June 2017 The Massachusetts Financial Services Sector 7th

June 2017 The Massachusetts Financial Services Sector 7th

June 2017 The Massachusetts Financial Services Sector 7th Annual Impact Report SPECIAL FOCUS : Fintech Opportunities Boston Financial Services Leadership Council The Impact Report was produced on behalf of the Boston Financial Services Leadership Council (BFSLC) by Mass Insight Global Partnerships (MIGP) with support from PwC. About the Boston Financial Services Leadership Council (BFSLC) The BFSLC, supported by an initiative of Mass Insight Global Partnerships, brings together CEOs and senior executives from the Boston financial services sector with academic partners to organize collaborations and advocate for the sector in Massachusetts. With millions of customers and accountholders, 181,000 local financial services jobs, and over 100,000 professional services jobs supporting the sector, the impact of the Boston financial services sector is an important success story. The BFSLC launched Financial Technology Boston a year ago to develop a FinTech agenda to promote the region as a global FinTech leader. Mass Insight Global Partnerships (MIGP) Mass Insight Global Partnerships creates a competitive advantage for its partners and the region through public-private leadership groups that bring together universities, industry and government what we call the Innovation Triangle to 1) shape policy initiatives and 2) establish pre-competitive partnerships to expand market opportunities, focused especially on technologies where the region has deep resources. In addition to the BFSLC, Mass Insight Global Partnerships launched in 2011 and continues to support the nonprofit Advanced Cyber Security Center (ACSC). The ACSC is a 25 member regional collaborative defense and research partnership of industry, universities, nonprofits and government led by the MITRE Corporation and the Boston Federal Reserve Bank to address the most critical and sophisticated cyber security challenges. MIGP continues to provide the longest running quarterly public opinion survey in Massachusetts to support MIGPs and its members initiatives in collaboration with Opinion Dynamics Corporation. PwC PwCs purpose is to build trust in society and solve important problems. PwC is a network of firms in 157 countries with more than 223,000 people who are committed to delivering quality in assurance, advisory and tax services. 2 Introduction by Mass Insight Connecting the Dots on our Regional Assets: The Boston FinTech Opportunity and the Importance of Collaboration In the fall of 2010, Mass Insight issued our first Financial Services Impact Report with support from PwC. Seven years later, we are pleased to confirm the continuing impact of the leading Massachusetts for-profit sector, a partner to our major sectors including life sciences, technology, higher education and healthcare and a global player, with a disproportionate impact on the states economy. Massachusetts distinctively has a complete portfolio in financial services. Growing firms through venture capital, private equity and banking and preserving institutional and personal funds through our global leadership in asset management, retirement savings and insurance. Three numbers tell the story of the sectors impact in the Commonwealth: 6, 14 and nearly 20. 6% of the states workforce, providing 181,000 direct jobs in 2016, up 7,000 from 2015 with the leading share of middleincome, middle class positions in our firms 14% of the states GSP, up from 10%; over $40 billion of the states total output Nearly 20% of the states business tax revenue ($2.1 billion annually) The future belongs to those firms and regions that embrace and lead the digital transformation sweeping across the economy. In financial services, that means financial technology or FinTech. This Impact Report's FinTech focus identifies six areas where Bostons traditional B-to-B expertise should give us a leadership role if we connect the dots on our assets. A year ago, our CEO-led Boston Financial Services Leadership Council launched a new initiative, FinancialTechnologyBoston.com, to 1)

assess and promote the regions FinTech resources and 2) recommend new initiatives to capture the next wave of innovation and assure Bostons future success as a global financial services and FinTech hub. Mass Insight with the support of McKinsey and Co. and a FinTech Work Group conducted extensive interviews in the FinTech community to produce a Boston FinTech Road Map. The Road Map identified the regions primary challenge moving forward to attract and retain Fintech talent, innovation and entrepreneurs. Although Boston has produced significant new FinTech startups, California and New York dominated the first wave of FinTech start up and VC activity. The FinTech eco-system is made up of four key elements financial institutions, startups, venture capital and academia with government as an important supporting partner in areas like talent development, workforce and education. The FinTech Road Map made the case for a new collaborative platform led by our major firms that connects these assets. Collaborations will engage universities in early stage, pre-start up idea generation and support emerging start ups seeking leading firms as customers in an accelerator. You will hear more about these initiatives in 2017. Thank you to all our partners for investing in this report and ongoing initiatives. We look forward to continuing our work together. William H. Guenther Chairman, CEO and Founder Mass Insight Global Partnerships 3 Contents Executive Summary 5 FinTech Trends and Opportunities 7 Machine Learning and Advanced Analytics 9 Robo-advisors 12 Robotics 12 Cyber Security 13 Blockchain 14 Digital Identity 15 Current strength of MA Finance Sector Mass Finance: A for-profit employment leader 16 17 Mass Finance: Increasing wages and leading gross state product contribution 18 Education: Cultivating and retaining top talent for Mass Finance 20

