The Future of Payments

SWIFT Exec Says Security and Data Management Will Play Key Roles
Payments are moving away from tangible currency to so-called new economies, where value relies more on reputation than currency. Venues such as Facebook and schemes such as prepaid cards facilitate e-commerce via new economies. But as with any change in the payments scheme, industry experts expect these new economies to be accompanied by new risks.

Kosta Peric, head of innovation for SWIFT, the Society for Worldwide Interbank Financial Telecommunication, says providers of alternate currencies carry heavy risk when they operate outside of the banking system. Prepaid systems, for example, exist outside of the banking system, and therefore outside of the controls and regulations that exist in banking.

Mobile network operators that have implemented prepaid systems also are recognizing that they need to comply with banking regulations. And they are starting to develop ways in partnering with banks.

"There is a major opportunity for banks to establish themselves in this new space, which is digital asset management," Peric says in an interview with BankInfoSecurity's Tracy Kitten [transcript below]. Financial institutions and the industry together can define the direction of the global payments infrastructure for the future.

During this interview, Peric discusses:

  • New economies and their impact on financial relationships;
  • Why mobile payments and social networks require heightened security and data expertise than only financial institutions currently can provide; and
  • How collaboration between competitive yet disparate industries will outline the direction of the payments future.

Peric has led SWIFT's Innotribe division since 2007, when he was appointed head of innovation for SWIFT. Peric previously served as head of securities market infrastructures, where he oversaw negotiating and acquiring for strategic programs. He was also the chief architect for SWIFTNet. Kosta has been with SWIFT since 1990. Before SWIFT, he worked for Solvay & Cie, Control Data Corp. and the Université Libre de Bruxelles.

New Payment Services

TRACY KITTEN: You're head of SWIFT's Innotribe division, the bank innovation division of SWIFT. Can you tell us a bit about Innotribe and some of the new payment services it is reviewing?

KOSTA PERIC: Innotribe is swiftly shifting to foster and enable collaborative innovation in the financial industry, and I think the relation team from SWIFT is behind this initiative. What we do are two things essentially. The first one is idea generation in the industry through events such as Innotribe at Sibos. The second is to be able to act upon some ideas, so an incubator, where some of the ideas generated can be in fact implemented.

Just to give you an idea to answer your question, some of the things we have in the incubator right now are projects related to digital identity, digital asset management, better management of market practices and payments and enhanced and secure ways to associate more data with payments. We are also active on the securities side of our business. Some other things we are looking at are working with entities and more general mobile payments.

KITTEN: The development of the globally connected economy is inspiring leaders and governments to redefine the ways we address intangible assets as well as long-term debt. Is money the form of value that can exist in a transaction? What are your thoughts about this discussion?

PERIC: To answer your question, no, money is not the only form of value as we move forward, and I think value will be represented in many ways, driven by what I call the digitizing of our world, or the pervasiveness of technology. There will be more alternative currencies, and let me give you some examples: corporate currency such as frequent-flyer miles and virtual currencies, such as Facebook credits, that Facebook recently launched.

New Economies

KITTEN: Now can you talk with us a bit about new economies like the trust economy, the intention economy and the relationship economy, as well as the social economy and the ethical economy? What impact are these so-called economies having on the global financial infrastructure?

PERIC: I'm really glad you asked this question because this subject will be one of the highlights of the upcoming Innotribe of Sibos event in Toronto - Sibos Toronto. All these things that you mentioned are essentially linked together and are now driven by the emergence of social networks and data, themselves driven by the technology and Internet. These economies have to do essentially with changing the meaning of the word consumer. And the change is that this consumer will change from this essentially passive participant today, this economy today, to a keystone and a new way to do business. Let me explain. Relationships will be based on trust and this trust will be built upon your digital reputation, which is something very valuable in digital. Let me give you an example that many people know. If you use eBay, you as a buyer or as a sender have built a reputation that is given by other people that you deal with, and this reputation is very precious because if you have good reputation then people will want to do business with you.

Talking a little bit about the intent economy, if the intent of this new consumer is well-known and trusted through reputation, then slowly but surely the economy will start revolving around this intent. For example, rather than me today as a consumer going through and shopping through values, websites and merchants to find something that I want, in the future I will be able to say this is what I want, and my intent is trusted so my intent is committed. Then many people can actually bid for my business. So now, all this technology and this new concept will be really revolving around this new consumer. The consumer will be in the driving seat and then that will drive some interesting things, such as transparency and new data and characteristics that will be made available to this consumer. Say I want to deal with a company or put my money in a certain bank. This new consumer will want to know what sort of business the bank will invest money in. For example, I would like to put money only in the bank that does investing for green business. This notion of transparency and community involve all parties.

Chip and PIN

KITTEN: That's very interesting. I was going to shift gears here a moment and talk a bit about chip-and-pin. But perhaps you could help me understand how some of the movement that's taking place in the regular economy from a payment's perspective might fit in with some of these new economies? We've been talking quite a bit lately about chip-and-pin technology. Can you tell us where and how SWIFT comes down on the chip-and-pin debate for the United States, and might it fit into this new scope when it comes to some of these different economies that you're talking about?

