ACT Canada Driving Insights – August 2019
Welcome to the August 2019 edition of ACT News – Driving Insights. This complimentary service is provided by ACT Canada. Please feel free to forward this to your colleagues.
In This Issue
||VISA CONTACTLESS AUTOMATION TEST SUITE
Featuring ACT Canada Member ICC Solutions
|2||WHAT PROFITS AT CANADA'S BIG BANKS ARE SAYING ABOUT THE ODDS OF A RECESSION
Featuring ACT Canada Members CIBC, Scotiabank and TD
|3||THE TIPPING POINT FOR MASS BLOCKCHAIN ADOPTION|
|4||FINTECHS NEED TO HELP BABY BOOMERS BOOM|
|5||CONCERNS MOUNT OVER BANKS’ MOVE TO THE CLOUD|
|6||GENZ GETS FRIENDLY WITH CREDIT|
|7||APPLE ISN'T DISRUPTING BANKS, IT IS HELPING THEM|
|8||PULSE STUDY: DEBIT PAYMENTS CONTINUE TO GROW AND GO DIGITAL
Featuring ACT Canada Member Discover
|9||VISA DEBUTS AI-POWERED FRAUD FIGHTING TOOLS|
|10||WHY MOBILE REWARDS PROGRAMS ATTRACT FRAUD|
|11||CIBC NAMED CANADA'S BEST CONSUMER DIGITAL BANK BY GLOBAL FINANCE
Featuring ACT Canada Member CIBC
Payment Acceptance Solution Provider
Ingenico Group is the global leader in seamless payment, providing smart, trusted and secure payment solutions to empower commerce across all channels, in-store, online and mobile. With the world’s largest payment acceptance network, we deliver secure solutions with a local, national and international scope in 125 countries. For over 30 years, we have been the trusted world-class partner for financial institutions and for retailers, ranging in size from small merchants to several of the world’s best known global brands. Our smart terminal and mobile solutions enable merchants to simplify payment and deliver their brand promise.
Payment Network Partner
Interac Corp. operates an economical, world-class debit payments system with broad-based acceptance, reliability, security, and efficiency. The organization is one of Canada’s leading payments brands and is chosen an average of 16 million times daily to pay and exchange money. For more than 30 years, Interac Corp. and its predecessors, Interac Association and Acxsys Corporation, have facilitated secure financial transactions through the development of innovative and convenient debit and money transfer solutions. A leader in the prevention and detection of fraud, the organization has one of the lowest rates of fraud globally.
Looking For good people?
There is a lot of movement in the market, so if you are looking for new employees, we are always aware of some great people. Please contact ACT Canada for more details - email@example.com
Calendar of Events
1. VISA CONTACTLESS AUTOMATION TEST SUITE
Source: ICC Solutions (8/22)
ICC Solutions is delighted to announce the immediate availability of the ICCSimTMat Visa Contactless Automation Test Suite – giving vendors greater flexibility and faster testing when using the Visa Contactless suite.
The new Visa Reader/Terminal Test Plan v2.2c has been created as part of Visa’s initiative to encourage test automation and allows for both automation and manual testing. It incorporates Visa contactless v2.2c and Visa ODA test v1.3c.
In order for the vendor to make full use of the automation a Reader controller (defined by Visa) needs to be developed which will communicate with the test tool in order to receive the terminal config for the test being undertaken and to return the result.
The tool also makes use of a card simulator to ensure that testing is as efficient as possible.
- ICC Solutions is a Member of ACT Canada; please visit https://www.iccsolutions.com/
The ACT Canada Forum helps you determine where our industry is headed and if you are aligned with the right partners to get you where you want to be.
The ACT Canada Forum challenges your views:
- Digital Commerce Enablement
- Data ownership risk & consent
- Secure Remote Commerce in Canada
- Disciplined innovation & how to implement it
- Open Banking Opportunities for Canadian FIs
- The digital charter’s impact on your business
- Improving the customer experience
- Digital identity in Canada
- Innovation within your organization
- AI & voice enablement as a sales & fraud reduction tool
- Fraud trends
- Where payments are headed next
The ACT Canada Forum (formerly Cardware) will be held on October 7that MaRS Discovery District in Toronto. This boutique event is known for delivering insights and networking for issuers, acquirers, merchants, brands, regulators, solution providers and other stakeholders.
2. WHAT PROFITS AT CANADA'S BIG BANKS ARE SAYING ABOUT THE ODDS OF A RECESSION
Source: CBC News (8/27)
TD Bank customers use one of the bank's ATM tellers in this photo. Canada's big banks are in the midst of revealing their quarterly earnings this week, and the numbers should offer a good glimpse of how the economy is doing overall. If a recession is headed our way, the canaries in the economic coal mine that are most likely to sing its arrival will be Canada's big banks. That's because Canada's five biggest lenders — Royal Bank, TD, Bank of Montreal, Scotiabank and CIBC — have a hand in nearly every aspect of Canada's economy, from loaning businesses money for expansion to funding the mortgages that finance much of the housing market. Those same banks are in the midst of revealing their quarterly earnings this week, and the numbers should offer a good glimpse of where the economy is headed.
The Royal Bank of Canada was first to report last week, showing profits rising to a record $3.3 billion in the third quarter. CIBC was next, with a quarterly profit of $1.4 billion in the three months up to the end of July. Both figures are up only slightly from last year's level, but in a world in which the financial media is warning of negative rates, inverted yields and huge stock market swings on a seemingly daily basis, rising profits are good to see at the banks. Because if the banks are making money, there's a good chance many of their customers are doing well, too. The Bank of Montreal and Scotiabank will report their earnings Tuesday morning. TD's expected to show its hand on Thursday. While the forecast for the two banks we've already heard from was generally sunny, that's not to say there weren't a few clouds on the horizon — potential storms that investors will be on the lookout for in the other banks' outlooks.
