Christmas came early for FinTech wonks in the US and abroad. For those of you worried about not having enough reading material to make it through the holidays, FEAR NOT! FinClaus (already) came to town!
In this edition, we’ll unwrap a “few” FinTech-related reports released over the last week or two. But first, let me present you all with a gift that keeps on giving: US FinTech Policy Update (November 2019).
Through November 30, lawmakers in the 116th Congress have introduced 101 FinTech-related bills, and more than half (55 percent) carry bipartisan support. We are also tracking 180 bills indirectly related to FinTech, of which 58 percent are bipartisan.
The update also covers several FinTech-related hearings held in November and early December. A LOT of topics were discussed, and I would expect these issues will be raised again in the New Year.
In mid-January, I’ll provide another update covering the month of December. The policy update will be accompanied by a short document containing legislative recommendations for lawmakers as the 116th Congress enters its final year.
Weren’t interested in this specific gift? Feel free to re-gift to your significant other, your kids, or that annoying uncle. Whomever you choose, it’s a great stocking stuffer that weighs enough to bring down the entire mantel.
We’ll be back with a new FinTech in Focus in mid-January.
Happy Holidays to all!
On to (more) Fintech…
Data Access—The Tug of War Continues: PNC Bank became the latest incumbent financial institution to restrict access from third parties to customers' accounts. According to The Wall Street Journal, when PNC upgraded its security systems "it prevented Plaid from accessing customers' account and routing numbers," which then led to PNC customers being unable to connect their accounts with Venmo. In response, PNC Bank told customers to explore alternative options, such as Zelle, to move money. Additionally, PNC executives also said that customers "…can continue to use Venmo by manually entering their account information to bypass Plaid - a step that usually takes one to two days," according to the WSJ. Of PNC's 6.5 million online banking customers, roughly 14 percent use apps supported by Plaid.
Holiday Reading: Thought you’d be able to find time to dive into your favorite book over the holidays? Not anymore. Here’s a list of FinTech-related reports that you can add to your “going to read” pile that only grows larger:
Bank for International Settlements:” The Design of Digital Financial Infrastructure: Lessons from India.” The report explores India’s unique approach to developing digital financial infrastructure and the various challenges that government officials have faced and will continue to face utilizing this infrastructure.
Board of Governors of the Federal Reserve System: “Consumer Compliance Bulletin: Highlights of Current Issues in Federal Reserve Board Consumer Compliance Supervision.” The bulletin discusses the Federal Reserve supervisory observations regarding FinTech. “This resource is intended to enhance the understanding of common fact patterns and emerging risks so that institutions can manage FinTech risk appropriately and efficiently.”
Consultative Group to Assist the Poor: “Fair Play: Ensuring Competition in Digital Financial Services.” In the paper, CGAP demonstrates "how regulation can have a substantial impact on competitive dynamics in the [digital financial services] marketplace." Further, the paper proposes several regulatory levers that policymakers can use to promote competition.
European Central Bank: “Exploring Anonymity in Central Bank Digital Currencies.” According to the report, the proof of concept for a central bank digital currency (CBDC), as developed by the European System of Central Banks EUROchain research network, “demonstrates that it is possible to construct a simplified CBDC payment system that allows users some degree of privacy for lower-value transactions, while still ensuring that higher-value transactions are subject to mandatory AML/CFT checks.”
European Commission: “ROFIEG Final Report: 30 Recommendations on Regulation, Innovation and Finance.” The Expert Group on Regulatory Obstacles to Financial Innovation (ROFIEG) recently published a final report on regulatory obstacles to financial innovation. The report covers “all segments of the financial sector, all types of novel technologies, a wide range of business cases currently observed and all types of market players.” The ROFIEG “opted for this all-encompassing approach in order to avoid that sectoral action (i.e. Recommendations for specific market segments, etc.) would risk additional regulatory fragmentation, given the potential applications of technologies within (and outside) the financial sector.”
