Fintech Startups Disrupt Market Leaders with AI

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Artificial intelligence is fundamentally changing the way that the consumer and small business financial system works. In the last few years, large investment banks have hired artificial intelligence specialists from the world of academia and put them in charge of their AI divisions. Fintech start-ups have begun using machine-learning algorithms to model credit ratings and detect fraud, and hedge funds and high-frequency traders are using AI to make investment decisions.

Most legacy banks have a fixed model of providing a free basic consumer banking service to their customers, and then charging disproportionately for additional services. Many services were developed pre-digital, and bank customers had to accept a slow pace and high costs. Digital technology has been introduced where it can be to improve efficiency, but they essentially remain analogue-designed processes.

Against this backdrop, Fintech startups tend to focus on one specific financial facility and develop a better and faster service at lower cost to the user. With better and automated examination of more databases they are able to accept more people as customers, maintain a lower default rate, and achieve a higher repeat rate. 

Several fintech startups were pitching to potential investors at the recent NOAH Conference in London UK, and a cross-section of them demonstrate the array of services they hope to steal away from the traditional providers.

Vetting for Home Tenancy Agreements

Virtually anyone who has rented a home has gone through the process of being vetted by a credit rating agency. In the UK, banks reject 50% of loan applications simply because there is not enough data available on the applicant to make a robust decision. And a refusal is itself a black mark on a person’s already weak credit rating, generally leading to higher interest rates charged by future lenders. So the process helps no-one.

The team at the Risk42 startup based in Hamburg, Germany, is led by founder Roberto Valerio. They previously specialised in fraud prevention and detection, and analysed over 700,000 loan applications. Using many additional data sources that the ‘regular’ credit agencies don’t think to consider they have been able to give a valid appraisal of 90% of applicants.

Risk42 raised seed funding in September 2018 and is currently raising a second round of investment finance.

Turnover-based Business Lending

After the financial crash of 2008, banks everywhere became more selective over who they lend to. Startups were starved of cash, and the growth of equity crowdfunding since then has been a market response. Though company founders are not always happy or willing to dilute their own shareholding.

Berlin-based ConsciousGrowth started just seven months ago under founder Sebastien Nienbaber. Startups that are already trading can apply to share a percentage of their future revenue in exchange for up-front working capital.

ConsciousGrowth uses AI to consider a wider range of variables in deciding to make business loans. By providing marketing and revenue data alongside basic business information, a business can receive funding in as little as two days.

Unlike equity crowdfunding it doesn’t cost business owners any equity; they do not have to give personal guarantees that a bank would require; and unlike VC funding they are not obliged to accept a stranger on their board of directors. Monthly cash flows can fluctuate, which is why repayments scale up or down from one month to the next in line with net revenue.

Small Business Loans

Led by Founder and CEO Jens Woloszczak who was previously a Senior Consultant at McKinsey & Co., Spotcap developed an in-house credit risk algorithm to provide flexible and accessible loans to small businesses.

It launched in Spain in September 2014 before expanding to the Netherlands and Australia in 2015, the UK in 2016 and New Zealand in 2017.

They are beginning to find that numerous banks and other lending institutions want to work with them to provide their own SME clients with an efficient and straightforward lending experience. Research shows 81% of banks believe the way to adopt digitisation is to partner with new generation providers like Spotcap and many other fintech startups.

Three More In Brief…………..

London-based Fluency is a startup crypto bank. Mainstream banks won’t hold cryptocurrencies and cash transfers from them to buy a cryptocurrency can take 3-8 days and cost up to 15% in fees, says Co-Founder Inga Mullins. Fluency’s cash transfers to buy crypto are instant, deposits are free, and there’s zero withdrawal cost. Crypto-fiat exchange is free up to £5,000 month. Like many fintech startups, Fluency provides a better service faster and cheaper than legacy providers. Fluency has just started a round of seed funding in U.S. and U.K.

Nemuru is a Barcelona-based startup in Spain that provides on-the-spot personal loans in three minutes at the point-of-sale for buyers of high ticket items costing up to €20,000. Their AI-based credit checking is faster and more accurate, and can accept more shoppers than traditional credit agencies can assess. They have over 300 store-owner users. Nemuru initially partnered with BBVA and BancoSabadell (two of the biggest Spanish banks) for funding operations and have so far raised €2 million from local VCs. Nemuru is enjoying an average 70% monthly growth and plans to expand to Colombia and Mexico.

flatfair is a fintech/proptech startup based in London. There is a vast level of distrust between landlords and tenants over deposits – and getting them back at the end of a property rental. Tenants join flatfair as a member for a cost equivalent to one week of their rental agreement, and can use a card rather than cash to pay a deposit. flatfair also runs credit checks for the landlord that are better at determining risk levels through using AI to assess additional data collection points. Clients include several major UK letting companies. 

BOLD Awards 2020

Any of these startups are BOLD enough to enter the Fintech category, which is one of 12 categories in the BOLD Awards 2020. Other categories include AI, Robotics, Science, Advertising and Marketplaces. The full list, and the place to submit an entry, is here. After a round of public voting and assessment by a panel of international judges, category winners will receive their award at a prestigious black-tie ceremony on March 27th 2020 in Venice, Italy.

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