FinTech in Focus
I Still Haven’t Found What I’m Looking For
A new report from KPMG surveyed 160 financial institutions from 36 countries. The research "shows that while financial institutions recognize that FinTech is a substantial disruptor, no single path has emerged to define how companies should approach FinTech." Less than half (46 percent) of financial institutions surveyed had a strategy in place to benefit from advances in FinTech. Banks, insurance firms, and asset management firms generally shared the same views regarding enhancing customer experience and transforming current capabilities as the most important aspects. Opinion varied over other areas such as delivering cost efficiencies, expanding new lines of business, and developing new artificial intelligence driven investment strategies.
Ranking of FinTech Strategy Objectives—by Industry
Stable and Low Costs of Capital—Advantage Banks
A report by Oliver Wyman and Fundera finds that banks "generally lag behind FinTech lenders in creating a satisfying borrowing experience across factors like application length, communication of steps, and time to approve loan applications." That said, alternative lenders' high cost of funds leads to frustrated borrowers. “To the extent that alternative lenders develop stable and low-cost sources of capital, they will be able to price loans more competitively and reduce the advantage currently held by banks. We therefore anticipate that banks will need to compete more energetically on customer experience,” the report stated. In fact, the "cost of loan offered" was the only category where traditional lenders outperformed online lenders.
Respondents’ Perceptions of Loan Cost Relative to Expectations
Meanwhile, a survey from the Electronic Transactions Association, the Innovative Lending Platform Association, the Marketplace Lending Association, and the Small Business Finance Association finds that nearly three-quarters of small business owners “believe there are more credit options today when compared to five years ago,” with 97 percent of respondents of the belief that more options are a good thing. Roughly 95 percent of online borrowers said the loan they secured enabled or drove business growth, and 98 percent of online borrowers are likely to take out another loan from an online lending firm.
A 2-for-1 Deal
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Alternative Credit Scores: FHFA on the Move
The U.S. Federal Housing Finance Agency (FHFA) is expected to release a request for input this fall on whether Fannie Mae and Freddie Mac should be required to use alternative credit scores, according to prepared remarks from FHFA Director Mel Watt. “I initially thought this decision would be relatively easy to make. After all, we all believe that competition is good, don't we? However, the more we looked into this issue, the more complicated it became and it is turning out to be among the most complicated decisions I have faced during my tenure at FHFA,” said Watt. Despite reservations, “FHFA is committed to making a decision about the Enterprises' future credit score model requirements in 2018 as soon as we complete our review of responses to our RFI.”
And speaking of alternative credit scores, VantageScore released a report titled, New Credit Scoring Models: A smooth transition to more transparent mortgage capital markets. According to the report, while VantageScore and FICO have launched "several generations of newer models," the mortgage industry "remains frozen in time" with Fannie and Freddie requiring "the use of a credit scoring model built by FICO prior to the recession using data from the late 1990s.” As a result, “FICO enjoys a government-sanctioned, de facto monopoly on this integral piece of the mortgage supply chain.” The report provides a series of recommendations to jumpstart competition in the space while ensuring a smooth transition to the use of newer credit scoring models. Lastly, Fannie Mae unveiled new products to streamline and digitize the mortgage process, including the use of APIs to derive greater efficiencies.
At a Tipping Point: Digital Innovation in Trade Finance
A report by the Boston Consulting Group (BCG) finds that a digital solution is needed for trade finance. According to the report, “A review of the end-to-end trade finance process reveals that a single transaction can involve approximately 5,000 data field interactions. As data flows through the end-to-end process, a decreasing share of data field interactions create value-adding data. Such interactions account for only ~1 percent of all interactions, with 85-90 percent being ‘ignore/transmit to the next party’. On a global scale, this adds up to ~200 billion data field interactions, of which only ~2.8 billion create value-adding data.” As such, if the process was fully digitized, “BCG estimates that more than 90% of data field interactions could be simplified or eliminated altogether, creating a process that is not only faster but also less vulnerable to error and fraud.”
