FinTech 2.0

Investment keeps flowing into start-ups that are missioned to disrupt financial technology and break banks. The way we obtain loans, invest, accept and make payments is being challenged and disrupted by clever minds all around the globe…but is there an end in sight?

Perhaps not, but a halt is probably coming, as the tech-bubble that’s building up in Silicon Valley is showing signs of being close to bursting – which would undoubtedly seal the fate of many promising (but overvalued) unicorns. Of the over 100 frequently mentioned unicorns a good portion is in the FinTech space and investors in these might have to visit the barber soon for a haircut, as recently demonstrated by Square’s 30% IPO discount from its latest VC valuation.

Much is written these days about the build-up of a tech-bubble as well as the counterarguments defending their valuations; why this time it is different from the dot-com era and that the unicorns have sounder financials, business models and cash-burns that don’t emit heat! Your underwriter remembers those articles from 1999 and doesn’t think many of the dot-unicorns will keep their horns.

Many entrepreneurs have been drawn to FinTech problems in the last few years and technology advancements play a part in that, but high valuations should certainly get some of the credit. FinTech itself is not new and has been around for centuries, whereby financial institutions (FIs) have relied on third-party IT companies for systems and innovation. Therefore, what is different now within the FinTech industry is perhaps that the FinTech start-ups are selling directly to the end-customer instead of white-labelling their solutions to FIs…as well as the fact that there are more companies in this space, challenging the models and re-thinking processes.

If (or when) the bubble bursts, many of these FinTech start-ups will be short of cash and tempted to direct their efforts back into white-labelling and teaming-up with the FIs they were trying to replace. That will not mean that there won’t be disruption in financial technology, but rather that the “disruption” may be more like a technology refresh and will be led by the very FIs that were supposed to go the way of the dinosaurs.

When the dot-com bubble burst, there was a lot of money lost on the markets, yet the knowledge wasn’t lost and the world was changed forever. We even made a name for the subsequent disruptive web technology and called it ‘web 2.0’. The end of the banks is probably not near, with some rough seas ahead, but the effect of the FinTech start-up activity will most definitely be felt for a long time…next in the form of FinTech 2.0.

* Credit for terming the post-bubble FinTech industry “FinTech 2.0” must go to Chris Skinner, for when sharing the above views at a Handpoint dinner party at Money2020 recently his immediate reaction to these thoughts was: “If you are right, then we will witness FinTech 2.0

From Bartering to NextGenPOS

The retail industry and the customer check-out process has evolved a lot since the birth of the industry. For a very long time “retail” was mostly confined to bartering and then market stalls, before evolving into fixed location shops and over-the-counter check-out processes. If we fast forward to the late twentieth century the industrial revolution changed everything and supermarkets disrupted the retail industry.

From Bartering to NextGenPOS
From Bartering to NextGenPOS

This is of course over-simplifying the evolution of trade and anthropologists would go crazy by my interpretation, but I often think of the evolution of retail and check-outs from stone-age to today simply as:

1. Bartering

In hunter-gatherer era, everyone is a merchant and everyone is a customer and goods are exchanged wherever suitable. Book keeping was probably sloppy.

– You give me 3 rotten fish in exchange for that worn-out fur I’m wearing (ridden with lice) and we’re both happy…sort of

2. Market Stalls

Producers (farmers, fishermen, weavers…) walk their carts into the market square to sell their goods (location becomes essential in retail!). Ledgers and abacuses guided the check-out process.

– You come to buy 2 loafs of moulded bread for one copper coin (plus you may steal an apple)

3. Shops

Retail becomes an industry with professional merchants that grew tired of walking the cart to the market. And as thieving became a nuisance the tent around the stall was exchanged with wooden walls and the retail shop is born! That environment and associated over-the-counter check-out process lasted relatively unchanged for centuries (sort of).

– You stand at the counter and tell me what you need and I run around to get the stuff for you. You pay with coins, notes or IOUs (or you run away and don’t pay anything!)

4. Main Street

Location is everything in retail and shops grow bigger with more employees (cashiers). The cash register was invented around the mid 19th century and become ubiquitous at the beginning of the 20th (starting with low tech cogs-and-wheels cash registers to low tech “digital calculators”)

– The cashiers have a harder time stealing from me now, I keep my money locked in a metal container which even makes a loud noise for me to look over every time it is opened 😉

5. Supermarkets/Malls

Retail gets big and decentralised with mega stores selling everything at a lower price disrupting the industry. Location is no longer the key to success and retailers become big, with multiple stores and purchasing power that allows them to reduce their cost price. Many of the little guys go under and the survivors focus on personalised customer service.

