FinTech in Focus
Industry Groups Develop & Grow
In a previous white paper, we highlighted the growth in the number of coalitions and associations that surfaced as federal regulators increased scrutiny on non-bank digital finance platforms. The Marketplace Lending Association, launched in April 2016 and made up of Lending Club, Funding Circle and Prosper Marketplace, recently expanded to include platforms with different models and focus beyond consumer and-or small-business lending. The new members include Able, Affirm, Avant, CommonBond, Marlette Funding, PeerStreet, Sharestates, StreetShares and Upstart. Similarly, the U.S. Consumer Financial Protection Bureau’s (CFPB) request for information regarding consumer access to financial records has led to the formation of a new industry group, Consumer Financial Data Rights. The group, formed by companies including Affirm, Betterment, Digit, Envestnet|Yodlee, Kabbage, Personal Capital, Ripple and Varo Money, supports consumers’ right to innovative products and services that can improve their financial well-being and “aims to be a resource for policymakers, including the CFPB, as they determine how to best assist consumers in leveraging their own financial data.”
Citi Revisits Digital Disruption
For those involved in the FinTech space for some time now, you may remember the digital disruption report published by Citi Global Perspectives & Solutions last year, which covered a wide array of FinTech platforms and models. Citi decided to revisit the report, and there are some interesting updates to the original piece. For instance, the new report goes into significant detail on the FinTech sector in China, which makes sense if you’ve been following global investment trends and the proliferation and expansion of technology-driven platforms in Asia. As the report notes, “We estimate VC investments doubled in China in 2016 versus 2015 while they declined 38% in the U.S. and 27% in Europe. Asia ex-China experienced almost a three-quarters decline in VC FinTech investing due to slower funding activity to India (a big driver for 2015).” The report also focuses on emerging subsectors of FinTech, including RegTech and InsurTech, and provides in-depth interviews with select companies and their approaches to innovation.
Mapping the Risk of Digital Disruption
Hong Kong: Leung Chun-ying, chief executive of Hong Kong, focused in recent prepared remarks on innovation and technology—a high priority on the policy agenda. “We established the Innovation and Technology Bureau some 14 months ago, and injected a massive $2.3 billion to promote innovation and technology,” he said. Meanwhile, Charles Li, chief executive of the Hong Kong stock exchange, focused on upgrades to post-trade infrastructure, noting that the exchange will continue to look “at the role new technologies (such as cloud computing and distributed ledger) can play in our future development.”
U.K.: Nearly a week after Prime Minister Theresa May provided remarks on the government’s plan for Brexit, Britain’s Supreme Court, by an 8-3 vote, ruled that Parliament must give the OK before the government can trigger Article 50. As stated by the justices, “The referendum is of great political significance, but the act of Parliament which established it did not say what should happen as a result. So any change in the law to give effect to the referendum must be made in the only way permitted by the U.K. constitution, namely by an act of Parliament. To proceed otherwise would be a breach of settled constitutional principles stretching back many centuries.” In remarks following the judgment, David Davis, the secretary of state for exiting the European Union, stated that the government would “shortly introduce legislation ... to move ahead with invoking Article 50.... This will be a straightforward bill. It is not about whether or not the U.K. should leave the EU. That decision has already been made by the people of the U.K.” In other Brexit news, techUK, a trade body representing technology companies and startups, announced the formation of an independent advisory panel to “provide additional insight to inform techUK’s work and a cut-through view on the issues of most strategic importance to the future of the U.K. digital economy.”
On the regulatory front, Bob Ferguson, the Financial Conduct Authority’s head of Project Innovate, provided some additional information on the FCA’s advice unit, which was launched late last year. According to Ferguson, nearly half of the firms that have joined the unit are banks, and the FCA will be publishing external guidance covering its experiences in running the unit. Separately, U.K. peer-to-peer lenders surpassed £7 billion in cumulative lending, with £3 billion lent in 2016. And speaking of peer-to-peer lending, Funding Circle announced that it would stop issuing new loans in Spain after helping more than 200 businesses there raise money since the platform launched in the country. Lastly, two schools are venturing into disruptive technologies, with Imperial College of London launching a digital asset research lab and students at the University of Oxford establishing a FinTech & SmartLaw Society.
