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Finovate Blog
Tracking fintech, banking & financial services innovations since 1994
Digital financial services company Ally Financial announced this week that it will acquire non-prime credit card and consumer financing company CardWorks. The deal, which has been approved by both companies’ boards, is valued at $2.65 billion ($1.35 billion in cash and $1.3 billion in Ally stock).
The acquisition adds a top-20 U.S. credit card platform and a top-15 merchant acquiring business to Ally Financial’s direct bank deposit, auto financing, insurance, and commercial product lines. The combined entity will serve 11+ million customers in 50 states when the transaction is closed in Q3 of this year.
CardWorks founder, chairman, and CEO Don Berman praised Ally Financial as an “ideal partner” for the “people-centric, compliance-focused” and technology-enabled organization he built in 1987. “In leveraging Ally’s commitment to innovation and adaptiveness, the combined company will be well positioned to meet the financial needs of our ever-growing customer base and deliver sustainable growth and performance,” he said. After the deal is closed, Berman will join both Ally Financial’s Board of Directors as well as the company’s executive management team.
Detroit, Michigan-based Ally Financial was founded 101 years ago as the General Motors Acceptance Corporation (GMAC) and retained that name until 2010. The company is one of the largest auto financing firms in the U.S. by volume, and is a top-20 U.S. bank by assets ($180+ billion). Ally Financial trades on the NYSE under the ticker ALLY, and has a market capitalization of $10 billion.
Ally Financial also has an online bank, Ally Bank, which is headquartered in Sandy, Utah, and offers mortgage financing as well as deposit and other banking services. As part of the acquisition, CardWorks subsidiary Merrick Bank will merge into Ally Bank.
When Lending Club was founded in 2007, the startup aimed to serve as a place to help borrowers avoid dealing with banks. In a somewhat ironic move today, that same startup is becoming a bank itself.
The move is made possible through Lending Club’s acquisition of Radius Bank, an online-only community bank founded in 1987 with more than $1.4 billion in assets.
It’s a logical purchase. Both Lending Club and its U.S. competitor Prosper have struggled with the classic chicken and egg conundrum– they can’t lend money to borrowers without investors ready and willing to lend, and they can’t find people willing to lend without enough qualifying borrowers. By becoming a bank, Lending Club has now adopted a pool of borrowers while having access to customer deposits to lend to those borrowers.
The deal is subject to regulatory approval and is expected to close in 12 to 15 months.
Radius President and CEO Mike Butler called the acquisition “a perfect marriage.” He added that, “with LendingClub bringing the leading digital asset generation platform, and Radius contributing a leading online deposit gathering platform,” they are set up for “long-term success.”
“This is a transformational transaction that allows us to reimagine banking in a way that is free from legacy practices and systems and where the success of LendingClub is aligned with the success of our customers,” said Scott Sanborn, CEO of LendingClub.
Lending Club isn’t the only alternative lender with aspirations to become a bank. U.K.-based P2P lender Zopa is currently working on launching a bank of its own and small business lender On Deck Capital plans to seek out a bank charter this year.
From the rise of the superapp to financial inclusion 3.0, the insights of our Fintech What’s Hot/What’s Not analysts at FinovateEurope last week continue to artfully disrupt our signature demo-only format.
Mixed in with live demonstrations of the latest innovations in payments and customer engagement (see our Best of Show coverage), our main stage analysts reminded us of the critical differences between machine learning and AI, the opportunities of 5G connectivity, and how open innovation helps companies maximize technological change.
Ratna Sita Handayani of Euromonitor International highlights the rapid growth of mobile payments in Asia.
Does the rise of the super app in Asia anticipate the future of apps in the West? Ratna Sita Handayani, Senior Research Manager with Euromonitor International, looked at the rapid growth in mobile payments in Asia, and the way that companies outside of traditional financial services such as ridesharing firm Grab have moved effectively into the payment space. Highlighting similar accomplishments from Japanese social media giant LINE and the continued rise of AliPay, Handayani considered how hyperlocalization and other strategies are helping these new offerings gain ground.
