Fintech Update, 6/25 - 7/1
June 25 - July 1, 2016
Leading Off
In something of a surprise decision, the Supreme Court declined to grant cert in the case of Madden v. Midland Funding, perpetuating uncertainty about loan interest rates among online lenders and partner banks; European fintech firms try to plot their way forward amid the confusion created by last week’s “Brexit” vote; a Florida judge must decide whether bitcoin is money or a commodity as part of a state AML case; J.P. Morgan looks to foster the next generation of fintech talent with its new In-Resident program; and the New York Times examines China’s rapidly growing role in the global Bitcoin network.
Policy & Regulation
The U.S. Supreme Court denied the petition for certiorari in Midland Funding LLC v. Madden, declining to reconsider the Second Circuit Court of Appeals’ decision that state usury laws to nonbank assignees are not preempted by the National Bank Act (NBA). The case is important for a number of reasons, not the least of which is that online lenders have typically relied on the NBA’s preemption of state usury limits as part of their business model. In the wake of the Madden decision, courts around the country are likely to see increased litigation on the issues presented in the case.
Presumptive Democratic presidential nominee Hillary Clinton announced a controversial plan to allow young entrepreneurs to defer their federal student loan payments, interest-free, for up to three years. The plan would also provide social entrepreneurs and those working in “distressed communities” the chance forgive up to $17,500 of their student loan debt after running their business for five years.
Banking & Securities
As banks continue to push each other to see which can gain the greatest competitive advantage in fintech, JPMorgan Chase announced a new program to foster startup firms in-house. The six-month In-Residence incubator program will give young firms access to JPMorgan’s “facilities, systems and expertise,” with a potential invitation to stay on after the official period ends.
Digital Currency & Blockchain
At the center of an anti-money laundering case in Florida is the question of whether bitcoin should be treated as cash or a commodity, an issue on which many regulators are split (e.g., New York treats it as a commodity while FinCEN regulates it as a currency). The outcome of the case will only have precedential value in Florida, but may serve as a reference point for future cases in other jurisdictions.
Citigroup’s Global Research Group published a white paper [full text] exploring blockchain as an alternative to international payment systems. The report concludes that blockchain does not pose a meaningful challenge to traditional card networks or money service businesses due to “scalability, network adoption and . . . dispute resolution” concerns.
Personal Finance
Credit card startup Final announced that it is shipping its first consumer credit product. Final offers a solution to credit card fraud by offering disposable card numbers tied to user accounts. Using the Final app, users can generate a unique card number for each transaction; the number stops working as soon as the transaction is completed. Final is currently operating a waiting list due to high demand.
Marketplace Lending & Credit
The Milken Institute's Center for Financial Markets published a white paper examining the growth of U.S. nonbank online lending platforms and related industry trade associations in response to current regulatory uncertainty. The Institute has also profiled more than 70 online lenders, including almost every one that responded to the Treasury Department’s request for information on the marketplace lending industry.
Prosper, the San Francisco-based online lender, announced a new partnership with HomeAdvisor.com, a website that links homeowners with contractors. The partnership is part of a new campaign to promote home improvement loans on the Prosper platform. Prosper reported that the number of borrowers who plan to use their loans for home improvement doubled from 2014 to 2015.
International News
The New York Times’ Dealbook examines how a few Chinese companies “have effectively assumed majority control of the Bitcoin network” by investing in server-based mining pools. The Times describes the project as “one of the grandest and strangest experiments in money the world has seen.”
Europe’s fintech firms are “scrambling” to figure out what the U.K.’s exit from the EU (“Brexit”) means for their businesses. Brexit represents an enormous degree of uncertainty for fintech firms on a variety of fronts, including state-based regulation, access to the EU and U.K. markets, the movement of personnel and money across borders, and partnerships with banks.
Company Spotlight
Deutsche Bank (DB) has decided to scrap its plans to build a digital banking service in the U.S. According to DB’s co-chief executive John Cryan, the digital bank initiative would have diverted too many resources from the bank’s “core strategy.” However, Cryan also said DB remains committed to implementing digital initiatives in other ways throughout the bank’s divisions.
Fortune features a profile on Citi FinTech, Citibank’s fintech “skunkworks operation,” to examine the bank’s response to the threat of fintech disruption. Citi FinTech is a team of 40 employees “from various parts of Citi and poached from tech companies;” and, according to Fortune, its approach “seems to be working. The bank has consistently been in the vanguard in terms of tech innovation among its peers.”
LendingClub announced Scott Sanborn as its new Chairman and CEO. Sanborn was a former partner at McKinsey and Lending Club’s acting CEO in the wake of Renaud Laplanche’s sudden resignation in the spring. LendingClub also announced that it will cut 12% of its workforce while rolling out new employee retention incentives and focusing more on investor outreach.
Commentary & Miscellaneous
Penny Crossman writes about the growing use of open APIs (application programming interfaces) in banking. Among the vocal proponents for open APIs is Dan Kimerling of Silicon Valley Bank, who argues that “banking will eventually become a software business, because all they do is move bits [of information],” as opposed to physical cash.
Rob Nichols, CEO of the American Bankers Association, argues that the banking industry will “successfully meet the customers of the future with the technologies of the future,” despite the challenges posed by fintech firms and millennials’ largely negative attitudes toward big banks.
Have a great holiday weekend!
The Fintech Update Team