In this issue:
Yours truly was out in Bandon, Oregon, for the Thanksgiving holiday to surprise the parents. While the surprise worked, what was also surprising was just how large the state of Oregon is, how terrible I am at geography, and how far removed Bandon is from literally anything (airports, highways, etc.).
My parents have this unique ability to move west, and keep moving west, the more kids my wife and I have. We are expecting our third child in May (a boy), which means my folks have packed up the wagon and proceeded on the Oregon Trail.
When I flew into Portland, I had this expectation that Bandon would only be, at most, an hour’s ride away. Little did I know, traveling by car to Bandon is roughly the equivalent amount of time that it takes to fly from Washington, DC to Portland, OR.
Those familiar with the state of Oregon might say to yourself, “Why did he not fly into Eugene, OR?” Great question, which leads me to the second part of my story...
In the midst of the busiest travel season ever, I decided to call the airline and have them rebook me flying out of Eugene. Yea, it was an expensive change, but I’m not driving all the way back to Portland.
Here’s the thing, though. The rental car company that I used to drive what seemed like halfway across the US to get to Bandon, OR, only has ONE location in Oregon. Where? You guessed it, Portland. Did I check on this prior to rebooking my flight out of Eugene? Of course not.
So, here I am with a flight out of Eugene, OR, but I have to return the rental car to Portland, OR. Long story short, I re-re-booked myself back onto the original flight out of Portland at 6 a.m., and Betty, from the airline call center, saved me from having to spend a fortune.
Driving back up to Portland, OR at 11pm to make my 6am flight (don’t ask me why I like to book travel at insane times!), I then realize that I’m running out of gas to the point where the car isn’t telling me how many miles I have remaining before it completely shuts down.
Here’s another fact about Oregon that would have been helpful prior to embarking on the return journey: gas stations are full service—meaning I am not allowed to pump my own gas. Because of this, most gas stations, especially stations located in rural Oregon, close at 10 p.m. I must have stopped at 15 stations, not one was open. Thankfully, as soon as I reached the interstate (two hours into the drive!) I practically pushed the car into what I considered to be the only open gas station in the entire state, got on my hands and knees and kissed the oily pavement, filled up, and proceeded to complete the trip.
In short, Bandon, Oregon, is a beautiful place, and you should all visit.
Back to FinTech...
Bank Charter: Robinhood pulled its bank charter application from the US Office of the Comptroller of the Currency. While the company said the withdrawal was voluntary, I would imagine the PR disaster over its checking and savings announcement in late 2018, and recent news about a glitch within the Robinhood app that allowed users to make highly leveraged trades without the funds to back the transactions likely weighed on their decision.
Big Tech: In a blog post, Facebook launched a data portability tool "that will enable Facebook users to transfer their Facebook photos and videos directly to other services, starting with Google Photos." The tool will be available worldwide in 2020. The announcement comes after a series of meetings with policymakers and other stakeholders. Facebook also called on other companies to join the Data Transfer Project.
But how much will Facebook open up? Around the same time Facebook launched the tool, the company's head of global affairs, Nick Clegg, was also issuing warnings to European Union regulators about the possibility of forcing Facebook and other large technology companies to open up data to rivals, arguing that such a move would carry significant privacy and liability risks.
Meanwhile, Europe's competition authority launched preliminary investigations into Google and Facebook's data practices in an effort to understand how data is collected, processed, used, and monetized.
Blockchain, Blockchain, Blockchain: HSBC is seeking to shift roughly $20 billion worth of assets to its blockchain-based custody platform, Digital Vault. According to Reuters, the platform "will digitize paper-based records of private placements, using blockchain to reduce the time it takes investors to make checks or queries on holdings."
A new blockchain consortium formed by NatWest, leading property software providers, and Coadjute—a network for decentralized workflow and data sharing within the property industry. According to an article in Forbes, the project "will ultimately aim to provide NatWest customers with complete transparency over the entire home buying process via a companion app."
