FinTech in Focus
Global Financial Inclusion
The World Bank is out with its 2017 Global Financial Inclusion and Consumer Protection Survey, which provides a global benchmark for financial inclusion and consumer protection in 141 economies. The report finds that while there has been significant progress in some areas, others have lagged behind, with most adults continuing to be excluded from the financial system in 65 economies. One of the highlights of the report is the growing importance of Non-Bank E-Money Issuers (NBEIs). Nearly 60 percent of respondents had a regulatory framework for NBEIs, with East Asia and the Pacific and Sub-Saharan Africa having an even greater percentage. Of the respondents that had NBEIs, 63 percent reported that some of their NBEIs are run by mobile network operators.
Percent of Responding Jurisdictions That Have a Legal/Regulatory Framework for NBEIs in Place, by Income and Regional Group
Source: World Bank
Small Business Lending
Several interesting reports are out covering access to capital for small businesses. Starting in the U.S., Biz2Credit’s Small Business Lending Index found that approval rates for small business loans from large banks hit a new high of 25.3 percent in January 2018. Small banks approved 49.1 percent of funding requests received in January, up slightly from December 2017. Meanwhile, loan approval rates among alternative lenders dropped a tenth of a percent to 56.6 percent, continuing a slow two-year decline in approval rates. According to the report, approvals “have dipped slowly each month for almost two years, except for a small uptick in November 2017.”
Meanwhile, the British Business Bank’s Small Business Finance Markets Report for 2017/2018 showed that while bank lending to small businesses in the U.K. remained flat, the alternative finance sector continued to grow in 2017. According to the report, equity financing for small businesses demonstrated the most impressive growth, while peer-to-peer lending and asset-based financing also demonstrated significant growth.
Finally, AltFi lender C2FO released its Working Capital Outlook Survey, which covers more than 2,600 small businesses in the U.S., U.K., Germany, Italy, France, China, and India. The report found that small businesses continue to face uncertainty despite improving economic conditions and that their need for working capital is only rising.
Winter Olympics: What Happened America?
Those of you who have received this newsletter since the beginning know that I am very passionate about sports, particularly events where America dominates against international competition. A couple of quick thoughts based on what I’ve seen from the Winter Olympics so far:
1. Halfpipe freestyle skier David Wise is our next president, without a doubt. You might say, ‘why not Shaun White?’ and, as a skier, I would say because nobody likes Zambonis on the ski slopes.
2. We had to wait until Thursday to finally find out that Team USA actually wanted to medal.
3. Team USA FINALLY beat Team Canada in women’s ice hockey. Thrilling finish, despite the fact that the game ended at 3:00 a.m. on the East Coast. The four-year celebration begins at my house this Saturday.
4. Biathlon is the best Olympic sport, without question.
5. Is anyone actually using tap and pay with Visa at this event? If not, please direct inquiries to Morgan Freeman.
6. It seems like 95 percent of Norway’s population has received a medal at PyeongChang.
7. I would hire any of the curling teams to sweep my kitchen floor after pasta night.
8. Hungarian skier Elizabeth Swaney was the BEST athlete at the Winter Games.
And now, back to FinTech.
[Author’s note: Last week’s FinTech in Focus, which we did not send out over e-mail, can be accessed here. Coverage includes FinTech investment trends in 2017, FinTech developments in India and Australia, financial inclusion in China, and the rise of RegTech.]
According to the Resolution Foundation, we millennials have plenty of reason to complain. The Foundation released a report this week showing that millennials in their early 30s have household incomes 4 percent lower than Generation X did at the same age. The effect was particularly pronounced in Spain, where Generation X was over 60 percent better off than the baby boomers, but millennials were 30 percent worse off than Generation X.
Source: Resolution Foundation
Blockchain: Last week, Microsoft announced that it would use blockchain technology to create decentralized digital identities. The company plans on testing the idea through the already established Microsoft Authenticator app. Elsewhere, Kenyan firms are exploring the technology’s potential to solve land ownership disputes. Perhaps most notable, however, is blockchain for dating. Why didn’t we think of that?
