The rapid penetration of smartphones is having a tremendous impact on the banking and payments space all over the world and innovative companies are coming up with creative solutions to offer a superior customer experience.
YellowPepper, a Miami-based mobile banking, payments and commerce startup focused on Latin America, believes that with its technology and approach to partnerships it is well positioned to offer differentiated solutions. For instance, in Colombia, YellowPepper has partnered with Davivienda Bank and Apple retail stores to issue instant credit cards, through the smartphone, which can then be used by the customers at Apple stores to make a purchase.
In conversations with Knowledge@Wharton, YellowPepper’s co-founder and CEO Serge Elkiner and CTO Alexander Sjogren discuss the changes in the mobile and digital payments market in the past two years since Knowledge@Wharton last wrote about YellowPepper, the partnerships they have forged, and their strategy going forward.
An edited transcript of the conversations follows.
Knowledge@Wharton: Serge, what are some key developments in the mobile and digital payments market over the past two years, especially in Latin America?
Serge Elkiner: Over the past two years, people have started becoming more interested in integrating the digital aspects of the world we live in into their core businesses. I would say that from 2015 to 2016 they were looking at different options and started planning around them. After that, 2016 to 2017 was about testing, about minimum viable products, and putting their toes in the water. And then in 2017, what I’ve seen is the acceleration of these investments into financial digital platforms and products in the digital space.
Knowledge@Wharton: What are some of the factors driving this acceleration?
Elkiner: Smartphone penetration is accelerating at a rapid pace. This is having a tremendous impact in enabling banks and retailers to think about the digital world in a different manner.
Knowledge@Wharton: How much would you say the Android penetration has been? What impact has that had?
“The fact that you now have $30-$40 Android phones available in the market has democratized access to the smartphone.” –Serge Elkiner
Elkiner: The fact that you now have $30-$40 Android phones available in the market has democratized access to the smartphone. This gives any company, specifically banks and retailers, the ability to give [their customers] access to their service through a smartphone. It is a great platform to serve people through digital channels.
Knowledge@Wharton: Which regions are growing the most rapidly in Latin America? How has that influenced your strategy and how you have had to adapt?
Elkiner: Colombia and Mexico are the fastest growing for us. Ecuador and Dominican Republic are the next two, but not very far behind. Regarding strategy, when we started we were working only in mobile banking. Then we were working in mobile banking and mobile payments — so there were two features on the platform. What we’ve done and adapted in the last 12 months is that we provide a platform that sits between the legacy systems of the retailers and the banks and enables them to integrate the new digital ecosystem without the fear of having their technology as a hurdle, because most legacy systems do not allow them to be very flexible. So we adapted our platform and we are now embracing more than just mobile banking or mobile payments and enabling different services in the digital world, integrating APIs (application programming interfaces) and SDKs (software development kits) from the Visas and the Mastercards to small startups or our own development that we’ve done over the past years.
Knowledge@Wharton: You have also spoken about increasing the number of transactions from 30 million to 40 million.What are some of the reasons behind that growth?
Elkiner: We grew the transactions about 25% in the last two years. But what is also important is that the mix of transactions changed; the share of transactions initiated from smartphones, versus traditional standard phones, is much bigger. We moved from one million transactions a month to nearly 10 million transactions a month initiated from a smartphone. That’s a growth of 10X. So we’ve grown the general transactions 25%, but we’ve grown the smartphone transactions 10X in the last 12 months.
Knowledge@Wharton: Alexander, what are your thoughts on how the market for payments, and more broadly, the fintech market, has changed in the past two years?
“The brick and mortar stores are really starting to understand the importance of collecting data and simplifying payments for the consumers and improving the experience in their stores.” –Alexander Sjogren
Alexander Sjogren: During the past two years, we have seen tremendous growth in verticals other than just the traditional financial issuing space and we’re now seeing a lot of retailers addressing their payments needs. Being in Latin America, they can look at the U.S. and see into the future. The brick and mortar stores are starting to understand the importance of collecting data and simplifying payments for their consumers and improving the experience in their stores. We have seen tremendous growth in that area.
Also, when you have done the difficult part, which is integrating with the legacy systems of point-of-sale and the banking platforms, you start to see the power of what that solution can do and how many more use cases you can find other than just the traditional payment experience that we were providing in the past. We now see huge opportunities in instant issuing, being able to issue a card immediately through the phone so that a customer can make a purchase in the store within minutes rather than having to sign up for a new credit card, get that sent home and then go back to the store in a couple of weeks.
Knowledge@Wharton: Can you give me an example of this process and how it has worked?
Sjogren: Yes, definitely. We worked with Davivienda, one of the largest banks in Colombia, and the Apple stores in Colombia and launched the instant issuing of a Davivienda credit card in the Apple stores. Prior to this, if you wanted to purchase a MacBook or an iPhone at the Apple store, the store clerk presented you with the option to buy it with a Davivienda card, which is interest-free for 24 months and so forth. But they had moderate success with that because there was a lot of tedious paperwork and a lot of signatures to be done. The customers would get the card at home two weeks later and then they would have to go back to the store to make the purchase. The activation rate, as with all credit cards, was around 65%.
