Daily Review: Setting the Principles of Responsible Innovation

FinTech investment and talent will flow to countries where regulation facilitates innovation. While regulators in the United States have made progress, our international peers are moving quickly to modernize regulations in response to FinTech. This is too important to be left behind. Regulators can make changes that facilitate innovation and partnering without jeopardizing financial stability or consumer protection. – ABA

The evolution of the bank-FinTech narrative had a variety of implications touching every party, including regulatory authorities and their approach to evaluating societal & economic consequences of the changing environment. Regulations around the world are being re-evaluated to address changing relationships between financial institutions, technology startups, and large tech corporations.

The American Bankers Association (ABA), a banking trade association of community, regional, and money center banks holding companies, savings associations, trust companies, and savings banks, just published a paper offering a framework for responsible innovation. The following subjects are covered by the framework: a path for startups to become banks, digital account opening, regulations around pilots, and more. ABA members together employ more than 2 million women and men, hold nearly $17 trillion in assets, safeguard $13 trillion in deposits, and extend more than $10 trillion in loans.

Pick #1. FinTech: Promoting Responsible Innovation

Specific recommendations from ABA on how to facilitate responsible innovation in financial services:

  1. Data Access: Regulators should clarify existing regulations to ensure that customers can securely share their financial data.

Three core principles should set the framework for how data are shared and how consumer data are treated:

  • Security: Consumers deserve bank-level security and protection regardless of where they choose to share their data. This means that consumer data are treated the same – and subject to GLBA protections – whether at a bank or a third party.

  • Transparency: Consumers must have transparency about how companies use their financial data.

  • Control: Consumers should have control over the access and use of their data.

ABA recommends that the Bureau:

  • Clarify that data aggregators are financial institutions subject to the requirements of the Gramm-Leach-Bliley Act (GLBA) that apply to financial institutions under the Federal Trade Commission’s Safeguards Rule and the Bureau’s Regulation Protocol.

  • Take steps to ensure data aggregators are subject to the same standards as depository institutions for safeguarding financial data and notifying customers about security breaches.

  • Clarify that data aggregators are service providers under the Electronic Funds Transfer Act and are subject to its provisions assigning liability for unauthorized electronic fund transfers.

  • Identify larger participants in the market for consumer financial data that are subject to supervision by the Bureau and begin to supervise those entities.

  1. Third-Party Risk Management: Regulators should think innovatively with respect to third-party relationships.

Regulators could incorporate into service provider examinations a review of how the provider plans for and responds to innovation & changes in technology. ABA recommendations:

  • Evaluate service provider innovation: Some vendors are not investing in research and development that would allow bank core processing systems to incorporate new technologies developed by FinTech firms.

  • Collaborate on third-party risk management guidance with special emphasis on FinTechs.

  • Share regulatory trends: The banking agencies should identify and publish information about regulatory hot spots, examination trends, and lessons learned from FinTech relationships. This could be a joint, FFIEC project that is similar to the Bureau’s quarterly Supervisory Highlights publication. Such a publication would be informative for banks & FinTech alike and could be particularly useful for educating non-bank firms.

  • Expand the firms subject to examination under the Bank Service Company Act: Regulators should exercise fully their existing authority to examine FinTechs. Similarly, policymakers should identify legislative changes that are necessary to expand the types of covered service providers that regulators may examine under the BSCA.

  • Share exam information: Banks are limited in their ability to evaluate a service provider’s compliance with applicable laws and regulations prior to entering a contractual relationship. To help, regulators could share a topical list of Matters Requiring Attention (MRAs) that have been issued to a particular service provider so long as a bank has formally extended a Request for Proposal (RFP) to that service provider and is subject to a confidentiality agreement.

  • Have reasonable and clear expectations regarding model validation: Regulators should provide guidance on how banks can test and demonstrate that the models comply with fair lending requirements and meet supervisory safety & soundness expectations about model validation.

