FinTech:

Shaping the Financial World

April 15, 2020

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Class 6: Overview
• Payment Systems
• Payment Trends
• Payment System ‘Pain Points’
• Real Time Gross Settlements
• Payment Companies Landscape
• Stable Coins, Crypto Projects & Tokenization
• Facebook Libra & China DCEP
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Class 6: Readings

• 'The Digitalization of Payments and Currency: Some Issues for

Consideration' Lael Brainard, Federal Reserve Board

• ‘The Payment Systems Space’ MIT Cryptocurrency Online Course

• '7 Key Payments Innovations in Fintech for 2020' Codete

• '9 Payment Trends That Will Shape 2020' Estelle Mense, BlueSnap
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Class 6: Study Questions
• What are the challenges and opportunities in the current payment
system architecture?
• What lessons can be drawn from Big Tech payment innovations such as
Alipay, WeChat Pay, M-Pesa, Paytm, Kakao Pay, Amazon Pay, Apple Pay, &
Google Wallet? What lessons from fintech disrupters such as Plaid,
Square, Stripe, Toast, TransferWise, Venmo, etc.? What are incumbents
such as the major banks as well as Visa, Mastercard and PayPal
responding to the changing landscape?
• Do stable value coins and tokenized assets fill real gaps in payments and
the financial markets? If so, will stable coins or tokenization take off or
just be a passing fad?
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Payment Systems
A Method to Amend and Record Entries on Ledgers for Money
Authorizing, Clearing and Recording Final Settlement

Personal Check Western Union

Telex
Thomas Jefferson Telegram
1950s – 1970s
1809 1873
5
Check and telegram are in the public domain. Telex image by ajmexico on flickr. CC BY.
 Payment Systems

Image by Richard Gendal Brown. 6

Used with permission. Source: ‘A Central Bank “Cryptocurrency”? An interesting Idea, but maybe not for the reason we think’, Richard Gendal Brown, (3/5/15)
 Modern Payment Systems

Alipay
Amazon Pay
GoPay
Kakao Pay
Paytm
Samsung Pay
Access Consumer
Digital wallets: Android Pay M-Pesa Venmo method
Apple Pay PayPal WeChat Pay 2
Phone

Consumer Payment Instrument Networks & PSPs Merchant

Visa/Mastercard/
1 Issuing Checks
Credit Card Union Pay/etc. Bank POS

Bank Debit Card

Prepaid Card
First Data/Stripe/etc.
Merchant
Payment Instruction
Others
ACH
Acquirer Web | e-
Other
commerce
Gateway
Cryptocurrency (Bitcoin)

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 Global Payment Trends

© Worldpay. All rights reserved. This content is excluded from our Creative Commons license. For more information, see https://ocw.mit.edu/help/faq-fair-use/ Source: ‘Global Payments Report 2020’, Worldpay (2/27/20)
 North America Payment Trends

© Worldpay. All rights reserved. This content is excluded from our Creative Commons license. For more information, see https://ocw.mit.edu/help/faq-fair-use/ Source: ‘Global Payments Report 2020’, Worldpay (2/27/20)
 U.S. Payment Trends

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Courtesy of the Federal Reserve and is in the public domain. Source: ‘The 2019 Federal Reserve Payments Study’, (December 2019)
 U.S. Card Payment Trends

Courtesy of the Federal Reserve and is in the public domain. 11

Note: Includes General Purposes Credit & Debit Cards Source: ‘The 2019 Federal Reserve Payments Study’ (December 2019)
Payment System ‘Pain Points’
• Chargebacks
• Complexity
• Costs
• Cross Border Payments
• Data Privacy
• Delayed Settlement
• Financial Inclusion
• Fraud
• Public Policy Compliance
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 Credit Card Transaction Breakdown

In Typical $100 Purchase

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© Bloomberg. All rights reserved. This content is excluded from our Creative Commons license. For
more information, see https://ocw.mit.edu/help/faq-fair-use/ Source: ‘Why China’s Payment Apps Give U.S. Bankers Nightmares’, Bloomberg (5/23/18)
Payments Global Revenues - 2018

© McKinsey & Company. All rights reserved. This content is excluded from our Creative Commons license.
For more information, see https://ocw.mit.edu/help/faq-fair-use/ 14

Source: ‘Global Payments Report 2019’, McKinsey (9/1/19), Revenues in Billions

Real Time Gross Settlements (RTGS)
• Early Large Value Models: Fed Wire (1970); UK CHAPS (1984); Eurozone
TARGET (2002); China CNAPS HVPS
• Operational Hours Limited
• SWIFT (Society for Worldwide Interbank Financial Telecommunications,
founded 1973) Facilitates Interbank Payment Messaging
• Real Time Retail ‘Instant’ Payment Systems (24x7x365)
• Australia NPP (2018); China IBPS (2010); Eurozone TIPS (2018); India NEFT (2019);
Japan Zengin (2018); Mexico SPEI (2015); UK FPS (2011)
• U.S. Projects
• The Clearing House: Real-Time Payment Network (2017)
• Federal Reserve: FedNow Service (announced 2019, expected 2024)
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Sources: ‘Economic impact of real-time payments’, Deloitte (July 2019) & for India – Reserve Bank of India Notification (12/6/19)
 FinTech – Payments
Big Tech

2003 2007 2007 2011 2013 2014 2014

Startup Unicorns

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© All rights reserved. This content is excluded from our Creative Commons license. For more information, see https://ocw.mit.edu/help/faq-fair-use/
© Brookings Institution. All rights reserved. This content is excluded from our Creative Commons license. For 17

more information, see https://ocw.mit.edu/help/faq-fair-use/ Source: ‘Is China’s new payment system the future?’, Aaron Klein, Brookings (6/16/19)
Facebook - Payments
• Facebook Credit (2009):
• Virtual Currency in 15 currencies,
• Terminated 2013

