Jason: Welcome to this episode of Cents Chat with Jason and Hayden. Let's jump right in to make payments make sense.

Hayden: Happy Wednesday, Jason. I am stoked to be in the studio for what has definitely been my favorite part of the work week. And happy belated Father's Day to all the fathers out there.

Jason: Yeah, absolutely. Hayden, I know you got to spend some time with your father over the weekend. And although neither of us has children yet, I think we could both consider this podcast our kid.

Hayden: Yeah, it's definitely been a baby to me, and I know it has to you as well. So we have some great topics in store today, and I'm excited to get into it. So let's do it. First, where's Waldo with Wirecard? How did $2 billion vanish? Next, casinos to go cashless: COVID reshaping yet another industry. And last, FedNow Community Kickoff: the latest on the Federal Reserve's faster payment solution. The now ex-CEO of German payments provider Wirecard was arrested on June 22. Markus Braun was investigated due to an accounting scandal that revolved around a missing $2.1 billion. He is facing charges of accounting fraud and market manipulation as he tried to inflate the company's balance sheet in order to be more appealing to investors and customers.

Jason: Hayden, this is so sad. Up until recently, Wirecard was Germany's fintech unicorn. And from everything I've read, they're not actually missing $2 billion. They never had it to begin with. It's unfortunate that the leadership of this company felt it necessary to inflate their stock prices for quick gains. They had such a great technology solution. Now that it's all unraveling at the seams, they pose serious risk, not just to the investors, but the payments ecosystem as a whole, as their cash dries up. Regulators need to pay very close attention to their merchants' funds to ensure that as Wirecard runs out of cash, they don't start using merchant funds to keep the lights on. What I don't understand is that this didn't happen overnight. How did this go unnoticed for so long?

Hayden: Jason, hours after Wirecard's former CEO was arrested, German finance minister Olaf Scholz said lawmakers must tighten regulations because the payment service company has embarrassed the nation's financial watchdog. The auditors and regulators were both ineffective here, and it raises questions about the supervision of the company's accounting and balance sheet control. I think we might see a change in regulatory rules in order to oversee complex corporate structures promptly and quickly.

Jason: And I think we need to, Hayden. This is a global and systemic problem that is the result of greed and enabled by lack of oversight. Payments processing accounting is very complicated. In fact, very few acquiring banks even know how to balance their own third-party payment processors' accounts. Generally, by the time someone suspects something is wrong, the hole is huge. I've consulted for banks, law firms, and CPAs that, even though they're in the payment space, really don't understand the end-to-end flow of funds from the card networks to the merchants and the timing of things. It's very complicated because there is always money in flight. In fact, most third-party payment processors don't even know how to track it to the penny. I think it's this lack of understanding that allowed Wirecard to inflate their balance sheet without anyone picking it up for so long. I'm all for innovation, but oversight is needed to prevent major financial losses for shareholders, central banks, and merchants.

Hayden: While on the heels of the Wirecard debacle, Brazil's central bank has suspended the WhatsApp payment feature in the country. Mastercard and Visa have also been requested to stop payments and money transfer services through the app in Brazil as well. This feature was introduced earlier this year in Brazil by Facebook, and this is seen as a major setback for the social media giant, as this was supposed to act as a central function of its plan to offer commerce options within the app. The suspension of the feature will allow Brazil to evaluate the potential risk to their central banking system.

Jason: Yeah, it's hard to say if the Wirecard fallout in Germany motivated Brazil to take a closer look at things or not, but I think it's a good step in the right direction. As everything moves to real-time payments, the window to stop fraud and take action becomes almost non-existent. The central banks and the entire supply chain really need to understand the risks associated with connectivity they are handing out to fintech companies, especially if they're not experts in the payment space and if they don't have a deep understanding of payment systems and risk controls. And I think this applies to Facebook. They're certainly a social media giant, but not a payments giant. The cross-channel risk attack vectors are increasing with every new integration that happens, and the regulators and auditors really need to understand how all of this payment stuff works so they stop getting the wool pulled over their eyes. Props to Brazil's central bank for taking the time to make sure that the system is working as expected. The rest of the world should really follow their lead.

Hayden: Jason, it appears that the U.S. casinos may be following the lead of the rest of retail. It is no surprise that casino staff and customers want to go cashless due to COVID-19. And the main reason for this industry being one of the last to operate solely on cash is that no state allows digital payments on a casino floor, but that will soon change. The American Gaming Association has just recently issued payments modernization policy principles that they say will guide the industry into contactless forms of payments.

