Fintech Finance presents: The Paytech Magazine Issue 12

ISSUE 12

THE The Guest Edit Age-friendly banking: Natasha de Terán challenges the challengers

When do we want it? NOW! Why Volante and ING believe instant payments are a lifeline for business

Platform for chang ge Vitesse PSP – the power behind payments in insurance

All in one How JCB is ‘unifying’ commerce for merchants

G+D’s Alex Gatiragas on leading sustainable change – one payment at a time

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CONTENTS PAYTECH FOCUS 16 Payments pizazz Riotous colour, vibrant music, sensuous dance and a unique, restless energy, Brazil’s get-up-and-go is filtering through into how it does payments, says PagBrasil’s Ralf Germer

30 New rules of conduct SmartStream has combined its deep knowledge of regulatory reference data and super-fast, Cloud-based, AI-driven reconciliation, to solve the investment industry’s reporting challenges. And – perhaps surprisingly – digital assets traders are clamouring for it, too, says Jethro MacDonald

55 The rationale for real time There are various motivations for implementing real-time payment systems. ‘Speed’ merely scratches the surface, writes George Evers, Senior Vice President for Realtime Products at Mastercard

NEW WORLD ORDER 6 Instant gratification The world of payments is moving at warp speed and providers must keep up, or fade into insignificance, say ING’s Mark Buitenhek and Dome Scaffidi from Volante Technologies

10 One-stop shop In order to thrive, retailers should prioritise providing their customers with real-time fulfillment in every possible avenue, says Andrew Mitchell from JCB

12 Small world, big possibilities Payments are driving unprecedented levels of global innovation and connectivity, including in insurance, say Vitesse PSP’s Phillip McGriskin and Mauro Di Buono

THEPAYTECHVIEW »

2022 ISSUE#12

THE GUEST EDIT: AGE-FRIENDLY BANKING The fintech revolution promised us a complete re-invention, not just a revamp or renovation of finance.

In many cases it has delivered – but in one important aspect, everything has stayed the same.

Capture customers young and they’ll stick with you for life is age-old banking logic. And it’s a logic that has long worked for incumbents, because finance was always sticky – the incumbents won customers young, but they also held onto them into older age. And those customers played a crucial function – providing wealth. It’s their deposits that furnished lending to the young.

With VC money washing around like soap suds and interest rates at near zero, I can see (if not mathematically square) why fintech has also been all about capturing young customers rather than wealthy, older ones; why it’s been about the low-hanging fruit in the digital native Gen Z and Millennial cohorts. Cool has ruled; not older under-banked boomers.

But times are changing. Some of the neobank business models that looked wafer thin before look positively anaemic now that money’s being squeezed. If fintechs want to grow up and survive, I’d posit that they are going to need to square the circle and create self-sustaining, revenue-generating models. And for that they’ll want to grow not just customer numbers but deposits, too. That means recruiting older users. Either that, or they will really have to reinvent banking

and its centuries-old business model.

For any fintechs fretting about the prospects of securing enough funding to see them through to that eureka moment, there’s hope – as we try to evidence in the Age-friendly Banking section of this edition. Boomers may not be budging, but that’s not because they’re happy with their lot from legacy providers. It’s because no one’s trying to speak to them, let alone serve them. Time for challengers grow up and do that?

Guest Editor Natasha de Terán Natasha has spent a lifetime at the intersection of finance and regulatory and public affairs. She is passionate about improving financial access and literacy, and is co-author of The Payoff: How Changing The Way We Pay Changes Everything. She holds a number of advisory positions, including on the Payment Systems Regulator Panel and the Financial Services Consumer Panel, and is a member of the Bank of England’s CBDC Engagement Forum. She writes about and consults on a wide range of issues affecting the payments industry.

Our last issue’s spine tingler, 'By endurance we conquer', is a quote from Antarctic explorer Ernest Shackleton.

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CONTENTS INFRASTRUCTURE 19 Above and beyond Peter Larsson of Volante Technologies and Kasper Mortensen from Nordea describe how the Nordics are starting to look beyond P27

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22 Joined-up thinking The acquisition of TruNarrative by global risk intelligence firm LexisNexis Risk Solutions has created a new force to help ensure tackling financial crime doesn’t come at the expense of payments innovation, says Edward Vaughan

26 Time to share Bottomline’s Charles de Rougé and Nicole Coates from PSR discuss how mutual support is the best way for providers to crack the payments interoperability challenge once and for all

FOLLOW THE MONEY: AGE-FRIENDLY BANKING

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46 A young country’s view A reflection from Kenya on how culture and demographics influences the development of financial services

34 Hey, big Boomer! Spend a little time with me?

‘Meet your customers where they are’ is business logic 101. Why is hardly anyone trying to do that with the silver generation and why fintechs should follow the money

49 Designing for an inclusive future If banking apps and services were built to be used by your grandparents, everyone would benefit

MAKING A DIFFERENCE

38 ‘Remote’ banking OneBanks Hub is attempting to restore the ‘face of banking’ with a physical presence in branchless communities across the UK. Founder Duncan Cockburn talks about his mission

40 Spain’s senior moment Spain is positioning itself as Europe’s ‘centre for silver fintech’. Among those leading the charge are Luis Castillo and Nuria Domínguez Soto of startup SeniorsLeading

42 In with the new, out with the old?

58 Payments pledge Alex Gatiragas describes how G+D is aiming to save the world, one payment at a time

62 Payments special op As war continues in Ukraine, the sanctions stakes are getting higher.

Companies need to roll out the virtual big guns to identify who they’re really dealing with

FOCUS ON AFRICA 66 Hakuna matatu

We ask if youthful neobanks have alienated the very generation that could guarantee their profitability

Better social mobility is the greatest gift payments can give Africa’s people, says BPC's Frank Molla

69 Out of app-rica!

Africa’s mobile money transfer service M-Pesa has led the world once – can it do it again? Vodacom’s Diego Gutierrez believes so

72 Standing on a platform for growth Africa wasn’t alone in seeing economic progress set back

by COVID-19 and now by war in Europe. But BankServAfrica is pressing on with a programme that promises to lift it out of the doldrums, says Portia Matsena

CRYPTO & BLOCKCHAIN 74 Bit up, Bit down, but still going strong Bitcoin is now in its 13th year.

But will 2022 be a crypt-astrophe for some? asks Ron Delnevo

77 Road to somewhere Paul Wong from Stellar believes digital currencies and their supporting technology are about to open up a ‘financial superhighway’ that will prove to be a game changer

THEPAYTECHMAGAZINE2022 EXECUTIVE EDITOR Ali Paterson GENERAL MANAGER Chloe Butler EDITOR Tracy Fletcher ART DIRECTOR Chris Swales

US CORRESPONDENT Jacob Bouer PHOTOGRAPHER Jordan “Dusty” Drew ONLINE EDITOR Lauren Towner ONLINE TEAM Lewis Johnson-Pitt

PRODUCTION Taylor Griffin HEAD OF CONTENT Douglas Mackenzie CONTENT TEAM Bobby Suman Aniqah Majid

SALES TEAM Tom Dickinson Shaun Routledge VIDEO TEAM Lewis Averillo-Singh Lea Jakobiak Oliver Chapman

ISSUE #12 FEATURE WRITERS Tracy Fletcher James Grant Martin Heminway Alex King Sean Martin Martin Morris Sue Scott Natasha de Terán

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NEW WORLD ORDER: REAL-TIME PAYMENTS

Instant gratification The world of payments is moving at warp speed and providers must keep up, or fade into insignificance, say ING’s Mark Buitenhek and Dome Scaffidi from Volante Technologies The winds of change sweeping through global payments have fast turned hurricane force. And those, be it banks or corporations, that have failed to batten down the hatches by readying themselves for a new world where instant is the watchword, are at huge risk of being blown away by competitors that have.

Consider the evidence. The

unquenchable appetite for frictionless digital transactions was vividly demonstrated during the sudden and dramatic lifestyle changes forced upon most of us by the COVID-19 pandemic, which supercharged an already high-speed transformation away from traditional financial processes in favour of real-time payments.

Then throw in the continuing rise of cross-border, instant payment rails such as SWIFT gpi for

No time for tardiness: Users won’t tolerate anything short of immediacy in payments

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high-value transactions, and the recently introduced SWIFT Go for smaller transactions; the P27 system in Nordic countries; and a soon-to-be introduced pilot for instant payments between the US and EU called IXB, which has been created by a coalition of SWIFT, EBA Clearing and The Clearing House.

Finally, add the glue to bind it all together, which comes in the form of the imminent ISO 20022 standard which is establishing a common model and language through which global payments data can be communicated consistently.

So, what will be the impact of all this at a time when bottom lines are coming under increasing pressure across businesses?

Mark Buitenhek, global head of transaction banking at Dutch giant ING, which operates across 40 countries, argues that the pace of demand for instant payments means they will be commonplace, or, as he terms it ‘hygiene’, in two or three years’ time.

“Where is this drive for instant payments coming from?” he asks. “It’s not coming from the regulators; it’s coming from the market, our clients, from things that change the business over time. We’ve seen that during COVID, with increased digitisation everywhere, it is e-commerce business where things are going at record speed. You cannot have, let’s say, a customer ordering something on a Thursday morning, it’s delivered Friday afternoon, but then the payment takes another day to get there.

That is incomprehensible.

“So, one of the things that was clear for us a decade ago, is that we would move from, let’s say, intraday processing, to instant payments, and then think in terms of seconds because that’s simply what society needs today.

“What’s interesting is you saw at first that the ones that asked for this were consumers and not so much corporates, unless the

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corporate was an e-comm company and immediately wanted to reconcile something that it had sold with the flow of cash coming in. But in two or three years, in our opinion, this will become purely hygiene, like the internet is hygiene, like a mobile is hygiene.

“That’s the way we look at it, and that’s why we started proactively. Instead of waiting for something to come – a regulation or whatever – we are starting to roll this out in our key markets and are doing so across Europe.”

KEEPING THINGS FLOWING The efficiencies brought about by instant payments are clear cut, says Buitenhek, citing an example where a company can deliver goods as soon as its bank informs it the payment has been received or is on its way, thereby directly impacting its working capital. But he concedes that some of ING’s larger corporate clients are slower on the uptake and are still insisting on using traditional weekly or monthly batch payments.

Everybody is used to the fact that everything is closed during the weekend, but what do you do if you get €2billion in over the weekend? Where do you leave your money? That’s the kind of thinking that still needs to be developed at most of the corporates Mark Buitenhek, ING

“We think what will happen is that corporates will also gradually start to understand what the benefits are and what they can do, including around their cash management. If you’re a corporate operating in 15 markets and you have the ability to move your money faster than seconds, that also says something about working capital management and how you do things.

“Everybody is used to the fact that everything is closed during the weekend, but

what do you do if you get €2billion in over the weekend? Where do you leave your money? That’s the kind of thinking that s till needs to be developed at most of the corporates, although we clearly see some frontrunners that really get this and are thinking in 24/7 processes. In that sense, it will develop and it will develop rapidly – we see it coming back in our RFPs (request for proposals), where corporates are now saying ‘you need to be instant’.

“And not only instant within Europe, or within a country, but start to think SWIFT gpi (and, for the record, I’m also a board member of SWIFT), and after SWIFT gpi comes SWIFT Go, which is a simpler version of SWIFT gpi, with more strict rules around it so it will go even faster.

“It’s only a matter of time, let’s say one-to-two years, before you can move money around the world in an instant – really, in an instant,” says Buitenhek.

However, it’s not only banks’ clients that have to adapt; banks themselves need to as well, and fast.

Dome Scaffidi, vice-president of global industry and regulatory affairs at US-based fintech and Cloud payment solutions provider Volante Technologies, is a staunch advocate of the case for banks to use ‘plug-in’ technology from third parties rather than try to upgrade their often decades-old legacy systems to be interoperable, with real-time functionality and compliant with regulation.

Sounding a warning, he says: “All these ingredients are still creating a lot of friction in the innovation of the banks.

That is the kind of problem we are still seeing in financial institutions, both as a solution provider and in terms of my experience with regulatory bodies and working groups. This is why this journey to innovation is taking time.”

The perils of failing behind, though, will soon become painfully clear, Scaffidi says, with SWIFT about to publish a ‘white list’ of banks that process business payments in a reasonable amount of time. It’s a clear signal that the financial messaging system provider is losing patience with the laggards as it drives to fulfil a strategy to provide instant, frictionless transactions across its network of 11,000 banks in 200 countries.

So, what are the benefits to them and their clients of getting up to speed with instant payments?

Issue 12 | ThePaytechMagazine

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NEW WORLD ORDER: REAL-TIME PAYMENTS Scaffidi offers up two main points: “One is the real-time reconciliation, which means we can reduce the cost of a single transaction and avoid a pending transaction waiting for days, so avoiding clients complaining that a credit or debit is not in the right account, or in the beneficiary account, at the right time.

“Such transparency is what corporates want to see. So, the benefits and use cases are coming from here; the capability to provide all the information corporates need to avoid delay, to avoid goods not being delivered in the right amount of time.

“The second benefit is very important, and I’m not sure every bank is aware, but we have seen a drastic reduction in the back office, the manual intervention. It is very costly today to have a huge back office that is manually dealing with reconciliation, investigation, transformation, repairing payments, everything that can be avoided, thanks to the new standard. But, again, it’s an investment. As you can see, it’s not only the technology; it’s the right technology, together with the right knowledge.”

That right knowledge is expanding into a realisation by the leading few that banks now need to nurture a partnership relationship with their clients or run the very real risk of losing them to competitors that do.

“It’s not only the technology, it’s the way we bank that is changing,” Scaffidi continues. “All the departments of the bank, like business, operational and treasury, need to be involved in this big change.

“Real-time liquidity and giving the capability to the clients of the banks – the corporates pooling their liquidity where it is needed – is a must, and that is why many corporates are switching to banks where they can get this feature. But, again, it’s not only the technology; the bank needs to understand that it is not just a financial institution, but a partner to its clients.

“Mark gave us a very good picture of what important banks like ING are already doing. There are other banks in the market that are investing, but not all are on the same page. So it means that having the right technology is not enough. This is why having a solution provider, and the right mentality in the bank, is the right recipe to be successful in the new market, to satisfy clients’ needs.

“It’s not just about signing a contract with the service the bank makes available; now the trigger is coming from the client,

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they want more services, based on the new technology and where the payment ecosystem is going.

“In other words, banks need to understand the new business models and where to get new, fresh revenues, partnering with the clients and not just getting revenue for the transaction fee.

This is why it’s important today to know the client and what the new standard of technology is making available.”

DEEP-DIVING THE DATA Analysis of the richer data contained in ISO 20022 – which, incidentally, Buitenhek argues is not just on the horizon but already here, as evidenced by its use in Single Euro Payments Area (SEPA) transactions – is, of course, a key component of banks being able to get a better understanding of their clients and, therefore, developing new revenue streams. And using technologies like AI, machine learning and data aggregation for analysis means its value can be weighed in gold, says Scaffidi.

“It means identifying and creating the new business model,” he adds. “The bank is supporting the corporates in their business and, of course, the services can be monetised, so this is where the new business model for the bank is coming from – from the data.”

It’s not only the technology, it’s the way we bank that is changing. All the departments of the bank, like business, operational and treasury, need to be involved in this big change Dome Scaffidi, Volante Technologies

Looking further into the future, Buitenhek ventures other potential developments using instant payments rails, such as Request to Pay products and also possibly creating a point-of-sale competitor to card payment behemoths Mastercard and Visa.

“Once an organisation has built an instant payments rail – and whether it does this domestically or intra-Europe, or internationally, doesn’t really matter

– besides doing an instant payment, it can also start thinking about adding other products,” he explains. “Request to Pay, as an example, to replace direct debit – a lot of consumers still find direct debit less comfortable than having control over a Request to Pay, where you send a message, the customer clicks, and it’s done. And you can do that while you are talking to somebody, while you are chatting with somebody on the phone. It could be in the form of a QR code, where the customer clicks, the transaction is done and everybody knows it is done.

“The other one, which is a more strategic discussion that is currently ongoing in Europe, although it’s not going that fast anymore, is that if you have instant payment rails, in principle, you can start using this for payments in any shop, whether physical or online, which means you’ve built the basis for a competitor to card schemes.

“That’s what the European Payments Initiative was about – and, hopefully, still is about – to create that competitor for Mastercard and Visa. Maybe also for the Chinese and other players wanting to come into that market.

“This is also a way for the existing financial industry to benefit from something that it still controls, and can bring, with lightning speed, to what we need today. Not two steps closer to what some of the big techs are doing, but jumping ahead of that.”

Buitenhek also sees Europe as the world’s pacesetter in establishing an instant payments ecosystem, partly spurred on by the white heat of fintech competition but also for strategic geopolitical reasons.

“Two years down the road from COVID, the level of digitisation across the world has increased tremendously. Where banks or countries were still behind in their thinking or capability, they now see that this is an integral part of what they need to deliver,” he says.

“Regulators are seeing this and understanding, also in the geopolitical arena, that we must create one European environment as a stronghold against what is happening in the rest of the world.

“There might be others who think differently but I believe that it was clearly visible in the past two or three years – that Europe is stepping up to the plate and moving faster.” ffnews.com

NEW WORLD ORDER: RETAILING Invisible connections: Consumers now want even more from their shopping experience

One-stop In order to thrive, retailers should prioritise providing their customers with instant gratification in every possible avenue, says Andrew Mitchell from JCB

If commerce was under pressure pre-COVID, things are even tougher now as retailers, both off- and increasingly online, strive to win the consumer buck.

Many high streets are now devoid of once-mighty department stores whose owners were late in realising the enormity of the e-commerce boom. But it is not only traditional bricks-and-mortar merchants that are struggling.

One particular UK fashion brand, only recently a market darling, plunged into administration in late May owing millions of pounds to its clothing suppliers, as a well-known rival turned up the dial by being able to sell cheaper and faster, by manufacturing its own products.

So, what’s the answer in an increasingly complex, omnichannel world where innovation and change have been supercharged by the COVID-19 pandemic?

In a new white paper, Unified Commerce – Reaching For A Seamless Customer

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Experience, global payment network provider and card issuer JCB argues that the guiding principle for all businesses, going forward, should be a constant focus on customer experience, particularly on how to meet and exceed their needs. And to successfully do this, JCB encourages all players in the payment and merchant ecosystem to consider a new concept that it is calling ‘unified commerce’ (UC). It’s, effectively, a one-stop-shop approach to purchasing.

The white paper argues that the current omnichannel approach often doesn’t allow the integration of channel sales, transaction data or inventory in one place and, therefore, fails to provide the ‘single source of truth’ that retailers need to connect and analyse processes for operational gaps; to develop frictionless customer experiences that drive conversions and profitability.

360-DEGREE INSIGHT UC, it suggests, brings all the retailers’ channels, payment systems and products together into a centralised platform, linking back-end systems with customer-facing elements.

The rich data created then allows merchants to build crucial insights into their customers and their behaviours across all touchpoints.

That previously unobtainable information can then be used to help improve both customer and team member experiences, as well as strengthening any operational weaknesses, leading to increased profitability and loyalty.

The importance of being able to do so is starkly underscored by three facts cited in JCB’s white paper. Namely, it is estimated that the global e-commerce market will total $6.169trillion by 2023; the average online cart abandonment rate runs at a staggering 70 per cent; and e-commerce is experiencing a steep rise in returns – currently 30 per cent of all purchases and it is still growing.

Andrew Mitchell, VP of development and infrastructure for JCB International (Europe), insists that UC creates a ‘win win’ for retailers and customers.

Spelling out the benefits, he says: “Perhaps a customer may buy a product and then have to return it online, or they may buy something in a bricks-and-mortar store and have to return that online, and they will be able to do so in a very smooth and seamless way.

“Producing this seamless experience for the consumer means that the retailer is more able to service the customer and assess how the transactional traffic is flowing in a more concrete way. I think everybody is used to the concept of UX or ffnews.com

user experience; now we have to look at CX, the consumer experience.”

Mitchell accepts that UC is a ‘paradigm shift’ away from omnichannel which, over time, has left many businesses developing separate structures within their organisations while reacting to new market demands.

“When it comes to payment acceptance, a lot of retailers have looked at the bricks-and-mortar establishments, online capabilities and in-app purchases, and have treated those as kind of single silos,” he explains.

“They develop a particular channel for face-to-face, they may develop something else for e-commerce. With UC, the key thing is the linkages. So, it’s looking at the back end of what goes on in the retailer’s engine, as it were, and how we, as a payment industry, can service that.

“The acquirers we work with, in particular, are now beginning to provide services for their retail partners that enable them to manage things like their stock supply and observe how that interacts with the payment modalities.

“So, we have these different ends of the chain chronologies. The stock has to be in the shop, the customer has to be able to buy it, using the payment method they prefer. The payment data has to be delivered correctly to the cardmember’s issuing institution, be that a bank or whatever, to ensure that the billing is something that is satisfactory to the customer, that it has the correct data that the customer needs, and perhaps that can then service loyalty and promotion.

The retailer has to be able to service that, so I think retailers and acquirers are taking a big leap forward in how they connect all of those different platforms.”

ADDING NEW STRINGS Integrated systems also allow merchants to easily add new payment methods across multiple channels. JCB’s white paper cites the example of Watches of Switzerland, which opened a new acceptance modality channel by enabling Zoom-based customers to make purchases via secure payment links generated by payment provider Adyen.

“We, as a payment method, can’t necessarily affect things like stock, but what we can do is touch every part of that kind of middle layer, the transactional ffnews.com

layer,” Mitchell stresses. “We can obviously provide payment acceptance in the way that the JCB cardmembers like to pay, but we can also offer certain frameworks at the back end of that, so that, when we are exchanging transactional data, we make sure that data is rich.

“What we, as a payment network, have been looking to do for a number of years, is to improve the level of data enrichment that we can provide to our issuing institutions. We’re working on new methodologies for doing that.”

A crucial part of enhancing customer experience is establishing their trust in both the retailer and the payment provider, adds Mitchell.

“I don’t want to get too geeky about it, but we also look at the security layer, because the key, I think, to any transactional relationship between a consumer and a merchant is going to be heavily vested in the consumer being able to trust that their data will be kept securely, and that they will get the output from the transaction that

What we really need to look at now is how retailers in this competitive world, where everything is becoming more digitised, are always able to exceed customer need and that will produce customer satisfaction they wish, in terms of loyalty, benefit and seamlessness. What we need to look at now is how retailers in this competitive world, where everything is becoming more digitised, are always able to exceed that customer need and that will produce customer satisfaction.”

But becoming part of this new linked-up ecosystem is not without its challenges for retailers that continue to rely on years-old legacy payments systems. As Mitchell puts it: “Probably, from a retailer-to-acquirer perspective, you’re only as good as your stack.

“One of the big problems we see, particularly when we try to integrate

different businesses, is the legacy of legacy; we tend to see a lot of legacy systems and dependencies on third-party providers, which make it very difficult for us to integrate to different stakeholders within the payment chain.

“The flexibility of those system stacks that enable the exchanges of data is key.

You have to have an effective production of data and then the ability to take that data and do the meta-analyses of it in a way that will benefit you and your business and enable you to strategise.”

THE FIGHT AGAINST FRAUD JCB also points out that consolidation of systems and data can help reduce the ever-present risk of fraud through the use of interoperable security like its own J/SecureTM authorisation system.

