Bank POV: An Interview with U.S. Bank CIO Dominic Venturo

At the Plug and Play Retail and FinTech Expo on October 22nd, I had the opportunity to interview Dominic Venturo, CIO of U.S. Bank, on his views of the future of fintech and the role of the traditional bank in the new age cloud and increasingly mobile-first landscape. While its invigorating to cover the fintech newcos, they hardly have the monopoly on innovation. And, in the words of the legendary and enduring Grandmaster Flash, “You have to know where you came from to understand where you are going.” Partnering with the banking establishment can provide insight (and resources) that may save newcos time and iterations later.
Why choose to spotlight U.S. Bank? First, it has what Venturo calls a “wide lens” or breadth of business in that it runs a large payments business, is both an issuer and an acquirer, and also has a large retail bank. But mostly I find the U.S.’s fifth largest commercial bank interesting in that it makes innovation a core component of its culture. Aside from the sending of a C-level executive to speak at an accelerator/incubator micro-conference despite not having a venture wing, the company strives to support and to work with innovative partners including start-ups. States Andy Cecere, chief operating officer for U.S. Bancorp, “Innovation is part of our culture and it is how we view the development of new products and services. By anticipating what our customers will want or need in the future, we can better prepare our customers and company for whatever is ahead, capturing opportunities and avoiding pitfalls along the way.” Recent examples of innovation from U.S. Bank include advances in mobile payments, voice biometrics, tokenization and integrated mobile and web commerce solutions.
But what I really like about U.S. Bank is that it is willing to be a banking industry contrarian — and successfully so. One notable example is that while the majority of banks have cut back on small business lending (sub $1 million) over the past few years, U.S. Bank has increased its commitment to SMBs. In its fiscal year ended September 30th, the bank stepped up the overall dollar value of its SMB lending by 15.4% over 2014, while spreading its lending over an 18% greater number of loan recipients. The bank lent $776 million via 3977 loans in its fiscal year 2015 — a modest size loan average of $195,122 per business. Yet U.S. Bank reported an overall full year record performance in 2014 with net income of $5.85 billion.
But back to my interview with Dominic Venturo. Pardon the video quality — impromptu interviews necessitate the occasional shaky frame whilst one adjusts her grip on the cell phone… Thankfully the post-production team has added a little more pizzazz by posting each of my questions on-screen prior to Dominic’s answer.

Some interesting takeaways:

  • It’s not so much the cloud now, it’s mobile.
  • He sees the greatest fintech innovation happening in the minutiae of the payment life cycle — making in-app payments seamless, simplifying mobile payments.
  • Passwords are going away for both internal use as well as consumer multi-factor authentication, with mobile phone-based biometrics being an area that U.S. Bank is focused on.
  • Hardward tokens are not necessarily making a full-out comeback (for authentication) but there is a marked increase in their use — U.S. Bank uses them internally.

 

Disruption, Innovation or Process Model Change? Why Banks Are A Great Example of Every Firm’s Dilemma

The debate

What do companies really need to do to succeed over the next five to ten years – and give yourself some strategic latitude here. Is it more innovation, more social communications in the enterprise? The need to find more creative responses to disruption? Or is it the bogey most firm’s fear most – deep process reengineering?
In this update we’ll look at the case of banks and conclude that, sorry, the future is all about process model innovation, or some kind of BPR. Process model innovation requires companies once again to look deep into how they do business and redesign how their people execute on company objectives.
The new process model is the business platform and executives in finance are beginning to realize they need one too.

The E2.0 Era and Social Business

Over the past decade an abundance of literature told us the real answer to productivity issues and workplace performance was “social”. In a variety of guises “social” has been the modern day but gentler business process reengineering meme.
There are various definitions: “Enterprise 2.0 is the strategic integration of Web 2.0 technologies into an enterprise’s intranet, extranet and business processes.” Yes, it represented a change in process but a manageable one for the folks affected. Enterprise 2.0 is “the use of emergent social software platforms within companies, or between companies and their partners or customers.”
This was change without layoffs, an answer to silos without process redesign.
Gigaom was on top of it from the start (see The Future of Work Platforms and the discussion around Technology and The Future of Work ) and is one of the few places that maintained a critical viewpoint. The challenge for banks is that no amount of socialising the enterprise will provide the answer to  the current disruption they face. If that’s the case for banks, it’s also the case for many other sectors too. And the reasons go deep.

