Mueller Jackson
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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FinTech in Focus

By: Jackson Mueller
December 18, 2017

Sizing the U.K. Alternative Finance Market

The Cambridge Centre for Alternative Finance released its fourth annual Alternative Finance Industry report which found that the country’s alternative finance market grew 43 percent in 2016 to £4.6 billion, up from £3.2 billion in the prior year. Nearly three-quarters of all U.K. alternative finance market volume, or £3.3 billion, was raised for U.K. startups and small or mid-size businesses, with 33,000 firms using alternative finance channels in 2016. “The annual British Banking Association data implies that peer-to-peer business lending platforms are now facilitating the equivalent of 6.56 percent of all new loans lent to SMEs, or 15 percent of all new loans lent to small businesses by all UK banks,” according to the report. Peer-to-peer business lending was the largest market segment followed by peer-to-peer consumer lending and peer-to-peer property lending. According to the report, the five largest alternative finance platforms accounted for nearly two-thirds percent of total market volume in 2016. Few new firms entered the market last year, but more than 35 alternative finance providers became inactive through merger or shutting down operations. Similarly, nearly 60 percent of surveyed platforms indicated that they had significantly or slightly altered their business models last year.

Peer-to-Peer Business Lending as a Percentage of New Loans to Small Businesses in the U.K.

(BBA Data 2012-2016)

12 18 17a  

Source: Cambridge Centre for Alternative Finance 

Digital Banking: Credit Unions Win the Day?

In a survey conducted by Malauzai of more than 400 banks covering 16.5 million logins from nearly 900,000 internet and mobile banking users, credit unions are outpacing traditional banks in the number of end-users actively using digital channels more than once over a 90-day period (72 percent vs. 62 percent). Also, the iPhone is still the most popular device to conduct digital banking activities. “The best in class financial institution has 75 percent of its end-users on iPhones. That ranges down to 40 percent. Conversely, Android usage tops out at 60 percent of all users at the best in class Android shop. But on average iPhone still wins handily with 60 percent of digital bankers choosing to use an iPhone across all financial institutions.”

Deutsche Bank Goes All-In on Blockchain, Less So on Cryptocurrencies

In a recent presentation, Christian Nolting, global chief investment officer and global head of wealth discretionary at Deutsche Bank, and Markus Muller, their global head of CIO office, discussed the importance of cryptocurrencies and blockchains in the future. The report provides an update on the bank’s views on cryptocurrencies and blockchain technology, with the bank finding that cryptocurrencies are a “highly speculative” investment with the emergence of a new asset class, only likely with more regulation and some degree of security. On blockchain technology, the bank expects the first full implementation of blockchains to begin in 2020, with around 10 percent of the worldwide GDP regulated by the blockchain by 2027. “Distinguished by high transparency and a decentralized system, we see in the blockchain one of the most innovative developments in recent years.”

In other blockchain-related developments, Sberbank, Russia's largest bank by assets, completed a pilot payments transaction using the IBM-built blockchain based on Hyperledger Fabric—the first ever such transaction for the Russian banking industry. Meanwhile, the Bank of Tokyo-Mitsubishi UFJ and NTT Data Corporation—a Japanese IT services provider—have partnered on a blockchain-based proof of concept to streamline and improve trade links between Japan and Singapore. Singapore's National Trade Platform is also involved in the collaboration. Finally, Apple filed a patent application last week which details “a program able to certify timestamps by combining aspects of blockchain technology with Public Key Infrastructure (PKI) tools,” according to a report in CoinDesk.

This Is All Going to End in Tears

Hello, FinTech in Focus readers. At the time of this publication, yours truly is probably carting two car seats, skis, and enough winter outfits to clothe an army through the airport, with my kids nowhere to be found. The Mueller family is headed out to Utah for the holidays, where I will save my son multiple times from skiing into trees while depleting my retirement account to buy ski tickets (thanks, Vail Corporation!). In short, see you on the slopes!

Speaking of depleting funds, I had written a while back about millennials taking out home equity lines of credit (HELOC) to fund our expensive travel habits. Fast forward to today, where HELOCs are being used to purchase bitcoin. Let me repeat: People are literally taking out HELOCs to buy bitcoin. I’ll let that sink in for a moment. You could also just sell your house to fund your own bitcoin mining operation. But make sure to call your local public utility for more electricity before starting. Even Coinbase, one of the largest virtual currency exchanges, is calling for people to cool it.

