|From: Glenn Petersen||5/5/2017 11:43:01 AM|
|An obscure regulatory debate has put the entire U.S. fintech community on edge|
by Nik Milanovic ( @NikMilanovic)
April 24, 2017
The future of American fintech may hang in the balance of a pitched battle that has grown in intensity over the past four months. An obscure request for comments on regulatory standards, released by the Office of the Comptroller of the Currency (OCC) last March, has since evolved into a complex turf war between the states and Washington, DC.
Caught in the middle is the entire online finance industry, raising the question of just what a “fintech” business really is. Though it hasn’t made many national headlines, this fight may determine the future of innovation, competition and survival in the fintech world.
The debate centers around a proposal made in December by Thomas J. Curry, the Comptroller of the Currency, in which the OCC details a program for fintech companies to apply for charters as “special purpose national banks.” The charter, which is optional for fintechs, is meant to provide companies with a stamp of approval from the OCC for having generally strong compliance practices. This would essentially be a way for Washington to separate the well-run, “safe” fintech businesses of the world (e.g. PayPal) from the shady, exploitative ones (e.g. check cashers and payday lenders.)
In theory, the idea has a lot of merit. Though fintech can still be thought of as a relatively young industry, it is growing quickly enough that it may soon determine how most people save, exchange and invest their money. This proposal comes at a time when the world — from the U.K. to Germany to India to Korea — is evaluating what kind of guard rails the fintech sector needs.
When the industry is all grown up, consumers will want protections in place that prevent bad actors from misleading them, misusing their private information or stealing their money. And even if individual fintech businesses look to be compliant on their own, some national oversight might be needed to get ahead of the same kind of collective practices that brought about the financial crash in 2007.
With this in mind, the OCC wants to take the first step to create a uniform, nationwide set of standards for fintechs. But what should have been an uncontroversial first step instead unearthed a slew of objections from a complex web of stakeholders. These parties quickly raised concerns about stifling innovation, overstepping the limits of federal authority and understanding the nuances of fintech, among many others. At the very heart of this battle is the question of what fintech really is. And as evidenced by the debate, that question is much harder to answer than it may seem.
The history of finance, technology, the OCC and the need for regulation
The idea of fintech regulation is nothing new or novel. The OCC was itself established by the U.S. government in one of the first efforts to create standard national banking practices. Before the Civil War and the National Bank Act of 1863, states had the freedom to issue their own legal tender. Often, this meant the dollars someone was paid in one state wouldn’t be accepted in the next state over, or would be worthless if the currency reserves of the issuing state became insolvent. Some states, such as Wisconsin, outlawed banks altogether, while others like Michigan let anyone open a bank and suffered massive fraud as a result.
Early financial technology: A Tennessee regional two-dollar bill before the Federal Reserve. (Source: Vern Potter Currency.)
It was only after the Civil War that Washington began enforcing national financial consistency, a move that generated massive protests at the time from states, who saw the move as a federal overreach to consolidate power over local government.
In many tech fields today, as the industry grows, so do the questions about regulation. The questions of “whether Airbnb hosts should be subject to hotel laws” or “whether Uber drivers are employees or contractors” are just two notable examples in a long history of technology’s legal debates. Fintech, at the intersection of finance and technology, is obviously more poised for regulatory discussion than most tech.
It’s easy to see why fintech worries regulators and the public alike. As long as finance has existed, so have bad actors looking to take advantage of unwary counterparties. Julius Caesar set one of the first interest rate caps — at 12 percent — for the Roman Empire to combat loan sharks.
The early Quran still sets the standard for many Islamic banks, which must conduct Sharia-compliant finance. In the antebellum U.S., private lenders charged up to 500 percent interest to borrowers due to a dearth of banks and government regulation.
Financial malpractice is just as pernicious today. In its first five years, from 2011 to 2016, the new Consumer Financial Protection Bureau (CFPB) received more than 900,000 consumer complaints about financial services providers.
Fintechs themselves have not been free from fraud and scandal. The publicly traded TrustBuddy, based in Sweden, was forced into bankruptcy for massive misappropriations of investor funds. Cincinnati-based SoMoLend came under similar fire for misleading investors. And China’s peer-to-peer lending sector has spent years battling its way out of the shadow of massive fraud that has tainted the industry.
Fintech is growing quickly around the world. (Source: CB Insights)
Given the natural tendency of unscrupulous actors to exploit regulatory loopholes in finance, it’s no wonder the OCC wants to strike first to prevent the next financial apocalypse. That’s why, in March of last year, it released a whitepaper on innovation in financial services detailing eight “guiding principles” it would use to foster a healthy fintech sector, including, among others:
Yet in November, when Thomas J. Curry announced the OCC’s plan for a national charter, all hell broke loose.
- Encourage responsible innovation that provides fair access to financial services and fair treatment of consumers.
- Encourage banks of all sizes to integrate responsible innovation into their strategic planning.
- Collaborate with other regulators.
