Iceland is a curious place, quite small in global terms, and with a small population of a smidgen over 375,000, a population that has discovered over recent decades that they can be really quite innovative, when it comes to the application of IT. They have also learned that living and working cheek-by-jowl in its main conurbation brings some useful advantages. It makes clustering together businesses that might be able to feed off each other in some way not just inevitable, but surprisingly profitable.
As a nation it has learned to concentrate on clustering companies with a common theme, so it was no surprise to find that this year it recently played host to the 26th TCI Global Conference, a coming together of business people, planners and government representatives from around the world who are working to develop and promote the benefits of clustering complementary businesses together.
Being an island a thousand miles from anywhere, Iceland has had to become self-sufficient in many ways - growing its own economy, creating its own currency and fiscal management skills, and developing many of the tools needed to manage these services. That has now become a great target for clustering, including a healthy fintech cluster.
Some companies are still at the one-person/one idea/one IKEA-desk stage, but others are already making serious in-roads into European and US markets, and two of technologies hot bleeding-edge technologies – Blockchain and Artificial Intelligence – are front and center in those developments.
Blockchain gets a job
Take Blockchain, for example. This has been like so many new technologies, an outstanding development looking for an application. One looks to have been found by one of the cluster, Monerium. It looks like this company has come up with a way that Blockchain adds real value to way we all use fiat currencies.
Monerium’s co-founder & CEO, Sveinn Valfells, expects to see global commerce move on to Blockchain for the provision and management of fiat currency movements over the next 10 to 20 years, because with the advent of Web 3 it is now becoming a much faster, cheaper and more flexible way of exchanging value than possible using today’s local, centralized and siloed ledgers:
We enable money to migrate, be issued and used on Web 3, as a service or as a platform for Web 3 services builders of decentralized financial apps. Why are we doing this in Iceland? Because we're part of the four freedoms of the European Union. And the European Union actually has a legal framework for issuing digital cash. It's been around for over 20 years. We're the first company authorizzed to issue digital cash using European rules on Web 3, on Blockchains. So we're pioneering this proven way of issuing digital cash.
The European regulatory environment now includes the MiCA framework (Markets in Crypto Assets), which Valfells indicated is something of a world leading development. He notes that the Chair of the House Financial Services Committee in the United States recently observed that MiCA puts Europe ahead of the game in Web 3. The understanding is that the US Congress is due to vote on similar legislation in the foreseeable future, and Valfells’ expectation is that this will open the way for the company to move into the Dollar currency transfer market. He also claims that Monerium’s technology is ahead of MiCA requirements , and is now only being held back by the under-representation of Europe, and the Euro in particular in Web 3 developments:
Most of the so-called stable coins that have been issued to date are denominated in Dollars, and most of them are unregulated or wrongly regulated. There was only 220 million Euros worth of Euro-stable coins out there, which hugely under-represents the Euro and global commerce. And of course it hugely underserves Europe as a market.
So now the company has connected the €11 trillions-worth of cash in the European banking system directly to Web 3 and connected Web 3 to the main payment systems of the EuroZone. This means businesses and individuals can transfer Euros directly from their bank accounts within Europe, transfer them straight onto blockchain as fiat-stable coinage and pass the blockchain token to an identified recipient:
So we make the experience seamless to the end user. There's no intermediaries needed, no ramps, no exchanges, you just move your Euros seamlessly from a bank account to Blockchain and back. You think about regular fiat money as being represented on a piece of paper or in a plastic card, people are used to that. Now, by tokenizing fiat we're issuing fiat money, not on paper form, not on plastic form, but just as a cryptographic token on a shared ledger. if you hold that token you can pass it around and use it to make payments just like you would with a paper note or a plastic card.
User funds are safeguarded using segregated accounts with Monerium’s US partner, State Street Global Holdings, which has over $3.5 Trillion in assets and is can therefore provide the high-quality liquid assets the company requires in order to give users a degree of comfort that the transactions are safe.
One interesting side issue here is Valfells’ opinion on what this might do to the workings of global markets and how it will change the way people do business:
It will have a massive impact on FX. Foreign exchange transactions will be conducted initially on the retail level, but ultimately probably on the institutional level and in real time 24/7. And they will become much more flexible. Like any technology that removes barriers to transactions, it will remove friction and help prices to establish themselves in the global markets. It will help supply and demand to meet in this intersection that we call price right. So I think it will be, overall, very good for making the global economy more efficient.
De-frauding fraud of its role
Another area where fintech can play a part in improving the efficiency of financial trading and movement is in the identification and management of fraud, and in particular money laundering. Another member of Iceland’s fintech cluster, Lucinity, has set its sights on providing new tools for the task.
