Fintech Finance presents: The Fintech Magazine 17 by Fintech Finance

ISSUE 17

THE Where’s hot, where’s not The ultimate guide to the world’s fintech hot spots

Onboarding for dummies

Jim Marous and Mobiquity on what the click rates tell us

MASTER

STROKES

New kid on the block

Meet Zelf, the Gen Z challenger that exists entirely in a messaging app

Ahead in the Cloud

An insight into Nationwide’s multi-billion IT journey

Andreas Burner on how SmartStream’s talented AI is painting the full data picture

INSIGHTS FROM Coconut ● BNY Mellon ● Krungsri ● Minted ● G+D ● Bank of America

Santander ● Trulioo ● Insha ● Feedzai ● VMware ● HPS ● Muniy ● ING ● Investec ● Coutts

CONTENTS

COMMENTARY 22 Switching gears The head of investments at Banco Sabadell’s digital innovation hub InnoCells understands that banking’s role has fundamentally changed – and it’s making the most of it

30 Building back better While investors took a raincheck on most deals this season, open banking platform Belvo struck gold in LATAM

38 The long walk to inclusion 2020 was supposed to be the year we celebrated the end of financial exclusion. But around half the world’s population still don’t have access to a bank account. We ask what fintech can do to get us closer to that goal?

62 Answering the SOS for SMEs Free-to-use platform Save My Local demonstrated how tech could leverage customer loyalty to help small businesses stay afloat in a crisis

64 Crossing the Bay As tensions in Hong Kong mount, China’s Greater Bay Area ambitions still represent a huge opportunity for fintech. How do they weigh up the risk?

THEFINTECHVIEW

2020

ISSUE #17

From a messenger bank for Gen Zers to a challenger inspired by hip-hop, our look at neobanks of the world in this issue is a refreshing, upbeat change from the news of the past few months. There’s an urgency and optimism about these newbies – some spun out of more traditional institutions, others born out of pure, entrepreneurial genius, that haven’t been blown off course by the pandemic, and some that have even been boosted by it. Minted’s sooner-than-expected launch as panicked investors raided the world’s bullion is a case in point! That’s not to ignore the very real struggle some startups and scaleups are experiencing in raising early-stage capital right now – especially in the lendtech sector, as Varengold lays bare on page 86. There is always opportunity in a crisis and, given the likely demand for liquidity as economies get back on track, it’s curious that VCs are shying away. That economies will recover is not in question – especially if the millions of

86 Sizing up the lendtech liquidity gap

small businesses that have refused to lay down and die have anything to do with it. Valitor’s recent joint survey, with Visa, of 300 UK SMEs gives us all cause to be positive on page 59, and makes the tale of fintech white knight Save My Local (page 62) all the more heartwarming. The extraordinary resilience and determination to embrace some frankly scary tech if you’re a small trader who’s got by with not much more than a ledger book and a cash box, demands not only respect, but a united FS response. PSPs, tax and accounting platforms and, of course, the banks, have a role to play here – and perhaps, as Banking Circle suggests on page 73, it’s best achieved by taking a platform approach, with infastructure as a service. The Banking Circle white paper asks if banks are ready for the rebuild. Well, are you? Sue Scott, Editor Did you recognise last issue’s ‘spine tingler? “Nobody knows anything” is a quote from American screenwriter, William (All The President’s Men) Goldman

Alternative lenders could help get the global economy on track, but they can’t do it without adequate debt financing, says Varengold

ARTIFICIAL INTELLIGENCE 8

Bringing clarity (and colour) to reconciliations With AI and machine learning maturing rapidly, the number of use cases in financial services is rising. SmartStream’s Chief Technology Officer discusses how reconciliations have jumped to the top of the tech agenda, how AI can support the most complex aspects of processing and what the firm’s Innovation Lab is cooking up next

12 For your eyes only Coutts and Investec explore how AI can help private wealth managers combat crime

www.fintech.finance

86 Issue 17 | TheFintechMagazine

Empowering the payments r-evolution FRAUD MANAGEMENT OPEN BANKING

BRANCH TRANSFORMATION

TAS Group delivers software solutions and services for cards, payment systems and financial markets in Europe and the Americas. We empower customers to leverage the latest technology and best fintech partnerships to become leaders in todayâ&#x20AC;&#x2122;s redefined payments ecosystem.

CARD MANAGEMENT

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solutions@tasgroup.eu www.tasgroup.eu

CONTENTS

46 43

25 15 Cracking or coping? How Covid reset AI AI has had to run fast to catch up with dramatically different patterns of behaviour during the pandemic. Santander and Feedzai consider the short-term and long-term consequences of changes in the way we spend

19 Putting the AI in Thai Krungsri Bank made a shrewd decision four years ago to get to the head of the queue when it came to acquiring and investing in new technology, by creating Krungsri Finnovate. Now it’s helping to propel Thailand towards an AI-enabled future

CLOUD 25 A journey to the Cloud Nationwide’s migration to the Cloud is part of a £4.1billion IT investment that’s more than lived up to its promise during the pandemic

28 Elevated decisions Financial institutions, with a timely nudge from COVID-19, have woken up to the huge transformational potential of the Cloud. VMware considers the shifting balance between private and public Cloud, and the importance of customer-centricity www.fintech.finance

REGTECH 33 120… a click too many An undercover study this summer revealed which banks really had a slick onboarding process. We asked fintech’s Jim Marous and Peter-Jan Van De Venn from digital consultancy Mobiquity, what we can learn

36 Making its mark Trulioo set out to give everyone in the world access to financial services by making sure they had an ID that was verifiable and secure. Chief Operating Officer Zac Cohen believes the changes being accelerated by the pandemic will bring that closer

PAYTECH 40 Fan ‘fair’ for a local hero In the helter-skelter world created by the pandemic, community-based cash systems could be part of a socially and environmentally conscious ‘new normal’, argues Ron Delnevo

43 Reality cheque US corporates are waking up to the fact that digital payment systems are not just preferable but essential as the world finds different ways of working. BNY Mellon believes the phrase ‘the cheque’s in the post’ will mean nothing a generation from now

46 Above and beyond banking ING is going further than most banks in redefining its role in payments. We find out how and why

48 Getting your clicks The etail explosion spurred on by COVID-19 is a golden opportunity for the industry – if it can collaborate over payment security, says G+D

50 Predicting the unpredictable ‘Digitising the trade’, not just the payment, is key to business survival in a future that’s increasingly hard to call, says Bank of America

52 Totally taken with tokenisation Raiffeisen Bank International was uniquely positioned in Central and Eastern Europe to develop a private stablecoin that operates alongside the Euro. It believes the bank’s tokenisation platform shows what collaboration and transparency can achieve Issue 17 | TheFintechMagazine

CONTENTS

56 69

54 Hands up for hands off RBR forecasts that the pandemic-accelerated shift to tap-and-go payments is likely to continue – even among slow adopters like the USA

73 Building for an unknown future

Africa is a vast continent with huge potential in the payments space, says HPS Worldwide

59 A key moment for retail? A survey, during the pandemic, of 300 SMEs in the hospitality and service sector, by Valitor and Visa, has revealed a surprising degree of resilience and optimism. Now they need additional support from payment solutions providers

NEOBANKS OF THE WORLD 66 Challenging the challengers Meet Zelf, a neo so disruptive it must be for Gen Zers

80 Mo’ money in the hood

Banking Circle’s three-part white paper, Ready For The Rebuild? Rethinking The Value Of Digital Infrastructure, reveals that the challenges banking executives cited as their most pressing concerns during the pandemic were the same as those that they listed before it struck… A platform approach is, it argues, the solution

56 A continental shift

80 Muniy, a new challenger with a hip-hop vibe, is reaching out to the underbanked and SMEs to create value for everyone

82 A golden opportunity Gold buying and trading app Minted was preparing to launch just as the pandemic prompted an investor stampede for bullion. So, it pulled out the stops and within weeks had turned over £500K

76 Think they’ve cracked it! Coconut is a bank sets out to give freelancers and the selfemployed a ‘finance team in your pocket’… and what a lovely bunch they are!

78 Fintechs’ Mayflower voyage – and the bank that’s welcoming them

69 Finding a healthy balance South Africa’s Discovery Bank took what it had learned in the health insurance sector and applied the same behavioural data approach to personal finance

America’s NBKC Bank is issuing an open invitation to European explorers who want a foothold in the Land of Opportunity

84 Money and morals One of Germany’s newest challengers has adopted the principles of Islamic finance to serve a culturally diverse audience – one hungry for a values-led approach to banking

LAST WORDS 89 The taxonomy of fintech Findexable’s Global Fintech Index is a new way to identify where the industry’s hot and where it’s not. What makes these rankings different?

THEFINTECHMAGAZINE2020 EXECUTIVE EDITOR Ali Paterson EDITOR Sue Scott ART DIRECTOR Chris Swales PHOTOGRAPHER Jordan “Dusty” Drew

ONLINE EDITOR Eleanor Hazelton Lauren Towner SALES Chloe Butler Tom Dickinson Karen Estcourt Shaun Routledge

US CORRESPONDENT Jacob Bouer VIDEO TEAM Douglas Mackenzie Lea Jakobiak ● Laimis Bilys Shaun Routledge Lewis Averillo-Singh Classic Dom Beasley

FEATURE WRITERS Hannah Duncan ● Will Dove David Firth ● Tracy Fletcher Andrew Gaudion ● Rachael Harrison Martin Heminway ● Alex King Natalie Marchant ● Sue Scot James Tall ● Swati Sanyal Tarafdar

ISSUE #17 Fintech Finance is published by ADVERTAINMENT MEDIA LTD. Advertainment Media Ltd. Riverside Business Centre, Riverside Lawn, Tonbridge Kent, TN9 1EP

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Issue 17 | TheFintechMagazine

ARTIFICIAL INTELLIGENCE

Bringing clarity (and colour) to reconciliations With artificial intelligence and machine learning maturing rapidly, the number of use cases in financial services is rising. We caught up with SmartStream’s Chief Technology Officer, Andreas Burner, to discuss how reconciliations have jumped to the top of the tech agenda, how AI can support the most complex aspects of processing and what the firm’s Innovation Lab is cooking up next Recent developments in deep learning have caught the eye. Literally. They’re potentially transforming the way film and TV programmes are created, enhanced and experienced. BBC researchers are currently experimenting with generative adversarial networks – setting two artificial neural networks against each other in an attempt to turn grey scale into awesomely realistic colour. As each algorithm learns to up its game against the other, the image is colourised in a matter of seconds – a process that would take hundreds of artists, working frame by frame, weeks to achieve. It’s not that it can’t be done, but the time and

TheFintechMagazine | Issue 17

cost are prohibitive for most projects. The obvious application of this gladiatorial machine learning technique is in enhancing old movie footage where much of the detail is lost in monochrome. But it’s the future potential for viewers to use AI to customise their experience that’s really exciting. So, what’s this lesson in moviemaking got to do with financial services? Well, SmartStream is intent on using AI, and specifically machine learning, to achieve the same jaw-dropping speed and detailed accuracy in financial services – metaphorically colouring in the missing elements in data to give firms a realistic picture of their liquidity in real time and, potentially, transforming their business with as yet unknown applications. AI has matured to the point where it can be widely deployed to address some of the most problematic aspects of data processing, such as reconciliations, which involve multiple parties and countless daily transactions. To give an idea of the volume of processing that requires, one major SmartStream client bank alone handles $4trillion a day. Even before COVID-19 knocked the business world sharply off course, simplifying the complex reconciliation process was becoming a big priority for financial institutions. The pandemic has only added to the number of electronic, low-value transactions that need reconciling. In the past, banks have written off many of these low-value ‘bad recs’ because it’s just too time-consuming and costly to investigate them properly.

They need help and SmartStream’s innovation lab is delivering it.

A breath of fresh AIR In September 2019, at Sibos in London, SmartStream unveiled SmartStream AIR, a Cloud-native, AI-based reconciliations platform – the first market-ready product to come out of its Innovation Lab in Vienna. AIR solves a number of problems. Given that it’s a Cloud-native and Cloud-hosted platform, new users can be up and running on the system within minutes of setting up a profile and receiving their login details. It then enables them to manage their reconciliations on an ad-hoc basis and provides accurate results quickly. Very quickly. Processes that would typically have taken days or even weeks can now be managed in under 10 seconds. The Lab is staffed by a multidisciplinary team of highly-trained mathematicians, applied data scientists and computer scientists, led by SmartStream’s chief technology officer Andreas Burner. “AIR is a Cloud technology, so it’s quite easy to roll it out. Firms just subscribe to it and they can get full access within an hour,” says Burner. “These days, with COVID-19, it’s pretty tough for organisations to purchase and install hardware, because people are just not on site – they are working from home in many cases. We didn’t anticipate that, of course, but in the times we are living in, it’s actually the optimal solution for organisations that want to quickly and easily verify their data.” Once access is granted, SmartStream www.fintech.finance

AIR automatically configures the system, ready for a new user. “Within seconds, AIR understands how columns belong to each other, what the values are, where the reference dates are, and so on. We’ve reduced it to just uploading files and getting an immediate result,” says Burner. SmartStream’s AI doesn’t have a binary black and white (bad/good) view of data. Like the moviemaking algorithms, it uses its catalogue of learned experience to identify where the nuances are missing and then paints in the detail to create a vivid picture. In the event that a reconciliation has to be processed manually because of an incomplete data set, SmartStream’s AI reviews the manual matches and learns patterns within the data to identify the appropriate broker, counterparty or department. This is already in use with one major client where it’s had an immediate and significant impact on manual matching. It has reduced cost across some of the organisation’s business lines by up to 50 per cent.

Within seconds, AIR understands how columns belong to each other, what the values are, where the reference dates are… we’ve reduced it to just uploading files and getting an immediate result

The full picture: “We take a holistic approach,” says Burner

www.fintech.finance

“We are running a proof of concept for one bank that is having problems with the quality of its data – either data is missing, or perhaps brokers delivered bad quality data,” says Burner. “We have implemented one of our machine learning libraries to try to identify everything that is missing and retrieve it from other systems. You cannot imagine how successful that is. It’s such a simple thing, but when the workflow of the bank is huge, having that pre-process means everything, from then on, is straightthrough, with less manual touchpoints for users and much more quality for managers. It’s really impressive.” Issue 17 | TheFintechMagazine

ARTIFICIAL INTELLIGENCE Burner also believes in the importance of ensuring that data is neutral, removing any inherent bias, but this is a work in progress – in financial services and beyond. “Data neutrality is one of the critical subjects in machine learning and AI,” he says. “This is because machine learning and AI learn from data, and that data typically comes from humans. So, if that data is biased, the machine learns from that.” The old programming watchword, ‘garbage in, garbage out’, carries added weight these days. “It’s important to understand how AI and machine learning decide, on what basis, and then to remove the bias from that data. Really objective criteria is needed in these troubled times,” says Burner.

Exploring the use cases While AIR is SmartStream’s most obvious application of AI and machine learning, it’s certainly not the only SmartStream business unit benefitting from the Innovation Lab's groundbreaking work. Ensuring that each of its offerings maintains its focus on solving users’ problems is central to the team’s products and services strategy. This makes a lot of sense. According to Gartner, by 2022 only 15 per cent of all AI projects will be successful. Many AI systems are coming to market, but they don’t always meet the use case and provide a return on investment. So, what else are Burner and his Lab team working on to cure the industry’s headaches? One area of acute focus is the ongoing struggle around managing unstructured data. SmartStream is working on adding support for unstructured files – emails, PDFs and large volumes of payment messages – which continue to trouble capital markets firms. The processing of this unstructured data is a complex and manually-intensive task, especially for larger institutions, which typically employ hundreds of back-office professionals to address the challenge. SmartStream’s TLM Reconciliations Premium is a platform used primarily in the back office to ensure the accuracy of information flowing between systems, and to identify risk and breaks in the process. It uses AI in several ways, one of which is to automatically improve data quality as it loads into the system. Through supervised machine learning, TLM enriches data using information from previously resolved

TheFintechMagazine | Issue 17

breaks. Data patterns are analysed to identify the best department or business entity for investigation. This process can significantly improve break resolution efficiency as the trade is presented to the optimal business entity first. “What we’re seeing is that the number of transactions is continuously going up. All banks, and many of our customers, have really big problems in terms of coping with this,” says Burner. “AI and machine learning can help them if we specifically define tasks that are really simple for them to do, but which, at the moment, banking staff are doing throughout the day. With reconciliations coming in, when there are breaks, who is following up on them? When there are exceptions, who is processing them? A simple transaction comes in and it needs to be allocated to a person or to a group. Does that data belong

You don’t just want a data record. You want to know when it comes in, what the quality of the record is, who works with it. We want to improve the quality of the data by taking a holistic approach to you or to me? Is it based on currency? US Dollar goes to you, and Euro goes to me. That is the kind of thing that AI and machine learning can simply take over. If you replace these very simple tasks with AI, you can make really good savings and efficiency gains. The workflows are much quicker because it’s straight-through processing if you have AI doing the allocations.”

Managing the process It’s not just SmartStream’s product suite that’s being boosted by advances in AI; SmartStream Managed Services is another business unit drawing on machine learning to further enhance its proposition. Many clients have their own technology teams who manage the TLM product, for example, but SmartStream’s Managed Services offers them an attractive alternative that taps into

the company’s considerable expertise. And it’s been able to manage a lot of the processes that would have been performed by people in the past, through the introduction of AI. By taking over the complex configuration of products, it reduces time-to-market and much of the manual effort involved in delivering a solution to clients. Ultimately, Burner sees AI and machine learning as a fantastic way to mitigate risks, something not in short supply in the post-COVID economy. “What a reconciliation really does is reduce a risk for an organisation,” says Burner. “And you want to identify any risk as quickly as possible. “These days, the big companies have data lakes, where all the applications store their data, and those data lakes have a lot of control points. Whenever an application writes data to that data lake, you need to ask ‘is there an exception already or is that a valid transaction?’. “To illustrate, when you go to an ATM to get money, and something happens at the ATM, it’s so beneficial for the bank to understand, at that very moment, what’s happened – not an hour later, when it hits its books. You want to have it as quickly as possible. With our products, because they’re so easy to set up, they’re the perfect tool to have a lot of control points throughout the organisation. And the more control points you have, the less risk, and the earlier you identify it. “That’s our ultimate goal. To really make it simple to have those control points, everywhere in the organisation, that automatically detect any exceptions or disputes.” Burner returns to the filmmaking analogy. “Based on the picture and how it is moving, AI is identifying that, for example, certain waves have to be blue. So, it’s correlating the movement with the colour that this particular grey needs to be. It’s a good example of machine learning and AI not taking the direct approach. It’s not just looking at the grey and trying to colour it; it’s getting much more information around it to identify the right end result. That is also what’s needed in the banking world. “You don’t just want a data record. You want to know when it comes in, what the quality of the record is, who works with it. “We want to improve the quality of the data by taking a holistic approach.” www.fintech.finance

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ARTIFICIAL INTELLIGENCE

For your eyes only Stuart Newey, Head of Client Service & Delivery at Coutts, and Mark Dabbs, Fraud Systems and Analytics Manager at Investec, explore how AI can help private wealth managers combat crime Most outsiders probably imagine the risk department of a private bank to be staffed by stiff-collared compliance teams who’ve only just upgraded to ballpoint from quill pens. Yet the reality couldn’t be more different. Because here is where some serious international crime-fighting takes place. Meet the 007s of wealth management, whose high-tech mission is to protect their high-net worth individual and corporate clients from villains that are every bit as shady as Blofeld and just as slippery. They have, after all, a lot to lose: not just cash but something much more valuable – trust. As banking becomes more instant, more convenient and more digitised, fraud has been steadily increasing. Scams take place in seconds, and the culprits slip away into the shadows so fast that law enforcement is struggling to keep up. The situation has only worsened during lockdown, so much so that experts predict that, instead of an anticipated eight per cent decrease in payments fraud in 2020, firms should now prepare for a 10-15 per cent increase. Across all financial products, fraud rates in the UK rose by 33 per cent in April, compared with previous monthly averages, according to data collected by Experian and fraud prevention service National Hunter. And the Investment Association released figures in July that showed clients of UK investment managers had lost approximately £4million since the start of the pandemic to organised criminals who faked their products, in particular investment bonds, promoting them through hoax price comparison websites and cloning brands to produce counterfeit documentation. Research from financial services firm Canada Life, in May, found that 5.2 million

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this could grow,” Investec said. It added people in the UK had fallen victim to, that businesses and their financial or knew someone who had been partners should relook at the validation duped by, a financial scam since the process to ensure accuracy and security. beginning of the virus outbreak. We humans remain the weakest link, In the US, 22 per cent of Americans have particularly during a stressful situation reported being targeted by fraud related like COVID-19. to COVID-19. More than $1.2million has “With COVID, you’re under a stress been stolen in COVID-19-related schemes scenario, people will either make mistakes in Canada. The list goes on. or, because they are in a rush, will do Fraud became the single biggest crime things which are ill-advised,” says Stuart in the UK in 2019, accounting for 35 per Newey, head of client service and delivery cent of all reported incidents – but combated by less than one per cent of law at UK-based private bank Coutts. “For example, your CEO has told you this, so, in enforcement officers, leading director a very hierarchical firm, you’d think ‘well, if general of the National Economic Crime the boss says I need to pay it, I need to pay Centre, Graeme Biggar, to admit to the it’.” Except, of course, it’s not the boss. BBC last month that the approach taken In the words of Mark Dabbs, fraud thus far has failed online banking users. systems and analytics manager at He said government, industry and police Investec: “Traditional fraudsters are using need to ‘change the way we are thinking the same fraud modus operandi, about fraud’ by putting Traditional just rebranding it with COVID.” greater emphasis on fraudsters are He talks about an new industry data sharing between using the same fraud emerging, ‘fraud as a service’, agencies and banks, modus operandi, using the same technology while encouraging they’re just rebranding available to financial institutions the latter to ‘design to give bad actors more out’ attacks. it with COVID sophisticated tools to improve His concern is shared Mark Dabbs, their scams. by wealth management Investec We have to It’s self-evident group Investec. protect the that private wealth Alarmed at the sudden managers need to spike in fraud attempts by April, it consumer from work harder than issued a detailed warning about making ill-advised online fraud and phishing scams, choices to start with ever to protect their clients from harm and in particular the risks associated Stuart Newey, – even as they struggle with authorised push payments Coutts to deal with the where third parties intercept emails pressures of lockdown themselves. And, or invoices and alter banking details in this scenario, artificial intelligence to divert funds into a fraudster’s account. (AI) is increasingly coming to the fore, “Across the banking industry, the using superhuman power to scan number of fraud cases where the account insane amounts of data in real time for holder transferred funds to an suspicious patterns of activity and unintended recipient grew by 69 per cent alerting managers to threats. On top of within the last year and, given the new that, says Newey, ‘we have to concentrate channels being used and unpatched on how we protect the consumer from home networks being used for corporate making ill-advised choices to start with’. communication [during the pandemic],

“

www.fintech.finance

AI teams are the 007s of wealth management: But unlike Bond, they can’t work alone

“That does require institutions to challenge their clients by asking, for example, ‘are you sure you want to make this payment?’ and not necessarily taking ‘yes’ as the right answer,” he adds. “That’s a real challenge. That’s where institutions that have long-term trust and relationships with their clients are better placed to have those conversations.” Within private wealth, Dabbs and Newey agree that AI is a powerful tool – but only when it works alongside the human service that defines this area of banking. “We already use that [AI] technology, combined with biometrics to protect our clients,” he says. Beyond that, it helps to ‘turbocharge’ the client director or relationship manager’s dealings with individuals. The AI may say ‘look, it’s worth giving Sarah a call’, but the purpose of, and value in, a relationship manager, is that they’ll understand the soft factors, other things might’ve happened. They’ll be able to put it into context,” says Newey. It’s about creating what Dabbs describes as a ‘high-tech/high-touch’ service. “You need to augment the two, from a machine learning perspective, with the individual, ultimately, making the call,” he says. www.fintech.finance

One area of security where AI has been transforming performance in wealth management is the process of opening an account. Famously slow, the onboarding process can take up to 12 painful weeks for some private managers. Like waiting for a bus in rural Wales or for John Wayne to finish a sentence, such delays can be a real chore for people with better things to do with their time and their money. AI has helped to lift this burden for the majority of customers. “I think the digitisation of the journey has revolutionised the onboarding process,” says Dabbs. But even then, AI is not a one-size-fits-all solution when dealing with the world’s elite. While it has definitely sped up onboarding for some ‘vanilla’ clients – those whose source of wealth and background isn’t especially complicated – Newey says: “Firms are going to need to make sure that, for accounts they bring in with a very light KYC, they have appropriate monitoring of payment and transaction activity to make sure that, until they really get to know the client, it’s legitimate business. “If you’re trying to onboard international clients, you’re going to find it a harder process. You’ll need to do a manual workaround.” Crime-fighting regtechs would do well to bear that in mind.

“There are many people wandering around with solutions that they think they can just plug into a private bank,” says Newey. “But It is fundamentally different to a retail bank. They need to understand that it is all about customer intimacy. We don’t just talk about the client, we’ll talk about the client’s family, in its entirety, as well as the client’s network. “So, understanding where we’re coming from is important. Also, understanding the complexity that comes with it, as mixing commercial, UK and international business creates quite a complex picture. “If you have solutions that work in a commercial space and a retail space, and are very personalised in what they can do and built around relationship values, OK it might work. [But] the other key thing is to understand the investment and the IT infrastructure we have already got because linking systems into that is often where the biggest cost is.” Private wealth managers want tools that enhance the premium service their clients are paying for because this will always be an exclusive people-to-people industry. For that reason, getting ahead of sophisticated scammers will take a hybrid of personal and technological expertise, with AI giving the 007s of wealth management a better chance to beat the villains… and they might even manage it without destroying an Aston Martin at the end! Issue 17 | TheFintechMagazine

ARTIFICIAL INTELLIGENCE

CRACKING OR COPING? HOW COVID RESET AI AI has had to run fast to catch up with dramatically different patterns of behaviour during the pandemic. David Bailey, Santander’s Head of Payments Strategy, and Andy Renshaw, VP for Banking Solutions at anti-fraud software firm Feedzai, consider the short-term and long-term consequences of changes in the way we spend Artificial intelligence (AI) software spots bank account fraud by identifying behaviour changes. A sudden interest in iTunes from an account held by an 81-year-old that has never even featured an online purchase before would be an obvious red flag.

human help to make sense of the bigger picture and intervene when needed. “We use machine learning and AI, particularly in financial crime and fraud, to help us identify patterns of behaviour that we would deem suspicious,” he says. “But it’s always been complementary to the existing tools that we use, and we’ve always had to combine it with some human interaction – human intuition – to guide its direction.” For Andy Renshaw, vice president for banking solutions at fraud software firm Feedzai, changes as the pandemic began were manageable because, overall, the behaviour was still recognisable. Feedzai screens bank accounts

But what happens when seemingly everyone switches from buying clothes and holidays online to face masks and toilet rolls? That was the scenario that faced bank security systems from February onwards as COVID-19 swept across continents. With big increases in home-delivered groceries and a collapse in restaurant and travel costs, almost everyone’s buying patterns changed as countries locked down. A report by the MIT Technology Review in the US examined how the top 10 Amazon search terms were knocked off the chart and replaced by sanitisers and protective wear, We’ve had a reflecting anxiety around more stable the pandemic. And machine learning some AI programs built and AI performance to act upon subtle shifts than we originally were thrown into chaos feared, right from as a result. the start [of David Bailey, Santander’s head of the pandemic] payments strategy, says Andy Renshaw, the crisis underlines that Feedzai AI still needs

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and debit cards in real time, using hundreds of data points to pinpoint anomalies. The immense volumes of data it handles require several data centres to run concurrently, but Renshaw says the systems held up well. “We’ve had a more stable machine learning and AI performance than we originally feared, right from the start. “The MIT Technology Review asked the question ‘is AI cracking under the pressure of the coronavirus pandemic?’,” he says. “Fundamentally, machine learning models look at individual behaviour and, from our perspective, it involves huge volumes. But, although the coronavirus pandemic is unique in terms of the scale of change, the underlying principles behind it are not unusual. “Machine learning software is already used to spikes on paydays, Black Friday, Cyber Monday, the last shopping day before Christmas, etc. With coronavirus, although customers are behaving in a slightly different way, their transactions are still relatively normal. “They’re still using merchants that they used before, for high-value and low-value payments. Fraudsters, too, are still, in many ways, committing the same types of fraud, and those transactions still look unusual, relative to normal behaviour.

