The Connector Podcast - European Digital Finance Association (EDFA) -Transforming the Fintech Lan...

Welcome to the Connector Podcast, an ongoing conversation connecting fintechs, banks, and regulators worldwide. Join CEO and founder Koen Vanderhoydonk as you learn more about the latest available trends and solutions in the market.

Welcome to another interview here at Milan Fintech Summit. Well, it's actually the second interview And in the second interview, I only interview 2. And 2, I have Joachim with me. And Joachim, I will put you on the grill because you said you're a vegetable. I will— I won't go into details too much. The interview as such, it's organized by EDFA, which is the European Digital Finance Association. So, Joachim, what's the thing with the vegetable?

The vegetable? Well, they're healthy, first of all. Yes, I agree. That's important, gives you energy. And helps you keep focused.

Now, we were taking the mickey, right? We— I told you we're not gonna grill, so no worries about grilling. It's gonna be a nice and open conversation here. Could you tell me a little bit more about you? Who is Joachim?

Sure. First of all, thank you for having me.

A pleasure.

Good to meet you. My name is Joachim. I've been working in fintech and actually with payments my whole adult life. But I started out with mathematics and physics from university years. So, back then, I wanted to figure out how the universe works and research questions like, why does there exist something instead of nothing? You know, those kind of questions.

So, pretty deep, to be honest.

Yeah, yeah.

Existential.

Existential, but also a lot of problem-solving. So, I have very good training in not being able to answer your questions, but try very hard for a very long time. I think that's kind of the key from that education. When I was studying, this guy Steve Jobs, he announced iPad. This was in 2009, 2010. And then I thought, wouldn't it be cool to run a cash register, like a point of sale on an iPad? So, I had this idea, something I wanted to make. I wanted to make this app, teach myself how to program.

Wow.

And I eventually made a prototype of this cash register. And the vision for this cash register was that the shopkeeper could then walk around in the store and serve his or her customers. instead of having long lines and queues. So, it was much more elegant than these big clunky cash registers.

Did it ever materialize?

It did materialize, and we did launch it. We had some pilot customers, and so that was great fun. But there was a problem. I had to integrate the iPad with a cash drawer and card terminals. So, I had this, like, sexy iPad and this old clunky hardware, and I thought, But do we need this? Everyone has a smartphone these days. So, this was in 2010, and the smartphone penetration, at least in Norway, was very high already back then. So, then we started working on making a mobile payment solution for the cash register, and it turned out to be much harder to make the payment platform. So, that became its own thing.

Is that, like, the first baby steps for Tू? Or was that something else?

At least in my journey. At least in my journey. So, the mobile payment app we made, eventually it was called MCash, and then now it's called Vips. But this was a pure B2C payments app.

Well, I've noticed that you worked on several fintechs. So, you're You're not a one-time founder, you've done several things. What has that taught you as a multi-entrepreneur?

Well, it taught me that payments are actually quite complicated. It's more complicated than you think, and there's lots of stakeholders involved that you have to keep in mind. When it comes to— so, I did this B2C thing for many years. And my— our customers, they asked us, do you have— we have business customers, do you have a solution for them? And I always had to say, no, actually, we don't. This is just for B2C, but of course, a business can use it, but then they would need to file an expense report, and it didn't really work well for B2B. And then, at some point, after having been working with these fintechs for a while, I started a company called... Transpot, which is a failed startup, but I can tell you what we did.

Please.

This is the first step for me for Tu because what Transpot was, kind of, I would call it an Uber for trucks. So, it was a platform where businesses could order shipments and it then connected buyers to transportation or transport companies.

Transporters.

And key here was to solve payments. The first thing I did was to integrate with cards. And the buyers on the platform, they said, you know what, we don't really want to use cards. First of all, we don't have a credit card. I don't know if you know that, but only, like, 5% of businesses have a credit card. But they do have a debit—

Too expensive.

Yes. No, the banks won't serve them. It's a completely underbanked segment, especially the SME segment. The banks don't want to take the risk.

Okay.

