Defining, Adopting and Executing on Fintech


fintech-9-5-17.pngFintech has become a convenient (and amorphous) term applied to virtually any technology or technology-enabled process that is, or might be, applied within financial services. While the technologies are complex, the vast array of the current wave of fintech boils down to three simple dynamics: (1) leveraging technology to measure or predict customer need or behavior; (2) meeting customer need through the best customer experience possible; and (3) the ability to execute more nimbly to evolve products and services and how they are delivered.

Every reasonably well-versed person in fintech knows that the ability to predict customer need or behavior is achieved through a strong data infrastructure combined with a high-quality analytics function. But what defines the quality of the customer experience? At Fundation, we believe the quality of the customer experience within financial services is determined by the convenience, simplicity, transparency, intuitiveness and security of the process by which a product or service is delivered. The challenge for many financial services companies in developing the optimal customer experience lies in the rigidity of their legacy systems. They lack the flexibility to continually innovate products and services and how they are delivered.

The distinct advantage that fintech firms like Fundation have over traditional financial services companies is the flexibility gained from building their technology infrastructures from scratch on modern technology. With in-house application development and data operations capabilities, fintechs can rapidly engineer and, more importantly, reengineer the customer experience and their business processes. The capacity to reengineer user interface (UI), user experience (UX) and back-end processes is a major factor in the ability of financial services companies to maintain a competitive edge in the digital era where customers are accustomed to engaging with the likes of Google, Amazon, Facebook and Apple in their digital lives.

Banks Remain Well Positioned to Win With Fintech
Armed with these capabilities, we, like so many fintechs, could be thumping our chests about how we are going to transform banking. But at Fundation, we see the future differently. We believe that the biggest disruption to banking is not going to come from outside of the banking industry—it’s going to come from the inside. A handful of banks (and maybe more) will reengineer their technology and data infrastructure using modern systems and processes, developed internally and augmented through highly integrated partnerships with fintechs. As a result, these banks will generate superior financial returns and take market share as customers migrate to firms that provide the experiences they expect.

In addition to enjoying a lower cost of capital advantage versus fintechs, we believe banks are well positioned for three other reasons. First, banks will remain the dominant choice of customers for financial products given their brand strength and existing market share. Second, banks have far more data than the average fintech that can be used to develop predictive analytics to determine customer need or behavior. Third, and perhaps most important, banks have what we at Fundation call the “trust asset:” their customers trust that they will protect their information and privacy and that they will recommend products best suited to their needs.

Be the Manufacturer or the General Contractor
Banks are in a strong position to win the fintech revolution but what remains are the complexities of how to execute. There are a few basic strategies:

  1. Do nothing
  2. Manufacture your own capabilities
  3. Operate as the general contractor, aligning your institution with third parties that can do the manufacturing
  4. Some combination of manufacturing and general contracting

For banks that are predominantly in relationship-driven lines of business rather than transactional lines of business, doing nothing is viable for now. The pressures on your business are not as severe, and a wait-and-see approach may enable you to make more informed decisions when the time is right.

For others, doing nothing is fraught with peril. Assuming that you choose one of the remaining three options, the implementation process will be hard, but what may be even harder is the change in organizational psychology necessary to execute on your decision. Resistance to change is natural.

That is why fintech initiatives should be driven top-down. Executive leadership should command these initiatives and set the vision. More important, executive leaders should explain why the institution is pursuing a fintech initiative and why it has decided to build, partner or outsource. Explaining why can reduce the natural resistance to, and fear of, change.

Manufacturing your own capabilities is hard work but has advantages. It provides maximum control over the project and limits your vendor management risk. The downside is that the skill sets required to execute are wide-ranging. That said, building in-house doesn’t mean that everything needs to be proprietary technology. Most fintech platforms are a combination of proprietary technology along with third-party customized components. Should you elect to build off of third-party software, you must ensure that the platform is highly configurable and customizable. If you don’t have significant influence over customization, you will lose the opportunity to reengineer the processes necessary to rapidly innovate and evolve.

Being the general contractor isn’t easy, either, but banks are very adept at it. You could make the argument that most banks are just an amalgamation of business lines, each of which employs a different system (mostly third-party) and are already operating as general contractors. The business line leaders we have come to know have significant experience managing critical third-party vendors and therefore have the skill set and knowledge to manage even the most innovative financial technology partners. What’s more, they often know what they would want their operating platforms to do, as opposed to what they are built to do today.

Should your institution decide to outsource services to a fintech firm, it is paramount to align interests. Banks should embrace their fintech counterparty as a partner, not simply a vendor. Welcome the flexibility that they offer, and allow them to empower your institution to innovate and evolve.

Don’t Squander the “Trust Asset”
In a world where Amazon, Google, Facebook and Apple dominate the digital landscape, deliver ideal customer experiences, and may possess a “trust asset” of their own, the status quo is not an option, no matter how painful change can be. If your financial institution intends to compete over the long term, executing on a fintech road map is vital, moving towards infrastructures with a foundation of flexibility. Over the next decade, flexibility will allow financial services companies to compete more effectively by delivering the products, services and experiences that customers will demand. Flexibility is what will allow your institution to maintain its competitive position over the long term.

