The Present and Future of FX and Payments with Mike Laven
Today, Rebank co-host Aman Ghei of Finch Capital is joined by Mike Laven.
Mike is the CEO of CurrencyCloud, one of the leading FX and payments companies in Europe, powering some of the most successful financial institutions and consumer fintech unicorns. Mike has spent over 25 years in financial technology, with executive roles at a number of large venture backed firms. Mike joined CurrencyCloud in 2011 and has raised over $140m in funding for the company.
In this conversation, Mike and Aman discuss the immediate impact of COVID on the broader FX and remittance market as well as potential longer term implications, why API delivery has been so successful in payments, consolidation and the future of payments, and what the next 12-to-24 months have in store for CurrencyCloud.
Full transcript:
Aman Ghei:
Mike, welcome to Rebank. Very nice to have you here.
Mike Laven:
Thanks. Happy to be here.
Aman Ghei:
Well, we are living in unprecedented times. This is my first non present recording, so hopefully this all goes well. I guess I'd love to start where most people have questions today. Mike, you're obviously in the FX business, what are you seeing happen right now in the market in general [in response to the COVID-19 crisis]?
Mike Laven:
Oh, so first of all, at one level we get a weekly briefing from the FX department of Barclays, which basically said that FX transactions themselves are down about 70%, so that there is just significantly less activity in the FX market. On the other hand, if you look at the trade finance departments, which is other words invoice discounting, that's been holding relatively steady. So though the UK economy itself, and we all know whether it's down 10%, 20%, 30%, that means it's still there, 60, 70 or 80% and that economy itself is very, very much importing with large importing supply chains.
Mike Laven:
So, though the economy itself is dramatically down and the FX markets themselves are significantly down, in fact, there's still a tremendous amount of currency transactions going on because of the volatility and because people are really unsure about the future. One of the things that has really slowed down is futures forwards, in other words, transactions that have some risk in them that have to do with predicting the future, yes we can't predict the future, that's slowed down. So overall, you've got a market that's slower than it was before, a lot less going on, but still a tremendous amount of commerce is happening and a lot of transactions are still taking place, but just not what it used to be.
Aman Ghei:
And what do you think Mike will happen in the next 6 to 12 months as we hopefully start to recover and governments start to ease their lockdowns and economies start to open and trade starts to increase. Are there going to be some fundamental shifts that have taken place in the FX cross border payments market that are there to stay?
Mike Laven:
So first of all, remember these things are very much by sector. Speaking for the Currencycloud, we're quite fortunate in that our business is balanced across a lot of sectors. So where there are firms whose businesses is in travel money or for example in purchasing real estate in Spain for UK retirees, those kinds of businesses that are related to travel and hotels are significantly impacted. And that's business that down and it's not clear how fast that will come back. Additionally, businesses that have to do with the support of overseas students, huge market, hundreds of thousands of Chinese students actually study in the US and Europe and plenty of other students study abroad as well. So there are certain segments that are down and won't come back. Travel, tourism, parts of education as well.
Mike Laven:
On the other hand, global supply chains and the UK supply chains. I mean, we all know from the Brexit discussions how much of our UK economy is dependent on trade back and forth with the EU and also with the US. So, those supply chains remain in place and the fundamental FX market, which is basically looking at trade among the majors. That will be robust and that'll continue to re robust at a fairly high level. Areas where it's related to travel and tourism and not related to supply chain issues, those areas are going to suffer.
Aman Ghei:
Yeah, I can imagine the revenue type business models where there are reliance on people being in certain countries or getting the best FX rate or remittance in general. What have you seen in the remittance market actually out of curiosity? There's obviously still a need for people to send money and maybe now more often than before to people that need it across different countries. Are you seeing similar impacts?
Mike Laven:
So there's been a couple of very recent World Bank studies in this as well, I mean like weekly. Remittance is flat to down because a lot of the workers in those lower end jobs are workers who've been laid off. Remember in the US the largest remittance cadre is between the US and Mexico and that has a lot of low paid undocumented or documented and casual laborers. And so the remittance market there is really very far down. We see that in the UK as well that remittance firms... And we service a certain number of remittance firms, have seen their business basically flat to somewhat down.
Mike Laven:
So with the economy to start to pick up and those same workers, whether they're in healthcare or construction or whatever part of the economy is in, those people come back to work, then remittances will start to come back up. Right now, the remittance market itself... So as opposed to the supply chain, which is very much a dollar Euro and pound market, the remittance business though may often be transacted in dollars, those are going to, whether it's Kenya or Bangladesh or India, those are going to countries throughout the world. And so that part of the FX market is actually quite slow.
