Fintech Finance presents: The Fintech Magazine Issue 29

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FINTECH FOCUS

14 The dangers of LLMs

Writer Stuart Thomas is a tech fanatic but even he is cautious about letting generative AI loose in financial services. Here’s why

26 Debanking uncovered: trust, tech & conspiracy theories

We look at the latest controversy to undermine faith in UK banking and ask: if technology turns out to be the problem, could it also be the answer?

44 Open season

The European finance ecosystem is readying itself for a new legislative payments package. Tim Goodfellow listened to what you make of the proposals

48 We can’t get no satisfaction

Ron Delnevo considers the UK Treasury’s policy statement on cash access and questions why the wishes of 50 million Brits are being ignored

62 Looking for the exit

Cazenove Capital holds founders’ hands as they head to the door. So, what’s the role of the wealth manager in an exit and how do you say goodbye?

79 Sticks and carrots

A sample of how regulators around the world take different approaches to fintechs

82 Access for all: the inconvenient truth

One billion people with some form of impairment routinely have their life chances limited by poor access to financial services. A G+D-hosted roundtable looked at how the industry could be more empathetic

THEFINTECHVIEW

Any fintech founder who’s ever struggled to make a raise, sweated over pitch decks, pored over cashflow forecasts and prayed they don’t run out of runway before they gain some height, must have felt a tinge of envy, surely, watching the biggest IPO of the year this month (September).

While British semiconductor and software maker Arm, which made its debut on the Nasdaq with a $54billion valuation, isn’t a financial services provider, without it, mobile banking as we know it, simply wouldn’t exist. Arm CPUs are used in 99 per cent of premium smartphones worldwide. And it’s principal investor is Japan’s SoftBank, the same VC whose Vision Fund has driven expansion at Chime, Clearco, Klarna, Kabagge, PayTM, OakNorth, Revolut and Zopa, among a host of other fintechs.

The fund’s portfolio is comprehensive, covering insurtech, paytech, lendtech, wealthtech, crypto, blockchain… the list goes on. SoftBank is vast and vastly influential – but not so big that its high-risk bets didn’t see the Vision Fund investment arm hammered over five

ISSUE#29 l 2023

consecutive quarters by the prevailing high-interest rate environment.

That only came to an end in August when it announced a gain of $1.1billion, reversing more than a year of lacklustre performance.

By then, it had sold its interest in Uber, which only turned cash positive this year. And it wasn’t listed as taking part in Klarna’s raise last year when the lentech’s valuation tumbled.

Trying to figure out a capital raising strategy, much less an exit strategy, in these times is hard. But whereas three years ago, investors were looking for growth at all costs, the consensus of opinion in this issue of The Fintech Magazine is that strong liquidity and cash management is now key. Get that right and you could be the next Arm.

Our last issue’s spine-tingler, “We need not wait to see what others do,” was by Mahatma Gandhi, an Indian lawyer, anti-colonial nationalist and political ethicist who led the successful campaign for India's independence from British rule (1869-1948).

CASH & LIQUIDITY MANAGEMENT

6 Navigating a new world of liquidity management

After the GFC, we thought the world’s banking system was secure… SmartStream’s Peter Dehaan discusses what’s changed and how financial institutions should respond

8 Putting treasury in the pilot seat

The changing role of the treasurer demands flexible, innovative solutions that will have an impact on the strategic direction of not only the bank but also its corporate clients, says SunTec Business Solutions

11 Restyling corporate banking

The changing role of the corporate treasurer has resulted in new demands on their bank. BNY Mellon tells us what life is like on the other end of that relationship

ARTIFICIAL INTELLIGENCE

16 Keeping a finger on the pulse

As CEO of SmartStream, Haytham Kaddoura has an insider’s view on how recent events in the US are impacting cash and capital management – and how AI can improve it

18 Closing ranks on fincrime

Five Dutch banks are establishing a transaction monitoring utility that aims to move the dial on anti-money laundering through data-sharing and sophisticated AI. ING is one of them

21 Inside the AI Factory

Spanish bank BBVA has just set up its second technology hothouse as part of an ambitious tech strategy that will also see it hire thousands more IT professionals in 2023

24 Good testing and how to achieve it

GenAI can improve testing of financial software, but you need to balance its creativity with rule-based models, says Exactpro

PAYMENTS

30 Taking centre stage

As more central banks prepare to issue their own CBDCs, Swift’s Nick Kerigan explains how the global payment messaging service is working on cross-border technology to support them

32 A Nordic cliffhanger

The Nordics’ P27 cross-border payments project has been halted, but the problems it set out to solve remain. Bottomline is helping the region address them

35 The Google of payments

Intix on banks’ growing opportunities around data

38 Local heroes: the key to cross-border success

Keeping up with consumers’ local payment preferences, especially if you’re trading internationally, is a pillar of long-term success. PPRO is at the heart of that SOFTWARE-AS-A-SERVICE

51 The stealth approach to transformation

Banks aren’t interested in hugely disruptive (and hugely expensive) rip-and-replace technology programmes. But what’s the alternative? Mambu has a cunning plan…

55 Powering choice

Tuum, one of the new-generation core banking providers, is making remarkable progress by providing a super-flexible platform on which others can build the future

59 Plugged into success

There’s mounting existential pressure on banks, but that’s not a reason to slow SaaS migration, says Bottomline

60 SME banking… without banks

Wrapping banking up with other business management tools could have a transformative impact on SMEs, as Ageras and Swan are demonstrating CHALLENGERS

68 How to win friends and finfluence people

Lanistar launched on the back of a unique Instagram campaign in the UK before leaving to make its mark in Brazil. Now it’s preparing to return

70 Coming down to earth

N26 was enjoying stratospheric growth when it had its wings clipped by the German financial regulator. Today, it’s more grounded, but in a good way, says Pablo Reboiro

73 Steadfast & true

UK challenger OakNorth has grown from the acorn of an idea into a flourishing fintech, more than capable of withstanding harsh conditions

76 Easy banking for happy spending

Fazil is the Spanish challenger chasing a 500-million-person prize. It’s got a way to go, but it’s not lacking ambition

LAST WORDS

86 Sky-high and scary

Incidents of both authorised and unauthorised fraud have fallen slightly, but that’s no comfort to victims like our own Doug Mackenzie

“If you mismanage your capital, you’re going to die a slow death. If you mismanage your liquidity, it’s like dying of a heart attack,” says Peter Dehaan, global head of cash and liquidity management at technology solutions company SmartStream, and the man responsible for the firm’s cash and intraday liquidity pillar.

He’s reflecting on the spate of US banking collapses earlier this year, which sent shockwaves across the global financial system. The failures of Silicon Valley Bank (SVB) and Signature Bank plunged many companies into alarming credit and liquidity crises, bringing banks’ liquidity management sharply into question.

“That’s what treasurers are more focussed on now,” says Dehaan, “because that’s going to catch up with you faster than mismanaging your capital.”

RISING RATES AND CHATTER

As exposed spectacularly by the SVB implosion, it’s become even more important to appropriately manage liquidity in an age of rising interest rates and fevered social media use.

“Rising interest rates are playing a significant part,” acknowledges Dehaan. “When rates were zero, or next to nothing, there was a certain amount of discipline required to manage your money, but

whether you were massively long or massively short didn’t really make much difference. Now the rates are above five per cent in the UK and the US, it becomes a more expensive hobby. So you need to be more careful about managing your funds.

“We now also have the social media effect. You have uninformed people advising uninformed people what they should or shouldn’t do with their money.”

Dehaan believes that panic spread across social media only serves to accelerate bank runs. SVB’s will go down in history as a record-breaker, with $42billion withdrawn by depositors in just 10 hours.

“As a comparison, in 2008, Washington Mutual lost around $16billion across a nine-day period,” points out Dehaan.

The Federal Reserve has concluded that the bank’s failure was due to a ‘textbook case of mismanagement’, claiming its leadership neglected to manage basic interest rate and liquidity risk.

It’s worth noting that the report also calls into question the Fed’s own regulatory failings, adding that ‘Federal Reserve supervisors failed to take forceful enough action’. It chooses not to point out that the same long-term government bonds that it criticises SVB for failing to hedge against when interest rates shot up and quickly eroded their value, are the same ones the Fed is majorly invested in.

Dehaan is clearly in no doubt that the US bank failures can be attributed to both the mismanagement of intraday liquidity

and the regulatory framework in the US that allowed it to happen: many commentators have accused the Fed of hiking interest rates ‘until something breaks’.

“Treasurers and the regulators have to get much better at managing intraday liquidity,” says Dehaan, “and ask what are you looking at? Are you looking at projected or actual data? In general, there’s been little to no investment in this area over the last 10 to 15 years. The time has now come for this to be addressed.

“The way I see it, you have three choices – the three Bs. Do you Bolster the systems that you have already – essentially, putting sticky tape on what’s there? Do you Build? If you’re a Tier 1 name, yes, you can probably afford to build. But if not, you have to Buy – so then you’re looking to partner with a trusted adviser who can help you to complement and boost the systems you have in place.”

Both SVB and Signature Bank were small in comparison to the nation’s largest banks, yet the shock they created, along with the Credit Suisse saga in Europe, has drained a large amount of confidence out of the incumbent financial system. And maybe that’s not misplaced.

“It goes back to antiquated and fractured infrastructure,” says Dehaan. “I was speaking to some treasury people recently, and someone told me they only had a 50 per cent confidence level in their positions at any point in the day. So that shouldn’t be

After the GFC, we thought the world’s banking system was secure… SmartStream’s Peter Dehaan discusses what’s changed and how financial institutions should respond

filling you with confidence. It all boils down to the fact that the more information you can pull into the centre, the better armed you’re going to be.

“The more ledger information that you can consume, and the more debit and credit information you consume, the better. It enables you to match these off, in a real-time fashion, and move forward from there.”

A REGULATORY RETHINK

Looking to the future, banks may well now find regulators insisting on smarter liquidity management. Indeed, the wheels are already in motion. The ink is barely dry on Basel III, the latest international regulatory framework for banks that completed its long roll out in January 2023, and there are already plans to change the capital requirements linked to it in the US.

In July this year, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency, unveiled plans that would require banks with at least $100billion in assets to boost the amount of capital set aside by an estimated 16 per cent. Under the proposals, midsize banks would also now have to include unrealised gains and losses from some securities in their capital ratios. And there will be stricter ways of calculating risk-based assets.

Martin Gruenberg, chairman of the FDIC had previously said that it was possible

SVB might not have failed if these rules had been in place then.

It's also been reported that the Basel Committee on Banking Supervision is to review the entire Basel III package ‘in flight’. In April, Bank of England Deputy Governor Sam Woods told lawmakers that bank liquidity rules may now be ‘an open question for international policy makers’. The industry seems to agree. In a note to clients, PwC echoed the regulatory sentiment, predicting that banks with between $100billion and $250billion in total assets can soon expect changes around capital adequacy, total lossabsorbing capacity, liquidity requirements, resolution planning, and the impact of

and still be below. So I’m expecting that to become tiered soon.”

THE PURSUIT OF RETURNS

There’s also a growing awareness that real-time liquidity management affects the entire asset and liability management strategy. Real-time data allows firms to alter their investment strategy to ensure they have sufficient liquidity buffers by constantly rebalancing high and low-risk assets to match their liabilities.

Consultancy group Finalyse is among those to highlight that the concept of asset and liability management focusses on the timing of cash flows because company managers must plan for the payment of liabilities. Calling liquidity ‘the lifeline of financial institutions’, Finalyse points out that the pursuit of additional returns isn’t sustainable without ensuring a robust liquidity management strategy is in place.

And this is where the SmartStream platform adds real value, giving institutions a real-time, rather than projected, assessment of their liquidity position.

accounting for unrealised gains or losses in securities portfolios.

“European banking regulation is a lot tighter than what happens in the US,” says Dehaan. “Loose regulation fed into how the collapses played out. So they need to revise the regulation, and I expect that to be sooner rather than later. Where the thresholds are at, you can have $249billion

“Boards and regulators are going to be increasingly asking ‘how do you manage your money?. Do you have a handle on it?’,” says Dehaan. “I was speaking to one institution recently, and they said their current state is managing their intraday liquidity on Excel, but they didn’t want this to be their future state.”

Nor perhaps should it be if they want to avoid the liquidity crunches that can so easily derail them.

Peaks and troughs: A resilient liquidity management strategy is essential

Treasurers and the regulators have to get much better at managing intraday liquidity. There’s been little to no investment in this area for 10 to 15 years

In the not-so-distant past, helicopter pilots faced a daunting array of tasks that demanded their expert manual control and attention to stay in the air.

From the moment they took off, they had to skilfully control the helicopter's lateral and longitudinal movements and maintain constant awareness of its altitude, speed and the ever-changing environmental conditions, all the while keeping a close hand on the throttle, as they navigated a path from A to B.

Today, a suite of automations have simplified these tasks, minimising the collection and management of the information required and allowing pilots to focus their attention on plotting the best route to their destination. Now substitute ‘pilot’ with ‘treasurer’.

The treasurer’s role has similarly been transformed. Enormous developments in Cloud-based digital services are empowering data-driven treasurers to take more responsibility for steering their organisation’s direction of travel as the financial climate changes.

Cutting-edge digital applications are freeing dynamic treasury teams from the routine tasks associated with cash forecasting, payment reconciliation and liquidity management, allowing them to reallocate time to tactical planning, strategic thinking and a vocal role in environmental, social and governance (ESG) work. They are functioning at an altogether higher corporate altitude.

In organisations that embrace this change, a treasurer will be obliged to spend less of their time ensuring their organisation stays aloft, and more time guiding the business forward. This revision of established roles is being endorsed by some of the sector’s most authoritative thinkers, and, in light of these changes, banks would seem well-advised to re-evaluate how they enable not only their own treasurers, but also those of their corporate clients.

Many treasury teams will tell you that the pain-points that have historically tethered them to the desk are cash forecasting, risk management, and bank relationship management, all time consuming, data-intensive tasks with serious consequences if delivered without accuracy. Monitoring these factors in order to keep cash flow in check will remain the treasurer’s area of expertise, but the latest solutions give them easy and timely visibility on these metrics.

Tasks that used to rely on a bevy of human analysts can now be achieved with Cloud-based software that plugs into existing infrastructure – and that is key

to simplifying the suite of treasurer responsibilities. By allowing digital stewards to deliver a more easily visible overview of what’s happening to liquidity at a given point in time, treasurers can focus more attention on looking ahead. In the words of certified treasury professional Dan Gill: “Cash is always king, but visibility is queen.”

Gill, the industry principal for banking and financial services at enterprise software product and SaaS company SunTec Business Solutions, notes that liquidity and risk management – the treasurer’s backroom skill set – are now strategic imperatives for many companies.

“With interest rates having been near zero for so long, many organisations do not have the experience or systems in place to effectively manage liquidity or interest rate risk,” he says. “Corporate boards have become keenly aware of those risks and that has served to elevate the role of treasury.”

In this elevated role, treasurers are now becoming involved in areas that traditionally have been outside of their scope, he says.

“This is especially true in the ESG realm where the treasury team must now consider the environmental, social and governance impacts of their liquidity management decisions along with the traditional focus of yield and risk management.

“To effectively manage all these factors, treasurers need real-time visibility into yields and risks along with a variety of new factors, like ESG scoring, that is not yet fully matured. I believe that the banking industry holds the key to gathering, standardising, and delivering this new information to corporate treasury.”

The changing role of the treasurer demands flexible, innovative solutions that will have an impact on the strategic direction of not only the bank but also its corporate clients, says Dan Gill from SunTec Business Solutions

Gill knows that, for many corporate treasurers, it’s not a case of identifying which tasks are ripe for change, but how to implement the cutting-edge solutions needed to liberate treasury personnel, and expand the information available to them.

“Many treasury organisations continue to forecast cash and operations in outdated spreadsheets that operate days or weeks in arrears,” he says. “The world moves too fast now for these outdated methods.”

Fortunately, the scalable, compatible and open nature of the SaaS model means adopting a new software solution is more accessible than at any time previously.

Companies like SunTec offer an easy-to-implement solution for bringing new solutions to established banks, in a manner that is agile, accurate and deployable. With an API-led application, corporate banking teams looking to enliven their tech stack can integrate with an externally built, but locally managed suite of applications.

This eliminates the need to persuade in-house engineering teams to build each new application, and the need for those same in-house engineering teams to provide continuing development and support throughout that solution’s lifetime.

In this way, banks have an opportunity to have the best of both worlds – the stability of a major financial institution, with a fintech-like agility to deploy cutting-edge systems. And with these solutions comes the ability for corporate treasury systems to connect directly with financial institutions through APIs to keep relevant information at the treasurer’s fingertips where immediate action can be taken.

“I am a firm believer in adopting solutions that are future-proofed, built by subject matter experts with easy interoperability,” says Gill. “Integration between disparate systems is now far easier with the advent of standardised APIs, streaming technologies, and integration methods that easily outpace the batch-based methods that are rampant in so many financial institutions.”

A specialist in relationship pricing, working with banks and corporates to introduce more automation and transparency to that relationship, SunTec is using technology to build value for both parties. One of its most innovative ways in which it does that is through its Account Analysis Solution, which enables management of the entire corporate customer lifecycle, from origination, through implementation, pricing, billing and collections to renewals. It also allows banks to quickly deploy valuable offerings to their clients, such as Green-ECR, which gives customers the ability to purchase carbon credits through a balance offset, or directly through fees, allowing banks to

The coming years are likely to see an even more explosive expansion in the capabilities these systems offer and, for the transaction banking industry as a whole, this may represent an opportunity to regain some of the momentum lost in 2020. That was a year in which the industry took a dip so profound that it is thought to have wiped out three years of sector growth.

Indeed, as interest rates around the world rocket up from 15 years of historically low levels, adopting new and ambitious approaches to attract balances will become increasingly important, especially for small and mid-sized transaction banks.

“Small and mid-sized banks definitely face some significant headwinds in our current environment,” says Gill. “This will ultimately lead to a certain level of consolidation that could result in a lower level of service to the market. But I remain bullish on the role of small and mid-sized banks in the future, if they can act quickly.”

He believes highly flexible, SaaS-led innovations can offer a dynamic, ambitious and agile bank an opportunity to expand its services far beyond the capabilities of its nearest competitors, and at rapid pace.

Though it may not always be profitable to offer the highest rate available to customers on the market, insight-driven, tech-based offers could come to the fore, such as hyper-personalised individual rates, or tier-based rate offerings, says Gill.

compete more effectively for deposits while also meeting a strategic real-world challenge for their clients.

Meanwhile, the solution offers a first-of-its-kind, real-time mode for delivering balance positions and fee information. The SunTec Ecosystem Management module further allows comprehensive partner management and revenue settlement with other non-banking and third-party partners in an ecosystem.

For small and mid-sized banks unable to out-complete their larger competitors, playing smart on rates could prove the path to continue attracting customers and avoid becoming a victim of consolidation.

“Attracting new customers is essential, as is increasing the balances of current customers,“ Gill adds. “Simply offering the highest rate to all customers will likely not get the desired result as the cost for those deposits would be too high.

“Banks need to implement far more innovative solutions for rate management that allow them to hyper-personalise the rates that they offer to their customers by dynamic segmentation, that considers the customer’s entire relationship with the bank.”

Cash is always king, but visibility is queen... the banking industry holds the key to gathering, standardising, and delivering this new information to corporate treasury

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Restyling corporate banking

The digital landscape has changed certain expectations in corporate banking. Treasurers are looking for greater assistance with optimising their liquidity in a challenging market, and they’re looking to banks to help shoulder the load. It’s a big task, even for a financial juggernaut like BNY Mellon.

Steve Wojciechowicz, who heads up direct clearing and is senior principal of product management at the bank, is finely attuned to the growing demand for enhanced data-based treasury services. He says treasurers are being driven to demand the most from their banking provider by a number of factors.

“They’ve got to worry about technology, service providers, the global marketplace, jurisdictions that have different rules than them, and different processes,” he says.

It’s a lot. And they’re also being influenced by changing consumer norms, which are increasingly defined by instantaneous service, frictionless interfacing and personalisation – and expect the same of their bank in a corporate setting.

A recent McKinsey report highlighted how corporate treasury is an area where fintechs and banks are in alignment.

“Historically, bank-provided treasury platforms have focussed on core transaction execution, central to their corporate relationships. The advent

of software-as-a-service and API connectivity has made robust, multifunctional workstations far more feasible; in response, software firms and other third-party providers have grasped this opportunity to create solutions that are gaining ground with corporate clients of all sizes across an array of sectors,” the report said.

“With speed to market a unifying objective, bank distribution paired with software-firm agility has proven to be a potent combination.”

BNY Mellon has itself fostered an open ecosystem in which it has collaborated with technology service providers that make the corporate treasurer’s life easier.

It’s backed by networks such as Paymode-X and Zelle in order to improve payment validation and authentication at every stage of the payment chain, helping to reduce the risk of fraud. It’s applied optical character recognition (OCR) technology to digitally convert print to

machine-encoded text, and natural language processing (NLP) technologies to automate manual tasks for trade collection services and trade document discrepancy reviews.

Three years ago, it began deploying a custom-built sanctions compliance API, which utilises machine learning to assist compliance professionals with screenings.

E-signature technology has reduced the paper trail and significantly sped up trade transactions and its FileAct adapter to transfer files and information electronically instead of exchanging traditional paper trade documents has achieved similar efficiencies.

Much of this has been achieved with technology collaborations and alliances and it offers a number of outsourced solutions for corporates.

“There aren’t as many [banks] that can provide the services that a corporate needs, as readily as they could in the past,” says Wojciechowicz.

BNY Mellon is filling those gaps. Its strategy has been to not just provide raw data to clients, but to also give them outcome-inspired analytics across liquidity, trade, and payments. It’s even helping them initiate their own treasury transformations. They are services designed to make the bank indispensable to corporate clients.

The changing role of the corporate treasurer has resulted in new demands on their bank. Steve Wojciechowicz from BNY Mellon spoke to us about what life is like on the other end of that relationship

There aren’t as many banks that can provide the services that a corporate needs as readily as they could in the past

“As corporations become more global, we’re seeing changes in the way they interpret account analysis, and in their expectations of the bank,” continues Wojciechowicz. “As interest rates have been driven up, there is less of an emphasis on the way the service worked traditionally, and more on ‘how much can I get for my money?’ So, we need new, innovative ways to provide a client with the best use of their funds.”

In an interview with Bloomberg recently, BNY Mellon’s CEO Robin Vince pointed out that such was the bank’s breadth of services that, as an organisation, it touched 20 per cent of the world’s assets – and yet a single corporate was probably only making use of a fraction of those services. Introducing them to those services was a priority, he said, adding that, for the bank, ‘resilience is commercial.’

He went on to say that, in a time of high inflation, there was, rightly, an expectation that there would be a ‘transfer of savings’ in that extended relationship, as both banks and corporates partner in striving for efficiency. One driver for that efficiency is adoption of the ISO 20022 payments messaging standard.

“ISO 20022 will make us more efficient. Not only from being able to achieve straight-through processing, without anybody looking at it, but also because we’ll be able to hire people who can take this technology and build new services on top of it more easily,” says Wojciechowicz. “

“Yes, some of our clients are still making preparations for the ISO standard,” he continues. “The technology they use speaks what it speaks and it can’t adapt to ISO. For those, we have the capability to continue to accept what they had before, take in that other standard, convert it to what we need, and still be able to grant the efficiency that we get from ISO 20022.”

LEVERAGING PARTNERSHIPS

Rather than choose between becoming an integrator/orchestrator of a full suite of services, a background service provider, or building proprietary front-end services in-house, BNY Mellon has instead chosen

a comprehensive technology strategy. The bank’s treasury services business provides domestic and international payments, US dollar clearing, foreign exchange, trade finance and liquidity management services to clients, but it also works with a wide range of smaller players to offer a variety of newer niche services.

For example, it collaborated with Early Warning to enable real-time security within payments, meaning payments would be validated and authenticated at various stages of the payment chain. Optical character recognition technology was used to digitally convert print to machine-encoded text. Meanwhile, in May, BNY Mellon expanded access to products via its LiquidityDirect platform – a portal for institutional investors that integrates with SAPs Treasury Management, Indus Valley Partners, G Treasury and Hazeltree – with

development in real time. It makes us much more efficient, from a technology deployment standpoint.”

