The Weekly Extract from Extractable is a condensed roundup of digital experience news for financial services institutions, and our take from San Francisco.
This week we look at the Wirecard scandal and the case of the “missing” $2B. We delve into the discussions about regulating fintech firms in the US, and finally, we look at customer engagement.
The big fintech story this week is the Wirecard scandal. In case you have been avoiding the news — and who could blame you — it all starts with one of the most vaunted European fintech firms, Wirecard. As summarized by Olivia McCall in Born2Invest, “Wirecard was founded in 1999 as a company active in electronic transactions for the gambling and porn industry. However, in more recent years, especially taking advantage of the decline of traditional banks, has managed to become one of the giants of payments and digital financial services in Europe, collecting commissions and making agreements with major electronic payment platforms around the world.”
As of last year, Wirecard reported a market cap of $19 Billion. In the latest financial statements, they stated “cash liquidity of about $2.24 billion (€2 billion) deposited in banks in the Philippines. However, according to the auditors of the company Ernest & Young the money is not in those accounts, and according to ongoing investigations, do not even exist and would have been declared only to inflate the group’s financial statements.”
The CEO has now been arrested in Germany and the company’s future is in doubt. Isabel Woodford writing for Sifted notes that Wirecard Card Solutions is a UK-based entity that is financially self-sufficient with £2.5m pre-tax profit in 2018 and could easily continue to operate if the rest of the Wirecard group, based in Munich goes belly up.
Regardless, the UK’s FCA “placed requirements on the firm’s UK business so that it should not pay out or reduce any money it holds for its customers except on their instructions,” per an FCA announcement. Shalini Nagarajan in a Business Insider article quotes Neil Campling, Head of TMT Research at Mirabaud Securities saying that “Wirecard is beyond salvageable.” Campling expects that Visa and MasterCard “may revoke their licenses as the firm is in breach of their code of conduct.” Campling also raises doubts that Wirecard even had the 300,000 customers they claimed.
This whole story reminds us of a little Texas-based company called Enron. Whatever happened to them?
Fintech and Regulations
Thomas P. Vartanian wrote an opinion piece in The Hill where he points to the Wirecard scandal and a few others in the crypto space and asks why “financial services (are regulated) based on what companies call themselves rather than what they actually do.”
Vartanian asserts, “The inconsistencies in the system are glaring when it comes to fintechs, cryptocurrencies and other digitally-based companies. Federal and state laws scrupulously control who can own as little as 10 percent of a commercial bank’s equity simply because such investors might influence its decisions. Such concerns appear to be irrelevant in the fintech world. No authority regulates or limits those that mine more than $250 billion of cryptocurrencies around the globe, notwithstanding reports indicating that almost 50 percent of some are mined in China.”
He further draws distinctions in liquidity and reserve requirements that aren’t applicable to fintech companies but do exist for banks. He concludes, “a smart rebalancing of all financial regulation would both turbocharge innovation by putting competitors on a leveler playing field and ensure greater economic stability.”
While US regulators have been much too slow to take action in the fintech space, last week’s Extracts covered the OCC’s desire for a Payments Charter. Brian Brooks, the Acting Comptroller of the Currency, has announced a desire to address cryptocurrency, payments, blockchain, AI, and RegTech technologies which could result in increased scrutiny of fintech firms. However, given the current Administration’s record on deregulation, the OCC’s action might result in further erosion of the so-called “level playing field.”
On the continuing discussion of the Payments Charter, Jason Cabral and Thomas Curry, with Nutter McClennen & Fish LLP, write in JD Supra that the OCC’s “longstanding position (is) that the definition of a ‘bank’ includes any entity substantially engaged in lending, deposit taking or payments. That is to say, an entity does not need to do all three activities to be a bank.” This interpretation would allow the OCC to go forward with the Payments Charter. Of course, that is the same rationale used by the OCC for the Fintech Charter that has been stalled in the courts.
The OCC isn’t the only regulator focusing on fintech. An article by Claire Williams in the Morning Consult notes, “Federal Deposit Insurance Corp. Chairman Jelena McWilliams is turning her attention to financial technology and small-dollar lending, which she said could help underbanked and unbanked consumers access the banking system.”
Williams further clarifies, “on one key fintech issue — the ‘true lender’ doctrine — McWilliams said the FDIC plans to craft a rule that would be designed to help clarify when a bank is the ‘true lender’ on a fintech loan and when a bank is acting as a false front to allow a fintech company avoids a state’s interest rate limits on online lenders.”
This piecemeal approach to fintech issues is unlikely to address Vartanian’s points. The regulatory regime in the US continues to lag behind those in Europe and Asia.
It might take several scandals in the space before there is any actual sustained action.
The Gap Between Financial Institutions and Millennials
In April of 2018, Gallup published an article noting that “Millennials have the lowest levels of customer engagement with their primary banks and are more likely to switch banks than any other generation.” At that time, they suggested four actions that banks can take to attract and engage “discerning millennial customers:
- Predict their problems,
- Help them speak up,
- Forgive a few fees, and
- Differentiate their banking experiences.”
Have FIs gotten any better in the interim years?
In an article in The Financial Brand, Extractable’s Content Strategist Cassandra Stumer notes that Financial Institutions continue to miss the mark with Millennials. Stumer points to “five content marketing blunders financial marketers make when trying to engage with Millennial consumers.”
First, Stumer notes that FIs fail to do their homework and not understanding what their specific customers care about. She writes, “misunderstanding or making assumptions about your audience leads to generic content that lacks true value — and at worse, insults those you most want to reach.” Without the understanding of their clients, FIs can’t predict problems as recommended by Gallup.
Stumer adds, that FIs often fail to use their unique voice and capitalize on authentic engagement opportunities. “Users want to feel they have a say in your brand. Neobank Monzo’s fervent user base become evangelists for the brand because they feel they have an active role in shaping the organization.” What better way to help Millennials speak up?
FI’s assumption that Millennial means Facebook, is also tackled by Stumer. “Leverage data about your unique customer base to determine which social channels to focus on. Where do they go for financial advice? What channels do they frequent? Whether it is Reddit, LinkedIn, or local forums, using social listening with tools like BuzzSumo or Google alerts can inform you about consumers’ media habits and the types of content they like.”
Often FIs find themselves “in the wrong place, in the wrong time,” Stumer adds. “Content delivery — or ‘content context’ — is as important as the content itself. While selling products is not the goal of content marketing, map Millennial personas, and buyer journeys to your content marketing program to ensure your content meets your customer at the right stage of the funnel.”
Engagement of Millennials is a long-term game. Stumer suggests that engagement must start “at the top of the funnel, (by) connect(ing) with Millennials who may be years away from making a purchase.” She recommends “content about careers, travel, and technology (that) are more likely to win with the youngest Millennials, who engage with less personal finance content than all other demographics.”
In an article by Steve Cocheo, Executive Editor at The Financial Brand, Brandon Purcell, Principal Analyst at Forrester, talks about the continued reliance by FIs on static demographic segmentation. Echoing Stumer’s point that FIs need to understand their audience, Purcell makes “the point that for many purposes traditional customer group segmentation won’t fly anymore.” Purcell recommends “segmenting prospects and customers by their attitudes, emotions, beliefs, and values on a given matter — psychographic data that transcends consumers’ age alone.” He adds that personalization concerns “the overall interaction you are having with the customer. It’s from the outside in: What is the customer trying to achieve with us as a brand?”
All of these learnings should apply not only to Millennials but to all customers. At Extractable, we see many organizations unable to define their target customers. In order to engage customers, an organization should identify what makes their customers unique and define products, services, and experiences that address their needs.