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Do you want to know more about the fintech world and about currency management for fintech companies? You're in the right place! Welcome to CurrencyCast. My name is Agustin Mackinlay, I'm the Senior Financial Writer at Kantox and your host. In this episode, we have the pleasure of welcoming Alistair Cotton, co-founder of Integrated Finance and host of The Finterview, the financial podcast.
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Alistair, a warm welcome to you and thank you for being here today on CurrencyCast. Thank you, Mack! A pleasure to be here.
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This episode is sponsored by Integrated Finance, API-First fintech Infrastructure you can build on. All right. Can you introduce yourself? Well, tell us what you do and what your mission is. Sure. So thank you for the warm welcome. My name is Alistair, I'm the co-founder and CEO of Integrated Finance. Integrated Finance is a fintech infrastructure business which helps any type of company build and embed financial services for their customers.
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Okay. And in regards to fintech and currency management, what are the sectors you are most familiar with or you're most interested in? In Kantox, we are mostly interested in with what we call fintech lenders and of course embedded of finance. What's your view here? So I think fintech is it's a very catch-all term and covers lots of use cases.
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We service lots of different types of fintechs, but by no means the entire market. So neo banks and cross-border payments providers, business-to-business lenders, similar to you guys, we service the crypto markets processing that fear off and on ramps, e-commerce marketplaces and also investment companies as well. So quite a broad range of companies, but by no means the entire market.
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So what are the main challenges faced by fintech companies, as their business model is impacted by currencies in general? I think there are a couple of trends that are impacting businesses at the moment. One is the technological aspect of everything. I think even a few years ago, humans were much more involved in the day-to-day transactional element of all types of things, foreign exchange being one element of that. And the rise of APIs and the continuing unbundling of the banking stack into many more APIs, that kind of existed before, can present itself as a challenge, also an opportunity, but a challenge to be able to piece together
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the services that you need. But what that brings with it as well as the requirement to work with multiple firms to be able to do things. You know, traditionally you might be able to go to a single very large transactional bank to get everything that you need as a business or as a fintech.
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And now the market is such that there are lots of businesses that can provide services at different levels of the banking stack to you. And you need to be able to pick the right one for you, pick the right service, and then re-bundle them together into what you need to offer your customers. And so I think that's one of the technological aspect of it.
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I think increasing globalization as well. I think there were traditionally, let's call it the G7 currencies, which were used and are still used by most kinds of large institutions. But I think if you're a fintech now, your default kind of outlook needs to be very much more global than it used to be.
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And that requires dealing with a much larger number of currencies, I think than there existed before. Also the existence of global retail platforms, Amazon being the largest, means that for certain types of businesses, you know, you can access all of these markets in a much more robust and easy manner. But that also brings with it the requirements to deal with multiple currencies, right?
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So it's both an opportunity and a challenge at the same time. And I think that's the same for all of these things. And the final thing is we're moving into a different environment financially, right? We've gone through ten years of incredibly low-interest rates and incredibly calm markets, which for the vast majority of the time have, I guess for the equity markets, trended upwards and for the foreign exchange markets kind of been relatively placid in historical contexts.
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And the kind of movement towards normalizing interest rates is just increasing volatility right? So it's the new regime of being prepared for kind of much larger moves across all of these asset prices. But make sure that you have the infrastructure behind it to be able to protect yourself from those moves going forwards. Because, you know, we're not talking about kind of small few pips here and there.
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We're talking about percentage point moves these days. So yeah, I think that's the three main areas that I'd kind of consider the main challenges. Right, yes, I agree absolutely with this. As we see the main challenge for those are fintech lenders to well, to help them reduce their cost of funding, especially by removing FX risk and also helping them to manage the interest rate differentials between currencies.
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Maybe we'll discuss that in a couple of minutes. Also for embedded finance, we help them, well, secure new sources of revenue. Alistair, my next question is, what are the entities or institutions that fintechs go to when they want to improve what they can offer in terms of currency management? Well, I kind of touched on this in the last question, but I think it's, let's call them, kind of specialists. Gone are the days really when you can kind of get all the services that you need from a single institution.
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So it's crucial that you can kind of find and work with institutions that can cover you in the places that you're doing business ultimately. Specifically if the currency market it remains quite fragmented from corridors and being able to kind of serve and open up the markets that you're trading in from a currency perspective is kind of the first element of that.
