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Finovate Blog
Tracking fintech, banking & financial services innovations since 1994
Marketing services company Kasasa is partnering with BSI Financial Services to provide a new mortgage loan product that community banks and credit unions can offer their clients.
The new offering, Kasasa Mortgage, helps small financial institutions compete with large banks by offering a unique loan product. What’s distinctive about Kasasa Mortgage is that it uses the Take-Back concept the company piloted in 2018. Every month the borrower has the option to overpay on their mortgage payment. If, at any time in the future, they need to access cash quickly, they have the option to take back any portion of the overpayment.
Making the new launch possible, BSI Financial will conduct the loan servicing on behalf of community banks and credit unions using the new product, Kasasa Mortgage.
“Through Kasasa’s partnership with BSI Financial, we are enabling a greater number of local financial institutions to help their borrowers better understand their mortgage loan and get out of debt quicker,” said Kasasa’s EVP of Product Management, Chris Cohen. “By offering the most consumer-friendly loan available today, community banks and credit unions can achieve higher yields without the additional risk and maintain their fair share of the market.”
Earlier this month Kasasa improved on its Take Back loan by integrating Carleton’s insurance and debt protection calculations to help tailor loan limits.
Customer engagement specialist Digital Onboardingannounced its Series A round today. The amount of funding was undisclosed and adds to the company’s existing $4.3 million in seed funds. Contributors include Detroit Venture Partners and other institutional and individual investors.
Along with today’s investment, FINTOP Capital Partner John Philpott, Jack Henry Senior Managing Director Shawn Ward, and a founding member of S1 Corporation joined the Board of Directors.
The company plans to use the funds, along with the fresh influx of expertise on its board, to begin “accelerating the execution of [its] product roadmap, scaling account management, and expanding sales.”
Digital Onboarding’s SaaS offering helps banks deliver compelling services that keep customers around for the long-term. The company is especially effective in helping motivate accountholders to take action because it aggregates data across banks with similar business objectives.
“Banks have myopically focused on getting new accounts opened to meet aggressive sales targets and are now being forced to contend with the reality that new accounts are worthless if they’re not converted into engaged relationships,” said Digital Onboarding CEO Ted Brown. “The Digital Onboarding platform has been proven to drive the adoption of additional products and services like digital banking, direct deposit, and automatic payments which drive long-term profitability.”
The funding comes at a time of increased demand for digital services of all kinds. Since many non-digital native customers are now needing to conduct much of their banking activities remotely, maintaining connection with them through digital channels is more essential than ever.
Digital Onboarding was founded in 2015 and is partnered with 40+ financial institutions that together represent $160+ billion in assets. The company most recently demoed at FinovateFall 2018. You can catch an all-new round of demos at FinovateFall Digital next month. Stream the event from anywhere on the globe September 14 through September 18.
The following is sponsored content from LendingFront.
With Covid-19 on the minds of businesses and lenders alike, conversations about the capital needs of small businesses have revolved—with obvious justification—around the Paycheck Protection Program (PPP) and other forms of relief provided under the CARES Act.
Yet the capital needs of many small businesses don’t begin and end with the PPP.
Let’s start with a few facts
According to the U.S. Federal Reserve’s 2019 Small Business Credit Survey:
43% of small businesses sought external funding for their businesses in 2018
And more than half experienced a funding shortfall.
These funds—when small businesses can obtain them—are often used to purchase inventory, replace equipment, finance expansion, and hire new workers.
These needs will persist long after PPP lending has come to an end, yet even in a strong economy, up to 80% of bank-originated small business loan applications are rejected.
In the post Covid-19 environment, we can expect that percentage to be even higher
That’s because the conventional underwriting criteria for small business loans will no longer work. Traditionally, both bank- and non-bank lenders have relied on four criteria for underwriting small business loans:
Tax/Financial Statements
Credit Scores
Collateral
Owner Wealth
In a normal economy, these criteria are fine, but they’ll do little to show the true state of a business in the post Covid-19 environment. 2019’s tax/financial statements will be all but irrelevant. Credit scores will be damaged as a result of the inability to make payments during a forced closure. Collateral will have questionable value if bankruptcies spike. And owner wealth will have been tapped in an effort to keep many businesses afloat.
Are we headed towards a capital drought?
With traditional underwriting criteria no longer useful, are we headed toward a capital drought? We certainly don’t need to, but the answer largely hinges upon lenders doing two things:
Adopting new criteria that are more appropriate for the post Covid-19 environment
Adopting new product structures that enable the lender to manage risk
New credit criteria include information such as:
Real-time Cash Flow Cash flow helps you gauge how quickly the business is recovering from Covid-19. Is it in irreversible decline? Is it struggling but stable? Has it gotten back to normal? Insight into real-time cash flow helps lenders make better decisions about who to lend to along with the terms of any offers.
