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AP Photo/Diane Bondareff
Prediction binge.
FUTURE OF FINANCE FRIDAY

How’s that prediction for the utter disruption of the finance industry going?

By John Detrixhe

It’s been said that new year predictions are little more than “mental junk food.” They’re designed for publicity—the bigger and more outlandish the better—and people who make them are seldom held accountable. A long time frame allows the prognosticator to repeat the same bold forecast for years.

So let’s have a look at a bold call that was published a year ago: 80% of incumbent financial firms will be “irrelevant” by 2030, a Jan. 29, 2018 report by the global research firm Gartner claimed. Fintech disruption will cause these traditional institutions to “cease to exist, become commoditized, or achieve zombie status,” the analysts wrote.

The researchers point to the sector’s flat return on equity (ROE) of around 9% since 2012 and argue that blockchain systems could disintermediate old school financial firms. Gartner also notes that new digital players can get up and running without building a single bank branch, and suggest that new breed startups will leap over regulations (or even have them cleared away by regulators).

Are these claims the mental equivalent of empty calories, or is there some actual nutrition? The forecast still has more than a decade to run, but we can do a progress report. Though equity prices fell into a bear market, the US banks’ ROE has ticked up closer to 12% following the Trump administration’s tax cuts. The enthusiasm for blockchain projects, meanwhile, plunged in 2017. Though there are still believers, like IBM, blockchain doesn’t appear to be shoving the big financial institutions into obsolescence.

But there are signs of disintermediation. Bank profit-streams from foreign-exchange are being disrupted by the likes of money transfer service TranserferWise, which broke even in 2017 and has continued cutting fees toward zero. Flashy debit cards that aren’t tied to a physical bank, from Venmo to Monzo, are multiplying. When it comes to paying for things, banks are getting unbundled.

In the UK, where open banking makes it easier to open and switch accounts, regulators seem to be speeding this process. In a fragmented financial world where users have multiple digital wallets and services, CEO of fintech startup Curve, Shachar Bialick, argues that the real opportunity is to provide a central app for viewing and controlling all these accounts.

As for sidestepping regulation, there’s a view that starting a tech company is as much about ignoring profit-squeezing rules as it is doing technology things. Take Uber, the taxi service that broke into the sector without originally being regulated like one.

Will watchdogs allow financial startups to sidestep the usual rules? The stakes are certainly higher—there’s never been a Great Taxi Crisis (unless you count taxi protests). Poorly regulated banking and lending, meanwhile, causes panics quite often.

And when Uber came along, many people (you and me, government officials) were willing to look the other way because we suspected that taxi services could be a lot better. They could be cheaper, we thought, and it would be nice if they had to accept credit cards. You can make the case that competition from ride-hailing apps helped change that.

But there are signs that financial regulators are paying more attention than the taxi watchdogs were. Late last year, executives at financial app Robinhood tried to outsmart the banks by offering checking and savings services that relied on brokerage protection (instead of savings account insurance). This idea crashed as soon as it was made public.

Even the rise of Ant Financial, the Chinese fintech that’s been a source of inspiration and fear for western executives, was blown off course by China’s financial regulators. It has reportedly been forced to increase the capital reserves held by its Alipay payment unit, and watchdogs tightened controls on its micro-lending business. These restrictions have crimped profit and the company now says its focus will be “tech services” rather than finance.

Most people probably get this. Complaining about banks is common, but people like knowing that the government will give us back our savings account money if one goes bust.

Likewise watchdogs, particularly in the UK, want to see competition and for startups to thrive. But losing people’s money makes them, and the politicians who appoint regulators, upset. For Gartner’s sugar-frosted disruption prediction to come true, financial startups will have to be a lot more mindful of government watchdogs than Uber seems to have been.


The future of finance on Quartz

  • Germans famously love their paper cash, which could make the society vulnerable to an ongoing cash-handler strike over higher pay. Some ATMs ran out of cash during a similar protest in 2015.
  • Happy birthday euro: the European common currency turned 20 this month. While the project remains incomplete, a good old crisis could spur policy makers to finally make the necessary reforms.
  • The US stock market stumbled spectacularly in December, its fourth-worst performance for the month since 1900. Despite the losses, the longest US bull market in history remains intact.
  • Robinhood’s saving service was too good to be true, but there are other high-yield savings accounts in the US. Better interest rates are available from online-only providers. Programs for credit card points, meanwhile, could become less generous.
  • Crypto tokens aren’t a risk to financial stability. The Financial Stability Board, whose members include the US, UK, China, and India, has adopted a “wait-and-watch” policy.

The future of finance elsewhere

  • Virtual cash is taking off in Zimbabwe, which adopted the US dollar in 2009 (paywall) after its currency collapsed. The African country is now relying on a quasi-US dollar (paywall) in electronic form, after banks ran low on hard currency.
  • European electronic payments got a turbo boost as the ECB made the jump to real-time small payments.
  • There are doubts about whether Ant Financial’s data-driven Sesame Credit (paywall) really works for assessing credit worthiness. In the meantime, the fintech giant is seeking to buy UK payment group WorldFirst (paywall).
  • As electronic money makes physical cash obsolete in China, merchants there are refusing (paywall) notes and coins. The central bank is cracking down to make sure cash payments remain available for consumers.
  • Facebook’s WhatApp service has yet to launch its payment service nationwide in India. Regulators are pushing for payments data to be processed locally in India, WhatsApp’s biggest market.

Previously, in Future of Finance Friday

Dec. 21: Big tech companies prefer the Federal Reserve over blockchain

Dec. 14: Amazon could learn from the Chinese tech giants

Dec. 7: An Indian entrepreneur aims to rid Japan of paper money, then repeat the trick in the US

John Detrixhe
Future of Finance Reporter
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