In this issue:
Ladies and gentlemen, I’m back. That’s right, the creator of this newsletter has returned. But before you crack open a bottle of champagne in celebration of my return, let me just say thank you to my former colleague, FinTech-SOC sock wearer, and cubicle neighbor, Mr. Dan Murphy.
Dan has moved on to join the Financial Health Network. We wish him all the best, and I’m looking forward to seeing him at various DC FinTech events.
For those new to this newsletter, here are a few facts about me: 1. I head our FinTech program at the Milken Institute Center for Financial Markets where I seek to provide you with insights into certain segments of FinTech and comments on US and international regulatory and policy approaches to the innovations reshaping the financial services ecosystem; 2. I am a fan of some of the worst/most depressing teams in the history of US sports (hint: NY teams that seldom win); 3. I feed my kids pizza three times a day when mom is out of town; 4. My favorite movies are Waterworld and The Postman. If you haven’t seen them yet, you are in for a treat!
So, here I go again on my own. Goin' down the only road I've ever known.
With my triumphant and much-celebrated return as author of this newsletter, I come bearing gifts:
The Milken Institute has been following FinTech-related trends and developments in the Middle East for some time now. At this year’s MENA Summit, we spoke with several industry stakeholders and regulators to gain an understanding of why the Middle East, particularly Bahrain and the UAE, has become such a hotbed for FinTech-related activity. Our discussions illuminated three key factors driving the emergence of Bahrain and the UAE as FinTech hubs in the region:
- an ecosystem conducive to new financial alternatives
- an ecosystem where the government is at the center of efforts to drive innovation as part of a larger remit
- an ecosystem particularly interested in attracting international talent as a means of stimulating innovation domestically
Steven L. Antonakes is the Executive Vice President for Enterprise Risk Management at Eastern Bank. Headquartered in Boston, Massachusetts, Eastern Bank is the largest and oldest mutual bank in the United States. Antonakes previously served as the deputy director and the associate director for supervision, enforcement, and fair lending at the Consumer Financial Protection Bureau. Prior to joining the Bureau, Antonakes was appointed by successive governors to serve as the Massachusetts commissioner of banks from December 2003 to November 2010. Preceding his appointment as commissioner, Antonakes served in a variety of managerial positions at the Division of Banks, having joined the agency as an entry-level bank examiner in 1990.
The Future of Banking
Kathryn Petralia, president and co-founder of Kabbage; Thomas Philippon, professor of finance at NYU Stern; Tara Rice, Bank for International Settlements; and Nicolas Véron, senior fellow, Bruegel and Peterson Institute for International Economics, co-authored a report titled, Banking Disrupted? Financial Intermediation in an Era of Transformational Technology. The report takes a look at the changes to the financial services landscape over the past several decades, the extent to which the emergence of FinTech and BigTech platforms in the financial services ecosystem will truly threaten the banking industry, and identifies several policy questions surrounding the future of banking.
In short, the authors conclude "that while the financial landscape will continue to radically transform, for the consumer, banking at large will remain a business conducted primarily by government-chartered and regulated entities, including many incumbent banks." Furthermore, one key challenge for financial policymakers "will be to work collaboratively with non-financial peers in areas such as competition and data rights, in order to adequately respond to increased salience of BigTech in the financial system."
Of particular interest to the author of this newsletter was the “Discussion” section of the report (Pg. 84), where representatives from academia, central banks, international organizations, and industry stakeholders provided reactions to the report and follow-on thoughts. The section includes some really interesting insights from those who took part in the discussions and is definitely worth a read.
Cryptocurrency: The International Financial Reporting Interpretations Committee, which is associated with the International Financial Reporting Standards (IFRS) Foundation under the International Accounting Standards Board, found that cryptocurrencies are neither legal tender nor a financial product. An IFRS document from June 2019 states: “The Committee concluded that a holding of cryptocurrency is not a financial asset. This is because a cryptocurrency is not cash. Nor is it an equity instrument of another entity. It does not give rise to a contractual right for the holder, and it is not a contract that will or may be settled in the holder’s own equity instruments.”
Facebook’s Libra: In an interview with the Financial Times, Ravi Menon, managing director of the Monetary Authority of Singapore, said that the global regulatory community "is coming around to the view that we need a broadly consistent approach. Some of the macro-financial risks [it poses] are actually global in nature. It's not as if one regulator can act on its own." Earlier this week, representatives of Libra met with 26 central banks in Basel, Switzerland. (In next week’s edition of FinTech in Focus, we’ll provide a recap of the FinTech-related hearings that took place on Capitol Hill over the past few weeks.)
