Apple Adds IDs to Wallet, Could “Apple KYC" Be Next?
Real Target of SEC's PFOF Remarks, Revolut Plans US Credit, Business Ready for Faster Payments
Hey all, Jason here.
This should be hitting your inbox around the time my flight touches down in Amsterdam, assuming it’s on time, capping off three weeks here in México. While not purely a vacation, it has been immensely refreshing to step away from the typical day-to-day for a bit. I even had the chance to meet up with several fellow fintech industry folks while I was here.
Looking ahead to the rest of September, I’m excited to be attending Money2020 Europe — if you’ll be there, let me know, and hopefully we can find time for a coffee.
If you’re an early stage fintech looking to raise equity or investor looking for deal flow, I may be able to help. Get in touch: email@example.com
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Fintech Meetup Returns in 2022
Sponsored content: I had the pleasure of attending the inaugural Fintech Meetup event earlier this year, and it's one of the most valuable events I've ever attended. The inaugural Fintech Meetup facilitated more than 19,000 meetings for professionals from across payments, banking and financial services.
The event received such a positive reception, its organizers are already planning for 2022. The next Fintech Meetup will take place online March 8th - 10th, and will keep the same online meetings event format as the inaugural event, but with a number of exciting platform enhancements to make the experience even better. 2022 participants are capped at 4,000 and the event will surely sell out.
Learn more about the event, a limited number of sponsorship opportunities, and get your tickets here:
Revolut Planning US Credit Card Launch This Year
Revolut’s US CEO, Ron Oliveira, revealed last week that the London-based fintech plans to launch an “unsecured line of credit as a consumer retail product, as well as credit cards” by late 2021 or early 2022, according to Financial News. The news of its intent to launch credit products in the US comes on the heels of Revolut’s so-called “US-Mexico remittance corridor” two weeks ago.
Though Revolut launched its core spending account offering in the US in 2020, the company has yet to put much marketing muscle behind it — that appears to be changing.
The company has blamed the slow start on the pandemic, though other challenger banks leveraged their branchless, app-based product delivery and early deposits of stimulus checks to rack up new users, capture direct deposits, and increase transaction volumes.
Revolut presumably will partner with a bank issuer, processor, and line up a debt facility to fund its lending, in order to get a product to market quickly — functions Revolut could eventually bring in-house, should its applications for a California state banking charter and FDIC insurance be approved.
The decision to focus on credit this early in its US lifecycle is a notable departure from most all homegrown challenger banks, which continue to earn most of their revenue from interchange fees.
Still, Revolut will have its work cut out for it, in the hyper-competitive US credit card market — particularly for its core younger Millennial and Gen Z target audience, which increasingly are gravitating towards alternative credit products, like buy now pay later.
Apple Adds Driver’s Licenses to Apple Wallet — A First Step Towards KYC-as-a-Service?
Apple announced that residents of several states will be able to store and display a digital version of their driver’s license or ID card via Apple Wallet. Arizona and Georgia will be the first to go live, with Connecticut, Iowa, Kentucky, Maryland, Oklahoma, and Utah planning to follow suit.
The process of adding an ID sounds roughly comparable to the approach identity verification platforms like Jumio, Onfido, and Trulioo use — with the significant added benefit that issuing states provide conclusive verification of the identity document. According to the release (emphasis added):
“Similar to how customers add new credit cards and transit passes to Wallet today, they can simply tap the + button at the top of the screen in Wallet on their iPhone to begin adding their license or ID… The customer will then be asked to use their iPhone to scan their physical driver’s license or state ID card and take a selfie, which will be securely provided to the issuing state for verification.
As an additional security step, users will also be prompted to complete a series of facial and head movements during the setup process. Once verified by the issuing state, the customer’s ID or driver’s license will be added to Wallet.”
Apple’s announcement of the feature gave the example use case of passing through airport security and didn’t specifically mention financial services.
That said, it’s not a huge leap to imagine Apple offering identity verification-as-a-service. Verifying users’ identity is a key requirement not just for financial services but also age-restricted products, “sharing economy” platforms like Uber and Airbnb, healthcare services, and some ecommerce sites. Many digital services also require users to verify they can receive communication at the email address and phone number they provide as part of the onboarding process — data points Apple could also verify.
Financial services companies typically seek to validate identity by comparing supplied identity information to known information available via credit bureaus. For accounts or applications requiring heightened scrutiny, they may use a service to capture an identity credential like a driver’s license, assess the document’s authenticity, that the document was captured ‘live’ (not a stored photo), and capture and compare a live photo of the user vs. the identity document. Such services are fairly effective, but introduce friction into onboarding processes and cost approximately $0.50 - $2.00 per verification.
If Apple can leverage a driver’s license stored in Apple Wallet, it could substantially streamline identity verification processes while providing a deterministic rather than probabilistic result.
Paired with a user’s mobile carrier information and Apple ID / iCloud data, Apple has a robust profile of users’ identity information, typically including name, date of birth, phone number, email address, street address, payment cards, and associated Apple devices.
With this information and a digital version of a state-issued and -verified identity document, it would be possible to complete most of an account opening or loan application process with user-permissioned data transferred automatically with just a Face ID, Touch ID, or passcode.
