The Banking Challenge

9th April 2016

The Banking Challenge

For more than two decades, Steve Mott has been a renowned consultant in the electronic payments industry, focusing on everything from transaction economics to security technologies. Albeit with a focus on the U.S., he tells us about the digital challenges facing banks.

How comfortable have banks been in meeting the digitalization challenge?

One huge problem for banks trying to innovate is their cultural perspective that excess regulations chew up most of their capital available for new investments, and restrict their ability to compete in emerging digital business models. To a degree, that’s probably true. However, a lot of that effect is because banking in the U.S. does such a poor job of ID proofing and verifying customers “up‐front” in a transaction. This invites excessive fraud that occurs in the “back‐end” of transactions – where most of the regulations have mitigated the effects of the “horse already being out of the barn”. Industry leadership (to a significant degree, provided by the Federal Reserve, with its faster payment initiative) on protecting accounts and their transactions at their origin is still lacking from most banks and all networks. Banks appear to resist what they can’t control, but refuse to allocate capital to invest in technologies they can deploy and scale.

How will digitalization principally impact customers?

“Digitalization” of consumer transacting will be led by bottom‐up, grass‐roots innovation – tapping one customer at a time, and relying on viral, word‐of‐mouth adoption (as in the case of Paypal’s Venmo). Business customers, particularly the 20 plus million small businesses, will likely convert in waves, as with mobile banking. For them, 2020 will reveal a very different banking experience altogether. The challenge for them will be how to take advantage of the innovations occurring with the biggest banks and corporations.

Migratable secure elements, biometrics, digital IDs, fortified clouds, new standards for data‐in‐motion, and many other technologies are all ready to go.

Juniper research suggests that around 37 percent of the global adult population will be mobile bankers by 2020. But how secure is the mobile banking that exists at the moment?

Material improvements in security throughout the banking system will take a while. But make no mistake about it: migratable secure elements, biometrics, digital IDs, fortified clouds, new standards for data‐in‐motion, and many other technologies are all ready to go – if and when we can achieve a national consensus of actually doing what’s needed to reduce fraud across the full banking spectrum of products and services.

Sweden is often cited as the future first cashless society country – how realistic do you think this is and how might this effect banks and customers?

“Cashless” is often defined now as a society where cash transactions make up less than 2.5 percent of the total. Sweden (and other Scandinavian countries) have led the world in the transition to all‐electronic transacting. Business models like “pay‐later” Klarna, credit‐push payments, and fully tokenized transaction models have enjoyed sustained adoption.

Why can’t that happen in the U.S.? Well, this country has been a backwater of payments/transacting for a number of reasons: 1) there is no government or industry entity that actually regulates payments – least of all cards; 2) card usage in the U.S. is far more penetrated than anywhere else in the world, and nobody regulates card use other than the network brands; 3) innovation, as we’ve discussed, is something banks have chronically avoided; 4) consumers have been incented (though rewards programs are unaffordable if not for the ability to pass costs onto merchants, and programs – for example, Card Not Present liability shifts, “zero liability” for fraud, and so on – that absolve them of liability)  to eschew any responsibilities for securing themselves; and 5) deployment of new digital technologies for businesses (for example, online banking) have been done in ways that streamlined access and use, but produced fundamental holes in security. So, it’s no wonder that payment innovations and improved security are so hard to come by.

What advice would you give banks in order to better hold on to their customers and thrive in the new era of digitalization?

First, find technology providers that can deal with individual banks at a level of service and scale that fits the specific situations of the institution. That will reward the providers which can achieve that and encourage other providers to do the same. There are even some services that the bankcard networks provide that actually drive real value (for example credit and debit gateways); in time, Wall Street (if no other source) will drive them to value‐based business models. But this will happen only if financial institutions (FIs) stand up for themselves as individual institutions (and customers). Second, smaller FIs should push industry groups, regulators, and providers to sponsor SaaS/PaaS/IaaS, cloud capabilities, new security and interoperability standards to tool up for the future in order to serve them. In this quest, all but the biggest FIs and all but the biggest merchants (and billers and third parties) share a common interest: a level playing field, and means to compete (and survive) in the all‐encompassing digital future. So, memo to security providers and the rest of the 14,000 FIs: GET TOGETHER, NOW!

What excites you most about the tech innovations in relation to banking?

The FinTech “revolution” is very exciting. The proliferation of “unicorns” (start‐ups with valuations that exceed USD1 billion) is expectedly unrealistic and many of these start‐ups solve only small portions of the problem addressed; in many cases, additional parts of the problem must be added in to drive value sufficient enough to gain traction and critical‐mass adoption. What’s also exciting is the emerging discussion of updating and coordinating industry standards (for security and interoperability), upgrading proprietary specifications (like PCI and EMVCo outputs) to more balanced and effective industry standards, and the Fed’s efforts to define a truly functional and open faster payments network option(s). The sooner the digital future of transacting gets addressed by the entire payments/banking ecosystem, the sooner the U.S. will leave its reputation as a payments “backwater” behind.

Steve Mott

With 25 years of experience behind him, Steve Mott describes himself as something of a “veteran” of the electronic payments industry. His specialization is in “‘landscape’ and strategic assessments, transaction economics, innovative uses of debit networks, authentication and security technologies, and emerging alternative payments types and venues – including stored value, online and mobile commerce, cloud‐based/digital marketing systems, and transacting over social networks.”


As well as an expert advisor to the Federal Reserve, Mott is principal of payments consultancy BetterBuyDesign, working with clients in various areas, ranging from strategy development and product research to organizational effectiveness and technology evaluations.

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