ANZ Lifts Security on Mobile Devices with Voice Biometrics

ANZ today announced it will be the first Australian bank to introduce voice biometrics to improve security on mobile devices to allow higher value transactions.

From the middle of this year, customers transferring more than $1000 through ANZ’s mobile apps will be able to use their voice to automatically authorise high value payments. Previously customers needed to use internet banking or visit a branch to complete transactions more than $1000.

Managing Director Customer Experience and Digital Channels, Peter Dalton said: “One of the key challenges today for banking as the world becomes more digital is making it easier for customers to do what they want to do in a safe and secure way.

“Voice biometrics is the next step in making banking more convenient for our customers while also strengthening security.

“A person’s voice has five to ten times as many security points than other methods such as fingerprints so we know this will improve security and be welcomed by our customers. The technology is now so advanced that it can tell the difference between identical twins or even a voice recording.
“We also know that people are becoming more comfortable with using their voice to do basic commands on their devices, so we see this is a natural extension of current technology and we are expecting this to be a popular enhancement of our mobile apps,” Mr Dalton said.

ANZ has been working closely with world-leading voiceprint and biometrics company Nuance to bring this new technology to Australian customers. A pilot will begin with ANZ staff and select customers in May using the Grow by ANZ mobile app. The service will then be rolled out to ANZ goMoney and other digital services progressively.

ACCC denies authorisation for banks to collectively bargain with Apple and boycott Apple Pay

The Australian Competition and Consumer Commission has issued a determination denying authorisation to the Commonwealth Bank of Australia, Westpac Banking Corporation, National Australia Bank, and Bendigo and Adelaide Bank (the banks) to collectively bargain with Apple and collectively boycott Apple Pay.

“The ACCC is not satisfied, on balance, that the likely benefits from the proposed conduct outweigh the likely detriments. We are concerned that the proposed conduct is likely to reduce or distort competition in a number of markets,” ACCC Chairman Rod Sims said.

The banks sought authorisation to bargain with Apple for access to the Near-Field Communication (NFC) controller in iPhones, and reasonable access terms to the App Store. This access would enable the banks to offer their own integrated digital wallets to iPhone customers in competition with Apple’s digital wallet, without using Apple Pay.

“While the ACCC accepts that the opportunity for the banks to collectively negotiate and boycott would place them in a better bargaining position with Apple, the benefits would be outweighed by detriments,” Mr Sims said.

The banks argued that access to the NFC controller on iPhones would enable them to offer competing wallets on the iOS platform which would lead to the following public benefits:

  • increased competition and consumer choice in digital wallets and mobile payments in Australia
  • increased innovation and investment in digital wallets and other mobile applications using NFC technology
  • greater consumer confidence leading to increased adoption of mobile payment technology in Australia.

The ACCC accepted that Apple providing the banks access to the iPhone NFC controller is likely to lead to increased competition in mobile payment services and that this was a significant public benefit. However, the ACCC considered the likely distortions to and reductions in competition caused by the conduct would also be significant. Three likely detriments in particular stood out.

“First, Apple and Android compete for consumers providing distinct business models. If the Applicants are successful in obtaining NFC access, this would affect Apple’s current integrated hardware-software strategy for mobile payments and operating systems more generally, thereby impacting how Apple competes with Google,” Mr Sims said.

“Second, digital wallets and mobile payments are in their infancy and subject to rapid change. In Australia, consumers are used to making tap and go payments with payment cards, which provide a very quick and convenient way to pay. There is also a range of alternative devices being released that allow mobile payments; for example, using a smartwatch or fitness device. It is therefore uncertain how competition may develop.”

“Access to the NFC in iPhones for the banks could artificially direct the development of emerging markets to the use of the NFC controller in smartphones. This is likely to hamper the innovations that are currently occurring around different devices and technologies for mobile payments,” Mr Sims said.

The conduct is also likely to reduce the competitive tension between the banks in the supply of payment cards.

“Finally, Apple Wallet and other multi-issuer digital wallets could increase competition between the banks by making it easier for consumers to switch between card providers and limiting any ‘lock in’ effect bank digital wallets may cause,” Mr Sims said.

The ACCC consulted with consumers, financial institutions, retailers and technology companies in reaching its decision.

The Final Determination is available here: Bendigo and Adelaide Bank & Ors – Authorisation – A91546 & A91547


A ‘digital wallet’ is an app on a mobile device that can provide a number of the same functions as a physical wallet, including the ability to make payments in-store and storing other information, such as loyalty or membership cards. A ‘mobile payment’ is a payment performed in-store using a digital wallet.

On 19 August 2016 the ACCC decided not to grant interim authorisation to the applicants.

On 29 November 2016, the ACCC published a draft determination proposing to deny authorisation.

Authorisation provides statutory protection from court action for conduct that might otherwise raise concerns under the competition provisions of the Competition and Consumer Act 2010. Broadly, the ACCC may grant an authorisation when it is satisfied that the public benefit resulting from the conduct outweighs any public detriment.

Further information about the applications for authorisation is available on the ACCC Authorisations register: Bendigo and Adelaide Bank & Ors – Authorisation – A91546 & A91547

Fintechs cash in on bank lending limits to curb property boom

From Australian Fintech.

