FinTech in Focus—November 12, 2019



FinTech in Focus—November 12, 2019

Jackson Mueller
Jackson Mueller

In this issue:

Industry Headlines »

Global Developments »


One Large Player, One Potentially Large Manipulation

An updated study set to be published this week will purportedly show how a single, large player manipulated the price of Bitcoin in the run-up to its peak of nearly $20,000. As described further in The Wall Street Journal, the study “looked at 95 nonconsecutive hours that comprised the largest percentage of tether dispersals. This showed a consistent pattern: In the three hours before those dispersals, the price of bitcoin was falling. Immediately after the dispersal, the price began rising. Those 95 hours accounted for 59% of bitcoin’s compounded returns between March 2017 and March 2018.”

While not definitively concluding who the manipulator was, the research calls into question the extent to which Bitfinex and Tether Ltd. were aware of the supposed manipulation.

In response to the research, Bitfinex released a statement calling into question the conclusions reached by the authors. "The purported conclusions reached by the authors are built on a house of cards that suffers from the absence of a complete dataset. As an example of one of many deficiencies, the authors openly admit they do not have accurate data on the crucial timing of transactions or the flow of capital across different exchanges. This critical lack of information means they are unable to establish a valid sequence of events through which the alleged manipulation could have happened. The updated paper is still based on the same incomplete and cherry-picked data that made the original study deficient. Furthermore, the authors now admit that the patterns of trading they observed could be consistent with the market purchase of Tethers, as opposed to the issuance of unbacked Tethers. Importantly, the authors do not possess or reference any data disputing that Tether has sufficient reserves to back up Tether token issuances in circulation."


 Industry Headlines

Acquisitions: In research published in the Journal of Banking & Finance, two researchers have found that firms with larger innovation outputs and R&D investments "are more likely to be acquired, receive unsolicited bids, and receive multiple bids." The researchers find "the takeover premium increases with the target firm’s innovation output and R&D spending. For instance, a one-standard-deviation increase in the target firm’s innovation output is associated with an 83 basis points increase in the takeover premium, which translates to $7.5 million above the target firm’s average market value measured 50 days prior to the announcement date. The economic significance is even larger for the subsample of target firms acquired by public firms: a one-standard-deviation increase in innovation output is associated with a 1.66% increase in the takeover premium, which translates to $19.8 million above the target firm’s average market value measured 50 days prior to the announcement date.”

Big Data: The National Institute of Standards and Technology (NIST) released the final version of the “NIST Big Data Interoperability Framework.” According to NIST, the framework "is intended to guide developers on how to deploy software tools that can analyze data using any type of computing platform, be it a single laptop or the most powerful cloud-based environment." The final version "includes consensus definitions and taxonomies to help ensure developers are on the same page when they discuss plans for new tools. It also includes key requirements for data security and privacy protections that these tools should have. What is new in the final version is a reference architecture interface specification that will guide these tools' actual deployment."

BigTech in Health: Facebook recently announced that it is working with US health-care organizations to offer a new Preventive Health tool initially focused on heart disease and cancer. "In the US, people can search for Preventive Health in the Facebook mobile app and find out which checkups, such as cholesterol tests or mammograms, are recommended by these health organizations based on the age and sex they provide. Reminders for flu shots will also appear at the appropriate time of year,” the company noted in their announcement. “The tool allows people to mark when tests are completed, set reminders to schedule future tests and tell loved ones about the tool to increase awareness of preventive care. People can also learn more about each checkup and find affordable places to receive care." 

In early November, Google acquired Fitbit for $2.1 billion. In its announcement, FitBit said that its health and wellness data will not be used for Google ads. The transaction is expected to close in 2020.

Cloud Services: IBM announced that it has designed the world's first financial services-ready public cloud with Bank of America as the first collaborator. "The financial services-ready public cloud can potentially enable Independent Software Vendors (ISVs) and Software-as-a-Service (SaaS) providers—from the smallest FinTechs to more established vendors—to focus on their core offerings to financial institutions with the controls for the platform put in place," according to the press release.

Core Deposits and Digital Banking: In a recent survey from the Conference of State Bank Supervisors, respondents from 571 community banks cited the cost of funds as likely to have the biggest impact on profitability over the next year. In addition, nearly one-third of respondents indicated that core deposit growth (~23 percent) or cost of funds (~8 percent) as the "single greatest challenge" facing their institution. The blog post follows a research paper released in September titled “Community Banks and Core Deposits.” In that paper, the researchers found banks "that do not prioritize core deposit growth over loan growth are less likely to report competition as the most important impediment to attracting core deposits, while banks that do prioritize core deposit growth over loan growth are more likely to report capital as the most important impediment to attracting core deposits. These same banks are also more likely to report higher expected future profitability."

