FinTech in Focus
I Survived London
With no coat (apparently thinking London’s weather is the equivalent of Bermuda’s this time of year) and a diet that consisted solely of bangers and mash, I somehow survived my stay in London. Although I heard the term “Brexit” in nearly every conversation, I still have absolutely no idea what it means or what it will look like in the end. Godspeed to those of you working to provide us with some clarity on this. And lastly, I had thought Hamleys toy store was the perfect place for Christmas shopping until I looked at the price of a stuffed bear and nearly fainted. So for those of you in the giving mood, feel free to make donations directly to my bank account.
FCA and PSR Respond to Crowdfunding Rules; Payments Infrastructure
The UK’s Financial Conduct Authority published interim feedback on its review of current crowdfunding rules. The review examines loan-based and investment-based crowdfunding, and the FCA has found risks embedded in the loan-based models, in particular. “We perceive risk of regulatory arbitrage in the loan-based sector, and potential for investors to misunderstand the nature of the products offered.” Risks include inadequate disclosures to investors, inadequate plans platforms have to wind-down in the event of their failure, and needed improvements to how platforms handle client money. According to the FCA, “business models are becoming more complicated and look increasingly similar in substance to other, existing regulated activities, but without being subject to the same regulatory requirements or offering the same consumer protections.” The FCA plans to consult in the first quarter of 2017 and publish final rules in the summer of next year.
Meanwhile, the Payments Systems Regulator revealed changes to the UK’s payments infrastructure including, “mandating a competitive procurement process that will enable new infrastructure providers with different technology to enter the market and drive new and innovative products and services” and “adopting a common international messaging standard for [Bacs Payment Schemes Limited] and [Faster Payments Service] to lower barriers and encourage new entrants to the market.” As stated in the final report, “this package of actions, taken together, will address the competition issues that we have found. In particular, they will enable new infrastructure providers with different technology to enter the market and drive new and innovative products and services. This can benefit all users of payment systems, from large PSPs to consumers.” Feedback on the provisional decision is due by February 1, 2017.
Europe's Financially Excluded
According to a report from Mastercard, nearly 140 million Europeans are cut off from the formal financial system, even though a third of that population is employed full time. A little less than 90 percent of the financially excluded have lived in the same country their entire lives and the average age of those excluded is 42. Not surprisingly, the use of cash is prevalent for the unbanked with 38 percent paying their rent in cash, more than half paying their utility providers in cash, and nearly 90 percent of the financially excluded using cash for goods and services. The use of the smartphone among the unbanked has grown exponentially while use of standard mobile phones has declined. Nearly three-quarters of those surveyed agreed “that access to digital products and services has vastly increased people’s ability to access financial products.” However, as the report states, “there is a gap between the use of technology and the use of digital financial services, demonstrated in the open ambivalence around the possibility of online utilities payments.”
Alternative Finance in Review
Moody’s Investors Service released its review of the recent announcement by the U.S. Office of the Comptroller of the Currency regarding special-purpose FinTech charters. According to Moody’s, “If certain marketplace lenders obtain such charters, it would be credit-positive for asset-backed securities (ABS) backed by their loans because these lenders could stop relying on partner banks to fund their loans at origination, a business model that creates legal risks.” However, consolidation is coming to the marketplace lending industry with pundits expecting the industry to contract from the 400 or so platforms currently in existence today to fewer than 20 in a few years. Still, the sector remains attractive with OnDeck recently receiving a $200 million revolving line of credit from Credit Suisse and ApplePie Capital closing a $16.5 million Series B funding round and striking a $180 million loan purchase agreement with TowerBrook Capital.
For those who may have missed it, Christopher Giancarlo, a commissioner at the Commodity Futures Trading Commission discussed distributed ledger technology, among other issues, at a recent ISDA event. According to Giancarlo, financial regulators should designate dedicated, tech-savvy teams to collaborate with FinTech companies — both new and established — to address how existing regulatory frameworks apply. In addition, he said that regulators should: foster a regulatory environment that spurs innovation similar to the UK's FCA sandbox; participate directly in FinTech proof of concepts to advance regulatory understanding of technological innovation; work closely with FinTech innovators to determine how rules and regulations should be adapted to enable 21st century technologies and business models; and provide a dedicated team to help FinTech firms navigate state, federal and foreign regulatory regimes.
Twelve Canadian FinTech companies visited the UK over the past week and three of them announced investments in the UK, which could lead to the creation of 150 jobs. The mission was organized by the UK Department for International Trade. Back at home, Payments Canada announced sweeping changes to the country's payments infrastructure and financial transaction rules. According to the press release, the changes "will be implemented over the next four to five years, with notable enhancements in place as early as 2017." Feedback on the roadmap is open until Jan. 20, 2017.
The FCA and the Hong Kong Monetary Authority struck a co-operation agreement to foster collaboration between the two regulatory authorities in promoting financial innovation. This is the UK's fifth co-operation agreement, which "will reduce barriers for authorized firms looking to grow to scale overseas and assist non-UK innovators interested in entering the market the FCA oversees."
