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Minister of State Seán Fleming TD outlines
Minister of State Seán Fleming TD: Ireland for Finance
Ireland for Finance is the whole-of-government strategy to develop the international financial services sector in the export of financial services products, writes Minister of State with responsibility for Financial Services Seán Fleming TD.
The strategy is a key element of the long-standing government commitment to enhance Ireland’s economic standing as a place of talent, innovation, and experience in international financial services.
The industry has gone from strength to strength, through a dedicated partnership approach between the public and the private sector. This dates back to the origination of the International Financial Services Centre in the late 1980s.
Since then the sector has developed into an important pillar of the Irish economy. Direct employment in the portfolio of firms in international financial services from both the Industrial Development Agency (IDA) and Enterprise Ireland stands at a record 52,000 people. Significantly, 30 per cent of these jobs are outside of Dublin. This sector contributes substantially through payroll taxes, VAT, and corporation tax to services in Ireland.
When combined with the many indirect jobs in the provision of professional services that the international financial services sector supports, the levels of opportunity for people that the industry is creating has never been greater.
Ireland is a specialist centre for international financial services, one with deep industry expertise in defined areas, such as investment funds, asset administration, aircraft leasing, fintech and payments. Over time the sector has also proven itself resilient over a number of different testing economic cycles. While Brexit has been a significant challenge on many fronts for Ireland, it has proven to be a benefit to Ireland in international financial services. Many firms chose Ireland more so than any other destination in the EU to relocate from the UK to maintain access to the single market.
This has broadened the reach of the already strong investment funds sector and has made new opportunities possible for large cross border international banking and insurance firms.
The attraction of Ireland for those firms is closely linked to the strong enterprise
platform focused on exports and innovation, coupled with our membership of the EU and a strong independent regulator. In addition to these factors, many firms welcomed the partnership model behind Ireland for Finance and recognised the forwardlooking ambition of the Government to develop the international financial services here.
To enhance and extend the effectiveness of the Government’s approach to international financial services, I have begun a focused update of the Ireland for Finance strategy. The updated strategy will focus on delivering a more globally digitally enabled and decarbonised society. This will create a new set of opportunities for the international financial services industry here. The updated strategy will be published in the middle of this year.
The impact of technology on the global economy and financial services became particularly evident during the pandemic. The capacity of innovation developed over many years delivered a seamless move to remote working and new ways of using financial products that were unimaginable in the past.
Fintech
The levels of investment in fintech from venture capital and other investors have seen significant increases as both new entrants and the incumbents look to capture the opportunities that digital technologies present.
Ireland is particularly well placed to benefit from this digital transformation in financial services as a well-developed financial centre with an established technology sector featuring the leading names from around the world.
In the area of payments, often cited as the gateway of fintech, Ireland has already achieved a strong leadership position as a location for innovative companies like Fexco, Stripe and Mastercard who all have large development teams operating here.
The digital finance ecosystem has also expanded in recent years to include many of the institutional financial services providers that have chosen Ireland to help them develop their fintech capability. Ireland is being recognised for the unique blend of experience that we have in technology and finance. Increasingly technology is also playing a significant role in how firms meet the demands of both regulators and consumers to explain how they address environmental, social and governance (ESG) issues.
Compliance with the ambitious targets that Ireland, the EU and the United Nations have set to take action on climate change require greater levels of disclosure around the activities of all organisations and financial services firms.
Harnessing the potential of ESG data can help contribute towards sustainability goals. As part of the Government’s Sustainable Finance Roadmap we are creating a dedicated framework to capitalise on this opportunity.
Thanks to the hard work and dedication of the executives from both the public and the private sector, Ireland is in a strong position to respond to the opportunities before us in international financial services. The core purpose of the Ireland for Finance strategy is to create choices for people in their careers and to encourage more people from more diverse backgrounds to participate in the opportunities out there. To achieve this pipeline of diverse talent we are working in tandem with the Department of Higher Education, the IDA and Enterprise Ireland.
The update of the Ireland for Finance strategy that we are carrying out seeks to build on the successes we have achieved to date and make the most of the exciting changes taking place in digital and sustainable finance.
While there are challenges that the sector must address, not least the current geopolitical uncertainty, the combination of partnership and innovation will be at the heart of the next phase of the Government’s approach to international financial services.
