From Open Banking to Open Finance: not if but when does it happen?; 3 emerging use cases in embedded finance;

In this edition:

1️⃣ Peer-to-Peer Payment Apps: A Case Study for a Digital Finance Standard

2️⃣ SEC pushes for tougher custody rules on assets including crypto

3️⃣ Banks and other FIs need to shift from traditional financial service distribution to ‘Embedded Finance’ distribution

4️⃣ Which Public Companies Are Still Hiring for Blockchain Roles?

5️⃣ Profitability remains a challenge in digital payments

6️⃣ From Open Banking to Open Finance: not if but when does it happen?

7️⃣ 3 emerging use cases in embedded finance

And many more….

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Peer-to-Peer Payment Apps: A Case Study for a Digital Finance Standard

The digital finance marketplace is rapidly changing and evolving, with new forms of payment, new forms of investing, new ways to borrow and spend, and new kinds of currencies. Consumers must navigate this dynamic financial ecosystem, with its constant flood of new products, but they don’t have the information they need to make informed choices.

Between August and October 2022, Consumer Reports conducted an initial study examining the safety, privacy, and transparency of representative products in the peer-to-peer (P2P) payment systems industry: Apple Cash, Cash App, Venmo, and Zelle. We based this examination on a subset of the principles CR has established in its new Fair Digital Finance Framework. Specifically, the Safety Principle is used to evaluate the technology and policies that companies use to protect consumer data and funds; the Privacy Principle concerns company data collection, sharing, and deletion policies; and the Transparency Principle concerns company disclosures of legal terms and consumer legal rights.

Key Findings:

● P2P payment apps collect large amounts of consumer data, often share data with other companies, and often make it difficult for consumers to delete the data.

● Policies for resolving fraud and errors can leave consumers at risk of losing money.

● App disclosures and documentation contain vague descriptions of security measures; there may be discrepancies between companies’ disclosed security protocols and their practices.

● Users have to meet sometimes-confusing conditions to ensure that their funds are covered by insurance under the Federal Deposit Insurance Corp. (FDIC).

● Apps make it difficult for users to understand and track updates to legally binding documentation.

● Users are generally required upon sign-up to give up certain legal avenues for resolving potential disputes.

● Consumer disclosures are often difficult to find and read, reflecting a broad concern about transparency.

Source Consumer Reports

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SEC pushes for tougher custody rules on assets including crypto

Wall Street’s top regulator has proposed toughening safeguards around investors’ assets after the collapse of several high-profile crypto companies last year revealed that customer funds were not as safe as had been advertised.

The US Securities and Exchange Commission, on Wednesday agreed to propose rules that would force investment advisers to secure all the client assets that they manage including so-called alternatives, such as cryptocurrencies and art, with qualified custodians.

The mooted crackdown on custody follows a series of failures in digital asset markets. Companies promoted funds as segregated and separate, only for consumers to discover in a bankruptcy that their holdings were treated as unsecured assets and part of the estate of the collapsed company. 

While the SEC’s proposed custody rules are designed to cover all assets, most discussion focused on how it would apply to crypto.

In looking to expand the scope of existing rules, the SEC is tapping powers granted to it in 2010 following the Bernard Madoff scandal, when clients of the fraudster were found to have lost billions in what was effectively a Ponzi scheme.

The proposals come after a year of acute turbulence for crypto markets, which has left millions of creditors waiting in line at bankruptcy court following the unravelling of groups including lending platform Celsius and exchange FTX. Many crypto exchanges act as custodians of customer assets but also borrow from, and lend assets to, customers. Some of FTX’s former managers have been charged with misuse of customer funds.

Under the proposed rule, investment advisers would have to draw up written agreements with qualified custodians to ensure a client’s assets were segregated and protected in case the custodian collapsed. Qualified custodians are typically heavily regulated financial groups such as banks, broker-dealers and trust companies.

The proposal was supported by four of the five SEC commissioners and will now be subject to public comment as well as a second vote before any implementation.

