Editor’s Note: From May 24 to May 26, 2017 Payments Canada held the 2017 Edition of the Payments Canada Summit. We sent our writer Amir Nosrat, who is doing his PhD in Strategy at McGill University and is interested in FinTech, to learn more. Here’s a recap of what he got out of the event, along with his personal commentary.
Hi, Amir over here. In this blog post, I will be talking to you about all the exciting things I learned at the 2017 Payments Canada Summit. I know that sounds like a hard sell, but essentially Payments Canada is going through a big facelift and that is great news for people who want to become involved with startups in the financial services industry – or FinTechs. But before we get there, I need to provide you with some context.
— The SUMMIT (@thesummit) May 26, 2017
First, I want you to know that I knew nothing, nada, zilch about FinTechs or financial services before I attended the summit. I’m a PhD student at McGill who studies the impact of climate risk in energy sector investments. The reason I ended up attending the summit is because I’m trying to learn about FinTechs in Canada and about the most cutting-edge developments in Canada’s financial sector. I’m actually taking a 3-day break from my thesis to do this. This collaboration has been incredibly fun and rewarding and I encourage you to reach out to the McGill Dobson Centre for Entrepreneurship if you want to find events and opportunities to learn more about a particular topic or industry.
It took me 15 minutes to realize “Wow – the payments sector is really the backbone of the global economy and I should pay attention to how things are changing here.”
I have to be honest: when I first heard about payments, my first reaction was “Wow, this is really boring”. But it only took me 15 minutes to realize “Wow – the payments sector is really the backbone of the global economy and I should pay attention to how things are changing here”. What’s more is that Canada is just on the starting edge of a big wave of change in how financial transactions are done which essentially means there’s lots of great opportunities for FinTechs to step in here. What I hope to do, through this blog post, is to walk you through my findings at the summit and share some nuggets of info for aspiring entrepreneurs who want to operate in this area.
— Bank of Canada (@bankofcanada) May 25, 2017
Which leads us to the second piece of context – for this blog post to make sense, we need to have a common understanding of what the payments sector does. Simply put – the payments sector makes sure that value from one individual is successfully transferred to another individual in exchange for some product or service. Let’s reflect on this for a moment. Imagine that you want to buy a thousand potatoes for $500 dollars. Now those are some premium potatoes. You whip up your cheque and hand it over to the potato farmer who then puts the money in their bank account and both of you very quickly move on with your lives. Now – unbeknownst to you and the potato farmer – there was a VERY complicated legal and technical system which made sure that value in the form of $500 dollars leave your property domain and ended up in the potato farmer’s property domain. How did you guys agree to transact in this way? It’s because you both fundamentally trust the checking system here in Canada.
This is important to take note: in order to exchange value, you need some trust mechanism. You and the potato former have implicitly relied on a really complicated trust mechanism that makes sure the right value is transferred in a safe and secure manner from you to the potato farmer. The payments sector is essentially that system – they are in the business of designing and enforcing various trust mechanisms that ensures value gets transferred from its rightful source to its rightful destination. In fact, they are so good at what they do that they do this for nearly $3 million every second. I’m pretty sure I haven’t generated $3 million in my entire lifetime.
Now checking is only one form of payment. We have cards, e-payments, wires, etc. Every country has some entity that tries to prevent these payment systems from breaking down. In Canada, federal legislation has empowered an association of banks and other financial service providers with this task. That entity is Payments Canada. They are a not-for-profit organization based out of Ottawa with the legitimacy to convene and coordinate all the stakeholders in the Canadian payments ecosystem to make sure Canadian individuals and business can transact with each other and the rest of the world.
Depending on who you talk to, Payments Canada is the de facto regulatory body overseeing the payments sector or it’s the voice of the Canadian payments sector. Maybe it’s a bit of both. If you didn’t know – which I’m pretty sure you didn’t – Payments Canada is pushing for a major ‘modernization’ effort. Modernization has become so important that, according to one employee of Payments Canada, the modernization team has grown from a few dozen to nearly half the organization over the last 2 years. I’m not really sure anybody knows what modernization exactly entails but you can try reading this really serious neo-propaganda document to make sense of it for yourself.
Great – now that we’re on the same page, let’s talk about some important innovation trends that are going to be important for aspiring FinTechs to pay attention to, especially as it relates to this big modernization push. Here’s what I did to arrive at these findings. I listened to a whole bunch of panels and talked with dozens of participants and asked every single person I met on where they thought the payments sector would go under modernization and how entrepreneurs could ride this wave.
In short, I found three key trends that are really shaping future of the Canadian payments sector. I also looked into early stage startups that participated in the FinTech Cup and saw very clearly how they are riding these three trends. As I’m going to talk about each trend, I will also be showcasing how each startup is in fact a solution to problems associated with these trends.
