FinServ in the age of AI – Can the FCA keep the machines under check?

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I landed in the UK about 14 years ago. I remember my initial months in the UK, when I struggled to get a credit card. This was because, the previous tenant in my address had unpaid loans. As a result, credit agencies had somehow linked my address to credit defaults.

It took me sometime to understand why my requests for a post paid mobile, a decent bank account and a credit card were all rejected. It took me longer to turn around my credit score and build a decent credit file.

I wrote a letter to Barclays every month, explaining the situation until one fine day they rang my desk phone at work to tell me that my credit card had been approved. It was ironical because, I was a Barclays employee at that time. I started on the lowest rungs of the credit ladder for no fault of mine. Times (should) have changed.

Artificial Intelligence, Machine Learning, Deep Learning, Neural Networks and a whole suite of methodologies to make clever use of customer data have been on the rise. Many of these techniques have been around for several decades. However, only in recent times have they become more mainstream.

The social media boom has created data at an unforeseen scale and pace that the algorithms have been able to identify patterns and get better at prediction. Without the vast amount of data we create on a daily basis, machines lack the intelligence to serve us. However, machines rely on high quality data to produce accurate results. As they say, Garbage in Garbage out.

Several Fintechs these days are exploring ways to use AI to provide more contextual, relevant and quick services to consumers. Gone are the days when AI was considered emerging/deep tech. A strong data intelligence capability is nowadays a default feature of every company that pitches to VCs.

As AI investments in Fintech hit record highs, it’s time the regulators started thinking about the on-the-ground challenges of using AI for financial services. The UK’s FCA have partnered with Alan Turing Institute to study explainability and transparency while using AI.

Three key scenarios come up, when I think about what could go wrong in the marriage of Humans and Machines in financial services.

  • First, when a customer wants a service from a Bank (say a loan), and a complex AI algorithm comes back with a “NO”, what happens?
    • Will the bank need to explain to the customer why their loan application was not approved?
    • Will the customer services person understand the algorithm enough to explain the rationale for the decision to the customer?
    • What should banks do to train their staff to work with machines?
    • If a machine’s decision in a critical scenario needs to be challenged, what is the exception process that the staff needs to use?
    • How will such exception process be reported to the regulators to avoid malpractice from banks’ staff?
  • Second, as AI depends massively on data, what happens if the data that is used to train the machines is bad. By bad, I mean biased. Data used to train machines should not only be accurate, but also representative of real data. If a machine that is trained by bad data makes wrong decisions, who will be held accountable?
  • Third, Checks and controls need to be in place to ensure that regulators understand a complex algorithm used by banks. This understanding is absolutely essential to ensure technology doesn’t create systemic risks.

From a consumer’s perspective, the explainability of an algorithm deciding their credit worthiness is critical. For example, some banks are looking at simplifying the AI models used to make lending decisions. This would certainly help bank staff understand and help consumers appreciate decisions made by machines.

There are banks who are also looking at reverse engineering the explainability when the AI algorithm is complex.  The FCA and the Bank of England have tried this approach too. A complex model using several decision trees to identify high risk mortgages had to be explained. The solution was to create an explainability algorithm to present the decisions of the black box machine.

The pace at which startups are creating new solutions makes it harder for service providers. In recent times I have come across two firms who help banks with credit decisions. The first firm collected 1000s of data points about the consumer requesting for a loan.

One of the points was the fonts installed on the borrowers laptop. If the fonts were used in gambling websites, the credit worthiness of the borrower took a hit. As the font installed indicated gambling habits, the user demonstrated habits that could lead to poor money management.

The second firm had a chatbot that had a conversation with the borrower and using psychometric analysis came up with a score. The score would indicate the “intention to repay” of the customer. This could be a big opportunity for banks to use in emerging markets.

Despite the opportunities at hand, algorithms of both these firms are black boxes. May be it’s time regulators ruled that technology making critical financial decisions need to follow some rules of simplicity or transparency. From the business of creating complex financial products, banks could now be creating complex machines that make unexplainable decisions. Can we keep the machines under check?


Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on Inclusion and a podcast host.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).


 

 

 

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Fintech has not created a level-playing field for small to mid-size banks

Temenos released in April its annual report[1] on the State of digital sales in banking. As I was reading some of the key findings reported by Jim Marous[2], I was struck by these observations:

More concerning is the reality that most of the high marks for digital sales continue to be garnered by only the largest organizations.

 Larger banks ($150B – $2,500B) not only have a financial and technological advantage, they benefit from a head start in the deployment of all digital account opening capabilities, allowing them to gain a share of mind advantage through media and word of mouth. 

 #AndTheIronyIs that technology was supposed to democratize banking not only for the end-customer but also for the smaller, less national, less international financial services provider. After all, fintech is by now overweight B2B providers. Remember it all started as a disruption, replacement to banking. Then it shifted to collaboration and partnerships with incumbents and as Jessica pointed out ‘Something’-as-a-service, the new fintech paradigm.

#AndTheIronyIs that despite the plethora of B2B unbundled fintech services out there, anything you can imagine as a service; the mid and smaller size banks remain overall behind. Of course, there is a variety of metrics and KPIs that one can use to measure their digital readiness. From mobile account opening, save and resume functionality, small business account opening, etc.

Digital transformation these days requires internal cultural and technological changes whose impact will be seen 3yrs down the road. That means that mid to small size incumbents remain at a disadvantage.

level playing field

When I look at 11Pulse, the digital benchmarking offering of 11FS that allows clients to benchmark themselves against peers on onboarding, security, PFM, …; I wonder whether mid to small size banks are flocking to take advantage of this service and to find ways to catch up.

