Payments Systems of the Future
On 1st June, card giant Visa crashed and sparked payment chaos across the UK and Europe. Visa’s statement said “the issue was the result of a hardware failure”, but experts believed a hardware failure could not cause an outage for a company with modern IT-infrastructure. The case once again raised the question of how to build more resilient payment networks, which are sufficiently fault tolerant and possibly decentralised, as existing centralised networks come laden with huge risks.
A month ago the global payment processor Visa went down, resulting in widespread transactions failure across the UK and Europe, with Irish users also affected. As one banking industry source said: “There is never a good time for the payments system to go down, but a Friday afternoon, when there is a flood of people leaving work, must be among the worst.”
Regardless of the fact that shortly after 10pm on Friday night, Visa said its services were operating at ‘close to normal levels’, and six hours later released a second statement assuring users the problems had been completely resolved, the outage once again highlighted the need to build more resilient payment networks.
“A hardware failure should not cause an outage if you have modern infrastructure,” Virgin Red’s CTO Paul Lomax Tweeted, “either VISA’s systems are not fit for purpose, or they’re run incompetently, or they’re lying.” IT Pro asked Visa to expand on the nature of the hardware failure and how this led to such a widespread outage. A spokesperson provided a link to Visa’s latest statement, and said the company would not be saying anything else publicly.
“The lessons Visa can take from the incident is that they weren’t prepared for this particular partial failure and should address this by building new processes to allow the backup switch to take over. We can all do the same,” Peter Groucutt, Managing Director of Databarracks, the UK’s specialist business continuity and IT disaster recovery provider, concluded.
Payment and behaviour shifts
Consumer payments have seen radical innovations in recent years, with contactless cards, one-click checkout and mobile payments. “The focus is on the user experience and removing friction from the buying process, and technology advances have accelerated this change,” Gary Conroy, CCO at TransferMate, believes.
Technology has never been more critical to a business’ success as it is today. To stay relevant to consumers’ needs and requirements, companies need to foster innovations and modernise their business and payment processes.
The fact is, 59 percent of UK consumers will leave a business’ website within just 30 seconds if it is ugly or hard to navigate, according to an independent, nationally representative survey by Studio Graphene of more than 2,000 UK adults, to examine how discerning the public is when deciding which companies to spend money with. The study also showed that, in the past five years, a quarter (24 percent) of consumers have switched loyalty from one company to a competitor whose technology — website, app and payment system — delivered a better customer experience. The figure jumps to 41 percent among those aged between 18 and 34. It is clear that companies of all sizes and sectors must make sure their digital solutions look the part and function well. Studio Graphene’s research showed that 52 percent of people always research a business online before spending money with them, while 47 percent say that a good website or app is key for them to trust a brand.
The card schemes also face significant challenges. We are heading to a so called ‘financial internet’ era with no fees and immediate and instant transactions — like sending messages via Facebook. Barriers to entry are tumbling as technology becomes commoditised and regulators are pushing increased competition and lower interchange. “People may try alternative payment methods, but they’re always going to want to carry a Mastercard or Visa as well to ensure they can pay — just ask anyone with an AMEX. That will make Mastercard and Visa difficult to replace, but that doesn’t mean Mastercard in 10 years time will look like it does today. I believe you will see them move increasingly into other areas, such as payment data analytics and value added services to issuers, to support declining margins in their core business,” Brad van Leeuwen, Head of Partnerships at Railsbank, said. Mastercard’s Startpath program, of which Railsbank is a member, is a good example of how Mastercard is already moving in this direction. With Railsbank, Mastercard can bring new issuers and products in just weeks, rather than the 9–12 months typical in the industry.
Visa’s recent Europe-wide outage was a reminder of what can happen in the fully centralised system, and yet more proof that alternatives are vital to avoid a disaster. Analysts were hesitant to speculate about the specific cause of the incident, assessing the opportunities of decentralised systems. “In a world where everyone accepts Visa and Mastercard and has come to rely solely on those two, there is no preparedness when disaster inevitably strikes,” says Emin Gün Sirer, a distributed systems researcher at Cornell University. “The world’s payment networks are incredibly centralised, a small number of actors control a large percent of all money flows,” he argues.
