What Would a Biden/Harris Administration Mean for Fintech?

A recent analysis by Brookings looked how technology, platform regulation, and China policy may be impacted by the policies of a future Joe Biden/Kamala Harris administration should President Trump fail to be re-elected. As might be expected, the review pointed to greater regulation – including anti-bias and worker rights advocacy – as one likely outcome if a new administration takes office next year.

Also interesting are the ways that the Brookings analysts – and others – see a Biden/Harris administration as an enabler of technological advancement and innovation, especially in the area of technology infrastructure. This is also one of the ways where a Biden/Harris administration could be most constructive for fintech.

As the Brookings analysts point out, the fact that the Democratic vice presidential nominee is a Senator from California (who represents Silicon Valley) suggests that there might be greater insight into the issues and challenges of the 21st century technology industry than exists in the current administration.

This likely cuts both ways. A Democratic administration would likely be more supportive of immigration policies that would enable tech firms to keep and attract more talent – as well as for international talent to decide to innovate and build in the U.S. rather than in Europe or Asia. This would benefit fintechs across the board as much as it would benefit technology companies generally.

At the same, there’s no doubt that regulation – especially financial regulation – would likely see a resurgence. While many are wondering about the prospects of an Obamacare 2.0 in a Biden/Harris administration, fewer are discussing the possibility of a CPFB 2.0 and the likelihood of a renewed attention on fintech’s lenders in particular. I think that the CPFB’s creator, Massachusetts Senator Elizabeth Warren, would probably not be headed to Treasury in the event the American people put Joe Biden in the White House, but her influence on the resurrection of the agency would be powerful.

At the same time, it is worth remembering that Joe Biden has a far different historical relationship to the world of finance, if not fintech, compared to Senator Warren. As a multi-decade senator of Delaware, Biden has been criticized – including by Senator Warren – for his “energetic work on behalf of the credit card companies.” A 19th century Delaware law allows any American company to incorporate in the state and not a few firms over the years have taken advantage of this to “place their profits in Delaware-based holding companies to avoid paying taxes in the places where they actually operate” as Tim Murphy described in Mother Jones last year.

It may be too much to suggest that the First 100 Days of a Biden Administration would feature a tug-of-war between the new president and Warren over the appropriate attitude toward consumer lending and credit. But the presence of both does suggest that any policy that emerges could be more moderate than might otherwise seem.

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Innovation in a Time of Crisis: A Conversation with Upgrade’s Renaud Laplanche

What are the challenges of launching a challenger bank in today’s environment? What do these neobanks offer that traditional banks do not? And what will the path forward look like for these newcomers in terms of disruption versus collaboration with both incumbent financial services companies, as well as fintechs?

We caught up with Renaud Laplanche, co-founder and CEO of Upgrade. The San Francisco, California-based neobank, which recently announced a major fundraising, was founded in 2016 and specializes in offering credit solutions rather than savings products to mainstream consumers.

We talked with Renaud about what makes Upgrade different from other challenger banks and what the company has in store for the second half of 2020. We also drew upon his experience as the founder and CEO of LendingClub to discuss the challenges of fintech innovation in times of crisis.

Finovate: Most founders would consider themselves lucky to be responsible for bringing one company to unicorn status. With Upgrade’s most recent fundraising, we can now say that you’ve brought two companies to this level. How big of a deal was the June investment for the company? 

Renaud Laplanche: Thank you, David, that was a big deal indeed. Reaching a billion-dollar valuation in just three years was an amazing achievement from the team, but more importantly we secured the backing of a formidable ally with Santander Group, a top 10 global bank, leading the round. We have been growing at a triple-digit rate in the last 12 months, and recently hit $100 million revenue run rate, so we would certainly have commanded a higher valuation from a growth-stage VC fund, but the strategic value of Santander was key to us. We believe this is the first time a top 10 global bank backs a neobank, which is a very positive development for the fintech industry as a whole as it shows that the largest banks in the world see tremendous value in fintech product innovation. 

