Traditional finance institutions often question and criticize the new finance models enabled by FinTech, using the excuse that banks are heavily regulated and must manage risks and protect their reputations. Yet the banking sector has more than its fair share of scandals – Danske Bank and Wells Fargo being two very recent examples – where regulations are bent or broken, putting their reputation and bottom line at risk (not to mention the careers of the people involved).
Perhaps now is a good time for them to wake up to reality?
Around 15 months ago I talked with a person at Danske Bank who works with digitization. I tried to get him to talk with some of our companies to implement truly digital processes. His comment was that he doesn’t talk with companies that use clouds because they are too risky. Another Danske person from wealth management gave me a lecture about how it’s easy for startups to use new technology – e.g. for KYC and AML and digital processes – but banks must really focus on regulation, reputation and risk management. Now we are reading that dozens of billions dollars (estimates of total exposure range from $30 billion to $240 billion) has been laundered through Danske.
Meanwhile, we’ve seen the news that Wells Fargo employees created millions of fake customer accounts to fulfill their targets. It was not very clear who initiated this practice, but it was basically motivated by pressure to hit targets and earn bonuses. Wells Fargo has also had other issues with things like modified mortgages, delayed payment fees (although the delays were their fault) and overcharging of credit card payments. Several management and lower-ranking staff were forced to leave the bank, and the firm has announced 26,000 job cuts.
When I recently spoke to a finance sector consultant in London about FinTech and wealth management, he commented to me: “It is clear the Swiss wealth management business struggles when it has been based on money laundering and tax avoidance, and now many governments have put pressure on it.” People also question more and more what these well-paid guys who offer coffee and lunches are really doing to offer value for their high management fees. Data analytics and AI can replace a significant part of portfolio management with lower fees, although it’s questionable if even AI can get those expensive lunches and dinners under control.
I was recently speaking at a FinTech panel in Silicon Valley and one fellow panelist – a venture capitalist – made a comment that “KYC is a funny thing – if you take a billion dollars in a suitcase to a bank in Switzerland or London, and you have traces of cocaine and blood in your suitcases, they find a way to pass the KYC, but if you are a foreign worker with a few hundred dollar salary, you are in trouble with KYC.”
Big risk hubs
Regulation seems to be a recurring argument traditional finance institutions use to protect their own positions. At least, people in the organizations seem to believe that. But in reality it is not so clear – many regulators have also seen that traditional finance institutions are big risk hubs and that’s why we have things like PSD2 and FinTech sandboxes. The cases above are only some examples – there are many others, so it’s fair to question how much talking about regulation and reputation is hypocrisy.
It is easy to list all kinds of risks and uncertainty with new technologies, crypto and blockchain models, and how machines could handle KYC, AML and portfolio management. They also like to argue that customers are keen to have a human touch in the services. But do you really feel you have a human touch when you call a bank call center, end up in a call queue for half an hour, and when you’re finally connected to the human, you realize he/she is reading standard answers from a screen?
It is said that if someone invented bank notes today, they would be illegal because they would be too risky to use. People are always skeptical with new things. At the same time, concern, skepticism and risks never stop development, especially when new solutions are just so much more effective and offer new opportunities. It is the same with finance services. When distributed models, FinTech and AI come to finance, old institutions either adapt or lose a significant part of their business.
We can already see, for example, cloud back offices and IT that cut the IT costs to 1/100th of traditional banking IT. When these come to the mainstream, this will be quite disruptive, and we will see thousands of new finance services that are not only more cost-effective, but also can offer better tools to manage money, find optimal loans and provide a better customer experience. Expensive IT is no longer a barrier to entry.
Probably AI is also more resistant to all the hypocritical talk about regulation while the other eye is closed to suspicious transactions and customers. Data analytics, AI and RegTech will be the new tools of regulators. No system is perfect, but when machines manage the process and there are audit logs and document history of yellow and red flags, it is harder to bypass processes.
We are headed for a new finance services reality, and traditional finance institutions can no longer hide behind the window dressing of regulation, reputation and risk management. They need to face reality and decide their next move. They can either fight and defend the old castle till the very last man, or start a journey to a new land.