Like all revolutions, the rapid rise in financial technology poses both threats and opportunities in equal measure. Within the space of just a couple of days, two of the world’s leading banks offered an insight into the opposite sides of that same coin.
BBVA, the Spanish bank, announced in July it was “dramatically” boosting investment in European financial technology companies and launched a dedicated team to harness digital disruption in banking. The upbeat move came just two days after an analyst at BNP Paribas, the third largest bank in the world, warned that the technology underpinning Bitcoin, the digital currency, had the potential to make existing companies “redundant”.
In other words the issue for existing financial service players is whether they find themselves digitally disrupted as their income streams are picked off by new innovative players, or digitally dominant as they embrace new technologies and prevent start-ups gaining a foothold. A recent survey of 25 leading financial services executives involved in innovation found three out of five believed the established players would survive and thrive in the digital future. But two-fifths saw a bleaker future: half felt the industry would become disaggregated, while the remaining fifth feared banks would lose market share, revenue, and scale.
At the heart of the debate is the shift towards digital money, an issue that Imperial has devoted much research to in collaboration with financial services group Citi to produce the Digital Money Index, which measures 90 countries’ readiness for new technologies. Working alongside Citi analysts, Imperial College Business School researchers Llewellyn Thomas and Antoine Vernet defined digital money as ‘currency exchange by electronic means’. This definition included not just non-cash transactions such as credit and debit cards, but electronic channels such as ATMs and pre-paid cards, new exchanges like PayPal and M-PESA, and even stores of value used for transactions, such as Oystercard.“ The goal was to use the index as a tool to look at where each country was going and whether there were tipping points and actions that countries needed to take to push them upthe readiness scale,” Dr Thomas said.
They found being ready for cashlessness did not mean the country was actually using less cash. Dr Thomas contrasted Venezuela, where the cashless economy was growing because of the government’s desire to reduce the informal economy even though it was technologically illprepared, with Germany that had high levels of readiness but low usage. “We were able to look at the political,
cultural and technological dimensions to get a better flavour of the drivers of digital money adoption.” Looking forward he said while consumer demand would drive digital money innovation in developing countries, in developed countries it would be better technology making services quicker and better, that would drive adoption.
There’s a massive amount invested in the existing infrastructure, so it will be a technological push but the question is who will do the pushing – payment agencies or start-up fintechs and how happy will the banks be at having it taken from them. These are complex questions
One of the key findings was that digitising money flows could deliver measurable benefits for businesses, governments and consumers. A 10% increase in countries’ digital money readiness would bring 220 million people and US$1trn out of the informal economy into the formal financial sector, which in turn would generate an extra US$100bn of tax revenue. Access to affordable credit would lower people’s cost of financing by US$600 a year that would lead to an extra US$150bn of consumer spending.
But phasing out coins and paper money poses challenges, as was highlighted at a conference in June organised by Imperial’s
Brevan Howard Centre for Financial Analysis.
Franklin Allen, its executive director, said it was possible people could “live entirely without paper cash”. But it was also clear this would be challenging for people such as the elderly and poorer households without access to technology. “The biggest change would be people adapting to the idea of paying for all their services, no matter how big or small, electronically,” he said.
One innovative digital currency is Bitcoin, the one that scared BNP Paribas. It is a peer-to-peer exchange mechanism that is
not backed by governments and bypasses banks by using a ledger of every Bitcoin, who owns them, and the history of all transactions known as a “blockchain”. Because it uses encrypted computer codes it is practically impossible to alter transactions and defraud users. The Imperial Bitcoin Forum, made up of academics from computing, bioengineering, mathematics as well as the Business School, believes blockchains could revolutionise the way business is carried out across the world. The forum has set up a biannual student competition with a prize pool of £5,000 for research into issues such as privacy and security that innovative technology used in blockchains raises.
New financial technologies are emerging all the time. The growth of fintech has seen a massive acceleration in the past year. Global investment in fintech ventures has more than tripled during 2014 alone – growing to US$12.2bn from US$4.1bn in the previous year, according to Accenture. It took the previous six years for investment to make a similar jump from 2008’s US$930m. Imperial alumni are involved in a number of projects that are part of this wave of innovation and investment. A good example is Yoyo Wallet, an innovative app that allows users to pay for items with their smartphones that was founded and pioneered at Imperial.
Yoyo was co-founded by Imperial Innovations, the College’s technology transfer company, and launched in January 2014 at Imperial’s South Kensington Campus. Alain Falys, cofounder of Yoyo Wallet and a venture partner at Imperial Innovations, told an Imperial conference on the fintech sector in June that the app recorded 150,000 transactions a month and represented 30% of all transactions at the College and was used at employers such as The Guardian newspaper and Diageo.
He said while the US led the world in terms of investment – Accenture said it made up the “lion’s share” of 2014’s US$12.1bn – the UK was stealing a march on innovation. “From an innovation point of view the UK and specifically London has a lot to offer in terms of fintech,” he said. “You can build a truly global fintech company from here. “I think we are going to see a lot more firms from the financial technology sector emerging from London that will branch out across Europe and Asia and other parts of the world.”
Abdul Basit, head of finance at Innovate Finance, a venture that supports technology-led financial services innovators, agreed the UK and Europe could not compete with the US for investment. “Where London excels and the things it needs to build on are the huge financial services sector, the huge technology sector, and great universities like Imperial,” said Basit who earned his MBA at Imperial.
“There are very few places on earth that have those in the same place and that will be the driver for London’s leadership position in this industry.”