Fintech Finance presents: The Paytech Magazine Issue 06 by Fintech Finance

ISSUE 6

THE

Preparing for the ‘big bang’

Outsourcing: where now? The importance of trust in a post-Wirecard supply chain

TAS Group and UniCredit on the T2 migration

Etail of woe

Monetary megatrends

What businesses told Stripe about payments barriers

R3 and the potential of central bank digital currencies

SPHERE OF INFLUENCE

Banking Circle’s future bank playbook

INSIGHTS FROM Finastra ● G+D ● Claro ● B-North ● Upgrade ● Tonik ● Walrus ● Aptitude

Enfuce ● Trulioo

●

Mobiquity

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Danske Bank ● SmartStream ● Varengold ● Varo ● Manzil

Putting the human touch in touchless banking With 200% growth in new mobile banking users and an 50% increase in app usage in 2020, banking clients demand

more and more on-line features. Intuitive user experiences are no longer optional, surprise and delight your customers to stay on top of the game.

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CONTENTS

NEOBANKS OF THE WORLD 6

Cover story: The future bank playbook As digitisation accelerates, it has profound implications for the infrastructure, says Banking Circle

11 The new deal B-North is building a regional UK business bank on old-fashioned relationships and the newest of tech

14 Time for change? Manzil is persuading Canadian financial services providers to rethink some fundamental concepts, so that Muslims can transact guilt-free

16 Teen spirit Walrus is among a new generation of challengers ready to tap into India’s young adult digital payments market

18 What she really, really wants It’s time to give women in Brazil their economic freedom, says Elas

21 Meet the world’s least powerful bank The Icelandic financial crash gave the founders of Indó a very different view of what a bank should be

25 Kiss and tell

THEPAYTECHVIEW

2020

ISSUE #6

Stripe has revealed that, during the first three months of the pandemic, it onboarded 100,000 new businesses. Meanwhile, NatWest's new merchant payment solution, Tyl, reports that 65 per cent of businesses registering for its services since the start of the UK lockdown, had previously only accepted cash. The digital payments tide has well and truly turned – and it’s raising with it fundamental questions to do with domestic and crossborder regulation, even the foundation of our monetary systems and how central banks should respond – perhaps with central bank digital currencies (CBDCs), as discussed by R3 on page 69? Elsewhere, we look at how the Wirecard collapse has impacted trust in

the payments supply chain and how SmartStream believes AI will become indispensible in managing such risks as the velocity, variety and volume of digital transactions increases. Editor-in-Chief, Ali Paterson Our last spine tingler, 'Life is 10 per cent what happens to us and 90 per cent how we react to it' was from the American preacher, author and educator, Charles Swindoll.

Opening an account is often an emotional experience – but it doesn't have to be, says Mobiquity’

28 Educate to accumulate If people don’t know their ETF from their ESG, personal financial coaching app Claro will teach them

30 A surprise Tonik Veteran fintech entrepreneur Greg Krasnov is boldly going where no bank has gone before in the Philippines

COMMENTARY 32 Neos v the high streets: What can they learn? Marcel van Oost compares two l eading neobanks with two incumbents to find room for mutual disruption

48 A question of standards ISO 20022 and SWIFT gpi show interoperability between crossborder payment schemes is not just desirable, but possible

www.fintech.finance

Issue 6 | ThePaytechMagazine

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CONTENTS

51 79

56 Bridging the legacyto-modernity gap

46 Getting your clicks

Is banking software-as-a-service the megatrend underpinning the move to open finance? Finastra thinks so

72 The language of hope

The etail explosion is a golden opportunity for the industry – if it can collaborate over payment security, says G+D Mobile Security’s VP

Danske Bank’s Søren Rode Jain Andreasen helps FinTECHTalents’ Virtual Nordics event explore the region’s reputation for innovation

REGTECH 36 A network of trust An effective, risk-based approach to onboarding can be technologically almost effortless, says Trulioo

39 The ultimate prize TAS Group urges banks to make the most of a postponed migration to the eurozone’s new consolidated platform for payments settlement

42 Banks’ ‘big bang’ moment Changes in European payments infrastructure will be tough, but worth it, says UniCredit

ECOMMERCE 44 Smoothing the payments ride Even in the ‘single’ European market, differences in regulation make the ecommerce journey painful. Stripe is determined to ease it

ARTIFICIAL INTELLIGENCE 74 Moving beyond hype

OUTSOURCING

66 Northern lights?

Digital Asset’s DAML could hasten the adoption of blockchain

Three industry experts consider successful AI applications, the hype cycle and how far it can replace traditional banking practices

51 In outsourcing we trust? The Wirecard scandal has raised serious questions about trust in the financial services supply chain. PPS and Polymath Consulting consider the nature of outsourcing

79 On a mission You can’t wait for the end of the day to take control of transactions that ‘don’t compute’, says SmartStream

54 The Nordic power behind payments Finland’s biggest startup by revenue in 2018, Enfuce’s rise has been impressive

LENDTECH 82 Land of the financially free Varo, the first challenger to be granted a national banking licence in the US, is liberating credit

CLOUD 59 Cometh the moment… Today’s CFO is the hero of the hour. Aptitude Software is rooting for them

63 A funny thing happened on the way to the Cloud ACI Worldwide’s Head of Public Cloud believes it’s an opportunity to reshape banks’ business models

85 Reaching for the summit Varengold Bank’s boss in Bulgaria tells us why outsiders have got it so wrong about the region

88 Up, up and away… again! Unicorn builder Renaud Laplanche is casting his spell on Upgrade

BLOCKCHAIN

LAST WORDS

69 Disrupting the payments stack

90 New riches

R3 is helping central banks respond to changes that challenge the foundation of monetary systems

Why risk + return + impact is the only sum that adds up for Ronald Cohen

THEPAYTECHMAGAZINE2020 EXECUTIVE EDITOR Ali Paterson EDITOR Sue Scott ART DIRECTOR Chris Swales

US CORRESPONDENT Jacob Bouer ONLINE EDITOR Eleanor Hazelton Lauren Towner PHOTOGRAPHER Jordan “Dusty” Drew

SALES TEAM Chloe Butler Tom Dickinson Karen Estcourt Shaun Routledge

VIDEO TEAM Douglas Mackenzie Lea Jakobiak Laimis Bilys Shaun Routledge Lewis Averillo-Singh Classic Dom Beasley

FEATURE WRITERS Hannah Duncan ● David Firth Tracy Fletcher ● Andrew Gaudion Martin Heminway ● Martin Morris Alex King ● Natalie Marchant Pravina Rudra ● Sue Scott James Tall ● Swati Sanyal Tarafdar

ISSUE #6 Fintech Finance is published by ADVERTAINMENT MEDIA LTD. Riverside Business Centre, Riverside Lawn, Tonbridge Kent, TN9 1EP

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

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

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Issue 6 | ThePaytechMagazine

COVER STORY: NEO INFRASTRUCTURE

The

playbook

As digitisation accelerates, it has profound implications for the infrastructure that supports and connects banks to each other and the wider financial ecosystem. Anders la Cour, CEO of Banking Circle, takes up the story CHAPTER 1: THE PATH TO DIGITAL READINESS THE PAYTECH MAGAZINE: You recently published research into how COVID-19 has impacted banks’ digitisation plans. What did that tell you? ANDERS LA COUR: Banks have been embracing digital more and more in recent years. They have been working to build more responsive and flexible businesses, centred on changing customer requirements as well, probably, as competition from fintechs and challenger banks. Regulation such as the revised Payment Services Directive (PSD2) has also been a key driver for digitisation. And banks have worked to overcome their traditional reluctance to moving to the Cloud for delivering essential transaction services. But COVID-19 accelerated the existing plans – suddenly, customers couldn’t go into branches, employees couldn’t come into branches or call centres, or online support hubs. Banks had to adapt and switch on more digital solutions. Many were already working with third-party financial infrastructure providers for some parts of their service. A number had also launched their own digital banks as a way of digitising and not replacing legacy systems – some more successfully than others. NatWest launched Mettle; Bank Leumi in Israel launched Pepper; JP Morgan is launching a digital bank in the UK in 2021. However RBS, for example, closed Bo. Our research among banks and payments providers across Europe, right

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at the start of the pandemic, showed that 90 per cent of banks and financial institutions are building technology design and architecture into their business planning. Eighty per cent of retail banks and 74 per cent of commercial banks have already worked with infrastructure providers. Close to 90 per cent of retail and commercial banks use customer data to determine demand.

CHAPTER 2: THE FUTURE-PROOF BANK TPM: Banks have been through previous financial crises, in very different circumstances, but can the lessons learned from those events be applied today, to help build more future-proof banks? ALC: Banking has long been a tech-heavy industry – banks’ basic architecture is derived from monolithic systems. It is a significant challenge for a bank to deploy new software in an agile, easy way and apply best practice. Many banks have tried to overhaul their legacy infrastructure – but with difficulty. Now the mindset has shifted – banks are increasingly open to collaboration for the best solutions for the customer. In 2019, Apple and Goldman Sachs launched a groundbreaking new credit card and Google is partnering with a variety of banks. Another example is Starling Bank, which has pursued partnerships with other fintechs. For example, Moneybox was one of Starling Bank’s earliest partnerships. In the context of COVID-19, collaboration has also addressed the issue

of financial fraud. HSBC has become the latest bank to sign up to a biometric identification system, developed by technology firm MiTek and offered through a partnership with Adobe. This trend of collaboration should continue post-pandemic. The most confident banks are those that have made heavy investments in

Alex Mifsud, Co-founder & CEO of payment services provider, Weavr Digital will continue to drive innovation and financial infrastructure. For example, innovation in customer onboarding has been largely driven by digital. The traditional way that banks used to pick documents and decide whether to open a bank account for you has shifted very significantly, as digital presents customers with a better way to do things. The same thing is going to happen to all aspects of financial services. Digital is simply going to drive a whole lot of innovation that financial infrastructure needs to respond to, because you can’t create a very deep and joined-up user experience if your back-office is completely disconnected. So, the next bit of transformation, I think, will happen in the backend systems. Ultimately, banks can’t do everything, so they also have to digitise a much bigger supply chain.

www.fintech.finance

Georg Ludviksson, Co-founder & CEO of digital banking software supplier Meniga Infrastructure is becoming more strategic, and banks and fintechs are building in optionality and modularising their systems and solutions, separating the frontend from the backend. More services are now consumed via application programming interfaces (APIs) and delivery models are changing. With the rise of open banking, that’s also blurring the lines between what’s inside a financial institution or a fintech, and what’s outside. So, interoperability, and the ability, for example, for banks to connect ,via APIs, to fintechs to offer their services, as part of the bank’s value proposition, is much more important than it was before. At least, the strategic optionality of doing so is, because that’s something everyone expects to increase. I think banks are realising that they may not have all the products in the future on their own balance sheet; they may not build them all themselves. So how can they build infrastructure that facilitates working or partnering with fintechs, while they may also compete with them?

www.fintech.finance

their tech stack and re-aligned their financial infrastructure requirements, using third-party services and platforms to respond to changing demands. 2020 has provided excellent learning opportunities to help financial institutions of all types regain clarity and confidence.

CHAPTER 3: A NEW COMPETITIVE LANDSCAPE TPM: Are banks in a strong position to face the global recession, in your opinion, and how do you think they compare to fintechs and payment service providers (PSPs)? ALC: Banks have the history to face the global COVID-induced recession. They also have their own brands and greater financial backing than fintechs. But they could learn from the ingenuity and innovative quick-thinking that is typical of fintechs to arm them well for the challenging economic conditions. History, experience and taking the long view are probably some of the reasons that just five per cent of the retail banks we questioned said they were concerned about the threat of recession, compared to 31 per cent of fintechs and 41 per cent of PSPs. Specifically on the COVID-effect, 41 per cent said the crisis has had ‘a little’ impact, and recovery is expected to be swift.

Thirty-two per cent said that the virus will affect their business ‘quite a lot’, with changes being made and cost reduction where possible. Another 26 per cent said the impact would be ‘significant and wide-ranging’. TPM: Has the process of ‘virtualisation’ effectively levelled the playing field between new entrants and incumbents? ALC: The playing field was already being levelled; it seems the pandemic has simply accelerated that process. But it still comes back to delivering a service that is in tune with customer need – and, to be able to do that, the financial institution needs to focus on its core skill and not be distracted by the ‘pipes and plumbing’ that underpin its service. Partnership with good financial infrastructure providers solve that problem, if incumbent banks can be open-minded enough to take that step. The institution must make sure digitisation is simply part of the delivery and doesn’t become the service itself. The firms that will be the winners are those that use digitisation as part of the journey to the benefit of the customer – they must not make it the destination. Issue 6 | ThePaytechMagazine

COVER STORY: NEO INFRASTRUCTURE TPM: As levels of collaboration across the financial ecosystem increase, have the dynamics of the competitive landscape for banks changed in turn? ALC: The competitive landscape was already changing as the new wave of fintechs and disruptors emerged. What is changing now is a recognition that different markets require different types of service, and the competitiveness is therefore focussed on being able to address a specific market need.

CHAPTER 4: THE STRATEGIC VALUE OF FINANCIAL INFRASTRUCTURE TPM: What did your research show about the challenges facing banks and other financial institutions today? ALC: The most common challenges remain aligned to a business-as-usual world – even a global pandemic has not changed that. So, the impact of regulation was a challenge to 58 per cent, while 53 per cent cited the

Juan Jiménez Zaballos, Group VP & MD for Innovation at Santander When we talk about platforms with our clients, and with other incumbents, it takes me to the first part of a conversation: how we put an open banking platform together to be the best in financial services? Open banking is dramatically changing the way we think of infrastructure. Back in the day, banks had robust, solid infrastructures, but they were closed ones. Now we are betting on the openness of the infrastructure and the platform in order to build new services – as platform-as-a-service, banking-as-a-service, etc. It’s a tough journey because the infrastructures that we used to have on prem, are still on prem. Most of the banks I meet are still only 20 to 25 per cent in the Cloud. Application programming interfaces (APIs) are a driving force to open banks to the ecosystem, to interact with third parties. And these third parties can be fintechs, they can be other banks and they can also be the regulators. We are all travelling on this journey together, and there are plenty of opportunities.

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implications of constantly evolving customer expectations. Less than a third are now concerned about the pace of technological change in banking – dropping to one-in-six among commercial banks. When building a digital-first relationship at scale, banks seem to struggle with the need to create both a user experience and a user interface that work for a wide range of customer types. The challenge is providing the experience rather than the underlying technology. Banking infrastructure has become a much more strategic concern – a significant number of businesses now have an interdisciplinary team looking at the latest technological innovations. This crucial decision is not simply a matter of IT selection, but something that can affect the entire business and, consequently, demands broad input and buy-in. TPM: In what ways are new digital platforms from external providers being used by incumbent banks to tackle some of their challenges? ALC: We, and other fintechs like us, are building systems designed from the basic understanding that technology is ever-evolving. Banking Circle architecture is decoupled, comprising smaller components and services. So, we are not just building for today, we are building for a payments world that is ever-evolving. With a decoupled architecture, we are able to replace or update individual pieces with limited impact on the rest. We are also able to easily add more functionality. For example, we may want to add direct clearing in new geographies, which may require new connectivity, new formats and protocols, and interaction with new clearing technology providers. We are also, like most other tech firms, building our infrastructure in the Cloud from the get-go. Using modern development tools, technology and infrastructure, together with a modern architecture, also allows for agile development and continuous delivery. That leads to us being able to bring solutions to the market quicker. A recent example of that is the launch of our payments on behalf of (POBO)/collections on behalf of (COBO) solution. Historically, business-to-business (B2B) payments have been received in the name of the payments business or bank rather than the underlying customer. This can result in reconciliation

Jason Maude, Chief Technology Advocate at Starling From around the time that Starling and the other first fintechs started to come along, there has been a big shift away from the thinking that you have to have your server in your building. Our CIO tells a story about when he was first interviewed by regulators. He was asked ‘who has the keys to the server room?’ and his answer was ‘not only do I not I know who has the keys to the server room, I don’t even know where the server room is’. At the time, that was fairly shocking for regulators. But I would argue that a Cloud-based infrastructure allows for greater security and responsibility, as long as you are clear about who has responsibility for what – and the big Cloud providers do a good job of saying where theirs lies. One thing that digital adoption does is really encourage the growth of new features and new ways of doing things. New add-ons, and additional types of account. The best digital players in the financial services market (and I would of course include Starling as one of those!) are releasing new features all the time. It’s really difficult to keep up with them, if you’re not on the Cloud. issues which, in turn, can cause delays in settlement and impact cashflow. Our solution addresses these pain points by enabling financial institutions to offer immediate visibility of the sender’s details when processing B2B payments, and to collect funds locally into accounts in the underlying customer’s name. Payments businesses and banks can deliver this service without relying on the slow, costly and outdated correspondent banking network, or invest in their own solution. The big challenge is staying focussed on delivering what customers need – and not relying on lethargy to retain relationships. To do that, the focus has to be on understanding and responding to customers effectively – and that means not being distracted by back office issues. That’s where financial infrastructure providers like Banking Circle fit in. www.fintech.finance

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INSTAN

NEOBANKS OF THE WORLD: SMEs

Thenewdeal B-North is building a regional UK business bank built on old-fashioned relationships and the newest of tech. Co-founder and CEO Jonathan Thompson explains the model Fintech developments offer the chance to challenge every aspect of banking, particularly its relationships with customers and businesses. When it comes to lending to SMEs, one newcomer has identified an opportunity to offer an evolved way of organising business loans that is both cutting edge and yet curiously familiar. Based in the North of England, B-North is building a model for business lending that is regionally focussed, establishing itself as not just another bank that views the UK through a London lens. Conceived before the pandemic, it will be offering secured loans in the scaleup sweet spot between £500,000 and £5million for those businesses that rely on core, committed debt finance – a lending market that has remained relatively undisrupted, both from a technology and lending model perspective. Co-founder and CEO Jonathan Thompson is part way through a £20million series A fundraising round and awaiting B-North’s full banking licence approval. He explains: “What we’d been seeing, in the business finance market was that there www.fintech.finance

was lots of innovation happening around the microfinance agenda. For a business looking to borrow, say, £50,000, £75,000 or even £100,000, you could probably do that via an app on your phone, and do it very quickly, very efficiently. But we’re here to transform the lending market for the core SME marketplace, which is scaleups and slightly more complex established businesses – to disrupt that segment with a transformational delivery.” B-North sets out to prove that there is a way to have a more advantageous and direct relationship with your lender – countering the complacency shown

It’s old school, in terms of having a people-based frontend, but the heart of the business is pure Cloud. It’s a true hybrid, designed specifically with SME borrowers in mind

towards this sector over the past few years by big banks, many of whom have shrunk their business lending teams and withdrawn from the community, so that they no longer have any direct relationship with business customers. B-North sees SMEs for what they are – the lifeblood of the UK economy. But they are often perceived to get a raw deal from banks. As a former banker with Santander where, among other roles, he was responsible for the bank’s relationship with mid-cap and large corporate customers in the North East, Thompson understands why that might be. “The banks are operating on very centralised models and there’s been no material investment in serving the SME market,” he says. “SMEs are difficult to serve, anyway, because they are complex. They grow in an organic way, not in a linear way, so they don’t naturally lend themselves to pure automation – and banks want to automate to reduce cost, because their profit pools are getting nibbled at by tech innovators. All that gives us an opportunity to turn the model on its head, and really look at what the market craves.” Issue 6 | ThePaytechMagazine

NEOBANKS OF THE WORLD: SMEs Make no mistake, technology is crucial to B-North’s plan for creating a system that works better for SMEs. But there is a hybrid approach at the heart of its platform. When it comes to critical infrastructure, it uses a combination of two global market-leaders: Mambu for core banking, and nCino for loan origination capability. This has allowed B-North to achieve speed and flexibility. But it’s also building a regional physical presence, with the final lending decision always resting with a human advisor. Thompson describes this combination as allowing it to ‘disrupt and transform the customer experience’. “We take the Cloud-native platform and then overlay it with people in the core regions of the UK. So, it’s a bit old school, in terms of having a people-based frontend, rather than technology, but, actually, the heart of the business is pure Cloud. It’s a true hybrid that is designed specifically with SME borrowers in mind.” This modular architecture offers B-North the chance to seamlessly wire in third parties to the core Mambu/nCino platform. For Thompson, it is about being able to embrace new technology not at the bleeding edge, but at the leading edge, ‘so that we can continue to innovate and transform the customer experience – being Cloud-native and reliant on a software-as-a-service (SaaS) model, gives us the infinite scalability and flexibility to do so’. The technology supports and facilitates the genuine, human connection between B-North and the businesses it hopes to serve. “A core part of the lending decision is getting under the skin of the business and actually meeting management,” says Thompson. “It’s the

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management, the entrepreneurs and innovators that drive the success of a business, and drive its resilience as well. So, the opportunity to meet them and understand what makes them tick, is a core part of the lending decision. “But the technology enables us to deliver a transaction in a very agile way, so we don’t have to wait for one thing to complete before starting the next. We can kick off legal documentation while we’re doing the credit underwriting decision or valuing collateral. It’s agile delivery that gets us to that endpoint much more quickly, and in a much more customer-centric manner.”

A core part of the lending decision is getting under the skin of the business and actually meeting management, the entrepreneurs and innovators The B-North team, even with regional offices, doesn’t expect to be literally shaking hands on all those deals itself, which is why brokers, some of whom helped seed-fund the bank, are an essential part of the mix, not just increasing B-North’s coverage, but also dramatically reducing operating costs. “It means that our cost/income ratio is less than half, at maturity, of the UK banking sector average, and that’s a really powerful, long-term tool,” says Thompson.

COVID-19 has, of course, upped the anti. The lack of liquidity to fund business expansion is a major concern; working practices and business development plans among SMEs have changed dramatically. But B-North has managed to adapt quicker than most. “We already had market-leading collaboration tools within our business, so that’s enabled us to keep the pace up, in terms of both the build activity but also how we’ve worked with third parties who are supporting us on our journey,” says Thompson. Looking to the future, B-North believes it is well-positioned to play an exciting part in the recovery of the economy. “We’re not held back by portfolio challenge, we’ve got a completely differentiated view of the market and how we deliver into it, which is very borrower-centric indeed and enables us to play our part in supporting the recovery of the UK SME segment, which is critical,” says Thompson. A poll was recently conducted by the British Chambers of Commerce in partnership with banking group TSB, among firms of all sizes, to assess their financial needs following lockdown and the end of government-backed business loan schemes. Forty-four per cent said fast and easy access to capital was most important; 36 per cent preferred a presence in the local community; 48 per cent of firms said they required personalised or face-to-face support. It would seem, then, that there is very much a desire for the service B-North is seeking to provide, as well as a desire to see transformation in the business lending process.

Road to recovery: B-North is determined to help SMEs

www.fintech.finance

NEOBANKS OF THE WORLD: ISLAMIC FINANCE

Timeforchange? Islamic financing platform Manzil is persuading Canadian financial services providers to rethink some fundamental concepts, enabling the country’s Muslims to transact guilt-free. Founder Mohamad Sawwaf believes everyone can get involved, though It’s difficult to achieve strict compliance with shariah law in a system that’s based on Western concepts of money – from the dominance of interest-charging payment cards to interest-paying investments, all sorts of routine transactions carry with them a certain unease. That’s why Mohamad Sawwaf decided to launch a different type of financing platform in Canada – not just for the country’s Muslim population, but for anyone to use. Because, for Sawwaf, the future lies in accessible, fintech that’s also shariah-friendly. “The global Islamic finance market is at US$2.7trillion and growing at a double-digit CAGR [compound annual growth rate], so it’s the fastest growing industry worldwide”, explains Sawwaf, who holds a doctorate in Islamic finance from Henley Business School in the UK. For this fintech founder, the need for an inclusive, 100 per cent shariah-compliant, online financial service was blindingly obvious when he set about building Manzil in Canada in 2017. Namely, the 1.6 million Muslims there who are underbanked. Often, when people talk about underbanked demographics, they’re referring to the poorest members of society.

