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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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Murphy Dan
Dan Murphy
Associate, FinTech Program, Center for Financial Markets
Capital Access and Europe and Finance and FinTech and U.S. Economy
Dan Murphy is an associate at the Milken Institute’s Center for Financial Markets. He focuses on FinTech and access to capital issues. Prior to joining the Institute, Murphy was a policy fellow at the Democratic Senatorial Campaign Committee.
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FinTech in Focus

By: Jackson Mueller and Dan Murphy
March 12, 2018
   
   

Big Banks, Big Tech, and FinTech

Hey there, FinTech in Focus readers, good to see you again. This week, developments in the world of FinTech made us want to step back and look at the big picture. Three recent headlines nicely encapsulate what we’re seeing in the FinTech space. 

  • Citigroup Moving Toward ‘National Digital Bank’: CFO” – Reuters
  • Say Goodbye to Android Pay and Hello to Google Pay” – TechCrunch
  • Next Up for Amazon: Checking Accounts” – Wall Street Journal

The first headline illustrates a trend familiar to FinTech in Focus readers—incumbent financial institutions offering FinTech-like services to their customers. Banks now understand the appeal of FinTech and will either partner with FinTechs or copy their services to avoid missing the boat. This week alone, both Citigroup and Standard Chartered announced moves into digital banking, UBS rolled out its robo-advising product, and Goldman Sachs moved to expand Marcus into the U.K.

The second headline is also no surprise to FinTech aficionados, as big tech firms have been making forays into financial services for some time. The most obvious and far-reaching example of this is Alibaba and Ant Financial in China, but American big tech firms have ventured into financial services as well. Amazon has already established itself in small business lending, and in recent weeks we’ve covered big tech’s interest in the payments space, with Amazon, Facebook (via Whatsapp), and Google all making waves. 

Finally, the news that Amazon and JPMorgan Chase may be in the early stages of offering a joint checking account turned a lot of heads and raised a lot of questions this week. What seems certain is that big tech’s interest in financial services is more than just a passing fancy. Just this week, Capgemini and LinkedIn’s World FinTech Report for 2018 highlighted Big Tech’s capacity to disrupt financial services by leveraging technology, data, and customer service to lure customers away from their banks.

That strategy sounds awfully familiar to us, so where does it leave FinTechs?

By the way, hi all, this is Dan. Jackson introduced me a few weeks ago as the newest member of the MI FinTech team, and I am filling in for Jackson this week. Jackson and I will be exploring this question and more in the coming months, so watch this space. 

Attitudes Toward an Amazon-Offered Checking Account Bundle

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Source: Cornerstone Advisors

Some Headlines 

Open Banking: The implications of open banking continue to slowly sink in for customers in the .UK. According to a study by the Prepaid International Forum, less than a third of U.K. customers would be comfortable allowing a third-party firm to access their data under newly implemented open banking rules. Customers aged 18 to 24 were more likely to be comfortable sharing their data, especially with a trusted third-party firm like Apple. Meanwhile, another study by CREALOGIX Group showed over 85 percent of U.K. customers were still unaware of what open banking is, or how it affects them. Clearly, there is still a lot of work to do. Elsewhere, the Future of European FinTech (FoEF), an alliance of 74 FinTech firms, has expressed concerns about having to rely on APIs developed by incumbent financial institutions.

Payments: NACHA, an electronic payments association, announced that financial institutions registered over 9,000 third-party senders through NACHA’s Risk Management Portal prior to the March 1, 2018 deadline. According to Jane Larimer, NACHA’s chief operating officer, “Third-party senders are important participants in expanding access to ACH payments … The positive response by banks and credit unions in registering more than 9,000 third-party senders demonstrates their continued commitment to ACH quality.”

Crypto: After a drawn out battle, Coinbase announced to its customers that it would finally be turning over documents to the Internal Revenue Service (IRS) regarding customers who transferred bitcoin between 2013 and 2015. This comes after a protracted fight with the IRS stating, “There has been an explosion of billions of dollars of wealth in just a few years from bitcoin, a significant amount of which has no doubt accrued to United States taxpayers, with virtually no third-party reporting to the IRS of that increase in income.” Meanwhile, Poloniex, another cryptocurrency exchange, was acquired by Circle this week. Circle, which is backed by Goldman Sachs, is a P2P payments app using blockchain technology.