The controversy: turf wars, anti-competition and solutions for problems that don’t exist
The OCC’s call for a national charter has been, to say the least, controversial. The proposal itself, only 16 pages in length, designates fintech firms as “special purpose banks,” which would be subject to minimum requirements around governance structure, capital, liquidity, compliance, financial inclusion and continuity strategy. This all sounds pretty benign — who would want to give their money to a company that didn’t have those safeguards in place?
As it turned out, the proposal caused a firestorm among numerous fintech industry stakeholders. Weirdly enough, fintech companies, which will arguably be the most impacted by the charter, have been relatively quiet. The strongly vocal opponents of the charter have been an alphabet soup of state regulators, who view this move as a broad overreach of federal authority:
The list of states goes on. It’s fair to say they feel threatened by the proposed charter’s impact on their authority. But is it just a territorial spat, a turf war over who gets to oversee the fintech industry? Brian Knight, writing for American Banker, does an excellent job summarizing and rebutting the states’ positions:
- New York: DFS Superintendent Maria T. Vullo in January released a stern public comment letter to the OCC. In it, she argued that banks with national charters don’t have to abide by some state lending rules, and this charter could allow payday lenders to sign up for protections meant for tech companies. As she commented, “Fintech may be a catchy new word, but the concept of online finance isn’t new.” New York plans to move forward with its own rule proposals for fintech businesses.
- Florida: OFRC Commissioner Drew Breakspear called the charter a “solution to a problem that does not exist.”
- Ohio and Oregon: Senators wrote in to the OCC saying this would complicate existing state fintech laws and initiatives.
- California: Jan Lynn Owen, the commissioner of the CA DBO, argued that the proposal would complicate the DBO’s efforts to compile data on online marketplace lenders — such as fintech firms SoFi, Lending Club, Funding Circle and Prosper — in order to separate them from payday lenders.
- The “Dangerous” Argument: Federal laws will pre-empt states’ abilities to regulate fintechs within their borders.
- As Knight points out, “national banks are still subject to many state consumer protection laws as well as federal consumer protection laws. Fraud, discrimination and unfair and deceptive practices are all prohibited and the OCC will perform regular examinations on national banks.”
- The “Unnecessary” Argument: States can already enact better laws to regulate fintech, so the OCC’s authority in the matter is redundant and unnecessary.
- As per Knight, “those laws remain an ever-changing maze that requires constant monitoring of more than 50 different sets of rules. Conversely, the situation is better for commercial banks; there is greater consistency between federal and state law, and therefore greater consistency between national and state-chartered banks.” (Morning Consult also points out that, where states like North Carolina have been very friendly to fintechs, states like New York and Connecticut have been much tougher — a feature that allows fintechs to engage in regulatory arbitrage across state lines.)
- The “State Sovereignty” Argument: The OCC is overstepping their authority by overruling states that should be able to freely impose their own regulations.
- “If — as is likely — the benefits of state-by-state regulation are outweighed by the loss of opportunity and access imposed on consumers, federal involvement ca
The patchwork of state regulators is so fragmented that you need a map to navigate it. Source: Faisal Khan.
Knight’s analysis exposes the states’ arguments for what they are: self-defense against a perceived territorial encroachment by the OCC. Even so, to give some credit to regulators, there are still very real reasons this charter could easily hurt the not-nascent-but-not-yet-matured fintech sector in many ways:
- Bureaucracy: The OCC has granted only one national bank charter in the last six years. Would it move quicker to enable fintechs? It’s difficult to see how it would.
- One-size-fits-all: Fintechs are too diverse to be included in a charter generally drafted to legitimize deposit-holding institutions. As The Hill notes, this charter could lump together “payday lenders, marketplace lenders, and peer-to-peer payment companies” with robo-advisers, bank service providers, insurance tech, stock market apps, etc… Should they all be treated as banks?
- A competitive moat: Though the charter could narrow the gap between fintechs and banks, allowing fintechs to compete nationally instead of applying for state-by-state licenses, it could also lead to a “ thinning of the herd” by being too cumbersome or expensive for young companies. This could easily stifle innovation.
- More compliance risks: Fintechs could find themselves written into a narrower and narrower regulatory box, increasing the chances they’re shut down for benign compliance missteps.
- Balkanized regulators: Similar to the CFPB’s “no action letter,” which promises the bureau won’t take action against companies that meet its standards, gaining a charter from the OCC still won’t shield fintechs from other regulators who may have different rules.
This wide variety of businesses could all be lumped together as “banks” under the OCC charter. Source: CB Insights.
Predictably, it seems national regulatory agencies such as Moody’s are in favor of the charter. Credit unions, which see the charter as a way to level the playing field with fintechs, are also in favor. The Conference of State Bank Supervisors is against it. It seems everyone but fintechs themselves has an opinion on the charter.
In light of all the controversy around establishing a national fintech charter, can a compromise be reached?
The path forward: what would a good fintech charter look like?
Despite the heated pushback against the OCC’s charter plan, there are still very good reasons for centralized, consistent and national oversight of the fintech industry. As ex-Treasury Secretary Tim Geithner notes in Stress Test, his excellent memoir of the financial crisis, one of the reasons the Great Recession was so bad was that the “safeguards for traditional banks weren’t tough enough […] but what made our storm into a perfect storm was nonbanks behaving like banks without bank supervision or bank protections.”
