Co-Founder Colendi , ininal, Next Ventures
The distinguishing characteristic of the current period is the appearance of more choices, better products, and lower prices for consumers all around the world via the interplay between finance and technology sectors under the name of “fintech.”
In other words, digital transformation has been for a while changing the way existing finance and banking industry operates. Over the last ten years, there have been new entrants to the banking ecosystem in the form of either competitors or enablers, and one of the main aims is to leverage innovative technologies to change the way financial services are provided to the low-income and unbanked populations.
Today, financial institutions are required to adapt to the fintech wave, or they have to die. The notion of adaptation is ranging from digitizing existing products and services to a complete digital transformation of processes and the introduction of new products and services. To understand the reason behind such large-scale changes in the financial ecosystem in the digital age, first, it is of paramount importance to be aware of the deficiencies in the traditional banking industry.
For example, according to the survey conducted by the World Economic Forum, only 28 percent of the millennial and Gen Z generations trust their banks to be fair and honest, which shows that the established banks are not successful enough to provide delightful products to their customers.
Furthermore, it is also possible to talk about a gradual reduction in investors’ confidence in the banks as a result of slowing growth in volumes and top-line revenues in the market. For example, there was only 4 percent increase in the loan growth in 2018- the lowest in the past five years and a good 150 basis points below nominal GDP growth, as can be seen in Mckinsey company report.
Moreover, there has been a dramatic reduction in the global return on tangible equity (ROTE) from 20.0 percent in 2013 to 14.1 percent in 2018 because of the “digital disruption”, which shows the difficulty for the banks to strengthen their productivity and manage the risk costs.
At that point, it is obvious that today, people all around the world need to get access to the alternative financial services and products, while ensuring the privacy and security of their data in the digital age. Until today, there have been fewer options, and those offerings are much more expensive. In that sense, the thorny question is as follows;
Why has the status quo survived until today, despite the extreme levels of customer dissatisfaction?
The answer to that question can be understood, considering the difficulty of adapting innovative technologies to existing financial services. Established financial institutions have been around for more than 100 years with a large brick and mortar retail footprint, which in turn prevents the businesses from cutting costs and introducing new products quickly.
At the same time, many of these institutions have already prefer to invest their billions of dollars, and IT budgets in maintaining their existing systems, and to comply with the highly regulated industry by a wide range of regulators across state and federal, leaving almost no room for innovative product development process.
The existence of compliance requirements and complex infrastructure creates both challenges and opportunities for many startups trying to enter the market, which is a paradox of today’s financial ecosystem. Nevertheless, it would be fair to be optimistic about the future without ignoring such challenges both traditional institutions and new entrants mostly face.
Why should we be optimistic?
When looking at ten years ago, the people trying to build a product for the market were required to go through many phases, just like buying the physical servers, software licenses, writing some codes for a database e.g.
However, today, a software company can be started through only a credit card or a laptop with the help of infrastructure as a service system developed by Amazon Web Services which can bring all of these phases into one step.
More importantly, this system reduces the cost and complexity of launching a software business, and of enabling the financial services companies, which in turn unleashes thousands of experiments for the future of banking. In other words, the notion of “AWS for fintech” shows itself in the banking industry.
For example, before the infrastructure as a service system, the cost of running compute and storage for a business could be around $ 150,000 for a month, yet it now costs approximately $1,500 for a month. And, as mentioned previously, today, any company can more easily and less costly start or enable financial services. In that sense, consumer apps across a wide range of categories are working as de facto banks.
For example, Distributed Core Banking Platform was established through the collaboration between the Ant Financial Services and Hoperun Information Technology to offer alternative banking products to people with the help of customer-oriented business models. Such a new solution is facilitated by Business Platform as a Service product that was introduced by ANT Financial in September 2018.
Through such an innovative business platform, financial institutions can take the advantage of Ant Financial’s capabilities in the areas of product and asset management, capital verification and full-link pressure tests that are combined with Hoperun’s experience in the finance industry.
All of these developments sound promising. However, how can the globalization of fintech wave become possible?
As we know, while B2B companies are traditionally making money by selling the products to the customers, B2C companies gain their revenues by selling advertising to customers as well as selling products. However, both B2B and B2C companies have started to implement new business models based on the white-labeling financial services with the help of rising fintech wave.
For example, ride-sharing companies such as Uber joined neo-banks to provide customers with debit cards and checking accounts. Adapting the financial services to their business plans has contributed to the roadmaps of such companies in two ways.
First, there was a high cost resulting from the employment of the drivers for these companies. After that, the employees were required to compensate that cost through margin on rides. However, such a compensation process has become faster through margin on banking services.
At the same time, the driver is more likely to continue to work with the company because of the provided financial services.
In addition to the ride-sharing companies, there have also been many other companies across multiple sectors that started to support fintech business models and infrastructure to offer specialized services to their customers.
In that sense, as an attractive opportunity for investing, the infrastructure companies are highly supporting the implementing financial services for both consumers and B2B products.
Considering some examples, just like Shopify, Mindbody e.g., whose almost half of their revenues are provided by the financial services such as offering websites for a monthly subscription fee to any merchant, the dimensions of the fintech explosion with the rise of “as a service infrastructure” might be understood to a certain extent.
As another example, CollectAI, digital receivables management firm, puts the business-to-business-to-consumer (B2B2C) white-label solution for the digital payment reminders in the segments of credit cards and consumer credits, and importantly, such sophisticated solution is deployed by Hanseatic Bank, a Germany-based subsidiary of Societe Generale.