Elsewhere, the Chicago Mercantile Exchange (CME) has submitted an amicus brief in support of the Commodity Futures Trading Commission’s (CFTC’s) challenge to a ruling by the New York Eastern District Court stating that bitcoin is not a commodity.

Finally, PayPal has filed a patent for a faster cryptocurrency payments system. Essentially, the system would allow cryptocurrency transactions to be executed without waiting for them to be included on the next block. Call us crazy, but doesn’t this defeat the purpose of blockchain?

Blockchain: Both e-commerce and traditional retailers alike are exploring the promise of blockchain technology this week. JD.com, China’s e-commerce giant, announced that it is launching a blockchain accelerator. This comes after a series of other blockchain investments from JD.com, including a joint initiative with Walmart announced in 2017. Speaking of Walmart, they filed a patent this week for a blockchain-based shipping technology, in order to improve tracking mechanisms.

Finally, if you’re feeling a little down on blockchain technology, check out this article by Nouriel Roubini and Preston Byrne calling blockchain the “most over-hyped technology of all time.”

Global Developments

International

Financial Stability Board: The shadow banking system is expanding, according to the Financial Stability Board’s (FSB) annual monitoring report. The report finds that the narrow measure of shadow banking activities that could pose a threat to financial stability grew nearly 8 percent to $45.2 trillion in 2016 for the 29 jurisdictions reviewed in the report. That number represents 13 percent of global financial assets. The report also found that over 75 percent of assets included in the narrow measure reside in six jurisdictions. Regarding FinTech: “For the 2017 monitoring exercise, several jurisdictions highlighted the rapidly increasing role of online or financial technology (FinTech) non-bank entities extending credit or otherwise facilitating credit creation (several other innovations were also noted by jurisdictions, for instance credit insurance),” the report stated. That said, since the “size of FinTech non-bank entities relative to total global financial assets is still quite small, currently these activities do not seem to pose material risks to global financial system stability. However, their rapid growth suggests the importance of ongoing monitoring of developments in this market, particularly with respect to its size and the nature of its potential risks.”

Macro-Mapping of the Financial System: 21 Jurisdictions and the Euro Area

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Africa

East Africa: A joint report by FSD Africa, East Africa Venture Capital Association, Intellecap, and FMO sheds light on the FinTech market in East Africa. According to the report, more than $200 million was raised for FinTech businesses in East Africa last year. However, the bulk of the funds raised in East Africa, more than 98 percent, went to companies domiciled in Kenya. Equity financing accounted for 71 percent of total funds raised, debt financing 6 percent, and hybrid financing 23 percent.

Kenya: The country has established an 11-member task force to develop a roadmap on local use cases of blockchain technology.

Uganda: The UN refugee agency, UNHCR, has launched a biometric verification system in the country to verify the more than 1 million refugees in the country. The biometrics software has already been used to register roughly 4.4 million refugees in 48 countries worldwide. According to the UNHCR release, “The verification exercise in Uganda is the biggest in the agency’s history.”

Australia 

In late February, the Australian Small Business and Family Enterprise Ombudsman, FinTech Australia, and theBankDoctor.org joined forces “to release a report which outlines the steps taken by FinTech lenders to increase transparency and disclosure.” The report “analyses the different approaches to disclosure across the FinTech industry and makes recommendations on best practice and identifies commitments to action.” The report includes an in-depth review of FinTech business lending in Australia, the current regulatory environment, and next steps as the industry evolves.

Also in late February—sorry folks, Google Alerts failed us yet again—the government's Digital Transformation Agency is "another step closer" to developing a digital identity solution for the country. The DTA released ten documents that make up the digital identity framework, as well as a summary of feedback received from the consultation.

Eurasia

Russia: Russian officials are considering amendments to a draft law that would include light-touch initial coin offering regulations and cryptocurrency income tax breaks, according to CoinTelegraph. Similarly, Russia's Ministry of Telecom and Mass Communications has reportedly put forward an idea to create a cryptocurrency exchange where Russian miners can trade their digital coins for fiat money.

Europe

European Union: On Thursday, the European Commission released its FinTech Action Plan (FAQ here). The commission “is proposing a pan-European label for platforms, so that a platform licensed in one country can operate across the EU. The Action Plan is part of the Commission's efforts to build a Capital Markets Union (CMU) and a true single market for consumer financial services. It is also part of its drive to create a Digital Single Market. The Commission aims to make EU rules more future-oriented and aligned with the rapid advance of technological development.”

