Wake up, policy-makers: The fintech paradigm shift could change everything
Nowhere within the financial firmament does enthusiasm abound more right now than in the arena of fintech. Just as it has disrupted and revolutionised our social interactions and shopping habits, the internet is breeding new ways to cut the cost of transacting and pair those with capital with those seeking it.
Peer-to-peer lending and crowdfunding (fairly understandable concepts even to the digitally deprived) have given way to fintech technologies like blockchain, alternative currencies and robot financial advisers. This is all exciting stuff, and stands to democratise the world of finance in an era where the clamour is to redistribute power from the money men and into the hands of the consumer and the entrepreneur.
Enthusiasts contend that the City is well-placed to clean up from the potentially sweeping changes to financial services, particularly as the UK is unleashed from the EU. The global banking sector consists of large, long-established players protected – over-protected, perhaps – by central banks and stifling compliance. The presence of a fast maturing internet economy and an established tech hub on the City’s borders suggests that, whatever degree of disruption eventually occurs, London stands to be a winner.
There is no doubt a lot of froth to all this and many fintech challengers will fall by the wayside. Some older and wiser heads in the City remember the glory days of 1998 and 1999 before the dot-com bubble finally burst. While bankers and lawyers do their level best to disentangle the insubstantial from the plausible technology platform, however, fintech startup innovators despair that the banking world fails to appreciate that a paradigm shift is underway. If they are right, governments will have to get their heads around some almighty challenges in pretty short order as the strategically important finance sector is disrupted.
For all the criticism levelled at banks for relying on the state as an ultimate backstop, there is now a firm expectation among voters that government stands ready to offer deposit protection when things go wrong. Regulators are already scratching their heads trying to create protection for consumers and unwary investors among this new breed of internet financiers. The issues around privacy and data security that we have seen played out over our online communications also apply to the world of finance. The need to track and prevent the movement of money by criminals, fraudsters and terrorists in an era of cryptocurrencies will rub sharply against the demand of consumers to have their financial affairs protected by strict privacy laws.
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The removal of the banking middle man poses a long-term threat to countless thousands of white-collar City jobs. Building a robust fintech sector in London may help to mitigate job losses by redeploying talent to new industries, but our success in this sector is not guaranteed. Typical fintech startups demand open access to the EU market for their products and, more critically still, skilled staff. The ability to employ young programmers from abroad will be a prerequisite for fast-growing companies in this sector and government will need to work hard to protect London’s reputation as the most attractive, vibrant place to work as the journey towards EU exit starts in earnest.
Additionally, we cannot forget that the financial crisis has left sovereign states and big banks more intertwined than ever. In the case of the UK, we still own billions of pounds worth of banking shares that we aspire at some point to sell at an attractive price. In the Eurozone, banking debt has essentially become interchangeable with sovereign debt. Governments’ vested interest is in seeing leading banking institutions continue their domination while imposing upon banks ever-more burdensome regulation and policy objectives such as the maintenance of costly branch networks.
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We need traditional banks to be able to compete against techy disruptors but they are ever less free to do so. Paradoxically the overregulation of the banking sector, which to the frustration of policy-makers has enabled the largest banks to evade effective competition from the much-heralded new generation of challenger banks, has also resulted in a distinctly complacent culture about the intense competition that fintech poses.
After all, central banks worldwide have presided over a near-zero interest rate policy for so long that thousands of investors and savers are being tempted away from traditional savings vehicles in search of higher returns, accelerating the growth of fintech. Mainstream banks cannot rely upon loyalty from a customer base that has now been exposed to eight years of stories on product mis-selling and banking greed.
We will not stop the innovation and growth of the fintech sector. Nor should we seek to. It offers a huge array of opportunities to reduce the cost of banking to consumers and to provide a more tailored and accessible range of financial services to thousands of entrepreneurs, pension holders and small scale investors. This could act as a timely vehicle through which to spread power at a time when even many middle class people feel that the spoils of globalisation have been unfairly distributed.
But we should not pretend that this will not throw up a range of fiendishly complex dilemmas both to governments and mainstream banks, from balancing security and privacy imperatives to the emergence of a dynamic, less regulated marketplace, the hollowing out of traditional financial services and the jobs they support, and the undermining of the government’s own investments. The fintech challengers will not overturn the international might of mainstream banking overnight, which thankfully gives policy-makers and bankers plenty of time to catch up with the realities of this fast-emerging new landscape.