Fintech and Graffiti – Distant Cousins

Buzzwords such as innovation, disruption and FinTech seem to be so popular that they have found their way into almost all spheres of life. In this article, however, I feel the need to reintroduce a long-lost cousin, graffiti.

Buzzwords such as innovation, disruption and FinTech seem to be so popular that they have found their way into almost all spheres of life. In this article, however, I feel the need to reintroduce a long-lost cousin, graffiti.

About 9 months into our journey, the Foundery team had seen multiple new partners join the initiative. It was therefore pertinent to pull everyone away from their beloved desks, get together as a team and get to know each other a bit better. After searching far and wide we decided to partner with The Talking Vandals (https://www.facebook.com/thetalkingvandal) for a graffiti team building.  The Talking Vandals structured the event for us utilising graffiti as a medium to explore concepts that have been pervasive in the graffiti world and that can be applied in the new business domains of innovation and disruption. Three of these concepts resonated with us at the Foundery:

Graffiti Principle 1 – Know your history

Any graffiti artist that wants to be taken seriously needs to have a thorough understanding of the graffiti sub-culture and its history. Graffiti artists pride themselves on knowing about pieces of work in their area and the story behind these pieces. Before we got to the painting, The Talking Vandals gave us a crash course in graffiti culture and terminology so that we could better understand what we were about to do.

In the worlds of Fintech and disruption this too is a critical piece of the puzzle. Knowing the history of how existing systems and solutions evolved is the first step in understanding how to disrupt them.

Graffiti Principle 2 – Plan

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You would be mistaken if you assume that graffiti artists pitch up at a wall (or any other surface) and just “wing it”. These pieces of art are carefully designed and planned. The mural that we painted was planned in numerous layers beforehand and even rendered in photoshop. Print-outs of the plan were distributed to all team members on the day so that we could all picture the final masterpiece. These plans, however, still allowed team members room to add their own flair to the mural.

Salim Ismail is a director of Singularity University. In his book, Exponential Organizations, Salim outlines a common trait between all companies that show exponential growth: a Multi-Transformational Purpose (MTP). Both the graffiti plan and an MTP enable the team to focus on a common goal while still allowing enough room for individuals within the team to flex their creative muscles.

Graffiti Principle 3 – Don’t be a Toy

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Finally, some slang! In the graffiti subculture a Toy is slang for… well let’s just say that people labelled as Toys are considered undesirables and you wouldn’t collaborate with an artist that you considered a Toy.

Innovation and disruption is not easy. Teams will often find themselves fighting in the trenches together. Would you choose to have a Toy with you? Fundamental to any high performing team is the team members’ ability to interact with each other as humans. To be able to create something beautiful, it is critical therefore to ensure first that you construct your teams with human beings that can co-exist in the same space and only then focus on understanding the required skill sets.

The team thoroughly enjoyed spending the day with the Talking Vandals. Along with sharing in a part of the graffiti sub-culture, we had the opportunity to watch two amazing artists apply their skill and it was a treat. It is no surprise that we could learn about the disruption world from graffiti artists who have been disruptive in their own world for much longer. We look forward to applying some of these principles in how we disrupt the world of corporate and investment banking.

by Tyrone Naidoo

The Evolution of Money – Part 1:

Any monetary value in our society exists in one of two ways: bearer instruments or registered instruments. A bearer instrument is an asset that is assumed to be owned by the holder of the instrument for which no transaction record is kept.

CRYPTO INSTRUMENTS – THE NEW MONETARY INSTRUMENT

Any monetary value in our society exists in one of two ways: bearer instruments or registered instruments.  A bearer instrument is an asset that is assumed to be owned by the holder of the instrument for which no transaction record is kept.  An example is physical cash.  You do not need to prove to anyone that the physical cash in your wallet is yours.  You have it and so you are the presumed owner.  Society keeps no record of who previously had the $20 dollar bill that now sits in your wallet.  Registered instruments, on the other hand, are assets whose ownership is determined by referencing a ledger managed by a trusted institution (e.g., properties at the Deeds Office, bonds and equities at the Central Securities Depository, or digital money in a bank account).  While all assets can be categorised as either bearer or registered instruments, assets can also be categorised as either physical or digital assets.  Overlaying asset form (i.e., physical vs. digital) onto instrument type (i.e., bearer vs. registered) helps us understand the evolution of monetary instruments in our society.