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It’s normally people with cash-in-hand jobs, or those who’ve newly arrived in a country. But that’s not Manzil’s main demographic. “In fact, Canadian Muslims have double the national average when it comes to household income,” Sawwaf reveals. “But when you look at their participation in housing, and in capital market solutions, they’re actually the lowest on that pole.” Finding a solution for all that uninvested cash could be a serious ‘kerching moment’ – if 1.6 million Canadians chose one platform that met all their financial and ethical needs, for example. “As we continue to grow and take market share away from the conventional banks, they’ll start to realise this is a true opportunity that they missed out on,” says Sawwaf. But, right now, he just feels frustrated at all the lost potential. “There’s all this wealth that’s just sitting, not participating in the economy. And this community is not growing, from a net worth perspective, because of a lack of product.” Manzil hopes to correct that by providing a range of financing solutions, including mortgages and investments, that address the debt-averse nature of many Muslim people while encouraging them to save – even while they are making payments. To that end, it recently teamed up with Canadian challenger KOHO, which is

partnered with Peoples Trust Bank, to provide customers with low-fee, Visabacked, pre-paid cards, linked to a KOHO online chequing account. The card rounds up change for saving and earns cashback from retailers. It allows practising Muslims to participate in paytech, guilt free. “VISA doesn’t earn its revenue through interest, rather through interchange fees,” explains Sawwaf. “It’s the banks that charge the interest and, yes, VISA enables that for them. However, our job is to provide solutions that are ethical and create habits for avoiding debt, and if VISA helps us do that then it is essentially enabling us to reverse the habits of having debt-issued credit.” Manzil doesn’t yet have a banking licence –“Our client servicing system is a modern treasury system that allows for payment reconciliation and automatic withdrawal of funds from the client account. I would say it’s better than the banks,” says Sawwaf. But it is licensed under the Mortgage Brokerage Act of Canada to originate, underwrite and administer funds in a totally online process. And it offers personal and business investment accounts with a shariah-compliant portfolio managed by robo-advisor CI Direct Investing (formerly known as WealthBar). “Everyone thinks it’s hard to find companies [to invest in]. But there are so

www.fintech.finance

many out there that by default are already sharia-compliant,” says Sawwaf. “The largest one – which is now a $trillion company – is Apple, of course. “You have to look at these companies’ financials and assess three main things: debt to equity; liquidity; and whether they have any activities that are not permissible [for a Muslim to invest in], and as long as that’s less than five per cent, you can still invest in that company,” he adds. “Once you’ve put in these filtration criteria, it becomes very easy, but you need somebody to do that research for you.” When it comes to credit and loan schemes, Manzil is also preparing to launch the only halal car financing offer in Canada. So what’s permissible under shariah law for Manzil’s potential users? Take away the element of interest and construct it as a repayment plan, and that pretty much ticks the box. In other words, the margin for profit is built into the price of the product and paid down over a fixed period. “Islamic banking is participatory rather than predatory, by which I mean one-sided, i.e. ‘I lend you some money, you’ve defaulted, and now I’m going to put you through the ringer and take everything else you own’,” says Sawwaf. “In participatory, we’re sharing the risk of that asset together – the profits and the losses. “Murabaha is the name of one type of transaction which is a credit sale model,” explains Sawwaf, “with a re-sale at a higher

amount that we agreed to over a specific period of time. In a Murabaha transaction there is no ‘lending of money’.” This method of advancing cash for larger purchases has a much wider appeal, beyond religious compliance. For one, it removes the uncertainty of a mortgage product renewing every few years on a new interest rate. In Canada, such a pre-determined property-linked repayment plan would work especially well. “Here, 98 per cent of mortgages renew every five years,” says Sawwaf. “But with our product, you can have a non-renewable term for up to 25 years, so you get to fix that payment. And a lot of non-Muslims who are interested in that have approached us, too.” In fact, they probably understood the advantages of such a product, from a purely financial perspective, better than Manzil’s target demographic, who have received very little financial mentoring in the past. “When we turned all of our products on, we thought there was going to be this influx of people,” says Sawwaf. “But what actually happened was that they didn’t even know the basics of investing, and that has nothing to do with Islamic finance. Basic financial literacy was the bigger obstacle that we had to overcome. This is not something we’re taught in schools and it needs to be added to the curriculum. We hope our government will listen to that.”

As we grow and take market share away from the conventional banks, they’ll start to realise this is a true opportunity that they missed out on

Meanwhile, Manzil is doing its best to address the knowledge gap itself – among both users and providers of potentially shariah-compliant products – by building a new ecosystem. “We’re creating experts in legal, audit and finance, consulting and education [around shariah finance], because this is virgin territory, in Canada,” says Sawwaf. “If you go to the UK, you can get Islamic finance degrees, there are law firms with Islamic finance departments, there are accounting and audit firms, and consulting firms with Islamic finance departments. None of that is here in Canada, so any time we have to engage with a third-party service provider, we’re always educating them and it is a challenge for them to say ‘this is something new. We don’t know if it can be done the way you want it to be done, but let’s figure it out’. And, when they do, it’s a precedent because this is something they can now promote and say ‘we were the guys that did this for the very first time’. It’s an alternative methodology of finance that is going to run parallel with its conventional counterpart.” A disruptor in the paytech and lendtech space, Manzil, in Arabic, means ‘house’ or ‘foundation’, and in Urdu, Turkish, and even in Farsi, it means ‘destination’. By contrast, the name for the instrument that backs the biggest purchase most of us are ever likely to make – ‘mortgage’ – means ‘death pledge’. Whatever your background or religion, if you’re going to sign 25 years of your life away to a loan agreement, ‘destination/house’ definitely sounds more appealing than ‘death pledge’. It’s just one example of a new way of looking at things that Manzil hopes will spread.

Piecing it together: Islamic finance appeals to a wider user base

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Issue 6 | ThePaytechMagazine

NEOBANKS OF THE WORLD: INDIA

Money matters: And Walrus is teaching teenagers why

Teen spırıt Walrus is among a new generation of challengers ready to tap into India’s young adult digital payments market. But, according to CEO Bhagaban Behera, it’s not all about spending Last year, Pooja Bhandary (43), a pathologist in Kolkata, opened an account for her 13-year-old daughter at the bank where Bhandary has her savings. Her daughter, who loves to paint and is a voracious reader, gets a fixed amount transferred from her mother’s account at the start of each month. She uses her physical debit card and net banking

ThePaytechMagazine | Issue 6

facilities for online purchases of books and stationery, and the occasional treat from Burger King. Last month, she took her mum and grandmother to dine out on the latter’s birthday. She has learned to issue cheques for larger amounts and is now planning to get a recurring deposit fund – a way to earn interest at very attractive rates by committing to regular monthly investments. Bhandary wanted to teach her daughter to value money and plan her expenditure and savings when she got her the child’s account, but she’s now amazed at her offspring’s growing interest in investing in stock markets and mutual funds. As far back as 2014, the Reserve Bank of India, the central bank, allowed children to open savings, fixed and recurring deposit accounts through a guardian, and a child over 10 could operate these accounts independently. This means banks, at their

individual discretion, may allow them to use additional facilities like debit and ATM cards, net banking, cheque books, etc, but, in order to manage the associated risks, may impose an upper limit on the transactions, and a minimum positive balance. The Indian banks have a lot going for young users – they’ve freed Bhandary, for example, from micro-managing her daughter’s expenses while making the teenager feel independent and important – but they don’t give them access to digital wallets. Similarly, Google Pay and Amazon Pay don't allow children to set up accounts because of know-your-customer (KYC) issues. But India’s neobanks and payment apps for teenagers are now beginning to expand their financial horizons. FamPay, for example, which is designed for users between 10 and 18 years of age, lives on the users’ smartphones and www.fintech.finance

connects them to a social feed where they can share their expenditure and updates. In July, founders Kush Taneja and Sambhav Jain launched a stylishly black, Rupay-enabled, numberless debit card called the FamCard that can be used to make both offline and online payments through India’s realtime payments network UPI (Unified Payments Interface), peer-topeer, without setting up a bank account. The card doesn’t carry a number, all details are saved in the app. To order a card, a parent and child have to first set up an account on the app and complete their respective KYCs. The app uniquely allows the family to set up a FamPool account via which not only allows the parent to send money to the child’s digi wallet, but also lets them keep tabs on expenses in the background while the child uses the wallet, independently and intrusion-free. And then there is Walrus. Currently in beta mode, it focusses more on the community aspect of the banking app for upwardly-mobile, urban teen groups in India that are tech savvy, brand-conscious and active on social media channels like Instagram. Founded in 2019 by a young-but-experienced trio of entrepreneurs – Bhagaban Behera (CEO), Sriharsha Setty (CTO), and Nakul Kelkar (COO) – Walrus offers users, aged between 13 and 22, a free bank account, a glitzy debit card, UPI payment options and easy money transfer avenues. It comes with the explicit intention of teaching money handling to young users, who need invitation codes to activate their account or upload a scanned identity card image. Crucially, both FamPay and Walrus link teen accounts with their parents, safely overcoming KYC in order to allow kids to pay digitally through their wallets. “We target the aspirational teenager,” says CEO Behera. “ The new generation are more independent, more ambitious and want things their own way. They prefer to use Instagram over Facebook. They want apps that are cool, that understand them, and are tailor-made for them.” The founders conceived Walrus as ‘like an Instagram version of a bank account for the Instagram generation in India’. It aims to embrace cash-using, high-spending young adults and convert them into digital payment users. Behera says: “In the metros, the children are outgoing. They go out with friends, they www.fintech.finance

spend on gaming credits like Google Play credits, they play PUBG (PlayerUnknown’s Battlegrounds) and Fortnite, they buy from ecommerce sites like Flipkart and Amazon. They frequently order food from Domino’s or McDonald’s, or via Zomato and Swiggy [Indian delivery companies]. We allow them to use their own card for this expenditure.” Walrus also targets a second set of users who are in the tier two cities of India, and whose parents are likely to be less digitally savvy than their kids. Behera cites evidence of these young people using their cards to pay taxes and bills digitally for adults in their household. He believes that launching Walrus accounts for these users would help digitise a much larger part of India’s semi-urban population. “We didn’t see them as a use case initially, but the data pointed them out for us,” he says.

Huge and lucrative market Globally, the teen market has huge potential, and very little of it has been tapped, given this group of users are among the most tech-savvy and brand-conscious. Nielsen has ranked the Indian teenage market the third most brand-conscious in the world, while Indian industry body ASSOCHAM also concluded from research that upper-middle class teens in the metros spend an average of Rs4,000-Rs5,000 (€46-58) every month on their wardrobes and following their favourite movie stars, models and sportsmen and women for fresh fashion ideas. So, we know they can spend it, but can they handle money responsibly? That’s where neobanks like Walrus in India, and Zelf, Starling and others in Europe, are hoping to fill the knowledge gap. “Children don’t learn basic financial management, they don’t know how to budget and invest money. Introducing them to money when they are young, means they are already disciplined when they start earning,” says Behera. The Walrus app makes the learning experience fun, practical, and secure. “Parents can give money to children without having to use cash, and children get the Instagram and Snapchat experience. They have fun dealing with money, saving, investing, creating goals and budgets,” he adds.

Like FamPay, Walrus offers zero balance, free accounts with no hidden charges. The plan is to work with retailers, devise a reward-based system for users and also function as an aggregator. “We work with merchants focussed on teenagers and other services we can provide to the age group. We don’t want to restrict ourselves to payments. We can tie up with other entrepreneurs, other companies, and curate a lot of products and services that this segment can use. It could be health and fitness, education or co-curricular activities. We want to become a one-stop-shop that has everything for a 15-year-old,” says Behera. While Indian kids have been ready for their own digital wallets and payment apps for some time, what happens when they grow up and out of them? Behera says Walrus will mature with its users, with whom it already has a great feedback loop that informs its developers. The split your bill facility was an on-demand case in point. “Say five of you go to a restaurant together, you can split your bill easily,” says Behera. “Or your friend’s birthday is coming up and 10 of you are going to celebrate it together; you can use Walrus to all save money towards it. We have talked with users and built in features that they want and which a [mainstream] bank will never want to build,” he adds. While these banks’ adult account holders are concerned with loans, EMIs, investments, insurance and retirement options, Walrus’ are more interested in buying books, going to a restaurant or watching a movie. It’s focussing on building perks and rewards around these. So, would Bhandary allow her daughter to use the Walrus app? She admits that digital payment is useful – not just because it’s cashless and therefore safer. “It encourages her to do her own maths at the beginning or end of the month, and, as a parent, I want to instil those values in her,” Bhandary says. “Setting goals is great, chasing them is good too. It’s also important for children to understand that money is a great enabler. Its not everything, though. And that’s where we parents still need to keep a check.”

We want to become a one-stop that has everything for a 15-year-old

Issue 6 | ThePaytechMagazine

NEOBANKS OF THE WORLD: SOUTH AMERICA

Over the past century, women have campaigned hard for gender equality. It’s now constitutionally recognised in 143 out of the world’s 195 countries. But that doesn’t mean discrimination doesn’t persist – financial discrimination in particular. Worldwide, more women are joining the workforce than ever before. According to the World Bank, between 1990 and 2019, the number employed in Brazil increased to 54 per cent of the adult female population. In Bangladesh, it went from 25 to 36 per cent. And in Qatar, from 42 to 59 per cent. And yet, despite this apparent accumulation of female purchasing and saving power, many women – 42 per cent – have zero access to an account with a formal financial institution. That’s according to UN Women, the United Nations entity dedicated to gender equality and female empowerment. While it acknowledges that 35 per cent of men are similarly disadvantaged, for women, financial exclusion has particular, even life-threatening, consequences. Psychologist and fintech entrepreneur Dr Vanise Zimmer has spent years working with women’s groups, researching the consequences of financial exclusion, and

Dr Vanise Zimmer, founder of Elas, a bank designed to empower women in Brazil, hopes her fintech’s legacy will be a new, confident and financially independent generation draws a direct line between it and domestic abuse, particularly in her own country of Brazil where it’s estimated that, every two minutes, a woman suffers an act of violence from a partner. More than 1,200 of those attacks were fatal in 2018, according to the Brazilian Public Security Forum. Because women must rely on the men they live with to take out a mortgage or sign a rental agreement, ‘when they suffer violence they cannot leave the house, because they will lose everything’, says Zimmer. So, she set out to do something about it. Zimmer founded Elas, a neobank that was built specifically to give women the financial independence that buys them freedom from abuse and helps them to build a better life. Elas is the plural of ‘she’ in Portuguese, and Zimmer wants to leverage the power of this fintech as a tool for social justice: to help end financial instability,

economic dependence – and domestic violence – experienced by women. “I studied for a bachelor’s degree in psychology and then, for my masters, I started looking at gender equality. I was invited to Germany to help to construct the first women’s international university,” says Zimmer. “I researched gender and finance and I saw few women in that industry. That made me really worried.” That is particularly the case in investment and wealth management. In private equity, only six per cent of senior positions are held by women. It’s the same story in venture capital funds, where just nine per cent of senior seats are occupied by women. For hedge funds, that number is 11 per cent. While much of society has moved on, somehow finance never stopped being a man’s world. It means that financial products and services are built mainly by men, for men. Elas is different. It’s designed by a woman, for women – although men, says Zimmer, are welcome to join. Zimmer’s first challenge was to address the glaring gap in financial literacy that exists especially among the poorest women in Brazil, who don’t see the need for a bank account. “When they work in the informal labour market, women do not get money deposited in a bank account, they get

What she really, really wants

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money in their hands. They do not learn how to save for the future, or for retirement, which means they have no security,” says Zimmer. Because they usually have family responsibilities, they need to keep working in the same place to maintain cashflow, leaving them with little wiggle room to break free or try something new. It narrows the possibilities of taking a risk, like starting a business, or saving for a higher education, which are all ways to escape cash-in-hand jobs and gain more financial stability. “They need to think about finance, and that was not happening in Brazil for the lower classes,” says Zimmer. “These women have no independence.” So, this is her social project: using app-based algorithms to boost financial literacy and accessibility for those who need it most – poor and middle-class women. “We’ll teach them how to invest, how to open and run a bank account, how to use a computer. We are going to make them capable of working in finance, of doing finance,” says Zimmer. In that, she is helped by the fact that Brazil is highly engaged digitally. It is ranked number five globally for smartphone usage, with 84 million adults – 54 per cent – chatting, texting and swiping daily. And that’s only increased since the pandemic. “It improved our access to the digital world. So, economically, it also became a digital world,” she says. And, once women get the information, support and access they need, chances are they will make a better job of financial planning than men.

Evidence shows that women are the more dedicated savers, more responsible borrowers and more calculated risk-takers. According to recent research from BNY Mellon, giving women better access to finance could unlock at least $330billion in annual global revenue, while the latest Women in Financial Services report from Oliver Wyman says women’s financial needs are still not being met, making them the largest underserved group of customers for banks, fund managers and insurers. Zimmer believes that creating a way for women to safely deposit their earnings

When women suffer violence they cannot leave the house, because they will lose everything digitally will be transformational, allowing them to plan ahead, especially over longer timeframes. Think about that. One fintech could mean that a dependant woman becomes independent. A mother could afford to walk away from an abusive partner. A young woman could get a degree and set up her own business. And not just one. There are more than 100 million women living in Brazil. Can you even imagine the extraordinary impact that could have on the country’s economy? “They’ll have a bank account, a credit card, a machine to pay locally, and we are going to use QR codes, too,” says Zimmer. But, importantly, the Elas user journey will be goals-based and support women’s specific aspirations.

“It’ll be much easier for women if they invest according to the objectives they have in life,” says Zimmer. “So, you choose, for example, ‘I want to have a house’, ‘I want to have a car’, ‘I want to pay for my daughter’s university’, ‘I want to have money for my retirement’. Once you’ve chosen, the robo-advisor will do everything for you.” As well as being the founder of Elas, Zimmer is a partner in white label robo-advisory platform RoboBanker, which was set up to give everyone access to a private banker with deep knowledge of the financial market and advanced asset allocation methodologies. RoboBanker believes that digital financial management isn’t simply about providing savings spaces on an app. Rather, it provides tools to help those on even very moderate incomes make realistic plans. “[There’s] nothing worse than saving money for an irrelevant goal and therefore not being able to pay for the daily milk,” it says. That should resonate with the women Elas wants to onboard. “We are the first bank in Brazil to have a robo for women to invest, to choose the options to get to the objectives they want in the future,” she says. “We are inside women’s organisations, so we have the data. We know how to feed the algorithms.” Elas appears to be the first female-focussed neo bank. And, if Zimmer succeeds, it could be revolutionary for women in Brazil. “We do not have aspirations to be worldwide,” she says. “Brazil still has a lot of work to do to make women’s lives better. It will not be easy: we are going to fight some organisations that exploit women. But when my daughter was born, I thought ‘I have studied a lot, I have to do something now for the new generations’. It’s a big responsibility.”

Hands up for financial freedom: There’s a lot of work to be done yet

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Issue 6 | ThePaytechMagazine

NEOBANKS OF THE WORLD: ICELAND

Meet the world’s least

POWERFUL BANK If asked to name one country where trust in banking reached rock bottom, Iceland during the 2008 global economic crash would surely top most lists. Reykjavík was rocked by unprecedented scenes as people took to the streets in protest at a triple whammy of a collapsing currency, soaring unemployment and the country’s stock market being more or less wiped out. And who was to blame? You’ve guessed it: the banks that had spectacularly and ruinously overreached themselves. But rather than use huge taxpayer-funded bailouts, as happened in many countries around the world, the Icelandic government went for the jugular. The country’s three major banks – Kaupthing, Glitnir and Landsbankinn – were allowed to fail as prosecutors were let off the leash to go after reckless bankers. The result? Many senior banking executives were jailed and the country's former prime minister Geir Haarde was also put on trial, although he was subsequently cleared of criminal negligence. Fast-forward more than a decade and www.fintech.finance

Haukur Skúlason was there when trust in the Icelandic banking system got badly burned during the financial crash. He stuck around to clear up the mess, but it gave him a very different perspective on what a bank should be. It should be more like Indó… two bankers who lived through those bitter days, Haukur Skúlason and Tryggvi Björn Davidsson, are launching another bank. Only this time, they’re determined to do things differently. Iceland’s first Cloud-native digital bank, Indó, has ambitions (if that’s the right word) to become ‘the world’s least powerful bank‘. This antithetical concept means it’s strong on trust, simplicity and transparency. But, more than that, given the horlicks that banks the world over made of things before, it’s giving its depositors a veto over the investment decisions it makes.

Explaining why he and his partner Davidsson decided, in 2018, that the time was ripe to set up their own neobank bank, Skúlason says customers were then, as they are now, being failed by complacency among the incumbents. “Basically, we’ve had the same kind of banking system for 30 years, three large incumbent, universal banks, pretty much all doing the same thing,” he argues. “You get the same kind of services, rates and products from every one of them. They themselves grew from mergers and acquisitions within the old savings bank system, going back 50 or 60 years, and we basically had the same type of bank in 2018 that we’d had in 2010: banks that are big by Icelandic standards bogged down by IT legacy problems, probably overstaffed, and focussed on being reactive to what happens, instead of proactive in developing new things. “So, we saw an opportunity to introduce the solutions and the technology that are emerging in Europe and the US, into Iceland, and offer better products and better services, at a much lower cost – then transferring the savings to our customers.” Issue 6 | ThePaytechMagazine

NEOBANKS OF THE WORLD: ICELAND As former employees of Íslandsbanki, Skúlason and Davidsson have firsthand experience of what they say is a post-crash malaise in Iceland, while the digital banking revolution started around the world. Skúlason says: “I went through pretty much every single department within the bank. I was there in its heyday of 2006 and 2007, and then, when the party was over, I was also there to clean up. So I got to know the way banks work pretty well. “Then, in 2014, I realised that the bank was in reactive mode. It was not really interested in developing new business; it was more interested in just defending what it had. And I thought ‘well, this change is going to come’. I’d realised it was happening in Europe and, eventually, would appear here.”

Third-party monitoring: It’s a mistake for a bank to try to do it all, says Skúlason

Anticipating the drive to digitisation would be led by the fintech sector, Skúlason left the bank and became chief financial officer for a fintech company in Iceland. There he had another realisation: that many fintechs were unwilling to enter the regulatory fray of banking, believing it was both too complicated and too expensive to do so. “I realised pretty early on that, in order to really get to the heart of the matter and change things the way they really need to change, you have to have the fintech mentality, but you also have to have this willingness to embrace the regulatory environment,” he says. “At that point, something just clicked in my head and I said ‘well, why not set up a new bank?’. “I sat down with Tryggvi, my co-founder – he had just left Íslandsbanki – and we said ‘let’s give it a couple of months. Let's create a business plan and see if anybody will invest in it’. It’s taken a combination of undying optimism, massive stubbornness and a healthy dose of naivety!”

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Two years later, though, Indó, which now has a staff of six, has secured €1million in seed funding as it progresses with its application for a banking licence from the country’s financial regulator. And things are also moving fast in the background. In June this year, Indó announced Enfuce – Finland’s biggest fintech startup – as its partner for payments, open banking and sustainability services. Using Enfuce’s payments platform, Indó can monitor card payments and control in-app features. The open banking solution allows Indó to build smarter money management services using a single, PSD2-compliant access point to Europe’s financial data. And Enfuce’s plug-and-play carbon footprint tracker, My Carbon Action, will show Indó

make sure the integrations work. Enfuce, for example, a terrific company from Helsinki, is our processor for our debit cards. We are using ComplyAdvantage for our sanctions screening and an Icelandic startup called Lucinity to carry out transaction monitoring for our bank accounts. We will be in charge of connecting all that to our offering, instead of trying to build it all ourselves, which, if we could do it, would cost us way more, and it would be arrogant of us to think we could do it better than people who actually specialise in it. “From that particular IT standpoint, we’re keeping things as simple and as minimalistic as possible, and then we can focus all our magic on the creation of the app, because that is where the cool stuff happens – the customer facing services. The app is going to be a real head turner when it comes out.” The business model for Indó will shake up the status quo in Icelandic banking. It will never directly manage user funds. Instead, it will use a ‘narrow banking’ system whereby deposits are put with the central bank, ensuring a completely safe and transparent banking service.

