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 27, 2017

BigTech and Retail Banking

Bain & Company released its eighth annual study on retail banking. The study surveyed more than 133,000 consumers in 22 countries and found that consumers "are surprisingly amenable to trying financial products offered by technology firms," though BigTech was favored over startups by a spread of 10-40 percentage points, depending on the country. Amazon and PayPal now rank nearly as high as banks for trust with the money of U.S. and U.K. consumers.

Customers Rank Certain Technology Firms Almost as High as Traditional Banks for Trustworthiness 

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Source: Bain & Company, Research Now

Among other findings, routine transactions that require bank staff can cost 20 times more than transactions done online or through mobile. However, the bank branch still lives—at least in the U.S. and U.K. where 40 percent or more of surveyed individuals made deposits through tellers rather than digital channels. And yet, tellers may disappear in favor of voice assistant technology. Roughly 6 percent of respondents in the U.S., U.K., and Australia use voice assistant technology for banking purposes, with a further 20 to 25 percent open to trying the technology for the first time.

Open Banking: The Long View

techUK—an advocacy group representing the U.K. tech sector—published a white paper on open banking implementation. The report provides six key recommendations: 1) The U.K. government, regulators, and industry need to come together to formulate a long-term strategy to create a diverse financial services sector based on open data; 2) Enhance customer access through a single digital ID to minimize KYC/AML burdens on companies; 3) The long-term governance of open banking and open financial services must be governed through principles of transparency and inclusion; 4) Stimulate competition through collaboration; 5) Determine common open standards for interoperability purposes; 6) Communicate the benefits of open banking to the public. The report notes that even though open banking is slated to go into effect in January 2018, this will be a long, drawn-out process with other standards not expected to come into play until months after the arrival of open banking. Even with the date around the corner, “we still lack a true sense of collaboration between the incumbents and the new players, the banks, tech titans, and the FinTechs and, crucially, the end-users - consumers and small businesses.” The study further notes that if collaboration and a connected ecosystem “are not embraced by the financial services sector, the danger is that the technology platforms will move in and come to dominate the market, relegating traditional banks to the unseen ‘rails’ of finance.” 

And speaking of open banking, the blame game continues in the U.S. between FinTechs and banks, with accusations that certain banks are selectively choosing FinTechs to work with while leaving everyone else out in the cold. Also, FinTechs find it difficult to deal with separate standards and requirements at each bank and restrictive agreements. In Australia, banks are calling for an end to screen scraping and for the government to impose capital requirements and an insurance scheme to protect customers harmed by criminals hacking their data, once the open banking regime becomes a reality.

Open Data: EU Edition

A new report by Capgemini assessed Europe's efforts towards implementing open data policies. The study finds that the number of countries that have implemented an advanced Open Data policy has doubled within the past year. Why the drive for Open Data? The report finds total market value is estimated at €325 billion by 2020, with 30,000 new jobs created and a cost savings of €1.7 billion that national governments can reach in 2020.

“The results show that governments across Europe have not only prioritized Open Data more strongly in 2017, but they are actually engaging in a race to the top,” the report stated.

Open Data Maturity Clusters and Evolution 2015-2017

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Some Headlines 

Incumbents Doing Things: Nasdaq has filed a patent for a blockchain-based asset ownership system. According to the patent application, “Information regarding the ownership of particular assets (e.g., shares in a company, etc.) are stored in a blockchain, and various data processing operations (referred to below as "application processing") are performed using this ownership information.” Meanwhile, the State Bank of India is expected to roll out a beta version of blockchain-enabled smart contracts and Know-Your-Customer by next month. Lastly, ING announced a breakthrough in protecting data privacy which is superior to existing technologies designed to keep information private on a ledger. According to the press release, the zero-knowledge range proof (ZKRP) "demonstrates the truth of a specific statement without revealing any additional information beyond what it’s trying to prove." ZKRP is an open source solution, allowing interested parties to access and contribute to the solution.

Separately, American Express and Santander launched a blockchain-based payment system using Ripple, allowing U.S. corporate customers to send funds to U.K.-based businesses that bank with Santander UK. "With the integration of Ripple into the American Express FXIP platform, non-card payments can be routed through Ripple’s real-time payment network, known as RippleNet," the press release states. ACI Worldwide has partnered with Zelle Network, helping financial institutions integrate with Zelle. The payments network has processed more than 160 million real-time, peer-to-peer transactions since January 2017. 

