The Family CFO and how PFM and PSD2 could commoditize the bank account


Personal Finance Management (PFM) may hold the key to Consumer Fintech. Last week we reported on a Swedish PFM startup called Tink that will be able to leverage PSD2 regulations to be a layer above any bank account. Today we do a deeper dive into how PFM and PSD2 could commoditize the bank account and really bring change to consumers.

One key to value creation is how close are you to the consumer? If the consumer spends time with your service then a) you are the brand they relate to and b) your service is where they leave their data exhaust and that is the key to personalization (which in turn leads to more use and so on i.e. it is a virtuous circle).

People don’t want bank accounts. That is a product. They want to have more money. To do that they need tools to manage their money better – tools that we tend to refer to as PFM tools). People want a service not a product.

Meet the family CFO

Picture Mom & Pop at the kitchen table paying bills and reviewing budgets. Either Mom or Pop is the CFO; the CFO is the one who pays attention to the financial details and executes on what is agreed (OK, it is often more messy than that in practice). Update this iconic image via Modern Family.  Now update it again and think of networked families (with single young adults in college or working in a distant location). How does that family budget work? Then think of diaspora networks and cash flowing from single young adults working in a distant location back to “the old folks back home” (who may be raising your children). Or think of cash flowing the other way in developed economies (“the bank of Mom/Dad” and rich Auntie Flo lending to Young Nephew Joe so he can buy a house). Now update that image again to accommodate the Gig Economy and the fact that globally most people are self-employed. Now you have variable revenue that needs forecasting, direct costs (paying Uber, AirBnB, Amazon etc) and fixed overheads (rent/mortgage, food etc). You have cash flow and you have a balance sheet (assets and debt). That sounds like a business to me and a business needs to be managed.

One fundamental trend in Fintech is the democratization of complex functionality. Things that were previously only available to companies with big budgets can now be done by small business and the really really small business that we call micro entrepreneur and that look to some like consumers. They need the same tools that the CFO & Treasurer use to manage cash flows, expenses, assets, liabilities etc.

Jessica, who brought Tink to our attention, normally covers small business, so the tools to do those things – manage cash flows, expenses, assets, liabilities etc – are normal things in her world. What PFM services like Tink can do is bring that down to the individual or family level.

The following scenario is not based on any individual PMF product – YMMV based on which product you use. However none of this is rocket science, it is all very doable using stable current technology (no Blockchain moonshots needed).

One Expenses Line Item is Bank Fees

Wells Fargo got away with their scam for so long because we are mostly too busy to pay attention to lots of small fees. You see the fees, they irritate you but you put them in a category along with untangling the headset cable – something you will do someday but not today.

Unless a tool makes these annoying extra charges more visible and easy to manage. If your PFM tool gave you insights such as which fees grew the most this period? So even if Bank fees are less than .1% of your total expenses, if they went up 20% you might pay attention.

The point is PFM then looks like it is on your side of the table and banks look like utility vendors who want to charge you more (along with other utilities like Telecoms and Heat). If the PFM can help reduce those utility fees (maybe via plug-in apps that specialize in different utility types) it becomes the must-use app on a daily basis and meets the toothbrush test.

The consumer mind-shift if consumers rely on a PFM to mediate their bank relationship is critical. Banks then become utility costs to be managed. Big companies already think this way and have the tools to manage Banks like a utility cost. Banks have work hard to add value in order to stay relevant to big companies, because the clout lies with the big companies not the banks.

Consumer banking has always been seen differently. Banks have the clout and individual consumers have little negotiating leverage. Part of that clout differential is simply information asymmetry – the bank has the information advantage compared to Mom & Pop at the kitchen table. A consumer with a good PFM tool levels that information playing field. Now the consumer has clout.

A more expensive Line Item in family budget is Interest Charges

Bank Fees are usually a small line item in the family budget. However Interest Charges are usually a significant line item in the family budget and that line item is also critical to Banks. A PFM can easily help consumers with modeling (what if scenarios), using real data about what the current rates are in the market for consumers like you. The consumer can then make an informed decision on whether it is worth expending effort to renegotiate some debt. Maybe the PFM app can deliver.

You see what happens there. The PFM app becomes an adviser and the bank becomes a utility vendor. That utility can still be highly profitable at scale – like any utility but the big fat margins get eroded.

