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Tracking fintech, banking & financial services innovations since 1994
The latest report from fintech enablement platform Hydrogen, which made its Finovate debut in 2018, takes a look at how the global public health crisis has accelerated the rise of payments-as-a-service. But it’s not just COVID-19; enabling technologies like blockchain and AI are helping play a major role in making PaaS a key space for both fintech disruptors and payment incumbents.
“While cash is still the leading form of payment at the point of sale, accounting for about 77% of all payments worldwide,” the report noted in its Executive Summary, “non-cash payment options such as e-wallets are gaining popularity, and the number of people using mobile payment apps in-store is forecasted to surpass one billion for the first time in 2020.”
Hydrogen’s report provides an overview of the PaaS market, how fintechs are driving innovation in the space, critical payment trends that will be accelerated by PaaS, and what industry experts and analysts are saying about the challenges they’ve overcome when innovating in the payments space and what they expect to see in payments over the balance of 2020 and beyond.
Access Hydrogen’s report on the rise of Payments-as-a-Service.
“Payments enablement platforms will be the bridge between the legacy cash infrastructure of yesterday, and the digital systems of tomorrow,” the report observed. Putting companies like Hydrogen at the center of this effort, the report anticipated that “this will create more competition, thus lowering costs for small and medium sized businesses (SMBs) and merchants, that can be passed onto consumers.”
Hydrogen helps developers build complex fintech applications quickly and with a single integrated platform. The company’s solution offers a suite of REST APIs to support custom app development and a no code environment to enable developers to configure white label apps without any coding required. Founded in 2017 by Michael and Matthew Kane, Hydrogen is headquartered in New York City.
Earlier this month, Hydrogen announced that it was teaming up with fellow Finovate alum IDology to help businesses run KYC checks on their end users. In April, the company announced that it was integrating with Amazon Web Services’ Key Management Service, having made a similar move with Azure’s KMS a few weeks before. Other partnerships forged by Hydrgen this year include collaborations with Tink, Salt Edge, and Zillow.
Driven by the preferences of millennial consumers, the fintech industry is expected to generate revenues of $500 billion in ten years based on research just published by UBS. This represents a growth of more than 3x over the $150 billion in revenues the industry generated in 2018, and shows fintech outpacing the revenue growth expectations of the overall financial sector.
The projections from UBS rely on more than just millennials – who represent 27% of the world’s population and own an estimated $24 trillion in wealth. The UBS report also suggested that blockchain technology will generate economic value of between $300 and $400 billion in multiple industries, with fintech and financial services being the biggest beneficiaries. In addition to automation, blockchain and distributed ledger technologies were recognized as playing key roles in enhancing areas ranging from trade finance and compliance to foreign exchange and insurance.
AI also will play a role in generating significant economic value for the fintech industry over the next decade, according to UBS. In addition to enhancing processes in fields like roboadvisory, insurance, and compliance, AI will help develop a growing array of ever-more-sophisticated, customer-facing applications such as virtual assistants and chatbots. Increased consumer interaction with these AI-enabled technologies could drive a customer experience/innovation loop that would keep adoption rates of these kinds of solutions high and growing. UBS featured data from its Semi-annual Cognitive/Artificial Intelligence Systems Spending Guide (in collaboration with IDC) which indicated that spending on AI technology worldwide this year would reach $47 billion. Ten years ago, that spending total was less than a quarter of that amount at $11 billion.
The report also underscored the growth of the e-wallet industry, particularly in the Asia-Pacific region where the area’s millennials have helped create a 66% penetration rate for the technology. This is double the rate in North America and an even more significant margin over trends in EMEA. Other areas in fintech highlighted in the UBS report were payments, insurtech, wealthtech, capital markets tech, and online lending.
Positive moves from regulators were cited as one of the more surprising sources of optimism for fintech revenues over the next ten years. The reasons vary widely, but include the public-private partnerships that characterize fintech development in the MENA regions, as well as pro-consumer compliance laws in Europe, the U.K, and North America that are driving innovation in often overlooked subsectors of fintech like regulatory technology (“regtech”). The rise of open banking and the proliferation of neo- and challenger banks are also ways that governments have and are likely to continue to create space for growth in fintech.
Since the U.S. government launched the Paycheck Protection Program (PPP) to help keep small businesses afloat as they grapple with the economic effects of COVID-19, the program has received plenty of criticism.
Banks were vastly underprepared and under-informed about the program, which made them ill-equipped to support their customers. Adding to headaches, small business applicants were often left wondering if their application was approved and if and when they would receive funds.
