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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 21, 2017
   
   

Apparently, It Was FinTech Week in Singapore

And to think it was going to be a quiet week in FinTech! Welcome back to all those who attended Singapore’s FinTech Festival. The Monetary Authority of Singapore (MAS) and the Association of Banks in Singapore (ABS), together with Accenture, launched a report titled, “Project Ubin Phase 2: Re-imagining Interbank Real-Time Gross Settlement System Using Distributed Ledger Technologies.” For those who may recall, Project Ubin is a joint effort to assess the application of distributed ledger technology for clearing and settlement of payments and securities. Phase 1 focused on domestic inter-bank payments.

The Phase 2 report shares the findings of a project that took place among 11 financial institutions, four technology partners, and Accenture. Phase 2 "is focused on solving the key challenges identified around the need for transactional privacy and deterministic finality, and most critically, the ability to perform multilateral netting capabilities in a decentralized manner while preserving transactional privacy." Three prototypes were developed that utilized three different DLT platforms: Corda, Hyperledger Fabric, and Quorum. The project "not only successfully demonstrates that [Real-Time Gross Settlement] functions may be decentralized without comprising privacy, but also marks the success and significance of industry-wide collaboration in laying the foundation for future innovation." 

Overall Journey of Project Ubin

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Source: MAS, ABS, Accenture

In remarks at the FinTech Festival, MAS Managing Director Ravi Menon provided an update on efforts to support a vibrant FinTech ecosystem in Singapore. According to Menon, more than 30 FinTech innovations labs have been set up in Singapore over the past few years, more than 400 FinTech enterprises have established themselves in Singapore, and multiple Singapore-based banks have launched APIs, with 270 open APIs made available by the Singapore financial industry to date. Meanwhile, MAS has now signed 16 FinTech cooperation agreements, and just signed on with MIT to cooperate on R&D in FinTech. MAS also launched an artificial intelligence and data analytics grant, among a list of other measures. Lastly, the International Finance Corporation, MAS, and the ASEAN Bankers Association introduced “an industry FinTech sandbox for financial institutions and FinTech firms as part of the ASEAN Financial Innovation Network (AFIN).... AFIN will provide an integrated platform for collaboration between ASEAN banks, microfinance institutions, non-banking financial institutions (NBFI), and regional FinTechs. The platform will facilitate development and experimentation of innovative digital financial products and services.” 

The Gartner Hype Curve Strikes Again?

Deloitte released a report covering the evolution of blockchain technology based on insights from the GitHub platform. According to the report, the number of new blockchain-related projects on GitHub has averaged more than 8,600 a year since 2009. "In 2016, alone, there were almost 27,000 new projects. The growth in the number of projects has been matched by the rapid growth of content produced to develop these blockchain technologies," the report goes on to state. Importantly, "about 90 percent of projects developed on GitHub become idle, and the average lifespan of a project is about one year, with the highest mortality rate occurring within the first six months." The report identified 11 variables that affect the longevity of a project. Based on insights from the GitHub platform, the report also found San Francisco, London, New York, Beijing, and Shanghai as the top five cities for blockchain development based on the number of projects initiated.

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Source: Deloitte, GitHub

The FinTech Institute

The Milken Institute has been quite busy over the past few weeks. Staci Warden, executive director of the Center for Financial Markets, took part in Singapore’s FinTech Festival. Staci held a fireside chat with Grady Booch, chief scientist for software engineering and Watson, IBM Research, and Vanitha Narayanan, chairman of IBM India Pvt. Ltd & Industry Academy Advisory Board Member. She also moderated a discussion covering the growth of initial coin offerings and the regulatory response. Yours truly avoided the 20-hour flight to Singapore to partake in the 54th U.S.-Japan Business Council meeting held at the U.S. Chamber of Commerce where I debriefed participants on the state of FinTech. Separately, I visited the home of THE Ohio State University (Columbus, Ohio) for a discussion covering regulatory sandboxes at a North American Securities Administrators Association conference. 

