Zilvinas Bareisis

About Zilvinas Bareisis

Zilvinas Bareisis is a senior analyst with Celent's Banking practice. His research focuses on retail payments, including cards, e-commerce, and mobile payments. He has a global perspective with a particular emphasis on market developments in North America, the UK, and Europe.

Introducing Celent Model Bank 2017 Awards

As my colleague Dan Latimore wrote in the article that began this series, 2017 was the best ever year so far for Celent Model Bank programme in terms of quantity, quality and diversity of nominations. As we went through the judging process, we felt a range of emotions – grateful and privileged to receive so many amazing stories, and daunted by the prospect of having to pick the most worthy award recipients. In the end, we are excited and confident about our selection of winners, yet we are sorry that we could not recognize so many others that clearly also deserve recognition.

Over its ten years of existence, Celent’s Model Bank programme has always changed and evolved. In the last few years we have been awarding multiple initiatives in a small number of categories – for example, last year we had four winners in Digital Banking Transformation, the busiest of seven categories. While all the awards within the category were equal, we knew that some institutions craved for more exclusive recognition. This year, we decided to take it a step further and to introduce specific named awards with only a single winner for each award.

After long deliberations, the judging panel decided to recognise 21 initiatives as winners of the following Model Bank 2017 awards:
  • Consumer Digital Platform – for delivering an outstanding digital experience for consumers. The award is open for traditional financial institutions, digital-first, and challenger banks.
  • Small Business Digital Platform – for delivering an outstanding digital experience for small businesses.
  • Corporate Banking Digital Platform – for delivering an outstanding digital experience for corporate clients.
  • Consumer Banking Channel Innovation – for the most creative use of consumer channels, or the most effective channel integration.
  • Branch Transformation – for the most compelling branch transformation initiative, including branch format innovations and creative use of live agents.
  • Product Innovation – for demonstrating the ability to launch multiple innovative products.
  • Open Banking – for the most impressive API strategy and results so far.
  • Payments Product – for launching the best consumer or business payments product.
  • Lending Product – for the most impressive consumer or business lending or collections initiative.
  • Fraud Management and Cybersecurity – for the most creative and effective approach to fraud management or cybersecurity.
  • Risk Management – for the most impressive initiative to improve enterprise risk management.
  • Process Automation – for the most effective deployment of technology to automate business processes or decision-making.
  • Employee Productivity – for improving employee training or collaboration, incentivising employees, or enabling mobile agents.
  • Payments Replatforming – for the most impressive project to improve payments back office, e.g. payment services hub implementation or cards replatforming.
  • Core Banking Transformation – for the most compelling initiative to transform a traditional core banking platform.
  • Banking in the Cloud – for innovative approaches to implement a banking platform, e.g. deploying in the cloud.
  • Banking as a Platform – for creating an ecosystem of partners via a banking platform that connects and enables third parties.
  • Emerging Technology for Consumers – for creative deployment of emerging technologies for consumers (e.g. AI, ML, API, biometrics, wearables, voice, blockchain, etc.)
  • Emerging Technology for Businesses – for creative deployment of emerging technologies for small business or corporate clients (e.g. AI, ML, API, biometrics, wearables, voice, blockchain, etc.)
  • Most Promising Proof-of-Concept – for the most promising experiment – pilot or proof-of-concept – with emerging technologies.
  • Financial Inclusion – for efforts to bring financial services to unbanked and under-banker communities.
And of course, we also kept our Model Bank of the Year award, first introduced in 2012, which recognises one financial institution that in any given year simply stands out from the crowd and uniformly impresses Celent judges.

For the time being, only the nominees will know if they won any of these awards, as we begin working with them to distill their achievements into a series of case studies. We will be announcing all winners publicly on April 4 at our 2017 Innovation & Insight Day in Boston. In addition to presenting the award trophies to the winners, Celent analysts will be discussing broader trends we’ve seen across all nominations and will share our perspectives why we chose those particular initiatives as winners. Make sure you reserve your slot here while there are still spaces available!

