Fintech Finance presents: The Fintech Magazine 23 by Fintech Finance

ISSUE 23

THE TRANSFORMATION

Who’s missing €60billion?

McKinsey y on why y embedded finance g way y to go has a long

GREEN FINANCE

Cleaning up the data lake

MOVE TIMES! LENDTECH

Are mortgage lenders ready to hear some digital home truths?

Banks can save the planet – but they y need p, say ys Microsoft help

WEALTHTECH

Older & wiser DBS and Sing gap pore’s fintech model for geing g comfortably y age

TRANSFORMATION

The Italian job How CBI is help ping g bankers blow the pen finance doors off op

INSIGHTS FROM FintechOS ● ACI Worldwide ● Mobiquity ● UBS ● Wealthify ● Avaloq ● Paga ● TSB Trussle ● Volante ● HSBC ● Molo Finance ● Sandstone Technology ● Mambu ● Tide ● Metro Bank

Will your customers leave your bank for better digital tools? Mobile banking has grown rapidly. With consumer expectations rising, a great mobile app is win or lose for any bank. In 2022 your clients want more high quality in-app user experiences. Want to move from a transactional relationship to one beyond banking, delighting your customers? See how we do it on mobiquity.com.

Mobiquity’s digital offerings cover the full range of digital banking requirements including; Digital omnichannel setup for customers and employees, Greenfield digital bank setup, and Incumbent bank digital transformation. Digital banking

User experience

strategy

design

API strategy &

Next gen

development /

core banking

Open Banking

implementation

implementation Cloud foundation

Digital onboarding

setup & cloud

& e-KYC

migration Confirmation of

Digital Innovation

payee service

Labs

Our clients

CONTENTS FINTECH FOCUS 6 Net zero gains The Director of Financial Services for Microsoft UK explains why he thinks the industry is key to changing individual and corporate behaviour – and buying time for the planet

22 A new warrior in the war on cash Can the UK Cash Supply Alliance end hostilities for good?

38 Young and restless Nigeria is experiencing a youth bulge and the Founder and CEO of financial platform Paga, sees that as an opportunity for fintech to shape the birth of a digital nation

WEALTHTECH & TRADING 10 Between two worlds You might be surprised by how fast and how far traditional wealth management is adopting digital technology. Peter-Jan Van De Venn from Mobiquity, Avaloq’s John Wilson and David Semmens from Wealthify, aren’t!

15 An age-old problem and how to solve it

THEFINTECHVIEW

2022 77 ISSUE #23

Bought a house recently? My daughter and I did – in sprints between lockdowns in 2020: the year that would see proptech come of age. We viewed her home in static pictures, online, and didn’t get to step inside – masked and sanitised – until after our offer had been accepted. The high street bank my daughter had been with since going to university five years earlier, said it hadn’t known her long enough to verify her ID in-branch. So we queued at a Post Office counter for the service, instead. And I joined another long, socially distanced queue outside another high street bank that had known me 40 years, in order to go through the KYC process and transfer her the deposit – because being physically present was the only way I could do it fast enough in the scorching-hot COVID property market. Those are the kinds of experiences that a new generation of online brokers and mortgage providers are trying to

eliminate from the already stressful property-buying experience, and, in this issue, we ask legacy lenders and challengers how that’s going. Francesca Carlesi of Molo Finance maintains that the one-click mortgage could be a reality now, while HSBC’s Christopher Pearson believes embedded home lending is within reach. That would require a huge amount of collaboration between all the professionals in a complicated chain of events that happen long before you start heaving boxes through the door. My older daughter and her partner have just started looking for their first-time buy... I'll get back to you with an update! Our last issue’s spine tingler, 'The measure of intelligence is the ability to change', was a quote from Albert Einstein, widely acknowledged to be one of the greatest theoretical physicists Sue Scott, Editor

Could the world’s first public/private attempt to give everyone access to all their financial information help Singapore avoid pensioner poverty? DBS believes it’s a big step in the right direction

19 The NIC of time Today’s traders need smart options if they are to react to the market in real time. We asked three low-latency experts from Cisco how two key technologies, used in combination, can help them

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10 Issue 23 | TheFintechMagazine

Automate the w*rk out of it. Integrate everything. Automate anything.

CONTENTS

38 34 Klarna karma: the BNPL debate

LENDING 24 The one-click mortgage

James Bryce-Lind of credit scoring platform Credit Kudos, Simon Westcott, from PwC, and Laurel Wolfe, a former ‘Klarnaut’, now with banking-as-a-service provider Mambu, discuss the risks and opportunities in the BNPL sector – its phenomenal rise in popularity and where both it and the banks go next

Francesca Carlesi, Co-founder and CEO of UK online mortgage lender, Molo Finance, has seen the future – and it’s closer than you think

27 Moving forward UK lender TSB and Australia’s Sandstone Technology have both seen artificial intelligence come to the fore during one of the most volatile homebuying periods in history

TRANSFORMATION 40 Yes, boss! The influx of small business banking remedies can feel like a bunch of solutions looking for a problem. We asked Adi Engel from US-based management app Vcita, the UK’s Oliver Prill of SME financial platform Tide, and high street operator Metro Bank’s Kat Robinson, what SME owners would want if you asked them

30 Bricks and clicks Everybody agrees that the home-buying experience can be improved upon. But as HSBC’s Christopher Pearson will tell you, it’s ‘not something you can just throw a bunch of algorithms at and think that’s going to land nicely with the customers’. Here, the Head of Intermediary Mortgages at HSBC shares thoughts on reform with Trussle’s Tom Hodgson and Laurean Herepean of FintechOS

45 Laying the open road In Italy, the banks’ trade body has taken the lead in building an open ecosystem and single API to defend and empower its members as they chart new territory

49 Low and behold! Low/no-code solutions are increasingly seen as a potential answer to IT prayers in all manner of business environments. Could ISO 20022 represent a defining moment for its adoption in finance? UBS and Volante Technologies think so

53 The €60billion missed opportunity Albion Murati, a Partner at McKinsey & Company and a leader in its Financial Services and Payments Practices, told TFM why embedded finance still has a long way to go

57 The Mexican payments wave Fintech adoption, cryptocurrency accounts and digital transaction rates in Mexico are soaring. Alejandro Valenzuela, CEO of Banco Azteca, and Francisco Javier García Delgado, of payment solutions provider ACI Worldwide, consider the challenges that presents for acquirer banks

THEFINTECHMAGAZINE2022 EXECUTIVE EDITOR Ali Paterson

US CORRESPONDENT Jacob Bouer

GENERAL MANAGER Chloe Butler

PHOTOGRAPHER Jordan “Dusty” Drew

EDITOR Sue Scott

ONLINE EDITOR Eleanor Hazelton Lauren Towner

ART DIRECTOR Chris Swales

ONLINE TEAM Lewis Johnson-Pitt Elvey Mensah-Afram HEAD OF CONTENT Douglas Mackenzie

SALES TEAM Tom Dickinson Karen Estcourt Serena Khemaney Shaun Routledge

CONTENT TEAM Bobby Suman Aniqah Majid Joe Butler

VIDEO TEAM Lewis Averillo-Singh Lea Jakobiak Oliver Chapman

FEATURE WRITERS David Firth Tracy Fletcher James Grant Martin Heminway Alex King Natalie Marchant Martin Morris Sue Scott

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Issue 23 | TheFintechMagazine

FINTECH FOCUS: SUSTAINABLE FINANCE

Craig Wellman, Director of Financial Services for Microsoft UK, explains why he thinks the industry is key to changing individual and corporate behaviour – and buying time for the planet The world has accepted that climate change is happening and most of us acknowledge that tackling it will be the biggest technological and societal upheaval we have had since the Industrial Revolution. But while businesses almost universally agree that urgent action is needed, only 41 per cent are currently on target to meet the UK Government’s aim to be net zero by 2050. That’s according to a Microsoft UK/Goldsmiths, University of London study published ahead of the United Nations’ 26th Conference of the Parties (COP26) climate change summit, held last November. And if you think that’s an alarming figure, the same stat for companies surveyed in the financial services sector is a woeful 16 per cent. “We’re going to have to reverse a lot of the bad that we’ve done, a lot of the working practices that have grown up, and fundamentally change the way we do business, the way commerce happens,” believes Craig Wellman, director of financial services for Microsoft UK. Wellman’s role at Microsoft sees him look after relationships and co-author strategies with some of the biggest names in financial services, including banks, payment providers, asset managers, fund managers and insurers. The tech giant has itself set ambitious targets around getting to net zero, aiming to be carbon negative by 2030 and, by 2050, to remove from the environment all the CO2 it has emitted – directly or by electrical consumption – since its founding in 1975. So, Wellman knows first-hand the challenges large companies face in becoming more sustainable. But, while financial services may have been slower than others to act, he’s convinced the industry is in a strong, and possibly unique, position to effect change – because it’s made up of large,

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data-driven organisations that have influence and control over the way other businesses and entire economies run. Mark Carney, former governor of the Bank of England, now UN special envoy on climate action and finance, would agree with him. Carney has long warned that large money institutions have been too focussed on short-term investments, instead of using their leverage to mitigate the long-term impacts of climate change. Wellman puts it succinctly: “What gets financed, gets done,” he says. “Whether they’re lending, helping companies invest or insuring their assets, there are instruments available to financial institutions – there are ways that can be managed – to encourage sustainability. And that’s going to drive behaviour.” Referencing Carney’s work on sustainable finance, he says there needs to be a multitude of different incentives, applications and strategies to encourage organisations to pull those levers.

Whether they’re lending, helping companies invest or insuring their assets, there are instruments available to financial institutions to encourage sustainability For example, according to an International Energy Agency report last year, to achieve global net zero emissions by 2050 and keep warming to 1.5°C compared to pre-industrial levels, at least $5trillion needs to be invested in climate solutions every year until the turn of the next decade: the investment community has a role to play in that by constructing innovative vehicles, particularly long-term green investment bonds; insurers can also design products to reduce some of the risks inherent in the

necessary infrastructure projects. The problem is, while we’re still in the foothills of this new investment landscape, the incentives for investors aren’t exactly compelling. Green bond holders, for instance, currently see only 50 per cent of the yield they could be getting elsewhere. Wellman cites the example of an insurer that Microsoft has been working with to create more sustainable products that appeal to people in the market who care about such issues. Like any insurer, what’s not paid out in claims is hedged, reinsured or invested. ffnews.com

Valuable asset: Microsoft’s Cloud services could help investors protect it

“The challenge for them, as they start to switch away from investing in the best returns to investing in greener and more sustainable outcomes, is that, at the moment, the returns are not as good,” he says. “I think what we’ve got to do is stimulate the returns that can be expected – through governmental and regulatory intervention, and by riding this ffnews.com

wave of [green] sentiment that we can see in society now – so that it’s a no-brainer for organisations like this to invest in more sustainable outcomes.” The Climate Policy Initiative (CPI) is an analysis and advisory group that came up with a ‘commitment taxonomy’ that captures details of actions, real and promised, to slow climate change, taken by 301 financial institutions worldwide (tracking their mitigation targets,

investment goals, exclusions and divestment, and new business practices). Using that index, it says Western Europe is well ahead of the rest of the world in the amount of assets committed to net zero, at $44.267billion. But – and it’s a big ‘but’ – the CPI’s 2021 report showed there were some significant shortcomings when you scratch beneath the surface of those companies’ public commitments. Notably, while CPI tracked almost $6trillion in investments pledged to climate solutions by 2030 (in effect doubling 2021 levels), it said ‘these commitments lack detail on target sectors and regions’. It added: “Tracked climate finance commitments, historically, have not gone to developing economies and hard-to-abate sectors, and these are both areas in which financial institutions can have an outsized impact if they commit to invest.” And, in the contentious area of fossil fuels, where several banks have been publicly denounced for continuing to support big polluters, the CPI found ‘a real shift away from fossil fuel investments is missing’. It said: “Overall, we found that the divestment thresholds of most entities contained broad ranges. As a result, continued financing of new and existing coal projects is effectively allowed, for example for companies with up to 40 per cent of revenue coming from coal or through financing parent companies with many subsidiaries. Moreover, few entities are taking steps to phase out oil and gas financing. Those that do are focussed on specific locations such as Arctic drilling and tar sands.” In other words, they are perhaps sensitive to the media shaming that comes from being associated with extraction in highly vulnerable and high-profile environments, rather than making a fundamental moral choice.

A RELIABLE INDEX? Banks that have direct relationships with investee companies, might not have many excuses for continuing to invest in high-carbon activities. But there is a genuine issue of transparency for other investors due to the absence of any green business barometer or index against which to measure companies reliably; it’s hard to be certain investments are ‘clean’. Issue 23 | TheFintechMagazine

FINTECH FOCUS: SUSTAINABLE FINANCE “Think about investment managers and fund managers. Are the funds they call green truly green funds? Do they have the data underneath to support the claim that those funds are sustainable?” asks Wellman.

THE GREEN CLOUD If there’s one thing the second-biggest company in the world knows a lot about, it’s collecting and interpreting data and, in the middle of 2020, Microsoft in the US took a step towards helping the sustainable investment community understand it better. It drew up an agreement with MSCI, which provides critical decision support tools and services for the global investment community, initially to move MSCI’s products, data and services onto Microsoft’s Azure Cloud platform. But the longer-term aim was to collaborate on leveraging MSCI’s deep knowledge of climate risk and environmental, social and governance (ESG) issues, and combine it with Microsoft’s Azure and Power Platform to provide new, data-driven capabilities to help investors ‘better understand and interpret the business risks and opportunities that climate change brings’, the companies said. The initiative builds on MSCI’s ESG Ratings and Climate Search tool, which currently allows investors to search more than 2,900 companies by name or ticker, to view their implied temperature rise, decarbonisation target, ESG rating and ESG rating history, and compare them to the ESG rating distribution by industry, as well as industry-specific ESG issues. The MSCI tie-up is part of what Wellman describes as Microsoft’s ‘sustainability Cloud’ – a number of initiatives that leverage the Cloud to give companies greater insight into the green credentials of an industry and the individual businesses within it. That not only helps them pull those levers that Carney was talking about, it also avoids exposing the institution to financial and reputational risk. US bank BNY Mellon is already using Microsoft Azure to deliver ESG data analytics for investment managers so that they can customise investment portfolios to individual ESG preferences with support from crowdsourced ESG data and demonstrability screens. In the UK, Microsoft has been working with retail bank NatWest. “Our sustainability Cloud effectively looks at data and transactions – in individuals, in

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businesses and in market sectors – and starts to inform the bank on their sustainability and carbon footprints,” explains Wellman. “So, in theory, in an area like SME lending, where NatWest is particularly focussed, it could start to look at market sectors, or even businesses, and say ‘how much of an effort are they really making to be sustainable, to be green, to reduce their carbon footprint?’. It will enable the bank to be more deliberate in how it lends and who to, which, again, starts to create a new wave of financing for more sustainable businesses.” Wellman believes that those financial service providers who stay at the forefront of innovations like this are more likely to capture the market as sentiment shifts. Skewing investment decision-making towards more sustainable target companies might be desirable, but it isn’t without jeopardy for the institutions involved. The authors of a recent post hosted on the Financial Conduct Authority’s Insight blog considered if such a move towards greener investments posed a threat to healthy market competition. It pointed out that imposing common standards when it comes to classifying ‘green’ activities, such as those now being developed by many regulators – including in the EU and UK – ‘may increase compliance costs for firms, and enhanced rigour could lead to products formerly marketed as ‘ESG’ exiting the market if they fail to meet classification requirements’. Likewise, climate-related financial disclosures, which will become mandatory for all companies by 2025 in the UK, could

also distort competition, they said, if not carefully balanced. Whatever the framework, Wellman believes: “The way the industry encourages organisations to be more responsible is going to be critical.” It’s not just about products and investment services, of course. Sustainability requires action by financial services providers at all levels, stresses Wellman, including reimagining working practices. “And organisations are starting to do that,” he says. “Their carbon footprint, in terms of property, travel, how they work and run legacy operations, are way out of date [but] I think people have realised, during the pandemic, that there is a rebalancing opportunity, away from constantly being on a train, in a car or on a plane, to travelling less and being more effective [at work]. “I think there are green shoots of positivity everywhere you look, because the societal change, which I would call the pull element of all of this, [is] creating demand and awareness,” he says. “There’s an opportunity for institutions to ride that wave, and also start to think about how they create products for people at home, and for businesses, that reflect it.” At the end of the day, reversing or halting climate change requires all of us –corporates and individuals – to make a leap of faith; to be prepared to challenge long-held norms, from working arrangements to investment strategy, in the interests of protecting the ultimate asset: our planet.

