FinTech in Focus—November 4, 2019



FinTech in Focus—November 4, 2019

Jackson Mueller
Jackson Mueller

In this issue:

Industry Headlines »

Global Developments »


What a Series

Congrats to the Washington Nationals for winning Game 7 of the Major League Baseball World Series. Despite their bullpen being worse than my New York Mets during the regular season, which is an extremely difficult accomplishment, they somehow are World Series champions. Both my wife and kids have thrown in the towel and, I’ve been told, can no longer tolerate watching and rooting for the NY Mets anymore. I don’t blame them…

The New York Mets: At least we aren't the Knicks.

So here I go, again on my own... 

 Industry Headlines

Accelerators & Incubators: Walmart and Green Dot have partnered to establish a new FinTech accelerator, Tailfin Labs. The accelerator “will help startups develop solutions that integrate omni-channel shopping and financial tech, which can be aimed either at consumers or businesses. These may involve products built on top of Green Dot’s ‘Banking-as-a-Service’ (BaaS) platform," according to Tech Crunch.

Separately, Mastercard launched Mastercard Accelerate, a global initiative that will give startups and emerging brands the "support and assistance for every stage of their growth and transformation from market entry to global expansion."

Cryptocurrency: Joint research conducted by IBM and the Official Monetary and Financial Institutions Forum (OMFIF) finds that a consumer-ready central bank digital currency (CBDC) will arrive within the next five years. The report surveyed officials from 23 central banks in advanced and emerging economies. Nearly three-quarters of respondents "would require retail CBDCs to be available under all circumstances and for all types of payments where cash is currently used." In addition, more than 80 percent of respondents identified the risk of digital bank runs as their greatest financial stability concern. And, nearly two-thirds of respondents said, “outsourceable 'intermediation' functions, such as customer onboarding, would be important for CBDC implementation."

Expansion: Square's Cash App announced last week that it is providing users with the ability to buy and sell stocks with zero fees. Separately, Uber announced Uber Money, which is focused on providing the Uber community with various financial products and services. Among them: real-time earnings, an Uber debit account and card powered by Green Dot, Uber Wallet, and an Uber credit card,

Machine Learning: A joint survey conducted by the UK Financial Conduct Authority (FCA) and the Bank of England (BoE) finds that nearly two-thirds of the more than 100 financial institutions that responded already use machine learning (ML) in some form. Additionally, more than half of all respondents (52 percent) “have a dedicated strategy for research, development, and deployment” of ML applications. 

Deployment of ML is most advanced in banking and insurance sectors. While the sample is “somewhat skewed” to larger firms, the survey also finds that 14 percent of firms have more than 10 distinct live applications of ML. The survey also finds that firms are past the initial pre-deployment phase, with nearly 60 percent of ML applications reported by firms now live. “Overall, the business areas with the most frequent and mature levels of ML deployment are: risk management and compliance, customer engagement, credit, securities sales and trading, and general insurance,” according to the findings from the survey. 

Of the ML models developed by respondents, more than three-quarters of them are developed and implemented internally, with less than one-quarter implemented by third-party providers. In addition, less than one-quarter of ML applications are run on the cloud, while structured data is used in more than 80 percent of ML use cases.

Risk management frameworks also need to evolve due to challenges related to the explain-ability of ML models and potential model drift, according to the survey. To address potential risks arising from deployed ML applications, respondents noted that the most common controls were alert systems and “human-in-the-loop” mechanisms. In all, 40 percent of use cases “have guardrails in place which switch off the model automatically if it produces undesired outputs.”

Going forward, the FCA and BoE will explore potential policy areas related to ML, announced a public-private working group on AI to further the discussion on ML innovation, and issue another survey in 2020.

Challenger Banks: A new survey from Kantar—a data insights and consulting company—on the impact of neobanks across 10 markets (Brazil, China, France, Germany, India, Netherlands, Singapore, Spain, UK, and the US) reveals "that the neobank impact on the retail banking market is remarkably strong in China, India and Brazil, but remains limited (so far) in the US, Singapore and European countries." Online interviews were conducted with 3,000 consumers that have at least one bank account (300 from each market). 

