FinTech in Focus
Peeking Into First-Quarter Earnings
Square: Square generated total net revenue of more than $460 million in the first quarter, a 22 percent year-over-year increase, with gross payment volume at $13.6 billion—a 33 percent increase from a year ago but down slightly from $13.7 billion in the fourth quarter of 2016. Of note on the payments front: 61 percent of transactions from the buyer side were from EMV-enabled cards, up from 53 percent in December 2015. At subsidiary Square Capital, more than $153 million was extended through more than 23,000 advances and loans in the quarter, with default rates currently about 4 percent. Amid heightened regulatory scrutiny, particularly around the bank-partnership model, Square intends “to continue to explore other models and structures for Square Capital, including other forms of credit and loan origination.” Square is also launching a prepaid card linked to a user’s Square Cash application and has recently expanded its payroll service to three more states, with the service now covering 65 percent of all businesses.
PayPal: First-quarter revenue growth rose nearly 20 percent, to nearly $3 billion, from a year ago, and 6 million accounts were added, with total active customer accounts surpassing 200 million. The average number of payment transactions per active account was 32, with total payment volume topping $99 billion. Financing to PayPal merchants through the company’s Working Capital product has topped $3 billion since its launch, with the vast majority of advances and fees involving merchants with a PayPal Working Capital Risk Model (PRM) score higher than 610. With regard to Madden vs. Midland Funding LLC—a thorn in the side of non-bank finance providers—PayPal said: “Although we believe the Madden case can be distinguished from the manner in which we offer our credit products, there can be no assurances as to the outcome of any potential litigation, or that the possible impact of such litigation will not have a material adverse impact on our business.” The company also introduced PayPal Business in a Box, offering small businesses a toolkit to start an online business.
Lending Club:First-quarter revenue totaled $124.5 million, a decline from a year ago and from the previous quarter. That said, total loan originations since inception topped $26 billion, including $2 billion in originations registered in the first quarter. Banks increased their purchasing of originations and now make up roughly 40 percent of total originations, while retail investors now make up 15 percent, both increases from the previous quarter. Of total originations, $14.6 billion were whole loan sales. At the end of the first quarter, no single investor accounted for more than 18 percent of the loans invested through Lending Club’s marketplace, a gain of 7 percent year over year. Rather than focusing on Madden, the company has given its attention to ongoing litigation in Colorado involving the “valid when made” doctrine. Though no assurances can be made as to the outcome of the case, the company said, it could affect business operations.
OnDeck: Revenue totaled $35.4 million in the first quarter, a year-over-year gain of 13 percent. The company is accelerating efforts to cut expenses further by implementing “an additional $25 million of annual run rate operating expense savings relative to our year-end 2016 exit run rate.” Originations in the quarter totaled $573 million, down from the previous quarter though up 1 percent year over year. Total originations for 2017 are projected to be less than for 2016. OnDeck is also increasingly moving to hold more loans on its balance sheet with the decision to reduce the amount of loans sold through OnDeck Marketplace. As a result, OnDeck sold $42 million of loans through the marketplace during the first quarter, compared with $123.7 million in the first quarter of 2016. “To optimize long-term financial performance, OnDeck plans to reduce the percentage of term loan originations sold through OnDeck Marketplace to less than 5 percent for the remainder of 2017,” the company said.
Greetings, FinTech in Focus readers! After decompressing for all of six minutes after last week’s Milken Institute Global Conference, I was immediately handed my two children as my wife absconded to a work retreat in Florida for the week. Wish me luck.
Author’s note: We will now return to a weekly release of FinTech in Focus. Last week’s edition, which was not sent over e-mail, can be viewed here.
Blockchain and Health Care
The IBM Institute for Business Value and the Economist Intelligence Unit released a report titled “Health-Care Rallies for Blockchains: Keeping Patients at the Center” which surveyed 200 health-care executives in 16 countries. According to the report, 16 percent of respondents said they expect to have a commercial blockchain solution at scale this year (compared with 15 percent of banks and 14 percent of financial market enterprises surveyed in an earlier study), and 90 percent said they expect to invest in blockchain pilots across various business areas in 2018. In addition, roughly 70 percent said they expect blockchain to benefit clinical trial records, regulatory compliance, and medical/health records in particular. However, “fewer than one in 10 health-care organizations are expecting significant disruption. In part, this may be because some areas like [electronic health records] could take longer to clear regulatory hurdles. The patient-centric models being advocated could be blocked by the fact that in some jurisdictions, patients aren’t allowed to ‘own’ their data.”