As regulators weigh new limits on bank lending to cool the housing boom, their impact may be muted as tech-savvy borrowers turn to fintechs to access cheaper rates offered by non-bank lenders.

Hashching is raising $6 million of fresh equity on the Neu Capital fundraising platform in a deal valuing the Sydney-based start-up – which gives borrowers access to the best interest rates negotiated by mortgage brokers – at $40 million.

Since it was set up in August 2015, Hashching has received applications for $5 billion of home loans, which has doubled in the last five months. Around 20 per cent of loans are made to property investors.

On the platform, borrowers are increasingly turning to loans from non-bank lenders who are undercutting the big banks on price, said Hashching co-founder Mandeep Sodhi.

Last year, 65 per cent of borrowers were choosing products from one of the big four banks, but over the past six months, the share of the big four has dropped 38 per cent, he said.

Big banks have been been forced to raise interest rates to curb growth in their investor lending portfolios due to APRA’s caps; owner-occupier rates are also moving up due to higher funding costs.

‘There are new deals every week’

Borrowers have access to 60 lenders through Hashching, including non-bank lenders like Liberty Financial, Pepper Group, Resimac and La Trobe Financial, and foreign banks like Citigroup.

“We are seeing that even though the big four have tightened investor lending, smaller banks and non-banks are going more aggressive,” Mr Sodhi said.

“There are new deals every week. They are going hard on rates. They are wanting to increase investor lending. We have been seeing this trend since November where discounts last for two or four weeks then jack back up again. But then when one lender stops their discount, someone else steps right in.

“It’s the non-bank lenders taking the market share.”

Mr Sodhi said that if the Council of Financial Regulators put additional macroprudential limits on the banking sector as expected, this would increase volumes on Hashching because it could make the interest rate differential between banks and non-bank lenders even larger.

Last year, some brokers on Hashching were able to access rates from big banks as low as 3.5 per cent per annum but at present none of the big banks are offering rates below 4.5 per cent. But some brokers have secured prices from foreign banks and non-bank lenders at below 4 per cent.

AFG, the country’s largest mortgage aggregator, has also pointed to growing market share from smaller lenders undercutting the big four.

“AFG’s data today shows flows to the non-majors are increasing quarter on quarter and are up to 35 per cent of our flows,” said AFG interim CEO David Bailey this week.

Pepper said in February it would look to raise at least $1.5 billion in residential mortgage backed securities (RMBS) in 2017 to fund its growth as demand booms, with mortgage applications hitting the highest level in the company’s 15-year history in January and February.

Australia finally has crowd-sourced equity funding

The Conversation.

The Senate has passed a bill to allow companies to access crowd-sourced equity (CSF). But its conditions make 99.7% of Australian companies ineligible and the lowered governance requirements that some companies may qualify for may not outweigh the costs of accessing CSF.

CSF is similar to other forms of crowdfunding in that it enables companies to raise funds through an online portal. The difference is that investors receive a share of the company rather than a product or service. They can now buy up to A$10,000 of equity in a company through a licensed CSF platform.

Eligible companies will be able to raise up to A$5 million a year this way. The government sees this as a remedy for a shortage of finance for small and medium enterprises (SMEs) and start-ups.

Over the 15 months since the idea was first touted – a different bill was introduced in 2015 – the legislation has undergone a series of changes and proposed amendments. This include fundamental aspects such as the size and type of companies that are eligible.

The bill that passed was introduced in late 2016 and contains improvements on the original. But there is still more to do to create a thriving CSF culture.

The safeguards

The bill that passed the Senate introduces three safeguards to protect investors.

1) Regulation imposed on companies seeking capital from CSF

At first glance, the regulation imposed on companies seems reasonable. Eligible companies are able to raise A$5 million through CSF. This is generous when compared to other countries that have capped CSF at A$2 million. Further, while companies must produce a disclosure document when they raise capital through CSF, it is not as onerous as those required for other methods of fundraising.

However, one key feature of the legislation is that it restricts CSF to public unlisted companies that are limited by shares, and with less than A$25 million in gross assets and annual revenue. These criteria alone exclude proprietary companies and many public companies. More than 99.7% of companies will not able to raise capital through CSF.

The legislation excludes foreign companies from raising CSF in Australia. It also excludes companies and their related parties from accessing CSF if their purpose is investment. This can be contrasted with other countries. In New Zealand, all companies can access CSF. In the United States, United Kingdom and Canada, only a small proportion of companies are excluded.

The more inclusive approach adopted by these countries allows CSF to achieve the aims of promoting innovation and remedying the shortage of finance that SMEs face.

2) Regulation imposed on crowd-sourcing platforms

Crowd-sourcing platforms, and Australia already has a few, must have a financial services licence. The platform also must comply with a range of obligations specified in the 2016 bill, such as vetting the companies seeking capital through CSF. This allows the intermediary to act as a gatekeeper, but compliance will be onerous.

The fact that only a small pool of companies can access CSF will lead to ferocious competition. The platforms could find it challenging to generate profits. This would affect the viability of platforms and create a barrier to entry.

We have already seen examples of overseas intermediaries struggling in this sphere. For instance, in Italy, where very few companies can use CSF, only one CSF intermediary now exists. In New Zealand, a number of intermediaries were quickly established but some have already withdrawn from the market.

