Frontier Fintech GPS #2 Sept 9th 2024
Flutterwave appoints a new CFO, AI Agents dominate with announcements from Ant Group and Replit and the EU has a "Come to Jesus" Moment with their economy.
Artwork by Mary Mogoi - Instagram
Hi All, Welcome to the 2nd edition of Frontier Fintech GPS where I provide key insights on the top global Fintech news items that matter to you. This newsletter will be arriving in your inboxes every Wednesday morning. The idea behind Frontier Fintech GPS is to help you navigate the endless stream of Fintech news and get smart about global Fintech. To those who are yet to subscribe, hit the subscribe button below and share with your colleagues and friends. 🚀
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🇳🇬 Former Citi Middle East Africa CFO, Mitesh Popat joins Flutterwave as Chief Financial Officer
Flutterwave, one of Africa’s largest Fintechs has hired ex-Citi CFO Mitesh Popat. Mitesh’s most recent role saw him being the CFO for Citi in the MENA region. It’s a continued sign of Flutterwave’s capability of hiring seasoned professionals from global companies. Mitesh follows Amaresh Mohan, Stephen Cheng and Amanda Ortega who joined from GoTo Group, Wyre and The Fortress Trust company. It’s a testament to Flutterwave’s scale that it’s able to hire such executives and a sign of a maturing ecosystem where executives see this as a viable career move.
Nonetheless, the previous CFO Oneal Bhambhani didn’t last too long in his role and a cynic could say that there is high turnover within Flutterwave. In the CFO role specifically such high turnover often corresponds to a deeper underlying issue such as issues with revenue recognition or the dreaded compliance/reconciliation. A large regional bank in East Africa has seen significant turnover in it’s CIO role. Having said that, the sample size is too small to make any definitive statement about the state of Executive turnover at Flutterwave.
🇨🇳 Ant Group launches AI-powered 'life assistant' app
Ant Group, one of China’s largest tech companies has launched Zhixiaobao which is an AI native app powered by Ant Group’s BaiLing foundation model. The app is meant to make every day tasks easier for the app’s users which come from the entire Ant Group ecosystem consisting of payments, ride hailing, travel and entertainment services.
The app also provides a number of built-in AI agents, each with specific domain knowledge. This includes an 'English Language Tutor' agent which can help users make a learning plan and provide tips for learning the language. A 'Fitness Pro' agent is also available to help users design workout routines and come up with personalized training advice. Cyril Han, president of Ant Group, says: "The evolution of AI extends beyond mere technological progress, it’s about applying these advancements to practical, user-focused solutions. Alipay is committed to harnessing AI’s potential to improve the user experience, ensuring that AI assistants like Zhixiaobao become valuable tools in everyday life for all."
Some key take outs emerge from this story;
AI agents are going mainstream, one way leaders should think about this is similar to how the internet led to websites as a primary means of interacting with a company. We should see way more agents being released in the coming year including from the likes of Meta and Alphabet across their ecosystems. The quality of your agent will be a source of competitive advantage and its conversational tone will represent your culture;
We’re seeing a bifurcation of AI across an America-China divide. American AI from leaders such as Anthropic and OpenAI will lead the rest of the world and then we will have Chinese AI focused on its massive domestic market. One proxy for this “battle” of sorts could be data centre investments by the likes of Huawei and AWS if China decides to make a play for Pan-African AI;
🇺🇸 Replit launches AI Software Development Agent;
Replit, An American tech company has launched its own software development agent. The video is pretty self explanatory and is worth a watch. Unlike other apps, Replit engages in the full software development cycle from staging to testing and database management. It validates two themes in AI, text to action and agents. Currently, it costs US$ 120 for an annual subscription to Replit and US$ 29 per month to benefit from Replit’s software development agent. The speed at which progress is being made in AI is dizzying and we should expect to see increased product launch velocity in the coming years.
Some take-outs;
The early consensus was that the likes of OpenAI i.e. foundational models would dominate the economics of AI. Nonetheless we’re seeing that there’s a role for the UI/UX layer in AI. It seems like the foundational models will have commodity like economics. Think ExxonMobil but for AI;
It’s plainly obvious that AI should be at the centre of a company’s product development strategy. In a start-up, that should mean that founders should take a pen and paper and re-think their entire organisation structure from scratch. More can be achieved with much less. Watch for this development in up-coming fundraises;
Large companies should ensure that their tech teams are using this at the very least for experimentation and product demos;
🇳🇬 Moniepoint, OPay, others to start deducting N50 EMTL from September 9, 2024
Fintech companies including OPay, Moniepoint, and others have started notifying their customers of plans to begin deduction of N50 Electronic Money Transfer Levy (EMTL) from every inflow of N10,000 and above received by their customers starting from September 9. According to the fintech companies, this deduction is in accordance with the Federal Inland Revenue Service (FIRS) directive.
