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 11, 2018

The Banking OnRamp

There has always been a tug-of-war between innovation and regulation. At the launch of our FinTech program in 2014, we observed that “the rise of FinTech challenges underlying precepts of existing regulatory approaches and requires fresh thinking as to how regulation can best foster the responsible development of this industry.”

One of the most difficult and arduous tasks for FinTechs, if they are indeed interested, is in obtaining a banking license from their respective regulatory authority. In all fairness, banking licenses come with a lot of responsibility given the power bestowed by a regulator on a newly licensed bank—it shouldn’t be easy to obtain.

But, are the frameworks and processes so outdated, time consuming, and costly that rather than instilling competition in the banking system, we’ve actually created a regulatory moat nearly impossible to ford? As Citi's global head of banks research remarked, “the license is a competitive moat.”

If that’s the case, then fresh thinking on how eligible applicants can navigate a less burdensome process towards a license should be welcomed. Greater competition should be encouraged to the benefit of the end user.

Take Australia, for instance. A few weeks ago, the Australian Prudential Regulation Authority (ARPA) finalized its restricted authorized deposit-taking institution (ADI) framework to provide eligible entities with a restricted, yet more manageable process by allowing the entity to conduct a limited range of business activities for up to two years while they build the capabilities to become fully licensed. The restricted ADI framework was published nearly a year after ARPA released a discussion paper on authorizing new entrants to the banking industry. Three days later, APRA granted a restricted ADI license to online startup Volt. 

In Israel, the Bank of Israel just announced a policy that provides an eligible entity with a limited bank license, modeled off the efforts of the U.K., Australia, and other supervisory authorities. The licensing model will allow an entity to manage limited deposit and credit provision activities, while completing the process to become permanently licensed.

These are just a few examples, but it does go to show that regulators around the world are beginning to question, if not outright questioning, current regulatory constructs and whether they ultimately make sense. Providing an on-ramp for eligible entities seeking to become a fully licensed bank is a step in the right direction.


Industry Headlines

AltFi: High default rates on loans made by online lenders have resulted in stricter underwriting standards by the industry leaders, according to Bloomberg. Prosper, for example, saw its weighted average of FICO scores rise to 717 from 704 two years ago, according to Kroll, a ratings agency. This comes as online lenders have begun to lean on securitization more and more, and investors risk tolerance has diminished.

6 11 Wall Street Grip

Meanwhile, China’s FinTech giant Ant Financial announced a shift in their strategy to focus on technology. This comes after Chinese regulators have applied an increasing amount of pressure on the Alibaba spin-off, citing concerns about systemic risk.

Blockchain and Crypto: Building off its previous announcement that it would launch its own cryptocurrency pegged to the dollar, Circle announced that it will seek a federal banking license in the United States, as well as a registration from the SEC as a brokerage and trading venue. In an interview with Bloomberg, Circle’s CEO conceded that the move would not be easy but noted that its current task of appeasing 50 state regulators is no easy feat either.

Meanwhile, there is a new religion in the universe: blockchain. This is, well, unsurprising. Speaking of blockchain, this blockchain company raised over $4 billion in an ICO without having launched a product. With that, my patience with blockchain has run out for the week. 

Challenger Banks: Challenger banks had another busy week. First, Revolut launched in Russia as part of a partnership with QIWI Bank and also announced their intention to apply for a banking license in the United States. According to their CEO, they aim to submit an application in California by the end of 2018. Not to be outdone, Atom Bank received a £85.4 million investment from BBVA, bringing BBVA’s stake in the company to 39 percent. Meanwhile, Starling Bank is seeking £80 million from investors and has dropped its partnership with TransferWise. This comes as Starling Bank is launching their own international payments feature, and TransferWise has begun offering their own bank accounts. TransferWise has already found another suitor, however, with rumors circulating that it might partner with Monzo.

However, the U.K. isn’t the only European (yes, you guys are still European) country to export challenger banks, as Berlin-born N26 recently reached one million users after its launch in the United States.

