FinTech in Focus
Central Banks and Big Data
Findings from a survey conducted by Central Banking and BearingPoint reveal that very few central banks have a designated big data department, and yet they are “increasingly carving out a budget for data handling” purposes. Of the 50 central banks that responded to the survey, roughly two-thirds have undertaken new projects involving big data over the past year, particularly central banks in Europe (see figure below). In regards to the various challenges faced by central banks in this space, data collection is a persistent problem with nearly 40 percent of respondents viewing this as the most significant issue. “Two common themes emerged from respondents’ comments; those regarding outsourcing data collection and those with concerns about inefficient systems,” the survey stated. Data processing, data management, and data analysis rounded out the top four concerns. In addition, nearly 60 percent of respondents noted that they did not have clear data governance in place.
In Which Area(s) Were the Projects Focused
FinTech Growth in the Personal Loan Market
A recent report from TransUnion finds that FinTech lenders continue to gain market share in the personal loan space. In a review of unsecured personal loan originations between 2012 and June 2017, the share of originated personal loan balances grew from 4 percent to 32 percent. Meanwhile, banks and credit unions share of originations fell 6 percent and 8 percent, respectively. According to John Werth, vice president of FinTech strategy and market development, "only around 10 percent of originated FinTech loan balances are subprime, compared to 14 percent for the overall market for personal loans."
The Financial Action Task Force (FATF) released revised guidance covering anti-money laundering (AML) and counter-terrorist financing (CFT) measures and financial inclusion. In conducting financial inclusion product ML/TF risk assessment in multiple countries, FATF found that the following issues “can also be of relevance to other countries seeking solutions to strike a balance between financial integrity and financial inclusion.” The issues include: limited dialogue between financial intelligence unit and the government department specializing in financial inclusion efforts; the AML/CFT regulatory framework “still does not recognize the risk-based approach and offer the possibility of simplified [customer due diligence (CDD)]”; regulatory reluctance to develop innovative simplified CDD measures “out of concern that any AML/CFT country assessors will not condone their risk based approach”; and the lack of public-private dialogue in striking the right balance between financial inclusion and CDD requirements. The report also mentioned developments concerning digital identity and the availability of e-KYC. “Although a number of countries have initiatives in this area, a substantial impact is yet to be seen. The lack of on-going dialogue between relevant stakeholders has led to situations where there is almost complete coverage with digital IDs (including for the poor and disadvantaged), but financial institutions still need to require a broad range of documents for customer identification and identity verification,” the report stated.
Incumbents on the Move: HSBC and Wells Fargo are moving into the robo advisory space. Wells Fargo officially launched Intuitive Investor–a hybrid robo advisor–earlier this week, while HSBC is expected to launch its robo advisor platform next year.
Deutsche Bank went live with EUR global payments innovation (gpi) services, provided by SWIFT, to speed up cross-border payments, which also incorporates additional transparency through end-to-end tracking. The bank went live with its USD gpi back in October.
On the insurance front, Allianz successfully trialed a blockchain technology prototype for the global captive insurance market. According to the press release, Allianz partnered with EY and digital agency Ginetta “to successfully create a blockchain prototype solution for the existing captive insurance program of a long-standing [Allianz Risk Transfer] customer with global reach.” The prototype “looks at three common process flows in the captive insurance cycle–annual policy renewals, premium payments, and claims submission and settlement. It translates these processes into the distributed ledger environment decreasing the time from start to policy, policy to premium and claim to settlement.”
Allianz Global Corporate & Specialty SE (AGCS) has successfully trialed blockchain technology for a global ‘captive’ insurance program including cash transfer between countries. “AGCS' Allianz Risk Transfer (ART) line of business has teamed up with EY (Ernst & Young) as blockchain advisory service provider and digital agency Ginetta to successfully create a blockchain prototype solution for the existing captive insurance program of a long-standing ART customer with global reach. In connection with this prototype, ART also joined forces with Citi Treasury and Trade Solutions which provided the payment processing services related to Allianz’s blockchain prototype. The results prove that blockchain technology can greatly improve the efficiency of corporate insurance transactions internationally.”
Speaking of blockchain technology, the State Bank of India has partnered with BankChain–a blockchain consortium of banks in India–and Intel, to adopt blockchain technology to manage Know Your Customer (KYC) requirements.
On the remittance front, both Moneygram and Western Union are increasingly turning digital. According to quarterly earnings, 15 percent of Moneygram’s revenue came from digital, while Western Union saw digital growth increase 23 percent year-on-year with online money transfers comprising 10 percent of the consumer-to-consumer business.
