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The first of three episodes recorded in partnership with Banking Circle at Money20/20 USA, that took place in Las Vegas on 23rd to 26th October 2022. We recorded a series of interviews on the Banking Circle booth with a number of the speakers and attendees from the conference. Our guests for this first episode were:
Aaron explained it’s a simple tap. They’ve evolved the past couple of years from swiping to dipping to tapping. He questioned ‘Do we need another way to dip or tap?’ and they thought yes. And so, they created this wearable device in the form of a ring. And so, if you hover over a kiosk with this ring, you just paid and so people love it. Aaron said it’s super cool and it’s been well received.
A big part of the marketing campaign was influencer content who put out very sleek content that hit the mark. However what far outshined that was user-generated content. The people who first got the ring and were filming using it around the US.
Sticking with technology, Quonitc also opened a virtual bank in the metaverse in Decentraland. Aaron explained that it’s not a full banking experience because it cant be yet. The metaverse is more conceptual than real. Decentraland is one of the two most popular platforms. So they set up shop and bought two plots of land, designing an incredible building – neoclassical – that has a concrete foundation with graffiti on it. One of the ways you can interact with it is through the ATM. If you go up to the ATM and hit it, the secret bank vault opens up. You can go into the back where there’s a pool party scene and there are free NFTs. Aaron explained its a cool, interactive, and educational experience that they invited their customers to enjoy and really imagine with them.
Aaron then talked about their concept of non-monogamous banking, which he said is where people have a bunch of financial and banking apps on their phones and they wanted to lean into this. A lot of their competitors want to be front of wallet. But they’re okay being your side bank and having a non-monogamous relationship with you.
Aaron explained that their customer base is changing and that, in a word, is ‘older’. Initially if you picture a digital bank customer he explained you’d imagine a younger tech-savvy type of person. However, their average bank customer now is close to 50.
Aarons’s key takeaway from Money2020 was regulation. He thinks people are a bit spooked by it.
Jessica Turner, is EVP, Global Open Banking and API at MasterCard. Her session at Money20/20 was titled ‘Open Banking and Beyond, Building the Future of Financial Services’. She explained some of her key highlights from this session.
Jessica was excited to see the amount of people interested in open banking. Speaking about how to get started with open banking, how really is a transformational shift in the financial services world? But even bigger than that, it’s really a transformational shift in data overall. And the reason she believes that is because open banking is about permission-based data access. That really opens lots of different use cases. She focused on where are they in the phase, which she thinks is in the innovation phase, and then how do they get to scalability and stability as an industry.
At Mastercard they define open banking as a consumer or a small business commission-based data connections, data exchange for the use of third parties to be able to reference that data. There’s also open finance, which extends beyond a traditional bank account. And then people often talk about open data. So, open finance might be wealth, retirement, open data could be utility usage. And open banking is the start of how they continue to evolve into that.
Jess explained that the types of solutions or use cases are different by market. So, the US is an unregulated market today. Jess continued by saying often people talk about open banking and they think about the UK with Psd2 in Europe. But the US has very much been focused on what are the commercial needs and those have been around account opening. So, making it easy digitally to open an account end to end. About payments being able to make different types of payments, including ACH, but with enhancements so that they go through better, and they have just more viability overall. Lending is a remarkable use case. Consumers and small businesses can allow access to their data and then it gets cleaned and categorized and then lenders can look at that data and they can make different decisions, really providing more capital and lending power out to consumers and small businesses. She then added that most of open banking has been focused on the consumer to date. However, Mastercard are very focused on small businesses because having access to more lending opportunities and easier onboarding is critical. And so those have really been the use cases. She said that what you see in Europe and the UK is that it’s been very much more about data exchange, personal financial management and payment. But just getting started, there’ll be far more innovations to come. But those are the use cases that are rising to the top now.
Nelson began by explaining what is meant by alternative investments. He says its something that doesn’t quite fit into the traditional 60:40 model that is used to dominate all of your investment allocation strategies for the longest time. So not stocks, not bonds. And so, it’s going to be things like hybrid credit, which is what Percent play in. It could be collectibles, it could be anything of that sort, that has come to the forefront, especially since COVID hit, wherein people were looking to actually diversify well beyond the traditional investments because there’s just more returns. And the 60:40 model in many respects is kind of dead at this point.
