Mike Laven, CEO at Currencycloud, defines the company’s embedded finance business model via API and how its cloud-based platform differs from the host of many payment players today.
He shares his views on the evolution of financial services with innovative technology as a disruptive force and the increasing competition and commoditisation in the payments space. He bares the expansion plans as the industry increasingly develops and matures, emphasising not just geographic reach but also the growth of market segments and clients.
The following key points were discussed during the interview:
The following is the edited transcript of the interview:
Emmanuel Daniel (ED): Mike Laven, CEO at Currencycloud, is here to distinguish Currencycloud from the host of many different players in payments today. We see payments in the remittance level, cross-border, and between institutions. I want to contextualise what Currencycloud really is; explore a number of themes on the evolution of financial services and fintech or innovation in financial services; the role of application programming interface (API) and how players like Currencycloud might disrupt the landscape or may actually be working with the incumbents to make them stronger. Give us a quick background on the company, its origins and where you've brought it today and also a description of it.
Mike Laven (ML): We call ourselves an embedded cross-border technology company, as distinct from a remittance company or even other payment companies. Our customers are other fintechs. We don't market it all to small businesses or to individuals. We ended the year with about 500 customers. There are well over a million end-users who put transactions through the system. Some of the well-known brands are Revolut, Starling Bank, Standard Bank of South Africa, and Santander. We work with about 500 firms - many are small fintechs and challenger banks.
Increasingly, our business is not as much payments, as it is payments collections and embedded accounts. We provide our clients with a multicurrency embedded account which allows them to both collect money from their clients and then send money out. The business is going beyond payments into embedded finance.
ED: I want to construct this carefully because you seem to be playing in a niche, where most traditional financial institutions had gone wrong or never really wrap their mind around it which is APIs. Many banks around the world, congratulate themselves on having hundreds of API links but the power of the relationship is still on the side of the institution. They give very little away to the API and got so much legacy at the back-end that the API's don't really help them to move forward. You are an API that can be linked into any institutions of any kind, quite seamlessly, and therefore providing a gateway towards digital finance and payments. But this API concept like would you describe it that way? Is that what you've perfected over time?
Cross-border payments are very compliance-driven
ML: The concept was to make the whole of the product available in a sandbox, accessible via APIs. When a cross-border talks about an API, they are talking about streaming prices. When we talk about APIs, it’s for beneficiaries, balances, account management and compliance. If you look at all of the components of moving money from a client's bank account to the fintech, from the fintech to us, and to distribute it in the market, what's incredibly important in cross-border is not just the money but the data. Cross-border is a very compliance- driven kind of function. All of the data has to move along with the money in the transaction because we're selling to fintechs, or banks, who then embed the product in their application. The features in our product are going to be whatever their business is. If they're a lending business, they need to make a cross-border transaction to receive funds, or to pay funds out. If they're a remittance business, they need to make the transaction to payout. But in each of those cases, the ownership or the client is not with us. Our client is the fintech, their client is the customer. The API concept that we would be embedded in access, and with any kinds of transaction, whom we're selling to.
A supply chain firm that's using us, they're going to use us very differently than, say, Revolut uses us. They have a different set of criteria. They have a different relationship with their client because the product has been really thought through broadly in terms of API's. Each of those firms will use us in a way that's unique to themselves, that will have a standard product. The distinction here is that we've always thought of ourselves as a piece of embedded technology. The API, its richness and availability, the demo system and availability in our sandbox have always been incredibly crucial to what we do.
ED: You seem to be riding on the SWIFT global payment initiative (gpi) infrastructure. You are actually carrying SWIFT data that makes you an API to SWIFT gpi. Why do you do that? Why couldn't you have created your own messaging infrastructure?
