Arival Bank’s primary customers are international technology firms. The bank offers these companies USD-based bank accounts, and supports both domestic and international payments for global technology companies. Arival so far has onboarded more than 100 business customers from more than 25 countries, with the biggest demand coming from firms in the U.S., Canada, the U.K., European Union, and Singapore. Arival has experienced 1.7x month-over-month growth and boasts $13 million in assets under management.

Read more: Finovate blog

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Read more: Tearsheet

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After two years of laying the groundwork, crypto-friendly Arival Bank is launching in beta Thursday. (Yes, even a bank can “launch in beta” these days.)

To be precise, Arival is more of a fintech startup than a bank in the traditional sense. A team of 20 with offices in Singapore, Puerto Rico and Miami, Fla., it plans to provide banking accounts to crypto startups via its sponsor bank, Puerto Rico-based San Juan Mercantile Bank and Trust.

But there’s a catch: if you want to bank with Arival and you own crypto you also need to show what’s in your wallet. 

The firm is using tools from the blockchain analysis firm Elliptic to scan the crypto addresses that onboarding clients provide and see if there are any suspicious transactions. 

“To the extent that Arival will be servicing crypto customers, we take very seriously the need to complete due diligence to ensure they are regulated and legally compliant issuers. Arival has no intention of servicing non-compliant entities or bad actors,” such as those under the U.S. sanctions, co-founder and chief operating officer Jeremy Berger said.   

The conditions are a stark reminder of the cryptocurrency industry’s uneasy relationship with the legacy banking system. Traditional institutions have largely been loath to provide even basic accounts to the young sector’s startups, for fear of enforcement actions if they even inadvertently facilitate money laundering, sanctions violations or other financial crimes. The revenue from the relationships often isn’t enough to justify the risk in bankers’ minds, and the few willing to do business with crypto firms, therefore, take a belt-and-suspenders approach to customer due diligence.

While monitoring a client’s crypto dealings, Arival’s compliance department would pay attention to things like where the clients and their own customers come from, transaction volume on the wallets, “specific cryptocurrencies utilized, conducting a transaction with a shell company” and other factors, Berger said. 

The clients are obliged to report if they own crypto, and Arival will be looking out for publicly available information pointing at that, he said. “We do media checking so we see if the client has involvement in the crypto space, and then we make an educated guess that they do have a crypto wallet.” 

A failure to report the fact of owning crypto would put a client “in a high-risk category” and potentially lead to suspending the account “until further investigation and receipt of corroborating information,” Berger said. 

Early days

In the “beta” stage, clients will only be able to open a business account with Arival, park their funds and transfer it around the world if they need it, with more options coming later this year, Berger said.

In the pipeline for the coming months are individual accounts, card issuance, analytics products for businesses and remittances in different currencies. Arival is also aiming to introduce lending and deposit and savings products down the road. 

According to Berger, there are around 3,000 prospects on Arival’s waiting list, and the firm will now start onboarding those clients. They come mostly from U.S., U.K, E.U., Hong Kong, Singapore and more than 60 other countries. 

Potential clients, Berger said, include new venture-backed crypto and fintech startups; crypto exchanges overseas that want to allow dollar deposits but have a hard time opening a U.S. bank account; independent contractors; and micro-businesses of three to five employees. 

All of those businesses can open an account with Arival without visiting a physical office, Berger said. Crypto disclosures aside, the know-your-customer (KYC) procedure is quite painstaking, he said: a potential client needs to submit a selfie, a video, and three types of identifying documents. 

Then, Arival runs the data through multiple datasets, from social media monitoring to face-recognition tools. 

Licensing challenges

Arival applied for a Puerto Rico International Financial Entity (IFE) license in August 2018, because it is easier to get than a U.S. bank charter. However, the process turned out to be far from easy anyway: Arival has only received a preliminary approval (“permit to organize”) so far. 

Part of the reason was that the Puerto Rico authorities have been dealing with hectic times recently, with U.S. regulators cracking down on the country’s banking industry last summer and the coronavirus pandemic leaving government offices shut for almost two months this year, Berger said. 

However, Arival is on its way for a full IFE license and has made overtures in other jurisdictions as well: the firm applied for a digital wholesale banking license in Singapore and an electronic money institution (EMI) license in Lithuania, Berger said. 

Igor Pesin, Arival’s co-founder and chief financial officer, said that having a variety of licenses will help the firm become “a borderless digital bank and banking-as-a-service partner for global fintech startups.” 

Arival was founded more than two years ago by a small team of fintech professionals from Russia and the U.S. with a focus on crypto entrepreneurs and gig economy workers, who may find it hard to get business accounts with traditional banks. 

The company raised $2.4 million via a crowdfunding campaign at SeedInvest and is now raising its Series A round, Berger said.  

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In June, Singapore’s regulator will hand licences to three new wholesale digital banks in a bid to better serve under-banked SMEs. Euromoney talks to Arival Bank, a fintech firm aiming to snag a licence and use it to fuel its global ambitions.

