Tag: Fintech

Rapid growth in FinTech credit carries opportunities and risks

A new report from the Financial Stability Board overviews the development of FinTech platforms and looks at potential risks such activity brings. The report highlights that the growth is strong in certain markets, but the business models and partnering models vary widely.  In volume terms China, US and UK lead the way.

There is diversity in Fintech target borrowers. In some markets, they are primarily consumers, in others, small business. Loans can be unsecured, or secured. A growing trend is the partnering with incumbent banks.

Although FinTech credit markets are currently small in size relative to traditional credit markets, they are growing at a fast pace. In some markets, the share of lending is sufficient to impact financial stability, and as growth continues, more measures may be required.

“A bigger share of FinTech credit in the financial system could have both financial stability benefits and risks,” says CGFS chairman William C Dudley (President, Federal Reserve Bank of New York).

Potential benefits include increased access to alternative funding sources in the economy and efficiency pressures on incumbent banks. At the same time, risks may arise, including weaker lending standards and more procyclical credit provision.

“The emergence of FinTech credit markets poses challenges for policymakers in terms of how they monitor and regulate such activity. Having good-quality data will be key as these markets develop,” said chairman of the FSB Standing Committee on Assessment of Vulnerabilities Klaas Knot (President, De Nederlandsche Bank).

Size and structure of FinTech credit markets

Academic survey data on lending volumes in 2015 show considerable dispersion in FinTech credit market size across jurisdictions. In absolute terms, the largest FinTech credit market is China (USD 99.7 billion in 2015), followed at a distance by the United States (USD 34.3 billion) and the United Kingdom (USD 4.1 billion). In each of these three markets, new FinTech credit volumes were USD 60–110 per capita in 2015. Lending volumes were very small in other countries. It is noteworthy that the survey data for China are judged to have a lower platform coverage than other large markets; activity in China may therefore be underrepresented in a relative sense.

The composition of FinTech credit activity by borrower sector has varied noticeably across jurisdictions. In the United States, more than 80% of lending activity in 2015 was to the consumer sector (including student loans), while high shares of consumer lending were also evident in several other countries, such as Germany, Korea and New Zealand. In contrast, in Australia, Japan and the Netherlands, FinTech credit was almost entirely directed to the business sector as measured to include invoice trading (a non-loan typeof business credit). FinTech credit in the United Kingdom was also mostly extended to the business sector, with a significant portion of this in the form of secured real estate lending.

The FinTech credit market structure also varies across those jurisdictions for which data are available. The Chinese market has by far the highest number of FinTech lending platforms. In the United Kingdom, there are 21 platforms that have full regulatory authorisation, but a further 66 are being assessed for authorisation, of which 32 have interim permission to undertake activity. France also has a relatively high number of platforms, with a significant number of entrants after FinTech-specific legislation was introduced in 2014. In most jurisdictions, FinTech credit market activity appears to be reasonably concentrated among the five largest platforms, with the most notable exception being the Chinese market.

FinTech credit can be primarily segmented into private consumer loans and business loans. Debt refinancing or debt consolidation appears to be the most common purpose of FinTech consumer loans (including for student loans in the United States). To a lesser extent, consumer
loans are also taken out for vehicle purchase or home improvement in Australia, France and Italy. The US P2P consumer loan market is split between unsecured consumer lending and student lending. Platforms target prime and near-prime customers for the former, and higher quality
borrowers with limited credit history for student lending. The available data suggest that, in most jurisdictions, average FinTech consumer loans are typically in the range of USD 5,000–25,000, with the United States at the top end of that range (Graph 10). Average borrowing amounts are much larger in China, at more than USD 50,000.

Business loans in the United States are typically for small and medium-sized enterprises (SMEs). Platforms offer both secured and unsecured loans. The small business lending segment comprises nearly one quarter of overall FinTech lending, and the borrowers are more heterogeneous than consumer loan borrowers. In the United Kingdom, the majority of P2P business lending appears to be extended to small businesses. AltFi data suggest that around two thirds of P2P business lending is on a secured basis, mostly real estate but also non-property collateral.