Why Are Fund Administrators Getting Fired at Alarming Rates?


administrator-8-25-17.pngPrivate fund managers are showing an increasing penchant for firing their fund administrators. A new report by the alternative investments data and research firm Preqin shows that 21 percent of fund managers changed a service provider in 2016, and of those, 36 percent changed fund administrators.

While that figure is alarming in and of itself, the trend for fund administrators is unfortunately heading in the wrong direction, as this is a 29 percent increase from 2015. All indications are that this will continue in 2017, as the report shows that 72 percent of private fund managers review their fund administrators at least annually, with 30 percent doing so every single time they bring a new fund to market.

Have fund administrators lost their way, or are they being scapegoated by their own private fund manager clients? The study lists the primary drivers given by fund managers for this level of firing as:

  • Dissatisfaction with quality of service provided (27 percent)
  • Cost (23 percent)
  • Increased portfolio complexity (23 percent)
  • To cope with regulation (23 percent)

The inability to help clients deal with more complex portfolios and cope with regulation would both contribute to a dissatisfaction with the quality of service being provided. These factors are interconnected.

As such, I would argue that the overwhelming reason that fund administrators were fired in 2016 is because of the lack of service they are providing to their private fund manager clients.

Going one level deeper, I also feel that a lot of this discontent is driven by a lack of modernization. The alternative investment industry is overwhelmingly document-based and manual in nature. The wave of technology-driven automation and efficiency that has swept through other areas of financial services has only recently started to impact alternative investments.

A peek under the hood of how a private fund is managed and administered would reveal an industry seemingly stuck in the 1990s, with manpower typically being the biggest determinant of the speed and quality with which the industry operates.

Private fund managers are tiring of the difficulty they are experiencing with their fund administrators over critical and repetitive actions. Things like getting monthly financial packages completed, formalizing agreements and sharing validated information with stakeholders is too difficult in an age that values simplicity and convenience.

The other factor that is at play here is that fund managers themselves are under increasing pressure from their investors. Many fund administrators and private fund managers alike forget that the same person that is invested in a private equity fund has banking and brokerage accounts at a bank or credit union.

These people are used to being able to see and interact with their information digitally on a laptop or a mobile device, be able to take certain actions in a self-service manner, and access their information at any time. Customers are frustrated about dealing with a fund manager who only delivers performance metrics in a document via email. To make matters worse, the volume of documents increases the more investments that investor has.

So why does it seem like fund administrators are bearing the brunt of the industry’s lack of modernization? The fund administrator is the backbone of it all. They have not only become the conduit for interactions between the investor and the fund manager, but also that for interactions between the fund manager and the fund administrator themselves.

Private fund managers are increasingly looking for their fund administrators to provide them the tools to better manage their funds and service their investors. As evidenced by the Preqin study, private fund managers are showing an easy willingness to change to a fund administrator that they feel gives them what they need.

Fund administrators that are absorbing this message are starting to take the right steps to address the quality of service that they provide to their clients. They are taking actions like creating investor relations teams that can better handle communications with clients and investors.  They are adopting technology that will automate manual processes between themselves and their clients, as well as make the needed transition to be able to present investment metrics in dynamic and interactive digital dashboards rather than in static documents.

These are the types of actions that fund administrators will need to take to ensure they are on the right side of the firing line.

Why Bank-Fintech Partnerships Are Here to Stay


partnership-8-18-17.png“Silicon Valley is coming,” Jamie Dimon, chief executive officer at J.P. Morgan Chase & Co., famously warned his bank’s shareholders two years ago. Indeed, with the rapid proliferation of fintech companies that are creating cutting-edge products, banks are asking how they can compete with these nimble startups that are reaching unbanked populations, and making routine transactions speedier and more accessible, without the same regulatory burdens shouldered by banks. While we can’t offer a silver bullet, it appears that some banks have concluded that there is considerable wisdom in the adage “if you can’t beat them, join them.”

A bank-fintech partnership is an arrangement in which a fintech company provides marketing, administration, loan servicing or other services to a bank to enable the bank to offer tech-enabled banking products. For example, a fintech company may perform loan origination services, while the bank funds and closes the loans in its own name and later sells loans it does not want to hold in portfolio to purchasers, including the fintech company. Banks have also partnered with fintech companies to provide payments services or mobile deposits. While some partnerships offer products under the fintech company’s brand, in other cases the fintech company quietly operates in the background. Some banks enter into more limited relationships with fintech companies, for example, by purchasing loans or making equity investments.

Many banks have realized advantages of bank-fintech partnerships, including access to assets and customers. Since most community banks serve discreet markets, even a relatively simple loan purchase arrangement can unlock new customer relationships and diversify geographic concentrations of credit. Further, a fintech partnership can help a bank serve its legacy customers, for instance, by enabling the bank to offer small dollar loans to commercial customers that the bank might not otherwise be able to efficiently originate on its own.

Of course, fintech companies derive significant benefits from these partnerships as well. For Fintech companies, having a bank partner eliminates barriers of market entry. With the bank as the “true lender” or money transmitter, the fintech company spares the time and expense of obtaining state licenses. Bank partners can lend uniformly on a nationwide basis and are not subject to many of the different loan term limitations that state licensed lenders are. Of course, banks must comply with their own set of lending regulations.