To provide some context, it cites the fact that global losses from payment fraud incurred by payment card issuers, retailers and acquirers, tripled in the decade to 2020, to $32.39billion, and are forecast to total $40.62billion by 2027.

“We are always in a pitched battle between fraudsters and security providers,” Mitchell says. “We’ve been working on a number of things, particularly with EMVCo, the card payment industry body, to develop a new technology, which is known by a couple of names, but let’s call it ‘secure remote commerce’, a form of broad tokenisation.

“We also have our own proprietary method, card-on-file tokenisation, and we support m-pay wallets, where card data is kept securely, behind several firewalls, so that at least when someone is transacting at the point of sale they’re not actually using their real card number. There’s a cryptography layer behind a cryptography layer, behind a cryptography layer.

“That’s going to be very important, because fraudsters are getting more sophisticated. Quantum computing is coming, which means they will be able to mine for cryptograms much quicker, so we need to get ahead of the game. But keeping everything behind several layers of firewall is probably a wise thing to do in future and we’re definitely on that.”

With consumer trends moving faster than ever, an inflationary squeeze, and tough competition among retailers, it must be comforting to know that at least your payments provider is on your side.

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NEW WORLD ORDER: PAYMENTS POWERING CHANGE

Small world,

BIG possibilities Payments are driving never-before-seen levels of global innovation and connectivity, say Vitesse PSP’s Phillip McGriskin and Mauro Di Buono The global insurance market stands at a pivotal point as digitisation increasingly hurtles an industry dating back 600-plus years into previously uncharted waters.

Opportunities abound as financial technology specialists use the building blocks of open banking regulations to offer their insurance company clients new solutions such as embedded finance products and ‘real-time’ parametric cover.

But underpinning all of this is the need for ease of payments – the very ethos of London-based Vitesse PSP, the global payments, liquidity and treasury management platform which is at the vanguard of the charge to change.

Vitesse was founded in 2014 by Phillip McGriskin and Paul Townsend, who had previously co-founded collection payments provider Envoy Services which, itself, was snapped up by payments giant Worldpay in 2011. Since then Vitesse has amassed some impressive statistics.

Operating in 172 countries or territories, it annually processes payments totalling £5billion. As well as counting many established blue chip insurers among

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its clients, it provides its services – which include payroll solutions – to over 70 per cent of companies in the London market.

And, in February, the fintech announced that it had secured $26m in Series B funding to support and accelerate its growth in Europe and the US, as part of its vision of becoming the payment partner of choice for the insurance industry.

The size of that prize is vividly demonstrated by the fact that, globally, more than $4trillion of claims are settled annually.

Announcing the Series B funding, which was led by venture capital firm Prime Ventures, supported by Octopus Ventures and Hannover Digital Investors, Vitesse CEO McGriskin said: “The sector is only now adapting to more digitised ways of working, demonstrating an opportunity for Vitesse to support those looking for more integrated and efficient ways of managing liquidity while simultaneously achieving greater capital efficiency.

“In just over a year, we have increased the payments value processed by over 100 per cent and the client funds under management by 127 per cent, secured

several significant new contracts and now, with the support of our new backers, we have even greater ambitions.”

So, what have been the drivers for digitisation of the payments industry, including, increasingly, in insurance, and what does the future hold?

Here, McGriskin and Mauro Di Buono, who is responsible for relationship management and business development for Vitesse’s corporate division, give their views.

THE PAYTECH MAGAZINE: Why has the payments industry been a catalyst for finance innovation?

MAURO DI BUONO: From a B2B perspective, I think the fact that organisations want to do more business ffnews.com

From a consumer perspective, we also saw a rapid acceleration of digital trends, in the last 12-to-24 months.

Consumers had little choice but to embrace e-commerce as social distancing measures and lockdowns were limiting access to physical stores, so that has inevitably affected spending.

And regulation has also played a role, when you think of open banking and the adoption of the revised payment services directive (PSD2), which is making big waves in the UK and Europe, and, to some extent, also in Latin America.

That has pushed the fintech and banking industry to try to deliver better and faster ways to make payments and create more financial inclusion.

PHILLIP MCGRISKIN: Digitisation is pulling the changes through, but the big underlying ground shift making them possible was when technology providers were allowed to start playing in financial services, around PSD2.

The payment services directive and the e-money regulations, I think, were the biggest enablers of all the innovation that’s come through, because they’ve enabled businesses that are not banks, to just focus on technology and payments-as-a-service, which means that they can approach the problem in an entirely different, free-thinking way.

Fintech players are the ones that have driven the change, and in my very humble opinion, it was a change in regulation that has enabled fintechs into the market.

World of difference: Payments have transformed how finance is done round the globe

globally, and also embracing what we have seen with remote working and a global workforce, has driven organisations to want to access different markets and jurisdictions. They didn’t really have that, historically, but it’s been accelerated in the past couple of years.

At the same time, organisations want a seamless payments experience, regardless of the country they are operating in or where their employees are based. ffnews.com

TPM: Have the expectations of businesses and consumers around payments been permanently changed by the impact of the COVID-19 pandemic?

MDB: The demand for instantaneous results goes beyond expectations of products or services, it also applies to how customers expect their payments to be handled.

Everyone wants to make a payment and the money arrive at its destination right now, and everybody wants to receive a payment as soon as possible.

So today’s customers have expectations for, let’s say, a smooth payment process, and therefore trying to create a more frictionless payment environment for your customer has become the key to making them happy.

They don’t want things to be complicated, they don’t want to jump through hoops in order to make a payment or access different systems; they want to do that as seamlessly as possible.

On the other side, it’s also important – and Vitesse is doing this – to adopt what I call a geolocal strategy, where you’re able to offer payment solutions in different markets or countries, based on what the requirements are in specific places. I think that is what business customers are demanding, from a payment perspective.

TPM: What are the biggest hurdles facing businesses and what solutions is Vitesse using to overcome them?

MDB: Businesses are still recovering from the pandemic to a certain extent and there are other topics, such as environmental, social and governance (ESG), and sustainability. But one theme coming through increasingly, recently, is access to the right talent and people within businesses.

Digitisation is what’s pulling the changes through, but the big underlying ground shift to make these changes possible was when technology providers were allowed to start playing in financial services, around PSD2 Phillip McGriskin, Vitesse

Organisations need to start to look outside their borders to access the best resources to grow. Most of the time, those individuals sit outside the country where they operate, and they need to ensure they can smoothly hire and pay them.

So having, for example, access to a network of local domestic payment rails, such as the one Vitesse has, for paying them, is a huge advantage to enable them to grow their business globally.

And also, at the same time, ensure they pay them and any vendors in compliance within the local regulation and currency requirements.

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NEW WORLD ORDER: PAYMENTS POWERING CHANGE PM: We’re a Financial Conduct Authority (FCA)-regulated business so we’ve been through the wringer in terms of making sure our processes, people, approaches, etc, are all gold standard.

By using the banks and our FCA regulation, plus our global banking network, we’re able to provide our customers with a very flexible solution, which still gives them the strength of the banks but with a much more configurable treasury platform, to enable them to make payments globally, in the most efficient way possible, and not just limited to what the banks are doing but also involving things like Visa, Mastercard and other e-wallets, to give our customers and their customers absolute choice around how the money moves. It’s about using a layer of technology and regulation, and treasury capability, on top of the big banks’ balance sheets, to make a much more effective payment service for our customers.

TPM: If we look at salaried employees and gig economy workers, as well, what is Vitesse doing to make this new payroll system work for them?

MDB: Companies are trying to innovate in that space. By innovate, I mean that employees are demanding alternative ways of getting paid, which can be real-time payments, or pay-to-card, or on-demand wage, and treasurers need to find the right tools to deliver on these expectations and meet those needs, to be competitive in the market and, above all, retain those employees.

For those employees, it means they are sure to receive their salary on time and the full amount, or they can access their salary whenever they want, which has become a more and more sought-after way of receiving pay. In that way, they can better plan their finances. They know they have flexibility around the way they get paid, and they can make more informed decisions. It’s all about making the employee experience the best possible, so that firms can retain their best talent.

TPM: Open banking is the glue that has allowed technology companies to shake up the financial sector. How is Vitesse taking advantage of options like embedded finance to drive innovation, including in the insurance sector?

PM: As we see more of these embedded finance technologies

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come through, Vitesse is using its payment platform, and its regulation, to help develop those solutions, giving some of the more legacy verticals payments and treasury access to these new-style channels.

We’ve got incredible technologies coming out. Anansi is a business that’s working on a parametric cover – cover that pays out automatically, based on a predefined event.

Anansi’s use case is around the fact that lots of people are sending parcels all around the world, using Shopify, Parcelforce, etc, so, to make this easier, they can just click a box when they buy their postage and the price of the insurance is related to the value of the parcel, and where they are sending it to in the world.

Then the whole thing, after that, is automated. They know exactly where the parcel is, because it’s with a courier service. If the parcel is delayed, or if it gets too hot or too cold, or is broken in transit, the courier reports that as part of its standard logistics processes.

And that reporting is what businesses like Anansi take back, so that they know when a claim has happened, and they can make the payment back to the customer in a seamless fashion.

Embedded finance has the flexibility to be applied to any company or industry with a transactional element to it Mauro Di Buono, Vitesse

It’s a great experience for a customer to be able to pay, say £1, and know their parcel’s going to get there and, if it isn’t, somebody will automatically send the £15 or £20 they’ve lost back to them. We’ll see a lot more of that coming through on all sorts of different finance-related products.

MDB: Embedded finance has the flexibility to be applied to any company or industry with a transactional element to it. What’s brilliant about it is that financial and non-financial organisations can work together and offer consumers a bundled service, as a one-stop-shop for their spending.

Obviously, you can apply this to different industries. Like, let’s say I want to buy a big purchase on Amazon, but I don’t want to pay for it up front, I want to apply for a loan and have the ability to do that through the Amazon platform as well.

But say the purchase is from another country and I need to pay for it in a different currency. Having a company like Vitesse embedded into the process could deliver the seamless payment experience and do everything through one system, rather than three separate ones. That’s just an idea, but I think the possibilities are endless for embedded finance.

TPM: And, finally, continuing on the theme of innovations, what can you tell us about Vitesse’s partnership with Mastercard?

PM: Part of Vitesse’s aim is to provide our customers with as much payment choice and capability as possible.

Mastercard is a truly global brand, and it’s got many billions of cards that are able to receive funds across the Mastercard network, through the Mastercard Send service, so it’s logical that our global insurance customers offer Mastercard Send to their customers as a way of being paid instantly when an insurance claim occurs.

This is one of the multiple payment choices we’ve put out to our customers, but we are working very closely with Mastercard on making sure its Mastercard Send service is optimised for the insurance industry. And by that I mean it isn’t just a case of making a payment from a pot of funds that somebody has lying around somewhere; in insurance the funds need to be in a secure environment, they need to be held in a CASS (Client Assets and Money)-type structure, in accordance with requirements of the industry from the FCA and other regulatory bodies.

Vitesse, being a FCA-regulated business, is able to hold those funds on behalf of, and with the agents of, the insurers, to make these payments out within the right regulatory framework and keep everybody in line with global rules and regulations.

Mastercard already had a Send product, and what we’ve been doing with them is really helping them to optimise it, and then get it into a platform state that’s deliverable to the insurance industry in the most efficient way possible. ffnews.com

PAYTECH FOCUS: SOUTH AMERICA Fancy footwork: Brazil's payments innovations are as dazzling as its culture

Riotous colour, vibrant music, sensuous dance and a unique, restless energy, Brazil’s get-up-and-go is filtering through into how it does payments, says PagBrasil’s Ralf Germer Brazil has taught the world a thing or two about joie de vivre – from its famous carnivals to fluent and flowing football. And, when it comes to moving money with speed and versatility, it’s demonstrating the same flair and flexibility in payments.

Thanks to the growth of fintech companies and government-led initiatives, plus a favourable regulatory environment, digital payments have taken off in Brazil, boosting financial inclusion across a population of more than 200 million and achieving a level of ease in business-to-business (B2B) transactions, in particular that the rest of the world would dearly love to emulate. Such positive trends were well-established before COVID-19 hit, but the pandemic sent digitisation into overdrive, and, as a result, the vast majority of Brazilians now have access to cutting-edge financial services.

PagBrasil, a fintech that focusses on payments, has been a key player in this transformation. It has helped to create a strong online payment infrastructure for the Brazilian market through a range of products that support both multinational

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e-commerce businesses and the everyday needs of consumers.

One of the main catalysts has been the introduction of Brazil’s unique Pix payment system, and, as it approaches two years since launch, PagBrasil’s CEO and co-founder, Ralf Germer, reflects on its impact so far, as well as other developments.

Although German by birth, Germer is well-placed to describe both the Brazilian national character and the country’s commitment to e-commerce and digital payments. He grew up in Sao Paulo and has wide international experience. Around 10 years ago, he spotted a weakness in Brazil’s payment infrastructure that was also an opportunity.

“I saw a payments obstacle that we needed to overcome,” says Germer, “because Brazilians wanted to pay with domestic methods that don’t exist outside of Brazil – even credit cards such as Visa and Mastercard were not enabled for payments with foreign card acquirers.”

PETRI DISH OF CHANGE Over the decade since, Brazil’s payment rails have come a long way, and Germer says it is now a payments leader in

Latin America, with a thriving e-commerce industry and a growing number of options when it comes to transacting. And the country’s unique characteristics have contributed to the speed of its progress, compared to elsewhere.

“Demographics and culture have contributed to this change,” he says. “A large part of the population has enough income to consume high volumes. We’re talking about at least 40-to-50 million inhabitants with purchasing power that’s equivalent to Western Europe. Brazil is also a very dynamic country, with a young population that is receptive to new technologies and e-commerce products and services.”

Naturally, e-commerce cannot succeed without efficient online payments, which is why fintech innovation and government sponsorship have been vital in paving the way for Brazil’s digital economy. Germer says that the long-term plan is for invisible payments, where everything happens seamlessly in the background, but e-commerce transactions have some way to go before this is achieved.

“However, change is on the way,” he adds.

“Fintechs like PagBrasil are optimising the payment process, improving consumer ffnews.com

experience and choice in small but important steps. The Brazilian market is quite different from others, it’s very diverse and we are developing lots of important alternative payment methods such as Pix.” Pix is a real-time payment system that was launched at the end of 2020 by the Central Bank of Brazil, and it’s been enthusiastically adopted. In fact, the growth rate is one of the fastest for any instant payment system.

“In the last quarter of 2021, Pix overtook other transactions in Brazil,” says Germer.

“And not only e-commerce business, but all other transaction types, like credit cards and debit cards. Pix payments are now number one in Brazil, and about 40 per cent are B2B transactions, so it’s succeeding in the business sector as well as with individuals.”

The key advantages of Pix are around-the-clock availability, transaction speeds of less than 10 seconds, no fees for personal users, convenience and security.

PagBrasil has integrated it into its platform, which also includes payment methods such as Boleto Flash, PagBrasil’s solution for boleto vouchers – a popular local payment method.

“Optimising payment journeys is crucial,” says Germer, “particularly in a complex and diverse market like ours.

Consumers can drop out at plenty of points when making a purchase, but most people exit when the payment has to be made, often because their preferred payment method isn’t offered or the system isn’t working. For an e-commerce company, this is very expensive.”

Ensuring payments acceptance is a challenge, says Germer. “In Brazil, even with credit cards, it’s a complex picture.

You have local methods such as Elo and Hipercard, not just Visa, Mastercard, Amex and other familiar names. And then you have instalment payments, which are financed by the merchant.”

Merchant-financed payments involve technology and functionality that’s different from other countries, and if a payment service provider or a bank wants to serve Brazil, it needs to be compatible, which is why many international companies struggle to access the Brazilian market.

This is great news for Pix, of course, when it comes to competitive advantage, and Germer says there is plenty of potential for it to evolve to meet new needs and preferences that are reflective of the diversity of its Brazilian marketplace – a key ffnews.com

reason why PagBrasil doesn’t need to focus on anything beyond that. “We decided many years ago to become a specialist,” he says, “because there is so much opportunity at home, in Latin America’s biggest market.”

Germer says it’s very important for merchants to be flexible and inclusive, and that when they switch from a semi-optimised payment solution to a PagBrasil one that enables them to meet these expectations, their conversion rate can go up significantly.

“Sometimes, the increase is as much as 30 per cent,” he says, “because the payments process has been optimised. We offer a wide choice of payment methods and can tailor solutions to a merchant’s requirements. Omnichannel payments are important because Brazilian consumers are discriminating; they know which companies provide the best customer service.

“For example, if you buy something in an online store and then want to return it to a physical store for a refund, you need to identify the initial payment that was made in the online store. There is also a convergence trend in Brazil between the physical and online worlds. Companies that were once only physical are blending with the digital world, and vice versa.”

Demographics and culture have contributed to change...

Brazil is a very dynamic country, with a young population that is receptive to new technologies and e-commerce products and services As with any evolving payments infrastructure, and now especially with the growth of mobile commerce, fraud is an ever-present problem. Digital payments in Brazil are no exception and face added risks.

“Like every country, we have fraud issues,” says Germer, “but ours are more acute. Brazil has one of the highest fraud levels in the world. One reason for this is that Brazilian consumer protection legislation makes it very easy for consumers to do chargebacks. With online transactions, you don’t have to argue, you don’t have to

prove, you just say ‘I didn’t receive the goods’. The consumer almost always wins.”

Fraud prevention is taken very seriously in Brazil, particularly credit card fraud.

Germer says that countermeasures take account of the peculiarities of the Brazilian market. For instance, Brazilian fiscal numbers need to be checked with each transaction, to reveal if there is any history of fraud or other irregularities.

“It’s important to be aware of these checks when working in the Brazilian market,” says Germer. “When we’ve tested the fraud prevention systems of providers, we always found that the Brazilian ones deliver better results. We use a solution called PagShield, which combines our own technology with that of a Brazilian fraud prevention specialist.”

RESTLESS FOR INNOVATION Looking to the future, Germer expects recurring payments to grow in popularity, following the success of the subscription model in other parts of the world.

“Some companies, including PagBrasil, are now working on subscription solutions,” says Germer, “and because there is incredible potential in Brazil, I believe we’ll see a boom before long. Brazilians are huge fans of Netflix and similar services that are ideal for subscriptions.”

When it comes to physical products, Germer cites the example of a subscription solution offered by one of PagBrasil’s customers, a coffee company that sells high-quality products over the internet.

Because the business is built on repeat orders, it was a prime candidate for recurring payments, but only if customers had enough control over orders, he explains.

“We created a subscription solution that allows customers to change orders easily,” says Germer. “When new coffee flavours are introduced, or customers want to experiment with the existing range, it’s simple to amend the subscription. This flexibility is an improvement on traditional subscription management systems, which are more difficult to adjust as demands change.”

Innovation is what most characterises payments in Brazil. As the economy resets after the pandemic and e-commerce continues to grow, the future for payments here seems overwhelmingly digital.

“I even did my first metaverse payment last week, albeit a test,” says Germer.

Surely a sign of things to come.

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INFRASTRUCTURE: THE NORDICS

Above and beyond

Peter Larsson of Volante Technologies and Kasper Mortensen from Nordea describe how the forward-thinking Nordics are starting to look beyond P27 – towards the next innovations and the rest of the world The mercurial Nordic region has long been recognised for financial services innovation. In 2017, six top regional banks and other financial sector players got together to from what would become a new Nordic payments platform called Project 27 (P27) – the world’s first real-time, cross-border payment system in multiple currencies.

It set out to connect the close-knit countries of Denmark, Sweden, Finland and Norway to give the region’s 27 million inhabitants and its businesses a more seamless payments experience – but the spin-offs will go much further than that.

With the first stage of implementation now imminent in Denmark, Finland and Sweden, the Nordic Payments Council (NPC) is looking beyond P27 going live, to how its members can ‘innovate on top’. The bar has been raised for creating an even better user experience, more commercial opportunities for local banks and, ultimately, interconnectivity with Europe and the rest of the globe.

We asked Peter Larsson, business development director of Swedish

payments-as-a-service provider Volante Technologies and member of the NPC and European Payments Council (EPC), and Kasper Mortensen from Nordic bank Nordea and a founding member of the P27 advisory board, what happens next.

THE PAYTECH MAGAZINE: You’re now very close to sending card payments over the P27 network, but what are the opportunities for future innovation?

PETER LARSSON: Bill payments represent a real game changer for the industry. In Sweden, we’re also aiming to move batch services from existing banks into P27, for invoicing, pensions, salaries, consumer account-to-account transfers, and for merchants and corporates too.

Confirmation-of-payee will secure payments by ensuring, before we make them, that the beneficiary represents an actual person or company, to reduce fraud.

In the Nordics, we do a lot of business between our countries. We live in Malmö, in Sweden, and work in Copenhagen, for instance, and Norwegians, Swedes and Danes invest in properties in each others’

countries. Where we are commuting and sharing investments, we need to do those transfers cheaply and simply. We don’t need to open extra bank accounts in the country we choose to live in; it should be very simple to pay for everything.

KASPER MORTENSEN: Even before P27 goes live, there are many innovations going on in the market.

There are bill payments, on the back of Request to Pay (RTP), and many other big opportunities for us, as a Nordic bank, to improve our product offering and commercialise on top of the infrastructure.

For many years, we have not really developed many advanced payment products, and, if we take MobilePay and Swish out of the equation, there is a lot that can be done differently.

Just the start: Corporates and international banks could all benefit from what P27 represents

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INFRASTRUCTURE: THE NORDICS While bill payments will be one of the first commercial products that will be built on top of P27, I am completely convinced that all banks are already looking at opportunities to enhance or add to their existing customer value propositions.

PL: There is growing interest in how corporates can benefit from this, with opportunities for any bank to offer services around reconciliation, so that you get richer information in the payments. Using that reconciliation, corporates can forecast much better because they get payment advice or status updates. Once I select who I have to pay, the bank can update the corporate, saying ‘Peter Larsson has accepted a payment and he will pay on Saturday or early Monday’. That is good for forecasting and allows a corporate or a merchant to make the most use of their liquidity, going forward.

TPM: What are the developmental imperatives of P27 for the Nordic region?

KM: One of the most critical objectives surrounds the fact Nordic banks have been sitting on a tremendously big legacy infrastructure, built over many years, in Norway, Sweden, Denmark and Finland.

One of P27’s core objectives is to modernise, to ensure we can build new components on top of product offerings and compete with the ever-changing competitive landscape, which is not just incumbent banks anymore. There is also competition from fintechs and new kinds of businesses that are bringing new models to market.

It has been extremely costly to run and do maintenance on a significant number of legacy infrastructures, for a long time.

For us, as a Nordic bank, to stay competitive and ensure we can offer our customers the best solutions, we need to modernise and take costs down. In fact, cost is a major topic for a lot of banks.

Interoperability is also important, so that our infrastructures can communicate with one another and be able to bridge not only the Nordic area but the entire world, via P27.

PL: The business case is not unique to P27, because we have seen initiatives like the United Payments Interface (UPI) in India, PayNet in Malaysia, and Pay.UK in the UK. But I get a lot of interest from international banks that are monitoring and viewing how we are succeeding on this. It’s a market for them, of course, but it’s also a

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blueprint for making European payments more efficient. Immediate payments were introduced very early in Sweden and also in the UK, but, from a European perspective, we are fragmented in many ways. P27 could act as a payments integration blueprint for wider Europe.

TPM: So, how do you see P27 dovetailing with the wider world for payments, and how does the universal adoption of ISO 20022 play into that?

