Earlier this year, Enterprise Ireland held an Appetite for Disruption event, at which key players discussed the future of the fintech sector. Pete Townsend of Norio Ventures chaired a discussion that offered diverse perspectives on the major themes driving change in the world of payments and beyond.
Read the partially edited transcript:
Pete: My name is Pete Townsend. I am the founder of Norio Ventures. My aim is to increase the odds of start-up success. I’m also co-host of the Money Never Sleeps podcast, which looks inside the minds of entrepreneurs to figure out what makes them do what they do.
Today, we have two teams: Team Europe to my right, and Team Rest of World to my left. And we’ve got three topical issues:
- East versus west as fintech superpowers
- Are emerging challengers ‘David’ taking on the banks as ‘Goliath’? Can the challenger bank model stand the test of time?
- Will banks continue to be necessary? Is the future cardless?
We’ve got people here who can take a strong position on each side of those fences. First off, to introduce Team Europe. We’ve got Jack Finucane Clarke, Enterprise Ireland UK market advisor for financial services, software and fintech; Sean Faughnan CEO, Salmon; and Philip Konopik, Ireland Country Manager for Visa.
Jack: I work for Enterprise Ireland based in the London office. Primarily, my job is to help companies export into the UK market and scale up in that market. We work with about 150 companies in the financial services portfolio many of whom are represented here today.
Sean: I’m a former investment banker specialising in technology, and we’re building a new digital platform to support ecosystem banking. Salmon is a codename rather than a brand name but I’m getting to like it maybe because I’m from Galway.
Philip: I look after the Irish market for Visa, growing card payments here but increasingly driving innovation and digitalisation, essentially leveraging the card rails as well. So, working with all the big banks, working with fintechs and with the merchants as well.
Pete: Great, thanks for that. So, Team Rest of World, we will start with Mo.
Mo: I’m Mo Harvey, financial services and fintech lead for Asia Pacific with Enterprise Ireland. I’m based in their Hong Kong office doing a very similar job to Jack. I work on a regional level, as well in terms of helping any of our Irish fintech companies scale in the region.
Tom: I’m Tom Layman, CEO of a boutique consulting firm in electronic payments located in Silicon Valley, San Mateo California. My company Global Vision Group has been in business now for 17 years. We do a lot of work around the world with different clients and help them navigate different markets.
Ollie: I’m Ollie Walsh, the co-founder and CEO of PiP iT. We are a Galway-based start-up. We help migrants to support their families at home by enabling them to pay bills with cash from the countries they live in. We basically partner with banks and utility companies in developing nations.
Pete: So, here’s the format we’re going to follow: each player will get two minutes to make their case for their position. There’ll be a one-minute response that the other side can take. What we would like to do is that after each one of these duels, we’re going to try to get the winner based upon how much you guys can raise the roof with your applause.
We’re going to start off with East versus West. Who is the fintech superpower?
Mo: This should not be a debate. The European dream is dead. And with the US in the stage that it is currently in, it is a no-brainer for us that Asia and in particular, the Asia Pacific region is the future of fintech. The World Bank Group estimates that about two billion or 42% of the global adult population does not have access to basic financial services. They’re not in Europe. They’re not in the States. And Asia also has the highest percentage of the unbanked population of the world: 21% in China, 47% in India, and 30-something percent in Indonesia.
In 2018, six out of the 10 top fintech geographic regions in the world as ranked by EY were in Asia, eight were in the rest of the world, two were in Europe.
And while in the West major fintech hubs such as New York and Silicon Valley have been innovating through incremental changes, what Asia has done has leapfrogged. You have gone from pure cash-based societies, skipped credit cards and gone straight to digital wallets. You have financial inclusion, micro financing – all of these plays are opportunities for fintech.
So right now, we’re on a global average of a 33% fintech adoption rate. You have China, which is sitting at 69%, India at 52%. Moving on to investment unicorns, if you look at the fintech unicorns globally, 14 come from the USA, $31 billion valuation, $5.7 billion raised. China only has eight unicorns but $96.4 billion valuation, $9.4 billion raised. And the rest of the world has five unicorns $11.5 billion – short change.
Pete: Thank you, Mo. Jack over to you.
Jack: Well there are a couple of points there that I’ll come back to, but I do feel that as a representative of the West, and speaking on behalf of somewhere between 600 and 1,000 years of history of banking, I think that we have a great opportunity here to showcase what a long rich history of integrated banking systems actually can provide.
So, there are a couple of areas that I’d like to touch on and then maybe I can get back to some of Mo’s points. The European dream is certainly not dead. The West is a term I suppose that means North America, Europe and Australasia. It is not a geographical reference, by the fact that Latin America is on the same vertical line as North America, but for some reason we don’t include those guys.
The truth is that the West is a term that’s indicative of the countries that had the first industrial revolution. We’re now sitting on the cusp of what could be described really as the fourth industrial revolution where our markets are certainly more integrated and our regulatory environments are more considered.
