Authors
Jackson Mueller
In this Issue
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Hello readers! I hope all is well with you and your colleagues, family, and friends as we enter week _(?)__ of quarantine. It has been roughly one month since we last spoke. Yes, this is supposed to be a bi-weekly newsletter, but I’ve got a valid excuse.
The Mueller family welcomed Lochlan into the world on April 30! Mom and baby are doing great, and all are in good health. Doctors say they haven’t seen someone progress this fast in life. Lochlan is already capitalizing the “F” and “T” in FinTech—as should all of you. Nurses say his ability to pump out 10-page FinTech reports at this age is unheard of, though still a far cry from his father’s reports—the near equivalent of War and Peace.
Over the next several weeks, yours truly will largely be focused on finalizing paperwork to register as an accredited zoo, while still paying attention to what all of you are doing out there.
So, with Mueller #3 in one hand and coffee in the other, let’s dive into some FinTech headlines. In this week’s edition, we continue to monitor regulatory and industry responses to COVID-19 as they pertain to FinTech.
COVID 19 & FinTech (Cont.)
As I have stated previously, this is not an exhaustive list of FinTech developments from industry or regulatory bodies in response to the pandemic. However, I’ve put together a list of domestic and global developments that, I believe, merit review.
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Round 2 for the Paycheck Protection Program—Where Do We Stand? With Round 1 funding exhausted, Congress passed a second emergency package to replenish the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) program. Lawmakers added a further $310 billion to PPP, with $60 billion set aside for smaller banks and credit unions. The carveout comes after mounting political scrutiny over large bank participation in Round 1 and public companies receiving funds. Surprisingly, approved non-bank lenders (i.e., FinTechs) were not included in that carveout. While the $60 billion carveout has been exhausted, the remaining PPP Round 2 funds continue to be drawn from as of May 14.
Non-depository firms were not included in the carveout, but they are included in the Federal Reserve’s Paycheck Protection Program Liquidity Facility (PPPLF). In an April 30 press release, the Fed announced the expansion of its PPLF to all PPP lenders approved by the SBA, including non-depository lenders. Of note, the Fed also announced that "eligible borrowers will be able to pledge whole PPP loans that they have purchased as collateral to the PPPLF."
Meanwhile, Round 2 of PPP continues. According to the Small Business Administration (SBA), as of 5 p.m. on May 13, 2.7 million loans totaling $192.6 billion have been approved in Round 2. (Additional details can be viewed here). Interestingly, the SBA has broken out lenders with less than $1 billion in assets and non-banks (as of May 8). For the "FinTechs (and other State Regulated)" category, there are 15 lenders that, together, lent nearly 70,000 loans worth $1.3 billion.
But should we take these numbers seriously? As Ryan Metcalf, head of US regulatory affairs and social impact at Funding Circle, noted:
“Non-depository lenders like Funding Circle US processed and sent more than 70% of PPP applications to bank partners to submit to SBA. Therefore, the % attributed to “Fintech” (4%) by the U.S. Small Business Administration, while technically correct if you only count direct submissions to its ETRAN system, does not account for the bulk of the leg work done by non-depository lenders who 1) weren’t approved until round 2 funding and 2) didn’t receive complete secondary guidance and Fed PPP Loan Facility access until May 1st. Therefore, we had to refer processed applications to our banking partners to submit on our behalf so small businesses didn’t have to wait.”
In response to calls from lawmakers concerned about the SBA's implementation of the Paycheck Protection Program, the SBA Inspector General identified the following areas of SBA implementation of the CARES Act that did not "fully align" with the provisions set forth in the CARES Act. They are: prioritizing underserved and rural markets, loan proceeds eligible for forgiveness, guidance on loan deferments, and registration of loans. In particular, because SBA "did not provide guidance to lenders about prioritizing borrowers in underserved and rural markets, these borrowers, including rural, minority and women-owned businesses may not have received the loans as intended. In addition, because SBA did not require demographic data to identify PPP borrowers in underserved markets, it is unlikely that SBA will be able to determine the loan volume to the intended prioritized markets." A potentially greater problem is how many of the loans distributed in Round 1 will be completely forgiven. As stated further in the document, the IG found from a review of the data "that tens of thousands of borrowers would not meet the 75-percent payroll cost threshold and would therefore have to repay the amount of nonpayroll costs in excess of 25 percent in less than 2 years."