Credit: Department of Finance.
Sean Fleming TD at the Q1 Joint Committee Ireland for Finance meeting attended by Commissioner Mairead McGuinness.
Financial industry cybersecurity risks are increasing
As one of the most prominent targets of cybercriminals, fintech has always been probably the most cybersecurity-conscious sector, subject to advanced regulation and with a solid backing of security professionals. ESET Ireland takes a look at a few aspects of fintech cybersecurity.
Just before the GDPR regulation was adopted, Adrian Mullett, head of technology sector for Bank of Ireland told Silicon Republic: “Ireland has a strong cohort of companies active in security. But what you are seeing now are massive changes in regulation compliance, and this is where fintech and security work hand in hand… We are seeing a move towards managed security providers consolidating their tech with fintech and regtech to meet compliance needs of various organisations. GDPR is merely a symptom of that as well as being a driver in and of itself.”
The EU Directive on the Security of Network and Information Systems, which Ireland has adopted includes proportionate technical and organisational measures, such as the security of systems and facilities, incident handling, business continuity management, monitoring, auditing and
testing and compliance with international standards.
But, a few year later, the seriousness of the threat cybercrime poses to businesses offering financial services is reflected in the cost of a data breach in the financial industry. According to IBM’s Cost of a Data Breach 2020 report, the average cost of a data breach in the financial services sector was US$5.85 million compared to an average of US$3.86 million. The financial sector is an attractive target for bad actors, especially due to the type and amount of information it collects from its customers and partners. In the event of a successful breach, the data can be used for identity fraud or sold on dark web marketplaces, which can lead to reputational damage to the breached entity as well as possible reputational and monetary damages to the customers affected.
A key area that is preventing companies from tackling cyberthreats head-on is that they have insufficient budgets allocated to cybersecurity. According to a survey conducted by consulting firm Ernst and Young, 87 per cent of surveyed organisations said that they did not have a sufficient budget to achieve the levels of cybersecurity and resilience they were aiming for. The lack of resources means that companies cannot hire enough cybersecurity talent or institute technical measures they need to be resilient when facing off against various cyber threats. Some organisations underestimate the value of cybersecurity for their business and instead opt to invest in other aspects they deem more worthwhile, such as financing expansions or developing new products. They could argue that the costs outweigh the benefits, such as the cost of cybersecurity measures outweighing potential losses from a data breach.
Verizon’s 2020 Data Breach Investigations Report estimates that 63 per cent of attacks carried out against financial institutions are done by external threat actors motivated by monetary gain. Organisations can expect that cybercriminals employ credential-stuffing attacks, social engineering attacks, fraud, DDoS attacks, and malware. The Covid-19 pandemic has increased the risk, particularly because many companies were forced to shift to working remotely, a move that introduces its own set of challenges. Since the shift came suddenly, companies may not have had enough time to properly institute cybersecurity policies that would deal with possible weak points due to employees working from home.
Employees are the cornerstones of any organisation, but, as the age-old adage goes, “to err is human”. The IBM report found that human error is one of the three major root causes of data breaches, accounting for 23 per cent of breaches. To mitigate the chances of any of these scenarios happening, companies should provide proper cybersecurity training to their employees. Exercises where employees are taught how to spot phishing or social engineering attempts should be conducted routinely.
Every company should have a business continuity plan in place in case a cyberattack occurs. A proper plan should always include data backups and, if budgeting allows it, a whole backup infrastructure; critical especially if a ransomware attack occurs. For the backups to be effective, they must be both updated regularly and tested frequently to ensure that they are operating properly. While financial organisations remain lucrative targets for most cybercriminals, they can still ramp up their defences enough to mitigate the possibility of falling victim to most threats. However, to build up sufficiently strong defence mechanisms, companies need to take a holistic and balanced approach, which consists of investing both in employee training and adequate technological solutions and business continuity plans.
Any combination of the aforementioned factors could spell a perfect storm for most organisations when faced with a cyberattack. On the bright side, financial services companies are taking cybersecurity concerns seriously on the highest level. Global management consulting firm McKinsey found that 95 per cent of the board committees that they surveyed say they discuss cyberrisks and tech risks at least four times a year. It’s worth noting, however, that building awareness in top management needs to go hand in hand with investing adequate sums in cybersecurity solutions and training personnel to the best possible standards.