Finovate: One of the aspects about Upgrade that has attracted special attention is the idea of being a neobank “with credit at its heart.” What does that mean and why pursue this route? 

Laplanche: Credit represents 70% of banks’ revenue in the U.S. and globally, and obtaining credit is often the number one reason consumers seek a bank relationship to start with. So credit is an essential component of any bank, and particularly a neobank that doesn’t benefit from a branch network and must establish trust and loyalty through other means. A credit relationship achieves that very purpose. 

Our ability to deliver a mobile banking experience offering payments and deposit capabilities coupled with loans and credit cards at scale makes us unique in the neobank space. Credit is difficult to scale because it requires billions of dollars of capital, which means either a very large balance sheet and a capital-intensive model that doesn’t generally fit with a fintech framework, or outsourcing that balance sheet to investors, which itself requires a long track record of credit performance. Building the underwriting and servicing infrastructure to handle billions of dollars of credit is also challenging. 

We started offering credit products in 2017, and have built the necessary track record, underwriting and servicing infrastructure, delivered billions of dollars of credit to consumers and are now about to roll out our full mobile banking experience. 

Finovate: What are the signature offerings from Upgrade? How many users are taking advantage of them and what kind of growth has the company experienced so far? 

Laplanche: Our signature offering is Upgrade Card, a credit card that delivers the low cost and responsible credit of installment lending through millions of points of sale. Instead of turning charges into a never-ending revolving balance like traditional credit cards, Upgrade Card turns each monthly balance into an installment plan that consumers pay down in monthly equal installments over 1 to 5 years. This approach encourages the discipline of paying the balance down every month, and eventually lowers the cost of credit for consumers. 

Since launching in 2017, we have delivered over $3 billion in credit through both cards and loans. We launched Upgrade Card in October of 2019 and already passed half a billion dollars in annual origination run rate. Even through the crisis over the last several months we continued to record 20%+ monthly growth. 

Finovate: One of the investors in Upgrade said that they were excited to support the company in its “next stage of growth.” What does that next stage look like? What are the goals, for example, over the balance of 2020? 

Laplanche: We are doubling down on the existing strategy and will be using the new capital to fuel the continued rapid growth of Upgrade Card and launch Upgrade Banking, a full suite of mobile banking products and services. Overall we expect to add approximately $2.5 billion in credit origination this year, and launch what we believe to be the most innovative mobile banking product for mainstream consumers. 

Finovate: What has the impact of the global health crisis had on Upgrade – both in terms of your relationships with customers and partners, as well as how Upgrade itself may have had to adjust internally to adapt to the “New Normal”? 

Laplanche: With many bank branches being closed over the last few months, a lot of consumers have turned to online banking. This was generally a small adjustment to the “millennial” population, but a much bigger adjustment to the generations that grew up in a world of in-person banking. The COVID-19 crisis accelerated the digitalization of financial services, and gave many consumers an opportunity to discover online banking and online credit for the first time. I believe the corresponding changes in consumer behavior are here to stay. 

The crisis also caused us to re-prioritize some of our product development, including the introduction of a contactless version and a mobile-payment version of Upgrade Card in April of 2020, several months ahead of the planned release date. Both features have helped our customers avoid surface contacts during in-store checkouts.

Internally, we made the decision early on to allow all of our San Francisco and Montreal employees to work from home. Everyone has stepped up to the challenge and we’ve seen no loss of productivity as a result. 

Finovate: You co-founded LendingClub shortly before the Great Financial Crisis and managed to steer the company through that challenge to great success. Some people have compared our current situation – with the COVID-19 pandemic and growing social unrest worldwide – to that previous crisis environment. From the point of view of someone who has led a fintech company through a major crisis, what advice do you have for fintech entrepreneurs in terms of dealing with this one? 

Laplanche: There are similarities and differences between the two situations. The economic crisis caused by COVID-19 is a lot more severe in terms of job losses, and came in more abruptly than the 2008 financial crisis. But the financial health of the U.S. consumer, the banking system and the overall economy immediately prior to the crisis was a lot better than in 2008. The monetary and fiscal policy response has also been stronger, and so far more effective this time around. It is still hard to know the exact economic and social impact of the pandemic, as so much is still in play.

