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
July 07, 2017

Artificial Intelligence: +$15.7 Trillion to Global GDP

A report by PwC finds that artificial intelligence (AI) could boost global GDP by fourteen percent, or approximately $15.7 trillion, by 2030, with China and the U.S. seeing significant gains, in particular. The analysis, “looked at the total economic impact of AI, accounting for increased productivity (which may involve the displacement of some existing jobs), the creation of new jobs, new products, and other effects.” Roughly $6.6 trillion is expected to come from increased productivity, while $9.1 trillion is likely to come from consumption side effects, according to the report. Labor productivity improvements, in particular, will account for fifty-five percent of all GDP gains from AI between 2017 and 2030.

Which regions will gain the most from AI?

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Source: PwC

In other AI headlines, IBM Watson headed to Capitol Hill last week with David Kenny, IBM Watson's senior vice president, to explain to lawmakers the importance of forward thinking approaches to AI, whilst downplaying the various concerns surrounding its use. The meeting comes roughly one month after U.S. lawmakers launched the bipartisan artificial intelligence caucus for the 115th Congress in late May. And speaking of caucuses, the UK House of Lords Select Committee on Artificial Intelligence was appointed in late June with a call for evidence to be published shortly, according to the Committee’s website.

Global Innovation: Patently Awesome

The World Intellectual Property Organization (WIPO) released a paper in mid-June covering the world’s most innovative clusters based on patent filings published under the Patent Cooperation Treaty (PCT) system between 2010 and 2015. According to the report, just under one million patent applications were filed under this system. The top five cluster rankings were Tokyo-Yokohama (Japan), Shenzhen-Hong Kong (China), San Jose – San Francisco (USA), Seoul (Republic of Korea), Osaka-Kobe-Kyoto (Japan). Taken together, the number of PCT filings in those innovative clusters totaled 227,320, or just under one-quarter of all patent applications filed. As the report notes, “The top-100 does not feature any cluster from Latin America and the Caribbean, Sub-Saharan Africa, and Northern Africa and Western Asia.” The clusters, as seen in the figure below, closely resemble the areas where FinTech, in particular, is prominent.

Top-100 clusters of inventive activity

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Source: WIPO

Happy Birthday America
Hello, FinTech in Focus readers! Happy 4th of July to those of you in the U.S.  Yours truly is currently camped out at the beach juggling two kids, multiple cousins, aunts, and uncles, as well as nursing a sore back from digging multiple holes at the beach (I’m thirty-two going on eighty). More importantly, my favorite American, Joey Chestnut, did the unthinkable and devoured seventy-two hotdogs in ten minutes – a new record at the annual Nathan’s Hotdog Eating Contest.

Most championship titles, all-time
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Source: ESPN

The Fed Examines Consumer & Business Payment Choice

The U.S. Federal Reserve released a study examining the changes in consumer and business payment preferences. According to the report, the number of checks written per household declined from an average of 19.3 per month in 2000 to 7.1 in 2015, while total noncash payments increased from 40.3 to 78.6 per month over the same time period. On the business front, “While total noncash payments per business fell somewhat, the combined value of business ACH transfers and business checks written reached $148.54 trillion in 2015, which alone was more than double the real value of total ACH transfers and checks written in 2000 ($73.78 trillion).” While payments made with general-purpose credit cards and non-prepaid debit cards grew faster than all other payment types between 2012 and 2015, "there was relatively little change in the number of payments per active card... during the same period."

Number of consumer and business non-cash payments, by type, 2015

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Source: Federal Reserve

In terms of alternative payment methods, mobile wallet payments increased from 0.3 billion payments in 2012 to 1.3 billion in 2015, or nearly 72 percent per year; online bill payment services increased from 3.1 billion in 2012 to 3.2 billion in 2015; peer-to-peer and money transfer payment services doubled between 2012 to 2015, but remained very low by number (0.4 billion and 0.2 billion, respectively, in 2015); while payments using online payment authentication methods grew from 1.8 billion in 2012 to 3.4 billion in 2015. Still, when viewed in the context of the total number of noncash payments, “these methods, while gaining traction, do not collectively constitute a significant number of payments at the current time.”