Where Will We See You Again?

When the leaves start falling, it usually means one thing for Celent analysts – the conference season is getting into full swing and it’s time for us to hit the road big time.

The team is already busy at SIBOS this week, with BAI and AFP coming in a few weeks. Personally, I am looking forward to speaking on customer authentication at Mobey Day in Barcelona on October 5-6, as well as attending Money20/20 in Las Vegas on October 23-27.

Such high profile events are always great places for catching up with our clients and other industry experts. They are also perfect for getting up to speed with the latest developments in the industry, or, as my colleague Dan Latimore says, “soaking up the zeitgeist”. Dan will also be joining me at Money 20/20.

This year, we will be keeping an eye on (amongst many other things):

  • Which of the latest initiatives look most promising to (re-)invigorate mobile payments? Will it be Apple Pay and Android Pay on a browser, the networks’ partnerships with PayPal, 'Merchant' Pay, or something new that will get announced at the events?
  • Adoption of and developments in payments security technologies, from EMV to biometrics, and from 3DS to tokenization.
  • Innovations that drive commerce and help merchants, from bots to APIs that enable deep integration of payments into the merchant’s proposition. Also, creative application of analytics, whether to help merchants increase conversation rates, extend a loan, or deliver the most relevant and timely offer to the customer.
  • Where will blockchain fit into payments world? Ripple continues to gather momentum with cross-border payments, the UK is exploring the use of distributed ledger technologies as backbone for a domestic payments system, while IBM is partnering with China's Union Pay around loyalty. What other payments-related innovations can we expect from the blockchain community?

What will you be looking for? If you’ll be in Barcelona, Orlando, Chicago or Vegas, we look forward to seeing you. If you haven't registered, now's the time. And because of your relationship with Celent, you are entitled to an additional $250 discount off the Money20/20 registration fee. Combined with the Fall Final special you save a total of $725. Simply enter promocode Celen250 when you register here.

US EMV Migration: Looking for the Silver Lining in the Clouds

It would be easy to assume that the migration to EMV in the US has gone terribly. The press is full of stories about slow transactions, inconsistent customer experiences and slow merchant adoption. Whilst not living this day-to-day, I also experienced this frustration first-hand on my trips to the US earlier this year; I wrote about it in a previous blog.

And yet, while the end customer experience clearly must improve, real progress has been made. Back in June, Visa reported "over 300 million chip cards in market and 1.2 million merchant locations." In August, MasterCard announced that "80 percent of its U.S. consumer credit cards have chips" and reported seeing "1.7 million chip-active merchant locations on its network, representing nearly 30 percent of the U.S. merchant population and a 374 percent increase in chip terminal adoption since October 1, 2015." Of course, these numbers would be far more impressive if the liability shift was happening in October of this year rather than last. However, EMV migration does not happen overnight, and in the market as complex and diverse as the US, it was always expected to take many years, especially considering the early reluctance and skepticism of the industry, and the additional complications in debit.

One of the challenges for merchants is getting their new EMV terminals certified, which can take a long time, especially when there is a backlog of demand. To alleviate the problem, in June both Visa and MasterCard have relaxed terminal certification requirements by reducing the number of tests, giving acquirers more freedom and responsibility in the certification process, allowing standard configurations and providing more resources to value-added resellers (VARs).

Also, recognising that it's not always the merchants' fault that they are behind with EMV implementation, both networks introduced measures to minimize chargeback costs to merchants who have not yet transitioned to EMV. For example, MasterCard has "checks and blocks to ensure that chargebacks follow the liability shift guidelines", such as not allowing chargebacks on fraudulent ATM and fuel transactions, where the liability shift has not yet taken place. Visa has taken a step further and announced that from July 22, Visa would "block all U.S. counterfeit fraud chargebacks under $25", while from October 2016  "issuers will also be limited to charging back 10 fraudulent counterfeit transactions per account."