Some Headlines:

AltFi: SoFi, which just partnered with Delaware-based WSFS Financial Corporation "to offer payment processing and debit card sponsorship services for a new cash management account,” just completed a $769 million student loan securitization, bringing total asset-backed-securities (ABS) issuance to nearly $7 billion in 2017. Point of sale platform Affirm raised $200 million in new equity led by GIC—a Singaporean sovereign wealth fund—valuing the company between $1.5 billion and $2 billion. Kabbage—the online small business lender—has delivered more than $4 billion to 130,000 small businesses since inception. The platform has over 1.5 million data connections with its customers and announced Robert Sharpe as its chief financial officer. A few other lending platforms have snuck in milestone announcements before the end of the year, as well. Finally, Fair Isaac Corporation, better known as FICO, announced the Explainable Machine Learning Challenge: "[A] call for AI developers to take a portion of the company's data and build a new, more transparent algorithm to predict whether customers would be able to repay a line of credit up to $150,000,” according to an article in Quartz.

Payments: To remain competitive against AliPay and TenPay, UnionPay launched an integrated mobile application connecting most of China's mainland banks to expand their mobile payment capabilities. Separately, Apple Pay Cash card, which is available on iOS 11, will leverage the Discover Network, Worldpay has partnered with Swedish-based payments company Klarna to launch invoice and other credit-based payments across six markets in Europe, and WorldRemit raised $40 million in its third round of funding. 

Robo-AdvisorsMorgan Stanley and Broadridge Financial have entered the robo-advising space, while HSBC is planning on launching its robo-advisory service next year. Similarly, China Finance Online and CITIC Securities signed a strategic cooperation agreement where China Finance Online “will provide CITIC Securities' investment advisors with [the firm’s] proprietary cloud-based software products. Both parties will cooperate to carry out intelligent asset allocation research to enhance their wealth management capabilities.” Finally, proposed changes to the U.S. tax code could affect certain robo-advisors, particularly as it relates to tax-loss harvesting. Roughly 40 House Republican lawmakers sent a letter to congressional leaders urging lawmakers to remove the inclusion of the first-in-first-out (FIFO) provision from the Senate bill. According to the representatives, a switch to mandatory FIFO “could deter an average investor’s use of these platforms and significantly limit their access to more sophisticated wealth management advice. Millions of ordinary retail investors have access to these services today.”

Cryptocurrency: NiceHash—a bitcoin mining company based in Slovenia—announced a security breach which resulted in the theft of roughly 4,700 bitcoins ($70 million worth). Meanwhile, the launch of bitcoin futures over the weekend triggered two trading halts at the CBOE with price gains reaching 25 percent in opening hours, and futures rising over 18,000 in the first day of trading. Meanwhile, cryptocurrency exchanges continue to face challenges to their services as the result of increased traffic and high volatility.

Global Developments

UAE: Dubai’s Financial Services Authority signed a FinTech agreement with Hong Kong's Insurance Authority and the Hong Kong Monetary Authority (HKMA). “Under the terms of each agreement, the authorities will cooperate on information sharing and referrals of innovative businesses. The agreement with the HKMA extends to collaborating on joint innovation projects,” the press release states.

Hong Kong: Thomson Reuters has signed a memorandum of understanding with Hong Kong's Applied Science and Technology Research Institute (ASTRI) to allow banks and other financial services firms to use the HKMA-ASTRI Innovation Hub to accelerate FinTech innovation.

France: The French government has allowed the trading of unlisted securities using blockchain technology, allowing such securities to be traded instantly with no middleman present.

U.K.: London Mayor Sadiq Khan commissioned a study on the impact of Brexit on London after Prime Minister Theresa May struck a deal with the EU to advance Brexit talks. The analysis will focus on financial and technology sectors, among other sectors, with the analysis expected to be published in January. Meanwhile, the House of Lords European Union Committee published a report on Brexit analyzing the potential impact of the U.K. leaving the EU with or without an agreement.

HM Treasury published a document containing the strategy behind the future of the U.K.'s asset management industry. Chapter six of the report details the role FinTech could play in achieving said strategy and includes discussion on the role robo-advisors, portfolio management, blockchain, and cybersecurity can play in propelling the U.K. asset management industry into the 21st century. Separately, and included in the autumn budget, HM Treasury announced the Rent Recognition Challenge—a £2 million prize "to budding entrepreneurs who can develop an application that will enable Britain's 11 million renters to record and share their rent payment data, helping to improve their credit scores and their chances of getting a mortgage."

Bangladesh: The central bank is moving forward on expediting the penetration of digital currency in the country with the formation of an inter-operative platform comprising the central bank and other public-private stakeholders in June 2018.

