Settlement – The Core of Banking – Part 1 

© Starpoint LLP, 2022. No part of this site, blog.starpointllp.com, may be reproduced or retransmitted in whole or in part in any manner without the permission of the copyright owner.

Given that 80% of my payments thoughts over the last month have been on identity it is time to move on to settlement. Understanding the process of settlement is key to understanding both payments and banking. 

Today’s blog hopes to address 4 questions

  • What are the fundamental innovations in settlement?
  • How will innovations change competitive dynamics?
  • How will innovations change political dynamics?
  • What flows will be impacted?

Nobel economists Coase/Williamson demonstrated how transaction costs shaped the Nature of the Firm. Settlement systems define the transaction costs of finance. Thus settlement system design shapes the organization of financial services. Settlement is in the midst of a revolution as many parties seek to remake settlement as the “base” platform capable of unbundling financial services.

Settlement provides the legal structures and operating rules required to clear $USD Trillions per day are 95% across multiple parties. Banking is a connected business, if the world was in a single account there would be no settlement issues as everyone would be on the same ledger. 

As with all networks increasing scale results in increased network rigidity and existing participants consider how changes impact the value they receive and their unique competitive dynamics. For example, many of the proposed changes to settlement will impact correspondent banking. While some see opportunities to reduce the “cost” of correspondent banking, others providing the correspondent services see change as a reduction in revenue.  While the tech of settlement is fascinating, at the end of the day one counterparty has to trust the netting process to permit funds to flow from their account. 

While there is no near-term cliff, settlement innovations may result in a dramatic shift of payment volume. Today V, MA, SWIFT, EFT, … ALL run on the same settlement process. As most of you know, there is over $4T of market cap driven by networks residing on TOP OF settlement.  For example, card networks do not move funds, but rather are messaging networks. While the legal and operational structure of settlement may not change, a change in technology can have significant implications for how messages operate between trusted parties and the DIRECT ACCESS of non-banks (ex PSPs, non-banks, …etc.).  

This is a HIGHLY POLITICAL undertaking, with many change advocates working to reduce the power of US/EU banks and sanctions controls. Changes in settlement have the potential to unbundle banking, payments drive changes to central bank power and FCY reserves. Where open banking breaks open the FRONT END, settlement remakes the back end. For example, if risk in settlement can be managed by specialists commercial/retail banking (and payments) could move toward a model which resembles modern financial markets (clearing process is a commodity).

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Paze Update – 4 Elements of the PAZE Wallet (70% confidence)

© Starpoint LLP, 2022. No part of this site, blog.starpointllp.com, may be reproduced in whole or in part in any manner without the permission of the copyright owner.

Free blog – no subscription required.

Over the last 5 yrs I’ve written 9 blogs on PAZE/SRC, and over 20 on the TCH’s 13 yr effort to own mobile payments. Today is my update and latest best guess at what they are building. This is a 70% confidence guess based upon my discussions with Merchants, Early Warning alumni, former bank execs, and previous releases (ex Authentify). 

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Separating Payment and Identity

15 pages (summary is 4)

Follow blog from Payment Authorization – Under the Hood (ie working on a car engine), Trust Assertions – Identity will Define the Future of Payments and Role of Identity and Trust in eCommerce.

Today’s blog is one of my personal favorites, not only because of the topic but because of the leading experts in retail, identity, networks, and payments that collaborated and provided editing (thanks all). While I’m no longer the tech expert, I do have a unique view on the “inside baseball” incentives and realities of what is actually happening (behind the rules). Payments are not like a brand-new Ferrari operating to spec, they are a very messy business with complex rules, worn-out systems, unresponsive drivers and a broke racing team with no sponsor. This is a get-your-hands-dirty blog. Note that I’m open to feedback in case I’ve missed something

Outline

  1. Summary
  2. Survey of global identity initiatives
  3. How identity works in eCommerce today
  4. Technical example
  5. How identity improves CX and eCommerce payment flows
  6. Four future scenarios of identity and payments
  7. What should investors track

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Payments and Identity – UPI continues to lead the world

Short 4 page blog

I’ve written heavily on payments, trust networks and identity. Today I’m providing an example of how UPI, powered by UIDAI’s centralized identity,  is creating a new cannon for next-generation payment networks and trust.

I believe that mobile platforms are well placed to learn their lessons in India and create a new phone based network agnostic identity platform that will drive a significant change to payments, the internet and how we manage trust with counterparties.

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Update – Views on CBDCs – Free Content

I thought I’d put together my latest thoughts on Central Bank Digital Currency (CBDC). This blog is an update to my June 2022 Post – CBDCs: Growth Opportunity for US Banks. 

Challenge – Explain a CBDC to a 10 yr old and describe why it is “better” than using cash or a card. While you can never lose your money. The government has the ability to know the source and destination of every transaction.

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Wallets, APIs and Trust

6 Page Blog

Top of mind today are Wallets, Identity and Application Program Interfaces (APIs). APIs are the core concept behind many new business models investors must decipher:

  • Software as a Service (SaaS)
  • Payments as a Service (PaaS)
  • Banking as a Service (PaaS)
  • Open Banking – PISP, AISP, ..etc
  • Account Aggregation – FDX, Plaid, Akoya, … etc
  • Payment Service Provider (PSP) – Stripe, Adyen, PYPL/Braintree, … etc

Previously, I’ve covered this topic in Open Banking and Open Payments and Trust Networks (2020)  Part 3 – Internet 2.5 (2022), Modularity and Trust (2022) and Evolution of V/MA – Moving Beyond Cards (2021). Summary points from these previous blogs:

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Back from Europe

Sorry for the long quiet period. My youngest just graduated High School and as a WWII history buff, his gift was the Band of Brothers tour from Normandy to Salzberg. We came away with a new appreciation for the cost of freedom and the sacrifices made all of those in the armed forces.

European Payment Insights

Covid had put a long pause on my travel to Europe. In the 6 countries we visited I was pleasantly surprised at the broad acceptance of contactless and tap to pay. Beyond tapping with my iPhone, most restaurants first attempted to tap cards before a “dip”.  Contactless now comprises ~60% of POS transactions, a behavior 3-5 yrs more advanced than the US and certainly one of the drivers of card GDV growth in the EU. The V/MA position is Europe is perhaps stronger than in any other market, as any new scheme would also need to integrate seamlessly into this acceptance (and presentment) infrastructure.  

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Future of Retail Banking – Part 5

This is the last of my 5 part blog series that started over 6 months ago. As a pragmatist, my views will likely be unpopular (and perhaps incorrect), but they are informed. Most of this blog will be obvious to US Retail Bankers and payment teams; the more interesting parts may be around Fintech and Asia. The exec summary captures the entire blog, it’s a new format.. I’m going to break down the detail of these points in separate posts. Today is Part A  

For quick reference, I’ve listed the links to the previous blogs. 

  1. Part 1 – US Payments Environment – Drivers of Change
  2. Part 2 – Power of Bank Networks
  3. Part 3 – Last Mile: Internet 2.5 – Embedding Financial Services
  4. Part 4 – Network Innovation – The Efficacy of V/MA
  5. Part 5 – Future of Retail/Commercial Banking … What Will Define Bank Success? 

The reason for this blog is to interact and challenge… please feel free to do so.

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