Payments: Usage of Walmart Pay could surpass Apple Pay in the U.S., according to Daniel Eckert, senior vice president for services and digital acceleration. According to Eckert, two-thirds of customers that try out Walmart Pay also use it a second time within 21 days. Speaking of Apple Pay, the public beta of iOS 11.2 was launched earlier this week and includes Apple Pay Cash. Apple users with iOS 11.2 can now send and receive payments to each other using Apple Pay.
Speaking of peer-to-peer payments, Facebook will roll out over the coming weeks the ability for Facebook Messenger users in the UK and France to conduct peer-to-peer payment transactions. Meanwhile, PayPal rolled out domestic payment services in India allowing the 20+ merchants that have so far signed on with PayPal the ability to process both local and global payments and gain access to more than 200 million customers globally in 200 markets.
And speaking of India, Paytm announced the integration of BHIM UPI, thereby allowing payments to be made via UPI and in larger transaction sizes. Paytm founder Vijay Shekhar Sharma recently stated that the company is targeting 200 million monthly users. In a separate interview, Sharma provided insight on where the company is headed in the near future. “Payment journey gave birth to payments bank opportunity. We launched depository accounts. We have not yet launched current account for businesses. But savings account is completely digital only yet, which means that you have a digital credit card, you have the capability to do money transfer and incoming and outgoing using digital methods. So, we are today the truest mobile first, a digital first bank in the country. So next we are adding wealth management product there. So, we have a super liquid fixed deposit, fixed deposit account which is totally zero cost for money in and money out and your money can swipe in at your setting basis and can come out on your demand basis–24x7, zero cost money in and money out from your savings account to your wealth management account and vice-a-versa. So, these services are continually being added. We are looking to do a formal launch once we have added our current bank accounts too. We are expecting by next month we could have publicly launched it. So, payment gave birth to payment bank and now payment bank is expanding the customer base to lending, insurance, and other additional financial services,” he said.
Crypto: A subsidiary of Amazon has registered three cryptocurrency domain names for reasons that no one seems to know at this point. The domain names are amazoncryptocurrency.com, amazoncryptocurrencies.com, and amazonethereum.com.
A coding error effectively locked out users from up to $280 million worth of Ether. According to digital wallet company Parity: "Following the fix for the original multi-sig vulnerability that had been exploited on 19th of July (function visibility), a new version of the Parity Wallet library contract was deployed on 20th of July. Unfortunately, that code contained another vulnerability which was undiscovered at the time–it was possible to turn the Parity Wallet library contract into a regular multi-sig wallet and become an owner of it by calling the initWallet function. It is our current understanding that this vulnerability was triggered accidentally … and subsequently a user deleted the library-turned-into-wallet, wiping out the library code which in turn rendered all multi-sig contracts unusable and funds frozen since their logic (any state-modifying function) was inside the library.”
This week, we were all expecting a hard fork to occur to the Bitcoin blockchain. However, advocates for the hard fork decided to cancel the SegWit2x fork due to lack of “consensus.” A post by Peter Smith on Medium had this to say: “Although we strongly believe in the need for a larger blocksize, there is something we believe is even more important: keeping the community together. Unfortunately, it is clear that we have not built sufficient consensus for a clean blocksize upgrade at this time. Continuing on the current path could divide the community and be a setback to Bitcoin’s growth. This was never the goal of Segwit2x. As fees rise on the blockchain, we believe it will eventually become obvious that on-chain capacity increases are necessary. When that happens, we hope the community will come together and find a solution, possibly with a blocksize increase. Until then, we are suspending our plans for the upcoming 2MB upgrade.”
Online Finance: Despite revenue of $154 million in the third quarter–the best revenue numbers in the company’s history–Lending Club forecasted a net loss in the fourth-quarter between $3-7 million on expected revenue of $158-163 million. Meanwhile, OnDeck posted a surprise third-quarter loss due, in part, to the recent string of hurricanes that hit the U.S. OnDeck is now expecting adjusted profit for 2017 to be at the lower end of the $5 million to $15 million range.
Beyond financial results, Square CEO Jack Dorsey briefly commented on the status of the company’s industrial loan charter applications. “I think the [regulatory] environment really changes depending on who you’re talking about. There’s a lot of appreciation for the fact that we’ve spent eight years serving an underserved customer, an underbanked customer, both on the seller and the individual side.” He added, “I wish I had a sense on government timelines.”
[Author’s note: We all wish we had that sense, Jack.]
And, it was only a matter of time, right? Intuit launched its small business loan service called QuickBooks Capital. The service will provide working capital loans anywhere from $5,000 to $35,000 to the roughly 2.4 million Quickbooks users. The credit model, according to CFO.com, is based on 26 billion QuickBooks data points. Rania Succar is the head of QuickBooks Capital.
