Snippings

My good friend Victor Dostov, the Chairman of the Russian Electronic Money and Remittance Association, wrote that the current consultation run by the central bank is not about the introduction of digital currency in principle (there is almost no doubt that this will happen) but about what new services banks will be able to provide to customers. Victor mentions the tracking of transfers, some sort of “colour-coding” and the programming smart contracts. It is this latter capability that is, in my option, what will distinguish the smart money of the future from the dumb money of the past.

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America’s top banks have decided not to let a good crisis go to waste. During the pandemic, they have capitalised on their customers’ increased willingness to use digital financial services.

For a country with global tech hubs like Silicon Valley and Austin in Texas, US banks had offered bafflingly archaic financial services, even by the start of the year.

From Covid nudges US bank customers into digital era | Financial Times.

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The Office for Budget Responsibility (OBR) reckon that up to 40 per cent of Bounce Back Loans could be irrecoverable.

From Microbusiness £50,000 Bounce Back Loans – how they work.

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The bank lent out £90 million ($110.1 million) within the first day and a half of accepting applications for the program,

From How Starling is seizing momentum during the pandemic | Banking Dive.

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Under the advanced notice of proposed rulemaking, users who want to send cryptocurrencies from centralized exchanges to a private wallet would need to provide personal information about the owner of that wallet to the exchanges, if the amount sent is greater than $10,000 in one day. The exchanges would also need to submit and store records involving such transactions with a total value over $10,000 in a given reporting period, or just maintain records for transactions over $3,000.

From FinCEN Proposes KYC Rules for Crypto Wallets – CoinDesk.

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As many people have observed, the COVID crisis has accelerated digital transformation that was already underway in the financial services sector. One area where this has been evident and much to the benefit of the sector has been in the provision of credit to small businesses.

My own experiences here rather illustrate how much transformation remains to be achieved! I logged into my bank for some sundry purpose not relevant to this anecdote only to find an attractive banner headline over my account, telling me that I had been pre-approved for a loan of (if memory serves) £25,000. Although I didn’t particularly need the money (blogging and playing around on Twitter are much less capital intensive than most small business operations) I thought that it might provide a useful buffer against a virus-induced reduction in circumstances. So I clicked on the button labelled “apply online”. I naively assumed that I would be taken to a page saying “congratulations, the money is in your account” but instead I was taken to a page telling me to phone the bank, which seemed a rather 1970s version of “online” to me, but whatever. Much against my better judgement, since actually phoning my bank is literally a last resort in any financial situation, I called. A robot answered and told me that I would be on hold for a least an hour (I’m not making this up). Naturally I hung up and never called back.

You can see the problem, especially in banks that have tried to layer a COVID response over a creaking infrastructure. Banks are getting inundated with loan applications, all of which must be inspected and assessed in time to stop businesses from going under. Yet UK SMEs struggled to obtain government-backed loans as concerns about fraud and defaults caused banks, which were in any case taking between four and 12 weeks to process applications, to restrict access to the scheme.

We all understand the basic problem: it takes many steps to process a loan application, with a range of checks needed before the application even gets through to risk management and underwriting. With the unprecedented scale of the crisis meaning urgent action was required to maintain financial stability and ensure the flow of credit into the “real” economy, the specific problem of supporting SMEs pushed some players in using new technology to deliver new solutions. Some banks were able to respond using this modern infrastructure and benefit mightily. Starling Bank is a case study, lending out £90 million within the first day and a half of accepting applications for the program, but the big picture is that SME support was a mess and the governments efforts to deliver desperately-needed support turned into, as the FT rather memorably detailed, “a giant bonfire of taxpayers’ money, with banks handing out the matches”.

One particular problem is the lack of a digital identity infrastructure in the UK.

 

Yet there is progress. Back in March, the Financial Action Task Force (the FATF) tried to encouraged the use of their risk-based approach to address some COVID-19 related challenges such as digital onboarding and simplified Customer Due Diligence (CDD). The financial sector tried to implement these measures and adapt to the new circumstances derived from the pandemic. This is particularly noticeable in the US where the banks provided (again, I cannot resist the FT’s phrasing) “bafflingly archaic” financial service but have still capitalised on customers’ increased willingness go online.

The Fintech Way

Maybe, just maybe, this an area where the fintechs have something to offer. In an interesting paper on the subject earlier this, Nydia Remolina at the Singapore Management University (after noting that “financial institutions have access to enormous amounts of data, but due to multiple constraints this data is not yet sufficiently converted into useful insights”) talked about a new “data operating model” that brings together open banking, cloud computing, machine learning and AI to support digital transformation. I think this model represents more than the usual technology upgrade cycle, because the ability for machines obtain insight and take action makes for a very different kind of fully-digital financial services sector. What’s more, as the paper notes, some jurisdictions (including the US) allowed non-bank online lenders that use these AI/ML models for lending to play an important role by in particular helping businesses that may not have an established lending relationship. When you combine this with automation of the onboarding and loan process, you have genuine digital transformation to the benefit of all of the stakeholders.

To be fair, what me might summarise as data-driven liquidity is hardly new. But what is new is the combination of new technology and new regulatory frameworks that have come together to bring it to SMEs. Using open banking frameworks to obtain accurate and timely data on SME finances, then feeding that data into rapidly-evolving machine-learning environment with emerging artificial intelligence (AI) capabilities, gives the financial services sector a way to better serve SMEs and to deliver better outcomes for the stakeholders. This is another facet of the push for “financial health rather than financial services” that forward-thinking strategists in regulators, fintechs and techfins are talking about at the moment.

This puts fintech firms, and particularly data-driven lenders in an interesting position because they will be able to demonstrate how beneficial the new business models, which bring together digital onboarding and simplified CDD with transaction histories as a substitute for conventional credit scores, can be for the economic recovery.

The UK actually looks pretty good in this regard. With a competitive fintech sector and open banking already in place, 

I was fortunate to be asked to be one of the judges for the Open Banking Innovation Awards for SMEs and I have to say I was pretty impressed by the businesses already taking advantage of this combination of new regulation and new technology. A couple of good examples are Fluidly, which plugs into accounting packages and bank accounts and uses machine learning to intelligently manage SME cashflow, and Swoop which integrates through open banking to simplify access to all kinds of SME finance.

A recent example of how access to data changing the range of services that can offered comes from Liberis, which provides cash advances to SMEs secure against their payment card transactions and repayments set as an agreed fraction of those transactions. This strikes me as good for all involved, and illustrates how fintechs can use data as a practical substitute for conventional credit ratings.

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“Digital sovereignty” describes the many ways governments try to assert more control over the computing environments on which their nations rely. It has long been a concern in supply chains, affecting the kinds of hardware and software available in a given market. Now it’s coming for the cloud.

Governments around the world are passing measures that require companies to host infrastructure and store certain kinds of data in local jurisdictions. Some also require companies that operate within their borders to provide the government with access to data and code stored in the cloud.

From The balkanization of the cloud is bad for everyone | MIT Technology Review.

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Today Visa published a technical paper that outlines a novel approach for offline point-to-point payments between two devices. The protocol allows digital money to be directly downloaded onto a personal device, such as a smartphone or tablet. The money is stored on a secure hardware embedded in that device and managed by a wallet provider (e.g. a bank).

From Central Bank Digital Currency and the future Visa publishes new research | Visa:

If that sounds a little familiar to readers of a certain age, that’s because it is.

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China’s central bank has called for wider acceptance of cash in economic activities and vowed to punish those who refuse to accept cash payments in the wake of a widening gap in access to digital services.

From China central bank urges wider acceptance of cash as payments go digital | Reuters.

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