Was that a Fee or an Interest Charge or what was it?

Who charges higher interest rates – PayDay Lenders or Banks? PayDay Lenders got media-slammed for egregiously high interest rates, but Overdraft charges that are not pre-negotiated lines of credit are often higher. This often blurs the line between fees and interest. The PFM tool can aggregate and slice and dice those charges any way the consumer wants.

Lets move to the Balance Sheet

The Family CFO now guides the conversation from the Cash Flow Statement (families don’t care about P&L other than at tax time) to the Balance Sheet Statement. She (the family money person is often a woman even if gender inequality on pay means she contributes less on the revenue line) points out that the family has excess cash that can be used to generate cash over different time durations. The PFM tool helps the CFO see the difference between lending the excess cash to a bank (known as a Deposit account) and lending to another Consumer via a Market Place Lending platform. The former has no risk (assuming Deposit Insurance) and the latter has some risk but higher returns. A good PFM tool can help the CFO to assess the risk reward trade off. It’s all about data UX simplicity.

Beware the gorilla

The gorilla in the PFM space is Intuit, with a current market of 27 Unicorns ($27 billion) and many Big Tech love the space. Microsoft for example has spent a lot in this market and is a player with Microsoft Money. New entrants have to be better, faster, cheaper to win.

Prosper Daily

One Market Place Lender, Prosper, saw this opportunity early and moved in with Prosper Daily. Done right this should reduce their CAC.

If there is an Uber of banking, my guess is that it will be a PFM. Expect more in this space.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

ChatBots in Consumer Banking


Image courtesy of SuitPossum

This is Day 5 of ChatBot Week on Daily Fintech. You can see the intro and index here.

How Much?

ChatBots are great when customers want answers to various “how much” type questions, such as how much….

  • Have I got left?
  • Will this cost me in interest/fees?
  • Will I earn/save by doing this?

Sure I could go online or check an App, but just texting those questions is easier.

Finding this innovation in the wild

MyKai from Kasisto launched on June 28. They must have had the back end ready and had the aha moment when they saw the launch of the Facebook Messenger App Store.

Bits don’t stop at borders but money has to show its passport. I wanted to try out Kasisto, but stopped at this Stop Sign (I am based in Switzerland):

“Right now, I am available in the U.S. If you live in another country, you can sign up and I’ll let you know when I’ve arrived.”

Do I have enough to…
“Eyeballing” physical cash in your leather wallet is how millions budget. We need an equivalent for the digital age.  MyKai shows shows how this can work by integrating with Venmo (check your balance before paying). Imagine that linked to your budgeting rules (Budget Nanny says no to that Latte).
Cousin of Siri

Kasisto which created MyKai originated from SRI International, the company that came out of Stanford University and created Siri.


MyKai anonymizes the data and does not have full access to your banking passwords. My take is “be careful” and this will be a big hurdle with most consumers, which brings us to the next point.

Public Proof Of Concept
MyKai is like a Public Proof Of Concept for a service that Kasisto sells to Banks. That is how they aim to make money. They claim Royal Bank of Canada and DBS Bank as early customers and Wells Fargo Startup Accelerator is an investor.
The future is already here….in Denmark

LunarWay, a Danish full stack startup bank (now tagged “neobank”, aka “challenger bank” in UK) offers LunarWay Bot today (in Beta with a few thousand users). It was developed in-house

…And in Africa

ABSA (Barclays Africa) offers ChatBots via both Twitter and Facebook.

Conclusion from innovation in the wild

ChatBot looks like a natural UI for a mobile first Bank. It will become an increasingly standard feature of both  startup and incumbent banks. Oh…and make tons of money for Facebook (showing us again how valuable being an ID provider is).

Messaging channels

Facebook is certainly the big one in America where Kasisto plays. When Kasisto hit a tech glitch they used SMS and Slack as fallback channels. Messaging itself is clearly a commodity. The money is at the intersection of ecommerce and payments and that is where Account Linking is the key innovation from Facebook (which we identified in the intro to ChatBot Week).

PSD2 and other utility regulation

Account Linking can be used a) by Banks to offer a better service or b) by startups who innovate on top of bank account data and aim to commoditise  banks into being low margin utilities. Actually that is not the objective of startups. They just want to offer a better service to consumers and to do that they need access to account data; turning banks into commoditised utilities is simply a by-product consequence.