PERIC: It's interesting, and as a person and as a consumer, I know that there is quite a different approach in the U.S. and Europe towards this. I know that in the U.S. banks tend to privilege convenience, while in Europe the banks tend to privilege more hardware-based security for online business. We at SWIFT, in fact, have come up in the last year with a new product that we call 3SKey that is targeted to corporates that have been connected to the SWIFT network for three years, essentially the clients of the banks. We have come out with this product called 3SKey that's based on a hardware security token, mainly the USB token that implements our PKI infrastructure. That token is focused on authenticating some people within these companies, typically the CFO or the person who has the power of attorney for the payments. By doing that, what we have issued is to provide a single window to the banks for the CFO so that there is a single mechanism to authenticate this person for multiple banks. We think we have there the best of both worlds. We have convenience in this product so that this person has only one type of authentication to all the banks that they deal with, but at the same time have strong security based on the hardware.

KITTEN: Going back to talk about some of these efforts to reach the underbanked, and then this may even tie in with some of the economies that we've been talking about, would a move to mobile chip-and-pin enhance options or services for the underbanked? And if it would, how?

PERIC: The first problem for the underbanked is to get these massive amounts of people banking in the first place. Just to give the size of the problem, in India I think the numbers are that there are about 1.2 billion people, of which only a third have a bank account. Now the interest in pointing this is that most people, including India, are equipped with a mobile phone. I would say that the issue of unbanked is a very large issue and the mobile chip-and-PIN is part of that puzzle, but it's certainly not the solution. To get people banked, there is a need for easy and widespread ways to identify and authenticate people the KYC process. If you look, it's being developed in India - a government initiative for this. It's quite a major endeavor.

To answer your question, I would say yes, it is a contributing factor but it is certainly not the only one.

Prepaid Services

KITTEN: When we talk about the underbanked rightly or wrongly, we often tie prepaid services to services that would reach the underbanked or the unbanked. Why are prepaid services that are aimed at this group getting so much attention right now?

PERIC: It has to do with some of the first projects that have been done, mostly by mobile network operators, like in Kenya, which is quite a nice country-wide success that has been driven mostly by the Bovine Network Operator in Kenya. That was kind of the most natural way because it's quite easy to implement. Now there are some other initiatives of that nature in some other countries. If you look at the picture globally though, I'm not sure that this convenience will trump in the end the need for a reliable global banking system.

Fraud and Security Concerns

KITTEN: What are some of the fraud and security concerns when it comes to some of these new and emerging services that aim to enhance payment options, especially when we talk about prepaid options?

PERIC: There are several issues that need to be tackled. The first one is that if you look at just the prepaid systems, they are happening essentially outside of the banking system, therefore essentially outside of the controls and regulations of the banking system that have to do with all sorts of regulations pertaining to money laundering, terrorist funding, and all these other issues. That is an issue in itself. I think the second thing that we notice is that the mobile network operators who have implemented prepaid systems are now in the situation of realizing that they need to comply with all these regulations and are looking to see how they can do that and perhaps how to partner with banks. ... Now I think there is some deeper thinking, or some perhaps more structured thinking, about how to go forward about this.

KITTEN: That's a great segway to my next question which was: how concerned should financial institutions be about the risks that are posed by some of these non-traditional financial players that have dominated this space? As we enter the prepaid and peer-to-peer payment space, what role should financial institutions be playing?

PERIC: I see this as a major opportunity for banks moving forward because we relate it a little bit to our talk about new economies. Moving forward in fact what we notice is that banks and the whole economy are not necessarily on money, but on data. In fact, I mentioned all these different virtual currencies, so it has to deal with data and I think there is a major opportunity for banks to establish themselves in this new space, which is digital asset management, management being really a big element that pertains to the identity and value of this new economy. I would say that there is this major opportunity and some banks have seen it and I think there is major opportunity for collaboration, because on the other hand, many of these things are like highways. Never can a single company have the power to build highways. There would be the need for collaboration to establish the common infrastructures to tackle these new markets while at the same time complying with current regulations and rules. There is a major opportunity ahead. That would be my comment and as usual, if the banking industry doesn't move well some other people will move in it. I think there is a major opportunity for new products and services pertaining to this new economy that we mentioned.

New Payments and Money Laundering

KITTEN: When it comes to some of these new value payments and then when we look at some of these emerging payments that are coming out when it comes to peer-to-peer payments, especially when they are on the mobile device, money laundering and fraud are of course a big concern. We've talked a lot about authentication. What steps is the industry taking to address some of these money laundering worries?

PERIC: Yes, some of these things like digital identity and interoperable identification and authentication systems will help. There are some other initiatives that are taking place in the sanctions screening type of things where it's very interesting. It's again a collaborative effort of the banks, or some of the banks, to basically centralize or share a common infrastructure for sanction testing. We notice there are so many things in banks and in particular related to anti-money laundering and sanction testing where every bank ends up implementing their own systems to essentially do the same thing, and we come to the realization that this can be shared. This could be a shared infrastructure. That is something that we at SWIFT are putting together as a project, to be able to contribute to this effort.

KITTEN: Finally before we close, what final thoughts would you like to leave our audience with as it relates to some of these new value payments, new economies or fraud and prevention generally?

PERIC: I will leave with you this. These things are happening and we hope that there will not be elephants in the room unnoticed, but we will notice them. There are major opportunities there. I think also that we need to be looking also at the new challenges that are brought by these digital economies and increasing digitalization. We at SWIFT have been active for more than thirty years in security and reliability. We have a private, secure worldwide IT network. We need to think how the assets of the financial community can be leveraged as well as we go forward increasing the digital economies or these new economies.

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