26 July 2017
Milos Dunjic


Milos Dunjic - TD Bank Group

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Payments Innovation - A Quantum World Of Payments

29 June 2017  |  7223 views  |  0

In nature, change is constant and inevitable. It is also fairly slow and mainly evolutionary. At the macro level, everything looks very logical, guided by the basic scientific laws of physics, chemistry and biology. We are comfortable with changes that we can observe and measure. We feel that we are in full control of predicting future movements, through elegant mathematical modeling and good enough approximations. The world of macro physics is full of order that is guided by clear scientific standards.

By digging deeper into the area of subatomic particles and quantum physics, things start to look blurry, counter-intuitive and completely unexpected. Old ‘silos’ of physics, chemistry and biology, as distinct scientific disciplines, start to disappear. We can’t clearly observe and freely measure any process, without danger of ruining and completely skewing the results of the very same measurement. We feel amazed and fascinated by the apparent chaos, but also confused and often scared by our inability to comprehend and predict what’s next. That’s the domain reserved only for the fearless and most curious minds. Imagination and intuition rule this world, without clear standards and without obvious order.

The “physics” reality of payments

In the world of payments, I see similar patterns. The traditional payments are ruled by established standards and are protected by clear rules, regulations and relatively high barriers to entry. These – sometimes rigid ‘Newtonian laws’ of payments industry – were established over several decades by payment networks like Visa, Mastercard, etc. Traditional FIs feel very comfortable here since they know how to play by the rules and they excel at it. That’s why we enjoy pretty good safety and security of in-store payments today. The standards like EMV, ISO 8583, ISO 20022, PCI DSS are just some of the examples illustrating the point. However, today some of these standards (not all) start to feel old and somewhat inefficient in dealing with some of the demands of the modern payments trends.

On the other hand, in the payments innovation space, we feel like operating inside the ‘subatomic’ world and space of the payment industry. Similar to the world of quantum physics, frequently, there are no clear rules, and imagination and intuition are often required to be relied on in order to invent and launch new services and products. Disruption of the old business models is ultimately at stake. The new business models are often not easily understood by payment traditionalists. As such, the payments innovation space is opportunistic and exciting, wide open for creative players, but at the same time, it is full of risks for potential investors and incumbents, which are faced with the inability to clearly distinguish winners from losers early enough.

Take online payments as an example – there is no clear standard here. It represented the ‘Wild West’ of the payments industry in the last couple of decades. It is a space that is still filled with significant security risks and friction. Agile and nimble FinTechs may thrive in such an environment, feeling free to experiment, unbound by any of the regulations and unconstrained by a traditionalist mindset. No wonder that incumbent FIs – together with Visa and Mastercard – have been somewhat marginal players here, despite their ability to rule the world of physical POS payment rails for over half a century now.

Blockchain is an even better example of the financial industry’s ‘quantum world’. It feels directionless, void of any clear standards and rules, combined with quirky and muddy explanations of underlying consensus-reaching algorithms. It is a fertile ground for buzzwords and skilled ‘snake oil’ type salesmen, further amplifying the inherent sense of confusion and unpredictability. Despite all of the hype and attention, however, blockchain’s disruptive potential has not been realized in real life so far. Key questions still galore: which blockchain platform to choose? Are the empirics behind the various consensus ‘recipes’ trustworthy enough and mathematically provable? How do we deal with inherent scalability challenges for real-time payments? The quest for suitable use cases still continues, but it is starting to feel like we are quickly approaching the point where the whole blockchain movement may need to detach itself from the original (‘traditionalist’) route and creatively explore some of the unusual paths and back roads, to be able to deliver promised breakthrough innovations.

It should be obvious by now, that the two worlds of payments – traditional and innovation – are not compatible. How do we move forward then?

What can be done?

Let’s go back to the physics field for potential inspiration and guidance. Physicists clearly recognized the chasm and ‘impedance mismatch’ between traditional and quantum science and are patiently working together to bridge the incompatible views. The relentless pursuit of the (still elusive) ‘theory of everything’ in physics is underway, with many colliding theories in existence, but with everybody marching toward the same important goal here. Physicists on all sides of the scientific spectrum clearly understand the need for healthy open-minded collaboration toward final convergence and harmonization of all of their existing incompatible views. Although it may not be obvious, they are in my opinion perfect example of agile innovators, not afraid to try any promising theory, challenge it and pivot if required or adopt and build on it. They are also brutal realists, well aware that their goal of ultimate convergence can only be enabled by solid standardization along the way.

Now, back to payments again. The good news is that standardization in the payments space is not limited, in any way, by our ability to understand unpredictable laws of the subatomic world, but purely by the willingness of all involved players to systematically collaborate and create necessary standards that enable progress. Nimble and agile FinTechs may feel they are more adept to play in chaotic ‘innovation’ space, but it is in their best interest to realize as soon as possible that they shall enable their offerings for easy integration with the incumbents, in order to be seriously considered as future partners. Incumbents, on the other hand, must realize that they can’t keep protecting their current business models forever, and shall become open-minded toward emerging payment innovations.

In online payments, for example, the upcoming W3C Payment Request and W3C Payment App standard APIs will enable direct communication between online merchants and the providers of online payment app browser plug-ins. Will both merchants and FIs recognize the potential of this standard and seize this opportunity? It can clearly give innovative FIs a chance to painlessly establish themselves as natural online payment providers for their current customers. It also enables merchants to integrate only with 1 standard API for initiation of online payments and thus eliminate the need for multiple “Pay With” buttons on their checkout pages, each involving costly integration with a different set of APIs today. This is a huge opportunity and a clear candidate for ‘theory of everything’ in the field of online payments. The process of online payment space standardization may likely expose PayPal as obsolete and unnecessary, after several decades of ruling the same space. Since this clearly benefits online merchants and FIs, I hope they will start collaborating intensely in 2017.

In the blockchain space, FinTechs must recognize that lack of standards, lack of clarity on the underlying consensus mechanisms and lack of scalability for real-time payments seriously impedes the adoption of their incompatible platforms. In my opinion, the set of common industry-standard APIs for blockchain is long overdue and initiating work must be the next biggest priority for the blockchain community in 2017. Why not again use W3C as a natural and neutral facilitator for this standardization? One day, the FIs should ultimately be able to experiment efficiently by plugging in ‘blockchain platform A’, then plug in ‘blockchain platform B’, in order to evaluate and compare, without the need to completely rewrite their application code. Further, the required scalability for real-time payments is hard to deliver elegantly using any of the current blockchain platforms. Here, openness to new ideas – which might be radically different than the current mainstream thinking – is clearly needed.

Will future deliver tangible solutions for some of these challenges? No crystal ball here, but I personally feel pumped up and am enthusiastically looking forward to our collective quest for the much needed “theory of everything” and standardization for every amazing sub-field of payments.


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Technology executive fascinated with and focused on payments innovation. All opinions are my own and not of my current nor prior employers

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