Banking – Core Dump

Blockchain – What is Permissioned vs Permissionless?

If you have been following distributed ledger technologies (Blockchain), you would see the term permissioned blockchain being thrown around. What is the core difference between a permissioned vs. a permissionless blockchain?

A permissioned blockchain restricts the actors who can contribute to the consensus of the system state. In a permissioned blockchain, only a restricted set of users have the rights to validate the block transactions. A permissioned blockchain may also restrict access to approved actors who can create smart contracts.

Permissionless blockchain is contrary to what you read above – Here anyone can join the network, participate in the process of block verification to create consensus and also create smart contracts. A good example of permissionless blockchain is the Bitcoin and Ethereum blockchains, where any user can join the network and start mining.

Now you may wonder what the benefits and disadvantages of each approach are? In a permissionless world, you do not have to prove your identity to the ledger. As long as you are willing to commit processing power to be part of the network and extending the blockchain, you are allowed to play. Any miner who is playing the game by the rule may be able to solve the hash puzzle and verify the block of transactions to win the mining reward (Higher the mining power, better the chances of winning the mining reward).

In the permissioned blockchain world, you need to be an approved actor in the system to participate in growing the chain as well as building consensus. Many of the blockchain consortiums that build private blockchains for financial institutions and other enterprises follow this model.

One other critical difference between these two is the underlying mining model – permissionless blockchains use Proof of Work(PoW) mining where hashing power is offered to build trust. As long as 51% of the nodes are honest players, network consensus is reached. (Read about 51% attack here). While Bitcoin uses PoW mining, Ethereum is proposing to use a Proof of Stake model (PoS) for reaching consensus. Proof of stake mining asks users to prove ownership of a certain amount of currency (their “stake” in the currency). Instead of buying computers and electricity for mining in a PoW system, a PoS systems uses the capital to acquire the coins/tokens that allow you to validate transactions.

Permissioned blockchains do not have to use the computing power based mining to reach a consensus since all of the actors are known; They end up using consensus algorithms like RAFT or Paxos. There are also other PBFT algorithms that can be used to reach consensus without PoW mining.

Let us look at the topic of enterprise blockchains. Almost all of these piloted blockchains these days are permissioned. There are many reasons why this is the case:

Privacy – using a permissioned blockchain allows only actors who have rights to view the transactions. A permissionless blockchain is ideal as a shared database where everyone can read everything, but no single user controls who can write. Imagine you are a large bank who uses a shared ledger with a list of other banking partners within a consortium – you do not want the volume of your transactions to be visible to your competitors.
Scalability – A Permissioned blockchain can build a simplified Proof of Stake model to establish consensus; this prevents the proof of work by burning computational cycles. The ultimate result is scalability compared to a public blockchain network like Bitcoin. (See BigChainDB).
Fine Grained Access Control – A Permissioned blockchain allows restricted access to the data within the ledger (See the design model underlying R3CEV’s Corda)

I want to highlight one of the most famous interviews by Bitcoin guru Andreas Antonopoulos – Sewer Rat and the Bubble Boy. When asked about “How are enterprise/private blockchains different from bitcoin’s blockchain?”, Andreas responded:

“The banks and the corporations say, “Oh, bitcoin’s awesome. We want that. Only without the open, decentralized, peer-to-peer, borderless, permissionless part. Could we instead have a closed, controlled, tame, identity-laden permission version of that please?”

It is an interesting argument where Andreas compares Bitcoin network to the Internet and the private blockchains as the secure intranet within enterprises. He compares them to the Sewer Rat and the Bubble Boy:

Bitcoin is a hardened platform because its security is tested on an everyday basis.

“Bitcoin is a sewer rat. It’s missing a leg. Its snout was badly mangled in an accident in last year. It’s not allergic to anything. In fact, it’s probably got a couple of strains of bubonic plague on it which it treats like a common cold. You have a system that is antifragile and dynamic and robust.”

Does this mean that the enterprise blockchains are the bubble boy?

“let’s take bitcoin, cut off its beard, take away its piercings, put it in a suit, call it blockchain, and present it to the board.” It’s safe. It’s got borders. We can apply the same regulations. We can put barriers to entry and create an anti-competitive environment to control who has access. It will be more efficient than our existing banking system.

Eventually, successful, vibrant, innovative companies are the ones that turn their IT infrastructure inside out. In the future of finance, successful, vibrant, and innovative banks are the ones that turn their infrastructure inside out and make it part of an open, borderless financial system that serves the other 6 billion, that serves all the people who have been excluded from finance.”