Promoting a “more autonomous, more distributed, and more ethical” fintech industry, Forrester VP and Research Director Oliwia Berdak encouraged innovators to move from thinking about the “next best product” to a value-for-value exchange in which interests align. Berdak compared many of the more limited fintech offerings of today with solutions such as smart contracts and even autonomous debt management that more fully take advantage of the latest technologies like advanced machine learning.
Berdak urges a move “from myopic and disoriented” to “more autonomous and more ethical” in fintech.
This is necessary in large part, Berdak suggested, to help manage the cognitive load of all the information that technology delivers in the first place. In other words, we need technology to “take the human” out of the technological equation we’ve created.
Tosin Agbabiaka, an Early Stage Investor with Octopus Ventures, leveraged his own experience – from frontier through the periphery to an increasingly divided developed world – to paint a vivid portrait of Financial Inclusion 3.0. Agbabiaka provided a deep, nuanced understanding of the challenges of developing countries like Nigeria in the 1990s where basic financial access was a principal obstacle to progress (Financial Inclusion 1.0). He then explained the difficulty periphery nations have when boom times stall and a lack of liquidity threatens to turn financial crises into catastrophe – like Greece in the late 2010s (Financial Inclusion 2.0).
A look at the challenges and opportunities on the periphery during Financial Inclusion 2.0
If the first stage of financial inclusion is about optimizing for basic access, and the second stage is about optimizing for quality and efficiency, as Agbabiaka indicated, the third stage of financial inclusion is about optimizing for affordability. This is the world we see in North America and Europe where the benefits of a digital, interconnected economy exist in abundance, but are harder for a growing number to obtain. These are places characterized by gig economics and alternative financing in response to low wages, funding challenges for micro- and small businesses, and the debt burden of higher education.
This is a critical challenge for fintech, Agbabiaka suggested, but it is not a challenge that needs to be pursued out of a sense of social good alone. Financial inclusion 3.0 represents the union of access, quality, affordability and, to coin a phrase used by another analyst above, aligns the interests of the frontier, the periphery, and the center when it comes to technological innovation. In this world, as Agbabiaka explained, “those served benefit as much as the newly-served.”
Fraud detection and prevention company Breach Clarity announced this week it has developed a new platform to help financial service providers offer personalized protection for their customers.
The machine learning-powered platform, dubbed Breach Clarity Premium for Financial Services, offers two sets of tools, one for the financial services company and one for the end consumer.
“Financial institutions are in a bad spot when it comes to data breach fallout,” said Breach Clarity founder Jim Van Dyke. “These breaches, most of which they have zero control over, are coming fast and furious, yet the actual damage can take years to occur. We first developed Breach Clarity to help the consumer fight back against the routine theft of their personal information. Now, we’re equipping their financial providers with much greater intelligence to help them strengthen everyone’s financial health.”
Founded in 2019, Breach Clarity analyzes data breaches, scores them in real-time based on 1,000 factors, and offers ideas for protective measures. The database behind the consumer-facing tool includes more than 4,000 data breach incidents, a number that grows by 50 each week.
Breach Clarity Premium for Financial Services has multiple benefits for financial services and their customers. The new tool details the most effective actions both parties can take, based on the information that was compromised, to mitigate loss in the event of a breach. The offering also enables consumers to search for data breaches that impact them without leaving their bank’s website or mobile app.
Breach Clarity is headquartered in Walnut Creek, California. Van Dyke recently demoed Breach Clarity at FinovateFall 2019 in New York.
The company that has helped bring fintech innovation to e-commerce with its mobile point-of-sale (mPOS), card reading solutions now offers merchants a card of their own.
SumUp announced this week the launch of the new SumUp Card. In partnership with Mastercard, the new card will make business payments easier for merchants, giving them both faster access to their funds, as well as enhance their ability to monitor their accounts.
