In this Issue

Industry Headlines»
International Developments»

COVID-19 and FinTech

Adena Friedman, chief executive officer of Nasdaq, noted during the recent Technology for the Future Conference that the COVID-19 pandemic is "fundamentally accelerating" the adoption of Software-as-a-Service (SaaS) solutions. According to CrowdFund Insider, Friedman also highlighted the benefits of FinTech, saying, "The reasons for acceleration are numerous, and include the ability for those technologies together to handle ever-increasing transaction flows while also elevating the integrity, transparency, and inclusiveness of markets around the world." 

On November 10, the Senate Committee on Banking, Housing, and Urban Affairs invited regulators from the Federal Reserve, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration (NCUA) to speak as witnesses. The hearing focused on regulatory measures during the COVID-19 pandemic, trends in the banking industry, and new agency-led initiatives promoting financial inclusion. 

Notably, Acting Comptroller of the OCC Brian Brooks and FDIC Chairwoman Jelena McWilliams made several mentions of the positive relationship between bank expansion into FinTech and increased financial inclusion. Chairwoman McWilliams urged the committee to "recognize the tremendous benefits that financial innovation can deliver to consumers." She also shared that the FDIC has established an Office of Innovation and launched the FDiTech initiative to help facilitate technology partnerships between banks and FinTechs. 

Comptroller Brooks shared the optimistic sentiment that financial innovation has led to increased efficiency and new banking industry products. Additionally, Brooks noted that "those who fear innovation may harm consumers should consider the possibility that innovation might be safer in a supervised environment rather than under the currently largely unsupervised." Brooks referenced the banking system as one of our most strictly regulated industries that is currently losing market share to less regulated shadow banks. 

You can watch the hearing by clicking here.

 Industry Headlines

Cybersecurity and Cloud Computing 

Apple announced this week that it will implement stricter consumer and data privacy requirements for all third-party developer applications featured in the company's App Store. Whereas previously, application developers could choose to identify all of the data they or their third-party partners collect, this requirement will enforce disclosure for any new applications or updates they submit to Apple. This requirement will allow Apple to provide increased transparency to users on how their personal information is shared with third parties. Chris Hazelton, director of security solutions at San Francisco-based provider of mobile security solutions Lookout, told Security Magazine, "The privacy changes in iOS 14 are part of an unstoppable trend to increase the protection of user privacy. This trend will not stop with tracking for advertisers. Developers that update their apps after December 8 won't have their apps approved unless they include this information." The increased transparency in consumer data collection practices could drive users to become more actively aware of data privacy implications. 

Apple's new privacy requirement follows the passage of the Consumer Privacy Rights Act (CRPA, or Proposition 24) by California voters. While California already has privacy laws within the California Consumer Privacy Act (CPPA), the CRPA will update existing provisions and allow consumers to direct businesses to not share their personal information, among other more stringent privacy measures. Channel Futures reports the provision is taking effect on July 1, 2021, and "removes the time period in which businesses can fix violations before being penalized. And creates the Privacy Protection Agency to enforce the state's consumer data privacy laws." 

Although consumers are at the forefront of California's CPRA and Apple's new privacy requirements, businesses are also placing an increased focus on fighting cybersecurity threats to their systems. The Wall Street Journal reported, "Cybersecurity spending, mostly by companies and governments, is forecast to grow about 9% a year from 2021 to 2024, when it is projected to hit $204 billion, according to one measure from research firm Gartner Inc., which updated its estimates in July." Additionally, the fastest-growing segment is expected to be cloud security, where spending is forecasted to increase by more than 30 percent a year, according to Gartner. The growth in corporate and government cybersecurity spending is underscored by the accelerated shift to the cloud propelled by the pandemic and the shift to remote work. However, the cloud also presents a set of different and more costly challenges. 

Damien Manuel, chairman of the Australian Security Association and director of the Centre for Cyber Security Research at Deakin University, claims that "the cloud can be difficult to secure because the tech companies that provide cloud-based services each configure their servers differently, and companies may need to use multiple vendors for different tasks." This did not seem to deter Macquarie, the largest investment bank in Australia, from announcing their goal of operating 100 percent in the cloud by the end of March 2022. In addition to Macquarie's open API banking architecture, the bank's e-banking system, mobile banking applications, and service centers are now cloud-based, according to ZDNet.