The U.S. Digital Economy: High-Level Digital Skills Required

A new report by the Brookings Institution analyzed "the digital content of 545 occupations covering 90 percent of the U.S. workforce in all industries since 2001." According to the report, occupations requiring high-level digital skills increased from 5 percent to 23 percent from 2002 to 2016. "Specifically, nearly 4 million of the nation's 13 million new jobs created since 2010, 30 percent have required high-level digital skills. Nearly two-thirds of new jobs required either high- or medium-level digital skills." Despite the benefits of digitization, the report also finds that “the uneven distribution of digital skills across races, genders, and places—combined with the nature of these technologies’ power—is understandably contributing to widespread disquiet about the economy.”

Employment by Levels of Job Digitization (2002 and 2016)

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Source: Brookings Institution

SkyNet Hasn’t Figured Out How to Replace Us… Yet

In a new report, Deloitte heard from 250 "cognitive-aware" leaders within "cognitive-active" companies. Among the AI being deployed by companies today, more than half of surveyed respondents are deploying robotic process automation, statistical machine learning, and natural language processing or generation. On the investment front, more than 10 percent of surveyed respondents are investing $10 million or more in cognitive technologies, 25 percent of firms have spent between $5 million to $10 million, and a further 25 percent have spent $1 million to $5 million. While still early, more than 80 percent of respondents "said their companies have already achieved either moderate (53 percent) or substantial (30 percent) benefits from their work with these technologies." Of course, difficulties remain. Nearly half of respondents discussed the difficulties in integrating cognitive projects with existing processes and systems, and 40 percent viewed the technologies (and expertise required) as too expensive.

With regards to job security and employment, nearly 70 percent of enterprises see "minimal to no job loss and even some job gains" in the near future. Over the long-term, "the picture is generally positive," according to Deloitte, with more than half of respondents seeing a potential opportunity, nearly 30 percent seeing AI augmenting people's capabilities, "while another 28 percent anticipate many new jobs created as a result of the adoption of cognitive technologies."

A Workforce in Flux over the Longer Term: AI Predicted to Cause Both Gains and Losses

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Source: Deloitte

Some Headlines

Payments: PayPal has launched Money Pools allowing users to split the costs of gifts, travel, or ask for funding for special events. As noted in a blog post, Money Pools "are free for your friends and family to chip into your kitty using their PayPal balance, a debit card, or funds from their bank account. Fees only come into play when a currency conversion is involved or if you use a credit card." The service was launched in 16 countries, and PayPal anticipates that one-third of American shoppers will pool funds to purchase holiday gifts this year. Meanwhile, PayPal and Synchrony Financial announced an expanded credit relationship whereby Synchrony will acquire nearly $7 billion in receivables, "including PayPal's U.S. consumer credit receivables portfolio." The two companies will also extend "the existing co-brand consumer credit card program agreement," with Synchrony Bank becoming the exclusive partner of the PayPal Credit online consumer financing program in the U.S. for 10 years. 

Same day  Automated Clearing House (ACH) payments have increased substantially in the U.S. According to NACHA–the governing body of the ACH network–Same Day ACH payment volume has increased 140 percent since August, with businesses and consumers having initiated 57 million Same Day ACH credits since inception (September 2016). Meanwhile, 6 million Same Day ACH debits have been initiated since the capability went live in September 2017. “Ninety-four percent have been for consumer payments, primarily bill payments and account transfers; and 6 percent for business-to-business payments.” 

Readers, get ready for Black Friday deals! Yours truly is looking forward to throwing some elbows in search of awesome deals on shampoo products. Of course, as more and more people avoid my elbows by shopping electronically, it's important to note that roughly 1-in-25 Black Friday apps are fake. According to RiskIQ, "more than 32,000 malicious mobile apps are leveraging the branding of the top-five online retailers." Happy shopping!