This is bringing an end to the “free” payment services that Nigerian Fintechs and Neobanks had grown on the back of. The taxation measures rhyme across the continent as governments continue to seek revenue raising measures to deal with increasing indebtedness. In Kenya for instance, Excise duties were introduced on financial transactions leading to an increase in both bank and M-Pesa charges. There is very little in the way of positive arguments for taxing financial transactions given that this worsens financial inclusion and drives transactions outside of the banking system compounding any existing challenges to creating a modern financial system. It’s one of those things where as an African Fintech founder, macro risk has to feature heavily in your thinking, specifically scenario planning.
As digital services grow, we should expect increasing scrutiny from a taxation perspective. Regulators need to nonetheless ensure that these tax measures are progressive and do not stifle growth.
🇪🇺 The European Union rethinks its Competitiveness
The European Union through a commission chaired by Former ECB Governor Mario Draghi just released a comprehensive report on the Union’s long-term economic competitiveness. The context is based on the following key points;
Europe’s GDP growth has been half of the US’s growth since the year 2000. The key driver for this divergence in growth outcomes has been stagnation in factor productivity (the ability to produce more with less) largely due to falling behind in technology;
Productivity growth has been made worse by an abrupt disruption in gas supplies from Russia which were a key pillar to Europe’s industrial competitiveness;
Weakening demographics - By 2040, the workforce is projected to shrink by close to 2 million workers each year;
Lastly, for decades, the European Union has relied on an American defence blanket that enabled Europe to invest its resources in other areas including welfare provision. With increasing geo-political uncertainty brought about by recent events in Ukraine as well as Trumpism, this assumption of continued reliance on the American defence blanket looks shaky;
With these in mind, the report states that it’s imperative that Europe rethinks its Economic competitiveness particularly with regards to technology. The three key pillars for growth are innovation, climate resilience and reduced security dependency. The factor that matters most to us is innovation. The report states that “Europe must profoundly refocus its collective efforts on closing the innovation gap with the US and China, especially in advanced technologies”. It continues to stay that Europe is in a static industrial structure that hasn’t changed for decades. The specific challenge noted here is commercialisation of innovation which is stifled by unnecessary regulation. In fact, the report states that “Between 2008 and 2021, close to 30% of the “unicorns” founded in Europe – startups that went on the be valued over USD 1 billion – relocated their headquarters abroad, with the vast majority moving to the US”
If you replace Europe with any African country, the report will ring true. There has been an undue focus in most countries of over-regulating nascent industries at the expense of nurturing them to growth. This has resulted in a situation of permanent and persistent “Japa” by Africa’s most productive people. What is worse is that Africa doesn’t have the safety blanket of an existing industrial structure. African leaders should take a page from the EU. If the EU is facing an existential crisis, then what sort of Crisis is Africa facing?
🌍 Huawei to build more data centres in Africa
Huawei has revealed plans to add more cloud data centres in Africa, with East and West Africa identified as the next target regions. The expansion programme will build on existing data centres in the northern and southern parts of the
The company was one of the first ‘hyperscale’ providers to establish a data centre in South Africa, the continent’s largest economy and data centre market, back in 2019. In Kenya, Huawei currently has a point-of-presence site, which uses a dedicated connection between the East African country and South Africa.
This comes on the heels of AWS’ recent commitment to invest over US$ 1.7 billion by 2029 in expanding its cloud services in South Africa. There is a clear nexus between having an advantage in cloud service provision and the ability to be the primary AI partner for organisations in the continent as they embark on their AI journeys. I expect to see a lot of activity in this space with what would seem to be subsidised capex to accelerate cloud deployment in the region. Huawei already has a strong presence in the market due to its Telco business and this could prove useful as the battle for AI continues;
🇳🇬 Exclusive: Sterling Bank outage caused by migration to new core banking application
In yet another Core Banking migration headache, Sterling Bank’s customers suffered down-time as the Tier 2 bank migrated to a new Core Banking System called SEABaaS. SEABaas is a custom built Core Banking System. I wrote extensively about Core Banking Systems here. Simply, these are the systems of record in which banks maintain their ledgers. When Core Banking Systems (CBS’s) fail, the ability to post or retrieve transactions is basically knocked off. That Sterling had a botched CBS migration is not news. I don’t know many banks which haven’t botched their migration in one way or another so these are table stakes. What I found particularly interesting is that Sterling took the bold decision to build its own platform with the support of Bazara Tech.
The reasons for the decision to build out its own Core Banking System were;
Limited Customization and Market Fit: Foreign systems often lack the flexibility to adapt to local requirements, leading to a generic approach that doesn’t fully address the unique needs of Nigerian customers.
Dependency on External Support and Slow Resolution Times: Non-domestic platforms require reliance on support teams in different time zones, causing delays in resolving issues and impacting operational efficiency.