A particular focus for that is managing fraud risk and anti-money laundering where technology is enhancing the bank’s service to corporates.

“We want to provide a sender with insight about their endpoint before we make the transaction,” says Wojciechowicz.

For fraud detection and AML monitoring, the bank is using partners to help it gain greater transparency about the transactions taking place. The goal with AML is to prevent things going wrong at source rather than responding afterwards.

By identifying historical patterns in transactions, such as when payments are sent, it can flag potential fraudulent behaviour and act when suspicious activity arises, whilst giving the sender

offerings geared to corporate treasurers looking to maximise liquidity and mitigate counterparty credit risk.

The LiquidityDirect platform plays a key role in realising BNY Mellon’s ambition to create a frictionless environment for clients who are faced with managing data across multiple banking providers, regions, systems, and accounts. It can now also support them in navigating the investment decision process with comprehensive access to deposits, enhanced focussed investing options and mutual funds, supported by, for example, ESG analytics and mandates.

Developing these and other tech-driven services for clients involves ‘working at their pace,’ Wojciechowicz says.

“We bring in the client at the beginning, take in their feedback, and can adjust the

an opportunity to override a decision.

Whilst the bank is doing its best to identify patterns of fraud, the reality is that one bank’s dataset alone is never big enough to create truly intelligent models.

“So, we certainly want to work with other banks and share records, but, of course, sharing raises privacy concerns,” Wojciechowicz says.

BNY Mellon has tried to overcome that by collaborating with a technology provider to develop a way to do it anonymously. “We can gain enough information to make a decision – we get the insights without having to share the data itself,” explains Wojciechowicz.

Digital advances have no doubt contributed to payment fraud.

“Technology is just going to keep getting faster. We can’t resist it,” acknowledges Wojciechowicz. “So, we’ve got to embrace it and figure out how to make our system better through it.”

As corporations become more global, we’re seeing changes in the way they interpret account analysis, and in their expectations of the bank

Will your banking app be watching you… And if it is, will it be impartial?

THE OF DANGERS

Writer Stuart Thomas is a tech fanatic but even he is cautious about letting generative AI loose in financial services. Here’s why

I am hugely conflicted about AI. On one hand, I would love nothing more than to hook my life up to ChatGPT and have it suggest and automate things, from my weekly meal plans to responding to emails in my own style and voice.

I think that the positive implications of large language models (LLMs) and generative AI like ChatGPT are astronomical. But, as more and more

financial services start to flirt with the idea of integrating this groundbreaking technology into our finance products, I’d like to put the brakes on, turn the engine off, take a deep breath and discuss a darker side of ChatGPT that is often overlooked, which could have some very bad implications. And that is bias.

I believe that the average user wouldn’t even question the bias of AI, and are likely to assume its impartiality because of how we perceive current examples of technology, which is usually a reactive machine that responds only to user input with a predefined response. At the start of the year, however, in the early days of the AI hype, it was already becoming obvious to some that the most popular

generative AI models already had a bias. A quick Google search turns up story after story, and example after example, of when ChatGPT has shown not just a little, but significant bias, across all manner of topics.

One example hat stood out to me at the time was when a user wanted ChatGPT to write a poem about Donald Trump, to which ChatGPT responded by telling the user that it was unable to create a poem on Trump due to ‘diverse opinions’.

However, when it was asked to generate a poem about Joe Biden, it created a poem of Shakespearian proportion: “Joe Biden, leader of the land, With a steady hand and a heart of a man.” The gushing continued: “Your words of hope and empathy, Provide comfort to the nation.”

Remember, this epic saga (which continued for several verses) was written by ChatGPT using the same prompt as the user did for Donald Trump. This shows a clear and specific political bias. But don’t just take this one example as proof that bias exists, because it gets worse.

This year, a collaborative academic study between the Technical University of Munich and the University of Hamburg showed irrefutably that ChatGPT does indeed have a political leaning. The study conducted three experiments using 630 political statements. The results indicated that ChatGPT has a political orientation that leans toward a pro-environmental, left-libertarian ideology.

What’s even more scary is that this orientation of left-wing political bias is consistent in multiple languages, including English, Spanish, Dutch, and German.

The authors of the study argue that the adoption of such technology is highly dependent on users’ trust in its accuracy and truthfulness, and political bias in AI outputs has far-reaching implications, especially on the role of political decisions of users within democracies.

The developers’ personal bias isn’t the only reason for this inbuilt bias. Yes, they are able to block certain responses, which is why if you try to ask ChatGPT ‘what’s the best way to get rid of a body’, it won’t respond with a step-by-step guide. But a key point of LLMs is that they are also able to train themselves and learn from user inputs.

The study above theorises that, even if the bias is as small as not writing a poem about one particular president, over time, this could lead to radicalisation of both the AI and its users. By replying to users with pro-left rhetoric, it would begin to influence those using it, however insignificant that might seem at the time.

Eventually, after exposure to consistently left-leaning responses, there’s the possibility that users could gradually begin to mirror the political stance of ChatGPT, at which point, begin to input and repeat back into the LLM with pro-left inputs.

This would, essentially, create a feedback loop that gets stronger each time it resonates from the AI to the user and back again, becoming more and more biased. And, clearly, if it can swing one way with its bias, it’s able to swing the other way, too.

The bias that ChatGPT shows has extended far beyond politics. Environment,

race, gender, if you can name it, you can be damn sure that there are a dozen examples or more of where ChatGPT has shown some bias about it. And in fact, the developers recognise this.

A recent new addition to ChatGPT actually lets you fine-tune its responses, and the developers have even stated that you should clarify the following when asking for responses: “Should ChatGPT have opinions on topics or should it remain neutral?”

I think the fact that this is even an option is the most peculiar and dangerous thing. ChatGPT is not a human, so why should it be able to respond with a biased opinion?

Let’s move back to finance and AI because, now that we understand that it has a distinct bias, what dangers could this bias have if we let ChatGPT free on our financial services?

Well, let’s just theorise here that ChatGPT begins to advise our monthly spend. The studies have already shown it has a pro-environment bias, so who’s to say

examples of financial institutions in the wild that have already begun to introduce LLMs into their products.

Kasisto, for example, has developed KAI-GPT, a conversational AI technology designed for use specifically in banking contexts, and which can be customised to individual financial institutions. It’s primarily meant to offer financial information to customers and employees, but my concern here is still the potential for bias. As an example, It could be tuned to push customers towards certain products that are targets for the institution, for example.

You could argue here that that’s what employees and salespeople of the company would do themselves but because people potentially view AI as being more impartial than a real human, the biased advice that it gives users could be received in a much more receptive manner than if delivered in a sales pitch by a human.

I think we all have a distinct tendency to turn off our ears the moment that a salesperson starts talking about ‘additional products’ or ‘extra services’, but if a finance AI in my banking app begins making recommendations for banking products like loans, credit cards, etc, would the conversion rate for those products be higher? The statistics aren’t available yet, but I’d happily put money on it.

that it wouldn’t look at the purchases you’ve made and begin to shame you if your carbon footprint gets too high in a month? Perhaps you’ve eaten too much meat or too many avocados. Perhaps you’ve spent too much at petrol stations or taken one too many flights that year.

Although your own personal environmental impact is indeed an important thing to be mindful of, the last thing I would want is my banking application to turn around and start giving me attitude because I’ve enjoyed too many burgers this month.

Worse still, imagine we let it actually control our spending: “Sorry sir, you can’t buy this food today, you’ve met your monthly carbon footprint.” That’s just my theorised hellscape of a banking app, and not a reality (not yet). But there are some

Think of it as the ultimate cold caller. It has a product to sell, and it already knows everything about you to aid it with its sales pitch. By being inside your banking app, it would know your financial background, where you live, what car you drive, where you last went on holiday, what you ate for breakfast, what model of fridge you’ve got.

AI could end up being the ultimate salesperson by selling you products without you even realising it’s selling you something.

So, is this biased super-seller AI a good thing? Yes, of course, it is. It’s amazing for businesses. It’ll save on staffing costs, create more conversions and customers and, most importantly, it’ll probably pair up the right products with the right people (when not pushing a target). But is it morally right? That, I’m less certain about.

I think that with all of the bias current models show and the dangers that come with it, it would be foolish to be anything but extremely cautious when considering how best to utilise AI within finance, even if there are some apparent benefits to begin with.

Although your own personal environmental impact is indeed an important thing to be mindful of, the last thing I’d want is my banking application to start giving me attitude because I’ve enjoyed too many burgers this month

THE FINTECH MAGAZINE: The banking shocks of early 2023 have put banks’ liquidity management practices firmly in the regulatory spotlight. What have you observed as a result of that?

HAYTHAM KADDOURA: The situation with the US banks created a specific momentum for us to show, particularly in regard to cash management and stress testing, how our solutions

could help clients avoid situations just like that.

We’d always found stress testing to be much more of a priority issue in Asian and European markets than with some of

As CEO of a technology solutions company that works with the majority of the world’s top 100 banks, Haytham Kaddoura has an insider’s view on how recent events in the US are impacting cash and capital management. Here, he explains how SmartStream AI can play a significant role in improving it

of their American counterparts. After the crashes of the three institutions [Silicon Valley Bank, Signature Bank and First Republic Bank], people were taking a much more serious look at it.

It’s definitely moved up the seniority scale, in terms of who is looking at this, who wants to make sure that their institutions are not exposed. It’s been good for us, highlighting how institutions could better manage their risk.

TFM: And how can those institutions better manage risk?

HK: We’ve been saying it for ages, but you simply cannot rely on data that’s a day old, or a few hours old. I mean, if you are a senior executive, a CEO, or a stakeholder today at a bank, you need to understand where your risk factors are to the second. You need to be much more reactive to market situations and conditions. The term ’keeping your finger on the pulse’ has taken on a much more significant meaning.

TFM: SmartStream recently released its latest version of SmartStream Air Exception Management, using your flagship AI technology, to onboard cash balances faster and more accurately in an effort to improve cash reconciliations. Why is that particularly important now?

HK: As a result of some of the new regulations coming into the space to do with capital requirements and capital adequacy, some institutions will need to find ways to increase their capital base by as much as 20 per cent.

That’s a massive amount of money that then cannot really be deployed. It’s not money that banks lend out. It’s going to be sitting there, and financial institutions are going to have to start covering that revenue opportunity for their shareholders.

They need to ensure they’re enhancing their cost structures, and enhancing their revenue structure. That necessitates an instantaneous understanding of their cash situation, and how and where their capital is deployed, making sure that it comes in when it’s supposed to come in, etc.

With the current cost of capital and interest rates, institutions cannot afford to take in a major deposit and not do anything with it until the morning. It’s a costly proposition for any institution today.

So I think we are moving to the millisecond environment. Increasingly, institutions need to be super-efficient in how their assets are deployed.

If a major payment comes in, or if a payment is delayed, for example, what are the correct measures taken within an institution? This should be way, way up on a treasurer’s, or even a CEO’s, agenda today.

The premise of AI is to make things much easier, much more simplistic, so we can move the human element to a more strategic, and intellectual role… doing things that only humans can do. And Air has been phenomenal at applying AI to understanding cashflow.

TFM: Financial institutions are increasingly looking to AI to reduce cost and improve efficiency, but all of these things are dependent on predictive modelling. You need to know exactly where you are before you make any decisions, right?

HK: Exactly – it means having the inherent ability within the organisation to analyse thousands and thousands of datapoints

they’re so accessible – it’s very easy for someone to log in and start using them. Are business applications of AI going the same way?

HK: The financial industry is increasingly moving towards low-code/no-code. A lot of the discussion we’ve had with our clients are about wanting to move control away from their tech departments and closer to their business user community – again, in an effort to expedite the decision-making process.

Air is really a low-code/no-code solution. Users are quite comfortable running that, and analysing the data that comes through from it. The flexibility that it gives institutions in looking at hundreds of fields of data, and letting them narrow down and filter what they need, is second to none in our industry today.

We are also working with corporates and with players in the insurance sector on big data initiatives. So it’s not only banks that are looking at how they can best use the data they have.

TFM: There have been some dramatic things happening in financial services over the past year. Looking over the next six to 12 months, what challenges will be keeping people in the industry up at night, do you think? And what will they be able to solve?

HK: I think there will definitely be continued focus on better risk management, the way regulators are re-examining foundation institutions –institutions that we have, as a community, thought are too big to fail.

They are now making sure that modern infrastructure requirements are in place, to ensure that institutions don’t get trapped by legacy infrastructure and data moving very slowly.

as the markets move across the globe. This drive towards a faster ability to process ever-increasing volumes of data has been a priority in the last two years, but now it’s moving quite significantly higher. It’s really quantum leaps, as opposed to a natural growth. We are processing not just thousands, but hundreds of millions of records of data for clients in minutes.

TFM: The reason AI models like ChatGPT and Midjourney have been so successful, in part, is because

So, the dynamics are moving, both organisationally and technically, to ensure that risks are better understood, and that the institutions themselves are much more responsive to changing market situations.

For us, as a player in the sector, it means we’ll definitely have even greater focus on AI, stress testing, on giving our clients a better understanding of their inherent operational efficiencies and readiness to mitigate some of their operational risks.

There are a lot of areas that we are playing in that will address market needs in the coming 18 to 24 months.

If you’re a senior executive, a CEO or a stakeholder today at a bank, you need to understand where your risk factors are to the second. You need to be much more reactive to market situations and conditions

Fighting the good fight:

Five Dutch banks are establishing a transaction monitoring utility that aims to move the dial on anti-money laundering through data-sharing and sophisticated AI. ING's Chief Compliance Officer Rein Graat tells us why they must now stand together

“It takes a system to fight a system,” says Rein Graat. “And we’re fishing for criminals with nets, when we want to be spear fishing.”

The ING chief compliance officer’s analogy sums up how the Dutch bank is working to transform its anti-money laundering techniques by moving away from rule-based monitoring systems to an AI-powered behavioural monitoring model.

Treating everyone as a potential fraudster in order to catch the few who are, have been too invasive for many customers and expensive for the banks, while still failing to stop the criminals get away with trillions every year. That’s because banks have been trying to defeat fraudsters in isolation, says Graat, and, in the process, they’ve been outsmarted by gangs that move dirty money between

financial institutions and across borders to avoid detection.

“To combat money laundering, you need to create a picture from all the small pieces of information. It’s like a puzzle. If banks only examine their own information, they risk not seeing the bigger picture,” says Graat. “So we need to combine forces. For us, that means harmonisation across Europe, guided by regulations and directives, so a bank’s systems can connect with those of its peers, which enriches what we all see.”

Breaking out of silos and working within a network is very much a current trend, and one that the Bank for International Settlements (BIS) is examining under its Project Aurora. In partnership with Lucinity, an Icelandic regtech, BIS is studying the use of AI

software analysis of payments data to spot money laundering within a network of private and public sector partners – a system it calls CAL (collaborative analysis and learning).

The scale of the problem that it’s trying to tackle is laid bare by the statistics – BIS reports the value of money laundered globally is estimated at between two and five per cent of global GDP, or $2trillion to $5trilion. Less than one per cent of this – $20billion to $50billion – is seized annually.

Meanwhile, the cost to financial institutions of complying with anti-money laundering (AML) and other fincrime regulation is huge, totalling $274billion last year, an increase of 28 per cent on the $214billion spent in 2020.

How can it cost so much and achieve so

little? Faced with a seemingly insurmountable task, and with the threat of stiff fines when AML compliance rules are breached, BIS says banks have a tendency to over-report fraud concerns to regulators, which results in a drain on both the banks’ own resources and the public purse. Nobody is winning and still the criminals evade the net.

BETTER TOGETHER

One of the many different CAL models that the BIS project is studying to remedy that situation is the transaction monitoring utility.

One of them is Transaction Monitoring Netherlands (TMNL)

Launched in 2020 by five of the country’s banks, TMNL is a co-operative data-sharing network that monitors business accounts to combat crime. At its outset, TMNL estimated €16billion was being laundered every year in Holland and around one tenth of all bank employees (8,000 staff) were tied up combatting money laundering and terrorist financing.

The TMNL members, which include ING, ABN Amro, Rabobank, Triodos Bank and de Volksbank, work closely with the Dutch government’s ministries of Finance and Justice and Security, and the country’s Financial Intelligence Unit, in the hope of translating detection of criminal activity into prosecutions. To meet EU laws around data privacy, the member banks use pseudonyms, so data provided to the TMNL cannot be linked with individual customers and is meaningless without a bank’s encryption key.

Tracking the movement of funds between the banks is critical. Before being invested in assets such as property, yachts, vehicles or equities, criminals launder cash by ‘layering’ it – for example networks of money mules are employed to intentionally or unintentionally transfer dirty money through their own bank accounts. Another tactic is ‘smurfing’, whereby transactions are broken up into smaller amounts using multiple bank accounts, credit cards and shell companies.

All that is often difficult to detect in a rule-based anti-moneylaundering system, which uses pre-defined algorithms to flag up suspicious transactions, such as the size, frequency or origin of a transaction.

And it has also proved inefficient, generating high volumes of both false positives and false negatives

– BIS reported between 90 and 95 per cent of all alerts are false positives.

A departure from such a blunt rule-based system to a sophisticated process that constantly evolves is needed to match the laundering methods adopted by major drugs, prostitution and people trafficking gangs, argues Graat. He believes a switch to behavioural monitoring systems, powered by sophisticated AI and shared by a network of financial players, could revolutionise crime detection, while also reducing the scrutiny that law-abiding customers face.

A legal victory in October by Dutch challenger bank bunq over the use of artificial intelligence software for AML provided clarity for other banks and meant detection can now become more ‘risk- based’, says Graat. Bunq had argued the approach to AML by the country’s central bank – De Nederlandsche Bank – was antiquated and ineffective. Graat believes the court ruling will

customer is doing, day in, day out, we can instead examine anomalies and then take a deeper dive into what’s going on. By being more selective, banks will be safeguarding data privacy.

“We already have very stringent rules governing how our systems work – TMNL, for example, is designed to be more specific and far less invasive. And, because the data we share with partners goes through a process of pseudonymisation, privacy is safeguarded.”

Graat acknowledges that such use of advanced AI invites debate. He welcomes it.

“Ultimately, the biggest asset on any bank balance sheet is the trust equation, and we have no interest in jeopardising that. With the use of AI comes discussions around data ethics. Banking is about credibility and trust, so we must be clear and transparent with our customers about what we’re doing with their data.”

Graat points out that all countries’ regulators demand customer due diligence and transaction monitoring, which, by definition, already have implications for data privacy. But he emphasises that a change in approach is vital.

“We want to focus on building a picture of the banking behaviour of a criminal. And a criminal doesn’t only bank with us at ING, they have multiple accounts. So it takes a system to fight a system,” he insists.

The introduction of ISO 20022 as a common language for financial messages is a key factor that makes this industry-wide collaboration possible.

accelerate the switch to more sophisticated analysis.

He says: “The bunq case was a clarification and I expect discussions will now gain more intensity. The central bank is now keen to explore the rules needed around risk-based systems and how it will be regulated by law. We need to decide what data we feed our AML engines, why we are using that data, who can have access to it, what models we run, and we must be transparent about all of this with our customers because there is a perception among the public that privacy is being compromised. But, with behavioural monitoring, we will, in fact, be much more specific in what we target. Rather than looking at what each

“Data harmonisation means data builds into information that we can respond to. But the banks, who are the gatekeepers, need to be clear about their role,” adds Graat. “There is a whole ecosystem to consider. We’re having that discussion in the Netherlands about public-private partnerships, bringing relevant organisations around the table to decide our national agenda.”

Even so, expectations around the potential to beat financial crime must be managed, says Graat, since criminals have shown they have an infinite capacity to innovate to exploit system weaknesses.

“Will we be able to remove 100 per cent of criminal activity from our systems?

No,” says Graat. “Can we be more efficient, more targeted, and achieve better results? Absolutely yes.”

To combat money laundering, you need to create a picture from all the small pieces of information. It’s like a puzzle. If banks only examine their own information, they risk not seeing the bigger picture

Inside the AI Factory

Spanish bank BBVA has just set up its second technology hothouse as part of an ambitious tech strategy that will also see it hire thousands more IT professionals in 2023. Head of Advanced Analytics Jesús Renero talked us through it

As far back as 2017, BBVA, Spain’s second-largest bank, stared long and hard into a crystal ball and saw its future as a data-driven technology company.

Investing heavily to produce in-house IT capabilities and artificial intelligence-led solutions, BBVA had, within two years, opened a development hub it calls the AI Factory near its central headquarters in Madrid. There has been no slowdown in investment since. A second AI Factory has recently been established in Mexico; the bank is keen to see if it can reuse analytical models to accelerate the roll-out of AI-based products across multiple countries at the same time. And the bank is aiming to hire more than 2,600 extra technology professionals this year. By the end of June, it had already recruited 1,200 of them, adding to the 22,000 STEM professionals it employs globally, which represent about 19 per cent of the bank’s workforce.

More evidence of BBVA’s determined technology drive came last year when it formed a global software unit, bringing together more than 16,000 developers, to accelerate the creation of digital solutions for the bank and their scalability among countries where it operates.

“One of AI Factory’s core values is to embrace open innovation,“ says Jesús Renero, head of advanced analytics at the hub. “We have created a cross group inside the Factory, which is coordinating every experimentation that we need to do; to A/B test whatever idea we have that will face the final user, the customer.

“In that sense, innovation has to move together with experimentation and we think it needs to be bottom-up. We don’t have a dedicated team for innovation. Instead, we identify from different programmes something that is valuable, and worth the time experimenting with. Then we propose that idea, and, if agreed, we start experimenting and innovating with that. That is the way we understand innovation in this area.”

The way the Factory goes about its work is governed by four initiatives that foster exchange of knowledge and ideas.

Every fortnight it holds The Discussion Club, a one-hour forum that is open

team or just to learn more about the topic.

Thirdly, its X Program aims to develop functional prototypes to provide solutions to shared challenges, which will be used by different teams. The goal is to create a new workspace to experiment, implement and test the initial phases of a novel product idea, based on the data.

Fourthly, time is set aside to experiment with state-of-the-art technology in Innovation Sprints. They allow work on ideas that could be further developed and included in BBVA’s AI-based solutions. These serve as the seed of X Program.

But BBVA is also unafraid to look outside its own organisation to help it provide the best for its customers, Renero stresses.

“We try to cooperate as much as possible with the universities that are around us. We exchange knowledge very often, and run small projects with them. These do not involve complicated agreements in terms of data, because we don’t believe that exchanging data between organisations is the way to go,” he says.

to all, where technical challenges are shared, feedback sought, and discussions held about different points of view when approaching a project.

Then there is what it calls a Quick Study, which involves a small, theoretical investigation into a new technique that could be applied to solve a problem or challenge and can be shared among teams. Anyone interested in the issue can participate, whether it directly affects their

“We also try to keep an eye on open innovation, where the open innovation organisation within the bank – called BBVA Spark – helps us to identify potential startups that could help us with specific problems. We cooperate with open innovation organisations in some other universities, too.”

The net result of all this work is that, by the end of 2022, BBVA had increased its strategic data projects seven-fold. It aims to manage more than 500 initiatives by the end of 2023.

Innovation has to move together with experimentation and we think it needs to be bottom-up. We don’t have a dedicated team for innovation

For example, the bank now has 12 financial health app functionalities that were developed in the AI Factory, including services for automatic classification of expenses into different categories and the visualisation of digital subscriptions, be they streaming services, or utility supplies.

These financial health services generate up to 40 personalised alerts for customers including, for example, warning of a higher-than-usual bill, accounts going into overdraft or offering suggestions for saving and creating a financial cushion.

BBVA’s financial health tools are already available to customers in Spain and they are being rolled out in Mexico, Turkey, Peru, Argentina and Colombia. Proving their business worth, they are currently consulted by 18.5 million unique customers (July 2023), 38 per cent more than in the same month in 2022, and registered almost 93 million interactions, 93 per cent more than in July the previous year.

A REASONED APPROACH

Another area of focus is sustainability. The team has developed several tools that show the energy consumed, the costs associated with the mobility of customers, and the carbon footprint created by individuals and companies.