Of course, there is a risk that rather than incentivising merchants to speed up EMV adoption, these changes to the network chargeback policies will reduce the pressure on merchants to migrate. Verifone, one of the largest POS companies, has reported lower revenues for Q316, partly as a result of "lingering EMV adoption issues", and has stated that their "outlook for Q4 now assumes a significantly slower EMV rollout." Not surprisingly, Paul Galant, CEO of Verifone, has emphasised the company's "relentless execution" on "the long-term vision for Verifone to transform from a box shipper to a services provider."

Nobody is under illusion that EMV migration in the US will be over any time soon. However, we must recognise that real progress is being made. Changes introduced by the networks, as well as new liability shift dates, such as for MasterCard ATM transactions coming into effect in October this year, should help keep the momentum going. And while the consumer adoption of various contactless pays, such as Apple Pay and others, has yet to "set the world on fire", perhaps they will end up giving another reason for merchants to invest into chip terminals? After all, for the optimists amongst us, every cloud has a silver lining.

Accepting Nominations for Model Bank 2017

It is my pleasure to announce that we are now accepting nominations for Model Bank 2017. The nominations window will be open until November 30.

Our regular readers should be familiar with Model Bank. We began the program in 2007 and are celebrating its 10th anniversary this year. Celent Model Bank is awarded for best practices of technology usage in different areas critical to success in banking, and is the main award that a financial institution (FI) can win from Celent. The award is only available to the FIs, although we are aware of and appreciate the critical role the technology vendors play in the success of those initiatives, as well as our program.

The essence of Model Bank program hasn't changed throughout the years – FIs themselves select and submit their various technology initiatives to us. We judge those initiatives on three core criteria – business benefits, degree of innovation, and technology or implementation excellence. The winners receive their awards during Innovation and Insight Day, Celent's flagship event, and the case studies of winning initiatives are featured in Celent reports.

Yet, every year we continue to make subtle changes, as we seek to improve the Model Bank program and ensure it stays relevant in the fast-changing world of banking. This year, we revised the categories in which we will be judging and awarding the initiatives.

For 2017, we are accepting nominations in five categories:

  • Customer Experience
  • Products
  • Operations and Risk
  • Legacy Transformation
  • Emerging Innovation

This year, we also created a page on our website dedicated to Model Bank. On that page, you will find more detailed descriptions of this year's award categories, and links to the nomination form as well as various PDF documents, containing the list of previous Model Bank winners, an example case study, and the PR guidelines for winners. You will also find answers to an extensive list of Frequently Asked Questions about the program, how to apply, how we judge the initiatives, what happens if you win, etc. We strongly encourage you to spend some time going through various FAQ pages. Of course, if you still have any questions that are unanswered, please contact us at modelbank@celent.com.

Last year we received well over a hundred nominations and awarded 19 initiatives. Yet, we know that the pace of innovation and change in the industry hasn't slowed down, so we hope and expect to see lots of exciting initiatives this year again. We look forward to hearing from you. Just don't forget, the deadline is November 30, 2016.

Good luck!

The Future of Zapp and Other Musings on MasterCard and VocaLink

Yesterday, my colleague Gareth shared on these pages his first thoughts after the announcement that MasterCard is buying VocaLink. I agree with his points, but also wanted to add some of my own observations.

As someone who closely follows the developments in digital payments, one of the questions following the acquisition to me is what happens with Zapp, a solution that VocaLink has been working on for the last few years to bring "mobile payments straight from your bank app." To me, it boils down to two considerations:

  1. Would MasterCard want to kill off Zapp?
  2. If not, can MasterCard help accelerate Zapp's launch?

My view on the first question is a resounding "no". Yet, the question is not as silly as it might seem. At Celent, we have been talking about the "battle of rails" in payments, i.e. between pull-based payments running on the cards infrastructure, and push-based payments, such as Zapp, built on top of new faster/ real-time payment networks. Given the cards' dominance in merchant payments today (at least in the UK, US and quite a few other markets), solutions such as Zapp may be seen as a threat to card-based transactions. Buying off a competitor only to shut it down may be an expensive strategy, but would not be unheard of.

