What's this all about?
At LEVERIS, we believe that the future of banking starts at the core. Core by LEVERIS is a new interview series where we address the issues at the core of banking, fintech and financial services. We speak to those working at the intersection between tech and finance about everything from the future of money to investment in fintechs. Through their insights, we explore current trends, predict future outcomes and get a taste of what it takes to succeed in the new age of banking.
Our second guest in the series is someone who always has their finger on the pulse when it comes to all things fintech. Peter Oakes is a former director of the Central Bank of Ireland where, at an early stage, he was a true proponent of new technology to provide less friction, more efficiency and greater innovation in Irish financial services. He’s also founder of Fintech Ireland, an organisation aimed at promoting the unique identity of — and facilitating — the fintech scene in Ireland.
In this wide-ranging interview, Peter talks about the current investment pathways available to fintechs, some of the exciting companies to look out for, the opportunities for AI in financial services, those three key things that central banks and regulators care deeply about, and a whole lot more.
LEVERIS: For anyone unfamiliar with Fintech Ireland, could you provide a brief background?
Peter Oakes: Fintech Ireland kicked off in 2013, commencing officially in 2014. It is a free network and is probably best known for our events, the Fintech Ireland Map and free mentoring to fintechs. Fintech Ireland was established in response to fintech firms approaching me about regulatory issues as well as to access my network with financial institutions and investors. Big firms and investors were also contacting me about how they should approach some of these innovative firms.
At the end of the day, the majority of fintechs need to think about licensing, partnerships and money! This led to the idea of showcasing Irish fintech and fostering engagement and communication among stakeholders to drive further attention to Ireland’s indigenous fintech opportunities. Given Ireland is a small and open economy, we continue to be approached by international fintechs setting up in Ireland, looking to understand the ecosystem and seeking collaboration with local firms.
As a result of Brexit, we decided to set up FintechUK, an important bridge between the UK and Ireland. This is now complemented by Fintech Northern Ireland – around 10 per cent of the 230 fintechs on the Fintech Ireland Map originate in Northern Ireland.
There is no fee payable by the member network or indeed anyone we work with. We provide anywhere between a day and a day-and-a-half each week of free time to young fintech start-ups to assist them on their journey. And we continue to connect investors with fintechs, financial institutions with fintechs and governments (particularly embassies) with fintechs.
A lot of what we do is also informed by the collaborators’ roles as senior executives in financial service and software development.
LEVERIS: One of your many successes has been the development of the Fintech Ireland map, something LEVERIS is delighted to feature on. How is the map looking in 2020?
Peter Oakes: We are delighted to have long-termers like LEVERIS on the map! We commenced a continuous survey of Irish fintech to help track and understand both the indigenous and international fintech and regtech companies operating in Ireland. Those that complete the survey are eligible to join the map (provided that they are indigenous and post-beta stage).
I suspect that we will see a net increase in the number of fintech companies on the map when the next edition is issued later this quarter. I think payments will still be the king of the map in terms of numbers, however, regtech is snapping at its heels. Any fintech that believes it should be on the map can complete the survey here. Regtech is getting so large we have created a separate RegTech Ireland Map.
LEVERIS: Anecdotally, how have the majority of fintechs been impacted by and responded to COVID-19? Has there been any positive knock-on effects on the industry?
Peter Oakes: As one would expect, the broad answer is every fintech has been impacted by Covid-19. The impact comes down to what area of financial services your fintech was pointing to at the time Covid struck.
At the outset of the pandemic in Q1 2020, many Irish fintechs, particularly in payments (moving money from A to B) and electronic traders, probably did quite well given the increase in volatility in currencies, shares and derivatives. For those providing payments services to e-commerce platforms, their fortunes would have been dependent on the sectors in which the e-commerce markets operated. Those servicing the travel industry, for example, would have had a challenging time.
Meanwhile, credit and lending fintechs experienced an increase of enquiries and business from SMEs as banks struggled to deal with a massive uptick of uncertainty in consumer loans, retail and commercial mortgages and business lending – not to mention government and regulatory pressure.