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Figure 1: The evolution of monetary instruments in society

 

Physical bearer instruments were the first monetary instruments of humanity (e.g., animal hides, shells, salt, etc.), but communities came to realise that such forms of monetary value had their limitations.  Land, for example, would be a disastrous bearer instrument.  If you left your land to hunt, and came back to find someone else standing on your land claiming it as theirs, one of two outcomes could result:  The loss of the land to the new “owner”; or violence to resolve the dispute.  Furthermore, there would be an incentive to remain on your land to maintain ownership and avoid any potential disputes.  None of these outcomes is conducive to an advancing civilisation.  So as communities came together, physical registered instruments emerged where the community collectively agreed on a trusted intermediary to keep the record of ownership (the source of truth) of a particular asset and update it on the community’s behalf.

As computers became more widely adopted, many of these physical registered instruments migrated from physical to digital registers.  The birth of digital registers also gave rise to digital registered instruments – instruments that have no physical form, and are defined purely by an entry onto a digital register (e.g., a government bond or money in a bank account).  Physical forms of value are easy to understand in this framework.  Digital instruments are less intuitive.

A purely digital bearer instrument (e.g., a digital coin) cannot function as a monetary instrument due to the double-spending problem.  Think of a photograph on your smartphone.  Sending this photograph to someone else does not delete it from your phone – you retain a copy.  This poses a problem for anything digital that is meant to represent value.  What is critically important in any monetary system is that when someone spends their money, they no longer have it.  The ability to copy and paste the digital coin ID mentioned above ad infinitum – the ability to double-spend it – reduces its scarcity and ultimately debases its value.  To avoid double-spending of digital monetary instruments, society has established trusted institutions (such as banks, deeds offices, CSDs) that ensure that when someone receives digital value, someone else must by definition no longer have it.  This is a fundamental principle of our double-entry accounting system where every debit must be equal to a corresponding credit.

In summary, three types of monetary instruments have been described:

  • Physical bearer instrument;
  • Physical registered instrument; and
  • Digital registered instrument.

These three instrument types were the only ones available to humanity until 2009.  That year, Satoshi Nakamoto’s seminal paper “Bitcoin: a peer-to-peer electronic cash system” combined advances in computer science, cryptography and game theory to develop what has now become known as blockchain technology.  This technology has allowed the emergence of a fourth type of monetary instrument:

  • Crypto instrument

The crypto instrument is a digital hybrid instrument with characteristics of both bearer and registered instruments.  It’s like a bearer instrument because the holder of a digital private key is the presumed owner of the value it controls, and a registered instrument because that value is recorded on a ledger (albeit a distributed one).  The presence of both bearer and registered instrument characteristics are necessary for the existence of a crypto instrument.  All assets issued onto a blockchain are crypto instruments.

The Evolution of Money – Part 2 coming soon!

by Farzam Ehsani

Intentional Simplicity

I believe that in this time we live in more than any other that came before it we are dealing with exponentials. Exponential growth, exponential challenges and exponential solutions. This theme manifests into both daily life and our businesses, and since our businesses are technology driven into technology too.

intentional-simplicity-v3I believe that in this time we live in more than any other that came before  it we are dealing with exponentials. Exponential growth, exponential challenges and exponential solutions. This theme manifests into both daily life and our businesses, and since our businesses are technology driven into technology too. Exponential translates to the sheer number of technology choices we now have when solving the needs of our businesses. While in principle I believe this is positive it also brings with it the potential for complexity. Complexity inherently is required in some cases, it’s the unnecessary complexity we need to guard against.

Another consideration is the way we approach problems. How is it that we find ourselves with “legacy solutions”? For me it’s quite simply two things: firstly, we’ve allowed ourselves to reach that position and secondly we have not been consciously optimising for the right things. What do I mean by this?  Simply put, life is about choices – if we consciously or unconsciously chose to allow legacy this was our doing. Often legacy is the unintended outcome of optimising for only a few dimensions such a delivery velocity, business functionality over sustainability. This talks to organizational culture and whether a culture of refactoring exists – this however is not the only consideration.

So the meta question for me becomes: since we have been building software for decades what can be done differently to achieve a different and more sustainable outcome. As it happens there is much research on the subject of IT complexity. My experience is that IT complexity mirrors business complexity – this my interpretation of Conway’s Law. I believe that while this is true, how we consciously promote intentional simplicity comes down to how we think, design, architect and ultimately build.

