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The week in fintech: Payments space on alert over possible UK regulation

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The week in fintech: Payments space on alert over possible UK regulation

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.

The stocks of several U.S. payments companies with exposure to the U.K. economy stuttered following regulatory news from across the pond.

The U.K. Payment Systems Regulator announced plans July 24 to carry out a market review into the supply of card-acquiring services to see if it "is working well for UK merchants and ultimately consumers." Card payments are increasingly popular in the region, and merchants must buy card-acquiring services, either from traditional merchant acquirers such as Worldpay Inc. or by dealing directly with payment facilitators such as Square Inc., which give retailers software, hardware and card-acquiring services as a package.

U.K. merchant acquirers already comply with regulations mandated by the European Union to unbundle pricing, but payment facilitators are not currently subject to those same regulations because their business model differs.

As such, the payment regulator is focused on two key areas: if the market is competitive enough and if the payment facilitator model makes it difficult to compare and get the best pricing on merchant acquiring, MoffettNathanson analyst Lisa Ellis said in an interview. In terms of competition, the regulator is questioning whether the larger merchant acquirers have relationships with the card networks Visa Inc. and Mastercard Inc. that box out smaller merchant acquirers from competing as effectively, Ellis said.

Worldpay is the largest merchant acquirer in the U.K. market with about 40% of the market share. Shares in the company's stock dropped about 5% before recovering slightly in the trading session following the British regulator's announcement. About 25% of the company's revenue comes from the U.K.

Fellow merchant acquirers Barclays PLC, JPMorgan Chase & Co. and Global Payments Inc. also hold significant market share in the region. Shares of Global Payments' stock fell about 4% before recovering later in the week.

Square, which also saw its stock dip and recover, has "immaterial" exposure in the U.K. and "may actually benefit" from regulation that encourages more competition, Credit Suisse analyst Paul Condra wrote in a July 25 note.

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Several analysts said the stock sell-off for Worldpay and Global Payments was warranted. Guggenheim's Jeffrey Cantwell lowered price targets for the two companies, writing in a July 24 note that regulatory uncertainty will "likely mean lower [near-term] valuation multiples" for the two payments companies.

But MoffettNathanson's Ellis highlighted the long-term nature of any regulation. The regulator is accepting comments until September, with a draft of the purpose and structure of the regulation to be published for market review before the end of 2018. The analyst believes any formal regulatory action is at least two years out, or possibly longer.

"The scope and nature of this regulatory inquiry, to me, does not rise to the level of putting some lasting impact on the valuations of the companies," Ellis said. "It strikes me as quite routine."

Global Payments is set to report earnings Aug. 2, while Worldpay is expected to report Aug. 9.

Elsewhere in financial technology, Synchrony Financial lost one of its largest co-brand card retail clients, as Walmart Inc. announced that it is instead switching its co-branded card to Capital One Financial Corp. Synchrony's relationship with Walmart began in 1999, and analysts are concerned about the company's other retail partnerships entering the renewal cycle in the near future.

Acting chief of the Consumer Financial Protection Bureau Mick Mulvaney launched a regulatory sandbox to help fintech firms develop new products and services without tthe bureau's regulatory overhang, The Wall Street Journal reported. In March, Arizona became the first state to approve such a program. SEC Commissioner Hester Peirce has advocated for a nationwide sandbox, but that regulatory body has yet to issue one.

The CFPB will look closely at cryptocurrencies, blockchain-based fintech, private currencies and lending by individuals rather than institutions — also called microlending — Mulvaney told the news outlet.

In other regulatory news, a group of fintech leaders sent a letter to SEC Chairman Jay Clayton demanding an increase in Regulation Crowdfunding to $20 million from the current maximum of about $1.1 million, Crowdfund Insider reported. The advocates wrote that Germany and the U.K. both increased their crowdfunding threshold to €8 million, or about $9.4 million.

On the payments front, PayPal Holdings Inc. reported a two-cent earnings beat above analysts' consensus estimate amid a 28% increase in processed transactions year over year. Investors should be focused on positive engagement trends, Credit Suisse's Condra wrote in a report published after the company's call to discuss earnings.

On that call, management highlighted its monetization efforts, reporting that since the launch of its Venmo LLC card, 17% of Venmo users have engaged in a monetized experience. Venmo's improving monetization trends, PayPal's steady new account growth and the company's increasing transactions per account are key performance indicators of PayPal's "expanding footprint and hardening user-base," Condra wrote.

From July 20 to July 27, the SNL U.S. Financial Technology Index fell 1.21%.

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.