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WHY MANAGING RISK PERFORMANCE WILL BE LENDERS’ BIGGEST CHALLENGE THIS YEAR

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Michal Smida, Founder & CEO, Twisto

 

  1. What are the key trends you’re seeing in lending?

Q2 was characterised by a conservative approach and a very proactive reaction to managing credit risk. There was substantial tightening in approval rates for onboarding new clients – this in part is due to the uncertainty of the potential impact of unemployment, as well as the increased challenge of gaining access to capital markets. We saw as much as 50% reductions in approval rates across the industry.

There was also a bigger focus on collections and managing risk in the existing portfolio, this includes more proactive and frequent communication with clients. Q3 has seen an easing of the above measures as prime client portfolios in the EU have recorded positive non-performing loan (NPL) performance. In some cases, customer payment behaviour has improved vs. pre-COVID, with some lenders recording their best performance to date.

 

  1. The 2008 financial crisis was the catalyst for alternative lenders. Do you think the current pandemic will be a similar agent for innovation and change, and if so, what might it look like?

The shift to digital has been an ongoing theme since 2008, which gave rise to many great fintechs, but also pushed banks to digitalise rapidly. What the current crisis has brought is increased customer adoption of what has already been in the market for some time. So we don’t see the change in the product offerings of financial institutions, but rather a change in customer behaviour and their willingness to use digital channels, which are not only much more convenient, but also safer and quicker to use in comparison to traditional offline processes.

 

  1. What are the biggest challenges for lenders in the next 12 months?

Maintaining and further managing risk performance. Q4 will be critical in proving the resilience of the customer base. As governments have stepped in to support businesses and the wider economy, the possible impact on unemployment has been delayed.

This in turn can lead to credit deterioration once the support stops. Venture capital and debt markets effectively shut down in Q2, with reopening noted in Q3. As many lenders require additional capital to sustain growth momentum, the key challenge will be attracting capital from investors who became even more selective and cautious.

 

  1. What do lenders need to prioritise to deliver a better customer experience?

It’s mostly about finding a sweet spot between a smooth customer journey and all the requirements coming from different stakeholders around areas such as risk factors.

Many financial institutions are not so brave in terms of challenging the status quo of the current financial conditions. We are doing our best to make bold decisions that might make a difference at the end of the day.

 

  1. You have already started to make the transition to lending 3.0. Why did you want to build a card programme?

Creating a payment card was the logical next step in fulfilling our vision of simplifying daily payments for customers. We started with simple deferred payments “Buy now. Pay later” for e-commerce, but in an age when the overwhelming majority of payments still occur offline, it was necessary to also enter that market and provide an omni-channel solution. The key was to have a better app and overall experience than traditional card issuers.

This was demonstrated in our recent launch of the Twisto app and card offering in Poland, which has been well received by customers, with over 70,000 sign ups and over 20,000 cards ordered in the first 30 days from launch. We are very pleased with the speed of execution through this launch, and strategic partners like Mastercard and Marqeta have been fundamental to enabling the success of the technology. We look forward to exploring expansion opportunities across the EU on the back of this solution.

 

  1. What’s your vision for your card programme and how it will help you solve your challenges and deliver a better customer experience?

At Twisto we believe that having a plastic card in your wallet is already outdated. Because of this, we’ve committed to our goal to stop issuing plastic cards by 2025. We believe that the future is paying with mobile phones. Thanks to Marqeta and our Digital First certification from Mastercard, we’re one of the first companies in Europe, or even the world, who doesn’t have to issue physical cards.

 

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HOW TO OVERCOME THE DIVERSITY PROBLEM IN STARTUP FUNDING

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1. What is Txeya?

Recognising that many businesses founded by black, female, minority ethnic and LGBTQ+ individuals often don’t get access to the funding and investment support that many other companies do, Txeya is a fintech platform that has been created to champion diversity-led businesses. Its mission is to give these start-ups and their founders a fair chance to access the credit, funding and investor networks they need to get their ventures moving.

