Welcome to Tuum Talks Episode #3: The Year Ahead in Fintech
Recorded Live: Wednesday, January 17, 2024
Host: Myles Bertrand, CEO of Tuum
Guest: Simon Taylor, Head of Strategy and Content at Sardine
Dive into the future of fintech with Myles Bertrand, CEO of Tuum, and Simon Taylor, Head of Strategy & Content at Sardine. Discover insights on fintech funding, the trajectory of crypto, Banking as a Service (BaaS) trends, the role of human bankers in the ChatGPT era, new developments in payments, key regulatory decisions, and unexpected surprises in the fintech sector. Simon’s expertise and thought-provoking perspectives make this a must-see for anyone planning for 2024 in the fintech world. Don’t miss this essential episode of Tuum Talks!
Key Highlights:
- Simon Taylor’s intriguing journey from traditional banking to fintech, and his current role at Sardine, combating financial fraud.
- A deep dive into fintech’s resilience amid funding ebbs and flows – with an optimistic outlook for a rebound in FY24.
- The evolving landscape of BaaS and its future trajectory.
- The impact of AI and ChatGPT on banking – beyond the hype to practical applications.
- Fintech’s role in pushing the envelope of innovation, financial inclusion, and combating financial crime.
Top Insights:
- Digital banking and AI are not just trends but integral to the financial ecosystem’s evolution.
- The necessity of cultural change within legacy banks to foster innovation and adaptability.
- The significance of BaaS and its continuous transformation, especially in light of compliance and regulatory challenges.
- The role of fintech in addressing economic stagnation through creative financial solutions and services.
The Year Ahead in Fintech
[Full Transcript]
[00:00:11] Myles: Hi everybody. I’m Myles Bertrand, welcome to Tuum Talks and welcome to Simon Taylor. Thanks for joining.
[00:00:21] Simon: Thank you for having me, good to be here. How’s it going Myles?
[00:00:27] Myles: Well the first one of the year you want to start with a bang, so we thought we’d get one of the gurus on to tell us what’s what and what’s going on. It’s a real pleasure to have you here, and I’m really looking forward to our chat today as well, because it’s going to be looking back on FY23 and looking at what’s potentially going to happen in FinTech and FY24. I’m looking forward to the year myself.
Before we start, maybe you could just give everyone on the call just a little bit of background about yourself.
[00:00:57] Simon: Sure. I am these days best known as the writer of www.fintechbrainfood.com, the weekly newsletter all about fintech that goes to more than 37,000 professionals in financial services; everybody from CEOs of banks and fintech companies to venture capitalists to everything in between. Real mixed bag, real gallery of nerds who enjoy this stuff. That’s been a lot of fun.
I also have a day job. I work for a company called Sardine, the world’s best fraud and compliance team that you hire as an API. We are very passionate about stopping scams. I’ve been more than 20 years in financial services, mostly in payments and banking. I was at Barclays, I helped set up Barclays Rise. I was head of crypto R&D over there for a little while, worked in global transaction banking, delivered some of the first mobile apps in the UK market. 20 years, man and boy, and I’m feeling old these days. Miles, that’s me.
[00:02:02] Myles: Oh, great to have you here. just on that, not to plug you out too much, but anyone who hasn’t subscribed I’d strongly recommend you get on board with Brain Food. Awesome topics, great discussions, really good things to see.
Having to do that all the time and write all the time, does it put pressure on you every week coming up with something new and something funky to talk about?
[00:02:31] Simon: Yes, it’s terrifying and sometimes the well is dry. But most of the time what actually happens is I’m like, that’s it, oh my God; it makes me think fast and the thoughts all come so fast that I almost have to write them down to catch them.
I guess I’m just really lucky. For a lot of people, I asked them, what’s that thing you do when you’re waiting for an aeroplane and you’re a bit bored and you’re looking at your phone? Because I’m reading about FinTech. I’m sorry I’m just that guy. It’s actually my hobby. If I see something just when I’m a little bit bored and it catches my eye, I’m like, Oh my God. That connects to this, which connects to that. You know that crazy guy meme where he’s standing there at the wall, like, I see everything. That’s my whole field to Brain Food. But what I’m actually trying to do is take it from crazy guy to like, here’s a rational chain of thought about why this would actually resonate with the CEO of a top 10 global bank and why they should make a meaningful change, and/or if you’re the CEO of a FinTech company, here’s what it means for you, and/or if you’re a venture capitalist, here’s what that macro trend means and where I think we’re going.