Appendix I 22 Appendix II 24 Endnotes 25 4 Executive Summary: Current Impact of the MA Finance Sector Creating Business Value While accounting for 2.1% of the U.S. population in 2015,1 Massachusetts contributed 2.9% of the nations direct financial services employment,2 1.4 times its population share. In 2015, Massachusetts accounted for 4.1% of the total wages of the U.S. financial services industry.3 The financial services industry is a critical component in the ecosystem of Massachusetts, as it supplies innovative companies with needed capital and is a global leader in asset management and insurance. With 181,000 direct jobs, the sector also provides supporting industries, such as IT, with over 100,000 jobs and opportunities. Three numbers tell the story of the impact the financial services industry has on the Commonwealth 6, 14, and nearly 20. 6% of the states workforce, providing more than 181,000 direct jobs in 2016 (up 7,000 from the prior year) 14% of the states GSP at over $40 billion (up from 10% in the prior year) Close to 20% of the states business tax revenue ($2.1 billion annually) over the last five years 6 Most recent data also indicates continuing wage growth for the sector at over 5% annually for the most recent two years, continuing to lead the state in average compensation. With the strength of our talent, our long history as fiduciaries managing assets, and our track record as innovators and academic leaders, financial services in the Commonwealth is well positioned for continued growth, especially with the opportunities in financial technology. 14 18 FinTech Opportunity for Innovation 5 Executive Summary (cont.): Mass FinTech in the Sector Opportunity for Innovation: Data and Security Dominate Despite being a hotbed of academia, financial services firms and world-class talent, Massachusetts has generally lagged behind other startup hubs like New York and California when it comes to FinTech innovation. FinTech is seen as a growing disruptor and is transforming each step of the value chain across the financial services industry. Looking ahead, Massachusetts has an opportunity to grow its FinTech industry to compete with the largest FinTech hubs by bringing together its talent, academia, startup community and high-profile Financial

Institutions. By partnering with FinTech companies or by individually integrating FinTech practices into their operations, financial services firms will benefit. Firms can reduce research and development costs, increase operational efficiencies, better market and sell services and enhance customer service. The FinTech trends below are seen to have the highest potential for Massachusetts-based financial services firms to capture the second wave of the FinTech evolution and become pivotal players in the global arena. Machine Learning & Advanced Analytics Using intelligence exhibited by machines to perform tasks that usually require human intelligence, this technology analyzes large data sets to identify patterns and respond to them. Predictive analytics rely on human behavior research. Cybersecurity Due to the heightened risk of cybersecurity threats, financial service providers need to protect their systems from phishing, business email compromise, ransomware, and distributed denial of service (DDoS) attacks. Robo-advisors Providing automated investment management advice and improved customer service with minimal human intervention, robo-advisors have allowed investment advisors to target the mass affluent as a new customer base. Blockchain Made up of blocks (transactions) that are added chronologically, Blockchain is a decentralized record or ledger. Transactions are independently verified by miners and a permanent record is created that cannot be altered, enhancing the transparency and security of data. Robotics Applying logic-driven software applications instead of humans to perform high-volume, low value-added tasks, Robotic Process Automation (RPA) can manipulate data and interact with other systems, improving quality, speed and agility. Digital identity Using controls to monitor the identity of individual users of a network, digital identity management is able to allow or limit access to systems and data to simplify organizational operations and enhance

customer experience. 6 Fintech Trends and Opportunities 7 FinTech Trends & Opportunities FinTech is a growing disruptor Converging financial services and innovation Transforming each step of the value chain High potential for opportunity Massachusetts has the potential to capture the second wave of the FinTech evolution, by focusing on the FinTech trends seen to have the highest potential and establishing a vibrant FinTech ecosystem. Machine Learning & Advanced Analytics Roboadvisors Cybersecur ity Robotics Blockchain Digital identity 8 Machine Learning & Advanced Analytics Figure 1 The financial services industry is witnessing significant growth in the use of machine learning and advanced analytics as a result of improvements in Artificial Intelligence (AI), where machines get smarter by analyzing and learning from large data sets. These machines can quickly discover trends and respond to them, helping organizations to enhance and streamline their products, services and operations in ways that were not previously possible. What are the most relevant technologies for your business that you plan to invest in within the next 12 months? With advances in big data, open-source software, cloud computing, and processing speeds, more firms will use cognitive computing and machine learning to perform advanced analysis of patterns or trends. For example, firms may use AI to help spot non-standard behavior patterns when examining financial transactions or to prevent and detect compliance issues. Artificial intelligence can help people make faster, better, and cheaper decisions. But you have to be willing to collaborate with the machine, and not just treat it as either a servant or an overlord.