Royal managed to grow their residential mortgage business by almost 6 per cent in the past year to $298 billion, an impressive feat considering how big a player they were in the market to begin with. As CBC News has reported, mortgage rates have been headed lower in recent months, a development that's a double-edged sword for banks — because each mortgage individually is less profitable for them, but they are also able to sell more of them because they appear to be cheaper. Policymakers have spent years worrying about Canadians' debt loads, but Royal Bank's performance suggests there's room for more. Borrowers wouldn't be taking on all that new debt if they weren't feeling confident about their prospects, either. As TD Bank analyst Mario Mendonca put it, "We expect mortgage growth to make a healthy recovery this quarter, reflecting a reasonably strong spring selling season, particularly in Ontario."
Analysts will be paying attention to the value of the big banks' mortgages as they make their quarterly earning announcements. As rates go down, they are individually worth less, but banks can recoup profits by selling more of them overall. The mortgage picture at CIBC, meanwhile, wasn't quite as rosy. Despite handing out $9 billion in new mortgages during the quarter, the total value of CIBC's mortgages actually shrank by a little more than one per cent to $222 billion. Worse still for the bank is where many of them are. "CIBC is the most-exposed to mortgage loans in Ontario and British Columbia," Bloomberg analyst Paul Gulberg said. While Canada's housing market overall has shown signs of stabilizing, activity in Toronto and Vancouver is still causing worry, so it should be interesting to see what the other banks have to say about their mortgage businesses.
Other types of loans
Another possible dark cloud on an otherwise blue sky could be what the banks are saying about their loans to businesses. That's because both banks that reported higher credit loss provisions — money that banks set aside to write off bad loans. While it's still a tiny slice of their overall business, if more businesses are having trouble paying back their bank loans, that's a bad sign for the economy. At Royal, credit losses came in at $425 million, a 27 per cent increase year over year. At CIBC, the figure stood at $291 million for the quarter, a 21 per cent increase year over year. The worst part is those credit losses seem to be spreading beyond certain problematic parts of the economy.
"It used to be oil and gas but it looks like it has spread ... to some other areas," said James Shanahan, a senior equity research analyst with Edward Jones. The oil and gas sector has been hit hard and has been a black mark on Canada's economy for a while, but there's some evidence that weakness is spreading to businesses in forestry, agriculture, and other industries, he said.
"It's not too surprising given the tremendous growth, but this could be a problem for the banks," Shanahan said.
But more cash for shareholders
Loans going bad are a bad sign for any business — never mind the broader economy — but the two banks did give a surefire indication that they are feeling confident about their prospects: they raised their dividend. No major Canadian bank has missed a dividend payment in more than a century, but with a track record like that, banks are incredibly careful not to promise any more cash than they are confident they'll be able to come up with.
Companies that have to snatch back a dividend payment tend to be punished heavily on the stock market, so the banks have been raising their payouts steadily, but cautiously, for decades. Based on Royal and CIBC not increasing their dividends during the previous quarter, Mendonca was expecting both banks to hike this time around. And that's exactly what they did — another three cents for Royal and four for CIBC. He's expecting a bump up at Scotiabank, too, but not for BMO since that bank already hiked last quarter. Based on how much they are paying out, Shanahan says the banks have some capacity to keep the dividend hikes coming, but on the whole he thought the numbers at Royal and CIBC showed they are "in pretty good shape." And as for the rest, "I think results will continue to come in similarly," he said.
- CIBC, Scotiabank and TD are Members of ACT Canada; please visit https://www.cibc.com/, https://www.scotiabank.com and https://www.td.com
3. THE TIPPING POINT FOR MASS BLOCKCHAIN ADOPTION
Source: Forbes (8/21)
In a report by Zage titled, “Real-World Applications of Blockchain,” Dan Weinberger, Co-founder, and CEO of MORPHEUS NETWORK, says that “distributed ledger technology (DLT) has the same transformative power as the internet had in the early 1990s.” Most experts in the report agree with Weinberger on the fact that the current state of blockchain can only be compared to where the internet was in the 90s. This means blockchains at the moment are slow and full of complicated processes that make mass adoption difficult.
Just as the internet was underrated in the early 1990s nobody can accurately predict blockchain's impact. Even then, everyone is eager to know when the technology will hit its tipping point for mass adoption. Here is a breakdown of some of the challenges that the Zage report addresses in order for a blockchain revolution to occur.
Julian-Andre Winter, head of asset management at The Naga Group, believes that “regulation is the first key for establishing blockchain technology at it will provide the lacking level of trust.” To date, there are still reports about fraudulent ICO companies in the blockchain industry. Such cases make people skeptical of blockchain-related startups. Plus, even though the blockchain technology is built on principles that advocate for freedom and autonomy, supportive regulation can accelerate mass adoption and build trust with the masses.
Christian Ellul, director at E&S Group, agrees that “regulation would bring mass adoption.” He adds that the industry “needs common standards to make the digital space more easily accessible.” According to Ellul, regulation will facilitate “mass education and the development of regulatory frameworks in major countries” thus bringing world markets together. At the moment, there is progress in terms of regulation in the US with 17 states passing bills related to blockchain adoption. However, uncertainty remains as existing regulations do not cover smart contracts as of yet.
Speed and ease of use
The current process of buying cryptocurrencies requires you to have a wallet and go through a list of complicated steps to make the transaction complete. Compared to existing cross-border payment alternatives, decentralized applications that use blockchain technology have processes that are complicated for the average user.