And so to the next stage of digital financial disruption. Last summer, the Monetary Authority of Singapore (MAS) said it would accept bids for five new virtual banking licences, with the winners to be announced around June 2020.

The MAS says it received 21 tenders and that the bids break down into two types. At least five bids have been lodged for full-service digital banks, to be whittled down to two by mid-year. Licensees have to stump up S$1.5 billion ($1.08 billion) in paid-up capital, must be based in Singapore and ultimately controlled by a local business interest.

Then there are the licences for new digital wholesale banks, coveted by at least nine companies and consortia. This is new and a further sign that disruption is moving beyond retail to the nuts and bolts of wholesale banking. 

The applicants include some of the biggest names in fintech and in technology in general. Among those bidding for a wholesale licence are Chinese firms Ant Financial and TikTok, and Singaporean internet operators Sea and Razer. Several are consortia, bringing together Hong Kong financial group AMTD with Chinese smartphone maker Xiaomi, and telecoms operator Singtel with delivery firm Grab.

Some are firms few will know outside the world of fintech. Take Arival, founded in 2017 in Singapore with a stated mission to “bring a new level of banking service” to small and medium-sized enterprises. 

Our initial customer focus is tech startups. That is the world where we most resonate. Within two years, we will be a leading financial provider for these firms, their go-to digital bank   

Jeremy Berger, Arival

When Euromoney meets its co-founder and COO Jeremy Berger, he is in Miami overseeing a Puerto Rico-based team in the final throes of applying for a US digital bank licence. 

Berger spends a lot of time in the air. Arival is also applying for a full digital banking licence in Lithuania, where Berger’s team is about to open an office in the capital Vilnius. 

Other markets on the firm’s radar are Malaysia, the UK, Australia and the UAE, with Hong Kong and Taiwan also on its wish list. But it is Singapore that interests the young firm most. 

Berger met his business partners, chief executive Vladislav Solodkiy and president Igor Pesin, both Russian nationals, at Money 20/20, an annual conference in Las Vegas about the future of payments and fintech. 

Solodkiy, who cut his teeth in media and marketing at two of Russia’s largest lenders, Russian Standard Bank and Alfa Bank, before jumping into fintech, launched Arival in October 2017. Pesin and Berger joined a few months later. 

Solodkiy’s CV is surely a sign of things to come as banking becomes more seamless and online. The leading providers of the future, Berger reckons, will be a melting pot of “industry experts, designers, artists, marketing gurus and young entrepreneurs”. 

He says that as a rule, virtual lenders “prefer to hire young, hungry and driven individuals with a clear mind and the willingness to learn, adapt and innovate” rather than employing “old bankers”.

‘Startup paradise’

Singapore was the obvious place to locate Arival’s global operations, Berger says, pointing to its global outlook and willingness to welcome outsiders. 

“It’s a startup paradise, with a lot of foreign-run fintechs, a supportive ecosystem and real fintech talent,” he says. “It’s full of ambitious digital firms looking for innovative digital financial services.” 

The firm spent its early days helping corporates and mainstream lenders tackle compliance issues, including money laundering, and little else. But given its history – Arival sprung out of a $40 million venture capital firm called Life.Sreda, whose early fintech deals include a profitable investment in Russian neo-lender Rocketbank – its ambitions were always set on becoming a transnational digital bank.

Then came last year’s announcement by the MAS. 

Singapore at the state level is a cautious operator, focused on pursuing accretive gains while keeping an eye on the bigger, long-term picture. The new wholesale licences fit into this framework. It involves risk, but it is contained. 

Innovation is the aim, but it is kept caged until it is fully trusted. Successful applicants will be allowed to serve SMEs and other non-retail segments, and can only take fixed deposits of over S$250,000 from individuals. 

Each licensee must have to hand minimum paid-up capital of S$100 million and will be restricted at first to just one physical place of business. After the winners are announced, there will be a period of bedding-in, before operations start in earnest from mid 2021. If the regulator likes what it sees, the new banks will be allowed progressively to expand their capital base, up to a limit of S$1.5 billion, and their service offering. 

Berger wants Arival to be “a real borderless fintech bank for rejected businesses and entrepreneurs”, eventually with operations around the world. 

While the application process in Singapore is still at a “very nascent” stage, he is “confident that we will be one of the finalists”.

Should it win, the firm will target its product offering at fintechs and the wider digital community, including bloggers, streamers and influencers, but also charities and freelancers. 

“Our initial customer focus is tech startups,” Berger says. “That is the world where we most resonate.” 

Higher-risk customers are the reason why we go to bed thinking about compliance and wake up to the very same thought   

Jeremy Berger

Based on an internal digital analysis of 2,000 customers, Arival identified 12 products to integrate into its platform, including business bank accounts (delivered via its own banking platform, ArivalOS), international payment transfers, foreign exchange, business expense and debit cards, factoring, and financial management services, including analytics and accounting. 

“Within two years, we will be a leading financial provider for these firms, their go-to digital bank,” Berger says. 

