New technologies such as blockchain threaten a veritable revolution in financial services, breaking the big banks’ grip on the payments system
They survived the explosive growth of the capital markets, and ended up harnessing it – disastrously, in some respects – to their own ends; thanks to taxpayers, who bailed them out, they also survived the financial crisis; and so far, they have largely survived the regulatory backlash that followed in its wake. But can the established banking industry outrun “fintech”?
Those with long memories will recall a UK internet bank called egg, widely hailed at the time as the start of a banking revolution that would overturn the entrenched oligopoly of the established banking players. It did not. What remains of it is today divided up between the Yorkshire Building Society, Citigroup and Barclaycard.
Egg and other digital banking start-ups of the same era failed because they didn’t fundamentally challenge the main tenets of the traditional banking model and way of doing things. As mere virtual copies of it, they were insufficiently disruptive, and therefore soon ended up crushed beneath the monopoly power of the incumbents.
All this could be about to change. Under the catch-all heading of the “fintech revolution”, a whole host of technologies are under development that promise a genuine alternative to traditional banking and payments systems. Most people will have heard of crowdfunding, peer to peer lending and robo-financial advice. These are early examples of the rival models that digital technologies make possible. Yet so far, they are also small beer, and certainly don’t pose any kind of existential threat to the traditional banking cartel.
Why has banking remained relatively immune to disruptive technology, when most other service industries are being shaken to their very foundations? From media to retailing, and from hotels to taxi hailing, everything is being turned on its head, with many incumbents in a state of seemingly terminal decline.
I once asked a senior executive at Google this question. Why in particular had the new generation of tech giants not invaded this notionally lucrative market? Simple, he answered. The regulatory barriers to entry, and the potential for reputational damage, are just too high. There are easier, less troublesome pickings than banking.
By regulatory barriers to entry he meant not just the capital, liquidity and conduct rules imposed on banks, but the iron grip incumbents exercise through the central bank on the payments system. There is virtually no non-cash transaction that won’t at some stage interact with this infrastructure.
As guardians of the currency, and ultimate guarantors of settlement, central banks put the integrity of the payments system above virtually all else. They claim to be open to change, and alive to its potential for making the money markets operate more efficiently, but in truth they remain deeply suspicious of anything that might upset the stability and resilience of the status quo.
And on one level, they are right to be so. Fiat currencies are extraordinarily fragile beasts. At their peril do governments mess with the credibility of their means of exchange. Once public trust in the currency goes, it’s difficult to impossible to get back.
In any case, technology is beginning to threaten the opaque, multi-layered – and high commission – nature of the payments system as never before. For ever several steps, if not miles, behind the markets, regulators have belatedly woken up to the implications and are now in hot pursuit. Minouche Shafik, Deputy Governor for Markets & Banking at the Bank of England, will on Wednesday be bringing together at the Bank a wide variety of payments industry stakeholders to help shape the Bank’s thinking on the future of the UK’s Real Time Gross Settlement System, the Bank of England operated platform which ultimately stands behind all high value sterling payments. All central banks offer similar systems, and will be going through much the same process of self examination.
A recent report by Santander InnoVentures, the Spanish bank’s fintech investment fund, estimated that blockchain, the digital settlement technology that lies behind the virtual currency Bitcoin, could alone save lenders up to $20bn a year in settlement, regulatory and cross-border payment costs. Yet, to suggest that there are big “savings” to be had is perhaps the wrong way of looking at the challenge these technologies pose. For incumbent banks, the main worry is blockchain’s potential for changing the nature of the money system in its entirety, leaving the traditional players with costly legacy systems that nobody wants to use.
What the latest generation of digital disruption promises is to give depositors, borrowers, investors, and businesses looking for capital, more direct, more immediate and cheaper access to each other. This is not obviously good news for the traditional middle man, the banks, and the “exorbitant privilege” they enjoy at the heart of money creation.
It’s never wise to write off the bankers. Down the centuries, they’ve proved among the most durable of trades. Nor are the incumbents asleep to either the dangers or the opportunities. The Australian Stock Exchange last week announced it is developing a blockchain as a replacement for its existing platform for clearing and settlement of trades. As a major hub for fintech, London is already in the vanguard of change.
Yet the Amazon of banking is most unlikely to come from any of the established players, all of which cannot help but adopt a defensive attitude to their trade, or indeed from the tech giants now establishing new forms of monopoly in other industries. It will either come from mobile telephony, where your Sim card essentially becomes your bank, or it will be someone entirely new and unexpected. Even PayPal, the biggest of the alternative money transfer systems, is beginning to look a little passé in its approach and technology.
Regulation, so often seen as a curse by bankers, paradoxically provides them with their best form of protection. Access to a truly global digital player and payments system is unlikely for a long time to come, if only because having to deal with a myriad of different national regulators presents such a profound barrier to entry. All the same, technology promises far more damage to traditional banking than both the financial crisis and the regulatory constraints subsequently imposed put together.