The SBA also continues to add to its list of frequently asked questions on the PPP. Of note, questions 46 and 47 were added recently and provide additional details regarding SBA's review of a borrower's "good faith" certification that the PPP loan is necessary to support operations given the uncertain economic environment. As the SBA notes, the administration—in consultation with the Department of the Treasury—has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: “Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith. SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans.”
Beyond political scrutiny, the SBA’s efforts are now facing litigation. The SBA is dealing with a lawsuit brought by The Washington Post, The New York Times, Bloomberg LP, Dow Jones, and ProPublica concerning access to government records on which companies received loans under PPP and EIDL. The complaint states that the SBA has either failed to respond to Freedom of Information Act requests or it has issued boilerplate responses stating the SBA intends to provide loan specific data to the public at some indefinite point. The complaint also provides a pretty in-depth timeline covering political scrutiny of the PPP and EIDL programs.
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How are approved FinTech lenders fairing? We continue to monitor the participation of non-depository firms in the PPP. Keep in mind that because several approved non-depository lenders were barely able to participate in Round 1—if at all—the below numbers largely reflect Round 2 activity.
Prolific tweeter and Head of Square Capital, Jackie Reses, tweeted that as of May 4, more than 40,000 Square sellers were approved by the SBA. The average loan size requested is $16,000.
Intuit, meanwhile, held a Quickbooks Town Hall event with Sens. Marco Rubio and Ben Cardin. Of interest, Luke Voiles—VP and business leader of Quickbooks Capital at Intuit—touched on the topic of underserved small business communities. According to Voiles, Intuit has 1.2 million small businesses that use QuickBooks for payroll purposes. "And if you look at those payroll days, those businesses running payroll, 80% of them have less than 10 employees, 57% of them have less than five employees," Voiles said. As of May 13, Intuit has processed more than $700 million in SBA-approved PPP loans with an average loan size of $40,000 for small businesses and $7,000 for self-employed individuals.
In an April 30 tweet, BlueVine CEO Eyal Lifshitz said the average loan size for approved companies is roughly $50,000. On May 11, Lifshitz took to Twitter again to state that BlueVine has helped "tens of thousands of small businesses" get funding with a median loan size of roughly $20,000.
According to PayPal Holding Company's recently filed 10-Q, originations facilitated through PayPal under the PPP through May 5 were approximately $1.3 billion.
In discussion with representatives from Funding Circle, nearly 80 percent of approved applications are for loans totaling less than $50,000. In all, 97 percent of applications approved in Round 2 are for loans under $350,000. In addition, more than half of approved borrowers have a positive impression of PPP, nearly two-thirds said the PPP loan prevented layoffs, nearly 30 percent the loan helped them rehire employees, and 12 percent said the loan helped to avoid bankruptcy.
OnDeck Capital, a small business FinTech approved to participate in the PPP in April, is reportedly being shopped around to potential buyers after a dismal first quarter compounded by a rise in delinquencies due in part to the pandemic. According to Forbes, the company has tapped $987 million of its $1.1 billion credit facility.
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Where Do We Go From Here? Once again, we are starting to hear renewed calls from lawmakers to allow for postal banking, FedAccounts, and for the Fed to expedite its real-time payments effort. Several lawmakers have also introduced data privacy legislation. According to The Hill, the legislation "would require companies to have consumers opt in before having their data used to track the spread of coronavirus and allow them to opt out at any point." In addition, two dozen lawmakers have also urged the SBA and Treasury to expand the list of eligible institutions allowed to partake in PPP to include installment lenders.