In China alone, 93 percent of consumers with a bank account do business with one or more local neobanks (Alipay, WeChat, and JD Finance), with India (50 percent) and Brazil (35 percent) listed in second and third place, respectively. The survey further found that 42 percent of Chinese customers “consider one of the neobanks to be their primary bank. This is way ahead of customers in Brazil (9%) and India (6%).” Page 4 of the survey provides a look into the proportion of consumers banking with a neobank by country.

Meanwhile, Metro Bank co-founder and current chairman, Vernon Hill, stepped down last week. According to the Financial Times, large customers of the Bank began withdrawing funds earlier in the year "after [Metro Bank] revealed it had been miscategorizing commercial loans when calculating how much capital it needed against them, forcing it to raise new equity."

Cloud Services: Google will soon publish information in its semi-annual transparency report on the number of government requests the company receives for its Google Cloud Platform and G Suite enterprise data.

Meanwhile, in a letter to the US Federal Trade Commission, two dozen Senate Democrats have asked the Commission to open an investigation "to determine if Amazon's failure to secure the servers it rented to Capital One may have violated federal law." As stated in the letter, "Amazon knew, or should have known, that AWS was vulnerable to [server-side request forgery (SSRF)] attacks. Although Amazon's competitors addressed the threat of SSRF attacks several years ago, Amazon continues to sell defective cloud computing services to businesses, government agencies, and to the general public. As such, Amazon shares some responsibility for the theft of data on 100 million Capital One customers."

Identity Verification: Jumio, a leader in artificial intelligence-powered identity solutions, announced the beta release of Jumio Go, "the company's first real-time, fully automated identity verification solution." The solution "is designed to remove friction from the user onboarding process, while still fighting online identity fraud and meeting AML and KYC compliance mandates."

Lending: UK-based peer-to-peer lender FundingSecure was placed into administration by the UK Financial Conduct Authority.

Open Banking: BNY Mellon's Laura McGortey, director of strategic partnership solutions, recently stated that open banking is being welcomed as a market-driven phenomenon in the US, compared to efforts by European regulators. US adoption is occurring across both consumer and business accounts due to market interest, compared to the EU, where progress in open banking in the B2B space is slow to come by.

In remarks at the Money 20/20 Conference in Las Vegas, BBVA Chairman Carlos Torres Villa was critical of how technology companies use consumer data to offer financial services but won't offer to share that data. “They’re keeping it for themselves, they leverage it to enter more businesses, they’re ever expanding their reach and gaining immense market power. Data is the new oil — the more data you have the more value you have.”

Payments: Jack Henry & Associates announced that 15 financial institutions will implement JHA PayCenter to connect to The Clearing House RTP network. "The initial 15 institutions are expected to be the first of many Jack Henry clients that will connect to the RTP network through JHA PayCenter," according to the press release.

Back in June, Mastercard and P27 Nordic Payments Platform—an initiative created by six of the largest banks in the Nordic countries, joined together to create "one common state of the art payment platform in the Nordic countries." According to the P27 website, the platform "will initially allow payments to flow instantly between people and businesses within the countries of Denmark, Finland and Sweden." In early October, the payments platform announced "key agreements" between the platform's backers that will lay the groundwork for the Nordic region's first real-time payments system. The payments system is expected to roll out in 2021.

Meanwhile, Western Union became the first money transfer operator to offer cross-border remittances via India's Unified Payments Interface (UPI), according to Finextra. YES Bank is involved in the collaboration and also becomes the first bank in India to integrate UPI "as an additional mode for facilitating remittances into the country on a commercial basis," according to Asit Oberoi, global head, transaction banking at YES BANK. The service will be available to senders from more than 200 countries and territories later this year.

