Mexico, LATAM’s biggest Fintech ecosystem, implement Fintech regulatory framework

Mexico is now the largest Fintech ecosystem in LATAM with over 240 Fintech startups, a YoY growth of about 50%. In the last year it has overtaken Brazil in Fintech growth as per Finnovista’s Fintech Radar (July 2017). But more importantly, Mexico is soon to become the first LATAM nation to have a regulatory framework for Fintechs – a key milestone very few nations have managed to achieve.

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Mexico has always been a huge Fintech opportunity with about 60% of the 127 Million unbanked as per World Bank. With the country’s growth forecasts being revised upwards for 2017 and 2018 the momentum has always been there. A high Internet and smart phone penetration, a strong ecosystem of entrepreneurship and e-commerce, and a low banking penetration, are a few of the features of the Mexican market that make the country one of the most fertile areas for the development of the Fintech industry. It is currently the fastest growing Fintech nation in LATAM.

However, setting up a Fintech regulatory framework is stepping into a whole new league. The Mexican financial regulatory set up has the following stakeholders:

  • Comisión Nacional Bancaria y de Valores (CNBV)—National Banking and Securities Commission
  • Secretaría de Hacienda y Crédito Público (SHCP)—Secretariat of Finance and Public Credit and
  • The Bank of Mexico (Banxico)

The regulatory framework for Fintech being proposed covers the following aspects,

  • A Financial Technology Institutions Committee will be set up and will consist of two representatives each from SHCP, the CNBV and Banxico.
  • This committee will be responsible for granting Financial Technology Institutions permissions to operate in Mexico.
  • A standard definition of who would be considered Payments, PFMs, Crowdfunding, Robo-advisory firms would be published.
  • Bitcoins and Crypto currencies would also be addressed as part of the regulation, however its being proposed that Banxico would act as a referee for operations of these firms.

The framework is aimed at providing clarity on rules, and thereby creating efficiencies and cost savings for Fintechs and consumers. The proposed regulation will be reviewed by an external commission, and then be submitted to the Senate to be voted on. If the bill is approved by the Senate, finer details then would be put into secondary laws.

The sentiment around Fintechs in Mexico about this development remains positive. The Mexican regulators can take inspiration from the likes of FCA and their initiatives such as the Sandbox to help Fintechs within the country.

If implemented right, a light touch regulatory framework would go a long way in capitalising on Fintech within Mexico which has already seen 400% growth (highest in LATAM) in the sector in the last couple of years. And they may be the first to do so not just within LATAM but across the developing world.


Arunkumar Krishnakumar is a Fintech thought leader and an investor. 

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Venture Wanted: AI Based Regtech firm to spot Mis-selling

As per Boston Consulting Group, since 2008, Financial services firms have spent about $321 Billion in conduct/mis-selling related issues.  Regtech firms have focused on improving efficiencies of compliance processes within banks. However, mis-selling products and services is a behavioural problem, and a harder nut to crack for Regtech firms. In this post, I have attempted to define some of these behaviours, the outcomes, and how a Regtech app using Artificial intelligence could catch these behaviours by plugging into the right sources of data.

 

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Regtech firms focusing on mis-selling need to define a methodology and the data sources to develop AI and machine learning to proactively address mis-selling. Some of the key data elements needed to identify mis-selling in my opinion are,

  • Product Life cycle
  • Marketing and Sales
  • Customer/Social Media Sentiment
  • Employee compensation
  • Operations and Technology Spend

Product Life Cycle data is critical to understand the process to develop and approve a product. It shows the involvement of senior management in the process, and the governance involved in getting the product out to the market. Data around complexity scores of a product will be useful for compliance teams to understand if there is enough support for both employees and customers to understand the product.

Marketing and Sales data is critical to ensure that right amount of money is spent in marketing the product and the sales commissions are aligned to the firms strategy. Sales data is also critical to analyse a sudden spike in sales of a product. Data can show if it was because of the new sales manager, a tweak to the product or just plain old mis-selling triggered by some year end target.

Customer complaints and social media sentiments are required to understand if a product or a service sold is keeping the customer happy. Also, in the open data world, product usage information could give firms a good view of, if a customer is using them.

Employee compensation often is directly related to aggressive sales done by sales people at banks. Combine this data, with sales of products, usage of products by customers and even complaints from customers, you get the view of how a particular bonus structure drove an employee to sell a product to a consumer when he or she didn’t need it.