Anand Rao, PwC Innovation Lead, Analytics4 Source: PwC Global FinTech Report 2017 Mature Financial Institutions see big data analysis as one of the FinTech areas most relevant to their business (Figure 1), given that they already have access to large data sets. Many large institutions are revamping their legacy systems with a strong focus on data analytics to inform their decisionmaking (Figure 2).5 These efforts so far have generated improved product pricing, more efficient underwriting, better targeted customer marketing, and reduced operational costs. A related emerging trend is the use of advanced analytical risk models, which companies are using to predict risk based on pre-determined business rules and using large data sets. Firms can use these risk models to make more informed decisions in a range of transactions, from investing in credit markets to providing insurance to potential customers. This technology has even opened up new niche markets that were previously deemed too risky or unprofitable. These advances bring both opportunities and threats to existing financial institutions (Figure 3). FinTech startups specializing in AI and big data are also entering the market, disrupting both back-office and front-office functions of traditional financial services firms and raising more than $2 billion in venture capital funding this year alone.6 Figure 2 Source: PwC Top financial services issues of 2017: Thriving in uncertain times 9 Figure 3 Source: PwC Top financial services issues of 2017: Thriving in uncertain times One such startup is Cambridge-based Kensho, which uses large computing power and state-of-the-art analytical tools to combine natural language search queries, graphical user interfaces and secure cloud computing. Within seconds of the market data being released, Kensho is able to produce fully automated analytical reports that would take human analysts days to assemble. This is expected to reshape the role of the analyst at financial institutions served by Kensho. The investment management landscape is also affected by these advances. Elsen Inc. is a Platform-as-a-Service (PaaS) company that helps asset managers to manage unstructured and complex data issues. With its highperformance computing system, Elsens nPlatform quickly analyzes vast quantities of data from premium sources to run complex models quickly and at low cost. These models help traditional financial institutions perform simulations and back-test their products using historical information in minutes, making it significantly easier and faster to identify insights. The platform also uses machine learning and AI techniques to detect trends that would otherwise remain hidden to the users. 7 "With the volume of data - and, increasingly, unstructured data - growing daily, we saw a true market need and opportunity for better aggregation in order to deliver greater and more meaningful insights to financial institutions, most of whom are still highly dependent on predominantly legacy tech stacks. With the caliber of talent available to us in

Massachusetts and the surrounding region, we are strongly positioned to continue to scale in bringing our solutions to our global customers' use cases. It's very exciting for Elsen to be part of improving the speed, quality and value of decisionmaking in financial systems all across the globe." Zac Sheffer, Co-Founder and CEO, Elsen Based in Boston, Quantopian uses crowd-sourced investment algorithm contests and machine learning to select the best trading strategies for their hedge fund. Coders get access to data, a research environment and development platform where they can test their algorithms, as well as intellectual property rights. The top performing algorithms then receive investment capital up to $3 million and, if profitable, the author (or quant) receives 10% of the net profits. To date, Quantopian has a community of over 100,000 quants and 450,000 investment algorithms.8 FinTech developments in data analytics and machine learning are being leveraged by both large financial institutions and startups to solve problems affecting both the financial industry and large parts of society. For example, in the past 30 years, college tuition has more than doubled, greatly outpacing inflation. To explore this issue, Fidelity Labs created a team of student loan experts, designers, developers and entrepreneurs. Using design thinking and iterative product development, the team is building resources for students, parents, and employers. After several months in beta, Fidelity Labs launched the Student Debt Tool this past spring designed to help borrowers understand their student loans and their repayment options. We've heard from young adults who are living with their parents, and those who are 50 years old who haven't yet saved for retirement. We want to help people plan for their future and that means helping them with the present. Sean Belka, Senior Vice President and Head of Fidelity Labs The Fidelity Labs Incubator is also exploring ways to get ahead of student debt before college decisions are made, and to help employers develop resources for their employees who face this type of debt burden. 10 FutureFuel.io is a start up that is also trying to solve the student debt burden by simplifying the implementation of debt repayments for both employers and employees. Signing up to FutureFuel.ios enterprise SaaS platform makes it easy for employers to repay their employees student loans. The set-up process is straight-forward and secure, all payment activity can be viewed in real-time, and businesses can track the ROI on their investment, seeing how much their workers retention saves them in recruiting and other costs. In return, by offering debt repayment in addition to other benefits, these firms stand out from the crowd and thereby attract and retain a diverse talent pool.9 The power of FutureFuel.io is in its intersectionality: solving problems by improving outcomes for both employers and employees. More than 44 million Americans are struggling under the burden of student debt. At the same, the private sector is struggling to attract and retain a diverse talent pool. FutureFuel.io is

creating a win-win for both parties to accelerate the rate of student debt repayment and inspire loyalty to forwardthinking employers. Laurel Taylor, Founder & CEO, FutureFuel.io Despite such successes, one of the main obstacles for new FinTech startups to succeed is the lack of access to big data and the associated cost. This prevents them from testing products real-time using real data. To overcome this obstacle, Fidelity, Amazon and Thompson Reuters launched FinTech Sandbox, a Boston-based not-for-profit ecosystem that enables financial innovation and collaboration globally. The Boston-based FinTech Sandbox supports Massachusetts startups like Elsen, Quantopian and FutureFuel.io by providing free or discounted access to data feeds and application program interfaces from financial industry partners for development purposes. These include a range of data feeds from real-time market, custody and clearing data to machine readable news and social media information from a wide range of large financial institutions and data providers. Sandbox provides free cloud hosting from industry-leading infrastructure partners, as well as connecting startups to potential partners and their 2,200+ community.10 Organizations like the FinTech Sandbox are also accelerators for fostering expansion of application program interface (API) ecosystems. An API is a set of instructions used to build an application interface, enabling systems to integrate with one another. Open API, where institutions share their code with external parties, speeds up the development of applications, leverages external tech talent and allows cooperation across the industry. For instance, banks have started to use these APIs to facilitate transactions with other banking institutions, allowing their systems to talk to one another. Through engagement with the Sandbox, large financial institutions have started to open up their APIs to new startups and technology companies. This allows these organizations to work closely together to make improvements to their systems, operations and client service interactions. API ecosystems can thereby accelerate the innovative process. With its mixture of state of the art research facilities, data science talent pool, and high-profile financial services firms, Massachusetts has an opportunity to create a thriving FinTech ecosystem in the advanced analytics and machine learning areas. Massachusetts has provided a robust ecosystem for us to engage not just with top players in financial services and technology but also with some of the country's best employers who are on the leading edge of benefits and investment in people. It's an exciting time; we believe the state is at an inflection point. Other startups are springing up, existing players are clamoring to innovate, and the government is eager to support those of us who are leveraging technology to create value and solve some of the world's biggest problems. Laurel Taylor, Founder & CEO, FutureFuel.io 11 Robo-advisors By providing automated investment management advice and improved customer service with minimal human

