Neira Jones, Emerging Payments Association: "Partnerships will be key to successful digital transformation in financial services"

Digital transformation - is it disruptive? Which are the enabling technologies of digital disruption that have relevance in the industry?

It is undeniable that digital transformation has created new business models:
• In 2015, Uber, the world’s largest taxi company, owns no vehicles
• Facebook, the world’s most popular media owner, creates no content
• Alibaba, the most valuable retailer, has no inventory
• Airbnb, the world’s largest accommodation provider, owns no real estate

Many commentators keep wondering who will be the Uber of banking and no one provides the answer yet. There is a very good reason for that: banks, and financial service in general, are heavily regulated. So rather than calling digital transformation disruptive, let’s call it transformative.

Most existing and established players have digital transformation initiatives and are placing digital at the core of their strategy to keep pace with consumer behaviours. Still, new entrants, on the main, have to rely on banks to provide the underlying infrastructure and services. Having said that, new entrants are forcing existing players to accelerate, with no legacy infrastructure heritage, their digital transformation pace and a few digital only challenger banks are already established and some are emerging. In addition, innovative peripheral services are starting to appear: as an example, the former managing director of Google UK, Dan Cobley, just launched a startup ClearScore offering free credit checks.

Additionally, we cannot miss the split from PayPal and eBay. Let’s examine this for a minute: in my opinion, the split made absolute sense: on one hand, eBay wants to be a global marketplace, and therefore leans into the retail sector, which suggests a need for agility and speed and focus on customer experience; on the other hand, PayPal wants to become a financial services institution, which will mean becoming heavily regulated. The two don’t go together, and the market agrees, given the recent valuation of PayPal at USD 50 billion on its market debut.

Partnerships will also play an important role in digital transformation and going back to PayPal again, we can see an interesting move when they decided to purchase digital money transfer company Xoom forcing the money remittance markets to pay attention. Many established financial services institutions are following this strategy. Going back to putting digital at the core, financial services institutions are being forced into opening up access though regulations (PSD2 for example), and some are starting to look at providing API-based banking platforms.

The enabling technologies themselves will be driven by consumer adoption of different modes of interaction (mobile devices, wearables, IoT, etc.) and different channels (websites, TV and other media, Youtube, social media networks, etc.). This in turn will suggest building infrastructures with API connectivity, cloud-based services (for elasticity and omni-channel), big data (for CRM and risk management), and of course, security to ensure the integrity of the ecosystem (e.g. identity management, authentication technologies such as biometrics, adaptive fraud monitoring, etc.).

Do you see any regulatory hurdles to mass adoption of IOT for the payments industry?

There is no doubt that the IoT is rather exciting at the minute and the enterprise market is set to grow exponentially for sectors such as manufacturing and healthcare. For the payments industry, the challenge will be to keep on the good side of the regulations and consumer perception for privacy and security. The PSD 2 will include stringent security requirements, as well as requirements for the deployment of strong authentication (which in turn will give a boost to the biometrics market); as per August 2015, this is now a requirement for most of the SEPA region ahead of PSD2. And of course, the EU Data Protection Regulations will play an equally important part. Those manufacturers and service providers that are fully cognisant of these requirements will be in a strong position. The other aspect, whilst not strictly regulatory, is the current lack of standardisation, which may pose interoperability issues.

Undeniably, the IoT is inherently about networked computers, and these will face exactly the same problems and challenges as networked computers everywhere else.

What impediments do you see in large scale biometrical authentication in conducting online payments?

It is undeniable that the new Payment Services Directive will give a boost to the biometrics authentication market with its requirement for strong authentication, which, even without this, is looking very healthy. Another aspect is how many large and small players have joined organisations such as the FIDO Alliance and the Natural Security Alliance. Consequently, the momentum is there. As far as I can tell, the only impediments that I can foresee are:

a) those related to the ecosystem itself. For example, EMVCo took over the development of 3D Secure 2.0 at the beginning of 2015, and this will undeniably push adoption of biometrics when specifications are released. Adoption in the card payment ecosystem can be encouraged through liability shift for merchants, as currently offered by card schemes with 3D Secure. We can foresee the establishment of partnerships with biometrics companies in this space. The reverse of the coin is of course to understand how such companies can benefit from the ecosystem and it is unclear what incentives will be available for companies outside of the framework.

b) the other impediment will be user adoption. Technologies that introduce too much friction in the user experience, either through a disjointed process or too much latency, will have little chance to progress.

