FinTech in Focus - July 02, 2018



FinTech in Focus - July 02, 2018

Jackson Mueller
Jackson Mueller
Dan Murphy
Dan Murphy
Senior Associate, Center for Financial Markets

In this issue:

Industry Headlines »

Global Developments »

Milken Institute Launches FinTech Advisory Committee

The Milken Institute Center for Financial Markets launched the FinTech Advisory Committee in Washington, D.C. last week. The committee is chaired by Tom Curry, a partner at the law firm Nutter, and former U.S. Comptroller of the Currency. Melissa Koide, a senior advisor at the Milken Institute, current CEO of FinRegLab, and a former deputy assistant secretary for consumer policy at the U.S. Treasury Department under the Obama Administration, will serve as the vice-chair. 

Curry said, “Banking and finance are not static businesses and must be allowed to evolve. The ability to adapt to meet the changing needs of customers and the marketplace is as critical today as it was 50 or 100 years ago. Simultaneously, we must also be able to responsibly innovate in order to take advantage of the large wave of progress quickly coming our way.”

Michael Klowden, CEO of the Milken Institute, stated, “FinTech is changing the face of financial services. We are honored that this impressive group of leaders is joining this effort to understand better the impact of FinTech and the role that it can play to address persistent challenges firms face across inclusion, access to capital, transparency, and compliance.”

Initial members include: Steve Antonakes, Executive Vice President, Enterprise Risk Management, Eastern Bank; Jo Ann Barefoot, Chief Executive Officer, Barefoot Innovation Group; Co-Founder, Hummingbird RegTech; Margaret Hartigan, Founder and Chief Executive Officer, Marstone; Karen Mills, Senior Fellow, Harvard Business School; Kathryn Petralia, Co-Founder and President, Kabbage; Thomas Philippon, Professor of Finance, New York University Stern School of Business; Colin Walsh, Chief Executive Officer, Varo Money.


Pictured above from left to right:
Thomas Philippon, Professor of Finance, New York University Stern School of Business; Margaret Hartigan, Founder and Chief Executive Officer, Marstone; Kathryn Petralia, Co-founder and President, Kabbage; Tom Curry (Chair), 30th Comptroller of the Currency, partner, Nutter; Mike Klowden, Chief Executive Officer, Milken Institute; Melissa Koide (Vice Chair), a senior advisor at the Milken Institute, current CEO of FinRegLab, and a former deputy assistant secretary for consumer policy at the U.S. Treasury Department under the Obama Administration; Steve Antonakes, Executive Vice President, Enterprise Risk Management, Eastern Bank

 Industry Headlines

AltFi: Kabbage announced this week that it has provided approximately $5 billion in funding to small businesses in the United States since 2008. Interestingly, CEO Rob Frohwein told PYMNTS that Kabbage’s analysis shows that about 20 percent of their dollars loaned out have gone to small businesses during off hours.

Crypto:The Sacramento Kings (yes, the professional basketball team) announced that they are mining Ether this week. The Kings regard themselves as a “tech-savvy” basketball team, expertise which yielded them a 27-55 record in 2018.

Cloud Computing: According to Synergy Research Group, Alibaba is now the fourth largest cloud computing provider, surpassing IBM. This puts the Chinese tech giant behind only Amazon, Microsoft, and Google. In the Asia-Pacific region, Alibaba is only second to Amazon Web Services.

Digital Banking:PayPal announced the launch of a Venmo debit card this week. The card, which will be issued by Bancorp, will allow shoppers to pay using their Venmo balance rather than their bank account. If a user’s Venmo balance is too low for a particular purchase, the card will reload your balance using your pre-selected bank account. Elsewhere, some Capital One customers have complained about a change that limits the way that their account data can flow to third-party apps. Plaid Technologies in particular has criticized the move as limiting the ability of Capital One customers to use FinTech apps. 

JPMorgan Chase & Co launched Finn, a digital bank account for smartphones, this week. In order to attract customers, those who sign up for Finn will receive a $100 bonus when 10 transactions have been completed. Meanwhile, U.K. challenger bank Revolut launched a marketplace for business banking apps called Connect as a part of their effort to develop an ecosystem with all of the tools their business customers require.

Payments: Following Ant Financial’s ill-fated bid to buy MoneyGram, the Chinese financial giant is looking to develop a blockchain-based remittance platform of its own. They will pilot the new initiative with remittances between Hong Kong and the Philippines in a partnership that includes AlipayHK, GCash, and Standard Chartered, which will serve as the settlement bank.

Elsewhere, Whatsapp updated its privacy policy in for Whatapp Payments in India just prior to launch, disclosing that Whatsapp Payments uses Facebook’s payments infrastructure. However, Whatsapp says that Facebook does not store or use payments data.

Finally, PayPal is on a bit of an acquisition spree this week. First PayPal acquired Hyperwallet, an ecommerce payments firm, for $400 million. Then, PayPal acquired Simility, a fraud detection firm that uses AI, for $120 million.

