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Jackson Mueller
Associate Director, Center for Financial Markets
Jackson Mueller is an associate director at the Milken Institute's Center for Financial Markets. He focuses on fintech, capital formation policy and financial markets education initiatives. Prior to joining the Institute, Mueller was an assistant vice president at the Securities Industry and Financial Markets Association (SIFMA), where he focused on...
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FinTech in Focus

By: Jackson Mueller
November 22, 2016
   
   

Thanksgiving

Hello, FinTech in Focus readers! For those of you in the U.S., have a safe and wonderful Thanksgiving Day holiday. Loosen your belt, keep political discourse with the family to a minimum, and try not to fall asleep as the Detroit Lions lose again on national TV. For the rest of you, continue investing in FinTech. 

Q3 FinTech Investment Numbers Are In

And speaking of investment, third-quarter FinTech investment numbers are in—and they’re not great. According to the latest KPMG-CB Insights figures, Asia again outshined the U.S. and the U.K., representing half of the $2.4 billion in funding to venture capital-backed FinTech firms globally, though North America dominated in terms of total deals. Interestingly, Europe “has yet to see a $50M+ financing round in 2016 YTD” and Germany “is now on track to outperform the U.K. this year,” according to the report. Roughly $87 million was invested in VC-backed blockchain and bitcoin companies in the third quarter, but, as the report states, “the ability to move blockchain from proof-of-concept to adoption and production has been minimal. While the market is still giving blockchain companies plenty of room to prove themselves, investors are also becoming more concerned about results.” 

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Source: KPMG, CB Insights, “The Pulse of FinTech Q3 2016”

Blockchain: The Hype

A few months ago we highlighted a report from Gartner on the hype cycle for emerging technologies in 2016. At that time, according to the chart, blockchain was nearing the “peak of inflated expectations.” Now it appears blockchain is entering the “trough of disillusionment” with the recent news that R3 cut its equity fundraising target from $200 million to $150 million and is changing the structure of its first round. A few banks have decided not to participate (Morgan Stanley and National Australia Bank) or have discontinued their membership (Goldman Sachs and Banco Santander) with the consortium.

 

Post-Brexit Blues?

Innovate Finance published its third-quarter report covering the venture capital FinTech investment landscape. While global investment in FinTech is up 27 percent vs. the same period in 2015, venture capital investment in the U.K. is down 26 percent “and has only just reached the halfway mark of the total 2015 investment of $1.1 billion.” Still, the U.K. attracted the second-highest volume of deals and was third in terms of total investment, behind the U.S. and China. And London retained its crown as Europe’s top city for digital entrepreneurship, beating 59 other European cities.

  

2016 U.K. VC FinTech investment

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Source: Innovate Finance, The Q3 2016 VC FinTech Investment Landscape 

Global Developments

U.S.: Roughly three weeks after Richard Cordray, director of the Consumer Financial Protection Bureau, spoke on consumer access to financial data, the bureau released a request for information “to better understand the consumer benefits and risks associated with market developments that rely on access to consumer financial account and account-related information.” According to remarks by Cordray at a field hearing last week on the topic, the bureau “wants to know more about three things. First, we want to be aware of what is happening right now, especially the extent to which consumers who are authorizing access to their financial records can choose how their records are being shared. Second, we want more insight into the process for sharing financial records, whether it is or can be made safe, and what assurance consumers and providers will have that it can be done securely. Third, we want to learn about transparency and how much control consumers have over their own financial records.” Separately, the Securities and Exchange Commission held its FinTech Forum last week, which included discussion on robo advisors, distributed ledger technology, online finance platforms, and investor protection. In prepared remarks, Commissioner Michael Piwowar stated that the SEC “should take the lead regulatory role in the FinTech space. Many of the firms pursuing FinTech are already SEC registrants, and others are providing services that are squarely within the commission’s oversight, such as investment advice and trading and settlement functionalities.” Meanwhile, the SEC announced that Chairwoman Mary Jo White would leave at the end of the Obama administration. Lastly, roughly a week after we brought up the Treasury inspector general’s concerns regarding virtual currency and tax reporting, the IRS asked a District Court for permission to serve Coinbase with a summons over user information.

EU: And here comes Europe. Last week, the European Commission established an internal task force focused on FinTech. The task force “brings together services responsible for financial regulation and for the Digital Single Market, along with other colleagues dealing with competition and consumer protection policy. It will further engage outside experts and stakeholders with the aim to formulate policy-oriented recommendations and propose measures in the course of 2017.”

South Korea: The Financial Services Commission has launched a digital currency task force, with the regulator expected to introduce guidelines for digital currency exchanges in the first quarter of 2017. 

China: The People’s Bank of China is hiring blockchain and big data experts to develop a national digital currency. The central bank expects the launch of a digital currency research institute as early as the end of this year.

Indonesia: Bank Indonesia officially established a FinTech office to monitor new services and products entering the financial services sector. The bank plans to monitor their development through its regulatory sandbox, which will be focused on “facilitating transactions, on monitoring the development of business innovation and cyber security, and on consumer protection, which will be the most important aspect to consider,” according to BI Deputy Governor Ronald Waas.

Singapore:The Monetary Authority of Singapore (MAS) released guidelines last week for its FinTech regulatory sandbox. The guidelines include three stages that platforms will go through after entering the sandbox, along with a list of legal and regulatory requirements that MAS intends to relax as well as maintain.

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Austria: The Financial Market Authority cautioned consumers with regard to the use of virtual currency products and platforms: “The FMA therefore explicitly warns consumers to exercise the utmost caution with regard to their contact with virtual currencies as well as business models or investment products based on such virtual currencies. Such financial products are as a rule not subject to any kind of regulation and supervision, and generally fall outside of the FMA’s supervisory competences. Furthermore, they are also particularly susceptible for being misused for the purpose of fraudulent acts.” 

Online Finance Developments

Securitizations backed by certain online consumer lending platforms aren’t doing so well, according to a recent report, with at least four different bonds having breached their “trigger” levels this year. The developments come as Prosper CEO Aaron Vermut is stepping down, staff members continue to depart from Avant, and Lending Club’s former CEO Renaud Laplanche reenters the online lending space with the launch of Credify Finance Corp.

And there’s been a few firsts in this space. For instance, SeedInvest listed its first side-by-side crowdfunding offering using Reg CF and Reg D exemptions, enabling the platform to offer securities to both accredited and non-accredited investors. Indiegogo officially launched into equity crowdfunding through a partnership with MicroVentures, with the first four Reg CF offerings on Indiegogo’s platform quickly raising funds. In the U.K., peer-to-peer lender Zopa has decided that it wants to become a digital bank and has applied for a banking license, while the first ever British IPO of an equity crowdfunded company took place last week on the London Stock Exchange. And lastly, in the robo advice space, Wells Fargo has partnered with SigFig to power the bank’s digital advice offering.

The World of FinTech

A survey conducted by Capgemini, LinkedIn, and Efma of 8,000 customers across 15 countries finds that nearly half of banking customers “say they use financial services from at least one nontraditional firm for banking, insurance, payments, or investment management, with the percentage reaching the highest in Asia-Pacific (58.5 percent).” Not surprisingly, customer use of nontraditional firms remains divided depending on your generation, how “tech-savvy” you are, and whether you are affluent. Interestingly, “almost as many [traditional firms] are developing their own in-house capabilities (59.2 percent) as are seeking partnerships with FinTechs (60 percent). Investment in a FinTech is the next-most popular activity (38 percent), though most institutions are stopping short of actually acquiring firms.” 

Executives’ view of FinTech firms, 2016

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