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Finovate Blog
Tracking fintech, banking & financial services innovations since 1994
This week, we take a look at more of the fintech entrepreneurs, analysts, and experts who will share their knowledge and insights into the fintech industry at FinovateFall next month.
Day One will feature Joe Lichtenberg, Global Head of Product and Industry Marketing for Intersystems, with his Mastermind Keynote address: How Next Generation Architectures Empower Financial Services Firms with Trusted Business Insights. Lichtenberg’s morning presentation will introduce a new architectural approach that is providing business decision makers with a consolidated, accurate, and real-time view of their business.
Personetics President of the Americas Jody Bhagat will deliver a Mastermind Keynote: How Mid-Market Banks Can Find Their Sweet Spot with Digital Plus Human Interactions in the afternoon of Day One. Bhagat will discuss how mid-market banks can evolve their relationship models to do more of what they do best: supporting customers with advanced money management capabilities and Digital Plus Human interactions.
VantageScore EVP and Chief Product Officer Rikard Bandebo will deliver a Mastermind Keynote in the afternoon of Day Two of FinovateFall. In a presentation titled Leveraging Data Analytics to Drive Financial Inclusion, Bandebo will talk about new tools and analytic strategies to discover not just newly scoreable consumers, but newly lendable consumers, as well.
Day Three of FinovateFall will feature a Mastermind Keynote during the Payments Stream. Tom Ward, Partner with Sidley Austin LLP and recent CFPB Enforcement Director, will deliver an address titled The CFPB in the Biden Administration – Enforcement and Regulatory Priorities for Fintechs in 2022 and Beyond. Ward’s presentation will explain the CFPB’s enforcement priorities as they relate to fintech and the organization’s current focus within the industry.
Co-founder and Chief Impact Officer for Symend Tiffany Kaminsky will deliver a Mastermind Keynote during the Customer Experience Stream on Day Three. Kaminsky’s presentation – Upping the Ante: Using the Science of Decision-Making for Effective Customer Engagement – will help businesses leverage behavioral science to better engage with customers and hyper-personalize customer outreach efforts.
Our Artificial Intelligence Stream on Day Three will feature a Mastermind Keynote from Kore.ai SVP of Marketing Michael Kropidlowski. In his address – Creating Extraordinary Customer and Employee Experiences for the Banking World – Kropidlowski will show how conversational AI is revolutionizing the customer experience in banking.
Visit our FinovateFall 2022 hub today and reserve your seat. Register by September 2nd and take advantage of early-bird savings!
What is venture capital doing to help promote fintech innovators who come from underrepresented groups and communities?
We caught up with Elizabeth McCluskey, Director of The Discovery Fund at CMFG Ventures, to talk about her work in supporting underrepresented entrepreneurs that are building solutions to drive financial inclusion.
We discussed her own extensive experience in financial services, working in both investment banking and wealth management before moving to venture capital. We also learned why she believes it is important to invest in female founders and founders from communities that are underserved by traditional financial institutions.
Why did you decide to transition from investment banking and wealth management to venture capital? What do you enjoy about working at a venture capital firm?
ElizabethMcCluskey: Investment banking is transactional. I enjoyed being part of transformational deals for companies but missed being there for the long-term impact. When I pivoted to wealth management, I was able to develop more longevity in client relationships, but the investments were focused on public equities with which I had minimal connection. These experiences led me to find the ideal balance in venture capital. Now I can build more intimate relationships with portfolio companies and invest in people and ideas that are meaningful and important to me. It brings joy and satisfaction to support their long-term growth and success.
Tell me more about your current role at CMFG Ventures and the Discovery Fund.
McCluskey:CMFG Ventures is the venture capital arm of CUNA Mutual Group. CMFG Ventures invests in fintechs to help financial institutions grow and provide a brighter financial future for all. The firm adds value to fintechs by leveraging its well-established network of over 6,000 financial institutions and suite of complimentary technology solutions. Since 2016, CMFG Ventures has invested in nearly 50 fintech companies and its Discovery Fund has invested in 14 additional early-stage companies led by BIPOC, LGBTQ+, and women founders.
I am the director of the Discovery Fund. The Discovery Fund was created to support underrepresented entrepreneurs who are building solutions for financial inclusion. We plan to invest $15 million over the next three years in early-stage fintech companies. Through my role, I’m able to see the full scope of venture capital investing, including but not limited to:
Sourcing deals and meeting entrepreneurs
Conducting due diligence
Negotiating the terms of the deal
Providing long-term support for entrepreneurs’ journeys by helping them scale, network, and find the resources they need to continue to succeed.
Why is it important to invest in diverse founders, especially women-led businesses? And what qualities you look for when investing in these companies?
McCluskey: Women entrepreneurs receive less than 3% of venture capital funding. This staggering number demands that we take a step back and focus on supporting diverse founders, especially women-led businesses, to improve equity in the venture capital space. This is not just the right thing to do – it’s good business. A 2018 BCG study concluded that women-founded businesses yielded two times as much revenue per dollar invested as those founded by men.
Women and diverse founders who have been historically underserved by traditional financial services are working hard to create the financial inclusion they wish they had. We are investing in entrepreneurs like them who are deeply connected to the problems they’re solving. Empowering underrepresented leaders is already creating new opportunities for liquidity management, wealth management, credit access, asset protection, and more.
