Raphael Stevens

IN 1977 A string of 12 characters ushered in a new age of global finance. Until then a bank wiring money abroad needed to relay up to ten instructions on public phone lines, which were then typed into forms, taking time and causing errors. Then payments began to be facilitated by a code and secure network created by the Society for Worldwide Interbank Financial Telecommunications (SWIFT), a club of 500-odd banks. A surge in global trade and investment followed. Last year nearly $140trn was transmitted across borders (161% of global GDP; see chart 1). Analysts reckon about 90% of that went through SWIFT. Its 11,000 members in 200 countries ping each other 42m times a day.Now SWIFT confronts another financial revolution. Customers want faster payments. Fintechs, banks and governments are looking to rival the network. Facebook is muscling in: on October 19th it began a trial of its digital-currency wallet. SWIFT, for its part, is fighting back. On October 14th it said 100 banks had signed up to SWIFT Go, its high-speed transfer service. It is seeking to link instant-payment networks across countries, in order to make transfers more seamless. Whoever wins the race to redefine cross-border payments will determine the future shape of the financial system—and who holds sway over it.The system of correspondent banking through which cross-border payments flow works like air transport: when two faraway banks do not have a direct relationship, money travelling from one to the other stops over at banks in between. SWIFT provides the radio signal directing the money. The Belgium-based network, which is owned by its members, provides the standards and services that allow firms to exchange information on transactions.In recent years, however, SWIFT has faced three criticisms. One is that it is technologically backward, making transfers slow and costly. Here the problem lies with correspondent banking, not SWIFT. Time differences and banks’ limited opening hours hold back processing. Checks have intensified along with the fight against dirty money, adding to delays and costs.Security is another concern. In 2016 North Korean hackers stole the SWIFT credentials for the Central Bank of Bangladesh’s account at the New York Federal Reserve and sent transfer requests to various banks. Most were blocked, but $81m slipped through. A third gripe is that SWIFT is no longer a neutral part of the financial plumbing. In 2011 America leant on it to exclude Iranian banks by making various threats, including that of sanctions on the network itself, says a former official close to the talks. SWIFT eventually complied. It also came under pressure to cut off Russian banks after the invasion of Crimea in 2014. Although they remained connected, America’s foes now know that relying on SWIFT makes them vulnerable.SWIFT has gone some way towards placating its critics. It has bolstered its security defences, and its international governance, it says, reinforces its neutral status. In 2017 it launched SWIFT Global Payments Innovation (GPI), a network that allows banks to process wholesale (ie, high-value) payments faster and makes transfers trackable. It now accounts for three-quarters of SWIFT payments. Today 92% of these reach their destinations in less than 24 hours. In July it launched SWIFT Go, a similar service for retail (low-value) payments.All this may help neutralise the threat from fintech firms. Many do not bypass SWIFT entirely: they aggregate payments at one end and net them off against transactions going the opposite way, so as to make just one, smaller cross-border transfer, and then use fast, local networks to channel the money. That means fewer payments and less access to transaction data for SWIFT. Ripple, a more radical disrupter, evades the network altogether, and uses a cryptocurrency to facilitate transactions.Yet fintechs so far play a minuscule role in cross-border payments. Data crunched by FXC Intelligence, a consultancy, for The Economist suggest the share of cross-border payments by value going through SWIFT has remained broadly unchanged since 2019. The number of messages sent across the network has risen steadily (see chart 2). Ripple, by contrast, has struggled to gain traction. Last year it settled just $2.4bn in transactions.Instead the bigger threats to SWIFT come from bigger beasts. Credit-card giants are building the infrastructure to process retail, “push” payments (those initiated by the sender, rather than the receiver, as is usually the case with credit cards) that largely runs parallel to SWIFT. Both Visa and Mastercard have bought startups that facilitate account-to-account transfers. Facebook’s wallet could make cross-border payments cheaper.Big banks are developing payment networks to serve wholesale clients. Earlier this year JPMorgan Chase, which accounts for a quarter of dollar payments going through SWIFT, teamed up with DBS, a Singaporean bank, and Temasek, Singapore’s sovereign-wealth fund, to launch Partior. This is a network that aims to get around the flaws of correspondent banking by recording transfers on “permissioned” blockchain ledgers, where only vetted members can validate transactions. The network will allow for payments that are instant, transparent and “programmable” (ie, the funds move only if certain conditions are met).Another threat is state-sponsored. Many central banks are developing their own digital currencies (known as CBDCs). In time these could allow banks to conduct overseas transactions across a shared ledger, undercutting SWIFT. America’s foes are building new plumbing. In 2015 China launched its Cross Border Interbank System (CIPS), which offers clearing and settlement for renminbi payments. The system, which processed $7trn in 2020, uses SWIFT as its main messaging channel, but has the tools to become a rival.SWIFT has responded by schmoozing with central banks and running experiments of its own, in the hope of securing a place at the heart of any cross-border CBDC infrastructure. In February it also formed a tie-up with CIPS and China’s central bank. And sheer force of habit could mean international finance continues to be bound by its current nervous system, even if the institutional muscle and monetary blood that compose it evolve, says Markos Zachariadis, the co-author of a book on SWIFT.But it is also possible to imagine a scenario in which banks gravitate towards a new platform. Most are not especially loyal to SWIFT: America’s biggest banks feel they have no voice, says an executive at one of them. Only one—Citigroup—sits on its board. Meanwhile Partior, which aims in time to host both central-bank and commercial-bank digital money, is in talks to recruit core settlement banks for euro, yen and renminbi payments, says one of its sponsors. China is touting CIPS’s messaging skills, says Eswar Prasad, a former official at the IMF. SWIFT may not be in immediate danger, but the next decade is full of uncertainty. An epic battle over how money travels is just beginning. More

