The real “challenger” banking business model is data, not money

I was quoted in The Economist (“Plug and pay”, 21st November 2019) talking about the impending reshaping of the retail financial services sector. Although the quote isn’t quite accurate — I was responding to the statement that a a bank is a balance-sheet, a factory that turns capital into financial products (such as loans and mortgages) and a sales force, I didn’t make the statement — the paraphrase is correct. Those first two activities are heavily regulated, as they should be, which is why Big Tech is uninterested are in them. They are more than happy to have banks, for example, do this boring, expensive and risky work with all of the compliance headaches that come with it. As noted in article, the Apple credit card is actually issued by Goldman Sachs (although it was Apple that caught the flack in the row about gender discrimination around credit limits) and the Amazon cards are issued by Chase, Synchrony and American Express. Similarly, the Google “checking” account (this is the American word for a current account, because they still use cheques, which must be something to do with the Continental Congress or something) is actually provided by Citi.

Open Banking Basic Options Updated Colour Picture

What big tech wants is the distribution side of the business, as shown in this old diagram of mine. They have no legacy infrastructure (eg, branches) so their costs are lower, but to my mind more importantly the provision of financial services will keep customers within their ecosystems. If you use the Google checking account and Google pay then Google will have a very accurate picture of your finances. As the article says “Amazon wants payments in-house so users never leave its app”. Indeed.

The business model here is very clear. What Big Tech wants isn’t your money (the margins on payments are going down) but your data. That’s why when people talk about “challengers” they should really be talking about Microsoft and not Monzo.

This is where there are some pretty serious implications. If Big Tech takes over consumer relationships, banks will end up having to give away margin but, far more seriously, data. Andrei Brasoveanu of Accel, a venture-capital firm, is quoted as saying that they could turn into “utilities, providing low-margin financial plumbing”. Well, that’s the lucky ones. The unlucky ones will be wiped out in a wave of consolidation and closures.

This isn’t a technology prediction, by the way. In Europe at least it is a regulatory prediction. Back in 2016, I wrote about regulators demanding that banks open up their APIs that “if this argument applies to banks, that they are required to open up their APIs because they have a special responsibility to society, then why shouldn’t this principle also apply to Facebook?”. My point was, I thought, rather obvious. If  regulators think that banks hoarding of customers’ data gives them an unfair advantage in the marketplace and undermines competition then why isn’t it true for other organisations in general and the “internet giants” in particular? This same point was just made by Ana Botin, Chairperson of Santander. My good friend Chris Skinner notes her comments to Bloomberg: “I need to know you and that’s based on data. Why should data be regulated in a different way if you’re called a bank and if you’re called something else”.

There are big changes coming, and banks and payment companies in particular are going to need effective strategies to survive. It’s not only a problem for those legacy incumbent dinosaurs that the happening new digital kids like to poke fun at. The fintech “challengers” also have a problem. Just as Big Tech has made ecosystems impervious to competition, so it could cross-subsidise (with data as well as with money) its financial services products to raise such a barrier to competition that no newcomer will be able to spend enough to gain traction.

There are some really big changes coming in retail financial services. And that’s not a prediction, that’s a fact.

Where’s “Sign in with Barclays”?

In my keynote speech at KnowID 2019 in Las Vegas, I said that we needed think about the big picture around digital identity. I said that digital identity should be seen as a fundamental defence in the cyberwar that we are already in and that has no imaginable end. It’s possible that some of the people in the audience felt that I was being hyperbolic and that this piece of conference rhetoric was for entertainment purposes only. In which case I must refer them to the recent comments of General Sir Nick Carter, Britain’s Chief of the Defence Staff, who said that our nation is “at war every day” due to constant cyberattacks. Even more interestingly, he then went on to say in the modern world there is no longer a distinction between war and peace (my emphasis).

This is precisely as the great media theorist Marshall McLuhan predicted. Indeed, I quoted him in my speech. In Culture is our Business, written nearly 50 years ago, he said that “World War III is a guerrilla information war with no division between military and civilian participation”. This is why we need to take digital identity seriously, as strategic infrastructure and as matter of national urgency. It’s not about making it easier for people to log in to The Daily Telegraph or Woking Council, although that should surely be a by-product of a well-designed system, it’s about keeping our people, our institutions and our democracy safe.

(I saw Paul Chichester, the Director of Operations at the UK National Cyber Security Centre, speaking about this at the P20 conference in London. In addition to telling the delegates that “cybercrime paid for that North Korean submarine launch”, he observed that it is the centenary of the Government Communications Headquarters (GCHQ) and that they have special exhibition about this over at the Science Museum. Since I spent formative time in my career working on secure networks for GCHQ, I’m really looking forward taking at look at this when I’m in London next!)

So what should we do?

I don’t think the answer for us it to build a centralised identity service (such as Aadhar in India) or a centralised reputation management system (such as China’s social credit score). I think we need to think about more sophisticated and more flexible federated options. I think we should start building an identity infrastructure for the modern world and that we should probably start with the banks. Citi put out a paper about this last month: it’s called “The Age of Consent” and it discusses the idea of a federated financial sector solution, something along the line of the Scandinavian bank ID services. (I contributed to the paper.)

You can see the author, Tony McLaughlin of Citi, talking about it here on Finextra TV saying that “if we fix digital identity, we fix payments”, and he’s got a point. Banks have an obvious and significant interest in creating the new infrastructure because it’s good for banks. But it’s also good for everyone else, so it’s not only a way for banks to save money, it’s also a way for banks to create new products and services that mean new revenue streams. In fact, it could be that digital identity is not simply an additional revenue stream in the future but that identity is bigger than payments to banks. You can watch Alessandro Baroni, CMO of equensWorldline, saying just this today on another Finextra TV interview.

