With the rise of several follow ups to Bitcoin, cryptocurrencies are proliferating at a very serious rate. With ICOs left, right and centre, Bitcoin could soon be facing serious competition; or is the competition already here? Below Richard Tall from DWF explains why Ethereum could be the new kid on the block.

I was helping a client the other day, to identify some of the legal issues surrounding his cryptocurrency trading business. One of my questions to him was which cryptocurrencies he trades in - and he very kindly shared a list of them with me.

It was pretty long.

I have previously made the point that, in the last four years, humankind has invented seven times more "currencies" than the governmental currencies that already existed. The two most famous of these, to those of us not immersed in the market, are Ether - the token associated with Ethereum - and Bitcoin.

Seemingly to most, Bitcoin is a bigger beast than Ethereum. But does the latter present a threat to the former's dominance?

The present state of the cryptocurrency market

As I write this article, the market capitalisation of all cryptocurrencies has taken a hammering as they suffer further setbacks. These range from UK mortgage companies refusing to accept funds generated from cryptocurrencies as deposits for properties, to concerns about further governmental bans in jurisdictions such as South Korea.

All of the major cryptocurrencies have trended in much the same way, albeit they do different things. Ether's market cap today is about $102 billion (slightly larger than Kraft Heinz) and Bitcoin's is about $190 billion (about the same as Citigroup).

In 2017 alone, the value of Ether rose by 13,000 per cent against a somewhat modest showing of 2,000 per cent from Bitcoin. There is little point in trying to ascribe reasons to the differing levels of value increase though, as a market driven by those seeking to get rich quick is no real market at all.

Ethereum's perceived threat to Bitcoin is not a simple comparison of relative worth, then. There are essential differences to what each does and while Bitcoin is currently synonymous with cryptocurrencies in the minds of the public, as the market matures the value of both Bitcoin and Ether will be driven by factors other than the frenzied speculation which currently persists.

Crucial differences between Ethereum and Bitcoin

In reality, Bitcoin and Ethereum are quite different.

Ethereum is a computing platform which provides scripting language for smart contracts. This means that there is a blockchain upon which a number of contracts can be written and which automatically execute on the happening of a set series of events.

As with most blockchains, it is open source, which means that anyone minded to do so can use the Ethereum blockchain to write and implement smart contracts, which are simply a series of promises in digital form. A bit like a contract really, just with the word "smart" added at the front.

Ether is the unit of value deployed on the Ethereum blockchain, and consequently shares certain characteristics with Bitcoin. It is a potential store of value and is fungible between persons who perceive it to have a value.

Bitcoin is ubiquitous. It has become mainstream, can be used as a means of payment in a number of different arenas and is part of common parlance.

Technically, there are no limits to the use of Bitcoin. While it settles in a way different to dollars or pounds, it essentially does the same thing - which is not a lot, really. Money exists and it sits in our bank accounts. It may enable us to do things but in itself it does not undertake any activity.

Ethereum - more than just a cryptocurrency

As we are currently seeing, governments are starting to put restrictions on cryptocurrencies, driven not by a desire to see their citizens exchanging any particular kind of asset for another asset, but because their citizens are speculating on something which their governments perceive they do not understand.

Ether is simply a child of Ethereum. Ethereum is actually a huge computing network which enables anybody to build a decentralized application. A business, if it determined that it needed a blockchain developed solution, could employ a programmer to build that on the Ethereum platform.

Ether, while associated with the Ethereum platform, is capable of performing the same function as Bitcoin. Whether or not it does so is simply a factor of the parties to any transaction determining whether or not Ether has any value to them.

So back to the central question, is Ethereum a threat to Bitcoin? Probably not.

While Ether is clearly a competitor to Bitcoin, bearing in mind that the combined market capitalisation of both is way south of the market capitalisation of some of the world's biggest companies, there is room for both. Ether has the advantage of being associated with Ethereum, and Ethereum does what Bitcoin cannot do, and came to be because of the limitations and single function of Bitcoin.

Mainstream businesses are beginning to embrace Ethereum technology with banks and other entities using Ethereum-led solutions for things such as payment services. The biggest threat to Bitcoin remains Bitcoin itself, with the continuing creep of government regulation and the ongoing tag of financial crime driving market behaviours.

Fiorenzo Manganiello is a recognised expert in the FinTech and private equity space. With an entrepreneurial mind-set, he is currently developing an investment banking team in a Swiss private bank and he puts his energy into projects where finance boosts human capital and innovation. He is fluent in five languages and has a distinguished academic background, having studied at IMD, London School of Economics and Luiss Business School. Earlier this month, we caught up with Fiorenzo to discuss the blockchain industry and the way it impacts the private equity industry.   

How a low interest rate environment impact the private equity/direct investment industry?

A low interest rate environment is particularly beneficial for PE firms, in fact, borrowing at a lower interest rate positively impacts the cash outflows in terms of interest repayments and enables them to achieve a higher internal rate of return (IRR). However, low rates bring more dry powder to PE firms and create a more competitive market. As a consequence, the valuation multiples increase and acquiring a target at an attractive entry price becomes challenging.

What’s your view on the blockchain industry? 

The blockchain technology is extremely powerful and has many potential applications in our economy, society and environment. The real potential relies on the high level of flexibility provided by the platform which increases the value creation for the ecosystem.  However, in today’s 4th industrial revolution, I believe that other technologies like Artificial Intelligence (AI) and Internet of Things (IoT) will have a higher disruptive potential in the coming years.

How can this technology affect the private equity industry?

The PE industry present high barriers to entry for entrepreneurs and UHNWI. A lot of paperwork is still required and GPs are more comfortable with institutional investors that are able to manage the workload. The blochchain represent an opportunity to democratise the asset class and operationalise those time consuming activities. As an example, sharing data, signing contracts and managing transactions will be more efficient and transparent.

What will be the impact on the fees structure?

The adoption of the blockchain technology will disrupt the classical 2/20 fees structure. Early adopters of the technology are already improving their operations and today are able to reduce by 50% the fee structure. As a consequence, the pressure on the fee structure is likely to continue to grow.