Though potentially beneficial, banks must be mindful of the risks that partnerships present. Banks are expected to oversee their fintech partners in a manner commensurate with the risk, as they would any service provider, following detailed regulatory guidance on oversight of third-party relationships. In June 2017, the Office of the Comptroller of the Currency (OCC) issued a bulletin communicating enhanced expectations for oversight of third parties, including, specifically, fintech companies.

Banks must perform initial and ongoing due diligence on any fintech partner to ensure that it has the requisite expertise, resources and systems. The partnership agreement should hold the fintech company accountable for noncompliance, and enable the bank to terminate the relationship without penalty in the case of any legal violation. The parties should agree to strict information security and confidentiality standards. Banks should reserve the right to conduct audits and access records necessary to maintain oversight. Adequate oversight is essential because liability for violations or errors made by the fintech company may ultimately rest with the bank.

Banks seeking to partner with lending platforms must also structure the relationship to address true lender concerns and consider how they will sell loans or receivables on the secondary market, including to the fintech company. Unless an arrangement is properly structured, a court or a regulator may conclude that the bank was not the true lender and that the interest exceeds applicable usury limits. Similarly, as a result of a ruling by the U.S. Court of Appeals for the Second Circuit in Madden v. Midland Funding, if interest on a bank loan exceeds the rate permitted by applicable law for non-bank lenders, a non-bank purchaser may not be able to enforce the loan even if it was valid when made by the bank. Banks might address this risk by selling participation interests instead.

While competition from fintech companies may seem daunting, the proliferation of bank-Fintech partnerships suggests that banks fill a critical niche in the fintech industry. Moreover, even though some fintech companies have sought to become banks themselves and the OCC has proposed offering a special purpose bank charter to fintech companies, given the high regulatory hurdles of operating as a bank and the obstacles the OCC has encountered in advancing its proposal, it appears that bank-fintech partnerships are here to stay.

Payments Processed on the Legacy Core: Not Smart Business


payments-8-16-17.pngBanks are discovering that the stronghold they once held on payment processing, a thriving revenue-generating machine for their industry, is beginning to slip away. Corporations are finding fintech companies, a community of organizations built upon entrepreneurial business models, disruptive technologies and agile methodologies, can serve their payment needs better. Unlike organizations in any other industry, financial service organizations are enduring exploding information technology costs at a time when major leaps in technology seem to occur daily. This increasing pressure on banks comes at a time when client expectations and behaviors continually shift to the latest modernized convenient options with no expected cost to them, all while regulators pile on new rules. Banking organizations are under considerable stress, and lack the strategic bandwidth to modernize their core payments infrastructure.

Banking’s legacy infrastructure is built on check-dependent data structures that achieve scale by volume. They are managed by outdated operating models and designed on the physical movement of payments. However, payment volume is no longer the basis for achieving economies of scale. Fintechs build smart technologies deployed in nimble fashion to right size applications, architected to streamline information capture and transform simple data into actionable intelligence.

The legacy core platform has seen its share of changes in technology, products and regulations. Generations of bankers have tried to reinvent their legacy core platforms for decades. Yet the systems survived each generation, unrecognizable from their original state and containing endless numbers of integrations pinned to it. Like a massive spider with hundreds of legs, the core has spun a web so complex that even the brightest banking IT professionals have been tangled up by its beautiful complexity. As the payments industry evolved, it began to do so in singular fashion, feature by feature, product by product. What remains is a core littered with integrations that at the time were modern, but today just difficult to support and expensive to manage.

Increases in regional, national and sector-specific regulatory scrutiny and oversight create major obstacles due to the lack of available insight of legacy core technology. Much of the allocated working capital at financial institutions is dedicated to compliance-related initiatives rather than put to use on modernizing or transforming payment-related infrastructures and platforms. The legacy payment silos of the past provide little to no data insight capabilities resulting in constant reactive work efforts to acclimate products to the fluid nature of consumer and corporate payment behaviors.

Many banks are on defense in the payments arena, late to market, missing premium-pricing periods, and struggling to gain market share. The community of companies in the financial technology space has been quick to step in, developing new products in old arenas, introducing easier to manage data exchange protocols and adding robust business intelligence; stripping some of the market from traditional bank participants. The arduous task of replacing or repairing the core payment platform is beyond reach for most banks. Many banks are looking to the fintech community, once thought of as augmented service providers, to become strategic partners charged with overhauling and replacing the legacy core. This is not a retreat from payment processing but rather the recognition that financial technology companies are better positioned to respond quickly to change. Even better for the banking system, fintechs are no longer at odds with banks and today’s fintechs are collaborating at every opportunity with banks.

Bankers can no longer turn their heads and wish the problem away. The core platform is holding the organization back. Replacing or repairing it are no longer viable options in today’s dynamic payments industry. Replacing the core with an elusive payments hub is not only impractical but also nearly impossible, unless the bank has a lot of money to spend and access to a lot of talent. However, all is not lost. The answer is an overhaul of your payments strategy. That strategy should be realistic in that payment processing has become an ancillary service for most banks and the bank would be better positioned focusing on its core competencies. As payment behaviors continue to shift, those that look to strategically source their payment services may fare the best. Demands from regulators, costly compliance operations and stricter evolving information security protocols are only going to continue and ultimately render the payment infrastructure obsolete. Not processing payments on your core platform is smart business.