There is also a high barrier to entry even for developers looking to create new blockchain-based applications. Furthermore, reports indicate that the current blockchain transactional speeds are slow. Take the ethereum blockchain, for instance, it can only handle 15 TPS and bitcoin’s blockchain can only handle 7 TPS. Therefore, there is a great need to implement easy-to-use, plug-and-play user interfaces (similar to existing mobile and web application) while speeding up performance to allow various people to get comfortable using and developing blockchain applications.
Simplifying set up processes and integrating faster and easier-to-use interfaces will allow users to understand the non-technical value that blockchain offers. Chris Hart, COO at Civic technologies puts it clearly when he says that "the industry will hit a tipping point when people have the opportunity to use blockchain-powered technology daily and understand the non-technical benefits of the technology.”
When you think about it, there is no need for consumers to know how blockchain works. A good analogy would be the computers of the 40s, and 50s. At the time, you would need a computer that would fill up an entire office just to crunch some numbers. Nowadays, companies like IBM are creating computers with blockchain capabilities the size of a grain of salt.
Mass adoption does not depend on people’s understanding of how blockchain works. After all, most people will resist change or the need to learn new ideas. Therefore, the more subtle the changes they have to make the more likely they will adopt new technology. Allen Lee, the founder of QLC chain, believes that “the day blockchain technology is used in day-to-day life is the day when people stopped talking about blockchain.” Just as internet users don’t need to understand TCP/IP protocols, blockchain users don’t need to understand what powers blockchain as it is a backend technology.
Apart from the above-mentioned challenges, proof-of-work blockchains still have to achieve efficiency in terms of energy consumptions. Other hurdles include achieving interoperability and establishing standards for collaboration to speed up development.
Matt Harding, the head of blockchain marketing for Zage, said, “The time of easy ICOs has passed, and now real projects with real use cases that add value to users’ lives can flourish and show the substance beyond the hype.” Chuck Ng, CMO at Project PAI, believes that the public’s faith in blockchain value plus additional clarity in regulation and increased scalability are the three most important factors that will drive mass adoption. Hopefully, all these challenges can be addressed with time for mass adoption to occur.
Join us on October 7th to hear Daniel Leslie from Norton Rose Fulbright LLP discusses the impacts of Canada's Digital Charter, and the risks of data management. This presentation will help you understand Canada’s Digital Charter and how it is set to impact the business industry, including the impact on new innovative platforms such as open banking. It will also address assessing the risks and rewards associated with data ownership and consent, including treatment of personal information and data trusts.
4. FINTECHS NEED TO HELP BABY BOOMERS BOOM
Source: Forbes (8/19)
For financial services firms, especially fintechs, baby boomers should be seen as the pot of gold at the end of the rainbow. They control 50% of the nation’s wealth, outspend younger generations, and are more likely to spend their retirement savings on themselves rather than passing them down. As they move towards retirement (albeit more slowly than previous generations), there will be a huge push to liquidate assets that have been amassed for decades, drawing from all the parts of their financial lives -- from their 401K’s to equity in homes and small businesses.
While fintechs like SoFi and Betterment cater to the financial needs of millennials, from investing to money management, there is still a wide, unfulfilled gap -- an opportunity rather -- that fintechs could capitalize on: helping baby boomers retire. The needs are glaring. Baby boomers’ obstacles to a healthy retirement are not just limited to finding the formula to sustain a particular lifestyle. Boomers face a host of issues (vastly different from millennials) when planning for retirement. There are three primary financial problems retirees face: (1) growing the money they already have saved, (2) dealing with (and preparing for) unforeseen expenses, the largest of which are tied to health care and related long-term care, (3) optimizing their financial plans when their exact lifespan is unknown.
Of these problems, one of the most intractable is planning for an uncertain lifespan. Think about the problem: The average 65 year old male can expect to live to the median age of 85 — and a female can expect to live to 87. However, there is a roughly equally probable age that they will live to 95 or 67. Think about the difference in spending a retiree could have if they knew they would only need to make their assets last 20 years instead of 30. However, the financial consequences of running out of money are high, and despite the lower probability of living to 95, it would be an imprudent financial plan that runs out of money.
One of the core benefits of the mostly disappeared (and much missed) pension plan is that it provided income for a retiree’s entire life. It did this by pooling the risk of retirees. That is, in a large enough pool, the retiree that lives to 95 is balanced by the retirees that pass earlier. Unfortunately, pensions have numerous issues for companies that offered them, and consequently for workers that depended on them. Pensions could remain unfunded (see Illinois), or even when fully funded, changes in the market or interest rates could cause wild swings in a company’s otherwise steady earnings. And workers were both obligated to stay with a single employer, and the pensions could suffer should a company’s financial prospects founder (though this impact is lessened by the Pension Benefit Guarantee). All this, as well as the cost of providing those pensions, has led to the decline of the pension.
A financial product already exists that helps retirees plan for uncertain lifespan — annuities. With an annuity, a retiree gives an insurance company a lump sum of money in exchange for an annual income that will last throughout the retirees lifespan. At their core, annuities have the potential to become useful tools in baby boomers’ portfolios when planning for retirement. They offer protection from market volatility while also eliminating the risk of outliving one’s retirement savings, which are not guaranteed by portfolios that lean heavily on stocks and bonds. The demand for retirement income amongst baby boomers already exists, and annuities are the only products that can provide a hedge for a long life -- like a ‘longevity insurance’.
While the needs of baby boomers, and their expected lifespan, have shifted over time, solutions to address these needs have not. Annuities, still the most prevalent way to guarantee lifetime income, have a well-deserved bad reputation. The typical annuity has high fees, and various “bells and whistles” that make it far too complicated for the average consumer to understand and use comfortably. Insurers have added features such as death benefits, principal protection, variability and others that make the products more complex, costly and ultimately less appealing. To make matters worse, they are offered through commissioned insurance agents instead of financial advisors acting in the fiduciary best interests of their clients.
