Following our regular weekly interview, the Finanser talks this week with leading commentator on all things to do with digital money and digital identity: David G.W. Birch.
Dave is well known as one of the leading voices in the field of developments in new forms of payment and money. He is an internationally-recognised thought leader in digital money and digital identity. One of the 2014 “Power 50” in European digital financial services and a NextBank Fintech “titan”, in 2013 he was named one of WIRED magazine’s global top 15 favourite sources of news from the world of business and finance and was ranked the no.1 influencer in European emerging payments by Total Payments magazine.
As a man clued up on everything to do with digital money, digital currencies, digital identity, what’s the main things that you see happening at the moment?
Well, I would say tokenisation, HCE (Host Card Emulation) is really big for us at the moment. So, there’s a lot of effort going into the kind of revitalisation of mobile. And a lot of people who are saying this is the year that mobile payments finally break through are probably right, if that’s anything to go by. So that’s very hot.
We have a lot of identity work, which we’ve been talking about for a long time, but it’s interesting to see how the banks are beginning to take identity seriously and start to form their identity strategies.
Coming up out of left field, you’ve got the whole Blockchain thing which, and I know I’ll get criticized for this, is quite different from Bitcoin. I had meetings about this again all day yesterday. So, Blockchain is quite hot at the moment, that’s very true.
For us, we also have a lot of work in transit at the moment. Transit is a very strong area for us because we had the good fortune to be chosen to be consultants by Transport for London a few years ago, to help them migrate to open loop. So, you can use your bank cards on the tube now, you don’t need an Oyster Card anymore. And, actually, that’s led us into a lot of work. There’s a lot of transit authorities around the world that really want to revamp their ticketing and payment systems. These are the main areas of focus we’re dealing with at the moment.
Let’s delve deeper into some of these. Tokenization and HCE for example. Can you just explain a bit more about these?
Well, tokenization is the core of the proposition from people like ApplePay. So, the idea is that instead of storing credit card numbers in your phone you store an alias to the credit card number. You store a token. And if somebody steals that token, it’s of no use to them. They don’t know what card that token belongs to. There’s a few things going on there because the banks, and various other people of course, have to make quite big investments in this to make it work.
So, one of the interesting things at the moment is thinking: “If we’re going to make a big investment to support ApplePay, Google, Samsung, whatever with the tokenization platforms, what else can we use them for? And how can we build them to be most cost-effective in the long term?” And that’s actually interesting work because it’s very new, and nobody knows how all of this is going to pan out. There’s also this whole issue of using tokens for non-payment applications bubbling up as well. So that’s interesting too.
Tokens such as what in terms of non-payment?
Well, for example, suppose you have a gambling site and I want to prove to you that I live in the UK and I’m over 18. My bank could give me a token that I can’t use for payments, but I can use for that. I just pass that token on to you, and my personal details are kept safe and secure and private by the bank. I just give you a token that says: “Here are things you need to know about me.” I don’t want to drop down too many levels of technical boring detail, but because there is a migration to APIs (Application Program Interfaces) underlying all of this and that’s an important area as there is pressure on the banks to get their API frameworks together. This pressure is because there are timescales around this. For example, in the UK, it’s the Treasury Framework. Then, you’ve got the European Framework. You’ve got the work that’s going on in the EPC (European Payments Council) and all that kind of stuff. There’s a lot of pressure to get these API frameworks in place and identity management, identity services, are potentially quite a big part of those API platforms.
In some ways it all come together with identity because, as you just mentioned, I could use a token to prove my age. Equally, couldn’t you use the Blockchain to register devices as part of your identity?
Yes, well, the Blockchain connection is coming up out of left field, as our transatlantic cousins would say. It will be very interesting to look at this kind of swirling intersection of the Blockchain, the Internet of things, and identity. There’s something going on in that space, which could be absolutely huge and, if banks play their cards right, they could potentially have an anchoring role in securing this identity layer for all of these things. That’s definitely an area to focus on. Of course, it’s very early days and so all of this is up in the air. People are inventing new kinds of Blockchains all the time, and thinking up new ways of using them in new applications. It’s very febrile at the moment.
So, if you were looking at how all of that is coming together, what do think would come out of this?