Consumer Sentiment Customers who vote with their reviews also vote with their wallets. Examine reviews from Google, Yelp, and other sources to answer, Is this a business that customers love? Businesses that are well-regarded by customers stand a much better chance of recovering than those that had problems before the pandemic shut them down.
New product structures also enable lenders to deliver capital efficiently while managing risk
Here’s how:
Shorter Terms First, lenders should emphasize shorter payback periods in the range of 6-12 months. Shorter terms get the lender paid back faster while enabling the business owner to show that he/she is creditworthy before seeking a larger amount of capital.
Daily ACH Payments Second, lenders should collect payments from the borrower on a daily—rather than monthly—basis. Monthly payments introduce unnecessary operational risk. Daily payments are smaller, consistent, and more predictable from the standpoint of the business’ cash flow.
Tie Payments to Performance Lastly, lenders should tie payment terms to current cash flow performance—and with visibility into cash flow, this is very easy to do.
A new economy needs new rules for lending
If the Great Recession taught us anything, it’s that opportunities exist for lenders to increase their assets, gain market share and, of course, to meet the capital needs of their borrowers. In the post Covid-19 environment, lending is only as risky as the information used to make decisions. With better underwriting criteria and more appropriate product structures, the most forward-thinking lenders will position themselves for success and reap the rewards.
Tandem Bank announced its latest acquisition this week. The U.K.-based bank has purchased Allium Money, an alternative lender that offers consumers financing to improve the energy efficiency of their homes.
Specific terms of the deal were not disclosed, but it is made possible by Tandem’s $78 million (£60 million) funding round that was led by Qatar Investment Authority and closed last week.
Tandem Bank will use Allium to enhance its existing in-house lending suite, tapping into Allium’s green lending solutions that help homeowners finance everything from insulation to efficient windows to solar panels.
“This is great news for our customers and the team that have worked tirelessly to develop the business focussing on financing improvements for our environment,” said Allium CEO Paul Noble. “The combination of Allium and Tandem will create the ability to rapidly scale a green banking proposition and help more customers access green finance products.” Noble will join Tandem’s executive team.
The partnership comes at a good time. With an increased focus on climate change and awareness of their impact on the environment, consumers have shown heightened interest in green initiatives. Along with home improvements, ESG (environmental, social, and governance) investing is also gaining interest.
Tandem Bank has raised $175 million (£134.3 million) since it was founded in 2013. The challenger bank’s 700,000 customers have access to Tandem’s accounts that include Autosavings technology, credit card, and, coming soon, cashback rewards.
This is a guest post by Sandeep Sood, CEO of Kunai.
Will Digital Behavior Affect Credit Scores in the Future?
Credit scores are about to take another leap forward—or backward, depending on how you see the future. People’s digital lives leave a trail of data “exhaust” that some countries are beginning to leverage to understand and better predict their behavior.
Assessing someone’s credit risk without traditional financial information is tricky business. Inevitably, concerns about privacy and credit-based blacklists arise.
For as long as there is debt, there will be debate about the subjective measures that determine who can be trusted to repay it. To understand how we got here and where we’re going, we’ll need to review the history of credit scoring as we know it.
Where Did the FICO Score Come From?
Formal credit reporting began in the U.S. in 1841. Ledgers in New York recorded borrowers’ creditworthiness, however these reports were extremely biased. Entries included advice such as “prudence in large transactions with all Jews should be used.” A more fact-based, alphanumeric system was developed in 1857 and used well into the 1900s.
Starting in the 1950s, computerized credit ratings used algorithms to automate scoring. FICO was born, and made rapid lending approvals possible.
In a world with Facebook and Google, it’s hard to think of an algorithm that has a greater effect on our day-to-day lives. It dictates the jobs we get and the places we can live. Yet, the algorithm is cryptic and occasionally biased, even if it works most of the time. FICO is far from perfect, but it’s the best system we’ve got—for now.
Alternative Scoring Methods Help Bankless Borrowers, at a Cost
Around the world, many people don’t engage in the banking and credit card transactions that feed the FICO algorithm. This has led to explorations of other credit scoring methods.
Fast-growing startup Tala, for example, is using the ubiquity of cell phones to bring credit scoring to unbanked borrowers. Applicants surrender their mobile data, and Tala monitors bill payment history, text messages, and behavioral data gleaned from their device to provide a unique “mobile credit score”.