What do you think 2018 holds for cryptocurrencies market? 

I truly believe that the market will continue to be characterized by a high level of volatility. The interest of institutional investors will move towards an asset class approach. Some improvements in the regulatory environment are expected to guarantee a higher level of investors’ protection.

To hear about FinTech and cryptocurrencies in Japan, this month Finance Monthly reached out to Kenji Hoki, Deputy Head of FinTech Promotion Support Office at KPMG Japan, who provides advisory services on financial regulations to financial institutions, as well as FinTech start-ups in Japan.

What have been the hottest topics in relation to FinTech in Japan in the past 12 months?

Not only in Japan, but globally, cryptocurrencies or virtual currencies have been what everyone’s been talking about recently. In Japan, they have been in the spotlight for a broad range of parties, including retail investors, FinTech start-ups, major financial institutions and authorities like financial regulators and central banks, while attitudes towards cryptocurrencies are varied across the sectors.

Retail Investors in Japan who trade cryptocurrencies are rapidly increasing and expanding their investments.

FinTech start-ups like a provider of personal financial management and marketplace to trade goods between users are seeking opportunities to incorporate cryptocurrencies as a mean of payment in enhancing their competitiveness.

Critical characteristic of the cryptocurrencies, when compared to traditional banks, is bypassing bank accounts to transfer money and the potential to disrupt their position in the financial industry. Large banks in Japan have plans to issue their own digital money, which can keep money flow via the account. In this context, Bank of Japan is conducting joint research with ECB on cryptocurrencies.

Japan has taken a very unique approach to emerging cryptocurrencies and has become the first country to give them legal status. The amendment of Payment Services Act (PSA) came into effect in April 2017, introducing new regulations that require virtual currency exchangers to register with the Financial Services Agency prior to setting up their exchange business.

What are the key recent developments in relation to cryptocurrencies?

Based on the amended PSA, 16 virtual currency exchangers were registered and are now subject to the regulations, while a lot of potential virtual currency exchangers are in the process of obtaining the status and are on the cue to register.

These companies include not only business operators that provide exchange services, but also various institutions, such as traditional financial institutions (banks, brokers, etc.), non-bank payment service providers, foreign virtual currency exchangers, etc. This increased interest to register highlights the potential of cryptocurrencies to become a business tool that can enhance the offerings of ordinary companies, which are not financial institutions.

New regulations have forced certain virtual currency exchangers that re not able to meet the registration criteria to close their business before the revised PSA came into effect.

As the cryptocurrency sector evolves rapidly, a study group from the Financial Council has started discussing a fundamental transformation of the regulatory frameworks in Japan - from focusing on entities like banks, securities companies, asset managers and insurance companies to functions like payments, finance and risk transfers, as well as redefining basic financial terms such as ‘money’, that will need adding ‘cryptocurrency’ to them.

Last but not least, global discussions on cryptocurrencies might affect the regulatory approach in Japan. In fact, coordinated regulations on cryptocurrencies are likely to be a priority on the global agenda for 2018. Discussing and considering how to face and use the cryptocurrencies, as well as fiat currencies, plays a new role in the future eco-system in the financial sector.

What would you say have been the best inventions of 2017 around the cryptocurrencies on an international level?

I would like to stress that these opinions are my own, and not the views of KPMG Japan.

Initial Coin Offering (ICO) could be a game changer at an international level, when it comes to shifting means of fund raising and hence, change the financial market/products (such as stocks) dramatically. A fundamental feature of ICO is to provide a broad range of parties an easier access (not easier money) to means of fund raising, in particular those who could not have had such access before ICO, including NPOs, start-ups, projects and even a divisions of a company.

These organizations and units who have had limited access to raise funds in the current financial markets can now benefit from fund raising via ICO and may facilitate innovation not only in the financial sector but in other sectors and markets too.

What have been the impediments on cryptocurrencies in Japan?

In facilitating business treating and/or using cryptocurrencies, many rules, other than regulations need to address cryptocurrencies. For example, accounting and auditing standards need to be reviewed to fit into this new environment and tax needs to be looked at too.

Furthermore, the regulations are still trying to keep up with the change. The above amendment of the PSA does not address ICO. As the sector expands continuously, differentiating digital currencies, including cryptocurrencies and fiat currencies, may be the next focus of the Financial Council and other similar organisations.

What does 2018 hold for cryptocurrencies in Japan?

Digitization in the financial sector will enter a new phase that will challenge the established systems. Banks will accelerate consideration or development of digital currencies which would be issued by themselves in order to keep the money flow in their hands.

Cryptocurrencies will be used more as a mean of payment from the current status, as opposed to an asset to invest in, while many FinTech start-ups that sell non-financial products/services are considering to add cryptocurrencies to their business model and expand the business in order to meet with users’ needs.

Token will be used more broadly to digitize existing non-financial products, while certain disciplines to sell Token without regulated intermediaries need to be introduced to the market. Distributed ledger technology might support the movement to replace certain goods like paper-based certificates with digital Token.

Any final thoughts?

In a digitized society, personal data and user interface is a critical source of competitiveness since every company, including financial institutions, has to customize its product and/or services to meet their users’ needs.

Meanwhile, digitization tends to remove the process of intermediation to deliver the products/services and payment, and bring old-fashioned processes to exchange directly between end-users.However, there’s the possibility of it falling apart both physically and electronically.

Until recently, it was impossible to transfer monetary value without trusted intermediaries and repositories who use expensive IT system and comply with strict regulations. However, distributed ledger technology enables the end user to do so directly by using cryptocurrencies as a mean of payment as well as Token as a digitized product/asset.

Financial authorities need to face that regulating intermediaries to be bypassed is not appropriate any longer in protecting users and markets.

Financial institutions need to know the above irreversible transformation and change their business model fundamentally and rapidly in order to keep up with an environment where personal data and user interface move to platformers to provide marketplace to users to exchange goods/services and monetary value instead of intermediaries.