Lastly, the Royal Bank of Scotland will roll out its robo-advisory service next week using NatWest branches. U.K. customers can use the service to invest as little as £500.

Robo-Advisors: Speaking of robo-advisors, PayPal is moving into the wealth management business in partnership with Acorns. The partnership allows users to link their PayPal accounts with Acorns and, if they so choose, set up a recurring or one-time investment funded from the PayPal account. Nutmeg's assets under management have surpassed £1 billion, and the company has nearly 50,000 customers.

Cryptocurrencies: Coinbase will open a new custodian service aimed at large institutional investors. Coinbase Custody will come with extra security measures and other efforts to persuade large investors—those who deposit at least $10 million—to partake in the service. Coinbase will charge investors 0.1 percent a month on top of a $100,000 initial setup fee.

Speaking of security, roughly $374,000 invested in Confido’s initial coin offering (ICO)—a startup on the Ethereum platform—has apparently vanished. The Confido team originally cited legal troubles as the reason without specifically indicating what legal issues Confido faces. In a separate statement, one employee stated: “Look I have absolutely no idea what has happened here. The removal of all of our social media platforms and website has come as a complete surprise to me.”

And speaking of ICOs, the founders of the Tezos project—which raised more than $230 million back in July—have been hit with a second class-action suit. The lawsuit states: “[D]ue to the many misrepresentations, factual omissions and unlawful activities engaged in by the defendants – it appears [participants in the ICO] cannot, and potentially will not, see any return on their investments.”

Online Finance: U.S.-based small business lender Kabbage announced a new $200 million asset-backed revolving credit facility with Credit Suisse. According to the press release, "This marks the first credit-facility transaction for Kabbage rated by DBRS, Inc., one of the top global-rating agencies." In addition, Kabbage's total debt-funding capacity now totals $750 million.

Global Developments

U.K.: Chancellor of the Exchequer Philip Hammond announced the Autumn 2017 budget on Wednesday. Some key points included in the budget: 

Brexit: The budget sets aside a further £3 billion for contingencies stemming from Brexit.

Homeownership: The budget includes the launch of a £2 million competition "to support FinTech firms developing innovative solutions that help first-time buyers ensure their history of meeting rental payments on time is recognized in their credit scores and mortgage applications." 

Developing a Tech Nation: The government will invest £21 million over the next four years to expand Tech City UK's reach, including additional support to regional tech hubs and startups. 

Access to Finance: The government will establish a £2.5 billion Investment Fund incubated in the British Business Bank. This is essential given Brexit and the loss of investment from the European Investment Fund. Other measures provide further support to the Enterprise Investment Scheme and the Venture Capital Trust scheme and unlock £20 billion of patient capital over the next ten years. 

Artificial Intelligence and Data Sharing: The government will create a new Center for Data Ethics and Innovation "to enable and ensure safe, ethical and ground-breaking innovation in [artificial intelligence (AI)] and data-driven technologies." As the budget states, “[t]his world-first advisory body will work with government, regulators, and industry to lay the foundations for AI adoption...." The government will also invest more than £75 million "to take forward key recommendations of the independent review on AI, including exploratory work to facilitate data access through 'data trusts.'" 

RegTech?: The government will invest £10 million to establish a new Regulators' Pioneer Fund. “This will help regulators to develop innovative approaches aimed at getting new products and services to market.”

R&D: Research and development get a boost in the budget to support the government's ambition of increasing R&D investment in the economy to 2.4 percent of GDP by 2027. For 2021 and 2022, total direct R&D spending is expected to reach £12.5 billion per year.

Workforce Training: A £30 million investment “to test the use of AI and innovative EdTech in online digital skills courses to that learners can benefit from this emerging technology, wherever they are in the country.”

BRAT Versus BRIC: Add yet another Google Alert to your FinTech alerts. Due to the adoption and use of emerging technologies across Brazil, Russia, Africa, and Turkey, the financial services industry is now referring to this group as ‘BRAT.’

EU: The FIDO Alliance announced the formation of the FIDO Europe Working Group to focus on PSD2, GDPR, and eIDAS issues. The group currently consists of 12 organizations: Cartes Bancaires, Daon, Germany’s Federal Office for Information Security, Gemalto, Infineon, ING, Oesterreichische Staatsdruckerei, TRUXTUN Capital, Vasco Data Security, Verizon, Yubico, and FIDO co-founder Nok Nok Labs.

