Snippings

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The overall 5 percent decline in payment revenues is composed of divergent regional trends: Asia–Pacific, which has consistently outpaced other regions in payments revenue growth over the past decade, registered a 6 percent pullback in 2020, while Latin America’s 8 percent decline was the steepest of all regions. Europe, Middle East, and Africa (EMEA) and North America experienced revenue declines of 3 percent and 5 percent, respectively, mostly driven by continued reduction of net interest margins (NIMs) in EMEA and contracting credit card balances in North America.

The global contribution of net interest income (NII) to payments revenue has declined steadily from 51 percent in 2010 to 46 percent in 2020. Over the past year, a 31-basis-point contraction in global interest margins (compared to a decline of 25 bps predicted last fall) reduced payments revenue by $66 billion—two-thirds the total global net decline.

Proportionally, the impact was felt even more sharply in EMEA, which traditionally relies more heavily on NII, and endured an absolute decline of $42 billion over the past decade (Exhibit 2). Some banks have begun offsetting the interest revenue loss through higher account maintenance fees, while negative interest rates on accounts have materialized in some European markets—mostly on corporate accounts but increasingly on large retail deposits as well.

From The future of payments: Transformation amid turbulent undercurrents | McKinsey:

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Twitch also built ban evasion protections into the verification tools. Users are able to tie up to five accounts to a single phone number. If one account associated with a phone number is suspended, all other accounts associated with that same number are also suspended both site and channel-wide.

From Twitch announces new safety tools in the fight against hate raids – The Verge:

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FATF Will Finally Publish Crypto Anti-Money Laundering Guidance Next Week
President Marcus Pleyer said the watchdog now expects countries to implement its “Travel Rule” guidance as soon as possible.

From FATF Will Finally Publish Crypto Anti-Money Laundering Guidance Next Week:

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But what is the “Travel Rule”?

A couple of years ago, as you may have read in the Financial Times at the time, the Financial Action Task Force (FATF) extended their recommendations to include cryptocurrency exchange and wallet providers and such like, referred to as Virtual Asset Service Providers (VASPs). This meant that all countries must supervise and monitor these, and that they should apply anti-money laundering and anti-terrorist financing controls: that is, customer due diligence (CDD), suspicious transaction reporting (STR) and the “travel rule”.

The decision to apply the same travel rule on VASPs as on traditional financial institutions was greeted with some dismay in the cryptocurrency world, because it means that the service providers must collect and exchange customer information during transactions. The technically non-binding guidance on how member jurisdictions should regulate their ‘virtual asset’ marketplace included the contentious detail that whenever a user of one exchange sends cryptocurrency worth more than 1,000 dollars or euros to a user of a different exchange, the originating exchange must send identifying information about both the sender and the intended recipient to the beneficiary exchange. The information must also be recorded and made available to “appropriate authorities on request”.

This identifying information, according to the FATF Interpretive Note to Recommendation 16, should include name and account number of the originator and benefactor, the originator’s (physical) address, national identity number (or something similar) or date and place of birth. In essence, this means that personal information will be smeared all over the interweb tubes. My good friend Simon Lelieveldt, who is very well-informed and level-headed about such things, said at the time that this is a “disproportional silly measure by regulators who don’t understand blockchain technology”, which may be a little harsh even if not too far from the truth.

Anyway, some folks from the land of crypto have put together a standard for implementing the travel rule in the hope of spurring interoperability and reducing the costs for all involved. The standard, known as IVMS101, defines a uniform model for data that must be exchanged by virtual asset service providers (VASPs) alongside cryptocurrency transactions. The standard (you can download it here) will identify the senders and receivers of crypto payments, with such information “traveling” alongside the cryptocurrency transactions but along a separate path (that is, the IVMS101 messages do not themselves need the blockchain or any other crypto infrastructure).

(If you are wondering why it’s called IVMS101, it’s because the SWIFT MT101 message is the global standard request for the electronic transfer of funds from one account to another. For those of us in the payments world, MT101 is mother’s milk: mandatory Tag 20 Sender Reference, optional Tag 21 Customer Specified Reference and so on and so on. The MT101 message is used throughout the business world to send bulk payment instructions (ie, a header and multiple payment instructions in a single message). There is also the MT103 message that instructs a single transfer but this is mainly used to move funds between banks and other financial institutions such as money transfer companies.)