So, together with Davivienda and Apple, we streamlined the process where the Apple clerk takes a photo of the customer, scans her ID and sends it to the credit bureau for scoring. The approval message is sent to Davivienda which issues the card and sends a message to our server. Following this, our server sends the customer a seven-digit token that is tied to the credit card. The customer can then enter this token number at the point-of-sale and complete the purchase.
This solution has had tremendous uptake. I think we have a 90% activation rate compared to a 65% activation rate of cards. The average ticket is somewhere around $950. I think it is almost a year and we have processed more than $45 million just within these stores. So it has been a huge success, not only for Davivienda — it has increased its yearly issued credit card base by 14% thanks to this solution — but also for Apple. I think in the first six months, Colombia was the fastest-growing country for Apple in Latin America. We’re now starting to see this use case going into a lot more verticals. A lot of other banks want to join, a lot of other retailers want to join, and Davivienda and Apple are taking this outside of Colombia.
Knowledge@Wharton: Do you have any plans to collaborate with the bank [Davivienda] to broaden this to other retailers?
Elkiner: We are already live with two other retailers. We’re broadening it into other regions where the bank is present. We’re also broadening the service to other banks within Colombia and within the region.
Knowledge@Wharton: What were some of the challenges in implementing this model in Colombia and how did you overcome those challenges? What is the potential for replicating this model in other countries beyond Colombia?
Sjogren: The challenges were really before this use case. It was about our being able to install our software in all the points-of-sale in the country. When we saw the opportunity, together with Davivienda, it was actually quite easily implemented. I think implementation was done probably within a month. But the real hurdle that we had to get through was the two years of development that we did before to integrate all these legacy systems and to update the point-of-sale infrastructure.
That’s where I think the beauty is. When you are able to understand legacy technologies and can integrate your solutions with them there are so many verticals that you can take your product to and so many pain points that you can solve. If we’re looking for a similar solution to something like this, we now have the infrastructure and the point-of-sale [software]. Now every point-of-sale can potentially become an ATM, which can help all the merchants get off cash handling by allowing withdrawals there. You can allow merchants to do remittance services and you can exponentially grow a remittance network to every point-of-sale in the country. We’re taking it to Mexico right now. Davivienda is taking it there.
Knowledge@Wharton: Are you doing that also with Apple or with other products?
Sjogren: Apple is taking this throughout the region. They’re doing RFPs (request for proposal) with the different banks that they want to use, or whoever wants to use this. The problem is that Apple is very strict in how they want their [customer] experience to be. They don’t want any physical papers being signed. The signatures have to be on the iPad at the store. The larger banks are struggling with this. But we see a lot of the challenger banks saying, “Okay, I’m going to do this. Why would we need a receipt? We have a digital copy of it.” So the challenge is: who is the best fit? It’s mostly the innovative banks that are going to take this up. Davivienda was the first in Colombia. But now we see other banks saying, “Okay, we want to do this as well,” because Davivienda has broken the barrier.
Knowledge@Wharton: What have been the technological challenges in working with Apple on the one hand, the banks on the other hand, and YellowPepper’s own platform? How do you manage that?
Sjogren: YellowPepper has always been a partnership-oriented company. Since our inception, we have had all the banking relationships and have been able to integrate with the banks. This is usually a very troublesome experience — to go through all the VPNs [virtual private networks], the security protocols, understand all the different core systems and so on. We have an advantage there because that is probably the most complicated side. We’re seeing that companies like Apple are usually more flexible in terms of their technology. They are easier to work with on the technology side than the financial institutions.
Knowledge@Wharton: What are the short-term and long-term objectives you have, especially on the technology side, in terms of building this out for the next, say, two to three years?
“For us, every technology decision is about time to market and scalability.” –Alexander Sjogren
Sjogren: Our number one goal right now is to improve our speed to market. And that is about making sure that everything is well documented, that we can convert all the different services that we have to the platform in a scalable way, and that we can address new markets far more rapidly than we can at present.
The technological challenges are that while we have our own proprietary product sets, we also have a lot of products from third parties such as Visa, Mastercard, PayPal, Facebook and a lot of smaller fintechs. We need to make sure that we are adhering to all the rules from all these major companies that want their SDKs to be packaged in one way, making sure that we can package all the different services from our end onto that in a very easily implementable way for the client. So, for us, every technology decision is about time to market and scalability. If we look at where we are technologically speaking right now, it’s quite easy to build scalable products thanks to the cloud, and thanks to Slate (a documentation tool) for documentation, and thanks to microservices you can contain very small services that were fragments of your services into contained areas. It allows you to scale in a completely different way that we have never seen in the past. So it’s quite easy to build it and architect it in a scalable way, than it is to package it with all these different interests from all these different organizations and ultimately make it easy for our consumers — the large retailers and the large financial institutions — to consume our services.
Knowledge@Wharton: Overall, what are some of the goals for YellowPepper over the next couple of years and what are the risks that you foresee?