And we have an infrastructure in the West that is certainly facilitative of fintech to make a big impact. Let me talk quickly about the regulatory environment: the regulatory environment in Europe and the US has been designed really to help competition and to protect consumers.
One of the points that Mo made is about social inclusion and I would say that life for someone using a fintech product in Hong Kong is very different for someone sitting in outer Mongolia. There’s still a long way to go in terms of social inclusion of financial markets. And while fintech is certainly a route to this, I don’t think that the East has in any way surpassed the West.
Pete: Mo, any other points?
Mo: What we are facing in Asia is agile legal systems and regulators who are always open to collaboration, while sandboxes there have mimicked and then surpassed the FCA.
Jack: One final point I’d like to make is about the adoption of the challenger bank model: it’s all well and good talking about adoption rates but in fact if you look at the level of internet connection that we have in both territories, the West is certainly at an advantageous position to that.
And in terms of things like biometric authentication for digital banking, you need quite a robust infrastructure to send those communications between platforms and users. I don’t think the East is quite there yet.
Mo: Incorrect. The mobile penetration rates in Asia is higher than anywhere else in the world.
Pete: Thank you to both Mo and Jack and their teams for supporting them on this. Just by a round of applause, who’s in support of the Team Rest of World?
Judging by the applause, I think we’re gonna call that a draw.
Moving on. David the Challenger versus Goliath the Bank.
We’re going to start with Sean for Team Europe. Will the challenger bank model stand the test of time?
Sean: Ladies and gentlemen, I have a dream. I have a dream of a banking sector that puts customers first. I have a dream of a banking sector where the technology works. I have a dream of the banking sector where bankers realise you make money by delivering real value.
We’ll probably hear that the incumbent banks are profitable, and the challenger banks are not yet. That’s true. But what you won’t hear is their margins fell by half since 2008.
Moody’s did an examination of Euro banks from 2010 to 2006. These guys – the traditionalists – they closed 18% of their branches and their cost income ratio went up by 7%. Why? Because the people who are not at the desks are now in their compliance offices, and I’m sure I’m not the only one who goes to a bank which you kind of remembered used to be there, but it’s now occupied by the Lucky Kebab shop.
And if you do actually get into the building, you’re told that they only do FX on Sundays between half ten and a quarter to eleven.
I have a dream because what they’re proposing is a nightmare. People want in their banking lives the same kind of service they get in their digital lives. People want transparency. They don’t want hidden charges. That’s what challenger banks can do.
I’ll finish on this point. Will challenger banks survive if they stay with the current model? The answer is no. The problem with challenger banks right now is they’re bank-light. For challenger banks to survive, they have to go further, they have to go deeper and if they do that, we will win by the fact that ultimately they too will have to become challengers.
Pete: So, Tom do you want to take it? Will the challenger bank battles stand the test of time?
Tom: Well not to count against my time but I was very impressed that they chose the oldest guy on the panel to basically defend the legacy banks. And more importantly I want it to be known from the very front end, I hate banks.
Seriously though I feel like the last point you made is probably the main reason why legacy banks will survive. Has anyone ever heard of AP Giannini? Sounds Italian? He was the founder of the Bank of Italy in 1904. Now you might ask where in the heck was the Bank of Italy? San Francisco!
He created a challenger bank. It is now the Bank of America. He was successful because he did exactly what the challenger banks are doing today and that is going after customers who weren’t banked, who didn’t know what they were doing.
Banking back then was all related to class. And if you weren’t of the right class you didn’t get a bank account and he changed that whole model. It got adopted and it continues to evolve today. So, the bottom line is that most of you are start-ups. How many of you got bank funding? Anybody ready to raise their hands? How many of you used your credit card to get that bank funding? That’s bank funding.
That’s why we have VCs. They are willing to take the risk. Most banks are unwilling to do that because, quite frankly, banks today typically don’t take risk. They avoid it, they manage it and that’s the one good thing – see I’m already disrupting this whole thing as you won’t know which side I’m on by the time I finish – the bottom line is I believe in coop-petition.
That’s the word that I typically now use because the fintech banks or the new banks, particularly in the US, are not regulated by any authority in the US and that’s why we have these 50 states which I agree is really Byzantine. However, the fact that they are regulated does, ultimately, despite the comment that people don’t trust banks, they still trust them because they are regulated.
So, one of the reasons that banks will survive is because they are potentially under the duress of compliance and regulation. The challenge is how to do it more efficiently and make it more responsive to their customer.
Pete: Sean – one-minute response.
Sean: I think Thomas’s speech is about the only thing disruptive about the traditional banks at this point. Are banks going to survive? Of course they are. The question is which banks?
So ever since Ryanair came into the airline market, are there still planes? Are there still airline companies? Yes. Are there the same number of them? No.
They forced huge consolidation and huge change in the business model. And of course, Ryanair itself has become huge. So, you can’t really say because some of them have survived by becoming Ryanair that somehow that’s a victory for the incumbent airlines.
