In this issue:
And the Oscar goes to…
Give me an IMDB profile and a star on the Hollywood Walk of Fame! Over the summer, yours truly was interviewed for a video segment on the topic of regulatory sandboxes as part of the Federalist Society's Regulatory Transparency Project. The good folks at Motivo Media gave me a few minutes to share my views on global regulatory sandbox developments. The video segment also includes some fantastic insight from Scott Astrada, director of community and government relations at Affirm, and Kate Prochaska, senior counsel and director, regulatory policy, at Discover Financial Services.
Siskel and Ebert give it two thumbs up. Enjoy!
Speaking of sandboxes, Ross Buckley, Douglas Arner, Robin Veidt, and Dirk Zetzsche just published an interesting report titled, “Building FinTech Ecosystems: Regulatory Sandboxes, Innovation Hubs and Beyond.” If you don’t know who these authors are, you have not been paying enough attention to the FinTech space—they have produced some fantastic material on FinTech-related issues and developments over the past several years. In short, read up!
The paper finds that innovation hubs “provide all the benefits that the policy discussion associates with regulatory sandboxes, while avoiding most downsides of regulatory sandboxes, and that many benefits typically attributed to sandboxes are the result of inconsistent terminology, and actually accrue from the work of innovation hubs.” Apart from good insight into firms that have taken part in sandbox cohorts, and operations of several regulatory sandboxes, the authors also find that sandboxes “are probably most effective in jurisdictions where there are already a significant number of innovation focused firms (such as the UK, Hong Kong, Australia, and Singapore) and less effective in small developing countries that lack a significant number of startups and innovation companies.”
Racking up sky miles like Edward Norton
Never seen Fight Club? You should (after you see Waterworld and The Postman). More importantly, I’ll be traveling a bit more over the next couple of weeks, and hopefully I’ll be able to find some time to connect if you’re at the same event or around town:
- American Banker BankAI 2019 (Chicago, October 7)
- FinTech Week (Washington, DC, October 21-24)
- Money 20/20 (Las Vegas, October 27-TBD
- Data Symposium (Los Angeles, November 4-5)
- FDIC Midwest Interagency Conference (Chicago, November 19)
The Future of Banking
The US National Bureau of Economic Research recently released a report titled, “FinTech, BigTech, and the Future of Banks.” In this report, René Stulz focuses on why banks have become less special over time, how FinTech firms are competing with banks for many bank activities that do not make banks special, and the potential threat of BigTech as opposed to FinTech. “As greater competition makes banks less special, they are likely to take more risks to attempt to be profitable with their current cost structure. If they cannot take more risks, they will have to reduce their costs sharply and become more like utilities.”
BigTech: A lot of discussion this week (and over the past several years) on the regulation of BigTech and whether BigTech firms should be broken up. In remarks at a conference in New York, Uber's CEO warned that tougher regulation of BigTechs could trickle down and unintentionally stifle innovation and block the next wave of innovative startups. JPMorgan CEO Jamie Dimon and Microsoft President Brad Smith have also recently responded to the threat of BigTechs. Lastly, Bruce Hoffman, director of the Bureau of Competition at the US Federal Trade Commission, testified in front of lawmakers on the Senate Judiciary Committee during a hearing that covered competition in digital technology markets. “To address the potential challenges posed by digital industries, the Bureau of Competition’s newly formed Technology Task Force (TTF) is marshaling resources and expertise from across the Commission. The TTF is actively conducting investigations, and it is also deepening our understanding of technology markets and strengthening our ability to protect consumers from anticompetitive conduct and harmful mergers in the digital technology space.”
One of BigTech's legislative efforts on Capitol Hill has been to introduce a nationwide online privacy bill. However, according to reports, that bill is unlikely to come before Congress this year.
Cloud: Amazon Web Services unveiled AWS IQ—a new service that will help firms engage with AWS Certified third-party experts for project work. "AWS IQ will let you quickly & securely find, engage, and pay AWS Certified experts for hands-on help." Speaking of cloud service providers, American Banker provides a great overview of the concerns and potential regulation around Google, Microsoft, and Amazon’s hold of the cloud services space.
Cryptocurrency: Harbor Square Investments, a subsidiary of the tokenized securities platform Harbor, received a broker-dealer license from the Financial Industry Regulatory Authority.
Separately, the IOTA Foundation, the entity behind the cryptocurrency IOTA, just launched the first decentralized, autonomous marketplace in the world. “By combining distributed ledger technology with established standards and openly-developed specifications, the Industry Marketplace will spearhead [Industry 4.0] and create a platform for the economy of things.”