Fintechs Take On Longevity
It’s 2019 and fintechs are still chasing millennials. Last year, I wrote about this generational appeal, and looking back a year now, fintechs continued to raise a record-breaking amount of capital. Eager to capture millennials’ wealth and grow alongside them, fintechs still seem to overlook one key factor: millennials don’t yet possess an abundance of the very commodity that fintechs are trying to manage, money. Riddled with debt and holding lofty aspirations of future riches, millennials only hold 4% of America’s wealth (juxtapose that with baby boomers’ 50%). Sure, they have the potential to accumulate assets and capital but it will be a long time till they do. Targeting millennials is, in essence, short-sighted. Fintechs who continue to do so are turning a blind eye to the immediate opportunity available: capturing baby boomers’ wealth as they head into retirement.
Today, only a handful of companies have taken on the financial problems of the baby boomers. Kindur, a relatively new entrant, offers retirees a plan for lifetime income. Blueprint Income claims to provide a one-stop shop for baby boomers’ annuity needs, presented through an intuitive platform. Companies such as RetireOne let advisors put annuities into their clients retirement account, and Envestnet, a popular platform for advisors, recently launched an annuities exchange. NextCapital is helping enterprises offer financial advice to retirement plans. New pending legislation, the SECURE Act, could also make it easier for employers to put annuities into their 401(k) plans. This would be an amazing opportunity for fintechs such as Financial Engines and NextCapital to offer the necessary advice to make this option successful.
With trillions of dollars of assets on the table, this is a huge opportunity for fintechs and advisors to tap into this market and provide the guidance of which baby boomers are in dire need. Imagine the demand for a next generation pension — one that wasn’t tied to an employer and could be customized by the future retiree. With the combination of technology and innovative financial products, that dream may be in reach. If equipped with the right tools and guidance, a retiree’s journey may be less stressful and more fruitful. And the the companies which facilitate this will stand to benefit abundantly from it too. Fintechs should follow the money. And the money today lies with baby boomers, not millennials.
5. CONCERNS MOUNT OVER BANKS’ MOVE TO THE CLOUD
Source: PYMNTS (8/20)
No rest for banks amid the hackers. And certainly not with an outsourced tech model. In the wake of the Capital One data breach that exposed data tied to 100 million individuals in the United States comes a warning that there really are not any places to hide. As quoted by Bloomberg, a senior official at the European Central Bank (ECB) has warned of the threats that come with embracing the digital age. It’s no secret that banks have been turning, increasingly, to bits and bytes to boost the consumer experience and provide a range of services to individuals and corporates alike. There may be cause for caution.
“There will be accidents, especially in the cloud,” Korbinian Ibel, a director general at the ECB’s supervisory operations, said in the report. “It’s not that clouds are more vulnerable, they’re actually often better protected than in-house systems, but they’re seen as juicy targets.”
The warning comes as banks have been enlisting the aid of tech giants like Microsoft and Amazon, while bringing operations and data to the cloud. Such moves are tied to the desire to streamline operations, move beyond legacy systems and cut costs. This last point is especially desirable in an age where lower interest rates mean top lines see pressure. Does the Capital One breach portend risks for banks on the Continent? Not as of yet, since many financial institutions (FIs) in Europe do not store sensitive data on public clouds.
“We see the benefits” of cloud computing, Ibel said. “The rule is that the banker is always responsible for their data and services … It’s not enough to have one person as the IT expert,” he said. “You need a common understanding at board level of the needs and risks of IT.”
The ECB warnings come as eCommerce giant Amazon late last month said it was not to blame, contending instead that clients (such as banks) are ultimately responsible for their own apps. As quoted by Newsweek, the firm said via spokesperson, “AWS was not compromised in any way and functioned as designed. The perpetrator gained access through a misconfiguration of the web application and not the underlying cloud-based infrastructure. As Capital One explained clearly in its disclosure, this type of vulnerability is not specific to the cloud.” In more recent news, the ECB itself said last week (as recounted in Forbes) it had been breached, in an incident where hackers injected malware that may have caused the bank to lose data. The hackers had gained access to the ECB’s Integrated Reporting Dictionary site. That site had been breached at the end of last year, and had been hosted by a third-party provider.
“The BIRD website provides the banking industry with details on how to produce statistical and supervisory reports,” the ECB statement said, “it is physically separate from any other external and internal ECB systems.” At least some data tied to subscribers may have been “captured.” Here then lies a conundrum. In the build vs. buy debate there has been a third way — partner. The model where banks (or any firms for that matter) link with other companies to tap expertise and get to market with new products and services saves time and money.
As reported by PYMNTS and as noted at the end of last month through the Innovation Readiness Playbook done in conjunction with i2c, as many as 80 percent of top performing artificial intelligence (AI) systems will focus on data analytics over the next few years. And, as noted in the study, technical limitations and complexity remain barriers to innovation for many FIs. This suggests they could benefit from partnerships to help them overcome some of these challenges, including the constraints imposed by legacy payment systems.
In the outsourcing model, then, it seems prudence would demand: caveat emptor.
Where are payments headed in Canada? What are the key considerations you should be focused on today? The Payment Insights Panel at the ACT Canada Forum on October 7th will feature the thought leaders who are shaping our industry, including:
6. GENZ GETS FRIENDLY WITH CREDIT
Source: PYMNTS (8/20)
Generation Z is growing up. The oldest members of the generation born between the mid-90s and the mid-2010s (specific year ranges vary depending on who is supplying the figures) are graduating from college, getting their first jobs and starting to form their relationships with credit products. And based on early indications, it seems the follow-up act to the millennial generation is much more positively inclined toward using credit products of all stripes. The percentage of credit card-eligible Gen Zers who carry a balance increased by 41 percent between Q2 2018 and Q2 2019, according to a new report from TransUnion, reaching a total of 7.75 million.
