Category: Digital Disruption

Speed Limits for Financial Markets? Not So Fast

From The IMFBlog.

On the afternoon of May 6, 2010, a financial tsunami hit Wall Street. Stunned traders watched as graphs on their computer screens traced the vertiginous 998-point plunge in the Dow Jones Industrial Average, which erased $1 trillion in market value in 36 minutes.

There was little in the way of fundamental news to drive such a dramatic decline, and stocks bounced back later that day. The event, quickly dubbed the “flash crash,” focused attention on the role of high-frequency trading and algorithms in amplifying market volatility.

Thick vs. thin

So far, though, there’s been remarkably little in the way of hard evidence on whether advances in information and communication technology help magnify market turbulence. Now, economists Barry Eichengreen, Arnaud Mehl, and the IMF’s Romain Lafarguette are trying to fill that gap. Their findings, surprisingly, are that faster transmission of market-moving news reduces volatility rather than increasing it.

The three economists present their research in a new IMF working paper titled “Thick vs. Thin-Skinned: Technology, News and Financial Market Reaction.”

The title refers to two popular hypotheses. The “thin-skinned” hypothesis holds that advances in information technology cause prices to react more violently to news by enabling strategies associated with volatility, such as algorithmic trading and stop-loss orders. High-frequency traders popularized by Michael Lewis’s 2014 book, Flash Boys, also have been blamed.

The “thick-skinned’’ hypothesis holds the opposite: advances in technology suppress volatility, because information that spreads more quickly reduces the information disadvantages of uninformed investors. Such investors “follow and amplify market trends by relying excessively on past or present returns to anticipate future returns,” the authors write. In other words, they engage in herd behavior, selling when prices fall and buying when prices rise. Better informed investors are less likely to follow the herd.

Ingenious test

Eichengreen and his co-authors have come up with an ingenious way of testing these hypotheses, by measuring reactions to news transmitted across superfast submarine fiber-optic cables.

“This result is consistent with the view that technology levels the informational playing field by easing access to information and that it thereby reduces trend following behavior,” they write.

Their laboratory is the world’s biggest financial market, the one for currencies, where average daily volumes exceed $4 trillion (more than the combined GDP of Italy and Brazil). They measured the reactions of currencies to major US economic news such as changes in gross domestic product, consumer prices and monetary policy.

London calling

To see how the speed of transmission affects the magnitude of the market reaction, they divided the markets into two groups: One receives news faster because it has direct fiber-optic connections with the major financial centers—Tokyo, London, and New York. The second set receives news more slowly, because it lacks direct fiber optic connections.

The amount of data they amassed is impressive: 240,430 observations for 56 bilateral exchange rates against the dollar between January 1, 1997, and November 30, 2015. Their conclusion: currencies traded in places which get their news faster via direct fiber-optic connections react less than currencies in places that receive their news more slowly. In fact, the reaction in markets with direct connections is 50 percent to 80 percent smaller.

Authors Eichengreen, Lafarguette, and Mehl decline to pass judgment on proposals to damp asset-price volatility by slowing the velocity of data flows with measures such as electronic “speed bumps.” But their study does suggest that transmitting information more broadly may reduce volatility.

 

 

That Other Bubble

From Bloomberg Technology

The financial world has been obsessed lately with debating whether we’re in a different sort of tech bubble, this time among public companies. One stock market strategist recently warned of “tech mania.”

The talk about tech stock froth is based on three interrelated facts: The performance of the U.S. stock market is more dependent on technology companies than any time in more than 15 years. Investors are willing to pay more to own these shares. And they’re crowded mostly into the same handful of big tech companies such as Amazon and Google parent company Alphabet.

Putting those data points together, some market watchers are worried that what has gone up in tech must inevitably come down — and take the whole ebullient stock market down with it.

It’s easy to understand why the finance world can’t stop talking about technology stocks. In the S&P 500 index, the sector accounts for about one quarter of the total market value of the equity benchmark. That is the largest share since 2001, according to Bloomberg data. (It’s worth noting that the S&P 500 doesn’t classify Amazon as a tech company, which is nuts. If the e-commerce giant took its rightful place, even more of the index would be tied to technology.)

Plus, money is pouring into the sector at a rate not seen in 15 years, according to research from Bank of America Merrill Lynch. And while investors aren’t paying stratospheric prices, as they did in the late 90s dot-com bubble, values of a broad collection of tech companies relative to their profits are higher than they have been since early 2004, Pavilion Global Markets calculated last week.

When you start mentioning things that haven’t happened to tech stocks since the early 2000s, you know we are living in odd times.

Every time there is tech froth, people will argue why this is or isn’t different than 1999. This isn’t 1999. But that doesn’t necessarily mean the exploding value of companies such as Apple, Netflix, Nvidia and Amazon is sustainable. I won’t try to predict the future, but the debate surely shows the outsized power of tech firms to drive global growth and equity markets.

