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
June 04, 2018

Sandboxes or Something

According to Mick Mulvaney, the director of the Consumer Financial Protection Bureau (CFPB), the CFPB is looking to establish a regulatory sandbox with input from the Commodity Futures Trading Commission (CFTC). Mulvaney said in a recent speech that they are “putting together, for lack of a better word. . . a FinTech sandbox.” If it is a sandbox, it would be the first at the federal level in the United States, but it would follow the establishment of a number of sandboxes created by financial regulators elsewhere. It would also follow Arizona’s recently established sandbox, which garnered a great deal of attention as the first state sandbox.

The direction the CFPB decides to take their sandbox in will likely determine whether or not sandboxes receive bipartisan support going forward. Many in the FinTech world look to the sandbox program set up by the U.K.’s Financial Conduct Authority (FCA) as a model to be emulated. The FCA’s sandbox ensures that regulators have the ability to keep close watch on innovative firms during their six-month testing periods without “tamping down creativity” or “discouraging innovation,” as Director Mulvaney fears that regulators are wont to do. 

By contrast, Arizona’s sandbox appears to have been designed to give participating firms as much latitude as possible without sufficient regulatory oversight, allowing firms to operate in the sandbox for up to three years. Worryingly, the law entirely fails to even mention the Arizona Department of Financial Institutions—the state’s financial regulator. Instead, Arizona’s sandbox will be run by the attorney general’s office. This has caused concern among consumer advocates. Lauren Saunders of the National Consumer Law Center (NCLC) wrote a highly critical analysis of Arizona’s sandbox earlier this year, raising concerns that the overly laissez-faire nature of the program might provide opportunities for firms to prey on consumers.

The real difference between these sandboxes, however, is not politics. The FCA’s sandbox has been marked by a level of rigor that demonstrates a real interest in taking an experimental approach to regulation. Though still nascent, Arizona’s sandbox seems to have been designed with deregulation in mind, rather than experimentation. This route may be a dangerous one for sandboxes, making them vulnerable to the criticism that sandboxes are simply part of a regulatory race to the bottom—a concern that we discussed in our 2017 report. The CFPB has to decide what they want their sandbox to achieve, but we encourage them to lean in to evidence-based policymaking and resist the temptation to use the sandbox solely for deregulatory purposes.

Some Headlines

GreenSky’s much anticipated IPO was a success, raising $874 million for the AltFi lender. At the time of writing, GreenSky’s share price is over $25, after initially targeting between $21 and $23 during the IPO.

Big Tech
Goldman Sachs published a note stating its belief that despite Amazon’s potential to expand significantly in financial services, it is unlikely to establish a “standalone” bank as a part of their business. Goldman Sachs believes that Amazon will continue to build out its partnerships, but that the onerous regulatory requirements to become a full-fledged bank will discourage it from fully establish itself in banking. This comes as Amazon’s forays into finance have drawn the attention of U.S. regulators including Federal Reserve Vice Chairman Randal Quarles who is reportedly concerned about big tech providing financial services without oversight.

Blockchain and Cryptocurrency
This week, Coinbase acquired Paradex, a “decentralized” (but not really) cryptocurrency exchange. It’s a bit confusing to explain how one can acquire a decentralized exchange, so we’ll leave it to the folks at Quartz to explain. Crypto experts believe this will be safer than centralized exchanges, which have had significant security problems. Elsewhere, NASDAQ also announced plans this week to establish a cryptocurrency exchange with Gemini, the first licensed cryptocurrency exchange in the U.S. Meanwhile, the crypto world is grappling with a 51 percent attack on Bitcoin Gold this week, which has reduced Bitcoin Gold’s market cap by about 25 percent.

In other cryptocurrency news, Goldman Sachs-backed Circle announced that it is launching its own cryptocurrency pegged to the U.S. dollar.

In the blockchain world, Wired created a helpful list of most of the things that blockchain is supposed to fix. Some of our favorites are “Nashville apartment buildings,” “borders,” and “paper.”

Digital Banking
According to a study conducted by FIS, challenger banks in the U.K. are far outpacing traditional banks in terms of customer satisfaction. Forty-five percent of challenger banks’ customers reported being very satisfied, compared to only 30 percent of traditional banks’ customers. Challenger banks have also made significant inroads in the U.K. Just this week, Tandem announced that it has 100,000 customers and Revolut revealed plans to make XRP and bitcoin cash available to its customers.