In the UK, it is time for the regulators to demand action from the banks. When I was last asked to log in to a web site to buy something (last weekend) I was presented with the option to “Log in with Amazon” and “Log in with Facebook” but no option to “Log in with your safe and trusted bank digital identity that is part of a regulatory framework designed to protect you and your personal information and comes with expectations of redress, ombudsman, accountability and, ultimately, a physical presence to resolve issues”. Why not?

SIBOS, Star Trek and the end of Bretton Woods

Here’s a story I came across that I found so interesting that I discussed it in my book about the history and future of money, “Before Babylon, Beyond Bitcoin”. It is a utopian future fiction that happens to have something to interesting to say about money, which is why it caught my eye. This is somewhat unusual for a utopian vision since, as Nigel Dodd observed in his 2014 book “The Social Life of Money“, utopias from Plato’s Republic to Star Trek don’t seem to include money at all, never mind M-PESA or Bitcoin.

Anyhow, the story that interested me has a ‘guy falls asleep under hypnosis and awakes a century later to find a model society, then finds it’s all a dream’ narrative arc that is hard to read with modern eyes, because the perfect society that the author imagines is a communist superstate that looks like Disneyland but run by Stalin. Everyone works for the government, and since government planners can optimize production, the ‘inefficiency’ of the free market is gone.

During his adventures in this new world the narrator, the time travelling protagonist, is told by his host in the modern era (the good Doctor Edward Leete), that cash no longer exists. Instead, the Doctor informs him, the populace use ‘credit cards’ for retail transactions. (He then, as it happens, goes on to describe what are in fact offline pre-authorized debit cards imagined in the technology of the day, but that is by-the-by.)

While the author does not talk about the telephone, laser beams or the knowledge economy, he does make a some insightful predictions about the evolution of money. When talking about an American going to visit Berlin, the good Doctor notes how convenient it is for international travellers to use these ‘credit cards’ instead of foreign currency: ‘An American credit card,’ replied Dr Leete, ‘is just as good as American gold used to be’.

This is an excellent description of our world after the end of the gold standard and the rise of a dominant reserve currency, what economists call the  “Bretton Woods II” era of monetary history. A clever prediction indeed. However, I think that the most fascinating insight into the future of money comes later in the book, when the time traveller asks his twenty-first-century host ‘Are credit cards issued to the women just as to the men?’ and the answer comes back ‘certainly’.

That answer might alert you to the age of the text, which in fact contains the earliest mention of a credit card that I have found anywhere as part of a fictional narrative. The book is by the American author Edward Bellamy and is called “Looking Backward, 2000–1887“. It was written in 1886, a century before the credit card became the iconic representation modern money, and it was one of the best-selling books of its day. I had a 1940s edition in front of me as I wrote my book, so it was still being reprinted sixty years later!

I cannot help but reflect that the discourse on money in that book is a wonderful example of how science fiction is not really about the future at all but about the present: the retort ‘certainly’ is clearly intended to surprise the Victorian reader as much, if not more, than the his prediction of glass tunnels that surround pavements when it rains.  It took a writer, not an economist or a technologist, to ask a simple question about money and get a surprising answer. Hold that thought.

Predictions are hard, especially about the future of money

Now let us have a go at predicting the financial system half a century onwards. Where do we start? Well, a good rule of thumb for futurologists is that if you want to look 50 years forward, you need to look at hundred years back because of the increasing pace of change. A hundred years back we had the telephone and global markets connected by instant, global communications. We had the Bank of England and the Federal Reserve. We had wire transfers. We had the world’s first commercial aviation service, created as it happened to accelerate the clearing of cheques between Chicago and New York.

A century ago we were also coming to the end of the era of the classical gold standard. The demise of that global financial system was brought about by the pressures of global conflict and depression that ultimately led Britain to abandon it permanently in 1931 after a temporary suspension that began in the middle of First World War and lasted until 1925. Some people think we are now coming to the end of the Bretton Woods II era and, as The Economist observed recently (“Into the woods”, 17th August), saying that international trade is complicated because “most countries have their own currencies, which move in idiosyncratic ways and can be held down to boost competitiveness”, it is not at all clear what is coming next!

If this is correct, and it seems likely that it is, then then what will replace the IMF, central banks and commercial banks offering credit when it comes to creating money, facilitating payments and prosperity? The reaction of regulators around the world to one alternative, Facebook’s proposed “Libra” digital currency, seems to indicate that the incumbents are not going to give up with out a fight. Yet given the history of financial markets and institutions, and given that we know that change is inevitable as the structures reshape under social, regulatory and technological pressures, it is not good enough to simply say that the incumbents are wrong. We (ie, the financial industry) must help to create a vision of future banking that helps us all – and I include the regulators in this – to shape strategies that lead to a financial sector that serves society better.

But what vision?

If we set aside both the misplaced view that the status quo will prevail and the Bitcoin maximalists fantasies of a completely decentralised society, where do we look to find believable alternatives? We all hear the speeches of the regulators, read the annual reports from the bankers, see the demos of the technologists and the slide decks of entrepreneurs. But have any of these created a vision in your mind? Perhaps it’s time to return to my opening observations to develop a narrative just as surprising to contemporary audiences Bellamy’s was to a Victorian one.

So. What do we now see a couple of generations from now. The world of Star Wars with a “galactic credit” that is universally accepted. That doesn’t seem right to me. A single currency doesn’t really work between Germany and Greece, so how it would work between Earth and LV-426? Would the use of a Synthetic Hegemonic Currency (SHC), to use Mark Carney’s words in the Financial Times (“Mark Carney calls for global monetary system to replace dollar”, 23rd August 2019), function in these circumstances as a trade currency for the universe?


What about the world of Star Trek with no money at all, save the gold pressed latinum of the Ferengi (shown above), valuable because it’s the only substance that the replicators can’t produce? How about the world of Charles Stross’ “Neptune’s Brood” where there is fast money and slow money that relies on cryptography so it only travels at one-third the speed of light?

