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 25, 2018

The New Phase of Financial Inclusion (Part 2)

Last week, FinTech in Focus discussed finance’s shift to data intermediation, and the implications for financial inclusion. The ability to monetize consumers’ financial data is an incentive for financial institutions, FinTech, and Big Tech to take interest in financial inclusion and the untapped data of the unbanked. However, on May 25, the European Union’s General Data Protection Regulation (GDPR) went into effect, a development that challenges firms who depend on monetizing their customers’ data. Much has been written about GDPR’s impact on financial services, but what does it mean for financial inclusion? If the future of financial inclusion partially depends on the ability to monetize user data, GDPR could be seen as limiting firms’ ability to offer financial services to the unbanked.

The emerging data intermediation model uses customer data to subsidize the cost of providing them with access to financial services. As FT Alphaville’s Izabella Kaminska wrote in 2015, the problem with this is that the exchange of data privacy for financial inclusion is not explicit. Moreover, even if customers are made fully aware of the exchange, they have no way of knowing the value of their data. GDPR gives individuals some control over their data, but if they don’t know its value they are unlikely to decline the exchange. High profile scandals like Facebook’s Cambridge Analytica fiasco were supposed to awaken consumers to the importance of data privacy, but so far, most Facebook users (including your author) have been unwilling to put their money where their mouths are and delete their Facebook accounts.

All this is to say that GDPR alone is unlikely to prevent the use of data to subsidize financial inclusion. However, as financial institutions and policymakers explore this new phase of financial inclusion, transparency must be ensured. Each party should not only be aware of the transaction, but also understand its value.


Some Headlines:

AltFi: GreenSky, a technology company that partners with a group of regional banks to provide consumer loans for home improvement and elective medical procedures, is planning a $700 million IPO this week. That would value them at $4.2 billion, about three times the value of LendingClub. Many will be keeping an eye on this IPO to gauge the strength of the online lending sector. In other AltFi news, Anthony Noto’s first shareholder letter as CEO of SoFi signaled a new era for the firm, highlighting SoFi’s program to help pay off student loans as well as its impending entrance into wealth management.

Blockchain and Crypto: The big blockchain news this week is that Amazon Web Services (AWS) is partnering with blockchain startup Kaleido to offer blockchain solutions to Amazon’s cloud computing clients. Kaleido, which was spun out of ConsenSys, uses Ethereum’s Geth and Quorum packages.

In the cryptocurrency world, investigations continue into ICOs, but cryptocurrencies have found an unlikely friend in some small banks. According to The Wall Street Journal, large banks’ reservations about cryptocurrencies have driven some of the industry’s household names such as Coinbase and Kraken into the arms of Main Street. Not all of the large banks are so down on cryptocurrencies, however. Circle Internet Financial Ltd., which is backed by Goldman Sachs, is valued at $3 billion after its latest fundraising round. Finally, The Wall Street Journal also reported that crypto firms are considering applying for banking licenses. According to the report, Coinbase met with officials at the Office of the Comptroller of the Currency (OCC), while Ivy Koin LLC met with officials at the Federal Deposit Insurance Corporation (FDIC). These meetings appear to have been more exploratory than anything else, but they certainly seem to signal that crypto industry leaders have abandoned their ambitions to operate outside of the traditional financial services space.

InsurTech: Comcast announced that it is partnering with Hippo to test an internet of things home insurance product in Houston, TX. The product would link smoke detectors and water leak detectors with home insurance policies to lower costs for consumers and mitigate risk for insurers. Elsewhere, Lemonade is proposing an “open source renters insurance policy” that will increase customers’ understanding of their insurance policy, and enable them to change it to fit their needs.

According to Insurance Age, Amazon is building a team of insurance brokers, possibly with the goal of launching an insurance product in Europe. This seems like something incumbents should be paying attention to. According to Capgemini’s World Insurance Report, 30 percent of people around the world would buy insurance from a large tech firm over an insurance company.


Consumer Propensity to Purchase Insurance Products from Technology Firms, by Demographic Segment (%), 2018


Source: Capgemini

Payments: Kabbage co-founder and COO Kathryn Petralia announced this week that Kabbage will begin offering a payments service to its small business customers by the end of the year. Petralia stated that “monoline businesses have a hard time succeeding long term,” in yet another signal that leading FinTechs are trying to build out their offerings. 

Elsewhere, Chinese tech giants Alibaba and Tencent continue their impressive growth in payments. Alibaba’s investment in Thailand appears to be paying off, with mobile payments leaders in Thailand struggling to compete with Alipay. Tencent, for its part, blew investors’ hair back with a 61 percent increase in net profit in the first quarter. Tencent’s payments business is among the fastest growing of its business lines.


