The new year 2019 is still young, but the old year’s legacy can still be felt. So a fintech end-of-year review is in order, as 2018 had many opportunities to make an impact.
365 days, to be exact, during which the fintech industry came up with unforeseen novelties and thrilling developments: The online payment, cryptocurrency, and digital finance sectors presented themselves as versatile and volatile. There is much to look at in our fintech retrospective, from the cryptocurrency decline to the new challenges and changes in mobile payment.
So let’s approach this giant of a year from different angles. We asked our three co-founders, what kept them occupied in 2018 in different areas of fintech.
Fintech End-of-Year Review Natallia’s
Or: What’s Up With Blockchain?
In my fintech end-of-year review, I want to focus on blockchain. For crypto enthusiasts, 2018 has been a tough ride. Just a glance on the Bitcoin/Euro exchange rate chart brings to mind a black diamond ski run. Having lost around 80% of it’s worth, Bitcoin is almost down at the base camp, actually. Some predictions look grim: We saw a cryptocurrency hype in 2017. Now some market analysts don’t rule out a slow death of cryptocurrencies altogether.
Blockchain Is More Than Cryptocurrencies
I have a much brighter view of the situation. Given time, the cryptomarket will rebind. Increasing adoptions of cryptocurrencies in different markets and countries prove that. Also, doomsday prophecies did not derogate general interest in the blockchain technology. At the c
Industry experts are aware that distributed ledgers have many fields of application: We did see many interesting use cases this year, like Ubirch’s IoT data solution (which Stephan Noller detailed at our
A Chain of Innovation
Possible Resolutions of unique fallbacks of blockchain entered the limelight, too: The Lightning Network protocol promises to solve the scalability problem. Basically, it sets up a second layer (side payment channels) on top of the chain for fast transaction processing.
Stablecoins take crypto another step forward (and backward at the same time). They are designed to reduce volatility in value, which is a major source of the distrust cryptocurrencies face. Stablecoins are pegged to another asset such as fiat currency (USD, EUR etc.), precious metal, or another cryptocurrency, in such a way that they promise that their value is much more, well… stable. Stablecoins are at the beginning of their rise and we will soon see whether promises can be kept.
ICOs and Regulation
The best way to reduce attempts on fraud is of course regulation. In 2018, many countries have attempted to fence in cryptocurrencies and restrict the impact they have on economies. A court of appeal in Berlin went in the opposite direction. Following their
“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
Team Crypto is stuck right in the middle between “tax it” and “regulate it” at the moment. I am thrilled to see what will keep the crypto scene occupied in 2019. Let’s hope it will yield a thrilling fintech end-of-year review next year.
Thijs’ Fintech End-of-Year Review
Or: Regulatory Refinement and Fintech on Four Wheels
When I think of 2018, I think of the many regulatory reforms affecting banks, PSPs and online businesses. Two rulesets come to mind: The General Data Protection Regulation and the Payment Services Directive 2.
GDPR – The New Challenger
GDPR, also known as DSVGO in Germany, took effect in May. Since then it has moved in as a long-term tenant in news feeds and editorial sections. The consensus: it puts up new challenges for financial service providers, who want to be compliant. Most prominently, such companies must now ensure their clients’ consent to process personal data – and clients have the right to be forgotten. Moreover, third parties such as IT service providers must meet the same obligations as the companies they work for or with.
Beyond these and many other rules, GDPR has provoked mixed reactions: Some see the legislation (if skillfully applied to business processes) as a chance to increase trust with clients. Others view it as limiting innovation instead.
PSD2 – The Direct Data Route for Fintech
In a way, PSD2 goes in the opposite direction. The Payment Service Directive 2 aims to make access to data easier for fintechs, for instance. Having taken effect in January, PSD2 harmonized the market conditions for financial service providers in Europe. A welcome ramification for payment and fintech challengers: banking institutions are now obliged to give such companies access to client accounts and finance-related data – provided the client gives their consent.
Once PSD2 has permeated the finance sector, it will be a huge competition booster. But let’s be honest: The application of PSD2 is easier said than done, even for fintechs. One area in need of renovation is online payment. In September 2019, the EBA will enforce additional regulations as part of PSD2. This means: all online payment transactions must be secured via 2-factor authentication.
This is both good and bad news for credit card payment flows: the current 3D-Secure Protocol 1.0. cannot be used for PSD2 secure customer authentication (SCA). It’s time for version 3D-secure 2.0, which is already being prepared for launch by selected PSPs. The industry is enthusiastic about the change, hoping that improved usability will make credit card payment more attractive in mobile and online environments.
I’m looking forward to having a more frictionless and dynamic 3D-secure experience, that uses many more data points (extracted from the device) than just a user-entered PIN or TAN – because 3D-secure 1.0 was very broken from a user experience point of view, leading to significantly lower conversion rates.
Payments in Mobility
Another thing to be curious about is the fintech innovation in the mobility space. Today, many people commute between home, work and leisure. A significant number of commuters still prefer their car to get to their destinations. Or rather: a car. Car lending and car sharing see increasing acceptance in our society.
With ever more connectivity, automotive companies design cars capable of assisting their drivers in mobility-related financial services. Processing car sharing is just one use case. Beyond that, the cars of tomorrow may automatically pay for parking, gas or tolls.
Companies already anticipate the prospects of this new kind of financial workflows. Fintech giant China, while weaker on the automobile market than the Western world, is willing to at least dominate the digital car lending market. In Europe, Japan and the US, fintechs can position themselves, helping the already strong automotive industry enter the competition.
