How fintech can adapt to a tougher environment; Revolut vs Softbank; What is the difference between “pull” and “push” payments?;

In this edition:

1?? How fintech can adapt to a tougher environment

2?? Bank of England plans to reject Revolut’s bid for banking licence

3?? The Next Phase of Real-Time Payments Growth Is Here

4?? Case Study: Brazil Open Finance

5?? Nubank Strategic Initiatives and Business Update

6?? What is the difference between “pull” and “push” payments?

7?? Revolut vs Softbank

And many more….

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How fintech can adapt to a tougher environment

While economic cycles may come and go, this one has the potential to be particularly challenging for those firms that rely on funding from private investors, who are themselves under greater pressure to produce returns as exit opportunities and valuations wane.

Private company financing in the fintech sector dropped by about two-thirds year on year in the fourth quarter of 2022, according to Financial Technology Partners. That figure ticked up in the first quarter of this year, but a big chunk of that was due to Stripe’s $6.5bn funding round at a $50bn valuation, 47 per cent below its high set in 2021. The actual number of financing rounds also picked to 794 deals in the first quarter from 681 deals in the last three months of 2022, according to the FTP data. But that still remained below the heightened levels reached in 2021 and early 2022.

Fintech firms now operate in a more competitive environment than before, and the fight for both cost-conscious clients and increasingly wary investors will intensify. That will force many firms to focus on survival in the immediate future, and a faster path to profitability, rather than growth at any price.

The sudden change in market environment might, for some founders, feel like sailing into a storm in shark-infested waters. To maximise the chances of survival, they need three things: a well-drilled crew in a seaworthy boat, enough life jackets for everyone on board and, just in case all that fails, the ability to swim fast to the shore. Or, in other words: risk mitigation, contingency planning and agility. Having all three will greatly improve the chances of making it to calmer waters.

Mitigation strategies can come in the form of diversified products or services, as well as carefully managed finances. Contingency, meanwhile, takes a fair bit of imagination. It involves monitoring and prioritising potential existential risks and developing response plans that can be activated at short notice when needed.

Of all these factors, however, it is agility — or the capacity to change tack and seize on new business models, product offerings and funding opportunities — that will make the difference for fintech firms. With high competition for diminishing sources of revenue and investment, and the difficulty of diversifying both at a small company, the incentive to make quick strategic changes increases.

Long-term survival is often underrated as a business objective but without it, all other strategic aims are moot. It is especially important in a difficult and fast-moving environment where the rate of change seems to be accelerating.

For fintech firms, the speed of decision-making to improve client and funding market fit, and the ability to implement those changes quickly and effectively, may start to separate those that make it through the cycle intact, and those that don’t.

Source Financial Times

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Bank of England plans to reject Revolut’s bid for banking licence

The Bank of England has told the Treasury that it is planning to reject Revolut's application for a banking licence, after a two-year campaign by Britain's most valuable fintech company.

The Prudential Regulation Authority (PRA), the arm of the Bank responsible for licensing, informed the Government in March that it planned to issue a statutory warning notice to Revolut within a few weeks.

It said the company’s initial application would be turned down owing to concerns over its balance sheet, after a qualified audit opinion in overdue accounts released that same month. Revolut has said auditors' concerns were about revenues, not the balance sheet.

However, it is understood that the warning notice has not been served and there are now urgent talks taking place behind the scenes in a bid to rescue the licence application.

There are signs the Government is growing increasingly frustrated over the conduct of regulators towards companies in emerging industries, which has led to accusations that Britain is seen as a hostile environment for entrepreneurs.

Senior sources close to Revolut said that the PRA had told it to produce a set of accounts with an unqualified audit opinion and to simplify its share structure before a licence could be granted.

The company's own auditors previously issued a qualified opinion on its accounts after saying they were unable to satisfy themselves over the “completeness and occurrence” of nearly ￡500m of revenue. A business that receives a statutory warning notice has up to a month to challenge it. After that, a final notice of the decision is sent.

Revolut's existing services will not be affected if it is refused a licence. However, the company would be unable to offer mortgages and loans to UK customers, who in 2021 accounted for more than 30pc of its revenues. Customers' money is already protected through safeguarding rules and this will not change.

Source Telegraph

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The Next Phase of Real-Time Payments Growth Is Here

1. Real-time payments are entering a new phase of growth. Consumer adoption is on the rise, as many countries have launched successful overlay or Request to Pay services, driving real-time volume growth to record highs, with India, Brazil and Bahrain taking the lead. Successful real-time services are reaching ubiquity and have profoundly changed the way consumers, businesses and governments make and receive payments and conduct their financial affairs.