However, it was disappointing to see, and not just in Ireland but around the world, the delay by governments to use fintechs to distribute Covid-resilience funding instead of relying solely on banks. Like many, I couldn’t understand why governments did not utilise fintechs, which were much better placed to get funds into the hands of the small businesses. Anyway, I guess that is a lesson learned and perhaps – in Ireland – is still being learned.
It is anyone’s guess as to how much innovation we have seen in fintech and finserv in the past six months. Some CEOs of banks say that the scale of innovation achieved in the past half-year is what they expected to see over a five-year period. Others say ten years. Of course, some of those banks are starting from a pretty low base.
On the consumer trends front, it is interesting to note that Irish consumers are paying down their debt and using credit cards less frequently. One might think that this points to a drop in retail sales, yet e-commerce transaction on Irish cards accounted for a record 49 per cent share of all retail card spending during April 2020, up from an average of 39 per cent; whereas the value of ATM withdrawals was 58 per cent lower in April 2020 than the same month last year.
This is no doubt owed to the increase of the upper limit of €30 on contactless transactions to €50 as part of the official industry push to facilitate a less tactile and ostensibly more hygienic (less Covid) shopping experience. And note my comment below on buy-now-pay-later fintechs – some of them are doing incredibly well in the current economic environment.
LEVERIS: What other trends are you witnessing in fintechs – at home and abroad – right now?
Peter Oakes: Strong interest in Banking-as-a-service (BaaS), embedded finance, Account Information Service Providers (AISPs) and regtech are four areas in which we see a lot of interest. The buy-now-pay-later fintechs, which sit squarely within BaaS and embedded finance, have finally piqued the interest of major banks. In recent days, we have seen Australian pillar bank Westpac choosing buy-now-pay-later fintech Afterpay as its first partner on Westpac’s new digital BaaS platform.
As banks continue to adopt open banking, expect to see more deals like the one announced recently by start-up and AISP provider, Circit, which has been selected by AIB to help the bank improve audit processes.
LEVERIS: We have recently begun our next funding round, an exciting time for us. What trends are you witnessing in terms of investment pathways for fintechs?
Peter Oakes: That is exciting and like many out there, we wish you good hunting!
It is pretty clear that if you are a young fintech and have not raised your first round of funding then you have a tough road ahead. Reports from trade bodies painted a stark picture for H2 2020. At home, the Irish Venture Capital Association reported that start-ups struggled for funding in Q2 2020 as venture capital firms prioritised companies already in their portfolios – seeing funding overall rising almost 60 per cent to €364 million.
It is unfortunate, but to be expected, that investors’ attention will be on the fintechs which have already raised money as opposed to ones that have not. It was great to see regtech Fenergo raising €73 million in H1 2020. But it is not doom and gloom for all young tech startups. An example being start-up Evervault – its mission being to encrypt the web – landing $16 million in Series A funding. Evervault’s founder is Shane Curran, an Irish 20-year-old former Young Scientist winner.
Young starts-up should make themselves known to Enterprise Ireland to ensure that they’re kept up to date on funding and business growth initiatives. I am often surprised by entrepreneurs of globally scaling businesses which erroneously think Enterprise Ireland is not geared towards their more mature companies. If you need its assistance, the government agency should be just a phone call or email away.
LEVERIS: You’ve previously described a reluctance by some of the bigger banks to engage with young fintech companies, despite stating the contrary when involved in events and webinars. Could you expand on this?
Peter Oakes: It was an observation. I tune into, participate and moderate in, many webinars in Ireland and overseas. I hear heads of innovation, CX, UX and labs at banks and other financial institutions talk about how they are open for business and conversations – same too with VCs. However, I have witnessed quite a few examples of fintech start-ups approaching these people only to be told that “the bank is not looking right now” or “the fund is fully allocated”. That by itself is not a criticism and simply a fact of life.
Cash is still king for many of our customers in terms of weekly budgeting and money management and we are appealing to and attracting a whole new cohort of customers who transact in a cashless manner and who want what we are offering online. We aim to serve both demographics.
LEVERIS: Are you seeing many fintechs develop a presence in Ireland as a result of Brexit? How do you see a ‘no trade deal’ Brexit impacting the fintech sector in Ireland?