Can you share more about the women-led businesses that CMFG Ventures invests in and supports? How are they helping make the financial services industry more inclusive?
McCluskey: CMFG Ventures has made investments in multiple women-led companies, such as The Beans, Climb, Caribou, and Frich to help the financial services industry become more inclusive.
The Beans simplifies the path to financial balance through evidence-based design and cutting-edge technology, so consumers stress less about money and focus on what they love.
Climb is a student lending and payments platform intended to make career education more affordable and accessible.
Caribou enables financial advisers to engage their clients in healthcare planning to support life transitions and build stronger financial futures.
Frich makes money social. It helps Gen Z develop better financial habits leveraging the power of community and benchmarking.
These female-driven fintechs are transforming the financial services space and improving the financial lives of everyday Americans.
What advice do you typically share with women founders? What about those looking to break into the VC space?
McCluskey: I would give the same advice to women founders as I do with men: always ask for feedback, especially to better understand why someone is telling them “no”. Founders who send updates over time allow me to track their progress, including growth and consistency of their business plans. In several cases, I’ve ended up investing in companies that I passed on in earlier rounds. And even if someone says “no” to doing business together, they can still be a valuable ally. Attempt to stay in touch and leverage their networks. People are often willing to share their connections and provide valuable guidance.
As for those looking to break into the VC space, I believe it is slowly becoming more inclusive and representative, yet it is still a very network-based profession. Similar to my advice for entrepreneurs, start with one person you know (or cold outreach via alumni networks, common interest groups, etc.). From there, ask every person you talk to for an introduction to at least one other person. Focus on growing your network with the goal of building genuine relationships, not necessarily getting a job right away. This is a long-term investment in your career.
We’re more than halfway through the 2022, what do you predict for the rest of the year?
McCluskey: After record levels of investments in 2021, we all knew things had to cool off. However, I believe the pace at which this has happened surprised VCs and entrepreneurs alike.
In fact, startup funding has fallen by 23% over the last 3 months, bringing us back to 2019 levels. For many, it probably feels like the sky is falling, but there is still a significant amount of money in circulation. Venture capitalists today, and by extension founders, are more focused on “real” metrics versus vanity metrics when deciding which companies to fund. The companies that will do well in the second half of the year will have measurable revenues, not just wait lists, and will be managing costs and runway to drive profitability, not endless cash burn.
Having worked in the fintech industry for four years, Kristiane Mandraki has developed a passion for emerging technology and has seen ebbs and flows of success and failure in the industry. Mandraki is currently the Director of Business Development and Marketing at Praxent, a 22-year old fintech experience design and development firm that helps financial companies succeed in their digital transformation efforts.
We recently spoke with Mandraki on some of the best practices in customer experience, digital transformation, and Web 3; as well as top trends she’s anticipating in the next year.
When it comes to customer experience, what are some of the top mistakes you’ve seen banks and fintechs make, and how can they avoid them?
Kristiane Mandraki: Banks and fintechs often make the mistake of trying to be all things for all people, which only leads to exhaustive mediocrity. Instead, it’s critical to pick a focus, your North Star. Narrowing in on a main priority or differentiator allows financial services providers to prioritize and innovate, setting the stage to truly excel at something instead of being average at everything.
Another mistake we often see banks make is implementing off-the-shelf technology without viewing the experience through the holistic lens of the customer’s journey. We see this often in account opening or loan origination experiences where the customer’s journey starts on the website and ends on the fintech product. It’s important to carefully consider the experience as part of the bank’s brand experience and ensure it’s configured in a user-friendly way. There are many opportunities to differentiate the brand by prioritizing the website and product configuration as a critical component of the digital experience which often requires UX/UI expertise.
What advice do you have for banks navigating this era that’s stuck between digital transformation and Web 3?
Mandraki: Some emerging technologies are fairly polarizing, like Bitcoin. You have the optimists and then those who see the headlines and are quick to write it off. What can’t be ignored is that blockchain technology unlocks much more than an asset class. It has created another sphere like the Internet.
The industry is currently in a transitionary period, or Web 2.5; we’re starting to evolve beyond Web 2.0 but Web 3.0 isn’t quite a mainstream reality. We’re facing a major user experience challenge, which is a huge opportunity for innovation.
There is a need to bridge the gap between banks and cryptocurrencies so institutions can offer these products in a way that’s intuitive and user-centric. No matter where bankers stand on the debate, they must educate themselves and remain open to how they might be able to leverage emerging technologies moving forward. Savvy investors are strongly considering digital assets within their wealth portfolios. In order to build trust with those clients, financial advisors in banks and credit unions must develop a strong understanding of the space to advise them responsibly.
I hope women in particular take the opportunity to help shape this new financial system to be more inclusive, especially since they weren’t in a position to do so when traditional financial systems were created.
How can banks offer digital services while maintaining human touch?
Mandraki: A primary issue is that for too long, banks have relied on experiences that are system-centric, ultimately forcing customers to jump through several hurdles to satisfy internal IT systems. This typically results in a process that is cumbersome, requiring customers to rekey information and leaving no room for human empathy.
Community financial institutions excel in customer-intimacy, as they move much of their customer interaction to the digital space, it’s critical they offer experiences that are human-centric.
