The two leading providers of realtime bank-based peer-to-peer payments solutions have joined forces. Last week, Fiserv, which operates the P2P solution #Popmoney, and Early Wanring, the owner of #clearXchange, announced a strategic alliance that connects thousands of #banks and millions of bank customers in a realtime money transfer system. Together, FiservRead More
Bank Innovation
Statement: It is cheaper to create a #fintech startup today than 15 years ago, yet very few fintech startups reach escape velocity and have been able to build a sustainable business yet. There are plenty of fintech unicorns but there is only one PayPal to date.
Question(s): Does the fintech startup scene obey an even more severe power law of success or is it too early to tell?
Statement: Financial Services incumbents continue to be hurt by a low interest rate environment that hurts their profitability and severely constrains them in the marketplace.
Question(s): Would a high interest rate environment limit financial services innovation to systematic progress, to the detriment of systemic progress? Would interest rates increases limit the ability disruptive fintech startups have at competing against financial services incumbents?
Statement: Incumbents notoriously do poorly with innovation. They are beset by agency issues, inflexibility, bureaucracy. They are also the first to retrench when failures arise.
Question(s): Will incumbents exhibit the same tendencies at such a pivotal point of transition to the new digital age? Or will they exhibit more resiliency as a matter of survival.
Statement: New technologies, new behaviors, new business models are giving rise to the omnipresence and the power of networks and platforms in an industry where very complex processes are the norm and where mastering these processes require depth and breadth of knowledge.
Question(s): Which is more likely, a) disruption coming from fintech startups alone, b) fintech startups failing to dislodge financial services incumbents, or c) collaboration between startups and incumbents?
Statement: Many fintech startups are building businesses in either fragile activities (lending) or “race to the bottom” activities (remittances, p2p payments)
Question(s): How difficult will it be for these startups to build resilient businesses long term? Will financial services incumbents be negatively impacted?
Statement: Most if not all financial services operations are eminently complex, standards and regulatory rules add to the cost of doing business, even more so when cross border processes are taken into account.
Question(s): Does this mean the capital requirements to build a sustainable fintech startup at scale – and the current size of financing rounds &8211; is too high or too low? How will financing rounds size trend going forward?
Statement: Financial services incumbents boards are light on #technology gravitas and knowledge. Fintech startup boards are light on deep financial services knowledge and understanding.
Question(s): Which will close the knowledge and experience gap first? Can the gap be closed?
Statement: Innovation is about taking risk. Running a financial services business is about managing risk.
Question(s): Can these two activities be reconciled? Under what circumstances?
Statement: The financial services industry is undergoing profound change and is also under tremendous stress. #Banks, Insurance, Asset Managers are faced with existential threats &8211; real or perceived. Every participant in the industry is responding to change, even forward thinking regulators in certain jurisdictions &8211; UK, Singapore.
Question(s): Can financial services regulators avoid further change to their own business models? Can they get away with systematic change or will they have to contemplate systemic change? Are the equipped to innovate within their midst? What will be the consequences if they do not change and adapt?
Statement: Financial services participants such as PayPal in the US, Starbucks &8211; and others &8211; &8220;hold&8221; sometimes more money on behalf of their customers than certain banks do. These actors do not hold bank licenses nor are they subjected to the same level of scrutiny as banks.
Question(s): Will this trend increase, both in terms of quantity of money held and number of participants? If so, will regulators pay a closer look at these participants and will regulation take into account the weight these participants hold within the overall market structure?
Statement: Bank or Insurer owned Venture Capital firms invest with a strategic mandate. Independent Venture Capital firms are not encumbered but such constraints.
Question(s): Which yields the best outcomes? For investors, for the incumbent parent? Is it sufficient for a bank or insurer to own its own venture fund? Should it be better for a bank or insurer to invest in an independent venture fund? Would both owning a venture fund and investing in an independent fund be optimal?
Statement: Financial services incumbent IT/IS staff are usually convinced they are better at building new products, services, platforms. Fintech Startups are usually convinced they are better at going to market first.
Question(s): Which is the most value destructive behavior? Which behavior is the easiest to correct?
Statement: Fundamental and economically productive product or service or business model innovation in the financial services industry has been scarce- e.g. mortgages, ATM, securitization. Most innovation has benefited the speculating activities prevalent in asset management, trading, capital markets.
Question(s): Will new technologies and their application via fintech further this trend or invert it?