Some Headlines

On the payments front, and Intuit have joined together to introduce digital payments for small businesses through QuickBooks Online. And since we’re talking about Quickbooks, Veem, a company that makes global payments simple for small businesses, announced that SMBs can now send international wire transfers direct from Quickbooks Online for free. Lastly, JPMorgan and Vantiv – a U.S. credit card processor – have made preliminary approaches to acquire UK-based payments platform WorldPay – a company with a market value of $8.2 billion. Vantiv ultimately prevailed after it agreed to buy WorldPay for $10 billion.

On the lending front, Square is reportedly moving into the consumer lending business with financing available to residents in six states - California, Colorado, Florida, New Jersey, New York, and Virginia. Separately, PayPal made a strategic investment in California-based consumer finance platform LendUp, Ron Suber is stepping down from Prosper, and SoFi is shutting down Zenbanx – the online banking provider bought by SoFi earlier this year – by the end of July. Lastly, LendInvest canceled its application for peer-to-peer authorization from the UK’s Financial Conduct Authority. As stated in its annual report: “In June 2017 we canceled our applications to operate a P2P platform, credit broking and consumer credit. While these FCA applications can be reopened at any time, we currently have no need for these permissions.”

On the digital currency front, Bitcoin’s user base has exploded with Coinbase, adding one million new users from May to June and four million new users in the past eighteen months (see figure below). Separately, Pantera Capital has filed with the U.S. Securities and Exchange Commission to become the first Bitcoin investment firm to offer an Initial Coin Offering (ICO) hedge fund. Lastly, Japanese-based virtual currency exchanges are offering merchants insurance to protect against failed virtual currency transactions, in an effort to spur more merchant interest in virtual currencies.

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Source: Alistair Milne in a tweet on June 29, 2017

On the blockchain front, several large European banks have signed on with IBM in an effort to simplify trade finance transactions for small and mid-sized companies. The Digital Trade Chain Consortium is expected to launch its platform by the end of the year. Lastly, SWIFT has completed a blockchain smart contracts trial in partnership with U.S.-based SmartContract, becoming “the first project to use SmartContract’s ChainLink v1.0, which lets users connect smart contracts to data feeds, web APIs and a number of payment methods.”

Global Developments

EU: The European Banking Authority (EBA) has published a report titled, “Report on innovative uses of consumer data by financial institutions.” The report comes more than a year after the EBA published a discussion paper on the potential benefits and risks from the innovative ways a financial institution uses consumer data. Among the reports’ six conclusions, the EBA finds that “after assessing the applicability of existing EU law to this particular innovation, the EBA finds no sufficient grounds for further industry-specific legislative interventions at this point in time, but will continue to monitor closely the evolution of this innovation, including through concrete case studies, and engage in further cooperation with the other ESAs, the European Commission and EU data protection supervisors. The EBA also encourages cooperation between national competent authorities across all relevant policy areas, in order to ensure that the legal requirements on the use of data are applied consistently across the 28 Member States, and encourages further education initiatives to raise consumer awareness on this topic.”

Separately, the EBA also replied to the European Commission’s intention to amend the EBA’s draft regulatory technical standards on strong customer authentication and common and secure standards. As stated by the EBA: “the EBA disagrees with three of the four proposed amendments and is of the view that the suggested changes would negatively impact the fine trade-off previously found by the EBA in achieving the various competing objectives of the PSD2. With that in mind, the EBA is suggesting in its Opinion some alternative means through which the Commission's aims can be achieved.”

Meanwhile, European Commission president Jean-Claude Juncker confessed that he does not own a smartphone, but insisted that the EU will push forward in its efforts to create a digital union. Among the efforts include the European Investment Bank pledging €18.5 million from the European Investment Fund to support European SMEs through the online lending platform Lendix. Lastly, Bulgaria’s Mariya Gabriel was appointed European Commissioner for the digital economy and society.

India: State governments in India are pursuing a variety of blockchain applications, with the states of Andhra Pradesh and Telangana particularly interested in applying blockchain to land registries. Meanwhile, the Reserve Bank of India has finalized guidance related to peer-to-peer lending platforms and is expected to release final guidelines within the next two-to-three weeks. Also on the horizon, India’s government is expected to release policies regarding the fees being charged by different modes of digital payments.

