TCS BaNCS Research Journal Issue 8

Volume 2
Issue 4
Re-Imagining
Payments
TCS BaNCS Research Journal_Vol 2 Issue 4.indd 1 12-06-2014 AM 11:25:43

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FOREWORD
Omni-consumers, Omni-com-
merce and Payment skeletons…
The Payments domain is going transaction flows are on the Some are leveraging the cloud for
through immense transformation rise and there is a definite on-demand processing capacity
globally, and it is one area where need for banks to support their and to manage peaks beyond a
innovation and re-imagination clients with offerings such as threshold; some are consciously
is taking place. Firstly, it is also cash concentration, FX and cash creating a payments hub kind of
perhaps the most noticeable area management type of offerings infrastructure to move volumes
in which non-banking firms are to retain loyalty; (b) the rise away from core banking systems;
positioning themselves to take a of point-of-sale/debit card and, a few others are segregating
share of banks’ wallet, resulting transactions, mobile payments, high value and bulk payments.
in banks becoming determined financial inclusion and government
to protect their turf. Secondly, payments are placing enormous Irrespective of the above, a
interest rate volatility implies challenges on the availability common thread we are seeing
that banks depend increasingly of systems and infrastructure is increased “surveillance”
on fee based income as opposed resilience; and, (c) regulations and and “intelligence” on payment
to interest margins for growth, market initiatives are playing their transactions with the objectives
leading to banks conceptualizing part in the form of SEPA, FATCA of understanding client behavior
Payments as a “Product” as and AML/KYC. better and thereby creating
opposed to being consumed by instantaneous and compelling
clients as a granted “Service”. In this context, banks have been offers for customers. These re-
Thirdly, a whole new or different at the forefront with the aim to configured infrastructures will not
way of doing business is emerging, renew their technology options only help the bank understand
i.e. that of ‘alternate/digital and excel in the race to offer client behavior better but also
currencies’. just-in-time value. They are make the client feel understood.
also reconfiguring their skeletal Unless banks do this, they are
As if the above drivers are not (legacy) infrastructures to support bound to create high levels of
enough, (a) global or regional availability and resilience concerns. customer dissatisfaction. Let me
4 TCS BaNCS Research Journal

share a real-life experience to At TCS BaNCS, payments, cash reflective of omni-changing device
illustrate this very point. On one management and transaction features.
of my trips abroad to an exotic (or banking have been and continue
forbidden) country, I discovered to be a focus area of our product We are proud to partner with
to my horror that my bank did not research and development some leading institutions in
honor my card transactions there. activities. We evolved our creating world-class solutions, in
I thanked the Almighty that I had payments processing capabilities the form of:
carried another card with me. My from a solution that processed
• a pan European Payments and
efforts to reach out to my bank high value, international SWIFT
Cash Management solution
proved futile when I was told that I and domestic RTGS payments to
for Societe Generale, which
should have informed them about a standalone payments engine
allows operations of 7 European
my impending trip before I left the today-- one that manages a
countries on a single application
country. Now, well, for this, did variety of domestic and cross-
and database;
they point me to a web page or a border payments and integrates
branch when I had used the very with commercial banking • a multi-market Single
same card to process my tickets and financial institutions as a Application Payment Services
and hotel accommodation before centralized payments processing Hub at American Express
my trip? In fact, they should have hub at our customer organizations to enable SEPA Compliance
sold their travel insurance or FX to in the advanced markets. for payables and receivable
me. A lot can be gleaned by mining Needless to say, such an offering instructions (Credit Transfers
payment transactions. Period. is helping banks gain a holistic and Direct Debits) well ahead
view of their liquidity and that of of compliance deadlines in the
So, what are we doing at TCS their customers. regulatory market place;
Financial Solutions in this regard?
We have also created innovative • a first-of-its-kind Enterprise
We believe that the onus is on apps on the retail side, be it for Payments Hub for AXIS Bank in
banks to ensure that they extract clients on the go or for small India, which enabled the bank
as much value as possible from businesses such as restaurants to initiate unique offerings;
the digitization and regulatory or multi-brand boutiques using • an end-to-end Money
compliance related technology Surface and Touch technologies. Movement platform at Morgan
investments they make and to Such solutions seamlessly Stanley Smith Barney in USA for
look at the instant benefits of help integrate the ecosystem seamless money transfer among
enhancing customer relationships. and its stakeholders and help accounts within the firm and
Partnering with alternative deliver deliver ultimate client with other banks over NACHA;
payments solutions providers is convenience. We have adopted and,
definitely an attractive option cutting-edge tools and hybrid and
for banks and is a much debated development infrastructure in our • a partnership with Mozido in
topic today. pursuit to remain current and be the mobile payments space.
TCS BaNCS Research Journal 5

No doubt, we live in exciting interactive and integrated solutions
times relative to payments. TCS to collaborate with our partners
Financial Solutions is closely and customers in generating true
watching market developments, value in the payments space.
and continues to invest in intuitive,
N. Ganapathy Subramaniam (NGS as he is called) heads TCS Financial Solutions, a division of Tata Consultancy Services Limited (www.
tcs.com/bancs). Part of TCS and the Indian IT Industry for more than 25 years, NGS has had numerous opportunities to perform a
multitude of roles in delivering solutions to TCS customers globally, and especially, in the Banking and Financial Services sector. As a
part of his current role, he is responsible for steering the financial products business, under the brand name, TCS BaNCS, globally. TCS
BaNCS is a suite of products covering the banking, capital markets, and insurance domains.
NGS in-depth knowledge about IT trends and systems policies of leading global corporations, gleaned from international exposure,
is evident in the leading role he has played in a number of mission-critical projects for the financial services industry. He actively
participates in banking, technology and business forums in addition to specific knowledge streams in Straight-Through-Processing, risk
management, front-office systems, back-office processing in capital markets and Six Sigma orientation.
N Ganapathy Subramaniam
President – TCS Financial Solutions
Tata Consultancy Services

Editorial Advisors
Dennis is the Chief Marketing Officer for TCS Financial Solutions – Tata Consultancy Services (TCS) Strategic Business Unit 100%
focused on leveraging all of TCS business applications to the financial services marketplace around the world. Dennis is responsible
for establishing and enhancing TCS Financial Solutions brand equity as a leading specialty IT solutions provider to the global financial
services industry. His responsibilities include the entire range of marketing, communications and research activities including
branding, media & public relations, industry analyst relations, lead generation, advertising, direct & telemarketing programs, collateral
& websites development and event execution.
Dennis Roman
Vice-President
TCS Financial Solutions
Nitin works in the Product Management function of TCS BaNCS and is responsible for the areas of Payments Processing , Corporate
Cash Management and Transaction Banking. Out of his 20 years of experience in TCS, he has spent more than 15 years working with
TCS BaNCS. During these years he has worked across many functions in the product lifecycle. With a special interest in the payments
domain, he has worked on building and implementing Payments and Cash management solutions around the TCS BaNCS product.
This includes a refresh of the TCS BaNCS solution based on ISO20022 standards. He has worked closely with customers across multiple
countries in North America, Europe, MEA and APAC. At present, he is engaged in a program with a leading banking institution to build
a first-of-its-kind Payments Hub in India. He is a keen follower of Payments related innovations and evolution across the industry.
Nitin Sirohi
Principal Consultant

Editorial
A
Finnish company, Uniqul, new players. In the payments alternative payments providers
hopes to turn your face ecosystem today, it is delivering collaborate.
into a unique PIN and on the promise of speed and
make it the mode of payments simplicity. Gareth Lodge, Senior Banking
transactions in the future. Analyst from Celent, takes us
This edition of the TCS BaNCS through his experiences in the
Paypal’s owner recently tweeted – Research Journal is focused on challenges--and many nuances--of
“My card got skimmed in the UK, exploring the many ways in which creating a true, real time payments
ton of fraudulent txns. Wouldn’t the payments industry is going system. We also delve into how
have happened if merchant through RE-IMAGINATION. the definition of a payments
accepted Paypal” transaction has morphed into
When traditional, big firms not just completing a transaction
These examples illustrate—and don’t rule anymore, there is a within a stipulated time but also
reiterate--the arrival of a new redefinition of the way financial having all information about the
payments ecosystem wherein large relationships are looked at. We payment reach the recipients and
scale, game-changing disruption is explore this aspect in greater regulators instantaneously. This
taking place. depth in the article on Payments is what ISO 20022 standards are
Transformation. seeking to achieve.
- Where cash no longer is king,
and digital payments (and Brett King, a leading evangelist The advent of biometric
digital money) rule of digital banking and Founder, technology and the increasing
CEO of Movenbank, whom we use of wearable technology have
- Where you can manage money
interviewed for our TCS BaNCS resulted in biometrics products
with your face, or the sound of
Research Journal, says that for creating a positive image in both,
your voice, the touch of your
those banks wanting to stay ahead the minds of payments players
finger, or a wearable device
of the curve in this space, it is not and users. When one has to
- Where a host of new players in about innovation so much as a remember ten passwords, and the
addition to banks and retailers more compelling user experience easiest and most used password is,
are playing transformative roles wrapped around a payment. An ‘PASSWORD’, it is only natural that
interesting point he mentioned digital footprints are tampered
Disruptive innovation of any that I found worth pondering with. The more integrated the
kind inevitably results in more about was that partnering forces applications are, the easier it is
convenience, leading to a better you to think of user experience to create avenues for fraud. The
way of doing things, or creating in a big way. And, this is what article on Biometric Technology
newer business models and will happen when banks and takes you through the steps being

taken to curb fraud from a global most contentious and controversial have harmful effects on liquidity
point of view. measures in the form of the resulting in increased market
Volcker Rules came into effect on volatility, remains to be seen.
With digitization assuming April 1, 2014. It was only natural
significant thrust today, where that we took a small deviation To sum up… total customer
is the micropayments industry experience is driving disruptive
and understood what it meant.
headed? Our article on the innovation in the payments space.
By curbing banks from trading
evolution of micropayments Services and solutions that assure
for their own gain and allowing
illustrates the many factors customers that financial services
only what is designed to lessen
that affect (and, sometimes, players are listening to their needs
bank risk and serve clients, the
impede) mass adoption. Digital and gathering insights to create
ruling is meant to curb speculative
micropayments, in many ways, are relevant, available and contextual
behavior akin to the run-up to the
spurring innovation to circumvent solutions are what will thrive in
cost and complexity. financial crises. But does it have this hyper-connected era.
the ability to differentiate between
While we were exploring all proprietary and legitimate trading
these changes happening in the functions of a bank, thereby,
payments industry, one of the reducing incentives to gamble, or Happy Reading!
Anjana Srikanth
Editor/General Manager
Marketing, Communications and Research


what’s inside...
VOLUME 2 ISSUE 4
12 Impending Disruption in the Payment Marketplace - Should Retail

Banks be Worried?
18 An Interview with Brett King on the Future of Payments
22 Real-time Payments Getting Real
28 Payments on ISO20022 – Time to on-board?
36 Revival of Biometrics in Banking: Heralding a New Era in mPayments
44 The Volcker Rule – Seeking to Shield banks’ customers
50 Payments in India – A Continuing Journey
56 Micropayments: The Case for Wider Market Participation By Banks

Impending Disruption in the
Payment Marketplace - Should
Retail Banks be Worried?
- A Validation Using Porter’s Five Forces
Framework
The decibel level in the payments industry marketplace. Perpetually connected wanting faster and easier ways of
is high with payment related innovations customers are quickly reclaiming control doing banking. They are demanding a
becoming commonplace. Ubiquitous of the banking relationship with how and transparent and convenient payments
mobile devices, with always-on internet who they do business with. experience that is efficient, secure,
access, supported by a number of path cheaper and faster. Making real time
breaking technologies are providing a There is friction everywhere in the payments is still a pipe dream for many
platform for disruption in the payment payments industry with customers in the advanced countries. Excessive

innovations collectively and separately
Payment
Digital Currency impact its future.
Analytics
Force #1: Bargaining power of customers

Payment Technology Disruption Smart
Infrastructure Payment Industry ATM
Consumers today live in a world that
is always connected, with “always on”
Pre-Paid
Remittances Mobile
Card
messaging and social networks. They
expect banking to work in that context.
Consumers are also rapidly adapting to
the new digital-led banking experience.
Mobile Check Mobile Mobile Mobile Mobile
Deposit Commerce P2P Wallet Bill Pay
From a mainstream banking point of
view, it is not a satisfying experience
with detailed paperwork, manual
transaction fees and delayed payment mainstream and disrupt the industry?
interventions, longer processing time
settlements continue to be big sore Should banks be worried about it and
and excessive fees. Laxity in security and
points. New technologies led by mobile what should be their response?
frequent downtime deny a 24x7 banking
computing, in particular, are bringing to
experience.
light these glaring inefficiencies. While it is not easy to predict if any of
these could disrupt the payments industry
Payments have become expensive, time-
Is the payments industry in a dire state? soon, it is also certain that ignoring
consuming and opaque. High churn,
It depends. For many of the newcomers, them will be at one’s own peril. But one
low switching costs and a plethora of
this is an exciting place to be in, as there thing is clear - a correct understanding
substitute solutions from alternate
is an opportunity to solve some of the of this consumer-led, technology-driven
providers are attracting consumers to
perennial problems facing the industry payments landscape and how it will pan
these newer players who are providing an
through new, digital innovations. For a out in the future needs to be factored in
alternate digital experience.
retail bank, however, there are more while formulating a payment strategy.
questions than answers. Are these
The bargaining power of buyers is VERY
innovations hyped? Will they move Analyzing the payments industry using
HIGH.
Michael Porter’s Five Forces Framework
Force #2: Threat of substitute products or
Porter’s “Five Forces” theory is a popular services
framework for industry analysis and
strategy development, designed by The mobile phone has become a
Harvard professor Michael E. Porter, disruptive payments platform for new
which posits that competitive intensity innovations and is attempting to replace
and attractiveness of any market is cash and checks. Some of the recently
determined by the bargaining power launched products have the potential to
of customers, the threat of substitute disrupt the payments industry, namely
products or services, the bargaining P2P payments, mobile wallets, mobile
power of suppliers, the threat of new check deposits, pre-loaded cards, digital
entrants and rivalry among existing currencies, smart ATMs, among others.
competitors. By analyzing these forces in
relation to the payments industry, one can P2P payments: After registering
gather a clearer picture of the competitive with a bank or a trusted third-party
environment and how the current organization, money transfers can be

Is the payments
industry in a dire state?
It depends. For many
of the newcomers, this
is an exciting place to
be in, as there is an
opportunity to solve
some of the perennial
problems facing the
industry through new,
digital innovations.
PayPal, Square, Starbucks, Isis a joint at people who are unbanked, as well
venture by AT&T, T-Mobile and Verizon as those who would like to avoid high
made using just the receiver’s e-mail among others, have taken the lead in bank fees. These cards can be used
address or mobile number. Major launching the mobile wallet.
players in the fray include PayPal,
Square, Google Wallet, Ribbon, Mobile check deposits: Mobile check
Dwolla and ClearXchange. Paym was deposit is a technology that replaces A recent Javelin report
launched in the UK recently with nine the inefficiencies prevalent in the
participating banks to facilitate money world of paper checks. Customers found that mobile
transfers using just a mobile phone deposit a check into their bank check deposits can
number. Similarly, Tencent and Alibaba accounts by snapping a photo of it
are battling it out in China. Vodafone with a smartphone. A 2012 Javelin cost the bank as
led M-Pesa is a successful mobile report found that mobile check
little as four cents
money system for the unbanked in deposits can cost the bank as little
Kenya, which lets customers pay bills, as four cents per check, while the per check, while the
transfer money without any bank traditional branch-based deposits
involvement. could cost anywhere between 75
traditional branch-
cents and three dollars per deposit. based deposits
Mobile wallets: Contactless payment According to Mitek, around 11% of US
technologies allow banks and other consumers have already used mobile
could cost anywhere
providers to launch digital wallets that check deposits. between 75 cents
can potentially replace physical wallets
and also provide a number of add- Pre-loaded cards: Reloadable prepaid and three dollars per
on services like ticketing, couponing,
loyalty offers, payments and banking.
cards sold at retailers and banks
deposit.
function like debit cards without the
A number of non-banks like Google, checking account, and are targeted

