Tag: Fintech

The Math Behind Bitcoin’s Security: Why Elliptic Curves Are a Genius Choice

On By mehranmuslimiblogIn Bitcoin, BlockchainLeave a comment

In the world of cryptocurrencies, security is paramount. Bitcoin, the pioneering digital currency, relies on advanced cryptographic techniques to ensure the integrity and privacy of transactions. One of the foundational technologies behind Bitcoin’s security is Elliptic Curve Cryptography (ECC). In this post, I’ll explain what ECC is, why it’s crucial for Bitcoin, and how it might face challenges in the age of quantum computing.

What Is Elliptic Curve Cryptography?
ECC is a type of public-key cryptography based on the algebraic structure of elliptic curves over finite fields. It allows users to generate two keys:

  • A private key, which must remain secret.
  • A public key, derived from the private key and shared openly.

The security of ECC lies in the difficulty of solving the Elliptic Curve Discrete Logarithm Problem (ECDLP)—it’s computationally infeasible to determine the private key from the public key using classical computers. This makes ECC an efficient and secure choice for encryption and digital signatures.

How Does ECC Power Bitcoin?
Bitcoin uses a specific elliptic curve called secp256k1 to generate key pairs. Here’s how it works:

  1. A user creates a private key (a random 256-bit number).
  2. The private key is multiplied by a predefined point on the curve to produce a public key.
  3. The public key is hashed and encoded to create a Bitcoin address.

When sending Bitcoin, the sender signs the transaction with their private key. Others can verify the signature using the public key without ever knowing the private key. This ensures only the rightful owner can authorize transactions while allowing anyone to validate them.

Advantages of ECC
ECC stands out due to its efficiency and scalability:
Smaller Key Sizes A 256-bit ECC key provides the same level of security as a 3072-bit RSA key, reducing computational overhead.
Resource Efficiency ECC is ideal for devices with limited processing power, such as smartphones or IoT devices.
Future-Proofing While ECC is currently secure, researchers are actively exploring quantum-resistant algorithms to safeguard against future threats.

Quantum Computing: A Potential Threat
Quantum computers, if developed at scale, could break ECC using Shor’s algorithm, which efficiently solves problems like the ECDLP. If this happens, attackers could derive private keys from public keys, compromising Bitcoin’s security. However:

  • Practical quantum computers capable of breaking ECC are likely decades away.
  • Post-quantum cryptographic algorithms are being developed to ensure long-term security.

Conclusion
Elliptic Curve Cryptography plays a vital role in securing Bitcoin and other cryptocurrencies. Its combination of robust security and efficiency makes it a cornerstone of modern digital transactions. While quantum computing presents a theoretical challenge, ongoing advancements in cryptography will help protect systems like Bitcoin well into the future.

As we continue to innovate in blockchain and fintech, understanding the underlying technologies—like ECC—is essential for building trust and driving adoption. What do you think about the intersection of cryptography and blockchain? Share your thoughts in the comments!

Elliptic Curve Cryptography (ECC) is a public-key cryptographic system used in modern encryption methods, including Bitcoin. It relies on the mathematical properties of elliptic curves over finite fields and offers strong security with smaller key sizes compared to traditional algorithms like RSA. Bitcoin uses a specific curve called secp256k1 for generating private and public keys, ensuring secure transactions through digital signatures. While ECC is highly secure against classical computers, it could be vulnerable to quantum computing attacks in the future. However, researchers are already developing quantum-resistant algorithms to address this potential threat.

Securing the Financial Frontier: Safeguarding Fintech APIs in the Era of Innovation

On By mehranmuslimiblogIn UncategorizedLeave a comment

In the dynamic realm of fintech, Application Programming Interfaces (APIs) serve as the backbone, enabling seamless communication and data exchange between diverse financial systems. From facilitating transactions to enhancing user experiences, APIs play a pivotal role in the interconnected world of modern finance. However, as the prevalence of APIs continues to rise, so does the risk of security threats. In this article, we delve into the significance of APIs in fintech, the surge in API attacks, and crucial strategies to fortify the security of these essential tools.