Financial Health: JPMorgan Chase & Co. invested $25 million to support FinTech companies helping low-income Americans become more financially healthy.
Investment & Revenue: Plaid, the US-based technology platform and data network that enables applications to connect with consumers’ financial accounts, announced that Visa and Mastercard were strategic investors in a $250 million Series C financing round in December. Meanwhile, Transferwise posted its third year of profit. Transferwise customers currently hold over £1 billion with its multi-currency account. The company "has 6 million customers globally and processes £4 billion in transactions each month."
IPO Watch: Ping An's OneConnect plans to list in New York in mid-November. If you recall, Ping An OneConnect is one of eight companies that received a virtual banking license from the Hong Kong Monetary Authority earlier this year.
Open Banking: American Express will launch Pay with Bank transfer, a real-time payment option "available to Current Account holders at UK banks, regardless of whether they are American Express Cardmembers.... Consumers will be able to make online payments quickly without a Card to hand, view their bank Current Account balances prior to confirming payment, and will benefit from bank-level data security." Meanwhile, US Bank continues to embrace "open banking" after signing seven data sharing agreements with FinTechs and data aggregators.
Payments: Iowa-based payments company, Dwolla, entered into a partnership agreement with TransferMate Global Payments. "This new addition to the Dwolla Partner Ecosystem gives Dwolla clients access to TransferMate’s unique global payments network in 162 countries and 134 currencies."
JD Digits, the former FinTech arm of Chinese-based e-commerce giant JD.com, rolled out an e-wallet app, Dolfin, with local partners in Thailand. The app can support Know Your Customer technology and includes money transfer, payment, and other digital wallet functions. Of note, JD Digits is also involved in the consortium behind Livi VB, which just received a virtual bank license from the Hong Kong Monetary Authority.
Accenture published its Global Payments Pulse Survey 2019. The report finds that global payments revenue will climb 5.5 percent to reach $2 trillion by 2025. According to the report, 46 countries “now have in place an instant payment solution and 12 more plan to implement one soon.” Payments are also "becoming free." According to the report, “consumer payments for debit card revenue per transaction dropped 14.6 percent, from $0.34 in 2015 to $0.29 in 2018. Credit card revenue per transaction dropped 11.6 percent, from $1.21 in 2015 to $1.07 in 2018. In corporate payments, credit card revenue per transaction dropped 33.3 percent, from $2.76 in 2015 to $1.84 in 2018.” A payments market that is increasingly becoming instant, invisible, and free, could cost complacent banks up to $280 billion by 2025. Some other interesting numbers from this report: The number of unique FinTech payments firms (that also received funding) increased 97 percent per year between 2015 and 2018. In addition, roughly 17 percent of survey respondents said: "establishing internal startup incubation units that are isolated from legacy processes to boost innovation will be the main priority for banks.”
Lending: Experian published its first FinTech Marketplace Trends Report covering unsecured personal lending. The report finds that FinTechs more than doubled their market share of the unsecured personal loan market in four years, more near-prime consumers are borrowing from FinTechs than traditional lenders, and prime borrowers make up 35.9 percent of total borrowers for traditional lenders and 35.3 percent for FinTech lenders. Meanwhile, delinquency rates for traditional lenders are climbing, while FinTech remains "somewhat steady."
We’re also starting to see several reports pop up covering several negative ramifications from mobile credit expansion in Kenya. From mass surveillance challenges to the creation of perpetual debt cycles through the use of mobile-based lending options.
FinTech Policy & Regulatory Developments
ASEAN: Several Southeast Asian nations are reportedly banding together to address BigTech-related issues, including fake news and taxation. Meanwhile, the Cambridge Centre for Alternative Finance published a benchmarking study on the ASEAN FinTech ecosystem. According to the report, the region saw a 58 percent increase in internet penetration and a 141 percent increase in mobile connectivity in 2018. FinTech investment in the region grew 143 percent in 2018, with roughly 600 FinTech platforms operating in the region. Of those, 60 percent are focused on digital payment and digital lending. Of note, FinTech platforms in Thailand “had the highest responses of not being regulated.” In addition, more than 50 percent of responses from platforms in Singapore, Philippines, and Malaysia indicated that they are regulated under banking/financial services regulation (page 60 provides a country-by-country profile of regulatory approaches to emerging technologies).
Australia: Scottish Pacific released its SME Growth Index for September 2019. The index found that, for the first time, Australian SMEs plan to fund their growth using non-banks, ahead of their main bank. “The proportion of SMEs planning to borrow from their main bank to fund growth has almost halved in five years, falling from 38 percent in 2014 to 18.3 percent now.” Of note, the results from the Banking Royal Commission are still resonating with SMEs. Nearly 10 percent said the disclosures, after several months of hearings on misconduct in the banking sector, was the reason they use non-bank lenders. Important to note that the head of the Australian Competition and Consumer Commission is calling for another inquiry into bank misconduct focused on consumer harm.