How will people transact? Will it be the world in Robert Heinlein’s “Beyond the Horizon” where the government has an “integrated accumulator” (what we would now call a blockchain) to record all transactions and the finance minister has dashboard to see just how the economy is doing? The integrated accumulator sounds very much like the “compubank” in Margaret Attwood’s “The Handmaid’s Tale” which tells what happens if this machinery falls under the influence of fanatics, in that case as theocratic US administration that bans and blocks women’s payment cards? Will cash, indeed, be banned or will it simple be cash as in William Gibson’s “Count Zero” where the protagonist finds himself in a near future where he  “had his cash money, but you couldn’t pay for food with that. It wasn’t actually illegal to have the stuff, it was just that no- body ever did anything legitimate with it”. (Which, frankly, sounds like Sweden rather than some future dystopia.)

What if money as we know it vanishes as a transactional medium of exchange? Will it be the world of Bruce Sterling’s “Distraction” in which distributed servers manage reputation as a currency, a theme also present in Cory Doctorow’s “Down and Out in the Magic Kingdom”. I am naturally attracted to these images of a future in which identity, trust and reputation reconnect us with our neolithic heritage (indeed, a few years ago I wrote a book called “Identity is the New Money”) and dispense with many kinds of intermediaries! Will this free us or will it fulfil the prophecy of the Book Of Revelation 13:16-17 that “no man might buy of sell save that he has the mark, or the name of the beast, or the number of his name” enslave us? Should we begin our scenario planning for these transactional environments now (hint: yes) or should we leave the technologists to choose a future for us?

Next week, for the Innotribe closing keynote of most important global banking conference of the year SIBOS, my good friend Brett King and I will be looking how writers have thought about the future of payments, banking and money to see if their narratives can help us to formulate strategies in this space and to see if we can find the hard question and surprising answer for the world of 50 years from now. I have an idea of what it might be, but let’s see how Brett, me and the Innotrible audience develop our thinking on the day. See you there.

Libra and Calibra… Tired: KYC. Wired: KYZ.

As Ed Conway noted in The Times recently, Mark Zuckerberg once observed that “in a lot of ways, Facebook is more like a government than a traditional company”. Indeed it is. And in fact it just got a lot more like a government. Companies have loyalty points, but governments have currencies, which are like loyalty points but with standing armies. You can hardly have failed to notice that Mr. Zuckerberg’s highly successful advertising company Facebook is now planning to have a currency of its own. 

The currency is called Libra and the media has been full of commentary about it the new blockchain that will support it (created by the Libra Network) and the new wallets that it will be stored in (created by Calibra, a Facebook subsidiary). Whatever you think about Facebook, or social media in general, or Bitcoin and its ilk, there’s no getting around that this is a big deal and it was unsurprising that it attracted such wide media coverage.

Now, putting to one side whether it is a currency or not or a blockchain or not (Central Banking magazine said that it’s “neither a true currency nor bearing all the hallmarks of a typical crypto asset, Libra will run on a system similar to a blockchain”) and actually I kind of agree with the economist Taylor Nelms that “the crypto angle does seem like a sideshow”,  the fact that it exists is nonetheless rather interesting, although not necessarily for reasons that are anything to do with money although it is a payment system of a potentially large scale, as I will explain later.

What is the purpose of this new payment system though? Libra says that hope to offer services such as “paying bills with the push of a button, buying a cup of coffee with the scan of a code or riding your local public transit without needing to carry cash or a metro pass”. But as numerous internet commentators have pointed out, if you live in London or Nairobi or Beijing or Sydney you can already do all of these things. It’s only in San Francisco where such things appear to be special effects from Bladerunner, an incredible vision of a future where people don’t write cheques to pay their rent and can ride the bus without a pocket full of quarters.

Nevertheless, I’ve written before that a Facebook payment system would be beneficial and I stand by that. The ability to send money around on the internet is clearly useful and there are all sorts of new products and services that it might support. A currency, however, has more far reaching implications. As the brilliant J.P. Koenig points out, Libra is more than a means of exchange. The Libra “will be similar to other unit of account baskets like the IMF’s special drawing right (SDR), the Asian Monetary Unit (AMU), or the European Currency Unit (ECU), the predecessor to the euro” in that it is a kind of currency board where each of  units is a “cocktail” of other currency units. This should, unlike Bitcoin, provide a reasonably stable currency for international trade.

This has significant implications. What if, for example, the inhabitants of some countries abandon their failing inflationary fiat currency and begin to use Libra instead? The ability of central banks to manage the economy would then surely be subverted and this must have political implication. This has not gone unnoticed by the people who understand such things, an example being Mark Carney, quoted in the Financial Times saying that if Libra does become successful then “it would instantly become systemic and will have to be subject to the highest standards of regulation”. Unsurprisingly,  both the international Financial Stability Board and the UK’s Financial Conduct Authority have said they will not allow the world’s largest social network to launch its planned digital currency without “close scrutiny“.

Yes, But…

So there are all kinds of reasons to be sceptical about whether Libra will ever launch and whether it will reach any of the goals set out by its founders. And yet…

There’s something interesting in Libra. I’ve long written about the inevitability of new technology being used for new payments systems that will in turn be used to create new forms of money. More than two decades ago I wrote about the advent of private currencies and I covered the nature of corporate currencies more recently (and in some detail) in my book “Before Babylon, Beyond Bitcoin”.

(Although I have to note than in my “5Cs” taxonomy of the future of money, I would classify Libra as a community currency rather than a corporate currency, but that’s not the point of this discussion.)

Now, using the model that I set out in the book to help general business readers understand what the likely trajectory of digital assets will be, I look at the two institutional bindings needed to turn the cryptographic level o. These are the binding of values on the ledger to real-world assets and the binding of the wallets to real-word entities.

Digital and Crypto Layers Revised Colour Pic


The binding of a wallet address to an actual person is difficult and costly. Here’s what Calibra say about it: “Calibra will ensure compliance with AML/CFT requirements and best practices when it comes to
identifying Calibra customers (know your customer [KYC] requirements) by taking the following steps

  • Require ID verification (documentary and non-documentary).