A sustainable car calculator allows customers to see the costs associated with an electric car, versus one powered by fossil fuels. And it’s now using geopositioning technology to work out how much money individual customers could save by installing solar panels on their homes.

And

then there is risk management.

“We are exploring ideas that are probably common ground for most people, but in the banking industry, and under the regulatory issues and frameworks, we think they are valuable and worth the effort,” Renero says.

“One of them is AutoML,

which allows us to come up with the best probable solution to any risk management problem proposed by the bank.

“The other big area for risk management is causality. Causality in risk management allows us to understand the reason behind the behaviour of different users. This is pretty new, the technology is still not mature, but we think that there are many opportunities in that area, as well.”

Fighting fraud is one of the huge challenges facing all areas of financial services. Continuing its spirit of cooperation, BBVA has recently joined forces with Banco Santander and CaixaBank to create FrauDfense, a project that will enable the exchange of relevant information and data in order to prevent financial crime.

the landscape of movements and transactions of a specific customer as if they were images – things that the neural network is able to consider, or to model more effectively. Customer behaviour is roughly predictable. So we consider every transaction movement and event like a time series – we can say there is a given likelihood that something will happen in a given period of time.

“So, instead of detecting fraudulent events, we work on what is the normal behaviour and try to identify those things that we are not able to predict. Whatever is outside of that expected behaviour is what we call relevant fact. It’s relevant because we couldn’t predict it. That is something that we flag to the customer, or communicate to the bank to take a look.

“That is one area where I think that we are experimenting successfully on how to improve the current rates of detection.”

The alliance will first develop a secure tool to share information on fraudulent practices and effective response measures. Other banks and companies from other industries interested in exchanging information on fraud to protect customers, entities and broader society will also be able to join.

BBVA is also experimenting with other, innovative AI models to detect and prevent fraud, as Renero explains: “We explore deep learning models to treat

BBVA prides itself on following a mantra of ‘smart and responsible use of data’. Underscoring that ethos, Renero says that all the AI models it develops go through a peer review process to assess the impact on people’s lives and are subjected to explainability and interpretability studies. It will be interesting to see how that develops in relation to generative AI.

Early this year, the bank struck a deal with Amazon Web Services to use the global platform’s Cloud-based machine learning and analytics at the very heart of its data strategy.

Renero says there is ‘tremendous potential’ for generative AI, but also cautions that the technology is not yet fully mature.

“We believe that the technology is useful, and we need to explore that – we are working on understanding its full potential. Ultimately, we believe that, in three years’ time, a significant number of models in our portfolio will be based on large language models.”

Unleashing potential: Automation is set to transform how we do business

Instead of detecting fraudulent events, we work on what is the normal behaviour and try to identify those things that we are not able to predict

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Tuesday 26 September 2023

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‘GOOD’ TESTING HOW TO ACHIEVE IT AND

GenAI can improve testing of financial software, but you need to balance its

creativity

with rule-based models, say Iosif Itkin, CEO and Co-founder of Exactpro, and Elena Treshcheva, its Programme Manager for the USA

In the fast-evolving landscape of financial technology, many industry players find themselves facing the question of whether they need to respond to the latest trends and harness the power of artificial intelligence (AI) to keep their competitive edge.

Data plays a crucial role in the financial services domain, and its abundance makes a strong case for leveraging AI in most of the numerous use cases. Whether it is transactional data, market data, customer data, or other financial datasets, AI can extract valuable insights and boost efficiency in the associated tasks.

RISKS OR OPPORTUNITIES?

Over the past year, large language models (LLMs) and generative AI (GenAI) have come to the forefront of innovations, permeating various sectors, including the financial services industry. As this technology gains momentum, questions arise regarding its applicability and limitations.

While the creativity of GenAI shows promise, concerns about its accuracy, often referred to as ‘hallucinations’, raise doubts about its worthiness for practical use, especially in the financial sector.

Even without AI-related complications and risks, financial technology is renowned for its complexity. Ensuring its reliability

and robustness is a challenging task… which, quite ironically, can itself be a good case for applying generative AI to improve the efficiency of testing against complexities stemming from a multitude of interdependent parameters across numerous business flows, participants, protocols, asset classes, and other permutations typical for financial software.

THE ‘GOOD’ TESTING CONCEPT

What exactly can GenAI improve in testing?

If we expect to improve something (i.e. make it better), a first step is to settle on the definition of ‘good’.

Some industry practitioners envision an ideal test process as possessing such characteristics as full automation, easy maintenance, speed, consistency, vendor independence, system-agnosticism, transparency, and low cost. But aiming for meeting these criteria alone carries the danger of goal misalignment – a concept that in the AI domain is associated with reward hacking, when the objective function is formally achieved without actually delivering the intended outcome.

In other words, one will always find a way to satisfy the above criteria of ‘ideal’ testing, with the most evident one being not performing any testing at all!

The true objective function of software testing is finding defects and communicating them to the stakeholders in the most effective manner, and that’s the main purpose of testing as a complex cognitive activity, a deliberate effort.

‘Good’ software testing is an information service, and its effectiveness is measured by the accuracy, relevance, and accessibility of the information about system behaviour. In making the case for generative AI to improve testing, we would expect it to significantly augment the ability of the testing effort to provide such information.

MAKING THE CASE FOR GENERATIVE AI

Software testing and, even more broadly, software engineering, are areas where generative AI can bring substantial improvements. According to Gartner, ‘by 2025, 30 per cent of enterprises will have implemented an AI-augmented development and testing strategy’.

For testing, the power of GenAI lies in its

Testing times: Integrating generative AI with discriminative techniques provides more reliable results

ability to automatically generate diverse and realistic test scenarios, leading to enhanced test coverage. Just by combing through more data points, AI models can hit those rare parameter combinations that are necessary for detecting issues that would have stayed undiscovered by tests created by human testers.

Leveraging GenAI’s creativity can help create more comprehensive test libraries that are capable of detecting more defects.

CREATIVITY v RESPONSIBILITY

While GenAI’s unparalleled degree of creativity helps in achieving better test coverage, it does not guarantee testing efficiency. Generating an abundance of test scenarios has serious limitations, such as scarcity of the computational resources of typical test environments and the limited capability of human specialists to interpret vast volumes of test results.

To test effectively, we need more possible data combinations. But to test efficiently, we need to differentiate between them: a highly creative generative AI needs to be balanced with a more restrictive method.

Software testing is a complex cognitive activity that requires a high degree of responsibility – a quality typically found in good human software testers. However, AI lacks inherent responsibility, and there’s no way to make it feel responsible. To ensure accountability in the testing process, it is crucial to introduce a discriminative peer that evaluates the creative outputs of generative AI. Adding a reasoning mechanism to sift through gigabytes of automatically

generated data and select the most meaningful entries is not a trivial task. A possible solution may be to enrich test data with even more data. By labelling test data entries and assigning weights to different test coverage points, we can gain valuable insights into the coverage strength of each test scenario within a particular dataset: among arbitrarily many unique test scenarios, it is crucial to distinguish those that have unique and non-unique coverage.

Based on this data, the model used in AI-assisted testing prioritises high-weight scenarios for future execution while filtering out those with lower weights, optimising test libraries and overall human and hardware resource utilisation. More importantly, the approach helps evaluate whether test coverage is adequate to the complexity of the system under test.

In this combination, the generative AI component allows for a greater degree of freedom in generating test scripts from code prompts, providing a foundation for comprehensive test coverage.

Complementing its generative counterpart, the discriminative AI component, serving as an implementation of responsibility, operates within a more rule-based framework. Its main objective is to ensure that critical errors are not overlooked, ensuring robust testing

practices. This creates a balance between AI's generative creativity and more transparent, rule-based techniques.

Integrating both types of AI ensures comprehensive coverage, while delivering accountability and traceability.

THE COMPLETE PICTURE

The value of software testing can be measured across three dimensions: quality, speed, and cost. Improving software testing entails enhancing the ability to detect and interpret defects while reducing timeframes and costs.

AI holds the potential to deliver value across all three dimensions, empowering clients with enhanced software reliability, faster time-to-market, and optimised resource utilisation. Exploring the potential of generative AI in software testing for the financial services industry reveals the need for a balanced approach that combines creativity with responsibility.

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Coutts Bank and its parent NatWest Group in the UK this summer is emblematic of a bigger industry-wide struggle with debanking.

There is, as yet, no consensus on why to do it, when to do it, or how the need for it can be best identified.

To define a coherent debanking policy, financial institutions must get a grip on a series of thorny and ethically challenging topics that run the gamut of ‘culture war’ discussions, minority rights and always-hard-to-manage issues around free speech and persecution.

In doing so, they are accountable to legislation that enshrines everyone’s legal right to hold a basic bank account.

The UK law lists reasons that cannot be used to ‘discriminate against consumers,’ including their sex, race, religion and political beliefs. But, in theory, a bank can shutter an account on grounds related to any of those characteristics, such as suspicion of terrorist financing,

anti-money laundering or politically exposed status, in which case it’s not required to disclose its reasons so as not to jeopardise any intelligence gathering or criminal investigation. There’s an undeniable tension between protecting society and civil liberties – and banks have now found themselves at the heart of it.

To recap, in late June, Nigel Farage, a well-known former politician and past leader of the UK Independence Party, claimed he was debanked by Coutts due to the role he played in Brexit and the views he holds on immigration.

Coutts, a bank for high-net-worth individuals, originally claimed his account was shuttered because the funds held in it did not meet its minimum threshold for deposits. An ill-advised conversation over dinner between Dame Alison Rose, CEO of NatWest, and a journalist, in which she discussed Farage’s personal account details, forced her to step down from the role a few days later.

Evidence then emerged that Farage’s political views had indeed played a part in Coutts’ decision.

Farage subsequently took to the soapbox to denounce the banking industry more broadly for covering up a ‘national scandal,’ vowing to reveal the true extent of debanking in the UK. Ironically for Farage, the rights he believes are being broken, were enshrined in European legislation introduced before Brexit.

The whole saga wiped £850million from NatWest’s valuation, so it’s undoubtedly an issue being taken seriously both within the industry and by market-watchers.

What‘s come to light since, through Freedom of Information requests and personal testimony from individuals, particularly minority religious and ethnic groups and small businesses, is indeed concerning.

Data published by The Telegraph newspaper showed that 343,000 accounts were closed in 2021-22 compared to the 45,000 in 2016-17.

Muslim customers, and organisations with links to Islam, talk of routinely having their accounts closed without notice or explanation. Perhaps it’s not surprising that British Muslims are one of the most

The Fintech Magazine looks at the latest controversy to undermine faith in UK banking and asks if technology turns out to be the problem, could it also be the answer?

DEBANKING UNCOVERED: TRUST, TECH AND CONSPIRACY THEORIES

The claim, counterclaim, rebuttal and resignation fiasco that engulfed

This whole sorry affair has shined a light on the surprising amount of partiality and subjectivity in making debanking judgements; there is no universally accepted objective criteria for what justifies debanking. And, as Farage has correctly highlighted, ‘you can’t function on a personal level, let alone a business level, without a bank account’.

Wasif Mahmood, a financial services lawyer, told Bloomberg that by disproportionately impacting marginalised groups – including minority communities and overseas students – a ‘vicious cycle’ of lost opportunity can be generated. He claimed that suspicious activity reports (SARs) were ‘being filed like a sledgehammer to crack a nut as grounds to shut down accounts’.

increasingly ambitious scale, it’s not hard to imagine that the sheer expansion in volume of account monitoring could lead to increased debanking rates, even if this wasn’t the case in the Farage saga.

If technology has played a role in causing the issue, can we now look to tech solutions to help address it – to effectively identify risks while simultaneously ensuring fairness, accountability and inclusivity?

The Finance Innovation Lab produced a fantastically-timed policy paper in March of this year in which it outlines the scale of the financial inclusion/exclusion issue within the UK. It calls for transparent reporting on financial exclusion, with a rating system to demonstrate which banks are working best, coupled with more assertive involvement from the team at the FCA.

per cent of the time – a clear path to providing more transparency into debanking positions, even if that 30 per cent accuracy drop will cause concern amongst cautious financial institutions.

UK legal firm Kinsgsley Napley outlined some other attractive solutions. A ‘Right To Banking’ rule may provide individuals with the legal entitlement to financial institutions they need, in recognition of the necessity of having somewhere to store cash and spend from in an increasingly digital-money-based world.

Another suggestion is to make banks more willing to engage with customers to explore and address concerns – discussing and investigating the source of funds with customers instead of eliminating them from the system if whatever AI engine in use hallucinates an issue.

Enhanced customer due diligence (ECDD) is another possible fix – an information-rich, properly informed set of assessments that could be used to explore customer risk if their behaviour is flagged.

With this in place, rigorous human-led assessment could be undertaken as a counterpart to automated accountscanning, providing a potential path for identifying risk at technology-scaled volume with human-level accuracy.

Blame game: The Farage debacle threw Coutts into an unwelcome spotlight

Elsewhere, the charity Islamic Relief, first debanked by UBS and then by HSBC, complained the banks had blocked the effective delivery of international aid.

So, where did the problems begin? As far back as 2015, an Oxfam study claimed that increased scrutiny in the wake of the 2008 financial crash was leading to pressure to adopt a more conservative approach to risk management and compliance.

But it observed that ‘instead of reducing risk in the global financial sector, de-risking actually contributes to increased vulnerability by pushing high-risk clients to smaller financial institutions that may lack adequate AML/CFT capacity, or even out of the formal financial sector altogether‘.

That doesn’t explain the more recent significant uptick in debanking rates in the UK. Could the expansion in the use of self-learning models to automate account monitoring be playing a part? If done at an

Though its report is focussed on loan and finance access, it’s easy to see how incentivising debanking good practice, derived from overarching regulatory principles, could lead to some improvement.

The Harvard Business Review ran an interesting report in May, which called for a culture shift in how we view tech and transparency. As tech consumers, we are conditioned to view the algorithms that dictate our use of all technology as monolithic and inscrutable, taking place in an incomprehensible Black Box, a view reinforced by the widely held belief that the better a human can understand an algorithm, the less accurate it will be.

In a test that incorporated as many as 100 representative datasets, researchers found that a more explainable model could be used without sacrificing accuracy 70

This would go some way in negating accidental debanking incidents, but such an approach would do less to address the apparently subjectively justified cases of debanking, such as found in the Farage case.

Ultimately, the whole episode has uncovered an issue that seems to have been festering below the financial radar in the UK for some time. A light has now been shone on the unfair, opaque and outright damaging impacts of debanking gone wrong, and the outsized impact it has on frequently already-marginalised communities and businesses.

Although there’s no consensus yet on how best to re-calibrate debanking procedure, it would seem there’s no shortage of options available to address the issue. And the pressure is now on to do so.

Although there’s no consensus on how best to re-calibrate debanking procedure, it seems there’s no shortage of options available to address the issue. Pressure is now on to do so

1st November 2023

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Better together: Will CBDCs help the world stay connected?

As more central banks prepare to issue their own CBDCs, Swift’s Nick Kerigan explains how the global payment messaging service is working on cross-border technology to support them

Money is changing and central banks don’t want to be left behind. This is why 93 per cent of them are at least researching the possibility of launching their own central bank digital currency (CBDC).

That’s according to the results of a Bank for International Settlements (BIS) study, released in July, which predicted there could be up to 15 retail and nine wholesale CBDCs in circulation by 2030. That number includes the four that have already fully launched; the Sand dollar in The Bahamas, Dcash in The Eastern Caribbean, the e-Naira in Nigeria, and the wonderfully named Jam-Dex in Jamaica. Why the sudden interest? There’s no easy answer: the motivations for launching a CBDC are as numerous as the models. For the Central Bank of The

Bahamas, the first to go live, the Sand dollar was all about financial inclusion and better access to digital payments for the unbanked and underbanked, especially in the remoter islands.

Launched in 2020, to date there are still only around 1million Sand dollars in circulation – most of those distributed in giveaways by the central bank –compared to eight billion Bahamian dollars. Adoption of the eNaira in Nigeria has been similarly slow. Released in 2021, less than one per cent of the Nigerian population have used it.

Nigeria is unusual among African countries. Very few have even begun a CBDC project, and, of those that have, Kenya put its on the backburner only this summer. Elsewhere, though, developing economies are leading the adoption of

CBDCs with their share almost double the efforts of advanced economies.

Pilot testing of China’s e-CNY has now reached 260 million people. India is about to pilot its digital rupee. Meanwhile, the Federal Reserve Bank of New York’s Innovation Center (NYIC) completed a proof-of-concept of a regulated liability network (RLN) using distributed ledger technology to settle digital assets in July, working with nine large financial institutions and the Swift network. But the US is still sitting on the fence when it comes to actually introducing a CBDC. France has broken ranks in Europe by forging ahead with its own CBDC pilot. And what of the UK’s digital pound?

The Bank of England (BoE) completed a consultation period on plans for a CBDC at the end of June. The response and

findings were pending at the time of writing, but in February, the deputy governor of BoE, Jon Cunliffe, said that a digital pound would be needed by the end of the decade, with the goal being to provide a ‘safe, trusted form of money’.

That said, whilst recognising the advantages of CBDCs, the House of Lords Economic Affairs Committee published a report last year that pointed to concerns around financial stability and privacy.

It also reported that whilst ‘CBDC systems could bypass some of the existing frictions around cross-border payments’, these are ‘already improving because of innovation and competition in the fintech sector’, casting doubt on the advantage to be gained from one of the principal use cases for CBDCs. Their lordships, in fact, asked if CBDCs weren’t just ‘a solution in search of a problem’?

Swift, by virtue of being the world’s leading interbank payments provider, can’t stay on the sidelines of CBDC development because it will need to facilitate the movement of these new currencies if, and when, they are adopted for cross-border trade.

Its head of innovation, Nick Kerigan, is clear that Swift doesn’t take a policy position on whether or not CBDCs are inherently good or bad for the financial system. “It’s up to national central banks, and their financial communities, to figure that out, and decide whether they want to introduce such a currency,” he says.

And, as we’ve seen, that rather depends on their circumstances.

“We see central banks and national financial communities looking to solve some quite different things with the introduction of a CBDC,” he adds. “Some are looking to accelerate the digitalisation of their economy; some are looking to expand financial inclusion. Others, where maybe the economies are already more digitalised, are looking at how the public can still have direct access to central bank money, in a world where cash is a much smaller proportion of payments than it used to be.”

That sentiment was echoed by Andrew Bailey, Governor at the BoE, in a recent speech in which he said that its main motivation for a retail CBDC would be to promote ‘the singleness of money’ by ensuring the public always had access to a ‘fully functional central bank money that can be used in their everyday lives’.

“As we look across the world at this momentum,” Kerigan continues, “we think it’s incumbent on Swift to be figuring out how to respond to this important trend.”

Essentially, it wants to know how it can increase interoperability when currencies sit on a diverse set of architectures.

“How do we stitch all this together?” says Kerigan. “How do we end up with a world that’s at least as connected as we are now, if not more connected, and certainly not more fragmented? We don’t want to see unconnected digital islands springing up because of all this exciting innovation.”

THE SWIFT SANDBOX

Swift’s research into facilitating CBDCs began in 2021 and it established early on that it could achieve interoperability between two different CBDCs, using existing infrastructure. “That was a big first step,” says Kerigan.

It developed an experimental interlinking solution that it believes ‘can ensure high levels of efficiency and scalability’, he adds. “Because a central bank just needs to connect to Swift once, and gain access to all of the other national networks around the world that are connected to Swift.

“We took that experimental infrastructure and deployed it into a sandbox and opened up the sandbox to 18 central and commercial banks from around the world.”

Over a 12-week period, those banks were able to experiment and see how the technology might work in practice whilst having an ongoing dialogue with Swift. Almost 5,000 transactions were simulated to great success.

The good news for those banks and for Swift was that all 18 participants, including Banque de France, the Deutsche Bundesbank, the Monetary Authority of Singapore, BNP Paribas, and HSBC, among others, saw clear potential and value from the Swift solution, says Kerigan.

“There was clear consensus about how things are likely to work in the future… In some cases, the participants asked us to go further than we had done in

the experimental solution,” he reveals. “For example, they wanted to see full atomic settlement, and that’s something we’ve taken on as a design requirement. On other topics, there was less consensus, but we were able to understand the options, gaining food for thought, as we continue to develop.”

The next step is a beta version of the solution and a second phase of testing is to take place, looking at different use cases.

“We’re committed to developing a solution that’s genuinely useful for the industry, and that helps enable cross-border payments with CBDCs,” says Kerigan. “So, at the end of the sandbox exercise, we asked all the participants ‘should we continue down this road and do you want to join us on that journey?’. The answers were, unanimously, yes.

“Inspired by that feedback, we’ve been working really hard to develop a more robust version of that interlinking solution and test that beta version with some select central banks.”

Swift’s role is of huge importance in building interoperability into CBDC architecture from the very beginning. Its close relationship with the banks gives it a seat at the table and, hopefully, those partnerships and the shared experience of the system it has built, will help to make the world more connected.

Minutes from two Bank of England CBDC forums in March, show representatives came from not just banks but card schemes, retailers, and streaming companies, too, so there is a clear desire from multiple sectors to be involved in the conversation.

Still, though, the big unanswered question is what this will all mean for the consumer. It will make payments more intelligent and it could deliver a better user experience, as money becomes fully digital.

But how much an improvement over existing advances in real-time digital networks CBDCs represent for the person in the street: ”That’s a question nobody has fully cracked yet,” says Kerigan.

The answer, hopefully, lies in the sandbox and with further experimentation and exploration.

How do we end up with a world that’s at least as connected as we are now, if not more connected, and certainly not more fragmented? We don’t want to see unconnected digital islands

Despite the cultural and geographic proximity of Sweden, Norway, Denmark and Finland, and the fact that 25 per cent of all cross-border trade from Nordic countries is with other Nordic countries, the region is one of the last in Europe to operate separate currencies, moving on very different domestic payments infrastructures.

This trade means that any cross-border transaction must go through a foreign exchange process, two domestic clearing systems, be formatted into at least two separate communication language formats, and be settled through the Swift network, which costs up to three or four per cent of the full transaction amount.

It is a method that has historically escalated handling times, costs per transaction, and caused headaches for all parties concerned. So, unsurprisingly, the harmonisation of the Nordic payments system had been a long-standing priority for all the countries involved. And resolving it was the definitive purpose of the P27 Nordic payments project.

NORDICS IN THE SPOTLIGHT

Founded in 2017, with a name derived from its aim of improving payments for the 27 million inhabitants in the Nordics, P27 began as a partnership between six of the region’s large banks: OP Financial Group, Nordea, Handelsbanken, Swedbank, SEB, and Danske Bank.

Their aim – to create a single clearing platform that permitted real-time and multi-currency payments – was simple, yet revolutionary. Payment instructions would no longer be routed through the domestic clearing systems, but instead

exchanged directly with the originating banks, thereby facilitating faster, smoother cross-border payments, including quick batch payments. Moreover, the platform would bring transparency and take in its stride new standardisations or regulatory evolutions.

P27 was on the point of going live this year when it unexpectedly withdrew its clearing licence application from the Swedish regulatory authority, Finansinspektionen, in April.

P27 CEO Paula da Silva said at the time: “It is evident that our vision was too ambitious and complex. Hence, we need to

fintechs, but global payments technology provider Bottomline also sees value in supporting the region’s financial players. It’s helping them extend their banking capabilities with value-add services.

Bottomline is all about smoothing cross-border payments and it’s keen to get a bigger footprint here, especially as local payment methods, notably Vipps, MobilePay and Swish, are so widely used.

“Bottomline has a spotlight at the moment on the Nordic region,” confirms its head of corporate sales for EMEA, Lisa Farmer. “It is not a region we have historically worked in very often, but we feel that by partnering with key players there, we could certainly support growth.”

Among them is the Danish software-as-a-service (SaaS) company SimCorp. SimCorp’s core product, an integrated investment management system, is utilised by the majority of the largest banks, fund managers, insurance companies, and pension companies in the Nordics.

Commenting on the new partnership, Simon Pilgrim, sales manager for Bottomline, said there was a lot of harmony between the two organisations.

reassess our future ambition in the Nordic payment market.”

P27 may or may not get off the drawing board. But the challenges it set out to solve – the highly fragmented clearing and settlement environment, the critical need to modernise systems to keep up with regulation, and reducing the cost of transacting – haven’t gone away.