This is where exercises and tools like a customer journey map, envisioning the customer journey in the context of use, provide significant value. Once the work is done to identify points of delight and frustration within the customer journey, the proper prioritization and investments can be put in place to overhaul the experience with the customer at the center.
What are the top trends you’ve seen so far this year, and what’s coming next year?
Mandraki: Going back to common mistakes we see in financial services, an exciting trend is that many banks and credit unions are starting to pay much closer attention to their ‘digital front doors’ or website experience. Strategic institutions have started to realize that a marketing department of one or two people, usually without any user experience or design background, is simply not enough of a resource to modernize and maintain their websites. Having a modern website that shares relevant information and options with intuitive navigation is just as important as the money being spent on things like modernizing loan origination systems or account opening tools.
We are also seeing many more financial services providers striving to identify a niche when it comes to investing and wealth management. There is a massive opportunity to reach and serve this group of Millennials and Gen Z that soon stand to inherit significant wealth but who have so far been hesitant to engage traditional financial advisors.
Launched in 2019, Piermont Bank aims to blend the best of modern banking and agile fintech. Piermont Bank’s peer banking approach provides customers with technology-enabled, human-delivered solutions, opting for dedicated bankers over “1-800 numbers or chatbots.”
Last month, Piermont Bank celebrated three years of innovation. The woman-founded and entrepreneur-led financial institution currently has more than $420 million in total assets, and offers an end-to-end, digital banking-as-a-service platform with more than 40 fintech clients already onboard. More than 50% of Piermont’s loans since inception have been made to low- and moderate-income communities, as well as women- and minority-owned businesses.
The genesis of building Piermont was actually really simple. A lot of entrepreneurs would tell you they had this grand vision. For me, it was actually just very two practical reasons. The first was seeing the impact and the speed of impact that fintechs were making on consumer banking … The second reason was: I’ve been in banking for 26, 27 years. (And I’ve seen) the same pain points repeatedly from both the customer (side) as well as internally as an operator … So basically I said, “Okay if I could start with a blank slate, how would I build this? How would I build a fully digital-native, totally tech-enabled bank to do commercial banking faster and more efficiently?
On the evolution of financial services in recent years
My industry, historically, doesn’t change. It doesn’t go that fast. These days, I say that if the CEO is still working off their three-year strategic plan, if it’s in their third year, the board should fire that person. I mean, are you still even relevant in terms of your products (or) the way that you’re delivering these products? So I think the biggest change is just the speed, the speed of change, the speed of innovation.
I was taught and it’s still true banking is a risk management business. So it’s a little bit counter-intuitive if you think about it, this so-called “innovation.” But you absolutely can innovate in a risk management business.
On the advancement of women into leadership roles in financial services
I find myself able to make the biggest impact in the day-to-day: hiring based truly on skill sets and meritocracy, being gender-blind, age-blind … I know that sounds weird but, as an executive, as somebody who is doing the hiring, as somebody who’s doing the promotion, if I can just say, is this person the best person for the job? That’s more than half the game. I know that doesn’t sound very inspiring or trailblazing, but it is actually the day-to-day that makes a huge difference. Empower women, give them the job opportunity, give them the opportunity to rise to the occasion. That’s how we get there.
If there were a Challenger Bank Hall of Fame, then rest assured that Anne Boden, who founded U.K.-based Starling Bank in 2014 and is the challenger bank’s CEO, would be prominently featured therein. As we learned in our conversation with Ms. Boden, her inspiration for founding the U.K.’s first digital bank was driven by both the opportunities presented by new technologies as well as a banking industry that was still significantly shell-shocked from the Great Financial Crisis of 2007 and 2008.
Headquartered in London, Starling Bank now has more than three million accounts and four different account types. Voted Britain’s “Best Current Account” five years in a row, Starling Bank maintains offices in Cardiff and Southampton, as well as London, and still has zero brick-and-mortar branches. Starling Bank secured its banking license from the Bank of England in 2016, launched its first mobile personal current account in 2017, and introduced the country’s first digital business bank account in 2018.
On the decision to launch a fully-digital challenger bank
(T)he banking sector, back in 2014, was still looking backwards. They were still looking at the financial crisis, trying to repair their balance sheets, trying to repair their financials, and they weren’t really looking forward about what they could do to improve customer experience or customer satisfaction. I went around the world, talking to big banks and talking to technology companies and asking what they were doing. I came to the decision in 2014: wouldn’t it be great to start a new bank? Wouldn’t it be great to have a new bank with all new technology, a different way of engaging with customers, being fair to customers? And here we are in 2022 and things have gone from strength to strength.
On the challenge and opportunity of digital transformation in financial services
Organizations have become far more fixated on minimizing the risk of change. “Let’s do small projects around the core. Let’s not change the core. Let’s make big decisions at the senior level. Don’t empower people.” But in order for big banks to be more successful and compete with the new startups such as Starling, they have to have new technology, but above all a culture of being prepared to change. I am trying to empower people – the CTOs, the CIOs – to knock on the door of the CEO and say: “We can be better. We can embark upon technology projects. And we can compete with the new guys.”