Lastly, MTN Group has launched a mobile money API hackathon. The group "has granted third parties access to its Mobile Money Access Programming Interface platform,” according to the press release. "The Hackathon, run in partnership with Ericsson (MTN’s MoMo technology partner), will give app developers based in Ghana, Uganda, Cote d’Ivoire, Cameroon and Zambia the opportunity to create innovative financial and transactional applications using the MTN MoMo API platform."

RegTech: Jo Ann Barefoot, former Deputy Comptroller of the Currency and current member of the Milken Institute's FinTech Advisory Committee, and David Ehrich, co-founder of FinTech credit card startup Petal, announced the launch of The Alliance for Innovative Regulation (AIR). "AIR is building on efforts in the UK—including tech sprints—to advance a more reliable, secure, and transparent financial system. AIR has already raised $2 million in funding from leading fintech entrepreneurs and venture capitalists, including a 3-year seed grant from Flourish, a venture of The Omidyar Group," according to the AIR website.

 Global Developments

Australia: In mid-October, the House of Representatives passed amendments to the Corporations Act 2001 and the National Consumer Credit Protection Act 2009 that would expand the Australian Securities and Investments Commission's (ASIC) regulatory sandbox. According to the law firm of Logie-Smith Lanyon, the expanded sandbox will extend the maximum exemption period for Australian financial services license and Australian credit license from 12 months to 24 months; expand the range of financial products allowed (financial advice in relations to superannuation, life insurance and domestic and international securities, issuing and facilitating consumer credit, issuing non-cash payment products, and providing a crowdfunding service; and raise the individual product exposure limit for exempt general insurance products from $50,000 to $85,000. If you recall, we documented how InsurTech Australia was frustrated back in late 2017 with the fact that ASIC’s sandbox had essentially locked out players in the insurance sector from participation. 

Meanwhile, the Australian Competition & Consumer Commission initiated legal proceedings against Google for allegedly engaging in "misleading conduct" and making "false or misleading representations to consumers about the personal location data Google collects, keeps, and uses." The focus of the case revolves around two Google Account settings: Location History and Web & App Activity. Among the allegations, "the ACCC alleges that when consumers set up a Google Account on their Android phone or tablet, consumers would have incorrectly believed, based on Google’s conduct, that ‘Location History’ was the only Google Account setting that affected whether Google collected, kept or used data about their location."

Lastly, the Australian government's efforts to introduce a biometrics system to authenticate users of government services has hit another setback as the Joint Committee on Intelligence and Security "declined to recommend the passage of Australia's pair of Biometric Bills, with a bipartisan agreement being reached that the privacy safeguards are not sufficient in their current form,” according to ZDNet. While the report agrees with the objectives of both bills, the chair of the Intelligence and Security Committee, Andrew Hastie, said he supports "concerns from submitters that protections for individual's rights should be more explicitly incorporated."

Canada: 3iQ Corp, an investment fund manager in Canada currently focused on launching The Bitcoin Fund, a closed-end bitcoin fund slated to list on Canada’s major stock exchange, received a favorable ruling from a panel of the Ontario Securities Commission. "Gemini Trust Company LLC,  a New York-based cryptocurrency exchange and trust company, will act as custodian of the bitcoin in the Fund," according to the press release.

China: The Shanghai Head office of the People's Bank of China recently issued 40 measures to promote the development of FinTech. Among the eight major goals include to promote research and development of emerging technologies, strengthen cooperation on FinTech in the Yangtze River Delta, improve the regulatory effectiveness, and enhance personnel training, among other objectives.

On the cryptocurrency front, in particular, China's legislature recently voted to adopt a national law on cryptography. According to Xinhuanet, the law, which will take effect on January 1, 2020, "encourages and supports the research and application of the science and technology in cryptography and protects the intellectual property rights in cryptography."

Lu Lei, deputy head of the State Administration of Foreign Exchange, said the government is studying the application of blockchain and artificial intelligence in cross-border financing, according to a report from Reuters. The comments come after the General Secretary of the Communist Party of China (CPC), Xi Jinping, underscored the importance of blockchain technology for the country, and promised to expedite the development of blockchain technology and innovation-driven industrial development in remarks during a CPC Central Committee Political Bureau session.

