Super Apps, CBDCs & the Rise of Chinese Fintech: Q&A with Richard Turrin, Author of “Cashless”
Peak NFT, Credit Bureaus Drop Medical Debts, Is the CFPB Coming for Your Models?
Hey all, Jason here.
I’m back home in the Netherlands and (mostly!) caught up on emails and such I missed while I was gone. I’m looking forward to this week’s Fintech Meetup event — if you’re attending, perhaps we’ll virtually cross paths there!
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Women Entrepreneurs in India: What Does It Take to Succeed?
Sponsored content: Join Flourish Ventures on March 24th for a lively, informative, and timely discussion to discover what’s working and what’s not for creating a vibrant ecosystem for women entrepreneurs in India. Hosted by Flourish Ventures Investment Director, Anuradha Ramachandran, she’ll take a deep dive with four successful women entrepreneurs to uncover:
Is this the best time for women entrepreneurs in India and how are they being perceived?
Is the rise of women-focused funds and women entrepreneurs enough?
How do you encourage young women to pursue engineering and/or become non-STEM entrepreneurs?
With more women leaving the workforce, how can you help them manage demands at home while at the same time, show they’ve got options in life and work choices?
Please join us for this provocative and inspirational conversation featuring Deena Jacob of Open Financial Technologies, Priya Sharma of ZestMoney, Shruti Shruti of ApnaKlub and Shinjini Kumar of SALT.
Is the CFPB Coming for Your Models?
The CFPB has made no secret that it’s taking a closer look at how firms collect data and use artificial intelligence.
The agency has included questions around “data harvesting” in multiple recently opened inquiries. Last October, the Washington Post reported (emphasis added):
“The Consumer Financial Protection Bureau has ordered six major U.S. tech companies to turn over information about how they harvest and profit from their users’ payment data, signaling an aggressive approach to oversight of the financial technology industry by the federal government’s foremost consumer watchdog.
The requests cover information related to how companies harvest and monetize data, including whether they share information with data brokers and whether they use consumer data for behavioral targeting.
The watchdog also seeks information on ways that companies try to undercut competitors by restricting users’ choices.
The requests were sent to Amazon, Apple, Facebook, Google, PayPal and Square, and the CFPB said it will also study the Chinese payments companies Alipay and WeChat Pay.”
And, more recently, the data practices of BNPL providers have been in the spotlight. Via the National Law Review’s commentary on the CFPB’s order seeking data from BNPL providers (emphasis added):
“Data Harvesting: The CFPB seeks data that the companies collect and retain as a result of BNPL product usage, the type of data that is generated from BNPL product usage, and the purpose associated with harvesting different data fields.
The information sought relates to “Direct Product Data” and “Indirect Product Data” and the kinds of data that the companies generate from this data. “Direct Product Data” means data collected (and maintained) as a result of consumer’s use of BNPL. “Indirect Product Data” is data that is both (1) generated, at least in part from Direct BNPL Data, and (2) about individual users of BNPL.
Data Monetization: The CFPB is also seeking information about how BNPL use data or data generated from BNPL data is used in connection with developing, selling, or marketing BNPL products or other products or services. The CFPB is also looking to understand third-party data sharing and related revenues, and use of BNPL use data or data generated from BNPL use data to sell advertising or targeted offers.”
The CFPB has also made clear it is taking a closer look at the risk of intentional or unintentional discrimination as a result of the use of artificial intelligence (AI) and machine learning (ML) models — going so far as to encourage engineers and data scientists to become whistleblowers.
Now, the CFPB is signaling it will be looking for discrimination beyond what is prohibited by fair lending laws by using its authority to prohibit UDAAPs to target potentially discriminatory practices.
According to the CFPB’s press release (emphasis added):
“The CFPB will examine for discrimination in all consumer finance markets, including credit, servicing, collections, consumer reporting, payments, remittances, and deposits.
CFPB examiners will require supervised companies to show their processes for assessing risks and discriminatory outcomes, including documentation of customer demographics and the impact of products and fees on different demographic groups.
