Lucinity, an anti-money laundering (AML) software developer headquartered in Reykjavik, closed a $17 million Series-B investment round in July led by Keen Venture Partners and supported by Experian, the credit reporting company.
Lucinity also announced an agreement to provide know-your-business analysis and risk assessments to Experian, as well as a separate partnership with fraud prevention platform Seon.
Gudmundur Kristjánsson, who previously served as director of compliance surveillance technology at Citigroup and was director of product management at Nice Systems, building compliance systems for top-tier banks around the world, founded Lucinity in 2018 and is its chief executive.
“I knew of a problem which needed solving,” Kristjánsson tells Euromoney. “The suspicious activity report (SAR) system is broken. It is an endless box-ticking exercise and a hugely time-consuming compilation of pointless reports, most of which aren’t even from suspicious transactions.”
Black box
Many of the systems banks use date back to the aftermath of September 11, 2001, before the advent of the smartphone.
Banks have tried to automate financial crime compliance, often using artificial intelligence. Kristjánsson set out to build systems that combine AI and human intuition.
“AI on its own is just a black box,” he says. “Banks that use such systems find they need even more data scientists to interpret the findings. Even if leveraging AI can help reduce false positives, it may actually increase review time if the results are not explainable.”
The Lucinity system raises far fewer false positives and increases compliance teams’ efficiency by 50%, Kristjánsson claims. Big customers include Visa’s cross-border payments platform Currencycloud and Pleo, the Danish fintech specializing in company cards and automated expense processing.
Crises, like the ones we are going through now, tend to spur financial crime. Our investors believe that Lucinity can actually help banks and fintechs through the recession
Gudmundur Kristjánsson, Lucinity
Lucinity’s customers are established companies, not startups. Pleo has a valuation well over $4 billion and 20,000 business customers. It selected Lucinity after a competitive process that pitted its system against dozens of legacy and newer vendors.
Having been through seed and Series-A funding rounds, Lucinity began work on its latest capital raise at the end of last year.
“We wanted funds to press the pedal to the metal for our go-to-market strategy and get our solution out to more customers in the UK, Scandinavia, Europe and the US,” Kristjánsson says. “Crises, like the ones we are going through now, tend to spur financial crime. Our investors believe that Lucinity can actually help banks and fintechs through the recession as they look to make their AML processes more productive and efficient.”
Whereas potential investors wanted to hear about growth when Lucinity raised its Series A in 2020, this time they wanted to hear about sustainable growth.
“In addition to investing in our products, we are also investing in customer stickiness. We want to build long-term partnerships with customers,” Kristjánsson says. “All of the investors which previously backed us also invested in our Series-B round. This time, investors were interested in different metrics than last time. These include annual recurring revenue, net revenue retention, spending per head, cost of customer acquisition and renewal rates.”
Timing
Some venture capital funds pulled back around the invasion of Ukraine, but others sensed a chance to invest on good terms.
Robert Verwaayen, general partner at Keen Venture Partners, says: “We quickly jumped on a plane to Iceland when we heard about Lucinity’s Series-B funding round. Banks and fintechs are stuck between a rock and a hard place, where compliance is a big headache for them and they are trying to wrap their heads around how to approach it in a truly risk-based fashion.”
Lucinity has not been lucky with its timing. Its Series A came in the first month of Covid lockdowns; war in Ukraine, rising rates, falling shares prices and gloomy economic forecasts accompanied the Series B.
But it got both done and Euromoney wonders when it might be out next.
“It definitely won’t be this year,” Kristjánsson says. “We will be focusing on investing these funds into the sustainability of the business. We will raise the next round at the right time to ensure the company’s long-term growth. I think the new focus on the sustainability of businesses is good and VCs have plenty of money to put to work.”
But, he adds, “we must not lose sight of the many positives that have come with the emergence of fintechs. If we don’t invest early in good ideas before they are sustainable businesses, we might lose out on some potentially great companies being created for the good of the world.”