I guess the simplistic answer is that small to mid-size banks don’t have the guts and the budget to stick to such a 3yr plan.

For sure they don’t have any internal strategic funding mechanisms like Goldman Sachs has. Goldman’s Principal Strategic Investments group has made key investments in Kensho and Tradeweb and helped create Wall Street chat platform Symphony, and much more.

Neither do VCs fund the transformation of existing banks because they are only interested in high growth stories, which means investing in those that are building the picks and shovels.

The only such example I have found is Cross River Bank that Battery Ventures, Andreessen Horowitz and Ribbit Capital invested $28million in 3yrs ago[3] and recently another $100mil was announced by KKR. Cross River bank started by supporting fintech startups with loans – $2.4 billion in loans for companies like Affirm and Upstart in 2015 alone. Today it is more than a leading marketplace lender for fintech. It is one of the top go-to bank-fintech cooperation providers. Its customers include Circle, Best Egg, Coinbase, Rocket Loans, Stripe, Upstart, Affirm, and Transferwise. Just 2 weeks ago it Cross River bank acquired Seed, a small business banking company.  Seed is a 5yr old online banking company for small business  owners and freelancers.

`If a payments company wants to become a lender or a lending company wants to do payments, then they have the ability to do that on our rails,` says founder Gilles Gade to Techcrunch.

The question to VCs, CrossRiver bank, 11Pulse, and other remains:

It is either the large incumbents (my Sharks) or the aggressively VC funded Fintechs (my piranhas) that are benefiting from the variety of  `anything Fintech as a service`. What about the bulk in between?

 

[1] The report includes the Temenos proprietary ‘Digital Sales Readiness Matrix’.

[2] Banks Not Meeting Digital Sales Expectations

[3] Who`s building the Banking Smart pipes

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer.

 I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

 Subscribe by email to join Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

Softbank Group eyes LATAM’s Neobank and the unbanked market

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The past decade has seen to major leaps made in financial services in the emerging markets – largely thanks to mobile penetration. Be it M-Pesa in Africa, or more recently Tencent and Alibaba in China, the transformation on the ground depended after usage of mobile phones became mainstream. However, there is one part of the world, that is stealthily moving towards one such leap frog moments – Latin America.

Latin America has the third highest penetration of smart phones globally, after North America and Europe. In 2017, smart phone penetration in Latin America was 61% and about 50% of smartphone users accessed the internet through their mobile phones. Smartphone penetration in the region is expected to grow to 76% by 2025.

A platform for growth is well set and the impact when growth occurs is going to be big too. That is because, 70% of the population in the region is unbanked. This is due to the processes involved in opening a bank account. The documentation required to open a bank account involves, proof of citizenship, employment and financials.

Nubank was the first Neobank of Latin America, and they are fast expanding within Brazil and Mexico. Both these markets are pretty large and hot for mobile based financial services. As per a PwC Fintech report, in 2018, there were 224 Fintech startups in Brazil, 94% of them based out of the southern part of the country.

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Nubank is hailed as the “Most Valuable Startup” of Latin America. There was recent press about them doing a $1 Billion fund raise from investors like Softbank group, at a massive $10 Billion valuation. The round is not closed yet, however, I wouldn’t be surprised if it goes through, due to the traction Nubank have achieved in a massive market. They have 8.5 Million customers already and are the largest digital bank outside of Asia.

With a huge base in Sao Paolo that has a 21 Million population, Nubank has captured the urban mobile-first customer base with an average age of 32 years. While the Nubank app provides basic banking services out of the box, the Fintech ecosystem in Brazil could allow for better opportunities.

Several Fintech players offering loans, wealth management services, mortgages and insurance can plug their apps onto Nubank’s platform. The API based integration could trigger a bundling up of financial services to form a Fintech Super-App.

One of the closest competitor to Nubank is a food delivery business – iFood. Brazilians are getting on lifestyle apps before they embrace fintech services provided by these lifestyle apps. It is interesting to see that in LATAM, a proper Fintech app (Nubank) has taken the lead, followed by lifestyle businesses (iFood). Whereas, elsewhere in China, lifestyle businesses started offering Financial services.

Brazil has certainly got ahead with Neobanking. But the other LATAM economies are catching up too. Albo in Mexico offers a digital banking experience, and provides a Mastercard that customers can use across the world – free of charge. Uala in Argentina is yet another Neobank app, that managed to acquire close to 500,000 customers in its first year.

With investors like Softbank and several Silicon Valley bigwigs getting into the act, LATAM could soon be the global hub of Neobanking. A case study where we see Neobanks leading a mass financial inclusion drive is waiting to happen. Definitely a space to watch.


Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on Inclusion and a podcast host.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).


 

Convergence or clash of non-natives & natives going Stable – #CVC19

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The 2019 Cryptovalley Conference remains true to its nature. Three days, three stages, and overweight technical and economics content. I attended for two days and became A cool kid on the Blockchain. 

The narrative has clearly changed. Lots of evidence around us. Yesterday the BIS, the umbrella organization, announced the launch of a global innovation hub in Basel,Hong Kong, and Singapore to help Central Banks to “identify relevant trends in technology, supporting these developments where this is consistent with their mandate, and keeping abreast of regulatory requirements with the objective of safeguarding financial stability”.

The EU is very serious about supporting Blockchain technology. Tom Lyons announced the Convergence conference this coming November sponsored by the European Commission, the EU blockchain observatory & Forum, Consensys, Alastria, and INATBA[1].

