You can lead a horse to water…

Gareth Lodge

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Dec 17th, 2015

A story on Finextra this week caught my eye.

It’s a survey carried out by YouGov on behalf of ACI Worldwide, with these headline stats. Of 2000 UK adults, the survey found that:

  • 88% have no intention of switching bank accounts within the next 12 months.
  • 82% never use mobile payment services such as PayM or PingIT during an average month,
  • 59% never use mobile banking within this same time frame.

It struck me that you can lead a horse to water, but you can’t necessarily make it drink. Or rather, becoming digital doesn’t mean your clients will be.

The first bullet has been extensively discussed in previous blogs. Consumers perceive no value in swapping, with a view that banks pretty much offer the same thing.

The second bullet for me, is actually surprisingly high. PingIT is not yet 4 years old and PayM not even 3 years old, making an 18% “market share” pretty impressive. It’s also for one-off payments primarily, usually P2P, and given how (relatively) few transactions of those take place each month, it’s even more impressive.

The last bullet to me is the most interesting, and perhaps is a reflection of the UK market as much as anything. Given my job, I suspect it’ll come as a surprise to some that I am in that 59% – I don’t use mobile banking, and nor do I necessarily have plans to.

There are a few reasons. In the UK, Direct Debit rules. 71% of household bills are paid by Direct Debit, with an average household having 7 direct debits. Therefore, the same transactions happen the same way every month at the same time. This means I have to only actively make a few payments a month, which typically fall at the same time every month.

The rest of my spending is primarily on my credit card – which isn’t issued by my bank. Another theme from previous blogs is that consumers typically hold their financial products across a range of banks – as a result, the mobile banking app will never tell me my financial position. I rarely even use my card providers app either – with the alerts I’ve set up, I get a text when I near the limits I set. As a result, there is little need then to check my spending on the app.

But perhaps the most simple reason is that the UK has had mobile banking for over a decade. And whilst it is good to be cutting edge, equally consumers will give up quickly on something if it doesn’t work or value from day 1. And if you’d try using WAP banking back in the day, or the app of even a few years ago, you too would be thinking there is little point.

The light at the end of the tunnel hopefully is PSD2 and the XS2A (access to account) proposal. Perhaps finally a good software designer will think through the customer experience differently, will have access to all my accounts and be able to deliver something that is truly revolutionary. It will be fascinating to track what impact the PSD2 has.

Learning from mBank’s branch channel investment

Bob Meara

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Dec 15th, 2015

The recent article in Finextra, mBank to spend EUR17 million on new network of ‘Light’ branches, prompted this post. At first read, I thought this was a story about a celebrated direct bank building a branch network. Well, not exactly.

About mBank
mBank is no stranger to Celent. It has received two Celent Model Bank awards. In 2014, Celent recognized mBank’s digital platform redesign and in 2015, Celent recognized mBank’s Bancassurance initiative.

For those unfamiliar, mBank is a Polish direct bank brand established by BRE Bank in 2000 as one of the first of its kind in the country.

Thanks to the mBank’s business achievements and potential of the brand as first and the biggest internet bank in Poland, BRE Bank Group decided in 2013 to change company name to mBank. Thus mBank became a mature brand with an offer addressed to mass customers, affluent personal and private banking clients, as well as businesses, from microenterprises to the biggest corporations.

Through 2014, mBank has grown to more than 4.7 million customers, 6318 FTEs, and deposits totaling $20.6 billion. It’s currently the fourth largest bank in the country.

Before It’s Time
Long before the Simples, GoBanks, Movens or Hello Banks of the world sought to capitalize on the shift in consumer behavior, there was mBank – serving customers where they want, when they want and through an innovative direct approach that, in its day, was one of the first of its kind. Rather than copying other financial institutions, mBank sought to deliver a best-in-class digital experience inspired from the world’s best retailers. For example:
• Its Virtual Store inspired by Zappos
Advanced search functionality inspired by Google
Merchant funded rewards inspired by Cardlytics
Research and advice inspired by Amazon and Mint
Video banking inspired by Skype and Google Hangouts
Gamification and social media integration inspired by Foursquare, Like and Love

In 2014, seeking further growth, mBank leveraged its new digital platform to introduce a complete digital transformation of insurance delivery to retail and SMEs, under its Bancassurance model. The platform is offered under an omnichannel environment, accessible through online, mobile, phone, video, or branch, all supported by a real-time, event-driven CRM engine. mBank enables the entire process to be handled electronically, while decision making and purchasing can be started and completed through different channels at the customers convenience. As a result of its efforts, the bank built the 5th largest insurance business in Poland aimed solely at existing checking account holders. Considering this represents only 7% of the market, the result is compelling.

