Open Banking Legislation Pushes Partnerships in EuropeApr4

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Daily Intelligence Briefing – April 3, 2018

FEATURED TOPIC: Open Banking Legislation Pushes Partnerships in Europe

Financial technologies and new digital payments are developing faster than ever, generating new ways to capitalize on consumers. MRP recently covered how the US’ fintech space is becoming dominated by big bank- big tech partnerships like JP-Morgan and Amazon. Across the Atlantic, the future of finance may be getting a boost from the regulatory environment.

Europe has been slowly developing fertile ground for fintech companies over the past few years. Italy’s biggest bank by market capitalization, Intesa Sanpaolo, already expects to lose market share to digitally focused rivals in many mainstream areas such as payments. Earlier this month, the European commission laid out its Fintech Action Plan, intended to align EU rules with rapid advances in new technologies, such as blockchain, artificial intelligence and cloud services. The final quarter of 2017 also saw brand new peaks in venture capital funding for European fintech.

Back in January, the European Union enacted the PSD2, which required banks to begin allowing third parties — such as retailers, technology groups and rival lenders — to access the accounts of any customers who authorize it. Bankstypically leveraged that data for critical insights, including, credit analytics and cross-marketing of new products and services. Open banking fundamentally changes the dynamics of banks and new financial technology  companies that will now build their platforms on top of the bank’s data and services. The PSD2 legislation is built on the concept of allowing depositors to be more particular about who they bank with, fostering competition.

However, as in the US, European banks may be less apt to swim against the current, instead learning to build bridges over it. With open banking facilitating data sharing, established banks will be able to more easily incubate new fintech companies into their services.  This will allow them to launch more initiatives quickly and develop new technologies to please their customers. PwC has found that 82% of banks, insurers and asset managers intend to increase the number of partnerships they have with fintech firms over the next three to five years, and we can expect these partnerships to fuel new ways to drive change and deliver a more customer centric experience.

Getting a head start on the rest of Europe, the UK has been a hotbed for developments in this space since the government enacted their own open banking law, separate from and prior to the PSD2. The Kingdom’s Financial Conduct Authority has a specific interest in helping increase competition in the country as Brexit approaches. While it will be some time yet before it gets much use, new organizations soon will be able to initiate payments between bank accounts on a consumer’s behalf. Any authorized organization can now make payments; it doesn’t need to be a bank. It also eliminates most fees associated with processing bank card payments.

63% of 4000 UK banking customers surveyed say they are willing to share financial information concerning their accounts with a competing bank, fintech or aggregator in pursuit of a better offer. Out of 31 UK fintechs that have raised about £500 million between them for the survey, 94% see Open Banking as a major area of opportunity. With this in mind, 81% are getting ready and 29% say that they are already fully prepared. But perhaps putting some bank’s worries at ease, 59% of participants see Open Banking as an opportunity to review their collaboration strategies.

It is not just European fintech firms that see open data and a broadening market as an opportunity. China’s Alipay, the digital payments branch of Alibaba, has been a large part of facilitating China’s rapid ascension toward becoming a “cashless society”. Now, with expertise in the field, they are eyeing Europe as a new horizon. Chinese tourists ranked first among all tourists worldwide in 2016 at $261.1 billion. The average expenditure per Chinese tourist in Europe is currently $3,754 and over 90% say they would use mobile payments overseas given the option.  Greater cooperation between tech and banking could facilitate these kinds of international relationships in the future. The Government of Japan has also launched a series of events across Europe to inform and promote active discussions around the future opportunities in Japan’s lucrative and intelligent market.

While open banking is still new and banks will take some time to get their footing, it lays out the map for a huge transformational shift across a banking sector that has lagged other regions in recent years. Banks will have the choice to remain competitors of new tech-based financial service and payment platforms, but without safe-guarded data, established European financial institutions, like those in the US, should see that collaboration is the way forward.

