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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FinTech in Focus

By: Jackson Mueller
October 06, 2017

Remittances: Recovery Yet Costly

A new report by the World Bank finds that after two years of declines, remittances to low- and middle-income countries (LMICs) are expected to recover in 2017. According to the report, “remittance flows to LMICs are projected to rebound by 4.8 percent to $450 billion. Worldwide, remittance flows are projected to reach $596 billion.” The report also described how structural constraints, including the regulation of money transfer operators (MTOs) and de-risking by international correspondent banks, continue to hinder the overall growth of remittances. Importantly, the cost of sending remittances “has remained nearly stagnant” at 7.2 percent as of the third-quarter of this year. “Two major factors contributing to high costs are the de-risking behavior of commercial banks and exclusive partnerships between national post office systems and a single MTO,” according to the report. By the end of this year, India is expected to be the top remittance receiving country in terms of overall value. However, as a share of gross domestic product, the Kyrgyz Republic is expected to take the top spot.


Top Remittance Receivers in 2017

 top remittance receivers

Source: World Bank

Divergence in the Digital Economy

The United Nations Conference on Trade and Development (UNCTAD) released its Information Economy Report 2017 earlier this week. The report finds that the digital economy "is creating new opportunities for trade and development," helping small business and entrepreneurs in developing markets connect to global markets. However, as the report notes, "such development gains are far from automatic.” Indeed, many developing countries, including the least developed countries "are inadequately prepared to capture the many opportunities emerging as a result of digitalization. According to the report, information and communication technologies (ICT) represent 6.5 percent of global GDP, and the ICT sector alone employs roughly 100 million people.


ICT Penetration by Level of Development 2016 

ICT pentration by level of department


Some Headlines:

The Mortgage Process–Digitized

A new survey from LendingTree of 5,000 closed loans between March 2016 through May 2017 finds that the mortgage process (from early rate shopping to close) is speeding up. The median time from early rate shopping to closing on a purchase mortgage declined seven days from 2016 to 2017. In that same period, “LendingTree has seen a 19 percent increase in the number of loans closed within 30 days and a 27 percent increase in loans closed in 60 days.”

Incumbents Doing Things

Goldman Sachs CEO Lloyd Blankfein is keeping an open mind as it relates to digital currency, in sharp contrast to recent comments from JPMorgan Chase CEO Jamie Dimon. The Wall Street Journal reported that the firm "is weighing a new trading operation dedicated to bitcoin and other digital currencies." Blankfein took to Twitter earlier this week and stated the following: “Still thinking about Bitcoin. No conclusion—not endorsing/rejecting. Know that folks also were skeptical when paper money displaced gold.” Goldman is also making an effort to strengthen its tech workforce in India, with a recent report suggesting that the firm has increased its tech hiring by 25 to 30 percent over the past year. 

On the blockchain front, Singapore-based Maybank and InfoCorp have signed a memorandum of understanding to provide financial services to the unbanked using the blockchain-based mobile application, CrossPay. Still in Singapore, Standard Chartered has appointed Mikhail Brovman as global head of technology and financial markets. The firm also announced two strategic partnerships with TradeIX and Infor to enable "clients and their ecosystems seamless access to the Bank's full range of trade financing solutions." 

Meanwhile, Commerzbank, Bank of Montreal, Caixabank, and Erste Group joined the UBS-IBM initiative to build a new global trade platform based on blockchain technology. The platform, called Batavia, "advances the work initiated by UBS and IBM to develop a trade finance platform built on the IBM Blockchain Platform powered by the Hyperledger Fabric Blockchain framework," according to the Commerzbank press release. “The new platform, will allow transacting parties to view the progress of a shipment as it leaves the warehouse, is loaded onto a plane, truck, or boat and arrives at the receiving port, automatically releasing payments incrementally along each step of the process.” In addition, the “open nature of the platform, which encourages broad participation by many banks, vendors, and regulators, will also help open new trade corridors, bring new players into the market, and expedite processes that before were prohibitively time-consuming and expensive."