That being said, some parts of the 2008 playbook remain relevant: cut costs early, conserve cash, raise more cash if you can, and always assume the downturn will be longer and more painful than initial estimates would have you believe. A prudent approach is generally rewarded in the early phase of a downturn. There will likely be opportunities toward the end of the downturn and early phases of the recovery, but these opportunities will only be available to those who weathered the storm in the first place.

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From COVID-19 to Inclusion: Fintech Faces New Challenges

In the middle of the first month of the year, one of the biggest names in the payments business acquired one of the most innovative fintech infrastructure companies in the industry, in a deal valued at more than $5 billion.

Six months later, Visa’s acquisition of Plaid almost seems like news from another time.

The arrival of the coronavirus to virtually every corner of the globe – and the worldwide response to the killing of a black man in police custody in the U.S. – have sent shock waves through the fintech industry – as they have the rest of the world. Now, at the same time, fintech is engaged in both the struggle to help businesses and consumers cope with the closures and shelter-in-place restrictions of the COVID-19 crisis, as well as the challenge of correcting decades of discriminatory practices against African Americans and members of other underrepresented ethnic groups. As we approach the middle of 2020, fintech is facing different kind of crisis that, while not of its own making, will require a response that is uniquely tailored to the world it operates in.

This is a world that is both heavily technical, relying on the latest innovations in machine learning, artificial intelligence, and distributed ledger technology, while simultaneously pledging to bring the benefits of 21st century financial services to the underbanked and underserved populations of both post-industrial and developing economies. This is a world that has grown tremendously through the contributions of people from diverse backgrounds, representing cultures from almost every corner of the globe. Yet, at the same time, it is a world that is still struggling to achieve true gender and ethnic diversity, particularly in the C-suite and in the boardroom.

There are many ways to value an industry: the quality of the goods it produces; the entertainment, education, or simple well-being its services provide; even just the degree of pure, gee-whiz innovation the industry may deliver, often seeming to grant us what we want even before we summon up the nerve to wish for it.

But as the fintech industry edges closer, inexorably, toward maturity, it now finds itself increasingly judged on the kind of criteria Corporate America – often to its own surprise and bewilderment – can find itself judged on from time to time. This is a judgement that has less to do with what Corporate America makes and sells, and more with who Corporate America is and what it values.

Both the global public health crisis and the renewed determination to fight racial inequality are providing fintech as an industry with an opportunity to show the world just what it’s made of. As we move into the second half of this historic year, I am hopeful and optimistic that fintech will rise to the challenge.

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Lift Every Voice: Fintech’s Other Diversity Challenge

In the wake of the tragic killing of George Floyd at the hands of a Minneapolis police officer, people around the world are showing remarkable support for the cause of African American equality. From every corner of the globe, and in cities and towns across America, people from all walks of life are increasingly committed to making sure that the slogan “Black Lives Matter” evolves from being a mere rallying cry to a new reality for millions of black Americans.

With this in mind, we want to share again our thoughts on ethnic diversity in our industry, fintech, where we are in terms of inclusivity, and where we need to go.

When the discussion of diversity in the tech world comes up, the conversation is typically oriented around gender diversity. But the call for greater inclusion in the tech world is not limited to gender; diversity along ethnic lines is also a goal that technology companies have increasingly begun to strive toward.

Perhaps the international nature of many technology enterprises, with tech entrepreneurs and tech talent truly arriving in Silicon Valley from all corners of the globe, serves to mask the relatively small number of tech firms in general, and fintech firms, in specific, that are run by Americans who are ethnic minorities. Indeed, an online search for “African Americans in fintech,” for example, is almost as likely to produce entrepreneurs from Nairobi, Kenya as from Newark, New Jersey.