Green credentials: Microsoft on the MSCI ESG Ratings and Climate Search

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WEALTHTECH & TRADING: DIGITAL TOOLS

BETWEEN TWO

WORLDS You might be surprised by how fast and how far traditional wealth management is adopting digital technology. Peter-Jan Van De Venn from Mobiquity, Avaloq’s John Wilson and David Semmens from Wealthify aren’t! We’re all aware of the explosion of retail trading apps that sofa investors lapped up during the pandemic, which minted money for robo-platforms, propelling Robinhood to an IPO in 2021. But how far have things truly changed for the rest of the wealth management industry, including brokers, advisers, institutional investors and market-makers? And, perhaps more importantly, how will they change in future? The first prototype virtual reality (VR) private wealth management assistant, Cora, emerged a few years ago. A digital take on the personal wealth manager’s role, these virtual assistants were seen by some as a heretical and unnecessary intrusion into an industry where real handshakes were a hallmark at the time. Then COVID threatened to disrupt those relationships, and even Cora and co now seem pretty tame compared to the step change represented by avatar trading in the metaverse – a development Wall Street already thinks will be worth billions and will likely expand the newly-democratised retail investment market still further. So, how soon will you be ‘meeting’ your broker virtually on the corner of Bull Avenue and Bear Lane in your own StockCity – a version of which was developed by Fidelity Labs as long ago as 2014 – watching little blue-bird harbingers of social media doom flock around skyscrapers representing your investments, the property’s relative height indicative of real-time performance? Not quite yet, perhaps, but according to a report released in November by digital transformation consultancy Mobiquity,

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most companies accept that embracing digital technology is the way ahead – and a surprisingly large number, particularly in the UK and US, are already using virtual reality tools most days of the month. VR is right up there with open banking (#1), client dashboards and video-conferencing as among the most important digital tools for them to execute day-to-day business. The Digital Opportunity For Global Wealth Management report was based on research among 400 wealth management executives in the Netherlands, Switzerland, UK and US. It showed that the vast majority (80 per cent) have adopted, or are adopting, digital tools to improve both speed of execution and reaction to volatile markets, efficiency, and customer relations, as well as to reduce the cost of doing business – although how far they are using technology to address more fundamental structural changes in wealth management is less clear. The ‘digital champions’ among the Mobiquity cohort were, it said, ‘using augmented and virtual reality to enhance both the employee and customer experience, artificial intelligence to make faster, more efficient and effective use of the huge quantities of data being generated that underpin financial behaviours, and open banking to allow seamless transitions between financial products and pots of wealth from across multiple providers’. John Wilson, managing director for the UK and Ireland at Avaloq, a software and banking platform-as-a-service supplier to the wealth management industry,

headquartered in Switzerland, says KPIs for wealth managers are still determined by assets under management, inflows and outflows, the split across advisory, discretionary, and exo-transaction models; cost to serve, number of customers, number of transactions, and revenues and margin. But he would add another to this list. “Risk profiles have changed, in terms of the way in which companies have adapted over lockdown,” says Wilson. “So, I would say, for any wealth manager who has managed to fully integrate technology in order to maintain client relationships, that’s a success metric.” Peter-Jan Van De Venn, strategy director at Mobiquity, would agree. “Customer servicing is one of the key differentiators for wealth managers,” he says, “and our research showed that wealth managers themselves view keeping up with digital customer demands as an important success factor. For a traditional, face-to-face, advice-heavy business, that’s a huge step forward, I would say.” ffnews.com

It’s not hard to identify the drivers. Writing in the report, Van de Venn pinpoints them as being the falling cost to build, implement and maintain the digital solutions needed to meet the complex investment affairs of ultra-high-net-worth individuals; the rapid improvement in artificial intelligence and machine learning algorithms that can accelerate and boost the accuracy of predictions and decisions; and the emergence of an open banking and API economy to support the collection of distributed financial information and create better insights. Couple those with a realisation, during the pandemic, that online communication and collaboration can be as efficient and desirable as face-to-face – even among older, more traditional investors – and the direction of travel seems clear, although Wilson points out that how fast you go depends on the geography you’re in.

“The UK, for example, has a particularly digitally-savvy population and there’s a lot of comfort with self-directed investments, hence the growth of direct-to-consumer platforms. Whereas, in Switzerland, you still see a lot private banking, discretionary fund management, and advisory activity,” he says. In that latter kind of environment, wealth managers are caught between a rock and hard place: how to strike the right balance between digital and human by choosing which elements of the wealth management service can be fully automated and those that can

Our research showed that wealth managers view keeping up with digital customer demands as an important success factor. For a traditional, face-to-face, advice-heavy business, that’s a huge step forward Peter-Jan Van De Venn, Mobiquity ffnews.com

be augmented with digital tools. Open finance, permissioned data-sharing and trust are all related components in that debate. The last is still a particular concern among many providers who have built a reputation on zealously guarding client information. Singapore has just enabled the permissioned sharing of information on assets and investments over its Singapore Financial Data Exchange (SGFinDex) platform, which leverages the country’s national identity pass. The industry there believes that gives both providers and customers confidence in using digital tools. “One of the barriers to digital implementation we saw in all regions was privacy concerns,” confirms Van de Venn. “Having a good, personalised, digital wealth management offering requires access to as much data as you can get, and that’s governed by regulation. But as far as the technology to collect it goes, I think it’s important for those wealth management companies to take that step, go through the digital transformation, change the architecture from the bottom up, because that future-proofs them for keeping up with customer demands.” His comments are aimed at the 20 per cent or so of companies who told Mobiquity that they do not have plans to increase digital services. David Semmens, chief investment officer at Wealthify, an online investment service that lets users choose the risk level they’re comfortable with and then builds the plans and manages them on their behalf, points out that firms don’t have to invest in the technology themselves. Wealthify has been engaging digitally from the get-go and is now taking a platform-as-a-service approach to offer other, more analogue, wealth managers the same advantage. “We’re a digital-only business, accessed via our app or website, so we don’t rely on face-to-face interaction,” says Semmens. “But we work with other wealth managers that are looking to build digital into their proposition to service smaller clients who are unable to afford advice. They are referred to us, sometimes through a co-branded customer journey, and self-serve through a non-advised discretionary investment service until they reach a scale that makes them viable for the wealth manager. Issue 23 | TheFintechMagazine

WEALTHTECH & TRADING: DIGITAL TOOLS “Clients will access a diverse portfolio of investments with low fees and a low minimum investment via web or app. It’s all about inspiring anyone to build their future wealth,” says Semmens. “First and foremost, wealth management is a relationship business,” agrees Wilson, “so it’s always going to be human-centric, whether it’s face-to-face or not. “With 80 per cent of wealth managers confirming their commitment to digital, we need to manage that transition quite sensitively, from a human perspective. At Avaloq, we prioritise persona-based design thinking, so we start from the perspective of the end user, the relationship manager or independent financial adviser and go through the middle and back office, looking for key personnel – whether that’s ops, risk or compliance – to make sure we are looking at the user experience through their eyes.” He believes the forced reliance on virtual communication channels during the pandemic has persuaded relationship managers that they need to be in contact with clients more, not less – ‘quantity of time is quality time’ as Wilson puts it.

We developed a standalone digital product called Engage, which, effectively, is WhatsApp for the relationship manager in a compliant environment John Wilson, Avaloq

“What we see happening is an uptick in conversational banking – having an ongoing dialogue with your client in a digital way. And how do we communicate with each other outside of work? It’s typically with instant messaging apps, WeChat, WhatsApp, etc. So, we developed a standalone digital product called Engage, which is effectively

WhatsApp for the relationship manager in a compliant environment, with the backup of customer relationship management (CRM), customer lifecycle management and access to your client’s portfolio details. So, as a wealth manager, you could have a regular, unintrusive dialogue with a client, which puts you front of mind with them. It allows you to offer insights and keep up with key events in your client’s life. It’s a lovely merging of digital and client-centricity.” “When a customer wants to talk to us, they can use our own in-app and web chats rather than WhatsApp, but I agree it’s about personalisation,” says Semmens. “Looking ahead, what customers are going to want is to impose their choices on the service.” Van De Venn highlights three immediate returns on investment that typically emerge as part of a digital transformation. “One is that it improves the customer experience, of course; if the servicing goes up, that’s more insight, and if you can do more yourself, customer satisfaction goes up. Secondly, operational costs go down. If you do it right, servicing will become cheaper per client. And the third, very important return in a heavily-regulated environment like wealth management, is that digitisation and automation lead to more control, because whatever you or your clients do is more auditable, more traceable and that makes regulators happy.” But he adds a note of caution: “Listen to what your customer wants, but also make sure that you look at technical feasibility, and viability, because it is key to have a business case that is actually working.” Semmens sees the white-label option ticking that viability box for more firms. “Big asset managers and wealth management providers come to robos like Wealthify because it means they can add their own branding to an existing digital proposition. By doing this, they are introducing more people

to affordable investing,” he says. “We’re seeing a rise in popularity of investing, particularly in Europe: people will get more involved, beyond the recent speculative, short-term investing phenomenon. And that’s going to be very interesting.”

Particularly in Europe, people will get more involved in investing, beyond the recent speculative, short-term investing phenomenon David Semmens, Wealthify

According to Citadel Securities, a global market-maker for broker dealers and institutional investors in the US, retail traders accounted for about one-fifth of stock market trading in 2020, and as much as a quarter on America’s most active trading days – a massive swing in the investment demographic, which had a big impact on equity trading volumes and stock price movements. Citadel itself, which is said to be eyeing an initial public offering (IPO) this year, has built its success on a combination of award-winning automation and human relationships. While from opposite ends of the industry, both it and Robinhood demonstrate how digital technology can elevate wealth management businesses. So, what about that 20 per cent of respondents in the Mobiquity report who said they wouldn’t be using digital tools beyond the pandemic? “My hunch is that it’s just a matter of time before they do adopt them,” says Van de Venn. “You have to be ready to serve that future generation in the digital way that they demand.” And if that’s watching blue birds hover over StockCity, so be it.

Facing the future: Traditional wealth managers are bridging the digital divide

TheFintechMagazine | Issue 23

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WEALTHTECH & TRADING: RETIREMENT PLANNING

An age-old problem and how to solve it Could the world’s first public/private attempt to give everyone access to all their financial information help Singapore avoid pensioner poverty? Evy Wee, Head of Financial Planning & Personal Investing at DBS believes it’s a big step in the right direction

At night, downtown Singapore hums with the chatter of the affluent. Crisp shirts and clicking heels swagger between Michelin-star eateries and five-star hotels, schmoozing or boozing along the light-strung mouth of Marina Bay. And, watching silently over this nightly carousel of canapés and cocktails are the buildings of the world’s biggest banks, the odd office still glowing with the labour of the late-to-leave. It’s a scene that epitomises the country. Since achieving independence in 1965, Singapore’s open-door policy towards global financial institutions has generated a colossal amount of wealth. In terms of GDP per capita, the island nation is consistently rubbing shoulders with Luxembourg and Norway, inside the global top 10. Singaporeans earn on average six times more than Malaysians living on the other side of the Johore Strait, and 16 times more than their neighbours in Indonesia. Despite this, individual Singaporeans know financial hardship. With space on the island at a premium, housing prices are astronomical; the cost of living is high and rising. And, like other mature economies, Singapore is fast approaching its senior moment, with the country’s median age set to rise from 35.6 in 2020 ffnews.com

to 53.4 in 2050. It’s a looming problem that Europe knows all too well: a greater burden on the state and young workers, and a rise in old-age poverty. Between 2012 and 2015, poverty in Singapore increased by 43.45 per cent. For the older population, that figure was 74.32 per cent. The country’s retirement policies aren’t helping: the statutory retirement age is 62, and employers routinely coerce older workers into leaving early. Adequate financial planning, well ahead of Singaporeans’ silver years, could help the country escape a looming crisis. That’s the opinion of Evy Wee, head of financial planning and personal investing at DBS (Development Bank of Singapore). Born in Malaysia, Wee is no stranger to financial hardship herself, having watched her parents’ home taken away from them when she was a teenager. “I literally just ate carbs for almost every meal during my first three years at DBS,” she says. “That was when I became more disciplined with my money, because we really had a single-minded focus to get the house back. I really learnt the value of money and the importance of saving and gaining financial freedom.” For many young Singaporeans, financial planning starts and ends with buying an apartment in one of the many high-rises. That’s a feat most only achieve after marriage, when they become eligible for state hand-outs designed to boost the country’s fertility rate and smooth that senescent upward curve. Investing and saving for the long-term, as DBS research found, isn’t on their radar. “In Singapore, people aren’t underbanked, they’re undeserved, lacking awareness of the need to plan,” says Wee. “And we’ve learned about some blind

spots in customers’ behaviour. For example, people would be spending a lot of money trading on a platform, but with a horizon of zero years. “On the back of Robinhood and Freetrade, many younger consumers, as well as customers who may not have a tonne of money, started investing with us through the digiPortfolio, which we integrated into the bank in 2019. It’s where they can buy equities from different stock exchanges,” says Wee. Following the launch of those features alone, DBS saw a doubling of customers starting to invest. Today, digiPortfolio is rated in the top three investment apps, after Stashaway and Syfe. It encourages low-risk, long-term investments, which feel neatly opposed to the bullish bravado of in-vogue trading apps.

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WEALTHTECH & TRADING: RETIREMENT PLANNING Wee reckons Singaporeans have significant misconceptions about financial planning: “Many mass market customers have this misunderstanding that planning and investing is something they depend on someone else to do, like a financial planner. The second misconception they have is, ‘I need to have a tonne of money before someone will even entertain what I need.’ We're here to change all of that.”

PLANNING AHEAD Having launched mobile banking in 2010, and a digital wallet in 2014, DBS is consistently ahead of the industry’s modernisation trend. But now it’s participating in a world-first: Singapore’s impressively coordinated approach to open finance, called the SGFinDex, or the Singapore Financial Data Exchange. SGFinDex doesn’t just share data between banks – it enables Singaporeans to consolidate their financial data in a single place. That’s everything from deposits, cards and investments through to government loans and records. As DBS puts it: “Your money may be in different places, or all over the place, but your financial planning doesn't have to be.” The SGFinDex involves eight participating banks with the Monetary Authority of Singapore and the Ministry of Manpower and it harnesses Singapore’s existing national identity infrastructure, the Singpass – citizens’ one-stop gateway for access to 1,700 digital services provided by more than 460 government agencies and businesses. “The launch of the SGFinDex was a very exciting time for us, for Singapore,” says Wee. “It was our first foray into open banking, and it was meant to help consumers really understand the need to look at a balance sheet more holistically for the purpose of financial planning.” With all their financial data at their fingertips, it’s hoped that Singaporeans will be empowered to make better decisions about how they spend, save and invest – planning for retirement, or for unforeseeable events like a pandemic. But sometimes

users need a nudge. To provide these, DBS has plugged SGFinDex’s power into its existing financial planning service, called NAV Planner, available on its digibank and iWealth apps. According to DBS, that’s supercharged the advice generated by NAV Planner, which was already delivering smart, personalised tips to customers, based on their unique financial profile. “The whole ability to aggregate data around all the other bank accounts, around investments that may be held outside DBS, has enhanced our ability to provide advice to consumers,” says Wee. It’s easy to see why: if a DBS customer had $5,000 in their account, but NAV Planner didn’t know about $50,000 sloshing around in another bank, it might treat them as a low earner and provide inaccurate or irrelevant advice. Since its introduction in December 2020, Singapore’s novel approach to open banking and the tools it’s allowed banks to build on top of it has proved wildly popular with customers. “The feedback is that they’ve loved what the application has brought to the table,” says Wee. “They’ve even asked the industry to add more datasets.” And so they are. The SGFinDex is soon to upgrade to its second generation, adding further data to the project. That’ll include data from the Singapore Exchange, where Singaporeans custodise their investment holdings. Wee is optimistic that, as the information available to NAV Planner and other tools expands, it will help consumers become more aware of the need to plan and services will become much more intelligent in assisting them. The Singapore government’s hands-on involvement in the SGFinDex reveals its readiness to be brazen in its response to societal changes, including ageing, as does its creation of MyMoneySense, a free

government financial planning app. For DBS, though, the bank’s upgraded NAV Planner is about something more. “It’s the democratisation of wealth services,” says Wee. “And we hope we’ll be able to take all these best practices, the whole platform, beyond Singapore.” No doubt some Europeans will yearn for the single-interface access Singaporeans now possess to review their myriad of financial investments, commitments and accounts. But it’s difficult to imagine infrastructure akin to the Singpass washing in the UK. Data privacy concerns regularly force the abandonment of state-led data-sharing schemes, and even vaccine passports have faced firm resistance. But, as with the UK’s open banking initiative, it’s certainly possible for financial institutions to work together on a similar project to the SGFinDex – with government taking a regulatory backseat. In lieu of a Singpass-style identity validator, such a project – or projects – could just as easily partner with third-party sovereign ID providers. Back in Singapore, Wee has worked hard on her own financial planning in order to help her parents buy back their home – and with it, their financial freedom. But with old-age poverty rates rising in one of the world’s wealthiest nations per capita, Singapore can expect more stories like Wee’s – of parents financially debilitated, and offspring working furiously to achieve financial stability. Tools like the DBS NAV Planner won’t stem anxieties about Singapore’s ageing population on their own, but they’re a step in a healthier direction and might just help keep the party going down on Marina Bay.