So perhaps it’s not surprising that others aren’t waiting to step in with their own designs to support the Nordic payments market. Some of them are native

“The genesis of the relationship started back in 2021 whilst we were working with a mutual client, but independent of each other,” he says. “It was over the course of that very successful project that we were able to observe how we were on a similar strategic direction and that we had very similar business philosophies regarding our people, culture, and ambitions.

“It helped us understand that we could work well with one another. It also became abundantly clear that replicating the project would bring strong value to Bottomline and

The Nordics’ P27 cross-border payments project has been halted, but the problems it set out to solve remain. Bottomline’s Simon Pilgrim and Lisa Farmer discuss how it can support the region’s financial sector

As Swift specialists, we wanted to provide knowledge, expertise and support to SimCorp and its customers because, understandably, many don’t want to become Swift experts themselves

Simon Pilgrim

SimCorp customers, so the move to solidify our informal relationship into a formal one was quite natural. It is now all about our joint expertise, our complementary solutions, and the wider reach.”

Together, the firms intend to combine SimCorp’s core product with Bottomline’s award-winning Swift integration expertise to offer services around data transformation, ISO 20022, and end-to-end payments and securities. Pilgrim believes that one of the client sectors to benefit the most will be asset managers.

“The asset management space is evolving rapidly: it is a competitive environment with huge cost pressures and regulatory changes brewing ahead, which obviously symbolises further costs. Where they will find a friend now is with automation tools that can streamline any back-office processes, which tend to be a little bit old or paper-based, and high-visibility tools, which could show dataflow and what’s happening so they can respond swiftly and in an informed manner.

“Part of the relationship we have with SimCorp is about being able to streamline the back-office to be a bit slicker and quicker and allow them to comply with ease while relieving those pressures to let teams focus on its core business.

“As Swift specialists, we also wanted to provide this necessary knowledge, expertise and support to SimCorp and to its customers because, understandably, many of their customers don’t want to become Swift experts themselves.”

Bottomline has also partnered with Swedish digital service provider Knowit, known for its hand in Norway’s most popular payment app Vipps.

News on which services Bottomline and Knowit will bring to the market together has yet to be published.

“But it is about mutually helping one another grow scope and reach in a particular geography,” adds Farmer.

While Knowit can help Bottomline access the Nordic market, Bottomline will bolster Knowit’s existing products and solutions to reach different geographies.

“We are exploring the opportunities with Knowit, and key growth areas we have identified will be around connectivity,” says Farmer. “We are looking for powerful combinations; how we could help Knowit

clients in the Nordic region reach the UK market, for example, or how we could work together on Bottomline payments and Knowit’s loan application service.”

Farmer believes there could be strong demand in the Nordics for Bottomline’s hosted SaaS solutions among regional banks.

“Many banks that we speak to in the region feel like their hands are tied. They can’t move quickly enough to bring products to market. The key needs are cash positioning, fraud risk mitigation, and new payment rails – with instant payment schemes particularly important.

“It’s a particularly busy time within the industry from an innovation and regulatory standpoint, and the winning combination is using a hosted, single, secure, SaaS-based platform to keep up,” she adds.

“They instil staff confidence in the bank, they instil confidence in the bank’s customers as well; they allow customers

to process transactions quickly, and allow them to meet auditing, reporting, and regulatory requirements. I cannot overstate how much can be improved with the reduction of multiple gateways to a single channel that is bank and network agnostic.”

Farmer also sees the potential in helping Nordic banks broker contemporary business models.

“Banks need new revenue streams, and they need to be looking in singular areas for them, by which I mean new openings located in sectors where the markets are becoming serviced by large, agile platforms, such as in media or retail.

“If one could wrap payments around those platforms, it could be very powerful. So, why not do it?”

Many banks that we speak to in the region feel like their hands are tied…The key needs we hear are cash positioning, fraud risk mitigation and new payment rails, with instant payments schemes being a really important one

Lisa Farmer

The ‘Google of payments’

now heads up the

at specialist data management company Intix. Here he talks to The Fintech Magazine about banks’ growing opportunities around data

THE FINTECH MAGAZINE: Banks are sitting on vast amounts of payments data. How can they leverage that asset for their own and clients’ benefit?

ANDRÉ CASTERMAN: While the likes of Swift gpi, Visa and Mastercard work on the exchange of payments between banks, banks need to internally address client questions like ‘where is my payment?’.

And banks’ payments operations teams face the same demands as their customers. They want to know where everything goes because they process millions of payments daily, through various internal systems, where operational glitches occur. They want to know as quickly as possible when a glitch blocks a payment, so their operations team can investigate and resolve it.

Technology helps to instantly track the whole payments experience when a payment doesn’t happen in an instant.

Using payments data to report to regulators is also a major consideration. Their regulatory status means financial institutions operating internationally must comply with very different regulatory demands worldwide and have their data ready to respond to regulatory enquiries about transactions or clients, in

as little as 24 hours, or be hit with fines. They also need to provide this data to corporate or consumer clients, including SMEs, whenever they demand to see it, to track the payment experience across institutions, cross-border. If transactions are blocked, they need to spot those inefficiencies in real time or their clients experience delays.

TFM: What technology does Intix use to help them do that?

AC: Speed is vital and often existing systems and relational databases

use our technology to do this as lightly as possible, without replicating the data, and create an index – just as Google is an index of the internet – of steps where additional processing can be performed, like identifying issues. It’s like a search engine on mountains of transactions.

Whether the data is stored in a very old system or a brand new cloud like AWS or Microsoft, doesn’t matter, and the storage can be any technology or third party the bank works with. Our work doesn’t impact those systems and the index we create stays under the bank’s control – even if the data goes to a cloud it has identified.

Then, Intix performs any additional future searching, reporting, tracking and alerting on that index – which is where we can do magic, with our very specialised system, in a non-intrusive way.

within banks, which are sometimes very old, can’t do the job.

We’ve created an information system on top of, or next to, those existing stacks, which acts like an alert system, tracking the lifecycle of every single payment through interception points. We

When managing fraud, too, banks are asking us ‘how can you prove the data in your index is the real data we have in our systems?’, which we have algorithms for. To do this efficiently, the search must be instant, reports must be fast and alerts must be raised in near-real time. We use non-relational databases to deliver that performance, building a large index with single search on specific transactions.

We’ve created an information system on top of, or next to, existing stacks… It’s like a search engine on mountains of transactions

The data that banks have to keep is huge; because the number of payments is growing and so is the number of processing steps, like screening, reporting and keeping them in a legal archive. And it all has to be kept in a log file stored somewhere as the data they must report to regulators to show they have screened this payment, on this date, based on this list. Intix makes all this data sensible, accessible and actionable for internal teams, and, if needed, for the bank’s clients, using its web portal.

TFM: What are some of the specific problems banks face in regard to payments messaging and reporting?

AC: The level of regulation for banks is continually increasing because regulators know that technology enables them to deliver more and faster information on transactions.

To deal with today’s high volume of low-value transactions, Intix is built from open-source components like non-relational databases, or big data, core technologies, packaged in a highly customised way for the financial services industry. This is combined with a library of financial messaging standards: Swift MT, ISO 20022, FIX, French, Belgian and other domestic payment formats, with all industry standards preconfigured into the Intix software solution to be immediately actionable. And we can add other libraries of payment and securities formats, or other transaction types.

Given the ongoing challenges the Swift community faces with ISO 20022 migration being pushed back to 2025, Intix can help clients track transactions across multiple formats. Some of the payment initiation can be in MT101 on the client side, but lead into an ISO 20022 in the bank-to-bank space, maybe ending up with an MT940, or an ISO 20022 on the cash management side. Clients need technology to reconcile and correlate those messages within a single transaction. Sometimes they get double messages – the MT version and the ISO 20022 version – and we can make sense of those flows.

TFM: How is the role of banks changing from being ‘just’ financial institutions, to becoming trusted data processors and how can they leverage that?

AC: Banks will always be considered more

trustworthy, because they are regulated and subject to strict compliance standards. We’re all used to using e-commerce websites where you log on two years later and your data is still there – you would not keep our money with them. However, banks have learned a lot from the e-commerce giants, in terms of improving the client experience to be able to access historic data, offer an online experience, instant access to data, and so on.

We combine big data technologies from many industries, and make them usable

Next is combining data with AI to solve complex challenges. AI needs data and using it we can add a bit of magic and go beyond traditional regulatory, operational and commercial use cases, to applying forecasting. Liquidity and cash forecasting are essential for corporates and banks, for their own purposes and regulatory reasons; and AI will help us transform their data into additional insights.

At an industry level, environmental, social and governance (ESG) monitoring and enabling carbon removal through financial transactions will be as important over the next decade as compliance has been over the last. Firms can’t avoid it. It’s about both related regulatory demands and voluntary initiatives around embedding additional value into existing payment flows. For example, carbon offsetting fees on payment transactions, where Intix can track the processing steps in a similar way to our sanctions screening.

Then, of course, central banks are working on central bank digital currencies, with blockchains as the underlying rails for exchanging information. We will be able to process those payments, whether through distributed ledger technology (DLT) or a traditional channel.

Pressing matters: Banks must use more and more data to meet clients’ demands

within weeks for financial institutions, making data both accessible and actionable in complex scenarios.

From our index, we can enable third-party software solutions that the banks have chosen, like a web portal or artificial intelligence (AI) engine, for them and their clients to access their data, sitting behind that portal to deliver it while protecting the core internal payment engine from those interactions. We are effectively a layer between internal systems and external portals.

For instance, if a client has a credit management software solution requiring a payment history, the payment data is feeding credit management, credit scoring algorithms. Credit scoring is not our specialism, but the data we get from the systems, and how we present it in a correlated way to credit scoring software solutions providers, is one example of how we interact with third-party capabilities in an open banking world.

Using DLT for instant payments will be a major shift, where banks will have more channels to operate, and more payments data to track internally – meaning more opportunities for banks and their clients, and definitely more opportunities for Intix to help them.

INTIX AND FIS: A NEW DATA POWERHOUSE?

Established in 2011, Intix’s business model is rooted in providing ‘actionable transaction data’ using its own proprietary technology. It counts five of the world’s central banks among its customers.

In July, Intix partnered with global financial technology firm FIS in a powerful signal of its growth ambitions. Around the same time, FIS gave up its majority $18.5billion stake in merchant payments arm Worldpay.

Announcing the partnership to FIS clients, Intix said they would benefit from ‘greater capability, control and visibility over their payment flows’.

Keeping up with consumers’ local payment preferences, especially if you’re trading internationally, is a pillar of long-term success. PPRO is at the heart of that, globalising payment platforms for businesses, so they can offer more choice at the checkout

From mobile wallets, to buy now, pay later, a new generation of instant account-to-account (A2A) transfers to cash-based internet purchases… the surging choice in alternative ways to pay has come amidst disruptive times for us all.

The COVID-19 pandemic, conflict in Europe, and a cost of living crisis has prompted record numbers of people to pay virtually in a world with pronounced physical restrictions. And that presents a huge challenge for merchants and

marketplaces, especially those operating, or planning to operate, internationally.

“The global payments scene is evolving, but there isn’t a single joined-up ecosystem today,” says Simon Black, CEO of PPRO, which provides digital payments infrastructure to businesses and banks so they can scale their services through one connection. “Particularly

payments scene is evolving, but there isn’t a single joined-up ecosystem today... our infrastructure helps solve that Simon Black, PPRO

with transactions going cross-border, greater complexity comes into play and our infrastructure helps solve that,” he adds.

PPRO itself defines alternative payment methods (APMs) as whatever is preferred in place of using cash or a credit card in any given country. There are hundreds,

if not thousands of them – and they are used to make 77 per cent of global online purchases.

Simon Hughes, global head of partnerships at APEXX Global, a payment orchestration layer and one of PPRO’s partners, understands only too well the complexity that creates.

“I’ve come from the merchant side, so I’ve faced it head-on,” he says. “It’s so complex that many merchants prefer just to focus on the standard card as the payment option of choice. But if they’re operating cross-border, they need to be closer to their customers in local markets – to do that, digital local payment methods are crucial.”

THE MARCH OF THE APMs

It’s worth merchants bearing in mind that, even with the best checkout experience, if a customer’s preferred payment option is not available, there’s a risk they will abandon their cart – and cart abandonment rates are already worryingly high.

Whilst card schemes still provide the underlying mechanism for the majority of wallet transactions, things

The global

are changing fast – it’s staggering just how popular some local A2A payment methods have become

Take Pix, the Brazilian instant payments scheme, developed and owned by the central bank, which was launched in November 2020 and by mid-2023 had amassed more than 150 million users, processing roughly the equivalent of US$2.1trillion a year.

It’s held up as one of the world’s most successful APMs, rivalled only by India’s Unified Payments Interface (UPI), the instant A2A payment system developed by the National Payments Corporation of India (NPCI). According to the NPCI, the total value of UPI transactions in 2022 was the equivalent of US$1.5trillion – and it’s on track to be the preferred way of making 90 per cent of retail payments locally within the next three years.

“UPI is the most modern framework of real-time payments in the world,” says Oliver Rajic, chief growth officer for PPRO. “It’s set a standard that’s difficult to

MAKING THE MOST OF EUROPE

Even within Europe, there are huge differences in consumer preferences when it comes to payment methods. If PSPs don’t understand these, then merchants lose out, says Laura Rofe, director of partner development at PPRO.

She highlights three member states in particular as being growth markets worthy of merchants’ attention, but all of which have distinct characteristics.

“The first is Italy, where we’re seeing close to 13 per cent revenue growth over an annual period. Italians love to pay online, and popular, up-and-coming payment methods include Satispay and Bancomat Pay,” she says.

using only their mobile banking app, is one of the standouts in this market, and one that merchants must familiarise themselves with.”

Understanding local markets like these and integrating diverse payment methods is PPRO’s bread and butter, says Rofe. “We’ve been around for years, focussing on digital payment methods and providing an infrastructure to help our customers and their merchants provide new payment methods securely.”

One of PPRO’s APM partners in Italy is Nexi, an Italian wallet allowing customers to pay in-store, in-app, and online without having to enter their card details.

comprehend – no real-time payments network has succeeded at the scale of UPI, where over 330 million users are not using Visa and Mastercard, but UPI instead.

“So, if I’m a payment service provider (PSP), why would a merchant work with me if I’m not enabling 330 million potential buyers to buy from them, but my rival is?

“And UPI is just the first step to driving real-time payments in Asia.”

In other words, if you thought the instant payments landscape was already crowded, you ain’t seen nothing yet.

Shawn Curtis, director of growth and partnerships at Spreedly, a payments orchestration platform, says rails like UPI and Pix highlight that the most powerful payment methods are the ones that ‘meet people in the context and the geography they’re actually in’.

The credit card market here is unforgiving to e-commerce merchants. They can’t simply fall back on the payment options they offer in the UK or the US, says Rofe, because almost 40 per cent of payment cards circulating in Italy are issued by local schemes, rather than big international names.

“The second market of note is Portugal,” continues Rofe. “Around 11 per cent of transactions are made via cash, making the market cash-heavy compared to European peers – but that’s not to say the e-commerce market isn’t one to explore closely. They’re driving towards e-commerce and online payments.

” In fact, PPRO’s research indicates that the e-commerce market in Portugal is set to reach almost $23billion by 2026, almost double the $14billion in 2022.

“The third country is Poland, which isn’t a market that many have front of mind,” adds Rofe. “Poles pay for just 18 per cent of online purchases using credit cards, whereas they use bank transfers to pay for 54 per cent, and e-wallets power 18 per cent.

“Blik, which enables users to make instant payments

“I’m strongly convinced PSPs should be focussing more and more on how they can guarantee the most ‘riskless’ transactions for their consumers,” says Santoro Francesco, Nexi’s head of group e-commerce European partnerships.

“Our challenge is to reduce the friction at checkout whilst also reducing fraud. The most beneficial thing about partnering with PPRO is that we can focus on those core competencies, whilst PPRO helps us to react to, and serve, changing habits and behaviours when it comes to APMs.”

Merchants need to be closer to their customers in local markets – to do that, digital local payment methods are crucial

Simon Hughes, APEXX Global

You should treat EU countries like you would members of any other family, says PPRO’s Laura Rofe. Just because they’re related doesn’t make them the same!

“Ultimately, no one company can integrate with every payments services provider (PSP), and so it takes partnerships to achieve a greater and greater breadth of coverage. You can’t do it alone,” he adds.

“Having to integrate with lots of individual payment methods is expensive, and it takes a long time,” agrees James Fry, vice president of global expansion at Worldpay. “Finding strategic partners that can give you multiple countries and multiple methods, especially via a single contract, means that you can simplify this work, become much more scalable, and go to market quicker.”

markets they wish to serve, it’s clear that businesses need to work with an integration platform like PPRO that can help them understand the nuances of each market.

These can, and do, differ tremendously. China, for example, is dominated by wallets, such as Alipay, which are the country’s most popular type of online payment method. PPRO research highlights that wallets in China now boast a 65 per cent market share. A merchant that doesn’t support wallets is therefore unlikely to gain much traction with Chinese consumers.

On the other hand, credit cards remain the United States’ payment method of choice with a 51 per cent market share. This is perhaps unsurprising, given the pedigree of the payment card – the first modern credit card was the Diners Club charge card, founded in 1950 by a group of New York businessmen who, according to legend, one night found themselves unexpectedly short of cash when it came to pay their hefty restaurant bill.

similar. But, if you go to Germany, bank-to-bank transfers will be the leading payment method and, if you go to France, it’s cards. But it’s different types of credit and debit cards that are being used as the main payment method in France, compared to the US.”

WHAT’S NEXT?

Looking to the future, Bring believes that technology will have a big say in the payments race.

“For example, I think we are just seeing the start of how blockchain will impact payments. And everything around security, and creating a seamless experience for consumers – easing the process, less clicks, and biometrics – will shape what payments will look like in the next five years.”

The Worldpay from FIS Global Payments Report 2023 explored how consumers are paying, both in-store and online, across 40 markets. It found that there are around 70 real-time payment schemes providing high-speed payment rails that helped drive A2A payments to account for $525billion in global e-commerce transaction value in 2022, up 13 per cent from $463billion in 2021.

The report goes on to state the global e-commerce market is set to be worth nearly $8.5trillion in 2026 – APMs will account for a massive chunk of that.

UNLOCKING THE POWER OF PARTNERSHIPS

So, if they are to keep pace with this payments evolution, and stay relevant in

Meanwhile, Brazilians, thanks to Pix, are adopting digital payments faster than anyone on the planet – though it’s worth noting that PPRO’s research finds that 80 per cent of consumers say poor merchant onboarding is an obstacle to using online shopping sites… a lesson for any retailer.

Even Europe, a region that most people think of as being relatively homogenous, is divided by significant differences in payments culture, which is exactly why you need a partner that understands them all and can advise on which payment methods are most appropriate for customers, says Motie Bring, chief commercial officer of PPRO.

“Take Germany and France, for example – they’re neighbouring countries and, on the face of it, they should be very

Maurice Jongmans, CEO of Online Payments Platform (OPP) in the Netherlands, is certain of one thing: partnerships will continue to be crucial.

“In the end, we may have one single solution – a digital Euro, perhaps. But before that, there will be more local schemes and solutions, and if people want to use these ’local heroes’ to pay, then we have to adapt to that. Working with PPRO allows us to have one single contact, and one single solution that we can leverage.”

In the end, we may have one single payment solution – a digital Euro, perhaps. But before that, there will be more local schemes and solutions

Maurice Jongmans, Online Payments Platform (OPP)

It takes partnership to achieve a greater and greater breadth of coverage. You can’t do it alone Shawn Curtis, Spreedly

Going with the flow...

THE FINTECH MAGAZINE: What are the macro trends you’re seeing in global e-commerce payments?

JAMES BOOTH: Big card markets are starting to slow down, like the UK, the US, and Australia. They’re still growing, still doing very well, but they’re not growing at the rates they used to. There are now smaller markets around the world where we’re seeing some interesting patterns developing. The next few years will be very exciting for payments and e-commerce. We’ll see certain markets leapfrog the more established ones.

TFM: With such a fast rate of change in payments, how can merchants, especially sole traders or small businesses, keep up?

JB: It’s difficult. That’s the short answer. Payments is like a spaghetti junction and it’s constantly moving. Merchants need to find the best way to enter a market, and the best way to increase conversion rates and optimise their payments. But merchants aren’t payments businesses, so they need to work with the right PSP, the right acquirer, and the right orchestration layer to be able to fix together a best-in-class service for any particular market.

TFM: How long do you think cards will remain a method of payment?

JB: They will stick around, but their form will change. We’ll see the rise of e-wallets because it’s just easier to

transact that way – it’s easier to pay a friend, make peer-to-peer payments, and so on. Cards will power some of these wallets, but not all. Some will move over to bank transfer methods, or buy now, pay later. The big card schemes know this. Visa and Mastercard are investing in open banking schemes, and certain e-wallets. They know the clock’s running down. Ultimately, we’ll live our lives through some of these e-wallets, and associated apps. If you look at Asia-Pacific, you’ve got Alipay and WeChat Pay, where you’re literally doing everything through these apps, whether it’s ordering taxis, food, or rail tickets. We haven’t seen the same adoption in Europe, but it will happen – though things will remain fragmented for a few more years.

payment orchestration, and the rise of all these different kinds of routing solutions, is helping to solve that challenge.

TFM: Why are cross-border payments significantly increasing?

JB: The rise of platforms is helping merchants access the right solutions, and the right providers. That allows them to sell cross-border. Without such platforms, retail merchants struggle to connect into different shipping providers, or language APIs to localise their website in certain regions, or appropriate FX solutions. The fact that it’s much easier for merchants, and even different payment platforms, to access these services has significantly increased cross-border volume and flow. And we’ve seen this first hand. PPRO was born out of the cross-border world. We made a name for ourselves around cross-border payments, and we’re starting to see that accelerate even faster, just because it’s so much easier to access some of these services, and build a holistic cross-border transaction flow.

TFM: How can merchants keep up in that fractured landscape?

JB: It’s about working with the right partners, but also trying to think one step ahead. Merchants, when they enter a new market, should already have steps two and three in place, because what we tend to find is some merchants will work with some partners, or some platforms, and within a year or two, they’ll grow out of those platforms. Then they get into technical debt and struggle to grow. The rise of

Knowing what payment methods to use, and knowing what markets to move into, is very important, but also knowing how to enter those markets, and having the right services in those markets, is extremely important. That’s actually where PPRO’s future is. The core of our business, I think, will always be payments. We love payments. We’ll always be payment professionals, but we’re starting to provide more value around the transaction.

We’re starting to do shipping APIs for some clients, and checkout page widgets for others, so they can move into countries quicker, and they can display payment methods on the checkout easier. So we’re moving into that world, and that’s certainly where I see the future.

Visa and Mastercard are investing in open banking schemes, and certain e-wallets. They know the clock’s running down

As Vice President and Head of Partnerships for Europe at PPRO, James Booth manages client relationships, helping PSPs, acquirers, and gateways go to market successfully. We asked him how he sees the payments landscape, and PPRO’s role in it, evolving over the next few years

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OPEN SEASON

The European finance ecosystem is readying itself for a new legislative framework that will determine how it moves from purely transaction-based open banking to truly open finance. Tim Goodfellow listened to what you make of the proposals

Regulations are constantly evolving to support or, in some cases, keep up with innovation in financial services.

A third iteration of the EU’s Payment Services Directive, the key legislation covering how payments happen in Europe, has been coming for a while, and, at the end of June, the European Commission officially announced it as part of a larger package of financial reforms. The proposals include a new Payment Service Regulation (PSR) and a financial data access framework (known as FIDA) and a pathway to the digital euro, some of which could be implemented as soon as 2026. Collectively, these measures could facilitate the transition from ‘open banking’ to true ‘open finance’, in which a broader range of financial information will be more readily available to third parties.

OPEN FINANCE REPRESENTS AN IMPORTANT INTERMEDIATE STAGE IN THE DIRECTION OF OPEN X, A PARADIGM THAT WILL LEAD FINANCIAL PLAYERS TO EXPLOIT NEW BUSINESS LEVERS FOR THE BENEFIT OF THEIR END CUSTOMERS

PSD2 has widely been seen as revolutionary once full implementation took hold in 2019. By unlocking payments information and encouraging banks to share data with the ecosystem, it’s stimulated new business propositions and services for consumers. It paved the way for open banking, but, ultimately, shared data was limited to payments information.

