FinTech in Focus
Global Conference: Milken Institute Launches U.S. FinTech Advisory Committee
Hello FinTech in Focus readers! It’s been a while since we last released an e-mail, and we do apologize for the wait as we prepared for and just finished our 21st annual Global Conference (#MIGlobal) held at the Beverly Hilton hotel in Los Angeles, CA.
Roughly 4,000 attendees viewed or participated in the more than 120 panel sessions covering a wide range of topics at this year’s conference which was focused on the theme, Navigating a World in Transition.
Financial Technology (FinTech) is certainly playing a role in this transition and several FinTech-related panels were held during the conference, including a panel that I moderated focused on the actual impact of FinTech rather than just it’s potential. During that panel, and as part of its revamped FinTech program, the Milken Institute announced the formation of its U.S. FinTech Advisory Committee. The committee will be chaired by Tom Curry, former U.S. Comptroller of the Currency, with Melissa Koide, senior advisor at the Milken Institute and CEO of FinRegLab, serving as vice-chair. The Institute’s FinTech team looks forward to working with Tom and Melissa as we continue to build out the FinTech Advisory Committee and set the stage for productive discussions and convenings moving forward.
AltFi: Lending Club suffered a setback in late April when the Federal Trade Commission (FTC) accused it of unfair and deceptive practices. Specifically, the FTC accused Lending Club of charging customers with hidden fees and in some case, charging them after they had already paid off their loan. In response, Lending Club said the allegations in the FTC's complaint "are legally and factually unwarranted" and that the company is "disappointed" that the matter could not be resolved constructively with the agency's current leadership. This was unwelcome news to shareholders of course and caused Lending Club’s stock to drop 14 percent. The company’s stock price has since recovered, after a strong earnings report.
Big Tech: In one of its boldest moves in financial services, Amazon announced last week that it will pass on its credit card fee discounts to other retailers if they use Amazon Pay. Lenders, credit card companies, and payment service providers will all take notice of this move, as Amazon appears willing to sacrifice profitability for greater market share and access to data. Elsewhere, Ant Financial is adding two additional money market funds to its Yu’e Bao wealth management platform, and British bankers are calling for stricter regulations on tech platforms.
Blockchain and Crypto: MIT announced that Gary Gensler, former chairman of the Commodity Futures Trading Commission (CFTC), will be joining them to research and teach about blockchain technology. MIT’s announcement made waves due to Gensler’s prominent position in the Obama administration, and due to his belief that Ether and Ripple are noncompliant securities. Elsewhere in blockchain, JP Morgan is filing a patent for an interbank payments system powered by distributed ledger technology (DLT).
Meanwhile, Telegram scrapped its plan for a public initial coin offering (ICO). This comes after two tremendously successful private fundraising rounds that totaled $1.7 billion, and after increased regulatory scrutiny of ICOs. Regulators aren’t the only ones debating the merits of ICOs, however. This year at Global Conference, we featured a lively debate on cryptocurrencies. The panel included Bill Barhydt of Abra, Alex Mashinsky of Celsius Network, Brent McIntosh of the U.S. Department of the Treasury, Nouriel Roubini of NYU, and Anna Irrera of Reuters as the moderator. So much drama in fact that Barhydt penned a blog post after the conference had ended titled, “Watching a Keynesian Economist Self Combust and Implode is NOT a Pretty Sight.”
Challenger Banks: British firms dominated the headlines while we were away. First, Revolut announced at the end of April that it raised $250 million in Series C funding, which it plans on using to expand its services to North America, Singapore, Hong Kong, and Australia. TransferWise, the British payments standout, also launched its multi-country borderless account at the end of the month. The account will give its holders bank details in the U.K., U.S., Europe, and Australia, and allow them to hold multiple currencies in their accounts. Finally, Barclays announced a partnership with PayPal. This will allow Barclay’s customers in the U.S. and the U.K. to use PayPal within Barclays’ online bank and allow Barclays to offer its products through PayPal.