As Data Flows Through the Process, a Decreasing Share of Data Field ‘Interactions’ Involve Creating Value-Adding Data
Fraud: Can’t Stop, Won’t Stop
A survey from VASCO Data Security International, Inc. finds that more than half of financial institutions with between $500 million and $20 billion in assets say today's fraud schemes "are too sophisticated and evolve too quickly to keep pace." Only 38 percent of respondents have high confidence in their organization's ability to detect and prevent fraud.
[Author’s note: Not sure what to think of the 27 percent of respondents who “lack visibility to mobile channel vulnerabilities.”]
In the Past Year, Have You Experienced Any of the Following Fraud Incidents Specifically Related to Mobility? (Check All That Apply)
Source: VASCO Data Security International, Inc.
AI Stands for Daunting Challenges
Researchers from the University of California Berkley have found that there are "daunting challenges" that need to be addressed before realizing the promise of next-generation artificial intelligence (AI) systems. “In particular, we need AI systems that make timely and safe decisions in unpredictable environments, that are robust against sophisticated adversaries, and that can process ever-increasing amounts of data across organizations and individuals without compromising confidentiality. These challenges will be exacerbated by the end of the Moore’s Law, which will constrain the amount of data these technologies can store and process,” the report found. The report presents nine research opportunities covering three topics: acting in dynamic environments, secure AI, and AI-specific architectures.
A Mapping from Trends to Challenges and Research Topics
Source: University of California Berkley
European Union: The European Parliament’s PANA Committee has approved draft recommendations to increase scrutiny and regulation on emerging technologies, including FinTech and virtual currencies. The approval comes on the heels of an 18-month probe into breaches of EU law regarding money laundering and tax evasion.
The EU recently completed its first annual review of the EU-U.S. Privacy Shield. The Privacy Shield allows firms to move data across the Atlantic without relying on model clause contracts which are expensive. The Commission urged the U.S. to appoint a permanent Privacy Shield leader.
Canada: Ontario has established a team of experts to strengthen consumer protection and innovation in the FinTech sector. The group includes 12 experts with diverse backgrounds in public policy, technology, and financial services. Ontario currently has 150 FinTech companies and is seeking to further facilitate the development of the FinTech industry.
Payments Canada, the Bank of Canada, and TMX Group announced a new collaboration to develop integrated securities and payment settlement platforms based on distributed ledger technology. The research is part of the third phase of Project Jasper, a multi-year research endeavor to better understand the potential use cases of distributed ledger technology.
The Ontario Securities Commission approved Ontario’s first regulated initial coin offering (ICO). The offering was conducted through the Canadian Securities Administrators’ regulatory sandbox.
China: Qudian, an Alibaba-backed micro-credit service provider, raised $900 million in an initial public offering (IPO) in New York on Wednesday. Qudian is a service that allows Chinese users to buy consumer electronics through monthly installments. The IPO is the largest U.S. listing from a Chinese FinTech company, and the company’s market value is estimated to be approximately $7.9 billion.
Indonesia: Mint Limited announced that it has partnered with PayPro Indonesia to provide a digital fiat currency solution to Indonesia. The digital currency will be part of Indonesia’s FinTech regulatory sandbox.
New Zealand: The Financial Markets Authority (FMA) “has decided to grant an exemption to enable personalized robo-advice,” according to a press release. The FMA decided to expand the range of products robo-advisors can provide to include mortgages and personal insurance starting in 2018. Separately, FMA and the Australian Securities and Investments Commission have reiterated their commitment to work together to develop the region’s FinTech capabilities. The two countries first signed a memorandum of understanding in 2012. Lastly, FMA published commentary on initial coin offerings and cryptocurrency services. Regarding ICOs, "The FMA’s view is that the specific characteristics and economic substance of an ICO determine if it’s a financial product–if it is regulated, and if so how. The FMA strongly encourages any businesses considering making an offer through an ICO to approach us early during their development phase."
