Rethinking Banking for an 'Always in Beta' World

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Rethinking banking for an Always in Beta world Report | September 2015 ©iStockphoto.com/RawpixelLtd

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Paul is a 29 year old living in London. He’s a typical example of digital natives’ emerging financial behaviours around the world. He sees his bank merely as a place to store money, and uses a variety of apps to meet his specific transactional needs. Among others, he has experimented with You Need A Budget (Ynab) to track his budget, Paypal to pay for purchases, Venmo for peer-to-peer exchanges, and Acorns to invest. He has not settled on the financial service offers he currently uses, but constantly keeps an eye open for new ones that may be more convenient. Online payment processor Digital wallet Micro investment app Budgeting app 2 | Claro Partners + Anthemis Group “Ynab helps me have control over what I spend, but it’s also a great tool to learn about my own behaviour. If I can stick to it and make it work, it will be life changing for me!”

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Phil (24, London) uses his phone as his wallet. He mostly uses mobile payments, but keeps some cash and his debit card in his wallet just in case The new generation of banking customers have radically different behaviours and expectations. A growing crowd of FinTech startups have recognised this market opportunity. To stay relevant in this context, banks must rethink their business models and the orientation of their value propositions. 3 | Claro Partners + Anthemis Group

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Claro Partners and Anthemis Group have partnered to help financial institutions understand and be responsive to the changing lifestyles, values, and behaviours of 21st century customers, and the new value propositions emerging to serve them. We’re pleased to present our perspective on how banks can reimagine their offers and business models to serve a customer base that is increasingly shaped by the digital world. 4 | Claro Partners + Anthemis Group Partner banks of Always in Beta project came together in Barcelona

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Payfast provides online payment processing for the South African market including Bitcoin payments There is a growing gap between banks and their customers. FinTech is rapidly filling it. The Digital Revolution has had a huge impact on the business landscape by lowering cost, distance and time to bring an offer into market. The resulting lowered barriers to entry have allowed many small, agile players to enter the financial services market. Players in this disrupted, competitive landscape do one job very well, rather than trying to bundle mediocre offers together. In the digital context, users have access to information and increasingly expect cost transparency and clear value propositions from the services they use. Competition Cost Access Transparency Barries to entry 5 | Claro Partners + Anthemis Group Distance Time The Digital Revolution Information Debundling The financial industry is at a critical point. - 1/3 of millenials are disinterested in banks, and believe they won’t need a bank at all within five years. - 2/3 would “rather go to the dentist than listen to what banks are saying”, and describe their banking relationship as merely transactional. - Meanwhile, from 2013 to 2014, global investment in FinTech ventures tripled to $12.21 billion. - By 2020, more than 30% of banking revenues could be at risk, thanks to new competitors and new trends.

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Apple Pay is the Tech giant’s first move into financial services Image source: http://bit.ly/1FsNJ9H Emerging FinTech players meet customers’ changing needs and expectations much better and faster than incumbent banks. Initially ignored as marginal players, Fintech startups that hit the right note are growing exponentially. Once established, they are hard to compete with, too expensive to acquire and often feel no need to partner with banks. On top of this, competition is coming from everywhere in the digital space; not just other banks or FinTech startups, but tech companies such as Facebook, Amazon, Google, Apple, and Uber are also making aggressive moves to enter financial services. Your challenge as a bank is to define your unique purpose and capabilities to meet the needs of a radically different customer profile. 6 | Claro Partners + Anthemis Group As of June 30, 2014, over $5 billion in personal loans have been issued through the Lending Club platform. Although still a small portion of the whole loans market, Lending Club has more than doubled annual loan volume each year since 2007. Uber, a P2P taxi service, has it’s own integrated payment service which elegantly and invisibly integrates payments into the user’s experience an early indicator that many financial functions that are key revenue sources for banks will soon be free or disappear into higher-value experiences.