The CFPB will look at how companies test and monitor their decision-making processes for unfair discrimination, as well as discrimination under ECOA.”
In an accompanying blog post, the agency stated (emphasis added):
“For example, Director Chopra has spoken about the work the CFPB will undertake to focus on the widespread and growing reliance on machine learning models throughout the financial industry and their potential for perpetuating biased outcomes.
Additionally, certain targeted advertising and marketing, based on machine learning models, can harm consumers and undermine competition. Consumer advocates, investigative journalists, and scholars have shown how data harvesting and consumer surveillance fuel complex algorithms that can target highly specific demographics of consumers to exploit perceived vulnerabilities and strengthen structural inequities.
We will be closely examining companies’ reliance on automated decision-making models and any potential discriminatory outcomes.”
Ballard Spahr provides additional context in its analysis of the announcement, saying (emphasis added):
“Specifically, the CFPB is directing its examiners to apply the Consumer Financial Protection Act’s unfairness standard to conduct considered to be discriminatory whether or not it is covered by the Equal Credit Opportunity Act (such as in connection with denying access to a checking account).
Under the CFPA, an act or practice is “unfair” if it
(1) it causes or is likely to cause substantial injury to consumers,
(2) the injury is not reasonably avoidable by consumers, and
(3) the injury is not outweighed by countervailing benefits to consumers or competition.”
Those who have worked in consumer credit will be familiar with the requirements of ECOA that prohibit discrimination in the provision of credit based on a protected class: race, color, religion, national origin, sex, marital status, age, receipt of public assistance, or good faith exercise of any rights under the Consumer Credit Protection Act.
Consumer lending companies typically have robust internal procedures to ensure compliance with fair lending requirements and will also frequently employ external consultants or auditors as a second line of defense.
But modern digital consumer finance is heavily reliant on models for functions far beyond underwriting — they enable automation, speed, and scalability.
Models are deployed in numerous areas in addition to credit decisions covered by ECOA, including: fraud detection, identity verification, income verification, targeted marketing, direct mail approval/response, transaction monitoring, and even collections processes.
But these other models historically have received substantially less scrutiny for potentially discriminatory impacts, both within companies and from their regulators.
Given that this clearly won’t be the case going forward, consumer finance companies would be well served to examine the types of data they’re collecting, why the data is being collected, how it is being stored, and how it is being used in models to make decisions — including having clear, documented policies and procedures for monitoring and testing models to assess their potential to have discriminatory impacts.
Most Medical Debts to be Removed from Credit Report
The Wall Street Journal reported on Friday that the big three credit bureaus, Experian, Equifax, and TransUnion, will begin implementing changes that will eliminate billions of dollars in medical debt from consumers’ credit reports.
Although the bureaus’ changes have reportedly been in the works for months, news of the planned changes comes just two weeks after the CFPB released a special report on the impact of medical debt on consumers’ credit reports. The report found that some 20% of American households struggle with medical debt and that at least one medical collection tradeline appeared on the credit reports of 43 million Americans.
The CFPB’s report concluded with a set of recommendations, including assessing whether medical debt should be included in credit reports at all and its intention to “hold credit reporting companies accountable.”
According to the Wall Street Journal:
“Beginning in July, the companies will remove medical debt that was paid after it was sent to collections. These debts can stick around on a consumer’s credit report for up to seven years, even if they are paid off. New unpaid medical debts won’t get added to credit reports for a full year after being sent to collections.
The firms are also planning to remove unpaid medical debts of less than $500 in the first half of next year. That threshold could rise, according to people familiar with the matter.”
On the one hand, this is a win for consumers, especially those with erroneously reported debts or those due to delayed insurance payments.
On the other hand, as the usefulness of credit bureau data and credit scores erodes, lenders are increasingly moving away from relying on standardized models, like FICO. Instead, lenders are adding new data sources, like bank account transaction data, and building their own (often AI/ML-powered) internal models.
In some cases, this may improve a lender’s ability to approve borrowers who may otherwise be declined. At the same time, it may make it more confusing for borrowers, who’ve grown accustomed to seeing their credit score through services like CreditKarma, and may not understand why one lender approves them while another declines them.