According to Willis Towers Watson, InsurTech investments reached new heights in the first quarter of 2018. The first quarter saw 66 InsurTech deals worth $724 million—a 155 percent increase from last year. Incumbent insurers and reinsurers joined venture capitalists as a significant source of InsurTech investment.

Insurers are not the only firms interested in InsurTech, however. Amazon led a $12 million investment round in Acko Technologies (an InsurTech firm in India). This follows Capgemini’s recent World Insurance Report, which showed a significant level of consumer interest in insurance solutions from big tech firms.

Adyen, the Dutch payments firm that made headlines earlier this year by stealing eBay away from PayPal, announced that it will be going public in Amsterdam. Adyen is seeking between $7 billion and $11 billion for 15 percent of its shares. Adyen counts Uber, Facebook, Netflix, and Spotify among its other customers. This comes after iZettle, another European payments firm, was acquired by PayPal shortly after announcing its own ambitions to go public.

Speaking of PayPal, the granddaddy of e-payment firms is deepening its partnership with Google. This will allow users of Gmail, YouTube, Google Pay, and Google Store to integrate PayPal, and comes after Google allowed the use of PayPal in Android Pay in April.

Wealth Management
Acorns announced that it has reached more than 3.5 million customers this week. The announcement comes not long after the platform rolled out retirement account services—now with more than 100,000 active accounts.

Global Developments

Asia Pacific Economic Cooperation (APEC)
APEC Ministers Responsible for Trade held its 24th meeting in Papua New Guinea in late May. The statement issued by the group included a focus on ongoing work regarding digital trade and e-commerce. According to the statement, the ministers "affirm the importance of cross-border information flows for trade. We will continue work on enabling the free flow of information and data for the development of Internet and Digital Economy, while respecting data privacy and applicable domestic laws and regulations. We support efforts in improving access to the internet and digital infrastructure."

The Commonwealth Bank of Australia, Westpac, and the National Australia Bank released a new mobile payments platform, Beem It, allowing instant payments for all Australian consumers and small businesses. According to ZDNet, the app "is currently restricted to users with a Visa or MasterCard debit card, of which the company says there are 43 million across Australia." 

For those of you interested in FinTech developments in “the land down under,” Monash University Centre for Financial Studies published several FinTech-related white papers over the past week or two including International Competition Policy and Regulation of Financial Services – Lessons for Australian FinTech; Innovation and FinTech Policy: Pust-Murray Developments; A Framework for Understanding FinTech and its Value: Implications for Australia; and Cryptocurrencies, Institutions, and Trust. All four publications are part of the Centre for Financial Studies’ Funding Australia’s Future project which was launched in 2012. I have not had time to review these documents, but happy to provide an overview in next week’s FinTech in Focus if there’s interest. 

The Central Bank of Brazil launched the Laboratory of Financial and Technological Innovations (LIFT)—“a  virtual collaborative environment with the participation of the academia, the market, technology companies and fintechs, aimed at the development of technological innovations, the exchange of knowledge and the evaluation of the results of the experiments." LIFT is supported by leading technology companies including Amazon Web Services, Microsoft, and IBM. The Central Bank also included a video (with English subtitles) that provides more information on the initiative. Projects submitted must relate to themes selected by a committee composed of the tech giants, Fenasbac, and the Central Bank. Each project selected "will be incubated in a virtual lab, and receive the resources it needs to become a working prototype. The results will be appraised and presented in a technical report from the Managing committee."

According to an article in the South China Morning Post, Ant Financial signed a strategic cooperation agreement with China Everbright Bank and its FinTech affiliate Everbright Technology "to help the state bank with its digital transformation" including cloud computing, mobile payments, artificial intelligence, biometric verification, and other areas.

Speaking of Ant Financial, the company has reportedly closed a $150 billion funding round. If that number holds true, Ant Financial would become the world's highest valued private tech company.

In regards to China's incumbent banks, mobile payments are up big in the first quarter of this year. According to the People's Bank of China (as reported by ECNS), banking institutions handled more than $11 trillion in mobile payments in the first quarter—up nearly 17 percent year-on-year. Roughly 10.7 billion payments were made through banks' mobile services—up  18 percent year-on-year.

