This week in InsurTech shows how fast the market is globalizing

global-insurance

It is hard to sip from a firehose and the InsurTech innovation pipeline in 2017 is a major gusher. As we parse this week’s news stories, one theme jumps out and this theme goes a long way to explain why the InsurTech innovation pipeline is such a gusher.

The theme is globalization.

5 InsurTech stories this week illustrate the globalization theme:  

  • Digital Fine Print goes from Seed to Asia via America and London
  • Australian insurer IAG establishes an Insurtech hub in Singapore
  • Youse is the very first Brazilian InsurTech brand
  • The first InsurTech conference in Quebec City
  • The first InsurTech VC fund in flyover country

Digital Fine Print goes from Seed to Asia via America and London

The news: the story broke on CrowdFund Insider. This one is as global as it gets. An American Insurance Company (MetLife) partners with an early stage London based InsurTech startup (Digital Fine Print) to move into Asia.

This story also shows the capital efficiency value of Incumbent partnerships and social media. Digital Fine Print is going into Asia having raised only $400k. Conventional wisdom was that you should wait until your $400m round before going global. However if you can use the back end platform of an incumbent and use social media at the front end, it is time to challenge that conventional wisdom. (Daily Fintech is totally global, with subscribers in 130 countries and we have not yet raised any outside capital).

Australian insurer IAG establishes an Insurtech incubator in Singapore

The news: It will be called Firemark Labs and was reported in multiple venues, here is one. IAG = Insurance Australia Group. It underwrites over $11.4 billion of premium per annum and is active in many Asian countries. The incubator (do we call them “hubs” or accelerators today?) has the usual job of scouting for innovation.

Score another one for Singapore – see here for our story about CXA. This story also illustrates the value brought by the very proactive Monetary Authority of Singapore (MAS) and its Chief FinTech Officer, Sopnendu Mohanty.

This is an inter Asia story – no American or European ventures. The Australia Singapore nexus makes sense as the Australian economy is tied to Asia.

The Incubator has access to cash through IAG’s $ 75 million venture fund.

The trend looks clear. MetLife already has an active Singapore-based innovation center called LumenLab. One can envisage each global insurance company having an InsurTech incubator in the 20 or more global cities with an active Fintech scene.

Youse is the first Brazilian InsurTech brand

The news: It is really only a “we are here” announcement with a lot of big picture data about how big InsurTech is.

Youse was created by Grupo Caixa Seguradora as a digital venture within a big company. We have seen some of these become successful in banking (see our Pirates With Ties interview series for some good success stories), even though cultural mismatch kills most intrapreneurial ventures.

Nubank in banking is a Brazilian specific example of a digital Neobank (but VC funded unlike Youse).

The first InsurTech conference in Quebec City

The news: InsurtechQC is the first conference dedicated to Insurtech in Quebec City. It takes place on April 3rd and has both local and international speakers.

The first InsurTech VC fund in flyover country

I know, I know, I should not refer to flyover country. It’s an old habit from living in New York and flying a lot to California. It sounds elitist and I apologize for that. The significant trend is that the Silicon Valley model of innovation has gone global and global does not just mean places like London, Zurich and Singapore. It also means places like Des Moines, Iowa.

The news: A Des Moines, Iowa-based VC fund called ManchesterStory Group backed by a consortium of insurance companies is looking for Insurtech deals.

“The new firm said it cannot disclose the insurance carriers behind it until the fund closes.”

They have company in Des Moines.  The Global Insurance Accelerator was launched in 2013 with backing from seven insurance companies and has since added 3 more.

Closer to mainstream customers and lower cost base sound like good ingredients for venture success.

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CXA Group $25 million Series B shows the maturing of InsurTech and future of Innovation Capital

 

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Closing a Series A round is tough (the “Series A Crunch”), but closing a Series B is even tougher. You have to show great metrics at all levels. Series B is the “show me round”.

So when we see a big Series B round in the white hot InsurTech sector we pay attention.

In this post we look at the trends and insights behind the news that a Singapore-based health InsurTech venture called CXA Group has closed a $25 million Series B round from Facebook’s co-founder Eduardo Saverin’s B Capital Group and Singapore’s EDBI.

This news illustrates 6 major themes:

– Innovation Capital goes where it feels welcome

– Innovation capital goes where there is opportunity and that is shifting to Asia

– Singapore just scored a goal in the Fintech Hubs Global Tournament.

– The UHNWI Super Angels will shake up the “permanent aristocracy” of top tier VC Funds.

– The role of Government in building Fintech hubs

– This could be Zenefits done right

Note on terminology: we refer to Innovation Capital as the combination of cash + connections + know how that has historically been called Venture Capital. For reasons explained later, the historical term – Venture Capital – has outlived its Sell By Date.