An AI algorithm that can have this data can spot regularly occurring trends such as the above, and even alert senior management when they approve a particular product, or agree to a compensation structure. Of course, many firms already use social media sentiment to spot product issues, but that is just one side of the story.

The root of the problem is within Financial services firms where their strategy often doesn’t align with their culture. AI can spot if their product strategy and employee compensation are genuinely aligned with their “Values”. AI could spot mis-selling based on social media sentiments, identify them even before it gets to social media, but a even better state could be to identify patterns that instigate mis-selling behaviour even before they occur.

In proactively managing mis-selling, banks can not only save fines they have paid to regulators but also cut down on the £5 Billion claims market. I believe, a well analysed framework that identifies mis-selling issues and reports on them to the regulators would help all parties involved. It will most definitely save billions for banks. Regtech firms, are you listening?


Arunkumar Krishnakumar is a Fintech thought-leader and an investor. 

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International Regtech Association Launch and IBM Watson announce Regtech Apps

Regtech has for long been an underdog subcluster of Fintech. Over the last year or so, the trend has been changing, and more stakeholders in the ecosystem are taking notice of how fundamentally important Regtech is to the industry. Over the last few weeks, Regtech has been in the press for all the right reasons. The International Regtech Association (IRTA) was launched with a mission to create an ecosystem for Regtech firms to thrive. IBM have announced the launch of Watson’s RegTech capabilities, thanks to its acquisition of the Promontory Financial Group (PFG) last year.

The top banks have been spending close to about $1 Billion per year on regulatory processes and controls. Regtech firms are focusing on bringing cutting edge technology like AI and Cloud computing and add efficiencies to achieving regulatory compliance. The FCA has been a pioneer in embracing innovation through the FCA regulatory sandbox, that allowed RegTech firms to test their value proposition without fear of a regulatory breach.

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The IRTA, a non-profit, was launched recently, with a goal to bring together technology firms, banks, regulators and academicians in developing international Regtech standards, and promoting research activities.

For Fintech firms to scale globally they need a consistent approach to regulation across nations. For instance, Fintech firms in Asia have serious challenges when navigating through different regulatory regimes while looking to expand beyond their home territory. For example, Cryptocurrency exchanges are treated as money changers and regulated by the customs authority in Hong Kong but they are licensed as online shopping malls in South Korea. In Singapore, the central bank has proposed regulating bitcoin exchanges as payment firms.

Every time they want to expand into a new country, Fintechs are having to start from scratch due to incompatible, and often conflicting regulatory approaches. This not only adds operational delays, but also sometimes needs business model tweaks. In my article last week, I discussed about similar challenges that US Fintechs have in expanding across different states.

The IRTA should help resolve these inconsistencies, over a period of time. It is chaired by Subas Roy who was most recently the Global Head of RegTech at EY. His vision for the IRTA is to set global Regtech standards, lead research and help Regtech firms develop solutions that can be used by banks for regulatory compliance.

The IRTA currently has about 250 members. They hope to work with the global Regtech market that has close to about 700 companies, while about five global banks are keen to join the initiative. This is a great start, however I believe it is essential for the IRTA to work closely with regulators, especially the FCA and the MAS, as they have created a good framework to groom innovation that other regulators could follow.

Earlier this week, IBM Watson announced the launch of its new anti-money laundering (AML) and know-your-customer (KYC) capability. This includes Financial Crimes Insight with Watson, which applies cognitive computing, intelligent robotic process automation, identity resolution, network analysis, machine learning, and other advanced analytics capabilities to help banks spot financial crime.

At the end of last year, IBM acquired Promontory Financial Group (PFG), a consultancy firm specialising in financial regulations. PFG have been training IBM Watson on regulatory compliance.

The aim of the new financial crime solution is to reduce the amount of false positives generated by today’s transaction monitoring systems. Banks have a false positive rate of 98% and spend about £2.7 Billion per year in chasing false leads. About 55% of these costs could be saved by Regtech solutions using AI, as per IBM. This would make the transaction monitoring process very efficient.

Its good to see that government agencies (FCA, MAS), non-profits (IRTA) and Technology firms are waking up to the fact that Regtech is no longer the underdog. Its a massively untapped market that might have just reached the tipping point and 2018 could be the year of Regtech.


Arunkumar Krishnakumar is a Fintech thought-leader and an investor. 