Several speakers and panelists participated at the Cryptovalley Conference from Central banks around the world. Of course, they repeatedly stated that they share personal opinions and not the CBs official position. Between the BOE, the Fed, the SNB, and the Bank of Italy, the conversations went deeper.

We were reminded that unconsciously we are going back to the 19th century when multiple entities issued money. I like to add to that observation that we are also going back to bearer instruments. Tomaso Atse, director of the UCL Center for Blockchain Technologies, pointed out that what is new in our era is programmable money and the creation of hybrid types of value (like combining digital identity with money or some other value) and the ability to exchange it).

Alexander Lipton, the EPFL visiting professor and founder of SILAmoney, poked and provoked and defended his point of view. In a nutshell, he is the godfather of the DLT version of Narrow Banking concept. This is a way for Central banks to deploy DLT technology by issuing a fiat-backed digital coin (FBDC). The idea is that the central bank will allow and work (indirectly) with a consortium of validators that manage the issuance of the FBDC. It is worthwhile reading about this concept `Narrow Banks and Fiat-backed digital coins` by Alexander Lipton, Alex Pentland, Thomas Hardjono (MIT). What jumps out of it is that right now, we are faced with Facebook intending to implement this kind of concept through the LIBRA association. While each Central bank is doing its in-house due diligence, concerned only with its local country monetary policy and reserves; there is a clear need for Central banks to get together. They should be designing a Central bank coordinated narrow bank consortium.

This is a wakeup call to nightmares of whether Central banks will be able to control reserves and rates on reserves if LIBRA scales. LIBRA`s adoption in countries with currency instability, is troublesome if it really scales. Can LIBRA create hyperinflation in Venezuela? Alexander Lipton, says yes.

The narrative has clearly changed, and we are shifting in a phase where understanding monetary economics is becoming important.

When I raised the question last week about the governance of the LIBRA association (see  here) and whether there could be collusion; I didn’t mean in the DAO technical sense (i.e. more 50% of validators collude and validate an invalid transaction). I meant collusion in terms of decisions about, for example, the management of the LIBRA reserve fund. Which currencies will be included, will the fund become a significant holder of US debt, how much government debt versus currencies, why share the interest of this cash cow by accepting new members, how to deploy the profits of the reserve?

Once the LIBRA reserve scales to $100billion (Ant Financial`s money market fund is currently $168billion down from a high of $250billion), the interest will be in the order of $1.5billion (assuming an average 1.5% interest rate). That is huge for an association with no reporting requirements.

We live in very interesting times.

Monetary policy issues need to be understood better.

Moral hazards are lurking everywhere.

Those that have been working on financial inclusion, self-sovereign identity, P2P protocols are feeling looted.

  • Why didn`t Facebook join the Decentralized Identity – DID- project (media report that they were invited and rebuffed an invitation)?
  • Why isn’t Facebook`s Calibra, the ID part of the LIBRA ecosystem, respectful of the open standards for verifiable credentials developed already by DID under the auspices of the World Wide Web Consortium (W3C)? Why do they want to design new ones?
  • Will this world domination-ish attitude, shoot them in the foot[2]?

Back to the native people, Lisa Nestor from the Stellar foundation, shared a great overview of the global P2P network that can be used by banks to work directly with each other, without the need for correspondent banks. Stellar is decentralized and open with 28 nodes currently. Their aim is to optimize cross-border payments and work with all currencies. They launched in 2014. In 2016 they had 9,000 accounts and today they have 3.2million. Their daily volume has reached $350k with a total cost of processing of $1.50! During the conference, they reported that the first Swiss node was launched.

Bitcoin Suisse announced that they are seeking a banking license and they will be expanding in Europe. Ficas, a Swiss crypto asset management group for HNW, was a platinum sponsor. They are based in Zug with presence in Turkey, Greece, Spain, and Australia.  Flovtec and Ovrium shared the award of the best Swiss Blockchain company at the SICTIC investor event during the conference. Orvium is a decentralized scientific collaboration platform for deploying blockchain and artificial intelligence technology. Flovtec is a liquidity provider for tokenized assets.

My opinion is that we will be seeing an explosion of stable coin issuance. CNNmoney Switzerland was at the Cryptovalley conference taking a pulse on  LIBRA (watch here).

The GOSCI  – Global Open Source Currency Index- is a novel independent volatility benchmark for Stablecoins. Launched by Bernard Lunn the same day the LIBRA white paper hit the market. Become part of it.

The Stablecoin.foundation was launched in October 2018 with 25 Stablecoin issuers from 16 countries. Its mission is to represent the collective interests of Stablecoin issuers to unify the industry.

Closing remarks

The narrative is now, about financial stability with privately issued coins. Several factors are forcing everyone to the table. These conversations are hard and consensus is not given.

Stable coins are creating a very collateral hungry market situation.

[1] INATBA is the new International Association for Trusted Blockchain Applications, offers developers and users of DLT a global forum to interact with regulators and policy makers and bring blockchain technology to the next stage.

[2] “That’s very world domination-ish of them,” said Kaliya Young, a co-author of “A Comprehensive Guide to Self Sovereign Identity” and co-founder of the Internet Identity Workshop. “Some of us have been working on that problem for a really long time. You already have a set of open standards for verifiable credentials that are basically done and working.” From the article `Buried in Facebook`s LIBRA paper, a Digital Identity Bombshell`

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer.

 I have a commercial relationship with Flovtec. I have no positions or commercial relationships with any other company or the people mentioned. I am not receiving compensation for this post.

