Joining the FinXTech.com Advisory Team


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Greetings from the United Kingdom. I’m part of the FinXTech Advisory Group and will be writing brief updates here from time to time. You may not know me and so you can find out what I get up to over here and on my blog. In case you don’t want to do that, one of the advisors to President Obama called me “the most authoritative voice” in fintech anywhere, which is why I guess the guys at FinXTech asked me to come on board.

Conversely, why have I joined the FinXTech Advisory Board?Mainly because its membership is comprised of many of the fintech leaders that I respect in the United States from the largest financial institutions, leading investment firms, technology companies, service providers and government entities. FinXTech is not just another media company—it’s a platform for connection via the FinXTech.com website, conferences for networking and interactive brainstorming sessions for real world application.

FinXTech’s mission is simple: to connect those who are truly shaping the future of financial services. The fintech ecosystem consists of five distinct groups:

  • The leaders of fintech companies who are producing, researching and creating new technological solutions.
  • Financial institutions that are embracing, adopting and/or seeking to implement cutting edge advancements.
  • Service providers, consultants, advisors and lawyers who are guiding the regulatory, compliance and implementation processes.
  • The investor and venture capital communities that determine who and what might be the next best thing for financial services.
  • And the government voices, be it from the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau or even the White House.

By establishing a group of advisors, FinXTech is able to set the course and agendas for their platform, based on the thoughts and feedback from some of the best and brightest in the industry—and me. So naturally, I joined, too—to be on the inside cutting edge, in addition to adding to it.

You probably already know a lot about fintech, although you may not know who is leading it. Is it Silicon Valley? Is it Wall Street? Is it London? Or maybe Singapore? In fact, financial technology is everywhere. During my travels—and I travel so much that when people ask me where I live, I usually say the British Airways executive lounge—I see every country with a financial focus creating a fintech focus. Oslo, Berlin, Zurich, Amsterdam, Tel Aviv, Dubai, Bangkok, Sydney, Shanghai, Hong Kong, Mexico City, S??o Paulo—fintech is happening in all of these places.

Why are so many billions of dollars being poured into these new technologies for finance?

The answer is that we are revolutionizing financial services through the Internet. For the past 50 years, bank technology has mostly been deployed for internal efficiencies and usage. Today, technology is creating external efficiencies, particularly through peer-to-peer networking. Apps, APIs, analytics, artificial intelligence, big data, blockchain, cloud, distributed ledgers, machine learning and the Internet of Things are changing everything. Everything is now networked and open sourced through marketplaces and connected platforms. This technological revolution has been bubbling for years, starting with the Amazons and Alibabas of the world, moving along to the Facebooks and Baidus, Tencents and Googles. Now we have the Ubers and Airbnbs, and everyone wants to know who will be the next PayPal or AliPay.

This is why fintech is so exciting, as we have major new players like Stripe and Square appearing almost overnight and gaining multi-billion valuations. There is no doubt that we’ve got it going on, and in my next few pieces here I’ll outline the key trends, players and developments.

For now, I wish you a big hearty British welcome to FinXTech. Glad you could make it and it’s good to be here.

Fraud: An Uneven Playing Field for Banks and Fintech Companies


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The role of banks and other financial institutions (FIs) as repositories for large amounts of money has made them prime targets for fraudulent activity over the years. As a result of this, a wide range of laws and regulations have been created governing the activities of FIs with the objective of helping to protect consumers from fraud—whether it’s from the inside or outside. In recent years the question of fraud involving banks and other FIs has arisen again in a new context. Innovations in financial technology have raised questions as to whether banks or the fintech firms developing and operating such technology are responsible when its use exposes banks and their consumers to fraud.

Fintech has changed the way financial firms do business in a variety of areas including investment management, loan sourcing and data aggregation. Along with the ability to more proactively manage customer financial affairs and data through the use of technology has come an increased threat of cyberattacks. These types of attacks give malicious outsiders access to sensitive consumer data. A recent example involved two fintech lenders that were defrauded by a man who misrepresented his financial situation to cheat them out of more than $100,000 in total. He was convicted in Tennessee on six counts of fraud stemming from his actions.

The newness of the fintech revolution means that current laws and regulations, for the most part, do not clearly specify who is responsible for fraudulent activity that occurs in conjunction with processes involving both banks and fintech firms. This is likely to change over time as the courts more clearly apportion responsibility between banks and fintech firms in specific instances of fraud. However, when it comes to the regulatory treatment of the two types of institutions, the situation is much clearer; banks face stringent anti-fraud regulatory requirements governing their activities, whether using traditional banking methods or innovative financial technology, while fintech firms are not subject to the same requirements.