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InsurTech and the regulators

When disruptive technology and regulation meet, the world changes.

Pity the poor regulators faced with competing demands:

  • Protect citizens from losing money

 

  • Encourage innovation that drives jobs and GDP growth

 

  • Don’t upset the incumbents too much

 

Oh, and do all that when technology keeps changing the game. For example, think of Auto Insurance, IOT and Self Driving Cars.

 

Auto Insurance, IOT and Self Driving Cars

This is just one segment of Insurance, but think of these tough questions:

  • Who owns the data? If I let the telematics in my car tell my insurance company what sort of driver I am, do I own that data or does the insurance company? The issues are similar to those driving PSD2 regulation in banking.

 

  • Who is responsible? If I let the car drive while I catch up on Netflix binge watching and there is a crash, who is responsible, me or company I bought/leased/rented the computer on wheels?

Then we have the regulation that used to be simple – Capital Adequacy.

Capital Adequacy

In ye olden days, Capital Adequacy simply meant a Regulator telling the Insurance company how much capital they need to hold in reserve. Only big established firms could play this game. Now think of these tough questions:

  • An Insurtech startup is only insuring small items, the sort of stuff that was seldom insured in the past because it was too much hassle, but now a couple of swipes on a phone does it. How much capital do they need compared to a company insuring life, health, house or car?

 

  • A minimally capitalized Insurtech startup creates a digital experience on top of a Reinsurance company platform. Whose capital has to be adequate, the Insurtech startup or the Reinsurance company?

 

  • A group of Hedge Funds, acting like the Lloyds Names of old, offer to cover Insurance through some variant of Cat Bonds and lay off some of that risk into derivatives contracts in the capital markets. Where is the capital and how do we know it will be adequate when the time comes?

Smart Contract meets big legal bills

You sign up for an instant payout policy (real time settlement) where proof of event is recorded on an immutable blockchain. The payout should be automated and immediate, but it does not happen. Who ya gonna call?

You are from Switzerland, but you are visiting New York, the Insurtech startup is in London, but is regulated in Bermuda and the servers are Iceland. Your lawyer starts talking about jurisdictional issues while he plans for a long and expensive project.

Bernard Lunn is a Fintech thought-leader and deal-maker. 

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Fintech Regulatory competition heats up as governments calculate the economic return on innovation

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For a long time, entrepreneurs faced competition and regulators sent them the rule book. Regulators were government employees who thought about competition only in the abstract.

Today, the environment is more fluid as governments recognize the economic return on innovation in terms of jobs and GDP growth. The regulators now face real competition because their political masters have to keep citizens happy and citizens care about jobs and GDP growth.

With both Fintechs and global banks being increasingly mobile, jobs can disappear fast if regulators get it wrong. Plus, innovation is the primary driver of productivity which drives GDP per capita.

Pity the poor regulator who must balance that with protecting citizens from fraud and abuse.

In this post we review the Fintech regulatory initiatives in these countries:

USA

UK

Switzerland

Singapore

Shanghai

Hong Kong

India

Eurozone

Others

We end by looking at common themes across jurisdictions.

USA: Fintech Charter vs States Rights

America is the largest single market in the world, is home to the biggest banks and the biggest tech companies. So when the OCC (Office of the Comptroller of the Currency) issues a draft Fintech Charter, we pay attention.

The problem is that there is always a push & pull between central government initiatives such as this and States Rights.

In simple terms, more central power means less state power. One of the comments on the OCC Fintech Charter (which is still only a draft) is from the New York State Department of Financial Services and it is not positive.

A national Fintech charter would mean there will be no reason to have a state license. States do not have the authority to regulate national banks, even those located in the state. This will reduce fee income from granting charters and regulating banks. Looked at from the other side, this will reduce the cost of going national for Fintech ventures. Banks that are already national may lobby to keep it like it is.

Nor do States agree at the policy level. California, home of tech, tends to favor the Tech in FinTech and New York, home of Wall Street, tends to favor the Fin in FinTech.

The politics of this currently are really unclear. So this falls into the wait and see category.

UK: the Post Brexit Landscape

The UK pioneered using smart regulation to promote financial innovation. Initiatives by the FCA helped turn London into the Fintech Capital of Europe and  that sparked Fintech growth that was giving credence to the idea of London as the Fintech Capital of the World. Financial Regulators around the world studied how the FCA did it and how Government, Banks and Fintechs worked together. The ability to have a conversation with regulators and have them listen was pioneered by the FCA and was a major breakthrough.

