Missing the boat on payments innovation
It is entirely possible that Bermuda could find itself excluded from the future of financial services. Companies such as PayPal, Square, Venmo, Stripe and Revolut are revolutionising the payments and remittances industry, just not in Bermuda. None of these companies are available for Bermudian small businesses to use to accept payments. Bermuda has been excluded from payments innovation and it could get far worse as financial services technology advances.
PayPal has been around since 2002. Bermudians can freely load money with PayPal using credit cards and buy things online. However, what is not possible is for Bermudian businesses to accept PayPal and transfer the proceeds to Bermuda without opening a US bank account. Speaking with a local representative from one of the banks recently confirmed that, despite considerable efforts to get PayPal to link with local banks, they have shown zero interest. Our market is simply too small.
Technological exclusion for Bermuda isn't a new story. An individual who was heavily involved in the roll-out of mobile phone networks back in the 1990s shared difficulties we faced in getting early roaming agreements. American network providers weren't interested in Bermuda, as, again, the market was too small. The first agreement was suggested to be struck because of a friendship developed with an industry executive who managed it as a favour, not because our market was any form of priority.
Similar stories are known elsewhere like our challenges in securing cable television rights. Services such as Netflix or Spotify Premium are either hampered with the wrong content or not available at all. Many Bermudians take to buying gift cards to access the Apple and Google app stores. There are many examples and it should raise a very serious concern: what risks do we face of future technological exclusion? Technology is becoming pervasive and is affecting nearly all areas of society as we go increasingly digital. Are we at risk of being locked out?
The future of finance is about a lot more than just payments; it's about automating flows of money and unlocking insights from data to increase access and lower costs. US payments company Square, best known for the small card reader you can plug into a phone, has been using payments data to drive new innovation in lending services. Square leverages its insights of payments flowing into small businesses to build credit profiles for merchants to power Square Capital, its lending business.
According to a recent article in American Banker, Square Capital has extended credit to 275,000 small businesses since it launched. Its loans range anywhere from $500 to $100,000 with an average of $6,500. They use a business's transaction and sales histories based upon using their payments and point-of-sale services to determine how much to lend to you. Further, loan repayments are automatically made as a part of each payment transaction rather than on a monthly schedule, which helps to reduce the lending risk.
Square's loans are based on data rather than demographics and profiling, and as a result are driving greater inclusion for those typically excluded. Square claims that 58 per cent of loans went to women-owned businesses compared with 17 per cent of traditional ones. They also claim 35 per cent went to minority-owned businesses compared with 27 per cent of traditional. Considering how closely this matches American demographics, that's quite a jump. Data insights are unlocking opportunity and increasing access, at least for those who can use services such as Square.
Contrast that with the average Bermudian small business. It is challenging to build credit and get loans. An entrepreneur starting a new business is required to hold on deposit the full equivalence of the credit limit. Even if they were to spend only a small fraction of the credit limit, they have basically to loan the bank money to build credit. It is daunting for those who lack wealth, creates additional barriers to entrepreneurship and the fees associated are quite debilitating.
Similarly, a taxi driver was recently lamenting how he had a long-term relationship with a local bank and yet his line of credit had been largely reduced because the bank wanted to lower its risk. Although he has a steady income, he expressed fears that any significant issue with his taxi that results in a costly maintenance bill could effectively put him out of business.
Payments innovation is also changing the scope of interactions and opportunities for individuals as well. A friend of mine recently visited China and finally understood what I have been talking about with regards to the revolutions happening in payments. He saw that paying for nearly anything and everything was app-driven and many places no longer accept cash at all.
Interactions are simple where you just needed to scan a barcode with your phone to buy fruit from a roadside stand. He also realised how frail and brittle our existing debit and credit-card systems are, as he realised that China's bank machines and payment systems run on different systems than our own, so his cards weren't supported.
Meanwhile, Chinese e-commerce giant Alibaba is copying Square's lead on microlending, but is driving it for individuals with their Alipay payments service and Huabei microlending company. Huabei offers credit starting at about $7 for users of Alipay and is providing rebates and discounts to encourage adoption. Huabei lends small amounts initially and then gradually increases limits after borrowings are repeatedly paid on time. It uses data insights to better understand and model-delinquency rates to drive down risk, and it is unlocking credit for first-time borrowers who never would have qualified under more traditional lending systems.
Lending is one example where Bermudians have had challenges. We don't have the benefit of credit bureaus and extensive scoring systems like in the US. A local bank executive recently was lamenting to me that one of the reasons why mortgage costs are so high for many is that it is simply very difficult to get a reliable picture of an individual's financial health and ability to manage and pay back credit. We are at a disadvantage because a 60,000-population jurisdiction for businesses such as PayPal and Square is very low on the priority list and the challenges of trying to create credit-rating systems are complex and expensive for such a small population.
Payment systems like Square and Alipay have leveraged their data to unlock opportunities for new innovation in financial services and have driven increased inclusion for those typically excluded. The question becomes, what happens as digital money becomes more open, shared and interoperable than it is today? Facebook's Libra project and the evolution of digital currencies have served as a wake-up call to global legislators and regulators of the potential and have driven considerable debate and discussion. According to a recent Bank of International Settlements report launched last month, 80 per cent of central banks are engaged in some sort of work on central bank-driven digital currencies.
The big question is, where does Bermuda want to fit into this? Do we want to take a wait-and-see approach, let everyone else figure out solutions and risk being further excluded?
Alternatively, do we want to try to get ahead of the curve and work hard to create an attractive environment for innovators to model and build new financial services solutions on top of digital currencies?
We need to decide if we, collectively as a jurisdiction, want to embrace and drive adoption in ways that can turn Bermuda into a showcase of what the technology can do, or if we want to bicker among ourselves and wake up one day realising that the ship has sailed and we're not on it.
• Denis Pitcher is a Bermudian tech entrepreneur with an interest in exploring the potential of blockchain and distributed ledger technologies for Bermuda. He is a fintech consultant to the Bermuda Government's fintech Business Unit as well as a tech cofounder and chief architect of resQwest.com, a global tourism technology solutions provider. He can be reached at firstname.lastname@example.org