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
November 03, 2017

High Expectations

In McKinsey & Company’s annual banking report, the global consultancy finds that tepid growth since the financial crisis has kept banks’ return on equity (ROE) “stuck in a narrow range, between 8 percent and the 10 percent figure that most consider the industry’s cost of equity.” While rising interest rates could lead to industry ROE reaching 9.3 percent by 2025, the switch by retail and corporate clients to digital companies could result in industry ROE falling to 5.2 percent by 2025. In short, banks must extract the potential of digital. Doing so could result in the industry adding $350 billion to its collective bottom line. Even so, an ROE gain of 2.5 percent from going digital will still not offset the 4-point drop. However, banks “that successfully orchestrate a basic ‘ecosystem’ strategy, by building partnerships and monetizing data, could raise their ROE to about 9 to 10 percent. Banks that can go further and create their own platforms might capture a small share of some non-banking markets, which would elevate their ROE to about 14 percent—far above the current industry average.”

Return on Average Equity—for an Average Bank with a Successful Ecosystem Strategy

return on avg equity

Source: McKinsey & Company

Deep Learning DeBugged

Researchers from Columbia University and Lehigh University have developed "the first whitebox framework for systematically testing real-world [deep learning] systems." Called DeepXplore, the framework tests whether deep learning models show incorrect behavior in an effort to improve the accuracy of such models. The researchers demonstrate "that DeepXplore efficiently finds thousands of unique incorrect corner case behaviors (e.g., self-driving cars crashing into guard rails) in 15 state-of-the-art DL models trained using five real-world datasets including Udacity self-driving car challenge data, image data from ImageNet and MNIST, Android malware data from Drebin, and PDF malware data from Contagio/VirusTotal." In addition, the findings “further show that the test inputs generated by DeepXplore can be used to retrain the corresponding DL model to improve classification accuracy as well as identify potentially polluted training data. We achieve up to 3 percent improvement in classification accuracy by retraining a DL model on inputs generated by DeepXplore compared to retraining on the same number of random or adversarial inputs.”

Bank Innovation Readiness

PYMNTS and i2c released the Bank Innovation Readiness Index. More than 200 financial institutions took part in the survey which found that consumers remain the driving force behind institutions rolling out innovative products and budgets to implement new products and innovative features. Innovation budgets, meanwhile, remain robust with more than half of respondents having more funding for innovation than other business units. Even in an era of collaboration, roughly half of all financial institutions surveyed view FinTechs as their top competitors. PayPal, in particular, was singled out with approximately 25 percent of banks with $1-5 billion in assets and nearly 20 percent of banks with $100 billion or more in assets viewing PayPal as a "significant threat." Interestingly, when it comes to launching new products, 52 percent of firms “indicated it took less than six months to go from the identification of the need to the actual rollout of the innovation. In fact, more than 81 percent took less than a year.”

Time From Development of Need to Deployment

Time Development of Need to Deployment

Source: PYMNTS, i2c

Halloween Fail

Hello, FinTech in Focus readers! Yours truly was caught off guard this Halloween after my son decided to wear a Transformers costume. For those of you who know me, I do not have the same physique as Mark Wahlberg, nor did I have any interest in dressing up as Megatron. Halloween, I quit.

Some Headlines

Incumbents Doing Things: JPMorgan Chase unveiled Finn by Chase –"a new all-mobile bank that gives consumers greater control of their everyday spending and saving–and happiness–through a completely mobile experience." The app is the culmination of 15-months of research covering millennial banking habits. The product is similar to Simple or Moven by providing the capabilities of a traditional checking or savings account through a fully mobile experience. Commonwealth Bank, Westpac, and National Australia Bank are expected to roll out Beem –a free application allowing users to make instant payments using their smartphone and request payment–later this year. According to the press release, "Future product initiatives beyond the payments facility are being planned, including digital wallet features and capabilities." At Money 20/20, IBM announced "an industry first solution" supportive of the entire lifecycle of Peer-to-Peer (P2P) transactions over the Zelle network. The partnership allows banks to provide an enhanced customer experience, while ensuring customer transactions are completed quickly and securely. Meanwhile, ING has set up a €300 million FinTech venture fund, ING Ventures, with plans to invest in 20-30 companies over the next five years. Lastly, Harit Talwar, head of Goldman Sach's online consumer lending platform, Marcus, spoke on the platform's recent partnership with Intuit.