Doesn’t compute: In some areas, massive changes caused by the pandemic confused AI

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ARTIFICIAL INTELLIGENCE “So, although the mix within ‘normal’’ has changed, our systems have remained stable,” says Renshaw. A desired increase in contactless payments as shops deter cash use to minimise the risk of transmitting the virus has been one of the success stories of the crisis, with the transaction ceiling rising from £30 to £45 within days in the UK and by similar amounts elsewhere. But, depressingly, fraud levels have risen too, as criminals targeted consumers who were new to digital payments and online shopping – meaning banks have had to re-examine their balance between security and low friction. For Santander, the increase in criminality has meant the bank has had to continually remind customers to stay alert to the dangers. Bailey says: “There were all sorts of scams

Change is coming: But it will be small and incremental

that suddenly appeared, it was astonishing how quickly fraudsters picked up on the opportunities. But, on a positive note, we've seen late adopters to contactless take off with the pandemic. The industry should be proud that it could quickly get together and push the limit up to £45, and I think that made customers relax a bit.” Renshaw agrees that fraudsters have sought to capitalise on the crisis, but says the frauds are not new, they have just been given a COVID-19 spin. “The fraudsters are leaping on the weaknesses and exposure points that COVID has brought,” he says. “Also, though we’re not seeing it yet, an economic downturn brings specific frauds to the fore. So, things like

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hardship fraud, refund chargebacks and claims for non-receipt of goods will emerge.” On the subject of friction in payments, both men recognise the need for balance. And balance is not just vital from a security standpoint, it’s needed to ensure bank customers feel comfortable. Bailey says: “Many people expect there to be a level of friction in the journeys they see because they want their finances to feel secure. They’re happy to remove the friction when it’s a very trusted brand, and in those instances leave their card on file with them. But if it’s a new provider, people are hesitant. “Legislation is pushing us towards more security but, from an open banking perspective, there are opportunities for less friction, especially for the big digital platforms where people trust those brands.”

Consider the Amazon Go model, where scanners register what customers take and charge their account in the background as they leave. There’s real potential for that model to appear in the future, but I think it’ll happen quite slowly,” he says. “ By way of personal example, I’ve started using filling station apps when I fill my car, so I don’t need to go into the shop to pay. But I still feel compelled to wave my phone at the attendant before leaving, because I feel uncomfortable with just driving away! I know they get a notification, but I still want to wave. So, I think it’ll take time for consumers to get over the thought of just walking out without making a physical transaction. “Payment journeys, or payments as part of broader journeys, will become far more integrated in a way that feels seamless to the customer. Micropayments for media consumption may become a new model to reduce the reliance on advertising, for instance – it will be interesting to see what changes happen but it’ll be bigger and slower than we expect.” Renshaw believes changes in payments will grow from the bottom – cash use will continue to fall, while lower value contactless and micropayments increase. “But it’s different at the moment when you go up to higher value payments, or transactions where you expect to have a long-term relationship with the vendor. Maybe you’re buying a car and you’re going to be returning to that dealership on an annual basis. Is that something you’re comfortable doing Change will via a contact-free payment? be bigger than I’m not sure people are yet. people expect, Another trend is the wallet, but slower than or membership model, where they expect Renshaw has experience of consumers register their an app launch where users payment details with a David Bailey, were worried by the fast speed Santander provider they trust. That of payment processing and will continue to grow.” actually requested proof that security Trust is the cornerstone, but the sudden checks were being made. Reassurance, he growth of contactless payments to reduce says, was established by a message, risk during the pandemic is a perfect example essentially telling customers to ‘please wait of how people are willing to embrace change. a few seconds as we conduct checks’. “There are customers who haven’t been But the security advances made by AI digital or ecommerce users with their mean the general trajectory is towards less supermarkets, for example, moving to delay and fewer clicks in the customer being digital users,” says Renshaw. “Probably journey, not more. And, with a nudge from what we’ve seen is customers looking retailers, bank customers can be guided at where they can establish trust. People through major changes, believes Bailey, who can then progress to not just using a says ‘change will be bigger than people different channel, but to interacting with expect, but slower than they expect’. companies that they haven’t used before.”

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ARTIFICIAL INTELLIGENCE

Krungsri Bank made a shrewd decision four years ago to get to the head of the queue when it came to acquiring and investing in new technology, by creating Krungsri Finnovate. Its MD, Sam Tanskul, believes it can now help propel Thailand towards an AI-enabled future It’s no coincidence that the biggest second-quarter financial deal in Southeast Asia involved Thai bank Krungsri and its Japanese superpower parent Mitsubishi UFJ Financial Group (MUFG). The $706million investment in Singapore-based Grab Holdings, the ride-hailing-turned-super app, which now includes food delivery and financial services, was a shrewd one from a shareholder’s perspective. Grab is, after all, South East Asia’s first decacom, valued at more than $10billion. But Krungsri is more interested in what it can learn from Grab’s mission to become an ‘AI everywhere operation’. To put this in perspective, every day Grab generates about 40 terabytes of

data, which is analysed using artificial intelligence (AI) to bring improvements for customers and the nations it operates in. And it’s in no mood to stand still, with its AI development budget, encompassing infrastructure, talent, technology and strategic partnerships, totalling more than $100million in 2019 and expected to increase by 50 per cent in 2020. The vital importance of AI to future prosperity is well understood by Krungsri (the common name for Bank of Ayudhya, Thailand’s fourth largest bank), and the country as a whole. Thailand has put AI at the centre of national policy with its Digital Economy and Society Development Plan, and is testing a biometrics-based digital identity scheme for all citizens which will be a foundation stone for the digitisation of infrastructure that touches every aspect of their lives. Based on blockchain, the biometricallysupercharged Smart ID system will provide near-instant, secure verification of individuals and a gateway to the future for Thais, be it remotely opening a bank account using e-KYC (know your customer) or accessing medical help through telemedicine. Indeed, according to a Thai government-commissioned survey by The Economist Intelligence Unit (EIU), ‘without an effective industrial policy that harnesses AI, Thailand risks losing six per

cent of GDP (gross domestic product) in 2035 due to losses in export competitiveness and declines in foreign direct investment’. But by introducing the right interventions to harness AI and associated automation tools to boost skills, strengthen international competitiveness and improve public services, ‘Thailand could keep unemployment levels low and see an increase in GDP to more than US$1trilllion by 2035, up from US$544billion today’. For its part, Krungsri recognised the value of technology investment back in 2016, when it set up Krungsri Finnovate, a venture capital fund for fintechs which also runs its fintech accelerator programme. It has a two-pronged strategy: to use the accelerator programme, Krungsri Rise, and a graduate contest called Krungsri Uni Startup, to expand Thailand’s fintech ecosystem; and a $30million fund aimed at growth startups at Series A funding stage or later to make sure they succeed. `It’s aiming to be the best banking corporate venture capital business in ASEAN (the association of Southeast Asian Nations) by channelling investment specifically into AI and data analytics innovation.

Charting success: Krungsri Finnovate has a good track record of investing in AI

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ARTIFICIAL INTELLIGENCE Sam Tanskul, MD of Krungsri Finnovate, says its RISE project was developed from a model successfully used by its parent bank MUFG. Collaboration is at its core. “The first year was 2016 and, at that time, there were only 20 fintechs in Thailand, so we invited everyone to join our accelerator, in order to learn and see how the fintech startups work,” says Tanskul. “The main objective of Krungsri RISE is to create a fintech ecosystem in Thailand.” Now entering its fourth year of running the accelerator, the Krungsri Finnovate fund has invested in the winning fintechs from each of the previous RISE rounds. The fintechs spent three months on campus and had to prove that they could work with the bank’s business units on demo day. “They have been used from that year until now,” says Tanskul. “We believe that fintechs will be successful if they have synergy projects with the bank, and we are open to working with them.”

Touching everyone: The Thai government has put AI at the heart of national policy

Among its AI investment successes so far are wealth management platform Finnomena, and Baania, which uses machine learning of real estate and consumer housing data to improve efficiencies in buying, selling, investing or building real-estate projects. In January 2020, Krungsri Finnovate was also among a group of investors which helped Finnomena, which has rapidly become one of the biggest wealth management platforms in Southeast Asia, raise a further $10million in a Series B funding round. But perhaps a more significant investment was the one it made in 2018, when Krungsri Finnovate went beyond the Thai border to become part of leading Japanese fintech and venture capital firm SBI Holdings’ AI & Blockchain Fund. That started it on a journey to help identify global startup players to further its mission to leverage the best AI and blockchain technologies and

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partnerships that benefit the bank’s own operations and achieve the imperative to cut operating costs while improving customer satisfaction. The move led to it being be part of an SBI-led consortium of investors who, in March last year, ploughed $8million in Series A funding into Silot, a Singaporean fintech company that helps banks improve their decision-making processes using AI. Tanskul points to what he perceives to be a different attitude to partnership working in the ASEAN region compared to the UK and Europe. “In the UK or Europe, most of the fintechs are banks’ competitors,” he says. “I think we have a different business objective. In Southeast Asia, currently, most of the startups are not the banks’ competitors; most of the fintech startups are banks’ companions. The fintechs have the technology, banks have the customers, so we look at how can we collaborate with each other, not compete.”

developers don’t produce something the bank can’t work with. Tanskul explains: “The external fintech team source the technology, my innovation lab work with the new technology, either from a startup or bigger tech company, running proofs of concepts to test whether this technology is matched to a bank’s business unit. If it tests well and if we want to roll it out, then we remove it from the innovation lab team and give it to the business unit, where we have another team working to run the project with them. “In that way, we became the first bank in Thailand to launch a chatbot, with voice and non-voice. Right now we are working on a project called AI Voice with a big tech team from Asia and a local Thai team. Our innovation lab tested whether the voice – Thai voice and Thai language – using natural language understanding (NLU) was acceptable for our banking product. We tested it for a year and it was proven to work, so then we handed it to our call centre team, to roll out. So this has been end-to-end.” Banks in Thailand have no alternative but to embrace the most advanced digital ways of working. “The interest rates and fees have been capped by regulation, so we have to see how we can reduce operational expenses,” says Tanskul. “We’ve found that digital products are key. Right now, every sale is online, we

In Southeast Asia, currently, most of the startups are not the banks’ competitors; most of the fintech startups are banks’ companions One of the bank’s objectives in using AI is to create what Tanskul calls hyperpersonalisation. “More than personalised, it means we have to know and understand customers, offer the right products, at the right time, in the right place. This is the motto of the bank,” he says. “Most of the big banks in Thailand have a ‘super app’ mobile banking application. We are not only offering banking products to customers: you can make a hotel booking on our mobile app, or book an Uber or Grab, because we want to capture the data around customer lifestyle. We need to understand more, if we are to present the right product to the right customer.” There is a strict development structure in place within Krungsri to ensure that the

don’t print documents, and things that might have taken seven days and 10 staff can now be done within half an hour.” When it comes to eKYC, for which most Thai banks have, for the most part, adopted Chinese facial recognition technology, Tanskul says, they are also under pressure. “The government of Thailand has said it doesn’t want any fraudulent cases of e-KYC – not a single person,” he says. For that reason, banks came together under a National ID initiative to use blockchain to automatically cross-reference the identity of a new customer. As Thailand heads towards an AI-enabled future, Krungsri won’t be alone in using the most intelligent technology… but it hopes to lead rather than follow. www.fintech.finance

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COMMENTARY: OPEN BANKING A cog in the FS machine: Banks aren’t always driving the customer relationship

Switchinggears As Head of Investments at Banco Sabadell’s digital innovation hub InnoCells, Paula Blazquez Solano understands that banking’s role has fundamentally changed… her job is to make the most of that opportunity Open banking is redefining the role of institutional banks and, with it, comes the realisation that they can no longer automatically control the end-to-end customer journey. Sometimes they can only hope to be a cog in the system. Accepting that is core to Banco Sabadell’s attitude to digital innovation, says Paula

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Blazquez Solano, head of investments at its corporate venture arm and digital innovation hub, InnoCells. Tasked with leading the bank’s strategic digital agenda, it invests in startups related to its core business. And, as elsewhere in the financial services sector, open banking and the EU’s revised Payment Services Directive (PSD2) have been key drivers of change and innovation at Banco Sabadell. But how they are leveraged varies between partnerships, says Blazquez, and the role the bank plays in the customer-facing relationship is no longer guaranteed to be the main component. “You stay ahead of the curve by staying relevant to your clients, and you have to understand you’re just a piece within the user experience or the customer journey,” she says. “Sometimes you’ll be an important piece, sometimes you’ll be just a smaller

one. But you have to make sure that you stay greased and engaged with the other pieces, that you function within that customer experience, and you match or exceed expectations in order not to be replaced.”

Investment strategy Among InnoCells’ recent launches is Nomo, a financial management tool aimed at freelancers that enables them to digitise and manage expenses and sales, create and send invoices, and has recently added an invoice financing service using a third party to alleviate cash flow problems through the pandemic. Since the end of 2018, Nomo has gained some 60,000 users – 40,000 of them over the past eight months – as freelancers continued to pay their bills and meet tax obligations during the crisis. www.fintech.finance

While Nomo was born and developed at InnoCells’ innovation hub, it operates as an autonomous subsidiary, targeting its own users as well as being promoted as a tool through the bank’s website. Nomo is 100 per cent owned by the bank, but in the past year InnoCells has invested in, among others, the Singapore-based artificial intelligence (AI) fintech Active.Ai, which has developed a sophisticated conversational AI platform, and Kovrr, an Israel-based cyber risk modelling company. Blazquez says that every six months or so InnoCells works out the verticals of interest for the bank. It then goes to the market to understand what’s going on in terms of trends, and to the business units within Banco Sabadell to understand their needs. InnoCells then also considers short-term and long-term demands before scouting appropriate startups. Commenting on the changing role of the bank in the customer relationship, Blazquez says: “People see their financial service provider as part of a solution to achieve their goals. These could be material ones – such as buying a house, a car, a TV – or non-material ones, such as financial stability, which goes along with pension plans or investment solutions, things of that sort.” However, thanks to the potential disintermediation caused by open banking, the problem a bank can be left with is that it remains relevant on the backend, or manufacturing side, but loses interaction with the end client, precisely the type of engagement that most challengers to incumbent banks champion. Blazquez says it’s not a case of open banking narrowing a bank’s options, but rather broadening them – so long as the institution builds out its platform. “You have the option to just purely comply [with the regulations] or [you can] build products and services alongside the new regulation and with a new strategy and data positioning, which gives you access to aggregation, data enrichment techniques and customer personalisation – and therefore a more enriched kind of experience with the client,” she says. In other words, banks can decide on what grade of openness they want to adopt, says Blazquez ‘from a platform-based approach to distributor, or even just as a provider of services’. www.fintech.finance

In scouting for innovation – be it for Banco Sabadell’s corporate or retail business – InnoCells has to work out if the bank wants to be a cog or the engine driving any particular process. “There are times when it would make more sense to partner with a startup or with a technological corporation that is already developing the product, or where you have access to specific information, or where they have already built that interaction with the client. This gives you a better or more agile time to market,” says Blazquez. “There will be other situations where there is a more interesting build approach and you can do it through partnering with a startup, or on your own. “But you definitely have to do it on a squad basis, so having teams in place that have the knowledge – both from the business side and also from a tech perspective – and are able to understand where the client is coming from,” she adds. The result, says Blazquez, is building a product offering that is client-centric and is able to be tested within the market, in an agile way. “It’s a lot about speed,” she adds.

Financial institutions will evolve towards a more platform-based model, with revenue-sharing propositions Deciding on what strategic position a bank takes has, in her view, much to do with the internal culture of the organisation – how upper management can seize an opportunity and is able to transfer that knowledge into mid-management, so they can propose use cases, product offerings or partner with startups to create them. “Then, there is also a big question around being able to develop a strategy that allows for collaboration with startups, but also with other big techs or corporations,” says Blazquez. “Open banking allows for that because you can have access to the data pools that are sitting within other corporations or big techs.” InnoCells does have a natural bias towards geographies in which it operates – such as Spain, the UK and Mexico – but it collaborates with startups the world over.

Going forward, open banking regulations will allow for different kinds of revenue for a bank, Blazquez believes, but it needs to have a strategy in place to launch the resulting products. Again, this means institutions need to decide where they want to be in the value chain – at the anonymous backend is not sustainable for every bank. “I think, in general, financial institutions will evolve towards a more platform-based model, with revenue-sharing propositions – a lot of them through collaboration and a partnerships approach,” she predicts. “In terms of the drivers, what we’re seeing is the financial services industry turning its focus towards a more innovation-led approach, mainly driven by technology.” Chief among those, InnoCells predicts, will be increased use of AI and robotics in order to lower costs and increase margins, and blockchain, to speed up underlying processes through smart contracts. By facilitating the creation of an end-to-end customer journey – at times created through or with other products and services – Blazquez agrees that open banking will undoubtedly help improve customers’ financial health. “Personalisation through data aggregation and enrichment techniques allows for more tailored products and services, which can be even less costly for clients and more intelligently made for them,” she says, adding that the focus on customer experience will benefit enterprise and retail clients alike. However, one thing Blazquez would like to see is the creation of an equivalent of open banking regulation for big techs, which would force them, like banks, to share the vast amount of data they hold on customers if those customers give them permission. While the Googles and Apples of this world have stressed they are more likely to partner with banks than challenge them directly, she feels there needs to be more of a two-way street from which everyone could benefit. “I think there is a need for a level playing field, yes, but there is also a need to access and aggregate the data, so that analysis of the client is even more extensive and therefore the customisation and relationship are even better. “That’s for everyone – banks, corporations, big tech, but, most importantly, for the client themselves.” Issue 17 | TheFintechMagazine

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CLOUD

Gary Delooze, CIO of the UK’s Nationwide, gives an honest and detailed insight into the building society’s migration to the Cloud – part of a £4.1billion IT investment that more than lived up to its promise during the pandemic Nationwide Building Society is in the process of re-platforming its digital banking and mortgage services to a multi-Cloud environment. It’s part of an ambitious journey that Britain’s biggest building society, the UK’s second-largest mortgage lender, set out on in 2008, to ensure it was primed for the next generation of digital innovation. As it progressed, it topped up the spend. In 2018, the organisation announced that it would be investing £4.1billion over the next five years to radically simplify its IT system, speed up development processes and improve the quality of the products and services it brings to market. Today, its Cloud Centre of Excellence teams are focussed on building Cloud landing zones using DevOps tool chains, and partnering with the likes of Amazon Web Services (AWS) and Microsoft to bring an agile, multi-Cloud capability to the organisation. Projects include working with Microsoft to build new

websites and member services into Azure tenants; building new digital journeys and APIs, using microservices hosted in AWS containers; and creating multi-Cloud, containerised environments using RedHat OpenShift. In the words of the man leading those teams, it means they ‘get to work on some phenomenal projects that tackle properly thorny problems’. Moving to Cloud is a road that many of Nationwide’s contemporaries are on, as they seek to prevent their market share from more nimble competitors. CIO Gary Delooze explains: “One of our bigger challenges for the last few years has been how we can achieve the same level of agility as you would expect to see in a challenger bank, or in a typical technology organisation. “What Cloud gives us – with the automation and tooling that we’ve put in place – is the ability to create infrastructure as code, to deploy this very quickly and to therefore be able to stand up new solutions, capabilities and

services for our members – we’re talking minutes, not months. But where it’s really exploded for us is software-as-a-service. That variety of building blocks, services, platforms and environments that we can stand up really quickly has grown exponentially in the past few years, and has accelerated the journey to value massively. And, done right, we can deliver it all in a way that is far more resilient than typical, on-premise technology.” Exploiting the vast possibilities that new technology and Cloud adoption create for the benefit of Nationwide’s 15 million members doesn’t come without its challenges, however. “Financial services organisations are set up to manage risk, so the big challenge for us in adopting any new technology, whether it’s Cloud, artificial intelligence (AI), or anything else, is are we able to put sufficient controls in place? Are we able to manage the risks so we can protect our members and customers, and deliver the kind of services that they want us to?

AjourneytotheCloud

Team effort: Delooze says he’s ‘proud of how our tech teams have stepped up to the challenges of Cloud adoption’

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CLOUD “When it comes to Cloud, I think the most important part of the adoption journey for us has been about getting a good understanding of the risks, developing a good understanding of the controls required to manage those risks, and being able to demonstrate, over time, that we’re able to put those controls in place so that we can safely and securely deliver the technology. “You could argue that it takes financial services organisations longer to do that; the regulations that we are managed by require us to take that approach. But, for me, it’s about protecting our members with the right controls in place while also unlocking the value that the technology brings. Getting that balance right takes a bit of time,” says Delooze.

Understanding the risk: Nationwide has learned how to manage, monitor and maintain a Cloud infrastructure

Not everyone has got it right, of course. “If I look back at some of the big surprises that organisations have had around Cloud, they typically come from an immaturity in the control frameworks and in their operating models,” he says. “For example, as we’ve gone through this journey we have learned how to better manage consumption and how to manage capacity and bandwidth. We now manage the economics of Cloud in a way that is very, very different from the economics of our on-premise technology.” That means, in Delooze’s words, spinning new environments up quickly, tearing them down quickly and moving on to the next. “If you leave those environments stood up overnight when you’re not using them, you’re still paying for them,” he points out. “So, it’s really important to have those capabilities to monitor, to manage, to maintain, and to consume the technology in the right way.”

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Meeting demand Investing in Cloud technology means Nationwide has room to grow and accommodate change as the number of customers who use its digital banking and payment channels continues to spiral up. The COVID-19 pandemic has put the organisation under immense pressure to deliver seamless services via digital channels, while coping with drastic operational changes and a huge shift in customer expectations. One of the biggest challenges was switching up to 13,000 employees to remote working overnight as well as re-routing calls from contact centres to remote workers and branches, so they could continue to support members affected by the crisis.

we’d deployed for some of our other digital services and, within about three or four days, had a payment journey working. And, in just over a week, we got the first version of those payment holiday requests online. “If I think back a couple of years, doing that through our traditional, waterfall IT development cycle, we would probably not have made it to the end of the requirement specification phase in the time it took us to go live,” he says.

Cost and security Using Cloud-based solutions or providers can open all kinds of possibilities for banks, especially for legacy financial institutions trying to shake off outdated infrastructure. Some are experimenting with this approach but others are stalling due to lingering concerns over cost, integration and security. “We take this incredibly seriously, and we put a lot of investment into securing our datacentres and infrastructure,” says Delooze. “However, we can’t get close to the level of investment that the likes of Microsoft, Amazon and Google are now putting into their own public Cloud infrastructures. “Given the complexity of the estate that we run, though, given the 50 years’ worth

One of our bigger challenges, for the last few years, is how we can achieve the same level of agility as you would expect to see in a challenger bank But when mortgage payment holidays were announced by the Government at the height of the pandemic, a team nevertheless built, tested and rolled out a dedicated online journey in just five days. “The regulators wanted us to be able to give our customers payment holidays to make sure that they were being helped through the crisis and, for us, that led to unprecedented demand on our branches and contact centres. “So, we wanted to stand up new digital services and give our members the opportunity to request a payment holiday online. And we couldn’t have done this without Cloud technology that we had already developed,” says Delooze. “We reused our Cloud platforms, reused the microservices we’d built in the Cloud-native architectures that

of IT that’s been built up, layer by layer, and the challenges we have in managing that complexity and maintaining service on a day-to-day basis, the risks we face in migrating from that environment to the Cloud are significant. “The legacy-free environments that the public Cloud providers run are super-scaled, but are often orders of magnitude simpler. However, the security technologies they wrap around these are phenomenal. I would love to say that we are as good at this as the hyper-scalers and, in many respects, we are. But I do believe they are gaining the edge on us, just because they have the depth of pockets in terms of an ability to invest in this space that we don’t have, and that’s one of the reasons why will be increasingly adopting their technology and using their services.” www.fintech.finance

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CLOUD

Public or private? CloudHealth by VMware works with both Cloud environments

Elevated decisions Financial institutions, with a timely nudge from COVID-19, have woken up to the transformational potential of the Cloud. We spoke to Marcus Chambers, VP of Sales for EMEA at CloudHealth by VMware, about the shifting balance between private and public Cloud, and the importance of customer-centricity You have most likely seen software and digital infrastructure provider VMware in the headlines recently. And not in relation to financial services. The firm has just finished work on the UK government’s much-publicised contract-tracing app for COVID-19. At the beginning of March, VMware Pivotal Labs partnered with NHSX, the technology innovation arm of the UK’s National Health Service (NHS), to share insights into how software can be used to track

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the spread of the COVID-19 virus. In less than 24 hours, VMware had presented a proof of concept using low-energy Bluetooth technology on smartphones to detect users’ proximity. After further research, this led to NHSX spearheading a contact-tracing app to deliver on the crucial objective of identifying and notifying people who had been in contact with someone with the virus, while also capturing anonymised data to improve the scientific community’s understanding of how it spreads.

It’s also been announced in recent weeks that VMware is working closely with Intel on the accelerated rollout of 5G networks across the world, with the addition of an integrated software platform for virtualised radio access networks (VRAN). The two companies are teaming up to collaborate on the software platform to assist communications service providers (CSPs) with future 5G networks across a virtualised infrastructure. VMware is helping the world to understand COVID-19 while also ensuring www.fintech.finance

that we can communicate amidst the global disruption. These intensely urgent projects demonstrate the growing stature of the company, which acquired CloudHealth Technologies in 2018 to create CloudHealth by VMware, a core part of VMware’s multicloud management portfolio, which is also driving rapid digital transformation at financial institutions around the world. It’s servicing the growing demand for the Cloud’s enormous capacity for data handling, speed and flexibility of execution, particularly when it comes to product development and cost savings. By focussing on the important digital foundations, CloudHealth empowers companies to go farther, faster – streamlining the journey to deliver better experiences to their customers as well as their employees. It works with hybrid Cloud and multi-Cloud environments and helps organisations to integrate on-prem and Cloud-based solutions with business apps. Its customer base includes telecoms companies, big banks, ecommerce giants and a number of gaming businesses. The company works in tandem with these clients to help them set up Cloud Centre of Excellence (CCoE) groups – cross-functional teams of professionals who are responsible for developing and managing the Cloud strategy, governance, and best practices that the rest of the organisation can then use to transform the wider business. “Creating these teams well is the key,” says Marcus Chambers, CloudHealth’s VP of sales for EMEA (Europe, the Middle East and Africa). “You then have all the governance and agility under one umbrella of compliance. It’s a very necessary first step.” Among CloudHealth’s clients is South Africa’s financial services group, Discovery (see page 69), an existing VMware solutions customer that wanted help in simplifying its Cloud management and to improve reporting across 62 environments in the 12 countries it operated in. Aside from an immediate 40 per cent cost reduction, the advantages of employing CloudHealth and VMware Secure State solutions were improved risk mitigation and the ability to make more informed decisions around its AWS-provided services. In terms of weighing up private and public Cloud, Chambers still sees room for both – at present. Public complements private. “There are now tools that CloudHealth and others offer that manage data centre www.fintech.finance

applications as well as public Cloud, so it’s not a case of one or the other,” he says. For legacy institutions, that allows them to ‘benefit from some very agile new applications that they can use to compete with challenger banks’, says Chambers. “They can spin out applications that are very customer-specific but also secure and fully compliant.”

