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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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Murphy Dan
Dan Murphy
Associate, FinTech Program, Center for Financial Markets
Capital Access and Europe and Finance and FinTech and U.S. Economy
Dan Murphy is an associate at the Milken Institute’s Center for Financial Markets. He focuses on FinTech and access to capital issues. Prior to joining the Institute, Murphy was a policy fellow at the Democratic Senatorial Campaign Committee.
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FinTech in Focus

By: Jackson Mueller and Dan Murphy
April 06, 2018
   
   

The Crowdfunding Paradox

As banks restricted their lending in the years following the financial crisis, innovative crowdfunding platforms seized the opportunity to fill the void. But how well does crowdfunding increase access to capital? According to a new report by the U.S. Small Business Administration (SBA), in the first year following the Securities and Exchange Commission’s (SEC’s) crowdfunding regulation taking effect, crowdfunding firms raise $30 million. These firms also employed an average of five people and tended to be relatively young, with 88 percent of them five years old or younger.

However, the report also found that 83 percent of crowdfunding issuers were male, and that over 60 percent of them were concentrated in five of the largest states. Indeed, 35 percent of crowdfunding issuers are located in California alone. The upshot is that while the report provides evidence that equity crowdfunding increases access to capital, it also provides evidence that there is room for improvement when it comes to, well, equity.

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 Source: U.S. Small Business Administration

FinTech in Capital Markets

The Boston Consulting Group is out with its 2018 white paper on FinTech in Capital Markets, which finds that equity investments in capital markets FinTech declined significantly in 2017. In fact, investment in capital markets FinTech was less than half of what it was in 2015 and 2016 and was at its lowest level since 2012. This slowdown was somewhat mitigated by an increase in interest by investment banks. Further, the average equity funding per round increased to $8 million in 2017 from $6 million in 2016, a sign that FinTech investments are moving towards later funding rounds.  

Equity Funding in Capital Markets FinTech Was down by 52% in 2017

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Source: Boston Consulting Group

[Hello FinTech in Focus readers! Last week’s edition, which was not sent over e-mail, can be found here. Headlines covering the Citi GPS FinTech report, growing tech competition between the U.S. and China, among other headlines and global FinTech developments]

Some Headlines

Crypto/Blockchain: Coinbase is one step closer to launching a crypto index fund this week. This week, a month after Coinbase announced the fund, it filed a Form D 506c with the SEC, which will allow accredited investors to invest in the fund. In other exchange news, Monex Group is thinking about buying Coincheck, which was hit by a heist of more than $530 million in early 2018.

Elsewhere, Intel filed a patent for a bitcoin mining accelerator and Ripple donated $29 million worth of XRP to public schools in the U.S. According to Ripple, this is the largest-ever cryptocurrency gift to a single charity. 

Payments: The competition for the world’s largest mobile payments market continues to heat up, with both Chinese firms and foreign entrants trying to get a piece of the Chinese market. Up until quite recently, mobile payments in China were dominated by Alipay, Alibaba, and Ant Financial’s payments products. However, Alipay’s leading position has been increasingly challenged by Tencent’s WeChat Pay, among others. The battle has begun to involve Western firms such as Walmart, who jumped on the WeChat Pay bandwagon last week.

In other payments news, HSBC added PayPal as a global disbursement option, Microsoft enabled P2P payments on Kaizala in India, and French retailer Carrefour launched its Carrefour Pay app.

The Rise of WeChat Pay: Market Share (%)

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Source: Financial Times, iResearch, CGAP

RoboadvisingNomura Asset Management acquired a majority stake in 8 Securities, a roboadvisor based in Hong Kong. 

AltFiThere are now 38 FINRA-approved Reg CF crowdfunding portals, according to Crowdfund Insider. Lawrence Summers has resigned from LendingClub’s Board of Directors and will be replaced by Susan Athey from Stanford. Finally, according to U.S. small business lender Kabbage, mobile lending has increased among small business borrowers, with 17 percent of small business loans from Kabbage being accessed through mobile phones.

InsurTech: Oscar Health announced a $165 million funding round this week, led by Brian Singerman and Founders Fund. The funding will be used to expand into new markets and form partnerships with the Cleveland Clinic, Humana, and AXA according to Business Insider.

