MASTERCARD Signals
Technologies and trends shaping the future of commerce
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December 2020
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Intelligent Connections
Today’s payment transactions are measured in milliseconds. In moments quicker than the blink of an eye, we communicate a consumer’s intent, a merchant’s request and an issuer’s decision. Trust is conferred, and value is exchanged. However, like listening to a favorite podcast on double-time, speed belies the richness of the moment. It abstracts the technical grit and ingenuity that makes digital payments – even on a global scale – feel effortless and secure. We don’t see the developers coding or the AI learning, we simply tap our device and go. This abstraction is the power of the digital economy. It brings sophistication to the simple. It hides its complexity behind a veil of intuition. It circumvents distance, computation, memory and attention, leaving us to focus on the things that truly matter. In this edition of Mastercard Signals we focus on the intelligent connections moving payments and commerce into the future. We get under the hood with real-time payments. As banks around the world move to real-time settlement, how will this affect the state of business-to-business and bank-to-bank payments? We examine trends in digital currency and smart contracts. And we explore the possibilities that emerge when payments becomes invisible and commerce becomes autonomous. As we round out the end of a long and difficult year, we wish you all a healthy and happy holiday season. We will return in early 2021 with new stories, ideas and predictions for our digital future.
Maja Lapcevic SVP, Innovation Management & Marketing, Consumer Solutions
Femi Odunuga SVP, Digital Future, Consumer Solutions
01
WELCOME
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SIGNAL SHIFT: Keeping Score with Alternative Credit Solutions IN CONVERSATION WITH: Zahir Khoja REAL-TIME PAYMENTS: Moving at the Pace of Progress | From Ancient Rome to the Digital Present | Anatomy of a Real-Time Payment | The Evolving Enterprise | Bridging the Divide IN CONVERSATION WITH: David Trecker SIGNAL SHIFT: Insights and Observations MONEY 3.0: Why Programmability is the Next Leap Forward SIGNAL SHIFT: 'Tis the Season for Social Commerce OUT OF SIGHT. OUT OF MIND: Invisible Payments and Autonomous Commerce AUTHORS AND CONTRIBUTORS
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Contents
Keeping Score
SIGNAL SHIFT
Traditional credit scores are an effective tool for most forms of consumer lending. But for alternative financing providers, these long-term instruments of consumer financing might not be the perfect tool for the job. BNPL solutions face different conditions and constraints compared with traditional lenders. Regulations for these alternative lenders are considerably different from rules that govern traditional issuers of consumer credit. The target markets are different. The nature of the unsecured loans they make are more discrete in terms of their purpose and duration. Instead of traditional credit scores, BNPL platforms are using home grown credit assessments that often make use of artificial intelligence and machine learning.Rethinking how credit risk is assessed clearly helps BNPL platforms grow their loan portfolios among populations generally understood to have less developed credit histories. 87% of consumers ages 22 to 44 are interested in monthly installment plans similar to the ones offered by BNPL services. And 40% of millennials and 57% of Gen Xers have already used such services. But like Sabermetrics in baseball, these alternative assessment tools might also prove useful in our efforts to support financial inclusion. In many markets, established credit scores are inadequate or do not exist. New scoring models based on non-traditional data sources might provide a viable alternative. And though the models developed by BNPL providers might not be directly transferrable to underserved markets, the information derived from these new scoring systems could be the basis for a new ballgame.
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1. https://www.fool.com/the-ascent/research/buy-now-pay-later-statistics/
estimated market for Alternative POS Credit
$25.2 trillion
With attractive payment terms, Buy Now Pay Later (BNPL) solutions are looking to grow their presence at the POS, especially as traditional lenders tighten lending requirements in line with macroeconomic trends. But before an installment-lending provider issues a loan, it must first assess the credit worthiness of the purchaser. Here, in the decisioning process, is where BNPL solutions might ultimately be most significant.
1
In conversation with
Zahir Khoja Executive Vice President, Merchant Solutions and Partnerships
No, absolutely not. There is nothing wrong with credit cards. Rather, POS installment financing extends the base of consumers for whom lenders - including credit card issuers/financial institutions - can provide credit. In today’s world, consumers want choice while shopping and at checkout. Merchants want consumers to successfully complete their purchases and increase loyalty to them. In addition to credit/debit cards, POS financing gives all types of consumers choices, based on their ability to complete the purchase. Let’s not forget, most POS financing solutions rely on a Mastercard product for repayment, so we are part of the purchase and payment journey.
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It’s an addition – not a replacement.
Even before the 2020 economic downturn, alternative financing at the point of sale (POS) started to take off. McKinsey projected as much as 20% growth for POS installment financing. What’s going on here? Is there something wrong with the credit card?
In the moment? Does that sound like an on-demand model?
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Precisely. The larger point is alternative POS financing solutions can provide consumers, merchants and financial institutions with more choices at the point of sale. Merchants can offer more payment options to increase conversion. Lenders have more choices in how and to whom they extend credit, and consumers have more choice about how to pay for or finance purchases. The idea of installment plans is not a new concept. But what is new is the ability to provide rapid origination and decisioning services using sophisticated algorithms in the moment a consumer arrives at the point of sale.
In some sense yes. In fact, if we think about alternative POS financing solutions through that lens, we start to see how digital, technology trends may shape the future of the business. For example, 5G will dramatically accelerate our ability to pass data between the device and the cloud. Maybe that will translate into deeper, decisioning analytics on potential loans within the same time period. Machine learning is already being used in these new credit scoring models, so what other digital tools will prove useful? Open banking for example can provide a holistic view of a consumer’s accounts – including unsecured loans. That will not only help banks and other lenders make better decisions, but it also provides consumers with a more accurate dashboard for their finances.