And yet, I believe that such logic would be completely flawed. By buying VocaLink, MasterCard becomes a rail-agnostic payments company, and stands to benefit from cards and non-cards transactions. Furthermore, specifically in the UK, Zapp could be MasterCard's ticket to regaining ground in everyday consumer payments. As I discussed in another recent blog, Visa controls 97% of the debit card market in the UK. I would imagine that a Zapp-like solution would have more of an immediate impact on debit card transactions rather than credit card spend.

So, if that's the case, can MasterCard help accelerate Zapp's launch? Perhaps. We first heard of Zapp in 2013, and even included a case study in a Celent report published in September 2013. Yet, three years later, despite announcing a number of high-profile partners – from Barclays and HSBC, to Sainsbury's and Thomas Cook, to Elavon and Worldpay – Zapp is yet to go live. I don't claim to have any insight knowledge into the reasons for a delay, but I would imagine that changes in the competitive environment had something to do with it, particularly with Apple Pay showing how easy mobile payments can be when paying in-stores or in-apps. While I have no doubt that VocaLink and Zapp have great technologists and User Experience design specialists, I would expect that MasterCard's Digital Enablement Service (MDES) should bring helpful experience of integrating mobile payments into the banks' apps. And MasterCard's relationships with both acquirers and issuers should help convince the remaining skeptics and bring more partners on-board.

Zapp aside, I think the deal is good for both organisations for a number of other reasons, such as for example:

  • Not every payment is particularly suitable for cards (e.g. B2B, government) – now these payment flows become accessible for MasterCard.
  • Visibility to a much broader pool of transactions should be very helpful when developing risk management, loyalty and other value added services.
  • MasterCard's global reach should help bring VocaLink's experience in faster payments to markets which would have been harder for VocaLink to access by themselves.

In closing, I woudl like to go back to another announcement MasterCard made last week – the one about rebranding, the first in 20 years. MasterCard has changed its logo – it still has the interlocking circles in the colours which are widely recognised, but the company's name is spelled "mastercard" (although the company's legal name remains MasterCard):

MC_728x150

According to MasterCard, in addition to a more modern look, there was a conscious desire to reduce the emphasis on "card." That particular announcement was combined with the re-launch of Masterpass, and of course, digital payments will over time reduce the reliance on cards as a physical form factor. However, yesterday's announcement diversifies MasterCard away from card rails, and not just the plastic form factor, and is an important step in the company's journey from a cards network to a payments network.

 

Setting Out a Vision for Customer Authentication

We all know that "passwords suck", as my colleague Bob Meara stated clearly and succinctly in his recent blog. But what's the alternative – is the answer biometrics or something else?

We do believe that biometrics is part of the answer. However, our vision for authentication – security measures banks take when providing customers access to their services – is broader than that. Mobile devices will play a key role, but for them to be effective tools for authentication, a strong binding between customer identity and the device is essential – unless this step is done correctly, all subsequent authentication efforts are pointless.

We also contend that authentication must be risk- and context-aware. It should take into account what the customer is trying to do, what device they are using, how they are behaving, etc. and assess the risk of fraudulent behaviour. Depending on that assessment, the customer could either gain access or be asked to further authenticate themselves. And while biometrics can and will play an important role, the banks' authentication platforms need to be flexible to support different authentication factors.

We outline this vision in more detail in the report published yesterday by Celent, Security, Convenience or Both? Setting Out a Vision for Authentication. In addition, the report discusses:

  • The upcoming PSD2 requirements for strong authentication.
  • The rise of biometrics, including different modalities and device-based vs. server-based implementations.
  • An overview of various standard-setting bodies, such as FIDO alliance and W3C Web Authentication Working Group.

Also, yesterday we launched a new Celent Digital Research Panel survey, this time focused on Authentication and Identity management. The objectives of this survey are to assess amongst the US financial institutions:

  1. Investment drivers for customer authentication and identity management.
  2. Current state and immediate plans around authentication and identity management.
  3. Perspectives on the future for authentication and identity management.