Speaking of consortiums, the Marco Polo trade finance consortium, which runs on R3 Corda, gained one more member with BNY Mellon joining the network.
Challenger Banks & Digital Banking: Monzo has tapped former Visa executive, TS Anil, to lead its US business.
Meanwhile, RBS has launched Bó—a digital banking app aimed at helping people manage their everyday spending. The launch comes after two years-worth of preparation.
Data Privacy (US): A new study from Pew Research Center finds a majority of Americans are concerned, confused, and feel a lack of control over their personal information.
In fact, seven-out-of-ten Americans feel that their personal data is less secure today than it was five years ago, and more than 80 percent of Americans feel that they have little or no control over the data that the government or companies collect about them. "Roughly six-in-ten Americans (63%) say they have very little or no understanding of the laws and regulations that are currently in place to protect their privacy. Only 3% of adults say they understand these laws a great deal, and 33% say they have some understanding."
There are some really good numbers in this report, and the report further breaks down responses by age group and race.
Expansion: US-based FinTech company Plaid continues to expand overseas. Beyond the UK, the company will launch in Ireland, France, and Spain. According to CNBC, the company "said it would support integrations with Irish banks AIB, Ulster Bank and Bank of Ireland, Spain lenders BBVA, Caixa and Santander, and French banks BNP Paribas, Societe Generale and La Banque Postale."
FinTech Bridges: I've always wondered to what extent these "bridges" are truly helpful, if they're even being utilized, or utilized effectively. According to Australian Senator Jane Hume, assistant minister for superannuation, financial services, and financial technology, the UK-Australia FinTech Bridge "is probably under-utilised, particularly at the moment in the Australia-to-the-UK side of things." According to The Sydney Morning Herald, Senator Hume "said the UK agreement was an exciting project but had only taken its ‘first steps’ towards fostering cross-border trade so far."
InsurTech: Aon PLC, an insurance brokerage firm, has agreed to acquire InsurTech startup CoverWallet. Terms of the deal were not disclosed, according to The Wall Street Journal. Separately, Hippo Insurance acquired San Francisco-based home maintenance software company, Sheltr. Meanwhile, Vouch Insurance raised $45 million in a Series B round led by Y Combinator Continuity. The company anticipates providing coverage to startups nationwide by the end of next year.
We previously covered CoverWallet, Hippo Insurance, and Vouch Insurance among 100 other InsurTech firms, in a prior Milken Institute report,” InsurTech Rising: A Profile of the InsurTech Landscape.”
Lending: With the real likelihood of the UK Financial Conduct Authority stripping Zopa of its banking license for failing to meet regulatory capital requirements, the company received a £130 million capital injection from US private investment firm IAG Capital. The investment firm now owns a majority stake in the FinTech company.
Open Banking—Consent Frameworks: Equifax teamed up with the Open Data Institute to launch a report covering the international consent framework for Open Banking. Pages 8-9 of the report identify the consent frameworks applicable in several countries.
The report further states that under most consent rules, “…data is consented to be shared for specific purposes that are explicitly stated, using shared data for any purpose not stated is breaking the agreed rules. Japan’s data protection law restricts the use of data in this way, as does Canada’s privacy laws. Canada includes restricting banks from even sharing financial data with their subsidiary companies, such as an insurance company. Mexico’s FinTech Law similarly allows only for data to be used for the authorised purpose of the customer, as does Brazil. Australia takes a different approach and imbues the need to state the purpose as part of the accreditation process to become a trusted TPP. This is then verified with unambiguous disclosure of how the data will be used again at the consent stage. Across India, Hong Kong, Malaysia, Nigeria, New Zealand and the US, specific rules for Open Banking have not been created, instead, general legislative frameworks for individual countries apply.”
In regards to consent duration—the length of time for which that consent is valid and in which the third party can use the data—the report finds that “only the UK, EU, Australia and New Zealand have defined consent durations for their Open Banking initiatives. The UK and EU follow the 90 day guidelines set under PSD2, while Australia and New Zealand have decided to set a 12 month consent period.”