Importantly, there are tech firms that have won admiration for the diversity of their teams. Slack, for example, was widely praised for its diversity report which, released in 2017, showed that the company had achieved better gender diversity than its Silicon Valley peers. The report also revealed that Slack’s workforce had as much as 3x the number of underrepresented minorities (African American, Latino/Hispanic, and Native American) as its peers. An Atlantic article from 2018 pointed out that where Slack had minorities in 13% of all technical positions and 6% in leadership positions, companies like Google and Facebook had less than 4% of their technical positions filled by underrepresented minorities.

Clinc CEO and co-founder Jason Mars during his company’s Best of Show winning demonstration at FinovateFall 2016.

How has fintech fared when it comes to ethnic diversity in its technical and leadership ranks? Finovate has hosted a handful of fintech companies with African American leadership over the years – Clinc and its CEO and co-founder Jason Mars, DarcMatter and its COO and co-founder Natasha Bansgopaul, are two that come to mind. And the industry writ large may have more founders of color than many think: Forbes celebrated the release of its Forbes Fintech 50 roster last year by featuring Ryan Williams, the young, African American CEO of mortgagetech firm Cadre on the magazine’s cover. And venture capital firms like Backstage Capital have made investment in startups with founders of color – as well as women and members of the LGBT community – a priority.

Nevertheless, even as the number of African American and Latino/Hispanic tech founders and leaders has grown, it remains true that there are fewer African American and Latino/Hispanic founders and CEOs in fintech relative to other areas of technology, including education and health-related tech fields.

One of the biggest problems that companies lacking in diversity can face is that it can make them less capable of responding to the needs of diverse markets. Fintech analyst Mary Wisniewski wondered in a 2018 American Banker article “Are black millennials a blind spot for fintech firms?” and noted that while millennials in general have developed a healthy skepticism toward banks, this wariness is all the more pronounced in young people from communities of color. Among the solutions offered are more minority-owned financial institutions, and an increased emphasis on financial literacy and wellness as an engagement strategy for younger minorities.

In this regard, fintechs like GRIND may become more well-known and popular. Launched last year and based in South Central Los Angeles where it caters to the local African American community, GRIND offers FDIC-insured debit accounts, a mobile banking app, and the ability to get paid two days earlier if they set up direct deposit with GRIND. Another example of this kind of company is Finhabits, a bilingual (Spanish/English) mobile investment platform launched by Carlos Garcia in 2015. Garcia, an MIT graduate with experience with Merrill Lynch and Galileo Investment Management, explained that the issue for Latino and Hispanic communities was not their ability to save, but their lack of familiarity with investing. “Our day-to-day money management is good, but planning for 15 years ahead is not” he said in a 2017 profile.

As fintech continues to diversify itself as an industry, one good note is that it appears that fintech may be helping alleviate some of the issues in financial services caused, in part, by a lack of diversity. A recent report from the FDIC on consumer-lending discrimination in the fintech era, for example, suggested that technology may be playing a positive role in reducing the discrimination in credit faced by Latino/Hispanic and African-American consumers in particular. The report specifically pointed to “new entry of fintech platforms” as well as digital improvements by incumbents for increasing competition and declining rate discrimination.

Alums Assemble! A Look at Finovate Merger and Acquisition Activity in H1 2020

Visa’s acquisition of Plaid for $5.3 billion at the beginning of the year set a high mark for mergers and acquisitions among Finovate alums in 2020. How have subsequent deals among our alums in the fintech space measured up?

Unfortunately, many M&A deals keep their financials well under wraps, which makes comparisons difficult. But we can take a look at some of the brighter lights in the merger and acquisition sky, and gain some sense of just how big some of these fintech stars truly are.

Looking at the first few months of the year, we have no figures for the four alums that were acquired in the first half of 2020. Of the acquirers, however, two deals stick out, rivaling the Visa/Plaid purchase in January: Intuit’s $7.1 billion buy of Credit Karma, and Worldline’s decision to put down $8.6 billion for Ingenico.

Below is our quick rundown of some of the biggest M&A action from our Finovate alums so far in 2020.

