Fintech – News and Analysis

Chris Skinner’s new book, “ValueWeb — How fintech firms are using bitcoin blockchain and mobile technologies to create the Internet of Value,” is a couple of years in front of today’s headlines. May 2, the Wall Street Journal’s Pau Vagna, who co-wrote the leading book on blockchain and cryptocurrencies, wrote that the state of Delaware is exploring block chain to reduce the costs of record keeping for the more than one million companies incorporated there. It would be especially valuable for the startups that have avoided IPOs while attracting multiple rounds of funding, he wrote.

On May 4, Alipay and Uber announced a relationship that will let Chinese travelers book rides on Uber and pay in renminbi in the 68 countries where Uber operates. That’s an early stage of what Skinner expects to see more widely — the transfer of value sometimes automated, sometimes under a user’s precise control as she monitors balances, expected bills and incoming payments through a smartphone.

He picks out bankers who get it, and tells stories of the anonymous ones who don’t, in a great global tour of advances, and speed bumps, in the fast-paced evolution of finance.

“It is not just the internet, or mobile, or bitcoin, or blockchain, or FinTech developments that are building the ValueWeb and changing our world—it is all of them combined,” Skinner concludes.

PWC Retail banking

In its report on Retail Banking 2020 — Evolution or Revolution, PWC optimistically ignores many of the details of its survey and concludes that banking has a great days ahead.

“Despite the emergence of new competitors and models, we believe the traditional bank has a bright future – the fundamental concept of a trusted institution acting as a store of value, a source of finance and as a facilitator of transactions is not about to change.”

The landscape will change, the report adds “in response to the evolving forces of customer expectations, regulatory requirements, technology, demographics, new competitors and shifting economics.”

The consultancy interviewed more than 500 client executives from leading financial institutions across 17 markets and found more than half believe that large banks will be the winners in 2020.

PWC identified six priorities for success: Developing a customer-centric business model, optimizing distribution, simplifying business and operating models, obtaining an information advantage, enabling innovation and proactively managing risk, regulations and capital.

It seems undaunted by the associated finding that fewer than 20 percent of finance executives are “prepared against these priorities, and only a similar percentage report that they are making significant investments in these areas.”

Banks need to decide whether they want to shape the industry, become fast followers or manage defensively, the report added. It places banking in a larger political context, noting that “Nation-states are seeking to better control their financial systems and the institutions within their borders, as they learn that a global banking system becomes local in a crisis.”

It makes the familiar case about branches — they need to become more productive or less costly or simply fewer — the consultants expect 20 percent fewer branches in the U.S. by 2020.

It suggests that top regional banks in the U.S. could become viable national players, a position somewhat at odds with Capgemini which thinks that the largest banks are preparing for a digital future which many regionals and super-regionals don’t think the changes and competition from fintech firms will impact them — see my recent story at Forbes.

It suggests banks may use a utility model such as relying on vendors like Fiserv for transaction processing, payments, and KYC processing, although the report mentions cloud just once, in passing. Similarly, it says wealth management will “move alongside deposit-taking as a baseline service for retail banking,” without discussing robo advisors or the huge mutual fund companies that have already takenn a large share of the wealth management business.

“Banks will organize themselves around customers instead of products or channels,” the report says, and then goes on to report that two in five customers had bad experiences with their bank, usually around rates and fees.

Despite the expectation that today’s leading banks will continue to be healthy in 2020, PWC notes that only 17 percent of the executives it surveyed feel well prepared for the  “difficult and expensive work of integrating, optimizing and simplifying their platforms.”

As for innovation, “Ninety-seven percent of CEOs consider innovation as a key priority for top- and bottom-line growth, but only 10% of CEOs view their organisations as innovation leaders.”

PWC does suggest major improvements can be achieved without replacing core systems, or undertaking radical digitalization. Working with a provider of financing solutions over 18 months, without touching the underlying technology platform, it helped the client “reclaim 50 percent of sales team time to focus on revenue generation. They reduced cost-to-serve by 25 percent. Processing performance improved 45 percent. Turnaround times and error rates have reduced significantly. Processes were standardized, and handoffs reduced (from an average 20 to 3).”

Judging from the lower percentage of bankers who feel prepared for the challenges they face, PWC has lots of opportunity ahead to do more of that.

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IPC’s network outage earlier this month, caused by an explosion in a manhole outside a New Jersey data center, showed the problems with proprietary networks, said Patrick McCullough,, CEO of Speakerbus, a competitor provider of trading systems.