Global Developments

Africa 

Kenya: Land sales and transfers are going digital, according to a recent report. Kenya's Land Ministry rolled out online land information management systems across the country in an effort to improve services, increase transparency, and reduce fraud.

Nigeria: The country's central bank, commercial banks, licensed mobile money operators, and super agents "reached an agreement to fund the expansion of a shared agent network to deepen financial inclusion in Nigeria," according to The Daily Trust. The agreement "entails an aggressive rollout of 500,000-agent network within two years" to bring roughly 50 million Nigerians into the formal financial services system.

Asia

China: The People's Bank of China recently announced that cryptocurrencies will be one of its top priorities this year, with stricter measures set to be enforced on unofficial virtual currencies. Meanwhile, peer-to-peer lenders in China are facing a second regulatory crackdown as a new licensing regime takes effect, even as questions abound about how to comply. Despite heightened regulatory risks in the country, The Financial Times points out how the growth of Chinese-based FinTech firms has spawned listings on international stock exchanges as the country continues to experience significant growth in its FinTech market.

India: The Unique Identification Authority of India (UIDAI) has reportedly restored telecom provider Bharti Airtel's "authorization to conduct Aadhaar-based verification of its mobile subscribers subject to specific conditions," according to BGR. Also, digital wallets are apparently falling on hard times, with the digital money space losing nearly half of its user base despite efforts by Paytm, Amazon Pay, and others to draw in users for Know-Your-Customer authentication. The drop in usage has led digital money providers to expand into other financial services verticals.

Lastly, Dr. Anupam Saraph penned an op-ed in The Sunday Guardian on how the UIDAI database is defective in targeting subsidies and benefits to those most in need in India. According to Saraph: "The UIDAI also has no idea about the documents of proof of identity or address used to issue the Aadhaar number. It is unable to say how many of these documents were used multiple times to issue an Aadhaar number. This not only means that the Aadhaar database does not have unique records, but also that it has no advantage over existing databases. The Aadhaar database has no basis to claim that it is free of ghosts and duplicates or that it can rid other databases of ghosts or duplicates. In order to ensure that the demographic or biometric information associated with the Aadhaar and used for authentication is genuine, it needs to be certified by the issuer. When asked which officers are assigned the role to certify the demographic and biometric information associated with the Aadhar number, the UIDAI replied that no such role exists with the UIDAI. The UIDAI further indicated that the database has never been verified or audited. It is evident that there is no basis to claim that the use of Aadhaar numbers is able to target subsidies and benefits to unique individuals and eliminate leakages to duplicates or ghosts."

Japan: Two more cryptocurrency exchanges—Mr. Exchange and Tokyo GateWay—will close operations in the country, following the closure of three other exchanges—Raimu, bitExpress, and Bit Station. 

Philippines: The country’s central bank, Bangko Sentral ng Pilipinas (BSP) is reportedly adopting two RegTech solutions this year. The solutions include "the Application Programming Interface (API) to connect financial service providers to the BSP and an automated complaint-handling system or 'chatbot' that would allow financial consumers to submit their concerns to the BSP via SMS, Viber and web portal," according to BSP Deputy Governor Chuchi Fonacier, as reported in The Philippine Star. Fonacier also noted that the central bank has partnered with RegTech for Regulators Accelerator (R2A).

Singapore: The Monetary Authority of Singapore (MAS) is working with key industry stakeholders (PrimePartners, DBS, Allianz, Standard Chartered Bank, UOB, OCBC Bank, and others) "to develop a guide to promote the responsible and ethical use of artificial intelligence (AI) and data analytics by financial institutions." According to the press release, "MAS will be engaging the industry to obtain views and feedback on the proposed guide in Q2 2018. MAS is also working closely with the Infocomm Media Development Authority to co-ordinate a broader understanding of AI governance across sectors." 

And speaking of Infocomm Media Development Authority, the authority launched its first Blockchain Challenge "to accelerate the development and adoption of innovative new solutions using blockchain technologies beyond FinTech."

