David GW Birch is Director of Consult Hyperion, the secure electronic transactions consultancy. He is an internationally-recognised thought leader in digital identity and digital money and was named by Wired magazine as one of their global top 15 favourite sources of business information.
From the perspective of the payments world, I think 2016 will see the trajectory of the blockchain shift and diverge.
To see why, let's divide the payments roadmap into four areas and look at each of them individually to see how they interact with blockchain technology. These key areas are the technical, business, social and regulatory regions of the roadmap.
There is no need to spend much time on the technology part of the road map because we can already see the important paths opening up: mobile everything, APIs for financial services and the blockchain will all develop throughout the year (irrespective of the specific evolution of bitcoin).
I don't think I'm sticking my neck out to say that, along with Big Data and cybersecurity, they will all attract more investment from the mainstream financial institutions (and yes, blockchain will be attracting more investment from such institutions).
In our transaction-oriented corner of the world, we are rather into the ECB strong consumer authentication (SCA) drive and obviously that's started to verge into biometrics.
Apple made the breakthrough of reframing biometrics in the mass market as a convenience technology rather than security technology. That's been tremendously successful and it's going to continue, so I expect we will see a jump in the use mass market consumer biometrics in the payments world.
When it comes to the business area, I think we can see the outlines of some of the key trends.
If you look at the breakdown of European bank income, you see pressure in all parts of the business. As a result, there is a premium on coming up with some new business models and sources of income, which is where blockchain is more likely to come into play.
I have a theory as to which one part of this might be, but let's come back to that later.
Payments is not all about banks. I think it's interesting to look at the non-banks and near-banks as well - especially the near-banks.
Then you have the non-banks such as Facebook, Google, Amazon and so on.
I think one underexamined group out there is retailers. Retailers haven't really moved in that space yet (apart from the obvious example of Starbucks), and because retailers dominate the contacts with the customer, which ones choose to do in that space might turn out to be more significant.
The continuing shift toward in-app retailer solution adumbrates fundamental change in my opinion. I have said before that if blockchain will cause revolutionary change, it will be by managing dishwasher warranties rather than by overthrowing the Federal Reserve, and I stick by that opinion!
In the social area we have, broadly speaking, three groups to look at and respond to with new kinds of payment systems.
First, we have an aging population. I recently looked at a project that involved a facial recognition system. You run the bank app on your phone, and then to log in you look at the phone and it logs you in, which proved to be rather popular, not with toy obsessed millennials (they were quite happy use their fingerprints), but older people who can never remember passwords or PINs (eg: me). The new technology isn't only for kids!
Then you've got the squeezed middle. These are people like me who have to catch the 7:52 from Woking in the morning and barely make it alive into Waterloo, scrabbling to keep up with things and very time poor. We need services that are delivered on the spot and within the correct context, and you will see that word "context" appearing quite a lot in the offerings that are coming out next year.
Lastly, you have the mobile-centric millennials. For them, we have to drive payments into the channels that they use and make them vanish. In a Venmo world, a Facebook Messenger payments play is just as important as ChasePay or Walmart Pay or Samsung Pay or anything else.
Finally, there are the regulatory trends.
In the payments world, these are by far the most important trends. It doesn't matter if people come up with a super duper clever blockchain. It doesn't matter if they come up with a niche way to sell it to millennials. It doesn't matter if they come up with a terrific near-bank structure to make it all work, because actually, this is a regulated world, and regulatory trends set the envelope that they can work within.
Here I will just point out two key regulatory trends that I think the blockchain world might want to pay close attention to.
The first is what people have started to call 'instant payments'. In the UK, the faster payment service (FPS) is well established, has been fantastically successful and is enabling things on top of it already like Pingit and Paym and so on. And there's more to come in that space.
That is also happening in other countries have started to take that route. The one great exception was always the US because the Federal Reserve has no regulatory mandate to make the banks there implement an instant payment system, and so we all thought it would be some time before instant payments appeared in the US.
Actually, however, in the last couple of months, there has been raft of announcements coming out of the US: The Clearing House (TCH) is working with VocaLink, Dwolla are experimenting with APIs, NACHA is moving to same day, and so on.
Even in the US, instant payments will feature heavily across the next year. Once you can send money instantly from one person to another in this way, bitcoin will have to work hard to find a payments niche for the typical customer.
The second is the 2nd European Payment Services Directive, PSD2. This mandates that (amongst other things) banks have to provide open APIs to third parties by 2018. The EBA has set out three categories of those APIs:
- The mandatory payment APIs which all banks will have to implement so that regulated third parties can have direct access for account information and for transaction initiation
- The non-mandatory payment APIs which banks will be allowed to offer so that they can provide some unique special services, trade finance or FX
- The non-mandatory, non-payment APIs.
I would say that if a European blockchain entrepreneur wants to look for an opportunity to make something really interesting, really different, and really special in this space, you should be looking at, not payment services, but the services that go around them - the valued-added propositions alongside payments.
Hence my advice to our clients to look at the non-mandatory, non-payment APIs. Blockchain plays can use these APIs to create new services with, for (or in spite of!) banks to embrace and extend services. To my mind, the most important of these will be around identity management and authentication services, and I predict that a lot of our work next year will be in this area.
Hence my 2016 bumper sticker for the readers: "Blockchain is #regtech not #fintech".
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