But they do have a debit card, but they don't want to use it. First of all, the people who make the— who place the order, they're typically not the CEO. So, often they don't want to have many debit cards floating around. So, that's one problem. The other problem, which is more important, these companies have often a big cash flow issue. So, if you use a debit card and pay with that, the money goes out of your account immediately. And that was a big problem. So, what we made then was Let's do this with invoices instead. An invoice has been around since the start of business.

And has a latency built in.

It has a latency built in, and there are also e-invoicing protocols that we could use to automate everything. So, then we did that, but now the sellers on the platform were upset, the transportation companies. They have super low margins, are very squeezed on cash, and they didn't want to offer terms to their buyers. They didn't want to wait for 30 days or 45 days.

Back to square one.

Back to square one, exactly. So, this was— this has been a scratch, this has been an itch that I really wanted to scratch. So, the platform eventually failed. I did some other stuff, worked with a company called Koen, which is a robo-trader that helps you save money in stocks and so on.

Mm-hmm.

Anyway, through that company, I got to know Andreas, who is now my co-founder. He came from Latin America. I built up a big... marketplace there, and he called me one day. I'd never spoken with the guy. I got introduced via his wife, and he just called me and asked me, have you thought about B2B payments before? And I said, as a matter of fact, yes, I've thought a lot about B2B payments.

So, yeah, then you took everything with you that you experienced.

Exactly. So, we spoke on the phone for 4 hours, and then I decided I wanted to go all in on solving this B2B payments problem once and for all.

Oh, nice. But maybe in a moment we're going to dive into the company itself. I still want to go a little bit further under the skin of you as a person. So, you said physics and mathematics, and what I hear, it's almost like an inventor. What do you think are the jack of trades that you need to become that inventor in the fintech space?

I think regardless of what space you're in, you need curiosity. As long as you're curious, willing to learn, and constantly go around, think about problems, try to look at them from different angles, and if you have a desire to solve those problems, you'll get very far.

Oh, that's a nice one. I think that's a very valuable lesson to all of the listeners and Predominantly entrepreneurs, they can learn a lot from this. But being curious is also hard because you have to reinvent yourself all the time. So what is it for you where you got your personal energy from that allows you to keep yourself going?

That's a very good question. To be honest, my curiosity is constant. It's not something I can switch off. As you perhaps understood from the story I told you now, it's very happenstance that I find myself in fintech and work with payments. It's not— I didn't have a career plan to end up where I am, right?

Okay.

I just happened to be curious about one particular problem that had to do with payments. So, I think to find your— go back to yourself when you were a child and think about how amazing you thought everything in the world was and try to be— try to make that propel you forward to learn more things because there's so much stuff to explore. in the world. So, I think that's— and it's fun too. Also, when you learn new stuff or if you manage to solve problems, at least for me, the feeling of solving something or inventing something that works is the best feeling.

No, I understand. Now you're older, do you feel that that has changed, that you sort of have a roadmap for yourself or you're still... You go where the flow takes you.

There's no roadmap for me, I'm afraid, no.

Okay. Let us maybe dive into the product, the company itself, because now everyone is curious to know more about Tू. So, how would you describe it to the general public? What does it do? B2B payments? It's very open?

It's very open.

What exactly do you guys do?

We want to make it as simple to buy online or to buy as a business as it is for consumers. So, if you look at the innovation that has been happening over the last 15, 20 years, all of that has been in the B2C space.

A lot of it, I agree.

A lot of it. So, still to this day, it's not that easy for a business to just go online on a webshop, And purchase. And also with B2B transactions, they're often a lot bigger than typical consumer purchases. So, the whole credit card infrastructure and card infrastructure that we talked about doesn't really serve that need.

So, what the payments people would say, the rail is not suitable for the purpose in this case?

Correct. At the same time, the whole E-commerce space is built around cards and the card infrastructure. So, you have things like authorize, capture, refund. All of these e-commerce platforms are built around that way of doing transactions. So, what we have done in particular is to emulate that payment flow with invoicing and financing in the back.

Does that bring you close to trade finance or are you far away from it?

No, it's close to trade finance actually. Like, we are actually doing invoice financing or receivable purchasing.

Receivables, yeah.

