Fintech’s risks and opportunities
Fintech, or financial technology, is in the spotlight in Bermuda right now. This week, I take a look at its many implementations and ramifications.
• The impatient among us (aren't almost all of us ADD these days) hate waiting in line at de bank, or even electronically for some transfer to be finalised.
• The private person hates providing confidential information to an array of non-specific finance personnel.
• The cautious resent the rules, regulations, endless paperwork, and perceived bias of human financial decisions.
• The secretive want complete anonymity (whether criminally inclined or not) meaning no required reporting to, or detection by governments and taxing authorities of their very existence.
• The investor wants cost efficiency at all levels. The fewer the human interaction (and errors) the better.
Any of the above may entice you into fintech participation (if you aren't already)!
Your smartphone will become more important than you! Voice, visual, immediate cost-efficient transactional access with no waiting, no fuss. Instant gratification. No more pulling ID cards out of a wallet/purse,or counting change.
According to The Australian: “Fintech is going to be much bigger than you think. If payments can be made anytime, anywhere, across any device, why do you need a currency, or even a bank?
“Fintech is a whole new industry composed of companies that use technology to make financial services more efficient. It's big, it's growing and it's disruptive.”
Fintech firms operate by filling niches not filled by conventional firms.
• Banking: digital currency, mobile, currency/ATM exchange and web-based payments applications.
• Loans: crowdfunding raises funding for a project or venture with monetary contributions from a large number of people.
• Credit activity is facilitated by electronic platforms whereby borrowers are matched directly with lenders.
• Currency routing: monetary transfers with cost efficiency and autonomous encryption ownership recording.
• Investing and financial planning: robo-advisers offer a range of automated services, from financial recommendations to investment or contract brokering to portfolio management.
• Legal: smart contracts, programmable distributed applications that can trigger financial flows or changes of ownership if specific events occur.
Fintech is not without risk.
Ease of use, less regulatory oversight, fast, anonymous interchange access, mobility spot-on, all requirements for the impatient persona, but there are risks.
The Deloitte Perspectives analysis, The Future of Fintechs: Risk and Regulatory Compliance, states: “The future is promising, but also brings increased exposure to regulatory requirements, sanctions, and legal actions given that customers assume bank-like regulatory protection even though they are using non-traditional mobile app-type financial services.”
Concerns, both micro and macro, relative to financial stability, such as leverage, liquidity, cyber-risk, confidence contagion, excess volatility, systemic importance and predatory pricing, were stated in a white paper Financial Stability Implications from FinTech Supervisory and Regulatory Issues that Merit Authorities' Attention, published June 2017.
Many questions arise.
How will security exchanges and governments regulate this new industry if interchange is confidential and anonymous on both ends of the transaction?
Fintech purports to be easier to use, more cost efficient but who pays for what, and how much?
Generally, start-ups need funding – from usual banks, investors, venture capitalists and the like.
What is required for a fintech company to be flagrantly successful long term? If fintech banks compete aggressively with fees and rates, can they facilitate their long-term business model to profitability after initial phases of venture capital funding is depleted. Media debate relative to these questions of fintech long-term financial viability remains indeterminate at this juncture given the newness, short-term track records, and limited access to non-public fintech company financial information.
What kind of staff will be necessary is a large question for Bermuda careerists. Will this new technology launch mean cannibalisation at the expense of other financial institutions? Or will new fintech banks increase overall employment in the finance sector?
Our traditional Bermuda banking model has been in existence for more than 150 years. Don't count them out yet.
McKinsey & Company's report, Cutting Through the FinTech Noise: Markers of Success, Imperatives For Banks, states it succinctly: “Banks remain uniquely and systemically important to the economy; they are highly regulated institutions; they largely hold a monopoly on credit issuance and risk-taking; they are the major repository for deposits which customers largely identify with their primary financial relationship; they continue to be the gateways to the world's largest payment systems; and they still attract the bulk of requests for credit.”
Caution: I've stated it before and will again. Complete reliance on any one technology supported by internet access for financial transactions is not without risks: hackers, power failures, political interference, identity theft, cyberfraud.
Physical cash in circulation from old-fashioned banks remains a tangible alternative certainty.
Diversification is key to life. It is well to remember that there is a price for everything, particularly financial safety and certainty.
Freedom from conventional banking structures may not be such a clear-cut truism, after all. But the end result, whether from mobile, application-driven fintechs, traditional banks, or amalgamations of both, it appears that the overall final structures will be good for the consumer.
One sure thing, according to almost every reference source perused, fintech is and will continue to be a major disrupter of the financial services industry.
Whether we individuals are highly smartphone equipped, or not, we should have a basic understanding of the use of digital cash and mobile financial applications.
It is here. It is now. It is the future, but it should not be the only thing.
So what will Bermuda's fintech industry (banks) look like? We'll be addressing the many facets of fintech (and how some startups work) in our regular series to follow.
• The Financial Stability Board is an international body (composed of G20 members and other countries) that monitors and makes recommendations about the global financial system, http://www.fsb.org/wp-content/uploads/R270617.pdf
• Deloitte Perspectives: The future of fintechs: Risk and regulatory compliance
Understanding the risks and rewards, https://tinyurl.com/y87kvuhq
• PWC Global: Customers in the spotlight: how fintech is reshaping banking, https://tinyurl.com/y8tmg9yq
• The Australian: “Bitcoin is just the beginning”, https://tinyurl.com/y7ergbck
• McKinsey & Company: Global Banking Practice, December 2015, https://tinyurl.com/y8twr3lj
• Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Dual citizen: Bermudian/US. Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Finance columnist to The Royal Gazette, Bermuda. All proceeds earned from this column go to The Reading Clinic. Contact: firstname.lastname@example.org