Through the collaboration between the traditional bank and the fintech company, while the collection rate of the bank pointed up from previous results, the expenses of the bank for receivables management reduced.
Michel Billon, CEO of Hanseatic Bank, states:
“Thanks to collectAI’s solution, we have increased the efficiency of our account receivables management and optimized customer retention with higher satisfaction. Further key results were overall higher cash flow, a faster execution as well as reduced communication costs. Customer-centric collections are the key to our digital transformation strategy.”
In the highly regulated banking industry, applying for a license can take years, and most of the new startups and companies have been increasingly trying to find a sponsor bank, to be a partner with the banks, and borrow a license by “open banking” innovation.
However, as well as such partnership, the startups are required to get the core system, just like the large database to log where the money of their customers is, and how it is moving around.
And then, it is necessary to integrate this database with a series of payment systems to enable the customers to take money out of their accounts.
As we know, to provide the loans to the customers, there is a need for the borrowers’ credit history and some personal information obtained by the credit bureaus following the KYC (know your customer) process. And, because of the necessity of protecting the private data of the customers, there is also the need for more software programs.
Therefore, the open banking partnership or banking as a service system has been increasingly preferred by both banks and startups because of its contribution to the KYC process and customer-centric business model.
At that point, it can be said that through the “infrastructure as a service” system enabling card issuing, regulatory compliance, and money movement, financial services have been increasingly being part of almost every company’s roadmap day by day.
That is to say, the way the banking industry operates is fastly changing in the digital age. As mentioned above, startups have also emerged as the actors contributing to such large-scale transformation of the financial landscape by introducing new, better, and cheaper products and lower prices for consumers.
In that sense, Colendi company can also be regarded as one of these new entrants to the finance and banking industry. As a credit scoring and micro-credit platform, at the beginning, Colendi project was developed to evaluate the creditworthiness of the consumers by leveraging a wide range of data sources about users.
The main goal was to provide the un/underbanked individuals with financing opportunities with the help of machine-learning-based credit scoring mechanisms that enable the Colendi company to evaluate complementary and distributed data segments of the users.
In that sense, Colendi company was developed as a protocol aiming to understand the real needs and solutions of the problems the consumers mostly face. And then, the protocol has been tested in many used cases both through users and developers globally until this time.
At that point, Colendi can now be called “as a service” platform whose B2B2C model aims to provide white-label solutions to any merchant, utility company or consumer company in today’s Fintech ecosystem.
Today, Colendi has more than one thousand merchants in the market in Turkey and is working with more than three big companies through B2B2C white label product model with the goal of creating big scalable model for utility, telecom companies and most of the other merchants trying to create their own credit market places.
Now, let’s get to know Colendi company better, focusing on its primary functions;
Through Colendi tools, for paying their shopping, users can receive a monetary loan from e-commerce networks, retail shops, or any merchant with the agreement that the loan will be repaid. In other words, users can do shopping through installments offered by the Colendi contracted merchants.
In the first stage, users are required to sign up to Colendi after downloading Colendi APP, and then, there is a need for each user to create their ID and scores through data access permission. Thus, borrowers can use the Colendi application at check-out to receive microcredit if their Colendi scores are sufficient.
After that, they have a chance to repay their installments via Colendi platform. All of these transaction details shape the credit score of the users as data dimensions. One of the main aims is to team up with reputable organizations that currently work on enhancing and expanding microcredit opportunities for customers.
Whether they are non-profit or for-profit, Colendi prioritizes signing a partnership to provide finance to the unbanked legitimately and efficiently.
In that sense, Colendi offers alternative credit scoring mechanism, therefore, the chance to be financially included in the market to previously un/underbanked people through its fintech business model. Due to the failure of traditional credit scoring mechanisms to evaluate people’s eligibility for microcredit, for a long time, most of the global population has been wholly deprived of banking services according to international organizations’ data.
In the Colendi platform, the credit score of users is shaped by user-owned data, smartphone, and social media data, and tertiary data sourced from data partners in the ecosystem. In addition to these data segments, Colendi credit history shaped by the transaction and repayment performance of the borrowers is also the main factor in determining their financial scores. Thus, it is important for borrowers to repay their debts on time to have a high credit score, and thereby, eligibility for taking micro-credits.
As mentioned above, the users can make their payments for shopping through the personal wallets the users create in their Colendi mobile application.
First, users are required to register to the application by creating a pin code and giving their telephone number. And then, personal verification code is sent to the mobile phones of the users.
After that, users can start to make shopping from the stores taking place in Colendi merchant list according to the credit amount the users can determine and then, see at the top of the screen of their applications.
After users determine the credit amount for shopping, they also have an opportunity to choose the payment system including the installment plan, total amount of repayment, e.g. In addition to the desires of the users, the credit amount is also determined by their current credit scores.
At the same time, we can talk about the Colendi Card as a payment method that can be obtained physically, and connected to users’ Colendi ID and scores by users. The users of Colendi Card can improve their Colendi scores after each transaction and through regular repayment schedule.
These can be efficiently handled without the risks carried by typical credit cards, such as excessive credit and high-interest rates, and the users can transact with the merchants in the Colendi platform or anywhere a MasterCard®️, and Troy®️ is accepted. Thanks to Colendi Card usage, the aim is to enhance the financial reputation of the users.
As we know, the term “utility” referring to the triangulation of the ability to store value, to move money and access credits has become one of the buzzwords to identify today’s fintech ecosystem.
In that sense, as Colendi , we are proud to be a part of that ecosystem, offering the real solutions to the problems not only consumers but also businesses mostly face in the market.
(Disclaimer: The author is the Co-Founder at Colendi)