Digital Assets

Lebanon's central bank governor Riad Salameh told a gathering of officials early last week, "We must prepare a Lebanese digital currency project" as a way to shore up confidence in the banking system, according to CoinTelegraph. Salameh said, "As for the monetary supply in the Lebanese market, it is estimated that there is $10 billion stored inside homes." Efforts to launch a new digital currency appear to have accelerated after violent protests and silent bank runs caused turmoil within Lebanon's financial system and led to a rise in locals buying Bitcoin. 

China Construction Bank (CCB), the second-largest global bank by market capitalization, has tapped Labuan-based digital asset exchange Fusang for the issuance of $3 billion USD worth of debt securities over a blockchain. According to the South China Morning Post, tokenized bond certificates will be issued through the state-owned bank's Lauban, Malaysia branch over three months in the form of digital securities. These securities will be exchangeable for bitcoin and US dollars. Henry Chong, chief executive officer of Fusang, stated, "If this transaction is a hit with investors, Fusang hopes to work with the state-owned bank on issuances of other currencies, including yuan." Through the shift to blockchain issuances, the CCB can reduce the costs traditionally associated with financial intermediaries and offer debt instruments at lower amounts. 

Virtual Banking

Early last week, BankingDive reported that New York-based FinTech Moven is partnering with digital banking software company Q2 to create a standardized digital "bank-in-a-box" that can be deployed in as little as 30 days by a traditional bank. Rahm McDaniel, vice president of strategic solutions at Q2, said, "The partnership enables any credit union or bank to use their charter and deliver their own digital-only channel to acquire deposits or new customers in a few weeks." Given that building out a digital bank is usually a complicated and expensive process, this solution could be especially attractive to community and regional banks.        

Daylight, formerly Be Money, announced the launch of the first digital banking platform in the United States specifically designed for and by the LGBT+ community. The platform will be backed by global card-issuing platform Marqeta and Visa. According to CNBC, "The platform aims to help LGBT+ people navigate their finances and prepare for their futures through products and content designed specifically for their unique needs - whether that's saving up for an emergency fund or gender transition surgery." Daylight will offer a wide range of products, such as Visa-branded cards in customer's preferred name, even if it does not match their legal identification, and opportunities to make direct donations within the platform to LGBT+ aligned charities. In mid-December, Daylight will begin operations with an invite-only beta phase focused on consumers in California and New York. 

Accelerators and Partnerships 

Mastercard has announced the latest FinTech startups joining its Start Path accelerator and partnership program. Since the program's launch in 2014, roughly 250 startups have participated and gone on to raise $2.9 billion in post-program investing funding, according to PYMTS. The latest Start Path Class has 10 globally diverse participants: Carry1st, FISPAN, Lendio, LISNR, Mocafi, Mo Technologies, Panda Remit, Paycode, Fanbank, and Subiaco. Ken Moore, chief innovation officer at Mastercard, said, "We are partnering with the newest FinTechs joining Start Path to drive inclusion, innovation, and trust with alternative ways to pay and authenticate, powerful solutions for small businesses, and new ways to create efficiency for business payments, as well as address the wealth gap." This partnership will help participants scale their businesses by allowing them to connect with Mastercard's global network of banks, merchants, and technology partners. Given that the ongoing pandemic has triggered a surge in digital commerce and with the global market for FinTech products and services expected to grow to $310 billion by 2022, Start Path's new participants are entering a ripe market for growth. 

Visa has recently launched the Visa FinTech Partner Connect program, a new initiative that will provide financial institutions and merchants in Europe with enhanced capabilities through the combination of Visa's capabilities and an exclusive set of FinTech partners. Mark Nelson, senior vice president of Europe product at Visa, said, "The popularity and need for digital payments and online banking has never been greater with the global shift in behavior. This means that financial institutions and businesses of all sizes are looking for ways to rapidly develop their offerings." FinTech Partner Connect will ultimately help Visa's clients meet their customers' increasing demand for new digital payment products. Visa's 13 FinTech partners range from ChargeAfter, enabling merchants to offer personalized and instant financing to their customers, to Ecolytiq, which analyzes payment transactions in real-time to calculate CO2 footprints on an individual level. 

