FinTech in Focus

June 07, 2017

Some Headlines

On the alternative-finance front, U.K.-based RateSetter—the third-largest peer-to-peer lender in Britain—raised £13 million, with a valuation north of £200 million. Similarly, U.K.-based Zopa announced it had raised £32 million, as the platform prepares to submit a bank license application later this year. Lastly, the New York Times highlighted the delay in Orchard Platform’s launch of its secondary market, Orchard X, due to regulatory issues.

On the RegTech front, an international RegTech association has launched, aptly named the International RegTech Association, composed of roughly 100 founding members. Its mission is to “ease and accelerate the evolution of the RegTech industry, by facilitating integration, collaboration, and innovation of all stakeholders, within the financial services sector.” Meanwhile, GTR caught up with Marc Andrews, vice president at IBM’s Watson Financial Services Solutions, to discuss RegTech and IBM’s focus on regulatory compliance. According to Andrews, IBM is focused on four areas of RegTech: regulatory change management, surveillance, KYC, and AML compliance. Discussing the biggest barrier to RegTech adoption, Andrews said that pressure from current regulatory actions inhibits financial institutions from looking at unique, innovative ways to address that pressure. He added: “It’s like the cartoon where two cavemen are trying to push a cart full of rocks with square wheels on it. When the guy behind them offers them a round wheel, they say, ‘No thanks, we’re too busy.’ It’s a great analogy.”

On the payments front, Stripe has launched Stripe Sigma, which gives companies running Stripe real-time data analytics directly through the Stripe dashboard and allows them to input simple queries to gain additional, potentially deeper insights into their businesses, such as geographies that contribute the most in revenue, the most popular products in a given month, etc. Square has launched its Virtual Terminal service in the U.K., allowing companies to accept payments through the Square dashboard. The service has already processed more than $300 million in cumulative gross processing volume across the U.S., Australia, Japan, and Canada. Also, say hello to LG Pay, which made its debut in South Korea the other day. And lastly, let’s not forget that Apple just announced its peer-to-peer payment system through its iMessage app. Money received from someone will be stored directly on an Apple Pay cash card until withdrawn or transferred. 

On the incumbent front, Deutsche Bank hired Tommaso Zanobini as managing director and global head of FinTech. HSBC is rolling out its robo advice platform targeting U.K. savers with less than £15,000 in savings, and it’s also partnering with an artificial-intelligence startup to combat money laundering.

Avocado Toast and Homeownership

Good news, FinTech in Focus readers: Avocado toast is not the reason behind millennials’ aversion to homeownership. Even so, in order to meet a 20 percent down payment in New York or San Francisco, I would have to forgo 312.5 years or 561 years, respectively, of avocado toast. That kind of wait time is nearly equivalent to getting on a ride at Disney World. Start building my casket. 

The Struggle with Trust

More than 90 percent of roughly 15,000 people surveyed in 15 countries said they would not let a computer make money decisions for them, according to a recent ING report. In Europe alone, only 4 percent of respondents said they would use a computer for advice if investing one month’s salary, and 40 percent continue to put their faith in a financial or bank advisor. Across Europe, as shown in the figure below, nearly 40 percent said they did not want any automated financial activities, with more than half of respondents from Luxembourg, Austria, and France of that view. 

Would you allow a robo advisor to make financial decisions for you?

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Source: ING

Global Developments

EU: European Central Bank President Mario Draghi addressed the European Parliament’s Economic and Monetary Affairs Committee on financial innovation and the economic outlook. According to his prepared remarks, financial integration and financial development “are distinct but interrelated concepts. Therefore, in designing the necessary institutional and regulatory frameworks, we need to make sure that financial integration and financial development reinforce each other, thus improving the performance of the financial system. This is why EU legislators have an important role to play. A Europe-wide harmonized and principles-based framework to regulate FinTech, in the context of the capital markets union agenda, would indeed help to create a level playing field from the outset. This would in turn foster cross-border investment and expansion.” The European Commission announced an agreement in support of a more vibrant venture capital ecosystem in Europe. Among the changes: opening up European venture capital funds and European social entrepreneurship funds to fund managers of all sizes.