The Acquired

  • Emailage acquired by LexisNexis Risk Solutions. May 7.
  • Arxan merged with CollabNet VersionOne and XebiaLabs to form new company, Digital.ai. April 17.
  • IdentityMind Global acquired by Acuant. April 1.

The Acquirers

  • SoFi acquired Galileo in $1.2 billion deal. April 7.
  • Tink acquired Eurobits Technologies. March 29.
  • Fiserv acquired Bypass Mobile. March 18.
  • DocuSign acquired Seal Software in $188 million deal. March 1.
  • Intuit acquired Credit Karma in $7.1 billion deal. February 28.
  • Envestnet | Yodlee acquired FinBit.io. February 25.
  • Lending Club acquired Radius Bank. February 19.
  • Worldline acquired Ingenico for $8.6 billion. February 3.

If you are a Finovate alum that was involved in a merger or acquisition in the first half of 2020, and do not see your company listed, please drop us a note at research@finovate.com. We would love to share the good news! M&A activity prior to becoming an alum not included.

How Technology Enables Insurtechs to Offer New Solutions to Old Problems

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The prospects for insurtech this year were bright. In February, financial services-based VC firm Anthemis announced that it was launching a new, $90 million fund focused on “fast-growing insurance technology startups.” The fund, which Anthemis anticipated would be fully-funded later this year, will target later-stage insurtechs with a proven track record in helping insurance companies make successful digital transformations.

Unfortunately, the coronavirus pandemic has had a significant impact on insurtech investment. Interviewed by Carrier Magazine, Chief Research Officer for U.K.-based firm Venture Scanner Nathan Pacer noted that VC funding for insurtech startups in the first quarter of this year was 50% below its quarterly funding average. He added that 2020 – already four months in – is currently at 11% of the previous year’s funding totals.

This investment retreat is not unique to insurtech; everything from the uncertainty over the economy to the practical challenges of conducting effective due diligence at a time of social distancing has put a pall over VC investment enthusiasm. Nevertheless, the slowdown in funding comes at an inopportune time for an industry that was looking to 2020 as a rebound year.

That said, what can be learned from the insurtechs that did secure funding in 2020?

Looking at the biggest rounds of the first few months of the year, the $100 million Series D round announced by online insurance marketplace Policygenius set a strong tone when it was reported in January. The investment gives the New York-based company the ability to execute its plan to launch a variety of consumer financial products over the course of the year. Focused initially on life insurance coverage, Policygenius has expanded to property/casualty insurance over the past year.

Indian insurance platform Digit Insurance also scored big at the beginning of the year, hauling in $84 million in capital and sending its valuation soaring to $870 million. Offering a multichannel approach to insurance distribution, the firm nevertheless relies on a fully digital model to deliver a diverse range of insurance solutions from health to fire to automotive.

And many audiences will be familiar with Gabi – or at least Gabi’s no-frills, omnipresent cable TV advertisements. A home and auto insurance comparison platform, Gabi claims to save its users an average of $825 a year through its unique approach of bundling both insurance products in a single quote. Gabi picked up $27 million in funding at the beginning of the year in a round led by Mubadala Capital and featuring participation from a group of several new and existing investors.

The Enterprise Innovators

Another way of looking at insurtech, especially for those coming from fintech, is to consider the firms as being in one of two categories. There are those companies that leverage the latest technologies to offer new and unique insurance services, and those companies that are innovating in those technologies – from advanced machine learning to the blockchain – that make key business processes in insurance more accurate, more efficient, and less costly.

One of the more recent investments in the insurtech space was the $8.2 million raised by Singapore-based Igloo (formerly Axninan) in a Series A+ round. Igloo is an ideal example of this category, offering digital insurance products, using end-to-end automated claims management, and leveraging technologies like big data to provide real-time risk assessment.

Another major insurtech funding this month was the $54.4 million (EUR 50 million) reeled in by French company Alan which offers a health insurance product as well as other solutions like telemedicine scheduling, appointment tracking, and a doctor directory. With more than $136 million in funding, the company insures 76,000 people at present and hopes to add significantly more as it expands throughout Europe over the next few years.