 Subscribe by email to join Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

The return of the QR Code and China’s obsession to it

 

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A few days ago, I had a LinkedIn discussion with Richard Turrin on QR Codes and their relevance in today’s go-cashless world. A few commentators on the post felt QR codes were the thing of the post, and I had a different view. I believe, in a world that’s getting digitised in a hurry, QR code is what bridges the digital world with brick and mortar.

QR Codes have gone through ups and downs since they were first created in 1994 by Japan’s automobile industry. QR – stood for “Quick Response”. However, those were days when mobile phones were clunky and the user journeys weren’t as friction-free as the ones we have these days.

When a customer scanned a QR code, an app or a website would be launched on the mobile using EDGE or GPRS. Once the website came up, users would have to use the clunky interface to fill in relevant details. I guess, that was enough to kill the QR code – or so many thought at that time.

QR Codes are more efficient than Barcodes because they are able to hold more information than Barcodes. This is because, QR codes have a two dimensional layout, where as with Barcodes it is just a one dimensional horizontal layout. And purely from a marketing perspective, QR Codes can be customised with a firm’s brand on it, unlike bar codes.

Utility of QR Codes seem better than Barcodes. But are they safe to store our information? For example, can I store my bank card details in a QR code and claim it is more secure? It certainly is – atleast in most scenarios.

Credit card thefts and frauds come in different shapes and forms. Even in a contactless payment mode, account details are still transmitted to the point of sale (PoS) device. So if the PoS device is hacked, hackers can get hold of the customer’s payment details. If at the point of sale, there is an issue with the internet, the customer experience could be poor.

The other hiccup is the case of lost devices, as QR codes do not check for user identity. This can however be overcome by asking for biometric information from the user at the time of registering. It could also be a selfie of the user at registration. At the point of sale, the device using QR codes, may have to use some ways of identifying the user.

Since QR codes rely on Wi-Fi networks, a hacker could get into the network and overlay fake QR codes. And then there is this issue of different variations of QR codes released by different vendors. There needs to be standards for ease of use from a customer’s stand point.

Despite some of these downsides, what makes QR codes special?

  • Simplicity
  • Versatility
  • Expanding mobile internet and
  • Smartphones adoption.

With better internet access and smartphone penetration, QR codes have become more common place in Asia. Smartphone penetration in China has risen to 63% and to 35% in Asia as a whole. In Latin America (Argentina), customers have taken to QR codes as it is a simple interface for the unbanked to perform digital transactions.

Pictures showing Alipay and WeChat QR codes in China and PayTM QR Codes in India have brought the concept back to life – in a big way. In India, PayTM are running campaigns to get millions of small and medium entreprises onto QR Codes. In Africa, firms like Dumapay are using QRCode to simplify the point of sale payments process. It has become easy for a roadside shop to accept payments using a QR code print out and no Point of Sale device.

Apart from payments, QR Codes can be used for several other interactions. They can be use for

  • Offering discounts,
  • Sending a pre-defined message,
  • Sharing contact details
  • Embedded pricing information
  • Linking to marketing videos or pages

China has taken the use of QR codes to a whole new level, as observed in the picture below. A quick google search on China and QR Codes reveal some really cool use of this tool.

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As QR Codes are versatile, most top apps like Pinterest, Snapchat, Wechat and device manufacturers like Xiaomi, Motorola, Samsung, Huawei all have inbuilt QR Code readers.

But in the wrong hands, QR Codes can be used to lead a customer to a malicious page and get hacked in the process. There is definitely caution needed when using QR Codes.

It may be hard for the west to embrace QR Codes like Asia, Latin America (in some parts) and even Africa. But several firms across the world are creating their own customised QR Codes to stay relevant. QR Codes may not have succeeded in the past and they may not be the future either. But they most certainly have a place in the present.


Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on Inclusion and a podcast host.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).


 

Who bought a seat at the table of the Libra Association

 Governance, Financial Inclusion, India, Tier 3 economies, remittances, payments, currencies, tokens, coins,…

These and more terms have been tossed around over the past few days, as we consumed facts and interpretations, triggered from the Libra white paper and all the related communications around it. As the dust settles down from the initial reactions, there are several overlooked aspects of the LIBRA plan that merit looking into.

Confession No. 1

There has been an explosion of cynical, partisan, and hyped threads of discussion. I include myself in the humans that reacted rather emotionally to the communication of the LIBRA plan. My `button` was pushed when the `financial inclusion` intention seemed to be the branding and PR storyline.

Dr. Cathy Mulligan and her collaborators called for caution in their Digital Cooperation report for the UN High-level panel  (UNHLP) about using vulnerable communities to experiment on with #digitaltechnologies. Of course, `experimenting` is subject to interpretation and in the case of Facebook, maybe they can argue that this will be their second attempt in financial inclusion – as they did attempt to launch in the booming Indian market to offer seamless, cheaper payments like in any messaging app. Admittedly,  payments are the very heart of any economy and we do live in a world that customers expect payments to be like WhatsApp messages[1].

Confession No. 2

We are not ready yet for DAOs. Thomas Power, rightly says that we need a Face to each and every scalable unicorn (every system needs a Face, at 8:30 BloxLiveTV). And the truth is that there is a problem with the Face behind Facebook, even though #DeleteFacebook led nowhere.

However, sentiment is not on our side, on this one. We, the ones that don’t forget Cambridge Analytica, fake News, propaganda, and what Chris Hughes or Sean Parker or Chamath Palihapitiya said; we are outnumbered. Let’s admit it.

The masses that send and receive remittances, and the masses that spend online to buy inexpensive items – micropayments – value access and convenience. While we, the ones that have a problem with the Face, are in another phase altogether, with more choices and the luxury of discussing governance, social responsibility, public scrutiny etc.