Separately, the American Bankers Association released a survey that found nearly three-quarters of Americans access their bank accounts via online and mobile channels. Banking via mobile app was the most preferred choice for 18- to 44-year-olds but was overtaken by a preference for online banking for individuals 45 years or older. Interestingly, while online and mobile are preferred channels used to bank, 17 percent of Americans continue to rely on bank branches.

Crowdfunding: In the US, Regulation Crowdfunding, otherwise known as Reg CF, has now topped $300 million in total funding across 2,000 campaigns, according to Crowdfund Capital Advisors. The vast majority of deals are concentrated in California and New York, with Wefunder, Start Engine, and SeedInvest the top three platforms by deals and commitments.

As CrowdfundInsider has pointed out, one significant regulatory impediment to Reg CF is the funding cap (companies may raise up to $1.07 million). That cap was not addressed in the recently House-passed crowdfunding legislation.

Data… Accessed: Changes are coming to accessing Facebook's Groups API. According to the company's blog post, Facebook recently found "that some apps retained access to group member information, like names and profile pictures in connection with group activity, from the Groups API, for longer than we intended." The company states that it is also reaching out to 100 partners "who may have accessed this information since we announced restrictions to the Groups API, although it's likely that the number that actually did is smaller and decreased over time." The announcement comes after the company changed its rules back in April 2018, and, more importantly, at least 11 partners "accessed group members' information in the last 60 days."

Data… Compromised: Two former Twitter employees and a Saudi national were charged by the US Department of Justice for allegedly acting as illegal agents of Saudi Arabia and providing information from Twitter users to representatives of the country. According to the complaint, officials from Saudi Arabia convinced two Twitter employees “to use their employee credentials to gain access without authorization to certain nonpublic information about the individuals behind certain Twitter accounts. Specifically, representatives of the Kingdom of Saudi Arabia and the Saudi Royal Family sought the private information of Twitter users who had been critical of the regime."

Digital Banking: Westpac, one of Australia's first banks, is planning to launch a digital banking platform. Slides 12-13 provide a closer look at Westpac's focus on innovation.

Financial Inclusion: A new report from The Economist Intelligence Unit finds that the overall environment for financial inclusion "has improved globally," with Colombia, Peru, Mexico, and India as the most conducive countries. As it relates to FinTech, 10 of the 55 countries examined in the report “have dedicated FinTech frameworks improving legal certainty for FinTech startups." The report also finds that 20 countries have established FinTech working groups, but at least 25 countries in the current index "have not yet decided how to approach the fast-evolving space of financial innovation." The report also finds that only nine countries "demonstrated having dedicated technical experts with advanced capacity to supervise digital financial services,” with Argentina taking the top spot.

GDPR: A new research paper, “Privacy & Market Concentration: Intended & Unintended Consequences of the GDPR,” finds that the General Data Protection Regulation (GDPR) reduced “the market shares of small web technology vendors: relative market concentration increases 17% in aggregate. Concentration also increases in the top four web technology categories that comprise 94% of categorized vendor ties: advertising, web hosting, audience measurement, and social media. Concentration is pronounced among web technology vendors that process personal information, so that personal data collection also becomes more concentrated after the GDPR.” 

The study also took a look at win rate—quantifying whether the dominant vendor in each category reviewed. “In advertising, Google Ad Manager wins an exceptional 98.9% of these head-to-head battles. Google also wins in hosting (Google APIs) 74.3% of the time and in audience measurement (Google Analytics) 93.5% of the time. For its part, Facebook wins 87.2% of its head-to-head battles in social media.”

The study further finds that while requiring consumer consent could favor large vendors, "the increase in concentration appears to be independent of consent. Instead, our evidence suggests that concentration increases because websites were more likely to drop smaller vendors."

Lending: Funding Circle will launch a new tool in early December that seeks to improve investors' ability to access funds "more regularly." According to a blog post, currently, "loan parts are sold on a first-come, first-served basis and investors wait until they reach the top of the queue before selling any. The new tool will cycle through all investors wishing to sell loan parts as many times as possible within a 120 day period. This will mean investors start to receive money back more regularly from the loan parts that have sold." The platform will "also introduce a transfer payment for those wishing to sell loan parts to other investors." According to Funding Circle, loans taken out since 2012 "are on track to deliver an annualised return of 4-7% per year and we are proud that 83,000 investors have earned more than £300 million in interest (after fees and bad debt), more than any other lending platform."