Have We Already Reached “Peak NFT”?
NFTs are seemingly inescapable lately.
Paris Hilton’s cringeworthy appearance on Jimmy Fallon, an NFT vending machine, former first lady Melania Trump allegedly buying her own NFT, a NFT fundraiser for Ukraine: NFTs are literally everywhere these days.
But as celebrities, brands, and advertisers (not to mention scammers, grifters, and shameless opportunists) have glommed on to the trend, is the bloom already off the rose for NFTs?
Looking at trading volumes on the most popular NFT marketplace, OpenSea, it seems that may be the case:
According to the FT’s analysis, the average price and trading volumes are down substantially from February peaks (emphasis added):
“The average selling price of an NFT has dropped more than 48 per cent since a November peak to around $2,500 over the past two weeks, according to data from the website NonFungible. Daily trading volumes on OpenSea, the biggest marketplace for NFTs, have plummeted 80 per cent to roughly $50mn in March, just a month after they reached a record peak of $248mn in February.”
The declines have even hit so-called “blue chip” NFTs, like the popular Bored Ape Yacht Club collection, which have seen their daily average price drop substantially from February highs.
Likewise, worldwide search interest in NFTs hit a peak in mid-January, before rapidly falling off to less than half of January’s peak:
Still, despite apparently waning interest, it is still early days for NFTs as a technology. While the current iteration — literally pixelated JPGs in many cases — may have peaked, the technology as a platform is still in its infancy.
The space has plenty of challenges, particularly with fraud, theft, insider trading, and failure to protect intellectual property rights — exemplified by the fact that 80% of the NFTs created for free on OpenSea are bogus.
But don’t expect NFTs as a technology to go anywhere. The platforms for creating and trading them will mature over time. New use cases will be identified. Perhaps we’ve passed “peak NFT” — of the first wave.
Super Apps, CBDCs & the Rise of Chinese Fintech: Q&A with Richard Turrin, Author of “Cashless”
Despite considering myself fairly well traveled, I’ve actually never had the opportunity to travel to Asia. My experience of the region, and especially of China, has been intermediated through the Western press, including its coverage of banking and fintech.
So when I came across Richard Turrin’s “Cashless,” I knew I wanted to read it. It provides a first-hand perspective on China’s transition from cash-dependent to fully digital, including the occasional misstep along the way, like China’s P2P lending crisis.
And, most importantly, it rebuts common Western misapprehensions — like the idea that China’s CBDC is seeking to displace the dollar as global reserve currency — and offers lessons, such as how choices Apple and Google made in mobile payments slowed adoption, while the use of simple QR codes in China paved the way for the rapid uptake of digital payments.
Jason: In your book, Cashless, you discuss China’s rapid financial digitization – its transition from reliance on cash payments to near-ubiquitous acceptance of payment methods like Alipay and WeChat pay. What enabled this rapid transition? Do you see any negative impacts from the rapid transition away from physical cash?
Richard: China’s rapid transition away from cash and onto the payment platforms directly resulted from the central bank’s decision to allow “big tech” companies Alibaba and Tencent (WeChat) to enter the payment space back in 2014. The PBOC’s goal was to increase access to the financial system and saw digital as a tool to accomplish this as traditional banks had reached the limit of their ability to build branches, particularly in rural villages.
This resulted in Alipay and WeChat Pay launching in 2014 and fundamentally changing payment in China. The critical thing to recognize about this decision is that the PBOC allowed big tech into the payment space, knowing full well that it would be at the expense of incumbent state-owned banks. This was a courageous decision and one that most cannot imagine Western central banks like the US’s Federal Reserve ever making. Most consider central banks as supporting incumbents and cannot imagine them making a decision that would cost them.
So far, the only negative impact of going cashless has been that people don’t have the cash to pay for things during natural disasters. So yes, it’s still essential to have some cash around!
Jason: Few Western countries have made similar progress towards going “cashless” – for instance, in the US, cash is still used in about a quarter of transactions. From your vantage point, what differences do you see that account for this slower uptake of digital payments in the US vs. China?
