Financial Information Systems

Fintech startups have been the new trend for the Silicon Valley. Many of these startups have been challenging financial service offered by traditional lenders for some time. Like any new technology, Fintech companies have gone largely unregulated for the past several years. Towards the end of 2016, the Office of the Comptroller of the Currency said that they will officially begin accepting applications for companies that wish to be regulated like a federal banking institution. The benefits will include being an established company in the eyes of the government, but they will also be subject to the same anti-money laundering controls and consumer protections of traditional financial institutions.

Seeing as the government is usually slow to react with regulation of new technology, now that the government sees that these fintech companies have replaced some functions offered by traditional financial institutions, it will only be a matter of time before they demand all fintech companies to be regulated like traditional financial institutions. This first step of allowing fintech companies to apply to be monitored like a traditional financial institution is the government allowing fintech companies to voluntarily choose to be regulated. Even if companies do not volunteer at first, eventually all fintech companies will be regulated like traditional financial institutions.

Reference: https://www.bloomberg.com/news/articles/2016-12-02/fintech-firms-get-chance-to-be-regulated-like-wall-street-banks

POS (Point of Sale) payment is one of the categories of mobile payment ecosystem. It is also known as tap-to-pay as the user just taps his device on the terminal to make the payment.

User stores his card details in his smartphone (or any compatible wearable). Instead of swiping the card, user can just tap the phone on the terminal. The device then requests for user authentication via fingerprint to confirm payment.

Tap-to-pay system uses NFC (Near field Communication) technology that allows two devices placed within a few centimetres of each other to exchange data. In order for this to work, both devices must be equipped with an NFC chip. So, when user taps the device on the payment, the NFC-powered terminal subtracts money from the balance written to the card.

Apart from making payment, now mobile payment can also allow you to withdraw cash from ATM. From end of 2016, Bank of America has services allowing the customers to withdraw cash from the user’s bank account by simply tapping their NFC device.

According to nfcworld.com “value of transactions conducted via NFC handsets will grow from US$30bn in 2016 to US$45bn in 2017, US$70bn in 2018, US$110bn in 2019, US$160bn in 2020 and US$240bn in 2021”

Major players: Apple Pay, Android Pay and Samsung Pay

More than 100m people will make an NFC mobile payment in 2016

 

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/

After the recent takeover of the fintech industry, analysts have been attempting to identify which financial sectors can benefit the most. In a recent fintech conference in London, VC’s unanimously said that the insurance sector would desperately need technology guidance to further advance the field. With the rise of artificial intelligence and more efficient bank transaction processes, insurance falls behind in innovation and user experience. Insurance is seen as old-fashioned and rely primarily on brokers and paper while not being adaptive to the changing auto and home industry. Insurance Technology or “InsurTech” has seen a sharp increase in interest from VC firms due to its scalability and early profit projections. Startups such as Cuvva, a 150 million pound valued pay-as-you-go car insurance app and Trov have been the benefactors of an opportunistic market for insurance. With the high volume of startups appearing both in the U.S and internationally, we can assume that a wide variety of them will attempt to saturate and revolutionize the insurance industry. While InsurTech may be in line to replicate what fintech did to the market, some struggles initial struggles will occur. Insurance requires a more personal approach as it deals with humans and situations that are out of their control and too unique to automate. Auto payments are expected but it is believed that innovation will illuminate a discovery that technology can improve with insurance. Overall, it will be a few years until we see a substantial impact in insurance publicly but it’s important to know how early to target InsurTech companies for investment purposes.

URL: http://www.businessinsider.com/fintech-hot-insurance-insurtech-vc-economist-finance-disrupted-2017-2017-1

ICICI, India’s largest private bank, and Emirates NBD,  recently announced successful international transactions for both trade finance and remittance purposes using blockchain technology.

This pilot transaction  was executed to showcase confirmation of import of  “shredded steel melting scrap” by a Mumbai-based export/import firm from a Dubai-based supplier, and to exchange and authenticate original international trade documents. The blockchain trade application co-created by ICICI Bank “replicates the paper-intensive international trade finance process as an electronic decentralised ledger”.

The information contained in the blockchain transaction included a purchase order, an invoice, shipping and insurance papers. Each participant was able to access and view a single dataset, to authenticate ownership of goods digitally, transmit their trade documents, check the status of their applications, and transfer their titles, while maintaining confidentiality. Further, it allowed each participant to check online the status of the application, transfer of title and transmission of original trade documents through a secure network, while preserving client and commercial confidentiality.  The application is designed to work with existing banking systems and processes, allowing banks to “plug in their systems and process.

