Authors
Jackson Mueller
In this Issue
To Our Readers
First and foremost, I hope all of you, your families (immediate and extended), friends, neighbors, and anyone else I may have missed are healthy and doing well as we all deal with the Coronavirus outbreak, get used to being socially isolated, and, for some of us, figure out effective ways to homeschool our kids for the foreseeable future.
Hopefully, this will pass in time, and we can all get back to connecting in-person with one another in Washington, DC, or at various events held around the world.
Stay healthy, stay awesome, stay somewhat productive, and we’ll see each other again soon!
The show must go on…. Back to FinTech!
UK Budget
On March 11, the UK Chancellor of the Exchequer, Rishi Sunak, presented his Budget to Parliament. Below, I’ve put together a list of FinTech-related topics that were covered. They include:
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Unlocking Competition: The UK government will accept all six of the Furman Review’s strategic recommendations for unlocking competition in digital markets. The six recommendations are: establish and resource a pro-competition digital markets unit; reset the ways in which the UK Competition and Markets Authority (CMA) conducts merger assessments in the digital marketplace; update the UK CMA enforcement tools to protect and promote competition in the digital economy; the CMA and the Centre for Data Ethics and Innovation should continue to monitor the use and evolution of machine learning algorithms and artificial intelligence to protect against anti-competitive behavior; the CMA should conduct a market study on competition in the digital advertising market; and UK government should continue support for cross-border cooperation between competition authorities to ensure common approaches to evolving issues across international digital markets.
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Regulatory Review: The UK Department for Business, Energy, & Industrial Strategy (BEIS) launched the Reforming Regulation Initiative. The initiative “will invite ideas from business and the public for regulatory reform in order to ensure that regulation is sensible and proportionate now that the UK has left the EU, and that the interests of small businesses are taken into account.” On March 12, the BEIS also published the “Better Regulation Framework: Interim Guidance,” which “sets out a general threshold for independent scrutiny of Regulatory Impact Assessments (RIAs) and Post Implementation Reviews (PIRs) where the equivalent annual net direct cost to business (EANDCB) is greater than ±£5m.”
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Regulators’ Pioneer Fund 2.0: The UK government will allocate £10 million of funding to help enable regulators “to unlock the potential of emerging technologies and help businesses to develop innovative products and services.”
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Regulatory Coordination: The UK government published a response to the call for evidence regarding the Financial Services Future Regulatory Framework Review. “This response announces a new forum, bringing together government and regulators, to provide industry with a forward-look of upcoming regulatory initiatives.”
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Payments: The UK government will bring forward legislation to protect access to cash for those who need it. Separately, the Treasury will shortly publish a call for evidence” to ask what more could be done by the government, industry and regulators to support a more innovative and resilient payments system and ensure the UK payments sector remains world leading.”
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UK FinTech Sector review: The UK Government has tapped Ron Khalifa OBE to lead a major review of the UK FinTech sector. “The review will identify what more industry and government can do to support growth and competitiveness, to ensure that the UK maintains its global leadership in this vital sector.”
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Cryptoassets consultation: The UK government intends to consult “on a measure to bring certain cryptoassets into scope of financial promotions regulation. The government also intends to consult later in 2020 on the broader regulatory approach to cryptoassets, including new challenges from so-called ‘stablecoins’.”
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SMEs: To realize the vision for truly open finance, HM Treasury will convene a summit “with those at the cutting edge of industry innovation to establish what further data needs to be opened up.”
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Digital Identity: The UK government will work to create a digital ID market that “makes it possible for people to prove things about themselves without showing paper documents.”
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Access to Credit: The UK will allocate £2 million to the Affordable Credit Challenge Fund to promote the development of innovative technology solutions that improve awareness and access to affordable lenders as an alternative to high cost credit. Six winners of the challenge will each receive £200,000 to further develop and scale their solutions. Separately, the British Business Bank’s (BBB) Start-Up Loans program is extended through the end of 2021-2022. The extension will support an additional 10,000 entrepreneurs across the UK access finance. The extension comes as peer-to-peer lenders in the SME space call for the BBB to extend facilities to all FCA authorized and regulated online SME lenders.
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R&D: The Budget allocates £22 billion to public R&D investment annually by 2024-2025.