1. Transactions need to get faster
First stop: speedy transactions. Let me begin by emphasizing that EVERY SINGLE PERSON I talked to brought this up in one shape or another. So if there’s anything you walk away with, let it be this: FinTechs can bring a lot of value by figuring out how to make payments quicker without compromising security of that transaction. Why? Because there is an unbelievable amount of consumer demand for quick and painless financial transactions. Think about it – if you had to pick between the clunky process of settling a debt with a taxi driver and the the near seamless money-grab by Uber – which would it be? (Hint: you’d go for the near seamless money-grab by Uber).
But to make payments quicker is no walk in the park, which is great news for FinTechs. There’s essentially two bottlenecks in payment processing speed. The first is the ‘clearing’ process. This is like payments purgatory. You’re not quite settled but, you and whoever your transacted with can move on with your lives while the real underlying value is being moved to and from your property domain. That underlying value movement where money is physically moved from one place to the next is called ‘settling’, the second bottleneck. Currently, Canadian banks settle once a day using the ‘Large Value Transfer System’, while they clear individual transactions using the ‘Automated Clearing Settlement System’. Remember the potato farmer? The cheque you gave to the farmer was the user end of a large clearing system which would then take a couple of days to settle between your bank and the potato farmer’s bank. It’s more complicated than it needs to be, I know.
Here’s the thing, Payments Canada knows the sector can do better and they are pushing to completely overhaul this clearing and settling system and move towards instantaneous payments by 2019! That’s really quick and will probably not happen in time. Regardless, this means you as a FinTech have a lot of work to do to make sure that the process of instantaneous clearing and settling is smooth and effective. Essentially, if you can figure out how to make payments for a particular demographic frictionless and secure, then you’ve got money in the bag, my friend. You’re probably wondering, ‘don’t credit cards already that?’ Uhhhh, yes and no. They are essentially taking advantage of the incredibly painstaking clearing and settling process of most payment types (think cheques, wires, money transfers etc.). Credit cards make the experience of transacting very easy (though not completely frictionless), while charging businesses (and by extension, consumers) exorbitant fees to transact. But all of that is going to change because payments is going to get so easy that we won’t really need credit cards as much as we used to. Credit card companies know this and are well underway in diversifying their business models.
As a FinTech, there are two areas that you can bring value to this modernization push. First, you can help reduce friction in a payment process (i.e. on the clearing side instead of on the settling side). Second, you can make sure that those transactions remain secure despite becoming quicker.
— Finn.ai (@finnforbanks) May 26, 2017
Let’s look at a couple of the startups who are very much focused on these two fronts. Payment Rails, which won second place in the People’s Choice award for the 2017 FinTech Cup is essentially catering to the freelancing/small business community’s payments need by integrating all the different payments systems across the world into one seamless experience for the user. If you’re a small business, you have a lot of transactions to deal with and no time. Essentially, Payment Rails does a great job at getting payments out of the way for the freelancing/small business end-user. They are in the business of creating frictionless and fast payments for a particular demographic.
Now let’s look at Zighra, which also got to present at the FinTech Cup. They are essentially integrating multiple data classes – biometrics, behaviour, social networks, etc. – to make sure that if and when a payment is made, it’s done very quickly at a level of security that no current technology can do. These guys are very much covering the digital security aspects of making payments transaction quicker. As a FinTech, these guys are in the business of making sure that payments are safe as everything is becoming instantaneous and digital.
Enough about speed – let’s move on.
2. Data-rich transactions need to be tamed
Second stop: data. This section is particularly pertinent to all you artificial intelligence geeks out there in Montreal. Not only are payments getting faster, but they are becoming impregnated with data. Which means someone’s got to figure out how stay on top of them. Currently, the amount of information embedded in a payment is about the same as a Twitter post. But there has been a push by banking clients to install more data-intensive payment systems compatible with ISO 20022. Yep – it’s as boring as it sounds. But what you really need to know is that the the ISO standard, when implemented, transforms the Twitter-sized payment data into a transaction LOADED with data which presents all sorts of opportunity for AI applications.
But I have to point out that not everybody was as gung-ho about data enrichment as they were about transaction. This could be partly due to previously failed attempts at enriching transactions with data. In Europe, for example, ISO 20022 has been mandated by legislation because payment system clients initially were not interested in spending their time and money on this standard. In Canada, on the other hand, ISO 20022 uptake has been driven by private actors. But even putting aside ISO 20022, the financial sector has become overwhelmed with a patchwork of different data oceans… and they’re not quite sure how to deal with it all. Think about it – 20 years ago, all that banks could know about a payment was its immediate origin and destination, and any basic identity information related to the parties involved. Now, they can pin down who is the ultimate debtor, who is the ultimate creditor, who their friends are, who they’ve done business with, what their credit rating is, etc. The payments sector is essentially going to do financial transactions as to what Facebook has done to our individual identities – we are analyzed with hundreds of data points that we don’t even know about ourselves. The point is that data is taking over the financial sector in an exponential manner and those poor banks need lots of help stay on top of it.
