The Future of Cash

By Catherine
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By Catherine Bolgar

Businessman touching the screen about currency icons

Digital payments are growing, with new methods and technologies proliferating and the number of transactions skyrocketing.

Non-cash transactions grew 8.9% to 373.3 billion in 2014, according to the World Payments Report 2016 published by Capgemini and BNP Paribas. Use of checks is down, but use of cards—especially debit cards—continues to grow, up nearly 12% in 2014.

“It isn’t just the card: everybody is convinced they have invented the payment mode of the future,” says Christophe Vergne, leader of the global cards and payments center of excellence at Capgemini. “Regulators are fostering that to create competition, innovation and boost the market.”

Indeed, many governments would love to reduce the use of cash, in order to crack down on criminal activity. France recently lowered the limit for cash transactions to €1,000 from €3,000. Other European Union countries also have limits.

“For the last three decades I have investigated the large-scale use of cash, which is the preferred medium of exchange for illegal transactions ranging from the production and distribution of illegal goods and services (drugs, prostitution, etc.) to tax evasion, and how large-denomination bills are primarily used in these activities,” says Edgar L. Feige, professor of economics emeritus at the University of Wisconsin-Madison.

Many CurrencyHowever, bank notes and coins are necessary “for the safety of the entire financial system,” he says, noting that a digital system is vulnerable to hacking. “That’s why it’s even more important to have a physical means of payment, as a safety backup system.”

The security of digital payments has greatly improved, thanks to tokenization, which swaps the real card or account number for a stand-in, explains Mike Cowen, U.K. and Ireland head of digital payment products for Mastercard. A thief who gets hold of the fake number at the point of sale can’t do anything with it.

The current global chip and PIN technology, called EMV, “did a fantastic job for us of massively reducing fraud at the point of sale,” he says. “Tokenization takes that same EMV technology and enables it to be used for online payments as well. It means that online payments can be as secure as those at the point of sale.”

The most important aspect is that tokenization technology is scalable. E-wallet providers don’t have to approach each bank to enable the technology; they just have to connect to the payment networks, such as MasterCard.

“Now that we have tokenization in place, it’s actually designed so [that] smaller, niche players can build digital services that require digital payments to enable consumers to buy things within their digital channels,” Mr. Cowen says.

Another huge trend, he notes, is contactless payments, which allow for payments using mobile phones as well as cards.

By 2020, every point of sale in Europe will be contactless-enabled,” Mr. Cowen says.

The Internet of Things will expand the possibilities. “Fitness bands are a sensible thing to build payments into. They have a means of monitoring your life signs, which is one way to authenticate,” Mr. Cowen says. “We believe there will be a huge wave of innovation on the back of this.”

The Internet of Things “will be a revolution,” combining such things as smart meters with digital payments, Capgemini’s Mr. Vergne says. “Tomorrow you will be able to pay as you use. Imagine you don’t pay electricity every month, but every time you reach three kilowatt-hours. Systems could cope with that.”

Man paying with NFC technology on mobile phone, in restaurantThe overall trend is toward smaller digital payments. “The marginal cost of transactions is decreasing to such small amounts that it economically makes sense to pay €1 digitally,” he says. “The more the volume grows, the more the marginal cost decreases and can compete with coins.”

The transaction cost of cards is 0.20% to 0.30% interchange plus merchant service fee, plus an annual fee for the card holder, Mr. Vergne says. The cost of cash, by contrast, is higher: between 0.5% and 1%, because of the burden of counting , storing  and transporting it, plus the risk of theft. Individuals don’t pay that cost directly. “Society is paying for all this infrastructure of maintaining cash,” he says. However, he notes, despite the costs and the explosion of digital payments, the volume of cash in circulation continues to grow.

“As for the notion of the advent of a cashless society coming about,” Dr. Feige says, “the truth of the matter is [that] cash holding and cash use have increased, despite digital payments. I would predict confidently that cash will survive as a medium of exchange for many years to come.”


Catherine Bolgar is a former managing editor of The Wall Street Journal Europe, now working as a freelance writer and editor with WSJ. Custom Studios in EMEA. For more from Catherine Bolgar, along with other industry experts, join the Future Realities discussion on LinkedIn.

Photos courtesy of iStock

Biometric banking

By Catherine
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By Catherine Bolgar

The next frontier for security is likely to arrive at your bank soon: biometric verification of your identity—and you may or may not be aware of it. The global banking sector is expected to spend $2.2 billion (€1.9 billion) on biometrics this year, according to Biometrics Research Group Inc.

Fingerprints, facial recognition and iris patterns are among the methods that could be used, thanks in large part to smart phones that already use fingerprints and that have cameras that can capture information for the second two. Other methods include vein patterns (in fingers, in palms and on the back of one’s hands) and even a solution under development that recognizes the ear cavities of a person by the resonance of sound, says Christy Lin, analyst with TrendForce, a Taipei-based provider of market intelligence on technology industries.

Issues include the cost, ease of use and the amount of time needed to capture the biometric, says Anil Jain, professor of computer science and engineering and head of the biometrics research group at Michigan State University in East Lansing, Michigan. Fingerprints and facial and voice recognition are convenient already. The iris is very accurate and becoming more convenient as more phones incorporate iris readers.