Innovation capital goes where it feels welcome

This is not complex. Countries with zero capital gains tax on long term investments will attract a lot of Ultra High Net Worth Individuals (UHNWI aka Family Offices). Eduardo Saverin is an example – a Brazilian who famously renounced his US Citizenship in 2011 to take up residence in Singapore.

What is new is the blurring of lines between these UHNWI Super Angels and traditional Institutional Venture Capital. More on that later.

Innovation capital goes where there is opportunity and that is shifting to Asia

Asia is the 21st century growth story.

This statement wins the “Captain Obvious Award”. What is interesting is the time lag between when the growth shifts and when the innovation capital shifts. For a while, Innovation Capital in the middle aged world (America) and the old world (Europe) knew how to invest and saw the growth shifting to Asia. It was American VC money flowing into Asia. The next iteration, happening now, is when Asian VC money flows into Asia. This deal illustrates that shift.

Singapore just scored a goal in the Fintech Hubs Tournament.

This deal demonstrates that Singapore is becoming a major Fintech Hub, leveraging smart regulation and its position at the heart of the Asia growth story.

The UHNWI Super Angels will shake up the permanent aristocracy of top tier VC Funds.

The lead investor is credited as “Eduardo Saverin’s B Capital Group”. If the PR said “Eduardo Saverin” then this would be classed as an Angel round. Whether B Capital Group has other investors is not that important because a single UHNWI individual or family has plenty of capital to deploy.

For a long time, we had Angels who led the way by investing early and then politely inviting the big funds to invest. This led to what the Ivey Business Journal describes as a permanent aristocracy of top tier funds.  The Super Angels with an institutional fund, such as Eduardo Saverin’s B Capital Group can give that permanent aristocracy a run for their money. Some of the partners of those top tier funds are now also setting up as Super Angels and just investing their own money. Like Hedge Funds that become Family Offices, they no longer manage other people’s money, they just invest their own money. This is partly driven by tax, as people see the political writing on the wall that signals the end of carried interest fees being taxed as capital gains.

This is why we see the term Venture Capital as past its sell by date and prefer the term Innovation Capital. What we normally think of us VC – funding early stage innovation – is being done by Angels and too many VC Funds have become part of the asset management industry  focussed on AUM fees and short term exits.

The role of Government in building Fintech hubs

Co-Lead on the deal was the corporate investment arm of the Singapore Economic Development Board call EDBI. This post looks at the increased role of governments in Fintech regulatory competition as governments calculate the economic return on innovation. Whether direct investment (“picking winners”) is the right way is debatable, but expect to see more government activity in Fintech.

This could be Zenefits done right

CXA is going after the employee benefits industry (pegged at $100 billion in Asia) with a free SaaS platform monetized via lead generation. If that sounds familiar, think Zenefits, the hyper-growth success that hit the speed buffer (for reasons described here).

CXA goes to the next level by helping employers unlock wellness through prevention and disease management.

The health InsurTech opportunity is no longer only about America.

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6 takeaways from SIBOS 2015 in Singapore

By Bernard Lunn

After a few days of reflection on many days of conversations over a 4 day marathon event here are my 6 takeaways from SIBOS 2015 in Singapore:

  1. Fintech is leaving the Yellow Brick Road and going to Kansas.
  2. The one subject that got heads nodding in both echo chambers was the move to real time.
  3. Blockchain is at the top of the hype cycle.
  4. The dream of the great core system renewal turns into the nightmare of end of life maintenance.
  5. The credit cycle will not save traditional lending models.
  6. Correspondent Banking will survive the transition to real time and SIBOS will always be key to Correspondent Banking.

Fintech is leaving the Yellow Brick Road and going to Kansas.

Zen-on-the-Yellow-Brick-Road

For years Fintech labored in obscurity. A few pioneers preached the message that everything was going to change. In the last 12 months the message was received loud and clear – as was evident at SIBOS this year.

It was a great journey “off to see the Wizard” on the Yellow Brick Road.

Some Fintechers remain stuck in the Yellow Brick Road era, still preaching the message. Investors, customers and partners have already got the message and it is time for Fintechers to stop preaching and start delivering.

This means heading back to Kansas (in the “show me state” of Missouri). This is when Fintech ventures have to show serious financial results. This is when focus shifts from prospects to contracts, from long term forecasts to this quarter, from pre revenue metrics to revenue, from revenue to quality of revenue, from revenue to gross margin, EBITDA & free cash flow, from forecasts to actuals. Many ventures are doing this, but too many of the new entrants seem to believe that the hype will make it easy.