Payroll Industry: For those who have a few minutes during lunch, there’s a really interesting article in The New York Times about the shutdown of MyPayrollHR and how that has caused misery for thousands of companies and nearly 250,000 workers.
Asia: The Emerging Payments Association Asia (EPAA) signed an MoU with the ASEAN Financial Innovation Network (AFIN) to promote the benefits of the APIX platform. EPAA is currently embarking on a project covering open banking in Asia—a 51 country review of API adoption, regulatory guidelines related to open banking, and FinTech innovation more generally. The research, which will be a topic of discussion at the Asia-Pacific Financial Forum, will include open banking best practice recommendations.
Speaking of AFIN, in early November, the network announced the formation of its Strategic Advisory Council. The council includes BNY Mellon, Amazon Web Services, AMTD Foundation, Mastercard, the Singapore FinTech Association, and Brankas.
Australia: The Reserve Bank of Australia released an Issues Paper covering retail payments regulation. The issues paper "is the first stage in the review process," according to the Reserve Bank of Australia. "While some of the issues identified are directly relevant to the Bank’s card payments regulation, the review is intended to be broader-ranging and to consider whether there are any gaps in the payments system that should be addressed, as well as whether there are any regulatory issues arising outside of the narrower topic of card payments." The deadline for submissions is January 31, 2020.
Bahrain: Bank ABC announced the launch of its mobile-only bank, ila Bank, in late November.
Meanwhile, Bahrain FinTech Bay announced its new board chairman, Khalid Humaidan. Mr. Humaidan was recently appointed as CEO of the Bahrain Economic Development Board.
China: The central bank announced a pilot "to explore regulatory tools that are in line with China's national conditions and international standards to guide licensed financial institutions to applicate information technology on the preconditions of compliance with the law and consumer interests," according to Xinhuanet. Beijing will be the epicenter for where the experimentation and testing will take place.
Meanwhile, mobile payments in the country grew more than 60 percent in the third quarter, according to the central bank. In the third quarter alone, banks processed nearly 60 billion electronic payments worth $87.2 trillion. Of those payments, nearly half were facilitated via mobile phones.
A state-backed blockchain alliance has formed called the Blockchain Services Network Alliance. According to Yahoo! Finance, the alliance "will look to develop and implement a national blockchain service infrastructure which spans across public networks, regions, and institutions." Also, the network "has been planned by top-level employees at the [National Information Centre] and is being independently developed by China UnionPay and China Mobile." Members include Huobi China, China Telecom, China Merchants Banks International, and Weizhong Bank.
Colombia: The country's stock exchange announced the launch of a crowdfunding platform aimed at supporting small businesses and startups to raise money. According to Reuters, the platform, a2censo, "…will allow people to make investments from 200,000 pesos, about $58, in exchange for company bonds which will offer returns with interest, the exchange said in a statement.
European Union: Benoît Cœuré, a member of the executive board of the European Central Bank (ECB), detailed steps to improve Europe's retail payments market, while raising concerns about reliance on non-European global players to facilitate payments in the Single Market.
"The only effective response to these risks is for European stakeholders to step up their collaboration and act together to provide payment solutions that both reflect the demands of consumers and strengthen the Single Market. With this in mind, earlier this month, the ECB’s Governing Council decided to relaunch its retail payments strategy. The aim of our strategy is to inter alia actively foster pan-European market initiatives for retail payments at the location of the purchase or interaction – so-called point-of-interaction, or POI, payments."
Cœuré also applauded European bank efforts to create a pan-European retail payment solution:
"The Eurosystem therefore welcomes the strategic initiative of a number of major European banks to create a true pan-European retail payment solution that has the potential to meet the vision of our strategy. The proposed solution would be based on the [Single Euro Payments Area] credit transfer instant (SCT Inst) scheme, which is in our view the correct approach as it is future-oriented. And it could capitalise from day one on existing powerful and sophisticated infrastructures, such as the Eurosystem’s [TARGET Instant Payment Settlement]."
