Flexa and Flex Network Protocol Whitepaper August 15, 2018
Executive summary At Flexa, we believe that the best way for global commerce to become more efficient and accessible is by making cryptocurrency spendable everywhere. With cryptocurrency transactions exceeding 20 billion USD each day,1 it’s simply a matter of time before digital commodities become a central part of global commerce. And yet, cryptocurrency’s collective value of 0.25– 0.5 trillion USD2 remains practically unusable in physical retail. Considering that 90.9 percent of retail sales in the US still take place offline,3 brick-and-mortar payments are the primary hurdle in realizing the true utility of cryptocurrencies. Furthermore, widespread retail acceptance of cryptocurrency is critical for its sustainable value. The solution to blockchain payments We have developed Flexa and Flex Network Protocol (FNP), an app and open standard that enable instant cryptocurrency payments in stores and online. FNP is designed to act as an intermediary between merchants and the blockchain, offering them inexpensive and fraud-resistant transactions without volatility exposure. FNP will enable consumers to pay with their preferred cryptocurrency while preserving their freedom, security, and data privacy. And, neither Flexa nor FNP require any debit cards or merchant point-of-sale upgrades. The Flexa team has developed this revolutionary platform from seven decades of experience in fintech, retail, and payments. The Flexa app and FNP work with many high-profile merchants today, marking the first real instance of a decentralized, global payment network with the power to make commerce more efficient and accessible for billions of people.
4 Vision We’re making cryptocurrency useful The blockchain as the future of commerce A framework for consumer adoption 14 Product & Technology A new app A new network A new coin 24 Growth Strategy 27 Roadmap 29 People Core team Advisors 34 Background
4 Vision
5 We’re making cryptocurrency useful In the original Bitcoin whitepaper, Satoshi Nakamoto outlined a perspective on the fallacies of modern-day commerce, which relies “almost exclusively on financial institutions... to process electronic payments.”4 Digital payment instruments in the United States and around the world How we’re making consist of complicated financial settlement processes—costing merchants cryptocurrency useful up to 4 percent in processing fees for purchases and involving up to twelve different entities (each a discrete point of failure) to process a Flexa, a mobile app single exchange. Meanwhile, retail fraud losses in the US alone continue for spending any to reach all-time highs, claiming more than 48.9 billion USD in 2016.5 cryptocurrency However, present-day payment instruments are extremely useful to consumers because they have widespread merchant acceptance. And in FNP, an open order for cryptocurrencies to realize similar real and sustainable value, it is cryptocurrency critical that they become spendable everywhere. acceptance network Many companies have recently developed wallets and apps that enable Flexacoin, a new retail blockchain payments, but they are universally dependent on existing coin that enables payment networks. The promise of cryptocurrency is not being realized and secures FNP when it also requires physical debit cards, linked accounts, or centralized payment infrastructure to facilitate the purchase of a cup of coffee. Flexa is the first mobile app to facilitate practical cryptocurrency payments by enabling instant, no-fee transactions at stores, restaurants, and online. The Flexa app represents a milestone in the acceptance of cryptocurrency—payments that are both consumer and merchant friendly.
6 We’re making cryptocurrency useful Flex Network Protocol (FNP) is the open, standard platform designed to make these cryptocurrency payments possible. It allows developers to add retail payment features to any app, streamlining acceptance of cryptocurrencies for merchants and eliminating volatility exposure. Flexacoin is the new coin that secures Flex Network Protocol and enables these instant, fraud-resistant payments for any cryptocurrency. By connecting merchants, banks, and the blockchain with this open protocol, we’re building a new, global payment system to challenge the status quo. Evolving legacy payment infrastructure to incorporate the blockchain is a major, but crucial, endeavor. The Flexa team is well positioned to accomplish this goal based on our payments and retail experience. We envision that the Flex Network will ultimately come to represent open network infrastructure for any blockchain payment, similar to how card associations such as Visa, Mastercard, UnionPay, and American Express offer closed payment rails for credit cards. Beyond that, with digital global payments in excess of 10 trillion USD each day,6 this retail platform will make cryptocurrency more valuable, meaningful, and useful.
7 The blockchain as the future of commerce The limitations of traditional payment instruments— fraud and cost—are solved by the primary strengths of blockchain technology. Accordingly, merchants and the greater blockchain community each stand to benefit from making cryptocurrency spendable everywhere. For many merchants, payment card fraud and transaction expense are two of the most significant operating costs to manage and actively reduce (e.g., in 2017, losses due to payment card fraud amounted to an estimated 28 billion USD worldwide).7 Payment card fraud today takes many forms, from stolen account numbers to abuse of marketing incentives. Even chargebacks, initially developed as a consumer protection over forty years ago, have become a vehicle for malicious activity. And smaller merchants ultimately share a disproportionate share of the damages, as they have fewer resources to counter sophisticated fraud or defend themselves in the case of a dispute. In addition to the costs of fraud, the very act of processing a payment can be extremely expensive, due to the variety of fees and operating expenses involved in handling cash, payment cards, and other payment instruments. For instance, in 2016, the top twenty-five merchants by revenue worldwide spent a collective 19 billion USD to accept payments.8 In general, these expenses are a result of complex settlement processes across a variety of network participants, including payment gateways, processors, card associations, and financial institutions. Due to this complexity, a standard payment card transaction in the United States involves more than ten discrete steps.