ML: In our world, there is receiving and paying money out. The average transaction inside the Currencycloud is in the thousands of dollars. We're not a remittance firm. We certainly have some remittance customers where they have average transaction sizes in the hundreds or even tens of dollars. We're generally serving businesses with thousands of dollars’ worth of transactions. And interestingly, those transactions often move via SWIFT at the request of the customer. We optimise how we send funds, certainly with low cost and value transactions. They always go via local automated clearing house (ACH) networks because the cost has to be low, but it always surprised us with the incredible volume of SWIFT transactions. If you're spending millions of dollars in buying a property, settling a real estate bill, sending money in bulk from an asset manager in London to a series of brokerages in the US, or if you're paying a huge insurance bill that's not going to move by my network, that's going to move by a large global network and invariably it moves by SWIFT.
With SWIFT gpi network and its ability to do traces better than we did before, and its ability to do, look at what's failing and to report on the bank accounts, we find interestingly and surprisingly that we have been moving money via SWIFT is still a very much preferred way to do it. Now with low value, lower-priced transactions, those are all moved by a low-cost ACH network. We are in the process of working with Ripple and will also be paying out via its network. But the skill of our product is in its ability to provide the conversions at a low cost and the management facility and effectively the multicurrency wallet to the customer. Payout networks are commoditised and we don't need to own them. What we need to do is to provide the interface to the client, the ability for account management facilities and for the client to manage their own transactions within their app. I don't see much competitive advantage quite frankly. A lot of payout networks will use whatever is best.
ED: Why not develop your own messaging platform and one of the weaknesses in the existing ACHs, SWIFT that you're playing into their inability to construct the last mile, the completion of the transaction, or the connectivity between the parties?
Institutions give importance to rich data in every transaction process
ML: One of the weaknesses in certain ACH networks is the ability to carry data. That is what banks want from a compliance space now. When we see this increase, a very rich data set has to move from the sender through every level of the transaction and into the end-user. That isn't done effectively in a lot of local ACH networks.
In the end, you're transferring money through banks. It's going to someone's bank account somewhere. Moving through a bank account somewhere, there's a real requirement to make sure that the data moves correctly.
Our skill is the conversion, the management of the account, and the compliance, as we're dealing with third and fourth-party transactions. All of which have to be authenticated and meet very high compliance in financial crime standards for moving money around the world.
The scale here is the API, the technology platform that allows you to integrate into whatever your app happens to be. The management tools that allow you to get reporting and see what those transactions are. The pricing of the conversions that we give, and how all that is integrated into what you do. There are a lot of payout vendors whether it's SWIFT, or local ACH networks. Plenty of firms who've established banking relationships and we use multiple players to do that. There's no single player that optimises the world.
For our customers anyway, we try to optimise everything for them. When you're thinking about payments, you are often thinking about the payout network and we look at that as a commodity. If our old friends at Earthport who become Visa, one of the earlier companies sort of commoditising the payout network, established connections all over the world - we used to use them for payout as well before they were acquired by Visa. But there's a lot of competition in that network and that's not where our expertise lies. Our expertise lies in our ability to connect to whatever the optimum is for the customer and provide all those management and conversion tools, and the multicurrency wallet with sub-accounts to all of your clients for both collections and payouts - that's where the technology is, not in the payout side.
ED: PayPal would operate in almost all of the segments and the payout. But it is very weak on the data and the functionality aspects that you just discussed. Would they be a competitor?
ML: PayPal is a large and effective company that certainly sells payment management to a whole host of firms and through that will provide cross-border transactions to them. We don't ever compete against PayPal. I'm probably wrong. But effectively, what we're selling is the embedded account, which is installed in the application of a client. It is a different kind of service than what PayPal is providing. PayPal has its own global network and they payout through many of the same partners that we have. It's not like they own a global payout network. They've constructed through banks, service providers and local firms all over the world, a payout mechanism that they utilise and we use some of the same partners as they do. The competition there is on the cross-border side and they're very expensive. The quality firm sells very much card-based payout on a global basis but very different in terms of what its technology is providing to the client.
ED: How does that translate into your income? If you're not on the payout side, it means that foreign exchange (FX) is not a source of income. At which point will transaction fee be a source of income?
