By Dima Okhrimchuk, CEO of Platio
With Bitcoin prices now trading over 70% lower than their January peak, you could be forgiven for thinking that the bubble has burst.
The recent rejection by the SEC of several proposed Bitcoin ETFs has added weight to this view.
It can seem like cryptocurrency is knocking on finance’s door but the financial authorities won’t let it in. And each time, the established financial industry breathes a sigh of relief.
But rumours of a startlingly different perspective are coming from some of Wall Street’s most venerable financial institutions. Just this month it was reported that Goldman Sachs was considering a plan to offer custodial services to cryptocurrency funds. This week, Bank of America applied for another patent for secure crypto storage, on top of the 50 blockchain patents its already holds.
So what is going on here? And how can you plan for an economic sea-change that few industry insiders are willing to publicly embrace?
As CEO of a fintech active within the space between crypto and traditional banking, I speak with both established financial institutions and the leading crypto innovators around the world. Here are some of the learnings from those many conversations, as well as pointers for planning for a tokenized financial future.
The global players in crypto are far from certain, but soon they will be financial giants
Bitcoin has been counted out so many times since its inception in 2009 that there is even a website dedicated to Bitcoin obituaries. There are 308 of them, at last count. Bitcoin is always on the verge of disappearing. Yet, somehow, it never does.
The website Coinmarketcap currently lists trading information for 1887 different cryptocurrencies and tokens, ranging from the well-known, like Bitcoin and Ethereum, to the unusual, like Dentacoin, a blockchain platform for dentists worldwide.
Yes, it is certain that many of these coins will fail. As with the dot com bubble, many of these projects will never be profitable and will be quickly forgotten. However, Amazon and eBay emerged from the dot com crash to become giant companies. One or two of those 1887 cryptocurrencies are going to be here in 10 years’ time. And they will be financial giants.
It might not be Bitcoin. It might not be Ethereum. It might not be Ripple. We do not know which will succeed, but can be certain that at least one cryptocurrency will.
Because for all its teething problems, cryptocurrency has been shown to work. The current version is rough around the edges, but the concept has been proven. There’s no going back for your institution or your clients.
This all raises the question: what should finance do about it?
Silencing crypto means silencing the needs of your clients
Maintaining silence about crypto or looking the other way is not a viable option. No one really knows how many people are using Bitcoin and other cryptocurrencies, but we do know that thousands of the world’s smartest technologists are working on making crypto payments quicker, cheaper, more secure and more user friendly.
Setting up a bitcoin wallet today needs some confidence with technology. Even so, it’s still a much quicker process than setting up a bank or brokerage account.
As soon as someone has some cryptocurrency they quickly realise that those funds can be transferred around the world, to anyone with an internet connection, in minutes. Geographical boundaries become meaningless. Compare this to bank transfers between EU countries, some of the most integrated countries in the world, which take one to two days. Again, crypto takes minutes.
Once your clients are exposed to the potential of crypto, there’s no going back.
In fact, the point where clients experience frustration is when the cryptocurrency system comes up against traditional finance. If users change their crypto for fiat in an exchange it will take days to transfer their funds to a standard bank account. More savvy technologists, including companies like my own, are working to make this immediate and intuitive. The innovation is coming from outside traditional finance.
And once the options for spending cryptocurrency increase (something else those thousands of technologists are working on), the juxtapositions with the traditional financial world will decrease. A truly independent financial system will emerge.
Traditional finance must listen to the client expectations set by crypto, and crypto companies must listen to the expectations set by traditional finance. Only companies able to blend the two will succeed.
Remittances as an upcoming battleground
The remittances market is a good example of an upcoming battleground.
According to the World Bank half a trillion dollars was sent around the world in 2015 in remittances – the sending of wages earned in one country to family members in another country.
These payments take days and are frequently subject to enormous fees. Transfers between crypto wallets are so much quicker and cost-effective, particularly across borders, that more and more people will explore the alternative. Unless current companies radically improve their services it would not be a surprise to see this market taken over by cryptocurrency payments in the near future.
Traditional finance must embrace crypto… and quickly
There is no other viable option but to embrace crypto, and this is happening behind the scenes in many of our most established institutions. Bank of America reportedly holds more blockchain-related patents than any other company, even beating tech giant IBM.
Even Jamie Dimon, the CEO of JPM Morgan Chase, who last year called Bitcoin a “fraud” softened his position in a June interview to “buyers beware”.