8 The blockchain as the future of commerce IIN + CARD PAN CARDHOLDER NAME %B 5105105105105100 ^ APPLESEED/JONATHAN The steps of a payment card transaction EXPIRATION CVV1 ^ 2304 1200000000000000** 987 ******?* Customer Merchant 1 2 8 Magstripe Payment Card Payment IIN POS Terminal Gateway Processor 510510 7 3 IIN Register EMV Chip Card 11 Merchant’s Acquiring Card Bank Bank Association CARD PAN ✓ •••5100 Mobile CARDHOLDER NAME 4 Wallet App ✓ JONATHAN APPLESEED 10 9 EXPIRATION ✓ 04/23 $8000 credit line CVV1 ✓ 987 Authorization 5 6 1 A customer presents their card or app at a merchant point-of-sale Cardholder Issuing Card Accounts Bank Processor (POS) terminal. 2 The terminal reads the magnetic stripe or embedded signature Clearing & settlement data from the card and transmits it through a payment gateway to a 6 The issuing bank returns an approval 9 The card association directs the issu- payment processor. or decline to the card association, ing bank to transfer a final purchase along with any other verification data amount (minus interchange) to the 3 The processor uses a list of Issuer as requested by the merchant. processor’s own bank, called the Identification Numbers (IINs) to route “acquiring bank.” It returns a success data through the appropriate card 7 The card association relays the message to the payment processor. association, or network. authorization to the processor, which sends a transaction success message 10 The acquiring bank receives funds 4 The card association sends the back to the POS terminal. within 2 business days. Meanwhile, transaction to the bank that issued the issuing bank resolves the cus- the card through a card processor. 8 Based on the merchant’s decision to tomer’s pending record of charge, complete the transaction, the POS and appends it to their statement. 5 The issuing bank reviews the transac- terminal sends the payment proces- tion data, metadata, and internal risk sor instructions to “settle” the prior 11 The acquiring bank initiates a daily models to determine whether the authorization amount, which are then transfer for funds collected minus transaction should be authorized. relayed to the card association. any fees for processing.
9 The blockchain as the future of commerce Payment processing costs of the world’s largest retailers by revenue in 20169 Walmart US 4,989 million USD The Kroger Company US 1,516 Costco Wholesale US 1,179 The Home Depot US 1,170 CVS Health US 1,120 Walgreens Boots Alliance US 1,090 Amazon.com US 1,059 Target US 956 Lowe’s Companies US 833 Albertsons Companies US 807 Apple US 740 Seven & I Holdings Co. JP 525 Ahold Delhaize NL 460 Wesfarmers Limited AU 416 Woolworths Group AU 399 Schwarz Gruppe DE 283 Carrefour FR 262 ALDI Einkauf DE 252 Tesco GB 249 Metro Group DE 238 ÆON Group JP 223 While the majority of payment processing cost Groupe Auchan FR 207 for any given retailer can be attributed to payment card interchange fees, they also include costs such EDEKA Zentrale DE 183 as bank charges, cash and check handling fees, or Groupe Casino FR 179 administrative fees for store credit programs.
10 The blockchain as the future of commerce How merchants and the blockchain stand to benefit The blockchain offers a practical solution to merchant concerns of fraud and cost. It dramatically reduces the number of possible fraud vectors by enforcing tamper-proof transactions on a ledger, and it decentralizes transaction verification—creating an open market for processing that more closely represents the actual computation cost. As an added benefit, the blockchain provides native support for borderless payments, which opens merchants to a global community of customers without requiring additional payment infrastructure or currency exchange. Meanwhile, the blockchain needs merchant adoption in order to become a viable supplement to other payment methods. Additionally, with this increased utility comes more straightforward cryptocurrency valuation, reduced volatility, and market stabilization. Growing merchant acceptance will make cryptocurrencies substantially more valuable, and truly enable the globalizing effects of peer-to-peer electronic cash that Satoshi Nakamoto envisioned. Blockchain adoption is inevitable For these reasons, we believe that the blockchain will soon complement the infrastructure of traditional payment instruments. However, due to the operational and technical complexity in managing native cryptocurrencies at scale, many merchants will require an intermediary service. This service must be designed so that it cannot compromise the core principles of data protection, decentralization, and choice that have bolstered the cryptocurrency community since its inception. We believe that Flex Network Protocol offers the first practical cryptocurrency payments service for retail, dining, groceries, fuel, travel, and more. We remove the complexities of acceptance to bring fraud resistance and low-fee processing to merchants, while still protecting consumer tenets of privacy, decentralized governance, and freedom of choice. By allowing merchants and their customers to engage directly as buyers and sellers, global commerce becomes vastly more efficient.
11 A framework for consumer adoption The software that moves the vast majority of money around the world today still uses legacy standards created during the late 1970s,10 but in the absence of a compelling alternative, consumers are trapped into maintaining the status quo. Since the creation of Bitcoin in 2008, blockchain communities have attempted to make cryptocurrencies a useful complement to traditional payment instruments like credit cards, debit cards, and cash. However, fundamental user-experience challenges such as unintuitive QR code interfaces, complex address strings, new security protocols, and network capacity issues have hindered commercial adoption. Various scaling solutions such as Lightning Network and Plasma Cash show considerable promise for improving the speed and utility of blockchain transactions, but create issues of complexity and compatibility for merchants. A variety of mobile wallets have begun promoting cryptocurrency payment solutions, but unfortunately, they are completely reliant on existing legacy infrastructure. These wallets utilize high-fee virtual Visa and Mastercard debit cards—requiring bank accounts, physical cards, and multiple tiers of centralization. Digital payments on these platforms are subject to low transaction limits (in some cases, less than $100),11 as well as Apple’s restrictions for NFC access on iOS devices.12 Justifiably, these systems have extremely low consumer adoption due to the increased friction compared to a typical payment card.
