FinTech in Focus

May 24, 2017

Index of Startup Activity

A Kauffman Foundation study examines the various trends in startup activity in the 40 largest metropolitan areas in the U.S. The index contains three components: rate of new entrepreneurs, opportunity share of new entrepreneurs and startup density. Startup activity has increased in each of the three years since it hit a 20-year low in 2014. The five metropolitan areas with the highest startup activity: Miami, Austin, Los Angeles, San Diego and Las Vegas. Meanwhile, St. Louis, Cleveland and San Antonio jumped up significantly in the rankings, while Baltimore and Nashville saw substantial decreases in startup activity. 

Startup Activity Index (1996-2016)

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A study by Oliver Wyman and Policen Direkt Group assesses 19 InsurTech business model categories by their individual market potential and chances of success. The report finds that while the subsector of FinTech has become a hot topic, as seen in the figure below, "it is not clear that InsurTechs will disrupt the industry...." The report also notes the "major mismatch between the categories with the highest level of startup activity and those with the greatest overall potential." It’s also not surprising to see InsurTechs searching for cooperation rather than competition. As the report states: “Part of this has been triggered by the simple necessity all businesses face: the need to make money at some stage. However, to succeed in insurance often takes a long time and a lot of money.”

InsurTech Annual Funding Trend (2011 – 2016)

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MI Comment Letter on the Use of Alternative Data

Greetings, FiF Readers! Last Friday, the Milken Institute Center for Financial Markets submitted its comment letter to the U.S. Consumer Financial Protection Bureau on the use of alternative data and modeling techniques in the credit process. Enjoy the rest of the week everybody!

Reg CF: 1 Year Later

It has been a full 365 days since Regulation Crowdfunding took effect, what have we learned? According to NextGen Crowdfunding, as reported by CrowdfundInsider, a total of $37 million has been raised, with total Reg CF offers amounting to more than 140 individual campaigns with 113 campaigns having successfully closed. According to Startwise, in a white paper, during the first three months of regulation crowdfunding, average individual investments were under $250 but by the end of Reg CF’s first year, crowdfunding investment grew to an average of $833 per person. Of course, for all the celebration there is still work to be done, according to Indiegogo founder Slava Rubin, including raising the amount companies can raise from $1 million to $10 million, the ability to create special purpose vehicles, and the inclusion of a test-the-waters provision. 

FinTech from the Frontlines

A new study by PayPal attempts to highlight which FinTech developments are really transforming financial services. The report also calls on policymakers and regulators to think like FinTech policymakers and regulators by focusing on four areas in particular: eIdentity, eAuthentication, eSecurity, and eRegulation. The study sheds light on the myths and facts of FinTech, specific case studies where FinTech is truly changing the landscape for financial services (mobile checking, alternative data in credit reporting, and automated advising), why FinTech ultimately matters, and current gaps that limit FinTech's transformational potential. On regulation, PayPal notes that while RegTech and sandboxes are important developments, "they do not go far enough." Instead of "piecemeal solutions, regulators should consider changing their mindset from one that is rigid and focused on classical design standards and risks to one that is flexible and is able to account for new technological developments, risks, and data points." The report also calls for regulators and policymakers to "think beyond their agency fiefdoms and national borders" such as creating interoperability through passporting regimes.

Speaking of Funds

Softbank's Vision Fund is now the world's largest private equity fund after raising $93 billion to invest in certain technology subsectors including artificial intelligence and robotics. Among the investors include Saudi Arabia's sovereign wealth fund, Apple, Foxconn, and Qualcomm. According to the press release, the Fund, "will target meaningful, long-term investments in companies and foundational platform businesses that seek to enable the next age of innovation," including the Internet of Things, artificial intelligence, robotics, mobile applications and computing, communications infrastructure, data-driven business models, consumer internet businesses and FinTech, among other areas.

500 Startups is seeking to create a pooled investment fund targeting FinTech, according to reports. The venture capital firm is seeking $25 million according to a filing with the U.S. Securities and Exchange Commission.