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Your next generation of customers are shaped by an “Always in Beta” world. Digital fundamentally changed people’s orientation to the world they inhabit. Google Maps enables us to confidently act in the moment in unfamiliar locations, without needing to plan ahead Banks, which are trying to respond to the changing landscape, are focusing on digital natives as a customer segment, and are trying to figure out what young people want. However, being a digital native is not a life stage issue. Being shaped by a digital world in constant and rapid change is not a phase people grow out of, but is the essence of the new customer. The behaviours, needs and expectations of this new customer will go viral across older age groups, as we have seen through other digital behaviours. Digital natives’ expectations will set the banking experience conventions that many future customers will come to expect as well. 7 | Claro Partners + Anthemis Group Image source: http://bit.ly/1Oawh13

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Who are the digital natives? Crystal (19, Singapore) has recently been offered a prestigious government scholarship to study abroad. She doesn’t want to accept it as it requires her to commit to returning to work in Singapore. “I don’t know who I will be when I finish studying” she says In our research, we have identified characteristics of digital natives that define them as a global profile. Unlike previous generations of customers, who would choose among a few defined options with fairly predictable endpoints, digital natives live in a context full of options and uncertainty. Their lifestyle reflects a logical response to this environment. They seek flexibility, and choose to keep their options open. Incumbent financial offers don’t work for digital natives’ lives in flux. Financial offers designed for customers with predictable life paths, financial stability and longterm commitments don’t meet the needs of digital natives. Banks need to shift their thinking to look beyond digital natives as a youth segment, to understand and develop totally new value propositions that align with and support the lifestyle of this new generation of customers. From a linear life-path to an unpredictable one 8 | Claro Partners + Anthemis Group Their values and behaviours support this lifestyle, and are ways to cope with a world in flux. They seek purpose, invest in themselves, and put great emphasis on growing their skills to be equipped to navigate the constantly changing world. They are very opportunistic in leveraging not only financial, but social and personal assets. This allows them to be in a position to respond to unexpected challenges and opportunities.

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Hakan (25, Istanbul) complains about his bank’s digital offers: “They give me some nonsense graphic analysis of ratio in my current account vs. my savings account. Really!?”, he says, “If they’re gonna do nonsense, I’d rather they don’t do anything and just keep my money safe.” eToro didn’t just put investing online, it reinvented almost the entire proposition of trading by offering it within a social, peerto-peer context, and dropping the barriers of entry. New value proposition Ability to invest in small amounts, learn from peers and manage your own trades Digitising existing offers isn’t enough; banks need new propositions tailored for digital natives The way most banks are reacting to this new customer profile is to simply digitise their offline offers. However, companies that are thriving in the digital business landscape are those that are not just putting their existing offers online, but are creating totally new digital value propositions and business models that address unmet needs of their users in a way that fits their lifestyle, values and behaviours. The challenge for banks is to really understand the inherent capabilities of digital, and create completely new business models, value propositions and user experiences that are meaningful for a customer base whose attitudes and behaviours have been shaped by a digital world. 9 | Claro Partners + Anthemis Group New user experience Easy in - easy out, simple, customisable, automated, social and participatory New business model Free service where revenues come from the spread of individual trades

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While banks struggle to understand and engage their new consumer, FinTech startups are taking the opportunity to meet consumer needs in new and innovative ways. “When the crisis hit the UK, banks started charging more to borrowers and giving less to lenders. In this environment our rates became the most appealing offer. In fact, the reason we grew and are still growing in the UK is the financial crisis!“ – Giles Andrews, Co-founder & CEO of Zopa 10 | Claro Partners + Anthemis Group Giles Andrews at Zopa offices in London

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We mapped out the FinTech landscape to explore emerging value propositions across different financial functions. The emerging FinTech landscape is an online interactive tool that maps out 68 value propositions across 8 functional areas, plus enabling platforms and core technology providers. 11 | Claro Partners + Anthemis Group