InsurTech: ZhongAn, China’s InsurTech giant, continues to suffer from the downswing in China’s tech market. The FT reports that ZhongAn’s shares are down 46 percent from their peak, reflecting second thoughts about InsurTech among investors. Meanwhile, ZhongAn has rolled out blockchain infrastructure as a part of their partnership with a group of 100 hospitals. They aren’t the only insurers looking to blockchain technology, either, with Korea’s Zikto and AXA launching blockchain products of their own as a part of a new partnership.

Wrisk, a British InsurTech startup backed by Munich RE, recently completed another equity crowdfunding campaign for £500,000. Wrisk stated that they plan on waiting until the first quarter of 2019 for their Series A funding round. Currently, it is in the process of incorporating its findings from the FCA’s regulatory sandbox and building out its offerings.

Payments: The Indian Payments War of 2018 continues and has begun to take its toll on Paytm. WhatsApp is accelerating its offensive, partnering with a host of banks in an effort to gain market share. WhatsApp already has 200 million users in India, presenting a significant challenge to Paytm.  Meanwhile, in Europe, Adyen announced that its IPO will aim for an $8.3 billion valuation. This underscores that Adyen feels it is well placed, with customers like eBay, Netflix, and Uber. Meanwhile, N26 announced that it will offer Apple Pay to its customers in Ireland. Finally, in remittances, WorldRemit announced a partnership with the First Bank of Nigeria.


Global Developments

Asia-Pacific Region
The Cambridge Center for Alternative Finance, the Asian Development Bank Institute, and the Academy of Internet Finance at Zhejiang University have partnered on a third alternative finance industry survey covering the region. Findings from this survey are expected to be unveiled later this year.

In prepared remarks to the Senate Economics Legislation Committee, James Shipton, chair of the Australian Securities and Investments Commission, detailed ASIC's role in encouraging the adoption of RegTech solutions in the financial services sector. According to Shipton, "ASIC believes Australia can position itself as a world leader in the development, and adoption, of regtech solutions, and we will look at new ways to encourage this." The Senate hearing can be found here.

European Union
The European Commission is proposing to create "the first ever Digital Europe programme and invest €9.2 billion to align the next long-term EU budget 2021-2027 with increasing digital challenges.” The €9.2 billion will be allocated to projects intended to strengthen supercomputing and data processing in Europe, artificial intelligence efforts, safeguarding EU's digital economy by boosting its cybersecurity industry, digital skills, and encouraging the use of digital technologies across the economy and society.

Meanwhile, the European FinTech Alliance is not happy with members of the European Commission's expert group on regulatory obstacles to financial innovation. The group was established as part of the Commission's FinTech Action Plan. At present, the group has 14 members, yet only one FinTech-focused organization. This has led to accusations that startups will not benefit from the guidance put forward by the group.

A new report released by European lawmakers calls for greater regulation of virtual currency exchange platforms. According to the paper, the EU "should expand on 5AMLD’s regulation of VC-to-fiat exchange platforms and take steps to regulate VC-to-VC exchange platforms." Also, the EU "should convene an expert working group to assess further measures that may be required to supplement 5AMLD over time," and play a leadership role in advocating for a consistent global regulatory approach surrounding AML/CFT regulation around virtual currencies. The report also states that the experience of the U.S. "suggests that comprehensive AML/CFT regulation around the VC industry, supported by meaningful enforcement action, can mitigate exposure to illicit finance risks."

Denmark has joined the European Blockchain Partnership. The partnership was launched back in April to act as a vehicle "for cooperation amongst Member States to exchange experience and expertise in technical and regulatory fields and prepare for the launch of EU-wide blockchain applications across the Digital Single Market....”

The government is moving to establish a regulatory framework for initial coin offerings (ICOs). The Pact Act is slated to be introduced this month and presented to France’s Treasury and financial services regulator before moving on to the French Parliament for votes. It is unclear when votes will take place and when the law would take effect.

The Unique Identification Authority of India (UIDAI) has denied Airtel Payments Bank permission to use Aadhaar-linked Know-Your-Customer authentication due to certain allegations made against the payment bank.

