An increasing number of fintech companies are applying for US banking licences, potentially turning former partners into competitors
 
Will the banks be able to keep up in this rapidly changing landscape? The exploding popularity of fintech applications continues to transform the finance industry, a sector of the economy previously dominated by traditional-minded institutions. One notable development in the increasingly widespread use of fintech apps is the merging of banking and fintech that we are beginning to see. Fintech companies are rushing to apply for banking licences, and quite a few have already been approved. The first to lead this trend was fintech giant Square, which was able to obtain approval to create an industrial bank from the Federal Deposit Insurance Corporation (FDIC).

Since then, other fintech companies such as Varo Money, LendingClub, SoFi, Figure and Oportun either have been approved to create their own banks or have applications pending. These developments are important because it will create competition for existing banks and also affect the partnerships between the two entities in the future.

Certainly it is alarming for banks to realise that their current partner may soon become a competitor, armed with the benefit of a deep understanding of their operations borne from their work together. However, this change in status will also subjugate fintech companies with an increased amount of regulation and oversight. As fintech continues to create easy, convenient, quick and low-cost methods of serving the financial needs of individuals as businesses, banks must move to develop their own mobile banking technology to stay competitive.

 

Changing fintech landscape
In a select few US states, industrial banking charters are offered to companies who want to offer banking services and loans to small businesses without the burden of oversight by the Federal Reserve. Industrial banking charters are controversial, with many raising issues with a licence that allows non-financial companies to offer banking services. Because of this, an industrial banking charter has not been approved in 10 years – at least not until Square had theirs approved in March of 2020.

Certainly, this is an interesting development for the financial services sector. It could be a very positive change for small businesses, who may find that they have more options in terms of obtaining loans.

    Servicing the small business market brings ample opportunities for fintech, as this historically has been ignored by traditional financial institutions

Square’s focus has always been on helping small businesses, which has never been more important, since the coronavirus pandemic has hurt profits for so many of them. In fact, one other interesting trend that has been seen among fintechs in the midst of the pandemic is the opportunity presented to them to serve small businesses under the Paycheck Protection Programme (PPP).

Fears that fintech will completely supplant the existing financial services sectors have been reignited. The birth of fintech originally scared banks for this same reason, and most of the traditional financial institutions reacted by agreeing to partnerships with fintech companies in the hope of riding their wave of success. The ability of fintech companies to offer new solutions, face challenges and adapt to a rapidly changing tech landscape has forced banks to reform their technology and adapt to better suit customers’ needs.

In fact, servicing the small business market brings ample opportunities for fintech, as this historically has been ignored by traditional financial institutions. This is a problem, with only 27.5 percent of small businesses, on average, being approved for business loans by banks. The pandemic has devastated small businesses, yet all signs point to the beginning of a recovery for the economy as a whole. It could be the perfect time for fintech applications to start offering banking services to help revive small businesses around the world.

 

Bypassing barriers
However, the process of applying for a banking charter can be lengthy. For example, it took Varo Money three years to be approved for theirs. Some fintech companies have found clever ways to bypass this governmental barrier, however, by acquiring digital banks in their portfolio. LendingClub was able to acquire Radius Bank in February, which may have saved them the steep fees involved in a banking charter application.

Both Radius Bank, LendingClub and Varo Money have focused more on individual consumers rather than small businesses, although this could change. The democratisation of stock reading, cryptocurrency investing and online banking has broadened access to financial services typically reserved for the middle or upper classes.

The financial services market has become so rife for innovation, and so potentially lucrative, that many industries are trying to get a piece of the pie. There has been a new term coined for technology companies who have recently begun offering financial services: techfin. However, traditional financial services point out that without the necessary knowledge, the ease with which everyday people can invest money via fintech apps can become dangerous. With fintech apps moving into the banking sector as well, there is a concern that these companies will encourage their users to invest their money rather than keep them in savings accounts.

 

Banking with fintech apps
So, what is behind this trend of fintech companies moving to get involved in the banking sector, rather than sticking with their partnerships with well-established financial institutions? By expanding their services to include those most commonly found in the banking sector, fintech apps can expand their clientele and gain access to a larger market. The profit is undoubtedly larger, as fintech companies can then cut out the middleman and deal directly with their customers, building relationships in the process.