On the present and future of Starling Bank
In the U.K. we’re very, very successful. We’ve built a whole new technology stack. We have a new banking license, three million customers, (and) we have something like eight percent of market share in business banking. That is huge. We’ve done in three years what some banks have done in 300. But that’s because we have this remarkable technology stack which we call Engine, and we have lots of banks around the world asking us if they can use Engine. We don’t plan to get a banking license in the States, but banks in the States will be able to use our Engine technology. So we’re going to be software-as-a-service, based on Engine, so lots of businesses around the world can have a bit of the Starling magic.
The world of banking is ever-evolving, and NCR has been part of this evolution since it was founded in 1881.
To get some insight from a firm that has had a front-row seat to industry changes– and to get a glimpse of what’s next– we spoke with NCR Chief Product Officer Erica Pilon. She has spent more than 20 years in the fintech industry, having also spent time at FIS managing three unique digital banking platforms.
What products and technology are resonating with NCR’s 600+ institution clients?
Erica Pilon: Our clients are really responding to data enhancements, crypto, and self-service support. Consumers today expect all interactions to be hyper-personalized, which is impossible without real-time, reliable data. At NCR we are helping financial institutions personalize banking experiences for customers at scale through enriched data and analytics. For example, we recently announced that Allegacy Federal Credit Union has partnered with us and Google Cloud for our data warehousing and analytics solution to make data actionable, unlock predictive insights, and drive innovation and financial health.
Another service resonating with our clients is the ability to offer buy/sell/hold of bitcoin within digital banking as it drives opportunities to build relationships, increase data insights, and generate revenue. Our clients have also shown increased interest in and excitement around enhanced self-service offerings, such as the Kasisto intelligent digital assistant, which provides human-like digital customer support.
What trends are making the largest impact in fintech in the coming year?
Pilon: Community financial institutions no longer only compete with the institution down the block but also with nontraditional threats like neobanks, big techs, and fintech providers. There is a new sense of urgency for financial institutions to provide modern, convenient experiences with robust, innovative products and services to retain customer loyalty, trust, and market share.
Open banking is a massive trend that is transforming the fintech space; it’s creating an opportunity for banking as a service and giving smaller fintech players the ability to try and steal market share from traditional institutions. To compete, banks and credit unions must work with partners that will help them stay open while continuing to leverage the significant trust advantage they have with customers and members. This is another reason why personalizing the experience within digital channels is so important; it helps community financial institutions retain their differentiator and compete with emerging threats.
How is NCR preparing itself for web3?
Pilon: We recently acquired LibertyX, a leading cryptocurrency software provider, which lays the groundwork for us to deliver a complete digital currency solution to our customers. This includes the ability to buy and sell cryptocurrency, conduct cross-border remittance, and accept digital currency payments across digital and physical channels.
NCR remains committed to delivering the agile software platform and services necessary for institutions to power flexible, efficient, and modern banking experiences across all customer touchpoints. Our platform is designed to help our clients quickly innovate and deliver new offerings to keep pace with emerging preferences and trends.
Howhas the recent consumer-first narrative changed how NCR develops its banking products?
Pilon: NCR continues to prioritize consumer-first, mobile-first experiences in our technology solutions. Now, in a world with so much optionality, banks and credit unions must be able to offer a wide range of choices for how consumers can conduct their banking. This means robust self-service capabilities with strong support options like video chat, as well as sophisticated physical footprints.
The consumer-first narrative is another reason NCR is so focused on data; banking interactions today must be personalized, or customers will quickly go elsewhere. This doesn’t just mean knowing basic details like names and birthdays, it also means being able to provide meaningful advice and guidance related to things like financial health and wellness.
How has NCR evolved to serve bank clients in today’s digital-first era?
Pilon: We firmly believe that digital-first doesn’t mean digital-only, but rather digital everywhere. This is where NCR is uniquely differentiated in the market; we have the ability to offer sophisticated digital solutions for both physical and digital touchpoints, enhancing the customer experience and increasing efficiencies. For example, we can facilitate the ordering ahead of cash or coin for small businesses or starting an account opening process online and then finishing it in the branch. NCR bridges the gap between physical and digital touchpoints.
The pandemic only emphasized what NCR and our clients have known all along: the future is digital, and it’s time to adapt. NCR remains dedicated to providing the flexible, innovative, and efficient technology needed to power excellent banking experiences and strengthen credit unions and community banks’ competitive positions.
In a digital world, there’s no way around digital identity. The topic touches all corners of fintech and ecommerce, and while it can create a stumbling block, leveraging consumer identity data can also hold great opportunity.
We recently spoke with Experian’s Kathleen Peters for her thoughts on digital identity and how financial services companies can use consumer data to their advantage.
Peters started her career as an engineer at Motorola and later moved into voice and messaging encryption technology. Eventually, she began working in Experian’s global fraud and identity business and now serves as the company’s Chief Innovation Officer.
The fintech industry has always struggled with digital identity. Why is digital identity so difficult to get right?
Kathleen Peters: A consumer’s identity is personal; every interaction and transaction requires their identity. Consumers expect a seamless and frictionless experience, but also rely on organizations to protect their information. The balance is crucial and challenging.
As an industry, fintech is known for creating compelling and personalized online journeys. But that experience can suffer if the fraud-prevention routines are perceived as burdensome by consumers.
Every year, Experian conducts a survey of consumers and business leaders, asking them about sentiments, trends, and other matters around fraud and identity. Year after year, the number-one consumer concern is online security. When transacting online, people want to know that their information is safe and secure. In striking a balance with consumers to instill trust, industry players need to show some sign of security that reinforces privacy.