The threat from the substitute products Force #4: Threat of new entrants
is VERY HIGH.
Countries like The payments industry has become a
Force #3: Bargaining power of suppliers hotbed for innovation with new players
Australia are building wanting to upstage the traditional ones
new payment The several decade-old payment and dominate the market quickly. They
infrastructures especially in advanced come from varied industries ranging
platforms that will countries are an impediment to from startups, telcos, card companies,
transition to a real supporting real time payments. There supermarket chains, technology
companies and de-nova banks, offering
is a lack of transparency in the current
time system. Similarly, settlement process with the value of simpler functionality through an
free float enjoyed by banks continues to exciting digital experience that appeals
the Financial Conduct remain very high. to everyone including the millennials.
Authority is planning Many see greater opportunities
Unable to support innovation, various in the payments data to generate
to open up the UK stakeholders are looking at alternate advertisement revenues. A number
payment sector to approaches to improve the current of these players are today offering
system. Countries like Australia are everything from debit cards, checking
new companies to building new payment platforms that and savings accounts to money transfers
improve competition. will transition to a real time system. and small business lending outside of
traditional banking.
Similarly, the Financial Conduct Authority
is planning to open up the UK payment
sector to new companies to improve
competition. The Federal Reserve is also
to withdraw cash at ATMs, purchase
planning to overhaul the U.S. payments
online and, at supermarkets, reload
system to achieve faster payments than Cell phone carriers
cash, with lower fees than that of bank
accounts.
is currently offered by ACH. On the other are pushing hard into
hand, the emerging market countries
Digital currencies: A digital currency is have leapfrogged with state-of-the-art mobile payments as
a way to exchange money in real time national payment infrastructure and
a natural extension
without any chargeback and behaves are able to provide a better customer
literally like cash. Bitcoin is one of the experience. of their services e.g.
popular digital currencies without any
Without a modern payments
Isis, Weve a similar
physical borders, national sovereignty
or middlemen and is an internet-wide infrastructure at banks, the market venture of Vodafone,
is open for new players for greater
payment system where transactions
either happen with no fees or very disruption, while also rapidly making the
O2 and EE among
low fees. Digital currencies have current systems redundant. A number others. Vodafone is
the potential to disrupt the high-fee of players are already innovating in this
world of banking through new ways of area such as Dwolla, Square, PayPal, successfully replicating
paying for goods and services. ClearXchange and virtual currencies like the M-Pesa model in
Bitcoin, all with the capability to build an
The above innovations, amongst others, alternate payments infrastructure. the emerging markets
address the current inefficiencies in the
The bargaining power of suppliers is
and even in Europe.
payments marketplace and can provide a
superior digital experience to consumers. HIGH.

Square, Stripe, YapStone, Xoom and
PayNearMe lead a crowd of startups,
many aiming to simplify how money
changes hands. Giants such as PayPal,
Apple, Amazon and Google top a list of big
companies that already have substantial
payments operations, with Facebook
recently applying for an e-money license
to enter the remittances market.
Cell phone carriers are pushing hard

into mobile payments as a natural
extension of their services e.g. Isis, Weve
a similar venture of Vodafone, O2 and EE
among others. Vodafone is successfully
replicating the M-Pesa model in the
emerging markets and even in Europe.
Supermarket chains like M&S, Sainsbury providers offering products such as credit to their customers in spite of the many
and Tesco are becoming financial services cards, saving accounts, personal loans and frictions that exist in their offerings.
insurance, among other services.
Card companies like Visa, MasterCard,
MCX , a consortium formed by retail and American Express are looking at
Despite the looming giants Wal-Mart, Target, Home Depot, opening up their market through new
7-Eleven, Best Buy, CVS, Sears and Shell offerings based on pre-paid cards, mobile
threat, banks continue will bypass the traditional payment wallets, among others. PayPal continues
networks altogether. Starbucks’s
to possess inherent spectacular success with its mobile
to dominate the payments settlement
business. clearXchange, a network of four
strengths. They payment application, with several million of the seven largest U.S. banks operates a
active users already, is an eye opener. P2P network for its member banks, while
have large customer Digital currency Bitcoin and its offshoots Western Union and MoneyGram maintain
bases; vast amounts are pursuing new ways of settling money their domination in the remittance
globally and on a larger scale. business.
of customer and
transaction data; and The threat of new entrants is VERY HIGH. The rivalry amongst existing players is
VERY HIGH.
strong capabilities to Force #5: Rivalry amongst existing
execute payments competitors What should banks do?
securely – all of The competitive rivalry in payments As one can see, Porter’s five forces
has intensified over the past year with analysis implies an approaching digital
which are difficult to banks, card companies, telcos, de-nova disruption that could fundamentally
replicate quickly by banks, payment companies, supermarket transform the payments industry. A
chains and large technology companies number of players from diverse industries
newcomers. all trying to engage with the consumer, are trying to influence the outcome of this
with traditional players trying to hold on marketplace in the backdrop of a rising

the risk of being relegated to back-office fulfillment irrespective of what form
utilities thereby losing their customer factors the future may take hold
Build fundamental touch points. (Google Glass, smart watches, etc)
capability to support Despite the looming threat, banks

thereby helping consumers make
optimal decisions on what to buy,
multiple contexts of continue to possess inherent strengths.
where, when and how to buy it –
They have large customer bases; vast
customer fulfillment amounts of customer and transaction
whether it’s dinner, a car or a new
home.
irrespective of what data; and strong capabilities to execute
payments securely – all of which
form factors the future are difficult to replicate quickly by
4. Continuously evaluate new
newcomers. Much will depend on their technologies to generate innovative
may take hold (Google ability to leverage these competitive ideas for a superior digital customer
Glass, smart watches advantages by providing greater customer experience, through dedicated
fulfillment through rapid digital adoption. innovation labs or partnership
etc) thereby helping Banks should consider the following. models.
consumers make
1. Build strong capabilities in (a) Finally, each bank will have to pick a
optimal decisions on customer data consolidation (b) real strategy that leverages its strengths and
time channel interfaces and (c) rapid
what to buy, where, creation of new payment products
supports its business goals, but also
accept the changed context that they
when and how to buy through a modern open banking have to strategize for. In the meantime,
platform.
it – whether it’s dinner, consumers are embracing mobile in
large numbers and are clearly showing
a car or a new home. 2. Digitize business processes quickly, be
their preference for the convenience and
it customer communications, channel
interactions, marketing and selling, simplicity of transacting on the mobile
amongst others. anywhere, anytime and on any device.
customer preference for greater self- Banks need to rise up to that occasion
service in an increasingly integrated digital 3. Build fundamental capability to and delight their customers in this new,
and physical world. And banks are running support multiple contexts of customer digital world.
Thomas Mathew
Principal Consultant, TCS Financial
Solutions, Bangalore

An Interview with Brett King on
the Future of Payments
Brett King is a bestselling author, The We present here an interview with Brett banks, in particular the payments industry,
American Banker’s Innovator of the King, where he shares his insights about be doing to counter these developments
Year for 2012 and the founder of the the payments industry. and stay ahead of the curve?
direct mobile bank, Moven. A global
thought leader in financial services and In your first book “BANK 2.0”, you talked The toughest thing to counteract or
customer experience, King is a sought about disruptive customer behavior, the circumvent as an organization in the
after-expert on innovation, technology rapid technology shift and emerging banking or payments space is the inertia
disruption, customer experience and new banking models. In the subsequent
and friction built into the current system.
channel distribution strategy. He book titled, “BANK 3.0” you covered
I think it is fair to say that a lot of banks
publishes regularly in his role as industry latest trends that are redefining financial
see the changes coming down the
advisor on the Huffington Post, Internet services and payments and why the
pipeline, but they have valid concerns
Evolution, SeekingAlpha, American gap between customers and financial
services players is rapidly growing, leaving about turning their business on its
Banker, FinExtra and his personal blog
Banking4Tomorrow.com and hosts a massive opportunities for new, non-bank head until it is absolutely necessary.
weekly radio/podcast, Breaking Banks competitors to totally disrupt the industry. Unfortunately, this is the same
with Brett King on Voice of America. In this context, what should traditional approach that organizations like Borders

be in a position to build from scratch, union has actually forced regulators to
so acquisition and investment in new simplify, rather than add burden and
As payments become technology developments and start-ups complexity.
is a real possibility, but only for the larger
faster, simpler and institutions. Friction is the big killer in all of this, and
more efficient, the partnering forces you to think about
For payments companies, the challenge the user experience in a fundamentally
challenge will be will be the inherent value of the payment new way---one that you may not have
payments simply network shrinking. As payments become come to within the confines of a bank.
faster, simpler and more efficient, the The problem is that banks tend to
won’t be differentiated challenge will be payments simply won’t think like banks, and not like start-ups.
in and of themselves. be differentiated in and of themselves. Start-ups, however, often completely
Staying ahead of this curve is not about underestimate the regulatory burden
Staying ahead of this innovation so much as a more compelling and risk and compliance requirements.
curve is not about user experience wrapped around the Thus the two need to work together.
payment. If the payment becomes
innovation so much invisible, the priority shifts to what Global Mobile Payments transactions
are expected to rise to $945 billion in
as a more compelling happens before and after the payment
rather than the payment itself. This 2015 (IE Market Research). We are
user experience requires broad collaboration. witnessing increasing growth in real-
time payment tracking, development
wrapped around the There is also the opinion about the of new applications for mobile devices,
payment. alternative payments industry requiring mobile wallets, P2P payments, NFC & QR
more regulation, especially with respect to code adoptions, and so also component-
non-banking players. What are your views driven platform-agnostic technology
on this? Should banks also be opening up architecture. What new technologies
and Blockbuster took to disruption in their platforms for co-creation with third do you see becoming a part of the
their industry, and they learned (as parties? mainstream payments space in the
banks will) that these changes can occur coming years? What should banks do to
so rapidly that if you haven’t already Banks have to open up their platforms re-engineer their payments processing
committed to the future direction of for collaboration. We don’t need more and stimulate innovation for increased
the industry, you rapidly lose relevance. regulation frankly; in fact, in the US customer intimacy?
Let’s be clear, banks can’t counter these where Moven operates we need thinner
developments, they have to adapt – and regulation. The problem with regulation The recent shift towards Host Card
that’s the hard bit. now is that it is so complex that it tends to Emulation and Tokenization is creating a
reinforce old structures, product silos and shift away from the card as an artifact,
In the banking space the most recent approaches which prevent innovation as and from the PAN (Personal Account
acquisition of Simple by BBVA is an a sector. These is why 2/3rds of all checks Number) as an identifier. Things like
example of the sort of approach to are still written in the United States, and a signature on the back of a plastic
this problem that we’re more and why the US has been so slow to adopt the card with a mag stripe make very little
more likely to observe over the next EMV standard around card payments – sense moving forward. This is not about
3-5 years. As branch revenue retreats both putting them 10 years behind more shoving a debit card into a mobile wallet;
and the economics of branch banking progressive markets. The EU (European however, this is about creating value day-
starts to fail, banks in particular will Union) has an advantage in that the need to-day for an account holder. We’re just
have a real crisis of identity, and won’t for regulation to fit across the entire starting to see this pivot in thinking.

control of their financial future and Rather than compete to be the
“living better”. It is considered to be a primary bank, Moven is designed to
Friction is the big customer platform offering insights about be the Primary Financial Application,
money management and not a Bank. a tool consumers can use every day
killer in all of this, and You use social media and gamification for managing their money. Instead of
partnering forces you to encourage saving and other positive trying to incentivize customers to swtich
behaviors. Can you share your vision for banks, and then trying to up-sell other
to think about the Moven with us? products, Moven’s call to action is simply
user experience in a to download the app. With mobile sign-
Today the basic current account offers up, funding and IDV, onboarding is low
fundamentally new limited value – it is a secure store for your friction, low cost and immediate.
way---one that you cash, and gives you the utility to move
money around. However, it’s limited to Moven starts by training users to use the
may not have come to just about that. app daily (our best customers use the
within the confines of App 3-5 times per day) through real-
If you want day-to-day engagement on time notifications and financial wellness
a bank. a smartphone, the value has to be much insights.
more significant than a simple value
store or a payments artifact. However, Within first 90-days, customers shift their
whatever comes next has to also satisfy primary discretionary spending to Moven
When it comes to customer intimacy, then another critical goal. (see Typical Moven Deposits), then armed
the ability to offer context to payments, with behavioral data, aggregated data
or give advice in real-time, will be a Margins on basic bank accounts have from other bank accounts and credit
real staple of the future of banking and been declining for years, to the point cards, location and social media inputs,
payments. Banks need to think about where almost half of US checking Moven adapts stimulating smart spending
their processing capability as a messaging accounts are unprofitable today. The and savings behavior.
architecture around the payment, not just solution lies in creating an app that
a processing of payments. customers use everyday, one that We want to redefine the bank account
delivers ongoing value, so that revenue as something you download, with day-
Moven stands for values that empower moments can be easily presented, and to-day value. Where a branch has no
your customers by helping them take executed in real-time. role or value…
Brett King
Founder, Moven Bank and Author of
Bank 3.0