Digitization continues to benefit China's economy, with the China Academy of Information and Communications Technology reporting that the nation's digital economy generated more than $4.3 trillion last year—up 20 percent from 2016. China's digital economy contributes a third to the country's overall GDP. More than 170 million people work in China’s digital economy, accounting for 22 percent of the country’s total employment.

European Union
For those of you trying to juggle both PSD2 and GDPR, Paulo Silva—a legal officer at the European Commission—stated that data processing rules under PSD2 do not override GDPR.

Separately, the European Securities and Markets Authority (ESMA) published its final report on the second Markets in Financial Instruments Directive (MiFID II) suitability requirements with a particular focus on the robo-advisory space (see pg. 13). Of interest, ESMA “confirms that it does not intend to require firms to disclose their algorithms in detail to clients and has therefore amended the guidelines accordingly." Commenters also asked the ESMA to clarify the definition of robo-advice to provide distinction between “robo-for-advisors” (professional-facing robo-advice) and “robo-advice tout court” (client-facing robo-advice). In response, the ESMA "wishes to clarify that the guidelines apply to all firms offering the service of investment advice and portfolio management, irrespective of the format used for the provision of these services, i.e the means of interaction with clients. ESMA also wishes to clarify that through the guidelines it does not intend to introduce additional requirements for robo-advisers, but rather highlight certain aspects that may be of particular importance in the case of the provision of services through fully or semiautomated tools.” That said, ESMA added a new paragraph to the final guidelines “to reflect the concepts expressed above and has amended the definition of robo-advice used for the purpose of the guidelines.”

In regards to the General Data Protection Regulation (GDPR), the European Union’s chief Brexit negotiator Michel Barnier responded to the U.K.'s interest in maintaining a supervisor on the European Data Protection Board (created to oversee the application of GDPR). According to Barnier, this request "will specially run counter to the interests of our businesses if we abandon our decision-making autonomy. This autonomy allows us to set standards for the whole of the EU, but also to see these standards being replicated around the world . . . And we cannot, and will not, share this decision-making autonomy with a third country, including a former Member State who does not want to be part of the same legal ecosystem as us." He added that the U.K. "must respect the fact that the European Union will continue to work on the basis of this system, which has allowed us to build a single market, and which allows us to deepen our single market in response to new challenges. And, as indicated in the European Council guidelines, the UK must understand that the only possibility for the EU to protect personal data is through an adequacy decision. It is one thing to be inside the Union, and another to be outside." 

Representatives from Germany's Financial Supervisory Authority (BaFin) met with members of the National Bank of Georgia in mid-May to discuss cryptocurrency regulation. 

The government-owned India Post Payments Bank is now allowing account holders to de-link Aadhaar numbers and open savings accounts without Aadhaar—marking one of the first instances, if not the first instance, of a government entity offering a choice to consumers on Aadhaar, according to MoneyLife.

In other news, Facebook is reportedly set to launch WhatsApp payment services to the entire country as early as this week. Partnerships have already been formed with HDFC Bank, ICICI Bank, and Axis Bank to process transfers with the State Bank of India expected to join soon after. Currently, more than 200 million Indians use the messaging app.

Speaking of ICICI Bank, it has launched several innovation labs to get a handle on FinTech and develop plans that reimagine banking. The bank has hired Rohan Angrish to lead its innovation effort.

Meanwhile, Paytm is currently embroiled in a data-sharing controversy after accusations were made that the company shared user data with the government. Paytm has since responded that the undercover video that led to the accusations "falsely claims that we shared some data with 3rd parties. Nothing can be further from the truth." 

Up until this point, the Central Bank of Iran was the only entity involved in developing regulations for FinTech companies in the country. However, on May 23, President Hassan Rouhani's cabinet announced it will also undertake efforts to support FinTech companies.

AgTech is blossoming in Kenya with the launch of 14 mobile applications to help Kenyan farmers increase production and improve trade. Kenya’s Agricultural and Livestock Research Organization is also moving to establish the first big data platform for agricultural research.

Meanwhile, Kenya’s central bank governor is increasingly concerned about predatory lending practices from FinTech lending firms operating in the country and has called for the sector to be regulated.