Investors can gain exposure to European banks, fintech, and digital payments via the European Financials ETF (EUFN), the Fintech ETF (FINX) and the Payments ETF (IPAY).

HERE IN THE MEANTIME are some articles relating to Fintech (the stories are summarized in the Finance section of today’s report):

• FinTech – Big banks on notice as tech groups ramp up pressure
• Fintech – A mortgage in 30 minutes? Fintech says it’s coming
• Fintech – Nomura Invests in Japanese Fintech Firm 8 Securities
• Fintech – Farewell to Robo Advisors, Hello to Cognitive Computing with a Pulse

CHART: Europe Financials (EUFN) vs Payments (IPAY) vs Fintech (FINX) vs S&P 500 (SPY)

OTHER STORIES HIGHLIGHTED IN TODAY’S DIBS:

• Economics and Trade: 
  • Trade War – Trump’s trade war with China is heating up
• Real Estate:
  • ASEAN – Singapore Home Prices Jump the Most in Almost Eight Years
• Services: 
  • Grocers – Here is what’s next as grocers catch up to e-commerce
• Technology: 
  • E-Commerce – More than half of retail sales are influenced by digital
  • Batteries – Lithium Battery Demand Drives Process Evolution
  • Aerospace – Used SpaceX Rocket Launches 10 Iridium Satellites into Orbit 
  • Aerospace – 5 Reasons Congress Surprised The Satellite Industry By Adding Military Satcoms In The 2018 Budget
• Transportation:  
  • Trucking – U.S. Trucking Prices Are About to Rise Even More
  • Ride Sharing – BMW and Daimler are putting their differences aside to beat Uber
  • Freight – Air freight takes off in early 2018
  • Autos – Subprime New-Car Buyers Going Missing From U.S. Showrooms
• Commodities: 
  • Cannabis – Marijuana Stocks Could Be a Buzzkill
  • Steel – On Steel, Forget Trump, Think China
• Energy & Environment:
  • Renewables – India’s biggest renewable-energy deal has been sealed
• Endnote: 
  • Music streaming services like Spotify are the leading source of music revenue in the US

JOE MAC’S MARKET VIEWPOINT

• Joe Mac’s Market Viewpoint: Beyond the HOUSING HEADWINDS
• Joe Mac’s Market Viewpoint: The Coming Value Rotation
• Joe Mac’s Market Viewpoint: Beyond the BOND BUBBLE
• Joe Mac’s Market Viewpoint: The Gathering Storm
• Joe Mac’s Market Viewpoint: Contrarian Crude Call

CURRENT MRP THEMES

About the DIBs: MRP focuses on identifying transformational change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP’s compilation of articles and data from multiple sources on subjects reflecting disruptive change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics. 

• United States, ISM Manufacturing New Orders, MAR: 61.9 from prior 64.2
• United States, ISM Manufacturing Employment, MAR: 57.3 from prior 59.7
• United States, ISM Manufacturing PMI, MAR: 59.3 from prior 60.8
• Russia, GDP Growth Rate, YoY, Q4: 0.9% from prior 2.2%
• Brazil, Balance of Trade, MAR: $6.28B from prior $4.91B
• Indonesia, Tourist Arrivals, YoY, FEB: 17.36% from prior -6.17%

Trade War – Trump’s trade war with China is heating up

Over the weekend, China unveiled its initial response to President Donald Trump’s steel and aluminum tariffs, as 128 US goods will be subject to new import taxes upon entrance to China. The tariffs focused on agricultural products and industrial goods — featuring an additional 25% duty on eight goods, including scrap aluminum and some types of pork, as well as a 15% duty on 120 goods, including certain types of fruits, nuts, wine, and rolled steel.

The announcement comes days before the deadline for the Trump administration to announce a final list of Chinese goods that will be subject to additional 25% tariffs. In total, this second round of tariffs will hit $50 billion to $60 billion worth of Chinese goods.

So far China has not targeted key US exports like soybeans, which made up $14 billion in US-to-China exports in 2016, but the threat is looming over the continued fight.