Real-time Payments Getting Real
As an analyst, we try to balance our there are certain trends that catch Much of these discussions were driven by
time by gazing out to the horizon and even the most seasoned trend spotter two key events.
anticipating what might happen in unawares. One of those has been real-
the future and against focusing on the time payments. First, in June 2012, there was the public
near term, advising on making the announcement by the Reserve Bank of
right decision, today. As such, there That is not to say that Celent is unfamiliar Australia mandating that Australian banks
are a number of trends that we, at with the topic - far from it. I worked on build a real-time system, and in a short,
Celent, have correctly predicted, such several attempts at bringing such a system aggressive timeframe. This came as the
as the inevitable move in the USA to to the UK market, starting in the early latest step in a long line of activities to
adopt EMV, and the rise of payment 2000’s, up to and including the system stimulate competition and innovation
services hubs. There are other trends, that went live in 2008, Faster Payments. in the Australian banking and payments
where we have perhaps called the As part of that development, we spent market.
trend too soon – adoption of cloud much time trying to find other countries
computing is mainstream everywhere that might be interested in taking the September 2013 saw perhaps an even
now. Everywhere, that is, but in bank solution that we developed, but with more surprising announcement from
payments. E-invoicing is another limited success. Once I became an analyst, the US Federal Reserve in the form
such trend, with wide-scale adoption discussions with clients were infrequent. of a consultation regarding future
seemingly still just round the corner, Yet in 2013, it was one of the most improvements to the US payment
rather than here today. Yet, occasionally frequent topics of conversation. systems. Central to the consultation was

the hypothesis that the US needed to and can use the value instantly, and the
have a near real-time payment system. sender has confirmation of the status of
the transaction.
Both announcements sparked significant
debate. One thing that has been clear Such a simple sentence, but so many
to Celent in the ensuing debates and nuances, and so many challenges in
conversations was that there is a actually delivering that
significant lack of understanding of what a
real-time payment system is, and what it For example, by retail payments, we mean
entails. And equally, what it isn’t. those that are low in value rather than
defined by the purpose or participants
Defining Real-time of the payment. In a number of markets,
there is an assumption that the systems
In our definition, real-time payments refer are purely for person-to-person
to retail payments that move between transactions, such as the oft quoted (but,
accounts at different organizations rarely and actually done) splitting of bills
(and, therefore, precluding closed-loop for a meal. Yet, in the UK for example, in
systems) and where the recipient receives the Faster Payments system, corporates
can pay other suppliers, and have a
daily aggregate limit of £100,000. Other
systems, such as SPEI in Mexico, have no
systems are generally designed to operate
limits at all. Therefore, we define retail
September 2013 saw as much as “not wholesale” as anything
“24/7”, every day of the year – but
most RTGS systems are bank run. As a
perhaps an even else. RTGS (Real Time Gross Settlement
result, Monday to Friday 7am-330pm
Systems) systems continue to have an
more surprising important role, but, we believe, for
are the typical operating hours. As a
result, a multitude of solutions have
announcement from increasingly high values. Many RTGS
been found, to suit market practice
systems today have surprisingly low
the US Federal Reserve average values. CHAPS, the UK RTGS
and requirements. Poland and Sweden
have sophisticated shadow accounting
in the form of a system, for example, have average values
systems, and delegated authority for the
around £10,000, whereas European management of settlement accounts. The
consultation regarding legislation considers a high value to be UK and Singapore have pre-set settlement
typically above €50,000.
future improvements windows, but with rules allowing the
trigger to additional settlements to
to the US payment One important thing to note is the
prevent imbalances. One interesting thing
real-time notification. Both the sender
systems. Central to the and receiver need to know that the
to note is that, at the time of writing,
is in proposing a market first, with the
consultation was the transaction is complete, and, in the RTGS system also working “24/7”. This
majority of cases, the receiver has the
hypothesis that the US value from that point. Note that this
makes sense on paper to an extent,
but has numerous, technical challenges
needed to have a near is not the same as settlement taking associated with it.
place. Whilst there are exceptions to
real-time payment every rule, in many cases, settlement in Myth busting
system. real-time systems takes place at a later
time. There are some very practical There are many myths surrounding real-
reasons for this. For example, real-time time payments. Strangely, considering

time payments. This is based on criteria field is beginning to be considered as too
ranging from presence of an ACH, to small to include the increasingly levels
ISO20022 is becoming economic factors such as the relative of precision required. In some cases,
levels of GDP per capita. From this, Celent 8583 has been adapted – after all, few
the default format, estimates that there are 115 countries standards exist in the real world without
because of the that are candidate countries, and virtually some adaptation. But there comes a point
all the countries we have outlined fall where a standard is no longer standard
flexibility of the into this group. This then puts adoption enough for long-term use. As a result,
underlying XML in a very different light. Rather than the ISO20022 is becoming the default format,
countries which have systems being because of the flexibility of the underlying
message format. For “Innovators”, at the bleeding edge of
countries that are adoption (the first 5% of the market), or
even “Early Adopters”, 35 countries would
still using heritage suggest that actually we’re somewhere
Elixir Express in Poland
message formats, this between late early and early- late
adoption i.e., accelerating to the top of is a good example.
will require significant a typical adoption Bell Curve. For many,
the question around real-time has (and A Polish IT company
changes across the should) moved from an “if” to “when” created their own
value chain. to adopt, with the recent consultation
in the USA being just one example. Yet, solution, effectively
from the responses published to the US
using correspondent
consultation, many would seem not to
the volume of myths, one of the first

agree. banking principles.
to be addressed and corrected, is a
Real-time payments is about far more
The banks were so
belief that there are only a handful of
systems globally, thus implying that
than payments slow to respond
this is something banks and banking Real-time payments is more than just – indeed, they
communities need to consider only in
the future. Certainly, there have been
speeding up clearing cycles though, and
initially tried to stop
has profound implications for a bank and
some very public examples, such as Faster its IT architecture. For example, real- the service, not
Payments in the UK, and G3 in Singapore. time systems typically operate on single
Yet the reality is that there are far more messages, and operate 24/7, yet most
compete with it –
countries that already have such systems, banks in non-real-time countries operate but the millions of
or that have committed to building batch systems and rely on off-peak hours
such solutions. Using the Celent criteria for maintenance. Early systems typically
transactions going
outlined earlier, we easily identified utilized the 8583 card standard to re-use through this alternate
over 35 systems, and the real number is parts of the cards value chain, but there
probably higher. are challenges in using that format. system showed that
For example, in Europe the new IBAN they couldn’t afford to
This puts real-time in a rather different numbers that are required often exceed
place on the classic adoption cycle model. the 16 characters allowed. This is certainly ignore it.
Celent has used a variety of assumptions is the case in Poland, for example.
and data points to identify countries Additionally, with payment cycles
that are candidates for adopting real- measured in seconds, the timestamp

Eating the bank’s own lunch?
Some questions fall somewhere between

a myth and a worry. The key question for
many banks is what will be the impact
on other payment types. Will it, as
feared in the USA, cannibalize their wire
volumes, and therefore wire revenues?
Inevitably, there is no simple answer,
and, certainly, no universal answer. The
answer varies from country to country
because the payment systems in each
country that it will compete with differ.
In the UK, there seems to have been no
visible impact on other payment types,
including CHAPS. In fact, CHAPS volumes
have grown slightly over the period,
though not because of Faster Payments.
But, it has uncovered other issues. One
leading bank lost a significant sum of
money via Faster Payments. However, the
issue was not Faster Payments itself, but
the authentication of users. As a result of
poor authentication, money was simply
XML message format. For countries that lost faster. A new payment scheme is a
are still using heritage message formats, learning curve for all, and, unfortunately,
this will require significant changes Zapp (UK) is seeking for fraudsters as well.
across the value chain. A good case in
point is Canada. Real-time payments are to effectively build an The danger is that if banks don’t create
being put on hold whilst the industry alternative to the card a solution, the others will. Elixir Express
plans a move to adopt 20022 first. in Poland is a good example. A Polish
system, by allowing IT company created their own solution,
effectively using correspondent banking
Another obvious challenge is availability,
though from the work we’ve done,
ways for a consumer principles. The banks were so slow to
it still seems to surprise a number of to initiate payments respond – indeed, they initially tried to
banks about how many systems are stop the service, not compete with it –
required in the process---all of which
directly from their but the millions of transactions going
in theory no longer have any downtime bank account. The through this alternate system showed that
(and of course, real-time, themselves). they couldn’t afford to ignore it.
The corollary to this is that traditional model has also been
customer support hours will also need designed to try to Swish (Sweden) is a mobile wallet, built
to change. As customers seek to take by a consortium of Swedish banks. It’s a
advantage of the extended availability, reward all participants response to the wallet, WyWallet, created
they will expect to resolve any issues
that arise at that same time (and speed)
in the system. by the three dominant mobile operators
in the country. Consumers are used to
as well. everything being instant (such as the

many markets, adoption of real-time The IMPS system in India puts electronic
payments has been mandated. Here, payments into the hands of millions
the benefit is in the future. Payment of consumers. It works on any phone,
systems are created once in a lifetime and on any network. It’s designed to
on this scale, and so the benefits ought be account-to-account, and it’s very
to be measured over the long term. For simple for merchants to set themselves
example, debit cards are the overnight up. At its most basic, they have to
success that took nearly three decades register for the scheme, and publish
to happen. It’s therefore important to their mobile phone number and ID on
think of the opportunities as well, and to their webpage. In theory at least, small
envision what this enables. One feature
merchants could be up and running
of the proposed Australian system is
within minutes.
the view that the real-time payment
system should be the platform on which Conclusion
innovative new offerings could be built.
Consumers are increasingly used to Real-time payments are, well, real. The
“anytime, anywhere”, particularly with adoption of RTGS systems may provide
mobile shaping their experiences.
clues as to what might happen. The
earliest systems date back decades. But
Systems in other countries are showing
in the late 1980’s, what was once an
how that might work. Zapp (UK) is seeking
unusual feature, saw rapid adoption,
instant updating and availability of their to effectively build an alternative to
and in a few short years, few countries
pre-pay phone balances). Whilst not yet a the card system, by allowing ways for a
consumer to initiate payments directly of note were without them. Whilst we’re
threat, it’s plain to see how it could easily
from their bank account. The model has not sure that the adoption will follow
become one.
also been designed to try to reward all quite the same pattern, we do believe
Platform for Growth participants in the system. That is, rather that in a relatively short period of time,
than the merchants effectively paying the many countries will feel that they too
After the talk of competitors, the banks, both banks and merchants share can’t afford not to have one. Future
realization of the cost of potential the value. Both the merchant and the Celent reports are planned exploring this
investments required and the potential consumer see the transaction in real-time. topic in much more detail, but one thing
impact on existing revenue, it’s For a very small merchant who may wait is clear - I may have spent a lot of time
important that we point out that it’s days for their settlement, this has a direct, on real-time on 2013. 2014 is only going
not all bad news. It is true that in positive impact on their cash flow. to be busier.
Gareth Lodge
Senior Analyst - Banking
Gareth Lodge, a senior analyst in the banking group at Celent, focuses on

research in payments. He has been widely quoted in the media, including The
Financial Times, BBC News, CNBC, Bloomberg, Computer Weekly, CardLine,
Silicon, and European Card Review. He is a frequent speaker at such events as
Sibos, EBADay, NACHA Payments, and the Global Payments Forum.

Payments on ISO20022
– Time to on-board?
Stakeholders in the payments value chain intermediaries facilitating this transfer.
and its ecosystem have always been In today’s world of financial services, this
innovating to deliver new products and definition has to be extended to – not The challenge of
services. Interestingly, in today’s world, only having the payment completed in
they stand at the threshold of a global a stipulated time but also having the a successful and
payments situation, which can deliver information relevant to the payment complete hand-off of
value manifold. ISO20022 standards are reach relevant stakeholders in its entirety
one such vehicle that will help realize this with regulatory authorities being one
a Payment (money as
leap into future. among them. well as information) is
Traditionally, a Payment transaction The challenge of a successful and addressed holistically
was considered as complete, when the complete hand-off of a Payment (money in ISO20022 standards.
transaction amount has reached the as well as information) is addressed
seller from the buyer, and through the holistically in ISO20022 standards.

Figure 1: Diverse Standards Landscape : High risk of loss of Payment Information
Payment Payments Payments Confirmation / Exceptions

Order Clearing Clearing Statement ?
Buyer Bank 1 Clearing Bank 2 Seller

(Customer System (Customer
of Bank1) of Bank2)
An interesting use case described below There are still challenges; e.g., in the ISO20022 standards are:
proves its advantage: interbank space regarding the size of data
to be transmitted, which we will look at 1. Being adopted by banks, corporate
Party A is making a cross-border payment later in this article. institutions and communities playing
to Party B against an Invoice for a gross a significant role in the payments and
amount. Party A is also sending to party Mass Adoption of ISO 20022 has the cash management domain
B the break-up of items (multiple items, potential to revolutionize the integration
e.g. > 10 in number, of various amounts of market participants throughout the 2. Already confirmed as the de-facto
adding up to the gross amount) in the banking and financial services industry standards for the future for SWIFT
same transaction. In the traditional set and realize multiple benefits across
up of Payment systems, Party A will send business, operations and IT. 3. Taken as the standard for building
this payment instruction to their Bank A National Payment Systems in multiple
in a format, which is proprietary , as in countries
a MT101 or a similar message, only 140

characters (4*35X) of information can be We are in the era As in the adoption curve of any salient
evolution, inertia against change is a
accommodated. Even if this information
of ‘apps’ today and significant barrier. There are leaders in
is sent by Party A to Bank A, it will not be
some pockets and both adopters and
possible to send this information along the future of ‘apps’ naysayers abound in the industry – be it
with the payment over a MT103 message
to Bank B owing to the restrictions on and collaborative banks or customers.
the size and structure of the Remittance

platforms look bright. We believe that there are compelling
information. ISO20022 has addressed this
reasons (and leading to compelling
with 140 Characters* n occurrences as An app will very soon business cases) for the adoption of
part of the payment initiation and clearing
messages with provision for structured analyze the payment ISO2022.
and unstructured information. Having this information available Collaboration

type of a remittance Information field in
the customer instruction, pain.001, in the in an organization The ISO2002 standard is more seen as a
interbank clearing message, pacs.008 and set of payment messages, which tends to
in account statement, camt.053 greatly
and deliver valuable hide the immense potential associated
simplifies the complexity of managing outputs. with it. When looking at adopting
reconciliations, statutory/regulatory ISO20022, one needs to adopt the whole
reporting for payment transactions. framework – business model concept,

Figure 2: Homogeneous ISO2002 Landscape : Efficient and complete transport of Payment Information
Confirmation /
Payment Order Payments Clearing Payments Clearing Statement High STP
(ISO20022) (ISO20022) (ISO20022) ISO20022 ***
Buyer Bank 1 Clearing Bank 2 Seller

(Customer System (Customer
of Bank1) of Bank2)
associated data and process model, the Integration becomes much more efficient Efficiency
implementation guidelines, and the and seamless when different teams are
messaging. Once a team is trained in all speaking the same language such as in Global, long-standing banking and
of aforementioned areas, they will be EndToEndIdentification, UltimateCreditor, financial institutions work with a
able to deliver value consistently over Remittance Information (Structured or plethora of formats for payments and
a longer period of time, specifically Unstructured) and more so when these Cash management services that they
when conversations take place about conversations take place over email or the deliver electronically to their customer
onboarding/connecting/exchanging data phone. in different countries. Multiple versions
between bank and clients or a bank’s and layers of mapping, truncating,
We are in the era of ‘apps’ today and expanding overlaying payments and
partners.
the future of ‘apps’ and collaborative
platforms look bright. An app will very
soon analyze the payment information
available in an organization and deliver
ISO20022 is valuable outputs.

