FinTech in Focus—September 21, 2020



FinTech in Focus—September 21, 2020

Kate Goldman
Kate Goldman
FinTech Associate, Center for Financial Markets

In this Issue

International Developments»

COVID-19 & FinTech

Members of the Congressional Blockchain Caucus wrote to President Trump this month, urging him to consider expanding applications of blockchain technology in light of the COVID-19 crisis. The letter advises officials to strengthen US digital infrastructure and “review new innovations and methods of deploying government services. The authors include three actionable areas where blockchain technology could be incorporated, including identity authentication, supply chains, and registries of medical professionals. 

KPMG International has published its H1’20 edition of Pulse of FinTech. Their research explains that since COVID-19, FinTech Mergers & Acquisition have taken a big hit, with Q1’20 producing “the lowest quarter of M&A investment since Q1’13.” Conversely, the report shows that VC investments still saw steady growth throughout 2020, “accounting for $20 billion globally.”  

And if you’re thinking about making some investments of your own, KPMG reports, “Cybersecurity is expected to be a very hot area of investment, particularly in areas related to cloud security and governance.”

As the world copes with widespread recession, e-commerce appears to be unscathed. In fact, it’s doing better than ever. General Manager of Visa’s UAE arm Shahebaz Khan told attendees of the DigiPay 2020: The Future of Digital Payments Summit webinar that e-commerce numbers have increased considerably during COVID-19 shut-downs. Crowdfund Insider reports that the Greater Middle East’s digital payments market is projected to see growth of 6.5 percent from 2020 to 2021. Khaleej Times, who organized and hosted the summit, quotes Khan that economic recovery and digitization “go hand in hand.” 

While online shopping remains a popular way to fill a pandemic-sized void, businesses are having difficulty accessing the technology they need to digitize commerce. Khan explains that “58% of online shoppers had been leaving or abandoning their carts, because they experienced delays related to payments processing.”

Acquisitions: US-focused FinTech Change Financial has entered a binding agreement to acquire FinTech solutions provider Wirecard for $7.8 million. Financial Standard reports that Change Financial “aims to upgrade Wirecard's existing platform to increase the addressable market in the US and focus on onboarding at least 10 new US customers over the next 12 months.”

Luno has been acquired by Digital Currency Group (DCG), one of the London-based cryptocurrency exchanges’ original seed funders back in 2014. Barry Silbert, DCG’s Founder and CEO, states, “We are proud to have supported Luno as an early investor, and we recognize a shared commitment to building mission-driven companies that can help transform traditional financial services and improve economic freedom for people all over the world.”  

In a slightly different kind of acquisition, California-based FinTech Jiko has purchased a Minnesota-based national bank after getting a green light from the OCC and Federal Reserve Bank of San Francisco. Acting Comptroller of the Currency Brian Brooks said of the purchase, "While two data points don't make a trend, the de novo charter granted to Varo Bank this summer and this acquisition by Jiko should demonstrate the optimism and positive energy for consumers, our economy and the federal banking system.” 

Blockchain: An updated report from the International Data Corporation (IDC) is predicting global spending on blockchain solutions to reach $4.1 billion in 2020, a 50 percent increase from 2019. IDC’s Worldwide Blockchain Spending Guide estimates that “Blockchain spending will continue to grow at a robust pace throughout the forecast period with a five-year compound annual growth rate (CAGR) of 46.4%, reaching a total of nearly $17.9 billion in 2024.”

Security and compliance are both on-going challenges for blockchain stakeholders. In response to this, blockchain company AnChain.AI and DeFi provider Bluehelix are planning to launch their Blockchain Ecosystem Intelligence (BEI) risk solution. Cointelegraph reports, “[BEI] looks over 100 million crypto addresses and smart contracts and sifts through this using a machine learning model. It will find the best compliance structure to meet anti-money laundering (AML) when determining the source and destination of the funds. Bluehelix’s cloud platform delivers these results to its over 270 exchange clients.”

Cryptocurrency: For banks dealing with cryptocurrencies, Anti-Money Laundering/ Know Your Customer (AML/KYC) compliance frameworks are essential for sound practice. In doing so, more banks are integrating crypto compliance software solutions. Cointelegraph describes these crypto compliance platforms “as automated risk profilers that score blockchain entity interactions as well as observe potential connections with other entities.” With risk parameters coded into the software, the technology is able to reduce total manual surveillance that would otherwise be performed by a human. Like AnChain.Ai and Bluehelix’s BEI platform, more dynamic software solutions are emerging to address these compliance challenges. 

The Securities and Exchange Commission (SEC) issued a press release this week charging rapper Clifford Harris Jr., also known as T.I., and three others for participation in fraudulent ICOs. T.I. is being charged with endorsing the fraudulent cryptocurrency “FliK token” on social media and “falsely claiming to be a FLiK co-owner and encouraging his followers to invest in the FLiK ICO.” The SEC also cautions consumers to independently research any investment opportunities…even those involving a three-time Grammy-winning artist.  