Financial Stability Board (FSB): “BigTech in Finance: Market Developments and Potential Financial Stability Implications.” The report covers the financial stability implications of BigTech firms as they expand further into the financial services ecosystem, including both the pros and cons of BigTech in the sector. While the activities of BigTech firms in financial services may already be subject to regulation in most jurisdictions, the FSB questions whether additional oversight or regulation is warranted. The FSB highlights three particular areas worthy of further consideration by policymakers: 1) the scope for BigTech firms to provide financial services from outside the traditional financial sector; 2) the diverse business lines of BigTech firms, coupled with complex and varied interlinkages with traditional financial services firms, calls for vigilant monitoring; and 3) BigTech's ability to leverage customer data may raise the question of how financial authorities should approach data rights. (The FSB also announced its work program for 2020.)
Retail Payments Global Consulting: “Payments Insecurity: How Visa and Mastercard Use Standard-Setting to Restrict Competition and Thwart Payment Innovation.” The Secure Payments Partnership—whose founding members consist of the National Retail Federation, the National Association of Convenience Stores, and the Food Marketing Institute, connected with the Retail Payments Global Consulting Group "to study and determine whether the U.S. payments industry is best-served by EMVco as the standards-setting organization for consumer payments." The report finds that the "setting of payments standards for topics such as authentication and tokenization should be migrated away from EMVCo to independent and neutral national or international standards-setting bodies." Further, "EMVCo’s ownership by the credit card companies has put profits ahead of security, driven up costs for businesses and consumers alike, and has left the United States with a fraud-prone payments card system even as fraud has been reduced in the rest of the world."
Lending: A senior tranche of newly securitized loans originated through UK-based peer-to-peer platform Zopa was given a AAA rating, the first ever for peer-to-peer loans globally. "It is the third securitisation of loans originated through the Zopa platform, and reflects the market’s confidence in Zopa’s ability to originate high quality loans, its approach to underwriting, and credit risk management," according to the press release.
Payments: Sweden-based FinTech company Klarna is expanding to more markets in 2020, with Australia first on its list. The company, according to CEO Sebastian Siemiatkowski, as reported by Reuters, is signing on a new merchant every eight minutes of the day, with 60,000 merchants coming on board since the beginning of 2019.
Citi and PayPal recently extended their partnership to institutional payments. In a press release, the partnership will "enable Citi's institutional clients to make payments into customers' PayPal digital wallets" via Citi's WorldLink cross-border payments platform. "Starting in the first quarter of 2020, Citi clients will be able to make payments into PayPal wallets globally in more than 200 markets."
In a letter to the Federal Reserve Board, Google urged officials to follow India's lead as the Fed moves forward with designing the FedNow system. Specifically, the letter highlights lessons learned from India's Unified Payments Interface scheme that could be useful to the Fed in designing its own real-time payments system.
Virtual Banking: ZA Bank Ltd., a wholly-owned unit of ZhongAn Technologies International Group, began a pilot for Hong Kong's first virtual bank targeting 2,000 retail users, prior to an official launch.
Meanwhile, UK-based digital banks Monzo and Starling have changed their overdraft policies. Both banks have changed from a fixed fee to a personalized interest rate based on a customers' credit score.
According to a blog post by Monzo, the changes are in response to new rules issued by the UK Financial Conduct Authority designed to fix the overdraft market. "We still won’t charge you a higher price for going into an unarranged overdraft, or fees for any bounced payments. We’ll keep sending you notifications when you’re about to go into your overdraft too, so you’re always in control,” according to the post.
Lastly, Australia-based neobank Volt Bank released information about its upcoming savings account product, which is expected to be rolled out to 40,000 Australians when Volt Bank goes live in February. Interested customers will receive a no-strings-attached interest rate of 2.15 percent, one of the highest rates offered in the country.
