FinTech in Focus
Accenture released its Financial Services Change Survey which examines organizations' change priorities, capabilities and approaches, and the change outcomes financial services firms are achieving. The most important change investment priorities according to the report: efficiency and cost control (the investment category most likely to increase over the next 12 months); customer service and experience; risk and regulatory compliance (85 percent of executives surveyed view their strategic change priorities as being inhibited by the need to invest in regulatory change); digital technology and channels (big data and analytics and mobile banking were rated as most important for transformation). Of note, “one of the most striking findings regarding banks' change investment is the demand for more rapid payback: 79 percent of respondents said their shareholders expect change programs to deliver the targeted benefits within 18 months or less."
Banks’ Prioritization of Digital
How important have these digital technologies been to the delivery of your change programs?
Light Those Fireworks!
Greetings FinTech in Focus readers! We are less than 5 days away from the greatest American sporting event of all time - the 2017 Nathan's Famous International Hot Dog Eating Contest (there’s actually a countdown clock). It's important to remember that my favorite American, Joey Chestnut, devoured 70 hot dogs in 10 minutes last year to retake the crown. To quote CBS Sports anchor Jim Nantz, "A tradition unlike any other."
Old School Doing New School
In the robo-advisory space, BlackRock pushed into the European robo-advice space after leading a funding round in digital investment manager, Scalable Capital. The company just announced that it will launch a white labeled pension offering later this year. Similarly, Vanguard's Personal Advisor Services now has more than $65 billion in assets under management after coming online in May 2015. Investec, an asset management company, has launched a wealth management service that gauges investor appetite before allocating investment across 300 actively managed funds. Lastly, Fiserv has partnered with GoldBean to provide "newbie" investors with an intuitive wealth management platform that provides users with customized portfolios composed of companies and brands users are familiar with.
Meanwhile, Goldman Sachs’ online consumer lending arm Marcus, which launched back in October, has already provided more than $1 billion in loans to Main Street, and $2 billion by year-end. American Express, whose venture arm just joined a $35 million funding round for insurance startup Next Insurance, will export Australian RegTech abroad after seeing customer onboarding times cut in half with the help of Simple’s KYC cloud-based technology platform. According to Financial Review, “Since adopting the Simple KYC system, the time to on-board new customers has fallen by 50 percent (in conjunction with some other measures), while sales staff efficiency is up by 20 to 30 percent.”
Since we’re on the topic of identity, Accenture has teamed up with Microsoft to build a blockchain-based digital ID network in support of the UN’s efforts to provide more than 1 billion people with legal identification, particularly refugees. BBVA and Das-Nano have formed a new technology company called Veridas. The new technology company will specialize in biometrics "that will develop client identification and authentication systems that will be safer and easier to use." And the U.S. Patent & Trademark Office recently published a patent application from Gemalto, a digital security firm, focused on secure identity on the blockchain.
EY announced the launch of its Financial Innovation Center in New York City combining the “suits and jeans” approach to innovation with a focus, in particular, on FinTech, blockchain, artificial intelligence, robotics and data analytics. About the most remarkable part of the press release is that the Suits+Jeans approach is trademarked!
Lest I forget, EY’s 2017 Fintech adoption index highlighted countries populations’ incorporation of FinTech. China dominated with an adoption rate of 69 percent, India took second with a rate of 52 percent, while the UK, Brazil and Australia rounded out the top five. The United States ranked tenth with an incorporation rate of 33 percent, equal to the global average, while MENA markets were left out of the index, which is interesting given efforts being made in the region to attract FinTech. The study also found that certain users of FinTech are becoming “super users” with 13 percent of respondents interacting with five or more FinTechs. According to the report, “FinTech adoption is predicted to increase for all 20 markets in our study, with the highest forecasted growth in South Africa, Mexico and Singapore. Globally, FinTech adoption is predicted to reach 52 percent.” The report also stressed that FinTech has reached a tipping point for mass usage and foreshadowed far wider disruption of traditional players by FinTech moving forward.
Comparison of the top five markets with the highest FinTech adoption for each FinTech category
Banking on Payments
The American Bankers Association (ABA) released its 2017 Payments Strategy Survey, which found that out of a sample of approximately 200 banks, only 46 percent have intentions of developing a formal payments strategy. Only 3 percent of banks self-identified as “first mover/experimenter”, while more than half (54 percent) stated that they were taking a wait-and-see approach to payments. The top three impediments to executing a bank’s payment strategy, as seen below: 1) reliance on third-party core system providers, 2) technical integration issues, and 3) limited resources.
