Mueller Jackson
Jackson Mueller
Associate Director, Center for Financial Markets
Jackson Mueller is an associate director at the Milken Institute's Center for Financial Markets. He focuses on fintech, capital formation policy and financial markets education initiatives. Prior to joining the Institute, Mueller was an assistant vice president at the Securities Industry and Financial Markets Association (SIFMA), where he focused on...
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FinTech in Focus

By: Jackson Mueller
July 26, 2016

It’s HOT Outside

Hello, FinTech in Focus readers! If you are getting this distribution in the U.S., that means you’ve somehow survived the “heat dome” (no relation to that awful TV show “Under the Dome”) that is baking much of the country. Yours truly decided to take the unprecedented step of moving the inflatable pool into the living room — a decision that was immediately overruled by my loving wife. Fear not however, as we have plenty of solid TV programming this week to take us away from the outside inferno. It’s Sharknado Week on SyFy, so grab your popcorn and sit back and watch some Oscar-worthy films such as “Atomic Shark” and “Chupacabra: Dark Seas.” But enough of my love for awful movies, let’s get to FinTech.

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Regulators: What They Said

A lot of regulatory developments over the past week or so, which I’ve tried to appropriately segment:

G20: The G20 released a statement from a July 24 meeting in Chengdu, China. Of note, finance ministers and central bank governors endorsed the "G20 High-Level Principles for Digital Financial Inclusion," and encouraged countries "to consider these principles in devising their broader financial inclusion plans, particularly in the area of digital financial inclusion.” The G20 expects to the Global Partnership for Financial Inclusion, which has held a series of meetings to hash out the principles, “to report back to us in 2017 on the actions being taken to promote digital financial inclusion at the country level.”

France: France's financial markets regulator and its prudential supervision and resolution authority announced the launch of the FinTech Forum, "a new body for consultation and dialogue with the FinTech industry." The inaugural meeting was held on July 18 where participants discussed efforts to "effectively identify the challenges associated with the development of FinTechs in terms of opportunities but also potential risks."

UK: Andrew Bailey, the new CEO of the Financial Conduct Authority (FCA), discussed his concerns with the UK’s peer-to-peer lending sector during a UK Parliament Treasury Committee hearing last week. In answering a question regarding the misalignment of incentives between platforms and their investors, Bailey remarked, “I am pretty worried about some of the things that are said about these funds when they’re sold to people. Some of the things that you read is that they get very near, but not quite there, to promising capital certainty.” The House of Commons Business, Innovation and Skills Committee published a report covering the digital economy in the UK. The report notes that the UK's position as the "world leader in FinTech" is at risk due to Brexit because "firms will want to be part of the single market of financial regulation." Further, he said the UK government "needs to set out with urgency how it will address this, and avoid our strengths in FinTech being eroded."

Meanwhile, the FCA has been quite busy, striking its third FinTech cooperation agreement with South Korea’s Financial Services Commission. According to the press release: “The Cooperation Agreement will enable the regulators to share information about financial services innovations in their respective markets, including emerging trends and regulatory issues.” On RegTech, the FCA published a summary of the feedback to the FCA’s call for input on RegTech (a summary of FCA activity on RegTech can be viewed in the figure below). The FCA heard from more than 350 respondents, nearly half of which were from technology suppliers. “We intend to concentrate our efforts on increasing our engagement and collaboration with the RegTech community, using our convening authority to help bring together market participants to work on shared challenges; and to act as a catalyst for change that helps to unlock the potential benefits of technology innovation,” the report notes.

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The UK Payments System Regulator (PSR) released its final review covering access to the UK payments system. The PSR has championed increased competition in the payments space that has largely been dominated by large banks in the UK. The final report notes that “positive progress” has been made in making indirect access to the payments system available for smaller payment services providers, in particular, which has led PSR to adopt a stance of encouragement rather than intervention.

And lastly, the Bank of England published a staff working paper titled, "The Macroeconomics of Central Bank Issued Digital Currencies." As stated in the report, movement to a bank-issued digital currency “leads to an increase in the steady-state level of GDP of almost 3 percent, due to reductions in real interest rates, in distortionary tax rates and in monetary transaction costs that are analogous to distortionary tax rates. Second, a [central bank digital currency (CBDC)] regime can contribute to the stabilization of the business cycle, by giving policymakers access to a second policy instrument that controls either the quantity or the price of CBDC in a countercyclical fashion.”

