FinTech in Focus
Cheesesteaks and FinTech
The Federal Reserve Bank of Philadelphia published a working paper covering FinTech lending. The report explores the advantages/disadvantages of loans made by Lending Club and similar loans originated through traditional banking channels.
According to the report's findings, Lending Club's consumer lending activities "have penetrated areas that could benefit from additional credit supply," including areas that lost bank branches or those areas in highly concentrated banking markets. For instance, “We find that consistently half of Lending Club’s new consumer loans are in areas where a few banks dominate the market; there is less banking competition.” In addition, “about 40 percent of Lending Club consumer loans were made in the markets that experienced at least 5 percent decline…in bank branches.”
The report also focuses on the use of alternative data and found that while Lending Club rating grades and FICO scores were "highly correlated" (80 percent correlation) in 2007, that correlation has fallen significantly to 35 percent in 2016. “This seems to indicate that the Lending Club is relying more on additional information,” according to the report. Indeed, despite the low correlation, the research also found “that Lending Club’s rating grades have served as a good predictor for the borrowers’ probability of becoming at least 60 days past due within the 12-months period following loan origination date.”
Correlation Between Origination FICO and Rating
Grade Assigned by Lending Club
Source: Lending Club
Tufts University released the Digital Evolution Index (DEI) 2017—a progress report covering the state of the digital economy across 60 countries. The analysis combines more than 100 different indicators across four key drivers: supply conditions, demand conditions, institutional environment, and innovation and change. The report also breaks out the 60 countries across four categories: Stand Outs, Stall Outs, Break Outs, and Watch Outs. The top 10 DEI countries include Norway, Sweden, Switzerland, Denmark, Finland, Singapore, South Korea, UK, Hong Kong, and the U.S.
The DEI Heat Map
Source: Tufts University
I’m referring of course to initial coin offerings (ICOs), not the terrorist group from the Netflix series House of Cards (I bet you haven’t heard that joke before….). ICOs are the all the rage these days, prompting yours truly to add yet another Google Alert to the mounting list of FinTech alerts. Given the amount of news, interest, and money involved (ex. Tezos, a blockchain startup, recently raised the world’s largest ICO), regulatory bodies around the world are watching. For instance, a counselor to the People’s Bank of China (PBOC), Sheng Songcheng, recently suggested that moderate regulation is applied to ICOs. Yao Qian, director of the PBOC Digital Currency Research Institute, suggested that “it might not be appropriate to simply apply the existing supervision framework of IPO and crowdfunding to ICO projects,” before recommending alternative ways to oversee and manage ICOs.
In an interview with CoinDesk in late June, the chairman of the Australian Securities and Investments Commission (ASIC) stated that ICOs are “a very interesting concept. An ICO is not equity – you're offering basically something that is the product of the entity that is doing the launch. You're taking a bet on getting that product early. How different is that if I go to Kickstarter and I buy something – a watch – and then I get that watch and sell it in the future? It's no different, is it?” He further stated: “To be classified as a security it would have to have some sort of financial conditions attached to it. Financial obligations have to be offered in relation to it, either it's equity or it's a debt-like instrument or principal instrument or a derivative on that.”
At a Heritage Foundation event in the U.S. on entrepreneurship and economic growth, Michael Piwowar, commissioner of the U.S. Securities and Exchange Commission (SEC), stated that the federal regulator is looking more closely at ICOs (1:06:00 mark; FinTech mentioned at 49:00). “There’s a number of different ICOs that are out there. There’s a question as to whether or not this is something that is innovative and OK to do, or is this something that is skirting the federal securities laws. It’s something that we’re looking at the staff level – and a lot of these are facts and circumstances type issues – but there are some commonalities in there so there’s going to continue to be movement in this space so it’s something that we are obviously paying attention to.”
Remittances and Poverty Reduction
A report from the Asian Development Bank Institute examines the impact of remittances on poverty reduction. In focusing on the poverty headcount ratio, poverty gap ratio, and poverty severity ratio, the report finds that international remittances “have a statistically significant impact on the poverty gap ratio and poverty severity ratio,” with a 1 percent increase in international remittances as a percentage of GDP equating “to a 22.6 percent decline in the poverty gap ratio and a 16.0 percent decline in the poverty severity ratio in the sample of 10 Asian developing countries from 1981 to 2014.” In terms of how remittance-sending systems should be organized, the report suggests remittance receiving countries in Asia reduce the cost of sending remittances for immigrants, and apply FinTech to improve and expedite remittance-based services.