PSD2 and other regulation is key to this. When banks have to open up their data, then they will.

It is a level playing field. Banks could win. Methinks we will see a lot of ChatBots from Banks soon.

level playing field

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Bernard Lunn is a Fintech thought-leader.

How PSD2 enables the unbundling & rebundling of the bank

level playing field

There are two types of regulation. One is just another annoying cost/process for the bank and a wonderful opportunity for consultants, lawyers, outsourcers & IT providers. Another type of regulation fundamentally opens up the market for innovation and threatens the control of the incumbents. PSD2 is the latter type. It is the key to the unbundling & rebundling of the bank. The regulators who drafted PSD2 also seem to have some tech savvy, which is very unusual, making this rather exceptional legislation. 

Three levels of maturity in regulation:

  • # 1. Created in haste by politicians and lawyers after a crisis

Two notorious examples are Sarbanes Oxley and Dodd Frank. The norm is reams of paper that can be interpreted different ways by lawyers and can be “managed” by banks with a smart internal process. The worst case for banks is lots of fines, which become part of the operating budget.

  • # 2. Using a disruptive tech without implementation help

XBRL is the best example. The XBRL technology is disruptive and will enable a new value chain to evolve that will be good for innovation and a healthy capital market. However by leaving implementation details up to the market, the time to benefit is so long that those who want to kill the initiative have plenty of ammunition. This would be like Steve Jobs saying in 2007 “I insist that you use a smartphone”.

  • # 3. Using a disruptive tech with implementation help.

PSD2 is a rare example of Tech Smart Regulation. We think of regulation as being rulebook driven. The regulator says you must do x. Banks say “that will take time because we have to develop the technology to support that”. During that time, lobbyists can work to tone down the regulation in the details. Lots of good intentions get lost during this process. Tech Smart Regulation is different. This is where regulators say “here are the technology standards, go implement them”. The regulators have to be technically savvy enough to only mandate something that is technically feasible. They have to launch a regulation like a startup does a launch, with good standards docs and a reference implementation. In EU terminology this is a Regulatory Technical Standard (RTS). XS2A (Access To Accounts or more formally Payment Initiation and Account Information Services) is the part of PSD2 where the regulators do this. It is not a commercial offering (that would not be appropriate for a regulator). This is not the equivalent of Apple offering a smartphone or even Android saying here is an operating system for a smartphone. This is more like saying here are the specs to create an operating system for a smartphone. For more on PSD2 and XS2A, go to this excellent explainer from Starling Bank (a Challenger Bank in the UK).

Unbundling the four consumer banking accounts

  • # 1 Current Account aka the money I need right now to pay and to get paid. This is shifting to mobile wallets, using payment providers and a Bank Lite or Payment Bank regulatory framework. The amount of money at risk is less, so the regulatory framework is lighter.
  • # 2 Wealth Account aka money I don’t need for a while but need to grow to fund a future need aka Robo Advisers of various types who shuffle assets to get the optimal risk adjusted returns. This is the world of Custody and MIFID2. You might choose to use a bank, but you don’t need to.
  • # 3. Deposit Account aka between 1 and 2, the money that I might need soon which I need to keep safely and generate as much return as possible. For most people, the only solution has been a Bank deposit. After years of Central Bank easing, the rates are so low that people look for alternatives. One alternative is to use the new generation of Smart Beta Robo Advisers that offer “better than cash” (a better risk adjusted return). So the Wealth Account and the Deposit Account will merge (or be Rebundled in our terminology).

The first 3 are Liability Accounts (in bank terminology). You loan the money to the Bank, so the Bank rightly sees it as a Liability.

  • # 4. Loan Account.  This is an Asset for the Bank. By using a Deposit Account, you are loaning money to the Bank which they loan to you and to people like you, earning an interest rate spread. The Fintech alternative to a Deposit Account is to use Marketplace Lending to find short duration loans to buy. The Fintech alternative to a Loan Account is to use Marketplace Lending to borrow on short duration to fund a cash flow gap. Corporates have always done this kind of juggling using money markets (lend or borrow short term based on cash flow needs). When this capability becomes democratised, consumers and SME will have the same flexibility.