– You run around the store and get things, whilst I stand still at the counter and wait for you (saving me time and money)

6. Next Generation Retail

Supermarkets become threatened after the 2008 crash as consumers start becoming smart shoppers, selecting “nearby” convenience and discount stores over mega stores. The SMBs become empowered by Next Generation POS, allowing them the get all the functionality and data like the big guys have but at a fraction of the cost. The cash register is exchanged with a tablet or a smartphone on the floor. The cash register is designed to be both mobile and fixed at the same time and the shopping experience becomes social again.

Enterprise merchants step up by enhancing customer experience and Apple decides to disrupt the retail industry (just as a habit of disrupting things) and eliminates fixed check-outs with mobile POS scattered around the store — because why would you want to put a barrier, i.e. a counter between you and the customer after he’s made a decision to buy something?

– We both run around the store in a “consultative dialog”. We pretend to be friends whilst I educate you and sell you the latest and greatest (fleece me)

The retail industry and associated check-out processes evolved slowly for thousands of years, then suddenly in the 20th century it was revamped and then almost re-invented in the span of the last decade. There has never been a more exciting time in retail and we are seeing some glimpses of Next Generation Retail with #NextGenPOS and the omni-channel store changing everything. Technology advances have undoubtedly surpassed the retail industry and the building blocks are being assembled and tested in different ways — with much more excitement yet to come.

1st of Oct – EMV Towel Day

The US is, supposedly, moving to chip cards today (EMV technology), away from all the unsecured magnetic-stripe cards…well, sort of. The facts are that US Issuers have barely replaced all the magnetic stripe cards in circulation, the payment processors are not ready, the merchants don’t have EMV readers (and don’t seem overly concerned) and cardholders are mostly clueless! Yet, today is the day when merchants assume liability for all the (massive) card fraud in over-the-counter card payments…unless they have upgraded their card reader to an EMV reader (which the processors cannot provide them with) in order to accept those chip cards (which the cardholders don’t have). In some European countries, they’d be burning cars at this point (did someone say France?). But yet, US merchants seem pretty relaxed.

The US is often a beacon of technology advancement.  There are very few areas where the US has been a laggard when it comes to any technology advancement — but the payments sector in the US is shockingly behind. While the US has about a quarter of the world’s card transactions, they also endure half of the world’s card fraud (just for clarity, that is not something to be proud of). Consumers should be outraged. Merchants should be outraged. But they are not.

I love that when I am in a US city, merchants everywhere are using tablets or phones for POS… and then I see the unsecured dongle they are using to take my payment. Let’s get the world back to a place where you don’t just assume your credit card info is going to be stolen.. please? But the thing is, US cardholders don’t really care that much. Yes, it is annoying to have to read carefully through the statements for “extra” items, and yes it annoying to have cards re-issued.  But the issuers mostly pick up the bill for any fraud, and the cardholders don’t lose any money (if they notice the fraud, that is). The merchants don’t seem to be bothered, either, because charge-backs are not a major problem to them. Let me tell you something, Mr. US Merchant – have a look at what your European colleagues are paying for accepting card payments! If you eliminate fraud (with secure EMV technology), there is money to be shared in the form of lower fees, which then again should theoretically benefit consumers in the form of lower prices. However, we have yet to hear about any plans in the US to lower merchant fees with EMV.

But no need to be overly negative.  It is a good thing that the US is finally making a move to secure card payments, which will most certainly reduce the circulation of fraudulent cards. Countries which have adopted EMV technology, which are most countries in the world, have seen a significant reduction in cardholder-present transaction fraud (note that EMV does nothing for cardholder-not-present transactions or eCommerce). European issuers look forward to the US EMV migration because the only real cardholder-present fraud they experience is US-related, because they still print a magnetic stripe on their EMV cards. But once the US moves to chip cards, they will most certainly stop doing that.