ML: We're a technology company. Half of our income is software as a service (SaaS) fees, which is the fee to use the platform and the other half is transaction-related, which is both foreign exchange and payment fees that are very different from most remittance companies orpayment firms. Firms pay a technology fee to use our product. The technology fee represents approximately half of all the income of the firm. A different kind of pricing orientation than a payments firm that’s totally making money on transactions. We believe that transaction pricing gets commoditised and compressed and that’s the value of the product. What we're providing to our clients is the technology product or value as much as it is the payment network. Depending on the maturity of the customer, their size will have different ways of working with us. The way people work with us is a mix of access to the technology and the transaction fees, which is a differentiator relative to a fairly standard payment firm, which is only making money on the transactions.
ED: At which point do you make money on the transaction and have access to FX? Because that's where most traditional remittance companies try to make the income. At which point do they hand that over to you?
ML: We receive the money from the clients, we convert it and make money there. We disclose all our pricing to the client plus what our markup is. Our client will then choose how they disclose that to their client and they may or may not reveal that at all. But when we work with Revolut or Starling, they're seeing the price that I'm buying at the price that I'm selling at. Part of their contractual relationship with us will be the markup that they're paying to us or the basis points over what we're buying.
In the FX world, there's no such thing as a mid-market rate. There's a buy and sell. But firms always put on their website what they say is the rate which is never the rate. It's the mid-market rate which is exactly what the rate is. But we'll be disclosing to all of our clients what we're paying and selling at and how much money we're making, and that will be part of our contractual relationship with them. We certainly make money on that conversion as well as on the actual payout. There's a local ACH fee or SWIFT fee and we would charge the client for that but all of that pricing is totally transparent to our customer.
One of the issues with the bank, and I find this even with some transactions I make in my own bank account is, you don't really know what you're paying until you get your statement at the end of the month, and you don't know where the money is gone. That's very true in the card networks as well. Your statement could be, if you do something at the beginning of your cycle, it's not going to necessarily come into the end of the cycle. You might not even pay until 30 days after that. The rate that you're getting could be 60 days after the time you've done the transaction. That's not acceptable in the world that we live in. We're disclosing per transaction, whatever the pricing is, relative to our client.
ED: What percentage of income are technology platform and transaction?
ML: It's close to 50-50, maybe a little more. We don't want it to be much different, that's the appropriate way to do it.
ED: When players like Visa become a shareholder, what is it that they're looking at from you because you are potentially a disruptor to their business? Or is it to onboard what you do into the models that are developing themselves?
ML: Throughout Europe and the US, there's a whole series of firms effectively in the debit card business that can offer real-time exchange rates. We provide a foreign exchange service to many of those firms that allows them to be very competitive in what they provide in terms of pricing to their customer. Effectively, Visa looked at that and said that this is something we would like to have inside our shop. They basically invested in us so that we could work together with them and improve the kinds of rates that they ultimately will offer to their clients. There's a recognition on the part of the larger card networks. It's not so much the network's, it's the participating banks that are doing the conversion work. That challenger banks and their ability to bring down prices for clients is going to transform the way people use money. In the end, banks will need to offer the kinds of pricing that challenger banks use. Visa invested in us so that we could look at that and work together with them on how they can reduce their own costs.
ED: When you do make money from the FX, how do you play that part of the field? You're not a volume player so how do you get the best prices? Are you competitive?
Currencycloud achieves $30 billion run rate
ML: I'm not taking positions against my client. I'm not a trading house. It's very important for the company if we look at the flow that goes through the firm on a monthly basis. We ended the year with a $30 billion run rate. That's $2 billion to $3 billion per month that is going through. If you were a trading firm, you would arbitrage that but we don't do that. We have made a very conscientious decision that we're not an FX trader. We're a payment shop. Every trade that comes in is priced to the client. They know what money we're making on it and we're not taking positions on that at all. We certainly have to maintain regulatory capital and maintain certain other kinds of balances to keep things going. We certainly often have to maintain balances so that we can speed up payments along.
When you deal often with an FX broker, they may tell you a price but you're never quite sure what price they're getting. They're not disclosing that and they could be arbitraging or not, that's not our business at all. Our business is the disclosure of what we're buying, selling, and how much you're paying to our client all the time.