We have to acknowledge that foundations and associations (two different legal entities) setup in Switzerland have credibility and thus, the registration choice for LIBRA association. However, we need to also admit that this Swiss branding that has been deployed in another `alternative` use case – to accommodate legally the needs of blockchain startups to launch ICOs – still has to prove itself in the governance field and in the ways it links to the for-profit businesses that are their raison d` ȇtre.

As Kathryn Haun, general partner at Andreessen Horowitz (one of the 28 founding members) pointed out[2], the Libra Association, will focus on governance issues debating decisions around how the new digital currency will be overseen etc. Swiss associations and foundations are not legal structures that were meant to spearhead such large business initiatives and that is the reason that Kathryn Hauna says “I think of it as a constitutional convention; you have all these different states coming in trying to form this union.” Dianne Schepers, a legal executive, explained to me that foundations are supervised by the Swiss Federal Supervisory Board for Foundations (ESA) and are required to be registered in the commercial registry and provide an annual report. Associations are not subject to any of these requirements.

As the 28 founding members will be discussing governance and much more about LIBRA, I feel that the composition of this association was overlooked (as other more basic items needed tending). It was actually – and rightly so – welcomed and the sentiment was positive because it has a decentralization flavor to it.

Confession No. 3

One of my first emotional reactions while reading the facts reported from Verum Capital – Your guide to Libra – on the day it hit the market, was to ask three questions:

Q1: For how many of the 28 founding members has financial inclusion been their business?

Q2: How many of the founding members have unsuccessfully experimented at scale in financial inclusion?

Q3: Which organizations were invited to consider being a founding member? And who decided this?

I share with you today my initial findings (more research and patience is needed to address them all) from looking closer to the founding members that each `coughed up` $10million

There are 7 members from the financial sector and most of them need no introduction.

  1. Visa
  2. Mastercard
  3. Paypal
  4. Stripe
  5. PayU has a large footprint in Latam and India that goes beyond payments.
  6. Mercado Pago, is the financial arm of MercadoLibre an Argentian company incorporated in the US (NASDAQ: MELI) running various online and ecommerce businesses. MercadoPago is a tech enabler with a significant footprint in Latam, for online retailers to provide their customers with payment solutions to pay in installments
  7. Calibra – is the startup, separate Facebook, wallet and dashboard entity

Discussing the composition of the founding members with Verum Capital, it became clear that none of the top 5 remittance players were invited. Xoom ranks 6th and was bought out by Paypal in 2015. LIBRA has included the 6th global remittance player as a founding member.

saveonsendSource: SaveOnSend.com

There are 4 members from the Blockchain space. Coinbase and Xapo, need no introduction. I do confess that I had to check out the others. BisonTails was only setup in Oct 2018 in the US to focus in blockchain interoperability and has only $5.3mil in seed funding[4]. Anchorage is a US start-up launched in 2017 focused on digital asset custody for institutional investors with a Series A funding completed (total funding $17mil).

  1. Coinbase
  2. Xapo
  3. Anchorage
  4. Bison Trails

Where did Bison Trails find the $10million membership fee to participate in the LIBRA association? Why did Anchorage decide to spend 60% of its total funding up to date, on its LIBRA membership?

There are 4 members from the VC world, which a priori seems a sector weight that I cannot rationalize (help is welcome; please comment).

  1. Andreessen Horowitz
  2. Union Square Ventures
  3. Ribbit Capital; a US early stage VC with the most fintech unicorns in the portfolio
  4. Thrive Capital another US VC more focused in tech investments and is well known for raising capital from institutional investors, like Princeton University, Wellcome Trust. According to a profile in Forbes, Thrive was one of three firms (joining Sequoia Capital and Greylock Partners) to invest in Instagram’s $50 million Series B round at a valuation of $500 million. Forbes wrote that after Instagram sold to Facebook, “Thrive had doubled its money in 72 hours.

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Source: Ribbit, A16Z Lead Fintech Unicorn Hunters, CB insights

Andreessen Horowitz is an investor in Bison Trails (one out of seven) and a lead investor in Anchorage. Thrive is family to the Facebook family. USV is family to Coinbase, and on and on.

Three out of the five top VC are founding members of the LIBRA association. Top VCs can be measured in several ways. What is more relevant here is their Fintech footprint.

There are 3 members from the e-commerce space. Ranging from travel, to luxury fashion.

  1. Booking Holdings
  2. eBay
  3. Farfetch is the online luxury fashion e-commerce business, publicly traded NYSE: FTCH

Two online hailing businesses and one music unicorn

  1. Lyft
  2. Uber
  3. Spotify

Two telecoms with Iliad being a founding member that is losing clients and revenues but has a founder and still majority shareholder (billionaire Xavier Niel) who loves challenging the corporate establishment and is the founder of the StationF, one of the biggest startup campus.

  1. Iliad is a troubled French telecom whose stock price has been in a steady bearish trap over the past 2yrs (-47% yoy). It has launched discount services and expanded recently in Italy.
  2. Vodafone

There are 5 members that are non-profit organizations:

  1. Kiva, Kiva Microfunds is a 501 non-profit organization founded in 2001 in San fransisco that has arranged  $1.3 billion of loans in 78 countries. They have a 96.9% repayment rate which makes them one of the most successful microloan NGOs.
  2. Mercy Corps is another US NGO focused on humanitarian aid launched in 1980s it boasts over 5,500 volunteers members.
  3. Women’s World Banking a US based NGO supporting microfinancing institutions
  4. Creative Destruction Lab; is a seed-stage program in North America launched in 2012 by the Rotman School of Management (the business school of the University of Toronto)for massively scalable, science and technology-based companies.
  5. Breakthrough Initiatives is a scientific non-profit launched in 2015 with several programs that aim to answer big  questions, like life beyond earth, through scientific and technological exploration, probing the big questions of life in the Universe. The Board has two members: Yuri Milner, who funded the initiative and Mark Zuckberg. Stephen Hawkins is still listed.