And, of course, there’s Brexit. And while no one knows how this will all play out, there were a few notable developments over the last few days. First, the UK Supreme Court concluded its four-day hearing on the UK government’s Brexit appeal with a decision likely to be rendered “as soon as possible.” The Court has already stated that it will not overturn the referendum result, but a decision will decide whether the government will have to go through Parliament or not. As a preliminary test, British MPs voted overwhelmingly in favor of backing the government's plan to trigger Article 50 by the end of March in a 448-75 vote, which is interesting given that no one has any idea what the plan will look like. Meanwhile, the European Union Committee has published six reports over six days covering Brexit and repercussions pertaining to UK-Ireland relations, trade, fishing, acquired rights, financial services and UK-EU security cooperation.
Also, will Scotland become the next FinTech hub in Europe? David Ferguson, CEO of Nucleus, and Louise Smith, head of design in personal and business banking at RBS, were appointed as the UK government's FinTech envoys for Scotland. According to the press release, "Scotland turns out the most FinTech related graduates in the UK — 12 percent of the annual pool of 97,000 graduates." Glasgow, Scotland's largest city, stands to gain from this effort, in particular.
Since headline activity has calmed down a bit (thank God), I’ve lumped a few countries together here. In Indonesia, draft regulations are in place for the country's 120-or-so FinTech firms. Steps including minimum capital rules, foreign ownership caps and reporting requirements are expected to take effect in the near future. In South Korea, five blockchain platforms and 21 financial services firms have signed a memorandum of understanding and launched a blockchain consortium. Central Bank of Kuwait Governor Mohammad Y. Al-Hashel spoke on FinTech at a recent MENA regional meeting in Abu Dhabi. While FinTech developments are “exciting,” there are concerns, including cybersecurity risk and regulatory arbitrage. “Ultimately, as regulators, we wish neither to stifle innovation nor to undermine financial stability — and it is indeed a very delicate balance to achieve. Similar to when navigating unfamiliar domains, we need to remain agile, adaptive and proactive. This will ensure reaping the enormous benefits of financial innovations, yet limiting their downside.” In India, the Committee on Digital Payments submitted its final report to Finance Minister Shri Arun Jaitley. The report recommends "a medium-term strategy for accelerating growth of digital Payments in India with a regulatory regime which is conducive to bridging the digital divide by promoting competition, open access and interoperability in payments." Meanwhile, as India goes digital, the country faces an increased risk of mobile payments fraud. According to one report, while mobile payment transaction volume is set to spike, India could witness a 60 percent to 65 percent rise in mobile frauds by 2017.
Facebook Messenger is coming to Europe. The social media giant secured an e-money license from the Central Bank of Ireland, paving the way for Facebook users in Europe to use the service for charitable donations or peer-to-peer payments. And speaking of Ireland, the Blockchain Association of Ireland is expected to launch on Dec. 14 and will provide guidance on regulatory conflicts surrounding distributed ledger technology and help establish Ireland as a FinTech hub. Separately, in a policy shift that could significantly promote crowdfunding efforts throughout the EU, the European Parliament is looking to adjust current requirements for small firms interested in raising capital. Meanwhile, Denmark continues its push towards producing a virtual currency, while a French bank-card trade association has selected Gemalto’s Pure to provide a white label solution allowing banks to deploy NFC mobile and in-app payment services more efficiently.
Nigeria's central bank has decided not to license telecommunications firms to provide mobile money solutions, but does support a bank-led model, which would better protect consumer funds and allow the central bank to continue oversight of bank-led payment methods. In South Africa, a report by FirstRand Bank examines the potential changes to monetary policy if central banks were to issue digital currencies. According to the report, a crypto currency issued by a central bank would eliminate bank runs and, for the first time, digital assets could “be held in custody by the owner of the asset, without relying on a trusted party such as a financial institution.” That said, trusted parties “will not disappear, but their roles will certainly change. We anticipate trusted intermediaries having ‘currency under management’ (which would not be deposit liabilities) as well as managing the link between physical assets and their digital representations on blockchains.” And lastly, a TechCrunch article provided a breakdown of the number of accelerators in Africa, which now range anywhere from 100 to 300.
Retail Banking and Consumer Loyalty
A Bain & Co. report looks at the advantages (reduced costs, consumer loyalty) to retail banks in promoting the use of mobile and online banking — an $11.4 billion annual opportunity just for the 25 largest U.S. banks, alone. The percentage of consumers using a bank’s app rose from 32 percent to 52 percent between 2012 and 2015, but has only managed to climb to 55 percent in 2016. As the report states, unless banks actively address the reasons behind consumers preferring not to use mobile apps, including habit, lack of knowledge, access and security, "the pace of moving transactions from branches and call centers to digital channels — and the attendant cost reductions — will remain slow." The report also notes that “top loyalty scores for an excellent branch experience miss the main point: Mobile channels have become the new way for busy consumers to do their banking. Banks that expect people to travel to the branch or wait in the queue for a phone agent for routine transactions are wasting people’s time.”
Large U.S. Banks Have a $11.4 Billion Cost-Savings Opportunity