In this FinTech in Focus
COVID-19 and FinTech
As Americans receive stimulus checks, they are increasingly shifting toward using debit cards over credit cards, which may boost FinTech stocks, according to The Wall Street Journal. For many neobanks and digital wallet platforms such as Cash App, an influx of customers are using them to receive their direct deposits, which is profitable for the platform. As reported by The Wall Street Journal, "Debit usage helps make some digital payments more profitable. For example, PayPal Holdings sees healthier transaction margins when purchases via its digital wallets are funded with debit cards rather than credit cards, which carry higher usage fees." Although FinTech stocks rallied at the start of the pandemic, investors are seemingly waiting to see whether consumers (primarily the more affluent) shift back to using credit cards for more expensive purchases. Still, from early direct deposits to facilitating a seamless transfer of funds, neobanking FinTechs have started to define themselves as a reliable financial alternative to traditional banks.
Industry Developments
Digital Banking
In JPMorgan Chase's recently released annual shareholder letter, Jamie Dimon, the bank's chairman and CEO, listed FinTech as one of the "enormous competitive threats" to traditional banks, according to CNBC. Specifically, Dimon stated that FinTech companies "are making great strides in building both digital and physical banking products and services" and that "from loans to payment systems to investing, they have done a great job in developing easy-to-use, intuitive, fast and smart products." Dimon also suggested that while innovation within traditional banks can be hindered by "inflexible 'legacy systems'" and "extensive regulations," they are arguably a safer option as a result. Ultimately, the tone and contents of the letter suggest there are obstacles traditional banks face that make it harder for them to compete with FinTechs for market share. Dimon ended with a call to action aimed at government regulators to "level the playing field" for banks, FinTechs, and nonbanks (financial institutions without a banking license) alike.
In JPMorgan Chase's latest effort to bolster its digital partnerships, grocery-delivery service Instacart Inc. has chosen the bank to issue a credit card to reward frequent users, according to The Wall Street Journal. The Instacart card's expected launch date is not until 2022, but the estimated 5 percent cashback rewards on Instacart purchases likely have frequent users intrigued already. Similarly, food delivery service DoorDash Inc. is planning to launch a credit card and has received issuance offers from several large banks and FinTech firms. Large banks have a history of partnering with companies, particularly airlines for travel rewards cards, but pandemic lifestyle changes may have propelled these partnerships with delivery service providers; these delivery rewards cards could draw interest from more average spenders who have shifted to getting delivery more often versus travel rewards cards that are traditionally for bigger spenders.
Nonbanks and hybrid FinTechs now have more details on a potential competitor thanks to a March 29 filing with the US Patent and Trademark Office, disclosing that Walmart's new FinTech venture has a potential name: Hazel by Walmart, according to Fox Business. The filing includes a logo with the word Hazel in a stylized font with a greater-than sign rotated clockwise with the "a" and "by Walmart" in a smaller font underneath. Although in earlier press releases Walmart hinted that it would provide services such as mobile payments and lines of credit and loans, the filing suggested the startup also will provide services, such as virtual currency transaction processing and issuing credit cards. According to Fox Business, Hazel by Walmart will also offer financial planning and credit repair services. Currently, the trademark application is awaiting examination by the US Patent and Trademark Office.
Cryptocurrency
Fidelity Investments, Coinbase, Square Inc., and other financial institutions are launching a cryptocurrency trade group to lobby and shape the way cryptocurrencies are regulated, according to The Wall Street Journal. The trade group will be called the Crypto Council for Innovation and will leverage its institutional members to launch research projects that will champion the economic benefits of digital currencies and related technologies. As reported by The Wall Street Journal, "Policymakers and regulators around the world will play a critical role in shaping the path forward." While creating safe platforms for cryptocurrency transactions is a priority for crypto-oriented FinTechs, regulation can make it either easier or harder to continue innovating. Fred Ehrsam, co-founder of Paradigm and Coinbase's former president, stated, "It’s challenging because policymakers want to balance risk and rewards, and even people who spend time in the space would struggle to predict where this will go in the coming decade.” As an executive member of the Crypto Council for Innovation, Ehrsam and his team will work to close the information gaps regarding the usage and development of cryptocurrency.
The Bank for International Settlements’ Financial Stability Institute recently published a report on supervising crypto-assets for anti-money laundering. The report highlights that while certain crypto assets make money transfers and payments more efficient, others present a risk of making it easier to facilitate money laundering/terrorist financing. The institute believes anti-money laundering/combating the financing of terrorism regulation and supervision are essential to reigning in the illicit use of crypto-assets. The press release for the report states that the paper aims to “contribute to the international debate by assessing emerging regulatory approaches and supervisory practices and identifying policy priorities to address common challenges faced by financial authorities.”