This disparity has not gone unnoticed, with leading financial institutions commenting on the danger posed to them by potentially risky fintech practices such as scraping bank websites to collect consumer financial data. At the same time, industry participants and regulators around the world have noted that they are aware of the regulatory discrepancy and that actions may need to be taken to help level the playing field.

Peter Misek, a partner at the Business Development Bank of Canada’s Venture IT Fund, recently opined that Canada’s emergence as a top five global fintech hub poses major risks due to an inadequate legal framework for dealing with fintech-related issues such as identity theft and fraud. He states that, in this regard, “Canada’s structures, rules and laws are antiquated and, in many cases, actually harmful.” Misek would like to see “innovative solutions to this problem” from tech companies, and wrote that his fund is willing “to put real dollars behind the effort.”

Addressing similar issues, the director and general counsel of Malaysia’s Securities Commission (SC), Foo Lei Mei, warned that digitalization in the financial services industry brings with it increased risk of fraud. In an article in Digital News Asia, Mei said that the SC planned to issue regulatory guidance regarding engaging with industry firms about the issue. “Discussions and focused group meetings have provided invaluable feedback to the SC in designing the regulatory framework for P2P lending in the capital market,” she was quoted as saying.

In the United States, the Federal Reserve Board has weighed in on the risks facing banks when outsourcing risk, such as using third party firms to provide data aggregation or digital wealth advisory services. The Fed’s letter on the matter includes commentary on various issues associated with working with fintech companies. In an article by Robert Canova, senior S&R financial/policy analyst at the Federal Reserve Bank of Atlanta, Canova states that, with the increase in data breaches, website attacks and wire transfer fraud schemes, “Banks will need to become more sensitive to safeguarding any systems containing customer data that their digital vendors have access to, given the fact that hackers are getting increasingly sophisticated at breaking those systems down.”

Canova writes that as competition between fintech firms and banks increases, the former are likely to become subject to increased scrutiny. He cites a consultative paper by the Bank for International Settlement’s Committee on Payments and Market Infrastructures which calls for greater regulation of fintech companies as evidence of this, along with a whitepaper by the Clearing House (a trade association consisting of the 24 largest banks) that discusses “the absence of a level regulatory playing field.”

With fintech innovations becoming increasingly embedded in the fabric of banking operations, the potential for fraudulent use of banking infrastructure involving such technology grows accordingly. With banks and other FIs currently subject to strict anti-fraud regulations, they are unlikely to outpace less regulated fintech companies when it comes to technological innovation in the sector. As banks and fintechs become increasingly intertwined due to mergers, partnerships or head-to-head competition, it becomes more and more likely that regulators will take steps to address this dichotomy going forward.

Banks and Fintechs Adjust Strategies as Sector Matures


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After a period of rapid growth, the fintech sector has reached, if not full maturity, at least the end of its adolescence. With customer acquisition growth rates slowing among digital wealth management services, otherwise known as robo-advisors, a number of industry participants have adjusted their strategies in response. One development reflecting this process is the increasing tendency among large banks and other financial institutions (FIs) to enter the sector by purchasing some of the earliest and most successful innovators in the field.

This marks a change from the approach more commonly seen early in the fintech revolution, when large FIs were more likely to take positions as minority shareholders in promising fintechs than to buy them out. Fintech buyouts hit an all-time high in 2015 as banks rushed to stake their claim in this disruptive market, with KPMG and CB Insights showing fintech investments growing from $3 billion in 2011 to $19 billion in 2015. A CNBC.com report on the sector sees no signs of this trend abating in 2016, with big banks expected to continue to favor outright purchases of technology innovators in the sector over investing in startups.

Other banks and FIs have chosen to pursue different strategies, either forming partnerships with leading fintech firms or, in the case of some of the largest FIs such as Fidelity and Schwab, electing to build their own digital wealth management platforms. Fintech firms, in the meantime, continue to rely on product innovation to attempt to set themselves apart from their competitors. As sector growth moderates and truly disruptive innovations become more difficult (and expensive) to develop, these startups must make difficult decisions about whether to attempt to go it alone or to merge or partner with existing financial industry players.