  1. FinTech Charters: Regulators should provide FinTech companies with a path to become banks.

  2. Pilot Programs: Regulators should provide a process for testing new technologies.

  3. Valid When Made: Congress should codify the valid-when-made doctrine.

  4. CRA Modernization: ABA appreciates Treasury’s review of the Community Reinvestment Act.

  5. Digital Account Opening: ABA supports congressional efforts to allow banks to use images of a driver’s license.

  6. Brokered Deposits: Regulators should reevaluate the overly broad definition of a brokered deposit.

  7. TCPA: Treasury should urge the FCC to revisit and modify its interpretations of the Telephone Consumer Protection Act to promote efficient & effective communications between financial institutions and their customers.

  8. E-Signatures

  9. Regulation D: Treasury should urge the Federal Reserve to revisit Regulation D.

Read more.

Pick #2. Rocket Internet SE: Alibaba Acquires Daraz

Alibaba Group acquired the entire share capital of South Asian e-commerce platform Daraz Group for an undisclosed amount.

Daraz was founded in Pakistan in 2012 and has since grown into the most popular online shopping destination in the country. Today, Daraz also operates online marketplaces in Bangladesh, Myanmar, Sri Lanka, and Nepal. The five South Asian markets in which Daraz is operating have a combined population of over 460 million, 60% of which are under the age of 35.

Daraz will continue to operate under the same brand following the transaction.

Read more.

Pick #3. Facebook Forming a New Blockchain Group, Headed by Coinbase Board Member

David Marcus, Facebook’s head of Messenger, is going to head up a new group focused on the blockchain technology.

I’m setting up a small group to explore how to best leverage blockchain across Facebook, starting from scratch, Marcus said in a post this Tuesday afternoon on the social media site.

Facebook CEO Mark Zuckerberg said in early January that the company will begin looking into cryptocurrencies and how to best use them in our services.

Read more.

Pick #4. Microsoft Conversational AI Tools Enable Developers to Build, Connect, and Manage Intelligent Bots

Conversational AI is the next user interface (UI) wave in computing.

At the Build conference, Microsoft announced updates related to its Conversational AI tools including updates to Aure Bot Service, Microsoft Cognitive Services Language Understanding, and QnAMaker, as well as the release of new experimental projects from the Cognitive Services Labs including Conversation Learner and Personality Chat.

With Microsoft’s Conversational AI tools, developers can build, connect, deploy, and manage intelligent bots that naturally interact with their users on websites, apps, Cortana, Microsoft Teams, Skype, Facebook Messenger, Slack, and more.

Read more.

Pick #5. Google’s Android Things IoT Platform Comes out of Beta

Android Things, Google IoT platform for developers who want to build connected devices, is now out of the beta stage. Google says it saw over 100,000 SDK downloads during the preview and that over 10,000 developers provided feedback during the beta phase.

Android Things provides hardware and software developers with all the necessary SDKs to build all kinds of IoT devices. The company has partnered with a number of hardware manufacturers to offer developer kits and also offers a developer console that allows for managing devices and pushing over-the-air updates to both prototype and production devices.

Non-commercial users can manage up to 100 devices in the Android Things Console to work on getting their product to market. Once they go over 100 devices or plan to roll out a commercial product, they’ll have to sign an agreement with Google.

Read more.

Pick #6. Microsoft Shows off Alexa-Cortana Integration, Launches Sign-Up Website for News

At its Build developer conference, Microsoft showed off how the integration will work in an on-stage demo with support from Amazon, and it launched a new website for developers interested in receiving Alexa-Cortana integration news and information going forward. When Microsoft and Amazon first discussed integrating their virtual assistants, it was described as a two-way street – that is, Cortana could pass requests back to Alexa and vice versa.

At Build, Microsoft CEO Satya Nadella stressed the values of a more open system: We want to make it possible for our customers to get the most out of their personal digital assistants – not be bound to some walled garden.

Developers who are building skills for Cortana and Alexa can go to this new site in order to sign up to be notified when the integrations go live.

Read more.