In this FinTech in Focus
Industry Developments
Data Privacy
As big tech firms like Google and Apple continue to bolster their FinTech offerings, consumers may soon turn to them for services for which they previously relied on incumbent financial institutions. However, according to TechCrunch, policymakers, technology experts, and consumers are pondering the possible data privacy implications as big tech FinTech platforms continue to grow. A ponemon study on privacy and security found that 86 percent of adult respondents are “very concerned” about how Facebook and Google use their personal information. This does not seem to be a deterrent for consumers transitioning to online banking generally though, as there was a 200 percent uptick in new mobile banking registrations, and total mobile banking traffic jumped 85 percent in April 2020. TechCrunch reports that as regulators decide how to restrain Big Tech firms from abusing their access to increased consumer data, firms focused on advertising, such as Google, might see the shift into financial services as an opportunity to bolster their advertising offerings.
In a move to increase users’ data privacy, last week Google announced that it plans to stop selling ads based on tracking individuals’ browsing history across websites, according to The Wall Street Journal. Instead of targeting ads based on specific browsing history, Google will use a new technology called a “privacy sandbox” that targets ads without collecting information about browsing history. Under this new plan, Google’s limit on individual tracking identifiers does not extend to first-party data a company gets directly from a customer, as reported by The Wall Street Journal.
Cryptocurrency
After months of speculation, cryptocurrency exchange Coinbase filed for an initial public offering (IPO) using a direct listing. As institutional investors and retail investors alike join the surge of interest in cryptocurrency, Coinbase revenue has doubled in 2020, hitting $1.14 billion last year after a revenue of $483 million the previous year, according to CNBC. Coinbase reported that the platform had 43 million verified users at the end of 2020, with trading in bitcoin and Ethereum accounting for 56 percent of users’ trading volume. Similar to Tesla’s filing outlining the risk of cryptocurrency’s volatile price, Coinbase’s filing stated, “Our revenue is substantially dependent on the prices of crypto assets and volume of transactions conducted on our platform. If such price or volume declines our business, operating results, and financial condition would be adversely affected.” This public offering represents both the increased sophistication of cryptocurrency exchanges and the recent boom in direct listings for technology companies. A direct listing is an alternative to the traditional IPO; instead of raising external capital, a company’s employees and investors convert their ownership into stock listed on an exchange.
While Coinbase’s direct listing did not come as a surprise for many, investors are speculating on what one particular disclosure within the company's Securities and Exchange Commission (SEC) filing may mean for its long-term plans. According to Daily Hodl, “Coinbase says that part of its capital-raising strategy may include the issuance of its own blockchain tokens to support the firm’s financial health as a public company.” Coinbase’s filing also notes, “We have authorized the issuance of ‘blank check’ preferred stock and common stock that our board of directors could use to issue shares of capital stock in the form of blockchain tokens.” Given that the company has recognized the volatility of the cryptocurrency market, particularly Bitcoin, it will be interesting to see whether this move indicates Coinbase’s optimism about the stability of its own crypto asset.
Twitter and Square CEO Jack Dorsey and Hip-hop mogul Jay-Z have recently announced their partnership to donate 500 bitcoins (worth $23.65 million as of the date of the announcement) to an endowment fund called Btrust, according to Coindesk. The new endowment will be structured as a blind irrevocable trust and will initially focus on teams in Africa and India to support Bitcoin development.
Digital Banking
As the proliferation of digital banking continues, digital banks are looking to differentiate themselves from competitors. Digital bank Ando announced last month that it promises to invest customer dollars in only sustainable infrastructure and other green initiatives, according to Banking Dive. Ando is based in San Diego and partners with Community Federal Savings Bank to offer the Federal Deposit Insurance Corp.-insured bank accounts. JP McNeill, CEO of Ando, is appealing to users that desire more transparency and said, “There are lots of different banks that say they are green, and that they have these different green investments… but at the end of the day, are those green loans 1 percent of your total loans, or 2 percent of your total loans? That level of transparency creates accountability that I think will ultimately lead to changes in behavior.” This transparency is facilitated by Ando’s Impact Center, which allows savings and checking account customers to view where their money is allocated. Given the increased interest in sustainability initiatives and ESG (Environmental, Social, and Governance) standards, particularly among the target user base of FinTech platforms, it is not surprising that users want their money allocated sustainably.
The transition to digital banking also has traditional banks considering how they can digitize as a way to cut costs. TD Bank recently announced it will close 82 branches as it seeks to reduce physical locations in preparation for more investment into its digital banking offerings, according to Crowdfund Insider. However, this is not indicative of the company's current financial position, as TD recently announced that its first-quarter earnings (CAD3.3 billion) is up 10 percent compared with the same quarter last year, as reported by Crowdfund Insider. Greg Braca, president and CEO of TD US, said, “You’ll see markets in future years where we continue to invest in new stores. But what you’re also seeing is the need for investing in digital capabilities, and we’re doing just that.” While a large influx of customers has felt comfortable transitioning to digitized banking, traditional banks will have to strategically balance their digitization efforts with the maintenance of physical banks for customers who prefer in-person banking.
