"A decade ago we had the first big leap, and that was web to mobile,[…] Now the next one is mobile to conversational” said Edrizio de la Cruz, co-founder and CEO of Regalii, a startup whose application programming interfaces are used by dozens of financial services providers to build their chatbots.
The pressure today to innovate and embrace new technology and practices is significant across a range of industries with financial services at the epicenter of the pressure but research by Econsultancy and Adobe shows that 9% of FS businesses claim to be digital first, compared to 11% across all sectors.
Alongside the drive to embrace digital, there is additional pressure from the market to:
Chatbots are essentially pieces of software that simulate human, natural language conversations and can respond to and act upon queries and commands from users. The advantage these systems have over a real conversation with a human is that they are able to extract and analyse a user’s needs and intent and ultimately return the information a user has requested or perform actions for them faster, at any time of day or night and at significantly lower cost than a human counterpart.
The benefits of this type of technology are clear with many people choosing to apply and research investments or loans through these types of systems rather than spending the extra time and potentially cash on a human broker that may not necessarily have the best deals available. These systems could potentially pave the way to a fully automated digital process, further removing the potential for human error and bias from financial services.
An apt example would be Capital One’s Eno. Eno is able to interpret text based conversational queries and commands alongside emojis. This includes the ability to check balances and pay off credit cards, while cash transfers are also in the works. Additionally for customers with Amazon Echo, Capital One has also built out a skill that allows for voice commands. At the business side, Capital One stand to make significant savings in terms of time and manpower as users transition from face-to-face and telephone queries to simply asking Eno.
This is only one form that chatbots have taken on so far with the sky being the limit on the functions a chatbot might serve. Other options include:
Furthermore, chatbots do allow for a smoother digital experience overall with the ability to sync with popular applications such as Whatsapp and Facebook messenger, removing the need for an additional download that may alter existing mobile usage patterns. This interface could be instrumental in data analytics as well in improving operational efficiency, promoting innovative practices and improving the customer experience. Banks usually have a mountain of customer data at their fingertips, but often struggle to understand and get value out of it. Customer data is the key to establishing meaningful, personal relationships with banking customers and offering customized products and experiences. Banks need to effectively analyze this data to better know and serve their customers. Conversational banking enables banks to acquire more nuanced customer data. By engaging customers in small talk through conversational interfaces, banks get insight into customer intents, desires, and concerns that are not apparent in banking app and website interactions.
Conversational AI can also help banks better understand this data. Through deep data analytics, pattern recognition, and predictive algorithms, chatbots can communicate intelligent insights about banking customers’ present and future banking needs. These insights can be used to offer more personalized banking products and services to build lifelong customers.
There may be concern that chatbots and other AI supported technology will put significant pressure on a number of customer facing services across a range of industries due to the attractive operating margins and this is certainly true but this is analogous to the widespread worry at the time when motorized options replaced horses, a slew of new roles develop and grew out of the adoption of a new technology.
An August 2016 report by Forrester suggested that banks should focus on developing the AI technology to build better bots in the future, rather than launch bots on messaging platforms now and provide poor experience to their users. The main criticism against chatbots is that they lack the empathy and the emotional response that a human can provide, which makes them less capable of dealing with complex situations involving financial decisions. Generally speaking, humans working in customer services will know how to respond to frustrated customers and not aggravate the situation; they can listen, reason, empathise and read between the lines.
A lack of emotional intelligence is a serious limitation that existing bots have. There is definitely a whole new world out there to explore in considering chatbots as an investment for your own business or in a third party capacity through a promising Fintech firm but there is a degree of risk in this relatively nascent space with regards to meeting customer requirements and security. There is potential for significant secure data being shared with these interfaces as clients address their needs. In addition, Forrester (2016) found that although chatbots are developing rapidly, customer experience is not. Many fail to effectively meet users’ needs due to poor infrastructure and lack of fundamental understanding of AI. Hence it is imperative to work with institutions that have the infrastructure to support your venture effectively on the front end as well as on the back office.
This post originally appeared on Crowd Valley Blog.
In between pauses at the WWDC, Apple announced it will be expanding their financial services strategy by going beyond Apple Pay and issuing virtual payment cards to all iOS users. There are 1bn iOS users around the world. At the same time, this same week Amazon made headlines by having lent over $1bn to third party sellers on the Amazon marketplace. Amazon has also rolled out a highly aggressive credit card offer with Chase, which offers 5 per cent cash back for its Prime customers. Neither company is a traditional financial services company. So what is going on?
Due to complexity and benefits of scale, banking has historically been confined to incredibly large companies and their global operations. Sure, some are stronger in some segments or regions, but this is the broad definition of an incumbent sector. What technology has allowed over the past years is the specialization of software and therefore service providers. No longer do you have to have one stop shops for everything in finance, you can actually challenge high margin verticals, e.g. payments or foreign exchange, with a standalone business in just that market segment.
Policy changes such as PSD2 play directly into this trend, setting requirements on financial institutions to open up their infrastructure in order to allow third parties access to their core processes. With globally interconnected institutions, the race into API Markets is well underway, with organizations such as BBVA, DBS, US Bank already far along.
With these trends ongoing, we also find many new organizations entering finance, such as Facebook, Google and Amazon, as mentioned earlier, with a lot of personal data and connections to billions of people. It creates a perfect setting to offer a financial service, when the habits of the individual or merchant in question are known and the service, e.g. a loan can be offered at the point of the transaction in near real time. The $1bn loans issued by Amazon is a testament to this, but so too is the fact that you can send money via Facebook Messenger at the click of a button (at least in the US). Financial services are becoming increasingly embedded.