Aman Ghei:
Interesting. I guess this is a good segue into Currencycloud Maybe in the short term. We all know the Western Union, MoneyGram type play where you need a agent generally physically located in a small distribution network for someone to remit but also withdraw funds. This must be a great time for you to at least speak to some customers that I guess are truly now needing to become digital.
Mike Laven:
So remember there had been a move in the remittance business to digital, Azimo, in TransferWise themselves, Remitly in the US, a series of other firms in Europe. So there's been a move to digital, but still the bulk of the money transfer business still remains with banks and the traditional suppliers. As people are uncomfortable to go into branches or the branches themselves are closed and as the cash agents themselves are closed, both on the receiving side and the payout side, then we believe and I think there's a lot written about the industry that the response to COVID is an acceleration of the digitization. But not just of the remittance business, but the loan business for example. If you can't go into your local bank to secure your small business loan, then that business is going to move online.
Mike Laven:
So from the fintech world, we think that the response to COVID or the fear of using cash and also the reluctance to go into branches actually accelerates the digitization of those parts of the financial services segment that were going digital anyway. Again, if you were to look at the downloads of whether it's Barclays or Monzo, their apps in the beginning of the COVID lockdown, you'll see that app downloads went up dramatically across all players as people look to how am I not going to go to a bank anymore? How am I going to actually behave digitally? So that accelerates the trend that was already there.
Aman Ghei:
Really interesting. I guess it's also another good segue into maybe thinking a little bit more longer term. And we were speaking a little bit about banks right now and some of the incumbent players as well as the Monzos of the world. How are you seeing banks wake up to I guess the opportunity cross border payments presents itself because for a long time, I guess if you just look at maybe the remittance space, it's been fairly consumer driven. They've charged decent markups, whether that's on the spot exchange rate or in fees, and that's why I guess you've seen businesses like TransferWise come across. But how do you see banks waking up right now to this? We saw, I think Santander recently launched a FX platform to compete with TransferWise. So how do you see the space evolving from an incumbent perspective?
Mike Laven:
So the foreign exchange market is dramatically concentrated in a global basis. And I've been in the foreign exchange market on the capital market side and now on the payments retail side for quite some time. And the top 10 banks in foreign exchange do well over 90% of all transactions. So though your transaction may start at a relatively low level, it actually gets pyramided up so that there are very, very few suppliers who are controlling the market on a global basis. And with many things, if you think of the pricing pressure... And TransferWise remember is not the cheapest, but if you look at across the consumer oriented apps who expose transparently what the price is, it's the transparency that ultimately eats margin. And to the extent that individuals knowing their personal life what they're paying, what we find is the way the technology often moves is from an individual. The individual comes to the business with the same expectation.
Mike Laven:
So what you're going to see is banks charging... And PayPal also is very, very expensive as well. So whereas Western Union or MoneyGram, banks, PayPal, I would say traditional institutional providers charge significantly more than the online only providers or the digital providers because after all they have a large physical infrastructure that they have to support. Rates come down. So to the extent that digitization brings more and more people online in their personal life, that will force corporate rates to come down and general squeeze on the profitability of foreign exchange at the banking level. You just can't charge 100, 200, 300 basis points, I mean the way that you did in the past when you have online services charging a quarter to a half of that.
Aman Ghei:
And so do you feel there will be some consolidation here? Because it seems to me like what you're saying is at some point kind of everything reverts to the mean because from a pricing standpoint, okay, the incumbents have this physical infrastructure which is you could argue non-necessary to a certain degree, but also someone like you comes in and enables them to get access to this physical infrastructure in a digital way. So how do you see some of the competitive dynamics playing out in this market?
Mike Laven:
So we see three substantial changes in what I would call in the fintech payments space. One is consolidation. I'll give you the three and then I'll come back and talk about that. One is consolidation, firms coming together. Second is substitution, which is new payment routes and new methods of payment. And third is changes in the value chain. In consolidation, weaker fintechs, either the startups who didn't raise money, weren't fortunate enough to have cash in the bank or else who are sectorally concentrated or who are selling into segments where the customers aren't buying right now, they're going to fall out. Again, if you look at app downloads, there are more app downloads for Lloyds, Halifax, Bank of Scotland and Barclays way out number that for all of the challenger banks combined. So you're also seeing people go to quality. So quality firms will buy other firms and there's plenty of good people out there who've invested in great technology but are just caught at the wrong point of the business cycle.
