How fintech can save us from Covid-19
Financial technology is not being employed to its best effect, while the coronavirus financial relief effort is struggling. Banks need to innovate and work with fintechs if they are to ensure that the most vulnerable do not get left behind.
At the start of the pandemic, banks scrambled to increase remote capacity to allow employees to work safely from home. Transaction bankers have had to grapple with an extra layer of complexity: helping large multinational corporations and their vendors within the supply chain adapt to the huge disruption caused by the Covid-19 crisis.
Some more nimble corporate clients have already turned to advanced technology to support ‘business as usual,’ while others need a little more hand-holding. The good news is that there are already many useful technology solutions that help workers work at home and companies repurpose their business and diversify their supply chains.
“These are not pie in the sky, distant solutions,” says Lisa Robins, head of transaction banking at Standard Chartered. Moreover, she says: “The speed at which paperless solutions in trade finance is adopted will accelerate, given current circumstances.”
Online banking portals provide treasurers with real-time access to their cash positions and are increasingly important as liquidity becomes critical. E-signing documents, when physical movement is restricted, is now second nature.
Some banks have even introduced virtual due-diligence inspections in lieu of physical visits to factories for companies that are repurposing supply chains to help with the relief effort.
Where long-standing clients need new working capital support, some banks can issue multimillion-dollar financing packages in less than a day because all the data they need about the client is easily accessible online.
When it comes to on-boarding new vendors to fill gaps in the supply chain, compliance is carried out digitally and risk spread between the bank and anchor clients. Some countries have even adjusted know-your-customer (KYC) regulations to support remote banking.
Artificial intelligence, application program interfaces (APIs) and faster payments all help ease the pain that transaction bankers and their corporate clients face in the crisis.
“Banks without digital ability will struggle,” says John Laurens, head of transaction banking at DBS. “If we hadn’t integrated digital documentation, remote supplier on-boarding tools or our API connectivity into our offering, we wouldn’t be able to deliver what have become essential digital services to customers today.”
Robins says: “Digitizing or tokenizing payment through blockchain allows working capital to flow from one end of the supply chain to the other safely and efficiently.”
Where corporates have difficulties adopting new technologies, transaction bankers are on hand to help. “We have to support clients through this journey,” says Matthew Davies, head of GTS EMEA and global co-head of corporate sales, GTS at Bank of America.
“The support we offer them now – financial, practical or through our own tech capabilities – will help further develop both the direction of their business and our relationship with them when things eventually go back to normal,” he says.
Most banks have also introduced measures to support clients under financial duress. HSBC has made £3 billion available to importers and exporters in need of additional support, extended payment terms to up to 60 days where possible and provided a dedicated helpline for companies that want to speak to trade finance specialists.
At the beginning of April, Standard Chartered created a global fund of $50 million to assist those affected by the pandemic. It also announced $1 billion in loans earmarked for companies providing goods and services to help fight against the virus, as well as those planning the switch into manufacturing products in high demand during the pandemic.
Most banks now are in a much better position to support the economy, having built up financial buffers since the global financial crisis. Moreover, for larger firms, the quality of their clients is high and they have long-standing relationships with many of them.
“ Our target market consists of well-regarded multinational corporations, selected sovereigns; when we do deal with commercial clients and local players, they are in the top tier or well collateralized,” says Naveed Sultan, global head of treasury and trade solutions at Citi.
“Then it comes down to the way you structure the loan: they can be collateralized, restructured or adapted in other ways – and we are confident that investor appetite will remain,” he says. “Yes, there will be some systemic risk, but again I believe this will be low. We just need to keep mitigating the risk.”
But what if you are a smaller company without an existing relationship with an established transaction bank?
Mom-and-pop stores in Kenya and Nigeria that form the backbone of the local economies, street vendors in India who depend on daily cash flow and sole traders in the UK are struggling to stay afloat as the economy grinds to a halt.
This is where fintechs may have the tools to address some of the bottlenecks in accessing financial support.