Peter Oakes: At the outset, it is important to understand that the financial services industry isn’t even on the Brexit negotiation table. Fintechs operating in the e-money and payments industry don’t fall under the EU equivalence doctrine, neither do banks. MiFID (i.e. investment services) holds out the prospect that third country investment firms (which the UK is since January 1st 2020) can provide investment services to professional and eligible counterparts within the EU without a licence – but not to retail clients.
Crowdfunding is not a pan-EEA regulated activity and thus they too cannot passport. The upshot is that if you are a UK-regulated financial services company, even if a deal is struck on Brexit, it seems pretty clear at this stage that short of a good-faith miracle, come January 1st 2021, if you continue or attempt to continue to service a client located in the EEA you will be committing a criminal offence. Some countries, such as Spain, Italy and the Netherlands promise regimes that allow UK financial services companies to service clients in those countries – but, of course, that is not an EEA-wide solution.
Turning to Ireland, S&P Global Market Intelligence reported recently that Ireland has attracted more global financial institutions relocating from the UK ahead of Brexit than any other EU member state. The report states that 35 global firms have moved to Ireland since the 2016 vote, compared to 22 to Germany and 20 to each of France and Luxembourg. Ireland has witnessed tremendous growth in the number of firms obtaining a fintech e-money/payments services licence. At the start of 2016, Ireland had just ten such firms, there are now more than 36 and Fintech Ireland understands that the Central Bank of Ireland is busier than ever with applications. This suggests that Ireland is not being seen as a Brexit haven, but rather a destination of choice for financial companies.
LEVERIS: Many of the challenger banks have enjoyed a windfall of customers in 2020. However, their business model still falls short when it comes to generating revenue. How do you see this playing out?
Peter Oakes: One could write a textbook here. Put simply, being a bank means that you are an integral part of society and therefore the risks of the bank are, potentially, risks to society.
Who will ever forget the Irish bank bailout? The banks, their boards and the Central Bank and regulator failed at their jobs, leaving ‘mum and dad’ to foot the bill. This should not be allowed to ever happen again. Hopefully, the new EU and global banking resilience framework, including the requirement for living wills in the event that a bank fails, should see banks (when, not if, they fail) doing so in an orderly fashion without recourse to the taxpayer.
Central banks and regulators care about three things – and they care about them deeply – financial stability, market integrity and consumer protection. Boards of banks – incumbents and challengers – need to think about these three things and their overriding duty to society, so that as soon as it appears that they will no longer be viable, they don’t punish the very customers they courted.
We talk about customer acquisition costs; that is not even half the story here. We want to see more innovation in banking, and that comes at a risk. The risk, however, must not osmose from shareholders and the directors to the customers of the bank. Yes, some of the new challenger banks will fail, but only time will tell which ones.
LEVERIS: In October 2020, Mairead McGuinness was appointed as the new EU Commissioner for Financial Stability, Financial Services & Capital Markets. While this is an independent position representing EU member states, do you think Irish fintechs stand to gain from the appointment?
Peter Oakes: Fintech Ireland made some noise about the selection of Ms McGuinness and, at the time we noted that – as is the case with all Irish women and men working in senior bureaucratic and parliamentary roles in Europe – their overriding duty is to the EU.
However, it stands to reason that their knowledge and experience of Ireland and how we do things, will not be lost on them. I believe that Irish fintech stands to gain another thoughtful Irish person in a senior role, which will benefit not only Irish fintech but European fintech.
Ms McGuinness has a big task ahead of her – shortly before her appointment was confirmed, the EU released the EU Digital Finance Strategy. Fintech Ireland was, disappointingly, one of a very few Irish bodies to provide a consultation response leading up to the release of the plan. We would encourage all Irish fintech to become familiar with the EU’s work. Remember, you have a good chance of getting the innovative and regulatory regime you advocate for, but you stand every chance of getting the one you don’t want when you don’t engage.
LEVERIS: What areas of financial services do you believe have the most growth potential for the coming years?
Peter Oakes: I tend to think of this question when asked more so in terms of what enablers will drive innovation in financial services. The obvious response is Artificial Intelligence (AI), machine learning and natural language processing – all three are different, albeit complementary.
One that I personally believe is not being discussed enough nor focused upon is virtual reality. In London, for example, UBS has experimented with issuing its London-based traders with Microsoft HoloLenses, which would allow staff to recreate the experience of working in a packed trading floor without leaving their homes.