Australia: A new report by the RegTech Association finds that Australia's leadership in RegTech is at risk due to lack of capital investment. Roughly 70 percent of RegTech firms are bootstrapped by their founders, directors, or employees. In addition, nearly 60 percent of the Association's RegTech member firms rated lengthy procurement cycles as the greatest adoption challenge. "On average, it takes RegTech firms 13 months to move projects from initial conversations to full deployment, across all regulated industry customers. FS is closer to fourteen months. Many solutions requiring deep integration actually take closer to two years."
The Australian Bureau of Statistics (ABS) will weigh in on safe data access. "The ABS hopes to contribute by sharing our knowledge and experience in the form of a research paper, which we aim to release in early 2020." The paper will include considerations and challenges in enabling access to public sector data, an outline of ABS definitions of privacy, confidentiality, and data utility, a comparison between the ABS approach and other approaches taken, among other inclusions to the paper.
Bahamas: The Securities Commission launched its FinTech Hub, SCB FITLink. Beyond serving as a central point of contact between the public and the commission on issues related to FinTech, the SCB FITLink will also promote investor education, conduct research, and consult with domestic and overseas regulatory authorities regarding innovative technologies, among other efforts. The SCB FITLink “will be led by Christian Adderley, Manager of Policy and Research within the Commission’s Office of The Executive Director.”
Bermuda: Alexander White will become the country’s first privacy commissioner and is expected to start in late January.
Canada: In prepared remarks on the Office of the Privacy Commissioner's 2018-2019 annual report to Parliament, Commissioner Daniel Therrien stated: "We have a crisis of trust" regarding individual privacy protections. New privacy laws "should recognize privacy in its proper breadth and scope, not as a set of process rules like consent, access and transparency, but as a human right." Further, "a reformed private-sector privacy law must put an end to self-regulation...The law should no longer be drafted as an industry code of suggested best practices, but rather as a set of enforceable rights and obligations." Additionally, greater enforcement mechanisms are needed, and the law "should allow privacy-invasive activities and programs only where federal institutions can demonstrate they are necessary, and where the intrusion is proportional to the benefit to be gained."
China: In his first public appearance as chairman of the China Banking Regulatory Commission, Guo Shuqing vowed to crack down on financial irregularities and curb risks to China's financial system.
Meanwhile, Alibaba Group and Ant Financial Services Group have entered into a strategic partnership with the Industrial and Commercial Bank of China to deeper cooperation in FinTech and other financial services-related issues.
EU: A not-so-confidential European Central Bank document, as seen by Reuters, states that the ECB may need to speed up plans regarding the creation of an ECB-backed digital currency if the use of cash declines considerably. ECB President Christine Lagarde recently confirmed that the central bank will accelerate the exploration of central bank digital currencies, with a paper expected to be published next year.
Meanwhile, the Council of the European Union and the European Parliament "reached a political agreement on a new framework which makes it easier for crowdfunding platforms to provide their services across the EU." According to the press release, the new rules "will cover crowdfunding campaigns of up to EUR 5 million over a 12 month period. Larger operations will be regulated by MiFID and the prospectus regulation. Reward- and donation-based crowdfunding fall outside the scope of the proposal."
Finland: The University of Helsinki, in partnership with Reaktor, a Finland-based tech consultancy, will provide European citizens with free access to an online course in artificial intelligence called Elements of AI. The initiative by the Finnish Presidency of the EU will attempt to educate 1 percent of Europe's population on the basics of AI by 2021.