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Digital Trade: The Department for International Trade (DIT) and the Department for Digital, Culture, Media, and Sport “will pilot a Digital Trade Network in the Asia Pacific region” to help innovative UK companies to access opportunities in new markets.
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Data Sharing (public sector): The Budget allocates £16.4 million over three years “to make it easier to share more, higher-quality data across government.” This investment “is a first step in the government’s National Data Strategy to unlock the power of data across government and the wider economy, while building trust in its use.”
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Visas: DIT will become an “endorsing body,” allowing the agency to directly support visa applicants from eligible foreign investors seeking to start a business in the UK.
Industry Headlines
Credit reporting: Equifax has partnered with UK-based rent-reporting platform CreditLadder. The partnership, according to a CreditLadder blog post, “allows tenants to improve their credit score via their on-time rent payments and CreditLadder is the first tenant rent reporting platform in the UK to work with Equifax.”
Data Access: US Bank and Fiserv signed a data sharing agreement. According to the press release, connecting third parties with a US bank customer’s financial data “is enabled by AllData Aggregation from Fiserv, which aggregates more than 18,000 consumer data sources including bank, credit card, investment, retirement, insurance and loan accounts.”
Free Trade Agreements: A document produced by the UK Department for International Trade sheds light on what a US-UK Free Trade Agreement could include. Regarding FinTech, several business associations “were particularly supportive of greater regulatory dialogue and co-operation between financial regulatory authorities in the UK and US.” Further, several associations “also put forward specific suggestions for deeper co-operation, which included calls for increased co-operation on emerging technologies such as FinTech and crypto-assets.” The document called for securing “cutting-edge provisions which maximize opportunities for digital trade across all sectors of the economy” and the inclusion of provisions “that facilitate the free flow of data, whilst ensuring that the UK’s high standards of personal data protection are maintained, and include provisions to prevent unjustified data localisation requirements.” As reported in CrowdfundInsider, UK Minister of State for Trade Policy Greg Hands was in the US to kick-start trade talks.
Launching platforms: India’s ICICI Bank announced the launch of ICICIStack, which offers “nearly 500 services that cover almost all banking requirements of customers, in one place,” according to the press release. Meanwhile, Standard Chartered launched its Banking as a Service solution, nexus. The rollout will begin in Indonesia. The solution “was incubated at SC Ventures, Standard Chartered’s innovation, fintech investment and ventures arm,” according to the press release.
Open Banking: Tom Blomfield, the founder and CEO of UK challenger bank Monzo, had some thoughts to share on UK and EU efforts. In an interview with The Telegraph, which was highlighted in an article in FinTech Global, Blomfield stated that the “positive effect of open banking on innovation has been nil.... It is imposing massive costs on [challengers] like ourselves to implement standards nobody uses.”
Payments: Sweden-based FinTech company Klarna announced that Ant Financial has taken a minority stake in the company. The investment “will deepen ongoing collaborations between Klarna and Alipay, which currently enables shoppers at AliExpress, the global retail online marketplace of Alibaba Group, to use Klarna’s popular ‘Pay later’ solution across multiple markets,” according to the announcement. Speaking of Ant Financial, the Chinese e-commerce giant “will open up its Alipay mobile app platform to 40 million service providers in China over the next three years and help them digitize their offerings,” according to a report by Reuters.
Privacy: An Accenture survey of 100 privacy executives in North America and Europe found that one-third of respondents “lack a clear road map and the resources to address their residual privacy risks.” In addition, more than 70 percent of respondents “indicate their organizations use consent to tailor customer-facing products and services, though leading financial institutions are making further strides to integrate their privacy programs into their broader value proposition.” Speaking of privacy, in a new FTI Consulting survey, three-quarters of surveyed firms (500 large, US-based companies) indicated they have made changes to their data privacy program within the past year. Of note, nearly 60 percent of respondents said they did not have the resources within their organization to ensure they are fully compliant with data privacy regulation. On CCPA, in particular, Jake Frazier, senior managing director at FTI Technology, said large companies will spend $1-2 million on establishing and maintaining compliance.
Revolut moves: The digital bank has named Bill Rattray as interim CFO after David MacLean stepped down due to personal reasons. In addition, as Revolut shifts more attention to the US market, the company has reportedly named Ronald Oliveira as chief executive of US operations.