If the fintech sector continues to grow as its leaders project it to, it may one day affect the lives of most Americans. It’s important to put the guard rails in place now to make sure a systemic shock doesn’t leave those Americans footing the bill.
The OCC’s proposal is probably the wrong solution. But, contrary to Florida OFRC Commissioner Breakspear’s assertion, that does not mean the problem does not exist. By launching a discussion of a national charter, the OCC has taken an important first step.
The state-by-state system has failed us before. As Geithner notes, it “led to venue shopping and other forms of regulatory arbitrage, as well as blind-men-and-the-elephant problems where no regulator had a truly comprehensive view of an institution or the responsibility for monitoring it.” And its Balkanization impairs the kind of federal oversight needed to detect nationwide trends as they develop: credit defaults in California could affect consumers in Texas, digital currency scams in Florida could inform regulators in New York, etc…
Then what would a good set of national fintech regulations look like?
It’s unclear whether the OCC is the best organization for the job. Many other federal organizations, such as the SEC, FINRA and the embattled CFPB, also have overlapping interests in the fintech industry. Maybe, as Brian Knight suggests, states can take the initiative by banding together to form a set of national rules, or maybe they can work with Congress to establish a new fintech regulator independent of the OCC. The Hill points out that one good example to follow is that of The Fed in its study of the payments industry.
- It would set basic underlying consumer protections. For instance, no fintech firm should be allowed to misrepresent its fees — and this is something that shouldn’t vary by state.
- It would preserve state sovereignty. States don’t have to all agree to one usury limit. But they can agree to a framework for how to establish usury limits that prevents lenders from cross-border regulatory arbitrage.
- It would recognize the heterogeneity of fintech. Most fintechs disintermediate banking services, each tackling only one of a wide range of services. On top of that, some fintechs (Zopa, SoFi) are themselves starting to build banks, while others (Moven, Monzo, Atom) want to be “bank-lites.” A banking charter runs the risk of being too broad (and weak) or too narrow (and inflexible). Regulation should be flexible enough to encompass new fintech models as they develop, without risking losing its teeth.
- It would promote innovation while following the Hippocratic Oath of first doing no harm. This could mean eliminating the burden fintechs face today of having to apply for 50 state licenses, while not imposing an onerous federal licensing cost and burden on them.
At the same time, it’s notable that one of the voices least present in this debate is that of fintechs themselves. While I won’t claim to have any more comprehensive of a perspective on the issue, my background comes from five years in the fintech industry (since before “fintech” was a common phrase). I’m surprised that commentators haven’t picked up on some great guiding examples already set by the fintech sector:
The Marketplace Lending Association and the Small Business Borrowers’ Bill of Rights are two industry organizations established for online lenders to self-regulate by adhering to high standards of transparency, fairness and consumer protection. (Full disclosure: One of the founders of these organizations is my former employer, Funding Circle.) In the U.K., online lenders (including Funding Circle) petitioned the Financial Conduct Authority to regulate the industry, which it began doing in April 2014. These examples can be instructive for U.S. regulators seeking to get their arms around the large and messy industry.
This month, Thomas J. Curry will step down from his post in charge of the OCC. The CFPB is under fire from Republicans and the Trump administration and may not survive much longer. It is unclear whether the push for federal oversight of fintech will survive this debate or simply die out, but striking down attempts at federal regulation ends up legitimizing illegitimacy.
Like many black markets, alternative finance and shadow banking would be safer if it were brought into the light and monitored. As Geithner says, during the banking crisis, “The financial cops weren’t authorized to patrol the system’s worst neighborhoods.” We can prevent the next financial crisis today… but we need to be willing to take the first step.
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|From: Glenn Petersen||5/15/2017 8:22:38 PM|
|Fintech is beginning to disrupt the remittance business.|
The Fight For The $400 Billion Business Of Immigrants Sending Money Home
A new class of startups is using bitcoin and the blockchain to drastically lower fees as they try to grab a share of the remittance market from old competitors like Western Union.
By Ben Schiller
04.28.17 | 6:00 am
“Dollars wrapped with love.” That’s how Dilip Ratha describes remittances—the money immigrants send home to their families and friends. “There are millions of people who migrate each year. With the help of the family, they cross oceans, they cross deserts, they cross rivers, they cross mountains,” Ratha, an economist, said in a 2014 TED talk. “They risk their lives to realize a dream, and that dream is as simple as having a decent job somewhere so they can send money home and help the family, which has helped them before.”
For a long time, economists tended to overlook these dollars, but recently they’ve come to appreciate their importance. Remittances, which totaled $429 billion in 2016, are worth three times as much as all the foreign aid doled out by governments worldwide, and it’s likely the money is more effective dollar-for-dollar. Unlike aid, which is notorious for passing through corrupt middlemen and inefficient bureaucracies, remittances go directly to recipients, where they pay for schooling, medical expenses, and new fridge-freezers. In some poor countries, like Somalia or Haiti, remittances make up more than a quarter of national income. And statistics show that remittances tend to hold up even in times of crisis. After the financial crash of 2007-2008, the intra-family flows continued even as private capital ground to a halt.