Outside of a few companies willing to devote the tremendous resources necessary to build their own platforms, the majority of FIs entering the fintech space have done so via purchases or partnerships. While partnerships can be a viable method for entering the sector, some banks and other FIs prefer to own the technology their customers use to access their financial information. For these firms, purchasing an existing fintech company offers the advantage of speeding time to market and gaining the expertise of the tech-savvy founders or operators of the acquisition, in addition to controlling the use and development of the acquired technology.

In an interview for this article, Charlie Haims, vice president of marketing at cloud-based portfolio management service MyVest, expanded on this idea: “The larger FIs historically choose to build a new innovation in-house to tightly integrate it with the rest of the company. But now we are seeing an increase in acquisitions, like BBVA with Holvi, Groupe BPCE with Fidor, Silicon Valley Bank with Standard Treasury and many in wealth management like BlackRock with FutureAdvisor, Invesco with JemStep, and Northwestern Mutual with LearnVest.” Haims attributes this trend to sizable VC investment in fintech startups a few years back, leading to the recent buyouts of VC-backed startups whose success in the field attracted suitors.

While owning your own fintech platform may seem attractive to banks and other FIs looking to enter the space, the truth is that the cost of this approach, whether via purchasing an existing startup or building your own platform, is by no means trivial. A price tag upwards of $100 million to build a comprehensive digital wealth management platform is not unknown. For many banks interested in entering the field, finding a technology partner is perhaps a more practical way of gaining access to the industry. Haims agrees: “For smaller FIs, the best approach is often partnering with leading service providers or startups to quickly adopt the best-of-breed for a given fintech innovation, and this still seems to be the case today.”

MyVest offers its enterprise wealth management software platform to FIs such as banks, broker-dealers, RIAs and service providers. Haims cites banks as being particularly well-suited to use the company’s service to “help them bridge silos across their trust, brokerage and RIA divisions, so they can run a smoother operation and provide a holistic customer experience on a single, unified platform.” The company also has channel partnerships with Genpact Open Wealth and Thomson Reuters Wealth Management “to offer a combination of wealth management technology and services to FIs.”

In addition to digital wealth management, banks have formed partnerships across a variety of other fintech platforms, including startups in the crowdfunding and direct-to-consumer loan sectors. In the former category, BNP Paribas has inked a partnership deal with SmartAngels, which provides a platform for investing in crowdfunding deals; in the latter category is JPMorgan Chase’s partnership with On Deck Capital, which provides online small business loans.

As the industry matures, the competition among fintech sector participants has become increasingly fierce. In the digital wealth management field, independent robo-advisors now face the challenge of competing with large FIs such as Vanguard and Schwab, which have attracted the bulk of new robo-advisor assets since entering the space.

One prominent robo-advisor, Personal Capital, has engaged a private equity firm to help it consider its financial options, leading some to speculate that the firm is seeking a buyer. Other digital wealth management platforms, such as Wealthfront and Betterment, have stressed their dedication to innovation as a major factor in helping them stay competitive. Industry expert Craig Iskowitz has outlined the challenges facing such firms as their growth slows in an article on his Wealth Management Today blog. In the article he suggests that, rather than going head-to-head with industry behemoths for assets, a hybrid model of “selling to consumers as well as advisors, along with the B2B model, will soon be seen as the best way to succeed in this market.”

Among digital wealth management advisory services continuing to pursue the direct-to-consumer model, Iskowitz cites the Acorns robo-advisor platform as notable for experiencing robust growth by pursuing a millennial-friendly strategy. The company’s mobile app allows users to link their bank or credit card accounts to the firm’s platform and automatically invest the spare change gained from rounding up transactions to the nearest dollar in an electronically traded fund, or ETF, which is a diversified portfolio of securities that can be valued and traded at any time during the trading day instead of after market close like a mutual fund.

Cutting Compliance Costs with Regtech


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I was having a discussion about the future of banking with some fellow investors recently and one of my younger and more tech savvy associates opined that fintech companies would soon make traditional branch banking obsolete. It is a provocative idea but I am pretty sure he is wrong. Two decades from now it will still be fairly easy to find a bank branch a short drive away even if it is in a driverless car. Bankers will adapt and banking will become more mobile and more digital, but there will always be a place for banks and their branches in the economy.

Bankers are not sitting in their offices waiting to be replaced. They are finding ways to use new technology advancements to make their business faster, more efficient-and most importantly, less expensive. This is particularly true in one of the highest cost centers in the bank-regulatory compliance-where the automation of that detail intensive process is providing huge cost benefits. Compliance costs have been spiraling upward since the financial crisis led to an avalanche of new regulations, and technology might be the industry’s best hope of bringing those costs back down.