  • Conduct due diligence on customers commensurate with their risk profile.

  • Apply the latest technologies and techniques, such as machine learning, to enhance our KYC and
    AML/CFT program.

  • Report suspicious activity to designated jurisdictional authorities.”

I thought it was worth reproducing this in full.  So if  we put together what the Libra white paper says with what Calibra say about their wallet, you get this specific version of the model from my book. I think it describes the overall proposition quite well.

Digital and Crypto Layers in Colour with Libra pic

All well and good. Now, while I was reading through the Libra description, I didn’t find anything remarkable. Until the last part. On page nine of the Libra white paper, just at the very end, I notice that “an additional goal of the association is to develop and promote an open identity standard. We believe that a decentralized and portable digital identity is a prerequisite to financial inclusion and competition”.

Well, well. An “open identity standard”.

Identity is at the heart of the proposition, if you ask me. One one first questions that Congress had for the Libra hearing with David Marcus was “how parties will ensure that the user or beneficial owner of a currency or wallet is accurately identified”. Now, you can’t know who the beneficial owner of the currency is any more than you can know who the beneficial owner of a $100 bill is, but you can know who the owner of a wallet is. This question has already been answered, by the way. Kevin Weil, Facebook’s VP of product for Calibra was clear that users will  have to “submit government-issued ID to buy Libra” as you would expect. People without IDs will still be able to buy Libra through third-party vendors, of course, but that’s a different point.

Put a pin in “government-issued ID” as we’ll come back to it later.

Its clear that the wallet addresses in a transaction (as shown in my diagram above), a timestamp and the transaction amount will be public because they are on a shared ledger, but as Facebook have made clear, any KYC/AML (ie, the binding shown in my diagram above) will be stored by the wallet providers, including Calibra. Since, as David Marcus has repeatedly pointed out, Libra is open and anyone will be able to connect to the network and create a wallet, there could be many, many wallets. But you’d have to suspect that Facebook’s own Calibra will be in pole position in the race for population scale. Hence Calibra’s approach to identity is really, really, important.

Now, if Calibra provides a standard way to convert a variety of government-issued IDs into a standard, interoperable ID then that will be of great value. Lots of other people (eg, banks) may well want to use the same standard. In the UK, for example, this would be a way to deliver the new Digital Identity Unit (DIU) goal set out by the Minister for Implementation, Oliver Dowden, of one login for your bank and your pension. But it isn’t only the ID that needs interoperability, it’s the credentials that go with it. This is how your build a reputation economy. Your Calibra wallet can store your IS_OVER_18 credential, your Uber rating and your airline loyalty card in such a way as to make them useful. Now, if you want to register for a dating side, you can log in using Calibra and it will automatically either present the relevant credential or tell you how to get it from a Libra partner (eg, MasterCard).

It seems to me that this may, in time, turn out to be the most important aspect of the “Facebucks” (as I cannot resist calling it) initiative. What if a Calibra wallet turns out to be a crucial asset for many of the world’s population not because it contains money but because it contains identity?

Government Issue

Now back to that idea of a government-issued ID. One of the other things that governments do is issue a passports as a form of formal identity. If I obtain a Calibra wallet by presenting my passport, that’s fine. But suppose I live in a developing country and I have no passport or formal ID of any kind?

Well I think Facebook can make a good argument that your Facebook profile is a more than adequate substitute, especially for the purposes of law enforcement. After all, Facebook knows who I message, my WhatsApp address book, who I hang out with, where I go… Facebook can tell real profiles from fake and they kill off fake “identities” all the time. My guess is that if you have had a Facebook profile for (let’s say) a year, then that identity is more than good enough to be able to open an account to hold Libra up to $10,000 or so and, frankly, it’s beneficial for society as a whole to get those transactions on to an immutable shared ledger.

Frankly, in large part of the world Know-Your-Customer (KYC) could be replaced by Known-bY-Zuck (KYZ) to the great benefit of society as a whole.

Follow the e-money

A couple of years ago I remember going to see ComplyAdvantage to make a podcast with them. I thought the new category of regtech was interesting and that the potential for new technologies in that space (eg, machine learning) was significant, so I went of off to learn some more about and talk to a few organisations to test some hypotheses. I remember thinking at the time that they were good guys and on a good trajectory and it looks as if my opinion was well-founded (they are doubling in size this year).

Anyway, I was thinking about them because they recently sent me a new white paper “A New Dawn for Compliance” (which notes that an estimated $2 trillion is laundered globally every year and only 1-3% of these funds are identified and possibly stopped) and it nicely encapsulated something that has been touched on in a fair few conversations recently: there’s no way to hire ourselves out of the compliance mess we’re in. Even if financial services and other businesses had infinite compliance budgets, which they most certainly do not, it’s simply not feasible to hire enough people to keep up. Even if there were infinite people with expertise in the space, which there most certainly is not, bringing them on board is too time-consuming, too expensive and too inflexible to create a compliance infrastructure that can respond the new environment.

Technology is the only way out of this.

Using technology to automate the current procedures is, as always, only a small part of the solution. The UK Financial Intelligence Unit (UKFIU) receives more than 460,000 suspicious activity reports (SARs) every year (according to the National Crime Agency), yet fraud continues to rise.

Moreover as Rob Wainwright (head of Europol) pointed out last year, European banks are spending some €20 billion per annum on CDD with very limited results. In fact, he said  specifically that  “professional money launderers — and we have identified 400 at the top, top level in Europe — are running billions of illegal drug and other criminal profits through the banking system with a 99 percent success rate”. This is not even a Red Queen’s Race, it’s a Formula 1 of crime where the bad guys are ahead and we can’t overtake them.

