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

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?

Guests:
Antony Jenkins, Founder and Executive Chairman, 10x Future Technologies
Ishaan Malhi, Founder, Trussle.com
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.

 

Asia Pacific leads digital wallet adoption

Asia Pacific leads the world when it comes to digital wallet usage via mobile and smart devices as revealed in the 2017 Mastercard Digital Payments study. Payments via ewallet tops 83% of APAC conversations compared to 75% of global conversations tracked in the 2017 study.

Consumers are also showing an increased interest in the application of new technologies to make shopping faster, easier and more secure. The topic of virtual reality generated the most positive sentiment globally and in Asia Pacific (100% positive) among emerging technology topics, as shoppers imagine completing a purchase with the simple nod of their head.

“Technology is making the promise and the potential of a less-cash life a reality for more people every day,” said Marcy Cohen, vice president of digital communications at Mastercard. “This year’s study notes a change in the level of interest for new ways to shop and pay that only a few years ago would have seemed farfetched.”

Embracing emerging technologies

The increased acceptance of digital wallets in-store, online and in-app generated more than 2 million mentions, with 84% of them taking place on Twitter. Beyond the payment, consumers looked forward to additional functionality like storing loyalty cards and supporting closed-loop public transportation systems.

Technologies like artificial intelligence and smart home assistants were the second most discussed payment topic throughout 2016. These new ways to pay generated particularly strong consumer interest in the fourth quarter, as people discussed how they might shop with newer, smarter devices.

In Asia Pacific, 93% of surveyed consumers spoke positive of wearables as a potential payment channel.

Smart assistants, virtual reality and artificial intelligence also emerged as new payment technology interests. Consumers across North America showed an increased interest throughout the year in the simplicity of sending and receiving mobile payments with one comment to a smart assistant.

The Internet of Things was a hot topic with the majority of conversations taking place in North America (44%) and Europe (34%). Discussion centered on the Internet of Things becoming the Internet of Payments where payments could be enabled in any connected device.

In their conversations, people continually noted that the success of new technologies and new ways to pay will be dependent on the security and protections delivered beyond what’s available today.

Forty-five percent of consumers in Asia Pacific are interested in biometrics and other forms of authentication to deliver enhanced security, reduce fraud and move beyond traditional passwords. Facial recognition, fingerprint and touch authentication topped 66% of conversations. The region appeared more open to these emerging technologies compared to the global average of 43% and 51% respectively.

The study also revealed frustration over activities involving the use of conventional passwords, including entering, forgetting and resetting passwords and expressed interested in getting rid of passwords altogether with easier, improved authentication.

Prospa Seeks $500m in SME Loans After Raising

From Smart Company.

Small business lender Prospa is gearing up to hire an additional 100 employees in its next stage of expansion, after this week securing a $25 million cash injection in what is believed to be the largest fintech venture capital investment in an Australian business.

The 2016 Smart50 winner says the investment round, led by Australian venture capital firm AirTree Ventures, will shore up the company’s ability to dominate the small business lending landscape on its path to writing more than $500 million in loans.

“It’s a great story for Australian VCs, and really just cements the general market awareness of how Australia can build great tech companies,” co-chief executive Beau Bertoli tells SmartCompany.

Prospa will be using the funds to further develop the technology side of the business, and with several new projects on the go, Bertoli says the funding injection will also allow the business to keep investing in people.

“It does require a lot of people—the costs are going to be in hiring, we’re going to be looking to hire about 100 over the next year. We’ve put a lot of thought and planning into it this year—it’s not the first time we’ve tried it,” he says on hiring big cohorts of staff at once once.

The Prospa platform, which allows small businesses to apply for unsecured loans of up to $25,000, launched in 2011 and previously raised $60 million in capital in September 2015.

The lender has written more than $250 million in loans, and recorded revenue of $22 million for the 2016 financial year. The current valuation of the business is $235 million, says Bertoli, and while that’s a “substantial” number for an Australian fintech operation, he believes there’s still plenty of room to grow.

“We’ve got a really long way to go,” he says.

“It all comes back to the customer problems, and they can all use capital at different times.”

Prospa has developed a number of strategic partnerships with the likes of Westpac and Mortgage Choice, but Bertoli says the company’s connection to smaller operations has also contributed significantly to its growing the loan base.“We work with around 4,000 partners around Australia, from Westpac to small little accounting firms,” he says.

“That gives us access to well over half of Australia’s small business customers. We’re able to work with lots of [those partners] and get access to their customers.”

Aussie fintech investment defies global dip

From Fintech Business.