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eToro team pitching at Finovate 2015 in London The FinTech landscape contains niche players using new technology and sleek design. Retail banking has traditionally centred around the current account, where deposit taking enables highly profitable consumer lending activities such as credit cards, consumer loans and mortgages. Besides allowing banks to price across portfolios instead of single services, this setup helped maintain a relationship with customers and serve all their financial needs. FinTech has turned this model on its head, fragmenting the financial services industry. Emerging niche players focus on single-product offerings such as consumer loans or savings accounts. Others provide adjacent services such as credit scoring, security software, and payment interfaces. Consumers can now mix and match providers and choose from a range of options, not only in their own market, but across the globe. 12 | Claro Partners + Anthemis Group Some of the most noteworthy FinTech offerings and new types of banks aptly fuse technology and design elements to respond to user needs. - With P2P lending, consumers can invest in strangers using safe, social platforms. - Robo-advisors use algorithms to create the optimal investment portfolio for investors based on their goals. - New digital banks and payment apps feature personal financial management elements such as budgeting, spending alerts, and savings goals.

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FinTech entrepreneurs at work in a co-working space in Dublin FinTech products combine attention to user needs, technology, and design. Niche products Products and services for investing, savings, credit, and payments have sprung up as standalone services…. Design Features … designed to achieve the simplicity, control, connectivity with other services, integration with other devices, social sharing capabilities, passive optimisation, and highly-informed control that digital natives seek… Technological capabilities User needs … driven by technology such as platforms, data analytics, optimisation algorithms, and sleek interfaces… … and responding to unmet user needs in new ways that align with the expectations of the new consumer. 13 | Claro Partners + Anthemis Group Betterment is a ‘robo-advisor’ that registers users by asking three simple questions to determine their investment goals. The automated investment tool then creates a customised portfolio. Polish mBank is more than just an online offering, the bank “has the internet in its DNA”, and 86% of sales are made online or through its call centres. Its seamless and speedy service are hallmarks of mBank’s offering, where loan approvals take just 30 seconds, mortgage plans are discussed over Skype, and paper statements aren’t even offered.

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Image source: http://bit.ly/1Frw0j2 Banks may be here to stay, but who owns the customer relationship is up for grabs. The emergence of a new consumer profile which FinTech startups are eager to serve has fundamentally changed the traditional banks. Regarded by many digital natives with deep suspicion, banks must work especially hard to prove their relevance in their new customers’ world. Digital natives are driven by purpose and are highly social. FinTech startups recognised this early on by including social connectivity, customised services, and transparent pricing models into their core offerings. Some have even marketed themselves as “anti-banks” that compete on honesty and reputation. Supporting this is an emphasis on simple, seamless user interactions for registration, purchases, transactions, customer service, and exit - through which FinTech offerings gain trust and strengthen their reputations. At times creating their services as an extra layer over banks, these new players win over customers while still utilising existing bank infrastructure. 14 | Claro Partners + Anthemis Group Transferwise is a UK-based company that facilitates low-cost cross-border currency transfers. They organised “nothing to hide” stunts in the UK and the US to attack banks’ lack of transparency in fees

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After a group of fintech companies organised and advocated for it, the UK government instituted regulatory changes that favoured financial services innovation. We expect regulation changes in other markets to follow this trend. Commonwealth Bank of Australia created a new customer proposition that looks beyond the traditional mortgage product: an augmented-reality app that lets potential buyers see inside houses for sale Image source: http://bit.ly/1bbd4g8 FinTech is now influencing the course of the financial services industry; and banks face a choice in how to participate. The financial industry has a general tendency to turn a blind eye to new players until the threat becomes too big. However, banks are approaching a crossroad where they will have to choose whether to yield the customer relationship to emerging FinTech, or fight to maintain it by competing or cooperating with the new upstarts. Taking a back seat doesn’t mean being inactive: a new and viable option is API banking, “where banks allow third-party developers to leverage institutional services to design new products.” On the other hand, banks that want to maintain the customer relationship need to rethink their products, customer engagement, and FinTech engagement models. 15 | Claro Partners + Anthemis Group At ten years old, Zopa has proven its staying power in the UK’s loan market; and with its IPO in December 2014, Lending Club has demonstrated that it has the size to compete with major banks. Credit Agricole was one of the first banks to launch an open API initiative, which is now the Credit Agricole app store. Applications allow customers to budget their finances and manage their credit card accounts. The API also uses its own Geolocation service for enhanced customer data on how the apps are being used.

