Virtual Banking: A Guide to Innovation and Partnering


Praise for Virtual Banking

“Dan deeply understands how technology is changing the future of money, and his book couldn’t be timelier. From digital wallets to digital currencies, technology-driven innovation is reshaping how we pay, how we shop, and how we bank. Dan’s insight and expertise makes this a must-read guide to the trends shaping electronic payments, mobile commerce, and virtual banking.”
—John Donahoe, President and CEO, eBay Inc.

“Schatt has managed to capture the incredible breadth and pace of innovation in payments and offers up practical advice for harnessing it to power winning consumer finance businesses. This book is an essential guide to forming the next-generation partnerships that are required for building powerful consumer experiences.”
—Jennifer Tescher, President & CEO, CFSI

“Unfortunately, most bankers and payments professionals find the transition to the new state extremely difficult. Tons of consumer choice, frantic innovation, and completely new ways of thinking about the old problems of banking and payments. Dan puts forward a great case for collaboration with the innovators and has filled his book with detailed examples and use cases that illustrate the gap emerging between the new players and the incumbents. A great read, meticulously researched.”
—Brett King, Four-time Amazon Bestselling Author; Founder and CEO of Moven

“The financial services industry is being challenged unlike any other time in history—which is why Schatt's book is an absolute must-read for those looking for guidance on why and how to innovate. It offers an in-depth look into all factors shaping the changes banks must adapt to today and in the future.”
—Peter Aceto, President and CEO of Tangerine (formerly ING DIRECT Canada)

“An extraordinarily insightful look into the future of digital banking. Dan Schatt’s new book is a wake up call for all banks today. Platforms and cooperation—in payments and beyond—are central to their future success.”
—Laurent Desmangles, Partner and Managing Director, The Boston Consulting Group

“The world is changing faster than ever, but more importantly, client expectations are rising just as quickly. Dan Schatt does an incredible job of laying out why the financial industry needs to adapt and then lays out concrete steps on how it can do so. Practical advice and interviews from some of the best in the world at innovating in financial services is the icing on the cake.”
—Nate Wehunt, SVP and Digital Channels Head, City National Bank

“Dan has put together a thoughtful and comprehensive overview of today’s complex landscape of payments and electronic banking opportunities. Of even greater value, Dan gives practical advice on innovation and strategic partnering from an experienced insider perspective. This collection of concise and insightful real life case studies is a must read for any bank or fintech executive planning for their future success in the industry revolution already under way.”
—John Schulte, SVP/Chief Information Officer, Mercantile Bank of Michigan

“In Virtual Banking, Dan Schatt has done something I would have said was impossible: he has delivered insights that will be useful to both practitioners in the field and to theorists and visionaries; he has written a book that serves executives and technologists within financial institutions as well as entrepreneurs building solutions in the fintech space. Schatt culls lessons directly from interviews with the players on the field, as well as his own insights from PayPal and elsewhere, to create an up-to-the-minute report from the frontlines of financial services innovation.”
—Matt Harris, Managing Director, Bain Capital Ventures

DAN SCHATT is the former Head of Financial Innovations for PayPal, responsible for defining and executing on PayPal's initiatives with the financial services industry. Schatt has also been an advisor to CGAP, part of the World Bank, and an industry analyst with Celent. Prior, he worked in the Financial Institutions Group at Citigroup. He currently serves as Chief Commercial Officer for Stockpile.

