International Finance Special Feature on Banking & Fintech

PRESENTS

BANKING & FINTECH

SPECIAL FOCUS

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THE KLARNA LESSON FOR RETAIL BANKS: FIND YOUR ‘PAPER INVOICE’

TECHNOLOGY IS CHANGING THE BRANCH EXPERIENCE

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It’s vital we all understand the nature of money launderers and the impact they have on our lives.

It’s just as important for businesses to know how to defend against them – and in the process play a role in protecting our societies from crime.

To help businesses start the fight back, experts at BAE Systems have identified the motives and modus operandi of the criminals behind money laundering. www.baesystems.com/invisiblenetwork

NOW, BANKING COMES WITH FINTECH

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intech is driving change in the banking sector in a way that nothing else has in several decades. Being the bastion of tradition and shackled by regulations, banks simply don’t have it in them to compete with the guerilla warfare of startups.

The new entrepreneurs are tech-savvy, small and nimble, shun bureaucracy and often offer ways to get around archaic rules. Basically, they try to make life simple whereas banks are seen as monsters that we have to deal with for the sake of our hard-earned money. So, startups actually had it easy.

All they had to do was come up with a product.

Just about any product would do

because banks have simply not bothered to innovate, or even look at what is happening outside the stone walls of their offices.

No wonder we have a deluge of startups and apps offering so many products and services that now we need a book the size of the Oxford English dictionary to list all of them.

That may be exaggerating a bit, but the bottom line is that banks had it coming.

Being unused to swift changes, banks have been slow to respond. That is why they are now

facing PSD2, which is expected to change the character and business model of banks. Our special section on Banking & Fintech will take you through some of these developments and the changes that seem imminent. We say some because the sheer volume of changes taking place is too much to capture in one issue of a magazine. This volume is an outcome of the internet, which has empowered smart people. In the 20th century, most of the innovation came from either the US, Europe or Japan. Today, with an internet connection, any teen in any part of the world could be coming up with the next big thing in fintech.

Without further ado, we welcome you to the new world of Banking & Fintech.

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BANKING & FINTECH INDEX October - December 2017

Volume IV Issue 1

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Daniel Döderlein

THE KLARNA LESSON FOR RETAIL BANKS: FIND YOUR ‘PAPER INVOICE’

Frans Labuschagne

BE READY BEFORE PSD2 IS UPON YOU 5 FINTECHS TO WATCH FOR

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‘THERE WILL BE TWO MAJOR TRENDS WORTH LOOKING OUT FOR’

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Norris Koppel

THE FEE IN A FREE CURRENT ACCOUNT

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TECHNOLOGY IS CHANGING THE BRANCH EXPERIENCE

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BANKS OWE NO DUTY OF CARE TO CUSTOMERS

International Finance Oct - Dec 2017

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SPIKE IN INTEREST IN BIOMETRICS

INTERVIEW INTERVIEW

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‘THERE WILL BE TWO MAJOR TRENDS WORTH LOOKING OUT FOR’ Interview with Dr Nelson Holzner, CEO of AEVI, which offers SmartPOS devices and payment solutions Rahil Shaikh Miya

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Dr Nelson Holzner, CEO, AEVI

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INTERVIEW INTERVIEW

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intech is ushering large-scale changes in the world of banking and business. In most cases, it is about apps that reduce the bottlenecks and facilitate business. One of the points where these apps interact with the customer is the POS terminal. In Europe,

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In the last 30 years, credit card terminals have become ubiquitous. Visa and Mastercard became the default payment gateways around the world.

Now, fintech companies are introducing new payment systems. But the problem is that in every country there is a different app to download and a different set of regulations to comply with for the app developer. What is your experience so far on this count?

We want to provide choice of the best devices in the market, combined with the best high-quality apps, instead of locking banks, acquirers,

International Finance Oct - Dec 2017

one of the most established companies in POS terminals is AEVI. The German-based fintech company provides an open B2B marketplace for business apps, SmartPOS devices and payment solutions. International Finance spoke to Dr Nelson Holzner about the changes he is witnessing.

ISOs and VARs into one single device or system. That’s why we have created an open solution, by connecting not just our own hardware (Albert) on to our Marketplace, but also 3rd party devices through the AEVI-Enablement process. It gives banks the chance to pick and choose from a wide array of high quality B2B apps, and AEVIenabled devices to build tailor-made solutions that enrich the payment experience for their specific merchant verticals.

The introduction of B2B apps at the Point of Sale is yet another innovation that requires a heightened level of security scrutiny not previously necessary for legacy POS systems.

With apps now being deployed directly on the payment terminal, they all need to be checked to ensure that they are as secure as the payment devices on which they operate. Therefore, a comprehensive vetting process is deployed to check that the apps are not only fit for usability, but are also secure.

Multiple regulations and solutions in every country have created a complex environment. Our transaction service removes this complexity for banks by leveraging a centralised payment platform that allows merchants to accept and process cashless payment transactions made through diverse payment terminals (multi-vendor)

INTERVIEW

and from different countries and currencies. We route transaction data through a single gateway, making it more accessible while providing our customers with a comprehensive suite of cloud-based back office reporting tools.

Why did you opt for the open, collaborative payments ecosystem? What are the advantages?

The open ecosystem we have created is the real USP of our solution, as it is enables our customers to connect to any device and choose the payment services that suit their needs.

Being open means we can connect multiple devices and applications to the ecosystem, making it a truly unique proposition for our merchant bank and acquirer customers to offer their merchants.