Payments: The big news in payments today is that Walmart finally beat Amazon in the battle for Flipkart, India’s e-commerce giant. Walmart paid $16 billion for a 77 percent stake in Flipkart. That includes SoftBank’s stake in Flipkart, but not Tencent’s. Elsewhere, a report by The New York Times found that some banks were experiencing fraud rates of up to 90 percent on Zelle, the banking industry’s response to Venmo. In some cases, it appears that Zelle’s reliance on email addresses or phone numbers associated with bank accounts has led to money being transmitted to incorrect accounts. Finally, Microsoft announced that it will add Microsoft Pay to Microsoft Outlook, allowing users to pay bills directly from their inboxes. The feature will be rolled out over the next several months.
Australia: The government released its budget for 2018-2019 earlier this week. According to the various documents, the government "will invest AU$45 million over four years to develop the Consumer Data Right as a safer way for consumers to share and use their data. The Right will commence with the banking, energy and telecommunications sectors and eventually apply economy-wide." The government will also invest nearly AU$30 million to support the development of the country's AI and machine learning capabilities. "A Technology Roadmap, a Standards Framework and a national AI Ethics Framework will help identify opportunities in AI and machine learning for Australia and support the responsible development of these technologies." Also, the government will spend AU$100,000 to promote Australia internationally as a FinTech destination and AU$700,000 on the development of the Digital Transformation Agency "to investigate areas where blockchain technology could offer the most value for government services."
Bermuda: Walton Brown, Jr., Minister of Home Affairs, announced "a new immigration policy for FinTech companies desirous of setting up businesses in Bermuda." The FinTech Business Work Permit Policy "allows a FinTech company that is new to Bermuda to receive immediate approval of five (5) work permits within the first six months of obtaining the first FinTech Business Work Permit."
Brazil: Neon Pagamentos SA—a financial technology startup—raised $22 million in the country's largest ever Series A round of venture capital funding. Twenty-four hours later, Brazil's central bank liquidated Banco Neon SA, which Neon Pagamentos SA was connected to in order to process checking accounts, due to a breach of regulations. The firm is reportedly looking for another bank partner.
Canada: The Joint Forum of Financial Market Regulators concluded its annual meeting in late April. According to the press release, of particular interest "were lessons emerging from the development and implementation by the [Canadian Securities Administrators (CSA] of a regulatory sandbox to support FinTech businesses...." Not surprisingly, the organizations "were all focused on consumer protection and the fair treatment of consumers." Lastly, the Joint Forum "is considering how best to increase the regular periodic sharing of issues facing regulators in each sector."
Estonia: The country’s banking industry is reportedly limiting banking services for companies that have signed up to the e-residency program. At this point, the program has received nearly 34,000 applicants from 154 countries with more than 5,000 companies established by e-residents. However, according to a spokesperson, and as reported by ComputerWeekly, Estonian banks "do still serve e-resident companies that demonstrate a ‘connection to Estonia’ and provide clear visibility of their business, among other considerations. Estonian bank LHV, for example, has opened business accounts for about 70% to 90% of e-resident applications."
European Union: The European Commission and the European Investment Fund (EIF) launched a pan-European Venture Capital Funds-of-Funds program, VentureEU. Six participating funds will receive EU support to invest in the European venture capital market. The EU will provide €410 million, with the funds aiming to raise up to €2.1 billion of public and private investment. According to European Commission Vice President Jyrki Katainen, roughly 1,500 startups and scale-ups “are expected to gain access to this new source of financing across the whole EU.” Meanwhile, the EIF is scaling back its involvement in investing in U.K. startups, with funding down 91 percent in 2017.
In late April, the commission also outlined a European approach to boost investment in AI and set ethical guidelines. The commission “is increasing its investment to €1.5 billion for the period 2018-2020 under the Horizon 2020 research and innovation programme. This investment is expected to trigger an additional €2.5 billion of funding from existing public-private partnerships, for example on big data and robotics.” The commission will begin work with member states “to have a coordinated plan on AI by the end of the year. The main aim is to maximise the impact of investment at the EU and national levels, encourage cooperation across the EU, exchange best practices, and define the way forward together, so as to ensure the EU's global competitiveness in this sector.”
