Should Banks Be So Fired Up About Bitcoin or The Blockchain?

In my book Shift, I said open source movements like Bitcoin are the wildcards that keep the economy moving in strange and unpredictable directions. It is disruption as a way of life. Built on blockchain technology, surrounded by an immediately scaled, global community, Bitcoin feels like a very Napsterish moment, shifting the way people think about distribution (in this case the distribution of value) without necessarily having all the credentials to be the fundamental building block of change (see a well argued, opposite viewpoint here).
Yet many banks are bullish about the blockchain (way before any proof of concept has given them good reason). Why?
The first reason is that many banks have serious legacy technology problems that get multiplied when they contemplate interacting with other bank legacy problems. Blockchain seems like a very simple ledger, one you write to once, gain instant agreement (through cryptographic discovery or some kind of consensus algorithm, in the case of payment and settlement startup Ripple) and then move onto recording the next transaction.
One shared record is immutable and cuts out any process errors that arise as records are transferred between different systems or curator costs that come with having a custodian be the record keeper, as happens now.
The second reason is that banks have now separated out their innovation functions from their execution funtions. it is possible, if not too easy, for innovation departments or technologists that have been granted Google time to rethink processes, to play with the blockchain and be seduced by its apparent simplicity
Business Insider quotes Aditya Menon, MD of global digital strategy at Citigroup:

On the blockchain, there are two parts that interest us. One is, today we are one of the largest movers of money -up to $1 trillion or more on a daily basis – because we’re the only bank that actually operates in 100 countries. So, there is obviously an opportunity around our own general ledgers.

If you are head of global digital strategy then you have to be looking at blockchain but that doesn’t make it the right technology for banking functions. Citi is taking a slightly bolder step by experimenting with its own currency CitiCoin (BNY Mellon has dome something similar internally by using a digital currency to reward staff).
While the idea of moving so much money around appears highly scaled, think of the number of API calls per day on the servers of companies like China’s Alibaba and TenCent. Hundreds of millions of users (350 million active users for Alibaba; annual orders, 12.7 billion, deliveries 4.3 billion) in the world’s largest Intranet (China), these systems run on best of breed web technology managed through a continuous process of code reduction and system improvement built into the working practices of the programming community.
Scale, in other words, doesn’t necessitate the blockchain – probably the opposite as blockchain is difficut to scale.
Banks though are keen on what they call the distributed ledger aspect of blockchain, one where consensus is created by the ledger being openly available to all participants. However, Bitcoin is a replicated ledger rather than a distributed one – each instance, each transaction, the whole blockchain is continuously replicated across the servers of all participants. Replication negates the value of a distributed computing system.
And in a sense bank-led digital currencies bring the banks into conflict with the startup community and possibly regulators – Ripple has its own currency XRP, which operates as a kind of token for money flowing through the Ripple system. Competition is no bad thing, in principle, but bear in mind the Fed and the Bank of England have also talked about creating digital currencies (and they are not the only central banks to do so) – much more of this and we will need a derivatives structure to de-risk the different valuations between fiat-backed digital currencies, a development that would be just self-defeating.
If you then ask why are the bank so interested the answers are:

  • They have to be – they are struggling to find radical cost reduction and the blockchain could (but won’t) be it.
  • They have embraced innovation and it would be tough to turn a blind eye to the possibility of blockchain, though in reality it would be more courageous to do so.
  • It provides built-in thought leadership, a feature startups are only to happy to cultivate – we have yet to see  a senior banker though create a real vision for the future of finance; blockchain provides that thought leadership, even though most banks are already advocates at some level, so the search for leadership increases the sense of a race.

I think the lessons from the blockchain gold rush are:

  • Ok, it pays to look at options but you need to be looking at viability at low cost (a fact that some banks get), what one might call minimum viable optionality. Blockchain should be put in perspective quickly, by a disciplined process of low-cost viability testing.
  • Look to how web pioneers are handling much larger record systems than banks do. The answer lies in highly granular innovation processes where developers fight for great fixes and are smart enough to take the latest ideas and push them to new limits.
  • And finally don’t be too preoccupied with your own needs – what do bank customers’ want? That should be the guiding principle of the minimum viable option.


Visa expands its online payments service Checkout to 16 countries

After seven months of testing Visa Checkout in the U.S., Canada and Australia, the financial giant has decided to bring the online payments service to 13 additional countries in 2015. Checkout allows you store your credit card details into a kind of cloud wallet and then pay at merchant’s websites and in their mobile apps by entering just a user name and password.