Global Developments

Australia: InsurTech Australia—a lobbying group for the InsurTech industry in Australia—has given up hope that the Australian Securities and Investments Commission will expand its sandbox framework to make it more palatable for InsurTechs to participate. According to the group's CEO, Simon O'Dell, and as reported in The Australian Financial Review, the sandbox "does not hold a lot of value for the vast majority of, if not all, Insurtechs in its current state and it doesn't look like it's going to evolve any further unfortunately. We retain a determination that the status of the sandbox is poor in its utility."

Separately, the Australian Competition and Consumer Commission released its ninth annual report covering scams activity in 2017. According to the report (page 18), by the end of last year, “reports of losses related to cryptocurrencies exceeded $2.1 million but as with other scams, this is likely the very tip of the iceberg.”

Belarus: Policymakers are currently searching for signatures to a resolution to promote the digital economy in the country. The central bank is also reportedly planning to enforce strict requirements for investing in initial coin offerings and designing a regulatory framework for cryptocurrency exchanges.

China:According to an article in Reuters, Huang Yiping, a member of the People's Bank of China's monetary policy committee, called for greater openness to China's financial services market to further encourage foreign competition, though cautioned on liberalization of cross-border capital flows. On FinTech more specifically, the head of Beijing's financial office, Huo Xuewen, stated that China "needed more competition from foreign financial institutions in order to make China’s financial technology industry stronger."

Separately, the Chinese National Committee of Experts on the Financial Security Technology released a report highlighting 421 cases of fraud in the cryptocurrency space. Also, the China Center for Information Industry Development, under the supervision of China's Ministry of Industry and Information Technology, rated Ethereum as the best among 28 blockchain projects reviewed.

European Union: The European Commission published its Digital Economy and Society Index 2018—“a   composite index that summarizes relevant indicators on Europe's digital performance and tracks the evolution of EU member states in digital competitiveness." Denmark, Sweden, Finland, and the Netherlands have the most advanced digital economies in the region, while Romania, Greece, and Italy have the lowest scores. The report found that growth in the use of online services is "generally slow," but the largest increase came from the use of the internet for voice or video calls (39 percent in 2016 to 46 percent in 2017). Roughly 70 percent of EU internet users now shop online, however, only 22 percent ordered goods or services from other EU Member States. Also, more than 60 percent of EU internet users used online banking last year (highest percentages in the Nordic countries)—up 2 percent from last year and 9 percent from 2010.

On integration of digital technology (business digitalization and e-commerce), Demark scored the highest, followed by Finland, Ireland, Sweden, and the Netherlands. Similarly, SMEs are closing the gap with large companies, however, "there are a lot of technological opportunities still to be exploited by SMEs such as cross-border e-commerce, cloud services, and automation." In the EU-28, "only 7 percent of enterprises made web sales to customers in other EU countries, while almost all enterprises with web sales (16 percent) reported that they sold in their own country."

All Member States improved their open-data scores (readiness and portal maturity) with Ireland leading the way, while Latvia and Malta recorded the most significant progress year-over-year. Also, Ireland "has by far the highest ICT sector share of GDP (11.6 percent in 2014)."

Regarding human capital, in 2017, "43 percent of the EU population had an insufficient level of digital skills. 17 percent had none at all, as they did not use the internet or barely did so." Even so, the employment of ICT specialists in the EU grew by 500,000 between 2015 and 2016, and the ICT sector now amounts to 4 percent (8.2 million people) of total employment in the EU.

India:, the country's largest peer-to-peer lending platform, announced that it has received its NBFC-P2P certification from the Reserve Bank of India. "The accreditation makes the first P2P lending platform in the country to receive the certificate of registration as an NBFC-P2P by the national regulator," according to the press release. Rajat Gandhi, founder and CEO of Faircent, said the certification marks "a very significant milestone for us at This development further bolsters our resolve to take financial inclusion to every last Indian through technology and to address the country’s credit deficit with our innovative tech-led offerings."

Japan: On May 16, the Japanese Diet passed a special measure that would allow the government to "suspend regulations at companies' request on a project-by-project basis." According to a report in the Nikkei Asian Review, "Businesses will submit plans for experiments that require deregulation to a new office at the Cabinet Secretariat, where a panel of experts will evaluate proposals for potential legal conflicts and other concerns. The heads of government offices overseeing the relevant regulations will sign off on plans they deem worthy. When data from companies' tests comes in, these offices will consider relaxing regulations for everyone. If agencies drag their feet on regulatory suspensions, the expert panel can appeal to the prime minister to speed the process along."

Norway: The country’s central bank recently published a white paper on central bank digital currencies (CBDC). The report found that it is “too early to conclude whether Norges Bank should take the initiative in introducing a CBDC. However, “the working group has not identified issues allowing it to conclude at present that introducing a CBDC can be ruled out. The working group has identified a number of factors that suggest caution, particularly in order to avoid conversion of bank deposits into a CBDC that is so rapid and so extensive as to impair lending.”