If you already received an email invite, we do hope that you will respond before our deadline of August 8th. If you represent an FI in the US, and would like to take part, but haven't received the invite, please contact us at info@celent.com. We will publish the results in a Celent report, and all respondents will receive a copy of the report, irrespective of whether they are Celent clients or not. We look forward to hearing from you!

Unintended Consequences of Regulation, Part “n”

I must admit, I lost count how many times we at Celent have written and talked about unintended consequences of regulation. This is the latest installment.

As most people know, PSD2 has introduced new card multilateral interchange fee (MIF) limits in Europe. Debit card transactions across Europe have been capped at 0.2% of transaction value, while for credit cards, the limit is 0.3%. This is often used as an example of regulators bearing down on the issuers, and in many cases, especially for credit cards, it is indeed a significant reduction of fees charged previously.

However, let's take a closer look at the UK. According to the UK Cards Association statistics, debit card transactions outnumber credit card transactions by 3.3 times (10.3 vs 3.1 billion in 2015), while the purchase value of debit card transactions was greater than that on credit cards by 2.4 times (£439 vs £181 billion in 2015). Furthermore, of nearly 100 milion debit cards issued in the UK, 97% carry Visa brand. In other words, Visa debit cards are the most popular payment cards in the UK.

Visa interchange rates have varied over the years, but immediately prior to March 2015, Visa interchange for consumer debit card chip & PIN transactions in the UK was flat 8p per transaction. In March 2015, those fees changed to 0.2% + 1p, but were capped at 50p. The extra penny could be charged, because the UK Payment System Regulator allowed an interim period where the cap of 0.2% could be applied at an aggregate rather than an individual transaction level. As the individual interchange fees were capped at 50p, that meant that in aggregate they didn't exceed the required 0.2% limit. However, we understand that as of September 1, 2016, Visa UK is removing both the extra 1p and the cap of 50p and setting debit interchange fees at 0.2% per transaction, as required by PSD2.

As the chart below demonstrates, transactions less than £35 become cheaper than 8p set prior to March 2015. At £41.34, which is the latest average debit card transaction value, the current charges are at 9p and new ones post September will be 8p, the same as before. However, transactions above that amount and up to £250 are already more expensive than 8p today and will remain so post September.

MIF1

The real difference is for transactions above £250. The removal of 50p cap and charging at a straight 0.2% means that a £10,000 transaction (for example, when buying a used car) will now cost a merchant £20 in interchange versus the 8p the merchant paid before the regulation came into effect.

MIF2

What about Brexit? Will these European regulations still apply in the future? The answer for domestic transactions is, yes. The interchange caps are now enshrined in the UK regulation and are independent of the UK's status in Europe. More broadly, the Payment Systems Regulator announced immediately following the referendum results that "current payments regulation deriving from the EU will remain applicable until any changes are made, which will be a matter for Government and Parliament." Perhaps a more interesting question is what would happen with transactions between the UK and Europe in the future. If the UK is no longer part of the EU, would the payment networks decide that such transactions should be treated as inter-regional rather than intra-regional? Only time will tell.

So, what are the merchants with larger than average debit card transaction portfolios going to do? In the short term, some might start surcharging to pass the costs on to the customer; longer term, others might start exploring other opportunities presented by PSD2, and consider becoming Payment Initiating Service Providers (PISP) to move customer funds directly from consumer bank account to theirs, shunning cards altogether. Almost inevitably, the most proactive ones will shop around to see which acquirers offer the best deals; remember, these are interchange fees, not the actual merchant charges, and it is up to the acquirers to decide how much they charge their merchants. However, once again, the consequences of a regulation are not quite as originally intended.

Are You Ready for Cardholder Transaction Alerts?

Quite a few issuers around the world already offer transaction alerts to their cardholders. They find them a helpful tool to reduce fraud, reduce false positives (i.e. unnecessary card declines), and strenghten their engagement with customers.