Statement: Many seasoned and reputable venture capital investors have gone on record stating corporate venture firms do not know how to invest and incumbents have a poor record with innovation. Most corporate venture capital investors are convinced fintech startups know little about the financial services industry.
Question(s): Which belief is the most erroneous? If true, which is easiest to upgrade?
Statement: In part due to local legislative and regulatory DNA, in part due to entrepreneurial genius, in part due to the size of their market, Chinese fintech firms (pure plays or children of Chinese tech giants) are ahead compared to their Western brethren. Further, based on recent evidence, cracking the Chinese market is a non trivial endeavor for a US or a European startup. US and European fintech actors do not enjoy the same advantages Chinese fintech actors do.
Question(s): Will Chinese fintech actors expand to Europe and the US? If so, how will Western regulators and legislators react? Will Chinese financial services markets mature to the point of being opened and interoperable with the outside world?
Statement: To date, the vectors of financial services industry disruption and innovation have been technology, a change in consumer and enterprise habits, the Great Recession, strengthened regulatory oversight, entrepreneurial spirit and a low interest rates environment. These have, to a large extent been forced upon the industry and its incumbents. Notably absent has been the political sphere &8211; executive or legislative.
Question(s): Will the political sphere engage with fintech and the financial services industry transformation? What will be the likely effects?
Statement: Fintech innovation needs both talent and capital.
Question(s): Which of talent or capital is more constrained? Are we faced with a demand or a supply issue? How will this change in the future?
Statement: Transitioning from the industrial age to the digital age induces profound implications. The way we organize ourselves, transact with one another, interact with one another are and will be drastically different. So will the skills, business architectures, mustering of resources and capital to sustain new models. Particularly so in the financial services industry. Incumbents have the advantage of political clout, access to high level spheres of power and decision making. Startups and entrepreneurs master the art of creation &8211; sometimes successfully. Be that as it may both need to see the future differently than they experienced the past.
Question(s): Is that transformation purely technology and business dependent? If not can either startups or incumbents transform the industry for the digital age without political leaders that understand what the digital age needs? Have political leaders emerged in any country or continent that understands the new age we are entering and its implications to the financial services industry and fintech as its enabler?
Statement: We are witnessing many changes within the financial services industry. Yet, Money, the concept of money has not changed for may generations.
Question(s): Should the concept of Money change? If not, why? If so, which is the most likely vector to effect a change; technology, politics?
You are welcome to come up with your own statements and associated question(s). Please comment and share.
#Banks only care #about millennials, right? Not really, though marketing about digital efforts may make it appear that way. Yesterday #Capital One, a leader in digital #banking, joined OATS (Older Adults #Technology Services) in launching‘“Ready, Set, Bank: #Online Banking Made Easy,’” an educational tool designed to increase online banking usage among older adults, enabling themRead More
Bank Innovation
I have visited quite a few #innovation centres at #banks, accelerators, labs and #FinTech startup offices: from the highest floors of mighty skyscrapers in Manhattan, to the folksiest office spaces in suburban warehouses. Everywhere I met enthusiasm, imagination, desire, hard work and openness to discuss global trends and detect:
There are two major yet antithetic drivers that turn new FinTech ventures into successful businesses (hopefully unicorns): PERSONALISATION and COMMODITISATION.
Yet, as I sat down today at my own kitchen table to write this post, I serendipitously spotted a share by Richard Joye which appeared on The Verge: “How Silicon Valley helps spread the same sterile aesthetic across the world“. Indeed I faltered and thought how true it is!
So do not expect many more insights about innovation, disruption and digital trends in the remaining of this article. We are going to talk a bit about casa, moda and buona tavola in the world of startups! Notwithstanding so much travel, speaking at more than 30 banking and FinTech conferences a year … and living in Germany … I remain Italian, born in Milan … and I have a weak for dolce vita stereotypes: design, fashion and food.
Here three summer recommendations to all my Fintech friends:
1. IDEAS DO NOT COME OUT OF THE FRIDGE
I happened to visit innovation labs at established banking institutions, and walk through rigorously decorated corridors just to feel amazed like Alice in the wonderland by crossing the last door, and find myself in front of super designed kitchens, see people playing table tennis, hear the latest lyrics of Taylor Swift (I know, Millennials account for almost 70% of Spotify clients).
True say, Bill Gates made his first Microsoft steps in a garage, Zuckerberg and fellow roommates in their dormitory kitchen at Hayward University. I also do most of my work as #book author in unusual places, like airplanes, my kitchen, the corner table of the Turkish bar which recently opened at the end of the street where I live. However, watch out! The FinTech world can be self-referential in many regards, and you risk to get trapped into a mechanism of emulation instead of autonomous innovation.