Multiple versions and
becoming the ISO20022 is becoming the standard of layers of mapping,
choice for new payments applications/
standard of choice solutions being built---thanks to the
truncating, expanding
for new payments prudent choice of XML (Extended Markup overlaying payments
Language) as the de-facto standard for
applications/solutions payment message exchange. Needless to
and cash management
being built---thanks say, no-one should be lagging behind or fields have built up in
left out from creating or consuming these
to the prudent choice solutions simply because they are not part IT systems of a bank
of XML (Extended of ISO20022 standards. rendering even small
Markup Language) as XML being a language which is easily changes for business
the de-facto standard understood by both computers and
or regulatory reasons,
human beings, is increasingly being
for payment message used for development of web-based complex and time-
exchange. applications. Payments Data in the form
of XML files can be rapidly integrated into
consuming.
web and mobile based applications.

cash management fields have built up Remittance information in structured and
in IT systems of a bank rendering even unstructured formats traverse without
small changes for business or regulatory loss, from originating customer (Creditor
reasons, complex and time-consuming. or a Debtor) to their banks and over
Also, fixed length formats are complex to interbank clearing over to the bank of the
maneuver with higher risks of regression, beneficiary and, finally, to the beneficiary-
when making a change. ISO20022 -enabling a true end-to-end reconciliation
standards have captured the essence of of information and closure of an open
the payments experience from multiple payable or receivable without manual
markets and formats. They provide a intervention in major percentage of the
more comprehensive set of data types payment volumes.
and sizes. Making a change in XML-based
For corporates, even bigger efficiency
data exchange formats is comparatively
gains can be expected in the form
easier with XML also lowering the cost of
of improved liquidity controls and
IT changes and risks of regression.
reconciliations based on enhanced For retail customers,
information and intra-day frequency
The case I had mentioned earlier in this
in Payment Status and Cash Reporting
ISO2002 standards
article is a good example of enhancing
STP. The structure and organization of
based on ISO20022 messages. As the will benefit in a cross-
adoption of ISO20022 gains momentum
data is greatly improved in ISO20022.
across financial institutions in multiple
channel experience
countries, corporates will also have an on initiation and
added advantage of better flexibility in
changing banking relationships as per the
follow-up of their
For Corporates, even business priorities and needs. Today, it is payment instructions.
extremely difficult to move out of locked-
bigger efficiency gains in proprietary formats.
Infrastructures such
can be expected in as real-time clearing
ISO20022 has included additional
the form of improved information about parties –- including are expected to be
liquidity controls actual and on-behalf initiation, beneficial to retail
intermediate and receiving roles--
and reconciliations which participate in payments clearing customers. Such
based on enhanced and settlement. This makes the task of infrastructures
extracting and sharing information with
information and regulatory and compliance authorities are being built on
intra-day frequency easier compared to traditional payment ISO20022 standards
data and process models.
in Payment Status and are appearing on
and Cash Reporting As an upcoming area of higher levels
national economic
of automation, ‘Exceptions and
based on ISO20022 Investigation’ are heavily leveraging a set agendas across the
messages. of 16 ISO20022 XML messages to deliver
globe.
superior efficiencies. These new standards
are in the phase of implementation by

Status and Account Statement reports. case to undertake such a massive
Existing EDI formats are seriously transformation.
S.W.I.F.T. has been challenged in providing better reporting
For retail customers, ISO2002 standards
playing the role of and reconciliation, and this is being
will benefit in a cross-channel experience
recognized by industry participants,
an anchor in the leading to continuous adoption of new on initiation and follow-up of their
promotion and standards. payment instructions. Infrastructures

such as of real-time clearing are
adoption of ISO2002 While SEPA implementation has been expected to be beneficial to retail
standards. The the flagship example, ISO2002 has customers. Such infrastructures are being
seen adoption in Nordic countries built on ISO20022 standards and are
roadmap of the roll in Customer to Bank and Interbank appearing on national economic agendas
out of MX is underway, Clearing. CBI in Italy has adopted the across the globe.
standards for transformation of customer
and S.W.I.F.T. is driving to bank space; the National Payment Much needed acceleration of the
the migration of the Infrastructure in India has moved firmly adoption of ISO20022 needs to be
with the new RTGS and ACH being triggered by the originators and
National Payments implemented on ISO20022 standards; recipients of payments and government
Infrastructure on to Switzerland has adopted ISO20022 and corporate institutions have a big role
in transformation of domestic Swiss to play here.
ISO20022 in multiple Franc payments in Interbank and Postal
countries. payments; Singapore is doing the same For corporates, rather than looking only
for G3 real time clearing; among others. at processing of Payment instructions,
There are many more cases showing a the business case needs to include
continuously expanding base of users improved yield in liquidity and cash
banking institutions and the number of of ISO20022 payments standards. reserves. Upcoming evolutions and
adopters is increasing slowly but steadily. Recently, the Federal Reserve Bank of trends such as e-Invoicing and electronic
USA has initiated a dialogue on the Bank Account Management (eBAM),
Adoption of ISO20022 transformation of Payment Infrastructure which will bring tangible returns on
and Landscape of USA for the future. investment in short periods of time can
Common Global Implementation This can be another opportunity for the also form the premise for the business
(CGI) Working Group, which was adoption of ISO20022 standards, which case.
established in 2009 by major global can provide a boost to global payment
banks, corporates, ERP vendors and processing. Central Banks or National Payment
S.W.I.F.T has been a determined step Authorities can take best practices
towards providing implementation It be gross ignorance to give an and lessons learnt from the European
guidelines for the adoption of the impression that the velocity of payments Council, which have led the
new standards by banks and financial adoption of the new standards has implementation of SEPA in difficult
institutions, as well as corporates. CGI reached desirable levels. There are still market conditions.
has published implementation guidelines challenges in the path of full adoption
for Customer to Bank Instructions and of ISO2002. One of the most critical It is not possible to conclude without
Bank to Customer reports like Payment issues is the viability of the business mentioning S.W.I.F.T. in this context.

S.W.I.F.T. has been playing the role of an The Way Forward National Governments and Central
anchor in the promotion and adoption of banks would have to holistically review
ISO2002 standards. The roadmap of the Institutions with payments at the core and promote ISO2002 standards and,
roll out of MX is underway, and S.W.I.F.T. of their business strategy need to build wherever possible, incentivize the
is driving the migration of the National urgency in developing competence adoption, with an understanding that the
payments Infrastructure on to ISO20022 on ISO2002 standards by leveraging new standards will provide the required
in multiple countries. internal resource pools or engaging with assurance to the overall regulatory,
consulting partners. New standards need
statutory and economic wellbeing of the
Myths and confusion exist about ISO2002 to form the fulcrum of the IT application
standards, which need to be clarified commercial ecosystem.
and integration strategy in the payments
or resolved. As mentioned earlier,
and Cash Management domain. This may With market practice groups and
ISO20022 payments standards should
need specific awareness and training communities engaging with multiple
not be seen as only a payment message
programs to be conducted inside the stakeholders in defining and refining
format change, which in turn completely
organization.
undermines its value proposition. XML ISO20022 standards, the industry is
being performance unfriendly is another making a serious effort to make ISO20022
Software solution providers need to
misunderstanding. Innovation and as the standard for future of payments
adopt ISO2002 standards at the level of
evolution of technology has proven that Processing and Clearing and Cash
the business process and data models
the cost of storage, network bandwidth Management. Now, whether it makes
to deliver true value for the investments
and processing power are non-issues business sense to delay adoption is
their customers make in procuring IT
as far as the adoption of XML-based anybody’s guess, indeed.
solutions are concerned. solutions.
Nitin Sirohi
Principal Consultant,

Members of an avian
species of identical
plumage tend to
congregate
(Birds of a feather flock together)
What makes the life of a business head of a capital markets firm challenging? The easy access to global
markets, sophisticated investment tools, growing transaction volumes, new investment avenues, among
many other factors.
At Tata Consultancy Services, we believe that the need of the hour is to ‘Uncomplicate’.
And, that these same challenges can be transformed into opportunities for growth. This demands a
time-tested, market-ready and move-as-you-grow solution such as TCS BaNCS. A universal financial
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Revival of Biometrics in Banking:
Heralding a New Era in mPayments
Banking is now living in an omni channel (CAGR) from the USD 12.8BN spent in is a common perception that mobile
world. Changing avenues for customers 20121. Gartner projects that over the payments platforms are less secure than
make banking easier, but nevertheless next four years the mobile payments e-commerce or traditional payment
also potentially riskier. The transition industry will experience an average methods1. Using 2012 industry market
of money --- from physical money to annual growth of 35 percent, creating projections on e-commerce sales in North
e-money -- has also transformed the a market of more than 450 million America, CyberSource, a provider of
world of crooks as well; where petty users worth USD 721 billion by 20172. payment processing and risk management
thieves are now capable of committing Parallel to this phenomenal growth, services, has estimated that total fraud
online fraud. the fraud matrix is also growing. There revenue loss translates to approximately
USD3.5 billion3. Fraud incidents within
Forrester Research forecasts that US 1 Denee Carrington et al, US Mobile Payments a span of five years may account for 1.5
Forecast, 2013 To 2017, Forrester, 16 January
mobile payment transactions will 2013
3 Paul Demery, Internet Retailer, 28 March, 2013
reach USD 90BN in 2017, registering 2 Janessa Rivera and Rob van der Meulen, : Source: http://www.internetretailer.com/
Mobile Payment, Worldwide, 2013 Update, mobile/2013/03/28/online-fraud-costs-e-
a 48% compound annual growth rate Gartner, 4 June 2013 retailers-35-billion-2012

comes into play, and has many bankers particularly iris patterns and fingerprints,
excited about its potential. Don Callahan, are unique enough to distinguish a
Using 2012 industry Citigroup CTO, says, “The idea of single individual from the entire global
biometrics is something that I am excited population.
market projections about. Having digital print is very good.
on e-commerce sales Accessibility to biometrics information Biometrics in banking has evolved over
is extremely important to us....having the years, starting from the 1970s, and
in North America, an organized back-end process to make has attained some level of maturity.
CyberSource, a sure you are who you say you are, is On analyzing various press releases on
terrific for the banking industry.”6 Central the Finextra portal, a specific trend is
provider of payment Banks around the world are also in the seen emerging. Until 2005, the financial
processing and risk process of formulating strategies to services world used fingerprints, signature
mitigate this risk. The Governor of the recognition, vein pattern, and hand
management services, Central Bank of Nigeria (CBN) is in the geometry; and after that (post 2005), the
has estimated that process of capturing biometric data technology extended to include Voice
of bank customers to ensure better Biometrics, Iris Scan, Face recognition,
total fraud revenue services. Amidst all these happenings, among others.
loss translates to Apple launched the iPhone 5S and,

Hosseini and Mohammadi of Iran, in their
subsequently, Samsung launched its 5S
approximately USD3.5 model using fingerprint biometrics for analysis of 121 global banks in 2012 had
concluded that fingerprints are the most
billion user authentication.
This article aims to bring out the

relevance of biometrics technology in
percent of all mobile transactions, says

the banking world, and suggest why Until 2005, the
biometrics should be the basis of multi-
Avivah Litan, an analyst at technology
factor authentication; diagnose fraud financial services
research company, Gartner.4 The most
common threat being that almost
prevalent in mobile channels; and, review
world used
the effect of new mobile devices being
70 percent of mobile phones aren’t
released in the mass market that are fingerprints, signature
protected by passwords5.
embedded with fingerprint technology for
mobile payments.
recognition, vein
Bankers across the world are grappling
with ways to find a lever to plug these
pattern, and hand
Evolution and Prevalence of Biometrics
losses. How can a banker establish
in Banking
geometry; and after
the fact that the person transacting is
actually a client and not a fraudster? that (post 2005), the
Biometric technologies analyze unique
This is where the biometrics science
biological traits that differentiate one technology extended
4 Olga Kharif, Fraud threatens mobile payment
human being from another, such as to include Voice
system, Bloomberg BusinessWeek, 7 October fingerprints, the retina or iris or the
2012. accessed fromhttp://www.stltoday. pattern of an individual’s voice. Data Biometrics, Iris Scan,
com/business/local/fraud-threatens-mobile-
payment-system/article_e49cfb01-9cbe-5b68-
93f2-38578183fc5b.html
gathered by some of these technologies,
Face recognition,
5 Carole Theriault, Sophos Naked Security
blog,, 9 August , 2011. Accessed from: http://
6 http://economictimes.indiatimes.com/opinion/
interviews/weve-changed-banking-the-way-
among others.
nakedsecurity.sophos.com/2011/08/09/free- google-changed-search-don-callahan-citigroup-
sophos-mobile-security-toolkit/ cto/articleshow/16816195.cms

Biometrics in Banking - The Spread
Dynamic
Signature
4% Facial
Keystroke 3%
1%
Voice
9%
Iris
5% Biometrics in Action
Fingerprint
41%
Hand Vein
Employee-
7%
Focused
30%
Client-
Hand Focused
Geometry 70%
14%
Fingervein
10% Fingerprint
and Hand
Fingerprint Geometry
and Iris 2%
4%
USA: Biometrics in Action Surveyed Banks and Their Geography
MENA
Client-
19%
Focused
22% Americas
Europe 39%
Employee-
10%
Focused
78%
APAC
32%
USA (n=55)
Global Banking Survey on Biometrics; N=184

Biometrics Type Applications Covered Countries
Dynamic Signature Internet banking, Branch banking, Document Estonia, Israel, USA, China, UK
processing, Workflow automation
Facial Branch banking, Fraud Recognition, Access control USA, UK, China, Switzerland
(Data center), Access control (Physical, Treasury),
Access control (Building, Time and attendance)
Fingerprint ATM, POS, ePayments, Access control (Applications), Costa Rica, Egypt, Mexico, Singapore, USA,
Branch banking, online banking, Fund Transfer, Bangladesh, Benin, Bolivia, Brazil, Brunei,
Access control (Physical), Access control (Network), Cambodia, Chile, China, Colombia, Germany,
Checking transaction history, Check Cashing, Access India, Indonesia, Kazakhstan, Kenya, Malaysia,
control (safe deposit box), Access control (Time & Mauritius, Mexico, Netherland, Nigeria,
Attendance), Biometric card, Online purchase, Loan Pakistan, Panama, Philippines, Puerto Rico,
Origination, Debit card, Access control(customer Russia, Saudi Arabia, South Africa, Trinidad,
information) UAE, Uganda, USA, Vietnam
Fingerprint Plus Iris Access Control (attendance), Access control Oman, India
(Network, Treasury), ATM, epayments
Fingerprint Plus Hand Access control (Safe deposit), ATM USA, Japan
Geometry
Finger Vein ATM, Access control (Server room), POS, Branch Poland, USA, Turkey, Japan
banking
Hand Geometry ATM, Access control (Safe deposit), Access USA, UAE, Puerto Rico, Saudi Arabia, Ukraine
control(Time and attendance)
Hand Vein Access control (Data center), ATM, ATM, Branch USA, Turkey, Japan, Switzerland
banking, Access control(Vaults Access)
Iris Branch banking, ATM, Internet banking, Access Jordan, Yemen, USA, Italy, Turkey, Lebanon,
control(Time and Attendence) Egypt, Norway, Yemen
Keystroke Internet banking Ecuador, USA
Voice Telephone banking, Branch banking, Password/PIN Australia, Israel, Indonesia, USA, Brazil,
reset, Telephone banking, high-risk transactions, Pakistan, China, Netherland, Canada, New
Mobile banking Zealand
popular biometric technology7. We have technology and is used in more than 35 applications, including attendance
extended this study to include 184 banks countries. Other important indicators are: registration
with the results being displayed above:
• Customer facing adoptability varies
• The USA has the most diverse use of
across countries and technology
Our study also concludes that fingerprint biometrics technology. However, most
continues to be the most popular • Mobile banking related adoptability is of USA-based adoption is employee-
rare, with a few banks piloting voice focused, rather than client-focused,
7 Seyyede Samine Hosseini, Shahriar biometrics which is in variance with the rest of
Mohammadi, Review Banking on Biometric in
the World’s Banks and Introducing a Biometric • Most of the employee-focused usage the world, where the technology is
Model for Iran’s Banking System, J. Basic. Appl.
Sci. Res., 2(9)9152-9160, 2012 is for access to various facilities and client-focused.