Lastly, Switzerland-based financial services firm Global Trade Solutions AG, the parent company to Crypto Capital, which is a payments processing platform with a direct connection to Bitfinex, was placed under supervision by the Financial Market Supervisory Authority. The development reportedly comes after "the firm’s association with an alleged scam worth $850 million involving cryptocurrency exchange Bitfinex and its sister organization Tether Ltd."
Facebook’s Libra: Several potential members of the Libra Association are reportedly reconsidering their involvement in the Libra network. According to the Wall Street Journal, representatives from potential member companies will meet in Geneva on October 14 to review the charter for the Libra Association and appoint a board of directors. David Marcus, head of Libra at Facebook, took to Twitter in response to the article.
Financial infrastructure: There's a good profile of a FinTech startup, Neocova, in the St. Louis Post-Dispatch on the core technology provider's efforts to compete and potentially unseat large incumbents. If you recall, both the FDIC and OCC have voiced considerable concerns about consolidation in the core technology provider space in recent risk reports or semi-annual reports.
InsurTech: Lloyds announced the publication of “Blueprint One” which describes the firm's strategy to build the most advanced insurance marketplace in the world. "This first blueprint sets out six ideas of improved ways of working, underpinned by a heightened focus on digital, data and technology to deliver greater benefits to customers."
Jobless: According to a new report from Wells Fargo, US banks will likely cut more than 200,000 jobs within the next decade due to the adoption of certain technological innovations and advancements. Back offices, branches, and call centers would bear the brunt of the cuts with staff numbers falling 20-30 percent.
Lending: US marketplace lenders continue to face legal uncertainty regarding the “valid-when-made” doctrine, among other legal issues (i.e. true lender). Recently, Georgetown University Professor Adam Levitin submitted an Amicus Brief in Rent-Rite Super Kegs West, Ltd. v. World Business Lenders, LLC. The brief "shows pretty conclusively that there was no such doctrine discernible in the law when either the National Bank Act of 1864 or the Depository Institutions Deregulation and Monetary Control Act of 1980 were enacted, and that subsequent cases consistent with the doctrine are based on a misreading of older law."
Payments: Big news from PayPal this week. The company acquired Chinese-based online payment services company GoPay, which makes PayPal "the first foreign company to be granted a license to provide online payment services in China." The transaction itself, according to PayPal, will close in the fourth quarter of 2019.
But there's more big news out of the payments space. UK-based TransferWise, the first non-bank platform to receive direct access to the Bank of England’s payment system, launched TransferWise for Banks in the US. As stated in their press release, financial institutions of all sizes “can now integrate with TransferWise and offer their customers cheaper, faster, transparent payments to 70+ countries and 40+ currencies. Right from their online banking or app." TransferWise has first partnered with Nobo and Stanford Federal Credit Union.
Open Banking: Plaid's international lead Keith Gross was interviewed by Bloomberg’s senior finance editor James Hertlingon on the world of open banking at The Future of Frictionless Payments conference in London. The interview provides good insight into what Plaid does and how it operates, their reactions to certain regulations, their views on the FinTech ecosystems in the UK and the US, and reactions to Brexit, Facebook’s Libra, and BigTech’s movement into actual financial services.
Point of Sale Finance: The Wall Street Journal provides an interesting look into leading FinTech firms (Affirm, Afterpay Touch Group, and PayPal’s Easy Payments) and incumbents’ interest in helping people manage their purchase options at the checkout counter.
Small FIs & Biz: A new study commissioned by financial technology and marketing provider, Kasasa, finds that Millennials and Gen Z are twice as likely as Gen X and Boomer generations to cite lagging technology as a barrier to banking locally. Interestingly, a “strong majority of Americans (75 percent), would choose a local institution over a national megabank if they had comparable banking products.” Separately, LexisNexis Risk Solutions released its 2019 Small and Mid-Sized Business Lending Fraud survey. According to the survey, fraud monetary losses for smaller banks amounts to 4.5 percent and 5.8 percent of overall revenue, compared to 2.9 percent for larger institutions. Cyber risks are greatest through the mobile channel, "which experienced a 107 percent growth in account takeover attacks in the last six months." Lastly, while demand for capital among US small businesses remains robust, the number of small businesses reporting that they are unable to secure a loan from a bank or credit union, or trade credit, declined significantly in the third quarter compared to the prior quarter.
