JPMorgan’s pay-by-bank vs card schemes; Fears that Credit Suisse could collapse are giving investors 2008 flashbacks; AI in Banking;
In this edition:
1️⃣ One Bitcoin Equals One Bitcoin (1 BTC = 1 BTC)
2️⃣ Square Launches Tap to Pay on iPhone for US Sellers
3️⃣ Different industries show varying levels of maturity in embedded finance
4️⃣ Full decentralization: How to decentralize DeFi and other simple applications
5️⃣ Traditional vs. Neobank Product Sets in North America
6️⃣ AI in Banking: Deploy AI everywhere
7️⃣ How has crypto banking’s competitive landscape changed this year?
8️⃣ JPMorgan’s pay-by-bank vs card schemes
9️⃣ Open source could transform the financial industry in four critical ways
🔟 Fears that Credit Suisse could collapse are giving investors 2008 flashbacks
One Bitcoin Equals One Bitcoin (1 BTC = 1 BTC)
A Bitcoin is a Bitcoin. That’s the expression that’s making its rounds on Twitter in recent days, where users, amid a deep decline in prices, have been posting that 1 BTC = 1 BTC. The idea is that it doesn’t really matter what the coin’s price is. Its supply is fixed and that should, theoretically, act as a buoy for prices in the long run.
“1 BTC = 1 BTC is something Bitcoin maximalists say tongue-in-cheek when looking at the USD price of BTC becomes too painful,” said Joshua Lim, former head of derivatives at Genesis Trading. “The implication is that BTC will eventually become a unit of account so just focus on the absolute number of BTC you own today.”
Anyone paying attention to the crypto market has become familiar with the many cloaks Bitcoin has donned over the years. Fans had, before 2022, utilized a number of narratives for the coin, including that it could at some point replace gold, or that it’s a great inflation hedge. Most of those narratives have fallen by the wayside this year as prices plunged amid monetary policy tightening. Bitcoin has lost roughly 60% this year and has been trading below $19,000 in recent days, down from a near-$69,000 high at the end of 2021.
When the pandemic first broke out, crypto investors ran with the idea that Bitcoin, thanks to that limited supply, could act as a hedge against rising prices. But consumer price pressures have remained sticky this year all the while prices for most cryptocurrencies plunged. Many market-watchers say that investors are now searching for a new narrative for the digital-assets market. Twitter has been flooded with posts proclaiming that all that matters is that 1 BTC equals 1 BTC.
Still, that’s not to say that diehard crypto investors have been deterred. The percentage of Bitcoin that has not been moved for over a year has held steady — at 68%, the metric is currently at its highest level since 2014, according to data compiled by FRNT Financial.
“Narrative tend to follow markets, more often than the other way around,” he said. “When things are correlated, one way of looking at it is that it’s the same kind of traders of strategies that are involved. Ultimately, there is a growing and significant percentage of BTC holders who will never sell their BTC and those that use it for commercial purposes. At a certain point, BTC will start behaving differently than risk assets, but clearly it’s not there yet.”
Source Bloomberg News
Square Launches Tap to Pay on iPhone for US Sellers
Square today launched Tap to Pay on iPhone to its millions of sellers across the U.S. Available within the Square Point of Sale iOS app, Tap to Pay on iPhone lets sellers of all sizes accept contactless payments directly from their iPhone, with no additional hardware required and at no additional cost to the seller.
Through Tap to Pay on iPhone, Square is providing a solution that makes it easier for both new sellers and established businesses to conduct in-person commerce. Any Square merchant with a compatible iPhone can accept contactless payments by simply opening the Square POS app, ringing up the sale, and presenting their iPhone to the buyer. The buyer completes the payment by tapping a contactless payment method such as Apple Pay, another digital wallet, or a contactless credit or debit card. Tap to Pay on iPhone uses the built-in features of iPhone to keep the business’ and customers’ data private and secure. When a payment is processed, Apple doesn’t store card numbers on the device or on Apple servers.
Today’s public launch follows Square’s Early Access Program for Tap to Pay on iPhone, which began in June. Over the course of the program, a wide range of sellers found new value in the ability to seamlessly and securely conduct business with no additional hardware:
- Mobile professionals like contractors and caterers gained the ability to securely take contactless payments onsite at their project location.
- Retailers found new efficiency through line busting and the convenience of helping shoppers complete their purchase wherever they are in store.
- Hairstylists and beauty professionals benefited from the speed and ease of enabling customers to pay for their services right from their chair.
