Matt Wilcox Pro

The digital age has not rolled forth without casualties. Type-writers, maps, encyclopedias, calculators, film cameras, digital cameras, camcorders, cash registers, books, newspapers, music CDs, and more are found among the metamorphosed, endangered, severely wounded, and just plain gone.

You will doubtless agree that morphing beats going the way of the typewriter. The good news for banks is that morphing in a digital environment represents more than survival. It represents exciting opportunities to prosper in newer and bigger ways.

If a building with a teller line, offices, an ATM and a drive-up is the caterpillar, then the butterfly is a device about the size of a deck of cards, except way thinner, and it rides around in purses and pockets. Some banks are now succeeding as butterflies only, but it doesn’t go both ways: No bank can remain a caterpillar and expect to be around much longer.

Change is never convenient, but this time the benefits outweigh

Share of wallet trends steadily up among digital banking clients. A study by Fiserv showed share of wallet for digital clients compared with branch-only clients at about two-to-one. And that correlated with increased longevity: Bank and credit union branch-only clients dropped off at about twice and thrice, respectively, the rate of mobile banking members.

I need hardly point out (but will anyway) that increased share-of-wallet makes clients less likely to dump you for a competitor. Hopefully that’s due to meeting demand with digital services; but on the more banal side, it can be due to the fact that moving accounts, already a pain, becomes a royal pain when clients also have to install, set up, and learn new apps. “It’s a pain to leave” isn’t quite the same as “my bank has won my affection forever,” but it’s nothing to rue, either.

Longevity aside, you’d hope that greater digital share would correlate with a rise in fee revenue, and that is indeed the case. The above-referenced study showed that mobile users generated 72 percent higher revenues than branch-only customers. Fee interchange fee revenue trended up, too, thanks to a positive correlation between mobile banking use, debit and credit card point-of-sale transactions, ATM use, and ACH transactions.

Meanwhile, apps like Zelle and Popmoney® present new opportunities for banks to generate fee revenue. These apps and others like them come with in-place fees as the norm, and, so far, clients haven’t rebelled. This can help compensate for and may someday overtake market forces making it difficult for banks to charge for bill pay.

I could go on about the growth and revenue opportunities that morphing with the times promise, over and above not ending up on the Digital Age Casualties List. Come to think of it, I have gone on about it, here, here, and here. More than a means of survival, this is a metamorphosis that looks to be as good for banks as it is for bank clients.

I’ll end on a prediction: I bet that soon the financial services industry will talk less about “share of wallet” and more about “digital share.”

The One Device: The Secret History of the iPhone Brian Merchant. New York: Little, Brown, 2017

NOW AND THEN along comes an innovation that sends the future careening down a path no one anticipated. Gutenberg’s movable type led to education and human rights advances and correlates with diminishing wars between major powers. Ford’s mass-produced, affordable automobile changed the landscape and the economy by making possible much that we now take for granted, such as motels, gas stations, paved roads, highways, neighborhood shopping centers, a freeway system, the tire industry, and suburban living. Farnsworth’s newfangled image dissector led to billion dollar industries from TV manufacturing to broadcast and cable networks to Netflix, and helped reshape societies by bringing world events into living rooms. 

iPhone could well claim the title of most-recent future-changer. Smartphones based on its design have attained such ubiquity that it’s a little startling to remember that 2017 marks only its ten-year anniversary. Fittingly and certainly not coincidentally, author Brain Merchant’s The One Device: The Secret History of the iPhone has been recently published to no shortage of positive reviews. Why am I offering one more ? I wanted to take a look from the vantage of the payments industry. 

I was prepared for the book to test my stamina as a reader. One does not expect to find a page-turner in the biography of a device. You cannot imagine how pleased—and relieved—I was to discover that Merchant has done, if not the impossible, the highly improbable. The One Device is painstakingly thorough, intelligently organized, and, incredibly, a compelling read. 

Steve Jobs introduced the iPhone at an Apple press conference in January of 2007. Its design preemptively defined the smartphone, forcing Google to scrap the design it was ready to bring to market and return to the drawing board.

Though AOS devices would eventually lead smartphone sales, iPhone set a standard that revolutionized, usurped, and in some cases obviated myriad products and services. Collateral damage in iPhone’s wake include landlines, calculators, cameras, printed maps, publishing, education, communication, news reporting, compasses, social interaction, election campaigns, tape recorders, and, of course, banking. 