The Fifth Anti-Money  Laundering Directive (AMLDV) which comes into force in 2020 will, I predict, do nothing to change this criminal calculus. AMLDV will cost organisations substantially more than its predecessors and these costs are out of control. According to a 2017 whitepaper written by my colleagues at Consult Hyperion, KYC processes currently cost the average bank $60m (€52.9m) annually, with some larger institutions spending up to $500m (€440.7m) every year on KYC and associated customer due diligence (CDD) compliance. In the AMLDV era we will look back with nostalgia to the time when the cost of compliance were so limited.

It’s time for a rethink.

We need to re-engineer regulators and compliance to stop implementing know-your-customer, anti-money laundering, counter-terrorist financing and the tracking of politcally-exposed persons (let’s lump these all together for the sake off convenience as Customer Due Diligence, or CDD) by building electronic analogues of passport and suspicious transaction reports and so on. In a world of machine learning and artificial intelligence, we need to invert the paradigm: instead of using CDD to keep the bad guys out of the system, we should bring the bad guys into the system and then use artificial intelligence and pattern recognition and analytics to find out what the bad guys are doing and then catch them!

Surely, from a law enforcement point of view, it’s better to know what the bad guys are up to? Following their money should mean that it is easier to detect and infiltrate criminal networks and generate information that the law enforcement community can use to actually do something about the flow of criminal funds. In any other financial services business, a success rate of 1% would call into the question the strategy and the management of the business

Stablecoins and stable coins

I notice that in the considerable press comment concerning the possible introduction of a Facebook payment system and perhaps even a Facebook currency of some kind, commentators continually refer to a Facebook “stablecoin”. I am certain that they are wrong to use this term, because it does not mean what they think it means. I may well be facing a losing battle about this, but I am stickler for correct currency terminology.

So. Stablecoin. What?

In the Bank of England’s excellent “Bank Underground” blog, there was a post on this topic that said “The chances of a stablecoin keeping a stable price depends on its design. There are generally two designs of stablecoin: those backed by assets, and those that are unbacked or ‘algorithmic’”. They are right, of course, but I would like to present slightly more granular classification of stablecoin currencies. I think there are three kinds:

  1. Algorithmic Currencies, in which algorithms manage supply and demand to obtain stability of the digital currency. This is what a stable cryptocurrency is: since a cryptocurrency is backed by nothing other than mathematics, it is mathematics that manages the money supply to hold the value of the steady against some external benchmark. This is what is meant by stablecoin in the original crypto use of the term.

  2. Assetbacked Currencies, in which an asset or basket of assets are used to back the digital currency. I don’t know why people refer to these a stablecoins, since they are stable only against the specific assets that back them. An asset that is backed by, say, crude oil is stable against crude oil but nothing else.

  3. Fiat-backed (aka Currency Boards), which are similar to a asset-backed currencies but where the assets backing the digital currency are fiat currencies only. There are mundane versions of these already: in Bulgaria, for example, where the local currency (the Lev) is backed by a 100% reserve of Euros

As for that last category, it is effectively what is currently defined as electronic money under the existing EU directives, and therefore already regulated. Those coins backed by fiat currency, such as JPM Coin, simply provide a convenient way to transfer value around the internet without going through banking networks. Now, this may well be an advantage in cost and convenience for some uses cases but it is a long way from an algorithmic currency. If this is indeed what Facebucks turn out to be (ie, actual bucks that you can send around on Facebook, something along the lines of Apple Cash), then I have written before why I think they will be successful.

So will any or all of these catch on?

Predictions are of course difficult, but my general feeling is that it is the asset-backed currencies that are most interesting and most likely to succeed in causing an actual revolution in finance and banking. Algorithmic stablecoins and fiat “stablecoins” exist to serve a demand for value transfer, but this is increasingly served well by conventional means. I notice this week, for example, that Transferwise can now send money from the UK to Hong Kong in 11 seconds, a feat made possible by their direct connection to the payments networks of both countries. Why would I use a fiat token when I can send fiat money faster and cheaper?

Of course, you might argue that a digital currency board might allow people who are excluded from the global financial system to hold and transfer value but I am unconvinced. There plenty of ways to hold and transfer electronic value (eg, M-PESA) without using bank accounts. Generally speaking, people around the world are excluded because of regulation (eg, KYC) and if we want to do something about inclusion we should probably start here. If you are going to require KYC for the electronic wallet needed to hold your digital currency they customers may as well open a bank account, right?

(I’ve written before about how the need for an account hampered Mondex. When it was first launched, I went to a bank branch with £50 expecting to walk out with a Mondex card with £50 on it. What I actually walked out with was a multi-page form to open a bank account so that I could get a Mondex card which arrived some time later. And since I had to put my debit card into the ATM in order to load the Mondex card, I did what most other people did and drew out cash instead.)

I suppose there are some people who think that the anonymity and pseduonymity of cryptocurrencies might make them an attractive alternative to certain sectors, but this is probably a window. If cryptocurrencies were used for crime on a large scale then efforts would be made to police them. Bitcoin, in particular, is not a good choice for criminals since it leaves a public and immutable record of their actions but you can imagine a future in which the mere possession of an anonymous cryptocurrency becomes a prima facie cash of money laundering.

Looking at the “stable” stable, then, I’ll put my money on the middle way. I’ve said it before and I’ll say it again, there is a real marketplace logic to the trading of asset-backed currencies in the form of tokens and I expect to see an explosion of different kinds.

Programming bank accounts

I’ve been reading an interesting paper from Northumbria University called “Recipes from Programmable Money“. The paper looks at what customers of the UK challenger bank Monzo have done with its integration with IFTTT (the “if this, then that” automation software) to draw some early lessons that may have wide applicability to post-PSD2 financial services infrastructure. This is fascinating to me (even though I think the title is wrong, because it’s not the money that is being programmed but the bank accounts) because it is natural to wonder what, once third-parties are free to build on banks’ interfaces because of PSD2, customers will want from the new product and service providers.

The paper goes about examining how real users (albeit savvy early adopters in the UK) used the ability to automate a selection of Monzo account actions. Since these automations are a small window into what users might want from from more general third-party API-based interactions, I think the researchers have uncovered useful insights about just how important XS2A will be. After all the speculation about what API access to accounts might mean for Europe’s banks, there’s no substitute for looking at what consumers actually do with the new technology.