Richard: The biggest difference is that the US has a well-developed credit card network that is ubiquitous but has high access fees, with merchants paying between 2-5% for the privilege of accepting cards. People don’t see the merchant fees in their purchase and have grown numb to the “tax” they are paying that allows them to receive “cash back” and mileage points programs.
The reliance on credit cards and the reluctance of regulators to approve any new cash transfer systems has delayed free and fast cash transfers in the US. For example, look at how long it has taken the US to get the retail “real-time gross settlement” (RTGS) “FedNow” system, which may come online in 2023. Other countries like India have had the UPI RTGS system in place since 2016. Frankly, the US has delayed access to low-cost payment systems to maintain the status quo for incumbent bank and card companies.
Jason: So China didn’t have credit cards, allowing them to take the lead?
Richard: Not really. China never had high penetration of credit cards, but it did have a very high penetration of debit cards back in 2014. Debit cards were behind WeChat Pay and Alipay’s success as they were required to use the services. The big problem that WeChat and Alipay solved was to give small businesses free access to a “point of sale” or POS system. POS systems from the banks were expensive and out of reach for most small businesses.
To give you an idea of how important small business is to China, small and medium enterprises (SMEs) account for 80 percent of jobs, 60 percent of GDP, and half of the national tax revenue. When WeChat and Alipay launched, all of these SMEs could suddenly take digital payments, which eventually led to China going “cashless.”
Jason: One key difference you highlight is the use of QR codes in Chinese payment apps. Why were QRs critical to fostering the adoption of digital payments in China? Why didn’t US payment apps pursue a similar strategy?
Richard: There are two reasons why QR codes were not adopted in the West. First and foremost, QR tech back in 2013-14 was considered unsuccessful in the West. It had been used in magazines for advertising but never caught on. So software developers at the time had no concept that it could be used for payment, or at least few did—more on this in a moment.
The other reason is perfectly illustrated by the difference between the roll-out of Apple Pay and WeChat pay in 2014. Apple Pay was rolled out in 2014 with great fanfare and the necessity to buy a new iPhone 6 as prior versions of the iPhone did not have near field communication (NFC) technology built-in. In essence, Apple said, “you have to pay to play.” Contrast this with the launch or WeChat. The coders who designed the WeChat app were instructed to make it work on the cheapest smartphone available on the market. So when it launched, WeChat simply said, “try this it's free if you don’t like it, don’t use it.” Street vendors didn’t even need a phone. Just the QR code printed out on paper was enough to receive payment. WeChat and Alipay both strove to be inclusive on launch, and their success is partly due to their not leaving anyone behind.
I mentioned above that “few” software developers in the West acknowledged QR codes. One that did design Starbucks app that used QR in 2009 and then changed to bar codes on its app. Starbucks’ payment system was larger than ApplePay or Google Pay until 2019. So the funny thing is QR worked in the US too! Apple and Google ignoring QR was a strategic blunder of epic proportions rooted in their desire to sell new hardware.
Jason: Your book discusses the peer-to-peer lending boom and bust in China – a bruising experience for borrowers, lenders/investors, and regulators alike. For readers who may be unfamiliar, can you briefly summarize the episode? What lessons did Chinese financial regulators learn from the episode? How has that episode informed regulators’ approach to subsequent fintech companies and innovations?
Richard: China’s fintech experience has not always been a good one. While digital payments are an undisputed success, China’s experience with peer-to-peer (P2P) loans was a disaster on an unparalleled scale. Estimates are that some $120 billion was lost in P2P markets and serve as an example of what can go wrong when digital markets are inadequately regulated. What the P2P market failure showed was less a failure of regulators to act, they did, and much of what they did was prudent. Instead, it was more of a problem with regulators' inability to act quickly enough to stem the crisis. So I call this a case of analog regulators moving too slowly for the new digital world. China’s P2P market is a critical story, and it is unrecognized to many in the West. I devote two chapters in Cashless to the P2P story.
