FinTech in Focus
You Bid Charter, We Raise You ‘Vision 2020’
Nearly two weeks after U.S. Comptroller Tom Curry stepped down and less than a month after the Conference of State Bank Supervisors (CSBS) filed suit against the Office of the Comptroller of the Currency (OCC) over its effort to expand special-purpose national bank charters to FinTech firms, the CSBS unveiled its “Vision 2020” initiatives for FinTech and nonbank regulation. Included in the “initial set of actions” the CSBS and state regulators are taking: a redesign of the Nationwide Multistate Licensing System, harmonized multistate supervision, an industry advisory panel, education programs to assist state banking departments, and better coordination between banks and nonbanks.
Speaking of lawsuits, the New York State Department of Financial Services filed a lawsuit against the OCC’s effort (separate from the CSBS lawsuit), calling it “lawless, ill-conceived, and destabilizing of financial markets that are properly and most effectively regulated by New York state.”
Speaking of bank charters, SoFi will reportedly apply for an industrial banking charter next month. CEO Mike Cagney discussed the effort during a TechCrunch Disrupt interview Tuesday. “We might have found a way to get around this where we can deliver the service and product to our members and make it economical and not have to go through the banking process,” Cagney said, adding: “What we’re doing would be completely SoFi. We’d be able to control the member experience, the product, the structure, the delivery.... Keep an eye out for it this year and see what we do with it.”
RFI Here, RFI There
At some point those of us who focus on U.S. domestic policy and regulation regarding FinTech are going to get a chance to rest, right? One good thing about the buildup in requests for information (RFIs) from regulators and lawmakers is that it keeps me employed here at the Milken Institute. The Consumer Financial Protection Bureau recently published an RFI pertaining to the small-business lending market. It also held an off-site event in Los Angeles at which Director Richard Cordray provided more details on the request. But there is no rest for us FinTechers(?)! Not to forget, the U.S. Commodity Futures Trading Commission just announced LabCFTC – the agency’s FinTech effort designed to “promote FinTech innovation and fair competition by making the CFTC more accessible to FinTech innovators and serving as a platform to inform the CFTC’s understanding of new technologies. “
Reports to Break the Printer
Several reports that have been released over the last week are worth a mention. First, and not surprisingly, millennials continue to favor P2P payments more than older generations do, according to a Bank of America “Trends in Consumer Mobility Report.” One of the more interesting statistics in the report pertains to how comfortable users are in sending or receiving different amounts of money, as the figure below shows.
No P2Prequest is off-limits
Source: Bank of America
Second, a report from the Harvard Kennedy School assesses whether certain FinTech models and services are a more promising alternative than the current short-term, small-dollar credit system that serves low-income working families. According to the report’s authors, “we believe that individual FinTech products would be able to address the utility needs of a minimum of 4.7 million and a maximum of 15.6 million full-time workers in low-income families. Collectively, we believe that these FinTech products could benefit virtually all of the 10.4 million low-income working families and, indirectly, the 47 million individual members of those families.” Among the solutions with the highest utility and scalability scores (defined on pages 39-40) are digital income/expense variability management solutions and digital credit access/cost improvement lenders, as seen in the figure below.
Source: Harvard Kennedy School Mossavar-Rahmani Center for Business and Government
Brazil: Goldman Sachs finds the country ripe for FinTech, according to a report cited by the New York Times. There are more than 200 FinTech companies in the region with the potential to generate $24 billion in revenue over the next 10 years. Payments, lending and personal finance are the most promising segments, given the country’s “oligopolistic market structure” in the banking sector, the report says. Meanwhile, the country’s central bank is expected to announce a raft of FinTech regulations this year designed to spur competition in the financial services sector. Brazil’s FinTech scene is explored further in a recent TechCrunch article.
New Zealand and Malaysia: Changes to current law will allow for the legalization of robo advice in New Zealand by 2019. Currently, only “natural persons” can provide financial advice. In Malaysia, the country’s securities regulator announced licensing and conduct requirements related to digital investment management.
UAE: The Dubai Financial Services Authority hosted a FinTech outreach session with more than 120 attendees, focused on the current conditions for FinTechs to set up shop in the region. Separately, the Financial Services Regulatory Authority of Abu Dhabi Global Market (ADGM) introduced “a risk-proportionate regulatory framework for managers of venture capital funds,” the first such framework in the MENA region. The framework, which took effect May 15, is part of ADGM’s effort to foster a vibrant FinTech ecosystem. ADGM also recently announced the first batch of applicants to its FinTech Regulatory Laboratory. The five participants offer a range of innovative services and “will receive dedicated regulatory guidance by the ADGM FinTech team and, in addition, focused membership and support by ADGM FinTech ecosystem partners.”
U.K.: A closer inspection of the U.K.’s bank referral scheme may show it to be ineffective. The Treasury recently announced the appointment of professor Russel Griggs to review the referral process, which went live in November. The appointment has been welcomed by a number of firms and organizations, including Assetz Capital, the Association of Alternative Business Finance, and the Just Loans Group, which have not seen an uptick in referrals.