Banking Channels
Kiosk ATM Web Mobile IVR Branch
Access through First

Biometrics
level Authentication
Second level Authentication

Pin/Password/OTP
for Transaction
• Localization of technology: fingerprint correlation between biometric adoption

and iris In India and Oman; finger vein, and the flexibility of the core banking
hand vein, finger print, hand geometry system. Emerging market banks were It is a strategic
in Japan; keystroke in Ecuador and able to leverage client-focused biometrics
USA technology as they run on modern imperative to fall back
• Japanese banks have shown a high
platforms, whereas their counterparts in
on the multi-factor
the developed world could not do so. For
level of maturity by offering their
customers bank cards with a chip, that
example, Capitec Bank of South Africa authentication with
has been a pioneer in that geography and
carries biometric data
has been using fingerprint biometrics
biometrics at the
All of the above point to the fact that technology to reach economically less front. It is all about
client-focused biometrics technology privileged citizens since 2006. It moved on
in banking is yet to converge globally, to implement biometric ATMs in 2012. combining the facts
and has evolved differently in different
However, many times, banks have
of “what you have”,
geographies. We also observe a
pioneered biometrics in a particular “what you know” and
geography and not been able to
sustain the momentum. For example, “what you are”.
Our study also Nationwide, gave up on iris biometrics
in 2003 after embarking on the same in
concludes that 1998. Lack of business benefits and high
fingerprint continues costs were cited as reasons; e.g., for the
It may also be noted that many cases
ATM project the iris recognition alone
to be the most popular was 25 per cent of the cost of the ATM, included in our study take into account
meaning it would not be cost-effective for POC stage implementations, and there
technology and is a wider rollout8. was no follow-up information available.
used in more than 35 A few IT solution providers have tied up
8 Andy McCue, Nationwide ditches iris and
with third parties and white-labelled
countries. fingerprint biometrics, ZNet, 23 September,
2003. Accessed from: http://www.zdnet. biometrics products for employee-focused
com/nationwide-ditches-iris-and-fingerprint-
biometrics-3040126657/ applications. However, the focus must

mobile device and know the transaction
pin, but if you are not authenticated by
We now have an ISO personal traits, such as fingerprint, you
may not be able to access the device to
standard 19092:2008 complete the transaction.
related to biometrics
While we encounter technology
security framework in sophistication in what we have and what
the financial industry. we know, we still are far from achieving

industry best practices on what you are,
It clearly establishes i.e. biometrics, across channels.
the security We now have an ISO standard 19092:2008

requirements for the related to biometrics security framework
in the financial industry. It clearly
implementation and establishes the security requirements for
management of state- the implementation and management of
state-of-the-art biometric identification
of-the-art biometric technology. As per the framework, the
enrolment repository is connected to a
identification management console that helps configure titled “Planning Your Cross-Channel
technology. biometric parameters for enrolment, Future” published in December 2012;
authenticates users and allows system mobile banking transactions in the USA
access privileges. DB Research also states are projected to grow by 240% between
that biometric authentication methods 2010 and 2015. In the same period,
enjoy a remarkable degree of acceptance online transactions are expected to
soon shift to client-focused applications
among the European population. Hence, grow at 10%, ATM transactions by 7.3%,
such as channels.
there is a growing probability that whereas the contact center and the
biometric technologies could also be branch are expected to see a decline in
Future growth of biometrics mooted
applied in banking 9. transactions10.
around multi factor authentication
Changing Channel Priorities: Growth of This changing channel priority has put
The banking world has seen the
Mobile Banking and Challenges additional pressure on banks. Banks
prevalence of two-factor authentication
are not equipped to handle the fraud
for some time now; but fraudulent
In an omni channel world, banks need instances related to mobile banking.
transactions are growing year-on-
to adopt a “bricks, clicks and touch” Access control is the first level of security
year. When we transact virtually, our
strategy, revolving around the concept and this has generally been managed
identities are determined by IP addresses,
of security, accessibility, personalization well through two-factor authentication
various “keys” and passwords, most
and convenience. Achieving this is a of Password, OTP/PIN in an online
of which are susceptible to tampering
Herculean task amid changing customer channel scenario, but in the case of
and fraud. Therefore, it is a strategic
channel adoption trends. Taking the mobile banking, the threats are not
imperative to fall back on the multi-factor
trends from the CEB TowerGroup Report clear. Each passing day, new malware
authentication with biometrics at the
are being identified, and many devices
front. It is all about combining the facts
of “what you have”, “what you know” 9 Thomas F. Dapp, Growing need for security in
online banking, DB Research, 2012. Accessed 10 Nicole Sturgill, et al, Planning Your Cross-
and “what you are”. To carry out a mobile from: http://www.dbresearch.com/PROD/DBR_ Channel Future: The Impact of Retail Banking
INTERNET_EN-PROD/PROD0000000000284825. Delivery Channel Volumes in North America,
payment transaction, you may have the pdf CEB Towergroup, December 2012

are not password protected3. As per the • Fujitsu Disney-branded F-07E Android
Third Annual Mobile Threats Report, device, launched with fingerprint
mobile malware has grown by 614% As per the Third sensors
from March 2012 to March 2013 and
73% of all malware exploit holes in Annual Mobile • Motorola, working on phone with
fingerprint sensor
mobile payments by sending fraudulent Threats Report,
premium SMS messages, each generating • Microsoft Windows 8.1, offering
around 10 USD in immediate profit11. mobile malware enhanced support for fingerprint
The technology platforms, iOS, Android,
Symbian, BlackBerry, Java ME have varied
has grown by 614% sensors
threat indications. The most disturbing from March 2012 • Diebold has launched a new line of
fact is that the popular platforms are fingerprint ATMs in Kenya
threat prone. The Internet Security to March 2013 and
• The Indian government has given
Threat Report 2014 reported that 97% of 73% of all malware a go-ahead for fingerprint or eye
malicious threats by platform is reported
for the Android platform. However, it exploit holes in mobile scan enabled ATMs to leverage the
biometric-based Aadhaar number,
was intriguing to note that 102 (82%)
documented mobile vulnerabilities by
payments by sending which establishes uniqueness of every
individual on the basis of demographic
platform for 2013 was recorded for the fraudulent premium and biometric information
iOS platform12. The threat is increased
when access is not secured, and if a SMS messages, each • Biometric ATMs are being filed for
device is used to access unwanted generating around a new patent application by Bank
content, there is a greater possibility of of America. This patent application
malware infesting the system. 10 USD in immediate outlines a system for authenticating
A paradigm shift in Mobile Payments:

profit. users with a combination of a pin-code
and fingerprint biometrics
Fingerprint biometrics securing access
control Mobile devices with biometrics will
help provide the first level of security,
The launch of the iPhone and the iPad are payments. The availability of biometrics which Symentec calls traditional access
highly disruptive trends in banking. With authentication at the source is certainly a control. If the voice biometrics based pilot
the launch of iPhone 5S and Samsung 5S giant change in the banking world. being carried out by ING Direct Canada
with a fingerprint scanner, embedded and ANZ is successful and the Bank of
within the phone’s hardware, the world A few instances reported during 2013 America patent for authenticating mobile
of biometrics will open up, especially in and early 2014 suggest that fingerprint transactions through voice biometrics
mobile payments. Internally, Apple allows biometrics is gaining mainstream
gains mainstream acceptance, we may
biometrics-authentication for iTunes, and acceptance:
soon see biometrics playing a role in
this has a huge potential for the future of • iPhone 5S, launched with fingerprint replacing OTP/Pins.
sensor that allows users to unlock
11 Juniper networks Mobile Threat Center Third
Annual Mobile Threats Report: March 2012 their phone with their fingerprint, and This development may be termed
through March 2013. Accessed from: http:// verify purchases on iTunes without disruptive, not because mobile-based
www.juniper.net/us/en/local/pdf/additional-
resources/3rd-jnpr-mobile-threats-report-exec-
having to input a password payments may potentially get safer, but
summary.pdf also because this change must be looked
• Samsung 5S, launched with a
12 Paul Wood, et al, Internet Security Threat from a liability perspective. The fraud
Report 2014 (appendix pp 32-33), Symantec fingerprint scanner
Corporation, April 2014 Accessed from liability at self-service channels lies with
http://www.symantec.com/content/en/us/ • HTC has launched One Max with 5.9- the clients. In the biometrics scheme of
enterprise/other_resources/b-istr_appendices_
v19_221284438.en-us.pdf inch display and fingerprint scanner things the customer has to be present

in person, while making a transaction. We must, however, remain cautious, as
And, in this context, customers are we have seen the failure of Motorola’s
safer if biometrics evolve to the core of Atrix Smartphone with fingerprint reading
the mobile payment scheme of things. technology due to its inconvenient
Customers are an important part of the position at the back of the phone and
mPayments value chain and the recent
its slow processing. The current phase
wave of fingerprint biometrics being
must be seen as a resurrection, where
circulated in the mass market embedded
biometrics technology is poised to occupy
within the phones will, in all possibility,
trim down the fraud matrix. a central position in fraud prevention.
The Biometric Research Group expects It assures the convenience of use and
introduce biometric technology to the
that worldwide mobile payment global smartphone mass market. delivers the prospect of fraud prevention
transactions will reach USD 250 BN in at the customer end — a secure first
2014, reaching USD 750 BN in annual Conclusion level access point to facilitate safe and
transactions with more than 700 seamless mobile transactions. While
million users by 202013. Biometrics The detrimental factors in the growth a few analysts still remain sceptical
will accelerate mobile commerce, of biometrics have been higher cost, about the role of biometrics in future
especially in North America, because ambiguity related to standards, and the fraud-prevention capabilities, it looks
the technology can offer a higher level proliferation of diverse technologies. like banking consumers are gradually
of security, while providing an intuitive It was also a bank-led activity, where
embracing it. A survey commissioned
customer experience. It also expects banks had to invest in costly biometrics
that over 90 million smartphones with by ANZ showed that 79 percent of
technology. The world needs simplicity
biometric technology will be shipped in Australians said that they are comfortable
and ubiquity for a technology to succeed.
2014. The Group predicts that Apple will with fingerprint technology replacing
And, probably we are in one such
initially lead in the deployment of such watershed moment, where biometric banking PINs.14 We may soon be seeing a
devices, due to fact that the firm is the standards are in place, and where mobile safer world of mobile banking , heralding
first consumer electronics provider to devices with fingerprint biometrics a new era in mPayments.
technology can shift the cost burden from
13 Rawlson King, Mobile commerce will drive
millions of biometric smartphone shipments, bankers to the consumer. Fingerprint
billions in transactions, Biometric Update, biometrics seems to be the new buzzword 14 Spandas Lui, NFC to stick finger in biometrics
13 September, 2013 Accessed from: http:// banking, ZDNet, 8 October , 2012.
www.biometricupdate.com/201309/mobile- that will bring in disruption in the mobile Accessed from http://www.zdnet.com/au/
commerce-will-drive-millions-of-biometric- banking transactions space. nfc-to-stick-finger-in-biometrics-banking-
smartphone-shipments-billions-in-transactions expert-7000005295/
Biplav Panda
Associate Consultant

The Volcker Rule – Seeking to
Shield banks’ customers
Today, Wall Street faces a 4.3 billion dollar protection act. The Rule, which was The Rule attempts to reduce risk and
challenge as it will be forced to implement initiated by former Federal Reserve banking instability by restricting US
the Volcker rule, which imposes curbs to Chairman, Paul Volcker, in response to the banks from taking part in proprietary
prevent a financial meltdown. With this 2007-2008 financial crises, will prohibit and speculative trading by imposing
Rule, banks may be forced to focus on banks (financial institutions) from: strict frameworks to justify exemptions
their core business lines while minimizing for certain activities like market trading,
systemic risks and ensuring and enforcing • Engaging in short-term proprietary underwriting, hedging, trading in
other forms of reform. trading of securities, derivatives, government obligations and organizing
commodity futures and options on and offering a hedge or private equity
On December 10, 2013, The Federal these instruments for their own fund.ii The Final Rules limit these
Reserve, Federal Deposit Insurance account exemptions if they involve a conflict of
Corporation and three other agencies interest, an exposure to high-risk assets
formally adopted the Final Rules, • Owning, sponsoring or having or trading strategies and are a threat to
implementing section 619 of the Dodd – beneficial relationships with hedge the safety and stability of the banking and
Frank Wall Street Reform and Consumer fund/private equity managersi financial system in the US.

Banks, in short, will not be allowed Proprietary Trading Prohibition: They are also permitted, in limited
to invest in funds that have not been circumstances, to engage in
registered with the SEC and from The Rule prohibits proprietary trading proprietary trading in obligation to a
partaking in hedging activities that do not by banking entities; however, there are foreign sovereign and/or its political
have a definite, identified risk. This will exemptions for: subsets.
lead to a number of changes in a bank’s
investment and hedging strategies. 1. Underwriting: Banking entities that 5. Trading activities of foreign banking
act as underwriters for distribution institutions: The Rules do not prohibit
What do the Rules say? of securities and the trading desk’s trading by foreign banking entities,
underwriting position being related so long as the trading decisions and
The Final Rules have defined and to that distribution are exempt as principal risks are held outside of the
identified the characteristics of prohibited long as the position does not exceed United States. Transactions could
and permitted activities and investments. the reasonably expected demands of involve US institutions but only under
customers. specific circumstances.
2. Market making and related activities: Covered Fund Prohibitions:

A trading desk is required to purchase
The Rule attempts and sell one or more financial The Rules, as stated earlier, prevent
instruments; however, they would financial institutions from owning or
to reduce risk and need to be designed such that they do sponsoring hedge and private equity
banking instability by not exceed the expected demands of funds, which are referred to as “covered
customers based on historical demand funds”. Under the Final Rules, the
restricting US banks and market factors. The market- definition of covered funds was clarified
from taking part making desk can hedge the risks of and it included any issuer that is an
its market-making activity only if it is investment company. However, the Rule
in proprietary and in accordance with risk management excludes covered funds of certain entities
speculative trading procedures that are a requirement with more general corporate purposes,
under the final Volcker rules. for example, wholly owned subsidiaries,
by imposing strict joint ventures, SEC-registered investment
frameworks to justify 3. Risk-mitigating hedging: A banking
entity would be required to conduct
companies and business development
companies.
exemptions for certain analyses to support its hedging
strategy and be able to evaluate its Compliance Requirements and how the
activities like market effectiveness and recalibrate the rule will affect information technology
trading, underwriting, strategy. Under the Rules, financial
institutions would be required to The Rules hand out compliance
hedging, trading record their transactions in real-time requirements based on the size and
in government and identify the hedging rationale for amount of activity conducted by a bank,
certain transactions that could present to reduce the burden on smaller entities.
obligations and a compliance risk. Banks will be required to set up an
organizing and internal program designed to ensure and
4. Trading in government obligations: monitor compliance with the final Rules.
offering a hedge or A financial institution can continue Banks that do not engage in activities
private equity fund. to engage in proprietary trading only specified under the Rules do not have
under a US government, agency, such compliance program requirements.
state and municipal obligations. The program will aim to monitor

