Andreas Park PRO
Professor of Finance at UofT
Instructor: Andreas Park
Rotman School of Management & FinHub, Rotman's Financial Lab
Date: October 7, 2020
Executive Education Module on Payments
payments is a profitable line of business
payments data is very valuable
payments \(=\) clunky and full of frictions
payments is the entry level drug to all things FinTech
Giancarlo Bruno, Senior Director, Head of Financial Services Industry, World Economic Forum
payments matter a lot more to people than we might think
Source: How can payments modernization benefit Canadian businesses? Evaluating the cost of payments processing; EY and Payments Canada, 2018
From Wendy Rotenberg: 734 Million Cheques for $4 Trillion
Source: Schmall & Wolkowitz (2016), Center for Financial Services Innovation (2016) "Financially Underserved Market Size Study"
International remittances: $600B (U.S.) p.a.
all in: 10% fees
to be fair: remittances to date don't even work for internationally operating banks
Source: How can payments modernization benefit Canadian businesses? Evaluating the cost of payments processing; EY and Payments Canada, 2018
Source: How can payments modernization benefit Canadian businesses? Evaluating the cost of payments processing; EY and Payments Canada, 2018
https://www.youtube.com/embed/g1IqjY88YuM?enablejsapi=1
Cash-In
agent
Cash-Out
agent
and almost every other 905 tourist mall
"To empower residents of India with a unique identity and a digital platform to authenticate anytime, anywhere."
UPI puts multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments under one hood.
Source: Seizing The Opportunity: Building The Toronto Region Into A Global Fintech Leader; TFI/Deloitte/McMillian 2019
Source: Seizing The Opportunity: Building The Toronto Region Into A Global Fintech Leader; TFI/Deloitte/McMillian 2019
loyalty
Payment financing
mobile payment integration
mobile payments + rewards
connect advertising directly with immediate mobile purchasing option
personal payment management app
Payment financing + loyalty
Overall idea: increase visibility of payments across the supply chain and across internal business operations
property management and rent payments
B2B & inter-company real time payments
gig economy instant pay
fast vendor payment
North American merchants connect to Chinese consumers who use WeChat & Alipay
New frontier: revenue-based lending
14.5% interest - over what horizon?
Why we should be skeptical of untethered AI
Partnerships
Source: Will Libra Succeed? Results of a Global Randomized Survey Experiment; by Danielle Goldfarb and yours truly
They have ZERO interest in becoming a financial institution/bank
\(\rightarrow\) no expertise
\(\rightarrow\) competitive market
\(\rightarrow\) one of the most regulated business environments
They are trying to deal with frictions that impede their business
They aim to collect data which will vastly improve their business
banking and payments activity require a banking license
need approval of the Finance Minister and the Office of the Superintendent of Financial Institutions (OSFI)
providing any financial service
acting as a financial agent
providing investment counselling or portfolio management services
issuing payment, credit, or charge cards,
operating a payment, credit, or charge card plan in co-operation with others (including other financial institutions)
granting of bank license has extensive list of regulatory criteria (subject to political interpretation)
takes 2 to 5 years to successfully acquire a banking license in Canada
Rogers applied in 2011 and was granted a Schedule I bank license in 2013
most FinTechs and PayTechs do not have the time or money to acquire a banking license
PayTech demonstrated use and purpose of prepaid card to regulator
OSFI rep had never seen one, not had any experience in dealing with the regulatory implications of this product.
OSFI and others do not have Fintechs and PayTechs in scope (not yet threat to the safety and soundness of the financial system).
EXAMPLE #1
regulatory compliance = lawyers
lawyers = second line of defence teams at FI
\(\Rightarrow\) decision makers have very little access to clients and the frontline.
EXAMPLE #2
good at general service and infrastructure
banks have very rigid ways of engaging with their clients, “they push information, they don’t take it”
\(\Rightarrow\) poor at customization and customer service
Banks' Modus Operandi
Premise of FinTech
start with customer needs and then build platforms
How much money is coming into and out of the account each month
Spending habits: what you spend money on and where you spend it
Payment habits: Are you paying bills way ahead of deadline or tardy?
