Fintech small business lenders support research survey

New research will aim to establish current trends and best practice in the growing fintech lending market to small and medium-size enterprises (SME).

Fintech small business lenders will be surveyed as part of a collaborative research project by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) with industry organisation FinTech Australia and independent SME finance expert Neil Slonim from theBankDoctor.org.

Fintech lenders are an emerging alternative to banks for small business loans, often through seamless and highly automated online application, assessment and decision processes.

Ombudsman Kate Carnell said fintech lenders have potential to fill the gap left by traditional bank lenders in the marketplace, particularly as awareness, trust and confidence in alternative lending grows.

Ms Carnell commended the sector for being proactive to ensure best practice and transparency.

“But with rapid growth in the number of lenders and the variation of fintech products, it becomes more difficult for SMEs to make informed decisions about which products and lenders best suit their circumstances,” Ms Carnell said.

“The survey will collect information from fintech lenders that can shed light on some of these issues.

“Results will be published in a report to identify industry best practice and help SMEs to better understand their fintech borrowing options.

“The survey results will also inform fintech lenders how they can help SMEs by improving the transparency of their lending products and by clearly communicating the rates, costs, terms and conditions of their products.”

FinTech Australia CEO Danielle Szetho said FinTech Australia was pleased to work with the ASBFEO and theBankDoctor.org.

“This work will help us to understand how the industry is currently servicing SMEs and steps we might take as an industry to improve the SME community’s awareness and understanding of alternative lending products,” she said.

“What is clear is that banks have not been adequately servicing the SME community’s needs and fintechs have stepped in with new loan products to help fill that gap.

“This is proving to be a very beneficial and cost-effective source of funding for SMEs. This research will help even more SMEs to invest in their growth and benefit from alternative lending products.”

Neil Slonim from theBankDoctor.org said “it is not easy for small business owners to assess whether borrowing from a fintech lender is the best option for them, and if so, which lender they should choose.

“There are around 30 fintech small business lenders now operating and their websites, through which they engage with their customers, all appear to be much the same.

“As a not-for-profit SME advocate we are pleased to be working with the ASBFEO and FinTech Australia to raise understanding and transparency in a sector which is becoming increasingly relevant to small business owners.”

Japan and Australia cooperate on fintech

The Japan Financial Services Agency (‘JFSA’) and Australian Securities and Investments Commission (‘ASIC’) today announced the completion of a framework for co-operation to promote innovation in financial services in Japan and Australia.

This Co-operation Framework recognises the global nature of innovation in financial services. In this environment, this Framework enables the JFSA and ASIC to share information and support the entry of innovative fintech businesses into each other’s markets.

This Framework will help open up an important market for Australian fintechs. The Japanese economy is the third largest in the world, with services – including financial services – accounting for about three quarters of GDP.

In recent years, the JFSA has been actively involved in encouraging fintech through a range of measures including the modification of the legal system to enable financial groups to invest in finance-related IT companies more easily and establishing a legal framework for virtual currency and Open API. This Framework will encourage Japanese fintech start-ups to engage with innovative financial businesses globally.

ASIC Commissioner John Price said, ‘Japan has been a world leader in technology for a long time. As we move into a new era of financial regulation, we look forward to sharing experiences and insights with our colleagues at the JFSA.’

Shunsuke Shirakawa, JFSA Vice Commissioner for International Affairs, said, ‘We are delighted to establish this Co-operation Framework with ASIC. ASIC is one of the leading Fintech regulators that actively promote fintech by taking progressive actions including setup of the Innovation Hub.

‘We believe that this Framework further strengthens our relationship and facilitates our co-operation in further developing our respective markets.’

The Co-operation Framework will enable the JFSA and ASIC to refer innovative fintech businesses to each other for advice and support via ASIC’s Innovation Hub and the JFSA’s FinTech Support Desk.

It also provides a framework for information sharing between the two regulators. This will enable the JFSA and ASIC to keep abreast of regulatory and relevant economic or commercial developments in each other’s jurisdictions, and help to inform domestic regulatory approaches in the context of a rapidly changing global financial environment.