Australia: Australia has passed legislation to remove the double taxation on digital currencies. According to Finextra, “digital currencies used to buy goods and services in Australia will be treated just like money for tax purposes.” The legislation is also backdated to July 1, 2017.
InsurTech Australia has launched as a standalone division of FinTech Australia. The new group will focus on the issues facing InsurTech start-ups, including the development of a more conducive regulatory environment.
The Turnbull Government has released draft legislation and regulations to enhance its regulatory sandbox. The bill “extends regulation-making powers to enable an exemption from obtaining an Australian Financial Services License (AFSL) and/or an Australian Credit License (ACL) under certain conditions for the purposes of testing financial and credit services and products.” The testing timeframe will also be extended to 24 months.
Hong Kong: The FinTech Association of Hong Kong (FTAHK) has announced Syed Musheer Ahmed as its Interim General Manager. Mr. Masheer has a background in financial services and technology and was one of the founding board members of FTAHK in June.
UK: The Confederation of British Industry (CBI) is calling for a commission to examine the impact of artificial intelligence on the job market. This push comes on the heels of a report from PwC that stated that more than 10 million workers’ jobs might be at risk due to automation.
Trademark applications in the UK hit a record high in 2016, a trend driven by the FinTech industry.
The Financial Conduct Authority announced that it is investigating the circumstances surrounding the hacking of Equifax Ltd. Equifax has stated that 15.2 million records of British citizens were involved in the data breach.
Nigeria: The Central Bank of Nigeria and the Nigerian Stock Exchange praised the FinTech Association of Nigeria for improving communication between regulators, government, and FinTechs. The central bank further stated that the FinTech Association would be involved in the process of developing regulations for digital banks.
Japan: Mizuho Bank, Sumitomo Mitsui Banking, and Bank of Tokyo-Mitsubishi UFJ are developing a new peer-to-peer mobile payments system. Built around blockchain technology, the platform creates virtual accounts that allow users to route cash faster than through traditional bank systems.
A manager of an exchange for the Ripple cryptocurrency, XRP, was arrested Wednesday for allegedly stealing $12,470 from a depositor. According to the Japan Times, this was the first arrest in Japan “made in connection with a bourse of the Ripple virtual currency issued by a U.S. venture company, which is officially called XRP, according to investigators.”
Singapore: LATTICE80, the world’s largest FinTech hub, announced that it intends to conduct an initial coin offering next year. The company is considering Singapore, Japan, London, New York, and Abu Dhabi as potential locations.
Plug and Play, a startup accelerator, is planning to open an accelerator program in Singapore by March 2018. The Singapore location would likely focus on FinTech and InsurTech companies. Currently, Plug and Play is seeking to partner with five banks, five insurance companies, and the Monetary Authority of Singapore.
South Korea: Estonia’s Police and Border Guard will begin issuing digital identifications to e-residents in South Korea this December. E-residency offers foreign citizens access to Estonia’s online services and is the first step in developing an Automatic Biometric Identification System for establishing e-residency as a global service.
South Korea is seeking to establish greater oversight of Bitcoin trading per recommendations from the IMF. In July, a task force was established to determine a regulatory framework for Bitcoin.
United States: The Consumer Financial Protection Bureau (CFPB) published principles for data sharing and aggregation for individual users. CFPB Director Richard Cordray stated: “Today, the Bureau released its consumer protection principles for the consumer-authorized data-sharing market. These principles express our vision for realizing an innovative market that gives consumers protection and value.” The nine principals focus on: access, data usability, control and informed consent, authorizing payments, security, transparency, accuracy, dispute resolution, and efficiency.