Here is the first recommendation: while it is convenient to work in the kitchen, ideas don’t come out of the IKEA fridge. So be DIFFERENT as much as possible. I don’t mean different from banks (that already comes by working in the kitchen …), I mean different from mainstream FinTech and its social media loudspeakers.
2. DON’T MAKE CLOTHES, DRESS WOMEN.
I find it fascinating to speak at FinTech conferences. The parterre is usually made of 80% FinTech entrepreneurs (wearing some sort of shabby cloths) and 20% bankers (in suits but without ties). While FinTech guys tell their audiences “HEY, I AM THE NEW MILLENNIALS-MINDED BANK“, bankers try to scream loud “HEY, I AM A TECHNOLOGY COMPANY NOW“.
Truth might lay in the middle, but one thing is certain: banks are still troubled banks, and FinTech companies are still fabulous software firms trying to use new technologies to service innovative business models. Since B2C businesses and revolutions are easier dreamt than won, most FinTechs’ future might feature their institutionalisation, as banks’ partners or service providers.
Here is the second recommendation: while it is cool to wear sneakers, a good woman’s wardrobe always features a Chanel. Fashion designer Valentino famously said “I don’t make clothes, I dress women”. So do the same: do not just build a Fintech, conceive a business which comes with genuine products, good pipelines, sound business plans and key partnerships.
If cloths don’t make the Monk,
FinTech attire doesn’t make the Unicorn!
3. DON’T EAT SOCIAL MEDIA JUNK FOOD.
The digital economy makes it truly possible to scale new businesses faster than ever across international borders, however “one man’s meat is another man’s poison“. I am fascinated during my travels and business conversations to learn what can work globally, and what instead makes sense only locally.
Here my third recommendation: copy and paste Silicon valley might not be a good innovation strategy that works everywhere. Luckily enough, you can eat a decent pizza almost everywhere. However, although Starbucks is a fabulous brand, it might work in the US but has not yet successfully landed in Italy. US might be an easier B2C market for #Robo-Advisors than continental Europe, because regulation, banking infrastructure and investors behaviour are not equal across the pond.
Copy and past Silicon Valley might not always
be a good innovation strategy
Elevator’s pitch to executive search companies: should you ask what is the role of a global FinTech though leader, here is what I do …
I sell the finest FinTech Furniture, FinTech Fashion and FinTech Food!
Read more about the topic? Check on Amazon my new book “FinTech Innovation: from Robo-Advisors to Goal Based Investing and Gamification“.
[linkedinbadge URL=”https://www.linkedin.com/in/paolosironipso” connections=”off” mode=”icon” liname=”Paolo Sironi”] is IBM Thought Leader – Wealth Management FinTech Analytics
This week, host Brett King and co-host Chris Skinner begin a 5-part series on #blockchain, starting with a very good question: What is it? King and Skinner are joined by top #Fintech leader Theo Priestly, Director of Blockchain at FS-11, and Director of Business Enterprise at Consensys.  
Bank Innovation
On Sept. 23 a major milestone in the journey toward faster payments will be reached: New rules will go into effect that will enable the same-day processing of ACH payments. Vendors are working to make sure #banks are ready to take advantage. Adam Anderson, CTO of Q2, a provider of cloud-based banking software, said thatRead More
Bank Innovation
In the following 5 years #banks may lose 50% of their business.
I don’t think I’m exaggerating when I say in 5 years banks will lose 50% of their business. I am pretty sure that the major banks handle this scenario. If not, why announce so insistently their strategy to shift to a digital #transformation?
In a low interest rate scenario, with low margins and high regulation there were only two ways to go: #Technology innovation or market expansion where margins were still high (such as Africa which was very risky and non competitive for banks such as #BBVA or Banco #Santander).
It seems that digital transformation is the correct approach. But now they have to start. Entrepreneurs who believe that the idea is worth something, I’m sorry to disappoint you: the idea has a value of 1%, the execution has 99%.
But how do you transform a traditional bank into a digital bank? There are three ways you can follow or rather a combination of these:
10 variables to be analyzed in the digital transformation
After studying many cases and opinions by hundred business leaders from business schools around the world[i], I’ll analyze the 10 variables that can determine who will win between BBVA and Banco Santander in the digital transformation.