Investment in Australian fintech companies remained strong in 2016, despite an almost 50 per cent decline in global investment figures, according to KPMG.

KPMG’s Pulse of Fintech report, released today, found an overall investment of US$656 million into Australian fintech in 2016 across 25 deals, up from $185 million across 23 deals in 2015.

Successful funding rounds by Tyro and Prospa were listed as factors resulting in a strong year for Australian fintech, alongside the acquisition of Pepperstone by CHAMP Private Equity.

The figures present a stark contrast to global investment in fintech companies, which was found to be US $24.7 billion, down from US $46.7 billion in 2015.

However, the report also made clear that the total global funding figures are “still significant compared to pre-2015 investment levels”, indicating 2016 saw a particularly pointed spike for fintech investment, rather than a new normal.

Reduced M&A activity and private equity deals were said to be the main factor in the global decline, while venture capital investment remained strong, actually reaching a new high of US $13.6 billion, up from $12.7 billion in 2015.

“In just five years, Australia has seen the creation of a healthy and active fintech sector, from an extremely low base of just $51 million of fintech investment in

2012 to exceed $600m in 2016,” said Ian Pollari, global co-Leader of fintech at KPMG, commenting on the findings.

“While mega deals result in peaks and troughs in overall figures, the trend is clear and demonstrates increasing interest and investment activity in fintech.”

Apple claims banks want digital wallets as a new revenue source

From Australian Fintech.

Apple says three of the big four banks are pushing to pass the costs of Apple Pay on to their customers as a way to “condition the market” into paying extra fees when using a mobile phone to make a ‘tap and go’ payment.

One of the issues in the long-running battle between Apple and Commonwealth Bank of Australia, National Australia Bank, Westpac Banking Corp and Bendigo and Adelaide Bank is whether the banks can pass through to their customers the fee that Apple will require them to pay to use the iPhone infrastructure.

But Apple has described the argument as a “trojan horse”. In a submission published by the Australian Competition and Consumer Commission on Friday, Apple suggests this issue of fees, rather than the bank’s other demand for access to the iPhone’s communication antenna, is motivating the banks, who are all developing their own digital wallets to compete against Apple’s. Digital wallets allow mobile phones to be used to pay through contactless payment terminals.

“Put simply, the applicant banks have the means, notice and opportunity to disadvantage Apple Pay by pricing Apple Pay transactions above transactions made using their own proprietary issuer digital wallets to dissuade cardholders from using Apple Pay,” Apple said. The banks have an “incentive to charge fees to consumers for using Apple Pay to steer customers towards their proprietary payment apps”.

Once the market became accustomed to being charged for using Apple Pay instead of a card, Apple says the banks would be “setting a precedent for charging for mobile payments on other digital wallets, in the future, including the banks’ own proprietary wallets”. The banks could “tacitly extend the imposition of those fees to any digital wallet transaction as a new revenue source,” Apple added.

ANZ deal

ANZ Banking Group broke ranks with the other banks to offer Apple Pay last year; the fee ANZ is paying to Apple has not been confirmed but is understood to be a few cents per $100 of transactions. But ANZ is prevented by its contract with Apple from charging customers for using the service.

The banks’ final submission to the ACCC will be published this week, ahead of the regulator making a decision on the authorisation request, which is expected next month.

Apple said that if authorisation is granted, it will merely provide “cover” for the banks. “The incentive to compete away these fees at the retail level is reduced or removed if there is an ACCC authorised ability to impose Apple Pay transaction fees which provides shelter for their own fees,” Apple said.

If scandals don’t make us switch banks, financial technology might

From The Conversation.

An efficient market relies on rational customers being willing to change suppliers when there’s good reason to do so. But what happens when customers stay put regardless? This issue is particularly acute in the banking industry.

Even when bank customers have a very good reason to switch, behavioural economics research shows they’re often reluctant to make the move. For example, big scandals that affect banks have a weak impact on consumer behaviour. However, there is a greater propensity to act among customers who are directly impacted.

Behavioural economics also shows bank customers are often slow to switch to take advantage of better offers from competitors. In 2016, the UK’s Competition and Markets Authority lamented that only “3% of personal and 4% of business customers switch to a different bank in any year” in the country. In 2013, Canstar suggested the figure is slightly higher in Australia at 5%.

Despite the slightly higher propensity to switch banks among Australian consumers, there’s much we can learn from the UK’s use of behavioural economics to nudge customers to act in their own best interests. In particular, financial technology companies can provide information platforms to make it easier for customers to switch.