The reason it is so important is that the P2P crisis was finally put to rest in 2018, a mere two years before the Ant IPO. Anyone looking to the root causes of the Ant IPO cancellation should look more toward the P2P crisis than the facile explanation that regulators were so thin-skinned that they blocked the IPO to spite Jack Ma for his controversial speech. While the speech certainly may not have helped Jack and Ant, the real cause for the cancellation was regulators' fear of a credit bubble. Many overlook the P2P debacle, yet it left a lasting and profound impact on the mindset of China’s regulators.
Jason: Ant Financial and Tencent have also faced dramatically increased scrutiny, ultimately resulting in Ant’s IPO being shelved. What are Chinese regulators worried about? What don’t Western observers understand about the dynamics at play in this situation?
Richard: The facile answer for the timing of Ant IPO’s cancellation is that with his speech in Shanghai before the IPO, Jack Ma provoked the regulators, who immediately took retribution by canceling the IPO. With this narrative, Jack Ma is turned into a tragic Greek hero, slain by regulators’ actions reduced to a vendetta against an innovator of mythical proportions who had grown too full of himself.
While we can never know definitively, I do not believe that the “pause” in Ant’s IPO represented a personal vendetta against Jack Ma due to thin-skinned regulators. Jack Ma may have been outspoken and raised regulators’ ire, but it does not spur regulators to carry out personal vendettas, even in China. What prompts them to act is fear. In China, regulators are still consumed with anxiety that credit bubbles might bring on another P2P-style crisis, and Ant’s ever-increasing IPO valuation provided ample reason for concern. Ant’s valuation peaked at $320 bn from an initial $220 bn, meaning that Ant would have to generate additional loans, its primary money-maker, to satisfy investors’ demands for big returns. The regulators panicked when they saw another bubble in the making while still managing the fall out from the recent P2P bubble.
Jason: “Super apps” feature prominently in the rise of Chinese fintech – services like the aforementioned Alipay and WeChat. Recently, we’ve seen US fintechs like PayPal and Affirm claim to be pursuing a “super app” strategy. What forces made the rise of a super app possible in China? How is the situation different in the US vs. China regarding super apps? Is the super app model viable in Western markets?
Richard: Not a day goes by where another Western tech company proudly proclaims its desire to be the next super app. Unfortunately, none have attained this status, although companies like PayPal, Amazon, and even Walmart are certainly getting close. Still, all lack the 360-degree lifestyle services available on China’s super apps. I don’t think that Western apps are there yet, not just because financial regulations constrain them, but more importantly because they do not provide a welcoming platform for third parties.
What made Alipay and WeChat super apps was the use of mini-programs that allowed third parties to build services directly on their app. They welcomed others and made it easy to use not just their payment systems but their log-in and security systems. This made building a mini-program and offering services on their platform a breeze. That openness is still lacking in the West, where Amazon and PayPal see the platform as “theirs” and don’t open it to third parties. I don’t see it getting any better soon and am amazed that sophisticated Western tech companies do not replicate the mini-program model. What are they afraid of?
Jason: You dedicate a good chunk of your book to discussing China’s CBDC, the e-Yuan (e-CNY), which is already being used by everyday consumers. What do observers in the West get wrong about China’s CBDC plans? What are China’s top goals in deploying its CBDC?
Richard: Rather than being the killer so many predict, China’s new central bank digital currency, the digital yuan, will have a symbiotic relationship with payment platforms Alipay and WeChat Pay. This may surprise many, who may have read that the payment platforms face certain death at the hands of the digital yuan. This common narrative gets it wrong because it does not take into account the “stickiness” of the digital platforms. People will not abandon them en masse because they are simply so useful. No one will spend hours on the e-CNY wallet app, as they do on WeChat or Alipay. Trust me; I have them all!
Some analysts also make the mistake of seeing digital payment in China as a fixed or static number, a single pie from which e-CNY will take a slice. But this zero-sum perspective ignores the e-CNY’s potential for expanding the mobile payment market. The digital yuan will increase the amount of digital money in circulation, which will allow even more use of the payment platforms. Put simply, as great as WeChat and Alipay are; there are a lot more payments for the e-CNY to digitize in China.