Ghana: The country is reportedly considering digital currency in response to the growth of electronic payments. In a speech by Ernest Addison, the governor of Ghana's central bank, he touched on the central bank's efforts to harness the potential and support the growth of digital financial services. Addison touches on four key areas in his remarks that the banking industry must pursue:
Seek partnerships with one or more non-traditional providers, aggregate multiple products under one payment platform or leverage the potential power of open banking through the use of Application Programming Interface (API);
Prepare consumers for digital finance to sustain the digitization process;
Greater responsibility in the education of consumers to understand the essence of financial protection is also crucial for industry players;
Retool legacy systems and enhance employee skills sets to use new technologies such as artificial intelligence, machine learning and other technologies underpinned by data and advanced analytics to offer better services, increase long-term value and strengthen the ability to adapt and respond to the digital age;
Reassess current fees and charges and promote greater transparency in consumer dealings.
Addison ended his remarks by stating that the bank "is also in discussion with key stakeholders to explore a pilot project (in a sandbox environment) on central bank digital currency with the possibility of issuing an e-cedi in the near future."
India: In a letter from the Ministry of Electronics and Information concerning the use of blockchain technology, Minister Shri Sanjay Dhotre stated that given blockchain technology's potential and the need for shared infrastructure for different use cases "an approach paper on National Level Blockchain Framework is being prepared, for scaling up and wider deployment of Blockchain based use cases."
In a separate written letter to India's Parliament, Ravi Shankar Prasad, the country's communication minister, said a task force has been created to explore the feasibility of converting India Post Payments Bank into a small finance bank.
Korea: The central bank is taking a "wait-and-see" approach to issuing a central bank digital currency. According to one official, as reported in The Korea Times, since Libra has yet to launch, “…we need to keep close communication with our counterparts from other countries on how to handle the issue. But we are not in a stance that the central bank should hurriedly issue a similar public digital currency like some countries."
Morocco: The country's central bank governor, Abdellatif Jouahri, gave prepared remarks at the Africa Blockchain Summit 2020. Jouahri stated that the blockchain, and more broadly distributed ledger technology, "…is by far the most disruptive technology of this decade,” before commenting on how Morocco is approaching FinTech. The national strategy, drafted by the Ministry of Economy and Finance and the central bank, rests on two FinTech-related pillars: "(1) developing alternative and lower-costs models to reach the most excluded populations in accordance with their specificities, and (2) creating conditions for greater use of financial products by accelerating dematerialization of payments, particularly between the State and the users, to entrench financial inclusion in households’ behaviour, and by improving financial education.” In particular, Jouahri was quick to point out the work done together with the National Telecommunications Regulatory Agency and other stakeholders in launching an interoperable and real-time national mobile payment solution.
Saudi Arabia: ByanPay, a digital payments company owned by Finablr, and that is part of the Saudi Arabian Monetary Authority’s digital sandbox, received approval to operate its mobile money platform in the Kingdom.
Speaking of Finablr, the company also completed the first phase of its partnership with Alipay on cross-border remittances.
Singapore: According to one report, roughly three dozen firms are in talks to form consortiums as part of the process to obtain a virtual bank license in the country.
South Africa: First National Bank (FNB) is terminating its banking services to virtual currency exchanges and intermediaries trading virtual currency by the end of March 2020, due to high risks associated with them. According to Xinhuanet, FNB "said they might change their policy in the future when there is a regulatory framework."
Sweden: The governor of the country's central bank, Stefan Ingves, recently announced a six-step plan on how the bank would implement its own digital currency and how it would operate.
Turkey: The government has paved the way towards open banking and PSD2 compliance after the passage of legislation.