However, in a few months, this will no longer be optional for issuers in the US. Effective October 14, 2016, Visa is mandating all the US issuers to offer their cardholders an option to enroll into transaction alerts. In other words, customers still have the opportunity to decide whether to use the alerts or not, but the issuers must make the option available to them. The mandate applies to consumer Visa credit, debit and reloadable prepaid cards; currently, commercial cards and non-reloadable prepaid cards are exempt. MasterCard has similar requirements – dual brand issuers also must comply by October 2016; MasterCard-only issuers have until April 21, 2017. Importantlly, unlike EMV deadline, which was a liability shift, these are real mandates which the issuers must comply with.

Alerts via email or SMS are the easiest but also the most basic option. In our view, issuers should look beyond the "compliance" requirements and take the opportunity to deploy notification, alert and control platforms that are integrated into their channels of customer engagement, such as mobile banking or payment apps. Advanced solutions in this space offer a range of alert delivery options, as well as ability for consumers to control their cards (e.g. turn off their use for certain transactions, such as e-commerce) and deliver other types of notifications, such as various offers.

Issuers must decide how they will be delivering the service. They can develop it in-house, deploy a third party solution or rely on their processors to offer the service on their behalf. The networks also offer their own solutions. In fact, in order to pursue any of the above options, the issuers had to notify Visa by April 29 this year that they wish to opt out of Visa-branded alerts service.

Visa itself offers a few alternatives and has just announced this week a "Visa Digital Commerce App, an issuer-branded mobile commerce solution that enables financial institutions to offer their own mobile app to customers with valuable card management services." In addition to the card management features, including the alerts, the issuers can also build HCE-based contactless payments into their apps. While a number of large US issuers (e.g. Capital One, Wells Fargo) have either launched or announced their HCE-based wallets, Visa's offering should help increase adoption of cloud-based payments and issuer-branded apps with contactless payment functionality.

Of course, there are a number of other vendors offering card control platforms or tokenised cloud payments, as well as processors with their capabilities. As an issuer, you have to make sure your choice fits your broader payments strategy. Whatever the decision, you have to make sure you can offer your cardholders the option to receive alerts by October.

Blockchain: Beware the Hype

At Celent, we just published a new research report with the same title as this blog – Blockchain: Beware the Hype. Why such a title? Isn't blockchain the coolest technology out there at the moment?

It is. At Celent, we firmly believe that blockchains and other shared ledger platforms will be a powerful catalyst for change in financial services and other industries for many years to come. There are some very promising use cases, particularly in cross-border payments, corporate banking, and capital markets, and even outside of financial services, in identity management, trade logistics, healthcare, and many other sectors. Even if “blockchain” ends up being a small component of the ultimate solutions, it facilitates new thinking that forces organisations to reimagine how they work, both internally and externally. And that can only be a good thing.

However, we do caution against succumbing to the hype, which is inevitable for any new exciting technologies. Blockchain hype is particularly acute, given the complexities of the underlying technologies. Nobody wants to be left behind when proclaiming the benefits of blockchain, but not everybody truly understands how those benefits can be achieved.

Luckily, the investment going into shared ledger technologies is resulting in a growing number of individuals and organisations lending their collective resources to explore deeply how financial services can benefit from these technologies. Their efforts are directed at exploring practical use cases (e.g. Everledger, Ripple, Shocard), developing new technology and tools (e.g. Ethereum, Intel, Multichain) and building out infrastructure for blockchain initiatives (e.g. IBM, Microsoft), with a number of firms engaged across the board. And the collaborative efforts such as the Hyperledger project or R3 are also bearing fruit – for example, R3 recently announced Corda, a new distributed ledger platform specifically designed for financial services.

We do think that is the way forward: thinking carefully about suitability of technology for the business problem at hand, and deconstructing blockchain technology to its fundamental components only to assemble the most attractive features in a way that makes sense for financial services. That is what will ultimately help us all move beyond the hype.

Celent research clients can access the full report here.