Putting this balance into practice, if a consumer or business is performing a large online transaction, they want to see added layers of identity verification. Conversely, if they are performing a simple online purchase, industry players should not over-index with heavy-duty identity resolution (e.g., facial recognition, passcode) on low-risk, low-dollar transactions. In short, we need the right fraud‑prevention treatment for the right transaction; it is not a one-size-fits-all exercise.
It is important to know a customer’s identity for compliance reasons, but are there business use cases for this as well?
Peters: When it comes to KYC (Know Your Customer) compliance, you want to verify that you are dealing with a real person (not a made-up entity) and ensure that you are not dealing with criminals or people on watch lists. This is a basic compliance check and mitigates the risk presented by increasingly resourceful “bad actors” who have become very sophisticated in how they find and exploit vulnerabilities.
For commercial entities, especially small businesses, you want to know that they are a real business. You want to know that the principals involved in the business (the owners, board members) are not criminals or people on watch lists, or that the company itself is not somehow engaged in things that you do not want to deal with. In this sense, KYC applies to consumers and businesses alike in terms of a compliance check. There is a different level of compliance for consumers versus businesses, but the KYC concepts remain similar.
With KYC, businesses can check the box that indicates that “I am compliant.” That does not necessarily grow a bank, fintech, or online merchant’s topline revenues. Compliance is certainly a core element of identity, but so is identifying a potentially fraudulent transaction. For example, recognizing synthetic identity scams can prevent an organization from losing hundreds, if not thousands, of dollars in fraud losses.
When the concept of personalization was introduced in fintech, there was a lot of discussion of privacy concerns and fears that consumers would perceive banks’ efforts as “creepy.” Does this still exist today?
Peters: Our annual Global Identity and Fraud Report shows that people hold banks in high regard. They possess an especially strong degree of trust from consumers. Yet, unknown fintechs that may reach consumers through a banner ad or other similar means may not yet possess that same amount of trust. Building trust with consumers is critical, especially for fintechs, and it starts with transparency and reinforcing the value exchange.
What is the best way for banks and fintechs to build trust among their consumers?
Peters: Banks and fintechs need a layered approach to identity resolution that accommodates the balance between fraud detection and the online experience to build consumer trust early in their relationship. Establishing that trust should be a top priority and involves having visible means of security, being transparent about why you are collecting certain types of data, and delivering value for that data exchange (e.g., personalized offers, speed). And that value needs to be immediate and a tangible benefit, not a down-the-road promotion or assurance.
According to our Global Identity and Fraud Report, consumers are willing to give more data if they trust the entity and feel as though they are receiving value.
Once the value exchange is established, those feelings of trust and recognition lead to increased brand loyalty, a holy grail for banks and fintechs.
Given this, what are ways banks and fintechs can leverage consumer data combined with an increase in their trust to better connect with consumers?
Peters: Building relationships with consumers comes down to recognizing them, protecting their information and offering a personalized experience. Consumers want to feel confident that their online accounts are secure, and that they don’t need to jump through hoops to access the resources they need.
It comes down to identifying and understanding consumers and their needs. The best way to do that is with a lot of data. It serves as a vast resource to look at the multitude of behaviors historically and predict the next likely behaviors and intent. Predictive modeling like this can be hard to do, especially if you do not have a lot of historical data. However, with aggregated data, scores, and solutions from a provider like Experian, it can be a very powerful way to drive engagement.
For instance, if a consumer is in-market for a new credit card, banks and fintechs may want to engage their consumers with a personalized offer or increase dollar-value transactions—both ways to build trust.
Innovation and regulation are the ying and yang of financial technology in many respects. To this end, we caught up with Justin Beals, co-founder and CEO of Strike Graph, to talk about the relationship between fintech innovation and fintech regulation, and why compliance is something that successful fintechs are taking seriously.
Founded in 2020 and headquartered in Seattle, Washington, Strike Graph specializes in helping companies secure critical security compliance certifications. These are the certifications that can both impact revenue and reduce the time to close, as well as demonstrate the maturity of an organization.
Why banks and financial services companies need a compliance partner.
The challenge (for banks) is that the standards that you’re trying to meet can be complex. It’s important to not only have technology, but (also) a provider of that technology with intelligence about how to meet the standard so that you don’t essentially spin your wheels trying to do things that don’t necessarily make you more secure and don’t necessarily impact compliance.
So when revenue is on the line – and that’s what the challenge is here – being unable to represent a security posture that meets certain standards (means) you might not get that partnership, you might not get that contract … You really need to do it efficiently and effectively and be able to maintain it for a long period of time.
On the role an effective compliance partner can play to help financial services companies
I think one of the secrets about compliance practices is that if there’s some aspect of your business that isn’t applicable to the standard, you’re actually not required to be assessed to it. And so what’s really important is to customize your security posture according to the types of risk that your business is meeting in the marketplace, and then respond to those risks. Then, (you are) able to talk to the assessor and say, “hey, look, you know we don’t necessarily have this particular risk. It’s not something we solve for and therefore it’s not something we need to be assessed for.” That way you get through the compliance process as efficiently as possible.
