PayPal, a leading global payment company, has recently announced that it is piloting some banking service models similar to those that traditional banks typically provide to customers. In addition to its primary money transfer service, the new feature services will be made available through the PayPal digital wallet. Under this scheme, PayPal is offering the option to make a mobile check deposit or have direct-deposit paychecks, an ATM-compatible debit card for cash withdrawals, and pass-through Federal Deposit Insurance Corp. (FDIC) insurance for the account balances.

According to Bill Ready, PayPal’s Chief Operating Officer, PayPal just wants to offer banking options to customers who may not be able to access fundamental financial services, but it has no interest in becoming a traditional bank at this moment. Ready emphasized that “if you already have a bank account connected to your PayPal account, this isn’t an account for you.” This is because PayPal claims that it aims to provide the service to promote financial access to a person who may not have an existing traditional bank account, also known as people who are “unbanked”. Ready pointed out that there are more than 30 million underserved people in the U.S. who basically spend 9.5% of their income on service charges or fees for alternative financial services. They are forced to turn to prepaid cards, check cashiers, or payday lenders to afford their basic needs of financial services.

In terms of serving those who are “unbanked,” on one hand, PayPal will not charge a monthly fee nor require the customers to maintain a minimum balance on their account. However, on the other hand, it will impose fees on cash withdrawals from out-of-network ATMs as well as take 1% of the deposited checks done through the smartphone camera system. This may not be so attractive to those with existing bank accounts but it would be a helpful option for some customers who are being ignored by big banks.

Interestingly, PayPal is hoping to pilot these services even though it has never obtained a U.S. banking license. The industrial loan company charter states that nonfinancial companies are allowed to engage in the banking business without being subject to banking regulations, including the Federal Reserve’s oversight authority in some states. To this end, PayPal has developed financial technological tools and has affiliated itself with small financial institutions who work behind the scenes for particular services from different locations. Namely, they use the debit card connecting to customers’ PayPal accounts issued by a Delaware bank, retain instant check depositing and clearing from another bank in Georgia, and engage with a bank in Utah to make loans to consumers. Such partnership agreements not only help PayPal bypass several financial regulations and FDIC deposit insurance but also allows PayPal to conform with the rules of card issuer companies, like Visa and MasterCard, which require their debit/credit cards to be issued by banks.

PayPal is not the only non-traditional bank firm trying to explore the banking field. There are other players, including startups such as Square Inc., Stripe Inc., Social Finance Inc. and TransferWise, or even one of the world’s biggest online marketplaces like Amazon, that are eager to seek the lucrative business opportunity in bank-like services too.

In the near future, we could see a lot of next-generation momentum in disruptive technologies and changes in the relationship between banks and customers. Fintech companies will likely go the extra mile to offer user-friendly services in the growing digital economy. In the end however, it would be a real nightmare for traditional banks if they cannot respond to these rapid changes.

PayPal Attempts to Enter the Traditional Banking World

On April 9, the United States Food and Drug Administration placed restrictions on Bayer’s implantable, contraception device Essure. The FDA’s order specifies that Bayer must restrict the sale and distribution of its contraceptive implant to “only health care providers and facilities that provide information to the patient about the risks and benefits of this device.” These new restrictions stem from a history of rising complaints that the agency has received about the device and the concern that women were not being apprised of its risks adequately.

Essure is a permanent, implantable birth control device made up of two small coils that operates via placement into the fallopian tubes to create scar tissue by triggering an inflammatory response. This resultant scar tissue created by the inflammatory response creates a physical barrier that isolates the eggs and prevents contact with sperm. Essure is a non-hormonal and non-surgical form of birth control. It is estimated that 750,000 Essure devices have been sold throughout the world with a majority of devices being sold in the United States.

In 2016, due to thousands of complaints regarding the use of the device, the FDA ordered Bayer to place the most serious health advisory warning on the label of Essure, warning that the device could cause certain injuries or health problems. The agency also ordered that Bayer conduct a new safety study. The concerns and complaints raised about the use of the device include depression, rash, hair loss, hives, fatigue, weight loss, perforation of the uterus or fallopian tubes, debilitating pain, and more. Many of the patients who complained suffered from more than one condition possibly caused by the device, and other serious problems reported include “deaths, pregnancy loss, and ectopic pregnancies.” In 2017, the FDA received almost 12,000 medical reports related to Essure. In addition to complaints filed with the FDA, Bayer itself has received about 10,600 U.S. lawsuits alleging Bayer gave insufficient warning to providers and regulators regarding the risks of the device.