I was never writing for them. I was writing for me and I think I still am, but it’s really about trying to ground some of this stuff. Because the world is noisy these days.
[00:03:53] Myles: It moves so fast. Your subscribers are so diverse as well; how do you cater for that? You’ve got completely different mindsets, how they think about fintech. For some people they are on board, other people like a different topic. How do you find that balance?
[00:04:11] Simon: I think people come to me for the fact that I am broad, that I go wide, that it won’t always be the same thing. But I can honestly tell you, I know that if I write about embedded finance, it will get more views. But sometimes I don’t have anything new to say about embedded finance. Embedded finance partner banks in the United States will get the most views. Can’t always write about that. A, Jason McCullough does it better than me; and B, sometimes I don’t have something new to say. But buy now pay later is always a really strong subject, as is lending credit quality, as is partnerships between fintechs and banks.
The other one, big one is whenever I’m talking about how big tech can really meaningfully enter the space and deconstructing their strategies. It’s just what’s interesting to me. In terms of the audience, I’m not necessarily trying to please them. Sometimes I’m writing something because I need to say it and I know it won’t get as many views. Sorry, if you thought that one stunk, I probably loved it; it was really useful for me. That’s what it’s about.
But there’s a core audience that will read everything, and they like the breadth. There’s some people that are dipping in and dipping out, they’re getting the newsletter, they’re not reading it every week, and that’s fine. I’m not going to force you to read the thing, but I think what you will see is something different. What you will see is something that you’ve not thought about before. It comes out on a Sunday, if you have a spare 10, 15 minutes, I’m a dad of two, which is rare, so it’s usually trying to find it whilst doing something else, scrolling on my phone. But if you sit and read that thing, I hope you get something from it and I hope it shows you something that you’ve not seen.,
[00:05:57] Myles: I’m a dad too, I know exactly where you’re coming from as well.
[00:05:59] Simon: I think on that serving many audiences, I’ve always found that there are people in banks that want to change things, and there are people in banks who think fintech is stupid. The people in banks who think fintech is stupid, I’m not there to serve them. But I’m there to arm the people who think fintech is important, with the rationale I would have used when I was in a bank to bring more supporters to this way of thinking.
I had a colleague at 11:FS who described me as having a big bank PTSD, which is like, I’ve dealt with that person who says no to me all the time, and now this is like, no, this is really important. It’s kind of my love letter to that person who really deeply believes the thing but doesn’t have the confidence to speak up, because that was me.
[00:06:52] Myles: I agree 100%. That’s one of the things I comment on a regular basis, is that there’s lots of people within banks who do want to change, who want to evolve, who want to embrace FinTech, but they don’t have the confidence to speak up because you’ve got these ginormous organizations that have been built up over years, their technology stack’s been built up and band aided together over years and years, and just the concept of tackling that, the tech’s there, we all know the tech’s there that can help solve these problems for them, but it’s the cultural change that’s required in a lot of these organizations to actually to make it happen.
[00:07:26] Simon: 100%. There aren’t a lot of people that have the permission to speak truth to power. If you do early in your career, you’re the naughty kid. and the middle management will tell you off. Even though probably the senior manager really appreciated it. I was always the naughty kid and I was always speaking truth to power, and I was always being told off by my immediate management for how I did it, my style, my tone. A lot of them were correcting the style and tone, like, “You can word things clumsily. You might be correct in your assessment, but you can still be a dick about it.” That’s what I had to learn, and it was a useful skill to learn.
But at the same time that message got through, and it wasn’t until probably I was at Barclays and to some extent TSYS, where a few people took a bet on me. But it was definitely the technology leadership at Barclays where I would say something, and it was like I’d sucked the air out of the room because I was saying it to somebody four levels above me and they were all looking, and that person would go, “Yeah, I think you’re right. Yeah, you’re right, Simon. You’re right.” Why did it take so long to get to this?
[00:08:42] Myles: I think a lot of organizations these days have created a culture where people just keep their head down, and the person who sticks their head up sometimes, puts their head above this office, gets their head shut off. Everyone just keeps their head down, and it’s really unfortunate.
[00:08:58] Simon: I was speaking to one of the top European banks’ leadership within the last six months. I was asked to come in and do a talk to their top 300. The whole thing was really set up around courage, and having the courage to speak up and having the courage to say the awkward thing. I’m such a people pleaser, that unless the passion drives me into saying it, and usually saying it incorrectly and hurting somebody’s feelings by accident, then I won’t say it because I don’t want to hurt them. I think a lot of us deep down are actually that person.