And of course, even smart cars won’t move even one bit of customer bank data without adhering to PSD2 and GDPR regulations. In the world of fintech, different industries inevitably clink together – just like sect glasses did on New Year’s Eve. That’s always a promising sound.
Matt’s Fintech End-of-Year Review
Or: Where Fintech Innovation Happened in 2018
I can’t help but cringe a little every time I think about innovation in fintech. And the same happened when I looked back on what happened in 2018 for my fintech end-of-year review.
Obviously, this depends on the point of view. Looking from our home base, Germany, the one thing that happened here in 2018 was Instant Payment.
Pay Now, Innovate Sooner
The SEPA Instant Payment scheme aims to speed up transfers between two participating European banks to a maximum duration of 10 seconds. Strictly speaking, it launched in 2017, officially dubbed SEPA Instant Credit Transfer or short SCT Inst.
And yet, I bring it up for our 2018 fintech end-of-year review. This is because it saw some significant adoption throughout the year, in Western European countries in general – from roughly 15% of the European PSPs in 2017 to nearly 50% in 2018 – and in Germany in particular – from only one bank to more than 1,500. From the inside, this seems innovative and exciting, but once you take a step back, you’ll notice the flaws.
Like often before, these numbers can easily be overrated. One should not forget that every single Sparkasse (local savings banks) is counted as a sole PSP. And then, there’s a similarly large group of banks, Genossenschaftsbanken (cooperative banks), which support receiving but won’t allow sending instant payments until mid-2019. Either way, it all comes with a price tag – banks reportedly charge up to 5 EUR – and it’s limited to 15.000 EUR per transaction. Not to mention the fact that regional products like UK’s Faster Payments Service already existed for 10 years.
So, yeah, I cringed a little.
One Smart Apple
The other thing that happened here in 2018 was Apple Pay.
Cash is still king in Germany. 74% of transactions were conducted using cash in 2017, according to a study of the German Federal Bank. Contactless payments raised just a little over 1% that year, and I doubt the numbers will look much different in 2018.
So Germany probably wasn’t a high priority market for Apple. And the German banks already sat out the launch of Google Pay. They prefered to haggle over fees and build their own apps instead. This is why Apple Pay launched a marvelous four years – light years in tech! – after its inception in the US. It could be used in the Vatican or Kazakhstan before being available in Germany, the 4th largest economy in the world. And even now, major banks like the earlier mentioned Sparkassen and Genossenschaftsbanken do not support Apple Pay!
Let me be very clear: It is my personal belief that younger generations won’t care that much who they bank with. Nor will they accept having to use dozens of different mediums, like plastic cards or dedicated apps. Traditional values like personal points of contact or branch networks are not sustainable anyway. It’s fair to say that the mobile phone in our pockets is now the most personal thing, not our faceless current account provider.
When Apple Pay launched, I wondered how long it would take until people signed up with so-called challenger banks like N26 who offer Apple Pay right from the start and just take 10 minutes to have your account setup. The same day I met one guy over coffee who did, and then another one who did purely for the Apple Watch experience. My wife gifted me one for Christmas, too, and none of the banks I have personal accounts with supports Apple Pay yet. So guess what I did.
Yeah, I signed up with a challenger. And I cringed a litte more.
Germany and Europe are slow-moving, complacent whales. I feel that, to quote myself, we’re keeping ourselves busy through regulation, not innovation.
Africa: Fintech Haven on the Rise
There are other parts in the world to look at, to get truly excited about the fintech year 2018. You don’t even need a thousand dollar smartphone for that.
A Global Banking report, released by McKinsey in February 2018 and titled “Roaring to life: Growth and innovation in African retail banking”, calls Africa’s banking markets to be “among the most exciting in the world” and “a hotbed of innovation”.
Sub-Saharan Africa in general, and rather well-developed countries like South Africa in particular, are traditionally affected by the fact that they have two economies: A well-banked one and an under-developed one where people are not financially included. Only ⅓ of adults in Sub-Saharan Africa have a bank account, as opposed to e.g. nearly 100% in the Nordic countries.
Yet, mobile users are already at 44% according to GSMA’s The Mobile Economy 2018 report and expected to grow to 52% until 2025. This explains why the Sub-Saharan Africa accounts for half of the worldwide mobile money users.
So, from my perspective, the truly exciting news in fintech 2018 came from the most popular mobile money system, M-PESA – and not just once.
In April, Safaricom announced a partnership with PayPal and TransferTo which allows M-PESA users to transfer from and to PayPal. Later this year, in early November, Safaricom announced a new service utilizing Western Union, opening M-PESA to more than half a million agent locations worldwide. This will bring speed, convenience and new opportunities for commerce.
In addition, it will hopefully lower the cost of remittance, with Sub-Saharan Africa still being the most expensive place to send money to. In late November, news broke that M-PESA users will now be able to transact with half a billion WeChat users through a service launched by Family Bank and SimbaPay. This will enable merchants to import goods from China more easily.
These services are currently limited to Kenya (pop. ~47M) but I expect them to expand to other countries where M-PESA is available, like the Democratic Republic of the Congo (pop. ~80M) or Mozambique (pop. ~30M).
So it doesn’t always need materialized innovation like an iPhone.
In Africa, innovation works with plain old feature phones and is through partnerships with the goal to provide additional value to the ecosystem. There’s a fitting African proverb which says, “If you want to go fast, go alone. If you want to go far, go together.”
Did we miss something in our fintech end-of-year