In Singapore, people aren’t underbanked, they’re undeserved, lacking awareness of the need to plan

Wealthy image: But Singapore is facing a growing poverty crisis among the elderly

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WEALTHTECH & TRADING: PROGRAMMING Today’s traders need smart options if they are to react to the market in real time. We asked three low-latency experts from Cisco how two technologies, used in combination, can help The network interface card, aka NIC, has been around for a while; but it’s the technology’s more intelligent ‘brother’, SmartNIC who has been turning heads more recently. This capable beefcake goes by several aliases – probably the dullest acronym is data processing unit (DPU) – but, at heart, he’s a networking adapter card with a programmable processor. Many say SmartNIC’s full enterprise potential hasn’t yet been realised, partly because of the investment needed. But in environments where cost, time and adaptability are all finely balanced, as in the case of financial services and, particularly, in high-frequency trading

(HFT), the numbers soon start to add up. When a SmartNIC carries an integrated circuit that can be programmed in the field of operation – a field programmable gate array (FPGA) – it allows all manner of computational add-ons to be accessed by a customer, using open-source tools. Combined with the processing power of a SmartNIC – which can offload work from a central processing unit (CPU) and shift network packages 40-times faster than traditional high-performance NICs – this double act can change the nature of trading and literally buy time. It’s been said that the return on investment (ROI) can be measured in fractions of a second. So, we asked three ultra-low latency experts at Cisco, one of the companies leading developments in this area for financial services, to help us get better acquainted with SmartNIC and FPGAs. Dan Brown is a technical solutions architect, responsible for ‘anything that’s related to the nanosecond or even lower’, who works alongside fellow ultra-low latency specialist Mike Skory, and Bob DiPietro, an ultra-low latency technical solutions architect with particular experience in toolchain development for finance markets. We began by asking them to give us a history lesson. THE FINTECH MAGAZINE: Before programmable NICs, what did the industry have to settle for? And when did things really start to speed up and why?

DAN BROWN: The latency race started in 2007. Ever since then, people have been building technology infrastructure to basically reduce the length of time it takes to trade on exchanges. BOB DIPIETRO: There’s been a whole evolution. It was originally based on NICs, with everything going back to a processor via the kernel stack, and all logic based in the host. Then, software-based stacks and kernel bypass arrived. Next, with FPGAs, some or most of that work that was done in the host could be offloaded and the latency reduced. You can now program in the FPGA and avoid the whole chain up to the host and back. For more complex problems, you can also use the host in conjunction with the FPGA. For example, you can create a hybrid stack, where you don’t have to build an entire transmission control protocol (TCP) engine inside the FPGA and yet still be able send TCP in the FPGA for ultra-low latency. This avoids having the limited functionality, performance, and resource constraints that come with putting a TCP engine in a FPGA. DB: At Cisco, we have a few different categories of NICs – the X25 and X100, which we’d classify as our drop-in NICs; they can be used to accelerate communications to the network. You can apply our kernel-bypass stack to that and get into the sub-microsecond range easily, for near-enough any application. The primary use case for those NICs has been in financial services for trading, but they do have applications outside of that.

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WEALTHTECH & TRADING: PROGRAMMING The NICs that have been more focussed towards our FPGA development users, one of which is based on the Virtex UltraScale 5P and one on the VU9P, both from Xilinx, can work in conjunction with our firmware development kit (FDK), which is a full suite of tools to do development on FPGA cards. With that, you can go from knowing not too much about FPGAs, to knowing how to program in Verilog or VHDL, and move towards creating a financial service package that will allow you to start trading on the exchanges relatively easily. TFM: Can we drill down into what SmartNICs loaded with a FPGA can do for traders and financial institutions, then? MICHAEL SKORY: This is all about time to market; it allows customers the flexibility and creativity to meet their specific business objectives – their trading

deploy and compile an image, and also gets them into the market a lot quicker. BD: With the FPGA, it’s fully programmable and can easily be changed several times a day. FPGAs can have many connections and give the designer the ability to do parallel processing, and then, as a result of those computations, get an action out in the order of nanoseconds. It’s all about the goal of getting to an answer in real-time and acting on that answer in the lowest possible latency. The Cisco SmartNICs and FDK provide a platform for designers to use it in a way to achieve that goal. TFM: So, does the framework allow you to accelerate operations over a typical processor, even if that has a higher clock speed? And how does introducing speed grade 3 help developers?

Faster and better: The Cisco platform promises traders to be both

initiatives. In reducing their time to market, they can focus primarily on the logic. That is the key to it all. DB: Put another way, it reduces the compilation times of our customers’ trading strategies. So what does that mean, in terms of use cases in the markets? Well, you compile an FPGA, or a firmware image, and deploy that onto a card, in order for that to start trading on the exchange. But what people like to do is change how the market is interpreting the data; they need to be able to change the way that the market is being seen, or maybe some of the parameters. Because that’s not easily done inside an FPGA, they recreate the FPGA image on the fly, and then redeploy that directly onto the card, in order to trade onto the exchange, without having any downtime or going against the strategy they might be working towards. So, it reduces the length of time needed to

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logic faster, to accelerate existing designs, and to create optimised designs which were not achievable before. TFM: Traders were looking at perhaps changing their algorithms once a day; how many changes are we looking at nowadays, then, with the speed grade 3? MS: Back in the day, an algorithm used to last maybe a month, two months; now it could last hours. Sometimes, you need to make a change right away. And this allows you to do that. Speed grade 3 is about creating more margin for the compiling; it gives you the ability to react in real time, rather than in the past. You can take sections of code, manipulate it, and then, using the toolset, get the timing perfect, send it off, and there you go. And the better you are, the faster you are – so, it allows you to really react to changes in the market. What we’re giving them with speed grade 3 is the platform to do so. TFM: From a business perspective, what does this mean for companies that embrace this technology? DB: A lot more people are moving away from having solely software applications, and finding ways to deploy it inside hardware.

This is all about time to market; it allows customers the flexibility and creativity to meet their specific business objectives Michael Skory, CISCO

BD: You can process streams of data, make custom code and don’t have to go back to the host to use a general-purpose processor. Basically, you can make your own logic, that is in hardware to process the data streams and with ultra-low latency. This is very powerful, because, in most cases, it is much faster than you could do it if you went to the CPU. Sometimes you may have a design, where, because the FPGA build tools have iterative algorithms that place logic and route connections within the FPGA, the tools may struggle to meet the timing. Speed grade 3 allows existing designs to meet timing easier and, in some cases, might speed up the design itself. Speed grade 3 also allows for new designs to meet timing that could not be met with the previous speed grade. Essentially, with speed grade 3, you might be able to synthesise/build

At Cisco, we are trying to embrace the future with those customers by making sure anything within our optical latency line-up is FPGA-enabled. Alongside that, with our FDK, we can support the unlocking of all of our devices, so that people can put their own strategic components inside those; we do it not just on our NIC cards, but also across all of our switch line-up. We’re here to embrace our customers’ needs as they move towards an FPGA/hardware-driven journey and, going forward, I see the use of high-level synthesisers for the conversion of software applications into hardware becoming more and more of a day-to-day activity. I think it’s going to be introduced into a lot of our customers’ software development lifecycles, as well as their strategic operations. ffnews.com

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FINTECH FOCUS: PAYMENT CHOICE

A new warrior in the war on cash Can the UK Cash Supply Alliance end hostilities for good? Ron Delnevo meets its Co-founder and Chair, Nigel Constable The war on cash started in 1949. Frank McNamara, a New York businessman, had dinner with his wife and some clients at Majors Cabin Grill in his home town. When the time came to settle the bill, Frank discovered he had left his wallet in another jacket. His wife had cash, so the bill was paid – but the experience got Frank thinking. Perhaps what Frank should have thought was that he needed to take his wife out more because, in those far off days, no woman would ever forget to take a handbag, even if her husband was dumb enough to forget his wallet. Anyway, the next year Frank returned to the same restaurant and this time paid with a small cardboard charge card. Diners Club was born that evening, with the card industry later describing Frank’s meal as the First Supper.

Credit cards were the next ‘big idea’, with Bank of America launching the BankAmericard in the US in 1958 and Barclays launching the Barclaycard in the UK around a decade later. A similar pattern emerged in relation to debit cards. The first US debit card appeared in 1978. However, in the UK they were delayed by nearly 10 years. Of course, it took longer than that for the card industry to pluck up the courage to openly declare a war on cash. Famously, the industry leader who finally swallowed enough brave pills was Ajay Banga, the now former CEO of Mastercard. Banga announced his war on cash in Mumbai in October 2010, the day after the Indian government started a campaign to give identification numbers to all

1.2 billion citizens. He saw a huge opportunity to work with the Indian government, with payments to the poor being processed via the Mastercard network. He was no doubt annoyed to find that, in 2010, 85 per cent of the planet’s payments were still being made using cash. The fact that this percentage had been the same or higher for more than 2,000 years cut no ice with the plastic tycoon. It just strengthened his resolve. So how successful has this phoney war on cash been? Mastercard and Visa, the two giant US payment networks, have both been very successful in issuing cards. Today, there are around five billion of them, carrying one or other of the two brands, in use. China UnionPay claims to have issued another seven billion cards. In

A battle for choice: The UK Cash Supply Alliance is mustering forces

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total, there are probably around 25 billion credit, debit and prepaid cards worldwide. Given that there are only around six billion adults on the planet, this is a mind-boggling figure, especially as around 25 per cent of those adults do not even have basic bank accounts. Way back in 1950, when Frank McNamara paid for a meal by card for the first time, effectively 100 per cent of payments worldwide were made using cash and cheques. Nearly 70 years later, with cheque use having declined to almost zero in many countries, according to McKinsey, cash still accounted for 77 per cent of the world’s transactions (in 2018). And this despite the huge – and expensive – efforts of the card and mobile payments industries. But the war on cash continues – and, unfortunately, the UK has become the main battleground. Contactless payment

It is critical for the health of many people’s personal finances that they are free to pay using the method of their choice Nigel Constable

has been the primary weapon used. Introduced to UK debit cards in 2007, the public was slow to show much interest but, thanks to massive marketing budgets and collaboration with Transport for London, since 2015 contactless payments have increased dramatically. And, as card use has been made easier, using cash has been made more difficult. Bank branches have been disappearing faster in the UK than in any other country in the world. The ‘big five’ UK banks have closed more than half of their branches in the last decade. A similar picture emerges in relation to ATMs, which now account for more than 90 per cent of the cash accessed by the public each year: more than 25 per cent of the UK’s free-to-use ATMs have been removed in the last five years. So, getting cash has been made significantly more difficult for the 40 million adults – 75 per cent of the UK’s population – who still use cash frequently. Depositing cash is now a problem, too. Bank branches closing is partly responsible for that, as is the fact that cash deposit at LINK ATMs has never been implemented. ffnews.com

Cash acceptance in the UK is also becoming a major issue. The UK government shows no sign yet of following the good example set in the United States as far as payment choice legislation is concerned. A Payment Choice Act is badly needed, not least because a recent survey by the UK’s Financial Conduct Authority revealed that only 64 per cent of UK businesses are content to continue accepting cash. One problem in the UK is that there has been no strong voice speaking up for cash – until now. I recently caught up with Nigel Constable, co-founder and chair of the UK Cash Supply Alliance, a new not-for-profit, supported by volunteers in the industry, and determined to speak up for both cash and the public interest. Constable has worked in the cash industry for 30 years, and was a founding director of Note Machine, one of the largest and most highly-integrated ATM operators in Europe. This is what he told me… RON DELNEVO: Why do you believe it is important to maintain cash supply and offer payment choice? NIGEL CONSTABLE: I believe cash is the lowest-friction payment method, particularly for smaller amounts, and that for many it represents an important way of budgeting, from the weekly shop to the evening out with friends. It is critical for the health of many people’s personal finances that they are free to pay using the method of their choice. Card and contactless payments are here to stay, and have obvious value, but it is easy to spend beyond your means through a series of low-value payments. Cash is physical and tangible and, for millions, represents a convenient, easy way to manage expenditure. RD: What’s your take on the cash health scares that surfaced in the pandemic? NC: Not enough has been made of the extensive research done by the Bank of England and others, which shows that the risk of contracting viruses through cash usage is vanishingly small. These scares have been used by some retailers to avoid taking cash because banks have made it very difficult to pay in cash in some localities, following an acceleration in branch closures. RD: So, do you see cash recovering, then, as the impact of the pandemic recedes?

NC: I am confident that a recovery will mirror the increase in shopping footfall as we exit the pandemic. People will still value having cash in their wallets and purses as they go about their daily business. RD: Cash in circulation increases each year in almost every country. Given we are constantly told that people are abandoning cash, how would you explain this phenomenon, and does it mean the long-term future of cash is assured? NC: I am very confident that cash has a long-term future – and it seems others agree, otherwise the Bank of England would not have seen the need to invest millions in introducing polymer notes. That, incidentally, has resulted in the best-quality, cleanest notes we have ever seen in circulation in the UK. The global economy continues to expand and, in local economies across the world, people value cash for the same reasons – certainty of value, immediacy of settlement, low costs to make and receive payments and ease of management.

The UK government shows no sign yet of following the good example set in the US as far as payment choice legislation is concerned Ron Delnevo

RD: What is the rationale behind founding the UK Cash Supply Alliance? NC: The UK CSA exists to bring organisations together that are involved in all aspects of the supply chain, to ensure that cash remains firmly on the consumer’s payment choice menu. We will work with government and regulators to make sure that the voice of the consumer is fully understood and strongly represented. The British public have always shown iron resolve to stop unwanted outcomes being forced on them. With the help of the Alliance, I am confident the public can end the war on cash and, in doing so, remove the threat of an imposed ‘cashless society’. Issue 23 | TheFintechMagazine

LENDING: HOME LOANS The UK’s biggest property website recorded its largest ever ‘Boxing Day bounce’ in 2021. Traditionally the day that online agencies see a spike in traffic as potential movers use the holidays to plan their new year relocation, Rightmove said enquiries from buyers were up 23 per cent and listings from sellers up by 21 per cent on December 26 last year – the highest number of new vendors ever recorded on that day. There will be nothing traditional, though, about the way many of those homes are viewed, mortgages financed and conveyancing completed. Instead of tramping the streets to feign delight at a would-be seller’s dodgy decor, buyers have embraced the idea of online viewings since they were initially forced on them during the pandemic – so much so, in fact, that Purplebricks has even launched a 25-second virtual house tour option on TikTok. Online home conveyancers, meanwhile, have dramatically cut the cost, time and effort involved in the tedious business of chasing counterparties and paperwork. The need for this, too, emerged during lockdown, when stay-at-home orders resulted in shuttered offices, and added to analogue processing delays. Which just leaves the financing of the UK’s estimated £1.6trillion home loans market: so, how close are we to a ‘one-click mortgage’? In theory, very, according to Francesca Carlesi, founder of online mortgage lender Molo Finance, thanks to a combination of APIs, Cloud, better data and open banking. “It will come to a point where you’ll have a native app on your phone, you walk down a street and see a property you like, geolocate it and ask ‘can I buy

this property?’. The app will tell you, for example, ‘yes, you can, but you need to save for two more months and then this is the best rate you can get’. This is already feasible today. The technical capability is there, and the regulatory environment is allowing it. I’d like to think that it will be made possible by Molo’s technology.”

