Founder of Fintech Ireland, Peter Oakes, contributes to Simon Rowe's excellent article on Ireland's booming fintech sector in the Sunday Independent (3101/2016).  The global financial crisis has ushered in a new wave of innovation as banking giants have been forced to rethink business models while tech start-ups reinvent ways to loan cash and transfer money. If Ireland can overcome the damage to its reputation from last week's Oireachtas report, it is uniquely placed to become an international financial technology hub for fintech, writes Simon Rowe of the Sunday Independent.

"Peter Oakes, the founder of Fintech Ireland, an advocacy group for the sector, and a former director of the Central Bank, echoes Watson's blunt assessment.

• Traditional forms of banking are all now trying to jump into fintech but they've still got problems in their outdated back-office systems. They've still got problems in their payments systems. And perhaps they really should be spending their money on fixing these before jumping into new initiatives because those new initiatives are highly IT dependent.
  
• In Ireland, the banks weren't very good at IT. They also weren't very good at making credit risk decisions. There was insufficient expertise of IT at board level and banks' management information systems were inadequate to monitor their risks during the period leading up to the crisis. A big unanswered question is whether this has in fact changed."
  

Peter Oakes - Twitter @oakeslaw : LinkedIn https://ie.linkedin.com/in/peteroakes 
See full article at http://www.independent.ie/business/technology/news/irish-fintech-sector-is-banking-on-boom-34410257.html 

P2P Lending: the best investment of 2016? Peer-to-peer lending has shot to fame in its 10 years in existence. Since being created in 2005 in the UK by Zopa, peer-to-peer lending growth has risen dramatically, resulting in a market value of £4.4bn by Q4 of 2015. With the number of peer-to-peer lenders in the UK market exceeding 50, P2P lending is now deemed one of the best alternative products on the market, but is it a really an asset class worthy of investing in?

Here we will take a look at peer-to-peer lending, the risk involved and how it’s mitigated to establish whether this is one of the better investment opportunities for investors.

Peer-to-peer lending risk v reward As interest rates go, peer-to-peer lending exceeds those on offer from most asset classes. The stock market has taken a hit this last year, with many markets in a “bear” territory – market prices falling encourage the selling of shares – falling 20% and with bank interest rates (Bank of England) at a historic low of 0.5%, P2P lending could be a new way of investing money and earning those returns in the region 5% per annum avg. What risk is associated in order to achieve these returns? Let’s evaluate:

Borrower default: how the risk is mitigated The no.1 risk associated with peer-to-peer lending is a borrower defaulting on their loan and the investor losing their money. P2P lending is not covered by the Financial Services Compensation Scheme either so there is no compensation if money is lost. Here are the key safety procedures imposed by P2P platforms to mitigate this risk:

1. Asset security
Many UK peer-to-peer lenders, such as Wellesley & Co, securitize their loans with tangible assets that can be sold to repay investors should a loan default.

2. Provision fund
RateSetter were the first to introduce a safeguard, or provision fund, but most major P2P platforms have followed suit. The fund will pay out on borrower defaults at the discretion of the Directors (in many cases) and assuming the fund is of adequate size. Find out how some UK peer-to-peer lender provision funds operate here.

3. Diversification
The number one rule when investing: diversify. With peer-to-peer loans your investment is spread across a number of borrowers, ensuring you don’t put all-your-eggs-in-one-basket. This spreads the risk and mitigates a single borrower default affecting your capital investment. RateSetter and Zopa retain very low default rates due to spreading a single loan amongst hundreds of borrowers.

4. Strict lending criteria
All UK peer-to-peer platforms will boast a rigid and robust lending criteria. The fact of the matter is, the investor will rarely see who it is they are lending to. Transparency is key, and with major UK P2P platforms making it clear capital investment is ‘auto-diversified’ between individuals, property and SME business loans, investors can be assured their funds are being lent to creditworthy borrowers. Christina Farnish, Chairperson of the P2PFA announces industry default rates are at a lowly 2-3% presently.

High interest rate reward 
 So it’s clear that peer-to-peer lending can offer one of the best saving rates (if deemed saving rather than investment) around so let’s take a look at what could be earned if a retail saver took their April ISA allowance, invested it an Innovative Finance ISA (IFISA) and lent through P2P lending.