Sending money to Africa from the U.S. or Europe sometimes costs an extra 15%, and within Africa, the fees can be stupendous. [Illustration: mooltfilm/iStock0]
But that’s not to say that remittances couldn’t be more effective. New startups are aiming to do for international payments what Venmo and others have done for domestic transactions: make transfers mobile, painless, and social. “In 5 years or 10 years, the whole idea of a remittance or cross-border payments will be gone, just like we don’t have cross-border email, or cross-border web browsing. It’s just the internet,” says Jeremy Allaire, CEO and founder of Circle, a blockchain-based service that’s working on the remittance market.
Currently, it’s expensive to send money overseas, which is especially damaging for the immigrants sending small savings home to the developing world. The World Bank says transaction fees average 7.45% globally, and, in many remittance corridors, they’re a lot higher than that. Sending money to Africa from the U.S. or Europe sometimes costs an extra 15%, and within Africa, the fees can be stupendous. To transfer 33,000 Angola Kwanza (about $200) from Luanda to Namibia costs about $50, according to the World Bank’s price database.
But in the last 10 years the average global fees have fallen by about 2.5%, which equates to about $90 billion in extra love-dollars, the World Bank’s Marco Nicoli says. The D.C. institution works to bring more transparency to remittance pricing (the database lets you compare providers), and it lends money to poorer countries to beef up their payment systems. A further 5% drop in fees would mean $16 billion in extra annual income for recipients, it says.
In his speech, Ratha suggests several reforms, including loosening money laundering regulations on amounts lower than $1,000, ending monopoly arrangements between post offices (which often disburse remittances) and money transfer companies, and creating a new low-cost remittance system funded by philanthropy. But new technology and the boldness of an emerging group of money transfer startups–like Circle, and others like Abra, Transferwise, and WorldRemit–could also have a profound impact. The combination of the internet, mobile phones, bitcoin, and the blockchain could dramatically reduce the cost of sending money internationally, say experts. That is, if the startups are allowed to grow unimpeded by unnecessary regulation and special interest griping, including from banks and exchange companies that currently gain handsomely from the fees and inefficiency in the space.
“Money transfer companies structure their fees to milk the poor.” [Photo: Flickr user Peter Robinett]
The High Costs Of Sending Cash
There are several reasons why the cost of sending money cross-border is currently so high. Nicoli notes that most payments start and finish as cash, which means that human agents need to be employed to receive and disburse the money, raising the price for everyone.
Bill Barhydt, founder and CEO of Abra, points to all the “hands in the pie” in traditional transactions, like those orchestrated by market leaders like Western Union, MoneyGram, and RIA. Remittances can be initiated via an agent (like those affiliated with Western Union or MoneyGram), a bank branch, a post office, the internet, and via mobile. So there’s someone at the cash window taking the money. There’s the agent’s bank. There are “correspondent banks” on both sides of a national border. There’s the bank for the agent in the receiving country. There’s the disbursing agent. There’s Western Union or MoneyGram itself.
Founded in 1851 as a telegraph company, Western Union has more than 550,000 agents in 200 countries. It completed 268 million consumer transactions in 2016, worth $80 billion. Together with MoneyGram and RIA, it controls more than a quarter of the international market. And, as its longevity implies, it’s been adept at beating back competition before now. The company generated revenue of $5.4 billion in 2016, with operating income of $484 million.
In an interview with Fast Company, Western Union’s chief information officer David Thompson says the cost of regulatory compliance, including new anti-money laundering regulations introduced after 9/11, raises the cost of sending money internationally. (Banks and transfer companies are now required to identify customers and report transactions in excess of $10,000). But the compliance burden also makes it difficult for new entrants to eat into its business.
“Western Union is in a highly regulated industry globally, requiring licenses in every jurisdiction you operate in. You need a strong money laundering and broad risk program in place,” Thompson says. “Technology doesn’t solve all those business and regulatory issues. Some pure technology plays forget that. We live in a world with criminal networks and entities that you have to keep out of your infrastructure. There’s a pretty high barrier to entry because of the risks associated with the market.”
In his TED talk, Ratha has a less complicated explanation for the high cost of remittances. “Money transfer companies structure their fees to milk the poor,” he says. Development groups often point to a lack of competition and financial regulation in poorer countries. African migrants in particular pay a so-called “ super-tax” on international transfers, and the market power of MoneyGram and Western Union is likely one proximate cause. In a 2014 report, the London-based Overseas Development Institute said the “two companies account for $586 million of the loss associated with the remittance ‘super tax,’ part of it through opaque foreign currency charges.” Ratha says governments should require higher standards of transparency from money transfer companies on exchange rates, and the fees and taxes they charge both senders and recipients, so it’s easier for immigrants to shop around. Some smaller exchange providers even charge fees to people collecting remittances, further inflating costs, he says.