The fundamental shift that one needs to make is to move away from viewing businesses as being supported by platforms towards a capability view of an organisation. The capability organisational approach prescribes that you need to break down your business into capabilities. Capabilities are at a granularity where they describe related sets of business functions, for example: valuation and settlement are two capabilities in a bank. Once you have done your business architecture work we can start talking about how you apply a new architecture approach. Enter the Snowman or Simple Iterative Partitions (SIP) architecture:

 

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The Snowman Architecture talks about creating “Snowmen” for each capability – essentially a small system for each capability. Business functionality is achieved by linking the required capabilities together by means of a messaging bus in accordance with a defined business process.

The head of the snowman contains the Business Architecture – practically what this contains is business logic which itself is comprised of the capability business process and related business rules. The belly of the snowman holds the Technical Architecture or technical implementation of this business logic as it pertains to the capability business process. The arms of the snowman represent the Service Architecture or service endpoints by which bidirectional communication is achieved through well-defined interfaces and through which snowmen interact. The base of the snowman encapsulates the Data Architecture which contains the data itself as well as the mechanism through which the belly of the snowman interacts. It must be noted that the head of the snowman must only interact with the belly which in turn interacts with the base – in this way we ensure design consistency.

Right so we’ve been through the theory, lets walk through a practical example of a snowman built for a valuation capability – a simple example. The capability is required to provided valuations of products given product characteristics and market data. Given this need the service endpoints (arms) of the snowman have a method that describes the interface that allows products to be valued given characteristics C and market data M. This method is implemented in the belly of the snowman, in the implementation the belly queries the head of the snowman for the valuation algorithm given C and M. The head applies the relevant business logic to return the correct algorithm. Once returned this algorithm is executed and both the method input and outputs stored in the data layer (base) of the snowman before the valuation result is returned by means of the service endpoint.

So I understand the approach, can you articulate some of the benefits? Sure, following the example above we can easily test our valuation capability. We understand its interfaces and expected outputs for a given data set. When we change our mind on how valuation will be done we simply build a new valuation snowman with the same interfaces and plug it in alongside the existing one for parallel run before we ultimately switch off the old snowman. We understand dependencies as these are articulated in the service data contract. Capabilities are highly re-usable. The most powerful value proposition for the Snowman approach is that we can achieve true composition – in other words solutions can be composed for business by linking capabilities. The outcome of this composition ability is that it allows us to move product to market at great velocity.

Is the Snowman the end, certainly not, adoption of this approach talks to the conscious mind shift that we’ve made towards intentional simplicity.

by Jason Suttie

“Open Banking” and the fight for the customer

The revised payment service directive (PSD2) is an anticipated watershed for the banking industry. PSD2 compels incumbent banks to open up their data to third party service providers.

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Source: http://qz.com/646279/who-will-win-in-the-age-of-open-banking/

The revised payment service directive (PSD2) is an anticipated watershed for the banking industry. PSD2 compels incumbent banks to open up their data to third party service providers. The new regulation is profound because it shifts the locus of power away from institutions. With complete account portability, banks can no longer lock their customers in.

The premise of the shift in power is straight forward: the customers own their data not the institutions with which they bank. Although the traditional concept of owning the customer is defunct, competition for the customer relationship is ever greater. It’s here that FinTechs and their strong orientation towards offering winning customer experiences threaten bank’s siloed product centric legacies.

https://www.linkedin.com/pulse/air-force-personnel-must-keep-pace-todays-digital-customers-ortiz
Source: https://www.linkedin.com/pulse/air-force-personnel-must-keep-pace-todays-digital-customers-ortiz

 

Although PSD2 amplifies the risk of disintermediation faced by banking incumbents, it also presents opportunities. After all, banks will have the same access as FinTechs to customer account information residing with their banking rivals.

One such opportunity exists for corporate banks, whose clients are typically multi-banked. Corporate banks have an opportunity to launch their own account aggregation platforms. Aside from offering a consolidated view across multiple bank accounts it is also possible to offer tools that help clients develop consolidated cash flow forecasts. The tools and analytics can enable corporate banks to pursue contextual cross-selling of term finance, consolidated account packages and other more bespoke products.