This makes an open ecosystem the natural progression, as it will encourage app developers to make the marketplace more interesting for

merchants. I believe an open market construct is more beneficial than a closed loop construct, and far more attractive to developers of business-tobusiness apps. This will ultimately lead to great applications being developed that we probably don’t even know about yet.

What is the role of AEVI’s app store, Global Marketplace, in your scheme of things?

At its core, our Global Marketplace is there to provide our customers, the merchant banks and acquirers, with choice. This allows them to break free from the shackles of legacy payment systems and control their own destiny.

The Global Marketplace already contains 70+ B2B apps supporting a variety of different merchant use cases, and enriching their checkout experience. I believe app content is key and this approach allows for leveraging a variety of different, tailored, merchant scenarios.

Our goal is to enable banks, acquirers, ISOs and VARs to create a unique merchant offering with a choice of hardware and app content for their preferred merchant verticals. All this leads to stronger bank-merchant relationships whilst at the same creating new app-led revenue streams.

With a lot of innovation taking place in the payments sector, it is very difficult to tell what will succeed. What criteria should an investor or acquirer employ to pick up a company?

The rate of innovation will mean that payments will continue to be a fragmented and complex sector.

In terms of criteria for success in payments, I think scalability and monetisation are key. If a new payment solution doesn’t solve a real and sizable problem without a clear understanding of how to earn money, it will likely be very difficult to build a sustainable business out of it.

Over time, I think there will be two major trends that will be worth

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The second big trend is very different, but just as important; enhancing the check-out experience through value-added apps and services that put a smile on the face of the consumer at the Point of Sale. This is the trend AEVI is shaping with our Marketplace of business apps and SmartPOS devices, and is one that is growing rapidly

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looking out for. Firstly, payments will become invisible, and reach a point where you don’t even realise that you are paying. You use a service, like UBER for examples, and the payment is so seamlessly integrated that by the time you’ve left the car, the payment has been made and processed. So, it becomes less about payments and more about the service or purchase experience. Any company that is attempting to reduce the complexities involved in real-world payments, so that the experience starts to match the seamless experiences found in e-commerce, is certainly worth keeping an eye on.

The second big trend is very different, but just as important; enhancing the check-out experience through value-added apps and services that put a smile on the face of the

consumer at the Point of Sale. This is the trend AEVI is shaping with our Marketplace of business apps and SmartPOS devices, and is one that is growing rapidly. App developers and Fintech start-ups are driving the innovation in this space, creating new and exciting services that are attractive to merchants and their customers.

You sold your company BillPay to Klarna. And then joined AEVI. Do you now see Klarna as a competitor? Is it likely that in the future you will?

We certainly don’t regard Klarna as a competitor as we operate in very different spaces at the moment, but it could end up being a very interesting partnership. It would be great to have a BillPay or Klarna type app on our Marketplace that would allow us to

bring their product offline and into the real world. So many businesses struggle to get to the Point of Sale in the real world and it is a tough job to push yourself there because it is so complex and fragmented. They often have old fashioned technology which makes it difficult, but now AEVI can make that a lot easier for online payment providers as we have created a great platform to roll out their products into the real world.

Klarna has now got a banking licence. Does this change the equation for its competitors? Do you see other payment service providers following in the footsteps of Klarna?

Payment and lending services have been regulated for quite some time.

PayPal has had a banking licence for years and Klarna has been a banklike regulated institution before.

Also, other players are beginning to see value in getting such licences for one reason or another. Other payments businesses go down the alternative route of cooperating with banks to be able to use their existing banking licences. As the regulation around licencing increases, so too will the number of licenced payment businesses.

What is the role of e-wallets going forward?

There are so many e-wallets around these days, so there is clearly customer demand and they appear to satisfy the customer’s needs. Given the rate

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INTERVIEW

of adoption, I would envisage that e-wallets will be around for quite some time.

How will PSD2 change the landscape for AEVI and the payments industry? What is the size of the opportunity that PSD2 opens for the payment industry?

Do you expect a spurt in startups to take advantage of this opportunity?

The European markets are focused very much on PSD2 right now. Most people are worried about what they must provide in the near term to comply with the directive before it goes live. The more traditional players aren’t embracing it fully; they see it as more of a hindrance with the additional levels of complexity, and the fact they will be forced to open their systems.

From an entrepreneurial stand point, however, we see it as a fantastic business opportunity especially for new companies who, through the help of PSD2, will be able to get access to very interesting new data. But still there are many questions surrounding it, such as what access do I get? What does access mean? When do I get it?

Will I have to pay for it?

We embrace the changes PSD2 will bring to the sector and believe that the clarity and opportunity provided by PSD2 are good for the market and our business. As a company fostering and living innovation every day, we see the

regulation as an opportunity rather than a threat.

Why should banks share the data they have gathered over several decades with start-ups that are less than a decade old?

PSD2 provides a framework which sets the rules and requirements for access to data. If the requirements for the data access are met by the recipient, then the access should be granted regardless of how long the recipient has been in business.

Openness and collaboration will help the industry to innovate and to create new products and services for customers. So, access to data can also be a big opportunity for the banks as they partner with innovative Fintech start-ups to drive progress in the financial services sector. I believe that more and more banks will embrace these opportunities as a result of PSD2.

Till the end of the first decade of this century, innovations were the reserve of the US, followed by Europe. But now, China is setting the pace in some sectors. Do you see the need to tap into talent beyond Europe? Which markets do you keep tabs on?

