01 Spotlight Fintech cover - New Statesman · harder if the Conservatives have their way with pledges to double the levy companies pay for foreign employees and reduce net migration

SpotlightFINTECH: UPGRADING THE ECONOMY

Sir Vince Cable MP / Mark Field MP / Sarah Jones MP

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Online Broker since 2001

CONTENTS

A copy of the Times from Saturday 3rd January 2009 would have been a good investment, if only you’d known. Original copies of that issue sell for considerable sums, not because of its age or because it recorded a major news event, but because it is referenced in one of the most important pieces of code ever written. The very first block in the Bitcoin

blockchain, known as the “Genesis Block” – the first piece of the currency to be minted by Blockchain’s mysterious creator – contains within its code a short burst of regular English, referencing the Times and its headline: Chancellor on Brink of Second Bailout for Banks. There has been much speculation over the years as to whether this was included simply as a timestamp, or a mission statement. An even better investment would have been to use a computer to “mine” thousands of the first Bitcoins to be produced in those early days. Doing so was at the time very easy – Bitcoins become harder to create as more are produced – and by the following year, a programmer called Laszlo Hanyecz had done exactly that. On May 22, 2010, Hanyecz became the first person to buy real goods with Bitcoins when he paid 10,000 Bitcoins, then worth around $25, to pay for two pizzas to be delivered to his house. The value of a single Bitcoin is at time of writing £2,164, meaning Hanyecz’s pizza purchase would in today’s money be worth well over twenty million pounds. If only he’d known. But Hanyecz has repeatedly said that he does not regret his purchase, because Bitcoin, like other money, is not made to be hoarded; its value comes from being used. Fintech has the power to create value with astonishing rapidity, but only if businesses and consumers engage with it – if they do not hold back and ask what could have happened (if only they’d known), but if they eat the pizza, and find out.

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First published as a supplement to the New Statesman of 30 June 2017. © New Statesman Ltd. All rights reserved. Registered as a newspaper in the UK and US.

This supplement and other policy reports can be downloaded from the NS website at: newstatesman.com/page/supplements

4 / Sir Vince Cable MP Fintech’s funding promise for small businesses and start-ups 6 / Mark Field MP London’s role as the global capital of fintech 10/ The new cryptocurrency Why central banks are taking a bite out of Bitcoin 14 / Croydon Sarah Jones MP and Rajesh Agrawal on the suburb that is becoming a fintech hotbed 18/ Open banking Data is the new currency and big banks are falling behind 24 / Avocado economics A new app uses behavioural change to put money in millenials’ savings accounts

Special Projects EditorWill Dunn

Special Projects WritersRohan Banerjee Augusta Riddy

Design and ProductionLeon Parks

Cover illustrationSam Falconer

Always eat the pizza

Fintech | Spotlight | 3

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4 | Spotlight | Fintech

SIR VINCE CABLE MPSUPPORTING SMALL BUSINESSES

The digital revolution is transforming the way we live and do business. Satellite navigation

has made maps redundant, on-demand entertainment has replaced bulky DVD and CD collections, and online social networks are changing the meaning of what it means to be together. Another area where technological innovation is rewriting the rulebook is in financial services. Though less familiar in the public consciousness than the examples mentioned above, so-called fintech is making major inroads into the traditional territory of banks, investment funds and insurance companies.

The industry has admittedly struggled to rebuild its reputation in the wake of the catastrophic crisis of 2008. Back then, a combination of loose regulation, a highly integrated network of global institutions and gambler-like behaviour on the part of some financial sector employees, led to a collapse in liquidity and huge, taxpayer-funded bank bailouts in Europe and the United States.

Fintech has opened up new opportunities for entrepreneurship, according to Sir Vince Cable MP, Liberal Democrat spokesperson for the Treasury

Kick-starting a start-up revolution

Decisive measures were taken by the Coalition government – of which I formed a part – to guard against similar crises in the future, including higher minimum capital requirements and caps on bonuses. Plans were set in motion to ring-fence banks’ retail and investment banking divisions, but to my frustration these have yet to be implemented.

Yet while mainstream banking may have lost much of its allure, around the margins of the established institutions, a new wave of start-ups and platforms – from international payments provider TransferWise to peer-to-peer lenders Funding Circle and RateSetter, and cryptocurrency Bitcoin – are reinventing how consumers and businesses spend, save, invest and earn money.

When it comes to the consumers, the growing market share of fintech start-ups is as much the result of frustration with lazy incumbents as it is the product of an innate public thirst for innovation. The Competition and Markets Authority (CMA) has repeatedly criticised the

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UK banking sector for being in effect an oligopoly. The domination of the market by a few big players, a lack of transparency in terms of services offered, and the barriers to switching between competitors mean that consumers lose out more than they would in a genuinely competitive market.

Fortunately, fintech is beginning to level the playing field for consumers; new competitors are challenging established firms, which in turn is pushing the incumbents to introduce technological innovations that benefit their customers. Furthermore, products that once seemed out of the reach of the ordinary man or

woman, such as wealth management, are being democratised by the invention of algorithm-driven robo-advisors, to give just one example.

The potential for disruption may be even greater when it comes to business lending. Not only are the new fintech players start-ups themselves, they also have a major role to play in filling the funding gap so many young ventures face. While bank lending has partly recovered since the global crisis, it still overwhelmingly favours large reliable companies over unproven upstarts, perhaps for good reason.

Into the gap have stepped solutions such as peer-to-peer lending – which cuts out the middle-man and reduces costs by connecting borrowers directly with lenders – and crowdfunding, online platforms where new or growing start-ups can pitch for funds from professional investors or the broader public in exchange for equity or in-kind rewards (prototypes, event invitations, free goodies).

It is perhaps no surprise – given the strength of both our start-up scene and financial sector – that the UK has wasted no time in positioning itself as the number one spot for fintech in the world, generating £7 billion in annual revenues and employing over 60,000 people. That isn’t patriotism speaking, but rather the judgement of consultants Ernst & Young, Deloitte and KPMG, who single out the UK for its regulatory environment, expertise, digitalised economy, tax incentives and “government programmes designed to promote competition and innovation.”

None of this happened by accident of course. While the success of individual ventures and entrepreneurs comes down to personal ingenuity and a dash of luck, a healthy business environment is something that only prudent and forward-thinking policymaking can provide. When it comes to the success of fintech, there are a number of initiatives taken during my time in government that I see as particularly important.

As business secretary I oversaw the creation of the British Business Bank LI

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(BBB), a state-owned bank which uses public finance to leverage in private funding that is subsequently directed towards small businesses.

Beyond working with established partners such as banks and venture capital funds, early on we also recognised the potential of fintech to help us achieve our goals. For example, the BBB has built strong relationships with peer-to-peer platforms Funding Circle and RateSetter, and since 2013 has lent over £60 million – benefiting 10,000 businesses – through the former.

Other pioneering policies introduced during the Coalition years include the Seed Enterprise Investment Scheme (SEIS), a tax break on investment in early-stage companies which has encouraged the growth of innovative finance platforms, and the Financial Conduct Authority’s (FCA) fintech regulatory “sandbox”, which has enabled fintech start-ups to experiment (in a controlled environment) outside the bounds of mainstream financial regulation. Sadly, nothing of the sort has yet emerged from Theresa May’s chaotic, unimaginative and unfriendly business administration.

Despite its impressive progress, the last thing the UK’s fintech sector should do is sit on its laurels. Competition from Europe, the United States and China will continue to grow, while an extreme Brexit – by threatening financial sector passporting rights and access to EU talent – will certainly wallop vulnerable start-ups.

And if that wasn’t enough, securing skilled workers is likely to become even harder if the Conservatives have their way with pledges to double the levy companies pay for foreign employees and reduce net migration to damagingly low levels.

From the very first ATMs in the 1960s to the introduction of online banking in the 1980s, the UK has been at the forefront of every major financial revolution. Having established itself as an early leader in what will perhaps be the most important one of all, it should do absolutely everything in its power to stay there.