E-mail: kenji.hoki@jp.kpmg.com

As of this month, the revised second Payment Services Directive (PSD2) is in force and set to cause significant disruption within the European payments & banking sector. The first and foremost disruption is the possibility of Open Banking, as the legislation now allows a level playing field for PSPs to operate.

From data and cyberattacks to market competition, there are lots of opportunities and challenges to confront, but are Your Thoughts on the prospects of Open Banking? Below Finance Monthly hears from a record number of sources on the introduction of PSD2, each with a different take.

James McMorrow, Head of Payment Strategy, Global Transaction Banking, Lloyds Banking Group:

It is still very early days. Open Banking is now live and we are working with regulated third parties. What’s immediately clear already, from a client perspective, it has laid the groundwork for a range of new financial services solutions for consumers and businesses.

Saying this, it’s still worth noting that we’re still very much at the beginning of the journey in the UK and Europe. PSD2 is now live, but new payment and account types will be added to the API channels throughout 2018 and 2019 to meet regulatory requirements.

However, what these solutions will look like in practice, who will be providing them and the rate at which businesses and consumers will adopt them is not yet clear. An important consideration for the entire financial services industry will be finding the right balance between ensuring customer security and developing an exceptional user experience.

Winston Bond, Technical Director EMEA, Arxan Technologies:

All banks are now required to share their Application Programming Interfaces, or APIs, to third-party applications, however, many have still not been advised how to do this securely.

The principal weakness in sharing APIs is the simple authentication that is widely used by most API Management Solutions to confirm that the client app on a device is genuine and, has been authorised to utilise server assets. If a cybercriminal breaks through an app’s security and decompiles its code, they could potentially root out the encryption keys. Attackers can then trick the system into recognising them as a legitimate client, giving them access to anything the API is authorised to connect with.

To prevent attackers from exploiting an API in this way, banks will need to ensure they cannot access the cryptographic keys it uses to authenticate itself, by using code obfuscation, for example.

As we’ve said before, the onus really is going to be on the banks. The PSD2 regulation makes it clear that they are responsible for the ownership, safety and confidentiality of their customers’ account data. Consequently, banks are going to have to do everything they can to maintain their well-founded reputation as leaders in security, including creating a united approach to ‘open banking’ as they work on their own solutions throughout 2018.

Gunnar Nordseth, CEO, Signicat:

By providing their users with a safe way to store identities and offering access to these through an API, banks can leverage the trust they have fought to establish and defend.

Unlike physical identity credentials, such as passports and driving licenses, a bank identity API can expose only the required attributes—a business can ask if someone is who they say they are, where their country of residence is, or prove that they are over 18 without needing access to additional irrelevant information. A focus on identity will offer banks an opportunity where previously there was only challenges.

Ryan Wilk, VP, NuData Security:

While open banking will allow a myriad of services for customers to take advantage of, it will also open them up to third-party vendors and therein lies the challenge. Securing the supply chain so that personal information is protected from attacks will take a herculean effort and one that has not been entirely successful up to this point.

The new European directive mandates the use of strong customer authentication (SCA) – two or more identification elements – to increase customer protection. One of the three pillars of SCA is biometrics technology. Physical biometrics provide a convenient authentication layer for customers, and passive biometrics help institutions detect and avoid screen scraping from third-party providers who try to access customer accounts through the bank interface. With a multi-layered approach that includes passive biometrics financial institutions can block screen scraping and provide a higher level of safety to open banking.

Daniel Hegarty, CEO and Founder, Habito:

Open Banking will be a fantastic innovation for consumers. However, with one in five people in the UK classifying themselves as financially illiterate, it also presents a pressing need to be implemented safely and securely. The consent-based data sharing that Open Banking will bring, will enable many to potentially save thousands per year, for example by simply switching from their standard variable rate mortgage, to a fixed rate product. However correct data management is imperative - low levels of financial literacy, mixed with a new ease of financial information sharing, could put some at risk. Financial services firms need to continue to invest in technology and prioritise safe Open Banking implementation, for the benefit of UK consumers."

Alex Bray, asst. VP of Consumer Banking, Genpact:

While this is a potential goldmine for fintechs which want to revolutionise the banking experience for customers, it poses significant challenges for banks which risk becoming a back-office utilities. In fact, a possible outcome is that banks could end up surrendering their direct customer relationships, becoming a commoditised payment back-ends as new aggregators or payment initiators swoop in. For banks to take advantage of PSD2, they will need to find a balance between openness, privacy and data protection. At the same time, they will need to improve their analytics so they and their customers can make the most of the huge amounts of new data that will become available.

Graham Lloyd, Industry Principal of Financial Services, Pegasystems:

As with all regulation, the unstated issue is what’s coming next in the pipeline, be it PSD3 or some other impactful directive. Beyond scenario planning, responding to the unexpected is all about the ability to change processes and technology rapidly and with minimal disruption. They must regularly redefine what it means to ‘promise’ and ‘deliver’, not just generating rich insights, but selecting the right recommendation and next best action within time and budget constraints. Also, operating models and IT should be quickly and painlessly changeable from a single point.

Jeremy Light, Head of Payment Services, Accenture:

Under the new regulations, banks will have to release customers’ financial data, with their consent by a few clicks online or through a mobile app. We found two thirds of consumers were reluctant to share their details with third party providers, and overwhelmingly trust their bank with financial information. Until new entrants to the financial services sector can earn consumers’ trust, banks can draw on their extensive heritage to secure an important early advantage. But, if banks move too slowly to adapt to the open banking landscape, they risk becoming back-end, transactional players, while retailers and third parties become the face of faster and frictionless payments

Victor Trokoudes, CEO and Co-Founder, Plum:

We anticipate a host of new providers coming to the fore in the wake of Open Banking. But these will be different to traditional banks, acting more like advisors to people’s financial life (from saving, to investing, to finding the right financial products). Users will still use their current provider to transact, but will manage everything else via these new wave of “added value” providers that are focussed on offering services that make their users better off.