Platforms in the Americas and Europe appear to be more domestically focused in their lending than in their capital or fund-raising activities, with only around 10–12% of platforms lending more than 10% to borrowers abroad. There is more cross-border lending in the Asia-Pacific region (around 40% of platforms lending more than 10% abroad), and the pattern of cross-border flows appears broadly similar for both lending and raising debt.

Scandals at FinTech platforms

Over the past 18 months, there have been a number of scandals in the FinTech lending sector.

While the fallout from these incidents has been limited, each one has raised concerns about performance and has attracted the attention of regulators to a less regulated industry.

Lending Club (United States): In May 2016, Lending Club, the largest US marketplace lending platform and one of only a few that are publicly listed, announced that the company had repurchased USD 22 million of near-prime personal loans previously sold to a single investor. Lending Club stated that the repurchased loans did not conform to the requirements of the buyer, and an internal review revealed evidence of data manipulation on certain noncredit fields. Concurrently, Lending Club announced that it had discovered a previously undisclosed ownership interest of senior executives in a fund designed to invest in marketplace loans. These disclosures resulted in the resignation of the CEO and several other senior executives.

While spillover effects to other platforms were relatively limited, this incident has prompted greater regulatory and investor scrutiny. Market participants reported that investors were subsequently seeking greater transparency in deals and underwriting practices.

TrustBuddy (Sweden): TrustBuddy was a P2P lending platform based in Stockholm. Launched in 2009, the platform originally specialised in payday loans, but was expanding into more conventional consumer loans. In August 2015, after reporting significant losses and as part of a transition to a broader focus on consumer lending, TrustBuddy brought in a new management team. The new team found evidence of misconduct, and an internal investigation revealed that the platform owed significantly more to investors than it held in assets. It appeared that TrustBuddy had been allocating new lender capital to cover bad debts, and using capital to make loans to borrowers without assigning the loans to a lender.

TrustBuddy reported the situation to the Swedish Financial Services Authority, which ordered TrustBuddy to cease its operations immediately. Trading in TrustBuddy shares was also suspended, and the platform filed for bankruptcy several days later.

While direct market reaction to this platform failure was muted, the incident raised questions about the safety of FinTech lending, and has prompted further regulatory scrutiny.

Ezubao (China): Ezubao, a Chinese FinTech lender purportedly active in small business lending, experienced the largest financial fraud in Chinese history. Ezubao unexpectedly stopped operating in December 2015, and ongoing customer investor complaints spurred a police investigation. In early 2016, it was revealed that Ezubao was a massive Ponzi scheme, in which more than 900,000 individual investors were defrauded of USD 7.6 billion. The platform, founded in 2014, was a relative newcomer to the market, but came under investigation for suspected illegal business practices early on. Most of the products offered by Ezubao were discovered to be fake, and the company was nothing more than a vehicle used to enrich top executives.

The FinTech lending industry in China is large and very fragmented. While the stock price of another large Chinese P2P lender, Yirendai, dropped precipitously around the time of the Ezubao announcement, it rebounded quickly. Other platforms do not appear to have been affected by the negative headlines.

Financial stability implications of FinTech credit

At this stage, the small size of FinTech credit relative to credit extended by traditional intermediaries limits the direct impact on financial stability across major jurisdictions.

However, a significantly larger share of FinTech-facilitated credit in the financial system could present a mix of financial stability benefits and risks in the future. Among potential benefits are effects associated with financial inclusion, more diversity in credit provision and efficiency pressures on incumbents. Among the risks are a potential deterioration of lending standards, increased procyclicality of credit provision, and a disorderly impact on traditional banks, for example through revenue erosion or additional risk-taking. FinTech credit also may pose
challenges for regulators in relation to the regulatory perimeter and monitoring of credit activity.

