FinTech in Focus

April 19, 2016

U.S. Venture Capital Fundraising Best in Nearly 10 Years; Seed Accelerators Ranked

U.S.-based venture capital firms raised $12 billion in the first quarter, the most since the second quarter of 2006, according to the National Venture Capital Association. Investments by Founders Fund, Norwest Venture Partners, Accel Partners and Lightspeed Venture Partners made up 43 percent of the new capital commitments. Meanwhile, global VC funding fell by more than $2 billion year over year, with firms raising $25.5 billion in the first-quarter 2016.

Early-stage investment activity in the U.S. has largely shifted away from well-known startup hubs to other locales. The largest declines based on deal volume were recorded in the San Francisco Bay Area, Austin, Seattle, New York and Salt Lake City. The top five winners based on deal volume: Boston, San Diego, Dallas, Detroit and Portland. And speaking of startup hubs, results from the fourth annual Seed Accelerator Rankings Project identified Alchemist, 500 Startups, Amplify LA, Angelpad, Chicago New Venture Challenge, MuckerLab, Techstarts and Y Combinator as the “platinum tier” of top U.S. accelerator programs.

Regulatory View & Parties

Regulators appeared at a number of FinTech-related events over the past week. At the Innovate Finance Global Summit, Harriet Baldwin, the UK’s economic secretary to the Treasury, and Christopher Woolard, director of strategy and competition at the Financial Conduct Authority, each detailed initiatives to support the UK FinTech industry and the government’s regulatory “sandbox” initiative which will launch on May 9. At LendIt USA 2016, John Williams, president and CEO of the Federal Reserve Bank of San Francisco, said that the Fed is looking at FinTech’s potential as well as the risks associated with new innovations. “The laws of innovation,” he said, “often mirror the laws of physics: For every great stride, there is an equal and opposite risk.” And Jeffrey Langer, assistant director for installment lending and collections markets at the U.S. Consumer Financial Protection Bureau, notedthat it is “unclear whether marketplace lenders have adequate loan servicing infrastructure or the ability to scale infrastructure quickly and effectively in the event of [an economic] downturn.” Separately, Federal Reserve Governor Lael Brainard, speaking at an Institute of International Finance Blockchain Roundtable, remarked that “a major threshold question for the adoption of distributed-ledger technology … is whether the advantages outweigh the costs of replacing legacy systems.” At a separate event hosted by the Cato Institute, U.S. Commodity Futures Trading Commissioner Christopher Giancarlo stated that the recent successful distributed-ledger technology test covering credit default swaps “proves that there is merit to the potential of distributed ledger technology (DLT),” and suggested that regulators adopt a “do-no-harm” approach. The Federal Deposit Insurance Corp. and three state regulators said it is unlikely the federal government will seek to preempt current or future state laws applicable to DLT. And, lest I forget, Senators Jeanne Shaheen, D-N.H.; Jeff Merkley, D-Ore.; and Sherrod Brown, D-Ohio, sent a letter to the U.S. Government Accountability Office requesting that the GAO update its 2011 report, which focused on peer-to-peer lending.

Meanwhile, the European Parliament (EP) will host a four-day conference next week to educate members on virtual currencies and the blockchain. The conference will be held just before an April 25 vote on an EP report covering virtual currencies and a June vote on legislation to combat terrorist financing. The U.S. Federal Trade Commission has announced the first in a series of forums on FinTech, with the first event to be held on June 9 that will focus on marketplace lending. Separately, for those of you in Singapore looking to party, the Monetary Authority of Singapore (MAS) announced the inaugural week-long FinTech Festival set to begin on Nov. 14. The announcement comes around the same time that MAS Managing Director Ravi Menon told reporters that the agency will not seek to regulate FinTech companies until they become large enough to pose risks to the system or impact a large number of customers.

Let’s Be Honest, There’s a Lot of FinTech News Out There

On the same day that CFTC Commissioner Giancarlo pressed for global regulatory coordination "to create a principles-based approach for DLT oversight," the U.S. Chamber of Digital Commerce and three other leading trade groups announced the formation of the Global Blockchain Forum. The purpose of the forum will “help shape an international blockchain policy framework,” the groups said. Both announcements followed meetings in Asia last month in which the U.S. State Department urged nations in the region to adopt distributed-ledger technology.

Despite the headlines, institutional investors remain interested in marketplace lending. According to a joint survey by RK&O and Wharton FinTech, roughly half of the 300 institutional investors surveyed have some form of investment in marketplace lending, up from 30 percent one year ago. Interestingly, nearly three-quarters of respondents agreed that consolidation is somewhat or very likely to occur, and less than half of legal/compliance professionals were familiar with the industry’s regulatory framework. Fear not, however, as the good folks at Chapman and Cutler LLP just released an update to their white paper, The Regulation of Marketplace Lending. And, not to forget, Funding Circle and Deutsche Bank reportedly are meeting with investors this week to create the first securitization of peer-to-peer loans in Europe.

Digital Banking & Payments: India

What’s going on in India? Apparently a lot these days as the government looks to broaden financial inclusion. The Unified Payment Interface, launched last Monday, is an effort to bring India's unbanked and underbanked citizens into the formal financial system through a digital payments structure similar to Kenya’s M-Pesa. The Interface, created by retail banks, is backed by the Central Bank. The interface is a single app allowing users to access different accounts and exchange money without having to provide bank details or other identification to another party. Elsewhere in India, online banking and plastic card fraud increased 35 percent from 2012 to 2015, while young merchants are more interested in adopting electronic payments due to the potential for greater revenue, efficiency and enhanced shop image.

FinTech: $50 Billion Invested in 2,500 Companies Since 2010

Accenture Financial Services released its much-anticipated report covering the global FinTech landscape. According to the report, FinTech and the evolving landscape: landing points for the industry, global FinTech investment grew 75 percent to $22.3 billion in 2015. Over 1,100 FinTech-related deals were announced in 2015, and there are now 20 FinTech unicorns — private firms valued at $1 billion or more — globally. Investment is also pouring into companies that are seeking to partner rather than compete with traditional financial firms. According to the report, "the level of FinTechs wishing to collaborate with the industry increased by 138 percent, now representing 44 percent of all FinTech investment, up from 29 percent" in 2014. Meanwhile, investment in FinTech companies looking to compete only increased 23 percent, suggesting that "there is a clear and growing appetite, from both sides, to collaborate." In North America, for instance, investment in collaborative FinTech firms represents 60 percent of all FinTech investment in 2015. In 2010, that figure was 40 percent.

Number of Applications/Sites Currently Used to Manage Finances