That is a much more active rate than seen in older generations during the same time period. Far more millennials and Gen Xers make use of credit cards than Gen Zers – at 38.29 million and 38.27 million, both cohorts have roughly quintuple the carrying rate. But the growth is much slower – 5 percent and 3 percent for millennials and Gen Xers, respectively. And, at least thus far, the new Gen Z entrants to the credit market seem to be managing their debt about as well as their older counterparts, according to the study data.
“Card delinquencies for Gen Z are roughly in line with millennials and Gen Xers,” Kristen Bataillon, senior manager of research and consulting at TransUnion, told USA TODAY.
Credit cards aren’t the only area where Gen Z is showing strong interest in lending products. Auto loans were up 40 percent year on year, according to TransUnion, and personal loans were up by about 45 percent. Gen Zers with mortgages jumped 112 percent year on year between 2018 and 2019 – though big growth is easy when starting with small numbers. In 2018, there were about 150,000 mortgages among the generation, and as of 2019, there are 310,000. All in, mortgages remain the underwriting product Gen Z consumers are least likely to have – which is unsurprising, given their maximum age and attendant life stages.
Credit cards, however, show the greatest strength. Currently, according to TU, there are about 31.5 million card-eligible Gen Z members – only about 5 percent of total U.S. card accounts. But their numbers in the market are set to rise along with their average age: By 2022, there will be 44.5 million Gen Zers in the market who are eligible to carry credit cards.
“The rapid growth in Gen Z credit activity is occurring despite many of these individuals having grown up during the Great Recession,” Matt Komos, vice president of research and consulting at TransUnion, said in a statement. “As we see more members of this group come of age, we naturally expect continued growth in credit activity by Gen Z.” Early data indicates that Gen Z is a bit warmer to the idea of taking on debt than millennials – but it is still a very early indication. Some of Gen Z is entering adulthood, with the oldest members of the generation around 22 years old. But more than half of Gen Z is still under the age of 18 and thus not credit-eligible, and the youngest members of the generation are still in elementary school.
It might be a bit early to be making long-term pronouncements about the credit opinions of an age demographic whose youngest members are still more than a decade away from being eligible for their first credit card. After all, an awful lot can happen both technologically and economically in the next decade. And it is probably safe to forecast that at least some of those happenings will influence the future credit preferences of today’s third graders. Early data is good – but staying current as the situation evolves on the ground is likely a good idea.
7. APPLE ISN'T DISRUPTING BANKS, IT IS HELPING THEM
Sources: Forbes (8/21)
“Silicon Valley is eating the banks’ lunch,” proclaims the Financial Times. Technology companies such as Apple are set to take over the services traditionally provided by banks, such as credit cards, foreign exchange, loans and payment services. Though the article admits that tech companies have been talking about this for a decade, and progress has been – well, non-existent, really:
“The embarrassing fact for the entire fintech industry is that it has failed to take significant share of core banking activities despite a decade of a benign credit environment with banks hampered by their recovery efforts after the 2008 crisis.”
Now the cycle is turning. Banks are no longer hampered by wrecked balance sheets and enormous fines. The strong dollar has tightened global credit conditions appreciably, even with interest rates at all-time lows. Economies around the world are experiencing slowdowns. Yet despite this, we are to believe that tech companies are about to disrupt banks more than they have managed to do in over a decade of far more supportive conditions. What on earth is the reason for this astonishing optimism?
Apple Card, apparently. “The clearest example is the just-launched Apple Card, a virtual interface on the iPhone to help keep track of spending and a physical titanium card for fashion victims,” says the FT.
Really, FT? It’s a credit card, not a “virtual interface.” There is nothing novel about a credit card. A credit card is, as its name suggests, simply a line of credit which is drawn upon when using a card to make purchases. Apple’s card may be fancy (and fragile), but behind it is a bog standard credit facility, just like every other credit card in the world. So the question is, who is issuing that facility?
Credit card facilities are provided by banks. Cards may be branded by a retailer, but the actual issuer is always a bank. This is even true for giant retailers such as Walmart, though they undoubtedly have the balance sheet strength to offer credit lines; Walmart’s credit card is issued by the online bank Synchrony. In fact, Synchrony issues an astonishing 115 branded cards, including Paypal’s credit cards, Amazon Prime’s store card and fuel cards from Chevron and Texaco. You can find the full list here.
Apple Card’s strapline “Created by Apple, not a bank” implies that the credit line is provided by Apple itself. If that were the case, then Apple Pay would be groundbreaking. It would mark Apple’s transformation into a bank – and a bank of such a size and reach would indeed eat the lunch of existing banks.
Sadly, the strapline is misleading to the point of dishonesty: “You’d think that Apple would at least have gone into partnership with one of the nimble fintech companies that do bank-like things while largely avoiding bank-like regulation. At least then it could legitimately claim that its credit card was not created by a bank, though that doesn’t mean banks wouldn’t be involved – after all, fintech companies themselves have to use banks to gain access to mainstream payment services, which are essential for credit cards. But no. Apple has chosen as its partner one of the biggest banks in the world – the infamous “vampire squid,” Goldman Sachs.
Goldman Sachs, you may remember, was the bank that was censured by the U.S. Senate for betting against its own customers. Admittedly that was a decade ago, when it was an investment bank operating in the shadows, out of sight of U.S. bank regulators. Now investment banking has gotten itself a bad name and returns on shadow activities aren’t what they used to be, Goldman Sachs is reinventing itself as a (regulated) retail bank. Its online Marcus savings products and unsecured personal loans are targeted at retail customers. And now it is offering personal credit cards too.