The digitalization of finance is a wide-ranging theme. In addition to the companies discussed above, established banks are also modernizing their products and services, or how these products and services are offered.
It seems there are two ongoing trends in different directions: 1) toward more integration of financial products in non-banks and 2) toward specialization within financial institutions. The latter may be less prominent, yet with PSD2 and pressure on margins, institutions will likely need to choose the businesses they want to invest and compete in.
What is a bank?
Is a bank where you place your money? Is it where your home mortgage comes from? Is it where your wealth advisor sits or who sends your payment remittance?
Through specialization and an embracing of the API economy, we can expect that the future consumer will have several parties that serve their ‘banking needs’. Some of these will be companies like Amazon through the increasing position and information they hold in the market and some will be traditional banks such as Wells Fargo.
Fast forward long enough, and it becomes an interesting thought experiment. Which grows in prominence, the higher margin specialized businesses or the one stop shop business that also faces the highest level of regulatory scrutiny?
One thing is however certain, our concept of a “bank” is quickly becoming outdated. The bank emerged during the industrialization and has had a central role in shaping societies. Are we at a different point in history where the next paradigm shift sees information technology giants as playing a further pivotal role in shaping the societal development and if so with what implications?
The “embedded bank” seems like the direction of the future. Embedded in points of interaction and specialized services, riding on the API economy and truly integrating into the customer’s life and habits, rather than serving as an interruption. How we get there is a true technological adoption across the sector over time, that places the consumer in control of their data and privacy and allows for real time decisions at the consumer’s fingertips.
This post originally appeared on AltFi.
As the senators in the United States Congress maneuver a health care bill of massive significance for the insurance industry, let’s a take a closer look at the wave of disruption that has firmly placed the insurance industry and Insurtech in the spotlight of the cross industry technological wave borne out of the great recession.
Insurtech joined the party at a later stage than its related counterpart Fintech. Given the revenues volumes and investment flowing into both these sectors, in 2014 insurance premiums amounted to $3,8 trillion while banking revenues were $3,6 trillion, it does come off, initially, as a surprise but a closer look at consumer relationships and regulatory changes in both spaces do provide an answer.
In considering the early uptake of Fintech or Bankingtech; first, insurance is a very passive product. Ideally, consumers have limited contact with their insurance provider , because ideally nothing goes wrong. Around 70% of all insurance customers interact with their provider only once a year or less. In comparison, the study states, consumers interact with banks 200 times per year on average, compounding the level of dissatisfaction and frustration.
Furthermore, the wave of regulatory changes introduced after the 2008 financial crisis, forced the banks to put massive efforts into adapting to the new rules. Financial regulators, most notably the American Department of Financial Services (DFS), the Fed, and others, started investigating banks more closely and burdened them with heavy fines, as well as more compliance enforcements. This forced the banks to restrict their business and shift resources, opening up a tremendous opportunity for innovative startups in the banking industry, from non bank lending, because banks could no longer provide enough capital, to consumer friendly apps and efficient payment solutions. The dissatisfaction with the banking sector on issues of inclusion, transparency and consumer agency further prompted a significant exodus of talent from the banking sector and related financial services to pursue solutions to these issues. The insurance sector encounters the same issues but due to relatively limited exposure, focus and the passive nature of consumer engagement, did not experience the same forces of change that both the public and regulators demanded on financial services.
Fast forward a few years down the line, according to data from CB Insights, global Insurtech investment totaled $1.7 billion, across 173 deals, in 2016. Both those numbers are roughly double what they were in 2014. In terms of total investment, 2015 was actually the bumper year to date, at $2.7 billion, although $1.4 billion of that was due to two mammoth investments, the financing of Zenefits and Zhong An.
In January 2017, investors from around the world were asked what the hottest area for investment in Fintech and the same sector kept coming up again and again: insurance. At the Economist Finance Disrupted conference in London in January, three out of the four VCs on the panel "Unicorns vs. Unicorpses" named insurance specifically when asked what was of most interest to them as an area for investment.
The sector was name checked by Yann Ranchere, a Geneva based partner at Fintech VC Anthemis, Reshma Sohoni, the CEO and cofounder of early stage UK fund Seedcamp, and Timo Dreger, a managing director at Berlin based Apeiron Investment Group. All the panelists offered up other areas of interest, such as optimising banking backends and artificial intelligence, but somehow the conversation kept returning to insurance.
Dreger summed up it up well, telling the audience:
"Right now we are looking at Insurtech. It's for sure the hottest thing in 2016 and for sure the hottest thing this year too. The answer is pretty easy why. In the whole insurance industry, there's a lack of innovation and the user experience is pretty horrible."
Rachel Botsman, a recognized expert on digital technologies and visiting academic at the University of Oxford, says, “the insurance industry is ripe for disruption”. Botsman has made this statement on the basis of her theory of collaborative consumption that identifies four root causes that are putting the insurance industry at high risk for disruption.
Our first cause is the complexity of the experiences people have in engaging with insurance providers, with the processes consumers have to go through are usually far from user friendly, entail a lot of paperwork and are cumbersome. Compared to earlier, this is of more significance as the Fintech space is significantly more saturated with startups addressing pain points as well as institutional funding backing these ventures. Hence, both increasing inefficiencies and opportunity for investors to get in at an early stage in an unsaturated environment have placed Insurtech in the spotlight.
The second cause is the lack or the low level of institutional trust in the entire system. The global financial crisis is often pointed out as a reason for this lack of trust, but there are two other major drivers. First, there is a lack of transparency in the insurance industry which creates uncertainty and dissatisfaction for consumers in accepting policies that protect their assets and lives. Second, peer trust is preferred above institutional trust.
