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
August 25, 2017

FinTech: Truly Transformational?

A paper released by Robert Hockett and Saule Omarova from Cornell University challenges previously held views that traditional banks and other financial institutions function primarily as intermediaries. According to the report, the “intermediated-scarce-private-capital orthodoxy is a myth, in turn, because it profoundly misrepresents the reality of modern financial systems.” The report finds that “what is routinely portrayed as the universal dynamic of ‘financial intermediation’–namely, ‘one-to-one’ private intermediation of a fixed quantum of pre-accumulated private funds–actually describes only a modest fraction of financial flows in contemporary financial systems.” Apart from credit-intermediation, the authors also describe credit-multiplication and credit-generation as two other analytically distinct modes of generating and organizing financial flows.

With all this in mind, the report also looks at FinTech (start at page 1201) with a focus on marketplace lending and cryptocurrencies. As stated in the report, “In its aspirations to render both the banks and the central banks redundant, this new-century FinTech sector portrays itself as a revolutionary alternative to the existing financial system. Ironically, however, despite its disintermediation rhetoric, what this currently unfolding ‘FinTech revolution’ seeks to create in practice is a pure form of the orthodox ‘one-to-one’ intermediation model of finance… in which traditional intermediaries such as banks or securities broker-dealers are replaced by electronic peer-to-peer transaction platforms.” The report adds that “a closer examination of the key dynamics in the alternative-finance universe suggests that, in order to expand beyond its present peripheral place, it is bound to seek reintegration into the core finance franchise. Without sustained direct access to the ultimate public resource flowing through that system—the public’s full faith and credit—alternative finance is not likely to outgrow its present fringe status.”

The findings in the paper are somewhat similar to some of the findings from a recent World Economic Forum report, Beyond Fintech: A Pragmatic Assessment Of Disruptive Potential In Financial Services. In that report, Jesse McWaters and Rob Galaski find that while FinTechs have succeeded in seizing the digital initiative and defining the direction, shape, and pace of innovation across nearly every subsector of finance, as well as reshaping customer expectations and user experience, FinTechs have struggled to create new infrastructure and new financial services ecosystems and have been unable to shift customer preference away from incumbents. In short "FinTechs have materially changed the basis of competition in financial services, but have not yet materially changed the competitive landscape." Even so, the report also acknowledges that in geographies “where incumbent service providers did not exist and in segments where incumbents were not meeting customer segments’ needs, new entrants to financial services have been able to build significant scale.”

Global Bandwidth Interconnectedness

A recent report by Equinix “tracks, measures, and forecasts the growth of Interconnection Bandwidth, a measure of the capacity to transfer traffic via direct, private Interconnection with a diverse set of counterparties at distributed exchange points.” By 2020, "the Interconnection Bandwidth used to conduct scalable digital business will grow to over 5,000 Tbps, outpacing the growth of overall global IP traffic, the internet, and MPLS, today's leading private network model." By 2020, the U.S. will contribute more than a third of Interconnection Bandwidth globally, Europe will contribute nearly 30 percent, and the Asia-Pacific region will contribute less than a quarter of bandwidth globally. Latin America, which will experience a 62 percent growth in interconnection bandwidth per annum, will contribute less than 15 percent of Interconnection Bandwidth globally.

Industry Trends

08 25 17a 

Source: Equinix

Coding While Floating

Folks, my apologies for the e-mail mishap last week. In an effort to ensure my two kids and dog remained on the raft at all times as the family floated down the river during our camping excursion, I was unable to push out FinTech in Focus over e-mail. That said, we did publish last week’s version online.  Last week’s release can be viewed here

Milken Institute Asia Summit

The Milken Institute Asia Summit will take place September 14th-15th in Singapore. Yours truly will be moderating a private roundtable session covering FinTech and cross-border regulatory harmonization, including a focus on the ASEAN Financial Innovation Network. I arrive on the 12th and am looking to meet with as many of you as possible on the 13th who, like me, get excited when discussing FinTech and financial regulation. Also, this will be my first visit to Singapore. I would appreciate any tips on who I should meet, where I should go visit, and how to deal with the 20-hour flight.

Some Headlines

Incumbents Doing Things: Nationwide is looking to pour $100 million into tech start-ups to remain relevant in the insurance space. For those with a Barclays bank account, Apple users can now ask Siri to make payments to those that have been paid before or that are listed in the iPhone’s contact list. Canadian Imperial Bank of Commerce (CIBC) announced plans to wind down its partnership with President’s Choice Bank and will launch a digital banking offer, Simplii Financial. Meanwhile, Standard Chartered hired Pedro Sousa Cardosa as global head of digital commerce, based in Singapore. Lastly, Falcon Private Bank, a Swiss-based bank, became the first Swiss private bank to add Ether, Litecoin, and Bitcoin Cash to its blockchain asset management services, provided in cooperation with Bitcoin Suisse AG. The bank's clients will now be able to exchange and hold Bitcoins via Falcon Bank by using their cash holdings.

