SDK is deployed, the third-party app users’ payment card information is never stored on the mobile device or in our servers nor is it broadcasted during the transactions.

All of our communication is encrypted through secure Internet connections. After initial sign-up the user of the branded app or wallet (with Soundpays “inside”) is granted a secure token ID used as a reference point for transactions sent to merchant processing gateways. By deploying the Soundpays SDK, a third-party app provider can upgrade to wallet capabilities without having to get involved in the complex world of payments processing and security.

Enhancing existing wallets Today’s mobile wallets, whether QR (quick response) Code or NFCbased, function solely at a POS. By integrating Soundpays technology into third-party wallets, the wallet users are suddenly able to access product shopping carts from a multitude of non-store locations.

This creates more purchase decisions and drives more payment transactions into the wallet processing mechanism.

Intent-based engagement Each transaction enabled by Soundpays technology is intent-based, meaning that the customer user must open the app and activate the listening process and finally confirm the purchase. On the off chance September/October 2018

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Payments modernization

Realizing Canadian Payments 2.0

By John Armstrong

T

o say that Canada's payments modernization plans or “Canadian Payments 2.0” are ambitious would be an understatement. With plans for real-time payments, data-rich transactions, more efficient standards and open-banking platforms, these initiatives will revolutionize how Canadians transact: much to the benefit of businesses and consumers alike.

These plans include a migration from the current large value transfer system (LVTS) towards a real-time gross settlement system (RTGS), the adoption of the more data rich ISO 20022 messaging standard and the introduction of real-time payments.

This “Real-Time Rail” that the modernization encompasses will facilitate near-immediate delivery of payments.

It will also lay the foundation for valueadded overlay services such as request for payment, where one party can send a message requesting payment and with a click of a button the recipient can reply with the payment. This has the potential to drive huge efficiencies for corporate customers, as reconciliation of invoices to payments made becomes very easy.

Opening doors to open banking In addition, the forthcoming 2019 updates to Canada's Bank Act will almost certainly include provisions for so-called “open banking”, wherein customers can compel their financial institutions to share their financial services data with third-party providers. Open banking will provide more aggregated views of customers’ financial positions. Enabled by application programming interfaces (APIs), these services will enable Canadians to wield greater control over their financial affairs.

For example, some will enable consumers to better compare products or services on aggregated platforms, while others will permit secure real-time payments between authorized users.

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Source: Pulse of FinTech 2018, Global analysis of investment in FinTech, KPMG International (Data provided by PitchBook) 9 July, 2018.

Payments modernization and the update to the federal Bank Act will unlock new opportunities for players in the Canadian FinTech market in the payments space and around open banking, according to John Armstrong, national industry leader of financial services with KPMG in Canada. The market has seen significant venture capital (VC), private equity (PE) and merger and acquisition (M&A) activity.

We've yet to grasp the full potential for open banking, but we know the opportunity is not lost on today's venture capital investors and FinTechs, many of whom are lining up to provide these new services. In KPMG International’s biannual global analysis of FinTech investments, The Pulse of FinTech 2018, we noted the payments and lending sectors continued to be the most mature of the FinTech sub-sectors in Canada.

That's not to say the incumbent banks are standing still. To the contrary, open banking will enable Canadian financial institutions the opportunity to differentiate themselves with their customers and increase customer “stickiness” through value-added services of their own, or services acquired through partnerships with FinTechs.

Other countries’ “2.0” initiatives Canada may be eyeing a new era for digital payments, but it is not alone. In February 2018 Australia launched its New Payments Platform (NPP) initiative, rolling out a national payments infrastructure that will enable instant, data-rich payments. The first overlay application, Osko, will let consumers send money transactions between authenticated

users in under a minute and accompany those transactions with 280 characters of text or emojis to describe the payments.

Osko is slated to be available through more than 60 financial institutions.

Open banking was launched in the U.K. in January 2018. Both FinTechs and established financial institutions are developing their own aggregated banking that will give customers access to comparison sites, digital ID and personal data services, customer loyalty programmes and all manner of customer-focused applications.

Modernization impacts Indeed, the impact of Canada's payments modernization will be dramatic. In addition to spawning new entrants and innovations, it will empower both existing financial institutions to redefine how Canadians interact with their financial providers and control their financial futures. There is no question it is an exciting time to be part of the payments ecosystem.

John Armstrong is national industry leader of financial services with KPMG in Canada. Read The Pulse of FinTech 2018 and learn more about Canada's payments modernization at www.kpmg.com/fintechpulse.

September/October 2018

FinTech

The AI payments revolution

By Derek Colfer

A

s consumers shift away from cash and towards digital and mobile payments, financial institutions and payments technology providers are exploring new ways to make those transactions faster, easier and frictionless. The next frontier in that evolution will be artificial intelligence (AI).

AI is a computer science that aims to imitate human behaviour, such as speech or visual recognition, decision making and learning.

Machine learning augments AI by enabling it to automatically improve performance through detecting patterns and predicting next actions.

It may sound like science fiction, but AI is already widely used in areas like online shopping and by virtual home assistants. Now AI is expanding into mobile banking.

In June 2018 Visa took an exciting step to embrace AI by collaborating with Vancouver-based Finn AI, a FinTech company that specializes in innovative personal banking software. Together, Visa and Finn AI will enable new capabilities in AI-powered personal banking chatbots. These features will allow banks to have more relevant and intelligent conversational relationships with their customers. Practical applications will include the ability to ask a virtual assistant where to find the closest ATM or what the best foreign exchange rate is currently. Customers will also be able to disable lost cards to prevent fraud or inform their banks of travel plans to avoid false declines.