Jessica Leitch, Principal, Adaptive Lab:

The biggest problem is that banks will start to lose access to their customers’ data. If you’re transacting purely through say Paypal or any other P2P payment platforms the banks not only can’t see what your spending your money on, they also can’t take advantage of overdraft, FX or other kinds of fees associated with financial transactions.  Losing this also takes away the data the banks use to feed their risk models.  Basically, it has the potential to disrupt the banks current prime account model as well as their payments value chain.

Lorenzo Pellegrino, CEO, Paysafe:

In this new world, fintechs no longer have to work within the limitations of legacy bank infrastructure. Instead, they can grasp the opportunity to refine their user experience, making it even more seamless and frictionless. More to the point, open banking — as well as the faster payments rollout in the UK and EU — may well result in card volumes shifting to online bank transfers, creating an environment ripe for disruption.

We also believe that services that allow users to send funds from their bank account in real time will benefit from these developments. And this holds especially true in Austria and Germany, where over 80% of all transactions are still cash- based.

But it’s not all roses. The price of payments is also intensely competitive. For businesses that have already achieved scale, large volume at low margin makes economic sense. For the rest, there will be a need to differentiate based on the ability to keep transactions as seamless and frictionless as possible.

Christian Ball, Head of Retail Banking, GFT:

The APIs of tomorrow will give banks a means to let customers do complex things quicker, such as apply for mortgages at the swipe of a mobile touch screen.

Our latest research confirms customers are excited by the prospect of more personal services, showing that 67% of them would be more likely to take out a loan with a bank if it came with practical advice unique to them. But to achieve the level of innovation required to stay relevant in an Open Banking world, banks need to be able get their customer data in order. Specifically, they need to get better at processing and segmenting customer data, which can be done through greater understanding of transaction metadata. This data can be described as the holy grail to unlocking the customer experience, and being able to use it properly will enable banks to understand what services customers actually want, and subsequently help to uncover new revenue opportunities.

Alastair Winsey, Regional Director EMEA, Thousand Eyes:

When a business’ network becomes unruly and far-reaching, locating the true origin of a problem, degradation issue or even a DDoS attack can take the best part of a day. This is due to the number of third-party providers that cloud computing ultimately relies upon to create an application ecosystem enabling a wide range of services ranging from payments to text and voice notifications. By providing true instant visibility of a complete network path including corporate networks, the internet and connected APIs and Cloud Provider apps, companies can shrink this time from days to mere hours, enabling them to quickly remedy any problems. The dawn of Open Banking in 2018 will make network health a vital component to business success in the finance industry.

Alexander Beattie, Enterprise Director UK & Ireland, Anomali:

From an overarching cyber security perspective, a major concern is the fast-growing number of new organisations who are now authorised to handle sensitive information. Whereas this data was previously held in the hands of a few well-known and visible organisations, under pressure to adhere to regulatory standards and security measures, now the same data will be shared with numerous other, relatively unknown, untested organisations.

This may create a greater chance for fraudulent activity, as Threat Actors explore the weak links in this new enlarged target-rich environment. Undoubtedly, this plethora of new market entrants will be held accountable and will have to adhere to regulation, to safeguard the security of the data they handle. To ensure this they will be investing heavily in the state-of-the-art cyber security systems and processes to try and stay ahead of the curve.

Nick Caley, VP financial services and regulatory, ForgeRock:

PSD2 and Open Banking will democratise the payment services industry by creating more choice for consumers, in turn opening up possibilities for innovation and changing the relationship between consumers and payment service providers for good.

While a lot of the discussion has been focused on how this change will put more pressure on the established banks from tech-savvy fintechs, it is often overlooked that retail banks do have considerable advantages over new players entering the market. For instance, the big retail banks have had decades to build trust with their customers, and they have a strong track record of protecting customer data. This foundation of trust is something that emerging fintechs will need to try and replicate if they are to succeed in the long-term.

Vanita Pandey, Vice President Product Marketing, ThreatMetrix:

Any new payments schemes governing payment initiation service providers (or PISPs) will need to be carefully crafted. Existing payment infrastructures are based on years of heavy investment, with specific operating regulations, settlement protocols, liability measures and pricing structures mutually agreed upon by innumerable parties. Many of the risks associated with a wholesale migration to a new schema can be mitigated by the use of risk-based authentication that preserves the balance between security and convenience.

With all the investment retailers have made in backend processes for one-click payments, it is critical that final directives include provisions for risk-based payments, so retailers can maintain friction-free customer experiences while securing all one-off and recurring transactions.

Camilla Sunner, Managing Director for the Global Partnership Business Unit, Valitor:

When you think about the number of options we now have to purchase goods when we are shopping, it is incredible. On top of that, the process involved in making a payment is highly complex. The fact is, we no longer expect to be faced with numerous decisions in a store or online. We want a simple equation where the consumer buys, the merchants sells, and payments shouldn’t even need to be thought about. PSD2 will help us along that path, making payments quicker and easier by opening up banks’ data.

However, the responsibility for steering this change shouldn’t just lie with the regulators. Traditional businesses need to focus on working together to build one uniform high-tech payments pipe that will ultimately make buying and selling less complicated.

Edward Berks, Director of Banking, Fintech and Ecosystem, Xero:

Open Banking means three major changes for accountants and bookkeepers – better access to digital bank feeds, slicker payments and new tools to empower accountants to predict when a business might need more working capital. The smartest banks and fintech players are already recognising the important role that accountants play in supporting businesses through this transition. Competition for mind-share among accountants will amplify in the coming months as new services and experiences become available across banking, payments and lending.

The most forward thinking accountancy firms, regardless of size, are finding ways to deliver great value and services to their growing client bases by embracing digital.

We would also love to hear Your Thoughts on this, so feel free to comment below and tell us what you think!

With a brief overview of end of year 2017, Andrew Boyle, CEO at LGB & Co., introduces Finance Monthly to 2018’s potential highlights, adding some thoughts on the prospects for crypto markets, new legislation and fintech.

