- Europe has stolen a march on B2C Fintech and created some giants
- Fintech is splintering but each splinter is a billion dollar opportunity
- Regulation is playing catch-up with market innovation
- Stripe found the perfect gap to fill
- Can the crypto explosion be regulated?
Setting the scene
It’s fair to say that Parker quickly became a citizen of the world; travelling and gathering experiences that have helped shape his career. In this podcast, we explore how Fintech is developing and growing in the US and Europe, and what the breakout segments look like. As ever, regulation is always lagging but can’t be ignored in building a startup servicing these new markets. And then there’s crypto – can that ever be regulated? Talking via experience, Parker takes us through his thoughts on how to approach Fintech, the impact of Open Banking and the companies that are doing it well. A fascinating listen in these hyper growth times for Fintech.
Where it all started…
Growing up, I used to live very close to the beach, and I was a surfer and a wrestler. I was good enough but not great enough to either go pro or have any real future. When I was 17, I told my parents I wasn’t going to go straight to college, and I was going to take a gap year. At the time, that gap year was something unheard of in the US- the US is very much about starting your career. I was sitting there telling my parents I didn’t want to go straight to school and they’re like, ‘great, you can stay here and work one of your summer jobs of either construction, landscaping or working in a restaurant’. But, that wasn’t what I had in mind. I applied to the University of Pittsburgh to defer my acceptance for a year and then I applied to do a gap year in Israel, and walked into my parents room one night and said ‘so, Pitt has put me off for a year. I’ve been accepted to this programme and I’ll be in Israel for the next year’. That kickstarted my international-ness and moving out in a way from the US cultural experience that most of my friends and family have had.
Finding my way into tech
I ended up in Israel for my last semester of college, because in the US, you do four years, and you’re supposed to do your last two years with a major. I just had 15 credits of electives and Pittsburgh had a policy of you couldn’t take your last 15 credits abroad because it was supposed to be your major, but I could have taken underwater basket weaving and graduated- I could just do whatever I wanted! So I said, ‘let me go back to Israel and let me graduate and I’ll send my credits back’. They told me I could go and do a semester at Hebrew University. At the end of that experience, I could either have gone into the Israeli army, which my mother responded, ‘over my dead body’, or I could go and work in Romania for a year. I went from Pittsburgh, to Israel to Romania.
Then my sister was getting married, and I had been abroad for about two and a half years at that point, and she said, ‘you have to come back’. I came back and was a political fundraiser in Philadelphia, in Atlanta. I was in my mid 20s, I met a girl who was from London, and back then you could just apply to get a visa. I was young enough, made enough money, spoke the right languages, so I got a highly skilled visa to come work in the UK. When I got to the UK, I was told by the fundraising mechanisms of the UK that because I had zero experience in the UK that my skill set of fundraising and selling was 100% untransferable to the UK market. I got told that four or five times where people told me ‘you’ll never be able to do it here’. At that point, the tech sector was the only one that would take me. I’d already been getting interested in tech, and tech didn’t really exist in London at that point in time. I was determined to prove all these people wrong who said that I couldn’t adapt to European UK culture as ‘the dumb American’.
The explosion of Fintech in Europe
If we start from the UK, it has really, for Europe, triggered that explosion of Fintech, because the FCA had to push out a new way to promote competition and innovation, because in the UK market, there was not a lot of competition (we’re talking B2C), there was only a core set of banks.That’s one of the interesting things right now that we’re seeing in Europe versus the US; Europe has really started as being first off a B2C go-to-market strategy, and you’ve seen the unicorns such as Revolute and Monzo. Whereas on the American side, you have a mix of not only the B2Cs, but you have a much bigger grouping of the B2B fintechs as a service coming out into the market. It was that push by the FCA to try to make it from a consumer point of view, and really promoted the ability for fintechs to come to the market, get their licences and really stand up against the traditional banks in the market.
How is Open Banking progressing?
It depends on where you’re coming from. From payments where you have PSC2, which is to make more secure payment transactions, versus open banking, that was, again, trying to be privacy centric and more secure. Originally, the way that these Fintechs were getting your data out of your core bank was screen scraping. Literally, you would hand them your username and password, and they would log in for you and just pull all the data out of your system. Whereas now, it’s a much more programmatic API based side of that programming. They’re merging into one, but there doesn’t seem to be a huge winner. It’s this interesting piece of: how do you transfer financial data in a more privacy centric, secure way in a market that allows anyone to not have to have a relationship with an end bank, but then use all your data and customers to create a value added service on top of it? Or, use it as a way to slowly or rapidly pull a user into a new service or experience?
Automation and speed are two main components to value add
It comes down to automation and speed. At the end of the day, if you look at the way regulation is set up, it’s set up in three pieces:
- It’s your KYC (Know Your Customer)
- You’re not taking advantage of customers in a way that you’re offering them either credit or a loan or any other financial product or service
Each one of those, from a traditional bank point of view, has a lot of challenges if it’s all been built out manually, and you’re trying to create a way of actually being able to provide our guests a better experience with a better UI that fits the user’s expectations. At the beginning, when I was working at Judo Payments, we worked with the likes of Revolute and Monzo and they were offering a better user experience with a prepaid debit card. They’re trying to offer a better service or features or something that you can offer to an end user, but there’s only limited things they could do because they’re not a bank and they’re not financially regulated.