The Power of APIs in Finance:

Ever wondered how your wallet app effortlessly retrieves money from your bank account or how your credit card gains approval during an online shopping spree? APIs hold the answer. Acting as bridges between different software systems, APIs facilitate communication and data exchange. For example, a personal finance app can leverage an Open Banking API to connect with a customer’s bank, allowing it to check balances and perform various financial operations.

The API Explosion in Banking:

Research indicates a significant surge in the adoption of public APIs by banks. According to McKinsey, 75% of the top 100 global banks had made public APIs available in 2022. This demonstrates a remarkable increase, considering that only 22% had established their API platforms in 2021, with an additional 39% in progress. The shift towards API adoption suggests a growing recognition of the benefits they bring to the financial landscape.

Types of Banking APIs:

  1. Partner APIs: Designed for specific third-party companies to address common challenges collaboratively.
  2. Private APIs: Developed within banking institutions to enhance their operational efficiency and services.
  3. Open Banking APIs: Increasingly prevalent, these APIs enable banks to share data with third-party companies, fostering a more interconnected financial ecosystem.

How Fintech Benefits from Banking APIs:

  1. Cost Reduction: APIs streamline development, enabling the creation of multiple products and services with reduced costs compared to building from scratch.
  2. Regulatory Compliance: APIs assist in adhering to regulations such as GDPR and PSD2 by providing controlled access to data, ensuring privacy and security.
  3. Enhanced Customer Experience: APIs improve customer experiences by enabling the delivery of high-quality features in a timely manner, making financial services more affordable.

The Dark Side: API Security Challenges:

Despite the myriad benefits, the rise of API attacks poses a substantial threat. The Q1 2023 State of API Security by Salt Security reported a staggering 400% increase in API attacks. Various attack types include Denial-of-Service (DoS), SQL injection, XML External Entity (XXE) attacks, Cross-site Scripting (XSS), Brute force attacks, Cross-site Request Forgery (CSRF), and Man-in-the-middle (MITM) attacks.

Protecting Fintech Against API Attacks:

  1. Eliminate Business Logic Vulnerabilities: Identify and rectify business logic flaws, which are a common avenue for cybercriminals to exploit and gain unauthorized access.
  2. Use Strong Authentication and Authorization: Implement robust authentication and authorization mechanisms, such as multi-factor authentication, to secure access to APIs.
  3. Segregate Data: Break up data into different entities to prevent easy access and theft by potential attackers.
  4. Enforce TLS/SSL for API Communications: Encrypt API traffic with SSL to ensure that all data transmitted remains confidential, even if intercepted.
  5. Invest in Employee Security Awareness: Educate employees on identifying API attacks and foster a cybersecurity-aware culture within the organization.
  6. Have a Tested Contingency Plan: Prepare for potential API attacks with a well-defined and tested contingency plan to mitigate damage promptly.

As fintech continues to thrive, the security of APIs becomes paramount. Financial organizations must recognize the potential threats, adopt robust security measures, and prioritize ongoing education and preparedness. API security is not only a safeguard but also a facilitator and differentiator of innovation in the ever-evolving landscape of fintech. By embracing these strategies, the financial frontier can remain secure, ensuring a resilient foundation for the future of financial technology.

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Neobanks need to own their niche

On By mehranmuslimiblogIn Banks, Mobile payments, neobanksLeave a comment

Currently there are somewhere around 256 neobanks in existence, according to Exton Consulting. These brands offer a digital-only experience that are perceived as customer-centric and easy to use, as in opening an account only takes a few minutes. They are also lower cost to use than their physical banking counterparts.

However, only a small handful of these banks have achieved substantial profitatbility. Their names will be familiar: Revolut, N26, Monzo, Nubank and Chime amongst them. The others, which are significant in number, are unlikely to be profitable for the foreseeable future, according to Accenture research, which revealed “the average UK neobank loses $11 per user yearly.”

Part of the problem is the rising cost of providing a service, whilst the margins generated per customer remain low. Finextra correctly reminds us that disrupting the traditional banking market was always going to be a long-haul business, and that it really needs large amounts of venture capital investing to keep the LTV/CAC ratio in good shape.