Lastly, SWIFT released a white paper covering "the use of financial messaging standard ISO 20022 for unifying FinTech." According to the paper, “FinTech innovation comes in all different shapes and sizes, using divergent technologies and without the adoption of common standards; it is likely to lead to inefficient and ineffective fragmentation. A common, standardized business language is paramount to ensure interoperability between existing and future financial systems.” Among the many values of ISO 20022 for FinTech: An open and collaborative standard not controlled by a single commercial interest; a tech-neutral business language allowing for uniform and unambiguous interpretation of the data exchanged among users; a rich and proven data model, and global interoperability.

Crowdfunding: The U.S. Financial Industry Regulatory Authority (FINRA) has approved 34 Regulation Crowdfunding platforms to date. U.K.-based SyndicateRoom launched a due-diligence guide for equity crowdfunding investors. Lastly, back in March 2015, the payments platform Square filed for a crowdfunding patent, which was just granted back in September. It’s unclear whether Square, at this point, will enter this market. 

Alternative Finance: SoFi announced to investors that the company is pulling back from its global ambitions and announced several executive departures with Peter Early and Arkadi Kuhlmann stepping down. In other news, Prospa has become the first Australian digital lender to deliver $500 million in small business loans, U.K.-based Zopa "is working on ways to let investors transfer their existing holdings into its Innovative Finance ISA," according to Peer2Peer Finance News, and Elevate is launching a credit card for sub-prime customers. 

Crypto: Speaking of Square, the company now allows users using Square Cash to buy, sell, and hold Bitcoins (not to be used to make payments, however). The news sent Square’s stock and Bitcoin’s price higher. Meanwhile, Finova Financial has announced the creation of a fundraising process–the JOBS Crypto Offering (JCO)–which, when completed, "will give investors the opportunity to invest in equity ownership of previously privately-held companies using cryptocurrency." The process is billing itself as a hybrid between initial coin offerings (ICOs) and initial public offerings of stock. “In a JCO, ‘tokens’ representing ownership of shares of capital stock would be tracked on a distributed ledger or blockchain (Tokens) and would be sold pursuant to a registration statement filed under the Securities Act or a transaction which is exempt from registration under the Securities Act pursuant to Rule 251 under the Securities Act (i.e. Regulation A+).”

Incumbents Doing Things: Credit Agricole, a French co-op bank, has launched a low-cost online banking service to stave off digital competitors, while BNP Paribas launched WeChat Pay in Europe. Mastercard launched an innovation center in Sydney, Australia and submitted patent filings for an instant payments processing service underpinned by blockchain technology. Separately, Goldman’s online consumer lending platform Marcus is closing in on $2 billion in originations by year-end. Fidelity Investments announced Fidelity Access–which allows clients to "maintain control over the access they provide to their account information." Fidelity clients "will be able to see which third-party websites or applications have been authorized to access their Fidelity account information...."

Bank of America, JPMorgan Chase, Wells Fargo, and American Express announced the formation of a third-party risk management company, TruSight. The company is designed "to combine best practices and simplify the process of conducting third-party risk assessments of suppliers and partners across the financial services industry."

Importantly, The Clearing House launched RTP–a real-time payments systems and "the first new core payments infrastructure in the U.S. in more than 40 years." The system was developed in collaboration with member banks and meets the objectives of the Federal Reserve Faster Payments Task Force. RTP will be open to all U.S. depository institutions "with the goal of reaching ubiquity by 2020."

Global Developments 

EU: Rob Wainwright, head of Europol, discussed the rise in cybercrime in a recent interview with Reuters. According to Wainwright, there are roughly 4,000 ransomware attacks a day, with the financial sector and other critical infrastructure increasingly targeted. “There is this sort of cyber-criminal underworld that's a lot bigger and smarter and adept than most people think. And, against it, we still have generally low cybersecurity standards.”

