Thursday October 27 2016, Daily News Digest

illiquid asset asia

News Comments Today’s main news: Are chatbots the next big thing in banking? Today’s main analysis : Why illiquid assets are the future of alternative investing. Today’s thought-provoking articles: Why three tech titans are investing in FinTech. Can FinTech prevent the next financial crisis? The OCC’s FinTech regulation framework. United States Banks (and credit card companies) are […]

illiquid asset asia

News Comments

United States

United Kingdom

European Union

Israel

Australia

  • OCC publishes FinTech regulation framework. AT: “The first step suggested in the framework is to establish an office of innovation whose mission will be to implement the framework. Unlike the U.S., Australian leaders strongly believe in regulation as a force for encouraging innovation.”

India

Asia

News Summary

United States

Banks Bet on the Next Big Thing: Financial Chatbots (New York Times), Rated: AAA

This week Bank of America, MasterCard and several financial start-ups announced new tools — known as chatbots — that will allow customers to ask questions about their financial accounts, initiate transactions and get financial advice via text messages or services like Facebook Messenger and Amazon’s Echo tower.

The early versions of the financial chatbots generally do little more than answer basic queries about recent transactions and spending limits.

But companies are aiming to build the chatbots into full-service automated financial assistants that can make payments and keep track of your budget for you.

Many companies are betting that automated bots — both in text messaging and voice-activated form — could become the dominant interface of the future, surpassing phone apps and websites as the way to reach consumers.

Digit, a San Francisco-based start-up, offers an iOS and Android mobile app that can monitor a customer’s spending habits and pull small amounts of money from a bank checking account into a Digit savings account several times a month — with all interactions channeled through text messages. The company has raised $36 million from venture capitalists and saved $230 million for its customers since starting in 2015.

Saving is one of the features being built into Bank of America’s offering, Erica. The early version that the bank debuted this week can also track your credit score, look at your spending habits and offer advice on how to pay off bills, along with moving money.

A day after Erica was unveiled at the financial technology conference Money 2020, MasterCard revealed its Kai offering, which it will make available to the banks that issue its cards. Neither Erica nor Kai is available to customers yet, and the companies did not provide firm release dates.

Among the Silicon Valley start-ups working in the same realm, there is a common argument that the new digital financial assistants should come from outside the financial firms, so that they can link to any account a customer may have and bestow unbiased advice.

ABA Urges FDIC to Take Tailored Approach to Third-Party Lending (Banking Journal), Rated: A

ABA today responded to proposed guidance by the FDIC addressing safety and soundness and consumer compliance measures institutions should follow when engaging in third party lending. ABA asked the agency to clarify the types of third party relationships the guidance applies to, provide greater specificity regarding the risks that are unique to third party lending relationships and be vigorous about ensuring that examiners treat any third party lending guidance as such guidance.

As proposed, the guidance encompasses any involvement of a third party in any part of the lending process, including marketing, underwriting, pricing, servicing, disclosures, compliance collection and other areas—whether the FDIC-insured institution originates a loan on behalf of a third party, uses a third party’s platform or originates a loan through or jointly with a third party.

Why Zuckerberg, Gates And Omidyar Are Investing In Fintech For The Poor (Forbes), Rated: A

According to a reportpublished in early September, Facebook is currently considering acquiring mobile money giant M-Pesa that launched in Kenya in 2007.

This is on the heels of Zuckerberg’s recent visit to Nigeria and Kenya. The future will be built in Africa, Zuckerberg said before visiting Kenya, the “world leader” in mobile money on his first visit to sub-Saharan Africa, a surprise trip that has propelled Africa’s entrepreneurial spirit. The mobile payment system is now a part of the culture of the region. Also Kenya has 5.3 million Facebook users, many of whom access the social network via mobile.

Bill Gates once mentioned that “in the next 15 years, digital banking will give the poor more control over their assets and help them transform their lives.” By 2030, 2 billion people who don’t have a bank account today will be storing money and making payment with their phones. And by then, mobile money providers will be offering the full range of financial services, from interest-bearing savings accounts to credit to insurance.

Can Fintech Prevent The Next Financial Crisis? (Forbes), Rated: A

I’m talking about the P2P lending model, which is Fintech that has enabled savers and lenders to come together. As with every new business model, especially when it comes to finance, there is tremendous interest but also a stark warning of the risks it poses for those who invest their savings. Yet, paradoxically, the P2P lending banking model may actually have the power to prevent the next financial crisis.

More than seven years have passed since the 2008 US sub-prime crisis, and the global banking system is still trying to recover. Yet, with US housing prices once again on the rise and with mortgage rates close to record lows, another credit bubble could be in the making, and this time, not just in the US.

In P2P lending it is the individual who lends his own money and it is the individual who decides who to lend to and it is the individual who decides how much risk to take.