Payments: Amazon launched a cash payment service in Mexico to address a customer-base that is resistant to online retail and hesitant to use digital means for transactions. Mobile pay usage among eligible U.S. consumers has fallen 5 percent when compared to last year, , according to a survey from Auriemma Consulting Group. Security concerns related to point of sale technology and problems among Samsun Pay, Apple Pay, and Android Pay users completing transactions at the register have depressed mobile pay usage. “Problems at POS are particularly perilous for cards at the top of the digital wallet, who have the most to lose if the Pay transaction is unsuccessful. In fact, 45 percent of in-store Pay purchasers quit trying to use mobile payments entirely, and use a physical card instead.” Square introduced a new register built for larger sellers. The register "sets a new standard for point-of-sale (POS) maintenance and reliability, including automatic Square-managed software updates; Ethernet, Wi-Fi, and Offline Mode for seamless usage; a five-port USB hub so sellers can integrate with peripheral devices; a two-year warranty; and acceptance of all payment types: swipe, dip, or tap.”

RegTech: Juniper Research published a complimentary white paper that forecasts RegTech spending to grow nearly 50 percent per annum over the next five years, with investment in tech-enabled compliance and regulatory reporting expected to jump from nearly $11 billion in 2017 to $76 billion in 2022.

Alternative Finance: The Innovative Lending Platform Association and the Canadian Lenders Association (CLA) joined together to launch SMART Box into Canada. "The CLA will encourage its members interested in promoting the responsible development of the small business lending industry in Canada to voluntarily adopt the model disclosure in their loan documentation." Separately, Lending Club is shutting down five investment funds under LC Advisors, with proceeds from the sale of assets totaling $376 million. Assets from a sixth consumer fund are also slated to be sold in the near future.

Cryptocurrency and Blockchain Technology: Institutional buy-in continues apace in the cryptocurrency space. The number of crypto-funds has risen to 124, with 90 new funds focused on digital assets launching just within the past year. Total assets under management by crypto-funds currently stand at $2.3 billion, according to data from Autonomous Next. CME Group will launch bitcoin futures in the fourth-quarter of this year. “The new contract will be cash-settled, based on the CME CF Bitcoin Reference Rate (BRR) which serves as a once-a-day reference rate of the U.S. dollar price of bitcoin. Bitcoin futures will be listed on and subject to the rules of CME,"  according to the press release. R3 and 22 banks built a real-time, cross-border payments solution leveraging distributed ledger technology. As the press release states, R3 “is the first to develop a shared infrastructure–built on its Corda platform–to facilitate the full payments workflow. The solution works by creating a representation of fiat currencies on ledger, and is programmed to enable interaction with central bank digital currencies as they are rolled out.” The prototype is expected to be rolled out later this year.

Alternative Data: FICO announced the launch of FICO Score in India and alternative data score, FICO Score X Data India in partnership with Lenddo. FICO Score India is based on credit data pulled from major credit bureaus in India. FICO Score X Data India, in partnership with Lenddo “evaluates alternative data such as that from a consumer's digital footprint (web or mobile device) to produce a score for consumers who don't have enough traditional data on file with one of the Indian credit bureaus to produce a FICO® Score for India.”

Accelerators Accelerating: Plug and Play will collaborate with Abu Dhabi Global Market in operating a three-month accelerator program designed to attract international start-ups to engage with financial institutions based in the region. The first class of start-ups will be accepted in third-quarter 2018. The Tokyo Metropolitan Government has announced that it will hold the Blockchain Business Camp Tokyo accelerator program "for foreign companies that possess blockchain technology that is considered one of the fields of the growth-strategy of Japan, in such areas as transactions, securities, supply chains, the sharing economy, and IoT." Five companies will be allowed to partake in the three-month program.

Global Developments

OECD: The OECD released comments (Part 1 and Part 2) received from more than 50 individuals and groups regarding the design of tax rules for digital firms. The aim is to assist the OECD task force present on the issue before the G20 finance ministers in April 2018.

Australia: The Turnbull Government released draft legislation and regulations for an enhanced regulatory sandbox for innovative financial services. The proposed sandbox will provide a 24-month testing timeframe for firms to test the commercial viability of new concepts. According to the draft explanatory statement: “The Corporations (FinTech Sandbox Australian Financial Services Licence Exemption) Regulations 2017 (the ‘AFSL Exemption Regulations’) and the National Consumer Credit Protection (FinTech Sandbox Australian Credit Licence Exemption) Regulations 2017 (the ‘ACL Exemption Regulations’) provide for conditional exemptions from the Australian Financial Services Licence (AFSL) and Australian Credit Licence (ACL) requirements to allow the testing of financial services and credit activities relating to certain financial and credit products. Eligible persons can use the AFSL and ACL exemptions concurrently.”

