Authors
Jackson Mueller
In this issue:
DC FinTech Week
Basically, a full week that I celebrate as if it were my second birthday. A lot of really great discussions in Washington, DC last week. Hats off to Georgetown Law, the Online Lending Policy Institute, the Federal Deposit Insurance Corporation (FDIC), and the Commodity Futures Trading Commission (CFTC) for putting together some fantastic events, panel discussions, and, more importantly, cocktail receptions.
For those who couldn’t make the events in DC, I’ve provided a few highlights from the remarks of several regulators and policy makers in attendance. Please note that I could not make every event due to 1. blowing out the back tire of my car while speeding to one event; and 2. actual work (this newsletter just doesn’t magically write itself, unfortunately).
Edward Blatnik: As the deputy counsel in the Office of Innovation at the Consumer Financial Protection Bureau (CFPB), Blatnik provided an update on the number of states currently engaged in the newly formed American Consumer Financial Innovation Network (ACFIN). According to Blatnik, membership has grown from the original seven states to now 11 or 12 states, without specifying which states had recently signed on to the Network. Blatnik also told the audience that the ACFIN was largely based on the Global Financial Innovation Network, originally launched by the UK Financial Conduct Authority, and in response to coordination challenges, regulators face domestically due to our fragmented financial regulatory system.
At the time of the event, the CFPB was the only US regulator to have joined GFIN. However, last Thursday, the Securities and Exchange Commission, the CFTC, the Office of the Comptroller of the Currency (OCC), and the FDIC announced that they had joined the initiative. In addition to four more federal regulatory authorities, the Arizona Attorney General’s Office and the New York Department of Financial Services also joined the global network.
A couple of thoughts on this before I continue to regurgitate highlights from last week’s events:
- Are there too many cooks in the kitchen with this initiative, and will larger membership hinder the success of this network and how it moves forward (GFIN is now up to 50 members)?
- To what extent will US federal and state authorities that are members of GFIN take part in the network? Will they largely sit on the sidelines as observers or partake in the cross-border testing pilot, among other initiatives?
- How much of an impact did the confusion and concerns surrounding Facebook’s Libra initiative, and the international dimension to this issue, have on US regulators, not including CFPB, in deciding whether or not to join the network?
I would be interested in your thoughts on this. Anyway, back to some of the key people that attended my second birthday:
Rep. French Hill (R-AR): The ranking member of the US Financial Technology Task Force mentioned that he was pleased to see the outcomes from the CFPB’s no-action letter policy. In particular, allowing the regulator to develop a greater understanding of non-bank lending models and the algorithms employed for the purposes of credit underwriting. On payments and cryptocurrency, Hill said there was a need for broader discussions, especially since the current focus of the House Financial Services Committee is too Facebook-centric at the moment. On privacy, Hill mentioned that lawmakers need to get ahead of the curve on this and that there is a need for a nationwide approach. Hill remarked that most significant state privacy effort, the California Consumer Privacy Act (CCPA), was rushed and poorly written and referred to the opt-out procedures under CCPA as particularly problematic. Hill also mentioned the need for regulatory harmonization and coordination at the federal regulatory level and specifically mentioned Rep. Patrick McHenry’s (R-NC) recently introduced legislation, the Financial Services Innovation Act, as one measure that could potentially address several challenges from regulatory fragmentation at the federal level.
Rep. Trey Hollingsworth (R-IN): Speaking of privacy, Hollingsworth noted that any legislative deal is unlikely to come before CCPA takes effect, but expressed confidence that lawmakers will get somewhere on this issue. In other remarks, Hollingsworth mentioned the divide between rural and suburban and urban areas, and how innovation, especially non-bank, online lending platforms can help close the economic divide. Hollingsworth also mentioned that people should not just view legal and regulatory uncertainty as a direct cost to businesses (more lawyers, etc.), but also potentially delaying innovation in the long run to the detriment of the US economy.
Julapa Jagtiani: A senior economic advisor and economist at the Federal Reserve Bank of Philadelphia, Jagtiani mentioned during a panel question concerning the use of artificial intelligence and machine learning for credit underwriting and access, that the Fed (unclear whether FRB of Philadelphia or the Federal Reserve Board of Governors) is currently working on guidance related to third-party risk management. That guidance may also include a focus on cloud computing.