Let’s just remind ourselves what Matt Taibbi had to say about Goldman Sachs’ business model: “The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money…”
Well, Apple certainly smells like money. Lots of it. “They achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased.”
Goldman Sachs is getting into retail deposit-taking and lending, in a big way. That is the most heavily state-supported part of banking, not least because it contains the most vulnerable customers. CNN observes that Marcus is already doing subprime lending funded by ordinary people’s savings:
“The company has lent $4.75 billion out in personal loans through Marcus and 13% of those loans have gone to customers with FICO scores below 660, which is roughly the definition of a subprime borrower.”
Among the loan types offered on Marcus’s website are debt consolidation and credit card consolidation loans. Of course, savings are FDIC insured – so this looks very much like the bank using the security provided by government insurance to risk up for higher returns.
CNN also notes that Apple, presumably with Goldman Sachs’ approval, has issued information on how people with low credit scores can still get Apple Pay cards if they meet other criteria. So far, Goldman Sachs appears to be selling its credit cards exclusively to Apple’s customers. But I wonder whether Apple will be as successful at tying down the slippery squid as it is at locking in its customers. Goldman Sachs is always happiest when it is on both sides of the trade. Apple may live to regret this unholy alliance.
The FT’s appeal to Apple Card as evidence that tech companies are about to disrupt the banks is evidently misplaced. A branded credit card issued by a major U.S. bank is not going to threaten the dominance of banks in the credit card industry. What it will do, though, is redistribute it. Goldman Sachs is clearly hoping to “chow down” on other banks’ credit card businesses by taking advantage of Apple’s ability to cross-sell services to the faithful users of its gadgets. And Apple is helping it to do so. The security features on Apple Card make it attractive for customers to stop lodging third party cards with Apple Pay and use Apple Card instead, while the perks on Apple Card include preferential cash back rates for purchases made using Apple Pay. If Apple users start adopting Apple Card as their preferred payment method, Goldman could quickly seize a large part of the personal credit card market. That, without question, is its goal.
It is not disruption of banks that we should fear, but the power that giant tech companies like Apple can give to the banks they choose as partners. Taibbi warned that Goldman Sachs is always looking for new opportunities to milk the gullible and exploit the vulnerable. Am I the only person who finds its new-found interest in subprime retail lending to tech-savvy but financially naive customers worrisome?
Innovation is the name of the game, but the stakes are high. FIs need to innovate but they need to do so in an effective way. The goal should not be ''innovation theater'' and instead focus should be on disciplined innovation. Milos Dunjic will discuss what it is, what it means, and how to make sure you can implement it right. Some things that will be covered by Milos and discussed with other panellists including Michelle Beyo from FinAvator are:
- Recognize the need for disciplined innovation
- Discuss the “Innovation Uncertainty Principle”
- Disciplined Innovation – How To Actually Do It?
- Ideas Are Plenty – Which One To Work On?
- Democratizing Innovation Across The Organization
Hear what Milos Dunjic, Michelle Beyo and other panellists have to say about disciplined innovation on October 7th at the ACT Canada Forum!
8. PULSE STUDY: DEBIT PAYMENTS CONTINUE TO GROW AND GO DIGITAL
Source: Discover (8/1)
Momentum building for e-commerce, person-to-person and other payment types
Consumers are paying with debit more often, and in a wider variety of ways, including e-commerce purchases, online bill payments and person-to-person (P2P) payments. This was a key finding of the 2019 Debit Issuer Study, commissioned by Discover Financial Services’ PULSE® debit network and conducted by Oliver Wyman.
Consumer debit use continues to grow, driven primarily by purchases made without physical cards, according to the 14th annual installment of the study. E-commerce and other digital transactions grew nearly 24 percent year-over-year – more than five times faster than debit transactions initiated with a physical card. One in four debit transactions took place without the presence of a card in 2018, compared to one in five in 2017.
Consumers are increasingly using debit for P2P transfers, business-to-consumer “push” payments and cardless consumer-to-business payments, most of which take place in mobile apps or online. Push payments are used for the disbursement of funds in cases such as paying gig-economy workers and settling insurance claims. As a result of shifting payment patterns, debit use climbed to an average of 24.8 transactions per month per active card in 2018, compared to 23.7 in 2017. Annual spend per active card averaged $11,684, a nearly 8 percent increase year-over-year.
“People are increasingly turning to debit whether they’re inserting a card at the point of sale, using an app or shopping online,” said Steve Sievert, executive vice president of Marketing and Brand Communications at PULSE. “Looking ahead, we expect the debit landscape to continue to evolve as issuers enhance anti-fraud measures, respond to changing consumer payments behavior and meet the consumer expectation of a frictionless payments experience.” Additional study findings include growing interest in issuing contactless debit cards and developing digital customer-service capabilities.
Growth in Funds Transfer Services
Although P2P transfers, push payments and other funds transfers account for just 6 percent of all debit payments made without a physical card, according to the study, the numbers are beginning to add up. An estimated 1.2 billion such payments were completed via debit cards in 2018, nearly all of which was incremental growth.
“These are truly ‘faster payments’ that enable individuals and companies to send and receive funds quickly and easily,” said Judith McGuire, executive vice president of Product Management at PULSE. “We’ve had tremendous success with our account credit transfer service, for example, which uses a debit transaction to push money to consumer accounts.”
Interest in Contactless Cards
The percentage of debit issuers that say they are interested in offering contactless cards nearly doubled year-over-year, with 70 percent planning to issue contactless cards by the end of 2020. Another 10 percent already issue some contactless debit cards. Only 20 percent of respondents said they have no plans to offer contactless cards.
