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
September 22, 2017

FinTech: Yet to Address the Trade Finance Gap

The Asian Development Bank released a report covering the current $1.5 trillion trade finance gap and found that the use/adoption of FinTech, at present, has done nothing to reduce the gap. The assessment, in part, explores digitization, inclusion, and the regulatory environment to understand the landscape of global trade finance shortfalls. The data continues to show that few firms "are familiar with FinTech solutions to finance, and digitization of trade finance processes in banks are not reducing rejection rates for SMEs." Only 20 percent of all reporting firms have used digital finance platforms, with peer-to-peer lenders most sought after. Of note, women-led firms are more likely to use FinTech solutions than the general population.

However, while there is the potential for digitization to reduce the gap, we’re not there yet. As the report states, “the data challenge assumptions that cost reductions alone will automatically reduce market gaps, particularly for SMEs. Indeed, there is no evidence to suggest this is happening. To promote this result, digitization and FinTech must be used to make due diligence on credit risk, performance risk and KYC more efficient, cost-effective, and reliable.” To address some of the shortfalls uncovered, the report recommends efforts to harmonize digital standards in the financial and trade sectors and the creation of a consolidated data architecture for the global trade finance market.

The Un(der)banked Remain Un(der)banked

A study by the U.S. National Telecommunications and Information Administration (NTIA) examines how minimal digital adoption acts as a barrier to the adoption of FinTech services by underserved individuals. In May, NTIA found that internet connectivity plateaued at 75 percent. In this study, just under half (47 percent) of unbanked households did not have a fixed or mobile internet connection. The study also finds that U.S. households without internet access “were 5 percent less likely to have a bank account than households with both fixed and mobile internet,” while households using only a mobile device “were 8 percent more likely to be unbanked than those with multiple devices.” While the banking industry “has suggested that mobile banking could be a silver bullet to motivate as a way to discourage the usage of alternative financial services,” the report finds that the lack of internet adoption and digital literacy “may be barriers to expanding access to the un(der)banked.”

BIS & Cryptocurrencies

A report by the Bank for International Settlements finds it unlikely that Bitcoin or other cryptocurrencies will displace sovereign currencies. However, "they have demonstrated the viability of the underlying blockchain or distributed ledger technology." As the report further notes, “We argue that the main benefit that a consumer-facing retail [central bank cryptocurrencies {CBCC)] would offer, over the provision of public access to (centralized) central bank accounts, is that the former would have the potential to provide the anonymity of cash. In particular, peer-to-peer transfers allow anonymity vis-à-vis any third party. If third-party anonymity is not of sufficient importance to the public, then many of the alleged benefits of retail CBCCs can be achieved by giving broad access to accounts at the central bank.” 

Two Taxonomies of New Forms of Currency

 two taxonomies

Source: Basel Institute for International Settlements

At 30,000 Feet with Amtrak-Like WiFi

It’s the 21st century and yet there I was on All Nippon Airways praying to the internet gods to give me faster internet connection. My apologies to those of you who waited patiently for last week’s FinTech in Focus to arrive over email. I met with some fantastic people while in Singapore during, and on the sidelines of, the Milken Institute Asia Summit and got tied down in FinTech discussions, which prevented me from filling you all in on the latest headlines. I am now, what feels like, eight years behind on FinTech developments. Let’s begin:

All Work and No Play Makes Jack a Dull Boy

It was a busy week last week as yours truly embarked on a 72-hour mission to Singapore. Aron Betru and I submitted an op-ed to American Banker covering the recent applications by SoFi and Square for industrial loan company charters. Separately, Carolyn Karo and I published a summary of Phase I of the Milken Institute and U.S. Small Business Administration's Partnership for Lending in Underserved Markets (PLUM) initiative–a two-year pilot program to develop actionable solutions to address long-standing structural problems that inhibit minority-owned small businesses from accessing capital. The Institute also submitted comments to the U.S. Consumer Financial Protection Bureau related to the Bureau’s request for information on the small business lending market, and the Institute submitted a letter, for the record, prior to the U.S. Senate Banking Committee hearing, Examining the FinTech Landscape

