In this issue:
US FinTech Policy Update
On Friday, we published an update to our exhaustive list of legislation directly and indirectly related to FinTech. In all, the update highlights 89 FinTech-related bills and 151 bills indirectly related to FinTech. We also include several charts that further break down the legislation.
Voices from the Committee
In this week’s edition of FinTech in Focus, we hear from Milken Institute FinTech Advisory Committee Member Margaret Hartigan, founder and CEO of Marstone, an enterprise-ready tech platform for financial institutions. Marstone offers a flexible wealth management solution that enables financial organizations to efficiently and affordably reach, acquire, and retain more clients through its core-agnostic offering that meets client needs as their financial position matures. In the Q&A, Margaret and I discuss the rise of digital wealth management platforms, Marstone's operations, financial literacy, and market volatility.
Amazon Speaks: The US-based e-commerce giant recently published "Our Positions," a piece covering Amazon’s stance on several US policy issues. Among the positions raised: Governments should work quickly to put in place a regulatory framework for facial recognition technology, and consumer data privacy should be protected under federal law.
Challenger Banks: RBS was reportedly in talks to acquire Monzo bank, but no formal offer was made due to price concerns and Monzo's reluctance to sell to a bank. That, in turn, led RBS to invest in its own digital effort, Bó, which will launch next month.
Another UK-based challenger bank, Revolut, is looking to raise upwards of $1.5 billion in new funding to aid its global expansion effort. The challenger bank says it is opening 12,000 accounts every day. If Revolut were to raise that amount of money, it would become the most valuable FinTech player in Europe. And speaking of new funding rounds, US-based online bank Chime is raising a new round of funding that would value the startup at more than $5 billion. The round is expected to be led by DST Global.
Lastly, Brazilian-based challenger bank Nubank has grown to 15 million users. An executive at Nubank said the bank plans to accelerate its offerings in Mexico in the coming weeks.
Cloud Technology: Facebook CEO Mark Zuckerberg is not happy with the cost of using Amazon Web Services. "One of the things we talk about is our cost of computing and our AWS bill,” he said recently during a Chan Zuckerberg Initiative event.
Meanwhile, CME Group partnered with Google to allow clients the ability to access real-time market data from any location via Google Cloud. According to Trey Berre in The Trade, CME Group's global head of data services, "This innovative collaboration with Google Cloud will not only make it easier for our clients to access the data they need from anywhere with an internet connection, but will also make it easier than ever to integrate our market data into new cloud-based technologies."
Cryptocurrency: The Financial Action Task Force (FATF) last week held “FATF Week” in Paris with representatives from 205 countries and jurisdictions. Among the list of issues discussed: assessing whether countries are regulating the virtual asset sector to prevent its misuse for crime and terror; discussing the potential impact of "stablecoins" on the supervision of virtual assets, how to mitigate the risks, and FATF’s briefing to G20 on this issue; adopting best practices on the beneficial ownership of legal persons; and a consultation on guidance on digital identity.
Data Privacy: A new report from Deloitte measuring US consumer sentiment towards data privacy finds that nearly half of the 2,000 respondents "feel they have little to no control of their personal data." In addition, nearly 90 percent of respondents believe they should have the ability to opt out of the sale of their data. The report also provides a good look at US privacy legislation across the 50 states.
According to one chart (page 4 in the report): Three states have enacted dedicated privacy laws covering nearly 43 million Americans, and 19 other states are debating new privacy laws that would cover an additional 134 million Americans. The report also dives into the complexity of retailers' internal data storing environments. "Nearly two-thirds of retailers say their organization has more than 50 information systems (spreadsheets, customer relationship management [CRM], data warehouses, data lakes, mainframe applications, point-of-sale, cloud applications, email servers, etc.) that hold consumer data."
Explaining Algorithms: Researchers at Penn Medicine have apparently discovered "a once-hidden through-line between two widely used predictive models that could increase the accuracy of machine learning tools," according to an article in Health IT Analytics. The discovery "could spread machine learning much wider throughout healthcare and other industries." The researchers developed a separate model, which they call the “additive tree,” which is more accurate and easier to decipher compared to current uses of classification and regression trees (CART) and gradient boosting. According to the researchers in a Penn Medicine news release, "The algorithm we developed shows that [CART and gradient boosting] exist at the extreme ends of a spectrum. The additive tree uses that spectrum so that we get the best of both worlds: high accuracy and graphical interpretability.”