A recent survey of 500 privacy professions by TrustArc and the International Association of Privacy Professionals (IAPP) found U.S. companies are more prepared for the EU's General Data Protection Regulation (GDPR) than their European counterparts. According to the survey, 84 percent of U.S. respondents expect to be GDPR-compliant by May 25, while nearly one-quarter of EU respondents will not be ready in time due, to the lack of adequate budgets to comply, in particular.

The European Commission announced a study on the opportunity and feasibility of blockchain technologies and when and how the technologies "may help public authorities to deliver European services and implement policies in an optimized way."

U.K.: The Financial Conduct Authority's Karina McTeague discussed retail banking and payments at the PayExpo 2017 in London. According to McTeague, “We have also worked with 42 firms, including those in the payments sector, in the first two cohorts of our Regulatory Sandbox. Here, both authorized and unauthorized firms–that meet our eligibility criteria–can test their ideas or products, on a limited number of real customers, for a limited duration, in a safe, supervised environment, overseen by the FCA to ensure consumers are protected–without incurring the full costs of regulation. We have also supported increased competition and innovation in this market through our New Bank Start-up Unit, along with our fellow regulator, the Prudential Regulation Authority. The Unit acts as a one-stop shop for prospective entrants. And these efforts are bearing fruit. In the five years to 2010, there was only one new U.K. retail bank authorization. But, in the following five years there were five. And, since 2015, we’ve authorized a further nine U.K. retail banks. We have also worked with the Bank of England to support increased competition by opening up access to the Real Time Gross Settlement system to non-banks.” 

U.S.: A number of regulatory developments to keep in mind. First, Acting Comptroller Keith Noreika announced that he will step down after the Senate confirmed Joseph Otting as Comptroller of the Currency. Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), will step down from the agency by the end of the month.

Meanwhile, in an unscripted remark, according to TheWall Street Journal, Jay Clayton, chairman of the Securities and Exchange Commission (SEC), stated that he has "yet to see an ICO that doesn't have a sufficient number of hallmarks of a security."

Federal Reserve Governor Lael Brainard gave prepared remarks covering where consumers fit in the FinTech stack during a conference at the University of Michigan. According to Brainard, “As consumers start to rely on financial autopilots, however, it is important that they remain in the driver's seat and have a good handle on what is happening under the hood.... In short, consumers should remain in control of the data they provide. In addition, consumers should receive clear disclosure of the factors that are reflected in the recommendations they receive.” 

In case you missed it, Treasury Secretary Steve Mnuchin discussed virtual currencies in an interview with Yahoo last week. According to Mnuchin, “It's something we are looking at very carefully and we'll continue to look at. So the first issue… is to make sure people can't use Bitcoin for illicit activities.... If you're a Bitcoin dealer in the United States, you have the same Know Your Customer requirements and [Bank Secrecy Act] requirements, and those are issues I'm discussing with all my international counterparts. Our number one issue is we want to make sure this is not used for illicit transfers of funds." On the question of any announcements or updates on regulation, Mnuchin stated: "No, there's nothing specific but we do have working groups that are looking at this. And again, something we’ll be watching very carefully."

At Singapore's FinTech Festival, U.S. Commodity Futures Trading Commission Chairman Christopher Giancarlo provided an update on LabCFTC and RegTech. According to Giancarlo, "LabCFTC has held over 100 meetings with market participants and FinTech innovators, ranging from established financial service firms to start-up companies. CFTC staff have held office hour sessions in New York, Chicago, and Washington D.C. and will be scheduling rolling sessions early next year in Silicon Valley, Austin, and Route 28 outside of Boston." On RegTech, Giancarlo stated: "I would be remiss if I did not mention some work we will be doing through LabCFTC to stimulate innovative application of RegTech. We plan to issue a call for public feedback on a series of innovation prize competitions we intend to begin in 2018 under the Science Prize Competition Act. These competitions will afford us the ability to spur innovation that can solve public policy challenges and enhance our markets. Such competitions may involve, for example, novel ways to use or share data, make our rules machine readable (i.e., developing a “robo rulebook”), or build a more dynamic, digital, and “smart” notice-and-comment platform."