Experian launched a new small business lending product, Experian Commercial Acumen. The solution "allows a lender to set up an application in five minutes, while a business can share its data in 10 minutes." The solution is an attempt to shorten the amount of time it takes small businesses (roughly three months) to collect the data required to apply for a loan.

Lastly, BBVA (USA) and Prosper joined together to launch a Home Equity Line of Credit (HELOC) available through Prosper's website. The collaboration creates an end-to-end HELOC solution "that allows customers to complete an online application in minutes and receive instant pre-qualification."

Mortgage Finance: Ellie Mae announced the launch of The Ellie May Marketplace—a "one-stop shop designed to make it easy for lenders to find, engage and connect directly with the industry's largest partner network."

Ellie Mae also released its 2019 Lender Insights Survey. The survey found that "an overwhelming majority of lenders (93%) now offer online applications and online portals where borrowers can submit documents electronically. Nearly half of lenders (49%) offer borrowers a mobile app experience—and among those that do, more than half (54%) saw their loan volume increase by 5% or more." Of note, the survey also unveiled that, on average, 50 percent of online applications that are started are never completed. "About one quarter of borrowers who start an application online end up completing it via a different channel. Nearly 60% of those borrowers say they abandoned an online application because they felt it took too long. One out of five borrowers who abandoned an online application wound up choosing a different lender."

Payments: Alipay and WeChat Pay have opened their platforms to accept transactions from foreigners visiting China. As reported in Yahoo Finance, China's central bank "recently told a number of payments firms they will soon be allowed to plug foreign cards into their apps for use in China." Both Alipay and Tencent account for 94 percent of the country's mobile payments market.

Separately, TransferWise has begun to process international payments into Asian digital wallets. 

Robo-Advisors: DBS Bank in Singapore has announced a hybrid human-robo investment service, DigiPortfolio. DBS first announced the investment service back in September, offering investors in Singapore early access. According to Finextra, "DigiPortfolio will target beginner investors, offering access to a collection of between four and seven ETFs listed on SGX, the Singapore stock exchange, with a minimum investment of SGD 1000 or USD 1000 depending on which portfolio the customer chooses."

Token Taxonomy: A business consortium led by the Enterprise Ethereum Alliance launched the first version of the Token Taxonomy Framework. If you recall, the initiative was first launched back in April 2019. As stated in the framework, it “bridges the gap between blockchain developers, line of business executives, and legal/regulators allowing them to work together to model existing and define new business models and networks based on tokens. The blockchain space alone makes it difficult to establish common ground, but when adding tokens to the mix they find themselves speaking completely different languages.”


 Global Developments

China: At Hong Kong FinTech Week, Mu Changchun, the central bank's digital currency head as of September 2019, provided an update on the central bank's plan to launch a digital version of the renminbi. According to the South China Morning Post, "The original construct of the proposed digital currency electronic payment (DCEP) system, which relies on licensed commercial banks to convert cash and coins in circulation into digital versions of the yuan, can be separated from the system for short-term visitors,” said the director general at the Institute of Digital Currency at the People’s Bank of China. “That would allow them to use the digital currency without first having to open a bank account with a Chinese bank."

Meanwhile, Chinese authorities have ordered more than 40 peer-to-peer lenders in Shanghai to exit the business altogether. According to the South China Morning Post, “Some of the nation’s biggest platforms including Ping An-backed Lufax and have been told in recent meetings with Shanghai’s financial services bureau to stop issuing new products and to wind down existing peer-to-peer lending services, the people said, asking not to be identified as the matter is private.”

European Union: In an op-ed in the Financial Times, German Minister of Finance Olaf Scholz said the EU is only halfway through its effort to develop a strong and robust banking union. Scholz offered four steps to complete the banking union: a common insolvency and resolution procedures for banks, continuing to reduce the number of non-performing loans and address sovereign debt risks, a common European Union-wide deposit insurance scheme, and the adoption of a common corporate tax base and minimum effective tax. These points were echoed in Scholz's remarks at the Bloomberg Future of Finance conference in Germany. "It is time for a breakthrough. It is time to put together a package to complete the Banking Union, based on the 2016 roadmap: A fair and balanced Banking Union that enhances stability, competitiveness and growth in the Eurozone and in the European Union."

