Topics covered in this month’s Spotlight post are Tencent’s forthcoming annual results, regulatory updates on the EBA’s final RTS, India’s Paytm, ApplePay market launches, AI driven chatbots and Switzerland’s CryptoValley.

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China’s Tencent will announce its 2016 annual results next week on March 22nd. Revenues for the full year 2016 are expected to be in the region of 154 bn CNY ($22bn). This compares to 103 bn CNY($15bn) reported for the FY 2015. See here for Tencent’s investor deck. The majority of the revenue continues to come from online gaming from within its 3 main social networks – 2 of which have approaching 1bn monthly active users (MAU).

Tencent Social Networks

  • QQ – its original desktop messaging platform with 877 million monthly active users
  • WeChat –  the even more successful mobile messaging app with 846 million MAUs
  • Qzone – a third messaging platform with 632 million MAUs

Just to step back slightly, Tencent started life in 1998 with QQ, an instant-messaging service that was a clone of ICQ which was in fact an Israeli invention acquired by AOL of America. It has since developed its business model around selling virtual ‘value added services’ to online gamers. These VAS include virtual weapons, avatar costumes and online VIP rooms.

Tencent’s Online Games Developers 

  • Riot Games games developers (its League of Legends game has 100 million MAUs)
  • SuperCell games developers (which produces Clash of Clans) – over 100 million people play Supercell  games every day

Two strategies in particular have contributed to the companies incredible revenue growth. First, it has championed the ‘app-within-an-app-model‘ featuring thousands of games, businesses and chatbots all accessible from within one single app platform. WeChat in particular has mastered this. Second, a contributor to its success has been its hugely successful mobile payments services Weixin (WeChatPay) and QQ Wallet. These enable users to make frictionless in-app payments. WeChatPay has also extended its service to face to face merchant payments and has especially excelled in online-to-offline conversions (O2O). By all accounts WeChatPay will have processed in the region of $556 bn in 2016 – a figure which is almost twice the size of PayPal’s total global volume of $282 bn for the same period.

Both these factors make Tencent’s platforms extremely ‘sticky’.  One of the takeways here is that the payment wallets are not viewed as stand alone value creators and are in fact not operated as profit centres. Instead they are seen as a key platform feature and enablers for other products and services provided through the platform. Tencent’s President Martin Lau says that the wallets “benefit our overall ecosystem,” by enabling conversions of advertising and acting as a gateway to financial services provision through Tencent’s wealth management fund and online bank.

Here are three slides from the Tencent investor deck.

As pointed out in a previous post earlier this month, the EBA published its final draft RTS on SCA on 22 Feb 2017. This followed a consultation period with industry to respond. The EBA received an unusually high volume of responses (more than 224) from stakeholders before the deadline in Oct 2016. In particular concerns were raised about the added check out friction that the SCA procedure would create for e-commerce merchants. In response, the final draft RTS (download the document here) includes key changes to the exemptions section which are explained in the previous post.

Based on the feedback from stakeholders, it also worth emphasising that the EBA took steps to ensure technical neutrality. Hence in the final RTS, the EBA has “removed previous references to ISO 27001 and to other specific characteristics of strong customer authentication, so as better to ensure the technological neutrality of the RTS and to facilitate future innovations.”

The EBA also previously decided against setting up a ‘governing entity’ that would “oversee the design, development and maintenance of a interface standard of communication” (i.e. a standard API to be used by banks to provide 3rd parties with access to customer accounts). The governing entity would have for example “determined the features of the interface, the interoperability of the interface with other interfaces, the information to be exchanged, and the minimum technical and message formats requirements.”

