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: Dan Murphy
September 24, 2018

In this issue:

Industry Headlines »

Global Developments »

Between Two Crises

Throughout this month, which marks the tenth anniversary of the collapse of Lehman Brothers, Monday morning quarterbacks of all stripes have offered their assessment of the global financial crisis. Reflection on mistakes made and lessons learned is important, but being right about the last crisis is a lot easier than being right about the next one. Without the ability to pinpoint the exact origin of the next crisis, it’s worth looking for systemic risk in our own backyard.

This is particularly important for the FinTech community, as financial innovation has a funny way of helping to precipitate financial crises. A recent paper by Karen Petrou of Federal Financial Analytics takes a critical look at FinTech and the future of finance from a systemic risk perspective and posits, “Most tectonic shifts of this magnitude end in earthquakes.” In her view, the current shift in financial services is characterized by growing concentration risk as financial institutions become increasingly reliant on and indistinguishable from tech platforms.

Petrou isn’t the only one wondering whether finance will be more highly concentrated in the future. An article by Thomas Hale of the Financial Times on Monzo, a British challenger bank, offers a glimpse of what the future of financial services might look like. Unlike traditional banks, whose business is the provision of credit backed by deposits, Monzo’s business more closely follows the platform model pioneered by big tech firms. Monzo will hold customers’ deposits, but rather than offer its depositors loans and other financial services itself, Monzo aims to provide its depositors with a marketplace for third party service providers.

Upon reading these two pieces, the obvious question is how financial regulation should deal with a tech platform that groups customers together for regulated financial institutions but does not, for example, hold credit risk on its balance sheet? A 2017 paper by Dirk Zetzsche, Ross Buckley, Douglas Arner, and Janos Barberis foreshadows this conversation and discusses the implications of the shift from financial intermediation to data intermediation. The authors argue that if tech platforms become the main client channels for financial institutions, the case for treating them like too big to fail banks grows more compelling.

That is a reasonable conclusion, but raises more questions than it answers. Petrou touches on several of these, including questions related to data portability, cloud computing, and credit discrimination. In order to ensure that the next crisis is not of the FinTech variety, getting the answers right is critical.  

 Industry Headlines

AltFi: U.S. Bank announced the launch of a small-dollar online loan called Simple Loan in order to compete with payday lenders. This comes after the Office of the Comptroller of the Currency (OCC) reversed its position from the Obama-era, which discouraged banks from offering deposit advances. Predictably, this move by U.S. Bank has drawn mixed reactions. On the one hand, Nick Bourke of the Pew Charitable Trust stated:

“This is the first time a bank has made small installment loans available to customers with poor credit scores on a widespread basis. It’s a game changer, because the loans have affordable payments limited to 5 percent of each paycheck and prices seven to eight times lower than payday loans.”

Others were less positive on the news, however. Rebecca Borné of the Center for Responsible Lending cried foul on the loan’s high interest rate and said:

"This type of product isn’t a safe alternative to a payday loan, and we reject the notion that bank loans as high as 70 to 88% APR will drive out higher-priced credit by non-banks. To the contrary, high-cost lending by banks will undermine the most effective measure against predatory lending: state interest rate limits.”

Separately, Funding Circle announced the pricing range for its initial public offering which could value the U.K.-headquartered firm at $2.4 billion.

Big Tech: TheWall Street Journal writes that prior to a previous report that Facebook had requested access to financial data from large banks, the social media giant had already spent years negotiating with financial institutions on how it could make use of financial data that passed through its Messenger platform. American Express, Bank of America, Wells Fargo, PayPal, and Western Union are among the financial institutions said to have negotiated with Facebook.

Let's turn our focus to Amazon. Bain is out with new numbers on Amazon's customer loyalty compared to U.S. banks. According to the release, 65 percent of Amazon Prime respondents "would be willing to try a free online bank account offered by Amazon." For those who don't buy through Amazon, more than a third of respondents said they would be interested in a free online bank account from the company. Meanwhile, Citi Research finds that splitting Amazon in two could generate more shareholder value and avoid antitrust scrutiny, while the Archbishop of Canterbury Justin Welby took aim at the gig economy and accused Amazon, among other tech companies, of avoiding taxes.

Blockchain and Crypto: Large banks have begun to roll out ways to offer investors “synthetic exposure” to Bitcoin and other cryptocurrencies. First, Citigroup announced that it will allow clients to trade “digital asset receipts.” According to Bloomberg, these would allow clients to trade by proxy without owning the underlying coin. Similarly, Morgan Stanley will offer investors the opportunity to trade in “price return swaps” tied to Bitcoin futures contracts. Meanwhile, an article by Barry Eichengreen sheds light on the problems with “stable coins,” which aren’t so different from the problems with pegged exchange rates.

In blockchain news, IBM announced the launch of “Blockchain World Wire,” a payment system that will compete against Ripple and other blockchain-based payment systems. Speaking of blockchain-based payments, Softbank announced that it completed a proof of concept to allow peer-to-peer payments from different carriers using blockchain.

