Fintech Finance presents: The Fintech Magazine 20 by Fintech Finance

ISSUE 20

THE FINANCIAL CRIME

Fraud’s most wanted and the private AI Feedzai on managing risk, post-pandemic

STANDARDS

COMPLIANCE & REGULATION

Playing by new rules

SCA and the landscape beyond Brexit

20022 in ‘21

It’s time for an urgent ISO game plan YO, PAY ATTENTION!

HOWDY PARTNER MANAGING INNOVATION

Banking Circle’s Jon Levine on why you need your fintech friends

Unravelling the fintech rap battle What is it with hip-hop and tech? OPEN BANKING

Not seeing is believing

OpenPayd and Chris Skinner on smart pipes and invisible finance

INSIGHTS FROM Deutsche Bank ● Bottomline ● ACI ● Wells Fargo ● Forter ● Mobiquity ● ING

Hips ● BBVA ● Maybank ● Banco Sabadell ● Square ● Nuvei ● MYHSM ● Fronted ● PPS ● Boomi

FINTECH AWARDS

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Awards

CONTENTS

COMMENTARY 24 The making of Fintech Rap Battle: Monzo v Starling Meet the cast and crew behind a hip-hop ‘love letter to fintech’

40 A panacea for Asia’s payment challenge? Maybank and Bottomline reveal how Asia’s approach to standardisation and interoperability is turning the tide for customer payment experience

48 Values-added banking Why the head of BBVA’s new Global Sustainability Office believes banks can and should help solve the world’s biggest social and eco challenges

66 Fraud’s most wanted and the private AI Risk management platform Feedzai on why Cloud-based fraud prevention is now top of the agenda

80 SOS: Spend or save? Ron Delnevo looks back over seven decades of mounting UK household debt and asks if financial services are the solution or the problem

MANAGING INNOVATION 6 We’re in it together… Partnership working is very much on the agenda at Europe’s big banks – and that’s good news for the SMEs they serve, says Banking Circle’s Jon Levine

THEFINTECHVIEW

2021

It’s the fifth birthday of The Fintech Magazine this summer (whoop, whoop!) and, looking back, we seem to have been putting the case for fintech/ banking partnerships in every edition since we first brought our ball onto the publishing pitch. But there’s definitely been a sea change in attitudes of late; a maturity in thinking on all sides, which is touched on by virtually everyone in our section on managing innovation. There’s plenty to ponder here. Having had it brought home to us by various existential crises – notably a pandemic and the ongoing climate change challenge – that we’re all in this together. Shareholders, directors and customers of technology companies and banks are looking for a more

ISSUE #20

collaborative approach. While that may present challenges to some organisational structures – and even some individuals within them – resistance is futile. And when the idea is embraced, the opportunity to design better, more resilient (and potentially more profitable) business models would be foolish to ignore. Chris Skinner and Sophie Guibaud (p32), aren’t the only ones suggesting it could, in fact, lead to legacy banks reinventing their ‘daddy-o of finance’ role. Talking of daddy-o, secret rapper Chris (AKA Umbrella Man) is in good company this issue! Our last spine tingler, 'Banking establishments are more dangerous than standing armies', was a quote from Thomas Jefferson.

Sue Scott, Editor

12 All for one, one for all Societe Generale’s open approach to innovation redefines what a ‘core banking system’ is

15 Forging ahead Mobiquity and ING on the importance of methodology and organisational structure in creating great ideas

18 Innovating out of a crisis When it comes to solving problems, Square (literally) wrote the book on it! So it wasted no time coming up with solutions during the pandemic

20 The data diggers Boomi pioneered the concept of the integration platform as a service... but if you want to bring the data pieces together, you first have to find them

22 A friend in need Banco Sabadell’s corporate venture arm and innovation hub demonstrate how legacy banks can be supportive partners to fintech collaborators www.fintechf.com

Issue 20 | TheFintechMagazine

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CONTENTS

OPEN BANKING

CLOUD 45 The third-party piece

30 A big opportunity for small business Open banking is beginning to transform the back office for SMEs, but providers need to get their messaging straight, say YTS and Zilverline

MYHSM and Hips discuss the impact of Cloud-based managed services on compliance

COMPLIANCE & REGULATION 51 In banks we trust… G+D’s Jukka Yliuntinen believes banks could become the gatekeepers to our most valuable data

32 Everybody wants to be a bank The desire to bury financial services in everyday life is being enabled by ‘smart pipes’, prompting a wave of quasi ‘banks’. Fintech commentator Chris Skinner and Sophie Guibaud from OpenPayd, consider what it means for real ones

54 Safe journeys Mastercard’s Mike Cowen discusses the roll-out of SCA, EMV 3DS (aka 3DS2) and what Click to Pay adds to the picture

57 Hot to shop Despite international travel bans, the UK remains the shopping destination of choice for millions of JCB cardmembers in Asia – and multi-factor SCA won’t put them off

34 An invisible force The power of financial services will only be truly realised when they are distributed through the ecosystem, impacting people’s lives without them even realising it. Belvo, Chubb and HUBUC are three companies on that journey

60 Conquering the complexities of 3DS Visa, Nevei and Forter put forward three experts at the coalface of change to explore the impact EMV 3DS, aka 3DS2, will have on the European payments industry

37 Opening doors How open banking-driven platform Fronted is making it easier for the UK’s four million renters in private accommodation to move on

63 Rules of the game

STANDARDS

70 First step in a new future for payments The ISO 20022 messaging standard will create a common language for banks and financial institutions; ACI Worldwide and Wells Fargo discuss the innovations that could flow from it

73 You got the message? The payments industry is about to be united behind a single standard, but it means big changes. Deutsche Bank and Bottomline urge banks to migrate sooner rather than later

77 Beyond ISO 20022 The enriched data that will flow from compulsory adoption of the messaging standard will be a ‘protein boost’ for AI, says SmartStream

2021 EVENTS 82 Self-service banking conference goes global Europe, Asia… and now the Americas. RBR plans a truly one-world event for our time

A financial regulation lawyer and a payment services provider give their perspectives on the challenges, and the opportunities, created by regulators in Europe and the UK

THEFINTECHMAGAZINE2021 EXECUTIVE EDITOR Ali Paterson

US CORRESPONDENT Jacob Bouer

EDITOR Sue Scott

ONLINE EDITOR Eleanor Hazelton Lauren Towner

ART DIRECTOR Chris Swales

PHOTOGRAPHER Jordan “Dusty” Drew

SALES TEAM Chloe Butler Tom Dickinson Karen Estcourt Serena Khemaney Shaun Routledge

VIDEO TEAM Lewis Averillo-Singh Laimis Bilys Lea Jakobiak Daryl Kotze Douglas Mackenzie Laura Raimondi

FEATURE WRITERS Hannah Duncan ● David Firth Tracy Fletcher ● Martin Heminway Natalie Marchant ● Sean Martin Martin Morris ● John Reynolds Sue Scott ● James Tall Kiara Taylor ● Frank Tennyson

ISSUE #20 Fintech Finance is published by ADVERTAINMENT MEDIA LTD. Pantiles Chambers 85 High Street Tunbridge Wells, TN1 1XP

IMAGES BY www.istock.com PRINTED BY LA Printers Ltd "PROUDLY NOT ABC AUDITED"

All Rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, photocopying or otherwise, without prior permission of the publisher and copyright owner. While every effort has been made to ensure the accuracy of the information in this publication, the publisher accepts no responsibility for errors or omissions. The products and services advertised are those of individual authors and are not necessarily endorsed by or connected with the publisher. The opinions expressed in the articles within this publication are those of individual authors and not necessarily those of the publisher.

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Issue 20 | TheFintechMagazine

MANAGING INNOVATION: SME BANKING & PARTNERSHIPS

We're in it together...

According to a recent White Paper from Banking Circle, partnership working is very much on the agenda at Europe’s big banks… and that’s good news for the SMEs they serve, who are desperate for better, cheaper financial services as they struggle to hold up the economy, says Jon Levine “Small business is both the Holy Grail of the banking market and also its biggest challenge,” says Jon Levine, co-head of institutional banking at Banking Circle, the payments bank.

There is an argument, of course – levelled by many SMEs and the organisations that represent them – that they’ve been left at the bottom of the list when it comes to legacy institutions updating their banking services in the UK and Europe. Perhaps because, until recently, SMEs had nowhere else to turn, but to them. That is no longer the case. Even before the pandemic, which many see as a tipping point in alternative financial services provision for SMEs, a key indicator of small businesses’ loyalty to traditional banks showed signs of strain. According to an Organisation for Economic Development and Co-operation (OEDC) report in 2019, bank lending to SMEs in the UK remained flat in nominal terms over the previous 12 months, while finance from alternative sources, such as P2P business lending and P2P invoice finance, rose markedly, albeit from a small base. The following year's pandemic forced the UK government and others to engage with challengers to deliver recovery programmes for SMEs, bringing many business owners into contact with what were once ‘alternative’ and are now increasingly mainstream providers of financial services for the first time. Challenger Starling Bank, which currently has less than five per cent of the SME market but has worked hard at

TheFintechMagazine | Issue 20

creating a marketplace of integrated third-party services for small businesses, predicts that the pandemic will help accelerate its share to nearly 20 per cent in five years... and that’s just one bank. A raft of other niche fintechs and paytechs have started to unpick banks’ relationships with SMEs, offering alternative services and a toolkit of useful plug-ins, made possible in many cases by open banking. Now, according to Levine, these providers are very much in banks’ sights – not as rivals, but as potential partners to deliver payment services in particular.

Many an SME owner or manager would tell you they still don’t have the banking experience that they aspire to. But, to be fair, many banks would tell you the same thing; that they’re still working hard to get it right SME payments have tended to be very expensive; they don’t have the volume to leverage discounts that large firms with purchasing power enjoy. That is changing, although probably not fast enough. “I think many an SME owner or manager would tell you they still don’t have the banking experience that they aspire to. But, to be fair, I think many banks would tell you the same thing; that they’re still working hard to get it right,” says Levine.

The genesis of Banking Circle was never as a rival to financial institutions. Instead, it set out to provide them with a non-competitive, shared payments resource – a new infrastructure to speed up delivery of services to their accountholding customers, while lowering the total cost of ownership for innovative solutions to some very persistent problems. “Our mission is always to enable other financial institutions to serve the end customer,” says Levine. “It’s the way we’re set up. It’s in our DNA. So, we’re never banking the last mile. We’re never KYC-ing an SME; we’re never facing them. Rather, we’re serving their banks, and their fintech providers, with the services to allow that bank, or other financial institution, to provide them with a great customer experience.” One of the solutions it’s providing is to help clients tackle the adoption of new instant payment schemes for businesses. Much still needs to change before real-time payments become more widely adopted for corporate use, especially for business trading across borders. For many banks, it comes down to addressing the inherent legacy systems on which their operations are built. For example, there are often issues connecting banks’ front end, what the customer sees, through to the instant payment schemes themselves. Managing liquidity by bank treasuries outside of normal working hours is another issue, and the dreaded payment repair queue – where a payment issue prohibits straight-through-processing – can diminish the benefits of instant payments.

www.fintechf.com

An ally, not a rival: Partnership is in the company’s DNA, says Levine

BIOGRAPHY

Jon Levine joined Banking Circle in January this year, in the role of co-head of institutional banking, having previously worked at Standard Chartered where he was most recently managing director and head of UK banks, brokers and fintech client coverage. Levine graduated summa cum laude from Washington University in St Louis, USA, with a degree in economics.

www.fintechf.com

Issue 20 | TheFintechMagazine

MANAGING INNOVATION: SME BANKING & PARTNERSHIPS

Investing in a partnership: How a bank or PSP goes about it, depends on the business model

The need is urgent to make instant payments for corporates a top priority, not least because they always have funds tied up in the payments system. That means vast amounts of cash that’s inaccessible and unusable. For large companies, that adversely impacts working capital metrics. For smaller companies, the issue is much more critical. A delay in cash flow can have far more significant consequences. “You have to find new methods and tools that haven’t been used in large scale before. That’s exactly what we are doing,” says Levine. It’s using that technology approach to lower the cost and improve the experience for both banks and SMEs involved in cross-border payments to address a structural problem with correspondent banking. A recent Banking Circle White paper, Better Business Banking: Collaborating For Success, showed that, at the majority of banks interviewed, at least half their small business customers required international payment services. But, on the whole, experience of the service has been slow and expensive to provide and to use. According to a McKinsey study, the cost of making a cross-border payment for a bank is around $25 to $35 for each transaction – a high burden, particularly amid competition from new, nimbler entrants offering lower-cost options. “There are bits of correspondent banking

TheFintechMagazine | Issue 20

that, historically, have been expensive, unpredictable, and slow, but it doesn’t have to be that way,” says Levine. Worryingly, some major banks have derisked by pulling out of correspondent banking geographies, or been removed from the network because the volume of payments they handle doesn’t justify them having a place – all at a point in time when businesses and consumers are wanting to transact abroad more than ever. “So customers of those banks now face an extra processing delay because their banker didn’t send enough payments to the global correspondents to stay in the system. That’s something we can fix. If you can get banks plugged back in, closer to the infrastructure, it speeds up the overall

If someone is going to spend time investing in a partnership, they want to know what they’re getting out of it. In our discussions with banks, they’re very focussed on customer outcomes, revenue potential, and the nuts and bolts of how it’s going to work

payment journey for customers,” says Levine. “The closer you are to the central clearing infrastructure, the faster your payments are going to get settled. And so, as a firm, our ethos is to be as close to the clearing system as possible and, generally, to join the relevant clearing systems that matter to our customers – we have an articulated strategy around joining currency systems as direct clearing members. Then you can look at the way they process and handle payments. There are going to be, for example, false matches on Office of Foreign Assets Control (OFAC sanctions) lists that have to be resolved. Do you resolve those in four hours, or four days? What I’m saying is, there are things that can be done to speed up the process.” Partnerships such as the ones Banking Circle has forged with hundreds of financial institutions, Levine argues, can improve the bottom lines of institutions by, for example, bringing new products to market quickly. It also gives a competitive edge – or at least keeps them in the race – against others that set out to exploit a weakness in legacy banks’ product offering. ”If a partner has the product ready to go, your time to revenue is going to be much faster than if you start from scratch and build it in-house,” says Levine. And that accelerated product delivery – of everything from better payment solutions to accounting services – motivates SMEs in particular to stay on board. www.fintechf.com

MANAGING INNOVATION: SME BANKING & PARTNERSHIPS Interestingly, the White Paper survey involving 300 senior decision-makers at banks and payment service providers (PSPs) across the UK, the DACH and Benelux countries, revealed that, for most, working with third-party service providers already formed a key part of their business planning. Half of them had partnerships in place or planned to work with an external provider within the next month. A further third had partnerships on the agenda over the following 12 months. In total, 80 per cent had either partnered with an external provider for services including payments, FX and trade finance, or planned to do so soon. As Mark McNulty, head of payments and receivables EMEA at Citi, pointed out in a recent Banking Circle webinar: “Banks don’t need to be present themselves in 40 countries to offer payments services in 40 currencies to their clients. They can clearly partner with others to leverage other networks and capabilities.” The White Paper findings revealed that ‘collaboration is no longer a novelty’ and the shift towards partnerships has become more pronounced due to COVID-19. And there are a number of strategies to choose from, says Levine, from a straight-forward supplier relationship to something a lot more strategic.

institution, the large institution benefits from the resource and the expertise that the fintech brings.” That ‘symbiosis’ as he describes it, could be seen playing out in the SME banking market when Spanish giant Santander splashed out £350million in 2019 to acquire a 50.1 per cent stake in Ebury Partners, a UK provider of corporate banking services to SMEs that trade internationally. Ebury, which operates in 19 countries and 140 currencies,

TheFintechMagazine | Issue 20

Serve one, serve all Banking Circle announced last month that it would be working with the Netherlands' PSP Online Payment Platform to provide a fast payment solution for around 170

Best intentions: Banks are serious about improving services to SMEs, says Levine

There is a debate within the banks, about what do they build, how do they partner, what do they buy, and that’s playing out across institutions in ways that best suit their business model “There is a debate within the banks, about what do they build, how do they partner, what do they buy, and that’s playing out across institutions in ways that best suit their business model. “One approach is to just go out and negotiate a commercial contract, terms of a service, and proceed. And, in fact, that’s how we normally work with banks. But there are different models that we see in the market, including where a bank will take an ownership stake in a fintech, usually a minority stake. It tends to happen with slightly earlier stage fintechs: it benefits from the capital of the large

share a resource. Such services are usually doing the heavy lifting for banks in some fundamental area of the business. The collaborative approach works best ‘when there’s some expensive component that has to be built’, says Levine.

has processed £16.7billion in payments for its 43,000 clients trading across Europe and the Americas. For Santander, it was a turnkey solution to the problem of servicing SME customers fairly and competitively. “If someone is going to spend time investing in a partnership, they want to know what they’re getting out of it,” says Levine. “Certainly, in our discussions with banks, they’re very focussed on customer outcomes, revenue potential, and the nuts and bolts of how it’s going to work.” There are cases – as indeed with Banking Circle itself and, recently, with Cloud payments platform Form3 in which Lloyds and Nationwide both have an interest – where banks are happy to

marketplaces that it runs in Europe. OPP is currently expanding into the UK and France, so having access to multi-currency accounts offered by Banking Circle, as well as its virtual IBAN solution, making it quicker and easier to allocate received funds to merchant accounts, made a lot of sense – benefiting not just OPP but each individual SME trading over a marketplace. It illustrates how a partnership model ultimately helps the financial services providers supporting those small businesses working on often tiny margins and frustrated by slow and expensive financial infrastructure. As Levine says: “It enables them to grow overseas, or to grow domestically, when their banks serve them well.” www.fintechf.com

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MANAGING INNOVATION: CORE BANKING

All for one, one for all! Societe Generale’s open approach to innovation redefines what a ‘core banking system’ is, says its Head of Execution Platforms Sohail Raja

It’s easy to generalise about digitisation and incumbent banks. Their technology spines bowed by legacy and their attitudes shaped by a culture that belongs to an analogue age, they were slow to adapt, which opened the doors for fintechs to steal their lunch. At least that’s the received wisdom. But these venerable Leviathans aren’t ready to be put out to pasture just yet. Societe Generale, for one, began taking an inventory across all its complex business divisions about five years ago, to see how innovative it could be in making the digital max of what assets it already had. And what it hadn’t, it now creates from in-house development, through partnerships, investment in start-ups and buying in services – or, indeed, the companies that provide them, as it did with banking-as-a-service Treezor in 2018. This is one grande dame of French banking – a member of the industry’s respected ‘trois vieilles’ – whose best years are definitely ahead of her, according to head of execution platforms, Sohail Raja. “We aim to be very smart in our approach. We examine our resources, our budget, our skillsets, what the client wants, the use cases that result, and ask ‘is it deliverable?’,” he says. “Given our size and history, we have a lot of assets internally, so we think about reusability and repurposing. Moving away from silos is vital. What has one department done that can be reused by others to avoid needlessly starting again from scratch?” A good example of how it answered that last question was making the bank’s internal platform for uploading customers’ documents to a central server available to corporate clients, including

TheFintechMagazine | Issue 20

payments companies and other fintech providers, in 2019. “For that type of thing to happen, we must have an internal ecosystem culture where staff share great ideas and share news about solutions to problems,” says Raja. “It needs to be documented well, so there's the potential for extending it to other uses. You can’t just have a technology solution without the ways of thinking adapting, too.” While no one expected the bank’s Transform To Grow strategy – which has been in place since 2017 – to change the organisation overnight, it has allowed the bank to ‘refocus what we do in-house to make something happen’, says Raja. “If we look at fintechs in the B2C space, the way they deliver and offer solutions to clients is very fast. But that capability is available not just to fintechs or challenger banks, it’s also available to incumbents. By focussing on use cases, rather than just thinking about three- or four-year timelines for programmes of work, we too can make things happen quickly. “It’s about getting that balance right, between the use of technology and understanding that we are in a culture and environment that’s been around for more than 150 years.” Founded in 1864, SocGen has 30 million clients, 133,000 staff and operates in 61 countries. It is majorly focussed on corporate and investment banking, but also runs a retail banking division in France and an international banking and financial services business. A step change in its core banking approach came with the introduction of SG Markets, a single platform to which it is currently migrating all customer access to its wholesale banking services. SG Markets gives both clients and staff one user-friendly platform over which they can manage the myriad of services that lie beneath – a one-stop shop for everything from cash management, financing and security services, to global markets and private banking. Given its huge span, the platform is constantly evolving, but its cornerstones are Cloud

computing, systems linked by application programming interfaces (APIs), and use of opensource solutions. Ultimately, the platform will run across all SocGen’s geographies and banking businesses, taking into account regulations in each country, so clients everywhere receive a similar experience. The programme does not mean ripping out legacy systems, but rather adapting existing tech that can still fulfil a role, and networking it with new or externally-provided systems beneath the SG Markets interface. The end game is to render transactions, such as payments and simple investments, almost invisible, leaving SocGen staff and the bank’s clients to focus on giving and receiving added-value advice and complex services. Having both the bank’s clients and staff use the same system vastly improves efficiency and customer service, says Raja. “What we wanted to ensure was when the client interaction is ongoing – whether that be sales, support or operations – whoever the touchpoint is within the organisation sees the same information that the client sees. It’s important that whatever we offer to clients is also made available to our employees to make the relationship more effective.”