Nelson explained that private credit in particular is really interesting and were Percent focus. It’s something that he would say most people have interacted with before, but they never actually realized it. So, anything from taking out a student loan with SoFi or doing buy now, pay later with Affirm. Those are all technically private credit, back when they were still private companies. And so, in that instance, it powers so much of the global economy and people just don’t recognize that actually is the case. So, it’s powering different varies to loans that happen in the industry, whether it’s consumer loans, small business loans, equipment leasing, factoring invoices, or litigation finance. It all fits under the $7 trillion private credit umbrella. And it all came to the forefront after the global financial crisis when the banks stopped doing this type of lending. So, in this instance, private credit operates almost exclusively off of Excel, phone calls and emails today, really archaic. And Percent’s job is to be able to take that and create technology, workflow tools and everything that this marketplace needs to be able to transact and do it in a much more efficient manner. And they’ve done that over the course of the last three and a half years that they’ve been around doing these types of deals.
They have gone through a Series A funding which has been an exciting time. As a result of this, they are well positioned to take advantage of what’s going on next in the market over the next few years. Alternative investment is massive but in their space which is already massive for private credit is $7 trillion. The type of businesses this would be attractive to are borrowers who need debt capital, and investors who want to earn a return by investing in these debt products and underwriters. They’re responsible for sitting in between the borrowers and the investors to be able to create these products. And so all three sides are clients of theirs using their technology to get more efficient and do deals faster and better than they could before and more profitably. But in this instance, the ones that people would most readily recognize would be the borrowers who need that capital. The SoFis and Afirms of five or six years ago before they turned public, and the investors who can invest directly on Percent’s platform and earn a return right now, when the stock market isn’t really doing all that well, they’re still averaging this year. To date they’ve paid out about 8 to 9% in returns to investors. So well above the S&P, which is down 16%, give or take.
Nelson explains that private credit is one of the most recession-resilient asset classes. And you follow the smart money. Blackstone, Apollo, Aries, KKR, they’ve all been putting money into private credit because they recognize that that is going to be what survives and thrives during a recession because it’s backed by assets. Transactions still need to happen. There is no liquidity freeze in that instance. At the right price, there will be a price taker, and someone will be willing to bite on it. So, he likes their chances and what private credit can do. And he thinks investors are recognizing that there’s a lot of potentials now more than ever. And a lot of asset classes had their heyday prior to this recession. It is private credits time to shine.
Julian Alcazar, is a senior payment specialist at the Federal Reserve Bank of Kansas City, and Nikita Aggarwal, a postdoctoral fellow at the UCLA School of Law. Julian moderated a session that Nikita was a part of alongside Katherine Adkins of Affirm, on the topic of ‘A new hope on credit, buy now pay maybe’.
Julian said they got a really good insight into how Affirm thinks of their role in the buy now pay later space. How they approach their product and service with each consumer and how they really then leaned into regulation. And so, everything they do comes from that lens. They want responsible innovators in the ecosystem.
Nikita explained that access to lower-cost credits has advantages in that enables consumers who otherwise were not able to fill a financial shortfall. To do so at a lower cost is smooth consumption. So, there are obvious economic and social benefits to credit that is genuinely more affordable. And it’s true that many buy now pay later credit products are cheaper than higher-cost alternatives, like credit cards in many cases, payday lending, or other forms of credit. The concern is when that promise doesn’t really play out. And they’ve seen in other markets that, for example, consumers can take on too much debt, and credit can become unaffordable. And it might be that it was unaffordable at the outset or that it becomes unaffordable due to some income shock that was not necessarily foreseeable. And so, when that happens, the people who are most vulnerable are those with the thinnest safety net, those with the least to fall back on. And so lower income families, there’s just a concern that people may be getting into too much debt. The concern is particularly acute because of the nature of many of these buy now pay later products, the way they’re structured and the way they’re designed. They’re structured to have no upfront interest. And they’re designed in very fancy, savvy digital apps, which makes it very easy to take out a loan and buy something without really paying the full price upfront. What decades of behavioural psychology has taught us, is that design can be manipulative, manipulation by design, as it’s called. And so, the concern would be that consumers who are not necessarily prone to more deliberate thinking and who are less likely to think more deliberately and might be more easily tricked into buying something with credit, even though they can’t afford it, are the ones who stand to be harmed the most.
Julian explained how the role of algorithm commerce in buy now pay later transactions is a behavioural part to shopping. The algorithm itself can start nudging consumers into irresponsible spending. And instead of managing their debt more effectively, they start spiralling out. These nudges that used to be for good consumer behaviour are now nudged toward irresponsible spending. Overextending yourself, buying more than you need, or the sense of stacking debt as well. That’s why this is so important.