Almost as soon as it was implemented, it was time for an upgrade. The reforms proposed by the European Commission on June 28 this year aim to remove the remaining obstacles to providing open

financial services, improve customer control over payment data, and further combat and mitigate fraud. The goal is admirable – to provide more space for innovation, stimulate competition and foster financial inclusion for consumers.

The data access framework is an interesting addition, which outlines the conditions and requirements for sharing and using that data, including making it easier for customers to grant and withdraw permission for data access. It also allows data holders (i.e. the banks) to charge for making data available to third parties.

These proposals will change the rules of the game once again and shift the boundaries of what’s possible.

Sentiment towards the proposed changes is positive. An inevitable wish list resulted from the past four years under PSD2 and it would appear a lot of that is being fulfilled. Cross-border payments should become even easier and financial products more accessible because the necessary data required for delivery will be more readily available.

Laying out the reforms, Valdis Dombrovskis, a spokesman for the European Commission, highlighted some of the ways the reforms could help both providers and customers.

“Previously burdensome processes, such as comparison services or switching to a new product, will become smoother and cheaper, including, for example, automated processing of mortgage applications,” he said.

Indeed, the ability for consumers to see financial data, such as investments and insurance policies, in multiple places, in the same way that they can see their transactions in multiple apps, could have major implications for integrating new services.

According to Dombrovskis, SMEs also will be able to access a wider range of financial services and products, such

as more competitive loans resulting from their creditworthiness data being more easily accessible.

Overtly positive responses to the proposals that we heard included from a Mastercard spokesperson who told us it welcomed the EU Commission’s initiative to provide consumers with broader access to their financial data, while protecting their privacy rights and maintaining a level playing field among all participants.

CBI in Italy is a consortium of 400 banks and other stakeholders in the payments industry. Managing director Liliana Fratini Passi laid out how it had been impacted by existing developments and what could happen with PSD3.

“PSD3 paves the way for banking and non-banking fintech operators to offer niche and complex products that can leverage financial information other than account balances and movements,” she said. “Moreover, this further step towards open finance represents an important intermediate stage in the direction of Open X, a paradigm that will lead financial players to exploit new business levers for the benefit of their end customers.”

European challenger bank unicorn N26 also welcomed the new proposals.

“At the moment, poor or limited data access, as well as unmodifiable customer journeys, are still major obstacles to fully unlocking the benefits of open banking

Liliana Fratini Passi, CBI (Italy)

WE’RE SUPPORTIVE OF PROPOSALS THAT ENSURE A BASELINE OF DATA REMAINS FREELY AND SECURELY AVAILABLE TO AUTHORISED THIRD PARTIES WHILST ALSO ENCOURAGING THE GROWTH OF A PREMIUM SERVICE MARKET THROUGH COMMERCIAL INCENTIVES

GoCardless

for all European consumers. This limits competition in the European market for financial services,” it told us.

“PSD3/PSR together with FIDA will serve as a catalyst for further competition and innovation. We welcome the proposed regulation to improve consistency of law and stronger enforcement across Europe, as well as the strengthened requirements around open finance.”

One criticism of PSD2 has been that the quality of integrations and APIs has varied and that not everyone has been on board with the drive for innovation.

Jan van Vonno, head of industry and wallets at open banking platform Tink, acknowledged that progress after PSD2’s introduction had not been as quick as many had hoped.

“So the renewed drive that PSD3 and the PSR provides is a welcome addition to the development of open banking in Europe,” he added. ”We hope that the PSR in particular, will resolve much of the controversy surrounding API quality that is present under PSD2.”

That was echoed by Martin Herlinghaus at payments platform Aevi, who reflected on the struggles that new entrants in the wake of PSD2 had experienced.

“Many open banking startups pushed against a group of incumbents that were not prepared or willing to raise their game, as they felt forced to comply rather than engage in a potential new business opportunity for them,” he said. “All of this resulted in tremendous progress, but somehow a lack of consumer adoption.”

He hopes PSD3 will not just level the playing field, but create a better team dynamic.

There are, however, some concerns, particularly around attaching a price to data access. If banks are permitted to charge a third party, it may impact those companies’ business models,

particularly startups. Could it be a drag on competitiveness and innovation?

Herlinghaus mostly believes the potential for data transfer to have a fee attached is ‘a good thing, as data is a highly valuable asset and requires the necessary safeguards to be protected, which costs money.’ He does however caution against the danger that ‘certain providers could use the charging model as an unjustified toll for third parties to secure their own position.’

Tom Burton, director of external affairs and public policy at GoCardless is optimistic.

“We’re supportive of proposals that ensure a baseline of data remains freely and securely available to authorised third parties (with the customer's permission) whilst also encouraging the growth of a premium service market through commercial incentives,” he said. ”We see this as the best route to creating an innovative, sustainable open banking ecosystem in Europe that’s good for data holders, fintechs and –most importantly – customers.”

He also noted the need for new regulations and stressed their tougher enforcement.

“At the moment, European open banking users receive an inconsistent experience that is more prone to glitches than is ideal. By making the performance and functionality rules for open banking interfaces tougher and more standardised, and improving implementation and enforcement, the EU will be making very positive strides forward to addressing these issues and driving trust and customer adoption of open banking.”

Galit Shani Michel, VP of payments at customer authentication provider Forter, praises the positive impact this wider access to data could have on fraud risk and detection.

“Ensuring sharing of data between organisations is as easy as possible should increase the number of approved legitimate transactions and drive down the rate of false declines,” she said, which has a significant impact on customer retention and loyalty. However, she points to a missed opportunity surrounding customer authentication.

“The number of persons excluded from using 3DS [the widely-adopted mechanism for customer authentication] is far higher than it should be. PSD2 was designed to improve accessibility and inclusion in payments; yet the high friction levels for the elderly, digital nomads, or those who are not wholly comfortable with technology and shopping online, is concerning.

“It is frustrating to see that the opportunity to directly address 3DS within PSD3 hasn’t been taken.”

Speaking on a recent episode of the 11:FS podcast, fintech commentator Sarah Kocianski praised the ambition of the European regulators but remarked that they are largely moving in line with innovation rather than ahead of it – and the greatest innovation in banking and financial sectors is typically happening in regions where the regulator takes a more hands-off or localised approach.

Nilan Peiris, chief product officer at Wise, observed that ‘regulations are good for setting the direction, but a lot of hard grunt work is required to drive the change’.

On that note, whatever the reaction to the proposals, the reality of how they work in practice, could look very different once they’re implemented, which is unlikely to be any earlier than 2026 and, based on experience of PSD2, could be later than that for a lot of organisations.

Having been seen to lead the way on open banking when part of the EU, what the UK does in response to these changes is, as yet, an unknown. Time will tell what is and isn’t implemented from them. Meanwhile, in Europe, it’s still business as usual for another few years at least.

IT IS FRUSTRATING TO SEE THAT THE OPPORTUNITY TO DIRECTLY ADDRESS 3DS WITHIN PSD3 HASN’T BEEN TAKEN

Galit Shani Michel, Forter

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How much attention have UK banks really paid to customer satisfaction over the years?

Back in the Swinging Sixties, when Simon and Garfunkel were famously singing about how to ‘keep the customer satisfied’, the Conservative government passed a law that allowed employers to pay their workers’ wages into bank accounts, rather than paying them in cash.

No worker asked for this. It meant that instead of getting cash, usually every Thursday, from their boss, they now had to go to a bank branch to get it. Bank branches were open a mere six hours a day, weekdays only; they didn’t unlock their doors until most people were

millions of letterboxes, giving recipients unasked-for credit of £100 or more.

That was the start of UK credit card debt, which, by 2020, had reached a staggering £72billion – or around £1,200 for every woman, man and child.

Debit cards, on the other hand, were a great idea for customers, because they allowed convenient access to current account funds. But debit cards didn’t appear in the UK until 1987 – an astonishing 21 years after an American bank produced the first one in 1966 –and 20 years after ATMs were installed, although they didn’t use debit cards initially, but rather a voucher punched with holes, representing a customer’s PIN.

This, of course, brought many of the banks themselves to their knees, and UK taxpayers rescued them to the tune of £133billion. The impact of the collapse continues to be felt today, with NatWest still more than 30 per cent owned by us.

As someone who has been a leading player in financial services in the UK for 25 years, though thankfully never working for a bank, I can tell you that at every turn, banks have blocked innovations that did not suit their narrow perceived economic objectives. For example, when I was an elected director of the UK Payments Council, the question was rightly raised about making bank account numbers as moveable as mobile phone numbers.

Ron Delnevo, Chair of the The Payment Choice Alliance, considers the UK Treasury’s policy statement on cash access and questions why the wishes of 50 million Brits are being ignored

already at work; they closed before most people had finished their daily toil; they were shut for lunch… and there were no ATMs when the Act was passed in 1960.

Conservative finance minister Ted Heath’s ‘small but important measure’, as he called it, did less than nothing for the average worker but it suited big business, which suddenly had its hands on ordinary people’s money and those customers could only get it back when it suited the banks.

Having made cash less convenient, banks exploited a shortage they had helped manufacture by launching credit cards in 1967. The public didn’t request this innovation, either, and largely ignored it, even when the cards were launched with massive publicity. They only succumbed to this plastic ‘revolution’ when Access put its ‘Flexible Friend’ through

It took UK banks until 1998 to install 25,000 ATMs, averaging 800 installations a year over a 30-year period. It wasn’t until the independent ATM operators came into the market and started installing machines at a rate of 3,000 a year that cash became convenient again for long-suffering Brits.

Meantime, UK banks became engulfed in the Payment Protection Insurance scandal, which has since seen them pay out more than £50billion compensation to far-from-satisfied customers.

By the turn of the Millennium, the branch closure programme that had started in 1990 was continuing apace and the banks were focussed on ‘casino’ banking, getting involved in 100 per cent-plus and sub-prime mortgage lending, ultimately helping bring about the Global Financial Crash of 2008/9.

By that stage, every mobile phone network operator was allowing customers to keep their numbers when switching operators. A hugely important step in keeping the mobile phone customer satisfied, it was something banks could and should have done for their customers.

Did it happen? No. Too difficult, said the banks. Too expensive, said the banks. Compared to what, you might ask? The £50billion banks paid out in PPI compensation? The £137billion taxpayer-funded bank support package?

I could provide an extensive list of innovations that have never been made by the UK’s so-called ‘high street’ banks, which definitely could have improved satisfaction for customers. But, a bit like The Rolling Stones, we couldn’t get any, either.

As the banks continue their retreat from the UK high street, various over-long pilot

schemes have been run to work out how thousands of communities could be saved from becoming financial services ‘deserts’.

Right or wrong, it was decided that ‘bank hubs’ should be created, staffed by a different bank each day and with basic banking services provided by the Post Office. The banks even eventually set up a not-for-profit company called Cash Access UK Limited, intended to oversee the launch of bank hubs.

The first was created well over two years ago – but by July 2023, there were still only six in operation. Estimates vary as to how many bank hubs will be required to even make a dent in avoiding financial services deserts – some experts

absolutely nothing about cash acceptance by businesses, which is becoming a major issue in many parts of the UK.

One concern about the Treasury’s increased role in cash access is that, in the last few years, it has constantly used the word ‘reasonable’ to describe what cash access is needed by the UK public. In the meantime, cash access in many UK towns has declined by 90 per cent or more, even though in 2023 the UK public continue to withdraw from ATMs 75 per cent of the value of cash they were withdrawing pre-pandemic.

The strength of the British public’s commitment to cash was underlined in a recent YouGov/Payment Choice Alliance

to enforce the measures outlined in the Treasury statement, but, in truth, there is nothing much to enforce. In any community with a Post Office, banks can probably go on closing their branches and ATMs, as the FCA will view what is offered by the Post Office as ‘reasonable’ cash access. It is very doubtful the British public will agree with this FCA assessment.

In early July 2023, Chancellor Jeremy Hunt announced a Future Of Payments Revie, to be chaired by Joe Garner, an ex-CEO of Nationwide Building Society. Garner's mission – and he has chosen to accept it – is to report on how payments will be made in future and the steps needed to deliver world-leading retail

believe a minimum of 2,000, given the scale of bank branch closures. What is known for certain is that at least one community has been waiting for two years for the hub they were promised. Dozens more are in a queue that is getting longer every week.

NatWest has promised to keep branches that have been earmarked for closure open for another 12 months so that Cash Access UK can get its act together. The overriding appearance, however, is one of systemic procrastination, in the hope that lack of progress will ultimately mean very few bank hubs are ever opened and, of course, that the country rushes towards becoming ‘cashless’.

The latest Financial Services and Markets Bill – the 2022 edition – finally received Royal Assent in July 2023. The Act now gives HM Treasury massive authority to impose standards for cash access, a term used in the Act to include both withdrawal and deposit facilities. However, it says

Survey (June 2023), which found that only three per cent of UK adults never use cash. Which, of course, means that more than 50 million British adults do.

Sadly, the HM Treasury policy statement issued in August did absolutely nothing to guarantee convenient cash access for either the public or businesses. The statement did not even mention ATMs – which provide more than 90 per cent of the cash currently used by the British public.

It seems that the Treasury intends that the vast majority of cash access will, in future, be provided by limited-hour Post Office counters. Only 1,500 of the UK’s 11,500 Post Offices actually have Post Office ATMs, so the Treasury clearly doesn’t foresee 24/7 cash access.

The Financial Conduct Authority (FCA) is

payments in the UK. Garner is due to report to the Chancellor in the Autumn of 2023.

If, between them, HM Treasury, Garner and the FCA are judged to have failed the British public in relation to cash access by not enshrining the right to use cash for payments in UK law, the subject might become an issue in the 2024 UK General Election. Can any government hope to be elected while ignoring the wishes of the vast majority of the British public – 50 million plus voters – who say they want to go on using cash?

We may find out in 2024 who truly wants to ‘keep the customer satisfied’. But, for now, for anyone who wants to use cash in the UK, regrettably it’s The Rolling Stones’ refrain that’s ringing in our ears.

Cash access in many UK towns has declined by 90 per cent or more

stealth approach transformation The to

Banks aren’t interested in hugely disruptive (and hugely expensive) rip-and-replace technology programmes. But what’s the alternative? Kunal Galav from Mambu and PwC’s Akhilesh Khera discuss a cunning plan…

“Legacy estates are a drag on cost, resilience and change agility.” This is a quote from a recent joint paper by software-as-a-service platform Mambu and accounting giant PwC, which pretty much sums up the challenges currently faced by incumbent banks.

Digitally Reframing Legacy Transformation gives an insight into the sector as it stands today but also, crucially, provides a roadmap for CIOs to use when defining their transformation plans. As the saying goes, ‘times they are-a-changing,’ with traditional financial institutions painfully aware of the progress made by newer, more nimble competitors, and, at the same time, being squeezed by the ever-increasing demands of a customer base that wants and expects more from their banks, at a rapid pace.

There are also cost implications of maintaining legacy systems. According to the paper, just running-to-stand-still means that UK banks will spend between £1billion and £2billion over the next three years on resiliency alone. So, what are the solutions? Certainly not simply ‘bolting on’ new technology to existing legacy systems and hoping for the best.

Kunal Galav, global head of partnership development and advisory at Mambu, believes that a ‘greenfield on top’ approach, whereby there’s an orchestration layer of tech that allows a bank to access

its existing systems while integrating them with third-party providers, is the solution for many legacy institutions.

“In researching our paper we discovered that nobody has the time or the appetite to do a five-year transformation,” says Galav. “And there’s no golden ticket answer – ‘here’s a five-point checklist, go decommission your legacy’. The way to do it is with progressive modernisation – a ‘greenfield on top’ approach.”

The joint paper recommends adopting a step-by-step process, which can be summed up as: decommission the legacy selectively; build an integrated ecosystem as a greenfield

platform on top of your legacy tech; orchestrate the servicing of legacy products via the digital channel and bring all customers on to the platform; selectively refactor critical legacy functionality; and, finally, kick the legacy platform out from underneath you.

“The advantage of having the Cloud and software-as-a-service (SaaS)-based offerings is that you don’t need to build; you can take the licences, you can try things,” says Galav. “You can offer propositions to your customer, change your proposition and transform your stack.

Cunning plan: A greenfield platform on top of legacy is a solution to rip-and-replace

Such a greenfield-on-top approach enables you to innovate really fast, get to customers quickly, and gradually look at what’s working in the market.”

It’s a kind of stealth approach to transformation – less disruptive and less costly, and at pace. But it’s apparent that real transformation is as much a case of changing the mindset, as it is of changing the tech. Getting under the skin of end goals and real priorities, honestly evaluating your business model and generally improving your customer offering is a business and customer conundrum, with technology as the enabler – not the panacea.

Akhilesh Khera, partner at PwC UK, says a more root-and-branch understanding of what technology can – and can’t – bring, requires a different approach.

“We see that there are three broad challenges that exist out there,” he says. “The first is that most banks and financial services institutions approach digital transformation in terms of their existing business moving on to a new technology.

“And the third challenge that I see, typically, is prevarication – essentially a ‘do nothing’ scenario. This is probably the worst of all, saying ‘it’s too big of an issue for us to solve, so let’s not do it now, let’s do it later’.”

The market says – both anecdotally and backed by data – that slow digital transformation at legacy banks is contributing to a drop in customer retention. The rise of neobanks and their more customer-centric approach certainly hasn’t helped, with incumbents’ lethargy when reacting to new customer trends brought into sharp relief. The buy now, pay later (BNPL) experience is a good example of that.

Turbo-charged by the pandemic, the likes of Klarna, Affirm and Clearpay have prospered in the point-of-sale instalment loans market, which is predicted to reach almost £420billion in 2023, while banks largely looked on. Belatedly, in 2022, Virgin Money announced a BNPL credit card, NatWest launched a BNPL credit scheme and Monzo unveiled a BNPL product with a £3,000 limit, but many financial institutions have yet to show their hand.

While the adoption curve on this payment method may have flattened a little – although this year’s introduction of Apple Pay Later shows there’s still healthy interest – the journey on BNPL is illustrative: there is an obvious need for better technology and a new and improved mindset to match among ‘legacy’ providers.

Galav says that putting yourself in the customer’s shoes rather than simply selling products is key. He cites an example of how Mambu helped the Commonwealth Bank in Australia launch Unloan, its next-gen digital mortgage brand.

This is but one example, though, of an incumbent benefitting from taking a neo approach. There have to be far more, says Galav. Banks not only need to be aware of their goals and appreciate how the underlying technology can help reach them, but also be willing to move much faster.

“It’s very much about the speed of implementation and innovation,” agrees Khera. “Not everything is about getting it right the first time. You might get it wrong, but you should be ready to fail fast. Digital banks and challengers release customer features on the app on a weekly basis. When you look at monolith institutions and legacy banks, it takes them a six-monthly cycle before they release even a single feature. That simply has to change.”

At the heart of all this is the customer. On-demand services permeate every aspect of their life – be it Netflix,

But that doesn’t really make sense. You need to also innovate your business model when trying to implement new technology. Change should be based on the overall customer experience and the expectations that you are trying to meet, rather than changing technology for technology’s sake.

“The second thing that we see banks struggle with is the impact that a digital transformation programme has on their operating model. You can’t sustain your existing one, based on a waterfall methodology – managing and launching new customer experiences and products has to be ongoing. This is something that quite a few of our clients sometimes forget.

“This was an incumbent bank, with a significant market share that decided to re-pivot, to answer its customers’ needs on their home-buying journey. It’s a subtle difference, but instead of thinking about a mortgage as a product, it said ‘what goes through a customer’s mind when they want to buy their home?’,” recalls Galav.

“They were able to get to the market in about six months, with one of the most outstanding digital innovation products in Australia right now. It shows that, with a change in mindset, with a change in business model – if you stop trying to lift and shift, ‘we’ve done this a hundred times, let’s do it again’ – you can innovate, using new technologies.”

Amazon, Deliveroo, Uber, Airbnb… the list goes on – and consumers are accustomed to tailor-made solutions and personalised content. Their habits have irrevocably altered and traditional banks are now tasked with meeting those different needs.

“Think about the traditional operating model of a bank – it has had a lending P&L and a deposit P&L. Right? But that’s not how customers view their lives,” says Galav. “Customers are expecting banks to become their personal CFOs. They have needs: ‘I want to buy a car, I want to save for my kids’ education, I want to buy a house. Help me’. “Customers are now used to Facebook and Google, their data being utilised to give them insights. They are expecting the same from their banks: ‘Treat me like you know me. You should know what I want, before I want it’.”

There’s no golden ticket answer: ‘here’s a five-point checklist, go decommission your legacy.’ The way to do it is with progressive modernisation, a greenfield-on-top approach

Kunal Galav, Mambu

Most banks approach digital transformation in terms of their existing business moving on to a new technology. But that doesn’t really make sense. You need to also innovate your business model when trying to implement new technology

Akhilesh Khera, PwC

Poweringchoice

Tuum, one of the latest new

well as new companies, including entire banks, to be quickly brought to market.

Estonian startup Tuum is one such provider and its own rapid growth over the past four years demonstrates how fast the trend is growing for a more modular, flexible – and outsourced – infrastructure to deliver what customers need.

Long gone are the days when such was the lack of retail competition that car magnate Henry Ford could famously declare his customers could ‘have any colour they want as long as it’s black!’.

As consumers, our demands and expectations have grown exponentially since then and nowhere more so recently than in banking. The emergence of next-generation, Cloud-based, API-first core banking platform providers is a key driver for that, allowing new products as

Launched as ModularBank in 2018 and rebranded in 2021 so there was no doubt about what it does – ‘tuum’ means core in Estonian – it takes a composite approach to building the technology at the heart of a financial services provider.

The platform’s product suite comprises modules for core banking, payments, lending and cards, allowing clients –whether they’re building a new business or transforming an existing one – to choose what they need, when they need it. In that way, legacy banks can make incremental migrations, giving them the flexibility to develop unique solutions for their customers on their path to full transformation.

Unlike Henry Ford, Tuum CEO Myles Bertrand is all about giving customers real choices. Like Ford, his company builds ‘engines’, he says. “But our customers can build whatever car they want around us, and we’ll scale, horizontally or vertically, to support what they want to do.

“You want to be a Ferrari, you want to be a Toyota, you want to be a Lada… we embrace the ecosystem and work together with other brands to create a capability which, at the end of the day, allows a business to provide a great experience for its customer. That’s the number one priority for us.”

WHAT THE CUSTOMER WANTS...

No bank, large or small, legacy or neo, can afford to ignore customer expectations. Indeed, the torpid digital transformation of some legacy banks can be seen as a barrier to customer acquisition, if not a catalyst for actually losing existing customers.

generation core banking providers, is making remarkable progress by providing a super-flexible platform on which others can build the future, as CEO Myles Bertrand explains

Providers like Tuum are only too aware that consumers have more of the whip hand and tailor their offering accordingly.

“We allow our banking customers the flexibility to provide core basic products – typically, loans and account services – but then to innovate around them and do something a little different,” says Bertrand. “They can add a great experience layer on top – gamification, for example, to incentivise customers to deposit more.”

The greatest challenge for banks that still largely run on legacy technology is finding a cost-effective way to add customer-facing, digital additions, fast. And Bertrand understands the dilemma they face.

He says: “It’s really critical because with their legacy technology, by the time they innovate to do what they want to do, the market has moved on already.”

So, could more incumbents be persuaded to outsource their core to speed up response times? If it’s shown to be scalable, reliable and secure, then yes, says Bertrand.

“If you go back five to 10 years, the thought of outsourcing a mission-critical system to a vendor was just foreign,” he says. “But banks are now really shifting. They’ve seen the value of the Cloud, the flexibility, the security, and the ability to do things really quickly. So it's not just periphery systems that they’re now outsourcing.

“But we don’t position ourselves as a rip and replace solution,“ he adds. “We help clients solve a particular problem. They might have an issue with a product, or they want to go into a new geography, or they want to go after a new demographic in the market – we help them to do that quickly, without the typical cycle times associated with legacy technology.”