The promise of bitcoin and blockchain-based startups is that they dis-intermediate corresponding banks from the settlement process. [Illustration: mooltfilm/iStock]
The good news is that a string of competitors are now appearing, aiming to cut prices and improve transparency. London-based WorldRemit calls itself the “WhatsApp of Money.” Started by Ismail Ahmed, a Somali-born former United Nations official, it facilitates mobile money (or airtime) transfers to more than 140 destinations and now does 580,000 transfers every month. The London startup has received more than $150 milllon in venture capital from investors who backed Facebook, Spotify, Netflix, and Slack. Ahmed’s seed money actually came via the UN in the form of compensation for wrongful workplace treatment. He had alleged corruption in the UN’s development program in Somalia and faced retaliation (a potential employer was told not to hire him) after making his claims public.
TransferWise, set up by two former Skype employees, tries to bypass bank wire fees. It pairs up people needing to send money in different directions, so the money never needs to go cross-border. So, if you want to send $100 from the U.S. to Germany, you put the money in the company’s U.S. account. TransferWise then finds someone who wants to send money from Germany to the U.S. and that person pays their money into its German account. Instead of either side paying a hefty wire transfer fee, the transfer is made domestically, with TransferWise covering the balance. The idea has been called “Hawala with paperwork” after the traditional Islamic banking system whereby value moves around an international network of brokers without physical money ever actually being transferred. TransferWise charges 1% of the transfer amount up to $5,000, with no additional charges hidden in the exchange rate conversion (Banks, it says, will often exchange your money at less than the official rate, pocketing the difference on top of a fee).
TransferWise, which has Peter Thiel and Richard Branson as investors, recently announced that it’s integrating with Facebook’s Messenger Chat service, as are a host of other major players, including PayPal, MasterCard, American Express, and Western Union. The latter also has mobile partnerships with Viber and WeChat (though this hasn’t stopped criticism that it obfuscates pricing through a mixture of fees and exchange rate mystery).
The promise of bitcoin and blockchain-based startups is that they dis-intermediate corresponding banks from the settlement process. Remittances have traditionally been settled using wire or SWIFT–transfers within a network of international banks. But they don’t allow small payments of $5 or $10, and, because of fixed fees, they’re relatively expensive for amounts of, say, $200 or $500, say remittance experts. Many new startups (though not TransferWise) offer greater convenience at either end of the transfer (the money appears on your phone’s wallet or in your online bank account). But they still go through the traditional banking system, so their potential in lowering costs is limited.
“We have seen more innovation in the delivery channel stage of the transaction where players allow transactions to be initiated over the internet in different forms,” says Nicoli at the World Bank. “Ultimately, however, most of these models have to rely on the corresponding banking network. This is where where the potential of [distributed ledger technology] and blockchain innovation is.”
Though bitcoin itself has a sometimes unsavory reputation, the distributed ledger technology underlying bitcoin is now being developed as a settlement engine for all kinds of financial products, from stocks and bonds to loyalty points and insurance contracts. Blockchains–ledgers running simultaneously on millions of devices–offer cheaper, more secure record-keeping than the banking system. And, they can be used to transfer virtual currencies (like bitcoin) as proxies for traditional currency exchanges. Thus, they have potential to dramatically reduce costs.
“As blockchain technology matures, it has true disruptive potential to bring the cost of remittances to nearly zero and facilitate instant secure payments anywhere in the world,” writes Talie Baker in an Aite Group report about emerging remittance startups.
Abra’s customers never know they’ve just undergone a bitcoin transaction.
Abra, which says it can reduce transaction costs by up to 90%, has an ingenious way around the international settlements system. It uses bitcoin to transfer value instead. You load money from a bank account or human “teller,” to a mobile phone wallet. Abra converts the money into bitcoin, transfers it across the digital currency’s blockchain, then settles the amount in a local currency on the other end.
Importantly, customers never know they’ve just undergone a bitcoin transaction: Abra’s app looks and feels like any one of dozens of money transfer apps (like Venmo). And Abra also offers a service for people who don’t have bank accounts. It signs up “tellers” in different countries who, like Uber drivers, act as “human ATMs” on its behalf. Using the app, you find someone nearby willing to convert your cash to bitcoin. You meet up, hand over what you want to send via Abra, and the teller takes a small fee for offering the service (they set the rate themselves). In such a way, Abra hopes to build out an extensive network of agents, but without making a hefty investment in infrastructure.
Having launched in 2016 in the U.S.-Philippines corridor, in March the company expanded to 155 countries and now accepts and disburses money in 54 local currencies. Abra, which has received capital from American Express Ventures and other high-profile VCs, charges no fees for transferring money (though you need to pay your teller if you don’t want to use the bank account method). It makes money on the exchange rate, though it claims to offer better prices than Western Union.
Barhydt says Abra has tellers in 150 cities so far. Each has to undergo a one-to-one interview to ensure suitability. Most are already trading in bitcoin either independently or via a digital currency exchange (like Kraken).