A MOVEABLE FEAST Launched in 2018 with the intention of rattling the market’s status quo, Molo came into its own during 2020, with two fund-raises during the course of the year. Its first tranche of Series A investment, a month before COVID began dominating the news, brought in £10million. Just 10 months later, after a spectacular uptick in trade, it secured a further £266million in debt and equity funding, demonstrating just how fast and how far the house-buying environment had changed and how keen investors were on backing the opportunity for innovation it created. Molo uses proprietary technology to combine automated decision-making and human expertise, working with partners, credit-referencing agency Experian and property website Rightmove. In Experian’s case, its open banking service offers Molo’s customers the option to provide instantaneous digital verification of their income instead of having to search, save and upload documents, in order to obtain a mortgage, and so secure a property, sooner. "COVID was a moment of truth for everybody,” says Carlesi. But even she was surprised when the explosion in digital traffic during successive lockdowns didn’t go away once they ended. “It has actually remained much more than we thought, so that today we’re probably seeing 30-times higher traffic,” she adds.

But it wasn’t the pandemic that cleared the way for Molo and many others to enter into the mortgage market; that, according to Carlesi, happened when the big banks withdrew from their traditional direct relationship with homebuyers and let broker partners fill the void. For her, it was their worst mistake because it cut the golden thread with homebuyers. “That’s the biggest thing they’re missing,” she says.“Owning the customer is important, because only then do you know what they really need and can create an experience around them.” That’s not to say legacy institutions don’t still control the lion’s share of the lending. In fact, when the pandemic property bulge persisted beyond the government Stamp Duty tax break that incentivised it, they piled in with a vengeance. Gross mortgage lending by the UK’s big five high street banks increased in 2020, although, according to Bank of England analysis, profitability fell in the last year. Meanwhile, UK challenger banks have become increasingly active in the proptech space, although some have been selective about it. Most recently, Starling bought specialist buy-to-let lender Fleet Mortgages, which came with a mortgage book of £1.75billion. Neo savings bank, Monument, is similarly targeting buy-to-let investors, offering a personal and curated property investment service. Meanwhile, challenger Monzo has teamed up with digital broker Mojo Mortgages to help customers remortgage their homes. But probably the most impressive player is Atom Bank, which added £362million of mortgages in H2 2020/21, having loaned £2.8billion since its 2016 launch. It hit a milestone in August, 2021, posting its first month of operating profit, largely due to its mortgage portfolio.

The one-cli k mortgage Francesca Carlesi, Co-founder and CEO of UK online mortgage lender, Molo Finance, has seen the future – and it’s closer than you think 24

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“Challenger banks mostly focus their business activity on a deposit and savings type of product, which doesn’t generate a lot of revenue,” says Carlesi. “So, inevitably, they need to match that liquidity with something on the other side of the balance sheet. Lending products are perfect, and mortgages even more so, because they are big ticket items, so it’s easier to fill the bucket. They’re also very safe; a mortgage is much safer than a personal loan. “So, you can see why it’s happening, but the way it will happen will be different to the legacy banks’ model. “The majority of challenger banks that are starting to look into lending and mortgages, don’t manufacture the product in-house. They are either buying assets, which is what Starling did, or partnering with companies that have already developed a capability – because building a fully-digital mortgage experience is quite daunting. In fact, it’s better to have specialists involved; then everybody does what they know best, and can just connect the dots around the customer.

Everybody offers the same type of mortgages. There is no real risk-based pricing: as a borrower, you either fit in the grid, or you don’t

“Fortunately for us, but unfortunately for them, legacy banks have a lot of issues in terms of being able to really deliver a superior digitally-enabled experience,” continues Carlesi. “They need to re-engineer the process, re-engineer the tech stack. They need to re-think the customer journey, and when and how they do underwriting.” The availability of APIs, the Cloud, open access to data and the AI to interpret it, have all contributed to one moment in time for proptech providers, says Carlesi. APIs have allowed them to interface with any potential third party through a simple gateway, which is critical ‘because, all of a sudden, you can interconnect different systems that before were very siloed and fragmented’. And Molo, she says, ‘couldn’t have achieved even half of what we have if we couldn’t leverage an existing Cloud infrastructure that was scalable, fast and efficient’. Machine learning has been key to determining mortgage suitability. “When we launched our minimum viable product, we thought we knew it all, but we didn’t because every single customer that came through was that little bit different, in terms of personal financial circumstances, from the rest,” says Carlesi. But the real game-changer, she believes, has been open banking. “It enables every player out there to access the same granularity of transaction

data that a bank can – effectively creating a level playing field for everyone to be able to provide the best financial services experience,” she says. So, now all that’s needed is some serious product innovation. “Everybody offers the same type of mortgages in this market,” says Carlesi. “We have 22,000 products and they all look the same. There is no real risk-based pricing, for example; as a borrower, you either fit into the grid, or you don’t.” Finding new ways to underwrite mortgages, not just price them, she believes, is critical: “It’s the only way to really have a tailored experience and give everybody the product they deserve.” As for the one-click mortgage, the extreme circumstances of 2020 proved there is another, better, way of doing things. So, in Carlesi’s reimagined, one-click future, the third most stressful experience in anyone’s life – moving home – could become one of the most pleasurable. For anyone poring over video tours of their dream home right now, that future can’t come soon enough.

Just like that: Buying a home could become almost as easy as ticking a box

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Issue 23 | TheFintechMagazine

LENDING: HOME LOAN AI

MOVING

FORWARD UK lender TSB and Australia’s Sandstone Technology have both seen artificial intelligence come to the fore during one of the most volatile homebuying periods in history. The bank’s Mike Gamble and Sandstone’s Ross Watts swap stories

There’s no place like home, but millions of us were desperate to change ours when the world was told to stay indoors. Eight months after the first UK lockdown in 2020, demand for mortgages was at its highest in 13 years. Breakneck property sales were still going strong the following autumn, with spiralling house prices defying the rules of normal economic activity, as a set of extraordinary circumstances combined. Near-zero interest rates, low inflation and fiscal and monetary policies designed to support the economy and the property sector in particular, a demographic shift as working from home became the norm for many, and household savings accumulated from months of restricted activity, all conspired to create the boom. On the other side of the world, a similar picture emerged. In Australia, where, if anything, COVID restrictions were even more severe, house prices in Sydney rose by 15.1 per cent in the first five months of 2021 alone; Melbourne, which endured the world’s longest lockdown, saw a 9.4 per cent increase over the year. By the end of 2021, there were more home loan applications in the system than at any point in the last decade. The public’s sudden desire to up sticks and move left many financial institutions in both countries overwhelmed; such hot ffnews.com

property markets put direct and collateral stress on banking systems and forced lenders to look for ways to stay ahead of the game. TSB Bank was one that massively benefitted as the UK packed its belongings into removal vans because the lender was digitally well-prepared for the challenge. Remembered by many in the UK from its 1980s advertising slogan, ‘the bank that likes to say yes’, TSB had been forced to rebuild both its reputation and its IT infrastructure following a disastrous tech migration to new owner, Spanish bank Sabadell, in 2018, when millions of customers were locked out of accounts for weeks. And, as average house prices increased by 10 per cent over the year, TSB kept pace with buyers and said ‘yes’ to the tune of a record £9.2billion of gross mortgage lending. By placing an emphasis on digital, it had built what is widely acknowledged as one of the most modern banking systems of any high street lender – although, critically, as Mike Gamble, director of analysis and design at TSB, stresses: “The human element of banking is really key to us and how we connect the digital world to the human world is absolutely front and centre for TSB.” Ross Watts, chief customer officer of Sandstone Technology, whose LendFast platform processes about 20 per cent of all home loans in Australia, couldn’t

agree more. There, processing staff, in addition to dealing with the sheer volume of business, were also under pressure to stay on the right side of compliance after a series of scandals that had seen major lenders fined for sending billions of dollars to operations overseas without appropriate governance – errors that, Watts argues, could have been avoided by using AI. In both TSB’s and Sandstone Technology’s cases, AI has been the answer to meeting the needs of customers during a pandemic, in a fast, compliant – and human – way. It could take care of the hard stuff in the background by making processes more efficient, while freeing up people to deal with issues that require personal interaction – to the benefit of the banks and customers alike. The jewel in TSB’s digital crown is its AI-driven TSB Smart Agent, developed with IBM and launched in the mobile app within just five days at the start of the pandemic to give customers immediate access to measures such as repayment holidays for mortgages and loans. The live chat service – which uses IBM Watson’s natural language processing and is powered by LivePerson – answered more than 40,000 customer requests between March 25 and May 1, 2020, alone, using a combination of virtual assistant and employees. Issue 23 | TheFintechMagazine

LENDING: HOME LOAN AI “Our AI Watson brain within TSB Smart Agent is very good at identifying when customers are in financial difficulty, for example, or they’re vulnerable,” Gamble explains. “And we just flip them straightaway from talking to a TSB Smart Agent and connect them in real time to a human being. We see that as the most powerful development in how we are learning how to use this channel and technology going forward.” About 70 per cent of TSB’s five million customers are fully engaged with digital and the vast majority (90 per cent) execute their own transactions such as paying bills or moving money, says Gamble. “But, for me, the biggest learning is that it cannot be just standalone AI. When you want to speak to somebody about buying a home or restructuring your debt, or you’re in financial difficulty… that’s when the interaction is really important,” he says. “In retail banking, we’ve had to move fast to catch up with that.”

For me, the biggest learning is it cannot be just standalone AI Mike Gamble, TSB

TSB Smart Agent is on a continuous evolutionary path of improvement – another advantage of using AI and machine learning-based systems, adds Gamble. “We’ve seen more than 1.2 million conversations since launching with our customers. We teach the bot some basic principles of how banking works and how to support our customers, and then keep building on it. We get the analytics out and we’re tweaking it every day, As we keep learning, we keep re-educating it.” Gamble gives an example: “I never knew that a common term for ‘I’m moving home’ in Scotland is ‘flitting’. But our TSB Smart Agent now recognises that and will immediately help the customer record their new address.” Key to evolving, particularly at speed, has been working closely with partners such as IBM Watson and LivePerson, as well as with Adobe on introducing digital forms and electronic signatures.

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“We recognise we can’t be experts in everything,” says Gamble. For Sandstone, it’s AI’s role in back office processes that has really came to the fore over the past two years. “It’s almost impossible to handle the amount of data that is going through legacy systems, from a transactional perspective, using anything other than an AI-based solution,” says Watts. “Not only are we able to speed up the time per application, in terms of days to approval, we’re also able to increase the number of applications that are handled, and reduce the amount of work and error.” Sandstone’s AI-enabled Digital Intelligent Verification Assistant (DiVA) platform, for example, claims to reduce manual touch time in the assessment process by up to 80 per cent. As such, AI has become a critical part of the home-buying process in the fiercely competitive Australian property market. “AI is integral to our home-lending offering. It’s almost impossible to think how

asked for she knew, she knew how it worked, she knew how to support them, she pretty much knew every customer, as they walked in the door as well. I was just blown away with how professional this woman was,” he says. But then he sat with her behind the counter and realised that, on the other side of the screen, were hundreds of Post-It notes

much longer the home loan process would be for customers, for those people in processing centres, for the brokers who are referring loans, if we didn’t have AI intelligently sorting and managing those documents, in terms of identifying the key phrases, putting them the right way round, making sure that the dates are correct and valid, and then sending out notifications to accelerate that process,” says Watts. “And then AI is also helping lenders in so many ways to meet the obligations they have – to their customers, the regulator, and to their boards. “Those financial institutions that have AI within their processes are able to get to an approval in three or four days. There are other, really big banks over here being criticised because their approval timelines are about 23 to 24 days. That illustrates the quantum of difference,” he adds. AI in the back office can keep everyone in the property buying chain automatically updated – freeing up time and space for those human moments that really matter for customers dealing with one of the most stressful purchases of their lives. Gamble harks back to watching an in-branch colleague who was ‘absolutely amazing’ at her job: “Everything a customer

on the wall, telling her everything she had to remember. AI is modern banking’s automated equivalent of the Post-It note prompt. “Much of the conversation with our clients around AI is about how we can remove low-value, manual handling processes from the system,” says Watts. “How do we speed up the capture of information that’s going to provide insight to the business, to make decisions more efficiently and with more accuracy? AI plays a really important role in that, in addition to the areas that are customer-facing. “What you get, as a result, when you think about cost-to-income, is a happier customer at the end of the process, and a happier introducer (the vast majority of the market here in Australia is broker-introduced). And, if you’ve got happy brokers, you’ve got someone choosing you over a competitor. You’ve also got happy colleagues; people in the processing centres don’t have a customer or a broker breathing down their necks for information. That leaves the great, high-five moments. And those are the interactions that can be had between humans, because AI is taking care of the difficult stuff and creating a really efficient process.”

It’s almost impossible to handle the amount of data that is going through legacy systems using anything other than an AI-basesd solution Ross Watts, Sandstone Technology

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LENDING: MORTGAGES

Bricks and clicks Everybody agrees that the home-buying experience can be improved upon. But, as HSBC’s Christopher Pearson will tell you, it’s ‘not something you can just throw a bunch of algorithms at and think that’s going to land nicely with the customers’. Here, the Head of Intermediary Mortgages at HSBC shares thoughts on reform with Trussle’s Tom Hodgson and Laurean Herepean of FintechOS 2021 saw mortgage approval rates reach their highest level in 13 years in the UK, even as the biggest annual percentage increase in property prices since 2004 pushed the cost-to-income ratio for housebuyers to a new record. That said, with Bank of England interest rates hovering above zero, mortgage payments were historically low – although that wasn’t much comfort for first-time buyers, struggling to find some of the heftiest-ever deposits as they watched the home of their dreams spiral in value. As the New Year fireworks fizzled, the property market continued to sizzle. In some areas of the country in January, agents were shifting much of their portfolio within hours. It wasn’t even worth viewing, unless you had the money – or, at the very least, the offer of a mortgage in principle – in your hand. And all that has made the lending market fiercely competitive, and given innovative businesses – both legacy lenders and digital startups – an enormous incentive to find new and faster ways of bringing mortgages to borrowers. According to research conducted across 22 countries, including the UK, for the annual European Retail Banking Radar, the public is rapidly becoming accustomed to the digital property-buying experience, too. Back in February 2020, 50 per cent preferred to consult with a branch bank advisor when signing a mortgage contract, while only 29 per cent would submit a digital mortgage application. By March 2021, that had changed markedly: 52 per cent were now happy to research their mortgage online and 47 per cent to apply for one through a bank portal.