Starting from the overhaul of its digital delivery in 2013, and then extending into insurance services, mBank is a model for how digital can transform an institution, enabling innovative applications that can substantially grow the business.

A Branch Network – Really?
An undeniable digital success story, this celebrated “direct bank” wants a branch network? It already had one…sort of. Bart of the BRE bank family of brands, mBank had always been a direct bank. But in 2012, BRE bank announced it would simplify its branding and brand all its banks as mBank. That initiative effectively made mBank a universal bank franchise. In my opinion, this is itself significant – a universal bank operating in three countries adopting a direct bank’s brand for the enterprise? Imagine BBVA adopting Simple as its global brand. You get the picture – except mBank grew to many times the size of Simple.

So, this isn’t really a story about a direct bank building branches. But, it is a story about a fabulously successful universal bank investing heavily in its branch network. To some, that still may seem nonsensical. mBank knows that point of sale is important and needs to be done right. Its’ new “light” branches will no doubt be right for its brand and its markets.

Retailers across most all segments get this too. The latest published statistics from the US Census Bureau (November 2015) tells the story with great clarity. Despite two decades of steady growth, industrywide e-commerce comprises less than 10% of total retail sales.

ecommerce trendsAs important as the digital channels are, the branch will remain central to retail delivery for some time. Celent’s Branch Transformation Research Panel gets this too. In its first survey (June 2015) we asked panelists how important branch channel transportation is. After all, the topic was virtually all talk and little action for years. But, 81% of the panel confirmed that branch channel transformation is not simply important, it is imperative.

Branch Imperative Because of this, Celent intends to thoroughly research the topic over the coming year. One initiative is our Branch Transformation Research Panel. Celent is accepting additional requests for membership in panel and expects to field ongoing research through 2016 at semi-monthly intervals. To request to be on the panel, visit: http://oliverwyman.co1.qualtrics.com/SE/?SID=SV_cx9ir9zpWcRgyix .

 

Banks need to recognize FinTech startups as opportunities, not threats

Stephen Greer

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Nov 30th, 2015

Fintech is booming. In 2013, according to a report by Accenture and CB Insights, total investment into FinTech was just less than $4 billion. By 2014 it ballooned to more than $12 billion globally, with 750 deals.

Many are claiming the death of traditional banks, but I’m not sure these claims have merit. Banks are surely slow to move with trends, but the barriers to entry act to partially insulate the industry from rapid disintermediation. Yet neither can institutions continue without any change to the operating model.

Banks will need to adapt to new behavioral patterns and trends in technology. Success for banks will require a change in mindset. They need to start looking at FinTech startups as an opportunity, not a threat. Many banks have already started acting, and it’s time for fast followers to get on board and employ a few of the following strategies:

Partnering with startups
The easiest and most accessible way of engaging new startups is through partnership. From a technological perspective, the evolution of technology deployment has made it easier than ever for banks to engage in strategic partnerships. This can be as simple as an agreement between entities to drive referrals or route website traffic (e.g. Santander UK with Funding Circle and Union Bank with Lending Club) to more complicated engagements where new services are plugged into a banks’ existing digital banking platform through APIs. Fidor Bank in Germany has architected its own completely open platform, allowing it to plug in new innovative offerings and enable customers to take full advantage of emerging services.

Acquiring FinTech
The main benefit of acquisition is that these companies are largely already established. The company has a culture that has been shown to be successful, and there is an existing base of customers from which to grow. Often the injection of new capital by the buyer can give a startup the resources needed to flourish. The risk is that as these offerings are brought closer to the parent company, the legacy processes and functions bleed into the new acquisition, hampering growth and essentially killing the viability of the product. The acquisition of Simple by BBVA Compass is one of the most visible acquisitions in recent years. It remains to be seen how the two businesses come together, and what role Simple will play in the larger BBVA vision, but the deal offers an example for other banks to follow.