House Democrats also introduced the Heroes Act last week, which includes several small business-related provisions. The legislation calls for additional carveouts for certain lenders participating in the PPP and certain small businesses (by employee size), and increased transparency regarding where funding is going. Of note, the fact sheets on the small business provisions in the Act do not indicate how much additional funding will be allocated to the PPP.
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International Support and Help: In the UK, we continue to follow the British Business Bank's efforts to allow more lenders to take part in the Coronavirus Business Interruption Loan Scheme. In our last newsletter, we highlighted how the BBB gave the green light in mid-April for several new lenders to participate in the Scheme. Since then, the BBB continues to add to the list of accredited lenders. Aisling Finn from AltFi continues to provide updates on which FinTech firms are offering CBILS, CLBILS, or Bounce Back loans.
Despite additions to the list of accredited lenders under the CBILS, alternative finance platforms continue to face headwinds. For instance, in late April, the UK Chancellor of the Exchequer Rishi Sunak announced a new scheme called Bounce Back Loans (BBLS). The 100 percent government-backed scheme allows businesses to borrow anywhere between £2,000 and £50,000, with loans interest-free for the first 12 months. However, like CBILS, alternative finance platforms are locked out of participating in this scheme for the moment. According to Finextra, all accredited lenders under the CBILS "have been invested to become accredited to offer loans under the terms of the Bounce Back Loan Scheme."
In light of the new scheme and the headwinds that remain in expanding participation to alternative finance providers, Innovate Finance called on the Bank of England and the Treasury to open up the small and medium-sized enterprise term funding scheme to non-bank lenders. Commenting on the BBLS, Innovative Finance CEO Charlotte Crosswell told Yahoo Finance UK:
“To be able to charge a six year loan of 2.5% is an incredible challenge for anyone who is not a deposit taking bank, just to try and get that cost of capital. They are potentially losing viable businesses of their own who are having to go back to a high street lender to be able to borrow that amount.”
Late last week, the British Business Bank published an update on the BBLS, CBILS, and the Coronavirus Larger Business Interruption Loan Scheme (CLBILS). All told, more than £14 billion in loans have been provided to 300,000 small businesses.
In Singapore, the Monetary Authority of Singapore (MAS), the Singapore FinTech Association, AMTD Group, and AMTD Foundation launched a SGD$6 million FinTech Solidarity Grant "to support Singapore-based FinTech firms amid the challenging business climate caused by the COVID-19 pandemic." The grant is a complement to the SGD$125 million support package for FinTech and financial services firms announced by the MAS in early April.
COVID-19—Global Ramifications Intensify: In our last update, we discussed the impact of COVID on the rollout of virtual banks and virtual bank regulatory regimes in the Asia-Pacific region. Other regulators in various jurisdictions have also issued advisories or announcements pertaining to FinTech and COVID-19. For instance, several authorities in the UAE, including the Central Bank, Abu Dhabi Global Markets, and the Dubai Financial Services Authority issued an advisory urging local financial service providers and designated non-financial businesses and professions to adopt appropriate technologies to meet KYC/AML requirements in an effort to make it easier for companies to follow FATF guidelines given the difficulties associated in dealing with the pandemic. In Canada, the government's push toward open banking is on hold—at least until the Fall—due to the COVID-19 outbreak. In response to the COVID-19 pandemic in Nigeria, the Central Bank pushed back deadlines pertaining to minimum capital requirements for microfinance banks. As stated in TechCabal, the MFB license "serves as a quick fix for fintechs looking to offer some banking services but are unable to raise the ₦25 billion ($59.5 million) required to secure a commercial bank licence."
