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The year in fintech: Rise of digital banks, fall of cryptocurrencies

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The year in fintech: Rise of digital banks, fall of cryptocurrencies

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

From the rise of digital banking to the approval of the long-awaited fintech charter, 2018 was a year of change in the fintech space. But lawmakers still have to weigh in on a Madden fix — a key issue for digital lenders — and global regulators are still investigating cryptocurrencies.

As 2019 approaches, the industry is watching four major areas in fintech: banks (and nonbanks) going digital, regulation, Wall Street's involvement in cryptocurrencies and high-profile mergers and public offerings.

Digital banking

In a race to attract customers, digital banks have found themselves paying top dollar for deposits. Goldman Sachs Group Inc.'s Marcus, Synchrony Financial, Ally Financial Inc., American Express Co. and Discover Financial Services have battled back-and-forth to offer the highest savings account rate, currently held by Synchrony at 2.20%.

These incumbent digital banks are now also facing threats from a flurry of traditional players entering the space.

In mid-2018, several large banks — all with expansive traditional branch networks — unveiled digital initiatives. That growing list includes Citigroup Inc., JPMorgan Chase & Co., PNC Financial Services Group Inc. and Citizens Financial Group Inc., among others. Even nonbanks like Robinhood Markets Inc. and T-Mobile US Inc. are launching banking services.

"There is an assessment that there is apparently some sort of underserved market here where traditional banks have not locked these customers down," said Brian Knight, a senior research fellow at the Mercatus Center who focuses on financial services and technology. That market describes tech-savvy customers who want to access financial services through their smartphones, he said in an interview.

Some experts warned that depositories might need to start questioning whether those customers are worth the cost. But Alyson Clarke, a banking analyst with Forrester Research, said many of these fintechs do not care if they have loss-leading accounts because data from day-to-day checking and savings accounts is much more valuable down the line.

Read more: Robinhood's botched savings account launch could throw IPO into limbo

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Regulation

Regulators checked off several major boxes in developing fintech oversight in 2018. All eyes were on the Office of the Comptroller of the Currency as it passed its highly anticipated special-purpose national bank charter.

The former head of the OCC said payments companies, not digital lenders, might be best suited for the newly launched fintech charter. The OCC expects to see the first applications in early 2019. Fintechs already have a variety of ways to gain federal oversight: apply for a regular national bank charter; apply for an industrial loan company charter; obtain individual state licenses or partner with existing banks.

The bank regulator's announcement came hours after the U.S. Treasury Department released a report on fintech and innovation, which broadly encouraged lawmakers and regulators to promote innovation by "removing regulatory barriers." One of the Treasury's more than 80 recommendations was that Congress codify the "valid-when-made" doctrine, which would allow marketplace lenders to buy and sell loans without conflicting with state interest-rate limits.

The debate over how to treat such loans centers around Madden v. Midland, in which the Second Circuit Court of Appeals ruled that fintech company Midland Funding LLC did not benefit from the national banking law that pre-empts state interest rate laws, even though the debt was originally issued by a national bank. Many marketplace lenders depend on nationally chartered banks to fund loans, making valid-when-made crucial to business.

Several industry members and government officials have pushed back against the ruling. Lawmakers are still working through proposed legislation but have faced opposition from state attorneys general, who argue the "fix" would usurp their local consumer protection laws.

Read more: OCC fintech charter might better fit payments companies, not digital lenders

Cryptocurrencies

Cryptocurrency prices have steadily declined all year in the aftermath of a buying craze in late 2017. Bitcoin has hovered around $3,500 for much of December, down considerably from nearly $20,000 a year ago.

As regulators around the world grapple with the burgeoning industry and enforcement actions continue, established financial institutions are exploring the asset class with caution. Goldman Sachs and Fidelity Investments are considering custody and trading for cryptocurrencies. Charles Schwab Corp. offers trading in the Cboe Global Markets Inc. bitcoin futures contract. Intercontinental Exchange Inc., owner of the New York Stock Exchange, plans to launch Bakkt in late January 2019. Working alongside a group of other companies, including Microsoft Corp. and Starbucks Corp., the digital assets platform will allow consumers and institutions to buy, sell, store and spend digital assets.

With bitcoin price volatility appearing to have slowed, many in the industry hope the SEC will approve a bitcoin-based exchange-traded fund. To date, the SEC has denied all cryptocurrency-based ETF proposals. Chairman Jay Clayton said he does not see an approval path until the industry addresses concerns over market manipulation. In August, Commissioner Robert Jackson Jr. said markets are "far too young" for products such as ETFs.

Read more: SEC's Jackson: Cryptocurrency markets 'far too young' for products such as ETFs

M&A and IPOs

The largest deal in the fintech sector in 2018 was a private equity buyout: a Blackstone Group LP-led investor group's carve-out of Thomson Reuters Corp.'s financial and risk business for $17.3 billion. The financial media company appears to be narrowing its business, as it also announced plans to cut its full-time workforce by 12% and reduce its offices around the world by 30% by 2020.

Companies announced close to 40 deals in January for almost $45 billion. In April, the industry saw more than 30 deals, totaling about $10 billion. Although deal values slumped in October and November, those months still outpaced the same period last year.

Payments was also an active fintech sector for M&A and IPOs. Swedish mobile payments provider iZettle AB had planned to list on the Nasdaq Stockholm stock exchange before PayPal Holdings Inc. acquired the company for $2.2 billion, marking the 11th-largest fintech deal in 2018. The industry also saw several highly anticipated public offerings, including Netherlands-based Adyen NV in June and Atlanta-based GreenSky Inc. in May.

In August, Spencer Johnson, a partner at corporate law firm King & Spalding, said payments companies are a "hot commodity" because scale is growing more necessary to succeed in the space.

Read more: Fintech M&A 2018 Deal Tracker — Deal values slump in October, November

From Jan. 1 to Dec. 28, the SNL U.S. Financial Technology index rose 4.85%.

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A recent report from S&P Global Market Intelligence explores why banks and insurers are increasingly partnering with fintechs. The report provides a comprehensive overview of important trends developing across several fintech sectors, including insurtech, digital lending and digital banking, among others. Click here to read the report.

Editors' note: The news items included in “The week in fintech” will be included in the weekly “Fintech focus” feature beginning Jan. 7, 2019. For more fintech coverage, click here.