Cryptocurrency: The big news in crypto this week was that Coinbase, one of the largest crypto exchanges in the U.S., had double-charged thousands of its customers, apparently leaving some of them penniless. Apparently, however, Coinbase was not to blame for the duplicate charges. A joint statement from Visa and Worldpay said that Coinbase was not at fault and that they were working to reverse the duplicate transactions. There seems to be a lot of finger pointing going on here, however, so what exactly happened and who is primarily at fault remains unclear.
Payments: Zelle is off to a bit of a rocky start, as fraudsters have taken to using the new platform’s “safe” image to lure the overly trusting into sending them money. Fraudsters purport to sell something on a site like Craigslist, ask the buyer to pay them via Zelle, and then just disappear. Unlike PayPal, Zelle does not offer fraud protection. A Zelle spokesperson said, “Consumers should not use Zelle for transacting with people they do not know and/or aren’t sure they will get what they paid for – for example, items bought from an online bidding or sales site.” Lastly, a month after Stripe announced that they would no longer be moving forward with plans to support payments in bitcoin, Coinbase has announced the launch of Coinbase Commerce for online merchants.
Challenger Banks and Open Banking: The Financial Services Information Sharing and Analysis Center released their new data sharing recommendations last week, in what could be a first small step toward adopting common data sharing guidelines for banks and third-party service providers. This is a major hurdle that banks and third parties will eventually need to overcome, should open banking ever be more attainable in the U.S.
Challenger banks continue to make headlines as well this week, with Azlo announcing that they would be launching in the U.S. Azlo is backed by BBVA, and specifically targets workers in the gig economy. Tandem, another challenger bank, announced this week that it is launching a credit card for consumers in the U.K.
Alternative Finance: Goldman Sachs continues to gain confidence in Marcus, its online lending platform. Lloyd Blankfein told a conference last week that “Marcus is evolving from a single offering to a multi-product business that I believe will move the needle for the firm over the coming years.” In his speech, he also said that Marcus has access to over $17 billion in deposits. Elsewhere, OnDeck reported a profitable Q4 in 2017 last week, much to the relief of investors.
Bank for International Settlements: The Bank for International Settlements (BIS) released a report assessing how tech-driven innovations in financial services may affect banking and the activities of supervisors in the near to medium term. The BIS noted that the fast pace of change in FinTech “makes assessing the potential impact on banks and their business models challenging.” For banks, they “will find it increasingly difficult to maintain their current operating models, given technological change and customer expectations. Industry experts opine that the future of banking will increasingly involve a battle for the customer relationship. To what extent incumbent banks or new FinTech entrants will own the customer relationship varies across each scenario. However, the current position of incumbent banks will be challenged in almost every scenario.” The BIS report further stated that given the uncertainty of these factors, the Basel Committee on Banking Supervision (BCBS) “recognizes that it should first contribute to a common understanding of risks and opportunities associated with FinTech in the banking sector by describing observed practices before engaging in the determination of the need for any defined requirements or technical recommendations. The BCBS also acknowledged “that FinTech-related issues cut across various sectors with jurisdiction-specific institutional and supervisory arrangements that remain outside the scope of its bank-specific mandate.”
European Union: The European Securities and Markets Authority (ESMA), the European Banking Authority (EBA), and the European Insurance and Occupational Pensions Authority (EIOPA) released a joint statement expressing concern over the number of consumers buying virtual currencies that may be unaware of the risks.
Croatia: The Blockchain and Cryptocurrency Association (UBIK)–a self-regulatory organization focused on educating the public and developing regulation in the country–officially began operations last week. At this point, the UBIK has more than 70 members. The development comes a few days after Coinbase, eToro, CryptoCompare, CEX.IO, BlockEx, CoinShares, and CommerceBlock formed CryptoUK–the first self-regulatory organization designed to regulate the U.K. crypto industry. A few days after the launch of UBIK, sixteen of Japan’s cryptocurrency exchanges announced plans to form a self-regulating body. The effort comes in response to last month’s theft of $530 million from Coincheck, a cryptocurrency exchange in Tokyo.