UK: Brexit bites. According to Andrew Bailey, head of the Financial Conduct Authority (FCA), the FCA has been shut out from certain discussions with the European Securities and Markets Authority, including discussions over the future of the UK-EU relationship and UK companies looking to establish operations in Europe. Meanwhile, as funding from the European Investment Fund dries up, the British Business Bank is becoming more actively engaged (and increasingly called upon to invest) in UK’s startup scene.

The Payment Systems Regulator (PSR) published its final decision "confirming reforms to UK payment systems infrastructure to deliver better and more innovative services for customers." According to PSR: “We found in our final report that the lack of competitive procurement represents a barrier to entry for alternative providers of central infrastructure services. Also, the operators and direct PSPs do not have a strong incentive to run competitive procurements, which has resulted in limited competitive pressure on VocaLink. To address these issues, we considered options for a potential remedy that competitive procurement exercises are undertaken for the central infrastructure services for Bacs, FPS and LINK.” As such, the PSR concluded “that the option of mandating competitive procurement for the central infrastructure services for Bacs, FPS and LINK would be effective,” and anticipates the “incremental cost of our remedy is between £6 million and £10 million each for Bacs and FPS, and between £1.5 million and £2.5 million for LINK.”

The first meeting of the Digital Economy Council took place on July 3. The council “has been set up to provide a forum for collaboration as Government works with leading industry figures on the implementation of the UK Digital Strategy and the development of a Digital Charter.” The meeting comes as criticism mounts over the UK’s digital strategy plan.

Lastly, on the lobbying side, the Peer-to-Peer Finance Association added eight new members to its roster, while the trade group UK Finance – formed from the merger of the British Bankers’ Association, Council of Mortgage Lenders, Payments UK, Asset Based Finance Association, UK Cards Association, and Financial Fraud Action UK, launched on Monday. The twenty board members include Tracey McDermott, the former head of enforcement at the FCA; Peter Smith, co-founder of Blockchain; and senior executives from Barclays, Citigroup, Nationwide, and HSBC. The association has 300 members.

Australia: The Australian Securities and Investments Commission (ASIC) signed a FinTech cooperation agreement with the Malaysia Securities Commission providing a framework for cooperation and information sharing between the two regulators. The agreement comes after ASIC signed cooperation agreements with Japan's Financial Services Agency and Hong Kong’s Securities and Futures Commission.

Republic of Korea: Lawmakers are making moves to legislate virtual currency, despite continued worries from financial authorities. Of course, it doesn't help when the country's largest bitcoin and ether exchange, Bithumb, was recently hacked resulting in the loss of billions of South Korean won from customer accounts. Meanwhile, the venture capital arm of Applied Materials, Applied Ventures, announced a joint fund with Korea Venture Investment Corporation targeting Korean technology startups across a number of industries.

US: On July 18, the General Services Administration and the State Department will hold a US Federal Blockchain Forum where participants, among other efforts, will develop “a U.S. Federal Blockchain Atlas and roadmap for the next 6 months on how agencies can collaborate to achieve our goals and support the creation of shared services for Blockchain technology.”

The Securities and Exchange Commission (SEC) announced late last week that its Division of Corporation Finance "will permit all companies to submit draft registration statements relating to initial public offerings for review on a non-public basis. This process will be available for IPOs as well as most offerings made in the first year after a company has entered the public reporting system.” The revision to the JOBS Act “will provide companies with more flexibility to plan their offering,” according to the SEC.

The Conference of State Bank Supervisors (CSBS) announced the formation of a FinTech advisory panel to help modernize state regulation. According to the release, interested participants have until July 14 to apply to join the advisory panel. “The advisory panel will discuss existing pain points in multi-state licensing and supervision, brainstorm possible solutions, and provide feedback to ongoing state initiatives. The first meeting is anticipated to convene this fall.” Speaking of the CSBS, the New York Department of Financial Services has transitioned to using the CSBS Nationwide Multistate Licensing System and Registry for money transmitting companies.