Linda Lacewell: The superintendent of the New York State Department of Financial Services largely focused on the potential for the insurance industry to discriminate through the use of new underwriting models. In particular, Lacewell mentioned her concerns about the use of certain data and algorithms in the auto insurance and life insurance segments, while also mentioning her concerns related to price optimization. Lacewell also commented on the recent ruling from the US District Court for the Southern District of New York that puts the Office of the Comptroller of the Currency’s multi-year effort to charter FinTech firms in serious jeopardy. Lacewell said the court’s ruling is a victory for consumers and that states are best positioned on consumer protection issues. Lacewell noted that she is pleased with the decision and that the ruling reaffirms the role of the states and federal system when it comes to banking.
Paul Thanos: Currently serving as the director for finance and insurance industries at the US Department of Commerce/International Trade Administration (ITA), Thanos mentioned that the ITA was focused on two areas in particular that relate to the week’s FinTech-related discussions. First, ITA is looking at the InsurTech space and how the industry is transforming through the use of new technologies. Second, ITA is also interested in discovering ways to address the $1.5 trillion trade finance gap. For information on the InsurTech space, including a landscape of InsurTech firms, we encourage ITA and interested persons to take a look at our report, “InsurTech Rising: A Profile of the InsurTech Landscape.”
Reps. Ben McAdams (D-UT) and Gregory Meeks (D-NY): Interesting insights from the two members of the House Financial Services Committee. First, and this should come as no surprise to most, both lawmakers discussed the difficult balancing act in supporting innovation but also ensuring appropriate consumer protections remain in place. While advanced technologies and models have the potential to open up greater financial opportunity, there is a need to maintain robust consumer protections. McAdams and Meeks briefly discussed several policy priorities including CRA reform, big data, Minority Depository Institutions, diversity in the workplace, and immigration reform. On CRA reform, McAdams said that as the nature of banking evolves, so to must CRA. On big data, there is immense potential but significant privacy challenges. McAdams stated that while this issue, in particular, demands the attention of Congress, there is a need for productive dialogues and not knee-jerk reactions. Of note, McAdams somewhat addressed a question from the audience concerning Industrial Loan Companies, in which he said he’s not sure if congressional action is needed here. He added that as the financial sector continues to evolve, “let’s allow innovation to lead,” so long as lawmakers continue to ensure appropriate consumer protections are in place.
Report Week
Regulating Alternative Finance The World Bank Group and the Cambridge Centre for Alternative Finance, with support from the Securities Commission Malaysia, published a survey containing responses from regulators in more than 110 jurisdictions around the world on their approaches (and challenges) to the regulation of peer-to-peer lending, equity crowdfunding, and initial coin offerings. According to the report, 90 percent of regulators "mentioned benchmarking and lessons learned from other jurisdictions as key triggers prompting changes in regulation more frequently than any other trigger." The survey also found that less than a quarter of respondents formally regulate peer-to-peer lending and initial coin offerings, while less than 40 percent of respondents have frameworks in place to regulate equity crowdfunding. Respondents also noted that new innovations and models are stretching regulatory resources. Regulatory resources dedicated to equity crowdfunding and initial coin offerings since 2017 have grown by over one-third and one-sixth for peer-to-peer lending. The survey also questioned the extent to which "light touch" regulatory frameworks are applied across those three areas. Lastly, the study finds that low-income jurisdictions are catching up to high-income jurisdictions, especially in regard to the regulation of peer-to-peer lenders. Here, low-income areas "are almost three times as likely as high-income ones to review their regulatory frameworks for peer-to-peer lending (43% vs. 16%)." However, as the study further shows, low-income jurisdictions are far less likely to have active regulatory innovation initiatives in place (innovation offices, sandboxes, RegTech/SupTech programs). Plenty of more data and findings in this report—well worth a read.
Stablecoins: The G7 Working Group on Stablecoins published a report, Investigating the Impact of Global Stablecoins. According to the paper, the G7 “believes that no global stablecoin project should begin operation until the legal, regulatory, and oversight challenges and risks… are adequately addressed.” If you’ve been following the back and forth over the Libra initiative, the list of risks and concerns expressed by the G7 in the report (without really mentioning Libra by name) won’t be all that surprising. The report also debunks several claims made by stablecoin advocates. That said, the G7 Working Group welcomes the Financial Stability Board’s plans to assess what key regulatory issues exist around global stablecoins and the upcoming consultative report to the G20 Finance Ministers and central bank governors in early April, with a final report expected in July 2020. Following the publication of this report, the Libra Association published a response to the working group’s analysis. As it relates to financial stability, the Association stated: “The Libra payment system and Libra coin will not be designed to replace the U.S. dollar or any other currency, but to extend the functionality of those currencies by enabling cheap and fast payments. Libra will not diminish the sovereignty of governments to conduct monetary policy.”