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Investment Trends: COVID-19 is also impacting the level of global investment in tech startups. According to a report from Startup Genome, the impact of the COVID-19 crisis has put significant funding pressures on the global startup ecosystem. According to the report, “41% of startups globally are threatened in what we call ‘red zone’: they have three months or less of cash runway left. Many very young startups live with only a few months in cash—29% were in that situation already before the crisis—but the crisis put 40% more of them in that precarious position. Focusing on startups that have raised Series A, B, or later rounds, 34% have less than 6 months’ worth of cash—a danger zone in the current situation where fundraising is difficult." Further, since the onset of the crisis, nearly three-quarters of startups have had to terminate full-time employees. More precisely, nearly 40 percent of startups have laid off 20 percent or more of their staff, and more than a quarter of startups have let go of more than half their staff.
Looking at FinTech investment more closely, according to CB Insights, VC-backed FinTech funding was $6.1 billion across 404 deals, marking the worst Q1 for funding since 2017 and worst for deals since 2016. Seed and Series A rounds have been hit the hardest, with FinTech startups raising $1.1 billion (a 9-quarter low) across 228 deals (a 13-quarter low).
Beyond the big picture, the smaller picture doesn’t look great either. For instance, according to Willis Towers Watson, COVID-19 "has had an enormous impact on global markets and global InsurTech investments... [W]e are reporting a 54% drop in total funding for this quarter when compared with the record highs of last quarter." The year 2020 "began on the same trajectory on which the previous year concluded. By January 3, almost $82 million had been raised; by February 6, that figure was just over $450 million. But it took until the end of March—the rest of the quarter—to double that amount. In short, almost half of the total amount raised in Q1 was raised in the first 35 days of a 91-day quarter. From March 10 to quarter-end, “only” an additional $108 million was raised. Again, in short, the first three days of Q1 saw almost the same amount of money raised as the last three weeks of Q1."
Industry Headlines
Capital Markets: The Securities Industry and Financial Markets Association (SIFMA) published a report covering FinTech and opportunities in capital markets. On RegTech, the report states that market participants "are focused on adding fintech applications to existing compliance systems. This is easier to implement versus big transformational projects like moving processes onto DLT platforms." Still, hurdles remain. According to SIFMA, "regulators like to control data in their own region, information sharing issues could prevent the gain of full technology efficiencies. The number of regulations, and lack of global harmonization, is preventing technology from driving efficiencies in regulatory reporting. Additionally, market participants indicate the need for standardization before moving into optimization, a longer-term strategy. Unfortunately, compliance teams have been firefighting rather than dedicating more time to proactively find regtech solutions, given Brexit, CAT, MiFID II, the LIBOR transition and now Covid-19."
CBDC: In an ING blog post titled, “Will Covid-19 accelerate the arrival of digital currencies?”, Teunis Brosens and Carlo Cocuzzo state that the pandemic will accelerate CBDC developments for several reasons, including the decline in the use of physical cash, the rise of political mandates and government support for central banks to introduce CBDC, and potential for the pandemic and de-globalization to "intensify attempts to establish 'national champions' in digital payments, either private or public." As it relates to hosting CBDC on the Libra platform, the authors find that the biggest problem is that "even though Libra added single-currency Libra's and potentially CBDC to the mix, the dreaded multi-currency original is not off the table yet. Authorities will continue to look at this global stablecoin with suspicion, and will probably demand guarantees in some form that it does not threaten monetary autonomy. We doubt whether Libra is able and willing to give such guarantees."
Separately, IMF Senior Financial Sector Expert John Kiff has put together a list of countries where retail CBDC is being explored. The chart is up-to-date as of May 11.
Contactless Payments: Not surprisingly, contactless transactions are on the rise. In a new survey, Mastercard found that more than 80 percent of respondents view contactless transactions as a cleaner way to pay, with nearly three-quarters stating they will continue to use contactless payment options post-pandemic. In the first quarter of 2020, Mastercard data revealed a 40 percent growth in contactless transactions globally. Of note, 80 percent of contactless transactions are for amounts less than $25.
