This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.
Finovate Blog
Tracking fintech, banking & financial services innovations since 1994
For several years now, there has been a rise in the number of digital banks taking on traditional banks, vying for a share of their client base. In the past couple of years, however, we’ve seen a slight twist in this trend.
These digital banks are taking personalization to the next level, and many have launched with the purpose of fulfilling the unique needs of niche subsets of the population that each share similar needs and struggles. Notably, these digital newcomers are generally not a solution looking for a problem; they are truly meeting unmet needs of previously ignored client bases.
Built for “x”
There are endless examples of these digital banks built for “x.” However, here are a few that Nymbus Board of Directors Member Rilla Delorier highlighted in her keynote at FinovateSpring:
Sable, banking services for immigrant employees and international students who may lack a social security number
Hitched, an app that helps newlyweds manage their funds together
Convoy, payment and money management services to meet the needs of long-haul truckers
Blueprint, banking services for contractors
Gig Money, money management tools to help gig workers smooth cash flow
Access, a banking platform that provides capital to black-owned businesses
This concept of niche banking isn’t new. Many community banks and credit unions launched to serve unique populations such as teachers and military families, but have since expanded their membership to serve the needs of a broad population. The continuous call for personalized products and services in the banking sector, however, combined with the lack of action from traditional banks, has inspired a new rank of fintech nerds to develop and launch not just clique-specific services, but clique-specific banks.
Sticking power
These newcomers have struck a nerve with users, especially those who were previously underserved. That’s because they not only make banking products accessible, they do so in a language that each unique consumer group understands. For example, the website may provide multiple language options or leverage visual/video tools to better communicate with customers from different backgrounds.
Furthermore, digital banks are providing products and services tailored to the unique needs of these groups. If the customer base notoriously struggles with making ends meet, for example, the bank might offer an early pay option that fronts their paycheck a week-or-so in advance. Or, in an example of a gig worker-specific bank, the bank may provide a tool that helps smooth out the user’s cashflow to ensure they don’t overspend on a month when their income is higher than average.
This segmentation goes beyond what traditional banks, who serve users based on geography, have previously offered. “If you think about defining community based on geography, where you live doesn’t really determine what your financial needs are,” Delorier explained in her keynote.
Given this hyper-personalization, expect that this new form of digital banking is here to stay. That said, traditional banks still have a the opportunity to stay in the game.
How it will work alongside traditional banks
What should the role of traditional banks be amid all of this? In short, the answer is that banks will be expected to collaborate with new digital banks and standalone technology providers. As Alyson Clarke, Principal Analyst and Forrester Research said in her presentation at FinovateSpring, “In the era of open finance, no bank will succeed alone.”
Banks need to become comfortable with collaboration, partnerships, and coopetition. Clarke recommends that banks build multiple routes to market, partner where they are weak, and specialize in what they are good at. “What we do know is that most banks will have a stark choice: own customers or power finance. But in the future, few will do both,” Clarke concluded.
What will traditional banks’ response be?
Both Delorier and Clarke recommend banks do one thing: rethink. That is to say, banks should rethink their digital transformation, rethink policies and procedures around credit decisioning and membership criteria, and rethink customers and markets.
What this looks like will vary among organizations, but banks can start by conducting research to discover unmet customer needs, incorporating diversity into their workforces in order to represent a wider range of customer segments, and leveraging technology partners.
“It’s not about following your established business models and delivering digital technology with agility. That’s not good enough anymore,” said Clarke. “You have to rethink customers and markets, rethink your consumers and what they need and invest ahead of that change to be more responsive.”
With vaccination programs in full swing in many nations across the globe, the spread of COVID is finally beginning to slow. What is not slowing, however, is the change that the pandemic has brought to consumers’ finances, including how they spend their money.
With that in mind, here are five aspects of payments that will change in 2021, as consumers solidify the habits they picked up last year.
QR codes
As we’ve mentioned on the blog in the past, QR codes have been making a comeback as a mobile payments tool. That’s because QR codes are both versatile and universal– they can be printed out on physical paper and can be scanned by a range of devices across operating systems.
These attributes make QR codes the perfect tool to facilitate P2P payments and to implement low-touch checkout solutions at in-store points of sale. Earlier this year, PayPal partnered with InComm to launch its QR code technology at pharmacy chain CVS. Just last month, Fiservteamed up with PayPal to enable businesses to use QR codes to offer touch-free payments at the point of sale on Clover devices. And yesterday SafetyPay began enabling users to use QR codes for real time payments in Brazil.
These use cases, combined with the increased demand for low- and no-touch payment options, are fueling the rise of the QR code.
Digital
The case for digital is a no-brainer these days, as consumers have shifted their habits to conduct not only their shopping but also many other aspects of their daily lives online. When brick-and-mortar shops were closed, consumers were left with online shopping (and therefore payment) options.