For people who need loans, giving up personal information is worth the sacrifice. Tala arose out of the need for better information in countries without established credit systems, making credit available to people who otherwise would not have access to it.
China’s Social Credit and the Big Brother Debate
In parts of China, credit is returning to a reputation-based model. Various local programs measure social credit based on behavior. Some of this is tracked online, similar to Tala’s methods, but facial recognition and CCTV networks are also leveraged to ding people’s scores. Littering, failing to cede right of way to pedestrians while driving, and other actions deemed socially harmful can affect someone’s score.
While these pilot programs feel Orwellian, the Chinese system remains in a nascent stage of development. Perhaps one day soon, the West’s fears of Chinese social control will be justified. And then the question is, how will the rest of the world respond?
The Future of Credit Scoring
The credit score is a fundamental pillar of our modern financial system. But it’s difficult to define a universal set of attributes to determine every American’s credit risk.
Cryptocurrency may offer a viable solution. Finance startup Bloom is already leveraging the recorded financial history available on the blockchain. Since all transactions are permanently stored in a public record, cryptocurrency provides an immutable source of truth. While there is no history on the blockchain yet, it could be a game-changer once developed.
But data and its surrender aren’t going to suddenly change a system that’s been, more or less, working since the 1950s. In fact, too much data can lead to bad models that over-index for characteristics that work well in one population but do just the opposite for another.
As these experiments continue, they’ll likely bring a more stable, accessible credit system to countries in the wild west of credit scoring. In five to ten years, their successes and failures may very well lead to breakthroughs that influence how FICO evolves. But for now, FICO is proving it works well enough without the glut of invasive personal data.
Sandeep Sood is the CEO of Kunai, a product development company that has been building digital products for 20 years. See more of his articles at Kunaico.com along with Kunai’s work. Follow him on Twitter @sandeep_k_sood.
Starting this week, NatWest is making it easier for clients to get the help they need to make their banking experience easier. The initiative is called Banking My Way and provides a single place for customers of the U.K.-based bank to input their preferences so that they are addressed across all channels.
The preferences are divided into two sections, About me, which addresses vulnerabilities or disabilities such as being visually or hearing impaired, and Support me, which focuses on how the bank can support the user, such as speaking slowly and clearly or not assuming a gender when addressing them.
“Banking My Way will allow you to tell us more about your current circumstances and the difficulties that you are facing with your banking,” NatWest explained on its website. “This will allow you to also tell us about the support you require, and we will ensure that this information is shared with our teams to support any further interactions that you have with us.”
Clients can input or change preferences online, in a branch, or via phone. In order to ensure information is up-to-date, users will be asked to review their preferences on an annual basis.
This is an amazingly simple idea, but because it is a pull, rather than a push approach, it may be lost on some consumers. That said, NatWest will have the best response rates with this system if it is implemented as part of the onboarding process, instead of being structured as a separate item customers need to register for.
Crypto asset-backed lender BlockFI just landed $50 million in funding, marking the company’s third investment in just 12 months.
The round was led by Morgan Creek Digital with participation from Valar Ventures, CMT Digital, Castle Island Ventures, Winklevoss Capital, SCB 10X, Avon Ventures, Purple Arch Ventures, Kenetic Capital, HashKey, and others.
BlockFI will use the cash to hire more employees and boost its business offerings. Specifically, BlockFI plans to add support for additional assets and currencies and is working on the launch of a bitcoin rewards-based credit card.
Flori Marquez, SVP of Operations and Co-Founder of BlockFi, described the company as “a driving force in bringing cryptocurrencies mainstream.” And that summarizes BlockFI’s goal with this new growth round. Not only does the company hope to improve the customer experience, it also wants to broaden the appeal of crypto-based investment.
Founded in 2017, BlockFI offers some of the same services customers are used to seeing at their traditional bank, only for cryptocurrencies. In addition to providing trading and institutional services, the company allows users to earn compound interest in a range of different cryptocurrencies. BlockFI also helps clients leverage their cryptocurrency as collateral towards a loan, paid in U.S. dollars, and receive their cryptocurrency back after the loan is paid off.
“With the support from our partners, we’re creating a platform for investors where they aren’t investing in just digital assets anymore—they’re investing in the future, greater financial empowerment and accessibility,” said Zac Prince, CEO and Founder of BlockFi.
BlockFi, which currently has $1.5 billion in assets on its platform, has seen impressive growth in recent months. The company ballooned its revenue 10x over the past year, with plans to reach $100 million in revenue over the next 12 months.