U.S. stock futures were steady in overnight trading Monday as investors geared up for a big day of earnings on Tuesday.
Dow futures fell just 30 points. S&P 500 futures fell less than 0.1% and Nasdaq 100 futures were down about 0.05%.

On Monday, the S&P 500 and Nasdaq Composite notched their fourth day of gains. The S&P 500 rose 0.34%. The Nasdaq was the relative outperformer, gaining 0.84% as Facebook, Amazon, Apple, Netflix and Google-parent Alphabet all closed higher.
The Dow Jones Industrial Average lost 36 points, dragged down by a 3% drop in Disney’s stock.
Earnings season continues on Tuesday with major reports from Johnson & Johnson, Procter & Gamble, Netflix and United Airlines.
Of the 41 S&P 500 companies that have reported third-quarter results, 80% beat earnings expectations, according to FactSet. While reports have been strong, investors are looking for commentary from corporate America about supply chain issues and inflation.
“The financials got earnings season off to another strong start, but let’s be honest, COVID and supply chain issues aren’t going to impact this group. Now it gets very interesting to see what other industries will have to say about the health of the economic recovery,” said Ryan Detrick, chief market strategist at LPL Financial.

Netflix could set the tone for technology earnings this season. Three months ago, the streaming giant forecasted paid net subscriber adds of 3.5 million, while analysts expect about 3.84 million, according to StreetAccount. Analysts are also forecasting fourth-quarter subscriber guidance of 8.5 million, which would be the highest outlook since the first quarter of 2019.
Netflix’s stock has traded lower on six of its last seven earnings releases.
Earnings from United Airlines should give investors a gauge on the travel recovery from the pandemic and Procter & Gamble earnings could show how strong the consumer is in the goods sector.
Stocks are coming off of a winning week but have been volatile since September. Morgan Stanley’s chief U.S. equity strategist Mike Wilson — who has been calling for a correction in the broader market — told clients on Monday that although fundamentals are deteriorating, the market seems to be resilient to a bigger pullback.
“Whether we end up getting this finishing move at the index level this year or not will depend largely on retail participation, the message that 3Q earnings brings from a guidance standpoint, and the path of PMIs into year end,” said Wilson.
Economic data from China weighed on investor sentiment after it reported low GDP and industrial production for September that fell short of expectations. Industrial production in the U.S. also fell for September as supply constraints continued to hinder manufacturing, the Federal Reserve reported Monday.
— with reporting from CNBC’s Robert Hum.

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Wall Street’s main regulator released its highly anticipated report on the GameStop mania on Monday.
The SEC said online brokerages, enticed to increase revenue through payment for order flow, are turning stock-trading into a game in order to encourage activity from retail investors.
“Payment for order flow and the incentives it creates may cause broker-dealers to find novel ways to increase customer trading, including through the use of digital engagement practices,” the agency said.

Rafael Henrique | LightRocket | Getty Images

The Securities and Exchange Commission said online brokerages, enticed to increase revenue through the controversial industry practice of payment for order flow, are turning stock-trading into a game in order to encourage activity from retail investors.
Wall Street’s main regulator on Monday released its highly anticipated report on the GameStop mania earlier this year. The 44-page report detailed how the trading frenzy went down and raised red flags on a number of issues, including the back-end payments that brokerages receive, gamification of trading, as well as disclosures on short sales. But it stopped short of laying blame on a single cause or entity.