“Fintech is leveling the playing field”

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MARK FIELD MPBETTER BANKING


The advent of fintech is one of the most exciting developments in the modern financial world. Just as

it has disrupted and revolutionised our social interactions and shopping habits, the internet is breeding new ways to cut the cost of transacting and pair those with capital with those seeking it.

Peer-to-peer lending and crowdfunding have given way to fintech technologies such as blockchain, alternative currencies and robot financial advisers. This is all exciting stuff, and stands to democratise the world of finance in an era where the clamour is to redistribute power from the money men and into the hands of the consumer and the entrepreneur.

Enthusiasts contend that the City is well-placed to clean up from the potentially sweeping changes to financial services, particularly as the United Kingdom completes its exit

London’s flourishing fintech scene could represent the UK’s golden ticket post-Brexit, writes Mark Field MP, secretary for the APPG on fintech

Towards a new age of financial democracy

from the European Union. The global banking sector consists of large, long-established players protected – over-protected, perhaps – by central banks and stifling compliance. The presence of a fast-maturing internet economy and an established tech hub on the City’s borders suggests that, whatever degree of disruption eventually occurs, London stands to be a winner.

There is no doubt a lot of froth to all this and many fintech challengers will fall by the wayside. Some older and wiser heads in the City remember the glory days of 1998 and 1999 before the dot-com bubble finally burst. While bankers and lawyers do their level best to disentangle the insubstantial from the plausible technology platform, however, fintech start-up innovators despair that the banking world fails to appreciate that a paradigm shift is well underway.

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protection for consumers and unwary investors among this new breed of internet financiers. The issues around privacy and data security that we have seen played out over our online communications also apply to the world of finance. The need to track and prevent the movement of money by criminals, fraudsters and terrorists in an era of cryptocurrencies will rub sharply against the demand of consumers to have their financial affairs protected by strict privacy laws.

The removal of the banking middle-man poses a long-term threat to countless thousands of white-collar jobs. Building a robust fintech sector in London may help to mitigate job losses by redeploying talent to new industries, but our success in this sector is not guaranteed. Typical fintech start-ups demand open access to the EU market for their products and, more critically still, skilled staff. The ability to employ young programmers from abroad will be a prerequisite for fast-growing companies in this sector and government will need to work hard to protect London’s reputation as the most attractive, vibrant place to work as the journey towards EU exit starts in earnest.

Additionally, we cannot forget that the financial crisis has left sovereign states and big banks more intertwined than ever. In the case of the UK, we still own billions of pounds’ worth of banking shares that we aspire at some point to sell at an attractive price. In the Eurozone, banking debt has essentially become interchangeable with sovereign debt. Governments’ vested interest is in seeing leading banking institutions continue their domination while imposing upon banks ever-more burdensome regulation and policy objectives such as the maintenance of costly branch networks.

We need traditional banks to be able to compete against techy disruptors but they are ever less free to do so. Paradoxically, the over regulation of the banking sector, which to the frustration of policy-makers has enabled the largest banks to evade effective competition from the much-heralded new generation of challenger banks, has also resulted in a distinctly

complacent culture about the intense competition that fintech poses.

After all, central banks worldwide have presided over a near-zero interest rate policy for so long that thousands of investors and savers are being tempted away from traditional savings vehicles in search of higher returns, accelerating

the growth of fintech. Mainstream banks cannot rely on loyalty from a customer base that has now been exposed to eight years of stories on product mis-selling and banking greed.

We will not stop the innovation and growth of the fintech sector. Nor should we seek to. It offers a huge array of opportunities to reduce the cost of banking to consumers and to provide a more tailored and accessible range of financial services to thousands of entrepreneurs, pension holders and small scale investors. This could act as a timely vehicle through which to spread power at a time when even many middle-class people feel that the spoils of globalisation have been unfairly distributed for too long.

But we should not pretend that this will not throw up a range of fiendishly complex dilemmas both to governments and mainstream banks, from balancing security and privacy imperatives to the emergence of a dynamic, less regulated marketplace, the hollowing out of traditional financial services and the jobs they support, and the undermining of the government’s own investments. The fintech challengers will not overturn the international might of mainstream banking overnight, which thankfully gives policy-makers and bankers plenty of time to catch up with the realities of this fast-emerging new landscape.SH

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If they are right, governments will have to get their heads around some almighty challenges in pretty short order as the strategically important finance sector is disrupted.

For all the criticism levelled at banks for relying on the state as an ultimate backstop, there is now a firm expectation among voters that government stands ready to offer deposit protection when things go wrong. Regulators are already scratching their heads trying to create

“A paradigm shift is well under way”

“Mainstream banks cannot rely on loyalty”

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Spotlight

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9 | Spotlight | Name of issue here

SECTIONARTICLE TITLE

A s technology evolves, so too does the need to control it. While the advent of fintech has signalled the

dawn of a new era in financial services, it has also presented a gauntlet of checks and balances for organisations to negotiate: data protection, analytics, lending practices and more resilient software. Regulation, though, shouldn’t necessarily be viewed as restrictive or stifling. RegTech, that is to say regulatory technology to help companies meet their legislative responsibilities, whilst allowing for creativity and innovation, is a refreshing change.

Consider that many organisations approach new policy, on most fronts, through silos, which are compartmentalised and independent of one another. This is costly both in terms of money and resources. A more joined up, holistic approach through RegTech supports the case for automation. Automation allows companies to streamline meeting their regulatory demands while also freeing up funds and manpower for other aspects of their productivity elsewhere.

Largely cloud-based, RegTech programmes help to declutter data that is intertwined through ETL – extract, transfer, load. This means that any reports that need completing can be done so more quickly and analytic tools intelligently mine existing “big data” and unlock their potential. Thus, the same data can be used for multiple purposes.

The over-reliance on legacy systems, some of which were designed as far back as the 1960s, represents the biggest barrier to RegTech. According to a recent report from Deloitte, in 2014 banks in Europe spent around £50bn on information technology

Nirvana Farhadi, global head of financial services, RegTech, risk and regulatory compliance affairs at Hitachi Data Systems, explains why companies need to stay on top of legislation

Why regulation doesn’t have to be restrictive

yet only £9bn of that sum was spent on installing new software. The balance was mostly used to bolt-on more systems to the antiquated existing technologies and simply keep the old technology going. This cannot continue.

The need for regulation within the financial sector is clear. But it’s not designed to stifle; it’s meant to make sure companies and people are safe. The world is still reeling from the global banking crisis in 2008 and repairing the relationship with once bitten twice shy consumers is an on-going challenge. Regulations such as MiFID II, SMCR, MAD/MAR and many others, aim to protect the financial markets and reduce systematic risk. There are roughly five billion smart phones around the globe, constantly transacting personal information and details as part of an avalanche of highly sensitive data. Keeping that data secure in real time is crucial to maintaining customers’ trust.

Since a lot of the technologies that banks are developing involve personalised services, there has been an increasing amount of regulation within this sphere. The General Data Protection Regulation (GDPR), for example, was adopted by the European Union in last year and is due to be implemented by May 2018. Key points of GDPR include the need for consent to use personal data, the right to erase it, and the requirement to notify individuals in the event of a breach. Sanctions include a fine up to €20m or up to 4 per cent of the annual worldwide turnover of the preceding financial year in case of an enterprise. Considering what’s at stake, having RegTech that can manage these requirements effectively is a necessity.

At Hitachi, as RegTech forms a new arm of a valuable alliance with fintech, we recognise the urgent need for this type of technology to be robust and fill the ever-gnawing chasm of complexity. Through our work with our clients in this space, our collaboration with industry stakeholders, and as one of the founding members of the RegTech Council, we strive to take a leading role in solving for complex industry problems through understanding the complexity and heralding in a new era of change.