intervention, robo-advisor startups are also transforming the industry. Despite being in a prime position to adopt this digital advice, wealth management firms have generally been slow to react. Indeed, only 34% have started to engage with these new entrants, even though 60% fear losing business to FinTech companies.11 Not only is there pressure from new robo-advisor entrants into the market, but revenue competition and the possibility of the new DOL fiduciary rule being phased in are putting pressure on commissions and margins for investment advisors. Also, the transfer of wealth to the next generation, who expect cheaper and more user-friendly products, means that these firms need to change their focus. Several large players are now responding to these pressures by investing in robo-advice or partnering with startups offering this service. For instance, firms are using online questionnaires to better understand a clients risk tolerance and time to retirement, and produce an investment strategy tailored specifically for that client. In fact, the use of automated advice has opened up new opportunities to target the mass affluent as a new customer base, due to the possibility of increased margins. Robo-advice startups like Wealthfront in California and Betterment in New York are successfully changing the wealth management landscape in North America, by providing automated and tailored investment advice on an easy-to-use platform. In contrast, Massachusetts startups offering these services have generally struggled to compete against the traditional asset managers given that these managers have economies-of-scale, benefiting from existing high assets under management and large customer bases. This means that Massachusetts-based innovation in this area is largely limited to wealth management firms developing robo-advisors in-house. The slow uptake of robo-advice in the wealth management industry and low number of robo-advice startups is in fact an opportunity for Massachusetts to expedite robo-advice development and become a center-of-excellence in this area. Robotics Another trend being used to streamline operations is Robotic Process Automation (RPA), one which has tremendous relevance in the FinTech arena. Adopting RPA means that high-volume, rules-based tasks can be performed quickly by logic-driven software applications that learn without human input. This differs from automation in that RPA can handle both structured and unstructured data, autonomously manipulating the data, taking action, and interacting with other systems.12 Not only does RPA bring quality and control improvements, but also ease of deployment and enterprise speed and agility. This is because RPA is localized to a business unit or function when it is implemented, and can thus react quickly to changes or opportunities as they arise. This makes it a more powerful solution than reducing costs via centralization and standardization of processes.13 Large financial services firms have traditionally relied on sizable back-office teams or outsourcing to manually process and reconcile transactions, generally using dated technology. Despite the opportunities associated with RPA to streamline processes and cut costs, traditional firms have been slow to embrace the technology, initially using RPA only for core processes. Nonetheless, we are now starting to see the technology expanding to areas such as digitizing loan processing, regulatory information (such as CCAR

stress tests), client reporting, account opening processes (such as know your client and anti-money laundering), and data remediation initiatives.14 Leading firms are using RPA in center-of-excellence structures to coordinate vendor contracts, create policies and procedures, and in control functions to address operational risks.15 "Across so many facets of the financial services arena, the rise of digital labor in the form of RPA presents a tremendous opportunity. We are seeing industry players place early bets throughout their value chains, especially in "quick hit" areas among existing back office routine processes, including reconciliations and data remediation. While organizations continue to work through the operational, governance, risk and compliance elements of these advances, we are confident RPA is here to stay. Boston and the surrounding region is poised to be a net winner from this trend, given the investment by local players in these technologies, and the launch of many promising RPA startups in the area." Jenna Switchenko, Director, PwC 12 Cybersecurity With the increase in technology-based business solutions, there is a heightened risk of cybersecurity threats. In fact, 69% of financial services CEOs reported that they are either somewhat or extremely concerned about cyber-threats. 16 The global WannaCry ransomware attack, which completely locked down infected computers and demanded $300 to regain control, proved that this concern was not without foundation. In its Global State of Information Security Survey 2017, PwC identified phishing as the number one cybersecurity threat, with 43% of financial services respondents reporting such attacks. Other attacks include business email compromise, ransomware, and distributed denial of service (DDoS) attacks.17 The largest challenge to financial institutions is assessing third-party vendor protocols and standards, with 41% planning to boost spending on monitoring and testing of third-party partner security (Figure 4). Other key challenges include increasingly complex technologies, rising threats from foreign nationstates and the need for clear regulatory guidance.18 The regulatory focus is not surprising due to the additional cyber standards from the NAIC, the CFTC, the NYDFS, in addition to the FED, OCC and FDIC proposing rulemaking on cyber risk management standards.19 The new executive order signed on May 11, 2017, further emphasizes the need for firms to increase the transparency of cyber risk management procedures.20 To add to this, the current and proposed standards are not all aligned, making it hard for firms to know how to comply with these standards. Figure 4 Cyber expectations are growing. Firms need to balance rapid innovation with the need to provide both seamless customer service and privacy protection. Joseph Nocera, Financial Services Cybersecurity Leader, PwC21 Due to the specialist nature of cybersecurity, there are cybersecurity startups appearing in Massachusetts, partnering with larger firms to help them to navigate cyberrelated risks. For instance, Burlington-based Veracode

