I have the wonderful occasion of contributing to the BIS’s new book, Promoting Global Monetary and Financial Stability, The Bank for International Settlements after Bretton Woods, 1973-2020.  The collection of essays are designed to highlight the significant role in the momentous changes the international monetary and financial system has undergone over the past half century.   Authors include Agustín Carstens, Claudio Borio, Stijn Claessens, Piet Clement, Robert N. McCauley, Hyun Song Shin, Harold James, Catherine R. Schenk, Chris Brummer, Andrew Baker, Barry Eichengreen, William C. Dudley.

economic crises. When economies go into recession, capital markets tend to freeze up as

banks and other financial institutions become skeptical (and scared) of lending money to

firms.

When they do, companies with the most resources are most likely to qualify for loans —

unless banks have a sense that the government will not let a borrower, or the industry of

which it is part, die. And even then, firms may be left to their own devices to survive

downturns. As a result, companies with the largest balance sheet, and deepest reservoirs

of savings and untapped credit lines, are most likely to survive.

For the reasons sketched out above, startups often find it virtually impossible to

raise capital in times of economic distress, resulting in fewer new challengers to

legacy financial institutions. With no operating history, and few resources, those

companies find that banks are loath to put at risk their balance sheets. Consequently,

entrepreneurs usually depend on angel investors and family members to get new

ventures up and running, investors who have likely seen their own wealth deteriorate

precipitously.

Varying global policy responses

Recessions usually result, consequently, in consolidation. And the fintech sector may be

no different. Indeed, even prior to the coronavirus, over $195 billion in mergers and

acquisition deals were reported by The Wall Street Journal in 2019, more than three

times the value of the prior year. Now, with valuations of firms plateauing, and in many

cases falling, fintechs will be increasingly attractive targets for acquisition. Don’t

be surprised to see an array of firms picked off, not just by banks looking for

technology, but also by other larger fintechs, and bigtechs — a trend reflected in

February with Visa’s $5.3 billion acquisition of Plaid.

Government policy can, however, have an impact on how many small businesses —

fintech or otherwise — disappear. Some countries, interestingly, have proposed direct

government subsidies to the industry to keep it afloat. Singapore, for example,

announced a $125 million support package for the financial and fintech sectors to deal

with the immediate challenges from COVID-19 and position itself strongly for the

recovery and future growth. Similarly, the UK recently announced a £1.25 billion

coronavirus package to protect firms driving innovation, including a £500 million

investment fund for high-growth companies impacted by the crisis, made up of funding

from government and the private sector.

The U.S. response, by contrast, has involved policy choices that have if anything

tended to favor and promote big companies. As in the 2008 financial crisis, well

connected financial institutions — as well as sectors like the airline industry — were given

front-seat access to government sponsored bailouts. Meanwhile, smaller businesses

found themselves at the back of the line, and in some instances off the line, in their

attempts to access financing.

The realities of the schism has been most obvious in programs specifically designed to

assist small businesses. Banks eligible to disburse federal assistance like Paycheck

Protection Program loans were at least initially among the largest in the country, and as

such tended to concern themselves most with their largest customers, and, among those,

the firms with whom they had existing lending relationships. Making things worse, big

banks had not fully invested in onboarding new customers or automating compliance

programs for anti-money laundering and sanctions regulations. As a result, small

businesses, including many startups, have had difficulties accessing federal assistance.

Not all has been lost. There have been attempts to shift course and funnel federal support

to small companies in need of assistance. The Small Business Administration, for

example, recently reserved a full eight hours on its website to companies seeking

funding; similarly, the Federal Reserve has created a Main Street credit facility intended

to support small businesses that were in sound financial condition before the onset of the

COVID-19 pandemic. But both measures come later than similar forms of aid have been

made available in other countries, and in the wake of intense, and continuing, bipartisan

criticism. Indeed, many firms — including fintech services providers — that at the start of

the year were turning down outside investors are now scrambling for capital, and

introducing layoffs and spending freezes to preserve cash.

A less competitive US fintech sector?

All of this could leave the fintech sector less competitive — and innovative — once

the dust settles, with fewer small companies and an ever more powerful

collection of banks and big tech firms.

Not every corner of the ecosystem will fare the same, of course. Payments firm PCM has

suggested that fintech enablers around artificial intelligence, internet of things, and

software solutions will be in high demand. In this regard, bots for call-centers, account

onboarding technologies and loan automation will be subject to considerable interest.

There will also be an increased need for safe digital IDs given the volume of digital

business transacted and robust solutions required for the protection of client assets.