Last year was an eventful year for financial markets. Globally, it was characterised by a continuation of the equity bull market, strongly performing debt markets and the surge in digital currencies. We expect this year to be equally exciting yet also challenging, with key issues likely to be whether the global bull market will run out of steam, whether disruption or collaboration will be the hallmark of Fintech’s impact on financial markets and if the significant increase in regulation will yield the benefits for which regulators had planned.

It was a banner 2017 for global equity markets, with the MSCI world index gaining 22.40% and reaching an all-time high. The US equity market was boosted by robust economic growth, strong rises in corporate profits, the Fed’s measured approach to unwinding QE and, latterly the potential of a fiscal stimulus from the much-anticipated tax reform bill. In the UK last year, the robust performance of the FTSE 100, was not only boosted by the weak pound since the Brexit vote, but was led by sector-wide factors that supported housebuilders thanks to the help to buy scheme, airlines, with the demise of Monarch and miners, as commodities enjoyed price rises against a weak dollar in a strong second half of the year.

Looking ahead to 2018, the global outlook for the markets might appear challenging. Valuations appear to be full, unwinding of QE may accelerate and bond markets are already showing signs of being spooked by rising inflation. However, it’s the first time since 2008 all major economies in the world are simultaneously growing, and despite being only the second week of the New Year, $2.1 trillion has already been added to the market capitalization of global equities. Growth still looks resilient and equity markets, particularly in the US, have been supported more by innovation in technology and innovative business models. With further advances of tech stocks underpinning the market, the outlook for equities looks more positive than a focus on the actions of central banks alone would imply.

Fintech has been heralded as a major force for disruption in financial markets. Yet looking forward it would appear that collaboration might be the model. Increased interest from large financial companies backing ‘robo’ investment – such as Aviva’s acquisition of Wealthify and Worldpay’s merger with Vantiv, illustrate this trend. Given this development, regulators are taking a closer interest in the impact of Fintech, keen to ensure if they are partnering with established financial institutions that there is no systemic risk to financial markets. One example of the interest from regulators and policy bodies is European Commission’s consultation on Fintech policy, potentially due out later this month.

Another key question is whether 2018 will see the ‘coming of age’ of cryptocurrencies. Bitcoin hit £12,000 in December last year, a month after the (CFTC) permitted bitcoin futures to be traded on two major US-based exchanges, the Chicago Mercantile Exchange (CME) and the CBOE Global Markets Exchange. Alongside widespread acceptance of cryptocurrency, this year may well see the BoE invest further in technology based on blockchain in order to strengthen its cyber security and potentially overhaul how customers pay for goods and services. It appears that the blockchain could lead to a change in the very concept of money, but also that the current speculative frenzy is overblown. The total value of the cryptocurrency market is at a new high of $770bn and a recent prediction from Saxo Bank states Bitcoin could reach as high as $60,000 in 2018 before it ‘inevitably crashes’.

One final thought is the impact of MiFID II - this presented financial services firms covered by its measures with some major challenges in the first weeks of 2018. Only 11 of the EU’s 28 member states have added flagship legislation into national laws and the sheer scale of legislation has raised questions that although far reaching, it is too ambitious and full compliance will remain difficult to achieve. Yet 2018 will not give companies any respite as both GDPR and PSD2 will be implemented this year. Roll on 2019 some regulation-fatigued financial firms may say.

Many dedicated cryptocurrency and blockchain companies will be ‘R&D by default’, says specialist tax relief firm, Catax. They could therefore be eligible for much more relief than a standard business, meaning US and UK firms could be in line for hundreds of millions in tax relief. Traditional firms investigating blockchain technology and the commercial potential of cryptocurrencies will also be eligible for R&D tax relief.

Catax estimates that as much as 82% of the work carried out by dedicated crypto firms will be eligible for R&D tax relief given its ‘ingrained innovation’. This compares to roughly 35% with a traditional company performing R&D.

In many cases, the enhanced R&D eligibility is because the majority of the workforce will be focused on developing this technology and adapting it to a specific sector or use case.

Rather than channel-specific, the R&D being performed at these companies is company-wide.

But traditional firms investigating the use of these new technologies for their specific sectors will also be eligible.

Firms in countless sectors are currently weighing up the benefits of trading in cryptocurrency amid the recent $12,000 valuation of Bitcoin, and the acknowledged efficiencies of the blockchain. This amounts to time and money ‘developing a new product or business process’ — the basic requirement for an R&D tax claim.

UK firms have already raised a total of £52.8m ($71m)¹ in ICOs, while the total raised in the US has reached more than $1.1bn (£820m). In the United States, firms are allowed to claim relief under the R&S Tax Credit system.

TokenData has revealed 90% of funds raised through ICOs has occurred in 2017, which means R&D tax relief for UK firms will fall well within the two year deadline for claiming.

Mark Tighe, CEO, Catax, commented: “Each day we’re seeing more and more dedicated blockchain and crypto companies emerge, while a growing number of traditional firms are also allocating significant resource into how they could integrate this technology into their own operations and sector.

“Within the crypto field, innovation is often company-wide rather than channel-specific and so the eligible expenditure is considerably higher than with traditional firms carrying out Research and Development.

“While you can’t claim R&D on Bitcoin and the blockchain itself, the potential for relief comes when companies evolve them or create new versions altogether. An example might be creating bespoke ‘sidechains’ for your sector that run alongside the blockchain, or a new digital currency altogether.”

(Source: Catax)

All beginnings are difficult. Studies show that, on average, nine out of ten start-ups fail (1), and the shark tank that is the financial industry isn’t exactly renowned for allowing tender start-up shoots to flourish. The risk of failure and the fierce competition should not, however, deter you from launching your own FinTech. Instead, you can learn from others’ mistakes. Anyone seeking to start a successful FinTech company should carefully examine why others fail and avoid making the same mistakes.

