FUTURE OF FINANCIAL TECHNOLOGY IN BALTICS AND EU March 23, 2018 Discussion notes and conclusions

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1 FUTURE OF FINANCIAL TECHNOLOGY IN BALTICS AND EU March 23, 2018 Discussion notes and conclusions Ieva Grabe, Head of Operations, Nordigen. What FinTech is bringing to financial industry? Banking is changing and decisions should be made fast. Financial institutions, which choose to use FinTech will succeed in the future financial landscape. Example: Nordigen s solution that allows to issue loan to a lender based on transaction data. Analysing income of applicant and spending habits one can get valuable insight about the applicant. It s much faster and precise then manual work of credit specialist. Behavioural scoring engine is built to identify risk critical behaviours in categorize data and to calculate probability of the default. Account data has proved to be extremely valuable in credit scoring. Plus, it s much more available than traditional credit bureau data. Thus, credit bureaus are losing their relevance with the rise of alternative data and privacy concerns With the implementation of PSD2, banks will have to provide access to their account data through open API s to the licensed third-party providers. Nordigen sees it as the next step how to expand and improve service that they already offer. Nordigen will have to obtain the account information service provider license, which we see as good news. Innovative services have to be secure and regulated, therefore Nordigen welcomes the proposed Action plan. It is essential for FinTech startups to prove the banks that data security is taken very seriously, before the banks choose to use the developed FinTech solutions Kerli Gabriloviča, Country Head in Latvia, Luminor and Association of Latvian Commercial Banks Board Member Considering the size of Baltic Financial market, we believe that the best and, in many ways, the only way to innovate in financial industry is by corporation. Baltic countries is not the first choice market for FinTechs in spite of being start-up wise and innovative The reasons are: o the limited market size, o technologically strong banks, o cheap daily banking services. It is challenging time for banks, as well, because of high competition, vast regulatory changes and digital desire bigger than pay off potential. Banks need FinTech companies, as well as FinTech companies need banks. Banks are good at being a one stop shop, having the customer base, having needed scale for stable growth opportunities and higher resistance to market turbulences. FinTechs are good at being agile and flexible innovators, customer centric and deep expertise in certain fields. We should think: bank and FinTech corporation. Competition 3.0. Expected new black in the banking is maximization of digital services; cloud, blockchain, artificial intelligence infrastructure; VR, innovation and product testing in a piloting mode and cooperation mode; transparent and simple regulation of compliance processes. 1

2 Traditional banking is not dead, it is on its way to great transformation. Partnership with FinTech is a big part of it. Innovation will always be ahead of legislation, so setting up this toolbox and the methods for collaboration is a good way to think ahead to build a system of innovations. Flora Coleman, Head of Government Relations, TransferWise TransferWise as a FinTech an e-money institution appreciates the steps taken towards FinTech regulation. This vibrant payment services FinTech would not exist, if there was no regulatory framework ensured by the Payment Services Directive and Electronic Money Directive in the EU. Countries around the world should follow this approach. Three principles must guide regulatory approach: o Technology neutrality, o Proportionality, o Integrity. Further developments and homogenization should happen in: o Online identification and verification areas, o Standards of RegTech, o Innovative regulation and legislation of data storage (cloud computing, cross boarder data flows). Look at updating current directives, if possible, rather than develop new directives. Anti-money laundering, GDPR good progress, very valuable for FinTech, as well. DISCUSSION AND QA SESSION Q. Is this initiative ambitious enough, given the global trends? A. Ģirts Bērziņš, Head of Digital Strategy, Swedbank Group and Co-Chairman of the Digital Transformation Committee at ALCB This is great and timely initiative. We are approaching one of the biggest changes in banking sector. Banking was all about trust, but today we need to add scale to it. This should be as trademark: EU wide, not only aligned to some extent. This is the only way how we can be competitive globally. The only way how to scale up it s open banking EU wide. Swedbank operates in 4 markets is very secured bank, because it has 5 seatbelts (country wise and ECB) or 5 regulations. But it takes time to fasten these seatbelts. And it s the problem of the whole market. We can t forget about trust. It s very serious industry. It s very interlinked industry and if some strings are broken in the chain, consequences are very serious, even if we are not directly in that particular chain. Q.: What areas we should be focusing in the future? How can we can help drive the agenda? A. Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Market Union Just to provide some areas of thinking and possibly advancing this plan in coming years: an example of possible future directions: allowing FinTechs to scale up across Europe. Everyone seems to be agreeing that we need EU wide framework for this. There are concrete initiatives 2