Bankers are starting to see the advantages of big data and analytics-based solutions when they are applied to the compliance challenge. “Although still in the early stages, banks are applying big data and advanced analytics across customer-facing channels, up and down the supply chain, and in risk and compliance functions,” said Bank of the West Chairman Michael Shepherd in a recent interview with the Reuters news service. For example, a growing number of banks are using new technology to automate the enormous data collection and management processes needed to file the proper compliance reports, particularly in areas like the Bank Secrecy Act. This new technology can help regional and community banks address data gathering and reporting challenges for regulatory compliance.

Smaller banks in particular are looking to partner with companies that can help build a data driven approach to compliance management. More than 80 percent of community banks have reported that compliance costs have risen by at least 5 percent as a result of the passage of the Dodd-Frank Act and the expense is causing many of the smallest institutions to seek merger partners. In fact, two of the biggest drivers of my investment process in the community bank stock sector is to identify banks where compliance costs are too high, and where there is a need to spend an enormous amount of money to bring their technology up to date. Odds are that those banks will be looking for a merger partner sooner rather than later.

While banks are looking to make the compliance process quicker, easier and cheaper, they also need to be aware that the regulators are developing a higher level of interest in the industry’s data collection and management systems as well. A recent report from consulting firm Deloitte noted that “[In] recent years regulatory reporting problems across the banking industry have more broadly called into question the credibility of data used for capital distributions and other key decisions. The [Federal Reserve Board] in particular is requesting specific details on the data quality controls and reconciliation processes that firms are using to determine the accuracy of their regulatory reports and capital plan submissions.”

The Consumer Financial Protection Bureau is also monitoring the compliance management process very closely. An assistant director there was quoted recently as saying that the bureau is increasingly focusing its supervisory work on the third-party compliance systems that both banks and nonbanks sometimes rely on. This is the behind-the-scenes technology that drives and supports the compliance process.

There is a developing opportunity for fintech companies to focus their efforts on providing regtech solutions to regional and community banks. The cost of compliance is excessive for many of these institutions and, for some, place their very survival into question. Regtech firms that develop compliance systems that are faster, more efficient and can help cut compliance costs significantly in a manner acceptable to the regulatory agencies will find a large and fast growing market for their services.

Embracing Disruption: Why Banks and Fintechs Should Work Together in a Regulated Environment


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At first glance, financial technology companies and banks are competitors with similar products but different business models. Fintech companies need fast growth to survive. They must exercise quick marketing strategies and adaptive technologies. And they excel at reaching customers in new ways and providing more personalized customer service. Banks, on the other hand, rely on well-established customer networks, deep pockets and industry experience for their success. However, if they want to preserve their customer base and continue to grow, banks will have to adapt to what’s happening in the financial technology space.

Fintech companies and banks both face many unique challenges. Fintech companies must often decide how to allocate limited resources between marketing, intellectual property, compliance and cybersecurity concerns. Banks depend on legacy technology, lack market speed and must continue to keep pace with new banking regulations and technologies. Although both fintech companies and banks face significant legal barriers, they have different needs and strengths. Fintech companies need the deep regulatory experience that banks have developed over many decades. Banks need flexibility to adapt new technologies to changes in the compliance landscape. These differing but not incompatible needs present an opportune cross point for partnership.

The following laws and regulations exemplify a small portion of the regulatory challenges and business relationship opportunities for fintech companies and banks. Please be aware that all financial products—especially new financial technology products with uncharted regulatory profiles–may implicate many other laws not discussed below.