So how do FinTech entrepreneurs meet the demands of a competitive and turbulent market, while trying to make it out on top? Tobias Schreyer, Co-Founder of PPRO Group reveals for Finance Monthly.

1. Thoroughly analyse your market

The crux of any start-up is the business idea. The fact that an idea initially looks promising, however, is no guarantee that it will work in practice. The key here is for FinTech start-ups to begin analysing the market as early as possible to determine whether there is an appropriate and suitably large target audience for their business. By far the most common reason for the failure of a start-up is that there is no market for their idea. You must know the size of target market, what the competition is like, and what prices comparable products and services are fetching. Never ignore market analyses and align your business plan precisely with the results.

2. Secure your funding in advance

Even (and sometimes, particularly!) FinTech start-ups want to attract financial backing. As with any other start-up, the issue of funding is right at the top of every FinTech start-up’s list. This issue can be roughly divided into two sections. The first is self-explanatory and covers the considerations which should be part of a traditional business plan and the questions which should ideally be resolved before the company is founded. These include things like how much capital is needed, the outgoings expected, and the potential profits. This is where you should investigate loans for company founders or appropriate grants and subsidies. The second part of the funding issue is more FinTech-specific. As, in most cases, you will be competing with banks or other FinTechs with a lot more money, so attracting partners and potential investors early on in the process is important. You should look for people who are excited about your idea and ready to invest.

3. Always keep an eye on your finances, particularly post-launch

After the business idea, finances are the highest priority for any start-up, including FinTechs. This is a very broad subject. Not only should the company be liquid, it should also have a handle on accounting and taxes. Seemingly simple tasks like setting up a business bank account or applying for a company credit card can be a challenge initially. What if you have a business trip coming up, but your bank won’t give you a company credit card? What if it’s simply not available soon enough? Nowadays there are many clever financial products on the market which can also be used directly and easily by start-ups. Prepaid credit cards with associated online accounts are quick to set up, but are also secure and flexible to use. The centralised company account provides an overview of all expenses at all times, as well as the requisite flexibility when expenses arise. You must never lose sight of your company’s financial status. This may seem obvious, but failure to manage finances has spelt the downfall of many a start-up.

4. Determine the appropriate form of organisation for your company

Choosing the right legal form of organisation is an important decision for a new company, and one that start-ups need to consider very carefully. Although, once selected, the legal form is not set in stone, changing it later can involve some effort. The form of organisation defines the legal and taxation framework conditions for a company, so your choice must suit the needs of a FinTech start-up.

5. Apply for licenses and register in good time

Start-ups should focus much of their attention on their product offering and customers, but even the best product and customer service can be at risk if you don’t have a handle on your day-to-day business operations. Start-ups must perform a great many administrative tasks, including registering with the tax office, listing the company in the commercial register, accounting, sales tax, and more. But to add to that already extensive list, FinTech’s are also subject to additional regulatory pressures. The second Payment Service Directive (PSD2) will, for example, come into force at the beginning of 2018 and can mean major changes for providers of alternative payment methods. Any financial service which can make automated payments at an end-user’s request while collecting and transferring data must obtain a PSD2 licence from the national financial regulatory authority.

(1) forbes.com/sites/neilpatel/2015/01/16/90-of-startups-will-fail-heres-what-you-need-to-know-about-the-10/#915f29c66792

(2) cbinsights.com/blog/startup-failure-reasons-top

(3) crosscard.com/solution/crosscard-expense

Without a doubt, 2017 has been a rocky year for financial services; with political upheavals, economic uncertainty and planning for numerous regulatory changes coming into effect in 2018.

In 2017, Brexit was the talk of the town, with “uncertainty” a word bouncing around the finance sector. As such, the key focus was on the financial services industry crafting their post-Brexit strategy, namely how to continue having access to both EU and UK markets and in turn catering to their clients’ needs.

According to Brickendon, while political events will continue impacting financial services, including Brexit negotiations, next year digitalisation and data will dominate alongside Robotic Process Automation and Blockchain, making larger waves in the sector and paving the way for uncapped growth and innovation.

1. A Data Future. Access to it, and the ability to mine data, will be central to everything that happens in the future of financial services. Now that the data is loaded, and the toolsets are understood and available, 2018 will see it being used for operations and technology processes.
2. The Rise of Robots. Robotic Process Automation (RPA), which uses software robots or ‘bots’ to mimic human activity, has the potential to unlock yet more value by freeing up employees to focus on value-added work – ultimately transforming the way the financial services sector operates. In 2018, we will see how this will impact RegTech, data analytics and ultimately how organisations service their clients. A gamechanger for the industry will be the start of the processes to replace people with robotics and machine learning.
3. The Reality of Blockchain. The use of the distributed ledger technology will no longer be just hypothetical. The opportunities for financial services who invest in such technology are endless from reducing operational costs to improving efficiency.
4. Simplifying Digitalisation. Business is becoming more about the user experience. Automated user interfaces can go a long way to helping this and embracing digitalisation is key in making it happen. The upcoming year will be all about the simplification of processes and digitalisation.
5. The Changing Political Climate. Brexit will remain a buzzword and continue to make headlines. As more details of the UK’s departure from the EU become clear, we will see banks and institutions adapting accordingly. Many will have to keep a close eye on their strategy if they are to survive and thrive in 2018.
6. Banking Regulations. 2018 will be a turning point for financial regulation. Alongside General Data Protection Regulation (GDPR) and Markets in Financial Instruments Directive (MiFID II), the requirements for central clearing and the second Payments Services Directive (PSD2) will force significant changes to the banking environment, with the innovators and disrupters emerging as the winners.
7. FinTech Collaboration. One of the largest technology shakeups in banking in recent years has been the use of advanced data analytics techniques to catch rogue trading activities within banks. In 2018, banks will have to decide whether to service clients in house or through a third party to stay competitive.

(Source: Brickendon)

Finance Monthly had the privilege to talk to tech veteran Carlo Gualandri about his FinTech start-up Soldo.

How does Soldo work and how easy is it to implement?