Mike Laven:
So we think there'll be consolidation in the payment space and in the fintech space. In terms of substitution, by that I mean whether it's crypto or near crypto, Ripple, Libra or other efforts. And there's a whole series of other real time alternative payment methods. And again, where we think that Swift oriented, very expensive payment methods will be substituted by cheaper methods and that will change the industry. And then the third thing will happen again, very much to the FX market, is what happened in many, many other markets where the value creation will have to shift from the thing itself to some other means of monetization. So right now you monetize your FX by charging for the FX. Whereas when you monetize music or you pay for Shazam, the actual end user isn't paying. There's a different method of monetization.
Mike Laven:
So we think that the purpose of monetization will actually shift from the transaction itself to something else. And there could be a lot of other business models in that. It could be bundled in the way Revolut is trying to bundle it with other kinds of services. Again, you could have the data and the data itself could create value. So value creation will be different, new routes to substitute for older routes and consolidation. So I think you're going to see these were trends that were happening anyway, but I think what you see is they accelerate an acceleration of digitization in the post COVID world. So we actually think starting now and moving forward that you're going to see a whole new landscape going forward.
Aman Ghei:
Super interesting. I want to pick up one point and maybe dive a little bit deeper, which is Swift and Ripple and that entire network. Obviously, Swift has been around for ages, well-funded consortium that basically I guess controls 99% of all the flirt today. How do you disrupt that? How do you change the way they do business? What needs to make them inflect in terms of the way they think about... And I know they have a couple of projects in the burner right now, but I'm not sure where they are in terms of actually making an impact. But this is really kind of how do we change the rails of payment infrastructure to make a lot of the things that you were talking about possible, right? The ability to move the fees from a consumer to something else.
Mike Laven:
So remember first of all, Swift is not sitting still. The Swift GPI network, which is their basically advanced network provides sort of for certain things where we move money has moved it from minutes or hours down to seconds and provided real time follow up in a way. So the Swift network itself remains and will increasingly be incredibly competitive. But when you look at whether it's Ripple or things that we learned from Bitcoin, though we can't use Bitcoin itself, it still has the issues that banks care about in terms of its anonymity. But those kinds of instantaneous transactions, so real time transactions across different time zones in different currencies will require different technologies at the bank level and at the local level. One thing that though I think shouldn't be minimized is that at the same time the technology is making the ability to move things instantaneously, compliance is making things even tougher.
Mike Laven:
I think what we haven't mentioned compliance, and compliance in this case means knowing exactly who's sending it and exactly where it's going and where the money sits at every stage in the transaction and that the consumer's funds are protected at every single stage. So at the one hand, you can do a series of instantaneous transactions. You could do that in some of the crypto worlds, but you do that at the sacrifice of a whole series of compliance issues, which then lends itself to problems that both regulators and banks have. So the key often to moving money quickly, cheaply and efficiently is not moving the money quickly, cheaply and efficiently, but actually meeting the very, very real needs of knowing who's on both ends of the transactions and making sure that the customer's money or the business's money, whoever is sending the money, that their funds are secure throughout the supply chain.
Mike Laven:
So for example, regulators on a global basis have now started to look at what data is carried by local payment rails. Often local payment rails don't have sufficient data to identify who's sending and who's receiving. And so you'll see banks moving away from that and actually moving to Swift just because the cheaper rail doesn't carry the right compliance information. So there's always this tension going on in the money moving business of moving it quickly and cheaply and making sure the data's there. And we can't... Often when you talk to younger startups or people say, "Oh, if it wasn't for the regulator we would be able to do this." The answer is that's never going to change, is that compliance driven, especially on global money transfers will always continue to be there.
Aman Ghei:
And it'll probably become even more important. I guess we've seen a spate of issues that banks and some of the startups have had with AML and the whole broader umbrella of anti money laundering and in KYC as well, right?
Mike Laven:
Yeah. So any money laundering, KYC, knowing who your customer is, knowing who your customer's customer is. Knowing that the funds are secure at every link in the chain so that every single link in the chain is secure. Regulators have an interest in protecting the customer's money. So they want to have an interest in making sure that we're not funding bad guys and bad guys is also tax avoidance and that carousels and a whole series of other things besides just funding armaments. But they also have an interest in making sure that the supply chain of the funds are secure at every stage. So that is as much a driver of the advances of technology, is this making it go faster and cheaper? And that is not going to get any relaxed anytime in the near term nor should it.