The U.S. is Doing Stuff on FinTech

Speaking of the U.S. Senate Banking Committee hearing, a number of FinTech-related topics surfaced including, the U.S. Office of the Comptroller of the Currency’s efforts to allow FinTech firms to apply for a special purposes national bank charter–an effort that is still a work in progress, according to Acting Comptroller of the Currency Keith Noreika. Other topics mentioned include data aggregation and who controls user data, bank-nonbank collaboration, federal preemption, concerns regarding opaque algorithms used to assess creditworthiness, for instance, regulatory sandboxes, the borderless nature of FinTech, tokenization, cybersecurity, financial inclusion, the fragmented U.S. regulatory structure, cryptocurrency and initial coin offerings (ICOs), the creation of an innovation office, among other issues.

A couple things to note from the hearing: The U.S. Government Accountability Office (GAO) is currently “undertaking work that will support congressional efforts” to address the current regulatory framework that serves as a barrier to entry for “innovative firms with socially beneficial products,” according to Lawrence Evans, director, financial markets at the GAO. The report is expected to be released early next year. There is also support behind the creation of an innovation office as a “one-stop-shop” for firms offering innovative products and services. Both Sens. Brian Schatz (D-HI) and Mark Warner (D-VA) discussed the idea with Sen. Warner stating that it “makes enormous amount of sense,” though the challenge will be in how to implement it.

Apart from the hearing, I had some fantastic discussions out in Singapore with representatives from the U.S. Department of Commerce. Unbeknownst to me (and for those of you who did know, thanks for not informing me!), they are actively engaged in the FinTech space. The department is putting together a U.S. FinTech Business Delegation to attend the upcoming Singapore FinTech Festival (November 13-17). I would encourage U.S. FinTechs on this distribution list to take a look at this effort.

Once More Unto the Breach, Dear Friends, Once More

A bit heavy on U.S.-related developments this week so for those of you on the outside, bear with me. Unless you’ve had your head stuck in the sand the past two weeks, you will have heard of the massive cybersecurity breach at Equifax–one of the top three credit reporting agencies in the U.S. The fallout from all of this, including multiple stories of just how poorly mismanaged the response to the breach has been, has just been unbelievable to read. But just as we are recovering (maybe not?) from one massive breach, the U.S. Securities and Exchange Commission (SEC) announced that its EDGAR filing system was compromised last year, with the Commission learning just last month that the incident "may have provided the basis for illicit gain through trading." According to SEC Chairman Jay Clayton, “We believe the intrusion did not result in unauthorized access to personally identifiable information, jeopardize the operations of the Commission, or result in systemic risk. Our investigation of this matter is ongoing, however, and we are coordinating with appropriate authorities.”

China Brings the Sledgehammer

Roughly a week after China banned companies from raising funds through initial coin offerings and launched an investigation of virtual currency exchanges in the country, Chinese officials have ordered exchanges to halt trading and new user registration. While the effort is viewed more as a temporary stopgap measure, the move roiled cryptocurrency markets before climbing back earlier this week. As Chinese-based exchanges set to close later this month, Chinese bitcoin investors are flocking to other avenues to trade with LocalBitcoins experiencing a significant rise in trade volume, for instance. 

Yuan-bitcoin Weekly Trading Volume on LocalBitcoins

 yuan bitcoin2

Source: Quartz, Atlas, Coin Dance              

What’s interesting about all of this is that as media coverage continues to focus on China, there have been a number of developments in the ICO space that are also worth mentioning. Specifically, the Chamber of Digital Commerce launched the Token Alliance–“an industry-led initiative to educate, promote, and help shape the responsible growth of token and digital asset issuances. The Token Alliance is co-chaired by former Chairman of the U.S. Commodity Futures Trading Commission, Dr. Jim Newsome, and former U.S. Securities and Exchange Commissioner, Paul Atkins.” Meanwhile, the Financial Commission–"a leading independent member-driven external dispute resolution (EDR) organization for international online brokerages that participate in global foreign exchange (forex), derivatives, and cryptocurrency markets"–announced the certification of Genesis Vision Initial Coin Offering. During the due diligence review of the Commission's ICO certification process, "over 150 important points were checked across categories including those set forth in Financial Commission's certification guidelines for ICO Applicants."