Lastly, on the robo advice front, Wealthfront has filed with the U.S. Securities and Exchange Commission to introduce its first mutual fund, Wealthfront Risk Parity Fund. According to WealthManagement.com, the robo advisor "is launching the fund through Two Roads Shared Trust, a shared mutual fund trust aimed at advisors, such as hedge fund managers, who wish to start alternative funds."
EU: The European Commission has published an inception impact assessment on the legislative proposal for an EU framework on crowd and peer-to-peer finance. The assessment “will analyze whether EU action is warranted and focus on general policy options” including 1) maintaining dialogue with the European Supervisory Authorities, Member States, and crowdfunding stakeholders; 2) mapping best practices and local regulatory regimes “with the intent to recommend a set of non-binding minimum standards and industry's best practices”; 3) introducing an EU framework for crowdfunding “into existing regulation covering financial services to include specific provisions governing the operation of crowdfunding platforms”; and 4) creating “a proportionality regulated EU regime that platforms wishing to conduct cross-border activity could opt into, while leaving the rules for platforms conducting only national business unchanged.” Feedback on the assessment is due by November 27.
U.S.: Acting Comptroller of the Currency Keith Noreika gave prepared remarks the other day focused on the separation of banking and commerce. According to Noreika, rules and laws “are enacted by people and affected by their personal interests at the time. They often persist long after the reasons that gave them life have ceased.... And, we must question whether the reasons for decisions made decades ago continue to support the public interest today.” He added, “The solution to concentration is not further isolation and protectionism, but diversity and healthy competition. Laws that prevent companies with resources and means from becoming competitor banks only serve to protect existing big banks from would-be rivals. It has the perverse effect of maintaining the concentration in the big banks that exists today.”
The 7th U.S. Circuit Court of Appeals recently vacated a preliminary injunction filed by Authenticom, a data scraper, to allow the firm to scrape data from competing car dealership software management companies, according to Reuters. According to the Court, “We appreciate the district court's concern to ensure that a potentially sound antitrust case should not disappear before its eyes because the plaintiff runs a high risk of going out of business while the litigation drags on. That does not, however, justify a preliminary injunction that goes so far beyond a measure that restores what the market would look like in the absence of the alleged violation. After trial, the court will be better able to assess the competitive significance of CDK and Reynolds's business models, of the 2015 agreements, and of any other agreement Authenticom is able to prove. In the meantime, however, the court must vacate the preliminary injunction that it entered on July 28, 2017.”
Estonia: Big problems on the horizon for the country’s digital ID efforts? The Estonian government "endorsed the proposal of the Estonian Police and Border Guard Board and the Information System Authority to block" 760,000 ID cards as of November 3rd. According to Prime Minister Jüri Ratas, “The functioning of an e-state is based on trust and the state cannot afford identity theft happening to the owner of an Estonian ID card. As far as we currently know, there have been no instances of e-identity theft, but the threat assessment of the Police and Border Guard Board and the Information System Authority indicates that this threat has become real. By blocking the certificates of the ID cards at risk, the state is ensuring the safety of the ID card.”
Canada: The Competition Bureau has published a draft report on its FinTech market study of Canada’s financial services sector. Feedback on the report is due by November 20. The draft study addressed the following questions: the impact of FinTech innovation on the competitive landscape for financial services; the barriers to entry, expansion, and adoption of FinTech in Canada; whether these barriers are regulatory-driven or non-regulatory; whether changes are required to encourage greater competition and innovation; and issues that should be considered when developing/amending regulations to ensure competition is not restricted. Recognizing that FinTech is an inherently broad term, the Bureau focused its draft on payments and payments systems, lending, and investment advice platforms. Recommendations include: support the continuation of regulatory efforts to increase price transparency and plain-language disclosures; the continuation of financial literacy and consumer education efforts; encourage the use of technology to facilitate account switching; continue collaboration with robo-advisors; provide firms with more freedom to automate certain processes; continue promotion of the existing passport system in Canada.
In Ontario, Finance Minister Charles Sousa recently stated that the government would create a regulatory sandbox and an accelerator, the Ontario FinTech Accelerator Office, to support start-ups and promote FinTech development.
[Author’s note: Keep an eye out for the fiscal update which is expected to be delivered on Tuesday as it could contain more information related to the sandbox and accelerator.]