Elkiner: The goal is to continue assisting banks and retailers in growing their digital presence and integrating the digital ecosystem into their core ecosystem at a faster pace, with adding new markets. And when I say new markets, it’s mostly in Latin America, like Chile, Argentina and Central America. There’s always a big question mark, of course, about Brazil. But I think that with partners like the Visas of the world we can definitely start looking at expanding into Brazil. And then, beyond the short and mid-term, look at expanding beyond the region to bring our platform and our capabilities to other places in the world.
Knowledge@Wharton: Could you talk about why you think Latin America and other emerging markets can leapfrog the U.S.?
Sjogren: Ten years ago, when I worked in Europe, the Baltics leapfrogged the Western Europe and Northern Europe in a matter of years in point-of-sale infrastructure and mobile financial services. And we’re seeing this happening in Latin America as well. You haven’t taken these very costly decisions to do incubated point-of-sale systems everywhere that is hard to migrate away from. So they have now a tremendous opportunity to really pinpoint what different services they need for each segment, so that not every merchant needs a point-of-sale. Certain mom- and-pop shops are going to work with a mobile point-of-sale. And that wasn’t the possibility before, right? So, in payments, we’re seeing Latin America leapfrogging a lot of the industrialized markets with instant issuing, credit lending to merchants and things like that.
And we’re seeing the same trend in Asia Pacific, especially in China and India, with Paytm and Alipay. In these markets, people took out their money from their bank accounts on payday and they kept it at home. But Paytm and Alipay have been able to capture that market. I think you have the same dynamics in the Latin American market. You have a fairly large, 40% to 50%, bankarization rate here [the percentage of population that has a bank account and uses it], but only a very small percentage of that is credit card payments. A lot of people take out their money from the banks but they don’t really have a payment solution that is created for them. We definitely see somebody like Paytm and Ant Financial moving into the region and having tremendous opportunity for growth with the different type of services that they can provide.
Knowledge@Wharton: Are you seeing any services provided by companies like Ant Financial in China or Paytm in India that you would like to offer through YellowPepper?
Sjogren: Oh yes, definitely.
Knowledge@Wharton: Where do you see opportunities there?
Sjogren: I definitely think there are a lot of opportunities. If you look at Paytm or Alipay, they have a complete spectrum of services like buying your train ticket, paying your bills, paying offline, paying online, lending, credit scoring, wealth management and so on. We would definitely like to acquire some type of lending products where we can start providing micro-loans and things like that. This would be in conjunction with a credit scoring product so that we can get data on consumers who may not necessarily have had credit cards earlier and therefore don’t have a credit score as yet. I see a huge opportunity for this in Latin America. And I think what they have done brilliantly is consolidating everything into one platform which makes it cheap and tremendously accessible for the consumer.
“I think we’re extremely well positioned to partner with [the Chinese companies] and help them come into the region.” –Serge Elkiner
Knowledge@Wharton: I’m very glad you brought this point up because a lot of the people whom I talk to in the fintech space mention the high potential for financial inclusion of people who were previously priced out of financial services.
Sjogren: Yes, exactly.
Knowledge@Wharton: What’s the potential for that in Latin America?
Sjogren: Oh, that’s tremendous. It’s tremendous. As I said before, there is 40% to 50% bankarization, so you have a lot of people outside that are under-banked. And then you have a part of the banked that are completely under-served. For instance, they have the debit history but they can never take a loan because they don’t have any credit history. So providing these alternative credit measuring solutions in Latin America will be crucial for financial inclusion and to be able to do a lot of lending.
We are seeing a lot of companies coming out with this. For instance, Tala Mobile from the West Coast is doing tremendous work in Africa. [Tala’s credit models allow it to evaluate an applicant’s creditworthiness and capacity using the data on their mobile devices.] I think when we have those things in place we have a tremendous opportunity to address the under-banked and under-served who have smartphones from where a lot of data can be collected. You can collect their social media data, you can collect all the touch points that they have in their interactions, and everything about how they’re structuring their life. And then you can build up a data portfolio which enables you to give out loans that really stimulates the economy and brings everybody into it.
Knowledge@Wharton: Serge, what do you think will be the impact of Chinese companies like Alibaba, Alipay and WeChat entering the Latin America market, on not just YellowPepper but on other companies as well?
Elkiner: I think it will be good. They’re looking for new markets to expand and Latin America is a fertile territory. I think we’re extremely well positioned to partner with them and help them come into the region. We don’t see them as a threat. We’re extremely well positioned in the market and extremely connected in the issuing part of the ecosystem. So we believe that we’re a fit and a good partner for them.
Knowledge@Wharton: What is your strategy for expanding YellowPepper’s footprint beyond Latin America, especially in Europe?
Elkiner: It’s not a fixed strategy, but the idea is as follows: there is a new regulation in Europe which forces a bank to give access to information of bank accounts and balances, etc. to third parties if the owner of the bank account agrees to it. This puts the bank at risk because a third party could now get access and move money from one bank account to another bank account and the bank is forced to integrate with that. This means that banks really need to start pushing for more digital efforts. Since our platform already has that capability, we can help them with it. So Europe would be one region where we would definitely look at expanding.