THE NEW ‘CORE’ When it comes to product and systems development – be it customer-facing or middle and back office – the bank takes a pragmatic approach, assessing what can be delivered in-house, and what is better provided by a third party. That confluence of intrapreneurship and external partnership is redefining what a core banking system is – and not just at SocGen, says Raja. “I think the language around core systems is changing; around what’s the right solution for the problem we need to solve, and what the use case is,” he says. “It may be that a fintech provider is offering a Cloud solution related to regulation, for example, meeting rules from a regulator that affects the whole www.fintechf.com

industry. And if it’s something that can be used by other banks as well, why not? “We have our own API integration with fintech partners if that solves a challenge we are facing, but we’re not just inward looking. We use opensource toolkits and frameworks. It’s important to be plugged into an ecosystem of some description, and then being smart around those partnerships and investments.” When it comes to adopting Cloud-based solutions, Raja says the first driver is often cost, since it can be cheaper initially, while offering the flexibility to scale. And, since Cloud computing is a cross-sector phenomenon, it also presents opportunities to collaborate and integrate systems with partner firms and clients. He says: “Clients are also moving towards Cloud. They also approach it from a cost-reduction perspective, and because it makes sense as regards their own digital transformation challenges. In addition it allows them to integrate, to interact with other providers and data sources, in particular. So, having that available in the Cloud, and then delivering via an API, or through another mechanism, to a client, is something that we’re seeing a lot more. “Using that Cloud infrastructure enables and accelerates collaboration and co-creation of ideas and product solutions. Partnership is easier with such a framework. It helps with

the interaction of data, analytics, developing pricing, developing ideas. With SG Markets, for example, we can cater for clients who simply want to take services from us, and also those with more sophisticated needs who may want to take data and price ideas from other providers, and then build their own models. Either way, we can support them, and the Cloud has enabled us to do that.” SocGen’s digitisation programme and collaborative approach also serve to empower the bank’s subsidiaries, such as the French challenger bank Shine, which provides services aimed at

It’s important to be plugged into an ecosystem of some description

Vive la difference: Openness and collaboration are at the heart of SocGen’s strategy

www.fintechf.com

freelancers and small companies, online retail bank Boursorama, and blockchain services provider Forge. SocGen is a member of trade finance consortia We.trade and Komgo Alliance, which both run on blockchain rails. And in 2019, it launched Societe Generale Ventures, a €200million start-up investment fund for e-commerce, e-payments, open banking and SME services. Meanwhile, its Open Innovation platform connects more than 30 of the group's innovation leaders with start-ups in those same areas, as well as credit, global markets, real estate, insurtech, cybersecurity and regtech, blockchain and cryptology. It was a founding member of Le Swave in Paris, a co-working space devoted to the incubation of fintech and insurtech start-ups. Collaboration works both ways. For example, ownership of Treezor allows SocGen to share the platform’s API expertise, while the bank guides Treezor in matters of global compliance. Indeed, Treezor chief executive Eric Lassus has said: “Our relationship with the bank goes beyond what Societe Generale can do for us – we also ask ourselves what we can do for Societe Generale.” The bank is already building services and products based on Treezor tech. The progress SocGen had already made with digitisation put it in a strong position when COVID-19 struck in 2020, allowing the bank to quickly switch to remote working in business areas where data was less sensitive and regulation allowed. “We were better placed because we already had our SG Markets platform up and running,” says Raja. “We had started that process to be more transparent [with data]. It’s not been achieved yet across the whole organisation but the last year has got everyone really focused on this now.” e 20 | TheFintechMagazine

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MANAGING INNOVATION: ORGANISATION

Forging ahead Stephan Hartgers, VP of Digital Strategy at Mobiquity, and Lieven Haesaert, Global Lead for Innovation Transformation & Management at ING, discuss the importance of methodology and organisational structure in creating great ideas Innovation, by definition, is never ‘done’: it’s an endless quest to do better, do different, and do right. When it comes to digital finance, Dutch banking giant ING has been on that innovation mission for the better part of five years, with notable success: it was named western Europe’s most innovative bank in 2020 and its ING Ventures €300million fintech fund, which currently holds more than 30 investments, was awarded most active fintech Corporate Venture Capital fund in Europe. The ING Labs, in Amsterdam, Brussels, London and Singapore, have so far been responsible for open banking platform Yolt, the multi-bank portal for corporate accounts, Cobase, and bond analytics platform Katana, while working on a host of other, internal solutions that might yet also find a commercial future outside of the bank. But it still felt it could improve. ING recognised there were roadblocks, constraints to idea generation and realisation, within the existing organisational structure of the bank. So, in October 2020, it announced that its multiple innovation programmes were being rolled into a single, independent business unit: ING Neo. It will ‘create space for breakthrough innovation’, as Annerie Vreugdenhil, previously lead for Wholesale Banking Innovation, who moved across to head up the unit, has described it. ING Neo will be focussing (as in fact the bank did www.fintechf.com

before but perhaps in a more fragmented way) on ’value spaces’: where it can improve client experience of its services, specifically around housing, lending, trade, financial health and compliance. Stephan Hartgers, VP of digital strategy at Mobiquity, a ‘full-service digital transformation enabler’, which has worked with banks across the world in helping them manage their approach to innovation, takes his hat off to ING’s achievements so far. And the new organisational approach is, he says, a mark of maturity in this space. “Banks saw the opportunity to jump on the innovation management cycle and be competitive against the challengers, in order to stay relevant for the future, as well as securing future revenue streams,” he says, but now they need to take a more structured approach. He’s seen three trends emerge in banks’ innovation strategy: optimisation of current banking practices, evolution and adoption. “Maybe the innovation factory [in a bank] started by collecting all the random ideas that were floating around the company and putting them on a list. There would be hackathons, or boxes where employees could submit their ideas. That was just the first iteration of idea generation,” says Hartgers. “What we see now is a strategic framework emerging. There can be

tools or concepts applied – the innovation thesis – that really sets out where to innovate and where not to. Then the concepts become much more targeted on where a clear potential to disrupt exists – what ING calls value spaces. That’s where to play, how to win. At this stage, there is more investment needed; otherwise, the pipeline of ideas will dry up and your innovation factory comes to a halt. “Where investment was initially made into understanding the concepts – around user validation, prototyping and building minimum viable products (MVPs) – now those ideas need to be proven to be able to generate value. And if it has value for the customer, it also has value for the organisation,” says Hartgers. At this stage – building them into products that generate the value that’s been promised – other people and other capabilities are needed. The journey through this innovation funnel can be hazardous for ideas – it’s meant to be a testing process, after all. But life can be just as dangerous for those that are safely delivered from it and make it through to the final stage – adoption. This is where they need careful nurturing. And it’s a lesson ING learned the hard way. “You can spin them back into the business; but sometimes you spin them in too fast,” says Lieven Haesaert, ING’s global lead for innovation transformation and management. Issue 20 | TheFintechMagazine

MANAGING INNOVATION: ORGANISATION “They’re still too small. It’s not because they don’t work, or don’t address a customer need in an agile way. They fall off the table, because there was something more urgent to be done, and, before you know it, the idea is floundering. “It’s one of the key reasons for setting up ING Neo as a separate business area with its own profit line, specific IT risk and HR policies – so those businesses can scale.” For a bank operating in multiple territories, scaling ideas, not just from concept to implementation, but across the organisation, can be a big challenge. DealWise, a popular retail cashback platform developed by Haesaert’s colleagues in Romania, couldn’t realise its full potential for the bank because there wasn’t the organisational structure to replicate it in other parts of the world.

The first thing managers at the top are looking for is ’how can we de-risk the project?’. That’s counter-productive to innovation methodology Stephan Hartgers, Mobiquity

“One country unit wouldn’t scale it for another. So we took it on, to scale it in a separate business area where we could apply different policies,” explains Haesaert. DealWise launched in Germany, and became the platform that powers the Deals+ in Belgium, this spring. Another shift in ING’s innovation management is seeing the potential in former rivals to be friends: “It’s not always the other bank that is our competitor out there,” observes Haesaert. Cobase, for example, was spun out as a consortium initiative. The multibank platform solution, providing a single point of access for corporate customers, operates at arm’s length from its main shareholders (ING, Nordea and Crédit Agricole) after ING concluded that it wouldn’t make any sense to scale the initiative on its own. Belgium’s digital identity service, Itsme, is another that demanded cross-industry co-operation. ING partnered with other banks as well as telcos, in this case, to bring forward the app, which replaces multiple

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passwords and security tokens with a single virtual token and PIN for accessing a range of banking and non-banking services. Fintechs are also valued, not just for their technologies, but as potential partners. “We have an active fintech scouting team,” says Haesaert. “We ask ourselves how we can use those fintech propositions and embed them into our core. Banks should be a bit more like car manufacturers. We should become the assemblers of components that somebody else has made.” In a big bank, there is often an institutionalised incompatibility between innovators on one side – the passionate individuals feverishly generating great ideas, but who have no idea how to build them into a business – and executives and directors on the other, who must sign off investment in the idea for it to scale further, or strangle it in infancy. As Stephen Hartgers observes: “The first thing managers at the top are looking for is ’how can we de-risk the project?’. And that’s almost counter-productive to the whole innovation methodology.” Mobiquity’s job, in part, is to resolve those internal business frictions by looking at the organisational alignment; the way products are ideated and developed. There’s no point having a rapid methodology for market testing and ideas analysis, for example, if it’s going to take 10 weeks for decision-makers to green-light the next stage. “It’s not guaranteed that all the board members understand the concepts that we are accustomed to within these innovation hubs, like the methodology of agile for decision-making,” says Hartgers. “Innovation is all about speed, so anywhere you lose it, there’s opportunity to improve the process.” Mobiquity conducted research into how banks in the Netherlands were organising their digital innovation and came up with two broad conclusions. “The first is that if the motivation for innovation isn’t aligned across the bank, it’s very hard for the teams to come up with ideas that get approval at board level. The second is, you really have to look at key performance indicators (KPIs) to drive the right behaviour, both across the innovation hubs and the business that’s going to adopt the innovation – KPIs to manage risk, for example,” says Hartgers. So, what are the key takeaways for generating more speed and less friction in the innovation management process?

“New business models, disruptive innovation… don’t do that in the core. People will need to de-risk it to the degree that they’ll lose the opportunity of what they are trying to do. So, they need to do that separately,” says Haesaert. “They also need to know why they are innovating. Agree the area where there’s a big opportunity or a big threat. That’s the concept of our value spaces. We have one around disruptive lending, for example, because there is so much happening in the lending sphere, from crypto, to the front end, to AI. The bank realises this is something we need to own, so ING Neo has the mandate to go all-out on disruption. “Another error we see people making is that they don’t fully understand the customer problem before they start thinking about the solution – even building the solution. In our governance – not only in the labs, but also in the core business – we try to avoid this jumping to conclusions, by requiring teams to do their homework first. Understanding the problem requires discipline from the user experience design and customer journey experts, tribe lead, but also the executive member that has to sign the cheque.

The error we see people making is that they don’t fully understand the customer problem before they start thinking about the solution Lieven Haesaert, ING

“Finally, try to make it a repeatable process. Innovation isn’t about having one lucky big shot, although we all hope we find that unicorn; it’s about methodology, leadership, governance and organisation.” For Hartgers, banks should ‘learn by doing, adjusting what is not working in the innovation process’. “If they enter a stage where it’s not clear who is facilitating the next step or they are not taking care of the approvals fast enough, maybe that’s what needs solving. So, also dig into problems in the innovation management cycle and come up with pragmatic solutions.” In other words, apply the concept of innovation management to implementing innovation management! www.fintechf.com

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MANAGING INNOVATION: COVID-19

Innovating out of a crisis

When it comes to solving problems, Square [literally] wrote the book on it! So it wasted no time coming up with solutions to challenges during the pandemic, says Kaushalya Somasundaram, Head of Payments Partnerships & Industry Relations at Square UK We all think we know what ‘innovation’ means, but do we… ? Four-sided ‘wheels’ to pull carts (squeels, perhaps?) would have been an innovation if some bright spark hadn’t struck on the idea of scaling up a potter’s wheel – and only then after potters had been watching them go round for 300 years. The point is, what’s the use of developing something new, if it doesn’t fulfil a real need? In business terms, innovation is often incremental: identify a problem, solve it and address the next one that becomes apparent as a consequence of the problem you’ve just fixed. At least, that’s the embodiment of the approach taken at Square, the financial services and digital payments company. The brainchild of Twitter co-founder Jack Dorsey and multi-entrepreneur (and professional glassblower) Jim McKelvey, who wrote a book on it, Square was born in 2009 to solve an issue encountered by McKelvey, namely that he was unable to complete a $2,000 sale of his glass products because he could not accept credit cards. To put it simply, small businesses like his, often not on the high street, needed mobile payments but there were too many obstacles in their path. Square’s first product was the Square Reader, which accepted credit card payments by simply connecting to a mobile device’s audio jack. Previously, credit card machines would only work with grounded connections, but this innovation allowed merchants to break free of outdated technology and trade wherever they wanted to, for a transaction fee of 2.75 per cent. That solved their problem but the format didn’t work for all businesses. So, next came the Square Register, a product

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launched in 2017 that transformed the iPad into an all-singing, all-dancing point-of-sale device. From handling $1billion in annual micromerchant payments via its phone Reader, Square entered the restaurant space and sales of $12billion followed. It now offers services such as a dashboard, employee management and payroll, each addressing a problem for its customers that became evident as the business evolved. But then came the biggie. A year after the pandemic redefined our concept of what a problem is, Square produced a report for every country it operates in, highlighting the impact of the crisis on merchants and its own operations. In the UK, it showed the number of businesses accepting online payments with Square had nearly doubled; at least 40 per cent of businesses giving up using cash altogether in just 12 months. The pandemic clearly wasn’t something in Square’s gift to solve; but its methodology meant there was a clear course to take. In an interview he gave about his book, The Innovation Stack: Building An Unbeatable Business One Crazy Idea At A Time, published just as the pandemic took hold in 2020, McKelvey reflected on the huge difficulties created by a global health crisis. “Most of the world-class CEOs I studied for the book were thrown into horrible situations and figured out how to thrive... they woke up in a burning city quite by accident and somehow figured out how to deal with it. “That’s what we need to do,” he said. Small business owners have been dealing with that ‘burning city’ scenario over the past year, resulting in – through necessity – digital transactions becoming the ‘new norm’.

Square recognised the problems yo-yoing restrictions and uncertainty surrounding COVID-19 created for merchants, and responded, during 2020/21, by introducing new hardware and software solutions across its territories. Notably, there was Online Checkout. Rushed to market so that businesses suddenly finding themselves having to trade remotely, could, it allows sellers to accept payments by sharing a simple social link. “We focussed on bringing new tools to the market so that merchants could continue to run with the changing guidelines that were imposed by the Government, initially, and then changing customer preferences,” says head of payments partnerships and industry relations at Square UK, Kaushalya Somasundaram, who joined the team at the start of the crisis. “Shoppers have preferred to limit their personal contact, so accepting digital payments has become essential for merchants. Payments through our Square Online Store [which allows merchants to build an online store for free] increased five-fold at the start of the pandemic. And, since last April, we’ve seen a 15-fold increase in digital payments compared with January. That’s, a massive, massive increase,” says Somasundaram. The majority of businesses have maintained their new modus operandi, which, incidentally, has also been good news for Square’s Cash App, a peer-to-peer payment application that is linked to a debit card or bank account and allows for direct payments to and from individuals and businesses. “It’s fascinating to see businesses pivoting to adapt to a new world,” says Somasundaram. “We’re now seeing www.fintechf.com

sellers selling to customers who have themselves moved to the new way of purchasing. Many businesses feel that online businesses are more accessible to customers, as well as being more convenient for themselves.”

RISE OF THE OMNISELLER In July 2020, Square integrated On-Demand Delivery to its Square Online Store for sellers to dispatch a courier through delivery partners for orders placed directly on their websites – another quick solution to the challenging environment in which retailers found themselves. That doesn’t mean Square is moving away from its roots in communities of small, face-to-face retailers. Rather, it sees more of them taking an omnichannel approach, says Somasundaram. “Let me give you an example. One of our sellers, Mrs Mac’s Sweet Treats, is a cake shop based just outside Milton Keynes, UK. When they started the business, they were only selling from a small shop in the local community. At the start of the pandemic, around about April, they went online, and within the first five minutes of going online, they took something like 300 orders. Now they are delivering to customers nationally. This is just one story of how the landscape has changed.” A Square In-App Payments software development kit (SDK) was recently added so that merchants don’t even need to use its Readers to take payments via Square. The addition of in-app mobile payments to the Square platform, gives developers access to a complete, omnichannel payments solution, allowing sellers to manage payments in-store, via mobile and online in one place. Together with improvements to its Cash App, it’s an example of incremental innovation that doesn’t just solve a problem for merchants, but also advances any ambition Square might have to rival payment platforms that don’t have the same solid relationship with bricks and mortar merchants that it enjoys.

mandates that sellers in the UK and Europe use two-factor or multi-factor authentication to double-check a customer’s identity when required by a card issuer. The danger, of course, in introducing another step to a purchase process, is that, if you complicate the transaction, customers will talk with their feet and leave the online checkout. Somasundaram says Square has taken this challenge of balancing compliance and customer satisfaction in its customary, ‘can-do’ stride. “It’s a really well-intended regulation to make payments more secure and reduce fraud. So, with that in mind, the experience is something I feel players in the payments industry should be able to solve. Right? And I’m confident we’ll make it more seamless, and more secure. One way to do that is to make use of the PSD2 exemptions that are available for us in maintaining the low-risk threshold. So, we have to strive to get the risk thresholds lower, but through that, one can very intelligently leverage the transaction risk analysis (TRA) exemptions and therefore reduce the friction. We are also looking at biometrics and other frictionless authentications, to meet the SCA requirements. Tokenisation, for example, is one way of ensuring that we can get the delegation authentication right.” So, the company’s innovation pipeline has been pumping overtime to keep businesses alive during the pandemic, and Somasundaram says it has one, clear aim. “Everyone should be able to participate in the economy, and every merchant should have access to the same tools and services,” she says. “For us, that means trying to bring true

innovation to all merchants, regardless of how big or small they are. So, all of our products are opensource, in particular opensource software, and we continue to support open technologies. Most recently, we launched our In-App Payments SDK, and our App Marketplace, which has been around for a while, again demonstrates our commitment to giving sellers choice. “We strongly believe that any platform must reflect the variety of experiences and verticals that sellers are offering and operating in. It’s not just a one-size-fitsall. And, in the UK, we are really excited by the fact that we have more than 80 technology partnerships, with some best-in-class companies. All of this follows a principle of meeting the diverse and specific needs of sellers. “We innovate to make the payments experience seamless, giving our sellers choice and flexibility. This has been, and will continue to be, our key driver.”

‘CAN-DO’ APPROACH In the UK, it isn’t just the hurdles created by the pandemic that Square’s had to overcome. Another potential existential threat for merchants was the revised Payment Services Directive’s (PSD2) requirement for them to introduce Strong Customer Authentication (SCA). This www.fintechf.com

It’s fascinating to see businesses pivoting to adapt to a new world Issue 20 | TheFintechMagazine

MANAGING INNOVATION: DATA Hidden gems: Metadata reveals where information is buried, but you can leave it undisturbed

THEDATADIGGERS Boomi pioneered the concept of the integration platform as a service... but if you want to bring the data pieces together, you first have to find them, as Chief Technology Officer Mike Kiersey explains How a bank goes about integrating technology systems in order to unify disparate data is pivotal to its digital transformation strategy, since it’s data that drives the modern bank. That can create an enormous burden on IT, having to custom code and manually transfer files containing data that needs to be accessed by different process flows – for example, when creating an omnichannel experience for customers in which both they and staff can access the same information in real time across different channels, such as mobile and desktop. And when staff dealing with those customers need to access different data silos inside the bank. We’ve all experienced the all-too-familiar scenario of an apologetic customer services team playing pass the parcel with a customer because an agent can’t see all the information required to address their

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issue. That’s where an integration platform can help. Mike Kiersey is the chief technology officer for Boomi, which provides drag-and-drop integration and data mapping for a wide range of industries, from transportation to healthcare, education to retail and many more, over its Cloud-hosted, multi-tenanted AtomSphere platform. Legacy layers of technology and related data silos are clearly not unique to financial services; they are a fact of life in any environment that’s gone through progressive digital change. When it comes to financial services, it’s often not the core banking systems that are the problem, says Kiersey. “It’s actually some of the associated services that sit around them. Some of the bigger, established banking organisations have grown up with the Roman road approach: they’ve built on top, on top and

on top of different technologies for point solutions, through multi-generations of technology change. And some of that needs to be dug out to allow a better transformation and ease of accessibility to some of those platforms today.” As a pioneer in integration platforms-as-a-service (iPaaS) – recently also made available as a pay-as-you-use service, AtomSphere Go, on the AWS Marketplace – Boomi is focussed on what might be called data archaeology… helping organisations to find where these priceless nuggets of information lie – exposing them, but not necessarily moving them. “Banks now have data in software-as-a-service-based solutions – they might have their customer relationship management (CRM) system hosted there; on-premise, such as reporting or business applications; and they have legacy. And there are a www.fintechf.com

multitude of different ways that all those connect,” says Kiersey. “With the CRM, it’s through APIs to the provider of the service, but, in the middle and backend of it, the bank is still batch processing. So, it’s picking up files, putting it through a database and then into a mainframe. We’ve got to speed up the way data moves through the chain.” However ‘smart’ a bank’s technology is, there will always be data silos, says Kiersey: “It’s the very nature of how applications have evolved, grown, been procured, because they’re solving particular business problems.” Rather than fretting about it, what banks should be focussed on is the metadata that’s attached to the information – the clues to its origin, content and location. “Using metadata is a better way to search, connect and then deliver new experiences, without moving the data itself,” says Kiersey. “It’s just referencing where the information should come from, which allows those data pools to be used effectively.” That includes erasing it, if requested, under the General Data Protection Regulation (GDPR) – how, after all, can banks comply with a key tenet of the regulation, the right to be forgotten, if they can’t say with certainty where every trace of a customer’s data is? Many, he suggests, are paying lip service to privacy-by-design, because they don’t have a strong governance policy in place for the management of data lineage – the up-to-date filing of metadata, which avoids the misnaming, poor record keeping and duplication that leads to the most accurate files ‘getting lost among old or wrong ones’. “If you take data out of the Cloud and put it on-premise to use, for instance, it’s still in the Cloud but now you’ve also got it on-premise. So, how do you keep them in sync? Having lots of data lying all over the place obviously incurs a huge amount of cost, management overheads and complexity. So, it’s not about putting your data in one place and then pushing it down to the legacy systems; it’s how you make it easier for those systems to be able to access a myriad of different data sources with ease and simplicity.” In an increasing number of organisations, responsibility for a metadata programme ultimately lies with the chief digital officer (CDO), a role that was unheard of before a bank – America’s Capital One – created the first post in 2002. By 2012, still just 12 per cent of major organisations in the US had www.fintechf.com

CDOs; six years later it was nearly 70 per cent, as data volumes grew exponentially and companies struggled to figure out how to handle them. Nevertheless, in a survey of CDOs last year by Informatica, 88 per cent admitted that many aspects of managing metadata were a big challenge, including data discovery, mapping business glossary terms to technical metadata, and mapping data lineage, process flow and proliferation. The survey also revealed that CDOs are seriously overworked, with multiple responsibilities for supporting operational efficiency, customer satisfaction, data privacy, innovation and revenue. An iPaaS solution would, then, seem an obvious choice. Kiersey has a lot of sympathy for CDOs and he sees them as being critical to organisational change, standing as they do at the nexus between operations and IT and providing data-driven metrics to the board. “It’s hugely important that both sides (operations and IT) have a greater understanding of metadata; that they know how to leverage it, how they can apply machine learning to make it more

Some bigger, established banking organisations have grown up with the Roman road approach. They’ve built on top of technologies through multi-generations of change hypersensitive to both the employee – around what they’re doing in their job – and for us as end consumers. IT and rest of the business are not two separate functions,” he says. And when that’s acknowledged by an organisation, he’s seen ‘innovation starting to seep through quite aggressively, as it builds that common language and taxonomy around what the business is trying to achieve, and how IT can play a part in that’. To help address the wider challenges of transformation, Boomi has recently linked up with Cloud-based core banking provider Thought Machine, looking at how it can help customers move from monolithic mainframe to Cloud-native platforms.

“Those are the ones that are going to get the acceleration of speed and benefit from modern architectural practices and principles,” says Kiersey. “Then, they’ll become truly data driven, which means handling more data than they have already, yes, but they’ll be able to link it up with ease and speed so they can gain insights around user activity, what’s happening around their different product sets, and how they’re being consumed. This, longer-term investment in digital transformation will really aid the visibility of data.” While the rise of Cloud-based, composable banking, plugged into an ecosystem of third-party providers, will trigger more data that demands better management, it could also generate an explosion in the use of APIs, the mechanisms through which the data is exchanged. “One financial institution I’ve talked to recently has about 2,000 APIs,” says Kiersey. While that’s impressive, it raises similar questions around management: “Do people understand what those APIs are, where they are, what they can do with them and therefore what they really mean to their business?” he says. “Because we’re only ever going to increase complexity by using APIs, unless we have a true strategy for managing them, understanding what they mean to the business and how we’re planning to link them up across the organisation.” API complexity is a consequence of a microservices environment that Boomi is already helping some of its 15,000 customers to address through its suite of integration solutions. As the so-called late-majority of organisations, who delay adoption of innovative technology until the pioneers have deployed them successfully, get on board, Kiersey has this advice for banks: “We’ve all heard of the tipping point, where small changes ripple up; once you’re over 51 per cent, you’re into big change, then epic change. Banks need to look for those short-term wins that reduce cost, lower risk, and improve simplicity and productivity. If they take that small, baby step approach, once the value starts to be seen, confidence will manifest for the longer term. If they can do that in the right areas, where cost has traditionally been seen, they’ll start removing some of that technology debt and, over time, they’ll start to simplify the underpinning architecture.” Issue 20 | TheFintechMagazine

MANAGING INNOVATION: PARTNERSHIPS

A friend in need Elena Lázaro Azpichueta, Partnerships Manager for InnoCells – Banco Sabadell’s corporate venture arm and innovation hub – discusses how traditional banks can be supportive partners to fintech collaborators “Our first strategy for keeping up with digitisation is to accelerate alliances with third parties,” says Elena Lázaro Azpichueta, partnerships manager for InnoCells, the bank’s corporate venture arm and digital innovation hub, which has struck up more than 20 such partnerships with startups – not all of them Spanish – since 2015. “It’s not efficient to do everything by yourself; it’s better to focus on what differentiates you and partner for the rest,” says Lázaro Azpichueta. “That’s why banks are building open and collaborative innovation. At Banco Sabadell, we are creating a standardised model so that we can collaborate with third parties on an even larger scale.” The goal is to help one of the largest banking groups in Spain address three key issues: accessibility of banking services, especially for the most vulnerable

Innovation wheel: Clearly-defined partnerships can generate huge success for banks and fintechs

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customers; the rise of ‘conversational banking’; and the rapid acceleration of digital services as a result of a massive, pandemicinduced migration to online everything in the previous 12 months. Sabadell’s own active digital clients grew markedly during the pandemic – to 70 per cent by summer 2020 with more than one million by then using the Sabadell Wallet. In mid-March, the bank launched its Partnership Portal, an open-API platform for developers, initially aimed at those looking to launch payment-related services under the revised Payment Services Directive (PSD2). But the Portal also seeks to create a point of contact with partners that help to accelerate the digitisation of Banco Sabadell with ‘faster and simplified contracting processes, remote channels, capabilities for self-service, and greater personalisation’, says Lázaro Azpichueta. Essentially, the

delivery of banking solutions is where the innovation is urgently needed. Swedish fintech Minna Technologies is one of those third parties that’s helping to provide it. This year it worked with InnoCells to develop – in very short order – a subscription management service, making Banco Sabadell the first bank in Spain to offer such a tool within its app. The service provides a complete picture of all subscriptions and bills paid by direct debit and/or debit card by the bank’s customers, including to utility companies, entertainment services and insurance. It also alerts them when a subscription changes and gives them the option to cancel in a click, providing price comparisons with other offers, if needed. The first iteration took 12 weeks to develop and a follow-up, to allow customers control over all of their subscriptions and bills with Banco Sabadell accounts. The next goal is to further develop the service to give customers an overall view, regardless of which bank they set up the payments with. “Fintech companies not only provide us with learnings,

but also sometimes generate solutions faster than we can ourselves,” says Lázaro Azpichueta, “although the bank itself aims to combine customer-centric methodologies and more agile ways of working, to reduce the time needed for analysis, development and delivery of those solutions. “Since last March, we have obtained significant evidence of the results of using these two methodologies, in terms of faster time to market and better predictability.” But combining in-house and external capability is the most productive course, for both parties, she says. “What we are seeing is a lot of fintechs pivoting towards a B2B model, or B2B2C, but most of the time, they are not going directly to the customer. They have realised that a hybrid model is better, and that the banks could be perfect partners to collaborate with. That’s why I think we are only at the beginning of the collaboration between banks and third parties. Collaboration will be as exponential as the technology it’s based on.” So, how are these partnerships realised within Banco Sabadell, given the big banks’ past technical and cultural resistance to shared outcomes? “The partnerships team that I head up acts as the nexus between the bank’s reality and the third-party’s reality,” explains Lázaro Azpichueta. “Internally, we create a standardised process that enables collaboration. The departments around that unified process all have their business-as-usual, so it’s important to be really agile, and to be clear what we are going to ask them to do. “The second thing is to have a clear vision of the bank’s focus areas and look to the third-party opportunities that can really impact those areas. You gain buy-in from management by giving them real metrics that show how it’s creating value for the bank. “From the startup’s perspective, we help them to align their service, product or technology to the needs of the bank. They could have the best solution in the market, but each bank is different. So, when they come to explain what they could give us, sometimes it’s not really aligned to what our business areas are expecting. We also help them to navigate

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the complicated onboarding requirements and procurement processes of a large, regulated bank. For those startups, or fintechs, we are really the main point of contact with the bank. We’re the friend they can call when they need to.” The UK's financial regulator led the way in Europe in creating an enabling environment in which banks and third parties could explore potential regulatory issues together. When Spain’s regulatory authority opened the doors on its first ever fintech sandbox at the beginning of 2021, among the 67 eager applicants queuing outside for a place was Banco Sabadell. “People say that traditional banks don’t want to take bigger risks,” Lázaro Azpichueta says, “but it’s not true. We want to, but the regulations sometimes don’t allow it. That’s why we wanted to participate in the first edition of the Spanish Regulatory Sandbox.”