“There’s a fundamental architectural difference between the way we do things and the way they do things,” he explained. “They have a private infrastructure that supports building to building enterprise connectivity for the traders, so you have to rent those services from IPC. Many times the customers don’t understand what type of resilience and redundancy is built into what they are contracting for. Most of what we do rides on the existing infrastructure of our customers and they usually have very large resilient structures they have built and tested.”

Those proprietary systems are also very expensive, he added. As financial institutions are looking to reduce costs, the Speakerbus gateways are attracting attention as an alternative to the proprietary networks that IPC and BT offer, he added.

“Having a proprietary systems that was built for traders is pretty much a thing of the past. The trader voice market is entering a very disruptive state where incumbents are trying to protect their base while the disrupters are listening to their customers and allowing customers to be more effective, efficient and have higher functionality at the same time.”

Firms want to move from a pure hardware platform to a hybrid model especially as new traders who are arriving on trading desks are more accustomed to software and app solutions and less dependent on hardware turrets.

“We are finding that next generation traders who rely on critical voice communications like Speakerbus have more flexibility. They are used to working in software or app, our customer advisory boards are telling us.”

Firms are moving from hardware to software, from proprietary solutions to a standards-based approach like Speakerbus offers, and from fixed to mobile, from on-premise to cloud. For companies selling hardware trading systems, this shift presents a challenge.

“If you are a company with a big installed based you are trying to protect, that makes it hard to move into the new environments.”

People around the world are on the move. Time Magazine estimates that 6 million Americans live abroad, the Australian government figures one million of its citizens live aboard, while refugees number around 60 million worldwide.

Dilip Ratha, lead economist at the world bank, thinks the 250 million the bank counts as international migrants is, at 3.4 percent of the world population, too low.

“Compared to the growth of international trade and investment flows, the increase in international migration is negligible. The world needs more migration, for growth, for reducing poverty, for sharing prosperity. But it can’t, because “we” don’t want too many of “them”. Even if that makes both us and them poorer, our societies less interesting, and not necessarily safer.”

People are moving in all directions. The New Yorker did a piece on the growing Chinese population in Vancouver and said “A study by the Bank of China and the Hurun Report found that sixty per cent of the country’s rich people were either in the process of moving abroad or considering doing so.”

But the New York Times said many children of Chinese and Indian immigrants parents are moving back to their parents’ homeland for new opportunities, often to the consternation of their parents.

Margareth Tran …”after graduating from Cornell University in 2009 at the height of the recession, she could not find work on Wall Street, a long-held ambition. She moved to Shanghai and found a job at a management consulting firm.

Samir N. Kapadia left a consulting firm in Washington to move to Mumbai because “Markets are opening, people are coming up with ideas every day, there’s so much opportunity to mold and create,…People here are running much faster than the people in Washington.”

And, of course, millions of Middle Eastern refugees have been flowing out of Syria into adjacent countries, to Germany and other European nations and to Canada to escape war and start new lives.

Mobile Capabilities Remove Financial Barriers

Individuals on the move and the nations receiving them need a way to establish valid identities, issue credentials and make it possible for new arrivals to open bank accounts, find a place to live. They also need a mobile phone account to communicate with resettlement agencies, with family members who may be scattered across multiple countries and increasingly to be able to send and receive money.

For refugees, a validated credential is critical for qualifying for assistance. The Financial Times reports that Germany is planning to roll out compulsory computerized ID cards for refugees. The plastic photo and fingerprint ID cards will be issued by the first German official a refugee registers with, and the information will be linked to a centralized computer system.

Trulioo has a centralized identity verification solution that is interoperable and transparent, with one use case being able to provide governments and organizations a secure way to verify individuals who are new to a country and have thin or nonexistent files. Its GlobalGateway API is connected to more than 100 fully vetted, transparent and compliant data sources in over 40 countries to provide instant ID verification for 4 billion people.

The need for low-cost remittances is pressing. In 2014, the Overseas Development Institute called for the UK Financial Conduct Authority to investigate $1.8 billion in alleged excessive charges annually on remittances to Africa. The reports points a finger to the “duopoly” of two major international money transfer companies for instigating financial exclusion and calls for increased competition in the industry to tackle the imbalance of opportunity. As media buzz and high valuations for cashless remittances continue to flourish, payment volumes will continue to grow and the emerging mobile money networks will continue to spread like wildfire in countries like Kenya and Tanzania.