Real-Time Payments
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GROWING UBIQUITY
In today's economy, business operates at the speed of now. Data moves between partners, on-demand and 24/7. Keeping up with the pace of progress requires money move in real time, too. That has not always been the case. "Our general policy," reads the sign at a typical bank deposit window, "is to allow you to withdraw funds deposited in your account on the first business day after the day we receive your deposit." But amid a global transition to digital commerce, automated clearinghouse (ACH) networks are picking up the pace. With expedited processing, improved data capabilities, and modern application programming interface- (API) based architectures, interbank networks are digitizing their infrastructures for the modern economy. With faster or real-time payment solutions, these institutions of commerce are stepping decisively into the digital age. Fast on the heels of this transition, banks and commercial enterprises are evolving, too. Improved visibility into the timing and nature of payments is encouraging the adoption of electronic invoicesand digital payments between buyers and sellers. Banks are redefining the markets they serve with products and innovations designed to stretch across geographic borders. The business of payments is getting faster. On your mark, get set…
Moving at the Pace of ProgresS
How fast is real-time?
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Source: FIS Flavors of Fast 2019
Real-time
Under 10 seconds
Under 30 seconds
Under 60 seconds
Over 80% of today’s modern payment exchanges clear in under 10 seconds …
66%
20%
9%
6%
Long before direct debits, wire transfers and P2P apps, the most efficient way to move money between parties was the paper check. Using a check, a payer instructs a bank to release money from an account to a designated third party, thereby eliminating the burden of exchanging hard currency. However, both participating financial institutions must actively oversee each transaction which adds controls and processes that both secure and —historically— slowed the process of getting money to the payee. From the emergence of a clearing house to today’s real-time, interbank systems the process of moving money continues to get increasingly simpler, faster, and safer. Checks have been around since the Roman Empire, replacing piles of gold and silver with an elegant slip of paper. But in those early transactions, the recipients n
Principles of Quantum Mechanics
08
In the context of history, real-time payments are a step change in the way banks move money.
From Ancient Rome to the Digital Present
REAL-TIME PAYMENTS
But in those early transactions, the recipients needed to physically present the check to the issuing financial institution for payment. Even on the fastest of horses, couriers sometimes travelled several hours, even days. In late 18th century London, a group of clerks from competing banks gathered at Five Bells Tavern on Lombard Street to conduct the business of exchanging paper checks and currency. Commiserating over mutton and ale about the inefficiencies of carrying heavy bags and missing connections with other couriers, someone hit on a simple idea, one that would revolutionize how commercial banking functions: Why not set a specified time and place to exchange checks all at once? Thus, the world’s first payments clearing house was born. Over the next 100 years, countries around the world adapted their own clearinghouses. Each adhered to a plan that worked roughly like this: Throughout the week, banks would drop off checks for money owed at the clearinghouse. There, clerks manually processed each payment. Then, at week’s end, the bankers would line up at the clearinghouse once more to collect their due and settle their debts. Each bundle of checks processed and handed out on a given day became known as a batch. Even within this choreographed structure of clearinghouses, moving money was a laborious and dangerous practice. Money still had to be physically moved over long distances. Bank customers lived with the uncertainty of when and whether their money would arrive safely. Nor was there a way to anticipate what fees or transfer rates other banks would levy.
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Innovation continued to make the system speedier and safer. Through the 20th century, increasingly stringent security measures were enacted to stave off fraud. In 1959, U.S. banks introduced the first automated processing machine, which allowed banks to save money by processing checks at a rate of 1,000 to 1,800 items per minute. In the late 60s, the UK-based BACs launched an automated clearinghouse (ACH), which was followed by the U.S. launching its first ACH system in 1972. Today, check images and other electronic payment instruments have replaced most of the paper moving through the banking system. To accommodate this digital transition, interbank networks are again transforming the way money moves with real time payments. These real-time payment systems are equipped with capabilities designed for the digital economy and built with modern architectures. They will ultimately make the process of moving money as fluid as the amber ale that once flowed from the courier’s pint glasses as they hatched a vision for the future of moving money. And, once again, innovation will change the way the world does business.
REAL-TIME PAYMENTS: From Ancient Rome to the Digital Present
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Anatomy of a Real-Time Payment
The process by which banks both agree that a transaction has occurred and record the effect of the transaction on the appropriate ledger.
CLEARING
(-$100 )
Anna’s bank
Anna’s bank records a debit for $100 on Anna’s ledger
Bart’s bank records a credit for $100 on Bart’s record/statement
Anna
Bart
SETTLEMENT
Bart’s bank
(+$100 )
The final step in a transaction, settlement is the movement of funds as determined by the record of cleared transactions.
$100
Funds are moved from Anna’s bank to Bart’s bank to finalize the transaction between the banks.
Request to send $100
In the context of modernizing interbank payments, the transformation of legacy clearing and settlement systems into real-time processing environments is central. Importantly, “real-time” payments are not always conducted in true, real-time fashion. Instead the term refers to a range of faster processing solutions that accelerate the clearing and settlement of transactions.
of organizations report making B2B payments by paper check in 2019 compared to 51% in 2016.
42%
Even before COVID-19, the acceleration of digital payment adoption was underway. From phones to fitness bands, one-click to no-click, the pace of innovation in consumer payments has run at breakneck speed. It seems every day brings a new invention, one more fantastic than the one before. While the same has not always been true in the commercial space, the emergence of real-time payments provides what many hope will be a catalyst for the digitization of commercial payments. Real-time payments offer several advantages to the enterprise that both facilitate and reward a shift to digital payments. Payments move faster creating more liquidity and delivering more insights into the flow and availability of money. Improved messaging standards allow organizations to transmit complex invoice and reconciliation data along with payment information, uniting in a single click disparate pieces of required information and approvals. And modern API-based architectures allow real time payment rails to deliver valueadded services that unlock attractive use cases and future innovation. But the question remains: is this enough? Paper checks, all but disappearing on the consumer front, are still the most prevalent form of B2B payment - more than 40% of companies still sending paper-based instruments. 45% of companies still rely on manual processes to make payments to vendors and suppliers. Though more electronic invoices are being sent than ever before, the migration to digital commercial payments has proven stubborn and slow. The fact is the diversity of commercial businesses, and the dynamics of supplier and buyer relationship that follow can obscure the benefits of shifting payment operations to digital. We end up with a collective action problem, where not all enterprises will command the expected returns of digital without a coordinated effort between both upstream and downstream partners in a supply chain. Like children daring one another to jump into the pool, many choose to remain on the sideline. However, more consumers and businesses are tilting toward digital during this pandemic, raising the question of whether the moment for a broader adoption of digital in commercial payments is finally upon us. The ability to work remotely, provide liquidity and embed resilience in supply chains have become absolutely essential. The decision to digitize is becoming a matter of survival, not mere strategy. Should this transformation continue, the benefits to organizations and the larger commercial ecosystem could be nothing short of transformational.