Speaking of stablecoins, roughly 20 central banks are working with RTGS.global, a startup founded by Worldpay founder Nick Ogden, which could reportedly make stablecoins redundant. According to GlobalCapital, "RTGS.global aims to link together the existing wholesale payments infrastructure run by central banks within their borders, to settle cross-border payments in real-time, and vastly cut down on the costs and burden of the correspondent banking system."
Separately, Christian Pfister of the Banque de France, published a paper on the "motives, modalities, and possible consequences of central bank digital currency issuance." The paper draws distinctions between a wholesale CBDC and a retail CBDC. "One consequence of issuing a WCBDC could be the development of an intraday market, which could, in turn, lead to the adoption of a real-time monetary policy. Furthermore, the issuance of an RCBDC could put a floor to bank deposit rates and, if it is remunerated, raise them. If the RCBDC were not remunerated, the effective lower bound would be raised to zero and the effectiveness of asset purchases by the central bank could be diminished. If it were, the interest and exchange rate channels should be strengthened. The remuneration of the RCBDC would thus seem to create a trade-off between the effectiveness of monetary policy and the cost of bank intermediation."
SupTech: A recent BIS paper examines “SupTech” initiatives in 39 financial authorities globally. The BIS notes that while there are several interpretations of SupTech, for the purposes of the report, the term is more broadly defined as “the use of innovative technology by financial authorities to support their work.” By innovative technology, the BIS means the application of big data or artificial intelligence tools used by financial authorities. Of the 39 authorities analyzed in the report, roughly half have explicit SupTech strategies or are in the process of developing them (roadmaps or institution-wide data transformation/driven innovation programs). Use cases largely revolve around misconduct analysis, reporting, and data management that are largely still in experimental or development stages at this point. Of note, less than a third of SupTech initiatives discussed in the paper are operational, while roughly three-quarters of SupTech initiatives “were or are being developed internally or jointly with external developers and organizations….” The report briefly discusses the role and value of innovation offices, accelerators, and tech sprints/hackathons as a way to explore and assess SupTech solutions. On the challenges associated with SupTech, the BIS states that the lack of transparency in some SupTech data analytics solutions “is a critical issue,” necessitating the need for human intervention and supervisory expertise before deciding on a course of action. Importantly, the BIS seems to be concerned (pg. 16-17) that the vast majority of the SupTech solutions are being developed from within financial authorities versus engaging with and utilizing external providers. “[S]trategic partnerships with other authorities, academia and research organizations will be important in overcoming the challenges associated with the experimental nature of these initiatives.” For more on RegTech & SupTech, see the Milken Institute’s 2018 report, “RegTech: Opportunities for More Efficient and Effective Regulatory Supervision and Compliance.”
Industry Headlines
Challenger Banks & Digital Banking: Issues with the database of payment processor Galileo caused severe service disruptions for customers of Chime and minor disruptions at several other FinTech firms that are customers of Galileo. According to CNBC, this is the third outage that customers of Chime have experienced since July. As of October 18, the FDIC received more than 200 complaints about the outages.
Santander is in the process of launching a nationwide digital platform to attract online deposits in the US within the next year. According to The Financial Times: "The deposits will be used to lower Santander Consumer’s reliance on more expensive wholesale funding by narrowing the gap between Santander’s $107bn of loans and leases in the US and its $64bn of US deposits." The bank is also setting its sights on the Berlin FinTech market after reportedly leading a $39 million funding round for CrossLend, a marketplace for consumer loans and other debt originated by banks.
Lastly, Standard Chartered selected Thought Machine to power its new digital bank in Hong Kong.
InsurTech: Willis Towers Watson published its Quarterly InsurTech Briefing. According to the press release, funding commitments to the InsurTech sector in 2019 have already surpassed 2018, with $4.36 billion deployed to InsurTech companies across 239 deals through the first three quarters of this year. The briefing also focuses on policy administration and central management systems.
Location Data: Foursquare CEO Jeff Glueck is calling on US lawmakers "to pass legislation to better regulate the wider location data industry amid abuses and misuses of consumers' personal data," according to TechCrunch.