Blockchain Technology Could Disrupt Everything. Are You Ready?


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Large banks are making the news with big bets on blockchain, but regional banks should also be looking at opportunities to leverage blockchain. The financial services industry has moved beyond the proof of concept stage and is now beginning to embrace the transformational potential of blockchain-based digital ID, digital banking, smart identity, smart contracts, trade finance, voting, reinsurance, KYC, onboarding, cross-border payments, loyalty and rewards, and real estate management. Just for starters.

Today, questions about blockchain are both strategic—should I do it or wait?—and practical—if I go in, where do I start?

Smaller banks will have to be smart and focused about time and resource investments. Forming groups—or consortia—can help create the aggregation of abilities and shared risk to take advantage of blockchain, either to do things differently or to do different things.

Three Pieces of Advice

Make choices early. Make decisions about what you want to achieve with blockchain before you put money on the table. Start from a business point of view, and with a business issue you want to solve. You can’t do everything, so make choices early and pick goals that are specific to your business and your bank: grow, create new ways to generate revenue, or cut costs with a cheaper or faster platform.

Start from a place of strength. Choose a specific use case close to your core competitive advantages, something you’re confident could help secure your current market position or open opportunities that you have the resources to pursue successfully.

Don’t go at it on your own. Like the internet, the value of blockchain derives from group participation. Establish a minimal viable ecosystem (MVE) to start. For example, if you want to use blockchain to address syndicated lending, first identify all the abilities required to bring it to market. Identify who needs to be part of that system to make it successful and form a consortium to bring them all together. Start small—that’s what MVE is all about—to validate that it works so you can extract value, then create and run a pilot, and finally expand to include others.

Three Areas of Focus

Get smart. Dedicate a team to study blockchain and develop a proof of concept. This should include a business strategist, a developer who knows blockchain or programing languages like Java, Bison and C#, and a technical architect who can connect dots between technology and the business. Build something beyond a pilot and learn from the effort so you can recognize limitations and identify the best potential opportunities for your bank.

Improve what you’re doing. Pick a specific use case that solves a problem in your organization. Take into account the platform you’re using today, a consortium you’re part of, or how you’re delivering services—and then consider how blockchain can help you be more cost effective or deliver better value in that one area to improve what you’re already doing.

Innovate. Once you’ve identified ways to cut costs or improve on services you already deliver, consider adopting services you don’t deliver today. Blockchain can help you identify new opportunities to help you keep a leadership position or expand a position of strength. If you’re a leader in large loans for farmers, consider the two-part question: How can blockchain make farm loans better, faster or cheaper–and how can it help open new opportunities for an agriculture bank?

The bottom line for bankers: To get value out of blockchain, do it with others. A good first step is to join or create a consortium that supports your goals. Hundreds are already established, for specific use cases, for creating technology techniques and standards, and for redesigning business processes. You can also buy or invest in a startup to bring resources and ideas to a use case you have a strong position for. Either way, focus on one specific goal—the narrower it is, the more likely that people will be passionate and specialized—and able to build an ecosystem that can help everyone improve their business position with blockchain.

Why Your Bank Should Be Watching Amazon


amazon-7-7-17.pngCould Amazon be a threat to banks? The online retailer announced in June that its Amazon Lending program, a small-business loan service that the company began offering in 2011, had surpassed $3 billion in loans globally, to more than 20,000 small businesses. One-third of those loans—$1 billion—were created in the past year, making it larger than most small banks.

Competition from nonbanks in small business lending isn’t new. But while lending startups in the past have often excelled in technology, they struggled to gain customers, and funding was more expensive than for traditional banks. In contrast, banks have had the expertise and relationships, and can fund loans more cheaply.

Amazon’s loan growth may represent a new phase in loan disruption, according to Karen Mills, a senior fellow at Harvard Business School and former head of the U.S. Small Business Administration.

“Having a pipeline into a set of small business owners who are doing business with the platform, knowing a lot of data about their business, could very well be the equivalent of a customer pipeline that’s unparalleled except at some of the most important traditional banks,” Mills says.

Amazon isn’t putting banks out of business, at least not in the foreseeable future. While 20,000 small businesses and $3 billion in loans is nothing to sneeze at, the program is invitation-only and limited to Amazon sellers, with the company leveraging its data on its client businesses to make credit decisions.

“Amazon looks at everything as basically a use case,” says Steve Williams, a partner at Cornerstone Advisors, based in Scottsdale, Arizona. “Is it something that we can do that the customer would want, can we technically deliver it, and can we make a business out of it?”

Banks should prepare for a reality, led by companies such as Amazon, where customers expect rapid credit decisions and an easy loan process. An employee describes the lending process as “three fields and three clicks” in a video published by Amazon in 2014.

