As had been widely anticipated in recent weeks, the Federal Reserve in Washington has chosen to cut interest rates once more.This may appear an overly dramatic move given that the American economy seems to be, if anything, in rude health at the moment, but in fact recent figures concerning the manufacturing sector and new job creation have raised concerns that the United States might be vulnerable, prompting this fresh manoeuvre from the central bank. The uncertain global outlook also played a part. "The Fed has tracked last week's move by the ECB in loosening monetary policy", noted Patrick Houlihan of Verisk Financial Research. "In a way this was a necessary move as the United States and China are engaged in a trade war. However, with a recession in the offing, it has to be concerning that authorities are using up their monetary ammunition during relatively benign economic conditions." For consumer lenders the pressure on profitability in a competitive environment only increases, with executives also mindful that a potentially influential bill to cap loan interest rates is progressing through the Californian state legislature in Sacramento: according to local news media, if a new law was to be enacted, state authorities would limit interest rates on consumer loans at 36 percentage points above the Fed's rate. Not a terribly low ceiling, one might think, but in fact, some lenders in the state have reportedly charged APRs that are many multiples of that number.
Throughout the world, regulators, policymakers and fintech investors all sing these days from the same hymn sheet: sustainable profitability in consumer finance is no longer a simple function of transaction-based revenues, but requires data harvesting to prise open new value chains, with Open Banking the much-touted portal to balance sheets that tend towards the black rather than red. In this context, key findings from a new report published by Icon Solutions make for interesting reading, with a mere 15 per cent of respondents to a survey of banking executives worldwide confident that their institution has successfully executed the switch to data-led revenues. But, these days, time waits for no bank: with every passing quarter, the new Chinese payments apps grow stronger: consider for example a South China Morning Post report that a new product inside WeChat Pay called Fenfu is set to offer users who cannot get a traditional credit card a virtual card inside the app. Firms looking for an example of how data can unlock new segments need to look no further.
If there is one market that has embraced Open Banking it has been the United Kingdom, driven in particular by a political consensus after the Global Financial Crisis to dismantle the hegemony of the Big Four banks there.The public, however, despite being keen on new payment methods such as contactless and the growing plethora of app-based banks, has proven more cautious than the authorities might like, preferring to keep accounts with legacy banks for salary deposits and mortgage purposes. Nonetheless, the take-up figures for mobile banking are impressive; according to the Financial Times this summer, quoting official industry figures, almost half of adults in the country took advantage of such opportunities last year, with some one-in-ten consumers largely avoiding the use of cash in everyday life. No less than five per cent of adults in fact have an account with one of the best-known digital challengers: Monzo. Such is the transformation away from cash and the cash machine network underpinning it that Mastercard announced this week it will start to pay British retailers to deliver cashback service to shoppers. From April of next year, retailers handing over any cash to Mastercard-branded debit cardholders will earn 12 pence ($0.15) for their trouble. Although cash shows no signs of disappearing, usage has fallen so dramatically that Britons spent more on credit cards at the point of sale in 2018 than they did in cash, according to the British Retail Consortium.
Returning to the Chinese payment apps, it is now over four years since Connie Chan wrote an influential article for Andreessen Horowitz's website setting out the marvels of Tencent's WeChat, describing it as a "Trojan horse that allows WeChat to quickly onboard user payment credentials that then unlock new monetisation opportunities for the entire ecosystem."The app, she concluded, "indicates where the future of mobile commerce may lie". With a new decade beginning in a matter of months, neither WeChat Pay nor Alipay has made the impact in the West that many expected at that time, although, as regular readers will know, the rival firms have been steadily expanding international acceptance. For Tencent, Ant Financial (owner of Alipay) and Bank of China (member of the consortium behind China's forthcoming state-backed cryptocurrency), one major stepping stone for global expansion was supposed to be Hong Kong, with Singapore not far behind: both jurisdictions launched digital bank licences this year. However, the long-running political protests in the former have led to a postponement by the authorities, with the Chinese government's involvement a sore point for potential users. As an unnamed executive at one of the frustrated applicants put it to Reuters: "This form of banking service is mainly aimed at the youth, millennials, and many of them are out on the street these days joining the protests. It will be difficult to launch a brand campaign around them and attract their interest when their priority is clearly not having another bank account."
Finally, if any one firm has a reason to be concerned about Facebook's transnational cryptocurrency, Libra, it is TransferWise, but with so many regulatory and operational obstacles yet to be cleared by Mark Zuckerberg's splashy innovation, the high-profile Unicorn can perhaps enjoy the fruits of its core strategy to undercut incumbents in cross-border payments.Although it was once viewed with some scepticism by industry insiders, the London-based firm has performed well, tackling pain points for small businesses and overseas travellers to deliver solutions such as a borderless Mastercard-branded debit card, avoiding the pursuit of risky niches, refining a user-friendly interface and forming canny partnerships with both incumbents (eg, BPCE Groupe in France) and challengers (eg, N26). The bottom-line outcome of all this graft? A reported 66 per cent growth in profits over the previous year, with net profit reaching £10.3 million ($12.8m). According to CNBC, the firm, which was recently valued at $3.5bn, "has six million customers globally and processes £4 billion in transactions each month".
To end, links to some other stories of interest this week...
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