‘Collaborate Or Die?’ was the title for business weekly The Economist’s London conference this week on fintech disruption in the financial services industry. For many, the question mark isn’t needed – banks, often still with their agility hampered by legacy systems, need to join forces with the financial technology intruders keen to poach their customers or their demise is guaranteed. The event took place on the day when one of the UK’s ‘big four’ banks, HSBC, announced that it will close a further 62 branches this year. This will take its UK network down to 625 branches, or less than half the total of 1,301 that it had as recently as June 2011.
By contrast, newcomer Metro Bank opened its first branch a year earlier and has slowly but steadily expanded beyond London since 2010 to its current national network of 48 branches. Its chief executive officer (CEO), Craig Donaldson, says that Metro ultimately plans to increase this figure more than fivefold, to 250, so a few more years could see the UK’s newest high street bank with no fewer branches than HSBC.
Asked by conference moderator Patrick Lane, The Economist’s banking editor, whether Metro wasn’t defying logic in moving in the opposite direction from the big four, Donaldson said that bank customers still want interaction and choice; this is particularly so of the new ‘Generation Z’ born since 1997 who, as a recent Ernst & Young report found, wish to be closely involved with the development of products and services targeted at them. “We don’t have sales targets and we don’t push products,” he stressed. “Instead, we ensure that when a customer wants a new service or product they come to us
Even though technological developments such as facial recognition software and click-and-collect are now a reality, Donaldson believes that physical delivery and the ability to communicate directly with a member of staff still have their place. So despite predictions of continuing decline, bank branches might not necessarily be obsolete by 2030.
Turning to a more imminent event, Metro’s CEO was asked if the bank is ready for the introduction next January of the new Payment Services Directive (PSD2) across Europe. “It would be nice if the regulator could stipulate exactly what we have to be ready for, but we’re working with partners to ensure we’re prepared,” he responded.
“It will be interesting to see who takes on the risk when data has to be shared. We see both huge opportunities and huge risk.”
Usurping London’s fintech crown
Will Brexit see London involuntarily surrender its crown as the fintech hub of Europe? Contenders including Frankfurt, Paris and Dublin have been setting out their stall since last June, but each has a challenge in meeting the UK capital’s strengths, which Eileen Burbidge, HM Treasury’s special envoy for fintech, identified as good access to market, the availability of skilled workers, the ability to attract investment and a progressive regulatory regime. However, banging the drum for Stockholm was Olle Zetterberg, CEO of Stockholm Business Region, who added that the Nordic capital also ticked these boxes and was further strengthened by Sweden’s rapid progress towards becoming the world’s first cash less society.
The possibility that Europe might collectively lose out, with even more of the fintech action shifting to the US, was raised by The Economist’s Philip Coggan, who moderated the session. However, Burbidge pointed out that the US is composed of many disparate markets and fintechs have to deal with 48 states and their respective legislation, which can pose a major obstacle. There is also the question of to what degree president Trump will deregulate.
The session panellists agreed that the UK’s future policy on immigration will largely determine London’s fintech future. “The single market is very black and white – you’re either in it or outside of it – and prime minister May has made it clear that the UK won’t be a single market member post-Brexit,” said Nicolas Véron, a visiting fellow from the Peterson Institute for International Economics.
“London is currently Europe’s biggest fintech centre by far and in many scenarios will remain so for a long time,” he added. But the immigration issue was a determining factor. Lawrence Wintermeyer, CEO of Innovate Finance, a non-profit organisation for the UK’s fintech community, added that London continued to attract investment from the US and increasingly from China, which would be maintained so long as “it opens its doors to talent”.
Blockchain’s next phase
A session devoted to blockchain was opened by Patrick Lane, who noted that after “two waves of enthusiasm” – the first around blockchain and the second around distributed ledger technology (DLT) – the debate had moved on to practical applications of blockchain.
According to Jeremy Wilson, Vice-chairman of Barclays Corporate Banking, many still see it as no more than a significant opportunity. “Yet it represents a new operating system not only for finance, but one that will change everyone’s lives in all sorts of everyday activities,” he stressed.
“The task is now to decide where blockchain can deliver most and develop serious business applications. So that means not applying it to areas where things already work well but to those where there are significant challenges – such as the high cost to the industry of the know-your-customer (KYC) regime and compliance.”
Adam Ludwin, co-founder and CEO of San Francisco-based blockchain start-up Chain was bullish; pointing out that the technology had successfully met two of three major challenges. The first was whether cryptography could be applied money to create a distributed ledger, which had been answered by Bitcoin. The second was whether the technology could then be extended to everyday financial instruments and this question had been answered affirmatively by a number of fledgling fintechs in the past two years.
The third question – and one still being worked on – was whether assets could now be migrated to this new medium from the existing one. This can also be accomplished, but it will take steady progress over time as consumers and businesses are offered new products, which they discover are blockchain-based.
CaixaBank’s mobile-only venture
One example of what future strategy might be adopted by many banks is provided by Spain’s CaixaBank, which a year ago launched an offshoot specifically aimed at Millennials. ImaginBank launched as the country’s first mobile-only bank, offering a complete range of commission-free products.
CaixaBank’s chairman, Jordi Gual, said that the new bank was in response to demand from customers in their twenties and thirties, who wanted a purely digital experience linked to the social networks. However, of CaixaBank’s 40m customers, no more than around 6m chose the mobile-only option. Those preferring the more traditional banking model tended to be aged over 40 and this group included a large number of high net worth (HNW) individuals.
Gual said that the “one size doesn’t fit all” rule that evidently now applied to financial services was equally applicable to regulation and the rules applied for fintechs and start-ups needed to be different, although he acknowledged that finding the appropriate degree of regulation wasn’t an easy job.
“Regulation tends to be risk-averse and therefore too stringent,” he suggested. “PSD2 should therefore involve careful dialogue to ensure it doesn’t destroy investment.
A concluding thought
A question that arose in several sessions was what impact tech giants such as Apple, Amazon and Google could make if they launched a concerted assault on the financial services market. As yet, initiatives such as Apple Pay and Google Wallet have made only a fairly modest impact.
The Economist’s Lane suggested that the “river of regulation” running through financial services has so far been enough to scare them off. However, the magazine’s editor-in-chief, Zanny Minton Beddoes, thought that should London succeed in becoming the world’s premier fintech capital, the trio might be encouraged to step up their competition with the incumbents in the sector.
Tim de Knegt, treasurer for the Port of Rotterdam, discusses how he is looking to bring more value to the Port's clients using blockchain.
Regulation technology is fast gaining currency by transforming how financial institutions can tackle compliance in a swift, comprehensive and less expensive manner.
Many banks around the world, large and small, continue to experience major security failures. Biometric systems such as pay-by-selfie, iris scanners and vein pattern authentication can help.
The implementation date of Europe's revised Markets in Financial Instruments Directive, aka MiFID II, is fast approaching. Yet evidence suggests that awareness about the impact of Brexit on MiFID II is, at best, only patchy and there are some alarming misconceptions.