KM: All the Nordic banks behind P27 are very aware that bringing more interoperability, as well as making life easier for us and enabling more opportunities for our customers, will lower the barriers to entry for our European and international competitors. Today, if you are an international bank that wants to do core business in the Nordic area, if you want to be a clearing partner, there is significant investment in not only running and maintaining your operation, but you also need to do it in four different countries. That will be harmonised.

So, it’s a major change in terms of how we deal with competition. We have to ensure we have value propositions that customers understand and welcome.

PL: Getting an understanding of ISO 20022, and the interoperability cases, not only among our tier one banks but smaller players too, is important so that they can create payments and offer them into the European market more flexibly.

It is complex to get to that level, because many are indirect today, but with harmonisation and the ISO development, it’s something some of our banks can leverage, and are investing in now to reach Europe and even the US. The great thing with the NPC is that we bring four different countries, with their different rule books, into one. That’s massive, and also mirrors European Payments Council requirements. We use different account structures and have some additional fields and attributes, but the rest is 99 per cent

European based. So, with ISO 20022 becoming more dominant and harmonising payments, taking a step into the European region is not that big, following the same trends as the rest of the world.

TPM: What steps will Nordic players, of any size, need to take in order to prepare for this wider compatibility?

PL: We’re used to building solutions in-house and learning from those lessons. Given the commoditisation of payments, outsourcing infrastructure is one way of reducing the risk, or learning from the experiences of others out there, too. Our main focus is lowering the threshold to make it simpler for banks to take that step into other markets.

KM: By harmonising and ensuring we have one infrastructure, with the same methodology, P27 members create new products on top to commercialise, and only have to ‘think Nordic’. That is completely different to how we’ve built products for the last 25 years, because almost all of them now relate to each and every country.

That will definitely be a game changer. It will also take the operational cost down, giving organisations other than banks access to the infrastructure, changing the competitive landscape.

We’ve created an infrastructure, in P27, which is modern and flexible enough to enable organisations to consume new standards like ISO 20022, giving them a bigger tool to define their own products and services and tailor them for bigger audiences or new markets.

I think it is extremely valuable for us, as a bank, to first of all understand whether we are a big creditor bank, or would like to increase our consumer flow.

We now need to agree, as a complete Nordic industry, and negotiate on new terms for some of the Nordic products, where some are seen as sector products, and some will, of course, be owned and developed by each and every bank, or any other competitor that’s out there.

All the Nordic banks behind P27 are very aware that bringing more interoperability, as well as making life easier for us and enabling more opportunities for our customers, will lower the barriers to entry for our European and international competitors

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INFRASTRUCTURE: IDENTITY & VERIFICATION Challenger banks have changed the face of financial services over the past decade – renowned for their unencumbered ability to run with innovation while their incumbent counterparts have been weighed down by legacy systems and assiduous observance of risk and compliance requirements.

It was, perhaps, inevitable, though, that the former would trip up. And several have done exactly that. The Financial Crime Controls At Challenger Banks report, issued by the UK’s Financial Conduct Authority (FCA) in April, gave neobanks a stern resume of what they must now do to

bring themselves in line, although it refused to single out challengers by name.

The findings largely centre on the inefficiency of transaction monitoring and due diligence – increasingly hot topics in the burgeoning digital transaction space where the challengers have helped drive the dramatic shift to ‘frictionless’ online payments.

It’s not all bad news, according to Edward Vaughan, head of banking for specialist data analysis regtech TruNarrative. And that’s principally because, by their nature, challenger banks are nimble enough to embed the changes they’ve been told to make, and

Joined-up thinking

still maintain their impressive stride.

The report’s specific findings included the fact some challengers were not consistently applying enhanced due diligence (EDD) for assessing the risks posed by customers at onboarding and throughout the transaction life cycle, or documenting it as a formal procedure to apply in higher risk circumstances, such as managing politically exposed persons (PEPs).

The FCA also discovered instances of ineffective transaction monitoring alert management – for example, using inconsistent or inadequate rationales for discounting alerts – as well as a

The acquisition of TruNarrative by global risk intelligence firm LexisNexis Risk Solutions has created a new force to help ensure tackling financial crime doesn’t come at the expense of payments innovation, says Edward Vaughan

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substantial increase in the volume of suspicious activity reports (SARs) logged by challenger banks as they exited customer relationships for financial crime reasons. This again called into question the adequacy of their customer and enhanced due diligence checks when onboarding and managing the ongoing risk of their customers, the FCA said.

Crucially, some of the challengers’ financial crime change programmes were not overseen adequately, nor were they able to keep pace with their fast-moving business models.

The report’s authors concluded that ‘more needs to be done by the challenger banks sector as a whole in light of the areas of improvement we identified. The weaknesses… create an environment for more significant risks of financial crime to occur both when customers are onboarded and throughout the customer lifecycle’.

The current sanctions regime against Russia is only increasing the focus on transaction security, including know your customer (KYC), know your business (KYB) and anti-money laundering (AML) checks.

“The findings were not particularly surprising,” says Vaughan. “The issue of applying EDD, in particular, serves as a good reminder to banks that swift onboarding and ongoing monitoring shouldn’t come at the expense of robust risk assessment, and it doesn’t have to. Like the FCA, we encourage challenger banks to review and enhance their firm’s financial crime frameworks with a focus on ensuring customer risk assessments and EDD measures adapt to the heightened risk of sanctions evasion, in particular. Applying a risk-based approach to AML controls and continuously making sure financial crime controls remain fit for purpose should be a top priority for all banks.”

Sophisticated tools developed by the newly-merged companies, like their new LexisNexis® RiskNarrative™ platform, can help firms get their systems up-to-speed in a relatively painless way, with its plug-and-play ability to quickly update data sources, as well as changing rules as a result of a development in risk appetite or regulation changes.

On the plus side, the FCA report did find evidence of good practice, in terms of innovative use of tech, indicating that ‘firms don’t need to sacrifice speed for

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assurance’ and can actually harness the things they already do best to overcome the regulatory hurdles.

“The challengers have been incredibly important, over the past 10 years, in changing the ecosystem of financial services and how products and services are now delivered through digital channels and in real time to customers,” says Vaughan. “They have fundamentally altered the landscape and challenged the status quo of the traditional banks.

“And, while the FCA has found weaknesses in some challenger banks’ financial crime controls, it’s my belief and experience that the same challenges extend across traditional banks, too.

“The advantage the challenger banks have is that, following these findings, they are probably better positioned to pivot and start using platform technology like ours, which will help overcome them, because they’re more agile in adapting to change. So, it could it be easier for them to close these gaps and weaknesses than it is for traditional banks that move at a far slower pace due to having far more governance and control processes.

Applying a risk-based approach to AML controls and continuously making sure financial crime controls remain fit for purpose should be a top priority for all banks going forward in 2022 “For example, we can help them dynamically risk assess their customers, from a transactional monitoring perspective, and instigate things like behavioural profiling and standard deviations across peer groups, to reduce inefficient processes and improve the management of false positives around transactional monitoring alerts.”

He continues: “And this is where we see the opportunity for challenger banks, in particular, when they’re looking at remediation plans for these weaknesses. In some cases, they’ve built their own controls around preventing and detecting financial crime, which are very resource intensive

and, because they don’t always get it right, that’s leading to some of these findings.

“They need to concentrate on disrupting and delivering fantastic services, while back-end compliance and financial crime management is best served by complementary technology platforms like ours.”

STRENGTH IN NUMBERS It was recognising this need and opportunity that led UK-based fraud prevention solutions provider LexisNexis Risk Solutions to acquire TruNarrative last August, and add the fintech’s Cloud-based data orchestration for detecting and preventing financial crime to its suite of services.

Now integrated into LexisNexis Risk Solutions’ Business Services offering, at the time of the acquisition the bigger player said this would enable it to help a variety of businesses select ready-made financial crime prevention components.

TruNarrative enables organisations to manage the entire financial crime life cycle within a unified platform that allows for automated onboarding, dynamic risk-scoring, real-time financial crime decisioning and transaction monitoring; all with no-code configuration and rapid integration through a single API for holistic oversight of customer risk. This complements LexisNexis Risk Solutions’ existing financial crime management offering, which helps companies keep pace with regulation, achieve compliance and mitigate their risk of fines and reputational damage with its fraud and identity authentication solutions.

The new alliance marks the latest step in its strategy of expanding data sets for global financial crime compliance, coupled with technology to ‘transform the ways in which financial crime compliance is achieved’. It follows its merger, in 2021, with transaction compliance software specialist Accuity, and the three combined now represent one of the largest worldwide providers of risk and compliance solutions.

Among them, LexisNexis Risk Solutions’ new Financial Crime Digital Intelligence offering, enabling compliance teams to keep pace with, and mitigate, escalating sanctions risks associated with accelerated digital transaction adoption.

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INFRASTRUCTURE: IDENTITY & VERIFICATION The combined portfolio has applications across insurance, financial services, healthcare and government, and, according to Vaughan, it now means compliance needn’t hamper the innovations challengers seek to bring to user experience, nor impede a quick and easy application process, followed by fast and convenient access to products and services without compromising on security and protection.

The RiskNarrative™ solution, for example, offers a dynamic risk rating as part of an underlying, integrated, risk management workflow, allowing firms to assess risk at every stage of the customer journey.

Changes to the risk rating are triggered by customer actions, with authentication stepped up only where required. So, with fewer false positives, genuine customers get the user journey they deserve and are protected every step of the way. From the provider’s point of view, it brings all areas of risk together in one workflow – including onboarding, ongoing screening and transaction monitoring – instead of myriad technology siloes, and without the need to individually interrogate different tools and amalgamate results across identity, fraud and compliance.

It is adaptable too. “The market isn’t static and neither is an organisation,” says Vaughan. “They need a dynamic risk framework that can grow with them and adapt quickly to changes in business model, risk policy and regulation, as well as adapting to shifting criminal methodologies. They also need to be able to rapidly integrate the very latest tools and capabilities, to manage risk most effectively and meet their evolving business needs – a risk framework that is fit for purpose today and scalable and adaptable for the future.”

The RiskNarrative platform is also solution-agnostic, he explains, combining TruNarrative/LexisNexis Risk Solutions’ own data sources with those of third parties.

FAST-PACED FINANCIAL CRIME Russian sanctions and recent exposés, such as the Pandora and Panama Papers, have highlighted the urgency of KYB and KYC checks on ultimate beneficial owners of assets to prevent criminal activity and tax avoidance. But Merchant Savvy, in 2020, estimated the global size of financial crime losses at $32.39billion, triple that of 2011.

So, what other trends are TruNarrative and LexisNexis Risk Solutions witnessing?

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“Fraud for financial gain and impersonation fraud were always the predominant types we saw within the industry,” says Vaughan. “What we’ve seen emerge more recently, is more advanced ways of committing financial crime, things involving authorised push payments (APPs), which in many ways is an unintended consequence of trying to make the payments process as seamless as possible for customers.

These often involve phishing, where someone might impersonate someone else, like a family member or their bank, and persuade them to authorise a payment using their own credentials, and it is very difficult to detect.”

STAYING IN CONTROL These crimes are often vanguards for ones with more sinister intent, says Vaughan.

“When we talk about financial crime prevention at LexisNexis Risk Solutions, we see fraud as a predicate offence to money laundering and the most serious types of financial crime.

So, the ability of organisations, be they challenger banks or established banks, but more so those digital players, to detect that fraud, doesn't just rely upon one thing.

The challengers have fundamentally altered the landscape and challenged the status quo of the traditional banks, and they have been extremely successful in doing that “We talk about the control environment, the strategy for detecting fraud that enables an organisation to look at multiple different vectors around how its customers are interacting in that digital channel.

As well as looking at the type, time of day and value of a payment, and where it’s going, a range of different vectors, applied together, can identify something that’s out of the ordinary or abnormal.”

And having the sophisticated data and systems to sift out the normal from the abnormal, is paramount, to avoid wasted time for banks and unnecessary interruptions for customers.

“It’s important to understand what’s

normal, because there’s a far larger population of normal things occurring.

Then abnormal alerts target the outliers.

But customer behaviour changes and, therefore, all the capability that sits within the technology, such as transactional monitoring, needs to be able to learn too.

“What we’ve also seen is a huge rise in money mules – individuals who could themselves be vulnerable and are being exploited to launder funds through their account for a third party, using a range of financial instruments, from cash and traditional fiat currencies, to financial instruments like Bitcoin.”

The challenge for banks in identifying mules is that they don’t always pop up on the radar, applying for a new account.

Often, they are existing customers.

“The FCA findings could suggest challenger banks are more susceptible to mules, because of the way they deliver their services,” says Vaughan.

“This means their control environments need to be far more digitally focussed and consider a range of factors in risk assessing their customers. This is where transactional and behaviour monitoring becomes really important – the ability to look at the patterns of behaviour of a customer who sits in a certain segment or peer group, against others in that same group.

“It’s also about asking customers the right questions and validating what they’re saying by monitoring their behaviour against what they have disclosed. For example, thinking about mules, if someone says they work in a factory earning £15,000 per year, but their transactional volume far exceeds that, risk profiling against the segment in which they sit will show that they represent a complete exception.

“Those types of more sophisticated transactional monitoring capabilities are necessary to deliver the best chance of the right outcomes, because traditional transaction monitoring just exists on binary rules, and leads to huge amounts of false positives.

“It’s got to get more and more sophisticated to keep up with this challenge and enable straight-through processing by eradicating those false positives.”

“There is no one silver bullet to solve this problem,” adds Vaughan, “but technology and systems like ours, which create the right control environment, can greatly assist organisations in preventing financial crime.” ffnews.com

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INFRASTRUCTURE: INTEROPERABILITY Innovation in the payments space is as dynamic as it has ever been.

New challenges to the old ways of doing things have led to a boom in fresh payment options, prompting major changes in what users expect from their providers.

For Bottomline and the UK’s Payments Systems Regulator (PSR), integrating this surfeit of new functionality is a process of balancing innovation and inclusivity: how to implement great new features while maintaining interoperability.

This balancing act poses a particular challenge in an industry where players must communicate effectively all along the payment chain to deliver a positive customer experience – given that it is built on a foundational layer of ageing legacy infrastructure.

So, how do organisations pull together diverse and often divergent tech stacks to enable an innovative, dynamic set of solutions that work well for customers? And how can new entrants and established players be encouraged to play nicely together, something their individual success is increasingly dependent on?

Charles de Rougé of Bottomline Technologies and Nicole Coates of the PSR, two organisations pursuing a complementary desire to help the payments space evolve, have powerful insights around

the challenges and opportunities facing payments providers. They each represent a different piece of the payments processing jigsaw: Bottomline is a software-as-a-service provider that helps financial institutions manage modern payments, while PSR, an independent subsidiary of the Financial Conduct Authority, with competition and regulatory powers, helps decide how those payments flow best.

In Bottomline’s report The Future Of Competitive Advantage In Payments Banking, more than 300 banks and FIs globally identified the following as the main issues with their current payments infrastructure: legacy systems (47 per cent), lack of operational efficiency (42 per cent), lack of interoperability between internal systems (40 per cent) and scalability (40 per cent). These results indicate why this is such a sensitive topic for businesses everywhere.

Additionally, 55 per cent said that adopting new payment rails was their top priority in the next 12 months, with 64 per cent making digital transformation their biggest focus, despite 36 per cent being sceptical or highly sceptical of their current strategy.

For de Rougé, the first step to solving these pain points is to ensure interoperability.

“We’ve new technology, new regulation and new payment rails coming to the

market. The ability to communicate from one system to another, the scalability, the ability to onboard more volumes… these are strategically critical for a bank. Today, that makes the difference between a successful banking business or not,” he says.

This commitment to dynamic interoperability is reflected in the PSR mission statement: a five-year commitment to support user choice in payment selection, to properly protect consumers from harm and fraud, to promote payment competition, and to encourage industry innovation.

For Coates, achieving these aims is a matter of making sure different tech stacks can communicate with one another effectively. “There are so many different perspectives, and so many different interests – and a lot of technological problems are in fact political ones,” she explains.

“There’s a real challenge here, for the payments industry to think about how we all get better at moving forward agreements that define how we use these new infrastructures, how we use new types of architecture, to set ideas about how we can work together.”

For Coates, facilitating evolution is about fostering consensus on what to pursue, something she describes as the ‘core philosophies of payments’.

Bottomline’s Charles de Rougé and Nicole Coates from PSR discuss how mutual support is the best way for providers to crack the payments interoperability challenge once and for all

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STRONGER TOGETHER No market participant functions in a vacuum, and de Rougé believes that some of the most successful tech adoptions have anchored themselves on a consensus-based approach. A four-step path to implementation (with a focus on industry harmonisation) is a strategy he believes serves businesses well.

“I use these four concepts: connect, control, comply, and then compete,” he says.

“By this method, new infrastructure must connect to existing payment rails and must prove itself to be firmly under control. From here, these new solutions must comply with regulator directives, after which they are finally able to enter direct competition with other market players.” He believes this represents the total package for constructing a saleable industry product.

“With the right level of operational efficiency, and fraud control and detections, you can compete without being a laggard, while being an innovator and growing your competitive advantage,” he adds.

To make this a reality, Bottomline has generally recommended a hybrid approach to its legacy-heavy clients – how they can fully leverage the best of technology, without throwing everything away.

The ability to communicate from one system to another, the scalability, the ability to onboard more volumes... are strategically critical for a bank. Today, that makes the difference between a successful banking business or not Charles de Rougé, Bottomline

This hybrid approach poses a problem, though – one company can mix and match legacy and bleeding-edge solutions within one tech stack, but how do you ensure this approach plays nicely with other companies’ systems? For Coates and PSR, an exciting new development sits on the horizon. With Pay UK, PSR is launching the National Payments Association (NPA), an initiative that seeks to encourage ffnews.com

innovation without leaving organisations behind. It’s a flexible, progressive approach.

“We don’t have to inherit all of the concepts that were decided in Bacs in 1968; there’s a chance now to consider questions like ‘can we improve reconciliation?’, ‘should there be greater degrees of information flow?’ and ‘what do purpose codes do for a business and its payment models?’,” explains Coates, who says this is organised progress, with an inclusive approach for slow adopters.

“It should allow us not just greater interoperability, but also a degree of greater flexibility, so that we should be able to get around challenges like innovation being dependent on the speed of the slowest pupil in the class. The NPA model gives people that added flexibility.”

Fraud protection is a good example of how this approach can work to the advantage of the industry. As payments get faster and often simpler, and as the infrastructure develops, ensuring the same high standards are applied to all new innovations can be a real headache.

Again, there is scope for a rules-based, but essentially hybrid, model to deliver the best solution possible. During the 2010s, for example, accounts payable fraud saw a steady rise, spurred on by faster payments and a lack of user verification.

“It added up to this huge problem,” says Coates. “So, we gave direction to some UK banks that they needed to introduce confirmation of payee back in 2019.”

This system authenticates payment recipient details against their registered names, meaning transfers are less likely to go astray when passed from one person to another. The UK is one of the world’s leading advocates of this kind of system, and it’s one that provides solid regulatory grounding that can be complemented by more detailed innovation.

The new ISO 20022 international payments messaging standard – due to be implemented later this year – ensures common best practice when handling sensitive information. And de Rougé believes it could be transformational for the market.

“ISO 20022 gives you the ability to add much more data into each payment.

That data is first a challenge for any chief operating officer, but also an opportunity to reduce fraud, have better control, make sure the reconciliation is happening better and quicker, make sure the payments are in the right direction, with the right information.”

“ISO 20022 is pretty clearly a good answer to central clearing infrastructure,” agrees Coates. “It gives us interoperability, it means that firms that have already built links to 100 switches elsewhere in the world can more easily connect to the UK’s financial infrastructure. And that’s got to be good for all of us.”

Combined with the latest tech solutions, compliance with standards like these can ensure thorough anti-fraud practice.

“New technologies, like machine learning and artificial intelligence, establish the profile of transactions, or of user behaviour, and flag anything out of the ordinary.

That will prevent the fraud and detect unintentional fraud ahead of it happening,” says de Rougé.

There are so many different perspectives, and so many different interests – and a lot of technological problems are in fact political ones Nicole Coates, PSR

“So, it is OK to stick with the old processes, as long as you also leverage machine learning and artificial intelligence to prevent fraud, and ensure you use the great innovation coming from regulations, too. If you combine those things, then you can confidently tell your clients that they’ve much less risk. I think it’s a great competitive advantage.”

Changing the ways in which people spend was never going to be a smooth path to one pre-defined construct.

Upgrading payments architecture is complex and needs a consolidated, planned and scaled approach with interoperability front and centre to any strategy. However, the industry needs to ensure that all participants move at the same time or it doesn’t work.

To best enable this ecosystem to grow, users need a system that facilitates development without leaving participants out in the cold – a set of well-defined, inclusive rules to help industry players build towards what could be the best payment ecosystem ever.

Now it is up to the regulators to ensure that this potential is fully realised.

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PAYTECH FOCUS: MIFID II The right stuff: Under MiFID II, reporting data correctly is essential

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NEW WORLD ORDER: B2B PAYMENTS

Digital

SmartStream has combined its deep knowledge of regulatory reference data and super-fast, Cloud-based, AI-driven reconciliation, to solve the investment industry’s reporting challenges. And – perhaps surprisingly – digital assets traders are clamouring for it, too, says Jethro MacDonald manually bringing together data, as The second Markets Financial That can involve up to 65 fields of Embracing digitalinisn’t just an aspiration for B2B firms – it’s an urgent commercial most were, from multiple data sources in information which must be completed as Instruments Directive (MiFID II) imperative if you wanttoto build lasting customer enable sales andactivity – information non-aligned formats, at relationships, immense scale. part of daily trading isn’t something you want bring access credit, sayconversation TreviPay’s Brandon Spear andin Digital Adam Coyle that will be used by regulators to monitor, It had been operating the field for River’s up in a dinner party for example, who is involved in a trade, years, developing sophisticated, automated with investment managers. Why and, in combination with other reports, reconciliation software to give businesses spoil a perfectly good evening? It’s perhaps flag market abuse. Too little or likely to have them reaching for the better insight into their data and improve missed information risks censure; but accuracy and processing speeds. But its Hors d’Age brandy and dabbing neither do firms want to spend time on decision to move its services to the Cloud, beads of sweat from their brows.

Four years ago, they might have been more sanguine, bullish even, about the impact of what was seen as one of the most important regulatory initiatives of the EU since the global financial crisis.

But then came two years of getting compliance systems, which were largely manually based, up to speed as the subsequent Markets in Financial Instruments Regulation (MiFIR) was embedded into European member states’ legislation.

In 2021, the first report from the European Securities and Markets Authority The devastating impact of (ESMA) the revealed howpandemic the industryhas was reshaped doing: COVID-19 badly.lives Figures showed that the number our forever. of Measures penalties imposed across Europe for by governments to try to breaching rulestoll, hadincluding quadrupled from contain its the terrible lockdowns, €1.8million 2019 to €8.4million have forcedinbehavioural changes in on2020. populations an unprecedented degree.

And theseto transgressions weren’t And that meant legions of businesses committed by small family offices, butand consumers suddenlywith had teams to pivot to doing large organisations, dedicated things digitally. handling thousands of to compliance, The evolution e-commerce, transactions.

Big towards trading venues were steeredfoul mainly byrules, a younger falling of the too. generation of While tech-savvy consumers, the huge increasesuddenly in regulatory turnedcould into aperhaps revolution, affecting action be partly explained everyone, every age.