 

Will we see more fintechs in banking?
There is a lot for fintechs to gain by applying for a banking charter. However, as we mentioned previously, the application process can be lengthy and expensive. There are also a lot of government regulations and obstacles that need to be overcome before an application is approved. Robinhood learned this lesson when they pulled their national banking charter application.

Previously, there was discussion from the Office of the Comptroller of Currency (OCC) of a special banking charter for fintech companies that would fast track the application. However, this was shut down in October 2019 after a New York federal judge ruled that the OCC, the regulator issuing the charters, did not have the authority to create this special type of charter. However, it is a significant development to have seen three fintech companies get approved with their banking charters (Square, Grasshopper and LendingClub). There have only been nine banking charters granted nationwide since 2008, and none at all in the past 10 years.

 

The benefits of a banking charter
It’s a fact that the traditional financing institutions have underserved small businesses, especially minority-owned small businesses. It’s also true that many of these same small businesses were hit hard by the pandemic and forced to close their doors because of lack of funding.

There is a huge need for financial services for small and mid-sized businesses as well as individuals who are just getting their financial lives started. There are undoubtedly hurdles to obtaining a national banking charter, but the rewards are astronomical. Fintech businesses with banking charters can work with Automated Clearing House (ACH), a standard payment rail. They can operate in any state in the US without having to deal with different state laws and jurisdictions and offer their customers FDIC insurance.

Fintech companies may be shaking up the financial sector, but that might be a good thing. Despite negative PR about the risks involved with new fintech investing apps and the value of cryptocurrency, clearly these companies are leaning towards accepting more federal regulations in return for access to broader market segments. The approval of so many fintech applications for national banking charters will serve to further legitimise many of these new fintech apps, and possibly become stiff competition for their former banking partners in the process.

Sue Millar of Stephenson Harwood Law firm says British banks are generally very interested to re-establish connections with Iran and claim that there is a real movement happening in this area.


In an interview with IRNA in London, and commenting on her opinion about the current banking situation, Millar said, 'We act for the British Iranian banks and have been heavily involved in discussions with industries, the regulatory authority and the government about how to break the banking impasse.

The good news is that there is a real movement and it is well intended, but it is frustratingly slow.'

On the reason why things are moving slow, she said, 'It is a combination of the architecture of the banking system in the UK which is different to the architecture to the banking system in Europe.

Each bank has a direct clearing relationship in Europe, but here in the UK you clear through another bank and those are the banks tend to be large banks who have found themselves on the wrong side of very large penalties from the US.

So they are naturally far more cautious than as warranted.'

Q. To a question if there is a prospect of normalization of banking system between Britain and Iran, the British expert said,' I think there is and it will happen. I am a long term optimist. I have said this and would say just wait another six months.

The banking industry in the UK are generally always very interested in Iran, but they want to be second or third in. They like to see what the other banks do first.

I think there are relatively simple steps that could be put in place to resolve this and I think that there is a political will to do so, but previously the UK government was looking for the commercial sector to fill the gap and now I think there is a grown realization that there might need to be some intervention.'

On the the impact of Brexit on trade with Iran, she said, 'It is a difficult question, but if the reality is that we are not going to have any deals with the EU and we are just going to be a trading partner like anyone else, it certainly is the case that the UK needs to find additional market.

Brexit should act as an accelerator real trade with Iran.'

Asked if Donald Trump retreats from JCPOA, would Britain preserve its position, the British sepert said, 'I think so far as the JCPOA is concerned, the next president is irrelevant to JCPOA. By that, I mean that in order to tear up the JCPOA it has to be on the basis that Iran has breached the fundamentals of its obligation.

What the US or any other signatories cannot do is just to say I am walking away from their international obligation. I do not think that is going to happen. I think the JCPOA will hold and I do think that the next president is irrelevant to the question of the future of the JCPOA.

*Sue Millar is a finance litigation specialist. She focuses on investment banking disputes, involving highly complex products and structures. Her expertise extends to commercial and private banking and trade finance disputes.

Iranian banks must commit to increasing their capital and reaching a capital adequacy ratio of at least 8%, says a deputy economy minister.