Like many of the large transaction banks, fintechs use APIs to collate relevant information from financial institutions via open banking, so that they can create an accurate profile of potential borrowers and price credit risk appropriately.
The process is agile and highly scalable, allowing fintechs to identify individuals and process loans and other types of relief quickly.
Leveraging all of our technical capability, we provide an alternative ‘yes’ to the traditional banking system - Simon Cureton, Funding Options
At Funding Options, a UK fintech, technology allows it to link prospective lenders to suitable borrowers quickly.
The firm has relationships with over 200 lender partners and some of the largest commercial banks in the UK; many of its partners are implementing the UK government’s coronavirus business interruption loan scheme (CBILS).
When a traditional bank is unable to offer a business a loan, it can refer the prospective borrower to Funding Options, which helps search for an alternative lender.
“Leveraging all of our technical capability, we provide an alternative ‘yes’ to the traditional banking system,” says Simon Cureton, chief executive of Funding Options.
Funding Circle, Kabbage, Toborrow and Credible offer similar propositions.
Open banking, APIs, automation and artificial intelligence are all tools widely used within the fintech and banking community. As governments start to distribute money into their economies direct to bank accounts, open banking is the obvious gateway to assess eligibility and process payments. So why have there been hold-ups?
When CBILS was announced in the UK, the main channels of distribution were traditional high-street banks. But no matter how much technology a high-street bank has adopted, clunky legacy infrastructure remains. This means delays are inevitable.
“Banking – like music – has transitioned through three stages,” says Nigel Verdon, chief executive of Railsbank, which provides the technology to fintechs.
Drawing out his musical analogy, first there was an analogue phase – physical branches where individuals and businesses had a specific bank manager that they worked with – much like vinyl records.
Then digital began to take over as banks introduced technology into their systems, such as mobile phone apps to check your bank balance, or an automated registration system on arrival at a branch and so on, something more akin to a CD.
The third phase, however, was the introduction of fully fledged digital banks that run entirely remotely and rely on technology to manage all processes. Verdon sticks to his music analogy, “it is a bit like iTunes” , a completely digital offering with advantages of speed and convenience that vinyl and CDs can’t replicate.
“And that is the thing,” he says, “high street banks may say that they are digital, but in effect they are simply digitized. At the end of the day, a lot of their processes – such as loan and grant approvals – take time because they are just digitized analogue processes.”
It’s a theme repeated over and again in different ways.
Given the system we are working with today, creating the seamless link between government funds and individual bank accounts can be a struggle - Olly Betts, OpenWrks
At a time when businesses are struggling to keep going, applications for loans and grants are being filled in manually, while people are travelling to bank branches and call centres are inundated.
Tully, a spin-off of OpenWrks – an API platform that allows users to access their financial data via open banking – is an app that provides advice to individuals looking for financial relief and support. Answer a few questions online, and solutions and advice are available in a matter of minutes.
Tully is connected to a number of banks, building societies, utility companies and broadband suppliers and can contact them directly for financial relief if needed.
“We usually deal with referrals from our partners; we expected to see a huge spike in demand for our services with Covid-19, but we initially saw referrals fall,” says Olly Betts, co-founder and chief executive of OpenWrks.
Swamped by inquiries from worried individuals, banks, utility companies and broadband providers were unable to deal with the volumes of calls so referrals took a back seat – creating yet another bottleneck in the system.
Tully’s owners decided to open up the platform to individuals directly, as well as taking on referrals from some of their partners, freeing up phone lines for some of the most vulnerable and less tech-savvy people, while all other customers’ data is collected digitally and distributed to the necessary parties. Now the platform is busy, Betts says.
But there are still going to be bottlenecks if part of the application process is automated and part is manual. Given the unprecedented demand for CBILS and the self-employment income support scheme (SEISS), it is no surprise that some banks’ digitized analogue processes are unable to cope.
“We hear that banks just do not understand how to quickly assess risk on the companies that are applying,” says Sam O’Connor, chief executive of Coconut, a fintech that offers banking and tax accounting for the self-employed.