3 where we provide EU licensing framework for crowdfunding, both equity and landing, so when we discuss further the developments in FinTech one can potentially think of other EU licensing frameworks for FinTech companies to avoid the national [level] obligations. We will be willing to follow up of what comes out of from this work on blueprint from national asset management companies, also guidance from European supervisory authorities on sandboxes. Maybe, at a certain stage we can discuss the need for EU wide sandbox, because in financial sector the regulation is largely determined by EU requirements. Q. What is your view on the EU FinTech Action plan. Is explanatory work needed more than regulatory work in this area? A. Marius Jurgilas, Member of the Board, Bank of Lithuania It is important to look at the actions, not statements. The action plan is unification of cross border FinTech activity, crowdfunding, peer to peer lending, pan-european licensing etc. that cannot be implemented without legislative process. As regulators we cannot afford not to innovate. In the geopolitical context we are losing to the West and we probably already lost it to the East. E.g., data privacy. It might look that we are doing one step forward, and two steps back with GDPR. If you are a FinTech company and you really want to engage in high, intensive private data analytics the best place to be right now is in China. There is no data privacy. But in Europe, as regulators, we are there to preserve the values, and data privacy is among them. We always need to have a balance. Also, regulators need to open up. As banks are going towards open banking, maybe the same can be done with regulation. What about open central banking? We have 19 member states, 19 Central Banks, 19 supervisory authorities, everyone doing the same thing. We are talking about single capital market union, banking union, but what about not doing it 19 times! Talking about EU FinTech agenda I need to focus on two points, which are really important in Lithuania: 1) The crowdfunding initiative, because we have a national legislation in place and many firms in our region are already operating. It s really important not to disrupt what s been created already. 2) In finance standards are essential, but if you push forward standard it should not disturb something which is already in place. So that is why, the second point, where the collaboration between the regulators is advised, is important, although I am not sure how to do that. Q.: How do you see this Action plan contributing to developments in Latvia, incl. issue of crowdfunding? A. Aija Zitcere, Director of Financial Market Policy Department at Ministry of Finance, Latvia Commission s plan is very much welcome, it facilitates innovation and addresses the risks. We wish a faster delivery. If we talk about crowdfunding, the proposal by Commission is the right way from the industry point of view: you have a single supervisor and the same rules for the whole Europe. The biggest challenge in the negotiation process will be the concerns of each member state on consumer and investor protection, and how we will manage to agree across the whole Europe. 3

4 Evaluation of current regulation is needed, if it is actually technology neutral and allows for new technologies. Unified application of the EU rules is very important. From the Ministry point of view the toughest part is cross border services, which may lead to market fragmentation. Q.: The Commission, has been putting forward initiatives on the review of EU Supervisory Agency. What s the latest thinking about this and how you see these aspects evolving? A. Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Market Union EU-wide licensing and national regimes. We propose to opt in into this European regime. If companies want to operate in a national regime they can continue to do so. Delivery speeds of proposal are adjusted to the speeds of EU decision making processes, including legislative decision-making processes. European Commission has already proposed reviews some time ago and the guiding principle that we want to ensure is supervisory convergence. There is proposal to change financing model of European supervisory authorities, which will be partly industry, partly EU budget co-financed. We think it makes sense European supervisory authorities has more role with the third countries. In case of ESMA we foresee certain, direct powers. We still have discussions with member states. Discussions in Council and Parliament are currently ongoing, although we hope to make progress in a due time. TECHNOLOGICAL INNOVATION SIDE OF THE DISCUSSION Sanda Liepiņa, Latvian Commercial Bank Association mentions 3 aspects of technological innovations that are covered in FinTech action plan, three transformative technologies cloud computing, the artificial intelligence, blockchain. Q.: From your perspective is there anything missing? A. Tomas Vitkus, President of INFOBALT, Managing Director, Tieto Lietuva I am excited about plan. It s a big step forward for Baltics and EU. I want to emphasize cloud services, it s a chance for companies to do more things, in a smart way. It s a big enabler in the Baltics, too. It gives us the opportunity to use the best services worldwide and get very fast and easy access to technologies. To access those technologies, we need a regulation to empower that. It s beneficial for technology companies, for banking industry and for FinTech. It s good that all those new technologies are mentioned in the plan, on the other hand if it is already mentioned in the document which is created by EU, most probably those technologies are out there for a long time, and there is something new already. We to find the way to use the new technologies and the only way is to try. We need regulators to allow the FinTech companies to try. Some of them might make mistakes, that s why we need regulators. That is where innovations can happen. We need to let the banks to let them try new technologies, as well, although it is even more difficult. 4