The Australian Senate established a Select Committee on Financial Technology and Regulatory Technology. According to the notice, the Select Committee will focus on the opportunities arising from FinTech for consumers and small businesses, barriers to uptake, opportunities for the RegTech industry in strengthening compliance, and "the effectiveness of current initiatives in promoting a positive environment for FinTech and RegTech startups." The Committee will present its final report by October 2020.
For those who attended our FinTech Symposium in July in Washington, DC, you may recall US FinTech Task Force Chairman Stephen Lynch (D-MA) talking about the potential for the Task Force to become a permanent Subcommittee on FinTech under the House Financial Services Committee (this is to be determined).
Earlier this month, the Australian Prudential Regulation Authority granted Xinja Bank Limited an unrestricted authorized deposit-taking institution (ADI) license. The firm was previously licensed as a Restricted ADI since December 2018. Xinja Bank follows in the footsteps of 86400 Ltd., Judo Bank Pty Ltd., and Volt Bank.
China: The country's shadow banking industry has reportedly surged back to life this year. "Shadow lenders accounted for 39 percent of total lending in the third quarter of the year, and 45 percent in the second quarter, the highest percentage of shadow financing since at least 2013." In mid-2018, shadow lending only accounted for 21 percent of total lending.
Meanwhile, Chinese officials are attempting to increase the level of oversight of tech companies. In Hangzhou, for instance, government representatives will be assigned "to work within 100 local companies, including Alibaba Group Holding Ltd." Speaking of Alibaba, the company and Tencent have reportedly refused to hand over loan data to cooperate with the government's credit scoring initiative.
European Union: In a speech to the Council of Bars and Law Societies of Europe, the EU's competition chief, Margrethe Vestager, spoke on the power of digital platforms and the role of data. "Our data protection rules already give Europeans control over their own data. They allow me to stop companies misusing my data in a way that’s bad for me. But they don’t help me, if the problems come from the way that they use other people’s data, to draw conclusions about me or to undermine democracy. So we may also need broader rules to make sure that the way companies collect and use data doesn’t harm the fundamental values of our society."
Hong Kong: Earlier this year, the Hong Kong Monetary Authority awarded eight virtual bank licenses to several consortiums and stand-alone firms. The launch of these digital banks is expected to be delayed until early 2020, however, due to the protests in Hong Kong.
India: FinTech startups in India are in a bind as a recent directive from the Reserve Bank of India (RBI) threatens to cut off certain avenues used to access credit bureau data. Separately, RBI also wrote to the Association of NBFC Peer-to-Peer Lending Platforms requesting the association "furnish quantitative data, if any, with respect to P2P platforms on instances of partial funding of borrowers, creditworthy borrowers registered but not granted loans." Meanwhile, RBI published a discussion paper on “Guidelines for Payment Gateways and Payment Aggregators” for public comment. Comments are due by October 17, 2019.
Lastly, the Microfinance Institutions Network and Sa-Dhan, the RBI recognized self-regulatory organizations and industry associations for the microfinance industry, launched a “Code for Responsible Lending” for the microfinance industry.
Korea: The country's electronic securities system launched in mid-September. Under this system, securities of listed stocks and bonds "are required to be issued and circulated electronically." According to the Financial Services Commission, the new system "will make it possible to build up big data on the issuance and circulation of securities, enabling FinTech innovation using such data."
Lastly, the government is putting together a $252 million FinTech fund, led by the Financial Services Commission. The regulator also stated that it will look into relaxing regulations to help FinTech companies list in the country.
Kuwait: Key findings of a report authored by the Kuwait Foundation for the Advancement of Sciences and the research arm of Kuwait Financial Centre, Marmore, were highlighted in a speech by M. R. Raghu, managing director of Marmore. The report studied “the latest globally-implemented applications on FinTechs, and the extent on which the domestic banking units (DBUs) are aligned with these applications. Also, developing a strategic vision in this matter, and measuring the readiness of the domestic banking and financial sector to keep pace with such developments.”
Malaysia: The Asian Development Bank Institute published a paper on the factors affecting investors' intention to invest in peer-to-peer lending platforms in Malaysia. “The results show that intention to invest is mainly influenced or driven by trust. Other variables, namely perceived risk, perceived ease of use, and security, are found to have no impact on investors’ decisions.”