Cryptocurrency & Digital Assets: Eris Clearing, LLC, the clearing entity for ErisX—a platform that offers individuals and institutions access to digital asset spot and futures markets—received approval from the New York Department of Financial Services for virtual currency and money transmitter licenses. The platform also announced it is the first US-based exchange "to introduce Ether physically settled futures contracts." Since 2015, the NYDFS has approved 25 entities to engage in virtual currency business activity in the state.
A report by PWC and Elwood Asset Management Services titled 2020 Crypto Hedge Fund Report finds the total Assets Under Management (AuM) of crypto hedge funds globally increased by more than $2 billion in 2019 from $1 billion in the prior year. The percentage of crypto hedge funds with an AuM over $20 million increased from 19 percent to 35 percent in 2019. In addition, the report finds the vast majority of investors in crypto hedge funds are family offices of high-net worth individuals. Interestingly, in 2019, the median crypto hedge fund returned more than 30 percent, down roughly 15 percent from 2018. More than 97 percent of crypto hedge funds trade Bitcoin, followed by Ethereum (67 percent).
Meanwhile, OKCoin—a digital asset exchange—has been on a hiring spree after on-boarding Haider Rafique, formerly the head of growth at Blockchain.com, and Megan Monroe-Coleman, a former compliance executive at Coinbase.
Data Access: A class action complaint was filed against Plaid Inc. by two residents of California. The lawsuit claims Plaid "induces consumers to hand over their private bank login credentials to Plaid by making it appear those credentials are being communicated directly to consumers’ banks.... In reality, however, though Plaid does not disclose this, the login screen is created by, controlled by, and connected to Plaid. Plaid executives have acknowledged this process was ‘optimized’ to increase ‘user conversions’—in other words, to provide a false sense of comfort to consumers by concealing Plaid’s role as an unaffiliated third party." The lawsuit also claims that Plaid “uses consumers’ login credentials to obtain direct and full access to consumers’ personal financial banking information for Plaid’s own commercial purposes wholly unrelated to consumers’ use of the apps.... To date, Plaid has amassed this trove of data from over 200 million distinct financial accounts."
Data Privacy: A new report from Brave Research finds the European Union’s GDPR regime at risk of failing due to the lack of technical staff and sufficient budgets for national GDPR enforcers. Among the numbers highlighted in the report, seven data protection authorities (DPA) have two tech specialists or less; half of all national DPAs receive budgets that are €5 million or less; and, of the 305 tech specialists employed at DPAs across the EU, nearly one-third are staffed in Germany's regional or federal data protection authorities. Further, annual increases to DPA budgets have fallen from 24 percent during the application of the GDPR to 15 percent currently.
Messaging Standards: In response to the Financial Action Task Force's (FATF) Travel Rule, the Joint Working Group for InterVASP Messaging Standards—a group established by the Chamber of Digital Commerce, Global Digital Finance, and the International Digital Asset Exchange Association—published a new messaging standard called IVMS101 to comply with AML regulations from FATF.
As the white paper notes, "diverse AML/CFT regulatory landscape applying to the VA space has also led to notable differences in the client data already possessed by VASPs between jurisdictions." Further, "there arises a greater need for the standardisation of the data domain to which VASPs can share data to avoid the proliferation of numerous data models. While underlying source data may not align to the Standard, standardisation of the data domain to which the required data is shared can ease the adoption of such technical solutions by VASPs. Irrespective of the technical solution, data should be expected to be structured in line with the Standard at time of transmission."
Partnerships: Visa struck a partnership agreement with Safaricom, connecting the M-Pesa platform with Visa's global payments network. According to Reuters, under the deal "M-Pesa’s 24 million users and 173,000 local merchants will be linked to Visa’s 61 million merchants and its more than 3 billion cards."
