FinTech in Focus
FinTech in Asia
A report by the Asia Securities Industry and Financial Markets Association (ASIFMA) provides 10 best practices to guide regulators in the region in support of the development of FinTech. They are: support the development and adoption of responsible, safe and secure products; work with industry to explore RegTech solutions; develop regulations and policies that strike the right balance between innovation and protection; ensure that consistent regulations and standards are applied to all market participants; ensure interagency cooperation; enhance cross-border cooperation with other regulators; support industry-driven interoperability; develop a clear framework and guidelines to allow for cross-border transmission of data; ensure that laws support technological developments; and promote cybersecurity and data security. The document goes on to highlight the various efforts that Asian governments and regulatory bodies have taken to support financial innovation, but it notes that “there remain a number of challenges confronting the development of FinTech, including cybersecurity risks, difficulties of scale for FinTech companies who have to navigate differing regulatory landscapes, and regulatory uncertainty.”
Amazon and SoFi
Amazon’s small-business lending arm, aptly named Amazon Lending, has provided more than $1 billion in short-term loans to small businesses over the past 12 months, with over $3 billion lent to more than 20,000 merchants since inception back in 2011. According to Finextra, the operation “is proving so popular that Amazon is seeing a 50 percent return rate for a repeat loan from merchants invited to take part.”
SoFi—which co-founder Dan Macklin left on June 6—applied with the Federal Deposit Insurance Corporation for a de novo bank charter. According to the application, the company “seeks to establish an industrial bank (‘the bank’) chartered by the state of Utah for the purposes of providing its customers [an] FDIC-insured NOW account and a credit card product. The bank will offer no other products and services. The proposed industrial bank will be named SoFi Bank, a wholly owned subsidiary of SoFi, with 100 percent of all issued stock to be held by SoFi.”
Vacation Over, Back to Work
For the first time in five years, my wife and I were not attached to our kids—and it was glorious! Top highlights: waking up after 6 a.m., actually playing a decent—and by “decent” I mean I lost fewer than five golf balls—round of golf, and watching my parents pop Champagne in celebration of the last of their four children (my brother) graduating college. And now … back to reality.
Digital Payments Growth
A new white paper from Fiserv, a company that has reportedly bought U.K.-based payments platform Monitise for £70 million, finds consumers are using mobile devices to facilitate certain forms of payments. According to the report, which surveyed more than 3,000 U.S. households, 75 percent of respondents use online banking and 44 percent use mobile banking. Roughly three-quarters used online banking to pay bills in 2016, up from 64 percent in 2015, while 80 percent and nearly 60 percent of respondents, respectively, used mobile banking to view balances and-or transfer money. With regard to peer-to-peer payments, roughly half of nonusers said they preferred to use other methods of payment, more than 40 percent were unwilling to pay a fee, and a quarter of respondents said they did not know enough about how P2P services work. While digital wallet usage is still in its nascent stages, the report says, “the overall adoption curve looks strikingly similar to the early years of online banking, suggesting that a sharp rise may be on the way.”
In related news, the number of EMV cards in circulation worldwide topped 6 billion, and Alipay is headed to Austria and Switzerland thanks to Concardis. SWIFT introduced a real-time cross-border payments tracker, which has been in use by more than 20 global transaction banks since January. Lastly, JPMorgan, Bank of America, Wells Fargo, U.S. Bancorp, and Capital One Financial Corp. will join together to allow customers to send money instantly to one another over the Zelle Network.
Headlines: Digital Currencies and Distributed Ledger Technology
Another week, more milestones. Bitcoin’s price crossed $3,000 for the first time, while the market capitalization of digital currencies breached $100 billion. Speaking of digital currencies, as Ethereum’s price continues to skyrocket—up 5,000 percent since the start of the year—questions remain about the size of the Ethereum blockchain and its viability going forward.
Total market capitalization of digital currencies (May 1-June 13, 2017)
In related news, Coinbase is seeking a new round of financing, which would value the company at more than $1 billion. Meanwhile, Western Union’s chief technology officer, David Thompson, provided more details on the company’s involvement with Coinbase in a project launched last fall. Separately, R3 and ACORD have launched a Center of Excellence for distributed ledger technology in the global insurance industry. According to the news release, the center “will provide a dedicated environment for both R3’s members and ACORD’s members to research, experiment, and design DLT applications that improve the efficiency of insurance processes such as claims handling and data management.”