Then Brexit happened.

There are two scenarios:

  • Scenario 1: UK is too small a market to matter on the global stage, business will flow to other centres in Europe (Dublin, Frankfurt, Berlin, Luxembourg etc) and globally to New York and Singapore.
  • Scenario 2: Freed from the bureaucratic constraints of Brussels, London can innovate away on the global stage and become the Fintech Capital of the World (and thus of Europe by default).

This is another fluid, wait and see situation where politics will be key.

Switzerland: This is mission critical for this tiny rich country

Financial Services accounts for 10% of GDP and 5% of employment in Switzerland and the country is a global leader in Wealth Management. So, what happens here really matters.

In November 2016, Switzerland announced a Fintech License. Like the US Fintech Charter, this is not yet law. These are the key features:

– No “maturity transformation” allowed. This is mandated Asset Liability Management and that eradicates systemic risk (no more bailouts) and favors Market Place Lending without any lending from their own balance sheet.

– Deposit Only License. You can provide deposit services, but not lend. You can accept up to SF100m once licensed. Separating Deposits from Lending is a bold and radical move in a world of ZIRP. Deposits is a nascent area of Fintech innovation.

– Up to CHF 1 million via sandbox innovation area. This allows a startup to build an MVP and get to PMF before investing in being regulated

– minimum of SFr300,000 in capital (vs SF10m for banks). If a startup has got to PMF that is a very manageable hurdle.

– not covered by deposit protection (read, no risk to taxpayers). It is a buyer beware free market.

–  crowdfunding grace period in settlement account. This defines when donors can withdraw the money. Today it is 7 days. The proposal is to raise it to a 60 days. which would give the company greater security.

– No limit to how many lenders or investors for crowdfunding services.

– You must abide by money laundering rules applied to banks.

Bitcoin is also legal currency in Switzerland and is home to some major crypto ventures. The Swiss Fintech License is a bold move, but it is not yet law. With so much employment at risk in traditional banks, the politics are still uncertain..

Singapore: Hub for the fastest growing region

Asia is where the growth is and Singapore is the hub for that growth, with people who are equally comfortable doing business in India and China and all other parts of Asia. The Singapore Monetary Authority is very open to innovation and the most proactive regulator at reaching out to the Fintech community. They have a Fintech Festival and a very approachable online presence and people who mingle with ease at tech oriented conferences.

Singapore itself is a small market and each country in Asia makes their own rules. There is no United States of Asia or Asian Union as yet, but we can be confident that Singapore will be central to any harmonization initiatives.

Shanghai: The Wild West gets a Sheriff

This data from KPMG shows the return on innovation. The line that matters is the P2P Composite Interest Rate that is falling like a stone in that chart. For China to transform from export led to a consumer economy, it must have low interest rates. If Fintechs and BAT can deliver that better than Banks, the regulation will deliver what is needed. This is the context for the news and plans we see in the Five Year Plan for 2016-2020.

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As always, the regulator must balance the risk from fraud as Market Place Lending (MPL) moves from the Wild West phase (with hundreds of marketplaces and lots of scams and very crude, violent debt collection practices) to the Settler phase, when the Sheriff rounds up the bad guys and the settlers move in and we get towns and cities and the big money is made.

These are the 12 commandments laid down in December 2015 by the China Banking Regulatory Commission (“CBRC”). Thou shalt not (my comments in italics):

1. Use the platform for self-financing or for financing of related parties. (This stops the most egregious scams).

2. Directly or indirectly accept and manage lender funds. (This is interesting. It prevents what in the West has become called Balance Sheet Alt Fi Lenders and it is unclear if that is a bad thing).

3. Provide guarantees to lenders or promise guaranteed returns on principal and interest.

4. Market or recommend loan investments to users that have not completed identification verification after registering on the platform

5. Directly make loans to borrowers, unless stated otherwise by applicable laws and regulations

6. Structure loans into investment products with liquidity timing that differs from the original loan term (“thou shalt not have have Asset Liability Mismatch” is another way of saying “thou shalt not have systemic risk”).

7. Sell bank wealth management products, mutual funds, insurance annuities and other financial products (Hmm, so MPL can only be an exchange, China is banning the 20th century strategy of vertical integration).

