This article was published on the City A.M. website on 12 January 2017 as part of Invest Edinburgh Talk.
In 1993, cartoonist Peter Steiner of The New Yorker coined the phrase: ‘On the internet, no-one knows you’re a dog.’ More than 20 years later, the issue of internet privacy and a user’s ability to send and receive messages anonymously, remains a significant barrier to building online trust.
“The reality is, as individuals, if we really knew and appreciated the risks we face when dealing with financial services online, we simply wouldn’t do it,” suggests James Varga, chief executive officer of The ID Co. “15 years ago nobody knew about banking fraud, now everybody knows somebody who has been affected by fraud, phishing attacks, or identity theft.
“High profile hacks from TalkTalk, Yahoo and dating sites have exposed our personal data to potential misuse. The fact is, a lot of that risk comes from our online activities and the need to constantly prove we are who we say are.“
With online fraud growing every year, it is now estimated to cost the UK economy more than £11bn per year, with bank-funded crime prevention group Financial Fraud Action reporting that a financial scam was carried out every 15 seconds in 2016.
However, in a world where 71% of millennials in the US would rather visit the dentist than open a bank account, it’s clear that not only does the modern world of financial services face an issue with establishing trust, it must also meet market demand for convenience.
As one of a number of disruptive fintech businesses headquartered in Edinburgh, The ID Co aims to meet both needs.
“Banks are built on the premise of trust,” adds James. “The whole business, the regulatory framework in which they operate, is built on the foundation of trust, reliance and security. As a fintech business, we aim to leverage the trust that users have with their bank and share that trust with other organisations.
“We want to provide online users with the same level of convenience and security that a passport brings when you travel.”
Through its DirectID offer, The ID Co connects a user’s online profile with their bank, in effect helping the user prove they are who they say are, and allowing them to control precisely what information they share with any third party.
A regulatory watershed
In his role as CEO, James has spent the past five years playing an active part in the UK’s Open Bank Working Group,
“We began discussions with GSMA, the trade association for the mobile industry, as well as Verify.gov a number of years ago. As part of those discussions, we were invited by HM Treasury to participate in the development of the latest pan-European Payment Services Directive (PSD2) programme, where I co-chaired the data sub-group."
For fintech businesses, the ongoing adoption of PSD2 across Europe represents a watershed moment. The key requirement of PSD2 requires banks to provide access, via secure APIs, to their customer accounts and provide account information to third party apps, if the account holder wishes.
“It establishes standardised interactions between consumers and their banks – seamlessly and securely.”
The implementation of PSD2 will enable fintech businesses to accelerate disruption in a sector recognised for limited innovation and being understandably risk averse. According to data from the World Economic Forum investment in fintech has soared in the past decade – from $1.8 billion in 2010 to $19 billion in 2015.
The majority of that investment has targeted the most profitable areas of global banking – namely personal and corporate finance. While fintech investment continues to be dominated by Silicon Valley, London remains the undisputed fintech capital of Europe, while pre-Brexit research by Ernst & Young singled out the UK as a whole as the world’s leading fintech centre.
Global fintech centre
The UK has a strong pedigree in the development and evolution of financial services. Positioned as it is, between North America and Europe, the UK enjoys a unique position at the heart of the development of fintech in both markets. To a large extent, banking itself can trace is roots back to the UK, and in particular, Scotland.
The UK is well positioned to cement its position at the forefront of a global industry. However, the buzz around fintech has gone global. The emergence of competition from Berlin, Barcelona, Lisbon and now Singapore is increasingly evident.
“Traditionally, innovation teams within financial services businesses have remained entrenched in London, while back office functions have been structured regionally. For the UK to build on its potential, this intrinsic financial services knowledge needs to disseminate around the country,” adds James.
“With five banks headquartered in the city, Edinburgh enjoys a privileged position in this exciting space, which is why so many fintech businesses are attracted to the expertise in Scotland’s capital.”
James believes we stand on the cusp of a seminal moment in the history of financial services; a future in which, for the first time, consumers can trust the Internet while enjoying its convenience.
As a consumer, if I told you that you could complete a mortgage application in 60 seconds, with a preferential mortgage rate, would you be happy? My guess is you’d be delighted."James Varga, CEO, The ID Co
“From a lender’s perspective, we’re working with a peer-to-peer lender in London that has seen a 75 per cent decrease in application fraud since adopting DirectID. So as a consumer, you now have the ability to complete complex financial application in seconds, while as a business, we’re not talking about the usual one or two per cent reduction in fraud … we’re talking about a 75 per cent reduction.
“If we could take the UK’s £11bn online fraud figure and reduce it by half, as a small fintech company we could save the UK economy up to £5bn.
“As an global business, with customers in 32 countries, from our operations in Edinburgh and our relatively small team, we have the ability to change the world.”