Andreas Park PRO
Professor of Finance at UofT
Instructor: Andreas Park
Rotman School of Management & FinHub, Rotman's Financial Innovation Lab
Date: November 24, 2021
Executive Education Module on Payments
Only one month till Christmas!!!!
A quick survey, before we even start
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Topic: Innovations in payments: Why and how?
Goal: Convey solutions and competitive developments to payments-related challenges of consumers & businesses
HOW Part 1: Innovation WITHIN the current institutional arrangements
HOW Part 2: Innovation OUTSIDE the current institutional arrangements
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: CNBC Jan 15, 2021, https://www.cnbc.com/2021/01/15/jamie-dimon-says-jpmorgan-chase-should-absolutely-be-scared-s-less-about-fintech-threat.html
https://www.brookings.edu/opinions/real-time-payments-can-help-combat-inequality/
https://www.brookings.edu/opinions/real-time-payments-can-help-combat-inequality/
Source: Schmall & Wolkowitz (2016), Center for Financial Services Innovation (2016) "Financially Underserved Market Size Study"
Pull
Push
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
From Wendy Rotenberg: 734 Million Cheques for $4 Trillion
Source: How can payments modernization benefit Canadian businesses? Evaluating the cost of payments processing; EY and Payments Canada, 2018
SME: why do they need the money?
Source: How can payments modernization benefit Canadian businesses? Evaluating the cost of payments processing; EY and Payments Canada, 2018
Can we get there with FinTech and PayTech?
gig economy instant pay
fast vendor payment and B2B & inter-company real time payments
Innovations in Non-physical Payments around the world
Cash-In
agent
Cash-Out
agent
and almost every other 905 tourist mall
The Threat of Big Tech
New frontier: revenue-based lending
14.5% interest - over what horizon?
Government Intervention
AI chatbot that chides you if you overspend and that advises you if an expense fits your budget
allows you to redesign your salary pay structure (make monthly weekly etc)
get alerts for suspicious transactions of elderly parents
Moneybox
aggregates all your banking related services
Source: Accenture Consulting Open Banking in Canada: Opportunity Knocks
End of Part 1 survey
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End of Part 1 debate
Setup: Random sorting into TWO groups
Format
Your task for the next 10 minutes
Outside Force #1: Decentralized Finance
What is a blockchain?
What is a cryptocurrency?
What is Decentralized Finance?
decentralized finance =
provision of financial services without the necessary involvement of a traditional financial intermediary at extremely low costs
in practice: new financial infrastructure that will be a common resource
payments
stocks, bonds, and options
swaps, CDS, MBS, CDOs
insurance contracts
DeFi: an emerging ecosystem
What is an NFT?
Source: Christophe Spaenjers (Hec Paris) NFTs: Modern Masterpieces—Or Money For Nothing?
Developments: NFTs bring in entirely new ideas to blockchain
Opportunity
Further reading: How NFTs Create Value
by Steve Kaczynski and Scott Duke Kominers
https://hbr.org/2021/11/how-nfts-create-value, Nov 10, 2021
cellphone data from 2018 (NewZoo), inflation from 2020 (World Population Review)
Source: Binance Research 2021
Stablecoins: Digital Representations of the USD
Outside Force #2: Diem*
*name changed on Dec 1; formerly Libra
Evolution
Fall 2021 description
previous description: "New financial infrastructure"
NB: underlying language "Move" is explicitly designed for financial contracts
Source: Croxson, Frost, Gambacorta and Valletti (2021)
The bigger picture: Facebook wants to own the "Metaverse"
= amalgamation of the digital and physical world ("phygital")
Outside Force #3:
Central Bank-Issued Digital Currencies
Evolution
CBDCs are on their way
Source: BIS Working Papers No 880 "Rise of the central bank digital currencies: drivers, approaches and technologies" by Raphael Auer, Giulio Cornelli and Jon Frost
The Bank of Canada's Contingency Plan (Feb 2020):
Consider Issuing CBDC if:
Will they?
Veneris, Park, Long, Puri (2021): BoC is in a legal position to issue a CDBC and there are several legal paths to do so
Can they?
What's Next?
CBDCs
End of Part 2 survey
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End of Part 2 debate
Setup: Random sorting into TWO groups
Format
Your task for the next 10 minutes
@financeUTM
andreas.park@rotman.utoronto.ca
slides.com/ap248
sites.google.com/site/parkandreas/
youtube.com/user/andreaspark2812/
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
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
https://www.youtube.com/embed/g1IqjY88YuM?enablejsapi=1
"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.
Why we should be skeptical of untethered AI
\(\vdots\)
Smart Contract Derivatives with Synthetix
Securities Creation: Tokensets
idea: create new mutual fund like asset
Risks and open problems
Partnerships
"new financial infrastructure"
When it goes live, it will come with extensive "layer two" functionality
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?
Source: BIS Quarterly Review, March 2020
BoC analysis (August 2020):
By Andreas Park