I for one cannot wait to see how this whole debate will shape up the future of finance. The advent of bitcoin and blockchain and DLT technologies is a pivotal moment in the history of computing and technology. It will change the way of how we build systems of the future.

You can watch the full-text interview with Andreas here and the video of his talk here.

And the Fintech Country of the year award goes to…

If you are not following what is happening in India in the last few months, you will need to wake up and take a look. The demonetization effort launched by the Indian government has shaken this cash based economy to the core.

While everyday folks suffered a lot with trouble in exchanging the 500 and 1000 Rupee notes for the newer 2000 or older denominations, the mobile wallet scene in India saw a sudden interest and growth which was a fortunate side effect.

Companies like PayTM and MobiKwik have seen their user and transaction volumes skyrocket in the past few months. Here is a link to the Paytm growth numbers for their year ending 2016 which is crazy!

As a payments industry observer I find this growth fascinating. I can’t wait for the time when Apple would release its ApplePay numbers in open like this!

The folks in Daily Fintech have done a fantastic job in presenting the case of why India is the Fintech country to watch here in this article. Go check it out!

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Digital Delight – How are you moved?

index-mobile 2007 was a watershed moment in technology. The iPhone redefined the concept of personal computing and the world as we knew it was never the same. In just a decade, we have seen the proliferation of smart devices in every aspects of our life. We take for granted the various conveniences offered by our smart phones.

However too much of a good thing can also create fatigue. Our smartphones are cluttered with apps which we download and use once or twice and never revisit again. Like a kid in a candy store, we hoard on apps and eventually get tired of it and settle on a few which truly make your everyday life easy. If you start filtering apps with this lens, I bet most folks don’t use any more than 10 to 15 apps in a repeating basis.

Apple and Google haven’t really done much to help solve this hoarding issue of the users. I have always thought a neat feature in an operating system level would be is to notify the user of an app dormancy – if I haven’t touched a thing in 3+ months, is there any possibility I would ever use it again? Recommend a list of these apps which I can get rid of and keep my sanity!

At the end of the the day, the few of the 10 to 15 apps we use may not be the best of the best but they may serve a utility which we cannot live without. A good example would be apps published by your banking and credit card providers. I counted a total of 10 apps in my phone representing my banking, credit card and investment/retirement account providers.

A fellow Fintech Mafia member Alex Jimenez mentioned the other day that most of the mobile banking apps are online banking shoved into a small screen. I tend to agree with his assessment. In a race to keep the mobile apps in feature parity, most financial institutions are in a rush to port the kitchen sink into their mobile apps. While I appreciate the swiss army knife of a mobile banking app, we really don’t need 48 features in a form factor meant to engage you for less than a few minutes to take care of quick and important banking transactions.

A mobile banking product manager’s wish is to figure out what makes the customer tick. Everyone wants to build the next Uber of the banking service. However, to get the formula right to digitally delight a customer is not an easy task.

What is Digital Delight you ask?

Digital Delight – if an online or a mobile product/service creates a pleasurable moment that makes an experience just a little more fun.

How can we can introduce this digital delight as a product designer? Not all of the apps can be digitally delightful as Monument Valley the game (which btw still blows my mind!). Sometimes the opportunity lies in taking the most mundane process workflow and integrating that into an informative notification that can make a huge difference.

Case in point – Delta launched a new redesigned app with a feature to track the status of your checked in bag.

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(Image Credit – Delta)

From the moment the baggage gets tagged into the system, the Fly Delta app starts tracking the baggage in transit. You get notifications that your luggage has been loaded into your plane. It allows you to see where your bags are at any point in time even using a satellite map!

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(Image Credit – Delta)

I want to send kudos to the Delta team for making an useful feature like this part of their app update. This is certainly one of those things where I was delighted to see in action. A nice video of this feature is available here.

What other apps surprise/delight you in this fashion? Share them in the feedback section below. As I see digital delights in the wild I will make sure I share them as well.

Happy New Year 2017!

Paypal needs to leave 1998 and move on to 2015.

I rarely use PayPal. The only times I use PayPal is to buy from Internet merchants who I have never dealt with before. I never use their money movement feature. That being said, a couple of months ago I decided to add a new bank account to PayPal.