Impediments to timely execution of payments strategy (%)
Source: American Bankers Association
Also discussed at the ABA Payments Forum, the U.S. Office of the Comptroller of the Currency’s (OCC) FinTech charter. The panel included Kathleen Oldenborg, director of payments systems risk policy at the OCC; Margaret Liu, senior vice president and deputy general counsel at the Conference of State Bank Supervisors (CSBS); and Rob Morgan, ABA vice president of emerging technologies. The back-and-forth discussion between the OCC and the CSBS can be viewed here.
Flash Crash: Ethereum Style
Last Wednesday, the price of Ether plummeted from roughly $320 to as low as 10 cents on the GDAX exchange, one of the largest cryptocurrency exchanges in the world. A multi-million sell order “was enough to then trigger a wave of about 800 automatic position liquidations due to margin calls and stop-loss orders, driving the price briefly as low as $0.10, and causing GDAX to suspend trading,” according to an article in Futurism. According to a GDAX post, “Our initial investigations show no indication of wrongdoing or account takeovers. We understand this event can be frustrating for our customers. Our matching engine operated as intended throughout this event and trading with advanced features like margin always carries inherent risk.” Two days later, GDAX posted that the exchange “will establish a process to credit customer accounts which experienced a margin call or stop loss order executed on the GDAX ETH-USD order book as a direct result of the rapid price movement at 12.30pm PT on June 21, 2017. This process will allow affected customers to restore the value of their ETH-USD account to the equivalent value of their ETH-USD account at the moment prior to the rapid price movement.”
Alipay on the Move Again and Other Payments Headlines
Uruguay-based FinTech payments platform dLocal has integrated Alipay, UnionPay and WeChat Pay into its platform, opening up China’s digital payments providers to the Latin American market whilst expanding dLocal services to Asia. Alipay will also launch in South Africa soon working with City Sightseeing, ACI Worldwide, and Peach Payments to allow the digital payments service to serve Chinese tourists in the region.
PayPal announced a new effort to speed up money transfers using PayPal or Venmo for those with MaterCard or Visa debit cards. The service will cost $0.25 per transaction and deliver funds to a user’s bank account in minutes. India's Paytm, which launched its payments bank in late May, will now offer credit card and lending services. The company recently applied for a license from the Reserve Bank of India to set up a money market fund. Staying in India, WhatsApp is in talks with the State Bank of India, the National Payments Corporation of India and other institutions "to launch a peer-to-peer payments system that will be powered by the government's aspirational Unified Payments Interface (UPI).”
International: The Financial Stability Board released a report on the financial stability implications of FinTech. According to the press release, the report “developed a framework that defines the scope of FinTech activities to be covered and classifies them by their primary economic function.” The report assesses some of the pros and cons of FinTech from a micro and macro policy and stability lens, its potential, and how FinTech fits within current regulatory environments, while coming to the conclusion “that there are currently no compelling financial stability risks from emerging FinTech innovations.” That said, 10 issues merit authorities attention: managing operational risks from third-party service providers, mitigating cyber risks, monitoring macrofinancial risks, cross-border legal issues and regulatory arrangements, governance and disclosure frameworks for big data analytics, assessing the regulatory perimeter and updating it on a timely basis, shared learning with a diverse set of private sector parties, further developing open lines of communication across relevant authorities, building staff capacity in new areas of required expertise, and studying alternative configurations of digital currencies.
European Union: The European Central Bank will develop a new service for the settlement of instant payments called TARGET instant payment settlement. The service "will enable citizens and firms to transfer money between each other in real time and will be available around the clock, 365 days a year."
China: The Bank of China has partnered with Tencent in establishing a joint FinTech laboratory. According to a released statement, "the two sides have made breakthroughs in the fields of cloud computing, big data and artificial intelligence applications, and set up a unified platform of financial big data."
Canada: Boston-based nonprofit, FinTech Sandbox, signed a memorandum of understanding with the Ontario Centres of Excellence. According to the press release, “FinTech Sandbox will open its program in Ontario, which will provide quality data products from 32 industry-leading partners, to qualified start-ups in Ontario.”
