FinTech for Breakfast
Held on Wednesday, June 1, 2016
With support from Dentons
Izabella Kaminska (FT Alphaville)
Liliana Reasor (CEO, Novus Ordo Capital)
Below is background information on the developments that we will be discussing. If you can make the session, please do add your comments - and let us know what we have missed. For more reading on these items, feel free to check out my rough notes. Harry Atkinson
MARKETPLACE LENDING WOES
It's not been a good month for US marketplace lenders. LendingClub lost its CEO, Renaud Laplanche, after he failed to declare a potential conflict of interest (FT Alphaville has been covering the story). The New York Department of Financial Services issued a subpoena to Lending Club and warned that other MPLs may come under scrutiny. A Deloitte report gave MPLs a best-case-scenario 6% market share by 2025. Prospect, a privately held US MPL, announced that it is talking to banks about funding options - including an equity sale - in an effort to support loan origination growth. VPC Speciality Lending, a London-based investment trust which buys debt from European and US MPLs, reduced its dividend to 1.5p from 2.0p. In March, the Consumer Finance Protection Bureau announced that it will accept complaints relating to marketplace lenders (and fined Dwolla for data security failings). But European MPLs may have been heartened by the Commission's regulatory announcement: "As crowdfunding remains largely local and the sector is changing rapidly, there is no strong case for an EU level framework at this juncture". Examples of cross-border EU MPL activity include Prêt D’Union's €31 million expansion into Italy, Funding Circle's acquisition of Zencap, and an agreement between SpardaBank Berlin and Zencap (now Funding Circle Germany) giving the bank's clients access to new investments.
To what extend do the problems experienced by US MPLs apply to their UK counterparts? Do the problems point to more fundamental concerns about marketplace lending business models?
How long before the Commission decides that an EU framework is necessary in P2p/marketplace lending? What level of growth - or consumer pain - would prompt a change in its current position?
Did Deloitte's analysis get it right? In particular:
MPLs and banks currently have roughly equal cost profiles - but a rise in interest rates will disproportionately affect MPLs, opening up a cost-of-funds advantage for banks.
Banks will find it easier (though not necessarily easy) to replicate MPLs user-experience advantages than MPLs will find it to replicate banks' cost-of-funds advantage (once the credit environment normalises).
It is doubtful whether MPLs have a credit scoring advantage over banks. Any major innovations in credit scoring will likely be 'model-agnostic' and available to banks and non-banks.
As an asset class, MPL loans are more likely to attract capital deflected from fixed-income or equity investments than from bank deposits.
Overall, MPLs will serve as a 'sustaining innovation', encouraging specific improvements in consumer and SME lending without disturbing the banking system as a whole. It will thrive in 'profitable niches', such as consumer lending outside of banks' risk appetites and among SMEs who are willing to pay a premium for quick credit decisions.
The consultation window for the OCC's white paper on 'responsible innovation' closed May 31 2016. The white paper set out eight principles guiding the OCC's approach to FinTech:
1) Support responsible innovation. 2) Foster an internal culture receptive to responsible innovation. 3) Leverage agency experience and expertise. 4) Encourage responsible innovation that provides fair access to financial services and fair treatment of consumers. 5) Further safe and sound operations through effective risk management. 6) Encourage banks of all sizes to integrate responsible innovation into their strategic planning. 7) Promote ongoing dialogue through formal outreach. 8) Collaborate with other regulators.
A clearer picture of the FinTech leads among US federal regulators and government departments is emerging. Courtesy of the FT: Amy Friend (OCC); Doreen Eberley (FDIC); Dan Quan (CFPB); Melissa Koide and Jessica Milano (deputy assistant secretaries responsible for consumer policy and small business development respectively at the Treasury Department); and Adrienne Harris (a special assistant to President Barack Obama on the White House’s National Economic Council). Meanwhile, former FDIC chair Sheila Blair joined the board of Avant, a US online lender, in April. She's not the first high profile government official to cross the barricades. Larry Summers sits on the board, and the risk committee, of Lending Club.
Equity crowdfunding is now legal in the USA. Title III of the Jumpstart our Business Startups (JOBS) Act legalised equity crowdfunding. The SEC adopted its final rules to implement Title III in October 2015. The rules came into effect May 16 2016. Investors with annual income or net worth less than $100,000 are restricted to the greater of $2,000 (or 5% of the lesser of their annual income or net worth) in a 12 month period. In the UK, retail investors are limited to 10% of their net investable assets (i.e. not house, pension or life insurance) - although this is enforced only through self-declarations. Plenty of US observers are sceptical about the emergence of equity crowdfunding.
The outlook for EU / US data sharing remains uncertain. Giovanni Buttarelli, European Data Protection Supervisor, expressed concerns about the proposed EU-US Privacy Shield, which will replace the Safe Harbour agreement struck down by the ECJ. Last month, the Article 29 Working Group voiced major concerns about the deal. Their respective objections do not mean that the details of the agreement will change, but they do raise questions about whether the Privacy Shield will stand up before the ECJ in any future legal challenges. The deal is due to be ratified in June. The Commission is reportedly unwilling to consider further changes, and will press ahead knowing that legal challenges will be likely. Looming over it the deal is the General Data Protection Regulation, which goes into effect in 2018.