In the coming months [company]Visa[/company] said it would bring Checkout to Argentina, Brazil, Chile, China, Colombia, Hong Kong, Peru, Malaysia, Mexico, New Zealand, Singapore, South Africa and United Arab Emirates, bringing the grand total to 16 countries across the globe.

Checkout replaced Visa’s more sophisticated, but also more complicated to use, digital wallet last summer. Though [company]MasterCard[/company] and Visa run competing online payments networks, MasterPass and Visa Checkout actually support each other’s credit and debit cards as well as [company]American Express[/company] and [company]Discover[/company]. Checkout also competes with PayPal, though Visa appears solely focused on large retail brands rather than smaller merchants. That said, The Checkout button is hardly universal on shopping sites today, but Visa has had success in landing some big names like [company]Staples[/company], [company]Pizza Hut[/company] and [company]The Gap[/company].

Visa plans to roll out Checkout first to international retailers that already have a cross-border presence, said Sam Shrauger, senior vice president of Digital Solutions at Visa. For instance, in China, many of the wealthier set are buying luxury goods from the U.S., so high-end Checkout partners [company]Neiman Marcus[/company] could benefit from having a Visa button appear on their websites overseas, Shrauger said. After that, Visa will start going after the big retail brands in each of the respective countries, Shrauger said.

In the U.S., Shrauger said, Visa has already signed up 3 million users for the payments service, and the majority of those users have used Checkout multiple times.

This post was updated on Thursday to clarify how Visa Checkout partners like Neiman Marcus would benefit from the international expansion.

2015: The “college experimentation” year of mobile payments

In November, when Dutchman Martin Wisjeimer became the first man to inject Bitcoin keys inside his hands, he captured the spirit of payments in 2015. Will others be crazy enough to try this? Maybe not, but many are going to try out new ways to pay. 2015 will be the “experimenting in college” years for shoppers.

Merchants will hit shoppers with options they never had before, and shoppers are going to try it all out because … why not? Waving your iPhone 6 in front of a NFC sensor to pay for stuff is entertaining and it makes good conversation during the holidays. If your sister-in-law bought you a bottle of wine with [company]Apple[/company] Pay, I promise you’re going to hear all about it. Personally, I arrived late to a meeting the day Apple Pay launched because I was eager to test it out. When I use Apple Pay at [company]Whole Foods[/company], [company]McDonald’s[/company] and [company]Walgreens[/company], other people in line are curious to see it in action.

2015 is about experimentation because tech companies are trying to displace the old card swipe system that facilitates a huge chunk of commerce in the U.S. These experiments will have ripple effects that change the underlying mechanics, rules and alliances of the payments industry. Here’s what you can look forward to in 2015:

From beacons to payments

Retailers are salivating over beacons, and 2015 will be the year we see them used here and there. Combined with a mobile app, these internet-connected, Bluetooth-enabled devices allow retailers to push location-based offers, collect data about how people navigate their stores, and link data from in-store purchases with online purchases in order to make personalized recommendations — just the way [company]Amazon[/company] does.

If you’re in the dental hygiene aisle, beacons can detect this and send electronic toothbrush discounts right to your phone. If you’re due to renew a prescription, beacons at a pharmacy could send a reminder the moment you walk into the store. If retailers use beacons tactfully, they will boost sales and pave the way for integrating payments into mobile apps. [company]Starbucks[/company] has gone that direction and many retailers will follow.

New checkout methods

Most shoppers with an iPhone 6 will try out Apple Pay, but the experimentation won’t stop there. [company]PayPal[/company] in-store, [company]Google[/company] Wallet, Alibaba’s Alipay, Coin, Current C and dozens of other checkout technologies will be tested (or re-tested) in 2015. Stratos, a company trying to build an all-in-one credit card, found that 30 percent of U.S. smartphone owners plan to use a mobile payment offering during the holidays. Consumers don’t necessarily find mag-strip credit cards inconvenient or lacking, but the sheer variety of payment technologies and accompanying buzz create a “cool” factor that adds social pressure to try them out. Didn’t I say this will be “college” for the payments industry?

“Card not present” rates will converge with card present rates

Visa and MasterCard set the rules on card processing, and currently, they charge a higher rate when consumers buy online. These Card Not Present (CNP) rates face some gray areas now that people can pay online and in-store at the same time. Say a restaurant guest uses [company]OpenTable[/company] to pay for the meal: Should the transaction face a higher rate even if customer is present in the restaurant?