Australia: Data Governance Australia released a Code of Practice for public comment in an effort “to set leading industry standards and benchmarks for the responsible and ethical collection, use and management of data in Australia.” The Code contains nine principles: No-harm; Honesty and transparency; Fairness; Choice for the subject individual; Accuracy and access; Stewardship; Security; Accountability; and Enforcement.
FinTech Australia released a FinTech ecosystem map of 119 of its member platforms. According to the press release, “The ecosystem map shows that wealth and investment, and consumer and business lending, are Australia’s two largest fintech sub-sectors.”
The Australian Securities and Investments Commission (ASIC) released two consultation papers for public companies and intermediaries regarding the new crowd-sourced funding (CSF) regime which will begin on September 29, 2017. Under the CSF regime, "eligible public companies can make offers of ordinary shares to investors to raise up to $5 million in any 12-month period." Among the rules that the company, CSF intermediary and other persons involved in a CSF offer must comply with, "a prohibition on multiple CSF offers and on providing financial assistance to retail investors to acquire a company's shares, and rules for how companies can advertise their CSF offers."
ASIC also announced a framework for cooperation with Japan's Financial Services Agency "to promote innovation in financial services in Japan and Australia." The framework, among other provisions, “will enable the JFSA and ASIC to refer innovative FinTech businesses to each other for advice and support via ASIC's Innovation Hub and the JFSA's FinTech Support Desk.”
UK: A new FinTech organization is being formed in Scotland to promote the industry's growth, according to reports. Innovate Finance, as part of the Transatlantic Policy Working Group FinTech, released a report titled, The Future of RegTech for Regulators: Adopting a Holistic Approach to a Digital Era Regulator. The report, “provides insight into the current global FinTech and RegTech initiatives, which can act as inspiration or instruction for the United States.”
A Holistic Approach to a Technology-led Regulator: Global Examples
Source: Innovate Finance
US: The Uniform Law Commission – tasked with considering uniform state legislation - outlined in a memo that it plans to discuss issues related to the regulation of digital currencies at its next annual meeting (July 14-20). Among the issues that will be discussed: A common approach of specifying "permissible investments" as the primary means of consumer protection in "money transmission" statutes, and definition of the term “bank”.
Among other headlines, Scott Bauguess, the Securities and Exchange Commission’s acting director and acting chief economist, division of economic and risk analysis (DERA), provided prepared remarks covering the role of machine learning, big data, and artificial intelligence in assessing risk. According to Bauguess, the data-driven approach to machine learning “is far easier to apply and is proving in many cases to be more accurate than the previous logic-based approaches to machine learning.” Bauguess went on to discuss the role machine learning plays at the agency and its evolution. In regards to oversight of investment advisers, DERA staff will apply unsupervised learning algorithms to identify unique or outlier reporting behaviors with the output “combined with past examination outcomes and fed into a second stage [machine learning] algorithm to predict the presence of idiosyncratic risks at each investment adviser.” As to the future of artificial intelligence (AI) at the Commission, “I can see the evolving science of AI enabling us to develop systems capable of aggregating data, assessing whether certain Federal securities laws or regulations may have been violated, creating detailed reports with justifications supporting the identified market risk, and forwarding the report outlining that possible risk or possible violation to Enforcement or OCIE staff for further evaluation and corroboration. It is not clear how long such a program will take to develop. But it will be sooner than I would have imagined 2 years ago. And regardless of when, I expect that human expertise and evaluations always will be required to make use of the information in the regulation of our capital markets.”
Christopher Giancarlo, acting chairman of the Commodity Futures Trading Commission, testified in front of a Senate Appropriations Subcommittee where he shed more light on the CFTC’s FinTech efforts. According to Giancarlo: “To avoid being a 20th century analog regulator of 21st century digital markets, the CFTC must keep pace with emerging technology. The world is changing. Our parent’s financial markets are gone. A digital transformation is well underway and shows no sign of stopping. For this reason we have launched LabCFTC, an important financial technology initiative that will help us catch up with the changing nature of markets for which we are responsible.”
Lastly, Rep. Emanuel Cleaver (D-MO) "launched an investigation into small business FinTech lending, including online companies that offer payday loan-like products for small businesses and individual consumers." A letter was sent by the Congressman to Lending Club, Biz2Credit, Fora Financial, Prosper, and LendUp who are expected to respond by August 10. As stated in the press release, "small business borrowers are typically not protected by disclosure requirements under the Truth in Lending Act. While FinTech lenders are required to comply with anti-discrimination laws like the Equal Credit Opportunity Act, these lenders are not subjected to supervisory exams like those required for community banks and credit unions."