Under the FDA’s order, before implantation of the device, an acceptance of risk form needs to contain the signatures of both the patient and the health care provider. The form can only be signed after the health care provider has discussed all the potential risks with the patient by reviewing a brochure together.

The burden lies with Bayer to ensure that medical providers follow the restrictions imposed by the FDA. If Bayer fails to implement the restrictions properly, and fails to ensure that physicians comply with the restrictions, the FDA has said that it will “take appropriate action against Bayer,” which can include criminal and civil penalties.

Essure entered the market in 2002. After the FDA required the most serious warning label to be placed on Essure’s box and ordered Bayer to conduct a new safety study in 2016, the sales of the contraceptive device have declined approximately 70% in the United States.

In light of these developments, Bayer maintains that the device’s “benefit or risk profile has not changed.”

Bayer’s sale of its Contraception Device Essure Faces New FDA Restrictions

More than 20 consumer advocacy groups, including Consumers Union, Consumer Watchdog, and Public Citizen, filed a complaint with the Federal Trade Commission against Google, the parent company of YouTube. The complaint claims Google has made “substantial profits from the [illegal] collection and use of personal data from children on YouTube.” The complaint was filed just a few days before Mark Zuckerberg testified before Congress to address the future of privacy in the wake of Facebook’s Cambridge Analytica scandal.

While YouTube’s Terms of Service state that its video-sharing service is not to be used by children under 13 years of age, a recent study found that 80% of children in the United States ages 6-12 use YouTube daily. And YouTube is clearly aware its services are used by children. Content providers directly communicate to YouTube that their content is directed at children. In addition, executives at YouTube have remarked “kidfluencer channels [have been] extremely successful because children like to watch on their own.” YouTube has also marketed its services directly to children, launching the YouTube Kids app in 2015; the app even allows children to create their own profiles.

Because YouTube’s services do indeed reach children under 13 years of age, it must comply with the Children’s Online Privacy Protection Act (COPPA). COPPA has several requirements, one of which is that website operators obtain verifiable parental consent before collecting and using the personal information of children. Assuming YouTube does not disclose children’s personal data to the public, it may give proper notice to parents by simply sending them an email and getting a click response. However, YouTube has made no such reasonable effort to give notice to parents of its collection practices.

The complaint asks the Federal Trade Commission to enjoin Google, and to assess civil penalties totaling tens of billions of dollars. The complaint maintains that such a massive fine is necessary in order to adequately deter Google, the second wealthiest company in the world. While it is too early to speculate how the Federal Trade Commission will rule on the matter, there is an immense public interest in halting Google’s conduct: just over the last year, Ofcom reported a double digit increase in the number of children that watch YouTube, the world’s most popular platform among children.

YouTube – Yet Another Tech Giant Under Fire for Privacy Issues

The U.S. venture capital world has been forced to share its monopoly of the global market with a new upcoming player: China. The country has emerged as a power in the VC world. Asian investors directed nearly as much money into startups as American investors did, totaling 40% of the record $154 billion in global venture financing versus 44%, reported in the Wall Street Journal’s article that analyzes data from private market data tracker Down Jones VentureSource. China, in particular, has seen a surge in investments marked by over the top valuations, intense competition for the best targets, and uncertainty on returns.

During the beginning of the year, 3,418 new venture-capital and private-equity funds in China raised 1.6 trillion yuan ($241.76 billion), over double the amount of 2015 and more than 10 times that of 2006, according to consultancy Zero2IPO Group. It estimates about 12,000 investment firms manage 8.5 trillion yuan in capital, an increase from 8,000 firms managing 5 trillion yuan in 2015. This has helped drive funding totals into the stratosphere and has transformed the VC landscape, from an USA-monopoly to a duopoly environment. However, even with these changes, U.S. investors remain the largest sources of global venture capital, conducting more deals than any other group. In 2017, American investors did nearly half of the venture rounds. The U.S. is also one of the most important drivers of innovation, with many of China’s biggest investments simply copying the American-created technology.

On the other side of the startup’s excitement over cash available to finance new technology, there is a very real prospect of the development of a trade war between the U.S. and China. This could potentially cripple venture finance along with overall investments if the countries go through with the threats to levy billions of dollars in tariffs on each other’s products. However, since the tariffs are mostly focused on product exports like cars and agricultural goods, they are unlikely to have a strong impact on most startups.