“Merchant acceptance of contactless cards has increased since the introduction of mobile wallets a few years ago,” said Tony Hayes, partner at Oliver Wyman and study principal. “Many issuers also said they don’t want to risk being left behind when it comes to contactless.” Contactless cards are projected to represent as much as 60 percent of U.S. debit cards by the end of 2021 if financial institutions replace their existing card bases at their expected rates.
Focus on Digital Transformation
Enhancing digital capabilities is an important area of focus for issuers. When asked about their digital strategies, issuers reported offering, or planning to offer, an array of digital services that fall into four categories:
- Providing effective, uninterrupted access to funds through offerings such as self-service card replacement and issuance of virtual cards into mobile wallets upon account opening.
- Driving debit use and wallet share through services such as cardless ATMs, P2P payments and a listing of merchants with which a cardholder has stored his or her card data.
- Enhancing customer engagement through services that include self-service transaction disputes and card freezes.
- Increasing security and controls by providing real-time account holder alerts and implementing multi-factor authentication for online or mobile purchases.
Decline in Fraud Losses
For the third consecutive year, debit issuers’ average net fraud loss per debit transaction declined, sinking to 1.1 cents from 1.3 cents in 2017. Issuers’ average net fraud loss per active card declined to $3.24 per year in 2018 – about 10 percent less than in 2017. Fraudsters are focusing on transactions initiated without a physical card, which accounted for 69 percent of fraud claims but only 24 percent of debit transactions in 2018. This compares to 66 percent of claims and 20 percent of transactions in 2017.
“Effective fraud mitigation requires a layered approach that encompasses products, processes and people,” said McGuire. “We’re working internally, and with others in the payments ecosystem, to employ a range of solutions to help financial institutions identify and block fraud on a broader range of debit transactions.”
About the Study
The 2019 Debit Issuer Study is the 14th installment in the study series, commissioned by PULSE and conducted by Oliver Wyman, an independent management consulting firm. The study provides an objective fact base on debit issuer performance and financial institutions’ outlook for the debit business. Sixty-three institutions – including large banks, credit unions and community banks – participated in the study. The participants collectively issue approximately 158 million debit cards and represent 44 percent of the U.S. debit market. The sample is representative of the U.S. debit market in terms of institution type, geography and debit network participation.
- Discover is a Member of ACT Canada; please visit https://www.discover.com/
9. VISA DEBUTS AI-POWERED FRAUD FIGHTING TOOLS
Source: PYMNTS (8/20)
Visa has introduced a new suite of security services designed to protect merchants and users from the latest security threats, according to a release. The new features are meant to help stop and contain payment fraud and to protect the payments ecosystem. There will be no cost for Visa clients; the company said it is one of the many benefits available to Visa merchants and financial institutions.
“Cybercriminals attempt to bypass traditional defenses by stealing credentials, harvesting data, obtaining privileged access and attacking trusted third-party supply chains,” said RL Prasad, senior vice president of payments systems risk for Visa. “Visa’s new payment security capabilities combine payment and cyber intelligence, insights and learnings from breach investigations, and law enforcement engagement to help financial institutions and merchants solve the most critical security challenges.”
Enumeration attacks, one of the most common types, is when ATMs are exploited to release money fraudulently. Another attack is the card-not-present fraud that affects eCommerce, phone and mail orders. Although the latter is not as common, it is responsible for 40 percent of fraud losses as well as operational costs. Visa noted that its newest security aids help to maintain trust in the payments system. Visa Vital Signs, for example, actively monitors transactions and alerts institutions of potentially fraudulent activity at ATMs. Visa will react either automatically or in tandem with clients to stop the activity or take action.
The Visa Account Attack Intelligence feature uses deep learning to process card-not-present transactions to pinpoint when hackers are trying to guess numbers, expiration dates or security codes through automated programs. The Visa Payment Threats Lab will test clients’ processing and configuration settings for potential vulnerabilities and ensure they are using security technology in the most efficient way.
Another security feature introduced is Visa eCommerce Threat Disruption, which scans eCommerce websites for malicious payment data skimming software. All of the new features complement Visa’s Payment Threat Intelligence, which provides reports, analysis and information about potential threats and fraud.
Ellie Zolghadr from MasterCard delves into Secure Remote Commerce in Canada and what it means for the market at the ACT Canada Forum on October 7th
10. WHY MOBILE REWARDS PROGRAMS ATTRACT FRAUD
Source: PYMNTS (8/19)
In the latest Mobile Order-Ahead Tracker, PYMNTS explores the latest developments in the world of QSR rewards programs and how credential stuffing and account takeovers are plaguing the industry. According to the Restaurant Readiness Index, 80 percent of QSR managers and customers reported positive experiences with loyalty programs. So, what are the downsides?
Rewards and loyalty programs also make attractive targets for fraud. These programs might not seem to be worth hackers’ time on the surface, but they store a great deal of personal data. They are also attractive because in many cases, customers sign up to take advantage of a one-time offer, then forget about it. It could be some time before a hacker’s presence is even detected.
Here are some examples of restaurants and retailers that have bounced back from mobile data breaches and what they are doing to ensure security.
Chipotle is on the route to recovery after suffering setbacks due to food safety concerns, falling sales – oh, and an April data breach. One of its moves in an attempt to win back customers was the launching of Chipotle Rewards in May. PYMNTS spoke with Curt Garner, Chipotle’s chief technology officer, about the restaurant’s new rewards program and how it safeguards against fraudsters.
The fast-casual restaurant was an early mobile adopter, launching an iPhone ordering app in 2009. But it took a decade for the chain to roll out a rewards program. “We took the position in the early days that we wouldn’t rush to put things in place that wouldn’t support a great experience for our customers,” Garner said. Chipotle attributed the April attack to credential stuffing, in which a hacker uses a bot to automatically enter usernames and passwords stolen from other websites to try to find matches.