8. Unless stated otherwise by applicable laws and regulations, collaborate with other investment or brokerage businesses to bundle, sell or broker investment products (sounds like the sort of grey area that would make fortunes for lawyers and/or those with good connections).

9. Provide false loan information or create unrealistic return expectations.

10. Facilitate loans for the purpose of making investments in the stock market. (No borrower would offer this as a reason to get a loan, so this sounds like the Casablanca scene “I am shocked. Shocked!! to find that there is gambling going on”).

11. Provide equity crowdfunding or project crowdfunding platform services. (Separation of asset classes by statute sounds like a hindrance to innovation).

12. Other activities forbidden by applicable laws and regulations (legal catch all phrase).

In a single party system there is no political risk; what the Government says is law is the law.

Hong Kong: Competing with Singapore and Shanghai

This headline says it all about regulators facing competition

Outdated fintech regulations hurting Hong Kong, Jack Ma says

Ant Financial to pick Hong Kong for IPO only if city is ready for innovation, Alibaba’s founder says

Hong Kong now faces competition on the Mainland from Shanghai and as a regional hub from Singapore. In the latter case, most commentary (such as this one on Bloomberg) puts Singapore in the lead.

India: The Dark Elephant

Often overlooked with all the attention on the China dragon, the Indian elephant is making some smart moves in Fintech and like China benefits from a growing economy and lack of legacy processes. India has pioneered with the Payment License and may be the first major economy to move to a cashless society. For more about India, go to our India Week.

Eurozone: Pencil Pushers or Tech Smart Regulators

Despite Brexit, this 28-country marketplace is still very big and the regulators seem to understand the Fintech innovation imperative pretty well. We see 8 regulatory initiatives;

Basel 3

Why: make sure banks have adequate capital so that there is not a “run on the bank” during any future financial crisis.

What: Tier One Capital is increased from 4% to 6%. Plus, banks must maintain enough “Liquidity Coverage Ratio” (a new concept in Basel 3) for 30 days.

When: Gradual rollout from 2014 to 2019. Banks need time to adjust and their strategies are already aligned to this rollout.

Where: Basel 3 is global, but voluntary. It is a “good housekeeping seal of approval” that gives confidence to the Bank’s investors. The US version of Liquidity Coverage Ratio is a bit tougher.

Elevator: Banks will be lending less. Plus Banks will be cross selling more (to show they have an operational relationship as it relates to Liquidity Coverage Ratio). US banks generally have stronger balance sheets than European ones.

SEPA

Why: reduce the cost of payments within Europe.

What: Single Euro Payment Area. Making bank-to-bank transfers cheap and quick within the Eurozone.

When: Completed by 2010. These are the IBAN numbers that still baffle some paying into Europe.

Where: Specific to Europe, which was playing catch up with America on this front (now caught up).

Elevator: payments within the Eurozone are quick and cheap (cross border to and from Eurozone is still a pain point)

MiFID 2

Why: protect investors from misselling and fraud.

What: Markets in Financial Instruments Directive. There is a lot in MiFID 2 and this FT Video is a good 6 min explainer. In short, MiFID 2 will a) reduce use of dark pools in equities, b) push derivatives and fixed income trading away from Over The Counter (OTC) to centralized clearing and c) curb abuse of High Frequency Trading.

When: From summer 2015 to early 2016.

Where: This is a European initiative, but as it is a big market and big global Fund operations are in Europe (Luxembourg, Dublin, London), this could set the benchmark globally

Elevator: Trading will become cheaper and more transparent. Wealth/asset managers will have to follow more rules in how they report to investors.

Solvency 2

Why: Protect consumers from insolvency of an Insurance company (ie they cannot pay on an insurance claim because they went bankrupt).

What: Specific to Insurance. Defines how much capital they need. Like Basel 3 but specific to Insurance rather than Banks.

When: Jan 2016 was final deadline.

Where: Specific to Europe.

Elevator: European insurers will be more conservative which may make premiums go up but will lessen chances of them not being able to payout due to insolvency.

IFRS

Why: A global standard for accounting.

What: International Financial Reporting Standards.

When: Voluntary.

Where: The de facto standard is GAAP (Generally Accepted Accounting Principles) although this tends to be viewed as an American standard.

Elevator: Use both GAAP and IFRS (using automated translation tools) until it is clear which has become the global standard.

AMLD

Why: Reduce Money Laundering.

What: The European standard for Anti Money Laundering (AML).

When: Still being defined.