3) Regulation imposed on investors

Australia has not imposed a general cap on investment as other countries have.

The US caps investment by those with less than US$100,000 of income or net worth to US$2,000 or 5% of the annual income or net worth (whichever is greater) within a 12-month period. If annual income or net worth is equal to or greater than US$100,000 they can invest 10% of their annual income or net worth (to a maximum of US$100,000) within 12 months.

In the UK, an investor should not invest more than 10% of their net assets in non-readily realisable securities (such as equity in an unlisted company) in a 12-month period.

The Australian legislation adopts a more balanced approach. It only limits the amount investors can invest in each company to A$10,000.

One contentious issue in the 2015 bill was the duration of the cooling-off period that allowed investors to withdraw their offers if they changed their mind. A cooling-off period can be a boon for investors but problematic from a business perspective as it could result in market manipulation. Industry contested the proposed five-day cooling-off period.

As a result, the 2016 bill shortened the period to 48 hours. This would be similar to the cooling-off period applied in the Canada. However, after debating this matter in the Senate, the final legislation was amended again and the cooling-off period is back to five working days.

The trade-off

Like its predecessor, the 2016 bill attempts to remedy the issues raised by the fact that only a small percentage of companies are able to access CSF. For instance, it reduces corporate governance requirements for newly registered or converted public companies if they wish to access CSF.

Consequently, if a proprietary company desires to raise funds through CSF it can convert to a public company and be exempt from certain compliance requirements imposed on public companies for a period of five years:

  • It is not required to hold an annual members’ general meeting for five years.
  • It is only required to provide online financial reports to shareholders for a period of five years. No hard copies are required to be sent out.
  • While public companies have to appoint an auditor within one month of registration, for the first five years companies eligible for limited governance requirements do not need to do so until they raise more than A$1 million from CSF or other offers requiring disclosure.

At first glance this may be appealing, but the concessions do not outweigh the significant costs of converting from a proprietary to a public company.

For instance, if the company raises more than A$1 million it will have to appoint an auditor. The company will also be deemed an “unlisted disclosing entitity” and be obliged to continuously disclose information. This can be costly.

How to make it work

In the end, the small number of companies that can access CSF, as well as the regulatory burden on the companies and platforms, creates a barrier to a thriving CSF culture. But there are different models that may be used to remedy this issue.

One idea is to create a new type of company that allows SMEs to raise capital while at the same time limiting their governance requirements.

Another, more complex option would be to review all the types of companies that we have under the statute to see whether these forms of corporations fulfil their objectives. This review is overdue and may provide answers to a range of problems facing businesses and investors. It may, for instance, result in a simplification of the corporate structure.

The current legislation is just a first step to closing the funding gap for SMEs.

Author: Marina Nehme, Senior Lecturer, Faculty of Law, UNSW

Banks spellbound by innovation?

A useful speech by Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank in which he explores the impact of digital on banking. He looks at potential scenarios based on the use of mobile devices, and explores the cultural and structural issues emerging, and the impact of fintech.  He concludes:

Can banks sit out the current situation using a strategy that was successful in the past? I am convinced that the answer is: no.

What type of innovation is being called for here? In my view, digitalisation will reward not those who “reinvent the wheel” but those who are generally more competent at what they do.

Can banks be innovative? Yes; at the very least, there are enough starting points and actionable areas. For it will not be possible to “sit out” digitalisation. To put it very clearly, in the words of Graham Horton: “Innovation is not compulsory, but neither is survival.”

We will be talking about nothing less than innovation in the financial industry – a subject which, by its very definition, cannot be boring. Innovation basically boils down to the introduction of something new. But is that all there is to it? Edward de Bono, thinking about progress in the world of transport, once described a key element of innovation with the following words. “Removing the faults in a stage-coach may produce a perfect stage-coach, but it is unlikely to produce the first motor car.”

Whenever we talk about innovation, it’s not, then, a question of perfecting habitual modes of thought and action but about harnessing inspiration and thinking laterally.

I would like to kick off today’s event by posing three questions that have greatly occupied me recently in my capacity as a banking supervisor.

  1. Why have innovations in the financial industry become a hot topic now, of all times?
  2. What do we mean, exactly, when we talk about innovation in banking business?
  3. Can banks even be innovative?

2 Innovation: why now, of all times?

Let’s start with the first question: innovations in the financial industry – why now, of all times? I would like to begin by saying that this question is not an inappropriate one. After all, you could say that, given the lessons learned from the financial crisis, it should not be in our interest to urge banks to churn out one innovation after another. Someone who is often quoted in this regard is Paul Volcker, who once said that the industry’s “single most important” contribution in the last 25 years has been automatic telling machines.

Let me be quite clear on this point. Innovations which are no more than smoke and mirrors are not what I came to speak about today. I am here to talk about innovations which offer new solutions, because they are exactly what the banking sector needs for a host of questions it is facing.

At first glance, Germany’s banking sector would appear to be faring quite well: the country’s banks and savings banks have managed to keep their earnings steady recently, and they have rigorously built up their capital buffers. Yet the outlook for profitability is gloomy, and there are a multitude of reasons for this. There are two particular factors I would like to single out because they shine a harsh light on what needs to be done.