Facebook’s Libra: Despite several companies dropping out from participating further with Facebook’s initiative, the Libra Association officially launched with 21 charter members last week. The association also announced in a news release that 1,500 entities have "indicated interest" in joining the project, and "approximately 180 entities have met the preliminary membership criteria..."
And while the drop-off in members, especially several large payments players, is certainly a problem, the Libra project faces another problem: trademark infringement.
There are also several very good articles detailing how fears over Facebook’s Libra initiative has spurred the US Federal Reserve to discuss whether to move forward on the creation of a government-run cryptocurrency (Politico, Financial Times).
Of course, it is best if you hear what the Fed is up to from someone close to the action: Federal Reserve Board Governor Lael Brainard. In prepared remarks, Brainard stated that any stablecoin project with global scale and scope must address a core set of legal and regulatory challenges: 1. Compliance with Know-Your-Customer regulations, 2. Adherence to consumer protection and data privacy regulations, and 3. Appropriately define what financial activities the various players in a project are conducting to ensure existing regulatory and enforcement mechanisms are adequate. Alongside the challenges of a private entity issuing stablecoins, Brainard also touched on the challenges that the Fed may face, including “profound legal, policy, and operational questions,” with the understanding that several jurisdictions “may move in this direction faster than others.”
Global FinTech Report: PWC released its third survey charting the rapid evolution of FinTech. More than 500 financial services (FS) companies and technology, media, and telecommunications (TMT) providers were polled worldwide. Nearly 50 percent of FS and TMT executives surveyed have embedded FinTech fully into their strategic operating models, with 44 percent of TMT and 37 percent of FS organizations having incorporated emerging technologies into their products and services. Interestingly, only 30 percent of insurers believe the Internet of Things will be transformational. This, compared to more than half of TMT and FS respondents who believe artificial intelligence will be transformational. At the c-suite level, the survey found that only 33 percent of TMT and 41 percent of FS respondents believe they have executives that are championing digital innovation efforts.
Incumbents on the Move: Vanguard is moving forward on developing a blockchain platform for the $6 trillion foreign exchange market. The company partnered with Symbiont to develop the platform. The platform has been operational for two months and completed its first trades during that time, according to the report.
Speaking of blockchain, Finastra joined Ripple's blockchain-based payments network, RippleNet. "Finastra’s customers will be able to connect and transact with RippleNet partners—more than 200 financial institutions worldwide—and in turn, partners can access Finastra’s vast global footprint," according to Finastra’s news release.
Meanwhile, State Street announced Direct Access Lending, "…a securities finance product that enables direct, principal loans between its lending clients and its borrowing clients." The product "offers a seamless peer-to-peer model, supported by the operational efficiency and expertise of a managed securities lending program."
In third-quarter earnings reports, Bank of America reported a 76 percent increase year-over-year in Zelle P2P payments. In the third quarter alone, consumers made nearly 81 million payments worth roughly $21 billion using the Zelle network. Meanwhile, Goldman Sachs updated investors on its digital brand, Marcus, during its third-quarter earnings call. The platform has generated $55 billion in low-cost retail deposits and $5 billion in loans but has lost $1.3 billion since its launch in 2016.
Initial Coin Offerings: Two Wharton professors recently published a paper titled “Inventory, Speculators, and Initial Coin Offerings.” According to the authors, "despite lack of regulation, moral hazard issues in ICOs can be mitigated when the initial coin offering itself is properly designed. In particular, we show how firms can determine the optimal number and type of tokens to issue, how to price them, and how to manage product inventory when facing uncertain future demand."
Internet of Things: GSMA published a report titled “The IoT Big Data Revenue Opportunity for Mobile Operators.” According to the report, the market opportunity for Mobile Network Operators (MNOs) in IoT Big Data by 2025 is estimated at nearly $400 billion—nearly half of the $1.1 trillion opportunity in IoT more generally. "MNOs’ addressable revenues in IoT Big Data predominantly lie in Platforms, Cloud and Hardware, Applications, Analytics and Solutions and Professional Services." Not surprisingly, the report identifies countries in Asia, Latin America, and Africa that are "likely to experience a steadier uptake in IoT Big Data over the period to 2025."