1. ENTREPRENEURIAL CULTURE. Having a very disciplined culture is a handicap for any innovation transformation. The employees must challenge the obvious, question and debate everything, innovate. Even ask themselves why you’re my boss? Why am I not your boss?
Can you imagine a bank manager persuading customers not to buy bank shares because the crash of their values in the last five years (-40% BBVA and -60% Banco Santander)? I mean, can you imagine it without his name being mentioned on the next employment reduction list?
2. CULTURAL CHANGE. The hardest thing to change in an institution is its culture. Both banks exceed the one hundred thousand employees (BBVA 135,000 and Banco Santander 193,000 approximately); Employees used to traditional banking culture. How many of these will serve to implement the digital strategy? I don’t think more than 5%.
Banks are making great digital campaigns on their digital tools. For example BBVA Wallet. But if you go to a branch office and ask employees if anyone knows how it works, no one will know exactly. It’s not what you say you are, but is how the rest perceive you!
3. ATTRACTING TALENT. Is not only that they have more than enough personnel, but is possible they may need 5-6 thousand digital employees who now work for Google and other similar companies that have no intention to change to BBVA or Banco Santander.
10 years ago the brightest students of business schools ended up working for banks. Today the brightest students want to start their own fintech or work for companies like Google, Apple, etc.
4. STRUCTURE TRANSFORMATION. They should flatten the organization to boost improvisation. It is true that both institutions have announced in press releases this kind of restructuring. But, “the words do not tell you anything, the facts will.”
Anyone that has had to negotiate with a bank can see that each time the deal maker is newer and with less rank than the previous one.
5. IMPLEMENTATION CAPACITY. A project that takes too long to start can only show you what can go wrong, not what it can be transformative and impactful.
Both in USA and the UK and even in Spain, there has been successful #robo-advisor developed in just 12 months. None of the surveyed had heard of a BBVA or Banco Santander’s robo-advisor, even after 10 years announcing leading digital transformation!
6. CHAOS vs ORDER. In the recent entrepreneurial culture of innovation is often put as an example of success the case of Israel. Among other reasons it is often argued that the military training of Israeli society has been one of the pillars of this entrepreneurial culture. This training is characterized by certain “chaos” versus the typical military order of other nations. “Challenging the boss” is one of the commands for all young Israeli soldiers. Any technology that reaches the army of Israel from the USA, is in five minutes modified to find another use of it.
Both banks are using their platforms for different tasks such as risk management, internal training or products assessment. These platforms were bought many years ago and are not flexible to allow any modification by the employee. However, in the market these systems have been improved substantially in the last 3-4 years and most of them use now open sources. Being “managed” by closed and obsolete systems prevents that the innovation process exists.
7. EMPLOYEE PROFILE. Following our example of Israel. One of the successes of Israel in terms of innovation is based on the large number of engineers and doctors that came from the Soviet Union. If a bank wants to innovate, it would be logical to think that they should have a high percentage of highly qualified engineers and doctors.
Silicon Valley companies hire the best engineers and doctors even if they don’t need them. Having them is the best barrier to prevent the competition of qualified personnel. And is not only capturing them but keeping them and create a network-effect that lures those professionals to working with them today.
8. PROCEDURES. When I see all the procedures that today bank employees must follow, I wonder how the hell they will innovate something? How many times will you know what a competitor or a customer plan? It’s like saying in the trade stocks market you’ll buy shares regardless what happens because it’s in the procedure.
I recently attended a conference in which three responsible managers of innovation of BBVA, Banco Santander and Bankia participated. Almost the three of them said the same of how they were going to innovate the financial sector, which surprise me. The three mentioned the importance of procedures in their institutions. I wonder, Can they really invent the future of banking following a procedure?
9. ABILITY TO BUY AND INTEGRATION. Is not only buying innovative companies. It is integrating them into the bank. To succeed in the transformation via purchasing you should be able to buy the best and especially to integrate the projects.
In recent years I have met four entrepreneurs which BBVA bought their innovative companies and incorporated them. None of the four lasted more than 24 months in the bank. Moreover it strikes me that they all had the same reason to leave the bank, “before I used to innovate, since I entered the bank I can’t make any kind of innovation.” In the case of Banco Santander I haven’t had a chance to meet entrepreneurs who had integrated to the bank. However I’ve met at least three ex-Santander that left the bank and have been quite successful creating digital businesses.
10. DISRUPTIVE MENTALITY. To create a style of iTunes platform you have to accept disruptive ideas. At MIT they use two very appropriate concepts to innovate. One is “Irreverent Creativity “. The other is the GSD (“Get this shit done”). But above all, any entrepreneur has forbidden to say “this is impossible”. If banks want to innovate they should start by banning from their managers “this is impossible”.
