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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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By: Jackson Mueller
April 13, 2017
   
   

It’s a Publish-All-Reports-at-the-Same-Time Kind of Week

I mean, at some point you’re all going to go on vacation, right? This week’s edition will largely focus on a number of reports that have surfaced over the past week or so. We will return with global developments next week. 

VC Investment: KPMG released its latest Venture Pulse, covering venture capital investment trends around the world for the first quarter of 2017. According to the report, global venture capital activity (in terms of completed financings) slid 15 percent between Q4 2016 and Q1 2017, marking the fourth consecutive quarter in which VC investment activity fell from the prior quarter. However, total capital invested climbed $4 billion, to nearly $27 billion. Asia, in particular, has seen venture activity drop to its lowest quarterly level since 2012. According to KPMG, “While there are some indications that the global VC market will rebound over the next quarter or two, investor caution will likely continue to be significant. As a result, while the number of deals and the amount of VC invested may go up, the level of activity will not likely approach the highs seen in 2015 in the near future. The global VC market is more likely to normalize at a rate similar to the investment levels seen pre-2015.” Meanwhile, corporate venture arms “have continued to invest at a steadier pace,” with participation in 17 percent of all venture-backed deals globally in the first quarter—an all-time high.

Corporate VC participation in global venture deals (2010 to Q1 ’17)

04 14 17a

Global Hubs—An Interim Report: Deloitte and the Global FinTech Hubs Federation released a preliminary analysis (full report expected at the Sibos conference in October) covering 44 FinTech hubs. You may recall that the 2016 analysis highlighted only 21 hubs. New entrants include those from the Nordic regions, Africa, and the Asia-Pacific region. The vast majority of the 44 are in Europe and Asia-Pacific—they account for nearly three-quarters of the hubs identified in the report. Pages 17-21 are very interesting in terms of the number of sandboxes currently implemented or proposed around the world, not to mention the number of FinTech agreements between regulatory agencies and national governments. Overall, London and Singapore remain the top hubs for establishing a FinTech startup. 

Implemented and proposed regulatory sandboxes 

 04 14 17b

Sources: Deloitte, GFHF

Small-Business Survey: The 12 Federal Reserve Banks released a small-business credit survey focused on U.S. employer firms. According to the survey, which yielded 10,300 responses, credit gaps persist among small firms with annual revenue of less than $1 million. In addition, 42 percent of small businesses rely on business owners’ personal credit scores to secure debt, and 45 percent use both the owners’ credit score and business credit score. Borrower satisfaction was highest for credit unions (75 percent), small banks (75 percent), large banks (46 percent), and online lenders (27 percent). Survey sample size is important, so do take note of the footnotes.

Reasons for dissatisfaction, select lenders

(% of employer firms dissatisfied with lender)

 04 14 17c

Source: Federal Reserve Banks 

Hong Kong Differentiating Itself From Other FinTech Hubs? PwC released a survey covering FinTech in Hong Kong and offered some interesting insight into what separates the territory from other FinTech hubs. According to the PwC report, more than 80 percent of incumbents plan to increase partnerships with FinTech over the next three to five years. “Hong Kong—dominated to a greater extent than other financial centers by a small number of very large players—has not experienced this degree of disruption or been impacted by so many new business models,” the report notes. Culture and talent “are two significant constraints on the growth of the FinTech sector in the territory,” while trust and security are the main areas FinTech can address to position Hong Kong’s financial services sector for success.

As an international financial center, Hong Kong “is lagging when it should probably be ahead,” the report says. “The city’s institutions are open to partnerships, which is to be welcomed. The concern is that—while this approach is savvy and sustainable—the pace is just not nimble enough.” 

Percent of annual turnover financial institutions allocate to FinTechmatters (investments into FinTech, IT projects, dedicated resources)

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PwC also released a global study covering FinTech’s influence on financial services. Among its findings: 80 percent of respondents are worried about FinTech’s threat to their business.

