What’s in your digital euro wallet? QR Codes for certain; Fintech down but not out, with APAC in the lead; What’s good for JPM is good for America, or too big to fail?

Are bank failures are the "new normal?"

1. What’s in your digital euro wallet?

2. Fintech down but not out, with APAC in the lead!

3. What’s good for JPM is good for America, or too big to fail?

Today’s art: Venice, Italy, St Stefano, and the Punto della Dogana in the low sun of the late afternoon. The view from the Accademia Bridge in Venice never ceases to amaze me. St Stefano is an underappreciated church and glorious outside and in with its pair of Titians.

On top of the Dogana are two statues of Atlas holding a golden globe upon which the figure of Fortune stands holding a billowing sail. (small globe to the left of the church) Fortuna turns to indicate the direction of the wind and, symbolically, the changeability of fortune itself. I think there is a message in Fortuna’s changing winds for fintech. The wind never blows in the same direction for too long.

Personal note: I am writing from Italy, so today’s newsletter will be uncharacteristically short! I finally returned after 3.5 years away due to covid travel restrictions. Please expect shorter newsletters and poor editing for the next few weeks!

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1. What’s in your digital euro wallet?

Your new digital euro wallet will have QR codes, budget management, P2P payments and offline usage.

Download: here

Say what you will about the ECB, their openness on the digital euro project, and use of surveys to find out what people want is praiseworthy. The Fed should take note!

In this latest Kantar survey of 321 EU citizens (admittedly too small to represent the entire population) they find out what people want in their new digital euro wallets. The results are intriguing!

Who’d have thought that EU citizens would want QR code payments?! Not me!

Here are the top features EU citizens want!

🔹 Functionalities most highly valued

–Budget management

The budget management tools included in the digital wallet were perceived to be useful and relatively advanced by most participants, despite some similar features offered by other payment providers. Currently, available payment solutions with budget management tools are not always accepted at every merchant.

–P2P payments

The money transfer functionalities were seen as must-have tools for a digital wallet, with high interest in using them. On the other hand, payment requests were judged relatively innovative by some participants. These features, in combination with the pan-euro area, reach and real-time capability were seen as adding value.

🔹Functionalities appreciated and currently not widely available

–Offline payments

The general population perceived offline payments to be the most innovative digital wallet feature with its use in specific situations, e.g. in areas without internet coverage, when mobile data isn’t available, or when using flight mode. Despite this, most participants expected they would not often use offline payments. The greater degree of privacy offered by offline payments was especially appreciated but it also raised concerns about potential misuse, i.e. for tax evasion.

–QR code payments

Not all participants across the general population, tech-savvy and merchants categories were acquainted with using QR codes for payments. Most participants considered this functionality to be useful in certain situations, e.g. self-service locations, payment of bills, online purchases. However, QR codes were also perceived to be slower than other payment solutions, e.g. contactless payments.

Thoughts?

Takeaways:

—The ECB’s use of surveys is fantastic!

—Surveying tech-savy, merchant and underbanked populations was thoughtful.

—The underbanked remain skeptical of the digital euro as they've been burned before!

—Programmable payments are seen as a generally appreciated feature,

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2. Fintech down but not out, with APAC in the lead!

Fintech is coming of age, "reimagining the future of finance" with APAC in the lead!

Download: here

BCG's report on fintech shows that the industry may be down but is not out with APAC predicted to be the largest fintech market with 42% of all global incremental revenues.

BCG sees current drops as “short-term:”

“Fintechs on average, lost more than half their market value in 2022—a plunge we believe is a short-term correction in an otherwise long-term positive trajectory, as the industry’s fundamental growth drivers haven’t changed.”

Driving fintech growth is the innovation-challenged financial service sector:

“The overall financial services industry is enormous and very profitable yet struggles with innovation and customer experience. More than half the world’s population remains unbanked or underbanked, and technology continues to unlock new use cases in leaps and bounds.”

BCG's key points:

🔹 A period of great exuberance, 2020–2022 saw peak valuations for fintechs reach 20X revenue multiples.