12 A framework for consumer adoption The solution to blockchain payments is not building cryptocurrency acceptance on top of the existing multi-layer networks, but creating a new network that solves merchant and consumer needs alike. While our decades of retail payments experience confirm the pain points of fraud and processing cost, we find that consumers’ needs are distinctly different. Consumers evaluate payment instruments against an individual framework of five basic criteria: Basic consumer criteria Bank transfers Payment cards Mobile wallets Flexa + FNP Freedom of choice The need to avoid fees, and × × × mechanisms of unwarranted control Security The need to use a system without ✓ ✓ × fear of loss by deception or failure Speed The requisite convenience of instant × × ✓ confirmation, often lost to security Usefulness The need for widespread acceptance ✓ ✓ ✓ of a particular payment instrument Value Any incentive to use a payment × ✓ × instrument (e.g., rewards, no fees) Speed, usefulness, and value are often the most critical factors in choosing a particular payment instrument at retail. Each of these features must be addressed for cryptocurrencies to see widespread adoption.
13 A framework for consumer adoption In order for a viable blockchain cryptocurrency payment network to achieve meaningful scale, the table stakes for consumers are the following: 1 Real-time transactions Merchants and their customers need to receive confirmation that a transaction was successful in less than one second. 2 No consumer-facing fees Consumers will not pay a premium to use blockchain cryptocurrencies, because such a cost represents negative value in their decision-making framework. The fee must be zero on the consumer side of the transaction, and ultimately provide competitive spending incentives. 3 Broad acceptance In order to see widespread consumer adoption, it must be possible to use cryptocurrencies for the majority of daily expenditures. Any less than that, and the mindshare required to maintain “front of wallet” utility will not be attainable. Meeting and dramatically exceeding these expectations will be challenging, but any new payments network must comprehensively solve both consumer and merchant needs. We believe that Flexa and Flex Network Protocol together satisfy all of the core consumer requirements necessary to break the legacy payments status quo.
14 Product & Technology
15 A new app Flexa is the first mobile payments app for instantly spending cryptocurrency in stores or online. The name Flexa is the combination of “Flex” and “ability,” chosen because this app represents the first instance of cryptocurrency spending ability on the new Flex Network Protocol (FNP). The cryptocurrency payments app that emphasizes simplicity We’ve worked tirelessly to make the Flexa payment experience far easier than anything else that exists today. As a result, Flexa app payments don’t require any special cards or hardware at point-of-sale. To pay, just: Open the Flexa app Tap where you want to spend Scan the flexcode and take your receipt
16 A new app Flexa is truly this simple. There are no cards to carry; nothing to swipe, insert, or sign at merchant points-of-sale; no amounts to enter; and no points to redeem or convert. Instead, with just one tap in the Flexa app, consumers can pay quickly and easily. Even better, the Flexa app does not require any special hardware or software of merchants, and it is not underwritten by a virtual debit card. This makes enabling support for Flexa incredibly straightforward for new merchants. Transaction processing is also significantly faster with Flexa as compared to traditional payment cards. The Flexa app is designed to make loading funds and spending cryptocurrency as simple, enjoyable, and secure as possible. Our team has gone to great lengths to design a protocol that can encourage broad user adoption of blockchain cryptocurrencies for everyday spending. Wallet management To spend from the Flexa app, consumers will load a preferred cryptocurrency into their Flexa wallet, using a standard QR code or a copy-and-pasteable wallet address. Future versions of the Flexa app may also integrate direct funding mechanisms via affiliate APIs. At public launch we intend to support a variety of popular coins— including Bitcoin, Ether, Litecoin, Bitcoin Cash, and Flexacoin—and will continue adding new ones based on community interest. Wallet security Establishing consumer trust is critical in developing any new payment instrument, so we consider security a cornerstone of our approach and take the security design of the Flexa app extremely seriously. We have built a team with nearly a decade of experience with PCI-compliant infrastructure for the secure storage of payment card details, and have applied that expertise to the design of the Flexa app.