The interesting thing about start-up culture is there’s just no time because you will be out of business unless you say that thing and deal with it. You can let the elephant in the room just stay there because you’re going to get paid and you’re going to go home and it’s going to be all right, and then they might talk to them who’ll talk to them, and it’s a high school thing. But having that courage to say the awkward thing, was really important. The feedback I got after the session was almost like, we need to hear this.
I don’t know if you’ve ever been for a sports deep tissue massage where it hurts, but you feel so good after? It’s a conversation.
[00:10:21] Myles: No pain, no gain. Let’s maybe cycle back a little bit, something which is a little bit more factual. Look at FY23 versus FY24. CB Insights said VC funding was down 80% in Q3 2023, versus its peak in 2021. You’ve seen a significant shift. But even towards the end of the year, I think there were small signs of stabilizing. Do you think there’s a rebound on the cards in FY24?
[00:10:53] Simon: It’s already happened. I don’t know if you’ve seen that Affirm was one of the best performing stocks of the last year. I don’t know if you’ve seen that Coinbase was one of the best performing stocks of the last year. These stocks did extremely well because they were oversold.
They were overbought, then boom, they crashed. Then they were overcorrected and oversold. Wasn’t that obvious? Wasn’t that always going to happen? Is it just me that zooms out and goes, duh?
The more interesting trend on long term fintech funding is it’s where it was in 1718. There wasn’t a lack of fintech funding in 1718. Now go look at how much fintech funding there was in the year that Stripe was formed, in the year that Square was formed, in the year that Monzo was formed; there was actually less than there is today. We’ve got two things. We’ve probably got too many fintech companies, and there was too much funding, so there will be some go out of business. But also, we already had a lot, and we’re in a position where banks were seeing net deposit fly, fintech companies and digital banks are seeing net deposit gains. The argument that, you won’t be disrupted I think has been proven factually incorrect. Your deposits are going down, your net interest margin is compressing, you are losing customers, you are having to cut jobs in order to stay profitable. That is death by a thousand cuts. That is the definition of death by a thousand cuts.
On the other side, Profitable Starling, Profitable Monzo, NewBank keeps utterly crushing its results. Wise is absolutely killing it right now. They just reported something like a 30% year on year customer acquisition growth, their revenues were up 23%. They have 7. 5 million consumers, 400,000 businesses. That is a big old organization. “This was never going to be profitable. Silly little fintechs. They were going to go away, weren’t they? Oh, we can do that.” Yeah, good luck, because they’re out there and they’re absolutely killing it.
They’re also above their IPO price. “Oh yeah, but they’re below the IPO price.” Everybody wants to be negative about them. The only person who’s. the opposite way, interestingly, is the CEO of the bank who had its best ever quarter. It’s Jamie Dimon. Jamie Dimon is on record of being “Sh*t scared of fintech.” It’s 9 o’clock in the morning, I’m not going to swear. I usually do.
[00:13:29] Myles: It’s 8 P.M. where I am, so it’s okay.
[00:13:31] Simon: I’m getting away with it. I don’t know what your brand’s like, I would have gone for it. But he’s the only one. Everybody else is talking about, “We’re going to return to the fundamentals. We’re not really concerned about FinTech companies. We believe in our co business growth and we’re showing strength in our blah, blah, blah, blah, blah.”
Winners, are trying to get better. The best are always trying to find the improvements. They’re always looking for what’s out there and what’s scary, how do I get better, how do I get a little bit better every day? Whereas everybody else is just talking up their failures. It’s like, “No, but my kid’s really good. They might have punched that other kid, but they’re sweet deep down.” No, you’ve got to have the crucial conversations. You’ve got to stop lying to yourself and lying to the market. That’s not an accusation of lying. They’re not doing that, obviously, but I mean it more in the metaphorical sense.
Looking at the hard facts and data, funding is more or less flat. Looking at bank stocks, the KBW Bank Index is down 5% year on year, JP Morgan is up 27% year on year. But Affirm is up more than 2X. Adyen is an absolutely killer stock. Square is making a bounce back. Yes, they’re down off their peaks, but their peaks were ridiculous. Let’s admit it.
[00:14:54] Myles: The multiples were just off the charts. But I think you’ve had the correction, but the good quality organizations, you mentioned a bunch of the well known brands. But I read the other day, like even Time Bank in South Africa just had profitability. Even the next year down, the ones that are just small, single regional, even they are starting to get inroads, millions of customers. You’ve seen really good traction with some of the digitals across Asia Pacific now; some of them are starting to do very, very well.
