The Blockchain Players: Understanding the Current Environment


blockchain-8-23-17.pngFinXTech Advisor Christa Steele has created a four part series to educate our community about how blockchain is changing the transaction of digital information, its implications and the players who are shaping this technology. Below is the final part in this series.

Part One
Part Two
Part Three

Banks may be slow to adopt blockchain in the long run but commercial clients may force their hand. Companies that use blockchain such as ConsenSys, Linux Foundation, Hyperledger, and R3 aren’t just working with banks. Kaiser Permanente, Toyota, Cargill, Amazon, and several state, local and foreign governments, among others, are looking to implement blockchain technology as well. The list of prospective commercial clients continues to grow daily.

Why Community Banks Must Pay Attention
It’s too soon for a community bank to dedicate precious and limited resources to blockchain beyond just staying educated. Blockchain, also known as digital ledger technology, will no doubt be led by and developed by the larger financial institutions and regulatory bodies. I believe a community bank’s first interaction with the technology will come from interactions through their correspondent banks in excess of $50 billion in assets or larger commercial clients with robust treasury management requirements.

Blockchain is potentially so transformative, banks are likely to see changes in how banking infrastructure works today in the areas of payments clearing and settlement; digital currencies; capital markets, including securities clearing, settlement and custody; digital identification; supply chain management and regulatory compliance.

Current Regulatory Vibe in the U.S. and Abroad
It is safe to say that blockchain technology is becoming mainstream. The Securities and Exchange Commission, Internal Revenue Service and several other regulatory and governing bodies acknowledge the technology and have adopted policy language surrounding blockchain, digital ledger technology and virtual currencies over the course of the last 12 months. The most notable foreign government to announce its acceptance of blockchain is Dubai which aims to be a “city built on blockchain.”

Have You Opened a Digital Wallet?
Though I am focused on the underlying blockchain technology instead of digital currency adoption, I do encourage you to understand how the digital wallet works. It will be increasingly important in the coming months and years as these consumer digital wallets become mainstream. Xapo offers an easy-to-use and secure bitcoin wallet. I found Xapo’s account opening process to be seamless and easy to use.

Resources for Staying up to Speed
I remain convinced our industry will continue to be disrupted by improvements in technology. Technology enhancements are moving faster today than ever before. We can thank IBM and others for leading this technology charge. As you look to stay educated, great resources to consider include a membership with the Digital Chamber of Commerce and Linux Foundation. For more information, you can also check out CoinDesk, a blockchain news source.

Digital Wallets: Crossing the Chasm Between Online and Offline Payments


chasm.jpgDigital wallets are beginning to change how consumers shop and pay. However, the concept can be confusing and daunting. There are over 160 wallets in the market. Some refer to them as “digital wallets”, others as mobile or e-wallets. What should banks do? Should they launch their own wallet solutions? Should they partner? If so, with whom?

The retailing landscape is changing. The growing number of smartphones and ubiquitous connectivity has been pushing the retailing industry towards “online-offline convergence”. Consumers are increasingly using their mobile phones when shopping to read product reviews, compare prices, and sometimes order online, leaving the physical shop empty-handed. Equally, they might order something online via laptop, mobile or tablet, but go and pick it up from a local store. Online commerce, both e- and m-variety, is by far the fastest growing retail segment in many developed markets.

If traditional payment instruments, such as cards, were somewhat clunky but acceptable for e-commerce, they are poorly suited for m-commerce. No one wants to fumble around their mobile phones typing in 16-digit card numbers, shipping addresses, etc. Not surprisingly, both Visa and MasterCard saw the opportunity to develop their own digital wallet solutions, V.me by Visa and PayPass Wallet Services respectively, to help address this market. Other players, such as, for example, Isis have focused on bringing the mobile wallets to physical stores.

There are many different ways wallets can differentiate themselves from each other. However, fundamentally, there are two main types of wallets based on where the payment credentials are stored:

  1. Secure element-based wallets store the payment credentials (e.g. card details) in a secure area inside the phone known as secure element, and communicate those credentials to the physical point-of-sale (POS) terminal typically via Near Field Communication (NFC) technology. An example of such a wallet in the United States is the recently launched Isis.
  2. Cloud-based wallets store the payment credentials in a secure area on a remote server, or “in the cloud.” How those payment credentials are communicated to the merchant depends on the specific implementation. Perhaps the best known example of a cloud-based wallet is PayPal.

While online-offline convergence is rapidly becoming a reality for retailers, the same is not yet true for payments. It remains a challenge today to use online the payment credentials residing in the secure element-based wallet, and to use cloud-based credentials at the physical POS. For example, PayPal, a leader online, is working hard to get to the physical POS, while Visa and MasterCard are using their strength in the physical world to develop cloud-based digital wallets. Google Wallet is one notable example which does combine both secure element and cloud-based credentials, but given the transaction economics, it remains an exception to the rule.

There are a few solutions emerging as potential candidates to help bridge the divide between online and offline payments, however, most of them remain in relatively early stages of development. We believe that the payments industry will continue to try and solve this conundrum and we will see more solutions in this space emerging over the next 12 to18 months.

However, in the end, the desired online and offline ubiquity for any single wallet may prove to be illusionary. I do not share the view of those who think that there will be “one wallet to rule them all.” If anything, the mobile phone itself might become such a “wallet,” with consumers using multiple apps to shop and pay with payment credentials stored in multiple places.

In today’s fragmented world of digital wallets, our advice to banks would be to think twice before launching their own branded independent wallets. Some banks might be successful in doing so, but many others are likely to be better off by ensuring their payment credentials are available with the wallets most likely to win in the market. Supporting traditional scheme wallets, such as Visa’s V.me and MasterCard’s PayPass Wallet, should be a “no brainer” decision for most banks, but other specific market segment leaders, such as Isis or Google in the United States would also merit consideration. Banks should also remember that many already have a great asset in their mobile banking platforms and should focus on enhancing and extending them with rich value-added services, including payment propositions, such as P2P or access to card-based and other payment credentials.