We have a very strong foundation currently in Europe and Australia upon which to build. We have already seen great success in Australia with the Commonwealth Bank of Australia,

and on top of that, we announced several very promising partnerships in Europe last year.

Over the next few years, we will enhance our global reach and expand our suite of solutions even further.

Our current focus is on the North American payments sector, which we have identified as a growing market that will be very receptive to our solutions, and we already have some very exciting opportunities in the pipeline in that part of the world.

The key mission for me is to build a fully blown company, with increased collaboration between our Marketplace business, built around B2B apps and services, and our strong payments business. This will create an even more interesting value proposition for our customers, whilst connecting all the dots to create a great team spirit and company culture.

Once this has been achieved and we are established in our target regions, we can start exploring markets beyond Europe and North America. IFM editor@ifinancemag.com

Dr. Nelson Holzner is CEO of AEVI, a German-based Fintech company providing an open B2B marketplace for business apps, SmartPOS devices and payment solutions to banks and acquirers around the globe.

ABOUT DR. NELSON HOLZNER Prior to joining AEVI as CEO, Dr. Nelson Holzner was the founder and CEO of BillPay, a leading provider of payment by invoice or instalments for e-commerce, which was acquired by Klarna in 2017. He started his career as a lawyer at an international law firm. He was Vice President at Cerberus Capital Management, an international investment firm. He is an active business angel in Fintech.

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OPINION

OPINION

Norris Koppel

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Banks should be transparent about the cost that a current account will incur from the very beginning

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OPINION: BANKING OPINION

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uch of the FinTech innovation we have seen in recent years revolves around removing the unnecessary middleman and putting an end the opaque, and often misleading, fees that banks charge for their services.

From international payment fees to costs associated with withdrawing cash abroad, the tide is now turning, and consumers are becoming much less willing to pay fees into a ‘black hole’, without understanding exactly what this cost will deliver for them.

The problem with current accounts, however, is that traditional banks have long been advertised and promoted to them as ‘free’.

How can you improve the value of something that costs nothing?

The root of the problem When setting up a current account, customers are led to believe that this is a free service – that they will be able to store their money, receive payments, arrange direct debits and similar, all for no cost. This may be true at the point of opening an

account. However, with no credit or lending involved with this basic service, there isn’t a way for banks to make money here. It does, however, cost them to run the service, so they must find a way to make this up elsewhere.

This is where banks introduce ‘hidden fees’, such as unarranged overdraft charges, extortionate money transfer fees, and heavy missed payment penalties – to name just a few examples. New research from moneyfacts found that a staggering 66% of financial service providers charge an unauthorised usage fee, and that the average cost of a so called ‘free’ bank account amounts to £147 year.

Charges such as these often come as a nasty surprise to customers who had assumed that their ‘free’ current account would be just that. Not only that, but it forces people to spend money that they simply hadn’t accounted for, and in some cases, just don’t have.

Reevaluating the fee structure The Financial Conduct Authority (FCA) has now

turned its attention to the issue of unarranged bank fees, saying that ‘fundamental changes’ must be made to the way in which unarranged overdraft fees are provided in particular.

While this is a welcome step in the right direction, there are many other fees that need to be addressed and stamped out, in addition to these overdraft fees. Banks should start by being clear about the cost that a current account will incur from the very beginning. There is no harm in charging people for this – it would be naïve to think that it costs nothing to provide the service. We must see a change, however, in the way in which these costs are presented, and then charged to customers.

Banks would be wise to take a leaf out the book of some of the most popular media tech companies, such as Netflix and Spotify.

These businesses have a clear fee structure, built on a transparent and static monthly cost. There’s no reason that financial services shouldn’t follow this model. Current accounts should come with a small, clear monthly fee

that outlines exactly what services the customer receives for this outlay.

Educating consumers Unfortunately, because the myth of free banking has existed for so long, financial service providers operating this model must explain why it is that they charge for the service, and banks (apparently) don’t.

Of course they do, but in stealth mode, making up their profits from some of their most vulnerable customers. Free banking is not a reality – it costs a banking services provider to enable what they do.

However, these fees needn’t be so high – and they certainly shouldn’t be systematically collected from the most vulnerable.

It’s time for financial service providers to begin supporting customers to save and spend responsibly.

Anything that adds to financial stress is a concern, particularly for those individuals who are unaware of the ways in which banks could potentially catch them out with hidden fees.

If providers can begin to charge honestly and openly for their services, they can put customers back in control, allowing them to truly understand the service they are buying, and building trust and loyalty that will pay dividends for the bank in the long run. IFM editor@ifinancemag.com

Norris Koppel is Founder and CEO of Monese

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SPIKE IN INTEREST

IN BIOMETRICS International Finance Oct - Dec 2017

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Awareness and confidence has increased; for many consumers, this technology is likely to serve as an attraction to financial services providers Thomas Bengs

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he financial services sector is at serious risk of digital disruption. In fact, 61% of global financial services firms believe that their organisation will not exist by 2021, as a result.

There are clearly threats from within the sector, as challenger banks and new start-ups take market share from longestablished incumbents.

However, strikingly a fifth

of European consumers would also buy banking or insurance services from companies like Google, Facebook and Amazon.

This highlights a critical shift for financial services: the changing demands of the modern consumer.

