Payments

Money 2020 Part 3 of 3: Tech Crime Takes Off

One of the most fascinating aspects of Money for me was sessions on fraud, security and of course hacking. I attended a keynote by Marc Goodman who started as a law enforcement officer in Los Angeles. He has been studying criminal behavior for years and has paired that knowledge with technology and of course the internet. He founded The Future Crimes Institute which is devoted to looking at where technology crime is going next. He painted a grave picture of what is happening and what could happen.

The evolution of crime was first low tech. A bad guy would come up to you, flash a gun or knife and you’d hand over your wallet. Pretty unsophisticated and hard to scale. One person at a time is a hard way to make a living. When trains came along the bad guys were suddenly able to rob two hundred people at a time. Now we’re getting somewhere.

Mr. Goodman recounted an event that took place in an undisclosed casino. The bad guys hacked their way into the casino security cameras and were now able to see what was happening at all the gaming tables. They sent in their gambling marks with ear pieces and directed them what hands to play. Before they were done they socked away $34 Million. Ultimate scale. The very system the casino owners installed to stop cheating was used for the express purpose of cheating and no one even knew it was going on.

In Mexico, Cartel guys have set up a countrywide cellphone network. Cell towers able to cover all 31 states, fully encrypted and available only to their own. Imagine creating a Sprint or AT&T type personal network.

Folks, robbing banks is over, forever.

He then took us even deeper into the abyss, down to the Dark Web. Free and open software programs like Tor can block your identity from networks, traffic analysis for browsers instant messages remote logins and much more. Anonymity is almost completely attainable. With this cloaking device people peruse anonymous marketplaces like the famous Silk Road where you can buy and sell almost anything. Talk about Black Friday.

And if that wasn’t enough, Mr. Goodman basically said anything is hackable. We have learned that retail point of sale systems are very much prone to hacking. As are computers, financial networks, you name it. It’s extending well beyond that into the home. Someone hacked a home baby monitor system and began yelling at the sleeping child using inappropriate language. The parents barged into the room to find no human form. Only a shrill voice coming from the monitor speakers. Do you have security cameras around your house? Have you changed the password from password or 1234 to something harder to crack? If not, go do it now.

Most of the internet traffic runs on the IPv4 protocol. Essentially this protocol serves as storage for all the IP addresses, or devices that can connect to the Internet. It allows for 4.3 Billion IP addresses (devices) to connect. Thought at one time to be quite a lot. Brings back those Y2K days doesn’t it. It turns out that space is nearly depleted, so the internet gods have come up with IPv6 and it is in the process of being rolled out. At this time about 10% of the internet traffic runs on IPv6 with more moving there over time.

If IPv4 can support 4.3 Billion devices, you may be asking how many IP addresses of devices can be connected to IPv6. An excellent question. Somewhere in the neighborhood of 340 Trillion Trillion Trillion devices. A number so big that can’t be grasped in any way. The point is everything that can be connected to the internet will likely become connected and it’s unlikely anyone will be turned down by the information superhighway because of lack of space.

Beyond theft there lies the growing potential that this amazing technology will be exploited by terrorists. This could have far-reaching consequences unless tougher safeguards and protections are developed. I’m very happy Mr. Goodman is on the case.

This ends my Money 2020 summary for 2014. Thank you for reading.

Read Part 1: The Future of Currency and Payments

Read Part 2: Mobile Payments and Crypto Currencies

Money 2020: Part 2 of 3: Mobile Payments and Crypto Currencies

At the close of day one my head was spinning. I managed to avoid all the trappings and temptations of Vegas and made it to my room at an early hour to review my notes and prepare for the next day. I chose to focus on two topics, Mobile payments and Crypto Currencies.

Apple Pay was announced not a month prior and so that dominated the conversation. How it would change the landscape of payments? Who will win? Probably the best way to start is to take a few moments to outline the four main attributes of Mobile payments. They are Near Field Communication, Secure Element, Host Card Emulation and Tokenization.

