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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
September 28, 2016
   
   

Time Flies

Sorry for the one-day delay, folks, as I was tied up with the launch of the Milken Institute-U.S. Small Business Administration Partnerships for Lending in Underserved Markets initiative (more on that here) and contracted a raging headache after the U.S. presidential debate Monday night. But enough about me, let’s get to FinTech.

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U.S. Goes 1 Up on Europe Before the Ryder Cup

According to a recent study that looked at more than 6,000 startup exits since 2012, the U.S. dominates Europe, with more than 80 percent of the startups analyzed acquired by U.S. companies. Silicon Valley completed 21 percent of all deals, 3 percent more than Europe, while the U.K. is the most active European Union country in startup exits. Of note, “44 percent of European startup acquisitions have been performed by U.S. companies.”

U.S. and European exits: Breakdown by region

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Source: Mind the Bridge, CrunchBase: Startup Transatlantic M&As: U.S. vs. EU

Digital Finance—The Upsides

A report from the McKinsey Global Institute says digital finance could provide nearly 1.6 billion people in emerging economies with access to financial services. The widespread use of mobile technology in particular can enable financial firms to provide services at drastically reduced costs (up to 90 percent). Of note, the gap between the amount of credit currently extended and what an estimated 200 million micro, small and medium enterprises (MSMEs) in emerging economies need is estimated to be $2.2 trillion. According to the report, “the additional GDP gains from digital finance would expand aggregate demand and create nearly 95 million new jobs across sectors, a 3.5 percent increase from current levels. Two-thirds of these new jobs are likely to be full-time salaried or wage-paying positions that are in short supply in the developing world.”

Meanwhile, Capgemini and BNP Paribas released the 2016 World Payments Report, which, for the first time, estimates that global noncash volume grew to more than 10 percent in 2015, to 426 billion transactions, with payment cards continuing to lead the list of noncash instruments. As the figure below shows, “regulators’ approaches to key regulatory and industry initiatives (KRIIs) vary across regions, with some regulators adopting a more protective approach while others are keen to open up local markets to competition.”

Varying scope of KRIIs across regulatory landscape

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More Sandboxes Than My Neighborhood Playground

Thailand, Indonesia and the U.S. have started to dig. The Bank of Thailand (BOT) announced that its regulatory sandbox would be made available to banking institutions in the first quarter of 2017, with nonbanks able to apply in the second quarter. According to BOT Governor Veerathai Santiprabhob, “FinTech is a new thing for the central bank and we have limited knowledge in this area. Therefore, having the regulatory sandbox will open opportunities for product experimentation and for the companies to ramp up their scale.” In Indonesia, the Bank of Indonesia (BI) announced that it would open a FinTech office next month that will oversee a regulatory sandbox. According to Deputy Governor Ronald Waas, “BI will establish a special task force that will coordinate with other FinTech offices.”

And in the U.S., Rep. Patrick McHenry, R-N.C., unveiled HR 6118, the Financial Services Innovation Act of 2016, which “establishes a federal regulatory framework that allows financial services companies and entrepreneurs the flexibility they need to go to market sooner with innovative, new financial technology products,” according to a press release. The bill requires each federal financial regulator to establish a Financial Services Innovation Office (FSIO) to promote financial innovations and assist with both established and startup firms offering innovative financial services and products. The director of each FSIO will also sit on an FSIO Liaison Committee, which will include a state bank supervisor, and the committee will be required to hold four or more public field hearings each year. The bill provides a safe harbor for firms submitting petitions requesting a waiver of agency regulation or federal statute to an FSIO office. Of note, and as stated in the bill, if a firm and an agency enter into an enforceable compliance agreement, another agency or state regulator “may not commence an enforcement action against the covered person with respect to the financial innovation that is the subject of the enforceable compliance agreement.” (A slide deck that describes the bill can be found here.)

And lastly, Christopher Woolard of the U.K. Financial Conduct Authority (FCA) provided an update on its sandbox initiative in prepared remarks at a BBA FinTech Banking Conference in London. According to Woolard, of the 69 applications the FCA received from firms looking to take part in the sandbox, “we have accepted 24 to develop towards testing, which met the sandbox eligibility criteria, leading us to expand our team to meet demand. We have also offered assistance via Project Innovate or other colleagues to 40 of the applicants, in some cases to prepare for the next cohort of the sandbox. The demographic of applicants is diverse, covering a range of geographies, both domestic and international, including Singapore, Denmark, USA and Canada.” Woolard also touched on the FCA’s Advice Unit, where 19 firms applied and nine were accepted. Eight of the nine successful applicants “are established financial services who want to bring automated advice to the market at scale.”