How can they deal with “Google Bank”?
At least one of these three things they must do better than “Google Bank”: either buy or develop or be disruptive in the platform. Google bought Android for approximately US 50MM, a ridiculous amount compared to what BBVA or Banco Santander are spending on recent acquisitions. Google has been able to integrate and reach 82% of the smartphone global market creating also a totally disruptive platform.
Maybe my initial idea of a 50% business loss for traditional banks in 5 years is a bit short.
[i] This article is based on the opinions of 100 leaders with the following profile:
[linkedinbadge URL=”https://www.linkedin.com/in/vicente-quesada-5632161″ connections=”off” mode=”icon” liname=”Vicente Quesada“] is Entrepreneur. Investor. Professor. Transformation Catalyst and this article was originally published on linkedin.
In general, Chief Risk Officers (CROs) and Boards of Directors of traditional #banks probably lose a lot more sleep over the health of bank balance sheets rather than the security and agility of daily payments and accounts processes. A failure to control the quality of loans on the balance sheet is an existential risk for a credit institution. A failure to maintain depositor confidence, leading to a cataclysmic outflow of funds from the liabilities side of the balance sheet, is also an existential threat. While significant frauds, security failures and data privacy breaches may tarnish bank brands, slow business growth and lead to very large regulatory fines, these events have to be incredibly large and systemic to suddenly wipe out a bank’s equity or cause a loss of a banking license.
Although banks may have ultimately adopted progressive API Strategies over time, banks are being compelled by #PSD2 to adopt API-driven business objectives and processes against a fixed deadline. Without regulatory intervention, the timing of this change would have been commercially driven. In more normal circumstances, the Boards of these banks could have approved new API Strategies (covering API provision and consumption) with a defined appetite for risk. This is the level of risk that a bank is willing to accept in order to deliver these business objectives. It will be important that the mandatory nature of PSD2 does not inhibit banks from carrying out these important disciplines. Even a “comply only” API business strategy prompted by PSD2 does not mean that bank Boards are not ultimately responsible for the risk profile of these business activities.
To try to avoid adverse outcomes, bank management and Boards of Directors spend much time defining their appetite for risk. To inform the process of defining risk appetite, banks invest much time and effort in developing risk models. Many of these risk models are devised and prescribed from the “top down” by Regulators and prescribed to a class of banks, in order to compare risk profiles. Risk models are also devised and implemented from the “top down” by #CRO and specialist risk management staff. For example, banks model the adequacy of capital levels and loan loss provisions in adverse economic conditions (often under regulatory supervision, such as the recent Stress Tests conducted by the European Banking Authority). These models help inform CRO responses – can and should risks be avoided, reduced, shared or accepted?
[linkedinbadge URL=”https://www.linkedin.com/in/paulrohan” connections=”off” mode=”icon” liname=”Paul Rohan”] , the author of this post, is also author of “PSD2 in Plain English”.
for Non-Specialists) (Volume 1)
PSD2 and #Open Banking is not a matter of a faster growth rate or a diversification into new market segments, using established business processes and risk models. In broad terms, PSD2 is extending and blurring the boundaries of a bank. With PSD2 and Open Banking, there are now new risks to a bank’s risk profile outside of contractual arrangements that the bank has chosen to enter. It could be difficult for bank CROs to fully understand and fully embrace the lessons from risk management problems inside PSD2’s “Third Party Providers (TPPs)”.
Does a bank’s CRO have a big blind spot in this new Open Banking environment? As the layer of overlay Payment Initiation and Account Information services grows into an ecosystem, the capability of the CRO to quickly identify where a fraud could happen or how a fraud was executed will fall. The possible points of weakness increase as more and more payment initiation is captured by the risk management and security of TPPs. There may be many TPPs for a certain type of payment or a certain device or security protocol that is breached across many TPPs. Calls from puzzled customers to a bank’s Call Centres will have many more scenarios to plan for and many more scenarios to try to understand. Call Centres will ideally have to know exactly the TPPs, current and lapsed, that a customer has granted PSD2 access to. Call Centres and Client Education will probably have to prepare and plan for the emergence of imposter TPPs. The normal patterns of API calls on a bank’s payments hub will have to be tracked as accurately as the normal pattern of customer instructions through proprietary channels,
The initial risk model prepared for PSD2 and Open Banking will have to come from the “bottom up”. Staff managing business units with expert knowledge of a certain set of products and processes can model their risk profiles from the “bottom up”. These models are used across a range of risks to help banks identify and manage the risks that they are running. A very common model is a “Risk Matrix”. It is a simple mechanism to increase visibility of risks and assist management decision making. The severity of an event could be classified as Catastrophic, Critical, Marginal or Negligible. The probability of an event occurring might be categorised as ‘Certain’, ‘Likely’, ‘Possible’, ‘Unlikely’ or ‘Rare’. It is likely that the technical function that physically manages the Private, Partner and Public APIs will be documenting new risks from newly published APIs on their unit Risk Matrix. The commercial function or functions that have line of business responsibility for API Monetisation and PSD2 compliance will probably be documenting different PSD2 risks a different Risk Matrix from a commercial perspective.