For those in Washington FinTech circles, however, the big news is that Coinbase, Circle, and the Digital Currency Group became the first members of the Blockchain Association, a trade association to advocate for the blockchain industry. According to Politico, the group will be led by Kristin Smith, Marvin Ammori, and Josh Mendelsohn.  

Payments: Visa and Mastercard have agreed to pay $6.2 billion to merchants to settle antitrust litigation related to card swipe fees. The settlement, however, only addresses monetary damages associated with the lawsuit, and a separate class of merchants is fighting Visa and Mastercard's business practices, according to Bloomberg.

Last week, PayPal launched Funds Now, a program to give small business owners who accept electronic payments instant access to funds generated by sales. PayPal says that their unique view of the payments system allows them to better evaluate the riskiness of a given merchant and identify fraud with more accuracy than was previously possible. Elsewhere, Apple put its plans to launch a payments platform in India on hold after facing regulatory issues and difficulties working with India’s national identification platform. A new data localization rule by the Reserve Bank of India was of particular concern to Apple, according to reports.

Finally, Dutch payments unicorn Adyen now has a market capitalization greater than that of Deutsche Bank. While this certainly speaks to the excitement surrounding Adyen, it also says quite a lot about the problems facing Deutsche Bank.

InsurTech: Amazon is further entering the insurance sector in India. The e-commerce platform has filed with India's Register of Companies and will focus on life, health, and general insurance products. While the company has yet to seek approval from India's Insurance Regulatory and Development Authority, the e-commerce giant "aims to carry out the business of soliciting, procuring, and servicing insurance as a corporate agent." On the venture capital front, State Farm announced the launch of a $100 million venture capital initiative through its newly formed State Farm Ventures.

RegTech: The U.S. Financial Industry Regulatory Authority (FINRA) published a report covering recent RegTech developments within the securities industry and potential opportunities and implications RegTech may have for broker-dealers. Public comments on FINRA's RegTech report are due by November 30.


 Global Developments

European Union: The European Banking Authority (EBA) announced that it will publish guidelines for the establishment of regulatory sandboxes in December. The EBA’s Elisabeth Noble told Reuters, “our report in December will include an analysis comparing the existing sandboxes and innovation hubs, and recommendations for the core design of a sandbox and innovation hub.” Meanwhile, European Central Bank President Mario Draghi, in a letter to the European Parliament, said the Bank has no plans to issue a central bank digital currency. Such technologies "require substantial further development" and there is "no concrete need" to issue a digital Euro, he said.

Australia: In a letter from the Australian Banking Association (ABA) in response to the Treasury Laws Amendment (Consumer Data Right) Bill 2018, the ABA stated that its members “hold significant concerns that value-added and derived data have been included in scope for customer-directed data sharing. Neither the Productivity Commission’s “Data Availability and Use” report (PC Report) or Treasury’s 2018 “Review into Open Banking” report (the Farrell Report) recommended that value data be in scope. Both reports concluded that for the system of data exchange to be successful, it must encourage innovation and protect the intellectual property of data holders.”

Brazil: The Central Bank of Brazil signed a FinTech cooperation agreement with the Hong Kong Monetary Authority, an effort to increase collaboration on FinTech issues and encourage innovation.

China: The People’s Bank of China (PBoC) is expanding its Digital Currency Research Lab’s efforts to promote FinTech outside of Beijing. The new municipal FinTech centers will promote the PBoC’s central bank digital currency project when it goes live, among other projects. Meanwhile, the PBoC has issued yet another warning to investors of the risks associated with cryptocurrencies, just in case their position on the topic wasn’t already clear.

Germany: There was a bit of confusion in Germany last week over a report that the finance ministry had given up plans to force big tech firms to pay more in taxes. The Finance Ministry disputed the report, saying that no decisions have been made on the tax at this point.

India: An inter-ministerial committee for finalization of amendments to the previous Payment and Settlement Act of 2007, has submitted a report and draft legislation to the Finance Ministry which, among other things, calls for the creation of an independent Payments Regulatory Board to regulate the payment sector. Separately, PayU India received approval from India's central bank to operate its own non-bank financial company.

Japan: SBI Holdings is planning to launch a Ripple-powered mobile payment application called MoneyTap, which will provide users with an easier, more efficient bank transfer application without fees. Speaking of Ripple, Ryan Zagone, its director of regulatory relations, gave a sneak peek into Ripple's upcoming product which is expected to reduce transfer costs between 40 and 70 percent.

Marshall Islands: The IMF advised the Republic of the Marshall Islands against adopting a digital currency as a second form of legal tender last week. This comes after the passage of a law to adopt a digital currency called the Sovereign, which would be accepted in addition to the U.S. dollar.

