Major banks on the move with Blockchain – huge development amid renewed economic flux
by Inline Policy on 13 Apr 2016
These are key months in the future of financial services, and for the power of traditional banks in the global economy. The recent Citigroup report spelled out in clear terms the potential of Blockchain technology, which underpins the digital currency Bitcoin, to revolutionise financial services way beyond payment and remittance services, into asset management and insurance. The report modelled projected surges in Blockchain use in retail banking services and automation of some routine financial advice, with a multi-trillion potential market in new peer-to-peer lending created by the app economy, while having the effect of losing 1.7m retail banking jobs in the EU and US. A recent McKinsey study showed that in Western Europe as much as 40% of new deposits could come via digital-only banking by the end of the decade, and 80% of people in developed Asian markets would be prepared to shift their accounts to banks offering digital only platforms.
Now, on both sides of the Atlantic, activity in the industry and on regulatory policy is driving rapid change. In the UK, eight firms have been fully authorised by the Financial Conduct Authority through Project Innovate to operate on peer-to-peer platforms, with 86 more currently undergoing the process. Some lenders have developed mobile apps connected to their recently launched Innovative Finance ISA products and innovative equity crowdfunders offer investment opportunities in a wider range of equities than hitherto possible.
The EU Payment Services Directive 2 comes into force in January 2018, requiring banks to provide access to their systems to potentially share client information with newcomers in the sector, including peer-to-peer lenders. The banks are therefore in a race against time to either engage in their own technological advances to see off Fintech competition, or to partner with a Fintech outfit, or buy them out. The advantage of partnership deals for the traditional banks is that they see off looming competition before it arrives, and for the Fintechs it allows for much needed scaling up. Similarly for Fintechs, as Blockchain becomes more widely used by others, the real advantage may come from more innovative services in the marketplace such as extending peer-to-peer lending networks, and lending against other assets such as invoices.
In the UK, Barclays announced a new partnership with US Fintech company Circle Financial Internet using delegated ledger technology to permit money transmission between sterling and the US dollar without charge for their debit card customers. Similarly, fee-free money remittance or transfer in Euros and some Asian currencies is expected within months through the new partnership deal. This has major implications, firstly, for other UK headquartered banks who may follow Barclays’ lead by teaming up with Fintech companies enabling Blockchain payment transfers; and secondly, for the business model of some Fintech payment start-ups, who may find competition with major-bank backed Blockchain companies becomes acutely difficult. The huge gap in the market might be closed tightly shut well before January 2018.
The likely outcome is not wholesale dismantling of traditional banks payment systems, guaranteed ultimately by central banks, but them being made more efficient through use of Blockchain, as the competition from new money transfer firms arrives by 2018. Similarly in insurance and asset management, getting ahead of the technological curve now may maintain the grip of the big sectoral players in the long term. If the banks can meet the challenge of higher consumer ease of use through smartphone banking, and appetite for lower or even no inter-currency transaction fees, they may emerge from the oncoming technological revolution as the biggest winners after all.
In the US, Fintech companies have formed a new trade association as the federal Government considers the details of its plans to introduce new regulatory standards to augment regulation at state level. The Office of Comptroller of the Currency published a consultation document containing its new plans. What will be fascinating in the responses is the potential divide between major banks looking for the most intensive possible regulation of the US alternative lending or peer-to-peer market, and the Fintech companies seeking light touch handling of the sector. This comes as JP Morgan Chase, Credit Suisse and others on Wall Street have conducted trials on using Blockchain technology in relation to February’s credit default swap transactions.
Japan’s Financial Services Agency has also convened a policy summit with its Fintech sector for next month to consider the implications of Blockchain for its markets and services, in the context of stating an ambition for Asia to become a global leader for the sector.
One of the reasons for the success of new participants in many lending markets is responding to unmet need for new lending, particularly for small businesses, but also because of the weak investment returns on savings accounts, bonds and even UK Government gilts as interest rates have remained near the zero lower bound for almost 8 years. A strong debate over the economic and market effects of central banks like those in Japan, Denmark, Switzerland and Sweden setting negative interest rates is expected in Washington this week at the spring meeting of the International Monetary Fund. Some call for fiscal policy to take up more of the slack in stimulating global demand, to prevent more and more of the burden falling on monetary policy – an approach, as Keynes put it, equivalent to pushing on a piece of string.
In Sweden, the Riksbank has cut rates deepest into negative territory, with the boost to demand generating a surge in house prices, higher inflation and growth at an annualised rate of 4.5%. But many are worried about the incentives negative rates provide to hoard cash rather than to invest as seen in Japan. Bond yields are affected too by downward pressures – good for Governments servicing public debt, but with low returns for pension savers, a particular burden for younger generations also facing barriers to entry to the housing market. There are now almost $7tr in government bonds with a negative yield globally – up from nil three years ago.
Any flight to riskier investment options among individual or corporate investors could inflate dangerous asset price bubbles affecting financial stability, so regulators face a delicate balancing act in authorising new lenders and products. With renewed volatility and uncertainty over demand in the global economy and European geo-politics, such decisions by central banks and regulators may not attract the headlines, but they will be among the most important taken in shaping the future of both finance and society in the coming decades.
Photo (CC BY-SA 2.0)
Topics: Financial Services Regulation