And it’s identified a by the wayofnational authorities transformation from which thereduring will that and reported breaches to ESMA be no return as customer demands and difficult honeymoon period, research the expectations changed, same summerhave frompermanently financial services both for business-to-customer advisory firm ACA Group found(B2C) that almost transactions and, increasingly, for all firms it surveyed were still incorrectly business-to-business (B2B) too. reporting transactions.

Andones, the majority Against backdrop, two companies didn’t eventhis know it. that are working together to further shakeII Complying with the demands of MiFID up the B2B payments are digital transaction reporting space is undeniably paymentsand provider TreviPay, which of that complex; proving the integrity provides credit lines forplace businesses akin data to regulators can a real strain to buy now, pay later (BNPL)toterms, and on organisations, according transaction Digital River, an e-commerce enabler that lifecycle management (TLM) solutions provides SmartStream. a merchant of Itrecord solution provider was only too covering payments, taxes, compliance, well aware of the immense pressure fraud mitigation logistics. the directive wasand likely to put on firms ffnews.com

where it could infinitely scale resources and to make research and development of artificial intelligence (AI) and machine learning (ML) a strategic priority, put it on the front foot when the reality of MiFID II began to sink in.

SmartStream’s AI-driven, Cloud-native solution, AIR (Artificial Intelligence Reconciliations), is capable of reconciling ‘volumes of data that are unheard of in our industry; not just millions of rows, but billions of rows’, says Jethro MacDonald, product manager of AI and machine learning at the SmartStream Innovation Lab. “SmartStream AIR is a solution to the painful manual onboarding Brandon Spear, the CEO ofprocess TreviPay,of building newwith reconciliations.

We speed up which deals $6billion of transactions the whole process,”each he continues. across 27 countries year, is in “Throw no doubt AIR files and it super-charged will tell you how they thattwo the pandemic B2B come together – in seconds. Then you can payments digitisation. make decisions “It’s informed been a macro trendas fortoawhether while you want to change match rules or of not. but there’s beenthose a huge acceleration “On top last of that, useprincipally ML: if a user is this in the twowe years, driven manually matching data, we learn by the pandemic, ” says Spear.

“Fromfrom our their matches pointbehaviour, of view, it’sthen reallypropose pulled forward, to client based or that compressed, three to five years’ worth on what the ML has of digital transformation into probably the observed.

That ”means last 18 months. it’sAdam not just helping Coyle, CEOwith of Digital River, is also onboarding, butother with changes that were convinced that day-to-day too.” like sales pitches borne out oftasks, necessity, For many, using digital meeting conference calls rather than MiFID II compliance face-to-face meetings, are here to stay. requirements is of us getting on airplanes “I think the days onerous.

RTSa customer’s 22, and flying“Under hours to site to have Article 15 ofmeeting MiFID II,are gone,” he says. a one-hour firms have towant reconcile “The buyers to have an experience from that istheir veryfront-office much like the consumer systems to the experience that they’ve become regulator, ensuring accustomed to in their personal lives. there are no gapswe’re seeing this huge “That’s where or reporting errors, ” both in terms transformation in B2B, says MacDonald. of online go-to-market and online

going to unnecessary effort.

“We not only give clients the means to reconcile the data and demonstrate the accuracy of their transaction reporting processes to the regulator, but we can also tell them whether their reporting decision is correct,” explains MacDonald.

And that’s the game changer.

SmartStream achieves it by using an API to link two of its existing solutions: near-real-time reconciliations provided by AIR; and SmartStream Reference transaction completion. That’s where Data Utility (RDU), which tracks data from people like Digital River and TreviPay regulatory industry offer great and solutions thatbodies. peopleIt sensechecks what data theexperience. regulator actually can leverage for that ” requires, including validating whether a financial instrument THE WAY TO GOis traded via a trading venue andglobal is therefore – or not.

Given the pace ofreportable change, Spear SmartStream the warns firms that claims have yet toresulting digitise tool –could Transaction Reporting Reconciliation quickly find themselves becoming and Reporting Decision Controlpublished – is an uncompetitive.

Indeed, research industry “It’s certainly a reallyinexciting in 2021 byfirst.

PYMNTS and Worldpay their use of the ” says MacDonald.

Global B2B technology, Payments Playbook, has shown So,digitising that’s theB2B firms, but what about that payments data and the tradingitvenues?

They have to meet managing via enterprise resource planning animprove even higher bar. days (ERP) systems, can collections, sales outstanding (DSO) and operations.

Post-Brexit, ESMA The study showed that just increased the under data half of firms that have adopted checks automated continuity that accounts receivable (AR)venues processes trading musthad lower overall delinquency rates;reporting 62 per cent perform when reported reduced DSO; andreference 72 per cent instrument made savings onand their operational costs. quantitative data.

In addition, 87Any perirregularities cent of thosemust that had incorporated automated AR technology be accounted for and said it had produced faster processing mistakes re-reported, speeds. Anotherso 79that per ESMA cent said had canitmeet improved team efficiency, while 75 per its publishing timelines. cent thought it had better Thatprovided includes afor experience for their customers. instrument liquidity, While it’s not too late for businesses size-specific-to-instrument to make the change, Spear says they and large-in-scale should hurry up.calculations.

We not only give clients the means to reconcile the data and demonstrate the accuracy of their transaction reporting processes to the regulator, we can also tell them whether their reporting decision was correct or not

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PAYTECH FOCUS: MIFID II

Data is king: SmartStream’s reach helps clients stay on the right side of reporting rules

At present, trading venues typically check their records retrospectively, on a three-month basis, against massive ESMA data files. This highly complex exercise is costly and accompanied with a huge operational burden.

“The obligation on trading venues, from a MiFID perspective, is so much more than for any other firm,” says MacDonald.

“Importantly, the regulator reconciles their reference data and the quantitative data.

The problem here is that there are nuances between these two reports, which means some instruments are reportable on one and not on the other. You need really specialist reference data to help you with that.

“So, again, we’ve combined internally with the RDU, to feed in the reference data needed to make really important decisions, and, instead of asking the client for their reference data report, we’re taking that directly from ESMA, because it’s publicly available information. All the trading venue has to do, then, is submit its quantitative report to us, and we’ll tell them whether they have an issue or not. And that’s carried out proactively, daily.”

The new regulatory solution, Trading Venue Quantitative Reporting Outlier Reconciliation, was launched in March of this year.

By virtue of the fact that SmartStream works with 70 of the world’s top 100 banks, capital markets, buy-side firms and corporations, it has eyes across the industry and that gives its clients another major advantage when it comes to whether they are on the right side of regulations that are often hard to accurately interpret, and in a state of constant flux.

“The more data you have, the more powerful the AI,” says MacDonald. “So,

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we’re looking at how we can use AI to tell us how the data comes together across multiple entities, to see if there are any reporting differences between a firm and its peers. That’s huge for them because, while there are validation rules in place, at the moment, in regulation, that doesn’t tell you if what you’re reporting is in line with that of the rest of the market.”

It could give an early signal of whether a firm is over or under-reporting, both of which it’s wise to avoid. “In fact, recent fines have all been around over-reporting,” says MacDonald. “And some of these issues may not be flagged to users until weeks, months, even years later.”

Waiting, oblivious of some indiscretion, until a surprise knock on the door from prosecutors, isn’t good for business, and neither is the lack of contemporaneous reporting and monitoring for policing the world’s financial markets.

Like the weather, those markets are constantly changing. ESMA has already proposed amendments to MiFIR transactions and reference data reporting regimes, and, since the UK has taken a different regulatory path, following Brexit, they may well not align in future.

But there are other winds blowing.

“Right now, digital assets aren’t regulated, but, at some point, ESMA will review them.

We saw that between MiFID I and MiFID II; we started reporting a lot more derivatives under MiFID II,” says MacDonald. “From a foreign exchange (FX) perspective, I wonder if cryptocurrencies will be regulated,

The obligation on trading venues, from a MiFID perspective, is so much more than for any other firm because FX isn’t directly; however, I imagine cryptocurrency derivatives will be, in the next couple of years. We’ll certainly adapt our systems to meet those regulations.”

Perhaps encouragingly for SmartStream, given the potential disruption that decentralised finance could cause incumbents, digital asset companies have been seeking it out, reveals MacDonald.

“One of the things we’d hear people say is ‘what’s the use of reconciliation tools anymore? They’re not going to be needed?’.

But, actually, we’ve found the opposite.

These firms themselves have a number of controls they need to meet.

“Trading venues, crypto firms, these companies are using the latest technology, too. So it’s not hard trying to sell AIR to them! They understand the technology, they know the power of it, so we work quite well together in delivering a combined control framework.

“We’re more than willing to help them with any reconciliation needs they have. We’re always looking at how we can improve our tools and create new products that will help the industry.” ffnews.com

Generation Overlooked: s Serving silver user GUEST EDITOR án Natasha de Ter

THE CASE FOR AGE-FRIENDLY BANKING

Hey, big Boomer! Spend a little time with me?

‘Meet your customers where they are’ is business logic 101. Fintechs are doing very well in meeting younger customers where they are – penetration is almost total in the coveted (if fickle) Millennial and Gen Z markets.

But how are they doing with older (stickier) generations?

In these pages, Guest Editor Natasha de Terán explores how well fintechs are appealing to, capturing, and serving ‘silvers’, finding they should do better for their own bottom lines as much as anything else Depending where you live, the older demographic is over 50, over 65, or (in Sudan) over a sprightly 40.

Here in the UK, the marker seems to be set at a more reassuring 55, over which there’s a chunky number of us.

It’s a demographic with an average household wealth of more than £800,000 – as compared to Gen Z and Millennials’ average of £155,000. And it’s a generational group that has lived through an enormous technological change – your average 55-year-old professional will have seen typing pools, Dictaphones, telex and fax machines, central switchboards and un-networked terminals; they will have transitioned through word processors and MS-DOS, dealt with 3.5” and floppy disks, dial-up modems, a nascent internet, the advent of the mobile, the portable computer and more.

Today, he or she will undoubtedly have a smartphone, perhaps a wearable, a home PC and probably a tablet. They will use

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Zoom and Teams and likely have some social media accounts; they’ll communicate

by WhatsApp and email and shop online.

Digital dotards they are not.

Banks everywhere have always tried to capture customers young – and keep them.

Customers being lazy sorts, tend to stick with them. Fintechs, challenger banks, open banking, price comparison sites and the current account switch service were all supposed to change that. Have they?

Not so much for the older groups. Until they were forced to, mature users didn’t even take up online banking. As a 2022 YouGov poll revealed, the highest rise in usage for online banking during the pandemic was among the 55-plus age group where 60 per cent of those surveyed used the service more often. In other words, it was not until they didn’t have a choice.

What’s more, they’re not switching their accounts to move online. The current account switch service (CASS), which was specifically designed to stimulate account mobility and improve competition in the banking sector, was introduced in 2013; by March 2022 just eight million accounts – somewhere around 10 per cent of the total number of UK accounts – had switched using the service, or around one per cent a year.

Is that because the older generations aren’t aware of it? Far from it, Pay.UK statistics show that if close to half of those under the age of 25 are aware of the service, 80 per cent of those in 55-64 age bracket are, as is a whopping 91 per cent of those who are over 65. That younger generations are the most fickle and mobile, and older generations are the stickiest appears counterintuitive. Because, if incumbent banks have failed to deliver value and service, it’s the older generations that have suffered the most by sheer stint of time (and money) they have spent with their banks.

These are, by and large, the wealthiest and most reliable customers. They provide stability, liquidity – precisely what

challenger banks seek. And yet, while there are some notable exceptions, of course, by and large, the neobanks (and wider fintech sector) is ignoring the older demographic.

Does it matter? What are they missing?

Firstly, an opportunity. As well as wealth being stacked old, the population is also skewed old: half the adult UK population is over 50, a quarter of it over 60; and, between them, they own more than a third of SME businesses. The situation is not unique to the UK. As we explore elsewhere in this section on the Generation Overlooked, Spain and Singapore have even more acute issues and are seeking to make more of the opportunities presented by an older demographic.

Secondly, dissatisfaction. People of 50 or more lived through the financial crisis and its aftermath as adults; they have seen bank runs and insider trading convictions; fines for personal protection insurance, Libor and other forms of mis- and over-charging; they have read about misconduct decisions and heard about competition inquiry findings.

If youth feels that finance wants shaking up, the older generation knows it does.

Thirdly, disenfranchisement. Far from all older generations need or want banking in person, are attached to bricks and mortar, to cash, or to in-person customer service.

But those that are, are fast-losing their access. In return, they are given online banking services and apps which, in the incumbent banks’ eternal race to ‘get ‘em young’, are not intentionally designed to appeal and work for an older demographic.

There could be a host of reasons why these hard-done-by account holders aren’t moving from their current providers (or at least not much), or multi-banking like their younger peers – laziness and (misplaced) loyalty, being the two most obvious. But how about we consider whether they feel there’s anywhere for them to actually move to?

Fintechs are disruptive and youthful by definition and often irreverent and

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rebellious by nature. Their positioning very often focusses heavily on these qualities – qualities that might do very well attracting the younger generation but can simultaneously alienate the older one.

This is particularly so if we remember that we are considering rebellion, disruption, youth and irreverence in the context of money. Money is quite a serious thing, and something you want to look after – particularly if you have accumulated quite a lot of it but have relatively short prospects of doing so again in the future. Suits might be a bit last year in Shoreditch, but grandpa might not identify with someone in sweats and trainers (the neos’ near-ubiquitous image), or grandma with folk that go outside in their underwear (the dress code adopted by Wise (then TransferWise) in an early media stunt.

Positioning isn’t the only thing. It’s also worth exploring

Image problem?: Is fintech’s relentlessly youthful positioning a turn-off for older users?

the sector’s marketing channels, products and product promises, the user interface and user experience. While many an early-adopting parent and grandparent will have been introduced to fintechs by their children and grandchildren, many a fintech has since moved on from community-based recommendations to advertising. In theory, that could take them closer to the potential older customer – but it won’t necessarily in practice.

For sure, older generations use social media, but are they ready to buy their financial services from social media? Is it appearing on Insta or ITV that will build their trust; is it on Twitter or adjacent to Tonight? Google and you will find ample case studies (and pitches) for how to market fintechs on social media – less so TV advertising. ffnews.com

Issue 12 | ThePaytechMagazine

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THE CASE FOR AGE-FRIENDLY BANKING And who watches most TV? The older segment – an average of five hours a day for the over-70s, compared to less than an hour a day for the under-15s. While Starling, Monzo, SumUp, Curve and Metro Bank have all run TV ad campaigns in the last three years and Revolut is looking to, they pale against the sustained presence of the high street brands on our screens.

Speed versus trust If positioning and marketing are how you get to, and build appeal with, customers, at the end of the day success is down to your product proposition, service and delivery.

Payments – which is what we are ultimately talking about here – are pretty

banking pioneer OneBanks among them.

Together with YouGov, Metro Bank did a survey that showed that while more than half (51 per cent) of people agree they like to speak to someone face-to-face for banking purposes, this increases to nearly two-thirds (62 per cent) of over-55s. A recent report from Mobiquity on credit unions in the US, showed that customers under 30 were almost 20 per cent more likely than those over 60 to switch to a provider with better digital banking tools.

For older users, ‘great customer service’ was more important.

Kat Robinson, director of customer experience at Metro Bank believes that there’s lots of value in the older customer Mature decisions: In the UK, more than a third of SMEs are owned by people over 50

simple things on the face of it. They need to be accepted and they need to work. Selling a payments proposition to an audience of consumers that doesn’t tend to like to think about them isn’t a trivial proposition, but the last few years have given product marketers plenty to shout about, especially when it comes to reducing friction and increasing speed – and shout they have.

Now, removing frictions and enhancing speed is great when you're buying a coffee, passing through a ticket machine, splitting a bill or buying make-up on Insta. But it isn’t necessarily your first thought if you are moving your pension around. If you are new to digital and/or have a deep wallet, being told that your money can move (away) invisibly and fast might not be the most compelling sell; security, trust and protection are probably more where your mindset is at. Handholding might appeal.

Thankfully, for those in need of that handholding there are some fintechs rising to the challenge, including those combining tech and a physical presence – the UK’s Metro Bank and high street open

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who actively use technology for other purposes and have a good grasp of their phones and yet who are bamboozled by the interfaces and alienated by the marketing.

By and large, providers are not thinking about what the older demographic wants – more control and transparency because they have wealth. And security is paramount to them – more important, perhaps, than it is to the younger demographic.”

He believes that the UX and UI designers are – if not all young themselves – designing for the younger generation.

“There’s a huge untapped market out there that needs to be addressed. We’re very passionate about payments for good at Volante, which, means payments working for everyone. But this isn’t just a concern about underserving a vulnerable demographic. What we also see is a huge business opportunity being missed.”

Follow the money

There are some encouraging signs of change. As we were preparing this edition for print, Revolut reported a 215 per cent uptick in users over the age of 55, ‘signalling a new age of silver swipers’. Well done, Revolut – but this silver crew has been online and swiping for decades: what took you so long to group. “And if our get to them? customers want us to What is curious in all of be on the high street, this is that while fintechs that’s where we’ll be.” have been ready to Not all of the more upend every other piece mature customers of perceived wisdom in need or want the sector, they haven’t face-to-face banking, upturned the traditional Vinay Prabhakar, of course, and could customer acquisition Volante Technologies perfectly well be model. ‘Get’em young served by digital-only and keep ’em long’ made providers. Only they largely aren’t being. sense when changing was tricky, alternatives scarce and youth loyal – less so today when Vinay Prabhakar, VP at Volante changing is easy, there’s competition aplenty Technologies, says: “It’s just a question of and youth is fickle. For sure, it made sense meeting them where they are and providing for fintechs to start off with the digital them with the products and services they natives, and, fair enough, going after hefty need in the way that works for them.” balances when interest rates were near zero Prabhakar believes there is a problem and there was easy-to-get financing, might in product design, in marketing, in UX not have been that compelling a proposition. and UI – all of which combines to alienate But youth is now a crowded market; time and confuse older demographics. horizons are short; financing is no longer “I have seen this play out in my own freely found and rates are rising. family – we are talking about smart older professionals who have no lack of Given all that, what’s wrong with going intellectual capacity and who have been the extra mile to get that sticky big spender, experts in their fields. These are people even if they do have a shorter runway?

Providers are not thinking about what the older demographic wants.

There is a huge, untapped market out there that needs to be addressed

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Generation Overlooked: s Serving silver user GUEST EDITOR án Natasha de Ter

PHYSICAL TO DIGITAL: ONEBANKS HUB Bridging the gap: Many consumers still want that human touch

‘Remote’ banking

OneBanks Hub is attempting to restore the ‘face of banking’ with a physical presence in branchless communities across the UK. Natasha de Terán spoke to Founder Duncan Cockburn about his mission In developing Square, Jack Dorsey says he set out to meet his customers where they were. His customers were out and about on their phones, but weren’t using them to take payments, so he decided to build the simplest thing to enable them to do so.

In coming up with the OneBanks Hub concept, Duncan Cockburn is essentially doing the same thing. His (potential) customers are out and about on the high street, in stations and supermarkets, but aren’t being banked there (any longer).

He’s planning to change that.

It takes a certain type to make those leaps – leaps that are pure genius at inception and so obvious in hindsight. Dorsey wasn’t in payments or retail. Cockburn wasn’t in banking. But, whether OneBanks Hub aims to be as ubiquitous as Square, or Cockburn has ambitions as big as Dorsey’s, it’s hard to argue that a high street solution for (open) banking isn’t needed.

Cockburn is, one senses, a serious soul; ambitious and commercial, he’s also thoughtful – enough to stand back and

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realise that, for all the virtual opportunities and efficiencies that technology is bringing to banking, banking still needs to meet people where they are, physically. What seems somewhat remarkable – at least to me – is that Cockburn reached this conclusion in California, while learning to code. In other words, it was when he was (presumably) surrounded by techno-evangelists and deeply immersed in technology that he realised how much others would be left behind by its progress.

Having quickly been taken by the promise of open banking and APIs, he returned to Scotland where between 2010 and 2020 the number of bank branches had fallen from 1,500 to around 690.

“I had really got into open banking and APIs during my period in California and could easily have gone down a pure fintech route, but the thing with open banking is that it only reaches people who are digitally savvy,” says Cockburn. “It doesn’t help those who aren’t, particularly the older generations. And so, while I was really excited about open banking, I was also concerned about what this transition

meant for those who weren’t being taken on its journey, particularly in the face of all those branch closures.”

POP-UP BANKING Passionate about financial inclusion and about making technology more accessible, Cockburn’s idea was OneBanks Hub, a visible, physical entry point to open and digital banking. No matter which bank they were with, customers could pop into a OneBanks Hub to deposit and withdraw cash, make payments and get help with setting up or using online banking.

Cockburn’s banking kiosks have so far popped up only in Scotland and the North of England, although perhaps we can expect more openings soon. Combining the physical with the virtual, staff with machines, the personal with the impersonal, they even update the ATM for the digital age. In fact, OneBanks Hub’s open-bankingpowered cardless ATM withdrawal facility recently won an API VRP hackathon award.

The facility is both a useful tool and an appealing entry point to digital, which is, of course, core to the OneBanks Hub mission. ffnews.com

Cockburn describes the mission as both ‘a social obligation’ and an ‘economic proposition’; in an earlier interview he used the words ‘a social good with private gain’.

There are quite a few such claims in fintech, but, when you look at the maths, you often end up questioning either the business’s survival or the speaker’s conscience (sometimes even both). I am convinced by Cockburn, though, and when I check out his previous on YouTube, I find he always comes across the same way: sober and matter-of-fact.

I canvas some opinions from others to find out where they think he lands on the scale between commercial savviness and social consciousness and while one comes out far on the social conscience side, most can’t (or won’t) put a number on it.

Perhaps because they’re coy – perhaps because they can’t. But one recurrent theme my interviewees return to is his interest in fairness and in making technology accessible. “That really gets him out of bed,” says one, “the fact that he can make a business out of it is a plus – but also a really necessary one in his mind.”

Making technology accessible is an interesting thing for a twenty-something coder to worry about. Cockburn will not have been exposed to life pre-Apple or Windows. If his first experience with digital had involved programming with C language or even Fortran, would he think today’s technology needed to be made accessible?

Anyone who suffered computing life when menus were only found in restaurants will know that technology is oh-so-muchmore accessible today. But what about financial technology? Many of the same people who email, Zoom and FaceTime, who use laptops, tablets and smartphones, are excellent in Excel and wunderkinds with

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Word, but they are nevertheless struggling to go digital with their finances. Cockburn believes part of this is down to trust.

“Money is all about trust, and banks with their physical branches have provided that for generations,” he says.

“Some people really only want to deal with and trust other people in their financial lives – they therefore only want to interact with people, not machines, particularly the older generations. Apps don’t offer that element that physical branches and real people do. The face-to-face environment and physical touchpoint are therefore both hugely important, especially during their transition.”

A WORLDWIDE ISSUE

While customer-facing staff will be key to the success of OneBanks Hub, it’s also Cockburn’s hope that its customers will be upskilled through their experience with them. He points to one recent example: “We recently had a 94-year-old customer come in who was really blown away by the possibilities. He had a lack of understanding about and trust in open banking but our kiosk made the difference.