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--“Electronic Payments Survey Report”, Association for Financial Professionals, 2019
Real-time payments are facilitating the adoption of digital in commercial payments, creating value for businesses that automate treasury operations. It's driving transformational change across the industry.
the EVOLVING ENTERPRISE
In addition to the improving the speed with which payments are cleared and settled, real-time payment systems increase visibility for commercial entities over their cash position. Because scheduled payments clear and settle immediately, an organization’s ability to manage liquidity and funds availability may be greatly improved. This not only helps companies better manage their own financial position at any given moment, but it also promotes more efficient interactions throughout the supply chain. Better awareness of cash flow can play out in many ways. With more visibility into when free cash will be available, buyers may be positioned to pay suppliers early, thus availing themselves of early-payment discounts when they are offered. More data around receivables may help businesses obtain trade and supplier financing, especially as financial institutions and other lenders tighten credit requirements and themselves move to digital. Added transparency and the resulting increased access to capital can be especially helpful for smaller companies. Whether they are funding the next production run or adding a new pizza oven, small businesses using homegrown accounting solutions may not have the structured documentation that lenders increasingly require. Moving to solutions built on top of real-time payment systems can provide the data and insights small business need to both apply for and receive strategic capital.
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1. VISIBILITY
3. OVERLAYS
Three elements of real-time payments highlight their potential to transform commercial payments, specifically the transfer of funds between buyers and suppliers, purchasers and vendors. These three elements address the complex requirements and processes inherent to commercial payments that have, in part, held back the adoption of digital payments.
With buyer-to-supplier transactions payments, it’s much more than just the instrument used and how it is delivered. Tied to the payment are a detailed list — specific to each company and relationship — of controls and approvals, orders and invoices that must be incorporated into the payment process. In a world of disparate and sometimes siloed systems, electronically sharing this mix of payment and operational data presents costs and challenges that historically undercut the benefits of attempting to automate commercial payment relationships. To facilitate the flow of digital information, standards like ISO 20022 can provide a shared mechanism for exchange. ISO 20022, used by many, if not most real-time payment solutions, is an international framework that enables a real-time, common language for global financial communications across debtors, creditors and their financial institutions. In simpler terms, ISO 20022 allows businesses to pass multiple pieces of transactional information in addition to the payment. The result is the ability to automate or digitize many of the paper-based/paper-reliant processes required for commercial transactions. Thus, a payment can include reconciliation information that already includes the invoice number, order date, customer account number and other pieces of information requested by the supplier. information requested by the supplier.
2. STANDARDS
Overlays extend the capabilities of real-time payment networks to create business-ready applications and use cases. Like apps in an app store, overlays are built on top of the standards and API-based architectures common to many real-time payment systems. Overlays create the space to provide significant value to users of real-time payment systems by addressing the needs of its users beyond real-time clearing and settlement. Proxy databases allow parties to connect and send funds to one another using a proxy or alias (e.g., phone numbers, email addresses) instead of the recipient’s account number. Commonly used in P2P solutions, proxy databases can reduce the risk of fraud and data-entry errors by allowing buyers and suppliers to exchange financial information without sharing account numbers. Request to Pay is another overlay more directly focused on eliminating paper invoices and bills. Request to Pay removes the need for the payer to provide the payee with account information, turning what was a debit pull into a credit push. In other words, the supplier being paid is not withdrawing the money from the buyer’s account, but rather the buyer is pushing the money to the supplier. This not only simplifies the invoicing process, but it lessens the potential for fraud and error.
REAL-TIME PAYMENTS: THE EVOLVING ENTERPRISE
MORE THAN FAST
of organizations believe faster payments will have beneficial effects for their business.
60%
13
“Ardent Partners’ Accounts Payable Metrics That Matter in 2020”, Ardent Partners, February 2020
The early benefits of automating commercial payment processes are largely accrued by the enterprises that implement them. Whether in the form of increased productivity, lower costs, reduced fraud or freer cash flow, the upside is tangible and immediate. Survey data from Ardent Partners shows it takes just over eight days and costs over $10 to process a single invoice, on average. With automation, companies can process invoices up to three times faster and almost six times cheaper. In addition, digitizing invoicing and reconciliation can free an organization’s treasury professionals to focus on more important tasks like supporting customer/supplier relationships, pursuing strategic initiatives and deriving insights from newly available payment and order-processing data. As digital has transformed customer service, distribution and marketing functions, so too will it alter treasury functions. The decision to digitize the procurement and receivables functions of an organization is not necessarily made in a vacuum. Commercial payments and relationships generally favor buyers over sellers and the bigger over the smaller. The business case to automate commercial payments depends, in part, on the willingness or ability of an organization’s partners to accept or send digital payment information. However, the fact is no two enterprises are the same when it comes to payments. Organizations bring different ideas and methods to solving problems and developing processes. Histories matter. Relationships persist. And the “way we do things” often just follows for the ride. The result is enterprises develop like Charles Darwin’s finches — each suited for their environment, but far from aligned to the point of being interoperable. In the face of this variation, the pandemic is, unfortunately, providing a point of commonality. Companies have adapted to operate remotely or at lower capacity. Digital has helped maintain critical functions like order-taking, customer service and delivery. Will treasury functions follow? If so, a significant shift to digital in commercial payments has the potential to unlock transformative change. The fluidity and accessibility of data around invoices, orders and payments invites the application of artificial intelligence, Internet of Things (IoT), blockchain and other data-driven digital tools. These tools have dramatically altered the consumer landscape and might yet do the same for the commercial. Maybe, where the pandemic has driven us further apart, digital automation in commercial payments will inspire, if not bring about, increased collaboration between suppliers and buyers, and the vendors who support them.
ARE REAL-TIME PAYMENTS ENOUGH?
