MALL Pay, the joint fintech venture of the retailer MALL Group and the bank ČSOB, has completed its full integration into the payment gateway of ČSOB, which is one of the dominant players on the Czech online market,…
Andrea Lauren for Hospodářské noviny: Technological innovations cannot happen without support
Andrea Lauren, chairwoman of the Czech Fintech Association, believes that the use of big data, which can completely transform the approach to evaluating loan and insurance-policy applicants, has the brightest future in the field of fintech. In Lauren’s opinion, the development of financial-technology firms is having a positive impact on the expansion of financial services, especially in developing countries.
Andrea Lauren is capable of viewing the world of finance from an international perspective. Though she was born in the Czech Republic, she studied economics in Denmark and eventually spent thirteen years working in corporate banking in London. At the investment banks JPMorgan and HSBC, she took part in the management of mergers and acquisitions for clients in both the private and public sectors. Today, she again lives in the Czech Republic, where in Jakub Havrlant’s Rockaway investment group she oversees investments in fintech and, as chairwoman of the Czech Fintech Association, she also protects the interests of financial-technology firms. With respect to the Czech start-up scene, however, she is also capable of being critical. According to Lauren, the current environment is still waiting for a service of global significance.
Fintech is a very broad field and thus covers various areas such as mobile payments, the use of robots, big data and cryptocurrencies. In your opinion, what is most revolutionary in this field and can bring about the greatest change in the way the financial sector operates?
Bill Gates once put it nicely, when he said that we always overestimate the impact of technologies in the next two years, but we underestimate the impact they will have in ten years. A number of things that are offered to end-customers today, such as mobile payments and peer-to-peer investments, may seem revolutionary in a two-year timeframe. But there is the highest probability that they will not be as important as, say, methods of internal big-data processing, which in the long term can lead to, for example, different methods of evaluating insurance risk, when an insurer will know the individual risk profile of every customer and will know a customer’s probability of defaulting or potential to contract a disease. These are things that will probably be fundamentally more revolutionary, though they currently are not being sufficiently utilised on a large scale. And, mainly, they are not very visible from the outside.
How exactly could that work?
If you use any wearable (ed. note: wearable electronics, e.g. a smart heart-rate monitor wristband) that checks whether you exercise, eat right, maintain a health regimen and don’t have a genetic predisposition to any serious illnesses, I can imagine that you will be rewarded for being a lower-risk customer. An insurance policy or mortgage will be less expensive for you than for certain other customers.
But could these technologies make it impossible for some people to acquire a given service?
If customers can be segmented in that manner, there is the highest probability that some of them could be left out in the cold. But nowhere is it said that people can’t change their behaviour and start acting more responsibly. However, fintech generally leads to expansion rather than denial of financial services. We generally view fintech through the lens of the developed world, where everyone has a bank account and payment card. But there are still hundreds of millions of people in the world who don’t have any access to financial services at all. Even in the United States, there are ten million people who don’t have a bank account. In Africa and other developing regions, hundreds of millions of people are starting to use services like payments and loans through fintech companies that are connected with mobile operators or which operate directly via the internet. Thanks to the development of fintech, these people have fully bypassed a generation of banking.
A number of services that seem revolutionary in the Czech environment actually do not offer anything new in comparison with services provided abroad. Is there any aspect of fintech in which the Czech Republic excels?
The absolute majority of services that have originated in the Czech Republic, not only in fintech but also in the area of e-commerce and internet services, are basically cloned business models that were successfully implemented abroad. However, there are definitely a few firms here that have certain partial innovations. For example, there is a start-up in Brno called ThreatMark, which is focused on cybersecurity and has developed very good systems for uncovering fraud in mobile banking. But I can’t say that, in terms of technological innovation, the Czech Republic would be comparable with, say, Estonia, where an unbelievable number of innovations have appeared with respect to the functioning of that country’s economy.
Why isn’t the Czech Republic more assertive in this area?
One of the reasons is the fact that Czech consumers are relatively conservative. Another thing is that any major technological innovation requires some sort of breeding ground and foundation. If we look at examples of truly successful countries in the area of technology, we always see long-term, planned support, which is provided partly by the private sector, but also partly by the public sector. In Estonia, technical education, starting at the level of elementary schools, has long been supported in a very methodical manner. E-government and fast internet have been there for a long time already. The government invests heavily in infrastructure. Another striking example of this type of long-term state support is Israel, where all security organisations and the government itself have been actively investing in technologies since the end of the Second World War, for example in the form of education, provision of grants and direct investments. They have thus created a wonderful ecosystem for supporting start-ups. In other countries, similar environments are built rather on a municipal foundation – in London, for example. Government policy should effectively pursue such support over the long term, but in the Czech Republic, it’s relatively conservative in that respect. In the context of the digital economy or Industry 4.0, there is no government concept here for supporting technologies that would be properly communicated and administrated over the long term. That should be the foundation.