He is keen to stress that Arival will be “the first fintech bank for SMEs. We’re not a neobank or challenger bank.” 

He says neobanks that align with traditional lenders are too restricted in their ability to serve the under-banked, while challenger banks such as N26 and Revolut are often seen as back-up banks rather than primary providers. 

Arival’s “full range of products and services” and open infrastructure will, he hopes, result in customers ditching their traditional provider and hopping on board.

He is careful not to rock the boat too much, however, balancing the firm’s ambitions with a nod to Singapore’s need to create growth and guarantee social cohesion. That means focusing on job creation and on innovation, but not at the expense of allowing margins and good ideas to be crushed by over-competition. 

To that end, he says: “I don’t think we will disrupt the local market. It’s dominated by three or four banks and that’s not going to change anytime soon. But more fintechs will spring up here or come to Singapore, and that development coexists nicely with our wider strategy.”

Insiders reckon the bidding battle for a full digital licence will come down to which firms are better known and more reputable, implicitly trusted by government and bolted firmly to the economy. 

That should put the Singtel-Grab consortium in prime position. Many see it as a shoo-in for one of the full licences, although Eugene Tarzimanov, Asia senior credit officer at Moody’s financial institutions group, points to the threat of a telecommunications firm “entering the retail banking space and actively cross-selling banking products to its already vast client base, by adding perks such as free Wi-Fi. If they get the right partner who knows how to do banking and credit, they will certainly pose a competitive threat.”

On the wholesale side, the ball is still up in the air. 

Dennis Khoo, TMRW Digital Dennis Khoo, regional head at TMRW Digital Group, Singapore lender UOB’s first fully digital bank, says: “The questions the regulator will ask are: ‘First, what are you bringing to the table that your rivals aren’t; and second, are you raising productivity?’ That’s a key question given Singapore’s incremental gains-based growth model.” 

In terms of paid-up capital, the MAS has set the bar at a reasonable height for applicants. It’s a decent chunk of money. But as Khoo notes sagely: “Banking isn’t necessarily something you can ‘try’.” 

He believes the big opportunity for new digital wholesale banks will be in disbursing credit to underserved or unbanked SMEs. But he adds that a new entrant “must have a different way to underwrite. New digital wholesale players will likely focus on the credit business and then expand into FX and remittances. 

“Data will be key in the credit business. If you can find better, quicker and more seamless ways to underwrite, you’re always going to have an advantage. And there, good data and interpreting that data will be important.” 

USP

Arival clearly marked out several of those questions in advance. Berger says the firm will “seek to bundle fintechs together. The regulator wants to encourage more fintechs to work together on one banking platform. That’s where we come in.” 

Where the firm can offer a unique selling proposition in the eyes of the regulator is its expertise in compliance and background checks. This is no small thing.  Arival’s A.ID platform is described by Berger as “cutting-edge compliance”, a “differentiator” that performs know-your-customer checks, tackles money laundering and meets compliance needs. 

Most banks, he says, view compliance as “an obligation, a headache and an expense. It isn’t their passion or key feature, or a channel to generating money for their founders and shareholders. Compliance is our ‘secret sauce’.”

You can call that good marketing or good anticipation, a sign of a company working to its strengths. Arival was aware from the start that the regulator’s chief concerns would revolve around compliance. 

“We wanted to be able to answer questions around how we check our clients and on-board them, and why our bank won’t be used for money laundering or other criminal activities,” says Berger. 

Compliance, he says, is “really what keeps the regulators’ blood flowing. Higher-risk customers are the reason why we go to bed thinking about compliance and wake up to the very same thought”. 

The regulator will be heartened by those words. If there is a concern over the new digital wholesale banking applicants, beyond an ability to stay the course, it is the threat presented by the darker side of the digital world. 

Hackers working for bad actors like to prod and poke at new digital platforms, locate any soft spots and use them to launder and pilfer for profit. 

Disruption in retail banking is established, a fact and a way of life. There is no turning back the clock. This summer in Singapore, a new chapter in this story will start, as three new financial providers are handed the right to offer digital wholesale products to underserved corporates in the Lion City. 

After that, it’s up to the disruptors to prove they are worthy of the customer’s and the regulator’s trust. 

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Singapore-based Arival Bank, a fintech bank for small and medium-sized enterprises and crypto businesses, has applied for a digital wholesale banking license in the city-state.

Arival was founded in 2017 as an internal venture spun out VC firm Life.Sreda. The company is led by CEO Vladislav Solodkiy, chief financial officer Igor Pesin, and chief operating officer Jeremy Berger, who are all part of the VC firm’s leadership team.

With its bid, Arival plans to focus on serving what it calls “abnormal” clients or higher-risk customers, who usually get turned down by more traditional banks, according to a Business Times report.

“The focus on ‘abnormal’ or underbanked SMEs gives us the opportunity to not compete with other digital or traditional banks, avoid spending money on advertising or customer acquisition, and allows us to focus on margins,” Berger told the Business Times.