We know from bitter experience that the problems that the banks have in Iceland primarily arise from their desire to build stuff themselves. We are not going to do that users the CO2 emissions of their individual spending in categories like food and transportation, and provide actionable insights on sustainable lifestyles. Skúlason says the choice of technology – it is using Amazon Web Services as its Cloud host – was again governed by one of Indó’s key tenets: simplicity. “We know from bitter experience that the problems Icelandic banks face are primarily rising from their desire to build stuff themselves,” he continues. “You have dozens or even hundreds of IT systems that are, to various degrees, outdated but all interconnected, and it’s extremely expensive to keep them all running. “We’re not going to do that. We are going to build as little as possible. We’re going to look at companies to partner with, who can provide us with specific solutions. That means that we are always looking to partner with those that are best in class and

And, by operating as efficiently as possible, it promises to offer a current account with market-beating interest rates. Explaining the rationale behind Indó, Skúlason says: “We want to be the least powerful bank in the world… with the most powerful customers. “We are just going to facilitate the transfer of money, so we will be taking care of people’s savings and deposits, and we will keep them safe and deploy them so that people know where they are. And we will not try to leverage our position as a bank to gain more power, or to watch over whole markets and try to make mountains of money. “That’s not the way things work. We want, in essence, to try to push away as much power as possible to people.” And that philosophy will surely be music to the ears of the protesters who crowded the streets of Reykjavík back in 2008. www.fintech.finance

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NEOBANKS OF THE WORLD: ONBOARDING

Kissandtell

Opening an account can be an emotional experience for all concerned. Which is why Peter-Jan Van De Venn Strategic Director at Mobiquity, is studying the onboarding processes at European banks to inform those future ‘first kisses’

Digital consultancy Mobiquity was given a blank canvas by Bahrainbased Bank ABC when it called in the experts to help create Ila, the first Cloud-based, digital-only bank in the Middle East. And with a brief to target the more than 100 million tech-savvy Millennials in a region where half of all business owners are aged under 35, two things were immediately crystal clear – the neobank had to deliver groundbreaking levels of technology and the customer experience (CX) had to be seamless. Mobiquity’s development team subsequently conducted detailed research of the target market in Bahrain to understand people’s goals, struggles, fears and ambitions, analysing some 30,000 user reviews. The results demonstrated the need to provide holistic personalised financial

solutions built around customer needs and aspirations, and aligning products and services around their lifestyles – in short, going beyond banking. Vitally, that all had to be under-pinned by a future-proofed technology infrastructure. Backbase was chosen for Ila’s software platform and Jumio’s artificial intelligence (AI)-powered face biometrics software selected for identity verification. Jumio’s technology enables the bank to verify online customers in minutes by having them first capture a picture of their government-issued ID with a smartphone and then take a selfie, with certified liveness detection functionality. This process ensures that the customer is who they claim to be and are physically present during the onboarding process, thereby keeping Ila compliant with strict local know your customer (KYC) and anti-money laundering (AML) mandates. As Bank ABC expands its digital operations globally and in the MENA (Middle East and North Africa)region, Jumio will be able to support that growth with its ability to verify IDs digitally across many different geographies. And why is such slick onboarding so important? Peter-Jan

Van De Venn, strategic director at Mobiquity, which itself announced a partnership deal with Jumio last May, believes it is now vital to successfully growing a business. That’s even more true as digitisation is rapidly accelerated across more areas of our lives, fuelled by changes caused by the COVID-19 pandemic. The quality of that ‘first kiss’ with potential customers has never been more crucial than it is right now. “Customer experience is key and so it’s very important that banks are able to cope with the high expectations of today’s digital customer experience. That means that they need to have a frictionless onboarding process,” Van De Venn explains, “otherwise, what you typically see is that people will just ‘drop off’. Onboarding is the process with the biggest drop-off rate in banks, so the better and easier yours is, the more clients you will get. It’s a big challenge to do it well, though, because it is still necessary to get a lot of information, so the easier you can make it for clients, the better.” Indeed, research shows that more than 40 per cent of potential customers will abandon the onboarding process if faced by cumbersome and time-consuming steps in setting up accounts.

In love with onboarding: Consumers will choose banks that are easy to sign up to

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NEOBANKS OF THE WORLD: ONBOARDING The huge differences in the ease and speed of opening accounts at 12 UK banks, including neos and incumbents, were also the subject of a study earlier this year by app experts Built For Mars. It found that opening an account with digital challenger Revolut took 24 clicks but it took 120 clicks to do the same at internet and mobile-only First Direct, which is owned by HSBC. There were also stark differences in the times taken for accounts to be operational, with the definition being able to use a PIN and a card, as well as having online access to the account. Barclays, Monzo and Starling took two days, Lloyds, Metro Bank and Revolut took three, while the slowest were First Direct at 15 days, Nationwide at 22 days, and HSBC at 36 days.

Digitally savvy: Today's users expect more from their bank

Another recent survey of European banks by digital identity verifier Fourthline found that there was a widening chasm between consumer demand for a fully digital experience and legacy bank processes that do not meet customer needs nor adequately prevent fraud. European financial institutions – specifically traditional banks – must reconsider their onboarding models to accommodate rising consumer expectations for a simple and smooth, fully digital experience, Fourthline concluded.

A real case for digital Mobiquity has also been doing its own research into the levels of digitisation of onboarding processes at banks in the vUK, the Netherlands, Belgium, Germany, Switzerland, France and Austria. It defines digital onboarding as being able to open an account for a new client without the need to provide any physical documents and/or to visit a branch. Giving a sneak preview into the study’s

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findings, Van De Venn reveals that small and medium-sized enterprises (SMEs) were particularly underserved by the banks. And he warns: “Banks need to take a human-centric approach to digital onboarding, to speed up their digitisation process for SME clients – simply because their customers expect them to. These clients have high standards when it comes to digital servicing. In their daily lives, they have frictionless customer journeys and effortless customer experience when they use big tech services like Google. “Furthermore, personal digital banking standards are quite high, so SMEs’ customers expect similar experience in business banking. The competitive pressure is mounting as well, brought on by the challenger banks, like Bunq,

present a business case’. “But the more clients you onboard, the better the business case is to automate the process.”

The all-important second date While emphasising the importance of the ease of first contact with customers, Van De Venn says Mobiquity’s methodology is to continue to work closely with clients even after the systems it has designed with them go live. That’s important to improve the ongoing customer experience – for instance, eradicating previously unforeseen pinch points that might cause customers to abandon the process. “The journey doesn’t stop when you build a digital onboarding process,” he says. “After go-live, we use analytics to measure how it’s performing. You can, of course, ask your client, but it’s even better to observe them, because then you can see behaviours. You can see where in the process people are hesitant, where the most drop-offs are. You can see, if you observe certain process steps, what happens in real life, measure it and make it better. “There are a lot of ways to automate. That’s not the issue. Really listening to your client, incorporating that feedback and making sure that you can easily adjust and do multiple releases in a short timeframe to make things better, that’s what’s really important. To my mind, that’s true innovation.” Summarising the case for banks to offer fully digital accounts, Van De Venn points to three compelling reasons. “Firstly, automation makes client onboarding frictionless, so customers are happy. Secondly, if you automate, it makes the bank happy, because there is less operational impact – if it’s all digital, costs go down. And, thirdly, regulators are happy because an automated process is really controllable, it’s auditable and it’s consistent. “That’s actually what I most like about what we do. It’s not just a win-win; it’s a win-win-win.”

The journey doesn’t stop when you build a digital onboarding process.… really listening to your client and incorporating that feedback is what’s important

Holvi or Revolut, which offer high levels of digitisation and onboard their business customers fully digitally.” But still, many banks have yet to offer that – a fact that somewhat perplexes Van De Venn. “I still don’t know the full answer,” he confesses. “It might be because there are still banks that believe in the personal touch, and still want to see the client. There are also areas where regulation might be an issue, especially in business banking – we see a lot of banks getting fined these days for anti-money laundering violations. So, in terms of business, the bar has been raised, I think, to do it fully digitally. “But, for me, it’s very simple; if there’s one bank that can do it, in a certain regulatory environment, then others should be able to do it, too.” He acknowledges that ‘automating costs money, so the bank needs to be able to

www.fintech.finance

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Doesn't grow on trees: The mission at Claro is to teach customers the realities of good money management

Plan to accumulate If people don’t know their ETF from their ESG, how on earth are they supposed to make the right investment decisions? For mission-driven, personal financial coaching app, Claro, the answer is simple. We’ll teach them, says Chief Revenue Officer Alex Ford An idea, from inception through to execution, inevitably undergoes refinement along the way. And this is proving to be the case with Claro Money’s financial coaching app. Founded in August 2019 Claro, lead by CEO Rob Brockington – a 15-year trading floor veteran managing complex algorithmic execution platforms – Claro Money started out as a pure-play trading app with an ESG (environmental, social and governance) data element. Following Google Ventures Design Thinking methodology and listening to user feedback has seen Claro morph into a platform aimed at ‘working with people’ rather than ‘working for people’, while

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retaining its ESG, ethical core. Now Claro Money is looking to provide the necessary education, support, community and tools needed to build a personalised financial plan, in addition to also match users to financial products that align to their core values and personal situation. As Alex Ford, its chief revenue officer, explains: “As we started to speak to more people about investing, saving, and general finance, a repeated comment was ‘they don’t teach you this stuff at school’. As a team, we must’ve conducted over two dozen user interviews face-to-face, as well as seven or eight surveys, reaching out to roughly 30,000 people. “We ended up thinking that, instead of

focussing on the execution end of the investment space, which is what a lot of people are doing, why not do something different and build value by helping investors to learn and plan their finances? We want to help people understand the ‘why’ behind it as well as the ‘how’. That way, users will be much better informed and empowered to make educated decisions about what they’re doing with their finances,” says Ford.

Feelgood-factor investing Set to launch in 2021, Claro Money has been in development for the last nine months, growing from an original team of three to more than 14 during the www.fintech.finance

NEOBANKS OF THE WORLD: WEALTH MANAGEMENT COVID pandemic, with plans to expand to 24 by end of the year. The app has four pillars to it: empowerment, planning, investing and sharing. The latter connects like-minded people and experts looking for financial coaching because, despite there being no shortage of financial information available online, feedback has shown that many people view it as jargon-heavy, complex and, in the case of savers new to finance, completely overwhelming. “So, what we’re trying to do is create a source of information that people can dip into and learn from to build their personal financial plan,” says Ford. He knew that, for the more passionate ESG adherents, principles invariably come before profits, but even he was surprised at just how much they’d be prepared to sacrifice for their beliefs. According to one Claro survey, 12 per cent of investors would be happy to give up more than 75 per cent in returns if they knew their money was being invested or managed in a completely ethical way. “While we were aware of the growing popularity of the ESG approach, we didn’t expect people to be that passionate,” says Ford. Claro’s job as a facilitator, rather than an advisor, is to expose the ESG options to those who perhaps aren’t as aware of mission-driven investing – in fact, its research revealed that 59 per cent of ordinary folk didn’t even know what ESG was, which means they probably don’t know that ESG portfolios have been shown to not just equal but outperform the market, in some cases over the long term. That, notably, is also the case during market downturns, which is why BlackRock is now parking billions in them. To help inform their users’ ESG investment decisions, Claro has partnered with an ESG data provider, which applies its own metrics to the Sustainability Accounting Standards Board (SASB) framework to give insights across short-, medium- and long-term investments. The ESG data also takes into account how the world is impacting a company’s financials. “What we’re trying to do with that [ESG] data is not to be preachy about it, but simply to bring it to the forefront of people’s minds so that they can come to informed decisions,” says Ford. www.fintech.finance

“It isn’t really our place to tell people which way to go, although we should definitely highlight the options/choices.” While some suspect that adopting an ESG investment approach means sacrificing performance on the altar of principle, in its report, Sustainable Investing: Resilience Amid Uncertainty, BlackRock noted that, in Q1 2020, global, sustainable, open-ended funds (mutual funds and ETFs) brought in US$40.5billion in new assets, a 41 per cent increase year-on-year, with US sustainable funds attracting a record US$7.3billion for the period. BlackRock also noted that global data provider Morningstar was reporting that 51 out of 57 of its sustainable indices had outperformed their broad market counterparts. Of course, one swallow does not (necessarily) a summer make; especially given that the returns were witnessed during a wider market sell-off that could have had a knock-on effect later. And yet, according to BlackRock, it was consistent with the resilience of sustainable investment strategies (versus non-sustainable) demonstrated in previous drawdowns, such as 2015-2016 and 2018.

Digging into data This year, sustainable funds continued to show their resilience, even after the market began recovering by the end of March (the Dow Jones had slumped more than 10,000 points over the previous month), with 88 per cent of sustainable funds outperforming their non-sustainable counterparts over the January-April 2020 period as a whole. One problem that Claro recognises, though, is that methodologies employed in ESG reporting are difficult to follow. For example, if corporations are self-reporting, and use different ESG criteria without audits, it follows that validating or comparing performance will be difficult. Other key issues include third-party ESG data providers using different methodologies regarding their ratings

systems, which inevitably leads to significantly different assessments, depending on the agency. A less obvious, though equally valid, issue is the apparent disconnect between many companies’ accounting data and sustainability investment tracking. “One of the biggest challenges for us at Claro, and I think for the industry as a whole, is that there isn’t a centralised, standardised framework,” says Ford. “There are two main frameworks, the Morgan Stanley (MSCI) framework, and the SASB framework. At Claro, we’ve decided to go down the SASB framework route because we feel it’s a lot more comprehensive, covers more data points and will allow our customers to drill down in a more granular kind of way.” There’s a lot to cover before they get to that stage, though. Claro’s cycle of releases will start with the learning content and financial planning tools. “Planning is the thing that people told us was most interesting and most valuable to them, so we have a beta release that works with open banking coming that’s out before Christmas,” says Ford. “We feel that the users of the Claro app will be much better informed, and much more empowered to make educated decisions about what they’re doing with their finances,” he adds. “Whether they’re buying Tesla or Netflix stocks, or investing in a FTSE 100 fund, they’re not doing it just because a roboadvisor told them to; they understand, hopefully, some of the reasons behind it, and – thanks to the learning pillar of the app – whether it’s suitable for the plan they’ve built with the app and which they’ll be constantly reviewing at whatever frequency works for people. “They’ll understand that maybe, at some points in their life, investing in individual stocks and shares might be a good option for them, but not perhaps at other times, when alternative funds will be more appropriate.” And that’s definitely something you won’t learn in school.

We want to to help people understand the why behind it as well as the how... it isn’t really our place to tell people which way to go, although we should definitely highlight the choices

Issue 6 | ThePaytechMagazine

NEOBANKS OF THE WORLD: PHILIPPINES

Veteran fintech entrepreneur Greg Krasnov is boldly going where no bank has gone before in the Philippines Fintech entrepreneur Greg Krasnov knows a thing or two about spotting market opportunities. By the age of 46 he had already founded and then sold a consumer bank in Ukraine before moving to Singapore where he has co-founded four market-leading and award-winning fintech startups, CredoLab, AsiaCollect, AsiaKredit Bank and SolarHome, as well as creating the venture builder Forum. Now he has put his name – and his reputation – behind creating Tonik, the first digital bank in the Philippines, which was granted a banking licence by Bangko Sentral ng Pilipinas (the Philippines’ Central Bank) in early 2020. And the opportunity he has spotted? Quite simply, it’s this: Filipinos lead the world in terms of internet and social media usage but, astonishingly, 70 per cent of the 100 million-strong population remains unbanked. And with a growing middle class enjoying more disposable income in a

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country that has an average age of just 24, Krasnov’s number-crunching tells him there is an untapped potential of US$140billion in retail deposits and US$100billion in unsecured retail lending out there. Explaining Tonik’s genesis, Krasnov says: “We see that there is massive demand from consumers in the Philippines who are very young, very digitally native, and they’re not being serviced with appropriate savings and term deposit propositions in the digital sphere by the incumbent banks.” He also believes the payment sector is overcrowded and sees much more potential in the lending space. But he is a fierce critic of the models used by any number of digital neobanks whose headlong rush to attract as many customers as they can before putting themselves on a solid financial footing puts their profitability, and even their futures, in peril. With an extensive background in private equity banking before becoming a fintech investor, Krasnov is a firm believer in marrying the basic tenets of banking with the very latest tech. And so enters Tonik. “The speed of scaling for Tonik will be determined by how quickly we can bring our core consumer lending proposition to profitability,” says Krasnov. Elaborating on his methodology, he says: “I’m a little old school. I spent the first 10 years of my career in private equity, thinking about EBITDA and leveraged

buyouts, and now I look at the neobanks that only have the liability side of the balance sheet and are scaling up and then posting ‘hey, I got all these users. Please value me based on user numbers’. “Evaluations based on user numbers on the liability side of the balance sheet, where the more users you have, the more money you lose, just makes no sense to me.” And so, no, Tonik is ‘not rushing into scaling’, he says. “What we’re going to really focus on is establishing our lending proposition, getting the cost, and especially the cost of risk, under control, which takes time. You need to train the risk models and that’s when you can really step up the scaling. “Our business model is not predicated on payments, as with a lot of neobanks; we’re very much an asset liability play, like Nubank in Brazil or Tinkoff in Russia.” Tonik has been more than two years in the making and, after initially being seed funded by Krasnov’s own venture builder Forum, it announced in June 2020 that it had secured US$21million in a Series A funding round, with a plan to launch in the third quarter of 2020/21. As you would expect from someone with Krasnov’s background and experience, much thought has been put into selecting the bank’s technology partners, with Finastra’s Fusion Essence Cloud, powered by Microsoft Azure, chosen for its end-to-end core banking, and BPC selected for its payment www.fintech.finance

Paradise found: Krasnov sees digital potential in the Philippines

processing activities, in both cases supplied as software-as-a-service (SaaS). Krasnov says the ability to use SaaS was a key part of the strategy in developing Tonik, both to reduce costs and to future-proof its operating system. “We’re the first bank startup in the Philippines to go for digital with its own banking licence. So, together with a Filipino regulator, we’re going into uncharted waters and defining what that digital banking licence needs to look like,” he says. “That’s why we needed very reliable partners, not just very cost-effective partners.” For its part, Finastra has been evolving itself into building platforms for banking over the past two-and-a-half years. Anand Subbaraman, Finastra’s general manager for Cloud, core and digital banking products, describes its move to offer SaaS for banking as a ‘win, win’ for his company and customers like Tonik. “I see our whole approach being in that sweet spot between traditional, with experience, and highly modern technology and SaaS,” he says. “We try to get the best of both worlds, and we want to be a solid partner with Tonik and make it successful. Because, at the end of the day, the technology is only as successful as the bank is.” Emphasising the flexibility offered by SaaS, Krasnov says: “We’re able to work as part of an ecosystem, rather than just one solid vertical, by partnering with a company like Finastra through a very robust set of application programming interfaces (APIs) that they have developed www.fintech.finance

and that we have integrated into our middle layer, which also enables us to connect to multiple other third parties very rapidly and offer their services on our platform – or, indeed, provide our resource to their lending books, or enable them in some other ways. “I’m not a big fan of talking about the whole open banking thing because, to me, it’s more about channel partnerships. Either we are a channel for somebody else or they are a channel for us, but there’s always

Evaluations based on user numbers on the liability side of the balance sheet, where the more users you have, the more money you lose, makes no sense to me. So, we’re not rushing into scaling somebody who is making a product, and somebody who is helping to bring that product to the market, and having a very robust set of APIs enables you to do that in a very cost-effective way, within the timescales today’s customers want. “You know, in the Philippines, for example, the average consumer loan from

a bank still takes two weeks for a TTY (time to yes). Then it might take another few days for a TTM (time to money). In the digital lending space, you’re talking about TTY in seconds. So, it’s kind of a step function. “If I am partnering, as a bank, with somebody who is doing digital lending, and I would like to provide my book as a resource for their lending, for example, then I need to be able to support those types of rapid bookings, and rapid transactions, between me and the partner. “Having a robust layer of APIs is critical to that and I think Finastra has done a very good job at putting that together. That’s a strong part of its proposition. We’re looking forward to capitalising on that.” With its use of Cloud-based technology, Tonik is also breaking the mould by not creating a head office for its key people who are scattered across countries and time zones. Krasnov concedes that has created some difficulties, for instance in developing strong relationships among his staff, but reckons that, overall, the pros far outweigh the cons. “I think, in the next couple years, we’re going to see completely new models of recruiting, onboarding and sourcing human talent,” he says. “COVID is going to push forward the gig economy concept where everybody’s a face on the screen and, at the end of the day, it doesn’t matter where that face is actually sitting. “So, interesting challenges that we’re learning to cope with, as I’m sure everybody else is. Let’s see how it pans out.” Issue 6 | ThePaytechMagazine

COMMENTARY: NEOS v INCUMBENTS Banking breakthrough: How do the challengers really measure up?

Neos v the high streets: Whatt can they learn? Digital disruption in banking has been revolutionising. Emerging companies, offering incredible software solutions for digital banking, businesses promising to digitise and move core banking to the Cloud, and providers of market monitoring tools, allowing any bank to monitor its competition and itself, every second of the day, are leaders of this revolution.

Independent fintech expert Marcel van Oost compares two leading neobanks with two incumbents, one pair in the US and one pair in the UK, to see what room there is for mutual disruption

What is the cause, though? There must be a driving force behind this sudden need for digital transformation. The

banking industry has never shown such high interest in going digital â&#x20AC;&#x201C; not until these last few years, with the emergence

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of digital banking services and increasing use of ebanking. Challenger banks have had a huge impact on this rush towards digital banking transformation. Mostly because of their nature. By definition, neobanks and challengers are built on a customer-centric approach, an ideology that puts the customersâ&#x20AC;&#x2122; needs and desires at the core of product development. They are banks built by people, to cater for people. Putting their wishes and experience first is one of their main goals. www.fintech.finance

United States v Europe/UK A look into digital banking in Europe and the US shows the wide difference that exists in their respective financial landscapes. Europe’s list of challenger banks is endless and many of them, such as Bunq in France, operate across borders. Some would say that there are way fewer US challengers (on a neo-to population basis) than Europe www.fintech.finance

is offering, and many have fewer capabilities than their European counterparts. On the other hand, both the US and Europe have highly distinguished high street banks, like Bank of America and the UK’s Barclays. Who could underestimate them? Let’s allow the numbers speak for themselves. We are going to analyse two scenarios, one for each region: PNC vs SoFi in the United States and Lloyds Bank vs Revolut in Europe. Our aim with these comparisons is to see their differences, in terms of digital banking, and answer, to some extent, why a customer would switch from one to the other. The areas of comparison are ■ Functionality per channel (web, iOS, Android) ■ Functionality focus ■ User experience (UX) ■ Major gaps Banks each have their own way of carrying out this analysis and it would take months of research to identify, quantify and examine. However, fortunately, the team behind FinTech Insights and its platform have made it possible to access the insights we need, much faster. UNITED STATES OF AMERICA

■ PNC offers more than double the amount of functionalities provided by SoFi when it comes to its web channel. The exact opposite is true for the mobile apps. SoFi offers more than PNC in general – it has a mobile-first approach. A closer look shows that, across all channels, in the categories of accounts, money transfers, cards and general payments, PNC still offers more. These are core services for banking – the most important ones ■ PNC’s functionality focus across all channels is its wide account and money transfer offering, whereas SoFi aggregates most functionalities into personal financial management and wealth management ■ SoFi offers better UX across all channels than PNC. It doesn’t matter if we are talking about transferring money, managing cards or paying bills. It’s also judged to be more friendly and frictionless for the user.

PNC v SoFi

1000

USER EXPERIENCE SCORE

Since the rise of challenger banks, a lot of traditional, well-established high street players have seen an alarming rise in switching, as customers choose these challengers for their everyday banking – most often the younger age groups who prefer the newcomers’ modern, digital look. People who are used to organising their entire lives via their smartphones and watches, find challengers obviously appealing. That appeal has turned into trust, and now a vast number, while they might also maintain an account at a high street bank, also use the likes of Revolut and Starling for more of their everyday banking needs. Yet, high street banks have been offering services through their digital banking platforms for many years. They were the pioneers of digital banking. So, what made everyone abandon them? Ralph Waldo Emerson’s quote ‘it’s not the destination, it’s the journey’ answers that well. And here’s why. Let’s look at the ‘destination’. In this case that’s the user being able to execute anything they previously could with a high street bank, through a digital challenger: the so-called functionalities. They play a big role in customer satisfaction. The more, the merrier, for a user who wants to be able to control their expenses right from their phone. So, now we come to the ‘journey’. In digital banking, offering the most is not the most important factor. Sometimes it can even have the opposite effect on users, and repel them. Sometimes it may not even matter how much a bank offers them. Why? Because they also look at how well the bank offers it. Does it take less time and effort to do the same task with a high street player as with a challenger? If this is the case for a lot of tasks, then no matter how many functionalities you offer, the user experience you provide will render them worthless.

SoFi

750

SoFi PNC

PNC PNC 500

250

Web

iOS

Android

If we really put these two banks to the test and compare both what they have in common, and what is unique to each, we have some very interesting findings. SoFi could add the following to its digital banking apps, which PNC already offers: ■ Applying for an overdraft ■ Searching for a specific transaction through its category ■ Any functionality that allows the user to add, edit, delete and manage another bank recipient and their details PNC could add the following to its digital banking apps, which SoFi already offers: ■ Closing a savings account ■ Setting a budget ■ Any functionality for the management of its card. Even though it offers a separate app for this, it causes a lot of friction for the user to have two different applications for managing their finances EUROPE/UK

Revolut is known to many as the original unicorn of fintech, and currently offers more functionalities than any other bank across Europe and the US, which is, in itself, impressive. But how does it stand up against one of the best-known high street banks in the UK? Issue 6 | ThePaytechMagazine

COMMENTARY: NEO v INCUMBENTS

Designing out friction: Who does what, best?

What can Lloyds or Revolut add to their digital product roadmap to surpass each other? And which are the features they have each failed to include that would make a big difference? Revolut could add the following, taken from Lloyds digital banking: ■ Cheques management ■ Opening an additional current account

REVOLUT* v LLOYDS BANK FUNCTIONALITY GAP ANALYSIS 500

■ Applying for a card replacement instead of cancelling an existing card and ordering another one On the other hand, Lloyds has plenty of options when it comes to enhancing its existing digital banking applications with new additions from Revolut. Here are some that stand out: ■ A multicurrency account, enabling users to hold many different currencies under the same account number ■ In-app wealth management, such as buying and selling stocks or even cryptos and commodities ■ Virtual savings accounts or savings pots, instead of using real savings accounts. Setting up a savings goalin Lloyds requires opening up (if a customer doesn’t already have one) a new savings account, whereas Revolut just adds them to a digital pot It seems that finding the sweet spot between what you offer and how well you offer it is a tough job, and gaining insights into your competition or market is not easy. Banks need to pay closer attention to all the offerings and user experiences that challengers have.