A typical way to setup a new bank account for ACH is utilizing the trial deposit method of account verification. With this method, the entity which likes to make the ACH linked setup, sends two micro trial deposits usually less than a dollar to the bank account and asks you to verify this amount. This process takes typically a day or two due to the underlying limitation of the ACH technology which uses batch files in this day and age to settle transactions.

Recently a newer way to verify bank information has been floating around – this is called Instant Verification where the entity (like Paypal) utilizes the online banking login information to confirm if you really are the owner of the account you are trying to link. I have used this method in a few places and 99% of the time, unless you are trying to link to one of the big banks, this never works. (In which case I fallback to the trial deposit method).

So when I set up a new funding bank account with PayPal using this new Instant Verification method, I was surprised to see it was able to connect to a small local credit union account. However I realized a few months later, instead of linking the checking account, PayPal ended up linking the savings account. (Disclaimer: I am not sure who screwed up here, PayPal or the aggregator they use or my credit union’s core system).

During holiday shopping season I used Paypal a little more than normal. This ended up deducting from my savings account (which didn’t have much balance on the first place since this bank account is purely used for everyday spend).

At one point, the savings account over drafted and PayPal hit me with a $20 fee for the failed ACH transaction (even though I have a backup credit card setup within Paypal to fallback in the event of ACH failure.

Transaction from my bank on 12/23:

Not wanting to deal with PayPal’s customer service, I decided to remove this bank account from PayPal and just leave it only with a credit card as funding source. When I try removing the bank account, I get an error message that “You have a pending transaction – you cannot remove this bank account”.

I give PayPal a full 5 day window and try removing this account and I got the same error message again. To add insult to injury, I can’t seem to locate the $20 fee or the Pending transaction within PayPal Account Activity Section.

Here is PayPal’s account history where you can’t see the $20 fee or a Pending transaction:

I even tried the Ugly Sister version (Classic Site) of PayPal to see if this Pending Transaction and hidden fee are visible – no luck.

I can’t believe PayPal, a massive platform with so many customers would suck so bad on User Experience. I wrote to PayPal Customer Service, lets see what that response would look like 🙂

Update 1 on Jan 1, 2015.

PayPal sent me a generic email about how to add and remove bank accounts when I specifically asked them to remove a bank account. Auto Responders are not cool – especially when you deal with customer’s money.

I tried moving some money from the PayPal account to my bank account. It seems like the transaction went through but this is the confirmation screen I got after the transaction. I got an error message to check my card details followed by a big green check mark possibly indicating that the money transfer was initiated. What does this even mean?

Screenshot:

To facilitate this move, I had to increase my monthly transfer limit. PayPal cleverly suggests that we add another credit or debit card to do this. I added a new card to increase my limit. PayPal charged me an amount of $1.95 to validate if the card really belongs to me. In the transaction memo they embed a 4 digit code which needs to be used to validate that the credit card belongs to me.

Once I finished adding the card, I got a realtime mobile SMS alert from my FI and I added the 4 digit code to confirm that the card was mine. After that I was able to move the money from PayPal to the bank account. However, when I viewed the account register again, instead of seeing a credit and a debit for the $1.95 which PayPal posted, I see two credits to my account. SMH.

Does this company even do any Quality Assurance Testing on the code they push to production?!?!

Clash of the Titans

Today I was in a day long meeting and did not have a chance to follow the Fintech activities in Twitter. However, this shaped to be one of the interesting days where two Fintech friends who I respect decided to dish it out on the Future model of Banking.

My good friend Bradley Leimer did an excellent coverage on this issue with quotes and links from American Banker’s original article followed by Ron Shevlin’s commentary which was followed by a rebuttal from Jeanine Skowronksi.

I have to say I am very much in agreement with Leimer’s analysis. However, I still personally feel strong about some of the points Ron made and some which Jeanine did.

The way we see olden days of banking are changing. It is like getting into an airplane and expecting a three course meal. (Maybe in business class you still get it, but I fly coach). Its good when you get upgraded and get a taste of this excellent customer service. However, due to the nature of how banking is changing and evolving, the good old days of banking as some might reminisce may be a thing of the past.

Like every other person out there, I would like to be treated well by a customer service associate. Almost all banks provide decent customer service when you walk into a branch. Question here really is will this old fashioned human interaction be replaced with automated servicing tools.

Most folks are starting to agree that a service interaction which can be simplified like depositing a check can be easily fit into a self service channel which customers seem to adopt and like since it saves them time whereas they are more inclined to use the branch for complex financial transactions.