• Facebook Messenger payments (2015):

• P2P & Charitable Payments offered in US, UK, & France
• Terminated P2P in UK & France 2019

• WhatsApp Pay (2018)

• Pilot in India, to be Rolled Out Conditional on Data Standards
• 1 Million Accounts Pending further Approvals

• Facebook Pay (2019)

• Consolidated Ap for Facebook, Messenger, Instagram & WhatsApp
• Announced 11/12/19 18
Payment Companies Landscape
• Commercial Banks & Bank Owned Payment Networks: 1,000s of Banks (1784 – now),
The Clearing House (1853) 24 Large Banks; China UnionPay (2002) 85 founding Banks
• Card Companies: Visa (1958) $373B; Mastercard (1966) $268B; AmEx (1850) $76B;
Discover (1985) $12B
• Payment Services Providers: Fidelity National Information Services (2001) $77B; Fiserv
(1984) $67B; Global Payments (2000) $45B
• Online, Merchant & Cross Border focused: PayPal (1998) $124B; Square (2009) $26B;
Adyen (2006) $26B; FleetCor Technologies (2000) $19B; Wirecard (1999) $15B;
Western Union (1851) $8B; StoneCo (2000) $7B; Euronet (1994) $4.7B; ACI (1975)
$3.2B
• Private Companies: Stripe (2009) $35B; Paytm (2010) $10B; Klarna (2005) $5.5B; Plaid
(2013) $5.3B; Toast 2013) $4.9B; TransferWise (2010) $3.5B; Payoneer (2005) $1+B
Sources: Public Company Valuations from Bloomberg (4/10/20); Private Company
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Valuations from Forbes & Crunchbase based on latest funding or announced merger
Payment Company Recent Mergers
‘Incumbent’ Payment Service Provider 2019 / 2020 Megadeals:
• Fidelity National Information Services - Worldpay: $34B (+ $9B Debt)
• Fiserv - First Data: $22B (+ $17B Debt)
• Global Payments – Total Systems Services: $21.5B
• Worldline – Ingenico: $8.6B

API / Data Aggregator 2020 Deals:

• Visa – Plaid: $5.3B
• Sofi – Galileo: $1.2B
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Sources: Individual public announcements by Acquiring Companies

Stablecoins & Messaging App Crypto Projects

• Retail Stable Value Tokens:

• Tether, USD Coin, Paxos Standard, TrueUSD, DAI, Binance USD
• Wholesale Stable Value Token Projects:*
• Fnality (aka Utility Settlement Coin), JPM Coin (JP Morgan),
Wells Fargo (Wells Fargo Digital Cash), IBM Blockchain World
Wire
• Messaging App Token Projects:
• Facebook Libra, Telegram GRAM, LINE (Japan) Link
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* Mizuho Financial Group’s J-Coin digital money offering has similarities but does not use token technology
Payment Cryptocurrency Tokens
• Bitcoin (2009) - $128B market value

• XRP (2013) - $8.5B - for Ripple’s xRapid cross-border application

• Bitcoin Cash (2017) - $4.4B - hard fork off Bitcoin, 32MB block size
• Bitcoin SV (2018) - $3.5B – hard fork off Bitcoin Cash, 128MB block size
• Litecoin (2013) - $2.8B – Bitcoin fork, 2.5 minute block times, ASIC resistance
• Stellar (2014) - $1B - Stellar Consensus Protocol with ledger chains
• IOTA (2017) - $455M – designed for micropayments on IoT

• Privacy Coins - $2.3B total - Monero (2014), Dash (2014), Zcash (2016), etc.
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Source: Market Values from CoinMarketCap.com (4.12.20)

Tokenization Goals
Broadened Access, Enhanced Liquidity & Efficiency through:
• Extending Settlement to 24 hours by 7 days per week
• Real time Instant Settlement with Finality of Transfer
• Borderless Permissionless Censorship Resistant Exchange
• Peer to Peer and possible related Disintermediation
• Broader Investor Base
• Smart Contracts and Automation
• Fractionalization
For:
• Payments
• Payments vs. Payments (PvP)
• Payment +/or Security side of Delivery vs. Payment (DvP)
• Atomic Swaps of Value 23
Facebook Libra Design Decisions
• Promote Libra as Global Digital Currency & Payment Solution
• “The goal of the Libra Blockchain is to serve as a solid foundation
for financial services, including a new global currency, which
could meet the daily financial needs of billions of people.”
• Create Multicurrency Libra Reserve to back Libra
• Government Securities & Bank Deposits - US, Euro, UK, & Japan
• Pay No interest on Libra
• Use ETF mechanisms for Libra Issuance and Redemptions
• Issue Libra Investment Token (LIT) earning Interest on Libra Reserve
& to Promote Customer Adoption
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Facebook Libra Design Decisions
• Use Libra Blockchain for a permissioned distributed ledger
• Develop Move language so apps can run on top of network
• Set up Libra Association as Swiss non-profit to Manage Libra
Reserve and Libra Network
• Recruit 100 Large Organizations as Libra Association members
• Set up subsidiary Calibra offering services & custody tokens
• Offer digital custodial Calibra Wallet for Libra tokens
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 Libra vs. China DCEP

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© Tabul8tor. All rights reserved. This content is excluded from our Creative Commons license. For more information, see https://ocw.mit.edu/help/faq-fair-use/ Source: ‘The Digital Currency Race’, Tabul8tor (12/4/19)
MIT OpenCourseWare
https://ocw.mit.edu/

15.S08 FinTech: Shaping the Financial World

Spring 2020

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