John Micklethwait, the Editor-in-Chief of Bloomberg, says last year you couldn’t get through any World Economic Forum panel related to finance without someone mentioning regulation. This year the inescapable topic is fintech.
Technological advances are destined to alter how the business of finance is conducted around the world. Are the world’s banks nimble enough to keep pace with the offerings of fast-moving fintech startups?
Unfortunately, there weren’t any representatives from smaller fintech companies on the panel Micklethwait moderated. However, that didn’t stop those assembled from weighing in on the role fintech stands to play in the future of finance.
Most of the panelists believe the current media hype mistakenly bundles various kinds of solutions into an all-encompassing “Fintech” category. Standard Chartered CEO Bill Winters explained that most fintech solutions belong in one of three buckets: lending, payments systems and data optimization. Winters made his most in-depth comments about the payments system and how it should be developed and regulated.
“The payment system isn’t a series of entities, it is one entity. There is one payment system. And if the payment system goes down, economies stop,” Winters explained. In comments that came as little surprise considering the role Standard Chartered plays in the global payment processing system, Winters outlined the role major banks play that can not be duplicated by fintech startups. “Banks play a central role in managing the payment system; not necessarily because we are better than a technology provider could be, but because we are regulated.”
Bank of America Chairman and CEO Brian Moynihan said an overlooked benefit of having major banks remain involved in payment processing comes from the resources big banks can dedicate to keeping those systems sound and secure. BofA spends roughly $500 million a year on cybersecurity, according to Moynihan. That is a cost most fintech startups can dream of matching. Moynihan highlighted how critical it is that firms like BofA have the resources to can spend massive amounts on protecting the system and avoiding outages, for if the payment system goes down for an hour, there are massive, global ramifications.
Moynihan also explained that not all fintech solutions are aimed at displacing big banks. In fact, some have helped major banks overcome regulatory hurdles and streamline their operations.
“We’ve reduced our costs from $80 billion to $56 billion or $57 billion and they will be lower this year. Along the way, we’ve spent $3B in technology development every year.” Moynihan explained. “We lost some lines of business because of policy decisions, but we learned to live with it. And part of doing so was using technology to optimize things not only in customer-facing areas but also in business operational processes.”
The biggest unknown about fintech revolves around regulation. How can policymakers regulate rapidly changing fintech solutions and business models when new regulations and policies can take years to implement?
Nevertheless, how to regulate fintech is on the agenda this year for working groups at the International Monetary Fund and the Financial Stability Board, according to Min Zhu, the deputy managing director of the IMF.
Standard Chartered’s Winters noted that how firms are regulated should depend largely on the service they aim to provide and how critical that service is to the proper functioning to today’s and tomorrow’s financial markets.
Ultimately, many fintech startups will win business because they can specialize in solving the specific needs of consumers and market participants. However, backed by the sheer power of their massive balance sheets, major banks will always have a role to play in global finance – even if that role is forced to evolve due to regulation, fintech advances or a combination of the two.