Launching venture capital business units
A number of institutions are establishing venture funds to actively invest in startups from the beginning. Most notable is BBVA Ventures, which has already invested in companies like FreeMonee, SumUp, and Radius, and which plans on spending more than $100 million on new projects over the next year. In October 2015, Santander InnoVentures $4 million in the block chain payments startup Ripple Labs, also investing in MyCheck, Cyanogen, and iZettle. HSBC has said that it will start a venture fund with up to $200 million in investments. Wells Fargo, Citibank, and others in the US have also started going down this path, both starting funds of around $100 million within the Silicon Valley. While this is a good way to get deep into emerging disruptors, it’s also relatively prohibitive, and all but the top banks are going to find this route difficult.

Every year more and more startup companies are launched; a strategy for innovation and cooperation with these challengers would be remiss without understanding the landscape. With this in mind, Celent is beginning a series of quarterly reports that will profile 7-10 startup companies, providing some analysis about the business model and opportunity for financial institutions. Look for the report series Innovation Quarterly: The Latest in Fintech Innovation to kick off in Q4 2015.

It’s not us, it’s you – why breaking (it) up is so hard

Gareth Lodge

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Nov 24th, 2015

The UK Retail Banking is undergoing yet another review of competition, with the initial conclusions released a few weeks ago. The full report is in excess of 400 pages – I must confess that I’ve not yet had chance to read it, but one has to assume that the press release is indicative of the tone and content. Which is worrying.

At first glance… it’s frankly shocking, and shockingly poor at that. Before I start a war with the CMA (Competition and Markets Authority), who are conducting the review, let make sure we’re clear on the lens that I am using. I cover payments, not banking per se, so I’m looking at this through the eyes of a consumer. Remember, this is the very group that CMA is trying to help.

As predicted, the new and improved switching service provided a brief, temporary lift, but has pretty much reverted to the same level of switching that has existed for the last 10 years. My thinking has always been that the switching wasn’t the issue, but the fact that few consumers perceive there is little benefit to be gained. In short, most consumers believe that most banks offer pretty much the same thing, and at the same price.

Imagine my shock then reading the official press release:

“Despite [some] encouraging developments, because too few customers are switching, banks do not have strong enough incentives to work hard to compete for customers through better products or cheaper prices, and smaller or better banks find it hard to gain a foothold.”

Sooooo, basically you’re not getting better products because you’re not switching. Surely that can’t be right?! It continues:

“The CMA says: “The problems in the market are unlikely to be resolved by creating more, smaller banks; it is the underlying issue of lack of switching which has to be addressed.”

 

Now, I’ve taken the quotes somewhat out of context – please read the full release – but the remedies proposed focus heavily on the switching, and not the underlying issue.

The CMA seems to think that there is both differentiation and ways of finding the accounts. Both these points I believe to be deeply flawed.

 

Differentiation

The release suggests that “heavy overdraft users, in particular, could save up to £260 a year if they switched, and on average, current account users could save £70 a year by switching”. I suspect the key word is average. Do they mean mean, median or mode? UK bank accounts operate generally on a fee free basis, but with heavy penalty and overdraft fees. To save £70 on average implies the average person is overdrawn most of the year (i.e. they’re still overdrawn, but paying £70 less). £70 is £70 – but equally, it’s only 2 Starbucks a month.

However, the bigger issue is that the assumption that the alternate bank would actually offer them an account with the overdraft they seek. Lending criteria has tightened up significantly over the last few years – most UK consumers have had the overdrafts and credit card limits reduced, and remortgaging is now frankly very hard work. I recently had to supply more than 15 additional documents to remortgage a house which 3 years ago took no more than 10 mins for a decision to be made, and where the value has risen by 20%. The reality then is that the heavy overdraft users simply won’t ever get a better deal as their existing bank, if they’re accepted as customers at all. The “average” UK consumer won’t see any benefit at all – if they don’t go overdrawn, it’s very difficult to see where the savings will come from. Which just leaves a very small set of people who will benefit. The switching service needs to be measured against this set of people, not against all those who won’t switch!