Separately, the Blockchain Insurance Industry Initiative, otherwise known as B3i, has expanded its membership role to include 23 new members. If you recall, the initiative was first launched back in October 2016 between Aegon, Allianz, Munich Re, Swiss Re, and Zurich. The news comes after the successful launch of a testing prototype in September that "will involve creating and managing property catastrophe (re)insurance contracts to evaluate the post placement processes."

Meanwhile, out with the old and in with the digital. French-based telecom group Orange is expected to launch its online banking service in November, while the UAE’s oldest bank, Mashreq Bank, has launched Mashreq Neo—"a new full-service digital bank to cater to the day-to-day needs of a world on the move." Services include branchless banking, instant account opening (less than five minutes), new payments options, personal financial management, as well as other services.

Artificial Intelligence–Lawyered

A new survey by Thompson Reuters explores the views of legal departments of artificial intelligence (AI). According to the report, two-thirds (67 percent) of respondents "stated that they are confident to try new technology,” though more than half of corporate legal departments are not familiar with artificial intelligence, in general.


Current Perceptions of AI Use in Corporate Legal Departments 

current perception of AI use

Source: Thompson Reuters

As much as AI is in the headlines, we still have a long way to go in fully understanding it. As the report notes, “small and midsize departments’ relative lack of interest may be related to a lack of awareness; almost half (45 percent) of those in departments with fewer than six attorneys indicated they are not familiar with the use of AI in corporate legal departments. Similarly, 27 percent of attorneys in both departments with fewer than six attorneys and those with six to 10 attorneys simply didn’t have an opinion about the use of AI in corporate legal departments.” In fact, more than a third of respondents indicated that AI will become mainstream in corporate legal departments in 10+ years.

ICO–An Update

I’ve largely tried to stay away from including every regulator’s opinion of initial coin offerings (ICO) as there have been plenty of regulatory announcements over the past month, in particular. That said, and for those looking to keep track, an exhaustive list of announcements can be viewed here. It is also worth mentioning that the U.S. Securities and Exchange Commission (SEC) announced charges in late September against Maksim Zaslavskiy and two companies for “defrauding investors in a pair of so-called initial coin offerings (ICOs) purportedly backed by investments in real estate and diamonds.” According to Andrew Calamari, director of the SEC’s New York Regional Office, “Investors should be wary of companies touting ICOs as a way to generate outsized returns. As alleged in our complaint, Zaslavskiy lured investors with false promises of sizeable returns from novel technology.”

The SEC’s enforcement actions and guidance are being heard by issuers seeking to launch ICOs. Colony’s Co-Founder, Jack du Rose, penned a blog post on the decision to delay their token sale until the second-quarter of 2018. According to Rose: “As far as we can tell, no matter what, tokens purchased for pre-functional products are securities. After it is functional, it depends. Talk to your lawyers. So, we will do a token sale when the Colony Network is live on Mainnet and people can use their tokens for their intended purpose right away. We’re tentatively targeting Q2 2018.” For those interested in efforts to become compliant, or determine whether or not they are compliant, the SAFT Project released a white paper covering efforts to develop a compliant token sale framework. However, as discussed in an op-ed by CoinDesk, there are some areas where the framework may fall short.

South Korea appears to have joined China in an outright ban of initial coin offerings. According to one report, Kim Yong-bum, vice chairman of the Financial Services Commission, is reported to have stated the following: “We are worried about the adverse effects such as increased risk of fraud. The ICO will be prohibited in all forms.” Unlike South Korea or China, the Australian Securities and Investments Commission (ASIC) released guidance to issuers of ICOs, as well as a warning about the potential risks of investing in ICOs. According to ASIC Commissioner John Price, “We want to ensure innovative firms understand the regulatory framework they may be operating under and ensure they meet any obligations they may have when raising funds in Australia. 