Germany: Was Bloomberg wrong? In a prior FinTech in Focus, we referred to a Bloomberg article which discussed how cash was still king in Germany. However, according to a Bundesbank survey of 2,000 people as reported by Reuters, cash “accounted for 47.6 percent of German transactions by volume last year, down from 53.2 percent three years earlier and below the half mark for the first time since polling started in 2008.” Germans are steadily increasing their use of cards as a form of payment, with cards grabbing a market share of 39 percent in 2017 compared to 33 percent in 2014. In recent remarks from Jens Weidmann, president of the Deutsche Bundesbank, "approximately three out of every four payments are still settled in cash at the point of sale" in Germany. In those remarks, Weidmann also downplayed the introduction of digital central bank money with the aim of abolishing cash.
Sweden: Speaking of going cashless, Sweden is apparently having trouble keeping up with the digitization of payments. In fact, some in parliament think they’ve gone too far, according to a recent Bloomberg article. Mats Dillen, who heads the parliamentary review looking into Sweden’s efforts to replace cash, stated that if the disappearance of cash happens too fast, “it can be difficult to maintain the infrastructure.” The review is expected to be published this summer.
Switzerland: The Swiss Financial Market Supervisory Authority (FINMA) published guidelines covering initial coin offerings (ICOs). While recognizing the possibility of hybrid forms of tokens, FINMA has classified ICOs in three ways: Payment ICOs, Utility ICOs, and Asset ICOs.
According to FINMA CEO Mark Branson: “Our balanced approach to handling ICO projects and enquiries allows legitimate innovators to navigate the regulatory landscape and so launch their projects in a way consistent with our laws protecting investors and the integrity of the financial system.”
U.K.: The Financial Conduct Authority (FCA) has been busy over the past week with the announcement of a call for input on the use of technology to achieve smarter regulatory reporting, the release of a new report on the supervision of algorithmic trading in wholesale markets, and the signing of a FinTech cooperation agreement with the U.S. Commodity Futures Trading Commission that includes information sharing on FinTech market trends and developments, referrals of FinTech companies interested in entering the others' market, and the sharing of information and insight “derived from each authority's regulatory sandbox, proof of concept, or innovation competitions.” The call for input looks at how RegTech solutions can be applied to re-shape current regulatory processes and systems, and the FCA is expected to publish its findings this summer. Regarding the algorithmic trading report, the FCA is "encouraged that firms have taken steps to reduce risks inherent to algorithmic trading." That said, further improvement is needed. Specifically, the lack of robust and comprehensive governance frameworks, the lack of a suitable process to identify algorithmic trading across a firm’s business, lack of appropriate documentation to demonstrate suitable development and testing procedures are maintained, and the additional work on identifying and reducing "potential conduct risks created by their algorithmic trading strategies."
Canada: In late January, the Canadian Securities Agency's (CSA) regulatory sandbox authorized three digital currency investment fund managers. In 2017, the CSA only granted four such authorizations.
U.S.: At the state level, Arizona Governor Douglas A. Ducey appointed Keith Schraad to serve as Interim Director of the Arizona Department of Insurance. Schraad is an "InsurTech veteran" having previously worked for Online Insurance Corporation. Meanwhile, lawmakers in Nebraska are considering four separate bills focused on cryptocurrencies and blockchain. According to State Senator Carol Blood, "We want to have it in state statute that we embrace this technology. We can start a boom here in Nebraska without a tax credit, without tax-increment financing, without a grant."