“We focus on a global ID verification from a consumer perspective,” said Jon Jones, president of Trulioo, “and we do it on a global scale through a trusted framework that incorporates traditional and non-traditional data assets. With verified identities in emerging markets, more financial opportunities become available to underserved groups.”

A trusted identity card is also a first step to helping refugees become integrated into the new country — through language and culture courses, education for those of student age, and apprenticeships and jobs for adults.

Refugees and jobs

“Refugees can only be accepted in a community if they have jobs,” said Hamdi Ulkaya, the Kurdish founder and CEO of Greek yogurt maker Chobani based in upstate New York. Ulukaya has 600 refugees working at his company’s plants in New York and Idaho. He has also founded Tent, an organization seeking corporate partners to bring both funding and expertise to the refugee problem.

Airbnb, Henry Schein, IKEA Foundation, Johnson & Johnson, LinkedIn, MasterCard, Pearson and UPS have signed on.

“If a refugee has a job, they are no longer a refugee,” Ulukaya said.

Tent promotes “the enormous and all too often overlooked potential of their refugees to shape a brighter future for their families and themselves.” The Economist agrees, saying that “it is vitally important to get refugees assimilated by getting them into work — they will more than pay their own way and will help Europe compensate for an aging workforce.”

Gillian Tett US editor and columnist at the Financial Times, wrote that “what makes Ulukaya’s move unusual — and admirable — is his unashamed embrace of the refugee cause.”

They may pay their own way, but not right away. BusinessWeek cites Joakim Ruist, an economist at the University of Gothenburg, who says it takes refugees on average 7 years to become self-supporting, and many never do.

But the combination of state support and charitable aid for refugees may give the Germany economy a boost, Peter Coy at BusinessWeek suggests, citing a study by the German Institute for Economic Research in Berlin. Refugees who get government aid will spend it, mostly on domestic goods and services, adding .1 to .2 percent to the country’s GDP.

RegTech, the use of technology to meet the growing number of financial regulations, needs a nudge from regulators, according to JWG, a London-based think tank with an unenviable focus on regulation.

“JWG estimates that over 300 million pages of regulatory documents will be published by 2020 and over 600 legislative initiatives need to be catalogued by a medium sized sell-side institution in order to have a holistic view of their rulebook,” the company wrote in a letter to the Financial Conduct Authority (FCA) in 2016.

“Based on the FinTech futures analysis, we estimate that between £50 billion and £60 billion a year is being spent in the UK on meeting regulatory obligations.  This is equivalent to 2.6 percent of UK GDP, double the annual revenue of a Big 4 firm, or nearly twice the size of the UK legal services market for all industries.”

When JWG look at the industry’s regulatory challenges in 2010, it expected that financial firms would retool their technology to meet the new demands, the consultancy added.

“… but six years later new regulations are coming into play that legacy systems cannot support.”

The reason costs are so high is that financial firms are responding with “reactive and costly tweaks to an antiquated system,” such as a tweak to COBOL code that was designed to work with shillings and pence,” it said.

“Despite the promise of new technologies, these are often slow to be coded to the specifications required and, therefore, it appears easier to spend professional services fees of £600 to £10,000 per day than to look hard for a better solution.”

The company called for a Regtech commons “where technology suppliers can interact with their potential customers to understand their issues and shape the ways in which their wares can be adopted.”

Perhaps wisely, JWG does not expect regulators to simplify and harmonize their rules. It asks them to bring technologists into the conversation at an earlier stage of the rule-making process. It did, however, propose a common dictionary “that links the words used across regulations to describe the specific classes of requirements and how they apply to a particular regulation.”

Approximately 10 percent of common fields are describing the same information requirements, while standards like ISO 20022 could be a big help.

“Regtech providers need a very clear understanding of the size of the market for their solutions and the probability of sale prior to making their investment… the FCA could provide access to a cloud for testing these new standards and reference datasets, and take an active role in uploading use cases to the platform to highlight the dependencies across regulatory domains.”

Here JWG suggests the regulators could reduce the complexity by comparing and aligning proposed regulations with existing regulation to reduce complications and achieve better results for consumers.

To show the scope of complexity, JWG recounted how it cataloged 39 MiFID initiatives and documented 137 implementation risks and loaded the 100 pages of minutes describing them into its RegDelta platform. Regulators are asking firms to do compliance in unrealistically short timeframes and often wait until late in the process to clarify what is required. JWG has organized a MiFID group of vendors, suppliers and firms to discussion of common solutions for implementation but such efforts would do better with a mandate from regulators, it suggested.