Nikita published a paper recently that explores the growth of Buy Now, Pay Later. But specifically on social media, she explained how concerned are we about this trend. She found it’s not so much the growth on social media, but what social media platforms can tell us about buy now, pay later. So, in the sense that, buy now, pay later is social media. They were looking at social media content to understand consumers’ experiences with buy now pay later. They focused on one platform, TikTok and one buy now pay later lender, Klarna. So, it’s not representative of the whole industry. And it was a small sample that they looked at, but she thinks it was at least enough for them to think that not everything is rosy in this market. There were definitely consumers who are complaining about basically being unable to afford their Klarna loans and also others who are complaining or at least on TikTok, voicing concerns that they didn’t realise that this is going to catch up on them or that they’ve now got too many loans and they’re getting all these notifications. There were also complaints because of the nature of the structure of the arrangement, where it’s a tripartite arrangement between the merchant, lender and the consumer, there are a bunch of issues around what happens when you return a product. You don’t get the refund until the buy now pay later lender has been refunded by the merchants. It basically puts the consumer in a holding pattern that can take a long time. So there were many complaints about that. Consumers also describing some strategic behaviour, how they’re, taking a prepaid card, which you can use, only filling it with enough of the first instalment, and then that’s it. And so that’s also worrying for Nikita.
Nikita added that Tiktok is always being mentioned as it’s the main platform for creative expression, cultural expression, and for that demographic, Genz particularly. Julian added TikTok has now become become that new public square. What’s odd to him is that it used to be, he explains: “you go to your parents for financial advice, like, ‘What should I do here?’ And then it used to be that I’m going to Google, ‘How should I get a credit card?’ But now it’s become I’m going to look it up on my TikTok app. I’m going to look it up on YouTube and get some influencer’s perspectives on what I should do for my financial life instead of going to pillars of authority.”
They recently published some research around data aggregation that play this connective tissue as it relates to open banking and data aggregators allow fintech companies to connect with established financial institutions, which is excellent because it allows consumers a broader set of tools at their fingertips. However, there are dangers as it relates to data aggregation because there is still a practice of screen scraping, which is a very unsecure way of gathering consumer data. And it also bogs down a bank’s system because the bank isn’t able to discern the difference between, this is a consumer logging end to their account, or this is a fintech app logging into their account. So that screen scraping is probably the most concerning to them. If they start shifting to a more structured API model where there is separate missions, rules of the road, of what information you can access and for periods of time, that’s better. And that’s what certain data aggregators and then industry-led efforts like FDX are starting to make happen for the industry and push it to this more equitable playing field.
For key takeaways – Nikita was excited to see how many people are innovating in finance. Julian saw an overarching theme that where people seem to be battling with how do they identify the consumer, what is identity, and how do they fight fraud? And so those two things seem in equilibrium because you should be able to fight fraud if you know who the consumer is. But fraudsters are also very intelligent, so they’re able to come up with new ways of fraud.
Her session was on exploring the use of alternative payment methods. She gave an overview of the talk.
They spoke about why alternative payments are so important and what’s the need for them. She talked about while consumers are driving the increase in alternative payment methods, it’s really businesses and earners who are driving the increase in accelerated money movement and why that’s so important for cash flow management.
Anusha doesn’t think alternative payments are not optional anymore. Hence the title of her session. So, everything from bank transfers, pay with your bank, buy now, pay later in digital, mobile wallets, E invoices, QR codes, they’re all various ways of paying different from traditional card payment methods. Square offers a variety of both traditional payment methods, but also increasingly alternative payment methods. Thinking about after-pay, cash app pay. And from an international perspective, they feel like APMs are even more popular because if there are forms of payment that are not card or not cash, those are winning with consumers even more. So, Anusha looks at Paytm in India. It’s just taken off, QR codes and E-money in Japan, have taken off. Square operate in Japan, and they want to make sure that buyers do not have to think about what they’re paying with and for the sellers to never miss a sale, they offer a variety of alternative payment methods. ID, QP, and Paypay as QR codes. So alternative payment methods are not optional anymore. They’re here to stay and businesses would do well to pay attention to this rise and offer more in alternate payment methods.
Anusha thinks that growth will absolutely impact small businesses. Over the past 10 years or so consumers have shifted away from swiping cards to payment methods that are more convenient. They’re more contactless. They’re more take money out of my bank account. Anusha explains with QR codes, there’s a study by 2025, roughly 29% of global phone users for context, that is 2.2 billion people, will be using QR codes as a mode of payment. So, businesses would do really well to pay attention to this rise in alternative payment methods for two reasons. One, so that they can offer flexibility, and two so that they can be relevant for all types of consumers.