  • Money transmission laws: In order for a fintech company to transfer money between two individuals, it must be licensed under federal and state money transmission laws. State money transmitter laws vary greatly and this creates a considerable barrier to entering the market on a national scale. Banks are generally exempt from state money transmitter laws. Fintech companies can meet money transmitter compliance requirements by strategically structuring the flow of money with banks. Alternatively, fintech companies can act as an authorized agent of a licensed money transmitter service provider.
  • Lending and brokerage laws: State law may require a lender, buyer, servicer or loan broker to be licensed to engage in its respective activity. A fintech company may face severe consequences for unlicensed lending or brokerage practices. Banks in many cases are able to engage in these types of activities. Fintech companies and banks can structure a business relationship to ensure that appropriate legal precautions are in place. Even if a fintech company is licensed, it does not have the ability to use and apply the interest rates of its home state, a power that is afforded to national banks. Fintech companies may be stuck with interest rate limitations set by the state where the borrower lives. Thus, a strategically structured relationship between a bank and fintech company may provide other non-compliance advantages for lending and brokerage products.
  • UDAP/UDAAP laws: Unfair, deceptive or abusive acts or practices affecting commerce are prohibited by law. Both fintech companies and banks face exposure to penalties for engaging in unfair, deceptive or abusive acts. Taking advantage of fintech companies’ adaptive technologies may help banks minimize the risk of committing the prohibited practices. For example, fintech companies may help banks design software that utilizes pop up warnings on a customer’s phones before the customer makes an overdraft.
  • Financial data law: Financial data is a growing industry that has seen increasing regulatory oversight. Both fintech companies and banks collect enormous amounts of data and may use it for various legal purposes. Data is the core part of the fintech business; fintech companies collect data and rely on data. However, fintech startups do not have the legal and technical resources of traditional banks to resolve a variety of regulatory and cybersecurity concerns related to the use of data. Fintech companies can partner with banks, particularly with respect to cybersecurity issues. A bank offering products through or with a third party is responsible for assessing the cybersecurity risk related to that third party and mitigating it, and thus parties should consider some important questions upfront, including where the data is located, who owns it and how it is protected.

Despite the many issues and concerns that may arise from the partnership between fintech companies and banks, cooperation colors the future. Fintech companies can take advantage of the industry knowledge that bankers possess, certain regulatory advantages that banks enjoy and the industry’s cybersecurity infrastructure. Banks can take advantage of fintech companies’ ability to create new products, certain regulatory advantages and adaptability to regulations. With an understanding of the legal and regulatory framework of fintech companies and banks, their different business models can be used as an opportunity rather than a barrier to business.

Build vs. Buy: How to Crack the Digital Wealth Management Sector


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The wealth management industry has been a significant source of fees for many banks in recent years. As innovation in the sector has resulted in the development of a plethora of digital asset management solutions, including so-called robo-advisors and data aggregation applications, a number of banks and other financial institutions (FIs) have taken steps to participate in this emerging market via partnerships or acquisitions. Recent activity in the sector includes Ally Financial entering the space by buying TradeKing, Northwestern Mutual buying LearnVest and BBVA partnering with FutureAdvisor. Leading robo-advisor firms Betterment and iQuantifi have also taken part in the trend by inking partnership agreements with banks.

Some large FIs have taken a different approach to entering the market, choosing to build their own fintech applications instead of buying or partnering. Firms taking this tack include Schwab, Fidelity and Vanguard, all of which have created their own robo-advisor offerings.

An upsurge in M&A activity can be a sign of a maturing industry, and this appears to be the case in the fintech space; after several years of breakneck growth, the market for digital advisory services seems to be stabilizing. Lending support to the idea that the pace of expansion is declining, at least among business-to-consumer digital wealth management services, is this blog post from industry expert Michael Kitces, who reports that robo-advisor growth rates have dropped precipitously this year to approximately one-third of year earlier rates.

In an interview for this article, Kitces, publisher of the Nerd’s Eye View and co-founder of the XY Planning Network, advised that FIs looking to purchase or partner with a company in the fintech sector focus on aligning any such effort with their core strategy. He suggests they identify the core business model used by the partner or acquisition target and ask how the technology powering that model feeds into the FI’s business strategy: “Is it lead generation? Is it customer retention? Is it expanding wallet share? And will the technology realistically be adopted, by the right customers or prospects, to serve that goal?”

One obstacle banks looking to buy their way into the digital wealth management sector may face is that M&A activity in the industry has lessened the pool of potential acquisitions. Tomas Pueyo, vice president for growth at fintech firm SigFig.com, points out that while buying can allow FIs to accelerate their time to market in comparison with building technology of their own, so many digital wealth management companies have been acquired that those left are mainly newer entrants to the space. While some large FIs have built their own fintech systems, the vast majority don’t, he says, “because they are much less productive than startups at creating new technology and don’t have as strong a culture of user experience.”

Mike Kane, co-founder and master sensei (a Japanese martial arts term that means teacher or instructor) at digital wealth management firm Hedgeable, expressed similar sentiment in regards to the difficulty banks face when competing with startups from a technology standpoint. Along these lines, Kane outlined some of Hedgeable’s latest feature introductions, including “core-satellite investing, bitcoin investing, venture investing, a customer rewards platform, account aggregation, and increased artificial intelligence with many more things in the pipeline.”