More publicly, The Intercontinental Exchange (ICE) announced its collaboration with Microsoft and Starbucks on Bakkt, a platform which will initially trade Bitcoin. ICE’s futures exchange and clearing house plan to launch a 1-day physically delivered Bitcoin contract along with physical warehousing in November 2018. The companies plan that Bakkt will eventually “enable consumers and institutions to seamlessly buy, sell, store and spend digital assets.”
However, traditional finance may need to move quickly if it is not to lose this opportunity altogether. A recent report by analyst house Sanford C. Bernstein & Co. outlined the huge potential for greater Wall Street involvement in the crypto sphere.
Cryptocurrency exchanges are expected to bring in revenues exceeding $4 billion this year, and are many times more profitable than any other kind of asset exchange. The report says that “as the crypto-asset class seasons and institutional demand builds, there are a plethora of opportunities for traditional firms.” Those firms can offer custodial services, market making, or asset management within the sector.
However, the report also strikes a warning. If traditional financial firms do not move quickly, they risk losing the market entirely. The trading platform Coinbase is estimated to have around half of the transaction revenue pool. If financial firms do not move quickly, Coinbase may soon have an “unassailable competitive position.”
Is crypto ready to take over finance? Not yet. But has it proven itself capable of massively disrupting the industry? Absolutely. Traditional financial firms will have to adapt to this new technology. They must plan to embrace crypto before it’s too late. If not, your bank, broker or investment firm may go the way of your CDs, video rental and bricks-and-mortar bookshop: solid businesses made obsolete by the increasing power of the Internet.
ISO 20022 migration: full speed ahead despite recent delays, says new Deutsche Bank paper
Today, Deutsche Bank has released the third installment in its “Guide to ISO 20022 migration” series, which offers a comprehensive update on the industry shift to the de facto global standard for financial messaging: ISO 20022. This paper comes at a critical time for the ISO 20022 migration, with a number of changes to existing timelines and strategies from SWIFT and the world’s major market infrastructures having been announced this year.
The paper explores the latest developments, including SWIFT’s year-long postponement of the migration in the correspondent banking space. The decision meets industry calls for a delay and also provides ample time to build the new central Transaction Management Platform (TMP) – a core feature of SWIFT’s new strategy that will allow the industry to move away from point-to-point messaging and towards central transaction processing.
It also details the wave of action that has been seen by market infrastructures around the world – with many, including the ECB, EBA CLEARING and the Bank of England, announcing revised migration approaches.
“Now more than ever, with shifting timelines and strained resources, it is vital that banks and corporates alike do not view the ISO 20022 migration as just another project that can be put on the back burner,” says Christian Westerhaus, Head of Cash Products, Cash Management, Deutsche Bank. “The delays in the correspondent banking space, and across several market infrastructures, should not be seen as an opportunity for banks to take their foot off the pedal. The journey to ISO 20022 is still moving ahead at speed – and internal projects need to reflect this.”
The Guide also highlights the implementation issues on the migration journey ahead – most notably surrounding interoperability between market infrastructures, usage guidelines and messaging formats. This is achieved through a series of deep dives, case studies, and points of attention drawn from Deutsche Bank’s internal analysis.
“As this year has proved, nothing is set in stone, “says Paula Roels, Head of Market Infrastructure & Industry Initiatives, Deutsche Bank. “The ISO 20022 migration involves a lot of moving parts and keeping abreast of the latest developments is critical for banks and corporates alike. As the deadlines near, and the ISO 20022 story develops, this series of guides will continue to highlight key points for consideration over the coming years.”
The Psychology Behind a Strong Security Culture in the Financial Sector
By Javvad Malik, Security Awareness Advocate at KnowBe4
Banks and financial industries are quite literally where the money is, positioning them as prominent targets for cybercriminals worldwide. Unfortunately, regardless of investments made in the latest technologies, the Achilles heel of these institutions is their employees. Often times, a human blunder is found to be a contributing factor of a security breach, if not the direct source. Indeed, in the 2020 Verizon Data Breach Investigations Report, miscellaneous errors were found vying closely with web application attacks for the top cause of breaches affecting the financial and insurance sector. A secretary may forward an email to the wrong recipient or a system administrator may misconfigure firewall settings. Perhaps, a user clicks on a malicious link. Whatever the case, the outcome is equally dire.