Meanwhile, the Financial Conduct Authority (FCA) has struck a FinTech cooperation agreement with the Hong Kong Securities and Futures Commission. The development comes around the same time that the FCA’s Christopher Woolard, executive director for strategy and competition, provided regulatory perspective on competition and innovation in the financial services space. According to Woolard, “Before we support an innovative business, we have to be convinced not only that its proposition is genuinely innovative, but also that it has consumer benefit and, crucially, that it will not cause consumer detriment. But we also understand that there is some trial and error for most startups—pragmatism plays its role. And this is crucial, because if we are serious about not having regulation stifle innovation, we need to be cognizant of the different circumstances of the firms who come to us.”
The Bank of England has published a blueprint for a renewed real-time gross settlement service designed to “respond to the changing structure of the financial system, meet user demand for simpler and more resilient payment pathways, build capacity to interface with new payment technologies as adoption increases, ensure continued resilience in the face of evolving threats such as cyber attacks, and support the evolution of regulatory and monetary policy tools.” The blueprint is the culmination of public comments received on proposals released back in August 2016. The U.K.’s Payment Systems Regulator released a response in support of the blueprint.
Lastly, the Land Registry office has indicated that it’s looking for nonexecutive board members to help strengthen the board as the agency seeks to live-test efforts—including through the use of the blockchain—to support a more digital-centric approach to land registry. The “Digital Street” initiative “would enable the ownership of property to be changed close to instantaneously” and would allow the agency to hold more granular data.
Singapore: Lim Hng Kiang, minister for trade and industry, spoke at a Singapore Business Federation event, where he discussed the direction of ASEAN under the country’s chairmanship beginning in 2018, including a major focus on efforts to spur digital economies and trade and to streamline rules governing e-commerce.
With the support of the Monetary Authority of Singapore, CCRManager, a company that invests in and operates technology platforms and financial solutions for the global trade and working capital industry, has launched the first digital platform for the distribution of international trade financing. According to a news release, the platform “is Web-based and will enable banks to manage the entire process of distributing trade finance internationally to other banks, credit insurers, and fund managers.”
Most importantly, the Singapore FinTech Festival will return this year, on November 13-17.
EU: The European Commission published a midterm review of its Digital Single Market strategy that includes three areas where additional action is needed: developing the European data economy to its full potential, protecting Europe’s assets by tackling cyber security challenges, and promoting online platforms as responsible players of a fair Internet ecosystem. Meanwhile, the European Parliament published a document covering blockchain’s potential impact on social values.
Lastly, the European Banking Federation (EBF) is pushing hard for the European Commission to ban the practice of screen scraping. According to a release, the EBF has asked the commission not to dismiss key recommendations made by the European Banking Authority related to the future of electronic payments in Europe.
China: The country’s central bank has formally established a committee to oversee FinTech developments. Concerned with the rise of new security challenges created by financial innovation, the bank will step up its use of big data, artificial intelligence, and cloud computing to recognize, assess, and reduce or prevent risk in the system. Meanwhile, Alibaba’s Ant Financial has delayed its anticipated IPO until late 2018 at the earliest, due in part to a decision to refocus its strategy (start around 2:40) in the face of mounting competition from Tencent.
Lastly, Wanxiang Group, a blockchain technology leader in the country, launched WanCloud, providing for an ecosystem “for open-source blockchain protocols to be localized and made easily accessible to the Chinese development community and enterprise users,” according to a report.
Canada: Cash is still king in Canada, but not for long, according to a report by Payments Canada. Although cash still makes up most transaction volume, its use has declined by 20 percent since 2011, the report says. The use of checks declined 25 percent in the period, but overall value increased 2 percent on average between 2011 and 2015. Online transactions are the fastest-growing segment, reaching 120 million transactions worth $45 billion in 2015.
Volume and value of payment categories in Canada
Source: Payments Canada
Speaking of payments, a study by PayPal Canada finds that less than 20 percent of small and medium-size enterprises (SMEs) are using online payment tools (electronic invoicing, online marketplaces, etc.), and more than 80 percent don’t accept any form of online or mobile payment; 70 percent say they would never consider selling products online.
And lastly, the Toronto Financial Services Alliance, in partnership with Accenture, released a report covering efforts to turn the Toronto region into a global FinTech leader. The report says the region’s ecosystem “risks falling further behind as other established and emerging FinTech hubs move to seize a global leadership position in this important industry,” and it calls for the development of a “clear, consistently implemented, policy-driven Canadian FinTech strategy that focuses on fostering innovation among all participants in the ecosystem.” Among the report’s recommendations: modernization of regulatory frameworks; closer and more frequent engagement between FinTechs, incumbents, and venture capital firms; encouraging the commercialization of research; and raising awareness.
U.S.: We’ll focus on the states this week. In Delaware, amendments have been offered to the General Corporation Law that would provide a framework for how companies incorporated in the state use blockchain for record keeping. In New York, the state Senate announced a public hearing May 22 on the practices of the online lending industry. New York has been actively focused on the online lending space for some time, with the Department of Financial Services inquiry back in June and provisions in the 2017 state budget that target the online lending industry.
Other countries: While I would love to break out each country, I just don’t have enough room! Interesting developments include: Japan’s interest in a deregulated sandbox, German companies seeking to create one European company to store customers’ data and provide for a more efficient payments process, four Irish banks joining a blockchain payments pilot, a decline in remittances in Bangladesh due to the increased use of mobile banking services, and the launch of a new payment card in Kenya by Safaricom.