David Trecker Senior Vice President, B2B Payments, Commercial/B2B Solutions
In researching our article on digitizing commercial payments, we spoke about how different organizations are and how those differences create a challenge for transitioning to digital. Can you give us some more insights here?
Of course, and you’re correct it all starts with this idea that businesses are different, but we need to think even smaller than “the business” and start thinking about the teams that are trying to drive these changes within an organization — specifically, departments such as treasury, accounts payable and accounts receivable. Those teams understand the value of digital. They live the pain of manual invoice management, payment, reconciliation and cash positioning every day. The challenge is that automation often requires behavior changes from an organization’s most important partners: its customers and vendors. For small- and medium-size businesses with limited clout, that’s a lot of risk for an uncertain reward — not exactly a recipe for a compelling business case.
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That sounds like a hard problem to solve – even with what could be the catalyzing momentum of the times we live in.
And back to the business case…it gets easier to make?
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It is at the individual level, but that’s where Mastercard can play a formidable supporting role. For example, Mastercard Track Business Payment Service™ connects fragmented networks and aligns incentives to facilitate digital engagement at the ecosystem level. Enabled by a common platform for exchanging payments-related information — such as know your supplier/know your customer data, commercial terms and payment preferences — trading partners can now automate and optimize processes at a level not previously seen. That’s possible because of Mastercard’s ability to deliver — today — the power of network effects to small and medium businesses.
Yes, it does. Again, because of the network effects Mastercard brings, small and medium businesses don’t need to persuade and plead with their customers and vendors to change behaviors. Instead, they can identify mutually beneficial options. This unlocks the outcomes that drive business cases: increased electronic payment volumes, improved forecasting, automated processes — all with less risk and often at a lower overall cost. It’s a case of enabling real, sustainable “win-win” outcomes.
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Real-time Clearing, Real-time Settlement
Real-time Clearing, Deffered Settlement
Category Other real-time schemes/services (eg, ATM/card rails, near-real time) 3
Launching 2021 (Saudi Arabia, Peru, Phillipines, P27)
Internet Banking Payment System (IBPS)
Immediate Payments Service (IMPS) + UPI
Hofinet
Promptpay
Faster Payments
Zengin
NIBSS Instant Payment (NIP)
SPEI (Interbanking Electronic Payment System)
Zelle (operated by Early Warning network)
Swiss Interbank Clearing System (SIC)
0
4000
8000
12000
4
6
29
Over 5,000 institutions are connected (either directly or through intermediaries) to real-time payment systems
Live and planned real-time payment systems 2019-2021
Top 10 real-time payment systems 2019 by transaction volume (Billions)
16000
16
Mastercard Analysis
The majority of today’s real-time payment systems operate as distinct networks. Across a common platform of standards and governing regulations, they facilitate the flow of funds between institutions, helping buyers connect with sellers and consumers with their peers. They are efficient, modern digital mechanisms of exchange. However, the fabric of rules and standards weaving these networks together might also constrain their potential. Where shared regulations and common currencies support efficiency within the network, a lack of this underlying governance results in friction. In the context of inter-bank payments, this friction is often felt at the border. Take, for instance, the case of commuters who cross national borders five days a week, a common occurrence for some people in some parts of the world. When they buy gas or lunch near their office, they are potentially doing so in a currency other than that which is held in their bank account. This currency must be exchanged as part of the transaction, adding settlement costs and time to the equation. In the face of this impediment, a new, regional exchange is beginning to emerge. With the goal of serving customers in multiple countries with shared economic interests, these networks are embedding the complexity of currency exchange and multiple regulatory frameworks into a unified system. The result is an evolution from national to regional — from a network to a bridge. One such example is P27. With plans to launch in 2021, P27 will link Nordic nations to form the first regional payment system. Using a combination of both RTP and batch payment processes, its platform will connect nearly 30 million people, businesses and other organizations that split their work and home between countries in the region and conduct business accordingly. business relationships to everyday purchases during a commute, the close-knit relationship among residents of Nordic countries demands a more efficient means of exchange. The goal is to unite competing currencies and regulations that define the payment systems of Sweden, Finland and Denmark.
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Among the advantages that real-time payment provides, one of the most intriguing is its ability to add value to regional trade. As our economy grows more global, consumers and commercial enterprises are increasingly looking to banks to help manage relationships spanning immense distances and multiple currencies.
Bridging the Divide
Evidencing a trend, similar concepts are emerging elsewhere. The Association of East Asian Nations (ASEAN), which includes Indonesia, Singapore, Thailand and Vietnam, is looking into making its payment systems interoperable. The West African Economic and Monetary Union (WAEMU), composed of Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo, is also increasingly coordinating its payment networks. As is the Single European Payment Area (SEPA), an effort that consists of over 27 European countries. Regional, real-time payment systems enable more efficient transfers between institutions, benefitting the consumers and commercial enterprises that rely on them. By embedding the regulatory requirements of each participating country within the system, banks gain additional protections against fraud and illicit activities in less time and at less cost. With more visibility into the timing of cross-border trade, customers gain new insights into their supply chains and remittance payments. Also, by aligning standards and creating a point of connectivity, regionalization can facilitate competition by levelling (and elevating) the playing field, allowing innovations from one institution to scale across affiliated banks across the region. In 1914, the Panama Canal opened its gates. An engineering marvel and testament to human ingenuity, the waterway facilitated global commerce by connecting the Atlantic and Pacific oceans. Instead of long and potentially hazardous journeys around Cape Horn, ships could transport cargo faster and with less risk. On a smaller scale, regional inter-bank networks have similar potential to improve the flow of funds between international banking and trading partners within participating regions. These regionalization efforts can provide efficient mechanisms to coordinate across scheme rules, expedite cross-currency transactions and provide a fresh vantage point from which to detect and prevent fraud. In his chronicle “The Path Between the Seas,” David McCullough described the canal as “an expression of that old and noble desire to bridge the divide, to bring people together. It is a work of civilization.” While no one can reasonably equate the scale of the Panama Canal with a trend toward regionalization, the opportunity to bring people, partners and transactions closer together remains the same.