Singapore: The Monetary Authority of Singapore (MAS) and the Infocomm Media Development Authority announced the launch of the world's first unified payment QR Code—The Singapore Quick Response Code (SGQR). "SGQR will be adopted by 27 payment schemes including PayNow, NETS, GrabPay, Liquid Pay and Singtel DASH, and will be deployed progressively over the next six months," according to the press release. In other news, the ASEAN Financial Innovation Network (AFIN) announced the launch of the API Exchange—"an online Global FinTech Marketplace and Sandbox platform for financial institutions (FIs). APIX is the world’s first cross-border, open-architecture platform." At the time of the announcement, Abu Dhabi Global Market announced a partnership with AFIN, which I believe makes ADGM the first regulatory actor outside of the ASEAN region to partake in AFIN.

Taiwan: Taiwan’s Financial Supervisory Commission reported that the first experiment in their regulatory sandbox will begin this December, which will be jointly run by KGI Bank and Chunghwa Telecom Co.

United Arab Emirates: The Abu Dhabi Global Market (ADGM) launched a digital FinTech sandbox, which will be supported by standards developed by the Financial Services Regulatory Authority. ADGM also admits its third RegLab Cohort. Ten firms were selected and join the total of 26 firms, from 20 countries, that have taken part in the RegLab.

United Kingdom: A report from Parliament’s Treasury Committee calls for increased regulations on cryptocurrencies and cautions that the U.K.’s strategic interest in being a leader in the industry must be weighed against the risks associated with it. The report is highly critical of the crypto market in the U.K., which it says resembles the “Wild West,” and the blockchain technology that underlies many cryptocurrencies. The report states “although small scale uses for blockchain may exist—the Committee has not been presented with any evidence to suggest that universal applications of the technology are currently reliably operational.”

United States: There has been a lot of FinTech news from policymakers in the U.S. lately. First, in non-crypto news, the New York Department of Financial Services (NYDFS) is suing the federal government in order to stop the OCC from awarding special purpose national bank (SPNB) charters to FinTech firms. The widely expected lawsuit alleges that the OCC’s charter is both unconstitutional and that it will enable predatory lending. In response, Comptroller of the Currency Joseph Otting published an op-ed accusing both the NYDFS and the Conference of State Bank Supervisors of wanting to limit consumer choice. The upshot is that it’s unlikely FinTech firms will dedicate their time to obtaining an SPNB charter until this is all sorted out.

In other non-crypto news, the Bureau of Consumer Financial Protection’s (BCFP’s) new Office of Innovation proposed a “disclosure sandbox” to allow FinTech firms to test new ways to inform consumers. The BCFP is seeking public feedback on the proposal until October 10th. Elsewhere, the Commodity Futures Trading Commission (CFTC) announced a cooperation agreement with the Monetary Authority of Singapore on FinTech innovation. CFTC Chairman J. Christopher Giancarlo stated, “I am delighted to join Ravi Menon in signing this arrangement to demonstrate our mutual commitment to facilitate market-enhancing innovation and share best practices in FinTech engagement.”

Speaking of sandboxes, the former senior advisor to the director of the BCFP and head of its Project Catalyst initiative, Dan Quan, penned an op-ed in American Banker on what the BCFP's regulatory sandbox should look like.

Meanwhile, U.S. regulators have been busy cutting the cryptocurrency community down to size, drawing predictably measured reactions from some of its leaders. In New York, the Attorney General’s Office published a report as a part of its Virtual Markets Integrity Initiative. Of particular note is that the Attorney General’s Office referred three cryptocurrency exchanges (Binance, Kraken, and to the NYDFS. These exchanges may have violated New York’s digital currency regulations, which would be particularly notable in the case of Binance, the largest exchange by volume in the world. Those, however, were not the only notable findings in the report. The Attorney General’s Office also found that Coinbase and other exchanges engage in proprietary trading on their own platforms. In Coinbase’s case, the report found that almost 20 percent of the executed volume on Coinbase’s marketplace came from Coinbase itself. This is potentially problematic for many reasons, not least of which is that the exchange’s liquidity is highly dependent on Coinbase’s own trading.

Somewhat counterintuitively, the other crypto news out of New York is that NYDFS approved stable coins from Gemini Trust Company and Paxos Trust Company. In a statement, NYDFS Superintendent Maria Vullo said, “These approvals demonstrate that companies can create change and strong standards of compliance within a strong state regulatory framework that safeguards regulated entities and protects consumers.”

Meanwhile, roughly two weeks after receiving a preliminary approval from the OCC on its application for a national bank charter, Varo Money has signed with core banking vendor Temenos to implement its T24 platform.

Elsewhere, a federal court ruled against a cryptocurrency founder who argued that the Securities and Exchange Commission’s (SEC’s) rules did not apply to his initial coin offering (ICO), as they did not constitute a security. The judge disagreed, ruling that the SEC’s rules do apply. Speaking of the SEC, the Commission halted trading in two ETF-like products, Bitcoin Tracker One and Ether Tracker One. The SEC cited “a lack of current, consistent and accurate information” about the products as the reason for their action.





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