The digital bank hopeful also said it plans to aggregate fintech products from third-party service providers and make them available on a single platform powered by open application programming interfaces. In addition, it looks to offer a banking-as-a-service platform that would help other fintech firms launch.

Berger noted that the company’s “compliance-as-a-service” product, which provides easily integrated compliance solutions, also serves as a key differentiating factor in favor of Arival.

According to its website, Arival is not a bank yet, but it has applied for a US-based international banking license that is on track to be granted this year. Berger told the Business Times that the US license, which is in the final stages of receiving preliminary approval, will be “complementary” to the Singapore license.

“It gives us a unique entry to the US banking market as well, and allows us to contribute to an ecosystem that is in need of a natural remedy for economic boost such as fintech,” he added.

In addition to the US and Singapore, Arival has also started the application process for a similar license in Europe and looks to receive it by the end of the year.

Arival joins a growing list of companies that have announced their Singapore digital banking bids: Grab and Singtel, Ant Financial, Sea, and an Enigma-led consortium, among others. Singapura Finance and digital payment startup MatchMove Pay have also reportedly teamed up to apply for a digital full bank license in the city-state.

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FinovateAsia 2018 Best of Show winner Arival Bank announced this week that it raised $2.3 million (£1.87 million) in a pre-Series A, equity crowdfunding campaign. The Singapore-based fintech bank for businesses and entrepreneurs soared past its fundraising target of $864,500 (£700,000), and now boasts a pre-money valuation of more than $14.8 million (£12 million).

“We’re not a neobank or challenger bank,” the company noted in its crowdfunding pitch. “We think of ourselves as the first fintech bank. We’ll exist as a licensed bank, (with) forward-thinking compliance (as) our secret sauce, and we plan to bundle some of the world’s hottest fintech products inside one banking platform.”

The fundraising follows the company’s $1 million seed round from April of last year. The new capital will help support licensing, product development, and effectively going live. The company is targeting a series A early in 2020 to capitalize the bank in the U.S., as well as to expand operations globally.

The campaign also marks the first time a digital bank has conducted an equity crowdfunding raise in the U.S. Seedinvest, an SEC-licensed broker dealer platform based in New York, spearheaded the fundraising with Crowdcube (the largest platform in the U.K.) in the role of joint partner.

“This is atypical for a digital banking startup, especially in the U.S.,” Arival Bank COO Jeremy Berger explained. “However, this was something we presented to the local regulators as we enter one of the most sophisticated banking markets in the world. Other digital banks in Europe have had real success with similar raises as it opens the opportunity to build camaraderie with future customers.”

Currently, Arival Bank has more than 1,000 requests from individuals and entities interested in opening accounts with the firm as it seeks to provide an alternative for “abnormal clients” traditional banks and even some digital banks do not serve. The firm’s main target focus currently are crypto- and blockchain-related businesses – who are chronically underbanked – as well as tech startups, and freelancers. The company, which applied for a U.S.-based international banking license last year, is betting that providing SMEs with access to innovative third party financial products and services – as well as “kick-ass customer service” and a unified banking interface – will go a long way toward supporting the next generation of businesses.

At FinovateAsia 2018 in Hong Kong, Arival Bank demonstrated ArivalOS, a digital banking platform, powered by open APIs, that features integrated third party fintech solutions designed specifically for SMEs. ArivalOS offers bank accounts, money transfers, debit cards, mPOS and factoring, and SME loans. The company also offers A.ID, a “virtual compliance manager” that provides a full-stack compliance solution that covers KYC, onboarding, AML and transaction monitoring.

Arival Bank was founded in 2017 by Jeremy Berger (COO), Igor Pesin (CFO) and Vladislav Solodkiy (CEO) – also known as the team behind Life.SREDA venture capital. Berger was recognized by Forbes this year in its 30 Under 30 list of the world’s top young finance professionals. Pesin is one of the top-ranked fintech influencers in Southeast Asia according to Lattice80, and is author of the annual fintech report, Money of the Future. Solodkiy is author of the book, The First Fintech Bank’s Arrival, now in its second edition, that inspired the very idea for Arival.

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Singapore-based neobank, Arival, has surpassed its £700,000 crowdfunding target on Crowdcube following its announcement in June to become the first licensed digital bank in the US this year.

The firm said it has designed an account for a customer base of users rejected by other banks. It will target E-Residency businesses, expats and refugees, cryptocurrency and blockchain-related businesses, politically exposed persons, and digital influencers.

It has raised £1,164,948 at the time of writing, before it closes the round tomorrow, 31^stSeptember 2019.

The Singapore-based firm, which has a pre-money valuation £12,012,061, said it while it is not a bank yet, it has applied for a US-based international banking license and is on track to receive it this year.

Founded in 2017 by two FinTech venture capitalists and a FinTech entrepreneur, the team has prior investments in digital banks such as Simple, Moven, Fidor, and RocketBank.

It describes itself as a business bank which is a rival to both traditional and digital banks.