The state of Maharashtra is planning to develop a sandbox to aid startups in the FinTech space. The government is also planning to have a dedicated FinTech officer located in the Department of Information Technology. Of note, various other state governments have expressed interested in partnering with Maharashtra, and the government is currently working on an agreement with the government of Andhra Pradesh. 

International Monetary Fund
Dong He, deputy director of the IMF's monetary and capital markets department published a white paper titled, “Monetary Policy in the Digital Age: Crypto Assets May One Day Reduce Demand for Central Bank Money.” According to He, crypto assets "lack three critical functions that stable monetary regimes are expected to fulfill: protection against the risk of structural deflation, the ability to respond flexibly to temporary shocks to money demand and thus smooth the business cycle, and the capacity to function as a lender of last resort."

That said, crypto assets do offer certain advantages. Namely, they offer nearly the equivalent level of anonymity of cash, allow for transactions to take place across long distances, and are potentially more divisible by the unit of transaction. In addition, they can be cleared and settled quickly without the need for an intermediary.

In short, "we cannot rule out the possibility that some crypto assets will eventually be more widely adopted and fulfill more of the functions of money in some regions or private e-commerce networks.”

For their part, central banks should respond to the competitive pressure of crypto assets by continuing to strive to make fiat currencies better and more stable units of account, by regulating the use of crypto assets to prevent regulatory arbitrage and unfair competitive advantage derived from lighter regulation, and by continuing to make their money attractive for use as a settlement vehicle.

Also, a central bank digital currency "could help counter the monopoly power that strong network externalities can confer on private payment networks."

Lastly, the IMF expanded its FinTech Advisory Group to include six new member groups. The current lineup is as follows: Circle, BBVA, Alibaba Digital Economy Institute, DTCC, U.S. Treasury, Bank Indonesia, Ripple, European Central Bank, Chain, Digital Asset, OECD, MIT Sloan, Monetary Authority of Singapore, People's Bank of China, Harvard Berkman Klein Center,, Bank of Canada, Kount, and Luxembourg House of FinTech.

The central bank published a policy "that regulates, clarifies and simplifies the process of establishing a bank, and creates regulatory certainty in the early stages of the licensing process for anyone interested in establishing a bank." To carry out the policy, the banking supervision department "has established a Licensing and New Banks Unit, which is intended—among its other functions—to guide the applicant through stages of the licensing process, examine requests for bank licenses and for permits to control a banking corporation, and supervise the new bank after receipt of the license."

Lastly, Daniel Hahiashvili, who has worked at the central bank for nearly two decades, was appointed head of the technology and innovation division in the banking supervision department.

For the first time ever, the Financial Services Agency is expected to reject the registration of virtual currency exchange operator, FSHO, due to a lack of sufficient risk controls.

The central bank released its Payments Strategy Roadmap for 2018-2021. According to the release, the bank has “formulated three key priorities. They are: stimulating innovation, promoting a robust electronic payment infrastructure, and working on a well-functioning cash payment chain.” According to one article covering the report, the bank reiterated its support for FinTech solutions, including whether blockchain and distributed ledger technology can improve the Dutch payment system, but largely dismissed the use of cryptocurrencies.

The Portuguese Tax Authority created a framework around the taxation of cryptocurrencies and whether or not VAT applies and in what circumstances. 

Government officials from India and Singapore signed a memorandum of understanding to strengthen cooperation in financial innovation through the establishment of a joint working group co-chaired by Monetary Authority of Singapore Managing Director Jacqueline Loh and India Department of Financial Services Additional Secretary Ravi Mital.

South Korea
Choi Jong-ku, chairman of the Financial Services Commission, stated that the government will submit a bill that relaxes crowdfunding rules in an effort to spur capital access for SMEs.