IVMS101 is pretty thorough and it sets out in detail what messages should be passed from (eg) one Bitcoin exchange to another, along the lines of:

if the originator is a NaturalPerson then either (
     geographicAddress
          with an addressType value of GEOG or HOME or BIZZ 
     and/or customerNumber
     and/or nationalIdentification
     and/or dateAndPlaceOfBirth )
is required.

This sort of thing is needed because there’s no global standard digital identity that could be attached to messages so market participants have to make do with national solutions or proxies. Nevertheless, it’s a good standard (as you’d expect when you see who wrote it) but uncharitable persons might well be asking what the point of it is because law enforcement agencies can already get this information by presenting a warrant. What the travel rule does is to, essentially, automate mass surveillance without a warrant or any other oversight and force personal information on to marketplace intermediaries (where, in my opinion, it doesn’t belong – my date and place of birth is no business of either intermediary exchanges or, indeed, the destination exchange). What’s more, since the travel rule is for value transfers between exchanges, it seems rather unlikely that it will catch any criminal flows at all.

I, for example, have a Coinbase hosted Bitcoin wallet and a Bitcoin wallet on a USB stick. If I want to send money to criminals, I will transfer it from my Coinbase wallet to my USB wallet and then from my USB wallet off via mixers to the criminal’s USB wallet and the travel rule is irrelevant. The uncharitable people mentioned earlier will undoubtedly observe that since the actual travel rule doesn’t seem to have stopped money laundering which is a massive global industry, there’s no obvious reason why the virtual travel rule will stop electronic money laundering on a similar grand scale.

[bctt tweet=”The enforcement of a regulation (the travel rule) that was created over 20 years ago for a fast-evolving industry, may not be the best approach for cryptocurrency.” username=””]

Writing in this month’s Chartwell “Compass” magazine, Omar Magana hits the nail on the head with respect to the travel rule, asking if “the enforcement of a regulation that was created over 20 years ago for a fast-evolving industry, may not be the best approach”. Note that he is not arguing against regulation, he is arguing (as I do) for a form of regulation more appropriate for our age (for which I use the umbrella term “Digital Due Diligence”, or DDD) using artificial intelligence and machine learning to track, trace and connect the dots to find the bad actors.

I am genuinely curious to learn more about whether the travel rule will make the slightest difference to the money launderers, so please do let me know in the comments whether such scepticism is misguided or whether the travel rule will make the world a safer place.

 

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To gain ground on the dollar, the digital yuan would require extensive international adoption. But there are a lot of obstacles before that happens: restrictive capital controls, lukewarm foreign audiences and lack of applicability, and a crowded international playing field. In particular, Beijing’s efforts to prioritize domestic financial stability through capital controls and tight management of the yuan exchange rate coupled with growing geopolitical assertiveness have tied its hands abroad. Without loosening capital controls, it is difficult to improve the attractiveness of the yuan as a readily accessible currency.

From China’s Digital Yuan Is a Trial Project Aimed at Domestic Needs:

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This fast-paced economics involves three big changes. First, it draws on data that are not only abundant but also directly relevant to real-world problems. When policymakers are trying to understand what lockdowns do to leisure spending they look at live restaurant reservations; when they want to get a handle on supply-chain bottlenecks they look at day-by-day movements of ships. Troves of timely, granular data are to economics what the microscope was to biology, opening a new way of looking at the world.

Second, the economists using the data are keener on influencing public policy. More of them do quick-and-dirty research in response to new policies. Academics have flocked to Twitter to engage in debate.

And, third, this new type of economics involves little theory.

From Enter third-wave economics | The Economist:

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The startup is trying to build a network of users for its cryptocurrency, dubbed Worldcoin, by promising people free cryptocurrency in return for scanning their eyes with a special device aimed to verify their identity.

From Charting FTX’s Rapid Rise in Valuation; Worldcoin Is Already a Unicorn — The Information:

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Here in the UK the Treasury has been undertaking a Payments Landscape Review that sets out some high level aims for the sector. One of these is to unlock open banking-enabled payments safely and securely to to allow consumers to pay for goods and services both in store and online directly from accounts. They expect that this will provide an alternative to credit and debit cards, creating competition for the existing infrastructure and players to give consumers and businesses more choice between payment mechanisms. It will also (and personally I am more interested in this agenda) create new opportunities for fintechs to build a new generation of payment products (ie, rather than attempting to emulate 70 year-old card products that combine authentication, authorisation, credit, convenience, cash replacement and so on in a single bundle).