A state fund to support start-ups is being set up in the Czech Republic, but part of the local technology community is criticising it, saying that there is little to no funding for it and there is rather a lack of ideas.
Well, there is relatively a lot of funding, but the way it is being allocated is not very effective. Furthermore, there have been severe attempts to establish a state fund here, but all of them ended relatively badly. And perhaps that is the source of some the scepticism. According to the current proposal, however, the European Investment Bank should play a significant role in the selection process via the European Investment Fund, which is Europe’s biggest investor in venture-capital funds. This is a very experienced and well-funded investor that should provide significant procedural assistance in the new Czech fund. Not everyone accepts aid from the state budget or from the EU with open arms. But when I look at the way aid is being used in start-ups, I see a wealth of positive experience among them. Thanks to such aid, small and medium-sized enterprises have managed to come up with innovations and to programme software that bank loans wouldn’t cover.
A number of fintech areas are currently unregulated. Could they thus pose a systemic risk for the financial sector?
I think that the systemic risks (ed. note: risks that could threaten the financial sector as a whole) of fintech are not significant. I definitely do not believe that the world of financial services is somehow becoming riskier only because fintech companies are not regulated like banks.
But banks complain that it is not fair that they are regulated more than financial-technology firms.
Let’s not forget that the current wave of bank regulation came about as a result of the global financial crisis of 2008-2009, after the banks absolutely failed to internally assess the risk of securitisation of toxic assets (ed. note: securitisation is the conversion of receivables into securities) and aggressive financing primarily of the property market. Because of that, they had to be bailed out with taxpayer money. Banks are also far bigger than fintech companies and if certain banking activities are not held up to scrutiny, that has a far greater impact on the economy and on customers than in the case of fintech. Moreover, development in financial technologies has the potential to better protect consumers and the financial sector itself in the future. Effective use of artificial intelligence and analysis of big data should be able to prevent many situations involving poor risk assessment on the part of financial institutions.
How is fintech changing online shopping?
Online shopping is still growing dynamically and people are bringing their shopping habits to the internet in all categories of goods and services. It will depend on how e-commerce companies are able to respond to all of their clients’ needs. In this respect, the best example is the development in China; to a certain extent, the second best example is Amazon. A lot of financial services are bundled into the buying process, so the client doesn’t have to deal with anything. There is a full range of companies that are subsidiaries of e-commerce firms and contractually provide financing and payments. And the client in this context is understood as being not only the end-customer, but also the given e-commerce company’s provider. On the internet, customers often cannot distinguish if credit or payment tools are being provided to them by a bank or by another company, but they need to know that the whole process is carried out in a single environment, in a single shopping cart and as efficiently as possible. The future of e-commerce lies in the fact that financial services are being integrated into a single buying process.
What does fintech mean for companies? Is it a way for them to easily gain capital?
Certainly. A type of fintech services, such as investment crowdfunding and peer-to-peer loans, was catapulted to the forefront of attention due to the financial crisis that began in the United States and western Europe in 2008. Small and medium-sized enterprises had severely restricted access to capital, whether in the form of bank loans or other capital. The market was almost closed to them. At the same time, it wasn’t that banks would somehow assess separate credit cases individually. They simply cut off financing across the board; they didn’t have capital for lending and they simply shut off the tap. This brought about the first peer-to-peer platforms, which suddenly offset the failure on the financial market. This showed that there was not only demand for loans among firms, but also demand on the part of investors, who in the context of ever declining interest rates on common investment products are willing to invest and thus better grow their money.
Other than facilitating acquisition of capital and loans, how does fintech influence companies?
Fintech can help firms in the area of managing cash flows. Today there are already a lot of fintech firms that can effectively assist corporate customers with their working capital. They analyse orders, deliveries and payment conditions and can, for example, refinance firms and implement provision of financing. This involves provision of credit, but on a different basis than when a bank provides financing of operating capital with a view of a company’s balance sheet. It is financing built on a foundation of dynamic analysis of financial flows and sales.
How will we communicate with banks in ten years? Will they still have brick-and-mortar branches, or will we only interact with a robot on the telephone or do our banking online?
Banks have wanted to shut down their branch networks several times, even before the proliferation of information technologies. And they were mostly met with resistance from customers. Numerous tests show that, for now, it doesn’t work well with robots. Customers often become frustrated with chatbots and every possible online service in the world still needs a call centre. Any service that doesn’t have a call centre and a human being that communicates with you about extraordinary issues will sooner or later start to encounter a high degree of dissatisfaction among customers. And that is true not only of finance. Yes, a lot is being invested in the development of intelligent assistants and robots – that is something that is constantly being improved – but I wouldn’t venture to say that there will be no need for a branch network in ten years.