The Week In Payments: China, China, Challenger Banks And Bitcoin

If there were a theme in the big headlines this week in payments, financial services and commerce, it would have been movement. That theme was apparent in both sets of news reports out of China this week: with movement of both the best kind in the form of expanded commerce capacity and movement of the not so good kind, namely the increasingly large footprint of the Wuhan coronavirus and the uncertainty it carries in its wake.

But China wasn’t the only place to look for all kinds of movement in the last seven days. The global march of the challenger banks carried on, now with the announcement that EI incumbent Monzo is looking to raise $130 million to, among other things, mount a U.S. expansion. And finally, there’s bitcoin, which has seen its use, transacting, trading and popularity fall off of late — except for among one group: criminals.

Don’t say we didn’t tell you so about four years ago.

Making sense of all the motion in the payments and financial services ocean this week with Karen Webster is RS2 CEO Daniela Mielke to help separate the actual impactful from the mere hype prone.

China:  Tapping The Future And Finding The Black Swans 

The news out of China has been something of an interesting bi-furcation of late. The very encouraging story in the news, Mielke and Webster mutually agreed, was the joint announcement by PayPal and UnionPay that the two entities would be combining to take on cross-border payments from two angles.  For Chinese consumers, the partnership will allow any UnionPay consumer to link their card credentials to a PayPal wallet — and start transactions with PayPal’s 24 million merchants worldwide. For the non-Chinese visiting China, PayPal users will be able to use their PayPal wallets to pay via QR code (and via a virtual card linked to their bank account) anyplace that UnionPay is accepted in the country.

As an ex-PayPal-er herself, Mielke noted that she is happy for PayPal — as having a partner like UnionPay paired with the payments license it managed to secure with the GoPay acquisition late last year are an incredibly powerful combination. Instead of having to compete for that direct local payments market against incumbents like WeChat and Alipay, PayPal is starting where the needs are still felt — and if they can capture even a tiny sliver of the domestic market of a billion-plus consumers so much the better.

“For foreigners to be able to use PayPal in China at UnionPay locations, that is pretty cool,” Mielke noted. “That is a lot more than the card networks have right now.”

The more interest thing, she noted, given the power of the cross-border channel in and out of China, is where this partnership is going next and what else can be built off of it as “this is only a start.”

Everyone is trying to get into China right now, she noted,  which for the first time is looking more open than it has been. PayPal is first to the gate in building out that opportunity in a meaningful way within China and what they do next with that will be interesting to watch.

It will be particularly interesting in light of the uncertainty in the market that has recently been injected by the outbreak and rapid spread of the Wuhan coronavirus. There are now over 8,000 cases worldwide, businesses like Starbucks and McDonald’s have shut down in China, planes have been grounded due to the outbreak and analysts are beginning to wonder if the coronavirus’s total economic effect will dwarf the $40 billion toll SARS took on the world economy a decade and a half ago.

The challenge here, Mielke told Webster, is how much remains unknown as this story is unfolding.

“It depends a little on how this plays out. If they can get it under control quickly, it will even then have an impact on GDP and the hundreds of brands that are in the Wuhan region. If it goes on, it could have significant economic impacts. The larger theme here is where are these black swan events that we can’t predict and that will keep happening.”

But given that analysts are already calling for as much as a 1.5 percent possible hit to China’s GDP, the effects, even if they are still cloudy, will likely be profound.

Speaking of profound changes …

The March Of The Challenger Banks

U.K challenger bank Monzo captured some headline space this week with the news that is courting Softbank to for participation in a £100 million (nearly $130.6 million) funding round it is looking to put together.  The funds, according to reports, will go toward fueling expansion into new markets, notably the U.S.

Monzo has already put a toe into the U.S. market with limited trialing of its services in Los Angeles: to date, it reports 3.7 million users in the U.K.

The move, Mielke told Webster, is certainly of a pace with other global challenger banks making a move on the U.S. market and it makes sense in the most basic terms. The U.S. is a big market and looks like fertile grounds for these banks that have started picking up some steam overseas. If they want to build a global scale, she noted, the U.S. is on the agenda.

The question she always has, however, is what exactly they are hoping to compete with, considering the U.S. has its own challenger banks — not to mention thousands of regular banks and credit unions.  Coming in with a slick app, pre-paid card doubling as a checking account and some friendlier pricing structures — and venture money to fund it all while it is losing money — is a place to start, she said.

But in the long term, that isn’t going to disrupt the banks.

“This is not the same as eCommerce putting pressure on traditional retail because banking is a very different animal obviously.”

The rising millennial generation, she noted, will likely decide what the real future of banking is going to look like. But, surprise, the data indicates they might not quite be the digital-only consumers the world assumed they would grow up to be. It seems they like having a bank to go to some of the time.  Challenger banks, she noted, clearly need a better-defined “secret sauce” than the current offering they have out there — because they aren’t remarkably different than an experience consumers already have.  And they may be failing to offer a crucial part of the experience by not having branches at all.

“I don’t think we’ve seen the banking model of the future yet, but I think we do know it will be more than an app and a card,” Mielke told Webster.

And, speaking of things that may not be the future of financial services…

Bitcoin, The Currency Of Digital Crime 

The price of bitcoin may be less than half of what it was at its peak, and the enthusiasm for trading in it may have fallen off over the last year, but there is one group for whom bitcoin will always be the last word in payments technology.  Unfortunately, those people are criminals.

According to reports out this week, drug sales on the dark web are up 60 percent and hitting $601 million from January to March 2019, according to blockchain analysis firm and government adviser Chainalysis. Bitcoin has also been pivotal in the rise in ransomware cyberattacks. The illegal activity comprises 1 percent of all Bitcoin transactions. That may not sound like a lot, but that is almost double from 2018.

Chainalysis’s new Crypto Crime Report indicates that criminal activity is immune to price fluctuations. Data for ransomware, tax evasion and money laundering, however, is likely underestimated because it is hard to track.

“For me, it is one of these ‘I told you so’ stories,” Mielke noted. “I never saw the attraction to something that is advertised as totally unregulated, uncontrolled financial transactions. I think there was excitement at first because of the new technology that is the blockchain and crypto — and bitcoin was the first use case.”

But as that excitement was then pushed mostly onto bitcoin it becomes largely misplaced — simply because what bitcoin has shown itself most useful for is exactly what one would assume an untraceable, unregulated and decentralized form of currency would be used for and who would use it: People who want to do illicit things with money.

That doesn’t mean, she noted, that cryptocurrency or blockchain technology is dead or has no future. Far from it, those technology forms, with regulation and oversight, could and likely will be powerful tools going forward.

But that future won’t be built by bitcoin. And it certainly won’t be financed by it.

What will it be built by and on?  Like much of the news this week, that question remains open-ended as the news continues to develop and situations on the ground unfold.

But whichever way it breaks, we’ll catch you every Friday morning with the ranking experts in the field.