Under the Rules,
financial institutions
would be required
to record their
transactions in real-
time and identify the
hedging rationale for
certain transactions
that could present a
compliance risk.
compliance activities as well as ensure The program will require larger financial
that the trading bans and restrictions institutions to establish a detailed will be able to detect and record areas
defined under the Rule are complied with. compliance dictate, which would include
of non-compliance and submit to the
the requirement of the CEO’s attestation
regulating agencies on request. The
while smaller banks will require a
biggest challenge of such a system is that
simplified compliance program. The
it would have to be able to differentiate
entities would be required to maintain
between those activities that are
A trading desk is documentation so that agencies can
permitted and those that are prohibited.
monitor their activities in case of evasion.
required to purchase Banks that perform significant trade
Many financial regulations have been
implemented in recent years that have
and sell one or more operations need to be able to report
pushed banks to add new controls, but
quantitative measurements, which are
financial instruments; designed to monitor these activities. with the Rule, which came into effect on
The requirement would be calibrated 1st April 2014, the number of changes
however, they would depending on the type and size of firms’ to be implemented has now become
need to be designed trading activities. more urgent. These include the need to
improve data quality, reducing end-user
such that they do not Implementing these compliance developed applications and spreadsheets
exceed the expected programs under the Volcker rule and improving front-office systems.iv
regulation embodies significant changes
demands of customers to the banking IT infrastructure, Impact of Volcker Rule on Investment
data processing and record-keeping banks, hedge and private equity funds
based on historical procedures.iii New, internal banking
demand and market policies will need to be developed to With the Volcker Rule now law,
document, describe and track trading investment banks and securities dealers
factors. and investment fund activities. Controls are the most affected. Brian Moynihan,
will have to be set up such that they CEO of Bank of America Corporation,

the implementation of the Rule are market-wide risk which increased as
expected to gain huge profits. IBIS world banks exposed themselves to more
The Rules do not reports that, over the next five years, the risk through diversification. A very
revenue for the private equity, hedge real concern of the implementation of
prohibit trading by funds & investment vehicles industry will this Rule is its inability to differentiate
foreign banking increase at an annualized rate of 3.8% to between proprietary trading and the
USD 107.7 billion.viii legitimate function a financial institution
entities, so long as should partake in to remain profitable.
the trading decisions A Rule surrounded by skepticism While some activities are clearly
defined as proprietary trading there
and principal risks Since the ruling, many commentators
are significant questions surrounding
have been writing about the lack of
are held outside of necessity for such a Rule. The biggest
activities related to market making and
hedging of risks. Regulators will have to
the United States. criticism being that far from stabilizing
keep a close eye on how banks change
the economy, the implementation of
Transactions could this rule would send it into a tailspin.
now that the Rule is implemented.
involve US institutions The ultimate goal of the Rule is to build

financial institutions and also prevent
but only under specific any future crisis. To minimize the need
circumstances. for the government to act as a safety
net during a crisis, regulars will need to Implementing these
create tools that:
compliance programs
i. Internalize the cost that arises during a under the Volcker
released a statement that ending trading crisis, including insurance
activities under the Volcker Rule costs the Rule embodies
banks near USD 500 million of revenue ii. Introduce more supervision of banks significant changes
per quarter.v Stephen Hoopes of IBIS through capital requirements
World opines that the Volcker Rule is to the banking IT
anticipated to further harm both revenue iii. Limit the sort of activities that banks
and profit for large investment banks. He can do
infrastructure, data
notes that a number of large banks have processing and record-
already witnessed losing some of their The Volcker Rule only addresses the third
best traders to hedge funds.vi Hoopes, component, and for the market to stay keeping procedures.
however, also opines that the general stable only three will have to work in New, internal banking
increase in corporate profits and the tandem.
improving US economy can more than policies will need
make up for the negative trends related to Banks diversified their income streams
to be developed to
the Rule.vii by introducing more business lines
in the hope of making the financial document, describe
The impact on the hedge fund and private
equity industry is not as severe. With
system more stable. However, there is
and track trading
no evidence to back up such a claim. In
banks being restricted from speculative fact, as per financial theory, the risk to and investment fund
activity, non-banking institutions now
have access to a wider market with lower
an individual firm should be recorded
activities.
separate to that of the broader market.
competition. The firms that remain after The economic crisis was a result of a

(CLOs) that fall under the Volcker rule. impact on banking activities in the near
(CLOs are used by banks to remove loans future as banks work to carve out new
The impact on the from their balance sheets by selling the profitable operating models in what will
exposure as some form of securitization.) now be a high regulated and scrutinized
hedge fund and ix
Beginning June 30, 2014, banking environment.x
private equity industry entities with USD 50 billion or more in
i Final Rules to Implement Volcker Rule Board
consolidated trading assets and liabilities
is not as severe. With
of Governors of the Federal Reserve System;
will be required to report quantitative Commodity Futures Trading Commission;
Federal Deposit Insurance Corporation; Office of
banks being restricted measurements. Banking entities with at the Comptroller of the Currency; Securities and
Exchange Commission
least USD 25 billion, but less than USD
from speculative 50 billion in consolidated trading assets ii Final Rules to Implement Volcker Rule Board
of Governors of the Federal Reserve System;
activity, non-banking and liabilities, will be subject to this
requirement on April 30, 2016. The same
Commodity Futures Trading Commission;
Federal Deposit Insurance Corporation; Office of
the Comptroller of the Currency; Securities and
institutions now have Rule comes into effect on December Exchange Commission
21, 2016, for those with at least USD 10
access to a wider
iii http://searchcompliance.techtarget.com/
guides/FAQ-How-would-Volcker-Rule-
billion, but less than USD 25 billion, in regulations-affect-compliance-programs
market with lower consolidated trading assets and liabilities. iv http://searchcompliance.techtarget.com/
guides/FAQ-How-would-Volcker-Rule-
competition. A major concern for banks is that regulations-affect-compliance-programs
v http://www.valuewalk.com/2013/12/volcker-
compliance with the new regulations rule-ripple-effect/
will cost them billions of dollars just
vi http://www.valuewalk.com/2013/12/volcker-
to continue to engage in permissible rule-ripple-effect/
Conclusion activities under the Rule. The Rule’s vii http://www.ibisworld.com/media/2013/12/20/
volcker-rule-financial-sector-2/
ultimate impact will depend on how
The final Rules came into effect on April closely the banks are scrutinized with viii http://www.ibisworld.com/media/2013/12/20/
volcker-rule-financial-sector-2/
1, 2014. The Federal Reserve Board has regards to permissible trades and the
ix http://www.reuters.com/article/2014/04/07/us-
extended the conformance period until tolerance limit to speculation. Financial fed-volcker-idUSBREA361R820140407
July 21, 2015. Recently, the Federal institutions should begin preparation of x http://www.lexisnexis.com/communities/
Reserve gave banks two more years to compliance programs in adherence to corporatecounselnewsletter/b/newsletter/
archive/2014/01/06/the-volcker-rule-s-impact-
divest their collateralized loan obligations the Final Rule. The Rule will have a huge on-financial-institutions-and-companies.aspx
Priyanka Sondur
Associate

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Payments in India
– A Continuing Journey
It has been more than three years since on which economic activity rides, past
we covered Indian Payments in volume 4 trends often serve as a reliable indicator
of the TCS BaNCS Research Journal. Over of future direction.
this period RBI (Reserve Bank of India)
India has seen RTGS
and NPCI (National Payments Council Progress over the Last Few Years volumes grow at 21%
of India) have taken progressive strides
in further modernizing the payments India has seen RTGS volumes grow at CAGR for the last
infrastructure in India. In addition, 21% CAGR for the last four years with the four years with the
since then, there has been increased number of participant banks increasing
availability of new payment instruments, from around 100 to nearly 170. This number of participant
especially in the P2P (Person to Person) growth in itself is spectacular, but is
even more significant considering that
banks increasing from
and P2B (Person to Business) space. It is
worthwhile to take a closer look at some the minimum threshold for RTGS was around 100 to nearly
of these key advancements achieved in doubled from Rupees One Hundred
the last few years. Payments being an Thousand to Rupees Two Hundred
170.
integral part of the core infrastructure Thousand, thanks to a mass adoption of

the Next Generation Real Time Gross opportunities to further strengthen
Settlement (NG-RTGS) system, which not their liquidity management as far as
The aim of NACH only places India comfortably in meeting collections are concerned.
increasing payment volumes, but also
is to centralize provides a platform that will enable Keeping pace with global payment trends
and developments in Europe (SEPA),
different regional advanced liquidity management services
the payment infrastructure in India is
and future date functionality.
clearing schemes and also being modernized by adapting to
The NPCI (National Payments newer and more robust standards. This
standardize processes Corporation of India) has introduced is best demonstrated by the adoption of
and practices therein. a National Automated Clearing House
(NACH) scheme to support high volume
ISO 20022 standards for NG-RTGS and
NACH-Debit. By enforcing ISO 20022
Besides supporting electronic transactions efficiently. compliance, RBI and NPCI have enabled
The aim of NACH is to centralize the flexibility of offering value-added
NACH credit different regional clearing schemes and services, and also built a standardized
transactions, the standardize processes and practices
therein. Besides supporting NACH
platform for improved efficiencies and
Straight-Through-Processing.
system also enables credit transactions, the system also
enables financial inclusion with the Consumers in India are emerging as
financial inclusion AADHAR Payment Bridge that has rapid adopters of alternative channels
with the AADHAR enabled benefits and subsidies to be
passed onto beneficiaries based on
like mobile, kiosks and through
business correspondents. They expect
Payment Bridge a unique identification number for the relationship with their banks to
residents of India. The NACH is today become more conversational, and are
that has enabled used for Old Age Pension Payments, demanding real time and complete
benefits and subsidies Student Scholarships and a host of other
Government Welfare Schemes. In the
servicing capabilities. Features like the
ability to make utility payments from
to be passed onto last three financial quarters alone, the the mobile, receive alerts when the
payment volumes on NACH have grown beneficiary is credited are now par for
beneficiaries based on exponentially from close to 1 million per the course. The corporate treasurer is
a unique identification month to over 20 million per month.
NPCI expects these volumes to grow
now more aware and expects the same
level of services as provided by the
number for residents significantly as more regional clearing best global transaction banks. Seamless
transactions move to the NACH, and it payment initiation, real-time status
of India. has displayed far-sightedness in building reporting, easier reconciliation and
a system capable of handling 10 million the optimal use of liquidity are all now
transactions per day. Additionally, NACH- standard expectations from a corporate
Debit is ready to be launched shortly, customer who is now interested in
the alternative scheme, NEFT (National which will not only promote digitization exploring the flexibility that hand-held
Electronics Fund Transfer). Remarkably, and centralized management of debit devices can provide. Kiosks and business
in terms of the value of the total mandates, thereby reducing the risk of correspondents have played a key role in
transactions in a year – more than 75% frauds, but also provide a high degree providing economical servicing channels
of growth was observed (only customer of control to the payer with regards to expand financial inclusion.
transactions) between the years 2011- to modifications/ cancellations. This
12 and 2012-13. Due credit needs to system will also serve to expand the The last three years have witnessed the
be given to the RBI (Reserve Bank of service network by including corporate near doubling of the number of ATMs,
India) for having the foresight to launch customers and providing them with and PoS machines increasing by more

have also provided India with a platform by enabling unprecedented customer
to meet future needs in this key area. connectivity and developing sound
By enforcing ISO back-office systems, thereby reducing
The role played by supportive and the overall cost of ownership and
20022 compliance, enabling regulatory and government transforming accessibility parameters
RBI and NPCI have institutions like the RBI and NPCI cannot across the ecosystem.
be overstated. These institutions have
enabled the flexibility modernized systems, standardized Security and risk management
improvements have been continuous
of offering value- processes and built scale to ensure
with examples like the introduction of PIN
that India has a sound and stable
added services, payments infrastructure. The RBI has based chip cards and enforcing two factor
authorizations for online transactions,
and also built also enabled an inclusive and structured
framework in the form of facilitative making card based transactions more
a standardized regulation in addition to advisory to secure.
provide impetus to these important
platform for improved changes. These developments have
Gazing Into The Crystal Ball
efficiencies and been all encompassing and designed

The only thing that can be said with
keeping in mind the challenges thrown
Straight-Through- up by the diverse nature of banking in
certainty is that the transformation is
not yet complete. This is evident from
Processing. India. The directive and focus towards
indicators like the value of transactions (as
Socially Inclusive Banking has further
a multiple of GDP) of electronic payments
necessitated the need for efficient
– India is still at a figure of 12-13 times
payment solutions catering to all social
GDP compared to a figure of more than
strata of Indian society.
than 75%, and card based transactions 50 times in some of the more mature
increasing by 66% in value. RBI has economies.
The opening up of the payment
also issued licenses to non-banking ecosystem has allowed for new players to Further standardization of processes
institutions to offer services that would introduce a differentiated set of products and reference data is on the anvil. The
enrich the ecosystem, and further and services. This has also increased Northern, Southern and Western CTS
increase usage of these electronic competition and traditional banks have (Cheque Truncation System) grids have
payment modes that ultimately benefit been proactively working on improving now adopted a uniform holiday calendar.
the end consumer. RBI has allowed for and expanding their payments portfolios. In the coming years, it is expected that
white labelled ATM service providers efforts will be made to standardize the
and issued licenses to five companies The transition from paper-based to various bank codes being used in India.
in the last year (2013-2014). Nearly 25 electronic payments in the Central and Similarly, a uniform account numbering
companies have been granted licenses State Government bodies offered a scheme on the lines of International Bank
for issuing pre-paid payment instruments huge confidence boost to the electronic Account Number (IBAN) may also be
and close to 10 of them are offering payments infrastructure and the implemented.
mobile wallets. capabilities of banks. This has given
banks the much needed impetus to Focus on interoperability with the ability
The Main Forces Behind the Progress modernize their payment systems, with to switch over from one payment system
many banks having readily embarked on to another based on availability will
The progress made by the Indian this journey. be a key driving force. This has already
payments industry has been the result been achieved in areas like ATMs and
of some key forces that have not only Information Technology has been an is expected to be a principle applied to
transformed the payments landscape but invaluable contributor to this progress relevant payment systems. The concept

RBI has allowed for
white labelled ATM
service providers and
issued licenses to
five companies in the
last year (2013-2014).
Nearly 25 companies
have been granted
licenses for issuing
pre-paid payment
instruments and
close to 10 of them
are offering mobile
wallets.
of inter-operability will also extend to

the customer servicing channels with the
ability to initiate, modify, view or cancel
transactions across all channels.
India will continue to see new payment
clearing schemes and payment types.
There has been a concerted effort
to increase efficiency through the
Implementation of a GIRO system in The directive and
India is already on the drawing board.
promotion of electronic payments,
This is expected to provide much needed focus towards Socially
with more and more government
bodies willing to use electronic
automation for low value payments
in the P2B (Person to Business) space.
Inclusive Banking has
payments for pensions, subsidies,
grants, loans and other purposes.
Evolving Person to Person (P2P) and further necessitated
Person to Merchant (P2M) payments
Educational institutions are moving using the mobile phone are expected the need for efficient
from traditional cheque or DD
(Demand Draft) payments towards
to grow further. A whole host of banks, payment solutions
including various small, co-operative
NEFT/RTGS payments. Increasing banks today offer P2M solutions. In catering to all social
number of service providers are, and
will further continue to, demand faster,
fact, today individuals can even make
donations to religious institutions using
strata of Indian society.
hassle- and paper-free payments. mobile payments.

that the IT infrastructure inside the continue their efforts towards migrating
institutions serving financial products customers to lower cost electronic
Focus on and services will need to become more automated channels and enhancing
robust. Hence, further growth and operational efficiencies in back-office
interoperability modernization of payments in India systems to reduce human intervention.
with the ability to will happen under the ask of increasing Government business would be
adherence to new regulations. The cost
switch over from one of regulatory compliance is a given
another area especially for the larger
banks centered on multiple format file
payment system to and banks will look at means and ways handling, reconciliation enablement and
to optimally adhere to incremental
another based on enhancements in payments related
easy exception management.
availability will be regulations. India has gone through a variety of

a key driving force. Conclusion
payment infrastructure changes in
the last few years, and a period of
This has already been consolidation is expected where benefits
A lot of banks are seeing payments
achieved in areas like as a growing business and an area for
from these changes will be reaped. The
number of players in the payments space
ATMs and is expected differentiation. They perceive value
is bound to increase with new banks,
in being able to increase transaction-
to be a principle based revenues and not purely rely on MNOs (Mobile Network Operators), pre-
applied to relevant the traditional credit spread business paid instrument providers participating,
model. Offering-specialized, value-added, but the Indian market is large enough
payment systems. corporate payment services are now for various banks to succeed in the
seen as a tenable strategy to grow the payments area.
wholesale banking business. The focus is
going to be on revenue through cross- The key to success will be the ability to
As the adoption of electronic payments channel operability, real-time reporting, clearly identify addressable segments in
increases, the legal framework will segregated pricing and flexible bulk file the market space and align the business
need to provide coverage to address handling. In the retail space, the thrust model and related IT and operations to
exceptions and disputes. It is expected is going to be on costs as banks will serve those segments.
Jojoe Cherian
Consultant

Scintillate,
scintillate
asteroid minim
(Twinkle, twinkle little star)
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benchmarks in scalability, processing speeds and customer expectations.