5 Q. Talk us through such aspects as cloud policy? A. Marius Jurgilas, Member of the Board, Bank of Lithuania If we talk about cloud computing and cloud-based banking, the most important is clarity. If I would have a chance to add a point to FinTech action plan I would really focus on cloud computing policy. Secondly, we need to push for single digital identity in Europe Q. ADAS gateway opportunities? How far off we are from the development of single electronic identity, the possibilities to opt for other country s electronic identity? A. Edmunds Beļskis, Deputy State Secretary for Information and Communication Technologies, Ministry of Environmental Protection and Regional Development, Latvia; There are national and cross border perspectives. How can we facilitate data exchange between government and financial sector. On the national level we are happy that cooperation with Associations of Commercial Banks is good and information is being exchanged (could be better). Now pilot project with commercial banks is in the process, with the governmental organizations where we try to exchange data between different registers on pilot base. We encourage financial sector make a unified integrator on their side. We improve and we will make even better governmental information system integrator. Then we interconnect the two integrators to have much better data exchange. Then, we have to look how to apply this on cross border level. Concerning ADAS, it is supposed to deliver access to e-services. Latvia will be ready to give necessary services for EU residents in Latvia by autumn, and. Latvian government has cloud strategy and intention to move governmental systems to the cloud. It will be done step by step. About the artificial intelligence. Some governmental organizations, for example Enterprise Register, are piloting artificial intelligence in public sector and using machine translating tools. Blockchain is very challenging. We are waiting proof of concept (before start to use it in public sector), not only in financial sector, but in other sectors, we don t have a lot of examples of how it can be used and what about data privacy and security issues etc. Unified identity in Europe, it is tricky question. It would be easier to provide unified services, but it s security question. Q.: Importance of data, regulatory data, financial data standardization? A. Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Market Union Cloud computing is part of FinTech action plan, we want to encourage its use. The problem is that different regulators apply different regimes. Digital ID in the context of Digital Single Market, we face certain resistance from some member states, but we have to move in this direction. Blockchain technologies and transparency gateway we are setting out blockchain development monitoring and application facilitation and knowledge accumulation. 5

6 Q.: Standardization, digital service development. APIs standardization. How do you as a retail bank working across Baltics dealing with these issues? A. Andra Altoa, Head of Strategy, SEB Baltic Division Nowadays Banks are also FinTechs. Banks are adopting to methods that FinTechs are using (and vice versa). Companies need to define themselves in which industry they are operating, properly. Standardization is for the sake of collaboration, for business scaling (in many countries). Currently standardization, especially when it comes to API s and open banking, standardization work is led by the market players; there is some room for comments still. Baltic banks are driving toward Berlin Group position, yet this is still evolving process. Q.: The Bank of Latvia has been a driver of technological advancement. FinTech is an example of cross-sectoral development. What are your expectations, how we move forward and what are next steps in Latvia and Baltics, that FinTech action plan will enable? A. Deniss Fiļipovs, Head of Payment Systems Policy Division at Latvijas Banka LB welcomes FinTech action plan. We are happy to see the list of actions to promote use of new technologies in financial services. This plan delivers us new opportunities and in the same time we have to face and solve list of challenges. LB was the first Central Bank in Euro zone in 2017, which launched instant payment infrastructure. By the end of the year we reached 5000 transactions per day. This is great basis, together with PSD, for FinTechs in Baltics, to deliver new benefits to the users. Challenges come from the Action plan, as well: we have to start to look at different payment instruments, ecosystems and technologies. We need to improve our approaches and our contacts working with public authorities, as it goes across different financial areas. Proposal to create National Forum in Latvia, with responsible organizations and businesses to work with the EU commission to proceed with further developments. Conclusion by Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Market Union The discussion shows how topical the issue of FinTech is. I am encouraged by the positive reception of the plan. It also shows that there are many issues to be dealt with. We need to keep in pace with time. We need to be able to adjust with changing world around us, so we are able to react on new technology developments for the benefit of our citizens. Conclusion by Sanda Liepiņa, CEO of the Association of the Latvian Commercial Banks The industry involvement and the discussion has been essential, it should be maintained, to ensure that the industry is involved in the policy and decision making. 6