Blockchain: The Linux Foundation's Hyperleder Project released its first production ready blockchain available for commercial use. Bitfury released its first open source, enterprise-grade blockchain framework called Exonum. The framework “is custom designed to securely and easily allow you, your company, institution or government to build a Blockchain system that solves your challenges and enjoys the unmatched security of the Bitcoin Blockchain, while also offering the technology’s most attractive features like transparency and smart contracts.”
Payments: PayPal and Samsung struck an agreement whereby PayPal can be used as a payment method within Samsung Pay. PayPal also announced further integration with Apple products, while also announcing the close of its acquisition of TIO Networks
Online Finance: PayPal added Mark Britto, a former Amazon executive, to its lending business. It has also been reported that Funding Circle’s Small and Medium-Sized Enterprises (SME) Income Fund, launched in November 2015, met investor expectations in its first year.
InsurTech: Startupbootcamp and PwC released a report that explores how InsurTech is poised to transform the insurance industry. Among the key findings, was a "second wave" of InsurTechs are emerging covering mid and back office issues rather than focusing specifically on the customer. Like online lenders and traditional banks, there is value in partnerships between insurers and InsurTech with nearly half of those surveyed engaged in partnerships.
Source: PwC, Startupbootcamp
India: India’s Competition Commission approved Softbank Group’s acquisition of a 20 percent stake in One97 Communications. One97 is the parent company of Paytm, a digital payments platform that is rapidly expanding throughout India.
The National Association of Software and Services Companies announced the creation of a blockchain special interest group. The group will work to further the interests of blockchain companies by educating the public on the uses of cryptocurrencies. India’s government is also considering implementing “Know Your Customer” norms to ensure safe cryptocurrency transactions. The Finance ministry is also considering developing specialized frameworks for international transactions using cryptocurrencies. Currently, the Bank of India regards cryptocurrencies as a violation of the country’s foreign exchange norms.
The State Bank of India (SBI), India’s largest lender, has reduced charges on electronic charges by as much as 75 percent. Account-to-account transfers through SBI’s Immediate Payments System are now free. These policy changes are part of SBI’s larger effort to channel users to its digital services.
EU: The European Commission completed the first #Blockchain4EU workshop. The workshop explored applications of blockchain and distributed ledger technology outside of financial services. The commission wrote that 34 people participated in the workshop, and included experts across a variety of fields and included policy makers, social scientists, and entrepreneurs. Workshops will continue to be held through February 2018.
The Government Digital Service and its affiliated consortium of banks plan to carry out a pilot project testing the use of Electronic Identity and Signature Standards. The project will design and develop a prototype service that will enable remote authentication of financial transactions throughout the EU.
Deloitte released a new report on alternative lending. Key takeaways were that in the first quarter of 2017 Europe’s alternatively financed deals had a total value of 9.1 billion USD, nearly twice the value of all 2016 and that there was a total of 79 first quarter deals, a 7 percent increase versus 2016’s first quarter.
Singapore: The Singapore FinTech Association announced that it has created an online directory for FinTech companies based in Singapore. The directory provides basic information including a description of the company and its founders, funding status, and business model.
Startupbootcamp FinTech Singapore, a global accelerator that focuses on innovative financial services start-ups, announced that its 2017 startup class has secured over 70 pilots, clients, and key partnerships.
Dubai: The Dubai International Finance Center and the Dubai Islamic Economic Development Center signed a Memorandum of Understanding to provide a platform to link FinTech firms in Dubai. The program will provide mentorship to promising startups and is another step forward in Dubai’s efforts to position itself as a financial hub.
Japan: Kazuyuki Sugimoto, head of the Japan Fair Trade Commission, stated that Japan is considering new rules on handling data to avoid digital monopolies. Mr. Sugimoto further elaborated that while most data issues can be handled through existing anti-monopoly laws, there are exceptional cases, and given data’s role in developing new economies it is vital to ensure a competitive landscape exists.