Incumbents Doing Things: Japanese investment bank Nomura will open an innovation office in San Francisco and invest up to $100 million in various start-ups in the region. In Singapore, DBS bank has leveraged SWIFT's Global Payments Innovation service to provide corporates and SMEs in Hong Kong and Singapore with a way to track their cross-border payments. DBS becomes the first bank in Singapore and Hong Kong "to execute cross-border payments with end-to-end tracking in these two markets," the press release states. DBS has also partnered with Singapore's Infocomm Media Development Authority "to create the first FinTech training program under the TechSkills Accelerator initiative." In Japan, the Japanese Bankers Association will employ a cloud-based blockchain platform powered by Fujitsu to allow member banks to test applications that employ blockchain technology. Meanwhile, Australian-based investment bank Macquarie Group announced that it will open its API platform to third-party developers in the coming months. In Europe (including the UK), the Royal Bank of Scotland (RBS) is working with R3's Corda and the UK Financial Conduct Authority to develop a blockchain mortgage application to improve regulatory reporting of transactions. Meanwhile, the European Commission has approved of RBS’ plan to boost competition in the UK small business lending market by creating a £425 million "capability and innovation" fund, administered by an independent party, to provide grant funding to challenger banks and incentivize customers to switch banks. Meanwhile, French bank Societe Generale has launched a digital wallet called YUP into sub-Saharan Africa in an effort to attract more retail clients. YUP is already active in the Ivory Coast and Senegal and the bank plans to roll out the product to four more countries by the end of next year. In the U.S., Goldman Sachs is pushing further into the lending space after poaching 20 employees from Bond Street Marketplace. Lastly, JPMorgan Chase partnered with “to deliver a simpler and faster way for businesses to send and receive invoices and payments.”

Incumbents Saying Things: In an interview with Bloomberg, Vikram Pandit said technological advancements could result in roughly 30 percent of banking jobs disappearing within the next five years. “Everything that's happened with artificial intelligence and robotics, and natural language processing–all of that is going to make processes easier. It's going to change the back office and I wouldn't be surprised if there are a lot of jobs that are going to be replaced by automation and robotics,” Pandit remarked. He also touched on regulatory approaches to FinTech, specifically the differences between how regulators in Asia are approaching FinTech compared to regulators in the western part of the world. “There's a big, important mandate to regulators in Asia about financial inclusion, efficiency... and these new approaches provide a great way for them to get to there. To some extent, western regulators are focused on their legacy architecture. I find the approaches by eastern regulators to be quite interesting, quite forward-looking.”

Lest I forget, JPMorgan Chase CEO Jamie Dimon called bitcoin a fraud, noting that the digital currency will "eventually blow up.... It's worse than tulip bulbs and won't end well." Dimon isn’t alone, as Mohamed El-Erian commented that the price of bitcoin should be half of what it is today, adding that current pricing “assume[s] massive adoption, and I don't think governments will allow the amount of adoption that's currently priced in.” All of this, particularly Dimon’s comments, set off a chain reaction with bitcoin falling 11 percent (there were other reasons as well), JPMorgan’s blockchain lead, Amber Baldet, shrugging her shoulders on Twitter, and multiple industry stakeholders finding his comments off-base.

Global Developments 

European Union: The European Commission published a summary of the responses to its public consultation on FinTech which was announced in March. More than half of the respondents were based in four countries: Belgium, UK, France, and Germany, with 16 responses from outside the European Union. Comments focused in particular on distributed ledger technology, big data analytics, artificial intelligence, and cloud computing. As for risks, respondents were concerned about cybersecurity, the use and control of data, and money laundering. According to the report, “Technological neutrality, proportionality, and integrity were considered to be the right principles to guide the EU approach to FinTech. Respondents called for applying the ‘same service, same risk, same rule’ principle to all market players, hence ensuring a level playing field in the financial sector.”