Politicians make things worse because the complexity of regulations makes it difficult to see the big picture (assuming they are even looking). The EU adds to the complexity as regulations are implemented on different schedules as countries move at their own pace. (Of course if Brexit occurs this problem might go away.) In a burst of optimism the consultancy suggests regulators could help by using workload balancing optimization software.

“The absence of both a common understanding and a purposeful roadmap to implementation is a strong factor behind recent regulatory delays.”

The letter lays responsibility for much of the problem of regulatory complexity on the way regulators work and suggests they standardize and simplify the regulator environment and consider putting their publications into machine-readable formats.

“When a Regtech solution is made clear to academics, investors, vendors and firms, and it has the backing of the authorities, there will be a much higher incentive for stakeholders, both in adopting the tools and contributing to its growth.”

And it claims a special role for the UK which it described as “the melting pot for the world’s financial infrastructure.” (Although UK regulators may want to wait for the June vote before they put a lot of effort into this.)

“The bottom line is that a small push from the FCA on the implementation agenda could change the game by freeing budgets to find good solutions, unlocking the potential of powerful innovation.”

The World Economic Forum (WEF), the organization behind the Davos conference, has issued a paper calling for more discussion about fintech and financial institutions.

“This publication represents the first time that incumbents, financial supervisors and fintechs have come together collectively to address the present wave of technology-enabled transformation in the financial services sector,” said Matthew Blake, head of banking and capital markets at the WEF.

“Traditional financial institutions no longer control the entire value chain, a trend which has effectively created a battleground for ownership of the end consumer,” notes the paper which was developed by Oliver Wyman, the consultancy. “Use of technology in finance is not new,  nor are many of the products and services that are offered by new entrants to the sector. Rather, it is the novel application of technology and its speed of evolution that make the current wave of innovation unlike any we have seen before in financial services.”

The paper is full of feel-good generalities whose vagueness makes them unobjectionable but not very useful.

New technologies offer greater efficiencies and also bring new risks, according to the WEF paper, citing “an urgent need both for the private sector and financial supervisors to collaborate and identify actions that can be taken to understand how best to maximize societal utility from these opportunities.”

It offers a survey of changes in the business and mentions some specific risks  — marketplace loans may shift risk to the end consumer in ways investors may not fully understand. In capital markets it mentions high-frequency trading, dark pools and algorithms where the WEF seems late to the party on these issues which have been debated for years. “…this remains an area of intense scrutiny,” it adds rather unhelpfully. And it calls for many safety factors to protect data while also warning that enhanced risk analysis could be used to deny services to an individual.

Key recommendations include beginning a debate on ethical use of data; public-private dialogue on transformation through a global forum  “particularly to identify areas where supervisor support is needed to develop technology for enhancing stability.”

Recommendation 3 is to approach standards for monitoring and understanding technology-enabled innovation. Here the vagueness reaches new heights.

“The international supervisory community should define a set of standards for internal capabilities required to ensure that national supervisors are well-equipped to monitor and mitigate against risks arising from technology-enabled innovation.”

Who is this international supervisory community? And is there some possibility that incumbents might try to use supervision to stop innovation? Or that individual countries within the international community might differ on their views of innovation?

The fourth recommendation, for proactive standard setting to “create industry standard-setting bodies that redefine and enforce standards of good conduct in light of new technology-enabled innovation,” does offer an actual example — the Hedge Fund Standards Board.

The WEF paper may be a start toward addressing some of the issues arising from fintech development, but it’s a weak one.

SAS has announced the launch of the SAS FinTech Incubator program which will give UK FinTech organizations free access to its big data technology assets and industry expertise to achieve their innovation goals. The company said the Incubator can slash the time to develop solutions by up to 50 per cent.

The Confederation of British Industry (CBI) estimates the FinTech sector will be worth £300 billion by 2020. However, investors are increasingly concerned about risk due to development efforts and cost. Many FinTech organizations start their pilot projects using open source software to save money. That can frequently create a need to re-architect solutions as the FinTech company grows.

Vincent Kilcoyne, FinTech innovation lead at SAS UK & Ireland, said that many financial services firms are focused on compliance rather than on innovation. As a result, much on the innovation in finance is happening outside established banks and inside FinTech start-up companies.