The Changing Economy

Banks, as we know, are more susceptible to global economic change that other companies. They had a bull run during the period 1995 – 2005, some would say on the back of collateralised derivatives but perhaps more pertinent, on the back of a long run of increased global trade that was closely tied to growth in gross domestic product in major economies like the USA. The 1980s and 1990s were the era of booming trade in goods. It’s over, according to a recent working paper from IMF staffers.
The key reason? The relationship between US growth and Chinese growth is broken. That conjoined growth is fixed in most people’s minds by the Apple-Foxconn relationship. Apple creates the IP and design values, Foxconn builds and ships. While nothing can derail Apple, a new reality is emerging – in many emerging markets local manufacturers and suppliers are beating out the multinationals.
The graph below shows the bald truth of China’s changing position as an importer of parts for onward manufacture and shipping.
Figure 1. China’s Share of Imports of Parts and Components in Exports of Merchandise and Manufacturing (percent)

china parts and goods

The evidence supports the idea that globally we will trade less. However there is a parallel development. Small companies are trading more – a whole lot more.
Evidence for the internationalization of small business trade comes from a variety of sources.
Figure 2. Small Business Internationalisation to end 2016

small business internationalization

The table above is supported by evidence from surveys by the World Trade Organisation and by companies like DHL that have a stake in any small package international trade. According to DHL:

81% of high performing SMEs trade internationally – high performing being measured as 3 years of 10% + growth in the OECD and 20% annual growth over three year in the BRICM (BRICS plus Mexico) countries, and much of that performance is attributable to a range of international activities – import, export, partnering, sub-contracting etc. and 60% of these companies expect to increase their international activities to a total of 20% of all turnover over the coming three years.

So here is the problem for banks. In fact it is a generic problem for companies looking a few years out.
Their large customers are being beaten out of emerging markets by local competitors because there are too few supportive financial functions for western companies in, say, the second cities of Vietnam, or the third cities of China. It is tough to get the credit checks, to provide the merchant credit, to find the data on consumption patterns, all the things that go into a western market entry campaign. So much so that Nestle is less able to sell its ice creams or P&G to sell its detergent.
Their small customers are meanwhile expanding into new markets. Traditionally these are precisely the customers that banks don’t want to loan to – sub-$1million dollar loans are not cost effective for relationship managers.
Leave aside the esoteric discussion banks are currently having about Bitcoin and distributed ledger technology, they are losing credibility with customers. This is not necessarily a fatal position but does call for substantial process change.

The case for banks as platforms

Banks will have to gravitate towards platforms if they are to serve small businesses and if they are to improve their relationships with larger ones. The importance of the first of these is that the rosy future (growth) lies with the small business that is internationalising. The second is their mainstay. It’s where the big money mandates come from.
In the case of small businesses, banks typically have too high a cost base for serving small business needs, depending on real-world relationship building, high margins and outdated credit scoring. New limited feature platforms like Cashflower can help with transparent cash management and platforms like PayPal are stepping in with working capital support.
Platforms like Alibaba fund the customer, the merchant and the manufacturer, as well as hiving off cash to fund managers, as well as providing escrow to secure trust. US and European innovators have a long way to go to be competitive in this area.
For larger customers banks need to adapt the integrated model that Alibaba has proven, and provide cash visibility, new foreign exchange management services, innovate in credit references, and devise other services that will make more trade happen in more localities.

The Process Model Innovation Challenge

Here’s the challenge. Most people who do not understand the world of platforms, think Uber. That’s essentially an upgrade of the late 1990s Application service provider-thin client model of platform that has people raving, has VC money gushing, but is not era defining. Integration is era defining.
For banks to move to platforms they have to look beyond Uber or the two-sided market model. They need to think how to deal with  x 10 the number of customers on a small business platform, how to engage the developers who might innovate around it, how to brand a platform with no ethnic or nationalist legacy, and how to promote brand inspirationally. They need to learn new traction rules. They have to go beyond departments to a Netflix style of internal platform configuration so that they can move with agility to solve problems as they scale.
In that context E2.0 makes sense too because suddenly everything you want people to do comes back to how they communicate, project the brand and engage people online at low unit cost.
The challenge though is how to get a departmentally silo-ed organisation with a traditionally minded executive team to see itself owning a platform that requires a totally new skill set. In that context here are some thoughts wrapped up in the takeaways but here is a final piece of evidence to ponder.
In a recent study of innovation capability among banks, conducted by The Disruption House, we found leadership to be the single biggest deficit of these august organisations. The graph compares the top 10 companies in terms of innovation capability from a 2013 study of innovation across all sectors (blue line) with a 2015 study of financial institutions (red line, including companies like Alibaba), with the top 10 banks in the same study (yellow line) and the top 10 Globally Systemically Important Banks (or G-SIB, green line). It shows the G-SIB with the lowest innovation leadership capability.
Figure 3. Comparing Financial Institution Innovation Capability