Coffee and donut giant Dunkin’ also fell victim to a rewards points hack last year—and then again in February. These were also credential stuffing attacks where hackers were able to use passwords they gleaned from other sites to get into the DD Perks rewards accounts. The intent wasn’t to access users’ names, emails or other personal information – it was to get into the DD Perks accounts and profit. Cybercriminals attempted to sell accounts and loyalty credits.
Hacks aren’t exclusive to the U.S. or relegated to restaurant rewards programs. In Japan, convenience store chain 7-Eleven fell victim to a data breach last month that compromised approximately 900 customers’ accounts. The attack occurred at 20,000 Japanese locations shortly after the launch of 7-Eleven’s 7pay mobile app. In a recent interview with PYMNTS, Rich Stuppy, chief customer experience officer at Kount, blamed the attack on prioritizing customer convenience over security, a flaw shared by many other mobile apps and digital services.
Chipotle has been using artificial intelligence (AI) and machine learning (ML) for risk assessment with human assistance when necessary.
“When you’re looking at account takeovers, for example, it’s predominantly automated bot attacks that have an identifiable signature. As a retailer, you can say there’s no practical purpose for a customer to be trying to log onto your network using a bot. The security platforms that utilize AI and machine learning can also spot attack patterns, and very quickly block those transactions as well,” said Garner. Chipotle has also partnered with payments providers and security firms, and even resubmits its app to the hackers every time it is updated to ensure that the software remains secure.
Third-party ordering provider ChowNow also leverages AI and ML to analyze each transaction conducted on its app and cross-references it with other transactions to determine its legitimacy. Other restaurants are turning to biometrics to increase security. Providing fast and frictionless ordering experiences that don’t compromise the safety of customer information requires tapping into modern authentication technologies and partnering with security experts for tailored solutions, according to Dan Simpson, CEO of Taziki’s Mediterranean Café.
Last year, the company launched a version of its app that included a new feature allowing customers to log in via face or fingerprint recognition. Despite some persistent wariness, the iPhone X has made biometrics more acceptable to the public. Fast-casual pizzeria &pizza revamped its mobile order-ahead app and rewards program. Security was paramount in the eatery’s app redesign, and it utilized the same cloud-based point-of-sale system present at all of its physical locations to handle in-app transactions. Importantly, the restaurant doesn’t store any card data.
“None of the card data ever resides with &pizza,” said Kevin Blesy, head of strategy, in an interview with PYMNTS. “We do the right vetting upfront before we put something as important as payment processing in the hands of a third party.”
11. CIBC NAMED CANADA'S BEST CONSUMER DIGITAL BANK BY GLOBAL FINANCE
Source: CIBC (8/15)
Global Finance magazine has named CIBC the Best Consumer Digital Bank in Canada, as well as being best in mobile banking, and for best mobile app and website design.
"We are thrilled to be named Canada's Best Consumer Digital Bank and to be recognized as leaders in web design and mobile banking," said Aayaz Pira, Senior Vice-President, Digital & Direct Banking, CIBC and Head, Simplii Financial. "This is a strong reflection of our commitment to delivering innovative, client-focused solutions and the work we do to continuously evolve across the digital landscape."
Recipients are awarded based on a number of factors, including their strength of strategy for attracting and servicing digital clients, success in getting clients to use digital offerings, growth of digital clients, breadth of product offerings, evidence of tangible benefits gained from digital initiatives and web/mobile site design and functionality.
CIBC has continued to enhance and deliver digital capabilities that put the clients' needs first. With the Manage My Card feature, clients can instantly lock their credit card if it's been misplaced, and easily unlock it when found. Clients using the CIBC Mobile Banking App® are able to check their credit score for free - safely, securely and instantly - while having no impact on their current score. Also, clients have the option to live chat with any online CIBC agent, creating a better user experience.
"These features and others are all built in a continuous effort to enhance our offerings to consistently meet our clients' needs," added Mr. Pira. The winners were chosen among entries evaluated by judges at Infosys - a global leader in consulting, technology and outsourcing - with the final selection of winners being chosen by editors of Global Finance.
In March of 2019, Global Finance named CIBC North America's Best Bank for Cash Management, and was recognized for the fourth time as Best Treasury and Cash Management Bank in Canada. In June, CIBC received the highest ranking for best overall mobile banking experience in Canada, according to a study from Surviscor, and ranked #1 in customer satisfaction among mobile credit card apps, according to a study from J.D. Power.
- CIBC is a Member of ACT Canada; please visit https://www.cibc.com/
At the ACT Canada Forum, Claude Clausing from Elavon will focus on how the industry can work together to deliver solutions that enable digital commerce, helping retailers create a more customer-centric shopping experience. Claude will examine security challenges facing retailers today and how artificial intelligence can reduce fraud and move liability from merchants to issuers. He will also discuss interoperability across platforms and its importance in digital enablement. From this session, you will take away unique insights:
- How to create a digital shopping and checkout experience to compete in today’s evolving eCommerce environment
- How new technologies such as AI and voice enablement can drive sales and reduce fraud at point of sale
- Why payment products and services that work together are essential to delivering good customer experiences
ACT Canada helps members understand complex issues and filter truth from market noise for current and emerging commerce trends. Through a consultative approach with all stakeholder groups, the association provides knowledge and expertise to help members leverage opportunities, confront challenges and advance their businesses. Please visit www.actcda.com or contact our office at 1 905 426-6360.
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ACT Canada helps members to:
Engage - Grow the commerce community via stakeholder contributions, collaboration and networking
Enable - Provide access to the expertise of the member community to gain insights that will help strategic decision-making
Evolve - Drive positive change in the increasingly complex commerce environment