Using the power of smart banking, Txeya gives diversity-led businesses access to financial tools to support them across the entire start-up journey and beyond, beginning with one of the biggest pain points for underrepresented entrepreneurs — access to funding.

 

2. What inspired you to create Txeya?

As an entrepreneur who has set up a number of businesses from the ground up, I’m fully aware of the challenges many of us face when trying to fund and grow our new business.

I’ve been lucky enough to have had a successful career in investment banking and as an entrepreneur for the last 20 years. And while climbing the career ladder and founding several businesses didn’t come without any challenges, I’m completely aware that growing a new business is even more difficult for diversity founders, particularly when it comes to securing venture capital (VC) funding.

The disparity is shocking and shows no sign of improvement either. Recent research from Crunchbase highlighted that global VC funding to female-founded companies fell to 2.3% in 2020, from 2.8% in 2019.

It’s a situation that’s beyond frustrating, and while there’s a lot of talk about the problem, not enough is being done to initiate change. But with the launch of Txeya we’re set to drive greater equality in entrepreneurship and business investment.

 

3. Txeya is solving problems for diversity-led businesses, but how is it helping investors?

Txeya isn’t just for underrepresented entrepreneurs, it’s a platform that champions the cause for equality from both sides.

Nearly a half (45%) of investors attributed the insufficient number of diverse founders in their portfolio to a “pipeline problem” — a lack of available businesses which fit the diversity profile. But there is no shortage of excellence when it comes to entrepreneurs from underrepresented backgrounds, so perhaps investors just don’t know where to look.

While giving entrepreneurs access to funding, credit and investment options, Txeya also opens the door for investors to connect with these exceptional entrepreneurs and convert investment into high-value returns.

 

4. How can funding diversity-founded business benefit investors?

As it stands, great entrepreneurs and great business ideas are being overlooked and investors are missing out on huge opportunities.

If we look at women as an example, when female-founded start-ups do get funded, they’re more likely to be successful and ultimately deliver higher revenue than businesses not led by women — more than twice as much per dollar invested.

Other research also suggests that start-ups with ethnically diverse founders are able to raise more operating cash and provide better financial returns for investors, and in fact outperform others by 30% when they go public or are acquired.

But despite being aware of the issue and the proven benefits of investing in diversity founded businesses, over a half (60%) of VC firms say that their portfolios hold too few diversity-led business, with 83% believing they can prioritise investments in companies led by diverse entrepreneurs and maximise returns.

 

5. What is your broader vision for the company?

There’s no doubt there’s a lot of work to do in order to create a fairer and more diverse venture capital industry, but it’s our commitment at Txeya to make diversity more central in conversations about investment and to become a leading voice on diversity and inclusion in business.

Our initial focus is to create a hybrid digital banking, credit and investor platform solving the first and most known pain point — access to funding.

However, our long-term goal is to become the go-to community for diversity-led businesses. We want to provide entrepreneurs with access to ongoing business support through mentorship programmes and coaching from leaders in the VC space, who are keen to support diversity and inclusion, beyond the initial funding stage to ensure their business flourishes.

 

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COULD YOU PROVIDE US WITH SOME BACKGROUND ON YOUR CURRENT ROLE WITHIN THE FINANCIAL SERVICES SECTOR?

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Q&A with Shanker Ramamurthy, Global Managing Partner – Banking at IBM, BIAN Executive Board Member

 

Can you explain more about your recent appointment to BIAN’s Executive Board and BIAN’s role in the industry? 

I lead the banking consulting practice across IBM Consulting, focusing on banks’ digital transformation, core banking, and payments. Additionally, I am the President of the IBM Industry Academy, a dynamic and diverse community of IBM’s industry experts aiming to form new solutions to help our customers win in a constantly evolving industry landscape. The Academy offers IBMers the chance to work together and collaborate with industry experts from all areas of IBM.

Since my career began almost three decades ago, I have been lucky enough to work across six continents in various consulting and leadership roles in the financial services sector. This experience, coupled with my current role, has provided me with a unique insight into the digital trends affecting all industries and enables me to serve IBM’s financial services clients better.