Meanwhile, a draft document prepared by the Finnish EU presidency urges the European Union to develop a common approach to cryptocurrencies. As stated in the draft text, and as reported by Reuters, "The ECB and other EU central banks could usefully explore the opportunities as well as challenges of issuing central bank digital currencies including by considering concrete steps to this effect."

Lastly, the Association for Financial Markets in Europe (AFME) recently released a report that tracks the progress of the Capital Markets Union through eight Key Performance Indicators. 

Importantly, one of the eight indicators covers FinTech (pages 29-33 of the report). The indicator is constructed based on four sub-indicators: regulatory landscape, availability of finance, degree of innovation, and talent pool. Not surprisingly, the UK dominates the rest of the EU, with Sweden, Luxembourg, Lithuania, and Ireland following in its footsteps. While the main strength of the EU27 is its talent pool, limitations include the lack of production and registration of new FinTech patents. "According to AFME estimates of FinTech patents registrations, EU27 countries registered a total of 219,108 between 2010 and 2019 (June) compared with 608,346 in the US and 600,172 in China." 

Funding is also a challenge, as well as greater coordination between Member States. As such, AFME, among its other policy recommendations, calls on regulators to facilitate coordination between existing and any future sandboxes, finding that such coordination by Member States "may be a more successful model than establishing a single European level sandbox."

Germany: Given the current discussions surrounding Facebook's Libra project, the Association of German Banks released a position paper that "explores what contribution banks can make towards a sustainable and innovative monetary system, how the general environment should be designed so that banks can operate alongside new competitors, and what is needed to ensure the stability of the financial system." Among its various positions, the association says that the stability of the existing monetary system must not be endangered by the provision of crypto-based digital currency, that a legal classification of programmable digital money is necessary, and that all innovators must respect a uniform supervisory and regulatory framework. “The user of a digital euro—whether man or machine—must be clearly identifiable. This requires a European or, better still, a global identity standard. With every form of digital money, customers should be identified using a standard that is just as strict as that which banks and other obligated entities are required to apply under current legal framework pursuing the combat against money laundering and terrorist financing.”

Hong Kong: The eight recently licensed virtual banks are in talks with the Joint Electronic Teller Services (Jetco) to provide their customers with access to ATMs throughout the city. Jetco currently operates roughly 60 percent of Hong Kong's 3,300 ATMs, according to the South China Morning Post.

India: The Mumbai FinTech Hub and the FinTech Convergence Council have joined together to create the India FinTech Festival (IFF), which will be held next year. The festival is backed by the Government of Maharashtra and powered by the World Bank, NITI AAYOG, and Invest India.

Last week, the Reserve Bank of India announced the opening of its first cohort for its Regulatory Sandbox (Application Form). Retail payments is the theme of the initial cohort. "Migration to digital modes of making a payment can obviate some of the costs associated with a cash economy and can give customers a friction-free experience."

International Orgs: The Asian Development Bank held its Asia Finance Forum last week, where participants discussed how digital technologies could provide financial services to underserved populations throughout the region. To support FinTech in the region and its potential, ADB touched on its rollout of a cloud-based banking pilot in the Philippines, its work on the use of a biometric ID system in Papua New Guinea, and the implementation of a weather index-based crop insurance pilot in Bangladesh. Meanwhile, ADB's digital innovation sandbox is leading to a more digitally savvy organization, with the organization currently focused on nine projects. 

Singapore: OCBC Bank is in talks with Keppel Corporation, peer-to-peer lender Validus Capital, and Vertex Ventures to form a digital-bank consortium in seeking to obtain a virtual banking license (digital wholesale bank) from the Monetary Authority of Singapore. The deadline for virtual bank applications is December 31, 2019.

Meanwhile, Singapore-based cross-border startup InstaReM has withdrawn from considering a digital wholesale banking license due to how crowded the banking landscape is already.

BNY Mellon announced several new initiatives to further cement its position in Singapore's digital and financial ecosystem. Among the announcements, BNY Mellon joined the ASEAN Financial Innovation Network (AFIN) with Hans Brown, global head of innovation, representing BNY Mellon on AFIN's Strategic Advisory Council. The firm also announced collaborations with EZOPS and Kingfield to better serve clients' complex data needs through the use of artificial intelligence and streamlining client service inquiries to develop a simplified client messaging system across the marketplace, respectively.

AFIN also signed an MoU with the Hong Kong FinTech Association in support of the API Exchange (APIX).