Where AI will impact consumers As the use of AI becomes more widespread in banking, there will be three primary areas where consumers will be impacted: 1. Speed and ease of making payments. AI will be able to anticipate what consumers want or need, identify the best places to get products and services and then help make the transactions happen. As the machine learning algorithms gain experience, its predictive powers will continuously improve.

2. Improved security. AI has the ability to identify many forms of security at once. This will allow for seamless integration of various forms of biometric identification on Internet-enabled devices, including facial and voice recognition.

3. Device-agnostic commerce. Customers will be able to complete transactions regardless of device or operating system. AI will reduce the need for a user interface as voice recognition allows consumers to make purchases simply by speaking to their mobile phones, tablets, smartwatches, cars or their virtual home assistants.

September/October 2018

One of the exciting things about AI that it is self-learning through machine learning. Over time, AI-enabled platforms will learn about the user and become more adept at understanding their needs. It will also learn from its mistakes and become smarter.

Take Finn AI’s chatbot technology as an example. If it is not able to answer a question, forcing the user to speak with a human to get help, the chatbot will learn from that experience and will eventually be able to provide answers to similar future questions from subsequent customers. It will also learn to anticipate possible followup questions and provide that information as well.

Merchant benefits and also concerns For merchants AI allows for more intelligent conversations with customers. They will be able to better understand what their customers want and need and anticipate their future expectations. AI applications may also provide opportunities for value-added transactions. And it may help to build relationships with customers as it becomes more comfortable interacting with certain customer-facing platforms.

AI has the ability to learn a vast amount of information about customers: which may raise privacy concerns. There have already been examples of privacy breaches caused by virtual home assistants.

At Visa, customer security and privacy are a top priority. Any service that uses an AI platform that is directed at consumers would require their opt-in and provide them with a clear understanding of the data that is collected and how it will be used.

The Visa Developer Platform Visa’s collaboration with Finn AI is enabled by the Visa Developer Platform (VDP). VDP provides simplified access to many of Visa’s most in-demand products and service capabilities through an open network of application platform interfaces (APIs), allowing anyone to transform great ideas into new digital commerce experiences.

The payments world is constantly changing and evolving. The Visa Developer programme allows Visa to work with developers to expand our capabilities and keeps our clients on the leading edge of technology, like AI. Derek Colfer is head of digital innovation, Visa Canada. Derek has over 20 years’ experience in developing leading edge digital and mobile solutions.

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FinTech

Innovation can't come at the expense of trust

By Michael Rhodes

T

hanks to technology companies we have new ways to communicate, buy the things we want —and sell what we don’t—to get around and have all our favourite music in our pocket. We can count on these businesses for hyper-personalization and to create new algorithms to power their latest innovations. But can we count on them to do this without breaking the trust bond?

For the last several years the focus has been on how every business is becoming a technology company. For good reason: technological innovation is reshaping virtually every industry.

Banking is no different. For example, our recent technology partnerships with FinTechs Moven and Flybits have helped TD create the number one banking app in Canada and deliver trusted, personalized and connected experiences to our more than 12 million digital customers.

What the banking industry is grappling with now is how to graft a legacy of trust onto a new banking backbone powered by technology and customer data.

Data used to be simply a byproduct of our relationships with our customers. Now, powered by new technologies, banks have the opportunity to approach data differently. At TD, we're focused on using customer data to develop the kind of ultra-personalized experiences that customers have now come to expect. At the same time, by using data to improve business decision-making and operations, we are breaking down internal silos and making it easier to innovate and inspire our teams to invent.

Perhaps the biggest opportunity that banks have is to use data for the public good.

Using data to improve lives Perhaps the biggest opportunity that banks have is to use data for the public good. When we look at the potential of data and artificial intelligence (AI), we see countless ways to make a difference in the daily lives of our customers: • What if we could help customers understand that based on their current spending patterns, there are early signs that they could face financial distress in the coming years: and then help them make changes?; and • What if customer data could help us create a more personalized investment strategy that makes it easier to meet retirement goals?

Banking's legacy of trust However, recent controversies such as Facebook's Cambridge Analytica data scandal shine a light on the fact that technology companies are not just in the technology business anymore, they're also in the trust business. This is a business that TD has been in for over 160 years. It's part of our DNA. What the banking industry is grappling with now is how to graft a legacy of trust onto a new banking backbone powered by technology and customer data. It’s no small task.

Many banks have a legacy that's even older than ours, and with that comes a massive internal technological and cultural transformation.

We are moving from a time when we used technology to simply run the bank to working with it creatively to meet customers' rapidly evolving needs and expectations and engage with them in new ways. We want to predict what our customers need and bring the solutions directly to them and this kind of transformation involves seeing customer data differently.

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As part of the terms of our acquisition of AI pioneer Layer 6, we supported their desire to dedicate a percentage of their time to AI projects outside banking, such as exploring unique and groundbreaking applications within healthcare. As the stable pillars of most economies, banks have the duty to think responsibly about data and see it an extension of the trust bond that we have with our customers.

Today we are taking a measured approach as we consider how to put that data to work. While being careful may sound like an excuse for going slow, trust can be lost in a heartbeat, and for some technology companies, they're experiencing that in a very public way.

Michael Rhodes is the group head, innovation, technology and shared services at TD Bank Group. Now based at TD's headquarters in Toronto, Ontario, Michael has held senior leadership roles at Bank of America and MBNA America Bank and has worked internationally in the United Kingdom, Spain and Ireland. Michael earned his MBA from the Wharton School at the University of Pennsylvania and holds an engineering degree from Duke University.