According to Finch Capital, challenger banks, by contrast, may face tough questions

from investors calling into question earlier valuations as a result of high burn and lower

than expected activity due to the coronavirus. Robo-advisers could see similar turns in

fortune. For those on the losing end, the consequences might be dire. It’s more likely

than not that angel investors and venture capitalists willing to invest will expect much

more from firms seeking funding, if they invest at all. And for fintech firms that fail, there

will not necessarily be a long line of companies, startups or otherwise, ready to replace

them with new models and resources sufficient to pose even distant challenges to bigger

than-ever rivals that hunker down and draw on existing resources.

How precisely this will. ultimately impact consumers will be anyone’s guess. But it’s hard

to see it being good.

The CARES Act for Gig Workers and Those Who Work for Themselves

The immediate challenges facing fintech are not hard to imagine, though looking to the stock market probably isn’t the best place to start. Yes, the stock market turmoil has been devastating to retirees and savers, but most fintechs are young, privately held companies that don’t have publicly listed securities. Instead, to get a sense of the problems in the sector you have to think about fintechs’ business operations.

The universe of companies that carry the fintech moniker is vast and diverse. Still, most companies — whether they be artificial intelligence tools, crowdfunding platforms or crypto firms — are early stage (often start-up) ventures, and as such are fragile enterprises whose continued funding will rely on growth and scale.

But in a world where the economy grinds to a halt, growth becomes difficult as firms run up against a brick wall of diminished demand created by the new reality of stay-at-home workers, not to mention historic strains to our public health care system. Only fintech firms whose businesses enable and support post-COVID-14 lifestyles — like being able to pay and apply for things remotely, beyond face to face transactions — will probably see a significant uptick in revenue.

Making things worse, many customers and clients of fintech firms will struggle in ways that could prove to be game changers for the ecosystem. Fintech lenders have been drawn to small businesses, in part due to their advanced analytics and the opportunity opened by legacy institutions overlooking smaller clients. Viewing larger banks as lumbering and at times disinterested providers of capital for start-ups and medium-sized firms, fintech firms have bet that they could provide faster, more efficient services.

But it’s precisely small and medium-sized enterprises that face some of the largest economic risks (think restaurants, yoga studios, coffee shops and more). With people staying at home, and reluctant to frequent their favorite diner or hairdresser, it’s increasingly likely that tens of thousands of everyday businesses will face problems repaying loans.

For this reason, members of Congress are already looking for more than just banks to step up and assist. In a joint letter, Democratic members of the House Financial Services Committee asked a broad range of industry associations, including online lenders and credit rating agencies, to explore changes in their practices to assist small businesses.

Whether they will be in a position to do so remains anyone’s guess, however. The bandwidth for fintechs in particular could be narrow. Fintechs are much smaller, and rarely as well capitalized as traditional banks. So they won’t be in a position to practice much forebearance. And even where fintechs originate loans for syndication, deteriorating credit quality can upend their reputation, making investors less inclined to do business with them in the future.

Fintechs may yet, however, play important roles going forward. With the U.S. Small Business Administration offering low-interest disaster loans for small businesses suffering substantial economic injury as a result of the coronavirus, fintechs might be important partners for getting money to the public. Kabbage’s Sam Taussig, for example, has argued that fintech partners could be integrated into the underwriting process, and begin to automate application and data collection processes that otherwise will stymie federal efforts to get funds expeditiously out to cash starved companies.

Fintechs might also be critical in providing new credit analytics for the coming swaths of people whose FICO and other scores are bound to deteriorate with the deceleration of the economy. With the coronavirus poised to wipe out the creditworthiness of millions of people under traditional metrics, fintechs could prove indispensable in devising new, less punitive models for scoring working and middle class applicants when the economy regains its footing.

Yet another tool could include leveraging crowdfunding in ways that temporarily permit greater levels of investment where neighborhood businesses seek bridge capital from local communities to retain their workforce.

These are, of course, but a handful of possibilities that might take advantage of, if not the balance sheet, then at least the technical know-how of the fintech industry in crisis. As the House Democrats’ letter suggested, other kinds of reforms — from rethinking what coronavirus-related data is reported to instituting a temporary moratorium on late fees and penalties, perhaps through advanced analytics -, might hold additional appeal. But just as in the case of the coronavirus, the time to act is short.

Many thanks to the Barbados Financial Regulatory Commission for co-hosting with Georgetown our first annual Seminar on Sustainable De-Fi and Financial Inclusion. We had the pleasure of welcoming an all star cadre of thought leaders from the IMF to Kenya’s Capital Market Authority to market participants spanning venture capital, philanthropy and blockchain forensics.

