Enabling Evolution in Financial Services

LHoFT CEO Nasir Zubairi was announced as a new member of the IMF Advisory Board in June 2018, and took part in the “Introduction to Fintech and Some Legal Considerations” session at the IMF’s Law & Financial Stability seminar in December 2018. What follows is a summary of that speech, which you can view in full here (from 36:20).

I find the cliche that I think we’ve all use at some point, “the world is changing”, quite interesting. Very often when we say that I think what we’re actually doing is looking from today backwards; the world has changed.

We are at the juncture today where innovation is occurring at an incredible place, and accelerating faster than ever before. In the next 10 years we will see restaurants 3D printing food, we will share the road with autonomous vehicles, our senses will be augmented with technology to enable us to match real world with the digital world, certain cities will be harvesting water from atmosphere. Data and the sensory environment around us be able to judge who we are and the expressions on our faces, and serve ads on a much more contextual basis. In the medical world we will see bio printing, the 3D printing of organs. Nanobots doing celular level repairs. AI being used in diagnosis. I’ll stick my neck out and say that in the next 5 years we will cure the disease of ageing. How do financial services cope with that one? Where life expectancy increases to 120, or to 150? How does that impact pension funds? Life insurance? Health insurance?  How does that impact the key decisions that influence the financial products we utilise? When do we get married, when do we have children… These decisions drive a lot of our financial behavior.

There is no question in my mind that financial services have to fundamentally change and improve in order to keep pace with all of the other changes occuring in the world. Financial services today are not fit for purpose. We can order a taxi with a click of a button, enter and exit without paying. Facebook can remind us of childhood memories at the click of a button. Linkedin will remind us about meetings and tell us about the person we are meeting. We live in a very connected world, and connectivity is going to be key. In the next ten years there will be more than 50 billion connected devices on this planet, which is likely to cause huge issues with cybersecurity.

“Nobody wakes up wanting to buy a loan, or a mortgage, or invest in a fund. You wake up wanting a car, or a house, or wanting to send your children to school and pay for their education, to buy mobile phone credit, or to buy food, to support your family.”

Financial services are overly complex, today, and I see the productization of financial services as farcical. Nobody wakes up wanting to buy a loan, or a mortgage, or invest in a fund. You wake up wanting a car, or a house, or wanting to send your children to school and pay for their education, to buy mobile phone credit, or to buy food, to support your family. Yet very often in these processes of transaction, financial services and the engagement with financial services to facilitate that, is the most complicated thing. Getting a loan is not an easy thing. buying a house is not an easy thing because of the mortgage element.

Where we’re seeing a lot of innovation in financial services is the focus on making this easier. Companies are using (particularly in the case of lending) large scale data analytics, social behavioural analysis, to be able to understand better the propensity of someone someone to be able to afford a mortgage, and the propensity of someone to be willing to repay a mortgage which is often the critical element in that credit process. We’re also seeing data and artificial intelligence, machine learning, being utilised to better deliver predictable financial services to us principally via the mobile phone which is having huge impact in terms of enabling financial inclusion around the world.

What we’re seeing is two key strands as to how financial innovation is occuring, and it’s more of an evolution than revolution. I don’t think it could ever be a revolutionary event. I particularly dislike the word ‘disruption’, because I don’t there is a natural disruptive force here. That is principally because of one key element: Trust. We all need to trust financial services, and trust cannot be earned overnight. Trust takes time.

Where we’re seeing a lot of the focus and the firms we hear about that are doing well, providing alternative services to traditional institutions, are in the B2C realm. They are the ones the media like to hype. In Europe you hear about Revolut, N26, in the US maybe Lending club and others. But in terms of volumes and impact they are having, it is like throwing a pebble into the pacific ocean. Financial services is a 13 trillion a year revenue stream. A small pieces of that is obviously quite profitable.

“I believe that we are getting to a maturity of fintech where a key element of it is the second side: financial technology enabling financial institutions to do what they do but better.”

I believe that we are getting to a maturity of fintech where a key element of it is the second side: financial technology enabling financial institutions to do what they do but better. Financial services firms are going through a period where sometimes I’ve heard some of them say ‘we are now a technology firm’. I think that’s a bad decision by a bank, because banks do not and will not employ the best technologists. And that’s an issue.