Payments: Revolut, which just announced its launch in Singapore, has also expanded its partnership with Mastercard. According to TechCrunch: "Revolut can now issue cards that work on the Mastercard network in any market where Mastercard is accepted, which represents around 210 countries. It doesn’t mean that Revolut will launch in 210 countries. But the startup says that the first Revolut cards in the US will work on Mastercard." Moreover, "at least 50 percent of all existing and future Revolut cards in Europe will be Mastercard branded."
Speaking of Mastercard, the company further solidified its partnership with Brex to bring additional benefits to Brex's corporate card customers. According to the press release, "Brex Mastercard cardholders will receive segment-specific benefits in addition to the core benefits of the Mastercard World Elite program. World Elite program benefits will include cell-phone insurance, rental car insurance, and ID theft protection, while the Brex rewards program will provide $50,000 worth of partner offers from AWS, Salesforce, Zoom, and many more."
Mastercard has also partnered with American Express, Discover, and Visa to make online checkout simple and secure. According to the press release, the new interoperable checkout "allows consumers to make purchases without having to create or log into an account. The idea behind this is to mirror the one, consistent checkout experience that exists in physical stores – with one terminal and one way to pay irrespective of the retailer. The vision for the future of digital commerce is that the new button will replace the current guest checkout process."
Mastercard also announced that it has joined the ASEAN Financial Innovation Network.
Separately, according to data from eMarketer, Apple Pay has surpassed Starbucks as the most popular mobile payment platform in the US. Apple Pay "will reach 30.3 million users in the United States during 2019. Starbucks, on the other hand, will have 25.2 million users this year, followed by Google Pay at 12.1 million and Samsung Pay at 10.8 million."
PayPal announced that it is launching a Venmo credit card through a partnership with Synchrony Financial. According to CNBC, “[a]lthough Synchrony Financial is the one handling the banking side, customers won’t be logging onto Synchrony’s website. Instead, they pay bills directly on the Venmo app.”
Lastly, CardLinx Association, a multi-industry trade association focused on promoting online-to-offline commerce and card-linking worldwide, announced "new aspirational principles for consumer financial data." Consumer data transparency rights include the right to be provided with clear, understandable statements that inform consumers about financial data collection; the right to be presented with an explicit consent; the right to have a choice over how their financial data and associated data is used, including limits to disclosure; the right to reasonable access to personal data held by the organization providing the program in which the consumer has enrolled; the right to receive a copy of their personal financial data from the company providing the program; the right to correct and delete data; and the right to data security.
Global Developments
Australia: At the China Financial Summit, the Commissioner of the Australian Securities & Investments Commission (ASIC), Cathie Armour, gave prepared remarks on ASIC's view on FinTech. "Certainly, as a regulator we welcome innovation, but the true value and success of innovation will be determined by the extent of market adoption. Innovation and financial technology therefore needs to provide net realisable benefits to participants and users of Australia’s financial markets, and avoid embedding what could become future legacy issues. In so doing, it will bring benefits to the real economy." Armour also stated that the Innovation Hub has worked with 500 entities, 470 of them having received informal assistance. In addition, "[o]ur statistics on the licensing of fintechs also indicate that, on average, Innovation Hub engagement has led to a material reduction in the time taken to get licensed." Armour also commented on ASIC's RegTech and distributed ledger technology initiatives as well as several recent developments including, open banking, Comprehensive Credit Reporting regime, and the restricted bank license offered by the Australian Prudential Regulatory Authority.
Meanwhile, the Senate Select Committee on Financial Technology and Regulatory Technology published an issues paper to act as a guide to those interested in submitting comments to the Committee. The deadline for submissions is December 31, 2019. As stated in the paper, the committee's formal remit is to inquire and report on: a) the size and scope of the opportunity for Australian consumers and business arising from FinTech and RegTech; b) barriers to the uptake of new technologies in the financial sector; c) the progress of Fintech facilitation reform and the benchmarking of comparable global regimes; d) current RegTech practices and the opportunities for the RegTech industry to strengthen compliance but also reduce costs; e) the effectiveness of current initiatives in promoting a positive environment for FinTech and RegTech startups, and f) any related matters.
TrueLayer, a UK-based provider of financial APIs, is expanding operations to Australia, "making it the first European open banking specialist to establish a presence in the APAC region," according to Tech.eu. The company also plans to expand to Hong Kong and Singapore.
Cambodia: Serey Chea of the National Bank of Cambodia was interviewed by CNBC on how the central bank seeks to use blockchain to reduce costs and enhance the speed of payments transactions. The central bank has been “experimenting domestically for retail payments, but what we wanted to see is whether we can make it happen for cross-border transactions." The central bank is currently collaborating with Maybank in Malaysia.
