I recently attended a conference in America, where the audience of mainly bankers could post questions to the speaker. During the digital bank discussion, here are the questions that came in and, purely because they are fairly common in everyday dialogue, I thought I would post and answer the questions here. Most are related to regulatory stuff – it was a banking audience – but there are also some interesting nuances.
What are your thoughts on physical-digital coexistence?
Let's start answering this question by saying that most people are not talking physical and digital, but physical and digital channels. It depresses me that we still talk about channels, as I’ve blogged often, as surely it’s now just physical and digital. Channels implies multiple digital services, rather than just digital and physical. That’s why I hate the word or thought or focus upon channels in discussing Fintech. Channels means multiple, separate digital structures.
So then we get into physical and digital coexistence and, for the next ten years, we will be working more and more on making these things seamlessly integrated and easy. The internet of things and robots, infomediaries and robo-advisers, will make life simpler and easier from a financial perspective. As these things develop, we will be paying and transacting seamlessly and easily everywhere, all the time.
The result of these activities is that, over time, we will not even be thinking physical and digital, just life. Life augmented by digital platforms that make our lives easier. Our physical existence is simplified as we no longer have to consider paying for anything. We just live and consume and receive by exchanging debits and credits occur through the air.
How do you reconcile emerging, disruptive financial services players with an environment of increased governance and regulatory oversight?
Governance and regulation is intriguing, and always a subject that is high on the agenda of financiers, as they have so much governance and regulatory oversight. The emerging, disruptive players have no oversight, as they are creating new value exchange models. However, as those models evolve, the regulators get involved. We’re seeing this right now with bitcoin and the blockchain, and we’ve seen it before in any market that involves financial exchange. A great example is peer-to-peer lending, where most governments are learning. As they learn, they understand and, as they understand, they work out that these markets need their own specific style of regulatory oversight and governance. In the UK for example, we now have P2P regulations and P2P governance through the Financial Conduct Authority . So the idea of financial services without regulation is plain stupid. Financial services, and therefore all the disruptive new financial players, will always be regulated or shut down.
Should the CFPB be looking at some of these companies?
I’m sure the CFPB ( Consumer Financial Protection Bureau ) is already looking at these companies. Certainly, the Treasury, Federal Reserve and White House are. I guess this sort of question is a little like asking: there’s a new financial market, are the regulators ignoring it? Of course they’re not. From asking for policy input in 2013 to embracing cryptocurrencies, the CFPB and all the other government agencies are moving from concern over new developments to using them .
Are we going through a Fintech bubble and when will it burst?
Yes, we are going through a bubble but it won’t burst for some time, as there’s a long way to go. We are seeing just a few players emerge with new models so far. In payments, the likes of Square, Klarna, Stripe, Currency Cloud and TransferWise have emerged as potentially major and massive heavyweights in transferring value. In lending, Lending Club, Prosper, Kabbage, Zopa, Funding Circle and more are all emerging as major new credit companies. In fact, of the $13.2 billion invested in Fintech startups last year ($4 billion the year before, under a billion in 2012), two-thirds is being invested in payments and lending. As a result, Goldman Sachs have forecast a fifth of bank profits disappearing in these areas to the new players within five years. That’s the reason why VC’s are investing and it’s not so much a bubble as building a new Fintech marketplace.
Many of the success stories for digital financial services are consumer/retail oriented. How are will digital impact institutional business outside of improved risk and compliance capabilities?
It’s a false illusion to think it’s just consumer and retail, but the media and commentators, including myself, focus on these areas as they are easier to digest and discuss. However, if you look at commercial and investment banking then everything from Traxpay to eToro to Colored Coins to Ripple to Betterment to Nutmeg to Secondmarket and more are ripping through those markets. In fact, Fintech and cryptocurrencies is as if not more transformational in investment markets than in retail. Just look at low latency, high frequency trading and BATS Chi-X, if you want to see the impact there.
Which segment should be a focus for digital for traditional financial players: wealth, business or consumer markets?
This is a question for your own company, not for me. You need to work out where your core competency lies, and then leverage and focus upon it. The problem most banks and financial firms have is that they’ve been trying to grow for the past twenty years from being monoline players to being universal financial firms. That trend is reversing fast as Fintech companies are predominantly very narrow. They’re not even monoline, as they don’t cover the whole line; they’re more monoparts. You cannot compete as a universal player against a specialist monopart, so you have to integrate the parts that are better than yours and combine that part with your core competency. Is your core competency wealth, business or retail focused? That will then answer this question, as the other parts that you’re not good at, you need to partner or purchase.
Is there an institution you see doing many things right? Who are they and how are they moving where others aren't?
There are several, but the main notable firms are ICICI Bank in India, mBank in Poland and Commonwealth Bank of Australia. I note these three specifically, as they are case studies I use for how to transform a bank. However, there are many other institutions that illustrate amazing innovation. These institutions generally have come from markets that are newer and unhampered by heritage. Turkey, Spain, Poland in Europe; Brazil, India and China along with some other related markets such as Japan. Taiwan and South Korea. Then there are the many other emerging economies including Indonesia, Mexico, Colombia, Nigeria, Kenya and South Africa. In other words, there are not really institutions but business models from many emerging and developed players that are noteworthy.