France: The country's central bank will undergo a reorganization in light of ongoing innovations in the payments space. According to Governor François Villeroy de Galhau: "The current Direction de la surveillance des paiements et des infrastructures de marché (DSPM – Payments and Market Infrastructures Oversight Directorate) will become the Direction des infrastructures, de l’innovation et des paiements (DIIP – Infrastructure, Innovation and Payments Directorate), and its scope will be extended to cover all payment innovations, infrastructures and central bank digital currency." The central bank is keen on running several experiments and will issue a call for projects in the first quarter of next year. In particular, the central bank is interested in taking part “in experiments to integrate a “wholesale” CBDC into innovative procedures for exchanging and settling tokenised financial assets."\
Hong Kong: The Hong Kong Monetary Authority and the Bank of Thailand are rolling out a new wholesale cross-border payments system leveraging distributed ledger technology. According to the South China Morning Post, "The first tier of the prototype, known as Project LionRock-Inthanon, involves the issuance of a token to Hong Kong banks taking part in the pilot programme, according to a spokesman of the Hong Kong Monetary Authority.The second tier involves the banks distributing the tokens to their corporate customers for settling wholesale payments with other banks, or with other companies." More details on the proof-of-concept will be announced early next year.
India: The Insurance Regulatory and Development Authority has reportedly received nearly 170 applications to its regulatory sandbox, the majority of which are focused on the non-life segment.
According to a statement from the Governor of the Reserve Bank of India, Shaktikanta Das, following the Monetary Policy Committee's meetings in early December, not only did the RBI increase aggregate limits for both borrowers and lenders across all peer-to-peer platforms, the Bank also introduced licensing guidelines for Small Finance Banks and announced a new type of Prepaid Payment Instrument with a higher cap to further promote digital payments.
Japan: Officials will reportedly tighten regulations around BigTech firms. According to Economy Minister Yasutoshi Nishimura, as reported by Reuters, “We want to put the new law into effect in the way that would make business transactions become transparent without imposing excessive burdens or hampering innovation.”
Korea: The Financial Services Commission granted Toss Bank a preliminary license to operate as an internet-only bank. Two other applicants were not approved, with one having withdrawn, while another applicant, Soso Smart Bank, failed to show "a sufficient level of preparation in terms of its financing and business plans."
Meanwhile, SFC Chairman Eun Sung-soo stated that the financial regulator will make further efforts in 2020 to lower regulatory barriers to encourage startup formation and competition in the financial services sector. The remarks come two weeks after the SFC announced measures (see: “Measures to Promote FinTech Scale-Ups) to promote FinTech startups across eight different policy areas. They are: improving the current regulatory sandbox system; regulatory reforms to facilitate FinTech development; lowering entry barriers to the financial industry; establishing regulatory foundations for the digital era; developing new growth engines for financial innovation; promoting a vibrant venture capital ecosystem; assisting FinTechs with overseas business opportunities; and expanding public sector support for FinTech firms. Included in these efforts is updating the Electronic Financial Transactions Act, which was enacted in 2006, expanding the scope of FinTech businesses that financial companies can invest in, and encouraging/requiring banks and other financial institutions to create and operate a $26 million Fintech Innovation Fund.
Pakistan: The Securities & Exchange Commission introduced a regulatory sandbox to promote competition in the financial services industry. According to the guidelines, the sandbox is primarily applicable for new products, services, or business models, or in cases where ambiguity exists under current law. The sandbox "shall be operated in accordance with the cohort approach," and a call for applications will be made "when deemed appropriate by the Commission." Applicants will have to pay a fee, along with certified documents and an explanation of the business model, among other requirements. An initial screening of each applicant will focus on the "genuineness of innovation," financial inclusion, consumer benefit, readiness for testing, and plans to exit the sandbox. Approved applicants will be allowed to operate in the sandbox for six months, with the ability to request an extension if the participant "encounters an unexpected technical or business difficulty beyond their control."
Sweden: Riksbank, the central bank of Sweden, has partnered with Accenture to help facilitate the e-krona pilot project. According to their statement, during the first year of the pilot project “a technical platform will be developed with a user interface that enables, for instance, payments with the e-krona from a mobile phone, a card and a watch. The platform will also contain simulations of payment service providers, retail outlets and other parts of the Swedish payment system. The assignment will run to 31 December 2020, with a possibility for extension so that the total maximum period of agreement will be seven years.”