It is clear that, even as the pandemic winds down, consumers are maintaining these digital-first habits. In fact, shoppers of all ages and demographics are more comfortable paying online than before.
Embedded
With the increase in digital comes the increase in embedded payments and embedded finance. Retailers and service providers have figured out that the more seamless they make the payments experience, the less friction will interfere with the customer experience and the more the customer will return.
By saving users’ payments credentials, ridesharing services, food delivery companies, and even online grocers increase the chance of a return purchase. It also provides the retailer with more data and offers enhanced data surrounding consumer habits.
Visibility
When it comes to security, with more data comes more responsibility. On the flip side, the extra data also brings additional visibility into consumer habits. From bank’s and merchant’s perspectives, this visibility can help them personalize products, services, and even the client experience.
Visibility into consumer spend data also helps banks and merchants anticipate customers’ needs and may enable them to more efficiently market up-sell and cross-sell opportunities.
On the consumer side of things the increased data can help them plan, budget, and manage their spending when the right tools are provided. Even technology as simple as purchase notifications can not only increase shoppers’ awareness of where their money is going, but also can help them prevent fraud.
Collaboration
It is becoming increasingly clear that in the banking and fintech space, no player is an island. By collaborating with other players, both banks and fintechs can maximize their competitive advantages by sticking with their core competencies.
So far this year, we’ve seen multiple successful bank-fintech partnerships, including this week’s mash-up between Ally Financial and buy-now, pay-later player Sezzle. Other headline-worthy mash-ups, such as Apple’s partnership with Goldman Sachs, highlight the benefits of leveraging others’ strengths, even when they appear to be a competitor on the outset.
What happens after the newest cutting-edge banking technologies become table stakes? Banks move on to tackle another new technology.
In fact, in the past decade or so, banks have been constantly moving from one new technology to the next– from remote deposit capture to merchant-funded rewards, roboadvisory services, AI-informed marketing strategies, and finally on to complete digital transformation.
So now that 2020 served as the year of digital transformation, what’s next? How will banks use their limited resources to get ahead of the curve? Below are a few areas in which banks are focusing their attention to gain competitive advantage:
Communication
Last year we saw multiple financial services organizations update their communication technologies in tandem with digital transformation. But the game of facilitating customer communication is far from over. As Ron Shevlin pointed out in his piece, Every Bank Needs A Chatbot (Or Two) For Its Digital Transformation, chatbots are no longer simply a novelty. Instead, these tools offer fast turnaround for customer inquiries, provide additional data about consumers, and help firms hold personalized conversations with clients.
Another communication enhancement comes in the form of leveraging popular third party apps to communicate with customers. Axis Bank, for example, India’s third-largest private sector bank, recently announced a partnership with WhatsApp. Customers can now use WhatsApp to inquire about their account balance, recent transactions, credit card payments, deposit details, and block their credit or debit card.
Cryptocurrencies
Ready or not, crypto is here! In January, the U.S. Office of the Comptroller of the Currency (OCC) published an interpretive letter detailing that banks can transfer stablecoins to other banks. While banks haven’t been rushing to leverage this functionality, there have been a few moves that indicate financial services are slowly entering the cryptocurrency game.
First off, marketing services company Kasasaunveiled plans to help its bank and credit union clients provide bitcoin wallets to their consumers. Additionally, Mastercard recently announced it willallow merchants to accept payments in cryptocurrencies, and BNY Mellon agreed to begin custody of cryptocurrencies.
Payment tools
With so many payments moving online in the past year, banks need to be even more aware of their role in the online payments flow. In fact, the recent rise in embedded payments poses a risk to banks as third party apps such as Uber and DoorDash make the payment element of a transaction almost disappear.
There’s also been a lot of competition in the booming buy now, pay later (BNPL) space, and not just from third party fintechs like Klarna and Afterpay. Last year, Citi announced Citi Flex Pay, a product that enables cardholders to pay for select purchases over time at a lower interest rate than their card’s purchase rate. And in 2019, JPMorgan Chase launched My Chase Plan, an offering that allows cardholders to make equal monthly payments on purchases of $100 or more with no interest, just a fixed monthly fee.
Offering another tool to make payments more flexible, is U.K.-based fintech Curve. The fintech connects with consumers’ existing payment cards to offer rewards as well as a Go Back in Time feature that lets users switch payments from one card to another for up to 14 days after the purchase was made.
Sustainability
If you’re not green, you’re gone! O.K., maybe not quite, but in the past few months we’ve seen an increase in fintechs working toward a more sustainable future. In fact, just this month there have been multiple headlines that highlight fintech’s green future. First, U.K.-based digital bank Starling Bank launched recycled plastic debit cards. Second, Citi began restricting financing for companies expanding coal power. And finally, Menigapartnered with Iceland’s Íslandsbanki to integrate Meniga’s Carbon Insight into its digital banking solution.