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REAL-TIME PAYMENTS: BRIDGING THE DIVIDE
CONCLUDING THOUGHTS
Insights and Observations
Data analysis is science and art. Is the glass 20% empty or 80% full? The answer often depends on the questions we ask, the data we collect and the knowledge, insights and wisdom we derive. In a retail environment increasingly built on understanding consumer data, the meme is especially poignant. In the past six months, consumer packaged goods (CPG) brands such as Pepsi and Heinz have launched direct-to-consumer shops online. With consumers spending more time in their homes and on devices, traditional CPG companies are seeking new digital shelves to fill. In addition to new sales, these digital channels are producing streams of consumer-purchase data. Simultaneously, consumer IoT continues to grow. U.S. consumers, for example, report an average of 11 connected devices in their home, including doorbells, toothbrushes and work-out equipment. Many of those devices enable direct-to-consumer sales in addition to relaying use and performance data to the manufacturer. This proximity to the end consumer provides a different perspective from the one traditionally shared through the supply chain. And yet, given the changes in consumer behavior in response to COVID, it might be fair to question the value of the knowledge and insights the new data brings. Do the observed use and buying patterns represent a new normal or a temporary detour? Will these new data points lead to wisdom or conspiracy theory? Rather than a bug, this uncertainty might instead prove to be a feature for those who focus on the process. If we are uncertain about the long-term fit of today’s curve, we can at least be certain that our controls and technology are operating as expected and built for the long term. Now is the time to test and to learn. Regardless of how our behavior evolves, the opportunity for the enterprise to connect with the consumer will only expand.
IoT and direct-to-consumer sales promise to provide new convenience for consumers and insights into consumer behavior for manufacturers. With consumer behavior in flux, how can we best make use of these new insights?
Maybe you’ve seen the meme. A series of imperfectly drawn boxes depict the nature of understanding. If data are represented as dots, knowledge is understanding how the dots connect. Insight is seeing a relationship. Wisdom is knowing the path to get there. The punchline is a scribbled picture of a purple flying unicorn over the dots labeled “Conspiracy Theory.”
Money 3.0
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In the past few years, we have witnessed an evolution of money with innovations in storage (cards), exchange (wire transfers), payments (digital), acceptance (contactless), and ledger management (cybersecurity). We have also seen the rise of mobile finance, which has turned smartphones and tablets into payment and acceptance devices that reshape commerce and peer-to-peer transactions. Another advancement is the growth of virtual currencies. Bitcoin, the first purely virtual currency, was released in 2009. For the first time, it allowed for the control of money without a central intermediary. Unlike government-issued currencies, virtual or digital currencies are operated by decentralized authorities, potentially reducing frictions in current systems, including the time and cost of settlements. Transactions live on digital ledgers accessible by all users, and a community of participants validates and confirms transfers for fractional fees in near real-time. While lower transaction fees have been a positive outcome of cryptocurrencies, scalability and security have been challenges. Other digital innovations that have recently come to market, including programmability, could help overcome those challenges and drive the next generation of finance. PROGRAMMABLE MONEY Programmable money is a framework for digital assets that turn regular transactions into smart ones using an innovation known as smart contracts. A smart contract is a self-executing software that digitally facilitates agreements among parties. The software code contains payment and other instructions that govern how digital assets operate across the network. Smart contracts control the execution of transactions and work on “if-this-then-that” logic. The rules are listed in order and are executed in an automated way, enforcing all the commitments. Consequently, they can help transfer and settle value in items such as shares, property and money, giving users more control. By design, they regulate trusted transactions and agreements between parties without the need for external enforcement mechanisms. Smart contracts differ from rules-based current API technology because the code executes automatically once a contract is deployed and is not reliant on another party to implement the instructions. Because they operate on a shared accounting ledger, smart contracts allow for tight integration of one service into another through a design principle called “composability.”
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The complexities of the pandemic have primed consumers and businesses around the world to leverage digital and virtual tools in ways we haven’t seen before. As we shift to a new normal, could emerging technologies alter the very nature of money?
$
Data
Money
PROGRAMMABLE MONEY
Composability sets up new ways to manage digital assets by including governance and voting rights, assigning ownership, or synthetically replicating real-world prices. Smart contracts rose in prominence with the 2015 launch of Ethereum, which introduced programmability to virtual currencies. Since then, innovators in the crypto space and traditional financial technology players have explored how to embed programmability into transactions. The early innovators of programmable money proposed building new systems and platforms that used a self-governing and decentralized execution model to reduce friction and cut out intermediaries. However, these kinds of systems lack the governance and institutions that can help prevent illicit transfers or reverse erroneous transactions. While they were initially thought to be disruptive to the current banking system, we’re now seeing that programmable currencies can be more robust when combined with regulations and other governance to help scale and gain broad adoption. Large tech players such as Facebook, Tencent and Mastercard are exploring digital assets within a corporate network (rather than decentralized). Banks also are increasingly running digital currency pilots, another sign of growing interest in this technology. They are exploring, with regulators, whether they can program functions such as anti-money laundering, know-your-customers, investor rights and communication into the digital asset. Hybrid solutions that combine technological advances with the right governance mechanisms will help set the stage for the broader adoption of programmable money. Programmable money has several variations. Governments are piloting Central Bank Digital Currencies (CBDCs) while other groups have pegged digital assets to a fiat currency via stablecoins. Some programmable digital assets provide transactional services that don’t necessarily include a payment, delivered via utility coins. The common thread is that programmable money offers an opportunity to create financial models that leverage smarter transactions and are especially useful in systems that tend to be expensive or complicated.
