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Atlas RL 7JUL17
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Daily briefing - 07 July 2017

Financial technology in India and China is far ahead of the rest of the world, says a report in Quartz — and much of this acceleration in fintech is due to the widespread adoption of the smartphone. "The big players in China — Alipay and WeChat, which together have more than a billion users — enabled $2.9 trillion in digital payments last year, according to a UN study. That's a 20-fold increase in the past four years. India's Paytm has some 200 million registered users for its wallet service. By comparison, US-based PayPal, which includes the person-to-person Venmo service, has about 200 million active account holders and recorded $354 billion in payment volume last year." If you click through to the Quartz article, you'll see that it is accompanied by a picture of four men staring down into their iPads and smartphones. On the radio this morning, doctors were discussing a new ailment, called 'Text Neck', and noting that children are spending up to four hours a day with their heads hanging down over a smartphone. Evolution, eh? Catering to Chinese visitors to Taiwan , acceptance of Alipay and WeChat Pay has grown rapidly since last year, and now Visa is launching its own QR-based mobile payments system for the country. "The company said that it is using QR codes in the hope that the universal platform will attract larger numbers of users than more limited platforms offered by Android Pay, Apple Pay and Samsung Pay," says MobilePaymentsToday.com. "All three of those systems debuted in Taiwan this year, but Visa claims its cardholders in the country are not signing up for those services." Open Banking , the private body tasked with delivering the specifications enabling third parties to access bank customer data in Britain, has delivered the specifications for Accounts and Transaction Information and Payments Initiation APIs. Do read on — the UK may be getting there early, but these technical standards will likely go worldwide in some form or shape. According to Open Banking, "Using these standardised API specifications, banks and authorised third parties are now able to begin developing new, innovative propositions and to tailor their products and solutions to the individual needs of consumers and businesses." The changes were mandated by the Competition and Markets Authority in the UK after it found that the main banks do not "compete hard enough" for customers' business: "Open Banking should deliver a new, secure option for customers to be able to compare the deal they are getting from their bank." In a statement issued on the website, Imran Gulamhuseinwala, trustee of the Open Banking Implementation Entity, said: "This is the next step in the transformation and opening up of the banking industry to the benefit of consumers and businesses. In March, we delivered on the first of the CMA Remedies with Version 1 of the branch, ATM and product data APIs from the nine largest business and personal current account providers in the UK. The specifications we are releasing today, which will be live from January next year, provide the platform for developers from banks, fintechs and other organisations to build new web and mobile applications that will deliver a safer, more personalised and easier banking experience for consumers wishing to search, select and switch financial products in a secure environment." JPMorgan Chase chief executive Jamie Dimon was in Dublin yesterday meeting Irish prime minister Leo Varadkar, having recently acquired a large office building capable of holding a thousand staff. "The bank in May said it plans to hire a significant number of people in Dublin in its expanding custody and funds services businesses over the next three years, as it focuses its European Union operations in Dublin, Frankfurt and Luxembourg after Brexit leaves its largest European office, in London, outside of the bloc," reports Reuters. Mr Dimon said that he met with Prime Minister Varadkar today to discuss plans to grow JPMorgan's business over the next several years. "Ireland is at the forefront of training its workforce to keep up with the latest developments in technology and business innovation, and the country has a global, open environment that will keep it economically competitive," he added. Mr Varadkar's office offered no comment. Although glad of the jobs, the new Irish leader won't want to be seen welcoming global investment banks to Dublin with open arms: austerity is still official policy in Ireland ten years after the GFC. In the United Kingdom , austerity also remains in effect, but here's a new word for banks as they consider their futures in the UK: Brexodus. Banks watching Theresa May's government box itself into a corner with unprecedented political alliances and a thin parliamentary majority are losing faith in her administration's ability to negotiate a useful Brexit, and Deutsche Bank is headed East, reports Bloomberg, citing unnamed sources familiar with the matter. "Germany's largest lender would relocate most of the business reported in London to a so-called booking center in Frankfurt under the plan, said the people. The strategy, which is still being finalized and would be reviewed if the Brexit scenario changes, will probably be implemented over the next 18 months, the people said. 'It's another milestone in what we call the Brexodus,' said Gildas Surry of Axiom Alternative Investments, whose holdings include Deutsche's bonds and shares. 'Every single continental European bank is working on plans to repatriate their trading and plumbing in their home cities'." Finally, South Africa's Capitec Bank said yesterday that it reached nine million customers, putting it now in striking distance of Absa. If it continues its current rate of growth — adding upwards of 100,000 new customers a month — it's on track to overtake Absa by year end, and to overtake Standard Bank (which has 11.6 million customers) within two years. Quotes of the Week A selection of quotes that have caught our eye of late at Lafferty News . "Regulators should create 'white lists' of reputable charities, which banks can serve without fear." "Swingeing fines have made banks too risk-averse", The Economist "If Amazon Go is successful as a shopping experience, it will become part of the Whole Foods Experience and be copied by retailers around the world. In the process, checkout will migrate from the point-of-sale to the cloud, a development that threatens to circumvent the traditional payments ecosystem and the not-yet-in-place NFC ecosystem." Richard Oglesby and Brad Margol, Payments Source "We need to develop mechanisms that will allow the population to directly benefit from the co-ownership of infrastructural technologies in order to hedge against displacement." John Egan, "AI is corrupting the social contract between rich and poor", LinkedIn "Every time you assume that others will be swayed by your logical argument, you've most likely made a significant, irrational mistake.." "The rationality paradox", SethGodin.com