Where: America led the way on this, rules are already clear.

Elevator: Follow American rules but have some flexibility in case European rules end up being tougher.

PSD2. This is a game-changer that we have written about many times  before. It is an example of tech smart regulation and key to creating a level playing field between Banks and Fintechs.

Directive on electronic invoicing in public procurement. This will cover all B2G e-invoices by November 2018. If this moves Europe’s current e-invoicing adoption rate of 24% closer to 95%, which is the tipping point for AP and AR to go fully digital, then this will be a very big deal. When AP and AR go fully digital, two big things happen. First, companies take a lot of cost out of AP and AR processes. Second, even more significant, working capital finance will scale beyond its niche today into a mainstream asset class and financing tool. The theory is that mandating it when Government is the buyer will set the ball rolling for adoption by corporates.

Others

Three other countries making smart moves in Fintech regulation are Japan, Australia and Canada.

Common Themes

  • To be regulated or not to be regulated, that is the question. It is easier to get a  Bank License and Charter these days. The question for many Fintechs is do they provide a tech service to regulated entities or become regulated entities? There is no simple answer, but we can see that the number of banks is declining.
  • Unbundling. Startups focus in one service and usually don’t try to offer an all-encompassing service that compete directly with Banks. So we see the trend to unbundled regs (eg a Payment License and a Deposit License and a Current Account License).
  • More tech savvy regulators. PSD2 and Payment Bank Licenses in India are examples of regulation that moves from “throwing the paper rule book at your compliance team” to sending “standards docs to your tech team”.
  • Immigration and Talent question. No matter how smart your regulation, if the best talent is denied immigration, the innovation hub cannot thrive. This is clearly a political hot potato at the moment.

There is a great conversation happening on this subject over on Fintech Genome

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The past, present and future of KYC for Banks

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In the Introduction to Digital Identity Week we looked at this from the point of view of the individual. Today we look at it from the point of view of the bank and the regulator – in this view we refer to it as KYC (Know Your Customer). 

The past was paper & plastic artefacts. To give a twist to the famous William Gibson phrase “the past is still with us, it is just unevenly distributed”. This is the world of scanners, faxes and Business Process Outsourcing. This is not a world we cover on Daily Fintech.

The present is what we call “digital embedding”.  This means machine-readable codes that are embedded into paper or plastic physical documents. This is like barcodes in a store or XBRL in a financial statement. This is the world of IT modernization projects. The past and the present co-exist peacefully.

The future is born digital identity artefacts. This is a first the Rest then the West story. For example, India issues native digital identities to their citizens (through Aadhaar). Countries that want to be startup hubs are innovating on the business front. For example, Estonia issues digital e-residency to micromultinationals. This is where disruptive change comes from.

What Banks & Regulators want from Individuals

Regulators today are usually “technology agnostic”, because they are innovation friendly (because of the Economic Value Add of Innovation to their economies). So they don’t usually care whether your KYC uses Paper & Plastic or Digital Embedding or Born Digital. Whatever the way data is delivered, the data they need:

  • Proof of Identity.
  • Proof of Address.
  • Proof of Birth.

This is like XBRL and Financial Statements. Data starts digital, gets converted to analog and is then reconverted to digital in the Digital Embedding phase. A Born Digital solution that stays digital is clearly more efficient – but that is in the future.

What Banks & Regulators want from companies

The same thing happens with data that Banks & Regulators want from companies, such as:

  • Certificate of Incorporation
  • Memorandum of Association

Managing Legacy

Banks not only have to manage the process of collection of data. They also need to maintain updated records (for example if an individual changes residence or a company changes Memorandum of Association).

Clearly all this is easier if the data is digital, but until almost all of it is digital, banks must invest in managing the old way of doing things. That is why, as Jessica Ellerm reports, having no customers could be the best thing for your fintech startup.

Of course, maintaining the old way of doing things is a huge boon for outsourcing companies. To paraphrase William Gibson – “the past is still with us, it is just unevenly distributed” and managing technology end of life programs is a big business. Some companies do renovation projects, depending on the age of their systems and their estimate of when the born digital future will go mainstream. These renovation projects include:

  • Single KYC view of a customer across multiple business units (even if the data was collected by one business unit).
  • Data quality, such as fixing input errors and misplaced documents.
  • Moving from Paper & Plastic to Digital Embedding.