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Fintech| Spotlight | 9

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BLOCKCHAIN THE BEGINNINGS OF BRITCOIN?


It is counterintuitive to think of something cryptic as improving transparency, but several central

banks around the world are considering the use of blockchain technology with the aim of making money handling simultaneously more open and secure. Central banks in England, China, Canada, Sweden, France and Italy have all explored cryptography in recent years and the prospect of minting their own digital currencies, similar to Bitcoin, in order to keep abreast of the fintech surge. According to Dirk Niepelt, director of the Study Center Gerzensee at the University of Bern, blockchain technology has the potential to inject fresh credibility into the global financial scene. For those in need of an explainer, a blockchain is a shared digital ledger in which transactions are recorded chronologically and publicly. Think of it

that financial institutions and central banks are looking at distributed ledgers. Blockchain technology is useful for when you have networks of untrusted parties needing to communicate with each other. You can use blockchain to verify that data in a controlled way.” But Bass does point out that “blockchain technology itself does not necessarily need to be centralised or decentralised – simply distributed. If more weight is placed on verifying nodes that the central bank controls, then it can regulate the money supply more effectively.”

The legacy of the 2008 global financial crisis is residual mistrust in institutions. As fintech continues to innovate and disrupt, through mobile and challenger services, the Bank of England’s chief cashier Victoria Cleland says that the old guard are faced with a pressure to modernise or risk being left behind. She

Blockchain technology is going mainstream, with central banks around the world investigating the benefits of Bitcoin-like currencies. Rohan Banerjee finds out more

Could a new cryptocurrency replace the pound?

like a shared document: you have to have the document open to use the currency, and you can’t buy or sell without recording it in that same document.

As Niepelt explained to the World Economic Forum in 2016:“Internet-based technology has made it cheap to collect information and to network. This has empowered the sharing economy and allows fintech to seize intermediation business from banks.” The great benefit of blockchain technology, he added, is that it “undermines the ‘middle-man’ business model. It makes it harder to cheat in transactions, and so reduces the value of credibility lent by trusted intermediaries. It is less important that counterparties may not know each other.” Craig Bass, senior software engineer at Made Tech and an expert in coding and risk assessment, agrees. “It’s not surprising

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told the Financial Times: “A lot of people think central banks are very risk-averse, but we are thinking: ‘Are there opportunities to grasp innovation ourselves?’” Some forward-thinking central banks, such as the BoE and the People’s Bank of China (PBoC) have already discussed issuing their national currencies onto some sort of distributed ledger. If the central banks succeed, it would turn the story of Bitcoin on its head – an invention popularised by the offer of anonymity and independence from the status quo would end up empowering central banks and making money easier to pinpoint.

The BoE has produced several reports with its One Bank Research Agenda (2015) suggesting that the benefits of issuing a digital currency on a distributed ledger could add as much as three per cent to a country’s economic output. SH

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Following meetings with the BoE, researchers at University College London developed a prototype currency called RSCoin. Researchers Dr George Danezis and Dr Sarah Meiklejohn describe RSCoin as “a cryptocurrency framework in which central banks maintain complete control over the supply chain, but rely on a distributed set of authorities to prevent double-spending.” While monetary policy is centralised, “RSCoin still provides strong transparency and auditability guarantees. We demonstrate, both theoretically and experimentally, the benefits of a modest degree of centralisation, such as the elimination of wasteful hashing.”

Danezis and Meiklejohn argue that RSCoin would be more palatable to governments because every unit of the currency is created by the central bank, not independently created or “mined” as Bitcoin is. It would offer the centralised control of a traditional currency while providing the benefit of the transparent transaction ledger. This allows direct access to payments and value transfers while supporting privacy, and offers more scope for innovative new payment systems and other uses of digital money. Danezis and Meiklejohn also suggest that centralising monetary authority also enables RSCoin to address some of the issues in scalability [what are these] faced by decentralised cryptocurrencies.

In China, meanwhile, PBoC governor Zhou Xiaochuan highlighted that the country might need a cryptocurrency if it is ever to deploy negative interest rates as the population prefers to pay in cash. In March at the Bao Forum, he said: “If everyone is holding cash, negative interest rates become useless. With the popularity of digital currency, cash usage will drop.” Negative interest rates, which effectively charge banks to store money, have in recent years been implemented by Japan, Sweden, Switzerland and Denmark to boost growth and raise inflation. China, by contrast, is still increasing rates as its economy continues to boom, but policymakers appear to be preparing for leaner times. Zhou was clear in his speech that the PBoC would

“It makes it harder to cheat in transactions”


BLOCKCHAIN THE BEGINNINGS OF BRITCOIN?


not rule out the use of negative rates in the case of deflation. But in that case, even with a negative-rate policy, people may want to hold onto physical cash rather than spend money. A switch to digital currency, Zhou thinks, could be part of the solution to this problem.

Against the backdrop of rapid digitalisation, there is a pressure across sectors to deliver products quickly and securely. This is particularly true within finance. Bass says it is this need for speed that may power the shift towards cryptocurrency. “I suspect that private blockchain technology will be introduced behind the scenes, between banks, to help handle intra-bank transfers. Currently, these legacy clearing systems are complicated and slow. The end result for the consumer on the street includes faster payments and statements. Nowadays, real-time data is everything but banks are lagging behind, so I can understand why they might turn to blockchain to help them keep pace.”

Does transparency necessarily denote security? Bass explains that “each player in the blockchain would communicate with all the others whenever money moved within it, allowing everyone to update the ledgers they control on the computer system simultaneously. Most importantly, no one player has control over the system. Cryptographic verification is required for a transaction. There wouldn’t be any need for direct bilateral trust, as these blockchain networks provide trust via a sort of multilateral peer review. As an extra bonus, each player would keep a backup if an individual bank’s computers came under attack. It would also hypothetically allow faster transactions to and would make it easier to spot bad eggs.”

While Niepelt, Bass and Danezis and Meiklejohn at UCL make an attractive case for the use of centralised cryptocurrencies, large economies move at their own speed. Saifedean Ammous, assistant professor of economics at the Lebanese American University, compares the invention of blockchain to that of the car engine, pointing out that while the internal combustion

engine did eventually replace horses, people didn’t begin bolting engines onto existing horses as soon as it was invented. So, if cryptocurrencies offer to make digital transactions as simple and trustworthy as a cash transaction – and, crucially, with a similar lack of need for a trusted third party – then why, Ammous asks, would a central bank step into that role? He wrote in American Banker: “A non-bitcoin blockchain combines the worst of both worlds – the cumbersome structure of the blockchain with the cost and security risk of third parties. It is no wonder that years after its invention, blockchain hasn’t managed to break through in a successful, commercial application other than the one for which it was specifically designed: Bitcoin.”

Kevin Dowd, co-author of Bitcoin Will Bite The Dust and professor of finance and economics at Durham University, is similarly sceptical. Bankers are drawn, he says, by the idea of fast digital money; they are less drawn by the idea of digital money that can’t be controlled and that can be used anonymously. There is also, he adds, a natural stand-off between blockchain libertarians who support open-source networks and governments or central banks who would prefer controllable databases.“There’s tension between a central bank-issued currency, which presupposes trust in the central bank, and the use of a blockchain, which only makes sense, because of its inherent costliness, if one wishes to have a decentralised currency. The better closed systems, which depend on a manager, are cheaper to operate than a decentralised system. So if one is going to trust the central bank to run the system, why would one not want it to run the cheaper system?”

The cryptocurrency debate is not one that will go away soon and it seems that the fine tunings for central banks are not quite complete. The BoE’s website admits it is undertaking “a multi-year research programme” before putting anything to market. But as Bitcoin – which is worth £2122.68 per unit at the time of writing – continues to evolve, that programme may have to hurry up.

“Why would a central bank step in as a blockchain third party?”