Switzerland: The Swiss Federal Council (SFC) published a report on central bank digital currency. As stated by the SFC, a “universally accessible central bank digital currency would not bring any additional benefits at the moment. The Swiss National Bank shares this view and sees the newly arising risks to monetary policy and financial stability, in particular, as a major challenge. As things currently stand, the further development of central bank digital currency that is restricted to financial market players would appear to be a more promising strategy."
UK: The Financial Conduct Authority (FCA) issued a call for input on Open Finance. Comments are due by March 17, 2020, and the FCA is expected to publish a feedback statement covering the responses by next summer. The call for input “will launch a discussion on the opportunities and risks arising from open finance, what is needed to ensure it develops in the best interests of consumers, and what role the FCA should play.”
US: At the federal level, the US Attorney General William Barr stated that the Department of Justice investigations into Facebook, Apple, Google, and Amazon, will likely conclude next year. Barr recently delivered prepared remarks on Section 230 of the Communications Decency Act at the National Association of Attorneys General 2019 Capital Forum. According to Barr: “The purpose of Section 230 was to protect the ‘good Samaritan’ interactive computer service that takes affirmative steps to police its own platform for unlawful or harmful content. Granting broad immunity to platforms that take no efforts to mitigate unlawful behavior or, worse, that purposefully blind themselves — and law enforcers — to illegal conduct occurring on, or facilitated by, the online spaces they create, is not consistent with that purpose.”
House Financial Services Chairwoman Maxine Waters (D-CA) was interviewed in a FinTechBeat Podcast by Georgetown Law Professor Chris Brummer about the Committee’s work on FinTech, among other policy issues. Waters briefly discussed the creation of AI and FinTech Task Forces, diversity, the Community Reinvestment Act (CRA), and impeachment proceedings. According to Waters:
“It has become very apparent to me that we cannot just understand and focus on all of the issues that we’ve traditionally dealt with. New things are happening in our economy and in our society. New ways of doing business. New thoughts and new talent have emerged…We have to have open minds and we have to be willing to do the kind of research and the investigation that’s necessary to deal with all of these new, big, and important issues.”
On CRA in particular, Congresswoman Waters stated that, while lawmakers agree that CRA is in need of an upgrade, “[w]hat I don’t agree with is that anyone would try to make changes that would disadvantage the very people that CRA is supposed to be supporting.”
At the regulatory level, Lael Brainard, a member of the Board of Governors of the Federal Reserve System, provided remarks on digital developments in the world of monetary policy and central banking. In particular, Brainard dove deep into the creation and use of stablecoins by private sector entities, and the risks that they pose to consumers and broader financial stability and monetary policy. According to Brainard:
“In the United States, the regulatory framework for cryptocurrencies is not straightforward. Our current framework is based largely on whether a cryptocurrency is deemed to be a security or has associated derivative financial products and whether the participating institutions have a supervisory agency overseeing their activities. Unlike many other jurisdictions, regulators do not have plenary authority over retail payments in the United States. Moreover, the regulatory challenges are likely to be inherently cross-border in nature. Because stablecoins and other cryptocurrencies are unlikely to be bound by physical borders, regulatory actions in one jurisdiction are unlikely to be fully effective without coordinated action elsewhere.”
At the state level, the New York State Department of Financial Services (DFS) announced a new proposed regime for the listing of virtual currencies. The announcement marks the first step in DFS's review of New York's BitLicense framework. The proposed guidance seeks to address regulated virtual currency firms’ interest in listing new virtual currencies in addition to those included in their initial applications. Comments on the proposed guidance should be submitted no later than January 27, 2020.
Vietnam: Draft regulations by the State Bank of Vietnam that would limit the foreign ownership rate in the payment intermediary service sector to 49 percent were a topic of discussion among FinTech firms in attendance at a workshop in Hanoi, according to Vietnam Plus.