FinTech in Focus
A Little Bit of Self-Promotion Never Hurt
Greetings, everyone, and welcome to another FinTech in Focus, where the definition of “FinTech” gets larger and more convoluted each week, and where I attempt to keep you up-to-date on the latest developments. The Milken Institute was up to quite a bit over the past week with the California Summit taking place (see: California’s Creative Disruption and Autonomous Future, in particular), the launch of our Partnership for Lending in Underserved Markets (PLUM) initiative in Los Angeles, and the submission of our comment letter to the FDIC on proposed third-party lender guidance. Never a dull moment. …
The Venture Capital Ecosystem
The Kauffman Foundation released a report covering emerging trends in entrepreneurial finance. The report looks at how venture capital financing is shifting at the tail end of the market, how angel syndicates and online platforms such as crowdfunding are filling in for seed/early-stage investment, and how women are playing larger decision-making roles in entrepreneurial capital. The report notes that between 2010 and 2015 new funds increased to 11 percent from 9 percent of total investments in first rounds for seed-stage and early-stage deals.
And since we’re focused on venture capital, a new study from the University of Buffalo and the University of Connecticut tracked 350 technology ventures that received both angel and venture capital investment. According to the report, “When studying innovation quality or performance through successful exit, our results demonstrate that venture capital influence is significantly higher compared to angel influence. The same conclusion cannot be drawn when studying innovation rates, a common strategy in our field. Venture capitalist influence almost disappears in the presence of prior angel influence.”
Happy Three-Year Anniversary, Title II of the JOBS Act!
Yes, Title II of the Jumpstart Our Business Startups (JOBS) Act is now 3 years old. My, how time flies. According to a report published by Crowdnetic, which also publishes quarterly reports covering private offerings, there have been more than 6,600 Title II offerings from 16 platforms since Sept. 23, 2013. They have generated more than $1.47 billion in capital commitments. Among the reasons for the decline in new offerings, but larger annual capital commitments: Title II is beginning to attract "larger, more successful, or slightly later-stage issuers," and investors who originally adopted a "wait-and-see" approach "may be more comfortable committing larger sums to the companies that seem attractive to them."
U.S. Regulators in Action
CFPB: Now, I did not go to Money 20/20 last week, but according to my twitter feed (@jackson_mueller), various FinTech firms started popping champagne bottles after they heard remarks from the director of the U.S. Consumer Financial Protection Bureau, Richard Cordray, regarding consumer access to financial data. As stated in prepared remarks, “Many exciting products we see through the lens of Project Catalyst depend on consumers permitting companies to access their financial data from financial providers with whom the consumer does business. We recognize that such access can raise various issues, but we are gravely concerned by reports that some financial institutions are looking for ways to limit, or even shut off, access to financial data rather than exploring ways to make sure that such access, once granted, is safe and secure. Let me state the matter as clearly as I can here: We believe consumers should be able to access this information and give their permission for third-party companies to access this information as well.” The remarks come nearly one year after certain banks were slowing, if not shutting down, third-party services from accessing consumer financial data.
At the time of Cordray’s remarks, the CFPB also released its first report documenting some of the highlights from the Project Catalyst initiative. The report provides an overview of FinTech developments over the past few years, the role of Project Catalyst in fostering innovation, and highlights covering cash-flow management, improved credit assessment, consumer financial data access, peer-to-peer payments, and others.
OCC: The Office of the Comptroller of the Currency released its Responsible Innovation Framework late last week. The report comes roughly eight months after the OCC requested comments on its white paper, Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective. More than 60 comments were submitted by various stakeholders, including the Milken Institute. Among some of the main takeaways: The OCC will create an Office of Innovation to implement the framework, which will begin operations in the first quarter of 2017. The office will be headed initially by Beth Knickerbocker, who was named acting chief innovation officer. The OCC also intends, among other things, to develop a formal outreach strategy related to innovation, improve response times to comments or concerns, initiate research on technology and innovation trends, promote interagency collaboration and, interestingly, "develop and implement an optional program for agency participation in bank-run pilots." The Comptroller of the Currency also provided, in prepared remarks, some insight into the OCC’s efforts to facilitate interagency coordination.
SEC: The SEC adopted final rules last week amending Securities Act Rule 147 and Rule 504 of Regulation D. They update and modify existing intrastate crowdfunding exemptions, essentially easing some of the restrictions small businesses previously faced in raising money (the aggregate offering amount is now set at $5 million) from investors within their state without having to register with the SEC. The Milken Institute submitted comments to the SEC in January regarding proposed rules to facilitate intrastate and regional securities offerings. Of note, the new Rule 147A “will require issuers to limit sales to in-state residents, but will not limit offers by the issuer to in-state residents. New Rule 147A thereby will permit issuers to engage in general solicitation and general advertising of their offerings, using any form of mass media, including unrestricted, publicly-available Internet websites, so long as sales of securities so offered are made only to residents of the state or territory in which the issuer is resident.”
The Innovative Lending Platform Association, made up of alternative finance platforms OnDeck, CAN Capital, and Kabbage, unveiled its SMART (Straightforward Metrics Around Rate and Total cost) Box in partnership with the Association for Enterprise Opportunity. SMART Box gives small businesses a table of standardized pricing comparison tools and explanations, including the total cost of capital (TCC) and annualized percentage rate (APR).” Three versions of the disclosure are available covering term loans, lines of credit and merchant cash advances. And, since we’re discussing online non-bank lenders, Lending Club launched an auto-refinance product, while SoFi is planning to enter the life insurance business. All of this comes as online non-bank lenders are continuing to enhance efforts to identify fraudulent borrowers.
WeFunder, a Regulation Crowdfunding platform, launched 10 new Reg CF offerings last week, the biggest one-week increase since the legislation took effect in May. WeFunder also began accepting bitcoin transactions for Reg CF offerings.
On the digital currency and blockchain fronts, the DAO hacker is apparently shifting funds in an effort to cash out, with a portion of the stolen ETC reaching at least one major exchange. Meanwhile, SBI Holdings will launch the first bank-backed digital currency exchange, and South Korea has begun to lay the groundwork “for the spread of digital currency.” Lastly, the Cambridge Centre for Alternative Finance announced that it would undertake the first global blockchain benchmarking study.
On the payments front, money-transmitter TransferWise announced that the company would begin to allow U.S. companies to make international payments through its service. Meanwhile, PayPal has joined forces with Facebook Messenger allowing customers to link PayPal accounts to Messenger and make purchases through the service.
Financial Inclusion Efforts
FICO announced the FICO Financial Inclusion Initiative, an effort to increase affordable credit to more than 3 billion people worldwide. FICO has so-far partnered with Equifax, LexisNexis Risk Solutions, EFL, and Lenddo to combine traditional credit bureau with alternative data metrics.
Around the time of the announcement, a new report was published focusing on the enabling environment for financial inclusion. The Global Microscope 2016 “assesses the regulatory ecosystem for financial inclusion by evaluating 12 indicators across a range of developing economies in East and South Asia, Eastern Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa, and Sub-Saharan Africa.” According to the report, while nine of the 12 financial inclusion indicators "improved globally in 2016 … many countries have not moved significantly beyond basic policies." The report finds that slow progress “might be understandable if policies were already reasonably robust. Unfortunately, by any measure, this is far from the case. The average overall Index score is just 49 out of
100. Similarly, fewer than half of the countries covered—24 out of 55—score above 50. In other words, most countries are not even halfway to an entirely supportive policy environment for financial inclusion.”
Source: Center for Financial Inclusion, Global Microscope 2016