Finally, the FCA has opened its much vaunted 'regulatory sandbox', applications for which must be submitted by July 8.
Are we seeing any divergence in the way UK and US regulators approach FinTech?
Is the uncertainty around US / EU data sharing harming European FinTech?
Is there any evidence that equity crowdfunding boosts the start-up economy?
Q1 2016 FinTech funding data was released by KPMG and CB Insights as part of their Pulse of FinTech series. UK investment fell from $275m in Q4 2016 to $102m in Q1 2016. The story was the opposite in the US, where Q1 2016 grew 80% compared with a poor Q4 2015 (resulting in $1.8 billion across 128 deals). European funding levels remained steady across the quarters ($348m). Almost half the global dollar total was accounted for by two $1bn plus deals in China (Lu.com and JD Finance). Meanwhile, Japan, which has lagged in FinTech investment, may soon see more activity. Mizuho, the country's second largest bank, indicated that it will be seeking out FinTech investments.
Does the relative lack of corporate participation in VC-backed FinTechs in Europe help explain why the continent is lagging behind North American and AsiaPac for overall FinTech investment?
Should the UK be worried about that funding drop?
DIGITAL CHALLENGER BANKS
Mondo, the digital banking start-up pursuing its license, revealed its product roadmap. It seems that the strategy is to develop various nice-to-have, 'smart current account' product features while awaiting its banking license. Once the license arrives, it can presumably loop back to core features such as direct debits. Techworld has a helpful summary of the UK's four digital challenger banks.
Does the product roadmap tell us much about the bank's strategy - and whether it will be successful?
FinTech as a whole isn't shy about telling the world how awesome it is (whether all that many people are listening is a different matter). TransferWise, darling of FinTech currency conversion, has been one of the most confident self-promoters. This month, though, the company was rapped across the knuckles by the Advertising Standards Authority.
The ASA objected to Transferwise claiming to be 90% cheaper than the ‘average bank’. The manner of TransferWise's claim, according to the ASA, encouraged the customer to equate this cost saving with their actual bank (i.e. with an ‘identifiable competitor’). Such claims are only permissible if they are backed by ‘route-specific’ costings detailing comparisons with the competitor(s). TransferWise claims that it now offers route-specific calculations on its website. FT Alphaville has more.
TransferWise announced that it has closed a $26m funding round. TechCrunch reported that the round in fact closed in February. The news site also reported that the company has only now reached unicorn status, meaning that previous reports (which the company did not deny) were incorrect. Sky News reported in February that the round would be worth over $70m. One of the company’s partner banks in the US (where it does not have a banking license) came has been under regulatory scrutiny, reported Business Insider.
Is the advertising rebuke an isolated example - or are more FinTechs overstepping the mark when advertising? Is this part of a wider 'FinTech hype' problem, which is skewing assessments of the sector by investors, regulators and consumers?
Was TransferWise's funding round sufficient for its loss-making but growth-chasing approach to the market?
As reported by FT Alphaville
- Curve enables its users to consolidate all their debit and credit cards into a single plastic card. Users register their debit and credit cards with the Curve app.
- Curve is a commercial card (i.e. used for corporate expenses). That means it can charge merchants more than 0.2% and 0.3% caps EU rules imposed on consumer debit and credit cards.
- When a customer uses the consolidated card, Curve takes a payment from one of the registered debit/card credits (incurring a 0.2% or 0.3% fee), but then charges the merchant a 1% fee, pocketing the difference.
- Customers self-declare whether they are in fact using the card for business purposes rather than personal spending. Curve claims that it monitors customer activity for signs of personal use.
- Curve also enabled customers to use Amex in places it wasn’t accepted. But American Express announced that from May 31, it will not authorise transactions made via Curve.
- Curve claims that it lost money every time customers used Amex (which charged Curve around 3% per transaction).
- American Express said it wanted to resolve some customer service queries before continuing the relationship.
- Curve has offered customers their money back if they are unhappy with the loss of Amex.
Is it fair to characterise Curve as an innovation in 'regulatory arbitrage'?
There is a lot to chew on this month – our ninth F4B meeting. In particular, our regular guide to the FinTech labyrinth, Izabella Kaminska, has spent a good deal of time and effort following up claims that Bitcoin’s Satoshi Nakamoto was really just a tinny-loving Australian smoothie. You may have read her nicely balanced spread in the FT; my guess is that she will be a bit less nuanced when she speaks to us.
Beyond that, my colleague Harry Atkinson is flagging up:
- the wider implications of LendingClub’s troubles;
- the ASA’s attack on TransferWise’s aggressive marketing; and, of course,
- the application window for the FCA’s regulatory ‘sandbox’ (which closes on July 8).
As usual, Izabella gets to lead off. But she has help this month. We are delighted to welcome Liliana Reasor, who was selected as one of the Top 100 Global FinTech Women Influencers and Leaders (phew!) in 2015. She is the founder of Novus Ordo Capital, a VC focusing on European FinTech start-ups; she is also active in several FinTech accelerators and angel networks. Prior to starting up Novus Ordo (cool name) in 2014, she worked with Moody’s, Morgan Stanley, Deutsche, BofA and JP Morgan – which means she presses the right buttons when it comes to serious money.