Money laundering exploits vulnerabilities in financial systems that allow for anonymity

and opaqueness when carrying out financial transactions. Research shows that serious and organised crime costs the UK at least £24 billion every year. The European Union’s fourth Money Laundering Directive (4MLD) was mandated to come into effect in all EU member states by 26 June. This is being adopted under The Money Laundering Regulations 2017 in the United Kingdom..

One of the government’s challenges is to ensure UK businesses comply, not only because of the moral imperative, but because after Brexit, the UK will want to further strengthen the integrity, stability and reputation of its financial sector. The need to thoroughly search for adverse information on customers and evidence this has been done will be challenging. Carrying out Customer Due Diligence (CDD) manually is going to be demanding, particularly if the target entity is based abroad. Which sectors will be affected? More businesses offering financial services to their customers, or handling customers’ funds, will be obliged to comply with the regulations than before. These include, but are not limited to: financial institutions, banks, building societies, insurers, accountants, auditors, estate agents and casinos. What are the main challenges businesses will face? Manual web searching is time consuming and often hit and miss. One simple

Jane Jee, CEO of Kompli-Global, explains how technology is making life more difficult for money launderers

What does the 4MLD mean for businesses?

case can take between a day and a week of work, and may result in important information being overlooked or hidden from researchers. What happens if businesses fail to comply? Penalties for non-compliance range from unlimited fines on individuals and companies, to being stripped of the ability to carry on a management role in a regulated business and companies losing their licence to operate. How can Kompli-Global help? Technology and human expertise combine as a powerful defence against money laundering and Kompli-Global is harnessing the power of both. To meet these challenges, Kompli-Global has launched a unique search platform, Kompli-IQ™. In addition, we offer tailored Due Diligence reports. What makes Kompli-IQ™ worthwhile? Kompli-IQ™, a multi-lingual, licensed software as a service (SaaS) search platform, uses proprietary machine learning technology to interrogate a wide variety of global information sources, including those invisible to search engines,for published adverse information on individuals and entities.

Using Artificial Intelligence produces quicker and more accurate results. It allows records to be saved and future searches scheduled for on-going monitoring. The bots do all the hard work, leaving the human researcher to view new results found and make a reliable, evidence-based risk assessment. Bespoke Due Diligence reports Kompli-Global offers bespoke Due Diligence reports when clients want or need to take a deeper look. To compile these reports, we draw upon local expertise from over 150 regions. With this level of input, Kompli-Global can provide the most in-depth information to help businesses make risk-based decisions and, importantly, provide the audit trail a regulator will demand. For more information, please visit: www.kompli-global.com

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13 Kompli-Global.indd 13 23/06/2017 14:05:58

LONDONCROYDON’S START-UP SCENE


It has been almost seven years since riots took hold of Croydon, and many residents would argue that

it is today a very different town. This regeneration can be seen everywhere in the area, but perhaps the best evidence is to be found in Croydon’s thriving tech scene. And while the riots are for many a painful memory, Jonny Rose, founder of the not-for-profit tech hub Croydon Tech City, says that disruptive time “had a real galvanising effect”. Rose, who was then a recent graduate, says the riots inspired him to return to Croydon, to build something positive at home. “We couldn’t just sit on our laurels,” he says. “We’d come back from university, we were full of ourselves,” he remembers, but says that when he began thinking of starting up, a sense of place and limited resources made Croydon the obvious choice.“Let’s do it from our parents’ houses, rather renting up in Islington.”

Between 2011 and 2013, Croydon’s tech scene grew by 38 per cent. The area is now home to more than 1,500 tech start-ups, progress the Deputy Major for Business Rajesh Agrawal describes as “phenomenal”. He calls Croydon Tech

London’s deputy mayor for business Rajesh Agrawal and Croydon Central’s Sarah Jones MP tell Augusta Riddy why Croydon is becoming a hotbed for fintech talent

The Silicon Valley of South London

City “London’s fastest growing digital, creative and technical start-up cluster”. Rose, too, is very proud of the progress that has been made, but he attributes the growth to bottom-up regeneration. “You don’t build the UK’s fastest growing tech economy by waiting on politicians.”

So, what is behind Croydon’s tech boom? Rose says the area already possessed all the necessary parts, and that it just needed a “unifying body” to unlock its potential, as Croydon Tech City has been successful in doing. As the “largest town in Europe,” the talent was there in spades. “Croydon is almost a city within a city, and if you think about the sort of people, the sort of talent you need to create a tech ecosystem ... [they] are all present in Croydon.” The borough is a major commuter belt, and Rose points out that talent was there, but simply commuting elsewhere. “We knew the talent was going uptown, so why not build an ecosystem here to retain it? This has really been one big retention exercise.” Crucially, Croydon was already home to some major tech companies, such as Dotmailer. Rose says this “proved that you could build a tech SH

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Spotlight | Fintech | 15

city here”, provided the means to create a well-connected tech community.

At the forefront of this community are a number of fintech firms that have been born and raised in the borough take off in recent years. Notable success stories include QuidCycle, an “ethical financial services company” that re-finances high-interest credit cards and loans, and Uniqodo, a “voucher code platform for eCommerce marketing”. Agrawal is himself a successful fintech entrepreneur, and he agrees that Croydon held the “key ingredients of developing a good ecosystem” including cheap rent and excellent travel links. For Agrawal, a particularly important factor is the makeup of the workforce: “[something] that really is attractive to entrepreneurs is diversity, and Croydon is very diverse”.

The newly-elected Labour MP for Croydon Central, Sarah Jones, is equally enthusiastic about Croydon’s future as a home for fintech companies. “As a new MP, I’ll be looking to quickly get involved and build relationships within the tech scene. I will be listening closely to firms already here to ensure we are

doing all we can to support them,” she says. Like Agrawal, Jones points to a diverse talent pool as one of the factors central to the borough’s tech success. “Croydon is a vibrant community with incredible diversity and energy so it is no surprise that young and innovative companies are increasingly choosing to set up here”. In local government, too, the potential of tech start-ups is recognised and encouraged; Croydon Council was named digital council of the year in this year’s Local Government Chronicle awards.

A nationwide debate on the technological skills gap has emerged in recent years with the growth of Britain’s tech sector. Jones says it is “vital that people from Croydon are contributing to and benefitting from our burgeoning tech scene. In the longer term this means investing properly in skills both for young people and adults – helping develop those lacking in basic digital skills and abolishing the digital divide.” There is a strong feeling that the growth of Croydon’s tech scene should not benefit only a technologically savvy elite, but the community as a whole. At City Hall, Agrawal points out the Mayor’s £7m Digital Talent Programme, which is aimed at training young people in digital skills, while at Croydon Tech City, Rose and his team have set up Future Tech City, a volunteer educational programme “converting non-tech locals so at least they have the skills to access jobs in the scene on their doorstep”.

Rose is so enthusiastic about his home town that he has recently started a line of T-shirts that read: “Croydon vs The World.” He talks excitedly about a recent local exhibition by Damien Hirst and an urban saffron farm round the corner from East Croydon station. “Now everyone has got a bit of vigour whereas once people were a bit ashamed ... Croydon is no longer a place where we lay our head at night”. Clearly, fintech firms are not the only things taking off in London’s leafiest borough and, as everyone is keen to point out, it’s all just 15 minutes from central London.

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In the mid-1990s, Bill Gates quipped: “Banking is necessary, banks are not.” And while obsolescence might

be a bit of a stretch – the old guard won’t go down without a fight – based on the developments within the financial sector since then, you can see that the Microsoft co-founder’s words were not without basis. The advent of fintech has brought with it several significant changes in the way that we handle our money. Challenger banks and mobile services – enabled by the modern miracle that is the cloud – have presented consumers with a fresh smorgasbord of choice. The choice for banks, however, is not so broad: modernise or risk being left behind.

An application programming interface (API) is the third-party conduit through which mobile payments are made. Think of it as the waiter taking your order at a restaurant. As mobile banking seeps into the status quo, it’s important that APIs work across the market, with any and all financial providers or banks, so as to streamline the payment process, anywhere and at any time. When you hop in an Uber, connect your Spotify account or get directions from Google Maps, you’re using APIs. Banking applications are more complex and are definitely more impactful.