The big bank awakening The big banks were already warming to the many merits of Cloud computing, but COVID-19 has made the technology white hot. Just this summer, two of the biggest public Cloud providers struck deals with major banks: Amazon Web Services with HSBC and Google with Goldman Sachs and Deutsche Bank. There is no doubt that COVID-19 has hastened the need for an architecture that allows for the rapid scaling up (and indeed scaling down) of services without accruing huge costs. “Customer experience is paramount,” says Chambers. “Banks need to maintain that in these unprecedented times, from the complexities of withdrawing cash, to asking for a mortgage, to maintaining the basic security of a general bank account.

With AI becoming much more meaningful, quicker, and smarter, I believe that public Cloud becomes the natural platform to best deliver this type of advanced intelligence “What we’ve seen with fintech and the wider verticals associated with COVID-19 and public Cloud is an elastic ability to take on more, and have the scale to rig up greater computing requirements. While it’s elastic enough to scale up, it’s also elastic enough to scale down. Struggling companies have been able to reduce their monthly spend in a software-as-a-service model by 80 per cent, which has allowed them to maintain the right business controls and customer experience. If we look at the airlines, the travel industry and so on, they’ll have that agility and the ability to scale it back up when things move forward.”

However, there is still a sense of nervousness about migrating incredibly complex systems, particularly businesscritical components. To mitigate such risks, Chambers advocates a staging post approach to moving from private to public. “We have an offering with cashless payments provider VMC to be able to manage a private Cloud environment on Amazon infrastructure, so it gives organisations that staging post to the public Cloud,” he explains. “They’re then adopting the huge scale and ability of Amazon, but with the ability to carefully manage that environment without the huge upfront cost, without the huge over-provisioning, so you get more of that public Cloud agility, but with the feel of your own private infrastructure.” There is equally a widespread concern about hitching one’s wagon to a single Cloud provider, hence CloudHealth’s continued emphasis on hybrid and multi-Cloud systems. That said, however many staging posts an organisation uses, it does appear that public Cloud is the ultimate destination for the industry. “Artificial intelligence (AI) is a logical example,” says Chambers. “Everyone is already using many more algorithms and, with AI becoming more meaningful, quicker, and smarter, I believe that public Cloud becomes the natural platform to best deliver it. “We’ve seen a lot of financial companies start to embrace the public Cloud. If we turn the clock back there was a reservation around whether it was secure enough, whether it was compliant. What we’ve seen over the last couple of years, though – particularly with the three horsemen of Google Cloud Platform, Microsoft Azure and AWS – is increasingly secure environments, complemented by offerings like CloudHealth and VMware Standard Switch that are enabling organisations to be agile and deliver applications quickly with limited upfront costs.” Commentators agree. According to Gartner’s public Cloud forecast, for example, the market will grow to $320billion by 2022. That’s nearly three times the growth of overall IT services. Organisations need to be bold as they step on to this higher plane. But with partners like CloudHealth supporting the transition, they should be confident in moving up. Issue 17 | TheFintechMagazine

COMMENTARY: INVESTMENT IN LATAM

Buildingbackbetter While investors took a raincheck on most deals this season, open banking platform Belvo struck gold in LATAM, as Co-founder Pablo Viguera explains COVID-19 has seen whole sections of national economies put on ice, so it’s no surprise to learn that investment in fintech has suffered, too. In its report analysing deals done in the first quarter of 2020, market intelligence agency CB Insights calculated that 404 deals were struck at a value of $6.1billion globally – the fewest number of deals since Q1 of 2016 and the lowest deal value total since Q1 of 2017. Of course, the impact of coronavirus didn’t begin to bite hard outside of China until March, so we can expect the performance for April to June to be far more depressing. It makes one LATAM-based fintech’s success in securing $10million in May to finance its product development and expansion all the more impressive. Maybe Belvo – launched last year in Mexico and Colombia to connect institutions, fintechs and developers over an open banking platform – got lucky. Or maybe investors judged it to be just too good an opportunity to miss. That’s because Belvo is positioning itself as one of the essential building blocks for the next generation of financial businesses in LATAM (Latin America) – a region where fewer than half the population have bank accounts and where platform solutions such as Belvo’s are seen as essential to building the financial infrastructure that governments are keen to promote. Or, as co-founder Pablo Viguera describes it, Belvo is providing the ‘picks and shovels’ to fintech innovators so that they can transform financial services in the region (with or without the banks). It’s been likened to Plaid – the financial services API (application programming interface) startup that helps developers in the UK and Europe share banking and other financial information. If Belvo is the ‘Plaid of South America’, then investors who poured money into it in the middle of a pandemic were probably given a confidence boost by the then still recent acquisition of Plaid by Visa for more

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than $5billion at the start of this year. Viguera acknowledges that Belvo was ‘very fortunate to have completed this fundraise’. “It’s testament, obviously, to the hard work the team has been putting in over the past year, but also it’s testament to the potential of fintech in LATAM,” he says. “It has the potential to be a transformational force across the region. Ultimately, we built the picks and shovels of the fintech innovators and, for us, it’s great to have the resources to then go on and equip these fintech innovators of today, or even those of tomorrow that will be able to exist because of us. “We’re extremely happy to be bringing onboard top-tier investors that can really help us for the months, years, and decades to come, and that not only share our vision about providing next-generation infrastructure but also have deep operational expertise in scaling infrastructure software-as-a-service, and specifically in LATAM.”

SoftBank leads charge Investment in LATAM-based fintechs had been accelerating hard before the global pandemic slammed on the brakes. The annual report from the Latin American Private Equity and Venture Capital Association (LACVA) revealed that venture capital investment in the region had soared from around £2billion in 2018 to $4.6billion last year. Fintech accounted for the biggest slice of the pie at 31 per cent. The $5billion SoftBank Innovation Fund, launched in early 2019, was a major factor in last year‘s growth, and was by far the biggest-ever technology fund to target the region. The Japanese bank’s interest could

be a rising tide that lifts all boats – given that it increases competition for seed-stage investment. Colombian delivery startup Rappi received a $1billion investment led by the SoftBank fund in April 2019, with other big deals including Brazilian digital bank Banco Inter ($330million), Brazilian lender Creditas ($231million), Argentine personal finance app Ualá ($150million), Mexican digital lenders Konfio ($100million) and AlphaCredit ($125million). SoftBank partnered with LATAM-based funds to increase the investment power, and benefit from their local knowledge. One of those funds is Argentina’s Kaszek Ventures, which, alongside Silicon Valley’s Founders Fund, was the group behind the Belvo deal. Viguera identified the opportunity for entering the LATAM market when working for peer-to-peer lender Verse. He was struck by the lack of inter-banking infrastructure, which would make expansion there difficult for Verse. Because Belvo‘s product provides some of the first open banking API rails for Latin America, demand is potentially huge – and growing fast due to the added pressure from coronavirus to develop digital banking. Mexico and Brazil lead the way in digitisation, with regulators in both countries driving open banking forward as a method of stimulating the economy and financial sectors. Both have worked closely with the UK’s Financial Conduct Authority to create systems that build on the British experience. But beyond Mexico and Brazil, Viguera says the LATAM picture is fragmented, with wide variation between national financial systems.

Belvo has the potential to be a transformational force across the region. Ultimately, we built the picks and shovels of the fintech innovators

www.fintech.finance

“Scratch beneath the surface and it’s very different to what you can see in the UK or Europe,” he says. “You find different legislation, different banking landscapes, different banking infrastructure. To navigate that is very tricky, and there won’t be, anytime soon, a common banking industry agenda or banking industry regulation in the way the revised Payment Services Directive or open banking has swept across Europe. “But in Brazil the agenda is kicking off in a few months, with the intended completion of open banking planned for the end of 2021. Then, as we’ve seen in Europe, there will be a period of time where adoption will need to kick in, and where every stakeholder will need to comply, whether that’s public API development or technical requirements or onboarding, and so on. There will also need to be a lot of education from all the stakeholders involved.”

Spotting the opportunity Viguera has experience of the UK open banking process from his time working at Revolut, where he was one of the early employees. Realising the same process would be undertaken in Latin America, and knowing there was no infrastructure to support it, was enough for him and fellow Belvo co-founder Oriol Tintore to realise they had a business. Interest was strong from the start and the company won support from sources including the Y Combinator accelerator, and David Vélez, co-founder of Brazil’s lending startup Nubank. Viguera says May’s $10million investment will be spent on product development and geographical expansion beyond Mexico and Colombia, where product delivery has already begun. Headcount will be expanded, too, building on teams that were launched in Mexico City and Barcelona. “Part of the goal with this new

fundraise will be to speed things up and to build an amazing product faster,” he says. “One of the things we’re actively doing now is extending coverage to other countries like Brazil, where we’ll be launching very soon. We’re also looking at specific verticals, and specific developer tools, so that we can keep adding to our API to ensure it remains the go-to platform for developers to plug into financial data across the continent. “One of the products we’re developing at the moment is what we call an intelligence API, which goes beyond being the pipes through which you can access data by contextualising that data. So, being able to not only get a specific end user’s transaction data on a credit card, but being able to answer questions about the person’s income, or their

liabilities, and so on. That’s going to be a big part of the next few months. “To execute this plan we need the best and brightest people. We have this really cool dual-hub setup, we’re in Mexico and in Barcelona, and an office in Sao Paulo is coming soon. We’re hiring across the board – in engineering, product and business development.” Viguera is clearly excited by the potential presented by fintech in Latin America – ‘democratisation of finance’ is much talked about in a region where cash is still king and around half of adults are unbanked. But he recognises the responsibility financial players carry, too, since lending done badly can quickly become bad debt, wrecking lives and businesses. To that end, Viguera says financial education is ‘extremely important to keep those people creditworthy’. As for the immediate future, ‘the pandemic will drive digitisation across the board’ he says. “In areas of finance where the touchpoints with the consumer do not have to be physical, there will be an acceleration of digitisation and investment in new processes. That will ultimately drive greater fintech adoption. Regarding infrastructure, there is a real pressure on the legacy players, such as banks, to invest in the technology that will enable this. “After the financial crisis, banks in Europe became more open, but in LATAM, the time of reckoning for banks had not yet arrived. “Then challenger Nubank launched [in 2013] and people who were trapped by the traditional banking system could suddenly get a credit card. Now Nubank is launching, very successfully, in Mexico. “We’ll start seeing many more cases like that, especially as talent and capital flow into fintech in LATAM.” Joining digital dots: Belvo is expanding across LATAM

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Issue 17 | TheFintechMagazine

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REGTECH: ONBOARDING

120 App experts Built For Mars went undercover this summer to find out which banks really had a slick onboarding process. We asked fintech’s Jim Marous, host of the Banking Transformed podcast, and Peter-Jan Van De Venn, Strategy Director at digital consultancy Mobiquity, what we can learn When you and banks know they have (or should have) access within seconds to reliable know your customer (KYC) data that has probably been used to authenticate you many times before, why can it still take up to 120 clicks and 36 days to open an account? The answer, in short, is that many banks – mostly, but not all, legacy ones – are continuing to kid themselves that they have fully digitised, according to fintech influencer and author Jim Marous. “The biggest challenge, not in just opening the account but in onboarding, too, is simplicity,” he says. And a breakthrough survey of 12 UK banks – including neos and incumbents – by app experts Built For Mars, confirms that many have not risen to that challenge yet. Onboarding new customers in as frictionless way as possible is rapidly becoming the game changer in a world of banking where customer user interface www.fintech.finance

... A CLICK TOO MANY

identity verification like that employed (UI) and user experience (UX) are now by Monzo, Revolut and Starling. Those critical measures rather than mere three digital challengers also asked buzzwords. Built For Mars used a simple fewer questions, relying (in the first way of benchmarking them: counting instance at least), on a limited address the number of clicks it took to register history to enable credit checks. for an account and the number of days for When it came to counting the working that account to become active. days for an account to become active, with Report author Peter Ramsey opened the definition being the ability to use a PIN an account with digital challenger and card as well as having online access to bank Revolut in 24 clicks, but it needed the account, the running order changed. 120 clicks to do the same at HSBC-owned With Barclays, Monzo and Starling it took two internet- and mobile-only bank First days, while Lloyds, Metro Bank and Revolut Direct. Neobanks Starling and Monzo, made customers wait three. Bringing up the at 38 and 45 clicks respectively, were rear were First Direct at 15 days, Nationwide also considerably quicker than the best of at 22 and HSBC at 36 – an astounding 18 the traditional banks, headed by Lloyds times slower than its best-performing rival. at 69 clicks, followed by Barclays at 74. Monzo, Revolut and Starling were also However, Barclays was the only able to steal a march by allowing users to traditional bank to join digital challengers add their cards to Apple Pay as soon as the Revolut, Starling and Monzo in allowing account was approved. an account to be opened solely through “Traditionally, you’d not say that you had their app. an open bank account until you’d actually Two-thirds of the banks forced users to received your card,” notes Ramsey. “But the go onto their websites at least once during challenger banks have rephrased this wait the onboarding process, while the apps as being ‘your account is open, see, you used by Metro Bank, Nationwide, NatWest can use your card right now, and Santander were not fully Eventually, it’s we just need to post it to you’. responsive on mobile. going to be “This is immensely subtle and The survey – which was part ‘what’s my gateway clever. That simple change of of a much bigger UX audit bank?’. Is it Google perspective makes opening an series that explored whether or Facebook or account with Monzo, Revolut the customer experience with some other service? and Starling feel instant, even neobanks was substantially if it really does take a few days better than with traditional Jim Marous to get full access. banks, whether the latter had “You get an immediate feeling moved on significantly and whether the of ownership and success.” former had substance or were just digital Marous believes the pressure on the hype – also found that, of the high street worst-performing banks to up their game operators, only Barclays, Metro Bank, will only intensify. Nationwide and NatWest used digital

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Issue 17 | TheFintechMagazine

REGTECH: ONBOARDING “We are still asking the consumer to fill in every blank on every form as if we’re still doing it by paper,” says Marous. “And when you look at the consumer, who’s becoming more educated on how to interact digitally, especially during COVID, they’re finding that there are much easier ways to engage. “Take Zoom, for instance. Why do people continue to use Zoom when there are possibly some security issues? Because it’s one click. Why do people like to use Amazon? Because it’s one click. Why do people like to use PayPal integrated within payment processes? Because you don’t have to fill in all the details about where you want things to be sent.” Banks need to wake up to that reality, says Marous. He cites new Digital Banking Report research which found that 70 per cent of organisations said they had online account opening and less than 50 per cent had mobile capabilities. “When we asked ‘how long does the process take?’, 80 per cent of online openings and more than 70 per cent of mobile openings took more than five minutes,” says Marous. “That’s a lifetime to a digital consumer. “Our new research for the Digital Banking Report asked financial institutions if they had a multichannel new customer onboarding process. For the sixth consecutive year, roughly 50 per cent stated that they had such a programme, with another 25 per cent stating that they plan to have such a programme within a year. How do these numbers remain almost exactly the same if any of the planned programmes are created?” Peter-Jan Van De Venn, strategy director at digital consultancy Mobiquity, agrees that there is an element of self-delusion among many banks when they talk about digitisation. His consultancy works across industries to smooth the customer experience and it has helped build the first Cloud-based, mobile-only bank in the Middle East. The onboarding requires customers simply to take a photo of two IDs and a selfie. They can set up an account in two minutes, after which they are issued with an instant virtual card. Van De Venn is currently conducting his own research into digital onboarding processes across European banks. “You see the difference between the challengers and the incumbents,” he says. “You sometimes even see exact copies of

TheFintechMagazine | Issue 17

the old paperwork online – it’s amazing that banks can still get away with it.”

in Van De Venn’s view, it’s the organisational legacy that’s key. “If you don’t have the culture of innovating continuously and adapting continuously, then technology Contextual onboarding is not a solution,” he says. “Adapting your The Built For Mars exercise highlighted organisation is, I think, the harder challenge.” how UI and UX should be built around the He urges organisations to listen to their context in which the customer is accessing customers, get the feedback, incorporate it the bank. A groundbreaking example of and adjust. “But you need to have that that is Latvia-based startup Zelf, which is flexibility within your organisation, it needs launching an app-free neobank that exists to be in your mindset, it needs to be in your solely in messaging platforms (see page 66). culture. This is the key to making it better It has a two-stage onboarding process. The and getting close to what clients want.” Marous quotes a J.D. Power study that showed organisations do best when they reach out five to seven times to customers in the first six months. What was concerning about the Digital Banking Report survey, he says, was that 50 per cent of firms only contact a new customer one to two times. “That’s not onboarding, that’s just saying ‘thank you’,” says Marous. He believes open banking will put the user interface front and centre as the access points to financial services narrow. “Eventually, it’s going to be ‘what’s my gateway bank?’,” Marous predicts – the brand that customers will go through to access a range of so-called ‘mistress banks’, other financial providers and lifestyle assistants. “Is my gateway bank Google? Or Facebook? Or some other, where they don’t have to own all the banking services; they are simply the way to get into them?” In time, it will act as a financial concierge. “I don’t pay attention to my accounts so much as the way they interact. Does my savings account transfer to my You sometimes Jumping through hoops: loan account on a payment A traditional onboarding even see exact day? If I run low on my current process can take days copies of the old account, does my overdraft paperwork online – account automatically kick in first gives access to a basic it’s amazing that to take care of that?” account with a capped banks can still get The era of the gateway deposit, which can be bank might be edging closer. away with it operational in 30 seconds. Google has just announced Only if customers want more Peter-Jan Van partnerships with eight US facilities will Zelf later take De Venn banks, using Google Pay as a them through the full KYC platform for digital accounts. Big techs are process. For its target audience – impatient experts at UI. They won’t ask customers to Gen Zers – the initial interface with the perform 120 clicks and wait three days to bank is as easy and fast as sending a text. open an account. And what of the banks Would a high street bank feel comfortable providing the infrastructure and doing the with that? heavy financial lifting behind the scenes? Maybe not. But both Marous and Van They will likely be anonymous as far as the De Venn believe the need for both cultural customer is concerned… The question is, if and technology change that enables that customers can sign up and have a virtual level of responsiveness have been vividly card in minutes, will they really care? exposed by the COVID-19 pandemic. And,

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ISSUE 268// JANUARY 2020

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REGTECH

Network effect: Trulioo is building a framework of trust

Trulioo’s aim is to allow everyone to participate in the digital economy by making sure they have a digital footprint that is verifiable and secure. COO Zac Cohen believes the changes being accelerated by COVID-19 will bring it closer to that goal “We need to re-evaluate how we approach identity, how we think about the online account opening process, and, most importantly, trust and safety online overall.” When those words belong to Zac Cohen, chief operating officer of global identity verification service Trulioo, speaking on the impact of the COVID-19 pandemic, it pays to take notice. Vancouver-based Trulioo has come a long way since 2011, when it set out on its mission to improve financial inclusion by ensuring everyone with a digital footprint can be verified and benefit from the online economy. It’s now a leading player in the world of digital identity verification, counting international banks, Fortune 500 enterprises,

TheFintechMagazine | Issue 17

tech giants and global companies of all sizes among those who use its solution to help meet know your customer (KYC) and anti-money laundering (AML) compliance and inform the user experience around them. Its Global Gateway is an identity marketplace of more than 400 trusted data sources and the company has invested heavily in building a low-code developer tool called EmbedID to allow its customers to easily integrate and plug into that database. Trulioo knows that no-one can afford to stand still in this constantly evolving space. Here, Cohen discusses how the pandemic has only amplified that. THE FINTECH MAGAZINE: To set the scene, what were the challenges global businesses were facing when it came to identity, pre-COVID-19? ZAC COHEN: The challenges typically fell into three buckets for us. Global businesses have global customer bases and each one is diverse, each has its own unique characteristics and each customer base brings a unique set of demands. So, when you think about a company that operates globally, how do you manage the onboarding programme in 30, 40 or even 100 different countries around the world, without spending huge sums on compliance, operations, personnel, and unique user experiences? Managing

that diversity is one of the big challenges. The second challenge is the regulatory landscape. If you work with customers online, you must confirm their identity, and, as a global business, you alone are responsible for designing, managing and, ultimately, adhering to the regulations within that vertical around identity verification. It’s complex and the penalties are stiff. Last year, AML fines totalled more than $8billion, globally. The volume of regulatory change has increased nearly 500 per cent, compared to 2009 levels. So it’s significant, when you think about the ramifications of that regulatory landscape and how many departments within your global business it will hit, whether it’s risk, operations, legal, customer relationships, design, security, etc. The last thing we think about is change. We live in a dynamic, highly competitive, ripe-for-disruption type of world. So how you build your business for change, and how you react or take advantage of that change, is often the difference-maker between long-term success and failure. TFM: So, what is the impact of the COVID-19 pandemic on these challenges? ZC: The biggest change for identity that the virus has brought about is really its impact on the digital experience. We’ve gone from a ‘nice-to-have’ to a ‘must-have’ digital www.fintech.finance

channels, simply because the physical interactions that we’re all used to are either limited, nonexistent or, frankly, from a customer experience perspective, they’re not preferred right now. And that change is a dramatic one that we believe will persist, regardless of how, as a society, we hopefully solve this virus challenge. Increased demand and online traffic are compounding those existing challenges. When we think about regulation, you now have to recalibrate your risk models because the risks in services that you offered before, and how you evaluated that, have dramatically changed. The other thing that we’ve really noticed since COVID started is around change. We did a recent study in which we found that 42 per cent of users will abandon the account opening process if the identity checks fail. It’s a very tight window of customer experience where they make their decisions rapidly. Also, we’ve seen fraud has increased dramatically because when online traffic increases, it also attracts individuals who are trying to take advantage of that. TFM: What will be the long-term impact on global business? ZC: We need to re-evaluate how we approach identity, how we think about the online account-opening process and, most importantly, trust and safety online overall. The online organisations and fintechs that have been most successful really have a strong way to look at that online identity approach and the user experience. Businesses that want to thrive in this environment need to double down on that experience and take a critical look at how their approaches are being rolled out. First, you need to take a look at the technology partners that understand the market, speak to them, work with them, and try to take advantage of their experience. And, second, you need to take a risk-based approach with your identity solutions. That means leveraging a network that can layer different identity tools, depending on the situation or the unique experience that you’re trying to create. TFM: Should governments or individuals be responsible for creating a digital identity network? And what form should it take? ZC: To answer the first part of that question: it’s both and everything in between. www.fintech.finance

At the end of the day, for all the players involved, the end goal is a secure scenario where you can be identified to reduce fraud, to satisfy the regulatory obligations that are in place and also to grow and be able to interact with, and have access to, the online economy. So, all these different players have to contribute and we’re only as strong as the weakest link. Government organisations that want to help drive secure access to data, that want to be able to create strong identity systems, users that naturally want to interact online but don’t want their own information to be put at risk, and technology partners that are the catalyst to it all, really need to work in concert together. I think the easiest way to think about an identity network is as an orchestra. It’s an orchestration of services that layer together and provide a robust but flexible and customised consumer journey. That will maximise your verification while minimising friction and fraud. Using existing services when you need them and having an intelligence layer to conduct them, is how we define an identity network.

With an identity network, you do not need to retain any personal information because it learns over time, it recognises normal and abnormal situations and it allows you to leverage services without necessarily having to resubmit all the same information each time TFM: What are the benefits of an identity network for your customers, including any impact on a frictionless user experience? ZC: We provide a proprietary software and intelligence layer that we share with all of our customers, so they can see, ahead of time, what has worked, in what situation, when and where. When you’re planning a global rollout, whether you’re a small business or a large one, that is incredibly powerful.

Another main benefit of the identity network is evolution and change. We all know fraud risks will change, we’ve seen the regulatory environment change and we know customers change. You need to be able to easily evolve along with that, to take full advantage of the marketplace. When consumers first started interacting with fintech apps, they were savouring speed over all else. In a recent survey that we ran, more than 60 per cent of individuals responded that security is more important than speed now. How do you balance both? You make sure that you’re doing business with technology partners that understand that for a start. And, frankly, you do not need to retain any personal information with an identity network because it learns over time. It recognises normal and abnormal situations and it allows you to leverage services without necessarily having to resubmit all the same information each time. You have the flexibility and sophistication to be able to do more with less and also apply common standards so that information isn’t put at risk. TFM: Will a global identity network help financial inclusion? ZC: Our mission around the world is financial inclusion. It’s to make the online economy accessible for everyone and you can’t do that if you’re not thinking about the end users’ experience, but also those fintechs and other online organisations that are trying to reach them. If we’re not servicing those organisations that tend to be smaller, with less resources but big goals in mind, we’re not satisfying our mission, either. There are huge numbers, in the billions, of individuals who are unbanked or underbanked, not by choice. We believe the first step to financial inclusion for them needs to be fuelled by a solid identity solution that’s inclusive and functional, that also satisfies the regulatory obligations that are becoming commonplace. We see privacy and compliance changes impacting the world, and you need a regulatory technology that can act as a catalyst to power them all. We’re really excited to be part of it and we really believe that the identity marketplace, the identity network, and EmbedID are the future to it. Issue 17 | TheFintechMagazine

COMMNTARY: FINANCIAL INCLUSION

The long walk to inclusion 2020 was supposed to be the year we celebrated the end of financial exclusion. But around half the world’s population still don’t have access to a bank account. We asked Edwin Chong of neobank Muniy, David Pope of verification specialists HooYu, and Diane Brocklebank, representing the Prepaid International Forum, what fintech can do about it

Sometime around mid-April, Ratan Kumari (46) gravely injured her feet from a bad fall as she, her family and neighbours were walking the 1,300 miles back home to their native village in Uttar Pradesh, north India.

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The entire group was stuck. The Indian government had announced complete lockdown of the country to check the spread of COVID-19 on March 24 and wage earners like Ratan, her husband, and his brothers, lost their jobs in the city of Bangalore. After a few days’ wait, with public transport suspended, they’d set out for home. By the time Ratan was injured, they had already walked for 10 days and desperately needed rest. Looking back, she considers herself fortunate. In Bangalore, she worked as a cook. One of her employers had insisted she get a bank account and taught her how to use a digital wallet, mostly to help keep her money safe. A cheap smartphone and a digital wallet linked to a bank account enabled Ratan to receive a cash donation from a volunteer organisation with which the family secured food, medicine and shelter for a few days before continuing their journey home. Worldwide, millions of people have to overcome many hurdles to access financial services – the time and cost of travel to banks, lack of identification documents and a general sense of inaccessibility. But history demonstrates that fintech can have a positive impact. Research shows that M-Pesa enabled around 185,000 women

in Kenya to move from subsistence farming to business or retail sales, and also helped them save – all through their phones. Access to mobile banking may help underserved communities, especially women, in more ways than one. But progress is slow. According to the World Bank’s Global Findex, by 2017 (the last time it collected figures), around 1.7 billion people (almost a third of the world) still didn't have access to mainstream financial services – a situation it had set out to address some years previously, promising universal access for all adults by 2020. The Centre for Financial Inclusion revised the Bank’s 2017 figures, removing dormant accounts, to conclude that only 48 per cent of adults in low- and middle-income countries had bank accounts that they actually used. Inclusion has also been very uneven across countries, communities and genders. Can fintech play a significant role in bridging these inequalities while improving financial inclusivity worldwide? We brought Edwin Chong, co-founder of the recently launched mobile bank, Muniy; David Pope, marketing director of ID verification specialists HooYu, and Diane Brocklebank, contributor to the Prepaid International Forum, together to answer that and other questions… www.fintech.finance

THE FINTECH MAGAZINE: How – and how far – has fintech extended financial inclusion for the unbanked people of the world over the last few years? EDWIN CHONG: One way that technology has tremendously helped is by lowering cost, so that more people could be reached. Another way it has played a role is with data – providing access to alternative types of data and ways to analyse it, which allows you to evaluate different financial situations and include them in the mainstream financial system. So, people could be offered loans based on their use of mobile phone data or their contact list. These digital footprints are also valid ways of evaluating someone’s situation. DIANE BROCKLEBANK: Fintech is about flexibility, scalability, and bringing solutions to markets very quickly; fintechs are unencumbered by legacy systems, which has been an enormous driver in helping to bring the financially excluded into the financial system. DAVID POPE: Fintechs solve problems that mainstream financial services weren’t even aware existed and hence weren’t catering for. Fintechs isolate a problem, then develop and build features to solve that problem. That’s particularly true in the emoney and prepaid space for financial inclusion.