Numbers is the language of business. In Singapore at SIBOS 2015 we had two echo chambers – bankers talking to bankers and their IT vendors and Fintechers talking to Fintechers. There was some dialogue between the two, but very little. By Geneva (SIBOS 2016), this common language of numbers should enable real conversations between Bankers and Fintechers.

——————–

The one subject that got heads nodding in both echo chambers was the move to real time. 

Franks-Box-Echo-Chamber

Real time is not just faster. Going from 3 days to 1 day is good. Going from 24 hours to 2 hours is good. But none of that is real time.

Real time does not need to get bogged down into techie discussions about how many fractions of a millisecond constitutes real time. That is just engineer “mine is bigger than your’s” talk. Or to put it another way it is machine real time.

Human real time is a few seconds. Human real time drives user experience and adoption. You cannot define human real time theoretically, you can only observe it practically. Growth hackers try to figure this out in their market experiments, because it will change within context. It might be vary between C2C, B2C, B2B – but only by a few seconds because humans are involved with all those interactions.

The fundamental mind shift is accepting that humans operate in real time (if you don’t you get run over by a bus) but that businesses operate in batch because of a legacy of old technology that could only operate in batch mode.

That legacy constraint has gone. Now businesses can operate in real time. That is a big deal. That changes everything.

You heard this expressed in different dialects across the echo chambers at SIBOS 2015, such as:

  • The language of market infrastructure and messaging standards.
  • Financial language (real time eliminates credit and market risk so that we can reduce spreads).
  • Fintech language (real time banking enables new user experiences and merges with social media to fuel real time analytics).

The fact that everything is moving real time is becoming accepted. The debate now shifts to the second order impacts. What new solutions become possible when the platform is real time? This will change market risk, credit risk, fraud and other bad guy detection, regulatory compliance and well – just about everything.

Whole departments of people processing work in batch will be cut. Whole new platforms and business models will be enabled by the move to real time. $ billions will be made and $ billions will be lost during this transition.

————

Blockchain is at the top of the hype cycle. 

2000px-Gartner_Hype_Cycle.svg

We know how this plays out:

  • SIBOS 2016. The Blockchain folks are too busy implementing to attend. Attendance at Blockchain sessions is way down. Eeyore is heard muttering “I told you so”.
  • SIBOS 2017. Attendance at Blockchain sessions are way down and skeptical questions dominate and a post about “Blockchain is dead” gets a lot of Twitter action. Eeyore is asked to give a Keynote speech. Rumors float in private conversations about a game-changing case study that cannot be revealed.
  • SIBOS 2018. One case study gets released. A post entitled “too early to bury Blockchain” gets a lot of Twitter action.
  • SIBOS 2019. Blockchain 2.0 sessions are standing room only. Tigger is asked to give a Keynote speech referencing Blockchain.
  • SIBOS 2020. “Are you telling me our xx system uses Blockchain. How weird. Can you  explain how it works? Is it like TCP/IP?”

The arcane debates around blockchain technology (permissioned or permissionless, altcoins or sidechains) and between platforms (Ripple, Stellar, Eris, Chain, Ethereum, Blockstream) are important but they will play out in different forums. Few people at SIBOS care which wins; they care about the application of technology not the lower layers of the stack.

I view Blockchain within the context of the move to real time. Blockchain is either an enabler for that move or it will fade away. I am in the camp that it will be an enabler for the move to real time, but I have also seen promising technology fade as it gets lost in standards battles rather than focusing on solving real world platforms. Only time will tell.

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The dream of the great core system renewal turns into the nightmare of end of life maintenance.

Marini2

I used to sell core-banking systems (Misys and Temenos a few eons ago). This feels like AA – my name is Bernard and I sell core-banking systems. We always dreamed of a catalyzing event that would make banks convert their old systems to something new. Customers demanding real time seemed like that catalyst, except for two problems:

  • Time. Core system change costs many $millions (no problem) and many years (big problem). The reason it is a big problem is that banks no longer control the pace of change – Fintech ventures do. No sensible Board will sanction a project where they have to put all user facing change on hold for the years until the new core system is ready. If user-facing changes are NOT dependent on a new core system, it begs the question “why bother doing this project at all?”
  • Fintech shows that there is an alternative. Bankers are seeing that these upstarts have no core banking system and it does not prevent them launching new services. The API economy changes everything.

The new Fintech services simply bye-pass the core banking system. Banks cannot switch off the core-banking system – existing users and services depend upon it. So you move them to the end of life maintenance bucket where the only criteria is cost. You keep looking for cheaper vendors to maintain the system. At some point you move the remaining laggard users/services over to some new minimalist cheap core system.