Philippines: According to the Manila Bulletin, the country's central bank has issued a circular "for the establishment and operations of non-bank credit card issuers such as bank subsidiaries or affiliates, and financing/lending companies if they can show P100 million in capital at least to expand the credit card industry."

Russia: The government is moving closer to regulating cryptocurrencies and the broader digital economy. The effort aims to "minimize the existing risks of using digital objects for transferring assets into an unregulated digital environment for legalization of criminal incomes, bankruptcy fraud or for sponsoring terrorist groups, according to Pavel Krasheninnikov of political party United Russia and head of the Legislative Work committee, as reported by Coin Telegraph. Whether digital currencies will become a legitimate means of payment however depends on the conditions established in a separate law that is currently being drafted by the Central Bank, Ministry of Finance, and Ministry of Economic Development.

Rwanda: Finance Innovation—a French-based cluster for innovation in financial services—has entered into partnership with the Rwandan government and kLab, a local innovation hub, to establish a FinTech hub in Kigali.

Sierra Leone: The country now has a regulatory sandbox. On May 15, the central bank announced the winners of the Sierra Leone FinTech Challenge and the first participants to its sandbox. InvestED, iCommit, MyPay, and Noory will participate in the sandbox. Sierra Leone is now the second African country to launch a sandbox (Kenya was the first).

In remarks, Dr. Patrick Conteh, governor of the central bank, stated that the challenge was jointly organized and supported by the central bank, FSD Africa, UK Aid, UNCDF MM4P, and USAID. In regards to the sandbox, “The sandbox is intended to enable innovative FinTech products, services, and solutions to be deployed and tested in a live environment prior to full licensing, within specified parameters and timeframes. Equally important, the Sandbox framework is intended to facilitate BSL’s understanding of emerging technologies and support evidence-based approaches to regulation that advance the goals of financial inclusion, financial stability and consumer protection...While it is clear that Fintech often constitutes regulated activities, Regtech may assist the regulated in ensuring compliance with our regulatory standards. Therefore, both are of interest to us.” For those interested, the Consultative Group to Assist the Poor (CGAP) released a detailed overview of the sandbox.

South Korea: The Financial Services Commission released an update (see “Progress in Financial Reform and Policy Tasks Ahead”) on the progress made from the various financial reform initiatives. On promoting competition and innovation in the financial industry, the FSC "outlined its plan to facilitate the use of big data by financial companies in developing innovative financial services, while better protecting individuals' right to their personal information," and proposed regulatory reform to entry barriers across the financial sector for the first time in 20 years. Meanwhile, Yoon Suk-heun was approved by President Moon Jae-in to take the reins of the Financial Supervisory Service (FSS). According to a report, Yoon Suk-heun said the FSS will consider relaxing cryptocurrency regulations.

United Kingdom: The Financial Conduct Authority (FCA) has thrown cold water on practices in the robo-advisory space. According to a report, the FCA found that the services and fee-related disclosures at most online discretionary investment management (ODIM) firms "were unclear," with a few platforms comparing their fee levels against peer services "in a potentially misleading way." Similarly, many of the ODIM firms examined "did not properly evaluate a client’s knowledge and experience, investment objectives and capacity for loss in their suitability assessments. Some firms did not ask clients about their knowledge and experience at all..." In general, the FCA was "not satisfied with the strength of information gathering about clients' financial circumstances." In terms of governance, the FCA found that there "appeared to be little consideration of auto advice-specific risks in firms' governance processes," and there "appeared to be confusion within some firms as to the nature of the auto advice services being provided." The FCA provided feedback letters to firms included in the review, and many of those firms have already made significant changes to their disclosures and suitability processes. Not surprisingly, platforms in the robo-advisory space had their say on some of the FCA’s conclusions.

Speaking of the FCA, Megan Butler, executive director of supervision - investment, wholesale, and specialists, gave prepared remarks during the FCA's fifth TechSprint focused on anti-money laundering. According to Butler, 2,100 firms responded to the FCA's survey through December 2017. "No-one is pretending that financial services aren't abused by criminals. They emphatically are. But the data suggests that most financial institutions are not complacent about the risk. So, the primary question is around efficiency. How can firms get better at detecting criminals and disrupting malignant activities like people trafficking, narcotics and fraud?" She added, "if there are methods, innovations, or technologies that help you combat crime, tell regulators about them – and do not be afraid to move first. Excessive risk aversion is not going to help us win an arms race that is so heavily rooted in automation. We need to turn technology against criminals." According to the FCA's analysis, firms are largely using compliance technology to automate existing processes, but "the next big step" is to apply intelligent technology (AI, robotics, natural language processing, and machine learning) "so that firms can spot suspicious transactions in real time from unstructured account and transaction data." Obstacles to this: legacy systems, cleanup required around unstructured account and transaction data, and concerns about bias and transparency.