A real time example is Chime, the leading US Fintech, which has been forced by the state of California regulators to stop using the word ‘bank’ in their marketing because they’re not a bank. They’re using someone else’s licences and giving a better UI experience to another banking licence. That’s when you look at the innovative piece here. A lot of these conversations are about taking from the user experience, providing that real time validation of ‘oh, I have an account, oh, I see my money there’. It’s all these different pieces that are just allowing it to move much quicker and do it at scale, so that I can download an app, enter my information and within two to three minutes, I have an account and I can start using the app. If we look at the way that apps have developed, the Fintechs are having to keep up with that seamless experience and speed that you get if you download the Uber app, for example. Everything then is trying to keep up with that speed of the user experience of never having a spinning dial. For me, anything there in the market is looking to help that user move quicker and spend money on a platform faster.
How Regulation is progressing in Europe and the US
Fintech in Europe as a whole has matured much better to engage the regulators in a way that they weren’t six years ago. When I started with Onfido, I spoke to everyone and said ‘we’re a RegTech, meaning we’re not regulated, but we help our clients be compliant with the regulation’. We were doing things in a very new and different world. The amazing thing about Europe is it’s far ahead when it comes to a lot of its regulations and a lot of the pieces are moving forward. You have the AML sixth directive that’s come out that’s really trying to push things into a way that makes it remote and digital. Now, every Fintech is engaging in the conversation, whereas previously they weren’t. A great example is the FCA, who has been going through the future of the buy now pay later loan platform. So, an unsecured loan or a micro loan in the UK is an unregulated space right now, but the FCA is going to be issuing the first regulation in the space. When I was working with Onfido, no one would have engaged in that five years ago. Now, if you look at the comments that have come in, everyone was involved in the process, every company commented on it, and everyone is trying to make it the best for the industry and user. The regulators across Europe, enables a lot of this innovation in Europe that you may not see in the US. Every major FinTech now has a Head of Government Policy, whereas when I first started talking to the Onfido clients, they would ask me to go and talk to the regulators. We would have conversations with them because we were doing something new that was in a grey area that had a potential of becoming frowned on by the regulators. But, we advocated that this is the future and they should engage with it, and the European Union FCA have really taken that on.
Stripe found the perfect gap to fill
Stripe filled a gap that saw the internet booming and e-commerce. If you look at the arc of payments, and where that’s gone, the piece that they saw was the challenge of integrating into a very old tech stack. As a payment platform, they’re not that regulated. They have certain requirements they need to fulfil, but that is driven to them by Visa and MasterCard. So, as they saw the e-commerce boom and they saw what was coming out of The Valley, for example new mobile services, to integrate into any one of these platforms was horrible and painful. But, they came out with the simplest thing.
I was thinking about the question, ‘who are your heroes?’ I think the two brothers who launched Stripe are very high up there for me because they took an incredibly horrible, complex, deep knowledge problem and gave the tools to make it easier. If you look at what they’re offering, it’s incredibly complex, but they just put an incredibly simple API over the top of it and they were really the first company to do that. You can’t compete with how simple, easy and automated Stripe is. They made it easy for any techie to start accepting payments- it sounds simple when you say it like that, but if you know payments, it’s incredibly difficult to do!
There’s a lot of things that need to happen! Firstly, from a regulatory point of view, because there’s really two places you can be in crypto: custodial or noncustodial. This means when you set up a wallet (which isn’t really a wallet) you have a recovery kit, and that, in essence, is your unique password to say that you own this wallet. Either the user can own that, or you can have a trusted institutional third party that owns that, which means the user can reset it and have control over it. But by doing that, there’s a higher level of understanding who the end user is.
Germany has launched and created their own crypto custody licence, which requires any digital asset in Germany to be sat with that. So, you can’t run a business now in Germany and be noncustodial. That type of regulation is going to permeate through Europe, and in the US they’re starting to think about how to do this. The first port of call is to make this more legitimate as a service of the regulators being confident that if I have a crypto wallet you can identify it’s me and not an anonymous user on chain. It’s getting to that point in time where now big institutions will want to offer it as an asset class, because it’s being de-risked from a regulatory position and putting in more frameworks around it:
- Is it going to be a future currency or a payment method and any of those different pieces?
- Are you going to be paying in fractions of Bitcoin or Ethereum, or dog coin or sushi coin or what all these other sort of meme currencies are?
I think that’s going to be a tough one! I feel like it has the knock that a lot of this crypto still is the millennials’ ‘Gold Rush’, but it’s one of the few places you can get really high returns right now. You saw sort of a peak and it’s flattened out, but hasn’t flattened out remotely where it was 12 months ago. So, I still think there’s a lot of upside! The other side is, how does blockchain change the way that sort of financial institutions work? Does blockchain change that? There is the possibility of it but there are scalability issues using blockchain to do that. There’s going to be a lot more hype, ups and downs before this really gets to something meaningful and more mainstream than we have today.