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Singapore Impact HUB Banks that choose to play in the B2C space need a new approach to building relationships with digital natives, and designing and delivering offers to them. We have identified four preconditions for banks to successfully create customer-facing propositions for digital natives: 1. Align your engagement model to your new consumers’ mindset 2. Think beyond segments; address financial modes 3. Tailor your offers to their lifestyle, values and behaviours 4. Define your FinTech strategy 16 | Claro Partners + Anthemis Group

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1. Align your engagement model to your new consumers’ mindset Digital natives have high expectations from the products and services they use, and no mercy for offers that are not relevant to them. They rely on their networks, want to understand the implications of their choices, and to have control over their own decisions. Banks need a new engagement model to align their offers and communication with this new customer’s expectations, their way of thinking and decision-making. Rob owns and runs a chain of restaurants in Singapore. Last year he needed to take a loan to invest in his business. However, he was offered very low amounts as he hadn’t taken a loan before. “They offer a low amount with the logic that I should build a relationship with them”, he says, “Why should I build a relationship? They should build a relationship with me!” 17 | Claro Partners + Anthemis Group Rob (28, Singapore) talking to us in one of his restaurants

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New players are already engaging their customers in ways that respond to their changing lifestyle and mindset. 1. Align your engagement model to your new consumers’ mindset There are five key engagement elements that are fundamental for banks to create a successful relationship with their customers. However, there is a misalignment between how banks presently approach these elements and the mindset of the digital native (DN) customer. Traditional approach New imperative Trust Banks expect their institutional authority to equate to trust DNs develop trust based on shared interests and experiences Loyalty Banks provide offers that lock in their clients, and call this loyalty DNs expect banks to prove their relevance at every touch point Planning Banks emphasise offers to help plan and build a financial future DNs need offers that prepare them for challenges and opportunities Financial management Banks encourage customers to delegate all their financial decision making DNs want to get smarter about choices and be enabled to make their own financial decisions Communication In attempt to be transparent, banks push all the information they have on to their customers DNs don’t want information overload, but to get to relevant meaning in the moment 18 | Claro Partners + Anthemis Group Kapitall enables its users to manage their own investments portfolios. It uses video game mechanics to develop a playful user experience. Through experimenting, users can create their first virtual, then real brokerage portfolios. Even helps its users prepare for financial downtimes by saving their extra earnings at good times to balance the lows. It meets a key need for people with increasingly unstable income streams by providing a consistent paycheck every week.

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2. Think beyond segments; address financial modes Digital natives don’t have pre-defined life paths, nor do they have steady financial behaviours. Segmentation based on demographics, or profiles based on life-stages aren’t enough to define their financial needs. Banks need a new model to complement and expand their existing segmentation models. When it comes to investment, Sean seems to be very conscious about managing his money. He has taken a financial trading course to avoid relying on a broker, and he checks his portfolio daily to make sure he’s building his future capital. He reveals a different story when it comes to managing his daily budget. He spends most of his salary in the first half of the month, and spends the second half patching by “surviving on pasta”. 19 | Claro Partners + Anthemis Group Sean (27, Dublin) in his apartment