Robo Advisers: An article in The Wall Street Journal found the robo-advising market has grown to more than a $600 billion market, and robo advisers are increasingly adding a variety of services to attract investors, including cash accounts, financial advice, lending, and retirement services, among other services.
Tech Hubs: Outside of Silicon Valley/San Francisco, the top five hubs are Singapore, London, Tel Aviv, Tokyo, and New York, according to KPMG. Of note, Tel Aviv went from 15th place last year to 3rd place due to Israel’s experience in artificial intelligence and mobility technology—two areas in high demand globally. Of note, less than 40 percent of respondents believed the tech center of the world would move away from Silicon Valley in the next four years, down from nearly 60 percent last year. The survey also notes that microhubs are gaining traction with Huntsville (Alabama), Eindhoven (Netherlands), and Hsinchu (Taiwan) as the standouts. On competitiveness between China and the US, survey respondents “perceive that the current U.S. stance on technology and IP - especially regarding China (e.g. tariffs, restricting China-owned acquisitions, company sanctions) - means that China must now spend more time and resources to develop its own domestic innovation ecosystem. It will take time to accomplish this and achieve parity with the US.”
To Read Pile: The Toronto-based C.D. Howe Institute published a report titled, “The Era of Digital Financial Innovation: Lessons from Economic History on Regulation.” In the report, David Longworth, former deputy governor of the Bank of Canada, focuses on the major macro-level risks arising from current and future digital financial innovation and what the implications are for Canadian regulators. As stated in the press release, the report recommends regulators “enact a number of policies, including requiring the use of Explainable AI (XAI) in lending decisions, taking care not to rush into open banking regulations, extending the coverage of stress tests to include stresses relating to borrowing from non-bank financial intermediaries, and increasing the amount of data on lending and short-term financing from lenders, whether regulated or not.”
Yet another document I missed…JPMorgan Chase & Co. (JPM)’s Global Research team published its “Perspectives” report covering blockchain, digital currency, and cryptocurrency. The report is separated into three parts on blockchain’s evolution, the rise of alternative payments, and whether stablecoins are scalable alternatives to cryptocurrencies. On blockchain’s evolution, JPM sees the long-term potential for distributed ledger technology to transform banks’ business models, “but legal and regulatory frameworks and technical challenges, such as cross-platform integration, may decelerate further progress.” On alternative payments, JPM suggests the transition to a mostly cashless economy can be managed at scale, yet voiced concern over the rapid rise of payments-related Money Market Funds in China. On stablecoins, JPM states that private stablecoins “are likely to face technical hurdles, including the need for intraday liquidity.”
Venture Capital: Quona Capital announced the final close of the Accion Quona Inclusion Fund. The Fund raised $203 million in commitments, “significantly exceeding its $150 million target,” according to the press release. At the time of the announcement, Quona Capital had $363 million in assets under management.
Global Developments
Aruba: The country’s entire banking community has switched to offering instant payments using the Clearing and Settlement Mechanism of the central bank. “After this successful switch, all interbank payments in Aruban florin initiated in Aruba can be instantly processed 24/7/365. The IP CSM is fully compliant with international standards and ISO20022.”
Australia: The Inquiry into Future Directions for the Consumer Data Right released an issues paper in early March for consultation. The paper states that a key focus “will be how the Consumer Data Right could be expanded beyond the current ‘read’ access to include ‘write’ access. This could enable customers to direct third parties to apply for and manage products and services on their behalf—including, for Open Banking, by making payments and changing accounts—through application programming interfaces (APIs). The Inquiry will consider potential benefits of, and barriers to, implementing write access, including regulatory compliance costs.” Responses to the issues paper are due by April 23.
Cambodia: The Securities and Exchange Commission signed an MoU with the Blockchain Elite Strategic Technology (BEST) Association. “BEST will provide advice, knowledge and professional skill to SECC to develop a legal framework, a licensed activity supervision framework, legal or technical matters for the development and usage of fintech and blockchain technology in the securities sector in Cambodia, and to transform SECC to be a digitalized institution.”
