Bitcoin, blockchain, banking. Ask any tech-inclined financial brain and they’ll tell you that 2017 is the year these three B’s – as well as AI, robo advice and host of other new technologies – collide. Brace yourself, says Jonathan Cotton, because the way we borrow, lend, save, spend and transfer money is about to change radically if the innovators, entrepreneurs, big thinkers and progressive incumbents focusing on this sector have their way.
In 2017 we find ourselves in the midst of the global re-evaluation of the processes and technologies that support the monetary system. Universally, countries are looking seriously at what needs to be done to update their services and practices for the modern financial age. The drivers behind the shift? New tech (open data, IOT, AI and a host of decentralising technologies), consumer demand and new regulatory environments.
The money is already there. According to one survey, investment in FinTech quadrupled in 2015 to $4.3 billion in Asia-Pacific alone, with global investment growing by 75 percent to $22.3 billion in the same year. The sector itself currently represents a $1 trillion global industry.
And there’s a worldwide rush get a piece of it. Hong Kong recently announced initiatives to foster financial innovation within its borders, establishing dedicated FinTech regulatory hubs, FinTech incubators and programmes to bolster its cybersecurity. Similarly, the UK recently announced its goal to become a “global capital of FinTech”, as did Singapore.
Closer to home, Australia has initiated its own regulatory changes to accommodate its burgeoning FinTech sector, setting up a ‘sandbox’ system that allows companies six months to test and refine their products without having to obtain a financial services licence. The recent federal budget saw the lowering of licensing costs for FinTech participants and the Australian Securities and Investment Commission (ASIC) has launched an Innovation Hub with a particular focus on helping these startups navigate the country’s regulatory system.
Kiwis have, historically, been enthusiastic early supporters of new financial thinking – think New Zealand’s groundbreaking adoption of EFTPOS and prescience around the equity crowdfunding and P2P regulatory landscape (not to mention rich home-grown FinTech pedigree in the form of Xero, PushPay and PledgeMe, among many others).
Right now, however, we seem to be missing the opportunity before us and that early foray into EFTPOS may be in part to blame. New Zealand has one of the highest levels of electronic payment adoption rates in the world. But other innovative platforms have not had the opportunity to thrive here as they have elsewhere. Simply put, the pain point hasn't been high enough to demand change.
New Zealand’s technology export earnings are predicted to surpass dairy by 2025 and FinTech has been identified as the fastest-growing New Zealand technology niche, with increased revenue of 31 percent year-on-year – twice the rate of the overall tech industry. And a comprehensive, government-level strategy to enable new thinking and support new FinTech solutions is the first step.
Pulling purse strings
One thing industry experts agree on is that lessons can be learned from regulators in Europe, Asia, the Middle East and Australia that are already taking deliberate steps to establish themselves as first-in-line FinTech centres.
“We need to have a single-minded approach across government and regulators, existing financial services corporates and startups to fully realise the opportunity,” says David Boyes, the chief technology transformation officer at Kiwibank. “Estonia, Israel and Finland are examples of smaller countries that have already become global leaders through this approach.”
Boyes says New Zealand’s opportunity lies in bringing both FinTech talent and investment dollars here, something only possible with a coordinated effort across government and industry. “Government needs to protect New Zealand citizens and our economy, but also enable a strong marketplace to develop quickly.”
Innovators need clear frameworks to work within for a market to develop, says Boyes, to know what they can and can’t do and to be supported within the regulatory environment.
“It needs to be as black and white as possible,” he says. “And the attitude needs to be about regulating to enable innovation. It’s a tough balancing act but those countries that are embracing that challenge are winning. So the opportunity is now to create a business and regulatory environment to dramatically fast-track New Zealand FinTech.”
The major challenge facing New Zealand is one of policy.
“The key issue New Zealand faces is the apparent absence of a true strategic approach to FinTech and the financial services sector at government level,” says financial services expert Simon Papa. “It’s about a lot more than changing legislation.”
WHAT IS BITCOIN?
Simply put, Bitcoin is the world’s first decentralised currency.
Technically, Bitcoin is a cryptocurrency and a digital payment system. In practical terms, it’s digital coins you can trade over the internet without the need for a bank or other intermediary.
WHAT’S THE POINT OF THAT?
Well, Bitcoins are ‘bankless’. Instead of a bank recording all transactions on one centralised ledger, Bitcoin operates via a decentralised ledger – it exists on all users’ computers at the same time. That means that no single party can control (or force a fee onto) a payment.
THAT SOUNDS PROMISING. WHAT’S THE DOWNSIDE?
What the internet is to publishing, Bitcoin is to money. It has the power to revolutionise or perhaps destroy the world economy.
Follow the money
Many believe regulation is unable to keep up with technology and, even if it could, legislators rarely have the power to solve issues in their entirety. So how are New Zealand’s financial prime movers and spenders, the banks, preparing for a future where thousands of startups are nipping at the heels of the big, well-established behemoths.