The firm has built its own compliance technology, A.ID, which will use facial scanning and compliance with the US Federal Reserve Bank.

The firm, which described this technology as its “special sauce” has plans to white label the tech to banks in future.

“We understand that we aggregate a lot of client data — to work with high-risk clients we need to trust them, and to be able to do this we need to see that the company and its representative are open to dialogue with us,” wrote CEO and founder Slava Solodkiy in a blog.

“If big international banks think that what we do and how we do it is more convenient for the client, more reliable in terms of verification and cheaper, it is a fantastic opportunity for us to test and perfect our system based on the experience of our bank and other banks as well.”

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Digital challenger bank Arival is now accepting reservations for preferred stock on SeedInvest.

Arival will be a crypto-friendly bank – unlike most traditional banks in the United States which tend to be crypto-averse.

The bank was founded on the notion that banks in many places around the world are closing accounts of crypto-related businesses as they are fearful of any collateral ramifications to holding these types of accounts. Arival says they surveyed “hundreds” of Fintech and blockchain startups in their network and 90% indicated they have encountered problems in some capacity.

But it is not only the crypto-sector that Arival wants to service. The digital-only bank wants to provide banking services to all SMEs and GIG economy companies seeking an alternative to the high cost, low service, experience of traditional brick and mortar banks.

Based in Puerto Rico, Arival has applied for banking license under the International Financial Services Act (IFE Act) and expects approval soon.

The IFE license will provide Arival with access to the US Federal Reserve system while still being an offshore bank which makes the license unique. Even better, an IFE license means the bank is subjected to just a 4% tax rate. The relatively new law has become fairly popular due to the advantageous structure and access to the US market.

Arival also states it has commenced the process for a license in Europe too.

Jeremy Berger, co-founder and COO of Arival, wrote a great blog post on the banking license odyssey. As one would expect, receiving a banking license is not easy and it takes a lot of time.

As for its tech stack, Arival is working with Mbanq to “integrate cloud-based core banking technology.” Regulatory compliance will be core to Arival’s operations.

The actual bank plans to launch in October 2019.

Arival Bank was founded in 2017 by Slava Solodkiy & Igor Pesin. The duo had found some success by backing some well known challenger banks like Fidor or Moven. The experience in the challenger bank world and the challenge crypto businesses were experiencing in getting access to simple bank accounts were enough to propel the entrepreneurs to launch their own bank.

Having previously raised $1 million in seed capital, it appears that Arival is ready for the next step. Crowdfunding capital is a well-trodden path for digital banks as it guarantees a boost in name recognition while driving bank customers as your shareholders will definitely want the bank to succeed.

So what do you get when you invest in Arival? 

For the moment, SeedInvest is only taking non-binding reservations. There will be a minimum investment of $10,000 per investor. The round seeks $3 million at a pre-money valuation of $15 million for preferred equity. Few other details of the security are available as of yet.

It has been reported that SeedInvest partner platform Crowdcube will also be co-listing the offer which makes a lot of sense. Banking is regulated at the national level but services are provided globally. Geographic boundaries are becoming less important for digital natives. Consumers and SMEs just want great banking services at a low cost, all available on a smartphone. And that’s what Arival hopes to provide.

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Apple’s new credit card has a curious security feature that will make it much more difficult to carry out credit card fraud.

The aptly named Apple Card is a new credit card, built into your iPhone Wallet app, which the company says will help customers live a “healthier” financial lifestyle. The card is designed to replace your traditional credit card and give you perks, such as daily cash. Chief among the benefits is a range of security and privacy features, which Apple says — unlike traditional credit card providers — the company doesn’t know where a customer shopped, what they bought or how much they paid.

But its one feature — a one-time unique dynamic security code — will make it nearly impossible for anyone to use the credit card to make fraudulent purchases.

That three-digit card verification value — or a CVV — on the back of your credit card is usually your last line of defense if someone steals your credit card number, such as if your card is cloned or skimmed by a dodgy ATM or stolen from a website through a phishing attack.

But rotating the security code will increase the difficulty for an attacker to use your card without your permission.

The idea of a dynamic credit card number first came about a few years ago with the Motion Code credit card concept, built by Oberthur Technologies, which included a randomly generating number built into a tiny display on the back of the card. The only downside is if someone steals your physical card.

Since then, other credit card makers — including Mastercard, the issuing payment provider for Apple Card — have worked to integrate biometric solutions instead. By enabling a fingerprint sensor on the card, powered by the card machine it was entered into, it was hoped that fraudulent purchases would be impossible. Other credit cards have worked to roll out biometric-powered credit cards. Again — a big letdown was online fraud, which still accounts for a huge proportion of fraud.

Apple Card seems to meld the two things: a virtual credit card with a rotating security code, protected by a biometric, like Touch ID or Face ID in newer devices. Better yet, the company’s debut physical titanium credit card won’t even have a credit card number.

Now if someone wants to commit fraud, they need to steal your phone and your face or fingerprint.