Meanwhile, UK Finance released a report with Parker Fitzgerald on how managing operational resilience and safeguarding data are at the core to sustainable digital financial services. According to the trade group, the speed and scale of digital transformation within the financial services industry "is contributing to the emergence of new non-financial risks." In particular, "failure to address emerging risks, as well as internal risk management processes, could lead to operational, as well as systemic, threats across the sector." The report focuses on three parts covering artificial intelligence (AI) and machine learning (ML), migrating a regulated industry into the cloud, and distributed ledger technology (DLT).

On AI and ML: “The validation of models that ‘self-build’ (for example genetic applications for credit scoring), predictive analytic models that are opaque (for example neural networks) and automated advisory models that could be prone to inadvertent mis-selling, would all benefit from best practice principles and guidelines to reduce ambiguity in this area. Adequate testing and ‘training’ of tools with unbiased data and feedback mechanisms will also be key, so will the build-up of skills in-house to understand and supervise AI and machine learning models.”

On movement to the cloud: “Although [Cloud Services Providers (CSPs)] have come some way in adapting their products for a heavily regulated industry, they still too often expect approaches to compliance to be standardized across the industry. In reality, compliance is dictated by the unique risk profile of each firm...The solution to this impasse would seem to be the creation of industry standards or best practices which the CSPs could fit their products to and which financial services firms could rely upon to give them some assurance that their approach was compliant with regulatory expectations.”

On DLT: “Consistency of approach from regulators is welcomed by the industry. As innovative technology providers play an increasingly important role in providing and maintaining FMI, regulators need to ensure that market critical operations and services are maintained against a whole host of risks including systemic, legal, liquidity and credit risks, insolvency and general business operational risks. There appears to be a growing consensus that the definition of best practice should be led by the industry, but supported by the regulator in line with their guiding principles. If this intent is followed through in practice by regulators and industry groups, then an environment is well placed to emerge that can liberate the innovative and exciting potential of distributed ledgers.”

U.S.: Last week, several U.S. regulators discussed the regulation of the cryptocurrency space, with particular focus on anonymity. Meanwhile, Federal Reserve Board Governor Lael Brainard gave prepared remarks at a digital currency conference in San Francisco where she stated that "there is no compelling demonstrated need for a Fed-issued digital currency." Given the "multiplicity of mechanisms" available for U.S. consumers to make payments electronically in real-time, "it is not obvious what additional value a Fed-issued digital currency would provide over and above these options."

Speaking of the Fed, the 12 regional banks released the 2017 Small Business Credit Survey. One of the interesting highlights from this report is the fact that net borrower satisfaction with online providers (broad definition) increased from 19 percent in 2015 to 35 percent in 2017.

The Federal Reserve Board also released its fifth report on the economic well-being of U.S. households. More than 12,000 people participated in the survey. The report found that nearly three-quarters of respondents are "doing at least OK financially" in 2017—up 10 percent from the first survey in 2013. Still, unexpected expenses remain an issue for a significant number of Americans. Nearly four in ten adults would not be able to cover an unexpected expense of $400, or would have to sell something or borrow money in order to cover it. In addition, more than one-fifth of adults are not able to pay all of their current month's bills in full and more than a quarter of respondents skipped medical care in 2017 due to being unable to afford it. With regards to student loans, more than 40 percent of those who attended college incurred some debt from their education—22 percent still owe money, while 20 percent have repaid their debt. For those with outstanding student loans, 20 percent were behind on payments last year—up one percent from 2016. "Over one-third [of borrowers] with student loans outstanding and less than an associate degree are behind versus one-quarter of borrowers with an associate degree."

Both the SEC and the Commodity Futures Trading Commission (CFTC) made headlines over the past week or so. The SEC set up a fake website,, in an effort "to educate investors about what to look for before they invest in a scam," according to the press release. The CFTC's Division of Market Oversight and Division of Clearing and Risk issued a joint staff advisory "that gives exchanges and clearinghouses registered with the CFTC guidance for listing virtual currency derivative products." Areas highlighted in the advisory include: enhanced market surveillance, close coordination with CFTC staff, large trader reporting, outreach to member and market participants, and Derivatives Clearing Organization risk management and governance.

Vietnam:According to a report from Reuters (in the first two minutes of the video), global tech firms, including Facebook and Google, are facing challenges with a set of new rules in the country. This month the country is set to vote in new cybersecurity rules covering what can be posted online and data storage within the country.



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