TECH TALK: Estonia and Global Fintech

• 2014-12-22
• Will Ross

For fintech - the bubbling group of companies disrupting financial services with cutting edge software and hardware -  2014 has been a tumultuous and lively year. 

We've seen the divorce of eBay and PayPal, the birth of Apple Pay and most recently the marriage of Snapchat's user base with the financial resources of Square in the form of Snapcash.

Trying to come up with an online solution to the fundamental problem of transacting value is a hot topic, forcing regulators and banks to rethink the way payments are handled. As advances in fintech continue to place new pressure on existing legal structures, only the law-makers can halt growth.

What the tech companies are doing isn’t illegal, but creates new parameters that regulators need to consider.  There is plenty of space for innovation within these new parameters as regulatory bodies adapt to these changes. The innovators themselves are mission-driven new companies - with hardly a suit to be seen worn among them.

Considering the amount of innovation in retail, communications and entertainment over the last decade, it is remarkable that an area as lucrative as fintech is yet to be profoundly disrupted. The opportunity to get between the customer and point-of-sale is a large one, not least in terms of an immediate commission-based revenue stream, but also through the ownership of information around purchasing patterns.

But fintech is fraught with problems that other recent tech disruptions haven't had to worry about.

First, regulation creates a barrier to entry, an obstacle that banks and brokers have become experts at handling.

Then there's the whole problem of trust and whether the customer is willing to change the way they pay by trying out mobile apps or brand new websites.

So the ordeal of working alongside regulatory infrastructure while maintaining a trustworthy value proposition is considerable, and requires a sensitive approach to an entire ecosystem of vested interests.

Over the past 10 years, Monitise  has been tracking the growth of new financial technology, figuring out where it can facilitate adoption in mobile. They've been entering partnerships with scores of legacy financial institutions to provide advice on the best ways to enter mobile payments, essentially selling a service of safe, chartered innovation.

Most recently, Monetise acquired a short list of companies and have been abandoned by Visa, one of their early partners. The transaction giant's withdrawal has worried some shareholders and excited others - those that consider Visa's withdrawal to be an indication that Monitise are actually onto something.

While mobile is continually relevant in foreign exchange, the main task has been to drive down the cost of cross-border transfers. One FX platform, TransferWise, does this by “matching” a customer sending money in one direction with one sending currency in the opposite direction. TransferWise is co-founded by Estonian Taavet Hinrikus, who rose to prominence in the tech world through his role as the first employee of Skype, another Tech company founded in Estonia.

Based out of London but with a major office in Tallinn, TransferWise’s matching technique effectively means the currency never crosses borders, side-stepping the hefty foreign transaction offered by a bank's rate. TransferWise may have had to negotiate UK and EU regulatory frameworks to make this happen, but they're in a good position to lubricate payments outside the eurozone. The currencies of Poland, Switzerland, Sweden, Norway, Denmark, Hungary, the Czech Republic, Bulgaria, Georgia, Romania and Turkey are already supported, with more currencies sure to follow.

The strong performance of TransferWise underpins a great deal of optimism among tech analysts that Estonia is a fertile ground for fintech startups, and not just in Tallinn: the university town of Tartu is also emerging as an interesting hub alternative to Tallinn, with the growth of exciting new companies like Fortumo.

Monitise, Fortumo and TransferWise are built around the idea that if you make transactions easier or less costly, they will happen more often. You might be more encouraged to pay for more services abroad with reduced fees, or get out to your high street if mobile payments across the counter becomes a big thing.

For another group of fintech companies, the task is more about making it easier to pay those you are indebted to. Beautiful interfaces and user experience are key for these players whose task it is to change a mindset about giving money.

Out of San Francisco, ZenPayroll makes payroll extremely simple, not least in bringing the process online, but in grinding through local, state and federal taxes for each given employee.

By creating a stunning user experience for the employer, ZenPayroll are doing well at removing the administrative overhead in paying employees for their good work. Meanwhile in peer-to-peer payments, Venmo have the somewhat revolutionary approach of creating a social newsfeed that publishes a “who-paid-who” summary.

People always love a feedback loop, and by socialising payments, senders of money build their trustworthiness while having an easily accessible record of who they paid.

Ultimately the idea of making payments easier while saving money is the duty of and dream of fintech. As convenience becomes a commodity in this space, the telling signs of adoption may well benefit legacy institutions and economies alike.

The writer is CEO and Founder of Zafiri