When merchant cardholders accept payments via their SumUp readers, the payments will now flow directly to their SumUp Card. The card guarantees next-day payouts including on weekends, has no upfront cost or monthly fee, and offers free overseas payments. Available initially in the U.K., Italy, Germany, and France, the SumUp Card will be expanded to other markets over the course of the year.
The card comes in the wake of consultations with the company’s SME partners, as well as a successful beta-test with more than 25,000 merchants. The partnership with Mastercard reprises a collaboration the two firms undertook last summer which was designed to boost the number of electronic payment acceptance locations in 27 markets in Europe. The company noted in its statement that the card makes SumUp a more comprehensive solution for SMEs by facilitating “both the making and taking of payments.”
“Since launching our first reader, we have been dedicated to empowering merchants so they can focus on making their business as successful as possible,” SumUp co-founder Marc-Alexander Christ said. “We had this in mind when we designed our latest product, with the SumUp Card being a smart solution so we can continue being the driving force behind small businesses across the globe.” He referred to the new offering as “a small card for big ideas.”
SumUp was founded in 2001. The small business payments facilitator offers a variety of solutions that provide merchants with inexpensive payment acceptance options wherever their business is. The U.K.-based company has raised more than $425 million in total funding, most recently securing €330 million ($356 million) in debt financing. An alumni of FinovateEurope 2013, SumUp forged a partnership with German challenger bank Penta in December, and collaborated with U.K. challenger bank Starling Bank in July.
Read more about challenger banks in Europe in our recent features on top challenger banks in Germany and how venture capital is impacting the growth of the industry across the continent.
As 2020 begins, there may be no hotter fintech theme, both globally and in Europe, than the rise of the challenger bank. As we reported recently, the race for digital banking licenses in Singapore, for example, has resulted in an increasingly-crowded field of at least two applicants for each available license. In Europe, investment in challenger banks has made steady year-over-year gains since 2014, reflecting not only the strength in interest in the sector, but also the confidence that digital banks are likely to be a major component of the European financial landscape of the 21st century.
How has venture capital’s surging interest in challenger banks shaped the industry and does the flood of funding VCs are providing tell us anything about the future success of challenger banks in Europe?
From the €0.1 billion in VC investment in 2014 to the estimated €2.4 billion in VC investment in 2019, European challenger banks have been among the top recipients of regional venture capital in recent years – with sums comparable to that invested in payments companies. What is especially impressive about the growth in VC funding for challenger banks is the relatively smooth trend in positive funding growth over the year, with each year bringing in more investment dollars than the last.
In this way, investment dollars are following the customers. Research by AT Kearney indicates that European challenger banks have added more than 15 million customers since 2011, and that the industry will have as many as 85 million customers by 2023.
Quantifying the number of challenger banks in Europe overall is … challenging. In part, this is because there can be disagreement between which traditional banks with digital offerings can be considered truly challengers alongside fully, digital-only neobanks. Fintech Futures, Finovate’s sister publication, is developing its own database of challenger banks by nation; there are an estimated 80+ challenger banks in the U.K. alone.
These firms include a number of companies that have demonstrated their platforms on the Finovate stage – such as Revolut (U.K.), Klarna (Sweden), and Twisto (Czech Republic). And virtually every European country is represented by a significant (and often expanding) challenger bank – from N26 in Germany to bunq in the Netherlands, and from Bnext in Spain to Fire in Ireland. In addition to generous funding, these companies have been able to grow and scale thanks in large part to regulatory changes like PSD2 and the open banking movement that encourage data sharing and collaboration with incumbent financial institutions.
Challenger banks are also taking advantage of customer dissatisfaction with traditional banks; Koyo founder and CEO Thomas Olszewski noted that 2017 the biggest bank in the U.K. has an NPS (Net Promotional Score) of -24, with Germany’s biggest banks earning NPS scores of -8 and -22. NPS is a way to measure customer satisfaction via the likelihood of the customer recommending the company or service to another customer.
