which represents a multi-faceted plan for collaborating with payment system stakeholders including large and small businesses, emerging payments firms, card networks, payment processors, consumers, and financial institutions to enhance the speed, safety and efficiency of the US payment system. This document includes multi-level regulations and comments to ISO 20022 to improve the efficiency and security of national and cross-border payments.
Local and Global Compliance – Make, Buy, or Partner?
Each FinTech, each service, each level, and each geography has its own set of rules and you must implement a strategy for how you might use regulation to your advantage at every stage of your FinTech’s expansion and development. The way you manage the process at each stage will have substantial implications for later stages. You may need to exchange a suboptimal customer experience or fast growth, for example, to gain regulatory approval en route to providing a better customer experience and faster growth later.
Even something as simple as regulation in a specific geography must be carefully considered. For example, where you choose to base your start-up is one of the most important decisions that you will make. There may be local, national, and international laws that can support (or damage) your business model and it is up to you to find them. Global examples of problems abound, like Uber entering a market regardless of legal and industry-specific regulations, resulting in many regulatory and union challenges at a local level in several countries and cities around the world. Others, like PayPal, first carefully investigated the regulatory ecosystem in each region, launched a very basic “ebay payment service”, and then expanded into other areas, i.e. P2P payments, after knowing exactly how to comply with each regulation for each service in each jurisdiction. Having a revenue stream originating in the jurisdiction also helped.
If you have got multi-million or billion-dollar funding for a global business, you may have the funds to buy any advice that you may need from local or global consultant firms. For FinTech start-ups, it might not be a bad idea partnering with medium-sized, flexible local bank heroes, and be guided by some experienced experts. Throughout all geographies (China is a more complex story), there are some great and powerful banks specializing in FinTech backbone services, e.g. Barclays (UK), biw-Bank & Fidor (Germany), mBank (Poland), Santander (Spain), Toronto-Domion (Canada), Westpac Banking Corp. (Australia), and many others. For a fee they will take care of much of the relevant regulatory stuff so that you can concentrate on your core business.
Regardless of any purchased advice or great partnership, please keep in mind that you will never be able to outsource or delegate regulatory compliance. If compliance becomes part of your company, your life, and your DNA, it will be one of your key success factors.
Lending (Capital) in the 21st Century
By Rodolfo Gonzalez
Partner, Foundation Capital
Finance seems too big. Certainly, some banks are still too big to fail. But what if finance is not big enough yet? Financial services are highly concentrated. Much as the wealthiest 1 % of households control 20 % of income in the United States, the distribution of consumer financial services can be viewed in the same way – but on a global scale. Right now, only 50 % of people worldwide have a savings account30 and just 20 % have access to a loan product from a financial institution. There are roughly five billion people that banks do not serve today. More than anything, finance is poorly distributed.
It is staggering to think how banking – one of the oldest, most powerful, and most globalized industries – remains elusive for four-fifths of humankind. It is also telling that banks have not figured out how to profit from lending to those other five billion people (while still alienating plenty of their actual customers by way of poor service). Last year, in Foundation Capital’s white paper, it was predicted that new marketplace lending platforms would originate $1 trillion in loans within the decade31 – but what if the actual potential is even larger? Lending holds the highest transformative potential for those excluded from banking services. After all, it is through credit that money is created in the modern economy.
Data and New Technologies are the Key to Unlocking Credit Globally
In the US, the ability to open a bank account, get a credit card, or obtain a loan to start building a life or business all hinge upon the approval of credit bureau data. Lending Club has built a multibillion-dollar business by accurately pricing the risk of borrowers that were overcharged by credit card operators. Emerging lending platforms are finding new ways to bypass and best FICO – the “gold standard” of credit bureaus. In the developed world, banks have been sitting on (and not utilizing) a wealth of available data that would improve their loan origination decisions. Banks need to become smarter just to catch up with the underwriting capabilities of new marketplace lending platforms. The very same data problem also hurts non-bank lenders. At the lower end of the spectrum, most payday lenders refuse to report the repayment history of their clients to bureaus, as they fear graduating them into lower interest loans.
Even when you have a privately owned repository of repayment data, as you do with credit bureaus in the US, it is incredibly expensive to access it. A hard pull from a single US credit bureau costs a lender between $1 and $2 at scale, depending on their size. While that works fine for an auto loan or mortgage where underwriting is done only a few times within a consumer’s lifetime, it is entirely uneconomical to do so on a regular basis – like an adjustable rate revolving loan or for small loan amounts (“Can you lend me a few dollars? This 6-month old printout shows I have a good FICO score!”).
Across the world, the challenge is that most countries have no credit bureaus, and of those who have them, they only tend to report negative payment behaviour (as opposed to positive and negative behaviour and a numerical score). Even then, coverage is patchy, as most of the population is not even listed in the credit bureau databases. Most utility and bill payments are not captured or reported. Many organizations still carry out a lot of the data collection by hand.
Underwriting based on behavioural data, using machine learning, neural networks, and other advanced statistical techniques, will provide the scalability required for financial institutions to offer more to those still without access. Mobile phones are making most of the world’s people electronically accessible for the first time, and are providing a wealth of data that a stale stack of stamped bill receipts simply cannot compare with. Unless banks and traditional lenders think of themselves primarily as data and technology companies, they will become increasingly irrelevant.
Non-credit bureau-based underwriting is an area that shows great promise in the developing world. Indeed, in China, Social Credit Scoring performed by Sesame Credit (part of Alibaba), is due to credit score 900 million people before 2020. In the US and a few other developing countries, fair lending laws limit the use of many pieces of behavioural and demographic data to make credit decisions. I believe the worldwide transition from feature phones to smartphones will mostly be completed within one or two replacement cycles (maximum 5–10 years), and at that point the comprehensive use of mobile phone data to make consumer underwriting decisions will be the norm.
There are great opportunities ahead, and a new notion of identity can emerge via new technologies. The bitcoin blockchain holds enormous potential here. I will not get into the weeds of bitcoin, but given the distributed nature of the blockchain, the emergence of a decentralized credit bureau with global reach is now a real possibility. Using the blockchain ledger to create a global repository of the world’s credit transactions will establish a new way to assess underwriting and risk with data that was previously unavailable. The notion of a thin-file or no-file borrower can become irrelevant – people and companies will have full, instant access to their complete credit history, and make use of it to access loans in any country, regardless of how long these potential borrowers have been there. The notion
See http://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-6025. See http://www.foundationcapital.com/admin/resources/whitepapers/p2p-lending-print-h-v20.pdf.
See http://www.foundationcapital.com/admin/resources/whitepapers/p2p-lending-print-h-v20.pdf.