“You can’t waste your customer’s time, and Amazon is relentless in trying to make things easier for its partners and customers,” says Dan O’Malley, the chief executive officer at Boston-based Numerated Growth Technologies, which spun off from Eastern Bank’s lab unit in May. That unit developed an express business loan program for the bank, and banks can now license the lending platform through Numerated.

Mills recommends that banks examine whether they want to grow their small business lending portfolio and if so, examine if they can provide the platform in-house or need to use an outside company.

Banks have been increasingly partnering with fintech firms, but Amazon’s suitability as a partner is debatable: O’Malley says Amazon is notoriously difficult to work with. But Amazon seems open to relationships of convenience. JPMorgan Chase & Co. offers an Amazon Prime Rewards Visa credit card, which gives 5 percent cash back to Amazon Prime members on their Amazon.com purchases. BBVA Compass has been testing the Amazon Locker program in its Austin, Texas, branches, so Amazon customers can safely and conveniently pick up their orders. Presumably, this would drive more traffic to BBVA’s branches.

And there’s Alexa, Amazon’s voice-operated digital assistant, which is used in Internet-enabled speakers such as the Echo. So far, Capital One Financial Corp. and American Express are among the few financial institutions whose customers can use Alexa for tasks like making a credit card payment or getting details on spending.

Amazon sees promise in its voice-enabled devices. “We’re doubling down on that investment,” Chief Financial Officer Brian Olsavsky said in Amazon’s first quarter 2017 earnings call. With the Echo, Dot and Tap products, Amazon has about 70 percent of the smart speaker market cornered, according to TechCrunch.

“Voice commerce and having to deal with voice as a channel is an important thing that [banks] are going to have to figure out,” says James Wester, the research director responsible for the global payments practice at IDC Financial Insights.

Amazon likely doesn’t have its sights set on becoming a bank—at least not for now, says Wester. But the company’s customer-first approach to improving processes is setting the tone for commerce, and if Amazon thinks it can make life easier for its customers and make money doing it, it won’t shy away from competing with the banking industry.

The possibilities are endless. Amazon unveiled its Amazon Vehicles webpage as a research tool for consumers in 2016, and the retailer is gearing up to sell cars online in Europe, according to Reuters. “There’s no reason that people won’t say, ‘I’m going to buy my car through Amazon and finance it,’” says Cornerstone’s Williams. Auto loans may very well be the next financial product on Amazon’s radar, and then, what’s next?

Banks Will Play a Critical Role in Digital Identity Adoption


digital-identity-6-26-17.pngWhat could be more important than your identity?

The recognition and authentication of an individual’s identity, together with associated rights, is becoming a priority for governments around the world.

From a world development perspective, identification—whether through civil registries or other national identification systems—means inclusion and access to essential services, such as health care, education, electoral rights, financial services, social safety net programs, as well as effective and efficient administration of public services, transparent policy decisions and improved governance.

It’s equally important for the business world. Banks and businesses across verticals are facing harsh competition from technology companies that build seamless online experiences around one’s digital identity. Ever-increasing volumes of digital transactions and the complexity of the payments ecosystem, including watches that allow consumers to pay for purchase, force financial institutions to understand the role of a digital identity in security and growth opportunities. Five key trends, according to the World Economic Forum, are increasing the need for efficient and effective identity systems:

  • Increasing transaction volumes: The number of identity-dependent transactions is growing through increased use of the digital channel and increasing connectivity between entities.
  • Increasing transaction complexity: Transactions increasingly involve very disparate entities without previously established relationships (e.g., customers and businesses transacting cross?border).
  • Rising customer expectations: Customers expect seamless, omnichannel service delivery and will migrate to services that offer the best customer experience.
  • More stringent regulatory requirements: Regulators are demanding increased transparency around transactions, meaning that financial institutions require greater granularity and accuracy in the identity information that they capture and are increasingly being held liable for inaccurate or missing identity information.
  • Increasing speed of financial and reputational damage: Bad actors in financial systems are increasingly sophisticated in the technology and tools that they use to conduct illicit activity.

Meanwhile, solutions like PayPal, Venmo, Stripe, Square Cash, and other leading examples set the bar for financial institutions of any size so high, that consumers’ expectations alone can bury a traditional institution that is not able to catch up. One of the reasons those solutions have been able to gain ground is the ease of signup and use. They are tied to strong digital identity verification and authentication rails, enabling them to offer smooth and secure mobile payments and online shopping experiences.

Banks, nonetheless, play a role as major gatekeepers for third-party solutions as identity is currently a critical pain point for innovation in the financial services industry. The lack of digital identity limits the development and delivery of efficient and secure, digital-based fintech offerings.

Many fintech startups are trying to deliver pure digital offerings, but the process of identifying users consistently forces them to use traditional rails established by institutional sector. These fintech innovators now see the development of a new generation of digital identity systems as being crucial to continuing innovation. Banks, being the primary verifiers of one’s identity in the financial sector, hold the keys to development of innovative, digital-based solutions. Digital identity would allow financial institutions to perform critical activities with increased accuracy over that afforded by physical identity, and to streamline and partially or fully automate many processes, according to the World Economic Forum.