Legislative/Regulatory/Policy Developments

U.S.: Alternative-finance platform LendUp reached a settlement with the U.S. Consumer Financial Protection Bureau (CFPB) and the California Department of Business Oversight (DBO) that requires the firm to pay more than $6 million in fines — $2.7 million to the DBO and $3.6 million to the CFPB. According to LendUp, the actions “address legacy issues that mostly date back to our early days as a company, when we were a seed-stage startup with limited resources and as few as five employees. In those days we didn't have a fully built out compliance department. We should have.”

Meanwhile, Rep. Mick Mulvaney, R-S.C., and Rep. Jared Polis, D-Colo., announced the launch of the Congressional Blockchain Caucus. Both congressmen are working with Coin Center to educate lawmakers on blockchain technology through convenings and events. 

For those who might have missed it, there was an interesting Q&A between the Los Angeles Times and Core Innovation Capital’s Arjan Schütte on his role on the CFPB’s Consumer Advisory Board. In particular, when asked what he would specifically like the CFPB to do, Schütte said: “If there’s one thing I wish I could do there, it would be to 10x Project Catalyst. It’s part of CFPB that works with innovators and entrepreneurs to give them tools and safe harbors. They’ll allow innovators to pursue new ideas. Catalyst has a one-man team who makes regular visits to Silicon Valley and has office hours. They should have 10 more.”

Lastly, the Securities and Exchange Commission has scheduled a FinTech forum to be held in November covering blockchain technology, automated investment advice or robo-advisors, online marketplace lending and crowdfunding, and how they may impact investors.

United Arab Emirates: The Financial Services Regulatory Authority of the Abu Dhabi Global Market (ADGM) entered into a partnership with GlassQube Business Centre Services “to explore initiatives such as creating and providing an innovation cluster in ADGM where FinTech entrepreneurs and innovator firms can exchange knowledge, test and launch innovative products, services and business solutions within controlled boundaries in a cost-effective environment.”

U.K. The Financial Conduct Authority published a feedback statement following its call for input covering big data’s role in the insurance marketplace. According to the press release, based on feedback and evidence examined, “the FCA has decided not to launch a market study at the present time, but will take forward a number of measures designed to further engage with the industry.” According to the feedback statement, “There is the potential for big data to increase risk segmentation and consequently lead to consumers with higher risks being unable to obtain affordable insurance. We carried out a further review of parts of the [retail general insurance] sector and this indicated these concerns were not yet materializing. However, we will remain alert to the potential exclusion of higher-risk customers and will engage with government if concerns begin to develop because of how firms are using big data.”

Regurgitating FinTech Headlines

Mobile payments company Square launched its contactless payments system in Australia; SeedInvest is now offering automated early-stage investing; China’s largest peer-to-peer lender is positioning itself for an IPO in Hong Kong; six large banks have joined together to launch the Global Payments Steering Group, which will “oversee the creation and maintenance of Ripple payment transaction rules, formalized standards for activity using Ripple, and other actions to support the implementation of Ripple payment capabilities”; and Europe will see its first asset-backed securitization of peer-to-peer consumer loans. Further headlines covering blockchain technology include BNP Paribas’ work on blockchain applications for transaction banking; Hyperledger adding to its membership rolls; R3CEV finding success using Intel’s blockchain platform for bond trading; Santander using the Ethereum blockchain to issue digital bank notes to the blockchain community; Aesthetic Integration becoming the world’s first platform to use formal verification for blockchain-backed smart contracts; the completion of an initial joint pilot between China’s UnionPay and IBM covering bank loyalty points; and Accenture unveiling a prototype “that enables blockchain technology to be edited under extraordinary circumstances to resolve human errors, accommodate legal and regulatory requirements and address mischief and other issues, while preserving key cryptographic features.”

An Analysis of FinTech Hubs Globally

The Global FinTech Hubs Federation released its first report, which provides an analysis of 21 FinTech hubs and scores them based on three business indices: the Global Financial Centre Index (Z/Yen Group Ltd.), Doing Business 2016 (World Bank) and the Global Innovation Index (Cornell University, INSEAD, World Intellectual Property Organization). Not surprisingly, it found that the top five hubs are London, Singapore, New York, Hong Kong and Silicon Valley. As to the growth challenges facing FinTech, the report finds limited exit opportunities and a risk-averse culture, as frequently cited, alongside the high cost of living and market size. Interestingly, existing regulatory barriers “don't appear to be as big an issue as may be expected (although five hubs did cite regulatory uncertainty).” Of note, nine hubs identified low levels of government support as problematic.

Global FinTech hub overview

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Source: Deloitte, Global FinTech Hubs Federation: Connecting Global FinTech: Hub Review 2016


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