Consumer Banking

Both West (Overbanked) and Rest (Underbanked)

Five UK startups pioneer AI across the Consumer Fintech Spectrum

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AI is no longer a differentiator amongst startups, it has become a default feature that most firms will need to have as one of their core capabilities. UK has never been short of AI success stories, with one of the first being Deepmind, that was acquired by Google in 2014. The Fintech wave was just getting started then, and there have been some good tales in the UK-AI-Consumer Fintech space, across various sub-clusters.

Personal Finance Management: Cleo

Cleo, an AI assistant that helps customers manage personal finance was founded in 2015, and after two years of work was launched commercially this year. The AI assistant taps into consumers’ bank accounts and helps them save money. Since launch, Cleo have close to £400 Million worth of assets under management.

They have integration with Facebook messenger to manage payments, and have an interface that has managed to retain 70% of their users even after 3 months of signing up – thats pretty impressive. VCs have been pouring their money into PFMs in anticipation of PSD2, and Cleo has recently closed a £2 Million round in which Skype’s Niklas Zennstrom participated.

RegTech: Onfido 

London based Onfido, was recently announced by the World Economic Forum as one of the “Technology Pioneers”. They help verify people’s identities digitally. Founded by three entrepreneurs from Oxford University, Onfido uses AI to perform background checks and spot frauds. They validate a user’s identity by comparing biometrics with identity documents. Identities can then be cross-referenced against international credit and watchlist databases

They operate across the globe in about 195 countries with a team of 150 employees, and support close to 1500 businesses. They have recently managed $30 Million in funding from Salesforce ventures and IdInvest Partners.

InsurTech: Tractable

AI within Insurance has seen some really good use cases in the last couple of years. Tractable is a deep learning startup specializing in computer vision to solve specific high impact problems. Their imagery algorithm can be used to quickly perform visual inspection of an accident and provide data digitally to support insurance claims.

In the past where even minor accidents took a few days if not weeks to settle, AI programmes can quickly scan the damage and digitally assess the cost to fix them. The deep learning capability that they have built in collaboration with Cambridge Machine Learning Group, the Visual Geometry Group (Oxford University) and the Neuroscience unit at UCL, can now assess damage to a vehicle more accurately than a human expert. Tractable closed their Series A round of $8 Million last month.

Mortgages: Habito

I wrote about Habito in detail in one of my previous posts. They are an AI capable online Mortgage broker based out of London. Their AI algorithm helps identify the best deal in the market, and also get real time approvals for mortgages. Customers have access to over 60 mortgage lenders through their platform.

Earlier this year, they closed a £5.5 Million funding round which they would be using to build an end to end AI enabled real time mortgage experience.

Credit Scoring: Aire

Aire offers AI enabled alternative credit scoring capability to lenders, where they get insights into borrowers with thin credit files. Aire has an interactive virtual questionnaire that provides insights on top of traditional credit data. Through this new capability, lenders on average have managed to increase credit approvals by upto 14% without increasing risk exposure.

Aire has recently signed partnerships with Zopa and Toyota Financial Services, and closed a funding round of $5 Million last month.

AI for decades has been a fairy tale as it lacked the data volumes and data quality to provide the right insights. However, with Social Media, Open data, and PSD2 providing a firm footing this time, the API era should see some Consumer Fintech AI success stories over the next few years.

Arunkumar Krishnakumar is a Fintech thought leader and an investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

 

Fidor, Starling, and Revolut add Fintech credit and investment products

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Digital transformation projects in banking come in all shapes and colors. To grasp the evolving space, I like to think of service providers focused on consumer banking transformation projects and those focused on SME digital projects. In consumer banking, those involved are incumbents or startup digital banks (challenger or neo or other acronyms depending on the region). For SME banking, there are digital spinoffs of banks realizing that technology now allows them to profitably serve small businesses and also standalone startups.

For both of these types, I like to think of service providers that offer Banking as a Service and those offering Cloud based Core banking. Banking as a Service goes with a white label banking license that usually includes KYC, AML, and back office needs; leaving the marketing and customization to the “client” (Solaris and Fidor are two examples). Cloud based core banking service providers don’t offer KYC, AML or a banking license; they are focused on the back-office infrastructure (Mambu and Temenos are two examples).

In this space, most service providers and B2B clients are focused on the deposit part of the banking business. The credit and investment aspect is taking off now.

For me what is more interesting in this space is that it is ideal for all sorts of partnerships.

Re-bundling is happening;

Marketplaces are being launched;

API connectors are being used to integrate deposits, credit, investments!

 

Growth, convergence, innovation!

 

Digital banks integrating credit and investment Fintech products

There are more than one noticeable moves in this direction out of the UK.

FinanceBay is the new marketplace that Fidor Bank in the UK has just launched. I like to think of it as a banking app store or a marketplace that curates relevant fintech partners. The first two fintech partners are Seedrs and Nutmeg. Seedrs will be the first and only equity-crowdfunding “app” on FinanceBay that gives access to such investment opportunities (i.e. equity funding of UK SMEs). To date through Seedrs accredited investors have allocated 200 mil pounds through 500 deals. A touch of Nutmeg will be added soon so that Fidor Bank customers can open fully managed investment portfolios on Nutmeg. According to Business Insider, Nutmeg is the largest UK robo-advisor with £600 million AUM which is more than its competitors, Moneyfarm and Scalable Capital.

