Daily Review: Banks are Not Going Away – Marcus by Goldman Sachs Lent $2 billion to Customers

On trends – banks are still the masters of the financial services industry

Goldman Sachs’ Marcus is winning the personal loans arms race

  • Marcus is pushing an us-versus-them anti-fee campaign highlighting potentially predatory practices of online lenders like Lending Club.
  • As of late Monday, Marcus by Goldman Sachs lent $2 billion to customers.
  • Meanwhile, Lending Club has reported losses exceeding $200 million over the last six quarters; Prosper has lost $210 million since the start of 2016, despite various cost-cutting measures, and lost its unicorn status. Even OnDeck Capital, which focuses on small businesses, is struggling to become profitable, having reported losses over eight consecutive quarters. On top of it, the Cleveland Federal Reserve Bank laid into such companies in a report Thursday, calling online lending a predatory business requiring more regulation. Marcus passed $1 billion in loans this summer.
  • Marcus, which offers personal loans to consumers between $3,500 and $30,000, has obvious advantages over its Silicon Valley competitors: a household name brand like Goldman Sachs behind it, the ability to raise FDIC-insured deposits as a deposit-taking institution and deep relationships with institutional investors that purchase consumer loans — like Goldman Sachs, which helps fund Prosper loans and is effectively competing with its own customer.
  • Goldman sees a $13 billion lending opportunity with Marcus over three years, CFO Marty Chavez said Tuesday in remarks at the Bank of America Merrill Lynch Future of Financials Conference.
  • Since late October, Marcus has been pushing an anti-fee campaign scripted to show how frequently and commonly people accept fees without fully understanding why the fee structure is in place in the first place and perhaps even highlight the fee structures at competing companies; namely, Lending Club, one of the largest players in online lending with more fees in place than its peers.

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Fintech sector needs a meaningful investment fund says challenger bank boss

  • Alex Letts, the founder of a challenger bank U (~50,000 customers), said that the sector is some way off from having the firepower to sufficiently challenge the mainstream banking sector and called for the establishment of a meaningful investment fund to support FinTech startups.
  • Mr. Letts questions whether the challenger banks were radically different from mainstream banking, positing that some had simply put new clothes on the emperor.
  • The other side are what I call the ‘neobanks,’ people coming in with much hurrah and hysteria and telling everyone that the big banks are finished and that they are going to take over the world. I can absolutely tell you they are not. But what I can say is that incremental change for them is very easy and simple. They have beautiful digital footprints, the support of regulators and in many cases some very bright people running them and a modern attitude."
  • I do believe in their skills and that they can offer a brighter fresher future for banking but I don’t believe they have done anything truly disruptive. I do not believe that they have done anything more than put new clothes on the emperor.

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On fraud

2/3 of Businesses Experienced Increased Fraud Attempts in 2017, a 58% Increase over Previous Year – IDology Annual Fraud Report

  • Shifting tactics used by criminals, along with the complexity of identity verification are the top challenges to fraud prevention.
  • Addressing rising synthetic identity fraud and improving the customer experience by reducing friction are key areas of strategic interest.
  • More than half of companies reported an increase in mobile-based fraud, led by device cloning.
  • About 67% of organizations reported an increase in fraud attempts, compared to just 42 percent in 2016, an increase of 58 percent.
  • Criminals are using more sophisticated schemes that are harder to detect, such as synthetic identity fraud (SIF), a combination of real and fabricated identity information used to create a new identity.
  • "The data indicates that fraud is growing in prevalence, type, and sophistication and this is changing how businesses approach the identity verification value chain," said John Dancu, CEO of IDology. "In today's post-breach environment, pulling together and assessing identities based on several smart layers of information from different sources, including data on mobile devices, ensures legitimate customers are approved with less friction for a more secure and positive experience."

