ALEX BRUMMER: Fintech has found an easy path to challenge conventional banks, avoiding intrusive regulation by processing rather than deposit taking
The global banking system was always going to be disrupted by financial technology. Big players such as JP Morgan Chase in the US, HSBC in Asia and Natwest in the UK are the products of countless mergers.
Ripping out the existing IT is impossibly expensive, which means that they are stuck with ageing, clunky tech. They also lack the AI and data management skills which the niche fintech players bring to the table.
When second-line UK player TSB sought to adopt an open-banking IT system developed by Spanish parent Sabadell in 2019, some 1.9m customers were locked out of their accounts, fraudsters swooped in and the bank’s boss Paul Pester departed.
Finger on the pulse: The global banking system was always going to be disrupted by financial technology
And when Barclays changed the account codes of all of its personal customers to create its ring-fenced bank, senior regulators lost nights of sleep fearing a disaster. It turned out painless, unlike the troubled start of Barclays Smart Investor, the new platform for the bank’s investor and stockbroking clients.
The difficulty of adapting existing systems allows fintech to make hay. There have been disasters, notably Wirecard and Greensill Capital, where investors, clients, governments and enforcers allowed themselves to be blinded by science. On a smaller scale, the collapse of payday lending firm Wonga, and problems of guarantor lender Amigo, explains why the sector needs a handle-with-care label. Nevertheless, banks and branded payments providers Visa and Mastercard recognise they are in a battle and models could be disrupted. The biggest threat on the horizon may come from Silicon Valley where Apple Pay, Amazon and others have parked light infantry on their turf. Tanks could follow.
The determination of big players to snuff out the challenge is very much in evidence. Visa this week revealed that it is paying £1.6bn for Swedish-based fintech group Tink which provides banks and other financial with smart access to consumer data. Tink skills are already used by more than 3,400 banks and it claims 250m customers in Europe alone. Visa moved on Tink after an anti-trust ruling prevented it from buying an American rival Plaid. JPMorgan is planning the launch of Chase, a digital consumer bank in the UK. In so doing it follows in the steps of Goldman Sach’s Marcus. JPMorgan bought itself capability in digital asset management this week by buying UK start-up Nutmeg.
Some big questions around several recent tech offerings concern governance and transparency. As was seen with Deliveroo, The Hut Group (THG) et al, being introduced to the market by top ranked investment banks is no guarantee of success. Dual class share structures are deployed as a device to protect the founders of ‘infant’ companies from predators. That is not a good enough reason if there are also questions about the way companies are managed.
Boohoo, in spite of fashion success, is doubted because of a flawed supply chain, inter-company transactions and lack of transparency. THG has done well, but imagine how much better it would have been if founder chairman Matt Moulding was not the company’s landlord and hadn’t maintained a golden share.
Wise, the next fintech to come to the market, is not seeking fresh funding. It should live up to its name and provide transparency max if it wants pre-launch valuations of £7billion to be justified. The business has been built on a simple model. The UK is filled with expatriates and the opportunity for sending remittances overseas enormous.
By creating enabling technology, Kristo Kaarmann and the lads from Estonia built a profitable enterprise. It is based on the premise that it can move money around more quickly, more cheaply and without making a turn on the exchange rates.
Similarly, Revolut, set up in 2015, began by helping travellers avoid mighty forex fees and has moved into all manner of other activities, from trading crypto to debit card payments and has 4.5m customers.
Fintech has found an easy path to challenge conventional banks, avoiding intrusive regulation by processing rather than deposit taking. When Wise or eventually Revolut do come to markets, investors need to know everything about the model. How income is earned, detailed income streams, the patterns of payment and governance.
Tech heavyweights on the board need to be mixed with trusted City names. Rushing to market without the right structures, hoping to ride the tech wave, is not good enough.