With 10,000+ attendees, including more than three thousand companies from seventy-five countries, Money20/20 is the largest annual global event focusing on payments and financial services innovation. The 2016 conference in Las Vegas this October featured a packed agenda of talks by industry and thought leaders on a broad range of current and emerging Fintech issues, as well as an exhibition area featuring Fintech companies, investors, incubators, venture capitalists, consultants, regulators and lawyers. A team of McCarthy lawyers attended again this year and report back on some of the hottest topics of the 2016 conference: machine learning and artificial intelligence (AI), open data and regulatory sandboxes/innovation hubs.
- Machine Learning and AI. One of the next ‘next things’ creating a buzz at the conference was the integration of machine learning and artificial intelligence tools in the provision of financial services. “What will banking be in two, three or four years? It’s going to be this,” asserted Michelle Moore, head of digital banking for Bank of America, as she introduced BofA’s new chatbot named Erica at Money20/20. Ms. Moore was not alone at Money20/20 in her obvious excitement about the promise of financial chatbots – tools that will permit the bank to interact with its customers through text messages or services such as Facebook Messenger and Amazon’s Echo. MasterCard also announced MasterCard KAI, a bot for banks that will put the company’s services on messaging platforms and enable consumers in the United States to inquire about their accounts, review banking history, monitor spending levels, learn about MasterCard cardholder benefits, receive contextual offers through integration with MasterCard Priceless experiences, and get help with financial literacy. Thinking Capital, the Montreal-based online lender to small businesses has also launched a financial chatbot named Lucy. Thinking Capital says Lucy was the first chatbot among Fintechs in North America.Chatbots are automated chat programs that use artificial intelligence to draw in data and translate it into understandable responses, akin to Siri, Apple’s interactive voice tool. Although the technology is not restricted to financial services, it’s clear that many financial industry stalwarts and startups alike are placing big bets on it. The customer-centric expression of this technological promise is that machine learning will, as described in the Money20/20 session Machine Learning & AI Powering Next Gen CX in Financial Services, “…raise the customer experience benchmark in financial services.” But it’s not all about the customer; another promising aspect of chatbots for financial institutions is reducing the cost of customer support.
Notwithstanding the promising aspects of the technology, as financial chatbots scale in number and functionality, associated legal and regulatory issues will certainly likewise scale. For example, a text messaging platform may not be secure enough to handle the sensitive nature of consumers’ financial information, giving rise to consumer privacy and protection issues. Consumer protection and competition concerns may also arise with chatbots that are affiliated with certain financial institutions, preventing them from giving unbiased advice about financial products and entities, and helping them to lock in customers using – and hoarding – accumulated data.
- Open Data. Another major theme emerging from Money20/20 2016 was the concept of ‘open data’ and ‘open banking’. Open Banking is an emerging term in financial services / financial technology that refers to, among other things, the use of open application programming interfaces (or “APIs”) that enable third party developers to build applications and services for the financial institution. It is predicated on the principle that personal information of customers (such as account and transaction information) should, with consumer consent, be made freely available to third parties, who can then use this data to create new tools to increase consumer financial data access as well as competition among participants in the financial ecosystem.The Director of the US Consumer Financial Protection Bureau (“CPFB”) made headlines when he endorsed open data in the financial context. In his Money 20/20 remarks, The Director stated that the CFPB is “gravely concerned” that financial institutions are limiting or shutting off access to financial data, rather than “exploring ways to make sure that such access…is safe and secure.” He concluded with the point: “Let me state the matter as clearly as I can here: We believe consumers should be able to access this information and give their permission for third-party companies to access this information as well.” These comments reflect a similar push (mandated by legislation) in the EU (the adoption by the European Parliament of the revised Directive on Payment Services or “PSD2”) and the UK (Open Banking Working Group) to require Open Banking.
The financial services sector has been traditionally a data-intensive industry and the advent of ‘big data’ analytic techniques has created a new landscape for businesses based on data technologies: equity platforms based on crowdfunding, new platforms that match lenders with borrowers in innovative ways, data visualisations tools to follow companies, suppliers and clients, and a whole range of new payment systems based on mobile and cloud technologies. These transformative players include early innovators as well as established financial institutions which provide big data-related services that are shaking up the traditional financial markets.
- Regulatory Sandboxes, Innovation Hubs and the Fintech Charter. The issue of how regulators should respond to Fintech innovation, and to what extent they can encourage innovation, was the final hot topic of the conference. Regulatory approaches to Fintech were discussed in depth at a panel featuring the Director of the CPFB and by the Head of Project Innovate from the UK’s Financial Conduct Authority (FCA).The Head of Project Innovate described the nature and status of the UK’s Project Innovate, which features a regulatory sandbox (which seeks to create a regulatory “safe space” in which businesses that qualify can test innovative products and services without immediately incurring all the normal regulatory consequences of engaging in such activity), as well as an advice unit and an innovation hub. The FCA accepted 24 applications to the regulatory sandbox (out of a total of 69 applications) as part of the first cohort of applicants and this first cohort is expected to begin testing shortly. More detail on the first cohort is available here.
In the US, the CFPB has launched Project Catalyst aiming to promoting consumer-friendly innovation. Project Catalyst involves the CFPB engaging with key stakeholders, coordinating with other government agencies and an “office hours” program of outreach to the Fintech community. In addition, the Office of the Comptroller of the Currency (OCC) has been considering the creation of a national limited purpose Fintech charter. While the approach has drawn praise from some within the Fintech community, some state regulators and consumer protection groups have been critical of the national Fintech charter concept, suggesting that a federal charter would likely preempt state laws on interest rates and impair the ability of states to protect less sophisticated retail consumers. The OCC has also recently issued a white paper outlining its recommendations for a responsible innovation framework. However, the recent US election could impact these various initiatives, given statements made by President-Elect Donald Trump during the presidential campaign, in particular in respect of the role of the CFPB.
In Canada, as in the US, legislative authority over financial services lies with both the federal and provincial governments. The mix of federal and provincial jurisdiction over Fintech matters in Canada and in the US adds to the regulatory complexity of regulating and fostering Fintech in these jurisdictions. Notably, in Canada, the OSC recently announced that it will be taking steps to help Fintech entities navigate the regulatory framework, through its innovation hub called “OSC Launchpad”, which was unveiled on October 24, 2016. Read more about the OSC Launchpad here.