Of course, for every upside there is downside and that is that the risk is moved from the institution to the individual saver/lender. And that is where the Fintech industry still has to achieve additional progress.

Finessing a FinTech merger? What banks need to know (Magenic), Rated: A

Banks weighing the pros and cons should consider the following before establishing such partnerships:

  • Opportunity cost: What’s likely to happen if we neither create our own solution nor partner with a FinTech?
  • Cost effectiveness: Would a merger be less expensive in the long term than building the same capabilities internally? Banks must be realistic about the expense, time and disruptiveness of building their own high-quality solution(s).
  • Overlap: Might the collaboration have an adverse impact on existing products and services, or is it likely to create its own separate revenue stream?
  • Longevity: How long will the FinTech’s platform or solution be important to the financial services industry? How soon might it be replaced by newer technology?
  • Regulatory soundness: Does the FinTech solution meet both industry and bank security standards? Banks must strive not to risk customer trust; In a poll this year, 70.3 percent of retail bankers ranked it their No. 1 advantage over new startups.
  • Company soundness: Because many FinTechs are so new, banks should closely scrutinize their profit and loss statements, capital structure, clients and goals. Are the founders in it for the long haul, or looking for a quick profit before moving on?
  • Cultural fit: Will bank and FinTech executives be able to work together effectively, or will there be serious cultural and philosophical clashes?

Marketplace Lending: If History is Our Guide, Greater Oversight and Regulation Are a Must (altfi), Rated: A

Apparently, we have yet to take this lesson to heart. The late 2000’s saw a rapid rise of a new group of stars – the “peer to peer,” or marketplace lending platforms. The timing of this rise was serendipitous, growing out of frustration with a banking system that had led to a global credit crisis. As traditional banks tightened credit, borrowers sought alternatives, and the marketplace lenders were able to tap into this latent demand. In spite of the “Great Recession,” the appetite for loans among consumers and small businesses was stronger than ever.

The marketplace lenders soon became the darlings of Wall Street with huge valuations – it was as if nothing could stop them; some even IPO’d. However, starting earlier this year, these lenders hit turbulence, and market enthusiasm has started to wane. The LendingClub scandals, followed by a series of disappointing earnings and dramatic reductions in force across numerous other platforms, has led many to question the transparency and viability of the marketplace lending model. Unlike traditional banks, most of these organizations have no other source of revenue generation besides originating loans. “If investments falter, how will these organizations sustain themselves?” was the question many began asking.

Whether we like it or not, regulations, oversights and interventional instruments are in place for a reason. In fact, we view regulation as an absolutely essential element of the marketplace lending industry’s maturation. There are certain regulations that we see as obvious:

  • Allow loan originators to serve only as originators
  • Only licensed brokers should be able to execute trades, and only with sophisticated investors and credit-worthy borrowers.
  • Finally, there needs to be an independent external rating system for loans and groups of loans.

Marketplace lenders are taking steps on their own to improve the integrity of their business model and operations. For example, one marketplace lending platform recently set up its own hedge fund, with the express purpose of purchasing loans it originates. This kind of foresight can serve to buffer marketplace lenders in times of tight liquidity.

Point Bolsters Executive Team With Key Financial Industry Veterans (Email Press Release), Rated: B

Point, the first financial technology platform that allows homeowners to sell a fraction of their homes, announced today the addition of two key executive hires. Ryan Randall, CFA, CAIA joins the company as Head of Capital Markets and Matt Brady as the Legal, Regulatory and Compliance Counsel. On the heels of Point’s successful Series A round, these appointments strengthen Point’s senior leadership team and further support the company’s next phase of growth.

Randall joins Point with more than 20 years financial services industry experience. Most recently, he served as CFO at fintech lending platform Upstart where he established the company’s capital markets function and helped attract $800M of loan capital within 12 months of launching its loan product. Previously, Randall was an investment officer at the $6B Fairfax County Retirement Systems and spent nine years with various Bay Area-based hedge funds.

Brady is a recognized expert in consumer finance law, and on federal and state financial regulations impacting FinTech companies. Brady joins Point having held senior roles at Solar City, practicing law at Reed Smith, and serving as judicial law clerk to the Honorable Bernard Zimmerman, former federal magistrate judge of the Northern District of California. He has litigated financial services extensively in the appellate courts and has been instrumental in developing innovative approaches to complex consumer finance instruments.

United Kingdom

UK Fintech Startup WeSwap Secures £1M Funding Target Prior to Seedrs Public Launch (Crowdfund Insider), Rated: B

On Wednesday, UK-based fintech startup, WeSwap officially launched its equity crowdfunding campaign publically on Seedrs. The company successfully secured well over its £1 million funding target from more than 1,800 investors during the initiative’s pre-registration.