The deputy chair of the Australian Securities and Investments Commission (ASIC) Peter Kell stated that there is likely to be far less regulatory scrutiny for financial planners in the future. Kell stated, “I can tell everyone in the industry, that is the very clear desire of ASIC. We do not want to be in a position where, in 10 years’ time, this sector is subject to the same level of regulatory scrutiny it is at the moment. That’s why we’re so committed to getting these [education and professional standards’ reforms] right at this point in time.” ASIC also signed a cooperation agreement with the Swiss Financial Markets Authority covering innovation in the financial services sector. This is ASIC’s eighth FinTech referral and information-sharing agreement.

Tony Richards, head of the Reserve Bank of Australia’s payments policy department, appeared before the House of Representatives Standing Committee on Tax and Revenue where he focused a portion of his remarks on digital currencies. “From the Bank's payments policy mandate, digital currencies do not currently appear to raise any pressing regulatory issues,” he said. Richards also provided remarks on the Australia’s New Payments Platform which, by early 2018, will provide Australians with a real-time payments infrastructure.

FinTech Australia released an updated ecosystem map of its members which shows a 40 percent increase in lending platforms, a 31 percent increase in wealth and investing platforms, and a 30 percent increase in payment firms. Australia has around 600 total FinTech firms.

Brazil: Nubank is expanding beyond credit cards into digital accounts to challenge traditional banks. According to Reuters, 2.5 million Brazilians have opened a Nubank card out of 13 million that applied, due to strict credit checks. Nubank has cleared this obstacle for new accounts in an effort to attract more of Brazil's unbanked population.

France: The country's financial services regulatory authority released a discussion paper to gain input from stakeholders on initial coin offerings (ICOs). Also announced–the launch of “a digital-asset fundraising accompaniment and research program. Called UNICORN (for "Universal Node to ICO’s Research & Network"), this program, in parallel with the reflection on possible ways forward for regulation, aims to offer initiators of these projects a framework allowing for development of their transactions, and to ensure the protection of players and purchasers wishing to participate.”

Malaysia: Bank Negara Malaysia has approved three more participants to its FinTech Sandbox. The group will undergo a 12-month testing phase which started on October 20th. Approved new participants are Jinerxu, a mobile bank application, CIMB Bank, and Paycasso, a global customer identification platform. Meanwhile, sandbox participant, MoneyMatch, , launched Transfer portal–a digital cross-border remittance services platform.

UK: The House of Lords released a report covering data sharing post-Brexit. The government is seeking to maintain unhindered and uninterrupted data flows with the EU. The document looks at how Brexit will impact Britain’s relationship to the EU’s data protection package on the following topics: the General Data Protection Regulation, the Police and Criminal Justice Directive, the EU-U.S. Privacy Shield, and the EU-U.S. Umbrella Agreement.

The National Crime Agency has assessed the risks posed by digital currencies in its latest National Risk Assessment (NRA). According to the report, there is increasing evidence that terrorists are interested in using e-money cards to transfer funds across borders, which has led the agency to elevate e-money to "medium risk." With regards to digital currencies, "the lack of evidence of [the use of digital currency to facilitate and finance terrorist activity] and the greater attractiveness of other methods mean that digital currencies continue to be assessed as low risk for terrorist financing."

The Financial Conduct Authority published “lessons learned” from the first year of the authority’s regulatory sandbox. In terms of overall numbers, 146 firms have submitted applications, 50 were accepted, and 41 underwent testing in two separate cohorts. Of interest, roughly one-third of firms “that tested in the first cohort used the learnings to significantly pivot their business model ahead of launch in the wider market.” In addition:

“We have witnessed the denial of banking services first-hand across a number of firms in the first two cohorts of the sandbox. Difficulties have been particularly pronounced for firms wishing to leverage DLT, become payment institutions, or become electronic money institutions. We are concerned by what appear to be blanket refusals for certain kinds of applicant firms. There are also apparent inconsistencies within individual banks regarding how they apply their assessment criteria in approving access to banking services. We recognize that this is not an issue faced solely by firms in the sandbox. However, this process has given us closer insight into the difficulties faced by firms in this area. Some firms have been unable to conduct their tests as initially planned as a result. If certain firms cannot secure bank accounts it is possible that they will be unable to meet our conditions for authorization and would therefore be unable to enter the market, even to test in the sandbox.”