Bubble talk isn’t likely to go away. Apple in May became the first U.S. company to top $800 billion in the total value of its stock. Now there’s a race to become the first company to sustain $1 trillion or more in market capitalization. Will it be Apple, or maybe Alphabet or Amazon? No non-technology companies, apart from Saudi Arabia’s mega government oil company, have a shot at the moment.

Snapshot of Marketplace Lending in Australia

ASIC has released a report today on its first survey of various participants in the marketplace lending industry.

Marketplace lending allows investors to invest in loans to consumers and small and medium enterprises (SMEs). It has the potential to provide another avenue of funding for business and consumers.

ASIC conducted the survey on a voluntary basis between November and December 2016 and focused on marketplace lending providers’ business models and activities for the financial year ended 30 June 2016.

Here are the main findings:

Loan origination fees accounted for approximately 83% of total fee revenue and the remainder of the revenue was almost exclusively generated from investors. The high proportion of origination fees may be partly explained by the fact that most providers have not been operating for a long period of time—any fees collected through interest payments may not be fully realised until future years.

Respondents promoted their product to a range of different borrowers, which fell broadly under the category of consumers (i.e. individuals) or non-consumer/business borrowers, such as SMEs, self-managed superannuation funds (SMSFs) and agribusiness.

As at June 2016, the eight entities who responded to the second part of the survey reported a total of 7,448 borrowers, consisting of 7,415 consumer borrowers and 33 business borrowers.

The survey results indicate that the industry is predominantly comprised of investors that are wholesale clients. However, some respondents that are currently wholesale-only providers have indicated that they intend to broaden their marketplace lending product offering to retail client investors in the future. The fact that many providers operate registered schemes seems to suggest that they may have plans to, or may wish to have the option available to, offer their marketplace lending product to retail client investors in the future.

Loans available on marketplace lending platforms may either be secured or unsecured. Two respondents provide loans on an unsecured basis only, while one respondent indicated that all its loans are secured (such as by way of a charge against all the borrowers’ assets or by registered first mortgage). The remaining respondents indicated their loans may either be secured or unsecured. The security is held for the benefit of the investors.

In most cases, requests for loans are assessed and assigned a risk grade and interest rate before they are made available for viewing and selection by investors. Most respondents indicated that interest rates are generally set by the provider and investors do not determine or influence the rate. Investors may choose the loans they wish to invest in based on the interest rate and/or risk grade allocated to the loan.

Loan amounts offered to consumer borrowers typically range from $5,000 to $80,000, while for business and other non-consumer borrowers, the amounts range from $2,001 to $3,000,000. None of the respondents provide small amount credit contracts or ‘payday loans’.

Most respondents indicated that they provide a grace period for borrowers in the event of missed or late repayments. All respondents indicated that reminders and direct engagement with the borrower are undertaken by the platform provider and that a repayment arrangement may be agreed with the borrower. Referrals to external collections agencies would be made if the loan remained delinquent. In one case, it was noted that recovery action would require the consent of the lenders for the particular loan. One respondent noted that problem SME loans require a more tailored process compared to consumer loans. Most respondents indicated they do not stress test their loan book, largely due to the relative newness or small size of current loan books which would not produce any meaningful assessment. However, two respondents do undertake some testing.

Commissioner John Price said, ‘As a relatively new industry, it is important for ASIC to engage with and better understand the business models of marketplace lending providers.

‘The survey responses have provided valuable insights into these businesses. We acknowledge and appreciate the participation of survey respondents’, he said.

Report 526 Survey of marketplace lending operators (REP 526) summarises ASIC’s findings from the 2016 Marketplace Lending Industry Survey and outlines ASIC’s role and recent activities in regulating the sector.

The responses to the survey showed that during the 2016 financial year, $156 million in loans were written to consumers and SMEs. Respondents reported a total of 3,201 investors and 7,448 borrowers as at 30 June 2016. Provider revenue was predominately tied to loan origination, and respondents were aware of the conflicts that arose as a result. The number of complaints received by providers was generally low at this stage.

Since the commencement of ASIC’s Innovation Hub in March 2015, ASIC has engaged with 34 marketplace lending providers to assist them to better understand the requirements under Australia’s regulatory framework. This has included specific regulatory guidance and examples of good practice.

ASIC has also granted waivers of some obligations under the law to facilitate six marketplace lending business operations, while maintainingappropriate investor protections.

ASIC will continue to monitor developments in the marketplace lending sector. ASIC is keen to assist marketplace lending providers and engage with new fintech businesses and industry organisations through its Innovation Hub.

Background

In Australia, there is no bespoke regulatory regime for marketplace lending. The regulations that apply to marketplace lending depend on how the business is structured, what financial services and products are being offered and the types of investors and borrowers involved.