Italy: The country's financial markets regulator has updated equity crowdfunding regulations to apply to all small and medium-sized enterprises (SMEs). SMEs of all sizes (136,000 in Italy) now have access to all equity crowdfunding platforms.

U.S.: The Federal Reserve announced Kenneth Montgomery as head of its payments security strategy task force. Montgomery is the first vice president and chief operating officer of the Federal Reserve Bank of Boston.

On the initial coin offering (ICO) front, Bart Chilton, a former commissioner with the Commodity Futures Trading Commission (CFTC), is backing the ICO of OilCoin, expected to be launched in January. OilCoin bills itself as "the world's first legally compliant cryptocurrency backed by oil." The press release states that Chilton "has been instrumental in the development of OilCoin as a digital currency which will comply with U.S. laws and regulations and be suitable for global institutional and retail users."

Meanwhile, the U.S. Securities and Exchange Commission (SEC) issued a cease-and-desist order on a California-based company, Munchee, which sold digital tokens to investors to raise capital for its blockchain-based book review service. In the order the SEC’s states that the white paper “referenced the DAO Report and stated that Munchee had done a ‘Howey analysis’ and that ‘as currently designed, the sale of MUN utility tokens does not pose a significant risk of implicating federal securities laws.’ The MUN White Paper, however, did not set forth any such analysis.” Also, “Munchee made public statements or endorsed other people’s public statements that touted the opportunity to profit. For example, on or about October 25, 2017, Munchee created a public posting on Facebook, linked to a third-party YouTube video, and wrote ‘199% GAINS on MUN token at ICO price! Sign up for PRE-SALE NOW!’”

In a follow-up statement from SEC Chairman Jay Clayton, which the CFTC commended:

“A key question for all ICO market participants: ‘Is the coin or token a security?’  As securities law practitioners know well, the answer depends on the facts. For example, a token that represents a participation interest in a book-of-the-month club may not implicate our securities laws, and may well be an efficient way for the club’s operators to fund the future acquisition of books and facilitate the distribution of those books to token holders. In contrast, many token offerings appear to have gone beyond this construct and are more analogous to interests in a yet-to-be-built publishing house with the authors, books and distribution networks all to come. It is especially troubling when the promoters of these offerings emphasize the secondary market trading potential of these tokens. Prospective purchasers are being sold on the potential for tokens to increase in value – with the ability to lock in those increases by reselling the tokens on a secondary market – or to otherwise profit from the tokens based on the efforts of others. These are key hallmarks of a security and a securities offering.”

Australia: The Australian Securities Exchange (ASX) announced its intention to replace the Clearing House Electronic Subregister System (CHESS) with distributed ledger technology developed by Digital Asset (DA). According to the press release, the decision “follows the successful build of enterprise-grade DLT software for core equity clearing and settlement functions, and the completion of extensive suitability testing by ASX and DA over the past two years." 

The Australian Senate passed legislation extending anti-money laundering and counter-terrorism financing requirements to digital currency exchanges. Exchanges will report to the Australian Transaction Reports and Analysis Centre.

Singapore: In late November, the Monetary Authority of Singapore (MAS) released its annual Financial Stability Review that focuses on FinTech, among other stability concerns/issues. Using previous studies, the report finds that while FinTechs may pose stability concerns, FinTechs can also be leveraged to achieve significant cost savings. MAS notes that the automation of certain banking functions or the use of artificial intelligence could yield a 30 percent reduction in costs. “The estimated cost savings represent 10 percent to 20 percent of Asian banks' operating income.”

Sweden: B-Hive and Stockholm FinTech signed a memorandum of understanding to collaborate on some FinTech-related issue areas. 

China: Chinese e-commerce giant announced collaboration with Plug and Play, where the company "will share technologies, including AI, cloud, and smart supply chain tech, with the program generally and work together to launch a new cohort that taps into its extensive presence in China,” according to an article in TechCrunch.

Canada: Folks, my apologies for not catching this earlier. The Ontario Securities Commission is seeking applications for membership on its FinTech Advisory Committee. The Committee will meet quarterly and will be chaired by Pat Chaukos, deputy director of the OSC LaunchPad. The Committee will also consist of up to 15 members.

South Korea: The National Tax Service is pushing forward on a plan to impose an income tax and transfer income tax on virtual currencies, according to Business Korea

Japan: The Financial Services Authority (FSA) is receiving a growing number of questions as they relate to virtual currencies. The FSA’s Counseling Office for Financial Services Users “received a total of 685 investor enquiries about virtual currencies in the quarter to September 30, 2017. This is more than 26 percent higher than in the quarter to June 30, 2017, when the FSA received a total of 543 such enquiries,” according to FinanceFeeds.