Author: Max

A panel discussion from SxSW (South by Southwest) demonstrated ways that Fintech could boost the global economy. Two major approaches were emphasized: increasing internet users in the third world countries and high end fintech service in first world countries. It was argued that currently internet penetration in third world countries was far below the average world rate (50%), with Africa having an average of 26.9% and Asia having an average of 44.7%. In addition, users in the third world countries usually had fewer financial service alternatives compared those in the developed countries. Both these two factors create a great potential for Fintech to influence people’s life rapidly in developing countries and therefore contribute to their economic development. It was argued that fintech could increase the total GDP by 6% by 2025 for developing countries.

I think this forecast has some valid points. As we have already seen in some developing countries, such as China, fintech is dramatically changing people’s life in many areas. While in the U.S. some restaurants are still cash-only, one can make a payment on cellphone with even a small street vendor in China. This phenomenon could be explained somewhat by the fact that in China, people used to have fewer payment alternatives other than cash, and credit cards are not very popular even for today.  Additionally, internet infrastructures are being designed and established at an unforeseen speed. Especially some wireless internet technologies, such as Facebook’s Aquila, a Wifi airplane, could make people in the developing countries get connected faster than ever before.

Source: https://www.forbes.com/sites/oracle/2017/03/14/how-fintech-is-powering-the-global-economy/#4ef9b39f1b5e

Dubai Financial Services Authority (DFSA) recently released a consultation paper which includes some core principles that Dubai uses to regulate fintech in the country. With a vision to be a fintech hub, Dubai takes an approach that is “flexible, response, innovative and adaptable”with fintech firms. Dubai’s goal is to set up a testing environment for the fintech companies to ensure that the products’ users are protected. Other than this, regulations are supposed to be minimal, and the DFSA should only regulate if needed. Dubai set a group of criteria that the fintech companies need to meet in order to get a testing license. Basically, these criteria ensures that the company who participate are truly financial technology companies. For example, it requires that the companies who sign up for the testing must involve the use of financial technology and must involve financial services that are currently regulated by the DFSA. Once a firm is granted a testing license, it will be able to test its fintech product with customers under a set of rules posed by the DFSA. After the product passes the test, it will receive a full Financial Service License.

Personally, I strongly agree with the approach that Dubai takes to regulate Fintech. As I mentioned in previous blogs, regulations are definitely needed in fintech, not to suppress its development, but to ensure the interest of customers. Good regulations can both create a environment that encourages fintech innovation, and protect customers from abuses. DFSA’s approach has definitely set up a standard for the rest of the world.

Source: https://www.cryptocoinsnews.com/dubai-financial-regulator-reveals-fintech-regulatory-approach/

Personally, I believe Fintech and banks should be friends but not foes. In some previous blogs, I have already introduced the idea that fintech companies will face great challenge for growth if they do not partner with banks, and banks may actually increase their service and efficiency if they work with fintech companies and adopt new financial technologies. Obviously, a summary report from ABA National Conference for Community Banks further attested to my opinion.

According to the report, bankers were far less optimistic of fintech in 2015 than they are today. Two years ago, bankers saw fintech companies as a potential threat and thought innovative financial technology could lead to a revolution in the banking industry. Today, bankers’ attitudes have changed dramatically and they believe that traditional banks can adapt to financial technology as well as they could to every other banking innovation in the history, such as ATMs. Banks can benefit from financial technologies in a great many ways, such as through automated services.  On the other hand, fintech firms have also found it critical to partner with banks. Fintech firms, in general, lack credibility in customers’ opinion. For example, lenders averse the idea that a lending company should grow fast without being a bank, and therefore lack confidence working with fintech companies.

I believe that in the near future, we will see more and more partnerships between fintech companies and banks, and they will deliver revolutionary technologies that make customers’ banking experience more convenient.

 

Source:https://www.forbes.com/sites/franksorrentino/2017/03/02/fresh-from-aba-2017-community-bankers-are-riding-the-fintech-and-regulation-wave-of-optimism/#4cb25c1fd2bz

Start-up companies have been a major player in delivering innovative and revolutionary fintech solutions. However, it is still not common to see these start-up companies work with traditional banks.  One start-up Creamfinance, has stood out from the group recently, and demonstrated success in collaborating with big banks. Creamfinance specializes in using machine learning and data analysis to evaluate credit score. They give banks a solution to quickly identify loan recipients, and facilitate in the loan application process for the customers. Since its start in 2012, Creamfinance has established services in more than 6 countries across Europe and America, and has raised over $7.3 million in funding.