In most cases, ASIC has identified that the provision of marketplace lending products involves the operation of a managed investment scheme, which would require the marketplace lending provider to hold an Australian financial services licence. Where the loans made through the platform are consumer loans (i.e. loans to individuals for domestic, personal or household purposes), an Australian credit licence is alsorequired.

NAB Ventures backs Canadian fintech Company Wave

NAB’s venture capital fund, NAB Ventures, has led a US$24 million (AU$32 million) Series D funding round in Toronto-based cloud fintech company, Wave.

Wave delivers cloud-based financial management software including accounting, invoicing, and payroll with seamlessly integrated financial services such as credit card processing and lending.

Hear from NAB Ventures’ Melissa Widner and Wave CEO and Co-Founder Kirk Simpson talking about the new relationship here (8.34min)

Targeting entrepreneurs with fewer than 10 employees, Wave has over two and a half million small business customers in more than 200 countries around the world, including more than 35,000 active users in Australia.

The Series D funding round also includes funding from Royal Bank of Canada (RBC), Silicon Valley venture firms CRV and Social Capital, global funds OurCrowd and Harbourvest, as well as Canadian investors OMERS Ventures, BDC IT Venture Fund, BDC Capital and Portag3.

Commenting on the equity investment, General Partner NAB Ventures, Melissa Widner, said: “We’re looking forward to working with Wave, which has developed an interesting approach to cloud software and financial services aimed at small businesses with under 10 employees.

“We were impressed with how Wave’s offering gives entrepreneurs the tools they need to be successful, along with the fact their invoicing and accounting software are free with customers able to purchase additional financial services to suit their requirements as needed.

“As the largest business bank in Australia with over 450,000 small and medium business customers, we are interested in any emerging technologies in this space that provide customers with a connected experience.”

NAB Ventures has the right to appoint an observer to the Wave board.

Wave Co-Founder and CEO, Kirk Simpson, said: “At Wave we believe that the way to help small businesses succeed is with powerfully integrated financial services and software. By helping business owners manage their cash flow, prepare for tax time and gain actionable business insights, Wave covers the spectrum of a small business owner’s financial life, and helps their businesses grow and thrive.

“We all know that small businesses power the global economy, and nobody understands Australian small businesses better than NAB. We look forward to exploring together how to serve those business owners better.

“We also believe that innovative partnerships between technology companies and world-class banks will lead to transformative solutions in the market. In NAB and RBC, Wave has forward-looking, innovative bank partners on two continents, opening the door to those transformations,” he said.

For more information on Wave, visit www.waveapps.com.

-About Wave-

Wave is changing the way small businesses make money, spend money and track money.  Wave delivers cloud-based financial management software with seamlessly integrated financial services to business owners around the world. Over 2.5 million business owners around the world have used Wave to help manage their finances, and over 60,000 new businesses join the Wave ecosystem every month. For more information, visit www.waveapps.com.

7 in 10 smartphone apps share your data with third-party services

From The Conversation.

Our mobile phones can reveal a lot about ourselves: where we live and work; who our family, friends and acquaintances are; how (and even what) we communicate with them; and our personal habits. With all the information stored on them, it isn’t surprising that mobile device users take steps to protect their privacy, like using PINs or passcodes to unlock their phones.

The research that we and our colleagues are doing identifies and explores a significant threat that most people miss: More than 70 percent of smartphone apps are reporting personal data to third-party tracking companies like Google Analytics, the Facebook Graph API or Crashlytics.

When people install a new Android or iOS app, it asks the user’s permission before accessing personal information. Generally speaking, this is positive. And some of the information these apps are collecting are necessary for them to work properly: A map app wouldn’t be nearly as useful if it couldn’t use GPS data to get a location.

But once an app has permission to collect that information, it can share your data with anyone the app’s developer wants to – letting third-party companies track where you are, how fast you’re moving and what you’re doing.

The help, and hazard, of code libraries

An app doesn’t just collect data to use on the phone itself. Mapping apps, for example, send your location to a server run by the app’s developer to calculate directions from where you are to a desired destination.

The app can send data elsewhere, too. As with websites, many mobile apps are written by combining various functions, precoded by other developers and companies, in what are called third-party libraries. These libraries help developers track user engagement, connect with social media and earn money by displaying ads and other features, without having to write them from scratch.

However, in addition to their valuable help, most libraries also collect sensitive data and send it to their online servers – or to another company altogether. Successful library authors may be able to develop detailed digital profiles of users. For example, a person might give one app permission to know their location, and another app access to their contacts. These are initially separate permissions, one to each app. But if both apps used the same third-party library and shared different pieces of information, the library’s developer could link the pieces together.

Users would never know, because apps aren’t required to tell users what software libraries they use. And only very few apps make public their policies on user privacy; if they do, it’s usually in long legal documents a regular person won’t read, much less understand.

Developing Lumen

Our research seeks to reveal how much data are potentially being collected without users’ knowledge, and to give users more control over their data. To get a picture of what data are being collected and transmitted from people’s smartphones, we developed a free Android app of our own, called the Lumen Privacy Monitor. It analyzes the traffic apps send out, to report which applications and online services actively harvest personal data.