The initial risk model will have to correctly identify and maintain the correct number of Payment Accounts that must be exposed by law. Banks will need to ensure that new controls are designed and effectively implemented so that TPP Permissions can be revoked by End Users who hold accounts at the bank. API Related Complaints by End Users or by API Developers will need to be monitored as potential indicators of risk. Managing data and privacy (both of customers and API Developers) appropriately in an Open Banking environment is a risk. If an API is temporarily or permanently withdrawn, a bank will need to understand the implications of that action. When significant actions or first-time processes are triggered by the end users, banks will need to be sure that Out of Band Challenges will go to End Users. API Permissions with an expiry date will need to expire on the time limit. If there is a dispute over a potentially unauthorised payment through a Payment Initiation Service, banks will need to be sure that PSD2 is being observed and an immediate refund is triggered. In the early days after PSD2, there is no “typical” or “average” number of risk events to guide a bank’s risk responses or risk appetites. Banks will also be required under PSD2 to share information on security threats. There will be guidelines for managing security incidents and the EBA will set guidelines on how to handle complaints.
In the early stages of Open Banking, volumes will be low. A key driver of the “severity” weighting that bank staff will use on a “Bottom Up” Risk Matrix will be both the volume and the value of the transactions that are traveling through this process. Relative to the volumes that currently travel through a bank’s proprietary channels and the enormous values of payments through a bank’s Treasury function, the initial Open Banking traffic is likely to be initially classified as “Marginal”. CROs may not see Amazon, Apple, Google, Facebook and Microsoft appear in the Overlay layer of TPPs in the first few months of the PSD2 and Open Banking regime. However, it is probably a mistake to assume that all “Fintechs” are small and undercapitalised, thus unlikely to trouble a bank’s infrastructure with a surge of volume. “Silicon Valley” TPPs will have pan-EU ambitions and have potentially large appetites for API consumption. Crucially, EU banks could find that 80% of their installed base of customers already trust and actively use services from these giants.
We can reasonably speculate that the crooks and fraudsters that exploit opportunities in digital services could have their own “PSD2 projects”. What sort of new attack vectors for fraudsters could exist in this new, more complex environment? Fraudsters can read the new PSD2 legislation just as well as anyone else. The fraudster knows that a bank has only one working day after a disputed payment to refund any unauthorised payment transactions generated by a TPP. Fraudsters will know that banks will have to deal with potential payment reversals within the TPP process while an impatient customer has launched a fresh effort at the same payment through a traditional channel. eCommerce or Mobile Commerce transactions that historically only appeared as Card transactions will start to appear as Faster Payment Scheme Credit Transfers, disrupting and confusing customer payment profiles held by banks. Fraudsters could start to watch for authentication and control differences between TPP processes and traditional processes, building up a trusted profile for subsequent exploitation on the other process. Fraudsters will know that sensitive personal or authentication data extracted from unsuspecting TPP customers could later be used in a bank’s proprietary channels without the account servicing bank being aware of the initial breach.