I think about the industry and you’re right, 5, 6, 7 years ago when digital banks were the thing, the big boys just used to sit there and go, “I’m not even going to worry about it.” But it’s now starting to hurt and it’s going to hurt more.
The expectation of customers is driving a different behaviour as well. You don’t have that lock-in, that loyalty that you used to have. I’m quite happy to go. If I’m going to get a really good rate over there, all those guys are going to give me the best mortgage, I’m just going to go there. I’ll use an Australian, I’m not going to be a CBA customer for life anymore. It just doesn’t happen. I think it’s interesting that Jamie says that. I saw a stat a while back, I use the stat a bit where in 50 states, they asked like the top 1000 bank CEOs in the world, and I think 57% of them said, “If we don’t evolve, we will become extinct.” Yet 90% of those guys still aren’t doing anything. They’re still band aiding together and they’re not really addressing the root cause of the problem.
[00:16:28] Simon: Well, the dinosaurs weren’t worried about these silly little mammals hiding in the dark. It wasn’t the mammals that killed them; it was the lack of food and the lack of the ability to adapt.
It’s your ability to adapt that is your strength. That is your ability to adapt and grow new revenue lines. When cities reporting that their revenue is down 3% quarter over quarter, they’re exiting Argentina, they’re exiting municipal bonds, they’re exiting distressed debt. That is death by a thousand cuts. It is starting to happen.
Ron Shevlin and calls big banks “pay check motels” because your pay check goes insure. The banks will go, but we’re still getting the pay checks, we’re still getting that direct deposit, we’re still getting the salary. I’m glad you feel good about that, because you’re not getting anything else. You’re not cross selling. The cross selling is going to somebody else. Ask your consumers how many banking or bank like or fintech apps do they have. The answer is not one, and it’s probably not just you, it’s multiple apps. We are in a multi app world. Airwallex is going to IPO soon. You see this everywhere in the world, without question.
[00:17:38] Myles: One of the big buzz things last year, and this is the world we live in, but banking as a service. It was talked about a lot in FY23. In fact, one of yours newsletters is called BaaS is dead. Do you see it as a secular thing? How do you think about BaaS? Will it reassert itself, or are you still sceptical on the topic?
[00:18:04] Simon: It’s an inevitable consequence of market pull. Banking as a service or something like it will exist. The distribution model is a work in progress.
Let’s define banking as a service. Banking product delivered via a non-banking app or service. That could run the gamut of, I’m a small business customer, I am signing up for something that looks and feels like a bank, but actually is really a technology company that’s working with another technology company who’s working with a bank behind the scenes. You get these three layers back. It might even be a technology company that’s working with a technology company that’s working with a payments company that’s working with a bank. It’s this layer cake almost, of complexity and unit economics.
That model, in Europe, we saw it struggle. We saw Railsr office closed. We’ve seen many other issues with it. Typically, what you see is actually something that looks a little bit more like somebody is a money service business; they’re working with a Barclays and NatWest on the back end. Then at the front, they’re working with cards processor like GPS, and then they’re putting the pieces together themselves, because the revenues are much, much lower.
Europe’s took an initial lead based on that model because you got the Revolut’s, the Monzo’s using that model to drive something new into the market, exciting. But then it stopped. Then the US went boom. What happened in the US is they have a very complex legal framework, to say the least. On the Dodd Frank 2010, there is something called the Durbin Amendment. What the Durbin Amendment meant was for a bank with less than 10 billion in assets, so teeny tiny banks, could charge a lot more for their swipe fees for the interchange every time somebody makes a card transaction. That meant there was a lot more to go around. These teeny tiny banks would say to these technology companies that would work with a payments company, let’s do a partnership. You saw companies like Synapse pop up, but now you’ve got Unit. Even Stripe got into that game for a little while, where I as a tiny entrepreneur, could get a mobile app and a card to a customer in about two to eight weeks, depending on my testing and my level of maturity. That’s gone from 12 months and a million dollars to two weeks and pay as you go. Amazing.
Software as a service, we live in the future. Except not everybody got their compliance right. There was massive money laundering, fraud was up. Some of that was driven by the pandemic, don’t get me wrong. There was a lot of pandemic related fraud. But also, not everybody knew what they were doing and there were some real problems.
