Virtual Banking: A Guide to Innovation and Partnering

Praise for Virtual Banking Dan deeply understands how technology is changing the future of money, and his book couldnt be timelier. From digital wallets to digital currencies, technology–driven innovation is reshaping how we pay, how we shop, and how we bank. Dans insight and expertise makes this a must–read guide to the trends shaping electronic payments, mobile commerce, and virtual banking. John Donahoe, President and CEO, eBay Inc. Schatt has managed to capture the incredible breadth and pace of innovation in payments and offers up practical advice for harnessing it to power winning consumer finance businesses. This book is an essential guide to forming the next–generation partnerships that are required for building powerful consumer experiences. Jennifer Tescher, President CEO, CFSI Unfortunately, most bankers and payments professionals find the transition to the new state extremely difficult. Tons of consumer choice, frantic innovation, and completely new ways of thinking about the old problems of banking and payments. Dan puts forward a great case for collaboration with the innovators and has filled his book with detailed examples and use cases that illustrate the gap emerging between the new players and the incumbents. A great read, meticulously researched. Brett King, Four–time Amazon Bestselling Author; Founder and CEO of Moven The financial services industry is being challenged unlike any other time in historywhich is why Schatt′s book is an absolute must–read for those looking for guidance on why and how to innovate. It offers an in–depth look into all factors shaping the changes banks must adapt to today and in the future. Peter Aceto, President and CEO of Tangerine (formerly ING DIRECT Canada) An extraordinarily insightful look into the future of digital banking. Dan Schatts new book is a wake up call for all banks today. Platforms and cooperationin payments and beyondare central to their future success. Laurent Desmangles, Partner and Managing Director, The Boston Consulting Group The world is changing faster than ever, but more importantly, client expectations are rising just as quickly. Dan Schatt does an incredible job of laying out why the financial industry needs to adapt and then lays out concrete steps on how it can do so. Practical advice and interviews from some of the best in the world at innovating in financial services is the icing on the cake. Nate Wehunt, SVP and Digital Channels Head, City National Bank Dan has put together a thoughtful and comprehensive overview of todays complex landscape of payments and electronic banking opportunities. Of even greater value, Dan gives practical advice on innovation and strategic partnering from an experienced insider perspective. This collection of concise and insightful real life case studies is a must read for any bank or fintech executive planning for their future success in the industry revolution already under way. John Schulte, SVP/Chief Information Officer, Mercantile Bank of Michigan In Virtual Banking , Dan Schatt has done something I would have said was impossible: he has delivered insights that will be useful to both practitioners in the field and to theorists and visionaries; he has written a book that serves executives and technologists within financial institutions as well as entrepreneurs building solutions in the fintech space. Schatt culls lessons directly from interviews with the players on the field, as well as his own insights from PayPal and elsewhere, to create an up–to–the–minute report from the frontlines of financial services innovation. Matt Harris, Managing Director, Bain Capital Ventures