Sygnum—the world's first digital asset bank with a Swiss banking license and Singapore asset management license—entered into a partnership with Tokensoft for asset tokenization. According to the press release, Tokensoft's innovative tokenization platform "will become an integral component of SEBA's asset tokenization offering for existing and emerging client demands.” The partnership comes around the same time that TokenSoft joined the Blockchain Association. Alex Levine, TokenSoft's Chief Legal Officer, will co-chair the Association's Security Token Working Group.
Speaking of joining groups, DBS became the first Singapore-based bank to join Contour's network, built on R3's Corda. The network "focuses on digitalising processes, including the creation, exchange, approval and issuance of letter of credits."
Show Me The Money: Robinhood raised $280 million in a Series F funding round, valuing the company at $8.3 billion. The round was led by existing investor Sequoia Capital with participation from NEA, Ribbit Capital, 9Yards Capital, and Unusual Ventures, among others.
Virtual Banking: UBS is reportedly aiming to launch a digital banking platform in mainland China, a decision that hinges on securing a license. As reported in the South China Morning Post, head of UBS (Asia-Pacific) Edmund Koh believes China's digital banking framework will be in place in June or July.
Global Developments
Brazil: In a press release from the Central Bank, new regulation on open banking "is an important step in the process of digitizing the financial system." The press release provides additional detail on the phased approach to open banking in Brazil, the four phases of which are expected to take place from November 2020 to October 2021.
Kenya: In its latest Capital Markets Soundness Report, the Capital Markets Authority (CMA) states it "may also be the right time to start thinking about completely transforming capital markets transactions into e-mobile where clients are on-boarded, trade and receive cash through their mobile handsets." The report highlights the first anniversary of the CMA Regulatory Sandbox. "Since its inception, the scope of applications include areas such as crowdfunding, tokenization of real estate, E-KYC platforms, Reg-tech and investor portfolio management." However, as the CMA notes, while some applications "meet the admission criteria, practicality of their testing may prove to be a challenge (e.g., those that cut across many jurisdictions)."
Malaysia: The Securities Commission announced that the Guidelines on Recognized Markets has been amended to introduce a new chapter on "e-Services platform." The amendment "will allow operators of e-wallet or e-payment applications to partner with Capital Markets Services Licence holders to distribute capital market products to investors."
UAE: The Central Bank of the UAE and Abu Dhabi Global Market announced they will jointly host the fourth annual FinTech Abu Dhabi Festival to be held from November 24 to 26. Meanwhile, Abu Dhabi Global Market Academy and The Cambridge Centre for Alternative Finance signed a bilateral research agreement "to facilitate tech-enabled financial innovation in the MENA region."
For more on FinTech-related efforts in the UAE and Bahrain, the Milken Institute published two reports covering both countries efforts to promote their respective FinTech ecosystems: “The Rise of FinTech in the Middle East: An Analysis of the Emergence of Bahrain and the United Arab Emirates;” and “Bahrain and the Fourth Industrial Revolution.” The Institute has also held several meetings to discuss FinTech-related developments in the region, including a panel discussion titled MENA: Building the Next FinTech Hub and a private roundtable discussion titled FinTech in the MEA Region: Fostering Unique, Innovative Ecosystems.
US: In California, a bill introduced in the state legislature by Assembly Member Calderon seeks to clarify the definition of securities to provide exemptions for certain cryptocurrencies. According to the legislation, existing law defines a "security" to mean a note, stock, and, among other things, an investment contract. As proposed, the bill "would create an exception from the above definition by providing that a digital asset meeting specified criteria is presumptively not an investment contract within the meaning of a ‘security’.”
Zimbabwe: Back in October, we highlighted several reports that the Central Bank had banned mobile money agencies from facilitating cash withdrawals or deposits, with potentially significant ramifications for the country’s largest mobile money operator, Econet. In early May, the Reserve Bank governor John Mangudya called EcoCash, which is run by Econet Wireless Group, a Ponzi scheme. In addition, according to the Daily News, the Reserve Bank governor "also said that the devaluing of the Zim dollar that was allegedly taking place on the Ecocash platform was destroying the economy."
Authors