The first concerns interest business: it is no secret that the low-interest-rate environment is squeezing margins and deteriorating the outlook for earnings. But saying that, rising interest rates are not a panacea either. Contrary to what is often assumed, they do not bring relief initially, but exacerbate interest rate risk, and that is particularly the case in Germany. Institutions will need to provide for this.

The second reason why profitability is weak is, of course – and I won’t shy away from it – regulation. Regulatory standards were made far tighter in response to the financial crisis, setting the bar higher for banks. That was the right move, and it was an important move – I think you will agree that a stable financial system is in everyone’s interest. But it is also right to say that tighter regulation is taking its toll on many banks. These shifts in the framework conditions are making themselves felt on banks, of course.

Time and again, institutions have raised these two points in an effort to pin the blame for their woes on monetary policy and regulation. But this “we’d be better off without you” mindset is of no help to anyone. Albert Einstein once even said that “insanity is doing the same thing over and over again and expecting different results”. Because there’s no getting around the fact that the rules of the game of banking have changed. There is little to be gained from coming over all helpless – it is up to everyone to adapt to the new environment. Actionable areas include different pricing models, cost reductions or also consolidation.

But innovation is an actionable area, too. And given the huge splash made by digitalisation in recent years, it is a field that has garnered a great deal of attention. If nothing else, the wave of digitalisation has unleashed a strong sense of optimism about the future – fintechs bursting with fresh ideas and business models, customers keen to adopt digital banking, and, not least, the necessary technical capabilities such as broadband internet, especially, have certainly seen to that. The centuries-old banking business has seen the emergence of a kind of virgin territory – a place where, all of a sudden, lateral thinking counts again and where perfecting mathematical models isn’t necessarily one of the best strategies for earning money any more. Innovation, then, is booming in banking business at the moment, and there are two reasons for that: first, the gloomy prospects for many traditional business fields; and second, the challenges and opportunities presented by digitalisation.

3 What does innovation (not) mean?

What exactly does innovation mean in the age of the digital bank? The digitalisation of the financial sector would not have become such a hyped-up topic, were it not for the existence of three visionary, but at the same time, ominous scenarios: I am talking about disruption, revolution and the infinite freedom of digital banking.

Let me talk you through these scenarios one by one.

The first scenario was, and still is, disruption. Disruption means the fear that fintechs, and especially tech giants as well, might offer far more innovative financial services far more cheaply, which would very quickly transform them into overpowering rivals for traditional institutions.

That is not entirely a far-fetched scenario – just take exchange trading, for example, much of which left the trading floor quite some time ago. What you will instead find in Frankfurt and at other exchanges are vast spaces filled with high-performance computers. This example shows us that when it comes to high frequency trading, machines are making ever greater inroads into the services sector. Decisions which were once the preserve of floor traders are now being made by algorithms. The chief difference is that algorithms make up their minds in milliseconds – that is, around the clock – and they can communicate worldwide. Their main cost factor is the electric bill.

But so far, disruption has only affected individual components of the banking business. As yet, not a single technological innovation has managed to fully replicate the economic functions of a bank or savings bank. And even if there have already been instances, such as online payments, where the well-established institutions fell far behind the pace of developments within a relatively short space of time, it is often the case that innovations are beset by what is known as the “curse of the first mover”. That is, the first player to come up with a bright idea frequently founders because that idea is not market-ready. Silicon Valley’s tech giants, on the other hand, often buy up ideas, but they make them a success. So time to market is not everything.

I don’t see widespread disruption happening today or in the foreseeable future. Right now, day-to-day relations between fintechs and banks in Germany can best be described by the relationship status “It’s complicated.” We are currently seeing almost every model conceivable in the business world, from a traditional fintech takeover and white label banking to the idea of the bank as a digital ecosystem. While fintechs started off being quite feisty towards the established institutions, we are now seeing a diverse coexistence based on competition, cooperation and expanding the service offering.

The second scenario is the one I dubbed “revolution”. That is another scenario which has not materialised so far. Digitalisation, it seemed, held out the prospect of creating alternatives to today’s financial system which would be less error-prone and more closely aligned with what customers really want. That is why fintechs presented themselves as a counterpoint to traditional institutions, dressed in hoodies rather than a suit and tie, and claiming to be “small, no-frills outfits” rather than “too big to fail”. But do a sense of a new dawn breaking and a customer-centric culture alone really make such a huge difference? Does the image which fintechs have of themselves really justify supervising them less strictly?

Perceived differences never did have a bearing for supervisory authorities, and the same is true to this very day. It is concrete evidence of safety and reliability that counts. News of glitches and failures, combined with isolated cases of fraud at fintechs around the world, just go to show that accidents and misconduct cannot be eliminated through technology and a fresh appearance alone.