Lending: China’s Hunan province has imposed a complete ban on peer-to-peer lenders operating in the province for failure to comply with regulations. "None of the 24 local P2P lending platform operators investigated by authorities complied with regulations, the Hunan Provincial Local Financial Supervision Administration said in a statement." Of note, nearly 6,000 peer-to-peer lending platforms "have defaulted on payment, absconded with cash or quit operations as of the end of September."
Meanwhile, Lending Club launched the "first-of-its-kind electronic marketplace," LCX, which offers additional real-time insights on demand at the loan level and provides the initial infrastructure needed for the development of a secondary market that will improve liquidity and value for this mainstream asset class. “This combination of speed, access, and transparency represents a substantial innovation in consumer loan transaction technology."
Lastly, Funding Options appointed Simon Cureton as interim chief executive officer, replacing Conrad Ford, who stepped down as CEO last month. The platform is planning to expand its services beyond lending to credit cards and other business services in the near future.
Payments: Americans still want to have stores that accept cash, according to a recent J.D. Power Pulse Survey. More than three-quarters of respondents "believe restaurants and retailers should be required to accept cash." Interestingly, the study "shows support for cash access transcending age barriers, as 85% of consumers above ages 60 and 72% of those aged 18-29 feel that cash acceptance should be required."
A recent survey from eCommerce solution provider Riskified shows a significant disparity in expectations in PSD2 awareness between European retailers and shoppers. Nearly 90 percent of the 200 European retailers surveyed believe customers are aware of the regulations, yet more than three-quarters of the 2,000 consumers surveyed stated they are unaware. Roughly one-third of customers would rather cancel online purchases then go through extra verification measures, while more than one-fifth of retailers have yet to take any steps to minimize the impact of PSD2 on revenues.
Out in Asia, TransferWise said it would not pursue a digital banking license in Singapore, according to reports. The company also unveiled third-quarter highlights, including: 6 million people are now using TransferWise to move £4 billion a month; nearly a quarter of transfers arrive in less than 20 seconds; and the average fee per transfer in the quarter was less than 1 percent, among other highlights.
Lastly, Diamond Trust Bank, African payment services provider DPO Group, and Mastercard joined together to launch DPO Virtual Card, a new offering that "will facilitate business to business payment without having to use a physical credit card, debit card, or bank account," according to an article in Verdict. Businesses that apply "will get a 16-digit card number, security code and expiry date that will work similar to a digital account and can be used across the globe similar to a physical card." The virtual payment card will be made available initially in Kenya and Tanzania.
‘Tis the Season: A new report finds that Santa is a digital payments giver! Nearly 20 percent of respondents to a recent money.co.uk poll of 2,000 parents with children aged four to 14 said money from Santa is now delivered digitally. Even the Tooth Fairy has gone digital, with 13 percent of parents sending money straight into their children's accounts. For those of you focused on financial health, the study also found that more than half of the respondents have turned to the Internet or mobile apps to start a child's financial training.
Trough of Disillusionment: Gartner recently announced its “Hype Cycle for Blockchain Technologies, 2019.” According to the release, blockchain is entering the “Trough of Disillusionment” and the company expects the market to climb out by 2021. However, the company also does not expect blockchain to become fully scalable technically or operationally until at least 2028.
Australia: Trade representatives from the country met with their peers from Singapore to sign a scope of agreement covering a broad range "of new areas of bilateral cooperation, including digital trade facilitation, e‑invoicing, e-payments, FinTech, digital identity and artificial intelligence," according to a release from the Australian government. Formal negotiations are set to begin shortly with an agreement expected early next year.
Canada: According to reports in AMBCrypto, the Bank of Canada is "contemplating the idea of a virtual asset that would help the organization tackle the 'direct threat' of cryptocurrencies, while also helping acquire more information about how people spend their capital.”
