FinTech in Focus
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Applying the term beyond the TV show “How I Met Your Mother” (my wife made me watch it, I swear!), there were two legal developments over the past week that are of interest. First, the U.S. Supreme Court will consider whether to accept the Madden v. Midland Funding case for review on Friday, March 18. If you have read any of the responses to the U.S. Treasury Department’s request for information on the online marketplace lending industry, recent news regarding how this case is already affecting the partnership between Lending Club and Utah-based WebBank, for instance, or the plethora of blog posts and op-eds my colleague has written on the issue, then you’ll understand that this case is a big deal to a number of online marketplace lenders and to the broader securitization markets in general.
Second, the U.S. Consumer Financial Protection Bureau issued its first data security related enforcement action against Iowa-based payment platform Dwolla due to “deceptive acts and practices relating to false representations regarding [Dwolla’s] data-security practices…” According to the consent order, Dwolla, which neither admitted to nor denied any of the findings, will, among other required measures, establish and maintain a comprehensive data security plan “designed to protect the confidentiality” of user information, designate a “qualified person to coordinate and be accountable for the data-security program,” and obtain an annual audit of the firm’s data security procedures and standards via an independent third-party.
Digital Currency, Blockchain Developments
The bitcoin trading network reached max capacity last week, resulting in massive delays in bitcoin transactions. Meanwhile, the bitcoin block size debate continues to rage within the bitcoin community. Separately, Japan’s cabinet passed legislation last week to spur FinTech development, including recognizing virtual currencies as “asset-like values” and placing exchanges under the supervision of Japan’s Financial Services Agency. The legislative efforts come roughly two years after the collapse of Mt. Gox—the largest virtual currency exchange at that time. Meanwhile, R3 CEV successfully tested five distinct blockchain technologies in parallel—the first such test of its kind. The test represented the trading of fixed income assets between R3 CEV members connected to private distributed ledger technologies built by Chain, Eris Industries, Ethereum, IBM and Intel.
In related news, JPMorgan Chase unveiled its 'Juno' blockchain project; investment guru Sallie Krawcheck joined the board of Digital Asset Holdings; Russia’s Central Bank announced that it has developed a working group to study blockchain technology; the Toronto Stock Exchange has appointed a chief digital officer to explore blockchain technology; and both Visa Research and Thomson Reuters are in the hunt for blockchain developers.
Google is now testing its Handsfree payments app at select stores in the San Francisco Bay Area, allowing users to simply say “I want to pay with Google” without ever having to tap their phone or slide a card. Instead, at the point of sale the app uses a combination of bluetooth, wifi, and photo sensors that match a consumer’s face to the profile picture created in the app. Separately, Samsung Pay, Apple Pay, and Android Pay continue to sign up millions of users to their respective mobile payment applications, yet information on active users remains a mystery. That said, mobile payments make up only three percent of all transactions in the U.S., even as Apple Pay tops the list of preferred mobile payment services among retailers. Meanwhile, competitors are gunning for Venmo and PayPal. Square Cash rolled out a feature last week that allows users to maintain a cash balance within the application—a feature that could entice small business merchants to the platform. At least seven U.S. banks, including JPMorgan Chase and Wells Fargo, are looking into developing an interoperable money transfer service where users can send money for free and in real-time within the network.
Speaking of JPMorgan Chase, Bloomberg’s John Micklethwait held an interesting conversation with JPMorgan Chase CEO Jamie Dimon on the future of finance. The interview marks one of the first times since the CEO, in an annual letter to shareholders, remarked on the growing threat to traditional banking posed by FinTech firms (JPMorgan Chase Annual Report 2014 (pp. 29)). Apart from stating that FinTech firms are “very good” at reducing pain points, Dimon also remarked that the biggest risk to incumbent firms is in the area of payments. “We like our hand, but honestly, who owns the future? Just because you have a good hand today doesn’t mean it’s good tomorrow,” he said.
Reports to Bust Your Printer
A few reports emerged late last week that provide an interesting perspective on the future of banking and capital markets and the current state of small business financing. In a report from the Deloitte Center for Financial Services, the research finds that traditional firms “face the prospect of losing control” as digital innovations will change business operating models, branding, payments, trading and lending. The report warns about operational risks to incumbent firms as a result of increased partnerships and reliance on third-parties, along with an evolving financial services landscape. The report also states that while blockchain technology is “the innovation that is possibly the most disruptive of all,” it adds that incumbent payment firms (processors and issuers) “should remain dominant even though the threat of disintermediation is real.” Deloitte predicts that moving from the current trade settlement cycle of T+3 (trade date plus three days to settle securities) to T+0 (real/near-real time securities settlement) “will only happen gradually, and certainly not within the next 10 years.”
Seven Federal Reserve banks released the “2015 Small Business Credit Survey,” which focuses on small business financing for employer firms with annual revenue between $100,000 and $10 million. Some of the findings from the report closely parallel findings from a prior study co-authored by the Milken Institute, in that traditional bank lending continues to be the preferred source of financing for U.S. small businesses. Similarly, a borrower’s existing relationship with a lender as well as concerns about cost were the two highest factors behind financing decisions. The report also includes analysis of online lenders (nonbank online lenders, including alternative and marketplace lenders). It discusses online lending as being a “noteworthy source” for employer firms with less than $1 million in revenues, despite the low borrower satisfaction score with online lenders due, in part, to high interest rates and unfavorable repayment terms.
A couple of other interesting findings in the appendix: 28 percent of employer firms operating for two years or less, and 35 percent of employer firms with annual revenue less than $100,000, indicated that the primary reason for not applying for financing was due to their feeling discouraged. For firms operating for two years or less and those with $100,000 or less in annual revenue, less than 40 percent of employer firms said their existing relationship with a lender was a factor behind their decision to finance.
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