Fintech Digest - March 2017

Transactions going digital

Following demonetization legislation by the Indian Government, removing INR500 (USD7) and INR1,000 (USD15) rupee notes from the market, there has been an upsurge in Indian people using digital wallets such as PayTM, to make in-store payments. The Times of India reported a rise in digital transactions of 271% within the first month after demonetization. 
Meanwhile, People’s Bank of China (China’s central bank) has been trialling its own cryptocurrency (a digital exchange that uses advanced cryptography for security). For the tech-literate consumer, the transaction wouldn’t be overly different to existing Alipay or WeChat digital payments. For the merchant the cost of a transaction would be lowered as payment would be direct from customer to business eliminating the middleman. 
The Bank of Canada, Deutsche Bundesbank and the Monetary Authority of Singapore (MAS) are also interested in digital currencies. The Bank of Canada released a report saying that bitcoin and other cryptocurrencies need the support of government and government regulation to ensure safety, soundness and uniformity when widely circulated. The MAS tested blockchain technology provided by R3 in late 2016 with a consortium of financial institutions to conduct a proof of concept study of interbank payments. Deutsche Bundesbank is also carrying out tests with blockchain technology. 

Fintech stepping in where incumbents fall

Data analytics is being used to transform the way financial services are delivered – particularly to groups traditionally underserved by the industry. Technology is also lowering the costs of serving these higher-risk customers, mitigating the risk for providers.
Chinese fintech companies such as JD Finance, part of JD.com, are offering Chinese SMEs loans that the incumbent banks are unwilling or unable to give. The CE of JD.com said in a speech at the Boao Forum, that from 2013 to the start of 2017 the company lent more than CNY250 billion (USD36 billion at current exchange rate) to SMEs and gave generous amounts of credit to over four million farmers. JD claims to have achieved this by using technology that swiftly, accurately and efficiently assesses appropriate loan value and interest rate for each individual applicant, a process that fintech and mobile finance helps to make cheaper for the lender. 
Another subset of people that might have problems getting loans or credit from banks are foreign students. As they have no credit history banks are unable to carry out the usual checks to come to a decision of creditworthiness. SelfScore, an American fintech company, uses its Analytics Based Credit Decisioning (ABCD) system to rate credit applicants’ eligibility, identity, stability of identity and ability to pay through a self-report method. The company then verifies this information through backend APIs and score it on the same scale as FICO. If the applicant is successful they will be offered a credit card with 19.49% APR.  
British digital bank start up Revolut  has launched a loan service that can enable a customer applying for GBP500-5,000 to receive a decision in two minutes with the fund credited to a Revolut contactless card in a matter of moments. The app asks applicants to input wage, required loan amount and residential status and then processes it through a credit decision model, which outputs information such as the total cost of the loan and repayment plans. 

Root card

OfferZen, a South African software developer, has announced its Root bank account, which allows software developers and end-users to build additional functions onto the basic bank account structure.  A use case that OfferZen details on its website is of building a function to place a credit limit on the card but allow spending above this limit if it is for a pre-specified purpose such as Uber taxi rides. Or the user could write code that will send them an alert when they buy a particular item stating how much they have spent on that item over the past week. Standard Bank will provide the underlying bank services and regulatory framework, as well as a secure store for funds. 

Moving to Ethereum 

Storj, a cloud storage service company, is planning to move its storage system to Ethereum’s blockchain from Counterparty. Storj CEO Shawn Wilkinson said the decision was due to a number of factors:
•    The Counterwallet has had no major updates in the past two years, and has a confusing interface for novice users.
•    Multisig stopped functioning because Bitcoin made multisig transactions non-standard causing multisig wallet tokens to become inaccessible. This caused Storj worries about the stability of functions in the future. 
•    Transaction backlogs and delay in payments with Bitcoin blockchain.
•    Counterparty transactions create small inputs and are ‘heavier’ than normal transactions, causing high fees for transactions. Transaction fees have been as much as 13% of total payouts in recent months.
•    Counterparty ecosystem is small, with few other organisations using it at scale. This means that Storj has had to fund upgrades to the Counterparty protocol to create its micropayment tools. 

ClearBank clearing bank

Launched in February 2017 ClearBank is a digital clearing bank, whose systems have been built on MS Azure cloud architecture. Before the launch of ClearBank there were four clearing banks in the UK. A clearing bank is a financial middleman that ensures payments are delivered to the recipient. Clearinghouses are a cornerstone of current account and bank sort code-based services. ClearBank is part of SWIFT (Society for Worldwide Interbank Financial Telecommunication) and funds are securely held by the Bank of England. The company is the result of three years of work in partnership with Microsoft. The company claims that its system will allow for more efficient, cheaper and quicker transactional banking than previously. The bank will begin business in Autumn 2017. 

EU amendments and digital currency

In March 2017, the European Parliament (EUP) amended several laws that affect cryptocurrencies such as bitcoin and ether.  In an amendment to Directive (EU) 2015/849, which reaches the 2-year implementation window in June 2017, the Parliament has targeted digital currency issuers and administrators. This is an attempt to bring them into line with other financial operators in that they must identify any suspicious activity and be licensed or registered. Another area touched by the amendments is the anonymity of cryptocurrency. Amending a Directive from 2016, the EUP said that cryptocurrency doesn’t possess the legal status of currency or money, and that digital currencies cannot be anonymous. To eliminate anonymity the European Parliament has suggested the creation of a database of digital currency and digital wallet users. This is expected to assist authorities to monitor the use of virtual currencies and identify suspicious activity. 

Jaguar makes petrol payment easier

Jaguar, the luxury car manufacturer, and Shell, the oil company, have cooperated to allow drivers of the Jaguar XE to make cashless payments at Shell petrol stations through PayPal. Installing the Shell app on the car’s computer allows the driver to pay for his/her fuel. He/she can do this through the vehicle’s touchscreen control pad by selecting the amount of fuel needed and then pay through their PayPal account. The Shell app for in-car contactless payments can be downloaded in the UK now, with the payment service coming to more countries in 2017. 

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