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In the UK, a new wave of digital lenders and intermediaries are responding to these massive shifts in the £1.6trillion property market – but not only challengers. Major institutions, whose share of the market had collapsed to around half by 2018, are seizing the opportunity presented by recent events and leveraging technology to make the most of them. The 60/40 market split between institutional and alternative lending channels in 2020 led UK Finance to observe that the mortgage market is more diverse and competitive than ever. That’s got to be good news for homebuyers. But what is it they really want? For Tom Hodgson, commercial director for online mortgage broker Trussle, which was among the early cohort of mortgage challengers to emerge in 2015, improved speed of service is a big part of the mix. “A customer wants to know ‘can I buy this house? How quickly can I buy this house? Is there anything that’s going to stop me buying this house?’ and the more that we can do to reduce that timeframe – bring speed and certainty earlier in the journey – the better,” he says. “That’s the direction we’ll need to keep going in, to really nail this customer experience point.” In fact, Trussle stakes its reputation on it – and, given how fast the market is currently moving, that’s probably a good strategy. It promises to deliver a mortgage decision in five days and is so confident of its technology and processes that it backs that up with a £100 reimbursement should it miss the deadline. The company was a runner-up in the country’s best mortgage brokers in the What Mortgage awards in 2021. Arranging a mortgage is a complex task and knowing how best to expedite that

process comes from understanding the choke-points in the existing procedure, says Hodgson. “It was really interesting to see a heavy reliance on automated valuation models, for instance, during the pandemic period. It meant cases were starting to progress quicker through to offer, even when there were obvious ffnews.com

same, post-COVID, but the customer experience has changed.” Companies whose mission it is to meet this need are well-placed to thrive in the newly tech-thirsty mortgage market. FintechOS is one of them. Based in Romania, it works with large financial organisations looking to develop effective solutions quickly in-house. Its solutions are ‘off-the-shelf’ but not pre-made. Instead, its Innovation Studio is a low-code tool that allows non-IT staff to design and construct their own processes. “They can build software from scratch, or extend functionality on top of the out-of-the-box accelerators that are available in our marketplace,” explains Laurean Herepean, a digital banking product owner with FintechOS. “We’ve seen a high demand for mature technologies, such as optical character recognition, face recognition, liveness detection, video capabilities, and digital signatures, for example.” At HSBC, AI is being used to help assess applicant suitability. As a global bank with many moving parts, it has the advantage of being able to access large-scale data sets and technology that has already been proved in other areas of the business. “We’re using AI for financial crime checks across the globe, and the scale of that is vast – something like 600 million financial crime checks every month,” says Pearson.

challenges around demand. Some banks still have a service level agreements of 10 days or more [to complete a valuation], so you have this point in the process where it all stops.” Accelerating the pace of applications is a major undertaking for service providers up and down the mortgage pipeline, and different organisations are taking different approaches. HSBC for example, which increased its mortgage lending during 2020 by 14 per cent, has begun a comprehensive digitisation initiative to help improve the user experience. More ffnews.com

than 60 per cent of its gross lending is placed through intermediaries. That means it has to bring everyone in the mortgage chain along for the digital ride by, for example, employing third-party broker tools across CRM systems and lender platforms, and accessing as much information as possible from trusted external data sources for steps such as ID verification and property valuation. “We’re seeing more automated, desk-top valuations,” confirms Christopher Pearson, head of intermediary mortgages at HSBC, “and more use of Office of National Statistics data, for instance, to assess customer affordability. There’s less throwing pieces of paper around. The components are the

ON THE MOVE It’s been an eventful two years in the UK mortgage industry. Here are some of the highlights:

2021

Starling Bank enters the property lending market by acquiring buy-to-let specialist Fleet Mortgages for $50million and inherits £1.75billon in mortgages under management

2021

Atom Bank exceeds £3billion in mortgage lending and goes on to turn a profit for the first time

2021 2022

US-based Better.com seals a deal to acquire online mortgage broker Trussle Newcomer Monument Bank launches its first suite of property investment products Issue 23 | TheFintechMagazine

LENDING: MORTGAGES Not every customer wants the all-guns-blazing, digital-first approach when managing where they and their family will live, though. To be successful in this space, Pearson, Herepean and Hodgson all acknowledge that tech must respect the importance of the user at a human scale; there’s no substitute for personal service to give consumers confidence when faced with what, for most, will be the biggest transaction of their lives. Much as in wealth management – also a high-value, traditionally face-to-face business – success in the mortgage market might depend on how well a provider can sustain a hybrid human/digital offer, leaving the borrower to choose how they wish to interact with

Pushing everyone down to an automated execution-only route would probably end up in a worse place for customers, overall Tom Hodgson, Trussle

the lender... in person, fully online, or as they feel appropriate to their level of stress and uncertainty. Trussle learned that lesson early on. “To begin with, we thought everyone has to interact online, and that’s the only way that they can come through the journey,” says Hodgson. “Now, at Trussle, we allow customers to come to us however they want – be it online, by phone, by web chat and bounce between these channels, in order to go through the process. They can choose how to start it and how to manage it. But if they want to speak to someone, we’ll always make that available to them. “There’s still a reliance on human interaction because, for lots of people, it’s a sophisticated product, and they want to be guided through it,” he adds. “Pushing everyone down to an automated execution-only route would probably end up in a worse place for customers, overall. We want people to get financial advice in this process, rather than self-select if they don’t have the knowledge to do it.” The winning strategy in this scenario is implementing tech to identify and displace the appropriate, often back-office, elements that don’t need in-person interactions. “We’ve been working on that for the last six years,” says Hodgson. “Things like the

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online fact-find, so, rather than doing two-hour interviews in branch, you do it online. And looking at online credit pools, electronic ID verification and assessing affordability online.” That sounds a lot like what Pearson is attempting to do at HSBC. Trussle, in fact, has taken a leaf out of the big bank’s book and made known it intends to partner with 1,000 brokers in the field this year to increase volumes. Which begs the question: how will these type of competitor carve out their own niche? Even given his digital manifesto, Herepean accepts that the human touch will ‘probably remain critical to building trust’ – as wells as market share. “I don’t think that the key differentiator for a bank is to compete on rate or technology alone; I think that competing

I don’t think that the key differentiator for a bank is to compete on rate or technology alone; I think that competing as a coach, or as an advisor, could be the key for success Laurean Herepean, FintechOS

as a coach, or as an advisor, could be the key for success,” he says. “It’s about hyper-personalisation. You need to understand the customer’s needs, in order to provide the right product for that client.” The technology key to successful broker-based businesses could be APIs. With this tech in place, sections of the broker process can be automated, allowing customers to solicit more quotes at a faster rate, all with the personal guidance from their preferred broker. Hodgson believes APIs can be used to massively expedite processes like the decision in principle (DIP) indicator. “From a broker’s perspective, if we can expedite DIP processes across multiple lenders, at a point in time, we can really give a customer confidence that they can get a mortgage, and at what rates, and at what mortgage amounts. That’s one of the things that we’re most excited about – working with lenders to be able to bring DIP certainty at the point of advice.” For APIs to work efficiently for brokers, a sufficient number of lenders needs to be

integrated, but the momentum has built over 2021 and will likely continue in 2022. For Pearson, open banking is going to be the real game-changer in mortgage processing, allowing lenders to see specific financial information, so they can make a decision without waiting for documents to be gathered and uploaded. Having insight into more and better information instantly both improves the customer experience, but also reduces the risk for lenders, perhaps opening the way to more innovative products – something sorely needed in the mortgage market. Pearson also believes there may be increased scope for different types of organisations to work together more. “I think it’s highly likely we’ll see more collaboration – perhaps, with embedded lending, now that there is more agility, through Cloud-based computing and the ability to link in certain component parts of that through API methodologies.” With this in mind, what type of organisation will grow to dominate the UK mortgage space? It’s an industry that has seen a boom in brokerage firms, a flutter of

I think it’s highly likely we’ll see more collaboration – perhaps, with embedded lending Christopher Pearson, HSBC

mergers and acquisitions, and times of boom and bust, all within the last decade. Newer, nimble banks have already started acquiring whole mortgage companies, such as Starling Bank’s 2021 acquisition of Fleet Mortgages. Trussle was itself the subject of acquisition last summer – by US online broker Better.com, which went on to add the UK's Property Partners to its portfolio. When Better made its move, it was quoted as saying: "We researched the UK market and were surprised to see how we could make it so much better for consumers buying and financing a home for the first time." Ouch! The only way to be innovative, it seems, is by adopting a hybrid strategy – one that gives borrowers confidence while accelerating decisionmaking and lowering risk for lenders. Who is best placed to do that and how will probably shape how this market matures. ffnews.com

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LENDING: BUY NOW,, PAY LATER

THE BIG BNPL DEBATE James Bryce-Lind of credit scoring platform Credit Kudos, Simon Westcott, from PwC and Laurel Wolfe, of banking-as-a-service provider Mambu, discuss the risks and opportunities in the BNPL sector – its phenomenal rise in popularity and where both it and the banks go next There’s no denying the success of BNPL (buy now, pay later) in recent years. The biggest providers – Klarna, Afterpay, Affirm and others – represent a new wave of digital lenders that banks and retailers are still unsure whether to treat as lovers or rivals. And yet they were barely even aware of BNPL’s presence back in 2016. In that year, the new wave of alternative lenders collectively gobbled up only one per cent of the entire UK credit market. Fast-forward a few years and credit card transaction volumes fell 31 per cent between January 2020 and January 2021. And, while some of that could be explained by lockdown, at the same time, BNPL transactions quadrupled to nearly £3billion. This explosive growth means BNPL is under increasing pressure from regulators and consumer groups, concerned that this particular form of easy-access credit has – in the UK Financial Conduct Authority’s words – a ‘significant potential for consumer harm’,. Meanwhile, other financial services have begun launching ‘me-too’ products. PayPal introduced its own version of BNPL in August 2020; neobanks Monzo and Curve launched their products, both named Flex and, both curiously, on the same day, in September 2021. Virgin and Barclays are taking an interest – the latter teaming up with Amazon to allow Amazon customers to spread the cost of certain purchases of £100 or more over equal instalments.

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The encroachment doesn’t appear to bother the BNPL brigade, who continue to diversify their offerings. One of the most artful is Klarna, which has stayed ahead of the game, changing its colours, confusing BNPL predators and appeasing regulators. Most recently, it launched its own version of a credit card and almost simultaneously aimed to avoid restraint in the UK by getting rid of late payment fees and offering an option to pay off in one go. As with others in this category, Klarna occupies a unique niche – somewhere between the retailer and the bank, posing a potential threat to both by disintermediating the relationship with consumers on the one hand and merchants on the other. So, what should banks, and acquirer banks in particular, make of it all? James Bryce-Lind of the open banking-powered ‘fair credit’ scoring platform Credit Kudos, believes the BNPL category is, first and foremost, a triumph of marketing, but it neverthelesss leaves banks in a quandary. “It’s such a loud space,” he says, “when, if you look at the US, for example, BNPL actually only makes up a small portion of overall spending: $100billion in 2021, compared to roughly $8trillion on payment cards.

For all the financial institutions that are current-account-first, it begs the question whether BNPL should be a feature or a product James Bryce-Lind, Credit Kudos

“For all financial institutions that are current-account-first, it begs the question whether BNPL should be a feature or a product. There’s been an ongoing debate around that, but if you look at the constructs of the first-generation neobanks – your Revoluts, Monzos, Starlings – the ability to monetise that customer base from a current account relies on how many products you can sell them. With BNPL operators, what we’re seeing is that, by

offering a value-added product first, like Klarna or Afterpay have done, they’re building meaningful relationships with customers. They’re then able to cross-sell into other aspects of financial life, whether that’s a longer-term product, or offering a personal financial management tool, which Afterpay launched recently in Australia. It’s flipped the concept of a neobank on its head.” Laurel Wolfe of Mambu believes that for banks imitating BNPL, ‘it’s more about keeping the customer in their ecosystem’ and dissuading them from using other payment options from other providers. “I don’t imagine they’re spending too much time thinking about the monetisation of it; rather, it’s a relationship issue,” she says. From a consumer perspective, though, one of the attractions of BNPL, is that their relationship with the provider is short-lived. “And that’s exactly the difference,” says Wolfe. “In a BNPL offering, you use it at the time you need it, once, and you have a relationship around that transaction with the BNPL provider until you pay it off. You don’t have to have a relationship with them again, if you don’t want to. It’s completely your choice. With other credit providers, you do have an ongoing relationship, with all of the entanglements that may mean.” 'Entanglement’, of course, includes long-term contracts, interest, late payment or monthly fees, as well as potential impact on a consumer’s credit score. As Wolfe points out, BNPL operators, in any case, make the majority of their money from merchant transaction fees. “ People often lose sight of that fact,” she says. But it’s particularly relevant in the current debate around consumer debt. With a BNPL user’s upper spending limit ‘pretty restricted’, according to Wolfe, there’s less chance of running up unmanageable borrowing – unless, of course, customers use a multitude of providers, for which, at present, there is no regulatory disincentive. PwC’s Simon Westcott says the difference between BNPL and traditional credit providers ‘becomes quite stark when you start to look at the different economic models underpinning each product’. ffnews.com

Time for a rethink: How can banks make the most of BNPL?

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Issue 23 | TheFintechMagazine

LENDING: BUY NOW, PAY LATER Fundamentally, credit cards are paid for and funded by the customer and, depending on the market, Westcott says that roughly 80-90 percent of providers’ incomes will come from interest payments, while BNPL customers receive the service for free, in the sense that it’s interest-free. “And it’s a much smaller transaction size, over a much shorter period of time,” he says. “From a customer’s perspective, that feels more manageable, more contained. A model that doesn’t rely on customers paying interest, or tricks and traps, or making mistakes, has to be a better direction of travel, in terms of how the providers are making money. The onboarding around BNPL is also very slick – although there is also some scrutiny from the regulators and others about the extent of checks up front.”

With the regulatory focus on the market and increased focus on affordability, harder credit checks, you could argue that plays into the banks’ established capabilities in those areas

Simon Westcott, PwC

The income split, says Westcott, is the almost exact reverse of the card model ‘with probably something in the region of 70-80 per cent coming from the merchant’, although providers will no doubt have to work harder to justify that, he adds. Klarna, for one, is. Last year, it launched its Comparison Shopping Service (CSS) into 21 European markets, offering Klarna’s partner retailers increased customer reach and budget savings, as well as driving traffic from internet consumers. It’s something the company’s competitors will have noted. “While there’s increasing price competition between BNPL providers, it’s still a significantly more expensive transaction cost for retailers than other types of payment,” points out Westcott. “BNPL is predicated on driving incremental sales, but if I’m a retailer seeing the growth in this transaction type, I’m looking down the barrel at margin erosion on a bigger and bigger scale.

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So, how are they going to drive down the cost of these transactions over time?” What’s evident is that the volume of BNPL spending, as an element of embedded finance, is potentially eye-watering. A December 2021 report, Embedded Finance: Who Will Win The Battle For The Next Digital Revolution?, from Mambu and Amazon Web Services, estimates that embedded finance will hit $7trillion by 2030, globally, with retail lending (including BNPL) set to account for 29 per cent ($2.1trillion) of that. Across Europe, today, BNPL is already worth about £90billion by Westcott’s reckoning and, crucially, is the only unsecured lending category witnessing double-digit growth. Looking out to 2025, CAGRs (compound annual growth rates) of 25-27 per cent are being forecast, depending on who you believe, he says. “There’s a really important play for the banks here, in terms of protecting their customer relationships and conserving value, rather than leaking it to competitors, hence BNPL is impossible to ignore,” says Westcott. “The key question, for the banks, is how can they run this sort of product in a differentiated and sustainable way for them; one that also plays to their capabilities and their ability to do this differently? I think just going in a straight head-to-head with some of the established providers, is going to be challenging.” Yet, on the basis that BNPL providers are moving up the value chain, banks have reason to feel optimistic, adds Westcott. “With regulatory focus on affordability and harder credit checks, you could argue that plays into the banks’ established capabilities in those areas. They would need recalibrating to be able to deal with the speed and the ticket size. But, potentially, the banks have access to much cheaper funding, and, for those that have broader payments businesses, particularly where they’ve got merchant acquiring in their stable, there are readymade opportunities for them to partner with an existing base of merchants and existing infrastructure.” Banks will have to up their game, though, if they’re to compete with chameleons like Klarna, says Wolfe. “Retailers’ margins are under significant pressure, and they’re definitely looking for ways to find new shoppers,” she observes. BNPL providers, in particular Klarna and Afterpay, can easily drive an affiliate

network where they can promote their merchants in their channels – although, the corollary of that is that a merchant might decide to have multiple BNPL providers at the checkout, leaving consumers to choose. And that takes us right back to responsible lending: a customer might end up using several providers, running up debt with each. James Bryce-Lind argues that there needs to be transparency around true debt levels, including BNPL debt. “We can talk about the risks facing merchants and BNPL providers, but the number one risk is consumers,” he says. “This is a credit-orientated product which, if not executed correctly, can land people in trouble. At Credit Kudos, with a mission of trying to provide fairer, better credit, we think it’s imperative that initiatives like the Woolard Review (published by the UK Financial Conduct Authority in February 2021) allows the filling of gaps currently left by the unregulated BNPL proposition. “The companies we’re working with want to build deeper, meaningful relationships with customers,” he adds, “and the first step in that is managing credit levels and providing the financial insight and tooling to help them, so that they’re not lending to someone who might be overleveraged. It’s something we’re working closely with a number of players to achieve.”

