January 2021, Edition 2
The Ashfords Fintech Digest provides insights into the recent developments of the Fintech sector as well as important legal and regulatory updates
Covid-19 has led to an increase in digital payments
One consequence of the Covid-19 pandemic has been to accelerate the shift from cash to digital payments. The World Health Organisation recommended in April 2020 that digital payments be used over cash for social-distancing and hygiene reasons. Whilst cash is still in demand, it is clear that digital payments are the future. The European Payments Landscape in Perspective 2020 Report, published jointly by the Emerging Payments Association EU and Luxembourg for Finance, notes that contactless payments (which can be made without a requirement to key in a PIN) are becoming ever more popular with consumers. Mastercard reported that 75% of all of its transactions across Europe were made via contactless payments.
This shift, however, has increased concerns about potential cyber security risks in terms of ensuring the payments are secure and that personal data online is protected. One of the major risks surrounding digital payments comes from hackers who steal bank account details and other personal information. Interpol reported a dramatic increase in online scams, disruptive and harvesting malware and misinformation in relation to cybercrime associated with Covid-19 between January and April 2020.
The Bank of England announced that it will make cashless payment technology and preventing cybercrime a top priority. The financial policy committee will be focussing on stress-testing how well banks can prevent and recover from cyber-attacks. It should be noted that the committee anticipates digital payment security will be led by fintech companies as opposed to banking institutions.
Lloyds is the first UK bank to launch new SWIFT gpi Instant payments
Lloyds Bank and SWIFT have announced the first go-live of SWIFT global payments innovation ("gpi") instant connection in the UK, a new service that allows customers to send global payments at any time via their financial institutions. This means that remittance payments due to be received in the UK from anywhere in the world can arrive almost instantaneously with fee and foreign exchange transparency, robust security and full regulatory compliance.
The SWIFT gpi connection uses high-speed cross-border rails alongside the existing UK Faster Payment infrastructure. The announcement from Lloyds Bank follows a successful pilot in 2020 that involved other banks including Barclays Bank, Commonwealth Bank of Australia, DBS, Wells Fargo and BBVA.
UK fintech review to report back on proposed recommendations to listing rules and tech visas
The independent Fintech Strategic Review was launched in July 2020 by HM Treasury and led by Ron Kalifa (former CEO of Worldpay). The aim of the review was to establish priority areas for industry policy makers and regulators to explore in order to support the ongoing success of the UK fintech sector. A key area of focus relates to future industrial strategy efforts after Brexit. The UK fintech sector is estimated to be worth around £7 billion to the economy and employs around 60,000 people in the UK.
The review looked at five specific areas: skills and talent, investment, national connectivity, policy, and international attractiveness. The recommendations are due to be delivered to the government in early 2021 and are still being finalised. However, it has been reported that proposals will include:
- specialised tech visas to bring in talent; and
- changes to the listing regime to keep the London stock market as an attractive choice for startups and fast growing firms.
The changes to the listing regime are likely to include recommendations for a dual class structure for listed companies on a "premium" exchange. A dual class structure would allow founders to retain greater control of the company immediately after listing.
Walmart announces launch of new fintech startup
US retail giant Walmart Inc has announced that it is launching a fintech startup as part of a joint venture enterprise with Ribbit Capital. The aim of the new startup is to develop and offer modern, innovative and affordable financial solutions. The startup will be majority owned by Walmart and hopes to bring together Walmart’s retail knowledge and scale with Ribbit’s fintech expertise to deliver tech-driven financial experiences tailored to Walmart’s customers and associates.
Walmart already offers a range of financial products including, cheque cashing, money transfers and credit cards. The retailer has yet to provide any information on any new products the startup will be offering.
FCA removes warning about banking startup Lanister
The UK is home to some of the well-known digital banks in Europe such as Revolut, Starling Bank, Monzo and Atom. Fintech company Lanistar is the latest startup to enter the alternative banking market and made headlines recently with the Financial Conduct Authority (“FCA”), the UK financial regulator.
Lanister claims that its polymorphic payment card, Volt, will be the most secure in the world. The Volt payment card will allow consumers to stack up to eight card in one and use the keypad (built into the card or on the app) to swap between the different cards. Lanistar has partnered with Mastercard. This means that the Volt payment card can be used anywhere that accepts Mastercard.
The company found itself in hot water after engaging influencers on social media (mainly on Instagram) to promote their Volt payment card. In response to a number of consumer queries, the FCA issued a warning that Lanistar was providing financial services without its authorisation and that requests for investment into the company could be a scam. However, the FCA removed the consumer warning following discussions with the company, the display of new disclaimers on the Lanistar website and appropriate regulatory disclosures in marketing materials. A spokesman for the FCA noted that they "will be working with the firm closely ahead of their launch". The company initially intended to launch in late 2020 but have now postponed it to early 2021.