·         Peer-to-peer lenders as ISA Plan Manager

·         Open an IFISA with a given P2P lender

·         RateSetter 6% per annum annualized rate IFISA

·         £15,240 ISA allowance can be invested

·         Interest received is tax free

So, a retail saver could receive £914.40 tax-free interest in one year. The ‘peer-to-peer ISA’ as some are calling it requires a closer look, seeing as it is new and there’s some complexity regarding withdrawals and transfers; find out more here. The Innovative Finance ISA isn’t the only way to invest in P2P lending, there are several products on the market. Appropriately comparing the many platforms and products on offer is of paramount importance.

Jordan is a FinTech enthusiast and co-founder of UK’s no.1 peer-to-peer lending comparison service, where the everyday person can research, compare and feel empowered to invest and earn more money on their money. [email protected], @orca_money, www.orcamoney.com  

According to a recent “Innovation in Payments: the future is fintech” report issued by Bank of New York Mellon; with nearly 4,000 active fintech start-ups in the arena and investment in the sector tripling to over USD 12 billion in 2015, a challenge to bank dominance is emerging not just in retail but also wholesale and corporate payments sectors.

The report outlines how new technology holds great potential to transform how consumers and clients initiate and process transactions stating that “it’s no longer just a case of new currencies or faster payment methods, but an entire rethinking of how transfers of any 'value' might be undertaken”.

Further analysis outlined in recent reports shows that although the financial services industry already has one of the highest ratios of IT spend as a proportion of revenue, over three quarters of this is estimated to be in maintenance rather than new services thus banks need to redress this imbalance if they are to thrive in the new fintech era and compete with smaller rivals by implementing swifter technology development cycles and replacing legacy payments systems. When examined closer this is being compliment by the some of the European Regulatory Authorities including the UK Financial Conduct and Prudential Regulation Authorities and UK Payments Systems Regulator whose recently implemented policies have encouraged the entrance of an estimated 14 new specialist start-up “challenger” banks, embracing the fintech sector with a niche service offering specific to the sector.  Such regulatory policies include reduced minimum capital requirements for “Small Specialist Banks” and more streamlined application processes thus reducing barriers, allowing fintech entities to establish as banks, gain direct access to the Payments Systems thus reducing their dependency on sponsor banks – a move which is bound to either challenge the larger correspondent banks or in some instances see further exits by those banks from the fintech/Payments sector to focus on core banking or higher margin activity.

Ultimately banks should position themselves at the centre of the payments industry and embrace the fintech revolution by understanding, interacting with and taking advantage of the array of fintech developments.

Joe Lavelle ([email protected]) is Founder and Director of Cloud Payments. He writes on Fintech incubators and opportunities for Ireland for www.fintechireland.com.  A chartered account and payments sector regulatory consultant, Joe also specialises in successfully establishing FinTech entities in Ireland, the UK and Malta as authorised financial institutions.

Editor's Note:  Irish readers will recall that many years ago Irish taxpayers could avail of a Special Saving Incentive Account (SSIA).  It was a type of interest-bearing account in Ireland. These accounts were available to open between 1 May 2001 and 30 April 2002, and featured a state-provided top-up of 25% of the sum deposited.  Whereas Individual Savings Accounts are a class of retail investment arrangements available to residents of the United Kingdom. ISAs qualify for a favourable tax status. Payments into the account are made from after-tax income. The account is exempt from income tax and capital gains tax on the investment returns, and no tax is payable on money withdrawn from the scheme either. Cash and a broad range of investments can be held within the arrangement, and there is no restriction on when or how much money can be withdrawn.  Although it is not a pension product, it can be a useful tool for retirement planning.

In this article Jordan Stodart, Co-Founder/CMO, Orca Money bring us up to speed on the UK's Innovative Finance ISA which is dedicated to peer-to-peer lending. Perhaps Ireland, following the past success of the SSIA, could consider a similar regime to the UK ISA regime.