In addition to increasing competition between providers and improving security through encryption, APIs in banking have the potential to offer people a more holistic view of their finances. When you pay for something, you want the end-to-end transaction of your money to be quick and secure.

The first fully licensed and regulated

As mobile banking services disrupt the status quo, the establishment has a duty to innovate, according to Daniel Döderlein, CEO of Auka

Making use of the mobile middle-man

financial company to be run completely on the Google Cloud Platform, Auka builds and operates fully regulated and licensed end-to-end payments infrastructure that connects financial institutions, merchants and consumers. All banks are then able to license the infrastructure and applications and launch payment products under its own brand. Auka’s API hosting service features vendor approval and management, ensuring that only requests from approved AISP (Account Information Service Provider) and PISPS (Payment Initiation Service Provider), and equivalent regulated entities are enrolled and granted access.

The second iteration of the Payment Services Directive (PSD2), a European Union directive set to come into action at the end of January 2018, has underscored the need for banks and financial providers to develop their mobile services; and Auka’s are fully compliant of this. While the United Kingdom’s relationship with the EU is admittedly uncertain right now, whatever the intricacies of an eventual Brexit deal, it is important that PSD2 is still honoured.

Although PSD2 may be a new model, it is all about an old value: trust. For the first time banks are able to ditch intermediates, allowing any e-commerce provider to take monies directly from a consumer’s account via an API. PSD2 means that consumers will need to give consent to allow their bank account information to be made available through the APIs. With this information, the third-party has the chance to bring together key bank data, including income, purchasing history and debt repayments to get a rounded view of the consumer.

This also includes the credit risk of each individual, as well as their likes and dislikes from the product and service marketing perspective. Such a dataset presents huge commercial opportunities, like cross-selling. The financial sector will need to identify a strong value proposition to garner people’s enthusiasm, which is where Auka comes in. For more information, please visit: www.auka.io

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16 Auka.indd 16 23/06/2017 14:07:16



Despite being around for many years, direct lending, which also encompasses peer-to-peer (P2P)

lending, is only recently accessible to retail investors and recognised as a mainstream asset class, used by personal investors to enhance their portfolios. As direct lending becomes increasingly established, we’ve seen more and more investors viewing it as a credible and potentially stable addition to their portfolio. Our clients have achieved a gross return of eight per cent per annum since 2015.

With interest rates at a historical low, increased inflation looming, savings accounts offering negligible returns and stock market volatility; finding reasonable investment returns is becoming more of a challenge. Direct lending can offer an attractive alternative – particularly if you approach it from a long-term perspective and keep your money invested for at least 12 months. Informed decisions The key to navigating the large and complex direct lending market and to make the most out of your investment portfolio is making informed decisions. This will help you target: attractive returns with lower volatility; downside protection from secured lending; liquidity with access to funds when you want and a diversified portfolio across a range of both lenders and loan type.

There are some key issues you may want to consider if you are thinking about direct lending as an addition to your investment portfolio. Be clear about your objectives and your appetite for risk. Why are you investing? Is it for capital growth or are

Making informed decisions is key to getting the best out of your investment portfolio, writes Stephen Findlay, founder and CEO of BondMason

Why lending is becoming the new investing

you looking to invest for income? Think how comfortable you are with risk. Do you consider yourself a more adventurous investor or are you focused on preserving your capital? Managing risks It’s crucial to understand the potential pitfalls of your investment. Your capital is at risk and your money is not covered by the FSCS. Understanding such pitfalls will help you mitigate against them properly. Diversification Diversification is an effective tactic. Spreading your funds across different lending partners and different loan types can help you better manage that risk. Equally, when you are choosing your lending platforms check that the team behind the platform has a solid investment or lending background and that the platform is aligned with your interests as an investor. Loan opportunities This brings us neatly to selecting the best loan opportunities. A good rule of thumb is to use the RADAR principle: reason, assets, duration, amount, repayment. Looking at all these in turn will help ensure you are selecting the best loan opportunities available. Auto-bid tools can help save time as you don’t have to manually select loans. Taking control Finally, it’s good to stay pro-active. As the direct lending market continues to evolve it is important to keep up to date with the platforms, new operators entering the market and any changes in performance. Good luck! You may like to download our free guide: “Steps to Successful Investing”, available from the homepage on our website or simply email us. BondMason curates direct lending opportunities from approved lending partners. Clients target a gross return of eight per cent p.a. Website: www.bondmason.com Email: [email protected]

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17 Bondmason.indd 17 23/06/2017 14:10:05


OPEN BANKINGTHE CURRENCY OF DATA

Big banks are rapidly losing customers to data-driven fintech firms. Augusta Riddy asks Tom Blomfield, founder of Monzo, and Imran Gulamhuseinwala, head of the Open Banking organisation, why information is the new currency

A few years ago it was reported that the average current-account contract lasts longer than the

average marriage. For whatever reason, British people have greater loyalty towards their bank than their spouse. But is it loyalty or laziness? Or is it the nature of the market?

Imran Gulamhuseinwala is the global head of fintech at Ernst and Young, but is currently on secondment working as the implementation trustee leading the Open Banking Implementation Entity. He says that a financial revolution is coming and, if all goes to plan, it should be here in under a year. “If we get this right we can build a financial services sector in this country that is more inclusive, that is personalised, and is effortless”. He is referring to open banking, a radical new system of commercial banking that allows customers to share their financial data through open application programming interfaces (APIs).

The Open Banking taskforce was

The future of banking is open

established by the Competition and Markets Authority (CMA) to oversee the adoption of open banking by early 2018, something that is expected to radically shake up what is seen as a stagnant sector. When the CMA published their report Making banks work harder for you, the chair of the retail banking investigation Alasdair Smith declared that they were “breaking down the barriers which have made it too easy for established banks to keep a hold on their customers.”

For many people the idea that their bank would share details of their salary, savings, outgoings and overdraft would be a horrifying proposition. But, as with email and GPS maps, opening up personal data brings important advantages. By sharing your data and making it securely accessible, banks will be opening their customers’ eyes to competition. It will allow third parties to access that data and develop services that are tailored to consumers’ particular circumstances. It will be much easier to

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OPEN BANKINGTHE CURRENCY OF DATA

compare quality of service and switch providers, and consumers will be prompted to assess the value of the products they have bought, including mortgages, loans, current-accounts and ISAs. Instead of being encouraged to stick with one provider for all your financial needs, the market will be cracked open for consumers to pick and choose, all through a shared platform.

The CMA is not the only organisation pushing open banking. Much of the impetus comes from two transformative pieces of EU legislation that aim to make digital banking faster and more secure. The first of these is PSD2, the second Payment Services Directive, which gives customers the choice to pay directly from their account rather than having to send their credit or debit card payments through a third party such as Visa, and must be implemented by January 2018. The second is the General Data Protection Regulation (GDPR), which takes effect in May 2018. The GDPR introduces fines of up to four per cent of global turnover for companies that lose EU citizens’ data. For banks, this puts a premium of billions on data security. Gulamhuseinwala is emphatic about their influence: “PSD2 along with GDPR have always been some of the fundamental catalysts behind making open banking happen. I sometimes define open banking as the combination of PSD2 and GDPR.”

He is insistent that the nine big banks are playing ball –“We’re really advantaged in that we have the wholehearted support of all of those nine banks to get it done” – but this begs the question of why such forceful legislation was required to help bring about open banking. While the big banks have been perceived to be dragging their feet, challenger banks have been embracing the technological gap in the market.