Canada: So of course, I missed this in a prior update—and it is kind of important. In late January, the Advisory Committee on Open Banking, first announced in Budget 2018, released its final report, “Consumer-directed finance: the future of financial services.” According to the release, consumer-directed finance “is not merely a natural progression in the provision of financial services, it is a fundamental part of a much broader transformation. Through this lens, it has an integral role to play not only in ensuring the sector’s continued global competitiveness but also in strengthening Canada’s innovation agenda and supporting Canada’s successful transition to a data-driven economy.” Importantly, eliminating screen-scraping, given its many pitfalls, “is not the answer.” Further, “The market has demonstrated a demand for services that data sharing can offer and consumers and market participants will continue to respond to this demand. Furthermore, eliminating screen-scraping would end the possibility of new-data driven financial tools being offered to a broader group of Canadians and would set Canada behind global developments that are digitalizing the financial sector.” In short, the Committee recommended the development of a framework to enable consumer-directed finance. “The public consultations have affirmed that consumer-directed finance should not be approached as a fight between industry stakeholders. In our view and in the view of most stakeholders, all participants in the ecosystem – from established financial institutions, to fintechs, to other innovators and most importantly, consumers – stand to benefit from consumer-directed finance.”
Meanwhile, an article from Investment Executive sheds further light on the tasks at hand for the newly established Capital Markets Modernization Task Force, which was formed in early February. The five-member group will be aided by an advisory panel of experts and will produce a consultation document by this summer with a final report expected in the fall.
China: The Securities Regulatory Commission issued revised rules “to make it easier for select venture capital and private equity investors to exit high-tech pre-IPO investments on the secondary market,” according to a report by Reuters. Further, venture capital funds “with more than five years of investment in a company are no longer subject to any share sale restrictions once the lock-up periods expire.”
Egypt: According to a report in Zawya, the central bank has reviewed its measures “to support electronic payment system and financial technology (FinTech) in the past period.” The quarterly magazine, Economic Review, focuses on the electronic payment sector and the FinTech Regulatory Sandbox.
India: 15 trade associations submitted a letter to policymakers expressing concerns with India’s proposed Personal Data Protection (PDP) Bill. In particular, the trade groups “are deeply concerned that the PDP Bill requires a copy of sensitive personal data to be stored in India even when conditions for its cross-border transfer are met, and that critical personal data cannot be transferred under any conditions. Requirements around critical data are particularly concerning because there is no definition of such data, creating significant uncertainty for businesses operating in India. In addition, the open-ended nature of the definition of sensitive personal data, which would allow it to be expanded at any time through government notification, raises significant concerns.”
Meanwhile, the Reserve Bank of India has been quite busy. First, the RBI issued “Guidelines on Regulation of Payment Aggregators and Payment Gateways.” According to the release, based on feedback from industry and “taking into account the important functions of these intermediaries in the online payments space as also keeping in view their role vis-à-vis handling funds, it has been decided to (a) regulate in entirety the activities of PAs… and (b) provide baseline technology-related recommendations to PGs….”
And, for those of you who have “non-bank” or “shadow banking,” you may have heard a lot about the deteriorating financial state of Yes Bank. In early March, the RBI imposed a moratorium on the bank “in the absence of a credible revival plan, and in public interest and the interest of the bank’s depositors.” Following the action taken by the RBI, the central bank issued a Scheme of Reconstruction and opened it for public comments. The RBI’s move also disrupted digital payments, according to the Economic Times, “with nearly all payment platforms of National Payments Corporation of India reporting disruptions.... A giant exercise is currently underway where payment companies are migrating from the Yes Bank application programming interface (API), or channel used for instant settlement of payments, to the APIs of other partner banks, people in the know said.”
According to a report in the Deccan Herald, “The day-long outage meant that there was a 40 percent drop in transactions on the UPI platform. Analysts tracking the sector say that UPI transactions might take a hit for a month or two. YES Bank had registered 514 million transactions. It had moreover conducted 415 million transactions and had a 45% share of the total UPI transactions in October 2019, when the UPI transactions touched the 1 billion mark for the first time.”
Lastly, RBI is planning to appeal a recent decision by the India Supreme Court that struck down the central bank’s strict curbs on digital currencies imposed in 2018.