You can be sure that there are already a whole bunch of FinTechs who are riding this data wave. MindBridge, who won the first place for the people’s choice award, are essentially using artificial intelligence to detect fraud. Now that’s bold, but it’s the type of strategy that a FinTech can use to help bankers deal with all the data they’re being drowned with. Consider Finn.ai, which won the actual cup (not selected by lowly people, but by VC heavy judges). These guys essentially enhance the banking industry’s ability to manage their interaction with customers by using – guess what – artificial intelligence! How about Cerebri, third place amongst the plebeians? They’re also using artificial intelligence (what a surprise!). The take-away here is that the banking industry is thirsty for solutions that can help them stay on top of the sea of data and if you are an AI dudess or dude, then you better be figuring out how to satiate that thirst.
3. The inevitable turbulence of Blockchain technology
Third and final stop: Blockchain revolution. Had Karl Marx been alive in 2017, he would have probably attributed the inevitable fall of the bourgeoisie to Blockchains instead of the working class. Now, I don’t want to suggest that the banking elite will actually fall, but I would dare say that Blockchain technology is to banks as the internet was to communication companies. The big banks of today are like the Nortels and AT&T’s of the 1990s and they’re eventually get going to pushed aside by the banking industry equivalent of Yahoo!s, Facebooks and Googles. The scary part is that while there is lots of talk about banks becoming disrupted by Blockchains, we can’t even conceive exactly how this will happen. As any good academic would do, I’d like to point out that I don’t really think Blockchain technology is really necessarily going to make things better or worse (whatever those things mean). They’ll just make things different. Think about the internet. We can go on and on about its benefits and disadvantages, but we can only agree on one point – that it really changed things.
Here’s why I think this. You probably have heard of Blockchain technology through the now popular digital currency, BitCoin, and its crazy anonymous inventor(s), Satoshi Nakamoto. Lots of people talk about BitCoin and the various problems associated with that currency. We’re not interested in BitCoin here because it is the wrong pony. It’s the technology behind BitCoin, Blockchains, that are really going to shake things up. Let’s go back to your transaction with the potato farmer. When you gave away the cheque, you and the potato farmer relied on the bankers to deal with the impossible task of moving value from your property domain to that of the farmer’s. But imagine for a second that you didn’t need the bank. You and the potato farmer and all the other potato farmers and potato buyers could independently verify that the potatoes were exchanged for a mutually accepted value. None of you need the bank anymore (at least in its current format), rather you depend on each other to determine whether or not the transaction and all other transactions were legit. Instead of the bank, your potato trading community is now enforcing the trust mechanism and not the bank. Et voila – your relationship with the banking sector is now fundamentally changed, i.e. you don’t need them anymore in their current format.
If this potato farmer thing isn’t working out for you, go check out this IBM boilerplate on Blockchain. Also – if you need someone to evangelize Blockchain for you, I recommend “Blockchain Revolution”. The author, Dan Tapscott, who wrote the book in collaboration with Alex Tapscott, his son, was the keynote speaker at the summit, which suggests that there are a lot of people thinking about how to integrate Blockchains into the financial system. The Blockchain trend isn’t as imminent as the first two trends, but I do want to point out that there are a LOT of people in the banking sector who are keeping an eye on this technology. And one of the interesting features of some innovations is that if a community thinks about something long enough, it kind of becomes a self-fulfilling prophecy. Blockchain could be one of those self-fulfilling innovations where we don’t really know what the hype is about but we’re going to do it anyway because everybody is moving in that direction. If you want to be a part of a FinTech in this space, you have to think hard about how things will be different with Blockchain and how you want to end up on the winning side of that different thing.
Rest assured, we have FinTechs in this space already. One of the FinTech Cup participants was the one and only Nuco. These guys are essentially building a commercial platform on top of blockchain code, Ethereum. If Ethereum is C++, Nuco is kind of like Microsoft. They enable businesses to use this technology in a variety of applications. These guys are in the business of rolling out bitcoin applications to different markets. Just last week, TMX announced they will be using Nuco to apply Blockchain to their natural gas commodity trading to “cut costs and reduce paperwork.” I’m willing to wager a few BitCoins that they won’t be the last to sign up for Blockchain technology.
— Dorfam Mirgharavi (@dmirgharavi) May 25, 2017