Health-care executives’ expectations of when they will have blockchains in production and at scale
Sources: IBM Institute for Business Value, the Economist Intelligence Unit
Peak Hype: InsurTech?
Willis Towers Watson Securities, together with CB Insights and Willis Re, released its inaugural report on InsurTech’s potential in the $100 billion small-business insurance market. According to the report, InsurTech funding volume surpassed $280 million in the first quarter, a 4 percent increase from last quarter but a decline of nearly 65 percent year over year. As the report notes, the decline “likely results from startups moving from fundraising to product launch stage.” The report also says that up to 25 percent of total small-business insurance premiums could be digitally underwritten by 2020. The marketplace itself remains highly fragmented, with “the largest carriers each only controlling approximately 6 percent of the market.” The report also includes a Q&A with a number of InsurTech “disruptors” in the marketplace.
A Few Other Headlines to Note
On the digital currency front, California’s attempt to reintroduce legislation covering a BitLicense-like framework continues to receive opposition from the digital currency community. According to the Electronic Frontier Foundation, the proposed legislation is premature given that the industry is still in its infancy, state-by-state regulation of cryptocurrencies will lead to confusion among consumers, and the bill could chill digital currency innovation in California. Separately, digital currency exchange Celery has suspended all deposits and withdrawals on its platform for reasons unknown at this time, while CME Group has filed a patent for an invention that “relates to systems for clearing derivative contracts based on virtual currencies and, in particular, to systems that allow for the physical delivery of virtual currencies without the clearing counter-party directly possessing the virtual currencies.”
In crowdfunding/P2P lending, U.K.-based Seedrs is launching that country’s first equity crowdfunding secondary market. According to a blog post, the market, which is in beta, will open for one week on the first Tuesday of every month, allowing investors to buy and sell shares from one another. Lastly, Prosper has notified investors about a system error that resulted in the company overstating investors’ annual returns. The error has been fixed, the company said, and did not affect bonds linked to Prosper loans.
International: The World Bank has launched XL Africa, “a five-month business acceleration program designed to support the 20 most promising digital startups from sub-Saharan Africa.” The program will collaborate with a number of investment groups, including the African Business Angel Network, AngelHub Ventures, Nest Africa, Singularity Investments, Thomson Reuters, and Orange.
EU: A 60-member FinTech coalition has formed to fight the European Banking Authority’s efforts to outlaw screen scraping, saying it would lead to reduced competition and place banks as gatekeepers of the FinTech sector.
Europe: At an event in Singapore, the Swiss finance minister called for greater FinTech cooperation between the two nations, highlighting the importance of the network between two small countries with important financial centers. In Norway, more than 100 banks announced the launch of VippsGO, a mobile payment app, in an effort to thwart competition from Apple, Google, Facebook, and other payment players.
U.K.: The Financial Reporting Council, an independent regulatory body tasked with ensuring high corporate governance and reporting standards, released the first in a series of reports on the future of digital reporting for companies, as the current use of technology in corporate reporting “is not meeting its full potential.” According to the slide deck, the report “sets out the characteristics that companies, investors, and other stakeholders want to see in any future digital reporting framework.”
The Payment Systems Regulator (PSR) and the Bank of England released a paper calling for the consolidation of three retail payment systems—Bacs, Cheque and Credit Clearing Company, and the Faster Payments Service—into one retail payment system operator. As noted in the PSR release, the single entity “would also become responsible for taking forward the next stage of the development of the New Payments Architecture,” an industry-led effort to increase competition and enhance innovation across the payments and banking industry. In order to meet “the constantly developing needs of businesses and consumers, our payment systems must evolve ever more quickly,” it said. “This means bridging the gap between these ‘end-user’ needs and our infrastructure’s ability to provide simpler access, enhanced adaptability, and security through faster-paced innovation.” The consolidation is expected to largely be finished by the end of the year.
Innovate Finance will soon welcome a new chair, Natalie Ceeney, who is taking over the post from Alastair Lukies. Ceeney formerly ran the Financial Ombudsman Service. And speaking of Innovate Finance, the not-for-profit organization released the final consultation report on the development of industry-led sandboxes for financial innovation. According to the report, which the Milken Institute provided input on, an industry sandbox “would support the testing of solutions before they reach a market, regardless of whether these solutions need to be regulated. It would not give access to any form of regulatory relief.” The report provides implementation options for the design, governance, funding, and regulatory and academic engagement in an industry sandbox.