This is happening at the same time as the big switch to Cloud. By the time it comes to switch the remaining laggard users/services over to some new minimalist cheap core system it will be in the cloud based and even the most conservative bankers will accept that Cloud is as secure if not more secure than their own data center.

Core banking vendors face the same innovators dilemma as their customers. They can take the traditionally cautious path of squeezing as much cash as possible out of locked in customers and locked in data. Or they can take a radical path and become relevant to the new world by opening up their system and data and making their system as a platform for external innovation.

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The credit cycle will not save traditional lending models.

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The best bits in a conference come when speakers depart from the script

Great moderators know how to make that happen. The moderator in the Future of Money session (incubated within Innotribe for many years in relative obscurity, on the main stage at SIBOS 2015) did an excellent job at this. They had Fintech ventures (all focused on lending) on the main stage and Banks at the back (visible on main screen so the audience could watch the drama unfold). One of the bankers made the quite reasonable point that Fintech has not been tested in a down cycle but then said something along the lines of these ventures being in the lending business and that credit is also about being in the much tougher collections business. This prompted one of the Fintech panelists to go off script and say something like:

“Of course we are in the collections business, that is just ridiculous”.

Downturns will test any model or team that is weak. That is what downturns do. Fintech ventures will fail, but so will banks. Any bank that thinks a downturn is their friend is dreaming. Fintech was born in the 2008/9 downturn. In a downturn, customer will want cheaper credit. Only radical automation can deliver cheaper credit and it does not matter whether that radically cheaper automated credit comes from a bank or a Fintech.

———–

Correspondent Banking will survive the transition to real time and SIBOS will always be key to Correspondent Banking.

 correspondent-banking

(Image courtesy of the always excellent Richard Gendal Brown)

It is fashionable to say that Correspondent Banking is dead. This conflates the current incarnation of Correspondent Banking which is batch based with the concept of Correspondent Banking itself. I am convinced that Correspondent Banking will survive the transition to real time and SIBOS will always be key to Correspondent Banking.

I am grateful for this insight to one of those serendipitous conversations where you leave the echo chambers. The serendipity arose from casual chatting while sharing a taxi. My companion was what I would describe as core SIBOS, from a regional bank far, far away. She described how SIBOS was the most important week in the calendar when she could a) learn the new stuff efficiently and b) renew the personal relationships that underlie the Correspondent Banking network.

I then sought out other core SIBOS attendees along these lines during lunch and breakfast sessions to see if this was a random point of view or if there was a pattern. I can best describe this pattern by a hypothetical customer-centric story.

A mid sized company in mid sized country wants to do business in another mid sized country in a totally different region. For example, imagine a Malaysian company wanting to do business in Poland. Note that this is NOT big market to big market. This not an American company wanting to do business in China or a European company wanting to do business in America. Nor is this nearby countries with existing relationship channels; it is not a Malaysian company wanting to do business in Indonesia.

That is where banks in both places – Malaysia and Poland in our hypothetical – facilitate the relationships and make a profit from doing that. The banks can do that because a relationship of trust – nurtured over many lunches and other socializing – exists between those banks. The technology makes it efficient. The old mantra is “schmooze offline, transact online”.

Anybody who thinks that you can replace that only with technology is dreaming. At some point a new real time cross border platform will emerge (many were touting their wares at SIBOS). At some point SWIFT will go real time. Those 9,000 member banks will keep the human relationships and just switch over to a new system.

In summary:

  • Fintech is leaving the Yellow Brick Road and going to Kansas.
  • The one subject that got heads nodding in both echo chambers was the move to real time.
  • Blockchain is at the top of the hype cycle.
  • The dream of the great core system renewal turns into the nightmare of end of life maintenance.
  • The credit cycle will not save traditional lending models.
  • Correspondent Banking will survive the transition to real time and SIBOS will always be key to Correspondent Banking.

Daily Fintech Advisers (the commercial arm of this open source research site) can help implement strategies related to the topics written about here. Contact us to start a conversation.

SIBOS Day Four – the FinTech story in Asia

By Ravi Patel

Ravi Patel is contributing to Daily Fintech as a Guest Author. He is the co-Founder and CEO of YoloPay, a Singapore-based mobile payment company developing payment solutions for families. Prior to this, he was a consultant and business strategist in the financial services industry.

Ed Note: I asked Ravi to cover SIBOS as a reporter as I was busy as a speaker/moderator and connecting with clients for Daily Fintech Advisers. 

SIBOS is truly a global Financial Services event with bankers traveling across all corners of the world to connect with banks, payment service providers, technology vendors, ‘FinTechs’, consultancies, regulators and more. This year, with the event being held in Singapore, there was a strong representation from Asian participants and Asian representatives of global organizations. So what is the Asia FinTech story? Is there one?