17 A new app Payment experience Flexa payments are designed to be as simple as possible. With just a single tap and scan, Flexa verifies your cryptocurrency balance against the public index rate and generates a proprietary flexcode for payment. At launch, Flexa will be immediately available for payments using iOS devices, with Flexa for Android shortly following. Notably, because Flexa payments do not require NFC (like traditional payment cards), they are not restricted by Apple’s requirements for payment cards to be loaded into the Wallet app, nor by tap-to-pay (contactless) implementation timelines or transaction limits. This greatly reduces Flexa’s overhead and risk as compared to other cryptocurrency payment apps. A Flexa transaction has two primary components: • The first is called an FPAN, or flexible primary account number, which is a one-time authorization that allows a merchant to debit local fiat currency against the selected cryptocurrency wallet balance. • The second is called a flexcode, which is a proprietary and backwards- compatible barcode format for conveying the FPAN with any user- authorized metadata through the merchant’s point-of-sale system. Again, the Flexa app requires no special hardware or software to be installed at physical point-of-sale. Our network is directly integrated with merchants in order to authorize purchases in real-time. Because all Flexa transactions use the same authentication process for payments, they represent the only interface that is just as secure—and just as usable—whether used in stores or online. Online Flexa transactions—coming in 2019—will make use of identical FPAN provisioning mechanisms and back-end integrations. In fact, online Flexa transactions will differ from physical Flexa transactions only in their
18 A new app form of approval. Instead of using a flexcode, virtual Flexa transactions will relay an FPAN via an account-linked device. Already a dramatic improvement over traditional payment instruments, future versions of Flexa and Flex Network SDKs will add alternative methods of scanning flexcodes to improve merchant acceptance. To support this expansion, the FPAN format can incorporate and describe various forms of authorizations on a use-case basis. Our team has decades of experience working with merchants on novel payment integrations, and we have already secured direct partnerships with many of the top retailers and restaurants in the US. In order to make cryptocurrency useful, we are working to achieve broad coverage of consumers’ everyday spending. Therefore, we are focusing initial efforts on the following three verticals, which collectively represent more than 50 percent of US discretionary spending:13 Food & dining Entertainment Apparel & accessories Particularly in the everyday, fast Including movie theaters and Across department stores, casual, grocery, and quick-service recreation facilities as well as big specialty retailers, and several restaurant (QSR) categories box electronics retailers popular fashion chains Thereafter, we will continue growing our network to provide coverage for other dominant categories of consumer spending, including home goods, office supplies, pet supplies, sporting goods, toys, transportation, and utilities. Ultimately, we view merchant acceptance as the key step toward the usefulness of cryptocurrency.
19 A new network Flex Network Protocol (FNP) is an open standard for enabling instant cryptocurrency payments in stores and online, allowing merchants to receive secure cash deposits via their existing points-of-sale. Our vision for FNP $ € Any Coin Any Fiat £ ¥ ··· Any Flex Network Any App Protocol Merchant Flex Network Protocol is designed to facilitate payments from any wallet, in any coin, to any merchant, across the globe. FNP is already integrated with many high-profile merchants, offering instant acceptance of potentially hundreds of cryptocurrencies to developers all over the world. Our vision is for FNP to become the open, seamless standard for cryptocurrency payments in physical retail.
20 A new network We intend to open FNP publicly for developers to integrate retail cryptocurrency payments with their apps by 2019. By creating the most simple, direct network, FNP enables broad cryptocurrency acceptance with the least complexity—no longer requiring the variety of payment gateways, processors, associations, and financial institutions. Sample FNP transaction flow Customer Merchant 1 App Payment Payment POS Terminal Gateway Processor 2 3 IIN Register Flex Network Protocol Merchant’s Acquiring Card Bank Bank Association Cardholder Issuing Card Accounts Bank Processor Streamlined authorization, clearing & settlement 1 A customer presents their app at 3 The Flex Network transmits a merchant POS for payment in any one-time authorization code cryptocurrency supported by FNP. (FPAN) in real time to authorize the transaction on the merchant’s POS 2 The app requests the current terminal, then pushes fiat funds to conversion rate for the customer’s the merchant’s bank account. The desired cryptocurrency, and submits customer’s purchase is complete. a blockchain transaction via FNP.
21 A new network Principles for FNP development The Flexa team has presented six principles for FNP, representing our vision for its ongoing development and sustained platform growth. In order to become a trusted, public cryptocurrency payment rail, we believe that FNP must be: Compliant Secure Instant Open Simple Useful We present these principles to help guide the development of FNP, and we hope to build trust and transparency with the blockchain community by articulating them as the ongoing intentions guiding our vision: Compliant We are designing FNP to support local compliance requirements and data protection regulations. Notably, unlike alternative solutions for institutional cryptocurrency payments, FNP does not require Flexa or third parties to act as custodian of funds; our technology functions as a direct payments processor without volatility exposure for merchants. Secure We have decades of combined experience in securing e-commerce transactions and payment card information, both over the internet and in mobile applications. FNP has been designed with open-source, end- to-end encryption, for resilience from man-in-the-middle attacks and other forms of surveillance or tampering, and exposes only the minimum amount of information required to complete a transaction.
22 A new network Instant FNP is the only protocol to offer instantaneous conversion of cryptocurrency via direct bank deposits at merchant point-of-sale, regardless of block time. End users need only one tap to authorize payment, with transactions (confirmed by point-of-sale) currently measured at less than a second. FNP transactions are intended to be the absolute fastest payment solution available in the world. Open FNP is designed to enable the free and open use of cryptocurrency at retail. Flexa is working to make FNP as accessible as possible to a wide variety of developers and merchants. To support this widespread acceptance, only simple staking of Flexacoin is needed. Therefore, FNP requires no proprietary license or gateway in order for developers to integrate their wallet or transmit cryptocurrency transactions. Simple From tap to transaction, FNP supports simple, straightforward API methods for exchange and payment. Because FNP itself is not reliant on existing payments infrastructure, payments are pre-authorized by the time they reach the rails, and authorization signatures and settlement can be combined into a single, fraud-resistant transaction. FNP’s simplicity of integration, operation, and settlement is inherent in our desire to make cryptocurrency payments simple for merchants and their customers alike. Useful Finally, we intend for FNP to be backwards-compatible with existing POS systems, and as interoperable with as many partners and platforms as possible. We are developing FNP toward broad accessibility and widespread acceptance—starting with the very first version of the Flexa app, which takes advantage of existing POS integrations and requires no new hardware or merchant upgrades.