Mobile Payments 

The National Payments Corporation of India announced earlier this month that Facebook's WhatsApp can expand its mobile digital payments service in India. The Wall Street Journal reports WhatsApp can bring the service to a maximum of 20 million users, which is a significant increase from the one-million cap that has been in place since the encrypted messaging platform began offering payments via its app in a trial service in early 2018. The new 20 million user cap represents an estimated 5 percent of WhatsApp's user base in the country. According to The Wall Street Journal, "The catalyst for mobile-payment growth in India came in 2016 when India's government unexpectedly nullified the largest-denomination cash notes in circulation to curb corruption." This created an increased interest in digital payments as consumers often had to stand in long lines for ATMs because of the crunch for cash. 

India's public banking sector is certainly not missing out on the increased interest and accessibility of electronic payments. The State Bank of Pakistan will launch a micropayment gateway (MPG) in the next two months to allow government and private sector entities, banks, merchants, and consumers to make digital payments. The Tribune reports, "Micropayment gateway has advanced functionalities to process instant/near real-time and alias-based payments, bulk transfers and capability to onboard participants including banks, merchants, electronic money institutions, etc. through Application Programming Interfaces (APIs)." The bank has also taken steps to improve the country's large-value payment system by collaborating with the World Bank's Financial Inclusion Infrastructure Project to replace its current system with the Automatic Transfer System. 

 International Developments

China 

Following Ant Group's suspension of their record-breaking $34.5 billion IPO in Shanghai and Hong Kong, Chinese regulators call for enhanced banking-oriented compliance measures to be placed on FinTech firms. During the 21st Century Annual Finance Summit of Asia, Liang Tao, vice-chairman of the China Banking and Insurance Regulatory Commission (CBIRC), said, "FinTech companies, which use technology to enhance financial services, should be regulated like banks and must observe the same risk and compliance requirements as financial institutions on main street." This speech follows a set of draft rules issued by the Chinese Central Bank and the CBIRC to tighten regulations on the country's micro-lending markets, requiring lenders like Ant to maintain the equivalent of 30 percent of their loan book in capital. Bloomberg reports, "Using big data gleaned from their hold on online payments, firms such as Ant and Tencent have grabbed market share from commercial banks in the lucrative consumer loans space by providing easier access to credit for younger users, many of whom have little credit history." Another primary concern of Chinese regulators is the potential for the rapid growth of FinTech firms to create monopolistic issues, resulting in new forms of risks and challenges from cybersecurity to data protection.

European Union

Several FinTech startups in the UK are drafting contingency plans as the December 31 trade agreement deadline between Britain and the EU looms. Currently, UK based firms are enjoying continued access to Europe's single market during this year's transition period, but banks and FinTechs are expected to lose "passporting" rights that allow them to operate throughout the bloc once this period is over, according to CNBC. As a potential solution in the event of a no-deal scenario, some UK FinTechs are securing licensing and establishing new European outposts to ensure they can continue operating in the region. Ireland and Lithuania are both favored locations for new European outposts with FinTech firms. Curve, Modulr, and Revolut are in the final stages of securing licensing to operate in one or both countries. A spokesperson for Revolut, one of Britain's most-valuable FinTech firms, stated, "While the process is still ongoing, to ensure that Brexit does not impact our Irish European customers, we will temporarily migrate their accounts to Revolut's e-money licensed business in the EU, based in Lithuania." 

Australia 

Australia could become substantially more accommodating for FinTech firms and cryptocurrency businesses. The Council of Financial Regulators (CFR) in Australia announced they will create a new regulatory regime for digital wallets that is less burdensome to small firms. The new rules will scale the regulatory burden depending on the size of the company, the amount of capital held in stored value facilities, and the provider's liquidity. According to the Australian Financial Review, the Australian Prudential Regulation Authority will control oversight of big operators of stored-value facilities, including global technology firms, and the Australian Securities and Investments Commission will regulate smaller players. Rebecca Schot-Guppy, chief executive officer of FinTech Australia, a policy-focused firm that represents over 300 companies in Australia, stated, "Trust from consumers is paramount in FinTech. Therefore, the industry has an interest in ensuring all new regulations protect the public. But it cannot come at the cost of innovation, and compliance measures must be balanced against the risk a service poses to them."

For more information on FinTech in Focus or the Milken Institute's FinTech program, please contact Kate Goldman at [email protected].