Authorization is faster than presenting a card to a sales clerk and having them swipe it,” says Jain. “It takes three to five seconds.”

There are two ways to create the link between you and your payment data for biometric payments, says Lorenzo Gaston, technical director at the Smart Payment Association, an industry group based in Munich. In either case, a biometrics device captures your biometrics—for example, taking a picture or a fingerprint—then digitizes it, and compares it with biometrics you already registered and enrolled with your payment data.

In one case, you use a device that stores your original biometrics. “Typically, it’s a chip card and it decides whether biometrics captured are close enough to what was enrolled the first time for that particular person,” Mr. Gaston says. The storage device also could be a secure element in your mobile phone. This is similar to using a super-PIN, which is stored only in your personal device under your exclusive control.

A second way is to send the captured biometrics information to an online database storing all the enrolled biometrics data from the users. In that case, a remote server decides whether the right person is gaining access. “The problem in that case is the biometrics are stored in a central database. Biometrics [is] considered very personal information. If somebody manages to hack into that, they can impersonate you,” he says. Resolving the problem could be tricky.

You can change a password, but you cannot change your face or your fingerprint.”

Alternatively, a hacker might change the information, replacing the real biometrics with the hacker’s.

“Online databases must have very strict access-control mechanisms,” Mr. Gaston says. That’s why from a security and privacy perspective, the storage and comparison of the biometrics in your personal tamper-resistant device (chip card, secure element in a mobile phone) is by far a preferable solution, he says.

Financial institutions have tight enough security that breaking in involves a significant investment of time and money, and encryption can further tighten safety, says Darci Guriel, professor of computer information technology at Northern Kentucky University in Highland Heights, Kentucky.

As a result, the people trying to break into accounts aren’t aiming for mass hacking but are grifters, targeting one account at a time. “They’re looking for the weakest link, and the weakest link in banking is people,” Prof. Guriel says.

That could mean winning over a customer-service agent to get a PIN reset. Or finding enough information online to be able to answer private questions necessary to change a password. The elderly often are targeted.

“Biometrics are there to help,” she continues. “To break into a single account at a time, nobody is going to have plastic surgery.”

Some things about you don’t change with age or even surgery—the space between your eyes and that across the bridge of your nose is unique, as is the depth of your eye sockets. For a voice, the sinus cavity and vocal cords don’t change. “The pitch might change, the tone might change, but the physical attributes—which are what get measured—stay the same,” Prof. Guriel says.

Banks probably already have or can easily get your biometrics, she notes. ATMs have cameras. Phone calls are recorded. They can find your picture online.

Some consumers worry that biometric authentication systems would be incapable of distinguishing between living and faked or preserved biological tissues, notes TrendForce’s Ms. Lin. “Biometric recognition systems that only authenticate living tissues would prevent the hypothetical scenario where criminals can use severed body parts (e.g., fingers) to steal money or access sensitive information,” she says.

Making fake biometrics isn’t easy, and phone companies—at the forefront of biometric technology—are making phones harder to spoof, Dr. Jain says. “You can’t just present a photo of me when it isn’t me live. Security is a cat-and-mouse game. Fraudsters will try to circumvent it, and security guys have to come up with ways to fix it.


Catherine Bolgar is a former managing editor of The Wall Street Journal Europe, now working as a freelance writer and editor with WSJ. Custom Studios in EMEA. For more from Catherine Bolgar, along with other industry experts, join the Future Realities discussion on LinkedIn.

Photos courtesy of iStock

The center of the tech revolution in finance couldn’t be further from Silicon Valley

By Alyssa
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By: Ian Kar

China, Shenzen skyline, elevated view

Silicon Valley is on a mission to disrupt finance. Even Jamie Dimon is worried about it. US venture capital funding for fintech startups reached $7.4 billion in 2015, up from $4.3 billion in 2014. But while the money’s flowing, the real action is in China.

According to a new report from Citi’s research division, people in China are actually using fintech products. The three biggest internet companies—Baidu, Alibaba, and Tencent—all have digital finance businesses that are thriving. Baidu Wallet has 45 million users. Alibaba’s Alipay is the world largest fintech startup and processed almost $2.6 trillion in payments in 2015—a third of all third-party transactions in China. Tencent’s financial products accounted for $800 billion in payments in 2015.

China’s fintech dominance isn’t just in payments. Alternative and peer-to-peer lending is bigger as well. The US does more peer-to-peer lending than the UK, but, combined, the two countries do less than China.

China’s fintech and digital banking businesses are growing in part because consumer banking hasn’t developed as much as elsewhere, Citi said. Chinese internet giants have stepped into the void to provide access to financial services via mobile apps. Chinese regulators have also taken steps to promote, not inhibit, financial innovation in China.

China could be where the US is headed. Citi said that China is past the tipping point of disrupting financial services, but the US or Europe is still a few years away. By 2023, 17%, or $1.2 billion, of North American consumer banking revenue will move to digital services, Citi estimates.


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