And, importantly, challenger banks are more likely to take advantage of the newest technologies for onboarding, and security, as well as provide the kind of digital customer experience (i.e., more mobile, more personalized; more social) that they have become accustomed to outside the world of finance.
Marcin Mazurek, founder of Inteliace Research, observed earlier this year that the eight bigger European neobanks – Revolut, N26, TransferWise, Monzo, Starling, Curve, and Tandem – had almost 27 million customers by the end of last year. “In fact, their number of clients has increased exponentially as the figure doubled every year since 2016,” he wrote. Mazurek credits the wave of VC funding to allow the strongest players in neobanking to get even stronger, suggesting that “investors are competing for the ‘privilege’ to fund top startups and not the other way around.”
Mazurek also highlights a few warning signs for the sector, noting that VC investment driven valuations of challenger banks to potentially extreme levels. He does the math to reveal the fact that the seven biggest neobanks in Europe have implied valuation-to-funding multiples of 4.8x. This leads him to caution that there is a significant “disconnect” between challenger banks, their lofty valuations, and the relatively modest revenue per customer the major challenger banks are achieving (Mazurek estimates that challenger banks made between $3 and $38 in revenues per customer in 2018 and 2019).
The way out for these challengers, according to Mazurek, is continued growth of the customer base. Investors, he said, are counting on future, “multi-million customer bases” to help close the valuation/revenue gap for neobanks. Another option is that these institutions will be successful in upselling their customers from the free and low-cost services and products they currently enjoy to more premium offerings. This may be all the more vital as fintechs explore “banking-as-a-service” offerings that will allow them to encroach on some of the territory newly-disrupted by challenger banks.
Indeed, the view increasingly seems to be that venture capital has played a major role in putting challenger banks on the map. They have provided them with the capital they need to develop new products and scale their businesses (an especially worthwhile option in Europe where a banking license from one EU central bank can enable a challenger bank to operate through Europe).
But at this point challenger banks may have reached a crossroads. At this point, the wisdom and mentorship venture capital provides may prove more worthwhile than their euros in determining which firms will grow and thrive.
One of my favorite sayings is, “If you’re not living on the edge, you’re taking up too much space.” Can the same be said of banks who don’t use edge computing? Not exactly.
First, let’s take a look of what edge computing is as it relates to the financial services sector. Edge computing refers to when data processing and storage occurs closer to the person or item creating the data. It is an alternative to cloud processing, in which data is processed at a data center that could be located thousands of miles from the source.
The classic edge computing illustration is an autonomous vehicle. The AI that the driverless car uses has to process a lot of data very quickly in order to be a successful (and safe) driver. Taking too long to decipher between a tree and a person could mean life or death, so being able to process that data as close to the vehicle as possible is key.
Edge computing sounds fancy and has obvious benefits across the technology landscape, but what can it do for banks?
Increase security
Because edge computing eliminates the need to send consumers’ personal information into the public cloud, the security risks inherent to the process of moving data are eliminated. The closer the data stays to its source, the fewer the places cyberattackers can penetrate.
Lower latency
With edge computing, data is able to be processed much faster since it does not have to travel to and from a data center. This increased speed can be beneficial when businesses must make decisions in near-real time.
Boost the use of the Internet of Things (IoT)
Banks are increasingly relying on IoT to interface with their customers. Bank apps, ATMs, kiosks, and technologies such as HSBC’s Pepper all require increased data processing capability. Edge computing opens up possibilities for more IoT options with fewer data limits.
Increased innovation
When security is less of a concern, speed is no longer an issue, and a bank has more options for IoT implementation, innovation is able to flow more freely. This, combined with edge computing’s potential cost benefits, can help banks implement new solutions that otherwise may have been on the back burner.
Lower cost
When there is no need for a data center, costs associated with the data center itself, as well as the costs of sending data back-and-forth to data centers or the cloud are diminished.
As Finovate goes increasingly global, so does our coverage of financial technology. Finovate Global is our weekly look at fintech innovation in developing economies in Asia, Africa, the Middle East, Latin America, and Central and Eastern Europe.
