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BUILDING A GLOBAL FOOTPRINT
Building an international footprint
Infrastructure services are opening up a global playing field for platform banks. Sue Scott asks if they have the ambition to step onto it
If you’re a financial service, with ambitions, perhaps, to become a unicorn, where in the world would you look to grow your business?
When researchers asked that question of a range of providers based in the UK, France, Germany, Denmark and Benelux, most weren’t tempted to look beyond their own back yard.
Eighty-four per cent of banks and paytechs questioned for Banking Circle’s white paper, Ready For The Re-build? Re-thinking The Value Of Digital Infrastructure, expected to find opportunities for growth over the next two years in Western European states, while just over half saw Eastern Europe and the Mediterranean as potential regions for expansion.
Few want to follow in the footsteps of N26, Monzo and Revolut, which established in North America this year (just a quarter of respondents saw that as the promised land), much less would join the UK’s TransferWise in the United Arab Emirates (digital might be the new oil, but just 11 per cent smelled success in the Middle East and North Africa). For most, China, Sub-Saharan Africa, Russia, the Commonwealth of Independent States, and Central Asia were barely on the radar, while South Asia and the Association of Southeast Asian Nations, India and Latin America – all tipped to be digital honeypots owing to the density of population, smartphone penetration and large swathes of the population being under- or unbanked – appealed to between 18 and 31 per cent.
This lack of global vision could be a symptom of uncertainty caused by the pandemic but, more likely, has to do with the difficulty in harmonising compliance, standards and protocols across
multiple and unfamiliar markets. blocks to expansion, making access to Seventy-five per cent of those in Benelux, distant markets easier and cheaper. for example, cited that as the biggest The composable banking model is challenge. That said, it’s something of a supremely flexible, ideal for replicating misnomer to think that building financial in different territories and adapting businesses in Europe is a synch. As or replacing products and services Thibault de Barsy, vice-chairman and according to local demand. Banking Circle general manager of the Emerging itself is based on that model, supporting Payments Association of the EU, based in its own vision to expand beyond Europe. Luxembourg, says: “The biggest problem Already active in Asia, Alibaba’s financial for digital solutions in Europe is that it is arm is among its biggest clients. not a truly unified market. It’s not even “Over the next couple of years, Asia about cultural differences. We’re talking will be a strong strategic focus, given the about basics, like regulation and tax.” growth opportunities there,” says la Cour.
Anders la Cour, “Our own architecture CEO of Banking Circle, which delivers financial Asia will is decoupled into smaller components. We can infrastructure to other be a strong replace or update banks and payments businesses, agrees. focus in our individual pieces with limited impact on the “Take the Single strategy, given rest and easily add European Payments Area (SEPA),” he says. “[It’s] the growth more functionality. For example, direct clearing come into existence opportunities we for new geographies, largely with the aim of removing complexity. have seen there which may require new connectivity, formats, Still, the complexity of protocols and interaction clearing through SEPA is enormous. ISO with new clearing technology providers.” standards have been implemented According to Findexable’s Global slightly differently in different Fintech Rankings 2020, there are still geographies, each bank may interpret growth pockets within Europe. But it is, formats differently, different technology by and large, a mature market where the providers exist, and there are several competition in most areas of financial settlement schemes.” services is only likely to become more
He would argue that mission-critical intense. Some of the most exciting infrastructure services for clearing, ID opportunities lie on further shores: verification and fraud control, all of which Findexable highlights India, Brazil, extend beyond borders, remove the road Mexico, UAE, South Africa and Argentina, where regulatory, innovation and ecosystem efforts are being focussed to build fintech success at scale. And there are plenty more bubbling up behind. Kicking the ball around the back yard might make you successful in the lower leagues, but there’s a global pitch to play on and, increasingly, infrastructure services that put the premiership within reach.
Scaling for sustainable success
The financial services market is exploding with exciting neobanks and other new entrants. They’ve a long way to go to catch up with the incumbents, but the adoption of the latest digital infrastructure services promises to help them scale rapidly and sustainably, writes James Tall
A wave of neobanks are making headlines all around the world. Europe’s biggest have moved on from being simply electronic money providers and have secured banking licences. In the UK, according to Accenture, they tripled their customer base to almost 20 million users last year as they compete among themselves and incumbents for the fastest, smoothest onboarding and the most exciting platform services.
But in the great scheme of things, they’re only just learning to walk.
“Let’s hold on for a minute, nothing has been achieved yet,” says Tom Stafford, CEO of Hong Kong’s DST Global. “The talented founders are building great teams, but ultimately the EBITDA (earnings before interest, taxes, depreciation and amortisation) of these businesses is still negative. And in terms of the $12-15trillon global banking market, they’re a fly on the backside.”
Ouch. A stark comparison maybe, but also a useful reality check. Neobanks, while promising, have a long, long way to go. Panellists taking part in the US/Europe Cross Eyes On Fintech Launch & Scale session at this year’s Paris Fintech Forum agreed with Stafford, and questioned whether some business models, even those that are scaling rapidly, are even truly sustainable.