NUMBER OF FUNCTIONALITIES

■ Revolut does not offer digital banking over the web channel, whereas Lloyds does. Yet, when it comes to mobiles, where Lloyds offers an average of 150 functionalities for both its iOS and Android apps, Revolut offers 400 – more than double the amount ■ Both banks aim to offer the most for accounts and money transfers, with a wide range of financial products and a plethora of ways to transfer money to a third party ■ Something special comes up when you compare the UX offered by Revolut and Lloyds Bank. Even though the gap in the number of functionalities they offer is big, their UX is the same. There’s no discernible difference across all categories, except the online account opening process, where Revolut takes the lead

400

317

312

iOS App

Android App

300 200 100 0

n Functionalities provided by Lloyds Bank that Revolut does not have n Functionalities that Revolut has in common with Lloyds Bank n Functionalities unique to Revolut * Based on Revolut Premium/Metal card account

There appears to be solid explanations for increased customer turnover – challengers are so-named for a reason: they are upending the financial ecosystem through innovation, technology and customer experience excellence. And yet the incumbents have not lost the battle. They still have the means to become better and show customers that they are worthy of their long-held trust.

The neobanks are challenging the financial ecosystem by introducing innovation, technology and customer experience excellence. And yet the incumbents have not lost the battle 34

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www.fintech.finance

REGTECH

Joining the dots: Cross-referencing data from different identity streams means a higher barrier to fraud

ThePaytechMagazine | Issue 6

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When a business is onboarding customers using a risk-based approach, some identifications require enhanced due diligence. Payment providers, for example, must consider factors such as the country of origin, where the money is going to, the source of funds and the transaction value. If potential risks are identified during due diligence, adding layers of identity verification to onboarding workflows helps provide more robust fraud prevention measures without adding substantially more friction or effort. Using digital identity, ID document and bank account verification can enable organisations to utilise a few reliable ways to verify and authenticate that someone is who they claim to be. By cross-referencing multiple networks, businesses can implement an even more robust fraud and risk mitigation system. Corroborating information from different identity streams creates a higher barrier for any would-be fraudster to overcome.

Custom workflows While fraud prevention and compliance measures are always necessary, requiring every customer to go through the highest level of scrutiny is often unnecessary and can sometimes even lead to transaction abandonment. The individual, scenario and numerous other factors will affect the risk profile and, thus, the rule sets and workflows should also vary. They can be customised to offer the most appropriate onboarding experience, based on risk, allowing lower risk accounts to onboard seamlessly while requiring higher risk ones to go through more robust measures, as part of a balanced, risk-based approach. For instance, Stake, an Australian-based investment platform that challenges traditional banks and brokers on investing costs and user experience, uses Trulioo to onboard and verify customers in four different locations (Australia, New Zealand, the UK and Brazil) with multiple legislations and other requirements. One of the founding principles of the company was to address three major legacy issues within the investment industry for customers: paper forms,

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An effective, risk-based approach to onboarding can be technologically almost effortless, says Zac Cohen, COO of Trulioo excessive fees and poor execution. Stake needed to undertake appropriate anti-money laundering and know your customer (KYC) procedures for every customer, and provide the appropriate level of security, without compromising on service. Using its risk-based approach, Trulioo has helped Stake with this due diligence while enabling the company to scale globally, delivering verification to a vast market. Validating personal identification information as a first step can provide insight into what further checks should be deployed. Beyond the information provided by the consumer, the simultaneous collection of significant

By cross-referencing multiple networks, businesses can implement an even more robust fraud and risk mitigation system metadata presents numerous signals that are useful for fraud prevention. For the consumer, it’s just a few simple questions, but for a sophisticated identity verification system, it’s a multitude of data points and signals to determine the risk profile and the associated workflow. If, during the initial analysis, a need for enhanced due diligence is identified, a secondary ID document verification might be called for. For these cases, the consumer is asked for images of their identity documents. These images can then undergo security checks, including analysing them for signs of forgery or alteration. For a company that needs extra layers, this process could also require the customer to send a selfie along with the picture of their ID. This

selfie enables a liveness check and biometric comparison between that image and the ID photo. Using facial recognition technology, the image comparison is done quickly and with a high degree of accuracy, providing yet another layer of comfort. If documents are unavailable or an even further due diligence layer is called for, a bank account verification may be requested. Bank verification is a mechanism to confirm that the person entering identity information into a form is authorised to use the identity they have supplied. As banks have strict regulations around proper KYC and security measures, using banks as a verification layer helps to provide assurance that the prospect has passed other strict ID verification procedures and that the information matches a defined bank account. As with any verification procedure, there’s always an amount of healthy friction for the consumer when adding security measures. Studies show that consumers appreciate the trade-off, as they understand the need for security and how those measures protect them when they open accounts. Providing the onboarding process prioritises data privacy, and is not complicated or slow in comparison to the value they receive, consumers will willingly proceed.

Right verification at right time With the smart implementation of a digital identity network, an effective, risk-based approach is technologically almost effortless. It goes without saying that compliance teams need to consider various risks and what appropriate measures should be in place to safeguard their operations. Regular adjustments, reviews and manual investigations should always be part of the process. However, effective identity verification workflows make remote onboarding safe, convenient and seamless – for both operational teams and consumers. The right level of due diligence is expected by consumers in today’s digital world and will help pave the way for greater customer trust and loyalty.

Issue 6 | ThePaytechMagazine

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REGTECH

Theultimateprize The decision to postpone migration to the eurozone’s new consolidated platform for payments settlement has given banks some breathing space. They should make good use of it, says SVP of TAS Group, Mario Mendia When the European Central Bank (ECB) fired the starting gun for banks to migrate to the new consolidated TARGET real-time gross settlement and liquidity management platform, Italy-based TAS Group was one of the first technology companies out of the starting blocks. Already embedded at the heart of the central banking system, it offered a range of solutions and a partnership approach. To date, 40 commercial banks and a central bank have used the company’s existing Aquarius and Network Gateway solutions and a new, Cloud-only product called PAGE, to manage a smooth changeover to the new infrastructure. TAS was also one of the first to welcome this year’s decision by the ECB to delay the deadline for migrating to the combined platform, due to several reasons, including COVID-19

diverting banks’ resources and attention – although that shouldn’t be read as an excuse to take a foot off the gas, says Mario Mendia, SVP of TAS Group, because the penalty for not finishing the race on time is severe. Any participant not ready by the revised implementation date of November 2022 will be excluded from central bank monetary operations, unable to pay or be paid in central bank money, or perform ancillary system settlements. “According to the ECB, banks that are not able to migrate risk no longer being able to do business,” says Mendia. “That’s why the entire community is preparing for the project. That includes at least 11 months of community testing because the impact of this migration is seen as being as challenging as the one to the Single Euro Payments Area (SEPA).” Nevertheless, the

postponement will help banks review and reassess some of their choices, he says. TAS Group’s Cloud and on-premise software solutions allow banks to leverage the new, rich features of the consolidated TARGET services – TARGET2 for bank-to-bank transfers, and TARGET2Securities service for settling securities. The new infrastructure will also require banks to convert, if they haven’t already done so, to using the ISO 20022-based messaging protocol. There will be one more hurdle to jump once this is complete – by 2023, the Eurosystem, the European Monetary Authority, will be using a new collateral management system (ECMS), to which banks will also have to align. “The ECB has been investing since 2009 in this new infrastructure. It manages the services and operates the platform, together with the Bank of Italy, the Bundesbank, Banque de France, and Banco de España,” explains Mendia. “It is also the regulatory authority that, together with the national central banks, supervises implementation. It has the capability to play all these roles.

From euro to hero: The infrastructure changes will strengthen the currency

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Issue 6 | ThePaytechMagazine

REGTECH “The migration to the new infrastructure means a wider and more integrated European payment ecosystem, which has better funding and liquidity management capability, supported by secure and reliable central banking services, in real time, and for extended hours. This means also a more competitive European payments and banking industry, and stronger euro currency. It will, in the future, attract more counterparties from abroad, because of its stability and cost-efficiency,” he adds. TAS also believes the consolidation project presents a clear opportunity for those ‘who haven’t yet worked on adopting ISO 20022, automating tasks, integrating information, scaling up their applications in real time and

opportunity to change your process and introduce more digital transformation into your payment processing.” Having achieved all that, the next prize is ECMS, which will be implemented in 2023. “It will allow better funding for all the European banks,” says Mendia. “After this, the only tool left to be implemented will be central bank digital currency.”

Off-the-peg solutions While TAS has worked with banks on implementing on-premise solutions, Mendia sees Cloud technology as the real accelerator in payments modernisation, because it enables resilience, scalability, World leading: Changes to the eurozone infrastructure build on previous advances

forecasting through adaptive intelligence’. And that goes way beyond Europe. “ISO 20022 has been embraced by payment infrastructures worldwide and will, in future be the standard used by others, including Fedwire and the Bank of England,” says Mendia. “The importance of this new standard is linked to capability in managing new data components and richer information, which, in turn, increases transparency of payments processing, helps compliance, and provides better customer service with rich data content. “Being an open standard, ISO 20022 provides an ecosystem with a variety of tools and support, but requires design capabilities, and significant investment to be implement, since it impacts internal business systems, databases, settlement and clearing systems, correspondent banking systems, etc. “How to manage ISO 20022 is a strategic business decision. From a business perspective, if you have to invest a significant amount of money in a mandatory project, it gives you the

ThePaytechMagazine | Issue 6

Eurosystem, with a new service called PAGE, where everything is provided and delivered in the Cloud,” says Mendia. PAGE, which is described as the first Cloud-native solution that allows banks to securely and quickly connect to the European TARGET services with a one-stop shop approach, also gives users the freedom to switch between the two network service providers that have been certified to provide access to the Eurosystem Single Market Interface Gateway – SIA-Colt and SWIFT. While Mendia believes such European payments infrastructure and technology lead the world, within the eurozone itself there is still a lot of levelling-up to do. “There are global trends for change that everybody knows,” he says. “Ecommerce, new integrated payment services, data management and analytics. All of these are setting new standards of customer expectation. Within this framework of global trends, Europe’s revised Payment Service Directive (PSD2) has forced the industry to evolve in a more competitive ecosystem, promoting innovation with application programming interfaces (APIs), as well as security standards, and pushing forward the SEPA integration, which allows for the possibility of scaling up investments. “PSD2 could have been more prescriptive in terms of technical standards, to avoid the present burden of different APIs, but it will enable the market to respond better to the COVID-19 crisis, which is accelerating some of the market dynamics towards a wider adoption of electronic payments. Europe has a bold infrastructure and technologies, but is in some ways traditional and fragmented, which means there is less opportunity for scaling up initiatives and investments. Ecommerce has been lagging behind, compared to the US or other countries, and the adoption of electronic payments varies a lot from country to country. While in Italy, for example, we have seen low adoption, in other countries, like the Nordics, it is very high. These local differences are very common still. “That said, with SEPA and PSD2, we have promoted common business and security standards. We have unlocked competition.”

This means a more competitive European payments and banking industry, and stronger euro currency

flexibility; so continuous improvement and faster market response. “But there is no one-Cloud-fits-all,” he adds. “Everybody has a different reason for moving to the Cloud, and speed of execution and keeping costs manageable will be a priority for many banks. In our experience, the neobanks and fintechs are naturally Cloudoriented; we have implemented a bank in a few months for Anglo-Gulf Trade Bank and it was fascinating how fast and simple that was. On the other hand, traditional banks are adopting the Cloud in steps, using a segmented approach, trying to differentiate by sector of business, data management and security risk, potential savings, and so on. “Small banks have a particular interest in the Cloud, because they can acquire package solutions to deal with complex issues. We are, for example, offering small banks access to the TARGET services of the

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REGTECH

Change is coming: TARGET2 and ISO 20022 migration will, in effect, happen at the same time for many banks

BANKS’

’ G N A ‘BIG B

MOMENT

The countdown has begun to two major changes to European payments infrastructure. Meeting the deadline for both TARGET2 and ISO 20022 migration will be tough, but worth it says Raphael Barisaac, UniCredit’s Global Head of Cash Management and Global Co-head of Trade In the heyday of English seaside coin arcades, there was always a penny push machine. You fed your pennies in until enough of them built up behind those perched precipitously on the edge for them to fall into the cash dispenser.

There was a heart-stopping moment when the weight of all those pennies literally hung in the balance – until the urge for them to move became irresistible.

ThePaytechMagazine | Issue 6

Just such a moment has been reached in the accumulation of systems, regulations, standards and reforms edging the eurozone towards a fully-realised, fully- integrated financial infrastructure. It’s been a long time coming, but the payout, in terms of infrastructure resilience, greater efficiency, improved security, access to new technologies and better usability for the EU’s central banks, retail banks and central securities depositories (CSDs), is huge.

The vision for the ‘last mile’ of this journey towards a harmonised system, and an outline roadmap for getting there, was originally set out by Eurosystem, the monetary authority for the eurozone, in 2015, a year after the Single Euro Payments Area (SEPA) – another important milestone in the harmonisation project – became fully operational in all states using the euro. Eurosystem’s proposal, worked up in

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consultation with the industry, was to build on the existing Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) and related services that had, at that point, been ensuring the free flow of cash, securities and collateral across Europe for almost a decade. They included TARGET2 (for settling bank-to-bank payments), and TARGET2-Securities, or T2S, (for settling securities). An extension of the service in 2018 would also see the introduction of TARGET Instant Payment Settlement (TIPS, for short), which allows individuals and companies to transfer money directly between accounts in seconds, outside bank opening hours, using central bank money for settlement. Eurosystem, which is comprised of the European Central Bank (ECB) and the central banks of eurozone countries, was working towards a November 2021 deadline for consolidating T2 and T2S in a single platform and launching a single market infrastructure gateway to make it easier for participants to access and use all its TARGET services. That timeline has now been pushed back to November 2022. Meanwhile, the revised Payment Services Directive (PSD2) went live in 2019. It was another one of those ‘pennies’ nudging the eurozone towards an inevitable tipping point, as more players entered the market and payments complexity increased. Running parallel with, but inseparable from, all of this was another, much bigger initiative – the rollout of a single, universal, data-rich language for payments messaging, using XML and ASN.1 file formats, not just in Europe, but around the world: namely ISO 20020. Described by one Bank of America executive as a ‘foundational change for our industry’, it promises to finally make different countries’ payments systems interoperable. That should automatically achieve efficiencies, transparency and, therefore, lead to better compliance. ISO 20022 will be the adopted language for all the TARGET services in the new, consolidated system – so, the year 2022 will become the defacto deadline for banks in the eurozone to align under the ISO standard, too. An enormous amount of work still needs to be done inside banks to successfully migrate their systems and ready procedures

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for this ‘big bang’ moment, as Raphael Barisaac, UniCredit’s global head of cash management and global co-head of trade, describes it. “Being a project that is regulatory by nature means there is no fall-back. This drives you to an end date failure is not an option. You have to be ready and on time. Pure and simple,” he says. It’s a hold-your-breath event, but everything leading to that point will have been worth it. “These types of projects are usually very difficult and painful to push through and you only start to see the benefits once the infrastructure is there,” says Barisaac. “On the other hand, we have taken the opportunity to review and streamline our internal processes and systems. “We are a big group of very successful pan-European banks, with a large retail and corporate customer base in each of the countries where we are present. Collectively, we have a lot of different systems and legacy infrastructures, deriving from a history of mergers and acquisitions. This is therefore an opportunity to say ‘OK, leveraging this new infrastructure, what can we do better?’.

There is no fallback. This drives you to an end date; failure is not an option. You have to be ready and on time. Pure and simple “We have already identified some of the benefits that may result from these technical changes. The conversation then begins to shift towards the additional services that we can introduce, since with an XML-based infrastructure, you are able to create new, value-added solutions in, or very close to, real time. “In the past, it had to be approached differently, because you needed to convert a lot of formats, which deprived you of cost and efficiency savings, in order to achieve the end result. “I believe we will see a significant improvement in our existing service level,

as well as in the new solutions we are going to be able to provide to our clients moving forward.” All this fits with UniCredit’s open banking agenda, under which the bank is rolling out an account aggregator feature for internet and mobile users in PSD2-compliant countries by the end of 2021. Already available to customers in Italy, it allows them to not only view accounts held with other providers, but also to make transfers from those accounts across the UniCredit platform. The service will be extended to customers of the bank in Germany and Austria this month. “PSD2, in this sense, is an enabler for a free market to provide additional value-added services for both corporates and individuals,” says Barisaac. “We are passionate about it because it allows open banking to really develop and show the type of maturity that brings wider benefits to the entire ecosystem. We are currently experimenting with application programming interfaces (APIs) in the corporate and retail space, looking at how to connect new services that were previously almost impossible to provide.” He sees the TARGET2 and ISO 20022 migration as being co-dependent. “We call it the XML ISO 20022 journey because it has several pillars. TARGET2 is an important change, driven by the European Central Bank, but, as an industry, we’re already on a journey towards XML migration.” SWIFT is key to that, even if it will continue to run its legacy MT (message type) protocol alongside ISO 20022 until 2025. “SWIFT’s change to ISO 20022 means that, eventually, the entire financial industry will be fully XML, bottom-up,” says Barisaac. “This creates a lot of opportunities, including the way that you are able to foresee different types of services related to liquidity and payments. “It is a very intensive project,” he adds. “The entire bank is working towards this migration, given that there are a lot of infrastructural and internal touchpoints. On the other hand, we have embraced this as an opportunity. “When you see the light at the end of the tunnel and the possibilities afterwards, that certainly energises the team.”

Issue 6 | ThePaytechMagazine

ECOMMERCE

The pandemic has forced an unprecedented surge in companies selling online. But, even in the ‘single’ European market, differences in regulation make their ecommerce journey a painful one. Stripe’s Ellen Moeller is determined to make it easier for them Ask any merchant, anywhere in the world, for their wish list for digital payments and you’ll get the same, straightforward answer: secure, easy and compliant.

Sm oo thi ng pa the ym ent s ri de

Unfortunately, that level of harmonisation is far from the reality, with a tangled web of differing methods and complex and fragmented regulations existing between continents and countries. Even attempts to level up the playing field, such as the European Banking Authority’s strong customer authentication (SCA) legislation, has been beset by delays and differences ahead of its intended implementation at the end of 2020. Being able to successfully navigate this maze has never been more important to businesses globally as the COVID-19 pandemic causes ecommerce to skyrocket. And it’s just this opportunity that San Francisco-based digital payments company Stripe is intent on investing in. Earlier this year, the company raised an additional US$600million from investors in an extension of a Series G funding round to further develop its platform and services. To achieve this, Stripe is advancing its software functionality to simplify online business; accelerating its geographic expansion (it now operates in 42 countries, including 29 in Europe, with

Bulgaria, Cyprus, the Czech Republic, Malta and Romania the latest to be added to the list); as well as pursuing strategic initiatives and acquisitions. And, so far in 2020, it has added leading firms Caviar, Coupa, Just Eat, Keap, Lightspeed, Mattel, NBC, Paid and Zoom to its customer base, which already includes partnerships with global brands such as Barclays, HSBC, Citibank, Klarna, Visa, Mastercard and Cartes Bancaires. Ellen Moeller, who heads Stripe’s partnership team for Europe, the Middle East and Africa (EMEA), says it has also seen record demand for its services in her territories, with the pandemic supercharging the pace of change. “Between March and June, at the height of lockdown, more than 100,000 new businesses came online with us, which is a pretty incredible number,” she explains. “A lot of those businesses might have come online a few years from now, but the pandemic has accelerated their need. For many, that was just survival mode – they need to sell their product,

they need to tap into a market, and it’s the only way to do that. We’ve seen trends that may have taken years to come to fruition, being compressed into a three- or six-month period.” But, despite the huge upsurge in ecommerce, all is not altogether rosy, as is underscored by a white paper, co-authored by Stripe, which was published earlier this year. Explaining the rationale behind the report, Moeller says Stripe asked business leaders across Europe what was preventing them from expanding internationally. “We really want to be an enabler of global trade, and so it’s important for us to understand, from a user perspective, what’s prohibiting that from happening,” says Moeller. “Overwhelmingly, the response was that regulation is a huge component. And it’s not just regulation, but the complexity of it, because, even in Europe, which, from the outside in, may look like it’s harmonised – we’re talking about a single currency and a single regulator in many cases – is actually not harmonised across the region. And regulation is certainly not harmonised across the world. “So, for a business, whether it’s trying to sell software or

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t-shirts, to have to suddenly become a regulatory expert across VAT, payments, identity, privacy, you name it, is a huge barrier,” says Moeller. “All the businesses we talked to said that in some respects that was prohibiting their ability to sell into more markets, while a huge majority said they would sell in many more markets if they had an easier way to navigate that regulation.” For example, as part of the revised Payments Services Directive (PSD2), which is aimed at reducing fraud and making online payments more secure within a more competitive payments environment, SCA will mean more than 300 million Europeans will soon need to confirm their identity for the majority of their online purchases using two of the following: something they know (such as a password), something they possess (such as a phone), or something they are (such as a fingerprint). And the penalty for failing to comply will simply be that the payment will be declined, an obviously undesirable outcome for any business.

Regulatory war chest Moeller says technology companies like Stripe now have a pivotal role to play in providing the tools to enable businesses to cope with this kind of added regulation, a fact evidenced by its acquisition, last year, of Dublin-based tech firm Touchtech Payments, which provides SCA-ready authentication software. She points to the added layers of difficulties, caused by not only the lack

of harmonisation around the regulations, but also the lack of synchronicity in their introduction and enforcement, which create a perilous minefield for businesses to cross. Advancing her argument, Moeller says: “When I look at something like SCA, top of mind for Stripe, as a company that plays in the payments space, was a statement from the European Commission saying it is going to be enforced by the end of this year. “But if you look at the local regulators, country by country across Europe, they’re implementing and enforcing that regulation very differently. So, in the UK, for example, it’s being delayed, in France you have some exceptions. That becomes very difficult for an online business to navigate. How do they implement that regulation, even when it’s harmonised, even when they understand how the rules are being enforced?

A huge majority of businesses said they would sell in many more markets if they had an easier way to navigate regulation “We are going to need a lot more investment in that space in order to help accelerate global economic trade and that will be a critical component of how we actually recover from this pandemic. That’s where Stripe and technology players can really come in and help to support them.” It’s just not forthcoming regulatory changes that cause headaches. Local payment schemes vary hugely across the world, raising multiple conversion issues. Moeller says: “If you look at the Netherlands, Germany and Belgium, they

share a border but everyone’s paying differently in all of those markets, especially if we look online. In the Netherlands, you’re paying with iDEAL, in Germany you may want to pay with SOFORT, in Belgium maybe you want to pay with Bancontact, and that’s a really complex thing, if you’re a Hong Kong merchant, for example, wanting to sell into that market to navigate. “Now that they’re coming online and selling across the world, how do we make sure that we can help these merchants tap into the customer base the right way, and the way that converts as seamlessly as possible for them? That’s another area of opportunity where we’ve seen a lot of demand.” Moeller says the barriers to trade identified in Stripe’s white paper have reinforced its mission. “We really felt and understood the pain of those businesses. And we overwhelmingly heard what we had hypothesised would be the case, which is that this is a really complex area, which businesses are craving technology to help them navigate. That helps us focus. “At Stripe, we see ourselves as being able to remove that complexity and build the technology, software and underlying partnerships with banks or other institutions for fintechs and other types of company to just plug into, so that they don’t have to become experts.” Accepting that one consequence of the upward surge in global ecommerce is that regulatory complexities will exist between trading nations, with Brexit certainly a major new contributor to that, she sees opportunities for companies like Stripe to, as she puts it, ‘smooth bumps in the road’. “Players in the regtech space can help businesses by navigating those complexities, work closely with regulators and regulated institutions, as Stripe does, and become the experts.”