RegTechIBM announced that they are updating their RegTech technology by combining Watson’s natural language processing abilities with Promontory’s expert insights and Armanta’s data analytics. IBM acquired Armanta in May and will now apply its technology for security and fraud prevention.

Wealth Management: Wealthfront CEO Andy Rachleff announced this week that Wealthfront plans to offer checking and savings accounts to its customers, in addition to automated wealth management.  In other wealth management news, SigFig raised $50 million in its latest fundraising round. The round was led by General Atlantic and also included UBS Group AG, Eaton Vance Corp, and Bain Capital Ventures.


 Global Developments

The Bahamas
The Central Bank of The Bahamas will soon introduce a pilot digital currency for the country. According to Deputy Prime Minister and Minister of Finance K. Peter Turnquest, a digital Bahamian currency "is especially important for the many family islands as they have seen many commercial banks downsize and pull out of their communities, leaving them without banking services. As an island nation... we must offer financial services digitally and securely."

The government is working on regulations that would close anti-money laundering loopholes and make it more difficult for terrorists and money launderers to use cryptocurrency for illicit purposes.

According to an article in CoinDesk, the Digital Currency Research Lab at the People's Bank of China filed more than 40 patent applications within the last 12 months, "all as part of an aim to create a digital currency combining the core features of cryptocurrency and the existing monetary system."

European Union
After the first month of the General Data Protection Regulation (GDPR) taking effect, regulators have seen a sharp increase in the number of data protection complaints and breach notifications. According to an article from The Guardian, the U.K.'s Information Commissioner's Office, the French data protection regulator, CNIL, and Austria's regulator have seen significant increases in both categories. In late May, Noyb, a consumer data rights organization, filed four complaints concerning "forced consent" against Google, Instagram, Facebook, and WhatsApp. “An end of “forced consent” does not mean that companies can no longer use customer data. The GDPR explicitly allows any data processing that is strictly necessary for the service – but using the data additionally for advertisement or to sell it on needs the users’ free opt-in consent. With this complaint we want to ensure that GDPR is implemented in a sane way: Without just moving towards ‘fishing for consent’,” the website states.

The European Parliament's Committee on Economic and Monetary Affairs published a report authored by the Kiel Institute for the World Economy. The paper defines cryptocurrencies as "a special case of digital currencies",” examines current scalability limitations and initial coin offerings, and focuses on the potential disruptive effects resulting from issuance of central bank digital currency.

The European Banking Agency updated its online Interactive Single Rulebook and Q&A tool with the inclusion of the Payment Services Directive (PSD2). "Users will now be able to review on the EBA website all the EBA's final Technical Standards and Guidelines associated with the PSD2 by navigating through the Directive on an article by article basis. The inclusion of the PSD2 into the Q&A tool will also allow users to submit any questions they may have on the application of this Directive and the EBA's work related to it," the release states.

CNBC Africa published a segment on Ghana's financial inclusion strategy. The Bank of Ghana recently announced plans to increase the percentage of financial inclusion in the country to 75 percent by 2023.

The country's antitrust authority published a document explaining why the authority did not allow the merger between Mizrahi Tefahot Bank and Union Bank of Israel, pouring "cold water on the Bank of Israel's optimistic predictions about the founding of a digital bank," according to a report by Globes. Both banks plan to appeal the decision.

The Financial Services Agency slapped six cryptocurrency exchanges with orders to improve anti-money laundering systems and controls. In the wake of the orders, the CEOs of Bitbank and bitFLyer resigned from the Japanese Virtual Currency Exchange Association.

South Korea
The Financial Services Commission published revisions to virtual currency anti-money laundering guidelines last week in light of lessons learned from inspections South Korea's Financial Intelligence Unit and FSS conducted back in April. The revised guidelines go into effect on July 10. Major changes focus on strengthened monitoring and enhanced customer due diligence, sharing information on overseas cryptocurrency exchanges, and clarifications in regards to the rejection of a transaction.

Separately, the commission signed a cooperation agreement with the U.K. Financial Conduct Authority on June 27. The agreement expands on the prior agreement announced two years ago by including "a framework for cooperation and referrals between the Innovation Functions of each Authority."

Financial inclusion is increasing in the country according to recent findings from the nationwide Making Access Possible study. According to the report, the percent of adults with access to at least one formal financial product increased from 30 percent in 2013 to nearly 50 percent this year.

Financial Sector Deepening Trust and Financial Sector Deepening Africa have partnered with NMB Bank, Jamii Africa, and Resolution Insurance to drive financial inclusion in the country.

London-based industry trade body Global Digital Finance published a draft of its cryptoassets code of conduct for public review and consultation. The global code of conduct "aims to act as the starting point for an industry-led “shared rulebook” to drive efficient, fair and transparent global markets in digital assets. This will reduce the risk of misuse and misrepresentation of this transformative technology, and foster a shared understanding of opportunities and risks,” the press release states.