“He was literally gobsmacked by how he could see his three balances on the same interface. It’s been really amazing to see first-hand the impact on people, particularly this older generation.“ The ‘gobsmacked’ customer might have been in his nineties, but it’s not just nonagenerians who are struggling with the shift to digital or who are attached to physical contact. The average age of a OneBanks Hub customer is 59.

“How the market is serving the older generations is certainly a real issue but at the same time it presents a real business opportunity,” says Cockburn.

A big opportunity, in fact. He sees Duncan Cockburn, OneBanks Hub OneBanks Hub ‘as the future of banking Accessibility is another problem. “Not all everywhere’. “I think the model will be digital offerings are accessible or appealing replicated all over the world,” he says. to all. We were very aware of that and The demise of physical banking and saw how alienating it was and, as a result, its impact on older and marginalised very deliberately set out to make our customers isn’t unique to the UK and positioning as broad as possible. We made OneBanks Hub isn’t the only alternative sure our font sizes were large enough for model. The UK Post Office has begun to roll everyone to read, and we designed the app out banking hubs as a result of an initiative to flow like a conversation, making the with the banking industry and the UK interaction as like the real thing as possible.

Finance Cash Action Group; New Zealand “We have sign language and read-out has run a similar pilot involving four banks; facilities in our kiosks which are always and Australia’s Bendigo Community Bank wheelchair accessible. Accessibility at – which is owned by the otherwise OneBanks Hub isn’t an afterthought, it’s branchless communities it serves – is how we design things in the first place.” thriving, even in settlements with fewer than 1,000 inhabitants.

The UK’s Financial Conduct Authority is preparing to strengthen its guidance to banks on assessing the impact on local people of changes to services, such as closing branches or reducing banking hours. The thoughtful and respectful way OneBanks Hub and others like it are addressing the issues faced not just by older users but One for all: by all those in danger of being The OneBanks Hub model could be replicated overlooked and left behind, is worldwide, says founder a lesson the rest of the fintech Duncan Cockburn industry could learn from.

How the market is serving the older generations is certainly a real issue, but at the same time it presents a real business opportunity

Issue 12 | ThePaytechMagazine

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Generation Overlooked: s Serving silver user R O IT GUEST ED Natasha de Terán Spain is positioning itself as Europe’s ‘centre for silver fintech’. Among those leading the charge are Luis Castillo and Nuria Domínguez Soto of startup SeniorsLeading.

Natasha de Terán went to speak to them Combine a healthy Mediterranean diet with a mid-century baby boom, a rise in longevity and steady fall in the birth rate and you get the Spanish situation – an ageing population. While close to a fifth of Spanish people are over 65, a whopping 41 per cent are over 50 – formally part of the so-called silver economy.

The good news for them is that the question of how to ‘silverise’ the digital economy – and digital finance in particular – is front of mind in Spain.

Earlier this year, a 78 year-old retiree from Valencia became a celebrity when his campaign ‘I’m old, not stupid’ garnered a nationwide following. He appeared on radio and TV, got a meeting with the Spanish Economics Minister, was profiled in the New York Times – oh, and secured commitments from the country’s leading banks.

EUROPEAN FOCUS Carlos San Juan is neither a lightweight nor a Luddite. A retired professor of urology, he launched his campaign on Change.org and his New York Times interview was organised by WhatsApp and conducted over Skype. Nonetheless, he felt that banks had forgotten about older people like himself, leaving them to fend for themselves in the digital diaspora. Shuttered branches, reduced banking hours and digital confusion were among his gripes. His generation were being consigned to dealing with apps and other online services that had neither been designed for them, nor explained to them.

The campaign personalised the issue, vividly evidencing how the transition to digital is leaving many of the wealthiest (and most vulnerable) prisoners of their own money. And it perhaps hit the collective Spanish conscience particularly hard because it was thanks to the wealth of these older generations that the younger ones had survived the 2008-2014 financial crisis, a period commonly referred to locally as the Great Spanish Depression.

In Spain, the business case for ‘silverising’ or ‘serving silver’ is unquestionable. So, while it’s surprising that the incumbents have managed to ignore it, there is a lively fintech scene seeking to do just that.

Indeed, well before San Juan launched his crusade, Luis Castillo established the Silver Economy Commission within Spain’s MAD FinTech cluster. His aim was to deep dive the problem and stimulate innovation and investment. The Commission looked beyond fintech – into travel, tourism and commerce – and concluded that the silver economy was the future for Spanish fintech

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and that Spain was best-placed to be the centre of silver fintech.

Castillo didn’t just buy into the conclusions, he put his money where his mouth is as CEO of startup SeniorsLeading whose first fintech product – a card and app that rewards spending by passing savings to children and grandchildren – is due to come to market later this year.

“We know the triggers that motivate the silver generation – the family. The family unit is a reality in Spain, it’s right at the centre of our culture,” says Castillo. “During (and in many cases since) the [financial] crisis, more than 40 per cent of over-65s in Spain were obliged to help their offspring.

It was thanks to pensioners that families could continue to operate during the crisis.

Our population is ageing, yes, but so are many others – it’s at least a 900-millionperson opportunity Nuria Domínguez, SeniorsLeading

“Our product, based on an app and a card, builds on this culture – the importance of family. As an intergenerational tool, we hope it will incentivise the silver generation to get into the digital world – and indeed it puts them at the centre of it. Using our product, they can pass on the benefits of their spending to their children and grandchildren; this really ties the family together and seeks to empower seniors’ digital transformation, motivating them through something tangible and important – the economic benefits they can pass to their families. And it has an obvious appeal for merchants as it will enhance loyalty and extend their native customer bases.”

While SeniorsLeading’s product is yet to launch, Castillo and his co-founder and general manager, Nuria Domínguez Soto, have big plans for it.

“Spain has huge potential and is a great market to start in, but once we are underway here, we aim to expand to other markets in Europe and further afield,” says Domínguez Soto. “Our vision is 100 per cent international – our population is ageing, yes, but so are many others – it’s at least a 900-million-person opportunity.

“And just as the problems we are facing here are global, so can the solutions be global too.” ffnews.com

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Generation Overlooked: s Serving silver user GUEST EDITOR án Natasha de Ter

NEOBUCKS AND GREYBEARDS

Hitting the spot: With Millennials maybe, but young founders would do well to listen to their elders

In with the new... out with the old?

Alex King asks whether youthful neobanks have alienated the very generation that could guarantee their profitability 42

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Flush with venture capital and flushed with the vigour of youth, most neobanks’ first priority has been to scale.

For the past decade, that’s meant burning through eye-watering sums of cash to reach young people – the cohort that’s most receptive to digital tools and most

promiscuous with service providers. Having come of age during the 2008 financial crisis, Millennials would prove particularly eager to ‘stick it to the man’ by hopping onto a rebellious new banking bandwagon.

Roughly one billion people are now served by 400 neobanks around the world.

But, as a recent report from the global

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consulting firm Simon-Kucher & Partners has estimated, less than five per cent of these challengers have reached breakeven, with some experiencing annual losses in excess of $100million. It turns out that targeting young people gets you reach but it doesn’t get you rich.

That’s in part because Gen Z and Millennials are less likely to seek high-margin financial products. But they’re also on the wrong end of the growing generational wealth gap in mature economies, holding less cash to deposit, to invest or even to spend. In the UK, Saga, a leading provider of products and services (including financial services) for the over-50s, points to figures that show 63p in every £1 will be spent by people over the age of 65 in 2040.

This begs an obvious question. If silver surfers, swipers and savers hold a record proportion of household wealth, why aren’t challenger banks clambering over each other to get a chunk of the wedge?

Almost all neobank founders are digital natives, and the older generation is just not top-of-mind for them… Investors who do want to see those issues targeted, say that if you tell a founder to focus on them, it’s just not where their heart is Christoph Stegmeier, Simon-Kucher

We can forget the received wisdom that older people just don’t use technology.

According to Ofcom, 85 per cent of the UK population owns a smartphone, including the vast majority of over-55s. Some seniors do fall into the digital divide, but most have proven effective digital migrants, many led safely over the threshold by digital native relatives. It seems, instead, that neobanks are simply out of touch with the very generation that could help them pivot from penetration to profitability.

For Christoph Stegmeier, senior partner at Simon-Kucher’s global banking practice, that blind eye starts with founders.

“Almost all neobank founders are digital natives, and the older generation is just not top-of-mind for them,” he explains. ffnews.com

“These founders don’t go into business with a strategic approach. They start out by saying, ‘I’ve had a problem opening a bank account, so I’ll do it differently’.

“Obviously, none of those young founders has experienced the sort of issues that the older generation has. I talk a lot with investors who do want to see those issues targeted, but say that if you tell a founder to focus on them, it’s just not where their heart is. And if they don’t put their heart into everything they do, it doesn’t work.”

They might not be Zuckerberg-fresh when they start their businesses, but the majority of neobank founders fall firmly within the Millennial age bracket. Nikolay Storonsky founded Revolut in 2015, when he was 31; the same year, Tom Blomfield founded Monzo at 29. Founders such as these would transform the debit card into a fashion accessory and the banking app into a hip financial advisor in your pocket – appealing to young people like them, but it was anathema to many mature consumers.

Dexter Cousins, founder of global fintech recruitment company Tier One People, based in Australia, believes that older generations are far warier of new, unproven platforms than Millennials and Gen Z. “Young people are happy to use robo-advisor platforms, for example, to help them manage their cash, but older people are more likely to think ‘this looks a little bit like a scam,’” he says.

That’s not an unreasonable suspicion.

For the past two years, researchers have warned of a ‘scamdemic’ as criminals seek to take advantage of older people in isolation. High-profile scandals at tech firms such as WeWork, Wirecard and Theranos, to name just a few, won’t have helped; they’ve led some older consumers to trust young technology CEOs about as much as young consumers trust older investment bankers.

Still, mature consumers are more clued up on the benefits of neobanks than you might think. In May, Revolut announced that it had seen a 215 per cent increase in UK users aged between 55 and 74 over the past two years, and a fourfold increase in their spending. According to George Grumbar, Revolut’s head of customer affairs, its growing number of ‘silver swipers’ is linked to scaling through younger people.

“Our most successful marketing tool is word of mouth, which has helped us to reach over 18 million customers,” he explains. “From our initial adoption by

Gen Z users, we have been seeing those users refer us to their parents, relatives, and family friends. These consumers are typically looking for high-value savings opportunities, and fee-free transaction rates as they travel more across borders.”

Grumbar highlights Revolut’s Stays feature – which gives users cashback on accommodation bookings – as being particularly popular among these savvy seniors. But it’s unclear whether Revolut is enjoying the larger deposits and higher profits one might expect as a result of a more mature base. More likely, parents and grandparents are being instructed by young relatives to load a Revolut wallet to save on FX or make low-value transactions through a digital card, rather than invest their savings.

Whatever they’re using it for, it goes some way to prove that neobank apps aren’t challenging for older generations to use.

Plus, it could lead Revolut to develop new products with their needs in mind. It points to a possible path to prosperity for any neobank looking to address its cash burn.

It’s telling that the challengers currently chasing the deeper pockets of older savers, often by offering generous deposit rates, have dialled right back on the youthful exuberance that characterises most neobank positioning. Based in the UK, Recognise Bank and OakNorth eschew the Silicon Valley neologisms and the DayGlo colours for a sense of prudence and reliability. The founders of both banks are middle-aged; they know from experience that senior savers value organisations they can trust rather than those that have sheared seconds off the sign-up process.

Our most successful marketing tool is word of mouth… From our initial adoption by Gen Z users, we have been seeing those users refer us to their parents George Grumbar, Revolut

Neobanks might do well to introduce retirees and older executives to their boards. But they should also go much further, because the Simon-Kucher report estimates that 70 per cent of revenues Issue 12 | ThePaytechMagazine

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NEOBUCKS AND GREYBEARDS across the neobank space are generated by accounts and card-based payment services. Those really are low-hanging fruit for today’s challengers. Up in the canopy lie the high-margin services: wealth management, pensions, healthcare, insurance, equity release. Interestingly, those were among the financial services identified by the Saga management team in 2020 as having the potential to power the business’s growth as it creates 'The Superbrand for older people’, taking it way beyond its core travel business.

Open finance makes all of these products possible for neobanks to integrate over one platform and could be a way to solve the liquidity and profitability issues that the vast majority continue to suffer from. Will they really miss the opportunity because their team is blinkered by youth?

Back in Australia, Cousins isn’t so sure that the age of a fintech founder is inevitably reflected in the direction the business takes.

He points out that all four homegrown, standalone retail challengers – only one of which survives as an independent – were set up by mature ex-bankers, not frustrated youths: “We’ve not seen the Revolut-style founder bank emerge here.”

The freshest-faced founders Down Under can instead be found in wealth management, he says – a curious juxtaposition, given that the wealth resides mainly among their parents/grandparents.

Perhaps inevitably, those apps have been geared towards Millennials, not Boomers, although in Cousins’ experience, older users will overcome any latent hesitancy to digital finance if the offer is good enough.

Xinja, a neobank that launched at the start of 2019 with a savings account that offered a rate-beating 2.25 per cent on deposits of up to A$250,000, fell over because it couldn’t put loans in the market fast enough to pay interest on all the deposits. It attracted AU$400million in the space of a month.

“It wasn’t Millennials, it was older people transferring their money,” says Cousins.

Xinja wound up honorably, repaying every account holder. Whether it will deter those older savers from using challengers again, or whether it will persuade them to explore digital finance further, it’s hard to tell. There’s no doubt, though, that you have to address the trust deficit if you want to attract mature and affluent consumers.

[Neobank] Xinja attracted AU$400million in the space of a month. It wasn’t Millennials, it was older people transferring their money Dexter Cousins, Tier One People

It’s one of the reasons that Stegmeier believes incumbents are best-placed to mine the mature user market – by leveraging the credibility they already have and deploying a speedboat strategy.

Seeing the mature market for what it is – a massive potential business opportunity, rather than treating it as a passion project – means they are more likely to succeed at it, he says. They still have to find pain points that consumers are willing to pay a bank to address, though. “You need a very precise understanding of that age group and what they would like,” Stegmeier adds.

Matt Williamson, VP of global financial services at the omnichannel design consultancy Mobiquity, believes that while new-generation banking is more about content and digital services and less about assets, senior banking is about providing a high-touch service with low risk. That might well be delivered through technology, but he suggests attaching the word ‘fintech’ to it is tempting ‘label bias’.

“If someone came along and created the right experience for that demographic, I think there would be a lot of take up,” he says. “Financial milestones are different for the over-50s, though; it’s going to be supporting kids through university, kids leaving home, downsizing, buying big-ticket items for retirement.”

You can hardly describe mature users as a ‘niche’, given they represent well over half the population in many countries, but Stegmeier agrees that this is an area of banking where depth, not breadth, counts.

“It’s a big mistake neobanks make to say ‘we will grow like crazy until year seven and aim to break even then’. That’s if they last to seven and many do not,” he observes.

Stegmeier believes one could be successful if it turned its passion for ‘meeting the customer where they are’ and the ability to design superb, customer-led products and UX towards a more mature market. And, by chasing the money, not the numbers, he suggests it could break even within three to four years.

“But the road is a bit steeper than launching other types of neobank,” he cautions. “VCs don’t have that patience – that’s why speedboats launched from within larger financial services groups should explore that field.”

It’s fortunate that the early neobank founders are beginning to develop their own silver streaks. When they can’t read the app comfortably because their eyesight’s fading and they have trouble raising themselves off the beanbags, we might expect new passion projects from them that cater towards older generations.

Pivoting from rebellious disruptor to sensible grown-up may come with a sense of anticlimax, but neobanks can’t live in Neverland forever. Opening its arms wide to affluent, mature consumers may be one of the best moves for a challenger seeking to turn a profit (or survive) this decade.

Cross-generational: Older people will use digital banking on their terms

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Generation Overlooked: s Serving silver user GUEST EDITOR n Natasha de Terá Julius Nyerere Ngesa, Head of Digital Banking at Diamond Trust Bank, reflects on how culture and demographics influence financial services Africa is predicted to be home to one-third of the working population of the world by 2050, such is the ‘youth bulge’ that many of its 54 countries are experiencing.

So how does technology – and financial technology specifically – respond to a demographic shift that’s going in precisely the opposite direction to that of most post-industrialised nations?

The almost universal adoption of feature phones – which are rapidly being upgraded to smartphones – led Africans of all ages to leapfrog financial tools and services that most mature adults grew up with in the West. There, they progressed from cash and cheques to cards, mobile and digital payments over a number of decades.

In Kenya, which led Africa’s payments revolution, people went from shillings to payments via SMS in a matter of months.

Walk down a sunny sidewalk in Nairobi now and you’re as likely to use your phone to transfer money to a streetperson’s M-Pesa account as you will use it to buy a coffee in one of the city’s up-and-coming bars.

We asked Julius N. Ngesa, now based in Kenya, but with experience at mainstream banks across Africa, to tell us how culture and demographics are shaping the country’s financial services.

THE PAYTECH MAGAZINE: Who is the incumbent banks' typical customer in Kenya and why do they choose a bank over a mobile money service?

Julius N. Ngesa: The typical bank customer dwells in urban and peri-urban areas, especially in cities and towns along the major transport corridors. They are

AFRICAN FOCUS aged between 26 and 55 and are mostly formally employed or in business.

Mobile money and, in particular, M-Pesa has driven overall financial access from about 32 per cent in 2006 to 83.7 per cent in 2021 in Kenya. All other mobile money providers lag behind in all facets – store of value, payments, lending, etc. But most banks also have a high adoption of mobile banking services and more than 95 per cent of all mobile banking transactions in the majority of banks are transfers between bank accounts and mobile money wallets.

Many employers still prefer to process salaries to bank accounts. This is a key driver for bank accounts. Most successful retail banks build their propositions around salaried employees: salary accounts, salary advance loans, credit cards, mortgages, insurance, etc.

TPM: Is including older people in the financial system even seen as an objective for service providers there?

JNN: The latest FinAccess Household Survey report 2021 indicates that young people (18-25) and older people (above 55) are the most excluded in accessing any form of financial services or products, at 22.5 per cent and 14.9 per cent. Lack of a National ID is quoted to explain the high exclusion rate for young people.

With older people, it could possibly be as a result of lack of education and that they live in rural areas.

That said, banks and mobile money operators have noticeably developed simple access to either mobile money wallets or bank accounts via USSD/SMS channels, which has significantly contributed to financially including the older generation.

Feature phones are also simpler to navigate, cheaper to acquire, have a longer battery life and are more hardy and durable, especially in rural areas.

TPM: How is wealth defined locally?

Does money flow from older parents to adult children or the other way?

JNN: People are still deeply attached to land/physical assets than more liquid assets. Wealth is passed between generations mostly as an inheritance from parents to their children. To do that, they mostly use traditional family inheritance processes/mediation, since many people do not believe in writing wills – although this is quickly changing, especially with the middle class and wealthy families. In my view, any new financial service in this area would most likely target wealthier families and probably take the form of trusts.

TPM: M-Pesa (among others) now has a lifestyle super-app. What impact could these financial/non-financial apps have?

JNN: Most personal financial management (PFM) apps and financial apps with PFM features have not done fantastically well in the market. That makes further investment unattractive. Perhaps it is because they do not command any network effect, like M-Pesa, to gather sufficient traction?

Or the user experience is not that great?

Or perhaps they are not solving a real problem? Or the consumer does not wish to have a mixed platter of their financial footprint, social life, personal fitness, insurance, etc, easily accessible in one app?I believe a deeper understanding of customer pains and gains should drive the right-sized digital solution.

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TACKLING UI & CX

Generation Overlooked: Serving silver user s GUEST EDITOR Natasha de Terán

Designing for an inclusive future Technology doesn’t discriminate; people do.

If banking apps and services were built to be used by our grandparents, everyone would benefit, says Sue Scott “You need to understand how rare it is to ask good questions of old people.” That’s Muriel.

She was 91 when an organisation in the United States called Older Adults Technology Services, or OATS, began asking questions of her and her friends.

They weren’t the usual playlist of likes and dislikes asked of focus groups by designers building the sleekest, fastest, most frictionless apps. Because the starting point for OATS giving older adults the motivation to go digital, or to go further with digital, wasn’t about using the technology at all.

Rather, it sought to understand what an individual (and it’s reached 35,000 seniors so far) needed in order to – as founder and executive director Thomas Kamber puts it – ‘age with attitude’. The technology skills, including digital finance ones, were then fitted around the answer.

Change is hard at any age, says Kamber.

And, if you want someone to change the habits of most of a lifetime, you need to really convince them of the value in doing so.

Defining the relative advantage of adopting a tool or not, is one of the biggest challenges anyone targeting the older demographic faces, especially in financial services where there might be a perceived risk attached.

As an organisation, OATS believes that the antidote to ageism is a thoughtful approach ffnews.com

to technology design. Sadly, Kamber doubts that the percentage of fintech products tested among older people even reaches into double digits. And, in his view, that means older users don’t feel loved or appreciated by those organisations which might quite like more of them to use their services. “People need to find things that are aspirational to themselves and feel like their voices are represented,” he says.

According to a report published by The Financial Health Network in the US in 2020,

the vast majority of over-50s there clearly haven’t been feeling zloved or listened to: “The lack of focus on older users persists in the fintech community,” it said.

And yet, as Age UK’s Age-friendly Banking study had pointed out four years earlier: “One of the insights of age-friendly banking is that if a bank can provide good service for its oldest customers, it can provide excellent service for all. The young and the middle-aged navigate the same systems as older people, but may have greater resilience in coping with poor design – for example, being able to access bank services through alternative channels. A bank that improves its systems and services to assist its older customers is likely to find the rest of its customers delighted by the improvement.”

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TACKLING UI & CX Not natives but not dolts: Over-50s use digital tools all the time – so what puts them off fintech?

Technology doesn’t discriminate; people do. So, if we figure out why fintech finds it so hard to see beyond the big five-o (addressed elsewhere in this special section), in theory, directing digital towards solving age-related issues is easy, right?

Chris Brooks, head of policy at Age UK, which has fought hard for widespread access to cash to be maintained, not least because three million over-75s don’t use online financial services at all, says that many older people would use digital services more, but 80 per cent of them don’t trust their IT skills to be good enough and 40 per cent simply don’t trust the technology.

“Older people are genuinely concerned about scams – a lot of them have been, or know someone who has been, scammed.

And, if you do not have the confidence or skills to go online and manage your finances, it’s high risk and people are right to be concerned about doing it,” he says.

Those two broad barriers – perceived or real issues with usability and concerns about security – are the top two challenges that banks of all stripes must address if they are to persuade and inspire silver surfers to fully participate in the digital revolution in financial services.

Brooks is in no doubt that ‘there’s lots of scope to use financial technology to

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develop solutions’. It’s just a shame he hasn’t seen much evidence of it coming from the challengers. In fact, Age UK, the largest campaigning organisation in the country representing older people, hasn’t, to his knowledge, ever been approached by a neobank to help understand older people’s needs.

If you look at why people do not use digital, it’s not necessarily fear about the technology; it’s frustration Frank McCarthy, Vizolution

In the States, Chase Bank has partnered with The Financial Health Network to produce a template for designing fintech for the over-50s. It looked at what tools older users wanted and how to encourage take-up.

The starting point was a 2019 survey that showed, despite 77 per cent of over-50s owning a smartphone device and 94 per cent of them using it on a daily basis, only two-thirds had accessed financial apps in

the previous three months. They’ll wave happily to their grandchildren over WhatsApp, but will probably send them a cheque for their birthday in the post.