When I said BaaS is dead, BaaS 1.0 is dead. Debit cards distributed to people in two weeks, probably not going to happen. Diversify businesses that work with multiple partner banks with a sophisticated operation under a different regulatory framework, that’s really exciting.
My most recent piece was about building the deconstructed Silicon Valley Bank, which is to say there’s a whole generation of companies in the U.S., Mercury, Brex, ARK, all of these companies, even modern treasury to some extent, that are building a new operating system for CFOs and businesses. That operating system does everything from, I can buy treasury bonds with it, I can raise venture debt, I can finance my receivables, I can store my money there, I can get a high yield account. Behind the scenes, there’s so many different banks and even brokerages. This is a complex product that a bank would never offer. It’s also built with a user experience that a bank could never build. I’m sorry, you just couldn’t, no matter how good you are. Even Chase couldn’t. This is really just put together.
BaaS 2.0 is starting to look a little bit better. Consumer is very, very hard. It’s extremely regulated. I think you’re better off almost becoming a digital bank in most cases in that sense, with some exceptions like Ys and whatever else where you’ve got a different wedge. But in the SMB space, it looks fundamentally different.
But isn’t it funny, BaaS is Dead was my third most viewed post of last year. Generally, when I’ve posted a negative headline, the views have gone up. I think people wanted to hear about how FinTech was dead in 2023. The confirmation bias was there. The irony of that whole piece was, of course it’s not dead, it’s evolving, but it can’t just exist as the way it was.
[00:23:18] Myles: Well, it has to evolve. 1 0 of anything is never perfect. You’re always going to get to 2.0, 3.0. I think exactly BaaS is in that cycle, buy now pay later has gone through that as more compliance and more regulations going into it as well.
Then I think the speed of how our industry is going now and how it’s operating, banks think about doing something now, and by the time they actually do it in the old world, it takes them 18 months or 24 months to release anything. The whole market’s moved on, the consumers have moved on, everything’s moved on. That’s why they need to embrace more Fintech and more technology to help them solve that problem. ChatGPT, or let’s say AI, the biggest tech trend of 2020, probably bigger than Taylor Swift, I might get into trouble for that.
[00:24:11] Simon: Stop saying that. Don’t John Lennon yourself and be bigger than God here.
[00:24:18] Myles: Yeah. I have my personal view on this, but ChatGPT or AI, how do you think that’s going to impact banking? Where is it going to be? You hear people talk about, it’s going to replace humans. Do we really think that’s going to happen? I’d be interested to get your thoughts on that.
[00:24:39] Simon: I can only judge ChatGPT as it exists today. The problem is in six months time, it’s going to be something completely different. I don’t know if you’ve seen what, Midjourney, the image generation platform, was doing 12 months ago versus what it can do today, but it’s gone from my ability to draw to Picasso’s ability to draw.
[00:25:03] Myles: I have seen something on that, it’s insane.
[00:25:05] Simon: Utterly. I think a lot of people realized how much an exponential curve can impact you during the pandemic. Because it’s like, there’s only a few cases. Yeah, but it’s growing exponentially. Yeah, but there’s only a few cases. Yes, but it’s growing exponentially.
Same thing’s happening with this technology. Javier out of the way. As it exists today, I have a couple of observations. One, it’s not artificial intelligence yet. It is intelligence augmentation. This is like having a really eager intern who wants to please you, and say what it thinks you want to hear. But you have to be so specific because it’s from another planet and it has absolutely zero context about who you are or what you’re trying to achieve. Your ability to get value out of it is dependent on your ability to prompt it well. For some people, hallucination is a feature, not a bug. It’s actually extremely creative. It’s very innovative. It’s good at things that machines aren’t. supposed to be good at. It’s bad at things machines are supposed to be good at. It’s not a very good calculator. It does maths wrong sometimes, because it’s trying to be creative.
It’s like hiring an artist to do your software engineering; it doesn’t make sense. Which is ironic, because it’s actually very good at software engineering.
Given all of that, here’s what it means for banking right now. Most big banks do not have the data governance in place, all the fundamentals, all the foundations, to do anything with this technology. Most of them will block it and ban it, like they have with social media.
For the big banks, you can talk to McKinsey all you want, all they’re going to tell you is use cases that you’re not going to use because your security team are going to lock this up forever in governance. Get out of your own way first and stop hiring consultants to do consulting to consult, and start actually doing data governance. That’s number one.
