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
Senior Associate, FinTech Program, Center for Financial Markets
Capital Access and Europe and Finance and FinTech and U.S. Economy
Dan Murphy is a senior 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
May 22, 2018

The New Faces of Financial Inclusion

Finance is undergoing a transformation from financial intermediation to data intermediation. Previously, banks had little incentive to tailor their services to the financially excluded, but this transformation has made the unbanked and underbanked increasingly attractive customers. That is fantastic news for financial inclusion, which development experts recognize as a critical enabler for many of the Sustainable Development Goals (SDG). However, the ability to monetize user data has brought new faces to the debate on financial inclusion, and new questions along with them.

The Economist’s special report on financial inclusion discussed the implications of digital platforms’ interest in financial inclusion. On balance, they conclude that this is a good thing for consumers, but questions of market concentration, security, privacy, and inequality must be addressed. FinTech advocates should watch the debate on market concentration particularly closely. Developing countries like Kenya have managed to make great strides in financial inclusion through the proliferation of M-Pesa, Safaricom’s platform for mobile payments. However, this progress came at the expense of maintaining a competitive market in financial services, with Safaricom enjoying near-monopoly status in Kenya’s mobile banking market.

Perhaps a better model for increasing financial inclusion is Tanzania, which has enjoyed Kenya-like success while maintaining a more competitive market. Technology’s ability to make financial inclusion not only possible, but also profitable is a welcome development. However, today’s restless innovators have a way of becoming tomorrow’s complacent incumbents. In the long run, advocating for increased financial inclusion means advocating for the competition that made it possible.

5 22 18

Some Headlines

Digital Banking: In another sign that incumbents have caught on to the importance of digital platforms, several big digital banking announcements came out of the UK this week. In the UK, HSBC launched Connected Money, an app allowing users to manage multiple bank accounts from different providers, including HSBC’s rivals. Santander, meanwhile, will launch a digital banking platform for SMEs.

Distributed Ledger Technology & Crypto: The big DLT news this past week was that HSBC completed the first trade-finance transaction using DLT. Using Corda, a blockchain-inspired platform from R3, HSBC processed a letter of credit for Cargill, an American agriculture firm. However, there is some debate over whether R3’s technology is blockchain or merely inspired by blockchain, for those of you who are interested. In other news, JP Morgan, SAP, and Taiwan Bank have all announced new DLT initiatives.

In crypto news, fraudulent concerns continue to be raised regarding ICOs. An analysis by the Wall Street Journal flagged 271 out of 1,450 ICOs. Examples of fraudulent behavior include plagiarized white papers and fictional leadership teams. In other crypto news (aside from the rest of your weekly helping of crypto money laundering and fraud), Bloomberg launched a market cap-weighted crypto index. The index includes Bitcoin, Ethereum, Ripple, Bitcoin Cash, EOS, Litecoin, Dash, Monero, Ethereum Classic, and Zcash. Huawei added a bitcoin wallet to its app store this week, despite the crackdown on crypto by Chinese authorities.

A lot of folks are also talking about the possibility of Facebook breaking into crypto and blockchain. Details are sparse, but the social network’s flirtation with blockchain comes amid a chorus of criticism for the platforms handling of just about everything, and questions about whether a decentralized social network might be the solution.

Finally, the Consensus conference in New York sounds like it was a bit of a spectacle, doesn’t it?

Payments: Apple and Goldman Sachs are teaming up to offer a joint credit card product, they announced last week. The move comes as more and more banks partner with Big Tech firms. For Apple, the partnership is a chance to expand their Apple Pay product, while Goldman sees the deal as an opportunity to build out its commercial banking business. Elsewhere, a recent note from Evercore ISI asserted that PayPal should be able to fend off Amazon’s payments onslaught. According to the note, this is due to PayPal’s size and the fact that it does not compete with its own retail customers, which is more than can be said for Amazon. They certainly don’t seem to be messing around. At the time of writing, the story broke that PayPal is buying iZettle for $2.2 billion. This comes as a bit of a surprise, as iZettle only just recently announced its intention to go public. No longer, it seems.

Moving abroad, Ant Financial’s latest disclosures are predictably staggering. According to documents released for Ant’s latest $10 billion funding round, it has over 600 million users and its wealth management arm has $345 billion assets under management, making it the world’s largest consumer wealth management platform. Should the funding round go according to plan, Ant will be valued at $160 billion. Meanwhile, French banks seem to be trying a Zelle-like P2P payments platform of their own. Paylib will first be rolled out by BNP Paribas, with the rest of France’s large banks following suit over the next several months.

Wealth Management: Robinhood closed a Series D funding round of $363 million this week, which it plans to use to expand its offerings. Meanwhile, Betterment and Vanguard reportedly use Amazon Web Services (AWS). AWS CEO Andy Jassy thinks it’s unlikely that Amazon will compete in this space soon, but he also said that “I've been at Amazon for 21 years and I've learned to never say never about anything.”