That doesn’t come as a big surprise to Frank McCarthy, business development director at Vizolution, a software-as-a-service provider that helps banks and telcos provide assisted and unassisted digital services. It sees its role as digitising the human and humanising the digital.

“If you look at why people do not use digital, it’s not necessarily fear about the technology; it’s frustration,” he says. And while people of any age can identify with that, older users in particular will tend to abandon the service if they can’t pull the help cord inside an app and be connected with a real person. Equally, they don’t want to be patronised.

“It’s about choice,” says McCarthy. “Don’t force assistance on me if I don’t need it; but don’t withhold it when I do.”

Vizolution works almost exclusively with well-established financial services providers with vast customer service teams; he doubts whether the challenger model can accommodate such nuanced delivery. ffnews.com

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TACKLING UI & CX “It’s not that incumbents are by default good and neobanks bad [for older people].

Neobanks are providing great customer service, but they come from a digital-first philosophy,” says McCarthy.

Is there anything they can learn, then, that would woo older users?

‘Start with the basics’ is his advice.

Vizolution was first asked by TD Bank in Canada to bake accessibility for older and less able people into all its customer journeys, and those same principles are now standard for all clients.

“So the screens all automatically adapt for the device you’re working with, for instance, and they all connect with screen-reading software; and, rather than asking the customer to remember a password, we send a code to the mobile,” explains McCarthy.

The Financial Health Network’s Fintech Over 50 report came up with 13 design recommendations across the four stages of the user journey: discovery, onboarding, navigation and use. The striking thing is that – whether you need spectacles to read a screen, struggle to remember what you did yesterday, never mind your six-digit access code, are anxious about security, or not – they’re all simple fixes that make everyone’s experience more comfortable.

For the most part, it’s about giving users a reassuring amount of personal control, the ability to escape to a place of safety quickly when trapped in a digital dead-end, or spooked by the frightening ease of transaction processes. Among the preferred features that might not normally be top of mind for digital natives are easy-to-access navigation tutorials, human touchpoints early in the user journey, the ability to clearly and easily turn off automated processes that move your money, and positive feedback that builds your confidence as a user.

While, as one seasoned customer experience designer commented, big banks ‘have always had the customer’s back, they just didn’t join the dots’, McCarthy and Brooks agree that many are now going the extra mile to bring everyone on the digital journey. That is, of course, against a backdrop of record bank branch closures, but it’s true that the pandemic pushed a reset button that has had huge impact on CX design.

McCarthy cites the case of Skipton Building Society, for which it introduced a screen-sharing facility so that customers could see and talk to named staff in branch offices that were closed during lockdown

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and it’s proved hugely popular ever since.

“You’re still talking to Sally in Skipton, but we’re, in effect, humanising the digital service and digitising the human on the other side,” he explains.

Given that, time and again, surveys of older users show that they favour face-to-face interaction, it’s an example of blended services that are an easy

Breaking down barriers for fintech over 50: A template for good design

Empower users

>

to overcome the barrier of older users lacking autonomy. Older adults seek to be confident users of technology on their own terms.

Put users in control

>

to overcome the barrier of older users fearing risk from fintech.

When people feel in control of their personal information and their money, this mitigates their concerns and bolsters their interest in using fintech solutions.

Eliminate stigmas

>

to overcome the barrier of older users feeling tech-challenged.

Although they don’t identify themselves as technologically savvy, many are.

Foster connections

>

to overcome the barrier of older users being digitally disconnected.

Older adults highly value their intergenerational relationships with friends, family and community members. Build on these social connections to establish fintech as a digital source of support for financial health.

Source: Fintech Over 50 report from The Financial Health Network, sponsored by the AARP Foundation and Chase Bank.

win for banks – if they have the human resources to support them.

If neobanks don’t voluntarily look to design the needs of mature account holders into their channels and services, change – in the UK at least – might be forced upon them. Under the new Consumer Duty being introduced by the Financial Conduct Authority (FCA), all

financial services providers will be scrutinised to ensure they present information in a way that doesn’t exploit consumers’ behavioural biases, doesn’t sell products or services that are not fit for purpose, and – crucially – represent poor customer support. The new rules, active later in 2022, will require firms to focus on supporting and empowering customers to make good financial decisions and avoid foreseeable harm at every stage of the customer relationship.

The FCA has promised it will use ‘assertive supervision and a new data-led approach to intervene quickly when it identifies practices which do not deliver for consumers’.

That could, Age UK’s Brooks points out, discourage neobanks from attracting older users. “Because they might see it as making it harder to work with that demographic,” he says. “But it’s a step in the right direction by the FCA, which needs to be working with challenger banks and fintech more broadly to make sure they are delivering a service for older people, too.”

In talking to over-50s from across the UK and the US, researchers for both The Financial Health Network and Age UK found that, for their apps to be effective, designers and engineers generally assumed everyone enjoyed full physical ability, with good eyesight, hearing and memory. The reality is that, while an increasingly number of us enjoy a longer, active life, age will eventually catch up. They might be happily drinking with their mates in a dimly lit bar in Shoreditch while simultaneously topping up their Monzo wallet, but those Millennials will be seniors too, one day.

“Older people tell us about a range of issues with the design of banking and payment services. As people begin to experience physical and perceptual limitations, they may run into difficulties with bank cards, ATMs, internet access, call centre routines and passing security. Older people describe how they ‘fail security’ because they cannot recall recent transactions, or slip up using password and code systems,” Age UK reported.

“I don’t know, 10 years from now, what the answer to the question ‘what is a senior?’ is going to be, or how to design for seniors,” says Kamber. “But I do know that dialogue is really healthy. We need to think about what the new older identity looks like and embrace that. When we embrace it, we can design awesome experiences.” ffnews.com

meniga meniga

PAYTECH FOCUS: INSTANT PAYMENTS

The rationale for real time There are various motivations for implementing real-time payment systems. ‘Speed’ merely scratches the surface, writes George Evers, Senior Vice President for Realtime Products at Mastercard The rapid and widespread development of real-time payment systems has been a central component of payments modernisation over the past decade.

Fast, secure and reliable, these systems support always-on financial environments and promote innovation and competition by providing a firm backbone for new digital experiences for all players in the payments ecosystem, including consumers, corporates, merchants and governments.

Our research shows that, by the end of 2021, there were 66 markets with access t o real-time payments, accounting for the equivalent of over 90 per cent of global GDP. New services are expected to launch soon in Sweden, Denmark and Finland as part of the Nordic payment system’s P27 initiative, and in Canada, the United Arab Emirates, Myanmar, Vietnam and India.

The obvious benefit of these systems is the ability to send and receive funds nearly instantly. But there are various motivations for implementing them. These include promoting competition, increasing efficiency and improving the end-to-end user experience. ‘Speed’ merely scratches the surface.

Interoperability, for example, is an often-cited aim of payments modernisation, with 39 per cent of real-time payments initiatives that we reviewed highlighting this as a stated objective.

But Interoperability can have a very different meaning, depending on one’s perspective. When policymakers at a domestic level call for interoperability between systems, it can be because they want to enhance existing infrastructure.

Meanwhile, markets are increasingly ffnews.com

talking about interoperability in terms of crossborder reach.

Whatever the definition, the potential is transformative. Not only can interoperability help remove barriers and increase the velocity of international trade, but there is also the promise of easing crossborder payment pain points, including cost-efficiency and transparency. This should, therefore, become an important consideration when looking at the standards, design and technology behind real-time payment systems.

The pan-European goals of the SEPA Instant and P27 are good examples of interoperability in practice; SEPA Instant is helped by the fact it’s based on a single currency, while P27 is multi-currency. To make this a reality in other multi-market jurisdictions, significant cooperation is required at the bank and scheme level, but also among central banks.

businesses, the digital creation of a standard invoice that’s executed in a pre-determined timeframe will provide significant positive uplift, supported by the implementation of ISO 20022. Certainty and predictability of payments, particularly in markets upgrading to real-time from legacy payments infrastructure, is also significant for businesses. It enables them to better manage cash flows and liquidity positions as they have greater visibility over both incoming and outgoing payments.

For a salaried employee, too, certainty of payment is paramount: knowing they will get paid on the same day each month – and it’s relatively simple for the employer to schedule this.

By contrast, for a business’s freelance or temp worker on more irregular pay, immediacy is far more important to them.

It’s worth noting that newer bulk/batch systems can already support more frequent intraday settlement cycles, which creates ‘fast enough’ processing that will meet the requirements of many B2B, C2B, G2P and B2C use cases. Many real-time payment systems are built to run parallel with this infrastructure; while there is sometimes migration of volumes, for the most part, the two are considered complementary.

There are a number of other options to consider here, however. One is modular implementation. The Netherlands, for example, is using two speeds over the instant rails – true instant and slower, controlled payments. The migrated batch traffic can use the second option, recognising that speed isn’t essential here, but 24/7 operations are attractive.

There are many instances where instant payments are not crucial but where certainty and ‘always on’ operations are.

All of these factors – and more – show payments modernisation is so much more than simply real time.

This understanding is crucial for central banks and governments to ensure they adopt game-changing infrastructures and solutions to benefit consumers, businesses, corporates and – ultimately – economies.

There are many instances where instant payments are not crucial but where certainty and ‘always on’ operations are

SUPPORTING THE B2B SECTOR Businesses are a vital customer base for banks, and a driving force for economies.

As such, real-time payments can support a variety of use cases that are driven by the context in which a payment is being made.

For example, for supply chain management, immediate payment can support a just-in-time manufacturing process that is looking to create efficiencies in automated stock management and fulfilment.

But here again, not all benefits of real-time payments are about speed, – for example, for many

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PA R I S F I N T E C H F O R U M

INTERVIEW SERIES 2022

Every Tuesday discover Fin&Tech international leaders in weekly 25 minutes insightful and unscripted video Interviews.

J. Teicke

E. Rossiello

R. Ardant

Wefox (DE)

AZA Finance (UK)

Spendesk (FR)

M. Rouso

S. Siemiatkowski

P. Botteri

La Banque Postale (FR)

Klarna (SE)

Accel (UK)

P. Taylor

N. Dufourcq

J. Gardner

Thought Machine (UK)

Bpifrance (FR)

Marqeta (US)

E. Shaw

N. Verdon

EBF (BE)

Flourish Ventures (US)

Raislbank (UK)

B. Marrel

D. Reiling

CEO

M.D. Retail Banking

CEO

W. Mijs

CEO

CEO

CEO

CEO

Partner

CEO

CEO

CEO

Managing Partner

CEO

J. Loginova

Breega (FR)

CEO

Sunrise Banks (DE)

CEO Radar Payments

A. Wand

I. Dimitrova

O. Prill

Hippo (US)

OpenPayd (UK)

Tide (UK)

E. Platts

M. Knecht

P. de Leusse

Silicon Valley Bank (US)

Billie (DE)

Orange Bank (FR)

CEO

Head of EMEA

CEO

Co-founder

parisfintechforum.com

BPC (CH)

CEO

CEO

MAKING A DIFFERENCE: EMPOWERING THE CONSUMER

Alex Gatiragas describes how G+D is aiming to save the world, one payment at a time When it comes to payments, Giesecke + Devrient (G+D) has seen it all.

Back in the 1800s, it helped banks to print cash; now, it supports not only banks, but fintechs and an increasing number of non-financial providers, too, with everything from physical cards to mobile wallets and other digital payments. Most recently, it’s helped in the modelling of central bank digital currencies, including a project with Bank of Ghana. Whatever the payment type, its solutions provide a safe transaction environment in which customers remain in control. One of its most recent innovations, Token Cockpit, for example, is a way for account providers to remove the frustration consumers often experience in trying to keep track of card-on-file and subscription commitments. It monitors their payments so that they don’t pay unnecessary and unfair repeat charges. This same solution enabled the tokenisation of those cards-onfile, for increased online checkout security.

Now, the company is addressing another of their key concerns – helping to minimise the environmental impact of their payments.

WALKING THE WALK The company signalled its commitment to protecting the planet by becoming one of 24 German businesses to participate in the United Nations’ Sustainable Development Goals Ambition Initiative in late 2020. As well as committing to reducing its own direct and indirect CO2 emissions by 25 per

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Green promise: Environmentally friendly payments make sense for providers and the planet

ffnews.com

cent by 2022, it committed to helping its customers and end-consumers achieve their sustainability goals.

To this end, G+D has recently announced two new partnerships. It teamed up with sustainable digital solutions provider Doconomy, which makes visible the environmental impact that purchases have, thereby enabling consumers to make positive choices. And, in April, it announced it would be working with Patch.io, an API-based solution for climate action that enables customers to influence the environmental outcomes of those payments by, for example, making carbon offsetting donations.

G+D is now also working with Parley for the Oceans, a non-profit environmental group which is campaigning for greater awareness of plastic contamination of sea water. This partnership allows G+D to offer reclaimed plastic cards as well as giving clients the opportunity to support and encourage direct environmental action.

All these initiatives are not just testament to how conscious consumerism is influencing financial innovation. They also play into the other urgent priority that payments organisations face, which is the need to demonstrate their corporate commitment to higher environmental, social and governance (ESG) standards. It’s not just a case of keeping consumers happy, but also all the other stakeholders in G+D’s business.

“It comes down to looking at the role of payments as a lifestyle enabler, a gateway for people to live their lives the way they want to and make a difference,” says Alex Gatiragas, director, solution experience for G+D. ffnews.com

Explaining how the new relationship with Doconomy supports this new mission, he says: “Doconomy is one of the league-leading organisations when it comes to providing data on environmental impact. Together, we can help consumers make informed decisions like ‘do I use this ride-share company or that one whose green energy rating is better?’. It will help them take stock of their environmental impact.”

Armed with that information, they can then choose to take positive action courtesy of Patch.io’s API-based solution, which has been integrated into G+D’s Convego Beyond sustainable payments facilitation platform. The plug-in enables G+D’s clients to let their customers seamlessly make offsetting payments to global carbon removal projects. These include natural and human-engineered solutions, all verified by third parties, with the added benefit that companies offering this service can also use it to quantify their own environmental impacts through corporate responsibility reporting cycles.

Illustrating how the two digital services dovetail, Gatiragas says: “A consumer might have purchased some goods and had them delivered because there was no other option, and this therefore had an environmental or carbon impact. Doconomy helps them see exactly what that impact is and Patch.io then gives them the option to make a small investment to offset it and, effectively, remove it from the environment.

“That’s on the digital side, where we’re looking at how we can integrate these with some of our wallet technologies. On the physical side, our partnership with Parley for the Oceans, means we can provide programmes for issuers where they can offer physical products, like payment cards produced from ocean-recovered plastics.

“Five grams of reclaimed plastic for each card doesn’t sound like a lot,” says Gatiragas, “but it’s really symbolic of the owner’s commitment to the oceans agenda – as is belonging to an organisation that is committed to doing other things to improve the health of those sea waters.”

One G+D customer which has taken advantage of that already is fintech startup WLTH in Australia; it’s already organising beach clean-up days for customers off the back of it.

“I’m Australian, although I live in Helsinki now,” says Gatiragas. “With Australia being surrounded by water, the majority of the population is living reasonably close to the shore, so we are very concerned about the health of our oceans.”

WLTH is among the next generation of fintechs for which the environmental agenda is part of their DNA. But enquiries aren’t just coming from startups.

“We’ve had conversations with Mastercard in relation to its eco Innovation Lab opening in Stockholm, looking at ways in which we can tie their payments together with improving the environment.

So, we’re expecting this area to grow,” says Gatiragas.

“Most of the interest at this stage has been around our physical products, because there’s an immediate impact in removing plastics from payments. Our physical product guys have done a great job in producing payment products that have a positive eco outcome,” he adds.

Gatiragas believes that, if they want to future-proof their businesses, payment providers should be focussed, above all, on offering customers choice – ideally, a blend of the physical and digital – but that should be closely followed by empowerment.

“In terms of consumer trends, we’re seeing global growth in the acceptance of digital wallets and, of course, a willingness to do a lot more online purchases,” he says.

“Having said that, we’re also seeing that getting rid of the physical payment instrument isn’t as common as people might think. Digital wallets are definitely growing but the physical card is becoming a companion to the digital wallet and vice versa, because consumers want everything available to them in order to quickly select what payment instrument they want to use for whatever it is they want to do at a particular time.”

It comes down to looking at the role of payments as a lifestyle enabler, a gateway for people to live their lives the way they want to and make a difference

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MAKING A DIFFERENCE: EMPOWERING THE CONSUMER Gatiragas acknowledges the heavy investment the industry has made to support digital, ‘[because] post-pandemic, a lot more people are comfortable using it’.

“But card rails have been a common way of accepting payments in the past so, for merchants and payment services providers (PSPs), it’s now about offering multiple choices.

“The conversations we’re having with PSPs and some of the large merchants, are about how they need to be prepared for what this might look like in the not-too-distant future, because they don’t want to lose out on opportunities to sell their goods and services. Being able to offer alternatives like e-payments, account-based payments, or whatever else, is something we’ll see continue to grow.”

As the range of payments becomes ever more extensive, Gatiragas believes G+D’s innovative Token Cockpit dashboard will become increasingly instrumental in helping consumers take control of their financial lives and make appropriate selections, by increasing visibility around their transactions, including the environmental impact they’re having.

“Token Cockpit is an example of how we’re moving away from securing digital payments being a back-end processing concern – something that lives in a server room, that’s somewhat invisible to a consumer. Token Cockpit is the start of being able to put payment control back in the consumer‘s hands through greater visibility of, and control over, their payment instruments,” says Gatiragas.

“That means everything from environmental impact awareness to avoiding that painful realisation that the card they’ve had on file at a merchant’s store, that card they’ve forgotten about, has just automatically renewed their two-year subscription and their money’s gone.

“Improving the customer’s experience to increase their trust in payments is definitely an area of focus for us at the moment,” he adds.

MULTIVERSE OF USES Reluctant to back any one horse in an eclectic payments race where the competition has been hotting up now for some time, G+D is continuing to lead on innovative solutions for everything from embedded, internet of things (IoT) payments – including those to support the

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practicalities of increasing electric car use – to the potential development of e-currencies and digital currency-based solutions. It’s balancing security with the seamlessness that consumers demand, while ensuring cost efficiency for organisations struggling to maintain their bottom lines amidst the explosion in high-volume, low-value transactions.

“With the introduction of 5G technologies and the reduction in costs for IoT devices, the need to try to keep the cost of doing increasing volumes of micro-payments down is really coming to the fore,” says Gatiragas. “One example of how we’re dealing with that is we’re looking at helping electric vehicle users pay for tolls, road taxes and charging stations via in-built, invisible payment methods.

“We have a long history of making sure everything we do is secure, but then not overburdening the consumer experience with that security to make sure payments are also seamless.

We’re seeing a lot of interest at the moment, from both the merchant and the payment service provider side, in simple payment solutions such as Click to Pay for guest checkout. We’re trying to make it as easy as possible for our clients to onboard solutions like that for their customers.

“We’re seeing big growth in Click to Pay and also in e-payments, because of the way we’re all starting to live our lives and the small things we need to do, just to get by from day to day. Companies have to service that cost-effectively.”

He continues: “We’re also seeing a lot of interest in single-click payments, with our customers and the industry generally wanting to be able to support multiple payment methods is this area. But there are pain points to overcome for businesses looking to enable such things. The infrastructure investment needed is the main thing, as well as being able to balance risk with having that seamless customer experience. That’s particularly so on the merchant side, where the aim is to improve the checkout experience to increase sales,” he says.

CONTINUOUS INNOVATION A conflagration of circumstances created by the COVID-induced switch to digital, geopolitical events, changes in consumer behaviour and the different regulations and infrastructure being introduced to help manage and control all of this – including Europay, Mastercard and Visa (EMV) tokenisation and the imminent universal introduction of the ISO 20022 payments messaging standard – is creating a burning platform like never seen before. Providers need to invest in getting this right.

“It’s a great time to be in the payments industry because there is so much happening,” says Gatiragas.

“Digital payments, digital currencies, instant payments, peer-to-peer payments, IoT, all these things are more than just buzzwords these days, and we’re seeing a lot of activity globally.

Our role is to help our customers navigate through all these different options.

“I’m a technologist at heart and I’m loving all this, but I’d hate to predict which payment form is going to win out in the end,” he adds.

“Certainly, in the near- to mid-term, I think providers need to be able to support multiple payment methods, because, ultimately, choice is key to consumers.

And for providers, it’s about being able to offer that in a way which also reduces the cost of doing business.”

For Gatiragas, G+D is perfectly positioned to help them do just that.

“We've been around for 170 years-plus, so it makes sense for an organisation like ours to continue to innovate, lead trends where we can, and work with the industry and our customers to continue that innovation cycle,” he says.

It’s perhaps apt that this established organisation, which was originally focussed on helping banks to print cash, is now working with them to help manage the migration from physical to digital payment methods – including a new kind of currency which is more appropriate to today’s needs.

It’s also reassuring that, although we won’t be able to hold that token of currency in our hands, G+D is committed to it being no less secure.

Improving the customer’s experience to increase their trust in payments is definitely an area of focus for us at the moment

ffnews.com

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MAKING A DIFFERENCE: SANCTIONS

As the Ukrainian/Russian war continues, the sanctions stakes are getting higher. Companies need to roll out the virtual big guns to identify who they’re really dealing with, as Tracy Fletcher reveals Increasingly heavy weaponry is raising the stakes as the war between Russia and Ukraine enters its fifth month, and the world of paytech is continuing to respond in kind by doing everything possible to squeeze the aggressor’s capabilities by stopping its funding lines.

Industry players are adding new battle tactics to help make individuals and companies linked to the Kremlin answerable to the sanctions also imposed to slow its ingress.

Because, when Russia invaded Ukraine In February, it kicked off a conflict unlike any other. Measures adopted by the West to try to stop the horrifying Russian assault in its tracks, have been rooted as much in economic and financial tactics and the cyberverse, as they have in the supply of tanks and artillery.

Russia’s central bank reserves have been frozen for several months now, and, in

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arguably the most powerful move to date, the country’s banks have been denied access to cross-border payments system SWIFT – preventing Russian businesses from trading on the world stage, and individuals from buying goods using major card networks like Mastercard and Visa. PayPal, too, withdrew its services and major international chains like Starbucks and McDonald’s followed suit.

As a result, 30 per cent was initially wiped off the value of the Russian ruble, forcing the Central Bank to hike interest rates to 20 per cent. The West is now seeking to strangle the ensuing recovery, widening the net of sanctioned Russian individuals and businesses, and increasing the penalties for anyone engaging with them.

European Union (EU) leaders reached a deal, in late May, to ban most of the Russian oil imports also funding the onslaught, with an embargo on imports of oil and petroleum products, to be followed by ceasing pipeline imports to

Germany and Poland and affecting 90 per cent of Russian supplies by the year-end.

In May, the EU also made breaking sanctions against Russia an offence in all 27 EU member states – with penalties of up to seven years’ imprisonment. And the UK has since introduced a strict liability rule, which effectively means an ‘accidental’ breach of sanctions (because the defendant was ignorant of an individual’s status) is no defence.

So far, the EU has frozen 10 billion euros in physical assets and more than €20billion in bank accounts belonging to Russian oligarchs, and in May it extended sanctions to close family and associates of President Vladimir Putin, to maximise discomfort among his inner circle and prevent them from harbouring his assets.