Chile: Treasury and foreign affairs ministers met in Chile for APEC 2019 to discuss several pressing financial issues. In a press release, several topics for discussion were highlighted, including boosting integration in financial markets through the digital economy and promoting financial inclusion in the digital age. Keep an eye out for the Joint Ministerial Statement.
China: According to China's Securities Regulatory Commission, caps on foreign ownership will be removed starting next year. "The first round of applications, for futures firms, can begin on Jan. 1, while fund management businesses can apply from April 1 and the securities industry will be able to file for 100% stakes on Dec. 1,” the CSRC said at a media briefing, as reported by Bloomberg.
Alipay and WeChat Pay have reportedly banned over-the-counter trading of virtual currencies. Speaking of virtual currencies, the People's Bank of China is looking to hire a half dozen experts for its digital currency effort.
Sticking with payments, access to and use of mobile payments has accelerated household consumption in the country, according to a recent report covered by XinhuaNews. "In rural areas, mobile payment increased consumption by 22.1 percent, while in urban areas, consumption went up by 12.79 percent thanks to the practice. Families of low, middle and high-income consumption increased by 22.81 percent, 16.5 percent and 6.04 percent respectively after adopting mobile payment."
Europol: The annual assessment of the cybercrime threat landscape was released earlier this month. The primary threat highlighted in the report is ransomware, followed by denial of access to an organization's data and distributed denial of service attacks. As it relates to cryptocurrency use, the report finds that "[a]s the trend of crimes that traditionally target fiat currencies evolving to targeting cryptocurrencies continues, we will see more financially motivated APTstyle cybercrime gangs shift their focus to any entity with large cryptocurrency assets—hacking exchanges and manipulating the Blockchain with 51% attacks." While Bitcoin "remains the most frequently used currency... there has been a more pronounced shift towards more privacy-orientated currencies, a trend that it is anticipated will continue as criminal users become more security aware."
India: A report by the Centre for Digital Financial Inclusion finds that only 22 percent of recipients of migrant remittances have access to banks within 1 kilometer from their house. Roughly 50 percent of recipients have a bank within 1-5 kilometers from their house. The report also found that nearly 98 percent of all remittances through banking channels are direct deposits to recipient accounts. Interestingly, however, nearly two-thirds of recipients who had a bank account did not use an ATM to withdraw money primarily due to a lack of knowledge on how to operate an ATM. Alarmingly, more than half of recipients who have a bank account had to spend money to travel to the bank to receive the transmitted funds. As it relates to products offered by the post office, while 34 percent were aware of the products offered, only 6 percent actually use the post office to remit money.
Meanwhile, the payments market continues to heat up in the country. India’s top FinTech firm, Paytm, is expected to close a new funding round worth $2 billion that would value the company at $16 billion. Ant Financial, SoftBank Group, and Discover Capital Management are expected to join the funding round along with others. Separately, Walmart is planning to spin off PhonePe from Flipkart. According to reports, the proposed move "will pave the way for Walmart to get into India’s booming digital payment space directly."
Lastly, new data protection legislation could be introduced this winter, according to the Economic Times. A committee, headed by Infosys Co-founder Kris Gopalakrishnan, has been appointed to make recommendations on how to handle non-personal data. "The draft of Personal Data Protection Bill, 2018…restricts and imposes conditions on the cross-border transfer of personal data, and suggests setting up of Data Protection Authority of India to prevent any misuse of personal information."
International Monetary Fund: At this week's IMF World Bank annual meeting in Washington, DC, Bank of England Governor Mark Carney sat down with Jason Furman, former economic adviser to President Obama and 28th chairman of the Council of Economic Advisers, David Marcus, head of Calibra, and Nandan Nilekani, co-founder and chairman of Infosys Technologies. The hour-long panel discussion covering BigTech and the Future of Finance is well worth a listen.
Ireland: Coinbase secured an e-money license from the Irish Central Bank, according to Finance Magnates. "The approval from the Central Bank of Ireland will now enable us to expand our Irish operation and deliver a better product to customers across some of our fastest-growing markets. It will also allow us to secure passporting for our customers across the EU and EEA," Coinbase said in a statement.
