Fintech Genome

Fintech, transparency and regulation


#1

Some P2P Lending platforms have pioneered unprecedented degrees of disclosure of their loan books (compared to traditional banking). Some commentators have argued that this might both be self-defeating from a business perspective and not effective from a risk management perspective (e.g., without adequate data quality.)

Yet the big picture remains: radically new levels of transparency might be truly disruptive, more so than any technology advantages (which in any case will only be a temporary, as incumbents catch up). For example built-in transparency may induce a permanent regulatory advantage (a good chunk of the “regulatory burden” involves regulators extracting information).

What are people’s thoughts on the trade-offs?


#2

@Philippos I totally agree that the Transparency movement (banking Open APIs, fees for financial products, loan books etc) is unstoppable despite multiple frictions.

Focusing on P2P loans, regulators and risk managers would want the transparency as you already mentioned because it facilitates their Data gathering. However, there are conflicts arising from Data privacy issues (for regulators) and from data quality (for regulators and risk managers). Companies like DV01 or NSRInvest (both in the US) are involved in the P2P loan market and are focused on transparency in the primary and seocndary market and analytics. Lets invite them in the conversation to bring their experience.

The UK is probably ahead of the game on the transparency front through the self-regulatory efforts of P2P Finance association. I looked at their activities last October in https://dailyfintech.com/2015/10/12/a-3d-look-at-uk-altfi-lending-government-associations-and-businesses/

What about the Asian ones? I just opened a conversation on Yirendai, Credit Ease. Their financial statements are unaudited. I cant imagine that their loan books are open.


#3

A post was merged into an existing topic: The Yirendai (YRD) stock rally; What say you?


#4

One very interesting idea related to Transparency and Regulation is the idea that an entire company can operate between two distributed ledgers.

This would make all of the company’s transactions effectively public, and fully transparent, and open to instant real time auditability.

This is how P2P insurance should be done. Transparency enables users to trust in the system, which means they dont have to trust all the other users. Designing transparency into a service offering for the right types of trust is key.

IMHO, Once the regulators get their heads wrapped around the facts about Distributed Ledger tech, they will come to love it.


#5

The Disruption in RegTech

Much of the discussions in social media and in articles online has been about Fintech, but for those who truly understand what’s happening, we recognize that once you get beyond the pretty facade of the application, you wake up to the wonderful world of regulations. And that means “RegTech”.

It’s impossible for anyone in Fintech, LegalTech, InsureTech, or OrgTech to be truly a force for change and evolution without RegTech following steadfastly in their wake, defining and altering their current state.

Operating Alternative Finance Platforms today around the globe means facing many challenges to maintain competitive advantage over traditional ways of doing business.

Most portals are operated by a registered broker dealer in their home country, or under some form of financial operator licensing. For those in the business, they have a much better appreciation of how regulations work in the first place, as well as what’s required to ensure the firm doesn’t lose its license. Operators share a common problem, no matter how long they’ve been in business or where they’re operating, and it’s that none can grow their business with the traditional model, it simply doesn’t scale. Some have tried to cope by putting up a website to connect investors and companies, but that’s really no competitive advantage over traditional ways of doing business - it’s the same old system with a new, digital face.

The real opportunity is in how they implement RegTech to meet their regulatory requirements. This can be done several ways: you build your own, or you partner. Depending on what country you operate in, this choice is often made up for you. Regardless of the path, the operator needs to understand the role of RegTech, and how to use it to their advantage.

RegTech is having a major impact in 5 main areas:

· AML
· ID Verification
· Investor Accreditation
· Background checks
· Company Verification

These five major developments in RegTech have allowed Alternative Finance platforms to become billion-dollar companies, servicing users all over the world. This is game changing.

Each of these RegTech services have made it difficult for traditional broker dealers to scale their business by out manoeuvring and out adapting them. Alternative Platforms that adopt RegTech for all of these 5 areas listed above scale faster,as they’re able to leverage technology to change.

RegTech is not done, we’re just getting started. RegTech needs to be more than just verification. RegTech needs to bring the same level of innovative thinking to the digital assets each of these 5 areas involves. An Alternative Finance Platform provider relies on the verification of the individual and the company, but the transaction still has other regulatory requirements to meet that are often only partly automated or not at all.

RegTech is ready to adopt distributed ledger technology to provide these critical mandatory services.


#7

@Philippos @Efi Transparency is a game-changing advantage if built into your business model. That is, If you make money by increasing transparency and empowering consumers with information vs making money by keeping true costs hidden, you have a great business on your hands.

This remains an advantage until that transparency becomes mandated by regulators. It creates a forcing mechanism for incumbents to adapt. Here in Canada, our government passed CRM2. This forces financial institutions to disclose the true cost and personal rate of return on most investments (e.g., mutual funds, stocks, bonds). Our homegrown roboadvisors like Wealthsimple have been transparent about this from the get-go. It was a breathe of fresh air. Now however, as incumbents are forced to become transparent, you can be sure they’ll find ways to adapt their communications to this new world. With deep pockets that will reduce the FinTech advantage. Eventually, a few incumbents will even adapt their business models. At that point, the FinTech advantage will be significantly less meaningful to consumers.

As FinTechs we shouldn’t lose sight of this unique (but limited) window of time to take advantage of these differences and build meaningful and impactful companies.


#8

@EytanB great insights. The topic around the window of opportunity that Fintechs have had and have, to offer a valuable new service (e.g. transparent financial advice), is especially timely given the possibility of a significant change in Regulations by the Trump presidency.
*Could that kill the Regtech vertical, first?
*Could that slow down VC funding, M&A in certain Fintech verticals?


#9

The combination of lower production costs and increased transparency should have been unbeatable given the financial crisis context (reduced profitability, increased mistrust). But my sense is that we are already at least half-way through this “window of opportunity” without yet (imho) seeing major impact. Judging by the pace of adaptation / restructuring at incumbents, the opening runs for another two years - at most - before a critical mass of existing players effectively adopt similar playbooks. Not that this would be unwelcome… in the end it is the end service that matters, not who delivers it. But having a few scaled up “signature” fintech platforms that embody the new possibilities (a bit like Tesla in the automotive space) would have been inspiring.


#10

@oscar great list of needs.

I believe there are already AML APIs, as well as some ID APIs, which I have seen & some played with. Not sure about Investor Accreditation (would be a nice little start up idea).

Background Checks and Company Verification, these sound more use case specific (correct me if I’m wrong) but that makes me think building a general purpose APIs service to serve those needs would more difficult/intense to build.

On the ID component, I think the existing API service providers should sell to an acquisition target in the next 2-3 years or earlier. Why? because there is going to be a distributed ID service hitting the market within the next few years. There is https://en.wikipedia.org/wiki/OpenID#History which has been working on this for a few years already. There are also other efforts that may push the use of more robust distributed methods to take this first iteration of ID services to the next level.

Regarding the window of opportunity both A) “being about half way through”, B) “having about 2 more years of remaining open”, sound reasonable, but maybe a little bit short IMHO.

I agree that we have not seen “major impact”, and that leans me into thinking that the real category killer start up (for each financial service) has not yet started, or is still unknown. I am assuming that a category killer start up would require 2-3 year initial user adoption period before the network would be at the “tipping point” of crossing the chasm. Which would mean we could have 3-4 years of remaining window of opportunity, max? IDK.

Just ran across this, https://www.yoti.com/