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Cryptocurrency Finance

Five FINtech Predictions for 2021

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter.

Technology continues to overhaul how money changes hands around the world, and in many ways the COVID pandemic accelerated that development in 2020. What can the fintech world expect in 2021? Here’s what the blockchain-powered crystal ball says: 

  1. Valuations will continue to climb. There’s no way to measure what a fintech premium should look like, but consider: As of the trading close on December 18, Square’s market capitalization was $106 billion, a little shy of Citigroup’s $123 billion—even though Citigroup’s profits are many times higher than Square’s. True, Square is growing like crazy and will probably continue to, but a price/earnings ratio of 357 is rather hard to justify—and this is a company that lost money as recently as Q1 of this year.It’s not just the public fintech companies that have become pricey. “Everything just feels so expensive,” William Libby, the CEO of Upper90, told FIN this week. His venture firm recently closed a $195 million fund that will largely invest in and lend to fintech companies. Today’s sky-high valuations make investments at the Series B stage much pricier for firms like his, so they try to chase companies at the seed stage. But there are so many companies coming up, and so much investment (especially worldwide) that, absent a broad-based market crash, it’s hard to see where any downward pressure on valuations will come from in 2021.
  2. Federal regulation under Biden will rationalize. There’s a bit of excitement in some fintech circles about the incoming administration, less because there is a clear agenda but more because there are genuine fintech experts on the Biden team. These include Reena Agrawal and Chris Brummer, both professors at Georgetown and both on Biden’s “agency review teams”; Brummer hosts a respected weekly podcast on fintech.It’s not so much that people expect Biden appointees to place a thumb on the scale for fintech, but rather that they will adopt informed, steady policies, as opposed to the fits and starts of recent years. For example, the idea of a national fintech charter—granting licenses to fintech companies to offer bank-like services without having to take deposits—was proposed by the Office of the Comptroller of Currency under Trump but blocked by a lawsuit in 2019. It is probably dead for now, certainly without any new action from Congress.One area where Biden appointees are likely to step on some fintech toes is companies exploiting “regulation arbitrage,” essentially using tech services to do an end run around banking regulation. 2021 also feels like a time for regulators to make firmer choices about the use of unusual or alternative data to make lending or credit decisions. This has already occurred at the state level. In 2019 the New York State Department of Insurance declared that “Many of these external data sources use geographical data (including community-level mortality, addiction or smoking data), homeownership data, credit information, educational attainment, licensures, civil judgments and court records, which all have the potential to reflect disguised and illegal race-based underwriting” in violation of state law. Assume that this regulatory perspective will expand in 2021.
  3. Bitcoin will go down before it goes up. This week, while the price of Bitcoin rocketed to and past $20,000, Coinbase CEO Brian Armstrong issued a public warning to investors, noting that cryptocurrency is more volatile than many other asset classes. And then, a division of Treasury called the Financial Crimes Enforcement Network proposed new bank-like rules for digital currency transactions over a certain amount. These rules are aimed at money laundering and other unsavory activities, but the end of anonymity might cool off Bitcoin demand somewhat. It still seems likely that Bitcoin value will be higher at the end of 2021 than it is now, but as Armstrong implies, it won’t be a steady upward path.
  4. Digital currencies will increase their acceptance. Many prominent fintech companies gave Bitcoin a stamp of approval this year, from Square’s investment of $50 million in Bitcoin to PayPal allowing its users to buy and sell Bitcoin. In 2021 we will see an extension of this mainstream embrace: Look for at least one major US or European bank to announce some kind of system where they either enable Bitcoin purchases or agree to hold digital assets for their clients. Some of the more experimental central banks will also continue to push forward with plans to digitize national currencies.
  5. China will continue to lead the fintech world. In FIN’s live podcast interview this week with Square cofounder Jim McKelvey, he likened the fintech industry in China to an arms race between two giants—Alibaba and Tencent—each constantly trying to innovate past the other. The result of this arms race in 2021 will be more fintech investment and deeper integration of financial services into all aspects of consumers’ lives. Meanwhile, China will expand the pilot programs that have introduced the digital yuan, and try to leverage that leadership to make its currency a global leader. The rest of the world will take careful notes to try and catch up.

FINvestments

  • Number of the Week: 68% – Massachusetts Commonwealth Secretary William Galvin this week filed suit against Robinhood, alleging that the trading platform aggressively markets to inexperienced investors. In the complaint, Massachusetts asserts that 68% of the state’s Robinhood users who’ve been approved for options trading have little to no investment experience. While I’m not as reflexively anti-Robinhood as some, Felix Salmon’s argument that Robinhood engages in manipulation persuades me. And, uh, 68% is a big number; I’ve been investing since the late ‘80s and it’s not clear that *I* should be approved for options trading.
  • E-ZPass and similar car transponder systems have made life better for millions of highway drivers; the next stage is to have it all happen through your phone. A startup called GeoToll has already carried out pilot programs in Florida and California.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter.

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