In April, UK bank Starling announced an integration with savings and investment app Moneybox, after its earlier partnership with Transferwise.

The foreign exchange app Revolut has launched a partnership with property investment platform Bricklane to offer its clients a tax-efficient way to invest in property, and with Lending Works to offer its clients consumer P2P credit up to 5,000 pounds.

Watch the Fintech startup world, blurring the lines between digital consumer banking and WealthTech, much faster than the established incumbents can. The race is on!

Efi Pylarinou is a Fintech thought-leader, consultant and investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

Key Trends in Q2 Fintech M&A activity – Payments lead the way

Fintech deal activity hit a peak in Q4 2015, and as discussed in a previous post, steadily went down through most of last year. However, this year after a good start in Q1, there was a strong rebound in Q2 2017, and recent news have been pointing to some big ticket deals happening within the payments space.

As per KPMG’s quarterly report, globally Fintech investments hit a healthy $8.4 Billion across 293 deals. Rebounds were particularly noticeable in both Europe and UK. Fintechs in Europe managed to attract $2 Billion (in investments) in Q2, which is more than double the Q1 number ($880 Million).

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Some of the key trends from the report,

  • Corporate Venture Capital continue to increase their involvement in Fintech deals
  • Asia sees a dip in Q2 investments due to low China deal activity
  • Regtech deals could create a record year 2017. At the current pace its likely to surpass 2015 and 2016 activity (in size and count)
  • Focus moves from B2C (customer experience) to B2B (mid and back office efficiencies)

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Apart from the VC activity, Private Equity firms have turned their attention to Payments, as the deal sizes within payments start to increase. In the last eight weeks we have had some M&As and private equity deals announced within payments.

  • Igenico acquires Bambora for $1.5 Billion. This happened after Ingenico tried a hostile takeover of WorldPay assets
  • Worldpay merged with Vantiv with a £9.1 Billion deal. The new firm will be jointly led by Vantiv’s Charles Drucker and Worldpay’s Philip Jansen.
  • Worldline acquires Digital River World Payments and First Data Baltics, giving them operational positions in the Nordics and in the Baltics.
  • Visa invested in Klarna – how much they invested and at what Valuation is not disclosed.
  • Blackstone and CVC announce acquisition of Paysafe for £2.9 Billion

These are some of the top stories, but the key takeaway is that money is flowing the Fintech way, again!! Both in the VC and the PE space!!

Arunkumar Krishnakumar is a Fintech thought leader and an investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

 

GDPR vs PSD2 – Banks may abandon PSD2 due to conflicting policies

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About a year ago, Bernard had written a post on PSD2, and discussed different levels of maturity in regulations. He highlighted that PSD2 was a regulation meant to open up the market for innovative consumer banking use cases and solutions. However, the same regulator (EBA) have set a timeline for General Data Protection Regulation (GDPR) in 2018 alongside PSD2.

We have discussed PSD2 and its implications for banks, fintech firms and consumers at length in the past. So, let me focus on GDPR and what it means to firms and consumers. The purpose of GDPR is to ensure consumers give informed consent before companies can share their personal data with third parties. Pre-ticked check boxes and inactivity from consumers can no longer be assumed as their consent to data sharing post GDPR.

Unlike PSD2, GDPR applies to businesses in the EU processing consumer data, not just Financial services firms. Also, for non-EU businesses GDPR applies, if an EU resident’s personal data is processed in connection with goods/services offered.

The Data Protection Act (DPA) provided consumers with right of subject access – which meant consumers can request a company for data that the firm had collected about them. Currently many businesses charge a fee to provide this data to consumers, but post GDPR, firms can’t charge this fee.

As consumers, we can instruct firms when to collect our data and stay on top of it using the right of subject access. Now what does this have to do with PSD2? PSD2’s purpose is to enable consumer data sharing, where as GDPR’s purpose seems to be to try and cut down on data sharing.

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PSD2 is about financial services firms sharing customer data with third parties who they may not necessarily have a contractual agreement with. These third parties may then come up with innovative use cases by processing consumer data.

So, to be compliant with PSD2, banks should ask for customer’s consent to share their data with third parties. But to be compliant with GDPR, data processing by third parties will also need explicit customer consent. How is a bank supposed to be responsible for the processing of consumer data performed by a third party, it has no contractual agreement with?

While this hasn’t been explicitly mentioned as a process required to be GDPR compliant, my guess is, it would be upon the Banks to ensure third parties (that they share consumer data with) have consumers’ consent to process their data.

Unlike PSD2, that doesn’t have any punitive charges, violation of GDPR might result in a fine of upto €20 Million or 4% of Global turnover. And knowing the way banks deal with regulatory compliance, nothing motivates them more than a fine hanging over their heads.