U.S.: The Federal Trade Commission announced Friday that it would hold its third FinTech Forum, focused on blockchain and artificial intelligence. And speaking of blockchain, the Financial Industry Regulatory Authority issued a report and is seeking comment on the potential implications of blockchain. The report “is intended to be an initial contribution to an ongoing dialogue with market participants about the use of DLT [distributed ledger technology] in the securities industry.” The document includes a number of legal and policy questions, with comments due March 31. At the Commodity Futures Trading Commission (CFTC), Commissioner J. Christopher Giancarlo devoted a portion of his remarks to ongoing CFTC efforts to enable FinTech. Giancarlo said regulators must take a “do no harm” approach to innovation, and added that U.S. financial regulators “are falling behind foreign jurisdictions in promoting FinTech.” Giancarlo outlined five steps the CFTC and other regulators should take to promote DLT and FinTech. “I plan to make FinTech a priority at the CFTC. Making market reform work for America means fostering FinTech innovation for the health and betterment of U.S. financial and capital markets, market participants and the American jobs they support,” he said. Lastly, the Securities and Exchange Commission will hold a half-day dialogue on regulation crowdfunding on February 28.
Australia: Square announced the launch of its payments platform in the country, making Australia the first nation outside the U.S. and Canada to accept e-commerce services from Square. And as Square entered, Treasurer Scott Morrison departed for Europe to discuss financial innovation with policymakers and industry stakeholders. Morrison will also visit London to discuss ongoing efforts to open up access to bank data. Back at home, Australia is providing FinTech accelerator H2 Ventures with a $2 billion loan guarantee, expected to lead to the creation of 40 new FinTech firms and 400 jobs.
Canada: The Competition Bureau will hold a meeting February 21 focused on driving competition and innovation in the financial services sector. The daylong event will look at changes to the financial services industry, regulation in the financial services sector and identifying best practices overseas. One recent report that may help inform the debate comes from the Toronto Financial Services Alliance and Z/Yen Partners Ltd., which examined current trends in the financial services industry with a specific focus on FinTech. Surveys were sent to 2,000 respondents to the Global Financial Centers Index—published every six months by Z/Yen—and 300 financial services professionals responded, sharing their thoughts on FinTech, including their views on the leading FinTech centers worldwide. Of note, the report provides a comparison between respondents’ views on current and future FinTech centers. While London, San Francisco, New York, Singapore and Toronto currently make up the top five FinTech hubs, London is predicted to drop two spots and Toronto to leapfrog Singapore, according to the report.
Leading FinTech Centers of the Future
Scale: 0-10, with 10 being the highest importance
Source: TFSA, Z/Yen Partners, “Trends and Innovations in Financial Services” (January 2017)
Global Developments Continued...
India: The committee of chief ministers on demonetization submitted recommendations to Prime Minister Narendra Modi to foster a digital economy. The recommendations include a tax on large monetary transactions above a certain threshold and measures to migrate the entire population to digital payments.
Chile: The National Economic Prosecutor’s Office has moved to end Transbank’s monopoly over credit card transactions in the country to allow for greater competition.
Nigeria: The Central Bank released a circular in which it reiterated that virtual currencies “such as Bitcoin, Ripple, Monero, Litecoin, Dogecoin, OneCoin, etc., and similar products are not legal tenders in Nigeria, thus any bank or institution that transacts in such businesses does so at its own risk.”
Blockchain: A Revised Cost Savings Estimate
Some of you may recall a report released by Santander back in 2015 that found that DLT could reduce banks’ infrastructure costs by $20 billion per year by 2022. That report, in my view, generated a lot of interest in the financial services space on DLT’s potential. More than two years later, Accenture published a report saying the annual cost savings to financial institutions through incorporation of DLT could range from $8 billion to $12 billion by 2025. Of course, regulatory challenges still exist. A recent BBVA report highlighted 11 such challenges, as seen below.
Distributed Ledgers Main Regulatory Challenges
Source: Javier Sebastian Cermeno, BBVA Research, “Blockchain in Financial Services: Regulatory Landscape and Future Challenges for Its Commercial Application” (December 2016)
The Crowd’s Influence in Expanding the Geographic Reach of VC Investment
New research finds that successful crowdfunded projects elicit increased investment by venture capitalists in regions of the U.S. that are not hotbeds of VC activity. The report (you can buy the article here or review this press release) reviewed six years’ worth of data from Kickstarter projects (55,000+) and VC investments in industries similar to the crowdfunded projects (17,000+) from 2009 to 2015. As indicated in the chart below, successful crowdfunding campaigns in a region, particularly technology campaigns, led to an increase in VC funding in those regions. “A 1 percent increase in the annual number of [Kickstarter] campaigns in 1 year predicted a 0.097 percent increase in the annual number of VC campaigns in the following year,” the report says. In 2015, for instance, “a 1 percent increase in successful [Kickstarter] campaigns in the technology category predicted a more than 1 percent increase in VC investments in the same year.” As the findings indicate, “the rise of [crowdfunding] may not only fund more innovation in a more diverse set of places but also expand access to [venture capital] and other forms of finance in these same regions.”
Source: Olav Sorenson, Valentina Assenova, Guan-Cheng Li, Jason Boada and Lee Fleming, “Expand Innovation Finance via Crowdfunding” (December 2016)