For fintechs, we are really the main point of contact with the bank. We’re the friend that you can call when they need to The sandbox will allow the testing of innovative technology-based projects in the financial field, with real users, which, due to the novelty of their business model, are unable to find a place in the current regulatory framework.

Supporting SMEs Banco Sabadell has traditionally focussed on small business, and many of its innovation partnerships have been aimed at improving services to those customers. In January, it invested €2.5million in Nomo, a startup that began life in its incubation hub, providing business management tools for SMEs and freelancers. Already spun out from the bank, it gained huge traction last year, almost tripling its user numbers, month-on-month during 2020, to 100,000. In collaborating with such innovators, banks can not only provide services for particular demographics, but also learn

more about their customer base through data collected from these external services, and discover new ways to meet their client’s needs. “We need to boost the capabilities of the bank’s technological architecture and infrastructure,” says Lázaro Azpichueta. “All the traditional banks have the same issue of legacy, but I think the difficulty is not so much about having the ability to renew that technology; it has more to do with the fact that sometimes we are not clear about what we want to achieve. For us, it’s to improve productivity, and efficiency, and to improve the connection with third parties.”

A two-way street As customers become more aware of the potential of technology to help them manage their finances, the rate at which new applications and services are produced is increasing dramatically. The model Banco Sabadell is creating with its partners, shows that, by working together, banks and fintechs can deliver relevant solutions fast. But the roadmap for getting there needs to be clear, says Lázaro Azpichueta. “The first important thing is to have a shared vision. It must be clear from the beginning, when you are signing the proof of concept, or the minimum viable product contract, what you need to accomplish, who has to do it, when and how, even if you do iterate it later. “Secondly, it’s vital for a good bank/fintech partnership to establish the metrics and key performance indicators (KPIs) from the beginning. It’s important to clearly define how you are going to measure. For example, with the Minna partnership, the KPI was customer engagement. Other examples of positive KPIs might be efficiency or building new revenue streams. Having clear measurements helps to transmit the message to C-level executives at the bank. “The third success factor is to work as a single team with clearly-established roles and responsibilities, and transparent and trustworthy communication. “Finally, there has to be mutual respect: a recognition that the other company is giving something that it would be difficult for the bank to achieve by itself, and an understanding on the fintech’s part that the bank is prepared to share a lot of knowledge gathered over a long time.”

Issue 20 | TheFintechMagazine

COMMENTARY: FINTECH RAP BATTLE

THE MAKING OF

Fintech’s legendary spat between the UK’s Monzo and Starling banks, led by former colleagues, now rivals, Tom Blomfield and Anne Boden, has stoked gossip, insider commentary… and a book. Now it’s a rap. Conceived and created by Fintech Finance’s home-grown hip-hop legends – with guest support from (the real) US artist Coolio – it features guest ‘appearances’ from a stellar line-up of fintech founders… and the odd unicorn (of course). This is the true story of how it was made 24

TheFintechMagazine | Issue 20

Lewis Averillo-Singh Writer & Videographer Video Manager & Director

Why a rap battle?

How did you get started?

Coolio made a cameo appearance: is there anyone else we should look out for? What’s the message?

What’s the reaction been?

The hero of the hour was undoubtedly rapper extraordinaire, Lewis Averillo-Singh, who not only wrote the rap, but also performed it, filmed the scenes, and even made a cameo appearance. He’s been writing and presenting The Fundraising Rap Up on the Fintech Finance YouTube channel since last year, putting big tunes to a roundup of big money raises. How do you get to be both a Fintech Finance camera guy and a rapper? I’ve a degree in film making and my job usually entails travelling the world behind a camera. But I loved hip-hop and rap as soon as I heard it from my older cousins. I’ve been writing rap since I was about eight years old. It’s only recently, though, that I’ve started to record, put the songs out there and share them. I never imagined I’d be able to do this. But it’s very, very cool.

Were you in on this from the beginning?

How did you shoot all the scenes with the social distancing rules?

What was it like to have rap legend Coolio feature in your video? Surreal! We thought he was going to say a 10-second intro, but he went and gave us way more. How did you decide on the right level of banter? Ali and I had lots of meetings about specific lyrics. There have been hard times for everyone and we didn’t want it to be mean – it was made in the spirit of good fun, which is how we hoped the founders would view it.

Emily Leaff Pond Costume Design Emily from emilyleaffpond.com had the task coming up with a trademark ‘look’ for the featured founder – and it wasn’t all jeans and sneakers (well, with the exception of Nik). How did you decide on the costume choices? I picked a key piece of clothing for some, for instance Kristo (Käärmann, CEO, of Wise) always wears this brown cord jacket. Others have recurring themes in their looks.

www.fintechf.com

Video Editor & Co-director

Have you ever filmed the real founders?

Which fintech founder has the most iconic style? Anne Boden definitely. If you want to recreate Anne’s look grab a big, patterned silk scarf and a shapeless navy dress and flaunt your stuff. I think she quite likes a Hermes scarf, but I found some good ones on Amazon. For Tom Blomfield, it’s a comfy pair of chinos and a grey shirt. Very easy! What was your favourite moment? There was a constant flow of people, so all the actors were only in for a few hours, but I think the teddy bear costume was the best moment. Especially as it had Lewis inside!

Issue 20 | TheFintechMagazine

COMMENTARY: FINTECH RAP BATTLE Louise Collins Casting Director Louise Collins of Collins Casting walks us through the process of finding blooming brilliant Blomfields and beautifully bodacious Bodens. How did the casting process work? The most important thing was to ensure a physical likeness. Secondly, we had to check that the actors had good

performing, comedy, and rap skills. We researched comedy groups and comedy awards to look for the best. Actors trained in musical theatre were naturally very good at this, too. Thirdly, it was important for us to cast some people who had a good social media following as it was going to be shared online. Did you enjoy being involved? It was a really fun experience, and the rap is hilarious. Watching the audition tapes and offering feedback to our performers was really enjoyable.

What is it with rappers and fintech?

Actor

– Tom Blomfield Anto Sharp is no stranger to comedy videos online, and he did a stellar job portraying Monzo’s famously confident founder. How did you approach the role? With comedic flare and high energy! Give us some tips for impersonating Tom Blomfield He puts his shoulders back and his hands together quite a lot. And he’s very sure of his stuff. What was the best bit of filming? There were a lot of shots with the green screen where things [in the edit] are falling on me, including a massive book – so I needed to act like I was being squashed by one! I like the scene where I’m a barman and I have to turn around and act shocked when he gets out his Monzo card.

I like the scene where I'm a barman and act shocked when he gets out his Monzo card! What was the most ‘Blomfield’ bit? Where I make it rain with money, it was fun to stand up on a box and shower fake money all over – which I think he must be doing in real life with all of his wealth and confidence.

Actress Gilda Waugh – Anne Boden Gilda's no stranger to impersonating bad-asses: she’s played Angela Merkel and Mary Berry in the past. How did you nail the audition? I did a bit of homework before the Zoom call. I put on an outfit that resembles what Anne wears – a shawl over a dress – and put my hair on one side. When the others joined and asked if I’d researched the look, I said [in a Welsh accent], “Oh, no, no, I don’t know what she does or what she’s like at all!” with all the hand gestures. What was it like to rap and play Anne Boden at the same time? I’ve done Shakespeare and I found it more challenging than that! I worked at the lines for a good few weeks – I was practising them in fields at the top of my voice. I thought, I’ve got to get these lines in my head, because I’ve never rapped in my life. At first, I wasn’t sure what I was going on about. As the days went by I started to understand. I was glad that I could ‘get it’ – that’s another box I can tick! What are the give-away Anne Boden characteristics? She makes fists with her hands quite a bit, and then she holds them quite flat. She’s an animated person. Quite a lively sort of woman. And she looks like a good laugh as well… I’d like to read her book. She’s one of those people who I think are always very inspiring. How do you think Anne Boden will have reacted? She’d have laughed her head off!

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Writing on Crunchbase in March this year, columnist Joanna Glasner drew a parallel between rap and start-up entrepreneurship. Both, she said, are ‘longshot career tracks that celebrate raw ambition and unabashed self-promotion. To make it, both also require an excellent grasp of what sells in the real world’.

Drake WealthSimple Toronto’s Drake is invested in the online brokerage, which more than doubled in value to $5billion this year.

will.i.am Atom Bank The Black Eyed Peas singer and tech entrepreneur completed a two-year stint as board advisor to the UK challenger in December. His Californian start-up I. am+ just launched a Bluetooth-enabled face mask for our time – the Xupermask.

Snoop Dogg Klarna and Robinhood The prince of business diversification and one of the most financially successful hip-hop artists in the US. Both the buy now, pay later platform and the fee-free stock trading app in which he’s invested have struck gold.

Nas Coinbase Nas’ co-founded investment fund Queensbridge Venture Partners took an early position in Coinbase. The NY rapper recently featured in a track from DJ Khaled, Sorry, Not Sorry, in which he references the platform and dubs himself ‘cryptocurrency scarface’.

Killer Mike Greenwood AKA Michael Render, he co-founded Greenwood bank in 2020 to address lack of fairness in the financial system for black and Latin American users. YouTube 'You can find Fintech Rap Battle on zMnd4 0JTb v=fG tch? www.youtube.com/wa www.fintechf.com

OPEN BANKING PAYMENT DIGITAL ASSETS SUSTAINABLE FINANCE INSURTECH INTERVIEW VIDEO SERIES PODCASTS

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Nik Storonsky CEO Revolut

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Anne Boden CEO Starling Bank

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CEO Financial Conduct Authority

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Executive Vice Chairman Mastercard

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OPEN BANKING: SMEs

A BIG opportunity for small ll business Open banking is beginning to transform the back office for SMEs, but providers need to get their messaging straight, say Leon Muis, Chief Business Officer for YTS, and Lars Vonk, Founder of Zilverline We live in an information age – and a misinformation age. The coronavirus pandemic has received saturation coverage and comment across the world, with constant dissection and reinterpretation of the facts. Mistrust is very much a trend of our time. And it can be seen elsewhere, too – take ignorance around open banking, which is built on the sensitive area of private financial data. According to the UK’s Open Banking Implementation Entity (OBIE), three million businesses and individuals are using open banking services three years after they were launched in Britain and the EU… not exactly the whip-cracking speed of adoption that policymakers were hoping to see. Whether technology or psychology has held it back, it’s hard to say. But misunderstanding doesn’t help. A survey of around 1,000 business leaders in finance, retail and personal finance software, by Yolt Technology Services (YTS) late last year, found that, while the majority understood open banking to be a secure way to give providers access to an account holder’s financial information, 23 per cent wrongly believed it allowed companies to access the data, regardless of consent. Ironically, as the YTS report points out, the regulatory drive behind open banking

was explicitly about giving consumers more control over their financial information, not less. Consent is at the core. If a quarter of industries most affected by open banking don’t ‘get’ that, no wonder ordinary individuals and small business account holders aren’t falling over themselves to take advantage of it. The YTS survey was conducted in the two territories in which the company operates as both a payment initiation services (PIS) provider and an account information services provider (AISP) – the Netherlands and the UK. Its findings also showed uptake of open banking products and services to be higher in the former than in the latter, where confusion over consent was more widespread, perhaps demonstrating that providers need to be much clearer about the messaging. “There are many misconceptions about data privacy, when the fact is that privacy and security are absolutely embedded in open banking,” says Leon Muis, chief business officer at YTS. “Our Unlocking The Value Of Open Banking survey showed that’s one of the main barriers to leveraging open banking, so we must keep educating the market. It’s come a long way, from a few million API calls in 2018, the first year of open banking in the UK, to 700 million a month now, but has it delivered on its promise? I don’t think so.” YTS provides APIs for open banking,

with 600 now connected in Europe. One of its clients is Amsterdam-based Zilverline, which uses YTS to provide the API rails for its small-business accounting software, Jortt. Zilverline’s co-founder, Lars Vonk, agrees open banking has had a disappointing start, but he believes it has the ability to transform small businesses, especially in the back office. And the activity that’s currently being disrupted the most, and will continue to be in his opinion, is accounting. He says: “One of open banking’s promises was to improve security for customers, and PSD2 and open banking are delivering on that, considering that in the old days we were sending bank files to each other via email to share data, and I don’t think there’s anything less secure.” A recent survey from Ipsos MORI suggests that, since the COVID-19 pandemic started, around half of small businesses are, in fact, now using open banking services. Among those, Cloud accounting is top of the list, at 24 per cent, followed by cash forecasting, at 21 per cent. For both of these services, open banking allows immediacy and improved

Open banking is unlocking the door: But will the banks enable everyone to walk through?

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accuracy, since data is no longer input manually. At 18 per cent, alternative lending was the third most popular service among those small business users who were starting to leverage open banking. The YTS report similarly revealed that, among firms using open banking, 57 per cent were making use of account information services, while 34 per cent were using it for data enrichment. “Accounting is one of the clear-cut use cases, where it’s really adding value in the customer process,” says Muis. “If you need to be able to solve a problem for a customer, open banking is just a means to an end. And the problem, in the accounting space in general, is that, while there are some direct accounting connections to some of the big banks, you still often need to download MT940 files, or CSV files, and then upload them with your accountant. Open banking introduced the possibility of an automatic connection with the bank, over an API, with the consent of the business owner, so that we can fetch the data in the background and feed it into the accounting system. It’s a more accurate, more customer-friendly process.”

There are many misconceptions about data privacy, when the fact is privacy and security are absolutely embedded in open banking Leon Muis, YTS

For Zilverline, it means it can concentrate on the data itself. “We don’t want to be the best API connector in accounting software, because that doesn’t make any sense; it’s not our core business,” says Vonk. Instead, it has succeeded in automating 88 per cent of the accounting tasks for its main target users. “That will mean that the role of a typical accountant will drastically change in a year or two,” adds Vonk. The most popular open banking tool employed by small businesses

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(used by 67 per cent), according to YTS, however, was payment initiation, which allows payments to be processed directly from bank accounts without the need for credit or debit cards. The keen take-up is not so surprising, given the potential for cost savings. According to one metric, 1.2 million transactions per year, with an average value of £429 and card network fees at one per cent, would cost a merchant £5,148,000 to process, while the same transactions carried out over open banking rails would cost £660,000. Of course, consumers value the extras that card firms provide, such as fraud protection and cashback, but Muis believes this year will see a ‘breakthrough moment’ in PIS use – so long as businesses and consumers know the data is protected and secured. As Muis points out: “PIS is more secure than card payments because there are no credit card details stored on the merchant side – payment via open banking increases security.” But, in his opinion, there are things that need to be evident to build users’ confidence in the service. “First, if a customer wants to share their data, it should happen with a redirect from their own banking environment which has strong, multi-factor authentication. Secondly, within open banking, security should be embedded within APIs, the so-called FAPI (financial-grade API) standards. On top of that, we at YTS encrypt data both at rest, when it is stored, and in transit, moving from the bank. And, finally, to be able to interact in the open banking system, firms need to be regulated and authorised by a regulator such as the Financial Conduct Authority.” He’s beginning to see PIS deployed across multiple environments, ‘from court houses to vending machines’, opening the door to alternative contactless payment methods, such as QR codes. Listing the benefits open banking has brought them, respondents to the YTS survey put improved customer experience top, followed by improved efficiency, customer and partner insights, reduced transaction costs, increased revenue, better security of transactions and data handling, maintaining competitive edge and

reaching new customers. Vonk and Muis agree, though, that open banking is but a stepping stone to an even greater prize: open finance. That will unlock data from across the financial services industry, and, with it, new applications. “What we are currently missing, for instance, is access to savings account information under the revised Payment Services Directive (PSD2), so we only have half the data that we want,” says Vonk. “We’re already seeing demand from people who want help with savings or pensions – I believe there will be pensions initiatives from smaller players, which will mean people no longer need the big institutions. It will also greatly benefit the lending industry,” he adds.

In the old days, we were sending bank files to each other via email to share data, and I don’t think there’s anything less secure Lars Vonk, Zilverline

YTS is establishing such relationships in a nascent open finance ecosystem, which Europe hopes to encourage with an incoming open finance framework. “The move towards an open finance ecosystem isn’t easy because insurance, mortgages, lending and savings are very products with their own data attributes. That’s a challenge that, as a wider ecosystem, we must overcome,” says Muis. “But it should lead to customers getting the best value and choice of services, products tailored to their needs and a holistic overview of their finances. Open finance is coming and we, for one, have connections on the pensions side, and with wealth and savings parties already offering bespoke APIs.” So, there is already sufficient maturity in the ecosystem to take the next step. “We’re at the tipping point,” agrees Muis. “But will these companies and banks provide bespoke, maybe commercial, APIs for all other product types? Or will the regulator have to force the industry in that direction? It will be interesting to see what happens.”

Issue 20 | TheFintechMagazine

OPEN BANKING: INVISIBLE FINANCE

Everybody wants to be a bank The desire to bury financial services in everyday life is being enabled by ‘smart pipes’, prompting a wave of quasi ‘banks’. Fintech commentator Chris Skinner and Sophie Guibaud, Chief Growth Officer at OpenPayd, consider what it means for real ones Imagine going into a store, picking a product off the shelf and walking straight back out, knowing you won’t be fingered for shoplifting as you pass through the door. Or charging your electric vehicle at a service station and driving off without having to physically settle your bill. In fact, you don’t have to imagine – in some parts of the world, including London suburbs, you can already experience some of these ‘invisible’ transactions. Challenger banks and payments services providers kickstarted the frictionless revolution, but now businesses far removed from finance – ride hailing firms, delivery companies, even furniture giant Ikea – are moving into their space, literally unboxing financial services in order to construct a flatpack bank or something that looks very much like one. Will it be companies like these, rather than providers of the financial nuts and bolts that lead the next wave of innovation? The financial services revolution began with the creation of new vertical fintech services reinventing each part of the bank, and by neobanks trying to satisfy specific customer segments, says Sophie Guibaud, chief growth officer at OpenPayd, a banking and payments-as-a-service platform, which is agnostic about which industries it serves. “I think embedded finance is the next evolution,” she adds. “We have seen a massive acceleration at OpenPayd over the last 18 months of brands – fintechs and non-fintechs – all wanting to include our services as part of their offering.” Fintech commentator Chris Skinner has a problem with the term ‘embedded’, preferring ‘invisible’, even ‘omniaccess’, as it increasingly refers to a financial encounter

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that’s no longer consciously experienced. “Like electricity or water, it’s just there,” he says. Neither does he believe that (with some notable exceptions – Brazil’s Nubank and Russia’s Tinkoff Bank) neobanks have ever really challenged the banking system. Proof of that is in the customer numbers: getting on for a decade after the first completely independent neo threw down the gauntlet to incumbent banks, there still hasn’t been a fundamental shift away from traditional banks. “Five million or so customers with Monzo, eight million with Revolut. Those are good numbers but what are those customers actually doing? Are they really moving their financial lives to those banks, or are they just supplementing their financial lives with those banks?” Skinner asks. “I think, in the majority of cases, it’s the latter.”

Embedded finance is the next evolution

Sophie Guibaud, OpenPayd

A little harsh, perhaps. Even Guibaud argues that Revolut’s multi-currency accounts were game-changing for their time and persuaded many of her contemporaries to join it. But Skinner questions whether most neobanks are really innovative or whether they’ve just repackaged the traditional bank in some shiny digital wrapping paper. He believes that where fintech innovation is at its most arch, its most disruptive, is generally where it is at its most focussed. “My observation, over the last decade of the billions of dollars invested, is that the fintechs that are most successful are not trying to replace banking; they’re trying to

replace the things that banking does wrong, and the things that banking doesn’t do at all,” he says. “So serving the underserved and the unbanked – which is what Nubank is doing, and Alipay is doing, and WeBank is doing – or dealing with the frictions of the digital world that the banks don’t deal with well – such as the stuff that Stripe, Square, Adyen, Klarna and others are doing – are proving hugely successful.” As Guibaud observes, these vertical service providers have, so far, mostly been the ones offering to integrate financial services for non-financial partners via a largely API-driven ecosystem of players who see an opportunity to fundamentally change the way things are done. They are ‘smart pipes’ – of which OpenPayd and Stripe are prime examples – as opposed to the ‘dumb pipes’ that characterise much of banking. And they’re being used increasingly to present consumers with a product that doesn’t feel like banking, but more of a financial lifestyle choice. And who better to offer that than brands they know and trust? Like the world’s biggest furniture retailer, Ikea, which took a 49 per cent stake in its financial services partner Ikano Bank in February 2021 – a deal presented as making the retailer ‘more affordable, accessible and sustainable’ by enabling it to offer financial products and services online and in-store. If you’ve never received a flatpack from Ikea, you’ve almost certainly received a delivery from Amazon, which has been rumoured for some time to be looking to establish its own bank. But it’s probably much too smart for that. Instead, it’s cherry picking what financial services it wants to offer and to whom – in the middle of COVID in 2020, for example, it struck a deal with Goldman Sachs’ digital bank Marcus to www.fintechf.com

embed invitation-only lending to merchants on its marketplace, through the Amazon merchant portal. A CB Insights’ report observed recently that it was using financial services strategically to enable merchants to sell more, buyers to buy more and make the two things happen effortlessly. “Apple, Amazon and Google are all in this space with Plex, Google Pay, etc,” says Skinner. “They’re not building banks; what they’re doing is building the ecosystem of bank APIs, through the platforms, to bring the customer the best experience ever.” In 2019, Angela Strange, general partner at venture capital firm Andreessen Horowitz, predicted that ‘in the not-too-distant future… nearly every company will derive a significant portion of its revenue from financial services.’ That prophecy is being incrementally fulfilled. “And there will be a first-mover advantage for smart pipes,” says Guibaud.