Well, I think there’s a plausible hypothesis. For example, do you remember a couple of years ago, SWIFT had that idea for the Digital Asset Grid and it never really got too much traction. The core idea of it wasn’t that bad. In fact, it was quite good. The idea was that the bank would lock up your identity and keep your data safe and secure, and protect you in this outside world. I think there’s something to that idea, I really do.
Now, if you think about the massive expansion in the identities that are going to need to be managed from your car to your toothbrush and everything in-between, what is going to underpin the identity there, that is safe and trusted? Because banks have to comply with KYC (Know Your Client), AML (Anti-Money Laundering), CTF (Counter-Terrorism Funding), they already know who you are. They’ve already checked your documents. I think, with a decent strategy and, just as importantly, decent APIs then banks can stand to play a pretty interesting part in that, and certainly a way of keeping banks as part of the transactional infrastructure around that.
So, in your opening you mentioned tokenization HCE, Blockchain, and identity. They’re all really intermingled and the question is what part banks play in the new digital asset grid.
Yes, I think that’s a good way of thinking about it. I see it when you’re challenging people saying, “Well, what is a digital bank?” I wonder if there’s a formulation, which says, “Well, a digital bank is a bank which is formed around managing your identity rather than managing your money,” if you see what I mean. In the old economy, you only have one identity as you only needed somewhere safe to put your money. We all understood what banks did in that world.
But in the digital world, you can store money anywhere. The bank has no privileged position. You might have some of your money in a mutual fund, some of it in Zopa, some of it in Funding Circle, maybe a small amount in the bank. But in that digital world, your identity becomes the crucial asset, and this is why it makes more sense for the bank to focus on protecting that. I think you can see an emerging narrative around those things.
Yes. As you look at the re-architecting of the traditional banking structure, what role do you think SWIFT, VISA, MasterCard and the traditional players will play?
That’s a tough one. You go to conferences and people stand up and say: “the Blockchain is going to eradicate SWIFT and bank tokenization is going to eradicate VISA.” That hinges on the people who run SWIFT and VISA being idiots who aren’t reading the papers, and who cannot see these new technological developments. I can tell you that’s not true because the people at places like VISA, AmEx, MasterCard and Discover are very smart people, and they can read the paper just as well as I can, so they can see this stuff coming.
Now, it’s reasonable to say: “Well, yes, but it’s really hard to disrupt yourself. When you’re the incumbent, it’s very hard to do that.” But yes, people are developing all sorts of new strategies that they can accelerate through partnerships and subsidiaries and just buying people, and stuff like that. So I would say it’s a bit simplistic to say that these new technologies are going to bypass the incumbents, because that assumes the incumbents don’t do anything and I can’t see that happening.
I was arguing with some bitcoin guy the other day. He goes: “Well, you know, it’s the banks, man. The banks are trying to keep bitcoin down because they don’t want to be able to transfer money cheaply from place to place.” And, I’m: “You’re kidding me, right?” The bank I’m working for right now finds that about a third of its costs are payments. If you can find a way of moving money around more cheaply, banks will be one of the first and biggest users of it. They’re going to use these new technologies to disrupt as well.
So yes there are threats of course, but the people you think of as the legacy incumbents, they’re going to use these new technologies too, right?
Yes, I agree that they don’t have their heads in the sand, although one of the things that’s quite intriguing is when you look at Ripple, for example, then that does take out a stack of what traditionally has been managed by SWIFT, because it’s looking at the counterparty banking trust mechanisms. So what comes into play is that SWIFT, VISA, MasterCard won’t be the control mechanisms of everything they used to be. They’ll probably be more aggregating lots of different pieces for the banking system.
Yes, although they might do a little bit more than that because they might reinvent themselves as well. You say: “Okay, conceptually, Ripple could take out a lot of the costs which are currently associated with SWIFT.” Well that’s true but, on the other hand, SWIFT could use Ripple to take those costs out of itself and offer a cheaper service. You can then imagine that there are structural reasons why banks would prefer to deal with SWIFT rather than Ripple. So, if SWIFT could use Ripple and cut costs, then everyone’s happy. VISA and MasterCard is a more interesting situation because they have the opportunity to use the new technologies to make a radical change, as they are also under a lot of cost pressures right?