Like other sensitive data — such as health, financial and biometric data — any banking and credit card data is stored on the device’s security chip, known as the secure enclave.

Apple Card will be available in the U.S. later this summer.

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In the rapidly evolving world of fintechs, cutting-edge intermediaries that seek to disrupt traditional banking or cater to underserved niches, success depends on rigorous customer screening and proactive regulatory compliance, according to Vladislav (Slava) Solodkiy, cofounder and CEO of Puerto Rico-based Arival Bank. Solodkiy is also managing partner at Life.SREDA, a Singapore-based venture capital firm that over the past six years has invested in more than 20 fintech startups and successfully exited from nine. He has documented his journey from a fintech investor to a founder of a digital bank in his book, The First Fintech Bank’s Arival – From Book to Bank in 12 Months.

Arival claims to be the first digital fintech bank to be focused on small businesses, the so-called “gig economy” of entrepreneurs, freelancers and startups, and small and medium-sized business enterprises that use crypto currencies to receive and pay money. While it may be difficult to identify the ‘bad guys’ among those customers — who could be money launderers or others with dubious backgrounds — prompt reporting of problem cases to regulators and remedial action to prevent future occurrences could save fintechs from hefty fines, according to Solodkiy and Arival’s chief operating officer, Jeremy Berger. Arival is now in the process of securing a federal banking license in the U.S. and exploring similar licenses in Europe and Asia. Solodkiy and Berger shared insights into their strategies for Arival Bank and the road ahead for fintechs in an interview with Knowledge@Wharton.

Knowledge@Wharton:  How did you come to write this book, and how did that lead to building a bank?

Vladislav Solodkiy:  The first edition of the book summarizes five years of my experience in the fintech industry. The second, updated edition, reflects comments from readers, including industry experts. Our investments and exits are well known in the fintech industry, because we publish our Money of the Future reports. Many people, after reading our reports, asked me to predict the next big thing in the fintech industry. That is how I came up this idea of the book, where I tried to predict and imagine what could happen in fintech over the next few years.

Knowledge@Wharton:  What does the fintech bank of the future look like? How is it different from a traditional bank in terms of its opportunities and its risks?

Solodkiy:  When neo-banks or challenger banks like Simple Bank (in Portland, Oregon) came to the market, they were very different in comparison with traditional banks, and relied on online channels of distribution. (Neo-banks typically do not have banking licenses and partner with traditional banks, while challenger banks – called so for “challenging” traditional banking – possess bank licenses and target areas underserved by bigger, traditional banks.) However, they had a branch-oriented approach. [As their customer], you first must go to the physical branch to sign a few papers to start your relationship with the bank, and after that you can use the bank’s other products and services including online access.

The first wave of neo-banks and challenger banks started with a mobile-first approach. You could download your bank’s app from the Apple Store or Google Play and start your relationships without any obligation to visit a physical branch, or to sign any physical documents. You could begin the relationship immediately and start using the bank’s services.

The first wave of digital banks provided basic products and services such as money transfers. But this approach does not provide you as the customer an ability to replace your traditional bank because your traditional bank could deliver up to 20 product verticals to cover all your possible needs.

“Three awards in three weeks is good sign from the universe that we are doing something new and attractive for our audience.” –Vladislav Solodkiy

The second wave of digital banks, which I describe in my book, could replace traditional banks for you as a customer, and deliver all possible products and services. I describe the different ways for new players to deliver those services, and different scenarios for the market itself, and how to build or even to imagine these banks.

Knowledge@Wharton:  What was the significance of the name of the bank?

Solodkiy:  When Jeremy Berger, co-founder and chief operations officer of Arival Bank, and I decided to build this bank, we also started to think about how to brand and name this bank. Jeremy is only 24 years old, and the youngest digital banker in the world at this moment. We took this game of words, like the arrival of the first fintech bank.

We have won three fintech awards in three weeks. (In October 2018, Arival Bank won an award at the FinovateAsia conference in Hong Kong. A week later, it won the FintechInn competition in Vilnius, Lithuania, organized by Central Bank of Lithuania. Next, it won the silver at the 2018 Driven x Design award of the London Design Awards.) I think three awards in three weeks is a good sign from the universe that we are doing something new and attractive for our audience.

Knowledge@Wharton:  Why do you think Arival Bank won these awards? What is it about the bank that appealed to the judges in all three locations?

Jeremy Berger:  Three key elements of our bank attract businesses and judges. The first is we have a heavy approach in our compliance and our KYC (Know Your Customer) processes. We are targeting underbanked businesses, if you will, like SMEs, startups, freelancers, charity organizations, and even crypto-related businesses.

The second is the way we deliver products and services. We have an open API banking approach. (APIs, or application programming interfaces, allow different pieces of software to work with each other, making it possible for third party developers to develop solutions to problems.) This means we can partner with hot fintechs in the market and deliver their products and services that are designed for business customers. Third, we have an authentic strategy in terms of interacting with customers. We don’t believe in chatbots; we believe in having this authentic communication that is transparent. We make a big effort in understanding our customers and their day-to-day business needs.

