FinTech for Breakfast
Held on Tuesday, April 4, 2017.
With support from Dentons
Izabella Kaminska (FT Alphaville)
Emanuela Vartolomei (All Street)
Winston Yong (IBM)
Last week saw the UK’s Brexit letter delivered. The week before, European Commission VP Valdis Dombrovskis gave an upbeat speech to the #FintechEU Conference (their hashtag, not ours), launching the latest EU consultation: FINTECH: A MORE COMPETITIVE AND INNOVATIVE EUROPEAN FINANCIAL SECTOR.
So what qualifies as FinTech for the consultation’s purposes? Well, if you take the survey, you can give opinions on robo-advice, algorithmic trading, alternative credit data, marketplace lending & crowdfunding, IoT (particularly vis-à-vis insurance), cloud computing, DLT, interoperability (and liability), digital identity, data sharing and cyber security. And you can also opine on parts of the EU regulatory framework (notably passporting, standards setting and sandboxes).
What’s missing? SEPA payments, Open Banking for consumers, and (seemingly) fraud detection are out, and crypto-currencies are definitely out. As is tech that isn’t specific to financial products (chatbots, robotic process automation, adbots etc). On the regulatory side, it’s a little more vague – but there’s certainly no invitation to weigh in on the tent-pole financial reforms, creditors’ processes, PSD2, GDPR, ePrivacy and so forth.
Given the backdrop, all that got spun as “passport blow to London”. But is the EU really rolling out the red carpet for FinTech, and if it is, will it be successful? And how should Britain respond?
Also on the regulatory side: Patrick Harker of the Philadelphia Fed is due to give a speech overnight entitled “Fintech: Evolution or Revolution?”
Payments, PSD2, and cross-selling
The FT had this from Jack Dorsey on Square’s decision to choose the UK as its first European market:
“Even with the [European] Union we still have to work with local banks and there are definitely different regulatory requirements in each market. Germany is completely different from France which is completely different from the UK. So the [EU] hasn’t really made that a commonality.”
The differences Dorsey referred to are played out in recent FinTech stories: Jiffy is big in Italy, Danish banks are doing their own thing, Vocalink will be speeding up UK cheque clearing, iZettle is resorting to a big advertising push to break out of its home territory.
At scale, payments is a seriously profitable business. Getting to scale is a challenge (even Square is still burning cash), particularly when the underlying infrastructure is a muddle. And as CNBC noted, part of Square’s business model is cross-selling loans. The UK is a very lender-friendly jurisdiction. For disruptors looking at cross-sales as a means to help get them up to a size where they’re competitive, the UK might still look an attractive bet.
Big Data, IoT, GDPR and ePrivacy
So far, no-one has managed to kill the buzz surrounding Big Data the Internet of Things. All the connectivity and data coming on-stream has financial services excited, especially insurers right now (A.I. and the IoT now attract 50% of all InsurTech investment, according to Accenture). Whether it be customer service chatbots, fraud detection, robo-advice, or many other things, there are certainly some gains to be had.
But what if you don’t have datacentres full of metadata? Well, it looks like the EU’s new ePrivacy Directive could be about to give a windfall to mobile telecoms operators by letting them monetise all the metadata they hold on consumers (see Clause 17) – which in turn could give a boost to a fair few financial services.
Still, as Taylor Wessing and others have pointed out, GDPR enshrines a right to data portability. So consumers ought to be able to shop their data around with minimal fuss – which may caution against investing too heavily in personalised services.
FinTech as arbitrage?
Izabella has written about FinTech being regulatory arbitrage on previous occasions. Now, a number of academics with the National Bureau of Economic Research in the States have weighed in. In their particular context, the authors have an interesting case: the regulatory tide has washed conventional banks out of the US non-prime secured lending sector, and FinTechs may (according to the authors) have washed back in to service the demand.
Regulatory arbitrage isn’t new, and neither is social arbitrage. Ignoring the recent hiccup experienced by Tandem Bank, neo-banks in the UK seem to be making headway (Monzo raised more cash, at double the Feb 2016 valuation). Which raises a cherry picking problem. If mobile-only banks win ever more affluent, cheap-to-service customers, that makes the economics for those still servicing the digitally-excluded progressively more challenging. The Select Committee on Financial Exclusion’s report touched briefly on the issues.
Money laundering meets data protection
Back in 2014, Italian cops took down an organised laundering operation facilitated by Sigue’s Rome office. One of the laundering tricks used was fractionation – breaking down lump sums into micro-payments, and running those payments through the accounts of unsuspecting 3rd parties. Last month, il Garante (Italy’s Information Commissioner) found a novel use for data protection rules: creating artificial payments on behalf of people without their consent is unauthorised processing, so Sigue and its associates got landed with a cumulative €11m fine.
As GDPR gives information commissioners the power to fine 4% of global revenues, the fight against money laundering may have some powerful new allies.
Where next for HFTs?
Whether diversifying will improve matters, or simply widen the front in the war of attrition, is a matter Izabella has given some thought. And there are some interesting takeaways.
Relentless competition has driven big investment for ever-thinner margins. Which means that, more and more, the actual beneficiaries aren’t necessarily the HFTs themselves. As they diversify into interpreting and trading on wider data, Izabella has a theory that history might well repeat itself.
EU moves to block Bitcoin
Since the Paris attacks, EU authorities have been keen to clamp down on Bitcoin. A new amendment of AML laws issued by European Parliament will introduce reporting requirements on crypto-currency exchanges and wallets, obliging them to identify currency owners and report suspicious transactions.
How these laws will apply extra-territorially, or prevent consumers from privately accessing such services outside the EU, isn’t fully clear – but it looks like all future trade deals, and all companies outside the EU that seek to hold financial assets inside the EU, are going to be in scope.
If the measures work, people with strong desires for privacy might have to go back to using cash. Although, according to Goldman Sachs, the days of cash could be numbered.
Also in the news…
- Blackrock is going long on robots
- US seeing rise of “loan stacking” fraud
- PayPal seeks graceful retreat in the subprime credit business
- Kenya issues world’s first mobile-distributed sovereign debt
- EU ban on screen-scraping bank data leaves some parties unhappy
- Ocra launches peer-to-peer loan comparison site for investors
- The UK’s pensions dashboard is in demo
First, apologies for scheduling April’s F4B meeting so soon after our last; these things happen.
Anyway, there is a lot going on – and a lot to talk about. In particular, Izabella Kaminska – who will be our guide through the FinTech wilderness once again – has returned from Citi’s Digital Money Symposium here in London. If you weren’t able to go yourself, she’ll fill you in; if you did go, you can argue the toss with her.
The Forum tends to look at FinTech globally – which is appropriate, since Accenture has recently reported that Asia-Pacific overtook North America with $11.2bn of FinTech investment last year. In addition, Payfort is predicting a FinTech boom for the MENA region, and Accion just wrapped its $141m Frontier Inclusion Fund – in time for the annual Impact Investing World Forum in London.
But it is not just the rest of the world. There is a lot going on here in the UK and in Continental Europe as well. So, I am delighted that Emma Vartolomei, founder and CEO of All Street, has agreed to join Izabella on the panel. As you probably know, All Street is an independent research house, providing analysis of crowdfunding, impact and small cap investments. Emma is also a senior fellow at the Finance Innovation Lab, and, before setting All Street up, spent over a decade in financial services with Citigroup, ABN AMRO, UniCredit and Dimensional Fund Advisors.
Lots to talk about. If you (or a friend/colleague) would like to join us, please let us know by calling 0207 621 1056 or emailing email@example.com. As usual, thanks to Dentons’s hospitality, there will be tea, coffee and buns.