Author: yzhu

On March 11^th, 2017, the Securities and Exchange Commission rejected an application to create an exchange-traded fund tied to the price of Bitcoin. An exchange-traded fund trades like a stock and tracks an index of assets. After the announcement, Bitcoin prices fell more than 15 percent.

SEC cited the lack of regulation in the current Bitcoin trading market as its reason for rejecting the Winklevoss Bitcoin Trust. According to the SEC, the lack of regulation raised “concerns about the potential for fraudulent or manipulative acts and practices in this market.” The SEC, however, is willing to reconsider its decision once Bitcoin-related markets become more mature. If the SEC did approve the application, an exchange-traded fund would help mainstream Bitcoin by increasing its availability to retail investors through brokerage firms.

While traditional financial institutions have avoided investing in Bitcoin due to regulatory concerns, these institutions have shown great interest in blockchain, which is the technology behind Bitcoin that created a new system for tracking information. Since the Bitcoin market is still in its infancy, I believe SEC made the correct decision to protect investors from an unregulated market that trades beyond the US and has relations to online black markets.

Reference: https://www.nytimes.com/2017/03/10/business/dealbook/winkelvoss-brothers-bid-to-create-a-bitcoin-etf-is-rejected.html

On March 5^th, 2017, some of the UK’s biggest fintech firms had to suspend their services after customers were unable to make payments. This was due to a technical failure from their third-party payment processor used to connect to the Mastercard payment network. Many fintech firms rely on third-party processors to connect to payment networks, rather than building their own systems to save money. Traditional banking institutions, however, directly connect to payment networks, and their advantage is system stability.

Fintech firms using third-party processors do not have control over how fast a glitch is fixed, and they cannot provide customers a time-frame for when the issue would be corrected. By using third-party processors, fintech firms are more likely to encounter an outage.

To stabilize systems, fintech firms should directly connect to payment networks. While it would increase costs, customer satisfaction and loyalty might increase. Having a stable system is necessary to retaining customers, which drives the firms’ success. Due to the large economy of scale that is required to build a direct payment network, I believe that only a few fintech companies would have the resources to do so. Thus, they will become the bigger market players.

Reference: http://uk.businessinsider.com/fintechs-need-to-go-solo-2017-3?r=US&IR=T&utm_content=buffer339b5&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

Accenture reported the introduction of artificial intelligence could increase labor productivity by 40% by 2035. Financial institutions such as the Royal Bank of Scotland have begun replacing human employees with automated services.

However, citizens are fearful of what the future means for AI. Technology was once a scary (i.e. Y2K) and foreign idea, and it took time for people to develop trust. Similar to technology, it will take time for people to adopt to and trust AI, but it could take even longer due to its negative media portals.

Like it or not, companies have already begun developing AI-powered digital assistants to infiltrate in our lives, starting with financial services. Telefonica is developing an AI to help users manage their digital experiences. It will integrate with Amazon Echo and Microsoft’s HoloLens to help users manage their financial accounts, make payments, and exchange currencies.

Current fintech disrupt traditional financial institutions and make banking simpler, and AI is the next disruption. AI has the power to deliver a streamlined method of banking, decrease labor costs, reduce potential risks, and increase revenues. Customers will no longer need to have human interactions with bank employees and customer service, but will that really be missed?

Reference: https://www.forbes.com/sites/madhvimavadiya/2017/02/27/artificial-intelligence-human-fintech/#4e72e4ba46a1

Although it is widely believed that financial technology is disrupting the traditional banking industry, many fintech startups have found themselves acquired by banks. Venture capitalists have yet to find a financial technology that is a threat to even a part of the banking business. Sheel Mohnot, a venture capitalist who focuses on fintech said, “We realized along the way that you really have no choice but to work with the banks.”

Under Trump’s administration, it will be harder for fintech to disrupt banks. Trump’s plan to ease post-financial crisis regulations will give banks more freedom to take risks in areas where fintech startups are currently finding the opportunity to develop in. Venture capitalist Arjan Schütte has been moving his firm’s investments away from fintech disrupters and toward startups that are working with existing banks.

P2P lenders have realized the difficulty to fund loans without having access to cheap deposits, as the banks do. They also struggled with the high cost of marketing to acquire new customers. I researched P2P lenders for the individual assignment, and found that Lending Club had the highest technology IPO in 2014. However, Lending Club’s shares have been trading far below the day of their IPO.

Reference: https://www.nytimes.com/2017/02/22/business/dealbook/silicon-valley-tried-to-upend-banks-now-it-works-with-them.html?smid=tw-share&_r=0&referer=https://t.co/7Wl3R7wfOn&_lrsc=06912909-a0ca-4685-bf7b-72cc34e89575

PayPal has agreed to acquire the Toronto-based bill payment firm TIO Networks, a major player in the North American bill pay market, for $233 million. Currently, the bill pay market has $3.9 trillion transactions each year, according to data from ACI Worldwide. TIO will help PayPal grow its market share in the bill pay market.

TIO can also help PayPal gain access to a new segment of customers who do not have affordable access to traditional financial services. These “underserved” customers are living paycheck-to-paycheck and many do not have bank accounts. The acquisition will allow PayPal access to customers who currently pay their bills at unmanned kiosks, and allow customers to pay bills in a simpler, faster, and more affordable manner. Although no specifics on integration plans have been provided, PayPal has been working on bringing cash transactions to PayPal digital accounts (PayPal Cash), which makes it more convent to covert cash into digital payments.

While I think that it is a great idea to help the “underserved” community and make bill pay more convenient and affordable, I am reluctant to believe that this community has the financial and technological resources to use this future product.