One certainty is that the ability to access specific third-party infrastructure services is
a big, timely boost for these new entrants and their life prospects.
“Over the last five years, it has helped hugely that new infrastructure tools – the likes of Galileo and Plaid – have been developed and built,” says Stafford. “So, if you’re starting a digital bank, you can simply plug into a platform like Deposit Solutions and instantly have a way in which you can offer a savings product without really building a lot on your side.”
Over recent years, Plaid, Deposit Solutions and a raft of other new fintechs have emerged as infrastructure providers. These agile platforms are selling services to financial institutions not only to improve the end user experience or to add additional capabilities, but also to more fundamentally change the way these financial providers operate – or, at least, “ It was important to that’s how they should be seen. start small to refine There’s no doubt that digital the proposition… infrastructure services can lay But our ambition the foundations for growth, is definitely global but a survey by infrastructure provider Banking Circle indicates that leaders across the financial Norris Koppel, Monese services industry (legacy and new gen) still don’t ‘get’ their full potential. When asked how important infrastructure was in enabling them to capture today’s opportunities, the overall majority (63 per cent) believed it had a role in helping them to offer new services and 56 per cent believed it would help them respond better to customer needs. But there was markedly less appreciation of the role of
Doing the heavy lifting:
Infrastructure services are key to growth
“We’re slightly more calm, less aggressive in our growth and more focussed on creating those products that really make life easy Ali Niknam, Bunq
“If you want to enter new markets there are some success factors: competitive advantage, a market with a critical size and ease of adapting your own system Thibault de Barsy, Emerging Payments Association (EPA)
infrastructure services in reaching new markets, responding to the unexpected or helping businesses to compete.
As the researchers noted: “The survey shows a patchy understanding of the diverse roles of customer-facing digital innovations and the underpinning infrastructure, despite a broad understanding of the importance of digital. For example, only one quarter of respondents felt infrastructure has a role to play in helping them respond better to unanticipated events.”
It’s crucial that they quickly connect the dots and understand the role of infrastructure as ‘the rails’ and new applications, services and solutions as ‘the brains’, they added.
“Infrastructure isn’t about delivering against a single business goal or enabling a sole use case. It may not be sexy, and it may not grab the headlines in the same way as technologies like robotics and artificial intelligence (AI) do, but without the right infrastructure, a business can be superficially strong while fundamentally weak.”
Tim Sievers, CEO of Deposit Solutions, is one who does see the strategic value in leveraging infrastructure.
“We spent a lot of time customising our product to ensure that it was the right fit for the US market,” he told an audience at Paris Fintech Forum earlier this year.
“We had to tweak our proposition but we were happy to – we had to be able to use our infrastructure for open banking solutions there and not build a parallel set of rails, which makes no commercial sense.”
START SMALL, GROW BIG! Such global ambition appears to be part of the DNA for many neobanks.
Monese founder Norris Koppel has talked of his vision to cover as many countries in the world as possible within eight years, but also advocates starting small. “We knew it was important to start small to refine the proposition. We chose the UK as a launchpad because of its very friendly regulator, status as a fintech hub, and good access to capital. But our ambition is definitely global,” he says.
Matt Oppenheimer, CEO of money transfer company Remitly, is a firm believer that most transformational companies have plan for One of the key world domination, but also highlights the importance of honing an offering in a single barriers to market before stretching your wings. achieving scale is the “We initially focussed on just one payments corridor, the US to the ability to align with Philippines, but now service over 700,” local regulations he explains. “You have to start off by navigating the chicken-and-egg problems and compliance… in terms of regulation and compliance ‘plug-and-play’ – having the capital to meet [US states’] net worth requirements, a product that infrastructure regulators can audit, a product to raise services can help capital and partners to disperse funds who will want to see your licence.” of this annus horribilus – have taken their
Ali Niknam, who self-funded French feet off the gas temporarily, there is still a mobile bank Bunq, which has an clear appetite for growth among fintechs. eco-friendly USP, has taken a TransferWise, for example, has continued different approach to most its ambitious expansion challengers. “We’re slightly more calm, less aggressive “ When you move beyond your core into the United Arab Emirates (UAE), while Mambu in our growth,” he says. area, you then need to is strengthening its position “We’re more focussed on consider how you take in northern America. creating those products that the opportunity set to Banking Circle’s white really make life easy, and different markets paper reflects this sense people really like to use. where you don’t have of optimism. Despite the
“I think a part of existing infrastructure pandemic, the industry sustainability is that you Emmalyn Shaw, clearly believes that have a business model that is capable of being Flourish Ventures opportunities for growth are there for those best able profitable,” he adds. “We to take advantage of them. have losses but at least the There is a belief that the unit economics are healthy.” newer participants and
While Monese has now technologies that are reigned back its fund raise in shaping the competitive light of COVID-19 and N26, landscape will help them Revolut and Monzo – who a make the most of ll entered the US at the start international opportunities by enabling them to offer more services across new markets. Europe’s financial services providers are true internationalists. When questioned about how big the opportunity was to grow their company over the next few years, the most common response was four to five per cent, with only a few anticipating sub-one per cent expansion, despite COVID-19.