With a Soldo business account, organisations can allocate multiple intelligent pre-paid plastic and virtual Soldo Mastercards to employees and departments. Soldo provides real-time control on exactly who within an organisation can spend money, how much they can spend and where, when and how they can spend it. Companies can allocate spending budgets and impose very specific spending rules, whilst processing payments in real time. Soldo’s instant controls are remote and virtually effortless. Soldo's rich and detailed transaction data allows for uniquely detailed analysis, putting an end to the tedium and cost of traditional expense reports. Setting up an account with Soldo is quick and easy. There are no credit checks and accounts are up and running within one business day of registration. Once money is loaded onto an account, funds can be easily transferred to users for free and they can start spending immediately.

What are the three main benefits of investing in a multi-user business spending account?

Delegate: Soldo provides a mean for businesses to manage delegation of spending. It enables them to empower employees and departments to spend on behalf of the business itself - putting an end to cash advances and last-minute bank runs.

Control: With Soldo, businesses can easily stay in control of their money by setting bespoke limits, budgets and rules on user spending to retain ultimate authority.

Track: With Soldo, employees can effortlessly add transaction data, including pictures of receipts, notes and tags. All transaction data is available to view in real time and with a couple of clicks, expense reports can be generated, putting an end to traditional tedious expense reports.

As a young company, what would you say have been the major challenges so far and how have you overcome them?

Soldo is constantly evolving to meet and exceed customer needs. As such, it can prove challenging to implement internal processes in an environment which is dynamic and constantly changing. Soldo benefit from being composed of an experienced team, many of whom have worked together previously, which facilitates processes implementation and communication of ever-changing needs. Another major challenge has been the international outlook of Soldo right from the beginning, with offices in 3 different countries. However, we strongly believe that it is important to have a global outlook from the start to better understand and serve our customers. Here at Soldo, we utilise technology to communicate daily between our various offices and have 2 annual companywide conferences where we come together to discuss our progress and vision for the future.

How did the company come about in the first place, and what has pushed you to develop it this far?

Soldo was founded in 2015 by entrepreneurs and banking experts, united by the search for a simple and effective way to manage money within organisations. With over 20 years of experience in payment services and developing transactional systems, the team has harnessed the latest financial technology to provide the smartest corporate payments and expenses solution. We didn’t just stick a label on an ‘easy’ solution but invested heavily in the creation of a world-class technological, regulatory and operational platform and in finding the best team.

Soldo’s rock-solid innovation and talented team has attracted $20 million, in both Seed and Series A funding. Led by Accel Partners, our Series A round was completed in June 2017.

What are your thoughts on the digital age and the optimisation of all systems, including cashflow and accounts, in 2018?

Long-overdue regulatory evolution in the financial services industry has coincided with vastly accelerated technology amidst a market in which customers are more demanding than ever. Used to seeing innovative technology change almost every aspect of their daily lives, customers are increasingly impatient with old-fashioned, expensive or inefficient solutions. This technological evolution has played out particularly powerfully in cloud and mobile, and the stage is set for a perfect storm that will create significant market opportunities for new players and services. Within financial services, banking has always been a relatively closed market, shielded from the need to innovate by the lack of open market access. In this context, competition has been minimal and B2B services have lagged behind, even those for consumers. Soldo has seized this opportunity, bringing B2B financial services up to speed and leveraging this perfect storm to the utmost. Soldo’s innovative services make it easy for companies to manage and send payments and gain clear insight into spend. Soldo optimises the entire accounts administration process, which has been woefully under-leveraging technological innovation, and is still dominated by time-consuming manual work.

Website:  www.soldo.com

Email: businesssupport@soldo.com.

More than three quarters (77%) of commercial banks are preparing to increase fintech investment over the next three years as the rapidly growing sector shows no sign of slowing, with 86% of senior managers expecting an imminent rise in investment.

The in-depth research commissioned by Fraedom, polled 100 decision-makers in commercial banks including shareholders, middle managers and senior managers.

The survey also discovered that more than seven out of 10 (71%) respondents believe the rise of technology within commercial banks threatens traditional one-to-one banking and customer relationships. This was felt strongest among 95% of shareholders, as opposed to 67% of middle managers.

Kyle Ferguson, CEO, Fraedom, said: “The research reflects what is an upward curve for fintech organisations and to continue this trend it’s important for commercial banks to make the right choice when working with a fintech provider. By working with a trusted partner that understands the challenges of local markets, and equally how digitisation of commercial banks can support financial service offerings, this choice can often lead to further investment in the fintech industry.”

The research also revealed that despite an overall feeling that the future of the fintech sector is exceptionally bright, nearly two thirds (63%) of respondents believe commercial banks are more cautious than retail banks when it comes to adopting new technologies.

In addition, it was discovered that the most common reason for commercial banks lagging behind its retail counterpart was that ‘the market was settled and there was no strong competition from newcomers until now’. This was supported by 37% of respondents that felt retail banks surpassed commercial banking in the uptake of technologies.

“The commercial banking sector must become less cautious in embracing new technologies, especially when fintech firms can support areas of their service by outsourcing operations such as commercial cards,” adds Ferguson. “When technology is embraced at a faster pace, the gap between commercial and retail banks will become smaller and the collaboration between banks and fintech providers will help drive the future of finance, benefitting consumers, businesses and of course the industry as a whole.”

(Source: Fraedom)

Bitcoin reached another new milestone today as it briefly traded above $17,000 (£14,809) before dropping $2,500 down to $14,500, sparking both fear and interest for investors alike.

This comes after the online currency reached $10,000 just over a week ago.

The Cryptocurrency’s meteoric rise in the tail end of 2017 began earlier this year in March 2017 when a single Bitcoin reached the value of $1200. Since then, it has been gaining traction and breaking record after record.

The 70% surge has largely been aided by demand in China, where people use it to channel money out of the country. It has been further aided by Bitcoin’s introduction to the Chicago-based Cboe Futures exchange and its impending launch on the CME futures market, which will allow investors to bet on the future price of the currency, and give it a form of regulation that has not been present thus far, something that has held back a series of big investors.

