Snippings

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NEW YORK, NY–(Marketwired – May 03, 2016) – SmartMetric, Inc. (OTCQB: SMME) — According to a research report conducted by the research organization The Nilson Report, for 2015 through 2020, card fraud worldwide is expected to total $183.29 billion. In 2020, global card fraud is projected to exceed $35.54 billion. Fraud, grew by 19%, and outpaced volume, which grew by 15%. Fraud losses by banks and merchants on all cards issued worldwide reached $16.31 billion in 2014 when global card volume for the same period totaled $28.844 trillion.

From Annual Global Card Fraud to More Than Double Reaching Over $35 Billion in Four Years

My general sense of the industry, without giving away anyone’s figures, is that not only is fraud growing faster than volume, but that merchants are annoyed because declines are growing faster than fraud. We need a sea change in tackling fraud and I think there are two parts to this: changing the security vs. convenience model at the front end and changing the transaction validations model at the back end.

As the former governor of the Bank of England, Meryvn King, has eloquently pointed out, banks are institutions that pre-date modern capitalism and “owe much to the technologies of an earlier age” (The End of Alchemy, 2016). There is no reason to expect them to continue in this form under the technological, regulatory, social and business pressures for change that are about to overwhelm them. If that sounds like waffle futurism that does not need to be taken seriously, you could not be more wrong. In the UK, those changes are going to begin in January when the world of “open banking” is created by the implementation of the Competition and Markets Authority (CMA) “remedies”. That is, the nine largest banks are compelled to provide Application Programming Interfaces (APIs) for third-party applications to access bank accounts, a milestone in a long journey to bring a revolutionary degree of competition to the sector.

This all rooted in the frustration of the regulators to see more competition. They tried forcing the banks to spend a billion or so quid on an account switching services and that didn’t work, so they decided that they had to look to more radical solutions.

The CMA reports a study by one of the very few new entrants, Tesco Bank, which found that a clear majority of account holders agreed with the statement “I cannot be bothered to switch accounts as I do not believe I would get better service/value for money elsewhere”.

[From John Kay – Competition in banking does not necessarily benefit consumers]

In the UK, the regulators’ determination to change this situations means that we are about to see major disruption in the space. I called this before a “crossing of the streams” (in an hommage to Ghostbusters!) because there are three different initiatives coming together.

The first stream is the PSD2 provisions for access to payment accounts. As you may recall, these include a set of proposals that are due to come into force in 2018. A group of those proposals are what we in the business call “XS2A”, the proposals which force banks to open up to permit the initiation of credit transfer (“push payments”) and account information queries. Even at a pure compliance level these PSD2 regulations pose significant questions for the structure of the existing payments industry. While PSD2 does not mandate APIs (I think – it’s all gotten a bit complicated but as far as I know the screen-scrapers have fought d a decent rearguard action) an open banking API is the obvious way to implement the PSD2 provisions.

The second stream is Her Majesty’s Treasury’s push for more competition in retail banking. This led to the creation of the Open Banking Working Group (OBWG), which published its report in 2016.  It set out was a four part framework, comprising:

• A data model (so that everyone knows what “account”, “amount”, “account holder” etc means);
• An API standard.
• A security standard.
• A governance model. 

The third stream is the CMA report that triggered the remedies mentioned above. This envisages APIs to improve competition in retail banking by focusing on the use of APIs to obtain access to personal data that can be shared with third-parties to obtain better, more cost-effective services.  These streams are coming together to create an environment of what is now called Open Banking. And it’s a big deal.

Open Banking makes it possible to pay with lightning speed directly from a bank account – in effect, creating an Amazon “One Click” for the entire internet.

From To change how you use money, Open Banking must break banks | WIRED UK

I think the use of Amazon in this example is far more disruptive than the author may have intended. Amazon Payments is, in my opinion, precisely the kind of business that will benefit from open banking. It won’t be fintech startups who eviscerate the existing payments industry, it will be the heavy hitters who are able to gain access to the bank account and merge that ability with their colossal resources and gigantic data reservoirs to create a new customer experience. Indeed, in that Wired article, Rowland Manthorpe says plainly that open banking is a new way of dealing with the twenty-first century’s most sought-after resource, personal data. This point was recently echoed by the Dave McKey, the CEO of RBC, who said “data is the battleground for banks that will determine the future success of financial institutions”.