September/October 2018

Cash & Cheque handling equipment

Cheques: the payments cornerstone

By Jason T. Schwabline

C

heques and modern payments? Two terms that are normally not presented cohesively together. But as consumers’ behaviours move into a more digital payments realm, cheques and the ecosystem that support them have become more relevant than ever.

While consumer use of cheques has leveled out, the details around what they are still being used for is telling. Larger payments requiring an inherent level of trust and security still find the average consumer writing three to five cheques per month. Even more telling is the growth of cheque use in the business sector for similar reasons1.

Leveraging a single solutions platform So how does this translate into the modern payments landscape? It starts at looking at industry assumptions. Should we have not designed a separate new silo for payments activity to move to? Instead, we should have been looking at the cheque for what consumers and businesses view it: as part of the payments ecosystem.

The consumers of our solution were speaking to us the entire time through their habits and we needed to take a moment and look at exactly what they were saying. Modernizing cheque processing is part of modernizing payments. It is an evolutionary step, not a revolutionary step and there are solutions platforms that are being deployed today to facilitate that very journey.

I believe there are six key reasons why leveraging a single modern payments platform for cheque processing will not only give the consumers and businesses what they desire, but also spark adoption of all other payment types that have languished.

1. Increased automation. The modern cheque processing environment is designed with automation in mind. These solutions were designed initially to reduce paper, but now with today’s checks and balances rules engines swiftly process payments from their acquisition all the way through processing with little to no manual intervention.

2. Anytime, anywhere availability. Mobile, ATM, ITM, branches and businesses are all connected via imaging to the solutions in our industry. No matter when and no matter where, access to introducing the payment for processing can happen. From the driver on remote routes collecting payments to the consumer donating to a local charity, it is all available today.

3. Turn transactions into intelligence. This is more internal to our industry, but cheque processing provides an enormous source of data and business intelligence to leverage. At deposit and September/October 2018

interrogation, from paper to image, there are over 150-plus pieces of information reviewed. We can then dig further into the path that the payment was sent from versus its destination. With that we can also see behaviour as it transitions and compares to the other payment types overall.

4. Security and compliance. A top reason in my view as to why it’s obvious to work with cheques as a cornerstone is that they are proven. No other modern payment vehicle has been exercised as much as the cheque from a security and compliance realm. It is the very reasoning for the consumer and business behaviours we are seeing. As cheques matured from paper instruments to digital instruments, like depositing cheques via mobile apps, the surrounding support system only got better. Leveraging this piece in modern payments is reason enough from a value perspective.

5. Fraud protection. Working hand in hand with the security piece is also the maturation of the fraud models around protecting cheques. Entire companies have built practices around the prevention of fraud in this most trusted payment source. Expertise in this area is high and the industry is able to react quickly to each new scenario presented. All of the cool terms in play today with “artificial intelligence” and “machine learning” have been in practice for years in the cheque processing arena.

6. Flexible delivery options. Modern platforms have been created and deployed in Canada as well as in the U.S. that enable quick and reliable delivery models. No longer is it about constructing a new department and its supporting infrastructure to supply processing to a new area: today’s leading solutions drive these options from single scalable platforms.

Viewing the cheque as a modern payment type is a paradigm shift.

However, Canada is at the forefront of utilization of these types of technologies and it can only continue to grow. While adoption and methods continue to be debated on the environmental variables surrounding other payment types, the fastest onramp to modern payment processing is already in our hands. Supporting the cheque is a vote towards supporting consumer and business choice in trusted technologies that empower us for today and for the future.

Jason Schwabline is chief strategy officer for Alogent (www.alogent.com). Jason has an extensive background in leading product and strategy organizations in the financial services space. He has a specific focus on developing and growing core and ancillary solutions such as online and mobile banking, core banking systems, teller platforms, cheque imaging solutions and enterprise content management products.

1 Alogent, internal study and research.

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Cash & Cheque handling equipment

Cheque versus check Understanding Canada/U.S. differences

By Jeff Hempker

W

hen people hear that Canada didn’t roll out its cheque truncation system i.e. converting physical cheques into electronic cheques until 2014 many will say: “They must be 10 years behind the United States,” since the U.S. started its system in 2004.

Actually, the opposite is true: Canada’s system is actually 10 years newer than the American system, which means it’s better in a lot of respects.

Taking advantage of new technologies

the funds are transferred) in order to create more fees from bounced cheques and overdrawn accounts.

But because the rollout took place later in Canada, and because Canadians were becoming used to and expected instant and seamless transactions including with Interac it did not take long for consumers and businesses to be convinced of the value of truncation and RDC. The adoption and “breaking-in” process that took years in the U.S. was condensed into a few months’ time in Canada: a success by any standard.

Part of the reason things tend to go more smoothly in countries with newer systems is because the hardware available is much faster and cheaper and the infrastructure is generally more advanced.

Originally, cheque truncation devices were designed primarily for bank branches and so the only scanners available were high-speed teller devices with price tags in the range of $1,000 or more. At those costs (as well as the original cost of the service itself), no one but a bank or a large company had a business case for using one.

In contrast, today’s RDC-specific devices might cost as little as a

What does this mean? Well, for one thing, a lot of technology that is around today simply did not exist back in the early 2000s. For example, smartphones. The first iPhone wasn’t released until 2007: three years after electronic cheque clearing came to the U.S. It took another few years for the industry to figure out how to do mobile deposits.