Near Field Communication (NFC) is essentially an antenna embedded in the phone that allows radio signals to exchange information between two devices at close range. It’s been around since the 1980’s and is widely used and often heralded as the future of payments. That promise has gone largely unfulfilled but now that the iPhones Six and Six Plus are NFC enabled we may see more adoption of NFC.

Secure Element (SE) is a tamper-resistant hardware that can securely host confidential and personal information on a mobile device. It’s built into the phone and is owned by the carriers (Sprint, AT&T, etc.). Until recently the only way to make payments using a mobile device was through the secure element, which meant the carriers had to be included in the ecosystem.

Host Card Emulation (HCE) allows software systems to manage mobile payments by creating an exact virtual representation of a smart card (SE) and storing it in the cloud. This deployment means the carriers can be by-passed by the OS owners. Google Wallet uses HCE in their solution.

Tokenization (sorry, no acronym available) takes the credit or debit card information such as account number, customer name, expiration date and replaces it with a surrogate called a token. This card information is not stored on the phone, only token. The merchant receives only the token during the mobile payment transaction and the token provider handles the translation from token to traditional account number for processing. Apple Pay uses tokenization which is stored in a SE on the phone. This protocol will likely be used to a larger degree in the future.

It has been reported that over 1 million cards were loaded into Apple Pay within 72 hours of the software upgrade being made available. This is more than all other providers combined, including Google Wallet which launched in 2011. This is a testament to the brand power of Apple who has over 800 million payment numbers in their iTunes system. Google has gotten a bump from Apple’s launch, seeing their wallet transactions increase by 50%.

The question of who will win leads to many more questions. How quickly will merchants install point of sale terminals that will accept NFC transactions? Will consumers feel comfortable loading their cards into their phone and using them at stores? As referenced in Part 1 of this Money series, recent and multiple merchant point of sale breaches have heightened everyone’s awareness that the payments ecosystem needs hardening. Consumers in particular are even more sensitized to this.

One more thing comes into play here. EMV, which stands for EuroPay, Master Card, Visa who collaborated on developing a standard that embeds a chip into a credit or debit card. This chip when inserted in an EMV enabled POS terminal. So another question to add to the above list is will merchants go all the way and deploy checkout hardware that will accept both NFC and EMV? The technology will improve security but is only good for physical story transactions. It won’t help with online commerce because the card is not present. It will also require some new consumer behavior. On an EMV transactions the card is not swiped, but is dipped into a terminal and needs to remain there until the customer signs on the screen and taps accept. Think back to the first ATM machines. You inserted your card and the machine held it until the transaction was completed. Now we either swipe or dip the card but it’s not left in the machine.

Crypto Currencies

We are rapidly reaching the point where you can no longer look in your wallet or checkbook register and know how much money you have available to you. Technology, but increase of financial instruments and the ease of opening accounts has caused us to fragment our holdings across numerous places and spaces. If that wasn’t confusing enough, we now have crypto money being thrown in the mix.

I was aware of currencies such as Bitcoin but I didn’t really understand it well. When I saw the amount of time dedicated to it at Money I stopped into a number of sessions to learn. I walked out fascinated by the concept. If you stop someone on the street and ask them to explain Bitcoin you will likely get silence. Technically these currencies are a medium of exchange using cryptography to secure transactions and control how new units are created. There is no financial or banking system and it is not regulated (yet) in the U.S. The safety and integrity of the currency is maintained by members of the currency community known as miners. They use their own computers to validate and timestamp transactions. Why do we need these currencies? Well, obviously we don’t need them but the developers of feel that there is significant friction in the payments and currency system that leads to fees, surcharges, fraud, processing fees and waiting periods.

They site the lack of a global standard for money and nation state specific proprietary infrastructure as primary reasons crypto currencies are the next logical phase of money. Simple, fast exchange with no physical currency.