Source: https://www.finextra.com/blogposting/13593/blockchain-accelerated-activity-in-trade-finance

For the 2017 year, David Klein of TechCrunch, has made five (safe) predictions on what he thinks will happen for the Fintech industry. I will make my prediction and provide reasoning on whether or not these things will come true this year.
Prediction 1: Fintech lending will further stratify as an industry
I feel that this will be correct, but not to the extent that he states it will be. Klein believes that from the 400+ lenders of 2016 will whittle down to around 10 lenders in total. I believe that this number will shrink but not to the extent that he believes, more likely there will be around 100+ lenders this year.
Verdict: Somewhat True
Prediction 2: The asset side of fintech will find its groove
I believe this will also be true because fintech companies are constantly looking for ways to disrupt traditional banking processes and digitize them for the 21st century.
Verdict: True
Prediction 3: M&A activity will start to become real
Similar to the same reasoning as the first prediction, there will be market consolidation as these companies become more established and companies will want to consolidate industry power.
Verdict: True
Prediction 4: Blockchain will have an impact on the financial services industry
I don’t really know what blockchain is or how it works. Because of this I really can’t make any comment on this prediction with any confidence.
Verdict: Unknown
Prediction 5: International investors will come to the U.S.
I don’t think that this prediction will come true. In my research I have found that there are robust fintech industries in foreign countries where investors are probably more keen an likely to invest. While the United States is a secure investment with minimal risk and decent interest rates, I believe foreign investors would rather work in their home country and try to develop a fintech company for their culture instead of a foreign culture.
Verdict: False

Article Link: https://techcrunch.com/gallery/fintech-predictions-for-2017/

Human financial advisors usually charge 1 percent of assets per year, regardless of the outcome of the investments. Until robo-advisors, the only other option was to manage accounts independently, which often underperformed the market. Robo-advisors offered a solution by being more efficient than working independently, and by being cheaper than a human advisor. The average rate robo-advisors charge is 0.15 to 0.5 percent a year, a fraction of what human advisors charge. Robo-advisors use computer algorithms from the same historical data human advisors use, and select investments based off the client’s risk profile. Deloitte Consulting predicts that within a decade robo-advisors will be managing $5 to $7 trillion. Asset management firms are creating robo-products to stay competitive.

Although robo-advisors are still making way into the market, I believe that in the near future they will replace human financial advisors. With the advancement of artificial intelligence coupled with more complicated algorithms, robo-advisors will be able to outperform human advisors. I also believe robo-advisors have the advantage of not having financial interests in the client, being able to custom-tailor to each client’s specific needs, and being useful for any time horizon. If asset management firms don’t adapt quickly enough, fintech firms will be taking over the market.

Source: The Rise of the Robo-Advisor

Over the past few years, it has become increasingly popular to use your phone to complete payment transactions. This technology is great for consumers because it is fast and sometimes more convenient than having to deal with credit cards or other forms of payments. However, the video I watched this week, “Mobile Payments: The Good, the Bad, and the Confusing”, raised the issue that regulation has not been able to keep up with the trend of mobile payment systems. Therefore, customer’s funds may not be as safe as they appear on mobile platforms. The first unclear rule they bring up is whether banks are allowed to take overdraft fees without warning from an account due to mobile payments, unlike the standardized processes of dealing with overdrafts from debt cards. There is also no clear indication of who should protect data of people using mobile wallets. Finally, mobile wallets do not have the same protection as checking accounts, so money can be stolen more easily.

I think more regulation needs to be made to protect consumer’s money online. I understand that technology moves so fast it is difficult for lawmakers to keep up with changes. However, these are legitimate threats to people, and currently there is not a clear path on how the government is protecting us.

1) Bank-owned P2P model: In this model, the sender’s bank does the transfer of funds. There are a number of banks which operate in this way. The financial institutions have developed their own applications so provided P2P service.

Example :

clearXchange: It was founded in 2011, and it was owned by Bank of America, Capital One, JPMorgan Chase, US Bank, and Wells Fargo. Customers of either of the banks could send/receive payments. The sender only has to enter the recipient’s email or phone number. It was sold to Early Warning in 2016 and rebranded as Zelle.

2) Processor/partner P2P model: In this model, the sender’s bank uses a processor/partner to transfer the funds.

Example:

PopMoney was developed by Cashedge is now a part of Fiserv. Popmoney is slightly different from other P2P payment services in the sense that the transactions execute from sender to receiver directly, eliminating the need for a stored value account. Pop is an acronym for “pay other people” and provides services for several banks and credit unions.

3) Third-pparty-ownedP2P: In this model, the sender interacts with a third party to transfer the funds using ACH or credit/debit cards. This is the most popular model and there are a number of players in the market such as Google Wallet, Amazon, Dwolla, Venmo, and Square Cash. PayPal is the most widely used service. In 2015, PayPal processed $41 billion in mobile person-to-person payments, up 42% from 2014.

 

References:

http://marketintelligence.spglobal.com/our-thinking/ideas/big-banks-take-on-paypal-s-market-share-in-mobile-payments

http://www.paymentsjournal.com/WorkArea/DownloadAsset.aspx?id=22928

While smartphone manufacturer keeping improving its feature and performance, so as thousands of applications, the technology revolution continue expanding services scope to meet the market demand and providing benefits to customers. Apple, Android, Samsung are top three mobile pay app providers, and rivals to seize market share. Although more customers have reported using Apple Pay, Android Pay and Samsung Pay have adoption rates on par, which are competing to win more customers by its distinguish payment features.

Conducting reliable secure process for transaction is still a priority topic that tech companies working on. Apple Pay and Android Pay must exclusively rely on Near-Field Communications (NFC), which requires newer terminal equipment at the checkout counter. Instead, Samsung invested in Magnetic Secure Transmission (MST), which transmits card information to older terminals that only accept magnetic stripe cards by creating a magnetic field similar to that of a mag stripe card as it’s swiped. However, it is not a significant factor in adoption because Samsung pay users reported that they use NFC payment more often than MST mode.

Source:

https://arstechnica.com/business/2016/06/apple-android-samsung-whos-winning-the-mobile-pay-app-race/