Fintechs are also helping consumers do their part to minimize their impact on the environment. Aspiration, for example, ensures accountholders that their deposits won’t fund fossil fuel projects like pipelines, oil drilling and coal mines. The startup also works with reforestation partners to plant a tree when users roundup their purchase to the nearest dollar. And speaking of trees, Treecard offers a wooden Mastercard and donates 80% of its profits to reforestation efforts.
By now you’ve likely heard of Central Bank Digital Currencies (CBDCs). With consumers’ lives taking place increasingly online and the recent boost in cryptocurrency usage and value, much of the global economy is ready to move from discussing CBDCs to formally implementing a CBDC strategy.
But though there has been some progress in this area, there is still a lot of confusion in the broader banking and fintech community. If you’re feeling a bit behind on the CBDC discussion, here are five things to know that can help you catch up:
Six countries are currently piloting CBDCs
While much of the world is struggling to wrap their heads around CBDCs, some countries are ahead of the game and already have pilot programs in place. Of these, the most well-known is China, but Thailand, the Republic of Korea, Ukraine, Sweden, and Uruguay are also actively piloting CBDCs. Additionally, Brazil reports it plans to formally launch its CBDC next year.
A handful of countries, including Canada, Venezuela, Cambodia, South Africa, and the UAE have made key developments with their CBDC programs.
Other countries are still in the research phase or have had no development.
Check out this interactive map from the Atlantic Council to learn more about each country’s progress.
CBDCs don’t necessarily need the blockchain
Many people associate CBDCs with Bitcoin, which can be a helpful way to think of distinguishing Central Bank currencies from fiat money in digital form. But while Bitcoin leverages the blockchain, CBDCs don’t necessarily need to.
That’s because blockchains are used when there is no central party to provide trust. When central banks serve as the trustworthy authority, however, this decentralization is no longer necessary.
In fact, according to a survey conducted last February by the U.K.’s Central Banking Magazine, only one reserve bank said that they planned to use a blockchain for the structure of distributing their CBDC.
There are two types of CBDCs
Many people don’t know this, but there are actually two types of CBDCs– wholesale and retail. Wholesale CBDCs facilitate clearing operations between the central bank and its member banks, while retail CBDCs are for the general public to use, taking the place of the bank note.
There will still be room for cash
CBDCs will work alongside cash, or fiat currency. While there are both negative and positive aspects to paper money and coins, there will still be a cash economy. CBDCs simply combine the convenience of a cryptocurrency with the stability and regulation of fiat currency.
CBDCs won’t harm banks
As Chris Skinner highlighted in a blog post recently, CBDCs have the potential to disrupt banks to the point making them obsolete. Because CBDCs are issued digitally, they could technically circumvent banks.
Skinner concludes, however, “The true role of banks, whether in a digital currency or cryptocurrency world, is to store and exchange value with trust. That’s why they’re regulated the way they are and why they exist the way they do. And that isn’t going away anytime soon.”
The decentralized finance (DeFi) conversation started to pick up about a year ago. Today, we’re starting to see this once-fringe topic emerge as a mainstream conversation in fintech.
In fact, now that DeFi has become a reality, it’s not something that’s going away any time soon. The advent of cryptocurrencies enabled consumers to transfer money between parties without relying on a traditional bank. DeFi takes this power the next level.
These added capabilities are what have the potential to take cryptocurrencies from a speculative device to a useful tool. But while this is a reality for some, it is still a concept on paper for most. So why am I paying attention to DeFi now, while it’s still in its infancy?
It’s more than an idea
As mentioned above, DeFi has moved from the concept of “an interesting idea” into a concrete, value-added financial tool. Leveraging the power of smart contracts, DeFi allows users to lend, earn interest, and claim insurance. It can also be used to prove identity, assist with underwriting, AML and KYC compliance, and more.
Because of these capabilities, the use of DeFi is becoming more popular. The following graphic from DeFi Pulse shows the total U.S. dollar value locked in DeFi. The graph shows DeFi starting to take off in July of last year and rise exponentially. Today, the total locked value is more than $35.9 billion.
With this growth, we can expect to see more projects and use cases launch as DeFi emerges from an idea to a new reality.
DeFi will change banking as we know it
Today’s traditional banking system relies on centralized control. But one of the key aspects of DeFi is that it operates without an intermediary. That is, users can complete banking activities without a central governmental authority, a bank, or even a company setting rules, governing, and regulating activity.
Instead of this central control, DeFi leverages smart contracts that use “oracles,” or services that inform smart contracts of external data so that it can execute its purpose based on that data. As an example, a smart contract for flood insurance might rely on rain gauges to determine whether or not to pay out insurance claims to homeowners living in a certain area.