Not to beat this to pulp, I think the original bankthink article showed one view point of a specific customer journey of her banking expectation. Ron was correct to point that it is an outlier scenario which may not jibe well with general populace. At the same time, I also get Jeanine’s point that there are still a whole lot of customers who place so much value in human interaction and walking into a branch to get their financial needs serviced.

Is the glass half full or half empty ? Depends on how you see it 🙂

PFM – A mystical rainbow-colored magic Unicorn?

Personal Financial Management (PFM) is probably the most misunderstood acronym in Fintech (next to NFC). A fun exercise is to ask what PFM means to a banker, an analyst or a Fintech consultant. You will be surprised at the variety of answers you get from them. After following PFM for the last three years, my opinion is this – PFM is a mystical rainbow-colored magic Unicorn which is out there – but no one has seen it yet. 🙂

Now lets flip the question and ask the same to Joe or Jane, a consumer on the street. There is a good chance that you would get a blank stare at the mention of the acronym. Since we are not totally clear what PFM means, let us ask some questions to clarify this:

Do you budget your finances? If yes, do you use tools like Quicken?
Do you use an online aggregation services like Mint.com to see all your finances in one place?
Do you monitor your income and categorize your expenses to track spend?
Do you set financial goals and follow through it with a help of a tool?
Do you have any tool/service which helps you in planning to make the right financial decision when it comes to life events? (Lets not consider your CPA here).

If the answer from Joe or Jane is yes, then they have been exposed to a Personal Financial Management(PFM) tool or service is some shape or form. The real question now is how valuable do they find this? Is there one tool or solution which manages to answer all of the above questions without making any compromises?

Problems with existing PFM solutions:

PFM industry today comes in two flavors – direct to consumer and white labeled solutions offered by Financial Institutions. Some players in the direct to consumer market are the likes of Quicken, Mint.com, Personal Capital etc. The white labeled solutions players include Yodlee, Intuit (parent company of Quicken), MoneyDesktop, Meniga and Strands to name a few. To my knowledge I have seen consumers more exposed to likes of Quicken and Mint since it gives them direct control of managing their financial lives . The white label solutions do have a stigma that you are locking yourself with the FI which provides them. Some consumers question that approach and prefer not to go that route (What if I have to switch my bank? Do I have to set up all of my accounts again with a new bank?)

FIs would love to have their customers use the white labeled solution as this gives them a nice 360 degree view of the customers finances and what their wallet share is. Some of the FIs also use this to promote their products to these customers based on this aggregated view.

However, the big challenge in this approach is PFM has always been relegated to the role of a second class citizen within the online banking experience (A tab within online banking instead of being the primary landing page). In my opinion, this severely hurts adoption. Due to the nature of the way these white label solutions work , there is definitely some lag (at least a day) in getting the most current information populated within the PFM tab. I have always argued that this is a bad idea and PFM should “be” the online banking experience. Moven has taken this approach and integrated this from the get go on their banking user experience.

Apart from the fact that PFM gets a secondary tab, many FIs come short at providing good PFM integration into their mobile apps. Jim Bruene from Net Banker writes that Mint is the only Pure PFM Player which provides basic PFM functionality addressing the questions I listed above. Here some issues with the Pure PFM categorization:

1. Mobile Apps are a great way to have users start using PFM. If you hedge your bets that apps are the holy grail for PFM adoption, then I implore you to look at budgeting and other financial applications of the past (Microsoft Money anyone?). Apps are just a modality to consume insights about your financial behavior. Like any other technology, they will find their natural demise. PFM should be focused on data of consumer’s financial behavior and the insights you can derive from it agnostic to the delivery mechanism.

2. Even a Pure Player like Mint does a less than impressive job when it comes to basic functionality like expense categorization. I have a hard time understanding with all the machine learning, neural networks and intelligent computing available out there, we are still faced with tools struggling to categorize our spending the right way. If Siri and Google Now can interpret our voice and translate them to text (accounting for various languages and accents), isn’t about time that we expect an expense categorization system which works and improves over time?

3. Analyzing overall financial health – Ron Shevlin calls this out his blog where the basics like budgeting, expense categorization and goals will only get you to a certain extent. The real value of PFM comes in understanding your spending behavior over the long-term and be able to predict your financial future. Allow me to illustrate – an ideal PFM should have the capability to not just look at your sliding window of income and expense over a limited time period – It should be able to look at this from the point when you started a real job over multiple years. A persons financial health is not just determined by their credit score or current balance but a holistic view of their savings, earnings, future earning potential and other assets in the mix.