I’m not smart enough to know exactly what these products will be, but I can see the retailers and others are looking to develop and evolve their apps and wallet products and that account-based payments can find a home with them. Rita Liu, formerly of Alipay and now of Mode (and someone with a deep understand of payment innovation), links open banking and QR codes by saying that “QR codes can revolutionise the front end as they have in the East, while Open Banking can revolutionise the back end”. This is a characteristically accurate analysis of the opportunities for bringing added value to merchants. As she highlights, the direct flow of information between consumers and merchants creates a simplified, cost-effective value chain, and it can transform merchants’ relationships with their customers by leveraging data to offer a truly personalised experience. This is precisely what Australia’s domestic debit network Eftpos hope to achieve with their launch of the eQR service. It has signed up Commonwealth Bank, National Australia Bank, Azupay, Beem It and Merchant Warrior to support the rollout of the new platform. It also has the biggest retailers on board, Coles and Woolworths, As with other retailers, one of the attractions for such chains is that their app can combine payments, loyalty and spend tracking in one and a simple quick QR scan is all that is needed to get everything done.

The A2A back end for these new propositions is coming together. As McKinsey point out, the introduction of applications capitalizing on instant payments infrastructure in recent years (such as PhonePe and GooglePay in India, PayNow in Singapore) has driven growth and sharpened competition between national and regional solutions and the global schemes. A good illustration is the building of the European Payments Initiative (EPI) that exploit the Single Euro Payments Area (SEPA) Instant Credit Transfer (SCT Inst) scheme for point of sale as well as online usage.

The US is moving forward as well. Plaid is making a move into this space with a set of strong payment partners in North America and Europe — including Square, Dwolla and Currencycloud (recently acquired by Visa) — that will integrate Plaid into their processing systems for payments direct from bank accounts. This means we will soon see “pay from your bank account” options being presented by merchants, billers and wallets. Those organisations would present this alongside conventional payment card options, option alongside other payment methods, such as credit or debit cards. I can imagine, however, that many organisations will start tender steering toward this lower cost, more secure option: It won’t be long before merchants are offering double points or whatever to encourage consumers to send money directly from their bank account to the merchant’s bank account.

Not Good Enough

I think the emergence of direct from accounts alternatives to card is an important evolution in retail payments. Driving down the cost of payments and reducing the margins available across the value chain is a good thing. Here’s one reason why: credit cards are unfair. Joanna Stavins, a senior economist and policy adviser at the Federal Reserve Bank of Boston is the co-author of a recent paper from that looked at the cost of credit card rewards and, as she notes, central to the dynamics of their use is that consumers who use credit cards “tend to be cross-subsidized by consumers who use cash or debit cards”.

This is true in the UK as well The government banned credit and debit card surcharges back in 2018, which was great news for me because now I can use my premium cashback rewards card everywhere. Until January 2018, when I had used premium card to book a flight, I had to pay a credit card surcharge. I didn’t mind paying the surcharge because I want the protections that the use of credit cards give me as a consumer and also because I wanted the frequent flier points I get for using this card. Now I get all this stuff for free, and less well off people who can’t afford the annual fee for the premium card are subsidising my free flights to all points of the compass. Thank you, Mrs. May!

Open banking payments are about to get another boost here because of what is known as Variable Recurring Payments (VRP). VRPs allow customers to safely connect authorised third parties to their bank account so that they can make payments on the customer’s behalf (within agreed parameters). Mike Kelly, who was the product lead for VRP, says that they have “huge potential to revolutionise finance” and he is absolutely correct. Right now, if I want to allow a supermarket to push money from account to their account (via their wallet app, for example) then I have to authorise each transaction individually. Doing this through some sort of request-to-payment mechanism is a very good solution in many circumstances (eg, a monthly subscription payment to a gym that keeps trying to charge you even though you cancelled months ago) but it’s not a good solution when you are standing at the checkout in the same supermarket that you have shopped at twice a week for the last decade.

With major players such as Plaid pushing forward the ecosystem, it won’t be long before the decade-old dreams of MCX (the failed multi-retailer attempt to oust the networks a few years ago) are a a reality and your supermarket QR-driven wallet will first give you the option of paying from your bank instead of via a credit of debit and then pretty quickly moves on to put this top of the list and offer you double points for paying that way. People who say that the current payment systems work just fine are just plain wrong, but it seems to me that open banking rather than cryptocurrency will provide an opportunity to make them better.

