UK’s Nesta drives small business fintech innovation forward

If your looking for the next wave of innovation in small business banking and possible investment opportunities, then Nesta’s Open Up Challenge is probably a good place to start.

Nesta – the National Endowment for Science Technology and the Arts – was established in the UK in 1998, with a mandate to take risks and back innovations over the long term, specifically projects that tackle the big challenges of our time. By doing this outside of short-term government funding cycles or shifts in political fashion, the organisation believes it can facilitate real economic impact.

And what could be a bigger challenge than figuring out how fintech startups can help small businesses take advantage of the upcoming Open Banking directive that will come into force in January of next year in the UK?

Stage 1 of the Open Up Challenge launched in January of this year, with 20 fintech startups granted a £50k up-front development grant in July. A prize pool of £1m will be shared amongst Stage 1 winners in December.

So who’s in contention for Nesta’s big prize?

Big names like Tide and Iwoca are featured, while up and comers like Teller, an api for your bank account and Coconut, a bank for freelancers, are certainly ones to watch. You can see the full list of 20 here.

Where to next? In January 2018 Nesta will launch Stage 2, aimed at ‘Market Ready’ fintechs in the SME space. In this round, 5 startups will share in a sizeable grant pot of £500k, with a further £2m up for grabs.

With other countries dragging their feet on open data, now looks like an exciting time to consider expanding to the UK, and front running your next wave of your product development there. And with money on the table and access to the epicentre of fintech – London – what more reason do you need to book your flight?

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

zipMoney lands Australia’s biggest fintech and bank partnership deal

zipMoney announced this week that one of Australia’s four largest banks, Westpac, has taken a $40 million equity stake in its listed point-of-sale consumer financing business.

The deal was struck at a 14.1 percent premium to last Friday’s closing price.

zipMoney has played its hand well in the SME space since launch, building a merchant base of over 4400 businesses. Over 300,000 customers have so far opted to finance their purchases through the platform, eschewing traditional credit cards, and the almost inevitable debt cycle that follows close behind.

Why is this deal significant?

It looks to be the largest ever direct investment by a local bank into a high-growth fintech venture. It signals the landscape is shifting, with banks developing an increasing appetite for fintech services that can be integrated into their existing platforms to either provide market differentiation or new revenue streams.

Who else is in this space?

The battle for bricks and mortar and online business payments is fierce, and Westpac’s tie-up with zipMoney could be seen by some as a defensive play.

In February of this year, startup bank Tyro announced its partnership with zipMoney’s closest competitor Afterpay.

Recently, Afterpay announced it had on-boarded over 6000 merchants, providing credit to over 840,000 customers. In July of this year, Afterpay completed a successful merger with payment technology company Touchcorp, forming Afterpay Touch Group. The market responded well, with the stock having made significant gains since.

Where to next?

The distribution power of Westpac’s bricks and mortar merchant network is significant and far outnumbers Tyro’s. The critical element will be how deeply the zipMoney payment experience can be integrated into existing payment workflows.

The other side of the coin – for both Afterpay and zipMoney – is how much merchants are willing to bear cost wise to close a sale. Typically point-of-sale financing companies front the payment for goods to the merchant, minus a discount. Any pricing tie up that allows for margin protection for the bank and the financing business is ideal. This could be through discounts elsewhere in the payments chain.

No doubt both banks will be looking at pricing models very carefully, to see how best to leverage these partnerships, and in what sectors.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Open emerges as India’s first SME only bank

You can be sure the world as you know it is changing when a challenger bank is able to get of the ground with as little as $250,000.

The bank in question is Open, an Indian neobank who hit the news in mid July, announcing it would launch a mobile first banking platform to support India’s growing mobile orientated, micro-business community. Rather than acquire its own license, it appears Open will borrow a wholesale license from an approved Reserve Bank of India institution.

Backing the business are two executives from the Indian arm of global payments provider PayU; CEO, Amrish Rau and Managing Director, Jitendra Gupta.

India has had a longstanding tradition (in fintech years anyway) of encouraging innovation in its banking sector. The biggest legacy its regulators have created over the past few years would be its issuance of payments bank licences. These licences allow companies to offer basic banking services and accepted some capped deposits, but prohibits them from offering loans or credit cards.

They were originally conceived to increase access to basic banking services to small businesses, low-income households and India’s migrant labour force. Fino Payments Bank was the latest to acquire a payments banking licence, launching its operations in July. It joins other payment banks like Airtel, India Post and Paytm.

Paytm, who already service 200 million customers, only launched their banking arm in May of this year. With the new features, the company believes it can surpass 300 million customers within a few years. For Paytm’s mobile wallet customers, transitioning onto the banking platform makes logical sense, as money held in wallets will be able to accrue interest.

And the interest rates are relatively healthy – especially compared to the anaemic looking ones in western nations. Interest rates offered range between 4% and 7.25% per annum, while revenue streams are derived from ATM charges, online transfers and cash withdrawals.