This key difference will change how consumers shop for financial services. Instead of hinging on trusting an institution, the consumer’s decision will rely on how smart they think the smart contract is, and whether or not they trust the oracles the smart contract uses.
It will transform the industry for the better
While DeFi is a little bit intimidating, it has the ability to change the financial world for the better. It is scalable and programmable, and is therefore well-suited for growth. In addition, it is immutable. That is, it is tamper-proof and cannot be changed or hacked. And transaction details are transparent; DeFi protocols are built with open source code and can be viewed by anyone.
The final, and perhaps most notable, aspect of DeFi is that it is permissionless. This means that anyone with a crypto wallet and an internet connection can participate in the DeFi economy. There is no minimum balance requirement and, because it doesn’t revolve around a central government, there are no geographic limitations.
Though we’re only four weeks into it, 2021 has been a big year for cryptocurrency. While there has been a multitude of news items in the crypto space, there are a handful of items worth highlighting.
Though much of the cryptocurrency news cycle is often quite hyped, it’s important for the traditional financial sector to keep their finger on the pulse of major news pieces in this space, especially as the decentralized finance trend takes off. That said, here are six things you need to know about what’s going on in the cryptocurrency realm:
Elon Musk stands bullish on Bitcoin
The price of Bitcoin hit an all-time high at the beginning of January of this year. A few weeks later, during an interview on Clubhouse, Tesla CEO Elon Musk said, “I do at this point think bitcoin is a good thing. I’m late to the party, but I am a supporter of bitcoin.”
This vote of confidence for the popular cryptocurrency didn’t send the price of bitcoin to the same highs that we saw on January 8. It did, however, offer it a nice boost in price and a stamp of approval that will be beneficial in boosting the cryptocurrency’s legitimacy.
Ethereum hits all-time high
The price of Ethereum reached an all-time high today, this time breaking the $1,600 mark. Fueling the surge is the pending launch of ethereum futures on the Chicago Mercantile Exchange next week.
While bullish buyers expect to see the price top out around $2,000, others anticipate it will level off.
The Indian government dances around a cryptocurrency ban
India is notorious for its hot/cold relationship with cryptocurrency. In 2018, the country’s central bank banned offering banking services for digital asset firms, but the Supreme Court overturned that ruling last year.
This week, the Indian government revealed that it will likely seek to regulate cryptocurrency, instead of ban it.
Visa announced plans to enable cryptocurrencies trading on its network
In an earnings call, Visa CEO Alfred Kelly said that he wants to make cryptocurrencies “more useful and applicable for payments.” To accomplish this, Kelly sees Visa working with wallets and exchanges to enable users to purchase cryptocurrencies using their Visa card or to cash out onto a Visa card to make a fiat purchase at a traditional merchant.
During the call, Kelly disclosed that the payments giant is already working with a handful of digital currency platforms and wallet providers to serve as their card issuer. This list includes crypto.com, Blockfi, Fold, and Bitpanda.
The OCC OK’d stablecoins
In the first week in January, U.S. Office of the Comptroller of the Currency (OCC) last week published Interpretive Letter 1174 detailing that banks may use stablecoins and independent node verification networks (INVNs) to facilitate payments for customers. Simply put, banks can transfer stablecoins to other banks.
This development happened under the watch of Acting Comptroller of the Currency Brian Brooks, who stepped down mid-last month. Taking Brooks’ place is Blake Paulson, whose attitude toward cryptocurrencies is untested.
Gemini began offering a savings account
Cryptocurrency exchange Gemini is starting to step on traditional banks’ toes. That’s because the New York-based company is launching a savings account called Earn that allows users to move their crypto holdings into high-yield savings paying as high as 7.4%.
Thanks to Gemini’s business model, it can afford to pay the high rate. That’s because it lends users’ cryptocurrency deposits to other borrowers through its partner, Genesis Global Capital, at a higher interest rate.
You’ve finally perfected your digital transformation strategy that was accelerated because of 2020’s global pandemic. What should you focus on now? Here’s an idea: stablecoin transactions.
The U.S. Office of the Comptroller of the Currency (OCC) last week published Interpretive Letter 1174 detailing that banks may use stablecoins and independent node verification networks (INVNs) to facilitate payments for customers. That is to say, banks can transfer stablecoins to other banks.
To catch you up to speed, INVS are distributed ledgers. And stablecoins are a type of cryptocurrency that minimize volatility by pegging their value to an external factor.
There are a few key things this means for traditional financial institutions.
Transactions become decentralized
Stablecoin transactions are essentially decentralized cryptocurrency transactions. Because of this, they enable banks to send and receive money without a government intermediary.
Faster payments
Stablecoin transactions do not rely on traditional payments rails, rather, they utilize public blockchains. Because of this, stablecoins, just like other cryptocurrencies can be transferred in near-real time from one party to the next.