Thailand: Thailand's Ministry of Finance has finalized a tax framework covering all cryptocurrency trading and investing practices. According to Thai Finance Minister Apisak Tantivorawong, cryptocurrency trading will be subject to a seven percent VAT and returns on investments will be subject to a 15 percent capital gains tax. Separately, Thailand’s four largest banks have decided to waive digital transaction fees as competition heats up with alternative payments providers. 

Australia

Stuart Stoyan, the CEO and founder of marketplace lender MoneyPlace and chairman of FinTech Australia, penned an op-ed in The Australian regarding Australian Securities and Investments Commission (ASIC) commissioner John Price's comments on innovation and regulatory sandboxes. According to Stoyan, "while we have a clear top-down prioritization from the country’s leadership that Australian businesses need to innovate, what is not clear is how the government agencies are implementing this. Along with poor sandbox take-up, anecdotally many start-ups are having issues with accessing the research and development tax incentive — which was meant to be a boon for the industry. This is partially due to an influx of inappropriate applications for R&D tax incentives, combined with poor advice proliferating within the sector, but it is becoming clear this is also due to AusIndustry’s apparent definition of “innovation” in a technology context.”

Lastly, one of Australia’s Big Four banks, Commonwealth Bank, submitted additional concerns to the federal Treasury as they relate to Australia's open banking efforts. In its submission, the CBA said the open banking regime "could result in customer's financial data falling into the wrong hands," according to The Sydney Morning Herald. "The current privacy concerns surrounding Facebook's use of customer data highlights the need for increased customer control," the submission stated.

Europe

European Union: The European Central Bank (ECB) published its response to the public consultation on the Guide to assessments of license applications (available here) and the Guide to assessments of FinTech credit institution license applications (available here). Overall, the ECB received 16 submissions to the public consultation. With the two guides, the ECB “aims, without being exhaustive, to enhance transparency regarding the assessment criteria and processes for the establishment of a credit institution within the Single Supervisory Mechanism (SSM) for all market participants and to ensure that FinTech banks are held to the same standards as other banks.” As to the FinTech guide in particular, the ECB stated that there was “also strong support for the ECB’s aim of harmonization by upholding the same supervisory standards for all credit institutions and ensuring a technology neutral approach to license application assessments.” Nevertheless, respondents were concerned about the need for two guides stating that the guides run counter to the stated aim of creating a level playing field for all market participants. The ECB stated that there is a need for both guides by stating that the FinTech guide "includes specific considerations relevant to the supervisory assessment of banks with FinTech business models.” Furthermore, the guide “is not only aimed at new FinTech banks, but is also aimed at new specialized subsidiaries of existing credit institutions (both significant and less significant institutions). In view of the increasing number of license applications originating from this sector, this will enable the ECB and the [national competent authorities] to ensure that risks specific to FinTech banks are considered appropriately and proportionately.”

France: President Emmanuel Macron was interviewed by Wired on the country's artificial intelligence (AI) strategy moving forward. According to Macron, "I think artificial intelligence will disrupt all the different business models and it’s the next disruption to come. So I want to be part of it. Otherwise I will just be subjected to this disruption without creating jobs in this country." That said, AI "will raise a lot of issues in ethics, in politics, it will question our democracy and our collective preferences.... [T]he day you start dealing with privacy issues, the day you open this data and unveil personal information, you open a Pandora’s Box, with potential use cases that will not be increasing the common good and improving the way to treat you." He added, "If we want to defend our way to deal with privacy, our collective preference for individual freedom versus technological progress, integrity of human beings and human DNA, if you want to manage your own choice of society, your choice of civilization, you have to be able to be an acting part of this AI revolution. That’s the condition of having a say in designing and defining the rules of AI. That is one of the main reasons why I want to be part of this revolution and even to be one of its leaders. I want to frame the discussion at a global scale."

Netherlands: The country's central bank recently voiced its opinion about the Ripple network and potential for cost savings to banks that use the network. The "expanding interest" that banks are showing in the Ripple network "means its use could grow rapidly as soon as possible. It is therefore essential to monitor this development carefully and to be included in any levels that banks might need." 