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A retail CBDC is, in principle, an attractive proposition. But given the system currently in place and the prospects for its near-term evolution, a retail CBDC on its own is, in my opinion, not an essential initiative at this point in time. For consumers, a retail CBDC would mostly replicate what they already have available. As such, the initiative is not likely to attract business away from private-sector PSPs or serve to discipline private-sector pricing protocols and rewards programs. For a CBDC to be successful in this regard, legislation (or moral suasion) designed to alter private-sector marketing behaviour is likely required. But if such legislation were forthcoming, the rationale for a retail CBDC is even further diminished. On the other hand, a wholesale CBDC (together with legislation governing pricing protocols) seems like the most straightforward way to promote competition and fairness in the Canadian payments system. While I see no reason why a CBDC could not work in principle, I also do not see why it is essential in practice. It probably makes more sense to let the Bank of Canada focus on its core competencies — monetary policy, regulation and wholesale payments — and let a regulated private sector manage retail payments.

From Does Canada need a central bank digital currency? FON Commentaries. Vol. 2, No. 12– Finances of the Nation.

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As anyone with an interest in fintech and the future of money has been doing, I have been following the development of what was Libra and is now Diem with some interest.

I was listening to the “Pomp” podcast in which he interviewed David Marcus, who leads Facebook’s financial services drive. It was an interesting discussion but I was surprised when at one point in the interview Mr. Pompliano says that he thinks that people have underestimated the importance of the wallet. I have certainly never fallen into this category and my analysis of the launch of Facebook’s “Libra” initiative, as it was initially called, was that the play was all about the wallet: the day that it was announced I said that “identity is at the heart of the Libra proposition, if you ask me“.

 

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Mr. Marcus, 48, a longtime Silicon Valley executive in payments and digital finance, worked on many projects during his seven years at the social media company. Most recently, he spearheaded Meta’s push into a global digital currency that could be used by Facebook and WhatsApp users to transmit payments across borders. The project, initially called Libra, was later rebranded Diem after facing pushback from regulators.

From Head of Meta’s Crypto Efforts, David Marcus, Is Leaving the Company – The New York Times:

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David Marcus (the executive who drove the initiative) has now left Facebook, work continues.

 

Writing in the Harvard Business Review, Christian Catalini (the Chief Economist of the Diem Association) and Jai Massari suggest that CBDCs and private-sector stablecoins are strong complements, not substitutes. This makes a lot of sense to me. Their view that the public sector could focus on issuing digital coins while the private sector builds rails and applications is practical, and as they point out, competition with legacy networks (rather than building on top of them) would ensure a better resilience and more innovation.

 

I noticed that, for example,

 

Today Facebook’s Novi announced a ‘small’ pilot of its digital currency wallet in Guatemala and most of the United States. The initial phase will use the Paxos stablecoin rather than Diem, which Facebook founded in 2019 but has not yet received regulatory approval. Coinbase is providing custody.

 

From Facebook’s Novi wallet launches pilot with Paxos stablecoin not Diem – Ledger Insights – enterprise blockchain.

 

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Facebook has launched a long-awaited pilot of its digital currency wallet Novi in the US, but has chosen to use the Paxos Dollar stablecoin after its own cryptocurrency Diem failed to get backing from regulators.

From Facebook launches digital currency wallet Novi | Financial Times.

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Paxos has positioned itself as a more responsible currency, and received “preliminary conditional approval” for a US bank charter from the Office of the Comptroller of the Currency in April.

 

one feature being trialled only in Guatemala, is the ability to exchange the wallet amount for physical cash.

 

 

There was an immediate reaction from politicians, with Democrat 

Senate Democrats called on Facebook to end its digital wallet and cryptocurrency project in a letter to chief executive Mark Zuckerberg Tuesday, saying that the company “cannot be trusted to manage cryptocurrency.”

From Senators call on Facebook to shelve Novi cryptocurrency project – The Verge.

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SEATTLE–(BUSINESS WIRE)–Remitly Global Inc. (NASDAQ: RELY), a leading digital financial services provider for immigrants and their families, today announced a partnership with Novi, a next generation digital wallet. To support its pilot launch, Novi is leveraging Remitly’s custom-built global network to enable cash pickup in Guatemala. Remitly’s global payments network spans over 1,700 corridors, serving customers in 17 countries, sending to over 115 receive countries.

From Remitly Announces New Partnership With Novi For The Pilot Of Its Digital Wallet | Business Wire.

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If you have two-factor authentication on, you will usually get a verification code sent to your phone in order to get into your accounts. That authentication process is the reason most hackers will SIM swap, because it’s an easy way to get into people’s email and bank accounts once they have the phone number.

From The FCC wants to stop this form of identity theft | Popular Science.

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