Australia: The government released its 2017 budget, which includes a number of measures pertaining to FinTech. Among them: The government will attempt to reduce the barriers to entry for new banks, remove the double taxation of digital currency, extend equity crowdfunding to proprietary companies, legislate an enhanced regulatory sandbox that allows for wider testing of products and services and a 24-month testing timeframe, and develop a 2030 strategic plan for the Australian Innovation, Science and Research System.
China: INCOMING! Alipay has entered the U.S. under a deal with U.S. payment processing company First Data Corp. The move comes a few months after WeChat entered through an agreement with Silicon Valley-based mobile payment platform Citcon. Under the partnership, users will be able to use Alipay at the point of sale at approximately 4 million U.S. merchants.
U.S.: Reps. Erik Paulsen (R-Minn.) and Suzan DelBene (D-Wash.) launched the Congressional Digital Trade Caucus, which aims to, among other things, eliminate data localization requirements and promote free cross-border data flows; a free and open Internet; and the elimination of requirements that businesses transfer technology, source code, or encryption keys.
Meanwhile, the Commerce Department has signed a memorandum of understanding with Singapore’s Ministry of Trade and Industry that reaffirms the nations’ strong economic ties and encourages greater collaboration between their companies. Of note—and I believe this is a first for a U.S. agency—the memo includes FinTech among the areas of collaboration between the two countries.
Lastly, Comptroller of the Currency Thomas Curry stepped down as of May 5, with Keith Noreika now serving as acting comptroller. In final remarks, Curry commented on the battle between his agency and state authorities, saying this is not about turf, but about the strategic direction of the banking industry.
Canada: The Autorité des Marchés Financiers (AMF) announced the formation of its FinTech Lab, whose mandate “is to study new technologies rather than the business models that are based on them.” In the same release, AMF announced that it had signed a partnership agreement with R3. Separately, the Competition Bureau released a report containing key takeaways from a recent workshop meeting that examined the intersection of competition, innovation, and regulation in the financial services sector.
Singapore: The Monetary Authority of Singapore (MAS) issued a response to a question from Parliament on encouraging the use of FinTech in financial institutions. The authority said that it “does not have to choose between financial institutions and new FinTech players. We take an evenhanded approach, encouraging established and new players to compete, collaborate, and innovate. There is a natural synergy here: FinTech solutions present financial institutions with opportunities to enhance their product offerings, while collaboration with financial institutions enables FinTech players to broaden their reach.” Separately, MAS is involved with two other government offices and four banks on a pilot project to simplify online banking transactions using the government’s MyInfo service.
Meanwhile, the Ministry of Communications and Information announced the creation of AI.SG, “a new national program to boost Singapore’s [artificial intelligence] capabilities.” The National Research Foundation will invest more than $100 million over five years.
Caribbean: The United Nations’ Economic Commission for Latin America and the Caribbean has released a paper covering the prospects for blockchain-based settlement frameworks as a resolution to the threat of derisking to Caribbean financial systems. Distributed ledger technology (DLT) could address the problem of derisking on two fronts: Blockchain offers new tools to improve the surveillance of transactions and could offer Caribbean banks a way to bypass correspondent banks altogether. As the report further notes, “Adoption of a net payment-oriented blockchain—whether open or permissioned—would reduce reliance of Caribbean banks on correspondent banks for money transfers. However, as long as settlements are conducted on a net, rather than per-transaction basis, a move to the blockchain alone would do little to support the additional compliance monitoring needed to address the issue of derisking.”
Hong Kong: The Financial Services Development Council released two reports this week. “The Future of FinTech in Hong Kong” focuses on the challenges and opportunities of developing Hong Kong’s FinTech ecosystem and the steps Hong Kong must take to become a leading FinTech center. It notes that Hong Kong “is a latecomer and, to have any chance of competing with and if possible overtaking other centers, it must focus. Hong Kong should not try to be a FinTech generalist but should focus on key areas within FinTech and build its reputation and expertise based on its strongest advantages and most promising opportunities.” Those areas, identified in more depth in the report, are cyber security, payments and securities settlement, digital identity and KYC utility, WealthTech and InsurTech, and RegTech. Separately, “Hong Kong—Building Trust Using Distributed Ledger Technology” examines the benefits and challenges of adopting DLT and proposes strategies Hong Kong can use to build on its strengths. Among the recommendations in the report, Hong Kong should create a DLT lead function within government, create a DLT hub funded by the public sector and industry bodies, ensure the legislative and regulatory systems in Hong Kong are conducive to digital currencies, and develop blockchain-based proof of concepts that are viewed as a higher priority within government than those currently being developed.