Governor Jerome Powell recently gave a speech on financial innovation at the 41st Annual Central Banking Seminar. The speech highlighted retail banking, payment innovations, and the role of banks in innovation. “All this is to say that we are at a critical juncture in the payment system's evolution, where technology is rapidly changing many facets of the payments process. FinTech firms and banks are seizing these technological changes in their own ways. But a collective and collaborative effort by all payment stakeholders will also be important as the United States works to achieve a payment system that has broad reach and can seamlessly integrate with other systems to transfer funds in a reliable, secure, and convenient manner,” Powell remarked. He added: “The Federal Reserve will also pursue two new efforts focused on security. Early in 2018, we plan to launch a study analyzing payment security vulnerabilities… We also plan to build upon the contributions of the Secure Payments Task Force to establish work groups focused on approaches for reducing the cost and prevalence of specific payment security vulnerabilities.”
Acting Comptroller of the Currency (OCC) Keith Noreika reiterated his view that FinTech firms should be able to pursue national bank charters during FinTech Week at Georgetown Law School. Of note, Mr. Noreika also focused his remarks on developing bank-run pilots. “Another way the office is supporting innovation is by developing a framework for OCC participation in bank-run pilots that allow banks to develop and test products in a controlled environment. We are still in the early phases of thinking through these issues, but believe pilots can be useful tools for the agency and industry. Pilots can accomplish the same goals as what others call ‘sandboxes,’ and allow us to gain insight into a product and to become comfortable with a proposed product’s controls and risks early in the process,” he said. Also at FinTech Week, Brian Quintenz, commissioner of the Commodity Futures Trading Commission (CFTC), who stated that digital currencies may transition from a security to a commodity.
Daniel Gorfine, director of LabCFTC, spoke before the 33rd Annual FIA Futures and Options Expo in Chicago. Mr. Gorfine’s speech highlighted the work of LabCFTC’s efforts to develop the CFTC into a 21st-century regulator by improving transparency, accessibility, and responsiveness of the CFTC.
The Conference of State Bank Supervisors appointed 33 FinTech companies to its new FinTech Industry Advisory Panel. “The advisory panel will have three working groups: money transmission and payments; lending; and community banking and innovation. Panel members and state regulators will discuss existing pain points and identify opportunities to improve multi-state licensing and supervision. The panel will kick off with a conference call later this month,” according to the press release.
In a note to Treasury Secretary Steven Mnuchin, U.S. Treasury Inspector General Eric Thorson outlined the scope of challenges cryptocurrency could pose to Treasury in the coming months and years. According to Mr. Thorson, the Bureau of Engraving and Printing, and the U.S. Mint “need to consider the effect of alternative payment methods and other technological advances (such as stored value cards, the internet, smartphones, and virtual currencies) as well as consumer demand on their respective business models, practices, future planning, and interactions with their customers, and the Federal Reserve Bank.”
Russia: The Russian government is set to begin testing blockchain-based land registry systems in early 2018.
Bahrain: The Central Bank of Bahrain announced the establishment of a FinTech Unit. “The proposed FinTech Unit will be responsible for the approval process to participate in the Regulatory Sandbox, supervision of licensed companies’ activities and operations, including cloud computing, payment, and settlement systems, and monitoring technical and regulatory developments in the FinTech field.”
UAE: The France’s AMF and the Financial Services Regulatory Authority of Abu Dhabi Global Market (ADGM), and the International Financial Center in Abu Dhabi have signed a cooperation agreement. ADGM also signed MoUs with Al Ansari Exchange and ADCB, a partnership with Plug and Play and announced a collaboration with Temenos.
ADGM also announced the second cohort for its RegLab. Of the 11 participants, four are focused on blockchain technology. They are: EquiChain, OkLink, Pyppl, and Remitr.
The UAE government has appointed its first State Minister for Artificial Intelligence, Omar Bin Sultan Al Olama. Mr. Olama is one of six newly appointed ministers that focus on “future skills, future sciences, and future technologies.”