Central and Eastern Europe
Dusseldorf, Germany-based apoBank partners with Avaloq.
German challenger bank N26 announces withdrawal from the U.K. market.
Sifted highlights the “fastest growing fintech startups in Germany.”
Middle East and Northern Africa
A partnership between Moven and STC Pay seeks to launch a new challenger bank in Saudi Arabia.
The biggest bank in the country by assets, the National Bank of Egypt (NBE), has joined the RippleNet payment network.
Wamda interviews more than 600 startups as part of its examination of pre-seed startups in the MENA region.
Central and Southern Asia
Uber establishes its Uber Money team at India’s Hyderabad Tech Centre.
Deal Street Asia looks at how fintechs in India are re-invigorating banking.
BusinessWorld reviews ways fintech in India can help “bridge the gap” between banks and the public.
Latin America and the Caribbean
In a round led by DOMO Invest, Brazilian P2P marketplace IOUU locks in $1.3 million in its latest funding round.
Chile-based investment platform Fintual teams up with Invermerica in new foray into Mexican market.
Brazilian fintech Bloxs Investimentos raises $690,000 in new funding to build out its collective investment platform.
Asia-Pacific
Vietnam’s central bank refuses to cap foreign ownership of e-payment companies at 49%.
Fintech News Singapore features “6 Agri-Fintech Startups in Asia to Follow in 2020.”
Thailand-based “crowdfunding bonds” fintech PeerPower announces pre-Series A round funding.
Sub-Saharan Africa
Nigerian fintech Aella Credit secures $10 million in debt financing.
CNBC Africa looks at how fintechs can help South African consumers avoid “credit traps.”
VentureBurn highlights the work of South African financial inclusion specialist Meerkat.
It’s a big week for Flywire. The global payments platform made a dual announcement yesterday that it closed a round of funding and sealed the deal on an acquisition.
The $120 million in funding brings Flywire’s total raised to $260 million. Goldman Sachs led the Series E round. The Massachusetts-based company will use the funding to digitize payments across education, healthcare, and travel.
“We are thrilled to lead the Series E round for Flywire”, said Ashwin Gupta, Managing Director at Goldman Sachs’ Merchant Banking Division. “They bring together a unique blend of a payments network, platform and vertical-specific solutions to completely digitize the payments experience for their clients across industries. We look forward to continuing to help accelerate Flywire’s growth.”
Along with the investment news, Flywire unveiled that it has acquired healthcare billing and payment solutions company Simplee for an undisclosed amount. The acquisition blends Flywire’s tech platform with Simplee’s solution that focuses on patients and providers. The combined companies power four of the top ten U.S. healthcare systems and together process $10 billion+ in payments per year.
“Flywire is uniquely built on a global payments network, which is the cornerstone of how we move billions of dollars across 200+ countries and 150 currencies, and an industry-leading payments platform” said Flywire CEO Mike Massaro. “This digital foundation enables us to develop vertical-specific applications that make payments more efficient and cost-effective for our global clients. The Simplee acquisition improves patient engagement and healthcare affordability and extends these capabilities to a broader customer base.”
Flywire, which originally launched has peerTransfer in 2009, has processed $12 billion+ in payments for 2,000 clients. The company has office locations at its headquarters in Boston, as well as Chicago, London, Manchester, Valencia, Shanghai, Singapore, Tokyo, Cluj, and Sydney.
The votes are in and the people have spoken! Congratulations to the winners of Best of Show at FinovateEurope in Berlin, Germany!
Dorsum for its Communication HUB that provides real-time, private, banking customer engagement through automated notifications and instant human and AI chat possibilities. Video.
Glia for its digital customer service platform that connects financial institutions to their customers using chat, voice, video, cobrowsing, and AI. Video.
Horizn for its focus on equipping frontline employees and customers directly with the knowledge to improve customer experience and increase digital adoption. Video.
iProov for its solutions – used in production globally by governments and banks – that use biometrics to authenticate users online. Video.