However, Brad van Leeuwen believes that decentralised payment schemes have some key challenges to overcome before they can be potential replacements for the current systems, such as transaction cost, certainty of processing, dispute resolution and governance.
“Given advances in AI, blockchain and cloud computing, it is hard to envision a future that doesn’t involve some kind of ‘platform’ which enables personalised AI to manage our day to day finances in an ongoing and proactive manner that was optimised for each individual,” Gillen Kelvin, Head of Customer Experience at KBC explains.
Examining the evolution of payment systems, Chris Skinner, fintech-guru and the author of Digital human argues that, historically, the processing engine for the financial system has been SWIFT, Visa, MasterCard, TARGET2, STEP2, Fedwire, CHIPS, BACS and more. “This is not going to disappear fast, if at all, but there is a new marketplace structure appearing. Originally, I would have said it was PayPal, as it has removed the friction of paying digitally, but it’s not PayPal. PayPal is good but it hasn’t changed anything. The reason why we’re so excited about the Internet of Value is that the blockchain is our new processing engine. The blockchain can info-mediate the financial system to deliver our processing engine for value exchange: I want to exchange value — connect me with the right value tokens and value stores to exchange.”
“Blockchain is completely decentralised (unlike traditional centralised databases designed by banks and governments) and open to anyone. This means there is no infrastructural point of failure. No one owns blockchain, just like no one owns the Internet,” Marieke Flament, Managing Director for Europe, Circle comments.
There are many experiments around brining the decentralised technology into financial services, but they have not become widely spread — even those that were piloted by incumbents in a strong collaboration with the most prominent blockchain startups.
As Ripple’s Chief Cryptographer David Schwartz said in a recent interview, banks are unlikely to use distributed ledgers to process cross-border payments for now, because of scalability and privacy issues.
At the same time, global fintechs don’t waste any time. According to Eric Jing, CEO at Ant Financial, the company will increase its global presence by leveraging the key technologies, including distributed ledgers. As a result, Standard Chartered was recently appointed by Ant Financial to be the ‘core partner bank’ for its new blockchain cross-border remittance solution. Standard Chartered will provide instant foreign exchange rates and liquidity to enable real-time fund transfers between the two licensed wallet service providers. Using the blockchain technology developed by Alipay, the service will allow individuals to remit money between Hong Kong and the Philippines ‘within a few seconds’. Lisa Robins, Global Head, Transaction Banking at Standard Chartered, says: “Remittances are a lifeblood of many communities in the Philippines, the third largest remittance market, with $33bn of inflows in 2017.”
From outdated to modernised
COBOL (Common Business-Oriented Language) is a high-level and object-oriented programming language for business applications. Before COBOL, all operating systems had their own associated programming languages, which was a problem for companies that used multiple brands of computers. Because of its ease of use and portability, COBOL quickly became one of the most used programming languages in the world. Although the language is widely viewed as outdated, more lines of code in active use today are written in COBOL than any other programming language.
According to Reuters and the International COBOL Survey Report, 43 percent of banking systems are built on this language; 80 percent of in-person transactions use COBOL; 95 percent of ATM swipes rely on COBOL code; and 220b lines of COBOL are in use today.
But COBOL is not without its challenges. The number of programmers with COBOL experience is steadily decreasing, as those who learned COBOL while it was popular are entering retirement age. While many organisations do still use the language, the lack of skills and burdensome text-based code is beginning to be replaced or integrated with more modern coding languages, such as Java, .NET, and C++. However, this can be a complicated and costly process, as these programs are often run on legacy mainframes that are difficult to replace, and because of the sheer amount of code still in use.
“A lot of core systems in payments and banking and many other areas of business are based on the language COBOL. COBOL is just a language (as is Java etc.), so the issue is not COBOL per se, but the fact that the architecture of these old systems was in the early days of business computing and does not include the more modern and reliable approaches. Also few people use COBOL today and much of the documentation of these systems has been lost, so compounding the problem — like Breton in France (a language spoken by few people), COBOL is spoken by very few computer programmers today,” Nigel Verdon, CEO & co-founder at Railsbank explains. Answering the question ‘How to switch to a more innovative ITarchitecture’, Verdon believes it is quite a challenge, as it is like changing the wheels on your car when driving at 100 miles per hour — most migration projects can take 5–10 years. “There are various migration strategies, like middleware — ‘hiding’ the old, M&A (acquiring new companies to build a new ‘stack’) and others. And there is also the argument — ‘don’t change it if it is not broken’.”