T: 053 914 6600 E: info@eset.ie W: www.eset.ie
fintech report A guide to fintech
Fintech refers to any business that uses technology to enhance or automate financial services and processes; as this becomes a mainstay in the global economy, eolas brings you a guide to understanding the applications that define it.
Digital lending
Digital lending is a complex ecosystem in which non-traditional loan providers are leveraging technology in an attempt to overtake traditional lending sources such as retail banks. While traditional types of lending such as mortgage lending are manual and paper-based, technologies such as robotic process automation (RPA), optical character recognition (OCR), automated document recognition (ADR), workflow, and machine learning are now all being utilised in the management of application processes. Digital lending allows financial institutions to boost productivity and loan profits while providing speedier service at the point-of-sale. The ease with which applications under this model can both be submitted and managed has seen e-commerce payment firms such as Stripe move into the lending sector, while global banks such as ING and BBVA Compass have partnered with tech firms such as Kabbage and OnDeck respectively. Faced with more integrated lending competition, banks are now said to be delving deeper into customers’ life experience in order to protect their market share, seeking to support broader life goals rather than the core types of loan such as car loans, mortgages, etc. Banks are now offering financial support to help customers insure, renovate, and furnish their new homes, all integrated into their platform.
Digital payments
Since the production of the first plastic card for electronic payments in 1959 by American Express and the advent of ATMs in the 1960s, financial transactions have slowly been migrating into the digital and online space to the point where today, the vast majority of transactions occur online and digitally, from ewallets and blockchain to contactless payments on credit networks.
Mobile technology now means that smartphones have become vessels for payment, replacing plastic, chip and pin cards; this has in turn meant that mobile technology companies enable businesses to simplify their payment methods. For example, Apple has recently launched Tap to Pay, a new streamlined contactless payment service for business vendors that enables them to download the software, install the settings and start using their iPhone as a payment receiving device.
Tap to Pay is made possible through near-field communication (NFC), a technology that allows short-range wireless connectivity between two NFC-enabled devices at a distance of 4cm or less. NFC offers a low-speed connection through a simple setup that can be used to bootstrap more capable wireless connections. Due to the ease with which these technologies are now accessed, use of digital wallets has seen a rise, jumping to 27 per cent of consumers in the US in 2020, up from 22 per cent in 2019.
Digital wealth management
Digital wealth management is an integrated system that utilises digital tools in order to allow users to manage a wide range of savings and investment products, such as stocks, exchange-traded funds (EFTs), and digital assets such as cryptocurrencies. A key aspect that separates digital wealth management platforms is their lack of barriers to entry when compared to traditional savings and investment methods, with platforms such as Scalable Capital allowing customers to start at just €1, free of order fees. Since EFTs are often available to clients of a certain country/continent only, digital wealth managers often offer country- or region-specific propositions to clients.
Digital wealth management solutions allow clients to process their entire portfolios through one app or website, with this streamlined process typically only requiring the answering of questions on the client’s part in order to build a profile around their needs. These platforms typically offer a variety of options, from risk-averse to risk-heavy; risk-averse portfolios often operate so-called stablecoin strategies. A stablecoin is a cryptocurrency that is pegged to a fiat currency, such as the USD Coin or USD Tether, both of which are pegged to the US dollar.
Digital wealth management is now also being embraced by more traditional players in the wealth management sphere. For example, the asset management firm Pantera Capital has been noted for its embrace of fintech, having launched the first investment fund focused on Bitcoin in the United States in 2013. The firm requires a minimum investment of $100,000 for its investment funds and now manages over $700 million in digital assets spread across five different cryptocurrencies.
Various market funds provide exposure to all areas of the cryptocurrency sphere, from illiquid venture capital assets to liquid digital assets such as Bitcoin. These funds are designed to protect investors against the unpredictability of assets such as Bitcoin and Ethereum by focusing on downside protection. 4
Blockchain and cryptocurrencies
The blockchain is a distributed database that is shared among the nodes of a computer network. In its role as a database, it stores information electronically in a digital format. While often mistaken for a cryptocurrency itself, the blockchain’s role in this sphere is to act as a ledger, maintaining a secure and decentralised record of transactions for systems such as Bitcoin. What distinguishes the blockchain is that it guarantees the fidelity and security of a record of data without the need for a trusted third party.