The campaign’s debut comes just a few months after WeSwap secured a second round of funding, totaling £6.5million, led by investment firm Ascot Capital Partners and backed by existing investors EC1 Capital and IW Capital. The company stated it is seeking to help democratize travel money exchange. Over the past 12 months, WeSwap has reportedly grown by a massive 204%, welcoming over 200,000 new users to the WeSwap community. Since its launch, WeSwap has swapped tens of millions of pounds and has this year saved its users £1.2million on typical high-street currency exchange fees and commissions.

LendInvest Announces New Dates For Property Development Academy (Crowdfund Insider), Rated: B

Online commercial mortgage marketplace lender, LendInvest, announced on Wednesday it is now offering dates for a second London course for its Property Development Academy as a way to accommodate some of the applicants who were not included in the first Academy course. This second course takes place in the third week of January 2017.

Last month,  LendInvest launched Property Development Academy, which is described as a non-profit initiative designed to improve the skills of aspiring property developers whose projects can help to solve Britain’s major housing crisis.

European Union

FICO and EFL Partner to Extend Access to Credit for “Unscoreable” Consumers and Entrepreneurs in Multiple Markets (Fico.com), Rated: AAA

  • FICO is announcing a strategic partnership with EFL Global, a pioneer in psychometrics and alternative data for credit decisions, to make this technology available to FICO clients to help them safely and efficiently provide access to credit to millions of previously unscoreable consumers in markets outside the US.
  • This increased access to credit will unlock new economic opportunities for lenders and some of the 3+ billion consumers who remain unbanked or underbanked worldwide.
  • The initial focus of the partnership will be in Turkey, Russia and Mexico.

For more information: www.fico.com/financialinclusion

Cadwalader Advises on Securitization of Consumer Loans Originated Through the Zopa Platform (Cadwalader), Rated: B

Cadwalader has advised on the first securitization of marketplace consumer loans in Europe. The firm advised the arranger of a securitization backed by £150m of loans to UK consumers originated on the Zopa platform. This is the first public, rated securitization of marketplace consumer loans in Europe.

The deal was led by Capital Markets partner Jeremiah Wagner and included Capital Markets associates Patrick Leftley and Melina Bheekhun, as well as Tax partner Adam Blakemore and associate Catherine Richardson, all in London.

The Zopa deal and other recent, similar transactions continue to solidify Cadwalader’s leading position in the European securitization and Fintech space; Cadwalader was recently recognized by the Financial Times as the most innovative law firm in Europe for its work in helping to develop the alternative finance and marketplace lending sector with new securitization techniques.

Atom Bank, the most innovative European fintech firm (BBVA), Rated: B

Atom Bank has been recognized as one of the most innovative startups in the 2016 Fintech 100 ranking. BBVA has a 29.5% stake in the mobile-only bank operating in the U.K.

Atom ranks sixth in the report the consulting firm, KPMG, prepares every year in collaboration with the venture capital company, H2 Ventures. It is the first European firmto be included in this ranking. Atom improved two positions in this year’s ranking from 2015.

Switzerland Equity Crowdfunding Platform Launches Campaign For Luxembourg Real Estate Development (Crowdfund Insider), Rated: B

Earlier this week, Switzerland-based equity crowdfunding platform Bee Investedannounced the launch of its new campaign for a real estate project located in Luxembourg. The website stated the offering is designed to simplify investments by connecting developers and investors. It also claimed is is the first project to funded through equity crowdfunding in Luxembourg.

Active in Switzerland since last year, Bee Invested has decided to expand into Luxembourg as a way to stimulate and encourage investments in startups and real estate development projects.

Israel

9 Israeli fintech cos make KPMG top 100 (Globes), Rated: A

Nine Israeli companies were among KPMG’s 100 most promising fintech companies for 2016, compared with eight in 2015. Two Israeli companies Payoneer and Ourcrowd were rated among the 50 leading established companies, while seven were listed among the emerging fintech stars of tomorrow.

Payoneer, which deals in the transfer of payments between businesses from different countries, recently completed a $180 million financing round (half in an offer for sale by existing shareholders). Founded 11 years ago, the company’s annual revenue exceeds $100 million. Ourcrowd is actually a crowdfunding platform used mainly by startups in Israel and elsewhere.

The seven Israeli companies listed as emerging fintech stars include Tipranks, an aggregator for capital market analysis used to devise investment strategies and in analyst ratings.

Other companies on the list include Lemonade, which is active in P2P – not in loans, but in insurance – and Innovative Assessments, which offers underwriting tools (mainly for loans) through the use of a psycho-technical questionnaire.

Israel is also represented in the payments sector by Paykey, which offers a keyboard for mobile devices that can be used as an interface with a bank and for making payments, and by Zooz, which streamlines the digital payment process for businesses. Israeli company Blackswan, which appears in the big data segment, uses big data to generate business intelligence, and DMway uses big data to predict various trends.