The ‘big daddy’ role In the case of OpenPayd, last year it decided to focus on using its banking platform to power embedded crypto services, including remittances. “And we have seen a massive acceleration of those conversations, from ‘maybe let’s start with card processing [offering crypto]’, to being able to buy the coins on their platform and do transfers,” says Guibaud. “The next evolution is wanting payment initiation through open banking. “It’s a very powerful example of how embedded finance/invisible banking can really supercharge a business model, going from something pretty narrow, pretty niche, to deeper into the market.” So far, so bad for legacy banks. Or is it? Guibaud and Skinner both argue that they don’t need to be left behind. They’ve proved themselves capable of doing intelligent finance in the past – but once they start innovating, they need to keep driving it forward. Skinner cites the example of Barclays mobile peer-to-peer payments app Pingit. Revolutionary when it launched in 2012, the service is now being shuttered having failed to keep up www.fintechf.com

with innovation from rivals in the money transfer space. “The opportunity for traditional banks, if they want to take it – and many banks haven’t made that decision strategically, they are just tactically dancing around the idea – is that you could be the utility of choice for the technology digital ecosystem of players,” says Skinner. They are just as welcome as the next neo or payments services provider or, indeed, retailer to use platforms such as OpenPayd

Fintechs that are most successful are not trying to replace banking; they’re trying to replace the things that banking does wrong, and the things that banking doesn’t do at all Chris Skinner

and Stripe to remodel finance. Some are already taking tentative steps towards that and the pipes are flowing in both directions. Stripe has teamed up with Goldman Sachs and Evolve Bank & Trust to embed business banking and treasury management within payments, and with Citi and Barclays to distribute financial services. In Mexico, Spanish bank BBVA partnered with the Uber to create what was essentially an Uber-branded bank account for drivers, so they can withdraw their earnings as they go.

Guibaud points out that, however invisible finance is, it still needs to be structured and for that you need the big daddies of banking. “Start-ups need the support of banks, essentially, to be able to provide the regulatory environment and the correspondent banking service,” she says. “Banks need to be comfortable with that. BBVA has been since 2018 or so, with Uber. Clearly, Goldman Sachs, Citi, Bank of America – powered by Stripe – are, too.” With new providers now looking and acting, but not legally being a bank, perhaps one thing protecting legacy banks’ ongoing fundamental role in finance is their regulatory status – an asset they can monetise. The intelligent ones, as Skinner says, will see that as an opportunity to become part of the network of ‘smart utilities’ instead of ending up ‘dumb pipes.’ And the consumer? Ultimately, they won’t have to think too much about any of this. And that’s the point. “As I interact with that bank-as-a-service, it learns more and more about my life, needs and wants,” says Skinner. “I wake up thinking, ‘I need to eat today. I need to go to town to buy some food, and therefore I need some petrol.’ And I expect the service to tell me ‘you can’t afford to go to town’, or ‘you can only afford a McDonald’s not a Michelin-starred meal’. It’s about the things that I’m doing. It’s not payments and transactions and finance; it’s living a life.” And living your life without thinking about money, is a future enabled by invisible finance. Issue 20 | TheFintechMagazine

OPEN BANKING: EMBEDDED FINANCE A neural financial network: And the possibilities from such an ecosystem are endless

invisibleforce The power of financial services will only be truly realised when they are distributed through the ecosystem, impacting people’s lives without them even realising it. Belvo, Chubb and HUBUC are three companies on that journey The bank of the future isn’t a bank at all… rather, it’s a neural network of financial providers that quietly exchange information so that we experience their services invisibly. The ecological equivalent would be Pandora’s sustaining forest in the epic Avatar – it’s aware of you, even if you’re not conscious of it. Variously called embedded finance, invisible finance, omniaccess, even headless banking – the term referring to the frontend or user interface (head) being effectively disembodied from the back end (body) of the bank that’s powering the underlying transaction – it is forecast to generate nearly $230billion in revenue by 2025, up from $22.5billion in 2020. And a whole category of fintechs is devoted to delivering it. Companies like HUBUC, whose single API enables any business to embed fintech features in their product. “We focus on non-fintech B2B companies, mostly software-as-a-service (SaaS), and help them enable the fintech

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features they want,” explains co-founder and CEO, Hasan Nawaz, who puts the global market opportunity for integrating financial services into non-banks somewhat higher… at $7trillion. So far, HUBUC has just scratched the surface of the UK and Europe. Meanwhile, in Latin America, Belvo, a newcomer that’s likened to open banking platform Plaid (including by co-founder and co-CEO Pablo Viguera himself) is handing out ‘the picks and shovels’ to developers to build the region’s future financial services, with or without the banks, connecting them over an open-finance API. And among the major institutions that might just feel threatened by all this disruption is Chubb, which, instead, has embraced it. Last September, it got ahead of the game by launching Chubb Studio, a platform that enables retail, e-commerce, banking, fintech, airline, telecommunications and other industries to integrate insurance products into their offer over multiple APIs. Two of Chubb’s recently announced white-label partnerships were both, interestingly, in South America – with superapp Rappi, to provide home and mobile phone insurance, and with Nubank, the largest independent digital bank in the world, taking it into life cover. Chubb’s initiative is part of a wider narrative that has seen the COVID-19 pandemic have a significant impact on traditional banking models, with embedded finance gaining more traction.

This isn’t surprising, given that non-financial companies have been redoubling efforts to offer more targeted products and services to customers in the financial services space by using the backend-as-a-service (BaaS), Cloud-based model, allowing developers to outsource all behind-the-scenes aspects of a web or mobile application, while only having to write and maintain the frontend. Sean Ringsted, chief digital officer at Chubb, sees that as an obvious opportunity for major providers like itself to diversify their business models. “Think about being able to make credit and other products and services, like insurance, available to people, in the right place, at the right time, in a way that is seamless, very contextual and enabled, because the underlying plumbing is making it all work,” he says. Ease of use and accessibility of financial services is key to financial inclusion. In countries where significant numbers of people are ‘unbanked’ – as is roughly half the population of Latin America – embedded finance, such as affordable credit and insurance, is a way to extend financial services to more people outside of the traditional banking channels, potentially improving their life outcomes in the process. Nowadays, pretty much any business can create a wallet, credit, investment or insurance offer off the back of banking- or backend-as-a-service. As Belvo’s Viguera points out: “BaaS has historically been used by challenger

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banks or digital companies seeking to build up banking services from scratch, in a modular way. With embedded finance, you’re not going after finance companies, you’re going after a much larger pie.” Which is precisely what Belvo aims to do, connecting a huge variety of non-banks to banks and making its money by charging for API calls. It aims to be the ‘go-to platform for developers to plug into financial data across the continent’. And not just raw commodity data; its product development includes adding value by contextualising transaction data, wrapping useful information around it to build up a better picture of the user behind it. In that way, individuals can benefit from financial services delivered by brands they interact with every day, without ever having to deal with the ‘head’ of the value

With embedded finance, you’re not going after finance companies, you’re going after a much larger pie Pablo Viguera, Belvo

chain: “They can get a credit card from an Uber, Lyft or Shopify, as they would from their bank,” says Viguera. “We’re also likely to see additional packaged services further down the line, which are just as critical to consumers, even if invisible to them. If you go all the way from what touches the customer down to the core of a bank, you have things like fraud management, credit reporting and even bank licensing where, for example, you can offer your licence to someone else as a service so that they can provide X, Y, or Z products. “So, as embedded finance evolves, we’ll see more and more of these APIs that sit in the core elements of the banking stack. “If you’re looking for just one piece of that stack, you can do that in embedded finance almost on a plug-and-play basis, whatever your business is.” Ride-hailing and delivery firm Uber might be a good example of that. It rolled out Uber Money in 2019, aimed at both employees and customers, including real-time earnings linked to an Uber debit account and card (both powered by US www.fintechf.com

bank GoBank), integrated into the existing Uber Driver app. Then there was an Uber wallet, also available in the app, with a planned rollout in consumer-facing Uber and Uber Eats apps. There were also plans to re-launch the Uber Credit Card with Barclays. The company had to scale back its ambitions to become a broad-spectrum financial services company, a la Grab in Southeast Asia, as COVID-19 tightened its grip. By summer, 2020, Uber CEO Dara Khosrowshahi had decided to ‘deprioritise’ several finance-related projects. That said, it’s enjoyed the highest gross bookings in its nearly 12-year history this year: its long-term financial services strategy may not be on hold for long. Khosrowshahi obviously sees the potential in embedded finance. Last year, he personally participated (as a private investor) in a $156million funding round for Deel (co-founded by two young Israeli

A B2B non-fintech company does not have experience with compliance and regulation. All they know is ‘I just want the feature. Can you give it to me?’ Hasan Nawaz, HUBUC

and Chinese entrepreneurs, Alex Bouaziz and Shuo Wang), which has developed a global payroll and compliance system, allowing employers to pay both full-time staff and contractors, wherever they are in the world, in their own currency. What’s becoming abundantly clear is that new ways of thinking are progressively replacing the old. As HUBUC’s Nawaz notes, many B2B companies offering SaaS, be they accounting, expense management, etc, have been watching the challenger banks’ marketplace model mature and wondering how they can incorporate something similar. This ‘sleeping majority’, as he describes them, of potential non-fintech, financial service providers are motivated by one of two things, and often both: customer loyalty/retention and new monetisation opportunities. According to Nawaz, lending is of

particular interest: “That’s where big companies are wanting to monetise by opening a revenue line.” Companies whose core business is running credit checks, for example, could legitimately ask ‘what if I offered credit-as-a-service (CaaS) or even credit cards myself?’. CaaS enables frictionless payments with easy onboarding and support for more payment options that translate into improved cash flow. So, the attraction is obvious. Nawaz cites Canadian e-commerce platform, Shopify, which has B2B and B2C interfaces. It introduced a Balance account, essentially a debit card for business, offering immediate payouts. “Then, suddenly, we saw them adding buy now, pay later,” says Nawaz. “So that increases customer consumption, as well as providing immediate liquidity for the merchant. That’s what I think companies are looking for: better retention, so that they can tap into payments and better monetise them through CaaS and lending. “The problem is, a B2B non-fintech company does not have experience with compliance and regulation. They don’t understand ledgers, PEPs (politically

As we navigate this, the opportunities in terms of how businesses increase their share of the pie, is endless Sean Ringsted, Chubb

exposed persons), sanctions, know your customer, anti-money laundering and settlements. All they know is ‘I just want the feature. Can you give it to me?’.” The $7trillion question is, then, how quickly will that exponentially big pie be opened up? Pablo Viguera takes a five-to-10 year view, arguing that what we’re seeing now is simply the tip of an iceberg-sized market opportunity. Nawaz and Ringsted agree. “We’re just figuring out how to lay the rails,” says Ringsted. “Companies are working out how to use them; regulators are looking at out how to manage it all. And, as we navigate this, the opportunities in terms of how we provide products and services, and allow businesses to increase their share of the pie, is endless.” So put your thinking caps on and tuck in. Issue 20 | TheFintechMagazine

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OPEN BANKING: ALT-FI Finding somewhere to live is a stressful – and expensive – experience for anyone. But the UK’s four million renters have a unique set of problems. Jamie Campbell’s open banking-driven platform Fronted is making it easier for them to move on Jamie Campbell had witnessed what it was like to be at the wrong end of the property ladder: that is, below the first rung. Which is why he launched Fronted to support one of ‘the least well-lookedafter demographics in the UK’. Renters.

OPENING DOORS www.fintechf.com

So, as co-founder of Fronted, he’s set out to make at least one of aspect of private tenants’ lives easier, using open banking to prise a down payment for their next home when the deposit is still tied up in the last. For many of the UK’s nearly 4.5 million households in private rented accommodation, who are, on average, moving every two to four years, having to find around £1,000 every time they relocate is at worst, impossible, and, at best, a struggle. By using open banking and financial technology to offer a credit product designed to finance deposits directly, Fronted believes it can reduce the emotional stress and time-consuming hassle that comes with moving, lending to tenants more cheaply than existing options and at lower risk to itself. As Fronted charges no early repayment fee, Campbell says it’s a solution particularly suited for those looking to bridge the payment gap between tenancies, when a new deposit may be requested before an existing one has been released. That was precisely the situation his girlfriend found herself in. “The landlord put the property on the market and they had to leave, pronto,” says Campbell. “But they needed two or three months to save up to move or borrow. I thought somebody must have fixed this because, to my mind, it’s where fintech works best: where there’s a niche customer problem, which is felt really acutely, that technology can make easy.” But, back in 2018/19, he couldn’t find any. “There were [no-deposit] insurance schemes available, but they were really expensive, and mostly owned by estate agents,” says Campbell. “When I started digging into the size of the market and how many people who are renting don’t have savings, I was like ‘OK, there’s something interesting here’. That started the ball rolling.” He wasn’t new to this area of finance. While working at Bud, the UK-founded startup helping banks deliver open banking solutions, Campbell had been involved in another solution addressing problems in the rental sector. In 2017, the Government announced the Rent Recognition Challenge – a £2million prize fund encouraging firms to develop applications to enable tenants to record and share their rental payment data with approved lenders and credit reference agencies. Bud used the fund to build AI software that automatically detects when an individual is paying rent and prompts them to get the payments verified. These payments are gathered in a rental profile that can be shared, via open banking APIs, with banks, mortgage brokers and other relevant services, to help renters demonstrate good financial management on their way to home ownership. Issue 20 | TheFintechMagazine

OPEN BANKING: ALT-FI “Bud created a product with Experian called Rent Recognition, which is used by a number of companies now,” says Campbell. “That audience of renters, to me, was a really interesting demographic because, generally speaking, they’ve been the least well-looked-after demographic in the UK.” To found Fronted, Campbell teamed up with former Monzo staffer Simon Vans-Colina and Anthony Mann, who previously worked for Apple. The all-round renters app went live in February 2021. Renters who apply to use the Fronted service are asked to link their bank account details, giving access to transaction data. Once Fronted has run the required checks

The renting roundabout: Looking for a new tenancy can be expensive and exhausting

and agreed to provide credit, the start-up sends money directly to the estate agent managing the client’s let, to be placed in one of the UK’s three deposit protection schemes. Around £5.5billion sits in these schemes right now. “Essentially, the money is in escrow until you move out. We wanted to use a cash solution to fit into this ecosystem, but we also wanted to be really pro-renter,” says Campbell. “Generally speaking, most people come to us to get a deposit in principle first, to see how much they could get from us, then go and shop for a property, which is a really interesting behavioural change. “Only around 20 per cent of people who come to us are renting for the first time. The vast majority are moving from one property to the next. And there’s this bridging occasion, which just doesn’t seem to be going away, where the landlord of the property that I’m exiting wants to hold on to the deposit until after they’ve done their

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survey, gone around to see if you’ve marked the walls, or dirtied the carpet, to see how much they think is fair to take from the deposit to fix things, while the landlord of the property that you’re moving into wants to get the deposit as soon as possible, because they want to de-risk the fact that their property is void. You’re always going to have this crossover, which means that people are always going to have to find double their deposit for this weird two-month period. “We wanted to create something which was really cost effective for renters to borrow from us, and, if and when they get their previous deposit paid back, have the

to market it was hard to engage with,” says Campbell. “There was lots of typing out usernames and passwords, and the APIs weren’t very sturdy. Now, it’s just an app-to-app redirect, so it’s a really good customer experience.”

ALL-ROUND RENTER'S APP Founded in 2019 and originally slated for a March 2020 launch, like many other business owners, Campbell and his partners were forced to put their plans on hold when the pandemic hit. “No-one could move home or view properties for about four-and-a-half months, so all the work we’d done on the product, we couldn’t test because we just didn’t have people who were in that mind-set. Getting early feedback on what we were building became really difficult. And so we hibernated the business, and then tunnelled through to greener pastures, which is kind of where we’re at right now,” says Campbell. Fronted is an ecosystem-native. It’s strategy from the get-go was to work with partners, using APIs to integrate them. “We worked with Credit Kudos on the open banking connection. They’re a credit reference agency as well, so it gives us a nice balance of working with an open banking provider who can also help us assess the affordability and creditworthiness of our customers,” says Campbell. “Businesses like Modular, who have made digital banking services extremely easy, and our loan book provider, Yobota, have been incredibly flexible with us. We’re pushing ahead with our partners and seeing really good results.” Initially, Fronted will generate revenue through interest charged on deposit advances. It then plans to extend its product offering with additional services to help address the myriad other problems faced by renters: broken boilers, lost or no internet connection, water leaks… “We want people to get cash back on their rent payments; to have internet on the first day they move in; give them a move-out service, so they’re not getting hit with huge fees. We want to help people protect their deposit as best as possible,” says Campbell. “We want to be the first app on every renter’s phone that fixes renting.”

We want to be the first app on every renter’s phone that fixes renting

option to settle early for no fee or maybe just go and buy a couch!” So why hadn’t it been done before? “The reality is you probably couldn’t build this business two or three years ago,” says Campbell. “The UK finance market has started to see quite a significant infrastructure shift. A lot of digital capabilities are accessible by API now, and our business is essentially built on that ethos, with interconnectivity of services and finance embedded in customer journeys. That’s the crucial bit: trying to fit a finance proposition around something that people are already doing.” Customers have also taken a while to get comfortable with the idea of sharing their financial information over open banking channels. “When we started Bud, we knew the power of open banking was going to have an impact in the UK, but when it first came

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COMMENTARY: INTEROPERABILITY Maybank’s Kalyani Nair and Eli Shoshani, from technology provider Bottomline, reveal how Asia’s approach to standardisation and interoperability is turning the tide for customer payments experience in the region The adoption of a common standard, ISO 20022, for payments messaging across the world’s financial markets is seen as a watershed moment in the digital transformation of payments ecosystems. As multiple deadlines to comply approach, many minds are now becoming focussed on migrating to a protocol designed to make all types of transaction – domestic and cross-border – more open, efficient, faster, safer and ‘always on‘. The use of ISO 20022, characterised by a data-rich messaging format, is also a key piece in the puzzle of ensuring international interoperability in a fast-moving world, where demands and expectations grow ever greater. Nowhere is that more so than in Asia, a region with a huge cross-border payment flow, many regulatory frameworks, and around 50 currencies in regular use. So, what will these changes mean on the ground, for both payment service providers (PSPs) and their customers there? Kalyani Nair, who is head of virtual banking and payments at Malaysia’s largest bank, Maybank, and Eli Shoshani, who heads up operations in Asia-Pacific for payments provider Bottomline, are both very familiar with a region that makes the largest global contribution to payments. Standing at US$900billion in 2019, it equates to nearly half of the world’s total

payments, according to McKinsey’s November 2020 report The Future Of Payments In Asia. It highlights the efforts being made in the region to create a seamless, borderless payments ecosystem driven by digital innovation. Indeed, Nair notes that some ASEAN (Association of South East Asian Nations) countries, like Cambodia and the Philippines, ‘leapfrogged’ into mobile phone banking, bypassing the normal forerunner phase of using personal computers for internet banking. As such, mobile technology remains hugely important as a means of payment, with increasing use of mobile wallets and a dramatic acceleration in the use of QR code payments, which, for Maybank alone, have grown more than 100 per cent year-on-year. All in all, it marks a significant shift for a region where, historically, cash has been king. Meanwhile, Southeast Asia (SEA) is fast emerging as the centre of real-time, cross-border payments growth, with the use of ISO 20022 and QR codes critical components of that. As a backdrop to that, SEA’s internet economy is forecast to triple in size by 2025, to reach US$300billion, making it one of the fastest-growing digital economies globally. Public and private organisations here drive innovation. For instance, the Monetary Authority of Singapore (MAS) and the Bank of Thailand (BOT) have just announced a

global first by linking two national real-time retail payment schemes: Singapore’s PayNow and Thailand’s PromptPay (see page 68). Meanwhile, in Malaysia, a Real-time Retail Payment platform (RPP) has been developed to modernise the country’s payments infrastructure, creating an integrated ecosystem to drive digital adoption. DuitNow, an instant credit transfer service allowing users to transfer funds based on a mobile number or national ID, was the first RPP payment service to go live on the platform, in early 2019. Adoption of ISO 20022, from the outset, has been credited as pivotal in driving innovation and transaction volumes over the platform, including credit transfer, DuitNow’s QR code payments, and a range of digital overlay services. RPP, which is operated by PayNet, also benefits from standard connectivity between participants and the central hub, aiding seamless integration and onboarding as well as ongoing compliance. “Things have changed dramatically,” Nair remarks. “If you look at the ASEAN market, about 38 per cent of the population is very young; the mobile/smartphone penetration is very high; and governments are pushing digital – you have different agencies in each country that are actively encouraging people to go cashless. “In Malaysia, the government was actually putting money into consumers’ mobile

A panacea for Asia’s payments challenge? 40

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wallets to encourage them to use those, instead of physical cash. “So, we have lots of incentive programmes designed to help, and I think that’s what really differentiates the ASEAN market from, say, the European market.” Another key differentiator is that there is increasing demand in Asia for a borderless payments ecosystem. Shoshani points to the fact that many people travel from one country to another for work, which forces banks to take action. “For example, a lot of Filipinos are working in Singapore, a lot of Bangladeshis are working in Asian countries, so banks need to give them a vehicle for transferring money home in a very fast way,” he says. “They are not transferring millions of dollars – it’s often small amounts of $100 or less. That's why some operators like

We make sure interconnectivity is friction-free for the consumer Kalyani Nair, Maybank

Western Union and MoneyGram have been able to play a very strong game. However, banks that are looking to create new revenue need to realise that they too can use these rails themselves to facilitate cross-border transactions of low values, but high volume to all of the countries in Asia.” Nair and Shoshani wholeheartedly agree with McKinsey’s analysis of Asia, which identified the ‘five Cs’ necessary to create a successful borderless payments ecosystem. They are: cross-border payment links, including more bi-lateral payment systems and possibly the emergence of a single pan-regional one; consolidation among payment providers; contactless payments, with an increasing customer focus on wallets and QR codes; connected commerce, including ways for providers to monetise payments beyond transaction fees; and cashless economies. But both would add the need for standardisation across the region. Nair says: “Even today, because we have banking relationships with key providers there, a Maybank customer from Malaysia can use his/her QR code in Singapore, because we tie up with some of the providers there. They understand the www.fintechf.com

need to create such an interoperable mechanism for payments. “To give another example, Maybank launched a virtual wallet, called MAE and what’s interesting about that is, if you were to take your wallet to a different country, you’d automatically see the wallet balance and the foreign exchange (FX) conversion rates available on your app in that country. “Long gone are the days when banks hid behind FX rates. You have to be extremely transparent and the payment must be immediate, and it must be real-time, cheap and fast. To do these things, we have to make sure interconnectivity is friction-free for the consumer.” Transparency is, of course, a fundamental element of the data-rich messaging provided by ISO 20022, and Shoshani stresses the need for banks and other financial institutions to be ready for what he calls a ‘generational change’, or run the very real risk of limiting their ability to do business. “Local regulators and scheme operators – the Monetary Authority of Singapore (MAS), Malaysia’s only large value payment system (RENTAS), the central bank in Thailand (BOT), and the Hong Kong Monetary Authority (HKMA), for example – are driving standardisation across Asia, so money can be transferred in one format, whether you’re sending or receiving local payments, or cross-border payments. “We believe it will be two to three years before everybody is ISO 20022 compliant. In the meantime, you need transformation layers to support your business. Without this, your ability to send information, and to enrich messages, becomes very limited.” It helps that several market infrastructures have published translation tables to understand the difference between ISO 20022 and the messaging formats it’s replacing where organisations move through a like-for-like translation period, as will happen in Singapore. The risks and challenges involved in managing translation is something Bottomline is focussed on helping businesses meet, drawing from its previous experience in having helped corporates and banks transition smoothly to ISO 20022 elsewhere. There are, of course, some major economies in the region already operating to the standard: both China and Japan’s real-time gross settlement systems already run on ISO 20022.

What customers want Nair sees the migration to ISO 20022 as a way of expanding markets and creating more value; using the advantages brought by the standard to work up new propositions for customers. She also suggests that what is developed on top of the payments rails for messages and transactions to travel over is of equal importance, and that is all about giving the customers more information and choice. “I’ll give you an example,” she says. “A customer wants to send money to, say, the US or India. Today, at Maybank, we have SWIFT, Western Union and Visa Direct, and very soon one or two other payment options will come in. So, the payment rails are available, but how do you add value for the customer?” Maybank’s answer to that is to provide a menu of choice for intelligent routing, much like selecting a postal service in the UK. Instead of options based on the size and weight of a package, how fast a customer wants it to get there and at what cost, Maybank customers can choose their

Local regulators and scheme operators are driving standardisation across Asia Eli Shoshani, Bottomline

payment handlers, based on criteria such as execution time, cost and exchange rate. The underlying provider of those services is irrelevant to them; it is, in fact, a neat reversal of the disintermediation that alternative financial services providers are often said to threaten banks with. “The customer does not understand SWIFT, Western Union, or Visa Direct,” says Nair. “These are all products that as banks we tend to put a lot of effort into promoting, but at Maybank we have removed that layer. On the internet banking channel, or mobile channel, we simply ask ‘where do you want to send the money and how much do you want to send?’ The moment we know the country and the amount, we are able to give them a comparison table. The customer sees for themselves how fast each option is, for what cost, and at what FX rate. Then they can make an informed decision. Issue 20 | TheFintechMagazine

COMMENTARY: INTEROPERABILITY “This brings a lot of transparency to that basic payment infrastructure layer.” Looking into his crystal ball, Shoshani predicts that competition in the payments sector within the ASEAN region will only intensify, and has this advice for banks: “You will need to use the best technology, but let the experts provide you with it, rather than running it yourselves. “You need to be focussed on what you can do to provide your clients with the best customer service, and where you can

innovate (for example, on top of ISO 20022), because you’ll face competition in doing that from all of your peers. “For example, Maybank is currently a leader in Malaysia, but I am sure that CIMB (Commerce International Merchant Bankers) and RHB Bank are pushing on its back, to make sure that they are not missing anything on the way.” For her part, Nair forecasts an unquenchable thirst for innovation and interoperability between different

countries in Asia to meet customer needs. “We will also see better fraud management as the interoperability between countries increases, because that’s extremely important,” she adds. “As we create more friction-free, embedded financing, how we secure these transactions becomes even more of a challenge. It has to be transparent, it has to be fast, it has to be hassle-free, and yet it has to be safe.” Or, put another way, the very essence of what ISO 20022 is aiming to achieve.