“Regardless of whether the first year of interest is paid, if a loan is only 80% guaranteed by the government, the lender will lose money if they have to claim,” he says. “This means it’s still risky for banks and has slowed things down. “
Then there is the assumption that the response fits the problem. Take, for example, mortgage holidays.
Betts says: “The government or bank might offer a mortgage holiday for three months with the expectation that things will automatically go back to normal and that they will be able to pay at month four.
“Yes, terms and conditions can be re-evaluated at the end of this period, but wouldn’t it be much better to start with an accurate profile of the person or business you are dealing with?”
Digital natives claim they have the ability to process information and distribute loans quickly, but say they have been left out of the conversation on financial support.
“The initial announcement that the government was going to inject millions into UK businesses was positive, but, so far, the scheme has been poorly executed,” says Cureton. “From the outset, there was little consultation with representatives from the full ecosystem of business lending in the UK – this includes the nimble and numerous fintechs that can help ease pressure with the huge demand in CBILS right now.”
Francesco Simoneschi, chief executive of TrueLayer, says: “In times of crisis, governments usually stick to what is familiar.”
TrueLayer helps fintechs get access to open banking infrastructure.
“If I were to put myself in the chancellor’s shoes,” Simoneschi adds, “I understand that the sheer velocity of change, the fact that we have never experienced anything like this before, means that some good ideas will fall by the wayside.”
But this seems counterintuitive to some.
“The UK government has been proactive in supporting the fintech sector for the last five years,” says O’Connor at Coconut. “At the same time, the UK has been a pioneer of open banking, which launched nearly two years before PSD2 [the second EU Payments Services Directive] – the European equivalent.
“Add to this the fact that between 80% and 90% of UK current account holders are still with the four largest banks in the country, and fintech solutions, supported by open banking, would be the obvious solution to streamline the CBILS application process and reduce manual work and fraud in SEISS.”
There is, though, some movement.
Verdon says: “The government is starting to recognize how the fintech community can help, and we are increasingly called into meetings with them in terms of looking into the financial response to Covid-19.”
Funding Options and Funding Circle were both recently included as one of the British Business Bank’s accredited partners – the hope is more fintechs will follow.
“Still, it will be too late for some,” adds Verdon.
While fintechs can address problems around identification and application processing, getting money to land in the right bank account remains a struggle.
“At the end of the day, it is all about how you stitch together the tech, but given the system we are working with today, creating the seamless link between government funds and individual bank accounts can be a struggle,” says Betts at OpenWrks.
Identification is the biggest problem.
In the UK, a passport, driving licence, national insurance (NI) number or a unique tax reference (UTR) number can be enough to accurately identify a recipient, but these IDs are rarely linked to a bank account.
The UK tax authorities will only have someone’s bank information if it has made a payment to their account at some point; and if that person has changed their bank account since a payment was last received, then delays can occur.
Rather than linking an existing ID to an existing bank account, a number of projects are looking at ways to create a new account altogether. That way, a person can be verified via their ID – passport, driving licence or NI number – and a whole new account can be made to receive funds.
India runs a public food distribution system that reaches 800 million people; due to the lockdown, the government has said that it will provide an additional three months of rations in advance - Mitul Thapliyal, MicroSave
In Southwark, a southeast London borough, mutual aid groups running errands for the area’s most vulnerable have been organizing.
“The most vulnerable here are people who are low paid, have either lost their jobs or have been furloughed and will have to decide whether they pay the rent or eat this month,” says Jannah Patchay, director and founder of financial consultancy Markets Evolution.
“This is much bigger than the number of people that have already been identified as vulnerable and known to local councils before the crisis,” says Patchay. “This is a whole new group of people that have had their lives completely turned upside down and will need support.”
The aid group has identified a number of concerns.
First, mutual aid groups are not incorporated entities, so they needed help to understand liability, policy and procedures.
Second, contact: volunteers were taking cash or debit cards from those they were helping, risking exposure to the virus. Then, there was no formal way of tracking how much money volunteers were collecting or spending, leaving the system open to fraud.