(recently bought by CA Technologies) helps firms to improve the security of their web, mobile and third-party enterprise applications. Veracode offer a variety of products and services, including static analysis, penetration testing, thirdparty vendor security, remediation coaching and security program management, all of which enable businesses to identify, understand and respond to threats quickly.22 In response to the ever-increasing threat, Mass Insight and its global partners launched in 2011 the Advanced Cyber Security Center (ACSC). The ACSC brings together partners from industry, university, and government, including experts from diverse fields, to develop unique approaches to cybersecurity. Led by The MITRE Corporation and the Federal Reserve Bank of Boston, this collaborative environment helps organizations to share security threat information confidentially, either real-time on the ACSC Cyber Sharing Portal or face-to-face at regular events such as ACSC Cyber Tuesdays. The ACSC also partners with universities to improve education in this area to develop a talent pool of cyber professionals. Information sharing and R&D are used to support policy development. With the regulatory focus and ever-changing technologies, planning upfront about cybersecurity is important. Many traditional financial services firms are choosing to partner with FinTech startups to protect their systems and data. Massachusetts, with its mix of traditional financial services firms, new cybersecurity startups, and tech talent from its universities is well-suited to create a FinTech ecosystem that specializes in cybersecurity. 13 Blockchain Blockchain is one of the most disruptive and exciting FinTech trends, with industry continuously finding new areas where the technology can be applied. In 2016 we saw funding in blockchain companies increase by 79% year-on-year to $450 million.23 Blockchain is a decentralized ledger that is made up of blocks (transactions), which are chronologically added to the blockchain (Figure 5). Transactions are independently verified by miners before being added, meaning that there are no data issues identified after-the-fact in previous ledgers. Since the P2P network of computers supporting the blockchain is decentralized, the transactions recorded are permanent and cannot be altered. These attributes have the potential to save back-office costs by eliminating mistakes, increasing the efficiency of the ledger and enhancing the transparency and security of data. The best-known application of blockchain is as a cryptocurrency (e.g. Bitcoin), however there are promising applications in the financial services industry, not just for accounting and payment processing. For instance, distributed ledger technology can be used to improve placement, claims settlement and compliance checks, which is predicted to save between $5 billion and $10 billion in reinsurance.24 Firms can also use blockchain technology to increase information security and predict, detect and analyze fraud.25 In Massachusetts, we have already seen academia, traditional financial institutions and startups come together to research and experiment with distributed ledger technology. State Street Corporation, as one of the worlds largest asset service providers, is experimenting with automating their processes using blockchain. The organization is connecting with startups via FinTech Sandbox to understand how to integrate blockchain into their software and has also joined

the banking consortium startup R3, an industry initiative that is leading research and development into blockchain.26 These investments have identified areas where State Street may implement blockchain technology in 2017, for instance as part of their securities lending procedures. When borrowing securities from State Street as part of their securities lending agreement, the collateral posted by the counterparty could be recorded on a distributed ledger. This would make it easier for State Street to subsequently identify the collateral and return it to the borrower at the end of the lending arrangement, reducing manual intervention and the risk of error.27 Were excited by the opportunity blockchain presents and are working to make it a tangible reality for our businesses, partners and clients. Hu Liang, Senior Managing Director and Head of Emerging Technologies Center, State Street28 Figure 5 Source: PwC Top financial services issues of 2017: Thriving in uncertain times 14 Digital Identity The average cost to comply with know your customer (KYC) and customer due diligence rules ranges from $60 million to $500 million per financial institution, yet the operational functions behind these requirements are generally identical at each firm.29 By leveraging distributed ledger technology and sharing digital identity data, traditional compliance functions may face drastic changes in how they accept and manage their clients. Identity management involves controls used to monitor the identity of individual users of a network to either allow or limit access to systems and data. Until now in the insurance, asset management and banking industries, onboarding new clients has required complex and lengthy procedures around anti-money laundering (AML) and KYC, as well as user access controls such as usernames and passwords or hardware tokens. FinTech breakthroughs in digital identity management are simplifying organizations operations and enhancing their customers experience. For example, by using a blockchainbased database of personal data shared amongst financial institutions, customers only need to complete the relevant paperwork and AML/KYC check once, significantly speeding up the onboarding process. In addition, the use of blockchain brings the benefits of a distributed ledger, such as data protection and real-time processing (Figure 6) and means that the individual can control and manage their own personal data, rather than the organization.30 Organizations can also incorporate digital signatures, further improving the customer experience. Digital identity technology has also been used by the industry to better automate customer analysis and target products based on individual risk profiles, reducing risk for businesses. For instance, insurance firms have used this technology to further enhance the credit underwriting process by using non-traditional metrics to determine applicant creditworthiness.31 One startup leveraging distributed ledger technology and Figure 6 Source: DeNovo Q3 FinTech ReView balancing the competing priorities of personal data security