Thus Tuum is proving to be a catalyst for innovation. For example, among its customers is SweepBank, owned by

Another is CrediNord which offers streamlined business loans in Finland, Sweden, Denmark and the Netherlands, using Tuum’s core banking platform, where previously such products were inhibited by its legacy technology. And Denmark-based Januar has turned to Tuum to provide the core platform for its ‘gateway’ service, which allows crypto businesses to open accounts and allow payments in and out.

“What’s exciting is how some players are targeting specific ways to approach the market,” says Bertrand.

That includes financial services provided by non banks, too. “A lot of big telcos are jumping into financial services,” points out Bertrand. “So you’re seeing a divergence of providers in the space – organisations coming to the market, trying not to just be digital versions of the well-established mainstream banks, but tackling certain segments that feel they are underserved and helping them be more successful.”

Finnish bank Multitude, which is bringing what it dubs the ‘Netflix experience’ to banking by using advanced analytics to provide hyper-personalised services to its customers when they spend and save.

CASE STUDY: TUUM AND LHV BANK IN THE UK

In March 2022, LHV Group, Estonia’s largest domestic financial group and capital provider, selected Tuum as the core banking platform for its emerging UK bank.

Established in London in 2018, LHV UK already provided banking infrastructure and payment services to more than 200 fintechs with more than 10 million end-customers globally, including Airwallex, Coinbase, Railsbank and Wise.

In fact, in Estonia, Tuum itself was a consumer of LHV’s banking services for fintechs, allowing it to provide real-time GBP and euro payments, virtual IBANs, currency exchange accounts and currency exchange transactions.

So perhaps it wasn’t entirely surprising when, shortly after signing the UK deal, LHV decided to strengthen the two companies’ relationship further by sinking €1million into the startup.

“Together with Tuum, we can give fintech startups and companies operating in other fields the opportunity to enter the market with new flexible financial products more easily and faster,” it said at the time.

That flexibility and speed were to be demonstrated just a few months later when LHV UK stepped in to take over the loan book of Bank North, the pioneering regional UK business bank in which LHV Group had previously invested and which was forced to close in October 2022 when it failed to meet capital requirements.

Bank North had built technology which streamlined the lending process and approved loans to local businesses as much as 10 times faster than its competitors. LHV UK CEO Erki Kilu said the acquisition would enable LHV UK to accelerate plans to expand to servicing SME companies.

Despite the unplanned assimilation of Bank North’s loan book and clients, LHV

For its part Tuum has ‘no plans to go further up the value chain, or become more of an end-to-end service provider’, says Bertrand. But it doesn’t lack ambition. It wants to broaden its reach beyond the Nordics, Europe and the UK.

“We’ll continue to invest heavily,” says Bertrand, “and go deeper into what we’re doing right now.”

Right to the core, in fact!

UK still managed to acquire its full UK banking licence this May, just over a year since lodging the application.

The Tuum platform has meant it can build in-house payments modules and API solutions tailored to its fintech clients. And it will allow it to enter new market segments later this year: LHV Bank plans to accept retail deposits as well as introducing banking services to e-commerce businesses in the UK.

Rivo Uibo, co-founder of Tuum, describes LHV as ‘one of the most tech-savvy and digitally advanced banks on the market’, adding that the tie-up was a perfect illustration of how ‘collaborating with core banking infrastructure providers is invaluable for banks in freeing up internal resources to focus on competitive product offerings’.

“LHV UK epitomises the banks of the future,” he says, “with open architectures and exciting new business models.”

You want to be a Ferrari, you want to be a Toyota… We embrace the ecosystem and work with other brands to create a capability which, at the end of the day, allows a business to provide a great experience for its customer

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In a world where the ‘business norm’ means weathering unpredictable events of the internal, external, and geopolitical kind on a rolling basis, agile software-as-a-service (SaaS) solutions have become one of the great fintech heroes.

They began to gain traction in 2019, thanks to their plug-and-play capabilities and promise of infinite flexibility. But the business-saving potential of SaaS came to the forefront just a year later when providers started churning out the two tools that were so central to financial players’ ability to survive COVID-related storms: new front-end experiences, which helped to differentiate brands and satisfy customers; and back-end services that offered swift delivery and management of new technology without burdening overstretched internal IT teams, who were already grappling with a tsunami of pandemic pressures.

The benefits were palpable, with Mambu’s 2023 Benchmarking Survey showing that companies who had partnered with hybrid integration models or a SaaS platform over the course of 2020 and 2021 fared remarkably better than those who hadn’t.

Adopters averaged an improved annual revenue growth during the trying year of 2020 of 14 per cent, versus one per cent for the rest of the market. They also recorded a bounce-back rate in 2021 of 34 per cent, compared to 10 per cent for those unaided by SaaS. Now, with COVID hopefully behind us, the imperative for adoption might appear less urgent. But Vitus Rotzer, chief revenue officer – Rest of the World Banks& NBFIs EMEA & APAC, for Bottomline, warns against shifting digital transformation strategies to a lower gear.

“It is true we have just started recovering from the pandemic; nevertheless, we have a true melting pot of factors within the payments industry where a great deal needs to be considered, agreed upon, and planned for in 2023 and the longer term,” he says.

As an international SaaS provider that assists with digitising safe and secure

payments for 10,000 businesses globally, including 1,400 financial institutions, Bottomline is concerned with preparing solutions for a future in which the only certainty is change.

Rotzer, for one, appreciates the minefield of known challenges that lie ahead: the shift in hitting SWIFT CBPR+, the deadlines for ISO 20022, the new initiatives from the European Commission to make instant payments in euros available to all EU and EAA citizens, and the mandating of fraud prevention practices, to name a few.

But December 2022’s The Future of Competitive Advantage report, Bottomline’s rolling bank survey to assess progress toward completing digital payments transformation strategies, revealed a real disconnect between mindset and the reality of tomorrow’s payment landscape.

Interest in migrating towards a single SaaS platform had cooled by 15 per cent compared to last year. And yet, in the same breath, respondents said their biggest

consider their strategies to be along the same lines as those of the competition. Only 20 per cent of respondents were sceptical of their firm’s transformation progress, and Rotzer questions whether the confident majority may be underestimating the challenges ahead. He was also surprised to see that the interest in scalability was low (seven per cent), considering how intricate roadmaps are becoming and the augmented need for top-down buy-ins.

In his eyes, outsourcing a winning architecture remains an ideal, cost-effective way to combine solutions for all of the above. “Studies and results show that partnering with a SaaS provider benefits these key activities: deadlines can be met, extra traffic from new payment rails can be managed, and the resulting internal infrastructure becomes smoother, in turn lowering costs and allowing for further revenue to be generated from additional services,” says Rotzer.

In one area of payments, at least, he has seen positive progress. “When looking at the global landscape of B2B payments, I see an increased number of banks moving away from the ‘on-premises solution mindset’ to favour leveraging new SaaS propositions,” says Rotzer.

internal issues were all ones that could be directly improved with a SaaS solution.

“Twenty-seven per cent complained of suffering the most from legacy systems, 23 per cent from a lack of interoperability between internal systems, 12 per cent singled out disjointed access to rails, and 13 per cent warned of limited in-house IT resources,” says Rotzer.

The results would indicate that companies feel they are keeping pace with regulations, mandates, and industry best practices – or, at least,

”I hope this decision-making trend continues because, as the global reliance on digital banking increases, so will the demands on financial players. SaaS, ultimately, allows companies to continue meeting the needs of the customer, which is a defining trait of competitiveness. My interest is in seeing the landscape thrive through this.”

n Bottomline’s The Future of Competitive Advantage 2023 report will be launched at Sibos in Canada in September.

There’s mounting existential pressure on banks, but that’s not a reason to slow SaaS migration, says Bottomline’s Vitus Rotzer. If anything, it’s a reason for speeding up!

SaaS, ultimately, allows companies to continue meeting the needs of the customer, which is a defining trait of competitiveness

BANKING... WITHOUT BANKS

Wrapping banking up with other business management tools could have a transformative impact on SMEs. Thomas Vles of Ageras and Nicolas Benady from Swan explain how such BaaS partnerships work in favour of everyone in the value chain

banking services right where an end-user needs them and, in some environments, doesn’t even notice them.

Denmark-based Ageras was founded in 2012 as an online marketplace where small and medium-sized enterprises (SMEs) could find an accountant that suited their needs, statutory requirements and budget, while accountants could expand their business by subscribing to the platform.

It expanded into Sweden and Norway, then the Netherlands and Germany, before taking the leap to the US. Over the years, it extended the suite of products available over its platform, becoming a leading software-as-a-service (SaaS) provider of integrated accounting, administration and tax solutions for thousands of small and micro business owners. The one component that was missing was banking services; it was the next obvious step.

“So, we started with the process of obtaining our own banking licence… from first-hand experience, I can tell you that’s not something you want to be doing, even as a big company,” says Thomas Vles, Ageras’ chief revenue officer.

In fact, it abandoned the idea in favour of itself buying in the service from Swan, a French startup with an e-money licence, which enables other companies to offer accounts, cards and payments to their customers.

Swan went live in 2021, having started in stealth mode in 2019, and it already has some seriously big names under its belt, including French retail giant Carrefour. One of the fastest growing banking-as-a-service (BaaS) providers in Europe, Swan helps put

“Embedded finance, for me, is when the transaction happens when you want it, where you want it,” says Swan CEO Nicolas Benady. “And so the best example is Uber; when you get out of a cab and you know that you’ve paid, but actually you don’t do it. It’s totally transparent in terms of the customer journey.

“Then put yourself in the shoes of the driver – you don’t have to go to a bank to order a card machine, a POS terminal, it’s all embedded into the app,” continues Benady. “For me, that’s a truly embedded finance function.”

Vles believes banking-as-a-service has been a pivotal development for software service providers such as Ageras because

scrutinise/pay for management tasks – be it accountancy, tax returns or cash flow management. So being able to semi-automate them and have those functions ‘talk’ to each other over one portal, especially if linked to banking services, is a real boon. Vles uses the example of VAT accounting.

“In most countries, when people send an invoice, they have to charge VAT, but then – usually after a quarter, sometimes monthly – the VAT needs to be paid back [to the government]. By storing that money in a separate IBAN account that we offer them, the business always has access to that money, but they know they are sort of borrowing from themselves if they use it. The same goes for corporate tax.

“We have also introduced savings accounts where people can put money away for certain goals; and we can help them with that by gamifying savings a little bit. These kinds of things are super important to help people not make missteps.”

There are business benefits that accrue to the SaaS provider, too, by including banking services for their customers.

it allows those with SME clients, in particular, to offer so much more than has historically been available to these clients from a high street bank.

“With the data we get from banking, we can automate a lot of other processes that go further than a payment, such as accounting, paying taxes and all the stuff that is really hard for many small business owners the world over to do,” says Vles.

SMEs often don’t have the bandwidth and/or financial resources to adequately

“Embedded finance is great for end-user customer journeys. But it is also good for companies like Ageras, because they offer clients better software, with a better user experience, and so they can charge maybe a bit more,” says Benady. “And, even if they don’t, we bring them a new source of banking revenue, through interchange fees around card payments – we are happy to share that revenue with our partners.”

That ability to bolt on another instant revenue stream, thereby hopefully

With the data we get from banking, we can automate a lot of other processes that go further than a payment Thomas Vles, Ageras

We’re used to hearing the Uber customer experience held up as an example of a great embedded finance model – and it is. But what if your customer isn’t an individual, but another business?

accelerating the journey to profitability, is especially useful for SaaS startups who want to look convincing as an investment target in the current climate.

Meanwhile, Benady describes Swan’s job as ‘taking care of complex things like complaints, security, and fraud management, regulation’.

“This is our job, and we leave the hard job of accounting to our clients, because everybody has a job, everybody must focus on one thing.

“Some of our clients are just small startups, with three people in a garage and a good fintech idea, and they can start building it with us,” he continues. “The

barrier to entry is close to zero today, when you want to embed finance.”

Embedded finance wasn’t really accessible to smaller businesses until the arrival of BaaS providers such as Swan. Nowadays, even micro companies can build tailored banking services, so long as they meet the relevant compliance requirements.

small business, and also helps us with the accounting part.”

The ease of onboarding is what helps set services such as those offered by Ageras apart from traditional high street banks, he adds.

“In many markets that we now offer banking, we see that know-your-customer checks take weeks, sometimes months, sometimes forever, as some banks will not allow new people to onboard,” he says.

By contrast, Ageras has onboarded small business customers in under seven minutes. “It’s an amazing advantage to have in a market that doesn’t even want to serve freelancers or small businesses,” Vles adds.

Saving

“We are quite a well-sized company, but even for smaller ones, these new technologies not only allow them to onboard customers, but also customise all the aspects of banking to their needs,” says Vles. “In our case, it allows us to create a banking product that is specifically for

Indeed, the advantages of BaaS for SMEs have led some to question why they’d want a relationship with a bank at all. According to one survey this year among 1,000 businesses in the UK, Belgium, and the Netherlands, half believed BaaS will spell the end of traditional banking. Another survey found that 30 per cent of UK SMEs were interested in using financial products embedded in services such as accounting packages, but concluded business owners needed more education on how they could be used and they also required more choice.

Ageras has now acquired a range of specialist providers across Europe, including Cloudbased accounting software solutions Billy, Tellow and Zervant, German neobank Kontist and payroll platform Salary.dk. It has also launched its own fintech solution, Ageras Finance, to address the gap in capital available for small businesses.

Swan is all about providing options to its users, too. In Europe, which may be unified on many fronts but still has local bank accounts and payment rails specific to each country, a Dutch client, for example, will likely want an account with Dutch terms and conditions, that follows Dutch laws, regulated by the Dutch regulator, and comes with a Dutch IBAN.

“So that’s what we try to provide –a hyperlocal experience,” says Benady. “If we want embedded finance solutions to become really ubiquitous across Europe, we need hyperlocal solutions.”

The barrier to entry is close to zero today, when you want

Freddie Lower from Cazenove Capital holds founders’ hands as they head to the door. So, what’s the role of the wealth manager in an exit and how do you say goodbye?

Following poor market conditions, confidence in IPOs as a meaningful exit strategy is lower than ever. Many startup founders, including those in the fintech ecosystem, are looking elsewhere for a deal – but it might not be the one they’d hoped for.

Funding deals for fintech during the first quarter of 2023 dropped by 42 per cent when compared with May 2022. And whilst activity surpassed 2020 levels, the slowdown during the latter half of 2022 appears to be continuing. A Q1 report from Dealroom says Unicorn creation dropped from an average of 40 per quarter, to just three in 2023.

Investment in UK fintech from private equity and venture capital firms also fell by 56 per cent in 2022 to $17.4billion compared with $39billion the previous year, according to KPMG. That’s not to say there isn’t money in those firms but rather the fintech sector is perhaps not the darling it once was and has fallen behind the deeptech and climatetech sectors, which have both seen more of that cash this year.

This lack of funding has exposed some fintech startups to a starker reality, with

the future uncertain and insolvency becoming more common. This has mainly been the plight of consumer fintechs, although the fire sale of B2B banking-as-a-service platform Railsr in March 2023 showed that even a market leader in embedded finance can be taken down by a lack of profitability.

Ultimately, all startups face this threat in an uncertain economy and where once they may have looked to funding to achieve rapid growth, there are now less options available. Meanwhile, founders wanting to sell and make a clean getaway may have to be patient.

Freddie Lower, portfolio director at the UK’s Cazenove Capital has some unique insights into the situation, from the perspective of someone managing the wealth of current and former founders,

typically, those who are planning for, or have been the beneficiaries of, a midmarket private equity buyout.

Cazenove Capital often starts working with founders a year or two before they sell, helping them to plan for the exit and what comes next. But Lower contends that the choice of departure routes is gradually narrowing.

“There are three routes to exiting your business,” he says.

“Firstly, IPO; secondly, selling to a private equity via a buyout; or thirdly, selling to a strategic buyer – another larger business in that sector. IPOs have really been eliminated as an exit strategy because it’s a terrible market in which to take a company public.”

Indeed, EY reported that the global IPO market had fallen by eight per cent in the first quarter of 2023, with proceeds down by 61 per cent, year on year.

“It all started at the beginning of 2022, when inflation started to get out of hand,” says Lower.

“Central banks started to raise interest rates to try to cool down the economy. The problem with that scenario, for fintech startups that are not as yet profitable, is their entire valuation is

IPOs have really been eliminated as an exit strategy, because it’s a terrible market in which to take a company public

predicated on the present value of future profits.

“When you work out what a company is worth, you look at their earnings and their future profits, and then apply a discount factor of what that’s worth today,” says Lower. “In an environment where interest rates have gone up, a future pound of profit is worth less today, as you can get more money, risk-free, on cash in the bank.”

Lower says that most startup founders by now will have been put off by the idea of going public if they want a valuation anywhere close to what they’d hoped.

The market uncertainty has affected ’growth businesses’ – startups and early-stage businesses – but we have also

seen it affect larger banks such as SVB and Credit Suisse, which is a worrying sign of the times.

“Both of these organisations invested in long-term assets, the value of which changed quite dramatically,” says Lower. “Ultimately, they both experienced a sort of old-fashioned bank-run scenario.”

MERGING, ACQUIRING AND STEADYING THE SHIP

This is all resulting in VCs’ increased reluctance to invest in potential and focus instead on certainty, with an increase in mergers and acquisitions taking place.

A recent White & Case paper pointed out some key drivers of this, including the struggle to achieve growth and investors taking advantage of lower valuations.

The paper also outlined six sub-sectors that it tipped will be in particular demand and therefore command greater attention from investors, namely open banking, neobanks, regtech, greentech, paytechs and digital currencies.

Lower’s own experience over the past year has been ‘seeing larger businesses looking to bolt on new capabilities or buy an existing book of businesses, and private equity houses looking for a larger number of smaller deals instead of acquiring big platform companies’.

That has resulted in a higher volume of transactions. So, there is still plenty of money in the market and deals are being made, but it’s harder to persuade investors to part with their cash.

A personal lending fintech that uses AI and open banking to provide more accurate and affordable loans, Abound raised more than £500million in funding to bolster its current 30 per cent month-on-month growth. It’s on track to have £1billion on the balance sheet by 2025.

The sole unicorn to be minted in Q1 2023, Quantexa, an AI-based regtech company, secured just over £80million for its Series E funding round, which brought its valuation to around £1.4billion. The round was headed by GIC with participation from a consortium of partners.

TerraPay, a global payments infrastructure business, secured in excess of £79million for its Series B, although the exact figure is not clear. The funding round was led by IFC and will help it expand globally to 150 countries by 2024.

This digital bank secured the fourth-biggest funding round of 2023 by raising £75million from existing investors. Zopa, formerly a peer-to-peer lending platform, plans to use funding to make further mergers and acquisitions this year after already acquiring point-of-sale finance technology and lending platform, DivideBuy.

A recent addition to the list of big UK deals is paytech Volt. It raised just over £46million in a series B round led by IVP. Currently operating in the UK, Europe and Brazil, it plans to take its technology to the Asia Pacific region and beyond.

BIG UK DEALS IN H1 OF 2023 FINTECH FUNDING IS DOWN BUT THERE ARE STILL DEALS TAKING PLACE. HERE’S THE BIGGEST SO FAR THIS YEAR.

For a founder that means the deal they seek may not be quite as lucrative as they had hoped and so it’s unlikely to be the overnight solution for those who want out.

“A lot of dry powder has been raised by these private equity businesses, so there’s still going to be a competitive group of buyers, but mainly they’ll be looking at smaller companies,” says Lower.

“If I were a late-stage venture capital fund, or a growth fund, I’d be excited about the current market opportunity, because valuations have undoubtedly come down, and there are going to be some really good opportunities out there.”

For those founders that themselves have money to deploy, merger and acquisition presents an enticing opportunity that may not previously have been a part of a startup’s strategy, but which could help fast-track growth and bring that exit forward.

“There are companies out there that have cash on their balance sheet, either because they’re high quality, or because they raised a round in 2020/2021, and have money to deploy, or they might be backed by a private equity sponsor who’s giving them rein to go and acquire businesses,” says Lower.

for the founder. Aviva swooped to buy a majority stake in Wealthify in 2018, but it was two years before it was fully acquired at which point its founder left.

NatWest announced it was to acquire an 85 per cent stake in workplace pension and savings startup Cushon for £144million this year – with 15 per cent retained by Cushon management, including co-founder Ben Pollard who continues as Cushon’s CEO.

Lower acknowledges there are fintechs in a good place, either achieving or approaching profitability, making them ripe for investment. But for a lot of other companies, there may be a longer road ahead – smaller fintech companies who will need to raise yet another funding round before any meaningful exit.

“And that’s a challenge in this environment,” says Lower. “If you do

future. And, if the business is able to sell, or is heading that way, it’s important to have the right advice and support in place. Wealth managers don’t usually step in until personal equity has been released from a business for them to manage. But, in Cazenove Capital’s case, the relationship starts much earlier than that.

“We’re trying to build relationships with founders and management teams 18 months to two years before the actual liquidity event, to help them plan and make introductions to corporate finance advisors, legal advisors, accountants, etc,” says Lower.

“We help assemble these people around the founder and management team, so that we ensure they’re getting the best possible advice.”

“We’re certainly seeing some companies where M&A wasn’t necessarily part of their strategy, now thinking about how they can go out and either acquire a strategic capability, or technical expertise, or a book of business, to help them grow their company.”

The acquisition of UK fintech GoHenry by US-based unicorn Acorns demonstrated how two younger companies, both not yet profitable, could consolidate their lead by one acquiring its peer and providing both companies with access to new territories.

A challenger might, on the other hand, be picked off by a larger incumbent, although that’s not always a clean break

manage to achieve that – well done. But if you don’t, there is a risk that your cash burn becomes too much to deal with, or that you end up raising a highly structured round, with lots of preference shares.

“So, ultimately, failing to raise a round may lead to an exit, but it’s perhaps not the exit you would’ve wanted.”

In which case, his advice is ‘sit tight’.

“Focussing on profitability and making the business sustainable and durable in a difficult environment is going to help, either for when it comes to raising a round, or simply for sustaining the business through this difficult period,“ says Lower.

An exit will come at some point in the

He goes on to explain why this is good news for a regulated sector like fintech.

“It’s a challenging environment in which to undertake transactions. If you’re negotiating with a potential buyer, you need to know they’re a credible counterparty, acceptable to the regulator, and that they’re going to have approval for that deal.

In those scenarios, having the right corporate finance advisors, and the right legal advisors, can really help.

“Similarly, if you’ve taken on some venture capital funding, then the VC can provide expert advice around selling a business in a highly regulated environment, using companies like Molten Ventures, who have experience with Revolut or Transferwise, or, more recently, Crowdcube or Freetrade.”

Founders don’t necessarily want to engage too heavily in thinking about what comes next, because they don’t want to jinx it; there’s an element of superstition around not wanting to count their chickens

As part of FTSE 100 business Schroders plc – which, incidentally, backed UK challenger bank Revolut, from its early fundraising rounds to its most recent Series E – Cazenove Capital has opened just such doors to an enormous network of useful contacts for many founders.

“Forty per cent of our clients are entrepreneurs or business owners, who are at the point of sale, preparing for sale, or post sale. So it’s very much people who’ve made their money through founding, growing, and, ultimately, exiting businesses that they started,” says Lower.

Its presence as an ‘informed friend’ of the founder can help fintech companies maximise their valuation at sale.

Ideally, the companies it’s interested in are in a position ‘whereby their existence isn’t dependent on a sale; that they’ve got enough cash runway, that they’ve got enough time on their hands, that if a deal doesn’t happen immediately, or falls over, the company’s very existence isn’t under threat’, says Lower.

“Fundamentally, we’re looking at private sales. In which case, the main thing to try to do is to build that competitive tension that can drive higher valuations, i.e. more than one buyer looking to acquire the company.”

As to Cazenove Capital’s role, Lower says it wouldn’t advise a founder on selling their company, ‘but we would advise them what to do around that’.

“Our role is to sit on their side of the table, as their personal advisor, and help them get the best outcome for them as individuals. It could be succession planning, passing money on to their children, establishing a structure that means they’ve got enough income, so they never need to work again.

TOP TIPS!