Because Lumen is about transparency, a phone user can see the information installed apps collect in real time and with whom they share these data. We try to show the details of apps’ hidden behavior in an easy-to-understand way. It’s about research, too, so we ask users if they’ll allow us to collect some data about what Lumen observes their apps are doing – but that doesn’t include any personal or privacy-sensitive data. This unique access to data allows us to study how mobile apps collect users’ personal data and with whom they share data at an unprecedented scale.

In particular, Lumen keeps track of which apps are running on users’ devices, whether they are sending privacy-sensitive data out of the phone, what internet sites they send data to, the network protocol they use and what types of personal information each app sends to each site. Lumen analyzes apps traffic locally on the device, and anonymizes these data before sending them to us for study: If Google Maps registers a user’s GPS location and sends that specific address to maps.google.com, Lumen tells us, “Google Maps got a GPS location and sent it to maps.google.com” – not where that person actually is.

Trackers are everywhere

Lumen’s user interface, showing the data leakages and their privacy risks, found for a mobile Android game called ‘Odd Socks.’ ICSI, CC BY-ND

More than 1,600 people who have used Lumen since October 2015 allowed us to analyze more than 5,000 apps. We discovered 598 internet sites likely to be tracking users for advertising purposes, including social media services like Facebook, large internet companies like Google and Yahoo, and online marketing companies under the umbrella of internet service providers like Verizon Wireless.

Lumen’s explanation of a leak of a device’s Android ID. ICSI, CC BY-ND

We found that more than 70 percent of the apps we studied connected to at least one tracker, and 15 percent of them connected to five or more trackers. One in every four trackers harvested at least one unique device identifier, such as the phone number or its device-specific unique 15-digit IMEI number. Unique identifiers are crucial for online tracking services because they can connect different types of personal data provided by different apps to a single person or device. Most users, even privacy-savvy ones, are unaware of those hidden practices.

More than just a mobile problem

Tracking users on their mobile devices is just part of a larger problem. More than half of the app-trackers we identified also track users through websites. Thanks to this technique, called “cross-device” tracking, these services can build a much more complete profile of your online persona.

And individual tracking sites are not necessarily independent of others. Some of them are owned by the same corporate entity – and others could be swallowed up in future mergers. For example, Alphabet, Google’s parent company, owns several of the tracking domains that we studied, including Google Analytics, DoubleClick or AdMob, and through them collects data from more than 48 percent of the apps we studied.

Data transfers observed between locations of Lumen users (left) and third-party server locations (right). Traffic frequently crosses international boundaries. ICSI, CC BY-ND

Users’ online identities are not protected by their home country’s laws. We found data being shipped across national borders, often ending up in countries with questionable privacy laws. More than 60 percent of connections to tracking sites are made to servers in the U.S., U.K., France, Singapore, China and South Korea – six countries that have deployed mass surveillance technologies. Government agencies in those places could potentially have access to these data, even if the users are in countries with stronger privacy laws such as Germany, Switzerland or Spain.

Connecting a device’s MAC address to a physical address (belonging to ICSI) using Wigle. ICSI, CC BY-ND

Even more disturbingly, we have observed trackers in apps targeted to children. By testing 111 kids’ apps in our lab, we observed that 11 of them leaked a unique identifier, the MAC address, of the Wi-Fi router it was connected to. This is a problem, because it is easy to search online for physical locations associated with particular MAC addresses. Collecting private information about children, including their location, accounts and other unique identifiers, potentially violates the Federal Trade Commission’s rules protecting children’s privacy.

Just a small look

Although our data include many of the most popular Android apps, it is a small sample of users and apps, and therefore likely a small set of all possible trackers. Our findings may be merely scratching the surface of what is likely to be a much larger problem that spans across regulatory jurisdictions, devices and platforms.

It’s hard to know what users might do about this. Blocking sensitive information from leaving the phone may impair app performance or user experience: An app may refuse to function if it cannot load ads. Actually, blocking ads hurts app developers by denying them a source of revenue to support their work on apps, which are usually free to users.

If people were more willing to pay developers for apps, that may help, though it’s not a complete solution. We found that while paid apps tend to contact fewer tracking sites, they still do track users and connect with third-party tracking services.

Transparency, education and strong regulatory frameworks are the key. Users need to know what information about them is being collected, by whom, and what it’s being used for. Only then can we as a society decide what privacy protections are appropriate, and put them in place. Our findings, and those of many other researchers, can help turn the tables and track the trackers themselves.

Australians Choose Digital Payments

Australians are embracing digital payments according to the latest  Milestones Report released by the payments industry self-regulatory body Australian Payments Network (previously Australian Payments Clearing Association). As a result, cash and cheques are in decline. Australia’s digital economy underpins what can increasingly be characterised as a less-cash society.