In both the above instances, the EBA retreated from the temptation to set rules and instead, like most regulators (including the UK’s FCA), followed a principles based regulatory approach. Principles-based regulation means, “where possible, moving away from dictating through detailed, prescriptive rules and supervisory actions how firms should operate their business”, and instead “placing greater reliance on principles and outcome-focused, high-level rules as a means to drive at the regulatory aims to be achieved, and less reliance on prescriptive rules.” This of course makes sense. However, there is a view that the EBA has gone too far and some rules around common standards are in fact necessary to make a transformative piece of legislation like the PSD2 work. Alternatively, setting up some kind of independent entity to make those decisions would under the circumstances also be a pragmatic move. As it is, it is left up to the stakeholder community (European banks and non-banks) to organise themselves to deliver the regulatory outcome PSD2 envisages including harmonisation and interoperability. This is fine and can be done but there is a risk now that without clear regulatory guidance any industry wide collaboration may turn out to be a protracted long term affair and  in the end fail to deliver the outcome desired.

Meanwhile the UK took a slightly different approach. The Open Banking Working Group (OBWG) was set up directly by the UK government in 2015 with aim of developing “a framework for adopting an open API standard across banking”. The OBWG – a collective of banking, open data and FinTech professionals – published its framework in Jan 2016 and is now working towards an agreed timetable to implement it. It says that,

Implementing the Open Banking Standard framework could significantly accelerate the implementation of new EU regulations on banking data. It would also place the UK in a strong position to lead the development of a similar international standard.

Separately and in parallel, the UKs Competition and Markets Authority (CMA) has decided to set up an ‘Implementation Entity’ (IE) that will “undertake the work necessary for the adoption of common and open data, API and security standards.” The IE is made up of a formal Steering Group (or Board) with an Executive leader based on the 9 main retail banks.  The CMA’s remedies build upon the OBWG framework so in effect the output from the OBWG will be an input into the CMA’s Implementation Entity. In contrast to the approach taken by the PSD2/EBA, this approach may in the end achieve the level of interoperability that in turn encourages competition, stimulates innovation and delivers customer choice. So in a slightly ironic Brexit twist then, in effort to achieve the aims of PSD2, the European banking community may resort to turing to the standard already nicely defined by the OBWG in the UK. Time will tell. CMA’s scope is however limited to bank accounts and doesn’t include card accounts. Below are some screen shots from the published Open Banking Standard framework including the target API release schedule .

Paytm is one of the top three consumer internet companies in India. Starting life in 2000 as a provider of value added content ‘portals’ for GSM mobile phone operators, it timed the ring tone market cycle well and launched Paytm (‘pay through mobile’) as a provider of online mobile recharge services in 2009. It has since expanded rapidly as a comprehensive online marketplace and payment wallet with over 200 million registered users. In a complex corporate restructuring move, Alibaba, an existing shareholder, has now led a further $200m funding into Paytm Ecommerce – the market place business spun off in summer 2016. The investment raises Alibaba’s shareholding to 50%. Paytm’s market place business now rivals Amazon India with estimated Gross Merchandise Value of Rs.5,000 crore (roughly $760m) per month (figure stated for Jan 2017) but is growing much faster having grown 10x since March 2015.

Separately, Paytm’s parent company One97 Communications, has received final approval from the Reserve Bank of India to formally launch Paytm Payments Bank. The RBI created new banking licenses for SFBs (small finance banks) and PBs (payments banks) in 2015. One97 was one of 11 recipients of a new payment bank licenses issued by the RBI. It will be able to accept deposits from individuals and small businesses of up to Rs 1 lakh (100,000 rupees) per account which is equivalent to about $1,500. As part of the restructuring, One97 merged Paytm wallet business with its new payments bank operation. Whilst Alibaba has a 40% ownership of the One97 and 50% of Paytm ecommerce, it will not have direct ownership in the payments bank. This is in line with the bank regulations limiting foreign ownership in the newly created payment banks.

ApplePay went live in Ireland on 6th March making it the first new market to support the payment service in 2017. Next on the list is probably Taiwan where 7 banks have recently obtained permission from their regulator to offer the mobile payment services. Activity in the various other markets suggest a launch is also imminent in Belgium, Italy and Germany.