The third stated cause is the concentration of inefficient intermediaries which hinders the ability to operate and react in a lean and agile way due to the longevity of the relationships existing with these middlemen. Customers experience these layers of intermediaries as something that ultimately does not add real value to the product, although they account for an estimated 15 to 20% of the average P&C insurance premium. This is tough obstacle to overcome for the traditional insurance industry, which has focused on distribution through brokers, financial advisors and more recently comparison sites, and typically lags behind other industries in its ability to provide seamless, multi channel customer experiences.
Botsman’s fourth cause is the limited access to insurance. Exclusivity echoes as a core issue for scores of individuals as insurers change policy conditions and premiums at their discretion, pricing out thousands of the ability to get coverage in both a partial or comprehensive manner.
As a result, in the last few years, Insurtech has started to steal revenues and increase market share, by addressing these pain points with technology, pushing overall costs lower and thus premiums lower as well as introducing new models that promote trust and transparency such as Peer to peer insurance models and blockchain based infrastructure. These new avenues are making insurance companies uncomfortable in holding onto their legacy systems, principles and models.
So, what kind of technologies do these challengers invest into? McKinsey’s 2017 global digital insurance report sheds more light on this matter. It shows that 85% of insurtech firms are focusing their innovation efforts on one of the following six domains:
1) Software as a Service (SaaS) & Cloud Computing - 21%
2) Big Data & Machine Learning - 20%
3) Usage based insurance - 13%
4) Internet of Things (IoT) - 12%
5) Digital insurance & Robo-advisory - 10%
6) Gamification - 9%
Other top ten innovation domains include more complicated and comprehensive themes such as the usage of blockchain technology, peer to peer insurance, and the improvement of micro insurance through the use of technology.
A slew of smart startups have sprung up and are attracting heavyweight financial support. They include US companies like Zenefits, Oscar Health, Clover, Collective Health and Gusto (formerly ZenPayroll) as well as Chinese innovator Zhong An. Agile companies are using digital technology to leap frog competitors by delivering highly personalized online customer services and creating new, lucrative markets that are bringing more consumers into the space via the digital medium. To develop our understanding of the energy and interest in the Insurtech space, it is worthwhile to review the reports PWC’s collaboration with Startupbootcamp through their Insurtech programme and fast track events.
Aligning with the sentiments echoed within Botsman’s statements, the largest volume of applications to the Startupbootcamp programme came from startups aiming to enhance the quality and frequency of insurers’ interactions with customers and, as a result, to build more trusted relationships with them. (Botman’s second cause). It reflects the evolution of the broader digital economy, where customer expectations are constantly increasing in a cross industrial manner set off in a domino style fashion by rapid Fintech growth. Consumers want the same levels of service and engagement from other businesses, including insurers. They want to use their smartphones and digital devices to secure insurance that is customized, priced right and employs easy to use payment solutions.
The latest annual survey conducted by Engine, the service design consultancy, ranked insurance as the worst of all industries for customer experience. Startups recognise this issue and are well placed to exploit it. Unburdened by complicated legacy processes and technologies, innovators do something quite powerful in going beyond just digitizing existing interactions; they combine digital with the human touch, often using technologies such as artificial intelligence (AI), machine learning and robotics, utilizing more and more data to understand their consumer base on an individual level allowing for a personalized solution versus a general broad spectrum approach promoted through intermediaries in a scripted manner. The need of the hour seems to be adaptation and customization and this bespoke approach is where a lot of institutional investment is flowing.
But this raises an interesting question about the fundamental nature of the insurance industry and the principles on which its models function. The fundamental age old purpose of insurance is to allow people or companies to pool their risk, thereby obtaining relative safety (from unfortunate or unforeseeable events) in numbers. But personalisation is gradually allowing us to de-pool that risk. Insurers are starting to understand, at an increasingly personal and forensic level, which policyholders might be more prone to unfortunate or unforeseeable events and to price accordingly, or to refuse cover altogether. Hence, through Insurtech, we may be embarking on a path that espouses a fundamentally different approach to insurance overall that may result in a model that is more punishing to those who, for example, are bad drivers or those of us who don’t make sufficiently regular use of our gym memberships and thus more rewarding to those who are considered lower risk. This dilemma will increasingly feature as avenues such as the Internet of Things gathers greater traction connecting more devices in our lives in a constant flow of personalized data with a prediction of 20.8 billion connected devices in use worldwide by 2020. Large companies, both from within insurance and beyond, are already investing in Internet of Things technologies such as Generali, Aviva and Allianz, as well as Google.
Using a variety of approaches such as online aggregation and comparison, self service, new distribution channels, education and engagement of customers and omnichannel offers, startups can enable ongoing engagement that leads to trusted relationships. In embracing new paths, while AI has previously been seen as most useful to underwriting, its application in distribution is helping insurers increase conversion results. AI and robotics help insert a human characteristic into what might otherwise be an impersonal digital experience. Robo advice, including applications of AI, is now starting to gain traction in insurance. Robo advisers provide customers with 24 hour access to information that empowers them to take financial decisions at a much lower cost.
Meanwhile, some 7% of applications to Startupbootcamp also came from peer to peer insurance startups. And reflecting on the earlier mentioned statement that consumers are now placing greater trust in peer ventures versus institutional set ups, these ventures have the potential to both disrupt the status quo and improve the image of insurance. Built to deliver trust and transparency, they address these key concerns of many customers today. Peer to peer insurance businesses are now beginning to take off. Examples include Lemonade, which recently raised a $13 million seed round, Guevara and Friendsurance, which is growing at 20% a month and has plans to expand globally. The model is tough, however, as it is much more capital intensive than other types of Insurtech startup. It may take time for customers to get to grips with the concept of peer to peer in insurance, and for startups to prosper.