and transparency is Cambridge Blockchain. Using a virtual container called a Personal Data Service (or PDS), users can pre-approve financial institutions to access their data and ensure that their personal information used by these institutions is accurate and up-to-date. The shared blockchain ledger contains cryptographic proofs that prove that the data is valid, including an audit trail of anything that has changed. Not only does this promote a better client experience and enable clients to control their data, it also eliminates redundant compliance checks and helps institutions using the data to meet the strict new privacy rules. These regulations can include costly fines for businesses, making digital identity startups like Cambridge Blockchain a vital part of their compliance functions. "Rapid developments in and everincreasing adoption of new technologies such as blockchain give rise to as many stakeholder questions as they do opportunities. And many such questions surround privacy, security and identity. Answering these questions is where organizations like ours come in. With our enterprise digital identity software, we use the power of a blockchain to help financial services firms put control of personal identity data back in the hands of the end user, without compromising on cost or security concerns. Our solutions ensure compliance with the strict current data privacy rules, and remove many redundancies resident in legacy tech stacks. We recently announced with LuxTrust, the launch of a privacyprotecting identity platform for the European market. Being Boston-based means we can source from a leading talent pool to expand our team as we continue to find growth opportunities like this one in serving such a global industry." Alok Bhargava, COO, Cambridge Blockchain 15 Mass Finance Sector: Current Strength 16 Mass Finance: A for-profit employment leader Directly employing approximately 174,072 in 2015 (181,000 in 2016) With the Financial Services industry embracing FinTech, the profile of a Financial Services employee is changing. The adoption of technology, operational efficiency and customer service is at the forefront of the industry. Jobs of the future will require advanced skills across a spectrum of disciplines including technology, data, analytics, risk and finance. Of the 174,072 direct jobs in the financial services industry in 2015, the Insurance sector contributed the largest share of these jobs, at 72,293, followed by the banking sector with 69,985 jobs and the asset management sector with 31,794 jobs (Figure 7). Support 119,960 indirect jobs In 2015, the financial services industry contributed 294,032 jobs through direct and indirect employment (Figure 8). The growth in the sector towards technology and innovation only furthers this indirect employment measure.

Figure 8 Total Employment Contribution: 294,032 Figure 7 Direct Employment, 2015 31,794 0 119,960 69,985 72,293 20,000 40,000 174,072 60,000 80,000 Insurance Asset Management Banking Direct Indirect Source: PwC analysis of BLS and BEA data. IMPLAN model (2013 database). Sustained employment year over year Direct employment in the financial services industry decreased due to the recession, but was not hit as hard as other industries. In 2014 and 2015, direct employment began to recover with positive growth year over year in direct financial services employment (Figure 9). In fact, the sustained level of employment since 2010 shows the robustness of the Massachusetts financial services industry. Figure 9 Massachusetts Financial Services Industry Direct Employment, 2010 - 2015 200,000 150,000 100,000 50,000 0 2010 2011 2012 2013 2014 2015 Source: PwC analysis of BLS and BEA data. 17 Mass Finance: Increasing wages and leading gross state product contribution Industry strength in wages As evidence in the data presented within, most of the Finance industry workforce has middle or high paying jobs. Finance delivers more middle income jobs than other sectors. With the transformation of the Financial Services industry and

inclusion of FinTech, a need is created for new talent with advanced skills. This continued demand drives higher wages. In 2015, the average salary for all occupations in Massachusetts was $70,186. The average salary for Massachusetts employees in the Financial Services Industry is $166,524 (Figure 10). This represents 2.4 times the average state wage, supporting the upper middle class population. In 2015, direct employment in the Massachusetts financial services industry accounted for 9.1% of total wages.32 Figure 10 Figure 11 Top 10 Industries in Massachusetts by Average Wages, 2015 Average Wages in Massachusetts, 2015 $180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 $180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 Massachusetts Fi Financial Services Industry na All Industries n M t gm o ia nc l r Se pa m o fC s ce vi ni

es , of Pr & En n ie Sc t p er fi ti ri se & c, s n ch Te al ic cs Sv In fo rm at io n U ti lit ie h W s e ol

sa le a Tr de an M tu ac uf ri ng in M a Re in s lE r ua Q , g ta te g in ry ,& & il O as G n Co s u tr i ct on Source: PwC analysis of BLS and BEA data. Wages include wages and salaries and benefits. Increased innovation, increased

wages Average wages in the Massachusetts financial services industry not only surpass those of other industries, but also continue to grow every year. Since 2009, wages have trended positively, showing significant increases in 2014 and 2015 (Figure 12). The innovation landscape of the Massachusetts financial services industry gives rise to increased need for advanced skills and paves the path for the growth in wages to continue. Figure 12 Massachusetts Financial Services Industry Wages, 2009 - 2015 $180,000 $160,000 $140,000 $120,000 2009; 1 $100,000 $80,000 $60,000 $40,000 $20,000 $0 2009 2010 2011 Average Wage 2012 #REF! 2013 2014 2015 Gain from Prior Year Source: PwC analysis of BLS and BEA data. Wages include wages and salaries and benefits. 18 Mass Finance: Increasing wages and leading gross state product contribution (cont.) Industry wage contribution Most of the citizens employed by the financial services industry have middle or high paying jobs. Noted in Figure 13 below, through direct and indirect employment, the financial services industry in Massachusetts contributes $40 billion to the Massachusetts wages. Direct employment accounts for almost 75% of the $40 billion and indirect jobs accounts for the remaining $11 billion. Leading contribution to Gross State Product Three numbers tell the story of the financial services industry in Massachusetts 6, 14, and nearly 20. The financial services industry accounted for 6% of total employment in Massachusetts and 14.4% of the Massachusetts economys GSP.33 The numbers tell the story of continued growth, as total output was 10% in 2014. When direct and indirect employment are combined, the financial services industrys value added to the Massachusetts economy was $52 billion in 2015 (Figure 14).

