Risks and Opportunties in the Fintech Space

Posted July 12, 2018

In this episode Frank is joined by Alex Jimenez, VP and Senior Strategist – Program Planning, Strategy and Standards at Zions Bancorporation. They explore the opportunity to serve the underbanked globally and the potential to further incorporate AI into Fintech in the future.


Frank:   Hey everybody. Welcome to another edition of Digital Identity 360. We’re very honored today to have Alex Jimenez with us. Alex, welcome to the program.

Alex:   Thank you for having me.

Frank:   One of the interesting things as we prepared for the program was really your focus on Fintech in general, and Fintech is such an awesome space and I think as a platform, it directs funds and availability to capital markets to people that are underserved. It’s really compelling, so, tell us a little bit, Alex, on what you’re seeing in Fintechs in terms of the opportunity, and then maybe talk about some of the risks and threats now, and I’ll interject here and there on some of the things we’re seeing.

Alex:   Well, the opportunity’s wide open in lots of different things. If we’re talking about the underserved, we primarily see that in the third world in places like Africa and Latin America. So, the best example is in M-Pesa in Kenya, where people never had access to or any way to transfer money. Now they do it with this thing called M-Pesa, which works in feature phones, and it’s really just a way for you to bank, using a feature phone. They pretty much leapfrogged what we do here in the West. Its pretty amazing. There’s a similar thing in Mexico, out in areas where there are no banks. Telefonica and Citibank did something similar. So, there’s a lot of opportunity to bank folks who don’t have access to banking. Throughout the third world, we see examples in India, rural China. In the U.S., we are pretty overbanked, so the opportunities are very different here.

Frank:   Yeah, its interesting as you talk about it, Alex, and you think about the concept of the financial inclusion, it’s fascinating if you look at the world today in terms of the global population of folks that are really not fully integrated into the financial system. It’s probably close to 3 billion people. But even more staggeringly, there’s probably a billion people on the planet, and in your indications and your comments, and many of them Latin American and many of them on the African continent and some in Asia that really have no access to any financial products, so I agree with you. One of the interesting realities of the mobile world, or as you said we leapfrogged, what was happening in the West, is that suddenly you have consumers that have the ability through technology to get access to these markets and to these financial products, which is a fantastic way to really infuse the capital necessary for them to do amazing things. But to our earlier question on challenges, it creates a challenge. How do you identify and authenticate these people off a mobile phone that you’ve never ever seen, for example, somewhere in the African continent?

Alex:   Yeah. So, the phone becomes the identity, which of course is a problem if you lose your phone.

Frank:   That’s right. That’s right.

Alex:   If it’s stolen, you lose that. My understanding, and I’m not really close to that, is in some of these examples and some of these models, there’s actually a local person, like a shopkeeper, who is responsible for onboarding the person on the device and onto the service. So, I suppose if we’re dealing with a local person, that knows your family, there’s a way to do that. But certainly not an official way to do it, and not an elegant way to do it.

Frank:   Sure. Its interesting. It leads us to our world of digital identities. We agree with you, unless you’ve got some local touchpoint that can authenticate the veracity of that identity, it’s very difficult to onboard these folks into a financial global market with any kind of trust or confidence. So, our view here is to say, “Look, there’s a digital identity associated with that device and that persona, and you know, to some degree, how that device and persona behave over time, in itself, becomes a trusted authenticator.” Are you seeing something similar, for example, if I have a mobile phone and I consistently top it up and make my payments on time, that in itself leads to credit worthiness, in the sense that look, they’re paying their bills and topping up. Are you seeing anything in terms of that concept of the amalgam of digital identities and behavior as a way to authenticate people in these emerging markets?

Alex:   Yeah, absolutely, and that definitely is a model and definitely is a way that people are doing it. You also see it actually bleeding into the West.

Frank:   Yeah.

Alex:   We primarily use it here for cybersecurity and for fraud detection. But we do have a problem with people in the West that have very thin credit, or no credit, and how do we authenticate them? How do we give them access to loans and other products if we can’t figure out if they’re credit worthy or not? There are some companies working on that problem, and you know, with some successes.

Frank:   Yeah, its interesting. Its funny that, you’re right, we tend to think of financial inclusion in terms of over there somewhere, but in fact, if you think of the thin-file customers or even the underbanked, even here in our own country, in many cases, very credit-worthy customers with great jobs and skills, but maybe they went through college and didn’t have any loans. Parents paid cash, maybe they don’t have a lot of credit in terms of credit card stuff, they don’t own cars, they don’t use what the credit bureaus used to use as authenticated elements like how long have you been in your home, do you have a landline, those kinds of things. So, it is interesting that we tend to think of financial inclusion as an outside of our borders kind of thing, but there’s a great opportunity internally as it relates to the underbanked in our communities here. Do you see any difference in risks between the underbanked and the underbanked, or under represented, over there?