Peer-to-Peer Lending + ISA = match made in heaven? Peer-to-Peer Lending (P2P) is becoming an even more attractive investment option with the introduction of the new Innovative Finance ISA (IFISA). But how will its introduction in April affect the P2P space? Will the investor number spike? How are existing firms gearing up for the change? Why should early adopters take the opportunity to invest? All will be explored. 

"The Innovative Finance ISA dedicated to peer-to-peer lending, is a game changer for millions of Brits who have suffered from poor returns since the financial crash. It signals that P2P lending has become a mainstream way for people to invest for their futures.’" Giles Andrews, Zopa Founder and CEO.

Low interest rates drive alternative investment.  The peer-to-peer lending industry has seen exponential growth in its 10 years. Last year saw a 106% increase in lent funds from Q3 2014 to Q3 2015 (UK P2P market) and with an expected industry value of almost £5bn in 2016 it could be a great opportunity for you to start increasing the returns you make on your capital.

When consultation commenced around the Innovative Finance ISA – also known as ‘Innovative ISA and ‘Peer-to-Peer ISA’ – it was clear change was on the horizon. In Summer 2015 the UK Government announced the inclusion of P2P investments in a new, ISA-wrapper, the IFISA. Here are the key takeaways from this announcement:

• IFISA arrives 6th April 2016
  
• £15,240 yearly allowance
  
• Allowance can be spread between available ISAs
  
• Peer-to-peer lenders can act as ISA Plan Managers without legally owning or co-owning the loans
  
• ISA transfers and withdrawals adapted to fit illiquid nature of P2P investments
  
• Only peer-to-peer lenders can offer Innovative Finance ISAs presently
  

The IFISA is helping position peer-to-peer lending as a viable alternative investment. How can the Innovative Finance ISA stimulate the industry and how will it work for the investor?

With this new tax environment, ISAs could be great for an investor's tax-efficient portfolio. Firstly, from April 6th almost all UK adults will be able to earn £500 or £1,000 interest tax free (depending on their tax bracket) with their personal savings allowance. If this is added to the couple’s allowance of £30,480 which can be held in an ISA, plus a top-up of £10,000 at an average peer-to-peer lending rate of 5%, it looks possible that an investor could achieve returns of over £2,000 per annum through an Innovative Finance ISA.

It’s important to assess the risk involved in a peer-to-peer investment as P2P lending is not covered by the UK's financial compensation scheme and you could lose all your money notwithstanding that these products are regulated by the UK's Financial Conduct Authority. 
Risk of P2P default is the number one concern. Borrowers could default on their loan repayments, and an investor could lose their money. However, P2P platforms implement security measures to mitigate this risk. Some key mitigation procedures are:

• Diversification – capital is split between numerous borrowers, often around 100.
  
• Asset security – some P2P platforms hold borrower’ assets over the loan, which can be sold if the repayments stop, thus paying back the investor.
  
• Provision fund – many P2P platforms hold back funds in a fund which pays out, at the discretion of the Directors typically, when a borrower defaults.
  

The Financial Times's FTAdviser published statistics last year gathered by Consumer Intelligence relating to the introduction of the Innovative Finance ISA.  The findings included:

• 1 in 5 of 1,020 UK adults say they will save in an ISA henceforth.
• 89% say they will seek to take advantage of the changes in ISA regulation. 
• 405,000 new P2P investors expected with introduction IFISA.
  

It is important to research peer-to-peer lending before you commit to a given platform and product. You can  compare UK peer-to-peer platforms and their risk mitigation procedures here. Orca Money has also created a handy guide to P2P lending.  Find out more about the mechanics of the Innovative Finance ISA and how it works here.

Jordan is a FinTech enthusiast and co-founder of UK’s no.1 peer-to-peer lending comparison service, where the everyday person can research, compare and feel empowered to invest and earn more money on their money. [email protected]

Each and every day we, as humans, establish a level of trust with each other.  We do this, in part, to gauge what we are willing to give to people, whether it be our time and attention, access to our home or anything else we may consider of value.  Among the ways we can build trust is by our appearance, our manner of speech or our actions.  Sometimes we need to present credentials, like a library card, before checking out that library book.  The greater the value of the thing we want, the more stuff we need to present to prove we deserve to get our hands on it.

