FinTech and the future of banking in 2017 - technology companies with balance sheets and regulators?
The start of a new year is always a time for predictions. And at Davos last week where the global great and the good of commerce and government meet there was a prediction that automation will change the face of banking - slashing jobs and allowing banks to significantly cut costs.
You might say this is nothing new - banks have been automating themselves for years - yet banks now face a perfect storm of low margins in their core businesses, regulatory change (including the revised European Payment Services Directive (PSD2)) and disruptive new entrants and technologies that are already transforming the financial services industry. The State of the Financial Services Industry 2017 Report presented at Davos by the consultants Oliver Wyman makes challenging reading - the authors say that investing in technology simply to boost efficiency isn’t enough - banks will need to invest much more deeply and strategically to build and sustain new competitive advantages and significantly increase shareholder value.
As the Financial Times highlighted in its commentary on the Report (17/1/11) without deep innovation banks risk being left behind as “component suppliers” to the evolving financial system eco-structure — providing heavily regulated financial services and products — but with their valuable customer relationships controlled by technology orientated businesses - “platform providers” and “demand aggregators” - just think what will happen once Google, Facebook and the like decide to fully enter into the financial services space. The PSD2 will only exacerbate this trend - PSD2 will open up access to customer and product data across providers of financial services in the EU making it easier for consumers to have third party providers (not just their bank) manage their financial information and payments. In effect where the customer requires this, data associated with deposits, payments, loans, and investments will be available to any firm that wishes to provide related services – independently of which firm or bank holds the original customer account. The PSD2 must be implemented in Member States by 13 January 2018.
And the challenge to banks isn’t just the PSD2 and current technology - artificial intelligence (robot advisers) and the much hyped blockchain technology will be equally transformative. Blockchain which provides a secure and transparent shared ledger is deceptively simple yet transformative across a range of industries. It is also ideal for quickly settling financial transactions. Applications are already being developed for blockchain for cross currency settlement and cross border payments and Euroclear have recently trialled the use of blockchain in the London bullion market. At the start of 2017 the Depository Trust & Clearing Corporation (DTCC), the premier post-trade market infrastructure for the global financial services industry, announced that it would be using blockchain to drive further improvements in derivatives post-trade lifecycle events – the goal being to establish a permissioned distributed ledger using blockchain.
There have long been concerns that the growth of FinTech will be hindered by a strict and outdated regulatory regime. Yet in the UK the FCA is championing the use of Fintech through its Project Innovate - providing regulatory advice and support and allowing the trial of new technologies in a regulatory “sandbox” - and other countries around the world are following the FCA’s lead - including Singapore, Hong Kong and Abu Dhabi. Indeed the FCA sees the growth of RegTech - the use of technology to enable regulatory compliance as an integral part of FinTech.
Jes Staley, Group Chief Executive of Barclays, recently said he considers his bank in some ways “a technology company with a balance sheet and regulators.” Expect more banks to be saying this in 2017 and re-aligning their businesses accordingly.