2. Other countries are taking notice of these success stories. There is likely to be continued pressure from governments and regulators to adopt real-time payments — in many markets and regions, they are taking steps to drive greater adoption of real-time payments, because they see them as a path to drive economic growth. Our report shows that government mandates and incentives are key for successful real-time transformation of payment ecosystems.

3. Targeted use cases drive consumer adoption, with consumers and businesses around the world hungry for cheaper, faster and more efficient ways to pay. Merchant adoption and acceptance of real-time payments is on the rise, as more merchants realize that real-time payments create significant efficiencies.

4. Real-time payments are part of the digital proposition of modern financial institutions — they secure competitiveness and increase customer stickiness. That means banks need to make the most efficient use of their real-time rails to avoid falling behind any competitors that do adopt real-time payments and subsequently reap the benefits.

Source Global Data

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Case Study: Brazil Open Finance

In April 2019, the Banco Central do Brasil (BCB) released the Open Banking Model. By then, the Brazilian financial sector was facing heavy disruption by both local Fintech companies and international players. As a result, many financial institutions already recognised an opportunity for open APIs to help maintain their competitive edge. In May 2020, the Central Bank released Joint Resolution CMN-BCB No. 1/2020, which established the participants of the Open Finance ecosystem, as well as the data and services to be exposed, with a planned phased rollout starting in November of the same year. Mandatory participants mainly included institutions that are included in regulatory segments 1 & 2, as well as institutions providing customer deposits, savings and prepaid payment accounts, and payment initiation service providers. These institutions were instructed to securely allow authorised Third Party Providers access to:

- Product and services data (branch locations, access channels, product characteristics, contractual terms and conditions, financial costs)

- Customer & transactional data (deposit accounts, credit operations and other products and services)

- Payment services (payment initiation, transfer of funds, payments of products and services, etc.)

The instructions also describe mandatory customer consent to share data, in particular the best practices for the collection and revocation of these permissions. The objective of this initiative was to enhance efficiency and innovation in the credit and payments markets by promoting a more inclusive and competitive landscape. The Central Bank is in charge of regulating the initial governance responsible for the Open Finance implementation. The governance structure is composed of:

- Deliberative Council – decisions on issues related to the implementation of Open Finance and propositions of technical standards to BCB.

- Technical groups – studies and technical proposals for the Open Finance ecosystem.

- The Secretariat – organisation and coordination of the Structure's working agenda

Brazil’s approach falls under the definition of the commander regime. It is topdown, driven by the Central Bank of Brazil and relies on a comprehensive standard (governed by the BCB) defining both API interfaces and security measures. This makes sense - the stated objective is to increase competition in a market dominated by incumbent banks (the six largest banks in Brazil have most of the market share).

In the two years since the start of Open Finance in Brazil, 17.3 million consents were granted by customers to share their data. Brazil reached five million connected accounts in just under a year (five times faster than the UK), which puts the country at the forefront in terms of adoption.

Source Open Bank Project

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Nubank Strategic Initiatives and Business Update

Growing and More Engaged Customer Base.

Reached historical highs for both retail customers and Small and Medium Enterprises (SMEs), closing the quarter with a record 79.1 million customers, with the activity rate up to a record high of 82.1%. In Brazil, customers increased 31% YoY to 75.3 million. Nu's customers in Brazil now account for 46% of the country’s adult population, versus 44% in the previous quarter. In addition, Nu has become the primary banking account (PBA) for over 57% of the monthly active customers who have been with the Company for over a year. Nu's customer base in Mexico increased over 52% YoY to 3.2 million. In Colombia, we reached around 635 thousand customers in the quarter, a 200% increase YoY.

Increasing Client Engagement by Building a Multi-Product Platform.

Core products, which include credit cards, banking accounts, and personal loans, reached approximately 35 million, 56 million, and 6 million active customers, respectively. Insurance reached over 1 million active policies, while NuInvest, the Company's direct-to-consumer investment platform, reached over 9 million active customers and NuCripto reached 1.4 million customers.

Sustaining Growth of Deposit Franchise.

Deposits increased 34% YoY FXN, to $15.8 billion in Q1'23, while funding cost achieved 81% the CDI rate, Brazil’s risk-free rate, in line with our expectations, showing that Nu is starting to unlock the value of the strong liability franchise built, with funding cost achieving a new normal. Nu continues optimizing the use of deposits quarter after quarter, as reflected in its 33% loan-to-deposit ratio (LDR).

Increasing Nu's Share of Customer's Financial Lives.

ARPAC increased 30% YoY FXN to $8.6 in Q1'23. This was the result of a higher number of active and PBA clients when compared to one year ago, which consumed a larger and more profitable set of financial products, and drove an 87% increase in revenues YoY FXN to $1.6 billion, also a record-high.