Customers want banks and insurers to offer the latest technology, in services that not only enhance the security, speed and convenience of transactions, but also deliver an exciting

customer experience. And if their bank doesn’t offer those services, they will leave them for the provider that will.

Biometrics sits exactly at this intersection of usefulness and excitement, and could be one of the most crucial tools for financial services firms looking to thrive in the face of digital disruption.

The driver for demand Biometric technologies

have been with us for many years, but recently there has been a spike of interest amongst both banks and consumers. Earlier this year, MasterCard announced that it would be launching a payment card with a fingerprint reader, while Barclays has implemented voice biometrics in its call centres. In Brazil, Banco Bradesco is using Fujitsu’s palm vein reading technology to identify users of cash machines, with the

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Thomas Bengs is Director & Head of Biometrics at Fujitsu in EMEIA

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aim of eliminating ATM fraud.

All of this is being driven in large part by growing consumer demand. In fact, 93% of UK consumers would choose biometrics over passwords. So what is behind this surge in interest?

First of all, concerns about security are at an all-time high. In both customer and business circles, there is growing awareness of the threat of fraud and identity theft, as well as the weaknesses of security measures like PIN numbers and passwords.

Robust security measures are a must – and a clear attraction for consumers.

Added to that is the fact that over recent years the cost, speed and accuracy of biometrics have all improved, making the mass

International Finance Oct - Dec 2017

roll out of these solutions more feasible. And now that almost every consumer has a smartphone, many of the practical challenges of scaling a biometric security scheme have been overcome.

However, perhaps most important of all is the rise of the bold and progressive consumer. People are now very used to digital services, and the convenience and enjoyment that they offer, in almost all areas of their personal lives. They now expect – and demand – the same up-to-date technology from their banks. In fact, 37% of consumers say that they would leave their bank if they didn’t provide the latest technologies.

Biometrics represent just that kind of bold, exciting new service – enabling users to physically ‘experience’

security in ways that they have often seen in films.

Consumer familiarity with biometrics has grown, as many mobile phone users can unlock their devices with either a fingerprint or an iris scan. A tablet has also been released which can be unlocked with palm vein authentication, which identifies users by the unique patterns of veins in their hands. Awareness and confidence in biometrics has increased; now for many consumers, this technology is likely to serve as an attraction to financial services providers.

The potential in banking Biometrics offer significant advantages for financial services firms, in the level of security they offer. Biometric-based security services deepen and

strengthen bank defences by providing an unequivocal link to an individual, event or transaction. Biometric signatures are very hard to forge; palm vein authentication, for example, maps each person’s unique pattern of blood vessels in the hand, which cannot easily be replicated.

Upcoming regulation will make biometrics even more attractive. The implementation of PSD2 in the European Union will require ‘strong customer authentication’ methods to be deployed whenever an electronic payment transaction is initiated.

The legislation defines this as two or more of three elements – knowledge (for example, a PIN); possession (such as a token); and inheritance (something the user is,

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In fact, 37% of consumers say that they would leave their bank if they didn’t provide the latest technologies.

Biometrics represent just that kind of bold, exciting new service – enabling users to physically ‘experience’ security in ways that they have often seen in film

such as biometric data). In practice, this means multifactor authentication, and is likely to result in more and more banks deploying the strongest authentication measure available – biometrics.

For consumers, biometrics offer more than simply peace of mind.

Transactions and log-on processes can be conducted more quickly, without the

need for security questions or passwords. Biometric solutions could also be used in branches to replace photographic identity documents to support large cash withdrawals.

Biometrics can also provide an audit trail for transactions. Biometrics then can benefit both consumers and banks, in many ways.

The new age of biometrics Today’s digitally progressive consumers are more demanding than ever.

In banking, customers want services that are convenient and effective, utilising the latest technologies.

Biometrics can be used to offer a new level of customer experience, allowing consumers to physically engage with their security

systems while improving safety and speed.

The use of biometrics amongst European banks is only set to grow. Those who can offer the technology quickly will secure their place in the digital future.

Those who are slow to act may very well find themselves at the wrong end of digital disruption in four years’ time. Banks must look to be as bold as the customers they now serve. IFM editor@ifinancemag.com

Thomas Bengs is Director & Head of Biometrics at Fujitsu in EMEIA

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TECHNOLOGY IS CHANGING THE BRANCH EXPERIENCE Mark Aldred

International Finance Oct - Dec 2017

BANKING

New digital branches have numerous benefits for banks, with data analytics technology providing more information about their customers

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e are starting to see a growing number of banks opt to close branches, often citing pressure to reduce operational costs. Advancements in technology as well as customer behaviour have also led some industry experts to suggest that the

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Mark Aldred

age of the bank branch is over, and that we are entering an age of digitalonly banking. This does not follow, however, as confirmed by a new report from Boston Consulting Group, which has urged banks to keep their branches alive.

Physical branches remain the cornerstone of sales and customer advice

and are central to banks’ relationships with their customers. Studies clearly show that the branch channel remains very important to the public (62% of British adults prefer face-to-face service in comparison to internet banking on 28%).

The recent BCG report examines digital transformation in the

banking sector and states that the blending of digital and personal interactions will be key in creating a more responsive and costeffective branch. However, as banks increasingly digitalise their services, it’s essential that they retain the human touch. Customers want the convenience of online banking, without losing the personal service they get when they visit a branch. This has led to the emergence of a new breed of branch.