 

Comparison

But perhaps I’m wrong? How can we find out? This element really surprised. One suggestion was:

“Making it easier for consumers and businesses to compare bank products by upgrading Midata, an industry online tool, launched with the support of Government, that gives consumers access to their banking history at the touch of a button. Midata allows consumers to easily access their banking data from their bank and input it directly into a price comparison website which can then analyse their transactions, and alert them to available bank accounts which best suit their needs. An improved Midata could have a radical impact on consumer choice in retail banking markets”

What?? Midata? What is Midata? Considering that the switching service has been heavily promoted, by the banks and on TV, the fact that I’m both a consumer and in the industry and have never heard of it, nor could I readily find details on it, speaks volumes. As a family, we have accounts at 4 of the 6 banks signed up. Not one, to my knowledge, have ever told me about it. My main bank has one single mention of it, as the last item in an obscure FAQ page.

I’m also uneasy that a well-known comparison website is hosting the service. Whilst the data is anonymized, I assume the site knows a fair bit – cookies will show I used the service, and so the ad’s will be served up to me based on my searches. Given that comparison sites get paid from ad revenue and lead generation, it feels a little too cozy. Not implying everything isn’t above board, but it undoubtedly put me off using the service.

 

So, enough ranting, where does this lead us?

As a consumer, I suspect probably worse off. Further change will cost more money – and it’s the customers who will foot the bill. There is also the danger that the more affluent, who already play the system, will be the ones who benefit, whilst those at the opposite end will just find things harder.

It would seem then at first glance (i.e. without having read the report in full yet) that CMA has potentially not only got it wrong, but is set to make things worse.

Why diversity abounds in new branch designs

Bob Meara

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Nov 19th, 2015

Branch channel transformation is a complex and expensive undertaking. For all its complexity, however, there are at least two certainties. Namely:

  1. It is no longer optional
  2. There is no single blueprint

It is the rich diversity in approaches taken to the important task of improving branch channel efficiency and effectiveness that makes this topic so fascinating. Retail financial institutions need to possess a number of core competencies to remain successful. Among them is omnichannel delivery. For this reason, Celent launched two research panels in 2015, one devoted to digital banking and another focused on branch transformation.

No Longer Optional
In its first Branch Transformation Panel survey, 81% of financial institutions regarded branch transformation as an imperative. After roughly a decade of talk but little action, we are encouraged by banks’ embracing the need to get going. They’re not alone. Retailers of all shapes and sizes are wrestling with how to deliver a compelling and differentiated omnichannel experience, what that means in their stores and how to manage a rapidly changing cost-to-serve. The rapid pace of change increases both the uncertainty and sense of urgency. One only needs to consider the meteoric rise of mobile engagement (Figure 1). Things are not what they were just three years ago. Channel systems designed ten years ago aren’t the answer to tomorrow’s challenges!

mobile usage chart

No Single Blueprint
While institutions may be aligned on the importance of getting on with branch channel transformation, there is much diversity of thought around what this actually means. Most banks appear to associate branch channel transformation with “radical changes” in the branch operating model. Arguably, for many banks, radical changes are needed. Not everyone sees it this way (Figure 2).

branch meaning

This diversity of opinion is to be expected. It stems from diversity in a number of factors: an institutions’ brand equity, desired customer experience, target market, legacy system capability and a host of other factors. The most distinguishing factor may be the willingness (or not) of each institution to intentionally disrupt its business model before someone else does. If you liked banking because it was slow-moving and predictable, the next few years will be stressful for you!

Celent is accepting additional requests for membership in the Branch Transformation Research Panel and expects to field ongoing research through 2016 at semi-monthly intervals. To request to be on the panel, apply here.

 

Model Bank nominations deadline extended to December 11th

Nov 18th, 2015

Today we announced that we are extending the deadline to submit nominations for Model Bank 2016 awards until December 11th. Thank you to all of you who already submitted, and to those who told us that you are working on your submissions. We appreciate that this is a busy time of the year for everyone, and we hope that the extra time will make it easier for you and your clients to submit the initiatives. And of course, it’s not too late to get started if you would like to share how your bank is using technology in a differentiating way.

You can see more details on the Model Bank program in my earlier blog, or better yet, by going to the initiative nomination page online and downloading a complimentary report, Becoming a Model Bank: A Guide to Winning Celent’s Main Award for Financial Institutions.