In this post, I will outline some of the themes, specifically relevant for Asia, that emerged most consistently.

1) Asian markets play catch-up but few are driving local innovation yet

Not many will disagree with the notion that the ‘FinTech’ phenomenon began in the US and Europe after the 2008 Global Financial [banking] Crisis where the significant turn in consumer sentiment propelled a drive for change. (Needless to say, there were many notable ‘FinTech’ innovators before but they were isolated.) However, there has been no such trigger for Asia where the majority of Asian banks, Financial Institutions and their customers were not directly impacted.

This means that there have been no external shocks to drive an urgent response in Asia – often the key ingredient to a significant shift in an industry. I would argue China is the only exception due to the Government siding with the large Tech companies, e.g. Alibaba and TenCent in an urgent attempt to challenge the rampant shadow economy, above working with the slower-moving state banks.

When I started my FinTech in 2013 in Singapore, there was almost zero interest in FinTech. In fact, even the word was unfamiliar to most. However, only after the emergence of the high profile ‘Unicorns’ such as Lending Club, Credit Karma, Square, Transferwise and many others, now banks, investors and entrepreneurs in Asia are starting to pay attention. In 2015, several accelerators were set up such as Startupbootcamp, InspirAsia, Spaze in Singapore and NestVC and FinTech Innovation Labs in Hong Kong and many venture capital firms have announced a new focus in FinTech. Even some governments are responding. The Financial Sector Technology and Innovation (FSTI) scheme that was introduced by the Monetary Authority of Singapore (MAS) in June 2015 with a commitment to invest S$225 million over the next five years.

So these are clearly very early days and there will need to be new large companies having impact before success can be called. It is imperative that suitable local problems are be identified, and not just extrapolations of Western market problems, before we can expect anywhere the near the same impact.

2) Unique consumer opportunity with the ‘Underbanked’ and the ‘Digital Native’

A very unique feature of the Asian opportunity is the demographic and socio-economic profile of the population and the ‘localized’ problems that exist or that are emerging. Two themes spoken about on multiple occasions were the 2.5 billion ‘unbanked’ or ‘underbanked’, a significant chunk being in Asia. Also the leap-frogging digital natives who were born with a mobile device (not literally) who may never see a bank branch in quite the same light as their older western counterparts. Interestingly there is a large overlap between these two segments.

This drives a local demand for new solutions, but again, it seems that the Asian Financial Services community are in the very early stages of identifying a proposition supported by a robust business model in order to target and serve these new segments.

I discussed this in more depth on my #SIBOS Day Two Figuring out how to profitably serve the Underbanked post. I believe the millenials and their younger friends will also have expectations that will demand a new sustainable business model. The early hopefuls seem today to be focused on mobile-only digital banking and payment services, new online credit services using social information and various crowd-funding platforms. The common thread between them is providing easy access to instant services on a mobile platform – minimum expectations for a ‘Millenial’ – just ask any ‘Baby Boomer’ with kids.

3) Real-time payments and remittences

Given the fragmented state of payment systems both domestically and internationally in Asian markets, building a new payment infrastructure supported by mobile wallets and mobile point of sale is extremely important. And extremely valuable. And therefore should be attractive.

Some countries in the region have made large steps forward in creating a domestic real-time payments infrastructure, such as Singapore and Australia. However, the majority are still operating multiple independent payment systems that make the cost and efficiency of money transfer, in many cases, prohibitive. I talked about some of the developments in my post on this SIBOS Day Three Real time payments going mainstream but this certainly remains very high on the agenda for most Asian markets given the status quo.

There are a lot of new local players now competing with the US giants on the merchant acquiring side, e.g. mobile Point-of-sale operators such as 2C2P, Coda Payments, SoftPay. Access to issuing licenses means that independent general-use wallets are more difficult to launch. We can expect much more growth here as these solutions can enable economic growth.

In addition, remittences is also centre stage in Asia. With more communities traveling across the region, more businesses expanding to have regional coverage and with online commerce lowering physical barriers, the opportunity for remittences is large. Given the poor infrastructure that the incumbent banks operate, the cost of moving money is extremely high. While companies like Transferwise and Azimo are making headlines in Europe where they have the scale to grow afforded by large domestic markets in the SEPA (Single European Payments Area), the complexities for Asian cross-border remain challenging, not least the growing regulatory burdens of KYC (Know Your Client) and AML (Anti-money Laundering) on innovating and operating cross-border business operations.

In summary, the Asian FinTech story is very young and only starting to emerge driven by strong local drivers and the ‘disruption’ apparently taking place in the US and Europe.