Headlines in Marketplace Lending and Payments

A few newsworthy items to keep an eye on. First, online lender Earnest, which began as a student loan refinance platform, is looking for a buyer, according to reports. Lending Club, which just appointed former PayPal executive Steve Allocca as president, has also raised the minimum initial deposit required for new retail investor accounts to $1,000. Meanwhile, SoFi launched its wealth management service, while Funding Circle CEO Samir Desai has stepped back from managing the Funding Circle SME Income Fund, which was launched in November 2015, and was replaced by the company's chief capital officer, Sachin Patel, who has been deeply involved with the fund since inception. Lastly, new issuance of bonds backed by loans from online lenders is receiving heightened interest from Wall Street, with $3 billion in bonds issued in the first quarter, double the amount from first quarter 2016.

On the payments front, international money transfer firm Transferwise has reached profitability six years after launching. The platform is also seeking to move into a new frontier, borderless accounts. According to a recent blog post, “the Borderless account works just like a local bank account in many different countries. It’s built the way the world works now. Interconnected.” Separately, WorldRemit continues to grow. According to a recent post, the money transfer service’s U.S. revenue now accounts for more than 10 percent of its business and is growing 250 percent year on year. The firm has licenses in nearly all U.S. states, and U.S. mobile-to-mobile money transfers using WorldRemit are growing more than 400 percent year on year. 

Virtual Currency and Distributed Ledger Technology

Even as Bitcoin’s price skyrockets to roughly $2,400, Bitcoin’s market share, as of May 16, fell below 50 percent for the first time ever. Even so, the Digital Currency Group announced at Consensus 2017 that more than 50 companies with the support of 80 percent of the network's miners have come to an agreement to upgrade the network to support additional transaction capacity. Separately, as concerns mount over criminal use of virtual currencies (see Global Developments below), a 15-member consortium has formed representing seven European countries, INTERPOL and other law enforcement agencies, to develop ways to mitigate crime and terrorism involving virtual currencies and the use of the dark web.

Speaking of Digital Currency Group, it also launched DCG Connect, providing select corporate partners with the ability to leverage the insights and technology of startups. Meanwhile, Microsoft Azure released a new blockchain proof of concept (PoC) framework for developers in an effort to reduce the current cost (as much as $300,000) and time (8 to 12 weeks) it takes to develop a blockchain PoC. Similarly, IBM announced an accelerator program, IBM Blockchain Founder Accelerator, "to help enterprises and enterprise developers take blockchain networks into production faster." Future\Perfect Ventures has announced the launch of the Future\Perfect Labs “to harness cross-disciplinary talent and resources to deliver solutions and unlock opportunities related to decentralized connectivity across innovation in cryptocurrencies, in a climate of heightened global security concerns.” The Lab, which will be based in New York City, includes a number of high-profile participants including Abra, Blockchain, Bitpesa, and others, according to one report. In other headlines, Nasdaq and Citi Treasury and Trade Solutions announced "a new integrated payment solution that enables straight through payment processing by using a distributed ledger to record and transmit payment instructions." The partnership "leverages Chain's blockchain infrastructure platform" providing a seamless end-to-end transactional process for private company securities. Lastly, despite recent news of financial institutions leaving the consortium, R3 has raised more than $100 million from more than 40 institutions involved in the group.

Global Developments

International: The Financial Stability Board and the Committee on the Global Financial System published a report titled, FinTech Credit: Market Structure, Business Models and Financial Stability Implications. The study provides a look into the landscape of the FinTech credit markets, the potential microfinancial benefits and risks, and implications for financial stability. 

Important developments are also underway in the ASEAN region. At the same time the Society for Worldwide Interbank Financial Telecommunications (SWIFT) released a report on the efforts needed within the ASEAN region to achieve financial integration, the Monetary Authority of Singapore and the International Finance Corporation signed a memorandum of cooperation where both parties will work "to establish and develop the ASEAN Financial Innovation Network (AFIN)... to facilitate broader adoption of financial technology (FinTech) innovation and development, and enhance economic integration within the ASEAN region.