In countries that have adopted electronic clearing recently— Canada, Brazil and the U.K. among them—this technology was already available and well-known and many banks have been ready with mobile remote deposit capture (RDC) apps from day one.

Other features, such as advanced fraud detection and a national duplicate database, were not available in the early days of RDC and had to be added later at great expense.

Countries rolling out truncation now generally build these fail-safes into their systems from the ground up with the latest technology: a considerable advantage in both cost and efficiency.

For that matter, the public awareness of cheque truncation was completely different ahead of the Canadian rollout than it was in the U.S. If you can believe it, back in 2004 many people were against the idea of electronic clearing, viewing the faster clearing times as an underhanded attempt by the banking industry to eliminate “float” (the time between Comparing a Canadian cheque with an American one. While the visual layout is somewhat different, they actually when cheques are written and when look very similar to a machine: the only significant difference is a dash in the Canadian routing number.

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September/October 2018

Cash & Cheque handling equipment third that much, while actually being more accurate and reliable.

And the cost for the service has likewise come down significantly.

The software behind the cheque scanners—like nearly everything electronic—has itself become much more refined over the years. For example, a “good” success rate for optical character recognition (OCR) on a scanner a decade or two ago might have been 80 to 85 per cent. Today, with devices that are more sensitive to light levels and contrast, and software that can recognize patterns and perform image cleanup on the spot, that rate is well into the mid-90 per cent range and magnetic ink character recognition (MICR) accuracy rates are within a fraction of a percentage point of 100.

staff with some IT knowledge who can be contacted as needed to do troubleshooting and repairs and they’ll have some spares located around the country within a day’s travel of just about anywhere.

Jeff Hempker is executive vice president of Digital Check (www.digitalcheck.com), a leading manufacturer of cheque capture hardware. He led Digital Check’s efforts to address the Canadian scanner market in 2012 and remains actively involved with many of the leading financial institutions and software providers in the region.

Banking practices dissimilarities There are minute dissimilarities in banking practices in both countries that can make a huge difference in front-line operations when cheques, and checks, cross the border. For example, take a look at the accompanying image comparing a Canadian cheque with an American one. While the visual layout is somewhat different, they actually look very similar to a machine: the only significant difference is a dash in the Canadian routing number.

Engineers figured out early on how to make scanners recognize both MICR formats; however, it was the human element that gave trouble. Most OCR software could only read in one language at a time. So, if the handwritten dollar amount was in French, the cheque would be flagged as invalid!

Additionally, some behind-the-scenes processes still meant that an American cheque would not clear in the Canadian system, and vice versa, even though both were now electronic. There were slight differences in the formats of the files being exchanged; variations in exception and return rules and then there was the matter of smooth conversion between the two currencies. Until these were sorted out, cross-border payments were still handled by sending the original paper cheques back to their country of origin to be scanned: which could take weeks.

Given the number of payments between individuals and businesses on both sides of the border, this seems like a rather important issue to fix. But from a programming perspective, it was not a trivial challenge. Only in the last few years have effective solutions finally become available.

Serving Canada’s remote locations Canada’s immense geographical size is good news for electronic cheque clearing because the amount of time and costs saved (compared with transporting the physical paper) is tremendous. On the other hand, there are many isolated communities with bank and credit union branches: and cheque handling hardware and software.

The electronification of many basic banking services, like deposits and withdrawals, has made it much easier for banks to support their branches in remote areas. It has limited, but not eliminated, the amount of cheque handling hardware and software and the need to upgrade and support them. We work with an extensive network of Canadian companies for fulfillment and service on our products.

Fortunately for remote areas we’ve found partners who have local September/October 2018

PAYMENTSBUSINESS

15

Industry updates

Electronic Transactions Association expands Canadian advocacy

By Jason Oxman

T

he Electronic Transactions Association (ETA) is a leading payments technology trade association representing more than 500 global companies. Our mission is to grow the payments industry and we serve our member companies in a variety of ways.

One of our most important roles is as leader in payments technology advocacy and our job at ETA is to engage with policymakers to promote sound government policies that support innovation and growth of the payments technology industry.

We represent a global ecosystem that is fueled by innovation, and it is the job of policymakers to stay informed about industry changes and their impacts on consumers. That’s why we announced in August 2018 an expansion of our advocacy work in Canada. Guided by a committee of ETA member companies, including Moneris, First Data, Worldpay, Pivotal Payments, Paysafe, Square and Blake, Cassels & Graydon, the ETA is strengthening our efforts and building on our existing programmes focused on elevating Canadian FinTech policy. We’ve engaged a leading Canadian public affairs firm, Tactix, to give our members a stronger voice for forward-thinking policy that advances innovation and global partnerships.

Action on proposed retail payments regulations Looking ahead the ETA and our member companies will engage public policy leaders in Canada as they look to update the laws and regulations that govern the Canadian payments ecosystem. Our focus is on promoting carefully crafted policies that are technology-neutral, device-agnostic and supportive of active industry collaboration.

As an example, we commented on the Department of Finance Canada’s A New Retail Payments Oversight Framework consultation paper that recommended new rules for the regulation of retail payments. They include requiring registration for payments service providers (PSPs) and that they place end-user funds held overnight or longer into trust accounts at financial institutions. There would also be rules that ensure payors would not be liable for unauthorized transactions unless they did so fraudulently, along with mandatory dispute resolution processes internally and externally.