Will EMV lead the payments security transformation?

I don’t think EMV will lead the payments security transformation as it is only one piece of the puzzle. Whilst EMV is not a new technology, it has drastically reduced face-to-face fraud in EMV markets, and the US are lagging behind the rest of the world by accounting for 48.2% of worldwide card fraud losses for only 21.4% of total volume. It is at once worrying and surprising that US merchant acquirers look down on EMV migration and that only one in ten Americans have received chip cards, knowing full well that the deadline for liability shift is October 2015. But EMV doesn’t solve every payment security problem: if you squeeze fraud in one place, it reappears in another. Indeed, where face-to-face fraud has been squeezed out, card-not-present fraud is prominent, not because the ecosystem is bad at protecting itself – there is undeniably increased sophistication in online payments authentication and fraud prevention technologies - but because of the sheer volume of electronic transactions generated in the digital age.

Consequently, we can expect a paradigm shift in security and fraud driven by the increased adoption of mobile payments where security innovations such as tokenization, fingerprint biometrics and real-time behavioural and transactional analytics will play a role in reducing digital commerce transaction fraud rates. Mobile players are likely to play an important part in this shift, especially as alternative to cards are becoming more popular (e.g. pay by bank) and we have already started to see a shift in criminal behaviour where in the UK, for example, current accounts have become the top target for financial fraudsters. Luckily, banks are well placed to address this issue.

Could IOT pave the way for new consumer payment preferences and business model shifts?

The Apple Watch and Apple Pay and others have popularised connected watches essentially taking the fitness tracker a few steps further to enable payments. Markets such as the UK, where contactless transactions are already mainstream will be more receptive. For further developments to happen in a sector as regulated as financial services, some standards will need to be established for interconnectivity and interoperability. There are already four separate bodies trying to address this matter, the Thread Group, the Allseen Alliance, The Open Interconnect Consortium, and the Zigbee Alliance and convergence will need to happen – but this is perhaps not so far away as Qualcomm has joined two of these organisations.

Automotive manufacturers have been experiencing with payments/ goods ordering, albeit in a limited fashion. White good manufacturers have also been experiencing with the IoT (e.g. fridges that can order goods). There are many other examples to cite (e.g. Coca-Cola and smart vending machines), but all those are still in limited pilots.

Wearables is currently the only technology that has a real chance of succeeding in the payments space. When combined with analytics and big data, wearables for payments with smart loyalty integration could prove an explosive combination. Indeed, payments through wearables are predicted to represent 20% of all mobile transactions and drive >USD 500 billion annually by 2020. Large payments players, such as MasterCard have realised this.

Consumer attitudes and behaviours are changing, but there is still a long way to go to address security and privacy issues, however, opinions are changing, and consumers are now looking for enriched experiences on mobile, where convenience, loyalty and rewards are key.

About Neira Jones

Neira Jones, Advisory Board Member & Ambassador, Emerging Payments Association, advises organisations of all sizes on payments, cyber risk, information security and digital innovation. She also chairs the Advisory Board for mobile innovator Ensygnia and is listed on the City AM FinTech Most Influential Power List.

About Emerging Payments Association

The Emerging Payments Association brings together companies across the emerging payments spectrum to help shape the future of the payments industry landscape. Our vision is to make the UK a global leader in payments innovation by attracting investment capital and creating a hospitable regulatory environment for innovators, new entrants and disruptors.

Stay tuned for the second part of this interview with Neira Jones, to be published in the upcoming edition of our Online Payments Market Guide (release date: October 2015).