Finally, those being helped often had little, if any, tech knowledge, tech access or a bank account.
“A group of us, including Humaira Ali, a local councillor in Southwark, and Victoria Thompson, the founder of Curatrix, an innovation and IP strategy firm, started to ask around our networks to see if anyone had any solutions,” says Patchay.
That’s when Railsbank came up. “We were introduced to Ren Yi Hooi, Railsbank’s director of financial inclusion, who had just come across a similar problem while volunteering in her local area. They worked quickly to put together a solution. We had it in live pilot within 10 days.”
The solution was LightningAid, a digital tool that allows community groups, charities, government departments and NGOs to distribute financial support via a debit card and bank account directly to those in need, or via a volunteer.
Railsbank provides the technology and the infrastructure and MasterCard the physical and virtual debit cards linked to accounts.
At the moment, the pilot in Southwark depends on identifying the most vulnerable people in communities on a case-by-case basis. In this instance, KYC automation simply would not apply.
However, there are other instances where this layer of technology can be adopted.
The Association of Independent Music, a non-profit trade body in the UK that supports independent record labels and musicians will also use LightningAid technology to support individuals in the music industry who are out of work during the Covid-19 pandemic.
Their ID will be verified through an automated KYC process and payment will be made to a new account that can accept donations.
Verdon says: “We have another five charities and social enterprises looking at how they too can use LightningAid under the current circumstances.”
The middle of a global pandemic might not the right time to overhaul the financial system, but once the dust settles, governments should take note and look at how similar initiatives can be adopted – it might save time, money and lives.
Has India found the key to distribution?
One way to channel emergency funds directly into a bank account is for everyone to have an account linked to a unique ID number.
In India, 1.2 billion people in a population of just under 1.4 billion have a unique ID number – Aadhaar – which is linked to a bank account into which the government can deposit welfare payments. It is a lifeline at a time when lockdown prevents many of the country’s informal workers from making a living.
Within a week of India’s lockdown, 200 million people received welfare payments in their bank accounts, something other countries have struggled to do.
There is even enough data collected to support the distribution of food, says Mitul Thapliyal, partner at MicroSave, a consulting firm that focuses on financial inclusion in emerging markets.
“India runs a public food distribution system that reaches 800 million people; due to the lockdown, the government has said that it will provide an additional three months of rations in advance,” says Thapliyal. “Much of this distribution is planned through digital mapping linked to Aadhaar, so those in the greatest need have access to essential items.”
In India, although money is distributed digitally, most recipients still withdraw cash for spending. This is often because mobile money agents are local shopkeepers who prefer taking cash as opposed to processing digital payments that eat into profits. Lowering or removing merchant processing fees would help push the process towards one that is entirely digital.
“The merchant discount rate [the fee levied by banks on a digital transaction] has been removed for the short term,” says Thapliyal. “But this cannot last for ever, otherwise the whole system will collapse if banks and payment service providers aren’t able to make any money from this. It might be hard to find another solution if the pandemic continues.”
Finance and health
The other role agents can play within the ecosystem is as sources of financial and health information.
“Local agents are well respected members of the community, and in providing access to cash are seen as key workers,” says Graham Wright, managing director at MicroSave.
“Provide them with the right personal protective equipment, teach them about Covid-19 and they can help local communities better understand the current risks and why it is better to transact digitally,” he says.
Other emerging economies are looking to India as an example to follow; Kenya, Ethiopia and Nigeria have sent envoys on research visits.
In Nigeria, digital bank Kuda is ready to help those most in need.
“We are a fully digital bank, and made the decision for all our staff to start working from home even before the directive from government to do so,” says Babs Ogundeyi, chief executive.
“Because of our technical ability to open accounts and transfer cash quickly, we are more than ready if the government does decide to distribute cash digitally to those in need.”
In the meantime, Kuda has partnered with the Lagos Food Bank, and provides a link on its website for people to donate directly to the charity.
“The food bank has an account that we can transfer the money directly into, which is something that we can easily replicate if needed,” Ogundeyi says.