Cheque use plunged 20% to 111.6 million – the largest drop ever-recorded. The value of cheques dropped by 6% over the same period, after remaining flat in 2015 and dropping by less than 1% in 2014. Over the last five years, cheque use has dropped 56%.

The number of ATM withdrawals dropped 7.5% to 648.5 million in 2016 following a 5.5% drop in 2015 and a 4.7% drop in 2014. Since 2011, ATM withdrawals have dropped by 22%.

CEO of the Australian Payments Network, Dr Leila Fourie said “Looking at the payment choices that Australians make, it’s clear that the vast majority of us are moving away from cash and cheques faster than ever before. This is happening because of widespread use of new technology combined with a strong preference for faster and more convenient payment options.”

Consumers’ preference for digital payments is reflected in the strong year-on-year growth in card and direct entry transactions:

  • Australians used their cards 12.3% more in 2016, making 7.4 billion transactions.
  • Direct entry transactions (direct debit and direct credit) increased by 8.6% to 3.5 billion.

Over the last five years, card transactions grew by 72% and direct entry by 36%.

Increased smartphone penetration, which reached 84% in 2016, up from 76% in 2014, is an important contributing factor.

Australia’s online retail spend was estimated at $21.6 billion in 2016 and encouragingly from a digital inclusion perspective, this spend is not restricted to digital natives. Older Australians are using online shopping platforms more, with domestic online spending growing by 8.7% for those in the 55-64 age group, and 7.5% for 65+.

The Report also tracks progress on initiatives supporting Australia’s transition to the digital economy including the industry’s New Payments Platform and Australian Payments Plan.

AI and the Future of Mortgage Lending

From The Adviser.

The managing director of online mortgage broker uno. has suggested that artificial intelligence in mortgages could disrupt the industry and change the way broking works.

Speaking to The Adviser, Vincent Turner outlined that currently, online mortgage platform uno. allows users to look at different loans suited for their needs, which are then supported by a team of advisers.

Mr Turner said: “There is the presumption that if it’s digital, it means you’re doing it yourself. But, today, our advisers look at deals in the same way a broker would. We work out things the platform doesn’t, yet, work out.”

However, the managing director suggested that as technology catches up, the role of brokers and advisers will change.

He said: “Every month, we improve the insights available in the platform, or the rules that are in the platform, so that more and more of the stuff that we get a broker to do today – looking at it, and having credit knowledge — will be in the platform. Anything that a human can learn about credit policy, you can teach a computer.

“Now at that point, the intelligence in the platform starts to surpass that of an individual broker because it’s across every lender we deal with, and the service person’s role becomes less around who will approve it (because that logic will be inside the platform), and more about how do we structure this deal.”

Mr Turner estimated that uno., could, “within a year from now”, have the algorithm rules to know who will lend the money, how much they’ll lend, how much will cost, and whether they’ll approve it.

However, he said that if the lenders “work out how to do lending decisions in real time, without involving people at their end”, there could be a point where the intelligence “gets beyond our own”.

Mr Turner explained: “If you move forward 10 years, the lenders, I believe, are going to make lending decisions quite differently. With the advent of ubiquitous machine learnings and AI, the credit policies could be evolving on a minute-to-minute basis. That’s where I think it’ll end up on the next five to 10 years… And, if that’s all changing real time and the algorithms work out how to get smarter and smarter, then, the concept of a broker doesn’t really exist. It’s basically platforms that are plugged into what the lenders are using to make decisions.”

When asked whether AI could spell the end of brokers, he said: “Well no, not now. Not two years from now, five years from now. Even seven to 10 years from now, I doubt it. But, I don’t know.

“Each year, we get closer to where technology can make the entire lending decision. As long as you give it all the data and the documents, and you can assume that any documents you give it, it’ll be smart enough to pull the data off those documents, populate it into a data file, then the lenders who can make decisions just based on uploading all of the documents you need for a particular person, they will win.

“And, if there’s still the concept for broker, it’ll be a platform that has access to all of those lending algorithms.”

He concluded: “Inevitably, a mortgage will be: have you enabled me to do the thing I want to do, as fast as possible, with the least amount of effort, at the lowest possible cost?… It’s competition, you know.

“It’s annoying, but it’s good for the customer.”

“Absolute rubbish” that brokers are being replaced by technology

Many in the broking industry have been quick to reassure that AI and fintech would not threaten the mortgage industry, with former RESI CEO Lisa Montgomery telling The Adviser earlier this week that the proliferation of technology companies coming to the fore is actually of “detriment” to the borrower.

She explained that this was because you “cannot run your personal financial platform without the guidance and support of someone who knows how to articulate it correctly to pay the least amount of interest and to pay things off quickly”.

Likewise, the former chief executive of the Stargate Group and a leading fintech consultant has said that despite technology becoming more prevalent in the mortgage space, “brokers aren’t going anywhere” and could actually be on their way to writing 80 per cent of home loans.