Now on April 16, the program’s $349 billion has dried up. In some ways, this is a sign of success. Small businesses across the U.S. have been granted access to funds that otherwise they would now have via PPP loans. So where did the $349 billion go?
4% of small businesses have received their PPP funds
Average loan size was $216,000
The median PPP loan size is $98,500
Average payment speed is 8.2 days
The banks who distributed these loans primarily consisted of small, regional banks, which issued 76% of the funds. JP Morgan Chase paid out 10% and Wells Fargo and Bank of America each distributed 1%.
While small businesses from all 50 states received funds, more than half (54%) of the PPP fund recipients hail from Texas, while 21% came from Georgia, 30% from California, 18% from Wisconsin, and 16% from Illinois.
As for what’s next, Congress is currently working on adding more funds to the program. The cash should be available to small businesses “soon.”
Last fall, blockchain payments company Ripple, in conjunction with Celent, conducted a survey to better understand payment services providers’ adoption of blockchain-based payments. The findings of that study are published in a report issued by Ripple, and illustrates how far the payments industry has come with regards to blockchain adoption, and what’s needed to keep the momentum going.
The study surveyed 1,050+ payment services industry representatives across 21 countries. Overall, it found that:
35% of respondents are in production of a blockchain payments solution
27% are nearing implementation of a blockchain-based payments solution
31% say that the blockchain offers the opportunity to expand existing services into new regions
71% are “very to extremely” interested in digital assets
Ripple indicated that leveraging the blockchain for payments has gained a significant amount of momentum thanks to its fair pricing for end consumers, attractive revenue for payments providers, and the overall level of trust placed in the technology.
Now all that’s needed is to pick up the pace of adoption– but what is holding back mass adoption of the technology? Ripple’s study identifies three drivers responsible for faster blockchain adoption:
Payments companies are concerned about implementing a blockchain-based payments solution because they are worried it will be expensive and difficult to integrate into their existing platform. In fact, a third of respondents to the study cited implementation as a concern of using the blockchain for payments.
When integrating new technology into existing platforms, regulatory hurdles are almost always a concern. With blockchain technology, however, this seems to be even more true, especially with legacy financial institutions. As one would expect, regulatory concerns of digital banking providers are less acute, since they are accustomed to operating using non-traditional models.
One of the top perceived benefits of using the blockchain for payments is the time savings. In fact, three quarters of the survey respondents were interested in leveraging the blockchain for digital assets in cross-border money transfers. Fueling this interest is the speed at which these transactions can occur when compared to traditional payments. The study found that early adopters of blockchain technology are most interested in using digital assets.
Deepfakes, or synthetic media that uses AI to distort a person’s likeness to imitate another’s, can be entertaining. After all, watching Ross Marquand evolve into 11 different actors in 3 minutes is impressive!
However, as most are aware, there is a dark side to deepfakes when videos threaten democracy by manipulating the public for political gain, or ruin reputations with revenge porn, or spread damaging misinformation. In general, there are two issues with malicious deepfakes. First, deepfakes have the potential to allow a person to pose as someone they are not. Second, they allow criminals to deny a wrongdoing by claiming a genuine video is fake.
Unfortunately, the fintech industry is not insulated from deepfake headaches of its own.
There are two different types of deepfakes– audio and video. Both media types can manifest multiple issues within financial services. Here is a list of weak spots that deepfakes threaten:
Fraudulent onboarding, such as a criminal posing as someone else or creating a new, synthetic identity
Fraudulent payment authorizations and transfers
Impersonation of business leaders for insider trading scams or tricking employees into taking nefarious actions
These examples aren’t just potential threats. Last March, a voice-based deepfake was used to impersonate the CEO of a U.K.-based energy firm. The fraudster called one of the CEO’s employees, convincing him to transfer $243,000 to a supplier based in Hungary. The money was then moved to a bank account in Mexico and the thief still has not been caught.
Given the wide variety of fraud opportunities, identity verification company iProov recently surveyed 105 cybersecurity decision-makers at U.K.-based financial institutions. The company, which won Best of Show at FinovateEurope earlier this month, detailed the results in a report.
According to the findings, 13% of firms surveyed had never even heard of the term “deepfake.” And while 31% of respondents had no plans to combat deepfakes or were not sure if their organizations had protective measures in place, 28% had already implemented such measures. The survey also reported that 4% of organizations said that deepfakes pose no threat whatsoever to their company. However, the majority of respondents, 40%, said that deepfakes pose a “slight threat.”