Right. So, that's something that banks have been offered for. They have offered this for 200 years or more. They offer their clients to purchase their receivables, like, in a sense, give them a loan until the receivable is made whole. So, we are doing this but instantly in an e-commerce setting. So, we take those, like, traditional banking products and make it accessible in an e-commerce setting.

Well, frankly, if I think about merging the concept of business-for-business payments and, like, the latest trends in commercial payments, then I cannot not mention buy now, pay later. How does that work in an industrial setup?

So, buy now, pay later is a term that was made popular by Klarna and other B2C players. So, when we started Twybee, we wanted to solve B2B payments, but it was useful for us to explain to others what we did by using the buy now, pay later term because essentially that's what you do. You buy now and you pay later. because you have to pay your invoice. But businesses have always transacted this way. That's nothing new. So, 30 years ago or 50 years ago, if you were purchasing something, if you were purchasing something, you received an invoice and you paid after 30 days or 45 days. So, now we're enabling this in an e-commerce setting and everything has to happen instantly. And here also the risk aspect of the transaction is very important.

Another thing that comes to my mind when I'm thinking about B2B payments is cross-border. Is that an important element from your offering as well?

Definitely. So, we see more and more what we call buyer-initiated cross-border transactions.

And what does that mean?

What does that mean? It means that a business in Norway can order online from a Dutch seller without any hassle and without any issues. So, that's something new. Like, B2C has been a lot more global, like, you have consumers buying from companies all around the world, but businesses have mainly been...

Local.

having relationships with other businesses in their community or from their own country, but we see now there are a lot more cross-border transactions happening.

Yeah, it's maybe not an obvious hurdle that you give in your example because Norwegian kroner versus euros, so you have a currency exchange in the middle. Is that also something you put into the mix? We have a couple of layers already in there, but does forex also be part of it?

That's also part of it. And, but to avoid the currency exchange, especially if you're a large business, you typically have different currency accounts.

Yeah, as cash correspondence.

So, you have a euro account, you have a dollar account, you have a Norwegian kroner account, and then we can decide which of the accounts we should pay into, and that way you kind of That makes it easier. But for other smaller businesses, they typically have one account with one currency. They want to start transacting in new countries, and we can help them facilitate that by handling the currency conversion.

So, if I understand well, it actually is the B2B company that is your client?

Yeah, the seller.

Where does the bank service come in?

The bank service comes in, so someone has to finance these invoices. So, we're a startup, so we could use our balance sheet and use our investor money to front money, but we don't want to do that. Instead, we want to partner with banks and help them offer their traditional financing services in an e-commerce setting.

So, these are also your clients?

Yes.

Any other players in the mix?

It's buyers, sellers, and banks, and we have built an infrastructure that allows these 3 to transact.

Interesting. You often say that originally you come from Norway. Well, being in B2B, boundaries is a blast of the past. So, how far do you stretch today in terms of clients? Is it European? Is it global?

So, good question. So, let's talk about the sellers. So, our offering is used by sellers in Norway, of course, UK. So, we launched in UK like 3 months after we launched in Norway. Then it's Sweden and Netherlands and the US.

Cool.

And we are now expanding to more European markets. When it comes to the buyers, you can find them in most European countries. So, we help serve buyers across Europe and in the US. And banks, here we have some local partnerships, for example, in Norway, Sweden, and in the Netherlands, and we have some global partnerships. We are partnering with Santander and Allianz to cover more global and larger enterprise accounts.

I was a little bit surprised that you deliberately said this is the order. What was the reasoning behind the order of the sellers? Well, Norway, UK, the Netherlands— what was the motivation behind that?

So, the reason we launched in Norway first is, of course, because we know our home market, but more importantly because in the Nordics the banks are very tech enabled. So, when we launched in Norway, we launched together with the partner bank called Aprila, which is a neobank who is technology-first. We worked together in order to deliver that solution in Norway. So, that was a model that worked great for us. We went to the UK to do the same, but there we discovered that... The banks there are not able to work with us in the same manner. It's too much legacy systems still and the infrastructure is just not ready yet. So, then we had to think outside the box and we ended up essentially building our own bank and set up some funding vehicles and Eventually got into partnership with banks.

Now, you make me very curious when you say that you set up your own bank, but in the beginning you said you collaborate with banks.