This output provides a large tax base for state and local government income, wage and property taxes. Financial Institutions and Insurance Companies have provided an average of 18% ($2.1 billion annually) of the state taxes collected on Massachusetts businesses over the last five years.34 Figure 13 Figure 14 Total Wage Contribution: $40B Total Value Added Contribution: $52B $12 $11 $40 $29 Direct Indirect Source: PwC analysis of BLS and BEA data. IMPLAN model (2013 database). Wages (as defined, see Report Methodology) include wages and salaries and benefits. Direct Indirect Source: PwC analysis of BLS and BEA data. IMPLAN model (2013 database). 19 Education: Cultivating and retaining top talent for Mass Finance The Finance sector in Massachusetts has long had connections to academia and has employed and cultivated the top talent in finance the universities in the region. Graduate degrees held as a % of state population (2013) Massachusetts workforce is a critical piece of the ecosystem, as the states residents are among the most educated in the country. 35.00% Massachusetts is home to some of the countrys top business schools including35: 25.00% Harvard University Massachusetts Institute of Technology

Babson College Bentley University Boston College Boston University Brandeis University Northeastern University University of Massachusetts Simmons College Massachusetts ranks 4th in the United States when it comes to international student enrollment, educating over 59,000 foreign students in 2016. The state is home to 2 of the top 10 most popular universities for foreign students Northeastern University (#6) and Boston University (#9). 36 The regions world class colleges and universities coupled with the recent trends in technology and innovation represent significant opportunities in the areas of FinTech, Big Data and Cybersecurity. The Council and nonprofits such as the Boston-based FinTech Sandbox aim to create more connections between graduates coming out of these academic institutions, investors, and other key players. 30.00% 20.00% 15.00% 10.00% 5.00% 0.00% DC MA MD CT VA NY VT CO NJ NH Bachelors degrees held as a % of state population (2013) 24% 24% 23% 23% 22% 22% 21% 21% 20% 20% 19% DC CO MA NJ MN VT NH CT Source: Bloomberg News

20 Appendix 21 Appendix I Report Methodology For the purposes of this report, the financial services industry is defined as public and private sector firms and institutions falling under North American Industry Classification System (NAICS) code 52, Finance and Insurance. The report further analyzes the industry in the following three subsectors, as defined as follows: Key Definitions Asset Management Firms primarily involved in portfolio management, investment advice, and trust and fiduciary activities. Insurance Insurance carriers and insurance agencies and brokerages. Banking Monetary authorities and firms primarily involved in depository credit banking (i.e. commercial banking, savings institutions, and credit unions), nondepository services (i.e. credit card issuing, sales financing, and consumer lending), mortgage and loan brokering, investment banking and securities dealing, and securities exchanges.37 Note that to the extent that a firm offers funds which hold real estate securities, these would be captured in the asset management category. Real estate firms which actively manage a portfolio of real estate assets as well as real estate investment trusts (REITs) are not within the scope of this report. Also note that the classification of firms who perform activities across multiple subsectors are classified based on the primary activity performed at the office addresses of the firms. This approach allows the activities of a single firm to be captured across multiple subsectors. In describing the economic impact of the financial services industry through its employment and purchases of goods and services, this report considers two separate channels the direct impact and the indirect impact that in aggregate provide a measure of the total economic impact of the financial services industry to the region. The direct and indirect impacts are captured for jobs, labor income, value added, and output to further measure the impact the industry has to the region. These measures are defined as follows: Key Definitions Jobs The total number of people employed in a given industry. 38 Labor Income Cash wages and salaries and benefits.39 Throughout this report, labor income will be referred to as wages for ease of reference. Value Added Employee compensation, proprietors income, income to capital owners from property, and taxes on production and imports. The value added of a particular industry excludes the value of intermediate inputs, for example the value added of the investment banking industry would exclude the value of purchased computers and software used for trading. The U.S. gross domestic product (GDP) is the sum of value added across all industries, and thus the value added of an industry can be thought of as the industrys contribution to GDP. Output The total value of sales, including the value of intermediate goods. For example, the output of the investment banking industry would include the value of purchased computers and software that are reflected in the cost of doing business for investment firms. 22