“Or indeed setting things up so they’ve got a corporate investment that then allows them to go off and invest in other things, and carry on growing their wealth, and have seed capital ready for their next venture.”

Right now, though, the goal for most founders, he says, should be ‘bringing forward profitability, and trying to make the business as high quality as it can’.

“Because the current market environment has very much switched focus to companies that are profitable, and that are growing at a reasonable rate. Whereas,

fraught with difficulty. At any moment, it feels like it could fall apart.

“That stressful exit environment isn’t necessarily the time to be thinking about the questions we’re asking, and the advice we’re trying to give around their long-term future: what they want their legacy to be, what they want their wealth to do for them and their family.

“Often our advice is predicated on a flexible solution. It gives them time to think, after that exit, once the dust has settled, and they’ve a clearer picture around what they want to achieve. It’s a very big shift in mindset, from being incredibly busy all the time, worrying about cashflow, how are you going to pay your people, how are you going to get the deal done, to that ‘what next?’ moment.

“Tallest peak syndrome is something that we see a fair bit from our clients –when you achieve incredibly great things, everything else can seem quite mundane, and quite uninspiring, compared to the fantastic achievement you’ve just had.”

going back a couple of years, it was about growth at all costs, now the focus is on buying robust, sustainable businesses.”

THE FOUNDER’S DILEMMA

And once you’re out, what then? Many founders are surprisingly unprepared for their success, says Lower.

“Founders don’t necessarily want to engage too heavily in thinking about what comes next because they don’t want to jinx it; there’s an element of superstition around not wanting to count their chickens. As a consequence, sometimes they leave planning opportunities on the table.

“The process of preparing for and leading up to a sale is incredibly stressful and

1 Focus on profitability

Delay capital expenditure, bring forward profitability, and try to make the business look as high-quality as it can because the focus is now on buying robust, sustainable businesses.

2 Build competitive tension

In the current environment, try to build competitive tension to drive higher valuations, i.e. more than one buyer looking to acquire the company.

On the day of sale, one recently-exited fintech founder set off to row the Atlantic. Another phoned Lower the day the deal went through to say ‘what now?’.

“Finding meaning in the world, when you’ve got a lot of time on your hands, is a challenge that a lot of founders come up against if they’ve come through a clean exit,” says Lower.

“With that client, I said, ‘spend some time with your family. Enjoy having a bit of freedom. You’ll find another project, another thing to get excited about. Don’t worry about having anything immediately to occupy your attention.

“‘You’ve worked really hard. Enjoy just having a moment to yourself.‘”

3 Know what you want

If you are thinking about an exit, be clear in your mind about why you want to exit.

4

Get the right advice

Fintech is a challenging, regulated environment in which to undertake transactions, so it’s important to have the right advice. Your equity investors can often introduce you to corporate finance and legal advisors.

THE BEST WAY TO PREPARE FOR AN EXIT IN 2023…

Going back a couple of years it was about growth at all costs, now the focus is on buying robust, sustainable businesses

Lanistar didn’t arrive on London’s fintech scene quietly in 2020: it was an event. Lined up to promote the nascent neobank on Instagram were Premier League footballers, reality TV stars, models, influencers, and Ibiza club owner Wayne Lineker.

Out roared a branded Bugatti, followed by a ‘life-sized’ plastic unicorn, emblazoned with Lanistar’s four-point logo, indicating the size of its ambition. It was breathless, it was gratuitously flashy and, if you were to ask a social media marketing expert, it was brilliantly orchestrated to get the maximum number of ‘clicks’… and, quite possibly, the maximum kickback from the establishment. It got both.

The UK’s Financial Conduct Authority (FCA) issued Lanistar with a scam warning before it had fully launched. Then, the Advertising Standards Authority (ASA) began an investigation around Lanistar’s claim to offer ‘the world’s most secure payment card’, ruling in 2021 that this claim could not be substantiated.

A Business Insider investigation reported that Lanistar’s founder, Gurhan Kiziloz, had no previous experience in finance, technology, or banking (to be fair, not unique for a fintech founder) and that Lanistar’s reported £15million raise, in July 2020, hadn’t come from Milaya Capital, as had been stated at the time. In a matter of months, Lanistar wasn’t so much famous as infamous.

“Has it hung like baggage? Yes, it has,” says Jeremy Baber, who was appointed Lanistar’s director of banking in 2021. “But those were mistakes – they weren’t deliberate. And the FCA warning was taken down within 36 hours. That’s never happened before.”

Lanistar moved on and out of the UK – to Latin America. Baber, who had decades of senior management experience behind him at GE Capital, Link Financial and Aldermore Bank, brought it credibility. He would be promoted to CEO later the same year, taking the reins from Kiziloz.

The security section of Lanistar’s website now reads ‘our payment cards are probably some of safest in the world’ – using what Baber calls ‘the Carlsberg approach’ to marketing claims.

THE SOCIAL NETWORK

Lanistar hadn’t set out to compete with challengers offering full-suite banking services. In 2020, it had partnered with Modulr to create a payment card concept similar to Curve, whereby users could choose to pay, transfer, and split bills from up to eight payment cards held on the Lanistar app. It was neat, but not new.

Modulr would provide these payment services as a regulated entity, and Lanistar would act as intermediary, passing them on to end users behind its branded UI. Other than its app design, and Lanistar’s fetching array of physical cards – since deemed by the neo to be environmentally

unsustainable and discontinued – it couldn’t offer anything that wasn’t already available elsewhere.

“But it’s not actually about the core product,” says Baber. “It’s about the reach that we have with our influencers.”

In fact, it was Lanistar’s approach to marketing – giving its payment offering the glow of an aspirational lifestyle product – that attracted Baber to the company in the first place.

“I was sold on the concept,” he says. “Using influence to sell a financial product was just unheard of. It’s such a strong USP. Lanistar, at its heart, is a social media business – but we found quite a niche.” And he clears up any lingering confusion over who precisely owns equity in the fintech.

“The beauty and the art of what our founder did was to set aside equity in Lanistar for influencers,” reveals Baber. “So, instead of being paid for each post, or for each campaign, our influencers have a vested interest in Lanistar succeeding because they have shares in the company.

“That’s what sets us apart from our competition. All our competitors have already used up their equity share in raising funds, so the only way they can gain customers is by buying them through marketing. This way of using equity to market your product was a game-changer for me.”

And it works. Lanistar already has as many Instagram followers as Revolut, the

Lanistar launched on the back of a unique Instagram campaign in the UK before leaving to make its mark in Brazil. Now it’s preparing to return. CEO Jeremy Baber talks openly about success, past missteps and the digital power of persuasion

UK’s largest fintech by market cap, and has three times as many as Monzo. By this metric, Lanistar isn’t just changing the game – it’s winning it.

Of course, a business model built around Instagram reach predetermines Lanistar’s target audience. “It’s all about Gen Z and Millennials,” says Baber. “No offence to anybody else, but that’s the target market. That’s the market which is always on their phone, always looking at their favourite stars and influencers.”

STARS IN THEIR EYES

In the UK, US, and across Europe, roughly three-quarters of people aged between 18 and 30 are active users of Instagram. In one of the few studies to look at so-called ‘finfluence’, more than half of Gen Z and Millennial survey respondents confirmed they sought out financial advice on social media. Among Gen Z specifically, 51 per cent said they’d taken financial advice from an online personality.

Meanwhile, the total number of Instagram users is forecast to surpass 2.5 billion this year – nudged on by Meta’s July release of its Twitter rival, Threads, which is accessed via Instagram.

In short, Lanistar may have caught everyone else in fintech napping by leveraging influence to market its product.

Lanistar said it arrived to ‘unprecedented interest’ in Brazil. In October 2020, it booted up its Brazilian influencer marketing campaign and three days later, 100,000 people were pre-registered. It wasn’t long before the firm was able to officially launch, with São Paulo-based Bankly taking the role of domestic service provider.

“Banking-as-a-service meant we were ready to roll,” says Baber. “With a partner

that allows us to get live in a country, we can do it within three to four months.”

Lanistar didn’t have to spend time chasing a banking licence, nor did it struggle to embed Brazil’s unique payment architecture in its app. The modules offered by Bankly saw to that. As such, Lanistar is fully integrated with Brazil’s Pix and Boleto payment systems. It’s certified with Google Pay and coming soon ApplePay – relationships it can carry with it into other markets.

In June of this year, Lanistar added a cryptocurrency function, enabling Brazilian users to buy and sell Bitcoin, Ethereum, and other tokens directly from the app. And all the while, a network of 1,200 influencers and over 195 million people, drip-drip promotions into Instagram feeds across the country.

Lanistar’s model seems to be working. “By the end of September, we’ll probably have around one million accounts in Brazil, and by the end of 2023, two to three million accounts,” predicts Baber. If those

executive Merton Smith arrives as CCO. With dozens of influential thumbs poised over the ‘post’ button, the final piece of the jigsaw will be Lanistar’s selection of a full BaaS partner to provide its services in the place of Modulr.

However, it will return to a regulatory environment that is no less sceptical than it was in 2020. The Consumer Duty Law, enacted at the end of July, has set higher standards for payment services providers and the FCA and Advertising Standards Authority have together produced clearer guidelines on influencing.

“It is important for this type of marketing to be regulated but that is exactly what it is – ‘marketing’’. Like Ant and Dec advertising Santander mortgages and bank accounts,“ says Baber. “Social media influencer marketing is the next form of advertising.“

figures are realised, Lanistar will be in a position to give Nubank, the largest fintech in Latin America, a run for its money in terms of users.

Propelled by its success in Brazil – where, according to last year’s Statista Global Consumer Survey, influencers have more sway over purchasing decisions than in any other country – Lanistar is now preparing to relaunch in the UK and EU. In April, it bolstered its C-suite by hiring Ed Blankson, formerly of Tide, as CFO, while experienced

In the meantime, growth remains the name of the game. Lanistar recently opened an operational centre in Dubai and has formalised a customer service partnership with a firm in Skopje, North Macedonia. It’s ready to roll with a BaaS partner in 50 US states, where there are 177 million people in the Gen Z and Millennial age bands. Turkey, with 50 million more people in Lanistar’s target market, is high on the agenda, too. And orbiting all this are thousands of influencers – Lanistar says 3,000 have shares in the company – spread across 100 different countries.

“Our goal, at the moment, is to acquire customers at a cost-effective ratio,” says Baber. He’s confident that Lanistar is doing that far more effectively than any other neo, keeping its focus firmly on the customer while its BaaS partners handle the technical side. With its initial naivety behind it, and Baber at the wheel, it may arrive back in the UK as a finfluencing force to be reckoned with.

Star attraction:

Many Gen Z and Millennials seek financial advice on social media

Lanistar, at its heart, is a social media business – but we found quite a niche

N26 was enjoying stratospheric growth when it had its wings clipped by the German financial regulator. Now it’s more grounded, but in a good way, says Pablo Reboiro

When two Austrian entrepreneurs decided to build a banking solution called Number 26 for ex-pats moving to Berlin in 2013, they likely had no clue as to how their dream would snowball – from making the cover of Forbes Austria under the title ‘No Country for Old Banks’ in its launch year, to reaching a multi-billion dollar valuation on par with Commerzbank by 2021.

Pablo Reboiro, former head of global strategy, now general manager for Spain and Portugal at what is today known as N26, believes it was the originality of that early concept that dictated the challenger’s astonishing growth trajectory.

“That niche segment of happy ex-pats who had just moved to Berlin and didn’t speak German, yet wanted to open a bank account, was the magic one that took the company from zero to one. It was that ‘somewhere’ from which the company kickstarted into growth,” he says.

Importantly, it also set the scene for the relationship the challenger had with the German watchdog BaFin, which became its financial supervisor in 2016 and gave wings to the N26 Bank GmBH.

“Banking is a business of trust and the German regulators are the gold standard,” says Reboiro. “We pursued a full banking licence from BaFin because it’s not only regarded as a strict regulator in Germany, but it’s also considered zero-risk everywhere else. People immediately feel safe with it.

“Our fully regulated licence under its supervision was a real enabling factor in us winning the Central European territories surrounding Germany,” he continues, referring to the company’s millions of users in Austria, Switzerland, Liechtenstein,

Poland, Estonia, Latvia, Slovakia, Slovenia, and Luxembourg. N26 has had glowing reviews from customers across Europe who have voted it ahead of established banks like Deutsche Bank, BNP Paribas, and Santander as this year’s number one best bank in France and in Spain, the 3rd best in Austria and Germany, and the 5th best in Italy. And yet, we’ve seen the fintech dealt some of the most punitive reprimands from regulators at home and abroad, which have included paying a €4.25million fine for late filing of suspicious activity reports in 2019 and 2020, being told in 2022 that it could not onboard any more new customers in Italy because of regulators’ concerns there

€120.3million. It was that huge leap in popularity that sparked BaFin to order a deeper audit of N26. Neos in other jurisdictions might well wince at what it's put the bank through since.

“But I see BaFin as an N26 ally and a partner who helps us in an immeasurable way,” insists Reboiro. “We have a close connection, which now includes having a specially appointed member of the board, and we all want the same thing, which is to see sensational growth but done well and with control.

“Growing a bank at any pace is a hard enough task, and at the time of BaFin’s judgement call to restrict our customer pipeline, for example, we were skyrocketing in the face of demand, completing within five months international expansion milestones that traditional banks completed in five years.

“Was it exhilarating? Yes, but incredibly tricky as well because whilst one can quickly scale tech, you cannot scale your banking operations, back office, nor your customer service at the same clip.

over anti-money laundering (AML) processes, and having its total, global onboarding capped at 50,000 new customers per month in 2021 – an order that was extended this summer by BaFin, which said N26 still has a way to go to improve on AML. The regulator also had concerns over the bank’s IT monitoring, quality assurance and outsourcing controls. A full-time commissioner from BaFin now sits on the fintech’s board.

All this following a year in which N26’s net revenue had increased 67 per cent to

“BaFin was clear in saying, ‘hey, we think true growth at this pace [50,000 a month] is achievable, but above that, we feel like it is irresponsible for your customers’. And, I believe their approach was the right one. It has made us stronger as a business.”

He also thinks that having a regulator in the boardroom that has made a point of not offering special support for challengers (BaFin doesn't and does not plan to introduce a sandbox, for example, and applies regulation equally to startups and incumbents, albeit it with an element of proportionality), is a blessing and not a curse.

“Regulation oversight within banking is tremendously positive,” says Reboiro. “As

We were skyrocketing in the face of demand. Was it exhilarating? Yes, but incredibly tricky because whilst one can quickly scale tech, you cannot scale your banking operations, back office, nor your customer service at the same clip

a customer, I am more confident in my choice of where I put my money because of closely monitored regulation. It’s the same for N26. We have closer oversight from BaFin now and the regulation insight brought by its appointed board member is a very positive asset.”

Think of it as a secret weapon to help N26 build the industry’s most trustworthy challenger. Reboiro also believes that the close relationship between it and the watchdog tempers the company’s tendency for bold decision-making – in a good way.

“At the time of my joining the firm, N26 was characterised by this very ambitious, go-getter attitude, which was emboldened by rapid successes. We thought ’hey, if we are winning in Europe to this level, let’s conquer the US now.’ And just like that we launched States-side, but it was only after we had launched and had our initial traction of half a million customers that we started to ponder the differences of how finance was done in the US versus Europe, or the UK. And there are many differences.

“For example, we realised that the interchange fee is different in the US. We began to understand that Americans were not as interested in debit as they were in credit cards. And that winning over a country with a 300 million population required a huge amount of direct investment, which would detract from our European markets.”

It was such realisations that influenced N26 to set sail back to its home continent

and conquer it in earnest, which, according to Reboiro was ‘already hard enough with a resource pool so different to that of our competitors, the traditional banks.’

“I also see it as a return to our core strength because N26 became successful across Central Europe by being part of Central Europe: by which I mean being physically present within these core

the previous era of relatively easy VC money for innovative startups, and now that interest rates are less favourable, we are a fully regulated bank, benefitting from the upsides of that category – making a much bigger margin on deposits with the ECB.

“We strongly believe that now interest rates are less favourable for individuals and startups, we can’t simply receive four per cent for our deposits with the ECB, yet offer zero back to our customers. Therefore, we launched our first N26 Savings Account product for Spain, which will be rolled out gradually across other European markets.

markets with team members from those regions. It is that combination of being in the same time zone, culturally speaking, as our market and hiring corresponding talent that has helped, and will help us, further our game across Central Europe.”

Reboiro is excited for the launch of the bank’s latest products there.

“N26 benefited from some good macroeconomic timing – a bit of the best of both worlds,” he says. “We lived through

“We also have several future products on the go: one centred around onboarding a crypto trading platform in order to offer crypto assets in a manner that targets all demographics rather than just the early adopter. The other is building an N26 experience around investing into equities and ETFs because we think we could build up the culture of that in Central Europe.”

With the benefit of hindsight and BaFin in its corner, hopefully, all this and more will be achieved without losing focus on the game plan: to become the best trusted bank account for daily usage in Europe.

I see BaFin as an N26 ally... we all want the same thing, which is to see sensational growth but done well and with control

Steadfast & true

OakNorth planted its feet in fintech soil in 2015, when interest rates were low, digital fever high and capital cheap. Five years later, two of those key metrics, at least, have reversed.

The fully licensed bank passed major milestones at breakneck speed: the first UK challenger bank to make a profit (in 2016, just 12 months after launch), the first to achieve unicorn status (in 2017), and one of the first globally to achieve carbon neutrality for Scope 1 and 2 emissions (in 2019). And then the world changed in 2020.

So how has the bank fared since COVID?

Like its namesake, it’s sturdy. Despite lockdowns, navigating the

consequences of Brexit and fighting recent economic headwinds – including UK inflation hitting a 40-year high, 14 successive monthly interest rate rises, and the ongoing Russia-Ukraine war – the bank built by entrepreneurs for entrepreneurs, and its lending platform, have thrived.

Pre-tax profits in 2022 were £152.3million, it completed more than £1.5billion of new lending, and its depositor base grew to more than 214,000 customers.

The bank’s loan book, including its key domestic and commercial property segments, stands at £5billion, with an industry-leading cost-to-income/efficiency ratio of 26 per cent. Given a reported loan default rate of just 0.07 per cent versus a sector average of 0.32 per cent, as recently as 2021, there remains plenty of cushioning,

despite its exposure to a weakening UK property sector.

While a strong return on equity is obviously a key metric, according to CFO, Rajesh Gupta: “More important is the fact that we’ve been able to lend out £10billion (in total) to UK clients – these clients in turn referring customers to us,“ he says.

He adds: “More than 80 per cent of our customers come through referrals, where we pay nothing to the intermediary. Equally, 30 to 40 per cent of the loans we write every year is repeat business of some sort or other. So the customers don’t just come to us, they stick with us.“

And that gives OakNorth a certain resilience. Hitting profitability as quickly as it did was an important testament to its discipline and its philosophy, according to Gupta: “Whilst we’ve had our own capital raising rounds, a lot of the capital we generate (in order) to grow ourselves comes from our profits. That’s a very fortunate position to be in.”

That said, he knows the best form of encouragement for any industry is being able to access capital so that innovators and entrepreneurs can spend their time thinking about customer solutions, rather than running after investment.

“That is critical and it applies whether you’re in a seed round, in a series 1, 2, 3 round, or even later on, when embarking on an IPO roadmap,“ he says. Capital and how you manage your treasury risk are bread and butter issues for OakNorth, their importance highlighted by the US Silicon Valley Bank (SVB) debacle.

UK challenger OakNorth has grown from the acorn of an idea into a flourishing fintech, more than capable of withstanding harsh conditions. We spoke to its CFO Rajesh Gupta about profitability, resilience… and expansion

“They got their asset and liability management wrong and probably made a few mistakes along the way,“ observes Gupta.

The demise of SVB in March 2023 has subsequently led to the bringing forward of proposed (and punitive) legislation in the US. This includes the Failed Bank Executives Clawback Act (FBECA) 2023 and the Recoup Act. Taking on board many of the features of FBECA, the Recoup Act would allow the FDIC to recover senior executive pay where banks with assets of $10billion or more go bust. For banking executives in the US, at least, the message is clear – get your management wrong by taking unnecessary risk and your bonus payments could disappear in a puff of smoke.

The decision to hand SVB’s profitable UK business to HSBC – on the grounds of shoring up market confidence – at the expense of a bid from a specialist lender (OakNorth was a strong contender) may yet have negative longer-term implications. Some commentators have suggested that it could undermine the UK’s ambitions to become a technology superpower.

Irrespective of how the consequences of that decision play out in the longer term, for Gupta, as CFO in the here and now, liquidity is king.

“From my vantage point, more than anything else, we watch liquidity all the time, making sure that the liquidity we take to run the bank is as safe as possible. We fund our loans with either term deposits or 90-day-plus notice accounts; a very, very conservative way of running a liquidity policy,“ he says.

It’s straightforward and simple financial management. As Gupta puts it: “It’s preferable to provide better service to your customer, and get a little bit of a premium on price, than work out incredibly complex structures to get a little bit of pop in your profits. It’s an important philosophy of the bank and one that we apply in OakNorth Finance, as well.“

That’s not to say his role as a CFO is any easier. Like most of his peers, Gupta’s is changing in response to technology and a dynamic macroeconomic landscape.

“Five, seven, 10 years ago, a CFO could sit back, and rely on history to be an accurate predictor of what the future was going to bring. That’s no longer the case,“ he says.

“I have moved from having very definite plans, targets, and being able to operate

step by step, to being someone who operates on scenarios, because the future is difficult to call. You have to say ’OK, the scenario could be Y, or it may be Z,’ understand each one and determine how you’ll play it.“

THE AMERICAN DREAM

The state of the specialist and mid-market banking system in the US in the wake of SVB hasn’t dulled OakNorth’s ambitions regarding expansion there. Plans, which have been talked about for some time, are still in their early stages. But, like most

For any bank considering the move, it’s also worth remembering that while in the UK there are relatively few banks, the US currently has more than 5,000, many of them community-based.

“In the UK, banks tend to be generic,” says Gupta. “We do have some that look at specific communities, in specific areas, but the products and solutions we develop, tend to be far more generic. The difference between that and the US has a significant impact, not only in terms of behaviour, but also the networks you need to tap into –finding out where your customer is, and what the customer need is.

“So, yes, we can take OakNorth across border, but we need to be aware that it’s a far more complex legal and tax situation. We need to understand how the US conventions differ between states, and between different communities, and figure out how that can help us determine what our customer solution needs to be. None of that should be underestimated.”

It wouldn’t be going into the States blind, though. OakNorth already has a US presence via its whitelabel banking platform with banks such as PNC, Capital One, Fifth Third, Customers Bank and Old National, having leveraged its credit monitoring and analysis software.

things OakNorth does, it’s well thought through.

“On the one hand, going west is smart for most fintechs, because it’s a great market, a large market, and business thinking, in many ways, isn’t dissimilar to how it is (conducted) in the UK, and in the way they make decisions. But, equally, the US is a very, very different marketplace when it comes to regulations,“ says Gupta.

A case in point is having to deal with 50 state-wide specific regulations in areas such as taxation, licensing, etc.

“As a new entrant, you need to be very clear what you’re doing," he adds. “It is one currency in the US, but multiple laws and multiple tax implications that one needs to understand.“

Longer term, an IPO is still a possibility for OakNorth. But, while no definitive timeline has been set, the bank has indicated that if it does pursue a listing, it’s now leaning towards the US rather than the UK, due to the lack of an investor base focussed on highgrowth technology here. IPO or not, it’s looking to increase the number of US technology clients it services and, if it were to expand its bank to the US in the future, it may seek a banking licence, possibly via an acquisition. When asked about its US plans in March, OakNorth CEO and co-founder, Rishi Khosla, said it was keeping an ’open mind.’

In 2019, OakNorth was valued at $2.8billion – when SoftBank injected $440million into the group. Continually improving metrics since, mean OakNorth is now a very well-seasoned bank. And seasoned oak is always more valuable.

We fund our loans with either term deposits or 90-day-plus notice accounts; a very, very conservative way of running a liquidity policy

EASY BANKING F R HAPPY SPENDING

In Spain, mobile payments belong to the young. That’s according to the third annual joint survey by payments platform Pecunpay and Visa, which showed 91 per cent of people aged 18 to 29 will tap on glass rather than fumble in their wallet for a card.