It seems to me that the key finding of the paper is that “some of the most intriguing recipes in our corpus were those that integrated Monzo with applications that ordinarily have little to do with banking”. (“Recipes” are the IFTTT automation scripts.) That is, in general, consumers use banking services as integral to other services, which is what you might expect on reflection because users don’t want to do banking, which is boring, they want to do other more interesting things that happen to be facilitated by banking.

The authors also observe that “this proliferation of financial data across different platforms, and channels, highlights the way in which programmable money may cut across services” and that “we are seeing how money and transactions are potentially just another form of data, to be pushed and pulled around integrated services”. I am sure they are correct about this, which is why it will be so hard for banks to find effective strategies to compete with other providers of those integrated services. It may well be that only the lower margin “‘pipe” services are available to them, in which case they need to focus on operational efficiency to compete.

All very interesting, and wholly congruent with earlier analyses from informed industry observers (eg, me). But it’s another point made in the “programmable money” paper that caught my eye. It’s impossible to disagree with it when it concludes that technologies such as machine learning, AI and smart contracts “foreground the delegation of significant financial power to automated systems and agents”. As I wrote last year, in the context of competition in retail banking, the future choice of banking services provider (the AS-PSP, in the euro-jargon) will be made not by customers, but by bots. It seems to me that the early indications from the real world are that this is correct, and that it has many ramifications.

I’ll give you an example. If you live in the UK and are over the age of around 30, you may have seen an advertisement with a man in a spacesuit in it.

To the Mooooooooon!

No, not that one. I mean an advert on TV, the sort of thing that no-one under 30 ever sees any more. It’s an advert for a bank. It doesn’t matter which one. The point is that it’s about brand and image. But what will be the point of it a world where an AI-powered child-of-IFTTT is doing the heavy lifting? Consumers may neither know nor care who their bank is. This will pose a challenge to those with a career in marketing, but it may have some positives too. For example, I can assure Barclaycard that my bot will pay no attention whatsoever to their advertisement with Simon Cowell in it, whereas like most normal people I would cancel my card because of it.

My bot will chose your bank on the basis of interest rates, response times, jurisdiction, functionality, service uptimes and other such measurable parameters. Your logo? Your sponsorships? Your history? Whatever.

US cashless backlash: why punish retailers?

The US is behind some other parts of the world, perhaps, but it is trending in the same direction. According to recent research, almost a third of American adults use no cash at all for their weekly purchases (it was a quarter back in 2015). Conversely, a fifth of Americans says that make nearly all of their purchases in cash. Against this backdrop, it is no surprise that some retailers, in some locations, are starting to go cash free. Now, as far as I am concerned, that’s up to them. Writing in the CATO Journal last year — “Special Interest Politics Could Save Cash or Kill It” CATO Journal 38(2): 489-502 (Spring 2018) — Norbert Michel said “it seems risky, at best, to give the government so much control over the form of payment citizens choose, but that is exactly what many policymakers are hoping to do”. He was talking about laws to ban cash, but the argument applies both ways. Should regulators care whether you pay in cash or not and, if they do care, what should they do about it?


Here’s a specific example. In March, Atlanta’s Mercedes-Benz stadium, home of the Atlanta Falcons, stopped accepting cash for sporting events. Now, I imagine the people who run the Mercedes-Benz to be business persons who operate according to the principles of profit and loss. They’re not making this decision because of some idealogical position about notes and coins. They wouldn’t be doing it unless they thought they would be better off without the costs of cash.

So: should they be allowed to do this, just as Tottenham Hotspur have done with their new stadium at White Hart Lane?

There is no US law on the subject. I see in Payment Law Advisor that the US Treasury Department has guidance on the issue, but it states that refusing cash may be allowable “on a reasonable basis, such as when doing so increases efficiency, prevents incompatibility problems with the equipment employed to accept or count the money, or improves security”. Security and efficiency are precisely the factors causing retailers to shift to cashless operators as far as I can see, so the Treasury guidelines seem to be working.

That does not, however, seem to matter to the State and City legislators who rising to the challenge of dragging America back into the 1950s, when the payment card was a notion restricted to future fiction and the concept of a mobile phone so alien as to be unimaginable. At that level there is a patchwork of regulation. Massachusetts apparently has a little-known 1978 law requiring retail stores to accept both cash and credit although it does not seem to be enforced and the legislature has yet to say whether it applies to restaurants. Food and drink are in the vanguard elsewhere, such as in Pennsylvania, where the head of the Pennsylvania Restaurant and Lodging Association says that there are lots of restaurants (as well as other businesses) that want to go cashless because “places that handle cash are less safe than those that don’t have cash on hand” and that in a cash business “taxes aren’t always paid”.

Yet US legislators seem to be in favour of maintaining this costly and inefficient state of affairs. The New York Times reports that the New Jersey Legislature and the Philadelphia City Council have already passed measures this year that would ban cashless stores and New York City, Washington, San Francisco and Chicago are consider doing something similar. Their objection is that cashlessness marginalises low-income communities. If this is true, and I have no reason to doubt the sincerity of these lawmakers, then it is a problem with the financial system not retailing. Penalising retailers by forcing them to accept cash because the financial system does not make a reliable, secure electronic alternative available to low-income (or, indeed, any other) communities is peverse.

I don’t want to discuss the causes here – that’s for another time – but the specifically US problem around financial inclusion is the root cause of the problem and that’s what should be tackled. If low-income people in Somalia can buy produce in the local market using their mobile phones, you can’t help but wonder why low-income people in Philadelphia can’t do the same, much to the benefit of society as a whole.