Unlike other remittance startups, Abra doesn’t have banking licenses in all its locations, instead classifying itself as “non-custodial” and therefore exempt from regulations. Circle, on the other hand, uses bitcoin for transfers but takes possession of funds during transfers. It’s focused less on unbanked consumers and remittances, though that’s also part of its target business.
As Baker says in her report, using bitcoin is not without risks, because bitcoin’s legality is still questioned in some places. “Bitcoin is still an experimental currency in active development, and nobody can predict its staying power. It is not an official currency, and some jurisdictions even consider it illegal,” she notes (though Baker is excited by Abra and Circle, describing them in an email as “viable business models” with the potential to give Western Union and MoneyGram “a run for the money.”)
Allaire, at Circle, expects the exoticness of blockchain and bitcoin to retreat into the background as the technologies gain wider acceptance, including for remittance payments. “Consumers don’t care about the name of the technology. They want services that let them do things faster and cheaper,” he says. Backed by Goldman Sachs, Circle is already transacting more than $1 billion a year.
Western Union is still working out its approach to blockchain and bitcoin. It has invested in Digital Currency Group, a major fund for such startups, and last year it ran a small pilot program with Ripple, a payment protocol provider. But Thompson says the trial didn’t deliver “significant business value” or “return sufficient value for our shareholders,” and the idea isn’t being pursued.
For the moment, Western Union isn’t prepared to tear up its existing business, even as it migrates to mobile and Facebook Messenger. “We feel that the investment we’ve made in our infrastructure, our team, our processes and policies are our secret sauce, and that’s why Western Union has been in business for 165 years,” Thompson says.
Maybe so. But, with all the startups gunning for its business, Western Union is going to have to work harder than ever to maintain its position. The next few years will dictate if Western Union can last another 165 years or whether its high-fee model–one that appears injurious to many immigrants around the world–can survive in its current form.
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|From: Glenn Petersen||6/21/2017 11:41:47 PM|
|Fintech in China. Ant Financial is an affiliate of Alibaba. Unfortunately, it was spun out of Alibaba prior to the IPO. It is controlled by Jack Ma. There are reports that it will IPO in Hong Kong later this year.|
Meet the Chinese Finance Giant That’s Secretly an AI Company
The smartphone payments business Ant Financial is using computer vision, natural language processing, and mountains of data to reimagine banking, insurance, and more. 0
by Will Knight
MIT Technology Review
June 16, 2017
Ant Financial announces a developer initiative in 2016.
If you get into a car accident in China in the near future, you'll be able to pull out your smartphone, take a photo, and file an insurance claim with an AI system.
That system, from Ant Financial, will automatically decide how serious the ding was and process the claim accordingly with an insurer. It shows how the company—which already operates a hugely successful smartphone payments business in China—aims to upend many areas of personal finance using machine learning and AI.
The e-commerce giant Alibaba created Ant in 2014 to operate Alipay, a ubiquitous mobile payments service in China. If you have visited the country in recent years, then you have probably seen people paying for meals, taxi rides, and a whole lot more by scanning a code with the Alipay app. The system is far more popular than the wireless payments systems offered in the U.S. by Apple, Google, and others. The company boasts more than 450 million active users compared to about 12 million for Apple Pay.
Ant’s progress will be significant to the future of the financial industry beyond China, including in the U.S., where the company is expanding its interests. The company’s approach goes around existing institutions to target individuals and small businesses who lack access to conventional financial services. Ant said in April of this year that it is buying the U.S. money-transfer service MoneyGram for $880 million. The deal is subject to regulatory approval and should close in the second half of this year. The company could well apply the technologies it is developing to its overseas subsidiaries. A spokesperson for the company says it hasn’t brought Alipay to the U.S. because existing financial systems provide less of an opportunity.
Yuan (Alan) Qi, a vice president and chief data scientist at Ant, says the company’s AI research is shaping its growth. “AI is being used in almost every corner of Ant’s business,” he says. “We use it to optimize the business, and to generate new products.”
The accident-processing system is a good example of how advances in AI can flip an existing system on its head, Qi says. It has become possible to automate this kind of image processing in recent years using a machine-learning technology known as deep learning. By feeding thousands of example images into a very large neural network, it is possible to train it to recognize things that even a human may struggle to spot (see “ 10 Breakthrough Technologies 2013: Deep Learning”).
“We use computer vision for a job that is boring but also difficult,” Qi says. “I looked at the images myself, and I found it pretty difficult to tell the damage level.”
Qi speaks a mile a minute, which seems appropriate given how quickly his company seems to be moving. Dressed in a smart shirt and dress pants on a sweltering afternoon in Beijing this May, shortly after giving a speech at a major AI conference, Qi explained that the company considers itself not a “fintech” business but a “techfin” one, due to the importance of technology.
Ant already operates a range of other financial services besides Alipay. For instance, it provides small loans to those without a bank account. It assesses a person’s creditworthiness based on his or her spending history and other data including friends' credit scores (see “ Alipay Leads a Financial Revolution in China”).
