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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
February 01, 2017
   
   

It’s Been 4 Years

Preliminary celebrations are already underway for my son’s fourth birthday party. Celebrations first began last weekend where yours truly inhaled gas fumes at a monster truck event (similar to World Wrestling Entertainment in that it is the best three hours of entertainment you will ever see), which also resulted in a loss of hearing for two straight days. This weekend, I will be dressed up in Star Wars gear while other parents judge me. Needless to say, I’m in need of a vacation. But enough about me, let’s get to FinTech.

Data

Congratulations to the United States, which tops the charts in the number of annual data breaches globally, according to a recent report. Over 2,000 announced breaches to be exact, resulting in nearly 3 billion lost user records—10 times more than Russia. Yahoo makes up a fair portion of the cumulative records that were breached in 2016, but even if Yahoo had emerged unscathed, the U.S. would still dominate.

Moving on, let’s talk about data sharing and standardization. If you were also planning for your kid’s fourth birthday, you may have missed the data-sharing agreement between JPMorgan Chase and Intuit. According to the release, “Chase and Intuit will use a business-to-business, data-sharing connection called an application-programming interface to download the information quickly and safely. It uses a token to authorize Intuit to download the requested account information on behalf of the customer without requiring customers to give Intuit their Chase user name and password.” The agreement aligns closely with the data-sharing principles published by the Center for Financial Services Innovation. The development comes more than two years after certain banks shut off or slowed third-party platforms’ access to customers’ information. Maybe Bob Dylan was right, the times they are a-changin’. 

Separately, Orchard published a white paper covering the lack of uniformity across data sets and structures in the online lending industry and a review of the platform’s efforts to standardize loan payment data from its partners. As Orchard notes, investors have a difficult time analyzing the disparate data elements, which require that an investor “be capable of not only understanding the many reporting nuances but also have the ability and resources necessary to develop algorithms and systems to normalize the disparate reporting structures on an ongoing basis.” 

Crowdfunding: Europe & Africa

The European Parliament has published a state of play on Europe’s crowdfunding marketplace. Using existing literature, the EU Parliament report provides a general overview of the crowdfunding marketplace in Europe, including the benefits and risks to project owners and investors, and policy efforts at the EU level to address this growing marketplace. Separately, the Cambridge Center for Alternative Finance and FSD Africa published a report assessing the development of crowdfunding in East Africa. With the industry still in its infancy in that region, the report offers three recommendations to facilitate the development of crowdfunding in East Africa: sector mapping, capacity building and industry engagement activities; developing initiatives that foster regulatory trust in crowdfunding platforms, including the creation of a regulatory sandbox; and government support and endorsement. In particular, the report states that “it is not recommended that any bespoke regulation is created at this time by the regulators as this might stifle market development.” It also goes into some detail on crowdfunding developments worldwide and international policy and regulatory approaches in regulating crowdfunding (see the below chart). 

Regulatory Regimes

 

 Regulatory Regime

 

 Description

 

 

 Exempt Market/Lack of Definition

 

 Market classified as exempt, or lack of legislative definition. In some cases, regulation protecting investors and fundraisers still applies. Relates to, for example: unfair interest rates, affordable credit, false advertising.

 

  Intermediary/Platform Regulation

 

 Regulates equity and loan-based platforms as an intermediary, and usually requires registration and other regulatory requirements depending on the jurisdiction. Generally, the requirements relate to platform registration, but also include prescriptions relating to business conduct, governance and, in some cases, reporting requirements.

 

 Banking Regulation

 

 Regulates platforms as if they were banks due to their credit intermediation requirements. Platforms therefore essentially need a banking license, and are subject to full disclosure and reporting requirements.

 

 Both National and Local/Provincial Regulation

 

 Two levels of regulation and required licensing; e.g. in the US, federal regulation is monitored by the SEC, and state regulation is applicable to state-level securities agencies. Some states have imposed an outright ban on equity and debt-based activities, while others have implemented crowdfunding exemptions, which allow for a broader investment base (non-accredited investors) to participate in securities sold on platforms.

 

 Prohibited

 

 Equity crowdfunding and loan-based crowdfunding is banned outright.

 

Source: Cambridge Center for Alternative Finance, FSD Africa 

Carney & Brainard Focus on FinTech

At a conference covering digital finance, financial inclusion and financial literacy, Mark Carney, governor of the Bank of England, gave prepared remarks on the promise of FinTech. According to Carney, “FinTech’s true promise springs from its potential to unbundle banking into its core functions of: settling payments, performing maturity transformation, sharing risk and allocating capital.” Given the rise of new entrants and incumbents adopting new technologies, systemic risks will evolve, Carney said. “The challenge for policymakers is to ensure that FinTech develops in a way that maximizes the opportunities and minimizes the risks for society.” He explored the various financial stability issues resulting from the rise of FinTech but encouraged regulatory bodies “to be disciplined about consistent approaches to similar activities undertaken by different institutions that give rise to the same financial stability risks. Just because something is new doesn’t necessarily mean it should be treated differently. Similarly, just because it is outside the regulatory perimeter doesn’t necessarily mean it needs to be brought inside.” Carney added that refreshing supervisory approaches to FinTech could include: regulatory sandboxes, adaptation of existing authorization processes to allow for new models and approaches, an expansion of who can access central bank money, and development of proof of concepts with enabling technologies. 