About Those FinTech Partnerships: The law firm Simmons & Simmons has published a report indicating that financial institutions are holding back on FinTech acquisitions. Though nearly one-third of banks and asset managers expect to acquire FinTech firms within the next 18 months, nearly 50 percent of those that don’t intend to acquire cite heightened regulatory risk and uncertainty over which firms should be targeted, the report says. More than 40 percent cited a “culture clash” with FinTech firms as a reason for not seeking to acquire. When it comes to joining a consortium of like-minded businesses to develop digital solutions, more than 70 percent said they recognized the value of consortiums, but 60 percent questioned their effectiveness because too many players are involved.

Attitudes toward FinTech consortia

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Source: Simmons & Simmons

Your Elders Are Bullish on AltFi: Your grandparents may still pay for e-mail—it took me years to stop mine from doing this—but Grandma and Grandpa are becoming more interested in alternative finance, according to a recent report from AARP. The 50-and-older consumer segment is projected to spend more than $15 billion in the alternative financial services sector by the end of 2017. According to the report, “this industry is gradually encroaching on the traditional financial services space, syphoning off $1.6 billion from banking revenue on DDA, consumer credit card, and lending products in the next four years, in addition to $1.2 billion in organic growth.” 

U.S. financial services revenue: Consumers age 50+ (forecast)

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Source: AARP 

G-20 Ministers Release Digital Economy Report: Ministers with the Group of 20 responsible for the digital economy met in Germany April 6-7 and released a report on shaping digitalization for an interconnected world. The report welcomes new innovative digital business models such as online platforms and the sharing economy and calls on ministers to consider principles that support investment and innovation while protecting intellectual property rights. “These developments should be accompanied by a sound and balanced system of policy approaches that should be based on supportable evidence and developed in an inclusive and transparent manner,” it says. (Author’s note: We would be happy to engage in laying the groundwork for a 21st century regulatory toolkit.) The report also provides the G-20 with a roadmap for digitalization that includes sharing of best practices, incentivizing investment in digital infrastructure, strengthening trust and promoting consumer protection in the digital economy, and promoting digital competition. 

Industry Sandbox: Findings Preview:You may recall back in February that Innovate Finance put out a call for input on the creation of an industry sandbox. It noted at the time that there was “demand among the startup and enterprise participants in the U.K. FinTech ecosystem to develop a shared sandbox where facilitated access to data, systems, and professional services expedite taking innovative ideas to market, and that regulatory engagement is a feature of such an off-market testing environment. While access to live data may be in scope for an industry sandbox, access to consumers and live production environments is strictly out of scope.” Earlier this week, Innovate Finance released a preview of some of the findings from the consultation, and it will also incorporate findings from the MIT workshop on constructing successful sandboxes held at the Innovate Finance Global Summit earlier this week, which yours truly was a part of. Among the preview’s insights: Industry sandboxes should have a critical mass of shared resources including data sets, APIs, reference architectures, analytics and audit tools, showcase mechanisms, methods for self- and industry-level certification, curated forums for identifying and solving complex industry problems, and curated forums for regulators to participate as observers.

Artificial Intelligence—Regulate It: Morning Consult released a poll based on a national sample of 2,200 U.S. adults largely focused on views regarding artificial intelligence (AI). According to the survey, nearly three-quarters of respondents (both Democrat and Republican) said there should be U.S. regulations on AI, and roughly 70 percent backed international regulations. As to how safe AI is, 41 percent view it as “generally safe,” while 38 percent say it’s unsafe. Even so, more than half those surveyed said they view continued research on AI as important and will continue to support research efforts. Roughly 60 percent of respondents are uncomfortable with AI’s use in making financial services investments. 

Share of Americans uncomfortable with relying on AI for the following tasks

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Source: Morning Consult

Cryptocurrency—It’s All China: TheCambridge Center for Alternative Finance released its first global study covering cryptocurrency. It found that between 5.8 million and 11.5 million cryptocurrency wallets are “active” today and that roughly half of small exchanges hold a government license, compared with 35 percent of large exchanges. In addition, nearly 80 percent of cryptocurrency payment companies have relationships with incumbent banks and payment networks but continue to cite the difficulty of maintaining these relationships. Lastly, more than half of major mining pools are based in China and over half of all miners surveyed consider their ability to influence protocol development to be high or very high. 

Miners’ perceived ability to influence protocol development

04 14 17h 

Source: Cambridge Center for Alternative Finance

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