India: The Mobile Payment Forum of India (MPFI), in collaboration with the Institute for Development and Research in Banking Technology, Hyderabad and Rural Technology Business Incubator, and IIT Madras, has set out plans for developing user-friendly features to increase digital fluency. Features include voice-based authentication, simplified message formats for SMS banking, proximity payments, and Near Field Communication (tap and pay).

Vietnam: The State Bank of Vietnam has prohibited the use of Bitcoin and other digital currencies. Users will be liable to pay a penalty of $8,800 and, starting next year, may be subject to prosecution.

Turkey: Turkey’s parliament is considering a legislative regime for crowdfunding. The proposed regime defines crowdfunding, licensing, and the role of regulatory bodies within the system. If you can read Turkish the bill is here.

Japan: Japanese conglomerate SBI has launched eight cryptocurrency-based businesses. The new businesses range from hedge fund management to mining and derivatives. The company also plans to establish a virtual currency exchange platform in Hong Kong.

Japan’s Financial Services Agency (FSA) published a clarifying statement regarding ICOs. The FSA warned that ICOs may fall under existing regulation–the Payment Services Act and the Financial Instruments and Exchange Act.

NRI and Microsoft Japan announced a Financial Digital Innovation Consortium. The consortium will focus on topics including cloud computing, advanced data utilization, and applications of new technologies. The consortium also seeks to improve financial institutions’ operating scope through improving information sharing.

Taiwan: The Financial Supervisory Commission will allow banks to hold 100 percent stakes in venture capital firms–up from the current 5 percent cap. The amount they can invest will be limited to 3 percent of the bank’s total net worth.

Hong Kong: The FinTech Association of Hong Kong has signed Memorandums of Understanding with three FinTech associations: the Singapore FinTech Association, the Taiwan FinTech Industry Development Association, and the Swiss Finance and Technology Association.

Hong Kong Exchange and Clearing Ltd. is closing its physical office space this week due to the shift towards digital trading. The space will be turned into a museum.

The Hong Kong Monetary Authority (HKMA) and the Monetary Authority of Singapore (MAS) signed a co-operation agreement on FinTech. According to the press release, “MAS and HKMA have committed to work on a strategic project on trade finance cross-border infrastructure, based on distributed ledger technology, as their first collaborative initiative.”

Singapore: The Monetary Authority of Singapore announced that Project Ubin, which explores the application of blockchain technology to a number of financial services areas, will conclude next year. MAS is reserving policy judgments until the trial concludes.

The Central Bank of Singapore has stated that it has no intention of regulating cryptocurrencies. Lenders of last resort will monitor activities and function as a backstop. Ravi Menon, the head of the Monetary Authority of Singapore, stated “As of now, I see no basis for wanting to regulate cryptocurrencies. [Our focus is] look-[ing] at the activities surrounding cryptocurrency and asking ourselves what kinds of risks they pose, which risks would require a regulatory response, and then proceed-[ing] from there.”

Lattice80, one of the world’s largest FinTech hubs, was evicted from its building by Hong Leong Holdings. Lattice80’s operator, Marvelstone Group, stated that it would move the hub into a new, larger office in the financial district.

Singapore unveiled a roadmap for strengthening its status as a financial hub in Asia. The plan aims to create 3,000 jobs in financial services and 1,000 net jobs in the FinTech sector. A focus of the plan is to foster collaboration between financial institutions to create common utilities for services including electronic payments, electronic KYC checks, digital IDs, and the potential use of distributed ledger technology for inter-bank payments and trade finance.

Indonesia: Indonesia’s Central Bank has banned Bitcoin as a method of payment. Agus Martowardojo, governor of the central bank, stated that Bitcoin was not a legal payment and legal action would be taken against users.

China: Liu Mingkang, a former chairman of China’s banking regulator, is pushing for the establishment of a regulatory sandbox for the Greater Bay Area–a region that includes 11 cities throughout southern China.

China is preparing to tighten regulation of online consumer lending. Ji Zhihong, head of the financial markets department at the People’s Bank of China, explained, “The public has doubts about its operating model and has appealed for it to be brought under regulation. To prevent and resolve related risks, the central bank is working with the related departments to deal specifically with risks from internet finance.”

U.S.: The House Small Business Committee held a hearing titled, , Financing Through FinTech: Online Lending's Role in Improving Small Business Capital Access." In his testimony, William Phelan, president of PayNet, Inc., provided detailed analysis on borrower credit quality, while Trevor Dryer, CEO of Mirador, provided some statistics on borrowers on his platform.


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