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Daily briefing - 25 April 2019

Which is Germany's most dysfunctional bank or financial institution: Deutsche Bank, Commerzbank or newcomer Wirecard? In news that will come as a shock to no-one this morning, Germany's Deutsche Bank and Commerzbank have called off merger talks. Wirecard, meanwhile, is getting attention it doesn't want, and German authorities have come to its defence. Wirecard this morning announced that EY had signed off on its 2018 accounts with no evidence that the results will be affected by an ongoing investigation in Singapore. Wirecard is definitely going places. The group said it processed $125 billion of payments last year, up from $91 billion the year before. The announcement follows an escalation this week of Wirecard vs the Press. But there are big stakes at play here, as payments processors are earning big valuations even if attracting a fraction of the interest that attaches to big tech IPOs. The processing of payments has become big news as the use of cash diminishes and new businesses are built on digital platforms. Deep pocketed private equity groups have been buying and selling payment processors that began life as acquiring divisions banks, but were spun off before or after the northern financial crisis. German payments processor Wirecard begat itself, growing into a sprawling international business and last year propelling itself into the elite of German businesses, and displacing Deutsche Bank from the DAX Index of Germany's top 30 companies. FT journalist Dan McCrum has been writing about Wirecard for more than four years, under the genius title of House of Wirecard, echoing the Netflix series about the power couple who sleaze their way to the US White House. The crux of the matter is an allegation by the FT that Wirecard's profits come through opaque partner organisations, some of which appear to be run by former Wirecard employees. The response of German authorities to this questioning of one of its industrial darlings has been to ban short-selling of Wirecard stock. Munich prosecutor said they were looking to see if they FT broke securities trading rules. Yet the FT is not the only one looking hard at Wirecard. A group called the Southern Investigative Reporting Institute, which this week published another instalment of its Wirecard investigations, which have helped to push forward the FT story. The main recent developments are the uncovering of a company called CardSystems Middle East. "Meet CardSystems Middle East FZ LLC, the tiny, Dubai-based box with a long name on Wirecard's ever-expanding organizational chart," writes Boyd. "Don't waste your time looking for information on CardSystems in Wirecard filings -- apart from a few very brief mentions in annual reports, there's nothing else. There are two reasons why Wirecard avoids publicly discussing CardSystems: optics and economics." The FT went over to Dubai's Internet City to visit the CardSystems office, and found no one in on a first visit, two people on a second visit, and a lone IT person on a third visit to the offices of Wirecard's most profitable division. (SIRF mentions helpfully that the operation seems to be run mostly from the home office of CardSystems owner Oliver Bellenhaus, who runs it from the Burj Khalifa, the world's tallest building.)A fascinating tale from Reuters covers the battle for Libya's banking system, as eastern Libyan commander Khalifa Haftar advances on the UN-backed administration in Tripoli. But the central bank is seeking to cut off cash to banks in the east, hoping to staunch the flow of funds to Haftar's soldiers. "But diplomats and banking sources say that those sources of support might be closing, as the Tripoli-based central bank, which controls the country's energy revenues, has taken steps to curtail the operations of banks in the east," reports Reuters. "Those banks have in recent months struggled to meet minimum deposit requirements, which could give the Tripoli central bank allied to Tripoli Premier Fayez al-Serraj the excuse to shut off access to hard currency, they said." Read the rest of the story here.Direct lenders in US see opportunity in cannabis where big banks fear to tread