Merchant loses no time dispelling the Lone Inventor Myth as it pertains to Steve Jobs. It was not Jobs but a clandestine group of Apple rogues who first toyed with the idea of a touchscreen device. They dubbed the project ENRI, for “Explore New Rich Interactions,” and kept it hidden from fellow employees—primarily to keep it hidden from Jobs. Depending on his mood, Jobs was known to dismiss ideas, even good ones, with a wave of the hand. Jobs in fact did dismiss ENRI with a wave of the hand when the team finally summoned the courage to show him a crude prototype. He reconsidered after a few days. At that point, in classic Orwellian fashion, it became a “fact” that a touchscreen device had been Jobs’s vision all along. Jobs truly does deserve credit, however, for later deciding that Apple’s first touchscreen product would not be a tablet but a phone. 

At and after iPhone’s launch, Jobs failed to foresee what would ultimately transform it into Apple’s crowning cash cow. He emphatically refused to allow third party apps, which he felt would sully his device. Besides, he insisted, iPhone’s “killer app” was its phone function. Market forces led Jobs to capitulate, and none too soon. “The iPhone was almost a failure when it first launched,” Merchant quotes Brett Bilbrey, now-retired head of Apple’s Technology Advancement Group. “When the iPhone was launched its sales were dismal.” Yet last year, observes Merchant, “… there were 7.4 billion cell phone subscribers in a world of 7.3 billion people.” 

What made the difference was the decision to open the app door to third party developers. The decision did more than save Apple and iPhone’s bacon. It launched a mega-industry. The Apple Store now markets over two million apps. Of those, 85 percent are games, which in 2015 accounted for $35 billion in revenue. Merchant shamelessly, in fact, almost gleefully devotes three pages to iFart as a leading indicator of third-party app potential, the digital whoopee cushion netting its developer a half-million dollars within weeks. 

As for iPhone’s killer app being its phone function, the market would soon set Jobs straight on that one, too. “If you fit the profile of the average user,” Merchant quotes technology analyst and Apple expert Horace Dediu referring to the iPhone, “then you are using it to check and post on social media, consumer entertainment, and as a navigation device, in that order.” 

Merchant also ably dispatches the “Apple invented it all” myth. Touchscreen technology began in 1960. Accelerometer technology goes back to the 1920s. For that matter, the iPhone was not the first smartphone. That honor goes to Simon, an IBM device invented by Frank Canova Jr. in 1993, which didn’t take hold. 

Merchant weaves a compelling tale, but from the perspective of a digital payments junkie The One Device comes up short. Merchant makes no mention of the revolution iPhone catalyzed in the financial services industry. Digital banking all but obviates physical banking for a consistently growing number of small businesses and consumers, especially Millennials and younger. (Fiserv researches and reports on the topic on a quarterly basis. Please refer to my articles for The Financial Brand here and here.) 

But don’t let the omission put you off The One Device. Despite its overlooking digital banking, I have five reasons for recommending it. First, it’s an enjoyable read. Second, it’s a fascinating study in how seeming instant innovations in fact stretch back decades. Third, with iPhone parts coming from all over the globe, it’s a lesson in the realities of world economics. Fourth, it’s a tour de force in the interactions of good and bad management, timing, and dumb luck. And fifth, it’s a sobering reminder that, sometimes, placing a small, rectangular object in the road will spin the future off in a new direction. 

Bankers didn’t see any of this coming when Jobs convened his press conference in January of 2007. Kind of makes you wonder what’s under our noses right now that may merit a more serious look.

IF YOU’RE A glass-is-half-full kind of person, I have good news. About 80 percent of what you spend on digital advertising is likely to show up under the noses of people you’d like to reach.

If you’re a glass-is-half-empty kind of person, the news isn’t so cheery. About 20 percent of what you spend on digital advertising is likely to show up under no noses at all.

This is reportedly due to bot fraud, automated systems that inflate views and clicks, on which, as you know, digital advertising rates are based. Individual bot fraud apps, hard to detect on their own, are often networked into—what else?—botnets, which have the power to make advertisers overpay in increments that add up fast. The overage, of course, lines the pockets of bad guys.

There is no shortage of ways to commit bot fraud. You can pile multiple ads atop one another with only the top ad visible, while each hidden ad is counted as having been viewed. You can reduce ads to a single, invisible pixel and crowd oodles of them onto a page where, again, they’ll be counted as viewed. You can create content-less sites loaded with stacked and single-pixel ads, and then “launder” to them ad impressions from legit sites. For more such activities—despicable, ingenious, or both, depending on how you look at them—check out Ryan Joe’s entertaining and informative Ad Exchanger article, “The Book Of Fraud: A Marketer’s Guide To Bots, Fake Domains And Other Dirty Deeds In Online Advertising.”

Just how serious are the numbers? According to CNBC,

New figures released today suggest that ad fraud will cost brands $16.4 billion globally this year, and that nearly 20 percent of total digital ad spend was wasted in 2016.