India: In light of recent reports on Aadhaar data breaches, the Free Software Movement of India sent an open letter to Dr. Ajay Bhushan Pandey, CEO of the Unique Identification Authority, asking what steps have been taken "to make the Aadhaar system safe, as the security problems seem to emanate from inherent design flaws in the Client Server architecture of Aadhaar." Despite the concerns and issues raised, transactions through the Aadhaar-enabled payment system reached 13.7 million in March, more than double the 6 million transactions recorded in April last year.
Speaking of payments, Paytm Payments Bank announced in late April that the platform has more than 100 million Know-Your-Customer-compliant wallets—roughly half of total users of the payments service. And speaking of banks, ICICI Bank—India's largest private sector bank by consolidated assets—launched India's first digital application form for opening current accounts.
Ireland: Derville Rowland, the Central Bank of Ireland's director general financial conduct, gave prepared remarks covering the regulatory perspective on innovation and technology in financial services. According to Rowland, “Simply put, the overwhelming impact of FinTech has been recognised by nearly every relevant global institution across every financial services sector. The themes are consistent. Benefits and risks for consumers and firms alike. Challenges for the existing regulatory framework. Underlying all of this work is the realisation that actors across financial services—both firms and regulators—need to adapt along with the changing industry.” To understand the opportunities and challenges presented by financial innovation, Rowland announced that the central bank is “developing an innovation hub for firms to engage directly with the Central Bank on innovation and FinTech. The absence of an accessible point of contact for FinTechs is an issue that has come up repeatedly in our discussions with stakeholders. It is also a common facility provided by other regulators. I think that this initiative is a good example of us being ready and willing to adapt in the face of a changing world. This new Central Bank unit will focus on engagement, sharing and listening, and will be a two-way street. We will have a direct contact point for new FinTech firms and existing firms that are becoming more innovative.”
Jamaica: Audley Shaw, Minister of Industry, Commerce, Agriculture and Fisheries announced the establishment of a Micro Stock Exchange "that will target companies for capitalization of between $5 and $50 million." The establishment of the micro exchange follows the successful launch of the Junior Stock Exchange back in 2009.
Japan: Masayoshi Amamiya, Deputy Governor of the Bank of Japan, gave closing remarks at the IMF-JFSA-BOJ conference on FinTech. According to Masayoshi, "Although the Bank of Japan does not have a plan to issue its own digital currency at this juncture, the Bank fully acknowledges the importance of deeply understanding innovative technologies not only for maintaining financial stability but also for seeking the possibility of applying them to central bank infrastructure in the future."
Middle East: The Board of Governors of the Arab Monetary Fund (AMF)—which has 22 member countries located in the Gulf and Africa—announced the creation of a regional entity for clearing and settlement of intra-Arab payments to promote investment and inter-Arab trade.
Separately, the AMF also announced the publication of a study on digital financial services in the Arab region. The report focuses on financial inclusion in the Arab region, digital payment infrastructures globally and in the Arab region, and includes a set of policy recommendations. Among the recommendations (page 58), there are efforts to promote and encourage RegTech and SupTech. “Implementation of these technologies and learnings from small-scale tests in regulatory sandboxes (often referred to as "RegTech") can enable Central Banks to act more nimbly with better access to data, ensuring greater stability while pursuing the goals of inclusion,” the report states.
New Zealand: In an interview with Interest.co.nz, Kris Faafoi, Minister of Commerce and Consumer Affairs, discussed the bank-owned Payments NZ's efforts to pave the way for open banking. "We’ve told Payments NZ that if they’ve said the end of the year’s when they think they’re going to be ready, that there is pressure on them now to make sure that they are ready, and that everyone is on board and playing by the rules and understanding exactly how the market will operate.... If they’re not, then… we may have to step in to make sure that we’re happy that the fundamentals we are concerned about with open banking are met."