A blockchain collects information together in groups, known as blocks. These blocks have defined storage capacities and are closed and linked to the previously filled block once full, forming the chain that then becomes known as the blockchain. New information that is collated following the addition of a block to the chain is compiled into a new block, which is then added to the chain once full. This chain structure means that the blockchain is an irreversible timeline of data when it is implemented in a decentralised nature. Once a block is filled, it is given an exact time and date stamp and added to the chain as part of the timeline, rendering editing impossible.
The blockchain enables cryptocurrency transactions and maintains a decentralised ledger of them. A cryptocurrency at its most basic level is a digital or virtual currency that is secured by cryptography, making it almost impossible to counterfeit or double spend. Cryptocurrencies are typically decentralised networks based on the blockchain that are not issued by any central authority, meaning that they are theoretically immune to government interference or manipulation, although some states such as China have begun wading into the market with state-backed cryptocurrencies such as the digital yuan.
The advantages of cryptocurrencies include cheaper and faster money transfers, with the decentralised systems meaning that collapses do not come from a single point of failure. The disadvantages of cryptocurrencies include their price volatility – for example, the value of Bitcoin, the highest profile of cryptocurrencies, has, at the time of writing, fallen 29.7 per cent in the past six months, risen 12.8 per cent in the last three months, and fallen 12.86 per cent in the last month – high energy consumption for mining activities, and prevalent use in criminal activities due to their decentralised and anonymised nature.
Cryptocurrencies can be mined or purchased from cryptocurrency exchanges, although not all ecommerce sites will allow the use of cryptocurrencies for purchasing goods. Cryptocurrencies are, in fact, as yet still rare in retail transactions, although notable companies such as Tesla have accepted Bitcoin as payment and then reversed this policy. They have since accepted the so-called ‘meme-coin’ Dogecoin, but also reversed this policy soon after. However, the skyrocketing value of cryptocurrencies has made them popular as trading instruments and as a vehicle for financial speculation.
The digital transformation of finance
Over the last decade, there has been major disruption to how we access and use financial services and products, globally and in Ireland, writes Lorna Smith. Partner, Financial Services Regulatory at the Maples Group.
A decade ago, most people would not have believed that we would be able to make payments from our phones, send a friend money to split a bill from our mobile phone contact list, or make investments using our thumb to confirm a trade. So far, the use of robotics, AI and machine learning are less widespread in the mainstream Irish financial sector.
A key part to any successful transformation is ensuring that it remains inclusive and those who may not have access or the ability to use technologies do not get left behind. So how do we balance innovation with inclusion, consumer protection and ensuring the stability of the financial system?
Regulators have sought to use a number of tools to achieve this. Various consumer/investor protection rules have been reviewed and updated to ensure they remain fit for purpose in the digital age while also ensuring an option for customers to access paper terms and conditions, statements etc., for those who need them. Clear disclosures and warnings help to educate investors. One example is the disclosures required in the new crowdfunding regime.
For virtual assets, the initial focus of policymakers was to ensure that they are not used to launder money or finance terrorism by introducing a virtual asset service provider regime to regulate providers in the EU from a fitness and probity and anti-money laundering/countering the financing of terrorism perspective. EU regulators continue to issue warnings about the risks of retail investors investing in cryptos while EU policymakers are developing an EU-wide framework for regulating markets in crypto assets (which are not already captured within the scope of existing financial services legislation), "MiCA", with a target date of 2024.
The pandemic highlighted operational risk and the importance of business continuity. Providers of financial services and products rely on a web of third parties to deliver that product or service to its customers. Oversight and management of outsourcing, scenario testing of operational risks and robust business continuity arrangements all help to protect customers. Despite the progress, there is still more to do, such as implementing an integrated and reliable system for faster payments, developing better ways for customers to aggregate their financial products, and adapting regulatory frameworks to support financial inclusion. I look forward to seeing what financial services will look like in another 10 years’ time.
T: +353 87 181 1746 / +353 1 619 2125 E: lorna.smith@maples.com W: www.maples.com Maples and Calder (Ireland) LLP 75 St. Stephen's Green Dublin 2, D02 PR50, Ireland