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And you're going to have to go to kind of currency specialists to be able to deal with that. The second thing is, it depends on your own stack of technology that you use internally and how you want to interact with the financial services providers that you are you're dealing with. So at the one end of the spectrum, it would be kind of calling someone up and asking for a price exactly like that.
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And the other end of the spectrum is fully automated, you know, capabilities via an API that's plugged into your treasury management system for example. And it's making sure that you're kind of selecting the institutions based on your business model and tech stack that can support you in that growth. And also, I guess it depends on where in the journey you are and what sorts of institutions you need to be talking to.
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That's absolutely the case. At Kantox, for example, one of the most important cases is for those fintech lenders that have won their loan book denominated in currencies or trade at a forward discount to their currencies, to fund themselves. Right. That's really, really the key, a key element there to help them reduce their overall cost of funding.
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Now, let's move a little bit towards, say, pricing and traceability issues. What is the typical pricing structure for those fintechs, fintech companies that you see? Well, I think the fintech market, if I start kind of a macro level, is going through an interesting transition currently where business models, based on transactional flow, maybe are less kind of attractive to investors currently.
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And so there's kind of a move back towards, let's call it the traditional ways of making money in finance. Which is, you know, by lending and having a deposit base to be able to kind of earn interest on, for example. And I think that has interesting kind of ramifications for the wider industry. And it's possible that the transactional-based business model is kind of, not dead in the water, but will be on pause for a little while.
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Yeah, yes, absolutely. Look, when we, at Kantox, here discuss pricing, what we have in mind most is the possibility for those companies to have what we call a strong API-based foreign exchange rate feeder that allows commercial teams to use the foreign exchange rate they need to for pricing purposes be the spot rate that three month forward, six-month forward rate and so on.
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And when we come back to that towards the end of this conversation, when we'll discuss APIs, what about traceability in general Alistair? So, what is it that fintechs can do so well, to be able to trace all their foreign exchange-related operations as well as they strive to best serve their clients? I think there are two elements to traceability.
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I think there's transparency both from the provider side and also from the customer side. Gone are the days where you can conceal, I think, the FX rates from the customer and hope that you're able to use it as a huge price and profit centre. The kind of best example of this probably from a retail perspective, is the way that TransferWise kind of approaches this, where they have very visible pricing to their customers.
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And that kind of was very different in terms of outlook. From, let's say, traditional kind of FX firms, and that actually feeds into a kind of traceability, doesn't it? So by giving very clear kind of pricing to businesses, it gives those businesses the ability to kind of much more accurately manage their FX risks.
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You talked about the forward market as well, I think kind of basis points and forward points kind of working in finance, were very well understood. But maybe not from the business side of things. and certainly not those kinds of prices transmitted in an accurate manner through to businesses. And so kind of the greater kind of ability for businesses to kind of see how much they're going to be charged both on a spot basis, on a forward basis is a huge net benefit for them.
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And so I would say kind of enables those businesses based on accurate information to make better kind of more accurate decisions about how they manage their FX risk going forward. Right. Because they're able to take advantage, as you say, of potential interest rate differentials that occur in places and potentially use it as a profit centre in and of itself.
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Yes. And, you know, you just touched on an important topic here, and you said that finance people do understand this subject. Of course, they do! What we see is sometimes a disconnect here between, say, as you mentioned, the finance people and perhaps the C-suite or CFO level, where they are a little bit less familiar with this subject.
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And it's an important, of course, issue for all those companies, especially when it is about managing those interest rate differentials. And by the way, at Kantox, we define traceability as the fact that so in along the journey from an entry to a position to a conditional order and then a payment and an operation, each element has its own unique reference number and that does of course provide enormous help for our currency managers.
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Now, Alistair how do you at Integrated Finance help fintech companies exactly? Is it a fast connection to the right service? Is it the right pricing model? Tell us a little bit more in detail. Integrated Finance is an infrastructure company born out and build out of the frustration that we as founders experienced when we were building our own kind of regulated financial institution. There were, you know, a plethora of great institutions that were able to support us and ultimately provide services to our regulated institution.
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But there was no kind of accurate information and any standardization whatsoever in our ability to connect to those institutions. And so Integrated Finance is really a way for people who want to build financial products to have a backend as a service that connects into all of the best in class, supporting banks and regulated financial institutions and currency management and businesses and compliance software. And have them be accessed in a single API so that they don't have to spend, you know, years of their time and developers kind of building out all of this connectivity. And they can just with the proviso really that we want more fintechs to be created over time and we think
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that the way that needs to be done is a technical challenge more than anything else. Because there's an ecosystem of phenomenal providers out there already with their own APIs that just need to be connected together. And we want to be like the universal socket for people to access those services. Wow! Those are really, really incredibly fascinating topics.