India: Paytm and ICICI Bank have partnered to offer customers interest-free short-term credit for up to 45 days for everyday uses. 

Denmark: The country’s central bank published an analysis that describes "how banks from all over the world safely and efficiently send Danish krone payments to each other" via the national bank's payment system, Kronos. According to the analysis, 1,800 banks from 117 countries indirectly participated in Kronos in the first half of 2017. “Nearly one third of the banks that participated indirectly in Kronos were based in the UK, Germany, the USA or Switzerland.”

Norway: Norwegian banks have reached an agreement to consolidate separate payment units (Vipps, BankAxept, and BankID Norge) in a bid to thwart the influence of BigTech in the payments space.

Philippines: The country's central bank inked a FinTech deal with the Monetary Authority of Singapore "to promote innovation in financial services in their respective markets." The Bankers Association of the Philippines convened with Amihan Global Strategies to establish "an industry-wide facility that will further enhance the country's digital identity technology." According to the press release, the facility is powered by blockchain technology, and several major banks have already signed on to accept and verify customer data on the platform.

Singapore: The Singapore FinTech Association was busy last week signing several MoUs including, the FinTech hub, KOOP, Invest Lithuania, and Business France. Other announcements around last week’s FinTech Festival include 20 global banks are expected to join the partnership between Singapore and Hong Kong to build a blockchain-powered trade network. The Global Trade Connectivity Network is expected to be rolled out by early 2019 allowing for the "seamless transfer of digital documents and data," according to Business Times. Singapore's Payments Council has endorsed “the specification for a common Singapore Quick Response Code that can accept electronic payments by both domestic and international payment schemes, e-wallets, and banks.” The service will be rolled out across Singapore next year.

Luxembourg: The Luxembourg Bankers' Association has partnered with the University of Luxembourg to launch a joint research project "on the distributed ledger prototype and data analytics for KYC." The four-year project "aims to develop and test new conceptual and technological approaches to KYC procedures in the financial services sector enabling financial institutions to use more efficient methods of customer identification."

U.S.: Craig Fischer, program manager for the Office of Financial Innovation and Transformation, which sits under the Treasury’s Bureau of the Fiscal Service, penned an article in the Journal of Government Financial Management where he discussed the application of blockchain technology. 

According to Fischer, the technology “is more versatile than what immediately meets the eye. In addition to its ability to improve efficiency, blockchain — or, more broadly, distributed ledger technology (DLT) — offers additional benefits that our community should consider, such as security, network resiliency, transparency, and automation. In other words, our pursuit of improving efficiency may result in being better overall stewards of our data and information.”

Fischer discussed some of the technologies potential values, provided in the table below.

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Source: The Journal of Government Financial Management

“To fully understand how DLT will impact our community, we must start developing relevant use cases, proofs of concepts and pilot projects. But testing is only the start of the solution. Creating venues — such as the AGA Blockchain Working Group — to share concepts, use cases and results will prevent us from duplicating work, and keep us abreast of successes and failures.”

Richard Cordray, outgoing director of the Consumer Financial Protection Bureau, sent a letter to the CEOs of several banks, credit unions, and other financial services companies calling on them “to exert greater control over their credit cards, debit cards, and other payment methods.” In the letter, Cordray writes that third-party providers “are likely to mount increasing competition in this space as well, offering tools that are likely to be very popular as consumers find they can easily and conveniently take action themselves to control and direct permissible uses of their accounts—without the hassle (to them) or the cost (to you) of more cumbersome methods of telephone or other authorization processes. This kind of competition is good for the industry and for consumers.” In concluding, Cordray urged financial institutions “to think creatively about how you can put more control directly in the hands of your customers. This will help them as they worry about data breaches, and could help you minimize the incidents of fraudulent use of credit cards and debit cards and other payment methods.”

China: Big news out of China as CITIC Bank Corp. and search engine giant Baidu, Inc. have launched a direct banking joint venture called AiBank. According to Reuters, the new venture "will focus on lending to individuals and small businesses while leveraging big data and artificial intelligence to build new risk control models." Meanwhile, China’s unsecured short-term lending market is now a $150 billion industry, according to a recent report.

Canada: The British Columbia Securities Commission is sponsoring a RegTech Hackathon to take place on November 28. Problem statements address the following five areas of focus: blockchain, crowdfunding, and smart contracts; capital markets innovation; Know-Your-Client; investor protection and investment literacy; and registration and compliance.