Speaking to The Adviser, Brett Spencer, the former CEO of the Stargate Group and executive director of TICH Consulting Group, said that he thinks anyone who believes the broking industry is being replaced by technology is talking “absolute rubbish”.

Mr Spencer said that the fact an abundance of “fintech” solutions are coming to the market is exactly the main driver behind brokers remaining relevant and increasingly relied upon by consumers.

He explained: “The reason brokers are here and will continue to be here, and market share will grow… is that the sheer proliferation of the number of mortgage products in the market today is in the thousands.

“You talk to any one lender and they might say they have three products, but there are probably 30 variations on those products. Joe Consumer just doesn’t understand it.

“No matter how good an online platform you have, no matter how good a technology solution you have — Joe Consumer still wants to talk to a broker who is the expertise. And so, brokers will be here to stay. There is no question about it.”

Bitcoin Reaches For The Stars

The digital currency Bitcoin has now breached the US$2,100 mark thanks to continuing strong demand from Japan and China. Japan accounted for nearly 55 percent of trade volumes recently, where Bitcoin is now recognised as legal currency.

But to highlight the volatility, after hitting a fresh record-high of US$2,230 in US trade, it tumbled over 10% to as low as US$2,001 before rebounding yet again. Now it is up again at US$2,143 having added over 5% in just the past couple of hours.

The longer term trend is clear.

Bitcoin had already lifted to USD$1,900 last week when reports of possible political scandal in the U.S. and Brazil drove traders to safe commodities so Gold futures rose more than 2 percent. But some are now suggesting that Bitcoin may soon be seen as a competitor for gold in a flight to safety.

In addition, Bitcoin traded on the Hong Kong-based Bitfinex will soon be easily converted to U.S. dollars and this has the potential to narrow spreads and lift volumes further.

Some are also suggesting that the US Securities & Exchange Commission (SEC) may reverse its earlier decision to block the creation of a Bitcoin Exchange Traded Fund (ETF) is also impacting the market.

Remarkable to think that this highly volatile digital currency may be seen in the same category as gold!

Rapid growth in FinTech credit carries opportunities and risks

A new report from the Financial Stability Board overviews the development of FinTech platforms and looks at potential risks such activity brings. The report highlights that the growth is strong in certain markets, but the business models and partnering models vary widely.  In volume terms China, US and UK lead the way.

There is diversity in Fintech target borrowers. In some markets, they are primarily consumers, in others, small business. Loans can be unsecured, or secured. A growing trend is the partnering with incumbent banks.

Although FinTech credit markets are currently small in size relative to traditional credit markets, they are growing at a fast pace. In some markets, the share of lending is sufficient to impact financial stability, and as growth continues, more measures may be required.

“A bigger share of FinTech credit in the financial system could have both financial stability benefits and risks,” says CGFS chairman William C Dudley (President, Federal Reserve Bank of New York).

Potential benefits include increased access to alternative funding sources in the economy and efficiency pressures on incumbent banks. At the same time, risks may arise, including weaker lending standards and more procyclical credit provision.

“The emergence of FinTech credit markets poses challenges for policymakers in terms of how they monitor and regulate such activity. Having good-quality data will be key as these markets develop,” said chairman of the FSB Standing Committee on Assessment of Vulnerabilities Klaas Knot (President, De Nederlandsche Bank).

Size and structure of FinTech credit markets

Academic survey data on lending volumes in 2015 show considerable dispersion in FinTech credit market size across jurisdictions. In absolute terms, the largest FinTech credit market is China (USD 99.7 billion in 2015), followed at a distance by the United States (USD 34.3 billion) and the United Kingdom (USD 4.1 billion). In each of these three markets, new FinTech credit volumes were USD 60–110 per capita in 2015. Lending volumes were very small in other countries. It is noteworthy that the survey data for China are judged to have a lower platform coverage than other large markets; activity in China may therefore be underrepresented in a relative sense.

The composition of FinTech credit activity by borrower sector has varied noticeably across jurisdictions. In the United States, more than 80% of lending activity in 2015 was to the consumer sector (including student loans), while high shares of consumer lending were also evident in several other countries, such as Germany, Korea and New Zealand. In contrast, in Australia, Japan and the Netherlands, FinTech credit was almost entirely directed to the business sector as measured to include invoice trading (a non-loan typeof business credit). FinTech credit in the United Kingdom was also mostly extended to the business sector, with a significant portion of this in the form of secured real estate lending.

The FinTech credit market structure also varies across those jurisdictions for which data are available. The Chinese market has by far the highest number of FinTech lending platforms. In the United Kingdom, there are 21 platforms that have full regulatory authorisation, but a further 66 are being assessed for authorisation, of which 32 have interim permission to undertake activity. France also has a relatively high number of platforms, with a significant number of entrants after FinTech-specific legislation was introduced in 2014. In most jurisdictions, FinTech credit market activity appears to be reasonably concentrated among the five largest platforms, with the most notable exception being the Chinese market.

