Chris Middleton presents a personal selection of just some of the stories we’ve been tracking on Transform Finance this year.
Crypto crashed, the BritCoin cometh, Open Banking boomed – albeit in slow motion – and the pandemic had complex effects on the financial landscape. Those were just some of the themes from a rollercoaster year in Financial Services.
Spring saw the Bank of England’s Monetary Policy Committee (MPC) issue a positive report on the UK’s economic prospects, after 2020 had seen it take a more severe hit than other G7 nations.
In 2020, the UK economy declined by nearly 10 percent year on year – with a Q2 slump that was twice as deep as the pandemic hit home. Those were record declines for a country also grappling with the uncertainties of Brexit.
However, the UK is bouncing back higher than previous forecasts predicted. Despite this, BofE governor Andrew Bailey acknowledged the bounce was from the deepest low. By the end of 2021 two years’ worth of output growth will still have been lost. “Let’s not get carried away,” he said.
The Kalifa Review
Also in the Spring, the promised independent review of the UK’s financial technology (FinTech) sector was published. Among the recommendations of the study by Network International chair (and former CEO of Worldpay) Ron Kalifa, OBE, were:
- A new FinTech scale-up visa stream for specialist firms
- A ‘scale box’ to provide regulatory support for growing companies
- A £1 billion-pound FinTech fund to help startups grow
- The establishment of a private sector-led Centre for Finance, Innovation, and Technology to support national coordination and growth in FinTech
- Changes to UK listings rules, including dual class shares.
Despite these aims, the US now dominates the space, with 54 percent of the world’s top 250 FinTech companies, according to analyst firm CBInsights last year, and with multimillion-dollar start-ups found in 43 US states (86 percent of the country).
However, the UK retains more than 10 percent of a fast-consolidating global market, generating an estimated £11 billion a year for the economy.
Financial technology continues to boom worldwide, according to CB Insights’ fourth annual roundup of the world’s top 250 FinTech companies. It found that the 2021 cohort had raised $73.8 billion in aggregate funding across nearly 1,200 deals since 2016.
The 250 have raised more than $40.3 billion in disclosed equity funding in 2021 alone (to mid-September), across 275 deals.
In the wider FinTech market, some start-ups have been wrongly describing themselves as banks, when they are more accurately described as e-money providers.
The FT reported in the autumn that the Financial Conduct Authority (FCA) had written to 300 FinTechs, instructing them to remind customers of the regulatory and trust risks of entrusting their cash to start-ups.
Meanwhile, the Competition and Markets Authority (CMA) wrote to online bank Monzo, warning it over KYC breaches of the rules governing customers’ transaction histories.
Easy being green?
One area where the UK can still lead is in green finance, with Leeds and London becoming home to a new UK centre for driving global green finance and investment, the government announced in February.
The UK Centre for Greening Finance and Investment (CGFI) will encourage banks, other lenders, and insurers to invest in clean innovations and green technologies, including sustainable agriculture and energy from renewable resources.
Divestment is important. According to a 2014 report prepared for the European Parliament, HSBC, Barclays, Santander, The Royal Bank of Scotland, and Lloyds at that time had in excess of £66 billion invested in oil, gas, and coal extraction within the UK alone.
Little has changed since then. Britain’s banking, finance, and asset management sectors are still major contributors to climate change, according to a 2021 report from Greenpeace and the WWF.
CO2 emissions from the UK finance sector’s global investments are nearly double the total for the whole of the UK. Were the City a country, it would be the ninth largest CO2 emitter in the world, at 805 million tonnes, it said.
Fighting the money launderers
The FCA wrote to the UK’s retail banks this year to warn them that they must do more to prevent money laundering or face serious consequences.
A letter, concerning persistent shortfalls in banks’ anti-money-laundering (AML) and counter-terrorist financing practices, was sent to bank CEOs in May by David Geale, the FCA’s Director of Retail Banking and Payments Supervision.
It warned executives they could be held personally liable for failing to counter financial crime. Failings in suspicious activity reports (SARs), risk assessments, governance, oversight, and transaction monitoring were all called out by the FCA.
Preventing financial crime costs banks and other Financial Services companies an average of £374,000 a year. That was according to a survey of 300 sector decision-makers by legal and business services consultants DWF.
Ending slavery must be a priority
Meanwhile, the need to fight modern slavery and human trafficking (MSHT) should be just as high on the radar of banks and financial services companies as AML and counter-terrorist-financing initiatives.
So said a report from anti-financial crime organisation Themis, in partnership with the Independent Anti-Slavery Commissioner and anti-slavery group the Tribe Freedom Foundation. The research was supported by NatWest, TSB, and financial services consultancy RedCompass.
