UK fintech scenario
Ever since I came here, I decided to start using all the available services to manage my money: pay at the supermarket with my phone, send money abroad, micro transactions with friends or pre ordering an espresso from my phone, were things that I was looking forward to.
And boy this is a competitive market! You have many choices and companies to use.
From the massive banks to exciting newcomers, London is filled with endless possibilities to manage and spend your money.
So far, a few things that got my attention are:
In Fintech, the most lucrative area are transactions, Paypal and Apple Pay are actively fighting to keep earning market share. Banks are lagging behind, but some of them are catching up rather fast
- This new players are creating an oligopoly along companies like Barclay’s and HSBC
- Visa and Mastercard still move above everyone else, and in time, they work as an enabler con expand the reach of companies like Paypal or Ipagoo
- Cryptocurrencies are still too complex for the average user. There’s a lot of information asymmetry and entry barriers. Plus, the “brand” factor is not there, therefore people won’t trust unknown brands managing their money
- Merchants of all sizes now have complete control over the terminals at their stores. They can set up payment processes in minutes with companies like Square or Paypal
- The non-bank competition keeps growing: Paypal has almost 23MM users in UK and Apple Pay spreads all over the country.
That being said, I would like to think about the most important elements in Fintech now in the UK
Here I try to put together a list of entities across the EU that create digital money guidelines. Their decisions affect us -the users- in big ways.
The Payment Services Directive (PSD) The Payment Services Directive (PSD) provided a framework for a single european market for payments The Single Euro Payment Area (SEPA) is the platform that allows to have cross border transactions at the same rate of domestic transactions. This applies for all the countries within the European Free Trade Area (EFTA) SEPA affects the bank revenue in 2 major ways:
- Reduce cross border transaction fee to domestic fee level Settlements move from 3 to 1 day, reducing the interest that banks charged on that “window”.
- The Interchange Fee Regulation (IFR) gives banks a cap for the fees charge on debit (0.2%) and credit transactions (0.3%). Now all the bank to bank transactions are on the same level.
The IFR also allow non banks to issue credit cards, bringing in more competition and innovation.
The Payment Service Directive is the newest regulation and opens the payment market to bring new companies to compete with traditional banks. Therefore, banks will have to start sharing customer information with non-bank entities through API’s and charge the exact same fees even if those transactions run on a “rail model”
I clearly remember with PM Narendra Modi, orchestrated the first step towards a cashless India; I did not agree with the “how” but I agreed with the “why”. That time, the disruption was huge for us, but local players like PAYTM jumped in to increase cashless transactions. The results were amazing.
All the players are going to be affected by front end changes as well as back end changes related to the way payments are conducted.
SEPA might consolidate all the payment processes, due to the standardisation of rules; 3 main factors affect this scenario:
- There will be further regulatory intervention
- More non-bank competition
- Payments in almost real time.
TARGET2 is the response by the Central Bank to deliver real time payments; but the challenge of clearing and settlements is not yet solved.
In this new competitive landscape, banks could have real time transfers as part of their competitive advantage to attract more users.
All of this perfect storm, leaves room for mobile players.
Convenience vs security
Banks have invested heavily on security; but now all of this non bank companies are all about convenience: the slickest app, the best UX, the easiest way to use etc. One can’t live without the other, but both seem to be very difficult to have.
Banks are perceived as clunky and slow, while apps are not trustworthy and reliable. We move towards an area in the middle.
In 2014, UK saw for the first time how non cash payments were larger than cash payments. That figure will increase by 30% in the upcoming years. Actual money is disappearing.
Apple Pay: Security, power to negotiate and a brand ecosystem. Apple is a monster and they truly know how to negotiate. Even here in UK; when everyone can pay contactless up to 30 GBP, Apple Pay got a deal to pay unlimited amounts with its service; using face ID and biometrics, they ensure a high level of security and reliability on their system. Plus, their hardware is #1 in UK for which now people can pay with their iPhones or Apple Watches in places like Lidl, Starbucks or Boots. Apple Pay is also deeply integrated to a wallet; one of the things that I personally like are apps like Starbucks: I can top-up from the phone and then order in advance.
Paypal: 23 million users in UK. Almost 300MM worldwide. They have “the first mover advantage” and people know the brand. Now, Paypal can provide credit cards through is deep collaboration with VISA. Paypal also means worldwide transactions, the company operates everywhere but places like Pakistan. Merchants have many solutions using Paypal, from microcredits to hardware to facilitate payments; Paypal has also acquired companies like Xoom and Braintree, which deploy ecommerce addons to platforms like Woo, Oracle, IBM or Magento. Paypal has already done wallets and mobile, today is about reimagining money. Even more, they are entering the bank arena with Paypal Credit.
iPagoo: A new company from London, that is trying to transform pan-european payments and transactions. They have accounts for individuals, multi-currency accounts, cards, wire transfers and direct debits. The onboarding process is TEDIOUS! But the vision of the company is truly amazing, I could definitely jump in once they triangulate with other countries outside of EU
Barclays: Must be the most digital thinking bank here. From its world class incubator for fintech companies, Rise to an amazing app, innovative digital services and an innovation center thinking several years into the future.
The power of data
Banks have immense powers here in the UK. They own data to calculate score credits and cross sell products. They can actually anticipate consumer behaviour and trends.
Banks can (1) optimize pricing through data (2) target and cross sell card-link offers (3) reduce risk by improving credit scoring with real time analytics (4) optimize liquidity by predicting (4) enable customer through sharing optimize and easy to digest data of ourselves, this is also amazing because banks might have to share customer information with non-banks to enable fair(er) competition.
Now, Europe is taking ISO regulations to standardize message payments and countries like Denmark and UK are fully adopting it. However, banks are not leading this race.
Non bank entities like iPagoo are promising a new world in which borders and currencies are not relevant. This - for some people- mean that banks could be perceived as an utility if people start adopting new ways to send and receive money (just like it happened in India with PAYTM which just recently filled the documents to become a bank) but I personally think this is far from reality; the trust we have on banks won’t erode any time soon.
According to Deloitte, this whole scenario could be translated into 3 scenarios:
- New oligopoly:Paypal and Paypal sharing room with Barclays, HSBC, Tesco Bank and Sansbury Bank
- Utility model: non bank entities, use bank “railroads” to provide financial services
- Parallel Payment method: something like cryptocurrencies
I have lived in Italy, Chile, UK and India so far and UK is by far (with India) one of the most early adopter countries. I can see people here paying with Apple watches (yup, it looks weird), ordering food on Deliveroo or sending micro transactions using Apple Pay or Barclay’s Pingit.
The challenges are huge and the possibilities are endless. 1st of many posts to come in Fintech UK