And no conversation about innovations in insurance products would be compete without a mention of companies like U.K.-based Laka, which raised $4.5 million for its bicycle insurance offering in February, and Pawlicy Advisor, a New York startup that scored $1 million in seed capital to fund its pet insurance comparison platform.

The Enterprise Enablers

Among the firms in this group that picked up funding are Flueid Software Corporation, which helps companies in title insurance, real estate, and mortgage lending industries automate their closing processes. Aquiline Technology Growth led the strategic investment round which closed this week. The total amount of the funding was not disclosed.

Sprout.ai, a London, U.K.-based insurtech is another enabler that raised capital this month. Courtesy of Amadeus Capital Partners, Playfair Capital, and Techstarts, the two-year old startup picked up an additional $2.5 million in seed funding to help support its technology which leverages optical character recognition and natural language processing to accelerate the insurance claims process. Sprout’s investment follows the $24 million raised by fellow London insurtech Tractable, which is also in the business of speeding and automating insurance claim processing using AI.

The global pandemic has put a strain on many aspects of economic activity, and the pressure on supply chains has been especially pronounced. Shark Tank investor Kevin “Mr. Wonderful” O’Leary recently commented on CNBC that the global economic disruptions brought about in an attempt to fight the spread of the coronavirus are a nightmare for supply chains and that being able to mitigate the new risks of supply chain management at this time is critical.

This makes the funding of companies involved in cargo insurance all the more interesting. One such firm is Colorado-based Parsyl, which helps shippers mitigate the risks of transporting perishable goods through the supply chain. The supply chain data company locked in $15 million in a Series A led by GLP and Ascot Group.

The investment announcement also accompanied word that the company was launching a new solution, ColdCover, that leverages a suite of connected cargo insurance products for perishable goods. ColdCover gives users access to Parsyl’s quality monitoring and risk management technology, leveraging smart sensors and data analytics to protect shipments against losses due to temperature.

“This is an outstanding example of how insurtechs and insurers can partner to bring innovation to the cargo insurance market at a time when supply chain interruptions demand new thinking and new products,” Ascot Group CEO Andrew Brooks said.

Octopus Ventures’ Nick Sando on Fintech Valuations and Building a Great VC Team

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One of the best ways to take the temperature of an industry is by talking to those helping fund it. Our conversation at FinovateEurope last month with Nick Sando, a member of the Future of Money team at Octopus Ventures, was a great opportunity to find out what venture capital is focusing on in 2020.

Octopus Ventures is one of the largest VCs in Europe and invests primarily in seed and Series A investments, two to five million. The firm has three principal focus areas: the Future of Health (health and wellness investments), DeepTech (industry 4.0) and fintech (or “Future of Money” of which Sando is a part), including payments, insurtech, credit, lending, and blockchain. “We’re pretty agnostic across the space,” Sando said.

Sando arrived at Octopus Ventures in 2018, after a career in which he founded companies like SaaS beauty and wellness platform Mojo and retail platform SnagTag. He notes that the benefit of co-founding two businesses what that it provided him with a “crash course in company building.” Sando added, “we had successes, failures, raised funding, and exited, all in a short space of time.” He has earned a double major in Finance and Economics from the University of Miami School of Business.

Asked where he and his fellow panelist on our All-Star Venture Capital panel believe the smart money is headed this year, Sando replied with a smile, “Well, there is always the theme ‘Is there correction coming?’ And there a lot of people who think that there is. So the smart money is probably the money that’s still there at the end of it!”

Here are some of the top takeaways from my conversation with Nick Sando this year at FinovateEurope in Berlin.

On valuations in fintech companies and the IPO v.s. acquisition debate

Sando: Investors (should) … look at businesses which are trading at multiples which, if they went public, they would be receiving the same multiples. In fintech, some of them are getting too large to be acquired. So going public is route to go down. I look at some of the challenger banks, for example. Who’s going to acquire them? They are so big now! I think the IPO route should be back on.