Deposits is the hardest nut to crack

The ability to take Deposits is rightly highly regulated (a scamster would simply set up a “Fintech” and take the money and even honest Fintech entrepreneurs run out of cash and go bankrupt leaving consumer deposits at risk). Finding short dated self liquidating securities is hard; it is possible via lending against invoices and other collateralized receivables such as Credit Card receivables, but this has not yet been democratised to the consumer level.

We believe that this is where the puck is headed. Any time you see sophisticated functionality that Corporates and Wealthy people use, it is only a question of time before an entrepreneur figures out how to offer that to consumers.

To do that, an entrepreneur will need a brilliant UX that abstracts the complexity. This is what we call Rebundling via a liquidity dashboard

Rebundling via a liquidity dashboard

The difference between the 3 Liability Accounts – Current, Wealth and Deposit – is simply Liquidity  aka “how quickly can I access that cash?” What consumers need is a mobile liquidity dashboard that optimally shifts money around, using the Loan Account when sensible and needed. That needs a) a brilliant UX and b) API access to all the underlying Bank Liability Accounts. To get that API access you need to get the Bank’s permission. It is not in the Bank’s interest to give that permission. PSD2 tells the Bank that they have to give that permission.

That Rebundling opportunity is available to entrepreneurs within Banks (the sort of people we interview in our Pirates with Ties series) just as much as it is to VC funded entrepreneurs. It is simply a level playing field. Ensuring a level playing field is a classic job description for a regulator and they seem to have done a good job in that regard with PSD2.Banks still have an advantage on that level playing field but will lose it if they don’t innovate at startup speed.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech. Bernard Lunn is a Fintech thought-leader.


Kreditech and the next generation of Consumer Banking


Consumer Banking is fundamentally about lending and non-bank lending (whether called AltFi, Marketplace Lending or P2P Lending) is already a mature market. Consumer Banking has taken 73% of Fintech investment to date (vs only 10% each for Asset Management) and Insurance) and has had the first IPOs and the first big blow ups. Now we are seeing the tipping point for challenger banks as well as the tipping point for incumbent bank branch closures. Looking past all the noise, we seek to find where the puck is headed and this took us to the unlikely Fintech capital of Hamburg to find out what Kreditech is up to (apart from recently closing a $103m Series C round).

Fraud and deadbeat detectors

Detecting Fraud in Insurance Claims was the  subject of our post yesterday about Shift Technology. It obviously also matters in Marketplace Lending because scamsters will flock to any market offering “few questions asked” payment. Frictionless and fraud-free is tough.

Fraud detection is all about spotting suspicious patterns. This can be as simple as clues that it is a bot or a human. For example, spotting a lot of copying and pasting could signal a bot. Spotting deadbeats (aka high chance of default) is also a pattern matching job. For example, a person who goes  straight to the sign-up page without reading the terms might be desperate for money (or a crook).

Kreditech claims to track 20,000 data points such as this.

For example, mining social media data can tell you if they are friends of somebody who who has reliably paid back loans. Some signals are obvious such as level of education and quality of employer (the guy who left Stanford to work at Google is probably a good credit risk).

Some are subtle and the sort of thing that old fashioned human bankers used to do such as seeing somebody getting drunk a lot or gambling in casinos. This can be viewed as invasion of privacy, but the key is that the consumer who wants the loan gives permission and credit card companies already have this data.

The key is seeing the connections, not a single data point. The example that Kreditech give is that behaviour that might be suspicious in a factory worker — applying for a loan from Hamburg when their job is in Stuttgart — might make perfect sense for a traveling salesman.

By doing all this automatically, Kreditech claims the “Lowest number of fields in the industry” – which is key to conversion.

Underbanked is a better market than Overbanked

Lenders are credit quality arbitrage hunters. They want high credit quality borrowers that are viewed as low credit quality borrowers by the mainstream lending market. As in any investing, you have to be both contrarian and right. Contrarian and wrong is an obvious error. Right and mainstream just means tight margins; everybody wants to lend to a AAA Corporate or a guy who just left Stanford to work at Google.

Now look at emerging markets. Mainstream perception is that lending here is high risk. It’s all foreign and strange and the credit bureaus don’t operate here. Yet, this is where the middle class is growing rather than shrinking. This is part of our First the Rest then the West thesis and a reason why we devote so much attention to the Underbanked market (index to Underbanked posts here). Which market would you prefer – a market where customers are spoiled for choice and competition is fierce or a market where customer are growing fast and have few choices?