A formal ‘Exchange of Letters’ ceremony between Australian Ambassador to Japan, the Hon Richard Court AC and State Minister of Cabinet Office, Takao Ochi, took place in Tokyo today to seal the Framework.

This Co-operation Framework further underlines the strength and closeness of the broader Australia-Japan trade and investment relationship.

Background

ASIC is focused on the vital role that fintechs are playing in re-fashioning financial services and capital markets. In addition to developing guidance about how these new developments fit into our regulatory framework, in 2015, ASIC launched its Innovation Hub to help fintechs navigate the regulatory framework without compromising investor and financial consumer trust and confidence.

The Innovation Hub provides the opportunity for entrepreneurs to understand how regulation might impact on them. It is also helping ASIC to monitor and understand fintech developments. ASIC collaborates closely with other regulators to understand developments, and to help entrepreneurs expand their target markets into other jurisdictions.

To date, fintech referral and information-sharing agreements have been made with the Monetary Authority of Singapore, the United Kingdom’s Financial Conduct Authority, Ontario Securities Commission and Hong Kong’s Securities and Futures Commission. In addition, information-sharing agreements have been signed with the Capital Markets Authority, Kenya and Otoritas Jasa Keuangan, Indonesia.

Informally, ASIC has also met with numerous international fintech businesses referred to us by industry or trade bodies, including delegations from the United Kingdom and the United States.

Fintech: Capturing the Benefits, Avoiding the Risks

The IMF have published a paper on Fintech.  From artificial intelligence to cryptography, rapid advances in digital technology are transforming the financial services landscape, creating opportunities and challenges for consumers, service providers, and regulators alike. This paper reviews developments in this new wave of technological innovations, often called “fintech,” and assesses their impact on an array of financial services. Given the IMF’s mandate to promote the stability of the international monetary system, it focuses on rapidly changing cross-border payments.

Using an economic framework, the paper discusses how fintech might provide solutions that respond to consumer needs for trust, security, privacy, better services, and change the competitive landscape. The key findings include the following:

  • Boundaries are blurring among intermediaries, markets, and new service providers.
  • Barriers to entry are changing, being lowered in some cases but increased in others, especially if the emergence of large closed networks reduces opportunities for competition.
  • Trust remains essential, even as there is less reliance on traditional financial intermediaries, and more on networks and new types of service providers.
  • Technologies may improve cross-border payments, including by offering better and cheaper services, and lowering the cost of compliance with anti-money laundering and combating the financing of terrorism (AML/CFT) regulation.

Overall, the financial services sector is poised for change. But it is hard to judge whether this will be more evolutionary or revolutionary. Policymaking will need to be nimble, experimental, and cooperative.

When you send an email, it takes one click of the mouse to deliver a message next door or across the planet. Gone are the days of special airmail stationery and colorful stamps to send letters abroad.

International payments are different. Destination still matters. You might use cash to pay for a cup of tea at a local shop, but not to order tea leaves from distant Sri Lanka. Depending on the carrier, the tea leaves might arrive before the seller can access the payment.

All of this may soon change. In a few years, cross-border payments and transactions could become as simple as sending an email.

Financial technology, or Fintech, is already touching consumers and businesses everywhere, from a local merchant seeking a loan, to the family planning for retirement, to the foreign worker sending remittances home.

But can we harness the potential while preparing for the changes? That is the purpose of the paper published today by IMF staff, Fintech and Financial Services: Initial Considerations.

The possibilities of Fintech

What is Fintech precisely? Put simply, it is the collection of new technologies whose applications may affect financial services, including artificial intelligence, big data, biometrics, and distributed ledger technologies such as blockchains.

While we encourage innovation, we also need to ensure new technologies do not become tools for fraud, money laundering and terrorist financing, and that they do not risk unsettling financial stability.

Although technological revolutions are unpredictable, there are steps we can take today to prepare.

The new IMF research looks at the potential impact of innovative technologies on the types of services that financial firms offer, on the structure and interaction among these firms, and on how regulators might respond.

As our paper shows, Fintech offers the promise of faster, cheaper, more transparent and more user-friendly financial services for millions around the world.