Retailers’ margins are already under significant pressure, particularly in e-commerce, and they’re definitely looking for ways to find new shoppers Laurel Wolfe, Mambu

The UK government’s consultation on proposals to regulate BNPL closed for comments in January. So, it’s not if but when the sector is regulated. However, BNPL operators have already proved tricky for the rest of the industry to grapple with: a triumph of marketing and utility, they have brought consumers onside in a big way and are unlikely to leave the scene, but they might just morph into something more powerful. Perhaps banks need to decide sooner rather than later if BNPL providers are ‘my lover, or my rival’. ffnews.com

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FINTECH FOCUS: NIGERIA “The way people should think about Nigeria is ‘India’.” That’s how Tayo Oviosu, founder and CEO of home-grown payment and financial services platform Paga, sums up the mind-boggling potential business opportunity in a country with one of the youngest populations on earth; one forecast to almost double, by 2050, to more than 400 million people, making it the third most populous, too. That spectacular growth brings with it spectacular potential for companies like Paga to make a real difference, because Nigeria is facing a complex set of challenges. Not least of those is that, of the estimated 80 million adults of working age, one in three is unemployed.

Nigeria is experiencing a youth bulge and Tayo Oviosu, Founder and CEO of financial platform Paga, sees that as an opportunity for fintech to shape the birth of a digital nation And, while about half of people have mobile phones, according to Pew Research Center, only a third of those are smartphones – which is a major issue if you are trying (as Nigeria’s government most certainly is) to move people away from using physical cash, to digital payments.

On top of that, 60 per cent of citizens have no access to financial services at all – they are truly unbanked, with all the limitations that places on individual and national prosperity. In 2009, Oviosu set out to address, directly and indirectly, every one of those issues and more with Paga. And, if payments technology is a litmus test for a country’s financial maturity, and an indication of its socio-economic status, then Paga’s journey points to big and positive changes for Nigeria in the years ahead. Paga’s core aim is to make it simple for people to digitally access and use money in a country where cash was, and indeed remains, dominant, despite

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a concerted government effort to persuade communities to adopt digital – to the extent that, in September last year, Nigeria became one of the few countries to introduce a central bank digital currency (CBDC). The e-Naira operates alongside the fiat Naira and can be used in the same way – you just can’t hold it in your hand and it can’t accrue interest. Right now, though, with existing e-payments penetration standing at only 0.4 cards per inhabitant, and the fact that the only way to load an eNaira wallet is from an existing bank account, it’s hard to see how most ordinary people could use it. A decade ago, Oviosu was asking himself a similar question: how do you get a mass market, that is not digitally-enabled and still using cash, onto a digital platform?’ “The answer, for me, was to leverage a network of agents – mom-and-pop shops, pharmacies, grocery stores, in the local communities. Let them become the bridge from cash to digital,” he says. What Paga offered was a hybrid cash/digital pathway; it found a way to meet people where they were (quite literally) and move both consumers and SMEs gradually to digital financial services. “Paga is a hybrid payments system that merges offline and online,” explains Oviosu. “And that’s because, in Africa today, digital-only platforms don’t scale across the continent, as smartphone penetration is still super-low, at 12 per cent in Nigeria. Cash, is still very much king, and the banks are too slow to innovate. So we’ve built a network of agents across the country. We currently have almost 60,000 points of presence, multiple places where people can go to get services. That’s one big aspect of how we solve the cash problem.” Paga also offered customers access to its services through their handsets, even if they didn’t have a smartphone – with a phone line, menu-driven system and a shortcode – and through email and the myPaga payments app for those that did. The result is that it now has 19 million users across its platform and that number is increasing fast. Paga no longer considers itself a standalone paytech: rather, it’s now taking a lead role in the development of Nigeria’s financial infrastructure through a strategy of partnership working that’s creating a self-sustaining ecosystem. ffnews.com

It’s thrown a paytech pebble in the pond and the ripples, it hopes, will have far-reaching consequences. For example, recognising that small and medium-sized businesses are a vital driver for the country’s economic growth through job creation in both urban and rural areas, last year Paga formed a partnership with SME specialist digital platform Doroki and global payments giant Visa. Doroki’s Business Connect and Grow platform is now hosted on Paga’s payments infrastructure as a platform-as-a-service venture, providing a host of digital tools to help businesses develop, as well as enabling the collection of payments from various providers, including Paga, using mobile point of sale (mPOS) technology and an app. Oviosu admits that the concept of embedded finance, as provided by the Doroki platform, is very much in its infancy in Nigeria, where SME usage of even a well-established digital tool like Excel remains almost non-existent. But therein lie some of the huge opportunities to help SMEs run both more efficiently and profitably, thus stimulating economic growth, he says.

We believe very strongly in partnerships. We really mean it when we say we want anyone and everyone, even people who are seemingly competitors to us, to use our platform Setting out his stall, Oviosu explains: “People are using pen and paper to track their sales, so there’s such a long road for us to even digitise them before we can make their purchasing, the management of their business, their inventory and their access to finance, more efficient through embedded finance, embedded sales and supply chain.” Indeed, Paga, which expanded its essential services last year to Ethiopia, where many of its development team are already based, will add more digital financial services to its product suite soon. “Access to loans and credit is so lacking in the market, there’s a massive opportunity to provide that,” says Oviosu.

“There’s another company we’re actively engaged with, which is building a digital bank just for the logistics sector, entirely on our rails. I love that: different product, different focus. And that is where I think there is a lot of opportunity down the line for us: to continue to scale and offer services into a variety of players. What we have built is an open platform – we believe very strongly in partnerships. We really mean it when we say we want anyone and everyone, even people who are seemingly competitors to us, to use our platform. “We can’t do everything and we’re not going to try to, so we pick and choose the things we do, but there are so many other use cases for our infrastructure. We are not worried about innovation or competition. We think that’s good. And the reality is that it’s a market where there is already a lot of cooperation. There are players that, on the surface, might look like competitors to Paga, but actually we’re working with each other on so many things.” There’s certainly no shortage of homegrown partners for it to choose from. According to Central Bank of Nigeria, $700million was invested into the country’s payment system alone by Nigerian founders between 2015-2020. Another African-born entrepreneur, Zimbabwean Strive Masiyiwa, is also contributing to the digital shift. His London-based Cassava Technologies subsidiary, Africa Data Centres (ADC), opened a 10MW data centre in Nigeria’s capital, Lagos, in November 2021, the first of four it has earmarked to build in the country as part of a pan-African network of hubs to help companies hyperscale. The Nigerian government is also optimistic that, by the end of 2022, it will lead the continent’s 5G race. Oviosu welcomes the investment in building a fintech infrastructure for Africa. “Five years from now, we will see a large number of Nigerians being banked and having access to financial services on digital platforms. I think Paga will be one of the main platforms consumers will be using and Doroki will be one of the main platforms for small/medium businesses. But there’s so much to do to solve Africa’s financial infrastructure problem, we cannot do it alone,” he says. “Nigeria is a big market. It’s a really big country. It has the size, capacity and future scale that people saw in India decades ago. Where India is today, we can get there.” Issue 23 | TheFintechMagazine

TRANSFORMATION: SME BANKING Over to you: Innovative providers are giving SMEs their power, and their lives, back

YES, ! S S BO The influx of small business banking remedies can feel like a bunch of solutions looking for a problem. We asked Adi Engel from US-based management app Vcita, and the UK’s Oliver Prill of SME financial platform Tide and high street operator Metro Bank’s Kat Robinson, what SME owners would want if you asked them 40

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What a sole trader or small business owner needs in terms of tools and services to adapt and thrive in an online world can seem obvious to a digital crusader: a bank account that integrates with accounting software, certainly; low transaction fees are a no-brainer; and then they should surely be taking advantage of networking opportunities and be shown examples of financial best practices to help their business grow. But what do small business owners actually want? Well, often it’s simply to be left alone if they’re being crushed by workload, or they’re in a battle to survive, and many cling desperately to tried-and-tested (but analogue) methods just because they don’t have the head space or time to learn a whole new set of processes. It’s also worth remembering that they’re far from being a homogenous group: size, aspirations, and therefore, needs, differ markedly, although an impatience with digital technology and a reluctance to spend time engaging with it can be a uniting characteristic! For years, pressure groups such as the Federation of Small Businesses have criticised what was perceived as a complacent business account offer from incumbent banks in the UK. Now, the growth of fintechs, challenger banks and open banking regulations are turning a digital famine into a feast of choice – the challenge is proving to be how you put products in front of bosses and get them signed up. Frustration is a common reaction to being told what they must do, says Adi Engel, chief marketing officer for US-based small business management app Vcita, which aims to improve efficiency by automating processes such as appointment and client file management and invoice chasing, alongside ‘robust’ marketing features. It’s a global company with 1.5 million registered users, including customers in the UK, so it’s obviously getting a lot right. “But I see frustration with us telling them ‘you should digitise, you should digitise’,” admits Engel. “I also often see their patience with models that are now ffnews.com

legacy concepts, because people don’t like to change – it’s easier for them to stick to pen and paper than try this new thing. “Business owners typically just want a good solution; they don’t want to be bothered with competitiveness and they don’t have time to compare rival systems to find each one’s unique properties.” Oliver Prill, chief executive of Tide, among the UK’s first dedicated banking service providers for businesses at the smaller end of the SME spectrum, understood that from the start, which is why he began by looking at what bosses do – not what they may or may not want – and then tied all the things that could be useful to them to one platform. For Prill, the notion of business banking has always been problematic for micro-firms, because business management is typically patched together by one person making it up as they go along. Vcita’s own research suggests that 90 per cent of small business owners directly provide the service their firm delivers – be that plumbing, hairdressing or fixing IT. Prill says: “A small business doesn’t do ‘business banking’. What a person does is write an invoice, maybe factor the invoice, chase the invoice, then account for the invoice – attaching it to the payment. “People aren’t in business to do finance and administration. It’s just a necessary evil and, maybe with the exception of accountants and financial advisers, almost all business owners I’ve spoken to don’t like their finance and admin. Many are not particularly good at it and don’t have the time for it because very often it’s not different people doing these jobs – one person has created a workflow which cuts across different products, many of them technically outside of banking. “The whole thing is broken and the way we think, at Tide, that this is best solved, is by connecting every step of a process.” Tide’s key offer as a licensed e-money provider, working with ClearBank, is a platform that’s been tailor-made for lone-wolf freelancers who are happy to remain that way, through to businesses in the early stages of scaling up. Among its most attractive benefits are invoice handling, low charges and integration with accountancy software. Customers can also find blogs on business education, ffnews.com

such as guides to cash flow – it very much aims to be a small business champion. Tide is, and always has been, an online service, albeit with telephone support; Metro Bank, on the other hand, prides itself on having been the first UK bank to open walk-in branches for 100 years in, when it launched in 2010. There are local business relationship managers in its ‘stores’ and a range of physical services targeting sole traders and SMEs, including seven-days-a-week opening, which is particularly handy for retailers. The bank focusses heavily on what it can offer clients face-to-face, such as networking events at branches. And all this alongside a growing range of digital SME services. Metro Bank customer experience director Kat Robinson agrees there’s no ‘one-size-fits-all’ answer to the question of SME banking, but there are obvious common themes when running a small business. A clear one is to recognise that back-office functions aren’t provided by a back office.

From a customer experience perspective, when we ask them to set up a lot of different tools, and upload a lot of data into them, have we actually told them why? People will engage when they understand it has improved their ability to get paid and given them extra time Adi Engel, VCita

Robinson says: “For years, banks have neglected small businesses and their needs. Running one is incredibly hard, and there were lots of things people looked for their banks to do, that they weren’t doing.” She agrees with Prill and Engel that their top priority is – and probably always has been – management of cash flow. And, as disruption to everyday life caused by COVID-19 continues, and state support programmes for businesses are withdrawn, keeping it flowing right now

is perhaps more of a headache than usual. A report from the Federation of Small Businesses in January warned that 440,000 of the UK’s estimated 5.5 million small businesses could fail in 2022 because owners feared a growing late-payments crisis threatened their businesses’ existence. “For small businesses, you can tie everything to cash flow,” says Engel. “It is about ‘how can I better utilise my time to service more clients?’. And ‘how am I chasing them for their payments?’. Or ‘how am I creating a financial buffer for myself’? and ‘how am I recording all of this?’. The digital solutions that are evolving are around having that 360-degree view of cash flow.” Prill adds that businesses have different immediate needs, which are dependent on the level of cash they hold. He splits firms into three groups – the cash-rich, the creditworthy and the uncreditworthy. He says: “For the third with lots of cash, what they need is digitisation, it’s about saving time. For the third that are creditworthy, cash flow issues mean making sure they can leverage the credit that is available to them for both working capital and investment purposes. Then there’s the uncreditworthy, for whom, regardless of what people say, credit is not the right solution because it would make matters worse. But they can be helped with cash flow by using tools and addressing processes to give them a better view of their position to effectively manage it. “Even though they are inherently uncreditworthy, a lot of times what kicks them out is the unpaid invoice, or the invoice not written on time, the invoice not chased, or even when expenses are paid too early. “So, while we see very different needs for support for those three segments, cash flow cuts across all of them.” This breadth of needs is reflected in the fact that Vcita’s mobile app has more than 200 individual features for SME owners. “While traditional CRM software is built to service the needs of enterprise businesses, Vcita’s platform was designed with small businesses in mind so workflows and tasks can be integrated and more efficiently handled,” says Engel. “For example, a sales opportunity is delivered by sales to the legal team, then goes to billing, and so on.” Issue 23 | TheFintechMagazine

TRANSFORMATION: SME BANKING “For a sole trader or a small business, we have to understand they are doing all of this within a few seconds, they’re making snap judgements. I was once asked whether our product had a lead-scoring mechanism in it and I said, ‘yes, normally it would be the business owner picking up the phone, listening to the caller, and deciding ‘OK, yes, I can serve this person. I’m free on Wednesday’. So, we’re condensing a lot of decision-making, and various business models, into a very small app.” Getting time-poor bosses to make the leap to digitising processes means demonstrating why it’s useful and relevant, Engel adds.

It’s absolutely right that we improve customer experience and take the burden away from small businesses by taking it on ourselves Kat Robinson, Metro Bank

She says: “We hear a lot of people saying digitisation has a high entry point, and people who are less technically savvy won’t get it. But I tell them about my late grandparents using WhatsApp. As soon as they realised that WhatsApp was a way of interacting with their grandchildren, suddenly there was a clear value to it, and they were very happy to engage with it. “So, from a customer experience perspective, when we ask SMEs to set up a lot of different tools, and upload a lot of data into them, have we actually told them why? If we say ‘this is where you’re going to have a list of all your clients and, because you are offering them services, this is how you’re going to ask for a payment’, the value to them is clear. It can still be difficult to work on screens all the time, but people will engage when they understand it has improved their ability to get paid and given them extra time, which improves their work-life balance.” As in many other areas of life, Prill believes the pandemic accelerated a change in attitudes and practices among small businesses. “Tide started off attracting the more digitally-savvy businesses; by the time COVID began, more middle-aged, established businesses were joining us.