European Union: Bulgaria's Mariya Gabriel is set to take over the European Commission's digital economy and society portfolio, according to reports, putting her at the helm of Europe's efforts towards the creation of a single digital marketplace. In other news, the Euro Banking Association released a paper analyzing cryptotechnologies in international payments. The report focuses on the potential as well as long-term challenges banks may face in the use of cryptotechnologies.

China: Going international. That’s the theme for China this week. Huawei reached a cooperation agreement with Azerbaijan to help build the country's digital economy. Meanwhile, China has struck an agreement with Belarus to establish a joint-venture capital fund set to launch later this year. Separately, the OTT Financial Group has struck a partnership with Tourism Toronto to set up the mobile payment infrastructure necessary for WeChat Pay to operate in Toronto, a popular destination for Chinese tourists. Lastly, Dianrong, a leading marketplace lender in China, announced a technology agreement with Maggie Ng that would create the first global FinTech marketplace connecting Asian investors "with high-quality, low-volatility and largely untapped asset classes, including U.S. consumer lending."

India: Paytm has launched its payments bank. Initial rollout will be made on an invite-only basis. Current Paytm wallets "will now move to the Paytm Payments Bank," according to the company, which plans on opening up more than 30 branches and 3,000 customer points in the first year. The company recently raised $1.4 billion in funding from SoftBank. 

UAE: The Abu Dhabi Global Market joined R3 recently, becoming "the first regulatory body in the Middle East and North Africa (MENA) region to be part of the R3 consortium," according to the press release.

Estonia: The Estonia-based Polybius Foundation is seeking to build the world's first bank to specialize in financial services for cryptocurrency and blockchain startups and projects, according to reports.

Norway: Norwegian-based online bank Skandiabanken has recognized Bitcoin as a new investment class, thereby allowing its customers "to access their bitcoin holdings through its online banking platform."

UK: The Conservative and Unionist Party has released its manifesto for Britain. Among the five “giant challenges” that Britain faces, fast-changing technology was among them. “For the sake of our economy and our society, we need to harness the power of fast-changing technology, while ensuring that our security and personal privacy — and the welfare of children and younger people — are protected,” the manifesto states. With regard to immigration, the manifesto states that the conservative government will ask the independent Migration Advisory Committee "to make recommendations to the government about how the visa system can become better aligned with our modern industrial strategy. We envisage that the committee's advice will allow us to set aside significant numbers of visas for workers in strategically important sectors, such as digital technology, without adding to net migration as a whole." Meanwhile, EU states have agreed on "tough guidelines" in preparation for Brexit negotiations which are set to begin the week of June 19. 

U.S.: A lot going on with virtual currency policy. First, Rep. Kathleen Rice (D-NY), the Ranking Member on the Homeland Security Counterterrorism and Intelligence Subcommittee announced legislation “that directs the Department of Homeland Security (DHS) to conduct a threat assessment regarding the use of virtual currencies such as Bitcoin to carry out terrorist activities or to provide material support for terrorist organizations.”

Speaking of virtual currencies, Coinbase has filed a motion to quash the John Doe summons filed by the Internal Revenue Service. As stated in the motion: “Despite the demonstrable need for clarifying virtual currency tax guidance, the IRS has opted not to issue a single word of virtual currency guidance since promulgating admittedly insufficient guidance more than two years ago. Having been unable, or unwilling, to issue such new guidance, it is hard to believe that the IRS has now issued the IRS Summons for a legitimate investigatory purpose. After all, if the IRS admits that it has not properly informed taxpayers of the virtual currency taxation rules, how could it now reasonably seek to review the records of over one million taxpayers for virtual currency tax compliance purposes?”

The legal battle between the IRS and Coinbase has also led certain lawmakers to express their concerns. In a May 17 letter, Reps. Kevin Brady (R-TX), Vern Buchanan (R-FL), and Senator Orrin Hatch (R-UT) stated the following: “We strongly question whether the IRS has actually established a reasonable basis to support the mass production of records for half of a million people, the vast majority of whom appear to not be conducting the volume of transactions needed to report them to the IRS. Based on the information before us, this summons seems overly broad, extremely burdensome, and highly intrusive to a large population of individuals. The IRS's actions in this case also set a dangerous precedent for companies facilitating virtual currency transactions that could be subject to a similar summons.”