Emerging markets have their own challenges when it comes to banking, where big, traditional financial institutions (FIs) are anything but efficient.
In an interview with Karen Webster, Vilash Poovala, founder and CEO of FinTech Oyster, said online financial platforms, powered by open banking, can serve as alternatives for business banking in a country where business banking seems an afterthought.
That can hobble an economy where nine of 10 businesses in the country are smaller firms and are responsible for the jobs and economic activity that create half of the country’s gross domestic product.
As Poovala told Webster: “We had to get a debit card by actually creating our own startup. It’s been 20 months, and we tried to get a debit card from some of the largest banks. Five times we went to a particular bank during COVID, and five times they had the debit card attached to the wrong company.”
For individuals, the process can be equally frustrating, mandating that they go in person to the branch to activate those cards — and the wait, of course, can feel interminable when one simply wants to have access to funds.
“The world doesn’t need another bank,” Poovala told Webster. “The world needs a FinTech operating system.”
Oyster, he added, can leverage the cultural mistrust of traditional banks in Mexico with the general trust that country’s citizenry places in foreign brands (Starbucks, he said by way of example, is ubiquitous and beloved in Mexico).
Widening Debit’s Acceptance
And there’s a niche for Oyster to fill, with some low-hanging fruit in debit transactions. Simply put, according to Poovala, banks do not view debit cards as part of their core suite of offerings. He also cited “banks’ aversion to taking on risk and fraud” in a proactive manner that leads them to create and promote new card offerings. For the traditional FIs, evolution is slow, he said, in what has traditionally been a “swipe” market, and where in a swipe market, fraud has traditionally been borne by the issuer.
As a result, he said, in the past no one got debit cards except large businesses — and even as the financial services industry moved to chip and pin, banks never caught up.
Against that backdrop, Oyster offers freelancers and small- to medium-sized businesses (SMBs) debit accounts. The company said last year that it had launched smart business accounts in tandem with Mastercard, where accounts can be activated within 24 hours after identity verification within Oyster’s app.
In terms of mechanics, account holders can make and accept transfers through an Interbank CLABE standard. The company issues two (Mastercard) debit cards to its users — a physical card and a digital one, which, as Poovala said, have separate BIN numbers (although they are linked to the same core account).
As for creating separate BIN, tied to the same account, with robust chargeback protections, Poovala said: “This was and has been a challenge and has been a challenge. But it's also an opportunity because in Mexico, this is very common that you never give your card to a waiter or at a gas station. If you give your card, you can forget about it.”
Fraud is a real risk when handing over the (tangible) plastic, said Poovala, especially when fraudsters lift the card data and then use that information to buy goods and services online.
In terms of protection, he said that the physical Oyster cards can only be used with physical, face-to-face transactions — all card-not-present, mail order and telephone order commerce has been blocked.
The physical card BIN, he said, “only supports physical transactions with a PIN or contactless transactions below a certain [transaction] amount.”
The separate card, he said, fosters an atmosphere of trust and safety.
As Webster noted, in the absence of widespread debit functionality, commerce and SMB growth may be relatively limited. And governments have an incentive to foster growth in debit payments because they want to collect tax revenue on cash transactions.
Asked by Webster whether SMBs or freelancers may in fact prefer to transact in cash (and perhaps skirt paying taxes), Poovala noted that “Mexico has a well-developed invoicing system” where taxes are based on invoices and not payments. (The country’s relatively advanced eInvoicing efforts stretch back well over a decade and were recently profiled by PYMNTS.)
“You can pay your invoices in cash,” he said, “but the invoice is already known to the IRS [in Mexico].”
Poovala said that as most SMBs struggle with payments, Oyster helps smooth the invoicing process by helping these smaller firms generate order forms and pay invoices via attached payment links (using cards and PayPal), which enables them to be paid faster.
(Poovala noted that Oyster guarantees funds and is required by Mexico’s laws to hold collateral against account balances.)
Fixing — And Verifying Business Ownership
Of course, SMBs can’t get debit cards (virtual or tangible) if they can’t get incorporated in the first place.
With a nod to recent laws (dating back to 2016) that make it easier for small businesses to incorporate, get off the ground and launch — via Simplified Stock Corporation — Poovala said the SMB landscape is shifting toward Oyster’s favor.
In the past, the banking system was so broken that in establishing ultimate beneficial ownership (UBO), articles of incorporation allowed business owners to assign people to stand in line and open up bank accounts on the UBO’s behalf.
That’s hardly conducive to a fraud-free environment as possible danger lurks in account takeovers and other schemes for the neo-bank like Oyster that seeks to provide banking as a service to nascent SMBs.
But as Poovala noted, “this has worked to our advantage,” as the company has a digital know-your-customer (KYC) process that can find all the tax IDs of shareholders and their percentages of ownership. Oyster sends those owners email links that request they verify themselves across mobile devices, and it follows up with video screenings and phone calls.
Looking ahead — and with $14 million in hand from a recent capital raising — Oyster’s near-term plans include obtaining a full banking license in Mexico, offering at least some forms of credit product geared toward SMBs, and forming partnerships with banks, although the focus for now will be on the direct-to-consumer/direct-to-business customer relationship.
"The way we see ourselves is as a financial hub,” Poovala told Webster, adding that “when we underwrite these businesses, we can sell them more financial products like credit, connect them to invoicing solutions, and make it really easy for them to understand their business’ mechanics on Oyster.”