Number of the Week: 679% (explanation below)
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Which Americans Use Fintech the Most?
There are at least two competing narratives describing how fintech functions in the United States. One, often on the lips of opportunistic CEOs, Bitcoin bulls, and their acolytes, is that fintech presents a groundbreaking opportunity for tens of millions of “underbanked” Americans—including underrepresented minorities, women, and some among the rural and elderly population—to establish important relationships with newly minted financial institutions. For these underserved millions, goes the story, fintech will secure a better financial future. A competing view is that fintech is mostly a playground for digital savants in affluent urban playgrounds, something for early adopters to swipe on their iPhones in between sips of agave-sweetened lattes.
In December, McKinsey published substantial research that illuminates this debate more sharply than I’ve seen anywhere else. For more than a decade, McKinsey has published a quarterly survey on US personal finance; in the most recent quarter, the consulting firm decided to ask about fintech use, in the wake of the COVID pandemic and associated lockdowns. The state-by-state breakdown was startling. Leave aside New York and California—because duh—and the place where fintech is most used is…the American South, with Georgia at the top of the list, at 53% fintech penetration. The survey includes in its top ten states I would never have guessed, such as Louisiana, Mississippi, and Tennessee. And notably, no tech or financial centers such as Washington, Illinois, or Massachusetts made the top ten.
Measuring the top ten states that have proportionally added the most fintech accounts since COVID struck, the picture gets even more interesting: New Jersey enters in—but so do Arkansas and South Carolina. This map tells the full story:
This research is the biggest public affirmation I am aware of that fintech has been enthusiastically adopted in US regions with high African-American populations. In an exclusive FIN interview, McKinsey Senior Partner Alexis Krivkovich said the survey “signals that fintech is moving mainstream.” She made it clear that the type of fintech the survey asked about was not, say, someone using an online account at Wells Fargo or SunTrust, but rather a specialized fintech product from a bank or lender, or a standalone fintech provider. “On some level, it is surprising,” Krivkovch added, given common perceptions about typical fintech usage. She also told me that she checked the findings with some large fintech companies (she declined to identify them), and they corroborated the growth in Southern states.
Some of the fintech adaptation measured in the survey is attributable to the COVID crisis. Still, “only 7 percent of respondents—across all age groups—that did not hold digital accounts prior to the crisis said that COVID-19 has made them more likely to open one in the future,” McKinsey notes. “At the same time, more than half of fintech users who opened an additional account during the crisis said that COVID-19 has made them more likely to use fintechs in the future.” FIN will be watching for the next quarter’s survey to see if the rest of the United States is catching up with the South.
The Global Take on Crypto Regulation
This week CNBC.com interviewed me at length for a story on concerns that would-be Bitcoin/cryptocurrency investors often have. One concern is worth digging into deeper: Those investing in Bitcoin/crypto for the long term should take into account that the legal and regulatory environment might be different when they sell as opposed to when they bought, which might eat into any potential returns. Most of the time, this is not a huge issue with other asset classes (such as stocks or real estate).
The CNBC.com article’s presumed readership is in the United States, where such a concern might come into play. But it’s also useful to take a global view of how cryptocurrencies are regulated, and consider how that might evolve. The Library of Congress (LOC) assembled an incredibly valuable study of this question in June 2018 (it’s possible there have been changes since). According to the LOC, nine countries explicitly ban all cryptocurrency transactions:
The only surprise there is the UAE, which has a pretty strong fintech community; FIN predicts that within the next 12-18 months the UAE’s restrictions around crypto trading will ease somewhat.
At the next level, the LOC says there are 16 countries with an “implicit ban” on cryptocurrency transactions:
Some notes here: individuals in Saudi Arabia are allowed to purchase and spend Bitcoin, although banks are prohibited from handling cryptocurrencies. As for China, FIN has often discussed its digital money efforts (see, for example, China Shows Off Digital Currency, from the December 13 issue); China’s Bitcoin restrictions can be viewed as an attempt to slow down the competition until the digital yuan gets up to speed.
But even in more developed “liberal” countries, there are numerous regulatory issues that investors should bone up on before dipping into crypto. In the United States, for example, the Internal Revenue Service treats “virtual currency” as property, and not as a currency; as such, any profit made on the sale of Bitcoin etc. is subject to capital gains tax (which, depending on annual income and how long the cryptocurrency was held, could be as high as 37%). India, which until March 2020 had an outright ban on cryptocurrency transactions, is reportedly now considering categorizing Bitcoin as an “intangible asset” subject to an 18% goods-and-services tax. Crypto investors also need to think about what they will do with their returns; on Saturday the London Times reported that global banking giant HSBC will not allow customers to transfer digital currencies into its accounts.
It’s worth repeating that nothing in FIN should be considered as advice to pursue or avoid any particular investment strategy—but we are here to help you do your homework, and if you have any fintech investment questions, please feel free to leave them as comments.
🦈Number of the Week: At $160.74 a share, stock in the fintech insurer Lemonade is trading at 679% of its July IPO price—and that’s after 44 million insider shares became available for sale this week. Lemonade was the best-performing IPO of 2020, for companies worth more than $300 million.
🦈The German banking-as-a-service firm Mambu this week announced a massive 110 million euro fundraising round, giving it a $2 billion valuation and establishing Mambu as one of Europe’s largest fintech players.