Financial foundations for a fintech start-up

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Starting a business is never an easy feat. But in the fast-moving and competitive world of fintech, and with worldwide economic and geopolitical conditions changing every day, start-ups in the fintech sector need to keep one step ahead. As well as making sure business plans, hiring strategies and regulatory compliance are spot on, it’s essential to have some core foundations in place first. And that includes making sure your start-up has access to the tools it needs to keep close control of its finances.

Spotlight

OakNorth

OakNorth was created with a single vision in mind to empower entrepreneurs to grow their businesses. The bank, which gained regulatory approval in early 2015, was borne out of the experiences of its founders, who encountered first-hand the challenges of financing a growth business in the UK. Most businesses can raise finance if they have property to secure their loans. However many of today’s growth businesses are not property rich – they prefer to invest in their business rather than bricks and mortar. Some businesses are in sectors that have “fallen out of favour” with the big banks while others have unusual structures and end up with a “computer says no” response from traditional banks. This means growth businesses often have to revert to more costly sources of finance or in some cases fail to find the funding they need.

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CORE BANKING

Open Banking and Trust a key issue

Article | April 15, 2021

Open Banking is all about the customer being in control of their data and funds. It gives them the freedom and flexibility to decide when and with whom to share their valuable information. However, as with all vibrant and progressive ecosystems, speed, security, and ease of use will determine open banking’s future success along with the key issue of trust. Will the end user trust people to share data with them and trust their banks to still protect their data? PSD2 Open Banking gives Payment Service Users (PSUs) the legal right to share their transactional account data with regulated third party providers (TPPs). For this to be possible, the 6,000+ Financial Institutions providing transactional payment accounts that can be accessed online have to put in place open banking APIs. These APIs give TPPs the access required to either make payments on an account holder’s behalf or view account data and funds, both of which require the account holder’s prior explicit consent. Access can only be denied if a TPP is believed to be unauthorised or fraudulent. Open banking regulation has given rise to a new group of FinTechs who are seizing the opportunity to create innovative apps and products with the customer at the core of the offering. At the end of 2019, 240 TPPs from across the EEA and UK were regulated to provide open banking services. A year later, this figure had increased to 450 (excluding the thousands of credit institutions that are also able to act in the capacity of TPPs). The near doubling of newly regulated entities demonstrates user demand for the innovative products and services that these organisations are offering – it is now down to trust and security in the ecosystem, along with ease of use, to drive volumes. Source: Konsentus The ability for TPPs, many of whom may be unknown to these Financial Institutions, to request immediate access to valuable data and funds presents many challenges and risks – all of which must be addressed without introducing potential friction in the customer journey. The main challenges are knowing if a TPP is who it claims to be and whether it is regulated to provide the services being requested at the time of the transaction request. After all, these are the key factors enabling the bank to trust the TPP and feel confident the end user can trust them. The added difficulty of knowing which markets within the EEA a TPP is authorised to operate in is an additional challenge. Financial Institutions have long been the trusted guardians of their customers’ data and funds. Although the open banking model means the customer now has ultimate control of their data, it is still primarily the Financial Institution’s responsibility to ensure nothing goes wrong and they are likely to be held liable in any disputes that arise. There is also the very real reputational risk to Financial Institution if something does go wrong. Checking a TPP’s identity, its current regulated status, and the services it is requesting to perform are essential but not easy tasks to complete in that, firstly, a Financial Institution needs to determine whether a TPP is who it claims to be. This is done by having real-time access to the 70+ Qualified Trust Service Providers (QTSPs) who can issue PSD2 eIDAS certificates. These eIDAS certificates contain the requisite information on a TPP’s identity and are used to secure communications between Financial Institutions and TPPs. They also digitally seal messages, ensuring the integrity of the concept and proof of origin. However, an eIDAS certificate can have up to a two-year validity period. During this time, changes may have been made to a TPP’s regulatory authorisation status by its Home National Competent Authority (NCA). This introduces significant risk to the Financial Institution’s decision process. eIDAS certificates also do not contain information on the countries a TPP is authorised to provide their products and services into under passporting rules. This information is held on the TPP’s Home NCA Credit Institution and Payment Service Provider (PSP) registers. Between them, the 31 NCAs maintain over 115 databases and registers. Checking them at the time of a transaction request is paramount to prevent fraudulent TPPs from slipping through the net. According to the Konsentus Q4 2020 TPP tracker, every country in the EEA had at least 75 TPPs who could provide open banking services. These may not all be Home regulated TPPs. Take, for instance, Germany, who had 35 Home Regulated TPPs in December 2020 but an additional 112 TPPs who could passport in their services. To do the requisite due diligence on all these TPPs would require having online access to all the databases and registers hosted by the NCAs regulating these TPPs. This means connecting to the 31 NCAs and interrogating over 115 separate registers in real-time, in addition to connecting with all the QTSPs who issue PSD2 eIDAS certificates. When a Financial Institution is presented with an eIDAS certificate by a TPP, if a real-time online connection can be made to all the legal sources of record, the Financial Institution can make an instant informed risk management decision on whether, or not, to give the TPP access. All this can be done behind the scenes without the end user even being aware of what is happening. As volumes look to dramatically increase over the next few years fraudulent and other sorts of attacks are bound to increase. Financial institutions are going to face increasing challenges around protecting end users’ data, ensuring access is only given to those with the appropriate authorisations and permissions. A very real risk for them is the reputational one; after all, end users may not be that good at separating a reputational issue around open banking from broader issues around their banking relationship. For Financial Institutions, maintaining trust in their brands is going to be crucial going forward, but the risks are going to increase if they have not locked down who can access end user account data and funds.