Asia: Step aside Hong Kong, Japan, Singapore and other innovation hubs across Asia, the U.S. has picked Australia. That’s according to U.S. Vice President Joe Biden, who told Australian business leaders that the U.S. wants “to see Australia continue to grow and to be a regional hub and a regional leader.” Meanwhile, Bank of Thailand Gov. Veerathai Santiprabhob discussed the bank's efforts in regulating the FinTech space, saying that businesses using new financial technologies “need to be regulated.” Of note, his remarks also touched on the creation of a regulatory sandbox and potential partnership with the Thai FinTech Club.

Rama Gandhi, deputy governor of the Reserve Bank of India, focused on FinTech in prepared remarks, calling on banks and the Institute for Development and Research in Banking Technology to work together on blockchain applications. On the development of virtual currencies, Gandhi noted “that e-currency is no substitute for currency; if at all, it can only be a better alternative to any other payment instrument…. Despite my misgiving about its success, I do support research on this subject.” In Taiwan, President Tsai Ing-wen said that the country’s Financial Supervisory Commission and other regulatory bodies are reviewing existing regulations to encourage FinTech development in order to keep up with international trends.

U.S.: Democratic senators Jeff Merkley and Sherrod Brown sent a letter to the heads of top U.S. financial regulators to explain how they are responding to FinTech innovations and developments. “As we think about the role of FinTech, we must be mindful that some of these products, activities, and business models may be new and innovative, while others may largely resemble those of existing, federally regulated firms. We write to seek more information about the tools the regulators have to ensure effective oversight over FinTech companies," the letter states. The Securities and Exchange Commission’s (SEC) Advisory Committee on Small and Emerging Companies submitted proposed recommendations to the SEC on the “accredited investor” definition. While the monetary thresholds remain unchanged, the committee recommended expanding the definition to include individuals who have passed certain securities examinations, and those with specific industry or issuer knowledge. The panel also suggested expanding the definition to include measures of non-financial sophistication.  

The Office of the U.S. Trade Representative announced the formation of a Digital Trade Working Group “to develop policy responses to existing and emerging barriers to digital trade around the globe.” Meanwhile, the EMV Migration Forum which has focused on EMV chip implementation across the U.S., will change its name to the U.S. Payments Forum. The group, consisting of 170 companies, also will adopt a broader mandate that includes coverage of emerging payments technologies. At the state-level, the Pennsylvania Department of Banking and Securities issued new guidance for investors involved in or looking to enter the equity crowdfunding space. 

Fast Take on FinTech Headlines

Keefe Bruyette & Woods and Nasdaq announced the launch of the KBW Nasdaq FinTech Index (Ticker: KFTX) which includes nearly 50 companies. In response to the recent hack of the Distributed Autonomous Organization, the Ethereum community came together to support a hard fork of the Ethereum blockchain to return roughly $40 million in ether to the rightful owners. SAP and Mizuho are separately collaborating with Ripple to test cross-border payments using Ripple's distributed ledger technology. Meanwhile, the technology was lauded by ATB Financial in Canada, which successfully transferred money to ReiseBank in Germany in less than 20 seconds. This compares to a typical transaction time of two to six days. Meanwhile, Kenya’s M-Pesa is piloting its own debit card, Square is setting up for a UK launch, and Paytm parent One97 Communications is eyeing expansion into Europe. In the U.S., Goldman Sachs will roll out its consumer online lending operation in the fall, Wells Fargo will launch its robo-advisory service in early 2017, MasterCard acquired VocaLink in the UK, a deal applauded by the UK’s PSR and the UK’s finance minister. PayPal struck a partnership with Visa that will allow use of PayPal for in-store payments, at a cost to PayPal, however.

Millennials & Small Business

And you all thought I wasn’t going to include something about millennials in this edition! Fear not, however, for Wells Fargo has provided us with a closer look at the millennial entrepreneur. According to the report, roughly three-quarters of respondent businesses are either in the start-up or growth phase. Meanwhile, three-quarters of millennial small business owners are “extremely wary” of taking on debt, though nearly the same number view taking on business debt as necessary for growth. Interestingly, more than 40 percent of millennial small business owners have taken on some form of personal debt to grow or maintain their businesses, compared to less than 35 percent who have taken on business debt. Lastly, more than three-quarters of respondents would be willing to pay more for services and products that would help them to run their own business.

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