By all accounts, with a mix of wariness and excitement. While it's true that New Zealand’s established banks are encumbered by their embedded infrastructure – legacy systems that have sometimes been in place for decades – these formerly static institutions are in fact reacting with surprising agility.
Take New Zealand’s mobile/internet banking culture, which is light years ahead of other progressive countries such as the Netherlands. So while it’s easy to focus on the potential destruction of industries that disruption brings, in this case, the banks have shown that they’re willing to embrace new technology when it's expedient and help bring New Zealand into the new FinTech fold.
Last year Kiwibank, Callaghan Innovation and Creative HQ launched the Kiwibank FinTech Accelerator, a Wellington-based initiative designed to fast-track the growth of promising Kiwi FinTech startups (see profiles page 42)
The accelerator has now taken seven digital startups through an intensive 14-week programme, providing mentoring, business education and support to help them successfully prove, build and take their ideas to market. Several of the startups have now launched and are planning their overseas expansion.
The project represents a maturing of the conversation and a new focus on collaboration, says Boyes.
“The future is about banks partnering with, acquiring and eventually becoming FinTech,” he says. “The future is highly innovative and customer-centric businesses using technology to reinvent banking. Those [banks] that don’t will end up becoming utility providers or worse.”
Entrepreneurs have also become aware of the power that collaboration with established players can offer, he says.
“In the last few years there has been a realisation in FinTech that partnership with incumbents can give faster access to large customer pools and incumbents are seeing the advantages of partnering with fast-moving innovators.”
Investment advice: Yup, there's an app for that
How would you feel about trusting the management of your investment portfolio to a robot? That’s what’s on offer as ‘robo-advice’ starts to look more and more like a viable way of managing investment.
Financial services can be pretty complex products. As banks find new ways to crunch customer data, and as self-learning computers become more refined, many believe that FinTech machines are rapidly becoming capable of making faster, more accurate judgements than human advisors.
This means much lower costs, hyper-personalised service, and the opening of markets to those with less to invest. And it’s imagined that, ultimately, you won’t even know if you’re dealing with a human or a machine.
There’s money behind the idea too. Global spending on wealth management initiatives is set to reach US$12 billion by 2019, and that’s due mainly to the potential of robo-advice services.
While there are plenty of opinions when it comes to investing, there are no guarantees and markets are not always rational. As a rather skeptical story in the Financial Times said: “By attempting to create technology that emulates humans and then beats them at their own game, this new breed of [AI] fund may simply end up aping all of the worst characteristics of human investors … Computers will have an edge in processing large amounts of economic data, but may struggle with the more qualitative judgments [Warren] Buffett has excelled in such as judging the character of a chief executive or the durability of a brand.”
The Blockchain gang
All things considered, the immediate future of the financial mainstream looks as if it belongs to distributed ledger technology and its most well known variation, blockchain.
According to research by UK bank Santander, blockchain technology has the potential to reduce bank costs attributable to cross-border payments, securities trading and regulatory compliance by between $15-20 billion per year by 2022. FinTechs that are focused on blockchain solutions are attracting high levels of investment, and legacy players are already experimenting with the technology that looks set to revolutionise banking, finance and commerce across the board.
So what is it, how does it work and what is its potential?
Blockchain is a decentralized digital ledger in which transactions are recorded publicly and cannot be altered retroactively. Put another way, a blockchain is a list of records managed by a peer-to-peer network, and is a way of facilitating secure online transactions without having to trust that transaction to a single centralised party.
“Blockchain can radically reduce financial costs in all sorts of ways,” says Mandy Simpson, CEO at cyber security consultancy, Cyber Toa. “Take transferring money between countries, for example, a process where costs are very high. If you do that via Western Union it's going to cost you a small fortune – seven, eight, nine percent of that to send. For migrants who might be sending just a few hundred dollars or less back to their family, that’s unacceptable.”
But the potential of blockchain technology is far more extensive than that.
“If you want to prove that you knew something at a certain time, you could do that with blockchain,” says Simpson. “It can be used to track a product through its lifecycle – food from farm to plate stamped with information about where it's been and how it’s been processed. It can be used for digital rights management for artists wanting to manage their own music. It can be used to track diamonds in a way that may eventually drive blood diamonds out of the industry. It’s very exciting.”
And because blockchain has the potential to change everything, this is why the banks are paying so much attention to it.
“What this technology solves is what I like to call ‘digital scarcity',” says Stephen Macaskill, president of Blockchain Association of New Zealand. “When you can copy something into infinity then it has no economic value,” he says. “But if you're able to create scarcity, then you're able to give that unit a value. So we can now have digital units that represent things of value. That's something that cryptographers have been trying to solve for the last 40 years.”