On Strike Graph’s approach to helping financial services companies meet compliance obligations
The secret sauce at Strike Graph is that we have a very intelligent SaaS platform that helps our customers customize that particular security posture based upon the risks that are impacting their business.
This is impacting any B2B company that’s sharing data. And that’s really how we describe our marketplace. And, of course, fintech handles some of the most precious transactions and pieces of data, and they have a long history of things like PCI DSS where compliance is really important. So they really do understand the value of having a good compliance practice.
The fintech industry talks a lot about bank-fintech and fintech-bank relationships. Everyone in this industry will proudly declare how essential these partnerships are for everyone in the value chain. However, the recent introduction of crypto and decentralized finance (DeFi) is complicating things. How can a traditional financial (TradFi*) institution like a bank align itself with a DeFi startup or get involved in crypto?
For insight, we spoke with Sila CEO and Founder Shamir Karkal. Karkal co-founded Simple, one of the first digital banks, in 2009 and sold the company to BBVA in 2017. The following year, Karkal founded Sila, a company that offers banking, digital wallet, and ACH payments APIs to help companies integrate with the U.S. banking system and blockchain quickly, securely, and in compliance.
In our conversation, Karkal highlights the intersection between TradFi and DeFi and examines ways the two can work together while still regarding necessary compliance measures.
What are some ways you are currently seeing crypto businesses and TradFi organizations interacting?
Shamir Karkal: Unquestionably, crypto is becoming part of life. It is becoming part of everyday finance. We had a massive crypto boom in 2021 and now we are experiencing a crypto bust. But public markets and fintechs have performed equally as bad – or worse – than crypto. Over the last few years, traditional finance has been waking up to the crypto space. They take it seriously now.
During mid-to-late 2020, most TradFi organizations thought of crypto as a passing fad, a new dotcom boom. Today, there is no more dismissal of it. The top levels of large banks understand that crypto is here to stay – that it is an important part of the future of finance. Clearly, how this future will look in detail is still to be seen. Some TradFi organizations have embraced crypto whole-heartedly, such as Cross River bank and Silvergate bank, but there are also others still on the fence.
Crypto has scaled dramatically in 2021, which – ironically, some might say – has made crypto businesses appreciate traditional finance a lot more. They are not fans, not by a long shot. But, for example, they understand that compliance is not optional, and that one needs to comply with the law in one’s jurisdiction. As crypto businesses matured, reality has set in partially because when you‘re big, ignoring the law is not an option. In fact, crypto businesses often have a better understanding of regulations than fintechs. Because most answers are subject to change in the world of crypto, participants need to understand and follow very closely how things evolve.
Some of the largest TradFi organizations such as JPMorgan went as far as launching their own stablecoin (JPMcoin). All are going to have similar projects. In my view, big banks have no ability to compete head-to-head with anybody in the crypto space. However, they are perfectly positioned to provide services to the winners in the crypto space– to the big exchanges, the big processors. All of those firms need all the services that traditional finance provides. Providing financial services to crypto winners is where the money is to be made. The foundation of the future of finance is still the financial services that today are supporting any other businesses.
What types of partnerships do you expect to see in the future?
Karkal: To partner is in the interest of both crypto and traditional financial institutions. Crypto businesses are using traditional finance to broaden and speed up adoption of crypto services. True, a lot of people want to get into crypto. Still, everyone who does today has money in a bank account or a debit card. Even if your business is all about crypto, you need to create the bridge to allow people to move money from here to there.
When it comes to regulation, what do banks need to look for when partnering with crypto startups?
Karkal: In technology or crypto, it is often said that you need to look for teams who move fast and break things. That is not true in banking. Banks need to look for projects that have good teams, are well funded, and where teams have an understanding of the compliance issues they will face. Because you can only develop a plan to deal with problems after they are recognized. One key question to ask is, “Do you have an opinion from an experienced lawyer?”
My advice is to look for real teams with real people that are serious about a long-term relationship. Beware! There are plenty of scams out there. Don’t support people who are only interested in making a quick buck, or the next ponzi coin (a real thing).
Crypto is also fraught with fraud. There are many, many different types of fraud: fraudulent businesses, payments fraud, ACH fraud, etc. Banks have been combatting these issues longer than crypto businesses. They stand to know more about them and can help. The key is to identify crypto businesses that built out the necessary capabilities, and that get advice from the good lawyers in the space. That’s a good litmus test.
How can banks position themselves as good partners for crypto companies?
Karkal: The key is to figure out which products and services the bank is willing to offer. That sounds basic, but a bank has to ask itself if it is willing to service a crypto company. Is it ready to be their corporate bank? To do payment processing? To be a custodian for their funds, or their customers’ funds? After figuring out what a bank is willing to do, the second step is to go do it with some startups. Some banks act as if they want to partner with crypto businesses, but then their compliance processes are so onerous, it just won’t work. They end up standing in their own way. My advice is: if you’re serious, go do it with a couple of crypto companies first before making a big marketing push. If you’re successful, word will spread through Discord or Telegram channels. And, suddenly, you’ll find other projects and companies that will be coming to you.
Here is the rap. The question is really, “Can you get to the point of opening an account?” Remember: crypto businesses do not have the profile of traditional customers. It might come as a Delaware subsidiary of a company registered in the Cayman Islands with senior people sitting all over the world. As a highly regulated bank, what is your process for this setup? You need to figure out your compliance piece to make such a setup work.