So... In Norway, we collaborated with a bank. In the UK, we didn't find a bank to collaborate with.

Okay.

It was too difficult. So, we built the technical foundation of a bank, essentially. That's what we did in the UK. And then we went to investors. And institutional investors and banks and set up funds for doing the receivable financing.

That's a very clever way to provide finance solutions without being a regulated bank.

Yes, exactly.

Is it the money market fund that you built? Is that sort of—

Very similar.

Very similar, okay. Well, that's a quite interesting journey, Joachim, that you have. What's currently on the agenda next?

On the agenda next is—

There was no roadmap, be careful.

No roadmap for me personally, but for the company it's pretty clear. We're expanding, we want to serve other markets. So, right now we have a big push throughout Europe and we are partnering with some large customers who will also launch in the US. So, there we're gonna test the waters in the US. So, we started transacting there a few months ago and now we're scaling up the US business. So, that's very exciting for us and it's also very different from Europe.

Yeah, I was about to ask what were your first lessons learned?

My first lesson learned is that the bank infrastructure is a lot more fragmented.

That we expect. As Europeans, we think it's one market, but then the devil is in the detail.

The devil is in the detail. And Americans love cards to a much bigger extent than I thought.

Also on the business level?

Also on the business level.

Okay.

To some extent, at least, at least for small purchases, like, if you're ordering a laptop online or something like that, you know, use your card. And another thing that kind of struck me was how common it is with what I call pull payments. So, typically in Europe you have push payments, they are being initiated by the payer. In the US it's much more common that the payee is pulling funds from accounts either over ACH or pulling money from credit cards.

It's like a domicile then, something like that?

Yes.

Power of attorney to grab money?

Correct.

Based on a contract, I would suppose?

Yes.

Ah, okay.

So, that's actually quite convenient because that makes it easier to automate purchases. For example, if you're a business who orders stock every week, you can set up— the seller can set up a schedule for you and withdraw money automatically.

Which circumvents the whole idea about receivables because it's instant.

That's instant, but if you add receivables, and this is where it gets powerful, if you add receivables in the mix, you can pull money on due date instead of on purchase date.

All right, I'm starting to follow with you. Interesting. One that comes when you go into a new nation, in this case a new continent, you mentioned changes. How is that adapted within your organization? How big is your organization?

We're about 70 people now.

Mm-hmm.

So, that's a good size for us from where we are, but when we're ramping up in the US, we will set up a larger office there. So, then we need some feet on the ground in the US in order to get the ball rolling. In terms of how the company has adapted, we knew that the obviously, the amount of transactions that we process and the volume will increase, and also the number of support requests will increase. So, before this, before we decided to actually go live in the US, we made sure that we had more automation in place in terms of support, in terms of financial operations. And we also had to Do some battle testing, so to speak, just test that we can handle peak volume from a large customer in the US on Black Friday, for example. Are we able to manage those kinds of volumes? And so, that was the preparation going in. And I think also the organization has been more privy to the fact that we are now operating in multiple time zones. Because that's also—

It's a big impact.

It's a big impact because in Europe you have a couple, fairly a handful, let's say, of time zones.

But they're pretty much complementary, right? There's no big differences.

There are no big differences, and that's very convenient. In the US, you have— there is a substantial difference there, so we've moved over to a 24/7 support model.

Wow, big changes.

So, that's a big change.

Have you already chosen headquarters in the US? Where will you land?

We will land in New York.

The Big Apple.

The Big Apple.

It all comes back to your iPad, that's where the link is coming from. When you look at B2B payments, a lot is happening today around, well, cross-border and a lot of other stuff. What is for you The future in, let's say, 5 to 10 years? And I deliberately say 5 to 10 years and not 2 to 3 because I think B2B by nature is a little bit slower.

Yeah, you could say it's slower, but there's truly a lot of stuff happening now. I think the development of technology is going at a very rapid pace, and AI will, will catalyze that further. So, in 5 to 10 years, like, first of all, everything will be instant and you will have payment solutions that is kind of— you don't see them, they're just there in the background. And everything is optimized for all the stakeholders that take part in the transaction. So, for example, if a buyer needs to pay on terms or to get, maybe they want to extend their terms midway, you would have agents or systems that would just instantly optimize the flow of funds and you would have this kind of dynamic loan structure and dynamic financing structure. that automatically optimizes the economy of each individual company. But that's at least where I think we will end up.