Having grown acutely aware of the role that people play in cybersecurity, business leaders are scrambling to establish a strong security culture within their own organisations. In fact, for many leaders across the globe, realising a strong security culture is of increasing importance, not solely for fear of a breach, but as fundamental to the overall success of their organisations – be it to create customer trust or enhance brand value. Yet, the term lacks a universal definition, and its interpretation varies depending on the individual. In one survey of 1,161 IT decision makers, 758 unique definitions were offered, falling into five distinct categories. While all important, these categories taken apart only feature one aspect of the wider notion of security culture.
With an incomplete understanding of the term, many organisations find themselves inadvertently overconfident in their actual capabilities to fend off cyberthreats. This speaks to the importance of building a single, clear and common definition from which organisations can learn from one another, benchmark their standing and construct a comprehensive security programme.
Defining Security Culture: The Seven Dimensions
In an effort to measure security culture through an objective, scientific method, the term can be broken down into seven key dimensions:
- Attitudes: Formed over time and through experiences, attitudes are learned opinions reflecting the preferences an individual has in favour or against security protocols and issues.
- Behaviours: The physical actions and decisions that employees make which impact the security of an organisation.
- Cognition: The understanding, knowledge and awareness of security threats and issues.
- Communication: Channels adopted to share relevant security-related information in a timely manner, while encouraging and supporting employees as they tackle security issues.
- Compliance: Written security policies and the extent that employees adhere to them.
- Norms: Unwritten rules of conduct in an organisation.
- Responsibilities: The extent to which employees recognise their role in sustaining or endangering their company’s security.
All of these dimensions are inextricably interlinked; should one falter so too would the others.
The Bearing of Banks and Financial Institutions
Collecting data from over 120,000 employees in 1,107 organisations across 24 countries, KnowBe4’s ‘Security Culture Report 2020’ found that the banking and financial sectors were among the best performers on the security culture front, with a score of 76 out of a 100. This comes as no surprise seeing as they manage highly confidential data and have thus adopted a long tradition of risk management as well as extensive regulatory oversight.
Indeed, the security culture posture is reflected in the sector’s well-oiled communication channels. As cyberthreats constantly and rapidly evolve, it is crucial that effective communication processes are implemented. This allows employees to receive accurate and relevant information with ease; having an impact on the organisation’s ability to prevent as well as respond to a security breach. In IBM’s 2020 Cost of a Data Breach study, the average reported response time to detect a data breach is 207 days with an additional 73 days to resolve the situation. This is in comparison to the financial industry’s 177 and 56 days.
Moreover, with better communication follows better attitude – both banking and financial services scored 80 and 79 in this department, respectively. Good communication is integral to facilitating collaboration between departments and offering a reminder that security is not achieved solely within the IT department; rather, it is a team effort. It is also a means of boosting morale and inspiring greater employee engagement. As earlier mentioned, attitudes are evaluations, or learned opinions. Therefore, by keeping employees informed as well as motivated, they are more likely to view security best practices favourably, adopting them voluntarily.
Predictably, the industry ticks the box on compliance as well. The hefty fines issued by the Information Commissioner’s Office (ICO) in the past year alone, including Capital One’s $80 million penalty, probably play a part in keeping financial institutions on their toes.
Nevertheless, there continues to be room for improvement. As it stands, the overall score of 76 is within the ‘moderate’ classification, falling a long way short of the desired 90-100 range. So, what needs fixing?
Towards Achieving Excellence
There is often the misconception that banks and financial institutions are well-versed in security-related information due to their extensive exposure to the cyber domain. However, as the cognition score demonstrates, this is not the case – dawdling in the low 70s. This illustrates an urgent need for improved security awareness programmes within the sector. More importantly, employees should be trained to understand how this knowledge is applied. This can be achieved through practical exercises such as simulated phishing, for example. In addition, training should be tailored to the learning styles as well as the needs of each individual. In other words, a bank clerk would need a completely different curriculum to IT staff working on the backend of servers.
By building on cognition, financial institutions can instigate a sense of responsibility among employees as they begin to recognise the impact that their behaviour might have on the company. In cybersecurity, success is achieved when breaches are avoided. In a way, this negative result removes the incentive that typically keeps employees engaged with an outcome. Training methods need to take this into consideration.