So-called invalid traffic, where bots rather than humans view or click on adverts on websites, was estimated to cost advertisers $12.5 billion in 2016 by ad verification company Adloox.

In December, in what it called “the biggest ad fraud ever,” Forbes reported:

A group of Russian criminals are making between $3 million and $5 million every day in a brazen attack on the advertising market, security firm White Ops claimed today. It’s the biggest digital ad fraud ever uncovered and perpetrated by faking clicks on video ads, the company said.

Not to be overlooked, Business Insider projects even higher numbers for 2017:

The amount of global advertising revenue wasted on fraudulent traffic, or clicks automatically generated by bots, could reach $16.4 billion in 2017, according to a new study commissioned by WPP and cited by Business Insider.

That figure is more than double the $7.2 billion the Association of National Advertisers estimated would be lost due to ad fraud in 2016.

Not a few other publications, including Fortune and Adweek, report similar, unsettling numbers. But a study by cyber security firm WhiteOps, commissioned by the Association of National Advertisers, predicts a downturn in bot fraud in 2017:

The third annual Bot Baseline Report reveals that the economic losses due to bot fraud are estimated to reach $6.5 billion globally in 2017. This is down 10 percent from the $7.2 billion reported in last year’s study. The fraud decline is particularly impressive recognizing that this is occurring when digital advertising spending is expected to increase by 10 percent or more.

One can only hope. By my calculation, $6.5 billion is nearly ten billion less than $16.4 billion predicted by CNBC and Business Insider.

Still, $6.5 billion could pay for a lot of lunches. Happily, the White Ops report offers suggestions for fighting bot fraud. Among others are demanding transparency for sourced traffic, refusing payment on non-human traffic in media contracts, and encouraging Media Rating Council (MRC) accredited third-party fraud detection on walled gardens. You can download the WhiteOps report in its entirety by clicking here.

I have written before about the “arms race” between banks and hackers. But there are other arms races between other industries and, instead of hackers, everyday consumers.

The current squabble between YouTube and the music industry provides a good example. A Rolling Stone article reports that YouTube has

… become a source of frustration for artists including Taylor Swift, Paul McCartney, Beck, Kings of Leon and others, who recently signed an open letter to Congress calling for reform on the law that allows YouTube to host millions of unauthorized videos. “The artist has no choice—their music is on YouTube even if they don’t want it there,” says Irving Azoff, manager of acts such as the Eagles and Van Halen. Azoff has published a separate letter to YouTube, calling for action on two issues: its relatively small royalty payments to artists, and its inability to efficiently remove content from the site.

Realize it or not, every time you hear a tune over the radio or piped into a store or other venue by companies like Mood Media (formerly Muzak), royalties are doled out. Organizations like BMI (Broadcast Music Inc.) and ASCAP (American Society of Composers, Authors, and Publishers) monitor song use and collect and distribute royalties to member artists.

YouTube poses a trickier problem. With over a billion users, any of whom can upload favorite artists’ work, it’s a gargantuan task for an outside organization to monitor song use in order to collect royalties per play. Yet YouTube has shown that it isn’t powerless when it comes to monitoring its own content. As Azoff argues in the above-referenced article, if YouTube can control porn access as well as access to its original content, certainly it can control access to copyrighted music.

The squabble isn’t new. Bootleg recordings have been around as long as the recording industry itself, but the problem grew to greater proportions in the 1970s. That was when cassette tapes (remember those?) burst upon the recording industry. Cassettes provided an easy way to copy and distribute music from other cassettes and LPs (remember those?). Bootleg organizations popped up almost immediately. As for consumers, most pirated innocently, unaware or unconvinced that they were committing heft. The music industry responded with advertising and PR campaigns blustering about legal penalties, but the threats were largely empty. Tracking down individual consumers was costlier than leaving them to their devices, so to speak.

Fortunately, piracy by cassette was somewhat self-limiting thanks to its poor quality—cassette tapes used analog technology and played at slower speeds than reel-to-reel machines used in studios. But with digital technology, quality loss from an original to a copy is all but indistinguishable to the untrained ear. Not only did underground operations selling bootleg CDs flourish, now consumers also posed a sizable threat in the aggregate. With recordable CDs, they could duplicate their favorite music with good fidelity and distribute it to as many friends as they pleased.

Troublesome as recordable CDs were for the music industry, they proved trivial compared with Napster. For all its bellowing and legal actions against Napster, the music industry was powerless to stop it. Not even a court order shutting down Napster did much good. As an earlier Rolling Stone article put it,

By late 2002, the file-sharing service that had peaked with 80 million users was no longer in business. The Recording Industry Association of America had sued the company successfully for copyright infringement, and the courts forced Napster to shut down. But the power of Napster would live on for years afterward, as more sophisticated, harder-to-kill copycats, from Kazaa to LimeWire to BitTorrent, began to take its place.