All of which reinforces my opinion that banks need get into the business of identity, reputation and trust pretty quickly.

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The Riksbank governor, Stefan Ingves, called for new legislation to secure public control over the payments system, arguing that being able to make and receive payments is a “collective good” like defence, the courts, or public statistics.

From “Being cash-free puts us at risk of attack”: Swedes turn against cashlessness | World news | The Guardian.

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“Cash only,” said Abraham Lebron, the store manager standing guard at Supermax, a supermarket in San Juan’s Plaza de las Armas. He was in a well-policed area, but admitted feeling like a sitting duck with so many bills on hand. “The system is down, so we can’t process the cards. It’s tough, but one finds a way to make it work.”

From In a Cashless World, You’d Better Pray the Power Never Goes Out – Slashdot

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If I was the manager of Waitrose after the Woking earthquake, then I would simply accept payment by writing down card numbers, or photocopying driving licences, or taking pictures of customers, or whatever. The core of the issue is identification and trust, not the payment instrument. As many media commentators noted, society in Japan did not collapse. My conclusion: natural disasters are not a convincing argument for cash.

From The disaster in Japan has lessons for payments | Consult Hyperion

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Shares of jewelers climbed in India after the government withdrew an order that brought the industry under anti money-laundering legislation, a move that comes just as gold buying improves before the Hindu festival of Diwali, the peak season for demand.

Jewelers were included in the Prevention of Money-Laundering Act in August, increasing compliance requirements. Buyers have been shying away from making purchases as they had to provide their income tax identity for transactions above 50,000 rupees ($766), hindering high-value deals.

From Jewelers Rally After India Anti-Money-Laundering Rule Reversal – Bloomberg

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Mass cash stashing might signal a widespread fear of a looming apocalypse – or, more prosaically, it could signal rampant illegality.

From In the contactless payment era, why is cash making a comeback? | Business | The Guardian

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I’m not sure if you’re supposed to have a favourite supply chain fraud or not but I do, and it is the famous case of the vegetable oil that almost bankrupted American Express (and went some way toward making Warren Buffet a multi-billionaire). The essence of the story is that a conman, Anthony “Tino” De Angelis, discovered that people would lend him money on the basis of commodities in the supply chain. His chosen commodity was vegetable oil (see How The Salad Oil Swindle Of 1963 Nearly Crippled The NYSE). Amex had a division that made loans to businesses using inventories as collateral. They gave De Angelis financing for vegetable oil and he took the Amex receipts to a broker who discounted them for cash. So he had tanks of vegetable oil and Amex had loaned him money against the value of the oil in those tanks, the idea being that they would get the money back with a bit extra when the oil was sold on. Now as it happened, the tanks didn’t much contain oil at all. They were mostly water with a layer of oil on top so that when the inspectors opened the tanks and looked inside they saw oil and signed off whatever documentation was required. Eventually the whole scam blew up and nearly took Amex down, enabling the sage of Omaha to buy up their stock and make a fortune.

Fortunately for us and unfortunately for conmen like Tino, the supply chain is one of the many industries that the blockchain is going to disrupt. As my good friend Michael Casey and his co-author Pindar Wong explain in their recent Harvard Business Review piece on the topic (Global Supply Chains are about to get Better, Thanks to Blockchain in HBR, 13th March 2017), blockchain technology allows computers from different organisations to collaborate and validate entries in a blockchain. This removes the need for error prone reconciliation between the different organisation’s internal records and therefore allows stakeholders better and timelier visibility of overall activity. The idea discussed in this HBR piece (and elsewhere) is that some combination of “smart contracts” and tagging and tracing will mean that supply chains become somehow more efficient and more cost-effective.

An aside. I put “smart contracts” in quotes because, of course, they are not actually contracts. Or smart. Bill Maurer and DuPont nailed this in their superb King’s Review article on Ledgers and Law in the Blockchain (22nd June 2015), where they note that smart contracts are not contracts at all but computer programs and so strictly speaking just an “automaticity” on the ledger. (Indeed, they go on to quote Ethereum architect Vitalik Buterin saying that “I now regret calling the objects in Ethereum ‘contracts’ as you’re meant to think of them as arbitrary programs and not smart contracts specifically”.)