“Payment for order flow and the incentives it creates may cause broker-dealers to find novel ways to increase customer trading, including through the use of digital engagement practices,” SEC officials said in the report.
Payment for order flow is one of the largest revenue sources at Robinhood, the millennial-favored stock trading app that raked in a record number of new customers over the past year and went public in August. The practice, though, is under increased scrutiny as many say it has a conflict of interest with brokerages incentivized to send orders to the market-maker that pays them the biggest rebate. SEC chair Gary Gensler had warned that banning this practice is not off the table.
To motivate trading, some brokers including Robinhood made their platforms visually enticing and offer game-like features such as points, rewards, leaderboards and bonuses to increase engagement. Amid criticism, Robinhood got rid of its confetti animation in March.
“Consideration should be given to whether game-like features and celebratory animations that are likely intended to create positive feedback from trading lead investors to trade more than they would otherwise,” the report said.
Still, the SEC review may fall short to some in terms of making concrete recommendations and laying the groundwork for potential changes to U.S. trading practices. The agency also didn’t reach a conclusion as to whether any of the trading — and the restrictions on trading — was manipulative and whether brokerages played by the rules during the mania.

The agency acknowledge that the extreme volatility in meme stocks tested the capacity and resiliency of the markets.

Risk management and transparency

At the height of the mania in January, a band of amateur traders in Reddit’s WallStreetBets forum bid up heavily shorted stocks “to the moon,” creating massive short squeezes in names like GameStop and AMC. The unprecedented volatility backfired on Robinhood, which had to tap credit lines and restrict trading in a list of the short-squeeze names as the central Wall Street clearinghouse at one point mandated a ten-fold increase in the firm’s deposit requirements.
“This episode highlights the integral role clearing plays in risk management for equity trading, but raises questions about the possible effects of acute margin calls on more thinly-capitalized broker-dealers and other means of reducing their risks,” SEC’s report said. “One method to mitigate the systemic risk posed by such entities to the clearinghouse and other participants is to shorten the settlement cycle.”
The SEC also brought up whether more transparency of short selling should be required. Right now, securities lending and borrowing is a relatively opaque system as investors aren’t required to report their bearish bets and the SEC only collects data on how much of a company’s stock is sold short.
“The interplay between shorting and price dynamics is more complex than these narratives would suggest,” SEC officials said in the report. “Improved reporting of short sales would allow regulators to better track these dynamics.”
Gensler will be on CNBC’s Squawk on the Street at 9:35 a.m. ET Tuesday to discuss the findings of the report.

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British online lending start-up Zopa has raised $300 million in a funding round led by SoftBank.
Zopa is now valued at $1 billion, making it the latest European fintech to achieve “unicorn” status.
The company aims to go public by late 2022, and CEO Jaidev Janardana says it’s likely to list in London.

Jaidev Janardana, CEO of peer-to-peer lender Zopa.

LONDON — British online lending start-up Zopa has raised $300 million in a funding round led by SoftBank, adding to the soaring investment flowing into Europe’s booming financial technology sector.
The company is now valued at $1 billion following the fresh cash injection, according to a source familiar with the deal, making it the latest European fintech to achieve “unicorn” status. The source preferred to remain anonymous as the information has not been disclosed publicly.

Founded in 2005, Zopa began life as a peer-to-peer lender, connecting investors with borrowers through a single online platform. The company has since shifted its focus toward becoming a fully fledged bank, after securing a banking license in the U.K., but still operates its peer-to-peer marketplace.
Zopa launched a credit card and savings account last year, hoping to capture a larger share of the British retail banking market and take on giants like Barclays and HSBC. It’s so far netted £700 million ($961 million) in deposits and attracted 150,000 credit card customers.
“We are growing our balance sheet rapidly,” Zopa CEO Jaidev Janardana told CNBC. “What this capital allows us to do is to accelerate that trajectory of growth.”
Zopa is one of several start-ups seeking to disrupt the banking sector. So-called neobanks like Monzo, Revolut and Starling have emerged in the last decade, luring millions of customers with fee-free checking accounts and a slick online interface. But so far they have struggled to make a profit.
Starling tipped into the black for the first time last year, and says it is on track to post its first annual profit. Revolut racked up £167.8 million ($230.6 million) in losses in 2020, while Monzo lost £130 million. Revolut did however manage to break even toward the end of last year.

Zopa is “more sustainable” than rivals, Janardana said, adding that the firm is on track to reach profitability within 10 weeks. This — along with Zopa’s use of artificial intelligence — was a key factor behind SoftBank’s investment, he added.
“[Softbank] share this belief that by using technology and AI a lot more, we are able to scale faster and compete with the incumbents because we bring both cost advantage and the advantage of making precise decisions,” Zopa’s CEO said.
Zopa said it generated net operating income of £21.9 million in the first half of 2021, more than double what it made at the end of 2020. The firm expecrts to more than double revenue this year.
Janardana believes Zopa will eventually become one of the U.K.’s “Big Four” lenders.
“Our view of the competition hasn’t changed much — it remains the big legacy banks,” he said.
Fintechs have raised huge sums of money this year as investors looked to capitalize on an acceleration of digital finance during the coronavirus pandemic. Klarna raised $1.6 billion across two funding rounds, while Revolut bagged $800 million. SoftBank is an investor in both firms.

