Innovation in Payments - How Do We Stay Ahead in The Ever Changing World of Compliance?

36 Toronto Street, Suite 1120, Toronto / 416.642.6924 / berkeleypayment.com

Innovation in PaymentsHow do we stay ahead in the

ever-changing world of compliance?

May 28th 2014Payments Compliance in Canada


Can Canada’s $4 Billion Employee Incentive Industry Boost Corporate Profits?

Dave EasonCEOBerkeley Payment Solutions

Canada’s largest provider of prepaid management services to financial institutions.


AGENDA1. Innovation as the driver of market share

2. Challenge of increasing payment compliance

3. Implications of compliance on innovation

4. Requirements and options available for ongoing payment innovation


PAYMENT INNOVATIONThe Innovator’s Dilemma

Should we invest to strengthen our position in the most profitable areas of our business? (Sustaining Innovations)

OR Should we invest to protect our least profitable and most price sensitive clients? (Disruptive Technology)

Source, Christensen and Raynor, 2003


NEW INNOVATIONS IN PAYMENTBoth sustaining and disruptive innovations are a must to gain market share.

BitcoinVISA MONEY TRANSFER

MASTERCARD ELEVATEMOBILE BANKING

GOOGLE WALLETNFC TECHNOLOGY RETAIL MOBILE “TAP & PAY”

DWOLLA

PREPAID INSURANCE

SQUARE

PAYPASS

FACEBOOK BANK

COMPLICATION


Ever increasing regulatory efforts and requirements is a new reality.The Basel I agreement of 1988 was 30 pages long; Basel II in 2004 logged in at 347; Basel III is 616

The Dodd-Frank law is estimated that the rulemaking could ultimately amount to 30,000 pages

Canadian Payments Act, Bank Act, Payments Clearing & Settlement Act, Provincial credit union acts, Bills of Exchange Act, Money Laundering and Terrorist Financing Act, United Nations Act, Special Economic Measures Act, Provincial Electronic Transactions Act, Electronic Commerce Act, Criminal Code of Canada, PIPEDA, PCI DSS

New Prepaid Payment Products Regulations went into effect May 1st 2014


Source: Cost of Compliance Survey 2013, Thomson Reuters http://accelus.thomsonreuters.com/sites/default/files/GRC00186.pdf

CHALLENGE FOR RESOURCESCompliance costs are increasing

Over 2/3 of the organizations surveyed expect compliance team budgets will increase.

http://accelus.thomsonreuters.com/sites/default/files/GRC00186.pdf




COMPLIANCE VERSUS INNOVATION

COMPLIANCE INNOVATION

Create a culture of compliance Create a culture of trial and error; Not to avoid mistakes

Strict adherence to process and policy Loose experimentation and learning

Structured systems and process for risk mitigation

Free form flow of ideas that encourages risk

Required by governments Encouraged by enterprise

Provides guidelines Creates new revenue streams

Many ways compliance is juxtaposed against successful innovation

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FINANCIAL INSTITUTION CHALLENGESVery, very challenging• Current payment business is always more profitable (today)

and requires strict adherence to compliance

• FI’s value chain is inherently tied to your current business model

• FI’s people, culture, values, systems etc. are all tied to the existing model

“My money is safe”


TYPICAL INNOVATION MISTAKES• Call for payment innovation, but then “who else is doing

this?” before committing to a new idea

• Set our business case hurdles too high

• Failure and fault are inseparable in most compliance driven organizations

– Admitting failure means taking the blame

• Apply financial measures incorrectly, or at least without understanding consequences on payment innovation


REQUIREMENTS FOR INNOVATION• Creating a learning culture and psychological safety

“shares, forgives and celebrates”

• Design experiments in small chunks so you can learn quickly without spending too much money.

• Design experiments to learn one variable at a time

• Detect failures early

“Fail often in order to succeed sooner”- IDEO

Source, McGrath 2011


INNOVATION IMPLEMENTATION1. Determine the nature of payment innovation investment

– Sustainable, Disruptive or both

2. Assess the organization’s ability to effectively embrace a culture of innovation

3. Select innovation options

– Develop in-house

– Outsource or partner with 3rd parties for innovation


IN-HOUSE INNOVATIONPros

• Potential lower overall cost • Potential to build an

ongoing culture• Greater oversight and

control

Cons

• Difficult to establish disruptive innovation as a payment incumbent• Challenges of resourcing in a

compliance culture• Challenge to hedge against all

new innovation


OUTSOURCE OR PARTNERSHIP INNOVATION

Pros

• Does not require operational costs• Cherry pick the

innovations after demonstrated success• Greater ability to adopt

disruptive technology

Cons

• Cost premium for proven payment innovation• Challenge of direct alignment

with objectives• Potential for difficulty to bring

in-house.


SUMMARY1. Building market share in payments requires increasing

attention to both innovation and compliance.

2. An organizational culture of compliance AND innovation are at odds.

3. Organizations must determine how to ensure innovation while allocating more resources and attention to compliance.

4. Organizations must decide what type of innovation to pursue and implement a strategy to remain relevant.

Business

Innovation in Payments - How Do We Stay Ahead in The Ever Changing World of Compliance?