In my opinion, the success of Creamfiance company is very inspiring for other start-up fintech companies. Traditional banks usually face heavy regulations, which makes it hard for them to offer customers with innovative financial services. Also, newer banks would want to use disruptive technologies to compete with big banks. On the other hand, start-up fintech companies do not have the long history and credibility that banks have, which puts them in a disadvantage when dealing with customers. The need for collaboration is definitely out there, but there are also challenges for the start-up companies.  Many banks may not see some fintech solutions as promising or needed. Therefore, both being innovative and addressing the real needs of banks is critical for the success of any collaboration.

Source: https://www.forbes.com/sites/julianmitchell/2017/02/20/meet-the-fintech-ceo-making-money-easily-available-anywhere-in-the-world/#683fbfdff724

In the last blog, I briefly introduced the DAO. Today, I am going to introduce the DAO attack and discuss what the DAO attack taught us about the future of IOT.

The DAO was launched on May 28th 2016 after raising over $150 million. On June 5th, an antipattern was found in the reward system of Ethereum, but it was quickly fixed and claimed not to post risks to the DAO. However, at the same time, a similar antipattern exited in the splitDAO function but was not discovered by anyone but the attacker. On the 17th, the attacker exploited this bug and moved $50 million to a child DAO. Despite that the Ethereum community quickly made it impossible for the attacker to cash out the Ether, the market value dropped from over $20 per Ether to $13. The attacker could have already benefited by shorting Ether beforehand.

While the idea of Internet of Things based on blockchain seems promising, the attack definitely taught us some lessons. Since both the Ethereum and the DAO are immature technologies, and it may be of benefit to take a conservative approach and launch new products more gradually. Reducing complexity of codes can also reduce bugs in the codes.

However, one thing I want to argue is to increase governance and probably create some centralized plans to address emergencies such as hacks, despite the main idea of the DAO and IOT is to eliminate central governance. Without central governance, it makes reaction to emergency very slow, since every decision takes time to vote and may not be passed by 50% of the users.

Source: https://blog.slock.it/the-history-of-the-dao-and-lessons-learned-d06740f8cfa5#.61xux96k5

In this blog, I am going to introduce a revolutionary technology that utilizes blockchain, the DAO. While I believe that the DAO has great potential and could be a break-through for the development of Internet of Things, I hold doubts about its performance and security in its early stage of development.

To start with, the DAO uses a blockchain based currency called Ethereum, which was launch in 2015. Its currency is called Ether, and it is widely considered “Bitcoin 2.0”, and has outperformed most of its competitors and jumped to the second place in terms of market value in just one year. What makes Ethereum so popular and attractive is that it allows building smart contracts.  Smart contracts are general-purpose codes that execute on every computer in the network, and could be programmed rules or orders. Therefore, smart contracts are identified by developers as a means to build autonomous organizations.

A German company, Slock.it introduced the DAO in 2015 as a prototype for its ultimate decentralized Internet of Things project. For example, people can share rides without being governed by Uber. The DAO relies on codified business rules to govern the organization, which are contributed by developers in the network. In the DAO, users could purchase tokens as voting rights, and a decision is made on any project upon a 50% pass rate.  The DAO was so popular that it raised $150 millions in the first month and generated over 50 projects for users to vote.

However, is the DAO as promising in its security as in its ideas? We’ll find it out in the next blog.

Source: http://www.coindesk.com/understanding-dao-hack-journalists/

I discussed the benefits of fintech in previous blogs, such as reduced costs and increased efficiency in financial transactions. Today, I will share some interesting opinions on risks associated with fintech.

Mark Carney, governor of Bank of England, stated in a conference that fintech would pose risks to the stability of bank funding, credit quality and even the broader economy. However, I found his statement not convincing.  Carney did not give any concrete examples of risks posed by fintech, but his only reasoning is that fintech can increase cyber risk and that history has plenty of examples where financial innovations led to early boom but eventually busted. In my opinion, many fintech, such as Block Chain, could actually decrease the risks of fraud and increase transaction security.