Lack of Control Over Updates and Features: Non-domestic platforms dictate the timing and nature of software updates, which may not align with local market demands or regulatory needs, slowing down our innovation.
Integration and Ecosystem Compatibility Issues: Integrating non-domestic systems with local infrastructure can be complex and time-consuming, limiting our ability to partner with local technology providers and leverage local innovations.
Vendor Lock-In and Reduced Agility: Non-domestic platforms often create vendor lock-in, reducing flexibility and limiting the ability to quickly switch providers or adapt to new opportunities.
All these make sense. In fact companies such as Revolut, Nubank and Monzo have all built out their own Core Banking Systems and years later a key outcome has been consistently improving operating leverage coupled with high product velocity. I wrote at the time that “Of course one of the downsides of this is the increasing complexity of building a core platform from a technical resource perspective. It could be difficult to do this in Africa. A workaround could be contracting a software company to build and maintain your system” and it seems that this is the strategy Sterling has taken by working with Bazara Tech. This is a smart move particularly if you’re a smart Tier 2 Bank with an owner-operator mindset.
🇧🇷 Brazil preps new round of CBDC pilots
Google, Visa and Nubank have been selected by the Central Bank of Brazil to take part in new pilot transactions for the Brazilian Central Bank Digital Currency (CBDC) called Drex. Visa will work with Nubank and brokerage XP on using a CBDC for "optimisation of the foreign exchange market". Google will work with financial services firms on credit collateralised in public securities; while Santander is experimenting on transactions for cars. Meanwhile, the central bank is already preparing a new call for applicants to take part in Drex pilots on smart contracts.
The Brazilian Central Bank has been implementing this project since 2020 with a view of enabling financial inclusion and enabling Brazilians to take part in financial transactions including those using smart contracts. I’ve written about CBDCs before.The article discusses what CBDCs are and the different distribution mechanisms open to Central Banks and specifically the implications of the different distribution mechanisms.
In Brazil specifically, CBDCs will be distributed through intermediaries by converting demand deposits into the Drex. Simply, think of this as either a Stablecoin or the money in M-Pesa. As per the Central Bank ”In practice, the Drex Platform is a Distributed Ledger Technology (DLT) ecosystem, in which regulated financial intermediaries will convert balances of demand deposits and electronic money in Drex , so that their clients have access to various intelligent financial services.”
The thinking behind this is simple: if money becomes digital, the Central Bank still needs to retain its role in ensuring fair access to a payments mechanism. Whereas a citizen can’t be excluded from cash, they can be excluded from digital payment methods e.g. M-Pesa or a bank deposit. The way to think about CBDCs is simply a responsible way of ensuring that nobody is excluded from participating in the economy. CBDCs like cash will be legal tender.
🌎 McKinsey launches it’s internal GPT called Lilli
McKinsey has launched its own Generative AI called Lilli. In their words “We recognized the potential of gen AI to transform not only how we operate internally but also how we create deeper relationships with business leaders and deliver even greater value to our clients,” says Erik Roth, the senior partner who leads the firm’s development of Lilli. “However, to do it, we had to set up a new operating model that brought together parts of our firm that historically had not collaborated deeply.”
In other words, this reads simply like McKinsey will use AI just like the rest of us. The big question here is “What will be the impact of AI on large consultancy services like McKinsey?”. If AI gets better then everyone will have a McKinsey in their pocket. What will therefore be the leverage that firms like McKinsey can have when it comes to generative AI. This will depend on what is proprietary to McKinsey outside of the brand and that they have exclusive access to. My view is that AI becomes a smart pHd then consultancy businesses in general will be on shaky ground.
🇮🇱Sedric raises $18.5M Series A for AI-based fintech compliance platform
Sedric AI, which has developed a compliance-dedicated AI platform for financial institutions, announced on Thursday that it has closed a $18.5 million Series A funding round. The latest funding round, led by Foundation Capital with participation from Amex Ventures, brings the total amount raised by the company to date to $22 million. Sedric’s existing investors include StageOne Ventures, The Garage, Gefen Capital, Skywell Capital, Secret Chord, and K20 Fund.
Compliance costs have risen from around 5% of bank opex 20 years ago to around 15-20% now. In that time, the number of compliance staff have risen at a similar pace if not faster. Despite this investment, the risks and headaches that come with compliance don’t seem to be abating. Compliance is an area that I think organisations should work on leveraging AI to ensure that they can improve the quality of their compliance whilst lowering the costs. Areas such as KYC, Onboarding and particularly ongoing AML monitoring would benefit from AI, particularly the generative kind that works on unstructured data. Such platforms can then give younger start-ups the same compliance depth as older banks. What remains to be seen is how regulators are educated on the benefits of AI from a compliance perspective.
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