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On payments

Digital payments expected to hit 726 billion by 2020 — but cash isn't going anywhere yet

  • People around the world are expected to make 726 billion transactions using digital payment technologies by 2020.
  • Emerging markets are leading the upward trend, and tech innovations such as connected homes, contactless bank cards, wearable devices and augmented reality will drive cashless transactions in the future.
  • "Curiously, though the number of transactions continues to rise at a rapid rate, the average USD value per transaction has decreased slightly, as digital establishes itself as a growing rival to cash for low-cost purchases."
  • Between 2014 and 2015, debit cards accounted for the highest share of non-cash payments at 46.7%, while credit cards trailed behind at 19.5%. Non-cash transactions rose 11.2%, the highest growth of the past decade.
  • Contactless cards are seen as "the new normal," especially in Europe. In France, the circulation of Visa contactless cards doubled to 40 million in 2015 from 20.3 million the previous year. The U.K. was the biggest market for contactless payments in Europe, with cards in circulation reaching 106.9 million in 2015.
  • But cash still remains the mainstream means of payment, especially for low-value transactions. "Cash continues to play a key role for many, and a crucial role for some," Bank of England Chief Cashier Victoria Cleland said.
  • Americans still look to cash as their preferred method of payment — although physical cash came in second place, behind debit cards.
  • Emerging markets are expected to grow at a rate three times that of developed economies in terms of digital transaction volumes. Non-cash payments in Asian emerging markets are projected to grow by almost a third (30.9%), led by powerhouses China and India. Digital invoicing, virtual payment cards and cloud-based accounting are also seeing popular use in emerging Asian economies.
  • FinTech firms and incoming regulation are transforming the payments landscape. "Within this new and dynamic ecosystem, payments industry participants must strategically reassess their roles," Anirban Bose, head of global banking and capital markets at Capgemini.
  • In an open banking ecosystem, banks are expected to open up their application programming interfaces (APIs) to third-party payment providers. APIs are codes that allow different financial programs to communicate with each other. Open APIs allow developers to gain access to the software applications of banks.
  • "Banks must embrace this opportunity to enhance their offerings in collaboration with FinTechs and third-party developers. Breakthrough technologies and significant industry advances, such as open APIs, instant payments, blockchain and regulatory standardization, will encourage collaboration," Bose said.

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On cryptocurrency and blockchain

India's Supreme Court Calls on Government to Regulate Bitcoin

  • Three justices issued a notice to the central bank, the market regulator, the tax department, and several other agencies, asking them to answer a petition on the matter.
  • According to the petition: "The lack of any concrete [control] mechanism pending the regulatory framework in said regard has left a lot of vacuum and which has resulted in total unaccountability and unregulated Bitcoin (crypto money) trading and transactions."
  • The petition goes on to state that bitcoin exchanges in India add 2,500 users per day, and that some 500,000 residents now hold bitcoin.
  • As a result of its adoption, bitcoin usage may affect "the market value of other commodities," according to the petition, which pleaded with the court for an "urgent direction" for the government to intervene.
  • In April, the government formed a committee to study cryptocurrencies and propose new regulations.

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MasterCard has filed a patent on its own blockchain-based money transfer solution

  • MasterCard has just filed a patent for a Method and System For Instantaneous Payment Using Recorded Guarantees – a patent for a blockchain-like system that offers instant payment. It is a patent that assumes that a blockchain-like ledger will be available to store and manage international transactions instantly.
  • The patent describes: "A method for processing a guaranteed electronic transaction, includes: storing account profile, each include an account number and balance; receiving a transaction message from an acquiring financial institution via a payment network, the message including a specific account number, transaction amount, and payment guarantee data; identifying a specific account profile that includes the specific account number; deducting the transaction amount from the account balance in the specific account profile; generating a record of payment guarantee that includes the transaction amount and data associated with the payment guarantee data; generating a return message including a response code indicating transaction approval and data associated with the generated record; transmitting the generated record to a computing system via a communication network; and transmitting the generated return message to the acquiring financial institution via the payment network."

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UK Financial Authority Warns Investors Against Cryptocurrency Derivatives

  • FCA has issued a warning to investors against venturing into cryptocurrency contracts for differences (CFDs). The agency claimed that digital currency-based CFDs are considered to be high-risk investments.
  • FCA issued its warning to investors against investing in crypto-based CFDs due to several risks that they could face, among which are price volatility, leverage, charges and funding costs and price transparency. The legal safeguards currently in place cannot protect investors and will not compensate them for any losses that they could incur from trading.
  • In June 2017, FCA Director of Strategy and Competition, Chris Woolard, warned that investors should exercise a degree of caution when dealing with cryptocurrencies.
  • In September, the regulator has also cautioned that ICOs are very risky investments and asked would-be participants to inform or report to the agency any possible fraud that they may encounter in the cryptocurrency-based funding model.
  • Other countries such as Germany, United States, and the Netherlands have also released their warnings about investing in ICOs earlier this month.

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