Where I grew up, card fraud is unheard of. It is more likely that one would die while taking a selfie (which would be twice as likely than being killed by a shark) than it is to suffer from card related fraud in Iceland. That is certainly not because cards aren’t a popular payment method but, rather, Iceland doesn’t do cash. Instead, consumers often use plastic to buy ice cream, coffee, or even pay a $5 cab fare. Once the infrastructure is in place, the convenience and pleasant experience eliminates the urge to ever reach for cash. And that is the Achilles heal. The US is lacking in its card payments infrastructure in general, both from a security point of view as well as processing. We know real-time payments is not a technical problem as it’s been solved in many places. Without a tech-overhaul, I think the US might continue to lag behind in payments…and checks and cash will remain relevant for a long time. But today is definitely a step in the right direction, although a baby-step by the looks of it.

Perhaps we should call it an EMV Towel Day (with thanks to Douglas Adams).

NextGenPOS to Cash registers are what PCs were to Typewriters

One could say that NextGenPOS in the form of a tablet on a counter is just replacing “low-tech” cash registers with affordable mobile devices. But that would not do it justice because NextGenPOS gives small and medium sized merchants (SMEs) enterprise-grade functionality. So in many ways, NextGenPOS acts more like an affordable version of PC-POS but with a sleek and modernised user experience.

  • NextGenPOS gives SMEs enterprise-grade functionality 

In addition to functioning as an affordable PC-POS for SMEs, NextGenPOS doesn’t have the constraints of the PC-era and has been designed specifically for mobile devices. For example, instead of software licenses and costly installation procedures, NextGenPOS providers typically offer SaaS models with its flexibility, affordability and distribution through iTunes and Google Play (sorry Mr on-site POS technician, computer automation just ate your job). Then almost all NextGenPOS systems also leverage the cloud for heavy work, back-end functionality and data storage.

  • Similar to typewriters turning into PCs, NextGenPOS is a giant leap from cash registers 

NextGenPOS is fundamentally an evolution at the point of sale. Before cash registers, there were cash drawers and abacuses. Then, cash registers were invented and they proliferated the industry. As retailers expanded and required more data, the larger ones could afford to pay for advanced PC-based systems (PC-POS) but most SMEs could not meet such an expense. Now with NextGenPOS, the SMEs can suddenly afford to get enterprise-grade functionally to help them run their business.

Eventually all SMEs will replace their cash registers with NextGenPOS and be able to utilise data to improve their management of stock, customer retention and revenue. That might take a decade to happen. Although, after NextGenPOS proliferation, some other system will inevitably be brought in to disrupt the industry. Such is the evolution of POS.

Fixed and mobile check-outs

The cash register of the future, and that future is now, is designed to be both fixed and mobile at the same time — and that is a part of the evolution of POS into #NextGenPOS.

Traditional cash registers and PC-POS systems are almost as mobile as glaciers, and onewouldn’t think seriously about carrying them around. But once you have a POS system that is primarily made up of a Wi-Fi-connected mobile device, it is silly not to take advantage of the mobility of it and that is exactly what we are beginning to see.

I have always found the whole concept of the store counter a bit bizarre. Its existence stems from earlier times of market stalls and over-the-counter sales when theft was perhaps a bigger problem than today. The problem I have with the “counter” is that it almost acts like a psychological barrier between the customer and the retailer. Once a customer is standing in front of it, he has already made that important decision to buy something and the retailer certainly does not want to change that decision. Retailers spend a lot of money and effort in location, advertising and promotions in order to attract customers to their stores, and once they have managed to do that there is another massive effort within the store itself (design, layout, product selection, customer service etc.) to convert that customer-visit into a sale — so why on earth would anyone want to build a barrier, i.e. a counter, between that dedicated customer and the sale?!

To make things even worse, retailers put an even bigger barrier on top of the counter: a big, bulky cash register or PC-POS. In some stores it is actually hard to see the cashier at all, as they are hidden behind a wall of screens and (empty) plastics. It is almost as if to say to the customer: “are you really sure you want to go ahead with this purchase?”.

Checkout counters are often relatively large, even in small convenience stores, but for whose benefit: the customer’s or the retailer’s? Bagging, de-tagging and payment is important, but there are other ways of accomplishing them. Despite customers being used to this interaction, and cashiers likely finding this more comfortable, it is not necessarily best for business.