I know of crypto businesses that are public companies abroad, are serious players, and yet have trouble opening corporate bank accounts in the U.S. As a bank, you need to understand that there is one thing crypto businesses don’t have: patience. They won’t wait 12 months while a bank’s internal committee rejects their application for the 13th time because they have a subsidiary in the British Virgin Islands that’s on a black list somewhere. You as a bank need to figure out this and related processes first, before your sales people are soliciting crypto businesses.
*TradFi refers to traditional financial institutions as well as fintechs.
There have been plenty of discussions surrounding fintech valuations this year. Rumors of a bubble have plagued fintech for a few years, and high valuations combined with seemingly endless funding rounds have analysts raising their eyebrows.
We spoke with CMFG Director of Discovery Fund Elizabeth McCluskey to get her take on fintech investment, M&A activity, and industry trends.
How is this year trending so far when it comes to investing? What are the funding numbers and volume as compared to years past?
Elizabeth McCluskey: Fintech startups raised $28.8 billion in funding during Q1 2022. Despite being down 18% from the previous quarter, this marked the fourth-largest funding quarter on record. And this represents a large share of all venture capital activity; fintech startups raised 1 out of every 5 VC dollars in Q1, indicating that the sector is still immensely popular for investors. CMFG Ventures is no exception—we’re on pace for our busiest and biggest year to-date since the inception of our funds. Transactions have been strong across all stages of companies.
Our two funds serve distinct purposes but share the same goal of fostering innovation between financial institutions and fintechs. Our main fund supports Series A companies and beyond, investing in fintechs focused on lending, banking technology, financial wellness, challenger banks, and insurtech. It has supported and validated nearly 50 fintechs. In 2021, we launched the Discovery Fund to support underrepresented entrepreneurs, who are building solutions for financial inclusion. It has funded 12 early- stage companies led by BIPOC, LGBTQ+, and women founders.
Some have talked of a funding slowdown. Do you expect 2022 to finish with lower funding totals than last year? Or will it build on the momentum?
McCluskey: Fintech continues to be a space for disruption and growth, presenting the industry with many opportunities to fund new solutions. The biggest fintech IPO of 2021 was Coinbase, which today has a market cap around $16bn. That seems like a large number, but it’s less than 5% of the market cap of the largest bank in the U.S., JP Morgan. Clearly, there is valuable market share still to be gained by fintechs. By capitalizing relevant and scalable companies, VCs can give fintechs the agility they need to compete in an increasingly active space.
2022 will build on several years of momentum – regardless of whether the final funding numbers are higher or lower than 2021. There is still a lot to do to keep pace with the rapid digitization of finance. Consumers expect Amazon-like speeds of interactions and a hyper-personalized, predictive experience. And businesses want their trusted financial institutions to deliver quick, frictionless decisions and client service. Financial services technology is primed for a future of tremendous growth for years to come.
Are we currently experiencing a fintech bubble? Do you think fintechs are overvalued?
McCluskey: It’s easy to get caught up in bubble talk, and there are certainly some frothy valuations in the private market in particular. However, there are many underlying opportunities for disruption and innovation, which leads me to believe the industry isn’t experiencing a bubble. What I do think we are seeing is fintech startups maturing to the point where they are being treated more like their “established” peers, and that is a good thing. While private markets may value potential in the form of user growth or even revenue generation, the public market wants to see profits.
Fintech companies that went public in 2021 have performed quite poorly vs the S&P, despite displaying strong revenue growth that in many cases exceeded expectations. The reason for this has been big misses on their earnings per share (EPS) results. For example, Robinhood’s user growth has been over 50% in the last year, and revenue nearly doubled. Yet they are down over 75% from their IPO price after disappointing from an earnings perspective. I don’t think we’ve seen a correction to the same extent in private markets yet, because companies are typically only resetting their price 1-2x per year when they raise a new round. So I expect private valuations to be a bit more tempered going forward.
What trends are you looking to invest in this year? Are there any specific trends you’re following?
McCluskey: As the Director of the Discovery Fund, I’m interested in fintechs focused on financial inclusion, specifically how we can make financial services more affordable and accessible to everyday Americans. This need only will grow in importance as people adjust to rising interest rates. Millennials and Gen Z have never experienced a sustained rising rate environment. Savers will be able to earn more, but borrowers will be impacted by higher rates for auto loans, mortgages, and personal loans. Our investments in portfolio companies like Climb, Line, and Zirtue will help them manage these uncharted waters.
I’m also interested in non-crypto applications of blockchain and distributed ledger tech, particularly in the mortgage industry. Use of these technologies has the potential to revolutionize the process of homebuying, as well as the secondary market for mortgages. A portfolio company of ours, Home Lending Pal, is working with IBM to make this process more seamless for both first time buyers and the financial institutions lending to them.
And lastly, I’m on the lookout for fintech solutions focused on the Latinx consumer. The GDP of this segment is growing 57% faster than the U.S.’s, according to a 2021 LDC U.S. Latino GDP report. Despite its size, the demographic continues to be an underserved market. Companies like Listo are building solutions to provide credit to Latinx consumers who are credit invisible yet display strong creditworthiness.
2021 was a record-making year for exits. Will we see increased M&A and IPO activity this year or are you expecting things to slow down?