IPO plans

Zopa said the latest fundraising would be its last before a planned initial public offering. Janardana is aiming to take the business public by the fourth quarter of 2022. But a stock market debut will only happen once Zopa has shown a “consistent track record of profitability,” he said. 
“Given the capital we have raised, it gives us flexibility about going then or a bit later, depending on market conditions,” Janardana said, adding that the London market was a “natural place for us” to list.
The U.K. is seeking to attract more high-growth tech companies to its stock market after Brexit. Reforms proposed earlier this year would see London relax its rules around blank-check companies and founder-friendly share structures.
Along with SoftBank, Zopa’s latest investment round was backed by Abu Dhabi-based asset management firm Chimera Capital and existing investors including IAG Silverstripe, Davidson Kempner and Northzone.
Zopa is one of the few fintechs in the social lending space that still runs a peer-to-peer marketplace. Domestic rival RateSetter closed its P2P business following a sale to British lender Metro Bank, while U.S. firm LendingClub did the same after acquiring a regulated bank.
Asked whether Zopa could eventually retire its P2P division, Janardana said the firm continues to review the market.
“We’ll see how the market evolves,” he said. “There are lots of things that we learned there around finding the right customers to lend to and ensuring that our investors can get a good return. And some of those things are really helpful in our future strategy.”

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The New York Stock Exchange welcomes The Walt Disney Company (NYSE: DIS), today, Tuesday, May 4, 2021, in honor of Star Wars Day.
Source: NYSE

Check out the companies making headlines in midday trading.
Occidental Petroleum — Shares of the energy company gained 4% after Truist upgraded the stock to a buy rating based on an expected jump in shareholder returns. The firm also raised its target on the stock from $35 to $50, with the new forecast implying a nearly 60% upside from Friday’s closing price. APA and Diamondback Energy, meanwhile, advanced 2.1% and 0.9%, respectively, on the back of West Texas Intermediate crude futures, the U.S. oil benchmark, rising to its highest level in seven years on Monday.

Zillow — The real estate stock dropped 9.5% after Zillow announced that it would not sign any new contracts to buy homes through the end of the year “due to a backlog in renovations and operational capacity constraints.” In a press release, the company’s CEO cited labor and supply issues as a reason for the backlog.
Walt Disney — Shares of the media giant ticked 3% lower in midday trading after Barclays downgraded Disney to equal weight from overweight. The Wall Street firm cited a slowdown in subscriber growth for Disney+, saying that the company’s long-term subscriber goals seemed optimistic.
Albertsons — Albertsons shares rose 3.3% after the supermarket chain’s quarterly earnings report beat Wall Street’s expectations. The company posted profit of 64 cents per share on revenue of $16.51 billion, versus 45 cents per share on revenue of $15.86 billion expected, according to StreetAccount. Albertsons also increased its quarterly dividend by 20%.
Biogen — Shares of the drugmaker fell 4.1% in midday trading after announcing its late-stage trial of an experiment ALS treatment did not reach its primary goal.
State Street — State Street shares added 2.2% after the financial services firm’s third-quarter earnings beat expectations. The company posted adjusted earnings of $2 per share versus $1.92 per share expected, according to StreetAccount. Revenue also topped projections. State Street said it would resume its share buyback program in the second quarter of 2022.

Virgin Galactic — Shares of Virgin Galactic fell 1.5%, continuing a slide from Friday, after UBS downgraded the stock to sell from neutral. The downgraded followed Virgin’s announcement last week that it was delaying its next flight launch until 2022.
Philips — Shares of Philips fell 3.1% after the Dutch medical technology company reported lower-than-expected quarterly revenue. Philips also lowered its sales and profit outlook for the full year, citing persistent supply chain challenges.
Stellantis — Shares of Stellantis retreated 2% after the automaker announced it would form a joint venture with battery marker LG Energy Solution to produce battery cells and modules for North America. The batteries would be supplied to Stellantis plants in the U.S., Canada and Mexico.
Revance Therapeutics — Shares of Revance Therapeutics plunged 39.2% after the U.S. Food and Drug Administration late last week declined to approve the biotechnology company’s frown line treatment. The treatment was seen as potential competitor to the Botox injection.
NetApp — Shares of NetApp fell 4.3% after Goldman downgraded the cloud computing stock to a sell from neutral. Goldman also cut its price target on the stock to $81 per share from $85.
CDW — CDW shares rose 4.8% after the technology company announced it would acquire Sirius Computer Solutions for $2.5 billion in cash.
Medtronic — Shares of Medtronic fell 5.5% after the company provided an update on a clinical study of its Symplicity Renal Denervation System to lower blood pressure. Medtronic said the study’s independent safety monitoring board did not recommend pausing the trial early.

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