Increasingly, businesses in different industries, including the financial industry, choose to use partners to develop a specific aspect of their operations rather than developing their tools themselves from A to Z. The use of services offered by financial technology businesses is also becoming an increasingly popular choice among banks. Citadele has worked with Fintech businesses on the development of several of its tools, both through the purchase or integration of prepared products, and by collaborating on the development of new services. Mārtiņš Bērziņš, Head of Digital Customer Experience and Deputy of Business Development at Citadele Bank, explains the bank’s experience using Fintech services and the benefits of this approach.
Correct collaboration with Fintech companies
To understand the potential that a partnership with a Fintech company could bring, each company must be able to identify the business operations in which they will operate and be the most knowledgeable, and the ones in which the Fintech company will be more knowledgeable. In this way, companies can untangle the processes which they must develop themselves, as others simply cannot, from those which already have an established technology or process, developed thoroughly and available instantly as a ready module without the need for significant improvements in order to be integrated into the company’s operations.
For example, looking at Citadele’s experience, becoming a bank customer remotely is almost completely a Citadele-created tool. The exception is the computer vision algorithm, which helps in the identity verification process; the selfie the customer takes is processed for Citadele by a partner who has developed and trains a special algorithm. Additional added value is given by the fact that the partner works with various forms of ID documents for different countries and is knowledgeable about current and important issues: for example, what kinds of identification can be forged, and other risk factors. Based on this knowledge, a computer vision algorithm is compiled and regularly trained, and is therefore able to identify fraud attempts with extremely high precision.
Of course, it is fairly inefficient, complicated and bad value for Citadele develop such a small niche. We would need to employ additional engineers who would work on nothing else. This means that the internal costs for the verification process would be significantly larger than what is offered on the market.
One of the partners with which Citadele develops their Fintech tools is D8 Corporation, which works in card data tokenisation. In this case, the main benefit of this partnership is the knowledge of individual engineers. In the changing field of cryptography, in which the amount of knowledge necessary increases year on year, it does not make sense for the bank to employ these engineers. At the same time, wishing to maintain its competitiveness, Citadele entrusts this specific field of knowledge to a partner who is an expert in the field.
We also recommend this approach to other businesses who wish to take the digital development path. There is no need to reinvent the wheel, and Fintech companies are well-regulated enough that, after checking the respective licenses, you can securely collaborate on new innovations or the use of existing Fintech innovations in order to digitise your business.
The PSD2 regulation opens even more options to work with Fintech businesses
In autumn 2019, European Union member states began to apply regulatory technical standards for secure customer authentication and unified, secure and open communication between banks and businesses who wish to use the data available to banks. The standards were passed in accordance with the Revised Payment Services Directive, or PSD2. It is a regulation that is focused on financial services in the EU and states that payments must be secure, simple and effective.
PSD2 gives bank customers two significant benefits. First, to see their bank balances elsewhere, not just through the online bank of a different bank, but also, for example, in an app or website. Second, this third-party app or site allows customers to make payments from their bank account.
For businesses, this opens up the options for offering their customers tools developed by Fintech companies. For example, a company can introduce online invoices that customers receive by email and pay with a few clicks, rather than copying and pasting information from a PDF invoice. This also creates options for the development of new services which require statements from a customer’s bank: online accounting systems, budget planners and so on.
When looking more at the areas which are developing the fastest — payment initiation — we currently only see a small part of the potential options, but regardless we can already see a significant improvement in customer experience and business operations. Payment initiation has allowed for the creation of various tools, but e-commerce retailers are most enthusiastic about one tool: a plug-in in the online store that allows for instant payment by card or through the most popular online banks. For example, businesses previously had to approach each bank separately, sign an agreement, and integrate it, so it often took a long time for a site to be ready. Right now, there are several of these tools on the market allowing for one plug-in to complete instant integration and the option to accept the most popular payment methods. In this field, Citadele has also created its own Fintech tool, the Klix payment system, which allows customers to pay how and when they want.
The path to innovation for Fintech partners
Each European country has its own regulators overseeing the implementation of PSD2. In Latvia, this is done by the Financial and Capital Market Commission. Each business that wants to create a tool based on a customer’s bank data must take a specific route. And, when selecting a Fintech partner, they must check whether their potential partner meets these standards.
If, for example, a Fintech company wishes to create an innovative, data-based financial service, they must comply with certain requirements. These are linked with, firstly, having sufficient capital and security, and they must pay for a license allowing them to operate anywhere in the EU.
“To understand the potential that a partnership with a Fintech company could bring, each company must be able to identify the business operations in which they will operate and be the most knowledgeable, and the ones in which the Fintech company will be more knowledgeable”
Secondly, they must provide a suitable infrastructure for storing data in compliance with certain security requirements for financial institutions. Thirdly, as the Financial and Capital Market Commission website states, in order for a business to be able to use financial services, the customer must give permission to access their bank information. Meanwhile, the bank has to provide this information, meaning that the Fintech company must collaborate with the bank on providing this specific service.
So, if a company wants to use a Fintech company to develop a tool, or use a pre-developed tool, they should check whether the company has the respective license for providing this service.
Businesses accept innovations gradually
As the public’s desire to digitalise and work remotely grows, we wanted to know what businesses feel and can implement around this trend. From the results of a December 2021 survey, we concluded that 24% of Latvian businesses want to develop alongside their customers by offering them digital options, but they lack the resources to do so. It is these companies for whom PSD2 gives a helping hand. Citadele already offers digital tools — Klix, our Business Portal and others — that don’t require enormous investment, but still give businesses the option of offering their customers the widest range of online payment choices, as well as allowing business owners to oversee their transactions and monitor their business figures more easily.
Unfortunately, 35% of those surveyed state that they see no need to offer new digital opportunities to their customers. This means that it is our job to show that these new tools and options could be of use to the business by making everyday processes easier, as it is difficult nowadays to imagine a business without at least some digital aspect. It will help them both to save time and become more competitive in order to reach their customers more successfully.
The development of Fintech will only continue
The process of confirming PSD2 was initially slower than planned, but we can now see that the snowball has begun rolling and innovations are popping up. I believe that we are still at the very bottom of this development mountain. The integration of PSD2 has now slightly picked up pace, but I believe that there will be an even faster sprint. We saw a growth in payments made using PSD2 integration of 156% in 2021, and the number of payment service providers has doubled.
I predict that, over the next few years, the trend of using an analysis of customers’ bank accounts when creating financial services will develop particularly quickly. For example, one use by the bank could be the option of evaluating a customer’s creditworthiness more accurately in order to fine-tune their credit rating. Fintech companies who work in issuing loans will also be more able to evaluate a potential customer by accessing more data.
Another service that some online retailers are currently using in collaboration with banks, but which could quickly become more popular, is the opportunity of determining whether a customer is an adult and is allowed to purchase products online which have an age restriction. In this case, based on customer information, businesses can verify a customer’s age and find out whether they are allowed to purchase a particular product or not. This approach could also be used in other categories, such as for the purchase of company shares or life insurance.
However, one of the obstacles that could impact the development of future payment options is linked with the fact that PSD2 requires stricter authentication for payments. This means that the security level is higher, but customer experience is more negatively impacted, despite greater security.
I believe that, in the next three to five years, we will see the introduction of PSD3. This may come alongside additional options that service providers and banks need to comply with in order to develop new services linked with payments. Another large change that this directive could bring is increased ease of payment without impacting security. Either the service providers themselves will find a way of providing this, or it will be set by the directive.