The hybrid branch Lloyds is one of several banks that has announced adoption of this approach, which is characterised by smaller branches that are equipped with much more powerful technology to take them into the future. This reduced physical presence and increased adoption of technology will not hinder the customer experience – indeed, if banks take the correct technological approach, it will be dramatically improved.

This merging of digital and personal service is a strategy that European banks have embraced well-ahead of their British counterparts. They benefit from being able to offer customers a wider range of services, using selfservice technology such as ATMs, which customers

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are already familiar with.

The use of kiosks can also be incredibly useful, for customers to carry out routine transactions without needing to queue to see a member of the staff. This means bank staff have their time freed up to advise customers on more complex or unusual transactions.

Some Italian banks, like Cariparma (part of the Credit Agricole Group), have used the space freed up by technology to create community areas, designed to provide support to local businesses and community groups. There is an opportunity for banks to be creative here, by finding novel ways of using the new-found space to forge long-lasting relationships with their customers and communities to encourage loyalty. Some use the space to create areas with

International Finance Oct - Dec 2017

sofas for customers, with access to tablets featuring video tutorials and demos to show them how to use certain banking products.

Others partner with local businesses, such as estate agents, and bring the services which customers need together in one place.

To ensure that onboarding more technology truly benefits customers, the service must be consistent and streamlined across all banking channels. Making the hybrid bank experience a success depends on striking the right balance between digital and personal service. This is a delicate challenge, and one that technology can play an instrumental role in, by improving the customer journey through greater personalisation and by smoothly integrating

solutions across a range of different channels.

Self-service Today’s ATM technology in particular can transform dull bank branches into highly-automated environments, where customer service is the number one priority and customers have quick access to the services they need.

These new digital branches also have numerous benefits for banks, with data analytics technology providing them with more information about their customers. This new wealth of information will enable them to understand their customers better, which can help improve customer loyalty by offering new services to the right customers at the right time.

Adoption of new technology will also create

more opportunities for staff to connect with customers. For example, when customers are using an ATM to carry out a transaction, bank staff can be immediately alerted via their tablet about any specific assistance or intervention the customer may need, as well as new products and services they may be interested in.

Customers should never be taken for granted, so the bank should make it a priority not to miss any opportunity to interact with them in a branch.

Freeing up more space with the adoption of new technologies gives banks the opportunity to explore how they can meet needs that they have not previously been addressing. The client should be at the centre of the branch to guarantee a consistent and personal

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Today’s ATM technology in particular can transform dull bank branches into highly-automated environments, where customer service is the number one priority and customers have quick access to the services they need

customer experience.

Everything must be done by the bank to guarantee a service that is secure, personalised and efficient across all channels.

Challenges ahead Of course, adopting new technology and rethinking how the space is used within a branch poses technological and marketing challenges for banks – can your existing self-service estate keep up to date with service

demands? Is your solution scalable enough to adapt to the new environment?

Which software and hardware will you deploy to make sure that your branch staff is empowered to help customers?

What is really needed is a mind-set change, from the current position of reducing operating cost, to a more optimistic outlook of expanding revenuegenerating consumer services. Done effectively,

reduced operating costs will follow.

The hybrid branch is on the brink of some very exciting developments, as technology looks to become a central component of the new bank branch – with ATMs, artificial intelligence, data analytics and chatbots poised to bring an even better branch experience and free up space for alternative services – but without the right infrastructure in

place banks, branches and their customers could risk missing out.

One of the critical challenges for banks is to make sure that they strike the right a balance between customer autonomy and personalised support and advice. This hybrid approach to bank branches should result in a positive benefit to relationships with customers, who should see real benefit from the introduction of new technology. IFM editor@ifinancemag.com

Mark Aldred is a banking technology expert at Auriga

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BANKS OWE NO DUTY OF CARE TO CUSTOMERS Judgment was handed down by the Court of Appeal in London on three joined appeals Abdulali Jiwaji

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with the Financial Conduct Authority (FCA). The judgment, passed on July 24, 2017, is significant because it was a marked departure from Suremime Ltd v Barclays Bank Plc — where permission was granted for pleadings to be amended to include a claim for breach of duty — and clarifies the uncertainty following conflicting first instance judgments.

It confirms the courts’

Abdulali Jiwaji is a Partner at Signature Litigation

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he Court of Appeal in London recently handed down judgment on three joined appeals, CGL Group v RBS, Bartels v Barclays and WW Property v NatWest. The appeal related to whether the banks owed a duty of care to their customers in the framework of a review by the banks of their sales of interest rate hedging products, under a settlement agreement

International Finance Oct - Dec 2017

Nikoletta Beneki

reluctance to recognise private rights of action against a regulatory and statutory framework where the FCA holds a central role.

The background of the case stretches back to when the FCA agreed with various banks in June 2012 that they would review their sales of interest rate hedging products to “nonsophisticated customers”.

They also agreed that they would provide appropriate redress in cases of mis-selling. The process would be verified by an independent reviewer appointed under section 166 of FSMA. The agreement also asserted that no person, except the banks and the FCA, would have any rights to enforce any term of the agreement.

In 2013, the Appellants received notifications from their banks informing them that they were eligible to take part in the review,

which they did. They were made redress offers but then brought proceedings against the banks for mis-selling.

They also applied to amend their pleadings to include a claim in respect of the banks’ conduct in relation to the review. The misselling claims failed and the applications to amend were dismissed. Permission to appeal was granted on the common issue of whether the review conducted by the banks gave rise to a duty of care owed to the customers to carry out those reviews with reasonable care and skill.