The unenviable task of balancing the scales

http://4vector.com/free-vector/scales-of-justice-99380
Source: http://4vector.com/free-vector/scales-of-justice-99380

Financial Regulators have a tough job trying to regulate FinTech. On the one hand they are obligated not to stifle the FinTech revolution’s innovation that promises immense benefits to customers. In the same vein they cannot protect the interests of incumbents by overregulating FinTech startups.

On the other hand regulators must uphold their mandate and protect consumers and the financial system from predatory lending, money laundering, funding of terrorists, and fraud. A scandal at the world’s largest lending marketplace, Lending Club, is a case in point. At the heart of the scandal, Lending Club was found to have tampered with loan applications to make them more attractive to investors. Lying to investors is a serious faux pas for a leader in a new form of finance trying to establish its credibility with institutional investors. Predictably, the fall-out since the scandal broke has hurt marketplace lenders.

On the surface it appears that with PSD2 regulators may have tipped the scales in favour of FinTechs. While this may be partly true, it’s also widely accepted that the honeymoon in the grey area of lax regulation that FinTechs have enjoyed so far cannot not last forever.

Many prominent banking executives have expressed their desire for more stringent regulation to be imposed on FinTechs. As John Williams, CEO of Federal Reserve Bank of San Francisco said, “If it walks like a duck and quacks like a duck, it should be regulated like a duck.”

There are bound to be more twists in the tale as financial regulators grapple with the unenviable task of trying to balance the scales.

by David Krawitz

 

 

 

Why did we choose Ethereum?

We’ve always said “You can’t spring a blockchain on anyone”. Blockchains by their nature are more secure, more reliable and therefore more useful as more nodes connect to them.

 

As a banking consortium why did we choose Ethereum over other blockchains?
We’ve always said “You can’t spring a blockchain on anyone”.  Blockchains by their nature are more secure, more reliable and therefore more useful as more nodes connect to them.
In the consortium space, the same is true.  You can’t build a blockchain on your own.  As financial institutions in South Africa, we came together several months ago to start working on a blockchain that we could all use to test concepts, experiment with technology and understand the implications of working across a number of institutions on a distributed shared ledger.

The first question we had to ask ourselves was “What blockchain do we use?”  This is not a trivial question.  There are a number of options that we looked at.  We used various questions to build a filter through which we examined the blockchains on offer.

Is this a “free to use” (i.e. open source) product?

While we as banks generally don’t use open source products and look for licensed products because of the support, quality etc that is included with those products, this project was different:

  1. We were not looking to build a production system, we were looking to pilot a number of concepts.
  2. The licensing costs become prohibitive as the number of institutions wanting to get involved increased.
  3. This is such a new technology that we felt that paying for a product that was still being developed was not ideal.

This ruled out a number of solutions that were technically sound but either had prohibitive licensing costs and/or limited access to the source code.

Can this be used for banking transactions?

While bitcoin is the biggest blockchain network out there, the bitcoin protocol is not designed for banking transactions.  The bitcoin network works brilliantly for bitcoins.  It is a single asset blockchain and does payments extremely well.  The problem is that the majority of banking transactions involve more than one asset.

  • Bank 1 purchases a bond from Bank 2 for x million.
  • Bank 1 places a Treasury Bill with the Central bank on repo for 1 week and then settles with interest on maturity of that repo agreement.
  • So we ruled out a few blockchain solutions where there was limited support for contracts and/or no multi-asset features.
  • Blockchains like MultiChain, while they are simple to use, did not have contract support.
  • There was an option to look at Counterparty style assets on the bitcoin blockchain, or use coloured coins, but these were not ideal solutions and there is limited smart contract support.
  • We needed a blockchain that supported contracts and multiple asset types.

Are there development tools that support the blockchain?

While there are many blockchains out there, not many have a mature set of development tools to support them.  As a developer, building on top of blockchain, you still need to be able to:

  • Create code (contract code in the case of blockchains).
  • Test that code.
  • Put the code into source control.
  • Deploy the code (core blockchain code as well as contract code) into a test environment.
  • Deploy the code into a production environment.
  • Monitor the blockchain and monitor the contracts running on the blockchain.
  • Most blockchains are still new (the bitcoin blockchain has only been running since 2009 and it is the oldest blockchain out there).  The tools supporting those blockchains are even newer and in many cases are non-existent.

Is there a community around the technology?

This was probably the most important question we asked.  Because of the network effect of blockchains, the more people working on a blockchain, the more other people will want to work on that blockchain.