At the ground level, P2P insurance refers to a set of practices and models which, through technology and community, allow individuals and companies to get together in order to diversify and mutualize common risks. In a way, Due to long value chains prone to friction, high overhead costs, and a lack of transparency for the end customer, these market failures and frictions result in higher premiums being borne by insured parties, while displaying a lack of transparency and agency by the consumer. By redefining the traditional insurance structure, P2P insurance aims to eliminate some of these frictions, and to remove the inherent conflict of interest (between the insurer and the insured) that arises during a claim.
P2P insurance is now growing quickly. 2015 was the real ‘lift off’ year, which saw 16 launch announcements from P2P startups. That’s more than during the previous five years combined. As the momentum has built up, so the P2P models have also evolved: from broker or distribution only models (where the P2P firms simply group people together based on their insurance needs, and then arrange for a traditional insurer to cover the group) to carrier models (where the P2P firm looks to cover some or all of the risk themselves, and not necessarily as formally underwritten insurance).
Moving Forward on Insurtech
In moving forward, efficiency and skill specialization becomes of increasing importance. By increasing the efficiency of insurers' back office processes and systems, these startups have the potential to enable insurers to operate more profitably at greater scale. Such efficiency can be most easily achieved through collaboration with API based infrastructure that allows existing system to supplement their current infrastructure with new plug in systems that can act as a concierge of sorts for boosting data aggregation, analytics, fund transfers and even creating peer to peer marketplaces or incorporating blockchain technology. There are a number of firms in this space that are establishing themselves. Crowd Valley is an industry agnostic pioneer in this regard that is able to offer a very robust set up for its clients across the globe. In contrast, the cost of developing and implementing proprietary new systems is quite prohibitive.
As we move forward, newer technologies such as AI, Internet of Things, the sharing economy and blockchain technology will push the boundaries of modeling effective value chains and revenue streams across the board, highlighting an accelerated form of the natural process of disruption in a sector that is very due for change. Information proliferation and education play an even greater major role in these times. Almost a third of insurers in PwC’s research said that they are not familiar with blockchain at all. The Insurtech firms, by contrast, are eyeing this opportunity. But it also presents much more exciting opportunities for insurers to leverage their deep industry knowledge to not only assess the viability of these emerging use cases but also to identify other opportunities where it may be possible to measurably improve efficiency and transparency, particularly in back office operations.
There’s growing recognition across the financial services sector that, whereas banking and capital markets may have started their Fintech journeys earlier (and built up a considerable weight advantage), it will ultimately be the insurance industry that sees the most benefit, and the greatest levels of disruption, from this global upsurge of innovation.
This post originally appeared in Crowd Valley Blog.
Working in Fintech since 2008, I’ve seen many models emerge and be reimagined. Standardization and cost efficiency have been led by technological improvements. Stages around the world from Toronto to Paris to Singapore have showcased how finance is changing and evolving through the embrace of Fintech. This has been a global phenomenon since the very start, yet its development is not linear and the spearhead varies from region to region.
I recently had the opportunity to host and sit down with a leading Fintech pioneer in Singapore and exchange views on these spearheads. Singapore has adopted a strong position in establishing itself as the Fintech hub for Asia and make significant investments in the sector, such as setting up a regulatory sandbox and strong incentives for companies in Fintech.
It’s apparent there are differences with adoption in different parts of Asia versus North America and Europe. However, there are many universal realities that resonate irrespective of location.
Applications – Wealth Over Private Equity
Through our conversation with our Singaporean partners, the difference in Fintech applications in market segments became clear. There is a prevalent focus on wealth management in established financial hubs in Asia, such as Singapore, and applications of Fintech such as robo-advisors and wealth chatbots have really taken off. With a significant segment of the market embedded in wealth management, it’s a clear sector to embrace the benefits of Fintech (which we will explore shortly in the universalities).
With vastly different regions and economies in Asia, there are also different corresponding strengths and opportunities. Strong established finance hubs may have a more traditional outlook on Fintech, leveraging roots in for example comprehensive wealth management practices, wherein emerging markets in Fintech such as Indonesia, Malaysia, Vietnam may present broader opportunities to change the entire fabric of financial models utilized.
A different reality is true especially in the US, where private equity models, including venture capital applications, are the norm. Certainly, there are robo-advisors as well, even launched by prominent firms such as Vanguard, yet private equity applications and private debt, even retail models are multiple in the US. Just look at how far Goldman Sachs has come with personal online lender Marcus, reversing over a century of policy and entering the retail market and even with Marcus Goldman’s name at the helm.
Wealth management is also characterized by heavy pressure and a true paradigm shift after the financial crash. The market is clamoring for transparency, there is an increased pressure on margins and no one quite knows what to do with millennials that soon will have money to manage. Innovate too fast and you alienate a lucrative client segment, innovate too slowly and you go down in history as a firm that failed to keep up.
Reducing Costs by a Magnitude of 100
With the high pressure on margins, wealth management is a logical sector to embrace Fintech and standardize processes. Through standardization of cumbersome and cost-intensive processes, such as new client onboarding, KYC, and diligence, these can be structured and even automated. This brings about a clear reduction of cost and by changing cost structure, operators can expand and provide further client value.
Despite the applications varying around the world, an increased competitiveness found in the standardization of processes and requirements and their automation is clear. By being able to dramatically decrease cost, opportunities for serving new client segments, for different private equity models are within reach.