The Court of Appeal referred to three tests to be used to determine whether a duty of care has arisen, including: 1. Whether the defendant assumed responsibility to the claimant.

2. The threefold test in Caparo Industries plc v Dickman [1990] 2 AC 6057 of whether: (a) Loss was a predictable

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test, the Court concluded that it was not “fair, just and reasonable” to impose a duty of care on the banks.

Factors that led to this conclusion were the fact that: 1. The supposed infringements of duty were a restatement of the original misselling claims, which however had been time-barred.

2. There was no “lacuna” in law, which a common-law duty of care needed to rectify, since it was the FCA which was authorised to carry out inquiries and to decide whether to bring enforcement proceedings when a review was not conducted properly 3. A duty of care could put the banks in a position of conflict with their customers.

Also, the incremental test was said to be of little value by itself and it was

Nikoletta Beneki is an Associate at Signature Litigation

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result of the defendant’s actions/inactions. (b) The relationship of the parties was adequately close. (c) It would be fair, just, and reasonable to enforce a duty of care on the defendant towards the claimant.

3. The incremental test.

The Court found the assumption of responsibility inappropriate. First, the regulatory context of the cases went against the imposition of a duty of care. This was a highlyregulated situation prescribed by statute within which the FCA had a wide range of powers. Second, the communications between the banks and the Appellants about the review did not suggest that the banks assumed voluntarily responsibility towards the customers; instead they were simply fulfilling their regulatory obligations to the FCA in carrying out a review that had been effectively imposed on them.

Turning to the threefold

not the focus of the Appellants’ case.

It was held that no duty of care was owed to the bank’s customers and the appeals were dismissed.

This underlines the need for both the FCA and the independent reviewer to be proactive and rigorous in their approach to redress schemes, as the scope for civil remedies may be limited.

The role of the independent reviewer will be further scrutinised by the courts considering the

appeal of the decision in R (Holmcroft Properties Limited -v- KPMG LLP & Ors) (where the court found that a skilled person’s actions were not amenable to judicial review), which is due to be heard in December 2017. IFM editor@ifinancemag.com

Abdulali Jiwaji is a Partner at Signature Litigation, and has over 15 years of experience of litigation, arbitration and contentious regulatory matters, with particular expertise in handling disputes relating to financial products.

Nikoletta Beneki is an Associate at Signature Litigation, with experience in commercial litigation and international arbitration in a range of sectors, including general commercial, banking, IT and shipping.

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OPINION: FINTECH OPINION

OPINION

Daniel Döderlein

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THE KLARNA LESSON FOR RETAIL BANKS: FIND YOUR ‘PAPER INVOICE’ The likes of Visa are buying stakes in fintech solution providers to enable them to go direct to market while banks risk being cut off from both sides

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OPINION: FINTECH OPINION

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Oct - Dec 2017 International Finance

OPINION: FINTECH OPINION

K

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larna is an e-commerce company whose retail payments solution allows customers to ‘buy now, pay later’.

Their model cuts out the cumbersome card payment process for those purchasing goods online from sites who use the Klarna solution.

The testimonials of their big clients, such as wish. com, Arcadia and Hype, say that allowing customers an invoice functionality has increased their sales by an impressive 40 per cent.

This almost guaranteed increase in sales means these customers are willing to (and do) pay Klarna a higher margin (than they pay card companies) for every sale. Customer experience and the resulting increased conversion for businesses is a powerful thing.

On June 19 came the announcement that the Sweden-based company had been granted a full

International Finance Oct - Dec 2017

banking licence. They are the largest European fintech company to get this licence.

Their chief executive and founder, Sebastian Siemiatkowski, openly said of the announcement that he wanted Klarna to play a large part in disrupting and reshaping the retail banking industry.

At the time, I came out and said this was the worst possible news for retail banks and card companies, alike. I even told Business Insider that I believed this meant Klarna was on track to becoming the next Visa.

This is because with more than 60 million customers and, post PSD2, direct access to all European bank accounts, they are certainly well-positioned to become a favoured credit provider. Not just for bigger ticket items, but also for everyday household goods, that are increasingly being purchased online.

The difference between Klarna and a big card

company like Visa is, of course, the fact that money is offered to people as a direct line of credit.

The bank who ordinarily provided this service behind a credit card is no longer relevant in more and more situations. So as cards become more and more irrelevant and the strong relationship between banks and consumers is challenged, distribution of cards, and thus Visa’s products, will drop.

Was it something I said?

A week after this original announcement, there came another announcement.

Visa had now taken an undisclosed stake in the payments technology company.

Despite Klarna’s chief commercial officer, Michael Rouse, admitting to being “somewhat enemies in the past in terms of competing”, the deal confirms that Visa is (rightly) looking to strengthen their alternative

payments technology. In fact, a quick Google of Visa (or Mastercard, etc.) + partnership sees the most recent news results return a string of similar announcements about partnerships with various fintechs who will help them to safeguard their future.

That’s all good for card companies, but what about banks?

For almost two years, retail banks in Europe have been (or should have been) conscious of the second payments services directive (PSD2). Its most pertinent article directing that they must be able to comply, via API access, with requests from licensed third-parties to access customer account information.