A number of large banks charge professional and High Net Worth Individuals (HNWIs) clients more than €500+ per hour for private meetings with their chief economists. The complaint I have heard from one of the banks is that they only have one chief economist, and she/he has a day job. Could you imagine replicating the knowledge of the chief economist through AI, and distributing it through a chatbot using VR technology? Those banks could have tens of thousands of clients engaging virtually with the chatbot economist for their one-to-one €500-€1,000 per hour sessions!
Speaking of banks, we have to return to the topic of BaaS. Something in which LEVERIS is an expert. The winners of this banking transformation play will be those that put customer’s needs and desires at the centre of their business model. This is very difficult to achieve when you are a traditional old school bank, tinkering around the edge of your legacy platform with the odd enhancement here and there. If you build out the seamless and integrated real-time solutions – provided you have enough runway in the form of capital – profit should follow.
If you can buy BaaS (or indeed embedded finance) out of the box, you have a headstart on the competition, whether it be a bank, a payments company, an e-commerce provider or car-sharing app.
LEVERIS: What exciting fintech companies out there – at home or abroad – do you believe will play a major part in shaping the future of financial services?
Peter Oakes: This is a tricky question, because sometimes you can be really impressed with the technology but unsure of what problem the fintech is trying to solve. On other occasions, you feel that the fintech has spotted an amazing opportunity but doesn’t have the recipe nor the ingredients. Still, they are a lot smarter than people like us who are watching from the sidelines.
A great example of paytech in Ireland is TransferMate, established by Terry Clune and Sinéad Fitzmaurice, which although only set-up in 2010 in a regional area – Kilkenny – is now backed by investors like Allied Irish Banks and ING and has a strategic relationship with Wells Fargo. It also has one massive portfolio of payment licences across the globe. It is essentially a bank service (without the credit and investment piece).
TransferMate is only one example of great Irish fintechs founded in the regions which are scaling globally. I am also impressed by Jon Bayle, who decided to give up the day job as a lawyer and set up Deposify in Ireland but target the US with an online escrow rental bond service. It goes to show that youth has no dominance when it comes to creating innovative finserv solutions (I hope Jon doesn’t mind me saying that!).
I touched on embedded finance above. It is worth sharing the example of Australian pillar bank Westpac, which has chosen buy-now-pay-later fintech Afterpay as its first partner on Westpac’s new digital BaaS platform. Under the partnership, Afterpay will provide Westpac transaction and saving accounts and other cashflow management tools to its 3.3 million Australian customers in Q2 2021.
“The platform allows us to combine our banking experience with the innovation of our partners to support new customer experiences. We look forward to working with Afterpay to deliver new products and services,” Westpac CEO Peter King said. The question is, when can we expect to see one of Ireland’s pillar banks do something similar?
Other companies to keep an eye on include Ireland’s fintech Trezeo, Gecko Governance and US regtech The Mizen Group, the latter which has some great tech to help banks and financial institutions keep on the right side of their regulators.
LEVERIS: What do the months ahead and 2021 look like for Fintech Ireland? How are you adapting in terms of events and networking?
Peter Oakes: Firstly, the updated indigenous Fintech Ireland Map will be released this quarter, preceded by an update to the September edition of regulated fintech map. Secondly, to stay up-to-date, readers should follow us on Twitter at @FintechIreland for the latest news and events, check out our events page and sign-up to the Fintech Ireland newsletter.
Fintech Ireland will also be launching a few other Irish fintech-focused maps and will collaborate on the BrexitIreland initiative, which is tracking the names and number of firms establishing in, and scaling further from, Ireland. A new Brexit Ireland Map will be released very soon (you can see more here).
LEVERIS: Any additional comments?
Peter Oakes: For those interested, we have a detailed, 80-slide presentation on the Fintech Ireland website explaining the Irish financial services, fintech and EU Digital Finance Strategy. A big thanks goes to Transfermate (Gary Conroy), Gecko Governance (Elizabeth McKeever), Sorcha Mulligan (The SME Chain) and the Department of Finance (Dr Paul Ryan) for joining the event and providing such an excellent overview of the Irish fintech and regtech landscape. Those who wish to access it simply need to subscribe to our emails and we’ll send them the password.