The most prominent challenger is Monzo, which launched its own API in 2015. Monzo is known for its distinctive bright coral cards, its well-designed app, but the key difference is the real-time expenditure information it offers consumers, by “building our systems

from scratch, using the latest technology used by Amazon and Google”. CEO Tom Blomfield says Monzo offers a switch from “anxiety and loss of control to a feeling of peace of mind”, and the appeal of this feeling of control is rapidly becoming clear. Two years after it was founded, the company hit 200,000 users.

Blomfield says the big banks have “historically resisted” open banking because they are unwilling to relinquish control of the data they have “sat” on, and are “obsessed” with selling financial products. “They sign you up very young as a customer and they try to flog you their own products throughout your life.” As Monzo is not seeking to sell its own financial products, he insists that when it comes to customers surveying the market, they have “no vested interest”. He believes open banking “opens up this new kind of service … this central aggregating platform that helps you control all of your money.”

Blomfield adds that banks have been trying to water down PSD2 legislation, but thinks this is due in part to panic: “It is happening because the timelines are now just so tight that getting something live by January 2018 seems less and less likely.”He thinks that the major concern is whether the banks’ systems can support open banking safely, referring to recent high-profile data breaches as examples. “The BA crisis, the RBS systems outage, the Tesco breach, the NHS… it wasn’t like they had cutting-edge technology and hackers managed to defeat them. They just haven’t upgraded their systems in 15 years.” Blomfield describes this negligence as criminal. The possibility of consumers’ financial data being stored and shared by banks that rely on “tacking on pieces round the edge of their core systems” may be increased by the tightness of the deadline. It is now less than a year until the APIs to support open banking are supposed to be ready.

Blomfield is not the only person voicing concern about data security. Jim Killock, executive director of the privacy campaign group Open Rights, says that although “the sharing of data in itself is

“Your data belongs to you, not a financial institution”



open banking will offer consumers more control than ever. “It is recognising that the data belongs to you and not the financial institution and you should be able to use it as you like in a private and secure way.” When probed on the banks’ ability to safely store and share the data, he states that APIs are “the safest and most secure technology. What we’re doing does not require a consumer to share their username and password.”

What is certain is that change is imminent. Blomfield says pressure is mounting on the banks, not just from consumers and the CMA but also from other levels of government. “There’s huge political will behind this. The Treasury is pushing this and they are not

going to give up.” However, he remains sceptical of the timescale targets.“This will happen, but it might not happen by January 2018.” Gulamhuseinwala is clearly awake to the enormity of the task but remains more optimistic. “Even though it’s really hard, I’m confident that we will get it done on time.”

The task is indeed great, but his enthusiasm seems to shadow any doubts. “I personally am really excited about what we can create here and the benefits it will give consumers and the opportunities it will give the market. I’m really grateful to get the opportunity to lead this.” Still, if the big banks don’t transform the market, the challenger banks will.

Monzo’s fast, data-driven

approach has won it

200,000 customers in

just two years

not necessarily a negative development, there are many things that could go wrong. Financial companies need to ensure that they can store and protect it securely”. While Killock acknowledges that GDPR “does improve things somewhat”, he also highlights concerns about consumer control. “A lot depends on whether we can genuinely consent to this valuable data being shared and control what happens to it afterwards”, he says, arguing that the financial sector faces “particular challenges, in that consent is a condition of getting credit, so it’s very hard to opt out from. Agreements to share data are not usually a fair bargain”.

For Gulamhuseinwala, however,




Data science is transforming the nature of numerous industries and insurance represents no

exception. Companies such as Uber and Netflix, for example, are already using data science not just to bring conveniences to customers, but also to entice their “casual workforce” to be more available, thereby boosting the supply chain. Beyond the law of averages Presently, guesswork is a huge component in risk assessment and the determination of insurance premiums; the foundations of which involve making assumptions about groups of people that share characteristics. Some of the assumptions run along the lines of “middle-aged, married men are better drivers” or “the younger you are, the healthier you are likely to be”. These syllogisms have historic use in the industry and refuse to die down despite studies that point to the contrary.

The “spray and pray” approach divides good and bad risks alike among customers of all types. Interestingly, a pilot study conducted by Aviva shows that analysing a potential customer’s online behaviour and spending habits is just as effective in identifying potential health risks as a medical examination. With advanced data science technology, it is possible to figure out a premium that is specific for the customer, instead of someone like that customer.

Given that most insurance companies already collect a vast amount of data about their customers, why not use it and start crunching it? A sizeable part

Companies have always done quantitative research, but now they’re leveraging data to deliver more bespoke services, explains Mark Broadhurst, head of insurance EMEA at Intellect SEEC

How data science can transform insurance

of this data, now termed as “big data”, is generated in the form of private emails, chats and other exchanges. An even larger set of data constantly flows through in social media posts. Statistical modelling versus data science To illustrate the difference between statistical modelling and data science, let’s consider the likelihood of claims by existing customers in an insurance company. Statistical modelling uses historical data. In this example, based on claims data from the last five years, we have a prediction for the likelihood of claims by customers in the coming year. Due to the lack of sophisticated technology to model for the future, statistics and data analytics average out historical data to represent trends of the past and future.

Data science can present a much more accurate view of the likelihood of customers claiming. This has been enhanced by the advances in matching actual data to the scientific modelling. Innovating in insurance Insurers have historically applied statistics to and worked out policies for the average person or company. Today, there is sufficient data available to adjust policies to suit a person’s specific life stage, habits and goals. A far more surgical analysis can be obtained from a number of sources such as wearables, the Internet of Everything and unstructured data through social media. This window into a person’s life is possible only because of data science and analytics. As a result, insurers can reduce the price of policies because individual customers and companies are no longer being judged against the average. Insurers could even incentivise customers to change their lifestyle to improve their policy.

A data scientist is equal parts machine programmer, statistician and mathematician. The combination of these skills enables them to formulate the problems and craft solutions – an undoubtable asset in a rapidly changing and exciting industry.

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22 Intellect SEEC.indd 22 23/06/2017 14:11:18



Global politics is as unstable and unpredictable now as it has been in living memory. A sweep of agitation

has made its way across continents and through borders. In the United Kingdom, the population was rocked by Brexit, with its result reverberating around the world. The nation was subsequently met by another surprise when Theresa May called a snap election. And with Donald Trump’s historic victory to become President of the United States has come almost daily news of perceived controversies, while far right figure Marine Le Pen fought through to the last two of the French presidential race.

This period of unpredictability has caused friction in the markets and driven global shifts in currencies and stocks, with even the usual correlation between the safe haven investment of gold and dollar figures being affected at certain points. For the first year in almost a decade, politics and the ballot box have consequently overtaken monetary policies from central banks as the driving influence in market sentiment.

The reality is that uncertainty alone can impact on the markets and political instability is a peril that investors can’t afford to ignore. The UK and the US, generally considered to be steady, stable and predictable political systems, have produced votes that astonished global onlookers and shook stocks, commodities and currencies across the world.

Since his inauguration, Trump has set about ripping up the script, with a barrage of executive orders, politically contentious statements and bizarre tweets. Market enthusiasm for Trump has taken a nose dive and the risk of trade wars with both Mexico and China has heightened

The relationship between politics and finance has never been so pronounced, says Ricardo Evangelista, desk manager at ActivTrades

How do we understand the unpredictable?

investor uncertainty. While the markets have remained in a stable state after May’s call to the UK public to go to the polls, investors must be mindful not to get carried away.

Of course, the winds of political change have certainly not been confined to the US or the UK. Uncertainty prior to the referendum wiped 20 per cent of the value of Italian stocks last year and the recent French election and threat from the far right succeeded in disrupting the usual relationship between the dollar performance and that of gold. Evidently, markets are so far unable to discount politics in the same way as they can discount anomalies in economic data.

For investors this is a lesson on the need to stay abreast of world events and follow significant moments in the political calendar. Likewise, companies that engage in market investment have a duty to keep clients informed on how these developments might impact on the market and therefore their own decisions. And this should be done across all available channels of communication.