Earlier in its meeting, the SEC finalised rules that will halve the two-day window for settling share deals, an initiative that gained urgency after brokers such as Robinhood were shaken by a surge in trading during the 2021 meme stocks frenzy.

Market makers and brokers have argued the current two-day window poses risks to the financial system. In volatile periods clearing houses that stand between buyers and sellers may demand more margin, or insurance, to cover any deal failures.

Source Financial Times

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Banks and other FIs need to shift from traditional financial service distribution to ‘Embedded Finance’ distribution

Banks & FIs need to define where to play: what are the customer segments to address in which financial domains, carefully weighing possible gains with potential cannibalisation effects

Banks & FIs need to define a value chain strategy around the richness of their product portfolio vs. product depth: either they gradually expand the embedded finance portfolio across products or become specialist within single embedded finance domains through well-developed capabilities

Based on chosen strategy, Banks & FIs need to ensure they team up with the right Distributors and Technology providers that allow them to reach desired target customer segments and can provide them with complementary capabilities

Banks & FIs need to modernise their (often legacy) IT infrastructure to support API-based product origination and maintenance thereof throughout the product lifecycle

Banks & FIs need to embed an ‘API first’ thinking within the various business lines to drive development of financial products that fit embedded propositions and improved servicing of API consumers (ie, developer experience)

Source Innopay

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Which Public Companies Are Still Hiring for Blockchain Roles?

Research indicates that 36 of these top 100 companies are looking for blockchain staff. Amongst these firms, there were 648 openings for blockchain-related positions, averaging about 18 per company (excluding the 64 that do not have open blockchain positions). JPMorgan Chase was at the top of the list with 91 open positions, followed by PayPal Holdings with 75 and Raytheon Technologies with 55.

JPMorgan Chase's openings in blockchain and cryptocurrencies cover many hierarchies and projects. Most are technical roles for its proprietary Onyx blockchain platform. Others involve top-level management positions such as executive director and vice president. PayPal Holdings' openings comprise mainly technical, compliance, and some managerial roles across several countries. Open blockchain positions at aerospace and defense company Raytheon Technologies comprise mainly cybersecurity and software development engineering jobs.

Besides JPMorgan Chase, other financial services firms such as Morgan Stanley, American Express, Citigroup, Visa, and Mastercard have also been looking for executives to assume key roles. Most of these positions were for software engineers and a few managerial roles.

Credit card companies such as Mastercard, Visa, and American Express also need to up their payment processing game. Payment processing using cross-border decentralized blockchain applications can prove to be much faster and more cost-efficient than the traditional centralized systems that are currently in use. This is why these companies leverage blockchain to stay ahead of the curve.

According to the research of information on LinkedIn, out of the world's largest companies (by market cap), only 73 had blockchain or crypto staff on their payrolls. These firms employed 489 blockchain or crypto staff at the time of writing this post.

Amazon was the biggest blockchain or crypto employer with 42 people, followed by Apple with 36, and Accenture with 25 employees.

It must be noted that Amazon's headcount in the blockchain category has increased by 12 since our last article was written in September 2021. The company's Amazon Managed Blockchain project has several global brands from various industries as its customers, including Accenture, AT&T Business, Guardian Life Insurance Company, Nestle, MOBI, and Singapore Exchange Limited. According to Amazon, its platform is used extensively, with 25% of all global Ethereum workloads running on AWS.

Source Blockdata

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Profitability remains a challenge in digital payments

To create profitable income streams, wallets are entering other payment arenas, such as bill payment, merchant services, and remittances. They are offering a more comprehensive range of financial services, including investment and wealth management, lending, and insurance. And they are providing lifestyle services, including transport, e-commerce, and food delivery to become a one-stop shop for consumers.

Extended payments.

In extended payments, wallets are offering a range of services, including merchant services such as universal payments acceptance, business digitization, loyalty programs, inventory management, and reconciliation. For example, MoMo offers merchants a set of tools to improve discoverability, access a voucher marketplace, and integrate loyalty programs.