In terms of geography, Western Europe is still seen as the land of plenty, followed – at a considerable distance – by Eastern and South-East Europe. Notably, North America is not seen by many as an area of opportunity anymore, while Russia is viewed less favourably than Sub-Saharan Africa. (To be fair, research firm Findexable is on record as saying that ‘fintech’s future will arrive fastest in Africa’. One to watch).
THE REGULATORY QUESTION One of the key barriers to achieving scale is the ability to align with local regulations and compliance requirements. Of course, ‘plug-and-play’ infrastructure services can help companies to get around some of these issues, but there is a lot to consider if you want to take on multiple markets.
In the Banking Circle survey, 75 per cent of respondents in Benelux and 71 per cent in France said that managing different standards across multiple markets is a
major challenge to rolling out banking services internationally. In Germany, 70 per cent highlighted integration with diverse technology systems and protocols as a headache.
One tip offered by the panellists in Paris was the distinct advantage of kicking things off in the UK. Generally, most global regulators recognise and respect the work of its Financial Conduct Authority and so passporting from the UK market really helps. In some jurisdictions, notably in Brazil, Hong Kong and the UAE, regulators have taken the lead from UK rule-makers, so it feels like familiar territory.
In fact, the UK’s success has prompted a new sense of competition between European regulators, with Germany’s BaFin (Federal Financial Supervisory Authority) actively promoting its jurisdiction to neobanks, and the French Autorité des Marchés Financiers playing an essential role in promoting fintech adoption among French banks and consumers alike. This is seen as a good driver for growth prospects.
VIEW FROM THE VCS And how do investors rate the neobanks’ prospects for growth?
“I would say that the UK and Europe are still the right markets to start making bets in,” says Emmalyn Shaw, managing partner of Flourish Ventures. “When you move beyond your core area, you then need to consider how you take the opportunity set to different markets where you don’t have existing infrastructure. The common approach is to apply for a banking licence, rent a charter partner and use a local back-end processor. But you also need to research and understand the local consumer base and get the unit economics working to push your value proposition and, ultimately, scale.”
DST Global’s Stafford has invested in the likes of Revolut and Nubank, the largest fintech in Latin America. He knows the market. “The job of an investor is not to dictate but rather to support,” he says. “Whether Nik Storonsky at Revolut wants to expand into eight countries or 198, our job is to help him achieve that.”
Indeed, he estimates that there will be 10 fintechs each with a $100billion market cap in 10 years’ time. But a lot will depend on their ability to sync their offer with digital infrastructure services to light a rocket under their growth.
The Gen Z bank that’s going viral
Zelf isn’t your average neobank. It’s challenging the challengers
A bank so disruptive that it could only have been made for teenagers, Zelf is entirely based where they are – on messenging platforms.
Powered by Treezor and available on WhatsApp, Viber, Telegraph and Facebook Messenger, its totally app-free model and 30-second sign up for basic transaction services are designed expressly for impatient Gen Zers.
Launching initially in Spain and France, which were selected for their regulatory framework and contactless capabilities, 350,000 people are already enrolled there. Key to its marketing, Zelf offers monetary incentives for referring friends, which is bound to appeal to often cash-strapped adolescents – and it’s gearing up to go viral.
“We felt that France and Spain presented the perfect opportunity,” says founder and CEO Elliot Goykhman. “In terms of the population size, contactless level, expenses per capita, these are the first two countries, from which we’ll make sure that we cover all of Europe, then come to the UK and to the United States.”
The goal for Zelf is to have half a million customers by the end of 2020. Within just two years, Goykhman is pushing to have five million users, a full banking licence and a global presence.
Paid-for Premium, Parent and Pro accounts, transaction interchange fees and yet-to-be-announced additional revenue-generating financial services are the basis for the business model. Freemium banks are nothing new – and most are still waiting to see a profit. So what, if anything, makes Zelf different? With no app to maintain, Goykhman says it’s incredibly cost-effective to run. It encourages users to opt for wallets rather than plastic, so issuance is substantially cheaper, too.
He aims to ‘extend not only globally, but also to different parts of human life’.
“For example, people have voice assistants with Amazon, Alexa, Apple Home, etc. They’ll be able to give voice commands to those appliances about their finances, so anything from paying their utility bill to sending money to friends [via Zelf].”
One of the conclusions of the Banking Circle white paper was that banks are locked in an echo chamber, listening to and meeting the changing needs of existing customers – but not the next generation. Zelf certainly can’t be accused of that.
