In This Newsletter

Lending
Payments
Money Transfers and Payments in Afghanistan
Data Privacy
FinTech Investment

Global Developments

Lending

Facebook recently launched a small business loan initiative in India that will facilitate lending of up to $67,000 to merchants across the country, according to TechCrunch. This move from Facebook is another signal of BigTech’s expansion into India’s emerging market, which could lead to potential displacement of locally grown companies like Paytm. According to a report from Clootrack, India’s digital lending market is poised to grow to $350 billion by 2023. Still, the Reserve Bank of India estimates total micro, small, and medium enterprise (MSME) credit demand alone has almost reached $500 billion. Even with the projected growth in the next two years, India’s private sector will be unable to obtain the credit it needs to grow. Interest rates for the program will be between 17 and 20 percent, and much of the loan distribution process will be handled among lending partners, as Facebook does not plan on monetizing the program.

So, what’s in it for the tech giant? Well, there’s a catch. To receive a business loan, the borrower must have advertised within the Facebook ecosystem in the last 180 days, making this a potential play to boost Indian ad sales and gain traction within India’s FinTech ecosystem. According to Entrackr, Facebook’s ad revenue in FY2020 for India was over $165 million, but that falls short of Facebook’s estimated revenue of over $5 billion in China, as estimated by The Wall Street Journal. As the Chinese Communist Party scrutinizes both domestic and foreign tech companies, Facebook’s shift to the world’s second-most populous country makes a lot of sense. India has abundant human capital waiting to be connected to the right resources, and greater foreign direct investment could spur MSME innovation.

Payments

Mastercard is currently facing a $14 billion class-action lawsuit in the United Kingdom, as reported by RT. The global payment processor has been accused of overcharging retail clients for credit card transactions, resulting in higher prices for goods and services. According to the Financial Times, the lawsuit is being brought in accordance with the Consumer Rights Act of 2015 on behalf of over 46 million customers affected by the exorbitant interchange fees. Given there is very little precedent for such a large lawsuit in the payments space, this case will be important to watch for regulators, consumers, and other payments companies. If Mastercard were found guilty of the accusations made against it, the case could mark a new era of consumer-focused regulation that protects individuals from larger corporations. It’s also important to note that $14 billion isn’t exactly chump change for Mastercard, given that the company held about $10 billion in cash at the end of its last fiscal year.

Money Transfers and Payments in Afghanistan

The United States currently has wide-reaching sanctions imposed on the Taliban dating back to 1999, meaning there are strict restrictions on exports, imports, and any financial dealings with the group. With the Taliban now in control of Afghanistan, this poses a huge problem for the Afghan economy and the people who rely on monetary aid from abroad. There is currently very little guidance about the financial implications of the Taliban takeover, and a major question is whether the sanctions still apply. If the sanctions are still in place, the Afghan economy will essentially be isolated, and overseas payments and investments will be extremely limited, according to The Wall Street Journal. Anti-money laundering and know-your-customer (AML/KYC) guidelines are even trickier now. Private financial services companies will likely steer clear from involving themselves in potential sanctions violations without any guidance from the US government.

So, what’s going to happen to the Afghan financial system? There is a chance the country begins embracing cryptocurrency as a means to circumvent traditional financial institutions and state regulations. A larger conversation stems from this: What role will FinTech play in the Taliban-run economy? Will FinTech be used to comply with or skirt regulations?

Data Privacy

In yet another battle in its ongoing war against BigTech, the Chinese Communist Party has mandated strict data privacy regulations intended to limit the influence of BigTech domestically, according to The Wall Street Journal. It’s a strategic move in response to the growing frustration from citizens about the use of their data in engaging tech products produced by companies like Alibaba and Tencent. Large tech giants in China have made use of wide swaths of data to develop optimized and alternative algorithms for financial services, such as lending. Instead of relying on traditional, publicly available data points, Chinese companies have enjoyed access to more granular data that has given them an advantage over international competitors. And for a while, China enjoyed fostering the domestic tech boom to boost its global competitiveness, but it now seems as if an era of stringent tech regulations has begun.

Debates on data privacy and consumer rights in countries like China have led to some thoughtful discussions on the commoditization of data. The reality is that data has become a more valuable payment for a good or service than monetary compensation. Still, many consumers are unaware their data has become the new currency. Amidst lower prices and faster shipment times, people have been unable to see that their own data⁠—an amalgamation of their habits, interests, and tastes⁠—may be their most valuable asset. In an article from the National Law Review, Robert Bonkin details how we must rethink data intermediaries and engineer a reverse subscription model that allows people to select different “packages” of how much data they want to give up in exchange for monetary compensation. It’s an intriguing proposal that offers an array of economic incentives but also allows people to opt out, making the bargaining power of consumers prominent. The third-party data intermediary offering the monetary compensation could then turn around and sell these data to tech companies that need the information to fuel their product and service offerings. While still a radical approach to addressing the outcry over data privacy, this “free-market” approach would put power back into the hands of consumers and limit the number of conflicts in courts over surveillance tactics and improper use of data.

Still, having the ability to sell one’s data might completely nullify its intrinsic value. People who are wealthy or powerful enough will inevitably opt out of sharing their data, making the data market less holistically representative and instead only inclusive of consumers who⁠—for whatever reason⁠—are deciding to sell their data.

All of this, of course, comes with the challenge of making corporations pay for an asset they can currently get for a much cheaper price. According to Bloomberg, BigTech companies spent up to $4 million on lobbying in the second quarter of 2021, demonstrating that any hints of a reverse subscription model for rights to data could see significant opposition.

FinTech Investment

Nigeria has become a hub for FinTech innovation in Africa, with money from venture capital and growth equity firms pouring in by the millions. Despite the country’s shaky political foundation and recent economic woes, $307 million was invested in 71 FinTech startups over the last year, according to a report from Partech Partners. Despite a 59 percent decrease in equity deal value in 2020 due to COVID-19, Nigeria still accounted for 21 percent of the total FinTech investment value in Africa. Internet adoption rates are increasing in the country, and Lagos is becoming an innovation hub for startup payment facilitators working to expand the country’s digital infrastructure for financial services. There are still structural issues in Nigeria that could potentially derail the recent FinTech boom. The Economist notes that the Nigerian government has already been quick to enforce heavy-handed regulation, and 40 percent of the population lives below the World Bank’s poverty line. FinTech adoption⁠—especially for payment services⁠—is linked with income per capita, so Nigeria’s inflation and poverty are concerning.

Given that Nigeria is the current anchor for African investment, its economic situation is not ideal for the continent’s growth. However, new internet infrastructure efforts are promising for ensuring Africa’s youth bulge is connected to online financial services. According to the Financial Times, 200 million new mobile internet subscribers are expected by 2025. Datacenter investments are taking off to localize internet connectivity and lower latency, resulting in a considerably higher peak capacity for internet traffic. Subsea internet cables connecting coastal cities have also become unique infrastructure solutions to increase connectivity and efficiency. The internet infrastructure project is about not only expanding internet access but also enhancing internet quality. But while important, expanding high latency internet services prone to outages during peak periods won’t help bring the unbanked and underbanked into the formal financial sector.