Daily briefing - 24 April 2019

Australia gets a new SME-focused bank this month as Judo Bank picks up its licence and goes into business. The fintech was founded by former NAB staff who plan what's now a familiar offering: a banking relationship built for the digital world. A report by Judo claims that Australian SMEs face a funding gap of $80 billion. Also familiar is the problem that most banks want a family home as collateral. "So what will Judo's secret sauce be?" asks Jessica Ellern in Fintech Daily. "The human touch and bucket loads of capital to execute on their vision.Late last year the bank raised $140 million, which was claimed to be the largest pre-revenue funding round done to date in Australia. It's heady stuff, and SME's will be saying about time. To date the only other player in the SME banking space exclusively is Tyro, who's lending product is suited to small businesses who accept EFTPOS payments as their predominant revenue collection model.We've all had a merciful break in Brexit negotiations for a few days over the Easter as politicians take a well-earned break. But the EU is not about to cut any slack to banks that are hoping to stay under the radar once the fateful day arrives on 31 October, so build some further uncertainty into the second half of the year. "Banks have so far moved around a trillion euros in stocks, bonds, derivatives contracts and other assets from London to their new EU hubs," writes Reuters. "Accounts of EU clients must also be moved to conduct business from these hubs, a process known as repapering. But there is still a long tail of small customers for whom repapering is a burdensome task of changing IT and controls systems, limiting how much business new hubs can take on despite regulatory pressure to move in to higher gear." The current pause and extension might give the impression of elasticity in the process, but there's little doubt that EU negotiators and regulators are ready to play hardball once negotiations resume in earnest. Softbank will inject $900 million into Wirecard in the form of five-year convertible bonds, according to reports this morning from Bloomberg. In a statement Wirecard said that the Softbank investment and collaboration will allow the company to expand in Japan and South Korea. There is potential for technology-sharing "It could potentially be quite savvy for them to invest via a convertible structure because they protect their downside with the bond yet still have upside should the business perform well in the future," said Rob Chandra, a general partner at Avid Park Ventures and a lecturer at the Haas School of Business at the University of California at Berkeley, according to Bloomberg. "We are in the early innings of a massive global shift to electronic payment processing. If Wirecard's issues are behind them, then this could be a smart investment." Wirecard is the processor for Uber in parts of Asia. Softbank has a stake in Uber, along with stages in Alibaba. Wirecard and its supporters in Germany have taken an aggressive stance against an FT investigation, still running, about the company's accounting methods. Incidentally, Wirecard is a bank while Softbank is not.Tencent, incidentally, has been a quiet but persistent investor in banks, having taken stakes in Germany challenger N26 and Brazil's Nubank. Now it's adding to its portfolio with an investment in Latin American lender Uala. Read more here.

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Daily briefing - 23 April 2019

Is it open season on capitalism? When Jamie Dimon is arguing that capitalism is not the solution to everything, we mortals should pay attention. What an election 2020 is shaping up to be in the US: Donald Trump will be unable to believe his luck as he sets out his stall as the last defender of capitalism. There's even talk that the Bank of England will select a new governor who once praised an anti-capitalist protest. What is the world coming to? Bank of England governor Mark Carney once promised to stick around to help get the Bank through Brexit, but realising that he might be stuck in London for the foreseeable future, Mr Carney is signalling his intention to be gone soon. Reuters takes a look at possible replacements, including Andy Haldane, the chief economist at the Bank of England, who has taken the bank on the road to speak and listen to opinions outside of London. He also took the unusual step of explaining to the public how banking actually works. Andrew Bailey, previously seen as a likely candidate as head of the FCA, has become embroiled in the RBS scandal. "But heading the FCA is fraught with risks. Lawmakers in parliament's Treasury Committee criticised Bailey for not publishing all of a report into alleged misconduct by bank RBS," reports Reuters. "Bailey has cited privacy restrictions." Haldane, of course, mostly comes into focus where Labour is concerned, as he's thought more likely to be palatable to Labour's finance spokesperson John McDonnell. "In 2012, he praised the anti-capitalist Occupy movement for suggesting new ways to fix the shortcomings of global finance. Haldane has experience of both sides of the BoE, having served as executive director for financial stability, overseeing the risks to the economy from the banking system. But he might be seen as too much of a maverick to take the job of governor."A popular slogan on t-shirts favoured by fintech revolutionaries is 'get shit done', which is a way of expressing how deeply insecure most fintechs feel, at least until they get a banking licence. But according to the FT, the bad boys of Revolut have quietly dropped the 's' and the 'h' from their in-house 'get shit done' slogan, and are now all focused on being compliant. In an interview, chief executive Nikolay Storonsky tries to come across sympathetically, explaining that as the company scaled rapidly, it spent a lot of time (symbolically) putting out fires. ""We were fighting for our survival — there were a lot of fires," Storonsky tells the Financial Times. "We didn't really have enough budget to hire a lot of great people in compliance." It's hard to imagine established banks getting away with this sort of excuse (but of course, they do, and we've written extensively recently about the after-the-fact demand for compliance offices in places such as Denmark.) Although banking is about risk and compliance, this stance has not deterred investors from continuing to pour funds into Revolut. Other concessions now include offering a phone number to customers, which serves as a reminder that all the promotion of AI for customer service is driven by a relentless cost-cutting agenda that is now looking unsustainable. India's banks are continuing to serve as a drag on the economy, writes Credit Suisse strategist Neelkanth Mishra, who says that state-owned banks control two-thirds of banking assets. "The problem is that state banks continue to have a very large role in the economy," he writes. "As they slow, they drag down the economy, too; private-sector banks simply can't grow fast enough to make up the difference. For a time, non-banking finance companies could help: Shadow banks were responsible for nearly a third of incremental loans in the system over the past three years. But, since September last year, when a funding crunch forced them to focus on survival, credit growth in the system has slowed."Can China's fintech giants help digitalise the country's banks?