On the other hand, I am with Carney on the point governments should assess existing rules for fintech and adjust policies accordingly to ensure that fintech develop in a direction that maximizes opportunities but reduces risks. Admittedly, some fintech can facilitate money laundering and terrorism financing if not governed properly.  For example, Alipay, a Chinese fintech that allowed unlimited free money transfer, was put on a cap of CNY 20,000 by the government for anti-money-laundering.

Source: http://www.businessinsider.com/mark-carney-on-fintech-and-systematic-risk-2017-1

 

 

This news article talks from fortune.come about the global trend of blockchain technology adoption by financial institutions, with a specific focus on Chinese banks.  Fortune.com reports that 80% of financial institutions in the world have stated that they would adopt blockchain technology in this year. However, most of the financial institutions may only apply blockchain as experiments to some special projects.

In my opinion, Chinese banks are interesting to study in this terms of blockchain adoption. First of all, unlike many other financial institutions who may only implement blockchain in their peripheral products, Chinese banks are trying to integrate blockchain technology in their central banking system.  Second, the adoption of blockchain of Chinese banks could revolutionize the way Chinese banking systems work now. Despite that four of Chinese banks rank among the top five in the world in capital, they are still using paper, fax, and stamps to verify transactions.

According to fortune.com, 86% of surveyed companies in China reported fraud, which was 4% above the global average, as a result of the outdated banking system. Therefore, the initiatives to invest in and adopt blockchain technology were backed up by the Ministry of Industry and Information Technology, as a fraud-fighting tool.

Source: http://fortune.com/2017/01/27/china-banking-fraud-blockchain/

Investopedia forecasts that Fintect will disrupt the mortgage market, given that Fintech has already entered payments, banking and financial advisory markets. The article shows that non-bank mortgage lenders have taken a much larger market share in mortgage market since the subprime crisis in 2008, which provides the potential for fintech to grow in this market. It also identifies that “62% of respondents under 35 who bought a home this year stated that they’d use a mobile app to complete a mortgage application, if available from their lender. And 20% of buyers of all ages weren’t happy with their lender, providing further support that there is demand for a new type of mortgage service.”  In my opinion, the article has a point, but the disruption from Fintech on the mortgage market would be limited in the near future due to regulatory issues.

I agree with the article that because of the benefits of Fintech in mortgage market, such as lowered fees and reduced processing time,  the demand for more automated mortgage process is growing. Therefore, loan application and approval process would become paperless and more automated. However, one of the biggest challenges facing fintech in mortgage market is regulation. The single fact that online lenders are not considered banks and therefore need to “comply with the standards of 50 individual state overseers rather those of a single centralized (federal) regulator” inevitably makes development of fintech technology more challenging for companies who would like to deliver mortgage service across the country.

Source: 1.http://www.investopedia.com/articles/personal-finance/011917/how-fintech-can-disrupt-14t-mortgage-market.asp

2. https://www.bloomberg.com/gadfly/articles/2017-01-19/newfangled-fintech-meets-oldfangled-financial-regulators

 

Automated Financial Service through Artificial Intelligence.

As pointed out by Horton, head of innovation at Synechron, “many banks have identified onboarding and know-your-customer process as the priority area.” Data analysis through machine learning algorithms will help financial institutes predict their customers’ needs and expectations and therefore deliver financial advice that meets customers’ requirements. As a consequence,  AI advising robots may replace a number of human financial advisors. However, Biz Tech predicts that more mature and astute investors may still prefer human advisors for their strategies.

More Block Chain Adoption and Integration

“Blockchain is a digitized and automated technology that is considered tamper-proof.” Because of the security, Blockchain is expected to be adopted by more and more financial institutes in 2017. McKinsey & Co  predicts that more than 100 blockchain solutions will be explored in 2017.

Blockchain integration will be another trend in 2017. Carlo R.W. De Meijer, an independent economist, claims that “Existing systems within financial institutions need to adapt to the blockchain element. It must fit in with other banking systems.” He further suggests that blockchain integration should not only be confined within a financial organization, but also be integrated into other organizations’ systems through the financial systems that include blockchain technology.

Source: http://www.biztechmagazine.com/article/2017/01/what-s-ahead-fintech-2017