Then there are norms and behaviours, found to have strong correlations with one another. Norms are the compass from which individuals refer to when making decisions and negotiating everyday activities. The key is recognising that norms have two facets, one social and the other personal. The former is informed by social interactions, while the latter is grounded in the individual’s values. For instance, an accountant may connect to the VPN when working outside of the office to avoid disciplinary measures, as opposed to believing it is the right thing to do. Organisations should aim to internalise norms to generate consistent adherence to best practices irrespective of any immediate external pressures. When these norms improve, behavioural changes will reform in tandem.
Building a robust security culture is no easy task. However, the unrelenting efforts of cybercriminals to infiltrate our systems obliges us to press on. While financial institutions are leading the way for other industries, much still needs to be done. Fortunately, every step counts -every improvement made in one dimension has a domino effect in others.
Has lockdown marked the end of cash as we know it?
By James Booth, VP of Payment Partnerships EMEA, PPRO
Since the start of the pandemic, businesses around the world have drastically changed their operations to protect employees and customers. One significant shift has been the discouragement of the use of cash in favour of digital and contactless payment methods. On the surface, moving away from cash seems like the safe, obvious thing to do to curb the spread of the virus. But, the idea of being propelled towards an innovative, digital-first, cashless society is also compelling.
Has cashless gone viral?
Recent months have forced the world online, leading to a surge in e-commerce with UK online sales seeing a rise of 168% in May and steady growth ever since. In fact, PPRO’s transaction engine, has seen online purchases across the globe increase dramatically in 2020: purchases of women’s clothing are up 311%, food and beverage by 285%, and healthcare and cosmetics by 160%.
Alongside a shift to online shopping, a recent report revealed 7.4 million in the UK are now living an almost cashless life – claiming changing payment habits has left Britons better prepared for life in lockdown. In fact, according to recent research from PPRO, 45% of UK consumers think cash will be a thing of the past in just five years. And this UK figure reflects a global trend. For example, 46% of Americans have turned to cashless payments in the wake of COVID-19. And in Italy, the volume of cashless transactions has skyrocketed by more than 80%.
More choice than ever before
Whilst the pandemic and restrictions surrounding cash have certainly accelerated the UK towards a cashless society, the proliferation of local payment methods (LPMs) in the UK, such as PayPal, Klarna and digital wallets, have also been a key driver. Today, 31% of UK consumers report they are confident using mobile wallets, such as Apple Pay. Those in Generation Z are particularly keen, with 68% expressing confidence using them.
As LPM usage continues to accelerate, the use of credit and debit cards are likely to decline in the coming years. Whilst older generations show an affinity with plastic, younger consumers feel less secure around its usage. 96% of Baby Boomers and Generation X confirmed they feel confident using credit/debit cards, compared to just 75% of Generation Z.
Does social distancing mean financial exclusion?
As we hurtle into a digital age, leaving cash in the rearview, there are ramifications of going completely cashless to consider. We must take into consideration how removing cash could disenfranchise over a quarter of our society; 26% of the global population doesn’t have a traditional bank account. Across Latin America, 38% of shoppers are unbanked, and nearly 1 in 5 online transactions are completed with cash. While in Africa and the Middle East, only 50% of consumers are banked in the traditional sense, and 12% have access to a credit card. Even here in the UK, approximately 1.3 million UK adults are classed as unbanked, exposing the large number of consumers affected by any ban on cash.
Even when shopping online – many consumers rely on cash-based payments. At the checkout page, consumers are provided with a barcode for their order. They take this barcode (either printed or on their mobile device) to a local convenience store or bank and pay in cash. At that point, the goods are shipped.
There are also older generations to consider. Following the closure of one in eight banks and cashpoints during Coronavirus, the government faced calls to act swiftly to protect access to cash, as pensioners struggled to access their savings. Despite the direction society is headed, there are a significant number of older people that still rely on cash – they have grown up using it. With an estimated two million people in the UK relying on cash for day to day spending, it is important that it does not disappear in its entirety.
Supporting the transition away from cash
Cashless protocols not only restrict access to goods and services for consumers but also limit revenue opportunity for merchants. While 2020 has provided the global economy with one great reason to reduce the acceptance of cash, the payments industry has billions of reasons to offer multiple options that cater to the needs of every kind of shopper around the world.
Whilst it seems younger generations are driving LPM adoption, it is important that older generations aren’t forgotten. If online shops fail to offer a variety of preferred payment methods, consumers will not hesitate to shop elsewhere. With 44% of consumers reporting they would stop a purchase online if their favourite payment method wasn’t available – this is something merchants need to address to attract and retain loyal customers.
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