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Financial infrastructure: the FinTech way

Article | April 15, 2021

Financial infrastructure plays a critical role in a country’s economic development and stability. It determines how efficiently financial services can be provided. A high-quality infrastructure lends itself, among other benefits, to lower transactional costs and more accurate risk evaluations, improving lending and access to capital.

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Warning: PayPal will kill cash within 5 years

Article | April 15, 2021

You heard that right. It’s not “if” PayPal will replace cash — but “when”. But, where’s this coming from? Well, we already know 73% spend money via apps. So, it was time to speak with 200 PayPal and Venmo consumers to understand their shift to mobile app payments. After watching them leave these apps, we sent a survey. And, I can tell you…they think cash is a thing of the past. Here are 3 reasons why. Reason #1: It’s familiar. Branding is the foundation of familiarity. And PayPal is comin’ in hot — even if 6% of this group isn’t familiar with PayPal. Now, that’s interesting, huh? It may be that Venmo users aren’t aware PayPal owns them. Either way, it’s not stopping PayPal. Think about Bandaid and Kleenex for a sec. When was the last time you asked for a bandage or tissue? Exactly. Their brands are so strong, they’re actually nouns now. If PayPal can reach that level…cash has no chance. They’ve already got a following…Right now, 66% of the people we spoke to prefer their mobile app payment to cash or credit card. This isn’t a phase either, 8 in 10 people have used a mobile payment app for at least two years. So, it’s not a trend. Electronic payment apps are very top of mind for these users. In fact, 43% use a mobile payment app weekly. They’re in such high demand, 34% say it’s very important to have multiple payment apps – an option for every scenario. Payment at the push of a button. Speed at its finest. Reason #2: It’s instant. This isn’t business, it’s personal. You love instant gratification, so do I. And everyone loves speed when it comes to money. So, with 94% of the people we spoke to on PayPal for personal use, instant access comes in handy — 49% are here to pay back friends. Here’s what else they’re doing… Why are there so many use cases? Well, it’s simple. Yes, 72% use PayPal because it’s easy. Think of it this way. You spy a beautiful red sweater online, a must-have. You’re going to buy it. But first, you have to make a choice. You can walk to your purse… and fumble through gum, cough drops, and kid toys until you find a credit card… Or, you can just log into PayPal. It’s easier. Maybe that’s why 43% of PayPal users hand over the app at grocery stores, and 42% use it at restaurants and retailers. With more places adding app payments each day, it’s easy to see why the group we surveyed loves it. Already, 52% use it in lieu of cash or credit. Imagine what will happen when all merchants accept it… We’ll see the death of cash and credit. Here’s why. Reason #3: It’s secure. That matters. 73% of PayPal users say it’s their go-to payment app. They’re relying on the safety of the app and that’s important. Why? Well, because 15% choose to use a mobile app payment for its security. If you’ve ever lost a lot of cash or had your credit card stolen, you know how valuable that is. Peace of mind. Not only are mobile payment apps familiar, easy and instant — 37% use them because they’re secure. At this point, you may wonder, “if everything is so positive, why hasn’t PayPal already replaced cash?” Timing. Those we talked to, who don’t use PayPal — or other app payment options — as often, can’t because it’s not as widespread. Yet. Give it time and you’ll soon see buyers getting rid of credit cards and killing cash. It’s a matter of time. Now what? This is what your buyers want. 61% of PayPal and Venmo users believe mobile payment apps will soon replace cash/credit cards. Now is the time to prepare, as cash may not last another 5 years.1 Do the work now, so you’re ahead of the game. This is market research. You can actually survey the same group of people we spoke to here. Or, grab a whole new group of consumers to dive in deeper, based on the app behaviors you need to understand. Stay on top. Use consumer behavior to stay a step ahead of your competition.

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Tracking the Future of Cross-Border Payments with AI ML and Blockchain

Article | April 15, 2021

The global payments landscape is undergoing a massive reorganization. Industry researchers and analyst groups attribute this seismic change to many factors. Technological advancements and competitive forces have proved to be the biggest transformational forces in the payments industry that have combined together to meet both consumer demands and standard banking regulations.

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Spotlight

OakNorth

OakNorth was created with a single vision in mind to empower entrepreneurs to grow their businesses. The bank, which gained regulatory approval in early 2015, was borne out of the experiences of its founders, who encountered first-hand the challenges of financing a growth business in the UK. Most businesses can raise finance if they have property to secure their loans. However many of today’s growth businesses are not property rich – they prefer to invest in their business rather than bricks and mortar. Some businesses are in sectors that have “fallen out of favour” with the big banks while others have unusual structures and end up with a “computer says no” response from traditional banks. This means growth businesses often have to revert to more costly sources of finance or in some cases fail to find the funding they need.

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