The Finance Ministry held a meeting in late May to discuss the administration's growth initiatives including reforming regulations that hinder experimentation with next-gen technologies. Separately, Financial Services Commission Chairman Choi Jong-ku gave prepared remarks on the state of the economy and efforts to improve regulations. Choi noted that the government is working to pass a bill that would temporarily lift regulations on FinTech companies, potentially making those restrictions permanent depending on outcomes, reform capital investment regulations, and lower barriers to entrepreneurs.

In late May, the Monetary Authority of Singapore issued a warning to eight digital token exchanges based in Singapore "not to facilitate trading in digital tokens that are securities or futures contracts without MAS' authorization." The authority "also warned an initial coin offering (ICO) issuer to stop the offering of its digital tokens in Singapore."

Thailand-based Bank of Ayudhya announced completion of a pilot test covering international remittances using the bank's own blockchain technology. The pilot "was conducted in joint effort with MUFG Bank, Mitsubishi Corporation (MC), and Standard Chartered Bank Singapore. It was under the Bank of Thailand’s Regulatory Sandbox guidelines," according to EconoTimes.

United Arab Emirates
Abu Dhabi Global Market (ADGM) and KPMG launched the second global FinTech innovation challenge. "This year’s challenge will primarily focus on generating real case studies in the adoption of FinTech solutions by major UAE institutions, including government entities and regulators," according to the press release. KPMG will also extend its Digital Village to ADGM's Innovation Centre.

United Kingdom
The Bank of England published another staff working paper covering the adoption of central bank digital currencies and its potential competition threat to the traditional commercial bank model. According to the white paper, "the universal disintermediated access to the central bank’s balance sheet, combined with the payment service functionalities offered by accredited digital wallet service providers, would provide depositors, both retail and corporate, with a potential substitute for deposit account services offered by commercial banks." At a minimum, the Bank of England states that such competition "can increase banks' cost of funding . . . with potential repercussions on the asset side of banks' balance sheet due to the resulting pressure to pass on the cost increase to borrowers through higher lending rates." More radically, banks "may be subject to an outflow of retail deposits, in particular in a scenario of financial stress, thus forcing them to shift their mix of sources of funding towards alternative wholesale forms of debt with longer tenor . . . in order to maintain liquidity adequacy." We're not finished. Under the extreme scenario, "the loss of retail deposits would force banks to adopt a 'narrow-banking' business model whereby their lending activity is entirely reliant on non-insured funding from retail and wholesale investors."

Lastly, the Science and Technology Committee issued a report that acknowledges the huge opportunities presented by algorithms to the public sector and wider society, but also the potential challenges, including decisions that disproportionately affect certain groups. The report "calls on the Centre for Data Ethics & Innovation to examine algorithm biases and transparency tools, determine the scope for individuals to be able to challenge the results of all significant algorithmic decisions which affect them . . . and where appropriate to seek redress for the impacts of such decisions."

United States
Comptroller Joseph Otting stated that the Office of the Comptroller of the Currency (OCC) will decide in July whether to proceed with granting national bank charters to FinTech firms.

Meanwhile, in Congress, 15 Senate Democrats sent a letter to the OCC, the Federal Reserve, and the Federal Deposit Insurance Corporation, urging the regulators to strengthen the Community Reinvestment Act (CRA). In particular:

“The digitization of banking also means that it is appropriate to re-evaluate the CRA’s service test, which assesses the number and types of investments made and services provided by a bank to LMI communities in its assessment area.  Clearly, physical branches are no longer the only way for banks to deliver access to credit.  Although technology has certainly helped expand access to credit through alternative delivery systems, studies continue to show that physical branches still provide a significant boost to access to credit to their surrounding community.  For example, a 2014 study found, even in crowded markets, a branch closing results in 13 percent fewer small business loans, and the effect is concentrated in low-income and high-minority neighborhoods.  We urge you to keep in mind that although digital banking has increased access to credit for many, branches continue to be important, particularly for LMI communities, due to the information-intensive and relationship-specific credit production in those areas compared to higher income areas.”

At the state level, Vermont has passed a law seeking to crack down on certain practices from data brokers—the first such law in the nation. According to the text of the bill, a data broker “means a business, or unit or units of a business, separately or together, that knowingly collects and sells or licenses to third parties the brokered personal information of a consumer with whom the business does not have a direct relationship.” In addition, brokered personal information “does not include publicly available information to the extent that it is related to a consumer’s business or profession.”




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