FinTech credit can be primarily segmented into private consumer loans and business loans. Debt refinancing or debt consolidation appears to be the most common purpose of FinTech consumer loans (including for student loans in the United States). To a lesser extent, consumer
loans are also taken out for vehicle purchase or home improvement in Australia, France and Italy. The US P2P consumer loan market is split between unsecured consumer lending and student lending. Platforms target prime and near-prime customers for the former, and higher quality
borrowers with limited credit history for student lending. The available data suggest that, in most jurisdictions, average FinTech consumer loans are typically in the range of USD 5,000–25,000, with the United States at the top end of that range (Graph 10). Average borrowing amounts are much larger in China, at more than USD 50,000.

Business loans in the United States are typically for small and medium-sized enterprises (SMEs). Platforms offer both secured and unsecured loans. The small business lending segment comprises nearly one quarter of overall FinTech lending, and the borrowers are more heterogeneous than consumer loan borrowers. In the United Kingdom, the majority of P2P business lending appears to be extended to small businesses. AltFi data suggest that around two thirds of P2P business lending is on a secured basis, mostly real estate but also non-property collateral.

Platforms in the Americas and Europe appear to be more domestically focused in their lending than in their capital or fund-raising activities, with only around 10–12% of platforms lending more than 10% to borrowers abroad. There is more cross-border lending in the Asia-Pacific region (around 40% of platforms lending more than 10% abroad), and the pattern of cross-border flows appears broadly similar for both lending and raising debt.

Scandals at FinTech platforms

Over the past 18 months, there have been a number of scandals in the FinTech lending sector.

While the fallout from these incidents has been limited, each one has raised concerns about performance and has attracted the attention of regulators to a less regulated industry.

Lending Club (United States): In May 2016, Lending Club, the largest US marketplace lending platform and one of only a few that are publicly listed, announced that the company had repurchased USD 22 million of near-prime personal loans previously sold to a single investor. Lending Club stated that the repurchased loans did not conform to the requirements of the buyer, and an internal review revealed evidence of data manipulation on certain noncredit fields. Concurrently, Lending Club announced that it had discovered a previously undisclosed ownership interest of senior executives in a fund designed to invest in marketplace loans. These disclosures resulted in the resignation of the CEO and several other senior executives.

While spillover effects to other platforms were relatively limited, this incident has prompted greater regulatory and investor scrutiny. Market participants reported that investors were subsequently seeking greater transparency in deals and underwriting practices.

TrustBuddy (Sweden): TrustBuddy was a P2P lending platform based in Stockholm. Launched in 2009, the platform originally specialised in payday loans, but was expanding into more conventional consumer loans. In August 2015, after reporting significant losses and as part of a transition to a broader focus on consumer lending, TrustBuddy brought in a new management team. The new team found evidence of misconduct, and an internal investigation revealed that the platform owed significantly more to investors than it held in assets. It appeared that TrustBuddy had been allocating new lender capital to cover bad debts, and using capital to make loans to borrowers without assigning the loans to a lender.

TrustBuddy reported the situation to the Swedish Financial Services Authority, which ordered TrustBuddy to cease its operations immediately. Trading in TrustBuddy shares was also suspended, and the platform filed for bankruptcy several days later.

While direct market reaction to this platform failure was muted, the incident raised questions about the safety of FinTech lending, and has prompted further regulatory scrutiny.

Ezubao (China): Ezubao, a Chinese FinTech lender purportedly active in small business lending, experienced the largest financial fraud in Chinese history. Ezubao unexpectedly stopped operating in December 2015, and ongoing customer investor complaints spurred a police investigation. In early 2016, it was revealed that Ezubao was a massive Ponzi scheme, in which more than 900,000 individual investors were defrauded of USD 7.6 billion. The platform, founded in 2014, was a relative newcomer to the market, but came under investigation for suspected illegal business practices early on. Most of the products offered by Ezubao were discovered to be fake, and the company was nothing more than a vehicle used to enrich top executives.

The FinTech lending industry in China is large and very fragmented. While the stock price of another large Chinese P2P lender, Yirendai, dropped precipitously around the time of the Ezubao announcement, it rebounded quickly. Other platforms do not appear to have been affected by the negative headlines.

Financial stability implications of FinTech credit

At this stage, the small size of FinTech credit relative to credit extended by traditional intermediaries limits the direct impact on financial stability across major jurisdictions.

However, a significantly larger share of FinTech-facilitated credit in the financial system could present a mix of financial stability benefits and risks in the future. Among potential benefits are effects associated with financial inclusion, more diversity in credit provision and efficiency pressures on incumbents. Among the risks are a potential deterioration of lending standards, increased procyclicality of credit provision, and a disorderly impact on traditional banks, for example through revenue erosion or additional risk-taking. FinTech credit also may pose
challenges for regulators in relation to the regulatory perimeter and monitoring of credit activity.