The difficulty of competing with nimble startups and the paucity of attractive acquisition targets leaves partnering as the preferred option for banks interested in entering the market, according to both Pueyo and Kane. “The great thing about partnering is that it dramatically reduces cost and time to market,” says Pueyo. “It’s a way to pool R&D for banks with very little cost and risk.” Kane also sees branding benefits accruing to banks which work with innovative technology firms in the sector: “Young people trust tech firms over banks, so it is in the best interest of old firms to partner with young tech firms for product in all parts of fintech,” he said.

SigFig has partnered with a variety of companies throughout its existence, beginning with AOL, Yahoo, and CNN for their portfolio trackers, and more recently with FIs including UBS, the largest private wealth management company in the world. Hedgeable also has made use of the partnership model in building its business. Kane reported that over 50 firms, including both U.S. and international FIs, have signed up for access to the firm’s free API. Hedgeable offers its partners revenue sharing opportunities to go along with the benefit of saving money they would otherwise spend developing their own platform.

Amresh Jain of Strategic Mergers Group, who advises clients looking to do deals in the sector, sees digital wealth management solutions only gaining in importance as new technologies make it easier and more efficient to process and allocate investment portfolios: “The first phase of digital wealth management was focused on the ability of robo-advisors to automate the investment process. The next phase, in my opinion, will see human advisors increasingly integrating their efforts with digital wealth management solutions to provide an enhanced client experience.”

How Government Disruption Impacts Fintech Innovation


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It is a given that markets are constantly being disrupted by innovation. I would argue that the financial services marketplace is also being disrupted by legislation and regulation. Let’s face it, the payments sector is hot right now. Issues that were once solely the province of industry publications are now widely covered by mainstream media. This fact is not lost on the legislative and regulatory community.

Last year we saw the creation of the Congressional Payments Technology Caucus, a bipartisan group of lawmakers designed to keep the U.S. Congress informed of the rapid changes in the financial services industry. Over the last year, the caucus has held briefings on issues ranging from EMV Migration to mobile payments. This year, the House Financial Services Committee and Senate Banking Committee have held numerous hearings on payments-related matters as well.

One of the more contentious topics addressed is Operation Chokepoint, a controversial campaign spearheaded by the Department of Justice in conjunction with several federal consumer protection and banking regulatory agencies (including the Federal Trade Commission and the Federal Deposit Insurance Corp.) to hold acquirer financial institutions and their payment processor partners responsible for allegedly illegal acts committed by merchants and other third-party payees.

This perhaps well intentioned program has moved beyond illegal acts to targeting legal activities that are perceived by some prosecutors and regulators as undesirable, which in turn has led to the denial of banking services to businesses that operate lawfully. Legislative attempts to rein in this initiative, led by Rep. Blaine Luetkemeyer, R-MO, have passed the House but face a future that is likely dependent on the outcome of the November elections.

Given this election season and the relatively limited number of working days remaining on the congressional calendar, it is unlikely that any significant financial services or fintech legislation will pass this year. Still, there is considerable opportunity for additional market disruption by federal regulators, particularly the Consumer Federal Protection Bureau (CFPB).

Those involved in the prepaid space await the CFPB’s long delayed final rule on prepaid products that have the potential to adversely impact long established business models-thereby driving some companies out of business.

Despite its popularity and the fact that consumers must opt-in to the program, overdraft services are viewed with skepticism, if not antipathy by the CFPB. The CFPB’s goal is to issue proposed rules on this in the near future. These rules have the potential to drive up cost and reduce access to consumers who have found these services to be beneficial.

Unlike other federal agencies, the CFPB will not be affected by the November elections. Created as part of the Dodd-Frank Act, the bureau was structured as an independent entity funded by the Federal Reserve, which insulates it from the effects of a change in the administration. The term of its current director, Richard Cordray, does not expire until 2018. And though this is currently being challenged in court, the director can only be fired for cause or malfeasance.

It is difficult if not impossible for legislation or regulation to keep up with technology advances and the dramatic changes they are creating in the payments marketplace. Such efforts should be flexible enough to accommodate these changes and not create their own disruption.

New Index Tracks Fintech Stock Performance


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Nasdaq and investment bank Keefe, Bruyette & Woods recently announced the formation of the KBW Nasdaq Financial Technology Index to track fintech companies. KBW describes it as an equal weighted index designed to track the stock performance of U.S. companies that leverage technology to deliver financial products and services, and earn most of their income from fee-based sources instead of interest payments. This is an index, not an exchange traded fund (EFT), so for now it is useful only for tacking the performance of fintech stocks, and investors cannot yet buy the index as an ETF. I won’t be shocked if that changes before too much time passes. For now, the index can be tracked under the symbol KFTX.