There are clear indications of the need to build propositions for new customer segments, supported by sustainable business models and also numerous opportunities to improve operational inefficiency for large financial institutions through improvements in process standards and also new technologies altogether. For example, distributed ledger technologies are being heavily explored in Singapore and Australia by both public and private sector initiatives as a means to improve processing capabilities. There is a lot of work to do.

Whether this comes from true disruption, i.e. new players replacing incumbents, or through greater collaboration, the tone of the conversation at SIBOS seemed to suggest collaboration would be the way forward. But that may not be a surprise given that it is a conference by SWIFT for banks. In any case, the Asia FinTech story is only beginning and its trajectory may end up being very different to what we see happening today in the US and Europe.

SIBOS Day Three Real time payments going mainstream

By Ravi Patel
Ravi Patel is contributing to the Daily Fintech as Guest Author. He is the co-Founder and CEO of YoloPay, a Singapore-based mobile payment company developing payment solutions for families. Prior to this, he was a consultant and business strategist in the financial services industry.

Ed Note: I asked Ravi to cover SIBOS as a reporter as I was busy as a speaker/moderator and connecting with clients for Daily Fintech Advisers.

One of the most heavily discussed topics at the SIBOS 2015 conference in Singapore was regarding the arguably utopian state of any payment system – ‘Real-time’ payments. Maybe this is not so much of a surprise since the event was organised by Swift who essentially have a monopoly on inter-bank financial communication networks. So definitely the right place to have the discussion.

But what I found interesting is the divergence of solutions to the problem. Broadly speaking, there are two camps here: The old guard who believe we have come a long way and still have much more to do to get to the utopian state. And the new FinTechs who believe their alternative solutions can fundamentally rewire the system using the new distributed ledger technologies. And do it quickly.

Whether this becomes a race or we see an evolution towards different solutions for different requirements, we will need to see. But I summarise below some of the key trends I saw:

1) Volumes are steadily growing – According to McKinsey & Co, payment volumes, payment revenues and the percentage of total banking revenues had all been increasing with a healthy growth projected from 2014-2019. Total payment revenues is projected to grow by 6 percent per annum each year through to 2019 eventually accounting for 40 percent of banking revenues. This is driven by continuing economic growth in a more globalised world, the growth of mobile as a new payment medium and also the growing inclusion of payment capabilities to new segments, in particular developing economies in Latin America and APAC.

This suggests that the demand for payment solutions and the need for efficient payment operations will notably increase. So this validates strongly the call to action.

2) New standards and technologies – There is a clear appreciation that the initiatives to deliver real-time payments in some countries such as the UK, Australia and Singapore can be considered a success. And general desire to expand this across other markets was very apparent. For example, Japan had announced that in the next year it will be implementing a real-time payment system and Thailand had also just recently announced it will be partnering with VocaLink (the company responsible for implementing Faster Payments in the UK, FAST in Singapore and a similar system in Sweden) to deliver a real-time mobile payment system. Sadly the US was highlighted as being a very difficult market to implement real-time payment on the current infrastructure due to the federal banking structure and thousands of banks within.

There were multiple sessions on the implementation of ISO 20022 specifically, a new standard with new business processes for electronic data interchange between financial institutions. (ISO 20022 was the basis of Singapore’s FAST payments solution.) One thing remained clear throughout, the complexity of banking infrastructures and regulatory pressures meant that implementation was going to take time. According to one survey by a consultancy Dovetail, over a third of banking executives surveyed believed that it would take more than 2 years to implement instant payments.

3) Alternative solutions – And unsurprisingly, the FinTech also had an approach. Both Earthport and Ripple were on site presenting their distributed ledger technologies (“DLT”) to bypass traditional networks and settlement processes and deliver real-time payments far more efficiently and cheaply using their API-accessible platforms. While still very early days, the banks appear to be interested. For example the Consultancy R3, is working with 9 banks across the world to explore how to implement distributed ledger technologies to impove operations (read here).

After speaking to several traditional technology vendors (meaning they have been around the block a few times) some were truly embracing the potential of DLT to transform multiple aspects of the financial services industry. IBM specifically mentioned DLT as one of their two areas of focus (the other being ‘Cognitive’, its deep learning capabilities). There may well be a race in the need to build capabilities including the technical human resource pool who will be called in to transform the financial services industry…. Once they have worked out exactly what the problem is; and got permission from the regulators to go ahead; and prioritizing with the increasingly tough regulatory burden; and making the business case on an increasingly competitive marketplace with thinning margins. Needless to say, while this is certainly a high point in the hype cycle and whether it continues to grow or we get bored and move our hype elsewhere, the DLT is clearly a strong contender for driving the sustainable and long-term growth of the industry.

