Fintech Talk – May 18, 2016
Continuing on from last week’s LendingClub saga, which resulted in a 35% decrease in its share price, the British and US media has been delving deeper into the company’s operations and the impact it will have on the alternative lending and fintech industry as a whole. A recent article by Financial News highlights the way in which the company and its peers have attracted great attention and support from investors and authorities in recent years, but its very public fall from grace raises the possibility of tougher oversight from regulators. Larry Tabb, CEO of research firm Tabb Group, and Imran Gulamhuseinqwala, head of Fintech at EY, echo these thoughts and predict that regulators will eventually push fintech organisations ‘to have the same compliance practices as the banks’ and that they ‘should expect an increasing degree of regulatory scrutiny as they gain traction among mainstream consumers and become larger, more complex organisations.’
The incident could also have serious ramifications in terms of the positive public sentiment that fintech companies have enjoyed in recent years, particularly when compared with larger financial institutions whose reputation was tarnished by the 2008 financial crisis. While these financial institutions have come a long way to getting consumers back on board, fintech companies will struggle to replicate this success as they ‘don’t have the physical presence and the longevity" of larger firms.
On the subject of regulation, the FCA, the U.K. financial regulator has opened its sandbox for applications from financial firms and tech companies that support financial services. Successful applicants will be allowed to test new ideas for three to six months with real consumers and will receive no disciplinary action for authorised breaches of FCA rules. This announcement emphasises the FCA’s image as one of the most innovative regulators in the world, alongside Australia, and its efforts to support the growth of fintech in the UK market.
That said, the FCA has faced some criticism for mostly focusing on assisting start-ups, which has led to some accusations of favouritism. However, in reality, the sandbox also offers safeguards and advice to legacy financial institutions who might also want to try out their own innovative ideas, and facilitates partnerships between legacy and start-up companies. In contrast, Fintech regulation in the U.S. has been extremely restrictive thus far and should be reassess to identify ways of implementing regulation that supports innovation and growth in the sector.
Now a look to the east, where e-commerce giant, Alibaba Group, has, this week, seen a loss of $32 million from its stake in Chinese fintech investment company, Ant Financial. Alibaba explains that the loss was likely due to marketing and promotional activities around Ant Financial-owned Alipay, the largest third-party payments platform in the world, in the lead up to the Chinese New Year. While I’m sure we all agree that this is a significant sum of money to spend, and more importantly lose, on marketing activities, it’s interesting to see what Alipay was trying to achieve:
- Alipay reportedly spent $42 million to sponsor the broadcast of the Spring Festival Gala on Chinese television, China's New Year's celebration television programme, which boasts an audience of over 700 million — the highest viewership of any television program in the world.
- Alipay has P2P payments capability, which people in China use to send sums of money, ‘red envelopes’, to relatives on the New Year's holiday. Alipay gave out $120 million in red envelopes as part of its Spring Festival Gala sponsorship. Additionally, the company likely incurs a processing fee for facilitating these free transactions.
- Finally, Alipay also launched a game called "Lucky Card Collection," in which users are incentivised to add friends to Alipay to win financial prizes of which Alipay gave out a total of $32.7 million. As a result of the game, 1.1 billion friend connections were made on Alipay and boosted the value of Alipay's network.