Gibraltar Magazine – May 2017
Ian Le Breton
Everyone’s talking about Fintech – or so it seems. Several articles in this edition of The Gibraltar Magazine are dedicated to various aspects of this vast topic, and for very good reason. On 9 May, a full-day conference is being held at the University of Gibraltar’s new Europa Point Campus under the heading A New Regulatory Framework for Cryptocurrencies. No doubt it will be well publicised and readers will be able to read detailed press comment after the event.
For my piece this month, I thought I would widen the scope from the cryptocurrency world – made famous by its best-known example, Bitcoin – to look at the whole concept of Fintech. What is it all about and what impact will it have on the general public? The answer, it may not surprise you to learn, is a great deal. All of us will become increasingly affected by the application of these new technologies – indeed you might be surprised the extent to which it is already doing so. Read on.
Before I joined Sovereign more than a dozen years ago, I had enjoyed – yes, that is the right word – a wide-ranging twenty-year career in banking. Even in those days I was asked to present on matters of topical interest to audiences all over the world. In the last five years at the bank, my favourite subject – Offshore Banking in the New Millennium – became my soapbox. As many of my friends will recall, it kept me going for years – well past the year 2000 anyway.
But did anyone really predict how the Fintech revolution would take off in the first decade or so of this century? Certainly not me and I’m sure I was not alone. Even today when the term has become common parlance, I’m not sure that many people really understand this brave new world and the ways in which Fintech will change their lives. Back to basics then. Let’s start by defining Fintech.
At first sight, it all sounds disarmingly innocuous. Fintech stands for Financial Technology and simply describes a business that uses technology – both software and ways to exploit it – to provide financial services to its clients. Perhaps the easiest way to demonstrate Fintech’s importance is to highlight a few of the more obvious examples.
The seeming unstoppable advance of technology has radically altered almost every area of the financial sector in recent years, but let’s start with banking. It seems as though digital banking has been with us forever. After all it is probably 20 years now since many of the major players rolled out their first digital services. I know that there are many people for whom “on-line” banking remains a totally closed book. I, for instance, admit to taking a childlike pleasure in paying for things in Gibraltar using my chequebook, even scrawling my home telephone number on the reverse as “proof” of my credit standing! But the truth is, of course, that most readers will be used to managing at least part of their finances online – some, probably the youngsters, will do the lot.
But the revolution had only just begun. As the dust settled on the 2008 financial crisis, the Bank of England started a process that would eventually open the door for a new type of bank to enter the market. In an attempt to introduce more competition into an industry that had lost touch with its customers, the Bank of England introduced a simplified two-step process with lower capital requirements for setting up new banks in 2013.
As a result a new breed of challenger banks – with very “unbanky” names like Atom, Monzo, Tandem or Starling – have sprung up. These new banks can start afresh from a reputational and technological standpoint. Add to these the plethora of payment companies who offer fund transfer services and the scale of the sea change becomes obvious.
Is this a good thing? Imagine for a moment that you are a bank manager in the old style – a Capt. Mainwaring figure – surveying the profitability of your branch. I can almost hear Corporal Jones shouting, “Don’t panic!” at you as the hopelessness of the situation becomes apparent. What profit? Interest rates remain at record low levels so depositors are not saving. Lending is getting better, so we are told, but it is still difficult and there are a plethora of new options that compete with traditional banking products. It gets worse. There are a range of Fintech money transfer options – PayPal springs to mind – that avoid using traditional banks altogether, so all those lucrative fees have vanished.
I have recently been introduced to the Asian phenomenon that is WeChat. At first, the application, which can be downloaded onto a smartphone or tablet, looks just like a standard messenger service such as WhatsApp. The difference is that WeChat has grown rapidly into a multi-level “platform” that incorporates shopping or low (or no) cost payments to others who use the App. Banks and their fees are thus neatly avoided.
It should therefore come as no surprise that banks are closing branches – and not just in Europe but across the world. A greater emphasis on technology that relies less on human intervention, and delivers low cost, accurate and secure solutions is no bad thing (providing that all those redundant staff can be re-deployed). And consider the vast areas of the globe, where millions of people had little or no access to traditional financial services and products. They used to be “unbanked” but Fintech has the potential to refresh the parts that other banks cannot reach.
Currencies, the very bedrock of the world financial system, are also being challenged by new technologies. Cryptocurrencies, which use encryption techniques to regulate the generation of units of digital currency and verify the transfer of funds, operate independently of central banks. Furthermore “blockchain”, the technology underpinning digital currency Bitcoin, could speed up transactions and take costs out of the system, meaning cheaper, more efficient services for all of us. But that is perhaps a subject for another day.
As so often in financial revolutions of this kind, not all regions of the world are exploiting the opportunities provided by these new technological advances at the same rate. Generally, Asia is far ahead of us in Europe and even the US when it comes to realising Fintech’s vast potential and how to exploit it. But there is no doubt that Fintech has arrived – and we should all be prepared for it.
This whole area is critically important to Gibraltar because our economy is so reliant on financial services. That’s why I am thrilled to see this conference coming to the University of Gibraltar. The pace of change in the increasingly fast-moving Fintech space is likely to test all firms in the sector over the next few years. The changes we have already seen are just the beginning. I think it is no exaggeration to say that this will lead, inexorably, to an overhaul in the financial system that will perhaps be the most significant in our lifetimes.
I conclude by wishing all participants in the forthcoming conference success in their deliberations. Do I think local firms could exploit opportunities arising from the ever-wider universe opening up as a result of Fintech? No, the word isn’t could. It is must. The Fintech revolution is happening now and we must embrace it or we risk being stranded on the beach when the tide changes.