Data Dive

New Challenges Editions: BNY Mellon, The OCC And China Union Pay’s New World

Good news this week for anyone on the East coast dreaming of a white Christmas — they may get their dream come true a little early. Winter storm Carly is bearing down on that part of the country, as is a blast of wintery cold — goodie, goodie.

And while we can’t send all you East Coasters a cozy blanket to keep you warm this week, we can keep you posted on what was hot in the payments and commerce data streams.

BNY Mellon had a major payments malfunction, the OCC said Fintech innovators need some regulating, and China said goodbye to the dual branded Union Pay cards that let Chinese consumers shop abroad with cards that have logos of Visa and Mastercard on them.

Got your hot cocoa handy?

BNY Mellon’s Big Mishap

Last week got off to a bumpy start for BNY Mellon as the bank found itself unable to process payment instructions sent to them via the SWIFT Network for a 19-hour stretch.

Reports indicated the outage began around 2:30 pm on Sunday (Dec. 4) and was not resolved until about 9:50 the following morning.

Cheryl Krauss, a BNY spokeswoman, noted the outage “impacted our ability to send messaging to and from the SWIFT network.”

She further noted that the bank’s systems are now fully functional and that backup systems were in place to prevent similar disruptions in the future. An internal memo confirms that SWIFT became aware of the issues as processing began to slow and then eventually stopped as the bank lost connectivity to the SWIFT network. Though a technology vendor was eventually able to get them back online, initial attempts to do so quickly were not successful.

BNY requested an extension in the Federal Reserve’s Fedwire system for clearing payments. Extensions of this kind are occasionally granted, particularly when banks are facing unusually large payments volume.

As of Monday afternoon, the bank was caught up, though the matter continues to draw internal scrutiny as some payments were unable to post by cut-off times Monday and were not formally completed until Tuesday.

As for why the issue arose at all, experts believe the root of the problem was a technological issue inside a single platform hosted by the bank. That system translates instructions from SWIFT messages to different business units. As of Thursday afternoon, BNY Mellon had no further comment on the cause of the outage. Officials at the Federal Reserve were also unavailable for comment.

The incident comes as BNY Mellon is facing increased scrutiny from both federal regulators — who worry about its size and systemic importance — and SWIFT officials who are monitoring member banks more closely following a string of cyber attacks in 2016.

BNY Mellon provides payment services in more than 100 currencies through more than 2,000 correspondent bank accounts worldwide. Known as a trust bank, BNY Mellon safeguards and keeps track of nearly $26 trillion in assets for clients that include the largest asset managers, pension plans and corporations around the globe.

OCC Wants FinTech To Get National Bank Charters

The Office of the Comptroller of the Currency wants to give FinTechs a charter — of the banking variety. According to American Banker, the new bank charters are defined as “limited purpose” with “high standards for new entrants.”

Under the plan, the OCC will enable FinTechs to operate their businesses nationally thanks to a special purpose charter. OCC Director Thomas Curry said in his announcement of this charter that the OCC is open to talks about what the terms of the charter would be — though the hope for the charters is that they will encourage FinTech companies to reach people who are underserved by traditional banking. It also gives regulators a convenient mechanism by which to offer regulatory scrutiny to a class for financial services firms that currently operate with rather less regulatory oversight than their counterparts at traditional banks.

Proponents of the new charter system note that a national charter will save start-ups legwork as they will not need to divert as much time registering to do business on a state-by-state basis. Such a charter would establish a national standard for nascent, technology-driven firms and streamline the number of agencies they would need to work with.

FinTechs will however still be responsible for meeting other regulatory provisions — like anti-money laundering safeguards, for example.

The charters would apply to FinTechs involved in core banking areas such as taking deposits and lending money. National chartering would also require FinTech firms to tackle financial inclusion as part of their business plans.

“Technology-based products and services are the future of banking and the economy,” Director Curry said in a speech outlining the proposal, according to Reuters.

FinTech companies, noted the report, have not previously been subject to many banking laws because they do not take customer deposits.

The regular examinations were applauded by traditional banking associations and trade groups.

Banks have long complained that there isn’t federal oversight of online lenders. “Maintaining high standards is the best way to ensure customers have access to the best financial products and services,” Rob Nichols, the American Bankers Association’s president and chief executive, said in the report.

