Fintech Inside #11 - 21st Nov, 2020

Hi Insiders, Osborne here.

Welcome to the eleventh edition of Fintech Inside. Fintech Inside is the front page of Fintech in emerging markets.

This week Affirm the US buy now pay later platform filed for IPO. It's IPO document is filled with quality data. Also, HDFC Bank released a very cool video educating users about payments fraud. Lastly, Venezuela's currency was found in garbage - its pretty much useless.

Indian insurance startups dominated this week - Clinikk (undisclosed), Plum (USD 4 mn) and Turtlemint (USD 30 mn). Obviously there was also the banking situation - LVB was put on moratorium and RBI's working group released recommendations for the banking sector.

VISA is piloting its a dynamic CVV feature. And while we're on the topic of cards, check out Mythra - its a US based credit card for gamers. Mythra is the first time I've come across a true differentiated credit card product strategy. Check out the demo video.

Diving in

One Big Thought ??

What is the business model of an Account Aggregator?

What's an Account Aggregator (AA): Think of an AA as a central connecting unit between your bank, your favourite consumer app and obviously yourself. While using your favourite app, the app might want to pull and authenticate your transaction history to provide you their services (loans, investment, cards, insurance etc.). The AA simply manages the data flow between your bank (Financial Information Provider) and your consumer app (Financial Information User). More importantly, the AA manages your consent digitally - the frequency of data access (e.g. monthly), purpose of data access, period of data access (e.g. 3 months or 6 months) and types of data access (transaction history, personal data etc.)

Regulations: Of course AA's are regulated and require a license to operate. In 2016, RBI released guidelines for a new class of NBFC's - the AA NBFC's with minimum capital of INR 20 mn (USD 270K). Till date, 4 entities received license to operate and 3 entities received in-principle licenses. For entities (banks) that do not want to build their own technology, there are Technology Service Providers (4 of them are AA's themselves). Interesting participant here is Transunion Cibil, who could not get the license, but has their foot in the door as a TSP. Sahamati is a "collective" that represents the interests of AA's and furthers its vision. Sahamati's website has tons of high quality information to learn more.

What role will AA's play? Technically, a fairly central role. AA's can enable true "open banking" and aggregation of financial data seamlessly across platforms. UPI along with AA will be sort of similar to the PSD2 framework in Europe making payments real time and financial data accessible. The data though, will be, at least currently, limited to Asset data - banking, stocks, mutual funds and so on. Liability data is still with the Credit Bureaus.

What's the catch?: For a user, none really. In fact, all the power will be with the user, because we now have a system to manage which entities are pulling our financial data. But AA's as a business, I have my doubts - at least from what I have understood so far. AA's are limited to consent management only. AA's cannot store any user financial data nor can they read it. In other words, they're "data blind". All entities wanting to use financial data will also have to provide financial data. AA's cannot act as data users (FIU) themselves.

Takeaway: As a business model, I have my reservations on an AA. Firstly, If the AA's are data blind, how will they earn revenue? The biggest revenue potential for them is to cross sell or up sell other financial products. One potential model I can think of is to charge for accessing this data from either the Data User or the Data Provider. But why will either of them pay? They may end up charging the customer - therefore making financial products more expensive. Secondly, AA's cannot store data on its servers, so if they have to provide, for example, a financial analysis feature - all data will have to be stored on the device itself. How much can one optimise for data storage on device? Because of these challenges, how large can the AA's get in terms of revenue and therefore valuation?

Let me know your thoughts on AA's by replying here on email me at [email protected]

Fintech Top 3??

1? RBI Working Group recommends significant changes to India's Banking sector

RBI dropped a bomb on Friday early evening. It released a report of its internal working group that made several recommendations on India's banking sector. The recommendations were primarily around ownership structure and corporate structure, conversion of NBFC's to Universal Banks, Payment Banks to Small Finance Banks and more. It's important to note that these are just recommendations.

Takeaway: These recommendations to me are a mixed bag - some great recommendations, others not so good. Among the good ones: increasing promoter shareholding from 15% to 26%, converting eligible NBFC's to Banks and Payment Banks to Small Finance Banks and so on.

The not so good one: increased minimum capital requirement for applying for licenses of Banks - from INR 500 Cr (USD 67 mn) to INR 1,000 Cr (USD 135 mn) and Small Finance Banks - from INR 200 Cr (USD 27 mn) to INR 300 Cr (USD 40 mn). Besides the fact that RBI allows majorly large corporates to apply for banking licenses, the minimum capital requirements are prohibitively high.

2? ICICI Bank launched "buy now pay later" solution for offline

In a first for an Indian bank, ICICI Bank launched its cardless "buy now pay later" (BNPL) solution for offline retail stores. The BNPL product is launched in partnership with Pine Labs. To avail this BNPL option, a pre-approved ICICI Bank customer will have to enter their phone number and PAN in a Pine Labs POS device.

Takeaway: It's interesting that a bank is realising that BNPL is the future of credit at POS. But I think this is most likely a push from Pine Labs and ICICI Bank is the one bank integrating with all Fintech's. Credit cards are fairly archaic (in technology and product) whereas BNPL offers a lot of flexibility on several fronts to all stakeholders.

What's more interesting to me is the Pine Labs integration. Pine Labs has sort of reinvented itself from earlier competing in the plain-vanilla POS device market to now expanding its offerings with some serious innovations. It has potentially left behind its incumbents with virtually no other competitors offline - other than maybe BharatPe with its QR code offering. Pine Labs has also made an offer to acquire Wirecard's business in South East Asia. I tip my (virtual) hat to you, Pine Labs. ??

