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Industry roundup: 1 April

Citi launched 2022’s Digital Money Index

As the financial landscape continues to evolve towards digitalization of funds, Citi, in collaboration with the Imperial College Business School’s (ICBS) Centre for Financial Technology, launched its newest Digital Money Index (DMI). This index tracks countries’ digital money readiness and is currently up to 113 countries tracked.

According to the press release, the index categorizes the countries into four groups based on their level of readiness (Incipient, Emerging, In-transition, and Materially Ready). Additionally, the revised index includes the progress of new indicators and profiles made by several developing countries to facilitate the preparation of digital money. The report explained that the overall digital policy should be based on four pillars: digital infrastructure, digital adoption, service innovation and digital trust, in addition to establishing a clear strategic mission supported by strong regulation and governance. More details on the DMI report can be found here: Digital Money: The Rise of the Entrepreneurial State - March 2022.

The report indicated that as an initial step, governments should develop a “digital vision” that is in line with their comprehensive goals, such as promoting growth, improving service delivery, and increasing public participation. The 2022 index results revealed that countries that supplemented their overall digital policy with targeted investments performed exceptionally well. Countries such as Malaysia, United Arab Emirates, Estonia and Uruguay outperformed their peers.

Ronit Ghose, global head of banking, fintech and digital assets, Citi, stated that company policymakers’ active role and investments in driving digital adoption led to significant strides compared to their peers. Deeph Chana, co-Director of the Centre for Financial Technology, ICBS, remarked that the latest DMI should improve accuracy and timeliness, increase capacity to handle new datasets as they arise, and create the basis for further improvements in the future using machine learning techniques.

FDIC publishes guidance on climate risk for major banks

The Federal Deposit Insurance Corporation (FDIC) created a framework, similar to that of the Office of the Comptroller’s (OCC) December 2021 guide, stating that major banks with assets over $100 billion should assess climate-related financial risks, including governance, strategic planning, risk management, and scenario analysis. The FDIC is requesting feedback on the outline within 60 days. Additional information can also be found in this document: FDIC Statement of Principles for Climate-Related Financial Risk Management for Large Financial Institutions.

Martin Gruenberg, acting Chairman, FDIC, commented that “these climate-related financial risks pose a clear and significant risk to the U.S. financial system and, if improperly assessed and managed, may pose a threat to safe and sound banking and financial stability.” Small banks, particularly community banks, may not have the financial capital and resources to identify climate-related risks but should be aware of these risks, added Gruenberg. All financial institutions, regardless of size, complexity or business model, are exposed to climate-related financial risks.

The FDIC intends to provide additional guidance to differentiate the roles and responsibilities of boards of directors and management. Additionally, it plans to incorporate feedback received on the draft principles and incorporate lessons learned and best practices from the industry and other jurisdictions. The release also stated that large banks should consider the physical consequences of severe weather, such as damage to people and property, and the risks associated with the transition to a low-carbon economy.

According to the American Banker, the Federal Reserve is the only major U.S. federal banking regulator that has not issued formal guidance on climate risk. Lael Brainard, Fed Governor, commented that the central bank was conducting a scenario analysis to determine the impact of severe weather on financial institutions last October 2021.

Prototype supervisory analytics platform created by BIS Innovation Hub and MAS

BIS Innovation Hub Singapore Centre and the Monetary Authority of Singapore (MAS) announced the development of a new prototype platform, Project Ellipse, that should enable the integration of regulatory data and analytics, such as articles and news, into a single platform. The report stated that the platform should help regulators identify potential risks to banks and their systems.

The need for accurate and timely information to assess new risks is vital for regulators in their decision-making process. Ross Leckow, Acting Head, BIS Innovation Hub, commented that Project Eillipse can be scaled to provide real-time analysis on a national or cross-border supervisory basis.

Project Ellipse was developed in two phases with the support of the Bank of England, the International Swaps and Derivatives Association, Accenture, and Financial Network Analysis. According to BIS, the project’s phase one explored how machine executable digital reporting could enable data-driven regulation using a common cross-border data model, and phase two studied how advanced analytics, such as machine learning and natural language processing, can be applied to unstructured, detailed report data. BIS also reported that the system should help regulators identify risk correlations and analysis in real time to help address any issues in a timely manner. 

BIS’s newly formed “Ellipse collaboration community” should give banks the ability to share, test, customize, and extend this solution to regulators globally. The Ellipse prototype was first published on BIS Open Tech, a new platform for sharing statistical and financial software as public goods and facilitating international collaboration and coordination.

Apple diving further into financial arena, potentially moving payment processing in-house

According to Bloomberg, the US tech giant Apple is revolutionizing various financial services operations, including their payment processing infrastructure, and is moving them in-house in efforts to reduce its reliance on external fintech partners. Additionally, Apple’s strategy is targeting future financial products and has contracted on a multi-year plan called "Breakout" that includes payment processing, loan risk assessments, fraud analysis, credit check investigation and customer service operations.

As revealed last week, Apple had acquired the UK’s credit bureau Credit Kudos, which utilizes open banking technology to provide a fine-tuned credit score. Apple already provides peer-to-peer payments, a wallet app, credit cards and the ability for merchants to accept payments from the iPhone. Bloomberg also reported that Apple may possibly add a BNPL product.

Expanding its financial service offerings even further, the tech giant also just launched Apple Business Essentials and AppleCare+ to serve all small businesses, currently only available in the United States. According to the press release, the new service is said to combine device management, 24/7 Apple support and iCloud storage with a flexible subscription plan.

Klarna powering open banking through in-house business units

Swedish-based BNPL behemoth Klarna is launching an open banking sub-brand and business unit, Klarna Kosma, to help businesses connect to its network of thousands of banks in Europe and the United States. Klarna Kosma is expected to provide financial institutions, fintechs and merchants with the connectivity to build financial services apps by providing easy and secure access to 15,000 banks in 24 countries via a single API.

Wilko Klaassen, VP, Klarna Kosma, commented that the demand for open banking services from financial institutions and fintech start-ups reached a turning point. Therefore, to focus on this fast-growing US$15 billion market, Klarna created a dedicated business unit that combines engineering, product management, sales and marketing units.

Klarna Kosma will enable companies to integrate into their apps and services through the use of Klarna's API, providing access to bank statements and allowing users to initiate payments, obtain bank information, and update data on a regular basis. Reports indicate that the platform is already in use by third parties such as Finom, an Amsterdam-based start-up that provides financial management, commercial banking and billing services to SMEs and freelancers in France, Germany and Italy.

According to the EU Payment Services Directive (PSD2), all banks and financial institutions in Europe are required to provide an open banking interface. However, there is no unified standard. Open banking APIs typically undertake the burdensome labour of establishing the system capability.

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