This can be as simple as a bank now being able to lend to a small business that it has been unable to lend to since the financial crash, all due to the fact that they now operate on a standardized technology stack that uses AI to power mundane tasks and harnesses the data for data driven decision making in underwriting. This is a universality that transcends location, where we will see Fintech not only be a growth platform but a reality across all business lines. Where functions can be standardized, they can be made more competitive.
Regions around the world are setting themselves up as Fintech hubs, embracing the fabric they already have. We are excited to see the opportunities and possibilities as the transformation continues.
This post originally appeared in Let's Talk Payments.
Borderless Finance is quickly changing the landscape for international financial flows asking more of the competitive players in this market while pushing for a reduction of the costs. Amidst this disruption, the consumer and entrepreneur continue to emerge as the beneficiaries.
Institutions emerging in this space are representative of a large wave of technological advancement that is sweeping across a range of different institutions and asset classes, introducing new models and ways to monetize assets in a more efficient, accessible and inclusive manner for the entrepreneur, consumer and average investor accompanied by the complementary rise of infrastructure provider pushing the bounds for innovation.
German Fintech startup, N26 has brought borderless banking to mainstream consumers with a focus on a comprehensive mobile experience. Customers can open a bank account – linked to a MasterCard – from their smartphone, and complete the process within eight to ten minutes. The MasterCard can be used worldwide without any fees at all.
Valentin Stalf, Founder and CEO of N26, stated:
“Our vision from the start has been to build Europe’s first bank account for the smartphone. We see traditional banks as having failed to adapt to the demands of the digital generation. The response to Number26 has been fantastic and we’re thrilled to expand to further markets.”
N26 account holders can make transactions and withdraw cash anywhere around the world without ever being charged for the service. Your entire banking needs are catered for through the app, even setting up of your account, something which is a painful process in any regular bank around the world. Your account is setup via a video call from your phone during which you will be asked to present identification for scanning.
In terms of a business model, N26 offers free ATM withdrawals globally by taking on the withdrawal fee that their customers would conventionally bear. Considering the above listed revenue model, N26 is able to cover the fees that would be traditionally covered by customer from the earned revenues. Digital Finance/borderless institutions such as N26 are able to do so as result of there being a relatively low overhead operating cost.
This did, however, lead to complications when a number of customers would use their free account exclusively for a large number of monthly withdrawals. This is because N26 utilizes a “attract customers with one thing, then sell them another” whereby customers are monetized via extra products and services around the base account such as international transfers or overdraft and in the future savings or investment products, etc.
N26 is not alone in pursuing this model with Fidor, Revolut and Tandem utilizing similar models or set to incorporate it in the near future. As to how this business model addresses market demand and consumer sentiment, there does seem to be some discrepancy with regards to the assumptions employed in the novel business models, especially with regards to consumer behavior. While initially offering a free service for the offerings other than for a credit card and USD debit/credit card, Revolut introduced a "fair usage" clause that charge some fees above certain thresholds , such as a 2% levy on ATM withdrawals above £500 a month. This seems analogous to the response N26 had when their consumer base took undue advantage of their free cash withdrawal feature resulting in N26 bearing too high of a cost in covering the withdrawal fees. N26 had originally decided to cover this fee with the assumption that most customers would use their accounts and this benefit, reasonably. Hence now, they charge a fee for monthly withdrawals over 500 Euro. Sound familiar?
Another major player in this space is TransferWise, who originally launched the ability to make international cross border transactions at a fraction of the price offered by banks and other traditional financial institutional and service providers. It remains to be seen whether TransferWise has found a longer term sustainable model but considering that TransferWise doesn’t actually bear the costs on behalf of its users and that they have captured a large share of the cross border transaction market from the banks is perhaps indicative of the fundamental strength of their venture.
The company manages to offer its services so cheaply by matching up payments with those going the opposite direction using sophisticated software. So "your" money never actually leaves the country — it's rerouted to someone who's being sent a similar amount by someone overseas. Your foreign recipient, meanwhile, receives their funds from someone trying to send money out of their own country. So in actual execution, there is no cross border transaction taking place but the system is actually an efficient reallocation of funds within the ecosystem of fund transfers.
The new borderless bank accounts are built upon this fundamentally simple infrastructure. Transferwise has local banking partnerships and a global network of banking accounts which, when coupled with their cross border money transfer system, allow funds to be deposited into local bank accounts in the local currency utilizing the efficient reallocation that was their original product. Essentially, they’ve added end points or deposit points to their original system which is why they can continue to grow and offer their services at such a low cost. Where their money comes from is similar to the business model utilized by N26, wherein customers are monetized by the additional services and products to the base account. In TransferWise’ case, the only times you are charged are when you convert money between currencies in your Borderless Account, send money to a bank account in the same or a different currency. They can just as easily integrate third party services such as auto loans and mortgages to truly capture the banking space.
The fees charged are fairly low and the logic behind is very transparently conveyed to the customers. This facility is a true catalyst in facilitating international flow of skills, services and goods with firms placed anywhere in the world now able to easily acquire and remunerate their suppliers and employees locally, reducing the monetary and logistical speed-bumps that may prevent the most efficient utilization of skills or service providers across international borders.
if you move money from one TransferWise country account to another or any of the 15 internal currencies supported, or if you make an international money transfer, you will only ever be charged the standard TransferWise ‘mid-market’ exchange rate and commission, with no minimum fee, which works out much more competitive than incumbent banks. Initially the new service will only be available for small businesses, sole traders and freelancers in the UK, Europe and — from June — the US. But TransferWise plans to make it available to consumers in the three markets later in 2017.
Such innovation while advertised as a borderless account actually breaks down borders that exist between different business communities and allow for easier cooperation and synergy globally. When TransferWise does launch a card, however, it puts the Fintech unicorn squarely in ‘neobank’ territory and in competition with a slew of startups offering a banking experience, including Revolut, whose banking account is built on the promise of low exchange rates and targets consumers with a “global lifestyle”.
