Fintech’s double-edged sword and the cost of living crisis

Hello readers, and welcome to the penultimate issue of FintechFT as we know it! After next week, we’ll have a one week hiatus and then we’ll be back with a new format, and new name.

In this week’s issue, I write about how fintech could help — or hinder — those facing the sharp end of the cost of living crisis, Eric Platt in New York reports on quant funds supporting the market rally and I speak to open banking provider Ecospend.

As ever, get in touch with Imani (imani.moise@ft.com) or me (sid.v@ft.com) with thoughts for new articles. Happy reading!

Fintech and the cost of living crisis

For the UK, the cost of living crisis is only getting more serious. Food prices continue to rise, and worse is yet to come this winter with soaring energy bills. Today, a report from Citigroup warned that UK inflation will hit 18.6 per cent — a level not seen in nearly half a century.

The historic rise in inflation calls for innovation in financial services — although the role fintech can play in helping those with tightened budgets it is not always straightforward.

“We can provide tooling to help understand what is affordable,” said Jerry Young, chief executive at ieDigital, which works with building societies and banks to improve their digital engagement, “such as seeing how inflation rates might increase your bills over time.”

These tools can help keep consumers informed so they can alert lenders when they expect to face difficulty paying bills, Young said. Banks such as NatWest have already referred customers who may be facing tough circumstances to charities who can help them.

Innovation in fintech is also playing a role in helping community lenders, non-profits that offer loans to those who cannot get them from commercial alternatives, to make affordable loans.

“We should be making sure that all people’s bank accounts are available through open banking so lenders can have a look at what’s going on each month,” said Brian Brodie, chair of finance broker Freedom Finance. This will allow lenders to make more accurate and rapid decisions on whether consumers can afford the loans they offer, he added.

But other seemingly straightforward ways in which fintech can help consumers and banks contend with the cost of living crisis are not necessarily so effective.

Community lenders say that the plethora of budgeting tools — some of which are built into banking apps — are often inaccessible to those who most need them, either because they lack the necessary digital skills or access to the devices necessary to use such tools.

And the fintech sector doesn’t have the best record when it comes to supporting those in difficult circumstances.

“Fintechs offer some potential, but so far the most successful intervention was to create payday loans,” said Faisel Rahman, founder and chief executive of Fair Finance, a socially focused lender.

Companies such as Wonga Loans have had success raising VC funds, but that was driven by its use of technology to cut costs and speed up decision making — and the company is best remembered for its obscene interest rates.

A similar debate is growing around the buy now, pay later sector — which offers interest-free, short-term credit. Charities and civil society groups have raised concerns that the smooth interfaces and frictionless lending of the sector could encourage vulnerable consumers to take on too much debt, at a time when they are particularly at risk.

The Financial Conduct Authority’s warning last week about misleading adverts from buy now, pay later providers brings to the foreground some of the fears that surrounded payday loans: several of Wonga’s advertisements fell foul of the Advertising Standards Authority.

“Firms need to ensure consumers, particularly those in vulnerable circumstances, are equipped with the right information at the right time, so they can make effective, timely and properly informed decisions,” said Sheldon Mills, the FCA’s executive director of consumers and competition. (Siddharth Venkataramakrishnan)

Fintech Fascination

Quant funds support market rally Eric Platt reports on how quant funds are increasing their bets on US stocks, helping fuel the rally that added $7tn to markets since June. These funds, which try to ride trends in the market, have unwound positions that were taken just earlier this year to benefit from falling stock markets.

Adyen shares slide after earnings miss Investments in new staff led Dutch payments group Adyen to miss its first-half revenue estimates, despite better than expected volumes of transactions. The market response was a slide of more than 11 per cent in shares on Thursday.

FCA takes aim at buy now, pay later over misleading ads The UK financial watchdog said it had seen evidence of adverts — including some featuring social media influencers — which failed to show the risks of taking on more debt than customers can afford to repay and the consequences of missing payments.

Quick-fire Q&A

Every week we ask the founders of fast-growing fintechs to introduce themselves and explain what makes them stand out in a crowded industry. Our conversation, lightly edited, appears below.

I spoke to James Hickman, chief commercial officer at Ecospend, a payments fintech that Swedish group Trustly acquired in May. Ecospend is among the growing field of companies utilising open banking, which allows consumers to share financial information with third parties such as budgeting or savings apps. Founded in 2017, Ecospend won a £3mn contract to provide open banking services for HMRC last February. Since then, it has begun a partnership with wealth manager Hargreaves Lansdown to provide open banking service to its clients, and has processed over £5bn in payments over the past year.

How successful has open banking been so far? According to the open banking Implementation Entity, there are more than 5mn users of open banking in the UK alone as of February 2022 — a figure which has increased dramatically over the past year. In addition to HMRC, we have seen adoption of open banking across companies including ITV, Anglian Water, and Travis Perkins. The next steps should be to continue to roll out solutions for areas like tax, business-to-business payments, digital identity verification and affordability testing. It is also vital that we ensure that we continue to test that open banking is proving more successful than established methods.

There have also been some promising developments in the regulation of the industry, which now falls directly under the FCA’s remit. This marks a pivotal point in the industry’s maturity as a fully-fledged financial ecosystem that is thriving.

The biggest challenge remains resistance from the entrenched card networks, which are often behind the curve in utilising open banking or open finance [the next stage of open banking, which allows consumers to share data about products like mortgages and pensions to get the most out of them].

What is the significance of your work with HMRC? Our partnership with HMRC is the single biggest use case of open banking anywhere in the world. It marks the first sovereign government to use open banking payments with billions collected in 12 months. It also means we can offer our payments and data products across a broad range of other UK government departments. It showcases the benefits of open banking, such as offering merchants savings on card fees and improved efficiency. We couldn’t anticipate just how many individuals would use open banking payment methods on the HMRC site and others and we have been really pleased with the uptake

What have been some unexpected trends in the space that have emerged over the past year? It’s been interesting to see just how much businesses can reduce their operational costs — potentially up to a fifth compared to traditional card payment methods. Not only has this created a new avenue for businesses to save, but we’ve also seen a shake-up of the payments industry with traditional card payments firms like Visa and Mastercard not being as agile as some of the other fintech companies in the space.