However, these proposed changes could hinder competition and innovation in payments, and so ETA submitted carefully considered recommendations that put industry collaboration and innovation 16

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first. For example, we recommended that the framework of dispute resolution policies preserve the flexibility of PSPs to implement programs that fit each unique organization. This type of approach encourages a policy environment that allows payments companies to avoid being trapped in one-size-fits-all procedures. That way, policymakers can support access and benefits to consumers without disrupting or burdening tested, efficient models.

Our focus is on promoting carefully crafted policies that are technology-neutral, device-agnostic and supportive of active industry collaboration.

Collaboration with other advocates Ultimately, our Canadian public policy efforts mean that ETA can bring its collective expertise, insight and influence in the global payments technology ecosystem to help promote policies which will grow payments in Canada. We are proud to have a network of thousands of industry professionals, plus an established history of industry leadership expertise, to bolster our voice and credibility for policymakers. Our mission is informed and supported at step one by our drive to grow payments technology, and so too will that be the focus of our work in Canada.

But we know we are not in it alone. As our work expands in Canada, we look forward to collaborating with other trade associations, such as our longtime partner ACT Canada, as well as industry advocates and businesses to find innovative and novel ways to grow safe, fast and secure payments for Canadian merchants and consumers.

It’s an exciting time in the payments technology world. FinTech innovation is bringing the next era of payments technology to the global marketplace. The ETA, as the voice of the payments industry, will continue to advocate in Canada, the U.S. and across the world to support policies that promote its growth.

Jason Oxman is CEO, Electronic Transactions Association (www.electran.org).

September/October 2018

Industry updates

Removing global payments barriers

By Normand Provost

T

he payments landscape across North America has transformed beyond recognition in recent years. The contactless revolution, for example, is in full swing. The volume of contactless payments in Canada alone increased by 37 per cent in the first quarter of 2018, compared to the same quarter in 20171. QR Code payments have also been announced to be heading to Canada, with the method expected in almost 5,000 merchants by the end of 20182.

While good news for consumers, these technology revolutions, combined with new regulations, have resulted in a deeply fragmented global payment acceptance market that limits business growth and expansion. Payment players face huge integration headaches and substantial costs when expanding into, or setting up in, multiple geographies. Consequently, they can struggle to deliver the cost-effective and efficient services required by their customers.

Why standardization and issues So, what’s the answer to successful international expansion and simplifying these complexities? Standardization. Global payments acceptance standards have the potential to enable all stakeholders (regardless of where in the payment chain they sit), to adopt a customer-centric approach and deliver a consistent user experience within and, crucially, across borders.

Fortunately, there has been significant progress towards standardization through the gradual adoption of ISO 20022, ISO’s universal financial standard. Already realizing huge efficiencies across Europe’s financial landscape, ISO 20022 is now gathering momentum across North America as central to both Payments Canada’s payments modernization strategy and the U.S.’s Faster Payments programme.

Even so there are still issues with standardization. The incompatibility of proprietary systems, together with the varying domestic interpretations of past ISO standards (ISO 8583, for example), have resulted in acceptance infrastructures September/October 2018

differing both within and between countries. This has meant that, despite being ISO-compliant, domestic infrastructures still haven’t been able to talk to one another, resulting in substantial costs and lengthy integration timescales.

Enter nexo standards Nexo standards is an open global association dedicated to removing the barriers in today’s fragmented global card payment acceptance ecosystem. Nexo standards works with its members—representing all categories of stakeholders present in the card payment acceptance chain—to standardize the exchange of card payment acceptance data between stakeholders. It does this by developing and maintaining ISO 20022-adhering specifications and messaging protocols that are universally applicable and are freely available globally.

The nexo protocols and specifications enable merchants, payment service providers (PSPs), acquirers and vendors to create a fully interoperable cross-border payment acceptance infrastructure. ISO 20022 is a globally standardized approach to the creation of financial messages for all kinds of transactions, enabling integration to be harmonized irrespective of domestic interpretations of legacy ISO standards.

This allows for quick and cost-effective international growth.

A customer-and vendor-centric approach For all players operating in the payment acceptance space, customer is king. And for merchants operating across multiple territories it is crucial that they can deliver an internationally consistent consumer payment experience.

Nexo’s protocols and specifications enable merchants to deliver a standardized customer experience at the points of interaction between multiple payment types. It also allows simple parameterization of payment services for individual countries, thereby ensuring that services are communicated to consumers in their native languages.

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Industry Updates Separately, international standards provide vendors with a great opportunity to differentiate themselves from their competitors by avoiding vendor lock-in. Merchants and acquirers want vendor partners that can support their needs on a global scale, provide solutions that can be easily scaled up and down, expand quickly and easily into new regions and support migration to new solutions with minimal impact on their business models.

Nexo standards enable a common interoperable solution that meets these needs, enabling vendors to deliver much stronger value propositions to their merchant and acquirer customers. They, in turn, are presented with increased and stronger options for building global partnerships.

Nexo standards’ specifications and messaging protocols are the card payments acceptance arm of ISO 20022.

Unified success Centralizing and unifying payments management for all stakeholders can realize huge efficiencies and cost savings. By migrating systems to standards such as nexo’s messaging protocols, international merchants can consolidate payment requests from multiple locations around the world. Volume-based deals can then be negotiated via a smaller number of acquirers or even through a single acquirer.

Of course, domestic relationships can still be maintained. All it takes is for the acquirer in question to also support global standards and given the benefits on the table, why would they refuse?

The lingua franca of payments ISO 20022 can be thought of as the “lingua franca” for the whole financial ecosystem: a universal messaging language for all kinds of transactions, including those performed with cards. Nexo standards’ specifications and messaging protocols are the card payments acceptance arm of ISO 20022.