TFM: And it’s not just individuals, is it? Even some sectors are underserved? EC: Apart from foreign nationals living in the UK, there are high-risk industries, such as crypto, gambling, or CBD [medicinal use of the cannabis plant] that tend to be shunned by traditional banks. They are eager to find solutions that let them move money normally. They could be a completely legitimate business but just because of the industry they’re in, everyone looks at them suspiciously. These are people who don’t fit standard credit assessments or usage patterns and, because of that, they miss out on opportunities. In general, at Muniy we’d like to get more people into the economy. By getting an account to people who primarily use cash, we can help them start establishing their digital footprint. And, once that happens, it’ll allow us to get a fairer picture of their situation and a credit record, so that they can take advantage of other services like loans, financial products or a better user experience.

TFM: Much of the problem stems from people not having traditional forms of ID that allow for the normal know-yourcustomer and anti-money laundering checks. How can that be addressed? DP: HooYu verifies customers in a way that a traditional approach TFM: It’s difficult to believe that there can’t. The old method of checking a are people who are still unbanked, database to confirm a name, address, even in a mature fintech market like date of birth, etc, is no longer the defence that of the UK. Who are these people? it used to be against fraud, and it also doesn’t work for everybody. It actually DB: There are lots of socioeconomic creates financial exclusion. HooYu is and cultural reasons why people are designed to verify the identity of anybody, unbanked. Many are left out because of the from any country, no matter design of financial products. Fintechs solve where they are, no matter what These are people who may problems that kind of ID document they’re have been discriminated mainstream financial using, and we make that against, may be marginalised services weren’t process easy for them. Let’s or belong to some very even aware existed suppose you’re Polish and vulnerable consumer groups, you’re in London, applying for and may not have the ID to David Pope, an account with a company open a bank account. They HooYu that’s using HooYu. It will may be temporary or migrant automatically detect the settings on your workers, or they could be people who device and serve you the HooYu user don’t have access to the technology, interface (UI) in the language you’re using. such as a smartphone. A lot of people We’ve also been doing a lot of work on who live on the periphery of society are in accessibility and we’re about to release a dire straits; they rely on very informal ways new UI that offers screen readers that of banking, like doorstep lenders, putting read out relevant parts of a screen to help cash under the mattress and borrowing users through a process without confusing from friends and family.

“

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them, and, for those unable to use the mouse, take them from start to finish by tabbing through each field. TFM: How can prepaid technology help to transfer some of the unbanked or cash sectors to digital? DB: Prepaid technology is an enormous fintech enabler. It allows fintechs to bring new solutions to market, very, very quickly. Use cases vary – from traditional travel money products to products that are designed for students going on their gap years, to offering an alternative to a business bank account . We’re seeing a lot of growth in this area, especially with very small businesses, freelancers and sole traders. In the context of COVID-19, it’s allowed companies that were formerly relying on cash to rapidly digitise their payments. Also, in the charity sector, we have members that have been working with charities, right through the pandemic, to bring their products onto a prepaid solution. So prepaid is not only about serving the underbanked. In the context of financial inclusion, there’s an enormous opportunity for fintechs to leverage that technology. TFM: What can the financially underserved expect once they join the digital mainstream? EC: I think that will lead us past thinking in terms of ‘OK, we made you a wheelchair that can climb stairs’, to ‘forget about stairs – here’s an elevator’. The future is more about meeting people where they are in their daily interactions, and figuring out how to be there to help them. DP: As the high streets become a less attractive place to go, the elderly generation who are digitally underbanked, will not only be using digital financial services, but a broader range of them. DB: The pandemic has accelerated the shift to digital and there’s a huge opportunity for fintech to now tailor products and services for a generation that have suddenly become digitally savvy. My mum, who refused to go near online banking, now wants a smartphone and online banking! If we look at some of the products out there for small businesses, too, where it’s not just about a means of payment, but a suite of other things that can be brought in to help them manage their business more effectively. Issue 17 | TheFintechMagazine

PAYMENTS: CASH

Fan‘fair’ for a local hero In the helter-skelter world created by the pandemic, community-based cash systems could be part of a socially and environmentall-conscious ‘new normal’, argues Ron Delnevo, Chairman of Cash & Card Consultants I recall vividly when I first became aware of the existence of Brighton Palace Pier. It was 1969. I was in a school group in my home town of Edinburgh, taken to see the anti-war movie Oh! What A Lovely War. I remember thinking at the time that this was a strange choice of movie for a school trip. We didn’t get many such outings. The previous one had been to The Sound Of Music, a very different filmic experience, although also a movie about a war. Anyway, I really remember only one thing about Oh! What A Lovely War, and that is the helter-skelter. After leaving the cinema, I asked a teacher if it really existed. I was told that it did, and that it stood on the pier at Brighton. I resolved then to visit Brighton to see the pier and its helter-skelter. I finally got there in the early 1980s and fell in love with the pier. The helter-skelter turned out to be possibly the least exciting of the attractions, among a wide array of rides, amusements, tattoo artists, fortune tellers and food and drink vendors. Before a pandemic blighted 2020, each year more than six million people visited Brighton Pier. It is the only visitor attraction outside London to welcome that many guests. Edinburgh Castle, in existence for 1,000 years longer, can only muster half as many. Why? Perhaps because history also needs to be fun to get punters through the turnstiles! My interest in Brighton Pier is not limited to its dazzling entertainments. Around 20 years ago, the then owners of the pier approached me to supply them

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with ATMs. They wanted machines so that those six million visitors could get the cash they needed to pay for all the fun. The owners couldn’t interest any bank in providing the service. I was delighted to oblige and my company Bank Machine installed half a dozen ATMs. Wherever visitors were on Brighton Pier, they now had cash close at hand. It was a great commercial deal for both the pier owners and my company. However, what really excites me, looking back, is the fact that, after the creation of an initial float of notes and coins by the pier owner, all the banknotes for those ATMs came from the site cash office. No cash deliveries were needed. A virtuous circle had been created, with many £20 and £10 notes never leaving the pier. They moved from change kiosks to the cash office to the ATMs, and then back to the change kiosks. There were also coin-dispensing machines on the pier, where bank notes could be converted to coins for use in amusement machines. Like the ATMs, these machines were serviced by the pier cash office team. Excess cash would be collected from the pier cash office by a cash-in-transit company, but no deliveries were ever required for the ATMs, even though they were dispensing millions of pounds every year. So, Brighton Pier was a brilliant example of a virtually perfect ecosystem for cash. Most of the banknotes and coins travelled no more than a few hundred steps. All the processing was as local as can ever be achieved. Travel is a massive issue for cash. There are thousands of vehicles in the UK that spend all their time moving cash over

long distances, so that it can be sorted and processed. The same cash often then travels back to where it originally came from, to replenish bank branches, post offices and ATMs. Such extended itineraries for bank notes and coins are time-consuming, expensive and environmentally unfriendly. Both new learnings and radical innovations have a role to play in keeping cash relevant and cost-effective in a fast-changing world. Two well-known examples of community payment innovations are the Bristol Pound and the Brixton Pound, with the Bristol Pound having notes to the value of £1million in circulation, which are accepted by more than 800 local businesses. The Welsh capital, Cardiff, could be the next major UK City to enjoy the benefits of a local currency, with a launch mooted for 2020. Such community initiatives can offer excellent support to local businesses, with the obvious advantage that there is no leakage. A Cardiff Pound will never travel far, since it only has value within the city. A vital learning during the current pandemic has been the importance of community and ‘localness’ in every aspect of life and, notably, in retailing. Though much has been made of the increase in online sales, actually it has been local convenience stores that have enjoyed the biggest percentage uplift in trade, with 30 per cent growth reported by research organisations such as Kantar. Convenience store customers generally travel a mile or less to visit their community shop, so such retailers are a truly local answer to meeting the needs of nearby residents. www.fintech.finance

A healthy, cost-efficient future for cash can be constructed from the learnings of Brighton Pier, local currencies and the increasing success of community convenience stores. In the next decade, circulation and recycling systems must be perfected to ensure that bank notes and coins travel as little as possible. The few yards of the Brighton Pier example would be ideal; the mile or less of convenience stores a very acceptable compromise. Innovations will include creating local communication networks for real-time knowledge of how much cash is available to circulate in every community; how much is in shop tills, in cash deposit/ recycling machines and in conventional local ATMs. This improved knowledge of the precise whereabouts of cash in the community can enable residents to better plan their cash acquisition, with, if they choose, the ability to use their smartphone to pre-book the cash they need before they leave home. Such an innovation will deliver both convenience and peace of mind, which are priorities for most of us. As solutions are implemented to keep cash circulating in the bubbles represented by thousands of local communities around the UK, cash will become that most admired of success stories; a true local hero.

A virtuous spiral: Cash withdrawn from the pierâ&#x20AC;&#x2122;s ATMs to pay for rides was recycled by the operators

Brighton Pier was a brilliant example of a virtually perfect ecosystem for cash

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PAYMENTS: INNOVATION

US corporates are waking up to the fact that digital payment systems are not just preferable but essential as the world finds different ways of working. Carl Slabicki, Head of Strategic Payment Solutions at BNY Mellon Treasury Services, believes the phrase ‘the cheque’s in the post’ will mean nothing a generation from now It’s a payment system that Alexander Hamilton (one of America’s founding fathers) would have been familiar with when he formed the Bank of New York in 1784. But is the paper cheque (or check as Hamilton would have known it), finally being shredded? Carl Slabicki, head of strategic payment solutions at BNY Mellon Treasury Services, which started life as the Bank of New York, is convinced it is – and that it has the current challenging environment to thank for speeding up its demise. Make no mistake, even in 2020, cheques remain one of the primary methods for firms to make and receive B2B payments in the States. And, of the 159 million payments made by the Internal Revenue Service (IRS) by early June under The Coronavirus Aid, Relief, and Economic Security (CARES) Act, nearly a quarter (35 million) had to be sent as a cheque in the post.

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But banks are itching to get rid of them: they’re expensive, time-consuming and not great for the environment. And digitisation will likely see the back of them. With a largely institutional client base, including insurance, healthcare, corporate, telecom and utilities, BNY Mellon has for some time been pushing to bring more efficiency to the business payments ecosystem through digitisation. For example, it was the first bank to originate a payment through the US real-time payments system, the RTP Network. Now, dramatic changes to working practices caused by the pandemic lockdown, principally the huge increase in remote working by its corporate clients, has brought things to a head. First came the enforced move to home working; then the realisation by corporates that digital processes were both effective and efficient. That opened up a conversation that BNY Mellon had been keen to have with them for a while.

“Everyone moving to working from home has really given us a chance to have a little bit more of a stepped-back, strategic conversation with our clients, to say ‘listen, maybe the way a lot of companies were doing things doesn’t make sense anymore’,” says Slabicki. He credits real-time payments solutions, such as RTP and Zelle, with changing the legacy banking system’s use of tools such as batch methods of processing payments at set times during the traditional Monday to Friday working week. “Under the current pandemic, a lot of our clients, such as insurance companies, were saying ‘I want to make sure I can get a payment to a policyholder instantly’. Or they wanted to process a refund for a medical payment, or pay an invoice for medical services and make sure the money got to the hospital in time, so that the hospital’s receivables didn’t dry up. Speed really matters in those cases and availability matters,” he says.

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PAYMENTS: INNOVATION “So, one of the really groundbreaking things we’ve seen, whether it’s real-time payments setting a new foundation for the market to move money continuously, or networks like Zelle giving a lot of our corporates real-time access to move money into individuals’ accounts, the speed, availability and transparency around the payment has increased across the board.” But Slabicki also believes that, in the short-term at least, US banking will need to continue to use traditional payment methods, including cheques, ACH (electronic, bank-to-bank payments) and wire, when and where appropriate. “Our goal is twofold,” he says. “To make

ultra-transparent, to help our clients learn with us and let us advise them as we go into that space and adapt these new capabilities. We’re piloting a lot of these across the board with clients to help us learn as we go, too, because we’re doing it for the first time, just like a lot of our clients are.” The digital transformation of the payments ecosystem has allowed a whole new way of working to develop in the US and across the world, with major implications for banks’ working practices. Companies based on the gig economy model – Uber, for example – need their banks to carry out multiple payments to workers daily, representing a paradigm shift from the traditional processing of

Of its time: Alexander Hamilton would have been familiar with the ‘check’ as a method of payment

sure the traditional methods are efficient, then make sure we have the latest capabilities to help our clients take that first step into the future – and then make sure they’re paired together as a holistic solution. “We know our clients are going to continue to need batch processing, we know they’re going to want a foot in the new space, to start leveraging things like application programming interfaces (APIs), real-time payment capabilities, alias-based payments and some of the new validation tools out there. Our job is to make sure they can use both of them with us. “We try to take a very consultative approach and say ‘this is what we’re learning, this is what we’re seeing, this is what we’re building. This is the roadmap’. We try to be

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the weekly or monthly payments run. “The way corporates are interacting with banks is moving away from SFTP batch-file models to more of an API, real-time, machine-to-machine type of connectivity with their bank,” says Slabicki. “The gig economy has brought it to light, but I think it is moving into the mainstream corporate world as well.” The increasing use of APIs is also allowing banks like BNY Mellon to work much more closely with their corporate clients to improve their customers’ experience. Slabicki says: “The fact that APIs can integrate those capabilities right through to the frontend has opened the door for us to be part of that user experience, which wasn’t possible in the past.”

Learning the lessons Slabicki acknowledges that many countries in the European and Asian marketplaces are considerably further advanced in developing a faster payments system than the US. He says: “We spent a lot of time talking to our peer banks in a lot of those markets about their experience, years before us, rolling out real-time payment and API capabilities to their own clients. We’re trying to take as many lessons as we can from them when we look to do the same here in the US market. “Now what we really need to do is bridge the gap to interoperability globally. How do you get to a point where you can move

Maybe the way a lot of companies were doing things doesn’t make sense anymore money crossborder, 24/7, 365? How do you take all those great capabilities to crossborder money movement, and multi-currency and foreign exchange? “I think the important thing is not just to make sure we’re sharing best practice to help each other out in our respective markets, but also to make sure we’re all moving down the same path, so that when we do start jumping crossborder and tying those things together, we’re in similar places, using similar formats with similar standards. So that we have a framework that’s going to make it easier for us to interoperate at a point in the future.” www.fintech.finance

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PAYMENTS: ‘BEYOND BANKING’

Above and beyond banking ING is going further than most banks in redefining its role in payments. Mark Buitenhek, its Head of Transaction Services, tells us how and why

Life-changing can be an overused adjective, but it’s certainly justified for the impact of the COVID-19 pandemic. In multiple ways, how we live will forever be defined as either BC or AC – before or after coronavirus. The need to push the reset button is clear, as what were initially considered temporary changes evolve into permanent ones, such as home working and shopping online to name but two. And it’s this moment that bosses at Dutch bank ING believe must be seized by governments and industry alike to develop new ways of doing business and successfully rebuild shattered economies. For its part, ING intends to use its proven track record of innovation through technology to go ‘beyond banking’, which includes following the path of the GAFA quartet of Google, Apple, Facebook and Amazon in becoming ‘master of its data’. That is taking the bank in surprising directions. In July this year, as consumers voted with their feet and continued to stay away from bricks and mortar shops in droves, ING made its debut as a home and fashion etailer. Its first foray into ecommerce is in Romania, where it has started an online shopping platform called DealWise, offering sports equipment, clothing, personal care products and toys, with links to major retailers. Announcing the DealWise launch, ING said that it plans to roll out the marketplace, with Germany and Belgium expected to be included later this year.

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A major benefit of the move into online retail is the ability to harvest the huge amounts of granular data generated by purchases. For ING, that will complement the information it already accesses through the QR code-based in-store, online and P2P (peer-to-peer) Payconiq payment app it developed in 2014 and later linked with loyalty platforms Qustomer, KBC’s CityLife and, last year, Joyn, the loyalty programme for small merchants, allowing shoppers to collect points and pay in one click. Payconiq has been adopted by a host of European banks and, in 2018, it merged with Bancontact with the aim of going further. Last year, the app raised $20million from its existing bank shareholders to expand its payments ecosystem beyond the 60,000-plus merchants in Belgium, Luxembourg and the Netherlands, and the 13 banks it currently works with. Its ambition is to become a pan-European, omnichannel, mobile payments solution – a one-size-fits-all-payments app that transcends banks and borders.

Fighting commoditisation It’s a further step along what Mark Buitenhek, ING’s head of transaction services for the past decade and chairman of the Payconiq supervisory board, acknowledges is a revolutionary road for the banking payments ecosystem with which he first became involved in the mid-1990s. “Purely trying to monetise a payment is very difficult. It is, and will become, even more of a commodity, then basic economic rules [dictate] you need to start thinking about additional services, and that’s exactly what we’re doing. We call it ‘beyond banking’,” he says. “A lot of banks have tried all kinds of loyalty activities. It is pretty difficult because, in the end, we are not the centre of the universe – it’s our customers who are the centre of the universe. They buy either at a retail shop, or our corporate customers

are buying goods for their businesses, and we need to be where they are. “So, if you create a loyalty scheme for yourself, yeah it’s interesting, but a merchant will always say ‘well, and what about the other 80 or 90 per cent, or, in some cases, 60 per cent of the market?’. The advantage of open banking coming towards us is that it is becoming more and more simple, based on new technology, to offer these kinds of services with a simple API (application programming interface). So, you can now combine, say, in a supermarket app, multiple APIs with multiple banks, and, whether you use card X or Y, or payments method A or B, you get the rewards you need. We’re investing in these kinds of opportunities.” Of the macro trends in the payments industry over the past 20 years, he says: “The change has been from multiple angles, from paper and cash to digital; from local standards to global standards; in the speed of transactions, from weeks to hours to now seconds; and from branch, to mobile, to APIs. It’s a fantastic journey, where basically nothing has been untouched.” And the pandemic has fast-forwarded others. Lockdown measures caused footfall in some of ING’s branches to slump so much that the bank has accelerated a long-running plan to scale back its network, immediately closing almost a quarter of its 170 branches in the Netherlands, replacing them with service points. Meanwhile, the huge increase in people working from home in less secure environments has seen the bank record a rise in attempted cybercrime, such as phishing fraud, which Buitenhek says it has reacted fast to shut down. “And increased use of contactless payments also opened up new kinds of fraud attempts,” he adds. “We’re carefully watching that after we increased the limits, as everybody did, across the world.” www.fintech.finance

Despite an initial surge in demand for cash in the early days of the pandemic, blamed on initial panic, cash and ATM usage has dropped dramatically. But, well before the crisis, ING had already combined with other banks in the Netherlands, to make better mutual use of their underused ATMs. “We put our complete ATM park into one collective company, a utility, to optimise the number of ATMs,” says Buitenhek. “We see far more card payments at the expense of cash. We’ve seen a drop of somewhere between 50 and 60 per cent in cash usage, which is extraordinary – it would normally take a decade to get there – and much more ecommerce, compared to physical transactions. Contactless has exploded.” Bank as etailer: ING is finding evermore innovative ways to go ‘beyond banking’

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In fact, Payconiq recorded a record number of transactions in May. In the face of such upheaval, Buitenhek argues that it is fast becoming a necessity for banks like ING to cooperate and consolidate over payment systems, as they seek, at the same time, to offer extra services through open banking. That will become an imperative as income levels from traditional banking models are punished by a combination of higher costs for meeting onboarding legislation, historically low interest rates and the increasing trend in many markets towards high-volume/low-value transactions, driven in the main by contactless payments.

ng to Purely tryi ayment ap monetise cult.It fi f i d y r e v s i ecome, b ll i w d n is, a of even more ity a commod

This summer, ING announced that it had come together with 15 other major banks in Belgium, France, Germany, the Netherlands and Spain to work on something potentially transformational in the European payments landscape – a banking industry-backed payments system that could rival Visa and Mastercard. A natural extension of the universal approach to payments thinking that’s driving Payconiq, the consortium is developing a unified system called the European Payments Initiative (EPI) with a goal of being operational by 2022. It will leverage SEPA Instant Credit Transfer (the European real-time payments system) and allow in-store, online, P2P and cash withdrawal, as well as international payment schemes. In a recent interview, Eric Tak, global head, ING Payment Centre, said he believed it would be the basis for building ‘a cheap, fast and efficient payments solution for P2P, ecommerce and mobile commerce, as well as point-of-sale payments’. With operations in 40 countries, Buitenhek points out that ING has the ideal test bed to actively encourage innovation and experimentation. “The point with payments, of course, is you cannot introduce something at scale if you don’t know it’s working well,” he says. “But we encourage not only our staff, but also a group of 200-plus fintechs, to experiment. And you can experiment without having to build anything. Just try it on paper. Do people like it? Is there a response? “We would never introduce something broadly without properly testing it. And that’s the good thing about having 40 markets; you can test it in a market, see if it works, then move to a different one. That’s what we did with Yolt [ING’s money management app]. We started pretty small in the UK and when we saw the traction coming, moved to Europe.” The ING company culture encourages such experimentation. “Instead of HQ saying ‘this is the way we should do it’, we cherish and want to understand what is different,” Buitenhek says. “And we keep focussing on the customer pain points; that is where all the inspiration comes from.” Issue 17 | TheFintechMagazine

PAYMENTS: ECOMMERCE

Getting your clicks The etail explosion spurred on by COVID-19 is a golden opportunity for the industry – if it can collaborate over payment security, says G+D Mobile Security’s Vice President Jukka Yliuntinen Hands up if delivery services like Amazon have become your fourth emergency service during lockdown. The biggest example of an online retailer stepping in to help consumers access supplies and stave off boredom during months out of social circulation, this megalith of ecommerce isn’t the only one to come into its own as a result of COVID-19. In fact, the unprecedented circumstances sparked by the pandemic, which has characterised much of 2020 so far, have sent an already significant trend towards ecommerce spiralling upwards. Thanks to increasing numbers clicking to source everything from household essentials to entertainment since March, Goldman Sachs has revised its growth predictions for ecommerce upwards – from 16 per cent per year for the next three years, to 19 per cent. In its July report, the US bank stated that ‘we’ve seen an acceleration in innovation over the course of the crisis as companies have rolled out curb-side pick-up programmes, contactless checkout and personalised consignment deliveries, and retailers and marketplaces have adapted to reflect the shifting needs of consumers focussed on the new essentials’. Meanwhile, in the UK, footfall in retail stores is less than 50 per cent of last year’s levels, suggesting that those businesses still here are also conducting more of their sales online. All of which is pushing online payments, and the associated need to ensure payment security, right to the top of the finance industry’s agenda. Yet, just as the requirement for enhanced security becomes stronger than ever, regulators like the UK’s Financial Conduct Authority have been forced to re-think their implementation deadlines for the introduction of the new Secure Customer Authentication (SCA) regulation, which will help to provide that protection – from 31 March to 31 September, 2021. The main issue forcing this delay is a lack of industry consensus around how it should be

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achieved, with the one-time passcodes (OTPs) currently being used by many organisations widely viewed as cumbersome and inadequate, and different organisations favouring widely varying solutions, from biometrics to tokenisation. The complexity and cost involved in bringing their online operations up to spec means many smaller merchants have been slow to respond, which is understandable, given they are still focussed on survival. Balancing seamless user experience with the necessary security uplift is no easy task for the processors either, with authentication hurdles oft-cited as a major cause of shopping cart abandonment. Meanwhile, as these implementation crinkles are being ironed out, an already burdensome fraud problem is accelerating rapidly. Enter key players like mobile security expert Giesecke+Devrient (G+D), which has experience in the security of all payment types and is working closely

Merchants are increasingly making the decisions about how payments will be made available with issuers and merchants, as well as card networks, to find solutions that provide a virtually imperceptible payment experience while keeping payments secure. Founded in 1852, G+D offers both physical and digital security technologies used by millions of people, worldwide, every day, to pay by cash, card or smartphone, interact with their cars or use their identity documents while travelling. It has led development of biometric cards, and a relationship with Crédit Agricole on a combined chip and fingerprint recognition solution is one of a number of productive partnerships it has established to push this technology forward. Card giants Mastercard and Visa are also both active in this area,

using G+D technology to offer their Visa Ready and Mastercard Biometric, fingerprint-based solutions. Tokenisation and dynamic card verification are among the other SCA-related developments taking place – where banks can turn account numbers into tokens placed into physical devices or ecommerce systems and mobile transactions, to bar access to fraudsters. In July, G+D was approved by Mastercard as a ‘digital activity customer’, enabling it to onboard and make technical and commercial services available to third-party businesses wishing to enable digital payments in fields like Internet of Things (IoT) and card-on-file (where ecommerce providers store customers’ chosen payment details to enable uninterrupted transactions) through the Mastercard Digital Enablement Service (MDES). While card-on-file solutions are becoming more prevalent, they aren’t without risk, as significant hacking incidents over the past 12 months, including the Easyjet breach last May which saw nine million customers’ details stolen, have shown. G+D has supported widespread calls across the industry for more discussion and collaboration over SCA implementation, as studies show the average person has 90 different online accounts and needs to authenticate themselves 45 times a day. Agnostic about which payment method it supports, G+D offers security solutions for all of them but is part of a collaborative industry movement calling for universal standards to bridge the usability/security gap.

Up for the challenge Jukka Yliuntinen is responsible for G+D’s digital product portfolio development. He says: “Online payments have seen phenomenal growth over the last decade, but even more during the last couple of years. Retailers and merchants have seen a huge increase in capabilities for offering their www.fintech.finance

services online, and there is increasing consumer demand for online shopping because it’s so easy and they can pick and choose, compare, and get home delivery.” And for these online providers, trying to ensure SCA compliance while opening up their APIs for authorised third-party access to customer data, collaboration is key. “We’ve traditionally been about helping issuers provide means of payment, from cash to cards, including payment devices in the field,” says Yliuntinen. “With digital, the same applies. We enable issuers to have their digital payment cards enabled in different types of wallets and endpoints. “But merchants are increasingly making the decisions about how payments will be made available and in that sector we now provide services for digitising cards-on-file, where there is a big market. “For example, Amazon recently announced that, together with Mastercard, it will tokenise all its cards-on-file [in 12 countries including North America, Latin America, the Middle East and Europe], which is consumer-friendly because, beyond the payment, no details are stored and, even if the merchant database is compromised, you’re not compromising the original card. “The other area is authentication, especially SCA, because it’s essential to know who is making a payment. It needs industry-wide networks of issuers, acquirers and vendor communities, like us, contributing to that security, user-friendliness and performance,” says Yliuntinen. G+D is taking its own steps to help solve this industry-wide dilemma. “We recently, announced that consumers can use their Europay, Mastercard and Visa (EMV) contactless card as a second form factor for

strong authentication, to increase security by combining smart card-level hardware with tapping their own near-field communication phone rather than a point-of-sale terminal,” he adds. Working at every stage in the payments value chain gives G+D a privileged perspective on stakeholders’ relative strengths and weaknesses. “From the security point of view, you cannot do it alone, you are always dependent on somebody else,” says Yliuntinen. “The issuer is dependent on how the whole transaction flow goes from acquiring back to them. And then there are the devices and software or hardware, that need coherent, end-to-end security. Big techs and IT giants like Apple, with its Apple Pay, Apple Cash and now Apple Card have a really strong position and are gaining market share. Internet is enabling payments and online shopping, and these players have the means to do it, from enabling the devices, such as mobile phones and tablets, through to the software and services. “Traditional players like issuers, acquirers and the banking community have a chance to compete, but they need to act much faster, to offer trust, which is the advantage they have. They have fairly good solutions, and are, ultimately, the ones that have our money deposited with them.” As co-chair of Mobey Forum’s Digital ID Expert Group, he urges banks to wake up to this opportunity to be the guardians

of payment security. Last year, the Forum called for banks to take charge of national identity systems. It renewed that call in the context of track and trace systems for combatting coronavirus this summer. The reasoning is clear: inherent consumer trust makes banks the ideal guardians of digital data verification schemes that protect consumers during data gathering to support everything from ecommerce payment verification, to coronavirus infection control. Whether banks are willing to step into such a potentially politicallycharged role remains to be seen. But, notwithstanding the challenges around getting SCA right, Yliuntinen believes it could help the whole economy – not just the big guys. “It could pave the way for an etail explosion, with more, and smaller, retailers getting involved,” he says. That’s not to deny the resource, cost and technical challenges they face in doing so, but, given the current threat to the survival of traditional stores, do they have a choice? “Online will be dominating, including new services created by COVID, like ordering lunchboxes online, which made a big difference for small restaurants. Small businesses have found that this new way of selling could be very good for them.”

