There is growing uneasiness behind the scenes 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,” says Huw van Steenis, global head of strategy at Schroders.
Recent events have provided another perfect illustration of this point with the Chinese central bank banning initial coin offerings of bitcoin-based currencies.
He says that so far, the big winner of new technology has 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. Rather, technology has led to a marked improvement in customer service and a sharp fall in the cost of payments.”
He says that there are three broad concerns beyond resilience to cyber attacks.
“First, will the banks, which they have spent so much time trying to make safe, become 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 just attack more profitable areas and skim the cream 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. Over $600bn has been raised to fund private debt, according to market data firm Prequin. 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.”
Thirdly, he asks whether central banks will 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.”
Van Steenis says that until recently, policymakers had not worried too much about cryptocurrencies as they provided few benefits as a currency, apart from to those simply trying to hide their tracks. “They are not a “store of value” as Monday’s move 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 successfully hacked several times this year in huge size.
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 which are worried about capital flight and organised crime. This won’t stop speculators and enthusiasts, but will limit their potential to create the powerful network effects which would make them a useful parallel currency.”
But perhaps these concerns should prompt central banks to make their own currencies more appealing, says van Steenis. “Clearly, more efficient protocols for electronic payments would help and there is much to learn from bitcoin technology. But more profoundly, this is another reason why the European Central Bank, Bank of Japan and others should look to exit their dangerous experiment of negative interest rates sooner than later.”