The European Commission introduced the new directive in an attempt to create a safer payments system and foster innovation in an industry that has remained relatively

OPINION: FINTECH OPINION

personal banking will be easier and there will be a great deal more choice — not only from the major banks but from tech companies who people might previously have just thought of as a social media site or a search engine.

dormant in this area for some time. Those most affected by the directive — that is, European retail banks — have, for the most part, missed the innovation memo. The exception to this is Scandinavia, where retail banks enjoy the highest percentage of bank-issued mobile payments users in the world, per capita.

Right now, banks are mainly relying on partnerships or trying to build their own NFCbased wallets (which are all doomed). One of the biggest bank/tech company partnerships most are familiar with is the partnership many banks have with Apple.

But what happens when Apple can drop the required partnerships once PSD2 gives them direct access to their customers’ bank accounts? The same question applies to similar situations with Facebook and Google.

Further, the most popular mobile wallet solutions, outside of the EU,

are all owned and operated by non-banks. Think Venmo in the US, and Alipay and WeChat Pay in China.

So whilst Visa is in a tough situation, compared to many retail banks, it’s nothing They (the likes of Visa, for example) are busy buying up stakes in solutions like Klarna to enable them to go direct to market with Visabranded solutions. Banks, however, risk being cut off from both sides. Their allies — the card companies — will likely join their growing list of competitors. The likes of Visa are in a position to buy companies or stakes in companies to help them pivot their strategy and stay relevant.

I predict that Visa will go direct to consumers as banks struggle to stay relevant and thus become negligible distribution channels for Visa, compared to Klarna, for example.

Klarna is, in fact, a bank for all intents and purposes, but a new breed. Traditional banks are then left in the

middle with competition from all angles.

Why aren’t banks doing anything?

Right now, banks are still extremely profitable. It’s hard to change when you’re riding the (albeit final) waves of success. Another reason for a lack of action amongst many is the use of extremely old infrastructure and legacy systems.

However, banks mustn’t let legacy systems overshadow their need to get ready for PSD2 and the shift toward a new way of banking and personal finance management any more than they should let current success hamper a shift to prevent disruption.

The entire point of PSD2 is: change. What has worked, in many ways, for the preceding decades isn’t cutting it any more.

Banks who come out the other end of PSD2 — in say, a year or two — will look very different from the traditional retail banks of today. For consumers,

So, what can banks do now?

In a nutshell? Accept that change is coming and that it will have a massive impact. It’s this acceptance that then will lead to the deep disruption that is needed to weather the PSD2 storm. The big disruption case studies we all know — the likes of Kodak or Blockbuster — had plenty of time to change their core business. This is especially evident in hindsight. I am certain that the same will be said of the many retail banks who fail to do what it takes to stay relevant.

So, my advice is: be bold, take risks and create customer-centric solutions — like Klarna did. While banks pushed cards, they saw the need for a simple yet powerful solution — by sending out invoices, on paper! There are millions of problems waiting to be solved.

To stay relevant, banks must find their own paper invoice, fast. IFM editor@ifinancemag.com

Daniel Döderlein, CEO and founder of Auka

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BE READY BEFORE PSD2 IS UPON YOU Payment institutions that act now to deploy secure authentication methods that are future-proof will put themselves in good stead to manage the next couple of years

OPINION: FINTECH OPINION

OPINION

Frans Labuschagne

T

he payment industry is undergoing phenomenal change. Thousands of fintech and insuretech companies have attracted the interest of the global venture capital community. More established financial service providers have, meanwhile, been forced to reassess their business models in order to remain relevant as well as compliant with ever more stringent regulations designed to protect customer data and prevent fraud.

With these top-down directives continually shaping the fast-paced payments industry, it can sometimes

be difficult to keep up. One of the latest such directives is PSD2, which constitutes a major update of the EU’s first Directive on Payment Services from 2007. The regulatory technical specifications (RTS) for the implementation of PSD2 are still under review, and meeting the January 2018 deadline for transposing PSD2 into national legislations is bound to be a challenge for governments.

The earliest starting point for the enforcement of PSD2 by law, namely September 2018, is also barely more than a year away. Payment institutions that act now to deploy

secure authentication methods that are future-proof will put themselves in good stead to manage the next couple of years.

A breakdown of PSD2 The original Payment Services Directive (PSD) established the legal foundation for creating an EU single market for payments. The objective was to make cross-border payments as easy, efficient and secure as ‘national’ payments within a member state.

This objective was largely achieved.

In 2013, the European Commission realised it would need to revise

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the regulations to cater for new mechanisms of payment as a result of technological advancements.

The revised regulations now have the following core objectives: • To contribute to a more integrated and efficient European payments market • To level the playing field for payment service providers (including new players) • To promote transparency and competition in pricing of financial services • To make payments safer and more secure How PSD2 affects customer interactions The European regulators have gone to great pains to ensure that the consumer will be the ultimate winner.

PSD2 fundamentally changes both how consumers access their financial data and how they transact, and with whom.

Currently, consumers holding

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accounts at multiple institutions need to log into each account via that institution’s proprietary digital interface, whether this be via mobile app or online portal. But to promote competition in financial services and improve ease of use for the customer, PSD2 makes provision for data aggregators, which allow for a single view of accounts at multiple providers (insurance companies, payments services, credit card issuers, mortgage lenders). All account information, all financial products, and all transactions will be viewed on a single dashboard.

To make this possible, PSD2 will compel banks and other financial service providers to open their data and payment initiation capabilities to third parties via an API or enterprise service bus. The term account information service provider (AISP) is applied to third parties that aggregate account information for consumers.