23 A new coin Flexacoin is our ERC-20 coin, ultimately to be used as a staking mechanism for public access to FNP. Additionally, Flexacoin will be spendable from the Flexa app with a variety of members-only incentives. In order to build the fastest and most secure payment system, we have created Flexacoin as a standard, decentralized coin for staking transactions on our global, open network. This simple, fixed-supply coin ensures that FNP is blockchain-agnostic, and allows people to spend the cryptocurrencies that are meaningful to them. People can also spend Flexacoin in the Flexa app, similar to how they would spend other cryptocurrencies, like Bitcoin. However, to encourage adoption of Flexa—and, by extension, FNP—we plan to partner with merchants to offer special incentives for spending Flexacoin. Since FNP is designed to significantly reduce costs throughout the payments ecosystem, merchants using Flexacoin have even more opportunity to build direct relationships with their customers through promotions, loyalty or rewards programs, and personalized offers.
24 Growth Strategy
25 Growth strategy Our approach to growth We are focusing obsessively on customer experience to drive both growth and retention, and promoting network effects to catalyze consumer acquisition. By emphasizing a world-class product experience, Flexa and Flex Network Protocol are positioned to become the standard for retail cryptocurrency payments, by directly solving the needs of both merchants and consumers while remaining independent of legacy payments architecture. Decades of specific domain experience have allowed our team to create the most efficient, simple, and open cryptocurrency payments platform, ultimately enabling worldwide adoption and growth. Network effects Flexa and FNP both benefit significantly from their respective growth: the greater the number of merchants accepting payments through FNP, the greater the value of cryptocurrency that can be spent by consumers. Our primary network effects are improved by increasing merchant acceptance worldwide, which is straightforward due to FNP’s broad compatibility. As mobile technology advances around the globe, the network effects of useful payment apps have dramatically increased. In China, more than 1 billion people use Alipay and WeChat Pay for everyday commerce:14 booking rideshares, paying rent, and buying movie tickets at millions of merchants, even in remote, rural areas. In 2012, Alipay and WeChat Pay combined processed 81 billion USD in transactions; just four years later, they processed a total of 2.9 trillion USD—an increase of 2,000 percent.15
26 Growth strategy Across the world, mobile payments volume is growing at unprecedented rates. Apps that offer a simple product experience with compelling consumer incentives have attracted billions of new users in just the past five years. In the United States, Starbucks has created one of the most successful mobile apps, focusing on convenient and fast in-store payments. Launched in 2010, the app also features a loyalty program, gifting, and personalized offers. As of 2018, the app is accepted in more than 25,000 Starbucks locations, and accounts for 34 percent of all transactions.16 Incentives and customer centricity Primary platform growth opportunities will consist of various merchant promotions and incentives to increase customer loyalty. For instance, merchants can enable discounts and bonuses to consumers paying with Flexacoin. Additionally, the long-term growth of FNP relies on consumer retention just as much as new consumer acquisition. Similar to payment card incentives, Flexa plans to offer members-only loyalty programs to support retention. Our team also takes pride in an intense focus on customer-centric design. Collectively, we have directly built and managed mobile consumer products used by hundreds of millions of users around the world. Over the course of our product roadmap, we will continue to invest our time in primary user research, working closely with consumers, developers, and merchants to refine FNP and make the Flexa app the most satisfying payment experience possible. The Flexa team is enthusiastic to continue building the foundation to make cryptocurrency spendable everywhere.
27 Roadmap
28 Roadmap Development timeline January ✓ Developed Flex Network Protocol (FNP), Flexible 2018 Primary Account Number (FPAN), and flexcode design specifications March ✓ Started beta Flexa app and FNP testing April ✓ Completed end-to-end testing and smart contract audit July ✓ Released private beta of Flexa for iOS October Generate Flexacoin ERC-20 coins Oct–Dec Release Flexa for iOS on the App Store Jan–Mar Release Flexa for Android on the Google Play Store 2019 Apr–Jun Start Flexa e-commerce integration testing Jul–Sep Launch in Europe and Asia Oct–Dec Launch public FNP access to developers
29 People
30 People Our team The people behind Flexa combine more than twenty decades of experience in technology, retail and payments at American Express, Capital One, the MIT Media Lab, NASA, PayPal, Starbucks, and Warby Parker. Tyler Spalding Trevor Filter Zachary Kilgore Co-Founder Co-Founder Co-Founder Tyler has founded and invested in Trevor began his career at the Zach has more than eight years of various blockchain projects since MIT Media Lab, and has been experience engineering front-end 2011. He was previously the CTO designing award-winning, and back-end software platforms of Raise, Co-Founder and CTO of customer-centric experiences for and infrastructures for payments Tastebud Technologies, and an over a decade. He was previously and mobile. He was previously Engineering Lead with the United Head of Product & Design at an Engineering Manager at Raise, Space Alliance, US Air Force, and Raise, Head of Product at Slide Director of Engineering at Slide NASA’s Space Shuttle Program. Network, and a Senior Product Network and a Front-End Engineer He holds two Masters degrees Manager at American Express. at Warby Parker. He holds a from MIT and UIUC. He holds a Bachelors from MIT. Bachelors from Duke University. linkedin.com/in/tylerspalding linkedin.com/in/trevorfilter linkedin.com/in/zacharykilgore