BIAN stands for the Banking Industry Architecture Network. It is a collaborative, not-for-profit organization of institutions and professionals from the financial and technology industries, including leading banks, technology providers, consultants, and academics from all over the globe. Member organizations are committed to lowering the cost of banking and increasing the speed of innovation adoption in the industry. Members draw upon their combined industry expertise to define a revolutionary banking technology framework that standardizes and simplifies banking architecture to overcome limitations preventing growth and efficiency and encourage ease of management in their existing environments.1

The opportunity to become a member of the BIAN board was an invitation I could not turn down. I am honored to be part of BIAN’s executive board to provide counsel and support their work in helping financial institutions negotiate this time of immense opportunity and disruption. For the financial services industry, BIAN’s open framework, services-oriented architecture, and standards model are more critical than ever before.

 

Shanker Ramamurthy

After working in the financial services industry for a number of years, what is it that makes you so passionate about the industry? 

I am delighted to see the impact of exponential technology on financial services because these innovations provide an opportunity to bring positive change to people’s everyday lives. I am also a strong advocate for financial inclusion and emphasize its importance as part of my practice. Financial services should be accessible for all, regardless of financial means and where you are in the world. In this respect, I am committed to helping banks widen the availability of banking services and reduce the cost point of doing so.

 

The importance of financial inclusion is evident. But what measures can global banks take to increase the availability of banking services and keep cost points low?

The financial services industry still has much to do to achieve inclusive banking globally. Having said this, incumbents, fintechs and techfins have made significant investments in technology and innovation, with this end in mind. Unfortunately, we live in a world where globally, billions of people still do not have access to basic financial services. Critical areas such as payments – particularly cross-border payments – remain costly, and access to credit continues to be a challenge for so many.

Global financial institutions will find success for their own business processes and their customers through a technology and business strategy to support the bank of the future and by prioritizing innovation powered by hybrid cloud and AI. Although there is much work to be done, it is encouraging that the combination of innovation will help democratize and transform finance like never before.

 

What can banks do to prepare for the future? 

Banks are facing an evolving landscape due to COVID-19 and changing regulatory environments. This is something banks and fintechs are navigating. At the same time, the financial services industry is being shaped by new consumer trends – from the rise of a cashless society to the pandemic-driven shift towards online banking and mobile payments.

The focus on technological development to accommodate these changes will continue. The banks that succeed will be the ones who have a technology and business strategy to support the ‘bank of the future,’ in which much of the middle and back office gets almost entirely automated and focus shifts to customers and customer value-adding functions. This transition requires rapid digitization and the adoption of exponential technologies powered by the hybrid cloud and AI. BIAN has an essential role in helping banks do just this.

 

What does the shift towards digital banking, including the increasing use of mobile contactless payments by customers, mean for the bank of the future?

Digitization drives innovation, new business models, and efficiency while simultaneously enabling extreme competition from traditional and non-traditional competitors. In tomorrow’s banking eco-system model, the value is increasingly accruing from customer-facing functions supported by platform-based business models. By extension, this has meant competition from both fintech and importantly, techfins (large technology companies that are moving into the less regulated aspects of financial services such as payments, electronic wallets, BNPL – buy now pay later models and more).

Banks in the future will automate extensively, and likely extend their business models to create ‘beyond banking platforms’ to support their customers in areas outside of the traditional banking value chain. The future of such models is being written in Asia by banks such as DBS in Singapore, State Bank of India, among others as they evolve their business models to combat the growth of ‘super-apps’ like Alibaba, Tencent, Grab, Gojek, and more in that part of the world.

 

How can the industry find its footing after such a change?

Banks have several natural advantages that come from incumbency, customer loyalty, and material regulatory barriers preventing non-traditional competitors from quickly breaching their businesses. Regardless, mastering the future will require banks to ask themselves three questions:

  1. Is our strategy ambitious enough?
  2. Are we executing fast enough?
  3. Do we have the talent and capabilities to win?

Answering these questions honestly and then putting in place programs to execute relentlessly is the only way for the industry to continue to thrive and take advantage of the extensive opportunities in the near future.

 

 

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