It is important to emphasise that FinTech credit is currently very small in nearly all jurisdictions. Perhaps only in the UK does P2P lending appear to be a significant source of credit to a particular segment – it accounted for nearly 14% of equivalent gross bank lending flows to small businesses in 2015. Reflecting the current small overall size of the sector, much of the analysis in this section is based on the assumption that FinTech credit continues to expand at a fast pace and that it becomes a significant share of credit activity. This analysis does not attempt to assess the likelihood of such an outcome.

Bearing in mind the pace of innovation and the rapid development of the industry, this section considers the implications for financial stability – both benefits and risks – of FinTech platforms becoming material providers of credit. It also considers the implications of the use
of securitisation to fund FinTech credit provision and the possible response from incumbent banks to the growth of FinTech credit.

The emergence of FinTech platforms has led to, and will continue to lead to, responses from the traditional banking sector. Specifically, banks may: (i) seek to acquire, or set up their own, FinTech credit platforms; (ii) make use of similar technologies for the traditional on-balance sheet lending business, such as those for credit assessment, either by developing them in-house or by partnering with FinTech credit platforms; (iii) invest directly in the loans of FinTech credit platforms; or (iv) retreat from market segments where FinTech credit platforms have a growing competitive advantage. The financial stability implications differ by scenario, but a few general trends may be surmised.

The growing adoption of online platforms and competitive pressures may lead to the greater efficiency of incumbent banks. By acquiring new online and data-based technologies, banks may “leapfrog” some current challenges in legacy IT systems. Similarly, successful partnerships between banks and FinTech platforms could create an opportunity to improve risk analysis or offer a better service to a particular segment of the market (such as the small loans segment). According to a UBS survey, around 22% of developed market banks have a partnership with a P2P lending platform. No emerging market banks surveyed reported having a partnership, but 23% intend to form a partnership in the future.

 

A ‘paradigm shift’ is taking place in financial technology

From Business Insider.

A “paradigm shift” is taking place in financial technology.

Venture capital firms, which poured $US117 billion into fintech startups from 2012 to 2016, have been pulling back on their investments. Meanwhile, established financial firms are positioned to step up their spending.

In a big note out to clients on May 18 titled “Fintech: A Gauntlet to Riches,” a group of equity analysts at Morgan Stanley said this shift will lead to an environment where legacy firms, or incumbents, “take the reigns”of financial innovation.

“Financials and payments incumbents are likely to be emboldened to step up R&D and take the investment lead, and this combination of VC/incumbent behaviour represents a paradigm shift that should benefit incumbents’ [return on investment],” Morgan Stanley said.

The role of VCs will continue to diminish

Financial technology companies experienced a surge in funding from 2012 to 2015, during which time venture capital firms poured $US92 billion into the space. Now it looks like those VC firms are experiencing a bit of a hangover.

In 2016, global venture capital investment in fintech companies dipped to $US25 billion, from $US47 billion in 2015.

In a recent interview with Business Insider, Amy Nauiokas, the head of Anthemis Group, a New York-based venture capital firm, described the time leading up to the dip as a “period of exuberance.”

“Big firms just sort of piled on a bunch of, let’s say, happy money,” Firms were thinking, we have money, we have capital, we have to spend it,” she said.

This environment of “happy money” sent valuations for fintechs to levels that some investors view as unreasonably high. For instance, Andy Stewart, a managing partner at Motive Partners, said at the International Fintech conference in London that valuations in fintech were “frothy,” or not connected to performance.

“Pullback in fintech investment over the past year is indicative of a realisation of lower [return on investments] than initially hoped due to some unique challenges to disrupting in the financials industry, and our suspicion is that VC investors will continue to scale back investing,” Morgan Stanley said.

Incumbents may fill the void

According to Morgan Stanley, there are a number of factors that will push legacy financial firms to step up their investments in fintech companies. The most obvious factor is the fear of disruption.

“[T]he threat of disruption from fintechs is forcing incumbents to up their investments in technology to gain operating efficiencies and preserve market share,” the bank said.

Deregulation is another trigger. If the Trump administration follows through on its promises of Wall Street deregulation, then incumbent firms won’t have to spend as much cash on regulatory compliance. That would free up money for fintech investment initiatives. Legacy firms’ focus on lowering cost also provides an incentive to invest in fintech.

“Managing expenses remains a key focus for incumbents as one of the drivers for earnings growth,” the bank said.”It follows that there is an increasing trend towards implementing more technology to drive efficiencies with moderated headcount growth going forward.”

What is the net outcome of this shift? A better business landscape for well-established Wall Street firms.

“As incumbents pick up investment while VCs reduce investment, we tilt towards a world where incumbents are less susceptible to disintermediation and more likely to co-opt new technologies,” the bank said.