Assess how much a customer spends on products of competitor and undermine competition
Pepper consumer with ads tailored to spending habits
Play on impulses and behavioral biases
Prying on the weak (payday loans)
create a comprehensive overview of balances for customer
keep tabs on expenses and income
show how much one can spend freely until next income
reminders or automated retirement savings when income arrives
Nokia's market shares for devices:
What happened and can it happen to banks?
What did they pay for?
What do people value?
If banks move all data into "the cloud," why do we need banks?
Siloed banks
Cloud computing and cloud storage
Open banking and open data
The past (and the present?)
The present and near future
3-5 years in the future
5-10 years in the future
Platforms?
Banks?
Tech firms?
Sue's bank transfers from Sue's account to its own account
Bob's bank transfers from its account to Bob's account
Central Bank
Central bank transfers from Sue's bank's account to Bob's bank's account
Sue's bank transfers from Sue's account to its own account
Bob's bank transfers from its account to Bob's account
use the Swift network of correspondent banks
very complex
many parties
lots of frictions and points of failure
very expensive
How do we agree on updating of the data?
Idea: mechanism to randomly select a proposer and have incentive to build on the correct past
Text
Source of picture: Cai, Long, Park, & Veneris (2020) (IEEE-BRAINS), original protocol: Li, Li, Zhou, Xu, Long, and Yao (2018)
Who gets to update?
Can a higher body prevent
transactions?
Can the past be altered?
consensus
immutability
censorship resistence
from Forbes
Azure Blockchain Tokens [...] lets enterprises, or anyone really, design, issue and manage a wide range of assets,
Currently, the platform is a permissioned version of the ethereum blockchain that uses Microsoft’s Azure cloud computing.
In the future Azure Blockchain Tokens will interact with the public Ethereum blockchain or even at distributed ledgers created by some of Microsoft’s own competitors.
blockchain \(\not=\) Bitcoin and blockchain \(\not=\) cryptocurrency
cryptocurrency \(\to\) attempt to bootstrap the network
blockchain is more than money - Ethereum is guaranteed execution of code
proof-of-work is horrible, but there are many efforts to get other systems to work
issuance of tokens
escrow contracts
auctions without an auctioneer
decentralized securities exchange
is not just about the money (Libra Coin)
NB:
TPS | T per 12 hours | |
---|---|---|
Bitcoin | 7 | 302,400 |
Ethereum | 30 | 1,296,000 |
Athereum | 5000 | 216,000,000 |
Algorand | 2000 | 86,400,000 |
Payments Canada retail | 648 | 28,000,000 |
US retail | 7639 | 330,000,000 |
Canada number of equity trades | 46 | 2,000,000 |
Orders on Canadian equity markets | 3588 | 155,000,000 |
Conflux Network (Ethereum-like) | 3600 | 155,000,000 |
Sue wants to sell ABX
Bob wants to buy ABX
sell order
buy order
Clearing House
Stock Exchange
Broker
Broker
3rd party tech
custodian
custodian
record beneficial ownership
central bank for payment
BUT: more than money, also code execution and added functionality
each Libra coin will be backed by a basket of SIX fiat currencies
idea is conceptually similar to IMF Special Drawing Rights (pegged to USD, EUR, YEN, GBP, YUAN)
developed by a consortium of firms (e.g., Facebook, Uber) and not for profits (Creative Destruction Lab)
Source: Consumer Digital Identity Leveraging Blockchain, report to DIACC by Securekey
Source: BIS Quarterly Review, March 2020
BoC analysis (August 2020):
*Bank of International Settlement: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States
Source: How can payments modernization benefit Canadian businesses? Evaluating the cost of payments processing; EY and Payments Canada, 2018
Source: How can payments modernization benefit Canadian businesses? Evaluating the cost of payments processing; EY and Payments Canada, 2018
gig economy instant pay
fast vendor payment and B2B & inter-company real time payments
Koho Financial just taught us the risk for owners...
Source: How can payments modernization benefit Canadian businesses? Evaluating the cost of payments processing; EY and Payments Canada, 2018
Source: Accenture Consulting Open Banking in Canada: Opportunity Knocks
@financeUTM
andreas.park@rotman.utoronto.ca
slides.com/ap248
sites.google.com/site/parkandreas/
youtube.com/user/andreaspark2812/
By Andreas Park