It is important to emphasise that FinTech credit is currently very small in nearly all jurisdictions. Perhaps only in the UK does P2P lending appear to be a significant source of credit to a particular segment – it accounted for nearly 14% of equivalent gross bank lending flows to small businesses in 2015. Reflecting the current small overall size of the sector, much of the analysis in this section is based on the assumption that FinTech credit continues to expand at a fast pace and that it becomes a significant share of credit activity. This analysis does not attempt to assess the likelihood of such an outcome.

Bearing in mind the pace of innovation and the rapid development of the industry, this section considers the implications for financial stability – both benefits and risks – of FinTech platforms becoming material providers of credit. It also considers the implications of the use
of securitisation to fund FinTech credit provision and the possible response from incumbent banks to the growth of FinTech credit.

The emergence of FinTech platforms has led to, and will continue to lead to, responses from the traditional banking sector. Specifically, banks may: (i) seek to acquire, or set up their own, FinTech credit platforms; (ii) make use of similar technologies for the traditional on-balance sheet lending business, such as those for credit assessment, either by developing them in-house or by partnering with FinTech credit platforms; (iii) invest directly in the loans of FinTech credit platforms; or (iv) retreat from market segments where FinTech credit platforms have a growing competitive advantage. The financial stability implications differ by scenario, but a few general trends may be surmised.

The growing adoption of online platforms and competitive pressures may lead to the greater efficiency of incumbent banks. By acquiring new online and data-based technologies, banks may “leapfrog” some current challenges in legacy IT systems. Similarly, successful partnerships between banks and FinTech platforms could create an opportunity to improve risk analysis or offer a better service to a particular segment of the market (such as the small loans segment). According to a UBS survey, around 22% of developed market banks have a partnership with a P2P lending platform. No emerging market banks surveyed reported having a partnership, but 23% intend to form a partnership in the future.

 

A ‘paradigm shift’ is taking place in financial technology

From Business Insider.

A “paradigm shift” is taking place in financial technology.

Venture capital firms, which poured $US117 billion into fintech startups from 2012 to 2016, have been pulling back on their investments. Meanwhile, established financial firms are positioned to step up their spending.

In a big note out to clients on May 18 titled “Fintech: A Gauntlet to Riches,” a group of equity analysts at Morgan Stanley said this shift will lead to an environment where legacy firms, or incumbents, “take the reigns”of financial innovation.

“Financials and payments incumbents are likely to be emboldened to step up R&D and take the investment lead, and this combination of VC/incumbent behaviour represents a paradigm shift that should benefit incumbents’ [return on investment],” Morgan Stanley said.

The role of VCs will continue to diminish

Financial technology companies experienced a surge in funding from 2012 to 2015, during which time venture capital firms poured $US92 billion into the space. Now it looks like those VC firms are experiencing a bit of a hangover.

In 2016, global venture capital investment in fintech companies dipped to $US25 billion, from $US47 billion in 2015.

In a recent interview with Business Insider, Amy Nauiokas, the head of Anthemis Group, a New York-based venture capital firm, described the time leading up to the dip as a “period of exuberance.”

“Big firms just sort of piled on a bunch of, let’s say, happy money,” Firms were thinking, we have money, we have capital, we have to spend it,” she said.

This environment of “happy money” sent valuations for fintechs to levels that some investors view as unreasonably high. For instance, Andy Stewart, a managing partner at Motive Partners, said at the International Fintech conference in London that valuations in fintech were “frothy,” or not connected to performance.

“Pullback in fintech investment over the past year is indicative of a realisation of lower [return on investments] than initially hoped due to some unique challenges to disrupting in the financials industry, and our suspicion is that VC investors will continue to scale back investing,” Morgan Stanley said.

Incumbents may fill the void

According to Morgan Stanley, there are a number of factors that will push legacy financial firms to step up their investments in fintech companies. The most obvious factor is the fear of disruption.

“[T]he threat of disruption from fintechs is forcing incumbents to up their investments in technology to gain operating efficiencies and preserve market share,” the bank said.