Alex:   Well, sure. Each of ecosystems are different, and they all have different risks. The problem in the U.S. is that we’re so… particularly from a financial organizations, we are so used to using the legacy type of credit worthiness, and so, when we start talking about different ways to think about it, its difficult for us to go there, which is why a lot of Fintech companies are the ones that are addressing those issues. Then there’s some technologies that we talk about as possible ways to solve that. I’m sure you’ve covered blockchain many times before –

Frank:   That’s right.

Alex:   … as a way to identify, and there’s organizations working on that problem, applying blockchain. How it pans out, how it works out, its anyone’s guess at this point.

Frank:   It really is interesting, isn’t it? The blockchain phenomenon is here. Everybody loves the idea of the blockchain. Cryptocurrency is everywhere. Everybody loves the idea of the cryptocurrencies, but I think you’re right. I think to some degree, I think we’re stuck in the mud a little bit in the U.S., as it relates to traditional authenticators and what we look at. And I think the challenge, certainly what we see in our network, is that identity is such an important and hot commodity. You know, if I’m able to steal my credential, or I’m a hacker, I take Frank’s credential, I can use those credentials across the web. That’s the gift that keeps on giving, so, on the one hand, I’ve got the imperative of, as you said, data … fraud prevention and cyber security and protection against the loss of potential market share, if I have an underbanked or thin-file customer who decides, “Hey, I’m not getting any love from this bank. I’m going somewhere else.” Within your own banking background, Alex, how do you guys balance that between requisite stringent controls versus hey, this could be a legitimate lifelong customer that might walk over to the competitor?

Alex:   I don’t think that there’s good examples of that yet, in the overall industry. I think everyone’s still pretty much using what has worked before. The other piece is regulation, and the interpretation of regulation by the banks. Banks are very, very risk averse. Even though they’re supposed to be … they’re in the business of risk management. But they’re very risk averse, particularly when it comes to compliance, and therefore they’re not likely to go to the edge. They want to stay away from the edge and being able to stay within the regulations, or at least their reading of the regulation. One of the things that I think is amazing is even to this day, so many banks and credit unions are so attached to the wet signature on something, that they’ll allow you to apply for an account online or on mobile, but they still require you to go to the branch to just do the last piece of signing a piece of paper. There’s nothing in the regulation that says you have to do that, but that’s the way it’s been interpreted, and nobody wants to get away from that.

Frank:   Yeah, it’s interesting. I guess it’s conservatism at play, right? You don’t want to be the first guy that says wet signatures are not longer required. But you said something interesting, and as it relates to your view of Fintech, think of GDPR as the most prominent privacy legislation today, it certainly does create a potential friction point. As you’re dealing with these underbanked and thin-filed customers across the world, we’re suddenly on top of the challenge of authenticating them. You also have this enormous challenge of complying with these regulations. What are your thoughts on those things?

Alex:   Well, Europe is an interesting case, because you have the PSD2, the GDPR, and they sort of conflict each other, right? At least, the goals conflict each other and at least in the U.S. we have the ability to watch and see what happens in Europe and then we’ll learn from that I hope, but there’s always that conflict between being able to use data to do certain things you want to do for the benefit of your customers, and at the same time, not use the data for nefarious uses, it’s a difficult situation to be and how do you, where do you draw the line, how do you define certain things? It’s always a problem.

Frank:   Yeah, for sure, and I think, look, in this world where its moving so quickly, I think you’re right. We will learn from GDPR because they’re kind of the trailblazers, and we’ll come up and say, “Wow. This went right and this went wrong”. As we wrap up today, Alex, and again, we’re so delighted you’re here, what do you think is the biggest gotcha moment in Fintech as you look into the future? I’d love a bit of your crystal ball prediction.

Alex:   Well, it’s not blockchain.

Frank:   There you go.

Alex:   AI has more promise than anything out there from a technology standpoint. We can apply it to the sales side, to onboarding, to identification, to security, and to processing all kinds of things. I think how we develop AI engines, how we develop machine learning, and how do we do it right? It’s gonna be difficult, but I think the promise is there, and I think that’s gonna be a big driver.

Frank:   Yeah, we agree. I think you said earlier the phone becomes an integral part of your identity. We’re seeing in our world, if you combine the identity, how you interact with the web, who you are and how you behave, and you have these machine learning and AI models that can help function in this high volume environment we’re in, I think certainly, it’s a leg-up to good customer recognition. Alex, its been a very big pleasure and honor. Thanks for joining us today. Folks, Alex Jimenez from Zions Bank Corporation. Check him out. He is a luminary in this field, and Alex, we certainly appreciate the time.

Alex:   Thank you.

Frank:   Thank you.

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