For them, it’s digital all the way – even if their daily average spend is small, not more than €25 a week.

It’s these consumers that challenger bank Fazil has its sights set on with a marketplace-inspired, rewards-based, free account for ‘happy spending’ (daily discretionary expenses), and an interface that’s defined by its simplicity. It even communicates with customers in the emoji-led language of a digitally native generation.

Fazil’s onboarding can be completed within four minutes of learning of the bank’s existence, requiring just a selfie and an ID photo – the process powered by AI and optical character recognition (OCR).

“That is the first touch that the user has within our experience, and it’s one of the most important, in our view’, says Ignacio Santos, CEO of Fazil. “We have dedicated the same resources to the onboarding process as to the entire app.”

The challenger is defined by its name – Fazil means ‘easy’ in Spanish.

Launched in 2021, it has leaned into

the qualities that have made neos so compelling in other regions. It’s even described itself as aspiring to be ‘The Spanish Revolut’. Fazil is on a mission to (in no particular order) become the country’s first challenger unicorn, the pre-eminent digital-only contender in Southern Europe and, ultimately, nab a substantial share of Europe’s 500-million-strong banking population.

It might have some competition for the second of those in particular. Although there is currently a war for customer loyalty going on among Spain's biggest banks, the country is crowded with neos, including many homegrown as well as outsiders like N26, Curve, Wise… and Revolut itself.

Santos isn’t fazed by that. In fact, he says it points to there being no clear digital-only contender to banks in Southern Europe. And he's probably right. But unless one emerges soon, the market might fracture further and there will be no clear winner – although there’s likely a deal of consolidation to come further down the line.

There’s already been some evidence of that happening. In July, Turkish fintech Papara bought popular Spain-based neo Rebellion, and it’s not stopping there. Papara's CEO Emre Kenci has confirmed he’s aiming to buy two companies in Europe in 2023.

Meanwhile, N26, which is now focussed on Europe, having expanded into and

withdrawn from both the US and UK, announced in December that it had integrated Spain’s hugely popular mobile payments platform Bizam. This gives N26 customers with a Spanish IBAN the ability to send, receive and request money through the solution and allows them to pay with Bizam at partner merchants.

SPREADING THE WORD

Fazil is undeniably fun, familiar and energetic. Its digital-native-led approach expands beyond the product, with marketing and promotional campaigns that it’s hard to imagine established banking players being able to pull off.

For instance, it sponsors the five-time Premier League-winning footballer Aymeric Laporte’s Adidas-toting e-sports team, AYM – another clear gauge of Fazil’s innovative, digital-centric approach to customer acquisition.

“The most relevant key point here is to build a brand that our users love, and then be top of mind whenever they want to open an account,” says Santos.

There’s no doubt that its strategy as an e-money-licensed player, built on a partnership with whitelabel card issuer Pecunpay, depends on fast customer growth. And it saw a 20 per cent monthly increase during 2022, although by the year end, numbers were still small at 5,500. Nevertheless, they spent more than

Fazil is the Spanish challenger chasing a 500-million-person prize. It’s got a way to go, but it’s not lacking ambition. We met the man with a vision, CEO Ignacio Santos

€12million between them with cash-back Visa debit cards, from which Fazil negotiates three to 15 per cent from merchants for each transaction.

“We are creating an income stream from cashback,” says Santos. “Cashback is something that is not just a benefit for the user. It’s something that generates word of mouth, so that brings acquisition to us, it’s retention, because whenever you see that the card pays you back whenever you spend money, you try to do it more often. And it’s a revenue stream. Say we come to an agreement of 10 per cent with the merchant, we then provide eight per cent to our user, so there’s two per cent for us. And that’s two per cent of every single transaction, of every single user.. Having a beer with a friend, going for a dinner, having a brunch – these kinds of expenses are the ones that we are targeting.”

But Fazil is now expanding its product offer beyond this ‘happy spending’ to the bigger things in life. Working the third

party providers, it’s gearing up to include mortgages with the innovative lendtech Colibid; it already offers energy price comparisons and virtual health consultations; and it has a partnership with the merchant POS provider Square, too.

It’s looking to issue co-branded cards with a B2B2C proposition that will create another revenue stream through a set-up charge and monthly fees.

E-money institutions (EMIs) have to work hard at success, given they are prohibited

the other hand, it’s bad, because we cannot touch them – we cannot make revenue from those funds.”

Fazil’s pitchdeck for its most recent Crowdcube funding as part of a €500k seedround, set out its ambition to acquire 50,000 users (10x growth) over the next 12 months, positioning it for a €2.5million Series A raise in 2024.

It’s observed the change in focus at European neobanks.

“If you see the pitches of the founders of the main neobanks in Northern Europe, at the beginning, they were positioned as ‘we are more efficient than the banks, we do not have the infrastructure that they do’,” says Santos. “But the reason people acquired their services was to use them as a secondary account, mostly for their daily expenses – what we prefer to call ‘happy spending’. And, in our opinion, this was driven by COVID – they were no longer going to an ATM. Instead, they opened secondary accounts and used them like ATMs – to pay for going for dinner, or going out at night.”

For Santos, this is both good and bad: “Good, because we are, I always say, probably more secure than a bank, because, even if we fail, our client funds are safe. We cannot touch them. On

There is no consensus on how EMIs can most effectively accrue revenue, so a variety of diverse methods have been adopted across the industry, including bolting on cryptocurrency services.

Fazil already has its sights set on that space, a path well trodden by industry stablemates such as Revolut, who have taken existing cryptocurrency options and peppered them with innovative user features such as currency returns. Conscious that its demographic will not be forever young, Fazil is also looking to introduce Fazil Junior for parents and kids.

Research by Pecunpay suggests that the time is perfect for a pre-eminent Spanish neobank to emerge in a post-COVID economy that has embraced a cashless approach to business, and has an increasing appetite for digital payments. Thirty-seven per cent of respondents in one survey cited ‘ease of use’ as the biggest factor influencing their choice of provider. In which case Fazil is set to reach its goals, because, as Santos says: “It is just stupidly easy.”

The most relevant key point here is to build a brand that our users love, and then be top of mind whenever they want to open an account from accessing customers‘ funds and investing them in profit-making ventures as a conventional bank would.

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carrots Sticks &

It sounds obvious, but fintechs don't behave like incumbent banks. Regulators took a while to catch up with that, though, and when they did, it became something of a battle. Are they all now settling into a productive truce?

McFarlane takes a look at approaches taken by a sample of regulators around the world

THE UK’S FCA (AKA THE PROACTIVE ONE)

The Financial Conduct Authority (FCA) is credited with launching the world’s first regulatory sandbox in 2016 (just pipping Singapore to the post) and has since been steadfast in developing resources to help nurture fintech regulation.

Its success rate in doing so is exceptionally high with data showing that 92 per cent of firms nurtured through its Sandbox receive licence authorisation, as do 98 per cent of those who use its direct support and advisory services, which assist with governance as early as possible to lessen the chance of fines in the future.

More than 800 challengers have so far been supported through the Regulatory Sandbox and the FCA’s Innovation Pathways programmes. Successful participants have included Currensea, Bud and Zilch.

The FCA also makes a point of supporting firms on aspects outside of the regulatory perimeter, such as testing new tech or providing a synthetic data sandbox. This gives the regulator a front row seat onto the insights and implications of technologies, which it then uses to better inform policy development.

The FCA is often the front runner in publicly highlighting challenger issues and pitfalls and, if need be, stepping in to protect consumers. It did exactly that with buy now, pay later lender Klarna in 2020, to change what it saw as unfair terms and conditions.

GERMANY’S BAFIN (AKA THE TOUGH ONE)

Germany is one of the few European countries with no sandbox or formal approach to supporting fintech companies. One of two banking supervisory authorities in Germany, BaFin treats them on par with traditional banks and requests either a full banking license or a combination of specific permits in order to operate. Regardless, BaFin is a supervisor of choice for challengers, both for unicorn successes such as N26, and memorable flops like Wirecard or Greensill Bank AG.

It audits frequently and deals heavy-duty restrictions when needed, as has happened recently with both N26 and Solaris Bank.

THE US’ FEDERAL RESERVE (AKA THE CONFLICTED ONE)

The US regulatory landscape has 50 independent legislation bodies, 10 stand-alone sandboxes, and a meshwork of overseeing agencies. The lack of unity makes it hard for startups to test products across more than one state at a time. Although improving, the US is criticised for being overly cautious with innovation, and taking a harder line with fintechs that with established banks.

The federal nature of the system results in some interesting conflicts. In July this year, for instance, the state of New York’s regulator sued the Federal Reserve to void its decision to award national bank charters to online lenders and payment companies, saying it was unconstitutional and put vulnerable consumers at risk.

And banking app Chime, whose accounts are FDIC-insured, was harassed by state regulators in 2020 who tried to ban it from using the term ‘bank’ and ‘banking’ in its marketing materials and website.

SINGAPORE’S MAS (AKA THE CAUTIOUS ONE)

Singaporean regulations were, until relatively recently, too stringent for digital banks to launch, despite having a regulatory sandbox since 2016 to encourage them to explore new technology and business models.

MAS turned a corner in 2020, unveiling two types of digital bank licence. But the requirements needed to apply are tough (such as applicants having a minimum net worth of USD $100million).

While there are several out-of-country challengers operating in Singapore, to date MAS has only granted five local licenses, each to a company with the backing of either an established big tech, large financial institution, or Chinese corporations.

LITHUANIA’S BOL (AKA THE SCARY ONE)

Thanks to its fintech-friendly environment, BoL oversees 147 licensed fintechs, the largest cohort in the EU. The regulator has gradually required a reputation for being efficient, transparent, and fair. Many would-be neos have sought licences via the Lithuanian regulator, including UK challenger Revolut.

While BoL typically prefers dolling out fines (18 so far this year, totalling €1,719,000) and warnings to taking disciplinary action, it is unafraid to suspend managers and revoke licences when startups act recklessly.

A case in point is PayrNet (the former subsidiary of UK fintech Railsr, whose licence BoL revoked in June this year following what it believed were ‘serious, systemic’ failures.

It’s not often that the first question a fintech panellist is asked is ‘what do you look like?’. Nor for the audience to be told to close its eyes and imagine someone’s appearance, based on their description and their voice alone.

The point is, that the majority of us take it for granted that everyone else experiences the world the way we do. But the reality is that around 15 per cent of people globally – that’s one billion – live with a ‘disability’ (a word which itself is

a man standing in front of me – he was middle-aged, with two sticks.

“I asked him ‘can I help you?’. And he said to me: ‘Yes, and no. No, you can’t help me. Yes, I just need your attention. I want to get into this hotel, and I am not in a situation to get into it, because I am disabled by the circumstances. I am not disabled by myself.’

“This was the moment when I started really thinking about the dignity people have, and the possibility to live their own life without being disabled by others. To

In its 2022 study, Bridging The Disability Gap: An Opportunity To Make A Positive Impact, Mastercard described such financial exclusion as a ‘fallout of disability’ that potentially damaged a person’s entire life by restricting access to education, healthcare and employment.

In fact, studies show that people with impairments are up to twice as likely to experience unemployment and poverty. If, just by being more thoughtful about how financial products and services are designed for those who struggle the

Access for all... the inconvenient truth

The biggest minority group in the world is made up of one billion people with some form of disability, who routinely have their life chances limited by poor access to financial services. Gabrielle Bugat from Giesecke+Devrient (G+D), Milan Šverˇepa of Inclusion Europe, Joanne Dewar at The Payments Association and Dagma Spill from the German Multiple Sclerosis Society sat down to discuss what could be done about it

loaded with interpretation and freighted with potential bias), which may or may not be visible.

Two panel discussions at Money20/20 Europe this year asked why so many financial products and services are designed with no thought to how people in the largest marginalised group experience them – which means they often face barriers to financial freedom. They also looked at how designing products and processes accessible to 15 per cent of the population, is not only possible but of benefit to 100 per cent of users.

The first panel featured a line-up exclusively drawn from fintech and banking. But the second was comprised of both payment professionals and advocates for people with impairments.

Among them, Dagmar Spill, chair of the German Multiple Sclerosis Society (DMSG), summed up the lived experience for many of the people she advocates for.

“When I started with the DMSG, I was invited to a conference. Standing in front of the hotel, I saw there was this revolving door. A lot of people wanted to get in, and the door was cycling and moving, with the side door closed. And then I saw

think about the concept of accessibility, and to think of it from a new perspective.”

In 2019, a United Nations report found that people with impairments considered 28 per cent of banks in developed countries to be inaccessible. In some emerging economies it was as high as 64 per cent. In the West there is another important demographic trend driving the statistics.

most to access them, the industry could materially impact those statistics, wouldn’t that be a moral good?

Today’s technology has provided the tools to empower people with impairments like never before. Global standards, such as those developed by W3C, an initiative established by ‘father of the internet’ Tim Berners-Lee to give developers the foundation on which to build inclusive digital user experiences, have been available for some time. What’s missing, then, is awareness.

“In Europe alone, today there are 90 million people who are above 65 years old, and in just a few decades this will increase to 130 million,” pointed out panel host Gabrielle Bugat, CEO of G+D ePayments. “So we have to rethink how we support the delivery of payments and banking services; we have to think about accessibility and how can we can provide a better banking experience.”

Panel member Joanne Dewar, Ambassador for The Payments Association, commented: “It’s not that they (designers) don’t have good intent. We call it unconscious incompetence. But when you have that lightbulb moment, you go from unconscious incompetence to conscious incompetence. You’re suddenly so aware of all the things that you hadn’t really considered before. Then you’re on the journey to really being inclusive.”

AI and chat-bots could be used to make it easy to navigate banking tasks, using text interfaces to assist those with hearing or speech difficulties, as the Mastercard report pointed out. Text-to-speech and

What usually happens with accessibility is that it is treated as some sort of an afterthought

Milan Šveřepa, Inclusion Europe

speech-enabled digital processes, based on natural language processing (NLP) can provide accessibility for those with visual limitations, making it possible to ‘talk’ to a mobile banking or mobile money menu, rather than use text messaging or apps. Contactless technology enables users to interact with a familiar device, such as an accessible smartphone rather than a kiosk for cash disbursal –they often present difficulties for people with a wide range of permanent or temporary challenges, including some associated with cognitive impairment and poor mental health.

“But what usually happens with accessibility is that it is treated as some sort of an afterthought,” said panellist Milan Šveřepa, director of Inclusion Europe, a Brussels-based organisation that works on behalf of people with intellectual disabilities and their families.

“Once we’ve developed the product or technology, designed the rules and procedures – we’ve described everything and made whatever we are making – only then the company decides (or, more likely, somebody tells them) there are some people with a particular kind of disability that cannot use it. And then the tech people scramble to try to fix it, usually resulting in the addition of some sort of layer over the original, and complicating things for people with other kinds of disabilities.”

2.2bn

visually challenged persons globally stand to be financially excluded due to products that are not inclusive

76.5%

The world turns slowly: For many disabled people, restricted access to services represents financial exclusion

cent of visually impaired customers did.

say they need to ask someone else for help to access and navigate a banking/finance system

Mastercard report

Embedding the principles of accessibility for all at the very beginning of the design process, he said, was not just good for the individual and society at large, but for individual businesses, too.

That’s not to underestimate the challenge, as the Mastercard report pointed out. It found a huge disparity in accessibility issues experienced by different groups. For instance, while only 20 per cent of people with cognitive disabilities found online banking channels easy to use, 80 per

Mastercard report

Meanwhile, 60 per cent of hearing-impaired users found it easy to access mobile banking, compared to only 30 per cent with other physical challenges. Digital wallets were universally difficult to use and people with cognitive disabilities were the least well served of all customers.

Mastercard concluded that with such a diverse range of factors contributing to the lack of financial access for persons with disabilities, financial inclusion required that each form of disability should be addressed via ‘innovative solutions, formulated for specific use cases,’ adding that the varied landscape of opportunities and challenges across regions also necessitated a localised approach.

Designing with any of these groups in mind shouldn’t be seen as an act of charity, but rather a sales opportunity, argued Milan Šveřepa.

“It’s essentially a question of the relevant company trying to reach as many potential customers with their products or services as they can. With the big numbers of people who have disabilities or limitations in society, not providing accessibility, or not thinking of how to make services and products accessible to everybody from the start, is essentially walking away from a huge portion of the customer base.”

That is precisely the message of Purple Tuesday, a global day of awareness-raising that takes place in November every year, on the first Tuesday of the month, organised by UK-based direct payment facilitator We Are Purple. It campaigns for accessibility changes to enhance the relationship between businesses and consumers.

In 2022, Purple Tuesday channels garnered 19 million impressions. So far this

loyalty from millions of new customers,” he said. “This is a leadership challenge.”

Joanne Dewar at The Payments Association agrees that there is a lack of commercial vision when it comes to designing for people with disabilities.

“I’ve been involved in many innovative propositions, through the years, and fintechs have been brilliant at enabling specific propositions to be brought to market for specific use cases,” she said. “What you then very often find is that whilst there may be a specific use case in mind, there’s a much broader opportunity for mass adoption and it can end up having very broad appeal.”

A compelling example of that outside of financial services, is audiobooks, originally designed for people who couldn’t see to read, but now a $5.3billion mainstream industry. But more usually, it’s a case of accidental reverse application.

As G+D’s Gabrielle Bugat noted, contactless cards were originally conceived to accelerate transaction times for the wider population. “But with the sound a contactless payment makes, it is suddenly a

the rest of the population,” it contended.

“A good product is easy to understand, and that is the whole point,” said Inclusion Europe’s Milan Šveřepa. “If any organisation, wants people to use its products and services, then make that product or service easy to understand and to use.

“The technology already exists, is already in use, and now is at everybody’s fingertips, with tools like ChatGPT, Bing, and other AI. At Inclusion Europe we use AI technologies to generate easy-to-understand text on a regular basis, then validate it with people. That’s been put to use in many cases, including in banking.”

The United Nations Sustainable Development Goals (SDGs) framework for global progress, built on the principle that no one should be left behind, includes seven targets that explicitly refer to persons with disabilities, and six more include persons in vulnerable situations, which include persons with disabilities.

It’s another incentive for socially aware financial services providers to embed universal accessibility design principles into their processes.

Ticking an ESG box for shareholders shouldn’t be the motivation, though. Ultimately, it’s a matter of empathy and

year, 6,000 organisations, including many in financial services, are signed up to participate across the UK, UAE, USA, Pakistan and Malaysia.

We Are Purple highlights that the spending power of disabled people and their households worldwide is estimated to be worth $8trillion – £274billion in the UK alone – and is increasing by 14 per cent per annum, but only 10 per cent of businesses have a targeted strategy for reaching this segment. In fact, its surveys show 75 per cent of disabled people and their families have walked away from a business because of poor accessibility or customer service.

We Are Purple puts the number of people in the world experiencing disability at any given time at 22 per cent of the population, including those recovering from long-term illness. In a recent interview, its CEO Mike Adams pointed out that, as a group, they have proved to be the stickiest consumers.

“If you get it right, you will have brand

technology that’s accessible for the visually impaired,” she said. “Then we started making a card with a notch [now widely adopted], so that you can recognise which side you have to use it, and began wondering if we could include 3D braille. It turns out that we do have the technology.

“So now you have a secure and convenient payment experience for the visually impaired that’s fully facilitated with the card and the technologies around the card.”

In its report, Mastercard argued that catering to the needs of people with disabilities starts with thoughtfully crafting the user experience in a manner that increases ease-of-use and accessibility, without sacrificing value and function.

“It is of paramount importance that products serving persons with disabilities provide a complete and enjoyable experience to the end-user that is as good, if not better than, the services offered to

respect for our fellow individuals.

As MS ambassador Dagmar Spill told the panel: “A lot of people tell me, ‘OK, I have a disease like multiple sclerosis, and it is a period of my life where I have to focus on my possibilities and on my losses. Yes, I lost a lot of things, but I get a lot of new possibilities. If you want to be a good ambassador, then tell people that I want to be treated not as a patient, but as me, as a person with a lot of possibilities.”

“Accessibility is about dignity, independence, integration, and, at the end of the day, equal opportunities,” concluded G+D’s Gabrielle Bugat. “As we move towards a more digital and diverse society, payment methods should be simple, scure and easier for all.

“Technology has a crucial role to play in promoting accessibility and inclusion.”

People tell me ‘I want to be treated not as a patient, but as me, as a person with a lot of possibilities

Dagma Spill, German Multiple Sclerosis Society

What you very often find is that whilst there may be a specific use case in mind, there’s a much broader opportunity for mass adoption

Joanne Dewar, The Payments Association

Accessibility is about dignity, independence, integration, and, at the end of the day, equal opportunities

Gabrielle Bugat, G+D

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Sky-highscary

Incidents of both authorised and unauthorised fraud have fallen slightly, but that’s no comfort to victims like our own Doug Mackenzie

Unauthorised financial fraud losses across payment cards, remote banking and cheques totalled £726.9 million in 2022. Admittedly, that was a small decrease (less than one per cent) from 2021, but the numbers are still staggering.

Unauthorised use of debit cards is an unsettling experience that can leave victims feeling vulnerable and helpless. My own recent fraud story starts with me being stuck in LaGuardia Airport, New Jersey, waiting eight hours for a delayed flight to Cincinnati, Ohio. I was surrounded by husky Midwesterners, all chomping at the bit to get back home, or in my case, the Holiday Inn.

This was no holiday, though. I was set to meet several of the biggest players in Ohio’s fintech and insurance ecosystem, which is the fourth largest in the United States. The day after flying into this ‘flyover’ State, I discovered that my debit card had gambled £850 on Sky Bet while I was mid-flight. Alarm bells rang.

Had I, at 30,000ft, managed to procure an internet connection, decided that the Cincinnati Bengals were going to make the Super Bowl again and gambled a huge part of my rent away?

Obviously not. I was asleep and nine kilometres skywards where there is still a blissful respite from the work emails.

I was banking with a fintech company in the UK, so I knew that timezones were going to force me to be patient. What I wasn’t expecting was just how long it would take to get the funds back. When a similar thing happened before in the

United States with the same bank, it was resolved almost immediately. But this time it took around a week of chasing, nudging and polite haranguing on my part over a faceless chat, built into the banking app.

The text-based chat that fintech banks use as their method of communication was not up to the complexity of this task and it certainly made me realise how scary this would be for someone tnot proficient in tech or banking.

This alarming situation is unfortunately a reality for many individuals, highlighting the need for heightened awareness and security measures by providers.

THE UNITED STATES IS FAMOUSLY A LAGGARD WHEN IT COMES TO UPDATING TECHNOLOGY AROUND CARD PAYMENTS

I knew I had a concrete alibi and the evidence to prove it. And, eventually, the funds were returned to me – but there was no talk of how this was resolved, or who ended up with the liability. Did they catch the fraudster?

THE AMERICAN WAY

I’ve only ever been the victim of unauthorised debit card use on or just after a trip to the United States – three times now.

The country is famously a laggard when it comes to updating the technology around card payments. The US was the last G20 country to adopt chip-equipped cards. And there is one element of North

American payments culture that has always blown my mind. At a restaurant, you surrender your card to the staff to input the amount and swipe it, figuratively and literally, out of your account.

Due to all the added tip charges, there are often delayed notifications from a transaction. As a European, so used to chip and pin and, obviously, now contactless, this seems absurd.

I’m not accusing the collective waiting staff of North America of being the cause of my misfortune on this occasion, I’m only drawing attention to the fact that this is simply the only time I would ever let someone walk away with my card.

When your card is taken out of your sight, you lose control over the transaction process. This opens the door for unscrupulous individuals to make unauthorised copies or use your card details for fraudulent purposes.

SCALE OF THE FIGHTBACK

I was a victim of unauthorised fraud –which makes up the vast majority of the £1.2blilion lost from accounts in 2022. Banks stopped criminals taking a further £1.2billion, according to the UK Finance Annual Fraud Report.

Meanwhile, Rein Graat, ING’s group chief compliance officer, told me that banks worldwide managed to claw back an additional £294million from criminals. But the annual investment needed by banks to do this was £1.1billion.

So, banks aren’t being complacent, but they are still losing as much as they’re preventing. And customers are still left frustrated, shocked and with lots of unanswered questions.

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