According to a report in CoinTelegraph, the Spanish Congress unanimously approved draft legislation to regulate blockchain technology and cryptocurrencies. "The document calls for a review of regulations pertaining to cryptocurrencies such as Bitcoin (BTC), as well as to blockchain, proposing to introduce the technology to the Spanish market through ‘controlled testing environments,’ commonly referred to as ‘regulatory sandboxes.’"

According to a survey conducted by FICO on how Swedes view PSD2, only a third knew about the directive, with the lowest level of awareness among 16- to 24-year-olds. Similarly, nearly half of respondents didn’t want to share information with any third party, while one-third of respondents said they were "uncertain" about this. Nearly half of those surveyed were uncertain as to how PSD2 would affect fraud.

Meanwhile, the country's central bank released a consultation on instant payments and the central bank's role in the payment infrastructure. In particular, the bank “would be interested in hearing respondents’ views in general on potential future changes in the payments landscape which may be of relevance to the RIX system going forward. Examples of such areas could be the entrance of new payment service providers in the market, possible new payment services or prospective changed consumer behaviour regarding payments in the future.”

Abu Dhabi Global Market (ADGM) and the Hong Kong Securities and Futures Commission have entered into a cooperation agreement "to jointly promote and support financial services innovation in Hong Kong and the UAE." The agreement "includes sharing of relevant information on innovation, providing support in the authorisation processes where appropriate, and referring cross-border activities that will accelerate the growth of the financial and FinTech industries in both jurisdictions."

And speaking of ADGM, ADGM's RegLab successfully completed its third round of applications with a total of 36 local and international FinTech innovators "offering potential solutions for the financial and small-medium enterprise sectors in the Middle East and Africa region." The ADGM RegLab saw a 70 percent jump in interest from platforms compared to the number of platforms that applied to its second cohort.

In early June, the Bank of England launched a six-week consultation on the adoption of a common messaging standard, ISO 20022, for payments in the U.K. According to the consultation, "the UK’s fragmented and restrictive messaging standards mean today’s systems are not best placed to respond.... This consultation document marks the first step in the transition of CHAPS, Faster Payments and Bacs to ISO 20022 and proposes a format for a new, common messaging standard to payments made in these systems. The format has been developed jointly by the Bank and the UK retail payment systems via the newly established New Payment System Operator (NPSO) and in close collaboration with payment providers."

In Parliament, MPs are asking Visa what went wrong after a system crash left millions of people unable to pay for goods and services in the U.K. and across Europe. Nicky Morgan, chairwoman of the Treasury select committee, wrote to Charlotte Hogg, Visa's CEO for Europe, demanding to know what went wrong.

The RFi Group released the results from a survey which found that U.K. Millennials view Amazon, PayPal, Mastercard, and Visa "as more trustworthy" than banks when it comes to personal data security. Regarding tech giant Facebook, more than three-quarters of respondents stated that they distrusted the entity to hold and maintain the privacy and security of their data.

At the federal regulator level, both the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) testified before the Senate Appropriations Committee on their FY 2019 budget requests. Both testimonies discussed FinTech-related topics including the work of LabCFTC and the SEC’s cryptocurrency enforcement efforts. 

Speaking of the SEC, the Commission named Valerie Szczepanik as associate director of the division of corporation finance and senior advisor for digital assets and innovation—a newly created advisory position. "Ms. Szczepanik will coordinate efforts across all SEC Divisions and Offices regarding the application of U.S. securities laws to emerging digital asset technologies and innovations, including Initial Coin Offerings and cryptocurrencies," according to the press release.

At the state level, New York's Governor signed AB 8938, which directs the Department of Financial Services to study online lending institutions that conduct business in the state and requires the department to submit a report containing an analysis of the online lending industry, applicable state and federal laws, and recommendations by July 1.

 Meanwhile, the New York State Assembly has proposed a bill that would establish a digital currency task force "to provide the governor and legislature with information on the effects of the widespread use of cryptocurrencies and other forms of digital currencies and their ancillary systems in the state." The task force will consist of nine members with a report due by December 2019. 

In California, the California Consumer Privacy Act is likely to qualify for the ballot in November which could significantly impact businesses that sell or disclose consumers' information.




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