A couple weeks back I had a conversation with Andrew Besheer, Head of North America for Appway, about the rise of challenger banks. Our discussion centered around some of the data points in Ron Shevlin’s piece, The Online Banking Insurgency of 2020, published in Forbes last month.
One of the questions that came up was if this surge in new challenger bank accounts is an accident of digital transformation? In other words, are Millennials and Gen Z consumers gravitating towards challenger banks because their websites appear more digitally savvy?
At its core, this is a chicken-and-egg question. Are challenger banks successful because their tech-first approach satisfies consumers? Or are underserved consumers driving challenger banks to create new products and services that banks are unable (or unwilling) to offer?
First, its important to recognize that both challenger banks and incumbents know their target market. That is, the challenger banks are catering to an audience looking for a different bank experience than the one that appeals to their parents.
To answer this question, first, take a look at the outward appearance. Traditional banks’ websites are text-heavy, with long-winded fine print, and are intimidating enough to drive away less experienced consumers. Conversely, challenger banks use colloquial language and present websites that look simple and transparent. As an example, take a look at Charles Schwab’s website:
And now look at Dave’s:
Both are relatively technologically and digitally advanced banks, but they are appealing to two entirely different demographics.
Taking a look under the surface, the products and services each bank offers are also different. Schwab’s are heavily geared toward investing and trading, while what Dave offers– paycheck advances and credit building tools– seems to center around keeping its users afloat.
In the end, the two approaches are perfectly suited for users on opposite sides of the generational spectrum. My father and grandfather would never bank somewhere that had a cartoon as a mascot. And younger, Generation Z users don’t trust incumbent banks’ language and apparent lack of transparency.
Now, to answer the question, “are Millennials and Gen Z consumers gravitating towards challenger banks because their websites appear more digitally savvy?” The answer is no. Challenger banks are built from the ground up to entice this generation of users. And while the banks’ advanced digital capabilities help to draw users in, they are not the sole reason younger, tech-savvy users choose them.
You can check out the full interview, where Besheer and I delve further into the challenger banking conversation, on Appway’s website.
You’ve likely heard the phrase, “every company will become a fintech company.” That’s because the banking-as-a-service model has officially taken off and is helping companies across all industries offer their customers a variety of banking options.
Perhaps that’s what Alviere was thinking in creating its new flagship offering, TheHivePlatform, which it distinguishes as a Financial-Services-as-a-Platform (FsaP) tool. Hive allows businesses to choose from a range of seven financial services offerings– including banking and treasury application services; payment processing and cross border transactions; debit, prepaid, and credit issuing services; identity, risk, and fraud management services, business intelligence and analytics, customer communication tools, and mobile technology– and enables them to easily integrate their own branded tools into their existing business via an API.
“We know from our own experience the pain it takes to get a financial service to market, so we launched Alviere and The HIVE to help companies like us to alleviate the pain,” said Yuval Brisker, co-founder and CEO of Alviere. “We’re excited to announce the launch of The HIVE, which is the most advanced and complete Financial Services as a Platform (FsaP) on the market today. It’s much more than Banking-as-a-Service, incorporating many more capabilities than similar offerings.”
The Hive Platform also solves one of the biggest hurdles for companies delivering financial services– regulations. That is because it is already designed to be deployed in any geography with any regulatory framework.
Offering businesses financial services is a good move because it allows companies to focus on their core competency while providing access to valuable financial services. In addition to keeping customers happy, delivering financial services helps businesses by creating a stickiness that will drive customers back to their business, website, or app more frequently.
Founded by Yuval Brisker and Pedro Silva, Alviere is now available to businesses in Canada and the U.S. The company plans to be available in more geographic regions by year-end.
After teasing the launch of its debit card in the U.S. earlier this year, Samsung announced that its digital debit card, the Samsung Pay Card, is now available in the U.K.
To make the launch possible, Samsung has teamed up with Curve, a fintech that consolidates all of a user’s existing Mastercard and Visa payment cards. The London-based company makes all of a user’s cards contactless and compatible with Samsung Pay.
Users will receive access to Curve features such as peer-to-peer money transfers, instant notifications about spending, competitive foreign exchange rates, 1% cash back on purchases made with a select group of three merchants, and 5% cash back on purchases made at Samsung.com. Samsung Pay Card users will also be able to use Curve’s Go Back in Time feature that allows them to switch payments from one card to another for up to 14 days after the purchase was made.
The deal is a win-win for both companies; Samsung will benefit from Curve’s e-money license with the U.K. Financial Conduct Authority, and Curve will gain from an increase in users. Interestingly, however, existing Curve users cannot also apply for a Samsung Pay card. As other sources have pointed out, the reason for this exclusion isn’t entirely clear.