China is creating “unicorns” at almost the same pace as the U.S., benefiting on funding from internet giants like Alibaba and Tencent Holdings. Money has rushed into the tech sector due to dwindling investment returns elsewhere and policy decisions by the Chinese government. Such decisions opened the credit taps last year to spur slowing growth, stirring money towards “innovation” in hopes of creating new economic drivers. This situation has lead experts to say that Chinese tech companies are at a critical size. The Chinese market alone is not enough to support their business and valuation, and the money will end up going first to the adjacent market where Chinese technology business models and capital have more impact.

Nevertheless, many in the U.S worry that strategic interests drive China’s new endeavors into technologies. Experts say these interests include the Chinese state and local governments having investments in private venture funds and Beijing’s interest in spurring startup VC activity.

Silicon Valley Long Dominated Startup Funding – Now has a new challenger

Withdrawing from the Trans-Pacific Partnership (TPP) and increasing bilateral tariffs have brought the U.S. and China on the edge of a trade war. Recent developments, however, have brought hopes of averting a trade war.

In a speech last week, Chinese President Xi Jinping promised to open the country’s economy and lower import tariffs. Xi said China will widen market access for foreign investors, addressing a chief complaint from the Trump administration. Specifically, Xi said that China would raise the foreign ownership limit in the automobile, shipbuilding, and aircraft sectors.

Although there have been no talks between the U.S. and China since U.S. tariffs were announced, Trump struck a conciliatory tone in response to Xi’s announcement. He tweeted that he was “thankful” for the Chinese leader’s kind words on tariffs and access for U.S. automakers, predicting that the two countries will “make great progress together.”

Others, however, are not so optimistic. Jonas Short, head of the Beijing office at Everbright Sun Hung Kai, said that the promised reforms are in sectors where China already has a “distinct advantage” or “strangehold” over the sector. For example, Xi pledges to open up the auto sector, where it maintains a 25 percent auto import tariff compared to the U.S’s. 2.5 percent. Analysists have cautioned that Chinese concessions on autos, while welcome, are a relatively easy win for China to offer to the U.S.

Easing relations with the U.S. is not China’s only strategy in approaching these trade disputes. China’s foreign minister Wang Yi met senior officials on Monday, April 16, in Tokyo for China’s first high-level economic talk in eight years with Japan. While there was no direct reference to Trump, the two nations’ finance ministers agreed on the importance of multilateral free trade and spoke against trade protectionism.

Victor Teo, an assistance professor at the University of Hong Kong and academic associate at the Harvard programme on US-Japan relations, said that the relationship between China and Japan has reached a turning point in order to concentrate on the challenges posed by Trump’s trade policies.

China Averts U.S. Trade War Tensions and Also Eases Relations with Japan (PDF)

The broadcast television network, CBS, has offered to buy the TV and film company, Viacom. While CBS is best known for controlling the CBS broadcast network, Showtime, and streaming network, CBS All Access, Viacom is popular for its cable channels like MTV and Nickelodeon, and its movie studio, Paramount. The Redstone family, led by media magnate Sumner Redstone, has 80% of the voting power for both companies.

The conditions of the all-stock bid, however, are not equal for both parties. Sources have said that CBS has valued Viacom at less than its market value and CBS would assume control. Sources have also said that Leslie Moonves, current CEO and Chairman of CBS, would be leading the new combined entity for two years at least. In deal negotiations, it is unusual to start valuing the target company at a discount.

The negotiation activity around the companies has been reflected in the share prices of both. As a result, on April 2 (the day after the conditions of the bid appeared in the news), CBS stock closed at $52.86, up about 4.2%. Viacom’s stock, valued at $29.42 per share, was down more than 3%.

In February, CBS and Viacom set up special committees to explore the merger. Nevertheless, this is not the first time that the two companies have explored a merger deal. In 2016, the negotiations failed due to price and governance issues. Redstone is trying again to combine both companies in an effort to increase the volume of the two entities in a critical moment of consolidation and rapid change in media and entertainment.

The merger, if successful, would bring back together the two media companies more than ten years after their spin-off. When the split took place in 2005, Viacom was expected to be the fast-growing company, but currently CBS is the stronger one, in part due to its strong programming lineup. CBS has also gained success in the streaming market, a sector dominated by Netflix.