From a prudential vantage point, then, there is little to be gained from constructing an artificial distinction between innovative start-ups and established institutions as long as they both run the same business model. That is also why regulators and supervisors only have eyes for a business’s actual business model. If you’re engaged in banking business, say – that is, you take in deposits and grant loans – you’re going to be treated as a bank by supervisors. You’ll need a licence and be expected to satisfy supervisory standards. Whether a bank only appears on a smartphone screen or it is a well-established institution with a number of branches is neither here nor there. The same reasoning applies to the business activity of financial services institutions and payment institutions. So if a fintech in Germany remains exempt from supervision, that is simply because its business model contains nothing which, from today’s perspective, presents a risk that needs to be supervised by us. The notion of “same business, same risk, same rules” therefore remains the guiding principle for supervisors.

Let me now briefly touch upon the third digitalisation scenario I mentioned earlier: the desire for infinite freedom in financial services, too. A trendsetter some years ago in this regard was bitcoin – a virtual currency, made up entirely of bits and bytes and not managed or controlled by an external authority. Could the underlying idea, to use a computer program to make human interaction manipulation-proof and trustworthy, work across the entire financial community?

I would initially like to state that I regard technical innovations – the best-known of which are blockchain and the distributed ledger – as being highly sophisticated. If combined correctly, they make it impossible for anyone to forge a transaction, a contract or a document, and transactions can be settled in a matter of seconds. In that regard, blockchain can be very attractive as a business factor. It can replace, in part, onerous administrative procedures and external control mechanisms.

But, once the initial excitement has dissipated, one thing becomes clear: there is nothing developing here which will exist outside the current financial system as an unregulated area. Of course, people can, and will, use “blockchains”. But, by the same token, people in the financial system of the future will also rely on the security afforded by our legal system. Financial questions are often existential, and by no means will it be possible to resolve every conflict by a ruling issued by a computer program. There is thus no doubt that technology will have to submit to the law. For banks, this means that they are permitted to use blockchain technology as long as this technology is in line with the legal framework and the bank’s management is willing to take responsibility for the risks of such applications.

Ladies and gentlemen, my remarks should have made one thing clear regarding the question of “What is innovation in the digital banking industry?”: the extreme scenarios of digitalisation have largely converged towards the middle. These days, most companies are not concerned about reinventing the wheel but instead doing many things more practically, quickly and, in particular, more cost-effectively. The question is no longer “bank or fintech?” but programming interfaces and calculating costs.  It is no longer a race to become the “most digital” bank or savings bank but to create an innovative – and therefore convincing – overall package.

4 Can banks be innovative?

Let me now come to the third question I asked in my introductory remarks: “Can banks be innovative?” In recent times, credit institutions have not exactly distinguished themselves as hotbeds of innovation – at least relative to fintechs. Though banks have, in the meantime, initiated their own innovations – up to now, fintechs have proven to be the drivers of digitalisation.

That said: it is not individual ideas we are talking about, but a bank’s overall package. And it is less about inspiration and more, above all, about perspiration. Innovation is thus manageable. It is not my job, as a banking supervisor, to dictate to institutions how they should evolve. We are, and shall remain, neutral to innovation: our job is merely to ensure that banks and savings banks are able to shoulder the risks of their specific business themselves. But our supervisors are, of course, monitoring developments. In the process, we have identified three aspects which are important for making innovation a success.

First: innovation presupposes openness to new ideas and developments. A not-inconsiderable share of change to date has taken place in peoples’ heads. Many senior bank executives first had to learn to take digitalisation and the new competitive situation seriously and to put themselves time and again in the place of their customers. I’m not saying that bank executives have to start learning to understand programming languages or memorise network plans. However, they should generally be able to understand the language of digitalisation.

Second: innovation presupposes the ability to do justice to complexity. Banks’ cyber defences are a good example. Credit institutions are certainly a particularly popular target for attack because the rewards are huge. Given the mounting threats, institutions are in a state of high alert.

But being on high alert is just not enough. For cyber defence is by no means a trivial matter. In the Middle Ages, it was relatively easy to defend castles: by building moats and fortresses. And it was mostly clear from what direction the enemy – often the same enemy – would advance. The reality of IT is a different matter altogether: enemies are unknown and almost never come out into the open. In some cases, professional hackers hide for months on end within a company’s fortress walls. And even if the company has detected a system breach, this does not mean for a minute that the assailant has been driven out of the system – this requires, in some cases, top-of-the-line criminology techniques. IT security must therefore be more akin to an immune system than to a fortress. And you can very well imagine that a good antivirus scanner and a firewall are far from enough to protect this immune system sufficiently.

For a bank’s immune system to be healthy, it has to have suitable corporate structures. Put simply: governance has to be good. Our supervisors therefore order some institutions to tear down the responsibility “firewall”, where no one is willing to assume responsibility for the many interlinked aspects of cyber risk. In addition, the “human” factor has to be taken into account as a weak link in IT and cyber risk.

Therefore, this IT security aspect has to be directly factored into any new projects on to which an institution embarks. By the way, the same goes for financial services start-ups. Despite their reputation for having more state-of-the-art IT knowledge, in the absence of comprehensive security management, they can easily fall prey to dangers from the internet.

I still owe you a third point: innovation often has to be a matter for each individual institution. In the patchwork quilt of banks here in Germany, there is no “one-size-fits-all” solution: each and every institution, be it large or small, rural or urban, special-purpose financing vehicle or universal bank, has to find and go its own way.


Fintech—A Brave New World for the Financial Sector?

From iMFdirect.