Many blockchains listed on coinmarketcap for example have small teams working on the technology.  Some of the bigger cryptocurrencies have larger teams (bitcoin and litecoin for example).

The one community that has really exploded in the last year is the Ethereum community.  It is also an extremely diverse community.

The Ethereum foundation is focused on the core technology.  There are multiple teams working on multiple client implementations (Geth, Parity, CPP etc).    There are language experts working on JIT compilers and interpreters.  Dr Greg Colvin for example has been working for years on various compilers and is now involved in fine tuning the Ethereum Virtual Machine (EVM) interpreter

Companies like ConsenSys, Monax Industries (Eris) and IPFS are working on applications based on Ethereum.

Banks and banking consortia are using the platform and contributing back to the platform.

The community is vast, specialised and growing and was one of the main reasons why we decided to put Ethereum at the top of our list.

Conclusion

While this technology is still very new, the landscape is already starting to take shape.  In our view, Ethereum ticks all the boxes when it comes to a blockchain technology that can easily be used by a banking consortium.

  • It is free to use (with full access to the source code)
  • It supports multiple assets
  • It supports contracts
  • It has a great set of tools
  • It has a vast and growing community developing around it

by Peter Munnings

Walking The Spine

In my previous post I introduced the Spine Model – a philosophy of thought for Agile companies. Let’s Walk the Spine to show how philosophy can be applied to the real world.

Walking The Spine

In my previous post I introduced the Spine Model – a philosophy of thought for Agile companies. Let’s Walk the Spine to show how this philosophy can be applied to the real world.

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Start with the Need

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Over the years I have been all over the world and have observed many teams and their ways of work. An organizational pattern that always seems to surface is what I call “Cargo Culting” – see https://en.wikipedia.org/wiki/Cargo_cult_programming. Simply put the pattern is where people conduct rituals e.g. follow processes without any understanding of what the purpose of this work is. Typically, how this comes about is that a person establishes the work needed to solve a problem at a point in time. This work process is then adopted by the team. At some point the person who established the process moves on yet there may no longer be a need for the work.

I’ve seen accountants doing arduous reconciliations that were replaced by a new system yet they continued with these process regardless. Similar things happen in software development teams where the team follows a ritual but has no idea why. When questioned the people usually say “Because we’ve always done this/followed this process”. The wisdom here is that it’s often very hard for people to see clearly when they are in a system, an external view sometimes provided by a coach can provide insight for change that may have dramatic impact. Be clear on the need that is being solved for.

What is valued in the context of this need?

I believe that all of us behave according to our value drivers. Being conscious of one’s own value drivers as well as the value drivers of others, the team and the organization is possibly one of the most useful insights a person can have. Also having the insight around whether people associate value to themselves by what they do versus who they are (human doing versus human being) is critical. In our competitive workplace I frequently observe an imbalance wherein people associate all of their value to what they do, then in the absence of the work they find themselves lost. Values are also not binary, for example a team may favour flow over simplicity – it’s an “and” discussion.

Making “Principle” decisions

blog-post-visuals-05-oct-princaplesPrinciples are a great tool to guide decision making. I recently was involved in organizing a large industry event with a number of peer organizations. Half way through the exercise we came to the realization that we disagreed on a number of principle issues. It’s harder to address these issues when you are half pregnant, my takeout is that one should always do an Agile Bootstrap when forming a new team. Agile Bootstraps typically allow for a safe space where team members can share their backgrounds and where the team can walk the spine together – through this process it raises where there is disagreement.

Practical steps

blog-post-visuals-05-oct-practicesIn the world of knowledge workers that we find ourselves in, it is imperative that the team is allowed to align their chosen practices to satisfy the ultimate need or outcome. If you have hired smart people who can solve problems with creative thought, then why on earth would you dictate a solution? The first caveat is that in large enterprises there are some metrics that need to be provided by the team that are common across each team so that management can obtain a holistic view of the system. The second caveat is that some practices are just inappropriate for some problems – see Cynefin framework: https://en.wikipedia.org/wiki/Cynefin_Framework. The summary of this is that it really isn’t wise to use Waterfall for work that is not highly repeatable.

A man with a Tool

blog-post-visuals-05-oct-toolsInterestingly this is where many people start. They think that choosing a technology or tool will solve all of their problems. Unfortunately, this is a cognitive distortion. Tools don’t solve problems; humans do so don’t expect tooling to have any effect on the behaviour of the people in the system. Having said this if one adopts best practice then common sense must apply. We are in the world of DevOps and there are best of breed tools in each part of the pipeline. Do some research, your time will be well spent.