At ActivTrades we pride ourselves on our webinars, seminars and published analysis, which guide consumers on current financial trends and news which affect the markets. The aim of our news output is to educate clients across the many countries we operate and to help traders making better informed decisions.

It is for this reason that we welcome the wave of regulatory changes sweeping across Europe. The German financial regulator BaFin, for instance, has confirmed plans to enforce a negative balance protection on CFD trading, meaning consumers cannot lose more than what they invest.This is a sensible measure that ActivTrades adopted ahead of the curve in 2013, and we are delighted to see that it is becoming standard practice.

The driving intention, whether it is taking place in Germany, Belgium or the UK is to protect the consumer. One common theme in many of these regulated markets, aside from restrictions, is the drive to educate clients on the financial markets. In the age of Trump and Brexit, this is necessary.

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23 ActivTrades.indd 23 23/06/2017 14:13:15


PLANNING FOR THE FUTUREMILLENIAL MONEY

Earlier this year, the Australian property developer Tim Gurner found himself in hot water when

he suggested that the main reason millennials struggled to get on the property ladder was not the legacy of a global financial crisis, crippling student debt or even the astronomical price of housing, but their indulgent eating habits. Gurner scoffed: “When I was trying to buy my first home, I wasn’t buying smashed avocado for $19.”

While a quick calculation exposes Gurner’s comments as not just crass but hopelessly inaccurate – it would take over 120 years of missed brunches to save for a house in Melbourne at today’s prices – it is true that spending habits are a force to be reckoned with. Moneybox is a new app designed to digitise the skill of saving, and to demystify the stock market. In an increasingly cashless economy, it allows users to invest their “spare change” by making small, automatic payments into a stocks and shares ISA. The app is linked to an online bank account and rounds card payments

The Moneybox app aims to open up the investment scene to young people. Co-founder Ben Stanway and marketing manager Charlotte Oates talk to Rohan Banerjee about a new way of saving

Can you buy a house with spare change?

up to the nearest pound. So, if the user spends £2.40 on a coffee the app will direct 60p into the ISA, which is then invested in one of three tracker funds – cautious, balanced or adventurous.

This technologically driven micro-investing is aimed squarely at young people who lack the experience or motivation to plan their finances. “Everyone in the world is saving towards something,” says Moneybox co-founder Ben Stanway, “but the reality is that not everyone knows how to do it effectively. It’s very easy to put off saving. We’ve reduced the barriers to trial and giving it a go. We’ve broken the inertia.”

Are millennials really incapable of saving off their own back? Surely, the most logical solution to overspending on coffee would be to buy a cafetiere? Charlotte Oates, Moneybox’s marketing manager, says: “Millennials have a pretty raw deal. It’s easy to say that you intend to save or cut costs; it’s harder to actually enact the behaviour to do it. We’d like to move away from the finger wagging and warning young people they need to stay

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in and just eat beans on toast.” The app also aims to make investing

stocks and shares easy for people who are time-poor or disinterested. Stanway, who spent eight years working for the hedge fund Habrock Capital and just over a year at Fidelity Investments, says he wanted to avoid presenting novice investors with “a paradox of choice.” He continues: “Each option contains a mix of three tracker funds: a Vanguard global equities fund, a Henderson cash fund and a BlackRock property equities fund. While the risks of investing still obviously exist, a lot of city fund managers don’t actually beat tracker funds. So it can be better to drip-feed money into a very low-cost but diverse tracker fund.”

Any app that requests access to its users’ bank accounts must inspire confidence. Oates says that Moneybox is authorised by the Financial Conduct Authority (FCA), and that the app makes “a secure connection with your financial institution, on a read-only basis”. Furthermore, the Moneybox app only

allows users to view their transaction history and the money they have saved using the service’s “round ups”. The company, says Oates, is never itself able to access the user’s account: “Moneybox doesn’t access or store your online banking login details. This is done through a partnership with [payment services company] Yodlee. When you enter your online banking details, Yodlee communicates with your bank and specifically excludes account or card numbers to further reduce risk. Login details are encrypted.”

As well as investing their spare change, Moneybox users can set up weekly savings and make one-off deposits. If funds are sold, users receive their returns within three days. But convenience and behavioural change will come at a cost – a subscription charge of £1 per month and a platform charge of 0.45 per cent per year, compared to 0.25 per cent for many other ISAs. So how much do people need to invest in Moneybox to make it worth it? Stanway suggests that the average Moneybox user, using only the round up option saves “around £600 per year” but points out that “our average customer has been saving around £600 per month with weeklies and one-off payments.” When asked if this really represents a millennial savings pattern, he elaborates that “Moneybox is for people who have an income that’s greater than their costs. The age of our average customer is 31. People need a period of time after school or university to pay off their debts.” Oates chips in: “Our direct audience is someone who has money set aside already and thinks they should do something with it.”

The financial journalist Jean Chatzky wrote in 2009: “Put all of your savings on autopilot and you won’t likely notice the missing cash.” With the aim to automate already established in other aspects of human life, from transport to manufacturing, finance is following suit. Companies such as Nutmeg have already made saving smarter, but behaviourally-focussed ideas such as Moneybox could form the next generation of automatic investment.

SQUIRREL This app works as a buffer between people and their salaries, drip-feeding cash back into their account when it is needed, and portioning out what is

left so they don’t spend it all at once. Users must direct their income into a Barclays-powered Squirrel account in their name. The app segments money into three groups – commitments (bills, rent or mortgage payments), savings and spending money. The first three months are free to use, then it costs £3.99 per month.

CHIP With read-only access to an online bank account,Chip gathers information about users’ spending habits. The app, which is free to use, then works out how

much they can afford to save every few days without affecting spending. The cash is diverted into a separate account held with Barclays, but Chip is also compatible with several other high street providers, inlcuding NatWest, Halifax, Lloyds, Nationwide, HSBC, First Direct, Santander and TSB.

GOODBUDGET Goodbudget is another app based on the envelope budgeting method – dividing your cash into pots of money for different things. Envelopes

and balances can be synched between different devices and other people – useful to work out the household budget for couples. The app is £3.50 per month to use. All money-based apps carry their own risks and should be used at consumers’ discretion.

The psychology of spending and saving: apps to look out for

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The fintech revolution is in full flow, democratising the financial sector and offering a vast range of

products. But with great power, comes great responsibility, including the responsibility to comply with complex and extensive regulation. This should not be viewed as a roadblock. Rather, consider it road maintenance.

The lesson to learn from a lack of regulation is that it fosters a culture of mistrust. The 2008 global banking crisis is still fresh in people’s minds and as the world continues to digitise, with more and more sensitive information being shared online, it makes sense for fintechs to ensure regulation is at the heart of their strategy.

London, and in turn the United Kingdom, is at the vanguard of fintech regulation, encouraging fintechs to test innovative products in the Financial Conduct Authority’s (FCA) regulatory sandbox (with the second wave of participants announced this month). The regulation that applies to fintech is not new but it was not designed for new business models and innovative products, making compliance a significant barrier to entry. Fledgling fintechs cannot risk non-compliance, so building efficient regulatory compliance into their systems has encouraged the development of RegTech, the use of technology to manage a range of regulatory challenges.

The same driver is prompting law firms to develop streamlined and commoditised services for the fintech community, reducing the time, complexity and vast expense of getting on the regulatory road. The Hogan Lovells Authorisation Tool

Emily Reid, global head of commercial and retail banking at Hogan Lovells, says it’s vital that fintech firms keep abreast of regulation

Why even a revolution needs a rubber stamp

and Regulatory Accelerator are examples, designed to provide a new tech solution to understanding the regulatory landscape.

Many fintechs don’t know whether their activity is regulated at all or which permissions they need. The Regulatory Accelerator addresses these challenges for fintech firms, designing and scaling a business, by providing information on the FCA’s regulatory regime, including resources to help companies determine whether they are conducting regulated activities or issuing financial promotions, and what they need to be regulated for.