Similarly, in our digital world, we as [banks, pharma companies, defense agencies, critical infrastructure owner/operators, etc.] are required to establish a level of trust, or confidence, of a computer user’s identity before permitting access or control of critical systems, data or other assets.  The “factors” that we must consider are clearly defined by the Federal Financial Institution Examination Council in the US and further clarified by NIST, the National Institute of Standards and Technology.  These factors were defined in such a way to form three distinctive groups characterized by their vulnerabilities and barriers they offer against would-be cybercriminals. These three factors are defined as “something the user knows”, “something the user has” and “something the user is”.  Any “authentication factor” in use can fall under one of these categories, and broadly take the form of shared secrets, tokens or biometrics.

These definitions can be applied to authentication thousands of years ago, or today.  For example, when Grok walked along the ridge of Big Mammoth cliff fourteen thousand years ago, Blok recognized Grok’s unique face and walk (his biometrics, defined as “a unique physical or behavioral characteristic”), knew it was Grok.  We do this all the time today, when we hear someone’s voice on the phone, or do a biometric scan and comparison of their iris at an airport terminal.  These various biometric characteristics vary in uniqueness and criminal’s ability to replicate based upon things such as feature scanning and matching sophistication and their position on the dynamic continuum, but we’ll save that for another blog post.

Similarly, tokens or “seals” with special carvings were carried during the Punic wars by centurions and messengers, coupled with secret passphrases (just long passwords), to prove that the message originated from friend, not foe, and designate authority.  So when Scipio Africanus came from Hannibal to collect a bunch of bronze bars from the treasury to purchase extra horses and spears to fight the Carthaginians, the process was not dissimilar to using an ATM with a card and PIN code.

There are several common misconceptions being promulgated by media and perhaps surprisingly, by software companies claiming to offer “4-factor” and “5-factor” authentication solutions.  Multifactor means just that: using more than one of any of the factors in your authentication process.  2-Factor Authentication (2FA) means token+biometric, biometric+secret or token+secret (like Scipio used).  3-Factor (3FA) means just that: all three factors are being used.  Three secrets does not constitute 3FA.  Two biometrics plus a smart card plus a browser extension does not constitute 4FA (sorry, nice try).  The browser and smart card are both tokens, have similar strengths, and vulnerabilities.  Two biometrics are great, but the same reasoning applies.  What is actually being described there is 2-factor, 4-step (even though the browser extension is somewhat invisible).  This is an important distinction, as adding more “steps” generally adds up to more work for the user, which typically means more chances to make an error and have to start over again (or just give up).

Another “4th factor” misstatement that we run across is that of geolocation being a "4th factor"; it is not really a 4th factor, it is a method of measuring a possession factor or token.  I need to have that smartphone/fob/smart card/”other thing I need to carry around” for you to know my location.  The FFIEC and NIST have these clearly defined. 

We have also seen solutions with one-time passwords (OTP) being displayed on a smartphone, which needs to be read by the user, being touted as 3FA.  They capture the reading of an OTP (eg. 123456), the user’s voice biometric and a device ID.  Clever, but where are the three factors?  A one-time password is not something you know, it is something you read from the phone.  So, a hacker with your phone has your phone and the OTP: phone+phone+biometric=2 factors, 3 steps.  In this scenario, you do not need to be present with the unique knowledge of the password (which is the challenge a cybercriminal would need to overcome).  Again, the reason they are defined this way is that each category comprises a distinctive set of vulnerabilities, and challenges to a cybercriminal.  The factors need to be mutually exclusive to improve security; it all about the fundamental distribution of risk.

When we began developing SensiPass, our objective was to employ all three factors in a secure way, without duplication, to build a simple solution to use, yet with the highest level of security: real 3-Factor Authentication.  We also wanted to build this without using passwords or PIN codes, collectively called “alphanumerics”, in the process, as they constitute the most vulnerable part of any authentication solution (more on that in another blog).  That is what we set out to develop, and that is what we did, elegantly.  Real 3-Factor Authentication in 3 seconds, no passwords or PINs.

Contact:
Mike Hill, CEO and Founder, SensiPass Ltd
[email protected]  Ph +353 85 8334477
@sensipass