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“A Market of Contrasts” – How can Fintechs Address the Diversity of the US Financial Services Sector?



A Market of Contrasts” – How can Fintechs Address the Diversity of the US Financial Services Sector?

By Russell Bennett, chief technology officer, Fraedom

The US financial services market is characterised by its sheer size and by its diversity.  Both characteristics make it of potential interest to fintechs.

According to a recent report from SelectUSA, prepared in collaboration with the International Trade Administration’s Industry & Analysis Unit (I&A), ‘financial markets in the United States are the largest and most liquid in the world’.

In 2016, according to the report, ‘finance and insurance represented 7.3 percent (or $1.4 trillion) of U.S. gross domestic product.’

So, the sector is large in scale but it also encompasses organisations of many different sizes and at many different stages of maturity and technological capability. In fact, there are few financial services markets more diverse than the US. At one end of the spectrum are some of the most technologically advanced commercial banks in the world, avidly embracing the latest innovations from virtual payments to distributed ledgers. At the other are the stubbornly old school institutions using dot matrix printers to do the latest cheque run.

Even across this mix, there is a size issue here. Typically, today, it is the larger financial institutions that we see dabbling more in the latest innovative technologies while the smaller ones are making a greater play around personalised service, taking the cheque off customers in person as they enter the branch as opposed to making them put it through an ATM.

There is clearly great diversity at play in this market. Partly, that is simply because of the scale of the market. It is so large that it inevitably does encompass a wide range of different kinds of organisation. There is also an innate conservatism at play in some parts of the US, where there can be an inertia around change and in some cases an unwillingness to look at embracing new technologies.

The diversity of the US market should be part of its appeal to fintech businesses. On the one hand, it is a market focused on driving innovations and keen to engage with the best that fintechs can offer, on the other, it offers a huge opportunity to get on board with banks that are either part way along the road to technological enhancement, or have just started out, and help to guide them on a journey that ultimately results in the uptake of innovative new technology including the latest apps; cross-border digital currencies and virtual card payments.

Regional Banks

For fintechs, one such opportunity is presented by the prevalence of regional and super-regional banks across the country – yet another example of the diversity of this marketplace.

The traditional national and multinational banks have historically been able to dominate the marketplace, and stay ahead of the challenger regional banks, thanks to their broader commercial banking and treasury-based operations. Today, though, the opposition these banks face is becoming ever stronger.

There are numerous regional banks throughout the US, and many aspire to grow into super-regionals, eating away at the established banks’ power base in the process. In striving to achieve their increasingly ambitious goals, many of these challengers have focused on driving the growth of their commercial cards business, a process that over time has also involved integrating their cards operations with their core treasury businesses.

Its an integration not just of function and structure but also of the approaches that banks use to market and sell their products.  Regional banks have incorporated card products into their treasury portfolio and in many cases these cards have rapidly become their fastest-growing and most profitable lines. They use them as an entry point to effectively ‘land and expand’ within their key target organisations.  It’s a hugely profitable move for many such banks but to make it work is challenging. Increasingly, they are partnering with fintech providers and leveraging technology to turn their vision into reality.

Window of Opportunity

The ambition of the regional and super-regional banks to challenge their larger rivals therefore presents great opportunities for fintechs to step in and provide the systems and consultancy these banks need to develop more effective commercial card programmes.

That is just one area where they can play a role but regional banks are relatively well advanced in technology compared to the much smaller local banks that work with limited technology and have not yet addressed many of the opportunities that new systems and solutions can potentially bring. That represents just as important an opportunity for the fintechs to introduce these institutions to technology that will benefit them as organisations.

For fintechs, there is no time like the present to start embracing the range of opportunity that the sheer diversity of the US market provides as that diversity may erode over time as market consolidation gathers pace.

According to global consulting firm, McKinsey: “From 2000 to 2014, there was a 28 per cent decrease in the number of small banks, while the number of large banks rose 33 per cent. The rise in the number of mergers for small banks indicates that despite a relatively stable economy banks are still turning to inorganic growth to gain scale and operate more efficiently and competitively. This trend is expected to accelerate over the next five years, especially among small to mid-tier players.”