The comments led blockchain stocks and the price of Bitcoin to soar, forcing the CPC to urge investors to "remain rational."

Separate from the cryptocurrency front, China is also looking to enhance its ties with Kenya on the development of a digital economy. The benefits of strengthened ties between the two countries were examined further during a symposium on China-Kenya cooperation and development of the digital economy, according to Xinhaunet.

EU: Earlier last week, the European Banking Authority called on the European Commission "to facilitate cross-border access, including the update of interpretative communications on the cross-border provision of services and further harmonization of consumer protection, conduct of business and AML/CFT requirements, in order to facilitate the scaling up of activity cross-border." The call comes after the EBA released a report (included in the press release) which found, among other findings how challenging it is for authorities and institutions “to identify when services are being provided across borders and, if so, when this is done through the freedom to provide services or the right of establishment. This is a complicated question that is exacerbated by the trend towards the provision of services using digital means. In this context, current European Commission interpretative communications do not reflect technological developments or accurately specify criteria for digital activity to be classified as cross-border; therefore, further European Commission guidance is sought. Such guidance would also be useful more generally in terms of identifying when a cross-border service is provided under the provisions relating to the freedom to provide services or those relating to the right of establishment.”

Hungary: The central bank recently published its FinTech strategy titled, “Financial Innovation and Stability.” "The key objective of the first central bank FinTech strategy in the region is to facilitate the spread of competitive and innovative services in Hungary, strengthen the efficiency and stability of the financial system, stimulate the domestic FinTech ecosystem and develop the general financial culture and professional training. In order to achieve these targets, the MNB drafted 24 specific initiatives and proposals," according to the press release.

India: The Insurance Regulatory and Development Authority of India (IRDAI) established a committee to evaluate applications submitted to its Regulatory Sandbox. The committee consists of several senior officials of the IRDAI.

Korea: Ten major South Korean banks began piloting an open banking service in late October. According to Korea BizWire, consumers can now "conveniently conduct banking transactions by registering all of their bank accounts in one bank app."

Malaysia: Two more robo-advisers are expected to enter Malaysia's market in 2020, adding to the three robo-advisers that have already been approved by the Securities Commission and are operating in the country. The Securities Commission also hosted the sixth edition of the SCxSC FinTech Conference to scale up the country's local FinTech industry. According to the press release, there are now 21 equity crowdfunding and peer-to-peer platforms registered with the SEC. Together, they've raised RM587 million (~$141 million) for more than 1,600 SMEs. Of note, Malaysia's Budget 2020 allocates RM50 million (~$12 million) "to the Malaysia Co-Investment Fund (MyCIF) to help finance start-ups and SMEs by co-investing on a one-to-four basis in campaigns listed on ECF and P2P platforms. A further RM10 million has been allocated to MyCIF under Budget 2020 specifically for social enterprises to raise funds via P2P financing platforms." Chairman of the Securities Commission Malaysia, Datuk Syed Zaid Albar, also stated that there are three licensed and fully operational robo-advisers in the country with two additional platforms having received approval-in-principle.

Southeast Asia: As mentioned in last week’s FinTech in Focus, in early October, Bain & Company, together with Google and Temasek, published a report covering the internet economy in Southeast Asia. In late October, the three firms published a separate report that found digital financial services will generate $38 billion in annual revenue by 2025. While digital payments are set to surpass $1 trillion in transaction value by 2025 in the region, lending, investment, and insurance are likely to grow by 20 percent annually through 2025. "Serving the unbanked population has been a lingering challenge in the region, and 67% of the executives surveyed believe access to the unbanked will remain limited by 2025. Indeed, contrary to common perception, pure-play fintechs and consumer tech platforms are not yet making a meaningful impact. Governments and telecom companies will need to play a key role in accelerating development of this segment, through a combination of infrastructure development, digital regulatory frameworks and, in some cases, direct access that can enable strong product and underwriting capabilities from partners."