Singapore: Hong Leong Finance, Ltd. is said to be among the companies interested in pursuing a virtual banking license from the Monetary Authority of Singapore. If you recall, MAS announced in late June that the authority will issue up to five digital bank licenses. Lastly, there’s a great interview with MAS Managing Director, Ravi Menon, on the authority’s efforts to build Singapore into a vibrant FinTech hub and remain a step ahead of the competition.
Taiwan: It is still up for debate on what becomes of Taiwan given the geopolitical tensions in the region. However, it is worth mentioning that the Financial Supervisory Commission has become more active in the FinTech space after awarding virtual banking licenses to three consortiums. A long way to go, but perhaps we will see this country mentioned more often in this newsletter.
Thailand: Regulatory authorities continue to crack down on unauthorized online lending applications. "The move is part of its crackdown on illegal lending, which also saw the regulator revoke the certification of registration of 2,081 lending companies for their failure to obtain the necessary certificate of authority to operate as a lending company. This year alone, the SEC revoked the certificates of registration of 837 companies engaged in lending activities but without the required license."
UAE: Abu Dhabi Global Market (ADGM) recently published detailed guidance on digital securities, becoming the first international financial center in MENA to introduce such a regime. The publication "complements ADGM’s ‘Guidance on Initial Coin/Token Offerings and Crypto Assets’ that was launched in October 2017 and the implementation of ADGM’s Crypto Asset Regulatory framework in June 2018." Separately, Anglo-Gulf Trade Bank became ADGM's first fully licensed digital bank. "The awarding of the license is an important step towards AGTB delivering simplified, client-centric, inclusive trade banking, and transaction banking services."
In Dubai, the Dubai International Financial Centre announced the registration of more than 100 FinTech firms in the Centre. "The figures reflect a three-fold growth in registered FinTech firms since the end of 2018."
US: The chairman and ranking members of the House Judiciary Committee and Subcommittee on Antitrust, Commercial, and Administrative Law sent letters to Facebook, Amazon, Google, and Apple requesting several documents and communications as part of a bipartisan investigation into competition in digital markets. Committee members also asked roughly 80 companies to provide information on how their businesses may have been harmed by the four tech firms. Sen. Mark Warner (D-VA) discussed the probes in a recent interview with CNBC.
The Federal Communications Commission established two innovation zones (New York City and Salt Lake City) to advance wireless technology, including 5G rollout. "Under this initiative, parties have flexibility to conduct multiple non-related experiments under a single authorization within a defined geographic area to develop new technologies and services while protecting incumbent services against harmful interference. This initiative allows experimental program license holders which are licensed to operate elsewhere to also use the New York City and Salt Lake City Innovation Zones. Parties must comply with each zone’s FCC-established guidelines, under the zone administrator’s guidance, and provide advanced notice of their project."
The Conference of State Bank Supervisors recently deployed a set of tools for the FinTech industry. The tools are: a portal of state agency guidance for non-bank financial services companies; an interactive map of agent-of-payee exemptions from money transmission laws; and a new cybersecurity 101 resource center for banks and nonbanks alike.
At the state level, Florida is opening its arms to FinTech. Governor Ron DeSantis recently traveled to Illinois, New York, among other cities, to promote Florida as a FinTech hub. FinTech policy initiatives were announced on September 16 and included the development of a regulatory sandbox. "The legislation will allow the Office of Financial Regulation (OFR) to provide statutory authority to waive certain licensure requirements for FinTech companies to offer innovative services in Florida within certain parameters." Governor DeSantis also announced the appointment of three senior state officials to the Blockchain Task Force. The Task Force was established in May after DeSantis signed SB 1024 into law. “The Blockchain Task Force will study if and how Florida’s state, county, and municipal governments can benefit from a transition to blockchain-based systems for recordkeeping, data security, financial transactions, and service delivery and identify ways blockchain technology can be used to improve government interaction with businesses and the public.” Florida is also one of several states to join with the Consumer Financial Protection Bureau in launching the American Consumer Financial Innovation Network.
In Arizona, the office market is continuing to adjust to an influx of tech firms, including several firms drawn to the state’s regulatory sandbox initiative.
In mid-September, California's legislature passed several amendments to the California Consumer Privacy Act (CCPA). Among the list of approved amendments includes a focus on “data brokers.” Under A.B. 1202, a data broker is "a business that knowingly collects and sells to third parties the personal information of a consumer with whom the business does not have a direct relationship." The amendment to the CCPA requires data brokers to register with the state's Attorney General's Office annually. Lastly, the CA legislature also passed a bill that would allow for the creation of public banks in the state and approved legislation that would cap interest rates for consumer loans at 36 percentage points above the main interest rate set by the Federal Reserve. The bill would apply to loans between $2,500 and $9,999.