So, with the diversity of the US market likely to diminish over time and the current challenger status of the regional and super-regional banks unlikely to last for ever, now is the time for fintechs to step in and start partnering with US banks as they evolve their technological approach. It is after all an opportunity that may not last forever.

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Britain starts formal countdown in ‘final chapter’ of Libor



Britain starts formal countdown in 'final chapter' of Libor 1

LONDON (Reuters) – Britain’s Financial Conduct Authority (FCA) on Friday called a formal end to nearly all Libor rates on December 31 as anticipated, piling pressure on markets to complete their biggest change in decades.

Libor, or London Interbank Offered Rate, is being replaced by rates compiled by central banks after lenders were fined billions of dollars for trying to rig what was once dubbed the world’s most important number, used for pricing home loans and credit cards across the world.

“This is an important step towards the end of Libor, and the Bank of England and FCA urge market participants to continue to take the necessary action to ensure they are ready,” the FCA said in a statement.

All sterling, euro, Swiss franc and Japanese yen denominations of Libor will end on Dec. 31, the FCA said. As previously announced by the U.S. Federal Reserve, some dollar denominated versions will continue until mid-2023.

“Today’s announcements mark the final chapter in the process that began in 2017, to remove reliance on unsustainable LIBOR rates and build a more robust foundation for the financial system,” Bank of England Governor Andrew Bailey said in a statement.

“With limited time remaining, my message to firms is clear – act now and complete your transition by the end of 2021.”

The FCA said that it does not expect any Libor setting to become “unrepresentative” before December, meaning that contracts that use Libor for pricing would have to switch to another rate at short notice.

(Reporting by Huw Jones; editing by Rachel Armstrong and Jason Neely)

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China’s export growth seen surging in Jan-Feb on low base: Reuters poll



China's export growth seen surging in Jan-Feb on low base: Reuters poll 2

BEIJING (Reuters) – China’s exports likely surged to a three-year high and imports also jumped in the first two months of the year, thanks to a low base, as economic activity ground to a halt last year due to draconian COVID-19 control measures, a Reuters poll showed.

Exports are expected to have risen 38.9% in January-February from a year earlier, according to a median forecast in a Reuters poll of 22 economists, up from 18.1% gain in December.

China’s customs began combining January and February data last year to smooth distortions caused by the Lunar New Year, which can fall in either month.

Separately, the head of China state planner said on Friday that China’s exports are estimated to have grown over 50% in the first two months, without specifying whether that was in yuan or dollar terms.

The strong forecasts contrast with official and private manufacturing surveys that have indicated a weakening in external demand for Chinese products.

“China’s exports are facing both positive and negative impacts currently,” analysts with China Minsheng Bank said in a note.

“The exports volume of medical supplies and transferred orders from other countries due to coronavirus-related disruptions to production will decrease, with more countries speeding up work resumption with the rollout of vaccines.”

The bank’s analysts also expected a rebound of overseas demand for Chinese goods with the reopening of global economy.

Chinese factory activity normally goes dormant during the Lunar New Year break as workers return to their home towns. This year, the government appealed to workers to avoid travelling to curb the spread of COVID-19, prompting some economists to forecast a marginal boost to production especially in the country’s coastal export-dominant provinces.

Imports likely rose 15% in the first two months versus a year ago, the poll showed, with some analysts expecting the number to have been lifted by high commodity prices.

China’s trade surplus is expected to have narrowed to $60 billion in the same period from $78.17 billion in December, according to the poll. The data will be released on Sunday.

(Reporting by Lusha Zhang and Ryan Woo; Editing by Simon Cameron-Moore)

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U.S. job growth likely regained steam in February



U.S. job growth likely regained steam in February 3

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. job growth likely accelerated in February as more services businesses reopened amid falling new COVID-19 cases, quickening vaccination rates and additional pandemic relief money from the government, putting the labor market recovery back on firmer footing and on course for further gains in the months ahead.