Why bank customers don’t change

Behavioural economists have shown that consumer decisions are not rational. In particular, there is a “sunk cost bias” that affects consumer decisions. That is, consumers tend to place more value on any previous effort or expenditure they’ve made rather than judging economic value when they make decisions.

If you have left a 20% deposit on an item in a store, you will probably buy it, even if you found the same item for sale at 75% of the price elsewhere. So, customers will tend to stick with the bank they’ve got, despite scandals.

Competition authorities, led by the UK’s Competition and Markets Authority, are increasingly trying the “nudge” options offered by behavioural economics as a way to help persuade an irrational consumer to do what is in their best interests. A nudge is simply a mechanism to encourage people. It might be a reminder as to the consequences of not taking the action or benefits of going ahead.

Regulators have examined ways in which nudges can be given without unintended consequences. For example, should the nudge be a carrot or a stick? And which works best? The UK’s Competition and Markets Authority’s chief economic advisor, Mike Walker, advises regulators to “test, learn and adapt”.

A critical part of any nudge is presenting information in a way that can be used easily by consumers. Intermediaries, comparison tools and other financial technology services can provide this information.

How financial technology businesses could help

One of the barriers at the moment to getting customers to switch in Australia is a lack of information on all bank products and financial technology businesses to manage this information.

Although the UK implemented services that make it easier to switch between retail bank accounts, the UK’s Competition and Markets Authority found that this didn’t improve competition in the sector. To resolve this problem, it has ensured that customers have information on other banks and their account options as part of new account-switching regulation.

The way that this works is that customers can compare their existing offering with alternatives using an app that talks to an open electronic interface to the bank. The UK’s Competition and Markets Authority has mandated that the retail banks provide this interface, known as an applications programming interface, to both consumers and to financial technology businesses.

The effect is a space for new businesses to provide comparison tools. These new financial technology businesses will not impose a significant cost on the banks. Each of the UK banks has spent around £1 million each to create these open electronic interfaces, according to the UK Open Data Institute.

The open electronic interfaces will be associated with the European Union Second Payment Services Directive, which will be implemented before Brexit takes effect. This directive will help automate parts of the switching process.

The Australian banks and the Reserve Bank under the auspices of the Australian Payments Clearing Association are trialling a New Payments Platform to try to make it easier for customers to switch. But it’s not likely to have the same degree of flexibility and consistency as the approaches adopted in the UK, as it focuses on financial institution needs, rather than consumer ones.

Regulators in Australia should use behavioural economic analysis to learn more about how consumers use any new information on bank switching or services on this offered by financial technology businesses.

We’re still waiting on evidence on how these new financial technology companies will change consumer behaviour in the UK. But it is likely that in the very least it will increase the intensity of rivalry between the retail banks, this can only be a good outcome for consumers in the UK.

This could also inform a similar implementation in Australia, particularly after a parliamentary committee’s first report on the four major banks is released.

Author: Rob Nicholls, Lecturer in Business Law, UNSW

Fintechs Eye The Mortgage Market

From Fintech Business.

Speaking at a media roundtable in Sydney this week, SocietyOne co-founder Greg Symons said there is a class of mortgages that could suit “exactly what we do”.

“We will look at that in time, probably through a partnership of some kind,” Mr Symons said.

“The fact is it’s very cheap debt and very low capital that goes into it. The problem is the margins of play are very tight, whereas there is a second tier of mortgage lending with a lower LVR, a different form of mortgage lending that actually would fit well,” he explained.

“It is more like a syndicated loan style opportunity, which essentially is just low-volume peer-to-peer. The thing is, you’ve got to change your thinking. You’ve got to move away from this pooled investment style to something that is more individual based.”

Mr Symons said he built SocietyOne and the technology underpinning it to ensure that the company doesn’t exclude itself from certain asset classes that are a natural fit.

However, SocietyOne’s newly appointed chief investment officer John Cummins, who was also present at Wednesday’s discussion, said there is little “juice” in mortgages, echoing Mr Symons comment about tight margins.

The group has over 280 funders including Australian banks, credit unions, high net worth individuals and SMSFs.

Mr Cummins said mortgages are a difficult market to get high net worth investors into.

“The structures are really set up for institutional. To go in and nakedly invest in mortgages… I know it has been done overseas. It’s just a bit more challenging here because you have established an investment structure now that looks like an amortising structure with a whole lot of variable rate mortgages in it,” he said.

US-based online lender SoFi, which is planning an Australian mortgage market play, has successfully managed to move from a peer-to-peer lending offering student loans to a balance-sheet lender offering home loans.