An Apple-powered identity verification service has the potential to streamline user onboarding and reduce fraud. But it wouldn’t come without risks.
Apple is keenly aware of privacy risk, an area in which it has attempted to distinguish itself from other big tech companies, and has emphasized the privacy protections built in to iOS and Wallet.
Zooming out, there is also risk in entrusting identity verification to a private, for-profit, $2.5 trillion dollar company vs. governments developing an OS/platform-agnostic identity verification solution. If this is achievable in the world’s second most populous country, why not the US? The Aadhaar identity system in India (population 1.3 billion) is managed by the government, not a private corporation, and can be used in KYC processes, both online and offline.
By choosing Apple as the primary partner to digitize government-issued identification, what happens to Android users? Or those who cannot afford or otherwise don’t use an Apple device?
There are clearly benefits to digitization, but as they advance these initiatives, federal and state governments should be cognizant of the risks of exacerbating an already problematic “digital divide” in the United States.
US Businesses Ready for Faster Payments
The Federal Reserve released a report last week shedding light on how businesses are using “faster payments,” which it defines as including mechanisms like Same Day ACH, push-to-card, digital wallet apps, and instant payment services. The report is designed to highlight the opportunity for its FedNow instant payments network, which is slated to roll out in 2023.
The survey showed about 75% of US businesses expect to start using faster payments soon or use them more extensively. The number rises to 90% for bigger businesses. Survey respondents prioritized features that enabled greater efficiencies in payment processes and better cash flow management:
The most popular use cases varied by context.
In B2B transactions, paying major suppliers was the top reason for using faster payments, with 44% of respondents selecting it as a reason.
For consumers paying businesses, the top use case was for recurring bill pay (33%).
For businesses paying consumers, payroll was the most selected use case (48%).
And for account to account transfers, the top use case was for internal transfers (32%).
The Real Target of Gensler’s PFOF Remarks
SEC Chair Gary Gensler made waves last week, when he said in an interview with Barron’s that banning the practice of payment for order flow was “on the table.” This was widely interpreted as directed at no-fee digital brokerages like Robinhood, which earns as much as 80% of its revenue from selling retail traders’ options, equity, and crypto trades to market makers and high-frequency trading firms.
Bloomberg reporter Aaron Brown has a different take on Gensler’s remarks — identifying the target as the high-frequency trading firms rather than retail brokerages like Robinhood, pointing out Gensler’s next statement: “They get the data, they get the first look, they get to match buyers and sellers out of that order flow. That may not be the most efficient markets for the 2020s.”
Brown argues (emphasis added):
“Gensler is taking aim at ‘they,’ the market makers, not at Robinhood and other retail brokers. The conflict of interest is that market makers have an incentive to keep their order flow information private. They can use it to adjust their bid and ask prices on exchanges plus dark pools and other electronic matching networks, and to take proprietary positions on their own balance sheets.
In effect, market makers are bribing retail customers with good execution prices in order to keep the information content of their trading out of public view. The victims are not retail traders, but institutional market participants who are now trading at an informational disadvantage.”
Perhaps both sides are right.
Gensler has previously testified about the risks of ‘gamification’ techniques, like those employed by Robinhood, and the risk of mis-aligned incentives causing brokers to choose less-than-best execution for their customers.
PayPal May Have Uphill Battle With Trading Offering
PayPal, the sturdy ecommerce payments enabler from the “web 1.0” era, has been making big moves to stay relevant in a rapidly evolving financial services ecosystem that sees it facing threats all on sides, from companies like Stripe, Adyen, Square/Cash App as well as establishment financial institutions.
The past several quarters have seen PayPal roll out a BNPL offering for its large established merchant base and reposition its consumer product as a financial “super app” by enhancing its core payments offering with more bank account-like functionality: enhanced direct deposit, remote deposit capture, budgeting tools, bill pay, subscription management, and even crypto.
Now, like key rival Cash App, PayPal is rumored to be adding stock trading. But PayPal may be a bit late to the game. While retail stock trading boomed during the pandemic, there are signs the frenzy is cooling.
With relatively limited growth potential in the number of retail digital brokerage users, PayPal faces fierce competition for users new to trading from companies as varied as Charles Schwab, Robinhood, Public.com, Cash App, SoFi, and Unifimoney.
Unless it has a significantly differentiated offering, PayPal also may find it difficult to win over users who already have accounts with competitors. Instead, the lowest hanging fruit is likely to be attempting to cross-sell to PayPal’s large user base, though this no guarantee of success.
FT Partners September Market Update & Analysis
Last week FT Partners released its thorough monthly report tracking financials on publicly traded fintechs, IPOs & SPACs, and financings, which you can see in full here.
A couple of highlights from the report on financing and M&A activity:
Other Good Reads This Week
As European Fintechs Vie for US Customers, Revolut Rolls Out A New Remittance Service (Forbes)
How Mid-size Banks Can Survive Fintech (Fintech Takes)
‘Buy now, pay later’ retail loan services test patience of investors (FT)
Network Effects Are Overrated (NYT Dealbook)
What at the moment looks like a toy in fintech, but will end up being the next big thing? (Fintech Nerd Collective)
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