Is a European consumer credit model coming to the US via ecommerce?

If you are a retail customer in most European countries, you are quite familiar with this sight:

Selling credit or selling televisions?

If you are from the US or the UK, chances are this will not be a recognizable image. There is a fundamental difference in the way retail consumer credit is built and distributed between the US/UK and Central Europe, which can be summarized as (I am oversimplifying):

  • USA/UK > revolving credit through credit card (financial institution or merchants)
  • Rest of Europe > installment credit in store or through payment card (financial institution or merchants), often linked to a specific purchase. The interest cost is either carried by the customer or the merchant.

In that perspective the launch of companies such as Affirm, Bread in the US, as well as the geographic extension of Klarna are quite interesting. Effectively, they are introducing in the US installment credit at checkout, a very European product dominated in its traditional form by companies often linked to banks such as BNP Paribas Personal Finance, Santander Consumer Finance, Credit Agricole Consumer Finance, except the new players are starting from e-commerce and mobile e-commerce checkout.

The daily life of an ecommerce site

If there is one think that ecommerce website hate, its the Cart Abandonment Rate. It basically means you had everything right from acquisition to product mix, to site/app experience but when comes the time to pay, the user drops out. Making the checkout experience seamless is a constant concern and making any change / adding additional steps is a risky move. This will be a challenge for the emerging players who have to prove offering credit brings more users than it deters in the checkout process.

On a broader scope, the impact of Fintech on the American Credit Landscape is one of the most interesting trends in the recent years. Whether it is the new crop of credit at checkout players or the marketplaces lenders such as Payoff* or Lendingclub, they all participate in Credit Transformation, moving consumers from Revolving Credit to Fixed Term Credit. Compounded by Millenials’ attitude toward Credit Cardshttp://www.bankrate.com/finance/credit-cards/more-millennials-say-no-to-credit-cards-1.aspx , I can’t wait to see what consumer finance will look like in the coming years.

Are we at the beginning of a move beyond Credit as we know it?

2016 and beyond in fintech: a few thoughts

valthorensLooking at 2016 with the experience of the past 7 years in financial services. it will be a pivotal year for financial services. In many ways we are coming to the end of a phase, that started with the world‘s the most important financial crisis since 1929. The FED hike is upon us, after having experienced one of the most destructive slow downs, of which the effects are still very much acute through the world. While banks are still experiencing the effect of the crisis notably through restrictive regulation and a continuing string of financial scandals, their public messaging is one of innovation and change. For the raft of new players in financial services, the funding environment has never been as good and some striking successes are showing the way forward. A new wave of technology, from blockchain to AI and omnipresent sensors is shaping a new world (hopefully not brave).

2016 will see a strong competition in the pure banking space. In Europe especially, a crop of new banks and alternative banks will push strongly into the market. European digital banks such as Fidor are expanding beyond their core market.The UK regulator’s move to lowering the barrier to entry in becoming a bank will come to reality with Atom Bank, Tandem, (…) establishing themselves as a brand to customers. Alternative solutions based on prepaid born in various european countries are also expanding beyond borders, with SEPA as a core foundation to propose bank like services. With PSD2 looming, traditional banks have the opportunity / incentive to more easily expand collaboratively with startups.

What about the alternative lenders, roboadvisors and other digital financial services players? Having spent the last few years building a trusted brand as well as consolidating a customer base, it is highly possible they will start leveraging this to expand horizontally into other markets, whether collaboratively or by launching their own services. For example, blended remittance and multi currencies current accounts are highly complementary services for clients with attachments to multiple countries.

This collaboration between emerging players will most likely extend beyond end customers, towards balance sheet management, especially for emerging banks looking at matching assets to their new found deposits. Looking beyond the pure European and US context, in a developing world that is increasingly interconnected, via diasporas and large economic regions, the winning platform of the coming decades appears to be the messaging platforms: Wechat, Line, Facebook Messenger and WhatsApp are all showing significant growth, engagement and increasingly financial services integration. 2016 may be the year where we will see Facebook becoming more integrated with financial services, leading with seamless blending of messaging, commerce and payment first and potentially P2P transactions next.

If 2015 was the awakening of the entrepreneurs, investors and incumbents to the potential disruption of insurance by digital first players, 2016 may well shape up to be the coming of more true game changing challengers in the space. In reality, most of the investment and company creation has gone through changing distribution to digital means, focusing mainly on two main trends: the modernization of broker first markets, such as the German or Swiss markets (following the UK market) where digital acquisition is seen as a cost efficient, scalable way to attract customers and the reorganization of health insurance in the US market following the Obamacare reform. What is maybe more interesting is the coming wave of startups looking to challenge the core business model of insurance companies, an early example of which is Oscar. These new players are leveraging lower cost, scalable infrastructures, sometimes through mutual insurance mechanisms.Increasingly, a smart use of the full insurance stack including innovative insurance companies and nimble reinsurance players allows them to succeed at lower scale. Another trend that will shape up 2016 is the change from insuring people for their things to insuring their things for them partly driven by the increasing importance of the internet of things and the facts that objects are more and more blending with the underlying services they provide.

If 2014 was seemingly the year of Bitcoin, with its pricing toping above $1,000. 2015 was the year of transitioning from currency to infrastructure. 2016 will be the year of blockchains as infrastructures for smart contracts. Financial services use cases in clearing and settlement will continue to dominate the headlines with an increasing number of pilots and low scale production releases. Financial services being multi parties by definition, they are a prime market for decentralized trusted software but the use cases go well beyond pure transactional financial services and the coming year will see an increased such projects. Large scale projects are also by definition multi parties and can benefit from a smart contract infrastructure. And lets not forget the elephant in the room, our civil infrastructure which needs to reinvent itself for the digital age.

Finally, taking a longer view, it will be important to focus on two complementary trends. Artificial Intelligence and omnipresent data. Financial services core functions are based on managing capital scarcity and information asymmetry. With the amount of data increasing at high speed, notably through widespread, cheaper and more detailed sensors and the capability to process it progressing in parallel through the use of machine intelligence, the core market of financial services will be affected. The autonomous car is the perfect metaphor for it: what is the insurance market for a sensor full, crash avoiding vehicle? But similarly, what new markets will this create for financial services?