ED: It seems that FX is where the winners and losers are being played out. Prices are becoming more transparent to customers. You need to be transparent but you also need to be the cheapest or the most cost-effective in the market. What's the proposition that you provide?
ML: A huge player is going to get better pricing than a small player. Our volumes with our banks are sufficient so that we get the best pricing that we get from them. We're in the business-to-business (B2B) market, so it's not my volume. Vietnam is relatively low. If I'm sending money to Vietnam, I’m probably sending dollars to pay for the manufacturer. In the remittance business, you're having to payout in many currencies because you're actually making local currency disbursements. Those may be restricted currencies. They may be low volume or highly volatile currencies.
Whether you're paying your factory workers or goods in the Philippines, in Latin America, or in Europe, that's going to be done in whatever your local currency is.
ED: You said collection is an increasingly important business. How did that business come about? What do you do in collections?
ML: When we looked at the business of our clients they buy steel from Germany, then also sell steel to Germany. In each case, there's a pound-euro or pound-dollar transaction. In one case I'm an importer and in the other I’m an exporter. The money is moving in both directions. We have the expertise in doing the foreign exchange transaction. They wanted us to go beyond payments to start receiving funds for them as opposed to paying them. If you have a global business, you might be sourcing globally.
You're importing but you're also selling back globally as well. Companies wanted both the importing and the exporting part or the selling and receiving to us. This is incredibly important. Payments is a relatively standardised market. We compete with a lot of different payment firms. There's a lot of different ways to provide it. Companies generally do it the same way all over the world. Collecting and receiving is not done the same way all over. The ways it's not as commoditised. It's primarily done by banks, old-style lockboxes. There's a series of other data issues with that because often you will be collecting funds from people you don't know. You need to be able to understand the compliance and the regulatory component of that.
So constructing the collections or the receivables business, how we collect the data from the customer, interact with them, how the customer manages that data is very different in the collection. It took us quite a long time to set up effectively our embedded wallet where our customers could collect and track from all of their customers and we collect via SWIFT. We can collect from all over the world and we do local collections at a series of markets as well.
ED: What are you doing that makes this a viable business for you today that many have failed in the past? Is there a temptation to go into supply chains like electronic data interchange (EDI) networks?
ML: I'm not a collection agency. I'm providing a facility to my clients to set up an account for each of their clients within my system, for them to manage with their system, how their customers pay their bills, and to provide the advantage of a low-cost transfer, FX transfer to their clients when there are two different currencies on either side of that transaction.
I'm selling to Germany or I'm selling to Singapore. My customer is paying me locally. We want the advantage of the low-cost and the ease or the ability to matter to the transaction to be provided by the firm that I'm selling to my customer the fintech, the bank, or the supply chain firm. EDI is the older generation of supply chain firms.
To handle the money, you need to be regulated. A supply chain, a firm that's providing data, or invoicing, or any of that kind of supply chain management aren’t necessarily a regulated financial firm. We would work with a supply chain firm to allow them to collect money from their customers or to payout and provide that regulatory component to what they're doing. I'm regulated by states in the US. I'm regulated by the Financial Conduct Authority (FCA) by the Dutch Reserve Bank. We have to be regulated and monitored all over the world because we're receiving customer funds. That's a very different business than the supply chain which is purely a data and technology and not a regulated financial business.
ED: We've seen many different players trying to scale this market. And even culturally, there would be players in Europe where the whole accounts receivable is even regulated. Many small businesses in Asia try and stretch their payments as long as possible. In so far as rates and transparency features, do you have clients that use your platform for collections?
ML: My business only works on cross-border transactions. The business that we've seen coming up recently is European wealth managers who are investing in the US stock market. They need to receive funds from individuals all over Europe in euro. They need to convert those funds and place them with a US stockbroker. That stockbroker needs to return dollars to them based on whether the markets are going up and down. And those need to be paid back in euro to their clients.