Latin America: Latin America is increasingly on our radar, as it should be on yours. We’re continuing to see significant activity in the region from investment trends to policy and regulatory developments. Crunchbase recently had a conversation with the Association for Private Capital Investment in Latin America to discuss such trends. Investment trends in the first half of 2019: $2.6 billion across 160 transactions; 2018: less than $2 billion across 463 transactions; 2016: startups raised $500 million. Colombia, Brazil, and Mexico make up nearly 92 percent of the dollars invested in the region.
Speaking of Latin America, SoftBank Group is planning to invest $500 million in venture capital funds in the region, as part of its prior $5 billion investment commitment.
Malaysia: The country's finance minister, Lim Guan Eng, announced that a regulatory framework applicable to virtual banks will be ready for public consultation by the end of the year with a final framework in place within the first half of 2020.
Malta: The government announced a national artificial intelligence strategy through 2030. According to Silvio Schembri, parliamentary secretary for financial services, digital economy, and innovation, the vision "is for Malta to become the 'Ultimate AI Launchpad.' We expect this strategy to catalyse R&D and innovation across the country. We will look to set up regulatory and data sandboxes for AI to help companies test innovative concepts and solutions in a contained environment with proportionate safeguards. We want to build a vibrant start-up community and encourage its members to collaborate with local businesses looking to infuse AI into their operations."
Nigeria: An interesting read from Quartz on the race to drive financial inclusion through telecom providers in the country. With the central bank taking a more open approach, telecom operators MTN, Airtel, 9Mobile, and Globacom are reportedly being issued licenses to become payment services banks.
Nigeria-based SME lending platform Lidya expanded into Eastern Europe. The company is on track to become the largest digital lender in Nigeria by the end of the year.
Singapore: In the first nine months of this year, the total value of FinTech deals in Singapore rose 69 percent from the prior-year period to $735 million, according to Accenture. However, the number of FinTech deals "fell by almost one-third (29%) in the first nine months of 2019, to 94 from 133 in the prior-year period showing that investors made larger bets into fewer deals as startups grew their business." No surprise, but payments and lending took top funding spots, though funding to InsurTech platforms nearly quadrupled from the prior year. That said, the number of lending and insurtech deals dropped by more than 40 percent, while deals with payments startups grew by 60 percent.
UK: Simon McDougall, executive director for technology policy and innovation at the Information Commissioner's Office, penned a blog post covering lessons learned from a recent Financial Conduct Authority (FCA) TechSprint. According to McDougall, who was a judge during the TechSprint, the recent event "brought together teams from all over the world to focus on how Privacy Enhancing Technologies (PETs) can help financial institutions to share data in order to prevent money laundering, while still meeting their confidentiality and privacy obligations." Of note, McDougall stated that there was a misunderstanding "that PETs alone can solve all [General Data Protection Regulation] compliance issues. They are just one part of the puzzle and it’s important that you’re not over reliant on them."
The country's peer-to-peer lending market grew at a compound annual growth rate of 175 percent between the first quarter of 2005 to the first quarter of 2019, according to S&P Global Market Intelligence. According to the report, the big three platforms—Zopa, Ratesetter, and Funding Circle—"accounted for nearly two-thirds of aggregate originations as of the first quarter of 2019 and 57.1% of 2018 annual originations."
US: Senator Ron Wyden (D-OR) proposed legislation that would severely punish firms for violating individuals’ data privacy. It's clear that Wyden is not happy with the outcomes following the recent Federal Trade Commission enforcement action against Facebook. "The new bill allows for state attorneys general to enforce the data privacy regulations and allows for privacy watchdogs to sue companies on behalf of people affected by data violations. It also imposes tax penalties on companies when their CEOs lie about privacy practices, which would be based on the executive's salary," a CNET article reported.
The Conference of State Bank Supervisors (CSBS) announced that it is seeking public comment on draft language for model payments law that covers state money transmission and payments regulation.
The Association for Financial Technology (AFT) announced that Brian Otte of ProfitStars was elected president by the AFT board. The national association represents FinTech firms of all sizes, data providers, processors, and service organizations.
In Massachusetts, state lawmakers recently held a hearing covering a new consumer data privacy bill that is modeled after the California Consumer Privacy Act. Key features of the Massachusetts consumer privacy bill can be viewed here. A recap of the hearing can be read here.