Would you think it's very technology-driven?

Yeah, I think it's very technology-driven, but also regulatory.

What are we missing on the regulatory part?

I think we miss a unification of technical interfaces and APIs.

Interoperability.

Yes, that's what we're missing. But I think it will happen one way or another because the need is so strong. So, either it will come from the government and they get their act together, or private actors will solve it.

And when you mention private actors, then combining it with trade finance, the first sort of use cases were DLT. On-trade finance blockchain, do you think that's what it needs? DeFi, is that the magic ingredient that you need to make this happen?

That could be. There are a couple of other ingredients needed, I think.

Now I want you to be the cook. What are we missing? What are the ingredients?

It's difficult to say what exactly the— what ingredients we need, but we have the blockchain, we have a good technology for transactions. What's missing is adoption and what does it take for businesses to adopt the technology. I don't know, I think it will be a mix between DeFi and local payment schemes.

Okay, it's interesting that you mixed, that you sort of, I don't know how to say it, you You leave loose ends in your answer.

Yes, somehow it's because I don't know all— I don't have all the answers. I just know that a lot will happen, and I'm pretty sure that things will be automated to an enormous extent, not just in payments.

And what do you see the role of Tू in this transformation?

So, what we aim to do is to build an infrastructure for net terms. That's really what we're trying to do here. You remember the sellers, the buyers, and the banks? We're building the infrastructure, and interoperability is key. That's something we are solving. So, we want to abstract away all the problems, fix them, and then others can build on top of our platform.

Do you see any other innovations that are happening within the B2B space in terms of payments?

In terms of payments, well, to me, it's interesting that we had this, like, phase where we had a lot of payment apps. So, we had different types of payment apps, and you even had, like, large enterprise merchants creating their own apps and wanted their customers to shop or to use their app to buy stuff. Now we're seeing, now we take a step back, let's not worry too much about the apps, let's focus on our website, make it mobile optimized. And I think the next step is to add more personalization into the mix and deeper integration with other business software. So, for example, ERPs, accounting software, accounting softwares, these systems need to They need better interoperability.

It's funny, in our previous conversation we talked about open banking, but to an extent this is also applicable to B2B.

Of course.

I'm surprised that you don't mention CBDCs because there's a lot of people that say that CBDCs makes the most sense when you talk about business-to-business payments. What's your view on that, if I may ask?

That's kind of what I was alluding to with DeFi.

Okay.

So, I think like if we talk about ingredients, I think it's government backing and then the central banks are backing it and are developing the technology further.

Yeah, because you could see it in 2 layers. It's a technology layer and there's a digital money layer. There's 2 different things in my opinion. Because you could work out the same as from a technology point of view also.

You could.

I mean, smart contracts, I think that was the number one use case that I ever saw on blockchain that was a live situation with trade finance.

Yes.

It's also amazing that we did not talk about AI. How does AI influence your business?

It influences it a lot.

That's a good answer.

So, now we have to talk about risk and the different aspects of risks when it comes to B2B payments in particular. So, let's just break it up into 2. You have credit risk. What's the probability that this company is not able to pay their invoice?

Default.

And default. By the way, those probabilities are not necessarily the same. Maybe a company goes bankrupt because they are too good at paying their invoices on time, you know, cash flow. So, that's something to think about. So, credit, then you take, you amass financial data, you pull in data from many different sources, you look at these different industry cohorts, and we apply machine learning and AI on top of this. So, we have heuristic models, as a foundation and, like, squeeze some more percentages out of our accuracy, we apply AI and machine learning on top. And this is what helps us be— this is what makes us competitive and have low loss rates.

That's the layer where you mentioned to optimize everything. So, you use AI to optimize all the flows.

Yes. Since we take, by the way, we take the risk in the transactions. So, the seller is now free from risk and they will receive money upfront. So, that's great, but now we have the risk. So, now we have to deal with that. So, credit risk is an important aspect here, but even more important, as it turns out, is fraud risk.