This is like e-invoicing. For example, plenty of e-invoices are already sent today, but until something like 90% of invoices are electronic, the paper processing systems have to be maintained. For example in India, some banks have implemented e-KYC using Born Digital data from Aadhaar, but they still have legacy customers that were onboarded in the Paper & Plastic era.

India, where a lot of the Past and Present legacy is being maintained, is also where the Born Digital future is more visible thanks to Aadhaar. They have KYC Service Agencies (such as NSDL, CDSL, and NPCI) that provide service to KYC User Agencies (Financial Institutions both incumbent and new) using Aadhaar data. Some banks have started innovating on top. For example, State Bank of India uses this data to power their Paypoint service, with pure digital account opening kiosks. Startups such as Chillr –  a mobile wallet provider has also offered solution to banks using selfies.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

Regtech thrives on change: welcoming Trump, Brexit and China

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Heraclitus, a Greek philosopher of the 5th century BC, is quoted as saying

“Change is the only constant in life.”

His doctrine was around change being central in the universe. This has also been translated to “the only constant is change.” And this exactly why Regtech, the cross-sector Fintech category, thrives and will continue to do so.

Whether one regulatory body is becoming lighter or stricter, change is what Regtech needs to be able to serve. A modular Fintech design of Regtech services, is key in both of these cases. For example, if the US changes its strict and complex multi-layer regulatory structure as a result of the Trump administration, the Regtech sector will not be affected; neither the size of the sector, nor its significance in the multi-carriage train of financial innovation. The train has left the station and there is no turning back. In every compartment, there is a place (albeit a moving target) for Regtech and this will not change.

Regtech companies will continue to serve the huge market need of integrating legacy systems of the incumbents and at the same time offering these services in a dynamic (quick and cheap time to market) way as regulations change. Regtech will always have new clients and areas to serve, as a result of regulatory changes. The recent announcement of the Office of the Comptroller of the Currency (OCC) in the US to offer an opening to the US federal banking system to Fintechs; is an example, of how new clientele will be flocking to Regtechs can serve the new business needs of Charter Fintech Banks.

“A top regulator said Friday that his agency would for the first time start granting banking licenses to “fintech” firms, giving them greater freedom to operate across the country without seeking state-by-state permission or joining with brick-and-mortar banks.” By  WSJ Regulator Will Start Issuing Bank Charters for Fintech Firms.

The US Regtech Fintechs have been different than the European in two main ways. First, the number of European fintechs is much larger basically because of there are more regulations (e.g. MIFID, EMIR, MAR, CRDIV, PSD2, REMIT etc) that apply to all EU countries and second because in Europe bootstrapping and growing businesses without strong VC support, is more common than in the US. On the other hand, in the US the complexity of regulations is mainly due to cross-state differences and incumbents have tried to find other ways to circumvent these frictions; plus, entrepreneurs prefer naturally to pick naturally businesses that have a higher probability of being funded by VCs. Regtech overall hasn’t been the favorite baby of VCs.

The US Regtech sector will not be hurt, in case of lighter regulations by the new US administration, simply because any type of change will create new opportunities and clientele. Regtech Fintechs have an advantage compared to the Regtech offerings by incumbents (and there are many) like Thomson Reuters, Bloomberg, IBM, Oracle etc. only because they can adapt faster. Whether they will able to execute on this advantage is yet to be seen. We will be monitoring how the acquisition of Promontory by IBM plays out, what market share Accenture and Bloomberg gain as they all have no procurement issues, which is an important friction for Fintechs. FundApps, the UK based Regtech focused on serving the investment management sector, just announced that they will be opening a NY office in the Flatiron district. This is the first international Regtech move from Europe over to the US. Regtech is less local than it looks at first site. I foresee, more moves from Europe towards the US in 2017, rather than in the other direction.

“The only constant is change, in regional and cross-border Regulations”.

The increased fragmentation and complexity, resulting from Brexit, will also open up more opportunities for Regtech services. The pain points are simply changing.

Similarly, in Switzerland and the East, we are seeing new regulations that will also need to be served. All these changes, are great opportunities for Regtech companies to show incumbents especially, that Regtech should be seen as an enabler rather than an expenditure.

Regulations lighter or stricter, new regulations, more or less complex, fragmenting or integrating; are great market opportunities for Regtech Fintechs and for incumbents with Regtech services. The biggest threat to Regtech Fintechs is rather the incumbent Regtech offerings.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.