There is growing unease about the impact of disruptive technology on global banking and payments systems, says Huw van Steenis, the global head of strategy at global asset manager Schroders. “Over the past months, both the Basel Committee on Banking Supervision and the World Economic Forum (WEF) put out lengthy papers on their concerns and the state of play.”
He says that, so far, consumers have been the big winners from disruptive technology.
“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. Rather, technology has led to a marked improvement in customer service and a sharp fall in the cost of payments.”
Van Steenis says that, beyond the threat of cyber attacks, there are three broad concerns.
“First, will the banks be weakened by new entrants? Simply put, will banks be ‘Amazon-ed’? Bankers used to think regulation made financial services less appealing for new entrants. But now the penny is dropping that non-bank rivals can attack more profitable areas and leave the regulated banks less profitable.
“Second, will banks become less important as more lending shifts beyond the regulatory perimeter? Since 2009, swathes of business have moved from banks to asset managers. 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, he asks whether central banks will lose control of payments if privately issued cryptocurrencies such as Bitcoin 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 that 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.”
Van Steenis says that, until recently, policymakers had not worried too much about cryptocurrencies, because they provided few benefits, except to those trying to hide their tracks.
“They are not a store of value, as the recent drop in the Bitcoin price showed. They are not widely enough accepted to be a useful medium of exchange. And digital currencies have failed to be as secure as promoted; they have been hacked several times this year.
“However, as cryptocurrencies grow, we should expect more central bankers to look to outlaw or crimp their use. This will be most acute in markets that are worried about capital flight and organised crime. It won’t stop speculators and enthusiasts, but it will limit the cryptocurrencies’ potential to be useful parallel currencies.”
Perhaps these concerns should prompt central banks to make their own currencies more appealing, says Van Steenis. “More efficient protocols for electronic payments would help, and there is much to learn from Bitcoin technology.”