UK: According to Pay UK, the leading UK retail payments authority, UK SME late payment debt is rising—up £10.4 billion year-over-year. The research also shows that UK SMEs are now facing a total bill of £4.4 billion a year, just to collect money they are owed, with around a quarter (22 per cent) of those waiting on funds spending more than £500 a month chasing payments." Nearly 80 percent of SMEs are waiting at least a month beyond agreed payment terms to receive payment, with nearly half of SMEs waiting at least two months before receiving payment.
The value of gross marketplace lending conducted by peer-to-peer and crowdfunding platforms in the country hit new highs in the first half of 2019, according to Link Group's Marketplace Lending Index. However, "rising loss rates on loans has driven down net returns. Losses currently reduce the net return by 3.4 percentage points – the highest level on our record. This compares to a year ago, when losses reduced returns by 2.1 percentage points." The index also shows "…that the net return on a typical loan now stands at 3.8%, the lowest on record. This has fallen from 5.5% in the second quarter of 2017, and is now a distance from its most recent peak of 6.3% in 2016."
US: Five federal financial regulatory authorities (Board of Governors of the Federal Reserve System, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, National Credit Union Administration, and Office of the Comptroller of the Currency) published an interagency statement on the use of alternative data in credit underwriting. In particular, the statement seems pretty bullish on the use of cash flow data for underwriting purposes. “Cash flow data are specific to the borrower and generally derived from reliable sources, such as bank account records, which may help ensure the data’s accuracy. Consumers can expressly permission access to their cash flow data, which enhances transparency and consumers’ control over the data. Additionally, creditors’ use of cash flow data can generally be explained and disclosed to the borrower, as may be required under the Equal Credit Opportunity Act and the Fair Credit Reporting Act.... [U]sing alternative data, such as cash flow data, that are directly related to consumers’ finances and how consumers manage their financial commitments may present lower risks than other data."
For those interested in the use of cash flow data in credit underwriting, I would point you to FinRegLab’s excellent research on this topic. The Milken Institute is proud to have supported FinRegLab’s recent report titled, “The Use of Cash-Flow Data in Underwriting Credit: Small Business Spotlight.”
The Financial Stability Oversight Council recently published its annual report. The report touches on cloud service providers, among other issues. “While cloud providers may offer superior cost or technological solutions, there have also been recent instances of unauthorized access to client data at cloud providers. The reliance of many institutions on a single vendor to provide a critical service creates concentration risk.” As it relates to distributed ledger technology and digital assets, the Council “recommends that federal and state regulators continue to examine risks to the financial system posed by new and emerging uses of digital assets and distributed ledger technologies.” (See "New Financial Products and Services" on pages 96-97; and “Financial Innovation” on pages 14-15, and page 122)
Former Chairman of the Commodity Futures Trading Commission (CFTC), Chris Giancarlo, was interviewed by representatives from the Institute for International Finance on the “digital dollar” proposal that he and former CFTC Chief Innovation Officer, Daniel Gorfine, discussed in a recent op-ed in The Wall Street Journal. Giancarlo recently joined the Willkie Farr & Gallagher law firm as senior counsel, where he will focus on the creation of a blockchain-based digital dollar, among other issues.
At the state level, the New York State Department of Financial Services (NYDFS) granted virtual currency and money transmitter licenses to SoFi Digital Assets. According to the press release, the two licenses, "The two licenses will allow SoFi Digital Assets to offer its New York Customers the ability to buy and sell virtual currency. The company is authorized to support the virtual currencies Bitcoin, Bitcoin Cash, Ether, Ether Classic, LiteCoin, and Stellar Lumens." Since 2015, the NYDFS has granted 24 virtual currency licenses or trust charters.
In the state of Nevada, discussions surrounding whether payday lenders should be allowed to participate in a new "Regulatory Experimentation Program for Product Innovation," modeled after Arizona's regulatory sandbox, are taking place. The Legal Aid Center of Southern Nevada, which has expressed opposition to payday lenders taking advantage of Nevada's sandbox effort, has urged the Department of Business and Industry to craft regulations to implement SB161 that would prohibit payday lenders from participating. SB161 was signed into law in June 2019.