At the state level, Illinois lawmakers passed a house resolution on June 28 calling for the creation of an inter-governmental task force to study "how and if the State of Illinois, county governments, and municipal governments can benefit from a transition to a blockchain based system for recordkeeping and service delivery." Meanwhile, lawmakers in Delaware passed amendments to state law allowing for the trading of stocks on a blockchain, as part of a set of broader measures aimed at recognizing certain records stored on a blockchain

UAE: The Abu Dhabi Accountability Authority will hold a conference in February 2018 focused on fraud where best practices, including the use of FinTech, will be examined and discussed. Separately, the Authority of Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone (Qianhai Authority) and the Financial Services Regulatory Authority of Abu Dhabi Global Market formed a partnership agreement to promote investment and FinTech cooperation.

Luxembourg: The Luxembourg House of Finance Technology and Singapore’s LATTICE80, the world’s largest FinTech Hub, signed a Memorandum of Understanding. The Memorandum creates a framework for increased cooperation between the financial centers, with a specific emphasis on facilitating the development of FinTech startups.

Denmark: The Monetary Authority of Singapore and the Danish Financial Supervisory Authority signed a Fintech Cooperation Agreement. Signed at the Money20/20 Europe conference in Copenhagen, the agreement will help facilitate market entry for Fintech companies.

Kenya: Safaricom announced that it will release a major upgrade to M-Pesa. The upgrade will increase the functionality of the platform by increasing the number of partners offering services through M-Pesa. This is the third update to the system in the last ten years.

Safaricom has also partnered with mSurvey to launch Consumer Wallet. Consumer Wallet is a mobile platform that quantifies non-digital consumer spending. The system is intended to provide a benchmark of Kenya’s cash economy.

Ethiopia: Mastercard and Kifiya Financial Technologies, a digital financial services provider, have partnered to introduce a consumer-to-business digital remittance payment platform. The platform intends to facilitate the payment of regular business expenses and has plans to expand to other verticals.

Spain: BBVA and Ant Financial Services Group reached an agreement this week that will allow Alipay, a digital payments service, access to Spain. Alipay will function as a built-in element of BBVA’s Smartpay system.

Italy: Law Decree 50, which for those of you that do not follow Italian legislation, allows small and medium enterprises access to crowdfunding, passed the Senate. SMEs have traditionally lacked access to capital, therefore this shift in policy has been positively received by the business community.

Bahrain:The Economic Development Board, Singapore’s Fintech Consortium, and Trucial Investment Partners have agreed to create a new Fintech partnership. The partnership will provide Bahrain with information on developing the commercial and legal framework required for fintech startups and will provide Singapore-based firms with deeper access to the Middle East.

Hong Kong: The Fintech Association of Hong Kong officially launched last week. The goals of the association are to advocate on behalf of Hong Kong’s Fintech companies, educate stakeholders on the importance of Fintech, and facilitate collaboration between Fintech companies.

Japan: On July 1st, Japan repealed the eight percent consumption tax that previously applied to bitcoin transactions. The revised law removed the consumption tax from all digital currencies. However, personal income tax, capital gains tax, or corporate taxes still apply.

Singapore: Singapore proposed rule changes that will facilitate banks investing in digital payment platforms to enable better competition with non-bank firms. The proposal would remove the need for regulatory approval for such investments. Investment would be capped at ten percent of the bank’s capital funds.

China: The People’s Bank of China (PBoC) recently unveiled the details of its upcoming plan for developing the financial sector. The PBoC aims to develop financial technologies, including but not limited to, blockchain, big data analysis, and artificial intelligence. The PBoC also established a new Digital Currency Institute in Beijing. Yao Qian, the former director of the PBoC’s technology department, will be the director of the Institute. Five out of six open positions were related to the design and development of software and hardware systems for digital currency.

South Africa: The Financial Services Board (FSB) missed its deadline for considering whether or not to regulate equity crowdfunding. The head of FSB’s Financial Advisory and Intermediary Services stressed that the work is ongoing.

Germany: Blockchain Bundesverband, a lobbying group dedicated to blockchain issues, was founded last week. The group is a new iteration of a voluntary collective of policy makers that was founded in 2015 to address blockchain-related regulatory issues.