An alliance of research groups and private-sector firms announced last week that they are pooling resources to decarbonize all cryptocurrencies completely by 2040, according to Forbes. The alliance has developed a proposal known as the Crypto Climate Accord, inspired by the Paris Climate Agreement. The proposal states that accord supporters have a goal of enabling “all of the world’s blockchains to be powered by 100 percent renewables by the 2025 UNFCCC COP Conference.” The Climate Accord initiative is supported by a diverse set of organizations and private firms, including the United Nations Framework Convention on Climate Change (UNFCCC), Energy Web, Rocky Mountain Institute, and the Alliance for Innovative Regulation, which lobbies for modernization of financial regulations, as reported by Forbes. The private firms that are signatories to the Crypto Climate Accord include Coinshares (a digital asset investment firm), Ripple (an international payments platform), and ConsenSys (a leader in the blockchain space). Walter Kok, CEO of Energy Web, insisted we have the technical solutions required to decarbonize blockchains readily available, but “what the industry does not yet have and needs is a concerted effort. The accord marries the right tools and public structure needed to achieve our goals.” According to Forbes, carbon emissions from Bitcoin mining could be responsible for 130 million tons of carbon dioxide emissions annually by 2024 (about the same as the Czech Republic produces), which is troubling to many given the state of our environment.
Data Protection and Privacy
The World Bank recently released a technical note, The Next Wave of SupTech Innovation: SupTech Solutions for Market Conduct Supervision, expanding on a previous discussion note by highlighting 18 SupTech (supervisory technology) solutions that financial authorities can deploy to support market conduct supervision. The note draws on the experiences of 14 financial sector authorities worldwide. The World Bank’s Private Sector Development blog post featuring information about the note states that “Supervisory technology—or SupTech—is aimed to facilitate and enhance supervisory processes. While financial sector authorities have always leveraged data and technology, there has been a marked increase in new and ambitious initiatives in recent years, including for market conduct supervision.” The note ultimately focuses on the increasing use of data and technology solutions by global financial authorities for consumer protection with a specific focus on emerging economies.
Legislative Developments
Late last month, President Biden and the White House unveiled a new $2 trillion infrastructure plan, including but not limited to investments in the electric vehicle market, STEM programs at historically Black colleges and universities, and US tech infrastructure, according to CNBC. One major implication Biden’s infrastructure bill has for the FinTech industry, particularly FinTech adoption efforts, is the $100 billion investment in expanding broadband access. According to Microsoft, “157.3 million people in the US do not use the internet at broadband speeds” and, according to BroadBand Now, “at least 42 million people do not have access to broadband at all.” Biden’s proposal targets underserved areas and prioritizes support for broadband networks with local governments, nonprofits, and cooperatives, as well as tribal lands. While internet subsidies would likely be needed for the short term, within the proposal, Biden makes clear that a long-term solution must focus on lowering internet prices for consumers overall, as reported by CNBC. From the beginning of the COVID-19 pandemic, FinTech has particularly helped lower-income households and individuals handle their financial transactions. With bolstered broadband access, there is potential for more individuals to leverage FinTech efficiently.
The Federal Reserve of Boston, working with researchers at the Massachusetts Institute of Technology, will possibly be revealing the first stage of its central bank digital currency project publicly this fall, according to The Wall Street Journal. James Cunha, the Boston Fed’s senior vice president of Secure Payment and FinTech Research, stated that Fed researchers are trying to “understand what’s possible, but also share it because we know many others are interested in the same questions around the globe.” While other central banks have rapidly released their digital currencies, the US central banks’ primary concern is getting the digital dollar right rather than quickly launching it. The research performed at the Fed will consider “how to balance the speed of any potential system with security, privacy and the need to protect it from criminals who might seek to exploit it,” as reported by The Wall Street Journal.
International Developments
China
Late last month, Chinese regulators announced they are considering stricter rules on loan facilitation that may set back Chinese internet lenders due to the potential curbs on fee-based business, according to The Wall Street Journal. The possible changes are an added barrier to the rules issued in February requiring internet groups to fund at least 30 percent of co-lending loans themselves by 2022, resulting in taking more risk with their balance sheets. The purpose behind these regulations and potential rules is to ensure online platforms carry a fair share of the risk and that banks understand the lending risks they are taking on, in addition to ensuring that consumer data are not misused. Daniel Zhi, a partner at KPMG China, stated that if such rules are implemented, it “would be a big blow to smaller banks and FinTech firms. Medium-sized and small banks typically do not have sufficient independent resources to deal with risk control and loan delinquencies.” He added that “more than 80 percent of outstanding internet loans rely primarily on FinTech companies’ data and risk-control systems.” Given the increased focus on regulatory protection and financial stability in China, there will likely be more regulatory changes announced soon.
After a 13 percent slump in share price since Chinese regulators announced an antitrust investigation into Alibaba, a Chinese e-commerce group, the company's shares rose sharply last week after Founder Jack Ma stated a record USD2.8 billion fine marked the end of the investigation, according to Financial Times. The antitrust investigation into Alibaba was due to anti-competitive practices, including scrutiny over past mergers and acquisitions. In its ruling on Alibaba’s anti-competitive practices, China’s State Administration of Market Regulation wrote, “The company had forced merchants to list exclusively on its shopping platforms, a practice known as ‘choose one of two,’" as reported by Financial Times. To rectify this finding, Alibaba said it would spend “billions of dollars” on initiatives to improve merchants' experiences, including cost reduction and eliminating exclusivity arrangements. The company has also decided not to appeal the regulator’s decision.
For more information on FinTech in Focus or the Milken Institute’s FinTech program, please contact Kate Goldman at [email protected].