FinTech in Focus
So apparently it’s September.
And with September comes a new college football season, which means that for three hours each Saturday over the next few months, yours truly will pull out his hair, yell at the TV (without waking up the kids), and use a defibrillator more than once during the game. That, in a nutshell, is what it’s like to be a fan of the Fighting Irish of Notre Dame. If you watched Sunday’s prime-time game against the University of Texas, you understand. But enough about football, let’s get into FinTech.
Everyone Wants a Sandbox
The Hong Kong Monetary Authority (HKMA) launched a FinTech “supervisory sandbox” earlier this week. According to the release, “we see the need for a supervisory arrangement with greater flexibility to enable [authorized institutions] to conduct more timely live tests of these initiatives before their formal launch.” Norman Chan, HKMA chief executive, said in prepared remarks that “it is important not to misinterpret this ‘technology neutral’ approach as one that is insensitive to the contributions that FinTech and innovation can bring to the financial sector. The more correct narrative is that, without compromising consumer and investor protection, the HKMA embraces the use of FinTech and innovation.” HKMA also intends to collaborate with the Applied Science and Technology Research Institute to set up a FinTech innovation hub which will include 200 work stations and connect to 30 external development laboratories in Hong Kong and overseas.
How to Misjudge Political/Regulatory Views
Two recent developments of interest: First, the private student-loan initiative between Wells Fargo and Amazon was scrapped roughly one month after launching. The initiative, in development for roughly a year, ran into political opposition in Washington, D.C.
Second, data privacy issues were raised immediately following WhatsApp’s decision to share user data with Facebook. In addition to certain privacy groups filing a complaint with the U.S. Federal Trade Commission, the decision has elicited responses from regulatory and legal authorities in Europe and India.
The British Are Coming! The British Are Coming!
Innovate Finance can’t stay out of the news. The UK industry organization aimed at advancing the country’s position as FinTech leader has opened up a branch in New York City. The organization is also behind the recent formation of the Global FinTech Hubs Federation, and the launch of the Transatlantic Policy Working Group with OnDeck Capital back in March.
MPLs & Banks: A Partnership Small Businesses Can Benefit From?
Moody’s released a report in late August on the potential benefit to lenders and small businesses from partnerships between marketplace lenders (MPLs) and banks, despite potential pitfalls (including ongoing legal developments). The report highlights the importance of MPLs to small businesses, especially micro-businesses — those with less than $1 million in revenue — in obtaining capital, as demonstrated in the figure below. The report also finds that “small businesses that approach MPLs outside of banking partnerships are likely to consist more and more of borrowers with poor credit histories.”
Online-Lending-Based Loan Applications Constitute a Larger Share of Applications Made by Small Businesses
New Week, New Regulatory/Legislative/Legal Developments
In Europe, the FinTech Zone launched this week in Luxembourg, becoming the first independent FinTech center to operate in the country. Services go beyond what traditional accelerators or incubators would provide, including use of Luxembourg’s network of accountants, lawyers, industry associations and others devoted to helping both startups and established companies locate FinTech business to Luxembourg. In Finland, the Crowdfunding Act, covering investment-based crowdfunding and signed into law on August 25, went into force on September 1.
In Asia, South Korea unveiled the world’s first FinTech open platform. As stated in the press release, “Until now, FinTech service developers had to sign separate contracts with each commercial bank in order to embed banking services in their programs…. However, with the introduction of open API system, in order for a FinTech firm to develop a FinTech service with banking functions it simply has to download program commands which 16 commercial banks and 25 securities companies provide in a single unified format.” Meanwhile, Korea’s Financial Supervisory Service Governor Zhin Woong-seob expressed his concerns regarding security issues related to biometric data. "In new businesses like Fintech, the management should directly handle relevant risks," Zhin remarked.
The Australian Securities and Investments Commission (ASIC) published its Corporate Plan through 2020. According to the release, “The increasing use of technology for financial decisions and transactions means financial firms and regulators alike need to ensure innovations in distribution and marketing enhance, rather than undermine, investor and consumer decisions and outcomes. Testing and monitoring is key to understanding the benefits and risks of innovation.” Of note, ASIC's Innovation Hub has assisted 74 entities as of July 2016, and a list of new and continuing projects can be found on pages 25 and 26.
Payments & Digital Currency Headlines
Are central banks continuing to warm to digital currencies? People’s Bank of China Vice Governor Fan Yifei appears to be interested, according to recent remarks, while a recent MIT paper argues that the future of digital banking “is unimaginable without using digital currency” given the active pursuit from both central and private banks. Meanwhile, the Bank of Canada published research which suggests that digital currency exchange rates will become less volatile if adoption increases. As the authors note, the finding “undermines the notion that excessive exchange rate volatility will prohibit widespread use of virtual currency.”
In other payments news, PayPal announced that Visa Checkout will soon be available to Braintree merchants, with the news coming about a month after PayPal struck a partnership with Visa. The company also struck a deal with MasterCard to allow in-store payments. And lastly, Square recently published a report on consumer perceptions of chip cards and mobile payments. Unsurprisingly, the survey found that nearly 90 percent of customers are frustrated about the slow transaction process with chip cards. Meanwhile, use of near-field-communication (NFC) technology remains limited, with nearly 80 percent of respondents indicating that they have not used it and nearly half cited security concerns as the main reason.
Alternative Finance in Europe: Volume II
The Cambridge Centre for Alternative Finance published its second report analyzing the growth of alternative finance across Europe. The report, which covers 90 percent of the alternative finance market, finds that its use jumped 92 percent year-over-year to €5.4 billion in 2015. Excluding the UK, which continues to dominate the market, European online alternative finance grew 72 percent to more than €1 billion, with France, Germany and the Netherlands the top three countries based on market volume. Peer-to-peer consumer lending remains the largest market segment of alternative finance, though invoice trading has become the fastest growing alternative finance model in Europe. Perceptions of national regulations covering alternative finance remain divided. Thirty-eight percent of surveyed platforms view existing regulations as "adequate and appropriate," 28 percent say current regulations are "too strict” and 10 percent say existing regulations are “too relaxed.” Separately, and as shown in the figure below, the report also states that the survey data “may indicate that new formation has peaked and that 2016 may show a phase of consolidation.”
Europe Alternative Finance Platform Incorporation and Trading (Pre-2004 to 2015)
Source: Cambridge Centre for Alternative Finance