Open Banking–Actually, We Don’t Want to Share Our Data

We’re less than six months away from the Revised Payments Services Directive (PSD2) taking effect in Europe, and yet a recent survey by Accenture of UK consumers has found that nearly 70 percent of respondents would not share their data with a third-party provider. As the press release states, “more than half (53 percent) of the consumers said they will never change their existing banking habits and adopt open banking.” As usual, there are generational differences in the perception of open banking with more than a third of Gen Z respondents likely to use open banking services, compared to just 13 percent of Baby Boomers.

Whatever–Your Data is Already Out There

Remember that Yahoo data breach and how it was originally disclosed back in December that 1 billion Yahoo users were affected? Well, according to disclosures released on Tuesday, ALL–and I mean 3 billion user accounts–were affected. What was once the largest data breach to date just got 3x larger. According to a recent press release: “Subsequent to Yahoo's acquisition by Verizon, and during integration, the company recently obtained new intelligence and now believes, following an investigation with the assistance of outside forensic experts, that all Yahoo user accounts were affected by the August 2013 theft.”

Author’s note: For those of you who have accessed information related to my Fantasy Football selections for insight into what players are producing and worthy of being added to your rosters, I would caution you from thinking I know anything about football to begin with.

And Equifax…. I mean, where to begin? Do I talk about the separate data breach that took place in March? Do I talk about the fact that the company is pinning all of their problems on literally one individual? Or do I talk about the company’s recent $7 million, no-bid contract agreement with the Internal Revenue Service for fraud prevention efforts that was awarded LAST WEEK? This can’t get any worse, right? RIGHT? 

Nutmeg, Nutmegged.

Robo-misery for UK’s biggest robo-advisor Nutmeg, which saw pre-tax losses rise to more than $12 million. The company expects that it will need to raise another funding round to grow its user base and assets under management, according to one report. Nutmeg’s operating troubles were further aggravated after wealth management firm SCM Direct ripped into Nutmeg's losses and other FinTech firms in a blog post. The comments also were critical of the UK Financial Conduct Authority and HM Treasury when it comes to oversight of robo-advisers: “Surely the FCA and the Treasury should be looking at UK robo adviser models to test whether or not their financial models make any sense. If the answer to such analysis is no, is it not irresponsible to allow mainly novice investors to have their money managed for the medium to long-term, by companies who may well not exist in the years to come?”

Global Developments 

IMF: The International Monetary Fund (IMF) released the results of the eighth annual Financial Access Survey (FAS). The latest FAS data and country metadata can be viewed here.

Meanwhile, Christine Lagarde, IMF managing director, gave prepared remarks at a Bank of England conference in late September where she discussed virtual currencies, new models of financial intermediation, and artificial intelligence. On the topic of virtual currencies, Lagarde stated that they “might just give existing currencies and monetary policy a run for their money. The best response by central bankers is to continue running effective monetary policy, while being open to fresh ideas and new demands, as economies evolve.”

On new models of financial intermediation, Lagarde remarked that regulators have traditionally focused on overseeing well-defined entities, but as new service providers take shape in different forms “fitting these into buckets may not be so easy.” As such, regulators “will likely have to further expand their focus, from financial entities to financial activities—while possibly also becoming experts in assessing the soundness and security of algorithms. Easier said than done.” 

On artificial intelligence, Lagarde stated that even with the best algorithms and machines, “targets will be missed, crises will occur, mistakes will be made. But can machines really be held accountable…? Accountability is key. Without it, we cannot have independence… and without independence, policy is bound to go astray.”

India: The Reserve Bank of India (RBI) has issued guidelines related to peer-to-peer lending. According to the document, Non-Banking Financial Company, Peer to Peer Lending Platform (NBFC-P2P) must obtain a Certificate of Registration from the RBI commencing or carrying on the business of a peer-to-peer lending platform. Companies that undertake such business must apply for registration as an NBFC-P2P with the RBI within three months from the effective date of the directions. The directions also note that an NBFC-P2P will become a member of all Credit Information Companies (CICs) and submit certain data (including historical data) to the CICs.

