FinTech disruption, the end of big banks and why that’s a good thing

The finance sector is changing as banks lose their power and influence and everyone realizes they must take FinTech and new digital services seriously. Big banks need to realize this too.

Casper von Koskull, the CEO of Nordea, Northern Europe’s leading bank, recently threatened to move the company’s head office out of Sweden if the government implements a tax proposal that would levy an additional 15% tax on the costs of companies that provide financial services. The money would be collected especially for a system to manage potential bank crises.

Of course, companies are never happy with new taxes, and after the initial complaints and threats there are typically negotiations. But now Sweden’s Finance Minister Magdalena Andersson has hit back, saying that in fact banks pose a risk for a country and are a potential liability, so maybe it is not so bad if Nordea moves.

But was this only a typical left-wing political statement, or does she actually have a point?

Many governments have been forced to use taxpayer money to save banks, most recently after the 2008 financial crisis. Of course, it’s not only about where the head office is located – countries have risks elsewhere, as consumer savings are guaranteed in many countries. But in practice, the home countries carry the biggest risk – something that small Iceland realized, for example, when its aggressive internally growing banks collapsed.

Many governments now try to limit their risks and create new models to handle crises. One aspect of this is to split financial institutions, for example, so that investment banking and retail banking isolated from each other. Then there are also models for better stress testing and financial oversight of banks, collection of special funds from the finance sector that can be used in crises, and finding new mechanisms to handle crises that would see shareholders lose first. The objective of all these actions is to ensure that governments don’t need to bail out failed banks anymore. Taxpayers are tired of being on the hook.

After the 2008 crisis, many countries introduced a lot of new regulation. This can help avoid some problems, but more regulations can also mean even more complex instruments and also even bigger “too-big-to-fail” banks. It is often said that banks are like big black boxes. New regulation hasn’t really helped solve this problem. It is extremely expensive to be a regulated bank.

It is even said, that banks might become highly regulated, high-cost money pipes in a similar manner in which telcos became bit pipes. Some regulations, like EU’s PSD2, put even more pressure on this development, when banks must open APIs to their core services so other parties can develop value added service on top of them.

FinTech influence

At the same time, FinTech is rising globally, creating new services to help businesses and people get loans and capital. FinTech has an influence on many high-profit services such as international money transfers, wealth management and consumer/SME loans.

A top level former banker who has worked in London and Asia commented that new finance services are especially growing in new finance hubs in Asia like Shanghai, Jakarta and maybe also Kuala Lumpur and Ho Chi Minh City. His reasoning was that it is easier for these hubs to go to the next phase when they have little or no history, culture, IT and liability of the old models and institutions. So, it could mean a tough time for Singapore and Hong Kong, as well as London and New York.

Sweden has a left-wing government, and the finance minister comes from the Social Democratic Party. So, it is easy to claim her statement is a typical left-wing anti-business comment. Banks are important in the finance market, they generate taxes and offer jobs.

But maybe the minister has also a point. The finance sector is changing, banks are losing their role, and they must also revamp their models. Historically they have had a strong negotiation position with governments, but maybe it also is changing. Especially after 2008, politicians are also under much more pressure from citizens to be tougher with banks and bankers.

The finance sector is still changing slowly. The industry itself has started to realize the direction everything is going, and that everyone must take FinTech and new digital services seriously. We are still in the early phase of these changes that most probably will result in a much more fragmented finance industry – which is why those fragments must be able to work together in a transparent way.

Governments and regulations are also preparing for this change. They must also start rethinking banking services and their role in the economy. Less regulation would make it easier to create new banks, encourage more innovation and competition, and reduce the number of too-big-to-fail banks. Big giant banks are still a risk and potential liability to governments. This Swedish discussion can – and should – be a positive opening to discuss banking regulation and the future of the banking sector. Functional finance services are the cornerstone of each country and economy. But no one can say that the finance sector and banks must stay the same as they are today.

This article was first published on Disruptive.Asia.

Photo: Gröna Lund amusement park in Stockholm, Sweden (source: Wikipedia).