Number two, there’s running before you walk going on here. I think as an individual, as a human being, there is no amount of time you can spend playing with this technology that is too much. You should make time in your day as a senior leader to be actively trying to use this technology in everything you do. Because if I’m a knowledge worker, I’m not going to get replaced by AI, I’m going to get replaced by a human who’s very good at using AI. That’s the difference here. You have to learn this skill. It is an utter imperative because genies don’t go quietly back into bottles. There’s that whole side.
As an organization, the first thing you need to do is get your data governance in place. When you’ve done that, you need to figure out machine learning, because that was all the hype five years ago. But I’m yet to see with one or two notable exceptions maybe, an organization that really does machine learning the way that Google would think about it. At Google, the answer is a neural net. What’s the question? In a bank, it’s like, “Oh, we do a machine learning thing over there.” That’s cute.
In fraud and compliance and anti money laundering, there’s some good pockets. Don’t get me wrong, I don’t want to insult the industry. Shout out to those of you that are doing a good job, you don’t get enough attention. It’s really important; you’ve got to get the basics. But if you go to a personal trainer, if the first thing is you want to go lift the heaviest weight in that room, they’ll say, “Slow down, we’ve got to stretch first.” Slow down, we’ve got to deal with your gammy knee first.” CEOs don’t want to hear that. They want to use the NextGen AI, super duper whammy bangy thing. They don’t want to fix their knee. Fix your goddamn knee before you try and squat. Get that in place and then you can start to use it.
How’s Gen AI going to impact banking? Well, most banks aren’t going to use it because they’re not going to do the basics right. How’s it going to impact financial services? Well, the low hanging fruit use cases are, let’s summarize a complex document, let’s brainstorm some marketing copy. We’ve got to file a suspicious activity report, let’s take all of these bits and pieces and summarize it. Good. We’ve got a customer service chatbot. Good. All of these are the no brainer things that you can start using more or less immediately. People are already doing that. It’s already happening in the way that people started adopting it on their phone.
But what I’d give a shout out for is some of the other tools, like Perplexity is a really good research assistant. You’ve got to be trying to use this and experimenting it. It’ll come bottom up, not top down.
[00:29:49] Myles: I agree, you’ve got to walk before you run. I love your analogy that you’ve got to fix the knee. I think most banks, some of their core technology is so old that if you try and plug any smart tech into it, the things are going to have a heart attack, a meltdown or a nuclear explosion.
But I think that’s the point here, is that I see it being a real thing, the genie is out of the bottle. I believe that as well. It is here to stay, but it’s going to evolve over the next 3, 4, 5 years. You’re going to see different machinations of it. But what I think established banks need to do is need to start fixing their knee right now. Because even in 3 or 4 years time, if they haven’t fixed their knee, these so called snotty little start-ups that are annoying them are going to leapfrog them, because they’re just going to be embracing this technology and using it.
[00:30:40] Simon: In the fintech world, I can’t name a company at Series A or Series B that doesn’t have Gen AI as a meaningful part of their workflow. The one I work for, it’s trained on all of our help docs. We have Slack bots where you can just ask it questions about, what went wrong with this fraud case, can you help me with this? You’ve actually got pretty decent customer service agents.
There’s a really interesting company called tennis dot finance. Tennis Finance is on the front of it. It’s an AI that will review things like marketing copy for treating customers fairly, or in the U.S. it’s UDAP, which is Unfair and Deceptive Acts and Practices. It’ll do that review. But here’s the crucial thing. They say it’s a pre check. It’s not a compliance check, it’s a pre check. We’re going to tell you things to look for, where you might have an issue, but we’re also going to sell you a fractional chief compliance officer, and this fractional chief compliance officer is available on demand to review the output of the journey. You can completely outsource this to us, or you can massively scale up your ability to deal with issues inside the organization. What’s the one part of the organization that has really grown in the past two decades? I saw an estimate that, banks spend anything up to 30% of revenue on fraud and compliance staffing. It’s absolutely enormous. The problem is more people is not solving the crime. The crime is growing exponentially.
There was a study by Portsmouth university that said the estimated financial crime with a 90% confidence interval, is $5.38 trillion per year. NASDAQ just came out and said in 2022 they believe there was $3.1 trillion of illicit trade flows. That is more than the GDP of the United Kingdom. In fact, the upper estimate is two times the GDP of the United Kingdom. Crime is a top five global economy. Hiring more compliance staff is not fixing that.
[00:32:57] Myles: No. the human factor, rightly or wrongly, more people; it gets to a point sometimes where no matter how many people you chuck at something, you just can’t solve the problem. It needs to be a combination.