TransferWise’s main target here, however, is undoubtedly the incumbent banks, and initially the rather neglected SME or sole trader market, for which the need to receive and make payments in multiple currencies and to and from different countries is increasingly a requirement. The impact of borderless banking of this sort is significant in enhancing the purchasing power of the global consumer base in mitigating the obstacle of service and product provider not accepting an international bank.
TransferWise shares this borderless finance space with Revolut that launched in July 2015 allows conversion of currencies at the interbank exchange rate utilizing a prepaid MasterCard. Like TransferWise they also offer multi-currency business bank accounts and now international money transfers for free up to 5000 pounds.
Another example of such forces at work is, the partnership of the Estonian e-residency program with the Finnish Fintech company Holvi allowing a completely borderless digital banking experience for entrepreneurs in the EU. This means a EU company with complete EU business banking and payment card can be established entirely online. This provides the perfect catalyst for large scale business growth with low start-up costs for establishment of a potentially thriving business. Such environments break down bureaucratic costs that deter small business owners with ideas as well as allow individuals to navigate roadblocks such a reluctance to work within certain emerging markets.
While the response to institutions such as N26, Revolut and TransferWise has been fantastic, it is impossible to void the legacy banking system. Despite persistent issues around inefficiency, exclusivity and high fees, there continues to be a strong inclination for the brick and mortar institution which can be attributed to a preference for a more tangible and face-to-face human experience highlighting the value consumers see in human interaction. At the same time, the borderless finance institutions discussed in this piece are able to offer attractive fair alongside a range of base free services due to innovative technological models and minimal operating costs. However, taking into account statistics like the ones below it can be inferred that these institutions, at least in the immediate term, do lose out on elements and value of the conventional institution:
The borderless digital finance revolution changes the playing feeling with a dynamic approach to financial inclusion and consumer experience. N26 users can now get a credit line in under 5 minutes. As mentioned earlier, the Estonian e-residency program’s partnership with Holvi is a major catalyst for small business growth across the EU. The proliferation of services that continue to evolve with the consumers’ needs is reaching a point of disruption for the banking sector where the incumbent institutions are being forced to commit time and resources to change the way they interact with consumers and consumer data but are bogged down by their legacy systems and massive scale. But as borderless FIs continue to make moves to tackle consumer and business issues such as exclusive and outdated credit models, expensive cross border business transactions, for goods, services and labour, and obstacles for business growth and personal investment, the scales and statistics are sure to tip in favour of the new kids on the block, complemented by increasing global digital, Fintech and internet adoption. To top it off, the unpredictable innovation that has been borne out of the great recession has found answers to pain-points every step of the way so it is likely that the brick-and-mortar human element will be addressed soon enough down the line. And as iterated in the first paragraph of this piece, whether it’s the spread of the borderless finance revolution or the reformation of the traditional banking sector, it is the consumer and the business owner that wins.
Crowd Valley prides itself in its commitment to supporting both consumers, investors and institutions bridge the gap that exists between in the lending, borrowing and alternative finance space by optimizing tools that work at the fundamental level of financial services and would be more than happy to discuss how our infrastructure can support your ideas and entry in the digital finance space.
This article was first published on Crowd Valley Blog.
I was at an event recently where alternative finance companies introduced their services. There were many new finance solutions for lending, real estate, investing and short-term finance. These companies explained how they have built their own platforms, have handled some finance (millions or dozens of millions), and are now looking for more investors. After witnessing all this activity, it seems the bottleneck of finance is not really the number of services and platforms available, but somehow getting the whole ecosystem to work.
Traditionally banks and other lenders have been able to use capital from deposits for loans, and use securitization to get additional capital for loans. Lending has been part of a huge finance system. It guaranteed money for lending and investing, but also created many complex finance instruments that have also combined more and less risky products – sometimes very risky, as seen in 2008.
Now we’re seeing new FinTech-based finance services whose technically excellent premise could be integrated to the whole finance ecosystem. But the technology as such is not enough to get the ecosystem to work. Many of these services have focused on building their own platforms and collecting their own investor user bases. Maybe they haven’t totally figured out yet in which business they really want to operate.
Some leading p2p lending platforms, like Lending Club, have institutional partners to lend and invest in their platforms. It is a starting point to use these platforms as a distribution channel for traditional finance services, such as banks. I earlier wrote that the invisible impact of FinTech is probably greater than the impact on visible services. This means that there are a lot of opportunities to really integrate these new solutions to the ecosystem, but also many challenges.
New digital finance services can help create much better finance products than the old models. The services can collect much more data, analyze and monitor the data in many ways, and monitor real-time information. This enables much better financial decision-making, better syndication, better pricing and better secondary markets. But to achieve this situation, the services much talk to each other, understand each other’s data, and there must be a market for them.
We are still in a situation where people and companies must fill out a lot of old-fashioned forms on paper to apply for a loan in a bank – even when much more data would be available in digital formats to make this simpler. Online finance services collect more data automatically from other systems, like using digital KYC and importing data from other finance tools, but they still do securitization in quite traditional ways, or hold roadshows to find investors. These simple examples show that many new services are still sub-optimized and don’t even have smooth digital processes, much less an ecosystem.
I have sometimes compared FinTech-based ecosystems to mobile and digital advertising ecosystems. It is not enough just to show some ads on screens. Digital advertising needs a lot of data from publications and users, targeting tools, systems to sell inventory, planning tools for advertisers, and many other components. This ecosystem includes thousands of companies and systems that must be able to talk to one other. A similar scenario could play out for the alternative finance ecosystem, but it’s still early days, and the critical mass needed to get the market to really work is missing.