With the lines of CNP blurring, [company]Visa[/company] and [company]MasterCard[/company] will have to somehow address or eliminate the rate disparity in 2015. Otherwise, they will lose ground to Merchant Customer Exchange, a consortium led by Walmart that is trying to fight back against Apple Pay, Visa and MasterCard with its own mobile payment system, CurrentC, which could save retailers billions in transaction fees.

Social payments will find a purpose

Twitter and Facebook are in the process of launching payment services, and in 2015, they will figure out how to make them profitable. Initially, Twitter and Facebook Messenger will feature peer-to-peer payments, but both companies must know that the real jackpot is serving merchants. They could take a “social commerce” approach and let people complete transactions from branded pages, posts and tweets instead of linking people to external websites. Like Visa and MasterCard, [company]Facebook[/company] and [company]Twitter[/company] could take a cut of each transaction. Shortening the gap between discovering and buying products would probably raise conversion rates for merchants and finally give the social networks a chunk of the e-commerce pie.

The upside to “experimenting in college” is that anything can happen in 2015. By the end of the year, I believe we’ll see an even clearer division between a pro-credit card group that partners with Visa and MasterCard, and an anti-credit card camp that tries to overturn their dominance in the payments industry. The current tension between Apple Pay (pro) and CurrentC (anti) is just a taste of what’s to come. Individual merchants, payment technologies and social networks will all have to figure out how to navigate this divide.

Ralph Dangelmaier is the CEO of BlueSnap, which aims to be the payments leader in e-commerce.

Apple Pay – Forecasting consumer Adoption

For several years, mobile payments in physical locations has been stalled here in the U.S. and – for the most part – around the world. Will Apple Pay become the spark for consumer adoption of mobile payments at retail outlets?

My short answer – not until mid to late 2016.

Here’s why:

  • Minimal market penetration of iPhone 6 and Apple Watch Part one of the formula for Apple Pay market adoption is to understand how many Apple Pay-capable devices will be in the hands of U.S. consumers in 2015. Only iPhone 6 devices will be able to make physical location payments. According to Comscore, 167.9 million Americans owned a smartphone in early 2014, 69.5 million of them iPhone users. Assume most iPhone 6 users are replacing older iPhones. Smartphone turnover for U.S. is running around 18-24 months, so let’s say at best, there will be just over 20 million iPhone 6 users in the U.S. at the end of 2015 (30% of all iPhone users). Piper Jaffray is forecasting Apple will sell between 5-10 million Apple Watches globally in 2015. If will assume half of those will be sold in the U.S., this means the total number of U.S. consumers with Apple Pay (physical location)-capable devices in their hands at the end of 2015 will be about 25 million. Let’s generously assume that 70% of them will be active users at the end of 2015 – 18.9 million. There are about 205 million adult Americans, so the likely number of Apple Pay users at the end of 2015 will be just over 9% of adult Americans.
  • Minimal market penetration of contactless payment terminals. Analysts estimate that only 10-20% of U.S. merchants currently have contactless terminals, which are required for Apple Pay or other contactless payments to work. Help is on the way in the form of a mandate for Visa-accepting merchants to have EMV/contactless payment terminals in place by October 2015.  However, the American Bankers Association believes only 50% of U.S. retailers will by compliant by the October 2015 deadline, and not all contactless payment-capable merchants will be an Apple Pay merchant. That requires a specific agreement directly with Apple.
  • For contactless payments, some merchants are more important. To spur market adoption, it’s not the total number of merchants who are capable that is most important. It has to be the right kind of merchant, which is one that handles a lot of everyday purchases – groceries, convenience stores, gas stations and fast food. It is also important for Apple and other mobile wallet players to court the merchants with the most retail outlets, which creates greater impact for a given amount of effort. Apple has secured agreements with three of the top 10 retailers as ranked by total number of retail outlets (Subway at #1, McDonald’s at #3 and Walgreens at #7), however, franchise-heavy retailers such as Subway and McDonald’s may not have as much say in whether the franchisee installs contactless terminals. Key players Apple should pursue to drive consumer adoption include Yum Brands (Taco Bell, KFC, Pizza Hut), Starbucks, 7-11, Burger King and Wendy’s. Mobile wallet players can drive consumer adoption by securing contactless payment commitments from the top 12 retail players (ranked by number of locations). Those 12 represent 50% of the total retail outlets of the top 100 U.S. retailers.

By mid to late 2016, Apple’s replacement cycle of iPhone 6 and forthcoming Apple Watch numbers will bring significant momentum to the marketplace in terms of consumers with Apple Pay-capable devices in hand. This should help spur merchant adoption of contactless terminals and create a symbiotic relationship for mass market adoption of Apple Pay, and perhaps Google Wallet and Softcard as well.