Total anonymity or enhanced privacy for payments?

Anonymity in payments is a complicated topic with no easy answers. There are those who favour complete anonymity, and then there are those who see that position as dangerous. Even the regulators aren’t too sure about which way to turn, as evidenced in the US Government Accountability report on “Emerging Regulatory, Law Enforcement, and Consumer Protection Challenges” (May 2014). It concluded, “that virtual currency systems “may” provide greater anonymity than traditional payment systems.”

Fintech expert David G.W. Birch, who has been pondering the issue for some time, and who has a ‘pseudonymity’ solution, examines it by looking at lottery winnings. He cites the case of a US lottery winner who took a case to court (as Jane Doe) because she wanted to retain privacy about her winnings. Why was she so desperate to do that? Perhaps another case Birch tells about explains it: “In November 2015, Craigory Burch Jr. matched all five numbers in the Georgia Fantasy 5 drawing and won a $434,272 jackpot only to be murdered in his home by seven masked men who kicked in his front door.”

However, in the case of Jane Doe it is clear that even if she managed to keep her winnings private, some people would know about it, namely the lottery people and her bank. As Birch says, “Being anonymous is really difficult in an infrastructure that has no anonymity.” On the other hand, if you have an anonymous system it is relatively easy to add non-anonymity to it if desired.

So, if we are designing future infrastructures, should they allow for the kind of anonymity the lottery winner wanted? Birch gives the example of New Hampshire, which allows people to form anonymous trusts and these trusts can buy lottery tickets. However, the money still has to go to a bank account.

Cryptographics could be the answer. For example, if you win the lottery, your money can be sent to your cryptocurrency address (which is in the ticket) without the lottery owner or anyone else having the slightest idea to whom it belongs.

However, there is resistance to the idea of electronic money, and central bank digital currencies in particular, to be anonymous. But there is a case for “a privacy-enhancing digital Dollar. This would be very appealing on a global scale in contrast to digital currencies subject to continual state surveillance.”

If that can be achieved, it will be to the advantage of digital currencies.

HSBC challenges fintechs with digital wallet

Major bank HSBC is challenging its fintech rivals by launching a multicurrency digital wallet, called HSBC Global Wallet, which will enable businesses to make simple and secure international payments.

The digital wallet is first launching in the US, the UK and Singapore and offers payments in Euros, sterling, Hong Kong dollars, Canadian dollars, Singapore dollars, Australian dollars and Malaysian ringgit. Curiously, there is no mention of US dollars!

According to reports, HSBC clients will be able to send money in a number of currencies, and hold and manage those currencies. However, the ability to receive payments will only be added later this year.

This is the latest in new product offerings from HSBC intended to appeal to its more digitally-minded clients. Last November it launched a free mobile-based service that customers can use to hold, manage and send funds in various currencies to HSBC customers in over 20 markets, 24/7 and in real-time without incurring any fees. This product –the HSBC Global Money Account – was aimed at wealthier customers, whereas the new digital product is primarily for small- and medium-sized businesses with international supply chains.

Diane S Reyes, HSBC’s global head of liquidity and cash management, said, “HSBC Global Wallet makes it just as easy for our customers to deal with a supplier or a client on the other side of the world as it is to deal with one on the other side of town.” She added, “By fully integrating this solution into our everyday business banking platform we’re giving our clients a virtual presence in markets around the world.”

What we are witnessing is an attempt by the banks to claw back business lost to fintechs, such as Transferwise (now Wise), Revolut, N26 and others that offer their customers borderless accounts. Even Santander bank in the UK is offering its PagoFX app to the UK retail market and sole traders, and it is also available in Spain and Belgium. The focus of the Santander app is on easy international payments with transparent fees and exchange rates.

This all sounds good, but there is one thing they have forgotten and that is cryptocurrencies and stablecoins. PayPal has moved into crypto and so have the major card networks, such as Visa and Mastercard. There are others as well. So, whilst the banks are attempting to appeal to those customers who moved to the new digital banks and draw them back (which remains to be seen, as HSBC doesn’t have quite the same hip appeal as Revolut), there is a swathe of people who want more advanced features, such as being able to earn money on crypto, lend or borrow against it, and trade it, all in one place.  No doubt, HSBC’s new products will gain traction with its loyal customers, but whether it will win them new ones is another matter.

Neobanks still need to build personal relationships

Catalan neobank 11Onze has taken a novel approach to training its recruits in the art of building personal relationships with customers. Anyone who has used  a neobank is aware that without physical branches it is far more difficult to achieve that very thing consumers value in traditional banks – someone they can talk to, and who is designated as their personal banking advisor.

11Onze decided on a pop up Acadamy to take 50 recruits through a 250-hour training course focused on building personal relationships in a digital age.