[00:33:10] Simon: I think you want to achieve the opposite at some point as well, because the communication starts to break down. The amount of. people that need to see a thing in the complexity of the organization massively increases. You want to simplify. Was it Steve Jobs who said, simple is hard, simpler is harder?
Really simplifying something, boiling it down to its essence, is incredibly hard. It’s attributed to Mark Twain, I don’t know who actually said it, “Sorry I wrote you a long letter, I didn’t have time to write you a short one.” Brevity, as you can probably tell from my verbal diarrhea, is extremely difficult to get something down and refine it. E equals MC squared is beautiful because it says so much with so little. The ability to have a small compliance team that is incredibly effective is actually an incredibly difficult task.
That’s why I’m so passionate about what we do because it’s so important when you think about some of the consequences of getting this wrong.
[00:34:12] Myles: 100%. Maybe do one more question to you, then we’ve got a couple of Q&A questions as well, which I’ll try to cover as well. This is probably two answers to come out of this question, what’s the one thing that no one expected that happened in 2023, in your opinion?
[00:34:38] Simon: I think the non consensus thing that happened in 2023. What we’ve been talking about is fintech is back, but also crypto is back. Bitcoin was the best performing asset of last year. Don’t know if you noticed. Not investment advice, do your own research. But crypto just won’t die.
[00:35:06] Myles: Well, the data speaks for itself on that, 100%.
[00:35:09] Simon: Yeah, the herd just herds around, doesn’t it? Everyone’s going that way, I guess I’ll go that way too. It’s independent thought.
Now I think the opposite. Now everybody’s excited about it again, it’s probably going to go the other way. Best flat, we’re going to have a dull year, that’s a good case for FinTech. It’s not going to put its head above the parapet, it’s just going to keep delivering results, person works hard, doesn’t get the headlines. Great. That’s exactly what we need 2024 to be.
[00:35:53] Myles: Why should our audience be confident about FinTech in 2024? Should they be confident about FinTech in 2024?
[00:36:02] Simon: It’s not going anywhere, that’s for absolute sure. Why do you want to be confident about it? I think if I work in a FinTech company, am I going to keep my job? Yes, probably. Especially if you’re the type of person that can adapt and keep moving forward. If I work in a bank, why would I want to be confident about it? Well, perhaps I’m trying to transform the internal organization and I need evidence to convince my organization that we need to change, in which case read www.fintechbrainfood.com, because I’m writing specifically for you. I don’t know. Why should you be confident, I guess is a very personal question.
But the innovation just doesn’t stop. Every time I look at, four new FinTech companies every week, I see something I didn’t expect to see. I’m blown away by the creativity, the seed stage stuff. Somebody will just come up with something, and you’ll go, “Oh, why didn’t I think of that? That’s amazing.” That’s cool, because we’ve got big problems to solve. The economy is broken. It doesn’t suit the underserved. It doesn’t suit the fact that we’re entering a world where geopolitics makes the world less stable, and the old infrastructure and rails we used to rely on are no longer reliable. We need different and new products for a different and challenging age, and frankly, a generational shift. One could argue that the millennials are starting to hit 40. Then so are the fintech companies of the millennials; they’re starting to reach a level of maturity where they think they’ve got the world figured out. What we’re now seeing is these young upstarts at the bottom and the cycle repeats. The Gen Z fintech companies, and it’s like, that’s weird. It’s like TikTok; I don’t quite get it, but I know it’s important. Yeah, I get it.
[00:38:01] Myles: Some of the people I meet on a regular basis, I still love the fact there’s so many people that are so enthusiastic and there’s new people coming into our industry and coming into FinTech and they’re just so hyped on it. It keeps us all up. You’re almost in your 40s, I’ve got a big five in front of me, but I’m still super excited about our industry and what’s going on.
I’m going to circle back, I’m going to take the first Q&A question, which is really perfect for what you said. This is from Dan Feeney. Hi Simon and Myles, the Barclays CEO just criticized the UK stagnation economy in terms of birth, growth and productivity. How can FinTech help? That follows on from me a bit now, so how can we help?
[00:38:49] Simon: They say never discuss politics, but I am aggressively pro immigration. I just think that yes, there’s lots of things that can go wrong with immigration, I’m not going to shy away from that. Everybody has their caveat; they want this type of immigration, they want blue, red, green and standing on your hands. No, it’s opportunity. What you need is more young people in the economy. The way to achieve that, if you don’t have the birth rate, is to have immigration. Look at Japan. The equation is really simple. We need to encourage that.