31 People Daniel C. McCabe Ryan Records Scott Mandel Co-Founder VP of Partnerships Director of Community Daniel has over twenty years of Ryan led the creation, rollout, and Scott has built and grown business law experience across consumer growth strategies for communities for more than ten technology, blockchain, finance, the Starbucks mobile app, one cryptocurrency projects since and more. He was formerly a of the most successful mobile 2014, and is an early investor partner at Greensfelder, and payment platforms in the world. in dozens more. He holds a holds his JD from the Chicago He holds a Masters degree from Bachelors degree from Michigan Kent College of Law. Washington State University. State University. linkedin.com/in/daniel-c-mccabe-14a6931b linkedin.com/in/ryanrecords linkedin.com/in/mandelscott Alex Disney Chris Pick Blockchain Engineer Software Engineer Alex is a blockchain engineer Chris is a financial software with ten years of experience engineer with seven years of developing cryptocurrency experience building distributed mining and trading operations data storage and analysis at DRW. He implemented EIP-758 systems and infrastructure at for Parity and holds a Bachelors Bloomberg. He holds a Bachelors degree from UIUC. degree from UIUC. linkedin.com/in/alex-disney-4a203617 linkedin.com/in/christopherpick
32 People Advisors To guide the growth and scale of our products, we have also assembled a group of talented individuals across blockchain development, consumer retail, hardware, machine learning, marketing, and payments. Our advisors bring the experience of leadership positions with some of the most notable companies in the world, including: Amazon.com Goldman Sachs Samsung American Express Google Tesla Apple Mastercard Venmo Capital One Nike Visa Citigroup PayPal Walmart / Store No. 8 ConsenSys Pinterest Warby Parker Payments, financial services, and blockchain Luke Gebb Dave Hoover SVP of Amex Digital Labs and Ethereum Developer, formerly at Global Network Products ConsenSys and IDEO linkedin.com/in/luke-gebb-12812b linkedin.com/in/redsquirrel Mark Jamison Jason Korosec Global Head of Innovation at Visa Former SVP and Group Head of and former CDO at Capital One Information Services at Mastercard linkedin.com/in/markrjamison linkedin.com/in/jasonkorosec Pete Woodhouse Former CTO of PayPal Credit and Sr. Director of Global Solutions linkedin.com/in/woodhouse
33 People Retail, hardware, and consumer partnerships Sharat Alankar Shahriar Khushrushahi Blockchain and Incubation Senior Engineer on Google ARA Associate at Walmart Store No. 8 and Project Jacquard, MIT PhD linkedin.com/in/sharatalankar linkedin.com/in/skhushrushahi Thomas Kim Brian Magida Former Board Director at ACTnano, Director of Performance products for Apple, Google, Tesla Marketing at Warby Parker linkedin.com/in/thomaskimco linkedin.com/in/brian-magida-46186312 Deirdre Peters Chris Walti Senior Product Manager for Former RFID Lead at Accenture e-Commerce at Nike Technology Labs, MIT Media Lab linkedin.com/in/dierdre-peters-9909318 linkedin.com/in/chriswalti Christina Wick Former Head of Engineering at Venmo and Sr. Manager at Amazon linkedin.com/in/christina-wick-60b4981 Branding and marketing Coby Berman Anthony Rodriguez COO at Radar, former Sales Founder and CEO of Emmy- Director at mParticle, Foursquare winning agency Lineage Digital linkedin.com/in/cobyberman linkedin.com/in/avrod Sarah Shere Pinterest Head of Product Marketing, former Sales Manager at Google linkedin.com/in/sarah-hoople-shere-87a2413
34 Background
35 The present state of digital payments Digital payments take many forms around the world and move a collective 10 trillion USD each day.17 The majority of these transactions are conducted using one or any combination of three instruments: Direct bank Payment Mobile transfer cards wallets e.g., SWIFT, Fedwire, ACH e.g., Visa, American Express e.g., Apple Pay, Google Pay, Alipay Global and domestic bank Plastic cards leveraging credit Mobile apps that proxy traditional clearing networks that move 3.6 and debit networks to move small payment instruments to move quadrillion USD in 102 million purchases of 26 trillion USD in more than 8 billion USD in 300 transactions per year 18 257 billion transactions per year 19 million transactions per year20 Common throughout Europe for Common in most geographies Common in Asia-Pacific for all all transaction sizes, and in the throughout the world for small transactions (via bank transfers); US and Canada for large and transactions, especially the US, gaining broad acceptance in the commercial transactions Canada, Europe, and Asia-Pacific US, Canada, and Europe → Page 36 → Page 39 → Page 42
