For what has felt like an eternity, Western countries such as the US and the UK have been at the forefront of payment innovation and development. But in more recent years, there has been a noticeable shift in where the innovation within the global fintech sector is coming from.
PayU GPO CEO, Daniel Cohen, believes that whilst Western nations have become more comfortable in their positions, it is emerging markets that are spearheading innovation and stresses the fundamental importantance of why regulators should look to enable this further.
Payment Expert: Firstly Daniel, over the course of the last several years, which countries have surprised you and which ones are unsurprising in terms of fintech development?
Daniel Cohen: All developing countries, if you want to put them together, have surprised me in one way or another. When you compare Latin American and African countries with Western nations, like the US or UK for example, you will find that fintech has almost always moved much faster in developing nations than in the West.
In the Western world, we have gotten a bit comfortable with what we have – cheque books in the US for example, where they are still using paper to pay bills. You almost never see cheques outside the US any more, there’s no such thing.
We operate primarily across Latin America and cover about 11 countries there, three countries in Africa, four countries in Central Eastern Europe, so we are really ingrained in the developing emerging markets. In each of the countries there are some really interesting examples of things that have surprised me, both positively and negatively.
From a positive perspective, I love seeing that we can accept cash online. I love seeing mobile money payments in Africa. I love seeing more account-to-account payments, as opposed to credit card payments, in Eastern Europe.
I don’t like seeing so many challenges in compliance and local regulation that is always trying to catch up. It’s almost always on the defensive side than on the side of promoting fintech.
If I had to name one country that is a shining example of a fintech revolution, it would be India in how they have completely revolutionised their payment rails. You think about the Unified Payments Interface (UPI) in just under a decade, that payment rail is now the payment rail in India and set on a path to outlaw cash.
I think you will find a lot of cool, interesting and fast-moving innovations in these emerging markets, some challenges too but I guess that is the fun!
PE: Can you speak on how fundamentally important EMIs are in being able to bridge the gap between traditional banking and next-gen fintechs?
DC: The divide, if you will, between what you traditionally do with your money, which will in most cases, be that your money is going into a bank. A bank is a very traditional-type vault for your money and it’s not very easy for you to use that money.
So then the bank starts issuing credit cards or wallets, but there are still lots of limitations in what you can do with traditional banks and their product offerings, which is where fintech really fills that void.
Fintech leverages and embraces technology much much faster, and this is not to call out banks as slow, it’s a cultural thing. Fintechs’ DNA as a culture, it just moves faster.
The enabling of the bridge and this technology to happen is crucial and critical for the future of how we handle money. How do we bridge gaps around bank populations? How do we get to the masses that have money and want to spend it as technology is becoming more readily available in emerging markets?
PE: The term ‘coopetition’ has been recently used to describe this relationship.
DC: I like that term. The fintech industry as a whole is coopetition market in general. I think with banks, it should be a lot more on the cooperation side than the competition side.
Banks will always be fundamental for the money and finance, they will always exist. I think this is where the more innovative banks embrace fintechs, because then the faster they can move and adopt new technology – they realise if they don’t, fintechs become competition.
But I think if they do, they’re not going to lose their place in the pecking order. Banks will always need to exist, and it’s just this value added service and obviously value added to the consumer, that is added on top.
PE: There are also several challenges that emerging markets face when it comes to fintech development. Could you outline some of these challenges that big and small countries continue to face?
DC: This goes back to the whole regulatory frameworks and compliance issues, and also thinking about how the western markets have become comfortable.
In all markets, the abundance of technologies and current digitalisation exists. In Western countries you have your AI and your big data, but all of that also exists in Colombia, in Chile, in Nigeria. It’s a level playing field.
But these emerging markets are moving much faster in terms of adopting this technology, innovating with it, and trying to reach the unbanked and underserved populations in their region.
In some countries, the governments are very much invested in the financial inclusion element, and this is what the fintechs are doing. They’re moving fast and that gets the regulators nervous – when fintechs that are now touching Bitcoin for example – and it becomes a concern to the nation’s economy, which if left unguarded, can become a challenge for certain governments.
This is where you’ll see over complication of regulatory compliance moves by certain countries. Ultimately, what I see for emerging markets is their reaction. I think with emerging markets, there is that correction and coming back to a main course, so there is balance.
For example, thinking about PSD3, there’s yet more regulation coming down the pipes. They’re bringing in more guidelines around fraud and spoofing attacks. There is practically no fraud in Europe in comparison to other continents, yet here we are coming in with more and more regulation.
I think in emerging markets, the challenge for the governments is that this technology is available, it’s about whenever the adoption of the technologies is faster and innovation is moving quicker. Not to mention the notion of ‘we need to catch up with what’s happening’, ‘I need to protect, I need to defend, I need to guardrail’ and that happens, but they’re much faster and coming back to a more balanced approach.
PE: With the impending arrival of PSD3, will this stifle innovation? And will this become a concern for venture capitalists?
DC: My short answer would be no. What would actually be the case for PSD3 on the contrary, is how it relates to Open Banking,
With PSD2, a lot of it was around fraud and the introduction to the Open Banking framework. But we knew it fell short in terms of better definition standards protocols for Open Banking and that’s where PSD3 comes into play.
It’s adding more anti-fraud measures, which in my personal opinion we don’t need because fraud is not that high. But on the Open Banking element, we certainly need the forcing of the banks to open up these APIs and a bit more work in terms of definition, and this is where PSD3 is going to, hopefully, fill the void.
Why is Open Banking so important? Because you see this, for example in Poland, where BLIK, which is an account-to-account form of payment, is bigger than cards. Cards have dominated the payment industry for many, many years, and they have their pros, they have their cons, just like anything else.
But once you have Open Banking, and a better definition, protocols, frameworks, etc., and the definitions of real-time payments as well, once you get that in place, just think of the incredible innovation that can happen in terms of people using their money paying for goods or sending money to a friend in a different country.
I think with Open Banking within PSD3, with the better definitions, the more we’re going to see a lot more innovation.
Investors will actually see PSD3 as more of a blessing for fintechs in the account-to-account faster payments space. There’s a lot that can be done in this space across Europe, and not just for moving money faster, but for consumer-to-consumer and for business-to -business payments. There’s a lot of opportunity once that gets defined.
From a fintech perspective, it’s not just about how you use your money and how you pay for goods, it’s also about how you manage your money. How do you become more financially literate?
Once that Open Banking framework is better defined and access into personal banking information is granted to an innovative fintech, it can also help manage this. We’re not that far off.
PE: Lastly Daniel, and thank you for your time, what would you like to see included in PSD3 regulations that would further safeguard European fintechs?
DC: Nothing significant. I think as for everything, regulation is needed and is critical and crucial I think for the overall success of the market.
There are some areas where the regulator’s overthinking goes a little too far in defining the how and the what, but that’s life and fintech. There’s nothing that I can think of that is glaringly missing from PSD3.