Estonia: Estonia has established the first data embassy. The embassy is a server room in Luxembourg that will enable NATO and Eurozone members to access Estonia’s government data in the event of a cyber-attack on Estonia’s domestic servers.
Iran: Iran’s Center for E-Commerce Development announced that the Central Bank of Iran will define a framework for FinTech operations by the end of the summer. Currently, FinTech services are allowed to operate as long as they are not involved in money creation, currency exchange, payment tools, or depository services. E-commerce sites have turned to aggregators, unofficial payment services, as a means of circumventing the bureaucracy of the banking sector. It is likely that the new regulations will be met with frustration as only 15 of an estimated 200,000 online shops have registered their businesses with the government.
Philippines: Cebuana Lhuiller Insurance Solutions, CARD Pioneer Microinsurance Inc, CLIMBS Life and General Insurance Cooperative, Western Guaranty Corporation, and Pru Life UK have formed the Mutual Exchange Forum on Inclusive Insurance Inc. The non-profit seeks to increase access and affordability of insurance by developing business models that are suited to Asia, as well as reducing regulatory barriers.
Korea: The Electronic Financial Transaction Act will be introduced to the National Assembly by Representative Park Yong-jin by the end of the month. On July 18 th, Representative Park held a legislative hearing on digital currencies and has been incorporating public comments into the bill.
Choi Jong-ku, the nominee for the chairman of the Financial Services Commission, voiced support for the easing of regulation on ownership of bank stakes by non-financial organizations. Mr. Choi noted that while online banking needs to be regulated, the regulations should reflect the differences between traditional banks and their digital counterparts, and should accommodate online banks need for greater access to capital.
China: The government unveiled financial sector reform plans earlier this week, which includes the formation of a financial stability and development committee under the State Council, among other efforts. Lufax–the online wealth management platform based in China–will launch its first overseas platform in Singapore. One of the reasons for choosing Singapore, among a list of other countries the company looked at, was due to the country's conducive regulatory environment. Lastly, Sun Guofeng, director general of the People’s Bank of China’s research institute, has called on FinTech firms "to help pay for a government-controlled monitoring system to watch over financial transactions on the internet."
U.S.: The Digital Chamber of Commerce organized a fly-in for 70 member companies to Washington, D.C. in an effort to "educate U.S. Members of Congress, Senators, and their staffs on the value of blockchain technology, and to ensure that America remains the epicenter of this breakthrough technology." The effort comes as Rep. Dana Rohrabacher (R-CA), in debate over the 2018 National Defense Authorization Act, called for digital currencies to be subject to fully anti-money laundering/Know Your Client standards. Lastly, Llew Claasen, executive director of the Bitcoin Foundation, penned an op-ed on the problems associated with the Uniform Law Commission’s efforts on regulating virtual currencies.
Lastly, the Financial Accounting Standards Board is considering accounting standards for digital currencies. The consideration is a response to the Chamber of Digital Commerce’s request for further standards in light of the increased proliferation of digital currencies.
U.K.: The House of Lords Select Committee on the European Union released a report covering data protection and the need to maintain "unhindered and uninterrupted data flows between the UK and EU after Brexit." Nick Cook, the Financial Conduct Authority’s head of data and information operations, provided additional insight into the regulator’s approach to RegTech during a London FinTech Week conference. "We're looking at these underlying technology approaches and regtech solutions to try and see how we can employ them internally to be more efficient and to better identify which solution (works) for the financial markets,” he said.
Australia: Stone & Chalk–the Australian-based incubator–has a new home in Sydney. The Sydney Startup Hub is expected to open its doors in November. Treasurer Scott Morrison announced efforts to create a more competitive banking sector in Australia as part of the Turnbull Government's 2017 budget. “New entrants to the Australian banking market face a simple but significant obstacle – the prohibition on the use of the word 'bank'. Currently, only authorized deposit-taking institutions (ADIs) with capital greater than $50 million are permitted to use the term 'bank'. This acts to discourage innovative new players from entering the market, as the use of the term ‘bank’ can be key to their business model at the critical early phase of their development. The Government is today releasing draft legislation for public consultation that will ensure that any banking business with an ADI license will be allowed to describe itself as a bank,” the press release states.