Japan: In late February, Masayoshi Amamiya, deputy governor of the Bank of Japan, spoke at the Future of Payments Forum in Tokyo on central bank digital currency (CBDC) and the future of payment and settlement systems. According to Amamiya, for major advanced economies, including Japan, the need for CBDC “is not necessarily increasing.... At this point, there is no need to implement new steps to ensure people’s access to central bank money. Moreover, the currency systems and the payment and settlement systems of these economies are operating safely and stably. They cannot simply jump into new technologies, or actually, they should not.”
Pakistan: The Economic Coordination Committee approved a series of measures designed to encourage the transfer of cross-border remittances through official banking channels. Included in the list of measures is the future launch of a National Remittance Loyalty Program with major banks and government agencies “through which various incentives will be given to remitters through mobile apps and cards,” according to the press release. (See: “ECC approved measures to boost remittances through formal channels” in the press releases)
Switzerland: Yapeal, an aspiring digital bank based in Zurich has received the first FinTech license from FINMA, according to a report by CrowdfundInsider.
UAE: The Dubai International Financial Centre (DIFC) announced record growth in 2019, with total companies within the Centre rising 14 percent to 2,437. The number of active financial firms has grown 18 percent to 737, while the number of FinTech firms grew four-fold to 129 in 2019. The press release also noted DIFC FinTech Hive’s growth and the Centre’s position as one of the world’s top FinTech locations.
Uganda: The Uganda Bankers Association and the Financial Technology Service Providers Association signed a strategic collaboration agreement to boost financial inclusion and innovation in the financial services sector.
UK: In early March, the Financial Conduct Authority (FCA) published a report titled “Fostering innovation through collaboration: The evolution of the FCA TechSprint Approach.” The report provides a deep-dive into the FCA’s TechSprint model and how it has evolved over time. On timing, the FCA’s TechSprints, “have been organised from idea to execution within a few months, while the significantly more complex and larger AML & Financial Crime TechSprints took approximately 8 months, with a venue secured 6 months before, and expression of interest packs sent 3-4 months before.” On participant composition, the FCA “found that teams of around 8-10 are optimal (with approximately 50-70% hands-on technical/ development skills). This team size generally includes enough resource to cover the key roles but not too many that could lead to too many opinions and ideas.” As it relates to data acquisition, the FCA found “that it is best to procure some of the core data sets. While it is possible for data vendors to do some of this work for free it will be done at the ‘side of desk’ and won’t have the same attention to detail which will increase risks to both its delivery and quality.”
Of note, Chapter 4 is interesting in that it highlights some of the challenges the TechSprints have faced. One of the keys to a TechSprint’s success is the future success of the Proofs of Concept (PoC) developed during each TechSprint. As the FCA admits, however, “one of our critical reflections is that maintaining momentum and continuing development for the solutions post-event remains a challenge for teams, and there are perhaps further steps we can take.” The FCA also states that due to the short timeframes of these tests, “figuring out contractual obligations with regards to IP and ownership is unlikely.” Recognizing the difficulties in transitioning from PoC to Proof of Value (PoV) the FCA is “currently looking at and beginning conversations with the industry, other regulators, and public and third sector entities to explore what a more permanent digital testing environment might need to look like. We have heard that a more permanent TechSprint environment resembling a ‘digital sandbox’ where very focused PoCs (both developed at TechSprints or otherwise) can be tested and then shown to industry, is an idea worthy of further exploration and attention.”
Separately, the Bank of England published two reports in mid-March. The first paper, “Open data for SME finance,” forms “part of the Bank’s input to the Government summit announced in the 2020 Budget, looking at what further data needs to be made accessible to make it faster and easier for SMEs to shop around for credit.”
In that paper, the central bank provides a snapshot of SME lending in the UK and the changes taking place. Of note, since 2017, “all of the net growth in SME lending has come from smaller banks or from alternative sources such as peer-to-peer (P2P) lending.” The central bank also states that, while the UK has taken positive steps towards creating a digital economy, “they do not yet address the long, manual and paper-heavy on-boarding process that presents a friction to shopping around for finance for most SMEs. And they do not yet address the challenge of the thin credit files of young and successful SMEs seeking finance to support their growth.” The central bank goes on to explain the proposal for an Open Data Platform. The platform “is a targeted application of the BEIS Smart Data and FCA Open Finance initiatives applied to the specific frictions in SME finance. It is a natural extension of Open Banking and Her Majesty’s
Revenue and Customs’ (HMRC) Making Tax Digital; and fully aligned with GDPR, as well as the conclusions of Professor Furman’s Digital Competition Expert Panel Report on how to extract value from data, promote competition and give consumers control of their data. It goes further by proposing a standardized approach for all sectors in the economy and by including both public and private data sources to enhance the information set a lender can access on a prospective borrower.”