The possibilities are exciting.

  • Artificial intelligence combined with big data could automate credit scoring, so that consumers and businesses pay more competitive interest rates on loans.
  • “Smart contracts” could allow investors to sell certain assets when pre-defined market conditions are satisfied, enhancing market efficiency.
  • Armed with mobile phones and distributed ledger technology, individuals around the world could pay each other for goods and services, bypassing banks. Ordering tea leaves from abroad might become as easy as paying for a cup of tea next door.

These opportunities are likely to reshape the financial landscape to some degree but will also bring risks.

Intermediaries, so common to financial services—such as banks, firms specialized in messaging services, and correspondent banks clearing and settling transactions across borders—will face significant competition.

New technologies such as identity and account verification could lower transaction costs and make more information available on counterparties, making middlemen less relevant. Existing intermediaries may be pushed to specialize and outsource well-defined tasks to technology companies, possibly including customer due-diligence.

But we cannot ignore the potential advances in technology that might compromise consumer identities, or create new sources of instability in financial markets as services become increasingly automated.

Rules that will work effectively in this new environment might not look like today’s rules. So, our challenge is clear—how can we effectively build new regulations for a new system?

Regulating without stifling innovation

First, oversight needs to be reimagined. Regulators now focus largely on well-defined entities, such as banks, insurance companies and brokerage firms. They may have to complement this focus with more attention on specific services, regardless of which market participants offers them. Rules would be needed to ensure sufficient consumer safeguards, including privacy protection, and to guard against money laundering and terrorist financing.

Second, international cooperation will be critical, because advances in technology know no borders, and it will be important to keep networks from moving to less regulated jurisdictions. New rules will need to clarify the legal status and ownership of digital tokens and assets.

Finally, regulation should continue to function as an essential safeguard to build trust in the stability and security of the networks and algorithms.

The launch or our paper today is one of the steps in the process of preparing for this new digital revolution. As an organization with a fully global membership, the IMF is uniquely positioned to serve as a platform for discussions among the private and public sectors on the rapidly evolving topic of Fintech.
As our research shows, adapting is not only possible, but it is the only way to ensure that the promise of Fintech is enjoyed by everybody

Fintech Disruption of SME Continues

The latest edition of the Disruption Index which tracks change in the small business lending sector, and more generally, across financial services has been released. The latest score is 38.39%

The Financial Services Disruption Index has been jointly developed by Moula, the lender to the small business sector; and research and consulting firm Digital Finance Analytics (DFA).

Knowledge of Non-bank Financial Providers

Further to the Business Data observation, we are seeing actual evidence of SME awareness of alternate financial offerings through data (eg. evidence of payments received from and made to alternative lenders; credit enquiries at the credit bureaus). At 11% of all data sets reviewed this quarter (above 10% for the first time), this appears to be forming a continuing, upwards trend.

Service Expectation

SMEs are becoming more demanding of their financial service providers, as we continue to see a collapse in their expectation of how long it should take for a loan application through to a decision. The latest data shows this number is below 5 days for the first time… at 4.8 days.

Business data in the cloud

SME’s continue to show a willingness to provide electronic data access in return for access to credit, with this quarter’s % of SME’s increasing to 16.2% from last quarter. It feels we are almost now at a tipping point, where businesses are moving into the ‘comfortable’ range in permissioning data, especially if there is economic and ease-of-process upside from doing so.

Loan Processing Speed

Time taken to execute loans was impacted by April’s 3 x 4 day weeks (school and public holidays), which slowed down the pace at which SMEs completed their loan applications and pushed out average total loan time elapsed to 36 hours… still well inside the Service Expectation measure observed (ie. fintech is doing its bit to meet and drive service expectation).

Smart Devices

The proportion of SMEs with smart devices has risen – now well over half of all SMEs at 54%

Read more on the Disruption Index Site.

Hong Kong and Australia seal agreement on fintech cooperation

The Hong Kong Securities and Futures Commission (‘the SFC’) and ASIC today signed a Co-operation Agreement which provides a framework for cooperation to support and understand financial innovation in each economy.

