Welcome to The FR, where we never close up shop
In this edition:
Fintech feels the shutdown pain
A backlash against robos
Wyoming’s blockchain revolution
Tech challenges ahead for banks
Bank compliance departments and CAATSA
Fintech feels the shutdown pain.
The promise of fintech is to be nimble, flexible and agile, transforming a traditional, highly regulated industry. However, the federal government shutdown is putting the equivalent of shackles around fintech’s ankles. And while the shutdown may have been temporarily halted on Friday -- though it could resume again in a couple of weeks if a permanent deal isn’t reached -- it has already hindered fintech innovation, according to Chris Brummer, a professor at Georgetown Law. In an analysis earlier this month in Roll Coll, he says the shutdown’s influence on fintech is “more expansive than expected.”
It’s an ironic twist: Federal agencies often seen as a drag on digital innovation are now recognized as essential to it. Policy development for the industry had been on hold, for example, because the SEC staff is furloughed. Start-up tech firms in blockchain and cryptocurrency were not able to file to make securities offerings. Online lenders couldn’t get SEC permission to repackage loans and sell them to investors in the public market. Surveillance and enforcement have slowed to a crawl.
Some banking areas, such as the FDIC and Federal Reserve, had been functioning normally, while state agencies are also unaffected. Still, fintech executives and entrepreneurs are surely gnashing their teeth in frustration. For an industry betting on an ongoing boom, this prolonged pause comes at an inopportune time. The entire U.S. fintech industry’s reputation is on the line, warns Brummer. “It’s worth wondering just how much damage the dysfunction is ultimately wrecking the reputation of the U.S. as an attractive place to launch and do fintech business,” he says.
Fintech firms will surely hope that this week’s temporary deal to re-open the government will turn into a permanent one.
The downside of robos.
The explosion of robo-advisers into the marketplace starting early this decade changed the industry. The bevy of easy-to-use, low-cost apps brought millions of new low-dollar retail investors into the market. And it forced the established players to start offering no-fee, digital services themselves.
However, some now say these apps’ ease of use and convenience isn’t necessarily all good. The Wall Street Journal (SUBSCRIPTION) reports that there is a growing feeling that the rise of robos has given “the ability to make foolish decisions to an ever-broader swath of people.” In fact, the Journal continues, such apps can encourage people to become stock pickers who aren’t building wealth and aren’t properly diversified.
Like any technology, as robo-investing has become more mature and widespread, it has now reached a point where people are also casting a more critical eye. It will be interesting to see if these fintech apps are still as popular five years from now as they are today.
The bucking blockchain bronco steps up.
“There’s no reason why the next Google can’t be there in Wyoming.” That statement, attributed to ConsenSys founder Joe Lubin, captures the spirit of possibility that is now in the air throughout the Equality State (Wyoming was the first state in the US to grant women the right to vote).
Specifically, a new bill recently introduced into the Wyoming House of Representatives would designate that cryptocurrencies receive the same treatment as money. In addition, the bill would also enable corporations to issue tokenized stock certificates. If a version of this bill ultimately becomes law — which is very likely — Wyoming would once again reinforce its claim as a trailblazing state.
It will be interesting to see which other states — and perhaps unlikely ones — will follow suit and experiment with crypto and blockchain. Last year, we saw Ohio become the first state to allow residents to pay their tax bills using cryptocurrency. It’s certainly a trend we’ll be keeping an eye on.
Tech challenges ahead for banks.
Banks face some big challenges in the year ahead, according to American Banker, which listed ways technology will change banking in 2019. Some of the steps look pretty basic, which may reflect on the problems with legacy systems, and suggests some of the advantages new banks could enjoy with new technology.
“The largest banks are automating work anywhere they can, especially routine work like cutting and pasting data from one app to another,” says the Banker. This results from old siloed systems; estimates are that banks spend 80-plus percent of their IT budgets on maintenance.
As Celent says, “Banks recognize that they have to innovate. But often the very reason that they have to innovate — their back office technology — is also what limits their ability to innovate.”
For that reason, more bank-fintech partnerships may be on the horizon, says John Mitchell, CEO of Episode Six, a payments software technology provider.
“Banks are realizing that collaboration will lead to more customers and more profits,” he says. “Internally they face challenges keeping up with digital innovation to effectively meet consumer demand, but with fintechs, banks can innovate faster and more efficiently develop new products and services.”
Real-time payments is another area to keep an eye on going forward. The Clearing House, owned by 24 large banks, has developed its own system for real-time payments, a real-time gross settlement (RTGS) system. Meanwhile, the Federal Reserve is exploring whether it should develop its own RTGS system. The big banks are opposed, but smaller banks and merchants want the Fed to step in with its own system to provide competition.
We may also see more federal probes of fintechs, perhaps starting with Robin Hood. But that might be too conservative — with Maxine Waters as chair of the House Banking Committee, and perhaps Rep. Alexandria Ocasio-Cortez as a member, it won’t be just fintechs under increased scrutiny.
Banking compliance departments and CAATSA.
Despite the partial government shutdown and a host of critical challenges facing our nation, the Trump Administration and Congress were preoccupied last week with the question of whether or not sanctions should be lifted on companies that are owned in part by Vladimir Putin confidant Oleg Deripaska.
Now, in the wake of a bipartisan uproar seeking to block Treasury Steven Mnuchin’s ultimately successful efforts to ease sanctions on companies such as EN+ and Rusal, details are beginning to emerge showing that Deripaska will benefit personally from the Treasury Department’s actions. We’ll leave it to others to determine why helping out Russian entities is such a top priority in the Beltway, but we’d point out that the compliance departments of several global banks must now figure out how to differentiate the treatment of the oligarch from the Russian companies relieved of sanctions.
That effort will rely on the latest KYC/AML technology and a careful understanding of the Countering America's Adversaries Through Sanctions Act (CAATSA), which was passed by the Senate in a 98-2 vote and signed into law by a reluctant President Trump. Below is a helpful overview of CAATSA courtesy of the law firm Steptoe & Johnson.
Quote of the Week
“Patriotism is supporting your country all of the time, and your government when it deserves it.”
-- Mark Twain