Payments: If you aren’t familiar with “buy now pay later” (BNPL) you probably should be. Millennials, many of whom are wary of credit card debt, are turning to the alternative payment plan. (It’s hard to say exactly why millennials are so debt shy, but it might have something to do with the average millennial owing roughly $33,000 in student loans). BNPL allows users to pay incrementally, often with the retailer covering fees. This flexibility allows users to make larger purchases than they could afford outright without piling up credit card debt. The Financial Brand reports Australia-based FinTech Afterpay “saw the number of users enrolled in its offerings rise by over 219% in mid-2020 over the same point in 2019. That results in an increase to 5.6 million US enrollees.” Millennials’ “iffy relationship with credit cards” has caused a surge in the number of Fintechs and traditional consumer lenders offering alternative payment options. 

Depending on the terms and conditions, delinquent payments could incur fees as high as 30 percent. New research from Ascent found that less than 25 percent of BNPL users actually understood what was in the fine print.

Traditional consumer credit companies are also engaging in BNPL plans. Mastercard has expanded its payment options by partnering with FinTech Jifiti. NASDAQ reports, “The agreement allows both merchants and issuers to offer credit and consumer financing to Mastercard holders.” Mastercard’s partnership with Jifiti isn’t their first foray into BNPL, NASDAQ explains. “The company forged alliances with Fly Now Pay Later, Splitit, Divido and Pine Labs to provide BNPL services worldwide. Per an Accenture figure cited by Mastercard, the BNPL industry boasts an astronomical market value of $1.8 trillion.” 

Catering to a much younger demographic, UK-based digital bank Starling has announced the launch of Starling Kite, a debit card aimed at kids. The card will enable online or in-person transactions controlled and monitored by parents. Starling Bank’s CEO and Founder Anne Boden is quoted in IBS Intelligence, stating, “Understanding the value of money and learning skills such as budgeting and saving from a young age, can help people lay the foundations for them to achieve better financial wellbeing later on in life.” 

Deals, deals, deals! Visa has recently signed onto two more partnerships with international FinTech companies. The first partnership is with Hakbah, an alternative financial savings platform based in Saudi Arabia that will now be issuing prepaid Visa cards to its customers. Naif AbuSaida, founder of Hakbah, states, “We are proud to partner with Visa, and we envision this will enable Hakbah and Visa to work closely in accelerating secure and convenient payment and alternative financial saving solutions.” 

The second partnership joins Visa with European FinTech, Vipps. A press release from Visa states, "Visa's clients and partners will now be able to take advantage of the Vipps platform to create their own digital wallets and offer customers new ways to pay, be paid and manage their money."

Virtual Banking: Euromoney Awards for Excellence 2020 has named Ping An Bank of China the world’s best digital bank. Euromoney announced the award and offered high praise to the bank, writing in the announcement, “Ping An Bank didn’t tweak the rulebook when it set out in pursuit of a better digital strategy. Instead, it tore it up and began again. The Chinese bank’s plans have worked beyond all expectations.” Euromoney also indicated that Ping An had fierce competition, with Bank of America and Singapore’s DBS Bank also in strong consideration for the award. 

Kasisto has announced its consumer banking virtual assistance, and KAI platform will be integrating with NCR digital banking technology. The platform will use AI to bring a human-like element to the digital banking experience. PR Newswire reports, “KAI is built to deliver these exceptional conversational AI experiences, servicing the banking, account, payment, and financial insight needs of consumers via an intelligent and omnichannel virtual assistant. Together, Kasisto and NCR's technology can deliver a digital experience to all segments of the financial services industry that will delight and excite customers, no matter where they are, what they need, or when they need it.”

Goldman Sachs’ digital bank, Marcus, has just released the first version of their personal financial management tool. Enabled by what I imagine to be an API or similar technology, Marcus Insights will offer users convenient interoperability across multiple accounts, streamlining the financial management process. Marcus Insights will also help users track expenses and budget. CNBC reports, “The bank hopes that by helping users get a handle on their finances with a simple, clean interface, they will be more inclined to trust Goldman — and try some of the firm’s existing and upcoming products.”

Central Bank Digital Currencies (CBDC): The global sprint to produce the first operational Central Bank Digital Currency (CBDC) is my generation’s Space Race. 

The Harvard University Belfer Center and the Atlantic Council Global Business and Economics Center have released a helpful interactive tool to track which countries seem most promising to pull out in first place. China, Ukraine, Uruguay, Sweden, Thailand, and The Republic of Korea are each in pilot stages, though many thought-leaders expect China will be the first to fully launch their CBDC. 

Bloomberg reports, “The People’s Bank of China is likely to be the first major central bank to issue a digital version of its currency, the yuan, seeking to keep up with -- and control of -- a rapidly digitizing economy. Trials have been held this year in a handful of cities and tests have started with some e-wallets and online apps, with the Covid-19 pandemic and need for social distancing providing a new sense of urgency.”