FaceCoin or FacePESA, Zuckbucks are a winner

Around a decade ago my son was, as is rather the fashion with teenagers, in a band. With some friends of his, he arranged a “gig” (as I believe they are called) at a local venue. There were five bands involved and the paying public arrived in droves, ensuring a good time was had by all. All of this was arranged through Facebook. All of the organisation and all of the coordination was efficient and effective so that the youngsters were able to self-organise in an impressive way. Everything worked perfectly. Except the payments.


When it came to reckoning up the gig wonga (as my old friend Paul Pike of Intelligent Venues would call it), we we had a couple of weeks worth of “can you send PayPal to Simon’s dad” and “he gave me a cheque what I do with it?” and “Andy paid me in cash but I need to send it to Steve“ and so on. Some of them had bank accounts, some of them didn’t. Some of them had bank accounts that you could use online and others didn’t. Some of them had mobile payments of one form or another and others didn’t. I can remember that at one point my son turned to me and asked “why can’t just send them the money on Facebook?”.

As I wrote at the time, I didn’t have a good answer to this because I thought that sending the money through Facebook would be an extremely good idea and I can remember discussing with some clients at the time what sort of services they might be able to offer to Facebook or other social networks that were empowered through an Electronic Money Issuing (ELMI) license and Payments Institution (PI) licence. The rudimentary business modelling was quite positive, and so I naturally assumed that there would be some sort of Facebook money fairly soon, especially because I am something of a proponent of community monies of one form or another.

I also wrote at the time that Facebook money, or Zuckbucks ($ZUC), could easily become the biggest virtual currency in the world given that there are so many people with Facebook accounts and the ability to send value instantly from one account to another via Facebook would be so attractive. You’ll remember that Facebook launched “Facebook Credits” so time ago but they weren’t really a currency, just a way of prepaying for virtual goods with the service. A virtual currency is something more, it’s true electronic money that you can send from one person to another. Well, it looks as if this is coming, as I read in the crypto press that Facebook “is talking to exchanges about potentially listing a cryptocurrency” [CoinDesk]. It looks as $ZUC might be just around the corner, and people are getting excited.

As I understand things, Mr. Zuckerberg has already decided integrate the social network’s three different messaging services — WhatsApp, Instagram and Facebook Messenger — on a single unified messaging platform and, according to the New York Times, have that platform implement end-to-end encryption. This would naturally be an ideal platform for a universal currency so it’s no surprise to hear that the company is now looking at just such an enterprise. Even if Facebook couldn’t read the details of a transaction, it would know that I just paid a car insurance company and might find some use for the data in the future.

My suspicions that a Facebook money might me rather successful were further strengthened while listening to one of my favourite podcasts, Pivot with Kara Swisher and Scott Galloway, on a plane last week. Scott said that his biggest friction in the physical world is charging (I couldn’t agree more – battery life is the bane of my road warrior existence) and that his biggest friction in the virtual world is payment. He cited the example of trying to buy wifi on a flight and having to mess around typing in card numbers like it was 1995 and pointed out just how much Facebook could gain by adding payments to their platform. Scott is surely right, and since the people at Facebook are smart, they must be looking at the potential to develop a new revenue stream that is separate from advertising with some enthusiasm.

Barclays equity research note on the subject (Ross Sandler and Ramsey El-Assal, 11th March 2019) reckon that a successful micro-payment service could add some $19 billion to Facebook’s revenues, so clearly I’m not the only one who is a little surprised that they haven’t already leveraged the technologies of strong authentication to get something off the ground already. It also notes that one of the problems with the original Facebook Credits business was the cost of interchange, a problem that has a very different shape now with interchange caps in place in various parts of the world and open banking giving the potential for direct access to consumer bank accounts (so that exchanges between fiat bank accounts and $ZUC would be free).

Facebook Marketplace has just added card payments [91Mobiles], as shown in the screenshot below, so that marketplace users can pay for goods directly without having to come out of Facebook. I think this is, frankly, a window into a one possible future for financial services!

These are boring old Visa and Mastercard payments, but presumably $ZUC can’t be far behind. Unfortunately, since there are no details that I can find on what exactly “Facebook Coin” is going to be, I can’t really offer any informed comment on the chosen implementation. If, however, it is something along the lines of JPM Coin then it will be a form of electronic money and governed by the appropriate rules and regulations (which is good, and since they have very smart people at Facebook I’m sure they’ve already spotted the advantages of providing a trusted, regulated global payment service). You can kind of see the idea: your Facebook account sprouts an automatic, opt-out, wallet. You can buy coins for this wallet using a debit card and then send them to anyone else with a wallet (why this needs the blockchain is not entirely clear, by the way, but that’s another discussion).

Wallets that have been KYC’d (put to one side what exactly this might entail) could store up to say $ZUC 10,000, wallets without KYC would be limited to say $ZUC 150. I think this might be a great opportunity for banks to use their federated and standardised digital identity infrastructure* to provide an attractive service to Facebook that might relieve them of onerous regulatory burdens. All Facebook has to do is get me log in to my bank and have them return some cryptographic token (with no personal information in it) to Facebook to indicate that the bank has done KYC and knows who I am. A bit of a win win.

This, at a stroke, would provide teenagers with a means to settle gig wonga, provide online retailers with instant payment across borders and provide brands a mean to reward consumer behaviour. If Facebook make it free to buy ZUC$ and guarantee to redeem at par for consumers, they could be on to a real winner. In Europe, if the Facebook wallet is combined with PSD2 to deliver instant load and instant payout, it delivers a serious play that will give people are reason to use the Facebook platform to organise their gigs, lay out their online wares and promote their brands instead of messing around with Snapchat or Youtube or email or blogs or whatever else they are using now.

* Note: does not exist. Images not from actual gameplay. 

Davo Polo

I set off for Hangzhou  and Money2020 China as a modern-day Marco Polo, intent on coming back home to regale the subjects of Her Majesty with fanciful tales of a far-away place where people use their mobile phones to pay for things and nobody uses paper money any more, much as Marco Polo himself would have regaled the inhabitants of Venice with his tales of (as it happens, the same) far-away place where people used paper money to pay for things and nobody used copper bars, cowrie shells or coins any more.

