FU | March 25-31, 2017

Leading Off

The Delaware Corporate Law Council proposed amendments to the state’s corporate law to allow for DLT-based stock records; BlackRock plans to rely more on computer models and algorithms in its stock-picking unit; Japan’s financial regulator will officially recognize Bitcoin as a method of payment starting tomorrow; and the NYDFS’s Maria Vullo discussed her opposition to the OCC’s proposed fintech charter in an American Banker interview.

The Big Idea

Fintech isn’t just for consumer-facing services.

The story:  This week, we saw two examples of large banks benefiting from technology developments to reduce costs by improving back-end functions. Bloomberg reported that several international banks are paring back their compliance staffs “for the first time since the financial crisis.” These banks, which include RBS, HSBC, and Credit Suisse, are planning to eliminate several thousand jobs worldwide as technology reduces the need for large compliance staffs. Meanwhile, the WSJ reported that some of the world’s largest banks are considering sharing back office resources to reduce the “administrative and operational costs involved with processing stock and bond transactions.” The proposed joint venture (“Project Scalpel”) would utilize upgraded tech to manage the functions, privacy, and potential conflicts of interest of its constituent banks.

Why we care:  Buzzy developments in fintech are often the ones that are most visible to consumers — things like apps that transfer your money faster, give you access to loans at lower rates, or otherwise put a new, tech-forward gloss on long-standing consumer financial products and services. But the risk of devoting attention exclusively to these kinds of developments is losing sight of other important, less visible ones.

What we think:  Sure, using technology to improve back-office infrastructure may not be as fun as the latest app on your phone. But banks aren’t going away anytime soon. And, in fact, banks often implement fintech solutions in ways that will impact more consumers and save more money than many would-be disruptor firms. Lower compliance costs and more efficient back-office functions give banks the ability to improve their products, services, and client relationships. Changes must be made within the bounds of regulatory requirements, and banks must capitalize on the opportunities generated by those changes, but the spark that makes them possible in the first place is technology.

In Other News…

Delaware considers DLT-based stock records.  Two weeks ago, the Delaware Corporate Law Council proposed amendments to the state’s corporate law that, if approved, would “provide specific statutory authority for Delaware corporations to use . . . a distributed ledger, in lieu of a traditional stock ledger, to record and transfer record ownership of shares of stock.”

BlackRock’s stock-picking unit to rely more on computers.  The world’s largest asset manager is overhauling its “actively managed equities” business, cutting jobs and relying more on computer models and algorithms to choose investments. BlackRock’s performance in this area “has lagged rivals,” and company executives believe that “it is difficult for human[s] to beat the market.”

Progress in applying DLT to syndicated loans.  Synaps Loans and banks in the R3 consortium carried out a “successful demonstration” of DLT in the syndicated loans market. Long settlement periods (20 business days or more) “threaten the continued growth” of the $3 trillion market, but Synaps argues that DLT represents immediate time savings for industry players.

Japan set to recognize Bitcoin as payment method.  The Japanese Financial Services Authority (FSA) announced that a law recognizing Bitcoin as a method of payment will go into effect on April 1. The law “defines Bitcoin and other virtual currency as a form of payment method, not a legally-recognized currency. Bitcoin will continue to be treated as an asset.”

DFS’s Vullo discusses fintech regulation.  Superintendent Maria Vullo of the New York Department of Financial Services (DFS) discussed with the American Banker her thoughts on the OCC’s proposed fintech charter and her agency’s plans to coordinate with other state banking regulators to challenge parts of it.

China’s fintech growth has pros and cons.  China’s large, smartphone-using population has led to increased financial services access and booms in crowdfunding and mobile payments. But this increase has also led to millions of “loosely regulated, often risky investments,” that prop up poorly performing firms and shift “the risks from China’s corporate debt load onto consumers.”

Have a great weekend!
Joe Oehmke and Austin Tuell

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