fintech comparisons

Takeaways

  1. Large scale economic change is upon us, even if we set aside any notion of some new technology or idea being disruptive. The old supply chain complexity model is flatlining.
  2. The momentum lies with smaller businesses that need different types of support
  3. Platforms are the answer but we are over-seduced by the Uber model and should be looking instead to integrated platform models.
  4. To do that, large organisations, like banks, need to develop an inter-generational leadership dialogue.
  5. The inter-generational leadership dialogue is a forum that large banks, and their peers in other industries, now urgently need in order that they can explore options openly. Optionality as a strategic tool was explored in this Gigaom paper. Process model innovation is an imperative but the ones who have to make it succeed are likely not the ones who commission the change. Difficult pill to swallow for many banks but leadership has to be a shared vision.

Apple has tripled the number of stores accepting Pay in 5 months

Apple Pay is accepted by 700,000 retailer locations in the U.S., and the iPhone-embedded payment service now loads cards from 2,500 card issuing banks, CEO Tim Cook revealed at the kick off of Apple’s Spring Forward Event on Monday.

That’s pretty astonishing growth considering Apple was accepted at 220,000 retailers at its launch in October, meaning retail chains and independent businesses have been either upgrading their checkout gear to accept the near-field communications (NFC) taps used by Apple’s iPhone contactless payment technology or they’ve turned on NFC capabilities in their existing terminals.

A growing list of retailers accept Apple Pay, Apple revealed at its Spring Forward event.

A growing list of retailers accept Apple Pay, Apple revealed at its Spring Forward event.

At the event, Cook flashed a slide on screen that showed many of the retail chains newly on board with Apple Pay. There were carriers like AT&T and T-Mobile, airlines and hotels JetBlue and Marriott and many, many new stores.

The number of partner banks quintupled from the 500 deals Apple had in place at launch, which is significant because it means consumers don’t have to apply for specific debit or credit cards to use Apple Pay. Consumers can load any card — or at least the vast majority of cards — they already have in their billfolds into the iPhone 6 and iPhone 6 Plus. Not having the backing of the banks has been a hindrance to other mobile wallets like Google Wallet and Isis/Softcard at launch, but Apple recently claimed that more than 90 percent of all credit and debit transactions could technically be supported on Apple Pay.

Apple is clearly having success embedding its service into retail stores, but it gave an update on its effort to embed itself into vehicles. CarPlay now has the backing of all of the world’s major automakers. Though we have yet to see a CarPlay-enabled vehicle, this likely means that CarPlay will eventually become an option in most newer cars with fancy infotainment systems.

Will Samsung’s mobile wallet plans work? We’ll know in 7 months

Samsung has entered the mobile payments fray with its acquisition of LoopPay, giving it the technology to turn its smartphones into wireless credit cards that can purchase goods and service with a wave of the wrist. LoopPay is clearly Samsung’s answer to Apple Pay, but there’s still one missing piece from its payments puzzle.

With LoopPay’s technology the consumer electronics giant now has all of the technical tools to take on Apple Pay, but Samsung still needs to form direct partnerships with the card-issuing banks. If it doesn’t, then the upcoming transition to new chipped smart cards will be awfully rough on its contactless payments technology.

Today LoopPay’s technology relies on what is essentially a spoofing of the credit card. It records the credit card number off of your plastic’s magnetic stripe, and when its fob or smartphone sleeve is waved over a payment terminal, it transmits that number through a magnetic field, emulating the physical card swipe. The technology works at nearly all point-of-sale terminals today, and I can vouch for its effectiveness. I’ve used a Loop fob to buy coffee at Starbucks and tools at my local hardware store with no difficulty. As Samsung incorporates this technology into its phones, it will work the same way.

The problem is that this kind of static magnetic transaction is going to be phased out of the U.S. retail industry starting in October (it already has been in many other regions of the world). The U.S. is adopting EMV (the name comes from the initials of backers Europay, MasterCard and Visa), which will replace magnetic cards with smart chip cards that store encrypted data that LoopPay won’t be able to emulate — at least not without the cooperation of the banks.

LoopPay's most recent iPhone 6 sleeve with detachable "card" module

LoopPay’s most recent iPhone 6 sleeve with detachable “card” module

LoopPay founder Will Graylin and Samsung’s head of mobile payments Injong Rhee assured me in an interview on Thursday that both LoopPay and Samsung have been in discussions with multiple banks and those partnerships are forthcoming. They also said that LoopPay’s technology is already optimized to handle EMV payments as soon as those first bank deals are signed.