Tap to Pay on iPhone is the latest addition to Square’s growing slate of software-powered commerce tools and provides new merchants with an easy entry point into the company’s broader ecosystem of innovative business offerings. With just the Square POS app and a compatible iPhone, sellers can gain access to a fully integrated technology stack that helps them start, run, grow, or adapt their businesses.
Square sellers and new merchants can begin using Tap to Pay on iPhone today by downloading the Square POS app on compatible devices.
Different industries show varying levels of maturity in embedded finance
As embedded services evolve, the total addressable market stands to grow. Enablers will move beyond payments and debt into new value-added services, including insurance, tax, and payroll. Regulation technology and compliance functionality could also become embedded in the short to medium term.
Looking at industries, retail and e-commerce platforms form the lead use cases. They’re highly digitized, with universally accepted checkout and payment options. Two-sided marketplaces across meal and grocery delivery, ridesharing, and mobility are prevalent consumers of embedded finance, facilitating payment in and out for restaurants and gig-economy workers, and often generating revenue from debit card transactions.
Conversely, many other industries have been slower to advance digitally, because of a lack of disintermediation, regulatory influences, or customer preferences, and are therefore harder for embedded finance to penetrate. Real estate, for instance, lags partly due to payment type (reliance on checks and ACH) and partly because the transaction value is so significant it would likely be subjected to platform caps and regulatory and legal requirements.
Source Bain & Company
Full decentralization: How to decentralize DeFi and other simple applications
Full decentralization is currently the most common model of decentralization within the DeFi sector.
- deploying an open-source smart contract protocol to a decentralized and programmable blockchain network to form the core infrastructure layer of the web3 system — the smart contract protocol provides an execution layer for all of the components of the backend that can be deployed on-chain;
- operating a “client” layer in a decentralized manner — the client represents all of the system’s software that operates off-chain, and acts as a gateway to the smart contract protocol (clients can range from being simple frontend websites to complex applications);
- adding digital assets distributions — this could be an airdrop to contributors and consumers; issuances to insiders (employees, advisors, and stockholders of the developer company); the allocation of digital assets to an explicit incentivization scheme (such as liquidity mining in DeFi); and the formation of a treasury controlled by the DAO, to be used in connection with any future incentivization;
- launching DAO governance of the smart contract protocol and DAO treasury; and
- ensuring users own and retain their own data (currently a huge contention in web2 systems).
For web3 systems that use this model, the decentralization of the blockchain network and smart contract protocol is achieved primarily as a result of the technical decentralization of those layers, and by launching decentralized governance in the form of a DAO that takes control of the smart-contract protocol from the developer company that created the system. Deploying the smart contract protocol to a public blockchain and launching its DAO results in transparency as well as greater safety and security for the system, and it means that no individual or group controls the system.
The decentralization of the client layer then happens in a few different ways. Within DeFi, where most clients are just simple frontend websites that provide a gateway to the underlying smart contract protocol (that is, they allow users to interact with the protocol), most developer companies make their client/ website open source, and host it on a decentralized file system (such as IPFS). With the client/ website open source, third parties that are independent from the developer company often end up hosting their own clients/ websites providing access to the same underlying protocol.
The above steps mostly eliminate the potential for information asymmetries — the impetus for much of the U.S. securities laws — because (1) information about the protocol and its operations are transparently available on a public blockchain ledger, and (2) the managerial efforts of the developer company that launched the protocol are no longer critical to the success or failure of such protocol.
Source Andreessen Horowitz
Traditional vs. Neobank Product Sets in North America
Neobanks continue to experience healthy growth and financial backing. Neobanks’ digital user experience and overall convenience plays a large role in their success, but what about meaningful product differentiation?
▪ Neobank success is not attributed to exhaustive banking product/service menus (less penetrated than traditional banks in more than 70% of product categories)
▪ Neobank differentiate with digital products like crypto investing and early direct deposit wrapped around debit card-linked current accounts
▪ Traditional banks still have much broader product sets, particularly in lending, and are quickly catching up on fintech products
Source Flagship Advisory Partners
AI in Banking: Deploy AI everywhere
An interesting report by Oliver Wyman
There is no single place where AI can be deployed within a bank’s operations for maximum effect. Rather, AI can make a substantial improvement in all areas of the banking value chain, from the front office to the back. We recommend embedding AI across all operations, as the stand-out trailblazers have done, giving them the advantage of financial and strategic value creation. A holistic approach to implementing AI will allow banks to excel in client experience, support their business goals, empower decision-makers with more and higher quality information, and automate operations.