Micropayments: The Case for
Wider Market Participation By
Banks
Evolution of Micropayments and W3C) as well as tech startups such user interface and scalability. However,
as DigiCash and CyberCash. However, these systems had to deal with increased
The evolution of micropayments has been these initial systems suffered from competition and regulatory oversight.
characterized by the cyclical emergence limited scalability and lack of customer Some of the niche players that were
and collapse of different generations 1, as trust. Thus, by end of the decade, most unable to adapt, were shelved or sold
presented in Exhibit 1. The first generation of these systems went bankrupt or
out – triggering the second wave of
of micropayment systems were initiated were terminated. For example, IBM did
collapse in the history of micropayments.
in the early 1990s – with the entry of not operationalize its micropayments
A prominent example is PayStone – a
top brands (IBM and Compaq), premier platform, while DigiCash and CyberCash
Canadian provider, who closed its online
institutions (Carnegie Mellon University filed for bankruptcy.
micropayments business in 2009 due
1 Párhonyi Róbert, Nieuwenhuis Lambert J.M., The next generation emerged around to non-compliance with regulatory
PrasAiko.The Fall and Rise of Micropayment
Systems. University of Twente, Enschede 2000-2001 with significant advances in directives.

Exhibit 1: Evolutionary Stages - Micropayment Systems
Micropayments Time Period Definition Key Highlights Regulatory Governance

Generation
Gen 1.0 1994-1999 Token or 1. Entry of top-notch tech firms - IBM Sales of Goods Act - no
account-based & Compaq separate provision for
systems, aimed at electronic transactions
2. Challenges - Scalability, lack
monetizing digital
of customer trust & machine-
content
dependent user interfaces
3. Collapse by way of bankruptcy/
public trial. E.g. Digicash
(Bankruptcy: 1998), NetBill
(closed in 2005) and CyberCash
(Bankruptcy: 2001)
Gen 2.0 2000-2006 Web interface- 1. Addressing challenges of Gen 1.0: 1. Federal Internet Privacy
based systems Account-based systems, increased Protection Act, 1997
linked to real- scalability & alliances with top
2. Directive 46/EC on
world financial banks helped gain customer trust
e-money 2000
repositories of
2. Increase in competition &
customers 3. Uniform Money Service
regulatory costs triggering collapse
Act 2000
E.g. Beenz (2008), PayStone (2009)
4. Electronic Fund Transfer
Act 2001
Gen 2.5 2006-2007 Channel- 1. Shifts in Consumer Habits – 1. EU eMoney directive

onwards agnostic systems Increased adoption of mobile 2009
targeted at all devices & digital payments
2. CEPAS (Contactless
low-value real-
2. Tech Innovations - NFC (2006), e-Purse Application)
world & virtual
Peer-to-peer standards (2009), Singapore
transactions
Smartphones (2006-7)
3. Explosion of channels (viz. mobile,
point-of-transaction, TV gaming
consoles) and use cases – including
games, transport and social media
payments
Gen 3.0 Yet to Arrive Systems New business models to work around Global & national regulations
characterizied the present-day challenges of high to enable & ensure inter-
by global fixed costs and system fragmentation operability
inter-provider
operability

Exhibit 2: Evolution of the Micropayments Ecosystem
Regulatory Waves
EU eMoney
Consumer Directive
Protection 2013: Off-chain
MPC UK: micro-transactions
mWallet 2007: Launch
Sale of Auditing of MPesa
CePAS 2000: Birth
Goods Act Standards of PayPal DI-3
Singapore
DI-2
eCommerce Open DI-1
Directive mWallet:
Kenya
Market Drivers Application Space

Payor MCI/PCI
Mobile 1 Real-world
eCommerce Universality Online Commerce
2
Boom Commerce Mobile
Social 13 6 Commerce
Sell-side: Payments
eContent Digital
e-Gaming 12 Gaming P2P & G2P
Sale Customer 9 Content
Payments
Loyalty 7
Product 11 Payee 3 Digital Social
Digitization Cash Goods Network
4 5
Digitization Transport
8 10
Issuer Payment
Technology Drivers Gateway
Participants in the Micropayment System

Digital
MFA & RFID Wallet
Generation 1.0
Social
Internet Mobile Micro-
Media payment Generation 2.0
& Digital Telephony Generations
Signature Cloud
Generation 2.5
Hosting
Web Content/Product Flow
Application NFC Process Flow for Payments
Technology
Process Flow for Authorization
CEPAS: Contactless ePurse Application DI: Disruptive Innovation G2P: Government-to-Person

Legend MCI: Merchant User Interface MFA: Multi-factor Authentication mWallet: Mobile Wallet
NFC: Near-Field Communication PCI: Payment processor User Interface RFID: Radio Frequency Identification
1. Payor requests for product/online content or payment in the user 2. Payor shares card/wallet/account credentials through the user interface
interface
3. User interface forwards these credentials to the payment gateway 4. Payment gateway sends credential to issuer (bank/provider) of the payor
Process 5. Issuer sends authorization and confirmation for the payment to gateway 6. Payment gateway passes on this information to the interface
Flow 7. Payee requests the payment gateway to initiate payment transaction 8. Payment gateway forwards transaction information to the issuer
9. Issuer debits the account of payor and sends the information to payor 10. Issuer sends these funds to the payment gateway
11. Payment gateway routes these funds to the acquirer of the payee 12. Acquirer credits the account of payee with the funds & informs payee
13. Upon receipt of the payment, the payee either sends the goods/content promised or simply informs the payor (in case of P2P or G2P payments

Meanwhile, in 2006-07, the industry A majority of incumbent providers
witnessed a set of unique disruptive managed to survive the new market
market forces – including shifts in conditions. However, the fundamental For instance, in the
consumer mindset, government policies, challenges of interoperability and high
technological breakthroughs and business fixed costs 2 remain unaddressed till second generation,
innovations. They created a dynamic today: Over the last decade, a large
ecosystem with expansion in channels variety of micropayment providers have
user convenience was
and applications and cross-industry emerged, resulting in a multitude of a motivation factor
participants. We have presented the payment systems and standards.
evolution of this ecosystem in Exhibit 2. – simple, web-based
While some central governments
are working towards nationwide, interfaces increased
interoperable platforms (such as the
the adoption of
CEPAS in Singapore), there have been
In 2006-07, the very few initiatives towards industry- micropayment
wide standardization. This has resulted
industry witnessed in a fragmented market, with limited systems.
a set of unique compatibility among competing providers.
Subsequently, the
disruptive market Moreover, the industry also suffers birth of digital wallet
forces – including from prohibitively high fixed overhead
costs. While top market players and mobile payments
shifts in consumer are experimenting with innovative
techniques, these initiatives are yet to redefined user
mindset, government gain scale. For example, Apple introduced
convenience, making
policies, technological back-end aggregation to distribute fixed
breakthroughs and
cost over a large number of transactions, this a hygiene factor.
while PayPal developed a new pricing
business innovations. model with low fixed costs exclusively for
micropayments.
They created a the new wave of market innovation and
This demonstrated that the universality
dynamic ecosystem of micropayments may not be addressed
government participation, we could
say that a sub-generation Gen 2.5 for
with expansion completely in the near future. The next micropayments that originated in 2006-
generation of micropayments, Gen 3.0, 07 continues till date. This Gen 2.5 is
in channels and when it arrives will have to address the distinctly different from Gen 2.0, but the
applications and, pressing challenges of interoperability change is not significant enough for us to
and cost management. However, given believe that Gen 3.0 of micropayments
thus, cross-industry has arrived.
participants. We 2 Birch Dave. (1997, June). Micropayments and
While the different generations
Microprofits – Can banks extend their payments
have presented the franchise to the net. for micropayments evolved from
a continuous interaction between
evolution of this
While some central governments are working
towards nationwide, interoperable platforms regulatory directives, market forces and
(such as the CEPAS in Singapore), there have
ecosystem in Exhibit 2. been very few initiatives towards industry-
wide standardization. This has resulted in a
technology drivers, Gen 2.5 is notable
on multiple counts as illustrated above
fragmented market, with limited compatibility
among competing providers. (shown in Exhibit 2):

Exhibit 3: Factors Affecting User Adoption of Micropayments
Motivation Factors for User Hygiene Factors for User

Challenges to User Adoption Adoption Adoption
• L: Extensive use of low-latency • C2: Real-time user interaction

systems • C3: Mobile payments redefined
• R1: Some governments (e.g. UK, user convenience
• C1: Innovation in transaction Singapore, USA) are promoting
GEN 2.5
pricing • P: Complete anonymity &

micropayments privacy
• S3: Linking wallet currency to • S1: Hosted data centers have
fiat currency • R2: Participation of top-
increased scalability at lower notch cross-industry
cost brands – technology firms,
• S2: Fraud & Risk Analytics communication providers, etc.
• C3: Superior web interfaces

Evolutionary Stages
Micropayments -
• C1: Use of aggregation: Front • L: Higher computing power • C2: High degree of control
and Back end integration of • R1: Enactment of regulations for offered in peer-to-peer transfers
GEN 2.0
individual transactions licensing/operation of MPS • P: Complete anonymity against

• S3: Interoperability amongst • R2: Alliances with banks merchants & protection of user
consortium of banks & payment details
providers • S2: Multifactor authentication
• S1: Account-based systems
• C1: Fixed transaction cost >>

Value of each transaction
• C3: Supported by dedicated
software
• P: Anonymity from merchants
• L: Low speed due to online
GEN 1.0
validation and limited • R2: Tech startups had reputation C2: Balance update
computing power • S2: Variation in nature of after every transaction
• R1: Lack of regulation for security offered
consumer/merchant
• S1: Poor scalability of token-
based systems
• S3: Lack of collaborative efforts
Legend
C1 C2 C3 L P R1 R2 S1 S2 S3
User
Cost User Control Convenience Latency Privacy Regulation Reputation Scalability Security5 Standardization
Regulatory Waves – Various national micropayments in Singapore, is a shining other related drivers. Starbucks realized
governments are legislating to example of the impact of government the significance of these emerging
promote and encourage the growth of endorsement on the health and success trends and benefitted from its multiple
micropayments. The Payments Council in of micropayments. initiatives. In 2012, it partnered with
UK will bring in regulation to allow mobile Square and started accepting digital
numbers as proxy for bank accounts. Market Drivers - The emergence of micropayments from its customers using
Similarly in Kenya, the government has customer loyalty schemes has created Square’s mobile app. Moreover, in Oct
directed mWallet providers to develop the need for micropayments in the 2013, it launched “Tweet-a-Coffee”
open systems to ensure interoperability. retail space. The increasing universality campaign to leverage social media-based,
CEPAS, a nationwide system for of mobile devices and social media are Peer-to-Peer payments. The campaign

was highly popular, triggering purchases and points of transaction. Similarly, cloud-
worth USD 180,000 for two months. More based mobile payments promise to bring
importantly, the success of this USD 5 gift forth a massive reduction in operational When premium
card shows that loyalty programs will be costs.
a key driver for digital micropayments in features offered by
future. Adoption of Micropayments certain providers
Some retailers are also leveraging User adoption has been affected by cannot be provided
3 factors3: motivating user adoption,
these trends to boost sales volume. For
instance, UK-based, fast-food retailer, barriers to adoption and hygiene factors
on a large scale, such
Greggs had been battling a shrinking (with the absence of hygiene factors factors continue
topline since 2012. To counter this, it causing user dissatisfaction).
started developing a digital loyalty app
to motivate user
based on PayPal technology, allowing User Adoption of Micropayments: These adoption. For instance,
transactions of GBP 50 or less. This app factors have been presented in Exhibit
was launched in Feb 2014. 3 as ‘Challenges4 to User Adoption’, even in generation 2.5,
‘Motivation Factors for User Adoption’
and ‘Hygiene Factors for User Adoption’.
providers that use low-
Exhibit 3 depicts the evolutionary stages latency systems and
of micropayments vertically, starting from
More than for Gen 1.0 and moving up to Gen 2.5. make use of cloud-
their market size, based operations
Cross-Factor Transition: Sudden
micropayments are technological innovations and systematic (for lower cost), are
critical because of the
efforts from industry participants convert
individual factors from one type to
able to differentiate
demand for innovation another - redefining customer experience themselves in the
across generations.
to circumvent cost market.
Based on our observations, there are two
disadvantages that kinds of cross-factor transitions:
cannot be addressed
a. Challenges arising from one for consumers. For instance, latency
by conventional generation transforming into was a major challenge in the first
payment systems. Motivation Factors of the next generation. In the second generation,
generation: Challenges which are this was addressed by some of the
addressed partially or by a small set of providers using offline validation,
providers, become motivation factors which has proven to be a significant
attraction for customers.
Technology Drivers – The widespread
popularity of mobile payments and digital 3 Párhonyi Róbert, Nieuwenhuis Lambert J.M.,
Pras Aiko. The Fall and Rise of Micropayment b. Motivation Factors of one generation
wallet solutions have offered a low-cost Systems. University of Twente, Enschede transmuting into Hygiene Factors of
alternative platform for the growth of 4 Gonville, Michelle Baddeley and Caius College, the next generation: When premium
micropayments. In the next few years, Faculty of Economics and Politics, Cambridge,
UK (2004). Using E-Cash In The New Economy: and innovative, first-of-a-kind features
NFC-enabled contactless payments An Economic Analysis of Micropayment Systems. offered in selected systems/markets
Journal of Electronic Commerce Research, VOL.
will open up newer use cases for are replicated on a large scale in
5 Clark, Brent (2001). Electronic Wallets: Past,
micropayments such as in public transport Present and Future. White paper, GPayments. the subsequent generation, they

web-based interfaces increased the prohibitive costs and regulatory oversight.
adoption of micropayment systems. However, at present, the market offers
With the advent of Subsequently, the birth of digital a huge opportunity in terms of market
wallet and mobile payments redefined growth as well as the underlying demand
digital payments, user convenience, making this a for innovation.
banks are competing hygiene factor.
head-on with Unless triggered by specific market
digital payment and conditions and collective industry efforts,

these factors continue to move in the By linking bank
technology providers same category across generations. accounts with
(such as PayPal and a. Motivation Factors: When premium micropayment
Google) as well as features offered by certain providers
offerings, banks can
cannot be provided on a large scale,
communication such factors continue to motivate offer an end-to-end
service providers. user adoption. For instance, even
payments solution,
in generation 2.5, providers that
These players use low-latency systems and make broadening their
use of cloud-based operations (for
are constantly lower cost), are able to differentiate transaction base.
innovating to create themselves in the market.
new combinations b. Hygiene Factors: Even when

of digital financial fundamental hygiene factors Market Size and Growth: The total
are addressed differently across value of the European micropayments
services – e.g. the generations, they remain a part of market stood at EUR 6 Billion in 2011.
basic service expectations in the
debit card from consumer mind space. For example,
Furthermore, under the aegis of the
European Payments Council (EPC), the
Google Wallet and the user control is one of the basic market is expected to grow to EUR 15
expectations from micropayment Billion by 2015 6. On the other hand,
Smartphone-based systems. Users should be able to micropayments (transactions values <USD
credit card reader monitor the status of their account 25) in USA stood at nearly USD 2 Trillion
(current balance and pending in 2005 while online micropayments, a
launched by Square payments) and track the duration of sub-segment of this market, were pegged
Inc. fund transfer. at USD 7 Billion in 2009.
The industry is still unable to address Market Relevance: More than for their
prohibitive fixed transaction costs in market size, micropayments are critical
comparison with transaction value. because of the demand for innovation
constitute hygiene factors, becoming
to circumvent cost disadvantages that
a part of basic consumer expectations Gen 2.5 – Why Should Banks Enter the cannot be addressed by conventional
from the service. Technological Micropayments Space?
breakthroughs are major contributors
6 Hernandez –Verme, Paula L, and Valdes
in this process. For instance, in the Till date, banks have been mostly wary of Benavides, Ruy A. Virtual Currencies,
second generation, user convenience launching a full-fledged micropayments Micropayments & The Payments Systems: A
Challenge To Fiat Money & Monetary Policy.
was a motivation factor – simple, product – owing to smaller market size, Universidad de Guanajuato, Mexico