Aman Ghei:
Good point. Mike, I want to talk a little bit about delivery so to speak. Currencycloud was probably one of the first companies in the fintech space to really get this API wave right. And there is something about the payment space that lends itself to this API delivery model pretty well. Obviously, the Stripes of the world and you and a number of others. What is it about payments that the API delivery model particularly suits?
Mike Laven:
So remember the thing about payments is everybody dislikes payments, right? Payments means I'm spending my money for something, right? And payments occur after the fact. So you do something and then you pay or you decide to send money and then it goes. So one of the things that you want to do with payments is make it as simply as embedded and as transparent as possible. And so the API approach to it means that you can actually embed the transaction inside the app. Not just a phone app, remember when you use your Uber, you've got an embedded payment.
Mike Laven:
But when you do a large supply chain transaction, you would like to have the same ease of use as when you pay for Uber, and when you do that on a cross currency basis. So the API approach basically allows you to embed the payment inside whatever the business process is. And that's what's makes APIs very attractive for businesses. It gives you that sort of Uber style. You just get out of your Uber and you walk away and it gets paid. That's what you'd like to have happen for all of your business purposes and an API approach to the delivery of the service allows you to do that.
Aman Ghei:
Interesting. And we've seen, I guess this "banking as a service" type models appear in Europe in particular over the last two or three years. Where do you see FX fitting into that silo, if any. Do you feel it deserves its own silo or it can be something a little bit more broader and generalist that a general platform business talking a Solaris or something can offer.
Mike Laven:
So we know a lot of those firms quite well and some of them are delivery channels for our product. For the most part the banking as a service firms are concentrated on card issuing and allowing vendors and merchants to be actually going to the card issuing business. So the question is what apps will FX be bundled with to be back to where I was before? So in a banking as a service model and part of our partnership with Visa is doing this as bundling FX with a lot of the services that Visa delivers. So the question is where transactions are cross border, how will that service itself get to the customer or get to the client whether it's a small business or it's a bank? To the extent that the banking as a service firms can sign up large clients and for the most part we haven't seen that yet and that's one channel for us to sell FX.
Mike Laven:
But remember in Currencycloud, we're working with Starling, with Revolut, with Monzo, with Monese. We work with about 40 different challenger banks throughout Europe and Scandinavia, Singapore, Hong Kong and in the US we have signed a number of challenger banks as well. And those cases, these are banking platforms that integrate the foreign exchange component directly, not through any third party provider. I think that there's always been one of the questions in the fintech business, once you dis-aggregated all of the components into loans and credit and foreign exchange and domestic payments, how will they be aggregated back up and what will be the point of that aggregation? I think what we're seeing right now is a series of what we call sponsor banks or high level banks and challenger banks doing that integration themselves. So it's really a question of where will the FX as a component be delivered and we think through the neobanks is the where it's going to go.
Aman Ghei:
And I guess partly related to why being an API is important for you as well, right? Is just maintenance, integration and all the things that come with it are probably easier to do than if you need to get bundled up into a larger platform offering. Wanted to touch on the first point we made around consolidation and that's a really interesting point, particularly in the payment space because I think for as long as fintech has been around, the payment space probably accounts for, I don't know 80 to 90% of all the M&A that happens in this vertical. And I wanted to dissect a couple of things with you that had happened over the past two years or so in particular the MoneyGram situation because it is so related to FX. Why do you think that transpired? Maybe to give the audience a little bit of a background and try to buy MoneyGram and a lot of things happened at the government level, but also interestingly a competitive bidding process and so on. So we would love to get your thoughts, obviously, you're in the center of all those.
Mike Laven:
So there's geographic expansion and that one was very easy to understand on that basis. Though with the Chinese firms, which could be a whole other discussion, I believe that their strategy is not global domination, it's China domination. And that strategy of buying MoneyGram really was focused on China. The US regulators didn't like that for obvious US reasons. In payments, there are a lot of different use cases. So, whether it's remittance or business payments or commercial payments or white collar transfers the way that TransferWise does them, but then our use cases, these insurance premiums have a very different in... Our payouts have a different use case. So there's lots of different use cases. And what we find is that the technology that services those different use cases often can be very, very different.