Jason: Well, Hayden, I for one fully support this, as I hate waiting in line at the casino cage to convert cash to chips and vice versa. This has been a transformation that I feel is long overdue. And its delay has really been driven by two factors: chargeback liability and transaction processing fees. Fortunately, by utilizing contactless payments based on EMV standards, the casinos will eliminate fraud liability as the transactions will be biometrically authenticated. It will, however, be very interesting to see how they deal with the fees. Will the casino or consumer end up eating those transaction costs?

Hayden: AGA officials say that in a survey of casino guests, 57% of them expressed a desire for digital payments. The Nevada Gaming Commission has a hearing scheduled for June 25 where it is expected to accept the state gaming control board's recommendations for streamlining the approval and testing processes for modern forms of payments in U.S. casinos. But it's not just AGA officials that are requesting this change on a casino floor. The CDC recommended tap-and-pay options in order to limit the handling of cash in casinos, and casinos themselves also want to see some modernization in the industry.

Jason: I think it's a great step forward. And most casinos are already equipped to handle this through their player rewards program. In fact, this is how high-stakes players already gamble. They fund the casino in advance, they walk up to the table with their player's card. It's essentially a closed-loop system once the funds are on hand with the casino. It won't be that hard for the casinos to adapt this solution to all players and have self-service kiosks or devices where a player can load funds onto their existing loyalty cards.

Hayden: I think that this can be a huge opportunity for casinos whose customers are an aging crowd to gain the focus of a younger crowd who operates largely by mobile payments. And as well as a new era of gamblers, casinos can take advantage of linking loyalty programs to the mobile wallets of their customers, making the process of a casino simpler and easier for their customers to use and understand.

Jason: Totally agree, Hayden. And I think really what the missing link here is the added capabilities of players being able to transfer their winnings from their casino card or app to a bank account. And more importantly, the anti-money laundering controls that will need to be in place as part of this solution. It's honestly a great opportunity for a fintech focused on remittance solutions. One of the things that will be very interesting to see in this transformation is how it affects tax reporting on gambling winnings. Since instead of walking away with a brick of cash from the casino, consumers will now need to enter PII for transactions over certain thresholds to have the money deposited into their bank accounts.

Hayden: We will definitely make sure to listen in on that hearing tomorrow and keep you guys updated on what's going on in that industry. On the topic of deposits, Jason, about a month ago we discussed the importance of the FedNow Real-Time Payment Service. And I know you participated in the FedNow Community kickoff webinar earlier this morning. I understand design activities are already underway, but what can you tell us about the focus of the FedNow community?

Jason: Well, Hayden, first and foremost, I think it's great that the Federal Reserve has put together this working community to collaborate on this next-generation system rather than building it in a silo. The community consists of key industry participants with varied expertise across multiple verticals. The goal is to foster innovation, transparency, advocacy, and ultimately get the entire ecosystem ready for the solution. Thus far, it looks like they're really trying to get as much engagement from the community as the community is willing to put in. We're super excited to be part of this group and play a role in shaping and driving the adoption of the FedNow solutions.

Hayden: Jason, what are some of the items that will influence organizations to offer the FedNow service? And what are some of the obstacles in adapting to FedNow?

Jason: Well, in my opinion, the key driving factor will be modernization of the payment system as a whole and the ability to move funds in real time. It's clearly the direction the world is going, and organizations that jump on the bandwagon will have an ability to attract new customers, create new revenue streams, and develop new and innovative solutions to meet the needs of the rapidly growing fintech community. I think the biggest challenges and roadblocks are that most banks aren't prepared from a risk or technology perspective for this type of solution, especially when you factor in cross-channel risk between different payment rails. Hopefully, through the collaborative efforts of the FedNow community, we can overcome these hurdles by the time the solution is ready for the mainstream.

Hayden: Well, I know as you continue to play a role in the FedNow community, you will be sure to keep us updated. Okay, Jason, it is time to make payments make sense. Give me those takeaways.

Jason: Regulators and auditors, it's time to really understand payments from end to end and the cross-channel risks that exist. There's a huge opportunity in modernizing casino acceptance and remittance. If you're in this space, we'd love to talk to you. Supply chain, FedNow is coming. Make sure embracing faster payments is part of your roadmap.

Hayden: Thanks for joining us today. And if you've got a topic you would like us to discuss, follow and message us on social media at Cents Chat. And as always, we would love your feedback. Hayden out.