Foreword xiii

Preface xv

Acknowledgments xix


Innovating through Scarcity 1

The Influence of Cloud on Innovation 3

The Influence of Smartphones 4

Big Data = Big Driver of Innovation 4

Taking a Cue from Retailing 5

The Enemy of My Enemy Is My Friend 6

Reconciling Innovation and Regulation 6

In Search of New Payment Revenue Streams 8

New Skill Sets for a New Era 9

A Road Map for This Book 9

Notes 11

CHAPTER 1 Consumer Empowerment Knocking at the Door 13

How Mobile Is Reshaping Consumer Expectations in Financial and Retail

How Mobile Is Changing Consumer Behavior 15

Mobile Is Blurring the Lines between Digital and Physical 17

Mobile Learnings from PayPal and Square 19

Mobile Commerce through Tokenization 27

The Mobile Camera--It’s Not Just for Pictures Anymore! 29

The Mobile Microphone--Offers and Payments through Soundwaves! 30

NFC’s Rebound and the Promise of Host Card Emulation 31

Apple’s Passbook 33

The Apps Phenomenon 35

The Uber-ization of Mobile 36

“Top of Wallet” to “Top of Mobile” 38

The Case of Braintree and Simple 39

The QR Code 40

What Banks Can Learn from Starbucks 41

Leveling the Playing Field with LevelUp 43

From Mobile Banking to Tablet Banking 45

Mobile Models for the Emerging Markets 47

What’s Next? More of the Same 51

Notes 52

CHAPTER 2 Social and Financial Services 55

Maintaining Relationships and Relevance through Social strategies

Digital, Data, and the Future of Banking 58

Social Media Experiences in Banking 60

Gamification 62

Personal Financial Relationship Mapping 63

Capitalizing on Social Banking 65

Moven: Delivering Banking through Social Context 66

Social Banking in Europe and Asia 70

Social Login, Sharing, and Top of Wallet 71

Peer-to-Peer Lending: Blending Social and Banking 73

Beyond the Hype: Partnering for the Future with Peer-to-Peer Lenders 74

Lending Club: A Win-Win for Banks and Their Customers 75

Takeaways for Banks 79

An Investor’s Perspective on Social Banking and the Emergence of Bitcoin 80

Message To Banks: Be a Smaller Part of a Bigger Pie 85

Notes 86

CHAPTER 3 Connected Financial Commerce 89

Location-Based Services, Mobile Commerce, and Digital Wallets

The “Local” Digital Wallet 91

The New Retail Experience 91

Retail 2.0 and Its Effect on Payments 93

Entrepreneurs, Developers, and Financial Services 95

Context Banking: The Next Step 96

Low-Energy Bluetooth, Hardware, and the Future of Commerce 97

iBeacon and EasyPay: The Future of In-Store Payments? 98

PayPal’s iBeacon: Proximity and Context 100

Google Glass for Finances 101

In Search of the Digital Wallet 102

Personal Financial Management 103

Coupons 104

Shopping Tools 104

Loyalty and Prepaid 104

Tickets and Passes 105

The Who’s Who of Digital Wallets 106

Google 107

LifeLock (formerly Lemon Wallet) 108

PayPal 109

Carriers 110

Retailers 111

Square Wallet 113

What’s Next? 113

Notes 114

CHAPTER 4 Innovating with Big Data and Open Platforms 115

Competing in a World of Unlimited Data and Storage

The Rise of Platform Services 121

Application Programming Interfaces (APIs) for Online and Mobile Commerce 122

Coping Strategies for Banks 123

PayPal’s Bold Bet: Unleashing Innovation through an Open Platform 125

App Stores for Banks: Will It Work? 133

What’s Next? 139

Notes 141

CHAPTER 5 Math-Based Currencies 143

How Bitcoin May Prove Transformational to the Financial Services Industry

Entering the Age of Context 143

Intro to Math-Based Currencies 146

Why “Math-Based Currencies”? 147

MBCs Are a Reality 147

History of Digital Currencies 148

Math-Based Currency Characteristics 148

Bitcoin: The First MBC 149

Bitcoin’s Brief History 150

Is It Bitcoin, bitcoin, or Just BTC 150

Bitcoin Is a Powerful Concept 150

How Bitcoin Works 152

Digging Bitcoin 154

Digital Push Payments 156

Counterfeiting No More 156

MBCs Enable Programmable Money 156

Completing the Bitcoin Ecosystem 157

Bitcoin Exchanges 158

Bitcoin Wallets--Where to Store Your BTC 159

Mobile Wallets 159

Cloud-Based Wallets 159

Bitcoin Hardware Wallet 160

Bitcoin Vaults 160

Trading Platforms 160

Bitcoin Use Cases in Payments 161

MBCs as Payment Rails 161

B2B Payments--The Known Counterparty 162

Bitcoin and Consumer Payments 162

Buy Me a Beer 163

E-Commerce and MBCs 163

Getting Harder: Music and Video 164

Challenges at the POS 164

Improving Bitcoin Processes 164

Improving the Bitcoin Protocol 164

Programming Bitcoin for a Special Case: Online Micropayments 166

Wallets 167

Ripple: The Second MBC 167

MBC Use Cases in Banking 168

International Remittance Rails 168

Interbank Settlement 169

Building Trust with MBCs 170

Automating Transaction Policies 171

Moving Ahead with MBCs 172

Conclusion 174


The Smart Pipe

Models that Will Survive the Next Generation The Prepaid Model 178

Prepaid Nation: Redefi ning What a Bank Can Be 179

The “Underbanked” and Opportunities for Innovation 184

Stockpile: An Example of Brokerage Innovation Through Partnering 185

MoneyGram: An Example of Innovation through Partnering 186

Innovative Ways to Expand Access--PayNearMe 189

How Innovative Banks Are Partnering for Innovation 190

The CEO-CIO Relationship Driving the Innovation of ING DIRECT Canada 190

A Whole New Era 193

How Banks Can Compete in the Future 194

Three Imperatives to Partner for Innovation 196

A Venture Capitalist’s Look at the Future of Banking 198

Technology as an Enabler and Partner 205

What the Next 50 Years Might Hold 206

Digital 207

Relationship Management 207

Platform and Identity Friendly 208

The Future Bank Bundle: Platform-Relationship-Utility 208

Notes 209

About the Author 211

Index 213