On 24/7
Once again citing freedom from traditional payment rails, because stablecoin transactions occur outside of the traditional payments infrastructure– and because they occur instantly– they can essentially be made at any time, including on the weekends and holidays.
Compliance is still on the table
According to the letter, stablecoin transactions, “should have the capability to obtain and verify the identity of all transacting parties, including those using unhosted wallets.” So banks are still responsible to adhere to KYC guidelines.
Additionally, banks using stablecoin transactions are responsible for managing the multiple risks associated with cryptocurrency transactions. Per the letter, “The stablecoin arrangement should have appropriate systems, controls, and practices in place to manage these risks, including to safeguard reserve assets. Strong reserve management practices include ensuring a 1:1 reserve ratio and adequate financial resources to absorb losses and meet liquidity needs.”
This is positive news not only because it offers banks more options, but also because it serves as a signal that the OCC and the Acting Comptroller of the Currency Brian Brooks are bullish on cryptocurrencies.
Pay attention to the cryptocurrency/stablecoin sector this year. We’re expecting to see significant developments in the decentralized finance area, and banks’ involvement in initial cryptocurrency efforts will be crucial. There will be little-to-no room for laggards in this space.
The U.S. government has approved a second round of Paycheck Protection Program (PPP) loans. The Consolidated Appropriations Act of 2021, which was signed into law late last year, is the second stimulus package, following the passage of the CARES Act in March of last year.
The second round of PPP loans, or PPP2, provides $284 billion in aid to small businesses suffering because of the pandemic. With PPP2, there are a few key differences from the first iteration. Here’s what you need to know:
Eligibility has changed
Unlike the first round, some 501(c)(6) not-for-profit organizations that have fewer than 300 employees may be eligible for funds if they meet limited lobbying requirements.
Businesses may qualify for a second loan
Businesses are eligible for a second PPP loan of up to $2 million if they have used up their first loan, have fewer than 300 employees, and experienced quarterly revenue declines of 25% in 2020 compared to the same quarter in 2019.
Additional expenses are covered
The first round of PPP stipulated that funds had to be used toward payroll, rent, mortgage, and utilities in order to qualify for forgiveness. PPP2 has added a few categories to that list, including operational expenditures, payments to suppliers, property damage costs resulting from public disturbances, and costs associated with protecting employees.
More time to use funds
The “covered period,” or the time the business was required to use the funds in order to qualify for forgiveness, was originally eight weeks. It was later amended to allow borrowers to chose a 24 week period. Under PPP2, borrowers have more options– they can choose any covered period between eight and 24 weeks.
Is it enough?
According to Greg Ott, CEO of Nav, a platform that matches small businesses with lenders, PPP2 is a “much-needed” improvement, but still falls short for some small businesses.
“The primary reasons for this,” he explains, “include the fact that the burden of navigating the complex and intimidating application process is too heavy for most small business owners struggling to survive day-to-day, the bill itself is written by people who don’t genuinely understand what these businesses need, and the traditional banking system simply isn’t set up to prioritize truly small businesses.”
“The new funds are certainly welcome, but it will unfortunately be too little and too late for many business owners,” Ott added.
Some might use the term “dumpster fire” to describe 2020. And while it certainly has been a difficult year full of change, loss, separation, and frustration, there have been some silver linings.
One of those bright spots is the acceleration of digital transformation that has taken place across the tech industry. The trends we predicted last December seem like small goals compared to what many organizations were able to accomplish this year.
We’re now faced with another year of uncertainty, not knowing what 2021 will bring. And while it is probably more prudent to make industry predictions in three-month increments, here’s a broader view that assesses some of the larger trends we expect to see take shape over the next 12 months.
Embedded Banking
Embedded banking, and more specifically embedded payments, began taking off this year. To be clear, embedded payments has been around for awhile now. The concept began as a way for customers to pay for a purchase without having to leave the merchant’s site or app.
However, companies are beginning to perfect the customer experience to such an extent that the customer doesn’t experience friction related to the payment. In these cases the payment process is so deeply integrated into an app that the customer doesn’t have to put extra effort into making the payment.
The classic example of embedded payments is Uber. A customer takes a cab ride and arrives at their destination without having to fumble around with their payment card. With Uber, when a customer arrives at their destination, they know that they have paid for the ride but they don’t have to make any extra effort to finalize it or even need to think about it at all.
When software providers can achieve an experience where the customer doesn’t have to think about the payment (but, of course, makes the payment anyway), they will not only have created a better customer experience but also will be able to close more sales.
Open banking in the U.S.
Open banking has already taken off in Europe and is making progress in Australia and Canada, as well. The U.S., however, has been slower to enact regulation.
Helping to drive progress toward an open banking future in 2021 and beyond, the Consumer Financial Protection Bureau (CFPB) issued an advanced notice of proposed rulemaking (ANPR) that requests information from the public on how consumers’ access to their financial records should be regulated.