"A minimum capital adequacy of 8% and reaching a capital adequacy of 12% must be pursued by the banks," Hossein Qazavi was quoted as saying by banker.ir.

"Privately-owned banks must improve their capital adequacy by selling their stocks and increasing the capital of state-owned banks should be the function of the government."

The deputy economy minister for banking and insurance affairs says budgetary constraints have indeed imperiled government moves to help increase the capital of banks. "But I hope that amendments to the budget law of 2016-17 which were approved by parliament will be implemented and capital adequacy of the banks will increase."

The amendments to the budget law of 2016-17, the implementation of which was officially proposed by President Hassan Rouhani in early November, contain measures to increase banks' capital and settle their debts.

According to another deputy minister of economy Shapour Mohammadi, the government has several plans to increase the capital adequacy of banks including cash injections with the help of foreign exchange resources of the Central Bank of Iran.

"It was proposed that proceeds from selling the shares of state companies could be utilized based on Article 44 of the Islamic Republic of Iran Constitution [which calls for the privatization of state firms]. These proceeds may be used to increase the capital of state banks which has won Majlis approval,” Mohammadi had said in June.

According to Qazavi, there is also the issue of several privately-owned banks in which the government holds a stake. If these banks choose to offer their stocks, he says, it should be "natural for the government to help in increasing their capital."

The official says in light of budgetary limitations, it seems that the government is willing to reduce its role in banks and let the capital market play its role in increasing their capital.

The main purpose of the amendments to the 2016-17 budget law is to allow the government to settle its debts to the banking sector by using the CBI foreign exchange resources. The government will have the authority to repay up to 450 trillion rials ($14 billion) of its debts to lenders through these resources.

Qazavi notes that when international banks want to collaborate with their Iranian peers, they look into their financial ratios, namely capital adequacy, non-performing loans, return on assets and stocks.

He, however, stresses that when a bank or country wishes to work with Iran on a large scale it should gauge the country within the framework of its extraordinary circumstances. He quickly adds that this does not mean the capital adequacy ratios of Iranian banks must not improve.

"This is a necessity. But in general, hurdles must be removed by way of improving or reforming the structure of bank's financial statements and giving the other side (foreign banks) the necessary assurances."  

Qazavi adds that in the case of government-owned banks, foreign banks can be swayed even if the bank's capital adequacy is below 8% because the government would be its stockholder "and if problems arise, they know that the government is there to help the bank(s)."

Production Loans Lagging

A deputy minister of industries, mining and trade has criticized the banks' performance in allocating loans to promote production in the country.

"Unfortunately, even though 90 cases were sent to private banks to receive loans to improve production, the banks have paid no attention," Reza Rahmani said in the 62nd meeting of the government and the private sector.

Pointing to the CBI governor Valiollah Seif's promise of delivering 16 trillion rials ($499.4 million) worth of loans to the ailing small and medium-sized enterprises (SMEs), the official said "so far, only 11 trillion rials ($343.3 million) has been paid to 16,194 industrial units."

Rahmani recalled that the CBI head had promised that "if any SME does not get the funding by the time the 16 trillion rials has been paid out, the volume of loans will increase."

 Iran’s national digital banking document has been drafted, the deputy economy minister for banking and insurance, Abbas Memarnejad, said during a Post Bank meeting in Tehran.

“Today, the world focuses on digital banking rather than electronic banking and the document is based on smart economy,” he noted, IRNA reported on Wednesday.

Digital banking is part of the broader context for the move to online banking, where banking services are delivered over the internet, he explained.

“There is no banking system but a banking ecosystem, which is possible through emerging technologies.”

Fintechs, startups and regulatory companies are the members of these banking ecosystem, he explained.

“In addition to new technologies, the new processing technologies also considered in digital banking.”

“We urged banks to announce their digital transformation mapping road according to which, we assess their services afterward,” he said.

The Iranian banks should provide their business plans according to digital banking system and provide services on smart phones, he added.

Digital transformation possible through banking, insurance

The digital transformation in businesses would be possible through banking and insurance systems, the information and communication technology (ICT) minister announced during the meeting.

Mohammad Javad Azari Jahromi said that the banks should invest in venture capitals (VC), which is very important in development of startup ecosystem and digital transformation.

