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FinTech in Focus

March 16, 2016
   
   

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Regulatory Outlook: Never a Dull Moment
If you skipped out early from the FinTech Forum at The George Washington University Center for Law, Economics and Finance last week, you missed out on some key statements by Amy Friend, senior deputy comptroller and chief counsel at the U.S. Office of the Comptroller of the Currency (OCC). Friend said that the OCC has been approached on multiple occasions from FinTech firms, including one in the virtual currency space, about obtaining a bank charter. In addition, the OCC is preparing to release a white paper in the near future exploring FinTech firms and their relationships with traditional financial institutions, in particular. Similarly, the U.S. Consumer Financial Protection Bureau (CFPB) announced that the agency is accepting complaints on consumer loans from online marketplace lenders. In prepared remarks given two days after the CFPB announcement, Director Richard Cordray stated that, among other things, the bureau has begun work on establishing "a rule governing the collection and publication of data on small business lending," including how firms should organize and manage the data. The CFPB is also interested in the fair treatment of competitors "regardless of their corporate structure or choice of charter," he said. He also mentioned that non-banks "should be subject to the same oversight and enforcement as banks if they are competing in the same marketplace for the same customers."

Regulatory chatter also surfaced last week regarding automated investment advice. Both SEC Commissioner Kara Stein and the European Securities and Markets Authority (ESMA) Executive Director Verena Ross touched on the topic in their prepared remarks. The UK’s Financial Conduct Authority (FCA) also released a summary of the responses received to its ongoing investigation on the barriers to digital innovation. Commenters noted that the “lack of clarity over regulatory definitions of advice, guidance and personal recommendations were a barrier to the use of digital and mobile solutions.” This in turn, has led to at least two firms dropping their pursuit of robo-advice plans. Adding further to the confusion is a letter submitted to the ESMA and European Banking Authority from the Financial Services Consumer Panel, an independent statutory body based in the UK that supports or challenges FCA initiatives. The panel said that automated advice “should be subject to the same standards as other forms of financial advice.”

The Dirt on Data Policy & Regulation
Less than a week after the CFPB waded into its first data-security enforcement action, the U.S. Federal Trade Commission and the Federal Communications Commission announced measures to protect consumer data. The FTC issued orders to nine companies seeking to determine “how they conduct assessments of companies to measure their compliance with the Payment Card Industry Data Security Standards (PCI DSS).” Similarly, the American Bankers Association’s Card Policy Council called for “all consumer-facing industries to implement the latest payment protection technologies and data safeguarding practices.” Separately, FCC Chairman Tom Wheeler, in an op-ed, put forward potential changes to govern how Internet Service Providers collect and use consumers’ information. “This is not to say network providers shouldn't be able to use information they collect—only that, since it is your information, you should decide whether they can do so. This isn't about prohibition; it's about permission.” And finally, the CFPB “is beginning to review the structure” of online finance platforms regarding, among other things, the use of geographic data by investors in the platforms, and the legal gray area surrounding whether investors could be subject to liability due to investing in loans from certain geographic regions.

Boosting GDP Through E-Payments
An analysis published by Moody’s Analytics, and commissioned by Visa, finds that higher electronic payment usage (debit, credit, prepaid, etc.) in the 70 countries surveyed between 2011 and 2015 contributed nearly $300 billion to total GDP, the equivalent “to the creation of about 2.6 million jobs on average per year over the five-year period.” A one percent increase in e-payment use “produces, on average, an annual increase of $104 billion in the consumption of goods and services” across the 70 countries analyzed. Of note, the analysis does not include the effects of mobile phone payments. And, for those who may not have the time to read the report, Visa has provided a flashy interactive graphic that breaks down the main findings from the study.

The Retail Bank, Reimagined
Ultimately, a digital world means the collapse of the traditional retail bank branch, according to a recent study conducted by The Economist Intelligence Unit and sponsored by Temenos. According to more than 200 senior retail banking executives surveyed, 49 percent of respondents agreed that the traditional transaction/branch-based model “will be dead” by 2020, with 64 percent of the view that retail banking will be fully automated by that time. The top five biggest competitors to traditional retail banks: peer-to-peer lenders, non-financial service firms (retailers, telecom providers), payment players (Apple, PayPal, etc.), robo-advisors, and new banks (online). An example of the impact these threats can have on traditional firms: China’s banks lost nearly $23 billion in transaction fees in 2015 alone, as Alipay and WeChat Pay have digitally transformed transactions across mainland China. For retail banks, talent acquisition, integrating front-end and back office systems, and updating legacy systems were the three top priorities, according to respondents. A number of financial institutions have already implemented or are in the process of implementing changes to bring the digital world to retail banking. For instance, JPMorgan just announced the rollout of its new consumer banking website, while BBVA acquired Finnish FinTech startup Holvi to bring a digital approach to small business financing.

FinTech 2015: A Review
More than $19 billion was raised by FinTech firms in 2015, according to a recent CB Insights/KPMG report, 72 percent of which was the result of venture capital-backed investment across 653 deals. FinTech financing throughout 2015 resembled the performance of some of my favorite sports teams in that they look pretty darn good through three-straight quarters only to crash and burn in the fourth, which is exactly what happened to the level of FinTech investment globally. However, the report notes that while caution “is expected to continue to be a trend over the next few quarters, FinTech interest is not likely to be held back for long.” North American VC-backed FinTech firms raised $7.7 billion, with 95 percent of funding raised in the U.S., alone. The top five most active VC investors in North America FinTech companies: Andreessen Horowitz, SV Angel, 500 Startups and Google Ventures (tie), RRE Ventures and Khosla Ventures. And, of the 19 FinTech unicorns—companies valued at $1 billion or more—that are based worldwide, 74 percent are either involved in the lending or payments space.

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