Legislative Action
After the volatile trading frenzy spurred by retail investors last month, the SEC is reevaluating listing standards for “penny stocks.” According to Fox Business, the SEC has classified penny stocks as any share that trades below $5, and according to the commission, “These companies may have little or no earnings” and are “highly speculative.” The SEC’s review of Nasdaq and the New York Stock Exchange’s (NYSE) listing standards for penny stocks may yield a decision to bar these listings altogether. As reported by Fox Business, “By listing the companies (penny stocks), some regulators believe the exchanges are giving an imprimatur of safety to these shares, according to people with knowledge of the matter.” This move is being interpreted as a possible solution to the market volatility bolstered by Robinhood traders, as Robinhood does not allow the trading of penny stocks that don’t meet NYSE and Nasdaq standards. While the SEC may be planning this review, the nature of its outcome will likely depend on the approach taken by Gary Gensler, President Biden’s nominee to chair the SEC.
SEC Chair nominee Gary Gensler and Consumer Financial Protection Bureau (CFPB) Director nominee Rohit Chopra had their joint Senate confirmation hearing with the Banking Committee early last week. While several senators used last week’s hearing to argue against the introduction of new regulations in the financial markets, others focused on Gensler’s ideas regarding corporate disclosures and investor protections for online stock-trading platforms. After a question was raised about the recent trading frenzy in shares of GameStop, Gensler said, “At the core, it’s about protecting investors,” and the use of “behavioral” technology in stock-trading apps is among the issues to be examined, as reported by the Associated Press. Gensler also said transparency and accountability in the markets would be a major focus for him, if confirmed as chair. Corporate disclosures were a major topic discussed, as senators were interested in Gensler’s stance on transparency in corporate climate change risks and political spending. Ultimately, Gensler acknowledged that investors are increasingly interested in the climate risks of the corporations they are investing in, as well as the sustainable efforts within these large corporations.
International Development
China
In a recent press release, Citibank announced it will be launching Citi Plus, a Hong Kong-based project that will allow users to have access to personalized wealth management information and investment products from Aberdeen Standard Investments, Allianz Global Investors, and Franklin Templeton. Citibank Hong Kong Business Manager Lawrence Lam stated in the release, “Citi Plus is our latest initiative to bring digital natives a banking experience they admire. Millennials were invited to participate in research and the co-creation process, through which we could better address target clients’ pain points and help them grow their wealth via the new service.” Although there are several applications that help users work towards their wealth management goals, Citi is differentiating their platform from competitors by taking an education-centric approach.
As China’s banking regulators continue to formalize rules to make their internet-lending platforms less “risky,” starting in 2022, internet-lending platforms in the country will have to fund at least 30 percent of every loan they make jointly with commercial lenders, which include banks, trust companies, and finance companies, according to The Wall Street Journal. As reported by the China Banking and Insurance Regulatory Commission, individual banks will also be subject to new caps on how much they can lend together with online partners. The Wall Street Journal also stated that, according to a Citigroup research note, “The new rules can prevent banks from over-relying on online lenders for credit assessment and over-concentrating on selective Fintech partners. It also effectively closes the regulatory loophole for regional banks to expand out of home regions via online lending.” Many regional banks in China relied on FinTech partnerships for business growth in recent years, but this will be quelled as regional banks will no longer be allowed to make loans to borrowers who live outside of their jurisdictions. This move follows regulators’ efforts for the past year to rein in the unsecured loans being originated through large technology companies, including Ant and WeBank.
South Korea
The South Korean Financial Services Commission (FSC) announced plans to launch a digital sandbox to test new FinTech products and services under development, according to FinTech Magazine. The South Korean government prioritized growing the country’s FinTech industry by launching its open banking system in December 2019 and setting aside a budget of USD16 million devoted to the development of the sector. The FSC’s new digital sandbox initiative will be launched in June 2021 and is already starting to receive financial support from state-backed financial institutions and private-sector investments. Although South Korea is one of the most digitally connected countries in the world, the low adoption rates of FinTech services in the country can be attributed to the almost 40 percent of the population that is underserved by financial institutions, as reported by FinTech Magazine. The FSC is promoting both financial innovation and financial inclusion with its latest FinTech initiatives.
Britain
Britain’s Chancellor of the Exchequer Rishi Sunak has recently revealed a “fast track” visa to attract highly skilled workers to rapidly growing companies, such as FinTech and cyber firms, in his 2021 budget, according to Yahoo Finance. As Britain’s eligible labor force continues to contract due to Brexit, Sunak hopes this new visa program will allow firms to get applications from the best candidates globally, not only from within the EU. Sunak said, “Now we’ve left the EU and taken back control of our borders, we want to make sure our immigration system helps businesses attract the best talent from around the world.” As reported by Yahoo Finance, an independent report found that “around 42 percent of Britain’s 76,500 FinTech workers are migrants.” The fast track visa sounds promising for attracting people interested in working for British high-growth FinTechs and cyber companies because once a migrant has a job offer from within those industries, they qualify for a visa without the need for sponsorship or third-party endorsement. The aim is to launch the fast-track visa in March 2022.
For more information on FinTech in Focus or the Milken Institute’s FinTech program, please contact Kate Goldman at [email protected].