Essentially, the ANPR serves as a first step in creating formal regulation in the U.S. around open banking. This– along with other factors such as an increase in digital use among consumers, a general recognition that screen-scraping techniques are harmful, and an increase in third party fintech apps– have primed the pump for open banking to take shape next year.
Automation
We’ve reached a point with AI where Robotic Process Automation (RPA) can help businesses effectively scale their operations. On the business side, we can expect to see increased automation in lending decisioning, communication and workflow tools, customer service, billing, invoicing, accounting, and investing. In fact, almost any business operation that lacks the ability to process information fast enough is a good candidate for automation.
End consumers can expect to see more benefits from automation, as well. More and more fintechs are working to optimize savings and investment opportunities for their clients. Take, for example, Wealthfront’s self-driving money concept. The roboadvisor wants to make money management effortless for customers by optimizing the use of each of their paychecks to pay bills, top up their emergency fund, and efficiently allocate the remainder into investments.
Banking-as-a-Service
This trend seems a bit meta, as many of the clients for banking-as-a-service tools are they themselves banks. It may prove difficult to explain to a fintech outsider why a bank would want to launch a challenger bank (the answer: to compete with banks!).
Despite this, however, banking-as-a-service sits at the core of fintech. Banks and fintechs focus on their core competency and integrate solutions from third parties into their own.
There are two major drivers that are transforming this historically vanilla concept into one of next year’s hottest fintech trends. The first is the push toward open banking. As explained above, there is more data being created in the digital realm than ever and, because of this, consumers want to share their data across platforms. This interoperability is altering customer demand and incentivizing fintechs to integrate additional functionality into their existing services.
The second driver is the sudden increase in the number of challenger banks. Late last year and into 2020, we have seen not only a record number of challenger banks launch, but also a record amount of VC funding allocated to challenger banks. While most consumers are maintaining their relationships with their traditional bank, they are also opening accounts at challenger banks such as Chime and N26.
These digital-first banks often have attractive features such as credit building tools, early paydays, and fee-free overdrafts. To compete, some banks are launching challenger banks of their own. Enterprise technology company Moven and digital banking services provider Q2 recently partnered to create a “bank-in-a-box” concept that aims to help banks improve their digital offerings and retain their digitally savvy customers.
Honorable Mention
Aside from this list, there are two items that deserve honorable mention. The first is buy now, pay later technology. The trend is currently on fire but will likely fizzle out after consolidation takes place. The second trend, Central Bank Digital Currencies (CBDCs), is on the opposite side of the spectrum. As China initiates the launch of its country’s own CBDC there has been a lot of hype about the concept. However, we are likely still three to five years out from the U.S. making any significant progress toward a CBDC so all talk about the subject will be just that– talk.
This year has brought on a lot of changes for U.S. businesses and individuals alike– some for the worse, and others for the better.
One change that fits into the latter category– open banking– has heated up in 2020. There are four indications that the U.S. may be at a tipping point when it comes to open banking:
More consumers than ever are using digital financial services. Not only has the coronavirus has halted in-person activities, it has also prompted users to focus on their finances.
We’ve finally agreed that screen scraping is a bad way to aggregate accounts. Last week, even Wells Fargo announced it has stopped using screen scraping as a data aggregation technique.
Consumers have become aware of their data usage. Big tech companies like Facebook were put on trial in the U.S. in 2018 for questionable usage of consumer data. Now, in an election year, and with films like Netflix’s The Social Dilemma, users are more aware than ever of how tech platforms use their data to sway their opinions.
There’s more competition than ever in the B2C fintech space. New competitors are laser-focused on perfecting the user experience, and have started making data management as easy as possible for consumers. Many, for example, provide users a dashboard that allows them to manage third party data sharing, toggling certain platforms on and off.
All of these elements have aligned to bring the U.S. to a tipping point in open banking. There is still one thing missing, however, and that is a unified approach for data sharing.
Whereas Europe enjoys standardization through common API specifications thanks to PSD2, the U.S. is lacking direction. Instead of a government-mandated approach, the market is currently being driven by private players such as Plaid, MX, Envestnet|Yodlee, and others.
Despite challenges, 2021 may the year for open banking in the U.S. As the global pandemic continues next year, so will consumers’ online presence, and ultimately their awareness of their digital rights. Earlier this week, the U.K. surpassed 2 million consumers using open banking, more than double the number recorded in January of this year. And even though the U.S. still has a long road ahead to fully realize open banking, take hope– we’re closer than we’ve ever been.
You know that buy now, pay later (BNPL) has jumped the shark when even Cosmo is writing about it. After all, BNPL is basically millennials’ way of reverse engineering the layaway programs their parents grew up on.