The last point to make is that when you have conversations be clear where you are having the conversation – the Spine again is useful for this.

by Jason Suttie

 

Survival of the digital-ist or win-win for banks and FinTechs?

The FinTech revolution’s narrative has changed over the past few months. What was once mooted as an all-out war between incumbent banks and FinTechs is morphing into a story of symbiosis and reciprocity that will unlock value across the ecosystem.

A special relationship

The FinTech revolution’s narrative has changed over the past few months. What was once mooted as an all-out war between incumbent banks and FinTechs is morphing into a story of symbiosis and reciprocity that will unlock value across the ecosystem. A recent article by Sam Maule in Bank Innovation likened the changing dynamic between banks and FinTechs to the relationship between the United States and Great Britain that evolved after the American Revolution into what became known as the special relationship, characterized by unparalleled cooperation on economic and military matters.

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Source: https://cointelegraph.com/news/moscow-hosts-first-international-bank-sponsored-FinTech-cluster

There is a strong case for collaboration between banks and FinTechs. Banks bring vast existing customer bases, regulatory certainty and data security and FinTechs bring innovativeness and flexibility to create superior user interfaces, product simplicity and seamless integration. The case for collaboration and the emergence of a special relationship is supported by a growing body of empirical evidence. Total FinTech investment in 2016 is expected to surpass the $14.6bn raised in 2015 and banks, led by Goldman Sachs, Santander, JP Morgan and Citi Group, are expected to expand their share of the total. Furthermore, a recent survey by Business Insider showed that only 25% of banks worldwide perceived FinTechs as a threat that they compete against directly. A far greater proportion of banks surveyed saw synergistic potential, with 34% viewing FinTechs as possible collaborators and 25% seeing FinTechs as possible acquisition targets (25%).

Most banks happy to partner with marketplace lenders for now

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Source: http://www.lendacademy.com/bank-partnerships-marketplace-lenders/

The growing number of partnerships between banks and marketplace lenders is a great example of bank-FinTech collaboration. Peer-to-peer lending has become a misnomer. The preferred term, marketplace lending describes a lending ecosystem where institutions (including banks) take up 80% of the loans. In spite of the general bank support of marketplace lending, some believe that the marketplace lenders could turn on the institutions that supported them.

Even though the flows through marketplace lending platforms and crowdfunding platforms are dwarfed by the flows through traditional bank and financial institution channels, the threat that FinTechs pose to banks is very real. Goldman Sachs has estimated that 7% of bank profits or +$11bn could be at risk of non-bank disintermediation. This explains why some banks, like Goldman Sachs and Wells Fargo, have opted to build their own marketplace lender, while others may, in time, acquire a marketplace lender outright.

Regulators could decide who wins  

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Source: http://digitally.cognizant.com/open-api-in-financial-services-making-peace-or-trouble/

The adversarial approach from banks may yet become justified. Adopting the view that banks and FinTechs will abandon all hostile intent in favour of cooperation could be premature and naïve in light of the latest changes in regulation. The Revised Payment Service Directive (PSD2) is expected to alter the landscape dramatically and demonstrates the profound influence that regulators can have on the power struggle between banks and FinTechs.

In the PSD2 compliant world banks are compelled to provide third-party providers access to customers’ accounts through open APIs. Effectively, this will enable FinTechs to build on top of banks’ data and infrastructure. Are banks facing the risk of becoming “dumb pipes” in the same way as mobile network operators with over-the-top (OTT) services layered on top? More to come on this in my next blog.

by David Krawitz

 

Why cash is here to stay

Many assume that physical cash is on its way out of our financial system. You’d be forgiven for thinking this, given current advances in technology, widespread adoption of mobile phones, higher inclusion of people into the ranks of the “banked” and the broader FinTech revolution taking place. However, deeper reflection leads to a different conclusion…

Many assume that physical cash is on its way out of our financial system.  You’d be forgiven for thinking this, given current advances in technology, widespread adoption of mobile phones, higher inclusion of people into the ranks of the “banked” and the broader FinTech revolution taking place.  However, deeper reflection leads to a different conclusion:  As long as dire poverty exists in any society, cash cannot be done away with.