Open’s immediate advantage will be its ability to offer a full suite of banking services – including credit. However the scale of the Paytm’s and Airtel’s of India will no doubt be difficult to match. And surely these businesses intend on offering credit services at some point. Still, India is a big country, and the opportunity is immense. Open is no doubt banking on the fact everyone can win enough of the banking pie to build a viable business.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Michelle Moffatt – the agile fintech auditor

Regulatory pressure, new regulatory models, cyber security, big data, small data, new payments platforms and standards, digital identity – there is no question the risk landscape is increasingly mottled with potholes for both traditional financial institutions and fintech startups. Potholes big enough to cause a business a serious flat tire, or at least make the ride somewhat uncomfortable.

This week I spoke at the International Auditors Conference in Sydney, Australia, sharing the stage with a friend and ex-colleague of mine, Michelle Moffatt. We took attendees on a mobile payments discovery journey – from where we are today to the new emerging voice activated platforms and forays into virtual reality payments. The message we had for the audience was simple. To effectively audit these sorts of innovations you have to be across the fundamentals of the technology and be part of the product journey – from inception to launch.

Michelle previously headed up the internal audit function at Tyro – an SME neobank/challenger bank in Australia, Michelle now holds the title of Chief Risk Officer at a fintech startup Spaceship.

Michelle has long been a practitioner and advocate of ‘agile auditing’. She, like a growing number of auditors in the fintech space, is acutely aware of the rapidly changing risk landscape, not to mention the increasing pace of change.

There is nothing worse for an organization when one agile arm (often the development side of the house) comes up against a non-agile one. This has huge implications on the traditional internal auditors role – a function which historically is only introduced at the end of the project.

However there is a growing need for more auditors like Michelle in the space. Auditors that are willing to come on the journey with the team, yet retain their independence. While this type of cultural shift will be notoriously difficult for an incumbent, there is no reason why a startup can’t adopt this approach with their internal audit function from day one. This is one more way the incumbents’ benefit of scale can be eroded by smart technology and alternative cultural thinking.

After the conference I asked Michelle for some feedback on a number of themes that cropped up throughout her presentation. Here are her high level take-away’s.

Audit processes must mirror startup processes – so agile is key

Starts ups are moving quickly so to keep pace internal audit has to mirror the way they work. Agile audit allows you to give feedback early in the product creation piece so that what matters most is taken into account.

Audit culture in startup land verses big financial institutions has fundamental differences

Starts ups are generally more nimble, flexible and have a greater need for pragmatism and commerciality. They are typically flatter structures, and easy access to key decision makers ensures audit feedback & findings are implemented faster.

On the flipside, larger organizations have the corporate support and access to resources that startups typically don’t have.

Both cultures can learn from one another, or find leverage.

Adopting a learning mindset to emerging technologies is critical to the risk and audit function in fintech

Apart from key technical skills and a base level of proficiency yourself, whatever niche you operate in, you can’t afford to sit back and not engage or understand the technologies you are auditing. This includes potential competitive technologies.

Aside from emerging technologies, you need to understand the emerging micro-cultures of the teams you are auditing. I strongly suggest internal auditors attend meet-ups in their space and network internally. It’s a constant education process with the subject matter experts. What is great about this is it builds your own sphere of influence.

What advice would you give to other auditors working at challengers/neobanks, given your time working at Tyro?

1) Don’t freak out, figure it out.

2) Have an open learning mindset

3) Go back to basics – auditing 101

4) Apply common sense, be part of the solution and trust your gut.

What is the internal auditor doing differently 5 or 10 years from now?

Much of the routine work is already being replaced by scripts, with auditors providing the valuable analysis of the results in a commercial solutions orientated way. All internal auditors will have both commercial and technology as technical skills and will be able to plug and play into any audit, any time anywhere with the freelance model on the rise.

New core banking platform to bolster Nigeria’s micro finance banking sector

It may come as some surprise, but in Nigeria over 1000 Microfinance Bank licenses (MFBs) have been issued by the central bank to small finance institutions in less than 10 years.

The purpose of these institutions is to broaden access to finance to low-income earners and small, micro businesses. Similar initiatives are at play across other developing nations, with India being one of the more prominent and well-known countries to created tiered access to banking licenses.

And while basic access to credit and savings accounts are important on the consumer front, the flow on effects for underdeveloped countries when business financing is addressed are significant.

Research shows that while SMEs account for, on average 51 percent of GDP in high-income countries, for less developed nations this figure stands at a paltry 15.6 percent. This lag is an effective handbrake on pulling many of these nations out of poverty.

A big part of this differential is down to a lack of access to growth funding for SMEs and micro businesses. Currently the International Finance Corporation (IFC) has estimated a financing gap of US$2.1 – 2.6 trillion currently exists amongst developing nations. And while finding funding to meet this need is one challenge, the bigger piece of the puzzle is how to get it to those in need in fast, reliable and secure manner.

To address exactly this, the Nigerian Central Bank announced this week that plans are afoot to build a new core banking system specifically for the nations MFBs. With a branchless mentality from day one, the core banking system will dramatically lower delivery costs for MFBs, and allow them to further extend their reach into the under-banked markets they seek to service.