Meanwhile, the U.S. Federal Reserve recently published the third issue of its Consumer Compliance Outlook, which included an interview with Fed Governor Lael Brainard, a discussion on balancing the promise and risks of innovation by the late Teresa Curran of the Federal Reserve Bank of San Francisco, and an overview of FinTech for the consumer market. “As an ever-broadening array of choices become available to consumers, we have to think carefully about ensuring that consumers can meaningfully make informed choices among the options presented to them. In one sense, regulators’ approach to fintech should be no different than for conventional financial products or services,” Brainard said. Yet “the application of laws and regulations that were designed based on traditional financial products and delivery channels may give rise to complex or novel issues when applied to new products or new delivery channels. As a result, we are committed to regularly engage with firms and the technology to develop a shared understanding of these issues as they evolve.”

Industry Developments

A few headlines to digest, including Ant Financial’s purchase of MoneyGram for $880 million, opening up Alibaba’s finance arm to MoneyGram’s network of 2.4 billion accounts and 350,000 locations. As FT Partners noted in a release, the combination “will provide over 630 million consumers in over 200 countries and territories with convenient and accessible financial services.” Meanwhile, StartEngine will launch a secondary market for Regulation Crowdfunding and Regulation A+ securities beginning in March. The marketplace will be made available to issuers that raised capital on separate U.S. crowdfunding platforms. And speaking of online finance platforms, Citigroup has launched a small-business lending website, run by Biz2Credit, allowing borrowers to seek up to $1 million in financing, while LendingRobot launched an automated hedge fund in which algorithms will automatically buy and sell loans originated by peer-to-peer lenders.

Global Developments

U.K.

If you guessed Brexit would be the first topic of discussion, you’re correct. The British government is expected to publish a white paper Thursday providing further details covering the U.K.’s departure from the European Union. Additional details on how the government views and will approach Brexit were highlighted in a letter published by the House of Lords EU Committee. Meanwhile, the government has also published legislation to trigger Article 50, which consists of two clauses and is only 137 words in length. While Brexit has taken center stage, FinTech is not far from it. The British government’s Department for International Trade will hold an international FinTech investment conference in early April, while the Australian British Chamber of Commerce plans to bring Australian FinTech firms to the U.K.

North America

The U.S. Office of the Comptroller of the Currency (OCC) has published supplemental guidance related to third-party relationships with chartered banks. According to the release, the OCC is interested in determining whether a bank has sufficient oversight and controls in place if it has contracted with third-party lenders “to perform some, if not all, operational functions, including processing, underwriting, closing, funding, delivering and servicing of loans.” As for our neighbor to the north, the Ontario Securities Commission announced the membership of its FinTech Advisory Committee.

Europe

Xapo, a bitcoin wallet company, received conditional approval from the Swiss Financial Market Supervisory Authority (FINMA) to operate in Switzerland. The two-year wait was largely the result of product development, not bureaucratic indifference, and the company praised regulators for their help and guidance throughout the process. As Xapo founder and CEO Wences Casares said, “FINMA invested a tremendous amount of time and resources in the approval process.” He added: “Many regulatory bodies in similar situations would have rejected Xapo (and Bitcoin) entirely. By choosing to persevere, however, we believe FINMA has positioned Switzerland as a hub for fintech innovation and ensured Switzerland’s primacy in global financial services for decades to come.” Meanwhile, in Germany, Jens Weidmann, president of the Deutsche Bundesbank, discussed the objectives of Germany’s G-20 presidency, including “taking stock of the different regulatory approaches” to FinTech with the aim of developing “a set of common criteria for the regulatory treatment of FinTechs.” He added: “Getting a clearer picture of fintechs’ business activities is essential if we are to better understand whether and in what way they might pose a threat to financial stability. It is therefore an important endeavor of the Financial Stability Board to further investigate and promote data availability. Without reliable data, any assessment of risks is unfeasible.” Lastly, the Paris Fintech Forum took place last week, with 1,500 participants gathering to discuss the creation of an enabling policy and regulatory environment for FinTech. 

Asia

According to the Thai Bankers’ Association, commercial banks could save more than $2 billion over 10 years under Thailand’s digital payment system, PromptPay. Meanwhile the Chinese New Year is expected to turn even more digital, with payments firms benefiting from consumers transacting billions of red envelopes. On Saturday, WeChat reported that 14.2 billion red packets were given and received through its network, 75 percent more than last year. The People’s Bank of China has issued guidance ordering lenders to curtail new loans in the first quarter of this year. At the same time, the country’s central bank also announced a successful trial of its digital currency system.

Payments, Fast

NACHA, the governing body for the U.S. Automated Clearing House (ACH) network, released figures regarding same-day ACH use. According to the release, between September and December a total of 13 million transactions took place, worth a total of $17 billion. Direct deposit via ACH transactions made up more than 50 percent of same-day ACH volume, while business-to-business payments represented nearly a third of the volume. Separately, the Federal Reserve released a progress report on efforts to improve the U.S. payments infrastructure. The report covers efforts the Fed has made up to this point, along with a list of steps it intends to take. The Fed’s Faster Payments Task Force, one of two task forces created under Fed initiative, released Part 1 of a two-part final report; it includes an assessment of faster-payment capabilities, analysis of remaining challenges and opportunities, and recommendations for successful implementation of faster payments.

Global Faster-Payment Systems

  02 1 17a

Source: FIS Flavors of Fast 2016, Federal Reserve’s Faster Payments Task Force

 


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