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The week in fintech: Can P2P payments threaten bank deposits?

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The week in fintech: Can P2P payments threaten bank deposits?

This weekly recap features updates on bank technology, payments, online lending and other news in the financial technology space. Send tips, ideas and chatter to rachel.stone@spglobal.com. For other recent fintech news, click here.

Mobile wallets are increasingly becoming a common way for consumers, especially younger cohorts, to transfer money to one another. The emergence of Generation Z, the age group following millennials, in the economy could make peer-to-peer, or P2P, payments outside the banking system a new normal.

Companies such as PayPal Holdings Inc. and Square Inc. have already grown in popularity. PayPal's Venmo LLC, for example, grew transaction volumes at a compound annual growth rate of more than 150% over the past three years.

But many personal payment companies such as PayPal focus on the payment itself rather than viewing the balances behind the P2P payments as deposits, Guggenheim analyst Jeffrey Cantwell said in an interview. Because the companies that enable those payments only facilitate the exchange of money, rather than accept the balances of digital wallets as deposits, they pose little threat to the basic nature of banking.

PayPal's billions of dollars in balances are not covered by the Federal Deposit Insurance Corp., unlike deposits in the traditional banking sector, a key protection that discourages consumers from leaving their bank accounts entirely. As such, Cantwell can foresee "a little" disruption from P2P for banks at the margin, but he does not expect near-term disruption for the larger banks. Even so, the rise of smooth, mobile payments platforms have kickstarted many banks' efforts to enhance their mobile and other tech offerings.

A P2P company that does accept deposits may pose a different threat, however. Square's application for an industrial loan charter, which would allow it to offer FDIC-insured deposits, would erode that advantage banks currently have. If Square's charter is approved, it would likely move toward acquiring merchants' business deposits to build a large base, before considering competing for individual consumers, Cantwell said.

Although Cantwell does not anticipate PayPal taking a similar path anytime soon, he said all fintech companies are testing the extent to which they want to participate in the traditional banking system. Another method could be to follow the example of Apple Inc.'s Apple Pay Cash, which is backed by Green Dot Corp. and has federally insured customer deposits.

In other fintech news this week, a hedge fund run by legendary investor Bill Miller is now about 50% invested in bitcoin, CNBC reported. Miller, who built a reputation as one of the best fund managers after beating the S&P 500 for 15 years in a row, founded Miller Value Partners LLC in 2016.

In blockchain news, Riot Blockchain Inc. entered into subscription agreements with accredited investors for the purchase of 1,644,444 restricted units of the company's stock at $22.50 per unit. The company plans to use the $37 million in gross proceeds to expand its bitcoin mining operations, as well as for strategic investments and general working capital.

Employees at cryptocurrency exchange Coinbase Inc. have been accused of insider trading, which the company is investigating, its CEO said in an online post. The company has a strict policy against employees trading on material, nonpublic information, and CEO Brian Armstrong said he will immediately fire employees found to have broken that policy and take legal action against them.

The price of bitcoin dropped 23.50% this week and sits at $11,904.53 as of 10:05 a.m. ET on Dec. 22.

From Dec. 15 to Dec. 21, the SNL U.S. Financial Technology Index declined 0.61% to 517.22.

A recent report from S&P Global Market Intelligence explores how banks and insurers are embracing fintech innovation. The report looks at recent trends and provides outlooks for the insurtech, digital lending, digital investment management, digital banking, payments and distributed ledger technology sectors. Click here to read the report.