REVIEW OF FINANCIAL MARKETS


HOW CLOUDY IS THE FINTECH FUTURE?


TIM SKEET, A VETERAN BANKER IN THE CITY OF LONDON, SURVEYS THE PROSPECTS FOR ‘FINTECH’ AS IT SHOWS SIGNS OF LOSING SOME OF ITS ALLURE


Tim writes in a personal capacity. He is a career banker in the City, currently serves on the Executive Management Committee of Bank of China, London branch, and is Junior Warden of the Worshipful Company of International Bankers.


timskeet1@gmail.com


The history of banking and tech has not been a good one. The relationship between conventional finance and technology and its fintech sector has been difficult, confusing, indeed fraught. There are many reasons for this awkward relationship. Lack of mutual understanding across the technology divide is only part of the issue. The financial services sector is caught between dealing with its rickety tech past and being challenged to embrace a shimmering tech future. This can be an uncomfortable place to be. On the fintech side, the term covers a


multitude of diverse services from crypto to various software applications or online banking. Some parts of the sector were designed to challenge, disrupt, and eventually replace conventional finance, although this bit of the plan does not appear to have worked out well, at least so far. Where does the relationship between tech and banking go from here? A string of high-profile failures and PR disasters has pushed banking management to address some of the industry’s pressing tech-related issues. There has been accelerated investment in and rebuilding of some of the dodgy old systems in the hope that they will prove more robust in future. Patching up old and outdated systems is no longer enough. There is also acknowledgment that


penny-pinching in IT can be a mistake, after past experiments in offshoring, outsourcing, and underinvesting. Those lessons have generally been learned and boards along with banking regulators no


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longer accept the idea that IT is an arm’s-length black box. Tech is an integral part of a bank’s operations and front-and-centre to the customer’s experience. But banks will need to consider carefully how to economically adopt and adapt new technology to fit their existing IT infrastructure. If banking is under pressure to clean


up its act, a string of recent scandals and failures in the fintech sector has reminded us all why we have regulators and their rules in the first place. Much of recent tech headline-grabbing has been in the not-so-niche crypto market, a sector ripe for a regulatory overhaul. Crypto is a sector deliberately built around an attempt to recreate financial services without banks and their associated regulatory framework. The broader question for regulators, beyond working out what to do about crypto, is how to go about dealing with those other unregulated parts of the fintech industry that overlap with banking.


CROSS-BORDER REGULATORY RESPONSE The regulators have, like the rest of us, been on a steep learning curve. It also remains unclear how the global regulatory apparatus will respond in this age of deglobalisation, protectionism, and geopolitical tension. Modern tech,


// A BETTER UNDERSTANDING OF THE RISKS AND REGULATORY NEEDS ON BOTH SIDES OF THE BANKING-TECH DIALOGUE WILL OFFER A WAY FORWARD //


just as financial services, is global and cross-border in nature. Will the regulatory response manage a suitably cross-border approach to tech, as was achieved for the banking industry following the 2008 crisis? Even as bankers and their regulators wise up to technology and its challenges, the banking industry is still faced with grappling with future tech needs and the ‘solutions’ on offer that might or might


not live up to their ever-expansive promises. Tech decisions can be a very expensive and risky business. To illustrate the nature of the debate, a


recent banking industry discussion of the potential for using cloud-based services highlighted some of the problems. On paper, cloud computing offers great potential for efficiency and streamlining certain services and data processing. There were three broad conclusions from the discussion. The first focused on concerns over the costly nature of employing cloud-based processes on the scale required. Then there were worries over security and data control, and finally concerns over probable regulatory resistance. These discussions all contributed to what one newspaper recently referred to as the cooling of ‘big tech’s hottest growth market’.


A TOUGH FUTURE However well thought out, much of today’s fintech sector is also having to face up to some other recent and pressing concerns. Crashing equity market valuations for tech stocks, a shortage of capital, lack of revenues, and struggles to scale up operations point to a tough immediate future. It is not clear who will survive and flourish, as wannabe disrupters find themselves now disrupted. It should probably now seem clear that banks need technology, and the new tech operators need banks. Both sides also need a more comprehensive, well-thought-out regulatory framework. This should call for open minds and a good understanding of the issues. There remain significant risks and


expenses for banks as they approach unavoidable IT and tech decisions. The industry is right to proceed with caution. Perhaps a better understanding of the risks and regulatory needs on both sides of the banking-tech dialogue will offer a way forward pointing to opportunities for those companies with ideas that the banks can use. We just need to understand how to navigate our way through the clouds of confusion.


THE REVIEW MARCH 2023


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