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The Green Sheet Online Edition

December 12, 2016 • Issue 16:12:01

What is Money20/20 Part Two

By Brandes Elitch
CrossCheck Inc.

In the first article of this two-part series on Money20/20 2016 ("What is Money20/20 ‒ Part One," The Green Sheet, Nov. 14, 2016, issue 16:11:01), I endeavored to explain why this show is important for anyone in the payments business. I almost said "payments ecosystem," but if I hear that phrase one more time, I will lose it. Yes, one hallmark of the new world of payments is dumb names and cutesy phrases not heretofore seen in a world dominated by large, conservative, buttoned-down, commercial money center banks. I'll get to the banks in a moment, but first, I'll address the big picture.

One interesting comment about Money20/20 came from Jeff Kagan, who said, "Many companies in this changing space were there. Interestingly, there were also plenty of historic leaders who were not there. This was a clear indication to me that the change sweeping over the banking and payment world is impacting everything. Every company needs to be a player, or they risk becoming irrelevant to the customer."

Another Money20/20 attendee said, "Every 20 years, something really important comes along, and this is it." What this means at this juncture is that while about 40 percent of the planet today doesn't have a bank account (and hence has limited options other than cash), new technology and solutions will bring big changes. In a few years, almost everyone will have a smartphone or mobile device, and everyone will be, or could be, connected to send and receive payments anywhere in the world for same-day settlement for low cost. This is revolutionary.

Trends to watch

Here are some trends I spotted at the show (with 400 exhibitors, undoubtedly I missed many others).

  • The financial scale of this industry is impressive. Six years ago, roughly $2 billion was raised in what we call fintech today. Compare that with the almost $19 billion raised in the first three quarters of this year. Not everybody will be a winner, but some significant new products and innovations will come from all of this.
  • The replacement of legacy systems is on everyone's mind. I hadn't realized this is happening in pockets, and there are individual segments of fintech. One big one is "insurtech," which has to do with the way insurance is sold and marketed; this is a huge market. Another is "regtech," dealing with compliance and regulatory issues, the number one concern of financial institutions today. There is "healthtech" for medical companies, and "edtech" for those in the school business. Others are emerging.
  • Everyone is interested in cross-platform interoperability. In addition to venture capitalists, there are "incubators" and "regulatory sandboxes" to foster multiple constituencies working together. A sandbox carves out a regulatory exception for innovators to test new products.
  • Cash management tools for small and midsize businesses are becoming viable. Until recently, only large enterprises used treasury management products from their banks. Now small banks and even nonbanks offer electronic invoicing, open application programming interfaces, online lending, factoring, account reconciliation, and business-to-business products. A big problem for small businesses is that commercial banks have curtailed their lending activity, which has curtailed the economic recovery. Online lenders are rushing in to meet this need, which is a very good thing.
  • There is a shift to online purchases and to online payments. My company works in the auto dealer space. Look at what's going on today with Amazon and Chase here. Amazon is launching a new portal for Hyundai that will allow for an on-demand test drive program at its dealers. Amazon also heralded that European buyers can buy a Fiat from Amazon without going to a dealer (dealer structure is different in Europe than in the United States). Chase is partnering with TrueCar to help people find cars online and apply for loans. I won't elaborate on the success of eBay Motors, or Craigslist, where, as a car collector, I buy my cars. It's an addictive experience.
  • As for paying online, there is a big trend in retailing called BOL/PUIS, which means Buy Online, Pick Up in Store. Everyone in retail is using another buzzword, omnichannel, which encompasses this consumer behavior. Retailers are figuring out how to reconfigure the shopping experience for the next generation of always-connected consumers.
  • Everyone talks about payments becoming "frictionless and invisible." Amazon, PayPal and Starbucks are the early success stories here, but it seems Uber has popularized this concept. When you leave the Uber car, you are done, no paying the fare or tipping the driver, which is a pain when you use a traditional taxicab. This is what "frictionless" really means. The sentiment is that consumers want "frictionless" experiences at every merchant, but I am not sure about that, particularly for high dollar payments.
  • A "culture of collaboration" exists within this space: everyone is looking for a partner to work with. Put another way, everyone is looking for the "value prop." People are interested in what vendors and speakers have to say because they are looking for partners, which does not seem to be the case at other payments shows, such as NACHA, AFP, ETA, BAI, etc.
  • The banks may be in the background, but they will continue to be the dominant players in the payments world. They are not going away, nor will they be compromised by upstarts in the room. They will carefully select vendors who offer products and services that will enhance their customer experiences, and I predict that they will be the winners in this space, ultimately.

Merchants and new tech

Also, I must say something about blockchain. While it seems mysterious, it really isn't. It is also called a "distributed ledger system." Data is stored in a transactional database that is publicly distributed across many machines. Imagine if you were a bookkeeper and your books could be open and available to anyone who wished to transact in your space. There would be complete transparency, so all the buyers and sellers could see every record of every transaction, anytime.

It seems a bit abstract, but think in terms of businesses that keep ledgers today: the title company when you buy or sell a house, the stock exchange when you buy or sell stock, the foreign exchange and wire transfer desks at a bank, factoring accounts receivable - you get the idea. If a buy-sell transaction is accompanied by a title, or a registration, or a serial number, it can be tracked because it is in a registry somewhere.

To make this work, it would have to be, as Jack Dorsey said at the show, "distributed, redundant, failsafe and ubiquitous." Since anyone can see the books, people could only buy or sell something once, and they couldn't claim later they really didn't do that trade.

Just as monetary authorities such as the Federal Reserve aren't going to let bitcoin or any other cryptocurrency create money and manage the money supply, so it will be with blockchain. At some point, the bank regulators will become involved, although this has not apparently happened yet, except to the extent government does not want to see enhancement tools for money laundering, international drug couriers, etc.

In addition, it is interesting to see what wasn't discussed at the show. I didn't hear any talk about the current state of the merchant community, which, as I see it, is that merchants are frustrated, stymied, and downright mad about what they see as arbitrary and capricious demands from the card brands for PCI, EMV, QIR, wholesale replacement of hardware, certifications, etc.

We have whole industries saying they might not adopt EMV (for instance, the restaurant industry) and another huge industry (petroleum) saying it cannot afford EMV. Furthermore, I constantly hear that security issues are a big barrier to ecommerce adoption, and security risk is top of mind for consumers, who do not feel confident in the ability of merchants or processors to manage and control it. Based on the breaches that now seem commonplace, why should they?

My hunch is Money20/20 will be even bigger next year - possibly topping 12,000 attendees and 500 vendors. If you are crafting a new product, or just trying to keep up with others who are doing so, put this on your calendar. end of article

Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at brandese@cross-check.com.

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