Uphill struggle: But Stripe can help navigate payment regulation

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Issue 6 | ThePaytechMagazine

ECOMMERCE

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

ThePaytechMagazine | Issue 6

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

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

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

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

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

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

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

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

www.fintech.finance

Issue 6 | ThePaytechMagazine

COMMENTARY: ISO 20022

A question of standards Eric Bayle, Head of UK-based global transaction banking team for Société Générale, and Edward Ireland, Global Solution Lead for Bottomline Technologies, believe ISO 20022 and SWIFT gpi show interoperability between crossborder payment schemes is not just desirable, but possible Legacy banks across the world, which have long enjoyed a highly lucrative near-monopoly on providing complex monetary transactions, such as crossborder payments, now face a tidal wave of competition. Blockchain-based newcomers, notably Ripple, as well as financial giants Visa and Mastercard, have been extending their reach as the ever-increasing digitisation of the financial world offers up new opportunities. Against that background, SWIFT (Society for Worldwide Interbank Financial Telecommunication) network, a global messaging system for bank-to-bank payments, developed in the 1970s, remains the de facto standard for high-value international transactions, used by more than 11,000 institutions

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across 200 countries, including some of the newest fintech arrivals. Founded by banks for banks and headquartered in Europe, SWIFT began to feel the hot breath of competition some years ago and responded with an enhanced messaging system, SWIFT gpi (global payments initiative), in 2017. A step-change in how the correspondent banking network operates, it vastly improved the speed of those transactions, from days to minutes, with full transparency of the payment journey between the counterparties. Since 2018, all transactions have carried a UETR (unique end-to-end transaction reference), which offers full tracking of payments on the SWIFT network. And, from November 2020, it will be mandatory for all financial institutions to send confirmation of incoming payments, too. However, perhaps the single most

important change to the payments landscape that affects SWIFT (and everyone else in payments for that matter), is the introduction of a new, open and universal messaging standard, ISO 20022. The standard for a modern, data-driven payments world, and one in which application programming interfaces (APIs) are increasingly becoming the accepted way of improving client experience. Already used by payment systems in more than 70 countries, ISO 20022 will run alongside SWIFT’s legacy MT messaging from 2021, with the latter phased out by 2025. The migration of high-value payment systems in multiple jurisdictions to ISO 20022 at pretty much the same time has been described by Deutsche Bank as ‘probably the most impactful payments industry undertaking since the introduction of the Single Euro Payments Area’. www.fintech.finance

Warm industry welcome Société Générale was one of the first to convert to SWIFT gpi when it was introduced in 2017, and Eric Bayle, head of its UK-based global transaction banking team, is encouraged by the number of other financial institutions upgrading their systems to accommodate it. The numbers nearly doubled between 2019 and 2020, to almost 900. In total, 65 per cent of SWIFT’s crossborder payments, worth $77trillion, were made through gpi in 2019/20, mainly in the developed economies of Europe, the US and Asia. “That tells you the scope of the pickup and the expansion,” says Bayle. He’s convinced that a large part of that success is down to the added transparency offered by gpi. The track and trace function, previously only available to financial institutions, can now be exposed to those institutions’ corporate clients through APIs, too. “You have the pure gpi, between banks, and then g4c, or gpi for corporates, which is the banks’ offer for their clients,” explains Bayle. “Very large companies might have an integrated gpi that allows them to automatically track payments, end to end. SMEs might choose to initiate a payment using an online banking tool and then access the tracker via the internet to monitor the payment. Now there is the inbound tracking initiative, too, where customers have the option to receive an alert of their incoming funds. This, obviously, is important for them to manage their treasury, because, whether you are a very large corporate or a small SME, you need to know exactly what’s going to come into your bank account on any given day to decide what payments you can make out of it. “All these gpi initiatives rely on standardisation of formats and the help and support of vendors. The vendors have a very important role to play in plugging these APIs – the gpi tracker, etc – into the customer solution.” Bottomline is one of those vendors. It has worked closely with SWIFT to encourage the adoption of gpi and Edward Ireland, product manager for payment technology, sees the next phase of that to be possibly the most challenging yet. “The big cash management banks have the dollars to invest in this type of project; it gets more challenging as we get down to the smaller banks, but the benefit is there for them, too,” he says. “That’s especially www.fintech.finance

true of those that are very dependent on crossborder payments.” Exposing the track and trace function via APIs as well as the universal confirmations initiative means the impact of SWIFT gpi is beginning to be felt way beyond SWIFT’s banking members. Implementing gpi triggers a whole raft of improvements in processes, applications and integrations across the payments ecosystem, says Ireland. “APIs are key. The early adoption of gpi wasn’t really based on APIs, it was based on the old messaging rails. But now we’re increasingly moving towards APIs and institutions are becoming more familiar with them, I think it [has to be] API first, if you really want to get the benefit from the gpi programme. “If we can give better visibility to our customers around transactions they’re making, and the detail within those transactions, there are other services and other capabilities we can offer customers off the back of it. For example, if we have

The level of detail required by the [ISO 20022] standard is the level of detail required by the market, so if your payment system can’t deal with it, you’ve got a bigger problem than the standard a customer making a Bacs payment in the UK, there’s very little information we can get from that. We can’t see what they’re buying, we don’t really know when the money’s going to arrive. “When we look at how payments are going to evolve, gpi is going to give us better visibility of when that payment is going to settle and when it has settled. There are other ancillary products and services we can then bring to the attention of our customers, based on what we can see within that payment.”

The same hymn sheet… SWIFT aims to provide an increasingly friction-free international, bank-to-bank payment network, but what happens when it rubs up against local payment

schemes, such as ACH (Automated Clearing House) in the US, Faster Payments in the UK and SEPA in Europe? Both Bayle and Ireland acknowledge that interoperability between schemes – local and international – has been a major hurdle in crossborder payments, but they are optimistic that there will be greater alignment in future over both standards and formats. ISO 20022 will undoubtedly hasten that. Explains Ireland: “If you look at the different faster payment or instant payment schemes, they’ve been developed at different times, in different standards. But the instant payment schemes are now standardising on the same format, which is a help. There is, increasingly, more interoperability between them.” As an example of what can be achieved, he points to the emergence of P27, a new crossborder digital payments platform in the Nordics, built by the region’s major banks, which is due to go live in 2021. “You’ll be able to settle instantly in various currencies across the Nordics, including the euro,” he says. “We’re also seeing SWIFT looking at how it can pull confirmations from these instant payment schemes into gpi for settlements occurring off the SWIFT network.” For Bayle, widespread adoption of ISO 20022 will make life so much easier, particularly when it comes to compliance. “Regulators across the world want more transparency around what’s going on in the payment. You need to know who is the ultimate originator, the originator, the beneficiary and the ultimate beneficiary. With ISO 20022, you can have all that in the payment, meaning that, for banks and regulators, the more we move to an ISO 20022 scheme, format or standard, the more transparency there will be in payments.” Both Ireland and Bayle acknowledge that change means cost – a cost that many financial organisations would prefer to avoid. But take heed, says Ireland. “The important thing to remember about ISO 20022, is that the level of detail required by the standard is the level of detail required by the market, so if your payment system can’t deal with it, you’ve got a bigger problem than the standard. Your problem is that you’re not going to be able to service your customers the way that you need to.” Issue 6 | ThePaytechMagazine

OUTSOURCING

In outsourcing we trust? The Wirecard scandal has raised serious questions about trust in the financial services supply chain. With most challengers and an increasing number of incumbents relying on third parties, we asked PPS’ Ray Brash and Polymath Consulting’s David Parker to consider the nature of outsourcing Look closely at any sterling banknote and you’ll find a pledge, whispered in tiny letters, that underwrites the entire system of fiat currency exchange: ‘I promise to pay the bearer…’. That promise – that essential bond of trust – maintains a certain global economic order, forging mutual connections of borrowing and lending, depositing and withdrawing, and a sense that, come what may, debts will be paid and promises kept. And this trust doesn’t only flow between consumers and merchants. It is the essential ingredient in the relationship between banks and the service providers to which they increasingly outsource. www.fintech.finance

Indeed, many of the neobanks fawned over by today’s financial commentators would never have had a product in the first place without these strong relationships – of firms – and their millions of customers. especially with payment services providers The same trust was, until recently, (PSPs), which support features boasted by invested in German payments firm Monzo, Revolut and other challengers. Wirecard, whose calamitous fall from Ray Brash, CEO and chair of PPS the DAX 30 to insolvency this summer (previously PrePay Solutions), believes will go down in history as one of the most the fintech ecosystem could not have dramatic failures in the sector. grown without the services of these PSPs. The fallout from this scandal has “The growth of fintech, in the last five shocked fintechs into a frenzy of due years, has been because of outsourcing diligence checks. And yet, while the trust payments,” he says. between banks and PSPs has certainly “Without processors like ourselves, or been bruised by Wirecard, it’s consumers GPS (Global Processing Services), guys like who have once again been left to bear the Monzo and Revolut would not have got brunt of the latest fintech disappointment. into the market, or to where they are, Sarah Kocianski, of fintech consultancy because outsourcing allows companies, 11:FS, believes the damage to consumer particularly fintechs, to really focus on trust caused by the Wirecard meltdown where they add value, which is proposition is ‘likely to be irreparable’. But what of and customer experience.” Wirecard’s partners – like Curve, ANNA PPS, which operates with a dual licence Money, Pockit and U Account in the UK and Belgium in Insourcing is – and the financial institutions preparation for Brexit, often done for counting their lucky stars handles clients’ processing, the wrong reasons... not to have outsourced issuing and prepaid the biggest ones to Wirecard? How should programmes in the UK and I see are egos and they respond to the European Union. With company valuations fact a payments processor customers ranging from UK trusted by millions, and fintech Coconut to a growing David Parker, valued in the billions, list of retailers with prepaid Polymath could betray its customers’ cards, PPS’ services are Consulting trust so badly? depended upon by hundreds

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Issue 6 | ThePaytechMagazine

OUTSOURCING “You have to manage your suppliers in almost exactly the same way as you’d manage your own teams,” explains Brash. “That was the lesson in the case of Wirecard: a lot of the Wirecard customers took it absolutely for granted that they would sign a deal with Wirecard, and that was it.”

A tricky trade-off If Wirecard was a failure of governance, then what about dealing with third party technology failure? David Parker, director at Polymath Consulting, regards failure as an inevitable by-product of innovation. "There’s virtually no technology that is 100 per cent reliable, 100 per cent of the time,” he says. “It just doesn’t exist. Virgin goes down. Microsoft continually has to put out updates to its software. The Hubble Telescope goes down. These things cost billions to build; they still go down sometimes. We are ultimately talking about technology and bugs, and things that do eventually break. You can put in place processes and systems to minimise problems, but to expect something to never, ever stop working is unrealistic.” “It’s a trade-off,” Brash agrees. “If you wanted to have 100 per cent uptime, it might be possible, but the money you’d have to spend would probably make the business uneconomic.” That raises an important alternative. If banks are intent on derisking, then why not bring payments processing systems in-house: in other words, insourcing, not outsourcing? For Parker, whose consultancy advises firms on payments and cards, there is rarely a sensible business case for doing that. “Insourcing is often done for the wrong reasons,” he explains. “Don’t get me wrong, there are good, solid reasons to insource. But the biggest ones I see for insourcing are egos and company valuations.” It’s easy to imagine ego and hubris driving a chief financial officer or chief technology officer into a software development quagmire – but why would firms insource for the sake of their valuation? “I’ve heard investors talk to our clients about their investments, saying ‘yes but what exactly do you own?’,” says Brash. “But, you know, in today’s world, where everything is hosted in the Cloud, no one owns anything anyway. It’s all about

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they’re not backend technology companies,” he says. “And I think, while we have seen growth in the number of people looking to hold their own ledger, we’ve also seen growth in the number of players that’ve realised just how complex that is.” The Financial Conduct Authority intervened in June when the severity of the Wirecard situation became known, freezing the accounts of consumers whose banks were supplied by the payments firm. Naturally, despite a flurry of press releases apportioning blame, those consumers held their banks responsible. What measures can neobanks put in place to avoid further loss of trust in the face of a similar outsourcing event? “You have to accept a trade-off between reliability and features,” says Brash. “We’re moving so quickly, as an industry, it’s inevitable we’ll not get everything right first time – every so often there will be a blip. And customers are relatively forgiving. We saw that with Monzo, when it had processor problems: it was more transparent than banks had been historically, and customers responded well to that.” Nonetheless, if fintechs want to retain the trust of the regulator and their customers, they’ll do well to use the Wirecard scandal as a lesson in safeguarding. A robust You have to A question of trust: ‘Plan B’, kicking in when a Now is the time to manage your supplier goes offline, seems learn lessons suppliers, almost in a particularly appropriate exactly the same way measure. And, in Mastercard, enough money into the as you’d manage Brash recalls an example of account for Saturday, Sunday, your own teams how it might work. Monday and Tuesday – and if “There’s a service Mastercard you’re a penny short, you get Ray Brash, PPS has, called Stand-In, which fined,” Parker points out. means that if a processor is down, the card “Wouldn’t you rather have that on Ray’s will continue to work,” Brash explains. “And shoulders at PPS, who’s been doing it for the interesting thing is that it was put in the last 20 years, than your own? After place by Mastercard because banks, back in all, if you’re a neobank, this might be your the day, didn’t have any back-up when they first Christmas.” wanted to do maintenance. They’d literally Meanwhile, both Parker and Brash agree take their platform down for hours at a that banks shouldn’t be focussing on time. So Mastercard said ‘OK, for the five building systems that already exist in hours on a Saturday when you’re down, the PSP ecosystem. Rather, they should we’ll stand in for you’. There’s no reason why concentrate on their product – which, for similar back-ups and stand-ins couldn’t be neobanks especially, is the frontend. created across the payments ecosystem.” “Ultimately, it’s all about knowing Whatever lessons the industry learns what business you’re in,” says Parker. “For from Wirecard’s broken promises, trust most neobanks, their expertise is around remains the key to a healthy, well-regulated the customer interface – not running great financial sector. Now is the time to be big processing platforms.” held accountable – outsourcing payments, Brash agrees: “Banks are customer user but insourcing responsibility. experience, customer interface companies; intellectual property – it’s not like the old days, where you owned your datacentre and that somehow made you more secure.” So, the majority of financial institutions should continue to outsource, albeit with a new-found sobriety around who they trust, and how they measure that trust. There’s clearly a strong case for trusting specialists in specific service provision, like PSPs. As Parker reminds us, payments firms can manage the trickiest payments processing scenarios far more comfortably than multi-department, multi-product banks. “Don’t forget, if Christmas Day falls on a Monday, and Boxing Day is on a Tuesday, on the previous Friday you’ve got to put

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www.fintech.finance

LONDON:

FINTECH’S NATURAL HOME Centuries ago, London laid the foundations for modern banking.

Decades ago, it devised the first modern international capital markets – the Eurobond. And over the past few years, it has become the crucible of fintech – from digital-only challenger banks and peer-to-peer lending to equity crowdfunding and expertise in regtech and blockchain. Fintech thrives where capital, tech and talent connect with regulators and government. Here are five reasons why London is the global capital for fintech.

HUGE INVESTMENT

LDN £2.2bn NYC £1.5bn BER £0.37bn PAR £0.32bn

London’s fintech sector has raised more VC funding in 2020 than New York, Berlin and Paris.(1)

WORLD-CLASS TALENT With 44,000+ people working in fintech and 260,000+ in digital tech, the city has a diverse and extensive talent pool.(2)

44k

260k

REGULATORY SUPPORT The Financial Conduct Authority’s (FCA) regulatory sandbox enables startups and corporates to test their products in the real market.(3)

FORWARD-THINKING CONSUMERS 71% of digitally active customers in the UK use fintech services, ahead of Germany (64%), Canada (50%), the US (46%) and France (35%).(4)

UK 71% GER 64% CAN 50% US 46% FRA 35%

EXTENSIVE ECOSYSTEM

>1k

More than 1,000 global fintech headquarters are in London, the highest globally, alongside New York (939) and San Francisco (593).

About London & Partners As London’s international trade, investment and promotion agency, we help international businesses set up and grow in London, with the help of our expert team across the world. Find out more: business.london/fintech

Sources: 1: Dealroom, 2020 | 2: TechNation, 2019 | 3: London & Partners | 4: Global Fintech Adoption Index, EY, 2019 | 5: Savills and Workthere, 2019

OUTSOURCING Uphill struggle? Not with Enfuce's enabling payment support systems

The Nordic power behind payments Finland’s biggest startup by revenue in 2018, Enfuce’s rise has been impressive. Co-founder Denise Johansson says its mission is to allow its customers to focus Established four years ago, Helsinki-based payment services provider Enfuce has been a boundary-breaker from the outset, becoming the first Nordic payment services company to launch Apple Pay and, in June this year, having its authorised payment institution licence approved. Now, it has its sights set on worldwide growth. Its raison d’être? As co-founder Denise Johansson explains: helping banks, fintechs and other financial services operators, succeed in a fast-changing, highly competitive financial services environment by allowing them to concentrate on their core purpose of serving customers. She believes banks can no longer afford to be encumbered by the limitations of out-of-date legacy systems, or expect to develop, in-house, the kind of complex tech needed to service the demands of today’s customers. Rather, they should allow out-of-the-box services, developed

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by the likes of Enfuce, to take care of the heavy lifting around everything from product enablement, to compliance. “We are the enabler, the hub, the integrator, the tech behind banks, and we don’t allow ourselves to become legacy,” she says. “They can trust us to be compliant, relevant and secure, so that they can focus on whatever great consumer or corporate ideas they have. “We are a processor, offering card issuing-in-a-box for any organisation that wants to enable digital payments, or attach to Visa or Mastercard payment rails. It’s a huge thing for banks to get this working on their own if they haven’t done it before, but we know how this part of the ecosystem operates and will make sure they succeed with whatever they want to achieve.” Enfuce proved the potential of its scalable, Cloud-based systems in 2019, when it nailed the Middle East’s largest ever card migration of almost six million cards belonging to customers of

International Smart Card (ISC – the region’s biggest provider of efinance transaction services, responsible for paying public sector salaries, pensions and benefits via its Qi debit card), remotely from Finland. Enfuce is committed to helping organisations, big and small, to achieve their goals, from leviathans like SmartCard, to fintech minions looking to test new products. It arose from changes in the Nordic financial services landscape: a perfect storm of technology, regulation, venture capital and evolving customer needs. “If we go back five or seven years, you didn’t see many new entrants into the market, or a lot of new stuff happening,” says Johansson. “Then we started to see movement, with new players wanting to enter the market but not sure how to do it, and that’s when we found our sweet spot. We wanted to come in and help, enable change and allow new players to join in. www.fintech.finance

“People were not happy with the services we had always had, they wanted things to go smoother, payments needed to become more seamless. We don’t use as much cash as we did 10 years back, so virtual money needs to be easy and safe to use.” Enfuce’s potential market has grown exponentially, with a raft of new banking entrants over the past five years – the likes of Boom, Monzo and Kuda – all needing to keep up the pace. “There hasn’t been that much change in the technology,” adds Johansson. “It’s really been about more players being enabled to use it in the push for new services for end users.” That said, the Cloud has had a major impact across the industry. “Looking back, when you used to put something into production, five to 10 years later that system could be working exactly the way it did initially, because you built it so well you didn’t need to make upgrades,” says Johansson. “Today, in the Cloud, everything moves so fast that what you put into production today will be legacy tomorrow, so you need to have new ways of working with tech because otherwise you will be left behind. “We’re now four years old and we have already changed around 80 to 90 per cent of our tech to something new. And that’s the only way not to become legacy; you constantly need to redevelop. If you think about a business with systems from 10, 15 or 20 years back, for it to change all that, piece by piece, requires so much. But when you are born out of the mindset that what goes into production today will be legacy tomorrow, you start to develop the processes to run tech services in a whole new way.”

Enabling innovation Just such an example is Enfuce’s recent tie-up with Swedish neo, Rocker, around its VISA-enabled, prepaid cards. “We love working with Rocker because they are so determined to find better solutions for consumers, with great ideas about future needs. We serve their back office and tech side so that they can focus on their consumer services,” says Johansson. For her, it is a great example of a fintech concentrating on serving its customers well, while outside specialists – in this case Enfuce – deal with everything from payment processing to compliance and licensing. www.fintech.finance

“When we started off, we had an idea that banks would need to start focussing on their core businesses because the neobanks had started to emerge, although they weren’t that big then. However, today, the neobanks are pushing forward, focussing on what they are really good at. So, for the legacy banks to keep up, they also need to focus on where their core business is and be the best at that, scaling off everything that is not core. “We do this as well. We look at our core business and how to be best at what we do, but we won’t start to put more and more half-services on it, and be semi-good at anything. If we are launching something new, we need to know we are the best at it.” Rocker’s prepaid card is part of plans by the Stockholm-based challenger, formerly known as Bynk, to expand its mobile personal finance platform into other areas. It also offers services like loans, payments, savings and a debit card. For its pre-paid card, Enfuce took care of everything from licensing to compliance, processing and

When you are born out of the mindset that ‘what goes into production today will be legacy tomorrow’, you start to develop the processes to run tech services in a whole new way back-office services, including dispute handling, and helped to create a product which is compatible with any payment method, currency or geography, thus supporting Rocker’s plans to expand its offering across Europe. Using Enfuce’s web-based application programming interface (API), Rocker can instigate dynamic spending limits, push notifications and geo-blocking. Emil Hansson, Rocker’s CEO, shares Johansson’s philosophy of tech delegation: “I understand tech must be frustrating for big bank CEOs who built their platform in the 80s or 90s as a supporting part of their company, based in the basement. But today, it’s the heart of the company, what the culture is built around, and they’ve got

to be customer-first and not religious about how they build their platform because it’s going to change over time, no matter what,” he says. “Tech is not IT, it’s development, it’s the core of the company.” Similarly, Enfuce has been instrumental in enabling the first new challenger bank in Iceland for decades, Indó, to get to market. Enfuce’s turnkey service provides payments, open banking and sustainability services to the newbie, which has designs on being ‘the world’s least powerful bank’, by never directly managing users’ funds but instead adopting a ‘narrow banking’ model where it places deposits securely with the local central bank. Founded in 2018, Indó aims to reinvent Icelandic banking with a simple and transparent service. Once its pending banking licence is approved by the Icelandic Financial Supervisory Authority (FSA), it plans to launch a card-linked app and current account with market-beating interest rates. As Indó’s full-service partner, Enfuce is helping it set up compliant banking services quickly and at scale, including implementing data-driven features within the Indó app, due to launch later in 2020. Indó co-founder Haukur Skúlason, says: “We know, from bitter experience, that the problem banks have, in Iceland, is their desire to build stuff themselves. So, you have hundreds of IT systems that are, to varying degrees, outdated, but all interconnected, and it’s extremely expensive to keep them all running. So, we’re not going to do that. We are going to build as little as possible, and look at companies to partner up with in providing specific solutions that are best in class.” Key pillars of Enfuce’s offering – its payment services, open banking and My Carbon Action services – will underpin elements of the Indó user experience, including providing customers with insights around the carbon footprint of aspects of their shopping, for items like food. Consumers will benefit from Enfuce’s technology and experience without ever knowing who’s providing it – and that’s the point. “We are the enabler, the hub, the integrator. Whatever word you want to call it,” says Johansson, “those who are managing their customer relationship need to be in the front but we need to be supporting them from behind.” Issue 6 | ThePaytechMagazine

COMMENTARY: SAAS

Bridging the legacy to modernity y gap g Is banking software-as-a-service the megatrend underpinning the move to open finance? Anand Subbaraman, General Manager of Cloud, Core and Digital Banking Products at Finastra, believes it is The use of open application programming interfaces (APIs) and Cloud-based technologies is fast becoming the key building blocks for all banks to develop or update their functions as efficiently and cost-effectively as possible – whether or not they’re operating inside a regulator-led open banking environment. That much has been reflected in at least two key surveys within the past few months. Infrastructure provider Banking Circle’s Ready For The Rebuild white paper and Finastra’s Open Banking And Collaboration: State Of The Nation Survey 2020, both quizzed hundreds of banks and institutions across Europe, the US, Asia and the Middle East. The latter revealed that 86 per cent of global banks are looking to use open APIs to enable open banking capabilities in the next 12 months. In addition, 30 per cent of the banks surveyed believed open banking was already making a tangible impact in delivering improved overall customer experience, albeit against a backdrop where regulation was perceived to be tighter than a year ago and close to half (48 per cent) thought it was now holding back innovation. The related megatrend identified by, among others, Gartner and PwC, last year, is for banking software to be consumed as a service; the leveraging of Cloud software to create a more responsive banking organisation at lower upfront cost and with inbuilt future-proofing. No more time-consuming upgrades and ‘temporary suspension of service’, server space crammed with programmes and a

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constant merry-go-round of patches and fixes. Already adopted by many banks for functions away from the critical core, PwC predicted that, in 2020, ‘service infrastructures in areas such as consumer payments, credit scoring and statements and billings for asset managers’ basic current account functions, will be well on the way to becoming utilities’. Anand Subbaraman, general manager, Cloud, core and digital banking products, for Finastra, would agree with that. Subbaraman, who is based in Bengaluru (Bangalore) – dubbed India’s Silicon Valley – is a firm advocate of how the use of software-as-a-service (SaaS) will help banks to avoid repeating past mistakes in allowing their IT infrastructures to stagnate and become outdated. “The more banks move to SaaS, the more current they can be,” he says. “When some of the older core systems came to market, say 20 years back, or 25 years back, and a bank took them up, they were not legacy then. The problem with technology is that we become outdated on the very next day after we select it. And the question is, how do you keep that legacy-tomodernity gap as small as possible? “I think what has happened is that banks fell behind because their traditional technology was inflexible and they couldn’t keep up with the latest version.” “With SaaS, we are leapfrogging that. We’re essentially saying a bank can be

always current. The bank can choose to consume the capabilities in its own time, because that’s a business decision, but if you keep it current, the flexibility is there. That’s the most important thing. “Secondly, there are more modern versions of the tools we had to help bank customisations 10 or 15 years back. We have all learned a lot. APIs, events, flexible frameworks for communication for digital UI (user interfaces) and so on, they help all of us move that curve. “So, for the next generation of banking, there will be some amount of legacy, but that’s going to be much smaller, and the window in which the legacy will exist will be much shorter.” That’s reinforced by the experience of some of Finastra’s most recent clients. Greg Krasnov, the fintech entrepreneur behind Tonik, the first licensed fully digital bank in the Philippines, which has chosen Finastra’s Cloud-hosted Fusion Essence, powered by Microsoft’s Azure, to provide its banking core, describes SaaS as a game changer in helping banks to keep pace with digital technology advances. “The technological barrier to entry started being removed, basically, when the SaaS models became available in the core banking space,” Krasnov says. “All banks in the future are going to be based on that.” And it’s not only newcomers like Tonik that subscribe to that view. At the other end of the timeline, Barwick Bank, founded in 1907 in southern Georgia in the US, is using Finastra’s Fusion Phoenix

With software as a service we’re essentially saying a bank is always current

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core to enable it to go digital, too. Barwick CEO, Jim Bange, says: “We know that Fusion Phoenix enables the delivery of excellent customer-facing solutions and has a simple and intuitive interface for our employees. Not insignificantly, the Cloud delivery model takes the technology burden off our shoulders and will enable us to deliver innovative new solutions quickly and easily.”