North American players seeking to expand and transact beyond their nation’s borders should base their future payments infrastructure on these protocols and work towards a vision of a borderless, interoperable global payments system. Acting now to standardize the exchange of payment acceptance data globally will hugely simplify the job of introducing new and innovative payment solutions at scale, reducing cost, increasing operational efficiency and freeing up resources.

Normand Provost is marketing communications and liaison chair, nexo standards (www.nexo-standards.org). All nexo standards’ messaging specifications and protocols are universally applicable and freely available globally.

1 Gary Ng, “Canadian Contactless Payments Continue to Surge in Q1 2018: Moneris”, iPhoneinCanada.ca, April 19, 2018.

2 Steven Anderson, “Canada Gets Access To QR Code Mobile Payments With UnionPay”, Payment Week, July 2, 2018.

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Adyen taps nexo standards Adyen delivers frictionless payments across in-store, mobile and e-commerce channels through its single payment platform. Its key customers include L’Oreal, Superdry, Facebook, Uber, Netflix, Spotify, Tory Burch, Casper and Bonobos.

Keen to offer merchants a modern way of connecting in-store terminal hardware to its platform, Adyen incorporated the nexo Retailer Protocol into its Terminal API. This protocol defines a set of interfaces between a card payment application and a retail point of sale (POS) system.

Adyen quickly found it could accommodate merchants’ needs in several ways: 1. Enabling the company to centralize its platform and offer cloud or on-premise based API options that transform the current resource-intensive one-to-one library management into a simple and agnostic service model that updates in real-time.

2. As the on-premise and cloud integrations use standard Internet access, there is also no need for complex client configurations.

Merchants simply plug and play their terminals to install the software and benefit from the latest services.

3. This interoperable and centralized integration process alleviates the business risks for both payment processors and their merchant customers. For Adyen, it also means they can enhance their payment offering at the POS, while delivering consistent integration between POS terminals, cash register systems and their payment platforms.

By standardizing the exchange of payment acceptance data, Adyen realized huge operational efficiencies for merchants. This includes mitigating risks such as forced updates if old versions aren’t actively managed and having multiple devices on different versions. Both aspects also drastically slow the delivery of new services, such as shoppers’ preferred payment methods and they make fleet management complex. New services and system upgrade delivery are now dramatically streamlined, thereby removing reliance on onpremise installs of software and updates.

There are other innovative ways in which the nexo Terminal API is delivering in-store fluidity and advancing customer experiences. For example, since in-store payments can be initiated remotely merchants can create experiences where shoppers initiate orders in-app and then walk into stores where the sales assistants can then pull up the orders and push the payments to in-store terminals (e.g. pay by QR code) on collection of the items. Another example may be hotel assistants helping guests check-in on tablets or mobile devices, then routing the payments through to the closest available terminals.

Adyen is continuing to enhance its platform with the nexo protocol. It plans to offer merchants a unified commerce payments solution accomplished by integrating the Terminal API with its Checkout API by early 2019.

September/October 2018

Industry Updates

Major settlements will reverse credit card fees

By Jonathan Razi

A

century ago engineers in Chicago, Illinois reversed the flow of the city’s main river to redirect billions of gallons of water away from nearby Lake Michigan. Today in Chicago, my company is working to reverse a similarly powerful trend: the rising cost of credit card acceptance for businesses.

Since a 2013 rules change in the U.S., when Visa and Mastercard dropped their contract prohibitions on surcharging, thousands of American businesses have opted to pass on the fee to customers when they choose credit cards for convenience or rewards. American businesses are increasingly following the example set in Australia, where 42 per cent of merchants, and a full 60 per cent of large merchants, pass on credit card fees1.

Now Canadian businesses are poised to capitalize on the same opportunity, with settlements to allow credit card surcharging receiving approval in the courts. These settlements would resolve class-action litigation filed by merchants against Visa and Mastercard in 2011.

These settlements would resolve class-action litigation filed by merchants against Visa and Mastercard in 2011.

This movement builds on the cost savings from Canada’s Code of Conduct. Surcharging will especially help the low-margin businesses hit hardest by the escalating use of credit cards, which has on average increased seven per cent every year since 20092.

While the economic benefits are obvious, the new opportunity comes with significant compliance requirements that businesses— or their processing partners—must meet.

New Canadian rules The new surcharge rules will likely come into effect in 2019, following final approval in the courts. What will they require? A few notable points from the Visa and Mastercard settlement agreements are below3: • The merchant must be registered with the card brands; • The merchant must inform their customers of the credit card fee with an appropriate disclosure; September/October 2018

• The amount of the credit card fee must not exceed 2.5 per cent and the merchant must not profit from the credit card fee; • The receipt must show the amount of the credit card fee as a separate line item; and • The merchant must not apply a fee to debit cards.

Based on our experience in the U.S. it’s beyond the scope of most merchants to create a payment solution that fully complies with all of these requirements. We predict most Canadian businesses will instead want to partner with a solution provider that offers automatic compliance with these rules.

The new rules have been a long time coming. Expect market adoption to be swift.

Who wins with surcharging?

With surcharging, businesses will dramatically reduce their costs.

But consumers and independent sales organizations (ISOs) are also winners in this changing market.

Customers will be able to use cards to pay at many businesses that didn’t previously accept cards because of the cost, especially in categories like professional services and business-to-business.

And, because surcharges apply only to credit card transactions, cardholders can always choose debit as a no-fee option.

For ISOs the new rules are an opportunity to sell to merchants based on value4, rather than brute price competition, meaning higher margin and greater retention. Unlike traditional processing, surcharging is not a commoditized market.