The question is now, will it make more sense for the incumbents to transform or for a new challenger to rapidly disrupt in particular product/niche. Once again, the reigning theme at SIBOS 2015, at least for me, is one about business model – What does the bank of the future look like? These are exciting times.

#SIBOS Day Two Figuring out how to profitably serve the Underbanked

By Ravi Patel

Ravi Patel is contributing to the Daily Fintech as Guest Author. He is the co-Founder and CEO of YoloPay, a Singapore-based mobile payment company developing payment solutions for families. Prior to this, he was a consultant and business strategist in the financial services industry.

Ed Note: I asked Ravi to cover SIBOS as a reporter as I was busy as a speaker/moderator and connecting with clients for Daily Fintech Advisers.
The ability for a bank to serve the ‘unbanked’ might just be a contradiction as there may be a very obvious reason why banks haven’t served them to date – possibly, they can’t profitably serve this segment. So the better question is, what is required to serve this segment?

A question all startups face as they establish themselves is “What is your business model?”What the questioner is trying to understand is what are the forces that will allow you to sustainably grow your business.

For banks, a very succinct answer might look a little like this…

Banks broadly make money by earning the interest differential between what they pay on the deposits they receive and what they earn on the loans they make to customers. They additionally make money by earning fees from services provided including transaction execution, advisory and management. These can be applied across customer segments and across channels.

At SIBOS 2015 Singapore, and especially when we think about the developing and emerging economies of Asia Pacific, Financial Inclusion (which we call the Underbanked market on Daily Fintech) is a very hot topic. We often hear about the circa 2.5 Billion people who are ‘unbanked’ and do not have access to quality financial services.

But of course when we think about this more, the unbanked can easily extend to young people (aged less than 18, the common age before credit can be offered to minors), those who cannot work for reasons such as disability or those with a tarnished history incompatible with the narrow parameters firmly held by a very old credit scoring industry.

Whether poor or disadvantaged, if you cannot pay the interest income on credit or the fees, there has not really been an interest by banks to offer services.

And compounding this unfortunate exclusion has been the rising wave of regulation aimed initially at fraud and now extending to anything remotely linked to terrorism, even by association of country. New regulations on KYC (Know-Your-Customer), AML (Anti-money Laundering) and more recently establishment of new bodies such as FATF (Financial Action Task Force), an independent inter-governmental body that develops and promotes policies to protect the global financial system against terrorist financing

On the SIBOS Day 2 Innotribe panel on Financial Inclusion, we heard from some leading thinkers in the space. There was a mix of optimism and enthusiasm that the industry could innovate its way profitably into this segment. However, there were also concerns, due to the compounding strains on banks, whether this was a realistic expectation.

I want to present some options that could promote inclusion by developing a new business model that could sustainably serve, initially, some of the huge unbanked populations (note that almost all examples will involve a mobile device to reach the customer):

1) Smart credit profiling – The banks are losing ground very quickly to new innovative online credit services, FinTechs, who are able to rapidly use widely available digital profile information to intelligently determine credit worthiness. Facebook was a suggested digital identity platform and with biometic idenitfiers. New startups in this space were well represented at SIBOS with Kreditech, Iwoca, Cignifi and Modeall presenting their new capabilities, and opening up financial services to various customer segments. But as was wisely pointed out, they have yet to see a down cycle so the jury is still out. Notwithstanding, better credit profiling will open financial services to a larger population.

2) Micropayments and alternative low-cost payment systems – Broad industy innovations can lower the cost of financial services to increase access to those on the lower, but maybe not bottom, segments. New peer-to-peer models mean that capital can be transferred to pay those who deposit and charge those who borrow much more efficiently without the intermediary earning the “interest differeniatial”. Also enhancements to payment systems include new distributed ledger systems that bypass the archaic payment systems operated today by incumbant payment service providers.

3) New business models – A saying that has often been quoted in startup world goes, ‘if you’re not paying for the product, you are the product’. That may not be such an unethical outcome if socially responsible companies are able to deliver new inclusive services such that customers can access and suppliers are able to create a profit. Some examples include Nextbillion who provide Mobile Movies to show movies and educational content while collecting data to document positive impacts. Another is Wobe who provide an App for women in rural Indonesia to earn commissions from reselling mobile phone credits. While these are isolated examples, they are indeed setting a precendent for creating self-sustainable business models to serve what we describe as being ‘unbanked’.

So question is not how can banks serve the unbanked, rather, what is the optimal business model to serve this segment to improve the welfare of this excluded segment. This could involve Banks, FinTechs, TelCos, or maybe even someone else.