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Mediterranean methods

As events over the last few weeks demonstrate, the European banking crisis has remained bubbling away in the background. The rescue of Banco Popular Español by fellow Spanish institution Banco Santander sent sighs of relief around Madrid. The seemingly never-ending Italian drama continues apace while yet another Greek rescue package is under discussion: clearly Southern Europe remains weak. Nor is elsewhere in Europe immune: yesterday brought the news that Barclays (bankrolled by the Qataris) is being charged by the UK's serious fraud office in relation to number of offences. The failure of Banco Popular Español must be a cause for concern. The Spanish lender's demise was not flagged by the European Banking Authority's stress tests in mid-2016, which must call into question the validity of these exercises. The nominal sale price of €1 tells a tale of its own, with Santander riding to the rescue. Spain This rescue is also significant as it was the first time that the EU's new Bank Recovery and Resolution Directive (BRRD) was called into action. Shareholders and junior bondholders felt the brunt of the new regime, while senior bondholders survived unscathed. The BRRD was put into place with the goal of eliminating the need for a state-led bail-out of a failed institution, thereby saving taxpayers hefty sums. While this has been achieved, the circumstances involved in this rescue mean that the boundaries of the new regime have not yet been fully explored. Santander was willing to take over Banco Popular, restructure the bank and raise approximately €7 billion in additional capital. However, if Santander or other potential investors had been unwilling to acquire the failed lender, then it would have been likely that the authorities would have had to impose losses on senior bondholders and unsecured creditors (ie, depositors). The former would have surely caused anxiety on the bond markets, while the latter would have certainly unleashed a political storm. So, while the intervention by the European authorities passed off without a hitch and barely a murmur, a couple of caveats must be borne in mind. Firstly, neither senior bondholders nor unsecured creditors were affected, which means that the most far-reaching elements of the new regime have yet to be implemented — and thus the reaction from the markets and from the public remains unknown. Secondly, Santander had very little time to carry out due diligence on its new acquisition. Banco Popular Español's loan book includes a relatively high percentage of non-performing loans: one hopes that this acquisition does not backfire on Santander. Italy In Rome, meanwhile, attempts to rescue banks continue apace. Both Veneto Banca and Banca Popolare di Vicenza are the subject of rescue efforts, as both lenders suffer from capital shortfalls. However, the approach adopted in Spain will not work in the case of the Veneto banks. This is because neither of Italy's banking champions — UniCredit or Intesa Sanpaolo — are willing to take over either of the ailing institutions on their own (in contrast to Santander's decision to acquire Banco Popular). This leaves the Italian and European authorities in a bind. If either of the ailing banks fail, then — as per the conditions of the BRRD — shares would be converted to equity while losses would be imposed on junior bondholders. However, due to the prevalence of ordinary retail investors among junior bondholders in Italy, any such action would almost certainly cause a political backlash. However (unlike in Spain), this does not take into account the likely non-intervention of a national banking champion. Under this scenario, any bank failure could easily trigger losses for senior bondholders or a haircut for unsecured creditors (in addition to shareholders and junior bondholders suffering losses). As this scenario has yet to come to pass, it is difficult to predict how it would play out. However, it is likely that investor confidence would be shaken while there would almost certainly be a public backlash. This means that in the case of a failure, the scope for a bail-in is limited. However, the entire point of the BRRD is to protect the taxpayer from expensive bank bail-outs — even when the state would prefer to rescue institutions, as is the case in Italy. This leaves the Italian authorities in a difficult position: The BRRD prohibits state bail-outs (except under exceptional circumstances); Imposing a bail-in would almost certainly result in a public backlash and precipitate a political storm; A private investor such as Santander has been (thus far) unwilling to step forward and take-over any ailing institution. This is most likely due to undercapitalised banks, over-banked markets and the general lack of incentives to invest in these institutions. Europe European authorities too find themselves at a tricky pass. The mountain of NPLs on the books of Italian lenders is not going away and has to be dealt with somehow. The country's economy is stagnant and has been since it joined the common currency. While this has been caused by several factors, membership of the euro prevents Italy from resorting to its tried and trusted pre-euro strategy of depreciating the lira. This weakened the domestic currency and boosted exports, giving the industrial north a chance to grow (at the expense of higher inflation). Now Italy cannot grow its way out of stagnation, meaning that it is difficult to see how a significant dent can be made in the pile of NPLs. This situation has forced European authorities to acquiesce to long-running requests from Rome for state intervention to shore up Monte dei Paschi di Siena. This effectively amounts to a state bail-out, with initial reports of an injection of some €6.6 billion (the latest of a series of attempted injections of state-aid). Leaving aside the inconsistent application of a one-size-fits all European directive to troubled lenders, the most important takeaway from the last few weeks is that crisis continues to haunt the European banking system, especially in Southern Europe. The Spanish solution may not be possible in many cases, while state intervention along the Italian lines would first have to meet European regulatory approval, which is difficult to achieve. The full implementation of the BRRD is the known unknown: how will markets and the public react to losses imposed on investors and depositors?