“At Samsung we believe in the power of innovation and, through our partnership with Curve, the Samsung Pay Card brings a series of pioneering features that will change the way that our customers manage their spending, with their Samsung smartphone and smartwatch at the heart of it,” said Conor Pierce, Corporate VP of Samsung U.K. and Ireland. “This is the future of banking and we look forward to continuing this journey with our customers.”
Fintech giant FIS has adopted the subscription model that has proven popular in selling everything from wine to digital media to diapers. The Florida-based company launched a subscription core banking solution today called ClearEdge.
ClearEdge is geared specifically to serve community banks and offers a bundle of technologies to help them modernize their operations and provide a better customer experience. The flat-fee, month-to-month subscription model doesn’t require lengthy terms and it eliminates liquidated damages and exclusivity requirements.
“We are committed to making it as easy as possible for our qualifying community bank clients to access the advanced technology they need to offer modern, differentiated products and services to their customers,” said Head of Global Core and Channels, Americas at FIS Rob Lee. “ClearEdge takes that commitment to the next level with a powerful offering that we believe will be a game-changer for many community banks.”
“The ability to bundle solutions relative to our business needs creates the opportunity for us to be more creative and flexible while better controlling our back-office expense,” said John Dickson, chief operations officer at Coastal Community Bank. “Plus, it just makes sense in today’s volatile market.”
As the bank-fintech partnership ecosystem strengthens and the uncertainty of the COVID-19 economic environment persists, we can expect to see more subscription-type models from tech providers. The increased flexibility, combined with the ability to pick-and-choose solutions that are tailored to each individual organization, is a model that is better suited to modern banking requirements.
The following is a guest post by Borys Pikalov Head of Analytics and Cofounder at Stobox.
One of the greatest challenges in fintech is reaching the unbanked. Accessing poor communities is operationally complicated and their use of financial services is very limited.
Microfinancing institutions are only a partial solution and traditional loans do not work as an investment vehicle because they are risky for both parties: banks don’t want to give, and poor don’t want to take. To solve this puzzle we may use two creative concepts from financial engineering.
Individual investment contract
Instead of taking a loan, people promise part of their future income in exchange for money. This reduces the risk for farmers in case they cannot pay off the debt. This is already being practiced when corporations provide education grants to poor students in exchange for future employment.
Loan securitization
Instead of taking a single loan from banks, real estate developers issue debt securities and sell them to many institutions. Thus, the loan is divided into many small parts that may be traded on a secondary market, which spreads the risk for parties giving the credit. For conventional real estate loans, the maximum debt-to-value ratio is ~60%, while for securitized loans it is ~90%, which means that 50% higher risk is acceptable.
Personal securities
Combining these two concepts we arrive at personal securities – individual investment contracts issued in the form of securities that can be divided into small parts and traded on a secondary market. There is already an example of a personal securities offering in use: a software developer offered a part of his future income in order to move to Silicon Valley.
The use of personal securities can solve the risk puzzle of investing in poor communities. However, there are a number of practical problems to be solved in order for personal securities to be an efficient solution.
First of all, personal securities should be powered by proper technology. Offering many securities to many investors in dozens of different countries requires robust and scalable infrastructure. Blockchain technology is widely considered suitable for these purposes. In the last few years, providers of securities tokenization made serious progress and now enable convenient mass operations with securities. For example, the blockchain was used to reduce the entry threshold in a $22 million venture fund by 2,0000 times– from $1,000,000 to $500.
Another problem is the operational complexity. Using personal securities would require reaching poor communities, doing the legal groundwork of signing investment contracts, choosing investment opportunities, and gathering and distributing income. This requires wide collaboration between existing banking providers, governments, nonprofits, and startups.
A solution may be to organize everything as an investment fund that would issue securities to investors worldwide and use the proceeds to organize the investment process and do the investment itself. Pooling investment into funds can further reduce the risk for investors. It is better to do pilot projects to test the best structures.
The next big investment opportunity
Giving money to poor communities is the next big investment opportunity. It would not only directly benefit investors but also all businesses that can sell to poor communities. It can vastly improve the financial outcomes of developing countries. Most importantly, it can assist in finally ending extreme poverty and providing people with a dignified life.
Borys Pikalov is Cofounder and Head of Business Analytics at Stobox, an award-winning advisory and technology company in the field of securities tokenization. Pikalov has done 2500+ hours of research in the digital securities industry. Co-author of the book “How to Attract Investments with STO: A Practical Guide”. He is currently advising the government of Ukraine about developing an ecosystem for virtual assets.