Not only have we recently witnessed new fintechs launch their buy now, pay later technology, we’re seeing a large increase in incumbent players expand their existing services to include BNPL offerings, as well. Just yesterday, Fiservannounced its BNPL payment option in partnership with QuadPay, and today Standard Charteredpartnered with Amazon to offer installment payment plans for customers in the UAE.
While each of the now dozens of BNPL schemes operate a bit differently, most allow the consumer to split up a purchase into multiple installments and repay over a set period of time without incurring interest. As with everything that seems too good to be true, however, negative externalities exist. Here’s a breakdown of the hidden (and not-so-hidden) costs:
The BNPL company
If a consumer makes a purchase and fails to pay one or more of the installments, the BNPL company is generally the one who feels the loss. To mitigate their losses, however, companies generally won’t allow customers to make repeat purchases if they default on a repayment. Not only this, most charge late fees and high interest (some charge up to 30%) to reclaim what they can.
The consumer
The end consumer is always responsible for knowing the repayment arrangement. However, mistakes happen and if the buyer is unable (or forgets) to pay one of the installments, they face multiple costly consequences. As mentioned above, the consumer in default generally faces a late fee. Klarna, for example, charges $35 per month for missed payments. Additionally, while most BNPL offerings are interest-free, some charge high interest on missed payments.
Merchants
Merchants have a pretty good end of the deal when it comes to BNPL. Many offerings allow them to receive the full amount of the buyer’s purchase up-front, and they are not on the hook if the buyer defaults. Some, such as Splitit, allow the merchant to choose a lower fee if they receive the payment as the consumer repays their monthly installments.
The pricing model for merchants vary. Among some of the fees that BNPL companies advertise are: up to 6% plus $0.30 per transaction, 1.5% plus $1.50 per transaction, or 3% plus $1 per transaction.
Banks
While the banks typically aren’t a party to BNPL transactions, these new payment schemes are still costing them. How? Many shoppers are using BNPL to circumvent credit cards, which charge compounding interest each month. For users that are in the habit of financing large purchases, it makes more sense to pay for the purchase over the course of four months, interest-free, than to incur credit card debt by only paying the minimum balance.
Digital identity technology plays an increasingly large role in financial services, and the current global public health crisis has accelerated this trend.
We spoke with Dean Nicolls, VP of Marketing for Jumio, to learn what the digital identity innovator is doing to help banks and other enterprises leverage this technology for their businesses. We also take a look at how the technology has been deployed to help deal with with coronavirus pandemic.
Finovate: Jumio announced that it is providing free identity verification services for organizations involved in COVID-19 relief. Which organizations qualify and why is Jumio launching this effort?
Dean Nicolls: Jumio launched Jumio Go for Good in March 2020 to help organizations involved in relief and assistance during this global health crisis quickly and accurately identity proof their patients, students and workers to ensure critical services can be delivered and trusted. Powered by AI, Jumio Go provides enterprises with a real-time, secure and reliable way to verify remote users, ensuring the person enrolling or logging in is who they claim to be online.
Jumio Go is becoming increasingly important in helping organizations across a wide range of industries reliably onboard and serve a number of important use cases (e.g., new account onboarding, fraud detection, AML/KYC compliance), where verification speed is critical. With Jumio Go, identity verification decisions are rendered in seconds, not minutes or hours, which translates to significantly higher conversions, lower fraud rates, and improved customer satisfaction.
Through September 30, 2020, Jumio will provide free identity verification services via its AI-powered, fully automated solution, Jumio Go, to any qualifying organization directly involved in helping with COVID-19 relief including (but not limited to): healthcare, online learning, and the general population.
Finovate: What services are included in this offering?
Nicolls: Jumio Go For Good is powered by Jumio Go, the only fully automated digital identity verification solution on the market capable of defending against bots, advanced spoofing attacks and sophisticated deepfakes, which are often leveraged for fraud.
By leveraging AI, Jumio Go works to prohibit bad actors from fabricating online accounts. As deepfakes, bots, and sophisticated spoofing attacks continue to rise, Jumio has integrated certified liveness detection to detect when photos, videos or even realistic 3D masks are used instead of actual selfies to create online accounts. Additionally, Jumio Go provides organizations with a real-time, secure, and reliable way to authenticate remote users, ensuring the person enrolling into a new service is who they claim to be in the real world.
Finovate: Identity verification has become an issue for small businesses seeking COVID-19 relief-related funding. What is the specific problem these businesses are facing and how can digital identity verification solutions help?
Nicolls: Small businesses across America are feeling the financial stress from shelter-in-place restrictions that have millions of people taking refuge from the outbreak by staying at home and working remotely. Recent changes have brought about a new question for the financial industry: how can lenders properly evaluate small businesses when they can’t physically walk into their office? For reference, SBA lenders are those who work with the Small Business Administration and provide financial assistance to small businesses through government-backed loans. The implementation of online identity verification solutions helps SBA lenders vet small business owners to ensure they follow compliance mandates (KYC/AML) by verifying their digital identities. Instead of requiring small-business owners to visit a local branch office, they can verify their online identity from the safety of their home, allowing lenders to effectively manage the influx of requests, and small-business owners the peace of mind knowing they’re being supported at this time.