We have, at least, three issues getting in the way of that critical mass:
This post originally appeared on Disruptive Asia.
Private transactions, both private equity and debt, have been inefficient and littered with information asymmetry due to the way the transactions have been made. The emergence of public distribution of information on private transactions seeks to change that and the quickly arriving secondary markets for private transactions can bring liquidity and efficiency to typically cumbersome asset classes.
The definition of an efficient market requires efficient access to information, no transaction costs and standardization. By definition most private deals do not correspond to these criteria. However, with more private information becoming public through new securities law changes around the world, we are beginning to establish process trust in asset classes that can become vibrant with further rigor.
Recently Seedrs announced the establishment of a secondary market for equity crowdfunding transactions in the UK. Private companies are among the most inefficient as an asset class, given the apparent lack of information, information asymmetry and long lock in periods. The situation in the US is no different, where private companies are even more private compared to the UK with publicly reported information even on private companies. The promise of liquidity in crowdfunded securities could be a fantastic development for an asset class which is difficult to manage. The Financial Conduct Authority (FCA) in the UK has been a pioneer in this regard as well in digital finance and set various standards worldwide, including the rollout of a regulatory sandbox.
At its core, a secondary market is an option for liquidity. Holders of securities can post a request to sell their positions, and those looking to acquire shares can bid for these. Depending on how the system is set up, matches can be made automatically or the marketplace operator can have a facilitator role. Automatic matches can follow procedures such as auctions, reverse auctions or Dutch actions. We work a lot with secondary transactions and markets through our digital back office, not only with smaller transactions but also with institutional grade assets.
Private equity is however not the only sector that benefits from liquidity. From private loans in peer-to-peer markets, a liquidity offer through a secondary market offers shorter cycles in the market and more trust in the underlying asset class. Many peer-to-peer or marketplace lenders globally run internal secondary markets, as yet there is no overarching liquidity destination for the sector. Both Lending Club and Prosper have offered secondary markets in the US, but only Lending Club’s remains open for business. Last October Prosper announced the closing of its secondary market, which the company said was underutilized by investors.
Private transactions becoming more and more public also open access to information that has previously been unattainable. In order for true efficiency to be a possibility, standardization of information has to be achieved. By being able to make comparisons and establish standards in private transactions and on private assets, we open up new possibilities of use with the data that was historically locked away. We are now beginning to realize what uses there are for this data, including being able to provide more tailored financial products such as debt for private companies while placing the company in charge of its own data.
Private companies and peer-to-peer lending markets are both relatively new asset classes that are governed by new policies, however there are also more traditional asset classes that benefit from private or even open secondary markets. Real estate holdings for example are highly popular, both equity and debt, and some times holders of positions may wish to divest part of their portfolio. Similar is true in areas such as renewable projects, solar bonds, insurance or private equity in a broader sense.
More Data, More Options
What secondary markets bring is more optionality for the investors and maybe by inference underlying security. This can be seen as an important area in establishing process trust for the transaction infrastructure, and a value add for the investor base. Yet at the same time it’s another area of the private securities transaction which is moving toward greater efficiency as a whole market, offering a higher value service in typically cost intensive asset classes.
With more data becoming available, we can expect more financial products to be developed that are more tailor-made and utilize even real time data. For years we’ve talked about the convergence of the private and public market and this is a tangible development where these new quasi-public transactions and novel services are charging ahead.
This post originally appeared on AltFi.
In the EU banks must open APIs to their services, and banks plan these steps also outside the EU. Some see it as a threat and some as an opportunity for banks. But one question is whether this is so relevant anymore. Some years ago, telcos started to talk about telco 2.0 and open telco APIs, but they haven’t really become anything significant. Can it be the same situation for banking APIs?
Telcos have wanted to open APIs for many years and in that way, for example, enable third parties to offer communications services that are based on telco infrastructure. This never took off, but they have also tried to revise the concept and activate it again. There are probably a lot of reasons for this failure, for example:
Banking API requirements are coming especially from EU’s PSD2 directive that targets to open opportunities for third parties to offer payment, accounts and finance data services by utilizing banking infrastructure and regulated banking services. It is basically intended to increase competition within finance services. At the same time, several banks have seen it as a business opportunity offer open APIs to their services and infrastructure.
We can easily see that there are quite a lot of similarities between telcos and banks in terms of open API business. The question is then, if banks can do it better than telcos have done. Or is it actually the case that those old-world services and APIs are not the way to build any truly novel services?
It is important to remember that the open API business needs much more than open technology APIs. An open API is relevant only if another party sees it is the best way to implement a certain service. To achieve that it requires at least four things:
There have been speculation and rumors as to how some banks might want to make it intentionally difficult to use these services, and in this way, they can limit competition. We have seen similar things in the telco industry, when the telcos needed to offer capacity, facilities and number portability to other service providers. I have also personally seen that in the telco industry it was not enough that a telco and its management were committed to offer these services, but many lower level employees were not willing to really get them to work. They still felt it difficult to offer something to potential competitors, or they didn’t like that the business changed and required new things from them too. So, this is in many ways also a matter of the organization culture.
Considering all the points above, we can see the open APIs to banking services is not such an easy thing to work in practice. The question is especially if those APIs offer a really competitive and trusted way to implement services. Legacy banking IT infrastructure is quite old, it is complex and expensive to make any modifications to it, banks have no technology or business competence for open API business, there are constant new modern technology solutions to implement similar things, and new service providers might have problems in trusting banks so that they really would be dependent on them. At the same time, other alternatives like cloud based finance back offices, payment gateways and distributed ledger type solutions are emerging and might offer more competitive ways to build services.