But that's the just the first step, he says, because this digital token can represent more than just money.
“It can represent data, it can represent things like identity, a social media profile, a stock or a bond or a share in a company, a housing title or a car title, or even something like a vote. And because it's an open ledger that anyone can see and audit, that has a lot of potential.”
Although initially wary, the international banking community has started to soften its attitude towards blockchain, appreciating the efficiencies to be gained and the opportunity for improvements to the bottom line. Internationally there are bank-driven pilot tests underway and entire research teams devoted exclusively to developing blockchain solutions.
FinTech represents a US$1 trillion marketplace opportunity and there’s reason to believe that a wholly new financial services platform model will emerge.
“In the short term some players will be reduced to becoming utility providers,” Boyes predicts, “providing financial capital, risk cover and data to those companies that maintain customer relevance by reinventing financial services using digital, data and customer-centric experiences.”
And, ultimately, he says decentralised technologies will unleash a wave of opportunity for those that can adapt.
“That disruption will include payments receding into the background as the majority of transactions move to machine-to-machine; wallets becoming the new micro-service; tokens replacing traditional identity services and new companies weaving financial management and wealth into product and service customer experiences across multiple industries.”
One thing that seems certain right now is that digital currency – in whatever form it takes – is coming and that makes everything else uncertain.
“It's impossible to know exactly how this will play out, but digital currency will become more popular,” says Simpson. “Not just the Bitcoin variety, but digitally issued New Zealand dollars and digitally issued currencies across the world. China has already said that they intend to issue a digital currency of their own and you can expect other major reserve banks to be committing to this too.”
Macaskill points to the rise of a new capital markets economy based on digital currencies.
“Right now there are 800 or more digital assets and cryptocurrencies on various blockchains around the world and people are using them to raise funding through initial coin offerings. The interesting thing is that these coins are truly inclusive. Anyone with a smartphone can buy a billionth of a penny of a share off one of these new age business models.”
It’s that democratic spirit that makes the new technology so powerful, says Macaskill.
“There are three billion people in the world who are unbanked and have easier access to cellphones than they do to traditional bank accounts. Those people can invest in these new projects.”
“This new global registry now has something like US$60 billion of market value and it trades 24/7. It crosses borders. It doesn’t stop for national holidays. It doesn't stop for disasters.”
“I don't know specifically how that's going to affect our traditional capital markets but there's a clear path towards disruption there.”
“The only thing certain is that it poses quite a challenge to the status quo.” Or, depending on your view, a massive opportunity.
CASH? NO THANKS, WE’RE SWEDISH
With plastic the preferred method of payment for most transactions and with mobile payments taking off, the question on every FinTech enthusiast’s lips is: Is society on the verge of becoming 100 percent cashless?
If it’s going to happen anywhere, Sweden, the first European nation to print paper money, is probably the place.
Led by Björn Ulvaeus – yes, the one from ABBA – and bolstered by the country’s robust IT infrastructure and progressive temperament, Sweden is now looking seriously at going entirely cash-free. The rationale? To save cost and to pull the rug out from underneath criminals, including tax dodgers, who depend on anonymous and untraceable physical cash to exist. Remove the cash and you remove the black market (or so the thinking goes).
It certainly looks good on paper, although some are concerned about the privacy implications, and the creation of an app called Swish that was created by a consortium of Nordic banks and allows cash to be transferred instantly between accounts without any fees means that millions of locals now use the app to pay for food, bus fares and even church donations.
"One thing that's quite funny is that when you collect these days, there are some who will raise their mobile phone in the air to show that they are giving," Swedish Church spokesman Mats Lagergren told Bloomberg.
The app is now used by over 50 percent of the population and is adding 100,000 users a month, and when surveyed about how Swedes paid for their most recent purchase, only 16 percent said cash in 2016, down from 33 percent in 2012.
But if India’s recent attempts to demonetise demonstrate anything – the government withdrew all 500 and 1,000-rupee notes, or 86 percent of the cash in circulation, overnight – it’s that the working poor are as vulnerable to strident anti-cash policies as any black market criminal.
93 percent of the country worked ‘off-the-books’, so to speak, so in India the move quickly devolved into a financial emergency with small businesses struggling to stay afloat, staggering queues at ATMs and even reports of suicides and murder. Despite this pain, Prime Minister Narendra Modi was voted back in in the recent elections, with many saying it was necessary to help deal with the country’s crippling corruption problems.
In New Zealand, a recent MasterCard survey showed 90 percent of Kiwis used a card as their main payment method and 41 percent of consumers said they could live without cash in just a few years’ time. Half of those surveyed didn’t think we will be using cash in ten years.
When it came to the types of payment technology likely to take off, 59 percent said mobile payments, 47 percent said wearable technology like smartwatches and 42 percent said biometrics such as facial recognition and fingerprints.