The insurance companies should use the capacity of startups for their services.

“The insurance companies can provide different ranges of services to different startups which has different types of members,” he said.

According to fivedegrees.com, digital banking contains a full transformation to a digital environment — frontend and backend and anything in between — for both customers and employees. Digital banking relies on big data, analytics and embracing all new technologies to improve the customer’s experience. You will only be considered a digital bank if you have digitized all the functions you have — from product development to customer service.Iran’s national digital banking document has been drafted, the deputy economy minister for banking and insurance, Abbas Memarnejad, said during a Post Bank meeting in Tehran.

“Today, the world focuses on digital banking rather than electronic banking and the document is based on smart economy,” he noted, IRNA reported on Wednesday.

Digital banking is part of the broader context for the move to online banking, where banking services are delivered over the internet, he explained.

“There is no banking system but a banking ecosystem, which is possible through emerging technologies.”

Fintechs, startups and regulatory companies are the members of these banking ecosystem, he explained.

“In addition to new technologies, the new processing technologies also considered in digital banking.”

“We urged banks to announce their digital transformation mapping road according to which, we assess their services afterward,” he said.

The Iranian banks should provide their business plans according to digital banking system and provide services on smart phones, he added.

Digital transformation possible through banking, insurance

The digital transformation in businesses would be possible through banking and insurance systems, the information and communication technology (ICT) minister announced during the meeting.

Mohammad Javad Azari Jahromi said that the banks should invest in venture capitals (VC), which is very important in development of startup ecosystem and digital transformation.

The insurance companies should use the capacity of startups for their services.

“The insurance companies can provide different ranges of services to different startups which has different types of members,” he said.

According to fivedegrees.com, digital banking contains a full transformation to a digital environment — frontend and backend and anything in between — for both customers and employees. Digital banking relies on big data, analytics and embracing all new technologies to improve the customer’s experience. You will only be considered a digital bank if you have digitized all the functions you have — from product development to customer service.

South Korea’s president heads to Iran on Sunday targeting billions of dollars of economic and energy deals in a landmark visit.
President Park Geun-hye will help establish a “foundation of cooperation” with Iran by becoming the first South Korean president to visit Tehran since the nations established diplomatic ties in 1962, a presidential spokesman said ahead of the visit, The Wall Street Journal reported.
She will meet Iranian President Hassan Rouhani on Monday and possibly hold talks with Leader of the Islamic Revolution Ayatollah Ali Khamenei.
Officials in Seoul say the primary purpose of the visit is economic, as Korean companies eye deals in areas such as construction, autos and electronics.
Park will be accompanied by Seoul’s biggest-ever traveling business delegation of over 230 executives during the three-day visit.
East Asian nations are scrambling to boost economic links with Tehran after it won relief from western sanctions last year by agreeing to restrictions on its nuclear program.
Chinese President Xi Jinping visited Iran in January and announced ambitious trade plans, while Japan signed an investment treaty with Iran a month later.
South Korea is also eager to boost its oil supply from Iran, which used to account for 10% of its oil imports before sanctions were imposed.

