In this Issue
COVID-19 and FinTech
As stay-at-home orders and statewide lockdowns become commonplace in the United States, many bank customers have shifted to using digital banking services rather than legacy brick-and-mortar banks. Although physical branches have been widely reopened with social distancing procedures, most bank branches were closed for weeks beginning in mid-March due to the COVID-19 pandemic; this gave customers no choice but to leverage technology for their banking needs. The Financial Times reported that “by May, more than 45 percent of Americans have changed the way they dealt with their bank, which was found in a survey of 1,000 people led by consultancy FIS.” Large consumer and commercial banks, such as Bank of America and Wells Fargo, have taken note of the trend in digital banking services and are expanding their digital channels, allowing them to serve customers inexpensively. Reportedly, 40 percent of Bank of America’s cheque deposits are now done online, as are around 50 percent of this year’s sales—almost double the 27 percent of the bank’s sales that were digital in 2019.
While banks observe an increased number of consumers utilizing digital banking services, it cannot be determined whether this trend will continue once the pandemic is over. Accenture’s 2020 Global Banking Consumer Study, based on a survey of more than 47,000 consumers globally, found that the replacement of in-person branch interactions with impersonal digital transactions has propelled the erosion of consumer trust in banks, as reported by Back End News. The study also found that less than one-third (29 percent) of surveyed customers trust banks “a lot” to look after their long-term financial well-being, compared with 43 percent two years ago.
Alan McIntyre, global lead of Accenture’s banking industry group, stated, “The pandemic-inspired increase in digital engagement is a double-edged sword for banks. While it has allowed them to serve customers efficiently throughout the pandemic—and advanced their digital strategies by up to five years in some cases—it has pushed them to launch solutions that are functionally adequate but devoid of emotion. To forge strong customer connections, banks must reimagine the digital services they provide and make those connections more personal and relevant.”
Last week, the Federal Trade Commission (FTC) ordered nine social-media and internet companies to disclose data about their operations to support the FTC’s study on antitrust activity and general business practices. Companies that received this information-gathering request are Amazon, Facebook, WhatsApp Inc., Reddit Inc., Snap Inc., Twitter Inc., Youtube LLC, Discord Inc., and TikTok Owner ByteDance Ltd. According to The Wall Street Journal, the FTC order demands the companies to disclose detailed, private business information about how they track Americans’ online activities and how they use that data. While the FTC is asking for an extensive amount of data and information, this order is not a formal law-enforcement action and does not come with any immediate penalties for non-compliance. FTC Commissioners Rohit Chopra, Rebecca Slaughter, and Christine Wilson said in a joint statement, “Social media and video streaming companies now follow users everywhere through apps on their always-present mobile devices. This constant access allows these firms to monitor where users go, the people with whom they interact, and what they are doing.” Additionally, the commissioners noted that “too much about the industry remains dangerously opaque.” The order was approved with a 4-1 majority and the companies have 45 days to respond. With many regulatory agencies turning their attention to consumer data protections, this order is likely unsurprising for these companies.
Earlier this month, the FTC also filed a lawsuit against Facebook over the company’s alleged use of user information to entice third-party developers and fuel anticompetitive practices. The Wall Street Journal reported that this lawsuit is centered around data sharing using application programming interfaces (API), which has potentially far-reaching implications for enterprise technology companies and digital industries such as advertising and financial technology. An API is essentially a set of dunctions that enables two applications to communicate and, at times, share data. Sinan Aral, Director of the MIT Initiative on the Digital Economy, said, “This case could set precedents for any platform that creates a service, shares data through an API and has conditions on that data sharing.” While Facebook has control over its data and interface, given that the company owns some of the most active social media platforms, any implementation of stringent restrictions to its APIs could significantly impact its competitors. With the increased consolidation and mergers of companies in the tech sector, it will be interesting to see if greater regulatory scrutiny will slow the pace of this trend.
Initial Public Offerings (IPOs)
The point-of-sale FinTech firm Affirm Holdings Inc. has recently announced it is postponing its initial public offering (IPO), which was initially set to begin marketing its shares to investors later this month. According to The Wall Street Journal, sources “cited the extreme first-day pops earlier this month in the shares of DoorDash Inc. and Airbnb Inc. and delays at the Securities and Exchange Commission (SEC) amid a flood of listing requests” as their reason for postponing. Affirm, which offers online shoppers the ability to pay for consumer goods in installments through their short-term loan offerings, was expected to reach a market valuation of around $10 billion before postponing.
While some FinTech firms are delaying their plans to go public, others are pushing forward. Stock trading application Robinhood has picked Goldman Sachs to lead preparations for an IPO, which could go to market as early as next year, according to CNBC. In Robinhood’s last private fundraising round in September, the company was valued at $11.7 billion, but many investors believe there may be a jump in valuation due to an increase in novice stock trading during the COVID-19 pandemic lockdown. The platform is known for allowing users to make unlimited commission-free trades in stocks, exchange-traded funds (ETFs), options, and cryptocurrencies. Recently, the app’s growing user base has been cited as a driver for volatility in stock trading this year. Given that the California-based company was founded by Baiju Bhatt and Vladimir Tenev to “democratize finance,” an IPO aligns with their mission as it would allow a wider range of market participants to invest in the company.