The fintech industry is ripe with security firms, such as iProov, that use AI to combat both video and audio deepfakes with anti-spoofing technologies. Many security companies also offers liveness detection to detect artificial representations of actual clients. Liveness detection plays a major role in detecting identity spoofing during new client onboarding, when cybercriminals may attempt to use a stolen drivers license along with a mask created from a photo of the person in order to set up a fraudulent account. Financial services organizations can also use liveness detection to thwart fraudulent login attempts for technology that uses facial recognition.
Fraudsters, by definition, show complete disregard to regulations. Nevertheless, lawmakers are making efforts to crack down on the technology. In June New York congresswoman Yevette Clark introduced the Deepfakes Accountability Act in the house. that would require video creators to disclose if a video was altered and allow victims to sue. As TechCrunch points out, the act would be difficult to enforce, but at least it’s a start.
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.
Break out the PSD2 birthday cake! On January 13 the Second Payment Services Directive (PSD2)– what we now generally think of as open banking– turned two years old.
PSD2 still has a long way to go but has made some impressive progress in the fintech sector. So after two years in, is PSD2 a success? And where do we go from here?
Despite growing pains, there is evidence that PSD2 has had a positive influence on the fintech industry by promoting both innovation and competition. Challenger banks have taken advantage of open banking, making Europe the leading region for such non-traditional financial institutions. Germany’s N26, for example, now has 2.3 million users– a 3x increase from the year prior.
Although some consumers may not realize it, they are indeed better off. Many banks have expanded their APIs and integrated with third party providers. Additionally, the introduction of more players has increased competition which, in turn, encourages banks to enhance their offerings and customer service. We recently spoke with Token.io CEO Todd Clyde, who added to this list, noting that open banking also offers consumers access to cheaper credit.
Clyde also laid out benefits for businesses and banks. “Businesses will benefit the most from a dramatic reduction in the cost of payments and will therefore lead the adoption of open payments,” he said. “Banks will benefit as they move from compliance to commercializing open banking and bring new API-enabled propositions to market which allow them to compete with big tech and fintechs in the new financial layer and re-intermediate themselves with customers.”
Missed the mark
The progress for compliance with PSD2 has been slow, primarily because of the cost to adapt. Last March, Tink interviewed 442 European banks across 10 markets and found that 41% of the banks were not in compliance with PSD2. Specifically, these banks failed to provide third parties a sandbox to test their APIs. Legacy systems in particular are costly to modernize, which is necessary when integrating with open APIs.
“On the payments side, the stability of the APIs is the greatest barrier, said Clyde. “If a data API fails and your balances are not reflected correctly for a few hours, the consequences are minimal. The same is not true for payments where API resiliency must be high in order to deliver success rates equal to or greater than cards.”
Additionally, end consumers are still not well educated on the purpose or benefits of PSD2. One of the aims of open banking is to place consumers in control of their own data. This means that consumers can allow third party companies to access their data easily and securely and have the right to decide what information third parties can access and for how long. However, Tink reported that, even among senior financial services executives, 20% were “not very familiar” with PSD2. If financial services companies aren’t educating their staff about PSD2, it’s unlikely they are educating their consumers.
Where do we go from here?
In an interview with Adam Farkas, executive director of the European Banking Authority, NS Banking reported that the new regulations will help the European payments market scale more easily and faster than in other regions and that industry participants will compete on a more global scale. Thus far, this has proven to be true. As we mentioned previously, the explosion of challenger banks in the European region is evidence of increased competition.
Multiple other fintech sectors have the potential to scale, as well, including:
PFM solutions are benefiting from a more liberal flow of customer account information and account aggregation.
Fraud prevention solutions prove more effective when they have access to more consumer data. When a customer opens a new account or applies for a new product or service, fraud prevention solutions are able to verify the person’s identity by cross-checking their personal data, such as name, address, and email, against their other accounts.
Underwriting has the potential to become more efficient. When underwriters have access to up-to-date information from credit bureaus combined with a full picture of an applicant’s financial situation, they are able to make more informed decisions and lower default rates.
Digital lending also benefits. In a chat with digital lending company ITSCREDIT, company CEO João Pinto said, “One of the strengths [of ITSCREDIT] is that the platform is open so that implementations can use as much data as is available in order to have a more complete view of customers and their financials. In this scenario, open banking is a key element. It not only makes much more data available from different players, but also makes integrations much easier.”
Traditional banks can create more effective marketing campaigns to customers.
According to Token.io’s Clyde, banks laid the groundwork for open banking with APIs in 2019 and he expects 2020 to be a turning point for open banking. “After a period of stabilization for APIs, transactions will soon follow, starting with data and progressing to payments. 2020 will also be the year of open payments in the U.K., with certain merchant categories going live with single immediate payments and transaction volumes following.”