Despite this climb, critics fear that Bitcoin’s rise is creating an inevitable economic bubble, similar to the Dotcom rise and subsequent crash that saw the end of many companies and stock reductions of up to 86% in others. Others, however, believe that the rise can simply be attributed to Bitcoin reaching the financial mainstream.

Even with its current rise, Bitcoin is still very much an unknown quantity leaving plenty of room for scepticism. Added in to that is the fact that roughly 1000 people own 40% of the Bitcoin market, which has created an environment where traditional investors have been tentative.

As it stands, people can speculate but no one knows which way Bitcoin is going to go. However, given that buying one Bitcoin last night and selling it 5 minutes later would have made you around $3000, makes it understandable that some are likening the continuing climb of Bitcoin to a “charging train with no brakes”.

What is Bitcoin?

Bitcoin was introduced back in 2009 by an unknown individual going by the name of Satoshi Nakamoto in the aftermath of the global banking collapse.

Cryptocurrencies are not a form of physical money, rather they’re a digital currency created by computer code and worldwide the total in existence amounts to £112 billion.

There is no middle man involved in transactions either, eliminating any fees that usually occur. Anyone can go online and purchase Bitcoin, whether that’s a single Bitcoin, a number of Bitcoins or even a percentage of a single Bitcoin.

What do you think about this sudden surge? Do you think now is a good time to invest in the cryptocurrency? Or do you feel this is just a passing craze that will soon die down? Leave your answers in the comments below!

Traditional banks are lagging behind when it comes to technology and we are increasingly seeing non-financial services companies, like Facebook and Orange moving in into the territory of traditional banks. Below Daniel Kjellén, Co-Founder and CEO of Swedish fintech unicorn Tink, looks at how Facebook is currently adding P2P payments to their services.

You would have to have your head in the sand not to notice that huge change is afoot across the banking and personal finance sectors. Earlier this month, Facebook announced that it was making its first foray into finance in the UK, with the launch of a new service which will allow users to transfer cash with just a message.

Facebook is not the only tech giant moving in on the territory of traditional banks, with Apple also set to launch its own virtual cash payments system and telecoms behemoth Orange recently announcing the launch of its online banking platform. This is just the tip of the iceberg. Fintech firms like Mint, Moneybox and Tink are taking this concept beyond payments, creating a sophisticated consumer led money management ecosystem.

So why is this happening? The launch of Facebook’s P2P payments service is evidence of the wave of technological and legislative driven disruption sweeping toward the retail banking market that change the shape of the sector beyond recognition. Consumers in 2017 are platform agnostic and don’t care whether they manage their money through their bank or their phone company or social media account.

Across the world, we are witnessing a move to the model of ‘open banking’ which will blow open the retail banking sector and create competition in the form of tech firms, who are already making a play for the territory traditionally held by banks. This hasn’t happened in a vacuum, it is just one symptom of the enormous transformation the industry is undergoing.

The fintech invasion

The current wave of tech companies offering in-app personal finance capabilities is just the beginning. The success of fintechs such as Monzo and Transferwise has demonstrated beyond doubt that today’s consumers are looking beyond their bank to manage their finances.

Until recently, banks have enjoyed a monopoly over their customers’ data and have operated in a market which by design, discourages competition and transparency. The result has been a mismatch between people and products, with consumers having to settle for high cost, low quality financial services. It’s not surprising that nimble tech companies are moving in on the space previously occupied by the banks. So long as their investments in fintech yield results, these ambitious and visionary companies will continue to pioneer new solutions that transform our relationship with money.

Banks who don’t innovate and create customer led products, will risk losing their customers who, through tech solutions will automatically be filtered towards a smorgoesboard of banking products which suit their needs. Third party platforms will become the main interface for money management, regardless of who the consumer actually banks with.

A nudge in the right direction

Facebook’s mobile payments feature will be supported by M Suggestions, a virtual assistant which monitors Messenger chats and nudges consumers to use the payments feature whenever the subject of sending money comes up in conversation, aiming for a seamless integration between social interaction and finance. The smart technology which underpins Facebook’s virtual assistant is a glimpse of the future of personal money management.

Today’s apps are nudging consumers in their day-to-day choices, encouraging them to save a little every month, offering tailored advice based on their economic habits, pointing them towards better deals and products, helping them to prepare for life’s big financial commitments - all with the aim of improving users’ financial happiness.

Money on autopilot

Facebook’s payments service aims to remove friction from the transaction - friction in this case being the need to leave Messenger. We are witnessing increasing numbers of tech companies offering these in app capabilities, the ultimate aim of which is to allow users to do everything in one place.

PSD2, which comes into force in January, will open the floodgates for third parties to build financial services apps which aggregate, enabling consumers to do everything in-app from paying their bills to comparing how much they are paying for access to financial products like credit and mortgages.

Technology is ushering in a new era where money management is frictionless and simple. Many people today have a difficult or distant relationship with their finances. There is often a mismatch between people’s needs and the product they are offered by their bank. This means money management can often feel like a chore rather than a choice.

In-app personal finance services such as those offered by Facebook, Tink and Apple, will offer consumers the ability to effortlessly manage their personal finances while going about their daily business. People’s relationship with their money will become a lifestyle choice, with financial decisions being akin to the choices they make about their health or their hobbies. Eventually, money will be on autopilot.

A bank by any other name

Today it is rare to find an individual who is loyal to their bank. With the ties between consumers and their bank becoming increasingly weak, smartphones will become the interface between people and their money. The entity sitting behind this engagement will become little more than an afterthought.

Tech companies who have built a strong consumer facing brand - underpinned by best in class technology - are waking up to the opportunity and are planting their roots in the fertile ground left wide open by the traditional banks. As the line between banks, fintech, social media and telecoms becomes blurred, the banking market as we know it will soon be unrecognisable. The banks who will survive and thrive are those who embrace the disruption and invest in the power to innovate through technology.