While tension has escalated, the two sides have reportedly opened talks about possible settlements to the trade dispute that could result in China opening its market to more US companies. This does not mean, however, that the risks of escalation are not still present. BI

FinTech – Big banks on notice as tech groups ramp up pressure

Technology companies are set to take a big chunk of customers from banks, as they intensify their challenge to traditional lenders across a range of mass-market financial services.

By 2025, North American banks could lose 34 per cent of revenue from payments, investments, personal lending, SME lending and business lending to “disrupters” including fintechs, technology companies and the banks’ own start-ups. The only part of the North American market that is expected to escape this dramatic upheaval is credit card lending, with disrupters’ share at 17 per cent by 2025.

Banks in Europe are being challenged by intensifying competition from tech-savvy rivals, spurred by new “open banking” regulation forcing lenders to give them access to the accounts of clients who authorise it.

Peer-to-peer lenders such as Funding Circle and Lending Club have already taken business from banks in the global loans market, while payments apps like TransferMate and Revolut have eroded banks’ foreign exchange commissions. Online-only banks such as the UK’s Atom and the US’s Bank of the internet USA have won customers from bricks-and-mortar based banks. 

Banks have tried to tackle the encroachment of disrupters by setting up innovation labs themselves, taking stakes in start-ups and partnering with tech groups: JPMorgan is in talks about helping Amazon launch bank accounts, for example. FT

Fintech – A mortgage in 30 minutes? Fintech says it’s coming

Lenda claims to make the fastest mortgages out there — currently two weeks start to finish, with an eventual goal of 30 minutes in a nearly all-digital process. Launched in 2014, Lenda has made $200 million worth of mortgages, is licensed in 12 states and plans to expand to 12 more later this year. 

The appraisal process, which typically is not automated, remains a problem. A human appraiser usually goes to a home, takes pictures, makes sure there’s nothing terribly wrong with the structure. It takes seven to 10 days to turn around. Lenda’s solution: Satellites could take pictures of a home. Comparable data for the neighborhood can be looked up. Eventually, an appraiser won’t have to come to the house, cutting seven to 10 days from the process.

Lenda has also piloted a digital alternative to in-person document signing or having a notary come to the borrower’s house. It tested digital signing of mortgage documents through video chat with a notary in January in a pilot project in Washington state.

The entire lending process start to finish is about 13 days, he said. Competitors take two weeks to two months, he said. Lenda also charges no fees and its rates are an eighth to a quarter of a percent lower than traditional lenders. AB

Fintech – Nomura Invests in Japanese Fintech Firm 8 Securities

Mikaal Abdulla, CEO of Japanese fintech firm 8 Securities, has announced a $25 million investment partnership with Nomura Asset Management. The two firms will be developing an app that would offer the Nomura subsidiary’s index funds, ready for Nomura customers by autumn 2017.

8 Securities offers robo-advisory services through mobile apps using exchange-traded funds, focusing on discretionary management. The deal will give Nomura a majority stake in 8 Securities. Nomura is also going to invest 1.1 billion yen ($10.35 million) in 8 Limited, the Hong Kong-based parent company of 8 Securities, giving it a minority stake in that company. 8 Limited provides online brokerage services in Hong Kong.

Nomura Asset Management is a subsidiary of Nomura Group, which is Japan’s largest brokerage and investment banking group. It has a market cap of more than $21 billion.

Nomura recently released its financial results for the third quarter of financial year 2017/2018, showing marked improvements across the board. The corporation recently hired 15 new directors for its investment banking business in the US. CEO Koji Nagai said to Reuters that a larger US market share is planned as that country produces more than 50 percent of the revenue from investment bank fees. The company has an investment bank in Hong Kong and is planning to open up in mainland China too. FinMag

Fintech – Farewell to Robo Advisors, Hello to Cognitive Computing with a Pulse

Like 19th century textile workers displaced by the power loom, financial advisors have been fretting over robo advisors for a decade. That was all before data aggregation, cognitive computing and AI took over. The step beyond robo advisors has been shaping up to be a hybrid between a human advisor and cognitive computing. Wealth managers are implementing a variety of advice models that combine the characteristics of a human advisor with predictive analytics, cognitive computing and artificial intelligence.