The WEF suggests that physical identity systems currently put users at risk due to overexposure of information and the high risk of information loss or theft; they also put society at risk due to the potential for identity theft, allowing illicit actors to access public and private services, using easy-to-steal numbers such as credit cards and social security numbers. Digital identity would streamline the completion of these public and private transactions.

Having established massive repositories of records and deep understanding of their customers, banks have a unique opportunity to transition from reliable physical information to reliable digital identity systems. Identity enables many societal transactions, making strong identity systems critical to the function of society as a whole, according to the World Economic Forum.

Identity is also central to the broader financial services industry, enabling delivery of basic financial products and services. Reliance on physical identity protocols introduces inefficiency and error to these processes. Digital identity has great potential to improve core financial services processes and open up new opportunities.

The People Who Plan to Change Financial Services


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This article originally published inside The FinTech Issue of Bank Director digital magazine.

The world is filled with technology companies hoping to transform the financial industry. Of course, very few of them will. Not all ideas can overcome the substantial hurdles to become major commercial successes. We are not proposing here at Bank Director digital magazine to tell you who will be a success and who won’t be. But we do want to introduce you to some of the entrepreneurs who are proposing to reshape the world as we know it. These are people whose ideas are re-envisioning platforms and processes, people who are simplifying, unifying and upsetting conventional practices. These entrepreneurs really are shaking up traditional boundaries to help us all think about banking a little differently.

Christian Ruppe and Jared Kopelman

They are creating the driverless car of banking.

Using machine learning, this duo, who met as students at the College of Charleston, have built a platform for banks and credit unions to help millennials save without even thinking about it. Frustrated that fellow college students would get on a budget and then abandon it a few weeks later, 22-year-old Ruppe thought he could make the attainment of financial stability easier. Achieving financial health takes discipline and focus, like weight loss. But Ruppe reasoned that technology could help with financial health so it wasn’t so dependent on discipline and focus. If he could come up with a way to automate savings, debt payments and investments, many more people could realize the benefits of compounding over time to create wealth. “We are the self-driving car of banking,’’ Ruppe says.

There are several other automated savings applications on the market that use machine learning, such as Digit and Qapital, but most of those are sold directly to consumers, rather than through a financial institution. Monotto’s private label approach means the customer doesn’t pay for the product and never knows the platform doesn’t come from the bank. Monotto, a play on the words “money” and “auto,” can be integrated into mobile banking or online applications, sending well timed messages about refinancing the mortgage or buying a house, for example. Bear State Financial in Little Rock, Arkansas, a $2.2 billion asset bank, already has agreed to pilot the program. When customers sign up, the algorithm learns from their spending patterns and automatically pulls differing amounts from their checking accounts into their savings account using the bank’s core banking software, taking into consideration each customer’s transaction history. Individuals can set savings goals, such as buying a house or a car, and the platform will automatically save for them. For now, Monotto has received funding from friends and family, as well as an FIS-funded accelerator program. Eventually, the founders envision a platform that will also help you invest and pay down debt.

“You have someone who is solving a problem [for society] but figuring out how to solve it for the bank, as well,” says Patrick Rivenbark, the vice president of strategic partnerships at Let’s Talk Payments, a research and news site.

Zander Rafael

This student lender calculates the school’s ROI to determine eligibility for a loan.

With the rising cost of tuition, students who take out loans end up with an average of $30,000 in debt after college, leading to rising rates of delinquency. But what’s holding the schools accountable?

Alexander “Zander” Rafael, 32, and his team created Climb Credit in 2014 to service student loans based on the returns the college provides its graduates. This places Climb among a menagerie of fintech startups, like SoFi, LendEDU and CampusLogic, all trying to serve the student loan market.

Climb, which funds its loans through investors, stands out because it only works with schools that have a record of landing students jobs that “pay them enough to [cover the] cost of tuition,” says Rafael. In addition to evaluating the student, Climb also assesses the schools. If the institution passes Climb’s graduation and return on investment analysis, then its students are eligible for Climb loans and the school takes on some of the risk of the loan, receiving more money if more students pay them back.

Climb has grown by focusing on more non-traditional learning environments, like coding boot camps, where students invest $10,000 for a yearlong program to learn web development. According to Climb’s analysis, many of these students land jobs that pay up to $70,000. “The return was very strong,” says Rafael. Climb now works with 70 schools, including some two and four-year university programs.

Schools benefit because they can accept students that lack cosigners and who otherwise may have struggled to find a private loan elsewhere. Climb charges an average of 9 percent APR for the loans, but it can range from 7.59 percent to 23.41 percent.

With a $400 million lending capacity, Climb has raised a Series-A funding round of $2 million. But the idea has shown early promise, as Rafael adds that profitability is “within line of sight.”

Ashish Gadnis

Could this man be the Henry Ford of identity?