Featured Articles

Thursday 18th April @ 10:17am

Not long ago, Lafferty News recently received birthday wishes by email from a hotel where we stayed last year. Somehow the hotel thought this it a good idea to remind us that it's still got all of our details in its system, waiting to be hacked. But we're now in a world of tension between proof of identity and storage of identity documents. "European anti-money laundering legislation means customers and businesses are required to provide potentially sensitive...MORE

Monday 15th April @ 10:45am

JPMorgan reported record 2019 first quarter profits on Friday. "But J.P. Morgan's results showed that it still benefited from the Fed's last move to hike its benchmark rate in December, the fourth time it raised rates last year," says CNBC. "That was most clear in the bank's consumer lending division, one of the two biggest segments for the company. Profit rose 19 percent to $3.96...MORE

Arif Naqvi
Friday 12th April @ 9:55am

Intesa Sanpaolo chief executive Carlos Messina has a lot to say to the Financial Times in a fascinating interview. Italy is sometimes characterised as publicly poor but privately rich, as Italians learned how to survive a perennially tumultuous political system. Italian banks have traditionally tapped retail investors, who invest in bank securities along with keeping their savings there, and the Italian government has angered the ECB with its efforts to staunch losses among...MORE

Wednesday 3rd April @ 9:03am

It's not insignificant that Germany's fintech capital is Berlin while its banking capital is Frankfurt. While the German press is absorbed in the slow-moving dinosaur rumble known as the Commerzbank takeover, Berlin's fintechs have been catching the attention of big dynamic Asian tech businesses such as Ping An and Tencent. As East Berliners note acidly, many of them grew up in the side of the city where it was easier to get to Shanghai than to Hamburg. In the great...MORE

Monday 1st April @ 10:39am

What does the change of strategy mean at N26? The banking app start-up embodies the new business model of banking: with costs going to zero, scale can produce profitability in a transactional world and who needs to engage in risky lending anyhow? Well, banks. And for N26 to scale, it needs to keep its offering light. "In a change of strategy, N26 has decided not to offer its clients a wide range of other banking products for now, preferring to build up its international...MORE

Wednesday 27th March @ 9:19am

Occasionally, we remind our readers (and ourselves) not to believe all the breathless hype that accompanies almost every press announcement about banking and payments. Take Mastercard, which clearly wants to do the right thing but goes about it in weird ways, announcing today that it is "vowing" to give consumers control of their digital identity. Hot on the heels of Apple's breathless announcement on Monday of a privacy-based credit card, with the added promise...MORE


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