HOW THE MONETARY AUTHORITY OF SINGAPORE IS ENCOURAGING ASEAN PAYMENTS TRANSFORMATION

The transactions are completed within a matter of minutes, a dramatic improvement on the average of one-to-two working days needed by most cross-border remittance solutions. And, in another move to meet the growing expectations of customers, the participating banks have committed to set their fees against the market so that they are affordably priced and transparently displayed, prior to the confirmation of any transfers. Users will also be able to view the applicable foreign exchange charges prior to sending their funds, with these rates benchmarked closely to prevailing market rates. The PayNow-PromptPay linkage is a key collaboration under the ASEAN Payment Connectivity initiative that started in 2019, and closely aligns with efforts by the G20, the Financial Stability Board and other international standard-setting bodies to facilitate faster, cheaper, more inclusive and more transparent cross-border payment arrangements. MAS and BOT will progressively scale the PayNow-PromptPay linkage to include more participants, and extend the transfer limits in order to facilitate business transactions. Announcing the partnership, Ravi Menon, MD of MAS, described the PayNow-PromptPay linkage as a pioneering effort. “It shows that the existing payments infrastructure and the banking system

have the potential to provide seamless cross-border payment options to retail customers. This is only the beginning. MAS’ shared objective with BOT is to work with our ASEAN counterparts to expand this bilateral linkage into a network of linked retail payment systems across ASEAN. With the rise of the digital economy, we want to empower individuals and businesses in the region with simple, swift and secure cross-border payments through just a few clicks on their mobile phones.” Dr Sethaput Suthiwartnarueput, governor of BOT, promised further evolution in the ASEAN payments infrastructure, saying: “With the success of PromptPay, our domestic payment system, we have sought to enhance cross-border linkages with ASEAN and other countries and have launched our QR cross-border payment connectivity with Japan, Lao PDR, Cambodia and Vietnam. “The PayNow-PromptPay linkage represents another key milestone in our digital payments journey. This service by the MAS and the BOT will effectively address customers’ longstanding pain points in the area of cross-border transfers and remittances, including long transaction times and high costs. “Looking forward, the BOT will continue to promote innovation in cross-border payments and infrastructure, to strengthen financial integration for the sustained wellbeing of the country and the ASEAN region.”

The white-hot pace of innovation in the ASEAN region’s financial ecosystem was vividly underscored recently when the Monetary Authority of Singapore (MAS) and the Bank of Thailand (BOT) announced a global first by linking Singapore’s PayNow and Thailand’s PromptPay real-time retail payment systems. It allows customers of participating banks in Singapore and Thailand to be able to transfer funds of up to S$1,000 or THB25,000 daily across the two countries, simply by using a mobile phone number. The system alleviates the need for users to fill in information fields such as the recipient’s full name and bank account details, as is the norm in traditional remittance procedures. Importantly, the link-up also enables funds to flow seamlessly and securely between customers’ accounts in Singapore and Thailand, mirroring how domestic PayNow and PromptPay transfers are made, with senders using their mobile banking or payment applications to initiate fund transfers at any time of the day.

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CLOUD: HARDWARE-AS-A-SERVICE

Thethird-partypiece Nicola Griffiths, Account Manager for MYHSM, and John Cavebring, Founder & CEO of Hips, discuss the impact of Cloud-based managed services on compliance Regulation has been the catalyst for so much innovation in the fintech/paytech space; but the cost of compliance is also, potentially, one of the biggest barriers to market entry. Serial paytech entrepreneur John Cavebring recalls how, during product development for one of his early startups, there was no alternative but to invest in hardware security modules (HSMs), just to run the tests. “It’s extremely expensive hardware, too, and it was just lying around the office for years after that, not being used,” he says. By the time he came to found Hips Payment Group in 2016, an alternative option had become available: hardware- as-a-service (HaaS), delivered in the Cloud. As a Cloud-based provider itself, it made absolute sense for Hips to partner with an expert in such systems. “Our main goal at Hips is to make a platform available for any merchant or company that wants to go into the payments industry without breaking any rules, so they can focus on what they are good at,” says Cavebring. “Whether they are a mobile phone company, or a small merchant selling flowers, they do that best, paying a small fee for us to ensure everything around them is compliant.” www.fintechf.com

Equally, Cavebring says, if every business it’s servicing downstream is concentrating on the things it is good at, ‘Hips itself is not doing HSMs’. Instead, it looks to MYHSM ‘because it not only has all the hardware, but also the licences that come with it’. It’s an area of expertise that requires not only a dedicated team, but relentless monitoring and updating as the regulations change. MYHSM concentrates exclusively on providing payment hardware security models and related compliance, including

The Cloud is an essential platform for catalysing innovations in the fintech sector Nicola Griffiths, MYHSM

Payment Card Industry (PCI) certification that regulates critical functions, such as how a PIN is transferred and encrypted. And it’s all delivered via the Cloud. Nicola Griffiths, account manager for MYHSM, believes the technology is the key influencer in digital disruption. “The Cloud is an essential platform for catalysing innovations in the fintech sector,” she says.

“It allows fintechs to innovate without constraints; it can provide faster time to market; and it allows them to focus their valuable IT resources on developing applications that will ultimately differentiate their businesses and transform customer experience, without the burden of managing infrastructure and datacentres, and the associated costs.” The backdrop to MYHSM’s relationship with Hips and many others is an atomisation of financial services – myriad payment options offered by non-traditional providers, from the contactless payments vending machine where you grab a coffee at the airport, to the invisible Uber transaction you make on your short trip from the terminal to a meeting, and the QR code you scan to pay and play at the golf course after work. They all share the common need to be not only secure, but also trusted to be so by consumers. Arguably, many of these wouldn’t have been possible without innovative fin/ paytechs relying on Cloud-based, thirdparty solution providers to ensure the risk remains proportionate as they scale. “More and more companies are moving into fintech that aren’t typical players, because it’s so easy to do now with Cloud-based regulation-as-a-service and HaaS,” observes Cavebring. Issue 20 | TheFintechMagazine

CLOUD: HARDWARE-AS-A-SERVICE MYHSM supports them by offering a test service, so they can securely and inexpensively develop payment apps using the latest payment HSMs, on either in-house IT infrastructure or in a Cloud services environment, such as Amazon Web Services, Azure or Google. All MYHSM services are accessed over industry-standard networking services, to guarantee the privacy of transactions. Griffiths adds: “We can help provide speed to market and help them adopt a multi-Cloud strategy. We also take care of the management, monitoring and system maintenance, via our online portal, which also allows our customers to monitor their data usage, track their performance stats, and check their latency status. “Our test service allows fintechs to develop and test their payment applications, whether on-premise or in the Cloud, in as little as three days, after which they can be migrated to MYHSM’s live service where they’ll have access to three payment HSMs in two geographicallyseparate data centres, providing resilience and 99.999 per cent availability. Our aim is to encourage the growth of the fintech industry, and support them from the early testing phase through to the live transaction. We do that by providing a fully-managed and compliant service, at a very cost-effective price.” In effect, it’s like owning your own payment HSM, except ‘the string is a little bit longer’, says Griffiths, with MYHSM providing its own secure, scalable, hosted environment for clients like HIPS. Where data is stored and whether it can be traced easily, are among the key addresses to be addressed before opting for a Cloud-based service, because outsourcing regulation doesn’t mean outsourcing responsibility if data security is breached or cannot be traced. But it does mean someone else is keeping an eye on the compliance landscape for you. Financial regulation is a ‘work in progress’, reflecting the evolution of technological threats and industry advances more generally. The latest, version 4.0 of Payment Card Industry Data Security Standards (PCI-DSS), for example, is expected to be ready by the year-end. While its 12 core requirements, including regularly updating and patching systems and conducting vulnerability scans, to name two, will be retained, it is also likely to be updated with

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a requirement to ‘promote security as a continuous process’. This reflects changes in the threat landscape and acknowledges the need for more flexible solutions in help organisations meet their security objectives. It’s an onerous task, if it’s not your core business and it’s often not done well. As Verizon noted in its 2020 Payment Security Report (PSR), ‘poor performance in compliance assessments isn’t spontaneous, it’s the outcome of a sequence of activities and events based on strategic planning – or lack thereof. Unless the security and compliance strategies, business and operating models are improved, it’s mostly symptoms that are addressed’. The report goes on to state that, on average, just 27.9 per cent of global organisations fully complied with the PCI-DSS at the time of publication. More concerning was that this is the third consecutive year of such poor compliance. That degree of disregard for a key piece of risk management wouldn’t be tolerated

We see more and more companies moving into fintech that aren’t typical players, because it’s so easy to do now with Cloud services John Cavebring, Hips

by an external service provider, adding weight to the argument that Cloud-based services are, if anything, more secure than those owned and maintained in-house, so long as robust third-party protocols are put in place. The relationship between MYHSM and Hips is a case study in how the service relationship works well in the interests of paytech (and consumers), especially for companies pushing into new territories, such as crypto, where, in the absence of close regulatory control, the industry has, by and large, had to prepare its own rulebook. As cryptocurrency adoption broadens beyond trading to a currency accepted as a payment method by online and high street merchants and supported by card issuers, Hips has pushed resolutely into that space. Most recently, it launched the Merchant

Token (MTO), issued on Ethereum, alongside the Merchant Protocol (HMP) and the Hips Merchant Protocol Gateway (HMP- gateway). By incorporating consumer protection concepts from the traditional card payment industry, and applying it to any blockchain with support for smart contracts, like Ethereum, Cardano (ADA) or Solana, the initiative is attempting to bring confidence and popularity to a payment surrogate that has lacked both. As Cavebring puts it: “The consumer-oriented features of the MTO are the missing piece for crypto payments to achieve market penetration and mass-adoption among mainstream consumers." That includes, he says, processing speed at very low cost. “Hips Merchant Blockchain’s near-real-time transaction speeds are a vast improvement on current blockchain responses. Its Merchant Protocol is not only built for Ethereum, but also on Solana, a blazingly-fast public blockchain which supports over 50,000 transactions per second, has block times of 400 milliseconds and a transaction cost of roughly US$0.00001.” The first trial of the MTO was announced a few weeks after its launch – a partnership between Hips and payment processor The Payment House, which will enable more than 20,000 taxis in Scandinavia and 10,000 in the UK to accept crypto-payments, at real-time transaction speeds. Hips is working in other areas of the payments space, too – in particular SoftPOS, ‘which enables more or less any Android device to become a POS terminal with contactless payments’, as well as QR payments that don’t rely on a proprietary app. “We’re looking at ways of using QR scanners, and paying with domestic payment rails in different countries,” says Cavebring. Griffiths believes that in the wake of a crisis that ramped up the adoption of these and other ‘contactless’. payments ‘businesses will need to adapt to this or risk being left behind’. “Fintechs will seek to meet these needs and with that comes increasing demand for payment HSMs,” says Griffiths. “Again, a fully-managed service takes away the c ost and time associated with them. “Running a successful business, now and in the future, will require a technology infrastructure based on Cloud foundations.” www.fintechf.com

COMMENTARY: SUSTAINABILITY

Values-addedbanking The head of BBVA’s new Global Sustainability Office, Ricardo Laiseca, firmly believes that, instead of being part of the problem, the finance industry – and banks in particular – can be part of the solution to the world’s environmental and social challenges The urgent need to tackle climate change at both governmental and corporate level is near-universally accepted. With the Organisation for Economic Co-operation and Development (OECD) estimating that $6.9trillion will be required up to 2030 to meet climate and development objectives, private capital will be required to do a lot of the heavy lifting. Corporates the world over have already started to assimilate environmental and social responsibility into their strategic objectives and operational governance, encouraged by influential investors such as BlackRock. Now, big banks are coming under increasing pressure to do better in their role as keystones of the economy and BBVA is one major player leading the way. BBVA is already the most sustainable bank in Europe and the second globally, as judged by the Dow Jones Sustainability Index 2020. Having already achieved carbon neutrality in terms of direct CO2 emissions last year, it recently announced a commitment to zero net indirect emissions by 2050 – surpassing the targets set under the Paris Agreement. At the time of the announcement, group chairman Carlos Torres Vila said that banks have a key role in ‘analysing investment opportunities and managing the risks associated’ with climate change. Indeed, BBVA was one of the first banks to adopt the World Bank’s Equator Principles – a risk management framework that seeks to ensure socially

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and environmentally responsible financing of large-scale infrastructure, mining and energy projects – in 2004. It's looking to develop sustainable versions of all its banking products, including a sustainable transaction framework, within the next few years, having already introduced specific initiatives, including green derivatives and green foreign exchange. Ricardo Laiseca, head of the Spanish giant’s global sustainability office, created in 2020, believes the banking industry could have a ‘transformative’ impact after the pandemic forced attention like never before on the social, as well as the environmental, ethics of big business. “We can support any transition, and, in particular, this transition from the pandemic into a new world that is much more based on values,” says Laiseca. “We can mobilise funds in order to fight against climate change and promote inclusive growth. We can also – as a financial institution, as a large player – develop capital markets and market incentives to promote sustainability.”

We can mobilise funds in order to fight climate change and promote inclusive growth. We can also – as a financial institution, a large player – develop capital markets and market incentives to promote sustainability He points to carbon markets and the capital markets union in the EU, that he says can help create a green market for bonds and loans. But adds that a particularly valuable tool, as a financial institution, is the decarbonisation of its own balance sheet by aligning it to specific goals such as the Paris Agreement on emissions. Banks across the world have long profited from investing in carbon-heavy ‘dirty’ industries, with some such as HSBC

more recently accused of ‘greenwashing’ by continuing to fund coal projects while pledging to go carbon neutral. BBVA has moved to reduce its exposure to coal-related activities by adopting an environmental and social framework that aims for zero exposure to coal clients by 2030 in developed countries, and by 2040 elsewhere. “The reason for that is that coal represents about around 40 per cent of total carbon emissions in the world,” Laiseca explains. “I feel this is the first step for any credible sustainability strategy, if you are committed to a net-zero future, so this is what we have done.” The bank intends to announce new goals for other sectors, particularly big polluters such as oil and gas, cement and steel, automotive, and transportation in general. But Laiseca stresses that it’s not just about limiting the bank’s interest in those sectors; it is also about adopting investment strategies that help those companies transition towards a greener future themselves. “We are happy to fund them, if they want to use their funds for renewable or sustainable energy projects,” he says. Indeed, it has played a significant role in co-ordinating three rounds of sustainable debt finance for Spain’s global utility company Iberdrola, helping it go coal-free last year. Most recently, the bank acted as the sustainability co-agent of a pioneering $2.5billion multi-currency syndicated loan to the company. The margin on the loan is linked to the company’s performance against two sustainability indicators that are wrapped into the loan agreement: not only will Iberdrola have to meet its emissions reduction target, but it will also have to increase representation of women in its boardroom. The finance is also subject to a third commitment from the company: to make donations to sustainability projects, the value of which is dictated by its use of the credit line. BBVA’s new sustainability advisory service also helps larger clients achieve their environmental, social and governance (ESG) targets, benchmarks www.fintechf.com

key performance indicators against similar companies’, assists with reporting transparency, and with access to sustainable finance products. A growing body of evidence suggests that such companies not only perform better, but shareholders are more likely to give them their support. In a recent Institutional Shareholder Services’ survey, 75 per cent of investors said they would consider voting against directors who were not effectively reporting on, or addressing, climate change risk in particular. Laiseca observes that calls for sustainable change can now be heard a long way down the value chain. The spotlight might have been on the bank’s corporate clients in carbon-heavy industries to begin with, but it’s being echoed by smaller business customers. Consumers also want the same sustainability and social issues addressed at retail investment level and in their daily financial lives. They are looking to the bank for support and guidance. During the pandemic, there was a clear trend towards embracing alternative financial instruments that matched an investor’s ethics. “People and small clients, individuals, are looking for a return, but they are also looking to fit their investment with their values,” Laiseca observes. “This is what we’re seeing right now – individuals, families and small businesses demanding new services. They want to adopt a new style of life that fits the new concepts, regarding sustainability.” BBVA was one of the first private financial institution in Europe to place a COVID-19 social bond on the market, which was way over-subscribed within hours, proving his point.

“A lot of detrimental impacts – particularly those relating to the environment – can be minimised through information and the right digital tools,” says Laiseca. “I feel that digitisation, and large institutions or financial entities can play a very important role in this, in particular for the smaller clients.” For example, BBVA’s financial aggregator One View uses data analytics to tell companies how much they emit in greenhouse gases through their daily activities. Knowing their carbon footprint enables businesses to make informed choices about how best to reduce their impact on the planet, while also exploring more sustainable ways of doing business. Laiseca describes it as a step-by-step approach. But BBVA fully intends to put sustainability at the core of its operations worldwide. “These issues will affect developed and non-developed countries at the same time,” he says. “So we have to find a plan, a global plan, to meet global goals in the whole organisation. “Our balance sheet, our credit activity and our lending business can contribute a lot to align the activities and the economy in general. So we are

defining some of those common goals there,” explains Laiseca. The bank is also setting targets in terms of transparency and disclosure at board level as sustainability requires more than aspirations and good intentions. It’s vital for a board to communicate what a business is doing so others can learn and incorporate such information into investment decisions. “This is also important in order to create an environment for new green investment. And this is where we’re going, with common goals on mobilisation and direct impact, transformation of the balance sheet, and transparency and disclosure.” Laiseca fundamentally believes that, instead of being part of the problem, finance can be part of the solution to the world’s biggest social and environmental challenges. “Our strategy is nothing to do with high-level manifestos. This is not about that; it is not about a pure regulatory compliance programme,” he says. “We believe that sustainability is something core for us as financial institutions, and for society as a whole."

A growing desire for ‘good’ business: BBVA’s strategy extends into corporate boardrooms

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Issue 20 | TheFintechMagazine

Emerge Better

S A FE . INNOVATIVE. AGILE. C O NNECTED.

We can help support your strategy. Let’s talk. bottomline.com/ paymentsmodernization

The importance of payments modernization has never been more urgent in addressing new customer behaviours and expectations. We have the opportunity to improve our organizations. In our world, that means improving the way we help our customers pay and get paid – the way we engage with our customers and the way we protect them against fraud. The modernization will be different for every payments organization, but this much is clear – manual and paper-based payments and analog banking processes simply aren’t agile or resilient enough for such an important function.

COMPLIANCE & REGULATION: TOKENISATION

In banks we trust...

G+D’s Jukka Yliuntinen believes banks could become the gatekeepers to our most valuable data, giving consumers ease of use and peace of mind when it comes to payments security. Its TokenCockpit is one solution that takes them closer to it For payment powerhouse Giesecke + Devrient (G+D), striking a balance between securing payments and maintaining the slick and easy transaction experience that consumers have come to expect, is a daily preoccupation.

Its focus recently has been on returning power to the people through its Token Cockpit solution, which is aimed at giving them 360-degree visibility and control over the disparate payment methods they have stored with providers of online retail goods, entertainment and services, in today’s increasingly e-commerce and subscription-based economy. The company’s head of digital payment solutions, Jukka Yliuntinen, believes banks have an opportunity to steal a march on their competitors by using solutions like Token Cockpit, thanks to the trust these major institutions have built with consumers over centuries. G+D has, in fact, grown up with many of those institutions. Since 1852, it’s been protecting their and their customers’ physical and digital security with technologies that millions of people worldwide use daily to pay by cash, card or smartphone, and interact with smart systems as well when accessing their identity documents for travelling. We asked him to expand on his ideas... www.fintechf.com

THE FINTECH MAGAZINE: Can we start by asking how customer expectations around digital payments and banking have changed in recent years? JUKKA YLIUNTINEN: We’re all very familiar now with having digital means to do whatever we want to do, including payments, largely driven by our mobile phones, which you could say provide a certain standard for everything in terms of convenience of accessing services and immediacy. That sets the bar and it’s still accelerating now – it’s almost unbelievable, if you look back five years, to see how things have developed. Of course, in this we’re talking about the digital natives, but then there are a lot of people who are not actually that savvy… I guess we would call them digital migrants, who need to learn a lot and try to keep up with the pace. The key point, for everybody, is perceiving that their digital payments are secure, which is where technology providers like us, the issuing banks and the whole financial network, come in, making online payments easy amidst phishing attacks and consumers’ need for reassurance that sites they want to purchase from are credible. But there are changes happening, which is something we need to address from both a technology and user experience point of view.

TFM: What role does tokenisation play in that customer experience? JY: People shouldn’t need to worry about whether there is a tokenisation technology, because all they want to do is buy something, and the payment is the necessary evil in between. How this technically happens is really important to us, but hidden from the consumer. The 16-digit PAN number on every credit or debit card is the origin of everything, and tokenisation is basically making digital surrogates of that. Consumers can have as many as they want and keep them in different digital wallets, like Apple Pay and Google Pay, or with merchant A and B, and then manage them dynamically. If they lose their phone, they can disable that token, but all the other tokens, and their original card, still work. So there are a lot of benefits. In terms of consumer experience, one good example is e-commerce. If someone wants to buy something from a web shop, they store their card details there and, with tokenisation, that information is automatically updated. If their real card expires, and they get a new one, the old information remains on the online merchant site but is automatically updated in the back-end system, which means, when they want to buy next time, their payments continue automatically, without re-entering their details. Issue 20 | TheFintechMagazine

COMPLIANCE & REGULATION: TOKENISATION A small thing like this is actually a big thing for the consumer, because they often stop a transaction at the point when they need to start doing extra work; and that’s an even bigger problem for the merchant, because then they have lost a customer. TFM: So, what challenges does this present for banks? JY: Consumers are very demanding, thanks to the big techs, raising their expectations. The challenge, in my opinion, is that whenever there is a monetary value, as there always is with a payment, it needs to be bulletproof. But banks need to build a level of security around a payment that is high enough, but still means the process is convenient and attractive. Banks can differentiate themselves from other service providers because they have the means, using tokenisation, to manage payment credentials, and can offer customers visibility around where those credentials are stored. So, with one look – and this could be a great feature of a banking app, or wallet – they could see and manage all the cards they have stored with merchants, the likes of Apple Pay, subscription services, even their car rental provider. Banks can create trust relationships and stickiness with consumers this way, because many don’t even recall where they have stored their cards: “Maybe they’re with a couple of airlines, a few hotel chains, some music and other entertainment, like Disney+ and Netflix... I don’t know.” I honestly think this is a potential advantage that banks have, that they should give special attention to. TFM: Will multi-factor authentication reduce complexity for consumers but make payment processing more of a headache for banks? JY: I guess it could. The most important thing is spending time on end-to-end service design. It’s not just a technology piece, but about the whole process of how they do this. One way is to ask customers to present their fingerprints to authenticate payments. Or, for high-value transactions, maybe their fingerprint and face ID, or another form of biometric test like iris recognition. As I’ve said before, banks need to ensure a good experience that’s not too complicated, and if they use three different authenticators they need to do so in a

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sensitive way. So, for example, using additional biometrics only when the value of a payment transaction goes higher, which reassures the customer that the bank understands this is an important transaction and want to guarantee it’s the customer authorising it. It’s also about choosing easy and simple biometrics, such as presenting a fingerprint or showing their face, and then the payment is done; not asking them to enter another code.