What if you could unlock trillions of dollars of wealth that could be associated with individuals around the globe? What sort of opportunities would be there for banks and businesses of all sorts? BanQu cofounder Ashish Gadnis saw first hand the problem facing billions of people worldwide who don’t have a bank account when he tried to help one woman farmer in the Democratic Republic of Congo. “The banker said, —We won’t bank her, but we’ll bank you, Mr. Gadnis,’” a native of India who grew up in poverty himself. “They wouldn’t recognize her identity,’’ he says, despite the fact that she owned a farm and had income every year from her harvest. Gadnis and cofounders Hamse Warfe and Jeff Keiser say this is a problem that confronts 2.7 billion people around the world who don’t have access to bank accounts or credit because they don’t have a verifiable identity. Gadnis, who wore a giant cross in lieu of a tie to a recent conference, promises to change all that by providing a way for people to create their own digital transaction-based identity through an open ledger system, or blockchain. Others in their network can verify transactions such as the buying and selling of a harvest, or the granting of a job. He estimates that approximately 5,000 people, some of them living in refugee camps in the Middle East, are using the technology to create a digital identity for themselves that could open up future opportunities to obtain credit and enter the global economy.

It’s not a nonprofit company, as you might think. BanQu is in the middle of a Series A venture capital funding round, and envisions banks and other financial institutions paying for the platform so they can access potential customers. It’s free to users. Like other tech entrepreneurs, he is optimistic about the potential of his platform, perhaps wildly so. “The key to ending poverty is now within our reach,’’ he says. But he has quite a few admirers, including Jimmy Lenz, the head of predictive analytics for wealth and investment management at Wells Fargo & Co. Gadnis has credibility, Lenz says, as he sold a successful tech company called Forward Hindsight to McGladrey in 2012. “When I think about Ashish, I think about Henry Ford. We think about Henry Ford for the cars. But really, his greatest achievement was the assembly line, the process.”

Nathan Richardson, Gaspard De Dreuzy and Serge Kreiker

These entrepreneurs provide anywhere, anytime trading for brokerage houses and wealth management firms.

All three of these individuals have well established backgrounds in technology, including Richardson, who was formerly head of Yahoo! Finance. Now, they are using application programming interfaces, or APIs, to try to make it easier to trade no matter the platform or where you are. Instead of logging into a brokerage firm’s website, Trade It sits on any website and lets you trade your brokerage account inside the website of a publisher or other company, such as Bloomberg. Although many banks have yet to sign up to use the app, the company is licensing the software to brokerage houses and Citi Ventures, the venture capital arm of Citigroup, invested $4 million into the company in 2015. “The thing that impressed us is taking financial services to our customers in the environment they are in, rather than expecting them to come to us,’’ says Ramneek Gupta, the managing director and co-head of global venture investing for Citi Ventures.

Publishers like the app because it doesn’t take the customer outside of their site. Brokerages like it because they can reach their customers anywhere. “If you think about 70 percent of consumers under the age of 40 who trust Google and Facebook more than their financial institution, why wouldn’t you want to put your product there?” says Richardson.

Gupta thinks this speaks to the future of financial services. “You have already seen it elsewhere,’’ he says. “You can order Uber from inside Google Maps.”

Bringing Finance to the Unbanked in India


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With about 40 percent of its entire population currently unbanked, India represents a unique challenge for banks and financial institutions looking to expand their services to the country’s consumers. Moreover, around 70 percent of the roughly 1.3 billion people in India live in rural areas, many of which lack reliable infrastructure and are difficult to access by road.

Add those factors to the Indian government’s recent demonetization program to take physical money out of circulation in favor of digital banking and payments and you have a tough environment for banks when it comes to signing up new customers.

That’s precisely what the Infrastructure Development Finance Company (IDFC) Bank, a newly formed commercial and consumer bank based in Mumbai, was faced with in 2015. IDFC has been in existence since 1997, but solely as a lending institution for infrastructure projects. As IDFC grew, the bank decided it was time to tackle the more traditional consumer and business markets for financial services.

But in order to obtain (and maintain) a license to operate in the consumer sector, the Reserve Bank of India (RBI) mandated that IDFC expand into rural areas and commit to serving the unbanked in those communities. In addition, the RBI gave IDFC a deadline of only 18 months to be operational in rural communities. Failure would result in the cancellation of IDFC’s license to operate in the consumer market.

IDFC needed a technology partner that had both a track record of success, as well as the capability, commitment and innovation to help solve the problem of reaching the unbanked. IDFC ended up partnering with Indian multinational IT company Tata Consultancy Services (TCS). Tata Consultancy works with organizations across the world to effectively integrate technology to achieve their business goals, and in 2015 was ranked the 64th most innovative company in the world by Forbes, making it the highest-ranked IT services company—as well as the top Indian company.

What Tata did for IDFC was develop a system called the TCS BaNCS core banking solution, designed to transform the bank from a vehicle for infrastructure financing into a full-service institution catering to a broad spectrum of customers, from wealthy corporate clients to the rural unbanked. Tata had already rolled out similar projects worldwide over 300 times, for some of the world’s largest banks. BaNCS is an all-encompassing enterprise banking system, supporting the premise that customers should have a seamless, convenient banking experience from any device, anywhere. This is especially critical for serving the unbanked, as smartphones are often their only access to basic financial services.

Specifically, Tata developed a “Bank-in-a-Box” scheme along with BaNCS, creating a portable device that performs many of the basic functions a physical bank can. Tata refers to the actual technology as a Micro ATM, authenticating each user with cutting edge fingerprint and biometric authentication. These Micro ATMs, along with BaNCS smartphone integration, allowed IDFC to meet the goals set forth by RBI in terms of serving the unbanked market in India.