Reference: https://techcrunch.com/2017/02/14/paypal-buys-tio-networks-for-233-million/

Reference: http://www.businessinsider.com/paypal-acquires-tio-in-bill-pay-push-2017-2

BookMyForex is an Indian Fintech company that allows customers to buy foreign currency online at a rate lower than that of the foreign exchange companies, banks, hotels, and airports. Customers can choose among options such as a foreign exchange card, hard currency, traveler’s cheques, or international remittances.

The company compares foreign exchange rates across foreign exchange companies and banks in real time, and it uses an algorithm to determine the best vendor to service a customer’s request. Once a vendor is selected, BookMyForex contacts the customer and fulfills the request within six hours. BookMyForex makes a profit through adding its own margin on top of the exchange rate.

I can see the appeal in simplifying the process of currency exchange. If I’m traveling, I would want the best rates. The current retail currency market has room for expansion; according to a Bloomberg report in 2016, the global currency market has an average daily volume of over $5 trillion. In order to be competitive in the online foreign exchange marketplace, BookMyForex and other similar companies must ensure the lowest rates, system stability, foreign expansion. With the rising use of e-wallets, BookMyForex should consider providing such an option, too.

Reference:  http://www.bloombergquint.com/business/2017/02/11/fintech-tracker-can-bookmyforex-make-money-by-selling-money

Mark Carney, the governor of the Bank of England, warns that Fintech’s market risks would evolve as the sector continues to develop. Carney believes that while new Fintech could reduce costs, improve capital efficiency, and create new economic functions, these changes could impact credit quality, macrocosmic dynamics, and market functioning. Therefore, it is up to the regulators to make sure that Fintech maximizes opportunities and minimizes risks to society.

Carney also warned about the potential dangers of increased reliance on peer-to-peer lending. Since peer-to-peer lending has yet been tested by a downturn, its stability and the lenders’ tolerance to losses are still unclear. Currently, Fintech is a rather uncharted territory; it might generate systemic risks due to its interconnectedness and complexity, or it might reduce systemic risks by introducing a more diverse and resilient system. Policymakers need to be ready to address vulnerabilities as they appear.

I think the complexity of the current regulatory system can be a hindrance for the development of Fintech policies and Fintech companies themselves. While Fintech companies are attempting to blindly meet compliance, the lack of coherent policies not only makes it difficult to plan, but also wastes resources that can be better utilized elsewhere.

Reference: http://bridgingandcommercial.co.uk/article-desc-11491_

Jude Scott, chief executive of Cayman Finance, believes fintech could revolutionize compliance in financial services and has the potential to streamline processes for firms and regulators. Scott promotes the use of a common ledger—blockchain—as the standard place for verifying customers’ credentials.

Recent money laundering scandals, however, have brought up potential regulatory issues with fintech: Blockchain has become associated with criminal activity due to its use of virtual currencies, and P2P lending can be done anonymously, without following global standards or certification, which would be difficult to trace for regulators.

Scott’s idea includes financial institutions following a global standard set in the common ledger, and customers who are transacting would be “certified and approved” following the standard. Regulators would have access to the ledger and transactions’ metadata, which makes compliance more efficient. Compliance officers would be relieved the burden of screening transactions for risky customers.

While I like Scott’s vision, it would be difficult to implement on a global standard. Current regulations need to be modernized to match the speed of today’s fintech, and regulations need to embrace, rather than fear fintech. Regulations take a long time to pass, and when they do, they might no longer be applicable.

Reference: http://blogs.wsj.com/riskandcompliance/2017/01/26/how-fintech-could-cause-a-revolution-in-compliance/

Digit is a financial technology startup that uses algorithms to track its users’ income and spending patterns, and helps them save by setting aside small amounts of money. The algorithm analyzes a user’s average, high, and low checking account balance, when he/she is paid, and the pay cycle’s periodicity. After searching for bills due within the next two weeks and analyzing recent spending, it transfers an amount that the customer finds immaterial to a savings account that can be accessed anytime.

Digit is working to develop “the first artificial intelligence-powered financial goal program”, which would optimize saving and help users reach their goals faster. Digit is also working on an algorithm to “move every dollar where it should go, at the right time, to minimize fees [on student loans, credit card accounts, etc.] and maximize gain”.

I think Digit would be popular among those who are bad with saving, but not for those who are good with their finances and would like more control. Digit earns profit from the interest rate received on account assets, so users are not receiving anything above their savings. As a potential user, I would rather find another service that offers a return.

Reference: https://www.bloomberg.com/news/articles/2017-01-10/a-siri-for-your-finances-digit-says-trust-me

Media has labeled Fintech as “the big bank disruption”, and Fintech’s growth has been substantial in recent years: the global estimated value of Fintech was $3 billion in 2013, $12 billion in 2014, and over $20 billion in 2015. Industry experts believe that 2017 is merely the “tip of the iceberg” of what we can expect for Fintech disruption.

The expected trends in 2017 include a growing focus on artificial intelligence, which will help Fintech companies make better decisions using predictive analytics to understand big data. With the increase of smartphone ownership, there will also be an increasing demand for mobile transactions. By 2021, contactless card transactions are expected to double worldwide, making physical cards obsolete. However, as contactless transactions increase, fraud prevention measures must be put in place. Multi-factor authentication, such as fingerprint or face recognition and iris scans, will become necessary.

While contactless payments are gaining traction, I believe the transition period to adopt this form of payment will be slow. For example, businesses were required to upgrade to EMV-enabled terminals in 2015, but I have seen many businesses yet to do so. Also, I am curious to see how traditional banks will to respond to Fintech disruption.

Reference: https://letstalkpayments.com/hottest-fintech-trends-2017/