Tokenisation: The key to security that banks can use to build on customer trust

especially. Just knowing where they are gives them some power back. Then, they can also manage these cards from their banking app containing all the details, and decide, for example, ‘I don’t want to use this service for the next six months so I’ll disable that one, but resume another one’. Our Token Cockpit provides consumers with that capability to view and manage all their cards. They can also send those cards to different places, for example to enable a payment with a new provider like Amazon, at the click of a button. Or they can disable or even terminate that card if they have any issues with the merchant. TFM: Another hurdle to providing a channel-agnostic, seamless experience, is Strong Customer Authentication (SCA). Can tokenisation streamline that? JY: Partially. For example, network tokenisation, provided by the payment schemes like Visa and Mastercard, has seen them start with the wallets like Apple Pay and Google Pay. However, there is strong momentum now for merchants to tokenise the cards they or their payment providers have stored in their back ends. We’ve all seen those small boxes payment services have, which say ‘do you want to save your card credentials for the next use?’. When a customer ticks that box, their card details are tokenised and stored, which means providers can start offering so-called delegated authentication. This means the issuing bank deems a payment good to go, but the authority is given to the merchant. Then, when the customer does their online payment, the merchant can check, using SCA, that the consumer is the one making the payment, and authenticate on behalf of the issuer. Again, biometrics could be used for SCA, and there are other technologies that we provide, where customers can use their physical, dual interface, such as their contactless payment card or phone, for really secure authentication, because these second-form factors are tamper-proof.

Banks can have the means, using tokenisation, to manage payment credentials, and can offer customers visibility around where those credentials are stored

TFM: With people becoming increasingly savvy about how their data is used – thank you, Facebook – how can consumers take back control of their payment data? JY: That’s a tricky question, because we’re individuals with individual preferences for how we want to manage our data, but most people are probably quite sensitive about data related to their personal needs like payments and health. They don’t want to share payment data freely, but they recognise that, if they want to get something, they have to share it. One way of protecting it is, once again, tokenisation. People each have 20-plus services where they have stored their payment credentials, their payment cards

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Leaders in reconciliation & finance automation software AutoRek is a financial controls, regulatory reporting and data management platform. We work with the world’s largest banks, asset managers and insurance companies to deliver timely, accurate and robust financial data control. Visit our website for more information at www.autorek.com or call us on +44 (0) 845 603 3613.

COMPLIANCE & REGULATION: AUTHENTICATION

SAFE JOURNEYS

With online fraud a major industry concern, there has been a raft of developments, from both the private sector and regulators, which bring together the various elements of security and authentication. Here, Mastercard’s Mike Cowen discusses the roll-out of SCA, 3DS2, and what Click To Pay adds to the picture Online card security is a hot topic. The revised Payment Services Directive (PSD2) has ushered in the enforcement of Strong Customer Authentication (SCA), which means that payment services providers are battling with the complexities of security protocol 3D Secure (3DS) and its younger sibling, 3D Secure 2 (3DS2), which have been introduced to reduce friction for users. SCA has now been joined by Click To Pay, an industry standard for online payments which, like 3DS2, is managed by EMVCo (a card consortium consisting of Europay, Mastercard, Visa, JCB,

American Express, China UnionPay and Discover). Click To Pay allows customers to pay with a single click, using stored payment information for all of their credit and debit cards. The service supports, and is supported by, Visa, Mastercard, American Express and Discover. These major developments are in response to the global uplift in e-commerce, a trend further driven by the pandemic, and the accompanying rise in online fraud. “Those who are less tech-savvy are more vulnerable to certain forms of fraud,” says Mike Cowen, Mastercard’s head of digital solutions for the UK & Ireland.

“Over the course of the last year, we’ve seen massively- accelerated growth in the shift of payments to online, but also a demographic shift, so that more people who haven’t shopped online previously are starting to, and those people are less comfortable and familiar with shopping online, and potentially more at risk.” UK Finance has highlighted that unauthorised financial fraud losses across payment cards, remote banking and cheques, totalled £784million in 2020, while research by TransUnion picked up on a 14-per-cent spike in online fraud during the last holiday season. It is feared online fraud will continue to boom throughout 2021. Getting their skates on: Card schemes are working fast on easy, secure checkout… everywhere

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MEETING THE DEMANDS OF SCA “Fortunately, there are a number of initiatives that are helping us to fight these issues,” says Cowen. “One example would be SCA, which has been driven by regulation and basically means that, when somebody is carrying out a transaction online, the bank, or the card issuer, will have a much greater degree of certainty that it’s a legitimate cardholder that’s completing that transaction.” SCA has been specifically designed to ramp up online security, and therefore significantly reduce fraudulent transactions, providing an extra level of protection for both consumers and companies. Despite the challenges of introducing a new protocol amidst COVID-19, many commentators believe it has come at the right time. J.P. Morgan, for example, claims that, in recent months, e-commerce transaction fraud has actually been reducing among its own merchant clients. The banking giant attributes this to an increasing consumer awareness of online fraud, but also an increase in merchants installing 3DS2, which accepts a wider range of authentication methods, including biometric and SMS data, and integrates better with mobile devices. “We do, indeed, now have very convenient ways of authenticating ourselves, things like fingerprint scanners and facial ID on mobile phones,” says Cowen. “We can harness that technology, and, even though we’re making people jump through more hoops in order to authenticate themselves, they can do it in a way that suits them.” However, despite the promises of 3DS2, there are also widespread concerns about the inevitable contradiction between the concept of frictionless customer experience and the imposition of more steps in the authentication process demanded by SCA. These concerns appear justified by data from fraud prevention platform Forter’s global e-commerce merchant and acquirer network, which provides a clear view on the negative impact PSD2 has had on conversions over the past 12 months. Conversion rates for 3DS transactions, compared with non-3DS transactions, expose the negative impact of 3DS on overall conversions throughout Europe, with a 25-30 per cent decrease in the www.fintechf.com

UK and a 50 per cent decrease in Germany, France, and Italy. Since many consumers are still unfamiliar with the 3DS process, merchants worry there’s a higher chance of abandonment during authentication. Users may also choose to abandon a transaction simply because it gives them more time to contemplate whether they really need to make the purchase. If the consumer successfully completes 3DS, the transaction will continue to authorisation, but even here there are opportunities for the transaction to be lost. A legitimate transaction may be declined, for example, if an issuer perceives the transaction as high risk. The issuer may then choose to decline the transaction to avoid chargeback liability. This is because, when 3DS is completed successfully, the chargeback liability shifts to the issuing bank. There are therefore a number of issues for the industry still to iron out, including worries about consumers being liable for exempted transactions. But Cowen is confident it improves consumer protection.

Even though we’re making people jump through more hoops in order to authenticate themselves, they can do it in a way that suits them “Mastercard offers cardholders what we refer to as ‘Zero Liability’. This means that, as long as the consumer has exercised reasonable care, and reported it promptly if their card is lost or stolen, they will not be held liable for any fraudulent transactions that may arise as a result,” he says. “Obviously, what constitutes reasonable care will evolve over time. As we give people more tools with which to protect themselves, the consumer also has an obligation to use those properly, and, obviously, banks have a responsibility to educate them about how to do so.”

MATCHING THE BIG TECHS? Click to Pay is a standardised payment experience based on the Secure Remote Commerce specifications, both managed

by EMVCo. The relationship between Click to Pay and SRC is similar to that between Chip and PIN and EMV chip specifications. Users first have to enrol their card and personal details in Click To Pay, either by going to a card issuer’s site or app, or at the point of making their first payment on a merchant’s site. Thereafter, they can pay via the Click To Pay button on any site that accepts the type of card they’ve registered, and use their email address to authenticate themselves. They then receive a one-time code by email to enter. It’s anticipated that the Click To Pay initiative will help to bring the idea of tokenisation, unfamiliar to many, further into the mainstream. “In terms of making online payment security more robust, there are two things really,” explains Cowen. “The first is SCA, which we’ve covered, and the second is around securing the transaction itself through tokenisation. “Tokenisation, essentially, is two things; it’s swapping out the real card number for a surrogate one, which is only used in certain scenarios, and secondly, cryptographically authenticating the use of that card number. Right now, we’re in the middle of tokenising cards that are stored by retailers in their systems – so a tokenised card-on-file, or tokenised credential-on-file. The final piece of the puzzle is when people type in card numbers online, and tokenising that,” says Cowen While there are still certain elements of friction, there are also clear upsides in terms of security for the consumer and less risk for the merchant. Click To Pay eliminates the need for a guest checkout process, for instance, so customers don't have to enter any of their personal details and merchants don’t have to store any customer information. Cowen emphasises that this advanced technology relies on analytics and biometrics to identify legitimate cardholders. In the US, where SCA isn’t required, Click To Pay has been described as the card schemes’ answer to Amazon’s one-click buying process, but it’s fair to say Amazon’s is a much smoother journey at present, albeit limited to certain sites and apps. With a solution that works on every channel that chooses to provide a Click To Pay checkout option, Mastercard and its peers are clearly setting their sites high. Issue 20 | TheFintechMagazine

COMPLIANCE & RGULATION: E-COMMERCE

Hot to shop Despite international travel bans, the UK remains the shopping destination of choice for millions of JCB cardmembers in Asia. Nick Fisher, General Manager for UK Sales & Marketing, says multi-factor authentication won’t put them off Name the keenest region for buying UK consumer goods. Still thinking? According to international payment giant JCB, it’s Japan. Figures from its 2021 Business Without Borders report, show shoppers in its home country simply cannot get enough of the stuff: 73 per cent of JCB’s Japanese cardmembers are doing most of their virtual shopping with UK retailers – up from 59 per cent in 2019. Meanwhile, its Chinese users have clearly been enjoying a virtual trolley dash around UK department stores. These destination retailers – normally high on Chinese tourists’ must-see lists – also saw their share of online spend increase substantially over 2019/20. JCB cardmember spending patterns in other countries in the Asia Pacific region showed a similar trajectory. Pent-up demand resulting from their inability to visit outlets in person during the pandemic, means any retailer not offering them online purchasing power is missing an expensive trick.

Pre-pandemic, analysts predicted that shoppers from the APAC region would be spending $32.6trillion by 2026; JCB itself witnessed e-commerce spend in Europe and the UK ramp up 300 per cent in the three years prior to the pandemic, largely fuelled by a perception that the region’s goods are of a higher quality than those they buy at home. And travel bans clearly haven’t dampened their enthusiasm. But there’s a problem. The average online cart abandonment rate among shoppers in the Asia Pacific (APAC) region is the highest in the world. They walk away from purchases 76.3 per cent of the time, leading to an estimated annual loss of as much as $18billion for merchants worldwide. So, it’s critical to make the path to a sale as frictionless as possible for those customers, says JCB’s general manager for UK sales and marketing, Nick Fisher. And that’s a challenge for merchants, particularly in the

UK and Europe, where tightening payment security protocols adopted by all the global card schemes could, it’s been suggested, push cart abandonment rates higher. Fisher is confident that retailers can continue to benefit from the current digital bonanza if they’re alert to what attracts – and dissuades – digital visitors in Southeast Asia from using their shopping channel. As much as these shoppers might have a low threshold to clunky digital journeys, they place a high value on security. “In fact, the compromise of an individual’s data is one of the key threats to the success of e-commerce,” says Fisher. Deloitte’s 2021 report, Emerging Digital Life In South And South East Asia, points to the fact 32 per cent of Thai technical professionals, for example, had personally experienced e-commerce payment fraud in the past year, an example of Asian consumers’ growing awareness of their vulnerability. Which is why, JCB has introduced its own, updated version of *EMV 3-D Secure, J/Secure™ 2.0, which helps bring the card scheme into line with Strong Customer Authentication (SCA) regulations being introduced in Europe, requiring all merchants and payment services providers to introduce multi-factor authentication (MFA) of the payer.

The compromise of an individual’s data is one of the key threats to the success of e-commerce

www.fintechf.com

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COMPLIANCE & RGULATION: E-COMMERCE Subject to a transaction risk analysis (TRA), there are permitted exemptions to that, but Fisher believes it’s important that JCB implements the most secure protocols, and that need not compromise the customer journey; it’s a matter of merchants adopting the right technical approach. According to independent user experience research group, The Baymard Institute, the top reason for card abandonment (at 49 per cent), is not the hassle caused to consumers by additional security checks. It’s hidden costs, like shipping, taxes and fees, which only became evident at the checkout. Another 24 per cent of shoppers are put off by the need to set up an account, it found, while 18 per cent lost patience with the time that it took to complete a purchase. So, Fisher has some timely advice for European retailers who are targeting its cardmembers. “I would make sure that the JCB logo is prominently displayed across the website, for example, in the FAQs, on the shopping cart page, and anywhere else where the payment options are displayed. “I would also make sure that the delivery and returns policy is clear, and supports international shipping to the markets that they’re actually targeting. And be clear on the total shipping costs and local taxes that are applicable. Be very, very transparent on the upfront cost, to avoid abandonment at the final checkout. “I would also make sure that the registration process is as simple as possible, and offer a guest option to support customers who are not ready to commit to share their data yet. “Then, I would offer the customer the option of transacting in their local currency. According to data from BlueSnap, offering currency transactions can see the conversion rate can go up by 12 per cent. This is further supported by local language websites, and offering chat functionality. “Finally, I would ensure that the latest EMV 3DS level 2.2 is implemented, which also has the functionality to support more complex sectors, such as travel, and try to reduce the checkout friction as much as possible by using the TRA exemptions to speed up the checkout process. Ultimately, we want the smoothest process, from click, to buy, to then deliver. But one of the greatest threats we all face in this digital world is theft of our identity.”

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With gross fraud losses for card transactions predicted by data provider Nielsen to exceed $40billion by 2028, safeguarding customers clearly doesn’t just come down to the merchants, though. Indeed, Fisher argues for a three-part plan to beat fraud, underpinned by collaboration within the payments industry. “Through communication, we need to educate both the cardmembers and businesses by sharing best practice to spot a fraudulent situation,” he says. “Businesses, ultimately, need to be given the tools to be able to recognise if the customer is genuine. The industry should Digital handshake: JCB is considering partnering on a palm vein authentication project

JCB requires licensees to meet Payment Card Industry (PCI) Data Security Standards. “By adhering to the PCI DSS rules, companies have a practical framework to reduce payment fraud by focussing on the security controls around handling customer data,” says Fisher. “The PCI DSS 12-point checklist provides them with practical steps to help protect against data breaches, and headline-grabbing fines. “The third element in fighting fraud relates to card scheme operational rules, especially management of disputes through the chargeback process. “The structure of card scheme operations means that, unlike cash, there is a set of rules that ultimately determines the liability, giving consumers confidence to use their card in e-comm transactions. Consumers know they’re not on their own if a transaction turns out to be fraudulent.” Harnessing biometric authentication to combat fraud is a long-term goal for the payments industry. JCB, for example, is considering partnering with a Japanese start-up to use palm vein authentication. But the challenge for the sector is to reassure consumers about the security of such technology, while not piling too much additional cost on merchants by compelling them to use complex software. One way to avoid that is to standardise the process of tokenising biometric data and using point-of-sale infrastructure to provide a device-based solution, such as thumbprint, palm vein or online facial characteristics. Fisher sees the use of contactless payments tokenisation becoming much more widespread in online transactions. “Linking the phone to the shopping cart reduces the risk for the consumer, but also for the merchant, and potentially bypasses some of the challenges of processing an e-comm payment,” he says. As JCB cardmembers flock to the UK’s online checkouts, who they share their details with and who they trust to protect them, might well dictate which businesses benefit and which don’t. *EMV® is a registered trademark in the U.S. and other countries and an unregistered trademark elsewhere. The EMV trademark is owned by EMVCo

We need to educate cardmembers and businesses by sharing best practice

create a best-in-class service that includes payment solutions, but also regulation support, security advice and data protection guidance. “Consumers also need to recognise the value of their own personal data, and banks should be educating them better, by explaining why they need to protect their identity carefully, and the consequences of not doing so, for example sharing it on open social media sites. “Banks need to educate their business customers on what the financial penalties could be, if they were to have a breach. “The second way to address fraud is through regulation and technology. While, in most European countries, stronger authentication principles have been introduced, AI can help make quicker, smarter decisions, by minimising the false positives, automating the TRA exemption rules and, ultimately, trying to balance the reward versus the risk as much as possible.”

www.fintechf.com

COMPLIANCE & REGULATION: SCA

We caught up with three experts at the coalface of change to explore the impact that PSD2 and a post-3DS world will have on the European payments industry One of the most significant elements of the revised Payment Services Directive (PSD2), is Strong Customer Authentication (SCA), already delayed once and now fully enforced in the EU with just the UK left to implement it by September 14 this year. In order for payments services providers to meet SCA regulation, card schemes have recommended they use an updated 3D Secure (3DS) protocol. The protocol, managed by EMVCo and known as EMV 3DS (also referred to as 3DS2), is optimised for mobile use, it is designed as an additional security layer for online card transactions but with less interruption in the customer journey, particularly with mobile transactions, than previous iterations. The 3DS references the three domains that interact in using the protocol: the merchant/acquirer domain,

the issuer domain and the interoperability domain. 3DS allows customers to self-authenticate payments, so that transactions can be processed securely without an increased risk of fraud liability resting on the card issuer. EMV 3DS allows businesses and their payment providers to send more data on each transaction to the cardholder’s bank, in order to carry out a risk-based authentication (RBA). Those payments considered higher risk will automatically generate a request for the customer to provide two out of three pieces of information to complete their transaction. Those are something the user is (e.g. a biometrically-collected fingerprint), something the user has (e.g. a mobile phone), and something the user knows (e.g. a password). What and how those pieces of information are conveyed depends on which version of the protocol is employed – 3DS2.2, for example, is a significant improvement on the user experience delivered by 3DS2.1, where merchants have found that shortcomings in user experience design resulted in consumer confusion and high levels of checkout abandonment. Given all this,

there is, then, some understandable nervousness about how best to comply when SCA becomes mandatory. For instance, should all payments be submitted under the EMV 3DS protocol by default if some fall within exemption rules for SCA laid down by PSD2, such as those of low value (under €30), or those deemed that are deemed low-risk? It’s a complicated area, so we invited Caroline Birchinall, head of authentication at Visa in Europe; Noam Grinberg, VP of risk management at payment processor Nuvei; and Galit Michel, VP of payments, with Forter, a specialist in e-commerce fraud protection, to gauge the industry’s direction of travel. THE FINTECH MAGAZINE: The payments industry has gone through a host of changes in fairly short order, especially around authentication and the requirement to apply 3DS and now EMV 3DS to an increasing number of transactions. What impact is it having? CAROLINE BIRCHINALL: There are many different parties that need to come together. Trying to make change happen, relatively quickly, is challenging. Everybody wants to make sure things

Getting there: Despite short-term challenges, EMV 3DS points a way forward

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happen smoothly, without teething problems but we never anticipated we would have this to deal with in the middle of a global pandemic. That said, at Visa we’re making excellent progress. We have more than 90 per cent of all e-commerce enabled for EMV 3DS, so that’s fantastic and it brings some significant benefits to the ecosystem. It enables the use of mobile and other devices, for example, and there’s lots of data that can be used for risk-based decisioning. We’re trying to provide the support, insight and infrastructure that the whole ecosystem needs. GALIT MICHEL: Our main focus at the moment is to understand what is the right thing to do with every transaction – whether to submit to EMV 3DS or do an exemption, just to ensure that PSD2 is not harming the conversion for our merchants.

SCA is designed to reduce fraud and, in order to do so, there has to be a certain amount of friction in the purchase flow Caroline Birchinall, Visa

The way 3DS works in the mobile apps causes a lot of failures still; often, I think, it’s just the consumer thinking they’ve finished the purchase process and missing the authentication window, or just not seeing it properly on their device. Generally, we’re seeing a 20-30 per cent failure rate when sending transactions to 3DS. This varies by market. In the Nordic countries, for example, it’s working well, while, in Italy, it’s creating a negative effect. But I think, as time goes by, consumers will get better at it, issuers will get better, and the mobile products themselves will improve. TFM: Creating a frictionless experience in payments has been e-commerce’s Holy Grail for years. With more and more people embracing e-commerce in the wake of the pandemic, how do you think SCA and 3DS can shape a better experience and better conversion rates? CB: SCA is designed to reduce fraud and, in order to do so, at www.fintechf.com

times, there has to be a certain amount of friction in the purchase flow for transactions deemed to be potentially high risk, or where the regulation identifies that they need to happen. But you’re right. In Europe, we’ve seen the proportion of merchants selling online for the first time increase from 27 per cent to 43 per cent since June 2020, so there’s been a huge increase in new merchants entering the digital payments arena. And they’re entering at a time when lots of disruption and change is happening, so we’ve been doing a lot to raise awareness among merchants of exactly what they need to do. Based on our modelling, we believe levels of 3DS usage shouldn’t increase enormously. Because if, as a merchant, you can take advantage of the exemptions, and flag out-of-scope transactions for EMV 3DS correctly, you’re left with transactions you probably would have put through 3DS anyway. So, the system works well. Some big digital merchants are opting to use EMV 3DS in the UK before they have to, from a regulatory point of view, and we’re seeing abandonment rates below two per cent.

For the long term, I’m optimistic; for the short term, it’s a challenge

Noam Grinberg, Nuvei

NOAM GRINBERG: For the long term, I’m optimistic; for the short term, it’s a challenge. Authentication is currently reducing some of the conversion rates, but we’re really enthused by EMV 3DS, which will make things more widespread and we’ll be able to start whitelisting with issuers and merchants. This will have a huge impact on merchants’ repeat users, doing multiple transactions, and help to remove more friction. We’re also working on ways to keep conversion rates high – for example, we’re exploring technical problems across different sites. If we see that EMV 3DS is failing due to a technical glitch, we are automatically downgrading to 3DS to smooth the process in the short term. We are doing the maximum to make sure that we’re not missing any transactions that are out of scope, and that everything is being flagged correctly as SCA evolves.

TFM: What do you think EMV 3DS (3DS2) will do for the industry going forward? If, as mentioned, there are elements where you have to look to the previous model, how do you think this can be resolved? GM: I do think, in general, EMV 3DS works better [than 3DS], and will improve further, as Noam says, when whitelisting is optimised. I think it will allow us to pass an exemption when we believe it’s the right thing to do, and will create a more comprehensive view of the transaction for all parties. We still see a lot of merchants that think PSD2 is simply about sending everything through 3DS. They don’t understand the important relationship between having a very good fraud vendor and avoiding 3DS when it’s a good idea to do so, for example, when the transactions are low risk, and allowing good repeat users not to have to go through authentication every time. CB: Consumers are creatures of habit and, generally, if you’re shopping at a merchant frequently, particularly a merchant that’s low risk, there’s no reason why your bank shouldn’t be happy to put that merchant onto a trusted beneficiary list. So that’s an interesting development. It’s not been rolled out widely just yet,

A lot of merchants don’t understand the important relationship between having a very good fraud vendor and avoiding 3DS when it’s a good idea to do so Galit Michel, Forter

because initially the push from everybody was to get the exemption flagging, the out-of-scope flagging, over the line. That’s been the priority. But I think, from now on, you’ll start to see a lot more of those trusted beneficiary solutions rolling out. NG: At the end of the day, if a cardholder wants to make a purchase that’s important to them, they will complete it. But I would advise merchants to choose a provider that has a really flexible solution, one capable of doing the transaction risk analysis and optimising the interplay between 3DS, EMV 3DS and SCA. Issue 20 | TheFintechMagazine

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COMPLIANCE & REGULATION

RULES OF THE GAME Regulation has been as much of a catalyst for fintech innovation as it has been an impediment. We talked to two industry figures on the challenges, and the opportunities, created by regulators in Europe and the UK

Across the global payments landscape, regulators have been acting as a catalyst for development, intervening to foster greater competition, protect consumers and promote financial innovation through new technology.

Nowhere is this more the case than in Europe, where, in recent years, regulatory intervention and infrastructure renewal have been challenging incumbents and re-shaping established relationships and methods. At the same time, there has been growing recognition that the intrinsic risks within many financial systems need to be tackled. The successful implementation of reforms in different

countries has been uneven, though, and planned outcomes have not always been achieved, with projects often unexpectedly slow to complete. For some, the planning and implementation of payments infrastructure development is a difficult task due to ingrained legacy systems, or the complexity of, and varying approaches to, reform. For others, payment system reform is simply unfamiliar territory. Turning the legislators’ theory into practice is, therefore, not always easy. We’ve seen this played out with multiple extensions to go-live dates for various key pieces of legislation, including, most recently, Strong Customer Authentication (SCA) as part of the revised Payments Services Directive (PSD2). Although not a regulator, SWIFT’s delay of the ISO 20022 migration date for crossborder payments, by 12 months, to the end of 2022, as banks struggled with decommissioning and preparing existing infrastructure for transition, is another example. Here, we look at the conflict between security and fast, frictionless payments, the differing mindsets of incumbent banks and challengers when it comes to payments regulations, and the ‘myth’ of regulatory alignment in Europe, from the perspective of an advisor on EU and UK regulation and a payment services provider’s lived reality.