Spain: Efforts to develop a regulatory sandbox may not happen until late 2020, according to Born2Invest. The Spanish Association of FinTech and InsurTech has urged the government to approve a regulatory sandbox through decree-law. However, as the report states: "Until now, the government had rejected the approval of the fintech sandbox by decree-law. Because it considered too difficult to justify compliance with the urgent requirements that require the use of this formula. Especially if one considers that the current Executive exercises only in functions. The problem is that this has been the case since April. And time is running against a tool whose primary advantage of implementation is that of ‘get there first’."

UK: A report released by the UK Treasury Committee says the current level of financial services IT failures is "unacceptable." According to the Financial Conduct Authority, the number of such incidents reported to the regulator increased 187 percent from 2017 to 2018. In addition, regulators "reported that 65 percent of the incidents notified to it in 2018 were from the retail banking sector, including payments services firms, over five times the next highest sector, wholesale financial markets." In the report, lawmakers said it is "essential that firms, and individuals within firms, are held to account for their failures, and we welcome the focus on accountability that has been brought to bear by the Senior Managers Regime. However, so far, there have been no successful enforcement cases under the Senior Managers Regime following IT failures, and we are concerned that this is evidence of an ineffective enforcement regime. The Regulators must consider if there are any barriers to its effective operation.” As stated in its recommendations, MPs are calling on the UK Treasury to “implement a continuing coordinating forum to assess the cumulative burden of regulatory change, and to facilitate a permanent “air traffic control” in the financial services sector.” The report also touches on MP concerns with the concentration among cloud service providers. In particular, “[t]he case for the regulation of these providers to ensure high standards of operational resilience is therefore considerable. The Government should urgently consider how best to regulate cloud service providers. Regulating them as critical infrastructure, while complex, may be necessary.” 

US: In meetings with Israeli officials in late October, the US Department of the Treasury highlighted in a press release that talks between Secretary Steve Mnuchin and Bank of Israel Governor Amir Yaron focused on "issues associated with digital assets and FinTech," among other topics of mutual interest. Earlier in the week, during a US—Israel Joint Economic Development Group meeting at the US Department of State, officials from Israel’s Finance Ministry and the US Department of Treasury “reviewed regulatory considerations and opportunities for investment cooperation in FinTech.”

The Securities and Exchange Commission will meet on November 7 to discuss the SEC's concept release on harmonization of securities offering exemptions. Back in June, the SEC published this concept, which asked for public comments "on possible ways to simplify, harmonize, and improve the exempt offering framework to promote capital formation and expand investment opportunities while maintaining appropriate investor protections." The concept release included focus on the accredited investor definition, private placement exemption, and Rule 506 of Regulation D, Regulation A, Rule 504 of Regulation D, Intrastate Offerings, Regulation Crowdfunding, and potential gaps in the current exempt offering framework, among other issues.

Meanwhile, the Data Foundation and Deloitte published a report titled, "Future of Open Data: Maximizing the Impact of the Open Government Data Act.” The report reviews the history behind the US OPEN Government Data Act, shares insights from current chief data officers, and next steps. Among the considerations: Agencies should establish cross-agency data governance processes to work across silos, and Agencies and Congress should fully fund Chief Data Officers in key agencies.

At the state level, the Electronic Frontier Foundation and several other privacy advocates published a letter calling for new provisions to strengthen a draft initiative, the California Privacy Rights and Enforcement Act (CPREA), which would make changes to the California Consumer Privacy Act (CCPA) of 2018. The coalition produced 19 pages worth of changes to strengthen the CPREA. Given California’s foray into data privacy and protection and the cascading effect this is already having at the state level, a recent op-ed in American Banker, notes that the balkanized approach to data protection in the US "is at odds with the borderless nature of the internet, and has the potential to put a brake on innovation. This demands a national solution in data protection."

At the local level, the City of Chicago has proposed raising its cloud-computing tax from 5.25 percent to 7.25 percent to fill budgetary gaps. The tax, first implemented in 2015, would exempt companies that are under five years old and have less than $25 million in revenue.

Published November 4, 2019