The consequences While these ideals are laudable, any new regulations, and particularly

ones as far-reaching as these, always come with unintended consequences.

The legal, technical and operational challenges (and opportunities) of PSD2 are landing on board meeting agendas across Europe and beyond.

From a technical standpoint, a key requirement of PSD2 will be the focus on security and authentication. All payment service providers (PSPs) will be required to apply strong customer authentication (SCA) each time a payer initiates an electronic payment transaction. This means that, except under specific exceptions, all PSPs will be required to use SCA whenever a payer: • Accesses a payment account online • Initiates an electronic payment transaction • Carries out any action through a remote channel which may imply a risk of payment fraud or other abuse Of note to banks is that the cost of designing, implementing, and auditing the effectiveness of the SCA procedure

OPINION: FINTECH OPINION

Market analysts already believe that by 2020, 80% of all transactions using mobile phones as a second factor of authentication will be based on out-of-band push – even though the figure is currently only 15%

will fall to the account servicing payment service providers (ASPSPs), i.e. the banks themselves. Meanwhile, payment initiation service providers (PISPs) and AISPs must ensure that SCA is applied appropriately, although they do have the right to rely on the authentication procedures provided by banks. This further reinforces the pressure on banks to be compliant.

PSD2 authentication requirements The latest RTS stipulate that a procedure can be considered to comply with the requirement of strong authentication when at least two of the following elements are implemented: •

•

Knowledge – something only the user knows (e.g. password, PIN, or identification number) Ownership – something the

user possesses (e.g. token, smart card, mobile phone) • Inherence – something the user is (e.g. a computer-readable biometric characteristic) In addition, the elements selected must be mutually independent, i.e. the breach of one should not compromise the other. At least one of the elements should also be non-reusable and non-replicable (except for inherence), and incapable of being stolen via the Internet.

A future-proof strategy If that “something the user possesses” can be an object that is conveniently to hand, that we carry with us as a matter of course, so much the better. Enter the ubiquitous mobile phone.

If you can uniquely identify the customer-held mobile device with a

digital certificate, and can ensure that only the owner can access sensitive communications to that device, you have the most reliable authentication factor – possession – covered, with zero input needed from your customer.

The second factor could then just be a quick fingerprint scan or simple PIN. This achieves not only the strong security specified in PSD2, but also a much more pleasant user experience.

Market analysts already believe that by 2020, 80% of all transactions using mobile phones as a second factor of authentication will be based on out-ofband push – even though the figure is currently only 15%.

It is true – security and userfriendliness do not often go hand in hand. But for banks and payments providers, choosing an authentication solution that leverages the convenient mobile phone while also adhering to the strictest standards in security will be a safe bet for years to come. IFM editor@ifinancemag.com

Frans Labuschagne is UK & Ireland country manager at Entersekt

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FINTECH

FINTECHS TO WATCH FOR

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International Finance Oct - Dec 2017

FINTECH

Since London Fintech Week launched in 2013, London has steadily become a hotbed for startups within the sector. Their presence has only been made more abundant through the introduction of accelerator programmes and communities such as Startupbootcamp, Fintech Innovation Lab and Rise London.

A look at five promising fintechs.

FIDOR BANK

Fidor Bank initially launched in Germany in 2009, followed by the UK in 2015, and since has become one of the main challenger banks that is changing the digital banking landscape with their unique online community banking model, which focuses on putting the customer at the heart of all their product offerings.

Tech innovations and changing the way consumers bank is at the center of everything Fidor undertakes and most recently Fidor Bank launched a digital fintech marketplace to enable customers to find all products they need right from their banking application. Customers can ‘shop’ for trusted fintech and InsurTech apps, and fintechs such as Seedrs and Nutmeg, which have already been integrated onto the platform.

CURVE

Curve is an easy to use application that saves the space in your wallet by bringing all your bank cards together to allow you to see, spend and save from one place. It has received backing from Santander InnoVentures and Oxford Capital.

YOYO WALLET Yoyo Wallet is a mobile wallet application that helps to bridge the relationship between retailers and their customers by integrating loyalty programs with fast, secure and easy payments.

Since launching in London in 2013, Yoyo Wallet has grown significantly, partnering with brands such as Planet Organic and Caffe Nero. More recently, they announced the closing of a round of investment at a staggering £12 million.

So we can only expect bigger and better things from Yoyo in the future!

FREEAGENT

FreeAgent is a multi-award winning cloud accounting software designed to meet the needs of contractors, freelancers, micro businesses and the accountants they work with. FreeAgent helps over 50,000 customers manage and maintain their business accounts, track time, log their expenses, create and send invoices and forecast their tax bills. In 2016 alone, they facilitated the processing of more than 3.15 million invoices worth more than £4.5 billion pounds.

With their IPO at the close of last year (valued at £34.1 million on their debut) and recent partnership with RBS and Natwest at the beginning of 2017, there’s no doubt some exciting movements for them on the horizon too.

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BACKBASE

Backbase are the creators of the Backbase Omni-Channel Banking Platform, a state-of-the-art digital banking software solution that helps banks and non-financial institutions in their digital banking transformation. The company is well-known for being a leader in this field, having worked with over 70+ banks across the world, and receiving awards from numerous organisations for their continuous contribution to banking innovation for their Everyday Banking, 60 seconds onboarding, as well as being recognised by industry analysts as one of the main leaders in engagement platforms. IFM editor@ifinancemag.com

Oct - Dec 2017 International Finance

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