The 1+1=3 will come from banks focusing on what they are good at (balance sheets, risk management, operations, access to capital markets) and marrying that with the best technologies of fintech firms in order to deliver better services out to the customer. Also very critically, and particularly where we see a lot of focus in Luxembourg, is on saving these institutions money and making them more efficient. What I find particularly interesting in today’s world (speaking from the European perspective) is that in an age where regulation seems to be increasing at an exponential rate in itself, the banks are getting into trouble. They are facing incredible margin compression in a world with greater transparency and more competition in terms of fees and revenues, and a significant increase in costs in terms of compliance and regulation.

If banks don’t use financial technology, and don’t begin to integrate Fintech into their operations, that that in itself poses the largest systemic risk as opposed to financial technology in itself. Banks will fail. In Europe we see Deutsche Bank and Commerzbank drop out of the DAX, having incredible problems with mounting cost bases. Interestingly replaced by fintech firm Wirecard in the DAX 30. A sign of the times to come.

They will not be the last. There are many firms wondering how they should structure their operations in Europe, because of the way their cost base is rising. The benefits of having multiple subsidiaries are now being outweighed by the cost of regulation in each of those individual jurisdictions. We are now seeing retrenchment and consolidation back into much leaner structures. Fintech is core to enabling these institutions. In Luxembourg we are very much trying to help them with big data, machine learning, robot process automation… in order to help them survive this future that is happening largely due to other factors. The world and the services we receive are dependent on this. Systemically, we can’t afford these banks and financial institutions to go under. They are still the lion’s share of the market. The new services that are coming are interesting, but I am curious how many of them will survive while offering a business model of very low cost transaction fees, trying to be lean on the cost side in terms of operations… It’s not easy to make money in financial services, especially for the challenger banks which seem to be mounting up equity investment to cover losses which i can’t see changing or reducing over the years to come.

One final point is on the world of crypto assets. I’ll be a little bit of a devil’s advocate. I’ve been building businesses and I very much believe in innovation and driving forward, creating new models and technologies for financial services, but with crypto i have a lot of questions. With bitcoin I have a lot of questions. I wonder whether it will create a societal impact, because right now it creates none. If anything it has a societal cost. Its legitimacy as a true currency when 80% of the coins are controlled by 3% of the wallets (who are profit orientated as opposed to government macro organisation) concerns me in terms of stability and volatility as a common tender.

In terms of ICOs, I dislike the C; coin. We see many projects around tokenization. Tokenization fits in one of two buckets. Either in the utility bucket, where you can use the analogy of a poker chip. You buy poker chips to fund building the casino, and then you can use the poker chip to play. The problem here is if every business on the planet uses poker chips there is always going to be a friction and a transaction cost, and there seems to be a lot of inefficiency in that model and so I wonder how long the ‘utility coin offering’ or ‘utility token’ will continue to gain momentum.

“I find it surprising that regulators haven’t put their foot forward and said let’s apply securities regulation to those tokens.”

On the other side, which is the one which I think will gain a lot of momentum and become more mainstream, is the securitisation. Where the token represents a security. And there I find that it is old wine in new bottles. The regulation exists. I find it surprising that regulators haven’t put their foot forward and said let’s apply securities regulation to those tokens. Then those legitimate ventures who are trying to do something truly evolutionary with tokens and legitimate in themselves will abide by those regulations. Every good fintech business prescribes to be regulated. Right now in an environment when we have nothing we are seeing the wild west, as is often coined by the media. The regulation exists, and if regulators came together and said ‘right, this is the regulation that applies’ I think we would see increased innovation in the sector because that would legitimize it to the broader world of money. The fund sector, private equity, venture capital, and the banking sector would see legitimacy in these products and would look to become users if not funders of these products.

There’s a lot we could talk about in this sector, it’s a fascinating  world and it is changing, and it can add a lot of value. It’s going to be an interesting world, as to how we look to how we can control this, while also looking to provide a melting pot where innovation can prosper.



The LHoFT Foundation

The LHoFT Foundation is a not-for-profit initiative supported by the public & private sector to drive innovation for, and digitialisation of Luxembourg’s financial services industry. The LHoFT is the national platform and central hub for Fintech, working to connect the domestic and international community to solve challenges and address opportunities that will ensure the Financial Industry’s continued competitiveness.

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