Online Finance: Dutch insurance giant Aegon will invest £160 million in loans to UK small businesses through Funding Circle’s platform. The investment is expected to help more than 2,600 businesses. Speaking of Funding Circle, the platform, as of September 18th, "will launch a significantly improved and upgraded version of [its] existing Autobid and Autosell lending tools, and the option to manually choose which businesses to lend to and which loan parts to sell will be withdrawn." One of the reasons behind the change: “73 percent of new investors who join Funding Circle choose Autobid, and 80 percent of Funding Circle investors say simplicity of lending is important to them.” The Innovative Lending Platform Association and the Canadian Lenders Association have joined together to adapt the ILPA’s SMART Box to the Canadian marketplace. Prodigy Finance–a UK-based student lender focused on helping postgraduate international students pay their tuition fees–has secured $240 million in equity and debt financing, paving the way for the platform to expand to the U.S. Lastly, UK-based platform RateSetter has withdrawn its membership from the Peer-to-Peer Finance Association (P2PFA) due to its breaching of the association’s principles.

Blockchain: Chainanalysis, a provider of anti-money laundering software for Bitcoin, published a blog post covering the rise of cybercrime on the Ethereum network. According to the firm’s analysis, in 2017 alone, “$1.6 billion has been invested in [initial coin offerings (ICOs)] on Ethereum but the cyber criminals have also generated more than $150 million in revenues. Meaning, 10 percent of Ethereum holdings marked for ICO investment lies in the hands of criminals. Chainanalysis estimates that there have been approximately 30,000 victims of cybercrime on Ethereum losing on average $7,500 each.”

Payments: AliPay and WeChat continue to battle for payment dominance in overseas markets. According to a report, AliPay is now available in 28 countries, while TenPay–a service attached to WeChat–is offered in only 15 countries. Meanwhile, Transferwise is reportedly looking to raise $60 million from Silicon Valley-based investment firm IVP. The fundraising round would value Transferwise at approximately $1.5 billion. Separately, Fiserv has agreed to acquire Dovetail Group Limited–"a leading provider of bank payments and liquidity management solutions"–to further help the company's efforts at transforming incumbent payment infrastructures globally.

Accelerators Accelerating: Techstars launched its first Asia center based in India last week. According to a report, start-ups that have participated in Techstars various accelerator programs have raised nearly $4 billion and have a market cap just shy of $10 billion.

Global Developments

UK: The second stage of Brexit negotiations could be pushed back to the end of the year due to a lack of progress. Slovenian Prime Minister Miro Cerar stated that not enough progress has been made and that negations will ‘definitely’ take more time than expected.

Separately, Lawrence Wintermeyer, the CEO of Innovate Finance, has stepped down after serving for two years. Charlotte Crosswell will assume the role of interim CEO.

U.S.: In the wake of the events that unfolded in Charlottesville, VA, more than half of all participants on the Commerce Department’s Digital Economy Board of Advisors resigned

On the virtual currency front, the Alabama Monetary Transmission Act became law–an update to legacy statutes not reflective of the digital age. Meanwhile, members of the U.S. Congress are looking into legislative efforts to protect certain digital currencies from government interference.

In October, Georgetown University will host its first FinTech Week in Washington, DC. The event will focus on a number of FinTech verticals with participation from industry stakeholders and regulators based in the U.S. and abroad.

Hong Kong: According to the Hong Kong Monetary Authority (HKMA), financial inclusion initiatives are progressing well. HKMA has made it a priority to increase access to basic financial services and the Bank of East Asia, China Construction Bank, and Standard Chartered Hong Kong have all responded positively to the push.

What is not progressing well is Hong Kong’s push to increase mobile payments. HKMA granted licenses to 13 mobile e-wallet services last year, yet total transactions have fallen by 3.7 percent. According to some, Apple Pay’s entrance into Hong Kong’s fragmented digital payments marketplace is likely to stimulate transaction volume.

The Hong Kong Trade Development Council will hold a business conference in London focused on FinTech and other topic areas. The Think Asia, Think Hong Kong conference will take place on September 21st.

Brazil: Nubank, an online credit card company, continues to grow. The company does not reveal customer numbers but it is reported that they have received 10 million applicants since 2014. Goldman Sachs estimates that the company has 500,000 cardholders. 