So if it turns out that you can send money from place to place using bitcoin for 1%, and it’s going to cost 2% with VISA or MasterCard, then surely VISA or MasterCard will just come up with bitcoin-based propositions. After all, I would still rather use Visa or MasterCard, because of all the rules and regulations and rights and charge-backs and all the other stuff that goes with it to turn the payment mechanism into an actual infrastructure for retailers and merchants.
Bitcoin does cause extremes of views, as typified by the interviews I did with Jon Matonis and Jeffrey Robinson. Jon Matonis is saying: “bitcoin is the future and it will create a money without government, and it’s already out there in the open source land.” Jeffrey saying: “that’s ridiculous because you have to have this regulated under the control of central banks.” Where do you sit?
Yes. I guess I’m slightly negative on the bitcoin as money thing. The people that are really pro- bitcoin like the fact that it’s not under government control, it’s anonymous, and see those things as positives. I’m not sure. I think they’re actually negatives. I don’t know if you want money that’s anonymous, for example. Do you really want to live in a world like that? That means the rich and privileged can act with absolute impunity, with nobody ever knowing what they’re doing doesn’t it? That doesn’t sound right to me. So to the bitcoin guys, it’s a negative that you have central banks and governments involved but I think it probably isn’t. Of course, I want them to operate more efficiently and more effectively and do good things for all of us, but it’s not transparently obvious that bypassing them is the best way to do that.
A final thought which I don’t think we’ve articulated well enough is on the future of digital identity, because that’s been a subject matter for you for a long time. How is it going to play out in the future in your view?
Well, it’s kind of exciting for me now because some of those concepts that we’ve been kicking around for a long time are now becoming elements of business strategy, and that’s really fun. But the big picture that you’re alluding to is whether it is going to be banks that actually do this, or are they going to be bypassed? And people always think about Facebook and Amazon providing identifiers to sign on, and there could be other people out there who could do this as well.
But if the idea is that digital identity essentially becomes a platform that’s crucial to the future of business, the future economy and future transactions, then it becomes really important who controls that, who structures it and who sets its parameters. There are very good reasons for thinking banks are in a good position to do that, but there are also plenty of good reasons for thinking Amazon or Apple could do it, or the government could do it or telcos. Nevertheless, I would probably think that if the banks got their act together and did it properly, they’d be in pole position.
But the banks would always bring it back to the trust factor, based on the fact they’re licensed by governments, whereas telcos and technology companies are not.
Yes, and that’s not a negligible factor. That’s not something to be dismissed.
So, in the long-term scheme of things, what you’re saying is there are contenders to take over digital identities but banks, if they play their cards right – particularly their bank license card – will win.
I think that’s a reasonable way of putting it, Chris, yes. I think that there is a huge caveat about if they do it right but, let’s not be negative, I think there are some real positives there.
I think you and I have seen enough over the years of people saying banks will be disintermediated to know that it hasn’t really happened yet. It may, but banks are pretty good at responding to this stuff.
Yes. And it’s not likely they’re going to disappear tomorrow, so they have time to work on that.
Have we missed anything, Dave?
No, I think that’s a really good way of finishing up to summarize the conversation. Banks are in pole position. But, to use a very clumsy metaphor, have they got the right engine, the right tires and the right driver?
About David Birch
Dave is a Director of Consult Hyperion, the technical and strategic consultancy that specialises in electronic transactions. Here he provides consultancy support to clients around the world, including all of the leading payment brands, major telecommunications providers, governments bodies and international organisations including the Bill & Melinda Gates Foundation. Before helping to found Consult Hyperion in 1986, he spent several years working as a consultant in Europe, the Far East and North America.
Described at the Oxford Internet Institute as “one of Britain’s most acute observers of the internet and social networks”, in The Telegraph as “one of the world’s leading experts on digital money”, in The Independent as a "grade-A geek" and by the Centre for the Study of Financial Innovation as "one of the most user-friendly of the UK's uber-techies", Dave is well-known for his thought leadership blogging, podcasts and events for Consult Hyperion’s Tomorrow’s Transactions series.
He has lectured to MBA level on the impact of new information and communications technologies and contributed to publications ranging from the Parliamentary IT Review to Prospect. He wrote a Guardian column for many years. He is a media commentator on electronic business issues and has appeared on BBC television and radio, Sky and other channels around the world. Retail Systems magazine said that his recent book “Identity is the New Money” is bold, forward thinking [and] grapples with weighty issues in a concise and accessible way.