From smartphones to cloud computing, technology is rapidly changing virtually every facet of society, including communications, business and government. The financial world is no exception.

As a result, the financial world stands at a critical juncture. Yes, the widespread adoption of new technologies, such as blockchain-based systems, offers many potential benefits. But it also gives rise to new risks, including risks to financial stability. That causes challenges for financial regulators, a subject I addressed at the 2017 World Government Summit in Dubai.

For example, we need to define the legal status of a virtual currency, or digital token. We need to combat money laundering and terrorist financing by figuring out how best to perform customer due diligence on virtual currency transfers. Fintech also has macroeconomic implications that need to be better understood as we develop policies to help the Fund’s member countries navigate this rapidly changing environment.

Soaring investment

Financial technology, or fintech—a term that encompasses products, developers and operators of alternative financial systems—is challenging traditional business models. And it is growing rapidly. According to one recent estimate, fintech investment quadrupled from 2010 to 2015, to $19 billion annually.

Fintech innovation has come in many shapes and forms—from peer-to-peer lending, to high-frequency trading, to big data and robotics. There are many success stories. Think of cell phone-based banking in Kenya and China, which is bringing millions of people—previously “unbanked”—into the mainstream financial system. Think of the virtual currency exchanges that allow people in developing countries to transfer money across borders quickly and cheaply.

All this calls for more creative thinking. How exactly will these technologies change the financial world? Will they completely transform it? Will banks be replaced by blockchain-based systems that facilitate peer-to-peer transactions? Will artificial intelligence reduce the need for trained professionals? And if so, can smart machines provide better financial advice to investors?

The truth is: we do not know yet. Significant investment is going into fintech, but most of its real-world applications are still being tested.

Regulatory challenges

And the regulatory challenges are just emerging. For instance, cryptocurrencies like Bitcoin can be used to make anonymous cross-border transfers—which increases the risk of money laundering and terrorist financing.

Another risk—over the medium term—is the potential impact on financial stability brought about by the entry of new types of financial services providers into the market.

Questions abound. Should we regulate in some way the algorithms that underlie the new technologies? Or should we—at least for now—hit the regulatory pause button, giving new technologies more time to develop and allowing the forces of innovation to help reduce the risks and maximize the benefits?

Some jurisdictions are taking a creative and far-sighted approach to regulation—by establishing “fintech sandboxes,” such as the “Regulatory Laboratory” in Abu Dhabi and the “Fintech Supervisory Sandbox” in Hong Kong.

These initiatives are designed to promote innovation by allowing new technologies to be developed and tested in a closely supervised environment.

Here at the IMF, we are closely monitoring fintech developments. Last year, we published a paper on virtual currencies, focusing on the regulatory, financial, and monetary implications. We have since broadened our focus to cover blockchain applications more generally. And we have recently established a High-level Advisory Panel of Leaders in Fintech to help us understand developments in the field. We expect to publish a new study on fintech in May.

As I see it, all this amounts to a “brave new world” for the financial sector. For some, a brave new world means a frightening vision of the future—much like the world described in Aldous Huxley’s famous novel.

But one could also think of Shakespeare’s evocation of this brave new world in The Tempest: “O wonder! How many goodly creatures are there here! How beauteous mankind is! O brave new world.”

By Christine Lagarde

Embracing the bots: how direct to consumer advertising is about to change forever

From The Conversation.

Soon, advanced computers won’t just be driving you to work, they’ll be selling you stuff as well. We can already see this in the form of chatbots.

Chatbots are artificially intelligent pieces of software, capable of maintaining a conversation with a human. While they aren’t perfect yet, they have markedly improved in recent years, leading some to claim 2017 will be the year that we finally see mass adoption.

Chatbots can already do some incredible things, such as operating a medical helpline, helping you plan your vacation, and even talking with you when you can’t sleep.

In the world of advertising, this represents a huge step. Chatbots are personalised, to the point, and all knowing, thanks to consumer tracking, big data, and machine learning. With the likes of Facebook jumping aboard, all of this is right in your pocket.

The rise of chatbots

According to American research firm Gartner, 85% of customer interactions will be managed without a human by 2020. Given this, businesses are beginning to invest and experiment in the space. Their bots have the capacity to do a great many things – provide personalised support for many customers at once (not just VIPs), recommend products and services, and assist during and after a sale. All without the need for humans.

The strength of bots is their ability to have tailored conversations, give personalised offers, and offer convenient purchases. Armed with data and serious computing, they can analyse patterns in our speech to decide when and what to advertise. They can also increase engagement and bring your brand personality to life.

In addition to all of that, bots are novel and a little bit human. This means we are less likely to get distracted than we would be with other digital options, like banner ads.

Personal assistant or sales assistant?

“Hey, I see you’re going to Gary’s party on Saturday. Need any help?”

What sounds like a conversation is the future of direct to consumer advertising. Chatbots won’t just remind me about Gary’s party, but accept his invitation, order a gift based on Gary’s preferences, arrange an Uber to the party, and maybe even move around tomorrow’s appointments for me.

Is this a personal assistant or advertising? The potential of chatbots is that they will be both: advertising will be intelligent, help will be on-demand, and it will feel like we’re being assisted rather than sold to.