Using Bitcoin to buy NFTs
The most interesting thing in the NFT space is the continuous percentage. If I create a piece of content, and I sell it off to someone, I get the residuals of that. The amazing thing about the creator of the third largest sell is, he did a bunch of things before that with Christie’s where he sold off 100 of them for $1 each on a platform. Then four months later, someone flipped it for $300,000, and he got 10% of it. But I was thinking, can that hype continue? I don’t know. But, I think for the creator side of it is a much more interesting market. It’s a different way of being able to earn money and have your digital experience or a video actually mean something for you, because if something goes viral, do you really see the benefit of it? For example, if I take someone else’s clip on YouTube, and I put it on my channel, do I pay royalties to that original poster? The answer’s no. Does that fix that royalties content problem? I think it probably does. Let’s say if YouTube allows you to put a unique hash on every video you upload, and then you get a part of someone else’s ad revenue every time you take it- that would be interesting!
The challenges of Ethereum
There’s two ways that blockchain works. When you’re issuing a digital asset, you in essence, put a contract together to sell it. The contract is either backed by a regulator that approves it, like in Germany, to say I’m selling this digital asset, this is what it’s worth. Then that transaction is just done from a smart contract. That’s really interesting, because really where the value is, is the issuing of that contract, and that sale within blockchain off a one off transaction that becomes faster, more transparent and cheaper. Now, if it’s an asset, that’s going to be traded 100/1000/10,000 times a day, for argument’s sake, that’s where the scalability right now isn’t there in most of this stuff.
Most of these platforms are built off of Ethereum, and the challenge with Ethereum right now is, every time I want to put something on a chain then I have to pay a gas fee. That gas fee has been getting up to 1000 plus euros per transaction, which is not as cheap or as efficient as if I just got someone else to do it off chain, as they say. To be able to have that gas fee, get to a point where it’s scalable fast enough, is something that Ethereum’s network and platform has been working incredibly hard to do. They’re looking at launching something called Ethereum II, which really takes this gas fee problem to shrink it down to allow you to do it at scale.
Ethereum is getting so busy that you have miners that are taking a node putting onto the blockchain and you have to pay the miners to include your transaction in their node. So, if there is tonnes of activity, they’re going to make you pay more to have that node put on and be included onto the blockchain. That’s where this price escalation is. Ethereum has gotten so busy, because everyone’s putting all these different protocols on top of it, that to get something publicly on chain costs a lot more money than it’s used to. So, you have everyone who’s trying to do different types of blockchains that are more private, and that allows you to do more high volume transactions and only put what is necessary onto a public ledger. But, if you’re a real diehard blockchain person that doesn’t really allow you to have the benefits of being fully transparent and fully out there in the market, and I’m still having to trust a corporation that they have an internal ledger that can’t be changed. Right now, you can’t run a high volume transaction business on Ethereum because it just costs a tonne of money to do that. So, the business cases for running these infrastructures are going away and a lot of people are putting it onto layer two solutions, which in essence, just takes it all out. It’s the same technology, and everyone’s waiting and hoping for the next Ethereum 2.0 to come out, which solves this challenge in the market.
The tides are changing between banks and Fintechs for the better
There seems to be a sea change that banks are now seeing Fintechs as true partners, and not competition and have the mindset of getting them close and then slowing them down as we build our own. They can’t compete with being a bit more flexible on the regulation, like in 2016, there was another ruling from Bofin about their behaviours around what they do. I’m convinced every FinTech is one or two calls away from some sort of fine, because you have to move quickly, and especially start going to scale. But, the challenge is, should they be investing in these platforms? Or should they be trying to use these platforms as extensions? I still think they have a way to go before they really see them as extensions.
There are a couple of good examples in the market, but you’re seeing more activities. The last round that Upvest took an extension on their Series A was from ABN Ambrose, one of the biggest banks in Europe and has a very big brokerage arm themselves. In essence, they are investing in somewhat of a direct competitor, but they know ‘are they going to be able to build what Upvest can build from a sleek new API, compared to what their legacy, their compliance and risk teams are going to allow them to?’ They’re getting the right idea by investing and then using that to try to pull them as providers but I still think we’re a couple cycles away from where the bank starts to feel comfortable with it.
Who has nailed go-to-market and the proposition to the market?
I’m a B2B guy, and for me, it comes down to category creation and doing incredibly well. This feels cliche, but for me, it’s Salesforce who stated a problem in the market, have owned it thoroughly and have made people realise ‘Oh, this is a much more painful problem than it is’. Whereas, I think the Stripe brothers did it from an opportunity point of view. There’s that other side where you’re that disruptive new player in the market, and you really want companies to think about doing things differently. There’s very few examples of not only creating a new category, but doing it in a more confrontational but positive way that Salesforce has done.