This Cooperation Agreement builds on the already close ties between ASIC and the SFC, as well as the Australia-Hong Kong trade and investment relationship more broadly. Hong Kong is already Australia’s seventh most important destination for services exports, valued at AUD$2.4 billion last year, and sixth largest source of services imports, valued at AUD$3 billion.

The agreement will enable the SFC and ASIC to refer innovative fintech businesses to each other for advice and support via ASIC’s Innovation Hub and its Hong Kong equivalent, the SFC’s Fintech Contact Point. This means Australian fintech businesses wishing to operate in Hong Kong will now have a simple pathway for engaging with the SFC, and vice versa.

The Innovation Hub and Fintech Contact Point offer assistance to innovative fintech businesses to understand the regulatory regimes in each of their jurisdictions.

Signing the Agreement, ASIC Commissioner Cathie Armour said, ‘Financial services are a major contributor to Hong Kong’s US$316 billion economy. The Cooperation Agreement is a significant boost for Australia’s burgeoning fintech sector and will ease entry into this important market for innovative Australian businesses.’

The agreement also provides a framework for information sharing between the two regulators. This will enable ASIC to keep abreast of regulatory and relevant economic or commercial developments in Hong Kong and to use this to inform Australia’s regulatory approach.

This is the fourth fintech referral agreement ASIC has entered into, following on from agreements with the United Kingdom, Singapore and Ontario. This agreement with Hong Kong expands our network of fintech cooperation to a critical financial hub in our region.

Background

ASIC is focused on the vital role that fintechs are playing in re-fashioning financial services and capital markets. In addition to developing guidance about how these new developments fit into our regulatory framework, in 2015, ASIC launched its Innovation Hub to help fintechs navigate the regulatory framework without compromising investor and financial consumer trust and confidence.

The Innovation Hub provides the opportunity for entrepreneurs to understand how regulation might impact on them. It is also helping ASIC to monitor and understand fintech developments. ASIC collaborates closely with other regulators to understand developments, and to help entrepreneurs expand their target markets into other jurisdictions.

To date, fintech referral and information-sharing agreements have been entered with the Monetary Authority of Singapore, the United Kingdom’s Financial Conduct Authority and Ontario Securities Commission. In addition, information-sharing agreements have been entered with the Capital Markets Authority, Kenya and Otoritas Jasa Keuangan, Indonesia.

For more on the work of ASIC’s Innovation Hub including our current regtech report visit the Innovation Hub website.

NAB Ventures backs Sydney start-up, Basiq

Basiq, a start-up that provides Australia’s first open banking API platform, has gained investments from NAB Ventures and Reinventure in a seed funding round.

Based in Sydney, Basiq’s core platform enables fintech companies to securely acquire authorised financial data on behalf of their customers. This enables fintechs to develop innovative solutions for their customers around things like personal finance management, wealth management and income verification.

Basiq launched in early 2017 and is unique in the Australian market with a product that provides easy integration, great developer experience and a pay-as-you-go pricing model.

“Basiq’s fundamental mission is to enable innovation in the fintech space. By providing a platform that delivers core banking functionality through a set of secure and easy to use API services the opportunities and possibilities of what can be created are endless,” Founder Damir Cuca said.

“A key part of realising this vision is to work with existing financial institutions and fintechs and be the bridge between the two. The institutions provide the regulatory discipline and the core systems, and the fintechs provide the speed of innovation.

Managing Director NAB Ventures, Todd Forest, said: “The way financial institutions use and share data continues to be an area of focus as banks look for ways to provide improved products and services for their customers.

“Over a number of years NAB has invested in secure API technology and looked for ways it can be used to deliver improved experiences for our customers by effectively and safely using data.

“Basiq is still in its early stages, but it is developing a dynamic technology platform; as they grow and develop their platform and tech capabilities we hope this relationship will help provide us with valuable insights and opportunities for future innovation.”

General Partner Reinventure, Kara Frederick, said: “Damir is a repeat founder with a unique ability to balance the sophisticated requirements of financial institutions with the pace and specialisation of fintechs. The result is that Basiq’s platform enables an ecosystem of tailored and secure solutions that banking customers want.