U.S.: Lawmakers have introduced legislation on combating money laundering, terrorist financing, and counterfeiting that includes provisions targeting virtual currency. Section 13 of the legislative text covers prepaid access devices, digital currencies, or other similar instruments and “would amend 31 U.S.C. § 5312 to include funds stored in a digital format within the definition of monetary instruments. This would effectively subject those devices to anti-money-laundering reporting requirements under the Bank Secrecy Act, in cases where the value stored is above $10,000.” Meanwhile, the Internal Revenue Service faces a deadline of today to respond to certain lawmakers about the agency’s overall strategy toward digital currencies. It was unclear whether the IRS would meet the deadline.

A few hearings to keep an eye out for this week (unfortunately being held at the same time on Thursday): A House Appropriations Committee hearing will focus on the budget of the Commodity Futures Trading Commission. It’s possible that the recent launch of LabCFTC will be included in testimony and questioning. Meanwhile, the House Financial Services Committee announced a hearing covering virtual currency. At the same time, the House Energy and Commerce committee has scheduled a hearing on improving consumers’ financial options in FinTech. (Here’s a review from one of the panels at Milken’s recent Global Conference where discussion focused, in part, on the role of technology in driving financial behavior to build financial health.)

On the advocacy front, the Consumer Financial Data Rights group now includes 27 companies with the addition of 14 new members. The group, launched this year, “seeks to drive financial innovation in a collaborative ecosystem by bridging the needs of consumers, banks, FinTech innovators, and regulators; partner with banks to support unfettered access to consumer and small-business data through a secure and open financial system; and promote consumer rights to access and share their financial data with third-party companies that provide tools to enable better financial outcomes.”

Malaysia: The World Bank released a report covering efforts to drive financial inclusion in the country. According to the report, 92 percent of the adult population in Malaysia had a bank account in 2015—the second-highest rate in the ASEAN region, behind Singapore. The report shows the importance of agent banking in reaching areas previously unbanked. Before Malaysia implemented its agent banking initiative back in 2011, only 46 percent of subdistricts were being served. Five years later, roughly 97 percent of subdistricts had access to financial services. The report further notes that agent banking “has become an important channel to provide payments, deposits, and withdrawals services to the population not previously served by branches of financial institutions in Malaysia.”

Growth in number of subdistricts (mukims) with access to financial services through agent banking

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Ghana: The Bank of Ghana has suspended the issuance of licenses to microfinance companies operating in the country. It also revoked roughly 70 microfinance licenses and increased its supervision of the microfinance sector to stem investor panic as a result of heightened economic uncertainty and financial loss.

Philippines: Speaking of microfinance, the incoming governor to the country’s central bank has indicated that he plans to further liberalize microbanking offices to provide services and products beyond just microlending. “In the past, MBOs are only for microlending activities,” Nestor Espenilla Jr. said. “Now we are moving in the direction of a light branch—functionality that is appropriate to the location and not only limited to microfinance.”

Serbia: Digital Serbia—a nonprofit, private partnership—was launched with the aim of transforming the country into a digital hub. According to a news release, its activities “will be directed toward setting up an improved framework and investment climate to encourage technological entrepreneurship, innovations in the Serbian IT industry, and a better level of digital literacy and education in the digital economy.”

Thailand: Speaking of efforts to foster a digital economy, Thailand’s Ministry of Digital Economy and Society has partnered with Huawei to publish a report setting out the government’s digital strategic plans.

Netherlands: Holland FinTech has submitted 10 recommendations on how to stimulate the country’s digital economy. Among them: education on digital and financial literacy issues, efforts to facilitate e-government and e-identity, harmonized European digital regulations to reduce country-specific differences, a competitiveness mandate for regulatory bodies, stimulating research and development and innovation for digital technologies, stimulating entrepreneurship, and improvements to the financial licensing process. 

Russia: The Moscow Accelerator, launched in early February with the backing of Russian banks, Mastercard and Accenture, has welcomed a dozen companies as its inaugural class. The 12-week program began Monday. Separately, Russia’s central bank is shaping regulation on how to classify digital currencies. According to reports, the bank’s deputy chairwoman, Olga Skorobogatova, hinted that digital currencies may be treated as digital goods in order to clarify the tax treatment and regulatory framework. That view was confirmed by central bank chief Elvira Nabiullina when she stated, during an interview with CNBC, that the bank does not consider Bitcoin a virtual currency. “It's more digital assets with the regulation of assets,” she said. Whatever the views, the bank has been engaged in piloting a number of digital currency schemes to see which one is more suited to Russia, according to reports.

