FinTech in Focus
Postal Service Delivers the Blockchain (and other headlines)
The U.S. Postal Service (USPS) generated one of its biggest headlines since Kevin Costner’s starring role in The Postman (ignore the Rotten Tomatoes score, it’s an incredible movie) when the USPS Inspector General released a report on how distributed ledger technology could impact its business — which has not turned a profit since 2006. The report identifies four areas where the application of the blockchain is of interest to the postal service: financial services, device management, identity services and supply chain management. For financial services in particular, the report advocates the creation of a global financial platform called Postcoin, which is envisioned as a "global postal money transfer and payment platform." The report suggests that the Universal Postal Union become Postcoin’s governing body.
Speaking of cost savings, a new report from Goldman Sachs quantifies the technology’s potential value across several uses: the sharing economy, $3 billion to $9 billion; U.S. electricity industry, $2.5 billion to $7 billion; underwriting title insurance in the U.S., $2 billion to $4 billion; clearing and settlement of cash securities, $11 billion to $12 billion; AML/KYC compliance, $3 billion to $5 billion. Challenges to reaching the potential in these areas include: creation of similar technical standards across industries to ensure interoperability among multiple blockchains; a failure to reach consensus which could slow or halt adoption; willingness to share information about counterparties; and whether the technology "is appropriate for high-speed, high volume applications."
Discovering Bias in (Opaque) Algorithms
A new report from researchers at Carnegie Mellon University takes a deep dive into algorithmic transparency — “an emerging research area aimed at explaining decisions made by algorithmic systems.” The researchers developed Quantitative Input Influence (QII) measures to “capture the degree of influence on outputs of systems” to “provide a foundation for the design of transparency reports that accompany system decisions (e.g., explaining a specific credit decision) and for testing tools useful for internal and external oversight (e.g., to detect algorithmic discrimination).” As the report notes, "QII does not suggest any normative definition of fairness. Instead, we view QII as a diagnostic tool to aid fine-grained fairness determinations." The research comes as federal officials are becoming increasingly interested in the opportunities and risks associated with the use of big data, which officials weighed in on at a recent Ford Foundation event.
Let’s Pump the Brakes on the DAO
In last week’s edition I briefly included mention of the Decentralized Autonomous Organization (the DAO), which has a primary function of serving as a crowdfunding investment vehicle and is one of the first smart contracts on the Ethereum blockchain. It has made headlines over the past few weeks because it controls 16 percent of the supply of Ether, according to a recent report. In that same report the authors, who include Ethereum’s Vlad Zamfir, identify nine "causes of concern that can lead DAO participants to engage in strategic rather than honest behaviors," resulting in honest DAO investors having their investments “hijacked or committed to proposals against their interest and intent." As such, the authors are calling for a moratorium to "give the DAO time to make security upgrades” to prevent several potential types of attack that could, for example, indefinitely tie up investor funds and lead to ransom demands; or enable a large cartel to “usurp” or depress the value of the native fund tokens. Beyond the security concerns, Digital Currency Group founder and CEO Barry Silbert has previously been skeptical of DAOs overall value, having stated the following at a recent event: "I don't know the role it needs to play in society. I don't know, in the capital formation process, what's wrong with our current system that it's solving for."
March of the Robos
Wells Fargo will announce a strategic partnership with a robo adviser in the second quarter of this year, according to the company’s head of wealth management. Meanwhile, UBS has partnered with SigFig – part of a $40 million equity investment in the company. And Invest.com is seeking to act as a “hedge fund robo adviser” by providing a personalized, low-cost investment program that makes recommendations based on a customer’s responses to five questions. Separately, the Australian Securities and Investments Commission is beginning to receive feedback on its consultation paper, Regulating digital financial product advice. One of the responses suggests that the rules applying to face-to-face advice also be applied to automated advice. According to the CEO of Stockspot, "We are concerned that there are a growing number of digital investment businesses with flashy websites that may not have robust systems, compliance and controls in place.”
FCA: Banks Shutting the Doors on FinTech
A report released by the UK Financial Conduct Authority takes a look into the reasoning behind banks that sever accounts tied to firms that are viewed as high risk, including firms that provide money transmission services. The report looks at the de-risking occurring in money service businesses (MSBs), charities and FinTech companies, in particular. On FinTech, banks expressed concerns about decisions made by start-ups that have “little understood business models and underdeveloped regulation” yet may be vulnerable to money laundering and terrorist financing with respect to virtual currencies.
FinTech firms, especially those that have lost or been denied access to a bank account, expressed concern that banks, regulators and law enforcement lack awareness of the potential benefits and risks associated with new technologies and have a "limited appreciation of higher quantity and quality of data" that FinTech firms are able to use. As stated in the report, the FCA "have found enormous frustration at the actions of banks, even amongst those customers fully supportive of the risk-based approach to financial crime, particularly at the lack of, or contradictory, communications from their bank other than a form letter mentioning unspecified risk appetite and at the banks’ unwillingness to identify what, if any, remediation could reverse the decision to de-risk.”
'Higher Risk' (HR) accounts as a % of total for each client segment, HR accounts opened (2015 annualised) as a % of HR total, HR accounts opened as % of total opened.