Wrap up

Confession No. 4

I continue to look into the issues raised by the boldness and the potential of the Libra coin (which has huge regulatory risk). LIBRA has actually a huge PR and branding problem, as even the MIT Tech Review article and many more, refer to the LIBRA Stable coin as the `Facebook coin` Facebook’s Libra: Three things we don’t know about the digital currency.

David Marcus, spearheading the Libra project for Facebook, had to denounce rumors that the $10 million buy-in got the validating firms access to transaction data (Decrypt).

There are 28 seats around the LIBRA table for now (similar to the way Stellar started off with 30 nodes). The LIBRA coin is not a Facebook coin. However, governance in an association is legally non-existent. So, for now we need to be clear that it is in good faith and only by giving the benefit of the doubt, that the LIBRA association has a dream and we should be watching their execution closely.

David Siegel through his new endeavor Cutting through the noise shared several facts and insights on LIBRA, as he is excited about the potential of a Stable coin  that can scale fast as it will be launched in established markets. LIBRA will be offered to all users on Facebook, Booking, Lyft, Paypal, Farfecth, …..

During his webinar on Saturday (recording on youtube) I learnt that 60% of votes are needed in order to make a change in LIBRA. I like to think of this as the 60% attack nightmare.

Can Facebook pull off a 60% attack?

As Bernand Lunn said to Swissinfo.ch the day after,  in What does Facebook’s Libra cryptocurrency aim to achieve?: “Facebook has been hugely successful making money from accumulating people’s data and then selling it. It’s hard to see them completely changing their stripes.”

How will the LIBRA association untaint the LIBRA coin so that it is not thought of as a Facebook coin?

[1] Excerpt from `Money is a claim on an Institution and the reason for change`, Efi Pylarinou

[2] Andreessen Horowitz: How Facebook’s Libra Cryptocurrency Will Be Governed

[4] Source from Crunchbase

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer.

 I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post. 

 Subscribe by email to join Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

$2 Trillion – India payments rise force regulators on data protection

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2016 was a pivotal year in India’s digital economy. Demonetization was deemed a execution failure by many experts. However, it has triggered a digital payment boom in the country. In the last two years, transaction sizes in India have grown 50 times to $2 Trillion (143 Trillion INR). Some claim demonetization wasn’t the reason for the payment boom. If not causation, there is definite correlation between the two.

When we talk about Asia Fintech/Payments, China’s $40 Trillion market perhaps takes precedence over the other economies. However, if India continues to grow at the current pace, we may see yet another leap frogging Asian Fintech economy. I must confess, I was pretty excited when I first read about the 50X growth of the payments market.

Several global players have set up shop in India. Google, Amazon and Alibaba have all taken part in the payments boom in different ways. While these tech giants keep clashing, the Indian government has led the way in setting up the core infrastructural elements through the Unified Payments Interface (UPI). This is perhaps one of the few instances where a government has pioneered innovation at this scale.

I recently spoke to Elizabeth Chapman, CEO of ZestMoney – a fintech lender in India. As a Westerner, now running a startup based out of India, she is perhaps best suited to assess the developments there, especially in comparison to the west. There were two key developments she was very pleased about.

One, getting a digital identifier for 1.3 Billion people. Getting the Aadhaar programme up and running in under two years, was no mean feat. The data base has been linked to several governance aspects, like tax for example. The other development Liz was impressed about was the UPI, which has catalysed the payments boom.

Now coming back to India payments, Facebook is a key player. Whatsapp payments was tested with a limited audience in India. While the uptake was very good for the functionality, regulatory support was missing. The Reserve Bank of India (RBI) initially came up with a rule that customers’ payments data can’t be stored outside of India.

The Government of India also imposed a rule that any data classified as critical personal data cannot be stored outside of India. Most international technology firms have expressed their dissatisfaction with these data protection rules. One of the key reasons why Whatsapp Payments didn’t take off in India was because of this rule.

In an emerging markets context, consumers care less about data protection and privacy. As long as they get to be part of the banking system and the financial ladder, getting paid is all they care about. Which is why QR codes and PayTM wallets have become so commonplace on Indian roadside shops.

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In a recent Linkedin conversation, one of the comments were about decentralised ways of storing assets in a wallet. It is a great concept in the west, and I love to talk about it till the cows come home. However, this was hyped as a great development in an emerging markets context. I don’t believe that is true.

Emerging markets consumers DO NOT care about decentralisation. I am not talking about the college graduate in south east Asia who is writing a Blockchain and has 10 different wallets to store cryptos.

I am talking about the lady who is selling the turmeric in the picture above. All she cares about is an easy way to get paid, so that she can cook dinner for her kids, and pay their school fees. They care about how inflation could take away all their wealth in Latin America and parts of Africa. Therefore, a solution that solves their day to day problems will see massive uptake.

We have already seen the rise of digital payments in India. With the removal of these data localization rules by RBI and the Government of India, there will be more explosive growth. With Facebook’s Libra (Sorry, couldn’t help mentioning it) around the corner, getting rid of the data localization rules, may not necessarily be a bad thing.