 Banking on Past Loyalty

According to South Korean government sources, contractor Daelim Industrial is expected to sign a $4.9 billion contract to build a railroad in Isfahan and a $2 billion contract to build the Bakhtiari hydroelectric power plant, Korea JoongAng Daily reported.
These will be the first major contracts won by a South Korean company since GS Engineering & Construction won a gas field development project in South Pars in October 2009, which was before the imposition of western economic sanctions on Iran in 2010.
Daelim’s advantage is its strong connection with Iran. The contractor maintained four employees in Iran even after the economic sanctions went into effect. That kept its networks going and earned points with Iranian government officials and businesspeople.
The company is known for having successfully completed the Kangan gas refining building project during the Iran-Iraq War. In 1998, the year that war ended, 10 of its employees were killed in an airstrike by Iraq. The contractor has completed 26 projects worth $4.55 billion in Iran over the past 40 years.
“Earning and keeping the trust of clients are very important,” a Daelim spokesman said. “No matter what happened, it was important for us to finish our jobs there. We have been carefully monitoring what is going on in Iran and we are happy to resume our partnership with the country this time.”
Daelim is not the only company with such a history. Contractors like Hyundai, Daewoo, Samsung and GS have similar experiences. They also maintained offices in Iran all through the sanctions, even though they couldn’t do any business, to keep up their connections. Now, they’re poised for new contracts.
Earlier this year, the Iranian government announced the launch of large construction projects totaling 214 trillion won ($186 billion) through 2020. The big opportunities are in construction, automobiles, information technology and consumer goods.
Iran is poised to grow faster than most countries in the Middle East, thanks to its nuclear accord with the international community and its enormous oil and gas reserves.
“Korean companies and Iran are expected to carry out new deals as early as the second half of this year,” said Kim Hyung-keun, a researcher at NH Investment & Securities.
“Major contractors that have experience in Iran will try to penetrate sectors they are strong in. Daelim will knock on the doors of the gas and oil refining companies, while Hyundai will look into power plant projects and Daewoo will focus on industrial infrastructure.”
Construction is the most promising sector.
According to the International Contractors Association of Korea, Korean companies completed projects worth $1.2 billion through 2009 and Korean builders could win projects of up to $20 billion in the next few years, nearly twice the size of contractors’ overseas orders, which hit $11.8 billion as of last month, a 44% drop from a year earlier.
Last year, South Korea only won $46.1 billion worth of projects, the lowest amount since 2007, mainly due to shrinking demand in the Middle East.

 Ambitious Lineup

Hyundai Engineering is close to signing a framework agreement on the Iranian South Pars Gas Field’s Phase 12 extension work worth $3.6 billion.
Hyundai and Posco Daewoo are trying to join a project for building a 1,000-bed hospital for Shiraz University of Medical Sciences worth $500 million.
Now that sanctions are removed, Iran is preparing to export more crude oil. According to industry data, Iran currently has 30 to 50 million barrels of oil ready to be shipped.
The Iranian government said in April that it will increase its daily crude oil exports from 2 million barrels to 4 million barrels until next March. That policy will positively impact South Korean oil refiners, as the average international oil price is expected to fall.
In January and February, South Korea imported twice as much crude oil from Iran than it did last year and that significantly helped oil refiners improve their profits.
Korea’s No. 1 oil refiner, SK Innovation, reported 844.8 billion won operating profit in the first quarter, a 153.2% rise from a year earlier. Iranian crude is about $2.5 cheaper per barrel than Saudi crude.
Korean automakers like Hyundai Motor, which is sending its president, Chung Jin-haeng, as a member of President Park Geun-hye’s delegation, expect to resume their partnership with Iran.
“Car sales in Iran shrank from 2011’s 1.7 million units to 1.1 million units in 2014, but we believe that the market will grow in the future, as the country’s overall economy is expected to boom,” said Hwang Kwan-sik, a spokesman for the carmaker.
Joo Won, a researcher at Hyundai Research Institute, said opportunities in consumer goods like cosmetics and electronics, as well as airlines, will be seen in Iran.
“The most important key to successfully launching businesses will be financing. The Korean and Iranian governments need to seriously discuss how they will support businesses,” he said.

 Posco to Export Technology

Pohang-based multinational steelmaker Posco is looking to enter the Iranian market through exports of its proprietary technologies.
Since the inauguration of current CEO Kwon Oh-joon, the company has raced to procure new sources of revenue through sales of self-developed technology like Finex and Compact Endless Cast & Rolling Mill.
In March, the company formalized plans to begin selling its steelmaking technologies, engineering models and management systems during its 48th general shareholders meeting.
Under this new business model, Posco will collect royalties from steelmakers who make direct use of their technology, as well as part of the revenue from orders won by companies using their management systems. Posco also expects to profit by dispatching its engineers to overseas facilities.
The company’s decision comes amid saturation in the global steel market. Having determined only so much profit can be made from the sale of steel products, it is looking to capitalize on the wealth of technology it has accumulated through 48 years of constant research and development.
This February, Posco signed a memorandum of understanding with Iran’s Pars Kohan Diar Parsian Steel (PKP) to tap into the country’s high-potential market. Under the agreement, it will build a plant with an annual production capacity of 1.6 million tons in Iran’s Chabahar free economic zone.
The project will be carried out in two stages, with the first involving construction of an integrated steel mill using Finex and CEM technology. The second stage will involve the addition of a cold rolling mill and a continuous galvanizing line.
Posco aims to break ground on the plant within the first half of next year, with commercial production slated to begin in 2018.
The MoU also involves Posco transferring its innovative steelmaking technology, which combines Finex and CEM, to its Iranian partner.
Posco’s subsidiaries are partnering with South Korean companies to ease the multinational steelmaker’s entry into the Iranian market.
Posco Daewoo, along with Hyundai Engineering & Construction, signed a deal with Iran’s Ministry of Health and Medical Education to build a hospital for Shiraz University of Medical Sciences, one of the country’s top medical schools. Posco Daewoo will supply medical equipment, while Hyundai will be responsible for construction.
Posco Energy, in cooperation with the Korea Electric Power Corporation, Posco and PKP, recently signed an MoU for an off-gas power plant and desalination project in Iran. Posco Energy and Kepco will be in charge of operating and maintaining the plant and desalination facility, while Posco will oversee their construction.

