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Behind the scenes, there is growing uneasiness about how disruptive technology may be to the banking and payments system. Over the summer both the Basel Committee on Banking Supervision and the World Economic Forum put out lengthy papers on their concerns and the state of play.
So far, the big winners from new technology have been clients. Fintech innovators in banking appear to have been less disruptive than expected because they have largely failed to change the basis for competition in such a regulated industry, the WEF report argues. Instead, technology has led to a marked improvement in customer service and a sharp fall in the cost of payments.
But, beyond resilience to cyber attacks, there are three broad concerns.
First, will the banks, which they have spent so much time trying to make safe, be weakened by new entrants? Simply put, will banks be “Amazon-ed”? Bankers used to think regulation would make financial services less appealing for new entrants. But now the penny is dropping that non-bank rivals can target more profitable areas and skim the cream, leaving regulated banks less profitable.
Second, will banks become less important as more lending shifts beyond the regulatory perimeter? Since 2009, swaths of business have moved from banks to asset managers. More than $600bn has been raised to fund private debt, according to market data company Preqin. As a result, policymakers are spending more time analysing the non-bank sector. The growing dependence of banks on large technology firms to run their infrastructure is also giving policymakers pause for thought about who is systemically important.
Third, would central banks lose control of payments if privately issued bitcoin currencies were to take off? Issuing currencies is a lucrative business as central banks pocket the difference between the cost of issuing a coin or bank note and its face value.
Central banks also fear their ability to monitor the payment system would fall. Given the global fight against terrorism and organised crime, this is an acute concern. In an extreme scenario, central banks fear they may even lose control of the money supply.
Full article on Financial Times (subscription required)