Malaysia: The Securities Commission Malaysia announced several FinTech agreements last week with the Hong Kong Securities and Futures Commission, the Dubai Financial Services Authority, and the Monetary Authority of Singapore. Government officials are also seeking to amend the current tax code in an effort to tax the digital economy.

Hong Kong: The Hong Kong Monetary Authority (HKMA) and the Swiss Secretariat for International Financial Matters convened a financial dialogue earlier this week. The two sides “also exchanged views on current policy development and areas of future collaboration at bilateral and multilateral level, such as RMB internationalization, wealth management, and FinTech.” Meanwhile, Hong Kong Cyberport and the HKMA brought a FinTech delegation to London earlier this week. Over 70 participants joined the mission which aimed to forge "connections amongst stakeholders in the global FinTech landscape, with a view to fostering collaboration and developing business and investment opportunities, as well as promoting Hong Kong's role as the leading FinTech hub of Asia."

Indonesia: The Indonesian RegTech and LegalTech Association was launched providing “a platform for regulatory technology (RegTech) companies, legal technology (LegalTech) companies, and law firms to work together to develop legal education and awareness in the country,” according to one report.

Malta: The government has announced the formation of a Blockchain Taskforce to provide a roadmap to implement the country's national blockchain strategy. "Apart from exploiting the opportunities that blockchain technology offers for added efficiency in public sector processes and services, the Government is ambitiously looking into the setting up of a new regulatory function with the primary objective of harnessing the technology with a legal operational framework, serving as a bold initiative leading to the formation of an ideal ecosystem for those willing to invest in blockchain technology.”

Mexico: The country is close to announcing legislation aimed at regulating the FinTech space, according to Reuters. “This (legislation) recognizes the need that a sector as dynamic as that of technological innovation needs a regulatory framework that allows authorities to mitigate risks and allow for growth in a competitive environment,” the draft bill states.

Taiwan: Lawmakers are growing concerned about the level of bad debts stemming from online lending platforms. Democratic Progressive Party Legislator Lin Chun-hsien stated that peer-to-peer lending “remains a legal gray area that harbors bad debt, fraud, and usurious interest rates, and has serious implications to our society. Enforcement of financial regulations should be carried out in accordance with an entity’s functional behavior, not its institutional type.”

KoreaAccording to a report, SBI Ripple Asia will test a new blockchain-remittance platform between Japanese and South Korean banks by the end of this year. Separately, the FinTech Center of Korea signed a memorandum of understanding with Switzerland's Greater Zurich Area AG for FinTech cooperation.

UK: Chancellor of the Exchequer, Philip Hammond, gave prepared remarks at the inaugural UK Finance annual dinner where he focused, in part, on FinTech. In particular, “It is my priority as Chancellor to ensure that the UK remains the financial services center of the world. And the global hub of FinTech. We have the time zone, the language, the legal system, the talent, the capital markets, and the tech center to succeed. And we have a government which is determined to create the regulatory and tax environment for these new markets to succeed. We have given our regulators a clear mandate to do so….” To help support the growth of the country’s FinTech sector, Tech City UK’s FinTech Delivery Panel released its vision that will guide the panel’s efforts over the next three years. The four key pillars of the vision: Talent, Capital, Access to Markets, and Policy. Separately, Simon Scorer, a researcher in the Bank of England’s digital currencies division, penned a blog post covering the technology requirements for Central Bank Digital Currency (CBDC). Scorer summarized the likely technology requirements for a CBDC in the table below:

 CBDC score 

Source: Simon Scorer 

Lastly, Hogan Lovells recently showcased its Engage: Authorization Tool "which aims to guide FinTechs through the process of authorization from the Financial Conduct Authority." The tool addresses two major barriers toward achieving authorization: complexity of the process without proper guidance and the high costs associated with applying.