Direct Impact Jobs, labor income, value added, and output within the financial services industry.40 To the extent an employee is determined to be employed by a financial services firm, they are included within the category. For example, an individual in an administrative role at an asset management firm would be considered in the direct category. Indirect Impact Jobs, labor income, value added, and output occurring throughout the supply chain of the financial services industry.41 For example, the indirect impact would capture an advertising firm hired by a financial services company to design an ad campaign. Jobs and associated wages are captured for all employees of firms in the financial services industries, not just employment and wages for financial services occupations. For more detailed information on methodology, see Appendix I. 23 Appendix II Sources Data on direct employment and wages in the financial services industry and the banking, asset management, and insurance sectors is based on data from the Quarterly Census of Employment and Wages (QCEW), which is administered by the Bureau of Labor Statistics (BLS) and data from the Bureau of Economic Analysis (BEA). For the purposes of this report, the financial services industry was defined using the following NAICS codes: NAICS Code Sector 52 Description Financial Services 521 Banking Monetary Authorities-Central Bank 522 Banking Credit Intermediation and Related Activities 5231 Banking Securities and Commodity Contracts Intermediation and Brokerage 5232 Banking Securities and Commodity Exchanges 5239 Asset Management Other Financial Investment Activities 524

Insurance Insurance Carriers and Related Activities 525 Asset Funds, Trusts, and Other Financial Vehicles Management The QCEW is a near comprehensive census of employment and wages at the national, state, and county levels for workers covered by state unemployment insurance laws and federal workers covered by the Unemployment Compensation for Federal Employees program. It does not include the self-employed, unpaid family workers, or private household employees. Jobs are counted regardless of full-time or part-time status. Individuals who hold more than one job may be counted more than once. In order to protect the confidentiality of firms information, the Bureau of Labor Statistics does not disclose data that would be easily identifiable to individual participating companies. We relied on employment data from the Bureau of Economic Analysis to impute QCEW data that was not disclosed at the state level. The QCEW data on wages does not include the cash value of benefits. Wage data from the BEA was used to supplement the QCEW wage data in order to estimate benefits. Employment and wage data from the QCEW and BEA were used in conjunction with the IMPLAN economic model (2013 database) to quantify direct and indirect employment, wage, value added, and output impacts of the industry in Massachusetts. IMPLAN is a well-known modeling system developed by the Minnesota IMPLAN Group for estimating economic impacts and is similar to the Regional Input-Output Modeling System developed by the U.S. Department of Commerce. The model is primarily based on government data sources. It can address a wide range of impact topics in a given region (county, state, or the country as a whole). IMPLAN is built around an input-output table that relates the purchases that each industry has made from other industries to the value of the output of each industry. To meet the demand for goods and services from an industry, purchases are made in other industries according to the patterns recorded in the input-output table. These purchases in turn spark still more purchases by the industrys suppliers, and so on. Meanwhile, employees and business owners make personal purchases out of the additional income that is generated by this process, sending more new demands rippling through the economy. 24 Endnotes U.S. Census Bureau, Population Division. Table 1. Annual Estimates of the Resident Population for the United States, Regions, States, and Puerto Rico 1 2 PwC analysis of BLS and BEA data 3 PwC analysis of BLS and BEA data. Wages includes wages and salaries and benefits 4 PwC Financial Services Institute, http://www.pwc.com/us/en/financial-services/research-institute/artificial-intelligence.html 5 PwC Global FinTech Report 2017 6 PwC Financial Services Institute, http://www.pwc.com/us/en/financial-services/research-institute/artificial-intelligence.html 7 https://www.quantopian.com/ 8 https://elsen.co/platform 9 https://futurefuel.io

10 http://fintechsandbox.org/ 11 PwC Global FinTech Report 2016 12 PwC DeNovo 13 PwC, Organize your future with robotic process automation 14 PwC, How can RPA and other digital labor help financial institutions? 15 PwC Top financial services issues of 2017: Thriving in uncertain times 16 PwC 19th Annual Global CEO Survey, 2017 17 PwC Global State of Information Security Survey Report 2017 18 PwC, https://www.pwc.com/gx/en/issues/cyber-security/information-security-survey/financial-services-industry.html 19 PwC FS Institute 20 PwC, http://www.pwc.com/us/en/cybersecurity/broader-perspectives/trumps-cybersecurity-executive-order.html 21 PwC Top financial services issues of 2017: Thriving in uncertain times 22 https://www.veracode.com 23 PwC Global FinTech Report 2017 24 PwC Top financial services issues of 2017: Thriving in uncertain times 25 PwC Global FinTech Report 2017 26 StateStreet.com, http://www.statestreet.com/ideas/ articles/explainer-series-blockchain.html

27 Fortune.com http://fortune.com/ 2016/12/21/state-street-blockchain/ 28 State Street Newsroom 29 Strategy&, DeNovo Q3 FinTech ReView 30 Ibid 31 PwC Global FinTech Report 2017 32 PwC calculations using IMPLAN modeling system (2013 database) 33 Ibid 34 Massachusetts Department of Revenue, FY2015 Annual Report 35 https://www.usnews.com/best-graduate-schools/top-business-schools/mba-rankings 36 https://www.iie.org/Research-and-Insights/Open-Doors/Data/International-Students/Leading-Institutions 37 Employees of monetary authorities make up less than 1% of jobs in the banking subsector in New England 38 Direct employment is defined as the number of payroll jobs. Indirect employment includes both paid and self-employment Direct labor income includes wages and salaries and benefits. Indirect wages includes wages and salaries and benefits, as well as proprietors income 39 40 Direct employment is defined as the number of payroll jobs. Direct labor income includes wages and salaries and benefits Indirect employment includes both paid and self-employment. Indirect wages include wages and salaries and benefits, as well as proprietors income 41 25

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