For Facebook, India is the biggest market – be it based on population or internet growth, or middle class income or financial inclusion. All the metrics point to India for Facebook.

For me, Financial Inclusion comes ahead of Data Protection. We thought Identity with Aadhaar – we didn’t think decentralisation. Let’s get them all on to the next generation payment network, get an economic identity created for them. Data protection, privacy and decentralisation will soon follow as awareness of the risks of the digital economy becomes more prevalent. For now, let us just help the lady selling the turmeric get paid.


Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on Inclusion and a podcast host.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).


 

How Emotional Banking can look like

Emotional bankingIt is Spring and officially in three days summer, so this is the time to open up and bring up topics like Emotional Banking. Several influencers have covered this topic – Chris Skinner, Brett King, Ron Shevlin – and Duena Blomstrom has been focused 100% on Emotional banking in her work and with her book `Emotional Banking : Fixing Culture, Leveraging FinTech, and Transforming Retail Banks into Brands`.

The core issue underpinning Emotional banking is the relationship we humans have with money. Undoubtedly not a simple one and clearly an emotional one.

When was the last time any of the three financial institutions you have relationships with, checked in with you as a person? The reality is that we each engage with at least three financial institutions but often with seven (consumer banking, business banking, wealth management, insurance, broker, etc) and the touch point is ONLY when and if we are ready to transact.

Sadly, most neobanks or challenger banks or Fintechs with banking services, are no different than the traditional financial institutions in that respect. And I am not referring to the fact that Revolut does remember my birthday whereas UBS doesn’t. I am referring to the fact that neither Revolut nor UBS, have any idea of what makes my heart beat, what would make me feel more secure, how I dream about the future, why I trained as a Kundalini Yoga teacher etc.

HOW Emotional banking looks like

Here is a concrete example of HOW Emotional banking can look like. Frost Bank is a 150-year-old Texas-based bank that started off as a small mercantile store and is now one of the 50 largest banks in the US. Frost bank has also been receiving the Greenwich Excellence award in the middle market and small banking category.

What caught my attention is their Optimism campaign called Opt for Optimism. They chose to link Optimism with financial health.

First, Frost Bank embarked on a research study about the link between Optimism and financial health. Here are some of their findings:

 Optimists experience 145 fewer days of financial stress per year

Optimists are 7x more likely to experience better financial health

They published their research in Mind over Money showing how attitude and mindset toward money impact financial health.

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At the same time, they launched a campaign about Optimism through a 30 day challenge during which people can join in performing 30 acts of optimism. They also created a community sharing portal to inspire each other, explore the financial habits of optimists,  watch inspiring films the bank produced for the campaign and find out why Frost Bank cares about something like optimism in the first place.

Share in the comments other examples of HOW Emotional Banking looks like.

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer.

 I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

 Subscribe by email to join Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

Neobanks – Game changers, but do they really care about their customers?

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Neobanks, digital banks, challenger banks – I don’t want to get into the exact specification of how and why we classify Fintechs across this complicated taxonomy. Neobanks have gone from strength to strength in the last three years. Especially in Europe, progress has been phenomenal.

Revolut, Starling, Monzo, N26, Tide and the list goes on. But apart from a cool customer journey at onboarding, better digital banking experience, do they offer anything meaningful? Do they really care more about their customers than the traditional high street banks?

Based on the news release yesterday about Revolut launching in Australia, their customer base was set to surpass the 5 Million mark. Monzo hit 2 Million users and are growing at about 150,000 customer per month. Starling have a relatively modest customer base of 600000, and also have a reputation that their services were as good as Monzo if not better.

I think atleast some of them have grown to a scale where they can be considered as operational banks. Let us therefore quickly go through how they are doing across different aspects of digital banking.

Onboarding: This is perhaps what digital banks have all been amazing at. A few months ago, when I moved from an iPhone to an Android phone, it took me about a minute or two to move my Revolut account to the new phone. My Barclays app is still not completely set up on my new phone.

This is true if you looked at business banking accounts as well. I had to wait for weeks to get a Barclays or a HSBC business bank account, whereas opening a Tide business banking account was a breeze. This is nothing new about Neobanks – we always knew they were champions at the onboarding customer journey.

Product Offering: I have found Neobanks good at their core proposition. Revolut for example, had a phenomenal uptake for the FX card and the app they have with it. However, they have taken a narrow and a deep approach to their product offering. That’s a very startupish way of developing a proposition.

I think, it’s high time Neobanks started to cross-sell products to their clients. Their product suite has been shallow in comparison to mainstream banks. Interest rates on accounts have been lower, business bank account balances have been lower, and some of the more advanced multi-user functionalities a business bank account needs are still work in progress – and those are just a few examples in already existing products.

They have all been focusing on growth and it’s understandable why they haven’t got the breadth of product offerings. However, the execution of their core offering has been excellent. For example, the user experience on tagging and managing transactions is good on these platforms. However, integration with ATMs or services like Paypal have been missed out by some of these Neobanks.

Customer Service: This is perhaps one area that decides if Neobanks are really providing the service quality they claim. Revolut have been making headlines for several wrong reasons recently and have almost got the “Spoilt Child” tag amongst Neobanks. Monzo recently had a breakdown of systems and that caused some noise on social media. Complaints data give us a bit of a perspective of what customers feel.

With 5 Million customers Revolut had 171 FOS complaints registered

With 2 Million customers Monzo had 82 complaints registered

With 600,000 customers Starling bank had 51 complaints registered

I have seen some illogical comparisons between them and the high street banks based on the number of complaints. Some high street banks have 100,000s complaints registered with the Financial Ombudsman Service (FOS). But they also provide so many different product lines which the Neobanks don’t.