Ghana: Ursula Owusu-Ekuful, Ghana’s minister of communications, stated that Ghana is currently implementing a number of digital projects to meet the goals of the Information and Communication Technology socioeconomic agenda. Ms. Owusu-Ekuful urged the government to expedite work to ensure that standards for all IT applications are established.

Canada: Canadian financial regulators approved the public sale of Impak Coin, a new digital currency, marking “the country's first official endorsement of money created independently of the government or central banks.”

Russia: The Federal Agency for Technical Regulation and Metrology formed a technical committee tasked with standardizing software and hardware for distributed ledger technologies. The move is part of a larger effort by the Russian government to introduce regulations for distributive ledgers by 2019.

Australia: Australia’s government is seeking to further regulate Bitcoin exchanges. The government proposed a set of reforms that will close a regulatory gap that will bring digital currencies under AUSTRAC’s authority through the Anti-Money Laundering and Counter Terrorism Financing Act.

The Anti-Money Laundering and Counter Terrorism Financing Amendment Bill seeks seven-year prison sentences and a maximum fee of $420,000 for unregistered providers of digital currency exchange services.

The Labor party will begin an inquiry into the digital delivery of government services. The inquiry will be executed through the Finance and Public Administration Reference Committee and will investigate whether programs are able to deliver services privately, securely, reliably, and economically, as well as focus on the government-wide push for digital transformation.

The Australian Securities and Investments Commission announced that it will hold a showcase event on RegTech on September 18th, 2017. The showcase will seek to highlight the future of regulatory reporting and software’s usage in meeting regulatory obligations. 

Japan: Japan’s leading bitcoin exchange, bitFlyer, received regulatory approval to operate in the United States. The license applies to 34 states. Approval by regulators allows the exchange to offer BTC/USD trading.

China: Tencent Holdings will increase its investments in FinTech. The announcement comes after the company reported a record net income of $2.7 billion. Payments, cloud computing, and artificial intelligence are in focus.

Ping An’s online lending platform, Lufax, turned its first profit. The platform is valued at $18.5 billion and is heading towards an initial public offering.

Vietnam: The Ministry of Planning and Investment will issue a decree to establish investment funds to support small and medium-size enterprises. The law was approved in June and will take effect in early 2018. The announcement is part of a larger reform process that began in 2015 to increase access to capital. 

South Africa: TheUniversity of Cape Town has become the first university in Africa to offer a degree in financial technology. The new degree is a Master of Data Science specializing in Financial Technology, with a focus on machine learning and blockchain technology.

Isle of Wight: The Isle of Wight is planning to hold a conference on November 8th to promote its digital economy. 

Singapore: The Government Technology Agency of Singapore is planning to commence trials for mobile software tokens as a convenient and secure authentication service. The testing is part of the broader expansion of the National Digital Identity project.

Singapore has also announced a push to increase the use of mobile payments. Prime Minister Lee Hsien Loong’s National Day Rally speech stressed that Singapore has fallen behind China in digital payments. The effort is part of the broader Smart Nation agenda.

DBS Bank announced that it will invest $15 million over the next five years to increase employee skills in digital banking and emerging technology. Employees will be given the opportunity to take paid sabbaticals to work on prototype projects and the bank intends to start an accelerator program. 

UAE: The Dubai International Financial Centre FinTech Hive has announced an accelerator program. The program features 11 companies and offers a 12-week curriculum. Participants will work with financial institutions and other stakeholders to create solutions that meet the needs of the financial services industry.

Non-bank lending in the Middle East is projected to increase due to increased credit constraints from traditional lenders. Low oil prices and slow growth have led to an increase in the number of non-performing loans in the region.

India: There are two upcoming events to keep an eye out for. On August 21st-22nd, Prime Minister Narendra Modi will meet with FinTech stakeholders in New Delhi for talks covering reforms to the financial sector. In late November, the Global Entrepreneurship Summit will be held in Hyderabad. According to U.S. officials, FinTech will be in focus during those discussions. Meanwhile, the country's telecom minister, Manoj Sinha, remarked that India's regulatory framework "should come up with policy recommendations to ensure growth of digital technologies."

Lastly, PhonePe, a Flipkart-owned digital payments firm is claiming to be the largest player using the Unified Payments Interface (UPI) for merchant payments. According to a report, PhonePe controls roughly 80 percent of all transactions in the UPI space.

Egypt: Even though Egyptian officials have yet to pass regulations concerning the virtual currency space, the country's first Bitcoin exchange is expected to go live later this month.

Philippines: The country's central bank is exploring new digital solutions to its processes, according to a report. Central Bank Governor Nestor Espenilla Jr. remarked that the bank was considering two solutions: an API system to streamline reporting requirements between the bank and regulated entities and an automated complaint handling portal. “We see non-banks and FintTech as value added… these layers need to be understood by regulators,” he stated.