Old and new: SaaS is removing legacy blind spots

www.fintech.finance

Subbaraman also points to the vast scalability offered by Cloud technology – an essential factor as banks like Tonik look to sail into previously uncharted waters by tapping into the still vast populations of those who are underbanked or unbanked. It‘s a customer demographic that banks that are still supported by a traditional architecture find hard to turn a profit from. “The whole Cloud proposition is about scaling up, scaling down, scaling in, scaling out,” says Subbaraman. “We have a strong partnership with Microsoft, leveraging its Azure technology, so we have a very sophisticated platform.” And Finastra has used it to amplify what Subbaraman describes as ‘the network effect’, enabling fintechs accepted onto its FusionFabric.cloud platform to connect to multiple banks through its API. “We have multiple levers that we want to use,” he adds. “A scalable core banking system, a scalable FusionFabric.cloud marketplace with a fintech ecosystem around it, as well as the power of the Azure platform.” In an increasingly-crowded, hyper-competitive and continually changing financial ecosystem, one certainty is that all players, new and old, will have to use every means possible to stay relevant. It’s the reason First National Bank and Trust (FNBT), which operates in 16 locations in US states Wisconsin and Illinois, was attracted to the flexibility of Finastra’s platform. George Hausermann, SVP and director of technology, believes that ‘a truly open core that shares data via APIs means we can continue to offer innovative bank services, sometimes through third-party fintechs, without the hurdles imposed by traditional cores’. In the case of Tonik, there was simply no other choice than to consume Cloud-based, third-party services. “You simply cannot serve [unbanked or underbanked] populations with traditional infrastructure,” says Krasnov. But Finastra is happy to work with both. As Subbaraman says: “Our whole approach is in that sweet spot between traditional with experience, and highly modern technology and SaaS.” Issue 6 | ThePaytechMagazine

meniga meniga

CLOUD

Cometh the moment… Today’s CFO is the hero of the hour – a leader who can drive the adoption of Cloud-enabled processes and deliver digitisation across the organisation, says Jeremy Marchant, Head of Pre-sales, International, at Aptitude Software If financial services focus on a shiny frontend user experience, without a reformed backend supporting it, success will always be limited. Think of a Rolls Royce, but with a broken engine. Clients will be unlikely to part with their cash for a luxury car again. “If the backend isn’t revolutionised, then no matter how good the frontend, at some point, the back office systems will be a brake on the organisation,” says Jeremy Marchant, head of pre-sales, international, at Aptitude Software. And not only will this stop new products being launched, but there will also be control issues and limits imposed by regulators further down the line, he warns. So, the cost and effort of updating back-office legacy systems will inevitably be worth it in the long run. As such, Marchant believes the person best placed to lead this digital transformation in any organisation is the chief financial officer (CFO). For it is he or she who can drive change across the company if they get a true handle on data and then automate processes in the Cloud to achieve cost efficiencies. That’s not been the archetypal image of an accountancy-driven role, he admits, but, increasingly, it is now the expectation. “If you look at survey after survey, the CFO is expected to be the digital leader in an organisation, not just in his or her own www.fintech.finance

function but across the organisation,” he adds. “If the CFO won’t do it, then the chief executive will find someone else who will. If you’re a CFO who only talks about compliance and regulation, you probably won’t last that long in your job.” Research appears to bear him out. Accenture’s CFO Reimagined report of 2018 notes that the role has evolved from ‘accountant to analyser, to strategic advisor’ in recent years, with 77 per cent believing that it is within their purview to drive business-wide transformation. It also notes that the CFO’s ‘greatest potential strength’ is the ability to capture and make better use of data to increase the effectiveness and efficiency of both their own department and others across their organisation. This backs up Marchant’ assertion that any form of digital transformation requires getting the company’s financial data in order first. It needs to be accurately identified, sifted and sorted, which is where Aptitude Software comes in. It offers users a range of solutions for finance teams to help run their companies, comply with complex regulations and forecast the outcomes of decisions. For example, the Aptitude Accounting Hub is designed to centralise and automate enterprise finance, accounting and reporting, while also building a detailed financial data foundation. This enables finance teams to gain control of accounting rules and processes,

be agile when it comes to adopting new business models and exploit finance data to provide actionable insights to the business. In other words, to futureproof it. And that’s where fintech providers can help. A major problem with legacy systems is that data tends to be held in silos, leading to what Marchant refers to as ‘data chaos’. “That means you have umpteen reconciliations: you’ve got to keep everything in line, you’ve got manual journals everywhere, you’ve got people checking things, doing analysis, understanding why numbers are different,” he explains. “So, essentially, you’ve an army of people doing manual processes and, if you are able to automate them, then all of those people can stop doing that and do something of more value instead.” Marchant cites the example of regulators asking European banks for data on their exposure to certain countries during the eurozone crisis back in 2009. “A lot of banks didn’t have that [information] digitally stored. They had it in boxes,” he says. “One bank had to hire literally a thousand people to go and open up a load of boxes and check in the contracts where all their loan exposure was,” he says. “So, that is the cost of not fixing your data; ultimately, you’ll end up spending the money anyway.” Issue 6 | ThePaytechMagazine

CLOUD The solution, he says, is not only organising that data in a centralised place but also then storing it in a way that is easy and efficient to access – which is where Cloud technology can prove invaluable. “Firstly, you have to create that single place where the data is. And, where the Cloud comes in, is about how cheap and available that data becomes,” says Marchant. “So, if you think of the current

organisation can mean multimillion dollars of savings and payback within a two-year period.”

The great enabler It’s not just about driving technological change; it’s also about changing things at an organisational level. “It’s governance, as well, and having the right people to do drive through change.

Beaming up: Data is much easier to handle in one place, within the Cloud

“In other words, you don’t have to do everything at once. You start small and you grow; you prove that it works for part of the business, for part of the product line,” says Marchant. “Then, once it works, that data can go into the Cloud and you incrementally migrate other businesses, products or entities onto Aptitude. It’s a scalable way of moving to the Cloud across all of your businesses.” Aptitude can also help clients address the issue of having too much transactional data on a general ledger (GL). “By moving to a subledger and taking the data away from the GL, you get a thin GL, which is much easier to handle when it comes to processing the data – as well as being quicker and cheaper,” says Marchant. “That data sits, logically, in a tool that was designed solely for that task..”

Getting a handle on data As well as outlining the benefits, Marchant is very clear on the pitfalls of not streamlining back-office systems and getting a handle on data – especially in the long term. “One of the clients I have worked with in the last 10 years, quite a big global bank, almost had its licence taken away and faced regulatory trading limits in one of its product areas because of financial

situation, in terms of ‘data chaos’, you’ve probably got the same piece of data, that covers the same thing, in maybe four or five different systems. “Our solution to that is to bring everything together in one place, so that finance knows where it goes to get certain data points, and that then leads to efficiencies.” Spelling out the benefits of this further, he says that if a single source of data can be found across finance, risk and treasury, it not only enables a business to manage its data better internally and helps the business deliver what it wants, but it also leads to between 25 and 40 per cent of efficiency savings among finance teams. “In one organisation, there were about 30 people who just didn’t need to do what they did anymore, so they could all move on to other things and deliver projects that were just in freefall before,” he says. “Automating reconciliations in a big

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Automating reconciliations in a big organisation can mean big savings on the cost line. You’re looking at multimillion dollars within a two-year period Technology is the enabler,” says Marchant. Looking to the future, having a data model that is granular, detailed and controlled – and can be enriched at a later date and kept in alignment with other data that a company needs to report on – helps futureproof a business for upcoming needs or regulations. Aptitude helps organisations to achieve this by becoming a single source of pre-Cloud data. “We then integrate all the data across the organisation that’s relevant for finance, and that then moves onto the Cloud,” Marchant explains. The benefit of this is that more data can be added as and when it’s required, rather than changing the interface or the underlying technology each time.

reporting and control deficiencies,” he says. That stands as a warning to other institutions to update their systems, not least so they are ready for unforeseen events – the coronavirus pandemic has only heightened that awareness . “People think situations like COVID-19, like the banking crisis, are black swan events, that they don’t happen that often,” says Marchant. “Well, it turns out they do, and you need to have the data to hand, and the flexibility in your finance architecture to be able to respond to it. “And that means finance becomes a key competitive differentiation in the industry. If you can respond in an extreme situation, you’re going to come out of it better, right? I mean, it’s just common sense.” www.fintech.finance

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CLOUD

A funny thing happened on the way to the Cloud “Everybody talks about payments moving towards the Cloud – that it’s going to be this $300billion market opportunity in the next five years,” says Ciaran Chu. “A lot of banks say they are committed to the technology, but if you look at the actual workloads being run there, from a payments perspective, a lot of them are still in their infancy.”

ACI Worldwide’s Head of Public Cloud, Ciaran Chu, says it isn’t just a technology solution – it’s an opportunity to fundamentally reshape banks’ business models

As head of public Cloud services at payment solutions provider ACI Worldwide, Chu is involved in the digital transformation journey of many of the 6,000 organisations that it works with, including 18 of the 20 biggest banks globally. And while some may be slower than others, for those who ‘get’ Cloud’s full potential, he believes it can radically change the way they operate as well as their future profitability. And it all comes back to payments…

they’re able to charge less fees and interest rates are at an all-time low. They’re the two traditional revenue streams. Where you’ll see an acceleration of Cloud technology, is through artificial intelligence (AI) or other data aggregation services, that allow them to create alternative, new value streams that they wouldn’t be able to create today in an on-premise environment. Those that are going to be really successful will move components, one by one, to arrive at value, assimilate the learnings and work in a truly agile manner. Ultimately, they’ll be able to unlock that value and transform the business, piece by piece, so that they’re diversifying their revenue, changing their cost base and, ultimately, spending more time on the consumers and less time on the maintenance. A lot of banks and intermediaries I speak

THE PAYTECH MAGAZINE: Can you give us a scene-setter – where banks are now and where they are heading to in their Cloud journey? CIARAN CHU: I think the big challenge that a lot of banks are going to have in the next three to five years is that their traditional business model is under attack: www.fintech.finance

to, be they merchants or processors, are saying: “I want to have a faster speed to market. I acknowledge there may be more upfront cost involved in that because I’m running two platforms – I’m not fully optimised when I’m deploying it in the Cloud – but, ultimately, my major driver is to get faster time to market and increase my agility. By doing that, my expectation is that I'll get new revenue streams that I wouldn’t have got otherwise in the short term. In the long term, much as I’ve done in an on-premise environment, I’m going to optimise my workloads as much as possible, to ensure that my cost comes down.” TPM: You talk about banks finding new business models and revenue streams, but where do they look? CC: The most logical place for neo and traditional banks to find revenue outside of transaction fees – with the caveat that, while revenue fees per transaction are falling, the volume of electronic payments, especially off the back of COVID, is rising – is through improved customer experience. The easiest way to do that is by improving transaction convergence or giving customers more contextual data to go about their daily lives. Issue 6 | ThePaytechMagazine

CLOUD The challenge for the established banks is that they’ve got spaghetti architecture – a customer has a retail account and a home insurance account, for example, but those two pieces of data are held in different databases. That means it’s very hard for incumbent banks to pull together a complete data picture of that client. Some of the advantage with the neobanks, particularly in Europe, is that they have the ability to leverage open banking to pull together that aggregated account information – because they’re Cloud native and they’ve got the AI capabilities that the Cloud providers give them. It helps give a far more seamless experience to consumers, which helps to drive more transaction volume. That transaction volume then gives them the opportunity

Does it add up? Revenue fees per transaction are falling but volume of low-value payments is rising

to provide more contextual information – and, as consumers, what we’re really looking for is the easy button. So that, I think, is going to be one of the big battlegrounds. Can the incumbents simplify all their data structures, and can they commercialise the fact that they are trusted by consumers to hold information? And who wins? Is it the trusted bank, which might have a lot of information and can’t quite get it together today, but, as they go towards the Cloud, can use the help of providers to better aggregate that info and make it available? Or is it your neobank that’s jumped straight in and is going to make it so easy for you to use their product, and so easy for you to be able to aggregate all your accounts in their product? That’s going to be a really interesting space in the coming years, because,

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ultimately, with transaction fees, it’s a race to the bottom. TPM: Do you see them naturally relinquishing some of the payment services they have traditionally supported in-house? CC: As a bank moves towards the Cloud, there is obviously a natural pause, a point for them to consider what it wants to offer itself and what it can outsource. The first big advantage of payments-as-a-service is being able to focus on your customers, while potentially outsourcing the technical infrastructure. The second big benefit is that a lot of the banks are looking at the Cloud journey and realising it requires a very different technical skillset, which they might not

really neat solution because it just allows you to unlock the new capability as you need it and not worry whether you’ve done the right market analysis, whether you can get it built in six-to-18 months, and, if you do, has the market has already moved on? Unlocking the payment capability, as you need it, using application programming interfaces (APIs), is massively powerful, because it transforms your go-to-market and your customer experience, not to mention your cost base. TPM: And what can ACI Worldwide bring to the table to help banks navigate this changing environment? CC: We’ve huge experience of supporting clients that are running mission-critical systems in their own datacentres. But we’ve also been on our own Cloud journey as a company – we now have our own private Cloud business – and that gives us a massive advantage in that we understand what it takes to migrate to and operate in the Cloud. So, I think our own experiences have really resonated with clients, because they can come to us to ask questions like ‘how do I solve the HSM (hardware security module) latency issue?’ and we’ve been able to say ‘like this… you can run it in your own datacentre, and here are the things you need to think about in order to connect to the payment application in the Cloud. Or, alternatively, here’s our colocation provider’.

Ultimately, they’ll be able to transform the business, piece by piece, so they’re diversifying their revenue, changing their cost base, and, ultimately, spending more time on consumers and less on maintenance have the abilities in-house today to be able to execute as quickly as they want. So, the idea that you can just consume a service, as and when you need it, is obviously very attractive from an operation and a maintenance standpoint, and certainly from a resource perspective. The third big benefit of payments-asa-service is the ubiquity of the payment experience. If you think about how fast the market is moving – transaction fees are dropping, banks are looking for different revenue streams – one of the challenges is how banks respond to that in an effective time period. Payments-as-a-service is a

We use our own middleware to connect our different applications, to make them seamless for clients, and particularly to API-enable them, so that customers can come in, use the services they need, when they need them. That’s really helped us think customer-first, about how we can make customers’ lives easier in so far as being able to consume the gamut of ACI’s technology in a really seamless manner, so that they can go to market faster, innovate faster, and also maintain their applications in a far more seamless manner – which, given the amount of regulatory oversight coming in, is in itself a massive challenge. www.fintech.finance

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COMMENTARY: NORDICS

Northernlights? Northern lights? A keynote session at FinTECHTalents’ Virtual Nordics conference will ask if the Nordics’ reputation for innovation is media myth or reality. Danske Bank’s Chief Digital Officer, Søren Rode Jain Andreasen, will be among the speakers. Here, he explores the region’s preference for digital payments and harnessing the power of APIs Much of the hype surrounding fintech and disruption in the Nordic region focusses on the tech titans that have their origins there, including Skype and Spotify. The region is also known for fast-paced payments innovation, with Sweden moving especially fast towards a cashless society. It’s also the birthplace of Klarna, the ‘buy now, pay later’ payment service loved by Europeans, which was valued at $10.65billion in its latest investment round. Native payments authentication provider Zwipe, meanwhile, has just raised $10.5million to prepare for the launch of biometric cards. While no Nordic cities made it into the first Global Fintech Hub world rankings, put together by Findexable, Sweden, Finland and Denmark were all in the Top 20 country rankings and Norway has been flagged as a nation that could soon rival some of the old guard because of its track record in innovation, ecosystem building and regulatory effort. If you dig a little deeper into the online world, though – Twitter chats, forums,

blogs – some point to a different reality, one of incumbent bank complacency, a reluctance to forge partnerships and a lack of capital for the majority of startups. So, what’s the truth about the northern fintech lights? One session at the upcoming FinTECHTalents Virtual Nordics conference aims to find out.

Innovating through challenge It asks boldly Is Nordic Innovation a Myth?’ and one of the panellists will be Søren Rode Jain Andreasen, chief digital officer at Danske Bank, Denmark’s largest bank and a major player in the Nordic region with more than five million retail customers. What’s his view? “On the one hand, Scandinavian countries are very innovative – we have seen some very large companies, global leaders, growing out of the region,” he says. “Within the financial services industry, we have iZettle and Klarna, which are now global leaders within their field. “At the same time, there are also challenges for startups,” he admits. “Access to capital, for example – it’s harder to get funded in Scandinavia than it is in the US, the UK, or even Asia.”

Despite this, the fintech landscape in the Nordics continues to be one of the most successful at producing unicorns. The increased investments and new initiatives made by local governments are primed to facilitate the continued success of fintech in the coming years. And when it comes to scale-up businesses, the Nordic region certainly punches above its weight. According to Findexable research, 16 per cent of European fintech scale-ups are located in Sweden, Denmark, Norway, Finland, and Iceland. While not as many as in an established financial hub such as the UK (38 per cent), that’s more than Germany, at 13 per cent. There is also a confidence and a determination to get things done. The European Commission has now finally approved, under the EU Merger Regulation, the proposed acquisition of Nets A/S’ account-to-account payment business, headquartered in Denmark, by Mastercard. The decision is conditional on the transfer of a licence for Nets’ Realtime 24/7 technology for account-to-account core infrastructure services as well as the relevant personnel and other assets. In terms of payments, what sets the Nordics apart, and is driving much of the innovation there, is people’ s willingness, and

All points North: The Nordics have spawned some of the most successful payments companies of recent years

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www.fintech.finance

governments’ keenness, to dispense with cash in favour of digital transactions. Facilitating that are a number of infrastructure services, including the soon-to-launch P27 crossborder network. A joint initiative by Danske Bank, Handelsbanken, Nordea, OP Financial Group, SEB and Swedbank, P27 aims to build the world’s first real-time, crossborder payment system in multiple currencies.

Meeting new customer needs “During the last decade, we’ve not only seen banks trying to make their customers go digital, but also customers wanting to go digital; they actually prefer to use digital solutions, especially in Scandinavia,” says Andreasen. “Most of our branches don’t have transactional services, only advisory, so they don’t even have cash in them anymore. While that means that we don’t see our customers as often as we used to, they still have an expectation that we know them, and the only way we can know them is by using data. So data becomes a very, very efficient and necessary tool in knowing our customers and being relevant for them, and being proactive; being able to advise them, at the right point in time, so that we can give them the right advice, and the right products, exactly when they need them.” Andreasen is a big advocate of the Cloud, and credits it with a crucial role in his bank’s digital ambitions, working hand-in-hand with application programming interfaces (APIs). “The scalability and flexibility that the Cloud provides are unparalleled by any other technology,” he says. “What’s really important is to use it efficiently. So what we try to do is ensure that the technologies that are not running in the Cloud are API-enabled, so that we can

www.fintech.finance

efficiently communicate across all of our different capabilities and microservices. When you are a big financial institution, you will have some solutions that a re not using the newest technology, simply because you have thousands and thousands of programs and just upgrading them would basically keep the whole company occupied for years. So you’ll always have some legacy, and it really becomes a question of how you manage that legacy and how you make sure that, when you build new solutions, you use new technology.” Payments innovation in the region is being fuelled by open banking. There is, for example, the open banking platform, Nordic API Gateway, which some of the major Nordic banks, including Danske, are plugged into. It has now extended its partnership with Danske Bank to enable customers to pay from other banks within Danske’s mobile banking app. In this way, Danske Bank is taking an important step towards

During the last decade, we’ve seen not only banks trying to make their customers go digital, but also customers wanting to go digital; they actually prefer to use digital solutions, especially in Scandinavia

becoming the region’s preferred banking interface. This deepening digital payments partnership encapsulates Danske’s and others' strong appetite to innovate through Nordic collaborations. “We employ around 20,000 people and the sheer size of the company makes some things go slowly. Being in a heavily regulated industry, of course, also imposes some boundaries on what we can do,” says Andreasen. “But we are constantly working on improving it. We are learning from tech giants and startups alike, looking at what works and then trying to implement that in our organisation. “Working in an agile way is something we have been doing for years, but now we are taking the next step in merging all our change activities – the business change functions will be merged with our IT divisions. Basically, we are implementing a version of the Spotify model.” Spotify founder Daniel Ek has just said he’ll invest €1billion in deep-tech European moonshot projects. Perhaps that helps answer the panel’s question!

FINDING FINTECH’S ‘TRUE NORTH’

FinTECHTalents Virtual Nordics is a virtual-first festival for those involved with, or interested in, fintech and innovation in the Nordic region. The half-day agenda will delve into lessons learned from successes and failures across Sweden, Norway, Denmark, Finland and Iceland – looking at, among other things, fintech for good, how startups and scaleups are being capitalised, the new P27 Nordic payment network’s journey, identity rules, and open banking. The conference takes place on October 14, starting at 9am (CEST). To register you’re interest, go to www.fintechtalents.com/ virtualnordics2020/

Issue 6 | ThePaytechMagazine

Redefining finance for good. Join the virtual gathering for collaboration and innovation. Find out more on finastra.com/sibos2020

BLOCKCHAIN

COVID-19 has prompted a fair amount of reassessment in the financial sector. But, in truth, digital disruption to the global monetary system was underway long before the pandemic emerged. Cash usage has been steadily falling – albeit accelerated over the past few months by a huge swing towards online shopping, while ‘bricks and mortar’ merchants have been reluctant to handle coins and bills, and encouraged by governments raising contactless card payment limits to make the digital switch. Meanwhile, digitally distributed stimulus payments to citizens and businesses, to protect them from the economic ravages of the pandemic, have, unsurprisingly, been seen as quicker and more efficient than simply sending out cheques. And alongside all this is the emergent parallel world of cryptocurrencies and stable coins. The change in how we pay and what we choose to pay with has far-reaching consequences – not least for central banks who preside over the world’s monetary systems. Many of them are now questioning whether the token of value on which they’ve built centuries of thinking and systems – cash – is really up to the job or whether they should now commit to issuing central bank digital currencies (CBDCs). It’s a huge step.

Central banks are being forced to respond to changes that challenge the foundation of monetary systems. R3’s Daniel Eidan says blockchain-enabled CBDCs could be one solution Daniel Eidan, global solutions architect, payments and CBDC, for enterprise blockchain technology company R3, which has been working with at least two central banks on Corda blockchain-facilitated CBDC projects, says the emergence of Libra – Facebook’s proposed stable coin – was a watershed moment. “Libra has awoken central banks to the fact that there are technology providers out there that have the network and technical capacity to challenge some of our assumptions around how we use money,” he says. As the Institute and Faculty of Actuaries noted in March 2019 in its paper Understanding Central Bank Digital

Currencies: “A switch from public fiat towards private electronic money challenges the definition of money, the access to legal tender, the role of central banks, the financial intermediation model and the transmission of monetary policy.” It added that central banks are now under pressure to respond. And one way they might do that is with CBDCs. As far back as 2015, Bank of England chief economist Andy Haldane floated the idea of using a blockchain-based central bank currency as a tool that would allow for negative interest rates to be sanctioned, if required. Fast forward five years and the bank’s March 2020 discussion paper, Central Bank Digital Currency: Opportunities, Challenges And Design, fleshes out a sterling-based CBDC in significantly greater detail. Of the many paths the BoE could take, building a fast, highly secure and resilient technology platform to sit alongside its real time gross settlement service with the necessary functionality for retail CBDC payments, would, it suggests, be easiest.