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Innovative offers are already addressing tensions in their users’ financial behaviours. 2. Think beyond segments; address financial modes Banks traditionally have a segmentation model based on income or financial performance. Some banks, in an attempt to be customer-centric, segment their customers based on life stages, which is a good step forward, but is still not enough to meaningfully address the digital native customer. These models do not apply to the digital native’s lifestyle, which is based on constant change and adaptation to the environment. With a life-path defined by choice and uncertainty, digital native customers cannot merely be boxed into segments. We need a new model to address the variations in their financial behaviours. Now I B D My life My finances P Future 20 | Claro Partners + Anthemis Group We have created a modal framework that addresses the four key financial modes of digital natives. These modes are groups of financial behaviours based on goals and orientation, and would apply to most customers. What is unique to digital natives is that they very rapidly switch between different financial modes, or even inhabit multiple modes at the same time. This multi-modal state often creates tensions in their lives. However, offers available from banks today are designed to address only one mode. The opportunity for banks is to create financial offers that help their customers resolve the tensions between their multiple financial modes. Payoff motivates its users to move towards their dreams even though they haven’t financially built for it. The social aspect of the product includes sharing of dreams, the ability to tag friends in dreams, and the posting of accomplishments on your Facebook wall. Saved+ helps its users save while they spend. Once users link their account and card to Saved+, in each transaction an extra percentage is added to be transferred from a source account into a saving account.

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Maria (22, Mexico City) with her one year old son 3. Tailor your offers to their lifestyle, values and behaviours Your new generation of customers have been shaped by a digital world, and have radically different expectations from the products and services they use. With so many alternatives available, they have no tolerance for offers that don’t meet their expectations. Banks need a set of guiding service principles for creating products or services matching the lifestyle, values and behaviours of digital natives. Maria is very conscious about reducing spending, especially after her son was born. She gets frustrated about unjustified costs, and expects clear, transparent communication from her bank. She has recently changed her bank because of high account fees. “Why do I have to pay commissions on a savings account?” she says, “A savings account is supposed to make your money grow, not shrink”. 21 | Claro Partners + Anthemis Group

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Successful financial services match the lifestyle, values and behaviours of their users. 3. Tailor your offers to their lifestyle, values and behaviours Financial offers are designed for an archetypical customer with a linear life-path. Unfortunately, these offers don’t meet the needs and expectations of digital natives whose lifestyle has evolved to keep options open and avoid long-term commitment, nor their unique values and financial behaviours. Banks can meet the needs of digital natives by adhering to service principles that are designed to match their lifestyle. These service principles are fundamental to creating relevant and valuable offers for them. Ininal card from ING Turkey is a pre-paid card for users who are averse to committing to longterm deals. It is very easy to start using and equally easy to stop. Users can buy it from, and top it up at the supermarket, and there are no implications if they decide to stop using it. We have identified principles that define an offer’s characteristics at three levels. Banks must address all three levels to successfully translate an opportunity area into a product, service or communication for digital natives. Be inc l Add m ea er xp Offer relevant benefit et ns tio ience in their conside ed ra ud ot ng t heir e ni 22 | Claro Partners + Anthemis Group Principles that define the baseline characteristics an offer should have for digital natives to even consider trying it. Principles that define the quality of the user experience and interactions that digital natives expect from their services. Principles to provide digital natives with a clear and relevant benefit that addresses their financial and nonfinancial assets, and future potential. Upstart gives personal loans based on users’ potential even if they don’t have a credit history. For users who are not interested in building financial capital in conventional ways, it looks beyond conventional measures of credit-worthiness and sets individual rates based on other types of capital such as education and job history.

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Brett King is the co-founder and CEO of Moven and a venture partner at Anthemis Group 4. Define your FinTech strategy While the financial services landscape is poised for a revolution in the form of financial technology, value proposition and business model innovation, banks have several options for participation in this new world. Any choice they make can form a strategic hedge against becoming obsolete or losing their relevance to consumers. “Banks have a sustained belief that people will still want to come into a bank branch. Meanwhile new entrants are entering into the market. It takes a few years for banks to realise this is affecting their revenue. So in the end you will split distribution … like what happened to books with Amazon. This is what is happening in banking now.” - Brett King, Founder of Moven Bank. 23 | Claro Partners + Anthemis Group Image source: http://bit.ly/1Nc6uEM