When it comes to small businesses, Anusha said that small payments are the foundation of their ecosystem. They are the heart of commerce. They want to make sure that sellers never miss a sale. So, they want to make sure that they can offer them compelling services, and compelling payment methods so that they never have to worry about missing a sale. And they don’t have to worry about telling their buyers. They offer a variety of cash flow management techniques, everything from moving their money their way to instant transfers. They have a home for all their business finances with Square banking, with Square checking. They have a Square debit card. So, it’s all about making sure that they can access their funds instantly. They never have to miss a sale because they can offer a variety of alternative payment methods and ultimately, they can meet their consumers where they are.
Anusha said for her key takeaway from Money20/20, payments are a very integral part of so many aspects of our life. She thinks if you have a growth mindset, payment is a field that will teach you something every single day and literally every single day. And this is for all companies, if you can find points of friction or drop off where there’s some redirect where their consumers are falling off and try to embed relevant financial services as it makes sense into those payment experiences, so embedded finance is huge and here to stay, and it’s all about making sure that those friction points are removed and businesses are meeting this, and companies fintech’s are offering this both for sellers as well as for consumers. Alternative payments are not optional anymore
Sunil explained that Instnt is a customer acceptance platform, fully managed. It helps businesses sign up more good customers without friction or fraud loss. They are focusing on financial services primarily, but they can be used in health care, education, federal and state government use cases – anywhere where you need to accept a good customer and don’t want to worry about having to deal with fraud.
Sunil explained that the Instnt platform allows businesses to sign up and onboard new customers. And they’ve been helping a lot of financial institutions since they launched two years ago. Credit unions, banks, fintech’s. And typically they have helped improve signups by 150% every quarter over quarter. He added that often within financial institutions and other businesses that are selling multiple products, you’ve got to sign in and sign-up multiple times for each of these products. As an example, when you go to a bank and open up a new bank account, you have to sign up. Six weeks later, you want to get a credit card from the same bank and have to sign up again. And when you get a loan, you have to sign up again. This is because each of these different lines of business have their own risk and compliance processes for the products they sell.
Instnt decided it would be nice if they could eliminate the need to do those multiple sign ups and sign ons. Wouldn’t be great if businesses could put their products and services within one click off the customer. So that’s why they created Instnt Access. It’s an overlay technology. It’s a line of code that you can add on any website or mobile app. And it’s based on an open, interoperable standard called verifiable credentials. What it means is when someone goes through that initial sign up and their information is verified, KYC checked and fraud checked, and have been given the rubber stamp, the green stamp to enter, their system issues the user a pass called a verifiable credential. It’s an open standard ratified by the W3C last year. And this credential is cryptographically secure, and it’s signed with a key pair that’s generated for the user. That key pair exists in an embedded wallet component in any mobile app the business has. The financial institution took the step of not storing information anymore but giving control of that information in the form of a verifiable credential, which is like a pass. It has an expiration date in it and the proof that whoever receives that pass can use to verify that it’s in fact their data that they are presenting. That data has been validated and KYC checked by the issuer and verifier, which in this case is Instnt. That’s because when they issue that pass the key that was used to sign that pass, the public portion of that key is escrowed by them and a public blockchain. They use IBM’s blockchain for this called Hyperledger Open, so anyone can go to the Hyperledger blockchain, pull a key there and say, was that key used by that individual to sign this document? With that pass, you can then go to any other product or service from that business or any other business that supports verifiable credentials and instead of going through the whole signup process all over again and getting treated differently from different institutions for different products and have a consistent user interface, all you have to do is scan a QR code or click a link.
Sunil explained they do indemnification for fraud losses. They’re the only vendor in the whole world that allow you to shift loss liability for fraud from your business to them. So, you have not only the assurance that the person is who they say they are and they’re fraud-free. But if any fraud were to happen, you’re protected against the liability
Sunil said the standards have taken several years to get ratified but it was ratified last year. They’ve been working over the last year and a half with their existing customers to fine-tune it and decided to give users an actual go at it to get a feel for how this technology works by playing a little game at Money20/20. It’s like a treasure hunt game. Follow the bunny and unlock events. The idea was they registered to the app with their name and email and phone number. They get a verifiable credential pass, which then unlocks a number of different things that were exclusively going on in Money20/20. To find out more information go to www.instnt.org.
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