Although most financial institutions don’t recognize Bitcoin at this time, a number of online commerce sites are beginning to accept them at checkout. Certainly this is will not play into the average consumer at this time, but it is something to watch. Part 3 up next.

Read Part 1: The Future of Currency and Payments

Read Part 3: Tech Crime Takes Off.

Money 2020: The Future of Currency and Payments: Part 1 of 3

I attended the Money 2020 conference in Las Vegas this November. It’s a gathering of over 7,500 financial and technology professionals from over 60 countries. Essentially we all talk about the innovation of money and payments, both of which are undergoing unprecedented disruption. It was the forum’s 4th year but my first and I found it exhilarating and thought provoking.

The conference format is multi-layered. Big room keynote presentations, breakout sessions that are panel discussion style, live demos and an exhibit hall with hundreds of booths. I also found it to be a bit of a homecoming event as I ran into at least a dozen people I previously worked with or worked for me at one time. Nice to see friendly faces again and catch up on what they’re doing.

The breakout sessions are set-up in tracks; regulatory, security, e-commerce, retail banking, etc. My role in the bank is very broad, so I elected to pick and choose across the tracks and ingest a bit from each. The conference doubled in attendee size from last year but it occupied the same space in the Aria Hotel. Needless to say things were very crowded. Some people got shut out of sessions because they arrived on time or a bit late, only to find them already full. Standing room only in many of the sessions I attended.

The content covered a wide range of topics so I don’t claim this post to be a summary of the conference itself. Instead it’s my perspective. What I observed through my lens of “convergence.” I gleaned four distinct themes of content and exploration.

Consumer Research: Who will influence change
Mobile Payments: Who will win?
Crypto Currency: The reinvention of money?
Fraud and Security: Will hacking impede progress?

Consumer Research

Lots of the latest consumer research was unveiled at Money and I carefully planned to attend as many of these sessions as possible. We know the world is big, but thanks to Social Media and the news cycle we tend to lose appreciation for that fact. Check out these insane numbers.

3.6 Billion unique active mobile phone users on Earth! People are saying they’d give up a lot of things in their life before they would give up their mobile device. You’ve see those studies. Indeed the mobile phone has been embedded in our lives and are neurally connected to our finger and hands. It’s happened in the blink of an eye. Steve Jobs released the first iPhone on June 29, 2007. Many think that the phone has materially impacted the way people pay for things, but the following chart reveals that the change began a decade and a half ago and the tectonic plates of payments has been steadily shifting ever since. The phone has not influenced nearly as many people to consider their payment options as debit and credit cards. Plastic still rules. Note: many of these slides were taken with my iPhone from audience seating. I apologize that some are of low fidelity or are not well framed.

As we can see, while checks and cash dominated the transactions of choice for U.S. consumers in 1996, it has been forever overshadowed by credit and debit. Cash is not going away any time soon and if the security of credit and debit cannot be substantially shored-up, the never-ending rounds of retailer database hackings could keep cash and checks on life support for some time to come.

One study asked consumers how they will pay for things in the future. Every one of the presented forms of payment rose except credit, debit and cash. All three showed a decline, with cash leading the way. Certainly it’s very hard to be confident about a survey looking six years out. In the technology innovation mind it’s an eternity. Many disruptive species will be born in that time. But the scale and footprint of payments is vast and when you add in the generational and geographical aspects one cannot be faulted to remain skeptical.

Notice in the chart above that the green line (future) and black line (today) are not that divergent. People say they are expecting to pay in newer ways in greater numbers than now, but those shares are still small. Is this due to the momentum and the buzz around P2P money movement tools as well as the growth of PayPal? Is this how people will prefer to pay in the future?

The chart below puts a future date on the survey questions of 2020. When you look at the numbers by instrument they are not widely different from the above study. What’s interesting is the orange square in the bottom left. An overwhelming number of consumers prefer to use a familiar network provider (Discover, Visa, Master Card, etc.) to provide them with payments choices. Not Square or PayPal, or whatever Silicon Valley garage door opens, but the old guards of payments. Certainly the disrupters definitely have a head start on what attracts consumers. One could say however that it’s the Network’s and Issuer’s battle to lose.