Separately, DBS launched a blockchain trade platform with Swiss commodities trader Trafigura and other participants. The platform "is built on Singapore's Infocomm Media Development Authority's (IMDA's) network infrastructure and blockchain technology by start-up Perlin," according to DBS.

South Korea: Parliament passed a new law covering peer-to-peer lenders. According to The Investor, "Under the law, the minimum capital is set at 500 million won ($429,600) for marketplace lenders to gain a license. P2P lenders will also be forced to draw a line between funds raised on P2P lending platforms and their working capital."

Spain: Spanish-based neobank Rebellion has reportedly become the first challenger bank in the country to receive a banking license and provide International Bank Account Numbers (IBANs).

Turkey: The country is finalizing plans to launch a state-backed cryptocurrency. According to the document, testing of the new currency is expected to be completed by 2020.

UAE: In remarks at the Middle East Banking Forum, the Central Bank of the UAE Governor Mubarak Rashid Al Mansouri announced the creation of a FinTech Office to act as the coordinating authority, the author of prudential and market conduct regulatory requirements, and as an enabler and facilitator of FinTech activities in the UAE. The central bank has also developed a FinTech Strategy and Roadmap, which includes five key pillars: 1. Research, advice, and the application of FinTech solutions to address the needs of the banking sector; 2. Regulatory interface between market participants and regulatory functions of the central bank; 3. Exchange of FinTech ideas and facilitation of joint projects among key authorities and stakeholders; 4. Meeting the growing needs of the FinTech sector; and 5. Building a partnership model with key cross-border regulatory authorities and stakeholders. Of note, the FinTech Office will not compete with existing initiatives offered, such as the financial free zone sandboxes. 

For those interested in understanding more about the UAE’s FinTech journey, you should read our latest report, “The Rise of FinTech in the Middle East: An Analysis of the Emergence of Bahrain and the United Arab Emirates.”

Meanwhile, ADGM's FinTech Digital Lab opened for member applications. "With the specific aim of solving this challenge, the Digital Lab will support and enable the creation of APIs, System Virtual Machines, data and applications that can enable seamless connectivity with the legacy systems of financial institutions to FinTechs, technology service providers or other relevant parties in a cost-effective and scalable manner." The Digital Lab "will also serve as the digital platform for start-ups in ADGM's RegLab programme to test their FinTech solutions under the supervision of the regulator." ADGM’s RegLab will be phased out over the coming months.

UK: Sheldon Mills, director of competition at the Financial Conduct Authority (FCA), spoke on open banking, the second Payment Services Directive and opportunities for banks in an interview with The Paypers. On banks' readiness to deliver Open Banking solutions via APIs, Mills stated that the FCA's assessment "shows that some UK retail banks are ready to deliver Open Banking via API, but others have struggled to encourage third parties to connect. This is because some third parties have capacity constraints in trying to connect to several different banks and some banks have problems with API readiness." The interview was part of The Paypers’ Open Banking Report 2019.

In prepared remarks, the director of innovation at the FCA, Nick Cook, discussed how the FCA continues to adapt to ensure it keeps up with the technological changes taking place in the markets it regulates. Cook discussed the effectiveness of the FCA's innovation efforts (regulatory sandbox, advice unit, etc.). These initiatives have helped support 700 firms so far, but, as Cook discussed, may be in need of some changes. On RegTech, Cook remarked that "the lack of access to high-quality synthetic data assets against which to test new technology solutions," is a concern raised by RegTech firms. "So, one of the things we are currently looking at and beginning conversations around is what that digital testing environment might need to look like, what role we ought to play in supporting its creation, and whether it could be something that could be scaled across jurisdictions."

US: The Financial Action Task Force (FATF) released draft guidance "to clarify how digital identity systems can be used for customer due diligence (CDD)." The guidance “draws links between digital ID assurance frameworks and standards and the FATF’s CDD requirements, to demonstrate that the key components of digital ID systems align with specific CDD requirements.” Under the guidance, “regulated entities” refers to financial institutions, virtual asset service providers, and certain designated, non-financial businesses and professions. Comments on the draft Digital ID Guidance are due by November 29.

Speaking of digital identity, Colorado Governor Jared Polis announced the launch of Digital ID in the state's myColorado mobile app. Digital ID "enables Coloradans to create an electronic version of their Colorado driver license or state identification (ID) card, and can be displayed on smartphones for proof of identification, age, and address within Colorado." The governor also signed an executive order stating that Digital ID "shall be authorized, and may be accepted, as a legal form of personal identification for use in Colorado."

Published November 13, 2019