Canada: Earlier this month, Payments Canada published a consultation on the Lynx Policy Framework. As part of the organizations payments modernization program, it is embarking on the development of “a new high-value payments system, Lynx, to replace Canada’s current Large Value Transfer System (LVTS) for wire payments.” The paper “provides an overview of the expected financial risk framework for Lynx and invites comments on the key policies that will underpin Lynx.” Comments on the consultation are due by November 15.
China: Authorities are continuing to reshape the country's peer-to-peer market. Government officials are working with local officials to reportedly convert qualified online lenders into small-loan companies. Those that don't meet the requirements will be forced to exit the industry altogether.
Construction has also started on six national-level pilot zones for innovation and development of the digital economy. According to China.org, the zones aim “to explore various aspects of the digital economy, including new production relations and resource allocation, so as to unleash new growth momentums, according to the plan for the pilot zones.”
India: The country's Supreme Court is looking into whether social media platforms should allow government authorities to decrypt private conversations.
Indonesia: Among other appointments made to President Joko Widodo's cabinet, the co-founder of Gojek, the ride-sharing and payments firm, was named education and culture minister. According to Reuters, Nadiem Makarim "had been given the mandate to 'break down' the system to 'innovate.'"
International orgs: In remarks at an Institute for International Finance event, Pablo Hernandez de Cos, chairman of the Basel Committee on Banking Supervision and governor of the Bank of Spain, discussed the future path of the Basel Committee. As you would expect, a lot of talk on Basel III reforms and risk supervision, more generally. For those unaware (including me), the average share of countries around the world experiencing systemic banking crisis in any given year since 1920 is about 7 percent, with 150 systemic banking crises since 1970. Rather than focusing on short-term objectives, the committee’s work “will be guided by a medium-term perspective and will avoid the temptation of falling into a regulatory cycle.” Regarding cross-sectoral financial stability issues, such as developments related to stablecoins, it will “require effective coordination across a number of authorities, including those with responsibilities for consumer protection, anti-money laundering and data privacy, to name just a few. I will ensure that the Committee effectively coordinates its work with the relevant authorities on cross-cutting issues.” On forward-looking approaches, given the pace of financial innovation and changes to the structure of today’s financial system, regulation and supervision must keep pace. “Put simply: standing still means going backwards.”
Lithuania: The Bank of Lithuania will decide between IBM and Tieto in developing its blockchain platform LBChain, which is based on Hyperledger Fabric and Corda. LBChain acts as the Bank’s regulatory sandbox.
Nigeria: The Acting Director-General of the Securities and Exchange Commission, Mary Uduk, stated that the Commission is drafting a framework to regulate crowdfunding for small businesses.
Sweden: The country's data protection authority issued its first GDPR fine regarding a time-limited test using face recognition technology to identify students attending class. Despite approval from students' parents, the authority "ruled that biometrics is sensitive personal data, and that it was not enough that students' parents had given their consent for the exercise."
Taiwan: KGI Bank, a unit of China Development Financial Holding Corp, "will not share its financial technology (FinTech) experimental business platform with Next Bank," according to Taipei Times, despite holding a seven percent stake in the virtual bank.
UK: The government has pledged £10 million of UK Aid support towards the Catalyst Fund to invest in FinTechs across several emerging market economies, including Kenya, Nigeria, and South Africa.
US: For those of you interested in a cashless future, meet the man who is looking to spoil your dreams. CBS News recently met with William Greenlee, the councilman behind Philadelphia's recent move to force retailers to accept cash.
Wales: The final report as part of the Welsh government's Digital Innovation Review was published in late September. The report is an attempt "to gain a better understanding of the opportunities and challenges presented by rapid advances in digital innovation including automation, AI and robotics." Among the key recommendations: the government should set an ambitious vision for Wales 4.0 in response to the opportunities and challenges posed by the fourth industrial revolution; the establishment of an AI Institute for the Future Economy; establish a new Lab for Work@Wales to bring government, industry, and others together to gain insight on future trends and technologies; and introduce a Future Economy Commission. "Our recommendations reflect the scale of the challenge ahead. We estimate that delivering the step-change requirement will involve an initial £100m of public investment to be made available. We believe that with this level of investment, the Welsh Government can proactively help to improve Wales’ economic prospects and the quality of working life."
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