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But the pandemic meant two other groups jumped the hurdle,” he says. “One was cash-rich businesses – those that had been using a high street bank because depositing cash next door was a great proposition. But, during COVID, many of us didn’t use cash, and walking into a bank might not have been the wisest thing. “Then, also, with the sudden growth of e-commerce, more mature business owners, people in their 50s, 60s and 70s, embraced digital and took up current accounts with us. It was a big step forward and it will be a lasting trend.” Engel questions whether all behaviour changes made in the name of public safety, such as giving up the use of cash, will stick, since not everyone will have willingly adapted. And Metro Bank, which has been a flag waver for ‘human relationships in banking’, will no doubt hope the end of lockdowns means it can once again capitalise on its branch network. Robinson says: “It’s absolutely right that we improve customer experience and take the burden away from small businesses by taking it on ourselves – making it easier to do their banking and manage their business. But, as well as offering budgeting tools and so on, I also think there’s something around how we succeed together. That can be through connecting them to other businesses like them, providing support and events in our stores, and through the partnerships we have.” One of those is with Enterprise Nation, a provider of advice, online tools and virtual events to small businesses. “I believe there’s something about supporting small businesses that moves beyond just saving them time,” adds Robinson. “Small businesses are increasingly facing a regulatory burden of their own. In the UK, changes such as Making Tax Digital mean they will expect more of their banks, I think, quite rightly. They’ll want help navigating digital tax reforms.” The Making Tax Digital programme, which has already begun for UK firms with a taxable turnover above the VAT threshold of £85,000, will cover all other VAT-registered firms from April. Digital income tax filing is due to follow in 2024, and digital corporation tax filing in 2026. That regulatory shove into the world of digital bookkeeping will force the hand of analogue die-hards – and inevitably raise expectations of what firms such as Metro

Bank, Vcita and Tide should provide. Prill is aware that, as in consumer banking, the business account holder is a moving target. “As people have better experiences across the digital universe – by that I mean everything else they use, such as WhatsApp – they need less time to learn things. “But then everything has to work,” he warns. “The standard is very high. At Tide, we’re already seeing raised demands rather than new demands.” The UK Government’s long-term ambition has been to increase market competition among financial service providers for small businesses. And, in a review published in January, it said that ‘while still strong, there are signs large banks’ historic advantages are starting to weaken’. In fact, they relinquished seven per cent of their share of micro-business accounts between 2019 and 2021, taking their market dominance down to 67 per cent. But breaking the stranglehold of incumbent banks remains a challenge. It’s taken Tide almost seven years to build its customer base to 400,000 – an impressive seven per cent of all UK SMEs, compared to four per cent in 2020 – but startups that had no previous banking relationship were responsible for nearly all that growth.

The old notion of the universal bank, and having one model, is a thesis we don’t subscribe to Oliver Prill, Tide

At the beginning of this year, Tide showed it was willing to rethink its own business model by taking advantage of open banking to offer its accounting products to customers of rival business banks, and they will soon get access to invoicing, expense management, payroll and credit services, too, under Tide Open Access. The company is also now focussing on the biggest SME economy in the world – India, having opened an office in Hyderabad, with a planned launch this year. “The old notion of the universal bank, and having one model, is a thesis we don’t subscribe to,” says Prill. “There will not be one model that succeeds, there will be a variety – if not, there needs to be further government intervention in the market.” ffnews.com

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TRANSFORMATION: OPEN FINANCE

Laying the open road In Italy, a financial community set up by the banks’ trade body has taken the lead in building an open ecosystem and single API gateway to defend and empower its members’ businesses, as Alessio Castelli, Head of Open Banking & Financial Markets at CBI, explains In Italy open banking services are constantly growing. To this day, 13 Italian active third-party providers and nearly five per cent of consumers in Italy are taking advantage of the data-sharing opportunity unlocked by legislation in 2018. According to a report released in December by PwC Italy and CBI – a public limited consortium company of now more than 400 banks and financial

intermediaries, originally set up by the Italian banking association to build an interbank ecosystem more than 20 years ago – they’re making huge investment in developing open finance services. That investment went up 27 per cent in 2021 alone, according to the CBI/PwC Italy Global Open Banking Report. CBI’s role has expanded over the last few years, so that it describes itself today as a collaborative hub for technological innovation and digitisation in financial services, both at home and abroad. One of the main drivers for that was the introduction of Europe’s revised Payment Services Directive (PSD2), which forced banks to expose customers’ financial transaction data to third-party account information service providers (AISPs) or payment initiation service providers (PISPs), if the customer authorised it. The same rules did not apply the other way around, of course, and CBI’s view is that, to protect their businesses and relationships with their final users, banks have to turn the tables: use this new ‘open access’ environment to leverage and monetise the huge amount

of data and expertise they hold. And, while the public in the piazza don’t appear to be fully aware yet of the implications and opportunities, Alessio Castelli, CBI’s head of open banking and financial markets, says what’s happening is nothing short of a paradigm shift in the way banks operate and see themselves. The Global Open Banking Report revealed that, among other things, since 2019 in Europe, the almost 4,000 account servicing payment service providers (ASPSPs) using open banking have been reached by about 500 third-party providers offering account information and payment initiation services – a growth rate of 300 per cent; in 2021, open banking acquisitions with a total value of approximately €2billion were recorded there; and, in a study of 41 market players, 63 per cent of about 2,400 APIs were available for open finance. Faced with this approaching, unprecedented competition, CBI’s primary focus is giving members the tools to thrive and the weapons they need to compete, so that banks themselves can even become third-party providers within a collaborative CBI ecosystem.

The Italian way: The CBI Globe platform has been adopted by 80 per cent of the Italian banking industry

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TRANSFORMATION: OPEN FINANCE “Because of our DNA, our history, we are focussed on the design and development of a great, collaborative infrastructure which can adequately support fintechs, third parties and financial institutions,” says Castelli. “In 2019, CBI designed, developed and launched the CBI Globe platform, an open API gateway, which could be described as a regtech platform, that has been adopted by more than 300 banks in Italy – that’s about 80 per cent of the market. With that we were able to help banks realise savings of about 30 per cent in relation to the investments otherwise forecast to implement functional adjustments under PSD2. “In the last two years, we have worked with all the Italian banks, and the main financial hubs in Europe, to define and design new value-added services. Last year, we launched the CBI Globe Active Functionality, a new open banking API layer designed to help third parties reach the Italian banking market, through a single hub, a single technical connection. Any third-party provider is free to integrate its solutions on our infrastructure – we are totally agnostic, because our core aim is to manage collaborative infrastructures that are able to support all financial institutions.” Such an initiative is important, believes Castelli, because, in Italy, those open banking business opportunities remain largely untapped. The CBI/PWC Italy report notes that, despite significant investment in open banking and PSD2 – €2.5million on average per bank over the last five years – the adoption of open banking services that should flow from that remains lower than in some European areas. Castelli takes a glass-half-full approach to that comparison. “The report highlights that more than 60 countries are undertaking open banking projects, and more than 130 million final users are expected to use open banking by 2024,” he says. “Low penetration and adoption rates could represent high growth opportunities for incumbents and new entrants interested in the banking sector and payment industry. “ The report also shows the widespread adoption of Cloud computing and API technology, which are able to support the new business models – models that Castelli sees being driven by three principle opportunities for growth as open banking and then open finance take hold. Firstly, banks can monetise the vast data

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reservoirs they hold. Secondly, banks, fintechs and other payment providers can collaborate with third parties, to offer more complex services, such as instant insurance, instant lending and smart onboarding procedures, over a platform using a single API access point. And, thirdly, there will be further, intense competition as big tech companies and new entrants march in to offer innovative, integrated financial and non-financial services, thereby threatening the ‘last-mile relationship’ that banks have traditionally enjoyed with customers. To that end, the CBI is intent on further developing its ecosystem to help its members and customers both seize the day and counter the threats. CBI Globe, its API-driven open banking ecosystem, links payment service providers, fintechs, non-financial businesses and government departments. Value-added services in the areas of open finance and data monetisation include its Check IBAN Service , which makes it possible to ensure that an IBAN code is correctly associated with a tax ID, in the case of an individual, or a VAT number for a business.

In Italy, we are now seeing investment moving from PSD2 compliance activities to development of value-added services “Today, if a third party is interested in having a connection with the Italian banking market, we are able, through a single API connection, to open the whole of the market to them, because we are able to reach 100 per cent of the Italian banks as well as European hubs,” says Castelli.

THE THIRD-PARTY PIECE In providing these services, CBI has itself enlisted the support of leading specialist fintechs to offer an integrated product to final users. Nexi Payments, for instance, has been selected to improve some technology solutions; knowledge solutions specialist CRIF provides financial management and credit scoring solutions that can be integrated with the CBI Globe platform; while certification company InfoCert supplies the digital certificates that third-party providers need to operate

under PSD2. Similarly, Castelli believes collaboration will be key for financial institutions to both retain and attract customers who expect an ever-wider palette of financial services available to them at the touch of a button. While many banks may choose to build their own, in-house solutions, others, for reasons of operation or cost, may choose to access the CBI ecosystem, and some will opt for both. Whatever the strategy, Castelli believes the most sought-after integrations will be to support digital onboarding, know-your-customer activities and innovative payments, including buy now, pay later and Request to Pay. “The traditional banks have to take a position within the market because, thanks to open banking, new competitors and new entrants are very interested in gaining a share of it,” he says. “We all know that the competitive scenario is characterised by low interest rates, tight margins on payments and growing competition within financial markets. So, by adopting open banking and open finance, institutions could take this opportunity to defend and protect the last-mile relationships with the final users, to monetise their data and enable upselling and cross-selling strategies, and innovative services as well, integrated with third-party functionalities. “We know countries are approaching open banking in different ways,” continues Castelli. “Some are regulatory-driven, such as, for instance, in Europe with PSD2, or Australia, while other countries have adopted a market-driven approach, like the United States. Regardless of the approach, banks have to invest in open banking and open finance, not least because of the improved customer experience; but also because services linked with complex products, could be perceived to have a higher value and to fit better with final customers’ requirements. “In Italy, we are now seeing investments move away from compliance activities to developing these new value-added services. There is also growing interest from financial institutions themselves in assuming the role of third-party providers; to have an active role within open banking and exploit the business opportunities enabled by it. That’s why CBI Globe Active Functionality is so important – for third parties to have a single point of access to reach all the traditional banks.” ffnews.com

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TRANSFORMATION: LOW-CODE Data drop: Low/no-code gives non-IT specialists a way of building solutions quickly

Low and behold!

Low/no-code solutions are increasingly seen as a potential answer to IT prayers in all manner of business environments. Could ISO 20022 represent a defining moment for its adoption in finance? Elmar Handke of UBS and Nihit Ahuja from Volante Technologies think so The challenges banks face in transitioning from old and cumbersome legacy systems to the kinds of adaptable IT solutions needed to meet the demands of today’s customers and operating environment is not, as they say, ‘new news’. There is growing evidence that the world’s major institutions are waking up to the increasing urgency surrounding this agenda, including the most recent Lloyds Bank Financial Institutions Sentiment Survey, which points to an overall increase in technology investment, to 77 per cent in 2021, compared to 62 per cent the previous year – and all focussed on developing new products and services, improving customer experience and responding to ever-more-complex regulatory requirements. Now, it appears that a further catalyst for change could be coming from the imminent migration by key payment infrastructures to the ISO 20022 payment messaging standard. Or, more precisely, according to Elmar Handke, project manager for UBS bank, from the realisation by some institutions that the only way they will meet deadlines imposed in multiple markets for such a change, is by adopting low/no-code ffnews.com

programming solutions – characterised by drag-and-drop tools, pre-packaged code and reusable components. Nihit Ahuja from Volante Technologies, which partnered UBS on its low/no-code journey, also believes such an approach is the best and, for some, the only way they’ll make it in time, given that the implementation deadline for a switchover in the US, Europe and the UK – and globally for any institution plugged into SWIFT – looms in November 2022. This is because these plug-and-play offerings have the potential to supercharge time to market, without the need to carry the additional overhead of specialist in-house developers and programmers – if businesses can even recruit them. Quite apart from the skills shortage, the revenue challenges banks also face in an increasingly competitive and commoditised financial services marketplace, placed under additional pressure by the pandemic-related rise in high-volume, low-value payment transactions, makes low/no code an attractive, cost-efficient option. Low- and no-code have been seen by many industries as a way of releasing the IT logjam caused by a customer swing towards digital. A survey of IT decision-makers by customer relationship

management platform specialist Salesforce, carried out in May 2021, gives some idea of the scale of the challenge. Eighty-eight per cent said they’d seen their workloads increase over the previous 12 months, while 96 per cent said the demand they were experiencing for apps was not sustainable using traditional coding. As a result, more than 90 per cent had turned to low-code tools that general team members could use with appropriate training. In response, over the last 18 months, Salesforce has created a mind-boggling 1.4 million low-code apps. Among the list of major financial institutions adopting an app-based approach, according to the report, are RBC Wealth Management, Academy Bank and Brazil’s Banco Bradesco, for functions ranging from digitising account opening and loan application processes, to streamlining wealth management, trading and compliance services. Nihit Ahuja looks after Volante’s global financial messaging low and no-code platform offering, and has seen the same sudden shift in operating requirements. Volante was one of the first providers to offer companies a way of accelerating the software development lifecycle by enabling them to build solutions quickly without deep technical knowledge. Issue 23 | TheFintechMagazine

TRANSFORMATION: LOW-CODE When it comes to ISO 20022, he believes payment providers have three options. “One is to do open-heart surgery and bring in a shiny, new payments engine that solves the problem. The second is to build in some sort of business application that takes care of the challenges. The third is to enhance your existing system, ready for ISO 20022 adoption,” explains Ahuja. “Volante provides all these solutions, but the low/no-code platform offers an accelerated approach. It enables organisations to adopt the new standards quickly and gives them the flexibility to create tailored experiences.

The low/no-code platform allows organisations to adopt the new standards quickly and gives them the flexibility to create tailored experiences Nihit Ahuja, Volante

“ISO 20022 is all about leveraging data to make it meaningful for customers. Our platform offers that in a tailored way, with acceleration capability.” For UBS, ISO 20022, while it focusses industry minds, is just the tip of a transformation iceberg. It commenced its IT evolution almost a decade ago, leaving it in a relatively strong position today. Handke explains: “We’re not completely new to data conversion; that was part of the message broker platform, which, at UBS, is a legacy application with about 20 years on its charter. The data converter was giving us maintenance issues and, about nine years back, we were looking at opportunities to modernise our architecture. We stumbled across Volante’s graphical developer interface platform and code generator for specifying data conversions. The deciding factor was that it was extremely flexible and could generate output for multiple different platforms and runtime environments – Java, virtual machines and standalone programs. “With Volante’s technicians, we built a framework to integrate this generated code into our existing applications, ripped out the old converter solution, slotted in the converted code and started to grow from there," he says.

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“Initially, we were purely mainframe-based, still running on heavy irons, z/OS mainframes, due to the scalability. To our surprise, even with Volante’s development workbench being a 4G implementation tool, it was very easy to integrate the output from it into our mainframe. From there, we went into the hybrid space and now have solutions for decentralised platforms, too. “Volante’s second big strength is providing libraries for different market standards, be they SWIFT FIN messages, Fed and CHIPS messages, or Swiss-specific SIC messages. That helps, even if you still need to define your data conversions,” continues Handke. “We went back to Volante for the ISO 20022 migration challenge, because time was short and we needed something to convert those messages. In this case, it’s a SWIFT MX to a SWIFT FIN message. What Volante gave us was on top of our existing market library – with really no code.”

ANSWERING THE CALL Volante intends to further invest and develop its offering over the next five years. In January, it announced a partnership with banking-as-a-service platform and low-code champion Mambu, which will see its low-code technology made available to financial institutions through the Mambu Payments Hub. It promises to give processors the power to modernise their payment systems and ‘deploy the elements needed to deliver an exceptional 24/7 experience to their customers’ within a matter of hours. Ahuja adds: “We are aligning our business to the challenges customers are facing. The scale of change is huge – it’s not just one market, or two markets – so, our focus has been standardising the way we do it, rather than doing it per payments scheme, or per requirement that’s changing. “Now we’re looking at how we can make it easier to use our development platform to do the job. Because, now we’ve standardised it, we don’t want there to be a lot of effort around using the data or embedding things. “As there is a huge quantum of work, we’re also looking at creating a stronger partner ecosystem to offer more value-added services for clients wanting to create a more tailored proposition or a unique experience. Then, we want to leverage artificial intelligence and machine learning.

“Automation is in our DNA but we now want to take it to a different level and make it easier to get the job done.” ISO 20022 is just one aspect of the multiple challenges facing financial services, including new regulations, increasing customer expectations and the need to operate in a global and diverse marketplace, adds Handke. “Being globally exposed, UBS works under different legal restrictions from the various regulatory authorities, so our challenge has been turning around the payment business to operate 90 per cent differently from the way it did 20 years ago. “A lot of companies have had to look into their operational processes and the way their payment, accounting, client reporting and reconciliation applications work. Probably, as in our case, some of these applications are fairly old, so they run fine day-to-day, but it’s possible that there’s code out there that they have to put on their Indiana Jones hats and dive into, because the people that originally defined the business rules around these applications are no longer there,” he says.