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MONEY 3.0
1. Parties’ terms of agreement are coded in the smart contract
2. An event or action triggers the execution of the contract e.g. send a donation if an exogenous event takes place, like a hurricane
3. Based on predefined terms, smart contract is auto-executed e.g. ensure donations are restricted to goups providing food and medical supplies
4. Actions such as payment and notifications are processed and recorded on the blockchain
5. Transactions are completed and settled instantly. Monies are sent directly to several relief agencies based on donar settings
SMART CONTRACTS - How they work
Programmable money lets users apply rules and embed conditions and payment “triggers” in many ways and for many circumstances. For example, if goods arrive within a set parameter, time or place, payment is made to the sender. This programming can include agreements between parties (such as supply chain terms) or automation of certain types of transactions (such as micropayments). Unlike current digital infrastructures or API platforms, the main idea here is that the programmability is within the digital asset rather than across multiple companies, tech stacks or networks. For example, structured loan deals often include several banks, each with a risk and business unit accessing information and proposing terms independently across different platforms. In these cases, programmable money can facilitate and implement the terms of the loan deal and make data systems more efficient. The potential to attach rules and conditions to money opens the door to further innovations, such as integrating regulatory and policy incentives into payments. Funds for economic relief, government grants and taxes can, through programmed
conditions, achieve significant efficiencies with improved transparency. For example, governments could issue tokens to business applicants who have certified a need for relief payments with covenants to distribute them to the employees who, in turn, could independently access their portion of the money. This could fix problems around fraud, misuse and friction that threaten government disbursement programs. In short, senders can embed considerations for concepts such as incentives, trust, identity, inclusion, and sustainability as self-executing instructions to recipients. Programmability is more than just a feature or subset of existing capabilities. It could power new economic systems that transform the basic tenets of business models in which the relationship between payer and payee is conditional rather than transactional.
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TRANSACTING WITH DIGITAL ASSETS
CryptoCurrency
Utility Coins
Hybrid Coins
Stable Coins
Controls money without central intermediary and serves as medium of exchange and stores value
Combine crypto technology with a central intermediary and governance mechanisms
Digital assets that have price stability characteristics and pegged to a fiat currency
Central Bank Digital Currency
Digital form of fiat money issued by governments
Transactional digital assets where payment is not the primary function
TYPES OF PROGRAMMABLE MONEY
One area where programmable money could play a role is in micro donations, which have become a mainstay of nonprofit fundraising as donors move from making a few large donations to many small ones. But micro donations don’t address a key consideration for donors: how their money is being spent. A potential solution is to leverage the distinctive programmability of digital money to enable “restricted-use donations.” In these cases, digital cash donations would be governed by smart contracts that only allow recipients to use donated funds on an approved list of outlays.The application of programmability eliminates friction in shifting funds to a third party before disbursing to the recipient. Some takeaways from early experiments into digital microdonations highlight the value of engaging donors through notifications and later-stage disbursements. Today, when someone rounds up a purchase to donate to charity, the engagement ends there. With programmable money, the new microdonations model could be more transparent and efficient, providing donors with more control, which creates better engagement. For consumers, programmable money could help enable micropayments, whereby pennies or fractions could be spent on niche subscriptions or targeted a la carte content. Early indicators of interest in micropayments are evident in China, where ecosystems such as WeChat provide “micro tipping,” used by about 11% of WeChat members. However, consider the mechanisms for moving money being used today by most financial institutions. They are designed for larger transactions (as recently as a decade ago, merchants discouraged credit cards for purchases under $10). Elements of programmable money could make sending such small payments frictionless and reduce servicing costs.
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EMERGING ECONOMIC MODELS
Enabling Micro Donations and Payments
Perhaps most transformative is the role programmable money could play for businesses. For example, in the logistics industry, data on the transit of goods often is tracked manually, despite the availability of new digital tools and IoT devices. Embedding supply chain requirements into payments opens new possibilities and might speed the adoption of these digital tools. Smart contracts could digitize and improve financing options such as escrow-like services and dynamic discounting. By automating complex payments, trading participants and financial institutions could increase transparency and liquidity and find new opportunities to grow their businesses. Take coffee, for example. As beans move through the supply chain, from harvesters to distributors, programmable funds could be released at each step, instantly settling payments instead of forcing companies to wait days, or even months, to receive their money. Recently, a world-leading furniture company out of Sweden settled an invoice with an Icelandic retailer, accepting payment in digital money, processed via a smart contract. Out of many benefits, this pilot creates the groundwork for simplified and improved cross-border payments. Future capabilities could also enable consumers to become active participants in the supply chain. For example, IoT data could assure consumers and businesses about sustainability practices and authenticity claims throughout the supply chain.
Could programmable money operate as a de facto Enterprise Resource Planning platform (ERP)? Today, large companies leverage ERP solutions as a digital hub for collaboration. If suppliers want to sell to a big retailer, they need to join the supplier’s network and often undergo a lengthy and expensive integration period. With programmable money’s ability facilitate interoperability, companies may find real efficiencies by automating inventory replenishment, ensuring shipments, and even managing rented warehouse spaces through conditional payments. This application of the technology could then allow for genuinely digital end-to-end supply chains.
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INCREASING TRADE EFFICIENCY
KYC
EmBEDDED RULES
CLEARING AND SETTLEMENT
PAYMENTS
Faster onboarding with automatic verification of customer information
Instructions for incentives, identity and inclusion and sustainability can be self-executing
Ease settlement calculations and automatic transfer of funds
Automate complex transactions and provide greater transparency to participants
SuPPLY CHAIN
Automated financing and flow of goods from predefined terms
Innovating FINANCIAL SERVICES
Programmable money can also help tackle income disparity. One-third of the world’s population is “unbanked,” which means 1.7 billion people do not have access to the formal financial system. In the U.S., more than 107 million people are financially vulnerable. These disparities have many causes, but a critical one is that the current banking system’s infrastructure does not have the economic incentives to service smaller accounts. Programmability can change the economics by delivering new efficiencies to reduce the costs of servicing small accounts. We’re already seeing success with pilot programs throughout Asia and Africa that focus on smartphone owners regardless of whether they have a bank account. MicroMoney, a money-lending app in Southeast Asian countries, including Myanmar, Thailand and the Philippines, provides services to help consumers build credit histories on the blockchain. Programmability could draw a more significant population into the financial system through reduced fees and improved credit access. Programmable money is in its early days. As the technologies evolve, new digital currencies or assets likely will emerge that vastly improve our current systems. We’re already seeing promising experimentations, including startups building tokens that digitize ownership shares with embedded voting rights. Large financial institutions are testing digital assets that leverage programmability to make capital markets more efficient. However, to tap into the full potential of programmable money, we’ll need a significant overhaul of our processes, technical design, and regulations to drive innovation and foster widespread adoption. Systems need to seamlessly interact with one another to promote competition, reduce fixed costs, unlock economies of scale and improve the utility of different digital assets. Governance models can also deliver new drivers of innovation in consumer protection and security, including protecting identities, mitigating system fraud, and improving trust. Programmable money can enable conditional settlements, better tracking of goods and smarter payments. New networks can integrate with data from IoT devices and benefit from the acceleration in connectivity that will come about with 5G. These innovations will lead to exponential improvements in digital experiences and better power supply chains. Given the promise of programmable money, it’s critical to explore ways to leverage future innovations in this space. And as viability and usability gain traction, it could deliver an entirely new commerce and value exchange paradigm. The future may be unwritten, but it’s likely to be programmable.