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Hanging with Tracey Davies, the President of Money2020.

My travels were a lot easier than Marco’s because for one thing I was able to fly directly to Shanghai whereas it took him years to get there and for another thing because everyone (and I mean everyone) has a smartphone, and their smartphones all have translation applications that convert spoken English to written Chinese and spoken Chinese to written English. My first experience of this was at Shanghai airport when the driver meeting me spoke into his phone and then presented me with a screen saying “do you know this person?” and holding up a sign with “Chris Skinner” on it. Naturally, I took the phone and said into the microphone “no, I’ve never heard of him and I’ve never read any of his books either” but it was too late as the driver had just seen him in arrivals.

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Flying the flag for Brexit Britain

My first step on the road to amazing my peers back home was to get a working AliPay or WeChat account. I’d forgotten my AliPay password so I decided to sign up for a new account. Unfortunately you can’t get an AliPay account with a UK phone number. An American phone number, yes. An Australian phone number, no problem. A Burkina Faso phone number, Bob’s your uncle.

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Alipay options

As it seemed like a UK phone number was beyond the pale, I decided to get WeChat instead. I activated my WeChat money function by linking my account to a couple of my credit cards.

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Activiating WeChat Money

None of my cards worked in this context, but it didn’t matter because once the money function is activated you can just give people cash and ask them to send the same amount via WeChat, thus topping up via a system of human Qiwi terminals. One of the women that kindly agreed to do this for me, on being handed a couple of RMB 100 notes, told me that it was the first time she’d touched paper money for at least a year.

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Woot! You can pay me using WeChat right now if you want to.

(China was the first in to printed means of exchange and they are close to being first out, close to being the first nation-state where notes and coins are economically irrelevant and post-functional cash will be the only kind most people ever possess. It looks as if China’s 800 year experiment with paper money will soon be over.)

Actually, it turns out that my stories of mobile phone payments are almost completely uninteresting – I wish you’d told me before, frankly – because everyone has now heard about WeChat and AliPay, everyone understands the transformational nature of their payments platforms and everyone has seen the ubiquity of QR  codes. The one time we tried to use NFC, ApplePay and that totem of Western Civilisation, the iPhone (which is, of course, made in China) to pay for something, it didn’t work. App and pay, frankly, is beating tap and pay.

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A payment expert witnesses the failure of tap-and-pay

(China was early into NFC, with China Mobile doing plenty of experiments in the field. Further back, Hong Kong was the birthplace of the contactless mass transit card, the Octopus scheme. I note that the Hong Kong MTA has just awarded a contract for QR code ticketing. It looks as if China’s 25 year experiment with contactless will soon be over.)

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Ron Kalifa talking about value-added merchant services

As for the conference itself, I particularly enjoyed Worldpay vice-chairman Ron Kalifa’s fireside chat. He said that in general people were underestimating the impact of open banking and I am certain that he is right. He also presented Worldpay’s annual report on payment trends worldwide, which was very interesting as you might expect.

One of the factors central to the evolution of payments is security and so I always enjoy presentations around fraud. In China, these have scary large numbers attached to them, but you have to take into account the size of the Chinese economy. According to the back of my envelope, Chinese cybercrime losses are lower than in many other countries.

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Real, and scary, fraud numbers

Given the widespread use of scores of one form or another to determine trustworthiness it is no coincidence that China sees a rise in frauds relating to the manipulation of these scores. Without commenting on the benefits or otherwise of such models (most Brits, myself included, can only think of Black Mirror when social scores are discussed) it is worth making the point that preventing “gaming” of these scores while preserving individual privacy means dealing with paradoxes that might well be resolved through the use of cryptographic techniques that have no conventional analogues and are therefore difficult for policymakers to bear in mind.

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Reputation fraud in action

Most of what I found thought-provoking, both in the presentations and the water cooler discussions, was to do with business models rather than new technologies. The new technology that fascinated me most was the toilet in my hotel room. The lid opens automatically when you walk into the smallest room and once you have settled onto the warmed and padded seat you are faced with a control panel (shown below) that gives access to a variety of functions, all of them wonderful. Next time someone tells you that a cashless economy is as likely as a paperless bathroom, tell them that I’ve experienced both, and they are both awesome.

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Toilet 2.0

The new business models emerging in a regulated, platform-centric, dynamic market are what we should be studying. We might choose to implement some of these models in a slightly different way taking into account the varying cultural norms around security and privacy, but the idea of separating payments from banking and then turning payments into platforms, and then using these platforms to acquire customers at scale for other businesses is certainly very interesting.

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This is what a smartphone-centric platform looks like

These new models, of course, centre on data and value-adding using that data. When people pay for everything with their mobile phone, they lay down a seam of data that is waiting to be mined. Despite this, the convenience of the mobile-centre platforms is so great that people are clearly willing to put privacy concerns to one side. I chaired a great session on privacy with CashShield, Symphony and eCreditPal with, I think, gave out a very comforting message: if you build services with privacy in the first place, then actually complying with GDPR and other global regulations is actually not that much of a problem.

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One more thing that struck me about the context for these developments that it seems to me that China is making its e-money regulation more like the EU’s. With an EU electronic money licence, the organisations holding the funds must keep them in Tier 1 capital and are not allowed to gamble the customer’s money, whereas in China there was no such restriction. Now the People’s Bank has said that from January 2019 the Chinese operators will have to hold a 100% reserve in non-interest bearing deposits at a commercial banks, a decision that will likely cost the main players (Tencent and Alipay) a billion dollars or so in revenue.

Anyway, a big thank you to the Money2020 for giving me the opportunity to take part in this event! It was lovely to meet so many new people and see so many new perspectives, even if I did have to spend some of the time in a jazz bar.

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All in all, I wouldn’t change my job for all the tea in China, much of which you can see in this picture of the plantations outside Hangzhou.

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Looking forward to next year already.