Therefore, it can’t be a like for like comparison. Comparisons could be at a product line level between a high street bank and a Neobank, however, I am not sure if that data is available.

With a simple AUM like calculation, Barclays at £1.13 Trillion AUM is 23 times bigger than Revolut that is £50+ Billion. Revolut’s 171 complaints feels pretty low even in that sense as 171*23 is ~4000 complaints. Although Revolut took some negative PR for its recent misadventures, the number of complaints per customer is not too different between them and the other top Neobanks.

Financial Inclusion: Let us look at some of the steps towards inclusion that the Neobanks have taken. 50% of UK bank branches have shut down in the past 30 years. However, Neobanks are creating new on the ground contacts to allow for more inclusion in a seamless way. Starling bank have partnered with Royal mail to accept cash from their customers. Monzo used paypoint in a similar manner creating over 30,000 points for customers to deposit cash.

They are also looking to be more inclusive from an age perspective. Less than 5% of Monzo’s customer base are over 60 years old, and that data can improve. Monzo, Revolut and Starling bank are all ramping up efforts to reach out to people of all age groups. This also makes commercial sense as people in their 60s generally are richer than people in their 20s.

As we can clearly see that, based on the data, Neobanks have just arrived. They have a long way to go before data can categorically drive conclusions on how well they have done (or not). With China’s Techfins piling money into the Neobanks of the west, may be it will not be long before we see Neobanks punching above their weight against high street competition.

Whether they compete with the mainstream banks is one question, but whether they will keep their culture of innovation and customer centred approach intact as they grow is yet another question.


Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on Inclusion and a podcast host.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).


 

Jumia – Africa’s Alibaba and its IPO roller coaster

Feels like a long time since I posted an article on Africa. Every time I research to write about the African Fintech segment, I invariably stumble upon a story that leaves me with one emotion – hope. The youngest continent of the world is all about hope.

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Africa is a “mobile-first” market, where consumers access the internet from their mobile first. Sub-Saharan Africa has the highest per-capita mobile money accounts in the world. Financial Inclusion has been achieved at scale, that the number of mobile money accounts have gone past bank accounts. Most of the numbers are humble when compared to the China Juggernaut. But the opportunity to scale is immense with over 1 Billion consumers gradually moving to cities by 2050.

One African firm that has captured headlines in recent times is Jumia. In short, Jumia is said to be Africa’s Amazon and is the first African firm to list on the NYSE. They listed on NYSE on the 12th April this year, and saw their share price close 75% higher at close of business. The shares rose from $14.50 at listing to $46.99 in early May and was one of the top 10 performers of IPO’d shares of 2019. So why is an e-commerce player relevant to Fintech?

That seems to be the trend in emerging markets, as firms use e-commerce and lifestyle business models for growth, and throw in Fintech services as value add. Fintech also helps the stickiness and improves margins.

Jumia have launched their marketplace for 14 African markets. As per their SEC filing, Jumia they talk about their payments platform JumiaPay.

“We have also developed our own payment service, JumiaPay, in order to offer our consumers a safe, fast and easy payment solution, whether they shop using a desktop computer or a mobile device. JumiaPay is currently available in four markets”

For this very reason, I am not sure if they should be instead tagged “Africa’s Alibaba”. They also are catering to customers who prefer cash with on-delivery transactions. They had 81 thousand active sellers as of December 31, 2018 and over 29.5 million product listings on the marketplace.

Considering ~450 Million internet users in the continent, there is a huge market to conquer. Jumia claim they are currently the largest marketplace platform in the continent.

They have a competitor in DHL, who have launched an e-commerce platform. DHL’s logistics business has served as a catalyst of growth. They have launched in 20 African countries and are seen as formidable competition to Jumia. Alibaba are also dipping their toes into the African market, but haven’t yet taken a plunge like DHL.

The Jumia IPO day wasn’t just a big day for the firm, but should be viewed as a breakthrough for the continent’s business community, as they join main stream markets.

However, the IPO was shortly followed by a claim by Citron Research that alleged that “the firm was Fraudulent”, and their “shares were worthless”.

Jumia’s shares hit $24 in early May following these allegations. Citron research have a reputation for reports claiming such frauds in the past. Their strategy was to short the stocks and make quick bucks from the price action post the report. This has got them (Citron) into trouble in the past too.

An analyst in Citi came to Jumia’s defence with a detailed analysis of Citron’s claims. The gist of the defence was that Citron’s claims were baseless, and Jumia just had to respond to a couple of several claims with a bit more detailed disclosure.

  • Citi highlighted that it was not uncommon for firms to update their usage statistics before a key financing round
  • Citi suggested that Jumia should highlight the details of their churn, with plans to address it.
  • Several allegations of Fraud by Citron were pushed back by Citi, citing that Jumia had disclosed fraudulent employee activities in its SEC filing. Citron chose to interpret these disclosed incidents as fraud that the entire company and its management were involved in.
  • Several other points on Citron’s report on the growth of the firm were not just baseless, but contradicting to data that showed healthy growth of the firm.

We are going through a period where several emerging markets businesses are growing in stature and an IPO grabbing the headlines every week. These firms need to understand the importance of market transparency and disclosures. As financial services firms advise them with their IPO, they should also provide enough advise on the right framework for disclosure.

I am hopeful that Jumia has sailed through the initial blips post IPO, and I genuinely hope they become Africa’s Alibaba. Good times ahead for Africa.


Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on Inclusion and a podcast host.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).