The second paper, “Central Bank Digital Currency: opportunities, challenges and design,” explores Central Bank Digital Currenty (CBDC) design and the central bank’s views on the opportunities and challenges of implementing CBDC. The bank also states that it has “not yet made a decision on whether to introduce CBDC, and intends to engage widely with stakeholders on the benefits, risks and practicalities of doing so.” The central bank has requested for the public to provide feedback on the paper by June 12, 2020.
Lastly, there was an interesting question posed by Lord Myners concerning default rates and losses experienced by the British Business Bank (BBB) on loans sourced through peer-to-peer lending platforms. According to BBB, the level of losses “provided for as a percentage of the net amount invested across the peer-to-peer platforms loan portfolio, is above the overall blended level for the British Business Investments’ portfolio.” That said, the overall returns from investments through such platforms “have been positive and the Bank has not experienced any negative returns from the peer-to-peer platform investments liquidated to date.”
US: In early March, the Internal Revenue Service (IRS) held an invite-only Virtual Currency Summit in Washington, DC. An article in Forbes provides several highlights from the Summit.
Speaking of virtual currency, Rep. Paul Gosar (R-AZ) introduced the Crypto-Currency Act of 2020. The bill is an attempt to provide clarity on digital assets by dividing them into three categories: crypto-commodity, crypto-currency, and crypto-security. According to the legislation, the Commodity Futures Trading Commission (CFTC), the Secretary of the Treasury via the Financial Crimes Enforcement Network (FinCEN), and the Securities and Exchange Commission (SEC) would govern each category, respectively. CoinTelegraph provides a further breakdown of the legislation in a recent article, while several advocates have already proclaimed the bill is “dead on arrival”.
On March 5, the Office of the Comptroller of the Currency unveiled FAQs to supplement OCC-Bulletin 2013-29, “Third-Party Relationships: Risk Management Guidance,” issued in October 2013. On cloud service providers, the OCC states that third-party risk management “is fundamentally the same as for other third-party relationships.” As it relates to data aggregators, the OCC states that a bank “that has a business arrangement with a data aggregator has a third-party relationship, consistent with the existing guidance in OCC Bulletin 2013-29. Regardless of the structure of the business arrangement for sharing customer-permissioned data, the level of due diligence and ongoing monitoring should be commensurate with the risk to the bank.” Further, when a bank “establishes a contractual relationship with a data aggregator to share sensitive customer data (with the bank customer’s permission), the bank has established a business arrangement as defined in OCC Bulletin 2013-29. In such an arrangement, the bank’s customer authorizes the sharing of information and the bank typically is not receiving a direct service or financial benefit from the third party.” On-screen scraping, in particular, the OCC states that while such activities “typically do not meet the definition of business arrangement, banks should engage in appropriate risk management for this activity. Screen-scraping can pose operational and reputation risks.” On obtaining alternative data from a third party, the OCC lists five bullets that bank management should address and defines alternative data as “information not typically found in the consumer’s credit files at the nationwide consumer reporting agencies or customarily provided by consumers as part of applications for credit.” Not surprisingly, the guidance has some stakeholders concerned.
Meanwhile, the Federal Deposit Insurance Corporation (FDIC) is seeking comment on a proposed rule "that would require certain conditions and commitments for approval or non-objection to certain filings involving an industrial bank or industrial loan company (ILCs) whose parent company is not subject to consolidated supervision by the Federal Reserve Board. A day after the proposed rule was released, the FDIC approved deposit insurance applications for Nelnet Bank and Square Financial Services.
At the state level, lawmakers in the state of Washington failed to pass the Washington Privacy Act (SB 6281). However, lawmakers were successful in passing SB 6280, which focuses on public and private facial recognition use.
In California, the attorney general published a second round of modifications to the California Consumer Privacy Act. The deadline for submitting comments is March 27. The National Law Review provides a good overview of the modifications.
Authors