The US has also supported the counter-fight, with economic sanctions and export controls. Its recently announced, eighth round of sanctions includes prohibitions on dealings with ffnews.com

certain Russian banks, bankers and television stations; access to accounting and management consulting services; and imports from and exports to Russia of a wide range of luxury, technological and industrial goods. There are also now visa restrictions on thousands of Russian and Belarussian military officials. Additions to its sanctions lists in June included current and recent Sberbank executive board members, Gazprombank directors, Moscow Industrial Bank and 10 of its subsidiaries, private Russian defence company LLC Promtekhnologiya and state-owned television stations Channel One Russia, Television Station Russia-1 and NTV Broadcasting Company. To date, more than 1,000 private sector companies have withdrawn from Russia and more than 200,000 Russians have also fled the US. However, imposing such restrictions on those wielding power within the Russian regime is one thing, ensuring they bite quite another.

“The breadth of influence of Russian money in the UK and London is very large and often hidden behind different shell or front companies, so often people that had very large exposures to people that have now been sanctioned had no idea. So, the big challenge is the hidden risk and how companies, not just in lending, gaming, gambling or banking – every industry – react to that,” ComplyAdvantage CEO Charles Delingpole told Sky News a month after the war began. By then, the counter-risk intelligence regtech said, more than 4,500 sanctions had already been imposed on Russian companies and individuals globally. By the end of April, that number had increased to 8,200.

To keep pace with daily new additions to sanctions lists and ensure they don’t fall foul of the penalties, companies now face the pressure of continuously updating screening and compliance programmes.

On the eve of war in Ukraine, ComplyAdvantage warned firms in its State of Financial Crime 2022 report that the use of sanctions would become more frequent, widespread and co-ordinated – and firms should ensure they have ‘robust adverse media, sanctions screening and payment filtering systems in place in order to identify any changes made to sanctions lists as political events impact the addition or removal of economic, trade and financial sanctions’. ffnews.com

It pointed to increasing examples of like-minded states co-ordinating sanctions to maximise their impact.

Indeed, in December 2021, the UK, US, EU and Canada had done just that against Russia’s ally in the war, Belarus, for ‘continuing attacks on human rights and fundamental freedoms… disregard for international norms and repeated acts of repression’.

There were other examples last year, too. The increasing use of Global Magnitsky-style (Global Magnitsky Human Rights Accountability Act or GloMag) sanctions programmes are forcing international businesses to revisit their risk calculations. GloMag, named after the Russian whistleblower Sergei Magnitsky, who was tortured and died in a Russian prison, originated in the States in 2016.

Copy-cat versions have since emerged in Norway, Australia, the EU and Canada, helping authorities to target human rights abuses and corruption.

Sanctions, money laundering, terrorist financing have always been huge issues… [but] the level of innovation required to counteract the Russian war machine is something we’ve never seen on this scale Charles Delingpole, ComplyAdvantage

As ComplyAdvantage pointed out in its report, during the US Summit for Democracy week in December 2021, the US federal government released new GloMag sanctions every day, graphically illustrating the near-impossible task of keeping pace manually with the law if you operate across borders.

“Sanctions, money laundering, terrorist financing have always been huge issues… [but] the level of innovation required to counteract the Russian war machine is something we’ve never seen on this scale,” said Delingpole.

So, telling a compliance team to assess your business’s exposure to risk in the current context is a big ask. For fintechs especially there is also the uncomfortable

realisation that their early success might well have been funded by Russian money. There was more than one oligarch sitting on cap tables in Silicon Valley, but many VCs aren’t required to disclose who their investors are.

In fact, the war has further highlighted weaknesses in the monitoring of assets as they flow around the world.

The Panama and Pandora papers earlier demonstrated how the true owners of significant wealth – cash and real estate – have become adept at using frontmen and women acting as their agents in different countries, or using offshore bank accounts in locations like the Cayman Islands. And the sophistication of the steps individuals are prepared to take to fly under the radar is only increasing.

Which is why identification verification (IDV) experts like Trulioo are having to work harder still to get to the truth.

Garient Evans, the company’s SVP of identity solutions, explains how it is adding more weapons to its own armoury to help firms gain that transparency.

One such is AI to mine more online information sources about companies and those within them – including ‘softer’ data sources, like media.

So, what trends has Trulioo observed in this space since the conflict began?

“In the United States, we’ve seen a number of executive orders,” he explains “The president has said we’re going to identify individuals who should be sanctioned, and that’s been reinforced.

We have an institution called FinCEN, a subsidiary of our Treasury Department, which dictates what’s legitimate activity and what’s not. On 7 March, overnight, it listed an exhaustive set of activities that financial institutions are supposed to be undertaking to ensure compliance with these executive orders.

In many ways, it’s a refresher, effectively saying ‘you know all these things you’ve been looking out for? Now, they really count, and you should pay particular attention to Russia and Belarus’. saying ‘you know all these things you’ve been looking out for? Now, they really count, and you should pay particular attention to Russia and Belarus’. It lists suspicious activity reports to be filed, and gives more specificity on what firms should do, and where they should look. In many ways, it’s a refresher, effectively Issue 12 | ThePaytechMagazine

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MAKING A DIFFERENCE: SANCTIONS “It talks about IP addresses originating from sanctioned areas, and individuals on lists who should be treated in a particular way. And it talks about predicate activities, like when a new account has been opened and is receiving funds from such individuals, amidst news items about the mistresses, children and cronies of oligarchs, and how this should be handled.

“But it’s when we look at businesses that we find the biggest challenge and the murkiest waters. Because, let’s be frank, the creation of businesses, the assets within them and the jurisdictions where they’re allowed to operate under the radar, are all opaque.

“This has been a practice for a long time, with offshore accounts in places like the Cayman Islands known around the world as a way to store assets and save them from being taxed. But they’re also taken advantage of by money launderers, terrorist funders, narco traffickers and oligarchs.

“This has become a legitimate – and I say legitimate because legal – way to distort funds. The alert I'm talking about says we should be examining these businesses and understanding who the beneficial owners are. But it has no real teeth behind it, because it doesn't change anything about registering.”

Europe, by contrast, is following through, continues Evans.

“Europe is on its Sixth Anti-money Laundering Directive (AML), and already working on its seventh. Any organisations that haven’t read it should go and do so because it has real enforcement action.

It says countries governed by the EU need to establish local registries for beneficial owners and make them available for financial institutions to use to determine who the beneficial owners and persons of significant control are within businesses, to make sure they have proper controls in place and can enforce the sanctions.”

That’s focussing minds across the business world, says Evans.

“We’re already seeing companies turn their attention to this latest directive, seeking our help with understanding what’s happening in different countries, with local registries, and saying ‘we’d better pass our audits and meet these statutes because we know there's some urgency’, particularly companies operating in Europe,” adds Evans.

“It has caused firms to shift their

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priorities because it has, among other things, some clear language around culpability. It says things like ‘if your financial institution is knowingly or unknowingly violating these sanctions and regulations, the persons in charge can go to jail’. And the important part of that is the word ‘unknowingly’ – even if people are unaware, the consequences could still be jail time.

“And the EU has no difficulty fining companies, even companies that are making an effort to comply, if they’re not going fast enough, or doing enough.”

But will this tough talk – and action – from the EU spark a ripple effect around the world? “What the EU is doing is going to help, as will any activity driving change in the way institutions prioritise this, choose new technologies and add staff to do what they can to shore up any gaps,” adds Evans.

Europe is on its Sixth Anti-money Laundering Directive (AML), and already working on its seventh.

Any organisations that haven’t read it should go and do so because it has real enforcement action Garient Evans, Trulioo

“I think of it as a seesaw. The US tolerates tremendous gaps when it comes to really solving these problems. With the Panama Papers, we saw that there are states in the US that act just like any of these offshore countries, which will allow the registration of trusts and businesses that could have a lot of illicit activity happening – third-world country leaders have stored their money in these states and have trusts set up. That's probably also true for oligarchs and those being sanctioned.

“In particular, we have no regulations for real estate, art and collectibles. So, you can come to the US, buy a very expensive piece of property for cash, and all of the individuals associated with that transaction have almost no obligations, even though there might be suspicious activity associated with it. And this has a lot of implications for cryptocurrency now, too.”

So, there is significantly more still to do, in the US, to overcome this problem.

“At the moment, the orders are not targeting any of the fundamental infrastructure,” continues Evans. “That still allows some of this activity and opaqueness to occur.”

It results in challenges for businesses that Trulioo is working hard to help them overcome.

He explains it like this: “The sanctions are targeted and identity matching is hard. If Fred Smith does something bad and finds himself on one of the sanctions lists, there are a lot of Fred Smiths and, unfortunately, a lot of them live on 123 Main Street, and all of those unfortunate Fred Smiths get captured into that process, in false positives. It is a nightmare for any payments, money transfer or cryptocurrency institution to find the right and legitimate Fred Smith, who’s on the naughty list, and separate him from all other Fred Smiths.

“So, in the last four months, we’ve ramped up our efforts by deploying AI, in addition to our usual strong data science.

A good example of that is where you see names repeated over and over again in social media or news sites. We’re using AI to crawl the worldwide web and identify mentions of sanctioned individuals – what we call adverse media. That intelligence helps us tell if we have the right individual and feed this back to our clients.

“Such information is really powerful, as it identifies both those sanctioned and their associates. And it’s increasingly critical because there are more than 6,000 lists we monitor and individuals are being added to or removed from them all the time.

“Our goal is to hone in only on right and proper matches, so that our clients have to invest less and know they’re only focussing on legitimately bad actors. This means they sleep better at night because they’re not going to unknowingly allow activity that can have serious repercussions for them.”

Go to our website for an exclusive interview with Igor Tomych, founder of Ukrainian fintech developer DashDevs, on fleeing Kharkiv and running a team in exile. https://ffnews.com/newsarticle/fintech/ defying-putin-the-dashdevs-story/ ffnews.com

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FOCUS ON AFRICA: TRANSPORT Well on their way: Payments are improving Africans’, and Africa’s, economic prospects

Hakuna matatu Better social mobility is the greatest gift payments can give Africa’s people, says BPC's Frank Molla 66

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In a nation developing as rapidly and diversely as Africa’s, the importance of being able to get around with ease and grasp opportunities for work and general self-improvement as they materialise, cannot be underestimated.

Which is why digital payments platform BPC has invested significant effort into enabling that through increasingly seamless payments technology, including an initiative involving 10,000 of Kenya’s colourful and iconic matatu ‘disco buses’.

In a country known for its hit-and-miss IT and physical infrastructure, mobile phones have taken the lead, over recent years, as facilitators of both lifestyle and the payments it relies on. As such, they provide a vital route to financial inclusion for millions.

In fact, Kenya National Bureau of Statistics data shows that, in this country alone, the value of mobile money transactions surged by 63.2 per cent, to KSh15.3trillion (US$0.13trillion), in 2021, compared to KSh9.392trillion (US$0.08trillion) in 2020; while the total number of mobile money transactions completed rose by 16 per cent to 2.165 billion.

This is coinciding with a number of infrastructure projects to help people physically get around and improve their financial lot, including the building of expressways linking major towns and cities.

These, too, have the potential – and need – to be powered by seamless payments using the various mobile-first options the population are now so comfortable with, according to BPC managing director Frank Molla.

At the same time, the disparate nature of the African continent means one size does not fit all, and solutions must be tailored to the individual needs of its different markets. For example, in Kenya, 70 per cent of the 54 million-strong population are dependent on buses, and payments have a key role to play in boosting financial inclusion by enabling people to get from A to B for work and other purposes, through seamless, electronic ways of paying.

However, while Sub-Saharan Africa as a whole may have been responsible for 64 per cent of the estimated US$2.1billion in daily global transactions via mobile money platforms in 2020, according to the mobile operators trade body, GSMA, 57 per cent of Africans, or 360 million adults, still didn’t ffnews.com

hold any kind of bank account, including mobile money accounts, according to BPC’s own Digital Banking In Sub-Saharan Africa report, released this Spring.

And the need to improve on this has never been more urgent. Chill economic headwinds blowing through this nation, whipped up by the COVID-19 pandemic and now the Russia-Ukraine conflict, are threatening to stall Africa’s progress. Indeed, these led, in April, to the International Monetary Fund (IMF) downgrading its Sub-Saharan Africa growth forecast for 2022 to 3.8 per cent from 4.5 per cent. And, given Ukraine is a globally important exporter of wheat, corn, barley and fertiliser, Mike Dunford, world food programme regional director for Eastern Africa, has said the region is facing its worst food security situation in recent history, with 82 million people now ‘acutely hungry’, up from 50 million this time last year.

Under these ominous clouds, BPC remains focussed on its endgame of ‘having some impact on people’s lives, on how they bank, how they pay, and how they transact… bridging digital into real life’, says Molla.

It is doing this by using available infrastructure like the ubiquitous mobile phones, to enable people to improve their circumstances by getting around more easily. In Kenya, this has involved ‘empowering’ almost 10,000 matatus using digital fare-paying capability, through BPC’s innovative automated fare collection solution, O-CITY, now used in more than 130 cities globally, including in Africa.

It is designed to leverage the M-Pesa mobile wallet, already the preferred payment method of 80 per cent of the Kenyan population and Africa’s most successful mobile payment service.

Passengers enter a code on their phone and a debit is made via their wallet, which can be instantly seen by drivers to grant access to ride. The platform does away with tickets and cash payments and increases transaction efficiency and transparency.

Highlighting the benefits of such initiatives, Molla argues: “I can easily board a matatu today, I don’t need to carry cash.

I get inside, get my seat, there is a till number, the conductor will tell me ‘Frank, from this destination to this destination it’s this amount’, I enter it and I’m done.”

BPC’s mobile-enabled payments are a win-win for matatu operators and passengers alike. Neither need carry cash ffnews.com

anymore, the former can easily reconcile their daily takings and passengers don’t have to worry about having the exact fare because drivers often don’t have change..

Beyond financial inclusion and the environmental benefits of reducing traffic in heavily-congested cities like Nairobi by enabling public transport use, there are wider ramifications too, such as improving tax collection for government.

And the journey has only just begun, says Molla: “We haven’t really scratched the surface, yet, in terms of improving mobility, because a lot of stuff is still closed-loop.”

One example is the Nairobi expressway, which runs 27 kilometres from the heart of the city to the airport. Ahead of its opening, in 2019, Molla had to pay for a sticker to use it, the only other option being to pay in cash during travel. But there are many ways in which the experience could be improved.

“The essence of the expressway was to reduce traffic and make it faster to get to and from the airport. What took one to two hours, now takes five to 15 minutes.

What I’d like to see is a shuttle bus carrying 20 or more people with a dedicated lane and pick-up and drop-off points, with the journey charged at a fair price. And, of course, the buses or matatus on the expressway should be cashless.“

We haven’t really scratched the surface yet, in terms of improving mobility, because a lot of stuff is still closed-loop There’s also the possibility of introducing number plate recognition to smooth the payment process – which, currently, doesn’t even accept M-Pesa.

In fact, Molla’s vision for payment methods for this expressway and others being built across the continent, goes further. “Let’s have QR code, let’s have different lanes, for different people – a sensor lane, an M-Pesa lane, a cards lane – so that, as a consumer, I can decide how I want to pay.”

QR and other technologies are already embedded in O-CITY. As Molla puts it: “O-CITY enables me to scan, pay using M-Pesa, use near-field communication (NFC), or whatever other method I wish.

“So, in Kenya, we still have more room to offer these different methods of payment – as BPC has introduced in the Philippines, the Ivory Coast and Latin America,” he adds.

Providing such variety is one thing, of course, while doing so compliantly and securely – particularly in a complex and developing country like Africa – is another.

For BPC, which has built its business on the principle of ‘link[ing] real life needs to smart digital solutions’ and helps customers in industries from retail to transport build ‘meaningful ecosystems’, the answer lies in the likes of biometric technology such as facial recognition, as well as leveraging AI and 5G capability. It also means taking account of differing mindsets and cultures and thinking ‘glocally’, as Molla puts it.

“We have to look at different regions differently, saying ‘yes, biometrics, but for which part of the world?’, ‘will AI work in this place?’ or ‘yes, 5G, but is the technology already present in this particular country?’,” he adds: “We also have to be cognisant of the direction of regulation, as far as payments are concerned. And, where we look to collaborate, we (need to) ensure regulation isn’t going to impact our innovation efforts.”

In fact, African regulators have shown commitment to maintaining progress.

Revised guidelines for agent banking and e-money issued by regulators in Ghana and Ivory Coast, have allowed operators to offer mobile money accounts facilitated by real-time gross settlement, currency exchange and remittance network, Ripple.

The ensuing boom saw mobile accounts in Ghana triple in three years, and increase by 40 per cent in Ivory Coast.

The Central African Republic’s decision, in April, to adopt Bitcoin as legal currency, could have far-reaching implications for the payments space, if legalised use at state level has the knock-on effect of helping broaden market access to more non-bank competitors and driving down users’ costs.

Meanwhile, the presence, in Kenya and elsewhere of super-apps like Safaricom’s M-Pesa Super App, is increasing the ease with which people can pay for their day-to-day needs, says Molla.

“Safaricom is making its app fun, so that people enjoy using it, and it has seen adoption by around nine million people already since its launch last year.”

Payments in Africa are clearly going places…

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FOCUS ON AFRICA: M-PESA

of

Africa’s mobile money transfer service M-Pesa has led the world once – can it do it again? Vodacom’s Diego Gutierrez believes so The M-Pesa story is legendary in the payments history of Africa – after Kenya entered the paytech pantheon as the first country to launch a mobile money transfer service back in 2007.

Fifteen years, more than 50 million monthly users and 52 million transactions-a-day later, M-Pesa is helping write the next chapter for financial services by building itself a super-app. It’s a logical next step for what is now the biggest financial services provider in Africa by transaction volume – bigger than all the continent’s banks combined – and it’s being propelled by a joint venture inked in 2020 between Kenya’s Safaricom and its parent group, Vodacom, based in South Africa.

The name of the joint venture, M-Pesa Africa, spells out a vision as much as a strategy; to build M-Pesa into a truly supranational brand.

THE EARLY YEARS Originally launched by local mobile phone operator Safaricom (then controlled by UK telecoms giant Vodafone, which owned the M-Pesa brand until recently), the service that allowed users to send and receive money by a simple SMS on a feature phone was adopted with blistering speed in Kenya.

Initially designed as a safe and easy way to transfer money between individuals, pretty soon, customers were using it to pay cashless for goods in supermarkets, transaction-fee-free, via what’s now the Lipa na M-Pesa channel. There was no need to waste hours

queueing at Kenya Power centres where customers traditionally bought their electricity upfront, either. And employers began transferring earnings direct to casual workers’ M-Pesa wallets because it was safer and cheaper than dealing in cash.

By the time of its 10th birthday, 96 per cent of Kenyan households were using their Safaricom/M-Pesa account to store, save, transfer and receive money, giving millions of people access to secure financial services outside of a banking system that mostly excluded them. Today, it’s said that more than half of Kenya’s entire GDP is transacted over the app.

Expansion into other African countries with similar infrastructures and equally large numbers of people living in remote areas with no access to formal banking, also saw fast adoption. M-Pesa is frequently held up as a poster child for what can be achieved if you really understand the challenges customers face and build your model around them.

“Last year, we transacted a quarter of a trillion dollars over the platform – that’s the money moved between wallets, and it’s growing in gigantic steps,” says Diego Gutierrez, chief officer for international business at Vodacom, which manages the M-Pesa service in Tanzania, Lesotho, the Democratic Republic of Congo, Mozambique and Ghana. M-Pesa is also active in Egypt and is poised to enter Ethiopia, Africa’s second most populous country with 114 million people, where banking services are limited and appetite for mobile payments systems enormous.

As a telecoms operator, Safaricom hadn’t set out to replace cash back in 2007.

Rather, it was just trying to find a safer, cheaper way of moving it on a

non-banking rail, after realising that its users were exchanging Kenyan shillings for airtime anyway in an informal economy.

In launching the M-Pesa service, it used touchpoints that its customers were already familiar with: a feature phone and local storekeepers who sold Safaricom airtime and were recruited as M-Pesa agents to facilitate account top-ups and cash-outs. It was simple, effective and – if operated at scale by the provider that owned the infrastructure to deliver it – very profitable.

But, beyond that, is there anything it can teach the rest of the world? Had Africa’s mobile money revolution continued to be limited to simple digital wallets and peer-to-peer transactions, perhaps not. But the story has moved on considerably since 2020.

Mobile pathway: As more people use smartphones, M-Pesa is maturing into a super-app

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FOCUS ON AFRICA: M-PESA Under the new joint venture, the ambition for M-Pesa is so much greater now. By 2021, neither Safaricom nor Vodacom saw themselves principally as telecoms businesses. Rather, Safaricom describes itself as a ‘purpose-led technology company’ with financial services, including wealth creation and insurance, singled out as future key revenue streams. Similarly, Vodacom now frames itself not as a telco but as a techco. Indeed, the Vodacom Group, including Safaricom as a strategic partner, now claims to be the biggest fintech platform in Africa by subscribers.

At the same time, both companies have been moving into new business areas, including education, healthcare and agriculture – all key to Africa’s economic and social improvement programme, and all needing finance, be it payments, loans, insurance or investment, which M-Pesa now supports with localised products across Africa.

By 2021, revenue from M-Pesa overtook that of Safaricom’s traditional core telecom services and financial services accounted for nearly 10 per cent of Vodacom Group’s service revenue.

The M-Pesa super-apps went live in June of that year – one for retail customers and another for M-Pesa’s large constituency of micro and small business users. Importantly, in a low-income environment that still suffers from poor connectivity, they have an offline mode so customers can continue to use them and complete transactions even without data bundles or when totally offline.

Over the first nine months, the super-apps would be downloaded by nine million customers and 320,000 businesses.

“Payments and financial services through solutions like our super-app and M-Pesa will drive the continent’s growth for the next decade,” says Gutierrez.

“Our job is to continue to innovate, and enlarge the ecosystem of customers, merchants and agents, and of third-party solutions that embed into our app.”

China’s Alipay, which has more than a billion users back home, to take the same micro app marketplace approach, inviting developers to use the M-Pesa Mini Program Development Platform to help move it from being a mobile money app to a ‘lifestyle companion’. It calls itself the ‘Google Play store of Africa’.

“Before, apps had their own payment interface; people went into them then paid through M-Pesa. Now we’re embedding these apps into our super-app, they won’t have to leave our platform to access them,” says Gutierrez. “The beauty is, we create a link with these companies to offer additional incentives – discounts, loyalty solutions, even loans, because we have access to users’ scoring.”

Customers can already shop, book a restaurant, food delivery, rail and bus tickets, and use government services,

Payments and financial services through solutions like our super-app will drive the continent’s growth for the next decade

IN GIANTS’ FOOTSTEPS M-Pesa took inspiration from the world’s super-app cradle when it came to deciding on its own model. It collaborated with

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Getting a life: M-Pesa’s app is a gateway to all manner of services

inside the M-Pesa environment. And, with 42,000 external developers creating additional services, the aim is to have several hundred mini apps active and hit 10 million downloads by the end of this year.

Safaricom isn’t the only one with super-app ambitions. But, in Kenya at least, says Gutierrez, M-Pesa has a natural competitive advantage over rivals like video-on-demand platform Viusasa and ridehailing firm Little Cab: it’s everywhere and used to pay for almost everything.

“Before M-Pesa arrived, only 10-15 per cent of people were banked; today almost 70 per cent are inside the financial system.

It’s massive,” says Gutierrez. “These people can make payments, send peer-to-peer, pay for services, get loans, save money, buy products through our network of merchants that take payments in M-Pesa.