Fun Fact: As of Q1 2020: US Credit card debt outstanding is USD 893 bn! Total credit cards outstanding are 511 mn. 23% of credit limit is utilised and the average person has four credit cards!

3?? Indian banking sector's weirdest two years (in recent past)

For context, a regional bank - Lakshmi Vilas Bank (LVB) has been placed on moratorium by RBI for 30 days. This means that the customers cannot withdraw over INR 25K among other limitations. The Bank is being merged with DBS Bank's Indian subsidiary. RBI possibly saw it coming: as on quarter ended Sept-2020, the Bank's NPA: 24.45% (less than 3% is acceptable), Capital Adequacy Ratio: -2.85% (more than 12-14% is acceptable), Net Loss: INR 397 cr (USD 54 mn). FYI: 93% of LVB was owned by public. Clix Capital lost out on a good deal to acquire a banking license here.

Takeaway: I say weirdest two years, because 2018-2020 has seen two extremes in the Banking sector. On one hand - HDFC Bank, SBI bank, ICICI and so on are doing phenomenally, not just in terms of financials performance but also on the stock market. On the other hand, 3 banks (LVB, YES, PMC) were bailed out, 10 public sector banks were merged into 4, and then there was IL&FS and DHFL.

All this, while it may look like positive action from RBI, is actually a too little too late. RBI usually has a member on the board of these banks. Further, RBI does regular audits of banks. Even after all this, some banks are deteriorating. IMO, RBI needs a proactive monitoring system to constantly get data and act on it.

India ????

Market Updates: ??

Life Insurers reported 14% growth in YoY annualised premium. Rohit Sharma (cricketer) signed on as brand ambassador of FinancePeer. NBFC's lose car loan market share to Public sector banks.

Rupifi partnered up with Fynd to lend to their small businesses. Mutual Funds added 400K folios in Oct-20, total 93.7 mn.

Google removed 5 lending apps from its PlayStore for violation. PhonePe became the largest platform for gold buying with 35% market share. Clix Capital may apply for a banking license.

Mastercard and USAID partnered to launch Project Kirana for women small business owners. NPCI offered shares to Chinese bank ICBC.

Regulatory Updates: ??

IRDAI: Extended deadline for digital signatures on life insurance

RBI: Launched its Banking Innovation Hub with Kris Gopalakrishnan (co-founder Infosys) as first Chairman. First cohort of Payments Sandbox announced - 6 entities, 2 in test phase. Muthoot and Manappuram were fined for non-compliance.

Product Launches: ??

IDBI Federal Life launched a non-linked, participating, life insurance plan. Teens fintech platform BirdFin launched. YES Bank launched prepaid card with Neokred. Instamojo is looking to launch in South East Asia and Middle East. EnKash launched a prepaid card.

Finin launched its neo banking platform. Zerodha launched stock gifting features.

Funding Announcements: ??

Clinikk - health care and insurance subscription (undisclosed). Turtlemint - insurance SaaS for brokers (USD 30 mn). Plum - small business employee insurance (USD 4 mn).

NIRA - blue collar lending platform (USD 1 mn). AdvaRisk - fraud detection SaaS (USD 250-300K). True Balance - payment platform for rural users (USD 28 mn).

NSE acquired TalentSprint - edtech platform. Eduvanz acquired Klarity - edtech platform

South East Asia ??

Market Updates: ??

DBS Bank adopts new future of work policies. Kasikorn Bank in Thailand launched wealth management platform. Mastercard appointed Sokin as Principle member and Card Issuer for Singapore.

Funding Announcements: ??

DurianPay (Singapore) - Payments platform (USD 1.4 mn). Mednefits (Singapore) - health benefits (USD 6 mn). Steaker (Taiwan) - crypto assets manager (USD 1 mn). Sleek (Singapore)- professional business services (USD 4 mn)

Europe ????

Market Updates: ??

Ukrainian central bank pledged to legalise crypto activities. McLear launched Ringpay payment ring. BNP Paribas launched market commentary on Alexa.

PwC spun out its fintech unit LikeZero. European Central Bank launched an external probe for 10 hour payments downtime. Contactless payments accouneted for 62% of all card payments in UK. Sugi launched carbon impact of investments in UK and Plum launched in Ireland.

VISA launched pilot of dynamic CVV. Sainsbury Bank recevied offers from suitors. UK's FCA has issued notice against Instagra-hyped Lanister. Nordic API Gateway launched Aiia PSD2 payments. Compassionate banking platform Bella expected to launch on 30th Nov. Globalance launched sustainable investing.

Klarna counts 11 mn users, acceptance at 60K US Stores

Funding Announcements: ??

DiPocket - e-money wallet (EUR 6 mn). Razor (Germany) - small business platform (USD 33 mn). Incuto - credit union (GBP 1.75 mn). OakNorth (UK) - challenger bank (USD 30 mn). Mintos - alternate investment platform (EUR 5.3 mn).

Bdeo - insurance SaaS (EUR 5 mn). Modulr - payments startup (GBP 9 mn). Stanhope Financial (Ireland) - SME banking services (USD 3.5 mn). Unbound Tech - cryptographic key management (USD 20 mn). Satispay (Italy) - mobile payments platform (EUR 93 mn).

Santander Bank acquired Wirecard Europe (USD 100 mn). Deutsche Borse buys majority stake ISS. SumUp acquired GoodTill.

That's all Folks ????

If you’ve made it this far - thanks! As always, you can always reach me at [email protected]. Your feedback is really a gift, any feedback will really help improve this newsletter. If you liked what you read, please consider sharing or subscribing.

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See you in the next edition.