It took Steve Jobs to survey the situation and figure out a way to turn Napster-esque technology from foe to friend. Napster, Jobs saw, revealed a market that wanted inexpensive music by the song. The insight led directly to the creation of iTunes, a means by which consumers could have easy access to only the songs they wanted at an eminently reasonable 99 cents apiece. Though iTunes and online music stores that followed didn’t eliminate piracy by file-sharing, they put a serious dent in it. At the same time, they gave the music industry a new way to market its products. Here’s how Nathan Ingraham put it writing for The Verge:

Apple drastically simplified the entire music experience, defying the odds to build a music-retailing dynasty even as file sharing skyrocketed. A decade ago, Apple started to answer what would become an all-important question: how do you get consumers to pay for content again?

With YouTube, the music industry once again finds itself up against consumers who exploit digital technology while leaving copyright holders without a means of collecting for use of their work. Again, the exploitation may in many cases be unwitting, as many consumers may be unaware that music and musical performances are property, the use of which legally and morally entitles artists to compensation. Odds are some sort of legal compromise will be struck. What I’m curious to see is if there’s another Steve Jobs out there who will devise a way to turn the YouTube problem into a profitable industry.

IN A DEVELOPMENT reminiscent of New Coke and Coca-Cola Classic (or, if you prefer, of a bisected hydra), Bitcoin split in two on August 1. As the industry puts it, Bitcoin reached a “hard fork,” dividing itself into “classic” (my word, not theirs) Bitcoin and Bitcoin Cash.

No one was surprised. The metaphorical fork had loomed in the metaphorical road for some time. Underlying the split is the fact that classic Bitcoin can process only one megabyte of transactions at a time, making transactions painfully slow. With Bitcoin’s meteoric rise in popularity and value—on Monday both Fortune and CoinDesk valued it at just under $3500—frustrations have risen, too.

As CNBC reported, Bitcoin Cash boasts a whopping eight-megabyte transaction limit. That certainly should speed things up. But then, the value of Bitcoin Cash will be inversely low. According to NextBlock Global Chief Investment Officer Charlie Morris, Business Insider reports,

… as soon as the split takes place most people will see their bitcoin holdings double. But that doesn’t mean the value of investors’ holdings will double.

Morris told Business Insider that bitcoin cash (BCC) has been trading in the futures market for about $200 to $400. Thus, if a split were to occur BCC would trade somewhere in that range while the value of bitcoin would witness a decline equal to the value of the new bitcoin.

Reactions to Bitcoin Cash have been for the most part tepid.

BitMEX, Bitstamp and Coinbase will not support or allow trading of Bitcoin Cash. According to The Verge:

A spokeswoman for CoinBase says, “If this decision were to change in the future and Coinbase was to access Bitcoin Cash, we would distribute Bitcoin Cash to customers associated with Bitcoin balances at the time of the fork. Coinbase would not keep the Bitcoin Cash associated with customer Bitcoin balances.” The exchange allowed a brief window of time before August 1st for users who wished to access Bitcoin Cash to withdraw their funds from Coinbase.

But, then, that’s as of this writing. Things change fast in the cryptocurrency world.

Things looked rosy at first, when Bitcoin Cash enjoyed an initial blip in value. But a fast decline followed on its heels, which caused enthusiasm to wane. Or perhaps it was the other way around, that is, waning enthusiasm caused value to decline. Or, perhaps not-so-natural market forces are at play: Bitcoin.com has suggested that interested parties may be artificially attempting to slow down Bitcoin Cash.

Not every sky over Bitcoin Cash is gray.

The new step-sibling seems to have had a positive effect on the original Bitcoin. According to Fortune,

“On a market cap basis, the price rise in bitcoin very closely mirrors the decline in Bitcoin Cash, indicating that investors are selling their Bitcoin Cash for Bitcoin,” said Matthew Newton, market analyst at trading platform eToro. “Additionally, investors that preferred to wait out the hard fork last week are now moving back in.”

Meanwhile, pending stakeholder approval, Bitcoin’s transaction limit is slated to increase to two megabytes in November. And it may be that the Bitcoin split has strengthened the cryptocurrency concept overall. According to The New York Times,

The divisions have, if anything, increased the excitement and the value of all the virtual currencies in the world—and banks and governments have announced their own projects to harness the technology.

In short, don’t give up on cryptocurrency. Given the rapidity of change in the field, it’s a good idea to check up on developments at least daily.