THE PAYMENT SERVICES PROVIDER Ray Brash is CEO and Chairman of PPS, the EU digital banking and payment services provider. A joint venture between Edenred and Mastercard, PPS provides the underlying payment structure for several challenger banks.

EU payments regulation The EU’s agenda to open up competition in payments has been a theme for the past decade. Partly through regulation, Europe has opened up the market with things like the Payment Services www.fintechf.com

Directive, which was designed to level up the permissions, required for payment entities, broaden the definition of payment institutions, and allow players such as e-money institutions to participate in the financial services space. Since then, we’ve seen headline initiatives, like open banking. On the other hand, you have the issue of consumer protection. Regulators want consumers to have choice, but also be protected against financial crime. However, regulators don’t necessarily understand how consumers use payments. That holds back innovation, to some extent. So, you’ve got this two steps forward, one step back scenario.

Regulating the ‘new kids’ Nevertheless, fintechs see regulation as a massive opportunity – as we did when we realised, as an e-money institution, that we could go places that traditional banks and payment institutions couldn’t. We could generate business by adopting the regulation and understanding it. Banks have a lot of compliance debt; legacy processes around regulation that have been so embedded into their organisations that they find it difficult to adapt to new rules. But most fintechs we work with, when there’s a change of regulation, such as when the contactless limits changed through COVID-19, are well and truly on it. Issue 20 | TheFintechMagazine

COMPLIANCE & REGULATION Also, if you look at trust, which is a huge part of financial services, fintechs have embraced the need to be transparent with their customers. Last year, for example, when British Airways had a data breach, cards that had been used on BA’s website were compromised. UK challenger Monzo was the first company I saw to spot the breach, go into their data warehouse and very quickly identify all their cards that had been used on the site, then communicate with their customers to say ‘we’re going to block your card and send you a new one’. The regulator should be applauding that ability to respond. There’s no way big banks

could have done that. The other thing that makes fintechs more adaptable is their partnership mentality.

Regulatory discrepancies There are still domestic requirements in Europe, so it’s not truly transparent. When we open an account for a customer in France, there is a database where we have to submit information on that customer in a certain format – just for French customers, to a company in France. If we’re opening an account in Belgium, it’s a different database with a different format, and so it goes on. Some payment services can operate

ubiquitously across the EU, but with other types of financial regulation, you’re dragged into domestic issues. IBAN (international bank account number) discrimination due to geographical location, for instance: on one hand, you’ve got a concept of borderless bank payments, which is exactly what the EU is there for – to reduce friction, lower the cost of doing business and allow EU citizens to work and move their bank accounts wherever they want. That’s the principle. The reality is that domestic banks still consider the country they’re regulated in as the most important, and take a localised view.

Some payment services can operate ubiquitously across the EU, but with other types of financial regulation you’re dragged into domestic issues

THE REGULATORY ADVISOR Ben Regnard-Weinrabe is a partner in the financial regulatory services practice at UK law firm Allen & Overy. He has extensive experience advising on EU and UK law and regulation.

Credit where it’s due Regulation can be seen as putting the brakes on innovation but, at the same time, where it is proportionate and where it is about ensuring a level playing field, so there is additional access and opportunity, the industry can welcome it. Indeed, if you look at the creation of the Payment Systems Regulator in the UK, it’s been trying to encourage fintechs to challenge incumbents. While detailed, payments regulation has been relatively manageable for these payments firms and they have been very successful in internationalising their model. Regulators tends to have clear objectives, such as encouraging competition and consumer protection, which is always going to have an impact on different ways of doing business. But to give credit to the European regulators, they have created a framework, particularly around payments, which has been copied across the world.

Implementing change One of the great things about fintechs is that they are absolutely focussed on the

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user experience: the product is king. They want to build a great reputation with their customers, they want to keep things simple and transparent. I think regulators felt traditional providers weren’t always focussed sufficiently on the user, on the product, on prominence of pricing, etc. So, non-bank financial institutions, the e-money or payment institutions, were pushing a bit at an open door, because they were already doing a lot of what regulations was attempting to do: trying to make sure that there are no hidden surprises, no unfair terms, no catches, that it’s a product that works well for customers. The reason these regulated providers, in the UK at least, have had relatively light-touch supervision is because there’s been a similar direction taken by them and by regulators. It’s been difficult for banks to adapt legacy systems to respond to competitive pressures and quickly launch new types of product, but also to respond to regulation. Secure Customer Authentication has shown how difficult it’s been. One thing one could ask more

It’s not always obvious regulators understand how much effort it takes, operationally, to redesign systems to respond to requirements, such as SCA

of from some regulators, particularly at European level, is for them to be more aware of the technology challenges of implementation; it’s not always obvious that legislators understand how much effort it takes, operationally, to implement change, to redesign systems to respond to new requirements, such as SCA.

Post-Brexit landscape For now, in the two jurisdictions of the EU and the UK, laws are still heavily aligned, so you’ve got a pretty high level of confidence that if you’ve an operating model, a product, a business structure, terms and conditions that work for one jurisdiction are likely to, largely, work for the other. There probably will be increasing divergence over time, and then, I suppose, it’s a question of figuring out what market you want to target and where you need to get your licence. The UK is going to want to have your global headquarters in the UK. For that to happen, it needs to provide incentives. Part of that is going to be around regulation. The EU will potentially go down the route of much heavier regulation. In the UK, the Financial Conduct Authority (FCA), has a big focus on consumer protection, but it may, in some respects, be more proportionate than some of the EU initiatives. The FCA, hopefully, will be more cogent in how it approaches regulation because there’s just one country to please. In Europe, there’s a lot of compromise. www.fintechf.com

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ADVANCED TECH. SIMPLER PROCESSES. HAPPIER CUSTOMERS. 04/2021

COMMENTARY: FINANCIAL CRIME Cracking the case: But banks and financial crime will ‘always be in tension’, says Harris

Fraud’s most wanted and the private AI A growing ecosystem of super-criminals, middlemen and hackers, combined with the chaos and digital upheaval of a pandemic, has put Cloud-based fraud prevention top of the agenda, says Richard Harris, EVP for Global Sales at risk management platform Feedzai You don’t need us to tell you that cyber-crime has exploded since the start of the pandemic. If you received any dodgy-looking emails from your boss or a colleague, demanding urgent action, you were not alone. Impersonation scams sky-rocketed by 600 per cent as criminals preyed upon people working from home. According to research by Scamadvisor. com, these shady characters hoovered up a staggering €36billion and counting over 2020, with 140 million scams reported across 30 countries. It’s estimated that three per cent of the global population got stung in one way or another, from straightforward identity theft to fake lotharios conning victims out of money through online dating. But sadly, due to the embarrassing nature of scams, a meagre seven per cent

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got reported, and the lack of a centralised reporting system in most countries means even less action is taken. So, the problem is probably much bigger than we even realise. Everyone from the regulators to the anxious business manager is pulling their hair out, trying to limit exposure to these revenue-draining tricks. Cyber-criminals are not just limited to using the internet as a vector, either. Computer programmes with menacing automated voices are now calling business owners and threatening them with fake prison sentences for unpaid tax. Algorithms are also being used to detect vulnerable people, who criminals manipulate into handing over their pensions. Around eight million people were targeted by pension fraudsters in 2020, a 45 per cent increase on the year

before. And, sadly, more than £54million in pensions has already been reported lost – with much more expected to follow. “This is organised crime on a massive scale,” observes Richard Harris, EVP for global sales for fraud detection platform Feedzai. “This isn’t a matter of a few people misusing a card to buy a bit of extra stuff. These are large criminal enterprises making huge amounts of money.” Security systems are surrounded by droves of marauding amateurs, hacking away day and night; it’s a constant shark frenzy. But the serious villains are facilitated by the dark web. “There are now businesses on the dark web that monetise the ability to carry out attacks,” says Harris. “Fraud’s a gold rush, so people are going to sell shovels. You’ve middlemen in the criminal underworld making and selling attack www.fintechf.com

kits – and the data obviously is a commodity in that space as well”. Harris describes digital fraud as an arms race: “The speed of that race is critical and you’ve got to be able to respond very quickly,” he tells financial institutions. Constant innovation is needed, which leads in a straight line to Feedzai, one of the secret agents of the banking world. As scams and hacks surged during the pandemic, firms like this have had to innovate and re-innovate faster than ever to keep up with escalating levels of crime. Feedzai has been particularly effective and, as you might expect, its value has swelled. In March 2021, the firm officially joined the unicorn club. Some 800 million people – including half the population of Canada, according to Harris – benefit from the protection of Feedzai, although they know little about it. It works with four of the five largest banks in North America and 80 per cent of the world’s Fortune 500 companies. The huge changes in those consumers’ www.fintechf.com

behaviour during the pandemic, and how cyber-criminals tracked them, was graphically illustrated in its Q1 2021 Financial Crime Report. In just three months, its customer traffic monitoring saw, for example, a 178 per cent increase in attempted fraud related to digital media services (Feedzai claims to monitor and protect 60 per cent of global music streaming subscriptions), a consequence of the world turning to online entertainment in 2020, as every other form dried up. It also revealed that 70 per cent of fraud was driven by card-not-present transactions, while card-present attacks dropped by 48 per cent – despite the latter type of transaction falling by only 20 per cent. “During the pandemic, certain products were more in demand, with people working from home, while others weren’t, so it was a case of managing the risk in a targeted way, and we did that well,” says Harris. Feedzai also noted a rise in transfer scams, including account takeover, impersonation, purchase, investment and romance fraud, as people’s exposure to the internet rose and their defences were lowered. And the report warned that another deception was on a worrying rise: the targeted recruitment

During the pandemic, certain types of product were more in demand, with people working from home, while others weren’t, so it was a case of managing the risk in a targeted way, and we did that well of ‘money mules’ in order to launder funds through their legitimate accounts – a crime always related to bigger and often deadlier activities, which often leaves the unwitting victim blacklisted by banks.

Fraudsters were clearly following the money online in 2020 – but it wasn’t just consumers and private organisations that suffered. One of the biggest pandemic honeypots was government-backed support schemes to get people and businesses through the crisis. The true scale of the fraud involved will only become clear in the post-pandemic washdown. “A lot of stimulus went into direct payments to businesses and there’s concern that not all of that was handed out in a way that was managed well,” says Harris. “Obviously, it was distributed quickly, but was AI or machine learning even used to decide who got those payments? I suspect, in a lot of cases, it wasn’t. If those things weren’t managed well, a huge amount of money will have gone into the wrong hands, because such schemes were absolutely going to be attacked by fraudsters looking for that kind of opportunity.” As Harris indicates, the first line of defence for Feedzai is its proprietary AI. “We protect billions of transactions every day,” he says. “AI has been the cornerstone for allowing us to do that. You can’t cover that quantity of data as accurately as we do without machine learning and AI. That’s been the catalyst for scaling this business.” Feedzai’s patent-protected machine learning AI takes just three milliseconds – the time for a housefly to flap its wing – to analyse and reach a conclusion on whether to approve, reject or review a transaction. Importantly, it also gives insight into those decisions to help others with future fraud management and detection. That data, shared across the Feedzai ecosystem, improves fraud management at all banks – and,thanks to Feedzai Solutions, a plug-and-play API package for much smaller businesses, they can benefit from that intel, too. It really is a case of ‘we’re all in this together’ when it comes to fraud. “Financial crime and banking are always in tension,” says Harris. “As famous 1950s bank robber, Slick Willie, said: ‘That’s where the money is.’ Whatever banks do, criminals and money launderers will try to find a way around it. To stay ahead of them, firms need to continue pushing the boundaries of innovation. They’re never going to solve this problem. They just have to keep investing in it. Issue 20 | TheFintechMagazine

COMMENTARY: FINANCIAL CRIME “As a bank, it’s very difficult to do that with your own technology team. That’s where we – and other companies in this space – come in, who specialise in solving such problems. You have to keep bringing innovation to the table. We’ve filed more than 12 patents this year for AI practices for detecting money laundering and fraud.”

Protecting businesses with the Cloud and machine learning The huge rise of virtual working and online scams over the past year has sparked a wave of new customers for firms like Feedzai. “Everybody realised that we’re going to be using a virtual environment, for the foreseeable future,” says Harris. “This has accelerated investment in that space, and banks are now shifting to the Cloud quicker than they were 12 months ago”. In 2020, the cyber-security industry grew to be worth at least $167.13billion, up from $112.01billion in 2019, as more and more businesses started investing heavily in cyber-security. Major banks and financial services were among them. But Cloud has been the technology that opened the door to a new kind of client. “It’s not just the big banks that can benefit. Suddenly, everyone can because we’re operating in the Cloud,” says Harris. Feedzai Solutions is made powerful by the collective use of a Cloud-held repository of decision-making data. When a business or bank ‘plugs in’ to the Cloud, its transactions become part of the shared consciousness, contributing to and benefitting from an enhanced level of intelligence and security. This means that even the smallest challenger bank can receive the same level of fraud detection and, ultimately protection, as the largest institution on Wall Street or Canary Wharf. “With a fully Cloud-based approach, you have all that data from across the network,” says Harris. “A community bank can plug in and take advantage of machine learning capabilities straightaway. We just went live with a big US challenger bank and had them up and running in just six weeks. “Five years ago, machine learning was the preserve of the Tier 1 banks,” continues Harris. “They were the ones investing in it. Now, everybody wants it, but it’s a question of having the capability to manage it. Embedding machine learning into operations is the hard thing. Even when you’re a Tier 1 bank, with 150 people in

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your data science team, transferring that capability into a live environment is often difficult. We built our business and reputation on helping the big banks build this capability very quickly. But smaller, challenger and community banks, B2B lenders and peer-to-peer payment providers don’t have teams of 100 data scientists. To support them, we built Feedzai Solutions. It allows them to plug into an API and get out-of-the-box machine learning, ready to use on a live channel. “Machine learning is fundamentally about maths and statistics and, for that, you need a certain level of data. But, once you are taking a fully Cloud-based approach, as we are, a

I didn’t set it up. I gave them the information and, sure enough, they couldn’t validate me, but still demanded I pay the bill. I knew the head off fraud operations at this bank… without their intervention, I don’t know how I would’ve solved the issue because it turned out someone had stolen my identity. I hadn’t had an account with this bank in 10 years, but they’d sent a letter to my old house, giving me a free credit card to get me back on board. Someone who was renting the house had just signed the card and gone around spending with it and, of course, the bill had traced back to me. “So, this whole thing was the result of

A huge amount of money will have gone into the wrong hands, because those types of government schemes were absolutely going to be attacked by fraudsters

small player can tap into the network effect of the intelligence we are seeing. So, suddenly, it doesn’t become the preserve of big banks, who’ve got big data. Suddenly, everyone can benefit.”

Smart robots and smart humans defeat cyber-criminals The growth of Cloud-based cyber-security is absolutely necessary, as criminals develop increasingly sophisticated attack tools. But, at client level, Harris’ best fraud prevention advice has nothing to do with super robots. It is simply: “Getting your risk team involved at the very beginning, because it could save you a huge amount of pain later.” He reaches for a personal example to illustrate the point. “I used to be a customer with a big bank and I got a call one day some time after I’d left it, saying that I owed money on a credit card and they wanted me to pass security. I told them I didn’t have a credit card with them so it was probably a fraud; I wouldn’t be able to validate the account because

a marketing campaign. And this is often what we see. There’s a disconnect within an organisation, where one department goes ‘let’s do this…’ and no one’s spoken to the fraud team about it,” says Harris. “People who go into fighting financial crime and fraud tend to be very passionate individuals. Fundmentally, they're driven by fairness, transparency, accountability and ethics,” says Harris. “So, usually, that team will do a great job, if they’re involved. The big risks tend to come when an initiative happens within a bank and they’re not involved at the beginning and given an opportunity to say ‘hey, you know what’s going to happen if you do that?’. When there’s no communication, things go badly wrong. So, if you’re going to launch new products, attack new customer bases or go into a new region, I cannot stress enough that it’s best to get your risk team involved.” With a risk-first company mindset and an AI super agent, like Feedzai, on your side, fraudsters will have ‘to get used to not being bullet proof’ – as that very analogue private eye Philip Marlowe would say. www.fintechf.com

Cloud-Ready Payments. Made Possible By ACI. When fast, flexible payments are critical to the success of your business, you need a payments solution that doesn’t slow you down. ACI’s cloud-ready payment solutions give you the ability to accelerate innovation to meet market demands—without requiring a substantial investment in infrastructure or IT resources. ACI’s solutions are simple to integrate and easily scalable to match transaction volumes while minimizing operational and regulatory burdens. To see how cloud-ready solutions from ACI deliver faster time to market at lower total cost of ownership, visit www.aciworldwide.com/cloud.

STANDARDS: ISO 20022

First step into a new future for payments ISO 20022 is the flag-bearer for efficient cross-border payments. Jessica O'Rourke of ACI Worldwide and Carmen Podgurschi of Wells Fargo discuss payment innovations and how the messaging standard will create a common language for banks and financial institutions

Payments have evolved rapidly on several fronts over the past decade. Digitalisation has been relentless, many innovative payment challengers have entered the field, and initiatives such as SWIFT gpi and the revised Payment Services Directive (PSD2) have set new industry frameworks. And now we have IS0 20022, which marks the next big step for the industry. The new standard, which is due for industry-wide rollout from November 2022, comes at a time when cross-border payments and e-commerce have been boosted by the impact of COVID-19 and customer expectations are increasingly driving service levels and the development of real-time payments. Wells Fargo has been part of the changing payments landscape for

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generations, and today has nearly $2trillion in assets, serving one in three US households. The bank’s Carmen Podgurschi has more than 10 years’ experience of working in treasury services, and says that cross-border payments are now at a watershed moment. “At Wells Fargo, it’s covering the full range of cross-border payments, from below $100 up to $2billion, and working with many new settlement types,” says Podgurschi. “Tremendous end-to-end changes are taking place.” And in the international arena that's mostly around transparency and interoperability, as the bank navigates a network of different payment rails – from, for example, an automated clearing house (ACH) to real-time settlement. For Jessica O'Rourke, a wholesale banking solution consultant with ACI

Worldwide, it’s precisely why new global standards are needed. “All the pressures arising from e-commerce, from customer expectations and digitalisation heighten the need for instant delivery, but also for transparency and interoperability,” she says. ACI research reveals that transactions surged by 41 per cent in 2020 as a result of the pandemic, accelerating the shift to digital payments. “As the pace of change increases, ISO 20022 will help to integrate all the different payment types,” says Podgurschi. “The new standard will improve processing, migration, backend infrastructures, APIs, the whole technology architecture. “We want customers to have the same experience with cross-border payments, in terms of transparency, cost and speed, as they have with domestic payments. “ISO 20022 will be a big help for payment www.fintechf.com

transparency in several ways – transparency of the amount the beneficiary receives, the currency, the foreign exchange (FX), where payment took place, if there were any type of fees, and the deductions applied to the payment.”

Compliance will be a big factor “SWIFT has implemented gpi, which has helped a great deal with transparency, but I think ISO 20022 will really reduce the compliance problem,” adds O’Rourke. ”It will make it faster and more efficient to do compliance scanning of cross-border payments.” The process is currently complex, but with the arrival of IS0 20022, the structure is clearer and more efficient, she explains. As a payment goes through the correspondent banking network, it makes scanning much easier. Important though compliance is, it would be a mistake to see ISO 20022 as simply a compliance exercise. The new

The new standard opens the toolbox and enables us to do a lot more things, both cheaply and quickly Jessica O’Rourke, ACI Worldwide

standard can have significant strategic advantages for banks and financial institutions. For example, product development and innovation on the back of ISO 20022 could generate new revenue streams, while improved efficiency could mean savings in labour and lower maintenance costs. Also, customer satisfaction is likely to increase because fewer payments will be rejected and user experience will be improved. Podgurschi says that Wells Fargo is ready to embrace ISO 20022 in the US because it sees the opportunity for exploiting the rich data embedded in the message format, and the beneficial impact for processing, sanctions, and regulatory reporting. There is, of course, an investment cost in introducing IS0 20022, but it is outweighed by the benefits of the new standard. “Just think of the maintenance savings,” she continues. ”Instead of having different types of formats, we are going to have the same standard behind all the formats, www.fintechf.com

maintaining the way the data needs to flow. So, the cost of maintaining all these formats across geographies, payment types, market infrastructures, will be far less.” The common structure will give Wells Fargo the versatility to develop different solutions for customers and apply automated reconciliation to a much larger proportion of receivables, she adds. That means a big payback for corporate customers; they won’t have to spend time reconciling invoices; the richer data, and the structure of that data, will promote straight-through processing (STP). “At present,” says O’Rourke, “if you have an invoice and a payment, the funds move along one pipe, and the data about the funds flows separately, and then they have to be reconciled at the other end. With ISO 20022, the payment data is embedded in the payment itself. It eliminates friction and it’s a huge cost that we can now remove from the industry. “Put simply, the new standard opens the toolbox and enables us to do a lot more things, both cheaply and quickly – all by virtue of having a much better structure for payments data.’” Fraud prevention is another compelling benefit to everyone across the industry. “The enhanced data will provide sharper insights into fraud,” says Podgurschi. “It’s a huge consideration, and a priority for many teams within banks and fintechs. Our colleagues in sanctions, anti-money laundering, compliance, know your customer – they are all excited because they’ll be able to delve directly into individual transactions, as well as particular corridors or payment types, using very standardised tools. And they’ll receive rich data to make more informed and accurate decisions.” Regulatory reporting in different jurisdictions is a major challenge for an international bank with costs to match, which inflates the pricing for customers. So, standardisation will make a positive difference because there will be fewer manual repairs and sanctions, and much better STP rates. But these gains in efficiency point to another important benefit – less time wasted looking for data means more time to build new solutions. Given the ever-increasing number and variety of payment types, it’s no small undertaking for a single standard to unify and streamline payments. The standard has

been around for years. The fact that banks have waited to adopt it until they must by default, would suggest that migration to ISO 20022 isn’t exactly a walk in the park. O’Rourke says it’s certainly a challenge for the banks that she works with at ACI but the spin-off benefits are now worth it. “We tend to deal with Tier 1 banks, and they invest in what makes sense for them,” says O’Rourke. “So, over the years, they have had their ACH infrastructure, their wire infrastructure, and they build a shiny new instant payment infrastructure. And then they’re siloed. This is not a criticism of any particular bank; it’s just that previously it didn’t make sense to invest in pulling all these things together. “But that’s changing now. ISO 20022 mandates a change in the overall banking infrastructure, and that opens doors.” Podgurschi agrees. “It’s important to migrate to infrastructures and platforms that operate on all the rails, and embed translations in them. All leading banks are probably moving in that direction now, working in the Cloud, and the benefits in

This improves the way you develop new solutions, leveraging technologies such as AI and machine learning. The result is tons of moving pieces on top of ISO 20022 Carmen Podgurschi, Wells Fargo

terms of flexibility should be clear. You can use whatever you need, when you need it. This improves the way you develop new solutions, leveraging technologies such as AI and machine learning. The result is tons of moving pieces on top of ISO 20022.” Nevertheless, according to a recent joint paper from ACI and SWIFT on cross-border payments and ISO 20022, many banks are still struggling to identify a clear path to compliance that also delivers additional value. Podgurschi and O’Rourke would urge them to look more closely at the benefits, because they believe that if the industry fully embraces the spirit of interoperability, which is the cornerstone of ISO 20022, it can truly create a new era for payments. Issue 20 | TheFintechMagazine

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STANDARDS: ISO 20022

You got the message? ISO 20022 will unite the payments industry behind a single standard, but it’s a big cultural change for banks – so migrate sooner rather than later, say Christian Fraedrich of Deutsche Bank and Edward Ireland from payments provider Bottomline Modernising payments is what everyone wants – banks, fintechs, payment services providers and, not least, customers. The aim is more speed, less friction, stronger security and greater transparency. However, when it comes to cross-border payments, all these have been a particular challenge. But change is on the way, because ISO 20022 means there is now a common language for payments data across

the globe. One industry, one format, with higher-quality payments for all – that’s the promise of the new standard. Christian Fraedrich, who is responsible for cash business architecture at Deutsche Bank, is leading its ISO 20022 project, and he sees the new standard as a key step in the evolution of payments. “We’ve seen many changes over the last couple of years,” says Fraedrich, “such as the SWIFT gpi initiative, which, for the first time, brought real, end-to-end transparency, as well as the ability to trace cross-border payments from initial instruction through to the credit in the beneficiary account. Not only does this provide transparency to the ultimate customers, but it also helps to streamline investigation and exceptions handling.” Other notable improvements over recent years have been pre-validation, ensuring there is no missing or wrong information that prevents a transaction from being processed, as well as instant payment schemes on real-time rails. “Now that ISO 20022 is rolling out,” says Fraedrich,

“banks have one standard for instant, bulk, domestic and cross-border payments. They no longer need to think about what type of payment they are executing, although it’s more important to be sure of the service level agreement associated with each.” Edward Ireland, who heads the ISO 20022 programme at Bottomline, a leading payments technology provider, is fully immersed in the industry migration and says that Bottomline is moving more than 450 customers across to ISO 20222 in the next couple of years. The current focus on meeting the regulatory compliance deadline for ISO 20022 is masking the fact that it’s been around for a long time. “The standard has been with us since 2004,” says Ireland, “what’s new is that it’s about to become the single standard for payments. Moreover, it’s proven. India and China, the two most populous nations in the world, are already using it for domestic payments, and one of Bottomline’s major markets, Switzerland, moved successfully to ISO in 2015. “It has also proved its value in the funds space, in terms of automating business.” So, how does ISO 20022 compare with the SWIFT MT standard, as well as other legacy standards? Ireland says it’s a big advance for payments and goes way beyond what we’re used to.