Philippines: In late April, the central bank launched InstaPay, "the latest automated clearing house (ACH) under the National Retail Payment System (NRPS) Framework. The NRPS aims to establish a safe, efficient, affordable, and reliable electronic retail payments system in the country, with an increase in the share of electronic retail payments to at least 20% by 2020."
UAE: The FinTech Hive at the Dubai International Financial Centre (DIFC) announced that it would expand its accelerator program by collaborating with Accenture's FinTech Innovation Labs globally and expanding to include InsurTech, Islamic Finance, and RegTech services.
U.K.: Competition could be coming to the country’s mortgage market. The Financial Conduct Authority (FCA) released an interim report in early April with the primary objective “to identify if and/or how a market could be made to work better going forward, rather than focusing on past firm conduct and our rules.” The study focuses on two key areas: the consumer’s ability to make effective choices given the tools available and commercial arrangements between firms leading to possible conflicts of interest. According to the report, the FCA estimates “that around 30% of consumers (in 2015-2016) could have found a cheaper mortgage with the same key features (e.g., the duration of a fixed introductory rate) as the product they chose. On average, these consumers paid around £550 per year more over the introductory period compared to the cheaper product. The pattern is similar whether customers used an intermediary or went directly to a lender. In the next stage of our work, we want to explore with lenders, intermediaries and mortgage sourcing system providers how the market could develop tools that make it easier for consumers to identify at an early stage those products for which they qualify.” In addition, “The 6 largest lenders hold around three-quarters of the balances of outstanding first-charge residential mortgages. This has remained broadly stable in recent years. The intermediary sector is far less concentrated.... Until recently, there appears to have been little material customer-facing innovation in the mortgage market,” the study found.
U.S.: At the federal level, the CFTC released a request for input on LabCFTC Prize Competitions. According to the announcement, CFTC staff "are exploring opportunities to play a constructive role to stimulate innovation and leverage FinTech solutions that can enhance our regulated markets and help make the Commission more effective and efficient in satisfying its mission." The CFTC has authority under the Science Prize Competition Act to "implement a competition and award prizes to stimulate innovation designed to advance the CFTC's mission."
The U.S. Treasury and the U.K. HM Treasury announced the formation of a U.S.-U.K. Financial Regulatory Working Group. The working group will meet twice a year and "will be used as a platform for furthering financial regulatory cooperation, with the general operational objective to improve transparency, reduce uncertainty, identify potential cross-border implementation issues, work towards avoiding regulatory arbitrage and towards compatibility, as appropriate, of each other’s national laws and regulations.”
Also, I would strongly suggest readers take a look at recent remarks by Securities and Exchange (SEC) Commissioner Hester Peirce on cryptocurrency and regulatory sandboxes. "We must be careful not to let our lack of familiarity with new technology breed anxiety and therefore bad regulation. There is a risk, when something truly innovative comes along, that regulators will focus only on the harms the innovation may bring and miss entirely the opportunity it presents to improve people’s lives. New technology does often bring with it risks; it can take time and experience for developers to build in the proper safeguards....However, undue focus on potential harm can result in an agency’s leading with its enforcement powers, and ultimately setting itself up as the industry’s adversary." Rather than formally establishing a "sandbox", however, Peirce recommended the SEC establish a web page "devoted to questions and comments about ICOs, tokens, distributed ledger, and other crypto concepts" as "a modest first step in putting some helpful guideposts in place."
Late this week, the White House convened executives from roughly 40 major U.S. companies focused on AI in an effort "to adapt regulations to advance AI in such fields as agriculture, health care and transportation," according to The Washington Post.
At the state level, the Technology Association of Georgia unveiled its 2018 State of Georgia's FinTech Ecosystem Report. According to the report, there are more than 120 FinTech companies that are headquartered or have a presence in the state, and nearly 58 billion U.S. purchase transactions are processed by Georgia-based acquirers—or two-thirds of total volume.