Source Nubank

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What is the difference between “pull” and “push” payments?

- When we swipe a credit/debit card at a merchant, it is a pull payment, where the money is sent from the cardholder to the merchant. The merchant pulls money from the cardholder’s account, and the cardholder approves the transaction.

- With Visa Direct or Mastercard Send, the push payments enable merchant, corporate, and government disbursements.

Step 1: The merchant initiates the push payment through a digital channel. It can be a mobile phone or a bank branch etc.

Step 2: The acquiring bank creates and submits an OCT (Original Credit Transaction) to the card scheme.

Step 3: The transaction is routed to the receiving institution.

Step 4: The issuing bank credits the cardholder’s account and notifies the cardholder. The money is deposited into a Visa account that can be accessed at an ATM or PoS terminal or a digital wallet.

Note that the push payments work for cross-border transactions.

Push payments are indeed an interesting innovation, which complements the digital wallet strategy in Visa and Mastercard. The abstraction of “account” masks the complication of different funding or consuming channels.

Over to you: What is your most frequently used payment method? Is it pull-based or push-based?

Source Byte Byte Go

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Revolut vs Softbank

Revolut is locked in a fight with top shareholder SoftBank after regulators told the UK’s biggest private tech company it must simplify its ownership to win a long-delayed banking licence.

The Japanese investor has demanded compensation for giving up its priority class of shares, which the Bank of England has made a condition for granting the crucial licence, according to five people with knowledge of the situation.

Revolut needs the licence to help it expand in the UK, the US, Australia and Singapore. Without it, the payments group cannot lend or benefit from the UK’s deposit insurance scheme.

The escalating clash between Revolut, SoftBank and UK regulators is threatening to turn political as the government fears London losing its status as Europe’s main financial services hub following Brexit.

UK business Secretary Kemi Badenoch has organised a meeting next week with Revolut’s top leadership, including founder Nik Storonsky, amid fears that the company may move its headquarters, two people familiar with the matter said.

Revolut is rushing to reach an agreement with SoftBank, appealing to the Japanese group’s founder Masa Son to break the deadlock. In July 2021, SoftBank’s Vision Fund 2 led an $800mn series E fundraising that valued Revolut at $33bn, a valuation boosted by $8bn after a meeting between Son and Storonsky.

The PRA told Revolut it needed to collapse its six classes of shares into one, according to the people familiar with the matter. The structure is a legacy of the start-up’s multiple funding rounds since it was founded in 2015.

But while most of the investors had agreed to swap their shares into common stock, SoftBank had demanded twice the amount of common stock Revolut is offering in exchange for giving up some of the preferential rights linked to its current share class, the people said.

The PRA is also requesting that Revolut expand its group level board and add more technology expertise.

Source Financial Times

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Fintech and SME Finance

Small and medium enterprises (SMEs) represent the economic backbone of most developed and emerging countries. Globally, SMEs account for more than 90 percent of all businesses and more than 50 percent of employment. SMEs are also significant contributors of economic activity, representing on average 60 to 70 percent of the GDP of most countries worldwide.

SMEs play a major role in economies, however lack of access to finance in many cases is a critical barrier for them. Many reasons prevent SMEs from accessing adequate to finance. These include higher cost of reaching and serving SMEs, relative to the revenue potential for lenders, information asymmetries that lead to non-availability of financial and credit data needed by lenders to assess creditworthiness of SMEs and, from the SME side, lack of collateral, lack of financial literacy, and difficulties in registration and verification.

Digital financial services (DFS) can help close the financing gap for SMEs, by providing access to alternative sources of funding and improving access to traditional players by enabling new digital products and process automation. Digitization and automation make the financing process more efficient, thereby lowering costs. The use of alternative data sources and big-data analytics provide additional information sources to the credit risk-assessment process, allowing SMEs that were once unable to obtain finances to gain access. New business models such as the sharing economy and e-commerce, digitization of SME business processes, and open banking and APIs, provide rich data on SME activities and cash flows, enabling DFS, and helping SMEs obtain access to financial products.

Globally, millions of small businesses are at risk of closing permanently and/or have suffered massive losses due to the COVID-19 pandemic. In a crisis, SMEs are more vulnerable in terms of access to finance when compared to large corporations. Speed of execution is critical for the provision of government relief funds to SMEs; digital financial products are essential to support SMEs during the COVID-19 pandemic.

However, there are obstacles and challenges that make it difficult for SMEs to fully adopt digital financial products. The main areas where challenges have been identified are: digital financial literacy and awareness of DFS, digital infrastructure, financial supervision and regulation, identity, and data privacy and data protection. Some issues are more prevalent in emerging markets, which have less developed digital infrastructure, systems, and processes.

Source World Bank