4. Imagine if a PFM can look at your income since you started working and the actual spend and savings you did over the period of time, it should be able to make a pretty good guess about what kind of financial personality you have and provide insights based on that knowledge. Projecting this further, the PFM should be able to tell when you can retire based on your retirement goals. There are PFMs out there which try to do this, but fall short in delivering it. A wealth of information is now available out there – this include the performance of your investment and retirement accounts, your savings, your asset values (depreciating vs appreciating) and the overall earning potential.

5. Here is where we start to move towards the grey area of financial modeling which can go boom or bust depending upon your assumptions. A well designed and thought out PFM should be able to interact with the user and make course corrections to reflect any changes to your financial behavior due to unforeseen events (like losing your job, divorce etc). I tried using the goals feature in Mint. Even with a master’s degree, I cannot figure out how this works. Call me dumb but if I am kept in the dark of how Mint figured out how much I should save for emergency fund or for retirement without an explanation, I am reluctant to trust that recommendation.

PFM re-imagined:

What would it take to capture consumer financial history over the lifetime? I am looking at the most unlikely place here for inspiration – Healthcare. A person’s health record over time is a trackable collection of data. Microsoft HealthVault tries to solve this problem by allowing an individual or a family to store their health records. Why can’t a PFM solution try to do the same? If a person’s financial interactions can be shared and stored in a vault like system, that would be a treasure trove for PFM analysis. Credit bureaus have a credit file which shows your credit cards/lines and loans but don’t have any information about your other assets or deposits/savings. As newer tools, technologies and players come into the market, dealing with a consumers financial DNA is a big data problem which is begging to be solved.

Will OFX be a standard way to solve this issue?

Maybe. Looking at OFX specs, it seems to me that it is purely conceived from the notion of opening up and solving data interchange issues between FIs. It doesn’t seem to address the issue from an individual’s perspective. Maybe its time the Yodlees, MoneyDesktops, Geezeos and Intuits of the world come up with an open PFXML format to store this unified customer financial data. Ideally a customer should have an option to port their financial history from the vault of one PFM provider to the other similar to transferring our health records. A HIPAA level standard to exchange this information in a secure fashion should also be in place.

Closing thoughts

Most of the PFM solutions today provide some help in managing financial lives of their users. They are very good at solving some of the issues and not generic enough to be adopted for all our needs. What is the point in having Mint to look at bank accounts/credit cards/loans, use Credit Karma to track credit scores and Sig Fig to monitor my investments? The more tools I need to keep track of various aspects of my financial behavior, the lesser I am inclined and disciplined to stick to the financial resolutions I make.

An ideal PFM should be able to provide the following advice automagically:

1. Based on balances on the asset mix, provide advice on how to rebalance portfolio based on age. Many people think they have a balanced portfolio but end up buying mutual funds and stocks in the same category which skews diversification.

2. Provide advice on optimal number of credit products to own. Display the ratio of credit balance to overall credit limit for the individual to show what a healthy borrowing limit is and when the user is breaching this limit. (Stop nagging about how much they spent on coffee, instead provide more actionable insights).

3. If the user ends up carrying over balance in a card and has enough money in savings to pay if off, notify them. (Like Suze Orman advice in real-time).

4. If a user has a mortgage with a higher interest rate, advise them of available lower rates and refinancing options based on current market conditions.

5. If a customer has a loan and enough savings and disposable income, display the interest they can save by prepaying the loan.

6. Provide financial projections and advise of how to save for college education and how small savings over a period of time will grow when junior is old enough to get into ivy league.

7. Analyze cash flow of user income and expenses and advise how much they can afford to save.

8. Provide ways to promote healthy savings behavior where parts of direct deposits are funneled into named target accounts like “Down payment for Next Home”, “Pay off Mortgage”, “Wedding at Mexico”, “College Fund” etc. Saved Plus allows you to impulsively save when you spend which I think is a neat way to promote healthy savings behavior.

9. When a user wants to spend money on binge purchases, show how that would affect their other savings goals in the long run. (MoneyDesktop has implemented this feature called “Guide Me” in a fantastic way – Video here).

FIs have a great opportunity to win over their customer base by providing relevant money management advice as part of their core offering – After all, that is the primary reason why someone decides to bank with them. Recognizing this and using this to win over customers is a must in the long run to stay in business. PFM players have the great opportunity of redefining money management and taking over the role of next generation of Online Banking.