Financial services. Wallets’ offerings span several types of financial services:

- Investment and wealth management services include micro investments for mass and upper-mass markets, money-market funds, and linked high-interest bank accounts with easy onboarding. In the Philippines, for instance, GCash partnered with CIMB Bank to launch GSave, which allows users to open a savings account from inside the GCash app without an initial deposit or maintaining a balance. Launched in 2018, GSave had a reported 5.3 million digital deposit account holders by May 2022. In 2019, GCash launched GInvest to offer users opportunities to invest in money-market funds and listed unit investment trust funds (UITFs) for a very low initial investment.

- Lending can take place through partnerships or by using the wallet’s own balance sheet. In Indonesia, OVO has bought a P2P license to overcome its lack of a lending license. In Africa, M-Pesa has taken advantage of its large subscriber base to pursue partnerships with banks to offer microlending and overdraft facilities. Wave, a wallet focused on Francophone West Africa, has recently received a regional e-money license that will enable it to extend its product portfolio by offering credit through partners.

- Insurance offerings include travel, health, personal accident, and other forms of coverage. In Brazil, for instance, PicPay has launched customizable insurance to protect users from unauthorized Pix transactions, money transfers, and purchases made using cards registered in users’ e-wallets.

- Consumer lifestyle services. Wallets are also expanding into consumer lifestyle services in areas such as transport, e-commerce, entertainment, travel, and discount vouchers. In addition, they provide data services that enable mini-app providers to personalize their advertising. Being part of a super app gives these mini-app players access to an extensive customer base in return for a share of the revenues generated.

Source McKinsey & Co

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From Open Banking to Open Finance: not if but when does it happen?

Open Banking can turn instant payments from a payment option available only as an online banking transfer into an alternative way to also pay in-store and for other industry sectors such as investments and retail. The emergence of Open Finance could spread instant payments to other niches, such as insurance or pensions.

How to overcome Open Banking issues

Some expect that PSD3 will be the answer to many of the barriers mentioned above but until then, we have to see what happens within the other initiatives. The SPAA scheme already aims to solve several issues. Ideally, PSD3 can help clarify at least some of them (for example, the full scope of the initiative, creating or improving standards to improve the user experience, on setting clear business models to incentivise consumer banks).

However, for banks, it will not be enough to have a clear business model, they will have to find a balance between incentives and regulation. Having an incentive may lead to increased competition between banks with card schemes, on card transaction data for example, the latter of which have a working business model.

As a response, banks decided to set up schemes on either an EU-wide level, such as the SEPA Payment Account Access (SPAA) scheme, or locally (Germany’s GiroAPI). However, such initiatives are somewhat contradictory to PSD2’s ‘no contract’ rule (Article 66.5). While working as incentives for banks, schemes would require new rules, new platforms, new interfaces, higher transaction costs and so on. Without a scheme and interchange fees, account-to-account payments in the context of Open Banking are currently relatively cheap.

The transition to Open Finance

Transitioning from Open Banking to Open Finance will give rise to similar questions related to clarity, customer education, business models, and others. However, some aspects will differ. With Open Finance, other financial institutions (e.g. insurance providers, pension funds, credit institutions, electronic money institutions, investment funds, etc.) besides banks will develop new innovative use cases with sometimes new disruptive business models based on exchanging data.

Regarding security and risks, Open Finance needs a somewhat ‘lighter’ regime than what is currently in place for payments. Based mainly on account information services, Open Finance would ideally not need AML laws and sanction screening. The main challenge for the initiative will be to handle GDPR and for service providers to control how data is used by all third parties involved. However, if it builds on the foundation laid by Open Banking and all issues related to the latter are resolved, it is up to regulators to find lenient rules that enable Open Finance to thrive, yet not sacrifice the security of its consumers.

Source Worldline

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3 emerging use cases in embedded finance