Security and speed: How to ensure one without compromising the other is the big question

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Issue 17 | TheFintechMagazine

PAYMENTS: INFRASTRUCTURE

Predicting the

unpredictable Ad van der Poel, Co-head of Product Management at Bank of America’s Global Transaction Service for EMEA, believes ‘digitising the trade’, not just the payment, is key to business survival in a future that’s increasingly hard to call Latin scholar or not, every company boss and treasurer surely knows the mantra scientia potentia est. In the digital age, knowledge is most definitely power. Having forensically accurate financial forecasts, including the key drivers of income and expenditure, are the bedrock for forging strategies for success. And the need for that has never been greater as the COVID-19 pandemic continues to wreak havoc on economies across the globe.

Latest statistics show how easily future-looking business plans can be rendered completely useless. Manufacturing in some sectors has plummeted. The retail and hospitality sectors are also reeling, with many high street chains looking at various ways of refinancing their debt mountains as layoffs mount. And it’s not just the major players that have been caught out by COVID. In the US, there are suggestions that at least 100,000 small businesses could be lost for good as the economy shrinks. Bank of America, like many banks, is seeing the impact of the pandemic on

clients and recognises the urgent need among corporates to get faster access to working capital, which is linked to the speed with which transactions are settled, better strategic decision-making and improved forecasting that can be achieved by leveraging the information around those payment journeys. Could better transaction data save those small businesses in the US? Maybe not, but it might give some a fighting chance – or at least a clue as to whether there is a future worth fighting for – by giving treasurers the granular insight needed to model a variety of forecasts more accurately.

Next moves: Accurate financial forecasting is critical to operational decision-making – and data can deliver it

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That’s where Bank of America’s CashPro, the platform used by thousands of businesses around the world to manage payments, receivables and deposits, could help as the bank focusses on what Ad van der Poel, co-head of product management for global transaction services Europe, the Middle East and Africa (EMEA), calls the ‘digitisation of the trade’. Timely improvements to the CashPro platform late last year included allowing treasurers to carry out their banking via mobile; the ability to originate real-time Automated Clearing House (ACH) payments in the US from the same platform that they use for all their other payment requests; and the extension of Bank of America’s eSignature capability to 20 countries across EMEA. While CashPro’s registered user numbers have remained fairly static during the pandemic, its usage has soared. This indicates that the crisis-driven changes to companies’ working practices, combined with the need to access working capital and understand a company’s available liquidity in real time, has become even more important for many clients. Describing the fast-evolving payments ecosystem, van der Poel says: “Initially, many were focussed on digitising the payment component, but we and our clients are now very much focussed on digitising the whole trade. When I say trade, I mean it in the broadest sense of business-to-business, business-toconsumer and government, too.” The more sophisticated the intelligence that’s attached to a payment and the faster it’s processed, the better a business can judge current performance, model future resilience against a range of scenarios and take operational and strategic decisions based upon them.

A basis for change There are many forces at play in shaping the evolution of payments. “From the consumer’s perspective, everything

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needs to be easy to use and customer-friendly; globalisation is increasingly affecting payments; and let’s not forget that we need to make sure we are compliant, transparent and doing the right things,” says van der Poel. But he believes the introduction of the new global payment messaging standard, ISO 20022, will be truly transformational in achieving that goal of digitising the trade. Van der Poel goes as far as describing ISO 20022 as a ‘foundational change for our industry’, and that’s because of the sheer volume of data that will be unlocked as different countries’ specific payments systems eventually become interoperable. More than 70 countries have so far signed up to the standard for crossborder payments messaging, which should be fully in place by the end of 2025. Emphasising its impact, van der Poel says: “In deploying ISO 20022, we get a lot more data that’s richer and delivered in a structured format. That will automatically achieve efficiencies, and it will achieve better transparency and, therefore, compliance.

Better cashflow forecasting has been on the top-five demands list from treasurers for years because it’s such a difficult thing to do “There are many players involved in moving an international transaction from A to B and it’s important to keep that transparency so that, by the time it reaches B, the data that was with A is still there. ISO 20022 is going to give us that. “At the moment, ISO developments are done within the context of a specific market infrastructure – for example, TARGET2 or CHAPS – and they’re focussed, obviously, on benefitting those specific infrastructures, which is great, but the real advantage is going to come when those infrastructures are interoperable from a payment

processing perspective. I think SWIFT said it is expecting 80 per cent, globally, to have that connection by 2025. Once we achieve that, we will see banks, payment service providers and other financial institutions, but also corporate clients, innovating on top of the enriched, structured flow of data. That’s when it becomes really exciting.” Cashflow forecasting is an area where van der Poel sees big improvements being made as fintechs step in to develop tools to analyse this newly-harvested data. “Better cashflow forecasting has been on the top-five demands list from treasurers for years because it’s such a difficult thing to do,” he says. “Because of automation, we will see reduced times to compile and compute all the data that feeds into cashflow forecasting, so you will be able to make quicker, more accurate predictions. And, because of all the data and the computing power you have, you will be able to do more specific modelling on your company, your industry or any specific area – to run more ‘what-if?’ scenarios, which will help you to determine whether you need more funding at some point or if you can use investment opportunities. “Treasurers will always have certain covenants and pledges in place that govern the way they manage their treasury. This automated cashflow forecasting will also help monitor those controls and thresholds, so that they don’t have to check it, leading to less risk of duplication or clashes. So, there really are a lot of benefits on the cashflow forecasting side and we’re looking forward to what all the new technology is going to bring us in that area.” Like many of its rivals, Bank of America has witnessed the pandemic’s direct impact on its clients’ demands and behaviours. Armed with its own granular data insight, it has disclosed that, despite that robust performance in the first pandemic-blighted quarter, it built up an extra $4billion in reserves to buttress it against any future credit losses due to the continued economic fallout. The future may be challenging, but better to meet it fully informed.

Issue 17 | TheFintechMagazine

PAYMENTS: CENTRAL & EASTERN EUROPE The new bloc: Many countries in Central and Eastern Europe are ready for decentralised systems

Totally taken with tokenisation Raiffeisen Bank International was uniquely positioned in Central and Eastern Europe to develop a private stablecoin that operates alongside the Euro. Head of Strategic Partnerships and Ecosystems, Christian Wolf, says the bank’s tokenisation platform shows what collaboration and transparency can achieve A payments system that’s superfast, super-secure and superefficient, with the ability to include transactional data, sounds like Utopia. Blockchain tokenisation can offer just that and it is fast taking hold among the most innovative players in global financial circles. The latest to join that still somewhat exclusive club is Austria’s biggest bank, Raiffeisen Bank International (RBI), which is also a leading force in Central and Eastern Europe (CEE). Its RBI Coin, revealed in May, is an alternative national currency, fixed against the Euro, which has been developed in partnership with UK/Polish fintech Billon. Stefan Andjelic, RBI’s Blockchain Hub lead, says the bank was inspired to make the move by two things. Firstly, US bank JPMorgan’s development of the JPM Coin, which has been offered to institutional clients for blockchain payments since early 2019. And, secondly, a forecast by the World Economic Forum that 10 per cent of global gross domestic product is

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expected to be digitised through tokenisation by 2027. Andjelic says blockchain tokenisation carries with it three distinct advantages over legacy payment systems – namely, near-real time settlement, a single source of truth that is permanent and verifiable, and the ability to constantly evolve through disruptive technologies. To that end, RBI, which has 16.7 million customers, has big ambitions for its stablecoin, which uses Billon’s Digitised Distributed Cash system, making it a valid alternative to central bank-backed tokens. Its initial goal, Andjelic says, is the development of a unified RBI tokenisation system, which is starting in its home territories of Austria and Central and Eastern Europe (CEE). Its greater vision, however, is to have coins backed by other currencies, as it aspires to become the most innovative bank in the region. Christian Wolf, RBI’s head of strategic partnerships and ecosystems, believes

that hugely contrasting market conditions in the CEE make the region ripe for adopting such a payments system. “CEE in general is very fragmented, but this holds true even more for payments,” he says. “We have some markets that are super-advanced, even compared to Western European markets – the Czech Republic, Russia and Croatia, for example – but, on the other side, we still have many markets that are quite cash heavy and not using digital solutions to the same extent.” The absence of a crossborder faster payments system such as the Single European Payments Area Instant Credit Transfer (SEPA Inst) – which has not yet been fully adopted by some central EU member states and is not, in any case, available to their near-neighbours outside of Europe – was another factor driving a tokenised system. “You need to keep in mind that most CEE countries are not within the SEPA system. This is the reason for the emergence of a lot of national initiatives, www.fintech.finance

for instance, in Hungary, Serbia, Poland and Russia,” says Wolf. Innovation is shot through RBI’s DNA: it has an award-winning Elevator Lab that actively seeks out ideas from fintechs, including many from the Russia Federation, as well as a Blockchain Hub. The RBI Coin was a result of testing between the bank and Billon in the Elevator Lab, proving Wolf’s point that cooperation and collaboration with outside partners is fundamental. “We have found that there is potential in cross-industry, co-innovation approaches, with fintech being one special part of that,” he says. “But we want to extend the offer of cooperation and collaboration to other parties as well. We have several approaches – for instance, in the area of purely digital cooperation concepts, very much based on the foundation of open banking. But we are also looking into emerging technologies that leverage the power of ecosystems.” Projects chosen for the Elevator Lab receive funding for an intensive, four-month programme, with the most promising pilots tested in a real-life banking environment. Invitations for forthcoming projects will focus on developments in digital payments and banking-as-a-platform, which will look at super apps, marketplaces for banking and non-banking services and plug/play infrastructure for core banking. The latter is an area where Wolf sees much potential, with artificial intelligence (AI) key to evolving the role RBI plays in its customers’ lives, particularly over payments. Explaining his vision, Wolf says: “We can use AI to analyse the payments habits of our customers and then, based on the information we gather there, propose better offerings. “For instance, if we find customers are using their cards when travelling abroad and they pay a lot of fees, we can offer cheaper cards. When we see that they incur a lot of costs for recurring payments, we could change that. In general, this would help us to better feed into the customer journey, and also provide some added value that is based on insights we didn’t have before. “I believe using these technologies can help us, firstly in better understanding the client and, secondly, in better shaping our offer to those clients. I personally www.fintech.finance

believe that these offers can and will also go beyond what we currently consider to be our core business.” That, Wolf says, will involve leveraging customer touchpoints so that banks will not just simply provide a payment, for example, but will also deliver other services alongside it. “It could be that we, as a bank, screen your subscriptions and your energy bills, and give you recommendations if you want to change your provider. We help you better understand your mobility needs and propose something that might be better for you. We help you not just at the specific point of buying a house, but in the whole house-buying journey, from identifying the need to then helping you to select the best option, be it an apartment or a house, at whatever location. Then, of course, we finance it, but also maybe help you find the right contractor, the right painter, the right people to help you to remodel it. “I really like that last example because, actually, it connects two different kinds of customer of the bank. It links them. On the one hand, we have our corporate customers – and that’s not always big corporations, but also SMEs operating locally. They make a living out of these connections, and I think this can be beneficial for everybody. You bring together the consumer and the producer and you, as an intermediary, help them on both sides, across the platform.” To make this achievable, though, requires a change of mindset in some markets. “Open banking, in the UK, is often considered as simply compliance with the revised Payment Services Directive (PSD2) regulation, but we take it to mean everything, based on application programming interfaces (APIs), that allows for new cooperation and collaboration,” he says. “So, it’s more about interconnectivity and interconnectivity also means openness. “You are not in the position anymore that you only consume data or services from the outside world to your liking, but you also need to offer data and services to the outside world – this is the value of an

ecosystem. And, once you overcome your maybe internal mental barrier that it’s not good to share what you are doing, then this can offer up a lot of opportunities, based on the network effect.” Wolf also believes that fintech entrepreneurs in CEE have much to offer, based on the applications within RBI’s Elevator Lab, mostly around open banking and analytics. “I believe that this high number of fintechs in open banking may relate to the fact that CEE countries are known for a very young but also technophile population,” he says. Looking more broadly at financial services of the future, Wolf believes that further decentralisation of financial ecosystems, such as through blockchain solutions, will help democratise investment opportunities like never before. It is an area being actively studied by RBI. “I do not say that decentralised finance must exclusively be built on blockchain solutions. It can, of course, be other solutions but, for the moment, blockchain looks very promising,” he says. “For instance, when we look at what’s happening in cryptoassets (and I deliberately do not just mention cryptocurrencies as I’m talking here also about tokenised equity, debt, etc) and what’s needed to make this tradable – blockchain allows peer-to-peer transfer of assets and near, or even real-time, settlement of those assets. “The concept of tokenisation, I firmly believe, also leads to a democratisation of investment, because you can buy fractions of shares or of whatever asset you want – even a piece of art – that wouldn’t have been accessible to you before.” The CEE region’s predisposition to new ideas and the local industry’s willingness to collaborate bodes well for RBI’s tokenisation platform. We’ll let the Blockchain Hub’s Andjelic have the last word. “An RBI ecosystem is the way to go,” he says, “with a common goal of making payments faster and more efficient, as well as creating new business models.”

CEE in general is very fragmented, but this holds true even more for payments

Issue 17 | TheFintechMagazine

PAYMENTS: CONTACTLESS

Hands up for RBR forecasts that the pandemic-accelerated shift to tap-and-go payments is likely to continue – even among slow adopters like the USA, says analyst Gillian Shaw COVID-19 has acted as a catalyst that has accelerated many changes in banking and payments that were already underway. Of all these changes, such as the increased use of online banking and the ecommerce-driven shift to electronic payments, it is perhaps the switch to contactless that has been most noticeable in everyday life. With social distancing critical, both consumers and merchants alike have shown a strong preference for tap-and-go payments. Enabling faster transaction times and reducing the need for shared physical touchpoints (such as the handling of cash or the touching of card terminals), the adoption of contactless has increased significantly since the crisis began. Although accelerated by the risks of the pandemic, RBR’s Global Payment Cards Data And Forecasts To 2024 report reveals how increased contactless card issuance and acceptance, combined with changes in consumer behaviour, were already driving growth in contactless payments. One of the most important factors is the increase in the number of contactlessenabled terminals globally. In China, by far the largest payment card market, the government’s mandate for terminal upgrades has had a significant impact on the adoption of contactless card payments.

Contactless journeys The number of contactless cards is increasing worldwide but different countries are at varying stages on the path towards universal contactless issuance.

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Despite the first contactless cards appearing in the UK as far back as 2007, they are relatively new in countries such as Indonesia and Argentina. Asia-Pacific is by far the largest region in terms of the number of contactless cards, accounting for 83 per cent of the global total in 2018, with China again leading the pack. Western Europe has the second-largest number of contactless cards, with some countries ahead of others – in Greece, for example, almost all cards have contactless functionality and most transactions are of the tap-to-pay variety, with customers only touching the terminal to enter their PIN when they exceed the €50 limit. In North America, there are differences between Canada and the USA; whereas Canadians are among the most enthusiastic adopters of contactless globally, consumers in the USA have been slower to embrace it, with contactless card issuance lagging. In 2018, contactless accounted for just five per cent of all issued cards in the USA. However, as the COVID-19 pandemic has spread and consumers and merchants seek quick and low-contact ways of paying, the number of contactless payments in the USA is surging and most of the big card issuers there are actively rolling out new contactless cards to customers.

Upping the limit Contactless payments have typically been used for lower-value purchases, such as drinks and snacks, and, as a result, have been displacing cash at the point of sale. In order to prevent fraud on stolen cards, contactless payments are subject to a spending limit, although contactless mobile payments often have higher limits than those made with cards, as they involve additional security such as a fingerprint, facial scan or a PIN keyed into the device. The COVID-19 crisis has seen the raising of the contactless limit in a number of countries to facilitate quicker and easier payments, for example from £30 to £45 in www.fintech.finance

hands off the UK and from C$100 to a very generous C$250 for contactless credit payments in Canada. Research published by Mastercard in May this year revealed that 78 per cent of all transactions across Europe are now contactless, a significant rise driven by a decrease in the use of cash and an increase in the contactless spending limit. The rise in the contactless limit has clearly encouraged the use of contactless payments for higher-value purchases.

Change is here to stay

Increasing demand from both consumers and merchants alike is expected to accelerate the issuance of contactless-enabled cards and the upgrading of card terminals

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As customers become more aware of the convenience of contactless, and as acceptance grows, the number of contactless payments per card is increasing. The average number of contactless payments per card was 12 per month in 2018 (up from nine in 2017), compared to 29 payments for cards overall. Contactless has the advantage of a shorter transaction time, which is particularly useful for payment on public transport. In countries such as the UK and Australia, the ability to use tap-and-go cards on public transport is a keen driver of contactless use. While we have seen some shift to contactless over the last few years, there is no doubt that the pandemic will quicken this trend: 43 per cent of respondents to the Mastercard survey stated that they have used contactless payments more often since the crisis started. Consumers who already have contactless cards will use them more often as behaviour born out of necessity becomes ingrained. Increasing demand from both consumers and merchants alike is expected to accelerate the issuance of contactless-enabled cards and the upgrading of card terminals. The COVID-19 pandemic has shone a spotlight on the benefits of contactless as a resilient payment channel, enabling quick and safe payments at the point of sale at a time when social distancing is a must. Consumer preference for more convenient payments will persist long after the current crisis subsides. n RBRâ&#x20AC;&#x2122;s latest report Global Payment Cards Data And Forecasts To 2024 for the worldwide payment cards market consists of an executive report and database. It is the first of its kind to provide comprehensive and consistent market data and five-year forecasts for 65 countries. The study includes bank cards, T&E (travel and expenses), private-label, co-branded and affinity cards, with substantive analysis and commentary. Issue 17 | TheFintechMagazine

PAYMENTS: AFRICA

Changing face of payments : HPS is piloting blockchain-enabled processing in Morocco

A continental shift Africa is a vast continent with huge potential in the payments space. We caught up with Abdeslam Alaoui Smaili, CEO of HPS, a multinational provider of payment solutions, based in Morocco, to discuss innovative services, financial inclusion and how his company is using blockchain there for social good The first name that springs to mind when you put ‘payments’ and ‘Africa’ together is Kenyan money transfer and micro-financing service M-Pesa, which has quickly become the world’s largest mobile money network, enabling millions of Africans to access safe and secure banking solutions. But there’s more to digital payments in Africa than M-Pesa. Much more. Ecobank

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Group, a leading pan-African financial institution, recently highlighted that mobile money payments of all kinds have grown exponentially, while the Central Bank of Nigeria has tried promoting a cashless society by imposing charges on cash withdrawals over a certain amount. According to Statista, the number of electronic payment transactions in Nigeria had already grown from 66 million in 2008 to more than two billion in 2018. In terms of absolute numbers, the digital payments market has matured faster in Africa than it has in Europe – however, it’s a mixed picture across the continent. A 2019 World Bank report pointed to the near-340 million adults in Sub-Saharan Africa who still do not have an account at a financial institution. One barrier to financial inclusion is access to digital technology. While mobile phones have been central to the region’s achievements, device ownership is twice as high among wealthier adults than poorer adults in Democratic Republic of Congo and Madagascar, for example. Nonetheless, analyses suggest that Africa will be the first continent to experience real

mass adoption of mobile payments. According to the Bill and Melinda Gates Foundation, by 2030 more than two billion people from regions with inadequate banking services will be using mobile payments on a daily basis. And more than 40 per cent of new users will be in Africa. There are significant international efforts underway to address the disparity of financial inclusion in Africa and help level the playing field. The UK Government, for example, is piloting a new programme that will link tech communities in the UK and Africa to accelerate the adoption of financial services and create a solid platform for future trading. In the first 12 months, a UK-Africa Tech for Growth community will be set up to help increase access to financial services and devices for the unbanked, with partnerships between British and African tech and finance firms heavily promoted. More and more African banks are pivoting to a mobile-led, digital transformation strategy to help them reach more customers. Many are looking to an established ‘broker’ such www.fintech.finance

as HPS to facilitate alternative payment services, linking up through application programming interfaces (APIs).

Out of Africa Born in Morocco, which has a fairly sophisticated electronic payments system and acts as a great hub from which to expand across the Mediterranean, payments software company HPS has rapidly grown into a global organisation. But it retains a particular affinity with Africa. “We started in Morocco but very quickly went beyond it,” says CEO Abdeslam Alaoui Smaili. “Our first customer was a Moroccan bank, the second was a Kuwaiti bank and the third was a Cypriot bank. This gave a level of respectability to our products and services. The more mature we’ve become, the further we have been able to go.” In 2018, the company launched an open banking platform, providing a rich set of application programming interfaces (APIs) that enables fintech innovators to easily build innovative payment applications on banks and other large financial institutions’ existing systems. Today, the national interbank associations in Morocco and www.fintech.finance

Ghana, as well as the West African GIM-UEMOA interbank group, use PowerCARD, HPS’ digital payments platform. It’s increasingly seen as an industry benchmark. “What’s made our positioning a bit different is that we have invested a lot to have just the single stack,” explains Alaoui Smaili. The approach allows HPS to go to multiple markets with the same core solution that is infinitely customisable. “So, when we were in Japan, we had to include some functionalities that are very specific to Japan. When we were in France, there was something else needed for that market, and so on. When we then went to Hong Kong, we were offering them what was in Japan and France, and they said ‘this is really brilliant’,” says Alaoui Smaili. “By retrofitting all these functionalities that we have all over the world, we’re able to bring the experience that we’ve acquired into each new country. I think this is really what makes us very strong and competitive.” HPS’ latest contribution to the industry and to African development was cemented in May 2020, when it completed the modernisation of South Africa-based financial services group Absa’s African operations outside of its home nation. The journey started in July 2019 with HPS replacing existing legacy systems with PowerCARD in eight countries where Absa operates: Botswana, Kenya, Mauritius, Zambia, Tanzania, Ghana, Uganda and Seychelles. Absa Regional Operations has now also subsequently replaced its legacy merchant-acquiring settlement platform with PowerCARD. Alaoui Smaili has no doubt that an innovative mindset has been the key to HPS’ success. “I think it’s a matter of will,” he says. “Does the company have innovation in the blood, in its DNA, or not? In the payments space, if you don’t innovate, you can be sure somebody else will. Necessity is the mother of innovation, of course, and each time we have new software, each time it goes faster, we need to sell faster. This makes for a very effervescent industry and every day we have to address a new challenge and offer a new user experience. That is extremely exciting for us,” adds Alaoui Smaili.

Blockchain for good Being able to accept payment from customers through the latest – and the customer’s preferred – method of transaction is becoming an important way to build customer loyalty, particularly in emerging markets like Africa where the payments sector is increasingly digitised. There, HPS is helping financial institutions to give individuals much more choice, freedom and a route to a better life. This ethos underpins the company’s newest proof of concept with the Moroccan government, which uses blockchain technology to enhance financial inclusion. It allows citizens in receipt of state benefits to make purchases through their bank for goods that are subsidised by the state. Working with the Moroccan central bank, the system removes the stigma associated with state benefits while also eliminating intermediaries in the payments chain who would normally take a charge ‘without really bringing value’, says Alaoui Smaili. “That’s the beauty of technology – it makes the unnecessary layers disappear.” This initiative promises a seamless experience for all stakeholders. Merchants immediately get paid the full amount for a purchase by the citizen’s bank, which can directly retrieve the portion due from the state. The innovative solution also enables the Moroccan government to easily identify which citizens are legitimately using the benefits, reducing fraud and costs, and boosting efficiency.

In the payments space, if you don’t innovate, you can be sure somebody else will

No let up

COVID-19 may well alter the speed of change when it comes to payments, but it won’t affect the ultimate destination. Africa is backing digital, and Alaoui Smaili is bullish about the future. “We’re seeing more interoperability in the industry, and electronic payments are really gaining in the emerging markets,” he concludes. “These developments are bringing exciting new opportunities day-by-day and I think, with the talented men and women that we have working in the industry, we are producing something really interesting.” Issue 17 | TheFintechMagazine

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PAYMENTS: RETAIL

Ready to pivot: Retailers have shown resourcefulness – but they need payment providers’ help

A key moment for retail? A survey, during the pandemic, of 300 SMEs in the hospitality and service sector, by Valitor and Visa, has revealed a surprising degree of resilience and optimism. But, as one door closes and another opens, those businesses need additional support from PSPs, says Valitor’s CMO Dr Christine Bailey

Back in January 2020, when COVID-19 was still a brief segment at the end of news broadcasts, payment solutions company Valitor spoke to The Fintech Magazine about the disappointing performance of the high street over the festive period and how better use of payments data could help buck this trend. Then the world changed. By the end of March, lockdown had stripped us of most of our retail freedoms. No longer could we simply head out for a carefree coffee with a friend on a Saturday morning, or pop into the shops for an impulse buy on the way home from work. For many bricks and mortar businesses, sales almost entirely ceased overnight. But, as with any crisis, there’s always an opportunity. There’s no denying the retail and hospitality sectors have been hit hard, and footfall on the high street was still down nearly 50 per cent in July, compared to the same time last year, according to the British Retail Consortium. But, while several major names have bitten the dust, many smaller businesses have been presented with a one-off chance to build an online presence that could be pivotal www.fintech.finance

for them, and provide a major source of revenue for years to come. Following the biggest decline in high street spending on record, Valitor and Visa joined forces in the second quarter of 2020 to interview 300 small and medium-sized businesses in the hospitality and service sectors, to discover how they were coping with the pandemic. “Only two per cent of respondents stated that there’d been no impact on their businesses, whereas 63 per cent said they’d had to close temporarily,” says Dr Christine Bailey, CMO of Valitor. “These preliminary statistics may sound bleak, but 65 per cent of interviewees later claimed that the pandemic had actually opened up new business opportunities for them.” Some were fairly obvious – petrol stations did a roaring trade in new stocks of hand sanitiser, while convenience stores saw toilet roll sales explode. After the initial shock, others took the chance for a strategic rethink – altering product lines to cater for a different type of customer; re-planning their spaces to make them COVID-compliant and more luxurious and appealing; maximising hitherto unexploited aspects of their

product or service that spoke to customers’ desire for things that nourished the soul, or played on localness, community, traceability and safety. “Some required a little more ingenuity,” says Bailey. “Sixty-five per cent of respondents said that they had expanded their channels to cater for the restrictions of lockdown, and a common example of this was restaurants providing a takeaway service and allowing customers to come in and pick up their orders. We also interviewed a car dealership that had continued to offer its clients car servicing by collecting their vehicles from their home and then returning them after they’d been serviced.” The Bricks And Mortar Under Quarantine survey, which was conducted by WBR Insights, showed that increasing their geographical reach has proved to be a lifeline for many businesses during lockdown, as has expanding their product offerings. Thirty-seven per cent of interviewees stated that they are now selling new products and services that are more relevant in a COVID world – and not just artisan hand sanitiser and superhero face masks. Issue 17 | TheFintechMagazine

PAYMENTS: RETAIL “We’ve even interviewed golf clubs that have had great success in offering training courses online,” says Bailey But perhaps the most significant change, in response to the pandemic, has been the rapid acceleration of SMEs’ digitisation processes. “Thirty per cent of respondents said that they were now conducting business online for the first time,” says Bailey. “I would class this move online as the standout trend that has developed among bricks and mortar businesses due to COVID-19. Although many are yet to upgrade their websites to be able to conduct ecommerce directly, they’ve been establishing an online presence in other ways. For example, restaurants have been presenting their menus on Facebook

Will physical retail sales return to ‘normal’? The jury is still out

and florists have been advertising their bouquets on their websites. Apps like ShopAppy, which helps small businesses to easily, quickly and cheaply attract online shoppers, have proved exceptionally popular with local retailers.” Global pandemic aside, there’s arguably never been a better time for physical businesses to take their first steps into the virtual world. Taking the UK as an example, 95 per cent of the population was already accessing the internet on a regular basis in January, prior to the outbreak; 86 per cent regularly searched for products and services there, and 81 per cent had made a purchase online. Given how primed the public already were to take their shopping online, it’s unsurprising that 90 per cent of all sales were taking place over digital channels at the height of lockdown. Research suggests that this is no fleeting phase, either – 44 per cent of consumers plan to continue shopping online after the pandemic passes. That’s not to say the process of moving a business online has been easy for owners.