People are happy to receive their salaries in M-Pesa because they can use them to pay other people … you create a circle and it evolves into enterprise solutions.

Fast-moving consumer goods companies, for example, have huge distribution fleets that move across Africa. They’re not carrying cash anymore, they distribute products and shop owners pay them in M-Pesa. That’s integrated into a system we enable, with our enterprise solutions.”

The super-app is, so far, ‘just scratching the surface’ of what can be achieved, he says.

STILL SOME GROWING ROOM The regulatory environment has been sympathetic to Safaricom as it went about building the M-Pesa service in Kenya – although its market dominance has attracted criticism and challenge from some quarters. Rolling out mobile money across African borders hasn’t been plain sailing, largely due to different regulatory approaches. Rules around data sharing, which is crucial to any super-app, may yet prove an obstacle.

A 2021 white paper from Mastercard and The Economist, called From Online Bazaar To One-Stop-Shop: The Rise Of Super-apps In The Middle East And Africa, identified three ‘promising players’ in Sub-Saharan Africa, aside from M-Pesa: Nigerian courier service Gokada, whose super-app allows users to send packages, order food and hail cabs on one platform; SafeBoda, a Ugandan-based ridehailing firm; and MTN Group, another telecoms provider headquartered in South Africa, which is bundling instant messaging with m-commerce and entertainment. Indeed, Vodacom itself launched a ‘digital shopping, lifestyle and financial platform’ called VodaPay, also backed by Alipay, in South Africa, in 2021. For any one of these to become a supranational player, there will need to be better harmonisation between existing industrial strategies and policies, the report said. Thanks to M-Pesa’s underlying payments platform, it probably stands a better chance than many because, as the white paper observed: “A super-app without a strong payment infrastructure is almost impossible to imagine.”

Gutierrez is confident that M-Pesa will be laying down many more historic markers.

“We think everything is going to be integrated into our super-app,” he says.

“Telcos are going to become banks; banks are going to become telcos. We see ourselves at the centre of this journey.”

And that is the new lesson that M-Pesa can teach the world. ffnews.com

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FOCUS ON AFRICA: INFRASTRUCTURE

Standing on a platform for growth

Africa wasn’t alone in seeing economic progress set back by COVID-19 and now by Russia’s invasion of Ukraine. But BankServAfrica is pressing on with a programme that promises to lift it out of the doldrums, says Portia Matsena BankservAfrica, the continent’s largest automated clearing house, is marking its 50th anniversary year by accelerating the drive to build a platform economy.

Wholly owned by five South African commercial banks – Firstrand, Nedbank, Standard Bank of South Africa, ABSA Bank and the Dandyshelf Group – it is South Africa’s official payment systems operator (PSO), processing billions of payments annually involving trillions of South African rand. Based in Johannesburg, the organisation’s operations, however, are not confined to its home country.

BankservAfrica is already a key player in the Southern African Development Community (SADC), enabling interoperability in the region through its specialist regional clearing house (RCH).

Beyond Southern Africa, its retail and card payment systems are well-established in the Democratic Republic of Congo, among other countries, and it regularly meets with key payments stakeholders across East, West and Central Africa to help usher in the continent’s new era of a hyper-connected financial markets infrastructure.

The importance of adopting a payments platform to enable better delivery of financial services – part of the BankservAfrica 2.0 strategy – cannot be underestimated. It is one of the central pillars of the South African government’s National Development Plan to help improve financial inclusion for the country’s millions of unbanked or underbanked – a move

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widely regarded as a key trigger for economic development.

And there is a desperate need for that: South Africa’s already weak economy was plunged into further distress by the COVID-19 pandemic, with worsening unemployment and reduced economic output. Indeed, latest statistics show that, in the fourth quarter of 2021, the country’s unemployment rate reached 35.3 per cent – the highest since the quarterly labour force survey started in 2008. Official estimates show an economic growth rate of only 2.1 per cent in 2022, far below what experts say is needed to make meaningful progress in reducing unemployment and poverty, and not helped by the global economic stress caused by Russia’s invasion of Ukraine.

Against that backdrop, BankservAfrica's infrastructure renewal modernisation programme, a critical enabler for BankservAfrica 2.0, is making solid gains.

The target state of BankservAfrica 2.0 is a fully interoperable, Cloud-ready orchestration platform, enabling a better delivery of financial services. As a technology platform, BankservAfrica 2.0 promises to be highly automated, extensible, and scalable on-demand, easily accessible to authorised participants through standardised APIs, with guaranteed, always-on availability. And, as a business, it says is ‘partnership-focussed, innovation-centric, and data-driven. We are structured around best-in-class teams of self-directed, high-performing

professionals, supported by clear procedures and standards’.

Cloud computing is one of the critical enablers in the first stage of the BankservAfrica 2.0 strategy. But there are others. The country’s Rapid Payments Programme, will see transactions cleared on an immediate basis (TCIB) for enabling cross-border payments in SADC and beyond. There is also a digital identity programme, a multi-industry-endorsed initiative to create one scheme for digital identity in South Africa. This, it is hoped, will enable validation, trust and interoperability for the country, as well as drive financial inclusion and give the unbanked access to financial products and services.

Here, Portia Matsena, BankservAfrica’s chief information officer, answers some key questions.

THE PAYTECH MAGAZINE: How have payments and customer demands changed in South Africa over the last couple of years?

PORTIA MATSENA: If you look at BankservAfrica 1.0, we were more of a back office, just a processing house, but the landscape has changed. And, if you look at what has driven the landscape, COVID has changed how we do business and also how we do a lot of things in the payments industry.

So, if you look at government, it had to subsidise a lot of people, due to the COVID experience that we had, and that increased payment volumes. The COVID ffnews.com

Payments pathway: BankservAfrica is supporting economic recovery by making transactions easier

relief grant was among several activities to support people who were hard hit

by COVID, which led to increasing transaction volumes. That changed the landscape because we needed to respond differently to what we had known, and led to the adoption of BankservAfrica 2.0 for us in the payments space.

As well as customer demands, there is also competition. I mean, you have fintechs that are not regulated as rigorously as us, and they are able to come up with solutions that enable them to respond easier to the customers we are trying to serve, and that’s putting a lot of pressure on us.

As a result, we have looked into how we can bring everyone into this ecosystem.

The financial ecosystem should be inclusive and, hence, we have adopted the Rapid Payments Programme and, as BankservAfrica 2.0, we’re building a platform to bring in different kinds of players within ecosystems, to be able to harmonise all of the solutions that are coming into the space.

TPM: How is BankservAfrica changing to meet the challenges of these new demands and expectations?

PM: BankservAfrica 2.0 is all about innovation. It’s about being able to respond to the client easily, in an agile way, swiftly, and also being trusted by the organisation. It’s about being the leader in the payment settlement house, leading the industry, and coming up with solutions that can respond to the ffnews.com

ecosystem without compromising anyone participating in it.

And when you’re talking about futureproofing, you need to be a trusted brand. With trust, comes a lot of things.

Firstly, when customers trust you as a brand, they trust your product, they trust that you are able to give them something they can depend on, which is able to run their product. We are talking security, we are talking availability, we are talking agility. Those are the elements I always have to make sure are embedded within any solutions I deploy within the BankServAfrica 2.0 environment.

BankservAfrica is the nerve centre for ensuring financial inclusion TPM: In what way is Cloud technology a gateway to innovation in finance?

PM: We cannot ignore the fact that Cloud is a new way of doing things. But, again, you look into the space we operate in, and we are driven by the regulator. We are operating regulated products and unregulated products and, at the same time, we find ourselves having to respond to legislation. As much as we would want

to adopt Cloud solutions, we also need to consider what the regulator is saying. But we cannot ignore the fact that Cloud is the way to go.

We have now come up with a Cloud strategy that has been approved by the regulator and we are looking into migrating most of our products to the Cloud, because we recognise that we cannot continue as is, with the current technology, and achieve our goal of being the leader within the industry. Banks are ahead of us in terms of migrating most of their products to the Cloud, but, again, they still have those legacy products that are hosted on-premise.

However, our current infrastructure refresh project is a way for us to be able to move to the Cloud environment, knowing we have made sure that whatever we bring in is Cloud-ready. It’s not easy to move from legacy straight to the Cloud, you need a transition plan, and ours, with our infrastructure refresh project, was to ensure we can migrate with ease.

TPM: What is the future for payments in South Africa?

PM: It’s going to be inclusive.

BankservAfrica 2.0 is about trying to achieve that for the country. It’s bigger than us. We’re responding to a national call to bring everyone into the system.

BankservAfrica is the nerve centre for ensuring financial inclusion.

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CRYPTO & BLOCKCHAIN: COMMENTARY

Bit up, Bit down... but still going strong Bitcoin is now in its 13th year. But will 2022 be a crypt-astrophe for some? asks Ron Delnevo When I started to research this article, the first surprise for me was that cryptocurrencies have only been around since 2009.

It was on January 3 that year that Satoshi Nakamoto, apparently determined to create a currency that could operate outside the control of traditional banks, mined (found a number used only once by deploying massive computer resource) the genesis block of Bitcoin.

Nine days later, the first transaction on a blockchain network was 10 Bitcoins, sent to Hal Finney, one of the first promoters of the cryptocurrency. A pause here for a word or two on blockchain, which was first conceived in the 1990s.

A blockchain is a decentralised digital ledger. Each block is a page, with a unique digital signature. A block can only be changed with the consensus of the tens of thousands of computers around the planet that hold the legitimate records of each block and relevant links.

Bitcoin is simply one product whose transactions are validated on a blockchain.

Reportedly, more than $6billion was spent in 2021 on blockchain solutions, many of which had zero connection with Bitcoin or any other cryptocurrency.

One perhaps surprising use of blockchain technology has been in the music industry.

For example, recently, Kings of Leon released a new album as a non-fungible token, in the form of digital data stored in a blockchain. Clearly, blockchain must be music to many ears.

Anyway, leaving blockchain to its own very diverse devices, 2022 marks the 13th anniversary of the launch of the planet’s first cryptocurrency, although we can’t congratulate Nakamoto because no one

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knows who Nakamoto really is or was.

Perhaps it would have been appropriate if this nom de plume had offered a cryptic clue as to his, her or their real identity, but it didn’t. And, so, it may well remain a mystery for all time.

Those 13 years have seen the market for cryptocurrencies enjoy phenomenal growth, to the extent that Bitcoin is now one of around 10,000 active cryptocurrencies available worldwide, which are currently being used by 300 million people.

In May 2022, the value of the Bitcoins Nakamoto enabled that have been mined so far – more than 18 million – was around $500billion. But – and this is where cryptocurrency’s 13th year may turn out to be unlucky for some – only six months previously, that value stood at more than $1trillion. I would describe a fall of around 50 per cent in six months as unlucky, to say the least.

Bitcoin hasn’t been alone among cryptocurrencies in suffering dramatic declines during this bear run. Ethereum, the next largest crypto, has seen its capitalisation fall almost precisely in line with Bitcoin’s performance. Such a sharp decline, say crypto’s critics, is evidence of the extreme volatility of Bitcoin. However, an examination of the 13-year history of the Daddy Crypto doesn’t necessarily validate that view.

FLUCTUATING VALUATIONS In the initial stages, a Bitcoin was virtually worthless, valued at a fraction of the US dollar. In 2011, two years after the first Bitcoin was mined, the peak value of a coin was $32. Two years later still and the price fluctuated between $13.40 and $1,200.

The 2013 high of $1,200 was not reached again for another four years, in 2017, when each Bitcoin was worth anything from $775 to a peak of $19,343, reached on 16 December that year. It would be another four years before such

Bitcoin values were seen again; in November 2021 it hit a ceiling of just over $68,000.

So, the reality of the volatility of Bitcoin is that anyone who bought Bitcoin between 2009 and 2020 and retained their holding, has made a very substantial paper profit. However, those who bought and sold during 2021 and the first half of 2022 may now be either nursing losses or enjoying profits, given the volatility during that period.

In short, as with many traditional investments, taking a long-term view has been the best policy with Bitcoin.

This is almost certain to continue to be the case. That said, Bitcoin’s volatility since 2020 has been very striking.

In March 2020 – more or less the start of the COVID pandemic – each Bitcoin was worth barely $4,000. A year later, the value had increased to $65,000, only to then plunge by 50 per cent over a few weeks. To counter such swings, a new class of cryptocurrency was developed in 2014: stablecoin.

Stablecoins were designed to have their prices tied to real-world assets, such as the US dollar. An example of the stability that can be achieved by stablecoins can be found in the shape of Tether, the first to be launched in 2015 and by far the largest in terms of capitalisation, reaching more than $70billion so far in 2022. Tether is pegged to the US dollar, and those that hold it, claim that since 2015 they have never failed to redeem their coin at a guaranteed value of $1. However, not every stablecoin has fared so well.

During May 2022, a new type of ‘algorithmic’ stablecoin – TerraUST – lost its peg to the US dollar. This had an immediate negative impact on the price of both TerraUST and its sister coin Luna, which was never pegged to any real asset, ffnews.com

As with many traditional investments, taking a long-term view has been the best policy with Bitcoin.

This is almost certain to continue to be the case

ffnews.com

but it was linked to TerraUST. As the price of both coins tanked, Luna kept being minted. In the space of a few days, TerraUST lost around 80 per cent of its value. Luna suffered an even more catastrophic fall, with a 99 per cent decline.

It rendered the market illiquid and forced the relevant blockchain to be switched off, making trades impossible.

A market capitalisation of approaching $30billion was effectively wiped-out in a matter of days, with a huge negative impact on many investors. One who reportedly purchased $3million of Luna lost all but a few thousand dollars within 72 hours. Overall, investors in both coins have reportedly lost north of $42billion.

The lesson here may well be that for a stablecoin to be relatively stable, the issuer must have substantial liquid collateral assets to allow timely redemption of the crypto. The issuers of Tether have strong collateral assets in place, adequately covering at least 80 per cent of the potential coin redemption

costs they might face. This explains why they have reportedly been able to redeem their stablecoins to the value of $8billion-plus in May 2022. Terra, it seems, was not in the same position of strength.

In any event, it is clear that there is much to consider in relation to investments in cryptocurrencies. However, despite Warren Buffett describing Bitcoin as ‘rat poison squared’, long-term investments in the founding crypto have proved to be lucrative and, in a troubled world, may well continue in the same vein.

It is certainly strongly arguable that the billions of sterling that the British public gamble each year would be better invested in Bitcoin. Very few of the 24 million UK-based gamblers make a profit on their wagers, whereas long-term crypto ‘betting’ to date has a proven record of success.

The 300 million or so current crypto ‘believers’ don’t have to look far for an online cryptocurrency exchange through which to buy and sell coins – there are hundreds. There are even ATMs at which Bitcoin and altcoins can be bought, though 80 per cent of these are currently in the US. Founded in 2016, the biggest operator – Bitcoin Depot – now has 7,000 ATMs in 49 states, as well as some across the border in Canada.

There are currently very few cryptocurrency ATMs in the UK – and the vast majority that do exist are in London.

However, this is likely to change as HM Treasury seems committed to seeing this country take the lead in all things crypto as the decade progresses.

Finally, you might be wondering where it’s safe to ‘keep’ your Bitcoins. It’s a very important consideration. One purchaser, who kept his Bitcoins only on the hard drive of his PC, seemingly inadvertently threw away coins worth half a billion dollars when he binned the computer. The hard drive is now buried in his local council refuse tip, with the local bureaucrats not yet persuaded to allow a recovery mission.

To avoid such a fate, most crypto investors keep their precious coins in what are called ‘cold wallets’. Oddly, these can be as unsophisticated as a record of the private Bitcoin key printed on a piece of paper, no doubt securely stored in a home safe or a bank safety deposit box.

You could therefore safely say that, on paper, Bitcoin can be a good investment!

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CRYPTO & BLOCKCHAIN: CBDCs Opinion is split on whether cryptocurrencies are the ultimate root of all evil or a force for good.

Those who’ve chased the market and cashed out at the top of cryptos’ many rollercoaster highs made a fortune.

Recent major crashes in the values of decentralised and unregulated tokens like Terra’s Luna and its associated US dollar-pegged stable coin, have ended in misery for investors who suffered heavy, and possibly unrecoverable, losses.

But, beyond the backlash headlines, there is support, both at government and corporate level, for investing in other types of digital currency that is similarly developed on blockchain technology.

Indeed, nine nations – The Bahamas, Nigeria and seven countries in the Eastern Caribbean Union – have already created a central bank digital currency (CBDC). And almost 80 more countries are either actively pursuing one, or considering doing so – with India, Russia, China, Sweden and Jamaica likely to be among the next issuers of CBDCs. In March 2022, US President Joe Biden signed an executive order to promote responsible innovation in digital assets, while the Bank of England is now starting a consultation process about creating a CBDC to run alongside cash and bank deposits. But it is not just governments that are heavily involved in research.

ffnews.com

Paul Wong from Stellar believes digital currencies and their supporting technology are about to open up a ‘financial superhighway’ that will prove to be a game changer for the payments industry and finance in general A blockchain ecosystem with some 1,500 different platforms is continually evolving, where established decentralised currencies like Ethereum and Bitcoin, the Hyperledger collaboration hosted by the Linux Foundation to advance cross-industry blockchain technologies, and the Corda distributed ledger technology (DLT) platform rub shoulders.

There is also the Stellar Development Foundation, a US-based non-profit organisation on a mission to create a more open and inclusive global financial system, which has a blockchain network processing more than five million transactions a day. Paul Wong, Stellar’s director of product for CBDCs and institutions, whose background includes running the Federal Reserve’s digital currency experimentation programme, is in no doubt of the game-changing potential of the underlying technology.

“I think what we’re really doing today is building a new financial superhighway, and that is incredibly exciting,” Wong explains.

“From my perspective, we’re currently operating on a two-lane highway that was built in the 80s or 90s, but has been repaved several times over. In some cases, we’ve been able to expand that highway to four lanes, we’ve built new highways to handle different asset classes, but otherwise, fundamentally, not much has changed over the last few decades.

“Today, our financial highway is somewhat siloed. Payments are on one highway, security is on another, and commodity is on yet another.

And that structure exists for a number of reasons, including, for example technology, technological limitations, regulatory constraints, legacy systems, the list goes on.”

But blockchain and other DLTs, he believes, have the power to overcome all that. “Innovation is really challenging the current arrangement. The blockchain community today is working to build multiple financial superhighways, with eight-to-10 lanes, accommodating a number of different users,” he adds.

“These highways are able to accommodate more than just freighters and cars, for example; they will hopefully allow for walkers, bikers, autonomous vehicles, whatever you can think of.

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CRYPTO & BLOCKCHAIN: CBDCs And, if you step away from my superhighway analogy, what we’re doing is creating a new financial and economic platform. Blockchain is really allowing us to rethink how we record information, how we maintain records, how we do business.

So, if you can imagine a world where we can send payments at almost zero cost across borders, if you can imagine a world where anyone can access the capital markets to fund businesses, if you can imagine a world where we are in control of our assets, it’s an amazing future.”

So where do CBDCs potentially fit into this mix? Wong is more sceptical about this.

“The superhighway I’m talking about is currently being developed by the private sector. Central banks can engage in this activity as well and build their own superhighway; and, in many cases, it might be more effective for a central bank to do so than the private sector.

“The benefits of a CBDC will vary by jurisdiction. An appropriately designed CBDC will accelerate the innovation that will come from this space. At the same time, a really poorly designed CBDC will limit growth and innovation.”

Other potential benefits of the widespread use of digital currencies for the issuing central banks, include receiving an instant picture of economic activity, as well as more accurate and timely economic data for gross domestic product (GDP) estimates than is available today. CBDCs can also help in the fight against corruption and money laundering, as authorities would be able to trace transactions far more effectively than is currently possible.

NOT TO BE TAKEN LIGHTLY But Wong warns there are major issues for governments to consider and extensive consultation is needed. He says: “We really need to be careful when we think about introducing any CBDC. “We need to understand what it’s designed for, how it’s designed and its purpose. CBDCs can be a catalyst for innovation and positive change or, as I say, they can lead to poor or possibly disastrous results. How do we avoid disastrous results?

We need to have significant and broad consultation. Designing a CBDC is all about trade-offs, and these trade-offs need to be made with the people using them.

“How much information do we, as a society, want to share with government?

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Where should our data live? How should our privacy be protected? There are so many issues that need to be addressed before we can issue a CBDC.” And consultation with the full range of potential participants will be key.

“We need to have broad stakeholder engagement,” continues Wong. “This includes reaching out to that five-person startup working on decentralised financial applications, the 100-employee crypto foundation, the 20-strong non-profit focussed on financial education, and even the 200-employee fintech unicorn. These organisations are essential to consult, in addition to the big techs and the large financial institutions that are already engaged in significant lobbying and consultation efforts.

“The reason I’m calling out the small players is that they typically don’t have the resources or the network to influence policy decisions and policymakers, but policymakers really need to consult with them, because they’re the ones that are effecting change on the ground.”

The blockchain community today is working to build multiple financial superhighways, with eight-to-10 lanes, accommodating a number of different users The European Central Bank (ECB) has noted another area of concern for central banks. Issuing a CBDC could potentially disrupt the commercial banking sector if people, particularly in times of economic stress, pull their savings from commercial banks and place them in risk-free accounts directly with the central bank, which could trigger a bank run and intense stress on the commercial banking sector.

And, as Wong highlights, data privacy and compliance with applicable consumer data protection and data privacy laws is another potential area of conflict. For example, if transactions are immutable, how will the ‘right to be forgotten’, a core tenet of the General Data Protection Regulation in the European Union, be addressed by affected central banks? It would likely lead to those people who

want anonymity continuing to rely on cash transactions. Many central banks are embroiled in intense debates like this; around the potential use cases of CBDCs, including the merits of wholesale-versus-retail use cases, direct-versus-indirect-versus-hybrid claims on the central bank and tiered-versus-non-tiered architectures.

“In my humble opinion, we’re still at the beginning stages when it comes to CBDCs and many early pilots have not passed the test of time,” says Wong. “Many jurisdictions have been studying CBDCs for a few years now, they’ve experimented with them, and nothing has really gone to full production.

This, to me, suggests several things: that CBDC may not be right for all jurisdictions; the use case for CBDC is still being determined; and, equally or more important, building a CBDC is really hard.

“For advanced economies that already have an instant payments system, like the US or the UK, the viability for issuing a CBDC is a bit more challenging to assess.

Advanced economies have more complex financial markets and more moving parts.

The key questions I would ask are really ‘what is our vision for the future?’, ‘what is the central bank’s vision, or role in that vision?’ and ‘what role does a central bank play in affecting that vision?’.

“These are all questions I think central bankers at the Fed and the Bank of England are thinking about.

“I think the lack of a CBDC might actually create more innovation in America, and also in the UK. If we go back to my highway analogy, what we’re really talking about is akin to building a new train tunnel between New York and New Jersey, or adding a new runway at Heathrow. The logistics coordination effort is huge.”

And, lastly, to the question: will CBDCs replace existing decentralised cryptocurrencies? Wong doesn’t believe so.

“It’s important to consider that we use different forms of money today, not just central bank money. In fact, we probably use commercial bank money and non-bank money more than we use central bank money,” he replies.

“I rarely carry cash, and I only use it when no other form of payment is accepted. In my opinion, stablecoins and cryptocurrencies that are used for payments are different forms of commercial and non-bank money, and they’re here to stay.” ffnews.com

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