The future is wide open for digital banking and fintech start-ups as the finance 2.0 revolution – spurred on by PSD2 – shows no sign of slowing down in Europe, writes John Kennedy.
Last November at Slush in Helsinki, there was a great sense of jubilation around the State of European Tech report, as it appeared European start-ups had captured some of Silicon Valley’s momentum. European tech firms had raised $19bn in 2017 and 41 European tech firms qualified as unicorns.
The celebrating was mainly around deep tech areas such as AI and analytics, but much of the optimism was due to how well Europe could be positioned to become a world leader in crypto and blockchain technologies over the next decade.
Technologies such as blockchain underpin the fintech revolution, paving the way for a whole groundswell of new start-ups that have targeted markets underserved by banks through better user interfaces and user experience (UX) as well as through digital marketing and branding.
Cash-savvy millennials know the score
A case in point is Revolut, a London-headquartered start-up with offices in Dublin. It turns out that cash-savvy young workers have no time for bank fees and are less forgiving of banks than older generations, and are flocking to these challenger banks.
Revolut, which was founded in 2015 by Nikolay Storonsky and Vlad Yatsenko, plans to become a fully fledged bank and has applied for a European banking licence. Using Revolut, a debit card account can be created in seconds, enabling users to instantly send free money transfers in 26 currencies to banks around the globe, spend fee-free in 120 currencies with the contactless Revolut card and exchange currencies at interbank rates in the app. It also offers peer-to-peer payments and has recently revealed plans to allow customers to set up and pay online with disposable virtual cards.
Revolut is the poster child for a vast array of fintech start-ups that are emerging from Europe to tackle areas that traditional banks have failed to modernise.
Examples include: Zurich’s Advanon, an online platform for invoice financing for SMEs; Dublin’s CurrencyFair, which allows individuals and businesses to send funds to bank accounts worldwide; Stockholm’s Klarna, which provides online payments for e-commerce sites; and London’s Monzo, a start-up bank that has amassed more than 20,000 current-account holders and more than 500,000 people using its distinctive ‘hot coral’ cards.
A sign of the momentum can also be seen in the recent acquisition by Dublin and London peer-to-peer payments player Circle of Boston-based cryptocurrency exchange Poloniex in a deal valued at $400m.
Dublin is also the home to the European headquarters of Stripe, a San Francisco-based e-commerce payments platform founded by Irish brothers Patrick and John Collison. The company has unicorn status – tech firms valued at more than $1bn – in the US and was previously valued at more than $9bn.
2018 could be a record year for European fintechs
According to a recent fintech report from CB Insights, 2017 was a record year for investing in fintechs, with more than $16bn ploughed into a coterie of payment platforms and challenger banks.
In Europe alone, fintech funding surged 120pc to $2.6bn while funding for fintechs in Asia fell for the first time in four years. Investment in early-stage US fintechs also declined, reaching a five-year low.
While North America and Asia have the largest proportion of fintech unicorns, ones to watch in Europe include TransferWise ($1.1bn valuation), Funding Circle ($1bn), Klarna ($2.5bn) and Ayden ($2.3bn).
According to CB Insights, 2018 will see European fintechs expand their global footprints – as already seen with Circle – and use instruments such as PSD2 to unbundle and rebundle traditional banking services.
On one hand, banks are likely to try to forgo partnering with fintechs in favour of fighting them in traditional domains such as payment cards. On another hand, the insights and skillsets that banks can glean from nimbler and feisty fintechs could also be valuable.
Another trend to watch will be how fintech start-ups are likely to move beyond their initial breakthrough products to launch new products and services, as can be seen with Revolut’s move into disposable cards for e-commerce payments.
Not only that, but start-ups are also creating next-generation investment platforms for new asset classes ahead of traditional banks.
But ultimately, it comes down to the nimble fintechs’ ability to offer free services and lower-cost services than traditional banks as well as easy means to transfer, and even stash away, cash.
Another aspect is usability through clever UI and UX, but also data.
Data will keep the fintech wheels turning
Anne Boden, the CEO of Starling Bank, told Siliconrepublic.com last year of the bank’s plans to launch in Ireland in early 2018.
Boden believes the key to the success of fintechs will be empowering the consumer with data.
“We are Mastercard issuers and we have direct access to payment systems, and each transaction is data,” Boden explained.
“For example, we can provide a map showing where you spend your money the most and give you better knowledge about day-to-day transactions. We capture lots and lots of information and then use artificial intelligence to analyse it. We can say how much you are spending on your shopping versus utilities. We can help you to set goals and we can actually help you to control your spending and your security.
“That information is currency and you should be able to use your data in a focused way. You could choose to share your spending data with mortgage providers and we will KYC (know your customer) using open banking to fill in forms for you. But it is your choice, not our choice.”
Boden hits on a key point: open banking.
Under PSD2, banks in Europe will need to make customer data available in a secure manner, and eventually give third parties access to their customers’ accounts. According to research from PwC, nine out of 10 European banks intend to use PSD2 to change their strategy, and the majority of European banking executives say PSD2 will impact all of their core banking operations.
Will traditional banks open up?
In a recent interview with Siliconrepublic.com, PwC Ireland partner Sinead Ovenden echoed Boden’s point about data being a differentiator that will grease the wheels of an open banking revolution.
“At the moment, the banks have more data than anybody else about all of our spending, and what PSD2 is doing is opening that floodgate,” Ovenden explained.
“It is going to provide open access for payments, but the bigger impact here is the sharing of data, so that volume of data can be shared with third-party providers. As a result, we will have a large number of fintech and innovative organisations coming up with all kinds of new services and products we haven’t seen before.
“They can start to analyse it and see trends. For example, if they have access to this live, and with some clever data analytics, they would be able to identify opportunities to sell additional products. For example, if they can see you are spending money in a certain jurisdiction, they can use that information to tell you that there are alternative ways to purchase the same products or services at a lower cost.
“The value there is the access to the data,” Ovenden said.
Yes, traditional banks will open up
You would expect traditional banks to circle the wagons in the face of feisty fintechs. However, in Ireland, banks are surprisingly open-minded about open banking.
Speaking with Siliconrepublic.com last year, Bank of Ireland’s head of group operations and payments, Vincent Brennan, who is also deputy chair of the Euro Banking Association, said that the banks are watching open banking very closely.
Brennan said that among innovation leaders at banks around the world, the potential of open banking – where banks collaborate with each other and with new fintech players via APIs and blockchain – is significant.
“It brings challenges that are important; how banks can share their data in a standardised and secure way, how customers can choose us to use financial data security, and how banks and fintechs can integrate banking into contextualised propositions.
“What open banking does is enable fintech start-ups to integrate transaction banking into these propositions that they are developing. Some of these are financial services-oriented; some are all about mobile commerce. But, for me, it is a movement that bridges the two worlds of traditional banking and fintech.”
In conclusion, it is hard to believe that 10 years ago, the global financial world had gone into meltdown with the onset of the credit crunch and the crash of Lehman Brothers.
Enabled and emboldened by the rise of smartphones, apps, KYC and analytics, nimble young players are stepping in and using UX design and cheaper products to relieve banks of former, less-profitable branch duties.
The key to all of this? The most valuable currency? Your data.
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