The Digital Economy
The United Nations Conference on Trade and Development (UNCTAD) released a report covering the top 100 digital multinational enterprises (MNEs) and their global footprint. According to the report, sales abroad make up roughly 70 percent of digital MNE sales, while only 40 percent of their assets are based outside their countries of residence. Similarly, “Between 2010 and 2015, the number of tech companies in UNCTAD’s ranking of the top 100 MNEs more than doubled. The assets of these MNEs increased by 65 percent and their operating revenues and employees by about 30 percent, against flat trends for other top 100 MNEs.” The report also notes a lack of regional diversity, with more than three-quarters of digital MNEs from the U.S, U.K., and Germany and only four companies in the top 100 headquartered in developing nations.
The Internet intensity matrix and the growth of digital MNEs
Seed Accelerators Ranked
A study from Rice University, MIT, and the University of Richmond ranks U.S.-based seed accelerators based on a variety of metrics, including valuations, amount of fundraising, and exits. Given the proliferation of accelerators over the years, the lack of reliable, publicly available data regarding performance, and confusion as to how performance should be measured, the study attempts “to provide greater transparency regarding the relative performance of programs along multiple dimensions that may be of importance to entrepreneurs.” Based on data through year-end 2016, AngelPad and Y Combinator shared the top spot among top-tier accelerators, followed by Alchemist, Amplify.LA, MuckerLab, StartX, Techstars, and the University of Chicago New Venture Challenge.
International: The International Chamber of Commerce Banking Commission has launched a working group aimed at identifying strategies “to overcome the constraints of digitalizing trade finance—such as a reliance on paper-based practices, a lack of recognition of the legal status of electronic documents, uncertainty over standards, and a general lack of clear legal and regulatory frameworks.” The group will be chaired by Michael Vrontamitis, global head of trade, product management, transaction banking at Standard Chartered.
ASEAN: Malaysian-based Maybanklaunched a regional FinTech sandbox giving startups the ability to develop and test new ideas using the bank’s expertise. According to Maybank Group President and CEO Datuk Abdul Farid Alias, “Having a great idea is not good enough to sell a product. FinTechs need to be able to develop a minimum viable product (MVP) in order to attract the right investments and funding. This is where many FinTechs face challenges—in their ability to move from ideation to a working MVP.”
Meanwhile, Lattice80, “the world’s largest FinTech hub,” has signed a memorandum of understanding with Nordic Finance Innovation to bridge the FinTech ecosystems between Asia and the Nordic countries.
U.K. (Author’s note: Look what happens when I leave on vacation! What is going on over there?) For those who might be unaware, the U.K. held snap elections last week and Prime Minister Theresa May’s Conservative Party found itself short of a majority, with potentially significant ramifications for the Brexit negotiations. Nevertheless, German Chancellor Angela Merkel said she expects the negotiations to proceed as planned. Donald Tusk, president of the European Council, reaffirmed that point, saying that regardless of Britain’s internal discord, the end date for negotiations is fixed. It’s likely that May will attempt to partner with the DUP (a Northern Irish party) to establish a formal coalition. The election results reflect skepticism over May and the Tories’ so-called hard Brexit policy, and subsequently both Tory and Labor MPs have pushed to soften the government’s position. Internationally, the election results are being described as a second “own-goal.”
Hong Kong: The Hong Kong Monetary Authority and the People’s Government of Shenzhen Municipality agreed to strengthen cooperation between Hong Kong and Shenzhen in the area of FinTech. The initiatives include an invitation to HKMA’s FinTech summit later this year, the organization of a FinTech competition event, and support for FinTech firms domiciled in Hong Kong and Shenzhen.
EU: The European Commission’s Community Research and Development Information Service (CORDIS) created a consortium called Titanium that will undertake a three-year project to curb digital transactions in underground markets and develop forensic tools for analyzing online transactions by criminal organizations.
The European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union issued a report titled “FinTech: A More Competitive and Innovative European Financial Sector.” The report outlines how FinTech would increase the efficacy of the European financial market in four areas: fostering access to financial services, reducing operational costs and increasing efficiency, reducing barriers to entry into Europe’s financial market, and balancing data sharing with privacy.
Meanwhile, the European Securities and Markets Authority (ESMA) issued a statement welcoming FinTech development in Europe. The statement focused on artificial intelligence, automation, crowdfunding, RegTech, outsourcing, distributed ledger technologies, and the role of regulators, and it stressed that while innovation is important, new businesses should seek to improve consumer experiences and facilitate financial inclusion.
Germany: The government will establish a new, state-owned enterprise venture capital fund. The company will be a subsidiary of KfW, the state-owned development bank, and will address the estimated €500 million funding gap in Germany’s venture capital system. The new subsidiary will provide €200 million in startup capital annually through 2020, then increase that to €2 billion.