Modern slavery and human trafficking hits more than 40 million people worldwide, with $150 billion a year lost globally to criminal organisations from widespread human rights abuses.
Spending on regulatory technology (RegTech) will hit more than $130 billion by 2025, as Financial Services companies and other sectors look for faster and more efficient ways to meet their compliance obligations, said a report in the summer.
Global spending last year on the technology was $33 billion, so the forecast represents an increase of 294 percent over five years – a compound annual growth rate (CAGR) of nearly 32 percent.
According to analyst firm Juniper Research, which produced the figures, growth will be driven by increased use of artificial intelligence (AI) to automate manual tasks, along with a transition to digital onboarding.
Make way for the BritCoin!
During FinTech week in April this year, the UK government revealed that it is exploring the establishment of a national digital currency.
At the time of writing, no firm decision has been taken by the government and the Bank of England on whether the UK should issue a central bank digital currency (CBDC). However, a formal consultation will kick off in 2022, with the earliest window for launching a stablecoin digital pound – or ‘BritCoin’ – being in the second half of this decade.
Transform Finance’s commentary warned that the timescale, though sensible in terms of creating a robust, trusted coin, may be too slow. China – which has already launched limited quantities of the digital yuan – the US, the EU, and others, are all pursuing the same aim.
Crypto booms and busts
Coinbase, the US cryptocurrency exchange platform, debuted on Nasdaq in April this year as a direct listing, marking a red-letter day for alternative finance as the first significant public move of its type by a crypto exchange.
In September the company reportedly bowed to threats from the FCA not to launch a cryptocurrency lending platform, Lend. The FCA apparently believed it could destabilise financial markets and lead to criminal behaviour.
The rollercoaster fortunes of cryptocurrency traders hit a downward stretch in May, as Bitcoin lost roughly 30 percent of its value in one day, and the other top-five traded coins took double-digit dives.
Bitcoin’s price plunged below $40,000 on 19 May, after hitting more than $63,000 earlier in the month, while the valuations of Ethereum, BNB, cardano, and Dogecoin also slumped. Traders were left licking their wounds, with some naming the date “Bloody Wednesday” for cryptocurrency. At the time of writing, one Bitcoin was priced at $48,858.
But despite the risks, and the challenges of using many cryptocurrencies as money – because of extreme, rapid changes in price – crypto remains extremely popular. American citizens are more likely to own cryptocurrencies than stocks, and many believe that digital tokens will replace the dollar within a decade.
That was the finding of a report by California-based personal finance website, CreditDonkey. It surveyed 1,000 American adults in May, and found that 73 percent owned some form of cryptocurrency, while only 64 percent owned shares.
However, it is fair to say that many may be attracted by the prospect of getting rich quick rather than making longer-term investments.
The report found that crypto investments are more prevalent among so-called Generation Z investors – broadly those reaching adulthood in the 2010s – than among older Generation X and Boomer investors.
In July, London’s Metropolitan Police ‘confiscated’ $250 million (£180 million) worth of cryptocurrency as part of an investigation into international money laundering.
In September, a report by the UK’s National Bureau of Economic Research – a private think tank – suggested that lax KYC controls in many crypto exchanges is enabling the laundering of billions of dollars worldwide.
In October, the US National Law Review added its voice to the debate: “Criminals are attracted to the cryptocurrency, Bitcoin, because it is easy and practical to move digitized money, because these transactions are very difficult to trace, and because there is a lack of consistent regulation regarding cryptocurrencies.”
Many crypto proponents argue that this is precisely the point: crypto coins should be a free-flowing, user-controlled system that exists outside of the existing structures of international finance.
Open Banking = open goal?
In the UK, the Competition and Markets Authority (CMA) launched a consultation on Open Banking this year, to determine the next stage of its development and governance.
UK Open Banking adoption more than doubled last year, propelled by the pandemic and customers’ greater reliance on digital online services and mobile apps.
According to the Open Banking Implementation Entity (OBIE, controlled by the Competition and Markets Authority and nine major UK banks), more than 2.5 million people were using these services by January 2021, up from a reported one million before the pandemic began.
At the time of writing, the numbers had shot up again and the UK had an estimated four million Open Banking customers, though that represents just 10 percent of UK account holders.
The UK now leads Europe in Open Banking services overall, but fares poorly in customer engagement and impact. That was the finding of a survey from Open Banking FinTech, Yolt Technology Services (YTS) in the autumn.
Meanwhile, a separate survey from payments provider Ecommpay found that few consumers fully understand Open Banking or its benefits.
Therefore, there is considerable potential for providers to educate customers and win their loyalty, when many customers – especially first-time bankers – are seeking out low-friction services.
Transform Finance wishes you a safe and happy Christmas, and a prosperous, healthy new year.