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Different banks pursue different strategies for their FinTech engagement. 4. Define your FinTech strategy For banks that want to maintain the customer relationship, engaging with the FinTech ecosystem is a critical part of the strategy. Banks can learn from the FinTech ecosystem on how to acquire new customers, how to engage them and retain their trust, and how to build propositions that deliver what digital natives expect. However, banks can also play a pivotal role in the FinTech ecosystem, either by competing with startups or by supporting the ecosystem’s development overall: - Build: Banks that have strong innovation capabilities can build new innovations in-house, investing in the innovation and design needed to create products that rival the best of FinTech. - Collaborate: Perhaps the richest way for banks to explore the FinTech opportunity is to collaborate directly with them. Joint research and product development, or establishing a vendor relationship, can allow banks to go-to-market with the leading propositions. - Invest: Banks that want to profit from the rise of FinTech and learn about how they win customers, can invest in startups via venture investment funds, direct investment, or supporting one of the growing number of startup accelerators in FinTech. - Acquire: Banks that want to gain access to market-leading capabilities can acquire FinTech startups outright, integrating them into the bank or running them as standalone entities. For some, this is a good way to target tech-savvy consumers who are suspicious of traditional banks. 24 | Claro Partners + Anthemis Group Citi’s internal innovation team has built its own cryptocurrency similar to Bitcoin and aimed at cross-border transactions, branding it “Citicoin”. Fidor, Western Union, and RBS are collaborating with Ripple Labs to use the Ripple protocol for low-cost cross-border payments in any currency. Barclays partnered with Techstars to invest in an international FinTech accelerator in London. The programme gives a small amount of seed funding and mentorship by Barclays staff in exchange for a small equity stake. BBVA acquired Simple - a branchless digital bank that uses online and mobile apps, allows users to set savings goals, and enables locationbased spending monitoring.

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We understand your new generation of customers, the emerging FinTech landscape, and how how their convergence impacts your business. We’ve created a set of tools to help you identify, develop and activate new value propositions for digital natives, and take steps to extend your offers to them. We can work with you to analyse your specific challenges and opportunities; to develop new value propositions and service designs within the financial services landscape; and to identify potential partners and paths to collaborate with the FinTech ecosystem. Contact us to learn more: www.alwaysinbeta.org 25 | Claro Partners + Anthemis Group Always in Beta final workshop in Barcelona

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Learning expeditions in six cities Dublin London Mexico City Expert and startup interviews Istanbul Singapore Ethnographic research with digital natives Mapping emerging value propositions in Fintech Cape Town Workshops with leading banks About this project This document is an outcome of a consortium project conducted by Claro Partners and Anthemis Group, in partnership with ING, BBVA, Garanti Bank, Standard Bank of South Africa, Bank of Ireland and Credit Suisse. We conducted global research to understand what digital natives mean for financial services, and how the emerging FinTech landscape is responding to it. Although the project scope was defined as consumer-facing financial services, the outputs have direct critical implications for other financial services sectors, such as private banking and wealth management, commercial banking, and insurance. In our research we focused on three user-centred stories that each gave us insights into different aspects of the digital native experience: transition to financial independence, entrepreneurship and pioneer users. We have complemented user stories with extensive industry research on both the incumbents and FinTech startups.

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Claro Partners is an international business innovation and service design firm. We make sense of disruptive shifts in business and society to develop new market opportunities, strategies and business models. By combining social science, design thinking, and business strategy, we lead our clients to solutions that create value for both business and society. Contact us at hello@claropartners.com Anthemis is an investment and advisory firm focused on reinventing financial services for the 21st century. We work with a diverse group of customers and partners – from start-ups and venture capital firms to financial institutions and private equity firms – to catalyse and accelerate positive and disruptive change across the financial industry. Contact us at info@anthemis.com Let’s continue the conversation!

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