Knowledge@Wharton:  What led you to launch Arival Bank in Puerto Rico? What challenges did you face initially in setting up the bank? Are there any special regulatory issues in setting up a fintech bank in the U.S. compared with other countries?

Berger:  My background relates to Puerto Rico. I went to university in South Florida, and so I was familiar with some of the opportunities emerging in Puerto Rico. After [Hurricane Maria] struck in 2017, the Puerto Rico economy was looking for rejuvenation, and fintech might be a natural remedy for economic boosts. The government has been extremely vocal in encouraging startups to come set up shop here, and in looking for fintechs, VCs, and so forth.

Initially, after we started getting all this traction and publicity with Slava’s book, we looked at 20 or 30 smaller banks in Europe and the U.S., in terms of buying them. But then we realized buying a bank doesn’t happen overnight. The amount of resources, capital and time it takes is equivalent to building it from scratch and going through the licensing process. So, we started looking at different jurisdictions.

In Asia, Hong Kong offers a virtual banking license; the U.K. has an e-money license, and in different places in Europe there are EMIs, or e-money institutions. The more due diligence we did, the more we realized that a lot of the banking systems globally try to emulate the U.S. market, in terms of its sophistication and its durability. Everything was leading us back to the U.S. market.

“The Puerto Rico economy was looking for rejuvenation, and fintech might be a natural remedy for economic boosts.” –Jeremy Berger

I am not going to say [the U.S. banking industry] is the most innovative, because it is not, and it is not due to lack of innovative minds; it is because of how competitive the playing field is. There are almost 9,000 small or community banks in the U.S., so it is hard for banks to come out on top. In countries like Italy, Poland, and even in Africa, you see many innovative digital banks.

Puerto Rico is a U.S. territory, and it is under the U.S. federal banking system, so there are many advantages and benefits of being in the Puerto Rican banking system, [including] allowing a gateway to the U.S. market. The U.S. is the hardest market to get into. We thought that if we are going to do it right and we want the integrity and the credibility going forward, why not start with the hardest market? That is how we identified Puerto Rico as the initial entry point.

At the same time, we are already expanding into different markets. The EMI license in the EU is certainly on our agenda. We hope to apply for that at the end of this year. We are also looking at [securing an] e-money license in the U.K. We want to move as global as fast as possible.

Solodkiy:  We also are in negotiations with regulators in Japan, Hong Kong, Singapore and Dubai. The U.S. is like the mother market for us. Digital banking started in the U.S.

Knowledge@Wharton:  How do you think about who your customers are, and how do you use data and analytics to gain a competitive advantage over traditional banks?

Berger:  The story of Arival started about a year-and-a-half ago when our VC fund, Life.SREDA, was approached by hundreds of different businesses with the same problem. Some banks were closing and freezing their accounts, and crypto-related businesses, freelancers, startups, independent contractors, and even charity organizations were facing this challenge of being disconnected from the banking system.

After three or four months of research, we understood that the problem was universal. You could read stories any day of the week that banks in Australia, Thailand, Israel, and the U.S. were closing or freezing the accounts of those businesses. That is how we identified them as our target customers.

We know there is huge demand and opportunity, but we want to make sure we are targeting an exclusive class – those that have obtainable data, where we can evaluate their risk ratings. We evaluate them in terms of customer retention or longevity. We believe that data is the driving force of the future of banking.

Solodkiy:  When you decide to build a licensed bank, the regulator – the Federal Reserve –– will listen to your innovative ideas and your predictions for the fintech industry. But 99% of their questions will be on compliance, compliance, compliance. The disrupters mostly care about innovation, but regulators must gauge the risk, and [protect] the citizens of the country.

When we told the regulator about the types of customers we want to serve, their immediately answer was ‘It is an interesting idea, and for sure it is not forbidden, but you have to understand that these are high-risk clients.’ They referred to not only crypto-related customers, but also charity funds, legal sellers of weed in different U.S. states, and other businesses excluded from banking system.

When you decide to work with such high-risk clients, you must show [the regulator] that you are able to implement all the technologies in KYC and AML (anti-money laundering) to track origin of their money and their social connections. It is everything about big-data analysis – not only transactional data and financial data, but also social data, the devices they use, their friends, colleagues, and family members, who the senders and receivers of money are, who their colleagues are and other social connections.

“The more due diligence we did, the more we realized that a lot of the banking systems globally try to emulate the U.S. market, in terms of its sophistication and its durability.” –Jeremy Berger

Fourteen banks came to us when they found how we go about our compliance processes and asked us if they could use our compliance as a service instead of setting up their own compliance department. One of 10 biggest companies in the world that I cannot name came to us and asked us if they could use our KYC model [for their processes in] ‘know your employees’, ‘know your partners’, ‘know your businesses’, and ‘know your customers’. One of the biggest messenger companies, which has several hundreds of millions of users, asked if they could use our compliance model.