When you're thinking about collections, think about industrial goods but these are only one part of that business and it’s important. But if you think of the flow of funds that goes in stock trading, that's another area. For funds that go in insurance or in lending, there's a whole series of use cases that go beyond just supply chain and industrial goods.
I'm providing the account’s ability to monitor that account accessed by an API. It integrates with whatever the app or the business with our client has so they can provide that service to their customer.
ED: You seem to be playing in two or three different key areas - collections, transaction, and data. How would you describe competition? Where is it coming from?
Value is in the technology product embedded in the client’s businesses
ML: There are currently banking-as-a-service (BaaS) companies that are bundling services. There are remittance companies like TransferWise which sell to end-users and banking companies like Banking Circle. There's a whole host of firms that offer a series of cross-border services. We try to look at all of those as a channel for us. I'm selling to other people where I'm embedding my cross-border service in what they're providing to their client. I've optimised my cross-border service and made it accessible via an API on a basis that you can use whatever you need in it because the API is very differentiated. It can be used in a different fashion by different clients. It's always a very rich market. But what we look at is we're a cross-border specialist and embedded specialist and whatever the route to market is, we want our product to move down that route.
ED: If you can scale, your business model works. Otherwise, any API player can build the functionalities that you have and be done with it. There is price that you've charged on the technology side. Is that a big distinguishing factor in the URL-competitive API or platform play providers?
ML: Our model lends itself to venture investment. If you're making basis points on each transaction, then you get big until you make enough basis points to cover your costs especially as the cost of global transactions gets higher and higher. The area under the curve which is the area while you're building up the network and establishing the infrastructure that has to be financed. When it does get financed, it becomes quite an interesting business. You see a lot of fintech venture investment. When you get to scale, then you start to become profitable. But the area from where you start when you scale gets to be large.
ED: Ripple’s data infrastructure is a lot more complex and ambitious. Are you going to be involved in the blockchain type of infrastructure?
ML: We've talked to Ripple for many years and we've finally come to an agreement. They are a global payout network and we're going to use them. With one integration to Ripple, we can get a whole series of payout countries that we otherwise would have to integrate locally. We'll be developing a series of payout channels working with Ripple and whatever partnership happens after that, that's the immediate need to use them as a payout network and we'll see where it goes from there.
ED: That will come. The central bank digital currencies, what if they ever take off? But the whole idea of the complexity of the data even the tokenisation of data is underway. Ripple seems to be using you to solve a more immediate business problem that they have.
ML: Stablecoins and central bank digital currency (CBDC) right now are not important. But that will be important in the future. It reduces friction and transfer cost. It doesn’t provide integration into a business and any of the end-user tools that we're giving a business to manage whatever their flows are. You start to reduce friction and costs, that's going to be good for everybody. If that happens via CBDC, that's great. There's a global infrastructure using CLS Bank and with sovereign currencies and that infrastructure is old. SWIFT is part of it. The CLS Bank is part of it. Could there be innovation in the next 10 years? I certainly would hope there would be. Payments are not centrally cleared and there could be real innovation coming there in the future. That will reduce risk, friction and price on a global basis. That's the future. We're solving a much more practical problem which is how do I get money from the US to India in a way that's quick and efficient. That's a very different kind of problem. There'll be some global changes.
ED: How do you think the payments industry will evolve from origination to payout? Which areas would be highly commoditised and where is the value? Where does a player define how payments will evolve?
Scale is important in payments industry as transaction related business will be commoditised
ML: Anything that's a transaction gets commoditised over time. You need scale. You need very large because the amount of money that a firm has, the transaction business makes per transaction, will get compressed over time as it becomes commoditised and more people enter the market. Some of the remittance firms like TransferWise and others have done a real service to everyone by putting pressure on pricing which then filters its way into business as well. The issue has become ease of use. It becomes the technology that we can provide to the client and the technology and pricing on the actual transaction side over time reduces as we've seen in the card networks as well. You're quite right that you see people consolidating because you need to have scale. We can always debate what scale means but it means you need to be big. You need to be global in what you do. That's the future of the payment industry. There will always be single card or local providers.