🔹 With fundamentals remaining strong, the last 12 months have seen a necessary short-term correction in an otherwise progressively positive growth story.

🔹 Today, almost 80% of adults in the world are still either underbanked or unbanked.

🔹 Annual fintech revenues are expected to reach $1.5 trillion by 2030—a sixfold growth—with banking-related fintechs representing a quarter of all banking valuations.

🔹 Outpacing even the US with a 27% growth rate, Asia-Pacific is poised to become the world’s top fintech market by 2030.

🔹 While the last era of fintech growth was led by payments, B2B and B2B2X will lead the next.

🔹 Spread businesses such as neobanks and lending platforms will face challenges in the developed world while playing a critical role in emerging markets.

🔹 The time for stakeholders to act is now: Fintechs must play offense, incumbents need to accelerate their own digital journeys, and regulators must remain proactive in maintaining a level playing field.

Thoughts?

Takeaways:

—Fintech is down but not out, and the disruption of valuations can be viewed as short-term….time will tell!

—The lack of innovation in the massive financial service sector will continue to drive fintech

—An additional fintech driver will be financial inclusion, driving innovation in payments.

—Look for developing nations to leapfrog developed nations in fintech development.

—Look to China and India as examples of nations where this is already happening.

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3. What’s good for JPM is good for America, or too big to fail?

First Republic is seized by regulators and sold to JP Morgan in the US’s second-largest bank failure.

Download: here

Another day another bank failure though this one was in the cards for weeks. Following SVB and Signature Bank we need to see bank failures as “a feature, not a bug” of a higher interest rate world.

Meanwhile, President Biden declares that the banking system is “safe and sound.” Really?

🔹Is it a bailout?

Not in the traditional sense. It depends on whether you consider the $50 bn fixed-rate financing to JPM a gift. It is!

The First Republic collapse will cost the FDIC roughly $13 billion. The FDIC already tapped $22.5 from the fund for the collapses of SVB and Signature in March, from a total fund value of $128 billion.

Banks will replenish FDIC funds and pass the costs on to you, the taxpayer.

🔹 Too big to fail?

Senator Warren’s quote rings true: “The failure of First Republic Bank shows how deregulation has made the too-big-to-fail problem even worse. A poorly supervised bank was snapped up by an even bigger bank—ultimately taxpayers will be on the hook.”

Following the Global financial crisis reducing the size of “too big to fail” institutions became a policy objective. So much for the lessons learned in 2008.

🔹 Trust in the Fed reaches a new low:

Nobel laureate Joseph Stiglitz’s article title says it best: “The Fed says don’t worry about U.S. banks, but why should anyone believe them?" Stating: “The fact is that regulators — including the Fed — have failed to keep the banking system safe.” It is hard to argue otherwise.

🔹 Fed rate rises make more failures likely:

From Stanford research: “The US banking system’s market value of assets is $2 tn lower than suggested by their book value. Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%.”

Even JPM’s ever-optimistic Jamie Dimon won’t rule out further bank failures.

🔹 Good for JPM is good for the US?

The attached PDF shows that JPM sees this transaction as expanding their High Net Worth franchise and expects to generate >$500mm in net income. Time will tell.

JPM touts “Fortress Principals” meaning a large and unassailable balance sheet that allows it to play a “constructive role in the banking system.”

Remember that fortresses keep invaders out but also trap risks inside their walls! While many will be grateful for JPM buying First Republic the US is concentrating risk within JPM’s fortress.

Takeaways:

From Mohamed A. El-Erian, who says it best:

—“The US economy continues to suffer from too many years of easy money, and the subsequent mishandling of the rate hiking cycle and lapses in supervision and regulation.”

—"With that comes the ever-present risk of collateral damage and unintended consequences given that first best policy responses are no longer available.”

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Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is number 4 on Onalytica's prestigious Top 50 Fintech Influencer list and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Rich is an independent consultant whose views on China's astounding fintech developments are widely sought by international media and private clients.

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Cashless: HERE

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