McCluskey: M&A and IPO activity skyrocketed in 2021, yet the landscape may look a little different this year. Interest rates will play a factor in M&A, as borrowing money to fund acquisitions is expected to become more expensive. That said, if economic growth slows, then acquisitions are one way to bolster profits and growth.
Given the expected volatility in the public markets, I believe many companies will continue to raise VC dollars rather than following the IPO route, even if private market valuations take a hit. And we will continue to see the emergence of platforms for secondary transactions of private companies, which will enable employees to get liquidity even without an IPO.
In a world full of inequalities, it is no surprise to see an imbalance when it comes to finances, and investing in particular.
For more insight into this industry conundrum, we spoke with Rukayyat Kolawole, CFA. Kolawole is familiar with inequities in the financial world, given her role as Founder and CEO of PaceUP Invest, a new platform launching on May 15th that offers e-learning, financial coaching, investment strategy, and execution for women and underrepresented groups.
Our conversation below highlights not only tips on bridging the knowledge gap, but also on building diversity and her view on the future of the retail investing industry.
When it comes to retail investing, there is a significant knowledge gap. What are some practical ways the fintech industry can bridge this gap and ultimately increase the number of investors?
Rukayyat Kolawole: The fintech industry can bridge this gap by incorporating financial literacy into its solution. The main reason people, especially women and those from underrepresented communities, do not invest is because of the lack of knowledge and being underserved by the finance industry. Many robo-advisors stop the process if the client indicates they are a novice to investing. Even though they include information and definitions of financial terms on their platform, this is not provided with the aim of increasing financial literacy overall, irrespective of the product they sell.
This represents a missed opportunity by the current robo-advisors to provide learning products and improve financial knowledge. At PaceUP Invest, we provide a hybrid, jargon-free financial literacy and investment platform to bridge the gap, and we have seen the impact on different communities. Incorporating behavioral science is also key to helping educate and increase the participation of potential retail investors.
How does the industry stand to benefit when the number and diversity of investors increases?
Kolawole: The industry will benefit immensely from a retail investor’s perspective because we will start to see a lot of gaps. For example, we’ll see a pension gap, retirement gap, and racial wealth gap gradually narrowing. Policies are still needed to ensure all these gaps are narrowed. Underrepresented communities and minorities will be greatly impacted by making a financial decision that will increase not only the number but also the average financial assets that they will hold. The economic benefit for society would be even larger.
When we look at capital allocators, it is still very much the old boys’ club of white and male. Very little is going towards women and people of color. The only way that people can get funding to solve real problems affecting their communities is if more women and people of color are writing the cheques. Otherwise, it’s going to be the same boys’ club.
How has the state of retail investing and retirement planning changed from how it was just five years ago?
Kolawole: Across the globe, we saw a spike in retail investing due to easy-to-use investing and trading apps. 2020 was called the year of retail investors, and the pandemic has no doubt contributed to the spike in retail trading. People became more empowered than ever. Retail trading has taken off more in the U.S. than in Europe. Retail investing in Europe makes only around 5% to 7% of total investments in Europe, compared to 25% in the U.S. and 60% in China.
With the large pension gap in Europe still not changing much in the past five years, low-interest rates, and new online brokerages being built could help to propel enough momentum to increase participation in the capital markets to solve these problems. Retail investing is here to stay!
However, we need to make it more inclusive for women and underrepresented communities.
When you think about what the industry will look like 10 years from now, what do you think will be different? What role will decentralized finance play?
Kolawole: People will have more choices and be in more control of their finances. More people will be financially independent and empowered via choices of products that solve their problems. Fintech will revolutionize and help to reduce a lot of gaps we currently have when it comes to money and wealth.
Banks will have their place in the future financial system, requiring more flexibility and a customer-centric approach by partnering with fintech companies to solve real-life solutions.
However, our financial world will probably not become that decentralized due to regulations and governments wanting to retain monetary power.
“What mmob does is solve the pain points on two sides of an ecosystem. On one side for third party product providers and service providers, we integrate all of their products and services onto our network. Then we also make that seamlessly accessible through to larger distribution channels so their products and services can be integrated natively.”
“(Identity verification) is very challenging, especially when you look at it as a global problem. Every region, every geography has a little bit of a twist. People may not have consistent addresses in some countries, or may not have a track record with a financial institution or a utility compared to some other places. So identity verification is very, very difficult and made much more complicated if you operate in a lot of countries or incorporate a lot of data sources.”
“We are an AI company focused on analyzing billions of articles and messages from the web in real -time using a technology called Natural Language Processing (NLP). We basically process text data and we derive insights that are consumed by financial professionals and corporates. We have the ability to screen an enormous, 20 billion articles and messages and to detect things like environmental, social, and governance risks; early warnings; analyzing competitors; measuring sentiment on companies and on concept.”
“Finshape is a new brand in the digital banking market. It has come about with the merger of two companies: BSC (Banking Software Company) and W.UP. With the combined force of these two companies, Finshape now has about 700 people with a hundred banking clients across the globe as clients and partners across four continents. We’re very proud to have built this digital powerhouse and we’re looking to do a lot more in shaping the future of digital banking.”
Stay tuned for more videos from Greg Palmer and the Finovate Podcast’s Conversations with Best of Show winners.