payment systems. This demand is three- a greater adoption of micropayment
pronged and comes from: systems. For example, the European
Consortium Rules Payments Council (EPC) is driving
1. Consumers: High fixed transaction the acceptance of digital payments
costs associated with micropayments resulted in the and micropayments to circumvent
prove to be a significant hindrance7.
Even though providers use aggregation
adoption of a unified the complex, highly expensive cash
generation process.
techniques at present, these do not micropayment
fit a one-time purchase. They are
also inconvenient in cases where the standard and set On the other hand, in emerging
markets, micropayment systems offer
customer has to pay upfront for the
of instruments a powerful means to achieve financial
products/services.
inclusion9. The success of M-PESA in
The emergence of mobile and social-
throughout the globe. Kenya is a case in point.
media based payments is also driving Alternatively, we see
consumer demand for real-time low- Market Dynamics - Role of Banks vis-à-vis
value transactions. the emergence of a Other Market Participants:
2. Business: Merchants are battling global Micropayment Banks: In those markets where we see a
against existing market fragmentation.
The micropayments industry is Exchange, with regulatory push towards micropayments
and payments innovation, top-notch
characterized by a large number interoperability banks have successfully launched
and variety of providers, each
controlling a small part of the market. among multiple micropayment services. For example,
Buy side customers can use any Barclays launched Pingit – a mobile
of these micropayment providers.
systems/currencies. app that allows person-to-person (P2P)
Few providers allow interoperability payments of minimum GBP 1. However,
among themselves. For instance, as is evident in this case, the approach
Facebook Credits incorporated PayPal has been indirect, leveraging popular
payments to increase user adoption of micropayments and developed consumer trends such as P2P (person-
in 2010. Later, it also adopted PayPal’s CEPAS 2.0, a standard to allow to-person) payments and social media
micropayments service launched for interoperability of different payment payments. Moreover, most of these
digital goods. However, the alliance schemes. Globally, the emergence initiatives have been launched in relatively
was short-lived, with Facebook of digital currency exchangers, mature markets such as the UK and The
eventually phasing out its digital which provide interoperability Netherlands.
payments platform. Facebook today is among different digital currencies,
preparing to join the mobile payments is a move towards addressing this Beyond these few instances, banks
race again with its own payments fragmentation. haven’t participated in micropayments.
system. The industry has been dominated mostly
Thus, merchants have to tie-up 3. Government: Public institutions by non-banking participants. The first
with a large number of operators to across the globe are taking active generation was driven by technology
ensure payment acceptance for a interest in the micropayments start-ups and venture capitalists.
substantial volume of customers. In industry.8 There are regional nuances Generations 2 and 2.5 have produced a
Singapore, the government recognized in their underlying objectives though. wider spectrum of players.
this challenge towards universality However, all these objectives favor
9 The World Bank (2012, Oct). Innovation In Retail
7 McGrath, James C. (2006, June). Payments Worldwide: A Snapshot. Outcomes
Micropayments: The Final Frontier for Electronic 8 Analysis Mason (2010, Dec). The marketplace of The Global Survey on Innovations In Retail
Consumer Payments. Discussion paper from for and regulation of micropayment services in Payment Instruments And Methods. Research
Payments Card Center. the UK. PhonepayPlus from Payment Systems Worldwide.

Digital Payment Providers 10: In the Social Networking Providers: The payments, banks are competing head-
second generation, digital payment consumer-led proliferation of social on with digital payment and technology
processors such as PayPal, Allopass and media and the rise of social gaming providers (such as PayPal and Google) as
Square came into existence. They have paved the way for two important trends - well as communication service providers.
been instrumental in the creation of commercialization of content exchanged These players are constantly innovating
new services and in introducing pricing over social networks and peer-to-peer to create new combinations of digital
innovation, such as transaction tier pricing payments on social media. These trends financial services – e.g. the debit card
in turn created a unique opportunity for from Google Wallet and the Smartphone-
in the market.
micropayments in social media. To exploit based credit card reader launched by
this market, some social networking Square Inc.
Mobile Network Operators: The advent
of mobile payments was another major providers started partnered with third-
party payment providers, such as Twitter’s In some cases, non-banking payment
development for micropayments. The
alliance with Twitpay, Twollars and Flattr. providers are part of the communication
popularity and widespread adoption of loop linking merchants, payer and banks
mobile devices helped mobile operators Others explored the opportunity to launch
(e.g. PayPal), while in others, they are
virtual payment currencies and platforms,
in gaining market traction. This wide offering payment portals, bypassing banks
such as Facebook Credit (2011). This
customer base helped in spreading altogether. M-Pesa in Kenya is an example
market segment is still evolving, with
infrastructure costs, while the absence of a mobile network operator (MNO)
Facebook switching back to real-world
of specific regulations helped maintain providing a cheaper and more efficient
currencies and Twitter dropping some of
profitability. In some of the emerging alternative to banks for financial inclusion.
its partners.
markets, such as Africa, telecom providers
are playing a pivotal role in reaching The end result is that multiple
Traditional Payment Processors 12:
out to the unbanked population and competitors are eating up parts of the
Payment intermediaries such as Visa
thereby helping increase GDP and lower banking value chain 13 and banks face the
have made a late entry into the market
transaction costs. risk of being reduced to the limited role
– primarily because the overall market
of offering basic transactional features.
size is much smaller compared to macro-
The rapid adoption of mobile payments Given the huge interest of governments
payments. The high cost associated with
across the world, the micropayments
also prompted other market players, card-based systems caused another market will play a significant role in
such as the digital payment providers, to hindrance. However, gradually these defining payment systems of the future.
leverage mobile as part of their digital providers launched the digital wallet and
channel mix for micropayments. micropayment services. For e.g. Visa Diversifying Revenue Pipeline: Banks are
launched Payclick in 2010 and American exploring alternative means of revenue
Technology Giants 11: Apple forayed into Express launched Serve in 2011. generation and micropayments offer
the market of micropayments primarily multiple opportunities for this. Even
to support its products. Nevertheless, To sum up, the inability of banks to without direct market participation, banks
the revenue-sharing model with the app respond in the near future can prevent can rely on their existing infrastructure
seller was an instant success, driving the them from playing a dominant role in such as channels, IT applications, among
adoption of micropayments. Google, micropayments in the future. Moreover, others, and earn revenue by leasing them
Amazon and Microsoft are the technology banks will lose out on a huge opportunity to participants from other industries. By
players of mark in this space. to reposition themselves. linking bank accounts with micropayment
offerings, banks can offer an end-to-end
Preventing Erosion of the Banking payments solution, broadening their
10 Bradford, Terri, and Keeton, William R (2012).
New Person-to-Person Payment Methods: Have Value Chain: With the advent of digital transaction base.
Checks Met Their Match. Economic Review,
Third Quarter 2012
12 McGrath, James C. (2006, Jun). Micropayments: 13 Dapp Thomas F, Stobbe Antje, Wruuck Particia
11 Analysis Mason (2010 Dec) The marketplace for The Final Frontier for Electronic Consumer (2012 Dec). The Future of (Mobile) Payments
and regulation of micropayment services in the Payments. Discussion Paper from Payments Card – New (online) players competing with banks.
UK, PhonepayPlus Center. Deutsche Bank Research

Marketing and Restoring Market However, the specific nature of bank However, based on the development of
Reputation: In recent times, the participation will depend upon the the payments industry and specific market
reputation of banks has suffered due evolution of micropayments and the events in the past, we envision three
to multiple litigations and regulatory course of action taken by market probabilistic scenario14 for the global
fines. Customer trust is also at an all- participants and regulators. micropayments industry, which are:-
time low. In this situation, by actively
participating in the micropayments Guidance: What Banks Can do in Scenario 1 - Consortium Rules
resulting in the adoption of a unified
market, and helping various Response to the Evolving Scenario of
micropayment standard and set of
governments in establishing financial Micropayments?
inclusion, banks can regain consumer 14 Párhonyi Róbert, Quartel Dick, Pras Aiko (2004).
confidence and recover some of their The market for micropayments continues Collaborative Micropayment Systems. University
of Twente, the Netherlands. 19th World
lost reputation. to evolve differently across regions. Telecommunications Congress (WTC).
Exhibit 4: Scenario Analysis for Micropayments
Consortium Rules (1)
Regional Rules (2)
RA1 RA2 ... RAN RA1 RA2 ... RAN
MPE1 MPE2 MPEN MPE1 MPE2 MPEN

MPSPs
MM & R M&T M & DC

Buyers Sellers Enterprise Rules (3)
FIN-EC TV NP
M&T: Mobile & Telecommunication

Legend MM&R: Micro-Merchants & Retailers M&DC: Media & Digital Content Providers
Providers
FIN-EC: Participants from Financial TV: Technology Vendors NP: Niche Players, specializing in
MPSP Ecosystem (including start-ups) micropayments
Interaction MPE: Micropayment Ecosystem
RA: Regulatory Authority of the economy MPSP: Micropayment System Providers
in an economy

Exhibit 5 – Future of Micropayments and the Strategic Positioning of Banks
Scenario Consortium Rules Regional Rules Enterprise Rules
Market 1. Adoption of a single micropayment 1. Emergence of nationwide and 1. Lack of global/regional consensus
Evolution standard and instrument – with regional micropayment standards among market participants
global operations and platform 2. Strong regulatory governance 2. Market Fragmentation
independence and regional co-operation – with 3. Partial interoperability based on
2. Worldwide Micropayments governments defining market space, vendor alliances
Exchange: Interoperability participation and interoperability
among multiple systems & digital
currencies across the globe – e.g.
foreign exchange markets
Present-Day Gen 1.0 : Microtransaction Standards CEPAS (Contactless e-Purse M-PESA in Kenya: Enterprise-centric
Simulative from World Wide Web Consortium Application) in Singapore: market in the absence of government
Cases (W3C) 1. e-Payment initiative by IDA - regulations
1. Birth of Mircopayment Markup Infocomm Development Authority 1. 2007: Mobile payment launched by
Working Group (MPM-WG) of Singapore Kenyan network operator, Safaricom
2. Common applications programming 2. Single MPSV (Multi-Purpose Stored 2. Penetration of unbanked rural
interface (API) & interoperable Value) card for micro-payments markets – growing to 17 Mn
language across Singapore accounts
3. The initiative was aborted later due 3. Enforcing interoperability in 3. Banking system bypassed by
to operational challenges the fragmented micropayments engaging airtime resellers/retail
market dominated by NETS (retail outlets
and monitoring space) & EZ-Link 4. Failure of mobile banking systems
Gen 2.0: Digital Currency (transport)
Exchangers(DCEs) launched by banks to replicate
4. CEPAS can lead an ASEAN-level M-PESA's success E.g. Eazzy 24/7
1. DCEs offer interoperability among market integration from Equity Bank
different digital currencies
5. Other banks have successfully
2. Exchange of digital currencies for teamed up with Safaricom E.g. CFC
conventional fiat money Stanbic Bank
3. Instances: EcurrencyZone in US;
Exchange Plus; Kraken Digital Asset
Trading Platform
Strategic 1. Single Universal Framework: 1. Strong regulations favor Stiff competition from incumbents with
Positioning for Adoption of a unified global market competition & uniform strong credibility & market presence
Banks micropayment standard: with interoperability standards help in
platform/channel independence market entry Banking Strategy:
2. Worldwide Micropayments 2. Banks work in similar conditions 1. Marketing Alliances: Mutual
Exchange: Interoperability under the Central Bank of a nation alliances -> low-cost strategy of
among multiple systems & digital penetrating the target audience.
currencies Banking Strategy: Promoting banking services through
1. Minority Stake/Acquisition: Minority 3rd party micropayment websites/
Banking Strategy: stake in leading micropayment channels
1. Cross-Regional Acquisitions & providers, followed by full-fledged 2. Cross-Industry Alliances: Client-
Alliances: Global banks acquiring acquisition. Mutual synergy sharing partnerships with
regional micropayment provider from payments infrastructure micropayment providers of other
OR regional banks partnering with and customer set of banks & industries – telecom operators,
global micropayment providers micropayment providers technology providers, etc.
2. Revenue Generation: Investment 2. Channel Expansion: Banks 3. Leasing/Outsourcing: Indirect
banking services for access to global introducing newer channels for revenues from existing physical/
markets, linking trading accounts micropayments – such as ATMs and digital infrastructure E.g. Leasing
with micropayments to offer micro- bill payment kiosks. In an integrated out banking channels; Outsourcing
trading transactions, generating fee- regional/national micropayment engagements bagged by in-house IT
based revenues by offering market system, such innovative moves help teams
infrastructure services in enhancing visibility to customers
and gaining market share

instruments throughout the globe. Scenario 3 - Enterprise Rules creating worldwide micropayment consortium.
Alternatively, we see the emergence of a lack of a consensus across nations Alternatively, governance by regional/
a global Micropayment Exchange, with or regions, which can in turn hinder national regulatory authorities will result
interoperability among multiple systems/ interoperability, leading to market in regional clusters of micropayment
currencies. fragmentation and the emergence of systems. In the absence of any such
closed ecosystems. collaborative efforts, the market of
Scenario 2 - Regional Rules causing the micropayments will mostly likely be
emergence of nationwide and regional Exhibit 4 provides a visual summary of dominated by individual enterprises
standards for micropayments, alongside these future scenarios: Collaboration from various industries. The Exhibit $ is a
strong regulatory governance. at a global level is expected to drive a representative micropayment ecosystem
with buyers and sellers interacting with
multiple cross-industry players, including
technology vendors, retailers and financial
service providers.
In order to win banks will have to chart

out a strategy and take up specific actions
to penetrate the micropayments space.
Natasha Roy In Exhibit 5, we illustrate each of the
Corporate Research Group scenarios with present-day cases and
Tata Consultancy Services recommendations for positioning.
Himadri Sikhar Pramanik

Lead, Corporate Research Group, Tata
Consultancy Services
Manish Kirtania
Manish - Global Corporate Research and
Campaign Support Service
Tata Consultancy Services

Consulting

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Volume 2

TCS BaNCS Research Journal_Vol 2 Issue 4.indd 1 12-06-2014 AM 11:25:43

Now, don’t you think it is time to uncomplicate?

Banking | Capital Markets | Insurance

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4 TCS BaNCS Research Journal

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12 Impending Disruption in the Payment Marketplace - Should Retail

18 An Interview with Brett King on the Future of Payments

22 Real-time Payments Getting Real

28 Payments on ISO20022 – Time to on-board?

36 Revival of Biometrics in Banking: Heralding a New Era in mPayments

44 The Volcker Rule – Seeking to Shield banks’ customers

50 Payments in India – A Continuing Journey

56 Micropayments: The Case for Wider Market Participation By Banks

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12 TCS BaNCS Research Journal

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Force #1: Bargaining power of customers

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14 TCS BaNCS Research Journal

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TCS BaNCS Research Journal 15

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Cell phone carriers are pushing hard

execute payments competitors What should banks do?

16 TCS BaNCS Research Journal

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capability to support Despite the looming threat, banks

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TCS BaNCS Research Journal 23

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the volume of myths, one of the first

24 TCS BaNCS Research Journal

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Some questions fall somewhere between

TCS BaNCS Research Journal 25

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Gareth Lodge, a senior analyst in the banking group at Celent, focuses on

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