Deregulation is another trigger. If the Trump administration follows through on its promises of Wall Street deregulation, then incumbent firms won’t have to spend as much cash on regulatory compliance. That would free up money for fintech investment initiatives. Legacy firms’ focus on lowering cost also provides an incentive to invest in fintech.

“Managing expenses remains a key focus for incumbents as one of the drivers for earnings growth,” the bank said.”It follows that there is an increasing trend towards implementing more technology to drive efficiencies with moderated headcount growth going forward.”

What is the net outcome of this shift? A better business landscape for well-established Wall Street firms.

“As incumbents pick up investment while VCs reduce investment, we tilt towards a world where incumbents are less susceptible to disintermediation and more likely to co-opt new technologies,” the bank said.

Fintech sector receives federal budget ‘boost’

From Investor Daily.

The government has announced initiatives to increase competition in Australia’s fintech sector, increasing access to capital for small businesses and expanding the AFSL exemption for start-ups.

As part of the federal budget handed down this evening, the government and Australian Prudential Regulation Authority (APRA) announced there will be a reduction in barriers for new banks and a focus on increasing competition to drive lower prices and a better service for consumers.

The government will look to relax the legislative 15 per cent ownership cap for innovative new entrants, and will also lift the prohibition on the use of the term ‘bank’ by Authorised Deposit-taking Institutions (ADIs) with less than $50 million in capital.

This will allow smaller ADIs to benefit from the reputational advantages of being called a ‘bank’. Over time, these changes are expected to improve competition by encouraging new entrants, the government said.

As well as committing to increasing competition in the fintech sector, the government has released draft legislation that will make it easier for start-ups and innovative small businesses to raise capital.

The draft legislation looks to extend crowd-sourced equity funding (CSEF) to proprietary companies. This will open up crowd-sourced equity funding for a wider range of businesses and provide additional sources of capital, the government said.

Proprietary companies using CSEF will be able to have an unlimited number of CSEF shareholders.

The government will also be introducing a “world-leading” legislative financial services regulatory sandbox, according to the budget.

This will enable more businesses to test a wider range of new financial products and services without a licence which will reduce regulatory hurdles that have traditionally suffocated new businesses trying to develop new financial solutions, and has caused Australian talent go offshore, the government said.

Robust consumer protections and disclosure requirements will be in place to protect customers, however.

Further, the government is removing the double taxation of digital currency to make it easier for new innovative digital currency businesses to operate in Australia.

From 1 July 2017, purchases of digital currency will no longer be subject to the GST.

This will allow digital currencies to be treated just like money for GST purposes. Currently, consumers who use digital currencies can effectively bear GST twice: once on the purchase of the digital currency and once again on its use in exchange for other goods and services subject to the GST.

The government has also commissioned Innovation and Science Australia to develop a 2030 Strategic Plan for Australia’s Innovation, Science and Research (ISR) System. The plan will outline what the nation’s ISR system should look like into the future and ensure that Australia is positioned as a world leader in innovation, the government said.

Fintech Australia chief executive Danielle Szetho warmly welcomed the measures, describing the budget as a “boost” for the emerging sector.

“We welcome these initiatives – they’re a huge step forward when it comes to growing a globally competitive Australian fintech industry, that will also deliver greater choice and improved financial outcomes for consumers,” Ms Szetho said.

“We’re also proud that many of these initiatives have come about through the strong and detailed advocacy work undertaken by FinTech Australia and its members.”

Banks and Fintech – Where Do They Fit?

US Fed Governor Lael Brainard spoke on “Where Do Banks Fit in the Fintech Stack?” at the Northwestern Kellogg Public-Private Interface Conference on “New Developments in Consumer Finance: Research & Practice”

In particular she explored different approaches to how banks are exposing their data in a fintech context and the regulatory implications. Smaller banks may be at a disadvantage.

Different Approaches to the Fintech Stack

Because of the high stakes, fintech firms, banks, data aggregators, consumer groups, and regulators are all still figuring out how best to do the connecting. There are a few alternative approaches in operation today, with various advantages and drawbacks.

