FinTech in Focus
Greetings From Utah
Where yours truly is searching for the Greatest Snow on Earth while wishing for FinTech-lite news coverage this holiday season (I implore all of you to go on vacation). Our next release will be in two weeks. Have a safe and wonderful holiday, and here’s to a productive and prosperous 2017!
Financial Literacy: A State-by-State Analysis
Let’s put it this way: If I received the kind of grades that U.S. states were given in a new report from Champlain College, I wouldn’t be allowed in the house. The report assessed all 50 states plus the District of Columbia to determine whether state efforts were bringing financial literacy to high school students. This year, 26 states received grades of C, D, or F, while those who earned As declined from seven in 2013 to five in 2015. Utah was the only state worthy of an A+ grade. Among the report’s recommendations was the need for the nation to develop a financial literacy assessment exam that does not rely on a specific curriculum or instructional model but the “full range of knowledge and skills critical for participation in the economy.”
Mobile payment services continue to expand worldwide, with Google’s Android Pay launching in Japan and Samsung Pay adding three countries to the list of locations in which the service operates while preparing for a 2017 launch in India. Speaking of India, Vodafone announced that it is on track to launch a payments bank by March and has activated its mPesa service, allowing retail merchants to accept wallet payments in an effort to target the $800-billion offline merchant payment market. Meanwhile, the Reserve Bank of India has stated its opposition to the creation of a separate payments regulator. In other payments news, Starbucks has partnered with WeChat to enable in-store payment at more than 2,500 Starbucks locations in China, and PayPal has struck deals with FIS and Citi. Separately, Mastercard and Visa struck an agreement that “allows Visa to request tokenized Mastercard payment credentials from Mastercard for provisioning into Visa Checkout, and Mastercard to request tokenized Visa credentials from Visa for provisioning into Masterpass.” And the Central Bank of Egypt announced new rules for mobile payments services to expand financial inclusion.
Aussie Aussie Aussie, Oi Oi Oi
I once watched a Discovery Channel episode on the 10 deadliest species in the world, eight of which live in Australia. I decided not to book travel to the Outback any time soon. However, a recent announcement by the Australian Securities and Investments Commission (ASIC) has me reconsidering my personal travel ban. Last week, ASIC “released class waivers to allow eligible financial technology (FinTech) businesses to test certain specified services without holding an Australian financial services or credit license”—a world-first licensing exemption. The exemption will allow eligible FinTech firms to test their services with 100 retail clients for up to 12 months, provided they contact ASIC before starting operations. The notice was accompanied by regulatory guides and infographics on the exemption. As stated in Regulatory Guide 257, FinTech firms that can’t get the licensing exemption may apply for individual relief tailored to their circumstances.
The announcement broadens the scope of Australia’s regulatory sandbox, though it excludes some products and services from the exemption, including complex products (e.g., derivatives), illiquid products, or arrangements that cannot be easily reversed; products with a long-term focus (e.g., superannuation and life insurance); and products that have been targeted at vulnerable consumers (e.g., consumer leases).
Going Digital: Bank Branch Closures in the UK
A new report from Which? finds that more than 1,000 bank branches have shut their doors over the past two years. Britain’s top banks have closed a significant proportion of their branch networks, with HSBC cutting 27 percent of its network, Lloyds shutting down 14 percent, and RBS closing 10 percent of its branches. Not surprisingly, rural areas were most affected by the closures, with Wales, Scotland, and southwest England seeing higher closure rates. While foot traffic continues to decline, 20 million UK customers continue to rely on branches.
The IRS and Coinbase
We’re keeping an eye on the Internal Revenue Service’s ongoing efforts to obtain the names and account information of U.S. taxpayers who engaged in business with or through Coinbase. The developments come after the Treasury inspector general for tax administration issued a report in September that found that no IRS operating division has "developed any type of compliance initiatives or guidelines for conducting examinations or investigations specific to tax noncompliance related to virtual currencies." On November 30, the IRS received authorization to serve the John Doe summons on Coinbase.