Russia: Officials continue to relax their stance on digital currencies with Alexey Moiseev, deputy head of the Ministry of Finance, confirming that cryptocurrencies can be traded on exchanges. ““Theoretically, yes. In cases where they are appropriately regulated, yes,” he was quoted as saying.
India: Financial services firm, Motilal Oswal, released a report on the country's demonetization efforts and whether that has resulted in a spike in the use of digital payments. According to the report, "after falling by more than 60 percent in the last months of 2016, cash withdrawals from ATMs have moved back to pre-demonetization levels. All these data points raise doubts over the desired structural shift towards digital payments post demonetization." Both the aggregate value of transactions and the total number of transactions have stagnated after impressive growth late last year. “Due to demonetization, the share of digital transactions increased from 0.51 percent in GDP in 2QFY17 (quarter ending September 2016) to 0.93 percent in 3QFY17 but eased to 0.82 percent in 4QFY17. One could argue that even 0.82 percent is much higher than what it would have been without demonetization; however, considering such low base and the extent of the historic movement, we believe that the fall in the share of digitization (using limited database) so early is not encouraging.”
Source: Motilal Oswal
Even so, the number of Indians using mobile devices and other digital banking channels is rising considerably according to FIS’ third annual Performance Against Customer Expectations report. The report found that roughly 60 percent of the surveyed population use mobile devices, up from 39 percent in 2016 and 34 percent in 2015.
New Zealand: The country's Financial Markets Authority is seeking feedback on proposals that would amend current law (2008) in allowing entities "to provide personalized financial advice generated by a computer program or algorithm (robo-advice)." According to the press release, the FMA “is proposing to use its exemption powers to facilitate robo-advice prior to the legislative changes. The purposes of the Financial Advisers Act (‘FA Act’) are aligned with the Financial Markets Conduct Act, which include ‘promoting innovation and flexibility in financial markets.’”
Hong Kong: Hong Kong's FinTech accelerator, run by DBS Bank and VC Next, is switching the format of its program to a "rolling intake that will see it host new startups throughout the year," according to Finextra.
Japan: The Tokyo Metropolitan Government (TMG) is currently putting together a new plan termed "Financial System Reform in Tokyo - Tokyo's Big Bang" in an effort to regain the city's status as the number one international financial city. The announcement will be made this fall, but TMG provided an overview of the plan earlier this month. Included in the effort is the launch "of a new initiative to develop FinTech business, and the initiatives to support the establishment or development of innovative businesses.” Pages 8-10 of the report focus on how Tokyo intends to attract FinTech startups, including the implementation of an accelerator program, studying issues "that will contribute to the formation of a FinTech ecosystem," and studying whether to implement a regulatory sandbox.
Thailand: Thailand's Digital Economy and Society Ministry is expected to establish a $150 million Digital Economy Fund in September to support domestic startups.
Luxembourg: The country’s minister of finance, Pierre Gramegna, visited San Francisco and Silicon Valley in mid-June and met with a number of FinTech companies, VCs, etc. Accompanying the finance minister were Isabelle Goubin, director of the Treasury, Nicolas Mackel, CEO, Luxembourg for Finance, Nasir Zubairi, CEO, LHoFT - Luxembourg House of Fintech. This is yet another effort by the Luxembourg government to drive FinTech growth and development in the country.
Cambodia: The National Bank of Cambodia is expected to launch the testing phase of a closed loop blockchain-based technology towards the end of this year, according to the Phnom Penh Post. According to director general Chea Serey, the technology will not be used to support any type of cryptocurrency at this point, but be used to reduce costs associated with interbank lending. The central bank also notified all payment services providers that they must be licensed by the NBC and are required to have at least $2 million in registered capital, and deposit 5 percent of their paid-up capital with the bank.According to Chea Serey, director-general of the bank, “innovation in payment areas is moving very fast, but the regulatory framework for payment systems in Cambodia is still behind and the scope of existing regulations cannot cover new payment innovation. As a regulator of payment systems, the NBC needed to update and formulate new regulations according to the market’s needs.”