Exclusive: ‘Scaling the payments stack’ – David McHenry, Silicon Valley Bank in “The Paytech Magazine”

Silicon Valley Bank UK  both lends to and banks the companies that are  building the payment tools and processes of tomorrow. Here David McHenry, who  heads up the bank’s global treasury and payments advisory team, ponders the impact of  regulation in Europe, the advent of contextual commerce and the disruptive potential of CBDC

It’s three years since the launch  of the EU’s groundbreaking revised Payment Services Directive (PSD2) and Britain’s Open Banking framework were introduced  – arguably the biggest drivers of change for the world of payments.

David McHenry from Silicon Valley Bank (SVB), which continues to invest strongly in payment systems that harness the power of improved connectivity, security and data use, is certainly of that opinion.

The California-based commercial bank has boosted headcount at its London office this year to take advantage of private equity investors’ appetite to sink funds into UK-based tech firms. In one of the most recent funding rounds, SVB provided €5million of financing for money-transfer fintech TransferGo, to develop its real-time payment platform used by foreign workers and small firms.

Despite global lockdowns, 2020 has been successful for SVB – third-quarter results delivered in October reported its net-income-for-stockholders profit measure was $441.7million, 65 per cent higher than the same quarter of 2019. Reserves set aside for bad loans were reduced as borrowers who had deferred during the COVID-19 lockdown resumed payments. Plus, its full-year outlook forecast growth for profit and loan balances, as well as circa 20 per cent deposit balance gains.

McHenry, who heads SVB’s global treasury and payments advisory team  for the UK, Europe and Israel, cites PSD2 as the spark that continues to ignite payments innovation. We spoke with him to ask what has been achieved since the legislation’s launch in January 2018, and what he predicts for the future.

The Paytech Magazine: How has open banking, and other regulations around it, been the leading cause for innovations within the payments sector?

David McHenry: PSD2 had such a wide scope – it covered everything from open banking to application programming interface (API) guidelines, to how payments were to be processed and how secure customer authentication (SCA) worked. It demanded so much that it has swallowed up financial industry investment for the past three years.

You could say some of that investment was to become minimally,  viably compliant. But PSD2 was a huge shift since it put everyone on the same footing  in terms of capabilities. Now we’re seeing what can be built on top, whether it’s the baseline account aggregation pieces that are starting to happen, or biometric secure authentication for online transactions.

Specifically, in the UK, we’ve got a great regulator in the Open Banking Implementation Entity, which did a good job of standardising the technology. It now leads the way in regulating the new breed of third-party processors, on both the information and the payment side, so that they can build solutions.

There is also some great regulation happening in Asia-Pacific, India and Australia. Conversely, open banking in the US is driven more by consortia, and payments are evolving differently there compared to the rest of the world.

TPM: It does seem that we are at the absolute tipping point of possibilities at the moment. What are some of the moon-shot elements that PSD2 can bring in?

DM: Contextual commerce is an important trend which was developing even prior to PSD2. Hopping out of a taxi without having to pull out cash or your card, or the Amazon Go convenience stores where shoppers pick up items and walk out of the door. Many of these systems are built on top of standard issuing and acquiring payment rails.

Now we’re seeing the adoption of augmented commerce [for example, where customers can ‘see’ the product in their home or on their person using a tablet or phone] giving them more information and context. I think we’ll see much more of such change.

Open banking will put more security around payments, with SCA. Biometrics will make life much easier. Then there’s the idea that we’ll have more interaction between our bank accounts and platforms, which will result in more push payments. It’ll just be one person initiating a direct payment to another via digital platforms, instead of via the mechanisms that sit behind a card.

TPM: With the world of payments becoming high-volume, how critical has it become for your customers to have a streamlined payments platform?

DM: It’s absolutely critical to have real-time capability. When standing at a till, if it takes more than a second for a transaction to go through, you notice it. When chip and PIN was implemented in the US, the additional three-to-five seconds that were added to transactions became a frustration point for consumers. So, the speed of the type of payment that you’re using is critical.

When you then look at bank-side payments, Faster Payments here in the UK – that can move money between accounts in minutes – they are pretty amazing, compared to other parts of the world that have next-day or even three-day payments. To be honest, there’s no patience left in the world for things like that.

TPM: Now that contactless payments have become the mainstay, how critical is it for banks to see transaction data with more clarity; and, with the scale increasing, what can they do with that information?

DM: Data is crucial for banks across all operations, from onboarding customers efficiently to monitoring transactions,  to client management and making  lending decisions.

Also, banking is as much about the safety and soundness of money as it is about the data in it. With real-time transactions, what once happened over days now  occurs in milliseconds. A transaction must be authenticated properly, funds must be known to be in an account before money can leave, data about the receiver must be vetted for both transaction and fraud monitoring. It is critically important for banks to scale towards this.

TPM: What does this change mean for Silicon Valley Bank’s focus?

DM: With our focus being on the innovation economy, whether it’s venture capital and private equity investors or banking startups that are scaling up, we’ve seen such a growth trajectory around the idea that the tech ecosystem is now the baseline for all of our lives.

Many of our investments are driven by the need to better digitally enable our clients, better embed payments capabilities within their platforms, and support their growth through these solutions and our expanding branch and banking network. We will continue to build our capabilities as our clients want them.

As for our experience of open banking, the first use cases were more around integrating account information with accounting or personal finance management platforms, then making lending decisions based on data from third parties. Looking ahead, progress can be made at point of sale, whether online or in person, to enable faster payment initiation.

We get excited about the idea of open finance rather than just open banking. Open banking, to me, is about minimal viable compliance, which is mainly about payment accounts and doesn’t encompass an individual’s other accounts, such as investments. If we create more account and payment types, more non banking financial data, and tie that in with payments, we’ll move to a new level – payments aren’t just about moving money, they’re about the context and information tied to them.

TPM: Finally, tell us about something truly blue sky – how will central bank digital currencies (CBDCs) change payments and enhance open banking?

DM: In recent years, banks have reformed their tech stacks to revitalise core platforms and payments architecture, so big things are now possible.  With CBDCs we don’t yet know how far change will go. Will it replace the real-time gross settlement mechanism that moves funds between banks? Or will this open up that central bank currency further afield, beyond the central bank’s balance sheet, so that it becomes a digital currency that is as good as holding a pound coin, or a US dollar, or a Mexican peso?

And how does it change our interaction if individuals can send digital currency rather than Faster Payments as we have now? Do I need that payment mechanism when I can just send you a digital currency?

So, there’s a lot that potentially can be rewritten by the use of these digital currencies at central bank level, including whether digital currency will stand alongside or replace physical, fiat currencies. And that’s a huge question that central banks have to figure out.

This article was published in The Paytech Magazine #07, Page 78-79