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Issue 6 | ThePaytechMagazine

BLOCKCHAIN This would allow private sector payment interface providers (PIPs) to connect to the bank’s systems, in order to offer customer-facing CBDC payment services. Even if all central banks recognise the same existential threats to the global financial ecosystem, their motivations for issuing CBDCs are much more nuanced, given payment systems vary globally, as do geopolitical considerations. The People’s Bank of China has a long-stated aim of actively promoting the development of a state digital currency. Even if no formal timetable for any roll-out is in place yet, the country’s major state-run commercial banks are presently conducting large-scale internal testing of a digital wallet application. In Sweden, the Riksbank began testing its e-krone earlier this year, taking the country one step closer to creating world’s first CBDC. It followed news that the

The fall of cash? Central banks are responding to fundamental changes

country had also joined forces with the UK, Japan, Switzerland and the Eurozone to assess the case for issuing CBDCs. Sweden’s e-Krone is driven mainly by a desire that no one should be left behind as the country heads towards total cashlessness in 2024/5. It’s an example of the inclusion agenda that Eidan has seen playing out. “Central banks are coming in and saying ‘we want to provide central bank money to every citizen in society’, which in turn enables inclusivity by offering an alternative to cash payments that aren’t run by the private sector,” he says. R3, meanwhile, is working with central banks, including in Canada and Thailand, to implement wholesale CBDCs.

No central point of failure On the assumption that CBDCs are eventually issued, portability is likely to be a major benefit, since such currencies won’t

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necessarily need to stay within the geographical confines of the country in which they’re issued. “It’s actually a lot easier to export CBDC to other jurisdictions. So you see a competitive nature to the instrument itself that maybe doesn’t exist as much in cash,” says Eidan. In its April 2020 White Paper Central Bank Digital Currency: An Innovation In Payments, R3 separates its analysis of CBDC projects into wholesale and retail categories, arguing that end users invariably have different requirements/preferences. The R3 paper makes clear that central bank-run experiments so far have shown how core existing features of RTGS systems can be improved using blockchain. In one example, according to R3, decentralised liquidity savings mechanisms may be more effective in reducing gridlock than existing approaches. In addition, decentralised systems may enable banks to have more

the best technology rail to use for retail CBDC, although it is being courted by at least one blockchain provider, L3COS, to run its operating system. In the meantime R3’s enterprise blockchain platform Corda continues to evolve. “What’s unique about this operating system is that it’s able to run applications – and synchronise between those applications – on many different systems,” says Eidan. “In effect, entire industries/ multiple countries can be optimised simultaneously, rather than simply optimising an individual firm.” And that significantly expands the number of use cases being made available. “What’s likely to happen is all of these different systems that were so used to being decoupled from one another, are going to be able to interact, because platforms like Corda and other distributed ledger technology (DLT) will become ubiquitous within the industry,” says Eidan. Taking a five-year view, he sees a variety of CBDCs offering different use cases, depending on the country of issue. But convergence is likely over the longer term. “As a retail user, I can see a future where I could potentially carry as many currencies as I want with me and pay automatically, based on how I live my life, and what types of goods and services I consume,” says Eidan.

As a retail user, I an see a future where I could potentially carry as many currencies as I want with me and pay automatically flexibility than they currently have using centralised liquidity savings mechanisms, meaning each bank could have more control and real-time visibility of how their payments are netting, network-wide, according to the paper. This would reduce reliance on the central operator for that netting calculation. And mean greater control and flexibility with liquidity that would benefit all market participants. Looking at the potential benefits of CBDC, Eidan says: “CBDC enables a distributed system, so it would enable counterparties to interact, each running their own piece of software and ensuring there’s no centralised point of failure, which in turn would lead to a more secure and resilient environment.” The Bank of England is still weighing up

A fundamental change So far, innovation in the payments space has largely involved the building of a payments stack of services and products on top of fiat currencies that haven’t fundamentally changed their character. Now, central banks are being forced to acknowledge the fundamental disruption to monetary systems posed by the seemingly inexorable move away from that historic token of value – cash – that underpins them. As Eidan says: “What’s fundamentally different about CBDC is that we’re not talking about adding another layer of innovation (to the payments stack), but adding another element to the base that will substantially change what this kind of payment stack looks like.” www.fintech.finance

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BLOCKCHAIN

The language of hope Remember Esperanto, the first attempt to create a common language between nations, designed to foster world peace and mutual understanding? There’s no evidence that it succeeded in the first, but as an auxiliary language currently used by two million people worldwide, it’s certainly helped to promote the second. That’s kind of the premise behind Digital Asset’s programming language DAML – not to achieve world peace perhaps, but to overcome barriers in communication, in this case between computer systems and, specifically, blockchain networks. Most people understand a blockchain to be a database for openly recording transactions between parties in a verifiable, secure fashion. But, beyond that, many are baffled by the technology’s complexities and have only a weak understanding of how a distributed ledger works, much less knowledge of the coding that underpins it. What anyone investing in the technology does know, however, is that the choices they make around it will most likely affect not only their future but also their current operating systems. Lack of knowledge and uncertainty have undoubtedly held back adoption of the technology, according to Digital Asset chief executive Yuval Rooz, but he believes that DAML could solve that. DAML is unique in being technology agnostic – use it to digitise a workflow and the software will integrate with whatever blockchain system, or indeed non-blockchain database, that sits beneath. “A company could model its processes with our language and still persist on traditional technology. And the nice thing about that is a lot of people are very comfortable running applications on traditional databases, think PostgreSQL, for example. But in a year from now, if you wanted to move your entire

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Digital Asset has developed a programming language that could hasten the adoption of blockchain by removing barriers to interoperability. Co-founder and CEO Yuval Rooz talks DAML process to a blockchain, because you believed that technology had matured to a point you were comfortable with, you wouldn’t have to change the application. The application would run on a blockchain, giving it a futureproof element – and the work would not have to be done again,” explains Rooz. Initially developed by Digital Asset to meet its own internal blockchain development needs, DAML has become the company’s core product and has recently helped it win investment from tech giants including VMware, Samsung and Salesforce during its Series C financing round. Software giant VMware was already using DAML to operate its own blockchain system. Rooz says the firm used DAML as a way to differentiate itself from rivals when pitching to potential clients. This summer DAML was integrated as a cross-platform alternative to Corda’s native programming language – possibly

the best-known financial enterprise-based blockchain, run by R3. DAML has solved silo issues caused by the various blockchain pioneers who used code unique to their particular distributed ledger, creating, in effect, islands of information that do not easily connect to each other. “Because every blockchain is unique, asking your development team to really understand the ins and outs of every type of distributed ledger technology is not scalable,” says Rooz. “As the developer, you don’t really care what underlying technology is running beneath your application, you simply want it to be decentralised. So, DAML is a smart contract language that is platform agnostic. It means if you develop an application to run on Corda, it will work in the same way on Fabric.” Right now, in a time of pandemic, when replacing manual processes with digital workflows has become urgent, DAML promises relative simplicity and flexibility across any and all platforms, which could make those choices under pressure easier. Rooz was a co-founder of Digital Asset in 2014, a time when blockchain meant Bitcoin in the minds of most people who were aware of it. He points out that blockchain is simply a tool – a database in essence – and businesses should not get hung up on the technology but rather focus on using it as a solution to improve workflow efficiency. “COVID has brought digitisation of processes into sharp focus and blockchain promises a solution due to its inherent resilience,” says Rooz. “Organisations have business continuity plans (BCPs) but no one imagined a BCP that said ‘every single employee of your company will now work from home’.” He points out that the distributed nature of a blockchain means there is

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no central point of failure – aka a place where employees come together, often for manual paper processing. And that’s precisely the scenario most organisations are now trying to avoid in order to protect their staff. “That’s the reality of this pandemic,” says Rooz. “Businesses with a central point of failure, or manual processes, need to digitise, and blockchain can be a very good solution.” Digital Asset has been working with clients through COVID-19 to that end, guiding them through the process of digitising workflows and using DAML to write applications. DAML uses less code than specific blockchain languages, and will produce the same result whether it is put to work with a Corda blockchain, or a Fabric system, says Rooz. “In the blockchain world, if you want to build on Ethereum, you use Solidity, if you want to use Corda, you use Kotlin, if you want to use Fabric, you use Chaincode, and each one comes with unique characteristics and a unique development approach," he explains. Back in 2014, Digital Asset’s clients were faced with having to choose a system. “And they would be fearful of choosing the wrong one,” says Rooz. The thought of committing vast IT resources only to become hostage to a rashly spent fortune would understandably make them think twice. The advantage of DAML is its ability – much like Esperanto – to rise above specificity. It is not just a language of blockchain; applications written with it can be switched between platforms as time goes on. It is open source but under constant development – its compatibility with Corda was only announced in July. Meanwhile Digital Asset’s major digitisation project with the Australian Securities Exchange is ongoing with the aim that every publicly listed company in Australia will be using the technology to clear and settle trades on the new CHESS platform by 2022. US financial services firm Broadridge is another

client, which is working to digitise the US Treasury repurchase (repo) market to improve efficiency and control of the asset class. Rooz sees the interest shown by the big tech players who came into his last funding round as confirming that DAML has merit, and the giants’ growing interest in blockchain will see the technology take off. He says: “When big tech comes into a space, some people worry that they are going to steal their lunch. That can be a valid concern but, from my perspective, it’s a good sign. A lot of times, you work, you’re very passionate about something, you’re convinced there is value there, but the affirmation never comes. So, I’m glad to see the big players in this space. “Secondly, because of their sheer scale and penetration, big tech will accelerate this technology. Once the likes of Microsoft and VMware really embrace something, the probability of adoption shoots up.” In predicting how blockchain will be popularised, Rooz draws the analogy with the introduction of the Cloud to host consumer-facing products, such as file-hosting service Dropbox. He says: “Like Cloud, blockchain will be a numbers game. Can you provide this

Because every blockchain is unique, asking your development team to really understand the ins and outs of every type of distributed ledger technology is not scalable

infrastructure, this commoditised technology, at scale? Companies like VMware, Microsoft, AWS and Google, will.And we’ve developed a language that allows digitisation of workflows to run on any technology. That’s a great opportunity to create a funnel into their offering. We’ve partnered with many such tech companies and they love it. “They can go to clients, with their reputations as infrastructure providers, and introduce DAML. “With VMware, we have already won three very significant projects to drive massive pieces of infrastructure, and companies choose VMware because it is a vendor to pretty much every top 1,000 enterprise company in the world. They use our language because they believe it can get them to market faster.” That DAML is the only language bringing various blockchain networks together makes Digital Asset’s position particularly strong. “The networks being created today are still islands. Blockchain providers want everyone on theirs, they’re not interested in building bridges to another,” Rooz says. “There’s much talk about interoperability but nobody else is providing it. That’s good for us, and this will continue to be one of our main focus points for DAML.”

What’s that you say? Getting different systems to talk to each other is a challenge

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ARTIFICIAL INTELLIGENCE

It seems that thereâ&#x20AC;&#x2122;s a wealth of new use cases for AI within the payments landscape. We brought together three industry experts to consider successful applications, the hype cycle and how far AI can replace traditional banking practices

Moving beyond hype 74

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The payments industry is moving to the forefront of pioneering use cases for artificial intelligence (AI) technology as it seeks to improve efficiency and boost security.

payments journey, has it finally moved beyond the hype? We asked three experts for their views: Ren Zhang, chief data scientist for BMO; Swapna Malekar, AI product lead at RBC; and Kai Schrimpf, head of global transactions and monitoring with Credit Suisse.

talking to them in a much more relevant way, knowing AI is this them better, based on their buzzword – and people expect historic transactions and feedback, so the customer to solve so many experience is more The plethora of digitised payment different things streamlined and relevant. technologies now available has produced with it. My job The other is AI’s impact on the a huge amount of payments data, which is to educate my cyber and fraud control area. advanced machine learning models stakeholders, and We use the mass of data can use to generate accurate financial help them to THE PAYMENTS MAGAZINE: associated with a customer’s predictions and present customers with understand the Can we start with each of you digital footprint to detect more personalised services. The growth in genuine use cases describing your day-to-day early signs of a potential AI and payment technology is symbiotic. Swapna relationship with AI? cyberattack and fraud. AI significantly improves payment Malekar, RBC As a result, for the customer, ecosystems and can also help businesses REN ZHANG (RZ): there will be less disruption using new platforms to fight fraud. I’m enterprise chief to their experience, and less financial Having already reported an 80 per data scientist in charge of BMO’s impact, or need to raise a dispute. cent decline in card-based fraud since AI Centre of Excellence, and enterprise the introduction of smart payment cards chief data and analytics officer. For us, KS: For compliance, the under the Europay, Mastercard and Visa AI is a day-to-day function now, as we technology is now there to (EMV) standard, Visa in August 2020, explore ways to add value to the business process massive amounts of data, announced the launch of Visa Smarter and develop reusable AI capabilities to learn from it and apply logic that we Stand-In Processing (Smarter STIP), which scale adoption. couldn’t five years ago. In my area, the leverages AI to help Visa act as a backup transaction monitoring space, the biggest SWAPNA MALEKAR (SM): I’m to approve or decline transactions on impact is in predicting alert outcomes. If product manager at RBC. We an issuer’s behalf. Decisioning is made you have an alert, your machine decides started really small, with some through real-time, intelligent analysis, there is money-laundering risk in this statistical analysis, then transitioned to AI based on card numbers, card type, whether pattern of behaviour, and the analyst as we enhanced our capabilities. I now transactions are face-to-face, and a host takes a look and checks it out. If it’s risky, develop products and solutions using of other data points. we tag this specific pattern of behaviour, machine learning, AI and any other Banks are deploying AI-based systems the inflows and outflows, the products technology that seems pertinent! in record numbers. The newly-released used, the industries used, all of the stuff KAI SCHRIMPF (KS): I consider Preventing Financial Crime Playbook, that is inherent to the transaction. myself an AI consumer rather a collaboration between PYMNTS and than an AI creator in my role SM: What’s really worked NICE Actimize, highlights that more trying to solve the global financial market in all the products and services than $217billion has been spent on problems of transaction monitoring, I’ve led, or seen in the industry, AI applications for middle-office use money laundering and terrorist financing. is data-driven decision-making. cases such as fraud prevention and risk I talk a lot to the data scientist community You have a humongous amount of assessment. Some 80 per cent of experts about solutions that will hopefully make information in your hands, demographic report that AI reduces payments fraud things better. It’s a problem that’s now information about your clients and and almost 64 per cent say it is vital to 50 years old and we still have big issues. transaction and financial information. stopping fraud in action. I’m presented with new AI Merging all of that together into one AI is also being deployed in solutions, some of which contextual data set is important, as APPROACH the back office. In September work very well, some of which is bringing out the insights to make You have to be careful, in 2019 at Sibos in London, don’t, on a daily basis. accurate and relevant decisions. terms of purpose, for example, SmartStream This has been very successful in banks when working unveiled SmartStream AIR, and fintechs because AI can understand TPM: What do you think has with a third party. a Cloud-native, AI-based the creditworthiness of a client, based been the most successful There are a couple reconciliations platform that it on contextual information, to decide application of AI in the of obvious areas created in its Vienna Innovation whether they are eligible for a loan or financial space – something where it’s very Lab. AIR makes reconciliations other service. Or, in the age of COVID-19, that has had a major impact effective, but it’s as simple as possible, drawing you can provide relief for certain clients on, say, customer experience important to also on AI and machine learning by understanding their needs. or fraud prevention? have an in-house technologies to ensure the user Even though the algorithm might say RZ: On the customer just has to upload the right files one thing, if you merge all that data experience side, it’s capability to get an instant, accurate result. Ren Zhang, and the human insight together, you personalisation and So, with AI now seemingly can provide a better experience and recommendations. Now, BMO touching every part of the decision-making for customers. customers feel that banks are

PERCEPTION

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ARTIFICIAL INTELLIGENCE more effectively. But its important to also TPM: Looking at it from another have an in-house capability to ensure you perspective, what AI hype have you don’t lose your competitive edge. yet to see delivered in the industry? KS: In my area, the biggest hype TPM: What are the typical barriers is around false positives. The large banks are running a 95-99 per cent to adoption you’re facing? false positive rate and there are a lot of RZ: Unfortunately, there are many. solutions out there that promise to bring On the technology side, the main that down to 40 per cent. Now, I’m quite barrier is infrastructure; the basic certain that good AI could do that, but in infrastructure that’s needed to enable AI large corporations, you’re running up is not there. As a result, many applications against legacy data quality issues that will we’re talking about become very costly to prevent that AI from functioning the way it implement. That becomes a showstopper. should. And, when I talk to the really smart On the people side, it depends on the bank. data scientists in my firm, with the triple And, even within the same bank, it depends PhDs, they tell me ‘I could build something on the group. Some people are ready, they that is better, but it’s going to be hard for Terminator you to understand how it works’. I always territory:? have to say ‘then I can’t use it, because I’m Don’t worry… going to have to explain it to a regulator’. we’re a long SM: In the last few years, I’ve way off started hearing about the ethical use of AI, which is very pertinent to what we’re trying to do and the kinds of solutions we’re trying to put out into the market. But the whole ‘explainability’ challenge or even, for example, bias in AI, all those challenges POTENTIAL are being talked about a lot and Will we soon they haven’t been solved yet. be in a world of Blade Runner or TPM: When it comes to Terminator? I don’t developing AI solutions, what’s think so. It’ll be your attitude and approach to a long time until working with third parties? Skynet comes! But SM: For a few products the technology is know what they want to do, and services that we advancing rapidly and some people are sceptical. want to develop, we

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In some groups, adoption is low partner with third-party vendors, Kai Schrimpf, due to fear of failure. but, at the same time, we have Credit Suisse So, how do we address these an in-house research centre. I’ve issues? On the infrastructure side, you seen this hybrid approach in most have to have some enterprise investment, companies; lots of organisations are to have the foundational data problem developing these AI, machine learning and addressed, making it easily available, data science capabilities in-house. Banks making it cheaper for individual teams to are trying to be technology companies, apply AI, rather than investing in the entire and companies like Facebook are trying infrastructure to adopt that. For people, to be banks. It’s an interesting time. there has to be very good education. There RZ: Definitely a hybrid approach. has to be an AI and machine learning team But I would say you have to be to sit with them and address a business careful, in terms of purpose, when working with a third party. There are a couple problem, working together. of obvious areas where it’s very effective. SM: First and foremost, data. A specialised area that they are very good at, Data is such an issue, especially for example, or something brand new that in a large organisation, because we are trying out. Or when the third party you have so many business groups and provides a certain capability that allows you so many points of contact with customers. to improve your process by doing things A customer can be a wealth management

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client, a retail client or a mortgage client, and, usually, there is no single source of truth about a customer. So, just to acquire and integrate that data, and merge it into one single source, normalise it and clean it, is a massive operation. On top of that, there is stakeholder expectation, because AI is this buzzword, and people expect to solve so many different things with it. My job is to educate my stakeholders, and help them to understand the genuine use cases. TPM: A final question – how far will AI go in terms of replacing traditional banking practices and personnel? Are we all going to be replaced by robot overlords? KS: Will we soon be in a world of Blade Runner or Terminator? I don’t think so. It’ll be a long time before Skynet comes! But the technology is advancing rapidly. In New York, 10 years ago, there were toll booths every couple of miles. You had to stop and pay a toll booth assistant $2 to drive on the road. Nowadays, a picture is taken of my car and the money gets automatically deducted from my account. That’s a development where a specific job description has been replaced by technology. Will all jobs go that way? I don’t think so. Ultimately, human beings are herd animals and there will always be people who will pay a premium for human interaction. Maybe a couple of generations from now, things will be different, but I don’t see the replacement of human intuition, human ethics or the human mind on the horizon yet. You can enhance technology, as vastly improved computing power has done, with AI the cherry on top. But I don’t currently don’t see it replacing a vast majority of the jobs that humans do. RZ: Will it affect the existing workforce? Absolutely. It will impact hugely. But does that mean people are going to lose their jobs? I think what will emerge is different types of skillsets, with people getting to do more value-added work. For example, on the fraud investigation side before, you’d have to manually review so many cases that you probably had lots you would never get a chance to check. Now, with AI doing the first screenings, your capacity is going to be bigger and the outcome is going to be much better. www.fintech.finance

Bridging real life to digital. At BPC, we are bridging real life to digital by equipping our clients with the right technology to create payments services that fit right into the customers’ lives. Real life needs of people who make payments or do business transactions converge into digital services. Is it a traditional card payment, mobile wallet or an instant payment, is it initiated via a mobile, through an agent of embedded into an app via an API? It no longer matters; everyone wants it fast, easy and secure, and not having to think about it. We have been doing this for 25 years, for more than 230 clients in 80+ countries, using the model that best fits the business objectives – be it in house, managed services or complete outsource.

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ARTIFICIAL INTELLIGENCE

On a mission You can’t wait for the end of the day to take control of transactions that ‘don’t compute’, says Santosh Tripathy, Practice Lead for Digital Payments at SmartStream

This summer’s Wirecard AG scandal, shortly followed by the FinCEN files exposure – the disclosure of confidential suspicious activity reports (SARs) that banks send to the US Financial Crimes Enforcement Network – sent a shiver down the spine of data controllers the world over.

The German payments processor, before its ignominious collapse into insolvency, had championed and facilitated digital payments – but then €1.9bn ‘disappeared’ from the heart of the organisation. The FinCEN disclosure, on the other hand, revealed that banks could identify and flag discrepancies in transactions that pointed to potential money laundering and other activities, even if senior management chose not to act on it. The dotted line that connects both of these events is data integrity and the need for automated data analysis that’s up to the task. In payments, it all starts with a single transaction that could and should be spotted when it hits reconciliations. But, as the payments industry functions at an ever-accelerated rate, delivering transactions in real time and globally, such exceptions need to be detected fast: at super-human speed, in fact, in order to manage exposure to risk optimally.

Super-powered AI: SmartStream is making heroic efforts to harness artificial intelligence

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SmartStream, one of the leaders in delivering real-time control and greater visibility into payment processing, has embraced artificial intelligence (AI) and machine learning to detect and resolve unmatched settlements, and flag those that could turn out to be benign or malicious. Practice lead for digital payments at SmartStream, Santosh Tripathy, believes accurate, real-time reconciliations might have prevented a Wirecard situation. And, if acted upon, perhaps even avoided some of the worst consequences of the activities exposed in the FinCEN files. We asked him how the company is helping to address the data integrity challenge. THE PAYTECH MAGAZINE: How is ‘real time’ pushing innovation, AI and machine learning in payments and settlement? SANTOSH TRIPATHY: The entire payments industry, across the ecosystem, has ironed out the challenges with recent innovations. From issuing to the way we are acquiring transactions, to processing, to the whole settlement business, in addition to the new regulation that has come along in the form of open banking, and the infrastructure around faster payments. Transactions have become more frictionless and seamless and, in settlement, we’re talking about real-time payments where settlement is instantaneous. Someone has described open banking as the ‘iPhone moment of payments’. The moment the entire ecosystem got opened up and Apple allowed developers to participate and collaborate, and most of the applications that we know came about... the same happened with open banking. The way fintechs are participating, and coming up with new solutions in payments, was unknown a few years ago. There is a statistic that 87 per cent of countries now have some form of open banking or application programming interface (API) banking . Issue 6 | ThePaytechMagazine

ARTIFICIAL INTELLIGENCE As transactions are moving faster, the need to manage operations in real time, in a very seamless and frictionless way, is more important than ever. You cannot afford to wait until close of business to tackle these scenarios, you have to do it on a real-time basis. In a few years from now, transactions will happen at a speed we cannot anticipate, which means the operation has to support you at the same speed and level of innovation. How are you supposed to gain this speed and efficiency without including innovations like AI and machine learning in your platform? TPM: How critical is it for banks to have their payments platforms streamlined for real-time checks and reconciliation?

Running to keep up: Data will be checked and flagged at speeds we can’t yet imagine

ST: Regulators, fintech providers, banks, all of them have now realised the importance of the right controls to handle the amount of volume and variations in the payments that happening around the world. If the payment is happening in real time, the settlement has already happened, exceptions have happened; you can’t wait for the end of the day to take control of all these transactions that have gone wrong. It’s too late for that, and it increases the exposure to risk, both reputational and financial. Most clients have started looking at reconciliation on a near-real-time basis. Real-time payments definitely warrant that. But the amount of investment that’s happening in the control space is not enough. Companies, fintechs, banks, and all players involved, should start focussing on the right controls, start investing in that space. If there had been the right controls, checks and balances by a third party, not

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internal and inward-focussed, we could have avoided a situation like Wirecard. That’s why it’s important that we bring the right controls, checks and balances to the operations. TPM: With that in mind, then, what does SmartStream Air offer when it comes to payments reconciliation? ST: SmartStream is a specialist in the operations controls space, which means we take care of the entire burden of any risks, either financial or reputational, that an entity could be subjected to if they are not handling transactions and the operations properly. Our platform is available in the Cloud and as part of managed services. Any new or existing player who wants to leverage the experience and capabilities of our platform and resources

A business or organisation does not have to worry about file formats, where this transaction is coming from, and what the matching criteria needs to be for the datasets. That is the job of the platform. The client is responsible only for managing exceptions and risk. The platform algorithms are the best in class and can onboard and reconcile transactions in almost real time. TPM: What’s SmartStream’s role within the payments ecosystem? ST: Everything has become a commodity or a service – from know your customer (KYC) , to settlements, to issuing cards, to the acquiring business, there are specialists doing those jobs. Twenty years back, the entire burden was on one entity: a bank had to do the KYC, bring on the merchants, process transactions, settle, handle disputes, etc. We would encourage our partners – and some of them are already part of this journey – to use our expertise, both in terms of our solutions and our people, to expand and become a force in their business. Let us manage their operations and the risks associated to them. Because we are on a mission here – to bring the same seamless and frictionless experience of making a payment into the operations space. The velocity, the variety and the volume of the transactions in the digital payments space, and the rate at which they are changing, is huge, which means some of these challenges trickle down to operations, and operations will find it difficult to handle in the future. If the payment modes and methods are changing and the whole ecosystem is coming up with a new variety of transaction flow, you have to think about how operations would handle that. We have a platform that is robust, which is scalable, has no restriction on the way transactions are captured or processed, which allows the business to grow at the speed it wants to. Operations should not, and shall not become a bottleneck to the growth of the business.