The bots will recognise patterns, learn from us, and their suggestions will be there at exactly the right time. And unlike the personalised suggestions already provided online courtesy of consumer tracking, this advertisement will have a human touch and embrace natural conversation – the new wave of advertising will allow us to upscale personal selling in a way we’ve never seen before.

But they’re not there just yet

One thing standing in the way of widespread chatbot adoption is that they are a little creepy. This cause of this creepiness is two-fold.

First, there’s the uncanny valley. This is the phenomena, where we perceive a non-human as creepy because it is almost (but not quite) human. Some suggest that the answer here lies in not asking the bot to “act” human, rather, just let it be a bot.

A second source of “creepiness” is a feeling of invasiveness that might arise if the bot appears to know something that you haven’t told it. It is a delicate balance for bots: they should know enough to be helpful, but not enough to give consumers a sense of invaded privacy. They must use the information responsibly to build trust, and aim to provide a valuable service.

But the technology isn’t mature yet. This manifested spectacularly last year when a Microsoft chatbot named Tay started sending out offensive tweets. Even the CEO of a virtual assistant company has warned of the damage of a “low-IQ” bot. If advertisers exploit this technology before it’s ready, bots could become just another thing to be ignored when the “ads are on”.

This isn’t about the transaction, it’s about the relationship.

Looking forward

Artificial intelligence is constantly progressing, spurred on in part by competitions like the Loebner prize. With enough data and time, chatbots could become very convincing. In addition to seeing our bots become more seamless and eloquent, we could also see them more integrated across different technologies and functions: already users of virtual assistants can utilise them across loads of devices.

Likewise, bots can talk to other bots, coordinating a valuable experience for the consumer behind the scenes. Imagine how much more important these interactions will become as we enter our increasingly connected future. In addition to knowing what Gary wants for his birthday, will our bot also lock the house behind us and drive us to the party? If on the way home the bot reminds us to stop and get milk and some antacids (maybe that second slice of cake wasn’t a great idea), will we think of this as advertising or just thoughtful?

It’s a call we will all be making soon, as these bots increasingly enter our home and work lives.

In many ways, they are already here.

Authors: Kate Letheren, Postdoctoral Research Fellow, Queensland University of Technology
Charmaine Glavas; International Business Lecturer, Queensland University of Technology

When it comes to copying Snapchat, Facebook will only get so far

From Business Insider.

In a great recent essay, The New York Times’ Farhad Manjoo made a strong case that Snap, the company behind the social phenom Snapchat, represents a big bet that the camera is the new way to communicate.

As of late 2016, even Facebook CEO Mark Zuckerberg had to concede that “the camera is the composer” in response to Snap’s ever-rising star, even as it builds Snapchat-like functionality into the news feed, Instagram, and its other products.

I think that Manjoo is exactly right. But from where I’m standing, Snap’s bet is much bigger, and could presage another way in which computing is undergoing a massive shift.

Whenever you take a Snapchat selfie with the infamous puppy or rainbow puke filters, there’s a surprising amount of maths going on behind the scenes, as artificial intelligence algorithms track your face through three-dimensional space, overlaying an image that moves with you. It ain’t easy, is the point.

In industry terms, the technology at work here is called either “computer vision” or “machine vision,” depending on the engineers you hang out with. And while Snap was the first social startup to build its fortunes on computer vision, it’s starting to catch on elsewhere.

Now, while Facebook is in a position of power as the incumbent, there are larger trends at play. The longer Facebook continues to ape Snapchat’s best product features, the less likely that it will be able to differentiate itself if and when Snapchat has its next big breakthrough in how we use our cameras to communicate and interact with the world around us.

Google, Pinterest, Salesforce, and more

Just a few weeks ago, Pinterest announced Pinterest Lens, an app that can use your phone’s camera to tell you where, for instance, they got those awesome sneakers, or point out similar products that match the item’s overall design aesthetic. Recently, Salesforce announced “Einstein Vision,” a way for businesses, to recognise when, say, a fridge needs to be restocked by “seeing” that a Coke was taken out.

Probably coolest of all, though, was Google’s demo of its new Video Intelligence API, a new system that can “look” inside videos and search what’s in them, the same way its popular Google Photos can search for specific people or events. Take a look:

What we’re really seeing, looking at all these advancements at once, is the birth of the camera as a viable computer interface. This isn’t a new idea: Microsoft’s doomed Kinect, for example, was a huge step forward in interacting with technology via camera.

Now, though, a few things are happening. With smartphones and webcams, high-quality cameras have rarely been so plentiful. And thanks to advances in artificial intelligence, and a big assist from the cloud (Snapchat is hosted with Google Cloud, for instance), those cameras can get a lot smarter via software without needing extra hardware.

So what does this mean for Snapchat?

Make no mistake, Facebook is one of the companies on the very bleeding edge of artificial intelligence, which includes advances in computer vision. Honestly, it speaks very well of Facebook’s AI prowess, and their acquisition strategy, that they were able to match Snapchat’s famed filters so quickly in Messenger.

But Facebook is also hedging its bets. While Facebook builds Snapchat-like functionality into its own apps, it still has to support the traditional news feed, Instagram, Messenger, and WhatsApp experiences. The camera is a big part of Facebook’s self-given mission to connect the world, but not the only part.

