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Essential Fintech Reading: Sept 19-25

Trusting Silicon Valley With Your Money? Skeptics See A Repeat Of The Past

Will fintech succeed where banks have failed? Writing for the Fiscal Times, David Dayen argues that there are a number of risks around the sector. Dayen notes that the peer on the other side of a peer-to-peer loan is often an investment bank, private equity fund or asset manager, with a significant secondary market emerging for securities derived from P2P loans. "There's very little difference between this relationship and the one between investment banks and non-bank mortgage originators during the housing bubble," writes Dayen. Concern lies around organizations like Lending Club and SoFi which "exist somewhere outside the regulatory perimeter." Dayen concludes that we should not fear innovation but "should wonder about the goals: to deliver better and cheaper financial services or to sidestep regulation and rely on the vagaries of the free market?"

Mobile Wallet Services To Be Regulated Like Banks?

Financial regulation experts speculate that mobile wallet services like Apple Pay may soon fall under the regulatory authority of the Consumer Financial Protect Bureau (CFPB), reports Max Lewontin for the Christian Science Monitor. While Apple Play does not transmit funds directly like PayPal - keeping it from being a "covered person" regulated by CFPB - it can transfer funds from a credit card and card issuers are regulated. Georgetown Law School professor Adam Levitin notes that Apple could qualify as a "service provider," a secondary category under CFPB's purview.  

Legacy Systems Inhibit Banking Innovation

Despite the buzz around innovation labs and push for open APIs, the banking industry will be difficult to modernize because it is still running on decade old legacy systems. Writing for American Banker, Robert Barba notes that core conversions will be easier said than done, as many banks have seen their customer satisfaction scores slide following core conversions related to acquisitions. Fintechs hoping to partner with banks may also find it difficult to scale when each partnership requires them to build around vastly different infrastructure over a long duration. Barba observes that Standard Treasury, a startup helping banks open up their APIs to developers, sold itself to Silicon Valley Bank in August after realizing that each bank it worked with would require a huge commitment of time.  "The startups can't go from bank to bank to bank if each one is a year's worth of work. How are you going to scale that?" says Bradley Leimer, head of innovation at Santander Bank. "You're going to see more startups make a broad pitch at solving one problem and have an exit strategy that involves one bank."

Prosper Acquires BillGuard

The New York Times reports that online lender Prosper Marketplace has acquired BillGuard, a start-up that helps customers manager their money and protect their identity. Valued at $30 million, the acquisition is Prosper's latest attempt to outflank the competition and comes on the heels of earlier deals like the January purchase of American Healthcare Lending, which finances elective surgery, for $21 million. Fellow online lenders such as Lending Club and OnDeck have seen significant weakness in their share prices this year.

Lending Club Investor Ciporin Downplays Risks

In an interview with the Wall Street Journal, venture capitalist Dan Ciporin rejects the notion that the alternative lending industry is introducing a new kind of systemic risk. "One of the reasons you had the crisis in 2008 is because people bought derivatives of derivatives, and you didn’t know who issued the loans. This is a marketplace connecting directly buyers [of loans] and borrowers. There is no misunderstanding about who the borrower is," says Ciporin. An early investor in Lending Club, Ciporin remains bullish on the company's prospects and the industry in general. "Lots of people have been predicting that the industry will be at least $200 billion in the next few years. I see no reason why it couldn't be significantly higher than that."



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