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Source: European Commission

Among the efforts to foster a more competitive and innovative European financial sector, the Commission will host a EU FinTech Laboratory to bring together EU and national authorities to engage with tech providers in a neutral setting, digitize information published by listed companies in Europe, facilitate workshops on cybersecurity, create a best practice guide on regulatory sandboxes based on guidance from the European Supervisory Authorities, and report on the challenges and opportunities of crypto assets through the EU Blockchain Observatory and Forum. “The FinTech Lab will take place four times a year and is based on a participant-driven agenda. The first workshop will focus on cloud computing or outsourcing.” On crowdfunding, the commission's proposal “introduces an optional EU regime which enables crowdfunding platforms to easily provide their services across the EU Single Market. Instead of having to comply with different regulatory regimes, platforms will have to comply with only one set of rules, both when operating in their home market and in other EU Member States. For investors the proposal will further provide legal certainty as regards the applicable investor protection rules.”

Germany: German tax authorities now regard cryptocurrencies as the equivalent of legal tender for tax purposes when it’s used as a method of payment. As stated in the release, and as reported by CoinDesk, “Virtual currencies (cryptocurrencies, e.g., Bitcoin) become the equivalent to legal means of payment, insofar as these so-called virtual currencies of those involved in the transaction as an alternative contractual and immediate means of payment have been accepted.”

Spain: The National Commission for Markets and Competition (CNMC) is preparing a study on FinTech. According to the CNMC, as reported in Competition Policy International, “In this sector there are market failures that can justify public intervention for reasons of efficiency, however, this intervention must conform to the principles of efficient economic regulation, such as necessity and proportionality, to ensure minimum distortions of competition.” For those interested in the press release (in Spanish), please click here

U.K.: Unless you were living under a rock the past week, you may have heard that Mark Carney, governor of the Bank of England, poured cold water on the use of cryptocurrencies. In prepared remarks at the Scottish Economics Conference, Carney said that cryptocurrencies “are failing” as they are proving to be poor stores of value and an inefficient means of exchange, with “little evidence of cryptocurrencies being used as units of account.” According to Carney, “The time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system. Being part of the financial system brings enormous privileges, but with them great responsibilities.”

Lastly, the Information Commissioner’s Office (ICO)—an “independent authority set up to uphold information rights in the public interest, promoting openness by public bodies and data privacy for individuals”—published its “Technology Strategy 2018-2021” report covering near-term efforts to address data protection risks. Among the eight technology goals listed in the strategic document, the ICO is interested in establishing a regulatory sandbox “drawing on the successful sandbox process that the Financial Conduct Authority has developed. The ICO sandbox will enable organizations to develop innovative digital products and services, whilst engaging with the regulator, ensuring that appropriate protections and safeguards are in place. As part of the sandbox process the ICO would provide advice on mitigating risks and data protection by design.” Top priority areas for the ICO include cybersecurity, artificial intelligence, big data and machine learning, and web and cross-device tracking.

Asia

China: Why are Alipay and other Chinese-based mobile payment platforms expanding abroad? Simple— Chinese tourists prefer to use mobile payment applications overseas. In fact, according to a recent study by Nielsen and Alipay, roughly 65 percent of Chinese tourists have already used mobile payment applications when traveling abroad. Convenience, speed, and familiarity, pride for Chinese brands, and preferential exchange rates were cited as the top three reasons for using mobile payments.

Hong Kong: Hong Kong's government presented their 2018-2019 budget. According to financial secretary, Paul MP Chan, the government will allocate $200 million to Cyberport "to enhance the support for start-ups and promote the development of digital technology ecosystem." Chan also stated that the budget sets aside $500 million "for the development of the financial services industry in the coming five years, providing necessary support for bond market development, FinTech, green finance, manpower training and other aspects of financial services." Hong Kong "must optimize its resources by focusing on developing its areas of strength, namely biotechnology, artificial intelligence, smart city and financial technologies (FinTech)...." Last year's budget reserved $10 billion for supporting innovation and technology development. This year, the budget sets aside an additional $50 billion. The budget also calls for the launch of a “Faster Payment System.”