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Numerous barriers still prevent them from doing it successfully, says Bailey. “Forty-four per cent of our survey’s respondents identified compliance with data and security regulations as an impediment to their online growth, and 40 per cent claimed that competition from other businesses [which is particularly prevalent online due to the ease with which consumers can compare retailers] was affecting their success. Thirty-two per cent said that building a website with ecommerce capabilities was proving challenging, and the same number stated that they’d had difficulty attracting customers in a virtual environment. Other common concerns include online fraud, lack of funding and delivery logistics.”

provider needs to be extremely reliable – in a world dependent on cards, a failure in payment technology can spell disaster for a SME,” says Bailey. Indeed, the survey revealed that small businesses had experienced a 55 per cent increase in online payments over the course of this year, so implementing a robust card payment system should be a priority. Moreover, the pandemic has precipitated the meteoric rise of a new type of virtual checkout process that is increasing customer expenditure in online stores by an average of 30 per cent. Buy now, pay later (BNPL) facilitators, such as Klarna, have witnessed unprecedented uptake during lockdown. “We’ve seen a 20 per cent increase in inbound requests from retailers who want our service to better cater to their shoppers’ demands,” says Laurel Wolfe, Klarna’s vice president of marketing. “By allowing shoppers to acquire goods and then defer payment, retailers can boost purchase power at the point of sale. The best part for the retailer is that they get paid upfront, which aligns with 35 per cent of retailers in Valitor’s report, which value fast settlement to ease the problem of cash flow.” Once perceived to be a golden ticket for shopaholic millennials, the BNPL option’s appeal has widened throughout the pandemic. “At Klarna, our fastestgrowing demographic is those aged 50-plus,” reveals Wolfe. “Regardless of age, all shoppers value the same thing – speed, convenience, payment choice and ease of use. That means a great, frictionless user experience with a streamlined checkout process and minimal steps on the path to purchase.” The question that haunts many bricks and mortar businesses is ‘will physical retail ever recover from the crushing blow dealt it by lockdown, or have our shopping habits shifted irreversibly in favour of online?’. The jury – the great British public – is still considering its verdict and may be for some time yet. Meanwhile, anyone in retail might do well to heed these presidential words of wisdom: “In a crisis, be aware of the danger – but recognise the opportunity.” Finding a payments partner to maximise any online advantage has got to be a wise move.

65 per cent of interviewees claimed that the pandemic had actually opened up new business opportunities for them

Partnering with a payment services provider can, Bailey believes, alleviate the majority of those teething issues for online newbies. “Not only can they help businesses to navigate data regulation to prevent it from impacting their growth, but they also usually offer fast and free setup to reduce the initial cost of moving online. “In the current climate, cashflow is still a huge problem for many businesses, but many payment providers offer fast settlement times, which can help to reduce this issue. Fifty-one per cent of our survey’s respondents cited 24/7 support as the most helpful thing a payment service provider can offer, so businesses should make sure that the provider they choose is consistent in delivering excellent customer service. Last, but by no means least, the payment technology supplied by the

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COMMENTARY: COVID-19

Answering the SOS for SMEs Free-to-use platform Save My Local demonstrated how tech could leverage customer loyalty to help small businesses stay afloat in a crisis. Product owner Jack Maddock and business owner Chris Hugo take up the story…

Running a business is tough at the best of times. When you’re everything from the CEO to the cleaner, it’s easy to feel underpaid and overwhelmed. Cashflow doesn’t always flow and footfall doesn’t always fall. So, when the lockdown rules forced local business to pull down the shutters, many felt completely lost. Shops and services that once thrived on neighbourly custom had their source of income severed. For many, stumping up for bills and finding staff salaries became impossible. British Business Bank said 60 per cent of small firms went into 2020 with less than £5k in credit balances. A couple of weeks after the UK’s March lockdown, accountants reported that 83 per cent of SME clients were already suffering from stress, with 11 per cent even feeling suicidal. By May, UK Finance estimated that a fifth of small businesses had less than a month of cash reserves left. A quarter of owners had used their personal savings to stay solvent; and almost a fifth said they were likely to cease trading or would not survive. It’s been a grim and harrowing period for Britain’s independent businesses – and, despite the biggest government-backed rescue scheme in history, they are not out of the woods yet. Of those that qualified, many have run through the local council-administered grants and one in six smaller firms now relies on government-backed debt through the Coronavirus Business Interruption Loan Scheme (CBILS) or the Bounce Back Loan Scheme (BBLS). But that’s exactly what they are: loans. And loans need to be repaid. And yet, there are kind and creative people who’ve been reaching out to help. One of the first was a band of quick-thinking fintech problem-solvers,

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who pioneered a voucher platform, Save My Local. It was launched less than two weeks into lockdown and designed with every small business owner in mind – even for those who struggle to find the on-switch on a laptop. The idea was straightforward: we’ll help you set up a webpage to promote and sell vouchers that can be redeemed by your customers against future purchases. Its execution was seamlessly speedy, deceptively simple and, best of all, 100 per cent free. Jack Maddock is one of the team of people behind it. “This initiative was born out of a tweet by Jason Bates of 11:FS, and then Mike Kelly, who runs Curl, got on board and brought the idea to life,” he explains. The platform has been a great example of how powerfully collaborative fintech can be. “People just jump on a Slack channel and ask ’what needs doing’. ’Hey, I’ve joined, I’m a copywriter’… ‘hey, I’m a designer’… ‘I’m a developer‘… ‘I just want to help – this seems really cool!’,’’ says Maddock. The voucher platform, which was up and running in just one week, enabled a number of local businesses to stay afloat in those early weeks when nobody came through the doors. The advanced sales made enough of a dent in their outgoings, like rent and staff salaries, to keep them alive. One of the business owners who’s loved using Save My Local is Chris Hugo, who owns Hugo Barbers in Winchester, Hampshire. For him, the idea of shutting up his buzzing business was almost unthinkable.

“I couldn’t really imagine that my businesses were going to be shut,” he says. “In theory, it was quite a safe business, but that changed overnight. It was quite scary, because you’re thinking ‘not only do I need to keep the business going, but all the people that work for me’. I’ve got a great team and didn’t want to lose them, or make them redundant.” For Hugo, the voucher scheme was a lifesaver. The instant payments helped to keep his six staff on the payroll and gave him some much-needed financial breathing space. “I think there were two months’ pay cheques that we had to find. To get that bit of cashflow back into the business was worth so much.” However, when the site first launched, Save My Local struck upon a surprising marketing challenge: its altruistic offer seemed too good to be true. We’re a sceptical bunch, and getting over this first hurdle was a major challenge for the team, which found itself fighting for inbox space with corporations. Maddock recalls some of the first feedback he received from businesses. “They’d have 25 other emails saying ‘free way to get you through the crisis’, so when they saw ‘free way to sell vouchers’,” they thought ‘I’ll just add that to my pile’. The quote I always remember from the early days was someone saying ‘well, the best and worst thing is that you’re free!’.” Both Maddock and Hugo have been touched by the widespread support and kindness from ordinary people. With the

It’s been a real learning curve, for me. Just to listen to businesses, and to what people are going through

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Lockdown blues: Save My Local have given some small businesses a lifeline

help of the platform, local communities were able to rally around independent businesses. An astonishing 70 customers bought vouchers from Hugo Barbers. It’s a testament to the loyalty that exists between a customer and a local business. “Some of the names are people who came to me when I opened by myself, five years ago,” says Hugo. “All the support puts you at ease… it’s not only the financial side.” For Maddock in London, the experience has also brought that warm feeling of togetherness which is so often missing from a big city. “Things may be a bit bleak at the moment, but if you look hard enough, you see so many good stories,” he says. “I thought London didn’t have that community feeling.” He’s heard first-hand from the businesses that’ve depended on their local customers. “It’s been a real learning curve, for me. Just to listen to businesses and to what people www.fintech.finance

are going through, and how they’re dealing with it – it’s just great to see.” Platforms like Save My Local have introduced some small businesses to using the internet for the first time: the little Italian restaurants that’ve welcomed three generations of the same families through their doors and know everyone’s favourite dish by heart; the fishmongers that throw in some extra prawns and ask how your nan’s doing; the beautician who dispenses weekly advice over a shellac and a coffee. They have never seen the need for a web presence, much less an ecommerce platform, in the past. The pandemic has been a brutal wakeup. Since the easing of lockdown restrictions in June, the slow return to normality, last-minute delay and cancellation of government plans to reopen some sectors, the continued threat of closure as a trade-off for opening society elsewhere, and the looming spectre of mass unemployment,

has meant small businesses exist in a constant state of anxiety – many with mounting financial responsibilities that will force them, zombie-like, to soldier on. The high streets are deceptively busy. In fact, compared to 2019, footfall across all shopping destinations was down by 42.1 per cent in July (the first full month in which shops were allowed to open across the UK), according to the British Retail Consortium. And some small businesses, particularly those linked to seasonal or life events – children’s entertainers, party and fancy dress suppliers, wedding planners, dressmakers, caterers and florists – remain in their own private lockdown, demand stifled by restrictions on gatherings that have been postponed or cancelled. They are still hoping for a better tomorrow. And until it comes, Save My Local’s job isn’t done. Issue 17 | TheFintechMagazine

COMMENTARY: HONG KONG

CrossingtheBay Hong Kong is the West’s golden ticket to the Greater Bay Area. But at what cost? What would persuade you to move your startup to Hong Kong right now? How about the Hong Kong Treasury’s HK$10,000-a-month wage subsidy, available for a year to businesses registered in the city that hire a local fintech developer? Or the estimated US$49billion that’s available through various innovation grants and venture capital schemes to tech firms? Or the up-to-US$1million investment sweetener announced by Hong Kong Fintech Week for every successful project selected through a virtual pitch event in November 2020? If these incentives to attract international businesses don’t overcome any queasiness you might feel about China’s current policy towards Hong Kong and its pro-democracy supporters, then there’s an even bigger prize that’s difficult to ignore: Hong Kong’s integration with the Greater Bay Area, an economic zone of such potential that it’s been described as ‘like putting Silicon Valley next to New York’. Hong Kong is one of the few places in the world that attracts and connects fintech companies from both East and West – a melting pot of tech and culture that has thrived under the ‘one country, two systems’ arrangement agreed between the UK and China when the former handed back its colony in 1997. While earlier this year, Hong Kong chief executive Carrie Lam

said there was no reason that arrangement could not continue beyond its 2047 expiry date, evidence would suggest it’s already being eroded. The imposition by the Chinese government of a Hong Kong security law in response to pro-democracy protests has met with worldwide condemnation and major banks like HSBC and Standard Chartered have found themselves in the international crossfire. Both publicly supported the law, which critics say erodes fundamental freedoms and China says restores stability. In July, Standard Chartered’s group chairman José Viñals, issued a statement in which he said the bank was ‘convinced that more collaboration – not less – is the best way to find a sustainable equilibrium’, adding that it believed ‘Hong Kong will continue to play a key role as an international financial hub and we are fully committed to contributing to its continued success’. The current threat of disruption to banking business, however, is real. In the face of more punishing US sanctions, the Bank of China International has recommended increased use of its Cross-Border Interbank Payments System (CIPS) – China’s financial messaging network for crossborder transactions on the mainland, Hong Kong and Macau – in place of the world’s biggest messaging system, SWIFT. Should a move away from industry standard SWIFT happen, it could have a major impact on the operations of international banks in the region. Such actions inevitably raise questions around the future of financial services in

the Special Administrative Region (SAR) of Hong Kong. China’s actions more broadly raise not just questions, but fears about the future of individuals there. Many anticipated a ‘brain drain’ of professionals and a downgrading of Hong Kong’s reputation as an easy place to do business and trade in the wake of the new law. International businesses have long trusted Hong Kong’s independent legal system, but this trust may now have been compromised. Its reliability as a secure datacentre host in particular has come into question. Datacentre revenue was forecast by Structure Research to top £1.7billion by 2023, but many data handlers are now talking of offshoring in the face of client nervousness over privacy. They’re not leaving yet, however. Neither has capital taken flight. And for those financial institutions that have been integrated into Hong Kong for decades, it’s easy to understand why they might choose to remain. Hong Kong’s status as a global financial hub has so far shown itself to be resilient during to political and civil unrest and a coronavirus pandemic. Meanwhile, there is deepening and ongoing financial cooperation between Hong Kong and mainland China. In June this year, the People’s Bank of China, the Hong Kong Monetary Authority, and the Monetary Authority of Macao announced the launch of a pilot scheme to facilitate crossborder investment by individuals in the Greater Bay Area, which comprises China’s mainland Guangdong province and the special administrative

The Greater prize: Hong Kong is key to the Greater Bay Area project

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regions of Hong Kong and Macau. The Wealth Management Connect pilot is just the latest initiative to encourage the flow of capital in the GBA. Stock Connect already links the Hong Kong Stock Exchange (HKEx) with those of Shenzhen and Shanghai, while Bond Connect links HKEx with the mainland China bond market. As with the previous schemes, Wealth Management Connect is seen as a way to internationalise China’s currency the renminbi (RMB) and bolster Hong Kong’s status as both a global financial centre and offshore RMB hub. According to a KPMG report this summer: “The growing demand for wealth management in the GBA will continue to present significant opportunities for financial institutions. Wealth Management Connect is expected to drive greater product innovation, and may attract more international financial institutions to set up or expand their presence in Hong Kong and the other GBA cities to capitalise on these opportunities and tap into a large investor base.” It pointed out that, as of February this year, foreign banks from 13 countries and regions had already established 155 businesses in Guangdong province, encouraged by the Chinese government’s plans to liberalise financial controls. For any fintech wanting access to the world’s biggest single market and some of the most advanced technology, Hong Kong is still its best bet. It’s just a short bullet train ride away from Guangdong province and the beating heart of China’s fintech industry in Shenzhen – home to tech giants including Tencent, Huawei and ZTE. And the GBA itself has a population of more than 71 million and $1.6billion in gross domestic product. The GBA is a mini version of the even more ambitious, trans-continental Belt and

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Road Initiative (BRI), a long-term policy and investment programme that seeks to boost infrastructure and the economy along the historic Silk Road trading route. By integrating financial services, shipping and innovation, the BRI will create a high-tech megalopolis on Hong Kong’s doorstep. Launched by President Xi Jinping in 2013, it is very much a global project, with 71 countries said to be taking part. It is also now seen as a route out of the current recession, and fintechs, like many others in the GBA, stand to benefit from the stimulus. Standard Chartered is among those financial organisations already looking to leverage the GBA’s digital development expertise, seeing it as a huge opportunity to support and provide services to its Greater China and North Asia clients. In fact, the bank is investing $4million in setting up the Standard Chartered Greater Bay Area Centre in the Tianhe District of Guangzhou, which will also seek to strengthen development of innovative financial solutions and crossborder banking services. It expects to employ 1,600 people by the end of 2023. HSBC, meanwhile, is continuing to up its investment on the mainland, including a joint venture mobile wealth management and insurance planning service for clients in Guangzhou and Shanghai.

Belt and Road to recovery As the country where the coronavirus pandemic started, China was inevitably one of the worst-hit by the outbreak, and economic and industrial recovery remain some way off. However, a recent Standard Chartered report indicated that small- and medium-sized companies are bouncing back as China slowly resumes business activity. The long-term outlook appears to be reasonably optimistic.

Given that China has the world’s largest mobile payment market, with 765 million domestic users – up from 583 million in 2018, according to Statista – that’s encouraging news for any financial services provider with an eye on the main chance. It’s a digital trend that has helped propel Ant Group – owner of the superapp Alipay – to become one of the richest privately owned businesses on the planet. Last valued at $150billion, as The Fintech Magazine went to press, it was preparing for an initial public offering via a joint listing on the Hong Kong and Shanghai stock exchanges – an event that will focus worldwide attention on, and signals confidence in, Hong Kong’s financial centre. Everyone from the respected fintech author Chris Skinner to the UK’s Foreign Secretary Dominic Raab have castigated bankers who support China’s security law. At the same time, we’ve heard from financial services providers genuinely worried that being associated with overt or even implied criticism of the authorities will backfire on their staff. According to a version of one Chinese myth, the Pearl Dragon was among four dragons that were sanctioned by the all-powerful Jade Emperor when they defied him and caused rain to fall on a drought-blighted Earth. In retaliation for being punished by the Emperor, the dragons created vast rivers so that people would never lack water again and would prosper. That is how the Pearl River, whose bountiful delta is otherwise known as the Greater Bay Area, came into being. The dragons apparently did the right thing, even though they attracted the Emperor’s wrath: the delta and its cities are still prospering. Now others must decide the right course of action.

Issue 17 | TheFintechMagazine

NEOBANKS OF THE WORLD

Where it’s at: For the next generation of bank users, that’s on messaging platforms

Challenging challengers the

How would I describe Zelf? Edgy. Revolutionary. So seamless and slick it’s practically invisible; a bank so disruptive that it could only have been made for teenagers, because Zelf is entirely based where they are – on messaging platforms.

Meet Zelf, a neo so disruptive it must be for Gen Zers. Hannah Duncan talks to Founder and CEO Elliot Goykhman

Proud to be app-free, it’s an instant bank for Gen Zers. And when it says instant, it means it. Opening a basic account takes a mere 30 seconds. Just pop an onboarding request to Zelf, and ‘30, 29, 28…’ done. Sending money works the same way.

Powered by banking-as-a-service platform Treezor, Zelf is so far available on WhatsApp, Viber, Telegraph and Facebook Messenger – and soon iMessage and Discord. And if you’re finding it hard to process how a bank

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can exist within a messaging system – or indeed why it would want to – then founder and CEO Elliot Goykhman says you haven’t ‘got’ how the next generation’s financial needs have already moved on. “You have to see how technology changes over time and understand how new generations of people are using it differently,” he says. “Originally, you had internet banking, then mobile banking, so now you have messenger banking.” Put like that, it’s obvious. The www.fintech.finance

generation Zelf is targeting spends more than 65 per cent of its screen time in messaging apps. It’s simply making banking contextual to their experience – embedding it into their conversations – which Goykhman says is the root of most transactions. The technology is morphing around our lives all the time. Take WhatsApp, the instant, end-to-end, encrypted chat platform that was acquired by Facebook in 2014. More than two billion of us now have the app installed on our phones in 180 countries, and use it not just to message our NBF, but increasingly for communicating at work and with merchants and other businesses, reducing data footprints and making better use of what we already have. WhatsApp’s enhanced level of security has made it a compliance-friendly tool for forward-thinking payment services, too. It’s already working with banks in India and announced in June that it would begin trialling the offer of credit, pension and insurance products to lower-income, unbanked users in rural areas – although, admittedly, WhatsApp Pay’s rollout in Brazil this year has been less straightforward. What makes Zelf different, though, is that it is a ‘chat native’ – a fully-fledged challenger bank, setting up camp within these messaging services and taking user-friendliness to the next level for an impatient generation. That 30-second sign-up was a challenge, but the workaround has been to offer limited functionality and postpone the full verification process to a more convenient time for the customer. “We don’t have to burden the person who is sitting at a café, or in a cab, to start scanning their passport, or their driver’s licence, or their proof of address, right there and then,” says Goykhman. “The 30-second sign-up allows them to have a card and start using it, to be within legal limits. And then, when they feel the moment is right – when they reach a threshold and want more functionality – at that point, we perform the full know your customer (KYC).” In other words, it doesn’t want to be the banking equivalent of a parent nagging a teenager to tidy their room when they’re heading out. This neo doesn’t want to slow up its www.fintech.finance

Gen Z customers or stop them using the service because of something as boring as admin. Getting them hooked in, before getting them booked in, is all part of the strategy. It sounds like a face-palm moment in banking – like realising that there was a shortcut home you never knew about, or a life hack that’s painfully simple. Why would a neo bank so extremely focussed on convenience, pressure customers with ID checks before those checks are absolutely necessary? Zelf’s aim is to become a ‘full-scale neo bank, offering not only debit cards but also fully identified debit card accounts and investments’, says Goykhman. By 2022, it hopes to offer loans, credit cards, insurance, investments and even SME business accounts, too. It’s also planning to fire up voice-activated features, including for invoices. Well, why wouldn’t it? “We’ll extend not only globally, but also to different parts of human life,” promises Goykhman. “For example, people have voice assistants – Amazon, Alexa, Apple Home, etc. They will be able to give voice commands to those appliances about their finances, anything from paying their utility bill to sending

Originally, you had internet banking, then mobile banking, so now you have messenger banking money to their friends [via Zelf]. The idea is for it to become their assistant and for it to manage all kinds of aspects of daily finances, their savings, their investments.” Imagine a world where you simply announce to the room, ‘Zelf – pay my electricity bill, invest £50 in something green and send Joe Schmoe £20 with my love’… and, just like magic, everything happens. That’s Zelf’s ambition – to be an invisible financial butler, catering to our every monetary moment and wealth-related whim.

Global ambitions This edgy neo has been gradually launching in Spain and France – chosen for their regulatory framework

and contactless capabilities – with 350,000 people already signed up to receive debit cards. Key to its marketing are monetary incentives for referring friends, which is bound to appeal to cash-strapped teens. “We felt that France and Spain presented the perfect opportunity in terms of the population size, contactless level and expenses per capita,” explains Goykhman. “From these first two countries, we’ll make sure that we cover the whole of Europe, then the UK and the United States.” The goal for Zelf is to have half a million customers by the end of 2020, and to expand quickly to other European markets the following year. Within just two years, Goykhman is pushing to have five million customers, a banking licence and a global presence. So, with free sign-ups, monetary incentives and spectacular scale-up ambitions, how will Zelf be profitable? Firstly, says Goykhman, it’s incredibly cost-effective to run, with, he claims, the lowest customer acquisition rate in the industry. With no app to maintain and fewer cards to ship out because it anticipates most users will use wallets or P2P (peer-to-peer) services, ongoing costs are a fraction of other challengers, too. It will also pick up revenue from its paid accounts, including Premium, Parent and Pro, as well as taking a slice from interchange fees. It’s a fair and frugal approach. As Zelf works on expanding its financial services, it will expand its revenue along the way, too. Will Zelf fly off the shelf? Probably. It reminds me of my sister, Holly, who’s 17. When she sees me scrolling through Facebook, she gives me a sympathetic smile, the kind you’d give to a grandma who riffles through dog-eared address books to find a number to type into her mobile. For my Gen Z sister, Facebook is already for ‘old people’, its very presence a bit cringeworthy. In a few of years, I’m sure she’ll give that same knowing smile as I search frantically for my Monzo card before the items in my basket time out and she says to the air ‘Zelf, authorise payment’. Issue 17 | TheFintechMagazine

NEOBANKS OF THE WORLD Tipping the scales: Rewarding good financial behaviour has already saved clients from a crisis

Finding a healthy balance South Africa’s Discovery Bank took what it had learned in the health insurance sector and applied the same behavioural data approach to personal finance. Akash Dowra, Head of Customer Insights and Technical Marketing, explains how it is truly a bank for our time Most neobanks promise super-slick apps, low or no fees and a gazillion ways to improve your financial management. Discovery Bank’s website offers something different: customer rewards for healthier living and responsible driving, followed by incentives for ‘banking well’. This more holistic approach is inspired by its experience in the health and life insurance sectors, which it entered in the 90s as the Vitality brand and included a Medical Savings Account that put clients in control of their private healthcare spending. As a company, it caught on early to the idea that gamifying such products and incentivising changes in behaviour with www.fintech.finance

rewards, shifted the culture from one built around claims serving to claims prevention, and enabled people to live well for longer. If it worked with physical health, then why not financial health? In fact, says Akash Dowra, head of customer insights and technical marketing at Discovery, there are more similarities than you might think. “There are three behavioural traits we’ve looked at from a health perspective, which also affect finance. The first is over-confidence. Looking at our health business, 60 per cent of people who are high risk believe their health is above average. “The second is frequent event miscalculation. Worldwide, 3.5 million people die from diabetes every year, while only eight die from shark attacks. Guess which people are more afraid of – a shark or a cupcake? “And the last is hyperbolic discounting, where the effect of actions is so far in the future that the impact today feels so small that people end up making the wrong decision. In health, it’s that one extra cupcake; in finances, it’s walking past a shop and thinking ‘I could buy that

jacket. It’s just R100 and R100 is not going to affect my retirement in 50 years’. The issue is, you’re spending R100 every other day, so even though the impact of one event is small, the frequency means it adds up to a lot over time.” By linking health, life and car insurance with banking under the Discovery Bank umbrella, it’s developed a kind of financial Fitbit®, which tracks users’ day-to-day behaviour and then adapts premiums and interest rates accordingly. It uses the data to reward good behaviour with everything from cashback to discounted air travel and free coffees. What claims to be ‘the world's first shared-value bank’ launched last year, with what Dowra describes as a ‘social mission’ to change people’s banking behaviour and, in so doing, introduce a new fairness to the products and services they have access to in South Africa. In the absence of a formal regulatory framework, like those in the UK and Europe, Discovery is instead applying open banking principles inspired by them, using application programming interfaces (APIs) like those it employed for Vitality to share data and build intelligence about every customer.