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Image credit: seemoreandmore.tumblr.com

Let me explain.

Any monetary value in our society is allocated to individuals in two ways – bearer instruments or registered instruments.  A bearer instrument is something that is assumed to be owned by the holder of the instrument.  An example is physical cash.  You don’t need to prove to anyone that the cash in your wallet is yours.  You have it and so you’re the presumed owner.  Registered instruments, however, are assets whose ownership is determined by referencing a database managed by a trusted institution (think houses at the Deeds Office or your digital money that is in your bank account).

Now let’s compare cash (a bearer instrument) with the digital money in your bank account (a registered instrument).  Even assuming zero bank fees, to access the money in your bank account incurs costs.  You either need to have a device with internet access (costly) or you need to travel to your bank branch (also costly) to access or spend the money in your bank account.  Physical cash on the other hand incurs no costs to be spent or accepted.

It is socially untenable for a government to require its poorest citizen to incur costs in order to accept value in the form of its currency.  As such, it follows that cash will remain in our society as long as the “access cost” to digital money is not insignificant to the poorest member of our society.  And of course, this assumes that fiat currency (i.e. government-issued currency) will last longer than it takes us as a society to eradicate extreme poverty! (More on this another time.)

by Farzam Ehsani

Kenya’s mobile money story: the runaway success of M-Pesa

Development finance and corporate banks alike have long wrestled with the issue of banking the unbanked in the developing world, which would encourage broad-based socio-economic development on the one hand, as well as greater product distribution for the private sector banking institutions.

http://martinpasquier.com/wp-content/uploads/2013/11/Mpesa-agent-shack-kenya-afrikoin-mobile-money-martin-pasquier-emerging-markets-innovation.jpg
Image credit: http://martinpasquier.com

Development finance and corporate banks alike have long wrestled with the issue of banking the unbanked in the developing world, which would encourage broad-based socio-economic development on the one hand, as well as greater product distribution for the private sector banking institutions.

However, bringing greater financial inclusion to the bottom of the pyramid no longer means universal branch bank account ownership. Nowhere is this more evident than in Africa, particularly in one of the continent’s emerging fintech hubs, Kenya.

http://asmarterplanet.com/blog/2011/04/kenya-leapfrogs-the-rest-of-the-world-with-its-mobile-money-services.html
Image credit: http://asmarterplanet.com

In 2006, before M-Pesa was launched, 25% of Kenyans had access to banking products. By 2014, this figure had jumped to 68%. Almost half of these users do not have a formal bank account, indeed, formal banking sector inclusion in Kenya remains as low as 23%. However, the M-Pesa platform performs the essential financial transactions:  deposit and withdraw money, transfer money to other M-Pesa users and non-users, pay bills and purchase airtime. M-Pesa agents are as ubiquitous as pavement airtime kiosks, whose owners have been duly trained and are incentivised by clipping a commission per M-Pesa transaction. This is the kind of distribution network that most ATM-driven banks can only dream about.

This context is not unique to Kenya. Small wonder then that Sub-Saharan Africa is a global leader in the use of mobile money technology. On average 16% of the adult population actively uses a mobile money product in the region; the global average is 2%. Of the 18 countries in the world that have more mobile money accounts than bank accounts, only one, Paraguay, is not in Africa.

The significance of M-Pesa and the mobile money products like it is the potential it holds for retail financial access in the developing world and the money to be made in doing so. As the trail-blazer in this innovation space, Safaricom now generates a reported 10% of its revenue through providing a transactional banking platform for that segment of the population conventional financial institutions did not consider worth it to bank.

[Reprinted with permission from Observer Research Foundation].

by Lucy Corkin

 

Read the full story originally published by Observer Research Foundation website here.

 

The Observer Research Foundation is India’s leading policy think-tank seeking to lead and aid policy thinking towards building a strong and prosperous India in a fair and equitable world. ORF has the mandate to conduct in-depth research, provide inclusive platforms and invest in tomorrow’s thought leaders today.

lucy-corkin-rmb1-cropped2Lucy Corkin is Business Manager at RMB Africa, having joined RMB as a Class Of in 2012. She has a PhD in International Relations from SOAS, University of London, and has picked up a couple of languages along the way, including French, Portuguese and Mandarin Chinese. She is a regular contributor for the Observer Research Foundation where she gets to share her thoughts on goings on in Africa, the world of banking, and anything else that grabs her attention.