FinTech in Focus
A Week of Celebrating Me
For those of you in the Washington area, time to batten down the hatches as Millennial Week in D.C. is apparently just around the corner. Hide your significant other and your kids from the self-loving and self-promoting generation that is now the largest generation in the workforce. I, on the other hand, will be carried down Pennsylvania Avenue showering myself with gifts and regaling everyone with stories about my recent op-ed in American Banker.
Regulatory & Policy Developments
U.S.: The House of Representatives passed the first-ever FinTech resolution on a vote of 385 to 4 last week. The resolution, in part, expresses “the sense of the House of Representatives that the United States should adopt a national policy for technology to promote consumers’ access to financial tools and online commerce to promote economic growth and consumer empowerment.”
Meanwhile, the U.S. Office of the Comptroller of the Currency (OCC) gave a presentation at a marketplace lending summit in Washington, D.C. While Comptroller Thomas Curry’s prepared remarks focused on a number of issues, one line in particular stood out in regard to the potential for a limited-purpose federal charter for FinTech firms: “If we at the OCC do decide to grant limited-purpose charters in this area, the institutions who receive the charters will be held to the same strict standards of safety, soundness and fairness that other federally chartered institutions must meet.” And since we’re on the topic of marketplace lending, the U.S. Congressional Research Service published a report in early September titled “Marketplace Lending: Fintech in Consumer and Small-Business Lending.” While the report provides a general description covering marketplace lenders and their products and models, the author concludes with the following: “The current regulatory system aims to balance benefits and risks, but it was developed before marketplace lending became prevalent. As a result, it is not clear how effectively the existing system will regulate the marketplace-lending industry. As the industry matures and if regulatory issues are resolved, the effects of marketplace lending for the financial system and the economy will become clearer.”
U.K.: The U.K.’s Financial Conduct Authority closed the comment period on the post-implementation review of its crowdfunding rules. Meanwhile, the FCA’s policy director, David Geale, spoke on the policy outlook for robo-advisors, noting that robo-advice will not necessitate changes to existing rules, although further clarity is needed. The FCA is expected to publish a number of case studies to provide asset managers with greater certainty. Lastly, London Mayor Sadiq Khan has arrived in the U.S. to promote stronger ties between London and U.S. cities. The mayor has traveled to Chicago and New York over the past several days.
Europe: Europol and the Basel Institute on Governance have formed a working group covering money laundering in digital currencies. According to a release, “Internet technologies become continuously more advanced, and so do the ways in which criminals utilize them for their illicit and illegal activities. Among these technologies, digital currencies are already transforming the criminal underworld.” Of course, oversight will have to also extend to the final frontier, as Genesis Mining successfully completed the first Bitcoin transaction in space.
Separate from the focus on digital currencies, the European Commission issued a statement regarding the Capital Markets Union. According to the release, as the commission continues to promote the development of FinTech, it will also “work with the European Supervisory Authorities, the European Central Bank, other standard-setting bodies, and the member states to develop a coordinated policy approach that supports the development of FinTech in an appropriate regulatory environment.”
Asia & Australia: In India, the Commerce and Industry Ministry has formed an eight-member task force to enhance the nation’s approach to innovation and support its ecosystem. Meanwhile, FinTech firms, banks and insurance companies have joined forces under the arm of the Internet and Mobile Association of India to lobby the Reserve Bank of India and other regulators to support technological innovations in the financial services space.
Thailand’s government established a Ministry of Digital Economy and Society last week, while China unveiled plans to turn Beijing into a national scientific and technological innovation hub. And in Australia, Treasurer Scott Morrison welcomed the decision by the International Organization for Standardization “to support Australia’s proposal to develop new international standards on blockchain.” Australia submitted its proposal back in April.
International Orgs: The World Bank Group and the International Committee on Credit Reporting released a consultation covering how credit reporting contributes to financial inclusion. Among the additional “action points” addressed in the release: the use of regulators to enable or require all financial service providers, including nonbanks, to report credit data to credit-reporting service providers, ensure efficient and cost-effective processes to access datasets, ensure credit-reporting service providers use of depersonalized data “for development of analytics which help lenders assess risk and ensure individuals are treated fairly” and for regulators to enable alternative data for credit reporting “if necessary by amending laws and regulations to clarify how such alternative data may be sourced, analyzed and distributed.”
Meanwhile, the Bank for International Settlements’ Committee on Payments and Market Infrastructures “has established a task force to look into the security of wholesale payments that involve banks, financial market infrastructures and other financial institutions,” according to a release. As noted in the statement, “The first phase of this work is seeking to review current practices in this area and, based on this input, the CPMI will decide how to proceed. It is premature to speculate what will result from this work.”
Robo-Advisors Under the Gun
BlackRock issued a report calling for regulatory focus on certain key areas, including algorithm design and oversight, disclosure standards and cost transparency, trading practices, know your customer and suitability, and data protection and cybersecurity. According to the report, “Digital advisors are subject to the same framework of regulation and supervision as traditional advisors; however, the applicability and emphasis may differ in some cases.” The report considers the growing number of platforms (as illustrated in the figure below) in the digital advice landscape and their importance to meeting different client needs.
Digital advisory firm launches in the U.S.
Meanwhile, the Massachusetts Securities Division sent a letter to Betterment asking the company to revise its communications policies in light of the platform’s decision to halt trading as a result of the Brexit vote. Around the time of the letter, Betterment renamed its RIA platform to Betterment for Advisors and expanded its product offerings to include Vanguard and Goldman Sachs strategies.
Payments & Distributed Ledger Technology Headlines
Ripple raised $55 million in a new round of funding last week. The global settlement network also added six more banks to its network. Meanwhile, Keystone Capital Corp. selected Overstock.com’s t0 blockchain-based platform to “provide brokerage services for market participants seeking to trade blockchain securities,” according to a report. This will be the world’s first blockchain-based public equities issuance.
On payments, Visa has partnered with four banks in Kenya to launch a QR-code-based payments application to rival Safaricom’s M-Pesa. Currently the app can be used at more than 1,500 merchants across Kenya, and Visa expects to extend the service beyond that nation over the next few months.
In Asia, Ant Financial’s Alipay will begin charging users if they withdraw money over a certain threshold to their bank accounts. At the same time, Ant Financial acquired U.S.-based company EyeVerify — the company’s first investment in the U.S. — which will provide added payments security through biometric authentication technology. And lastly, South Korean FinTech firms, led by the nation’s Fintech Industry Association, have filed a petition with South Korea’s Fair Trade Commission against Apple for the company’s policy against opening its near-field communication technology to external developers.
Small-Business Access to Credit
Two reports out over the past week cover the small-business credit outlook. According to platform C2FO, less than half of small- and medium-sized enterprises surveyed said they could get financing at rates below 8 percent. More than 1,800 SMEs from the U.S., U.K., Germany, France and Italy took part in the survey. According to the findings, a majority of SMEs consider cash flow the biggest obstacle to business growth, more than one-quarter of respondents have no or limited ability to borrow, and the U.S. and the U.K. are the most expensive countries to borrow in.
Meanwhile, Third Way released a report examining the factors holding back new business formation and access to credit. Today, and as seen in the figure below, new businesses account for only 8 percent of all U.S. firms, compared with 13 percent in 1980. The report states: “What’s less clear is whether the volume of lending to small businesses is below what economic conditions actually warrant. There is strong evidence that there are simply fewer creditworthy small businesses putting forward loan applications than in the past. Unfortunately, the best data available send conflicting signals.”
New firms as a percentage of all firms