ED: Describe your technology stack and how you construct it. How much are you into open source driving from it and building into it? And how are you organised on the technology front?
ML: The amount of technology investment is substantial. We use a tremendous number of tools. We are cloud-native in the way that we approach everything. That requires a tremendous amount of investment on our part and in terms of foresight and thought and how we're doing because that's the future of everything. Our product has been thought through from the beginning that it will be embedded. It will be handling second, third and fourth-party transactions and need to let the data flow and provide control for the parties that are part of it. That's very different. What's embedded in our technology is a business model. Often the differentiator of what we do is much that we've embedded a business model of embedded finance into the product. That becomes a competitive differentiator.
If all I'm doing is offering Click through remittance transaction to a customer who badges their site, they come in, they see if they click through, they get a good rate. That's a very different kind. They could optimise a whole series of things and what they're doing. We've optimised the fact that we're providing the product to people servicing other end-users. That's a very different value proposition. It's a very different technical approach that impacts everything that we do and how we think about it.
ED: But at the same time it impacts the organisations that want to work with you. Are you commoditising the technology stack of this business?
ML: We get more efficient over time. How do we embed our product more effectively in different kinds of businesses with different requirements over time? It's always thinking through that embedded business model which is where we come from.
ED: Where are you taking the organisation as a business? What's your next big challenge?
ML: Our plan in 2019 had been to open our office in Singapore and we ended up deferring that. The virus came, everything got shut down. We had employees ready to move. We now have just started hiring people. One big approach is to develop our Asian business which, relative to other companies, has been undeveloped. We have certainly plenty of Asian customers but we're now starting to invest in hiring both in Singapore in relocating expertise and making that part of our global network.
Another strategy is other segments of fintech, wealthtech, lintech, and paytech. As fintech develops and matures and the companies get larger, we find the need for our cross-border component becoming more important. The collection is part of that because people are looking for the embedded wallet. There's geographic and market segment expansion. The third part that we're seeing with embedded finance is more non-regulated companies want to embed financial functions. And that means we'll have to provide our regulation in a way that we hadn't been in the past to more firms. You expand both in terms of region. You expand both in the market segment and the kind of clients that we service.
ED: In terms of the bandwidth of your organisation, do you pursue the larger players, the more complex ones, the securities houses as opposed to the small players that just want to embed the functionality? It could be a corporation. It's not even a financial institution trying to put a payment app into their supply chain, for example. How much time do you spend?
ML: We have dealt with many of the fintechs that are big and successful, started with us as absolute startups with nothing going so we're actually very startup-friendly. We have announced and talked all the time about our partnership with Revolut. But our partnership with Revolut started when it was a tiny startup and not doing any business at all. We are quite friendly to early-stage startups in the fintech world. But as we mature, we're also starting to sell to provide services to larger and medium-sized banks as well. We have to do both of those. You have to stay on the innovation and with fintechs because there's a lot of transformation. We learn a lot from those customers. But remember to go back to the basic business model. I'm not selling to end-users. The idea of selling to a single corporation would not be a client who would be using us because we're not an end-user tool. Somebody else's got those end-user tools. I'm selling the infrastructure to them.
ED: Are you not an API?
ML: We're totally an API company but we're selling to other fintechs. We're not selling to end-users. Someone is providing an end-user service and they're using us as a service to provide it. And so our API is sold to the client and that's the kind of firm that we sell to. You can sell payments to a small corporate. We would not be the person who is the vendor who's selling that. We have clients who are selling to small vendors and corporates. But the actual engagement with that corporate isn't being done by us. It's being done by our client. That's a very important business model point. It's all API but it's API to other firms that are embedding our product. Their service could be trade finance, corporate accounting, business accounts, stock broking, shipping, and all sorts of different things. But we're servicing the provider and they're providing it to somebody else. It's a very important distinction.
ED: Banks have not been very good as users of APIs. The growth model for you is that as long as there's a need for fintechs going out to talk to banks to build APIs, you're the back-end of that.
ML: We are the back-end of that. We're happy to stay in the back-end of that. That's what we do.
ED: Thank you very much, Mike.