U.K.: U.K. Finance's Director of Commercial Finance, Mike Conroy, recently announced that the trade association "has commissioned an independent review of the dispute and [Alternative Dispute Resolution] landscape.... This independent review will consist of an evidence-based, comprehensive analysis of the scale and complexity of banking complaints from SMEs and will recommend effective, practical solutions that will deliver fair outcomes both for SMEs and for the industry."

Meanwhile, the SME Alliance—representing thousands of small business across the U.K.—told MPs on the Commons Treasury select committee that big banks are reluctant to lend and their large legal teams are able to delay small businesses' claims and complaints beyond the six-year statute of limitations, according to The Financial Times

Lastly, the Bank of England "is undertaking a Proof of Concept (PoC) to understand how a renewed [Real Time Gross Settlement] service could be capable of supporting settlement in systems operating on innovative payment technologies, such as those built on [Distributed Ledger Technology]." Findings from the PoC will be published later this year, according to the announcement.

Middle East

Bahrain: The country's Economic Development Board (EDB) is looking to collaborate more with Malaysia's financial sector. According to EDB's financial services Executive Director David Parker, as reported by Malaysian Digest, “We can work on our strengths because Malaysia and Bahrain both have relatively newly implemented policies when it comes to fintech. I get the sense that Malaysia and Bahrain are at a similar stage as both countries have launched sandboxes, both have innovation-friendly regulators, (and) an Islamic fintech agenda and set to catch up with the likes of London or Singapore. Moving forward, we would love to do this in partnership with Malaysia in getting to become the next global fintech hub.”

Saudi Arabia: The Ministry of Transport and Communications launched the "digital transformation for SMEs programme" designed to help small businesses adopt technology seamlessly. Roughly 5,000 SMEs are expected to benefit from the scheme over the next two years.

North America 

Canada: The Ontario Securities Commission (OSC) outlined key areas of focus for 2018-2019. According to the Draft Statement of Priorities, the OSC will continue to support FinTech innovations through the OSC's regulatory sandbox, also known as LaunchPad, integrate learnings from working with innovative businesses and identify opportunities to modernize regulation, continue to identify potential regulatory gaps from cryptocurrency, initial coin offerings, and blockchain technology. Among the various opportunities to reduce regulatory burden, the OSC will also seek to identify opportunities to use technology and data to reduce regulatory burden.

U.S.: The Federal Reserve announced that it will study payments fraud and security vulnerabilities as part of its ongoing effort to improve and support payment security throughout the industry. The Boston Consulting Group will conduct the study which will "systematically and objectively measure payment fraud and identify and provide insight on payment security vulnerabilities." 

Meanwhile, in prepared remarks on the Federal Reserve's financial stability agenda, Governor Lael Brainard stated that the Fed "is monitoring the extreme volatility evidence by some cryptocurrencies." However, "it is less clear how the valuations of cryptocurrencies currently could pose a threat to financial stability. For instance, it is hard to see evidence of substantial leverage used in the purchase of the cryptocurrencies, or a material degree of use in payments, although our assessment of these markets is limited by their opacity. Nonetheless, we will continue to study them,” she said.

In separate remarks, Randal Quarles, vice chairman for supervision at the Federal Reserve, spoke on the roles of consumer protection and small business access to credit in financial inclusion. According to Quarles, "The use of fintech to expand access to credit has great promise and also associated risks. For example, online origination platforms and more sophisticated algorithms may enable credit to be underwritten and delivered in a manner that is still prudent but with greater efficiency, convenience, and lower processing costs. And as regulators, we do not want to unnecessarily restrict innovations that can benefit consumers and small businesses. At the same time, our interest is in ensuring that banks understand and manage their risks when introducing new technologies or partnering with fintech companies, and that consumers and small businesses remain protected.”

As to modernizing the Community Reinvestment Act (CRA), Quarles stated that “the arrival of new financial technologies, along with significant industry consolidation and other structural changes, has changed the way that financial services are delivered to consumers and the ways in which banks lend in communities. We continue to study these shifts, and share the common goal of improving the current supervisory and regulatory framework for CRA to further the statute's core objective of promoting access to credit and financial inclusion.”