AltFi: LendingClub and Prosper both reported strong first quarters this week. Their originations grew by 18 percent and 27 percent, respectively, while LendingClub posted an impressive 22 percent revenue growth. Meanwhile, Cross River also reported some good news, with its monthly loan origination growing by 60 percent between April 2017 and 2018. 


Global Developments

Australia: The Australian Prudential Regulation Authority (APRA) formerly established "a pathway for financial entities to become registered as an authorized deposit-taking institution (ADI) in Australia." According to the press release, "eligible entities can seek a Restricted ADI licence, allowing them to conduct a limited range of business activities for two years while they build their capabilities and resources." (Information Paper & Response Paper) Three days later, APRA granted a restricted ADI license to online startup Volt. 

Regarding the review into open banking, the government announced that it agreed "to the recommendations of the Review, both for the framework of the overarching Consumer Data Right and for the application of the right to Open Banking, with a phased implementation from July 2019.” All major banks will be required to make data available on credit and debit card, deposit and transaction accounts by July 2019, with data on mortgages made available in February 2020. “All remaining banks will be required to implement Open Banking with a 12-month delay on timelines compared to the major banks.”

Speaking of data, a new report by the Consumer Policy Research Centre finds that 70 percent of the more than 1,000 Australians surveyed "were uncomfortable with basic data, such as purchase histories and location data, being shared." More than 85 percent "opposed personal information, such as phone contacts and messages, being shared." Also, 95 percent of respondents "wanted companies to provide opt-out options for data collection, while 91 percent wanted an option for data to be collected only for the purpose of delivering the product or service."

Lastly, FinTech Australia announced a new CEO, Brad Kitschke, former head of public policy and government relations at Uber.

Bahrain: The Bahrain Development Bank has launched a $100 million venture capital fund of funds to support startups across the Middle East. 

Canada: The Competition Bureau released its draft 2018-19 Annual Plan in early May. Building on last year's market study on FinTech the Bureau "will continue to advocate in this sector and keep the conversation going. In the coming year, we will also undertake a new market study aimed at supporting innovation and focusing on an issue that is important to all Canadians." The Bureau "will also work on building our digital enforcement capacity to better understand and protect Canadians against new and evolving technologies that have the potential to impede competition and innovation, such as pricing algorithms and blockchain technologies." Targets that the Bureau will use to track and measure its perfomance include carrying out 10 FinTech-focused advocacy interventions.

China: China is working to publish official standards on blockchain technology next year. The standards are being drawn up by the Blockchain Research Office and "will include guidelines for the application of blockchain in terms of business, information security, and reliability," according to the Chinese Academy of Sciences.

Europe: Yves Mersch, Member of the Executive Board of the European Central Bank, came out swinging against virtual currencies last week. Mersch said that he is "very skeptical" in the use of blockchain or distributed ledger technology “to create currency”. Similarly, Mersch mentioned financial stability risks in the rise in market valuations of virtual currencies and focused his remarks on four broad areas "that require particular attention": virtual currencies themselves, the facilitators—VC  exchanges, wallet—providers  and brokers, financial market infrastructures (FMIs), and the banking sector.

“In my view, there’s a need to examine whether any VC activity carried out by FMIs should have to be ring-fenced. The enforcement of segregated accounts and liabilities could be discussed. FMIs play an important role in financial markets, and any liquidity support offered by central banks should be to mitigate shocks emanating from the real economy, not from gambling in risky assets,” said Mersch.

Germany: Deutsche Borse together with Clearstream, FinTech startup figo and Luxembourg-based RegTech start-up Finologee have partnered to create a common FinTech acceleration platform. The platform "will allow easy access to Deutsche Börse Group’s market and reference data as well as functional services via web based APIs. The first services offered by third parties will be an access to account gateway for banks for the second Payment Services Directive (PSD2)," according to the press release.

Hong Kong: The Hong Kong Monetary Authority (HKMA) released new guidelines to banks on credit risk management for personal lending business. The guidelines "allow banks to adopt innovative technology to manage credit risks related to personal lending business, in a bid to improve customer experience in the digital environment." According to the press release, the guidelines were developed "after consultation with banks and tech firms undertaken by the HKMA’s Banking Made Easy taskforce."

Separately, the Alliance for Financial Stability with Information Technology—an  NGO composed of senior bank officials, financial regulators, and central bank officials—launched last week with the mission of fighting money laundering and regulating the growth and development of FinTech across Asia.

India: For those interested in the arguments made by petitioners and the government before the Supreme Court on the Aadhaar Act 2016, Bloomberg Quint has provided a list of the essential issues here.