The SAS FinTech Incubator will provide  FinTech firms with access to data science expertise and rapid prototyping environments for testing innovations without up-front financial outlay. This helps mitigate risks for the entire project. Using SAS components in products and services also allows FinTech solutions to be designed to scale in accordance with rapid growth expectations, eliminating the need to re-architect. This ultimately ensures the solution can satisfy the triple pressure points of clients, investors and regulators. It also expands the SAS customer base at a time when it is facing competition from open source technology such as R or Apache Spark

Daryl Bowden, CEO and Founder, Glia Ecosystems, a FinTech start-up for financial intermediaries and investors aiming to revolutionize the way that financial data and analytics are consumed, said: “I knew of SAS as the market leader in complex analytics but at that time I was planning to undertake all my analytical development work using open source tools – largely for cost reasons. We had a number of very open and constructive investigation meetings that really opened my eyes to a different way of working. I was pleasantly surprised by the depth of analytical functionality that was available to Glia Ecosystems almost out of the box. I could immediately see how using SAS would slash my development effort and timescales, enabling me to get to market in a much shorter timeframe.”

Time is key for start-ups,  Kilcoyne said. “Working with SAS, these organizations have the confidence that their new product development time can be reduced by up to 50 per cent.  The SAS FinTech Incubator initiative provides organizations with the ability to achieve early momentum, by mitigating risks across design, development and deployment. Our zero entry cost model provides access to approximately $5 million worth of software assets that have been proven and supported by SAS. The programme’s revenue share model means that FinTechs can be assured we are engaged as a valued partner with shared goals.”

When Google announced last week that it will phase out its Wallet Card, it suggested that cardholders look to Simple or American Express for a replacement.

“If you’re interested in finding a replacement for your Wallet Card, both American Express and Simple offer accounts with similar features, including a card. Plus, we’ve teamed up with them so that Wallet Card users will get an added bonus after signing up,” Google told is Wallet Cardholders.

“It’s a great vote of confidence (from one of the biggest players in tech history),” said a Simple spokesperson. “We’re pretty stoked.”

Krista Berlincourt, spokesperson for Simple

The Google message to cardholders passed along Simple’s description of its service: “Simple is fee-free online banking with budgeting and saving tools built right into your account. You can set Goals for big and small purchases, and save automatically, every day. Goals also work as digital envelopes to store money for all your budget categories. Simple accounts come with a Simple Visa Card and access to thousands of free ATMs.”

Google is discontinuing support for the Wallet Card on June 30 and users won’t be able to add money to the card after May 1. Wallet balances will remain intact, the company said in its announcement.

While Google is discontinuing its card, it will expand the new Google Wallet app which it introduced last fall.

“You can use Google Wallet with your Android or iOS device to send money to anyone in the US with an email address, even if they are not a Wallet user,” Google announced in September.  “And now, when you receive money through Google Wallet, you can quickly cash out to a debit card or linked bank account.”

Last week the company said that it is hard at work on new features for the Wallet.

Commerzbank has gone live with an integrated set of finance and risk solutions powered by the SAP HANA platform.

With the SAP Bank Analyzer set of applications, including the SAP Accounting for Financial Instruments application, Commerzbank is now able to close its monthly books significantly faster.  As one of the largest banks in Germany, with €533 billion in assets and 51,300 employees worldwide, Commerzbank is working with SAP to digitally transform its operations for connected line-of-business transactions, simplified closing processes and regulatory compliance.

The bank said SAP HANA is part of its program to go digital; it has now digitized production for all lines of business, including retail, commercial and investment banking.

With the SAP Bank Analyzer set of applications, including the SAP Accounting for Financial Instruments application, Commerzbank is now able to close its monthly books significantly faster, and the bank has digitized production for all lines of business, including retail, commercial and investment banking.

SAP solutions, based on the in-memory computing technology of the SAP HANA platform, process massive quantities of data quickly to deliver precise reports in real time that help the bank satisfy its regulators in addition to its customers.

“The scalability and processing power of SAP HANA are huge for multinational corporations like Commerzbank, which have to cater to many different audiences at the same time,” said Luka Mucic, Member of the Executive Board of SAP SE, chief financial officer and chief operating officer, SAP SE. “The digital transformation goals of large banks demand comprehensive solutions that address a multitude of requirements across the entire organization. We are delighted to support Commerzbank in its digital enterprise journey, and we look forward to our ongoing collaboration.”

A java security flaw that was supposedly fixed in 2013 is still vulnerable, according to a report by Security Explorations.

Waratek, which provides a Runtime Application Security Protection (RASP) containers said it protects the full application stack using a pioneering virtual container technology that operates in the runtime. Continue reading →