Japan: Last week we mentioned how the trading of Bitcoin in Japanese yen had accounted for a significant portion of overall Bitcoin volume recently. That “frenzy” is also spilling over to Tokyo’s Stock Exchange, with listed companies tied in some way, shape, or form to Bitcoin seeing volatile swings in their share prices.

India: The Securities and Exchange Board of India announced the launch of an online portal for portfolio managers and venture capital funds, providing a one-stop site for registration and reporting. Meanwhile, a consortium of Indian banks including SBI, ICICI Bank, and DCB Bank have completed work on the first blockchain project focused on KYC, AML, and CFT, while Amazon Pay is ramping up operations in the country as it plans to partner with various government institutions. Speaking of payments, Telangana became the first Indian state to roll out an e-wallet. T-Wallet offers a digital payments platform on which users can make payments to government and private organizations and receive benefits from the government. Lastly, the Ministry of Electronics and Information Technology has released a letter urging government agencies to ensure that Aadhaar data and personal information are encrypted so that no public information is displayed online. According to reports, the private letter says the ministry has been notified of “instances wherein personal identity or information of residents, along with Aadhaar numbers and demographic information and other sensitive personal data ... have been published online.”

Canada: The government has launched a consultation on venture capital policy as part of the Innovation and Skills Plan included in its 2017 budget. The consultation paper seeks advice from industry stakeholders to help inform the government in its support for Canadian venture capital investment. The deadline for comment is July 17.

Estonia: The country’s e-Residency program has partnered with Finnish-based FinTech firm Holvi “to provide borderless business banking to the borderless digital nation.” Holvi plans to provide e-residents “with a fully digital business account combined with a Holvi Business Mastercard and useful tools to grow a business.” 

Australia: The government of Victoria state has joined the Australian Digital Currency Commerce Association. Meanwhile, FinTech Australia elected a new board that reflects “constitutional changes to ensure gender diversity and representation from a broad number of states.”

Nepal: Nepalese seeking to work abroad must open a bank account in order to establish a formal remittance channel. Krishna Bahadur Mahara, the country’s deputy prime minister and finance minister, said in prepared remarks that “to receive remittance through a formal channel, opening of the bank account will be made mandatory for Nepali outgoing labors and provision will be made to remit money to that bank account.”

UAE: The Dubai International Financial Center announced that FinTech Hive, the region’s first FinTech accelerator, has received 100 applications from more than 30 countries covering big data and analytics, blockchain, payments, crowdfunding, and robo advice, among other areas, for its inaugural program. Ten finalists will be selected on July 11 and the 12-week program will begin August 21. For those interested in the legal aspects of setting up a FinTech business in the UAE, Latham & Watkins put together a short brief on what firms need to consider.

Egypt: The National Council for Payments recently announced five steps to turn the country into a cashless society. They include preparation of legislation to develop non-cash transactions, notification to government agencies to suspend cash and checks to suppliers over a certain monetary threshold, mandating all government agencies to provide non-cash options for payment, and giving citizens a one-year exemption from expenses related to opening an account for mobile payment services.

China: Shanghai’s Financial Services Office has posted draft rules that would require online lenders to deposit their funds within six months after registering with local financial authorities. Public comment on the proposed rules, posted last Thursday, will remain open until June 30. Separately, three major Bitcoin exchanges—Huobi, OKCoin, and BTCC—have begun allowing customer withdrawals again after a three-month moratorium was imposed by Chinese authorities to ensure that the exchanges were complying with money-laundering regulations. 

Kenya: The Better Than Cash Alliance released a report looking at how digital payments in the agricultural sector are affecting poverty. According to the case study profiling One Acre Fund—which since 2014 has enabled farmers to make loan repayments digitally using M-Pesa—instances of payment fraud fell 85 percent after the digitization of repayments was introduced, processing time for each repayment fell from 16 days to two to four days, and total repayment collection costs for OAF fell 80 percent. In all, the average Kenyan farmer in OAF earned nearly 50 percent more than non-OAF peers. 


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