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And let's go deeper into those. I mentioned the idea that with API-enabled pricing with a spot or three-month or a six-month or so forward read with all of the pricing markups for clients segment and currency pairs, we provide those companies with what I think that what you mentioned here, the ecosystem, namely the fact that we can break down those silos between commercial and finance teams.
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Isn't that just one of the most important topics? There's a book coming up from McKinsey Consultants, it's called The Ecosystem Economy and it's points exactly to what you say, Namely that, well, perhaps trillions of dollars, euros or pounds await those all in value creation right away, those companies that are going to be able to tear down those silos.
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Tell us a little bit more about that. I think there are a couple of trends that are kind of pushing financial services firms towards the direction that you describe, which is that technology is eating financial services. Mack, Andreessen kind of famously said software is eating the world and I think the software is eating financial services at the moment, which means that you know, the traditional financial services worker, let's say, and both internally to financial services firms and externally from the client side of things, is moving way more towards someone who is fluent in building software.
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Right? So instead of, I don't know, a traditional MBA from Harvard, it's, you know, a software engineer that's building businesses these days. And when they come to build these businesses, what they're really looking for is not necessarily interpersonal relationships necessarily, you know, between sales and customer. They're looking for a set of APIs and a provider that can do what they want and the ability to stitch those businesses together into a service that they can offer their customers.
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And I think that is one of the crucial kinds of trends that are driving this at the moment. The other trend we've kind of touched on this, and it goes back to the software is eating financial services, is the traditional bank which is vertically integrated, has been completely unbundled into unique software companies. I'm going to increasingly call kind of financial services software companies offering financial services, right?
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That's probably a better way to describe them. And maybe how Kantox now describes itself, rather than a traditional kind of financial services company. And what that enables businesses to do is basically plug in the services that it needs at the right point in its journey to serve their customers. Right. That's another crucial thing. We're getting financial services into other products at the point of least friction for the customer.
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So that and businesses and customers do not have this new super friction process where, you know, they sold something and then have to, it's jarring almost these days to think that you had to log out of a system, log into another system and make a payment for it like it's happening at the point of sale. Right. That's crucial.
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And from an FX angle, it is you know, I have this requirement, I need to execute a fixed transaction now, I don't want to be leaving that system where I do the calculation for that liability and asset mismatch, let's say, to then have to execute that transaction and then reported back to the other system. Right. It's what's happening is the trend that the two systems are combining, you're able to execute your transaction based on, you know, the data that you're getting in the system within that system itself.
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So it's super exciting this trend. Is a long way to go, but it's all, I think, driven by software kind of taking over and the people that we're appealing to now as financial services companies are increasingly people who write software rather than people who just use it. Absolutely. Look, there's another key illustration for us of API using what we call the free trade phase of the foreign exchange workflow, namely. If you have forward points that are in your favour, for example, if you're selling in a currency that trades at a forward premium, well, they need to capture it immediately as soon as possible.
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And in the most complete way, all of your exposure to currency risk and if you hedge you're going to generate financial gains. So we see some again, companies that are slow to react to this idea. For that, you need of course those API-based systems that allow you to collect all that exposure from any type of company system, be it ERP,
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even spreadsheets or in the travel world, we call that the booking engine or the TMS. All of that is so, so important these days. Alistair, you have mentioned, I think also the story about artificial intelligence, AI We're a little bit well, I wouldn't say sceptical, but we don't really see the norm, an urgent need for that when it comes to currency management.
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I'll tell you in a second why. But what is your view in general about AI in currency management and in the fintech world? Well, maybe I'll touch on what I just mentioned about kind of the need for financial services companies to serve increasingly software engineers as their kind of user. And I think what AI has the opportunity to do actually is flip the balance back towards, let's say, serving the compliance officer or the CFO.
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You can see with things like ChatGPT, you know, is ultimately an English language prompt to code, right? And so what in theory it might be able to do is kind of level the playing field, so to speak. Where the trend that I just described, where software is eating the world, ChatGPT almost acts at least as, in a world that I see, a translator between an increasingly technical software world and a human and non-technical world.