Since 2016, Robert Bakish, president and CEO of Viacom, Inc., has taken several steps to improve the company’s performance. Some of the measures include improving relations with cable and satellite companies and cutting costs. On one hand, according to the analyst Brian Wieser, Viacom’s weakness is not a surprise because “they haven’t really established many zeitgeist-changing programs or content,” he said. On the other hand, more optimistic opinions have suggested that CBS may ultimately pay a premium for Viacom stock.

CBS Presents Formal Offer to Buy Viacom Below Current Valuation (PDF)

If there was any lingering hope China would not hit back against the Trump administration’s duties on imports of aluminum and steel, it has officially been crushed. 128 U.S. products, from fruits to wine, will be facing a 25% tariff increase. Further, China’s Ministry of Commerce announced, despite its obligations to the World Trade Organization to reduce tariffs on goods such as fruit and ethanol, it would increase tariffs on those products by an extra 15%.

In addition to imposing tariffs on steel and aluminum, Trump had previously threatened to impose protective duties on $60 billion of other Chinese products. On April 3, his administration announced a list of 1,300 proposed tariff increases designed to penalize China for disadvantaging U.S. companies in the Chinese market. Trump is seeking to retaliate against China’s theft of  U.S. intellectual property, and the newly proposed tariffs, the administration says, are equal to “the harm caused by China’s unreasonably technology transfer policies.”

Financial markets have been rattled over fear of a U.S.–China trade war and the damage it could cause to world growth. China’s Ministry of Commerce indicated the move was intended to push Trump to refrain from the broiling trade war, arguing U.S. tariffs on Chinese products violate World Trade Organization rules.

Taking tough action on China’s unfair trade practices was a center piece of Trump’s campaign. Yet as he attempts to deliver on this promise, stock markets have plummeted and major U.S. companies, including General Electric and Goldman Sachs, are pushing back.

There is strong support in the technology and finance industries for the idea that China blocks off valuable markets from American competition.  Some major players, such as Apple, Google, and Microsoft, have been supportive of targeting China’s trade practices. But whether firing back at China with tariffs will work as a solution is less clear.

The Information Technology Industry Council, and advocate group for those companies, has said it is not happy with using tariffs as the primary remedy. Other technology and investment companies now say Trump’s measures could severely damage supply chains they have built over decades.

The U.S. faces a tricky balancing act between cracking down on China’s allegedly unfair economic practices and prompting it to scale up those practices.  Trump leaves no indication he intends on scaling back punitive measures. At least in the short term, uncertainty and fear of a trade war will continue to influence global markets.

The U.S. and China are Not Far From a Trade War (PDF)

The future of media has its day in court. On Thursday, March 22, 2018, the trial between AT&T and the U.S. DOJ over AT&T’s proposed $85 billion acquisition of Time Warner began. How Judge Richard Leon rules could shape the future of video, as the tug of war between cable companies and streaming services has seen millions of consumers cut the cord in favor of the latter. The key question at trial is what impact the merger will have on American consumers. AT&T believes that the merger would help the company remain competitive in the marketplace against tech giants such as Netflix and Amazon, while offering premium content at lower rates. The DOJ believes the exact opposite; the merger would give AT&T too much power, resulting in higher rates for consumers.

Justice Department lawyer Craig Conrath’s opening statement claimed the merger would hike rates for consumers by $0.45 a month on average, and that “Time Warner would be a weapon for AT&T because AT&T’s competitors need Time Warner.” In addition, the DOJ believes that the merger would stunt innovation in online video. AT&T’s leading lawyer, Daniel Petrocelli, claimed the merger would lead to a decrease in rates by $0.50 a month. He explained that the merger would give AT&T access to better customer data, leading to more effective “addressable advertisements.” These advertisements are tailored to specific households based on viewer data, and are nearly triple the cost. The increase in advertisement costs for large companies would lead to a decrease in rates for the consumer. But as Matt Wood, policy director at Free Press, a consumer advocacy group, suggests, “mergers create cost savings, but they don’t have to pass them along to consumers unless there’s competitive pressure.”

If the government loses, we could see an increase in vertical integration between distributors and content providers. Steven Salop, a professor of economics and law at Georgetown University Law School believes that a merger “could direct the future path of the industry.” On the other hand, if the government wins, antitrust regulators would have a huge advantage in ending any similar, future mergers. Nonetheless, the outcome’s effects are not limited to media mergers either; it could have rippling effects in other sectors, such as CVS’s $69 billion bid for insurance giant Aetna.

Streaming Soon- A Fight Over AT&T, Time Warner, and the Future of TV (PDF)