India: India’s banks are beginning to set charges for use of the United Payment Interface (UPI) platform for peer-to-peer payments, with the State Bank of India charges effective June 1. This despite pleas from the National Payments Corporation of India to banks to not charge customers for peer-to-peer UPI transactions.
Singapore: The Monetary Authority of Singapore (MAS) released a consultation paper on conducive regulatory frameworks for firms interested in offering digital advisory services. MAS intends to refine the licensing and business conduct requirements under the Securities and Futures Act and the Financial Advisors Act, provided firms have certain safeguards in place. It also entered into a FinTech agreement with the Association of Supervisors of Banks of the Americas (ASBA) providing a framework for FinTech cooperation between Singapore and ASBA’s member countries. Under the framework, “both parties can explore potential joint innovation projects on technologies such as blockchain and big data. MAS and ASBA will also facilitate discussions on issues of mutual interest, such as emerging FinTech trends and other pertinent issues on innovative financial services.”
China: China’s banking and regulatory commission has released a report on the development of rules covering blockchain in an effort to streamline the country’s securities market. According to the report by CoinDesk, “The innovation of blockchain application in the security market still needs to follow the theory and rule of thumb of the finance sector. The previous chaos of P2P lending in China explained well how a fast-developing technology can outpace the financial regulation and bring serious threat to the system.” Guo Shuqing, chairman of the commission, has urged banks to boost credit availability to small and micro businesses by devolving loan approval responsibility. Lastly, Ping An, the world’s largest insurer by market capitalization, is in the market for FinTech investments of $10 million to $30 million.
Canada: The government has committed to the development of a social innovation and social finance strategy to “provide better support for community organizations working to achieve positive solutions to persistent social problems, including those facing vulnerable populations.” Meanwhile, the Blockchain Research Institute, based in Toronto, announced the addition of new members, including the government of Canada, the government of Ontario, the city of Toronto, and the Bank of Canada.
UAE: U.K.-based firm ObjectTech announced an agreement with the government of Dubai “to create the world’s first ‘gateless border,’ combining the power of biometric verification and the immutability of blockchain technology.”
U.S.: The General Services Administration (GSA) will begin a blockchain-based pilot project this summer, according to Justin Herman of the agency’s Technology Transformation Service. The GSA’s Federal Acquisition Service and the State Department’s Office of Global Partnerships will hold a forum in the next few months on the topic. Meanwhile, the State Department plans to form a blockchain working group and is seeking applicants to support its formation and activities.
Speaking of blockchain, Jeff Bandman, FinTech advisor at the Commodity Futures Trading Commission (CFTC), was interviewed by Regulatory Intelligence. He discussed LabCFTC and the commission’s interest in distributed ledger technology. (Author’s note: Bandman recently spoke at a Securities Industry and Financial Markets Association event in New York, where, according to his prepared remarks, he announced he would be leaving the CFTC to join the private sector.)
Sticking with federal regulatory agencies, the Office of the Comptroller of the Currency (OCC) released FAQs to supplement the agency’s risk-management guidance concerning third-party relationships. Included in the list of questions are several that are FinTech-specific, including: Is a FinTech company arrangement considered a critical activity? Can a bank engage with a startup FinTech company with limited financial information? How can a bank offer products or services to underbanked or underserved segments of the population through a third-party relationship with a FinTech company?
Of note: On Friday, June 23, Innovate Finance and Hogan Lovells will hold a launch event covering the Transatlantic Policy Working Group’s first white paper on the future of RegTech for regulators. Speakers at the Washington, D.C., event will include officials from the OCC, the CFTC, and the Consumer Financial Protection Bureau.
On the legislative front, Reps. Jared Polis (D-Colo.) and David Schweikert (R-Ariz.), co-chairs of the Blockchain Caucus, sent a letter to the IRS inquiring about tax-reporting requirements related to virtual-currency transactions. The letter encourages the agency “to consider the recommendations of the [Treasury inspector general for tax administration] and take action based on those recommendations to increase taxpayer compliance with Notice 2014-21.” The letter also encourages the IRS to provide clarity on virtual-currency exchanges regarding information reporting and record keeping.
At the state level, Nevada became the first state to block local government entities from taxing blockchain transactions. The move comes roughly two weeks after Arizona signed a bill into law that formally recognizes blockchain signatures and smart contracts. In New Hampshire, Gov. Chris Sununu signed a bill into law exempting “persons conducting business using transactions conducted in whole or in part in virtual currency” from the state’s money transmitter regulations. Meanwhile, the state of Illinois, CME Group, and others have joined together to launch the Chicago Blockchain Center.