Russia: Cryptocurrencies could be included in the country's financial literacy improvement strategy according to Finance Minister Anton Siluanov. Meanwhile, Deputy Prime Minister Arkady Dvorkovich stated that Russia is studying Japan's experiences regarding the use of distributed ledger technology for state administration purposes. "I don’t have the slightest doubt blockchain technologies will find broad use in state administration in the short term, too, but all of these novelties require legislative foundation for further development, and we’re studying Japan’s experience with much interest now,” he said.

Japan: Speaking of Japan, the Financial Services Agency has approved 11 companies as operators of cryptocurrency exchanges. Interestingly, 12 companies originally in business before the new regulations took effect have now closed and 17 applications from other exchange operators are pending.

U.S. On the legislative front, while a lot of activity is happening on Capitol Hill with regards to the Equifax breach, Congressman Patrick McHenry (R-NC) and Senator Cory Booker (D-NJ) introduced the IRS Data Verification Modernization Act of 2017. According to Booker, “Our commonsense bill simplifies the loan process for small businesses and entrepreneurs by providing lenders quicker access to financial records and data, while safeguarding private information. This bill will cut red tape and unreasonably lengthy waiting periods, making the process more efficient in getting much-needed capital into the hands of small businesses.”

Federal agencies are increasingly discussing or testing blockchain technology. Next week, the Securities and Exchange Commission Investor Advisory Committee will hold an open meeting to discuss the technology’s implications for securities markets. Meanwhile, the Chamber of Digital Commerce and the U.S. Department of Commerce led the first blockchain certified trade mission to the UAE this week. According to U.S. Ambassador to the UAE Barbara A. Leaf: "Leading U.S. financial technology providers are here to share the latest in blockchain technology developments with UAE banks, investment firms, and government agencies to ensure the integrity of financial transactions. U.S. financial technology firms are uniquely poised to assist Dubai’s vision of becoming one of the world’s first governments to use this technology.”

Meanwhile, Treasury’s Bureau of the Fiscal Service's Office of Financial Innovation and Transformation (FIT) announced two pilot projects “exploring innovative technologies–Robotic Process Automation and Distributed Ledger Technology–that can boost efficiency, strengthen accountability, and cut paperwork for the federal government.” As stated in the press release: “The pilot project will test whether the inventory of an agency's physical assets can be continuously monitored and reconciled in real time as the physical assets are transferred from person to person throughout the pilot.”

Speaking of real time, the Department of Justice has signed off on a real-time payment network spearheaded by JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, and other banks, according to a report. The approval comes after a year-long antitrust review.

Separately, the Commodity Futures Trading Commission has requested information from Coinbase regarding the June 21 incident on the company's GDAX platform where the price of Ether fell from nearly $318 to 10 cents before recovering.

Hong Kong: The Securities and Futures Commission (SFC), the Hong Kong Monetary Authority (HKMA), and the Insurance Authority (IA) announced a series of measures designed to place Hong Kong as the regional hub for FinTech. All three authorities and commissions announced regulatory sandboxes or enhancements to existing sandboxes. All three sandboxes will be linked up, providing a single point of entry for pilot trials of cross-sector FinTech products. HKMA intends to launch its enhanced sandbox (FSS 2.0) by the end of this year. Lastly, “The SFC expects the great majority of applicants applying for a corporate license under the SFO, including firms which make use of FinTech in conducting their regulated activities, such as robo-advisors, to go through the normal license application process without the need to enter the Sandbox.”

HKMA and IA also announced a series of initiatives designed to support FinTech development and growth. HKMA’s initiatives focus on faster payments, the promotion of virtual banking, open application programming interfaces, and cross-border collaboration, among other issues. Meanwhile, IA also announced Fast Track–“a pilot scheme with a dedicated queue for new authorization applications from insurers using solely digital distribution channels. Fast Track will expedite the authorization process by giving the IA an opportunity to review proposed digital distribution channels at an early stage.”

Announcements and circulars can be viewed below: 

SFC: Sandbox Circular; Circular Clarifying Responsible Officers

HKMA: Prepared Remarks, Norman Chan, Chief Executive, Hong Kong Monetary Authority; Press Release on a New Era of Smart Banking

IA: New Initiatives to Facilitate InsurTech


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