What can fintech do in that? I think it’s got to create on ramps into the economy. We’ve seen lots of financial crime risk around companies that open accounts where people have thin files when they’ve come across borders, but I think that’s where you’ve got an opportunity for innovation. How can I onboard somebody into the real economy, not to the grey economy? Because the alternative is you get one of these SMS messages, which is earn 800 a day working from home. What you’re really doing is signing up for a bunch of fintech accounts and you’re being a money mule for an organized crime organization cross borders, washing the proceeds of crime through the UK economy. Don’t do that. Do something better. Be actually good at fraud and compliance, bring people through this, that’s an incredibly hard thing to do, and find and create the economic opportunity.
How can I fund people to go into certain types of education? The UK is very bad at lending innovation, weirdly. What are the types of on ramps into the economy that we start to do? Barclays has a whole Digital Eagles program, I’m surprised they haven’t come out with something from that side, because that’s their opportunity. It’s one thing to say the UK is sluggish, it’s another thing to say, here’s what we’re doing about it. Innovative products can make a meaningful difference.
Thank you, Dan.
[00:40:50] Myles: Last but not least, and I think there’s probably a caveat that this not financial advice, but are housing loans going to be the killer feature for neobanks? As a lucky millennial just able to afford a place, it is a key decision maker that determines my primary bank going forward.
[00:41:09] Simon: I don’t know if housing loans are going to be the thing that makes you switch neobanks, but it might be the thing that makes the digital banks profitable. Starling’s bought a loan book. That was the classic way to make money in the consumer, is you get the salary and what that allows you to do is lend to them at a better price because you see all of that income.
With open banking I can probably do the same pricing calculation that anybody else can do, but I’m also benefiting from that little bit of net interest margin, which means I’ll be nicer to that customer because I want to keep their deposits sticky. That’s classic maturity transformation. I think that’s still worse.
Sometimes, a thing that works on a spreadsheet still works. But I think the key part of the sentence was “as a lucky millennial”. Most of us haven’t been that lucky. I would count myself as one of the lucky ones, I’m sitting in a house. But it’s a scramble. I’m fortunate both my wife and I work, we’ve both done reasonably well for ourselves. We can just about do it. What about everybody else? You’ve got to be in the top 5% of earners in order to really meaningfully do this. Then how are you going to save a deposit? We got lucky for two things. One, there was a pandemic, so we weren’t spending any money, which helped with the deposit. Two, then when we did, housing prices were depressed and my wife happens to know a bunch of areas that were under-priced, and they were building an Elizabeth line, which is really helpful in London. That is rare. I am extremely fortunate to have that.
I don’t know that you can predicate the success of your organization entirely on a business model that has a shrinking market size and a shrinking opportunity just because people aren’t there. What you can do is start to find on ramps to that for a certain segment of the population. But I think if I zoom out, there’s a broader point, diversify revenue, digital banks. The fastest growing business in Europe, in the Fintech Power 50, was Alicabank. That is a bank that lends to small businesses and takes consumer deposits. It’s the Oak North model, but just done faster.
If maturity transformation works as a business model, it’s really effective. If you execute it well, it’s, it, it’s incredibly efficient. Most of the big banks are so big that they’ve got economies of scale, but they’ve got economies of cost that they’ve got to deal with. You can go do that really well. I think a lot of the neobanks have tried to do other things around consumer experience. In fairness, that has pulled them in a slightly different direction.
I’d look for a broader point, which is more innovation around lending, more innovation about how you do lending, with mortgages being a piece of that puzzle but a shrinking piece. I don’t think you can bet the whole organization on it.
[00:44:12] Myles: I tend to agree. It’s really interesting in our world we service and support and talk to a lot of digital banks and neobanks, and they’re always talking about deposits and taking money and cards. Because that’s an easier entry point for them. Lending adds a level of complexity and maturity to the organization. It always takes them, I think, and they go through that life cycle, “I want to start a bank, I want to take some money.” But to get the profitability, Alacabex is a really good example, you need to have that smart lending book. Starling buying a loan book, that had to make a difference for them as well. I tend to agree.
Okay, time’s up. Simon, absolute pleasure. Thank you so much for joining. I always love these chats. We have a diverse group that joins us on Tuum Talks. I really appreciate your time today. For our audience, please look forward to other episodes of Tuum Talks coming up. Simon, have a great day.
[00:45:09] Simon: Thank you.
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