FINTECH ARTICLES OF THE WEEK 07/02/17
Start with Crain’s Chicago Business reporter Lynne Marek’s excellent macro overview of Chicago tech leaders’ failureto pull together a coordinated FinTech hub, “Chicago should be a FinTech hub. So why isn’t it?” In terms of venture money, Chicago falls way short, as Marek and her colleague Joe Cahill point out.
Yet in terms of micro projects, Chicago and the State of Illinois are making progress, seeking to build on the city’s long history of innovation in the technologies that power capital markets and financial services.
Broad awareness and knowledge of FinTech among financial professionals is relatively low in my experience, including in Chicago. In research I did among FinTech Rising newsletter readers, awareness of most FinTech companies outside of payments and lending is fairly low, especially among the Chicago companies outside of payments and bank technology.
FinTech is not merely a catchphrase. It encapsulates the development and adoption in finance of the latest digital technologies, for lack of a better characterization, that:
- Replace 1970s and 1980s legacy computing technologies
- Make legacy technologies more efficient and easier for consumers to use at the device interface level
- Combine mobile, advanced analytics, and virtual computing technologies to create new ways of working with finances for both consumers and businesses
I listed several Chicago companies in a FinTech awareness and partnership study I did among FinTech Rising readers. The results are about what you would expect, with the most established firms in the most established FinTech sectors scoring the highest awareness among financial professionals. Note that the highest scoring firm is a Chicago firm by recent acquisition, not by founding.
Another answer to the question of Chicago and its FinTech position is that Chicago’s financial technology experience, like our economy in general, is broadly spread. We have firms in the payments sector of FinTech, in lending (consumer and banking), in wealth and personal financial management, in capital markets and trading, in insurance, in risk and regulation, in bank technology, and in cryptofinance. The leading international cities tend to have more a concentrated focus of related financial services sectors in their FinTech firms.
As Crain’s columnist Joe Cahill put it in What’s better than targeting FinTech startups?, “For the most part, our financial sector companies are niche players, not mass-market consumer lenders. And big consumer markets hold a lot more promise for aspiring FinTechs and their venture-capital backers.”
Even so, the city and state are seeing a lot of activity at the micro level, on the ground, as it were. Two FinTech spaces, Currency and FinTank, has been formed this year. The State of Illinois is making a concerted effort to become a center for blockchain innovation. The city’s major universities have sponsored conferences and research.
They are not projects that draw venture funds and are, as a result, not captured in that primary macro measure of FinTech activity. They are a start. The pace picked up in the last six weeks.
In and of themselves, none of these efforts will make Chicago a world-class FinTech center—there’s a little too much distance between the leading cities—and a single physical focal point for FinTech activity like the CBOT building would be nice. They’re counting on a space like that for startups in Paris.
But with state support moving in the right direction and more coordination among private and academic projects, the city is an attractive and eclectic FinTech destination with a bright international future.
I asked my summer intern, Mary Freeman, to summarize the Chicago FinTech events and financial studies I’ve come across over the last month. Here are her reports:
Chicago looks to become FinTech Mecca as lawmakers show they actually understand blockchain
As both federal and state regulators either ignore blockchain or look at the technology with suspicion, Illinois has stepped up to break down the barriers between government and innovators, seeking to create a “FinTech Mecca” in Chicago. As a result, FinTech entrepreneurs and innovators alike are moving to Chicago to enjoy the hospitable atmosphere, reports IBTimes. Although Chicago is not yet an international shoulder for FinTech, it is a place where FinTech discussion and collaboration are present and productive.
Millennials of color are worse off financially
A study at the University of Chicago’s Booth School revealed that African-American and Latino millennials are more likely to have financial instability than White and Asian people of the same generation. The study on the banking stability and payment habits of millennials of different races and socioeconomic statuses was designed to combat the household, umbrella attributions given to millennials. However, the study showed that millennials are not as uniform as most studies and media characterizations make them out to be.
According to Cathy Cohen, a professor at the University of Chicago who headed up the study, because African-American and Latino milllenials often grow up in “banking deserts” where there is low access to traditional banking services, they often do not have a chance to apply for a credit card. Because of this, these groups of millennials do not have the ability to create a good credit score. This in turn effects their ability to get loans in the future. Thus, the vast amount of African-American and Latino millennials are set up for financial failure because of where they live.
On the other hand, White and Asian millennials reportedly have relatively good finances because they tend to grow up in an environment where banks with reasonable interest rates exist. Therefore, they have the ability and resources to set up a credit card that Latino and African American millennials do not.
The study (PDF) shows the economic vulnerability of millennials and how it varies by race and ethnicity.