Meanwhile, if the camera is indeed the new interface, Snapchat is all in. Snap describes itself as a “camera company. Make no mistake, there is no Snapchat without the camera. And the future of the camera lies in computer vision and any new techniques.


Messenger DayFacebookMessenger Day, the new Snapchat Stories-like feature for Facebook Messenger

In a job posting for a computer vision expert, Snap says “you’ll work on creating new ways to employ computer vision and graphics to give Snapchatters exciting tools that they can use to amuse and delight their friends.”

This means that Snap is making a big gamble. If it can continue to stay ahead of the curve on computer vision and deliver those tools, it stands to be the pioneer and the trendsetter into the future of cameras and of computing itself.

The payoff of this focus, though, is the enhanced likelihood that Snapchat will continue to set the pace in computer vision. And as computer vision begins to truly touch our everyday lives, it will be Snapchat, not Facebook, that gets the credit for breaking it into the mainstream.

The BBC Does Fintech

Interesting programme from the BBC looking at UK developments in Fintech. The discussion centered on how mobile devices are fundamentally changing banking and why incumbents are struggling to respond. Listen to the programme, or download it here.

The UK is a world leader in financial services technology, otherwise known as fintech.

Presenter Evan Davis asks how Britain has beaten Silicon Valley and what challenges fintech poses to traditional banking?

Antony Jenkins, Founder and Executive Chairman, 10x Future Technologies
Ishaan Malhi, Founder,
Eileen Burbidge, Co-founder, Passion Capital

Bank of England FinTech Accelerator latest proofs of concept

As announced in the Governor’s June Mansion House speech the Bank of England has set up a FinTech Accelerator, working in partnership with new technology firms to help harness FinTech innovations for central banking.

In return, it offers firms the chance to demonstrate their solutions for real issues facing us as policymakers, together with the valuable ‘first client’ reference that comes with it.

The Accelerator is building a network of firms working in this space.

Firms we are currently working with:

  • MindBridge AI: MindBridge’s AI Auditor detects anomalies in financial transactions and reports using data science, machine learning and artificial intelligence technologies. Using a small set of anonymised regulatory data the Bank is using MindBridge’s AI Auditor to explore the benefit of machine learning technology in analysing the quality of regulatory data input.
  • Ripple: Ripple’s solution is built around the open and neutral Interledger Protocol and serves to power interoperable payments across different ledgers and networks. We are conducting a PoC with Ripple to demonstrate the synchronised movement of two different currencies across two different RTGS systems in particular to show how this kind of synchronisation might lower settlement risk and improve the speed and efficiency of cross-border payments.
  • Enforcd: In this proof of concept, we are using an analytic platform designed specifically to assess and draw out trends on regulatory enforcement action using publicly available information.

Firms we have worked with in the past:

  • BMLL:  This machine learning platform provides access to historic full depth limit order book data. The BMLL platform aims to facilitate analysis and anomaly detection. We have agreed to test their alpha version for this Proof of Concept.
  • Threat intelligence: As part of the Bank’s wider information security and threat intelligence work we partnered with two firms – Anomali and ThreatConnect – that provide innovative technologies to collect, correlate, categorise and integrate security threat data. For these projects, we asked them to offer a solution to consolidate threat intelligence into a searchable repository that can optimise information collation, enrichment and sharing in support of a proactive intelligence-led defence strategy.
  • BitSight: In this PoC we used a tool that assesses a firm’s cyber resilience based on publicly available bulk data to assess firms’ cyber resilience. As part of the PoC, we asked BitSight to evaluate the Bank’s own resilience and to assess the benefit of this service as one of the range of information security tools that we use. More detail on this work is provided in the BitSight publication, published 9 November 2016.
  • Privitar: As part of our Proof of Concept, we tested the software on a manufactured dataset to examine the analytical value of the desensitised data to establish if this could allow us to provide wider access to data for researchers within the Bank.
  • PwC: We invested in understanding the technology of Blockchain and distributed ledger, working with PWC. The team built a multi-node scalable distributed ledger environment, which contained several smart contracts to illustrate the applications of the technology. This has enabled us to better comprehend the resiliency benefits and practical limitations of the technology. These are detailed further in the PwC publication, published 17 June 2016.

Areas of Interest

Examples of priority areas for the next cohort are listed below, but we also welcome expressions of interest from firms working in other areas of FinTech.

We are interested in Metadata management tools; and new tools to manage and harvest business rules (including rule languages) that are embedded in systems and data collections. We also have an interest in security tools that protect data at rest and in transit. Further, we are looking for innovative tools for data cleansing, for example for text strings, and anomaly, trend or changing behaviour detection, particularly in transaction reporting data sets.

Our Fintech Accelerator has launched a new community which brings together fintech-related organisations.

The community has three aims:

1. To share developments, trends and insights.
2. To make sure the Bank is engaging with different fintech firms from across the sector.
3. To enable firms with an interest in fintech to network, supporting the development of the sector.

Community members will be invited to meet us two to four times a year to share updates on trends and developments in the sector. We will also hold quarterly networking and knowledge-sharing events, and publish summaries of the topics discussed.