The company has made clear its ambitions to grow beyond lending to provide a fuller, more holistic banking-like offering to customers including deposits, credit cards and payment solutions. It is currently preparing to launch its first mortgage securitisation deal.

SoFi this week announced the acquisition of Delaware-based mobile banking group Zenbanx, which has been pioneering ‘conversational banking’.

Faster credit decisions with real-time technology

From Fintech Business.
Credit providers will need to embrace newer technologies and real-time data processing in order to meet changing client needs, writes Experian’s Suzanne Steele.

Over the last decade, the digital transformation of the banking sector has accelerated dramatically, and the pace of change is showing no sign of slowing.

Recent research data shows more than 1.2 billion people are banking on their mobile devices today, a number set to increase to over two billion by 2021.

Competition from agile new arrivals to the market, combined with a need to enhance the customer experience, are compelling credit providers to improve their range of services and reduce the time it takes to make credit decisions.

Gone are the days when a discussion with the local bank manager was the only option.

Dissatisfaction with traditional systems that fail to meet the instantaneous needs of the modern-day customer already has some Australians looking to fintech start-ups and alternative lending sources.

Millennials report convenience anywhere, any time as the primary driver for choosing non-traditional finance providers, according to recent Telstra research.

This highlights that many of today’s consumers live in a world of digital banking and expect to be able to have their banking needs met at any time, in any place and on any device.

There are signs consumer pressure is shifting the massive cogs of Australia’s financial services industry, slowly but surely adjusting to the demands of today’s hyper competitive 24/7 global economy.

The National Payments Platform (NPP) rollout in late 2017 will provide Australian businesses and consumers with a faster, more flexible and data-rich way to transfer funds within seconds.

In the NPP world, an Australian credit shopper can receive funds from friends, family or peers almost instantly.

Australian credit providers will have the same ability to almost instantly fulfil a customer’s credit wishes, but they will also need the right tools in place to assess customer risk with the same level of immediacy.

In order for credit providers to meet the evolving demands, real-time automated decision-making must become the new norm across the credit industry, enabled by access to a variety of internal and external databases.

What are the databases and insights credit providers need at their fingertips to make well-informed decisions?

In order to accurately, quickly and confidently make a ‘yes’ decision anytime, anywhere, a credit provider needs to first answer these five fundamental questions:

  1. Is the applicant who he or she purports to be? (ID data)
  2. Will the applicant likely be fraudulent? (fraud data)
  3. Is the applicant too risky? (credit data)
  4. Can the applicant afford to repay the loan? (servicing capacity data)
  5. If the applicant has a property, is it worth what they say it’s worth? (asset value data)

Historically most credit providers have answered each of these questions separately, using disparate and unconnected systems. For example, the bank will access an existing customer’s profile on their CRM database, but will also look at external data provided by a credit bureau or a shared fraud database.

The result is a lengthy process that delays credit decisions and results in a poor customer experience. In an increasingly saturated market, consumers’ ability to access credit seamlessly will likely be a key differentiator.

A one-stop shop

Emerging technologies promise a faster and more customer-friendly alternative to these clunky systems of old, offering access to a wide range of separate databases on demand and as part of a singular process.

As banks up the ante in their adoption of cloud-based services, a more flexible, collaborative technology ecosystem is emerging.

These technologies enrich a bank’s own customer data with third-party credit data, identity information, fraud insights and property data, and make it all available online and in real time.

With integrated workflow and decisioning processes, banks can fast track applications from existing customers and prompt a request for more data from new customers.

This enables credit providers to deliver a credit decision within seconds, reducing the number of customers who drop-off midway through the application process due to the lengthy questions and delays.

However, it also ensures credit offers are more accurate, based on a holistic approach to a customer’s financial situation. For the bank, this reduces risk, streamlines operations, and enables it to offer efficient and competitive products and services.

A digitised approach also addresses an ongoing concern for credit providers.

In 2009, to meet ASIC’s responsible lending guidelines, the onus was put on lenders to request evidence such as pay slips or financial statements, to support credit applications.

This process significantly delays the processing of applications. However, by applying the same principles in data integration, banks can now automatically access bank statements to fast track their evaluation of the ability of a consumer to service a loan.

Developing an effective data hub with real-time decisioning software future-proofs a bank, enabling an agile response to both future regulatory changes and transformations to the market.

Such a capability results in a more positive experience for customers and delivers much improved efficiencies and business performance for credit providers.

Suzanne Steele is the managing director of Experian for Australia and New Zealand.