Explain me more because I would not marry fraud with B2B.

No.

But that's my ignorance.

Yes, but kind of the shift that we are driving is the move from traditional B2B purchases to e-commerce where businesses are ordering online. And if you order online, you could, in principle, like, you could impersonate someone. You can claim that you represented, uh, A large company.

Identity fraud.

Identity fraud of an individual. You could do that. You could pretend you represent Google and that you're buying office furniture to Google. And it's actually quite tricky to be able to figure out whether this person in front of the screen actually represents the company that they claim to be representing. So, a lot of our effort and what we have used AI the most for is to solve that problem and to calculate the fraud risk of any particular transaction. And there we have to amass data from a wide range of sources. Like, there are many indicators that kind of gives us clues into whether this could be a fraudulent transaction or not. And then we combine that with identification and verification methods of various kinds. And, by the way, this is also something that's different from country to country. In Norway, we have— Norway and Sweden, we use national ID schemes.

Yeah.

So, we use BankID, we use VIPS login, which is another ID scheme in Norway, and that works well for identifying you as an individual. In the UK, there isn't really any national ID scheme in that sense, so we have to use other means. But that's just the first part of the equation. Now, I know who you are, but how do I know what company you represent?

You have the ultimate beneficial owner, but then they're not linked up to each other.

But not necessarily beneficial owner because you could work there.

It's the one that's authorized to make payments within the company.

Exactly. So, you could be a receptionist but be allowed to make, to place orders on behalf of your employer. So, that's kind of the key to figure out If they are employees or associated with the business.

Well, you're from Norway and last year I was in Bergen at the FinTech Week and I was doing a panel about digital wallets and the discussion was about the wallets for companies. Would that solve your problem? Yes. Because the wallets will have the sort of level that you need for power of attorneys for payments?

Yes. But who will make the wallets?

I would say the regulator.

The regulator, right. So, if you have a national wallet for businesses, then that would be very useful.

Yeah, and then the question is this is a European initiative, so you will actually need to lift and shift it into the US.

Yes. And I don't know much about how this wallet will turn out, but I think when they start to develop this, they will discover a lot of interesting use cases and edge cases because businesses, they transact in very many different ways and they have different ways of conducting their business. So, some need 3 people to authorize a payment. For others, the receptionist can order up to $100,000, let's say. So, there are many, like, these internal policies which will be important to kind of take into account when developing such a wallet.

Yeah, I understand. And it's— there is no rule, there's no regulation that forces you to do something. It's more best practice than anything else.

Yes. And it also has to be very easy to use, especially in e-commerce setting where conversion is king, as you know. So, if the wallet is too clunky to use, let's say, or takes too much time to—

Then they'll fall into old habits.

Then they will fall into old habits.

Well, if you look at the company too, you mentioned you have a strong next step into the US. What's next? What's next on the horizon?

Well, next after that is Asia.

I was expecting to hear Asia much earlier in the conversation.

Yes.

Because there's a lot of trade happening there, but there's probably a good reason.

We can only do so much at once, and the US is a huge market. Like, our strategy there with, okay, going to a new continent is more, can we find some customers who are operating in these new markets and can we launch together with them? And that's a good way for us to test the waters together with the customer, like, through a partnership. And that also makes it possible for us to adapt to the various intricacies of the particular—

But at a slower pace, not a big pace.

At a bit slower pace.

Well, Joachim, you know what? We're almost at the end of this conversation. It was really nice talking to you, but what I always want to ask as a last sort of question is that who should contact you and how do they do that?

Oh, you can, you can shoot me a message on LinkedIn, although I'm not the best at keeping track of my LinkedIn inbox these days. There are so many bots sending me messages.

Oops.

But I would do that, or you can send me an email.

All right, well, thank you very much again. Thank you also to the audience. This was it. These were the 2 interviews straight from Milan, but stay tuned because Adfai will come with a lot more insights in the fintech industry. Thank you very much.

Thank you. Thanks for listening to another episode of the Connector Podcast. To connect and keep up to date with all the latest, Head over to www.jointheconnector.com or hit subscribe via your podcast streaming platform.