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TACKLING FINANCIAL INCLUSION
FUTURE CONSIDERATIONS
people do not have access to the formal financial system
1.7 bn
Source: Mastercard Survey 2020
Source: The World Bank
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‘Tis the Season for Social Shopping?
In the early days of the pandemic, headlines predicting the death of the shopping mall were not uncommon. With consumers practicing social distancing, stores closing to protect their employees, and Covid-19 spreading aggressively, it seemed a foregone conclusion that shopping malls would be among the hardest hit. And though recent data suggests reports of the mall’s death appear greatly exaggerated, the approach of colder weather may signal a second shift from in store shopping to digital commerce. The beneficiaries of an upswing in ecommerce are likely to be the digital equivalent to shopping malls – online marketplaces. Both pureplay marketplaces and their omnichannel competitors have seen sales increase over the past six months. But one marketplace category in particular – social commerce – may be uniquely positioned to take off, especially as consumers seek outdoor social interactions in the face of rain, snow and colder temperatures. A Harris Poll from May 2020 , found that almost 50% of US adults had increased their use of social media since the pandemic. Similarly, a Global WebIndex survey found consumers – particularly Gen Z and Millenials - were spending more time on social media since the start of the outbreak. Are we finally approaching the hockey stick moment for social commerce? With fewer physical outlets for socialising, consumers have turned to digital channels for everything from entertainment to staying in touch. As they turn to social media to check in, post and scroll, can shopping be far behind?
2015
2016
2017
2020
2019
Timeline of Social Commerce Innovations
Pinterest introduces Buyable Pins to turn consumer posted content into actionable points of commerce
Facebook launches Marketplace to connect local buyers and sellers
WeChat launches mini programs enabling ecommerce through the platform
Instagram launches in-app checkout for advertisers
Walmart bids for TikTok’s US business
When patios and parks are covered in snow, will social media become the place to meet and shop?
2018
2018 Instagram launches shoppable posts
Out of SIGHT. Out of MIND.
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Much of the innovation at checkout over the past 10 years has focused on reducing friction. With each evolution of the consumer experience, the number of steps, clicks and seconds required to complete a transaction has fallen. Now, as payment and shopping decisions fade further into the background, a new canvas for innovation is emerging. Built on a growing platform of AI interfaces, the merchant point of interaction (POI) is moving beyond frictionless to a world both invisible and autonomous. The physical wallet is replaced by the phone, which itself is replaced by the face. The fitting room is swapped for ecommerce and then by monthly subscription boxes. As the graphical unit interface changed the way we interact with early computers, removing the interface altogether will change the way we interact with the merchant POI. Counterbalanced by consumer choice and privacy controls, invisible payments and autonomous commerce free merchants and consumers to focus on what matters: the product, the experience and our connection with the world around us.
Reimagining the consumer experience with Invisible Payments and Autonomous Commerce
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Invisible payments move the physical act of payment into the background of the POI experience
Invisible payments move the physical act of payment into the background of the POI experience. Untethered from a fixed moment of time and place, merchants are free to refashion the traditional checkout steps of validating goods to be purchased, collecting consumer credentials, authenticating the consumer, and processing the transaction. For example, ride-hailing apps created what many will point to as the first notable invisible payment experience. Consumers with a card on file reserve a car, ride in the car and get out without ever exchanging money with the driver. To the consumer, it feels almost like getting away with something. It elevates the experience in a way that provides a sense of — albeit false — ownership for the consumer. The hired car becomes a chauffeur. Taking food from a grab-and-go vending display feels like raiding the fridge. And like an all-inclusive vacation, the consumer is freed from the reality of budgets and account balances to enjoy the experience for what it is.
Now you see me. Tomorrow you don’t.
Invisible Grocery
Items are “scanned” using computer vision as customer puts them in their basket
Payment preferences stored as tokenized credentials on file accessed upon entry
Sensors detect customer as they exit, triggering payment for the customer’s basket
Traditional Grocery
Enter Store
Shop
Present basket for checkout
Choose payment option
Confirm Purchase
Exit Store
of consumers expressed interest in shopping in a store using invisible payments
59%
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Set it and Forget it.
Autonomous commerce offloads decision making to the cloud
Online Apparel Shopping
Visit Site
Browse Items and add selection to cart
Initiate Checkout
Checkout with Credential on File
Receive Purchase
Recurring scheduled order
Suggested items are mailed to the customer
Autonomous Commerce "Cloud"
Order customized based on declared and learned consumer preferences
Customized Apparel Subscription Box
of consumers expressed interest in using "automatic replenishment" services
55%
Autonomous commerce offloads decision making to the cloud Autonomous commerce shifts purchase decisions to an agent acting on behalf of the consumer. Those decisions can include what to buy, when to buy it, the merchant(s) patronized, and the instruments used for payment. While this has always been possible with human assistance, it is increasingly becoming the domain of intelligent digital devices and on-demand services. If cars can drive themselves, why can’t a vehicle buy its own fuel? If irrigation systems can determine when fields need water, why can’t they also sell the crops at the peak of harvest? As our ability to harness the power of AI grows, these concepts are moving out of the lab and into commerce. In addition to automating the components of a consumer purchase journey, autonomous commerce adds intelligence to the process. At any step along the way, autonomous commerce solutions can help uncover new value for consumers and merchants. Algorithms built on consumer preferences, for example, help find that perfect sweater or keep consumers on a budget. Not only that, with each interaction the algorithm (and the AI behind it) improves. The possibilities are endless.