One way to go about changing this is to have no fixed counters in the store, which is what Apple has famously deployed. Although it can sometimes be a little confusing and seemingly disorganised when their stores are busy, they probably do not experience many “walk-outs” due to long queues…as you don’t see them.

The ‘mobile POS vs fixed POS’ can work well when the processes are carefully planned. However, this is the case only in retail stores, where the customer’s basket consists of few items of high value as opposed to many items of low value (such as in a supermarket). For many merchants it might not make sense to only mobile counters, but they should consider combining both fixed and mobile checkouts.

Obtaining the ability to re-use the same system on the counter as well as on the shop floor can be very cost-effective. The technology is already available to achieve this. Yet, it is first and foremost the internal processes which must be well thought through. With NextGenPOS replacing so many traditional cash registers, I am sure we’re about to see much more of “advanced” checkout processes.

The Confusion in Payments

I usually tell new employees at Handpoint that it takes about six months to understand payments and that they shouldn’t be overwhelmed by all the acronyms and abbreviations. That is a lie actually, as it takes forever to understand payments. In fact, I have not yet met a person who fully understands payments (down to the the nitty gritty details) – I certainly don’t after over a decade in the payments business (yes, I’m that thick). Every month I’m learning something new; from the current infrastructure, ecosystem as well as new solutions coming to market and I’m fascinated about it all (sad, I know).

When people pay with their credit or debit card (or their phone) they’re not particularly interested in what happens behind the scenes, and why should they be! People just want the process to be quick and end with “Accepted” instead of “Declined”. We, payment professionals, however are fascinated about the process behind it, and it is really amazing that one can pay for goods and services anywhere in the world and instantly pull out money in any currency from ATM. It might be an old system, but it sure works.

It’s been a hobby of mine to understand both the payment ecosystem as well as the technical process behind it, in details. I’ve been asking payment professionals from within all aspects of the ecosystem to explain it to me (and I meet a lot of people in the industry), but so far I haven’t come across a single person who can explain it to me in details. Yes, of course they know the highlights but not the full details from A to Z. Scary, isn’t it!

There is so much happening in #fintech and payments today but there is a lot of confusion and miscommunication about it all. We see start-ups fail (and many more will), as they don’t understand the technology, as well as billion dollar companies blunder tons of money because they don’t understand the ecosystem. And yet, in all of the mess, there is this hope that something big, something revolutionary will come out of it. Some even (wrongly) predict the end of banks. Whether a payments geek or not, that has to be interesting enough to pay attention to; better still, to make a bet and have a stake in the game.

What is #NextGenPOS ?

We used to call it “mobile POS” because it was essentially a MOBILE Point of Sale solution. But these days mobile POS often takes the form of a tablet fixed on top of a counter – which isn’t very mobile at all but still leverages the same basic technology. What we are witnessing is another example of mobile devices acting as a swiss knife, taking over more and more functionalities, and in this case the Point of Sale.

The mobile is doing to the PC what the PC did to the mainframe” @russellbuckley

Historically Mobile POS originates from the airline industry where space constraints required a full-blown mobile retail checkout system. In the absence of mobile devices these solutions were based on bulky handheld terminals (running PalmOS and WinCE). The technology proliferated the transportation industry and was then famously adapted in a retail stores by Apple – changing the whole retail checkout process. A lot of retailers wanted to imitate Apple with a “queue busting solution” as it was called back then, but very few succeeded.

What has since happened is that smartphones have replaced handheld terminals and the old cash register is giving way to new technology, namely tablets with integrated payments (instead of stand-alone payment terminals). This new technology, easily available to merchants through iTunes and Google Play, gives merchants many more features over the traditional cash register (reports, inventory, analytics, loyalty…) and helps them run their business. In other words, POS systems using mobile devices are advancing the industry and therefore we collectively call them: “Next Generation POS”.

Next-Gen-POS = {Tablet POS, iPad POS, Mobile POS, mPOS, queue buster…}

Yesterday is never coming back and neither is yesterday’s technology (thankfully). Most industries see some technological advances every year and checkouts and payments are no exception to that rule. Cash registers brought huge benefits to merchants when they were introduced and have been greatly successful. Now we’re seeing another type of technology replacing cash registers and that wave will take many years to fully peak…at which time we’ll probably advance to something very different…the After-Next-Gen-POS!…but until then, we’ve got plenty of work to do.