A number of large banks have developed or are in the process of developing interfaces to allow outside developers access to their platforms under controlled conditions. Similar to Apple opening the APIs of its phones and operating systems, these financial companies are working to provide APIs to outside developers, who can then build new products on the banks’ platforms. It is worth highlighting that platform APIs generally vary in their degree of openness, even in the smartphone world. If a developer wants to use a Google Maps API to embed a map in her application, she first must create a developer account with Google, agreeing to Google’s terms and conditions. This means she will have entered a contract with the owner of the API, and the terms and conditions may differ depending on how sensitive the particular API is. Google may require only a minimum amount of information for a developer that wants to use an API to display a map. Google may, however, require more information about a developer that wants to use a different API to monitor the history of a consumer’s physical locations over the previous week. And in some cases, the competitive interests of Google and a third-party app developer may diverge over time, such that the original terms of access are no longer acceptable.

The fact that it is possible and indeed relatively common for the API provider–the platform–to require specific controls and protections over the use of that API raises complicated issues when imported to the banking world. As banks have considered how to facilitate connectivity, the considerations include not only technical issues and the associated investment, but also the important legal questions associated with operating in a highly regulated sector. The banks’ terms of access may be determined in third-party service provider agreements that may offer different degrees of access. These may affect not only what types of protections and vetting are appropriate for different types of access over consumers’ funds and data held at a bank in order to enable the bank to fulfill its obligations for data security and other consumer protections, but also the competitive position of the bank relative to third-party developers.

There is a second broad type of approach in which many banks have entered into agreements with specialized companies that essentially act as middlemen, frequently described as “data aggregators.” These banks may lack the budgets and expertise to create their own open APIs or may not see that as a key element in their business strategies. Data aggregators collect consumer financial account data from banks, on the one hand, and then provide access to that data to fintech developers, on the other hand. Data aggregators organize the data they collect from banks and other data sources and then offer their own suite of open APIs to outside developers. By partnering with data aggregators, banks can open their systems to thousands of developers, without having to invest in creating and maintaining their own open APIs. This also allows fintech developers to build their products around the APIs of two or three data aggregators, rather than 15,000 different banks and other data sources. And, if agreements between data aggregators and banks are structured as data aggregators performing outsourced services to banks, the bank should be able to conduct the appropriate due diligence of its vendors, whose services to those banks may be subject to examination by safety and soundness regulators.

Some banks have opted for a more “closed” approach to fintech developers by entering into individual agreements with specific technology providers or data aggregators. These agreements often impose specific requirements rather than simply facilitating structured data feeds. These banks negotiate for greater control over their systems by limiting who is accessing their data–often to a specific third party’s suite of products. Likewise, many banks use these agreements to limit what types of data will be shared. For instance, banks may share information about the balances in consumers’ accounts but decline to share information about fees or other pricing. While recognizing the legitimate need for vetting of third parties for purposes of the banks fulfilling their responsibilities, including for data privacy and security, some consumer groups have suggested that the standards for vetting should be commonly agreed to and transparent to ensure that banks do not restrict access for competitive reasons and that consumers should be able to decide what data to make available to third-party fintech applications.

A third set of banks may be unable or unwilling to provide permissioned access, for reasons ranging from fears about increased competition to concerns about the cost and complexity of ensuring compliance with underlying laws and regulations. At the very least, banks may have reasonable concerns about being able to see, if not control, which third-party developers will have access to the banking data that is provided by the data aggregators. Accordingly, even banks that have previously provided structured data feeds to data aggregators may decide to limit or block access. In such cases, however, data aggregators can still move forward to collect consumer data for use by fintech developers without the permission or even potentially without the knowledge of the bank. Instead, data aggregators and fintech developers directly ask consumers to give them their online banking logins and passwords. Then, in a process commonly called “screen scraping,” data aggregators log onto banks’ online consumer websites, as if they were the actual consumers, and extract information. Some banks report that as much as 20 to 40 percent of online banking logins is attributable to data aggregators. They even assert that they have trouble distinguishing whether a computer system that is logging in multiple times a day is a consumer, a data aggregator, or a cyber attack.