THE NEW POINT OF INTERACTION FRONTIER
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The majority of today’s shopping is still user-driven and highly visible to the purchaser, yet payments are trending towards a more automated and less conspicuous future.
More Invisible
More Autonomous
Subscription Shopping Services
Smart Contracts
Automated Bill Payment
Traditional eCommerce
Voice Commerce
“Grab & Go” stores
POS Payments
Ride Hailing*
*May not pertain to all ride hailing applications
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Credential on File Credential on file has been a primary enabler of frictionless commerce since Amazon introduced One-Click almost 20 years ago. More recently, a focus on securing these credentials has led to innovations in digitization and tokenization that form the core infrastructure behind payment-enabled devices, vehicles and even grab-and-go environments. In particular, the launch of Secure Remote Commerce provided an industry standardized approach to storing, securing and retrieving consumer credentials from the cloud for use in digital payments. Tokenization Tokenization is the process of replacing sensitive data, such as a payment credential, with a surrogate value called a token. It provides critical security, convenience and control elements to the digitization of consumer credentials. Tokenization is used to enable device-based payment solutions such as Apple Pay, Samsung Pay and Google Pay. The technology can also be used to secure merchant credential on file repositories and other emerging digital-use cases in the cloud. In payments, tokenization standards are set by EMVCo, which promotes interoperability and innovation. Artificial Intelligence Artificial intelligence (AI) is central to both invisible payments and autonomous commerce. Removing complexity from the user requires the product or service to do more in the background. To do this work in a precise, automated way is the role of AI. This AI infrastructure centres on technologies that can identify the user and their intent. Behavioural models for aggregate transaction patterns both keep watch for fraudulent or unexpected activity by connected devices and evaluate consumer shopping behavior to help predict the right next purchase. Natural Language Processing (NLP) Natural language processing is an AI-based technology that allows our digital devices to understand and react to the spoken and written word. Chatbots, digital assistants and even TV remotes make use of NLP to create more organic interactions between humans and devices. The result is an interface that frees the hands and eyes. Primarily focused on simple, command-based interactions today, NLP-based solutions like voice commerce will ultimately be employed for more complex situations such as noisy environments and truly conversational interactions.
Computer Vision Computer vision is another AI-based technology that converts live images and video into actionable data. From doorbells to electric cars to grab-and-go shopping experiences, computer vision allows camera-equipped devices and environments to understand the world around them. In commerce settings, computer vision allows the merchant to build and update a consumer’s cart in real time as items are taken off (and potentially returned to) the display shelf. It can be used to identify the presence of people and, when paired with biometrics, specific individuals. Over time, computer vision will be trained to pick up on the small, unconscious signals conveyed by our physical movements to assess consumer intent. For example, when faced with a product or offer, do consumers smile or express disgust?
Enablers of Invisible Payments and Autonomous Commerce
Consumer Control and Choice
Tech Savvy
Not Tech Savvy
33%
32%
31%
35%
34
26%
30%
13%
Are Consumers Ready? Even with a healthy dose of consumer choice and control, invisible payments and autonomous commerce might have hurdles to overcome with consumers.
I would go out of my way to try this out at a new store
I would be concerned about the security of my personal information
I would be concerned about the security of my payment information
I would worry about the app making mistakes and charging me for things I didn't buy
Both invisible payments and autonomous commerce free consumers from their wallets before, during and after the critical moment of payment. While this freedom provides consumers added convenience, the decision to participate and use these digital services requires a high degree of trust both in the technology and the merchant employing it. This confidence in the various tools and payment flows that invisible payments and autonomous commerce make possible is conferred and reinforced through consumer controls and consumer choice. Consumer controls are critical for digital payment. Whether they manage the nature and amount of a particular purchase or provide visibility into where a consumer’s credentials might be on file, controls provide awareness, assurances and action to consumers. Even in the earliest days of mobile adoption, banks provided mobile alerts and real-time information to help consumers manage their spending and account balances. With invisible payments and autonomous commerce, merchants too might need to contemplate how best to convey this sense of security to consumers. Related to control is the freedom of choice. Allowing consumers to choose their preferred payment instrument or their preferred merchant brands creates a fundamentally better experience for the user. Choice provides assurances and trust that the algorithms and strategic interests of the merchant or device are not at odds with the consumer. In the long-term, choice and control will lead to broader adoption, deeper engagement and fewer disputed transactions.
A New Canvas for Innovation
Amazing things can emerge when the structural elements of the world around us disappear from view. The trees, no longer obscured by telephone poles, provide renewed beauty to the neighborhood. The phone, freed from copper wire, becomes a powerful means of building financial and technological inclusion. Something similar happens when payments become invisible and commerce more autonomous. Stores rethink layouts and experiences. Devices remap a customer’s journey. Long-standing norms of commerce become malleable, inviting the expression of new ideas and experiences. We stand at the threshold of a new POI. Far beyond frictionless, commerce becomes more intelligent and payments fade to the background. These are powerful agents of reinvention, and we are only at the beginning.
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Authors
Mike Cruz Mike Friedman Rhea Kakar Simon O’Regan Tracy Rodrigues Nima Sepasy
Contributors
James Anderson Brooke Capps-Yaroni Raj Dhamodharan Benjamin Didszuweit Brooke DiNatale Brian Dobson George Evers Jeff Feuerstein Sinead Fitzgerald Hayden Harrison Jeannie Hii Vicki Hyman Zahir Khoja Shashank Kumar Amy Kover Maja Lapcevic Victor Lopes Andrew Neeson Femi Odunuga Sneha Pendse Katie Priebe Elisabeth Riedl Zeynep Selcuk Ekren Erika Smith David Trecker Thomas Veraart Liz Wishaw
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Mastercard Signals
explores the technology and trends shaping the evolution of commerce in today’s digital-first world.
For more information
on these topics or other digital topics of interest, please contact the Digital Future team at: digital.future@mastercard.com or your Mastercard account representative.
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