Carrier service: ISO 20022 wraps up data with the transaction

www.fintechf.com

Issue 20 | TheFintechMagazine

STANDARDS: ISO 20022 “The BACS standard 18 format was developed in the 1970s, and was suited for payments in that era,” he says. “ISO 20022 supports current and future needs. It’s far more granular, with much richer data and more definition of different business elements that can go into the messaging. We don’t have much structure to the information today; with ISO 20022 we’ll have more structured information and better end-toend processing. It will enable the payment to become part of the wider transaction.” ISO 20022 may have been around for a long while, but customer expectations and internal processing have increased the pressure to adopt it now, says Fraedrich.

challenges in implementing ISO 20022. “It’s not simply a case of changing an interface to SWIFT, or to whatever local clearing system is changing,” he says. “It impacts end-to-end processing, and if you want to get the full benefit of ISO 20022 migration, you need to change all your systems along the value chain.” Fraedrich explains that effective implementation means updating every processing system, in order to cope with additional data and to support straightthrough processing, including systems that provide statements to clients so that they can benefit from richer and more structured information. He adds that training should not be an afterthought, because it’s important to be operationally ready. ISO 20022 migration is therefore also very much a cultural change. “Many staff will have worked with the legacy format for a long time,” says Fraedrich, “so there’s a mindset challenge as well as a technical one. Also,

You no longer need to think about what type of payment you are executing, although it’s more important to be sure of the service level agreement associated with each payment

Authority of Singapore, the US Federal Reserve Bank and other players are all moving at different speeds, so there will be a period of coexistence between old and new messaging systems. “There is a danger of drift,” admits Ireland. “It’s a complicated space and some institutions are waiting until they are forced to do something. They’re saying ‘the point at which we move is the point at which we have to’. What we’re saying to customers is ‘don’t delay, move to ISO 20022 as soon as you can and start taking advantage of it’. “We may not have all the great new business ideas available today, but they’ll develop as we learn about what customers expect and want. And, if we have the ISO 20022 building blocks in place, we can make these ideas happen faster and therefore increase customer satisfaction.” Fraud prevention is one of the benefits that can encourage migration, says Fraedrich. The better the quality of an organisation’s data, the easier it is to identify fraud. Also, with a sound data pool, there is a good foundation to apply

“The rich and structured data helps our customers as well as supporting bank processes,” he says. “Compliance and the monitoring of money laundering also greatly benefit from more structured data, as does any type of exception handling.” Having richer information with the payment instruction will help cross-border payments in the same way that payment operations are routinely supported in domestic schemes, adds Fraedrich. Because the essence of ISO 20022 is data and structure, he says it will enable banks to overcome many of the issues that can’t be solved with legacy formats. Ireland agrees that customer expectations and internal processing are key drivers of change. “Customers are adding momentum to ISO 20022 migration,” he says, “and when we look at things like fraud monitoring and the sanctions screening that payment service providers must complete, they all have to be done well. And that won’t happen the old way. We need better data, which is what ISO 20022 provides. So, there’s an operational driver to use better formats, and then there’s customer expectation pushing the need for better visibility and more granular information.” That said, there are significant operational

technologies like AI and big data screening. For both Fraedrich and Ireland, the overriding advantage of ISO 20022 is that it’s not only a standard for cross-border payments, but also for domestic and instant payment schemes. “Ultimately, we won’t talk about crossborder versus domestic, just about a payment and the service level agreement attached to it, such as desired time or speed. From a customer perspective – and this is the most important point to stress – there’s just one standard for payment instructions, and banks can execute it in the most appropriate way.”

Christian Fraedrich, Deutsche Bank

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There is a danger of drift. It’s a complicated space and some institutions are waiting until they have to do something. What we’re saying is don’t delay Edward Ireland, Bottomline there’s an interoperability consideration, as not everyone is migrating at the same pace, which adds complexity.” Industry understanding is as important as acceptance, says Ireland. “Great work is being done to explain ISO 20022, and Deutsche Bank has been busy educating the market,” he says. “In the discussions we’re having now, everyone seems to have a good understanding of ISO, so the big question is not ‘what is it?’ but ‘how do I migrate?’.” And not just how but when. As Fraedrich points out, it’s not a big bang approach, because SWIFT, the Bank of England, the European Central Bank, the Monetary

www.fintechf.com

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STANDARDS: ISO 20022

Beyond The enriched data that will flow from compulsory adoption of the new messaging standard will be a ‘protein boost’ for AI in the field of transaction analytics and forecasting. Victoria Harverson from SmartStream believes banks need to seize the opportunity SmartStream’s trademarked approach to solving operational processing challenges – known as Transaction Lifecycle Management (TLM) – had something of a head start on what’s been described by one leading bank as ‘a watershed moment’ for the payments industry. It’s been working in the ISO 20022 environment since the payment messaging standard first emerged in 2004. However, as compliance with ISO 20022 becomes mandatory over the next few years for any institution transacting through EURO1/ STEP1 and TARGET in Europe, processing SWIFT messages, or using Singapore’s MEPS+, Hong Kong’s CHATS and Australia’s RBA-RITS clearing, the heat is on to bring every one of its clients up to speed. The logic and aspiration behind ISO 20022 is irrefutable: it’s designed to enhance the speed and efficiency of global payments by enforcing universal uniformity, which will demand a new granularity of information around every www.fintechf.com

20022

financial message, spanning not just cross-border retail payments but also trade, securities and foreign exchange. Importantly, for a company that has made a strategic shift to harnessing artificial intelligence, ISO 20022 is a protein-boost for AI. The rich information attached to every transaction will enhance analytics, improve reconciliation rates and – the end game – improve the experience for the customer. But migrating to the new standard is not simple if your payments engine is built on legacy infrastructure. To support clients, SmartStream expanded its TLM Corporate Actions solution in 2019, to include ISO 20022 message processing and interoperability support. Its new iteration of its SmartStream AIR Cloud-native data validation software solution, and the new TLM Aurora Universal Data Control platform, both powered by machine learning and AI, are bringing the latest technologies to help companies migrate to and maximise the opportunities that the new standard presents. Under ISO 20022, every character within a financial message must be 100 per cent correct and aligned with the specifications, and the format is validated at several points along the communication chain from the sending and receiving ends. A single missing colon could result in a multi-million currency transfer being rejected or delayed for days. But, once compulsory, ISO 20022 could revolutionise the increasingly-borderless payments marketplace, picking up where

transparency-boosting messaging systems like SWIFT gpi have left off, by ensuring not just increased payments visibility, but also real-time speed and glitchless delivery. SmartStream’s considerable technical fire power helps organisations manage their data for in-time compliance, and ensure exceptions are identified early to minimise disruption. Its services include data transformation, regulatory alignment, innovation labs, managed services, Cloud environments and solution delivery. Global head of business development, Victoria Harverson, believes organisations must embrace technologies like AI, to make the most ISO 20022. Too many, she says, overlook AI’s power to transform their behind-the-scenes activity. Banks need to decide how they will manage their – often outmoded – core architecture as they adapt, to avoid their back-ends limiting their capability for frontend innovation. To help them, in March, SmartStream announced it had re-engineered its TLM Aurora software-as-a-service solution to help banks upgrade their core systems to comply with ISO 20022’s more complex data requirements. TLM Aurora Universal Data Control allows for basic-to-complex reconciliations data matching by enabling AI, machine learning and Cloud-native technology. Issue 20 | TheFintechMagazine

STANDARDS: ISO 20022 Speaking at the time, Roland Brandli, strategic product manager for SmartStream, was quoted as saying: “The discussions we are having with banks right now revolve around ISO 20022… where financial institutions are having to upgrade legacy systems for data remediation and improved channel and back-office processing. We decided to [develop] a new environment to meet today’s business needs. [It] goes over and beyond basic reconciliations… and is based on open architecture and adaptable to all banking requirements, without the need to re-engineer operational processes.” In April, SmartStream also launched V3 of its proprietary AIR software-as-a-service (SaaS) platform, designed to serve organisations worldwide that are using Microsoft’s Azure platform for data management and infrastructure improvements, as well as AI solutions access. Also hosted on Amazon Web Services (AWS), the move to Azure offers users more flexibility to use regional data centres for their localised compliance needs – as well as data lake support for improved upload, handling and manipulation, and customised reports offering deep reconciliations insights. Harverson says the company is well aware of the opportunity payments represents: “At the moment, most of our experience lies in capital markets and use-cases within key financial services, although we are moving much more into payments, and the Payment Card Industry Data Security Standard is key for us.” The company achieved PCI DSS accreditation in 2020. Harverson advocates a balance between core infrastructure improvements and innovation. “Banks are constantly striving to compete in an age of disruption. There’s lots of demand for incredible front-end services, focussed on customer experience, and a dedicated function and budget for tech innovation activity is key because the client experience is their differentiation and biggest profit contributor,” she says. “However, if they over-focus on those things and don’t invest in their underlying systems, including end-of-lifing old components and rebuilding their architecture so that it’s flexible, scalable and Cloud-ready, they risk being disrupted by the competition. Our customers, using our AI solution in their core banking architecture,

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can easily inspect data between front, middle, and back-office systems. They can also better leverage their transaction data, then run business intelligence to do things like forecasting client spending. We are also running initiatives with banks’ technology stakeholders, to help them speed up their transformation projects, using AI and other tools for doing things like quality assurance tasks that would usually take hours, in minutes, with a fraction of the resource.” But AI must be used wisely to bridge between old and new. “Seeing the value in AI, doesn’t always mean an organisation has Smashing barriers: AI should be a key enabler for banks

transaction data, in different formats, in minutes, rather than days. We focus on doing more with less.” But adopting it, for banks, can be tricky. Harverson adds: “Our Cloud-native SaaS product is easy to use; with the right security, standards and certifications to allow clients to run any data on it, easily. “But reduction of team resources and changes to governance can be real issues. A bank might have used a multi-step data management approval model for years and it’s difficult to move from that to an automated, faster solution. “AIR offers audit logs and capabilities, so we can export details of how processes have been performed, or the client can see it all on the user interface. Fintechs like us, and banks, are trying to do things to make life easier, but traditional models and internal rules that have been in place for a while can make enabling change difficult.” SmartStream sees itself very much as part of a cavalry of fintechs. “We use AI to reconcile data rapidly and effectively, and do that really well. But there are other fintechs that do data visualisation, for example, equally well. We can integrate to those and allow our customers to run deeper analytics and business intelligence. “You have to focus on your strengths and let others focus on theirs. It’s important organisations think about the strategy for such ecosystem partners.” Therein lies the potential for further iterations of AIR. “We’re talking about integrating our AI with business intelligence and management information service tools that allow organisations to visualise reconciled AI data more meaningfully. We’ve built the product and are selecting providers to work with,” says Harverson. So, what next? “I’m looking forward to more opportunities within open banking; API platforms and ecosystems of applications and toolkits for financial institutions to access and integrate fintech products from different companies in one place, with no code needed,” says Harverson. “We continue to listen to customers and build our internal agility, so we can deliver future-proof solutions.”

In the front end, people ‘get’ AI … But in the back end, it can control risks, increase productivity and efficiency, and lower costs

an efficient implementation strategy for it,” says Harverson. “Legacy IT infrastructure and systems often don’t share data or interoperate, and there are still divided opinions around using AI. However, if banks don’t do this, others will. In the front end, people ‘get’ AI and we talk about ultra-personalised experience, like the Amazon analogy. But in the back end, AI can control risks, increase efficiency and lower costs – doing things like fraud prevention and identity verification.” One of AI’s greatest benefits is efficient data management, making it indispensable for ISO 20022 readiness. “Our innovation labs focus on using AI to compare high volumes of data and find discrepancies instantly. There’s no need to build data reconciliation; AI does that. We use supervised, unsupervised and observational learning techniques, linking system data together to make sure it displays in all the systems accurately. And we can reconcile vast volumes of

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COMMENTARY: CREDIT FINANCE Ron Delnevo looks back over seven decades of mounting UK household debt and asks if financial services are the solution or the problem The UK Financial Conduct Authority (FCA) recently announced that it is looking to create rules for buy now, pay later (BNPL) credit. I have the Klarna shopping app on my phone, which gives me access to a host of major retailers where I can make purchases on a BNPL basis. The good news is that BNPL deals usually offer a period of interest-free credit, which can vary from one month to a year and, if you pay the original price in full within the defined timeline, you incur no cost. The bad news is that if you opt for extended credit, beyond the interest-free period, the typical rate is around 40 per cent. It is understandable, therefore, that UK regulators are concerned about BNPL. The nation’s household debt already stands at more than 120 per cent of disposable income. In fiscally-conscious Germany, the figure is around 85 per cent. This got me thinking about how the UK got into this position, with households sinking in a sea of debt. Many people must be ignoring the famous advice offered by Mr Micawber to David Copperfield: “Young friend, I counsel you: annual income, 20 pounds. Annual expenditure, 19 pounds. Result? Happiness. Annual income, 20 pounds. Annual expenditure, 21 pounds. Result? Misery.” It is not necessary to go as far back as the Dickensian era to find a time in the UK where the public appreciated the good sense of living within their means. Back in the 1950s, as the country began to emerge from a long period of post-war rationing, it was socially unacceptable to resort to credit. People were proud of their ability to cope financially and worked hard to buy things they wanted.

The first step towards a debt-ridden future was the introduction of Hire Purchase (HP), a payment system where the customer neither paid up front nor owned the merchandise. Instead, hire/ rental payments were made. In theory, if you made enough of them, the item became your property. In practice, interest rates frequently increased and penalties for slow payments were imposed. Because of this, HP became known colloquially as the ‘never, never’: the customer never finished paying and, as a result, never owned the item. When HP was first introduced in 1938, customers were expected to pay 30 per cent of the total cost of the purchase upfront. However, in 1955, Chancellor of the Exchequer Harold Macmillan capped the up-front payment at only £1. This may be judged to have been a populist measure, because he was promoted to Prime Minister two years later. The change to hire purchase coincided with the launch of commercial television in the UK. By the early 1960s, TV advertising was promoting the latest fashions and domestic appliances in most living rooms. Soon, this continuous exposure made the attainment of these latest products irresistibly appealing to the public, overpowering the stigma previously associated with debt. It’s worth mentioning here that, in those days, access to cash was not an issue because the vast majority of people were paid in it. That changed in the mid-1960s when, rather than being handed out at the workplace in cash each week, wages started to be paid into bank accounts. If you were no longer paid in cash, a trip to a bank branch was now necessary to get the cash you needed to meet your daily expenses. But banks were only open for around five hours a day and not at all at weekends. In other words, they were only open when most of their customers were busy working. That led directly to the introduction of branch ATMs in 1967. It is important to bear in mind, that stopping paying wages in cash was not

done to help the workers. It was done to suit the government, employers and their bankers. The government saw it as a route to better tax collection, employers reduced their costs for cash handling and banks got their hands on the workers’ wages. Getting wages deposited was particularly important to banks, because they operated on the basis of fractional reserve banking, a system which, in the 1960s, allowed them to lend out 20 times or more of the value of monies they held on deposit. Perhaps it was just a coincidence that credit cards came along at exactly the same time. As most people ceased to be paid in cash, these tiny bits of plastic became more popular. Instead of visiting your bank branch several times a week to get cash – because for decades that’s the only place you’d find an ATM – you could use plastic to make your daily purchases and only visit the branch once a month. This visit was to get the cash to settle your credit card bill, of course, which you did at the branch at the same time. Oddly, perhaps, your shiny new plastic credit card was of no use to you if you wanted to get cash from the first ATMs. Here, again, it was to be a couple of decades before the convenience of being able to insert your credit card in an ATM to get cash became a reality. Credit cards (by default or design), let banks hold onto a worker’s deposits longer – so increasing lending power. And, if the bill wasn’t settled in full at the end of the month, the worker could be charged interest on the debt. Such cards also earned banks fees from retailers, who paid for the privilege of accepting the plastic, no doubt convinced by messaging from the issuers that people using cards would spend more in their shops. So, three wins for the banks – and largely at the cost of the workers, who had been quite happy to be paid in cash in the first place! Economists will tell us that the changes of the 1950s and 1960s were great for our country, leading to a massive expansion of the UK economy.

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However, it is worth recalling that the following decade was largely characterised by economic turmoil and societal unrest, culminating in the Winter of Discontent in 1978/79. That was followed, in 1979 by the emergence of a Conservative government, led by Margaret Thatcher, that was able to convince many of the workers that the ills of the UK could largely be blamed on the fact that too many industries were effectively owned by said government. This may seem an odd thing for workers to believe – after all, many of them were employed by those self-same nationalised industries. But when the message came with a promise of cheap or even free shares for every worker in the event their industry was privatised, it turned out to be very convincing. So, how to sum up the 30 years we’ve covered so far? Workers went from being paid in cash and living within their means to being paid through banks and building up significant personal debt. They were then persuaded that they needed shares in privatised industries to help repair their finances, surrendering as they did so the job security they had enjoyed while being employed in those self-same previously state-owned Industries. By the 1980s, the debt landscape had changed dramatically in the UK. Yet, even so, by 1980 household debt was running at only around 30 per cent of disposable income. By the early 1990s, that had doubled to 60 per cent. What had happened? Thatcher’s concept of ‘popular capitalism’, for one thing. Suddenly, millions of British people discovered they had to own shares. This was partly fuelled by free or cheap shares that workers had been given as part of the privatisation process, but there was also a surge in initial public offerings, which people rushed to buy, especially in retailers such as The Body Shop, Sock Shop and Tie Rack.

The UK Stock Market’s Black Monday crash of 1987 – the year, incidentally, that debit cards first appeared – only temporarily dented the public’s belief in the ‘get-rich-quick’ potential of share ownership. By the time Mrs Thatcher left office in 1990, her decade in power had seen the number of share-owning Brits increase from around three million to at least 12 million. And, as she was departing Downing Street, one of her favourite policies – building society demutualisation – was only just starting to take effect. In 1989, Abbey National converted to a PLC, followed by many other societies within the next decade. The shares gifted to former members added yet more millions to the number of UK shareholders, reaching a high of 15 million in the mid-1990s. Today, the number stands at around 12 million, though many of those may only hold shares in one PLC – often the one they work for.

It is arguable that the last thing we need is for fintech innovators to provide novel ways of increasing our debt burden Consistent, real-terms wage increases since the 1950s and the debts UK consumers were prepared to allow themselves to build up, fuelled massive extra expenditure. But the decade of austerity that the UK

endured, following the financial crash of 2008, saw household debt peak at a high of more than 150 per cent of disposable income. So, what does the future hold as we look forward from 2021? Circling back to where I started this article, it has to be said that many believe the emergence of BNPL credit is not a positive sign. It is arguable that the last thing we need is for fintech innovators to provide novel ways of increasing our debt burden. However, there have certainly been some more helpful interventions from fintechs. A number of app-based banks try to assist users to better manage their personal finances. A good example is Monzo, which has four million users, including me, who use overdraft facilities, loans and a debit card, but also have access to products such as Get Paid Early, Salary Sorter and Bills Pots. Can the app-based banks help customers escape the debt-trap that has been almost 70 years in the making? Or does it really come down to education? Financial education is certainly best started early and many believe that using cash gives children a proper understanding of personal finances and budgeting. But apps have also been playing a role in the education process for quite some time, too: the likes of Kids Money, Allowance+, Savings Spree, PiggyBot and, more recently, Nimbl – an app linked to a prepaid debit card with control features available to parents. It’s been nominated as the Best Children’s Financial Provider in the British Bank Awards 2021. Perhaps a combination of right-minded banks and app educators such as Nimbl can help exert downward pressure on the UK’s household debt. Who knows, maybe one day household debt levels can be reduced to those of the 1950s, an era when cash was definitely king and living within their means was second nature for the vast majority of the UK public.

Saving our bacon: Can fintech apps help Brits out of a sea of debt?

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Issue 20 | TheFintechMagazine

LAEVENTS ICEPS AISA 02/02 YENOM 2021

RBR Self-Service RBR’s Banking 2021 conference goes global Europe, Asia… and now the Americas. RBR plans a truly one-world event for our time, says Gillian Shaw Strategic research and consulting firm RBR will be running its flagship self-service and digital banking event – Self-Service Banking 2021 – in a virtual format from May 25 to 27. The three-day conference and exhibition will cover Asia-Pacific, Europe, Middle East & Africa (EMEA), and, for the first time, the Americas. Delegates will gather virtually to discuss current and emerging trends shaping the industry. We caught up with conference producer Gillian Shaw, to find out more about this year’s hot topics. THE FINTECH MAGAZINE: How will RBR’s Self-Service Banking event work this year? GILLIAN SHAW: The event features a unified expo area and incorporates region-specific conferences, held over three days: Asia-Pacific on May 25, EMEA on May 26, and the Americas on May 27. Each of the regions will have a tailored speaker agenda, streamed in the relevant time zone. All presentations will be available afterwards on-demand, so delegates can learn from thought leaders and innovators from around the globe. Delegates have the opportunity to network through real-time chat and video meetings. And they will be able to engage with speakers via an interactive Q&A. TFM: Why is self-service so important? GS: Self-service is a real mix of different

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digital banking channels, including ATMs, non-cash kiosks, internet and mobile banking. The rise of fintech, changing customer expectations and the need for banks to increase operational efficiencies were already driving change and innovation before COVID-19. The closure of bank branches and the need to limit face-to-face interactions meant self-service channels were critical to delivering essential financial services. TFM: What are the hot topics this year? GS: The agenda comprises bank case studies and thought leadership sessions outlining the essential role technology and innovation are playing in helping banks emerge from the crisis in a stronger position. One of the main themes will be the importance of building a bridge between the physical and digital worlds; customers are happy to embrace digital channels but still want human help to be available. Video seems well-placed to build this bridge; it has really come into its own in all areas of our lives over the past 12 months and its application in retail

The pandemic and the accompanying economic hardships have emphasised the need for fairer and quicker access to financial services banking is no exception. The programme features case studies from NatWest and Eurobank, showing how video banking can connect the physical and the digital, creating the right ‘phygital’ experience. With customers unable to visit bank

branches to open accounts and apply for loans, the question of digital identity has gained significant importance. Santander will be talking about a new initiative, which proposes that banks work together to build a digital trust marketplace; Emirates NBD will be telling us what it learned when it rolled out its advanced contactless identity solution. The pandemic and the accompanying economic hardships have emphasised the need for fairer and quicker access to financial services. Standard Chartered will show how it is leveraging technology to make sure no-one is left behind; Beyond Bank and Newcastle Building Society will emphasise how important it is to put inclusion and positive human impact at the heart of any transformation strategy. The programme will also discuss other emerging trends in self-service banking. Attijariwafa Bank and DBS will be exploring how big data and machine learning can improve the customer experience; KBC Bank will focus on how mobile banking apps can simplify merchant payments; Axis Bank will present a case study on best practice in dealing with ATM chargebacks. There will also be insights and case studies from institutions such as OVO, Maybank, Permanent TSB and Bank of America. TFM: How can readers get involved? GS: We are always looking to add case studies and would love to hear from anyone interested in presenting. We have a range of exhibition and sponsorship packages and, of course, individual delegate tickets are available. ■ Contact gillian.shaw@rbrlondon. com or visit www.rbrlondon.com/ www.fintechf.com

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Fintech Finance presents: The Fintech Magazine 20

Articles inside

SOS: Spend or save?

Beyond ISO 20022

You got the message?

First step in a new future for payments

Rules of the game

Fraud’s most wanted and the private AI

Conquering the complexities of 3DS

Hot to shop

Opening doors

Safe journeys

In banks we trust

Values-added banking

The third-party piece

A panacea for Asia’s payment challenge?

An invisible force

All for one, one for all

A big opportunity for small business

The making of Fintech Rap Battle: Monzo v Starling

Everybody wants to be a bank

A friend in need

The data diggers

We’re in it together

Innovating out of a crisis