I find the development of the index significant for two reasons. First, fintech is one of the more investable concepts that I have run across in the past few years. In 1972, Thomas Phelps wrote a book titled “100 to 1 in the Stock Market” in which he talked about the powerful returns that can be earned by identifying companies that would benefit from a changing world and hanging onto them for a very long time. One of my favorite intellectual exercises is to sit and think of those industries that offer the potential for decades-long periods of growth that could deliver 100-to-1 returns. Fintech is pretty high on the list.

While my primary focus as an investor is and always will be on community bank stocks, I find with increasing frequency that while in the process of researching banks and talking to bankers I run across companies that focus on product areas like cybersecurity, payment processing, loan underwriting algorithms and other technology areas that help bankers make more money with greater efficiently as well as increase their safety and security factors. A few of them have made their way into my portfolio and a bunch more have made it onto my watch list in hopes that I can buy them at more favorable valuations at some point in the future.

When the new index was announced, Fred Cannon, KBW’s global director of research, highlighted something about the fintech sector that’s not widely understood. “Some people see fintech as disrupters who are going to kill the big bad banks, but we feel it’s not quite that,” he said. “We feel that there are some big companies that are already providing financial services [companies with] technology.” There is a perception of many fintech entrepreneurs as Steve Jobs-type garage cowboys who are running around disrupting the banking industry. The real story is that many of the leading edge fintech products are being developed or sold by old line companies like First Data, Fiserv, Alliance Data Systems, VeriFone Systems and Fair Isaac. All of these are included in the KFTX.

There are some new cutting edge fintech companies in the index as well, including Green Dot, Global Payments and Square. Most of the newer companies in the index appear to be those involved in payments, and they deal directly with un-banked or under-banked consumers. They are not really a threat to traditional banks.

Those fintech companies that sell directly to banks tend to be older, more established players. There a key lesson here for younger fintech companies hoping to sell technology services directly to banks. Most banks are not going to be willing to take on the early adopter risk of doing business with new and untested technology companies no matter how exciting their products might be. Younger fintech firms are going to need to partner with older, more established companies that have been doing business for decades and have a large installed user base. The makeup of the new index acknowledges the reality that very few bankers will be willing to take on the reputation and career risk needed to deal with start up vendors.

How Financial Institutions Can Meet the Marketplace Lending Challenge


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What makes a bank a bank? When it comes to the commercial lending space, in a world of seemingly commoditized products and services, the true differentiation is defined by how a bank decides who they will lend to and who they won’t. It’s each individual bank’s unique credit policy that, however subtly, makes one bank different from another. All banks use many of the same metrics and scoring data to determine credit quality, and there is generally no secret sauce that one bank has and the rest don’t. Instead, it is often the nuances within those metrics and the interpretation and prioritization of the data that makes one bank different from another—and potentially, enables a business owner to get capital from one bank and not from the other.

Banks have spent a long time fine tuning their credit policies to match their risk appetite and even the history and culture of the bank. Their risk profile is integral to who they are. It is integrated into their brand, their mission statements and their core values. The bank’s credit policy is exclusive to that bank and helps define it as a lender.

Enter the fintech revolution, which has spawned a long list of marketplace lenders that have disrupted the business lending universe by essentially disregarding credit policies that took banks and credit unions decades to develop. Marketplace lenders like Lending Club, OnDeck and Kabbage are telling the business borrowing universe that they have a better solution than financial institutions when it comes to measuring a borrower’s credit worthiness.

Banks and credit unions are being driven to offer an online business lending solution by the need to improve the customer experience, increase customer acquisition and raise their profitability, while at the same time decreasing costs, streamlining workflow and reducing end-to-end time. As marketplace lenders aggressively court the business borrower, financial institutions need to do something in the online space just to remain competitive!

To replicate the technology that the disruptors have created would cost banks millions of dollars and years of development time and energy. The great news is, with innovation and evolution there is always the exploitation of every niche and iteration of a solution or model resulting in alternative means to attain the same outcomes.

There is a technological revolution within the fintech phenomenon that is being created by businesses that have the vision and mission to work with banks—not against them. Companies are hitting the marketplace with technology-only solutions that help banks help their business customers succeed. These “disruptors of the disruptors” are essentially selling financial institutions the technology needed to deliver loans easier, faster and more profitably, without forcing them to give up their credit policies, risk profile, relationships or control over the customer experience.