The Emergence of the Millenial

When you wander a conference and keep your ears open you take note of the words or phrases that are repeated in nearly every type of content session as well as what’s said over a libation or two. One of the words that stood out without a doubt at Money was, Millenials. This generation is defined by most as a combination of Generation Y (25-34) and Generation Z (18-24). Seems like a very wide range, but when coupled with exposure to technology and shifting attitudes towards work and education, one can see why they can be coupled.

All camps that I observed lauded the Millenial population as one that brands − old and new − must attract and retain to ensure growth and to maintain relevance (otherwise known as survival). It doesn’t necessarily require a complete reboot, but it does mean we should guard against doing old things new and focus instead on doing new things that accomplish longstanding needs. This will be hard for financial institutions, but the future is all about change in relevance.

Millennials

Our young friends are absolutely adorable. They are confident and have an “I can” attitude. They are book smart and savvy, which means they carry a significant share of the $1 Trillion student loan debt now piled up in the U.S. As such, many live with their parents because they can’t afford a mortgage. An alarming share are under-employed, experiencing a large and confusing cognitive gap between their image of a job while in school and the reality of what they are doing Monday through Friday. This somewhat explains, at least to me, their zealous interest in getting promoted. Dues (literally) have already been paid in the form of tuition and they are looking for a faster track to pay back.

Research I saw at Money outlined an interesting persona of Millennials . They ike to have fun first then hard work next. They are close to their parents, many who have doted on them as children. They buy prestige brands and will spend more to design or customize a product to reflect who they are. As social natives they have more intense relationships with brands and don’t think twice about calling them out for either handing things well or dropping the ball. Their use of Social Media gives them an outsized voice that smart brands are addressing.

What is most fascinating to me is how they leverage technology to positively impact their financial position. We know they are getting their driver’s license later than previous generations, relying on Uber and public transpiration to get to where they want/need to go. Owning a car, actually driving a car is not at all important. They do not define themselves by the cars they drive.

When it comes to consuming content they don’t have a monthly cable bill the size of a car payment. They’re not cord-cutters because they never plugged in the cord. Television ownership is also much lower among Millenials . TV is on a grid. You have to be in the same physical space as a television to watch it. How barbaric! Why do that when you can stream almost anything to the glass surface of your smartphone, tablet or laptop? Oh yes, they don’t own desktop computers either (how mainframe of us). Oftentimes they share Netflix passwords or Prime accounts so everyone can get on the same series. The CBS network recently announced “All Access,” a content streaming service. For $5.99 per month subscribers can watch full seasons of current primetime shows and leading daytime and late night CBS Programming. Others will likely follow.

Another bit of interesting research came from a study on values Millennials rated as important vs. Gen X’ers rating at a similar life stage. Millennials value enjoying life, having fun, authenticity and stable relationships much higher than their Gen X counterparts. They moved freedom, close friends and knowledge down in importance.

Y’s and Z’s were influenced by the internet in their formative years. Gen X is actually more closely aligned with the Boomers in that they were more or less adults before they were faced with the prospects of a digital world. One study drew closer connections between Millennials and Boomers than I would have even imagined. It seems the two categories to be reckoned with, especially among financial services are the Boomers of course (we have all the money) and the Millennials who will eventually have all the money. They will just interact with it in a much different way.

Understanding what your customers value, particularly a segment with this much power is critical to financial success. My next Money 2020 installment will cover Mobile payments and eWallets.

Read Part 2: Mobile Payments and Crypto Currencies

Read Part 3: Tech Crime Takes Off.

Image Credits:

Money 2020 magnifying glass: Money 2020

Crowd at Money 2020: Steve A Furman

Various Slides: Taken during live sessions by Steve A Furman

Image of Several Millennials: Mirus Reporter