The National Payments Corporation of India "is looking at expanding the shareholding structure by bringing in payments banks and small finance banks as shareholders in addition to the 56 banks which are currently its owners," according to the Economic Times.

Ireland: A study from NUI Galway found a relatively low adoption rate of blockchain technology among Irish enterprises. “Of the 20 companies interviewed, eight had adopted blockchain and 12 had not, or did not intend to adopt blockchain in the next two years. In terms of blockchain awareness, five out of 20 representatives had a basic level of blockchain awareness, six had a medium level and only nine were able to demonstrate a high level of awareness.” 

Netherlands: The Dutch Blockchain Coalition presented a national blockchain research agenda, commissioned by the Dutch Ministry of Economic Affairs and Climate Policy, according to CoinTelegraph. The research agenda focuses on three key areas: trust, sustainability, and governance.

Rwanda: The Bank of Kigali (BK) launched a campaign to promote digital banking called SingombwaKashi. According to BK's head of digital banking, Kevin Rudahinduka, as reported in Hope Magazine, “We want all categories of customers to be able to access services and transact digitally. Whether you have a feature phone, a smartphone, a tablet or you have debit or credit cards, you can perform transactions anytime, anywhere and at no cost.”

Singapore: The Monetary Authority of Singapore (MAS) together with the Economic Development Board, Infocomm Media Development Authority, and the Institute of Banking and Finance announced joint collaboration aimed at fostering an artificial intelligence ecosystem comprising financial institutions, research institutions, and AI solution providers. “The joint effort will encompass three key prongs: developing AI products, matching users and solution providers, and strengthening AI capabilities,” the press release states.

MAS also introduced revised reporting standards for banks in an effort to reduce duplicate data submissions. The revised requirements are in line with MAS' objectives to collect data in machine-readable format.

MAS and the Authoriti Monetari Brunei Darussalam (AMDB) announced a FinTech cooperation agreement between the two regulatory authorities. Beyond information sharing, the regulatory authorities "will also work together to enhance the retail payment ecosystem between Brunei Darussalam and Singapore."

Lastly, in remarks at the 14th Conference of ASEAN Ministers Responsible for Information, AMRI, Singapore's Minister of Finance Heng Swee Keat discussed the pivot role AMRI will play in leading the ASEAN region into the digital age. Keat discussed the importance of drawing together the region's strengths to develop a vibrant digital economy with cooperation that could facilitate the free flow of data across borders, mutual recognition of each other's national digital identities, a coordinated, regional approach for digital literacy and to ensure trust in the digital economy, among other suggested efforts.

Thailand: The Stock Exchange of Thailand launched LiVE –“the first Thailand crowdfunding platform for startups and SMEs." The platform "has been developed with the use of blockchain technology as an infrastructure for participating businesses to expand and get connected with future alliances," according to the press release.

UK: The British Business Bank's commercial arm—British Business Investments—launched  a £500 million Managed Funds Program in an effort to address the UK’s patient capital gap and to support investment in high-growth, innovative businesses.

The UK government published its response to the House of Lords European Union Committee report, “Brexit: The Future of Financial Regulation and Supervision." Pages 16 and 17 of the report focus on FinTech. Of interest, the government states that it may be "mutually beneficial" for the UK to maintain a relationship with the European Investment Bank and European Investment Fund – a relationship that will be explored in future talks with EU officials.

FinTech Scotland announced the appointment of its first chairman of the board, David Ferguson, founder and chief executive of Nucleus Financial, and new strategic partners (Deloitte, Pinsent Masons, Dentsu Aegis Network and Sopra Steria).

US: At the state level, the New York Department of Financial Services "has authorized Paxos Trust Company LLC, formerly known as itBit Trust Company, to offer a permissioned, blockchain-based post-trade platform settlement service called Bankchain, and has granted a virtual currency license to Genesis Global Trading, Inc." The department has now approved seven firms for its BitLicense.

Meanwhile, the White House hosted an event on "Artificial Intelligence for American Industry" two weeks ago. The White House published a summary of the summit, which includes the creation of the Select Committee on Artificial Intelligence under the National Science and Technology Council. Members will include senior R&D officials in the federal government.

The Commodity Futures Trading Commission (CFTC) released a two-part "CFTC Talks" podcast focused on LabCFTC's recent request for information on innovation competitions and conversations between U.S. and UK regulators on FinTech and RegTech issues. Similarly, the CFTC is in London this week to discuss their recent FinTech agreement with the U.K.’s Financial Conduct Authority.

Zimbabwe: In a circular to banking institutions operating in the country, Zimbabwe's central bank has banned all financial institutions from using, trading, holding, and/or transacting in any way in virtual currencies; from providing banking services to those persons or entities dealing with or settling virtual currencies; and required institutions to exit existing relationships with virtual currency exchanges within 60 days.


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