Goals-based asset allocation, bucketing and risk management characterize this new style of customized, holistic advice. Machine learning and cognitive computing allow advisors to tailor their services in highly personalized ways.

The value proposition of a robo analyst is very different from a robo advisor. By shining an analytical light in the dark corners of financial filings, robo analyst technology can identify many critical, overlooked data points.

To survive, investment providers and wealth managers will need to consider how they can offer a digital client experience that is comparable to major technology retailers. If they don’t step up machine learning and AI efforts tech giants like Amazon, Google, Apple and Facebook will step in and offer services like wealth and asset management. There’s already evidence that some are moving in that direction. WealthMgmt

ASEAN – Singapore Home Prices Jump the Most in Almost Eight Years

Singapore private home prices surged the most since 2010 as the property market staged a recovery from a four-year slump.

An index tracking private residential prices jumped 3.1 percent in the three months ended March 31, building on a 0.8 percent gain the previous quarter. That’s the biggest quarter-on-quarter gain since the three months ended June 2010.

Share prices of the city’s largest real estate developers led gains on the benchmark Straits Times Index. City Developments Ltd., controlled by billionaire Kwek Leng Beng, climbed 1.5 percent to S$13.20, the highest in more than a week. CapitaLand Ltd., Southeast Asia’s biggest developer, rose 1.4 percent to S$3.62, the most since March 6.

Singapore’s so-called core central region drove the price increase, where housing values climbed 5 percent in the area that includes prime residential districts. With 90 percent of new residential properties sold in 2017 at below S$2 million, that means home buyers may opt for smaller units to keep to their budgets as home values rise. If the majority of transactions move up to S$2.5 million, demand could ease. B 

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Grocers – Here is what’s next as grocers catch up to e-commerce

The grocery retail space has lagged behind when it comes to e-commerce, so the faster it can accommodate this new reality, the less expensive it will be.

Six months after Amazon acquired Whole Foods, the company announced that it would test free same-day delivery for Prime members in four U.S. cities. This comes in the same month that Instacart raised another $200 million (at a $4.2-billion valuation), while Target begins integrating same-day delivery with its Shipt logistics service.

The challenges of e-commerce reduce already thin margins for grocery chains, and all shoppers (both online and off) will end up footing the bill — at least in the short term. Instacart’s model, for example, largely passes on these costs directly to customers, with final prices often surging as much as 40% higher than the product themselves after price premiums, services fees, delivery charges and shopper tips.

Unless grocers can pressure manufacturers to reduce wholesale costs (an unlikely scenario), customers will foot the bill for increasing infrastructure costs. So while online customers will benefit through lower delivery charges, in-store shoppers will likely see higher prices without reaping the rewards. And if this price inflation is substantial, grocers will need to strategize to accommodate changing shopping habits. FDive

E-Commerce – More than half of retail sales are influenced by digital

Last year, just over half of retail sales were impacted by a digital interaction. After years of surging, mobile commerce growth is easing up, and is now no greater than e-commerce growth. Last year, 65% of U.S. online adults accessed the internet from a mobile phone daily, versus 71% the year before Just 28% said they made purchases on mobile at least monthly in 2017, down from 35% who said they did so in 2016.

Only a little over a third (36%) of retailers had ‘buy online, pickup in store’ in place by 2016, and just 7% implemented it last year. Yet, multi-touchpoint consumers are very valuable, and, by 2021, digital touchpoints will influence 41% of U.S. and 38% of E.U. offline retail sales.