Companies, fintechs, banks, and all players involved, should start focussing on the right controls, start investing in that space

can start on day one, without going through the entire journey of setting up these operations in-house. Our managed service is working particularly well for some of the largest banks in the world. It means that any new and growing business does not have to worry about the burden on its operations. That’s fundamental. We are there to ensure that no bank or fintech player is at a risk of either losing their clients’ business or money. The rapid pace at which innovations are happening, means you have very limited time to adapt, which means the platform you are using should be able to do that on your behalf. So, applying AI and machine learning in reconciliation, as we have done with SmartStream Air, helps bridge that gap.

www.fintech.finance

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The first challenger to be granted a national banking licence in the US, Varo is reaching out to the millions of Americans who still don’t have access to mainstream financial services. Chief Risk Officer Philippa Girling explains how it’s going about it Not every company can legitimately claim to have made history, but being the first US consumer fintech to get full regulatory approval to become a national bank is certainly one for the record books. Three-and-a-half years and multiple rounds of applications later, San Francisco-based Varo Bank was finally granted a national bank charter in July. It now plans to vastly expand its services for the benefit of the millions of Americans who are financially struggling, and to lead what it calls a ‘new wave of financial inclusion’. Because, even in one of the biggest democracies in the world, 22 per cent of adults are either unbanked or underbanked. According to a 2018 report by the US Federal Reserve, they either don’t have a bank account, or have an account but still go outside the banking system to make ends meet. It found that 28 per cent borrowed money using an alternative financial service product, which could include payday, pawn shop or auto title loans. According to an earlier Federal Deposit Insurance Corporation survey of financially excluded households, more than half of those questioned said they simply didn’t have enough money to keep in an account, while a massive 30 per cent said they simply didn’t trust banks. “These are the people we’re trying to help,” says Philippa Girling, chief risk officer at Varo Bank. “There are a lot of people who have not managed to successfully open a bank account; they may have had a prepaid card, or been

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www.fintech.finance

finding other ways to manage their financial lives, with payday lenders and cheque cashers.” Varo’s website proudly declares it is the ‘new way to bank’ and, by gaining its charter, it is certainly breaking the US banking mould. Like other US fintechs, Varo initially partnered with a community bank to offer services – in its case, Bancorp, which held customers’ funds while the fintech handled the consumer interface and app. Regulatory approval by the Federal Deposit Insurance Corporation, means consumer deposits will be transferred to Varo which will now use Temenos Transact as its core banking infrastructure. By using Temenos’ Cloud-native technology, Varo hopes to rapidly innovate and deploy new digital banking products – from deposit accounts to savings and loans. But, unlike many other bank-in-a-box challengers, it’s developing its own tech stack. “Temenos is our core system, it’s our ledger and, as a bank, we’ll be sitting on the Temenos infrastructure,” says Girling. “Much of the rest of the Varo experience, though, is really within our own tech environment and that’s something we really focussed on. “We want to make sure that we’re building a unique intellectual property that’s Varo, because a lot of the things we do, the products we start to develop and offer, are going to be in our world,” she explains. “This is our secret sauce… what makes Varo, Varo. It’s everything our side of the tech stack.” Since 2015, Varo’s core ethos has been to help Americans make progress in their financial lives. And, as the country’s poorest households take the hardest hit from the COVID-19 pandemic, that is becoming an even more pressing concern. There is also a very noticeable racial divide between those who routinely access regulated financial services and those who don’t, largely driven by enormous income inequality. In its 2020 report, The Case For Accelerating Financial Inclusion In Black Communities, McKinsey points out that the average black American family in 2016 had a total wealth of $17,600 – about a tenth of that of an average white family. Nearly half of those households were unbanked or underbanked in 2017. Varo aims to tackle such financial exclusion from the very outset – at onboarding. “We don’t require somebody to already www.fintech.finance

have successfully entered the financial system in order to enter Varo,” says Girling. “The key, I think, to everything in the future, is authentication, and Varo is leaning in to future innovation in that space,” she says – although she adds that if a bank’s know your customer (KYC) processes are too intuitive in the future, that could prove a little disconcerting for the customer. “If you applied to Varo and you put in your telephone number and we said ’thanks very much. Go ahead. Bank’, you’d think ‘how on earth do you know I’m me?’. “It could be unnerving that we already know,” she admits, “and so we might need to build in an additional question just to help ease that user experience.” Once a customer is onboarded, Varo focusses on getting to know them even better, with the eventual aim of being able to offer more innovative and tailored products. And all this is made possible by the company amassing clean data in its own Varo data lake. “As data comes into our lake, we are going to be checking the quality and lineage of that data, using the latest tech tools,” says Girling. This data can then be used to empower and inform decisions in the future because Varo intends to build a relationship with its customers from scratch.

We don’t require somebody to already have successfully entered the financial system in order to enter Varo “We will not charge you fees because you became a little overdrawn, we’re not going to charge you fees to take money out of an ATM or to deposit a cheque,” she explains. “We’re going to give you an opportunity to have a real banking experience so that you can build that relationship with us. We get to know you better, you get to know us better, and as that confidence grows, you’ll be able to do more things.” The freedom to break the banking mould in many and various ways, comes back to Varo’s proprietary data analytics and legacy-free Cloud-based agility, leveraged by a different mindset. All the applications remain in Temenos’ Cloud infrastructure,

meaning that Varo can quickly scale up and scale down, and add new functionalities as required. “We’ve noticed how effective that’s been, just dealing with the pandemic,” Girling adds. Perhaps the most obvious impact the outbreak has had on financial services is an accelerated move towards digital payments, as many people prefer them to cash, for safety reasons. This has, in turn, provided greater validation of online banking services. These digital payments in themselves help to provide a rich source of data for getting to know customers, although Girling stresses that the bank wants users to feel comfortable with that. “We’re trying to make sure that we build a very transparent relationship with our customers,” she explains. “‘As in ‘this is what we’d like to know. Are you comfortable with us knowing that? This is how we will use it to help you’. And there are some things that are really easy to do.” One of the first of these – to encourage good financial behaviours – is Varo’s Save Your Pay service, which enables customers to elect to automatically deposit a percentage of their salary into a savings account that earns higher interest, encouraging saving while rewarding the customer’s bond with the bank. Those deposits are also key to Varo’s other key proposition: lending to many of those one in 10 in the Federal Reserve report who don’t even bother applying for credit because they think their application will be denied. “We’re really looking forward to finding ways to safely lend small dollar amounts to people who need that access to credit and just haven’t had it before,” says Girling. Regulatory approval for Varo to become a national bank marks the end of one journey and the beginning of another. The process was necessary but draining. “That focus on becoming a bank is a lot of work,” says Girling. “We can take all that energy, now, and pour it into innovation in the way we interact, learn from and build trust with our customers. They may or may not be excited about us being a bank. What they will be excited about is that, over the next six to 24 months, they’ll see Varo provide them with the kinds of products and services that they’ve always wanted.” Issue 6 | ThePaytechMagazine

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Reaching for the summit Sergey Panteleev, General Manager at Varengold’s branch in Bulgaria, tells us why outsiders have got it so wrong when it comes to the region Central and Southeast Europe is not typically regarded as prime investment territory for fintechs. But Varengold Bank, having already developed a strong track record in European marketplace banking and providing long-term, sustainable support for fintechs and peer-to-peer (P2P) lending platforms, chose Bulgaria in 2018 as a hub for extending its activities in Central and Eastern Europe (CEE) and the Balkans. Its mission? To seek out emerging technologies in an area that has witnessed a significant amount of digital as well as non-digital disruption. According to Sergey Panteleev, who heads up Varengold’s Bulgarian office, the conflicts and upheaval that scarred this region in the late twentieth century are one of the reasons the bank is there. “Eastern European countries were on www.fintech.finance

the wrong side of the Iron Curtain so, when it fell, lots of entrepreneurial spirit was unleashed,” he says. Different countries went at different speeds towards what he describes as ’liberated capitalism’. But Bulgaria was out in front. It had already invested heavily in technical training in the Seventies, which sowed the seed for a strong digital payments sector to emerge, one that was attracting global research and development funding by the dawn of the Noughties. Homegrown international businesses to have earned widespread recognition since include Paysafecard, SafeCharge, SumUp, EMerchantPay, iCard, Epay and Paynetics, not to mention online trading platforms Trader.bg and Trading 212, which operate in both Bulgaria and the UK. In August, Paynetics AD, digital banking platforms provider Phyre and Bulgarian telecoms provider Vivacom, launched the Mastercard Digital First card – the first payment card of its kind in Central and Eastern Europe and one of the first in the whole of Europe. “We have 70-plus fintechs here in Bulgaria and more are popping up every day,” says Panteleev. “Of course, COVID slowed things down a bit, but it was inevitable that we should come here to join this fast-growing fintech community.” It’s nevertheless a community that’s been largely overlooked and

LENDTECH

under-reported by the fintech world. That could change following publication of Findexable’s Global Fintech Index – the new fintech world rankings which shook up perspectives on the region by placing Lithuania fourth on the list (behind the US, the UK and Singapore, and just ahead of Switzerland). While Bulgaria itself didn’t make the top 50, Bulgarian fintech leaders would do well to prepare themselves for the spotlight – their country has the fastest-growing fintech market in Southeast Europe (SEE). The fintech sector’s contribution to GDP has more than doubled since 2014, and last year their net income reached €212million. “We have a strong startup ecosystem,” explains Panteleev. “Historically, Bulgaria was under the influence of the Soviet Union, which gave rise to IT specialism. Then, in recent years, institutional investors came in – creating fertile ground for fintech. In the beginning, it was a matter of copying and pasting [from Western Europe], but now we are integrating new models and are really booming. This is the sweet spot for us: to provide funding to businesses that, for some reason, are not able to get it.” In many ways, the region is the perfect fintech and paytech petri dish – plenty of university graduates who specialised in technology, lower fixed costs than Western Europe and accessible markets – which is why so many Western companies outsource to the area. Many employees of London corporations wearily dial what they think is their internal IT team when their computer crashes, only to reach an advisor in Bulgarian capital Sofia. Issue 6 | ThePaytechMagazine

LENDTECH According to a report last year from KPMG, the trend of large regional Western European banks dismantling their business arms in the region is creating openings for new, nimble players. That said, among the top 10 banks that continue to operate in Bulgaria, UniCredit, Raiffeissen and Société Générale are well advanced when it comes to digital transformation and operate accelerators, partnerships and outsourcing from which fintechs benefit. KPMG also observed that privatisation programmes by governments in the Western Balkans ‘to relinquish the burden of running large retail banks’ are creating openings for investors looking to tap into the growth markets of Southeast Europe. And, even better for Varengold, given its focus on credit platforms, KPMG forecast that, in the next two years, ‘changes in legislation, combined with improving fundamentals, should see almost all countries experiencing lending growth’.

Digital panacea: Fintech could help the COVID fight-back in Eastern Europe

One of the bank’s early investments in the region was Sofia-based Klear Lending, the P2P platform that was named best fintech startup in Bulgaria at the 2017 and 2018 Central European Startup awards. In 2019, Varengold took a 20 per cent equity stake in Klear, and provided additional debt financing. The success of platforms like Klear is not so surprising when you consider the overall rate of financial digital adoption in CEE. The top five countries with the highest share of contactless payment transactions at point-of-sale (POS) in Europe, in 2018, for instance, were all from this region, according to data published by Mastercard and Statista. Remember, CEE skipped some of the legacy steps supported by payment institutions in Western Europe – it went straight from cash to cards and now virtual cards. That has been facilitated by an

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equally unencumbered mobile network infrastructure, providing ultra-fast broadband quicker than in the West. Hungary and the Czech Republic have 80 per cent coverage and Latvia more than 90 per cent. Meanwhile, the area’s upheaval and subsequent accession of almost every one of its states to the EU, provided another upside for fintechs: the flight of nationals to find employment abroad created significant remittance flows – sometimes a third of gross domestic product (GDP), giving fintechs plenty of opportunity to cut out the middlemen and reduce fees with mobile transfers using multi-currency accounts. Thirty-four per cent of fintechs in SEE fintech hub Sofia, focus on payments, says the Bulgarian Fintech Association. So, given all of that, why has investment in fintech and paytech not been as fast as one might expect? Probably because, as the Russians were fond of saying after the

creating supportive conversations with regulators and industry bodies. “Many Eastern Europeans understand that the only way to have competitive advantage over older money and economies is to invest in innovation and education,” says Panteleev. “If you provide a sandbox for people to work together, sustainably and correctly, without over-regulating it, you get results.”

New challenge, new openings COVID hasn’t blown Varengold’s mission off course. If anything, it’s emboldened it. “COVID proved that we should focus more on digitisation,” says Panteleev, adding that any lingering resistance to using digital finance has faded during the pandemic, which fed through to robust performance for fintechs and paytechs. The bank’s commitment to the credit marketplace has also continued to prove well-placed. Klear’s metrics show that, while applications for loans via its platform dropped in the first few months of the pandemic, they began to recover in June. Meanwhile, all the negative indicators, including payment postponements and non-performing loans, remained in low, single-figure percentages. At the same time, its investors stayed loyal. “During the past few months those guys have really proved their model,” says Panteleev. “We showed that if you have

Many in Eastern Europe understand that the only way to have a competitive advantage over older money and older economies is by investing in innovation and education collapse of the Soviet Union: ’It’s easier to turn an aquarium into fish soup than to turn fish soup into an aquarium’. While, in 1989, many countries, including Bulgaria, Hungary and Romania, broke free of the Soviet Union and embraced free markets, there is no quick way to undo communism – an absence of old order did not stop local institutions from retaining significant levels of inefficiency, bureaucracy and sometimes even corruption. But change is finally and rapidly spreading. In 2012, the European Investment Fund allocated €21million to two Bulgarian venture capital funds. They, in turn, invested in more than 100 startups,

a good platform, a reliable infrastructure and scoring that’s up to speed, you’re faster at adapting than conventional institutions and pretty resilient to shake-ups like a pandemic.” Nevertheless, economies in this mountainous region are now climbing steeper economic slopes. And, while governments have not put obstacles in fintech’s way, neither have they provided it with all the enabling policy frameworks seen in Western Europe, says Panteleev. His message to those governments is this: “Think about it. Because we can be really fast in supporting the economy after COVID.” www.fintech.finance

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UP and away... again! Renaud Laplanche and his team have a track record in building groundbreaking, credit-based businesses. And, as Upgrade becomes his second to smash unicorn status, he’s using nimble tech to make sure it stays ahead – even in a pandemic Living within your means is undoubtedly a sensible – if perhaps boring – motto to live your life by. But the COVID-19 pandemic has really driven it home for many consumers who have either lost work or are concerned by the prospect of a falling income. So, it’s really no surprise that many are cutting up their credit cards or paying down debt. Bank of England data showed that, in April, UK consumers collectively reduced credit card balances by £5billion, smashing a record set only the previous month of £2.4billion. Meanwhile, in the US, the Federal Reserve said Americans cut their credit card debt by $76billion to $820billion in the second quarter – the highest amount since records began in 2003. Of course, we’re living through unusual times. But there are other options for consumers wanting to reduce their reliance on easy credit, including a new payment products specifically geared to shrinking personal debt – the Upgrade Card.

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It was launched in the US in October last year by fintech 'godfather' Renaud Laplanche, and it has helped Upgrade, his latest startup bank, achieve unicorn status with a $1billion valuation in three years. Built on the principles Laplanche developed with his previous unicorn, credit marketplace business Lending Club, the Upgrade Card can be used for both purchases and consolidating existing unsecured debt. But, unlike a credit card, the balance at the end of each month is wrapped up into a repayment plan so borrowers have a clear target for achieving a zero balance, similar to an unsecured loan. No more rolling debt over month after month and incurring endless interest costs. “We are changing the way people look at consumer debt. The ethos is that spending should be driven more by necessity than impulse,” says Laplanche. “We help customers really think about their credit, and learn about their finances, so that they make better decisions. That is a complete departure from the way the credit card industry, and much of the lending industry, has operated so far. “If you look at the make-up of credit card debt, much of it is new purchases, and a lot of that is electronics, and other non-essential purchases. Too many people spend more than they earn and, in the best case, pay their credit card debt off once a year when they get their bonus. But overall, people are accumulating too much high-cost, unsecured debt.” Laplanche’s crusade against the credit card debt trap began in 2007 with Lending Club, where loans were pitched as vehicles

for consolidating and paying down credit card borrowing. He, along with several members of the senior team, left the business in 2016, and began to work almost immediately on creating Upgrade, which has delivered more than $3billion in consumer credit through cards and loans since 2017. Based in San Francisco with an operations centre in Phoenix, Arizona, and a technology centre in Montreal, Upgrade’s loan funding is sourced by Cross River Bank, which also originates loans for Lending Club. Customers of the Upgrade Card can borrow from $500 to $20,000 to fund purchases or have the cash transferred to a bank account. Debt is repaid over terms from 24 to 60 months with no early redemption fees. www.fintech.finance

A prudent approach Since April, the card has been contactless, and exists in digital forms via Apple Pay and Google Pay to help reduce physical contact at the payment terminal amid the COVID-19 pandemic. Interest rates start at around 6.5 per cent and Laplanche says the bank’s net promoter score of 79 is proof that customers really buy into the claim that Upgrade Card is a credit card that’s good for you. In June, a $40million investment as part of its Series D round led by Santander InnoVentures, the venture capital fund of Santander Group, was made based on a $1billion valuation of the business – Upgrade had become a unicorn. Existing investors, including Union Square Ventures, Ribbit, Vy Capital and Silicon Valley Bank, and new investors Ventura Capital and Uncorrelated Ventures, also participated in the round, bringing total funding since launch to $200million. Laplanche that focussing the business on credit products ensured monetisation of customers from the start. So far, it offers loans, the Upgrade Card and credit score and financial health tools. Current and savings accounts will launch later this year. “A lot of neobanks around the world have started from deposits, trading, robo-advisory, payments products, and have a plan to move into credit later,” says Laplanche. “Our path is more similar to Nubank in www.fintech.finance

Brazil – it started with credit to draw in millions of users, then went into other banking products. We think that’s the better way because credit makes up 70 per cent of banking’s revenue globally, and in the US it’s the number one reason consumers seek a relationship with a bank. We also get the monetisation upfront, so don’t need as much capital to build a large brand.” That strategy is verified by the relatively modest investment rounds – Laplanche says though Upgrade’s valuation has grown quickly, it is still setting fundraising targets of $50million rather than $500million.

Credit makes up 70 per cent of banking's revenue globally, and in the US it’s the number one reason consumers seek a relationship with a bank “Part of the reason for the size of our funding rounds is that we are a bit more conservative and I don’t like spending money. But it’s also because we’re building a neobank anchored in credit. “I like this business model better than spending money opening accounts then wondering how to monetise them. That said, credit is hard. Don’t underestimate how long it takes to build a credit underwriting and servicing infrastructure, and how much capital it takes to move billions of dollars of credit every year.

“Either you build your own balance sheet and you lose the fast-growing, capital-light appeal of a fintech firm, or you adopt a marketplace model, where you sell those credit balances to banks and investors. The second option requires you to build a track record of credit performance, which takes years. But we’ve built that track record and now we’re rolling out the other banking products.” Having once before created a credit-based, multi-billion-dollar company, Laplanche and his team not only drew on their experience of credit markets, but also the nuts and bolts of IT. Though his ventures have never been weighed down by what we traditionally understand as legacy banking infrastructure, Laplanche admits much of what Lending Club was using in 2007 would now be very much out of date. For that reason, Upgrade Bank has a modular infrastructure, based on microservices, where each service is self-contained and can be improved, reused, redeployed, or ripped out. He says: “Even a first-generation fintech company now ends up running on legacy software. Starting just three years ago with a modular infrastructure allowed us to develop, test and launch products faster. “That’s because the codebase is identical. So, between our first product of loans, and our second product, the Upgrade Card, the experience for consumers is radically different yet the codebase is 70 per cent identical. That’s one of the benefits of a microservice-based architecture. “Another is that it’s not a monolith, there's no large architecture base you need to throw away 10 years later because it’s outdated. Components can be swapped out without major redevelopment.” Such nimbleness is an asset, especially for a business launching major products during a global pandemic. Caution has been a watchword, says Laplanche, and Upgrade has tightened its credit policy to reflect the huge unemployment surge in the US. He says: “July’s report showed there were 16 million Americans unemployed, so we need to protect our customers, give them additional time to make payments and provide increased flexibility. “The launch of our banking products will help us to amass more data to improve our knowledge for underwriting. There’s more demand than ever before and overall business trends are good.” Issue 6 | ThePaytechMagazine

LAST WORDS: BOOK REVIEW

Newriches New riches Investor Sir Ronald Cohen believes risk + return + impact is the only sum that adds up in a new, post-capitalist world. Ellie Hazelton finds it hard to disagree Any book that can unite a Nobel prize winner, a Harvard professor, the managing director of the International Monetary Fund and Bono in admiration has to be worth picking up, right? From curiosity, if nothing else. But Impact: Reshaping Capitalism To Drive Real Change is then hard to put down. It wears its heart on its sleeve – you can’t mistake the sermonising message in the title – but the content is engaging and powerful, and the central message hard to disagree with. The author is Sir Ronald Cohen, a philanthropist, venture capitalist, private equity investor, social innovator and leading member of the Impact Revolution, a global movement that is reshaping the way the world thinks about the financial system – specifically, how and why we invest and how our approach could and should be recalculated to produce tangible, sustainable, long-term social and environmental change. The book starts with a history lesson – how capitalism got to where it is, i.e. the world’s pre-eminent economic system, based on the private ownership of the means of production and their operation to profit individuals. It then analyses some of the perverse and damaging effects the unbridled application of this model has had on justice, health, the wealth gap, education and the environment.

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At its core, says Cohen, is the bankrupt, two-legged stool model of risk and return; risk being the likelihood of adverse outcomes that could cost investors money; return being the payback they get from taking such a risk. What Cohen explores is how to make that stool more stable by adding a third leg: a new model of risk+return+impact. This rests on the same capitalist principles, but focusses on investments that gain from positive social and environmental impacts. It’s a subtle but potentially life-changing shift for millions across the globe. The key takeaway is this: redefine the narrative so that moral decisions become business decisions.

The key takeaway is this: redefine the narrative so that moral decisions become business decisions Cohen doesn’t deny that there are already businesses trying to implement a version of this model, including well-known brands. One is IKEA. Its ‘people and planet positive’ sustainability strategy, focussing on ‘healthy and sustainable living’, ‘circular and climate positive’, and creating a ‘fair and equal society’, is one of them. IKEA has put circularity at the heart of its production of flat-packed goods: it means designing products from the outset to be repurposed, repaired, reused, resold and recycled. It’s the antithesis of built-in obsolescence. IKEA is currently aiming to reduce its carbon footprint by 15 per cent through achieving 100 per cent circularity by 2030. It will be interesting to see if and how far other multi-national companies similarly adapt their business models. There are

some big numbers involved here if they do. Cohen highlights an impact comparison between PepsiCo and Coca-Cola. In 2018, PepsiCo’s sales of $64.7billion were double that of Coca-Cola’s at $31.8billion. However, PepsiCo’s environmental cost came in at £1.8billion, whereas Coca-Cola’s tally was $3.7billion. Cohen’s argument is that such figures should be used in impact-weighted accounting, with companies required to show impact integrity as well as financial integrity. In terms of outcomes, changing the way return is calculated could have a dramatic effect on organisations working to rebuild society, too. Non-governmental organisations (NGOs) rely heavily on donations and are, therefore, inevitably spread too thin. ‘Caring capitalism’ could help address that shortfall: indeed, there are emerging mechanisms for doing so with social impact bonds (SIBs) and, in developing countries, development impact bonds (DIBs), but both are still relatively new. Cohen’s parting shot? Focus not only on minimising harm, but on doing good. His book strives to demonstrate that, by doing so, every one of us, including investors, is so much the richer.

Impact: Reshaping Capitalism To Drive Real Change by Sir Ronald Cohen, is published by Ebury Press in hardback and Kindle editions. Great for: A post-pandemic reset Best read: Before your next investment portfolio review Good read rating: ★★★★★

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