Ant’s creditworthiness system also provides a high-tech way to obtain various services, such as hotel bookings, without a deposit. Qi says that Ant uses advanced machine-learning algorithms and custom programmable chips to crunch huge quantities of user data in a few seconds, to determine whether to grant a customer a loan, for instance.
A recent hire offers some measure of Ant’s intent to apply artificial intelligence to finance. This May the company announced that Michael Jordan, a professor at the University of Berkeley and a major figure in the field of machine learning and statistics, would become chair of the company’s scientific board.
Qi is no slouch, either. He got his PhD from MIT and became a professor in the computer science department at Purdue before joining Alibaba in 2014. Once there, he developed Alibaba’s first voice-recognition system for automating customer calls.
“We built a system, based on deep learning, to carry on conversations; to provide answers to your questions,” Qi says. This chatbot system also taps into a knowledge base of information created by Ant, and is an example of how researchers are increasingly combining cutting-edge machine-learning techniques with conventional representations of knowledge. “Human language is still very hard for a machine to understand,” Qi says.
In March this year, the chatbot system surpassed human performance in terms of customer satisfaction, says Qi. “There are many, many chatbot companies in Silicon Valley. We are the only one that can say, confidently, they do better than human beings,” he says.
Ant’s success to date has certainly been impressive. Credit Suisse estimates that it manages 58 percent of mobile payments in China. A key competitor has emerged in recent years with WeixinPay, from the mobile chat giant Tencent, now accounting for almost 40 percent of the market. Ant remains enormously valuable, though. Earlier this year, a Hong Kong investment group valued the company at $75 billion. The company was expected make an initial public offering this year, but that now looks more likely to happen in 2018.
Ant is also increasingly looking to expand its interests overseas. The company has invested almost $1 billion in Paytm, an Indian payments company. It has also invested in Ascend, a Thai online payments business, and M-Daq, a Singaporean financial business. Ant apparently also sees investments and acquisitions as a way to bolster its technological prowess. Last year the company acquired EyeVerify, a U.S. company that makes eye recognition software.
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|From: Glenn Petersen||8/5/2017 10:57:42 PM|
|Money continues to pour into the sector, though at lower valuations. LendingClub still has a valuation of $2.1 billion.|
Fintech lender Prosper's valuation dives 70% in latest funding round
Riley McDermid Digital Producer
San Francisco Business Times
Aug 4, 2017, 11:50am PDT
San Francisco fintech Prosper is about to close on $50 million in funding, in a round that slashes its value 70 percent to $550 million, The Information reports .
That a steep decrease from the $1.9 billion valuation the second-largest online lender saw just last year. The Information reports people close to the matter as saying the company's new investor is Chinese and that although Prosper is struggling, it's attempting to get back onto a path toward financial stability.
"A sharp drop in the valuation of Prosper has nearly wiped out the value of the online lender’s common stock," the Information reports. "The company’s problems reflect the continuing struggles in the industry, as wary investors pull back from the platforms."\
Prosper is similar to most other online lenders because it makes money by taking a fee from lenders looking for access and then a percentage of each loan made. But the increasing scarcity of buyers and increasing pressure on the fintech space have had it scrambling for new ways to stay viable.
"Prosper in particular was reliant on a small number of large buyers such as BlackRock (NYSE: BLK). As one investor began backing out the rest followed, and the company’s revenue dropped," the Information reports. "Prosper’s revenue went from $204 million in 2015 to $136 million in 2016."
The company has also been downsizing as it looks for places to trim the fat, including closing an office in Salt Lake City earlier this year and laying off 30 percent of its employees.
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|From: Glenn Petersen||9/4/2017 7:17:40 AM|
|Alipay rolls out world’s first ‘Smile to Pay’ facial recognition system at KFC outlet in Hangzhou|
PUBLISHED : Friday, 01 September, 2017, 3:12pm
UPDATED : Sunday, 03 September, 2017, 4:40pm
Alipay today launched its facial recognition payment solution at KFC’s new KPRO restaurant in Hangzhou. SCMP Pictures (UNDATED HANDOUT)
Ant Financial, which operates the Alipay electronic payment platform used in Alibaba’s Taobao and Tmall online shopping sites, has rolled out the world’s first commercial application of a payment system that identifies payers using facial-recognition technology.
At KPRO, a new KFC restaurant that serves salads, paninis and fresh juice instead of deep-fried chicken in Alibaba’s home base of Hangzhou, customers can authenticate their payments by having their faces scanned.
The “Smile to Pay” application takes just one to two seconds to recognise and identify a face, which follows the scan with a second verification through a mobile phone, according to Ant Financial. The technology is fully insured, and users of Alipay can disable or enable the feature any time.
A video provided by Ant Financial, which bought a stake in the China-based KFC and Pizza Hut fast food restaurants business last year from Yum! Brands for US$460 million along with Primavera Capital, shows customers being accurately identified, even though they were in disguise using make-up or wearing wigs.
“Combined with 3D cameras and likeness detection algorithm, ‘Smile to Pay’ can effectively block spoofing attempts using other people’s photos or video recordings,” said Chen Jidong, Ant Financial’s director of biometric identification technology.