U.S.: States are moving on FinTech. For instance, the City of Boise, Idaho has entered into an agreement with ULedger to explore potential public sector benefits from the use of blockchain technology. In Ohio, FinTech71–an accelerator run by industry leaders based in Ohio–announced its first cohort. Meanwhile, Detroit, Michigan is trying to solidify itself as a FinTech hotspot with the launch of the Detroit FinTech Association.

Gerald Tsai, director of applications, enforcement, and FinTech at the Federal Reserve Bank of San Francisco, recently stated that the U.S. is unlikely to adopt regulatory sandboxes any time soon, if ever. “Notwithstanding the complicated regulatory environment and the sort of delayed response that we seem to be having with a number of these matters, the U.S. FinTech industry and the RegTech industry is still quite large and has been a global leader for a long time…. Maybe our inaction at some level encourages innovation. 

There have also been a few developments in the online finance space. First, SoFi CEO Mike Cagney stepped down from the company as a result of sexual harassment claims. The company appointed executive chairman Tom Hutton as interim CEO effective immediately. Meanwhile, the Consumer Financial Protection Bureau announced its first no-action letter to Upstart Network. “Under the terms of the no-action letter issued by Bureau staff, Upstart will share certain information with the CFPB regarding the loan applications it receives, how it decides which loans to approve, and how it will mitigate risk to consumers, as well as information on how its model expands access to credit for traditionally underserved populations.”

India: Google has launched a digital payments service in the country. The payments app, called Tez, uses the state-backed United Payment Interface. Google has also partnered with the State Bank of India, HDFC Bank, ICICI Bank, and Axis Bank. Separately, it is being reported that the Reserve Bank of India will classify peer-to-peer lending platforms as non-banking financial companies when final guidance is released.

Australia: A few developments to keep in mind. First, the Australian Securities and Investments Commission (ASIC) will accept license applications from crowd-sourced funding (CSF) intermediaries beginning September 29. ASIC has also extended the CSF regime to include proprietary companies. Second, the Australian government has introduced legislation to remove the double taxation of digital currency. According to the press release, the bill “will ensure that Australians are no longer charged GST on purchases of digital currency, allowing it to be treated the same way as physical money for GST purposes. The law change will retrospectively apply from 1 July 2017, in line with the 2017 Budget announcement.” Lastly, ASIC also published a summary of the feedback to its Innovation Hub and approach to RegTech. Responses “were generally very supportive of ASIC’s Innovation Hub and its approach to RegTech. However, there were differences of opinion on our proposed new initiatives, particularly the RegTech liaison group and RegTech problem-solving event.” ASIC expects the first RegTech Liaison Group meeting will take place by the end of this year.

Japan: Japanese-based bitcoin trading platform Coincheck announced that it received approval from the Financial Services Agency (FSA) to become a licensed virtual currency exchange. The FSA is expected to appoint a chief of cryptocurrency monitoring and establish a 30 person team to regulate virtual exchanges. Meanwhile, the FSA and Abu Dhabi Global Market (ADGM) signed a FinTech cooperation agreement "to promote innovation in financial services in Japan and ADGM." 

Thailand: The Securities and Exchange Commission released a statement on the regulator’s views regarding initial coin offerings. According to the release, the regulator “encourages access to funding for businesses, including high potential tech start-ups, and realizes the potential of ICO in answering start-ups’ funding needs. In cases where an ICO constitutes offering of securities, the issuer will need to comply with applicable regulatory requirements under the SEC Thailand’s purview. Nevertheless, the SEC Thailand understands the unique environment in which tech start-ups operate and realizes that ICO may not yet fit neatly with SEC Thailand’s current regulatory framework.  Therefore, to strike the balance between supporting digital innovation and protecting investors from potential ICO scams, the SEC Thailand is considering appropriate approaches on ICO and welcomes comments and suggestions from the private sector.” Lastly, Chinese e-commerce firm, Thailand's Central Group, and Provident Capital announced an aggregate investment of up to $500 million "to establish two joint ventures in Thailand covering e-commerce and FinTech services, respectively."



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