Mike Laven:
So if you look at what for example iZettle did and being acquired by PayPal, there was a consumer small business use case and then there was actually a very different use case at the acquire level. So that on the other hand, the back offices of all of those things, whether it's compliance, accounting, PCI compliance, a whole series of things actually can be consolidated. So actually consolidation where you have multiple technologies under one umbrella actually makes sense. I think it looks very much like issues that happened in the phone company where the competition becomes how you can reduce costs in the back office to become more efficient while you service lots of use cases in the front office.
Mike Laven:
So that drives large amounts of consolidation where you're acquiring basically firms that have a specific use case and you leave that use case in touch with its technology while you consolidate a lot of the things in the back office. So that drives M&A. Also to go back to where we were before, whether it's FX or whatever it is, there's millions of payments or trillions of payments every day. It's possible to achieve massive amounts of scale and then bring in the economies of that. So the fact that you have multiple use cases plus tremendous scale effects and a lot of new innovation down at the bottom drives tremendous amounts of M&A.
Aman Ghei:
Super interesting. Finally, Mike I wanted to touch on Currencycloud. I think probably not a lot of people know, but you're responsible for multiple unicorns in Europe and power them from a business standpoint. You recently raised around... Maybe if you can give the audience a little bit of flavor in terms of how you see Currencycloud evolving over the next 12 to 24 months.
Mike Laven:
Well, certainly, in some ways we've operated as a venture capital firm. We've worked with a lot of very young firms. Revolut is always a good example when they were just starting out and then have grown with those firms. So what we think the future and if you look out 12, 18, 24 or 36 months, is that the market has evolved from starting at bank accounts to wallets. And a wallet could be Revolut, it could be Venmo, it could be in the US it could be Ant or Alipay in China, it could be wallets that are held by telcos. So what you're going to see is tremendous amounts of money being held in electronic wallets, which will behave very, very differently than bank accounts. We think that the money transfer business moves to a very electronic wallet focus away from a purely bank account focus and we think that's a longterm trend that will happen over a period of time that we'll have to meet.
Mike Laven:
That's one thing that's happening. The second thing that's happening is to go back that you said, we've certainly provided transaction support and FX support for a lot of unicorns. The banks aren't sitting still. We have divided our market into digitally native firms. Other words, firms that started with a mobile consciousness and digital [inaudible 00:30:14] on online, whether they were business to business or consumer to consumer. Now you're seeing digital transformation. We have Standard Bank in South Africa, some of our work with Visa, a whole series of other firms that we've dealt with that are what I would call much more traditional banks, but at the transforming themselves into a more digitally oriented firm because that's the way the market's going. Again, I'm going to go back to where we were before. COVID accelerate digitization and traditional banks will have to keep up that pace to go forward. So you see basically digital transformation among all of the major banks.
Aman Ghei:
Super interesting. And how do you see, I guess from a customer standpoint them evolving in terms of size and expectations from you? So I guess Revolut, it's a big customer, they've changed to what they were from when you meet. We started working with them to now in terms of the amount of their process, what do you need to do to be able to be geared up for that?
Mike Laven:
So one, we've released a new product this year called Spark. And if you think of the evolution of the company, when we first started, we did payments, then we brought out a wallet. We called it cash manager, we didn't call it a wallet, we didn't want to be in the wallet business. Then we've added receipts, other words, the ability to collect money for our customers. And now with the release of Spark, we brought out a multicurrency wallet for our banking and our business customers. And that's a massive innovation, and what we've done with the wallet is a tremendous amount of technology to allow us to get money in very different ways, to get money out in very different ways, but also to do the compliance around it.
Mike Laven:
So, to go back to my discussion of wallets, we think that the future is all about the technology, about providing multicurrency wallets to businesses, to fintechs, to fintechs who supply it to businesses so that people can maintain a multi-currency account. I mean, if you're in the UK or the US, to get a multi-currency account as a business is incredibly difficult. As a consumer, you can go to TransferWise, you can go to other places, but as a large business then that becomes very, very difficult. Also, the commercial wallets don't have the kinds of enterprise features and security that you need when you're a business.
Mike Laven:
So, we think the world's being driven to these wallets. We think that our product direction through the release of Spark this year, which has had a tremendous take-up, is delivering that wallet functionality. But again, we stayed true to where we were. We're not an end user sales organization. Our customers will always be fintechs, banks and other businesses who are providing this service to their customer and we're embedding it in the apps that make everybody's life simpler.
Aman Ghei:
Fantastic. Well, sounds like a very promising future Mike. It's been great to have this conversation. Super insightful and wish you all the best.
Mike Laven:
Thanks so much.