Banks and credit unions need to find these partners, and find them quickly, because they represent a way for those institutions to accelerate their entry into the online business lending space. Choose a partner that best meets your needs. Are you looking for an online application only, or an application and decisioning technology? Or, are you looking for an end-to-end solution that provides an omni-channel experience from application, through underwriting, docs and due diligence and even closing and funding? The type of partner you select depends on what’s driving your financial institution, whether that be increasing profitability, new customer acquisition, streamlining workflow, reducing end to end time or simply creating an enhanced customer experience for the businesses you serve. Explore all your options!

How Mobile’s Popularity is Disrupting the Regulators


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The world is going mobile and dragging banking along with it kicking and screaming. I am something of an anachronism as I still go into the branch once in a while and still worry about using my phone to deposit a check. My adult children, on the other hand, use their phone for everything, including all of their banking. They bounce from store to store paying for everything from Starbucks to bar tabs using their phones without a second thought. Banks that want to capture and hold their business will have to be very good at mobile banking and mobile payments.

One of the biggest hurdles bankers face is that as unprepared as they were, the regulators were equally unprepared and are now playing catch up with regards to mobile payments. The regulatory picture today is fairly muddled with a mishmash of state and federal agencies offering guidance and opinions to mobile payment providers and consumers. There are gaps in the current laws where no regulations apply to parts of the process—and other situations where two or more rules apply to the same part of the process. As mobile banking and payments continue to grow, the regulators will be looking to create a more coherent regulatory structure and coordinate their inter-agency efforts to protect consumers at every stage of the process.

At a forum held by the Office of the Comptroller of the Currency in late June, Jo Ann Barefoot, a senior fellow at Harvard University, outlined the current regulatory situation. She told the packed room at the meeting that “Agencies are going to have to develop ways to work together, to be faster, to be flexible, to be collaborative with the industry. The disruption of the financial industry is going to disrupt the regulators, too. This is the most pervasively regulated industry to face tech-driven disruption. The regulators are going to be forced to change because of it.”

In a white paper released at the forum, “Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective,” the OCC noted that “Supervision of the financial services industry involves regulatory authorities at the state, federal, and international levels. Exchanging ideas and discussing innovation with other regulators are important to promote a common understanding and consistent application of laws, regulations, and guidance. Such collaborative supervision can support responsible innovation in the financial services industry.”

While the OCC has noted the massive potential benefits that mobile payments and other fintech innovations can offer to consumers, particularly those who were unbanked prior to the widespread development of mobile banking and payment programs, Comptroller Thomas Curry has cautioned against what he called “unnecessary risk for dubious benefit,” and called for responsible innovation that does not increase risks for customers or the banking system itself. Mobile payments programs that target the unbanked are particularly ripe for abuse and unnecessary risk.

The Consumer Financial Protection Bureau is also heavily involved in overseeing and regulating the mobile payments industry. The bureau noted that 87 to 90 percent of the adult population in the United States has a mobile phone and approximately 62 to 64 percent of consumers own smartphones. In 2014, 52 percent of consumers with a mobile phone used it to conduct banking or payment services. The number of users is continuing to grow at a rapid rate and the CFPB is concerned about the security of user data as well as the growing potential for discrimination and fraud.

CFPB Director Richard Cordray addressed these concerns recently when announcing fines and regulatory action against mobile payment provider Dwolla. “Consumers entrust digital payment companies with significant amounts of sensitive personal information,” Cordray said. “With data breaches becoming commonplace and more consumers using these online payment systems, the risk to consumers is growing. It is crucial that companies put systems in place to protect this information and accurately inform consumers about their data security practices.”

The regulators, like the banks themselves, are latecomers to the mobile payments game. I fully expect them to catch up very quickly. The biggest challenge is going to be coordinating the various agencies that oversee elements of the regulatory process, and it looks as though the OCC is auditioning for that role following the June forum on mobile payments. Cyber security systems to keep customers data and personal information safe and secure is going to be a major focus of the regulatory process in the early stages of the coordinated regulatory efforts.

I also expect the CFPB to focus heavily on those mobile payment providers that were formerly unbanked. These tend to be lower income, less financially aware consumers that are more susceptible to fraud and abuse than those already in the banking system, and the bureau will aggressively monitor the marketing and sales practices of mobile payment providers marketing to these individuals.

The regulatory agencies are starting to catch up with the new world of banking and the mobile payment process will be more tightly controlled going forward.