Poland – laboratory for consumer banking innovation

Kreditech acquired a Polish company called Kontomierz in January 2015.

Poland is a laboratory for consumer banking innovation (as we detailed a year ago here).

Kontomierz was an early pioneer in open bank APIs. This is driven by EU legislation and is the key to Kreditech and the future of Marketplace Lending.

PSD2 and Open API Banking is the key to Marketplace Lending

Profit lies at the intersection of market demand, technology enablement and regulatory driven change. We don’t need to say more about market demand (strong on both borrower and lender side) or technology enablement (the Internet changes everything). The only question is who will seize the day – incumbents or upstarts? This is where regulatory driven change holds the key.

PSD2 (defined in November 2015) enables a third party provider (TPP) access to accounts held at Banks via XS2A (Access To Accounts). For TPP read Fintechs and Challenger Banks (including Marketplace/P2P Lenders). PSD2 mandates that banks must provide access to customers of the Fintechs and challenger Banks. More on PSD2 next week (will be RegTech Week on Daily Fintech).

The reason this matters to Kreditech is that for all the talk of 20,000 data points, AI, machine learning, data science etc, understanding what a borrower has in their bank account (in and out and balance) is key to understanding their credit worthiness. If this data has to be released by banks, it will crack open the market for lending to marketplaces and tech driven originators and challenger banks.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech. Bernard Lunn is a Fintech thought-leader

The tipping point for UK Challenger Banks


Bank concentration is a problem in many markets, but it is particularly acute in the UK where the Big Four control 77% of the consumer market and 85% of the SME market. Despite many attempts by government and the private sector for many years, nothing has changed. This research note outlines why this may finally be about to change thanks technology driven regulation.

Evidence from recent funding rounds that investors are sensing opportunity

Atom Bank $128 million

Starling Bank $70m

Mondo raises $1.4m on Crowdcube in 96 seconds 

(Demand was so high it even crashed the Crowdcube site as per reports on Business Insider!)

Tandem Bank gets banking license and goes on funding trail.
Recent IPOs such as Aldermore and Shawbrook and M&A such as the acquisition of TSB by Spanish bank Sabadell are further evidence of investor interest in this sector.

Deposits are the regulatory heart of banking

Banking is being unbundled. Lending is moving to Altfi, loan origination startups and Lending Marketplaces. Current accounts are going to Payment Banks and mobile services. Deposits are rightly highly regulated – the opportunity for fraud is very high. So a “full stack bank” has to include Deposits and that is where the regulations are tough.

Technology driven regulation is different 

We think of regulation as being rulebook driven. The regulator says you must do x. Banks say “that will take time because we have to develop the technology to support that”. During that time, lobbyists can work to tone down the regulation in the details. Lots of good intentions get lost during this process.

Technology driven regulation is different. This is where regulators say “here are the technology standards, go implement them”. The regulators have to be technically savvy enough to only mandate something that is technically feasible. They have to launch a regulation like a startup with good standards docs and a reference implementation. In EU terminology this is a Regulatory Technical Standard (RTS).

XS2A is the technology driven regulation that could crack open bank oligopolies.

XS2A (Access To Accounts or more formally Payment Initiation and Account Information Services) is part of PSD2, which was defined on 16 November 2015. It enables a third party provider (TPP) access to accounts held at Banks. For TPP read Fintechs and Challenger Banks. Basically it mandates that banks must provide access to customers of the Fintechs and challenger Banks. That is a big deal. It will reduce the dominance of a few big banks and open the market to competition and innovation.

For more on PSD2 and XS2A, go to this excellent explainer from Starling Bank (yes, a Challenger Bank in the UK)

The UK regulator, FCA, has a specific competition mandate. So even if UK does a Brexit, the FCA may cherry pick XS2A as good regulation. If so, the UK will be a market laboratory for consumer banking innovation and that will enhance London’s Fintech Capital status.

Challenger Bank version 3

Gross simplification alert – Challenger Bank innovation is moving to version 3:

  • Version 1: Better branches, better service & better tech. An example is Metro Bank.
  • Version 2: Digital only, old money. Almost all the Challenger Banks raised money the old fashioned way, on the insider’s circuit in the square mile (City of London)
  • Version 3: Digital only, new money. This is where Mondo raising on Crowdcube is so groundbreaking.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech. Bernard Lunn is a Fintech thought-leader.