Brazil has announced its CBDC will be out sometime in 2022. PYMNTS reports, “Roberto Campos Neto, president of Brazil’s central bank, said his country’s new digital currency will work in concert with its new instant-payments system.”

Mastercard published a press release announcing the launch of their “proprietary virtual testing environment for central banks to evaluate CBDC use cases.” The testing platform will enable central banks to simulate the digital currency’s behavior prior to deployment. The press release invites collaboration from other stakeholders on the project: “Central banks, commercial banks, and tech and advisory firms are invited to partner with Mastercard to assess CBDC tech designs, validate use cases and evaluate interoperability with existing payment rails available for consumers and businesses today.”

DeFi: Nirametrics reports that crypto exchange market Binance has announced a $100 million seed fund to “attract more decentralized finance (DeFi) coders to its smart contract-enabled Binance Smart Chain.” Approved DeFi projects will be eligible to receive up to $100,000 in funding from Binance. According to data from DeFi Pulse, the total market value of DeFi is above $8 billion. 

VC: Santander Bank has announced its FinTech venture capital arm will be transforming into FinTech-focused Mouro Capital and will be doubling total investments to $400 million. A press release from the bank states, "The decision to spin out its investment arm is another milestone in Santander’s four-year, 2019-2022, $23.6 billion digital and technology investment plan. The group is accelerating its digital and commercial transformation to maintain its operational excellence, while constantly improving the customer experience and innovative services it brings to customers."

 International Developments

Switzerland: Berner Kantonalbank (BEKB), a Swiss cantonal bank, has announced their interest in expanding into the digital asset space. BEKB is aiming for the digital asset exchange to be operational by next June. Finews reports, “BEKB's tokenization play is part of a five-year strategy to update itself and include blockchain technology in its offering. Hypi Lenzburg's Finstar, an open banking platform, will provide execution services on transactions and custody.”

Often regarded as one of the most crypto-friendly nations in the world, Switzerland just unanimously passed new blockchain regulations set to go into effect in 2021. Beincrypto notes, “As part of the newly passed law, statutes concerning bankruptcy and securities regulations received blockchain-focused updates. The [Blockchain] Act also provides a legal framework for trading tokenized shares and general cryptocurrency exchange operations.”

European Union: Finance Ministers from Germany, France, Italy, Spain, and The Netherlands released a joint statement calling for strict regulatory enforcement of cryptocurrencies in the EU. Reuters reports, “The five countries want all stablecoins to be pledged at a ratio of 1:1 with fiat currency, with reserve assets denominated in the euro or other currencies of EU members states, and deposited in an EU-approved institution.” EU regulators are fearful of how stablecoins, like that of the Geneva-based Libra Association, may threaten sovereign currency.

François Villeroy de Galhau, Governor of the Bank of France, stated in a speech at the Bundesbank conference in Berlin, “We in Europe face urgent and strategic choices on payments that will have implications for our financial sovereignty for decades to come. I see it as a ‘strategic square’, the four parts of the system to be solved for delivering a European strategy: i) Cross border payments shortcomings, ii) BigTech’s global projects in the financial sector (including stablecoins), iii) The developing European Payment Initiative (EPI) and iv) The potential Central Bank Digital Currency (CBDC).” The Governor noted that decisions concerning a CBDC and EPI would be made in the next one to two years.

United States: The Internal Revenue Service (IRS) has signed a $250,000 contract with a blockchain analytics company in an on-going effort to expand crypto tracing capabilities. Cointelegraph reports, “The firm behind the contract, Blockchain Analytics and Tax Software, is a relative unknown compared to familiar faces in analytics like Chainalysis. The firm’s only prior government contract was for only $9,800 with the US Treasury for serving as an expert witness.”

Earlier this month, the IRS published a request for submission to begin piloting crypto tracing technology. The request notes, “There are limited investigative resources for tracing transactions involving privacy cryptocurrency coins such as Monero, Layer 2 network protocol transactions such as Lightning Labs, or other off-chain transactions that provide privacy to illicit actors.”

Nigeria: Wema Bank, Nigeria’s first fully digital bank, will be hosting their second virtual hackathon October 30-31, 2020.  All Africa reports, “The 2-day virtual event will focus on five essential areas—Health-tech (community health and disease management), Agric tech, Edutech, Financial technology services and Gaming & Betting in a bid to contribute to the country and economy recovery.”

The Securities and Exchange Commission (SEC) of Nigeria has released regulatory guidelines for digital and cryptocurrencies. The Nigerian SEC released a statement that they “will be taking a three-pronged approach to regulate innovation in the crypto sector; these are: safety, market deepening, and providing solutions to problems.” The SEC also indicated all crypto assets will be treated like securities unless determined otherwise.

Published September 21, 2020