Meanwhile, in the U.S. Congress, lawmakers are considering new cryptocurrency rules, with additional hearings expected in the coming weeks. Similarly, U.S. Department of the Treasury Under Secretary Sigal Mandelker gave prepared remarks at a Securities Industry and Financial Markets Association event where she stated that Treasury is encouraging its international partners to strengthen their virtual currency frameworks. “The lack of AML/CFT regulation of virtual currency providers worldwide greatly exacerbates virtual currency’s illicit financing risks. Currently, we are one of the only major countries in the world, along with Japan and Australia, that regulate these activities for AML/CFT purposes. But we need many more countries to follow suit, and have made this a priority in our international outreach, including through the Financial Action Task Force.”
China: The Lunar New Year brings with it a flurry of red envelopes. According to Caixin Global, Tencent gave out nearly 1.8 billion red envelopes worth a total of 200 million yuan to 221 million users through its QQ messaging platform. Alipay users sent 500 million yuan through the payments app, up from 200 million yuan last year.
Thailand: The Central Bank has banned banks from involvement in cryptocurrency transactions. In addition, banks are also prohibited from allowing clients to use credit cards to buy cryptocurrency.
Israel: According to NewsBTC, the Israeli Tax Authority has issued a circular outlining its position on cryptocurrencies. The circular discusses whether value added tax and/or capital gains tax treatment applies.
Saudi Arabia: Ripple has signed an agreement with the Saudi Arabian Monetary Authority (SAMA) to support Banks in the Kingdom of Saudi Arabia (KSA) to explore Ripple's technology. The pilot program "will allow participating KSA banks to use xCurrent for cross-border payment payments. SAMA will support KSA banks with program management and training." According to a recent report by Moody's Investor Services, as cited in a CPI Financial article, a successful pilot that leads to integration of distributed ledger technology into Saudi banks' existing payment infrastructures result in a 10 percent reduction "in the cost of completing and managing a cross-border transaction," resulting in savings between $200 million and $400 million annually.
UAE: The Dubai Chamber of Commerce released a report titled, “Latin America's Emerging Sectors: A Closer Look at FinTech and Renewable Energy." According to the press release, the study “identified a lack of transparency as an area of challenge facing the financial services sector, and noted that emerging FinTech firms are now disrupting the status quo and offering digital services, often with no associated fees. Providing investors with better information captured through their digital platforms is essential, the report stated, identifying Mexico, Brazil and Chile as the most promising markets for FinTech in the LAC region.”
Meanwhile, First Abu Dhabi Bank–the UAE's largest bank–launched 'payit'–the country's first fully-featured digital wallet, according to CPI Financial. Lastly, the Dubai Financial Services Authority (DFSA) has issued an asset management license to Middle East Venture Partners (MEVP), allowing the firm with $220 million in assets under management to operate within the venture capital regulatory framework announced by the UAE last year.
South Africa: The South African Reserve Bank (SARB) has established a FinTech Program "to strategically assess the emergence of FinTech in a structured and organized manner, and to consider its regulatory implications." The main goal of the program "is to track and analyze FinTech developments and to assist policymakers in formulating frameworks in response to these emerging technologies." The program's three primary objectives are: reviewing SARB's position on cryptocurrencies; investigate and decide on the applicability for innovation facilitators for the SARB, including the formation of innovation hubs, regulatory sandboxes, and accelerators; and to launch Project Khokha, which will experiment with digital ledger technologies.
Tanzania: The Bank of Tanzania Monetary Policy Statement Mid-Year Review 2017/18 finds that interoperability “between the major mobile payment services providers has continued to contribute to substantial increase in transactions across network operators.” In the first half of 2017/2018, “44.8 million transactions valued at TZS 1,905.2 billion were processed, representing 123.8 percent and 92.7 percent increase in volume and value,” compared to the prior year. The number of active accounts of mobile financial services grew to 19.3 million at the end of December 2017, up from 17 million a year earlier. The news comes exactly one year after Tanzania became the first country in the world to achieve full interoperability among its mobile network operators. The Consultative Group to Assist the Poor (CGAP) also produced a great infographic on the difference between Kenya and Tanzania in regards to the number of mobile money providers.