In the future, identity verification solutions will become crucial for SBA lenders to establish trust remotely with an increasing number of remote users who simply do not want to visit a branch office. Jumio Go verifies government-issued IDs and ensures that the individual in the selfie matches the picture on the ID. A biometric-based approach to authentication helps expedite onboarding while also deterring fraud by as much as 90%.
As the number of SBA lenders continues to increase, online identity verification will rapidly become a vital competitive advantage in terms of quickly distributing capital to small-business owners and nonprofits on the front lines, while also preventing cyberattacks.
Finovate: What are the key technologies behind identity verification solutions such as those offered by Jumio? AI? Advanced machine learning? What capabilities do these technologies enable that would not be possible otherwise?
Nicolls: Jumio launched Jumio Go, the company’s first real-time, fully automated identity verification solution, in November 2019. It is designed to remove friction from the user onboarding process, while preventing online identity fraud and meeting AML and KYC compliance mandates. Jumio leverages the power of informed AI and equips modern enterprises with instant online identity verification that delivers a simple and intuitive experience for good customers.
There are three critical ingredients to informed AI:
Data Breadth: Jumio has verified 250 million digital identities to date. This gives Jumio a big leg-up in developing smarter algorithms. Not only is the data set very large, but it’s also very deep. Jumio’s database has seen large volumes of each one of the more than 3,500 ID document types/subtypes from more than 200 countries and territories.
Ground Truth: Jumio has leveraged supervised AI from the very beginning. This means Jumio employs identity verification experts who tag every identity verification based on an analysis of the security features and physical characteristics of an ID and selfie. These verification experts have spent thousands of hours reviewing and verifying government-issued IDs from all over the world which helps train our algorithms and make them iteratively smarter.
Production Data: Jumio’s AI algorithms are trained on real-world production data, not purchased data sets. Jumio AI models are trained on images of ID documents and selfies where the images may be blurry, dimly lit, or have excessive glare which means our models are more robust and scalable than models trained on perfectly captured photos. This also helps us avoid bias since the data has been tagged by trained verification experts.
Finovate: Where is adoption of identity verification technology most robust? Are there industries where the technology would be especially valuable, but adoption rates have been slower than expected? If so, which industries and what challenges to adoption are they facing?
Nicolls: Traditional banks have been surprisingly slow to adopt online identity verification and take digital transformation seriously. When you’re talking about traditional banks, there are numerous divisions including retail banking, private banking (for high net worth individuals), business banking and brokerage accounts. While all banks need to comply with KYC/AML checks when new accounts are created and have defined customer identification programs (CIP) in place, the methods they employ to establish a consumer’s digital identity are varied. Many traditional banks leverage non-documentary approaches to corroborate identity and this often involves pinging third-party databases or credit bureaus based on self-reported information from the consumer (e.g., name, address and date of birth).
Unfortunately, these methods are not overly reliable. In fact, Gartner recommends that identity proofing solutions that rely on shared secret verification, such as out-of-wallet knowledge questions, or memorable personal data, be phased out. The concept of high-memorability, low-availability data has become archaic since the rise of social media and the subsequent plethora of breached data available through underground organizations. By requiring a picture of a government-issued ID, and pairing it with a corroborating selfie (which should include an element of liveness detection), banks can have much higher levels of identity assurance than traditional approaches and can deter as much as 90% of attempted fraud.
Finovate: Lastly, are there any upcoming announcements or initiatives coming in the next few weeks that we should be looking out for?
Nicolls: Jumio is launching a new suite of address services that can be used to validate and corroborate addresses with independent, third-party sources. Historically, Jumio has only relied on the ID document itself and a corroborating selfie as the fraud signals. Jumio Address Services actually consist of two distinct services:
Jumio Address Validation:Determines if the address extracted from a government-issued ID (e.g., passport, driver’s license, ID card) exists in the real world.
Jumio Proof of Residence: Checks to see if the person being verified actually lives at the physical address extracted from their ID document. In the U.S., if the user moved, we would return whether the address provided matches the most recent address on file.
With these new add-on features, customers can use this data as additional fraud signals that help enterprises know if the person creating a new account is in fact who they claim to be. These services will be sold with our current identity verification solutions to provide a more holistic picture of an online user.
Founded in 2010 and headquartered in Palo Alto, California, Jumio has been a Finovate alum since its debut at FinovateFall in 2013. In the company’s most recent appearance on the Finovate stage at FinovateAsia in 2018, Jumio demonstrated how its Netverify Identity Verification solution used liveness detection to prove an individual’s physical “presence” at the moment of the transaction.