“Historically, our technology architecture has been based on heavily controlled programme structures. In the 1990s, we moved into structures based on modular computing, object-orientation and service-oriented architectures (SOA). Today, we live in a world of plug-and-play APIs and open marketplaces,” Chris Skinner argues in his book Digital Human.
Considering the fast growing competition in the global financial market, leading payment providers intensively test new approaches and solutions. For instance, according to Ian Taylor, VP of Business Development for Europe, Government and Public Sector at Mastercard, the company is constantly innovating, embedding new technology in its products and solutions, whether it is biometric authentication or the development of the latest anti-fraud mechanisms. As an example, in June Mastercard launched AI Express — a new service that will help companies develop a tailored artificial intelligence model which answers real business questions and can be swiftly deployed. Elsewhere, Visa Canada and Finn AI formed a collaboration to expand artificial intelligence banking capabilities through Visa Developer. “We are proud to work with Finn AI and collaborate in the rapidly evolving AI and chatbot space. For consumers, this will mean a more relevant and personalised digital experience,” Derek Colfer, Head of Digital Product, Visa Canada said.
SWIFT has kept up with other global processors and introduced its global payments innovation service — gpi, revolutionising the financial industry. Launched in early 2017, gpi already accounts for 25 percent of SWIFT’s crossborder payment traffic. More than $100b in SWIFT gpi messages is sent every day, enabling payments to be credited to end beneficiaries within minutes — many within seconds. Since going live, SWIFT gpi has seen rapid adoption, with more than 180 banks already signed up to the gpi service. Nearly 50 percent of gpi payments are completed and credited to end beneficiaries’ accounts in less than 30 minutes, enabling banks to deliver a much enhanced service to their customers. To date, 35m gpi payments have been processed, and hundreds of thousands of payments are being sent daily across 450 country corridors, in more than 100 currencies. Yawar Shah, Chairman of SWIFT said: “The gpi service is already radically transforming the cross-border payments experience. No other service has been able to safely deliver hundreds of billions of dollars in payments around the world in minutes or seconds. The time is now right to accelerate the adoption of gpi, ensuring that all banks on the network adopt it.” Luc Meurant, SWIFT’s Chief Marketing Officer, said: “With gpi we are rolling out an ambitious global programme involving all the banks, currencies, and routes on the network, to ensure global adoption by end 2020.”
While it’s hard to imagine a solution disrupting the established oligopoly on global financial market in the short term, the Chinese market gives an interesting insight into how mobile payment could penetrate very rapidly, shrinking the market share of Visa and MasterCard in terms of percentage of processed transactions, Louis Millon, CTO and Co-founder of Universal Reward Protocol predicts that “global players will have to adapt to a world where fee-less transaction systems can be implemented and put in millions of hands in just a few years.”
Payment systems’ future
Payment systems of the future will definitely be fast, costless (zero, or much lower transaction fees than current systems), and mobile, Louis Millon believes. Brad van Leeuwen from Railsbank is of the same view on the ‘free’ criteria. “Payments happen following an exchange of data between a number of parties. Charging a fee calculated as a percentage of one of the fields of that data exchange is hard to justify in a world where the internet makes data exchange easy and almost free. Regulation is likely to drive the costs toward zero and increase competition, as well as create new revenue, that can be realised from adjacent services arising from data, which could help accelerate the trend”. He also believes in the ‘instant’ nature of future payment systems: “If I can send a picture of a cat around the world instantly using the device in my pocket, why can’t I send money instantly too?”
Lastly, future payment systems should follow the principle ‘customer first’ and be equitable. “All entities will be given a fair chance to participate. One’s ability to freely transact will not be decided by a small group of people behind closed doors. The future of payments will be open, free, and fair,” Sean Rolland, BitPay’s Director Product, concludes.
Find out what Wim Raymaekers, Global Head of Banking Market at SWIFT, has to say on the future of payment systems — “Payments experience will continue to improve and get richer”.