Our challenge has been turning around the payment business to operate 90 per cent differently from the way it did 20 years ago

Elmar Handke, UBS

As with most things, there is a counter to the growing argument for low-code; sceptics say that while it does indeed offer quick fixes to urgent needs such as product development, customer information management and financial crime management, it perhaps should not be viewed as a silver bullet. Some would argue banks need to ensure that, by firefighting today, they don’t add further complexities to already-patchworked legacy infrastructures, which will then need undoing tomorrow. Whether low-code can stave off the need for front-to-back, bespoke legacy upgrades in the long term is the subject of ongoing debate. Notwithstanding that, the argument put forward by UBS and its own low-code implementation partner Volante, is a persuasive one. At least for now. ffnews.com

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TRANSFORMATION: EMBEDDED FINANCE Switched on: Banks could have a big role to play in embedded finance

€60billion missed opportunity Embedded finance is the ultimate shopping experience, one where you can not only buy, but also optimise your borrowing, the delivery of your goods, even insure them, and all in that one, simple customer journey. More and more non-financial companies, such as merchants and marketplaces, are looking to integrate financial services into that journey. They see it as a way of building stronger relationships, trust and loyalty, with customers but also to increase the lifetime value of those customers. There have been two fundamental enablers for them to do this. On the one hand, is regulation. Open banking and Europe’s revised Payment Services Directive (PSD2) forced access to data and made a lot of banking players think hard about how they were going to expose their services to third parties. And then we have a new tech paradigm, giving providers the ability to build modular components, hosted on the Cloud, and delivered through APIs. Now COVID has brought embedded finance to a tipping point by rapidly accelerating three trends. One is consumer demand for digital financial services. We’ve seen growth rates in the number of digitally active ffnews.com

Albion Murati, a Partner at McKinsey & Company and a leader in its Financial Services and Payments Practices, told TFM why embedded finance still has a long way to go

customers doubling over the last few years, so that now roughly 55 per cent of all consumers globally are digitally active banking customers. The same trajectory can be seen for the sale of financial products; roughly a third of banking products nowadays are bought online. The second trend is that fintechs have been gaining a lot of momentum. While that’s been true for the past five or 10 years, the most recent statistics are quite remarkable. For example, customer adoption of fintech services has radically increased. In the US, in a recent survey conducted by McKinsey, we found that 44 per cent of customers now have an active account with a fintech of some kind. And it’s not just consumers who are showing an interest; the investment community is putting record amounts of money into the fintech sector. In 2021, around €100billion of VC money was invested in these types of company; that compares to a previous annual average of around €40billion. Investors clearly believe there will be a market share shift, away from more traditional models, to new services, enabled by fintechs.

The third fundamental change that came with COVID, the one everyone is familiar with, is the digitisation of commerce. It’s not that just e-commerce penetration has increased; the more interesting fact is that we’ve seen new categories moving to digital commerce. Even the art world is moving to marketplaces and platforms. As new verticals like this shift to digital sales, it will unlock new opportunities for embedded finance. And that will really challenge the status quo. So, are banks and payment businesses ready to take on these new opportunities and challenges? We’ve seen some progress. To a greater or lesser extent, everyone, over the last few years, has had to renew their IT landscape, and, in many parts of the world, they’ve had to comply with a regulatory requirement to open up access to data. But while we estimate that the revenue pool for embedded finance could be €60billion globally, with the potential to grow tenfold over the next decade, today, the sum of the revenues generated by all the players – banks and fintechs – active in this segment, amounts to only a fraction of that.

As new verticals shift to digital sales, it will unlock new opportunities for embedded finance. And that will really challenge the status quo

Issue 23 | TheFintechMagazine

TRANSFORMATION: EMBEDDED FINANCE In Europe, we’ve seen ING strike up a partnership with Amazon to provide SME lending. In the US, Citi, JP Morgan, and Goldman Sachs have been making similar plays, as have some of the payment fintechs, most notably Stripe. But, while the opportunity is huge, it is still largely untapped. Ultimately, a big portion of financial services could be accessed through embedded finance/API-based banking, but for that to become a reality, two things need to happen. Firstly, you need new technology and new capabilities, and that’s not only modular services that you distribute through APIs. You also need to build strong risk and compliance; management capabilities that can operate in real time. Because, as the embedded finance partner to a non-bank, you’ll find they expect you not just to provide better financial products that they can embed in their journeys; they’ll also expect you to take care of all the risks that come with providing that product. This is where the banks should have a stronghold – but they have not built the products yet. On the other hand, fintech and payment players are starting to build the products, but don’t always have the balance sheet or risk management capabilities that will also be required. The second thing that needs to happen is for banks to fundamentally rethink their business model, because more than 50 per cent of banking revenues are linked to distribution, and, with embedded finance that is, ultimately, what you’re giving away. There is a risk that banks could just end up as utilities, where they control the balance sheet, but not much more. Banks will need to build new distribution capabilities, adopting a B2B2C, or B2B2B go-to-market approach. In other words, they are no longer optimising for serving the end consumer and merchant, but serving these ecosystems, merchants, or marketplaces that can give them access to that customer base. There are big benefits that accrue from this new model. Banks can massively lower their cost of acquisition, by leveraging the access that some of these platforms can bring. Banks can also leverage nonbank data from their partner, to, for example, make better credit decisions. In many other disruptions that we have seen in financial services, banks have struggled to gain the upper hand. But that’s

TheFintechMagazine | Issue 23

not the obvious outcome from the disruption that we see within the embedded finance market, because, to be a truly effective player, you need to combine banking-as-a-service (BaaS) software or service capabilities (that’s a modular product, in a Cloud-based environment, accessed in a very easy and convenient way, that is easy to integrate) with very strong, classical banking, balance sheet, funding, and risk management capabilities. Three categories of player are already emerging. There is the pure BaaS fintech, or infrastructure player, which provides very strong product components to a merchant or marketplace, but does not want to take

Bright ideas: Embedded finance has a role beyond e-commerce ecosystems

in service that need to be filled. Merchants tell us that is still hard to find one partner to solve a use case in the same way across multiple geographies. They can find, for example, a card-issuer that will give them a fantastic proposition in the big European markets or UK/US, but it’s really hard to get that same provider delivering a solution in France, where there might be local card schemes operating, or local requirements. Similarly, it’s difficult to find onebuy-now-pay-later provider across markets. Another problem merchants have is finding one partner to take care of all their financial offerings: most face a choice between a bank, where they at least they have zero financial responsibility, and a more nimble player with better products. In the main, it’s the more simple products, providing end-to-end automated experiences, embedded into broader customer journeys – payments, financing, accounts, treasury management – that are seen as very good candidates for embedded finance. Daily consumer lending, for example, naturally provides a much better customer experience if it’s embedded into an e-commerce journey, rather than residing in your mobile bank. And this is a reality that we’re all accepting: your bank won’t necessarily be intermediating the relationship. That will result in a natural fragmentation of financial services, where a number of products will be orchestrated by embedded finance ecosystems, a number will be served by more vertical specialists, and we’ll still see a number of services orchestrated by banks. Today, embedded finance is still very much limited to digital ecosystems around e-commerce and online marketplaces. Going forward, I expect to see it being integrated in other ecosystems, too – social media, travel and hospitality, energy, health and others. And there are technologies on the horizon that will start to play a bigger part – we’re already hearing about use cases developed on the back of IoT. The future of embedded finance is a fundamentally new way of delivering and integrating banking services through new customer journeys. And those journeys have only just begun.

The embedded finance industry is still developing, but there are some clear gaps in service that need to be filled

on any of the risk in embedding a financial product. Then you have the banks. And, lastly, a provider (bank or fintech) that combines both. An example of the latter is Affirm, which delivers a buy-now-pay-later offering for, among others, Peloton, Walmart, and Amazon. It also takes full control and ownership of managing the balance sheet on behalf of the merchant. Another example in the B2B2B space would be Banking Circle, which is building an ecosystem of offerings to enable payment players to integrate payments and merchant financing solutions, while also being a regulated bank. We will probably also see partnerships between pure BaaS services players and banks to meet the needs of merchants, marketplaces, and ecosystems.

Identifying opportunity The embedded finance industry is still developing, but there are some clear gaps

ffnews.com

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TRANSFORMATION: MEXICO Fintech adoption and digital transaction rates in Mexico are soaring. Alejandro Valenzuela, CEO of Banco Azteca, and Francisco Javier García Delgado, of payment solutions provider ACI Worldwide, consider the challenges for acquirer banks “You can’t swim against the tide of innovation,” says Alejandro Valenzuela. And the bank he leads, Banco Azteca, has no intention of doing so. Part of the Mexican financial, telco and retailing behemoth Grupo Salinas, established by the business magnate, investor, and Bitcoin hodler Ricardo Salinas Pliego, it’s been riding the digital swell around banking and payments since 2002. Most recently, it found itself at odds with the central bank over plans to accept cryptocurrency; it’s lost that battle, along with every other local bank (for now). But Grupo Salinas’ Elektra stores – often referred to as the Amazon of Mexico by virtue of their market dominance – has pressed ahead with becoming the first retailer in the country to accept Bitcoin for purchases. They will go through US-based Bitcoin payment service provider BitPay instead.

ffnews.com

Salinas’ personal determination to promote cryptocurrency, which he has referred to as ‘the new gold’, strikes a chord with ordinary people across LatAm. El Salvador, where Banco Azteca also operates, became the first country to adopt Bitcoin as legal tender, alongside the US dollar, in September 2021. People in every walk of life across the region – and notably immigrants who need to transfer cash cross-border – have dramatically increased their holdings as a way of hedging against economic instability, especially after COVID. Many see cryptocurrency potentially levelling the playing field and extending financial inclusion to those who can’t access mainstream financial services – and more than half the Mexican population still can’t. About 42 per cent live in poverty, according to the International Monetary Fund, despite many being in work. Banco Azteca has a long track record in extending financial freedoms to many of those who hitherto had no access to credit, savings and transactions using anything other than cash. Financial inclusion is not just part of the business model – Valenzuela sees it as more of a mission. “We’re developing digital products to give access to banking for around 20 million Mexicans, which will probably be their only option for formal banking,” he says. That includes tackling some big social issues, such as finding ways to help women who are kept out of the financial system by patriarchal communities, and even abuse.

The pandemic has helped hasten the bank’s progress. “According to the Bank of Mexico, in 2019 there were 422 million purchases via digital channels, amounting to a total of 246billion MXN. In the first quarter of 2021 alone, there were 407 million digital transactions, which translates to 232billion MXN. The metrics tell us that we’re going to double the number of transactions conducted in the digital world in just two years. So, this [digital shift] has come to stay,” says Valenzuela.

TRANSFORMING LIVES Even before the life-changing events of 2020, Banco Azteca was profoundly altering ordinary people’s relationship with money, providing micro-financing for businesses, personal loans for those without conventional credit records, and facilitating payroll coupons for food and gasoline (a common way for employers to top up wages in Mexico and for employees to reduce tax). Francisco Javier García Delgado, a customer success manager, responsible for Mexico, Central America and the Caribbean with payments solution provider ACI Worldwide, cites his own experience of the impact it’s had. He had an issue trying to pay a local person to look after his remote cottage in the Mexican countryside. “I couldn’t go every week or fortnight to pay him in cash, so we both set up an account with Banco Azteca – which he could use via a local Elektra store – just so I could transfer money to him and he could take it out.

Issue 23 | TheFintechMagazine

TRANSFORMATION: MEXICO “Now, I see his card is being used to buy groceries. If banking is advancing out there, it’s a sign that the whole Mexican market is advancing,” Delgado says. It’s this utility that proves the case for digital finance, agrees Valenzuela. And the number of low-friction options for consumers and businesses is growing all the time. The challenge for banks is in deciding whether to accept all or some.

The reality is that the bank is transforming. Banking-as-a-service will revolutionise the sector, but the bank of the future isn’t necessarily going to fracture Alejandro Valenzuela, Banco Azteca

“The acquirer market is changing a lot,” says Delgado, “not least because businesses want to have the same experience between their physical and virtual terminals. Then you have traditional credit and debit cards, being joined by alternative payment methods like PayPal, Google Pay and Apple Pay, which are also coming to market, QR codes and payroll coupons. And more payment methods are being introduced. One of the things we’re seeing is a growth in real-time payments in Mexico and SPEI (a real-time gross settlement system for large-value funds, in which banks can make transfers on behalf of themselves or their customers) is becoming very popular. Today, a business will typically tell you that you have to pay with cash or card. In the future, they’re going to ask if you would like to pay by cash, card or bank transfer. There’s also CoDi, (Cobro Digital, the central bank’s fast retail payments platform), although that needs some more development.” CoDi, launched in late 2019, provides a national mobile digital payments platform based on QR codes that allows business-to-business, peer-to-peer and other payments to be made over SPEI. Despite it being free to end users, awareness and uptake has been disappointing. “Certainly, in the near future, there’ll be more cross-border payments,” adds Delgado, “and all these things the acquiring

TheFintechMagazine | Issue 23

market needs to take into account within their systems and operating models.”

REGULATION V INNOVATION Will that mean that every acquirer bank has no choice but to offer an omnichannel platform for businesses that will allow them to respond to any type of payment? For Valenzuela, there is no future but omnichannel, which means banks will have to ‘do what it takes to understand the customer’s end-to-end journey’ and figure out what transaction is likely to come next. “This has everything to do with data science and the low costs enabled by the Cloud,” he says. “It also has to do with questions around blockchain. “The reality is that the bank is transforming. Banking-as-a-service (BaaS) will revolutionise the sector, but the bank of the future isn’t necessarily going to fracture. “Let me give you an example. I want to go to Cancún, and this morning I asked Alexa ‘how can I finance it?’. She gave me options, not based on a single bank, that allowed me to get complete financial visibility about what I should do. As a consumer, it doesn’t matter who I do this with, all I want is for my experience to be positive. How we interact with banks is going to change and an omnichannel experience becomes truly fundamental to this client journey. “As to whether every bank will provide it, I think that depends a lot on the size of the organisation. Two verticals will emerge: one will try to do everything and the other will specialise in a niche, offer a really differentiated, added-value service. I would expect to see banks in these two worlds existing together in much the same way that we see banks and fintechs existing together. But we really need one of us to achieve that omnichannel experience for the customer.” Javier sees a third way. He believes that the effort banks have put into building a superior infrastructure in Mexico over the past few years – albeit one that’s still struggling to find relevance when it comes to CoDi – will be rewarded and forms the basis for more co-operation between banks and third-party providers. “Banks and fintechs complement each other in several ways – perhaps, ultimately, the fintech will offer payment services and the bank will offer acquiring services.” Wherever the players end up on the payments board, both Delgado and

Valenzuela believe regulators will have a hard time keeping up. “Innovation and transformation are happening at such a rate that we have to work very closely with regulators to make them understand the sophistication and the speed of change that we’re experiencing,” says Valenzuela. “Because, if they don’t regulate correctly, abuse will happen that could also lead to mass distrust.” Regulators have already fallen back on the blunt instrument of banning banks from handling cryptocurrency – at least in advance of Mexico issuing its own national digital currency in 2024. But, meanwhile, as Delgado points out, a parallel economy is emerging because regulators have failed to engage with it. “There are ATMs with cryptocurrencies, there are cryptocurrency payments that still aren’t regulated. There are issues with money laundering, fraud, handling charges.” Meanwhile, Valenzuela is watching El Salvador’s national experiment with Bitcoin closely.

Banks and fintechs complement each other in several ways – perhaps, ultimately, the fintech will offer payment services and the bank will offer acquiring services Francisco Javier García Delgado, ACI Worldwide

“It seems very risky but fascinating in that it should give us an indication of how banking might evolve. I also think there will be a permanent battle between the cryptocurrencies that are already here and regulations – and I don’t think the regulators will give up because issuing currency is a gigantic resource of sovereignty and profitability, at the end of the day So, we’re going to see a permanent tussle around this innovation between the entrepreneur, who is obviously seeking the most effective business model, and the regulator. “There’s going to be friction, there are going to be blows, in the sense of understanding different conditions, but I think we’re going to push on and, fortunately, as I said, you can’t swim against the tide of innovation.” ffnews.com

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Fintech Finance presents: The Fintech Magazine 23

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