Sonect for its easy-to-use and accessible for everyone, everywhere global platform for cash transactions. Video.
W.UP for its banking personalization platform that turns data into better banking. Video.
Thanks to all the demoing companies that took the time and effort to demonstrate their innovations live on stage. Thanks also the City of Berlin for being such a wonderful host for our first conference of the new year and new decade. We are already looking forward to returning in 2021!
Notes on methodology:
1. Only audience members NOT associated with demoing companies were eligible to vote. Finovate employees did not vote.
2. Attendees were encouraged to note their favorites during each day. At the end of the last demo, they chose their three favorites.
3. The exact written instructions given to attendees: “Please rate (the companies) on the basis of demo quality and potential impact of the innovation demoed.”
4. The six companies appearing on the highest percentage of submitted ballots were named “Best of Show.”
5. Go here for a list of previous Best of Show winners through 2014. Best of Show winners from our 2015 through 2019 conferences are below:
For banks, digital transformation is a moving target. Perhaps that’s because it’s all-encompassing, or maybe it’s because it seems like an ambiguous buzzword with no real meaning. There is one overarching truth about digital transformation, however, and that is that it is a multi-faceted process, not a single solution.
In a conversation with Grant Spradlin, Nuxeo’s VP of Customer Success, Spradlin outlined three key challenges businesses have in achieving digital transformation.
1. Competition Making digital transformation more complex are players in the bigtech arena such as Google, Facebook, Apple, and Amazon. When it comes to customer experience, banks are not only competing against other banks or even other fintechs. Instead, they are pitted against the tech sector at large.
2. Gap in customer expectations Customers are expecting more from banks than just acting as a safeguard of funds. This is because bigtech megaliths have redefined the user experience for their customers to such an extent that it has raised customer expectations.
3. Regulations New and updated regulations are always a challenge, but are especially so with digital transformation. Fortunately, digital transformation also serves as an aid to comply with new regulations. Banks will have an easier time complying with GDPR, for example, when they update their data management practices.
As with most digital objectives, digital transformation all comes down to data. Spradlin noted that his successful customers have one thing in common– they are all using data management as a service. Nuxeo’s data management as a service offering is a single API that offers access to all of the content across an enterprise. “It’s all kind of the same use case at the end of the day,” he said. “That is, providing the right content to the right person at the right time.”
Payment processing company Cloverannounced a new capability for dine-in restaurants to offer their guests. The Fiserv-owned company launched Scan to Pay, a tool that enables diners to pay for their meal at their table without the help of their server.
Available on Clover Dining, Scan to Pay prints a QR code on the customer’s itemized bill. Once guests scan the code with their iPhone they can pay via Apple Pay without opening a separate payment app. After the transaction is complete, the server sees a notification on their Clover terminal that their customer has paid. This allows the customer to leave the restaurant without further interaction.
“As restaurants look for new ways to adapt to consumer trends and offer quality dining experiences, Scan to Pay puts the power of when to pay and leave into the hands of the restaurant guest, creating a better dining experience and reducing extra tasks for servers,” said John Beatty, co-founder of Clover. “Scan to Pay represents another step forward for Clover as we continue to build out our core technology capabilities and provide additional solutions that can help merchants grow their businesses and delight their guests.”
Restaurants using Clover Dining can access Scan to Pay without additional cost, though they are charged card not present (CNP) rates for Scan to Pay transactions.
While the potential user base is limited to iPhone users and further limited to those that have set up ApplePay, the user base for payment services such as Scan to Pay is growing. 9to5Mac recently reported that Apple Pay is used for 5% of card transactions across the globe. And by 2025, that number could reach 10%.
Clover was founded in 2010 and was acquired by First Data in 2013. First Data, in turn, was acquired by Fiserv in July of last year. Clover, which demoed at FinovateSpring 2012, offers a range of card present and CNP technologies and processes more than $100 billion in payment volume each year.