There are three behavioural traits we’ve looked at from a health perspective, which also affect finance

Issue 17 | TheFintechMagazine

NEOBANKS OF THE WORLD And it is notching up massive early support, despite South Africa not being the friendliest place for fintech startups due to its lack of a clear open banking framework and contrasting cultures across different African countries. Discovery is just one of a number of forward-thinking companies trying to fill that gap amidst concerns about financial inclusion and the protection of customer privacy and personal data. And it has seen a surge of new customers during the COVID-19 lockdown, as customers increasingly look to digital channels to fulfil their financial services needs. It has so far attracted 275,000 customers. Dowra explains the unique challenges it is now aiming to tackle. “South Africans need help managing their finances,” he says. “We have one of the lowest savings rates in the world, a tenth of those in Europe, China and the US. And even though people might be relatively affluent, they still end up not being able to retire comfortably. Our spending behaviour also leaves a lot to be desired. We have more people with credit than in employment, for example. It’s a dire situation.” And this trend is classless. “We’ve seen this behaviour throughout the income levels. Even in the middle and upper-income brackets, 28 per cent of people spend more than they earn and only 25 per cent have sufficient savings to withstand financial shocks like losing their jobs. So, South Africans need help with their finances and this is complex, taking into account how much they save and how much they put into their retirement as well as how much debt they can take. “Our job is to make it as simple as possible for clients to, number one, understand their finances and, number two, do something about it’.” As a consequence of financial ignorance, a high proportion of the population is trapped in a vicious circle of having too much debt and struggling to service it at ultra-high interest rates. “A large proportion of the population is in debt counselling,” adds Dowra. “The

government has done a lot, it came up with the National Credit Act a while ago, which forces financial institutions to ensure a client can pay off their debt before issuing it, but there’s a high level of bad debts that banks have to price into their books, resulting in higher interest rates than normal. People that are good risks end up having bad debt priced into their rates as well, so everybody is affected by it.” Is financial education not the answer? It’s more subtle than that, says Dowra. “This sounds like you need to go back to school, and not many people want to do

At our core is our concept of shared value, a virtuous circle where we incentivise and nudge people to unlock economic value by changing their behaviour

TheFintechMagazine | Issue 17

Financial fitness: Behavioural traits are similar

that. Because this trend isn’t circumstantial and we have people earning R1.5million (£100,000) in financial difficulty, it comes down to behaviours. We have learned experience and behavioural science from our health business, Vitality, so we researched what is driving the financial state of South Africans. “We’ve identified five behaviours that result in 80 per cent of defaults. They’re very simple, such as spending more than they earn; not having enough insurance; not saving for emergencies; not saving for retirement and managing their secured debt poorly. “You’d probably say ‘OK, that’s obvious’. But if it is, why don’t people do what they should? Even if you told them ‘you need to do these five things’, they still probably

wouldn’t do them. This is where the behavioural science comes in. “While financial education plays a part, you actually need to change those behaviours, so we incentivise people to do so by saying ‘if you don’t spend on this, and you save your money, we will reward you for it today. We gamify the system with active rewards, dynamic discounts and interest rates to make the rewards for the right actions more tangible.” Discovery’s launch was mobile-first and app-based. “We have a strong brand in South Africa. People trust us with their health and now their money. “We went branchless to keep costs low and this offers great security. The bank is available when customers want it and we can reach a really big footprint of people at low cost. The savings we make from not having branches help us to fund additional rewards and incentivise even bigger changes.” Discovery sees the ‘behavioural bank’ as providing a wider service to society – and that’s proved particularly so during the pandemic. “At our core is our concept of shared value, a virtuous circle where we incentivise and nudge people to unlock economic value by changing their behaviour. Our Vitality Money statuses correlate to probability of default, so we know that, as a customer improves their financial wellbeing and Vitality Money status, their risk of defaulting on the credit we offer them is much lower. So, we drop the interest we charge them because why should they have to pay a premium for risk they no longer have? “We’ve had lots of engagement so far, with clients moving up their Vitality Money statuses after two months of joining. We’ve had testimonials since the pandemic, saying ‘if you hadn’t incentivised me to save, I wouldn’t be in the position I’m in now, able to withstand shocks’. We’ve always said people need to save for an emergency and, while they were probably thinking about car crashes and no-one anticipated a pandemic, that resilience is paying off. Despite a lot of people having their salaries curtailed, we still have a zero default rate on our Diamond clients, and a zero arrears rate on the credit.” Fusing the principles of physical and financial health in the eye of a global pandemic: it truly is a bank for our time. www.fintech.finance

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NEOBANKS OF THE WORLD

Building a bank for the future

Banking Circle’s three-part white paper, Ready For The Rebuild? Rethinking The Value Of Digital Infrastructure, showed that the challenges banking executives cited as their most pressing concerns during the pandemic were the same as those before it struck… only now they are well on the way to resolving them “Banks are no longer playing Jenga with their internal systems – where one new block or one more change could bring the whole edifice crashing down… worries about the chokehold of legacy systems – and the mindset that accompanies them – are passing.” That upbeat appraisal of how the limitations of legacy have been largely ‘conquered’ by institutional www.fintech.finance

banks was one of the standout conclusions of the first in a new series of reports from infrastructure provider Banking Circle. It commissioned Magna Carta Communications to go to the industry just as COVID-19 was declared a pandemic, to assess how well banks’ digital investment over the past few years had stood up to its first real shock – and whether the events of 2020 had changed their digital trajectory going forward. It reported a ‘renewed sense of confidence’ among incumbents. While that may come as a surprise, Banking Circle says it reflects a fundamental change in their business practices, culture and, most of all, technology. Particularly the adoption of Cloud-enabled systems, platform services – notably those supporting a more flexible infrastructure – and a willingness to outsource. Resilience and flexibility are front of mind, it said, with many banks believing that now they, rather than challengers and disruptors, are best placed to move successfully into an economically

uncertain future. Just five per cent of retail banks it spoke to said they were concerned about the threat of recession, compared to 31 per cent of fintechs and 41 per cent of payment services providers sampled across Benelux, Denmark, France, Germany and the UK. If the report’s fanfare that ‘the banks are back in town‘ is correct, maybe it’s because they’ve heeded the advice of providers such as Elliott Limb, chief customer officer for Cloud-native banking and lending software-as-aservice provider, Mambu, who says: “Anybody who’s trying to build s omething that isn’t ecosystem-led, open, and isn’t collaborating, I think they have a short shelf life.” Limb adds: “Gone are the days where ‘collaboration’ just meant a bank demanded its customers pay a certain way and the technology vendor sold what the bank wanted. Now, we’re all working a lot closer. Composable and collaborative are absolutely fundamental to making this market work.” Issue 17 | TheFintechMagazine

NEOBANKS OF THE WORLD Certainly, the Banking Circle white paper would suggest that these more digitally-confident banks are taking a less defensive approach to fintechs: far from trying to punch them out of the ring, the Goliaths are shaking digital Davids by the hand. Less than a third of financial institutions say they are concerned about the pace of technological change in banking and less than 20 per cent are worried about the competitive landscape. Maybe that’s because 90 per cent of retail and commercial banks, according to the survey, are now using customer data to determine demands. “We have to acknowledge that we now have to share clients, not compete for them. It’s no longer an exclusive

Agile workflows: Incumbents have understood the need for organisational change

relationship with the bank. Come together, cooperate, and digitise as much as possible,” says Paul Le, who leads on data and platforms for Dutch multinational bank ING’s trade business. That’s a pretty awesome statement; a ‘reset’, of banking’s cultural orthodoxy and the technology around which it is built. At its heart is a recognition that customer behaviour, encouraged by regulators and facilitated by data and digitisation, is changing dramatically. As with every other area of their digital lives, customers are looking for ease of use, new experiences and infinite choice in their financial services. Even if one bank alone could provide all three, securely, and remain profitable, it’s would be unlikely to achieve undying loyalty from an increasingly digitally nomadic customer base. ING recognises that people don’t need banks, they need banking, and has set out to ‘find ways to empower people and

TheFintechMagazine | Issue 17

businesses on their preferred platforms with a clear and easy experience – or become a platform business ourselves’. Meanwhile, BBVA has already planted a foot in both camps. It has its Open Platform in the US, allowing fintechs and others to plug into its services, and an API (application programming interface) Marketplace in Europe through which customers can access third-party provider products. Georg Lúdvíksson, CEO and co-founder of white label digital banking solutions provider Meniga, points to the newly-minted partnership between Apple and Goldman Sachs in the US, to provide the Apple Card, as an example of how just such collaboration can deliver value to all parties. He describes the new consumer

all services to a customer’, and that a competitive market is the best way to deliver what they need. “People look at open banking and think about aggregation but, in many ways, that’s the least disruptive part of it,” says Maslaveckas. “The value comes when you can understand someone’s financial data and help them to act on the insight.” As of early 2020, he says, a million people were connected to the open banking ecosystem and network traffic volumes doubled between November and December [2019]. “On the supply side, 76 per cent of fintechs we are tracking have accessible APIs and 30 per cent already have full read, write, create, fulfil and transact APIs. Pretty much anything that a customer would want to do with their finances is available via API – so, the product catalogue is, or will soon be, extensive’. While it may be true that challengers are, as one commentator puts it, still just a ‘fly on the backside’ of banking, and that the GAFAs (Google, Amazon, Facebook and Apple) have no interest in becoming fully fledged banks themselves, most are nevertheless looking to them to, in effect, white label their financial packages for customers – as evidenced by Google’s tie-up this summer with eight US banks to facilitate digital checking and savings

There’s a renewed sense of confidence among financial institutions and banking incumbents – Banking Circle white paper credit card partnership as creating an entirely new ‘found money’ ecosystem. One of the most forceful arguments for adopting a Cloud-based architecture is that it frees up organisational space to focus fully on the customer, enabling the business to change, pivot and grow as users seek stronger, seamless digital journeys and personalised financial services. It also allows banks to better embrace innovation from outside – for the benefit of banks and customers alike. As banks take their place in an open ecosystem, that capacity becomes particularly relevant, as Ed Maslaveckas, CEO of Bud, which provides banks and others with data intelligence and fulfilment capabilities to create new personal financial management features, points out. He believes that ‘no single institution can offer

accounts for Google Pay users. If they are not exactly worried about the new entrants, banks should at least be figuring out a way to gain some value from partnering with them, given the fragmentation and disintermediation that’s already being seen in financial services. Reflecting on his organisation’s attitude to development, Mark Buitenhek, global head of transaction services at ING, says: “We don’t allow the ‘not invented here’ syndrome. Instead of HQ saying ‘this is the way we do it’, we cherish what is different. We want to understand what is different. We keep our eyes wide open and we’re always open for change.” If the insight in the Banking Circle white paper is correct, that is the spirit in which most of ING’s fellow banks are also entering the post-COVID era. www.fintech.finance

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NEOBANKS OF THE WORLD

Think they’ve cracked it! If keeping your self-employed tax in order drives you nuts, then professionally trained accountants Sam O’Connor (right) and Adam Goodall know how you feel. In fact, it drove them to found Coconut – the bank that gives you a ‘finance team in your pocket’… and what a lovely bunch they are Life’s a beach, they say, for the self-employed. Determining their own hours, working at their own pace… if you’re on a nine-to-five treadmill it’s difficult not to envy Britain’s five million self-employed for leading the kind of flexible, independent, and laid-back lifestyle that you covet. But when it comes to filing an end-of-year tax return, or managing finances as a sole trader or micro-SME owner, that beach can quickly begin to feel like a desert island,

marooning you without access to the tools you need to help manage a complex and diverse financial life. Serial entrepreneurs Sam O’Connor and Adam Goodall have spent the past four years devising a fintech solution for just such castaways in the UK. The result, Coconut Bank, promises to deliver ‘the power of a finance team into your pocket’, through a mobile app and a Mastercard-powered current account that’s tailored specifically for the 15 per cent of working-age Britons who currently work for themselves. “Our vision is to

make self-employment easier than being employed. And the first piece of that is accounting and tax, because that’s the bedrock of your business,” says O’Connor, the firm’s CEO, who, like Goodall, trained as an accountant with global firm PwC. You might think that more than prepared them for that castaway life. In fact, they only became aware of how painfully difficult it was after selling their first joint-venture, ProConfirm, to Confirmation.com in 2014. “The idea came to us when we joined the self-employed community and thought ‘wow, OK. Actually, the accounting and tax side, the running your business side of this, is really difficult’,” recalls O’Connor.

This is the life: Coconut Bank promises to make financial admin easy for the self-employed

TheFintechMagazine | Issue 17

www.fintech.finance

“That’s because you’re stuck with tools like Xero and QuickBooks, that were built in the web era and typically for businesses with 10-plus employees. “So, we’ve made the ultimate tool for the self-employed, specifically for individuals running a business with fewer than five employees – all the way down to designers or hairdressers who are sole traders. Our customers can connect up their current account from 20 major UK banks, or open a current account with us, and then they’re ready to go – with all of the tools they need for expenses, invoicing, a profit and loss account, tax tools and so on.” While the spending breakdowns provided by the likes of Monzo solve problems consumers didn’t know they had, Coconut addresses all the problems that the self-employed are all too aware of – answering the desperate SOS signals of those adrift in a sea of accounting documents and tax reminders. Feedback on the app from Coconut’s customers has been overwhelmingly positive – one of the reasons behind Coconut’s inclusion in Business Insider’s 10 Hottest Fintechs list in 2019. “Every time we go past the tax year-end, our customers tweet ‘ah, I’ve saved 80 per cent of the time that I would normally spend submitting my tax return!’,” O’Connor says. “And that makes me do a little dance around the kitchen.”

Making tax less taxing Tax is a particularly tough nut to crack for the self-employed. They work hard for a full financial year only to find HMRC gobbling up their savings when they run their books. From the start, Coconut has aimed to make this unpleasant surprise a thing of the past. “We forecast your tax bill as you get paid,” explains O’Connor, “so you can set aside the right amount and then, when you get to the end of the year, you don’t have a surprise about how much tax you owe. And we’ve got a really handy report that you can use to submit your tax easily.” At the beginning of last year, Coconut also added a corporation tax feature for customers running limited companies. It’s little wonder, considering their enamoured customer base, that Coconut chose to follow the crowdfunding route for a second time last month. Having closed its first round in 2018 at 400 per cent of its funding target, this year’s round saw more www.fintech.finance

than 3,000 investors pledge in excess of £2.5million, or 350 per cent of its target, over Crowdcube. “Crowdfunding is a really exciting thing to do – and, for us, it’s a very natural fit, because right at the start of our journey with Coconut, we decided to set up a Facebook group called Coconut Bite, and that was really a turbocharged customer feedback forum for us,” says O’Connor. “That very quickly started to build quite a big audience and community around what we were doing – a huge amount of buzz and excitement.” Coconut Bite is now integrated into the firm’s website, allowing customers to propose patches and new features for Coconut to put its new funding towards. And on top of its wildly successful crowdfund, which increased Coconut’s pre-money valuation to £12million, the fintech has also applied for a share of the £100million Banking Competition Remedies Fund in July; if successful, Coconut could be granted up to £5million more in funding for its next steps. The cash injection is timely, given that economic downturns tend to force former employees into self-employment, as evidenced in the months following the 2008 crash. With the current furlough lifeline scheduled to be withdrawn at the end of October, the UK’s economic recovery from the coronavirus crisis is likely to feature swathes of newly-displaced, newly-disorientated workers filing self assessments for the first time. It’ll be down to fintechs like Coconut to service this growing archipelago of lonely economic islanders, struggling to efficiently deal with their finances. Even before lockdown, statistics revealed legions of UK workers jumping ship from their employers and working for themselves. Some 3.3 million UK adults identified as self-employed in 2001, that figure jumping to a record five million at the start of this year. With the so-called ‘gig economy’ also booming – albeit through mostly precarious positions – Coconut’s target market is set to balloon further, post-COVID-19. Co-working spaces are now popping up in towns as well as cities, and older workers, as well as the young, are giving self-employment a shot: indeed, by 2024, over-50s are predicted to make up

the majority of the UK’s self-employed. Rishi Sunak’s Self-Employment Income Support Scheme, announced back in March, was yet another, state-sponsored acknowledgement of just how big and important a feature of the economy all these self-starters are. The trend towards ‘going it alone’ has led to an increase in services for the self-employed, such as UK-based Penfold, which specialises in pensions for the self-employed. Meanwhile, the Independent Workers’ Union of Great Britain (IWGB), established in 2013, has seen its membership double each year since 2016. “The ecosystem around self-employment is really starting to develop,” confirms O’Connor, “with specialist products focussed on things like sick pay – all those benefits you get when you’re employed, but don’t get when you’re self-employed.” Coconut is now focussing on establishing itself as the go-to problem-solver for the self-employed, introducing features to help with just such downsides of independence. “There are so many exciting things that we can do for this segment of the workforce,” says O’Connor, “and that’s all coming as part of what this funding round allows us to do.” One example is insurance, says O’Connor. “Because of the richness of the data we have – when a transaction happens, we categorise it, using our proprietary Accounting Intelligence technology, and it figures out what tax category that’s in – we can look at what you spend on insurance, and say ‘actually, in your peer group, or in your industry group, you’re overpaying’. And we can find you a good alternative deal to help you.” It already offers bespoke, one-to-one accounting services, connecting beleaguered self-employed workers with professional accountants across the UK. Its Accounting Partner Services currently boast 1,500 accountants, who look after more than 27,000 Coconut customers and their specific, diverse needs. So, it looks like there’s no need for the self-employed to feel they’re adrift on a choppy sea of financial admin – and we can all finally go back to sipping our piña coladas and topping up our tans.

Our vision is to make self-employment easier than being employed

Issue 17 | TheFintechMagazine

NEOBANKS OF THE WORLD

Fintechs’ Mayflower voyage – and the bank that’s welcoming them Contrary to popular belief, the acclaimed explorer Christopher Columbus was not the first European to discover the Americas. It was the Vikings. Norse sagas from the time corroborate this theory, telling the tale of Leif Eriksson, son of Erik the Red, as he pioneered a route from Greenland, across the Davis Strait to Newfoundland and beyond. The sagas describe North America as a land of unspoilt riches – a miraculous bounty of game, timber and pastures, hitherto unimaginable to Dark Age Europeans. Fast forward 1,000 years and it’s fair to say that the USA very much remains a land of opportunity for a particular group of European explorers – challenger banks. But where treacherous waters and crude boat design once discouraged these foreigners from attempting to cross the Atlantic, an onerous regulatory regime and virtually unnavigable banking licence application process is now deterring them. As a result, the country’s neobank ecosystem has lagged behind Europe’s, as Eric Garretson, CFO and fintech strategy leader of NBKC Bank, explains. “Thanks to the easing of banking regulations, European challenger banks are free to move money, provision accounts and hold customer funds without necessarily having to partner with another bank on their home continent,” says Garretson. “By contrast, obtaining a bank charter in the US is still an extremely complex, costly and time-consuming process. Even for those new banks that do succeed in gaining their charter, the safety and soundness exams that come with being regulated can prove an insurmountable challenge. That’s why, until now, so many neobanks have refrained from attempting to establish themselves in the US.”

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NBKC Bank’s CFO Eric Garretson is issuing an open invitation to European explorers who want a foothold in the Land of Opportunity Just as foreign banks have traditionally failed to make the move Stateside, so too have American fintechs struggled to overcome their domestic market’s barriers to entry. However, change appears to be on the horizon, with three of Europe’s leading digital-only banks launching in the US over the past year. Monzo and N26 both experienced impressive customer take-up in the few months following their American debuts, in 2019, and Revolut would no doubt have enjoyed equal success had it not completed its US roll-out just as the global pandemic struck at the end of March, 2020. Not only this, but the USA is currently witnessing a boom in homegrown challenger banks, with new players such as Current, Stash and Moven all looking to take a bite out of the Big Four’s apple pie. Chime, one of the first neos to be born in the USA, is currently valued at $5.8billion and saw its customer base quadruple from one to four million in 2019. You may be wondering why challenger banks, both European and American, are all of a sudden opting to undergo the painstaking process of obtaining a US bank charter. The fact is, they’re not. Instead, they’re taking the far easier route of partnering with existing American banks in order to operate off the back of their US licences. Existing American banks like NBKC. “I love where we’re positioned as a bank – right at the forefront of fintech partnerships,” says Garretson.

“Considering how difficult it is for a fintech company to come over here and spring up its operation without a whole host of regulatory challenges, we’re at a real competitive advantage.” It would seem that love is in the air of America’s neobank ecosystem. Following Monzo’s engagement to Northwest Ohio’s Sutton Bank, N26 popped the question to SoCal’s Axos Bank. Over on the east coast, Revolut has hooked up with New York’s Metropolitan Commercial Bank and Chime has jumped into bed with Bancorp Bank (the 10th largest bank in Delaware, the second smallest state in the country). As an international reader, you may never have heard of any of these American partner banks – in terms of size, they’re more akin to Wells, Somerset, than Wells Fargo. However, that’s precisely what makes these partnerships such a match made in heaven, as Garretson explains. “As we were launching our fintech strategy, we went out and met with numerous different startup founders and management teams,” he says. “Time and time again we listened to them complain about how long it takes for a fintech to partner with a large bank. First of all, you need to find a person at the bank to talk to, and then you have to wait for your proposal to move up the chain in the organisation until it reaches a decisionmaker who actually has the power to say yes or no. Add to this the extensive amount of due diligence and contract negotiation that has to take place before onboarding can start and it can take 12 to 18 months to strike up a partnership with a big bank. Most new fintechs can’t afford to wait over a year before kickstarting their operations.” It’s for this reason that many of those seeking to establish a foothold in the US are forgoing partnerships with major www.fintech.finance

incumbents in favour of working with smaller ‘community’ banks, as they are known. Although it holds a considerable $1billion in assets, NBKC remains a relatively compact institution by American bank standards, and thus can still deliver the efficient, hands-on customer approach typified by the 5,000 or so other community banks in the US. “My team members and I are the decision-makers in our organisation, and we’re consequently able to vet ideas very quickly and determine whether a particular fintech is indeed something that we could actually work with or not,” says Garretson. “Startup founders and management teams are exceptionally busy people who hate having their time wasted, so it’s great being able to swiftly analyse their business’ needs and provide them with a rapid response concerning a potential partnership. It’s this level of agility that larger institutions are simply unable to replicate.” However, NBKC’s offering to fintechs exceeds merely allowing them to piggyback off its charter as a bank of record. From its corporate office in Kansas City, Missouri (not Kansas City, Kansas), the bank works hand in hand with its fintech partners to help them turn their innovative concepts into reality. “We are a pilot bank for startups,” says Garretson. “As soon as they present a new idea, we provide them with our 20 years’ worth of expertise to help them to develop a product that’s ready for distribution. As part of our fintech strategy, we also consider whether we can bring any of these products in-house to improve our own efficiency and deliver new customerfacing solutions that will support our nationwide expansion.”

NBKC’s eagerness to act as both partner and mentor to startups and challengers perhaps stems from the bank’s own fintech heritage. “We originally started out as an online mortgage lender, way back in 1997,” says Garretson. “The internet was very much still in its infancy, as was online lending, which meant that there were still a lot of faxing and FedEx deliveries taking place. However, we were as digital as you could be back then, and we’ve carried that ethos forward through the years. We consider

Over the next three to five years, I envisage us forming 30 to 40 really solid relationships with select companies so that we may effectively help them to pilot their programmes and distribute their products

ourselves to be a fintech that provides banking services, as we believe that fintech companies generally provide a better customer experience than traditional banks.” Despite identifying as a fintech itself, NBKC is not looking to partner with any old challenger that knocks on its door. As in other areas of its business, the bank’s partnership policy is one of quality over quantity. “We don’t want to be a bank that partners with anybody – we’d rather carefully choose the right fintechs to work with, according to both of our needs and capabilities,” says Garretson. “Over the next three to five years, I envisage us forming 30 to 40 really solid relationships with select companies so that we may effectively help them to pilot their programmes and distribute their products. Nevertheless, we’re keen to put our name out there to let fintechs know that we’re open for business and would love to hear their ideas.” So, thanks to community banks like NBKC, fintechs and challenger banks the world over are finally being given their ticket to America.

All aboard!: N26, Monzo and Revolut have all made the crossing to the US

www.fintech.finance

Issue 17 | TheFintechMagazine

NEOBANKS OF THE WORLD

Mo’ money in the hood Muniy, a new challenger with a hip hop vibe, is reaching out to the underbanked and SMEs to create value for everyone, as Co-founder Steve Suarez explains You’re out with a friend in search of some retail therapy and maybe a spot of lunch. As you walk along the high street, your pocket vibrates. It’s your banking app, letting you know that you can get two-for-one cappuccinos in a gorgeous little café around the corner. Perfect timing! As if by magic, you got a super-relevant, personalised offer that appeared exactly at the right moment. And nobody else has access to the delicious discount that you’ve been offered, which somehow makes it all the sweeter. That helpful little app on your phone would be Muniy (pronounced money) – a soon-to-be-launched UK challenger bank that gives you tailored discounts across shops and services. Muniy has just closed a successful round of funding on Crowdcube, raising 103 per cent of its target, or just over £206,380. As well as funding its latest ambitions, the raise turned out to be a great publicity move for Muniy. “Crowdcube has been really great for us because we’ve been in stealth mode for a while and this was kind of our coming-out party,” says co-founder Jeremy Suarez. “Now that we’re out there, other businesses are coming forward to say ‘hey, we really like what you’re doing – can we have a chat?’. So, the past three weeks have been very busy for us, just saying ‘hi’ and having ‘welcome to the family’-type conversations. At the same time, we’re seeing if there are any synergies that we can take advantage of going forward.” By fintech standards, £200,000 is modest; Muniy’s plans are anything but. The team intends to use the capital to

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build out business, merchant and retail banking facilities, including API (application programming interface)-driven access to loans, pensions, foreign exchange, and trading across the platform. But at its heart is the concept of a marketplace that mutually benefits its client merchants and shoppers, creating what Suarez calls a ‘chain reaction’. “We want to try to work with partners and merchants to give value back to users and let the merchants take advantage of that at the same time,” explains Suarez. “We’re working with people who are interested in bridging those gaps.” High street banks have been offering cashback deals and rewards with selected partners for some time – five per cent back on your Waitrose shop with Lloyds and two per cent cashback at Waterstones with Barclays are among the current offers. It’s nice, but it doesn’t exactly give you a retail adrenaline rush. With Muniy, the discounts are open to all merchants, great and small. Think of the dad who finally quit his soul-destroying job to set up the world’s tiniest Polish bakery. Or the pumped-up business grad who’s unlocking the door to her new sustainable gift shop for the first time, even though nobody thought she could do it. Muniy’s looking to support those guys, too. “There are people behind those businesses, in modern mom and pop shops and restaurants,” says Suarez. “It’s their dream… and they have small margins to keep their businesses going.” Muniy offers a bunch of tools to help these smaller merchants drive sales and,

in many cases, pay less in fees to card processors. Its payments are based on a Muniy-generated QR code for which it charges 1.2 per cent and 10p per transaction with no set-up fee or going monthly costs. According to Merchant Machine, for micro vendors bringing in around £1,000 a month, £50 or so of that goes towards card processing payments. If you think of our Polish-bakery, that’s a lot of bagels. But Muniy’s fee structure is just part of it. It’s the additional consumer data that Muniy gives smaller merchants access to that is the real appeal, helping to give them a competitive edge against bigger rivals and offering better sales incentives – and all through the merchant’s www.fintech.finance

business banking platform. “Anybody who has a Muniy account as a merchant has access to that information,” explains Suarez. “We’re trying to make sure that the person behind the business can benefit at the same time as the person using Muniy. There’s a bit of a handshake there.” The impact of coronavirus has been devastating for Britain’s small businesses and extra support can’t come soon enough. Research from business banking app Amaiz found that a staggering 10 per cent of the UK’s small enterprises lost all their business as a direct result of the coronavirus lockdown. Not most of their business, ALL of it. For those that are still clinging on, tough times are expected ahead. Muniy’s QR code payment facilities, which mean merchants and shoppers can avoid touchpoints altogether, should help to give still-nervous shoppers the confidence to return in numbers. And Muniy would like to think that by helping businesses get back on their feet, it’s supporting the whole economy. But it’s not just struggling small businesses that it’s looking out for. A major part of its financial mission is concerned with improving access to affordable banking for the underserved. “We’re really looking out for the unbanked,” explains Suarez, “and there’s a huge number of those people.” With Revolut-style instant foreign exchange and multiple-currency wallets, whether its travellers, immigrants who need a new account in the UK or small business owners, everyone is welcome. “Offering loans is something we’re looking at doing really soon”, says Suarez, “And we’re also launching a way for small businesses and freelancers to apply for pensions. We’re doing a lot of interesting stuff with crossborder payments and we

have some really nice relationships with foreign exchange companies. We might be offering stock options, too, so you can buy and sell stocks through the platform.” And because all those services require the same know your customer (KYC) and anti-money laundering due diligence, Muniy is keen to explore ways to make the onboarding process smoother. “That information is done over and over; if you get a mortgage, if you get a loan, if you open a bank account. With all us fintech companies doing the same thing, can we not streamline things a bit?” says Suarez. “We’re not even just doing the same thing; we’re using the same companies, the same APIs, the same user flows, and we keep building them, over and over again.” There is a lot going on under the hood at Muniy, with a phased rollout planned for paid-for premium services, layered on top of free basic accounts. But it’s spent time working on its image, too. A memorable brand is strategically important for neobanks. As more and more float into the marketplace, it can be tricky to stay centre-stage and become profitable. So Muniy put a lot of thought into its edgy design. Fusing pink and orange, this neo has a feel-good vibe, the kind that makes you nostalgic for beach parties and schnapps, and brightens the dullest of wallets. “If you go to our website, you’ll notice that there’s a lot of reference to hip hop. ‘Mo’ Muniy, less problems’ and stuff like that,” says Suarez (that’s a riff on rapper Notorious B.I.G.’s Mo’ Money, Mo’ Problems 1997 hit). “My co-founder, Edwin Chong, and I are from the golden era of hip hop and so we love that space. In our video, we use the song C.R.E.A.M., from Wu-Tang Clan, which means Cash Rules Everything Around Me. They’re a group out of the 90s, a collective of 10 who all have their own special skills. “I think that kind of plays into what we do. We’re not just there for the user on a personal level, we’re there for the merchants, too. Keeping it equal for everyone but, at the same time, giving the benefits to everyone.”