The ultimate question is if banks really want to get the open API business to work. If they want, they must really consider all aspects of the business and technology. It might require fundamental changes for their competence, technology and culture. They must realize that they won’t be the gate keepers to many of these services in the future. They must offer a real competitive solution and value.
This article was first published on Telecom Asia.
Working with one its large retail bank customers, Crowd Valley (a Grow VC Group company) has successfully passed an enhanced, independent security audit undertaken by one of the world’s leading information security consulting firms.
This third party verification confirms the stability and security for sophisticated users of the company’s products and services, and sets the platform up for even more institutional applications around the world.
Nixu Corporation (www.nixu.com) is one of the world's leading security specialist companies and has been focused on information security since its foundation in 1988. Since then it has worked with numerous banks, telecommunications firms and governments around the world to help them address and improve their approach to cybersecurity.
Nixu carried out a project to assess the security of the Crowd Valley API and Back Office platforms, which was done by attacking the Crowd Valley API and the administrative applications from the point of view of a motivated attacker trying to obtain unauthorized access to Crowd Valley’s customers’ data and functionality.
The API was tested for general compliance with the OWASP Application Security Verification Standard requirement categories: Authentication, Session Management, Access Control, Malicious Input Handling, Error Handling and Logging, Data Protection, Communications Security, HTTP Security, Business Logic, and File and Resource Validation.
Following the process Crowd Valley customers can now benefit from the following functional updates that have been implemented and are already available on sandbox and live environments:
For more information on how you can make the most of these security features in your own applications please get in touch with your primary Crowd Valley contact.
ICO’s are a new form of project financing for distributed ledger technologies or cryptocurrencies. The process involves collecting funds in the form of fiat or crypto currencies in exchange for a “coin” or “token”. In order to fully understand why this financing model exists, we must first understand the fundamentals of distributed ledgers in relation to regular internet protocols, which you can read more about here.
While being seemingly similar to equity offerings, ICO’s typically serve a rather different purpose. An ICO can technically never be used as an exit method for the issuer, as the coins are technically issued during the ICO, meaning that it can be compared to a seed round of financing. In addition to this, an ICO’s don’t typically make use of underwriters, which is a primary characteristic of equity offerings
Investing in ICO’s
Investors may decide to participate in ICO’s for several different reasons, mainly as a pure investment strategy, but there may also be other sentiments at play. Examples or various sentiments may be access to a limited edition product, or even tokens which can be used in online games. If investing with a pure financial incentive, the investor must carefully analyse what drives the price or pay-offs of owning a certain coin or token. Many tokens are built on top of public ledgers such as ethereum, meaning that the value they create may be absorbed by the ethereum blockchain rather than the token itself, other tokens may be value driven by events completely outside of the blockchain space - tokens pegged to the price of USD for instance. In addition to carefully considering the price drivers, and investor must also consider code quality, expertise level of the development team, and any other factors which may impact the success of the DLT. Regardless of the brief history of ICO’s, there are examples of 6-digit returns as well as complete value destruction, indicating that this is a relatively early and volatile market.
ICO’s are used to fund the development and maintenance of DLT’s, so a portion of the funds raised will typically be retained by the development team behind the DLT. The coin offerings themselves may have different quirks depending on the issuers goals, but typically they will have several shared characteristics.
In addition to the aforementioned characteristics, the issuer will typically reserve an allocation of the “coins” or “tokens” for their development team and/or a foundation dedicated to the development of the DLT. The reservation may be made in the form of creating a certain percentage of tokens at inception, or allowing a “pre-mining” period where the issuer can generate tokens for themselves via the regular mining model. This is the “incentive” part of ICO’s, making it a significant determinant to the success or failure of the DLT. As mentioned earlier, each token has a market value based on supply and demand of the token, a successful network will increase the value of tokens since the “goods or services” provided by the token will be considered more valuable, while an unsuccessful network will deteriorate the value of all tokens in the network.
In a successful ICO, there should be a fairly strong alignment of interest between all parties involved, meaning that the issuer will see a value increase in their stake if the technology performs well, and investors will see their stakes increase as a result of good performance.
Are ICO’s legal?
The legality of ICO’s was widely disputed at Consensus 2017. The general opinion within Blockchain circles appears to be that ICO’s should be legal, but also regulated in order to provide investors with a certain level of security and fraud protection. There are examples of ICO’s which have failed due to natural causes, but also cases of outright fraud, which harms the trustworthiness of DLT’s on a general level. As of today, no bespoke regulation has been set when it comes to ICO’s in particular, regulators also have trouble classifying the underlying asset - leading to even more complication.
How to participate
Investors will can typically participate in ICO’s via the issuers own website, simply by signing up and making a commitment towards the funding goal. KYC is seemingly quite light, meaning that investors can participate with as little as an email address, one of the reasons behind a light KYC may be the lack of regulation. Several media outlets such as Smith + Crown maintain curated lists of historical, current, and future ICO’s.
The ICO model is an innovative form of financing which allows both issuers and investors to have “skin in the game” when it comes to the performance and adoption of a distributed ledger. The model itself is not very different from an equity offering when it comes to execution and incentives, but the asset class doesn’t fit into the categories of equity/debt/commodities, as it’s more of an economic system rather than an traditional asset. Regardless of the inherent risks and volatility, I remain cautiously optimistic concerning the future of ICO’s.
This article was first published on Crowd Valley blog.
Est. 2009 Grow VC Group is the global leader of fintech innovations, digital and distributed finance services. Our mission is to make the finance services more effective, transparent and democratic. The Group includes leading fintech companies in their own areas.
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