Speaking of cryptocurrencies, the House of Commons Treasury Committee held a meeting covering digital currencies on June 20. The committee received testimony from Marco Santori, Chief Legal Officer, Blockchain; Obi Nwosu, CEO, Coinfloor; Iqbal Gandham, Chairman, CryptoUK and Managing Diretor, eToro; and Izabella Kaminska, Editor, FT Alphaville.

The Information Commissioner's Office is investigating Her Majesty's Revenue and Customs practice of collecting millions of biometric voice IDs. The tax agency has been collecting millions of voice recordings of those who call the department since January 2017 in an effort to make the agency more efficient at identifying callers, according to Threat Post.

The Financial Conduct Authority (FCA) issued a statement on the European Banking Authority's draft opinion and guidelines on regulatory technical standards on strong customer authentication and common and secure communication. "We plan to consult on changes to our guidance and rules to reflect the RTS, Opinion and draft Guidelines during the summer. This consultation will set out the proposed process and level of information we require from firms to make our exemption assessment. We expect to be able to make assessments from early 2019. As the RTS will apply from 14 September 2019, we will aim to respond to firms’ exemption requests promptly."

Speaking of the FCA, Experian—the country's largest credit reference agency—secured FCA accreditation to offer open banking and PSD2 services "to enable the exchange of bank account information between people and organizations."

Also, U.K. consumer group Which? published a paper titled, “Control, Alt or Delete? The Future of Consumer Data,” that calls for more transparency about the impact of personal data on the livelihoods of consumers, a review of governance of data, and a request for the Competition and Markets Authority to conduct a market study on the digital advertising industry.

The FCA also released a survey of roughly 13,000 adults on their use of financial services. The report "finds notable differences between urban and rural areas." For instance, of U.K. adults who have never used the internet, 70 percent live in rural areas "and the take-up of mobile banking in rural areas (23%) is nearly half that in urban areas (45%)."

Last week, we highlighted the U.K. Chancellor of the Exchequer remarks at the Mansion House. In this week's edition, we profile Mark Carney's remarks. In particular, the governor of the Bank of England discussed the rebuild of the Real Time Gross Settlement (RTGS) system. In particular, the rebuild will allow for "new private payment systems, including those using distributed ledger," to plug into the RTGS system. The new system “will capture much richer data on every payment made in a format that defines international best practice.”

At the state level, California Governor Jerry Brown signed into law a bill that provides consumers with unprecedented protections for their data and tougher restrictions on the tech industry. “Once again California is taking the lead in protecting consumers and holding bad actors accountable. My hope is other states will follow, ensuring privacy and safeguarding personal information in a way the federal government has so far been unwilling to do,” State Senator Bill Dodd, a coauthor of the legislation, stated.

And speaking of California, American Bankersat down with Jan Owen, Commissioner of California's Department of Business Oversight, to discuss FinTech-related issues, including the Office of the Comptroller of the Currency's FinTech charter, state licensing and authorization, efforts to foster innovation (regulatory sandbox), cannabis banking, the use of alternative data to underwrite a borrower, and consumer lending.

Meanwhile, the Financial Industry Regulatory Authority fined Betterment—a digital wealth management platform—a total of $400,000 for improperly maintaining books and records between 2012 and 2014, including violation of customer protection rules, according to Citywire. Betterment submitted a letter of acceptance, waiver, and consent in response to the alleged rule violations. 

Separately, the U.S. Treasury is reportedly getting close to finalizing its fourth and final report, which will look into non-bank financial institutions, FinTech platforms, and financial innovation, in general. Craig Phillips, a counselor to Secretary Steven Mnuchin, in prepared remarks at a Securities Industry and Financial Markets event, gave a preview of the report which will include more than 100 recommendations.

In Congress, Rep. Austin Scott (R-GA), Chairman of the House Agriculture Committee Subcommittee on Commodity Exchanges, Energy and Credit, introduced the Commodity Futures Trading Commission (CFTC) Research and Development Modernization Act (H.R.6121). The legislation, “would grant the CFTC two new authorities to facilitate interactions with financial technology companies. The first would authorize the CFTC to engage in non-standard procurement transactions and enable the CFTC to collaborate on projects with FinTech developers. The second would authorize the CFTC to receive gifts solely for research, development, and demonstration purposes, and would allow the agency to receive and use software to advance its understanding of developing financial technology. Lastly, this legislation requires an annual report detailing the use of this authority and the gift authority would be subject to a five-year sunset clause."

Rep. Scott’s bill is yet another bipartisan bill focused on FinTech-related issues. The Institute published a white paper covering FinTech legislation introduced in the 114th and 115th Congress back in March. Legislation pertaining to a number of FinTech topic areas covered in the paper have already passed Congress over the past two years. In the coming days, the Institute will provide an update on FinTech-related legislation introduced in the 115th Congress.

Published June 28, 2019