The Labor Department’s closely watched employment report on Friday will, however, also offer a reminder that as the United States enters the second year of the coronavirus pandemic the recovery remains excruciatingly slow, with millions of Americans experiencing long spells of joblessness and permanent unemployment.

Federal Reserve Chair Jerome Powell on Thursday offered an optimistic view of the labor market, but cautioned a return to full employment this year was “highly unlikely.”

“We will probably see more people having gone back on payrolls,” said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles. “Many will be related to service jobs, but that will not mean a rapid increase in jobs. It’s a slow progress toward eventual full recovery.”

Nonfarm payrolls likely increased by 182,000 jobs last month after rising only 49,000 in January, according to a Reuters poll of economists. Payrolls declined in December for the first time in eight months.

Economists saw no impact from the mid-February deep freeze in the densely populated South as the winter storms hit after the week during which the government surveyed establishments and businesses for the employment report.

But unseasonably cold weather last month, especially in the Northeast, and production cuts at auto assembly plants because of a global semiconductor chip shortage likely shortened the average workweek.

The labor market has been slow to respond to the drop in daily coronavirus cases and hospitalizations, which helped fuel a boost in consumer spending in January that prompted economists to sharply upgrade their gross domestic product growth estimates for the first quarter.

Historically, employment lags GDP growth by about a quarter. But economists believe the catching up started in February, a year after the economy fell into recession at the start of the U.S. COVID-19 outbreak.

A survey last week showed consumers’ perceptions of the labor market improved in February after deteriorating in January and December. In addition, a measure of manufacturing employment increased to a two-year high in February.

Though millions are unemployed, companies are struggling to find workers, which is contributing to holding back job growth. A survey on Wednesday showed employment growth in the services industry slowed last month, with businesses reporting they were “unable to fill vacant positions with qualified applicants.”

That was underscored by an NFIB survey on Thursday showing 91% of small businesses trying to hire in February reported few or no qualified applicants for their open positions.


This labor market dichotomy is because the pandemic is keeping some workers at home, fearful of accepting or returning to jobs that could expose them to the virus.

It has also disproportionately affected women who have been forced to drop out of the labor force to look after children as many schools remain closed for in-person learning. According to Census Bureau data, around 10 million mothers living with their own school-age children were not actively working in January, 1.4 million more than during the same month in 2020.

The Fed’s Beige Book report on Wednesday showed there are shortages of workers in both low-skill and skilled trade occupations. The vacancies are mainly in the high-growth industries that have fared well throughout the pandemic, such as information technology, engineering, construction, customer support, manufacturing, and accounting and finance.

“Jobseekers are more hesitant to pursue many of the in-demand roles that are required to be onsite, particularly in industries like manufacturing, which has seen double digit increases in job roles like assemblers and warehouse managers,” said Karen Fichuk, CEO of Randstad North America.

The virus has greatly altered the economic landscape and many of the services industry jobs lost will likely not return.

Though the unemployment rate has dropped below 10%, it has been understated by people misclassifying themselves as being “employed but absent from work.” It is expected to have held steady at 6.3% in February. Just over 4 million Americans had been unemployed for more than six months in January, while 3.5 million were permanently unemployed.

Given the difficulties of retraining, structural unemployment could account for a bigger share of joblessness in the near future.

But there is light at the end of the tunnel. Economists believe the labor market will gather steam in the spring and through summer, with vaccinations increasing daily, even though the pace of decline in COVID-19 infections has flattened recently.

A boost to hiring is also expected from President Joe Biden’s $1.9 trillion recovery plan, which is under consideration by Congress.

“The labor force will begin a meaningful recovery in mid-2021 as extensive vaccine distribution will push toward herd immunity, reducing health concerns and allowing for a more complete recovery of some hard-hit industries,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

(Reporting by Lucia Mutikani; Editing by Dan Burns and Andrea Ricci)

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