Knowledge@Wharton:  How do you ensure compliance with banking regulations, especially the Know Your Customer and Anti-Money Laundering rules, as you pursue new opportunities with high- risk clients like crypto-businesses?

Berger:  From the get-go we had to be transparent and open with the regulators. From day one we made it clear that these are the kinds of businesses we want to go after. At the same time, we are not a crypto bank, so we share a lot of similarities with traditional banks in terms of fiat [currency] transactions and such like.

Going back to your question regarding compliance, we had to engage some of the top names in the compliance consulting world. In addition, it is important to understand the three most important things in compliance: customer, product, and geography. That is basically about who your customers are, what they want from you, and where they are located. Once you obtain this information during the KYC process, you put them into your risk matrix, which should tell you the risk rating. Based on this risk rating, you proceed internally with due diligence with KYC verifications that you need to validate for every customer that you either want to onboard or not.

Going back to this old school compliance model is important. At the same time it is crucial to understand where compliance is heading. Right now, with traditional banks, most of us can agree it is very time consuming, costly and done manually most of the time. It is not designed for high-risk businesses.

We have made it our goal and priority to develop compliance that is designed for these kinds of businesses. We show them that we understand the businesses, what they are doing day to day, what kind of investors they interact with, what kind of auditing should we expect from them, and what kind of business plans we evaluate as being feasible.

At the same time, we are looking ahead. Three, five or eight years down the road, we see a big level of deep tech, machine learning and data analytics in banking, because we want to remedy the faults you see now with traditional banks. If we could automate many of these processes, it will make compliance a lot easier, and increase the chances of us effectively onboarding high-risk businesses.

Solodkiy: [First], before creating this cutting-edge solution for ourselves, we tried to become a customer for other compliance firms. We found that while many companies were trying to provide solutions and technologies for the KYC process, only few provide solutions for the Know Your Business, or KYB process.

Second, all compliance firms focus on the onboarding process. But 80% to 90% of these ‘bad guys’ can be verified as ‘bad guys’ only when they proceed with a transaction. This is clear from recent investigations by the U.S. government in money laundering cases. The real bad guys – or the big money laundering specialists – will be able for sure to successfully proceed with your onboarding process. But where you could find them, track them, and cage them is only during ongoing compliance. Only a few companies worldwide provide solutions not only for onboarding verification but also for ongoing compliance.

“For all banks across the world, compliance is expensive and a headache. For our bank, it is a passion and we have a real love for it.” –Vladislav Solodkiy

The reporting and the architecture of your compliance process are also important. An open API-based technology could be used not only by yourself but also by other companies, including other startups. In the beginning, we created our architecture as open architecture, based on open APIs. A third-party player could use each element, including our compliance solution.

For all banks across the world, compliance is expensive and a headache. For our bank, it is a passion and we have a real love for it. It is one of the biggest income streams for the bank.

Knowledge@Wharton: How do you work with other institutions as part of the financial services ecosystem? Do you see other banks as competitors, or as partners, or both? How do you manage your relationships with them?

Berger: Many banks have approached us. We don’t see them as competitors. If anything, we want to create a learning platform, to educate one another, because certainly they know some things that we don’t, and we know some things that they don’t. This book is about how fintechs and banks need to collaborate and cooperate. There are many benefits and advantages to doing that, whether in monetization strategies, or market share, or sharing customers and referral agreements.

In terms of how we want to work with banks, we are looking at sub-licensing for expansion into different markets that are a little bit more conservative, especially in places in Asia, such as in Japan or in Singapore, where we are talking with some banks passively in terms of partnerships there.

It’s not that we have this anti-mentality against traditional banks. Of course, we want to do something a little bit differently, and we think this fintech banking strategy is real, and the time for it is now. That said, we don’t have an active approach in terms of partnering with [traditional] banks yet, but we certainly see some potential down the road.

Knowledge@Wharton:  What are the biggest risks you foresee for Arival bank in the future? How will you mitigate those risks?

Solodkiy:  The biggest risk is to onboard the wrong client, and wrong money from hidden sources of funds. We want to be super-transparent to regulators and other counterparts across the financial markets when we onboard the wrong customers.

[Two aspects are important here.] First, who will spot the mistake [when you onboard an undesirable customer]? If it is you or your bank, it is a plus for your karma. If the regulator [discovers that], it is a minus [for your bank]. Second, [a lot depends on] how fast you share information about such cases with the regulator. If you do it immediately, and in a transparent manner, it is a plus for your karma. If you wait a few months, or even years – like it happened recently with several banks – you could face fines from the regulator of hundreds of millions of dollars.

Third, it is important for the regulator to know what you have done before to predict and to hedge such risks. The fourth aspect is about what you will do after that the event. How would you upgrade your internal processes, compliance requirements and compliance technologies to avoid such risks with other clients?

If you can [satisfactorily] answer those four questions, nobody will punish you, because regulators in the U.S. and in other jurisdictions understand that you cannot protect 100% your business from potential enemies. Some wrong people will try to use your brand for their illegal plans.

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