Earlier this month, US Congressmen Warren Davidson, Tom Emmer, Ted Budd, and Scott Perry sent a public letter to Treasury Secretary Steven Mnuchin highlighting their “concern regarding reports that the Treasury Department is considering issuing regulations that would restrict the use of self-hosted cryptocurrency wallets.” The lawmakers warned that Americans may be placed at a disadvantage compared to our global competitors if the planned regulation “requires a company to determine the owner of a self-hosted wallet, with which the company’s users wish to transact.” They further elaborated, The contemplated regulation would not meaningfully support law enforcement, while it would raise privacy concerns and place impractical regulatory burdens on digital asset users and companies.” The four Congressmen support using self-hosted wallets and believe that “eliminating the middleman through the use of self-hosted wallets means that as consumers can maintain privacy and transact freely.” While they noted there are risks that self-hosted wallets may be exploited for illicit purposes, the lawmakers insisted this vulnerability also exists with cash.
Representative Rashida Tlaib, alongside her House Democrat colleagues Jesus “Chuy” Garcia and FinTech Task Force Chair Stephen Lynch, introduced the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act earlier this month. The bill intends to “protect consumers from the risks posed by emerging digital payment instruments,” as stated in a press release published by Representative Tlaib’s office. The bill takes aim at Facebook specifically, but the bill's language could capture many or all Stablecoin participants with widespread consequences. While significant movements are unlikely in this Congress, support from establishment Democrats like Lynch heavily suggests this bill will reemerge in January.
The private sector is also speaking out against the rumored Treasury-led regulation. Brian Armstrong, CEO of cryptocurrency exchange Coinbase, tweeted that the regulation could have “unintended side effects'' and “kill many of the emerging use cases'' for cryptocurrencies. Given that the letter urges the Treasury Department to consult with industry stakeholders before taking any decisive action, it suggests there is merit in collaboration between regulators and the private sector, specifically to expose possible inefficiencies in regulatory approaches to newer asset classes.
Some federal agencies seem to be having an easier time grappling with the implementation of cryptocurrency solutions. At the Singapore Fintech Festival earlier this month, US Acting Comptroller of the Currency Brian Brooks has recently proposed a crypto-centric concept called “country coin” as an idea to help ameliorate the wealth gap between developed and developing countries. Brooks stated that “the crux of the plan is to promote education and economic growth worldwide,” as the country coin would incentivize continued learning. According to Fortune, “Under the plan, a student earns coins by completing online courses and passing tests. The coin would essentially represent claims on a ‘trust fund’ set up by the state, which would entitle recipients to future payouts tied to increased GDP.” In theory, this plan may address socioeconomic inequality through incentivizing continued learning, but it may be harder to implement in countries that do not have the infrastructure to facilitate a program that likely requires extensive technology.
While regulators tackle balancing financial innovation with necessary protections properly, established investment funds are expanding their cryptocurrency asset holdings. Massachusetts Mutual Life Insurance Co., which has been around since 1851, has purchased $100 million in Bitcoin for its general investment fund, which represents 0.04 percent of its general investment account, according to Bloomberg. MassMutual spokeswoman Chelsea Harty said, “We see this initial investment as a first step, and like any investment, may explore future opportunities.” As Bitcoin continues to rally into the end of this year, it will be interesting whether the asset sheds its volatile reputation.
After a wave of scandals and defaults in 2018 connected to peer-to-peer lenders, Chinese central bank regulators claim online peer-to-peer (P2P) lenders have all been zeroed out since mid-November, according to the Wall Street Journal. Peer lenders collect funds from small investors, consolidate them, and loan them out to small businesses and individuals. Chairman of the China Banking and Insurance Regulatory Commission said that, at one point, China had more than 5,000 peer-to-peer lenders in operation and an annual transaction volume totaling the equivalent of about $459 billion. The Wall Street Journal reported that at first, the P2P was loosely regulated and cited as financial innovation serving parts of the Chinese financial system that were ignored by state-backed banks. Although it is said that some peer-lending companies have not fully shut down operations, many former P2P lenders have transformed their business by switching to offering loans funded by themselves and banks, while also adding other services such as wealth management.
European Union’s executive arm proposed two bills last week, one focused on illegal content and named the Digital Services Act, and the other on anticompetitive behavior and named the Digital Markets Act. According to the Wall Street Journal, if the bills pass, regulators would be empowered in some cases to levy fines of up to 6-10 percent of annual global revenue or break up big tech companies to stop certain competitive abuses. One of the competitive abuses is requiring bundled purchases of core services, rather than allowing the option to purchase individual company services. Karan Bhatia, Google’s vice president of government affairs and public policy, said he is concerned the proposals “appear to specifically target a handful of companies and make it harder to develop new products to support small businesses in Europe.”
The Monetary Authority of Singapore (MAS) recently awarded four digital banking licenses, consisting of two digital full bank licenses and two digital wholesale bank licenses. Singtel & Grab and Sea limited were awarded the digital full bank licenses, while Ant Financial and Sea Limited were awarded digital wholesale bank licenses. According to Yahoo Finance, MAS assessed 14 applicants based on the following criteria: “value proposition of business model, incorporating innovative use of technology to serve customer needs and reach under-served segments, ability to manage a prudent and sustainable digital banking business and growth prospect to Singapore’s financial center.” The Singapore Deposit Insurance Corporation (SDIC) will insure bank deposits up to $75,000 per person per bank for licensed digital banks, like traditional financial institutions.