It’s a victory for the Ryanair model and I think we’re going to see the same in banking. Some of the names you know now are going to survive. Some of them are not. But the names you know now – they may not be called challengers – but they’ll be acting like challengers.
Pete: Does Tom want to retort on that?
Tom: I love your analogy because how many airlines that were start-ups are no longer? They didn’t have the financial or the managerial skill but the one thing that is important is that now I can fly United at the same price that Ryanair offers but I get more service. So, competition is wonderful. It is good for everybody.
Pete: So that was it for the David versus Goliath and according to the applause, the challenger bank wins this one!
The next topic – no bank necessary. Is the future cardless? I hope it is. So how about we start with Ollie, Team Rest of the World. Is the future cardless?
Ollie: From our work with attempting to partner with local banks, we find that they’re trying to force an existing solution onto the marketplace as opposed to starting with a customer and finding out what they want.
And as Mo pointed out, 42% of the world don’t have a bank account, so you can’t give them a card. 50 million of those people live in Europe, mostly migrants, which is the people we work with. They can’t get a bank account for bureaucratic or migrant reasons and therefore they’re being fleeced by transfers.
So, what we see is that there’s the opportunity that the customer is looking for a way to make payments to be able to be financially included but they’re not getting that.
I think the move to digital banks that you see now from the traditional banks is kind of a good anecdote. You know that the Tier 1 banks here and in the UK, they’ve all got this online banking now, and the way they’re motivating people to move towards it is by making their traditional service worse as opposed to making online banking better.
And anybody who has to go into a bank now, you find it’s impossible to actually get any services, as they’re trying to force services onto people as opposed to generating a service that customers want. And this is especially relevant in developing nations.
Pete: Ollie, thank you. Philip – over to you. What’s your view – is the future cardless?
Philip: I don’t think so. Not in our lifetime. And the same way as there’s never going to be no cash, at least not in the foreseeable future, we’re always going to have cards and cards are great because they’re a bloody good form factor. They work pretty much everywhere and they’re very cheap in reality to produce and to get into people’s hands.
It’s a physical representation of something digital and that’s always going to be powerful. Now, there might be fewer cards. Absolutely. But to the point around a physical representation of something digital, card rails is effectively a reputation of a number. You can use it for authentication, you can use it for the storing of data. In reality, even if the plastic may disappear or become less prevalent over time, card rails will only increase. And with the tokenisation we’re now seeing through the Internet of Things (IoT) we’re probably going to go for a 10 X growth in the next couple of years in terms of the number of cards or tokens that represents in the ecosystem.
Your fridge, car, watch, phone, Alexa, all of these things will hold credentials and card credentials are effectively a very easy way of getting there.
So yes, cards will amalgamate or will change or evolve but in reality we’re probably going to see more card-powered solutions then there’s ever been.
Pete: Ollie, you got a minute to fight that?
Ollie: It’s good to see Visa attempting to diversify. The rails are particularly strong and I’d be more than happy to discuss them accepting PiP iT barcodes under their international card network.
Philip: We’re actually launching Visa Direct, which is push payments, so effectively bypassing the interchange kind of regulation element because you’re actually pushing payments from one card to another, and then you can get a price point which is much cheaper.
So, you can redesign the rails to do different things. What they’ve done in the past is definitely not what they’re going to be doing in the future. And so, we have to evolve because the future is moving faster and it’s looking brighter than ever.
Pete: Philip, you said that cards may go but the rails will still be there. There’s no branding on a rail is there?
Philip: Well, this is a kind of misconception of Visa and indeed I think Mastercard as well. You know, we are a B2B brand, we’re not a consumer brand. So, we’re very comfortable being in the background. It’s not our job to convince consumers or merchants of anything really, it’s the job of the business that issues the cards. I think you’ll see increasingly Visa becomes powered by a number of different propositions, solutions and services. We’re not pushing the Visa brand down on consumers. However, it is a really valuable asset. It’s one of the 11th most valuable brands in the world, more powerful than Coca-Cola and Pepsi, yet it’s not a consumer brand.
Pete: Anyone else on Ollie’s team want to help out?
Mo: Why is nobody talking about QR codes? This is something that I use on a daily basis. My cards have become redundant. My wallet is everything but it is on my phone.
Philip: So QR codes are just another form factor. We have an M-Visa proposition that’s a QR code-based proposition. It’s live in the number of African countries and uses the QR code for a vendor to be able to sell and accept payment.
So, it’s just another way of using the rails. It’s going to depend on what the market and the culture is ready for and is ready to accept and what can scale. So, we don’t have any predefined notions of what proposition is going to be successful here and it needs to be the same everywhere. It’s whatever the market and the environment can sustain and get scalable.
Pete: That leaves us at the end of our third debate. Based on the applause, the Rest of the World is the big winner!
That evens it up folks because the first one was split, the second one went to Europe and the third one went to the Rest of the World.
So, everyone is a big winner here today. On that note – thank you, Enterprise Ireland.