Examples of the power of AI abound. For instance, at one institution, the use of machine learning models leveraging social media information helped to quadruple digital cross-sell campaign sales. Another institution has reduced client service and support costs by implementing an in-app chatbot that is able to service millions of clients by automatically responding to up to 500,000 varieties of client inquiries. And yet another organization has improved the detection of fraudulent transactions by 200%, by deploying an AI-enabled fraud-detection engine.
That said, AI should not be viewed as an isolated element that can solve a specific business problem or optimize a specific metric; rather, its power is exponentially enhanced when it is holistically combined, in which case its impact becomes truly transformational. This is well demonstrated by one European trailblazer that achieved a perfect score for client experience once it embedded AI in its app. This made it possible for the institution to assess clients’ financial health (based on an analysis of expenses, debt, and saving goals). Using this information, it could offer tailored lifestyle-specific plans that improve customers’ financial health. The bank is also able to alert customers if they are about to run into overdraft, based on anticipated upcoming deposits, withdrawals, and expenses.
Of course, deploying AI in every area is not an overnight process, nor should organizations aim to make it so. It must be viewed as a multistage, progressive journey, with rollouts taking place throughout the value chain on an incremental basis. Rather than building one large set of applications, it is more practical to launch, refine, and industrialize one application before moving on to the next. It is equally important to ensure that all employees support the transformation.
Achieving this buy-in may be easier if the bank first deploys applications that will make a notable difference through strategic quick wins, thus creating early engagement and enthusiasm for momentum.
Source Oliver Wyman
How has crypto banking’s competitive landscape changed this year?
BLOCKDATA benchmarked the 12 biggest crypto banks with respect to their services and offerings. Since then, there have been major changes in the market. For example, leading crypto bank Celsius filed for bankruptcy in July 2022.
Below, we explore some of the key trends and developments we’re seeing among the current market leaders to highlight how the competitive landscape has changed.
Users: From October 2021 to May 2022, Crypto.com saw its user base grow from 10M to 50M, an increase of 400%. Similarly, the number of Nexo users doubled from over 2M to over 4M from September 2021 to May 2022. Crypto lending has surged over the last two years and publicizes a vision of financial services where lenders and borrowers avoid the traditional financial firms that position themselves as the gatekeepers for loans or other products.
Company size: While some crypto banks are facing hiring headwinds, others are unperturbed amid the market volatility. In June 2022, BlockFi announced a 20% layoff — company headcount dropped from about 850 in January to about 680 by the end of July. Meanwhile, Nexo’s LinkedIn headcount has jumped nearly 60% since January 2022.
Interest and other earnings: Apart from pooling investments into cryptocurrency, most of these banks provide customers with earning opportunities in traditionally aligned frameworks.
For instance, Nexo allows its users to buy and build portfolios of diverse digital assets and trade (swap and exchange) them when prices hit a markup. The company also provides them with the option to earn up to 16% in annual interest. Institutions such as BlockFi and Crypto.com also enroll customers in rewards programs that enable them to receive non-currency rewards for every transaction or purchase.
Cards: Many crypto banks have their own cards and allow users to earn interest and take out loans on their cryptocurrencies. These cards also offer rewards: Nexo, for example, issues its own Mastercard-powered credit and debit cards that give users up to 2% back in cryptocurrency with each purchase. Nexo also allows users to spend without having to sell their digital assets such as bitcoin, which are used as collateral to back the credit provided.
Crypto banks have also diversified their service portfolios along the lines of institutional services, wherein they provide businesses with crypto-backed loans, short-term credit options, etc. However, the current market scenario has negatively impacted investor confidence, making it critical for crypto banks to streamline their processes to restore trust.
JPMorgan’s pay-by-bank vs card schemes
Pay-by-bank, which would enable sellers to take payment directly from a customer’s bank account, is part of the growing movement towards “open banking” — securely allowing consumers to give financial providers the ability to access their financial information.
JPMorgan already allows account holders to instantly pay one another through Zelle, a mobile application launched by the largest US banks in 2017. However, Zelle’s use for retail payments remains extremely limited. Bankers have said this is partly because it is run by a separate company owned by a consortium of lenders.
Bank transfer payments have caught on in countries such as the Netherlands and India, but US consumers have been slower to take it up.
This is partly because of the country’s clunky bank-to-bank automated clearing house, a network that settles payments in days rather than seconds and whose roots trace back to the 1970s. This may change next year with the US Federal Reserve aiming to launch FedNow, a new rapid payments service for big banks, and is another reason why JPMorgan is moving on pay-by-bank.