But should fintechs feel the same sense of glee?

The Virtues of Lower Interest Rates

Lower interest rates, at least at first glance, point to a state of affairs where young fintech firms will have an easier time business-wise.

Many if not most fintechs are young companies, indeed often upstarts, dependent on early stage capital contributions from venture capital firms, and bank loans.  Lower interest rates would seem to make this latter form of financing easier, since borrowing would become cheaper—and in the process help fuel expansion strategies, as well as enable refinancing outstanding debt with higher rates.

Lower interest rates also enable fintech (‘online’) lenders to continue providing loans to borrowers that traditional bank lenders might ignore, or be wary of due to their perceived credit risk.  When interest rates are low, so are generally instances of default, and as long as the job market remains strong, the likelihood that consumers won’t be able to repay their debt is low.   The risk-adjusted return for fintechs may thus be high—indeed higher for many fintechs than for traditional banks.

Digging a Little Deeper

Still, all too often the causes for falling rates point to greater challenges for fintechs, not less.

When the Federal Reserve acts, it does so purposefully, and the central bank’s moves last year–like the PBOC’s emergency liquidity lines–was a response to  data, gloomy data, suggesting growing threats to US economic growth.  If fears pan out, it means that a recession may be on the horizon—and with it risks to employment, price stability and the very credit quality of outstanding loans. For the many fintech firms that make (often unsecured) loans, this spells trouble.

Now importantly, when many fintech lenders make loans, not all (or even most) of their risk resides on fintech balance sheets.  Depending on the industry—whether real estate finance, mortgage lending, or peer-to-peer lending, etc.—loans originated by fintech lenders may be syndicated out to investors.  Which means deteriorating credit quality may not necessarily come to bite platform lenders directly.  Still, greater loan defaults will impact their business model, and the attractiveness of a platform and its reputation as a destination to do business.  Meanwhile, creditors and investors may be less inclined to support fintechs financially, regardless of lower interest rates.  And if these fintechs find themselves starved of capital, the consequences for their operations could be devastating.

Fintechs aren’t banks, which means that a ‘run’ on fintechs, and even widespread failures by fintechs, won’t necessarily mean the end of the global financial system.  But you can still imagine plenty of problems.  High delinquencies could arise in those fintech sectors where loans are held on the books of firms—or where firms devote their equity to support highly leveraged investments that don’t pan out.  And where fintechs distribute or pass on their risk, but also act as servicers—think the mortgage market—bankruptcies could end up slowing growth (or accelerating downturns) in larger segments of the economy.

Fintech Targets

Still, I could also imagine another possibility—a world where fintechs increasingly become targets of takeovers and acquisitions.  This would be a real change of course from the popular narrative of venture capital firms paying a king’s ransom for equity in untested fintech upstarts.  But in a world where faith in not-yet-clear business models erodes, or balance sheets come under stress, valuations could fall, enabling (alongside lower interest rates!) more buyouts and takeovers.

Of course, no one can tell the future, especially in an economy like that in the United States shaped by as many commercial and even political forces as monetary ones.  But even for fintechs, lower interest rates can be as much a harbinger of things to come as they are a kickstarter for stronger economic performance.  Indeed, with the recovery entering an unprecedented tenth year, it’s becoming safer to bet on the latter than the former.

Applicants should get their papers in by 14 February 2020 – please click here for the submission form and further details.

The Society of International Economic Law, the Journal of International Economic Law, and Oxford University Press have jointly established the SIEL/JIEL/OUP Essay Prize to award the best essay submitted on any topic in any field of international economic law.

The competition is open annually to all current undergraduate and graduate students of any university or other tertiary education institution, and those who have graduated from a university or other tertiary education institution no earlier than five years before the submission deadline (this can include five years from PhD graduation). Co-authorship is permitted provided all authors meet the stated conditions. Members of the SIEL Executive Council may not submit entries. The essay must not have been previously published. Submissions shall not exceed 10,000 words and shall follow the JIEL style sheet.

The essay prize comprises three parts. The prize consists of £200, as well as £400 of Oxford University Press book vouchers and a three year subscription to the Journal of International Economic Law. The winner will receive free entry to the Graduate Institute/IIEL Annual Conference on WTO Law, and where circumstances permit, he/she will be also given the opportunity to present on a Panel or poster presentation at the conference. The winning essay may be submitted to the Journal of International Economic Law for publication, subject to the standard review and decision procedures.