SIBOS Day One – return to a new looking Singapore

By Ravi Patel

Ravi Patel is contributing to the Daily Fintech as Guest Author. He is the co-Founder and CEO of YoloPay, a Singapore-based mobile payment company developing payment solutions for families. Prior to this, he was a consultant and business strategist in the financial services industry.

Ed Note: I asked Ravi to cover SIBOS as a reporter as I was busy as a speaker/moderator and connecting with clients for Daily Fintech Advisers. 

SIBOS, the preeminent Financial Services conference organised by SWIFT, returns to Singapore after 12 eventful years. You may forgive many of the returning veterans (out of the estimated 8,000 attendees, a preliminary estimate) for not remembering too many local landmarks for much has changed; in both Singapore and not least the Financial Services Industry.

As a guest contributor to the Daily FinTech, I want to share some observations and themes that emerged from Day 1 of the conference, the most memorable being the use of the word “disruption”. (Please note that as a self-proclaimed “FinTech entrepreneur”, I have a bias to sessions on the future state of payments and digital innovation.)

The conference agenda seemed to cover the usual areas of payments, securities, cash management and trade, however, it did not take long until the word “FinTech” was bandied about referring to the new generation of challengers driving new innovation and growth. There seemed to be a serious desire for debate about the future business models for the industry whether it was ‘disruption’ or ‘collaboration’, need for technology or a revamp of culture, whether something new (e.g. blockchain) or a retrofit of the existing world (e.g. real-time payments).

Here are some of the key take-aways from Day 1:

1) “An emerging divergence.” There seemed to be a slight divide between the SIBOS loyalists and a small new generation, made visible not least by their attire (Ed, in past years suit and tie was mandatory for men and that was the practice for about 98% by my rough count). While the banks and traditional technology vendors set their stalls across the exhibition floor with lavish displays, Italian coffee machines and closed glass rooms for private meetings, the Innotribe section (Insights on innovation) was open, loud and most certainly over-subscribed.

2) “Going back to the drawing board on the business model.” There were multiple discussions on innovation across the different fields whether looking at new models, new entrants replacing the incumbents, new policies or regulations to improve service standards or some suggestion of collaboration. There was a fiery debate between FinTechs and Banks at the “Future of Money: A burning platform?” panel. A good example was regarding new online credit services leveraging new social data sources to make intelligent approvals and improve service delivery and inclusion for credit services. Such evolutions were suggested to be exciting and in some cases best delivered by startups with their single focus, but it was noted that many models were still untested through economic cycles.Would it be disruption or collaboration?

3) “Finding use for the Blockchain.” No FinTech conference in 2015 can escape the mention of the Blockchain and the sweeping potential to transform the financial services industry. Beyond the high level sensationalism, the panel “New kids on the Block(chain)” raised some good points about potential use cases for banks highlighting how trade invoicing could be effective, however clearing and settlement functions would not work due to privacy requirements. It was therefore very clear that a lot more investment was required to understand how to implement and operate the blockchain to improve the efficiency of the business operations and also the customer service levels.

Ed: this session was so overbooked that they created an overflow room connected by real time video and that too was standing room only. Many commented that Blockchain was top of the Hype cycle meaning that in a year we will be wondering how it disappeared so fast and then x years later we will all be using it even if most of us are not aware we are using it (like VOIP).

4) “APIs as a product.” Fidor Bank, Silicon Valley Bank and BNY Mellon presented some interesting examples of progressive banks opening public APIs as a new product offering to front-end solution providers with great advice on how to build and operate. A noteworthy consideration was the importance of a new developer to developer culture that will be front-line in financial services. It was suggested that this may be the strategy to survive and emerge successful in the next phase of digital banking, in addition to new regulations such as PSD2 which will require in any case for banks to have certain public APIs in Europe.

5) “Regional disparities are prominent.” In the context of real-time payments, it remained clear that the different regions were at different stages of evolution and faced different challenges whether looking at the USA, Europe, SE Asia, Australia or Japan. Such structural differences will remain to be a challenge for harmonisation and eventual optimisation. However, the locations have implemented or have plans to implement real-time payment systems with some markets paving the way forward, such as the UK’s Faster Payments system.

There were numerous other panels, workshops and meetings all fully attended throughout the course of the day covering the above and many more topics. Some sessions reached capacity and wouldn’t let more people in. While there is broad consensus of the need to innovate more in the financial services industry, given the significant changes in the consumer landscape, the technologies available and the regulatory environment, the debate is still on to explore what are the best ways forward. I’m looking forward for another 3 days. And I am sure there are a lot more deals to be made in those shiny glass offices.