In case you missed it, there's an interesting read in American Banker on the FDIC's efforts on approving de novo banks, which have reportedly stalled over the past several months. "Over the last 12 months, 33 groups have filed applications with the Federal Deposit Insurance Corp. for deposit insurance. Of those, 17 were approved, five were withdrawn, and 11 are still pending. A number of the approved efforts—including Spirit Community Bank, Community Bank of the Carolinas and Marathon International Bank—fizzled out. While regulators were faulted for a post-crisis dearth of de novo activity, struggles in raising capital lead the list of impediments today, industry experts said."
Venture Capital and Investment: Goldman Sachs is reportedly looking to cut its exposure to SoftBank's Vision Fund. The firm "is seeking to offload a portion of its stake in a $3.1 billion credit line it helped arrange for SoftBank Group Corp.’s Vision Fund."
Meanwhile, FinTech startup Fundbox Inc. raised $176 million in addition to a new $150 million credit facility; London-based Rapyd raised $100 million for its “FinTech as a service” API; Los Angeles-based FinTech money management platform, Dave, raised $50 million from Norwest; Spanish-based FinTech company Bnext raised $25 million; Switzerland's EST Group is planning to invest $250 million into Indian FinTech firms; and Santander InnoVentures, the venture arm of Santander, continues to focus on investment opportunities in Latin America including, Mexico, Argentina, Chile, Columbia, and Peru,.
Australia: The Australian Competition & Consumer Commission announced in late September that it "has sought authorisation to amend its Banking Code in line with recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Hayne Royal Commission)." The proposed amendments aim to improve basic bank accounts, low or no-fee accounts, remove minimum deposit requirements, and allow for free unlimited domestic transactions, among other amendments.
Brazil: The country's FinTech sector is booming. Data compiled by Finnovation finds 504 FinTechs operating in the country across 10 segments up from 377 companies identified last year. "According to the study, business-focused FinTechs, who often cater for incumbents, represent 61 percent of all startups operating in the sector."
Egypt: The central bank (CBE) recently authorized 28 banks to provide mobile payment services in the country. CBE Governor Tarek Amer also revealed that "mobile payment subscribers reached 13.5 million at the end of June 2019, with a total value of transactions of about EGP 20bn until September 2019."
European Union: The European Banking Authority's outsourcing guidelines, which are more prescriptive, have a broader scope and apply to payment and e-money providers for the first time went into effect on September 30.
Hong Kong: In a recent speech, Hong Kong Monetary Authority (HKMA) Deputy Chief Executive Arthur Yuen discussed the HKMA’s recent approval of eight virtual banks, including a slide presentation on HKMA’s oversight of virtual banks.
International Monetary Fund: The IMF recently published a blog titled, “From Stablecoins to Central Bank Digital Currencies.” In the post, the authors note that it is “questionable” whether stablecoins are indeed stable. The authors mention several regulatory options regarding stablecoins, including: 1) to require that stablecoin providers hold safe and liquid assets, as well as sufficient equity to protect coin-holders from losses; or 2) to require stablecoin providers to fully back coins with central bank reserves—the safest and most liquid assets available. The authors then discuss the potential for a synthetic central bank digital currency.
Israel: The Israel Securities Authority and the Capital Market, Insurance, and Saving Authority have signed a FinTech collaboration MOU with the Croatian Financial Services Supervisory Agency.
Mexico: 85 FinTech firms are seeking permission to operate in the country, according to the country's banking regulator. In all, 60 FinTech firms have requested to operate as Electronic Payment Funds Institutions, while 25 firms have elected to operate as Collective Financing Institutions.
Qatar: The Qatar Financial Center "has expanded the number of FinTech activities to be licensed and conducted by companies listed on the QFC platform." According to the press release, "the activity of non-regulated Professional Services firms has been widened to FinTech Services Providers which include activities such as, but are not limited to; providing cybersecurity solutions, application programming interfaces (API), cloud computing, developing blockchain-based technologies, Artificial intelligence and companies which provide a platform for facilitating real-time transaction capability of internet-connected devices."
Singapore: Bank of China and IBM announced an expansion of their current relationship “to co-create a new innovation model for the financial industry." The BoC has opened a Global Innovation Lab in Singapore "that will unify digital systems, introduce automation in processes and establish efficient means to comply with regulations."