11Onze COO Darren Smith, who is leading the training, said, “Our philosophy for the whole bank, not just for the campus, is about creating something truly exceptional. The first experience a customer will have with our organisation will be digital and we place a lot of emphasis in the technology and the user experience. However, we wanted to go much further than this. In a digital age we are worried that the personal relationships we build over time get lost and at 11Onze we wanted to bring relationship into fintech banking. We want our customers to have a long and meaningful, personal relationship with our representatives.”

Another reason for setting up the course is Covid-19 and the prevalence of remote working. The neobank’s agents will continue to work from home for some time, which is why 11Onze wanted to ensure that the recruits could also have a means to forge relationships with each other and with senior team members, as well as learn how to build robust client relationships. The bank also wanted the team members to build support networks, which James Sene, Chairman and founder of 11Onze says is impossible to do on Zoom calls.

He said: “The pop up academy was designed to provide a Covid safe and secure environment to give them all the knowledge, skills and tools required to be able to deliver an exceptionally high quality customer service experience. The Academy trained the “whole person” – and our programme places as much emphasis and priority on personal skills, mental and physical health and well-being, as it does on technical and professional skills.”

The importance of teaching customer relationship building

The Academy course delved into psychology and philosophy alongside learning to use new hardware and software. And it included yoga classes. A production team followed the new recruits and asked them to share stories of their journey and development. There is a marketing purpose behind this as Sene points out: “11Onze customers will be able to review and follow the personal journeys of our agents and this will help them develop a real relationship with the customer services representatives.”

He added, “In the digital age, we are concerned that the personal relationship we build will be lost over time, so, at 11Onze we aim to recover that “relationship” aspect that a traditional bank offers to establish links with the community in addition to withdrawing money or depositing it. We want our clients to have a long and meaningful personal relationship with our representatives.”

11Onze makes a very important point with its pop-up Academy idea: whilst challenger banks are often perceived as offering a better service than traditional banks, there are elements of the traditional way that mustn’t be overlooked, particularly customer relationships, because human psychology is very attuned to that need, and fantastic technology won’t easily remove it.

AI can lead financial services to more inclusive lending

Upstart, an AI-powered fintech lender that launched in 2012 has received a ‘blockbuster’ earnings report that has made a new billionaire of Dave Girouard, the firm’s cofounder and CEO.

While there have been concerns about sky-high valuations, Upstart’s stock “ended the day up a staggering 89%, lifting the fortune of 54-year-old Girouard, who cofounded Upstart in 2012 and owns about 14% of shares, to an estimated $1.3 billion,” according to Forbes.

Based in California, Upstart “reported fourth-quarter earnings that nearly tripled average analyst expectations and posted full-year 2020 revenue of $233 million, 42% higher than in 2019.” Girouard said, “Last quarter was monumental for us as we took the company public in the midst of a historically complex and challenging time for the world.” Moreover, Upstart forecasts its revenue will more than double this year to $500 million.

Wall Street is so happy with the figures that Bank of America and JMP Securities upgraded Upstart’s stock on Thursday, and the future promises even grater things as Upstart moves into the auto lending sector. To facilitate this, it has acquired San Francisco-based Prodigy Software, a cloud-based platform that lets customers buy cars online. Girouard said, “While Amazon and Shopify have modernized the online shopping experience, the auto industry has been left behind. Auto retail is among the largest buy-now-pay-later opportunities, and together with Prodigy, we aim to help dealers create a seamless and inclusive experience worthy of 2021.” He added, “We see at least as much inefficiency in auto lending as we have seen in personal lending. Millions of people spend far too much for car loans.”

Upstart makes loans of $1,000 to $50,000 at interest rates ranging from 7% to 36%–but it is different to some of the other main players in the way it assesses borrower risk. It uses Artificial Intelligence (AI) and other data, such as education and employment history to assess a person’s creditworthiness. This is something that Girouard believes is the future of lending: “We believe virtually all lending will be powered by AI in the future, and we’re in the earliest stages of helping our bank partners successfully navigate that transformation.”

This is not a new idea. In 2020 the Harvard Business Review published an article by Sian Townson, ‘AI can make bank loans more fair’. This examines the problem with bias in AI, as Townson says, “Lenders often find that artificial-intelligence-based engines exhibit many of the same biases as humans.” The reason for this is that the AI has been fed a “diet of biased credit decision data,” according to Townson, adding that this data has been “drawn from decades of inequities in housing and lending markets. Left unchecked, they threaten to perpetuate prejudice in financial decisions and extend the world’s wealth gaps.”

Townson believes that there is a way that AI can encourage a more inclusive economy: “The key lies in building AI-driven systems designed to encourage less historic accuracy but greater equity. That means training and testing them not merely on the loans or mortgages issued in the past, but instead on how the money should have been lent in a more equitable world.”