For community banks with limited resources, the necessary investments in API technology and in negotiating and overseeing data-sharing agreements with data aggregators and third-party providers may be beyond their reach, especially as they usually rely on service providers for their core technology. Some fintech firms argue that screen scraping–which has drawn the most complaints about data security–may be the most effective tool for the customers of small community banks to access the financial apps they prefer–and thereby necessary to remain competitive until more effective broader industry solutions are developed.

Clearly, getting these connectivity questions right, including the need to manage the consumer protection risks, is critically important. It could make the difference between a world in which the fintech wave helps community banks become the platforms of the future, on the one hand, or, on the other hand, a world in which fintech instead further widens the gulf between community banks and the largest banks.

 

Building the Infrastructure to Realise FinTech’s Promise

An excellent speech by Mark Carney, Governor of the Bank of England which paints some useful pictures about the future of Fintech and the need to break the mould.

To its advocates, FinTech will democratise financial services. Consumers will get more choice and keener pricing. SMEs will get access to new credit. Banks will become more productive, with lower transaction costs, greater capital efficiency and stronger operational resilience. Financial services will be more inclusive; with people better connected, more informed and increasingly empowered. And tantalisingly, FinTech could help make the system itself more resilient with greater diversity, redundancy and depth.

These possibilities are why the Bank has already taken a number of steps to encourage FinTech’s development. The PRA and the FCA have changed their authorisation processes to support new business models. The New Bank Start-Up Unit, created in 2016, works closely with firms seeking to become banks. Already, four new ‘mobile’ banks have been authorised.

The Bank also established a FinTech Accelerator last year. Since then, we have worked with a number of firms on proofs of concept ranging from strengthening our cyber security to using AI for regulatory data, and improving our understanding of distributed ledgers.

Today we are opening our 4th round of applications to the Accelerator. We are looking to work on new proofs of concept on maintaining privacy in a distributed ledger and applying a range of big data tools to support the Bank’s analysis.

More broadly, the Bank is working to ensure that this time the right hard and soft infrastructure are in place to allow innovation to thrive while keeping the system safe.

Let me expand briefly with three examples.

The Right Soft Infrastructure

First, with respect to soft infrastructure, the Bank is assessing how FinTech could change risks and opportunities along the financial services value chain. We are then using our existing frameworks to respond where necessary.

We are disciplined. Just because something is new doesn’t mean it should be treated differently. Similarly, just because it is outside the regulatory perimeter doesn’t mean it needs to be brought inside. We apply consistent approaches to activities that give rise to the same risks regardless of whether those are undertaken by old regulated or new FinTech firms.

Some of the most important questions we are considering include:

  • Which FinTech activities constitute traditional banking activities by another name and should be regulated as such?
  • How could developments change the safety and soundness of existing regulated firms
  • How could developments change potential macroeconomic and macrofinancial dynamics including disruptions to systemically important markets? And
  • What could be the implications for the level of cyber and operational risks faced by regulated firms and the financial system as a whole?

To illustrate some of the issues, consider how FinTech is affecting the financial services value chain (Figure 1).

At present, the most significant changes are taking place at the front-end, where innovative payment service providers (PSPs) are providing new user interfaces for domestic retail and cross-border payment services through digital wallets or pre-funded eMoney.Other aspects of the customer relationships are being opened up. For example, aggregators are providing customers with ready access to price comparison and switching services. This will increase further when aggregators gain access to banks’ Application Programme Interfaces (APIs).These new entrants are capturing potentially invaluable customer data which can be used to target non-bank products and services.

In their current form, these innovations are simply a new front-end to the banking system where FinTech providers take a slice of customer revenue and loyalty but none of the associated risks.They have generally avoided undertaking traditional banking activities. So for now, absent a substantive change in business models or scale of activities, the FPC is unlikely to want to bring these firms into the regulatory perimeter.The changes to customer relationships resulting from FinTech competition could, however, reduce customer loyalty and the stability of funding of incumbent banks. If this happens, the Bank of England would need to ensure prudential standards and resolution regimes for the affected banks are sufficiently robust to these risks.