The new rules have been a long time coming. Expect market adoption to be swift. As Ernest Hemingway, a Chicago native, once said: changes happen gradually, then suddenly.

Jonathan Razi is CEO and founder of CardX (www.cardx.com). A noted expert on credit card surcharging, Jonathan authored the CardX brief in the U.S. Supreme Court.

Jonathan earned a J.D. from Harvard Law School and a B.A. from the University of Chicago.

1 Reserve Bank of Australia, Payments System Board Annual Report 33 (2014).

2 Payments Canada, “2017 Canadian Payment Methods and Trends”, report, December 2017.

3 “Canadian credit card fees class action national settlement agreement”, published on Credit Card Class Actions, June 9, 2017.

4 CardX, “CardX in the Green Sheet: New Solutions Create Value for Both Merchants and Industry Providers”, August 27, 2018.

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Alternative Currencies

Blockchain means business

By Wally Vogel

W

ith all the hype surrounding blockchain, and a short track record of practical business applications to date, it may be tempting to wait and see what others do, or perhaps even ignore it and hope it goes away.

That was the approach Blockbuster took to streaming video in 2008 when their CEO stated that Netflix was “not even on his radar screen” as a competitor1. It did not end well for Blockbuster, which filed for bankruptcy just two years later.

It may be tempting to ignore or dismiss emerging technologies in their infancy, but disruptive technologies can grow quickly and any business that fails to embrace them early does so at their own peril.

Not “that” blockchain Much of the skepticism surrounding blockchain for business applications are based on assumptions about public blockchains such as Bitcoin and Ethereum, as most of the media attention has been focused on these blockchain-based cryptocurrencies.

Bitcoin, for example, was previously known as the currency of choice for purchases of illicit goods and services, resulting in a negative association. More recently, the initial coin offering (ICO), has emerged as a vehicle for raising money by minting cryptocurrency tokens on a public blockchain, and this practice has attracted a fair amount of skepticism and scrutiny.

However, there are multiple types of blockchain technologies that are very different. Private or permissioned blockchains, Hyperledger Fabric being one of the most popular, aim to overcome many of the concerns businesses would have about using public blockchains by offering true enterprise level security, privacy and processing capabilities.

Misconceptions versus reality There are four common misconceptions about using blockchain technology for business: 1. A blockchain doesn’t do anything a traditional database can’t. The reality is that a blockchain offers several advantages over a traditional database. It provides a shared ledger which is distributed and immutable. What does that mean for business?

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It means a blockchain can be used to synchronize data between existing databases, therefore reducing redundant data entry, eliminating costly and frustrating reconciliation and providing a permanent record that can be easily audited.

The benefits of blockchain are financially significant. The reduction in transaction costs achieved with it is typically over 40 per cent. In addition, the distributed nature of blockchain can provide superior business continuity and disaster recovery compared to a centralized database with standard backup processes.

2. Blockchains are too slow compared to traditional databases. While public blockchains are slow due to the consensus mechanisms employed, the reality is that permissioned blockchains can achieve production-level throughput. Hyperledger blockchains are processing up to 3,500 transactions per second today, with 10,000 transactions per second being a realistic target for the near future.

3. Blockchain technology is outside of the mainstream and therefore not well supported. Permissioned blockchain is already in the mainstream. Hyperledger is an integral part of cloud offerings from major suppliers like IBM and SAP; these companies have invested significantly as they understand the transformative power of this technology and the inevitability of its adoption.

Ginni Rometty, the CEO of IBM backed this commitment with her statement that “blockchain will do for transactions what the internet did for information”2.

4. There are no proven use cases for the efficiency of blockchain technology in production. On this point, skeptics have been silenced by the recent announcement that TradeLens, a blockchain collaboration initiated by IBM and Maersk, now has 94 partners and processed 165 million ocean freight shipment events, with another million being added every day. Since being implemented it has reduced shipping times by an average of 40 per cent3.

How can blockchain make ships go faster? Well, it can’t. However, it can make containers move faster, since those containers often spend more time in port awaiting paperwork or payment than they do moving on ships. The use of blockchain has cut the paperwork September/October 2018

Alternative currencies handling process by a factor of 10, resulting in faster and more costeffective shipping.

Moving forward with confidence Blockchain is already ushering in a major wave of change, and Canada is positioned to take advantage of this opportunity and lead the way4. Now is the time to get ahead of the disruption by learning more about blockchain, evaluating its potential impact on your business and formulating an appropriate strategy for the future.

Consider the possibilities. Engage a blockchain professional to bring your team up to speed and to evaluate the specific threats and opportunities for your business. Blockchain is particularly well suited to eliminating friction and improving efficiency in transactions and payments between businesses.

Perhaps a small pilot can get your business started on the path of learning and incorporating blockchain to improve efficiency with minimal investment. Perhaps you will decide to engage in a longterm enterprise project.

Regardless, every business should have a plan to avoid getting swept under by the wave, and hopefully ride it to a sustainable competitive advantage.

streamline B2B transactions with blockchain. You can reach him at wvogel@sparcblock.com.

1 Rick Munarriz, “Blockbuster CEO Has Answers”, The Motley Fool, December 10, 2008.

2 Tom Groenfeldt, “IBM's Ginni Rometty Tells Bankers Not To Rest On Their Digital Laurels”, Forbes, September 28, 2016.

3 Stephen Shankland, “IBM-Maersk blockchain alliance cuts oceanic shipping times by 40%”, CNET, August 9, 2018.

4 Don and Alex Tapscott, “How Canada can be a global leader in blockchain technology”, The Globe and Mail, March 10, 2017.