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‘found worrying or nasty in some way’

From Making Britain the safest place in the world to be online – GOV.UK

Yes, well I find things like this every single day on the internet. For example, I am very worried about 

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While the implausible nature of the $9 billion price tag may have been a red flag to human traders, Apple did briefly see its stock rise to $158 before settling back down to around $156, raising the possibility that some algos were fooled.

From Fake news: Dow Jones blames technical error for headlines claiming…

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Perhaps the universe was telling me something, because it seems to me beyond coincidence that I don’t remember hearing the word “homophily” before and yet I’ve just come across it twice in the same day: once when listening to historian Niall Ferguson on the BBC’s Today programme while in the shower and then again a couple of hours later while reading Geoff Mulgan’s new book “Big Mind” on the couch. Homophily means the tendency of people (e.g., me) to tend to congregate online with people who think the same as they do (e.g., the Chancellor of the Exchequer is very probably insane) but worse still in the new online world, also view only “news” (fake or real) that reinforces their position.

We will come back to homophily in a moment.

Geoff’s thesis is that the “collective intelligence” formed from groups of people connected together online functions according to new dynamics. Now, while he notes early on that a more networked world does not automatically means a higher IQ world (in fact, as far as I can see, the general level of idiocy has increased substantially since the early days of the the telegraph and the bulletin board), and that “shared thought is not only knowledge but delusions, illusions and fantasies”, I’m not sure that Snapchat boosts either individual or collective IQs.

Hence I began with caution, and about two thirds of the way through the book I was caught in a terrible English dilemma. I’ve known the author for a long time and admired his work with Demos and NESTA. But I wasn’t enjoying the book and didn’t feel I was getting anything from it. So how could I say that politely?

Luckily I carried on reading and I realised that the first two-thirds of the book is not for people like me who spend their entire lives on LinkedIn and Twitter but for politicians and policymakers who have only the vaguest idea of what these new technologies are and just how different these new dynamics of the collective that they have created is from the collection of individuals that they are used to dealing with.

It’s the last third of the book where Geoff gets into the tough questions. I’d not heard of the “folk theory of democracy” (i.e., that the people are wise and come to the right answer) before but I can say with certainty that it is doomed with the masses so easily subverted through Facebook adverts and clickbait headlines. While it is appealing to hope that new technology is the answer, a means to rejuvenate democracy, I’m not sure. As the author notes, crowds are good at ideas, not judgements.

Do we then give decision making to an elite? Maybe, but the experts aren’t always right even when they are more connected than ever before. I strongly agree with the author’s view that “expertise can entrap”, or to put it another way, foxes make better predictions than hedgehogs, but we don’t seem to be rummaging through the dustbins of knowledge to pick out the good stuff at all. The example the author uses illustrates this rather well: we have more data about health and diet and nutrition than ever before, yet we have an epidemic of obesity. More data does not mean wisdom.

Which leads me to my suspicion is that it isn’t networking people together that is going to help, but networking people with artificial intelligences. As Geoff himself points out, technologies can effectively perform many of the elements of collective intelligence. He references a a Hong Kong investment firm has already invited an AI to join its board and given it the same vote as human board member.

A cabinet of ZX Spectrums could hardly do worse than the flesh and blood version. I laughed out loud when I saw “government is collective intelligence” since there’s precious little evidence of such (“government is muddling through” is more the British way). Geoff has had access to government decision-making process that I have not, so how accurate his characterisation is I can’t say. He certainly right when he says that companies pretend to operate with collective intelligence but actually go by gut feeling rules of thumb (as memorably described in one of my favourite books from last year “Chaos Monkeys”).

Geoff puts forward an interesting thesis but doesn’t completely convince with it. At the end of the book, I was left unsure whether he thinks that the online collective multi-intelligence of the connected crowd is something to be harnessed, managed or avoided at all costs.

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“Zero-knowledge proofs are one of the biggest inventions in the last two decades in cryptography,” said Emin Gun Sirer, an associate professor of computer science at Cornell University. It “will allow a slew of applications we can’t even imagine right now.”

From ‘Mind-Boggling’ Math Could Make Blockchain Work for Wall Street – Bloomberg

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