The results come from a natural peaking in growth in digital interactions, especially on mobile considering there are only so many phones to be had. But the wall that retail is apparently hitting also comes from the fact that many retailers have yet to embrace omnichannel services – Customers need opportunities in both the digital and physical realm. RDive

Batteries – Lithium Battery Demand Drives Process Evolution

An explosion in battery demand has fostered a welcoming environment for innovations in sourcing and processing lithium and cobalt.

One side effect of the increasing demand for lithium is a rush-to-market tendency from mining companies. This rush, combined with the high value of lithium and its specific physical properties, underlines the importance of proper design throughout all stages of lithium processing.

As the performance demands of LIBs have evolved, equipment manufacturers are developing new technologies to meet those needs. To address purity concerns, GEA provides crystallization units that can be combined to optimize purification. Another important consideration in combined crystallization units is energy efficiency. One energy-saving measure is the use of mechanical recompression of vapors from the crystallizer to create steam for driving the process. LiOH — currently the preferred lithium form for most LIB makers — demands an extremely precise particle-size distribution, which requires specialized spray-drying equipment.

The intensifying global demand for LIBs has forced the industry to consider alternative sources for many metals, and in several cases, look to traditional oil-and-gas processes for inspiration.

Finally, increases in LIB manufacturing capacity have placed unique stresses on the supply of cobalt. Not only is cobalt mined in politically unstable regions, but it is primarily recovered as a byproduct of nickel and copper mining, so its economics are tied up in the demands of those markets, creating a necessity for new primary sources of cobalt to satisfy demands. ChemEng

Aerospace – Used SpaceX Rocket Launches 10 Iridium Satellites into Orbit

A used SpaceX Falcon 9 rocket launched 10 new communications satellites, the fifth set of Iridium Next satellites for Iridium Communications, into orbit from California’s Vandenberg Air Force Base March 30.

Iridium has tapped SpaceX to launch 75 Iridium Next satellites to build up its communications constellation in orbit. To do that, Iridium has bought eight Falcon 9 launches for a total of $536 million.

The Hawthorne, California-based SpaceX has regularly launched, landed and re-flown Falcon 9 rockets as part of the company’s reusable-rocket program aimed at lowering the cost of spaceflight.

SpaceX sent out its recovery boat Mr. Steven, which is equipped with a giant net held up by huge steel arms, to try to catch half of the Falcon 9 rocket’s payload fairing, the protective nose cone that covers satellite payloads during launch. The capture attempt was unsuccessful – the fairing’s GPS-guided parafoil twisted during descent, causing the fairing to hit the ocean at high speed. The company is hoping to recover future payload fairings, which cost up to $6 million each, to lower the cost of its launches even more. Space

Aerospace – 5 Reasons Congress Surprised The Satellite Industry By Adding Military Satcoms In The 2018 Budget

During the final stages of completing the omnibus spending bill for 2018, congressional appropriators added funding for two military communications satellites that the Pentagon had not requested. The two satellites would be the eleventh and twelfth in a program known as Wideband Global Satcom (WGS), which the Air Force describes as the “backbone” of the worldwide communications network on which soldiers, sailors, airmen and marines rely.

Even a cursory review of where the military space program stands today reveals that the joint force was going to be needing more of the current satcoms before any new space architecture becomes a reality, with five reasons why as follows:

1. Military demand for high-rate, reliable communications is growing fast: Usage of WGS voice, video and data capacity is growing at double-digit rates annually.

2. The Air Force needs time to complete its future plans: The analysis of alternatives the Air Force is conducting to determine how wideband communications should be provided in the future is nowhere near done.

3. Commercial satellites lack essential security features: WGS is designed to overcome electromagnetic interference or jamming of its signals by focusing beams on particular regions where U.S. forces are engaged.

4. Transitioning to a new system entails risk: when key performance features for spacecraft are changed, there are often technical and funding delays that lead to schedule slips.

5. Resilience is more important than minimizing costs: U.S. space systems are increasingly subject to attack by both kinetic and non-kinetic means; secure, reliable communications are essential to every facet of military operations. Forbes

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