Don’t forget, in addition to bragging rights for winning the most prestigious Celent’s Banking award, you also have the case study of your initiative featured in our reports and receive complimentary invitations to Celent’s flagship event, Insight and Innovation Day in New York. 2015 was a sold-out event, and 2016 promises to be even better. It will be on April 13th 2016 at the Museum of American Finance. Tickets are already selling fast, so submit your initiatives now for a chance of winning the Model Bank award and free entry, or register here.

Reports of small business lending’s death are greatly exaggerated

Patty Hines

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Nov 18th, 2015

I’ve spent much of my career in and around the financial services sector focused on small business banking. In the US, small business customers get bounced around like Goldilocks—they are too small to be of interest to commercial relationship managers and too complex to be easily understood by retail branch staff.

I applaud those banks that make a concerted effort to meet the financial needs of small businesses. After all, in the United States small businesses comprise 99.7% of all firms. (According to the US Census Bureau, a small business is a firm with less than 500 employees). In general, larger small businesses are better served as they use more banking products and generate more interest income and fee revenue than smaller small businesses. The lack of “just right” solutions for many small business financial problems has been a golden opportunity for FinTech firms.

In the FinTech space, much of the focus is on consumer-oriented solutions like Mint for financial management, Venmo for P2P payments, and Prosper for social lending. But FinTech companies figured out early on that small businesses weren’t getting the attention they deserved from traditional banks. Many of the top FinTech companies—Square for card acceptance, Stripe for e-commerce, and Kabbage for business loans, have gained prominence serving primarily small businesses.

Online small business lending by direct credit providers has especially taken off. Disruptors like Kabbage, OnDeck, and Lendio were quickly followed by more traditional players like PayPal, UPS, and Staples. Morgan Stanley reports that US small business direct lending grew to around $7.5B in 2014 and projects expansion to $35B by 2020. They also maintain that most of this growth is market expansion, not cannibalization of bank volumes. This makes sense—direct lenders usually attract borrowers that can’t get bank loans and charge accordingly. For example, Kabbage averages 19% interest for short term loans and 30% annually for long term loans. According to the Federal Reserve, the average interest rate for a small business bank loan (less than $100k) in August 2015 was 3.7% and current SBA loan rates range from 3.43% to 4.25%.

And that common wisdom that US banks have pulled back from small business lending? Let’s take a look at data compiled by the FDIC starting in 2010.

Small Business C&I Loans

The overall volume of small business loans increased year-over-year from 2010 to June 2015, with a CAGR of approximately 3%. The total dollar value of small business loans outstanding dipped slightly in 2011 and 2012, reflecting slightly smaller loan amounts, a result of tighter lending standards. The facts are that US small business loan volume and dollar value outstanding are at their highest levels since the FDIC began collecting this data from banks. And by the way, there are almost 2,200 fewer banks in the US today than prior to Lehman’s collapse in 2008.

Banks are happy to work with credit-worthy small businesses to meet their working capital needs. And direct lenders are happy to work with everyone else—-a win-win for all.

Proposed new cyber security regulations will be a huge undertaking for financial institutions

Joan McGowan

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Nov 11th, 2015

New York State Department of Financial Services (NYDSF) is one step closer to releasing cyber security regulations aided by the largest security hacking breach in history, against JP Morgan Chase. The attack on JPMorgan Chase is revealed to have generated hundreds of millions of dollars of illegal profit and compromised 83 million customer accounts. Yesterday (Tuesday, November 10), the authorities charged three men with what they call “pump and dump” manipulation of publicly traded stock, mining of nonpublic corporate information, money laundering, wire fraud, identity theft and securities fraud. The attack began in 2007 and crossed 17 different countries.

On the same day as the arrests, the NYDSF sent a letter to other states and federal regulators proposing requirements around the prevention of cyber-attacks. The timing will undoubtedly put pressure on regulators to push through strong regulation.

Under the proposed rules, banks will have to hire a Chief Information Security Officer with accountability for cyber security policies and controls. Mandated training of security will be required. Tuesday’s letter also proposed a requirement for annual audits of cyber defenses.