However, on December 13, a Los Angeles attorney filed suit to quash the subpoena. As stated in the complaint, “Despite the demonstrable need for clarifying virtual currency tax guidance, the IRS has opted not to issue a single word of virtual currency guidance since promulgating admittedly insufficient guidance more than two years ago. Having been unable, or unwilling, to issue such new guidance, it is hard to believe that the IRS has now issued the IRS Summons for a legitimate investigatory purpose…. Perhaps most importantly, the IRS’s desire to obtain personal information unrelated to tax compliance from over one million America citizens who are Coinbase users clearly reflects bad faith and an abuse of process.”
UK: According to a Freedom of Information request seen by Business Insider, the British Business Bank (BBB) has invested roughly £85 million in UK peer-to-peer platforms with the bulk of the funding (£60 million) going to Funding Circle. The BBB has funded nearly 10 percent of loans by value on MarketInvoice’s platform, while funding represents less than 1 percent of the total value of lending on the Funding Circle and RateSetter platforms. Speaking of alternative finance, CrowdCube became the first crowdfunding platform in the UK to raise £200 million in capital. The company also unveiled an infographic covering the equity crowdfunding platform’s milestones since inception.
U.S.: Because domestic and international policy is now being carried out over Twitter, hedge funds are developing trading algorithms based on what President-Elect Trump tweets. Meanwhile, Fitch Ratings, which expects to rate SoFi’s first residential mortgage-backed securities transaction, also expects FinTech charters to have “significant impacts on the operating strategies and regulatory environments for some players in this emerging sector.” While the ratings agency does not expect all FinTech companies will be interested in applying for a special purpose charter, the charter itself “could be an initial, gradual step” toward insured deposit-taking. And speaking of SoFi, the platform has pushed back its plans for an IPO after a challenging year for FinTech firms. It is also worth noting that former Commodity Futures Trading Commission member Mark Wetjen penned an op-ed in The Hill regarding regulatory sandboxes. According to Wetjen, “the policy goals reflected in the U.S. regulatory framework for financial markets have stood the test of time…. What would not make sense is to suspend critical regulations that promote the most important policy goals for the U.S. financial market simply to encourage new innovation and technologies. That risky approach could needlessly erode the very confidence that investors and consumers have had in U.S. markets for decades.” And lastly, the U.S. Department of Commerce Digital Economy Board of Advisors released recommendations on how the U.S. can lead the digital economy. They focused on a 21st century Department of Commerce, the future of jobs and work in the digital economy, measuring the digital economy, and empowering businesses to innovate and compete by leveraging digital platforms.
Germany and France: The two countries announced a plan to establish a €1 billion fund to support startups in an effort to compete with the U.S. and boost Europe's digital economy. Separately, Germany-based Deutsche Bank announced the appointments of Elly Hardwick as head of innovation and Philip Milne as chief technology officer for innovation, and the Paris FinTech Forum is scheduled for late January.
Kenya: A report from the Massachusetts Institute of Technology examines the role of mobile money in reducing poverty in Kenya. According to the report, “We have shown that access to mobile money has lifted as many as 194,000 households out of poverty, and has been effective in improving the economic lives of poor women and of members of female-headed households.” Agent density was revealed as a key factor that leads households out of poverty, as greater density contributed to heightened per-capita consumption.
Cash Not King by 2026
According to a report from legal firm Paul Hastings, cash will account for less than a quarter of U.S. transactions by 2026. U.S. and UK noncash transactions represent 63 percent and 55 percent of transactions currently but are expected to rise to 76 percent and 68 percent, respectively. Meanwhile, the share of businesses accepting noncash transactions will continue to grow, with 82 percent of U.S. businesses and 74 percent in the UK accepting alternative payments by 2026. Payment security continues to provoke worry, with U.S. and UK consumers identifying the risk of theft (41 percent and 45 percent), fraud (46 percent and 59 percent), and data security incidents (46 percent and 49 percent) as their most common concerns.
Share of businesses accepting alternative payments, U.S. (left) and UK (right)
Source: Paul Hastings, The Future of Payments