Customers can open and activate a new account at a Micro ATM in around four minutes, using a combination of biometrics and common identifiers like a mobile number. Micro ATMs have also proven to be cost-effective, with devices costing less than $295. Within nine months of TCS BaNCS implementation, more than one million rural IDFC customers have benefitted from Micro ATMs to do things like transferring cash and paying utility bills. More than 1,000 IDFC Micro ATMs were launched within a year, also resulting in employment opportunities for rural Indians since the Micro ATMs do require an on-site customer service liaison. Today, there are around 6,500 agents, growing at a rate of about 300 daily.

Aside from offering the rural unbanked in India a customer experience head-and-shoulders above what previously existed, IDFC saw its profitability increase six times over the first year of TCS BaNCS, going from US$8.53 million to US$56.91 million in net profits. Tata also had BaNCS operational in only nine months, despite having to link together and integrate 18 disparate systems within IDFC.

Importantly, access to financial services for the underbanked in rural India were also expanded by more than 50 percent for those areas (like the Krishna district of Andhra Pradesh province) serviced by Micro ATMs. The underbanked includes the self-employed, micro-enterprises and marginal farmers, who are now more financially empowered thanks to the partnership between IDFC and Tata.

Today, IDFC’s Micro ATMs are available in 16 states across India, with the underbanked now able to access government welfare benefits and remit payments to relatives in other remote areas. The TCS BaNCS partnership shows that—with an innovative approach and the use of technology—banks can both generate substantial benefits for both themselves and for rural developing communities.

This is one of 10 case studies that focus on examples of successful innovation between banks and financial technology companies working in partnership. The participants featured in this article were finalists at the 2017 Best of FinXTech Awards.

Making Blockchain a Reality


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FinXTech Advisor, Christa Steele, has created a four part series to educate our community about how blockchain is changing the transaction of digital information, its implications and the players who are shaping this technology. Below is Part Three of this series.

Part One
Part Two
Part Four

Though blockchain is still in early stage development, one of the most notable blockchain applications took place last fall between Commonwealth Bank of Australia and Wells Fargo. An Australian cotton trader purchased a shipment of cotton from a company in Texas and had it sent to China. The blockchain trade consisted of 88 bales of cotton, totaling $35,000. The two banks shadowed the normal trade process utilizing blockchain technology to create verifiable digital records automatically replicated for all parties in a secure network eliminating the need for third-party verification, and to make automatic payments when the shipment reached certain geographic locations. This greatly reduced duplication (checking and re-checking) of payment processing, manual errors and long standing time constraints from being in multiple time zones during the course of shipment.

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Typical bank involvement in the international trade process:

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Any bank offering trade services to its customers either directly or through a correspondent bank via a letter of credit can appreciate how cumbersome, risky and redundant this process is today. The international trade ecosystem is ripe for disruption.

Other recent examples include HSBC Bank and State Street Corp. successfully testing bond transactions and UBS and Santander testing a new cross-border payments process.

Here is how cross-border payments work today and how blockchain streamlines the process:

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More than 75 banks worldwide have joined blockchain consortiums or formed partnerships with companies such as R3, ConsenSys, Ripple, Digital Asset Holdings, IBM, Microsoft and others. Many of these banks have established innovation labs for blockchain and other related technology initiatives. Some are more serious than others about implementation versus trying to boast an image of being innovative.

I encourage you to read “The Blockchain Will Do to the Financial System What the Internet Did to Media,” published by the Harvard Business Review in March 2017. The title says it all and the article is backed up by some pretty powerful intelligence and market data.

Banks and related financial services companies have already begun patenting blockchain technologies for themselves, including Goldman Sachs, Bank of America and Mastercard.

Last Fall, IBM reported that within four years, 65 percent of banks globally expect to have blockchain in commercial production or at scale. IBM interviewed 200 global banks and reported that 15 percent will be using some form of blockchain technology by end of 2019.

These banks are all focused on lending, payments and reference data (real time information) sharing of transactions across business divisions and between banks.

What are some hurdles to making blockchain work for banks?
With all of the energy and momentum behind blockchain there are also signs of fatigue and plenty of challenges. There are lots of ongoing discussions surrounding this topic. Morgan Stanley’s Global Insights report published last year sums it up best by identifying the ten key hurdles to making blockchain a reality.

What needs to happen to make this a reality?
There are four keys to long-term success:

  1. Continued education about blockchain technology to the public and private sector.
  2. Consensus among and between financial institutions and regulatory bodies.
  3. For individual institutions, a determination of whether if blockchain is a valid solution.
  4. Commercial bank clients begin to adopt the technology ahead of the banks themselves and bank regulatory bodies, forcing all to assimilate to some form of distributed ledger technology.

When do we anticipate certain milestones being achieved?
We are already seeing the achievement of important milestones. Though some may perceive these advances as baby steps, they are still a step in the right direction. While I remain optimistic, I am also realistic and know that something as complex and regulated as the U.S. financial system will take time to adopt this technology. I predict that other industry verticals will make active use of blockchain before the U.S. financial system, but only time will tell.