Mauritius: The Financial Services Commission issued draft rules for peer-to-peer lending. The rules apply limits on lenders "whenever they will transact with licensed P2P Operators" in the country. The rules also describe who cannot apply to be a P2P Operator and also prevent P2P Operators from being involved in donation-based or equity-based crowdfunding activities.

Mexico: The Federal Economic Competition Commission (COFECE) released a statement concerning the draft FinTech law published by the Federal Regulatory Improvement Commission. According to the COFECE, “Within the framework of the collaboration agreement signed between COFECE and the Federal Regulatory Improvement Commission (Cofemer), on September 19, the latter sent this competition authority the draft Law to regulate FinTech institutions, with the purpose of obtaining its opinion regarding the effects of the law on economic competition and free market access. Said collaboration agreement grants COFECE a response-time of 20 business days. However, on October 3, Cofemer published the General Opinion of the Draft Law, that is, before COFECE’s deadline to issue its opinion. Thus, Cofemer’s opinion establishes its request for COFECE’s opinion; Cofemer has not yet received COFECE’s observations, in fact the response times established in the referred agreement have not yet expired.” As a result, COFECE “will submit an opinion to the legislative committees responsible for ruling the draft law in Congress, in a timely manner.”

UAE: The country's Financial Services Authority granted Sarwa Digital Wealth Limited "an automated investment advice service, in-principle approval for its Innovation Testing License (ITL). The DIFC-based company becomes the first FinTech operator to receive approval for this special class of financial service license developed specifically for FinTech firms." Meanwhile, the Dubai International Financial Center announced a $100 million fund to invest in FinTech startups.

China: The country's online sales are growing more than 30 percent a year, with mobile payment transactions surpassing $23.8 trillion, according to Chinese President Xi Jinping at the Asia-Pacific Economic Cooperation Economic Leaders' Meeting.

Let's not forget about Alibaba's Single's Day which saw more than $25 billion worth of transactions in 24-hours. Over 60,000 international brands took part in the event among the 140,000 total brands. Interestingly, roughly 80 percent of consumers on Alibaba's shopping app are younger than 25, with 90 percent of gross merchandise volume generated from mobile.

The country's central bank released a paper titled, “Roadmap Toward a Modern Payment Infrastructure in Aruba.” According to the report, there is no institution in Aruba "that has the mandate to regulate current or future payment infrastructure and solutions." The current payment system lacks innovation, transparency, efficiency, and leadership.

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Source: Central Bank of Aruba 

Germany: The Federal Financial Supervisory Authority (BaFin) issued a consumer warning on the risks of initial coin offerings (ICOs). According to the regulatory body, “The systemic vulnerability of ICOs to fraud, money laundering, and terrorist financing increases the risk of investors losing the sums invested, all the more so due to the possibility of authorities taking necessary measures against operators or other persons or enterprises that are involved in such illegal dealings.” 

Rwanda: The Competition and Markets Authority is planning a study on FinTech innovation to help open up the country's financial services sector to tech intermediaries. The baseline survey is expected to be released in the first quarter 2018.

Australia: The country's Digital Transformation Agency is seeking feedback on the Trusted Digital Identity Framework. The agency released 14 documents that make up the draft framework. Separately, Australian consumer groups are up in arms over efforts to expand the current sandbox. "Given that there will be no proactive examination of sandbox services, this protection is too limiting and inadequate. The Australian Securities and Investments Commission (ASIC) needs better powers to act quickly and in a targeted way should an experimental sandbox service be causing consumer harm…. Our first preference to address these risks would be for ASIC to assess applicants before they’re granted a regulatory exemption or entry into the sandbox, similar to the approach used in the U.K., Singapore, and Hong Kong. As an alternative, the Treasury should give ASIC the power to act if they find sandbox participants are offering harmful products or services.” 


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