In crude conclusion, the initial risk profile of PSD2 and Open Banking looks quite benign compared to some of the existential risks that banks face every day. However, as PSD2 and Open Banking starts to gain market acceptance and volumes start to ramp up, the “banana skins” will come quite quickly. CROs and Bank Boards will have to recognise that a new business strategy like exposed APIs has to be rigorously scrutinised for risk, whether this new business strategy is enforced by an EU regulation or not. Banks will have to prepare for the new PSD2 and Open Banking regime without any tested and mature risk models. The blurring boundaries of the organisation make a “top-down” identification of material PSD2 risks a difficult challenge for the CRO. Risks related to PSD2 and Open Banking will not be confined to one business unit, making the “bottom up” risk profile more blurred. At an industry level, there will be a period of time before a “sensitivity level” is established for the risk profile of Open Banking processes. The addition of 5% of a bank’s total payments volumes through TPPs in immature processes may be a “marginal” change in payments volumes but it probably does not represent a marginal change in the bank’s overall risk profile. The structure of PSD2 means that Silicon Valley giants could arrive with very large volumes and effectively unannounced, without having any prior relationship with the API publishing bank. Fraudsters will know that the addition of new overlay services managed by TPPs is a radical change in business model and is completely different to the incremental addition a new proprietary bank channel (such as tablet, mobile or kiosk) using the same proven customer profile and control processes.
In crude conclusion, the primary risk control for banks in this environment can only be a risk-aware culture. Bank management will have to seize growth opportunities from APIs while managing risk, just as in all other processes. The immaturity of risk classification models, industry norms and fraud detection models will mean that bank management will have to approach this arena from “first principles”. As API volumes grow, clear and active communication within banks and within industry bodies about the various “banana skins” will be crucial. #Fintech innovators seeking to build partnership relationships with banks in the Open Banking era should also welcome tough questions from banks about their risk control capabilities. If a bank is asking tough questions and paying good attention to likely risks in the TPP overlay layer, that bank is far more likely to be serious about building an ecosystem out of its payment
[linkedinbadge URL=”https://www.linkedin.com/in/paulrohan” connections=”off” mode=”icon” liname=”Paul Rohan”] , the author of this post, is also author of “PSD2 in Plain English”.
for Non-Specialists) (Volume 1)
You have probably heard the term co-petition applied to the bank-#Fintech relationships in which they do not only compete, but also cooperate on providing financial services and a better user experience. But how is this actually being implemented? Are we headed towards a collaborative environment in the near future? And perhaps more importantly, is this a win-win relationship, as it is usually described as? Some of these questions will only be answered as more real examples take off. So, for now, let’s start examining some of the arrangements already in place.
Sharing the value chain?
What looks clear is that #banks are trying to fight back in every area in which they are facing disruption by new actors. Unlike some challenger banks (e.g. Number26 or Starling Bank) looking to build “banks as a platform”, traditional banks are used to owning the whole value chain, so they’re not eager to lose revenue from any of their businesses. In the words of Manolo Sanchez, chief executive of BBVA Compass:
“There’s the much-talked-about discussion of utilities, where you have unbundling of the financial services value chain and banks are just providers of the rails. That would be falling into the low-value execution of this opportunity. We’re not so fond of the unbundling part of the fintech opportunity.”
I guess it is true that banks are scared of Fintech firms that can escalate and challenge their revenue sources (let alone the potential competition posed by the huge tech giants). But this won’t keep them from cooperating with them in different business areas if they can extract some positive outcomes from such a relationship.
So why would banks and Fintechs be interested in such cooperation?
On the banks’ side, many of them are trapped in their own legacy structure. Although, as Chris Skinner describes it, “in reality, the problem isn’t just the [banks’] legacy system. It’s the legacy people and legacy customer.” But even more relevant is the fact that they “were built around products, rather than customers”, as Tom Groenfeldt puts it.
Under such a scenario, some of the characteristics of Fintech become very attractive since they are not easily replicable, for instance: the innovation culture, the ability to connect to millennials and the faster development cycle. That’s why Jamie Dimon, chief executive officer of JPMorgan Chase & Co., described the cooperation between banks and Fintech as “the kind of stuff we don’t want to do or can’t do, but there’s somebody else who can do it and do it probably well. So this is going to be collaborative”.
On the Fintech side, these firms may find opportunities in leveraging banks’ customer base, deep pockets, trust and reputation.
From acquisitions to partnerships
Like many firms from different industries, banks also face the build, borrow, or buy growth dilemma. We’ve seen several banks acquiring Fintechs (e.g. Simple, Holvi, Fidor, etc.); taking stakes or injecting capital (e.g. Atom Bank, iZettle, Ripple, etc.); creating labs for developing their own products in-house; or staging competitions and hackathons that could foster similar kinds of interactions. However, although there has been some buzz around direct collaborations between Fintechs and banks, we actually find few examples of this sort of partnerships among these players.
Focusing on the latter, we may find heterogeneous terms and conditions in place under the “#partnership” label, which implies that neither the goal nor the outcome of the collaboration are identical. We could classify them as follows:
Moreover, beyond the differences and specificities of each type, there is a clear trend towards a prominent role played by APIs in such agreements. But let’s examine some real examples to grasp better how this is being implemented.