A new core banking system designed specifically for a new breed of bank is something developing nations, starting with little legacy infrastructure are well positioned to achieve. Similar new banking or new payments platforms in developed markets are far more difficult, requiring deep stakeholder engagements with powerful incumbent players – many of whom need to retrofit their own systems to be compatible.

It will certainly be interesting to see the speed at which Nigeria can deliver on this new infrastructure. But if it can, the rewards for the economy as a whole are immense.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Who’s who in the new Aussie consumer bank zoo

Unlike the UK, fintech consumer banking applications have been a little late to the fintech party in Australia. But recent regulatory changes making it (somewhat) easier to launch a banking platform seem to be changing that. Today we’re bringing to your attention three Australian neobanks on our radar.

None have officially launched and it would seem there is a probable likelihood many will come to market at a similar point in time. Not ideal for any startup, but an increasingly reality given the pace of innovation these days. Of course that means differentiation will be critical.

Xinja

Problem they’re trying to solve

Founded by a team of ex-bankers, according to their website Xinja don’t think it’s quick, easy or fun to track your spending or save for what you want. Quick and easy I certainly agree with. I’d say the jury is still out on whether banking can ever be fun.

Likelihood of success

Xinja were one of the first fintech startups to announce to the press that they would be going after a banking licence post the capital relaxation announcement. If they are the first to successfully pull this off, it will be a significant tailwind in their favour.

What is harder to tease out from the information released to date is what that big product differentiator will be. Hook lines are great – and I’m interested for sure, but how this translates into actual product features and experience is still unclear. No doubt this is part of their pre-launch strategy.

Wildcard

Problem they’re trying to solve

Nathan Tesler and his team believe the Australian dream of home ownership is dead. They’re not far wrong, considering most house prices are north of $1M in Australia’s major cities and completely out of reach of first home-buyers.

Wildcard’s other hypothesis is that a good number of Aussies live pay-cheque to pay-cheque, with banks failing to help them get on top of their outgoings, through clunky, unintuitive interfaces and an over-reliance on pushing credit facilities.

Likelihood of success

Rather than get a bank licence, Tesler is opting to partner with a yet to be disclosed major FI. If he pulls this partnership off, then he’ll be one of few fintech startups who’ve managed to do so, giving Wildcard a strong runway on potential competitors. He also massively reduces his compliance burden, which is a key operating cost for a banking business.

How the team will successfully commercialise this venture through this partnership is yet to be seen. He’ll need to convince someone to pay for something – whether that’s the FI or the user. Could be an interesting BaaS play for sure, if he can get the pricing/value model right.

Douugh

Problem they’re trying to solve

Founded by Andy Taylor, Douugh’s website indicates it thinks banks are failing to educate people about how to manage their money, with many Australians stuck in a continuous loop of debt.

Likelihood of success

Sophie, Douugh’s virtual assistant looks to be the hero feature of this banking platform. While we get a snippet of Sophie’s interface on the homepage, not much more is revealed. The company hasn’t made any bold announcements to the media about its banking aspirations, however its call for potential partners suggests it may be looking at a white label play direct to FIs.

The education play is definitely interesting though. There is no question a large swathe of the market Douugh is after are currently unadvised. Digital advice wrapped into banking could be a serious differentiator.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

Fragmentation in the SME banking sector is running apace

This week Tide, an up and coming player in the small business banking sector, announced it had raised a further $US14M as it looks to ramp up its suite of product offerings to SMEs.

Even without a banking licence- a ‘management distraction’ Founder and CEO George Bevis has said – the company has already managed to build out a platform that creates new bank accounts in minutes. It also plugs the annoying gap between invoice received, payment made and transaction tagged. The app allows you to add an invoice direct from your email inbox into Tide, set up a payment and tag it i.e. office expenses.

For a small, simple business, this is gold. However for a bigger business, they’ll need more weapons in their arsenal. This explains the tie up with SME lender Iwoca.

The company is also beta testing bank feed integration with Xero as we speak, which will no doubt open up the door to a raft of new users.

Bank feeds have been such a success for cloud accounting platforms and their banking partners, that many businesses will refuse to join a bank that doesn’t have this in place. And it makes perfect sense. The drudgery of manual bank reconciliation is still a fresh memory for many business owners and bookkeepers. And while some small, micro businesses might be able to get by with just Tide for a while, most serious business need a solid set of accounts sooner rather than later.

Automated banking and accounting is certainly the future – and businesses like Tide and Xero are at the forefront.

Auto-coding transactions is a big focus for Xero, who are working on machine learning in efforts to streamline the process for businesses. According to CEO Rod Drury, there are about 10.1 million unique codes on Xero, with businesses regularly accidentally attaching the wrong code to an invoice or transaction.

It’s a smart move by the platform, who’s initial success was driven by being an earlier adopter into the cloud space, way ahead of the big incumbent players.

But cloud and slick UIs are becoming the norm in the sector. Automating more drudgery is the future.

That’s the secret sauce in SME fintech.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.