The Right Hard Infrastructure

A second, related example is how the Bank is working to develop the financial system’s hard infrastructure to allow innovation to thrive while keeping the system safe.Specifically, the Bank is widening access to some of its systems to include PSPs in order to boost both competition and system resilience.

The UK has led the world in innovation in the wider payments ecosystem. And we are committed to keeping pace with customer demands for payments that are seamless, reliable, cheap, and ubiquitous. Our challenge is how to satisfy these expectations while maintaining a resilient payment systems infrastructure.That’s important because the Bank operates the UK’s high-value payment system ’RTGS’ which each day processes £1/2 trillion of payments on behalf of everyone from homeowners to global banks. Understandably, we have an extremely low tolerance for any threat to the integrity of the system’s “plumbing”.

Currently, only 52 institutions have settlement accounts in RTGS. Indirect users of the system typically access settlement via one of four agent banks. These indirect users include 1000 non-bank PSPs at the front-end of the financial services value chain. As they grow, some PSPs want to reduce their reliance on the systems, service levels, risk appetite and frankly goodwill of the very banks with whom they are competing.

The Bank has decided to widen access to RTGS to include non-bank PSPs in order to help them compete on a level playing field with banks. The Bank of England is now working with the FCA and HMT to make this a reality, and we will issue our new blueprint for RTGS in early May.

Coordinated Developments in Hard and Soft Infrastructure

My third example of the Bank’s efforts to realise FinTech’s promise is our work with industry to help coordinate advances in hard and soft infrastructure.New technologies could transform wholesale payments, clearing and settlement. In particular, distributed ledger technology could yield significant gains in the accuracy, efficiency and security of such processes, saving tens of billions of pounds of bank capital and significantly improving the resilience of the system.

Securities settlement seems particularly ripe for innovation. A typical settlement chain involves many intermediaries, making it comparatively slow and keeping operational risks high. Industry has begun to work together to determine how distributed ledger technologies could be used to solve these issues at scale.The Bank is participating in several related initiatives. To help distinguish distributed ledger’s potential from its hype, we have completed our own Proof of Concept. We are a member of Hyperledger along with private market participants and tech firms. And we will make our next generation RTGS compatible with settlement in a distributed ledger.

It is not clear, however, that that the only challenges are technological. Indeed, the FCA highlighted earlier this week that settlement times could also be cut using existing technologies. This requires market participants to change their collective practices as it takes more than one intermediary in a chain to compress settlement times.

Conclusion

FinTech’s promise springs from its potential to unbundle banking into its core functions of settling payments, performing maturity transformation, sharing risk and allocating capital.

This possibility is being realised by new entrants – payment service providers, aggregators and robo advisors, peer-to-peer lenders, and innovative trading platforms. And it is being influenced by incumbents who are adopting new technologies to reinforce the economies of scale and scope of their business models.

FinTech could deliver significant benefits to households and businesses across this country and across the world. FinTech can widen access to financial services and bring new sources of credit. It can connect customers better with their finances and empower them more in the process. And new technologies can deliver faster service, greater choice and keener pricing.

As it does, risks will evolve. Changes to customer loyalties could influence the stability of bank funding. New underwriting models could impact credit quality and even macroeconomic dynamics. New investing and risk management paradigms could affect market functioning.

At the same time, the resilience of the system could also be built, through greater diversity in provision of financial services as well as increased redundancy. A host of applications could reduce costs, improve capital efficiency and strengthen operational resilience.

The challenge for policymakers is to ensure that FinTech develops in a way that maximises the opportunities and minimises the risks for society.

We are ideally positioned to realise FinTech’s promise in the UK.The Bank will work with the market and other authorities to build the hard and soft infrastructure the system needs to support innovation and growth, consistent with the City’s best traditions.

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.

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.