The new Authorisation Tool also provides information on the FCA application process, what companies will need to demonstrate to the FCA in order to be eligible for authorisation and the key rules that will apply to the business once it becomes authorised. A package of support can then be provided to boost a fintech’s authorisation journey. Ultimately, the longer it takes for a company to gain authorisation, the longer it takes for their product to reach the market.

Another important consideration for fintechs is compliant with some European Union-mandated legislation like the General Data Protection Regulation (GDPR) and the Second Payment Services Directive (PSD2). Whatever the eventualities of the UK’s Brexit deal, it is crucial that these regulations are still adhered to. While the UK’s future might lie outside of the EU, it seems unlikely that all interaction, even if only in terms of competition, with EU companies is going to stop. Thus if there are standards to be implemented, then the UK must honour them.

Fintech has also renewed focus about companies’ cyber security. Convenience, though, should not be pursued without compliance. If the trust of the consumer is lost, the lasting reputational damage for a company can prove devastating. In both starting and sustaining fintech services, Hogan Lovells continues to offer expert advice on how to fulfil regulatory and legal responsibilities. You can’t win if you break the rules. For more information, please visit: www.hoganlovells.com

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26 Hogan Lovells.indd 26 23/06/2017 14:15:44



It is being increasingly discussed how fintech can help global issues like financial inclusion but fintech also

presents an opportunity to address domestic policy challenges. Ensuring stable growth in capital flows and Foreign Direct Investment (FDI) is one such area that warrants greater exploration. FDI is always high on political agendas but is more relevant when our global trade relationships are being restructured and currently, as highlighted in EY’s recent UK Attractiveness Survey, the landscape is mixed.

Last year showed overall growth in inward investment projects, yet a reduced market share compared with other European jurisdictions. Long-term indicators suggest, however, that the real challenges lie ahead due to a sharp fall in how global investors rank the UK on key criteria such as education and political stability.

The challenge of overcoming investors’ concerns is even more pronounced for regional hubs, with a growing risk of only certain geographies being in a position to benefit from growth in FDI. London is far, far ahead in attracting investment when compared to its regional counterparts.

Yet amid the task to attract capital for regional economies, a new opportunity emerges from two key trends: increased devolution to regional economies, and the rise of High Net Worth (HNW) individuals and family offices allocating private capital to private companies, private debt, real estate and infrastructure. According to a BNP Paribas report, today’s HNW allocates over half of their wealth to illiquid assets. Better engagement with

In the aftermath of Brexit, the case for investing in digital platforms has never been stronger, says Gareth Lewis, CEO of Delio

Using fintech solutions for inward investment

this pool of capital represents a unique way of getting on the front foot in achieving regional growth.

For any regional ecosystem wishing to engage more with private capital there are difficulties but, first and foremost, it is about network. The access to these investors exist across a range of organisations within each ecosystem (e.g. universities, chambers of commerce, regional investment funds) but they are fragmented; there is no co-ordinated approach which gives prospective investors the real-time visibility of opportunities they demand or a regional economy the capital supply they seek.

Technology can, has and will play a significant role in overcoming these issues. At Delio we have seen this first hand. We have worked with leading financial institutions, government and other types of organisations to unearth relevant deal flow within their network and connect it with private investors in a way that is right for them and their commercial ambitions.

What this means in real terms is an own-branded digital platform that can help source, validate and qualify suitable investment projects, then manage and automate processes such as engaging with investor bases to secure the capital required to see projects through to generating returns and delivering economic benefit.

Governments and other regional bodies can serve as independent cornerstones of a regional network of such platforms and be the unifying force to present a single regional showcase. This can enable the illumination of the full range of investment opportunities in the area in a timely, structured and compliant manner whilst meeting the needs and requirements of all the players and partners.

There is no “one size fits all” approach to achieving this and nuances exist in building the right solution for each region but this is where flexible financial technology can come in to its own. Regional ecosystems can utilise fintech solutions to build a showcase that leverages local networks and efficiently engages with the international investor community. For more information, please visit: www. deliowealth.com

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ADVERTORIAL


27 Delio.indd 27 23/06/2017 14:17:06


FINTECH BY NUMBERS

What’s it worth to the UK?

£6.6bn

Estimated total value of the fintech

sector, 2015-16

Of financial seplan to adopt

techno

Predicted global value of mobile

payments in 2018

Fintech provides 61,000 jobs – five per cent of

financial services

61k

$930bn

77%

28-29 infographic.indd 28 23/06/2017 16:31:21

Name of issue here | Spotlight | 29

INFOGRAPHICTH VALUE OF FINTECH


By 2027 there could be 45,000 technology

companies based in London alone

Increase in investment in fintech in first quarter of 2016

Yearly spend by the banking industry on

areas that could be handled by AI

services firms pt blockchain nology

7%

$270bn

67%

45k

28-29 infographic.indd 29 23/06/2017 16:31:22



T he Markets in Financial Instruments Directive (MiFID II) is the latest in a series of new rules and regulations

governing electronic communications in the financial services industry. Due to come into force in January 2018, some consider it to be the most sprawling piece of financial legislation ever devised, presenting numerous challenges for those looking to achieve compliance. One of the more contentious aspects of MiFID II is the change in requirements relating to the recording and archiving of telephone calls. The Financial Conduct Authority (FCA) currently mandates that only telephone conversations of individuals directly involved in trading need be recorded, but MiFID II significantly broadens the scope to include anyone involved in the advice chain that may result in a trade.

Perhaps unsurprisingly, before MiFID II was announced, few financial institutions had the infrastructure in place to meet this requirement and many are still working on how best to achieve compliance. For those that don’t have the necessary in-house resources, a variety of call recording and archiving solutions are available from third party organisations. But choosing the right one can prove difficult without the necessary knowledge of what to look for.

There are some key considerations when assessing available solutions. The first is that calls should be recorded across all platforms. MiFID II mandates that calls must be recorded across both mobile and landline platforms, so it is critical to ensure any solution being looked at has the ability to do this, as many out there cannot.

Secondly, will implementing the new solution result in business down time and

Matthew Bryars, CEO of Aeriandi, considers how MiFID II will strengthen both market integrity and investor protection, while future-proofing the regime

Navigating the MiFID II maze

therefore, loss of revenue? If so, this creates problems of its own. Many cloud-based recording and archiving solutions no longer require any on-site installation, eliminating disruption incurred as a result. Scalability is also a major factor. Can the solution scale up to cover busy periods, whilst scaling down to save the organisation money during quieter periods? If not, it should be avoided.

Cloud-based recording and archive solutions offer the ability to access call recordings and archives from anywhere, at any time via a secure online portal, a major benefit for organisations spread over multiple locations. Vendors specialising in on-site recording and storage often cannot deliver this level of flexibility, so be careful to ensure any solution being considered matches the needs of the organisation.

Secure storage and encryption represents another key issue. MiFID II mandates that call recordings relating to a financial transaction must be stored for a minimum of five years after the transaction was made, a significant rise from the six month period currently mandated by FCA legislation. Not only does this impact heavily on storage resources, it also presents security challenges. Only recording and archive solutions that offer the latest data encryption and provide guarantees about who is able to access recordings should be considered.

Finally, there must be compliance with additional data standards. Some solutions offer additional layers of compliance beyond MiFID II, helping to improve returns on any investment made. This includes the Payment Card Industry Data Security Standard (PCI DSS) and BS10008; governing whether recorded content is legally admissible in court.

When addressing the new MiFID II legislation related to call recording and archiving, organisations have a number of avenues they can go down. For those not choosing the in-house route, there are numerous excellent solutions available from third parties. Care must be taken to ensure the solutions on offer help to achieve all compliance goals. For more information, please visit: www.aeriandi.com

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30 Aeriandi.indd 30 23/06/2017 14:18:21

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Documents

01 Spotlight Fintech cover - New Statesman · harder if the Conservatives have their way with pledges to double the levy companies pay for foreign employees and reduce net migration