On the role of venture capital in helping startups become better businesses

Sando: Having such a large fund gives us the benefit of being able to invest into certain roles across the board. The most commonly helpful role that we can provide outside of money is generally hiring. We have various people, and a whole hiring function in Octopus – and that’s not for our internal hiring, its for our help our portfolio companies hire.

In fintech, these companies are global companies with big ambitions, so traveling for example, from Europe to the States is on nearly all of these company’s roadmaps. Therefore we have set up an office, for example, in the States which is purely just to help those companies make these transitions.

So I think, given there are so many fintech investors in the market, as a fintech founder, I’d ask myself, “I should really be getting a little bit more than cash, these days!” Because they deserve it.

On what makes for a successful and creative venture capital team

Sando: A VC team should be made up of very different thinkers. If you have a VC team with all the same way of thinking, you might as well just have one of those people. What a team needs, therefore, is whatever it lacks.

We generally lean toward people who are intensely curious, have a different opinion than ours, see the world differently – maybe they grew up somewhere else, maybe they were a founder themselves – I think over half our team (are founders) … I think that’s what makes really great investment teams as a whole, when people can argue and talk and debate different ways of thinking.

Watch the full, six-minute interview on Finovate TV.

RegTech, AI, and the Future of Digital Identity

My first introduction to Dave Birch, Director of Innovation and Global Ambassador at Consult Hyperion, was via his book Identity is the New Money, and a conversation we had at a Finovate event a few years ago. He is as synonymous with the issue of digital identity as any fintech analyst; his book Before Babylon, Beyond Bitcoin, is a fascinating history of the relationship between money and identity.

Birch sees digital identity not just as a way to create a safer, more efficient interconnected world. Instead, he sees digital identity – powered by technologies like artificial intelligence – as capable of restoring the power of relationships at a time of digital and social atomization. “Before we had the kind of urban anonymity of the industrial revolution,” he said, “things were based on relationships: whether I trusted you, whether I wanted to lend you money.”

“And we’ve scaled away from that, and had institutions become intermediaries. But with the new technologies, because we are connected all the time, in a weird kind of way we’re going back to that. In a way, those new connections are taking us back,” Birch explained.

Here are some of the top takeaways from my conversation with Dave Birch this year at FinovateEurope in Berlin.

On whether financial services professionals and regulators are on the same page with regard to the importance of digital identity.

Birch: A long time ago it was the theorists who said we’re going to have to do something about identity. And then a few years ago it was technologists like me who ran into the buffers and said we can’t make any more progress until we do something about identity. But now it’s people like Mark Carney, who is the governor of the Bank of England, saying we can’t make any progress without doing something about digital identity. So it’s gone up the agenda. But my point was that it’s not just technologists who are saying it. It is people who understand the financial system that are saying it. It’s become a priority. And, of course, because of my heritage, I feel that banks have a role to play in fixing the problem.

On why regtech may be the most critical subset of financial technology.

Birch: In terms of the goal, which is to reduce the cost of financial intermediation, it’s getting asymptotic. We’re getting as far as we can get. We’ve already cut the cost of transactions, increased the speed of transactions. We can’t get any further with fintech. The costs that are out of control are the regtech costs. It’s compliance, it’s Know Your Customer (KYC), Anti-Money Laundering (AML) … If we really want to make an impact on costs, we’ve got to attack those costs … And if we really want to do something about that, then we have to start talking about artificial intelligence.

On how advances in digital identity will help build new communities of trust.

Birch: I like to look at what the social anthropologists say rather than what the technologists are saying. Those guys are very into this idea that we live in these clans with relationships. There’s something more human about that. I think that technology, basing identity on relationships, the reputations we establish in those relationships, that is more interconnected.

Nowadays we’re all in lots of overlapping communities of one kind or another. But the idea that our reputations can be forged in those communities, that the values that we share will lead us to form these communities, that the transactions we get involved in, the money that we use, will somehow reflect those values, to me that seems like a very positive vision of the future.

Watch the full, 12-minute interview on Finovate TV.