   

According to Financial Tribune ,Britain’s vote to leave the European Union and the rise of US presidential nominee Donald Trump have paralyzed efforts by western governments to encourage already highly reluctant international banks to do business with Iran.
Under the nuclear deal, international financial sanctions on Iran were officially lifted in January this year and yet it has secured banking ties with only a limited number of smaller foreign institutions.
One senior unidentified Iranian official told Reuters Tehran was examining alternatives. “Iran will continue to work with small banks, institutions as long as major European banks are reluctant to return to Iran,” said the official.
“Our estimation is that this uncertainty will continue for a few years. We are in talks with many countries, mainly China, Russia and African countries to widen our banking cooperation aimed at resolving existing banking, financial problems.”
US banks are still forbidden to do business with Iran under domestic sanctions that remain in force. European lenders also face major problems, notably rules prohibiting transactions with Iran in dollars - the world’s main business currency - from being processed through the US financial system.
Britain says it remains committed to tackling the banks’ concerns, while the US Treasury says it won’t stand in the way of legitimate business with the country.
However, Iranian officials and foreign bankers believe the British political upheaval after last month’s referendum has distracted governments in London and other European capitals, while the possibility that the shock will send the British economy into recession has deepened banks’ caution yet further.
“Fear over Brexit’s financial consequences have made Britain and other European countries more careful over their interaction with Iran. Most of them have adopted the policy of watch and see,” another senior unidentified Iranian official told Reuters.

 Not interested
“The British banks and authorities have a very big problem to deal with and since the vote, they have been less eager about Iran and I can even say almost not interested. Of course, we believe we can still work with British banks and have told them so.”
European banks have generally cited the US elections as a political risk, while avoiding detailed comment on how a victory for the Republican nominee Trump might affect their business.
However, another Iranian official, who also declined to be identified, said the election and Trump’s promise to tear up the Iran nuclear deal if he wins was complicating Tehran’s efforts.
“Major European banks are worried about its outcome. An official from a German bank told us recently that they could not risk getting involved in Iran especially when Trump was a candidate,” the official said.
A US Treasury spokeswoman said Treasury officials were not going to stand in the way of permissible business activities with Iran. They had travelled worldwide to provide guidance to governments, companies, and financial institutions, she noted.
On July 12, Britain’s Foreign Office said a meeting between Iran’s central bank, the US Treasury, British officials and international banks in London had been postponed.
The resignation of prime minister David Cameron following the Brexit vote and a cabinet reshuffle by his successor Theresa May, who took office on July 13, has complicated matters.
“The new government has bigger priorities related to Brexit and the impetus to push the banking issue is likely to take more of a back seat now. Iran relations will also be affected by officials moving to other offices due to Brexit,” a western source said.
A Foreign Office spokeswoman said it was in both countries’ interests that legitimate business was supported. “Some challenges remain, but we are committed to working through them with international partners, Iran, and the banking community,” she said.
A British trade visit to Iran scheduled for May was postponed. Banking sources said this was partly due to bankers’ reluctance to join it.  A British official said the new government was keen for the visit to go ahead this year.
But the UK sanctions manager was skeptical: “I would be hugely surprised if any of the UK banks would go. I do not think any of the banks want to stick their head above the parapet.”