Jason: What can Western governments and central bankers learn from China’s CBDC?
Richard: The West is easily a decade behind China in fintech adoption. That may surprise some who feel that Apple or Google Pay are high-tech, but I’m sorry to report that they’re not. The real revolution in payment will only occur when payments become free, immediate, and without third parties controlling the payment flow.
China showed how free and immediate digital payment can change the payment system with WeChat and Alipay. In hard figures, China’s mobile payment market is $66 trillion, representing 4.5 times China’s GDP. Meanwhile, in the US, the market for all card payments is a mere $8 trillion or one-third of the US’s GDP. These aren’t just numbers but show how profoundly digital China has become and how far ahead they are of the West. Therefore, I ask readers who think they currently enjoy a wide array of services with digital payment to consider how many more services must be available in China to get to that 4.5 x GDP figure.
By issuing a CBDC, China is taking the final step of tokenizing money to eliminate the need for third parties. If China’s $66 trillion mobile market seems big today, once e-CNY launches, it will explode and get far bigger. What this means in practical terms is that even more of the payment stream will be digitized.
Western regulators need to reconsider the monopoly that card companies and banks currently have on the financial system. Not that card companies and banks are bad, they’re not, but they have inhibited the growth of payment services because they want to maintain a payment system that has high fees and slow payment times. In issuing a CBDC, governments take a first step in acknowledging that payments are digital infrastructure, just as cash printing and management was infrastructure for another era. CBDCs are the infrastructure that we can build a digital future on where payment is free, immediate, and doesn’t require anyone’s permission.
Jason: Western governments’ response to Russia’s recent invasion of Ukraine has escalated more quickly than many commentators expected, including cutting off SWIFT access to some Russian banks and, perhaps more critically, sanctioning Russia’s central bank. How do you think these actions are being received by the Chinese government? What actions, if any, might China take to protect its own financial system from such threats? Will China use its banking system to help Russia avoid sanctions
Richard: No, China will not bail out Russia. This is unlikely and is growing less likely by the day as the conflict drags on and the political risk for China allowing Russia access to its banking systems increases. The EU is China’s largest trading partner, and China does not want to injure this crucial relationship irreparably.
China has three systems that Russia could potentially use to evade sanctions. They are the CIPS cash transfer system, which replaces SWIFT, UnionPay, which replaces Visa and Mastercard, and finally, new technology China’s digital yuan. We do not see China rushing in to make any of these systems available to Russia. Most talked about are CIPS and the digital yuan, and there are two reasons why China is unwilling to make them available to Russia.
First, while considered a SWIFT replacement, CIPS is so new that it doesn’t have sufficient numbers of foreign users signed up to be helpful to Russia. Ironically, some CIPS payments still require SWIFT to make it to the end recipient. The digital yuan is so new it’s in trial and has no facilities for international transfer, while the digital ruble hasn’t even entered trials. So while both systems are designed to reduce China’s dollar dependence, they will take years to attain broad-based adoption and can’t be rushed in to save Russia.
The other reason China isn’t making CIPS and the digital yuan available is that they do not want their reputation tarnished as being “sanction busters.” Both CIPS and the digital yuan are designed to help with yuan internationalization. China knows full well that if they are used to bust Russian sanctions, their acceptance in international markets will be significantly diminished. The digital yuan, in particular, is brand new and seeing it dragged through the mud as a “sanction buster” would likely kill its adoption, which is certainly not in China’s interests.
NYC Fintech Week: April 18th - 22nd
Exciting news! I’ll be in New York for New York Fintech Week this April. I’ll also be presenting a Fintech Master Class with none other than Alex Johnson of Fintech Takes, in which we will take a critical look at the Future of Consumer Lending.
Alex and I will break down five key themes that will impact consumer lending in 2022, including the changing macro environment, bank charters and M&A, as-a-service and APIs, the changing role of credit bureaus, and, of course, BNPL.
Other Good Reads
Who Owns All the Planes? (Net Interest)
Biden’s Executive Order To Fuel A Bank-Bitcoin Boom (Ron Shevlin/Forbes)
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