The roll out of Ant Financial’s “Smile to Pay” function, powered by the Face ++ technology developed by Beijing start-up Megvii, underscores how China, with the world’s largest population and a headlong embrace of mobile internet technology, is becoming the latest testing ground for new applications and services.
China’s has been a front runner in both the developing and applying facial recognition technology for commercial use, a trend that’s been untouched by technology companies in the United States, due to tighter US laws governing the collection of biometric data. An airport in Nanyang city in Henan province has installed a check-in system that augments a boarding pass with a facial recognition system developed by Baidu, operator of China’s dominant internet search engine. Similar plans are afoot for the Beijing airport.
Alipay already has more than half the share of China’s US$5.5 trillion market for mobile payments, while Alibaba’s Taobao and Tmall are the biggest e-commerce and online shopping platforms on the market. Alibaba is also the owner of the South China Morning Post.
Alibaba’s founder and chairman Jack Ma Yun demonstrated Ant Financial’s “Smile to Pay” function for German Chancellor Angela Merkel during the 2015 CEBIT exhibition in Hanover. Facial recognition is one of hottest technology trend in China.
Ant Financial’s facial recognition technology was licensed from Megvii. Other companies like Didi Chuxing, the dominant Chinese ride-sharing company, uses Face++ to verify the identities of its 1.35 million drivers, while Meitu uses it to enhance its photo-retouching features.
Megvii raised US$100 million from investors CCB International and Foxconn Technology during its last funding round in December, according to a report by Bloomberg.
This article appeared in the South China Morning Post print edition as:
Alipay launches world’s first smile-to-pay system
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|To: Sr K who wrote (83)||10/22/2017 10:21:10 PM|
|From: Glenn Petersen|
|Jack Ma stole it from Yahoo, Jerry Yang, and Marissa Meyer.|
Alipay was the subject of one of China’s most controversial corporate governance scandals, when in 2011 Mr Ma took it out of Alibaba and placed it under the direct control of himself and some associates. Yahoo, at the time a 40 per cent shareholder in Alibaba, was among the main protesters.
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|From: Sr K||10/26/2017 12:16:59 PM|
|Lending Tree (TREE) is up ~15% after reporting Q3.|
Adjusted earnings 1.17, compared to consensus .97.
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|To: Kirk © who wrote (86)||12/11/2017 11:10:29 PM|
|From: Glenn Petersen|
|Probably a good call. Last week's reaction to the revised guidance was a bit excessive. Hopefully, they have their house in order now.|
LendingClub (LC) Stock Tanks 17.4% on Lower Q4 Guidance
December 11, 2017, 08:15:00 AM EDT By Zacks Equity Research, Zacks.com
Shares of LendingClub Corporation LC plunged 17.4% since its Investors Day conference last week. Investors turned bearish as the company lowered its fourth-quarter 2017 outlook within a month.
What's the New Q4 Guidance & Why was it Lowered?
LendingClub provided the details related to its new outlook in the Investors Day presentation. The company now expects fourth-quarter 2017 revenues, GAAP net income and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be nearly $3 million lower than what it guided in November.
LendingClub now projects net revenues to be in the range of $155-$160 million, down from previous outlook of $158-$163 million. Additionally, adjusted EBITDA and GAAP net loss are expected to be in the range of $16-$20 million (lower from $19-$23 million) and $10-$6 million (wider than prior loss estimate of $7-$3 million), respectively.
Further, LendingClub's 2017 revenues are projected to be approximately in the $573-$578 million range and adjusted EBITDA between $42 million and $46 million. Notably, the company is expected to report a net loss of $72-$68 on GAAP basis.
The main reason for reduced fourth-quarter outlook is related to the "timing impact" of holding residual from the company's recent securitization deal. While securitizations help LendingClub in originating more loans and thus earn additional origination and servicing fees, they expose the company to more risk as it has to retain part of securitization deals on the balance sheet.
LendingClub's 2018 guidance includes $25 million operating expenses related to investments in automotive refinancing platform and technology upgrades while not taking into consideration any legal costs.
Further, LendingClub's 2018 revenues are projected to be approximately in the $680-705 million range (up 18-22% year over year). This shows that the company is on track for its long-term revenue target of 15-20% rise year over year.
Adjusted EBITDA is anticipated between $42 million and $46 million (rising 87.5% at the mid-point). Notably, LendingClub is expected to report a net loss of $53-$38 on GAAP basis, reflecting a year-over-year improvement.
Road Ahead Expected to be Bumpy
LendingClub grew rapidly in the last few years. But the company's asset quality deteriorated as high-risk borrowers defaulted. This, in turn, led to some of the investors moving away from the company.
Nonetheless, LendingClub tightened its underwriting methods earlier this year. Therefore, the company was now expected to meet its financial targets. So, this reduced outlook made the investors apprehensive.
LendingClub's shares have plunged 33.1% so far this year against industry 's growth of 17.8%.
Currently, LendingClub carries a Zacks Rank #3 (Hold).
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