In particular, Whites and Asian-Americans are most likely to use traditional banking and lending services, pay off their credit cards in full every month, and have more money in savings than they have credit card debt. African-Americans and Latinos, by contrast, are more likely to use alternative forms of banking and credit that are costlier, are more likely to make minimal payments on their credit card, and are just as likely to have more credit card debt than savings.
Cook County finds the bitcoin blockchain not ready for government prime time
A test of blockchain as a means of verifying mortgage titles finds that the technology that powers the digital currency bitcoin is a mixed bag for government use. The Cook County Recorder of Deeds (CCRD) began a blockchain pilot in 2016 and recently posted its report, Blockchain Pilot Program Final Report.
The current use of blockchain is not an all-or-nothing resource but can prove to be useful for storing information securely. The full report on the blockchain pilot program stated that, when considering recordkeeping, “a transition from the status quo to blockchain-powered real estate industry will require a lot of work and education, but the payoff appears to be worth the effort. . . We could see new industry workflows centered around liquidity, accuracy, immutability, and efficiency.”
Blockchain is a helpful resource to permanently store transactional records that are resistant to alteration. The necessary energy expenditure the county experienced during the trial is not ideal, but the ability of blockchain to simultaneously notice and convey recordation is valuable. Particularly in the real estate market where regulation can be complicated when buying using a third party, blockchain services free the consumer from many complicated processes.
The use of blockchain is efficient in its ability to empower not only residential and commercial property buyers, but also lenders and other interested parties, creating a framework for a digital property token. However, security issues are present because transactions are finalized with digital signatures. Because of these and other double-sided uses of blockchain, Cook County will continue to incorporate some blockchain technology with the hope of future system improvements.
“CCRD’s current enterprise land records software vendor, Conduent (formerly Xerox/ACS) has agreed to incorporate some of the technology used in blockchains, particularly file hashing and data integrity certification, into the new land records system currently being installed at CCRD. Both parties will work together over the next year to explore further possible uses,” the CCRD Blockchain Pilot Final Report states.
Online alternative finance models show steady growth
In the past year, alternative online finance models have become less of a skyrocketing, investor-driven industry and have achieved more control and self-sufficiency. The 2017 Americas Alternative Finance Industry Report produced research proving that alternative finance models are achieving controlled success with a specific spotlight on FinTech and the online alternative finance it offers.
The Polsky Center for Entrepreneurship and the University of Chicago Booth School of Business sponsored the reportwhich was done at the University of Cambridge Judge Business School. Both the Polsky Center and the Booth School believe that the next wave of FinTech in Chicago is an important step for finance, stating that “Chicago is already a major hub for global Finance, and we must continue to come together to support these efforts.”
The weaknesses of FinTech that concern users are its risk in malpractice, cybersecurity breach, crowding-out of individual investors, changes in national regulation, and changes in state regulation. These worries are not unfounded as, according to the report, 76% of platform operators express the opinion that there is a medium to very high risk of breaching cyber-security.
However, the risks that are involved with alternative finance have not prevented an increase of individuals’ and businesses’ interest in FinTech.
“Continued innovation, coupled with growing demand from consumers, businesses, and institutional investors led to a sustained increase in the total US volume to $34.5 billion,” the researchers reported. “This represented a 22% increase from 2015.”
The steady growth of the alternative finance industry signals future prosperity. In reviewing funding models for alternative investments, researchers found that funding sources are becoming more diverse.
“When reviewing market trends and dynamics, we note that platforms in the United States are becoming somewhat more self-sufficient, with less reliance on institutional investor-driven volume and diversifying their underlying funding model to include a greater emphasis on balance-sheet driven origination,” the researchers report.
Chicago Blockchain Center launches
A new blockchain center of innovation launched in downtown Chicago on Thursday, June 8. The State of Illinois and several Chicago enterprises have established the blockchain hub as a catalyst for other startups, a research facility, a place to mentor entrepreneurs and students, and an event space.
“Our goals are to offer a co-working space and accelerator for blockchain-based startups as well as educational programming and mentoring in the field,” Lexy Prodromos, Marketing Strategist for Bloq and Director of Operations for the CBC, said in an interview with ChicagoInno. “Chicago has a unique ecosystem with a thriving corporate and startup presence, as well as comparatively less stringent regulatory oversight.”
The State of Illinois and many large enterprises partnered to make the launch possible. “With this partnership, the State of Illinois is directly connected to, and moreover responsible for, working with the blockchain community day-to-day to understand the needs of the community and meet them with bespoke programming and collaboration,” Jennifer O’Rourke, the State of Illinois’ blockchain liaison, told ChicagoInno.
See this interview of FinTEx Chicago co-founder Jason Henrichs, one of the sponsors who spoke at the blockchain center launch.