Foreword xiii Preface xv Acknowledgments xix INTRODUCTION Innovating through Scarcity 1 The Influence of Cloud on Innovation 3 The Influence of Smartphones 4 Big Data = Big Driver of Innovation 4 Taking a Cue from Retailing 5 The Enemy of My Enemy Is My Friend 6 Reconciling Innovation and Regulation 6 In Search of New Payment Revenue Streams 8 New Skill Sets for a New Era 9 A Road Map for This Book 9 Notes 11 CHAPTER 1 Consumer Empowerment Knocking at the Door 13 How Mobile Is Reshaping Consumer Expectations in Financial and Retail How Mobile Is Changing Consumer Behavior 15 Mobile Is Blurring the Lines between Digital and Physical 17 Mobile Learnings from PayPal and Square 19 Mobile Commerce through Tokenization 27 The Mobile Camera—It’s Not Just for Pictures Anymore! 29 The Mobile Microphone—Offers and Payments through Soundwaves! 30 NFC’s Rebound and the Promise of Host Card Emulation 31 Apple’s Passbook 33 The Apps Phenomenon 35 The Uber–ization of Mobile 36 “Top of Wallet” to “Top of Mobile” 38 The Case of Braintree and Simple 39 The QR Code 40 What Banks Can Learn from Starbucks 41 Leveling the Playing Field with LevelUp 43 From Mobile Banking to Tablet Banking 45 Mobile Models for the Emerging Markets 47 What’s Next? More of the Same 51 Notes 52 CHAPTER 2 Social and Financial Services 55 Maintaining Relationships and Relevance through Social strategies Digital, Data, and the Future of Banking 58 Social Media Experiences in Banking 60 Gamification 62 Personal Financial Relationship Mapping 63 Capitalizing on Social Banking 65 Moven: Delivering Banking through Social Context 66 Social Banking in Europe and Asia 70 Social Login, Sharing, and Top of Wallet 71 Peer–to–Peer Lending: Blending Social and Banking 73 Beyond the Hype: Partnering for the Future with Peer–to–Peer Lenders 74 Lending Club: A Win–Win for Banks and Their Customers 75 Takeaways for Banks 79 An Investor’s Perspective on Social Banking and the Emergence of Bitcoin 80 Message To Banks: Be a Smaller Part of a Bigger Pie 85 Notes 86 CHAPTER 3 Connected Financial Commerce 89 Location–Based Services, Mobile Commerce, and Digital Wallets The “Local” Digital Wallet 91 The New Retail Experience 91 Retail 2.0 and Its Effect on Payments 93 Entrepreneurs, Developers, and Financial Services 95 Context Banking: The Next Step 96 Low–Energy Bluetooth, Hardware, and the Future of Commerce 97 iBeacon and EasyPay: The Future of In–Store Payments? 98 PayPal’s iBeacon: Proximity and Context 100 Google Glass for Finances 101 In Search of the Digital Wallet 102 Personal Financial Management 103 Coupons 104 Shopping Tools 104 Loyalty and Prepaid 104 Tickets and Passes 105 The Who’s Who of Digital Wallets 106 Google 107 LifeLock (formerly Lemon Wallet) 108 PayPal 109 Carriers 110 Retailers 111 Square Wallet 113 What’s Next? 113 Notes 114 CHAPTER 4 Innovating with Big Data and Open Platforms 115 Competing in a World of Unlimited Data and Storage The Rise of Platform Services 121 Application Programming Interfaces (APIs) for Online and Mobile Commerce 122 Coping Strategies for Banks 123 PayPal’s Bold Bet: Unleashing Innovation through an Open Platform 125 App Stores for Banks: Will It Work? 133 What’s Next? 139 Notes 141 CHAPTER 5 Math–Based Currencies 143 How Bitcoin May Prove Transformational to the Financial Services Industry Entering the Age of Context 143 Intro to Math–Based Currencies 146 Why “Math–Based Currencies”? 147 MBCs Are a Reality 147 History of Digital Currencies 148 Math–Based Currency Characteristics 148 Bitcoin: The First MBC 149 Bitcoin’s Brief History 150 Is It Bitcoin, bitcoin, or Just BTC 150 Bitcoin Is a Powerful Concept 150 How Bitcoin Works 152 Digging Bitcoin 154 Digital Push Payments 156 Counterfeiting No More 156 MBCs Enable Programmable Money 156 Completing the Bitcoin Ecosystem 157 Bitcoin Exchanges 158 Bitcoin Wallets—Where to Store Your BTC 159 Mobile Wallets 159 Cloud–Based Wallets 159 Bitcoin Hardware Wallet 160 Bitcoin Vaults 160 Trading Platforms 160 Bitcoin Use Cases in Payments 161 MBCs as Payment Rails 161 B2B Payments—The Known Counterparty 162 Bitcoin and Consumer Payments 162 Buy Me a Beer 163 E–Commerce and MBCs 163 Getting Harder: Music and Video 164 Challenges at the POS 164 Improving Bitcoin Processes 164 Improving the Bitcoin Protocol 164 Programming Bitcoin for a Special Case: Online Micropayments 166 Wallets 167 Ripple: The Second MBC 167 MBC Use Cases in Banking 168 International Remittance Rails 168 Interbank Settlement 169 Building Trust with MBCs 170 Automating Transaction Policies 171 Moving Ahead with MBCs 172 Conclusion 174 CHAPTER 6 177 The Smart Pipe Models that Will Survive the Next Generation The Prepaid Model 178 Prepaid Nation: Redefi ning What a Bank Can Be 179 The “Underbanked” and Opportunities for Innovation 184 Stockpile: An Example of Brokerage Innovation Through Partnering 185 MoneyGram: An Example of Innovation through Partnering 186 Innovative Ways to Expand Access—PayNearMe 189 How Innovative Banks Are Partnering for Innovation 190 The CEO–CIO Relationship Driving the Innovation of ING DIRECT Canada 190 A Whole New Era 193 How Banks Can Compete in the Future 194 Three Imperatives to Partner for Innovation 196 A Venture Capitalist’s Look at the Future of Banking 198 Technology as an Enabler and Partner 205 What the Next 50 Years Might Hold 206 Digital 207 Relationship Management 207 Platform and Identity Friendly 208 The Future Bank Bundle: Platform–Relationship–Utility 208 Notes 209 About the Author 211 Index 213

DAN SCHATT is the former Head of Financial Innovations for PayPal, responsible for defining and executing on PayPal′s initiatives with the financial services industry. Schatt has also been an advisor to CGAP, part of the World Bank, and an industry analyst with Celent. Prior, he worked in the Financial Institutions Group at Citigroup. He currently serves as Chief Commercial Officer for Stockpile.