J.P. Morgan – OnDeck
J.P. Morgan is the largest US bank (Q3 Revenue ‘15 $23.5 billion) and OnDeck is a US Fintech (Q3 Revenue ‘15 $67 million) that provides loans to SMEs through an automated lending platform.
This “David and Goliath” deal could be categorised as a white label agreement, since J.P. Morgan is using OnDeck’s technology to give quick approvals and funding for small-dollar business loans, while the loans are J.P. Morgan-branded and appear on its balance sheet. So, OnDeck, which is invisible to J.P. Morgan customers, receives origination and servicing fees on each loan.
Through OnDeck’s technology, the bank gathers data about a business’s operations and SME customers are pre-screened by an algorithm that determines loan eligibility (OnDeck is prevented from pitching its loans to borrowers that J.P. Morgan rejects). In the end, some of them are invited to apply for loans of up to $250K.
This adds value for both partners. J.P. Morgan expands its share with business clients who want smaller loans while OnDeck could benefit from a huge revenue boost (and use data from the partnership to improve its lending models).
Santander UK – Kabbage
Kabbage is a US Fintech that provides loans to SMEs through an automated lending platform and Santander UK is the British subsidiary of the Spanish Santander Group. One of the distinctive features of this partnership is that Kabbage was previously invested in by Santander through a $135-million Series E round in October via its fund InnoVentures.
Although they are still in the pilot phase (they started in April 2016 and we still don’t know how exactly it will crystallise), this seems yet another type of white label agreement. What we know is that Santander will offer working capital loans of up to $100,000 within a matter of hours to its SME customers in the UK through Kabbage’s platform. Right now, they are fine-tuning the platform’s lending algorithms before Santander’s pilot customers are tested.
Whereas Kabbage offers the technology, i.e. real-time risk modelling, and cross-reference data against multiple external sources (the approval times vary from 20 minutes to 13 hours and the interest ranges from 8%-20%), Santander provides its large SME customer base, its trusted reputation, its UK payments infrastructure and its understanding of the requirements of UK businesses.
ING – Kabbage
But before partnering with Santander, Kabbage had already closed a similar deal with ING Bank. Again, Kabbage brings the technology, while ING brings funds and customers.
This is a white label agreement in which ING targets Spanish SMEs, with Kabbage’s participation also invisible to ING customers. The service was launched in November 2015 and is still in place.
Under the product name Crédito NEGOCIOS 10’, the potential client needs to fill in a short form on ING’s website (answered within 10 minutes) and may apply for anywhere from €3,000 to €100,000 in financing.
Santander – Funding Circle
This older partnership between Santander and Funding Circle (the UKs biggest marketplace lending platform) would fall under the cross-referral agreement category.
Since 2014, Santander has been referring small business customers looking for a loan to Funding Circle, for those cases in which the Fintech firm is better placed to help. These referrals have taken place on Santander’s website and in letters to customers.
On Funding Circle‘s side, it has signposted borrowers to Santander “where they require day-to-day relationship banking support or other services that the bank can offer, such as international banking expertise, cash management and support for growth”.
BBVA Compass – Dwolla
BBVA Compass, one of the US leaders in digital banking, has arranged partnerships with different Fintechs (such as FutureAdvisor and eCredable), the most prominent of which is the agreement with Dwolla.
Dwolla is a US real-time payments processor that bypasses traditional networks through its FiSync protocol. It aims at correcting the fact that the US lacks infrastructure and the rails to provide real-time payments.
BBVA Compass is the first major bank to have joined Dwolla’s network, directly suggesting its clients sign up with Dwolla so they can make real-time money transfers to other people or businesses through their BBVA checking accounts.
In conclusion, we can expect many different kinds of partnerships between banks and financial technology firms to emerge in the following months. Given the different ways in which these may crystallise, establishing a win-win relationship will greatly depend on the details of each of them.
To go back to Kantox, we are already exploring “Full integration agreements” with different global banks. In a nutshell, we have developed very innovative products like Dynamic Hedging that banks are unable to develop or copy fast. They know that these products bring huge value to clients and that thanks to them we now have a very unique positioning in the market.
[linkedinbadge URL=”https://www.linkedin.com/in/philippegelis” connections=”off” mode=”icon” liname=”Philippe Gelis”] is CEO at KANTOX, disrupting the financial industry and this article was originally published on linkedin.
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