Not every industry player is on board with the OCC’s proposal. The Independent Community Bankers of America (ICBA) said in a release that it had “serious” concerns about giving nonbank online lenders a charter. “While ICBA supports oversight of these unregulated financial firms, a FinTech charter poses risks to taxpayers and the financial system by endowing these nonbank companies with a federal bank charter,” said ICBA President and CEO Camden R. Fine in a press release.

“ICBA has been deeply concerned that nonbank online lenders’ lack of oversight has provided them with regulatory advantages over other institutions — such as highly regulated community banks — while putting consumers and the financial system at risk. Any limited FinTech charter must hold these companies to the same standards of safety, soundness and fairness as other federally chartered institutions. Our nation’s FinTech regulatory framework should be no less stringent than that which applies to insured depository institutions to ensure a fair regulatory system that protects consumers and supports safety and soundness at these unregulated companies.”

That will likely be a debate to watch in 2017.

China’s Long Good-Bye To The Dual-Networked Cards

Given that China’s payment card market is worth about $8 trillion annually, it is unsurprising that a big shake-up is big news.

And last week, the world got just such a shake — the People’s Bank of China has ordered local banks to stop issuing co-branded cards (i.e. bearing both the logo of UnionPay and a foreign card network such as Visa or Mastercard.)

Stemming from the PBOC’s order, Chinese banks have stopped all orders for cards bearing foreign network logos. Though cards already in service will continue to function, the issuing banks will not be renewing them as they expire.

The co-branded cards, as issued, allowed Chinese consumers to process payments made in U.S. dollars while traveling abroad. The Visa or Mastercard logo shared some plastic real estate with the UnionPay logo on the front of the card. Within mainland China itself, UnionPay (China’s main and only issuer) has up until now been the only choice — as the PBOC-approved card network was the only firm legally capable of processing domestic payments.

Dual branded cards are routinely issued by China’s largest banks: the Industrial & Commercial Bank of China, China Construction Bank, Bank of Communications, Shanghai Pudong Development Bank and China Merchants Bank, to name a few. Around 240 million co-branded credit cards have been issued by Chinese banks during the past 14 years, according to data from Goldpac.

The results of the partnership have been mixed. Both sides have undoubtedly made money — as UnionPay and its international partners split the fees on international card transactions. But the partnership has at times also been uneasy — particularly as Visa and UnionPay have clashed over which company would take point on actually processing some payments.

The dual-branded cards have also been connected with currency flight from China — the South China Morning Post reports have become particularly concerned of late, given that the renminbi is currently in the process of declining to an eight-year low.

“These moves appear to be part of the continuing clamp-down on capital outflows,” said Keith Pogson, a partner in EY’s financial services practice in Hong Kong.

Visa and Mastercard are not entirely locked out of China by this — both have a path to more autonomous operations in China, as the PBOC and securities regulator have mutually determined that foreign card companies can apply for licenses to clear domestic Chinese payments. When renewals become possible again, customers will no longer carry a single co-branded card — they will simply carry two cards.

But those licenses, according to experts, will face a host of regulatory challenges that will take at least a year to clear. In the interim, Chinese customers will simply drop off of foreign card companies’ roles as co-branded cards expire without the opportunity for renewal. And a year, most experts believe, is an extremely optimistic estimate.

“I get the impression that the actual licenses to operate aren’t terribly difficult to get, but getting the final approval to start operations is, as there are all these checks,” Kapron said. “At this point, I would expect the earliest we would see a mainland-issued [foreign] card would be late 2017, early 2018.”

Visa declined to comment on the specifics of the situation but said that it “will comply with all government regulations.” MasterCard and UnionPay had no immediate responses.

So what did we learn this week?

The world is a rapidly changing place – with more changes set to come. BNY Mellon may have to explain to already somewhat skeptical regulators why it can totally handle the hundreds of billions in payments it controls, FinTech startups may soon have to deal with an entirely new regulatory regime — and card network operators are learning that a world with more opportunity to operate in China may be a harder one before it becomes an easier one.

Stay warm out there!



B2B APIs aren’t just for large enterprises anymore — middle-market firms and SMBs now realize their potential for enabling low-cost access to real-time payments and account data. But those capabilities are only the tip of the API iceberg, says HSBC global head of liquidity and cash management Diane Reyes. In this month’s B2B API Tracker, Reyes explains how the next wave of banking APIs could fight payments fraud and proactively alert middle-market treasurers to investment opportunities.

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