“Through this investment, Basiq will help to open up a world of fintech end-to-end solutions, some of which we anticipate – like the digitisation of the traditionally manual mortgage application process – and many of which are yet to be discovered.”

-Notes-

About NAB Ventures

NAB Ventures was established in January 2016, as the venture capital arm of National Australia Bank (“NAB”). NAB Ventures is a global initiative supporting entrepreneurs in Australia and offshore in their quest to build leading technology companies. NAB Ventures’ partners, Todd Forest and Melissa Widner, have founded, led, and invested in technology companies for two decades in both Australia and the US. NAB Ventures invests in founders that can leverage NAB’s expertise, assets and market position, to scale both within Australia and overseas. To learn more about NAB Ventures visit: www.nabventures.com

About Reinventure

Reinventure is an Australian venture capital fund whose largest investor is the Westpac Banking Corporation, one of Australia’s largest banking and financial services companies. Reinventure’s primary objective is to bring great entrepreneurs together in a partnership opportunity with Westpac. As a result, Reinventure helps ventures to scale more rapidly than they could do on their own. Reinventure makes investments from seed to Series B. Reinventure was co-founded by Danny Gilligan and Simon Cant, and is managed along with partner Kara Frederick. The partners are also fund co-investors. Reinventure funds total $100 million across Fund 1 and Fund II and include 15 portfolio companies and growing. To learn more about Reinventure Group visit: www.reinventure.com.au.

Fintech Startup MoneyMe Above $100 million loans

Fintech startup, MoneyMe Financial Group, has this week broken through the $100 million loan mark, after record daily compounded growth of 2,747 per cent in its medium amount and personal loans offerings drove its lending volume exponentially in the past few months.

MoneyMe is a good example of the innovative new players pressing in on existing lenders with digitally sassy offerings to target market segments. We expect more disruption in the months ahead. Our surveys underscore the strong demand for finance from niche segments, despite overall personal credit falling according to recent RBA data.

MoneyMe is a privately owned company with cornerstone equity and wholesale debt investors who fund the loan book growth.

This rapid acceleration, combined with record low default and customer complaint rates, now sees MoneyMe set to launch a series of niche loan products over 2017, all designed to provide greater financial inclusion for the growing Australian millennial market

“To have reached this exciting milestone so quickly really is validation that the millennial market is actively looking for financial alternatives to the big banks and their ‘one size fits all’ lending proposition,” said Clayton Howes, CEO of MoneyMe.

“From day one we’ve sought to provide financial products that are tailored to the individual’s lifestyle and credit profile, through personalised risk-based pricing and by developing products that can be consumed when and where the customer needs them – consumption characteristics highly valued by the millennial consumer in particular.

“By creating products that ensure greater financial inclusion to the exact consumers the big banks don’t find profitable enough to service, and by ensuring these products suit the lifestyle and financial needs of this market perfectly, we are hoping to contribute to the growing democratisation of financial services that fintech is driving globally.”

Since its inception in 2013, MoneyMe has maintained a default rate ranging between 2 and 4 per cent, which is significantly below the industry average of 11 per cent.

On over 100,000 loans provided to date, MoneyMe has also received a total of just 17 issues raised by its customers – less than a 0.017 per cent of total loan volume – all of which were mutually resolved or cancelled without the need to involve the ombudsman.

This exceptional track record, combined with its exponential  growth, is now pushing MoneyMe towards the next phase of an aggressive expansion plan which will see the launch of a series of niche loan products over 2017 targeting the millennial consumer.

“For us, the past year’s results have been clear validation of the strength of our value proposition, and our ability to deliver on the ambitions we set out for our various stakeholders,” continued Clayton Howes.

“We now feel extremely confident in taking that next step to expand on a mass scale, in terms of market penetration, product development, and channels for distribution.

“We are confident that the real winners will be Australian consumers, who will increasingly enjoy greater choice and lower-cost financial products than ever before,” concluded Clayton Howes MoneyMe’s niche loan products are expected to be unveiled in September and October later this year.

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.

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.