Two issues confront most financial institutions open to fraud. One is the number of analysts that are required to plow through the wealth of data that is generated by every user. This ranges from the initial KYC (Know Your Customer) data collected as a new customer is on-boarded, through to full transaction records that might indicate a fraud is being effected. The analysts here are divided into two categories – those with enough skill to detect a false positive first warning and identify where something 'unusual’ is showing up in the transaction record. At that point, specialist teams of analysts become involved, often needed because most financial institutions still use a wide array of disparate systems, all using data held in unconnected siloes. This means that, for the analysts, there is a lack of overview, which results in huge operational inefficiencies and difficulties in maintaining compliance.
All fraud investigations have to be conducted against this background, making the process time-consuming for a large number of staff, and very expensive. In 2022 banks were estimated to have spent $150 billion on the human part of that process.
According Celina Pablo, Lucinity’s Senior Marketing Manager, the original goal was to make Iceland one of the most secure places in terms of financial fraud, and then move outward from there. This happened quite quickly when it secured its first overseas client, a tier one bank in the USA, and has since then started to scale out in Europe and the USA.
What the firm offers is a range of modules that can pull together all the relevant data needed to evaluate a possible fraud from all those disparate siloes. These include modules on case management, after-intelligence, and regulatory reporting. The key module, however, is known as Luci, an AI-based copilot solution that helps drive analysts and investigators in the right direction. Pablo explains:
They're spending up to like six hours a day, looking at these different systems. One of our clients, for example, were looking at 15 to 20 different systems trying to make sense of the data and pull different pieces of information together about customers and their transaction behaviour to determine whether a case is potentially money laundering.
The case management solution is where that thread of evidence comes together, and Luci sits on top of that whole process, helping analysts further understand and gain insights from the information that they do have. Luci can automate some of the tasks and run supporting tasks like background checks, or name screening checks. This can include analyzing services like Google Maps to check that addresses are genuine rather than car parks or similar non-domestic locations. Finally, it can then write the case narrative and summary.
This has a specific advantage in this type of work, where the regularity of content and structure of the document produced is much easier to work with when important details can be missed in the individual writing styles of the analysts.
The company has bitten the bullet of dealing with the inevitable legacy applications, often built around spreadsheet technology, that form the basis of those many data siloes. So the modules have all be designed to sit on top of those applications, explains Pablo:
We aim to be as flexible as possible, so we don't need financial institutions to rip and replace their current systems, we just sit on top of their systems and take in data from them, summarize, and present it and augment it.
The rental mess
One other member of the fintech cluster is Igloo, and its target is managing one of the most important financial involvements most people will ever have – buying or renting somewhere to live. It is also an example of the trend of growing closeness and cross-over between pure finance houses and those that execute function or service using finance. As CEO Vignir Lydsson observes there is space now for fintechs to effectively become banks:
What Igloo provides is a rental management service encompassing every aspect of long-term renting out apartments, or long term. We're not building Airbnb, we're building a platform for long term rentals, where we take responsibility of these three pillars.
These are the platform on which it runs, which he described as `very basic’. Second, it manages all the legal processes, creating in effect a legal/tech company. This facilitates all the legal processes of renting, for both renter and tenant. The third pillar is financial management for both the tenant and landlord, with Igloo’s revenue then coming from management charges on that part:
What is different with the platform itself is that it is open, it is free, and you can do everything, as a landlord, or a tenant, find an apartment, communicate, make contracts, all this basic stuff, you can do it for free.
Perhaps its biggest factor however, especially in the world of potential flakey tenants and duplicitous landlords, is that it can provide a proper, documented record of all transactions, and also ensure that they happen. For example, Igloo works with banks to ensure the landlord is paid on the due date, and deals with recovering the funds from the tenant (cutting the tenant a modicum of slack for those times when payment might otherwise be difficult). For the tenant, they also get a documented payment record. Lydsson explains:
If you're a tenant, you might have to pay three, four or five months of rent up front, or put down a security deposit. And that can be really hard for many. And we step in and we issue what is called a rental guarantee where we cover the tenant and the landlord with a certain amount. And instead of paying it all up front, the tenant only pays a small monthly fee.
That documentation can also then be used by tenants to demonstrate to mortgage lenders a certified payments record that can be taken as at least a partial alternative to large deposits. This is certainly one of the biggest issues found in the UK where long-term proof of a good payment record carries zero weight with mortgage providers.
Part 2 will appear shortly, covering some interesting Icelandic developments in how systems and services can be managed.