This means, where there are conflicting regulations, and lack of clarity on a standard approach to data sharing, banks will focus completely on implementing the punitive GDPR. In someways, GDPR may also become an excuse for banks for not implementing PSD2 and avoid sharing what they feel is their asset – consumer data. Watch this space!!

Arunkumar Krishnakumar is a Fintech thought leader and an investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

 

Fraud Detection using AI and Mastercard’s acquisition spree

“Progress is made by the improvement of people, not the improvement of machines.”

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As more consumers turn to digital banking for their everyday transactions they will generate huge amounts of data that banks can use to identify trends and highlight suspicious behavior.

As digital transaction volumes increase, and real-time payments become the norm, banking solutions to identify frauds are often inadequate. In most cases these systems will need to determine if a transaction is genuine or not in a fraction of a second. Thanks to the AI wave, as fraudsters get better, machines spotting them get better too.

Cybercrime is estimated to cost the global economy 400 billion dollars. Credit card fraud accounts for a large proportion of this cost. Artificial Intelligence (AI) can provide faster, cheaper and more accurate fraud detection.

Some of the key considerations of a payments infrastructure (using AI) while solving the fraud detection problem are,

  1. Initiate the payments safely
  2. Handle billions of transactions
  3. Identify relationships through graph maps
  4. Social media integration and Sentiment analysis
  5. Behavioural analysis
  6. Adapt quickly as fraudsters evolve their modus operandi

An AI system can use thousands of data points in every transaction and do a fuzzy lookup to billions of other transactions to identify patterns, coincidences and anomalies.

Most payment giants are increasingly turning to AI and Mastercard is no exception. They have been acquiring firms focusing on fraud detection as AI deal activity hit all time highs in Q1 2017. In March 2017 Mastercard announced the acquisition of NuData Security to deliver online and mobile anti-fraud solutions using session and biometric indicators.

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“Our unprecedented use of artificial intelligence on our network is already proving successful. With the acquisition of Brighterion, we will further extend our capabilities to support the consumer experience.”

– Ajay Bhalla, President of Enterprise risk and security for Mastercard

 

Earlier this month, Mastercard announced the acquisition of Brighterion. Brighterion’s portfolio of AI and machine learning technologies provide real-time intelligence from all data sources regardless of type, complexity and volume. Its smart agent technology will be added to Mastercard’s suite of security products already using AI.

“Progress is made by the improvement of people through the improvement of machines.”

Arunkumar Krishnakumar is a Fintech thought leader and an investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

 

From a Blockchain based to a Blockchain inspired world, SWIFT could deliver verdict at Sibos

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This time last year, the dust hadn’t settled on the Blockchain hype, and several key players within Fintech and Financial Services were quite upbeat about the possibilities. However, as results of PoCs from various consortiums, central banks and payment providers emerged, the results were mixed. Daily Fintech covered an article on R3’s miseries towards the end of last year when Goldman Sachs left the consortium.

Since then, R3 publicly moved away from Blockchain, into a Blockchain inspired world using an open source distributed ledger named Corda. The R3 consortium lost three major banks towards the end of last year. This is vastly attributed to the fact that they chose to move away from a pure Blockchain implementation to a Distributed Ledger implementation for Corda.

The three banks Goldman Sachs, Santander and JP Morgan left the consortium and invested in Axoni that was a pure Blockchain firm. It got worse when R3 blogged that they were not a Blockchain firm, and had always been a distributed ledger company and got trolled on social media for that.

This was shortly followed by the news that SWIFT had launched its inter-bank payments platform that it believed would be the future of its cross border payments platform. The platform was called GPI (Global Payments Innovation), and had a founding consortium of 12 global banks. The GPI, at that time was based out of traditional technologies and not Blockchain. However, earlier this month, SWIFT announced that GPI was being beta tested on Blockchain with 22 new banks validating the system. Verdict on this PoC is going to be at Sibos later this year.

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Apart from this, the Bank of England (BoE) haven’t delivered a conclusive verdict on the PoC with Ripple for Cross border payments. The detailed report on the PoC was released earlier this month. The key message was:

” Cross-border payments when applied to wholesale markets present different challenges than when compared with retail and corporate transactions, which the Ripple product is designed to handle. The availability of liquidity is one such challenge, and the PoC allowed the Bank and Ripple to begin exploring these questions. “

In other words “Ripple’s solution wasn’t fit for purpose”, although Ripple chose to see it differently.  A few days later, Ripple announced that a pure Blockchain based approach was not scalable for banks and advocated a “Hybrid approach”.

Wearing my technology hat on, I see some fundamental lessons here, and I may be repeating what has been so often mentioned.

  • Find technologies that can solve your problems – it may not have to be Blockchain.
  • Do not interchangeably use Decentralised Ledgers and Blockchains. You can photocopy on a Canon machine too (not just on Xerox).
  • Innovation doesn’t always have to be on sexy technology. SQL Server and Oracle can do the job too.
  • Simplicity is often overlooked and massively underrated.

I believe that SWIFT’s announcement of the results of their Blockchain PoC at Sibos could provide a decisive direction for Blockchain in Financial Services/Payments. And it might well be “Let’s Move On”.

Arunkumar Krishnakumar is a Fintech thought leader and an investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

 

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.