Legal & Regulatory updates
The Financial Markets Law Committee says to HM Treasury that LEIs could contribute to cryptoasset transparency
The Financial Markets Law Committee (“FMLC”) has written to the HM Treasury on 8 December 2020 highlighting its publications on legal entity identifiers (“LEIs”) for an evidence gathering survey run by the public-private LEI Innovation Working Group.
The FMLC has published letters and papers in the past on the usefulness of the widespread adoption of LEIs and argues that they could contribute significantly to the transparency of cryptoassets.
European Commissioner of Competition Policy on the Interchange Fee Regulation
Margrethe Vestager, the European Commission’s executive vice president and commissioner in charge of competition policy, has given a speech on 7 December 2020 entitled “The Interchange Fee Regulation in a rapidly evolving payment landscape: Impact and way forward”.
Vestager discussed the impact of the Interchange Fee Regulation (EU) 2015/751 and a report on this topic published in summer 2020, in which the findings include lower charges faced by merchants for card payments by capping interchange fees and that more merchants are seeking acquiring services in another EU member state which has a positive effect on competition and in turn better value for consumers. It’s a sign that the Single Market for payments is growing stronger. She noted that this will over time lead to consumer benefits, such as lower prices, more choice and convenience because lower fees facilitates merchants accepting different types of cards. She also mentioned the importance of big data as a key driver of innovation as it can improve markets by allowing “for the targeting of products, better pricing decisions and enabling innovation”. However, big data can also potentially undermine competitive markets and give unfair advantages to larger players.
US lawmakers introduce legislation to require stablecoin issuers obtain banking charter
A group of US lawmakers has introduced legislation designed to protect consumers from the risks posed by stablecoins such as Libra by requiring issuers to obtain a banking charter.
Three Democrat members of Congress - Rashida Tlaib, Jesús “Chuy” García, and Stephen Lynch put forward the Stablecoin Tethering and Bank Licensing Enforcement (Stable) Act (the “Act”), which aims to ensure that the issuance and related commercial activities of stablecoins are strictly regulated.
The lawmakers argue that digital currencies whose value is permanently pegged to or stabilised against a conventional currency like the US Dollar, pose new regulatory challenges while also representing a growing source of the market, liquidity, and credit risk.
The Act requires that:
- any prospective issuer of a stablecoin to obtain a banking charter;
- any company offering stablecoin services must follow the appropriate banking regulations under the existing regulatory jurisdictions;
- any company or bank issuing a stablecoin to notify and obtain approval from the Fed, the FDIC, and the appropriate banking agency 6 months prior to its issuance and maintain an ongoing analysis of potential systemic impacts and risks; and
- any stablecoin issuers obtain FDIC insurance or otherwise maintain reserves at the Federal Reserve to ensure that all stablecoins can be readily converted into United States dollars, on demand.
HM Treasury consultation opens on proposed changes to insolvency rules for payment institutions and electronic money institutions
HM Treasury has launched a consultation on potential amendments to insolvency rules for payment institutions (”PIs”) and electronic money institutions (“EMIs”).
Proposed changes include helping protect customers where PIs or EMIs have gone into insolvency resulting in the improvements on the outlook for the payment and e-money industries. The consultation closes at 11.59 pm on 14 January 2021.
The consultation seeks views on:
a) the introduction of a special administration regime (SAR) for PIs and EMIs; and
b) the proposal to extend the FCA's rights (under Part 24 of the Financial Services and Markets Act 2000) to participate and protect consumers in an insolvency process for PIs and EMIs, as it does for other FCA-supervised firms.
UK Finance sets out ethical principles for advanced analytics and AI in financial services
UK Finance, together with KPMG, has published a paper setting out high-level ethical principles for financial services firms developing advanced analytics and artificial intelligence (“AAAI”). The principles are intended to serve as a useful resource and reference for firms developing their own internal frameworks and oversight for these emerging technologies.
The paper presents five ethical principles that financial services firms can apply when developing products, services and back-office applications that rely on AAAI. The principles are not rules but instead, they are intended to be a valuable resource to firms as a point of reference for developing or enhancing their own internal principles and governance.
UK Finance says they are designed to be flexible enough to be adapted as appropriate to the diverse use cases to which AAAI can be applied, using a proportionate and risk-based approach. Each principle is supported by several sub-principles, which provide more detailed considerations.
The five principles, in summary, are:
Principle 1: Explainability & Transparency – Be transparent about how AAAI is used and provide appropriate explanations on decisions.
Principle 2: Integrity of AAAI – Adopt appropriate controls for the integrity, sourcing and sharing of AAAI and its associated data throughout the AAAI lifecycle.
Principle 3: Fairness & Alignment to Human Rights – Design and use AAAI that produces fair outcomes.
Principle 4: Contestability & Human Empowerment – Support the empowerment of AAAI subjects, respecting their decision making.
Principle 5: Responsibility & Accountability – Be responsible and accountable for our AAAI.