36 The present state of digital payments Direct bank transfer In general, non-cash payment instruments are underpinned by a Daily processing volume traditional account held at an insured financial institution, such as a commercial bank or credit union. Whenever money is exchanged via SWIFT one of these payment instruments, whether electronically or by an 5 trillion USD21 offline ledger, it is ultimately transmitted between financial institutions. 30.7 million transactions22 To reconcile these payments, a variety of domestic and international standards are used for direct bank transfer between businesses and Fedwire consumers (also sometimes called “electronic funds transfer”), such as 2.1 trillion USD21 ACH/IAT, CHIPS, SWIFT, RTGS, Fedwire, BEPS, NEFT, and KFTC. 528,000 transactions Despite their ubiquity, each of these systems rely on legacy infrastructure CHIPS that remains vulnerable to fraud and transaction inefficiencies. 1.4 trillion USD21 430,000 transactions Legacy infrastructure ACH 120 billion USD23 The underlying technology of the global financial network is difficult 70.1 million transactions to navigate, consisting of a variety of incompatible legacy protocols and standards; many of the current electronic settlement systems have remained relatively unchanged for 40 years. For instance, Automated Clearing House (ACH) transactions in the United States are still conducted via fixed-width text files (with precisely 94 characters per line), uploaded to various FTP servers and downloaded at specific times of day for settlement. Until 2016, these transactions cleared the following business day, when NACHA announced an update allowing for same-
37 The present state of digital payments day payments.24 This “upgrade” involved no changes to the underlying specification; rather, banks were required to process transactions twice instead of once daily. Other clearing systems include the Society for Worldwide Interbank Financial Telecommunication (SWIFT); the New York Clearing House Association’s CHIPS network; and the Federal Reserve’s Fedwire network. Each involve substantially more robust checks and balances than ACH and benefit from greater speed, increasing the complexity of the global financial system. Together, these systems transmit a staggering 3.6 quadrillion USD in global volume.25 Fraud vulnerability Despite the additional supervision involved in these ledger systems, their protocols and networks are vulnerable to fraud. In a 2016 survey of the largest financial institutions, “cybersecurity concerns” was the most- responded challenge that bank executives said they faced in their day-to- day role,26 and many such instances of theft have recently become public. In 2016, thieves made off with 81 million USD by impersonating Central Bank SWIFT operators.27 Throughout a single weekend, they routed four transactions through the New York Fed’s mostly automated system, moving 101 million USD from Bangladesh to the Philippines. It was only when a New York Fed official caught a thief’s misspelling of the beneficiary name that they were able to alert Bangladesh Bank officials and prevent the transit of an additional 920 million USD. In 2018, a larger heist was discovered involving the Punjab National Bank and promissory “letters of understanding” issued through SWIFT, where funds were laundered by using a password provided by bank officials for direct access to the SWIFT network.28 Letters of understanding were issued for the equivalent of nearly 1.77 billion USD, and they were not correlated with the lesser amount that was registered via SWIFT in the bank’s holdings. Despite repeated warnings against fraudulent SWIFT messaging from the deputy governor of the Reserve Bank of India, the scam went undetected for nearly seven years.29
38 The present state of digital payments Transaction inefficiency Despite the underlying fraud vectors, funds transmitted over SWIFT, Fedwire, CHIPS, and ACH incur costs of approximately 18 billion USD every day.30 Additionally, transfers require three to five days for settlement, and up to 4 percent of payments fail due to technical reasons.31 The blockchain could potentially offer several enhancements in these systems, namely cryptographically secure transactions, immutability, and data redundancy. For instance, Ripple, a prominent US startup, allows financial institutions to quickly settle cross-border payments using its xCurrent network, claiming a 60 percent reduction in net cost.32 Remittance providers such as Western Union and Moneygram have also piloted using native Ripple blockchain tokens (XRP) for settlement.33 Using products such as these, we believe that blockchains have the potential to influence well beyond the primary layer of the global financial network.
39 The present state of digital payments Payment cards Direct bank transfers are just one of the several steps involved in Daily processing volume conducting a standard transaction with a payment card (e.g. a credit or debit card). In practice, the payment card authorization and settlement Union Pay framework implemented throughout the United States and Europe 41 billion USD34 involves the coordination of no fewer than six parties in order to transmit 105 million transactions35 and guarantee funds. Visa Although payment cards offer universal acceptance and consumer 20 billion USD36 benefits, they are prone to many single points of failure as well as the 305 million transactions rising costs of fraud and incentive fees. Mastercard 12 billion USD37 Many single points of failure 184 million transactions The companies involved in payment card processing serve mutually American Express exclusive roles and extract a share of the transaction fee. This fee is called 3.2 billion USD37 “interchange,” and has been variously regulated by the European Union 19.8 million transactions (Interchange Fee Regulation, April 2015), and the Federal Reserve (Durbin Amendment, July 2010). JCB 731 million USD37 Payment cards also mandate a secondary network provided by entities 8.1 million transactions called “card associations.” Card associations work with payment processors to conduct the three broad stages of a payment card Discover transaction: authorization (verifying funds in accounts on either side 466 million USD37 of a transaction), clearing (transferring funds between banks after the 6.4 million transactions exchange of goods or services) and settlement (paying a merchant).
