Adding modern ‘tech’ to the ‘fin’

The point where regulation intersects with payments and innovation is a sweet spot for Dr Ruth Wandhöfer, partner at early stage venture capital firm Gauss Ventures. When she was part of Citi’s global transaction services division, she tracked the evolution of the Payment Services Directive (PSD), publishing a book titled EU Payments Integration in 2010. “PSD has allowed many new firms into the market to address customer needs, or even create new needs, and increasingly leverage technology,” she says.

However, Brexit has thrown the UK payments and foreign exchange (FX) industry a curveball with a lack of certainty around regulatory equivalence. Ms Wandhöfer says: “Although the UK Treasury is addressing this issue, it will take more time to clearly identify which rules are considered to be truly accepted as equivalent between Europe and UK.”

It has also meant that since January 1, firms can no longer use a UK licence to offer services in Europe. “While the bigger players had the resources to obtain licences in other EU jurisdictions, this uncertainty and the inability to serve European customers since January has had a considerable competitive impact on the smaller payments, FX and remittance firms,” she says.

Safeguarding London’s position as a leading fintech hub — currently garnering 10% of the global market — is now top of mind for the UK. “We need to maintain the right standards and regulations, but also ensure that businesses can grow and even list in our market,” Ms Wandhöfer says, pointing to the recently released Kalifa Review of UK Fintech and Lord Hill’s Listing Review, “which address the critical issues that we face now in the context of Brexit, as well as the economic implications of Covid-19”.

Ms Wandhöfer believes that the UK regulators have an important role to play in pooling knowledge and market data to identify issues that could balloon over time. “This could be addressed with a more concrete approach to building regtechs that focus on solving industry issues, which the regulators are seeing even at this stage,” she says.

More tech, please

Not only a theoretician, Ms Wandhöfer is also very hands-on. Currently, she is helping an incumbent FX and payments player, GC Partners, re-engineer its technology stack, adding in modern technology such as artificial intelligence (AI). Ms Wandhöfer notes that this “will have profound benefits for the business and, more importantly, the businesses it serves”.

“Many stable FX companies are classical relationship businesses, but relationships alone won’t ensure survival,” she explains. “We are bringing in great technologies to deliver scalability to processes, such as know your customer and anti-money-laundering screening, pulling data through the open banking model, and analysing a prospective client’s data to understand their business — such as why they make certain transactions, whether they are touching any sanctioned countries and so on. All of this can be checked before the company even says ‘yes’ to a customer.”

Data analysis also allows GC Partners to service an ongoing relationship and add value. “Because they know what their customer is doing, they can take a very customer-centric approach and prompt solutions, such as hedging credit lines, among other treasury tools, which is informed by data and analytics,” Ms Wandhöfer says. “This strengthens the relationship because they can reach out to a client with new solutions, not just when there is a compliance question. That is the beauty of doing compliance in a coherent and sustainable way.”

This will also allow the business to scale globally, with additional offices in Europe, Asia-Pacific and North America already in the pipeline. “In future, financial services companies can’t have a manual control approach or restrictive back-office environment for hosting and processing data. They need to create a scalable approach, such as cloud, data and analytics on tap. The market is trending towards a pay-as-you-go model,” she adds.

New business models

Through Gauss Ventures, Ms Wandhöfer has oversight of new business models — particularly around payments, digitisation, and AI and analytics. For example, she points to Estating, a proptech/fintech start-up that allows investors to buy small fractions of real estate.

“Estating enables investors to pick the property of their choice and fractionally invest within the regulated financial system via an ISIN number. This allows the financial services industry to supply and distribute different-sized chunks of real estate as investment assets,” she says. Launched in 2020, it issued its first real estate-linked certificate and the world’s smallest ever securitisation in November 2020 — a garage in Spain for €10,000.

“After being invited by their financial adviser, a customer can choose a property at their leisure from their mobile phone in a country of their liking,” Ms Wandhöfer explains. “It’s showing the art of the possible by combining existing tools in a novel way to create value that benefits everyone. That is a really innovative way to democratise investment in this asset class.”