We’re trying to make sure that the person behind the business can benefit at the same time as the person using Muniy

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Issue 17 | TheFintechMagazine

NEOBANKS OF THE WORLD

A golden opportunity Gold buying and trading app Minted was preparing to launch just as the pandemic prompted an investor stampede for bullion. So, it pulled out the stops and within weeks had turned over £500K. For co-founder Shahid Munir, it was the start of a glittering new career It was Voltaire who said paper money eventually goes back to its intrinsic value of zero. Time and time again, he’s been proved right. Whether it was the fall of the Roman denarius or the Iranian rial, which now trades at 42,100 for one US dollar, fiat money eventually becomes worthless. Perhaps that’s why some economies still prefer to trade in gold. It’s glitzy, tangible and holds its value. Recently, we’ve seen a rise in gold bartering in India, where households store an

incredible 25,000 tonnes of gold, the highest domestic stash of any nation. But it’s not just the East that trusts gold more than fiat currencies or volatile investments. Like religion or family, it tends to be what we turn to when all else fails. When markets wobble, investors pile it on like gangsters at a bling convention. We saw it in the aftermath of 2008, when gold demand hit a 28-year high. And we’re seeing it now, in the midst of a pandemic-induced recession. On August 4, spot gold raced past trading

highs of $2,000/oz, only for prices to experience their sharpest fall in seven months and then more than recover within the space of a few hours a week later. Despite the somersaults it’s performed recently, gold is famously dependable. But, on the whole, it’s not the likes of you and me who benefit. Shahid Munir knows about gold and, with a cohort of entrepreneurs, he’s created a gold-trading app or our time: Minted.

An ore-some feat: Minted is working on allowing users to pay with gold

TheFintechMagazine | Issue 17

www.fintech.finance

Gold you can hold There are plenty of mobile trading platforms you can use to get into this market – but what you hold is a piece of paper, an electronically-traded fund for which the underlying asset is bullion. What makes Minted unique is that the investor gets to own the physical gold. You can even get it delivered to your door. “We deal in physical gold”, explains Munir. “That gold is physically attributed to you. With the other trading apps, you’re subject to manipulations of the gold price itself, and that’s the only thing you’ve really got exposure to – the movement in gold price. Whereas here, you hold gold.” It’s an interesting proposition, and one which could appeal to risk-adverse investors. One of the special things about gold is that, even though it’s low-risk, like a bond, it’s protected against inflation, like a share. It’s the best of both worlds. For Munir, it’s a no-brainer. “You could buy a car with a kilo of gold back in the 1920s,” he says. “And you can do the same today. It’s almost inflation-proof. Gold has an intrinsic value; it has a certain level of supply, as opposed to a printed currency.”

The ore that’s underrated No wonder Munir feels that he’s stumbled on a gold mine. “Gold has always been neglected as an asset class,” he continues, “even though, if you look at the performance of gold over the past 10 years, it’s outperformed the rest.” It’s true that retail investors have not been snapping up gold, but central banks can’t get enough of it. In the months before the pandemic gripped the planet, they began raking in record amounts of the stuff. In 2019, they repatriated 650 tonnes of gold back into their vaults, the largest amount recorded in 50 years. According to Adam Glapiński, governor of the National Bank of Poland, gold still ‘symbolises the strength of [a] country’. So, it’s strange that, for such a valuable asset, the buying and selling of gold does not fall under any regulation, according to Munir. “Apart from the usual AML (anti-money laundering) and KYC (know your customer) controls that you have to conduct, there’s no formal regulation. It doesn’t even attract VAT, which is another benefit.”

Despite this, the team at Minted wanted to get a stamp of legitimacy to reassure customers, so it became regulated as a trader under the UK’s Financial Conduct Authority. “It adds further confidence for the customer,” says Munir.

Making gold accessible The genesis for Minted was similar to many fintech startups: a frustrating problem. Munir and his co-founders wanted to invest in gold themselves. But purchasing a block was not an option. “Wherever you go, there’s almost a 30 per cent mark-up on the gold bar,” Munir explains. “If you calculate the rate for gold when you buy a bar, it’s staggeringly high, and we just could not understand why. We all wanted to own the asset, [but] you’ve got to spend north of £250,000 if you want to get a good rate.” Munir and his gold hunters did not like getting ripped off. Where most people would have given up and gone home, they decided to create their own gold-trading app. As with most things in life, a little charm can go a long way. To get the gold, the team had to forge strong relationships with the right people. “We made a very good contact with a refinery,” Munir explains. “We sold them our vision and they were like ‘even though you don’t have the volumes there, we’ll let you buy it at close to market rate and see if you can really build this thing up’. It kind of went from there.” They say luck is the meeting of preparation and opportunity. The team were already well underway when the unpredictable hit the world and demand for gold skyrocketed. Since the start of the year, the price of gold has soared by 34 per cent (as of the first week of August 2020). Ready or not, Minted needed to launch ahead of schedule to capture the momentum created by the pandemic. “We were kind of hurried into it,” recalls Munir, “because the pandemic came, the

lockdown hit and there was a gold rush. Everybody wanted to buy it.” The team needed to power ahead and adapt to the surging demand. “Luckily, we had some reserve stock in place,” says Munir. “So, we thought ‘right, the techies have done a great job on the backend. It doesn’t look wonderful, but it’s functional. Let’s launch’.” Minted has since turned over more than £500,000 of gold, raised £1.5million from investors and grown the team to 15 people. “We wanted to make buying gold simple, secure and affordable,” says Munir. “So, we start our savings plan at £30 a month [but] you’re getting the same rate as someone spending a quarter of a million pounds.” They found a way for users to seamlessly move gold, too. “Our app has the functionality to transfer gold,” says Munir. “So, if I wanted to send you a couple of grams, I can do it through my app, and you would receive the grams, even if you’re not a customer.” Not only can Minted members trade and transfer gold, they can earn it as well. “We’ve combined an element of gamification into the app, so we’ve got this system where you accumulate points that you can redeem for physical gold,” says Munir. Anyone on the app can pick up free gold, like Super Mario in the Mushroom Kingdom, and have it delivered minty fresh to their doorstep. But we’ve saved the best till last. Put down your coffee and get ready to catch your jaw. The Minted team is facilitating a way for everyday customers to pay in shops with gold. If they can pull it off, it’s surely one of the biggest comebacks of all time. Here in the UK, we haven’t shopped with gold since the Napoleonic Wars. Minted is on a gilded mission. With the tap of a phone, it wants to seamlessly make gold the international currency it once was. “It would be fantastic if, one day, you walked into a shop and there was a sticker saying ‘Minted accepted here’, and you can pay with gold,” says Munir. “It’s something that we’re exploring with jewellers, right now. I see that being in the near future, for sure.” In the meantime, Minted members should soon have the next best thing: a debit card that converts the gold you own to digital cash for payments. That’ll be one sparkling ewallet!

The pandemic came, the lockdown hit and there was a gold rush. Everybody wanted to buy it

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Issue 17 | TheFintechMagazine

NEOBANKS OF THE WORLD

One of Germany’s newest challengers has adopted the principles of Islamic finance to serve a culturally-diverse audience – one hungry for a values-led approach to banking. Co-founder of Insha, Mehmet Burak Dikmen, believes it can help redefine the concept of money Worldwide, there were 142 fintech firms offering shariah-compliant financial services, according to Islamic Finance News. That’s almost 20 up on June’s number. With new launches literally every week, this particular fintech space is getting crowded and, as digital disrupters compete in the $2.7trillion Islamic finance market, they’ll need to stand out to get noticed. One that has been catching headlines is values-first neobank Insha. Fully launched in Germany in 2019, the challenger is the digital daughter of Albaraka Türk Participation Bank, based in Istanbul, which operates branches in 17 countries, most of them in the Middle East and North Africa region. Insha began as a way for the just under three million Muslims with Turkish roots living in Germany to align their financial needs with their values. But its principles have struck a chord more widely and today Insha has more non-Muslim customers overall. “They chose Insha because of our ethical principles and purposes,” says co-founder, Mehmet Burak Dikmen. “The majority of sign-ups come from people who like the product or agree with the values.” Ethics can be a thorny issue in finance. After all, who gets to decide what’s good or bad? This has been a recurring criticism in ESG (environmental, social and governance) investing, leading to some seriously sketchy greenwashing. It also has the potential to be problematic

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for Islamic banks that want to appeal to those outside of the faith. While most people can buy into non-interest-based banking, not everyone agrees with, for example, the concept of halal. “Islamic banking is separate from the religion,” corrects Dikmen. “We are simply using Islamic banking tools and principles.” And he believes those are relevant in countries of any faith or none. “The most prominent country for Islamic banking right now is the UK, but the UK is not a Muslim country. I know many people there who are experts in Islamic banking, but they are not Muslim,” he points out. “We believe that these tools and principles are important for all our futures and for us as individuals. We avoid all kinds of uncertainty. Justice, being ethical, being moral is essential for us. These principles are not only for Muslims, but for everyone. They are universal.” Studies show that brands with a strong moral compass resonate better with Millennials and Gen Zers. According to research by First Insight, more than seven in 10 people who belong to those two generations will select purchases based

Justice, being ethical, being moral is essential for us. These principles are not only for Muslims, but for everyone. They are universal on values. This trend is growing as more people consider the impact that their decisions make on the world and look for alternatives to the status quo. The Islamic banking business model fits those aspirations. It is based on holding assets and sharing the risk of ownership. Money is simply a token, representing an underlying asset; it has no value in its own right, since it cannot accrue interest. “This is important because, in that

way, Islamic banking actually redefines money,” says Dikmen. “From our perspective, an interest-free model sees money simply as an exchange tool. It’s what separates Insha – and Islamic banking – from traditional banking [in the West].”

Pivots and principles Although Insha started as a lifestyle bank for Muslims, it reassessed its model as its customer base became rapidly more diverse. Some of its original features will stay – easy currency transfers between Germany and Turkey and a multi-lingual UX (it can be read in German, Turkish or English), for instance. But others will ultimately disappear, says Dikmen. “We’ve pivoted more than twice. We are building our product based on our customers’ needs, and most of our customers need tools to manage their money easily.” One of those tools is inSight, which helps customers to categorise their spending and track where their money goes. Another is inSave, a sub-account that saves a preset percentage of everything a customer spends on their Insha cards. Some of the app’s original features were, nevertheless, well thought out. They included an alarm to remind Muslim users when to pray, a Qibla finder so that worshippers can easily make sure they are facing towards Mecca, a mosque tracker, and a zakat calculator to ensure customers gave the right amount of alms each month. There’s also an easy way to pay zakat money to Islam-friendly charities. But if they’re not right for the audience, Insha is not afraid to delete some tools and create new ones instead. “We will redefine and convert those areas to offer solutions for everyone,” says Dikmen. “Most probably, we will delete Qibla finder and mosque finder on our next app release and add new and different features.” Among those is likely to be an investment tool. That’s where it gets really interesting – and different. “The first investment product is like a time deposit account… we call it a www.fintech.finance

participation account,” says Dikmen. “We invest this money into projects and share our profits with the investors. The other is a gold-selling and buying platform.” By that he doesn’t mean digitally traded ETFs (exchange-traded funds), but physical gold, stored with the bank or delivered into customers’ hands. “That makes it compliant with our principles,” says Dikmen. “Because our business is based on a real economy and real assets. So, we have to [be able to] deliver the gold to you.”

A global opportunity There are future plans, too, for insurance products and a sharia-compliant stock-trading platform, as well as straightforward open banking-facilitated

services, such as account aggregation. While staying close to Germany, Insha is looking to expand to nearby European countries such as Austria, France, Belgium and Austria. Austria was an obvious choice because of its proximity and close cultural connections to Germany. “There are a lot of opportunities in France, too,” says Dikmen. “There are more than five million Muslims in France, but no [obvious] ethical banking provider right now – we know that there are some attempts, but no real operations. It’s similar in Belgium and The Netherlands.” Sensible scale-ups can generate significant returns for neobanks, and there is no doubt that Islamic banking

has the potential to be hugely profitable for them. The Islamic economy is worth an estimated $2.7trillion and, around the world, there are 1.8 billion Muslims, not to mention non-Muslims who feel Islamic banking is better aligned with their personal values. That’s enough to make any opportunistic fintech sit up and take note, especially as the Muslim population as a whole is underbanked. Insha roughly translates from Arabic as ‘to build something’. Given the current disenchantment with the old normal in banking, that ‘something’ could turn out to be very big indeed.

Moral compass: Insha’s principles strike with customers who are disenchanted with mainstream banking

www.fintech.finance

Issue 17 | TheFintechMagazine

COMMENTARY: LENDTECH

Alternative lenders could help get the global economy on track, but they can’t do it without adequate debt financing. Head of Varengold Bank’s London branch, Alison Harwood, says now is the time for institutional investors to back them With the global economy in uncharted territory, the relative calm in the markets through July and August has been accompanied by a stronger sense that the world is sailing through the eye of an all-encompassing economic storm. No wonder retail investors are flighty: all bets are off, with second-wave lockdowns threatening to stymie what was, in any case, a tentative recovery from March’s market decline. In such a climate, maintaining liquidity is a challenge for any firm – but for lenders, who have thus far played a crucial role in keeping businesses afloat, investors’ reluctance to push funds into their coffers feels like a stop-block for economic recovery plans the world over. The struggle to maintain working liquidity has been felt particularly by lendtech firms, many of which carried a troubled history with capital markets into the coronavirus crisis. UK-based peer-to-peer lender Funding Circle drew

unfavourable headlines when its share price fell 80 per cent after going public in 2018. In the US, digital lenders OnDeck and LendingClub bore comparable declines, their values having tumbled more than 90 per cent from the IPOs (initial public offerings) they set in 2014. It’s clear that the markets haven’t warmed to the lendtech proposition – but now, with millions of businesses across the world scrambling for emergency funding to take them to the year’s end, fintechs in the lending space are caught in a double bind: desperate to prove their worth, they’re struggling to find the financing to facilitate the speedy, digital-only loans that set them apart from traditional lenders. With retail investors pulling back, it’s institutional investors that must step in to fill the lendtech debt financing gap. That’s according to Alison Harwood, head of Varengold Bank’s London Branch, and an expert in the funding of fintechs. Varengold itself performed a strategic pivot into credit platform investing back in 2015, leading the firm to the most successful year in its history in 2019 – trebling its profits compared to the previous year and proving lendtech investment to be profitable as well as practical. Harwood is unequivocal in her rallying cry to investors. “This is not the time for institutional investors to shut up shop,” she says. “It is instead a time to leverage the strength of trusted partnerships and play our part in shaping the economic and societal legacy of COVID-19.

“Fintech lenders can and must be allowed to contribute to overcoming the ensuing global economic crisis. To do this, they need strong support – not only from governments and regulators but also from their investor partners.” In the initial days after the World Health Organisation declared a pandemic, it appeared that governments were dragging their heels when it came to helping lendtech firms to distribute loans to shell-shocked businesses. Nick Ogden, executive chairman of the UK’s ClearBank and long-time fintech guru, spoke for the entire alternative lending space when he remarked that, since lockdown: “It’s been a collective effort from everybody in the industry, trying to shout to the politicians ‘hey! We can help, you know!’.” In the UK, those calls haven’t fallen entirely on deaf ears. Starling, OakNorth and Funding Circle were all eventually accredited to offer loans under the Coronavirus Business Interruption Loan Scheme (CBILS) , with Funding Circle alone having reportedly pumped £9billion, through the programme to more than 80,000 UK businesses since lockdown. “The British Business Bank has received a little flack for not getting fintechs onboarded quicker,” says Harwood. “But, relative to their counterparts across Europe, I think there is a decent representation of fintechs and alternative lenders that have been onboarded onto the CBILS and then the Bounce Back Loan Scheme (BBLS).” Both schemes are backed by the government – but lendtech firms are

Sizing up the lendtech liquidity gap 86

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nonetheless being asked to source financing for the loans themselves. As a result, UK neo-lender Tide ran into issues in the first week of June, having only received BBLS accreditation from the British Business Bank in May. The firm’s CEO, Oliver Prill, was forced to write a letter to his 150,000 SME customers announcing Tide’s withdrawal from the BBLS scheme, citing liquidity issues. “The conclusion we have reached is that we, and players like us, can only really serve BBLS customers if the funding is provided [by the government],” Prill told reporters, leaving confidence in lendtech firms more than a little strained. Nevertheless, Harwood’s emphasis remains firmly on institutional investors, which she believes can still ride over the hill to back the portfolios of lendtech firms across Europe. “Fintechs need investors to give them the financing to roll out to their customers,” says Harwood. “And lendtech firms are unique because they not only need to be able to raise equity capital to support the growth of their businesses, but they also need to raise significant amounts of debt financing to grow portfolios. So, naturally, they have far higher capital-raising needs than most other fintech businesses. That causes challenges for them and that’s exactly where parties like Varengold come into play,” she adds.

Varengold supports promising digital lenders with that broader level of funding, but it also welcomes its fintech partners under the bank’s regulatory umbrella, and provides them with access to Varengold’s middle- and back-office services. “We have a deep understanding of the industry: we know what’s out there already and what we do and don’t like,” Harwood says. “We always have a strong alignment with the partners we’re working with, so there will typically be a first loss piece in place from the originator that keeps them strongly aligned with us, ensuring that the defined credit quality we think we’re getting will be sustained throughout the life of the relationship.” Most interestingly, Harwood draws attention to the difficulties lendtech firms encounter when they scale, revealing an underserved financing gap that Varengold is particularly interested in plugging. As she explains, the leap from angel investment to institutional investment, as digital lenders scale up, is a crucial moment in the lendtech lifecycle. “Lending businesses need someone to step in and start to grow the portfolio with them to the point where they can reach the broader capital markets, and deeper-pocketed institutional investors like pension funds, that typically won’t look at a transaction unless it’s a book of £100million to £200million,” Harwood explains. “And there’s very little liquidity in that space – between £10million or £20million and £100million – so that’s where we see our role as being important for the industry, in helping those lending businesses at that early stage grow portfolios and really consolidate.” By targeting this gap in financing, the Hamburg-based bank has thus far supported the likes of LendInvest, Assetz Capital, and MarketFinance – all

innovative European lendtech startups bringing instant digital credit to the lending sector. Meanwhile, in January, Varengold provided Berlin-based scaleup Grover with debt financing of €220million – one of Europe’s largest fintech financing deals this year. And in Germany, where Harwood notes the government has been slower to recognise the support lendtech firms can offer SMEs – the so-called ‘mittelstand’ of the German economy – Varengold has sprung into action, too. Having received accreditation as a ‘hausbank’ from the state-owned KfW development bank in May, Varengold has been instrumental in getting lendtech companies involved in the KfW-Corona-Aid loan scheme. “We’ve been very active in helping German fintech lenders to access that scheme, which can only be done with a partnership through a house bank,” Harwood explains. “We’re the first fintech-driving house bank to have been onboarded by the KfW, to make sure that the alternative lending ecosystem has not been left out of those programmes.” All of this underscores the value Varengold sees in the lendtech ecosystem, which Harwood believes will be vital as states and sectors fight back against the economic downturn. As in 2008, when traditional lenders reigned in their credit appetite, Harwood predicts that digital lenders could step up to pinpoint the needs of businesses across Europe, servicing them with the loans they need to survive the oncoming recession. “I think lending is going to be back at the front and centre of the fintech ecosystem,” says Harwood. “Now is a great time for them to showcase what they can do.”

Fintech lenders can and must be allowed to contribute to overcoming the global economic crisis. To do this they need strong support from their investor partners

Building capacity: Lack of finance means lendtechs are not fulfilling their critical potential

www.fintech.finance

Issue 17 | TheFintechMagazine

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COMMENTARY: LAST WORDS Evolution theory: The new index takes into account a range of factors that impact the genus known as fintech

The taxonomy of fintech

Findexable’s Global Fintech Index is a new way to identify where the industry’s hot and where it’s not. We asked Founder Simon Hardie what makes these rankings different

There are many fintech indices out there, and, while many countries and cities aspire to feature close to the top of them, there is a dollop of scepticism about what it really means to be included in the rankings. The criteria by which they are calculated have never been entirely clear and trying to make sense of them is no easy task. But that’s exactly what Simon Hardie, the founder of Findexable, has done by launching the first interactive Global Fintech Index to rank countries and cities by not one, but multiple indices to determine the healthiest ecosystems. We chatted to him about what it is he hopes to achieve with Findexable, what it offers the industry, and whether it contains some genuine revelations. THE FINTECH MAGAZINE: How would you describe Findexable’s Global Fintech Index and the genesis of the idea? SIMON HARDIE: Our mission is to rank and score fintech innovation, at the city and country level, and then to build out, on top of that, a large global catalogue of fintech companies. We launched some rankings at the end of last year, which was basically the first time anybody had ranked any and all fintech countries/cities where there’s any degree of fintech activity. We used that to raise awareness about what we’re doing, and then built our digital platform, which is a www.fintech.finance

map of fintech companies, that you can zoom in on to see the companies that are based in that location. If you’re a fintech, an association or an accelerator, you can also add yourself to the map. What we’re starting to do is categorise, so that you can look at specific cities or countries and the types of fintech activity that’s going on, such as payments, banking, blockchain, crypto and so on. It’s a big task. There’s a world out there that is not being mapped or tracked, and there’s a lot of exciting innovation happening. We wanted to put that on a map, and make these companies more visible.

Fintech was created to solve difficult problems, global problems. The index can play a role in making sure that happens TFM: How do you foresee the site working when it comes to mapping and cataloguing fintech companies? SH: Much like LinkedIn. We want players to come to us and see the opportunity to add themselves to the map at no cost. My guess is that we will end up with at least 10,000 companies, maybe well beyond that. We

also have a network of close to 50 association and ecosystem partners worldwide that we’re working with directly, on a day-to-day basis, to get more of their local fintech companies to look at the map and add themselves to it. TFM: What have been some of the surprises in terms of the locations and types of companies out there? SH: It’s just the sheer diversity of fintech activity across the world that’s surprising. We have literally had companies from Albania to Zimbabwe adding themselves to the map. One of our key mission statements is to not just make it easier, make it more transparent – democratise the visibility of fintech innovation globally – but also to be an advocate for progressive financial services. My belief is that fintech was created to solve difficult problems, global problems, and the index can play a role in making sure that happens. It’s not just about niche providers taking advantage of fintech, it’s really about enabling entrepreneurship. Clearly, fintech, as an industry, has some work to do, to make fintech firms more diverse, to encourage more women to found fintech companies, to be more ethnically mixed, but it is our view that we can play a role in advocating that, and actually effecting some change in that direction. Issue 17 | TheFintechMagazine

COMMENTARY: LAST WORDS TFM: What do you anticipate for the future, in terms of uncovering opportunities for fintechs? SH: We’re just starting to work with the Africa Fintech Network, and we’ll be kicking off an Africa-wide fintech census programme to track innovations across the continent, from Northern Africa, as well as Sub-Saharan. So, I would anticipate that we will soon start to see where these new pockets are emerging. Rwanda, for example, is something of a tech hub. Its fintech story has been less well told. There’s also a bit of a hole when it comes to Latin America. We’re engaging with new partners in that region, too. Mexico is the first country in the world to institute a Fintech Law, to promote and advocate more fintech innovation, and, as a result, there’s an emerging open banking cluster. We’re looking to track things like that, as rules and focusses change. I suspect, coming out of the pandemic, different governments will take very different steps, when it comes to the

promotion or advocating of digital finance, as a means to allow people to carry on with their daily lives. TFM: How do you intend to keep up with the speed with which businesses can change in the world of fintech? SH: The problem with fintech data is that there’s almost no comparability. What data there is, is kept behind expensive paywalls, and it’s quite often an analyst’s view. That’s partly why we want to offer a free service where you can add yourselves to the map. We will optimise that consistently, over time, with more features. Companies will own their records and they will improve the quality of the information that’s held on there. Obviously, our team will validate the stuff that’s important, in terms of ‘is this a fintech company, is this a company that exists, and is it trading?‘, and so on. We believe that having a web presence as a fintech firm is key to a company’s success, so we are also algorithmically ranking fintech companies according to

the weight of their website, much like a Google search ranking. Fintech is a global industry, but there are no globally agreed standards or definitions of what is and what is not fintech, and, certainly, when it comes to classification within it, it’s very blurred. We currently have 14 or 15 different categories, but we will be building that out. We will keep it straightforward, so that it’s easy for the user. We are also forming a data governance council, which is a global group of academics, institutions, investors and experts on fintech. We’ll be working with them to improve and optimise the classification system, the taxonomy of fintech, starting with a very precise definition of what constitutes a fintech company. We see doing that, in parallel with marketplace representatives coming to us, as the way to create the most accurate picture, and, ultimately, a benchmark of fintech in different countries. It doesn’t need to be absolutely perfect, but it needs to be relevant, useful and usable.

TOP 5 SURPRISES OF 2020 While some of the cities and countries in the Global Fintech Index were the usual suspects in the usual places, the new ranking did reveal there had been some unexpected developments…

San Francisco beats London While both were expected to rank highly among fintech cities, it was a surprise to see them slog it out for the top spot, with Frisco just pulling ahead of the UK capital. This can be put down to the index offering a more holistic view of not just the quantity of fintechs in the area, but also the quality of the environment around them, giving the Bay the edge.

TheFintechMagazine | Issue 17

Aviv demoted 2 Tel While Israel, at #12 in the country

a dark horse 4 Lithuania’s The US, the UK, Singapore…

rankings, likes to position itself as one of the biggest ecosystems for fintech in the world, Tel Aviv itself only achieved 18th place among the cities. It may have an ecosystem that’s unrivalled when it comes to startups, but in terms of being an environment in which fintechs thrive, it clearly has more work to do.

and Lithuania. Ranked fourth among countries overall, its capital city also came in a respectable 29th – above many European capitals – demonstrating the power a smaller nation can have when it dedicates itself to building an ecosystem that encourages fintech development.

3 The city state’s inclusion in the

Singapore reaps what it sows

5 While it hasn’t reached the top 20

top four, behind San Francisco, London and New York, is testament to how government intervention can create the right environment for an industry. It implemented laws and regulations designed to make it irresistible to fintech – and it’s clearly worked.

yet (it’s currently #33), the island state of Malta made strong gains, thanks to the effort it puts into attracting fintechs and its cheaper cost base, compared to better-known fintech hubs. Malta is also seen as a springboard to other up-andcoming fintech nations, such as Africa.

Malta makes a mark

www.fintech.finance

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