40 The present state of digital payments In order to accept payment cards, merchants incur disproportionately high processing fees which are often one of their largest operational costs. In 2012, responding to these rising processing fees, some of the largest merchants in the US—including Walmart, Target, Best Buy, CVS and 7-Eleven—created a cooperative organization called Merchant Customer Exchange (MCX), with the charter of developing an ACH-backed payment instrument to avoid interchange fees.38 After three years of continuous merchant investment and delayed development, the MCX mobile app never exited a pilot phase. Although it was successful at reducing merchant costs of processing, MCX was never able to deliver a compelling consumer value proposition. In 2017, JP Morgan Chase acquired the MCX technology to integrate with its existing Chase Pay system. In the past decade, payment card processing fees have skyrocketed for two main reasons: first, because of an increase in fraud, including losses that are paid by issuing banks when they reimburse their customers for unauthorized charges; and second, because of the consumer demand for better card benefits and rewards on high-end credit card products. Rising costs of fraud EMV (Europay Mastercard Visa) chip cards have found mainstream adoption in Europe, Asia and the US, but payment card fraud in aggregate has continued to rise. Despite broad acceptance of the card-based technology, 2.8 million fraudulent accounts were created in 2018,39 and account takeovers cost merchants 5.1 billion USD.40 Additionally, transactions made online (i.e., “card-not-present”) have seen fraud losses increase more than 100 percent since the introduction of the EMV standard.41 Chip-enabled cards have subsequently increased payment security, but are still vulnerable to man-in-the-middle attacks, especially when merchants don’t upgrade their systems to support encrypted transaction data from EMV-capable terminals. Cards can also be cloned from unsophisticated account enumeration, physical card skimmers, RFID readers, or simply a restaurant waiter with a cell phone camera.
41 The present state of digital payments In 2016, the total fraud losses for payment cards worldwide was estimated at 22.80 billion USD,42 with 46 percent of all US citizens reporting card fraud within the past five years.43 Recently, the rate of identity theft has soared, with more than 1,500 corporate data breaches,44 including the theft of 143 million credit reports from Equifax45 and 40 million credit card numbers from Target.46 Yahoo—now part of Verizon—also revealed that hackers obtained the personal information of its entire database of 3 billion worldwide users during an attack in 2013.47 Incentive fees Credit card rewards points also contribute to the high fees incurred by merchants to accept these payment instruments. Originally introduced by American Express in 1991,48 these points have since become a cornerstone of consumer marketing for major credit card products. Today, travel and dining bonuses have become extremely competitive for the major credit card issuers: Chase, Capital One, and American Express are each vying for coveted “front of wallet” placement by offering up to 5× points or five percent cash back on various purchase categories. As a result, many industries have developed to help the affluent consumer “optimize” their spend for maximum returns, perhaps without realizing that the true cost of these rewards is subsidized either by the small merchant businesses (which lack the required leverage to negotiate more affordable interchange rates), or the other payment card consumers who finance debt through high monthly APR interest. Many small businesses ultimately choose to avoid payment cards altogether and revert to cash- only transactions, putting them at a significant consumer disadvantage.
42 The present state of digital payments Mobile wallets More and more, third-party mobile wallets are becoming mainstream Daily processing volume payment instruments, capitalizing on their ability to aggregate various aspects of bank accounts and payment cards and offer even more Alipay consumer choice and convenience. While some (like Apple Pay, Google 4.7 billion USD49 Pay, and Samsung Pay) simply serve as vehicles for virtual cards by 175 million transactions proxying existing payment cards’ primary account numbers, or PANs; others (such as Alipay, WeChat Pay, PayPal, Venmo, Square Cash, WeChat Pay and Apple Pay Cash) have built a suite of value-added services and 3.3 billion USD50 integrations on top of what is essentially a stored value account. 130 million transactions51 Many of these mobile wallets have seen substantial growth in recent PayPal (incl. Venmo) years—especially in China—but their traditional payment instrument 425 million USD52 underpinnings present limitations on the ability to provide meaningful 8.3 million transactions53 incentives, grow internationally, and manage fraud vulnerabilities. Paytm 55 million USD54 Limited incentives 11 million transactions Today, even the largest and most successful mobile wallet apps and services enable the vast majority of their transactions by proxying an underlying insured or regulated payment instrument, such as a bank account or payment card. By functioning as this abstraction layer, services like Apple Pay and PayPal are able to offer value-added features like enhanced security or purchase protection, but are limited in their ability to provide unique incentives or sustainable bonus structures beyond what the underlying instruments already support natively.
43 The present state of digital payments International incompatibility Moreover, mobile wallets have seen substantial growth in markets without entrenched financial institutions. For example, in the absence of traditional, credit-based payment infrastructure throughout China, companies like Alipay and WeChat Pay have built a direct system that facilitates mobile transactions on a private payment network over the internet. The rapid growth of these platforms—in terms of both scale and versatility—is impressive. But because the underlying financial infrastructure is still provided by domestic financial institutions, international growth is encumbered by the overhead of adapting these systems to foreign banks and exchanging currencies. Outside of payments, the major value in third-party mobile wallets is their usefulness for internal or peer-to-peer transactions via network effects. Many people join Alipay, WeChat, Venmo or Square Cash because their friends are there, or because it’s easier to send money to a phone number or username than it is to share account numbers. These features build community, but ultimately limit platform growth to these regional groups because users have limited incentive to interact internationally. Fraud vulnerability Mobile wallets are essentially an interface to existing payment instruments, which can make them vulnerable to certain types of fraud. By storing many payment instruments behind a single online account and password, these apps create an opportunity for account takeovers, which in 2018 amounted to 5.1 billion USD in losses.55 Many apps also distinguish between peer-to-peer payments and payments for goods and services because of their inability to mitigate buyer fraud, such as chargebacks and ACH returns. For example, due to its ACH underpinnings, Venmo’s terms and conditions explicitly warn against using the app for retail payments. When a fraudster reverses an ACH transaction used to load a Venmo account, the company is forced to reverse the transaction within its own ecosystem, sometimes by directly debiting beneficiaries’ bank accounts.
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