India: The government constituted an eight-member steering committee on FinTech. The objective of the committee will be to "consider various issues relating to the development of FinTech in India with a view to make FinTech related regulations more flexible and generate enhanced entrepreneurship in the area where India has distinctive comparative strengths vis-a-vis other emerging economies." The committee will be led by the secretary of the Department of Economic Affairs. The committee will also look towards international cooperation on FinTech and potential development of a regulatory sandbox model.

Elsewhere, India's e-wallet industry is struggling under new know-your-customer (KYC) regulations put in place at the end of February. According to a member of the Payment Council of India, as reported in Scroll.in, “The new norms by RBI [Reserve Bank of India] are disastrous...It is now like opening a bank account. So why will anyone want to go through the hassle? This will result in de-digitization.” The RBI is also still on track, according to a report, to achieve its target of interoperability of digital wallets by April.

Malaysia: So, apparently, we missed a lot of headlines in late February.... The country's central bank published a document covering anti-money laundering and counter financing of terrorism (AML/CFT) regarding the use of digital currencies. The document "sets out the minimum requirements and standards that a reporting institution must observe to increase the transparency of activities relating to digital currencies and ensure effective and robust AML/CFT control measures are put in place to mitigate risks that reporting institutions may be used as conduits for illegal activities."

North Korea: According to an interview between Priscilla Moriuchi, a former U.S. National Security Agency officer, and Radio Free Asia, North Korea may have raked in $200 million in digital cryptocurrency transactions last year.

Singapore: The country signed a memorandum of understanding with Sarawak—a state in Malaysia—on mobile payment collaboration. 

Taiwan: The country signed a FinTech agreement with Poland. “The framework enables both regulators to refer startups to their counterparts, provide support to allow the regulatory regime in each jurisdiction to be better understood, and share related information on their respective markets and innovations in financial services.”

Thailand: The country's finance ministry, the Bank of Thailand, the securities and exchange commission, and its anti-money laundering office met on Tuesday “to create a clearer regulatory framework to supervise initial coin offerings (ICOs) and cryptocurrencies,” according to the Bangkok Post.

Middle East

UAE: The Dubai International Financial Center (DIFC) achieved record growth in 2017, with 315 new companies registering. "Dubai has been ranked as the top FinTech hub in the region and number ten in the world. FinTech Hive is a driver for the rankings and has an ecosystem of around 45 partners," according to the press release. Moving forward, “DIFC is also increasing its commitment to FinTech in 2018 with the launch of two new programs, focusing on RegTech and InsurTech, in addition to the existing Fintech Hive at DIFC.”

Meanwhile, Dubai SME introduced regulations for business accelerators and incubators. “The new regulation will offer varied advantages to SMEs and entrepreneurs, including full alignment with the economic focus and Industry 4.0 strategy of the Government of Dubai.  The business incubator license offers 100% ownership and investors can apply for the license through Dubai SME, which will be in charge of organising and monitoring the activities of the incubators. Every license application will undergo a feasibility check, done by a special committee.”

North America

Mexico: Mexico's lower house of Congress approved FinTech legislation, establishing regulations for the FinTech space including crowdfunding and cryptocurrency firms. The legislation currently awaits President Enrique Pena Nieto’s signature. 

U.S.: The Financial Crimes Enforcement Network will apply its regulations to those conducting an initial coin offering. According to the letter, as reported by CoinDesk, “...a developer that sells convertible virtual currency, including in the form of ICO coins or tokens, in exchange for another type of value that substitutes for currency is a money transmitter and must comply with AML/CFT requirements that apply to this type of [money services business]. An exchange that sells ICO coins or tokens, or exchanges them for other virtual currency, fiat currency, or other value that substitutes for currency, would typically also be a money transmitter.”

Meanwhile, the U.S. Securities and Exchange Commission issued a statement on "Potentially Unlawful Online Platforms for Trading Digital Assets." According to the release, “The SEC staff has concerns that many online trading platforms appear to investors as SEC-registered and regulated marketplaces when they are not. Many platforms refer to themselves as ‘exchanges,’ which can give the misimpression to investors that they are regulated or meet the regulatory standards of a national securities exchange.”

Lastly, we’re keeping an eye on S.2155, a banking bill designed to rollback a number of regulations targeted at community and regional banks. Last week, we released a report covering more than 70 FinTech-related bills introduced in Congress between January 2015 and December 2017. Several of those bills have been incorporated into S.2155. At this point: HR 1457, HR 2864, and HR 1219/S.444, which are discussed further in our paper, have been added to the legislation at this time.

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