In the short term, JPMorgan believes pay-by-bank is an alternative for rent and bill payments as well as cash, high-priced debit and cheques, rather than for credit cards, according to people involved in the project.
In the longer term, however, the bank is making sure it is ready for the potential demise of credit cards. JPMorgan is not the first to try and disrupt the credit card industry.
Executives at the big card companies privately remain sceptical that pay-by-bank will dislodge credit cards in the US anytime soon, given deeply ingrained consumer habits, generous reward programmes and fraud protections that are more clearly defined than competing payment options.
But despite their confidence, card companies have taken steps to bolster their ability to facilitate direct transactions, including the recent acquisitions of fintechs Tink and Finicity, a Mastercard Company by Visa and Mastercard respectively.
And banks such as JPMorgan — long incentivised to maintain the status quo since they accrue the bulk of interchange fees from card payments — are hedging their bets too, hoping pay-by-bank can replace at least some of those threatened revenues.
JPMorgan is now aiming to take pay-by-bank live next year and is in talks with at least one fintech company over a partnership to provide infrastructure support, according to people briefed on the plans.
Source Financial Times
UX playbook for finance by Google
Open source could transform the financial industry in four critical ways
Drive standards and increase reliability
Standards exist in payments, but they are old and tedious to build to. Last year, $55 trillion moved via ACH (a format created in 1970), for instance, and 1.3 billion trade lines were reported every month to the credit bureaus via Metro2 files (a format created in 1997). Open source libraries would not only save developers the hassle of building such standards from scratch, but would also create modern reference points.
Payments have thousands of edge cases, too many for even sizable teams to keep up with. Modern open source libraries are made more robust by the many contributors who run payments through them, fixing edge cases along the way.
From the U.K. to Brazil, many countries are driving open banking regulation, in which banks are required to create and maintain APIs that enable consumers to give third-party applications access to their banking data. Open and accessible banking data can help consumers make better financial decisions.
Developers at banks around the world are developing similar infrastructure (connections into legacy core systems, APIs to expose data) to comply with these open banking regulations. This is a repetitive process across banks and countries — where banks would benefit from open source libraries as a starting point.
Tap global networks
Two trillion dollars are laundered every year globally, often financing drug trafficking and terrorist activities. In 2019, banks spent $30 billion to combat money laundering; their efforts were effective at stopping just 3 percent of such crime. That same year, banks paid $10 billion for non-compliance with federal authorities, despite software systems that continuously alerted compliance teams of potential issues. (Ninety-five percent of those alerts turned out to be false positives.) Clearly, the system is not effective.
With open source libraries, banks could contribute their hard-won algorithmic intelligence to benefit the system as a whole. When one bank gets smarter at solving a particular pain point — say, entity matching — it would contribute to the collective good.
Increase access and reduce costs
Open source can also make what was previously prohibitively expensive proprietary software, much more accessible.
There are three billion unbanked or underbanked people worldwide. Why don’t banks around the world serve lower-income customers? One reason is that they are making too much money. Latin American banks, for example, have some of the highest ROE (return on equity) in the world. Another factor, however, is banks’ underlying cost structure: If it costs $20 per month in software fees to keep an account open, the economics simply don’t work for account holders with low balances who will never take out a profitable lending product.
Source Andreessen Horowitz
Fears that Credit Suisse could collapse are giving investors 2008 flashbacks
Swiss bank Credit Suisse was no angel thanks to numerous missteps and a high-profile corporate spying scandal, but the internet decided this weekend to brand the firm with a big scarlet D: The bank’s credit default swaps (CDS) — a security that reflects how much default risk the market sees — surged yesterday after rumors spread throughout the trading floor that the bank was short on cash.
Now, social media is ablaze with hot takes that suggest we’re looking at Lehman Brothers 2.0.
Don’t start spiraling tho. Most experts have pointed out that yes, Credit Suisse’s rapid CDS jump does mean investors think the firm has a higher probability of defaulting on its loans. But if you zoom out a little, that probability is still very low.
How did we get here? Record high inflation + the Fed’s rate-hike-a-palooza + Credit Suisse’s less-than-stellar performance this year = investors on edge. So when execs tried to do damage control by asserting that “everything’s all good over here!” it just made everyone freak out more.
Looking ahead…the bank is expected to make a restructuring announcement on October 27 that will address its plans for coming back from epic blunders like the $5.5 billion loss it sustained when client Archegos Capital collapsed last year. — MM
Source Morning Brew