India: Officials from the Reserve Bank of India (RBI) have reiterated that cryptocurrencies will not be used to make payments and settlements. "Our current position on bitcoins is that we will not be using it for any payments and settlements...though the technology underlying cryptocurrencies will not end," S Ganesh Kumar, executive director of RBI said at a recent event. Separately, e-wallet use has dropped substantially as the country nears the one-year anniversary of demonetization. The study found that roughly 40 percent of the 65 percent of active users of mobile wallets shifted back to cash transactions when the availability of cash increased.
Uruguay: The Central Bank has rolled out its digital currency pilot which consists of a six-month test on 10,000 mobile phone users. The Bank has made it clear that no new currency will be created in this effort. Rather "it is the same Uruguayan peso that instead of having a physical support, has a technological support."
Australia: The Australian Securities and Investments Commission (ASIC) and China's Securities Regulatory Commission (CSRC) announced an information sharing co-operation agreement covering FinTech. The agreement “provides a framework for information sharing between the two regulators on emerging market trends and developments, as well as regulatory developments pertaining to innovation in financial services.” In addition, the agreement “also specifically provides that the CSRC and ASIC will collaborate through sharing information on regulatory technology ('RegTech') trials.”
UK: UK-based FinTech platform Revolut has applied for a European banking license with the expectation that the company will be awarded a license by mid-2018. Meanwhile, the Financial Conduct Authority (FCA) published a new page on its website dedicated to RegTech and is also joining with the Bank of England to explore the advantages in using RegTech solutions. The efforts come as the authority faces criticism in its approach to innovation. Separately, the Royal Mint has revealed that it is currently using blockchain technology to track transactions and ownership of gold.
Singapore: In an interview with The Business Times, managing director of the Monetary Authority of Singapore (MAS), Ravi Menon, said the regulator would publish requirements as it relates to cybersecurity in the near future. Menon also mentioned that MAS is looking to potentially reduce the requirements to enter its sandbox in recognition of the long approval process. "We have quite a few in the pipeline. We are taking a while longer to evaluate them. One would have hoped we could have approved sandbox applications in weeks rather than months. But, we are learning ourselves–we're in the sandbox, too,” he said.
[Author’s note: Staci Warden, executive director at the Milken Institute Center for Financial Markets will be in Singapore next week for the Singapore FinTech Festival. Staci will be moderating a panel covering initial coin offerings and conducting a fireside chat with IBM’s Vanitha Narayanan and Grady Booch.]
Bahrain: The country is looking to solidify itself as a FinTech champion in the Middle East with the launch of a FinTech Hub set to open early next year.
China: The People's Bank of China is exploring ways to launch its own digital currency. According to lead researcher Yao Qian, “What the central bank have in mind is a centralized digital currency among all. As money has evolved from the barter system to its metallic and paper forms, it is now going digital.” The comments come as China continues to grapple with trying to crack down on cryptocurrencies–an effort that is apparently much more difficult than first imagined as transactions have now gravitated to over-the-counter markets through the use of mobile messaging services. In addition, top bitcoin exchanges, OKEx and Huobi Pro, are changing their business models in light of the regulatory crackdown. On the lending front, regulators are currently discussing whether to license eligible FinTech lenders, while applying additional scrutiny to lenders who charge annualized interest above 36 percent. Loans borrowed through online lenders reached $120 billion last year.
Malaysia: Securities Commission Chairman Tan Sri Ranjit Ajit Singh provided an update on the progress made since announcing its Digital Markets Strategy. Statistics provided by the commission show that equity crowdfunding and peer-to-peer financing platforms "have funded 450 campaigns, raising a total of RM50 million to meet the financing needs of the Micro, Small, and Medium Enterprises." For equity crowdfunding in particular, "more than 70 percent of the issuers have women or youth as founders, with 40 percent of the investors under the age of 35." Similarly, the Commission expects the first digital investment manager to be licensed in 2018 and is launching a pilot project to explore the use of distributed ledger technology in the unlisted and over-the-counter markets space.
Thailand: Three Thai banks joined more than 120 banks located around the world to implement SWIFT's Global Payments Innovation. Roughly 70 percent of the country's cross-border payments flow through the three banks.
Hong Kong: SWIFT is working with the Hong Kong financial community to provide its enterprise messaging and gateway solution, Alliance Messaging Hub, to the Hong Kong Faster Payments System.
Cyprus: The Securities and Exchange Commission has partnered with the Blockchain Technology for Algorithmic Regulation and Compliance Association to build a blockchain-based electronic payment system
Africa: The continent is still on track to have more than 1 billion inhabitants with mobile broadband connectivity by 2022. By the end of this year, more than 400 million people will have mobile broadband connections, compared to roughly 150 million in 2014.