The prize is awarded by the SIEL Executive Council on the recommendation of a Prize Committee drawn from its members and the Editorial Board of the Journal of International Economic Law. Any queries should be addressed by email to Dr Gracia Marin Duran (University College London) at Gracia.Marin-Duran@ucl.ac.uk.

The winner of the 2018-2019 SIEL/JIEL/OUP Prize was Catherine Gascoigne for her article, ‘The Role of Non-Attribution in Determining the Use of Trade Remedies’.

The winner of the 2017-2018 SIEL/JIEL/OUP Prize was Rafael Lima-Sakr, with his article, ‘Beyond History and Boundaries: Rethinking the Past in the Present of International Economic Law‘.

The winner of the 2016-2017 SIEL/JIEL/OUP Prize was Luigi Pedreschi (European University Institute), with his article entitled “Balancing Efficacy with Space: Public Services in EU Trade“.

As in Brexit, there have been some pretty high profile splits associated with Libra.  The fintech news of the last couple of months was the departure of the major payment processors Visa, Mastercard and Stripe from Facebook’s Libra project.  The news followed on the high profile, and embarrassing departure of PayPal from the venture the week before.

Without the companies on board, the project’s future has been intermittently cast in doubt.  The idea behind Libra’s launch was to create an association of (for the most part) large, global payment players who could assist in the scaling and development of the Libra ecosystem by creating new kinds of apps and services.  But as companies jump ship, the specter is increasingly raised that Facebook’s plan may not only meet greater regulatory scrutiny, but also diminished market adoption.  Instead of being an eventually “decentralized” platform, it will look, increasingly, like what many critics always claimed that it was—a Facebook-dominated commercial venture.

Governance Lessons…from Brexit?

This does not, however, necessarily have to be the way the story in fact plays out. To understand what I’m getting at, consider the United Kingdom’s impending departure from the European Union, or “Brexit.” For many commentators, Brexit serves as a potential mortal blow to the block. The UK has the second largest economy in Europe and the third largest population. Moreover, the country hosts one of the largest financial centers in the world, the City of London, which is helped to propel the competitiveness of the entire region’s financial sector. But if London is no longer a member of the European Union, and no longer has access to Europe’s common market, that competitive advantage could be wiped away.

But increasingly, commentators—and officials throughout Europe—are noting that the departure of the United Kingdom from the European Union could help to deepen cooperation among the remaining members. London, after all, had long served as a counterweight to more social democratic regulatory impulses within your, and favored lighter touch and more laissez-faire policies. Without that counterweight, efforts to deepen regulatory and governmental involvement in the economy could accelerate, bolstered by renewed and intensifying collaboration between France and Germany. If this happens, the European Union could emerge from Brexit more politically cohesive, active, and perhaps even stronger than ever.

The Upside of Down

The point, of course, is that even smallness can carry important advantages. Fewer preferences have to be kept in mind, decision-making can be enhanced, and conflicts of interest reduced.  From this standpoint, the optimistic take on the departures is that Facebook no longer has to concern itself with placating parties whose economic interests could over time find themselves in some conflict with goals and aspirations of Libra.   If, for example, Libra becomes a dominant international currency, with transactions executed on its blockchain, it is unclear as to whether or not such an instrument could end up eroding Paypal’s—or MasterCard or Visa’s—existing market share in payments services.  Now, however, the Libra Association won’t have to necessarily take into consideration the negative market implications of its technology in that industry segment.

Still, a smaller Libra association will certainly change the direction of the Libra ecosystem, just as a Uk-less EU will change.  The Libra Association is, after all, designed to assist in the adoption of Libra by coordinating the efforts, resources and competitive advantages of the association’s members.  But with payments players largely having exited (the only payments firm remaining is PayU), the logical course of action could be to focus on the strengths of the members remaining in the group.  And with some of the remaining big technology marketplaces including the likes of Spotify, Uber and Lyft—and major fintech Venture Capital firms like Andreessen Horowitz—the project will look a lot more like tech companies bargaining into finance, a point Josh Constine recently made.  Retail adoption may be elevated in priority, if it wasn’t already.

Of course, there is another potential course of action—accelerating the Libra Association’s original goal of building out the body’s membership.  Originally, the objective had to do with ensuring the evolution of its platform to a more decentralized infrastructure; now, however, it could be based on generating reputational momentum as other firms have departed as skepticism concerning the project grows.  But this will be easier said than done.  It’s certainly one thing jumping on a project with the world’s leading technology firms joining forces.  It’s quite another jumping into a project facing enormous regulatory headwinds, and where other market participants have voted with their feet.