I have no reason to doubt Graylin and Rhee, since even before the acquisition LoopPay already had the backing of at least one credit card powerhouse — Visa was an investor — and Samsung itself wields enormous clout. If it commits to making a Loop-powered wallet a key feature in its smartphones, then banks will want to come to the table, just as they came to the table with Apple Pay.

But Graylin and Rhee wouldn’t offer any details on the specific banks they’re talking to or any timeline for when those deals would be in place. That’s worrisome because the clock is ticking. If those deals don’t come down by October then Samsung may find itself with a mobile wallet that increasingly doesn’t work.

What happens in October

This year, banks will start replacing your plastic with chipped cards, and by the end year MasterCard expects that half of all U.S. credit cards will support chip-and-PIN transactions. Meanwhile, U.S. retailers are replacing their point-of-sale terminals with new card readers that accept EMV transactions.

The transition to EMV in the U.S. was originally expected to be slow – and it will take years before that last small merchant upgrades its hardware – but recent big security breaches like the one affecting Target have lit a fire under the major retailers, explained Osama Bedier, a long-time veteran of the mobile payments space. Bedier founded and is now CEO of payments terminal maker Poynt. Previously, he ran [company]Google[/company] Wallet from its launch until 2013, did product development at PayPal and is an advisor to and investor in LoopPay competitor Coin.

By the October deadline, the top 100 biggest retailers in the U.S. will accept EMV payment, accounting for 40 percent of all in-store retail transactions, Bedier said. Why the hurry? If they don’t, they’ll be liable for any fraudulent transactions made on chipped card at their stores.

Every point-of-sale terminal maker is developing an EMV reader, including Square

Every point-of-sale terminal maker is developing an EMV reader, including Square

That’s a huge shift in the U.S. retail landscape, but LoopPay and other digital credit card makers like Coin, Plastc and Swyp like to point out that even new chipped cards will continue to sport magnetic stripes so they will be able to load them into their universal cards. Conversely, even new payments terminals will still have magnetic stripe readers, so every merchant will technically be able to accept a transaction with their devices.

The infrastructure will remain in place for retailers to continue accepting their digital cards, so everything is hunky-dory, right? Here’s the problem: just because a merchant can technically accept a mag stripe transaction doesn’t mean they will.

EMV transactions are more secure because they use cryptograms instead of the numbers printed on your card face. When digital card holders start sending that insecure static data over payment networks instead of using the encrypted chip on their physical cards, the banks will notice, and a certain point they’re going to start rejecting purchases.

“It all depends on how long the grace period is,” Bedier said. “It could be three months. It could be six months. But the card issuers will start declining transactions.”

Samsung’s opportunity

The key for any of these universal card makers is to demonstrate there’s enough utility and demand for their technology that the banks will gladly climb on board, Bedier pointed out. And here’s where Samsung has a big advantage.

On its own, LoopPay was a small company selling a niche product. But with the might of Samsung behind it, it has enormous advantages over its digital wallet competitors, who are mainly startups trying to crowdfund their products. If Samsung were to make a big commitment to embedding LoopPay’s tech in all of its forthcoming Galaxy smartphones and its wearables, or if Samsung created a detachable phone module that you could hand to a waiter or sales clerk, then the banks would likely eat it up. The banks want to offer their millions of Android customers an alternative to [company]Apple[/company] Pay.

Could LoopPay's technology make it into the Galaxy Gear?

Could LoopPay’s technology make it into the Galaxy Gear?

Furthermore, Samsung would have much larger potential retail appeal than Apple could ever hope to achieve any time in the near future. Graylin explained that LoopPay can route secure EMV data through the mag stripe reader, effectively turning a static transaction into a dynamic one. That means LoopPay could process EMV transactions at any terminal, as it wouldn’t be restricted to working with chip-and-PIN readers or systems with near-field communications (NFC) radios, which is the big limitation of Apple Pay.

With the banks’ cooperation, Samsung could also go beyond the EMV standard to offer tokens – temporary credentials good for only one or a limited number of payments – just the way Apple Pay does. Since LoopPay would be connected to the cloud through the Samsung mothership, it could constantly update its encrypted credit card data from the banks.

“I think we’re going to offer a very unique experience,” Graylin said. “I think people will soon see that.”

So over the next seven months we shouldn’t just be looking out for announcements on how Samsung will incorporate LoopPay’s technology into its products. We should also be watching for the specific banking deals Samsung signs. If it gets enough of them quickly, Samsung could find itself with a mobile wallet that could rival Apple Pay. If it doesn’t, Samsung’s fledgling mobile payments plans could wind up buried in the same heap as Google Wallet and Softcard.