United Nations: The UN Task Force on Digital Financing of the Sustainable Development Goals published a report titled, “Harnessing Digitalization in Financing of the Sustainable Development Goals.” The report highlights how digitization could support three disruptive waves of change "that could dramatically shift the centre of gravity of the financial system towards the citizen." For example, “better, cheaper and more accessible information could support the first wave of opportunities to empower citizens in their financing decisions, from their roles as savers and borrowers to consumers and pension policyholders. Disruptions caused by digitalization that disintermediate incumbent financial intermediaries, such as banks, could provide a second wave as new data-fueled actors find fresh ways to customize and deliver finance. Finally, digitalization could offer citizens the means to act collectively, providing a potential third wave of opportunities for citizens to take more control over their financial lives.”
US: This was Speech Week in the US, apparently. Federal Reserve Board Governor Michelle Bowman gave prepared remarks on advancing the understanding of community banking, including a plea to academics and economists to focus future research on the economic impact to a community when a local bank is acquired by a larger FI elsewhere, and the calculation of the cumulative contribution of community banks to US investment, employment, and economic output.
Meanwhile, FDIC Chairman Jelena McWilliams gave prepared remarks on the future of banking. According to McWilliams, "…[d]ata is the new capital. Financial service providers are using data and technology to develop new services for consumers.... Developments that allow data access and open banking while ensuring security, safety and soundness, and consumer protection hold a great deal of promise to enable further innovation in the financial services marketplace." As to why more community banks aren't developing new technologies, McWilliams cited cost and regulatory uncertainty, before explaining the importance of the FDIC's Tech Lab, FDiTech, in being able to address some of those challenges. Among the initiatives currently being explored: tech sprints, prize competitions, rapid prototyping, pilots, and a series of community bank-focused stakeholder roundtables on digitization, data access and ownership, machine learning and artificial intelligence. (FDiTech is hiring, by the way)
In a keynote speech, Dan Berkovitz, commissioner of the Commodity Futures Trading Commission, stated that it is his belief "that FinTech solutions that digitize and automate derivatives transactions and other swap related activities will lead to compliance that is both more complete and more cost-effective." Berkovitz noted that much of the CFTC's energy has been spent on examining cryptocurrencies, yet reminded the audience that improving infrastructure technology "is critical to the CFTC’s core mission of facilitating vibrant, safe, and competitive derivatives markets." Further, Berkovitz urged the CFTC to "dedicate a significant portion of its FinTech initiative to engaging more actively with market participants and infrastructure technology developers to facilitate more effective and efficient compliance with our regulations."
In prepared remarks during a federal identity forum, Financial Crimes Enforcement Network (FinCEN) Director Kenneth Blanco stated that in some cases cybercriminals "appear to be using FinTech data aggregators and integrators to facilitate account takeovers and fraudulent wires. By using stolen data to create fraudulent accounts on FinTech platforms, cybercriminals are able to exploit the platforms’ integration with various financial services to initiate seemingly legitimate financial activity while creating a degree of separation from traditional fraud detection efforts."
The Consumer Financial Protection Bureau (CFPB) announced several executive appointments recently. Bryan Schneider, the former secretary of Illinois Department of Financial and Professional Regulation, will now serve as associate director in the Supervision, Enforcement and Fair Lending Division at CFPB.
In Congress, the US Task Force on Financial Technology of the House Financial Services Committee and the Senate Banking Committee held separate hearings covering the Federal Reserve’s decision to move forward on real-time payments as an operator. Some really good back and forth discussions between Esther George, president and chief executive of the Federal Reserve Bank of Kansas City, and several lawmakers (Ex. Sen John Kennedy (R-LA): 1:39:25 – 1:46:05; Rep. Warren Davidson (R-OH): 58:10 – 1:03:25; Rep. Denver Riggleman (R-VA): 1:17:20 – 1:23:20). At issue: whether the Federal Reserve’s role as regulator and operator in a faster payments system is the right way to move forward on faster payments, especially since The Clearing House launched its real-time payments system back in 2017 and when there have been calls by multiple stakeholders for the Fed to prioritize opening another settlement window for the Fedwire Funds Service and the National Settlement Service.
Zimbabwe: The country's central bank reportedly banned mobile money agencies from facilitating cash withdrawals or deposits. That ban was lifted a bit a day later with the central bank only allowing cash-in, cash-out up to a limit (USD $6). The central bank had also suspended services to mobile money operator Ecocash, before partially restoring its services. Econet's Ecocash has a 95 percent market share and moves a significant share of local currency every day. According to a press statement regarding cash-in, cash-out, and cash-back facilities: "The Directive (NPS 01/2019) on cash-in, cash-out and cash-back facilities was issued to protect the transacting public from some mobile banking agents leveraging and abusing the payment ecosystems."