Australia

OCC Unveils Fintech Framework in Advance of Charter Decision (Morning Consult), Rated: AAA

The Office of the Comptroller of the Currency on Wednesday released a framework for how it would approach financial technology regulation, a preliminary step ahead of its decision on whether to issue a national charter for fintech firms.

The blueprint, which comes as the OCC rolls out plans for a new innovation office to oversee fintech efforts, lays out recommendations for outreach, training and technical assistance. Because the effort is so new, the framework offers almost no indication of how regulators might police the fledgling industry.

The OCC has said it plans to publish a paper later this year seeking comment on a potential charter as firms grapple with a changing regulatory landscape for their industry. Several fintech companies are calling for clarity in the form of a limited-purpose charter, and other small companies are partnering with established banks.

The framework is the latest step in the OCC’s handling of fintech following a March white papercalling for comments on the topic, followed by a forum in June.

The agency said it will establish the new innovation office in the first months of 2017, which will be headed by acting Chief Innovation Officer Beth Knickerbocker, and it plans to develop an optional pilot program that would allow banks to tinker with fintech products and services.

Some of the OCC’s outreach under the framework will focus on banks partnering with fintech firms that need clarity on how third-party risk standards apply to them.

India

5 Reasons Peer-to-Peer Lenders in India could attract poor credit quality (LinkedIn), Rated: A

Peer-to-Peer Lending is emerging in India and will be successful if the Credit quality on these platforms have a reasonable default rate and provide good returns to the lenders.

As a Bank, we used to have 3 key criteria to understand if we were a potential target of “Negative self select”.

  1. Heavy documentation /Cumbersome Application – asking for more information or documents then the industry.
  2. Slow process – if the industry is processing a loan in 7 days your process take 10+ days or more.
  3. Higher interest rate – if you price your credit product higher than others and information is seamlessly available then a good customer will choose the loan which costs them lower.

However, for Peer-to-Peer Lending platform there are 2 more challenges:

  1. Brand Awareness: The belief that borrowers do not care about the brand from which they borrow – is not correct. A good borrower does not want to borrow from an unknown brand. They care about their personal information, kind of practices the borrowers adopt post disbursal of loan and how will they get serviced during the loan period.
  2. Confidentiality of the transaction: Most cars and houses in India are sold with financing however no one puts a sign on the car or house the name of the bank they took financing from. Similarly, the good borrowers do not expect finance company to publish their name of their website.
Asia

Why illiquid assets are the future of alternative investing (The Asset), Rated: AAA

The growth of illiquid alternatives, particularly institutional loans and private debt, are expected to keep pace with the expansion of the more popular alternative investments including real estate and hedge funds as investors further diversify portfolios.

Industry data compiled by AllianzGI indicate that illiquid alternatives have grown substantially post-global financial crisis. Going forward, illiquid alternatives are expected to more than double to US$2.4 trillion dollars in asset under management by 2020 from US$1.1 trillion as of 2015.

AllianzGI’s infrastructure debt portfolio more than doubled in 2015. It grew 29% in the first quarter of 2016. The infrastructure equity segment posted steady asset growth from a low base of 10 million euro in 2013 to 552 million euro as of end 2015. On the private debt side, AllianzGI plans to launch a new vehicle at the end of 2016 with 300 million euro in commitment.

Another benefit of investing in illiquid assets is that investors can get a premium because such assets cannot be easily sold without a substantial loss in value.

 

To be a FinTech hub, Singapore needs RegTech (Today Online), Rated: A

Singapore is working hard to develop its financial technology (FinTech) industry and results are beginning to show.

In a recent report by Deloitte, Singapore was tied with London as the top FinTech hub in the world. Both cities attained a score of 10 on the index — the best score among financial centres ranked.

As Singapore begins to reap the benefits of melding technology and finance in FinTech, it also needs to explore how technology can contribute to more effective financial regulation through what is known today as regulatory technology, or RegTech.

Singapore’s robust and transparent regulatory infrastructure has always been a crucial determinant of its success as a global financial centre.

However, there may be emerging regulatory challenges associated with the proliferation of FinTech solutions and technologies.

The new financial instruments and business models that FinTech start-ups bring with them add a level of regulatory complexity. Unlike traditional banks, FinTech start-ups may not be as well capitalised or leveraged. This suggests higher levels of risk.

Given this context, RegTech can provide regulators with a set of tools that can help them quickly identify risks and formulate the appropriate regulatory responses.

If Singapore is to retain its position as a leading FinTech hub in Asia and the world, it must now pay closer attention to the regulatory side of FinTech, particularly RegTech.

Authors:

George Popescu
Allen Taylor