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The Atlantic Conundrum

Europe and America are home to the most entrenched banking systems in the world — and must make their peace with fintech realities When the next definitive history of banking is written, the chapter on the Global Financial Crisis will surely be followed by one detailing the dialectical encounter of traditional financial institutions with digital technology. It may be that the second of these two chapters will be longer: universal banking may have been chastened by the events of 2008, but the impact of the digital is revolutionary. However, a sceptic might argue that banking entered the digital age long before many industries, half a century ago now in some cases. That is true. And yet retail banking as it is largely practiced in 2017 is like the compact disc era in music: digitalism on the terms dictated by the incumbent. This can only last so long. The long-term resolution of the banking plus fintech equation will mean to the banking industry much as Spotify and Napster meant to the music industry: consumer expectation and savvy will zoom upwards. The result will be that, when it comes to the mass market, intuitive and powerful platforms will be a basic requirement. With the implementation of PSD2 on the way in Europe, it may be that banking, despite trade worries over the propulsion of third-party payment service providers into their space, is in fact getting a head start on the race into the future. Europe The shift is global, but there are revealing parallels at work on either side of the pond when it comes to fintech's relationship with banks. In the European Union, the most recent flashpoint has been the screen-scraping tussle that arose when the proposed Regulatory Technical Standards were released four months ago by the European Banking Authority (EBA), an EU agency. Here is the key passage: ...the EBA has decided to maintain the obligation for [banks] to offer at least one interface for [third-party providers] for access to payment account information. The...existing practice of third-party access without identification referred to by a few respondents as 'screen scraping'...will no longer be allowed once the [Regulatory Technical Standards] apply. In other words, the new players can't come in the hall door, but will have to use a service entrance — from November 2018, which is the earliest date at which they can apply. This proposal, advanced on the grounds of security and yet to be ratified by the EU, was interpreted by many in the fintech sector as a defensive wall being thrown up to block their progress. It remains to be seen how radical PSD2 will actually turn out to be. As one tech executive (Ralf Ohlhausen of PPRO Group) put it in a recent Reuters article: "We have serious concerns that if banks are given a choice, they will try to limit the access and make our life difficult. We can't have access blocked by an underperforming API". America In the United States, a Fintech Charter being crafted by the regulator seems to posit fintechs as depository institutions — with appropriate regulations in train. This is still a work in progress and already under fire. Again the tech start-ups are unhappy, feeling that a wall is being erected to protect the industry's collective lunch. But the convergence now in process calls for disciplined and dispassionate thinking: at the vanguard are those banks that are profoundly rethinking their role. One such is Suresh Ramamurthi's oft-profiled CBW Bank. CBW's thinking is to transform the bank into the purveyor of a Platform-as-a-Service (PaaS). Visionary models like this not only upgrade services for customers through the pooling of innovations but can also fortify the bank's position in the market as the quality-guarantor of a new ecosystem. Amazon is the most breathtaking case of a company (originally an online bookseller) transforming itself itself into a market-interactive platform of this kind. As perennial fount of wisdom, Seth Godin, observed recently: "in interactions that lead to connection, to shared knowledge, to possibility, it's pretty clear that there isn't a zero-sum game being played. In fact, the more enthusiasm and optimism people bring to the interaction, the more there is for everyone else." The conundrum on either side of the Atlantic boils down to not letting the banking industry be, in effect, destroyed by digital technology, to not let Citibank or Lloyds, to take two random examples, not go the way of Kodak or EMI. That will take courage, at all levels of banking, not just in the c-suite. In China meanwhile, the powers-that-be have created a fintech committee that will soon produce recommendations which, as is the way in one-party states, should soon become law. Any Incumbent v Challenger, or indeed Regulator v Regulator, battles will be settled — if they have not been already — far from public view.

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