CAC is ‘customer acquisition cost’, and LTV is Life-Time Value in this case. The LTV is a measurement of the average revenue generated by a customer in a 1, 3 or 5 year period. Clearly, neobanks want this to be as high as possible, but it is one area where they are being challenged, as the average is around 15€ per customer per annum. Banks like N26 and Monzo obtain revenue mainly from “the low debit card interchange fees,” but this results in very low LTVs. Less travel and smaller purchases during the 2020 pandemic has had a big effect on this.

The CAC is calculated by taking the total money spent on customer acquisition and dividing it by the number of new customers. Neobanks do much better than traditional banks in this regard, “with an average CAC of neobanks around 30 euros versus 200 euros for incumbent banks,” Joris Lochy reports at Finextra.

Lochy says that what we are going to see this year is a switch from chasing growth to increasing profitability. Neobanks are being strongly encouraged by VC investors to provide more profitable products, such as investments and credit: products such as credit cards, overdrafts, salary advances and purchase financing. They are also likely to chase small business customers, and provide Banking-as-a-service services to other Fintechs or even banks.

It also follows that some neobanks will stop offering free services. They used these effectively to grow their customer base, but now they may need to charge more fees.

Threats are also coming from the incumbent banks, but perhaps the biggest threat is from Big Tech stepping into this space. As Lochy suggests, what the neobanks need to do is “find a niche where they can excel and not fight head to head with the large banks.”

Finding a niche

This is likely to come by restructuring and rethinking the product offering to provide an even more personalised service, probably in the credit sector. Some would also be better off by targeting a specific consumer group and tailoring their product offering to them. For example, the Longevity Bank is for Seniors, and there are ones focusing on women, freelancers and SMEs. Ultimately, what neobanks need to do to survive, is offer something that no other bank, credit union etc offers – that’s what ill really bring home the customers.

PayPal targets fintech

On By mehranmuslimiblogIn FintechLeave a comment

PayPal is getting into point-of-sale financing. This is a tool that allows you to pay for an item in instalments rather than putting it on your credit card. It has been growing in popularity, and the pandemic has driven its use to rise even more steeply.

Two companies, namely Afterpay (Australia) and Affirm (USA) have been thriving in this sector. For example, Afterpay, whose entire business is staked on the scheme, has sailed from a market valuation of $1 billion in 2018 to $18 billion today, and Affirm is planning an IPO that could fetch $10 billion.

Now PayPal is squeezing itself into the space with its new ‘Pay in 4’ product. This will allow you to pay for any items that cost between $30 and $600 in four instalments over six weeks.

It promises to be slightly less expensive to use than the other two companies mentioned. It won’t charge interest to the consumer or an additional fee to the retailer, but if you’re late on a payment, you’ll pay a fee of up to $10. 

It’s OK for PayPal to do this, because it already has a highly profitable payments network it can leverage. As Jeff Kauflin says, “Eighty percent of the top 100 retailers in the U.S. let customers pay with PayPal, and nearly 70% of U.S. online buyers have PayPal accounts.” Not to mention the fact that as Covid-19 made online purchases skyrocket, it saw record revenues of $5.3 billion and profits of $1.5 billion. Its stock has rocketed in value, adding $95 billion of market value over the past six months, and Lisa Ellis, an analyst at MoffettNathanson, told Kauflin, “PayPal can grow 18-19% before it gets out of bed in the morning.” 

Why move into point of sale financing?

Data from both Afterpay and PayPal shows that consumers spend more money—sometimes 20% more—when they’re offered point of sale financing options. Therefore, when PayPal launches Pay in 4 this autumn it can expect to see transactions rise. It earns 2.9% on each transaction, so its fee revenues will receive a boost as well.

Kauflin makes a good observation: “With Pay in 4, PayPal’s renewed push into lending is an indication the company is getting more aggressive in a volatile economy where many consumers have fared better than expected so far.” Furthermore, PayPal will house these new loans on its own balance sheet. As its senior vice president Doug Bland says, “We’re incredibly comfortable in managing the credit risk of this.” That is indubitably true.