Wally Vogel is a payments veteran, a certified engineering technologist and a certified blockchain professional. He has founded multiple software companies specializing in transaction processing for government entities and business enterprises, and is currently serving as a director for Sparcblock, a Canadian company helping businesses

Staying ahead of blockchain and cryptocurrency

By Derek Wood

F

or many finance leaders “blockchain” and “cryptocurrency” are some of the latest buzzwords floating around. However, new research1 reveals that it might be time we get more familiar with them; 50 per cent of Canadian finance leaders surveyed

by Robert Half Finance & Accounting say that cryptocurrency will become at least somewhat common for business transactions in the next five years. Respondents also noted that blockchain and cryptocurrency will drive the need for finance professionals to: • Expand skill sets to adapt to new accounting and finance technologies (53 per cent); • Collaborate more with IT departments (31 per cent); and • Increase the need for specialized accounting (e.g. tax and forensic accounting) (30 per cent).

September/October 2018

While 28 per cent of respondents said blockchain and cryptocurrency won’t impact accounting and finance until they become government regulated, there’s no better time to learn about these rising FinTech terms.

What are they?

Wikipedia offers definitions of both terms. Blockchain “is a growing list of records, called blocks, which are linked using cryptography”.

Cryptocurrency “is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units and verify the transfer of assets”.

Cryptocurrencies are a kind of digital currency, virtual currency or alternative currency. Blockchain is the platform that makes cryptocurrency possible. With this technology, it can be applied to PAYMENTSBUSINESS

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Alternative Currencies accounting and finance functions and cut out processes that would normally be incredibly time-consuming. For example, with blockchain technology, ID verification becomes a quick process rather than a task that can take days to complete.

Digital currency already disrupting business Cryptocurrency is already impacting business transactions and will likely become more common in the years to come. As cryptocurrency gains in popularity we’re already seeing some retailers accept it as a form of payment. In the U.S., travel sites like Expedia are already accepting it. Overseas, more retailers allow it as a form of payment; bitcoin ATMs are even popping up.

Cryptocurrency is already impacting business transactions and will likely become more common in the years to come.

Canadian stance Because Canada’s federal government is already in campaign mode ahead of the 2019 election, publishing the final cryptocurrency or “virtual currency” regulations has effectively been put on hold. This leaves the current regulatory model2 in place until well into 2020, as there is an additional 12-month period after publication for any new regulations to take effect. Until then, finance and accounting departments are advised to arm themselves with knowledge and train professionals on how to use blockchain technology, even without the use of cryptocurrency.

Gearing up Companies shouldn’t wait for the regulatory picture to become clearer. It is crucial to take steps now towards understanding how blockchain and cryptocurrency (or any new and evolving digital innovation) could affect the business and how to prepare.

Finance professionals interested in entering the blockchain space should consider looking for institutions or professional groups and programmes that offer blockchain certifications. For example, IBM offers accessible courses and resources for professionals who are interested in blockchain basics. Some higher education institutions are starting to offer courses that cover the topic. In addition, professionals working in this space will need to prove they are able to collaborate and communicate well with others, especially outside of their specialties.

Hiring professionals who can handle the changes blockchain and cryptocurrency will bring is becoming increasingly important. Here are a few tips for finance leaders on finding blockchain talent: • Facilitate collaboration. Encourage communication with IT departments for seamless integration of the new technologies. IT colleagues may also be able to share best practices and provide additional training; 22

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• Relax the job requirements. Blockchain expertise is hard to find but can be developed. When hiring for roles requiring this knowledge consider focusing on candidates who will have a short learning curves and can be trained.

• Hire individuals who match 70 to 80 per cent of the job requirements and train up. It may not be uncommon to see candidates with engineering or computer science experience.

• When hiring for an open role, consider applicants with great soft skills—it’s harder to teach those—and focus training on technical skills.

• Accelerate the hiring process. If you find a candidate you want to hire, move fast. Enlist the help of a specialized recruiting firm that has access to candidates you may not be able to find on your own and can assist with your hiring efforts; and • Offer professional development. Whether it’s in-house training or external courses, allow employees to spend time on skills development courses that would most benefit your company’s bottom line. Some industry associations may offer relevant training.

Companies shouldn’t wait for the regulatory picture to become clearer.

Digital transformation job loss concerns Some finance professionals share the same fears about blockchain that they do about artificial intelligence or any other type of digital transformation: that technology has the potential to replace them and take their jobs. However, according to Robert Half’s report, Benchmarking the Accounting and Finance Function3, 22 per cent of organizations in Canada said they plan to expand their accounting and finance teams due to digital transformation initiatives. There will always be a need for finance and accounting professionals: technology like blockchain can simplify certain processes and help them do their jobs.

Derek Wood is a regional manager for Robert Half Finance and Accounting. Robert Half (www.roberthalf.ca) is a leading global specialized staffing firm. The company has more than 300 staffing locations worldwide. For career and management advice, follow our blog at roberthalf.ca/blog.

1 Robert Half, “How Blockchain and Cryptocurrency Are Impacting Accounting and Finance Departments in Canada”, study, August 14, 2018.

2 Government of Canada, “Regulations Amending Certain Regulations Made Under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, 2018”, Canada Gazette, Part I, Volume 152, Number 23, June 9, 2018.

3 Robert Half, “Benchmarking the Accounting and Finance Function”, study, June 2018.

To send press announcements, please direct them to Brendan Read, Editor, at brendan@paymentsbusiness.ca September/October 2018

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