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Right. So if I am able to, you know, in plain English, write a prompt that I'll execute an API at Kantox for an FX hedge for three years in the Nigerian naira, then I think that's a great thing right? Because you're enabling someone who you know has the industry domain expertise, let's say, but maybe not the technical knowledge, to call an API back the power to be able to do that. Wider uses of AI,
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I'm probably slightly sceptical alongside you. Well the reason that was not that we're sceptical, but look, it's been mentioned as a tool to improve the accuracy of cash flow forecasts and well, that's something that at least I hear also at Kantox do not see as a crucial requirement in terms of currency management. Because if you're on what we call a micro hedging program for firm or say sales or purchase orders, well, there's no really that's not really a forecast at all.
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Right. It's it has almost certain to occur. And if you run what we call a layered hedging program. So the hedge rate is built in advance, it is not that important for you to have those accurate cash flow forecasts on this. So let's say the reason why we at the moment, we don't see much application in terms of currency management.
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What are the emerging technologies do you see going forward, making their presence felt in the fintech space? Emerging is probably not the right word here, but we see that the fintech kind of industry needs a high degree, some high degree of standardization to really achieve its growth potential. And also I'm speaking from Integrated Finance point of view here, right?
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This is our house view that says, if you look kind of look back to how the card networks, for example, really kind of got global scale, it was because of the standardization procedure that Visa and MasterCard implemented to enable the ecosystem to kind of scale to the degree that it had. And we see parallels really to kind of the nascent fintech industry as it is now. Where there are lots of, as described kind of bespoke connectivity methods to everyone builds for these systems often they act as silos, siloed businesses, let's say.
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And we think that kind of being able to standardise and standardise connectivity to them is going to enable kind of the next round of businesses and big fintechs to be built on top of that standardization layer. Interestingly, I saw that the Linux Foundation, last week announced that they're attempting to create a standardization layer between all of the digital wallets, for example,
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so Apple Pay and Google Pay currently. you know, If I want to pay, you're an Android and I'm on an apple, I can't pay you even though you know it should be possible. Right. And so the Alliance Foundation is attempting to tackle that problem and so it's not really an emerging technology, but we see kind of the standardization being kind of the big play here to enable everyone to kind of play together nicely.
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And you mentioned ecosystem as the buzz word really. Like create a more useful and larger ecosystem of businesses so that lots more people can access them and grow the entire market, grow the entire fintech market. And I think is the way that this is going to play out. And I think the emerging technology may be on top of that standardization layout. Rather than so, it would be sequential standardization
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and then the emerging technology is layered on top of that and your guess is as good as mine. You know, once that's completed, we're going to be in a different market altogether. Absolutely. Well, look, I don't like the term buzzwords here. I don't think it applies. It's happening already. So, for example, you can embed swift spot FX payments in dozens of currency pairs or you can well expand your embedded finance portfolio by seamlessly onboarding customers and KYC procedures. On top of the foreign exchange risk management facilities that you could have for those fintech lenders.
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So it's going now way beyond just a buzzword, right? Absolutely. Maybe maybe I can just touch on market structure potentially as kind of one of the things that I see happening. So if I can see the future of financial services, is the embedding of those services into the places at which you and I and everyone else in the world spend all that time.
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So think payments by WhatsApp, could be credit card acquiring via Facebook, currency management in Apple Pay, and all of these players. If they're not going to build the services themselves they're going to plug in to best in class providers in the background to offer these services to everyone. It's just too difficult for them to do it.
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And the market at the moment does not allow you and big batches of companies to be like put together into something that, you know, Apple and Google can service their customers with. And I see the market structure adding an additional layer, let's call it the orchestration layer. And I think the orchestration layer is maybe the standardization piece that I was talking about dressed up in a different way. Is going to be basically another piece of technology that sits on top of the regulated banks and the financial services providers and allows technology firms, and the places that we spend all our time, to
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recombine these financial services into weird, wonderful customer experiences that currently cannot exist in the scale, the global scale that is required in this market. Yes, absolutely. Well, Alistair, is I think we've covered many issues here. We're going to finish with that orchestration there and that idea of standardization. And I think they're doing a really, really amazing job there.
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And I wanted to thank you for the opportunity of having you here on CurrencyCast. Alistair Cotton, co-founder of Integrated Finance. Thank you very much. I hope you to see another time in CurrencyCast. Thank you so much for having me. All the best. Thanks to Integrated Finance for sponsoring this episode.