ApplePay, which originally launched in USA in Oct 2014, is now live in 14 markets of which 9 went live during 2016. Here are the release dates as stated on Wikipedia

SamsungPay, which originally launched in S Korea in Aug 2015, is likewise now live in 14 markets of which 3 went live in 2017 and 9 went live during 2016. Here are the release dates as stated on Wikipedia

By contrast Android Pay, originally launched in USA in Sept 2015, is now live in 10 markets of which 8 went live during 2016. Here are the release dates as stated on Wikipedia

More than 34,000 AI driven chatbots (figure stated as of November 216) have been launched on Facebook Messenger since opening up to 3rd parties in April 2016.  The first year has been mixed with a large proportion of the chat bots have surprise surprise not functioned correctly. Facebook hired David Marcus, former Paypal boss, in 2014 to run its messenger service with a view to turning it into commerce and payments engine. So far there is little evidence that this has happened. Chatbots are however proving to be more effective at customer service type use cases. These are more reliant on Natural Language Processing (NLP) than transactional bots where bot conversations are more rules based. The most effective bots require a bit of both with time invested into mapping out and designing the conversational flow and user experience. AI driven chatbots are not limited to messenger apps and can for example be developed for SMS instead. Depending on the target customer segment, this might be a more appropriate channel to use.  This month Capital One launched an SMS chat bot it is calling Eno. Claiming to be the firt SMS chat bot to use NLP in USA, it:

Leverages artificial intelligence to understand what you need. You can get a quick update on your accounts by texting Eno things like “What’s my balance?” or “How much credit do I have?” and it will provide the information you need instantly. You can also pay your credit card bill by simply texting “Eno, pay my bill.”

Also this month, HDFC Bank in India launched a customer services bot called Eva. It claims to be:

India’s first AI-based banking Chatbot and can answer millions of customer queries across multiple channels instantly. Eva can assimilate knowledge from thousands of sources and provide answers in simple language in less than 0.4 seconds.

Chatbots are not limited to text chat channels. Capital One also has a ‘skill’ on Amazon Alexa that allows customers to obtain account information by simply speaking to Alexa. This month Royal Bank of Canada launched a chat assistant forApple’s Siri platform which allows customers to send Interac money transfers via voice.

Check out this excellent BBC podcast on AI which provides a nice explanation of the recent resurgence of Artificial Intelligence.

Artificial intelligence is already transforming everything from medicine to music. Manuela Saragosa speaks to three pioneers of this latest industrial revolution and asks what will be left for us humans to do? Professor Geoffrey Hinton, a father of AI, explains how neural networks revolutionised Google’s translation services, and why we might one day be able to recreate consciousness in silicon.

London and Berlin receive plenty of coverage as Fintech centres, but Zurich is not far behind. Its already firmly established as a tech centre. According to a recent google blog,

Zurich, already the largest Google development centre outside of the U.S. and housing teams working on Google Search, Maps, Calendar, YouTube and Gmail, will now be the European centre for our exploration of research and implementation of machine learning.”

Given its financial services and banking routes, it’s no surprise that Switzerland is also making waves in financial innovation too. In particular, the small town of Zug – near Zurich – has established itself at the forefront of crypto currency innovation. Nicknamed Crypto Valley, its rapidly becoming a global centre for cryptocurrencies. Its home of the Ethereum project – a decentralized blockchain app platform that enables code executable smart contract agreements across parties (see here for a good overview of smart contracts). In late February this year it announced the launch of the Ethereum Enterprise Alliance (EEA) featuring a roster of blue chip launch partners including Microsoft, Intel, JPMorgan, BBVA, Credit Suisse and UBS. The purpose of the EEA is to build and promote Ethereum-based technology best practices, standards, and a reference architecture. The launch of the EEA is a massive endorsement of Ethereum technology. EEA aims to augment Ethereum  to achieve enterprise-grade technology and will for example develop standards and governance for the interoperability of blockchains architectures that span both permissioned (private) and public Ethereum networks – read more on the EAA here.

We recently spoke to David Keast from Corniche Growth Advisors  based in Montreux, Switzerland who describes the Swiss fintech scene in this short audio snippet.

You can read all previous posts at the Monthly Spotlight page. Do get in touch to discuss any of the topics we raise.