Financial institutions will be required to show material improvement in the following areas:

  1. Information security
  2. Data governance and classification
  3. Access controls and identity management
  4. Business continuity and disaster recovery planning and resources
  5. Capacity and performance planning
  6. Systems operations and availability concerns
  7. Systems and network security
  8. Systems and application development and quality assurance
  9. Physical security and environmental controls
  10. Customer data privacy
  11. Vendor and third-party service provider management
  12. Incident response, including by setting clearly defined roles and decision making authority

This will be a huge undertaking for financial institutions. Costs have yet to be evaluated but will be in the millions of dollars. It will be very difficult to police third party security because, under the proposal, vendors will be required to provide warranties to the institution that security is in pace.

The requirements are in the review stage and financial institutions should join in the debate by responding to the NYDFS letter.

Alexander Hamilton’s approach to innovation has lessons for us today

Dan Latimore

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Nov 11th, 2015

CBS’s 60 Minutes ran a story recently about the hottest new Broadway musical – Hamilton (go to the 14 minute mark). It turns out that some of the research for the show was conducted at the site our Innovation and Insight Day – The Museum of American Finance.

This biography underscores why we chose the Museum for our next Insight and Innovation Day (to be held April 13, 2016). The segment talks about Hamilton’s numerous accomplishments:

“…a penniless, immigrant, orphaned kid who came out of nowhere and his achievements were monumental…he creates the first fiscal system, the first monetary system, first customs service, first central bank…”

Without these innovations, the modern economy as we know it now would look very different.

Anyone working in financial services today is aware of the challenges we face responding to changing customer expectations and new technology opportunities. Vast sums of money and time are being spent on innovation, looking for answers. However, Celent’s research shows a widely held view that the financial services industry cannot innovate very effectively.

Hamilton graphic nov 2015

So how do we improve?

The theme of our Insight and Innovation Day event this year will take inspiration from Hamilton’s work and use it as a guide for our future efforts.

By the way, if you want to go to Hamilton while at the Celent I&I Day, I suggest you get your tickets now. It’s the hottest ticket in town!

This is a republished post by Mike Fitzgerald from the Celent Insurance Blog. Click here to read the original post.

Reconciling TouchID with Bank T&Cs

Nov 9th, 2015

Apple’s TouchID is brilliant – I now use it not only to unlock my phone, but also to log into my Amazon account. I can also use it to log into my Amex app and my bank’s mobile banking app. And of course, it is the way to initiate Apple Pay transactions.

The only trouble is that none of those providers can be assured that it is really me doing all of this. TouchID allows registering up to 10 different fingerprints, and authenticates the user locally by matching his or her fingerprint to the registered templates. However, authentication is not the same as identity – banks and other apps know it is someone authorised to use that phone, but they don’t know it’s me, Zil Bareisis. It is likely to be me, but it could also be my wife or my kids. It could even be a total stranger if in some bizarre bout of insanity, I allowed them to register their fingerprint with my phone.

The Telegraph reported last week that the UK banks are very much aware of this issue and have decided to take a hard stance:

“Banks have warned customers that if they store other people’s fingerprints on their iPhones they will be treated as if they have failed to keep their personal details safe.

This means the bank can decline to refund disputed transactions or refuse to help where customers claim they have been victims of fraud.”

According to the paper, “the banks’ position is typically buried in the detail of bank account Ts & Cs”, something as we all know that most people accept without reading in detail.

I can appreciate the banks’ concerns, but I wonder if they are somewhat overblown. Although this will change in time, most of Apple Pay transactions in the UK are still capped at the contactless limit (£30). Any of my family members today can take my contactless card and use it as contactless without any PIN. I haven’t heard too many suggestions that I should keep my card locked away from my family members. However, if this were to happen, I should be prepared to accept my family’s transactions and not report them as fraud.

I am no legal expert, but it doesn’t feel like inserting protective statements within T&Cs is the way forward. First, it’s not very transparent. Second, if the issue were to arise, it is something that would not be easy for banks to prove. Could consumers just delete all the other fingerprints in case of a dispute? Finally, it’s just poor customer service.

Instead, banks should invest into educating consumers about digital technologies and how to use them safely and responsibly. Even if it’s as basic as, “don’t allow strangers to register their fingerprints on your phone” and “be prepared to accept your family’s transactions and not dispute them as fraud.”

As the value of Apple Pay transactions grows, banks ought to consider deploying additional techniques, such as behavioural analysis to authenticate the users and minimise fraud. As with most security, multi-layered approach is likely to work best.