• Dec. 3, 2016, 1:41 pm

Mark Carney’s comments on ‘non-bank’ systems raise eyebrows

A recent speech given by Bank of England Governor Mark Carney caught the attention of many in the UK financial sector

While the focus was on the introduction of a financial sector crackdown (“The Age of Irresponsibility is over”), the following passage also raised a few eyebrows.

“Markets are a major part of the UK economy. 350,000 people are employed in financial services in London alone, and 1m across the UK as a whole. Across the country, their enterprise contributes £130bn to our national income and £70bn to our exports. On current trends, the UK-based non-bank financial system would increase from around six times UK GDP to nearly 15 times by 2050.”

To paraphrase Mr. Carney, trends suggest the impact of the UK’s non-bank financial system impact will increase by 250 percent over the next 35 years.

Should that target be reached, the entire nation would benefit as the technological innovation generated from the new wealth would touch every aspect of society.

But that is if the target is reached, and Nick England, for one, is not sure it will be.

Mr. England is the CEO of VFX Financial PLC, a London-based online foreign currency exchange provider. Because VFX handles such large volumes through large customers and the aggregation of many small orders, they negotiate lower prices and pass those savings along in lower costs.

Nick England

Nick England

vfx logo_CMYKMr. England admitted he was intrigued by Mr. Carney’s comment, which is a continuation of Chancellor of the Exchequer George Osborne’s rhetoric about the UK being the center of the fin-tech universe.

“I struggled to understand the basis Mr. Carney’s comments,” Mr. England admitted. “London is a fin-tech hub already.”

London is also a global financial center, possibly THE global financial center, Mr. England said.

Because of that status, tech entrepreneurs flock to London and innovation hubs have been established in different areas.

This includes fin-tech, he added. New startups are disrupting finance, and are leading the way with innovation.

But not all the news is good, Mr. England said, because he is beginning to see parallels between last decade’s tech boom and bust and today’s climate in many areas, including valuations.

Thanks to open architecture and the Internet, companies no longer have to build out the heavy architecture. That lowers the cost of entry.

So will these fin-tech startups radically alter the financial landscape?

Mr. England does not think so. Just like the last tech bubble, many startups will be bought and absorbed by existing firms. That is indeed the exit strategy for many. Most fin-techs also rely on banks for back end processing, and most cross border payments still go through SWIFT, the Society for Worldwide Interbank Financial Telecommunication, a member-owned cooperative through which 11,000 financial institutions and corporations in more than 200 countries exchange standardized financial messages.

Banks are also collaborating on blockchain technology.

While the ability of technology to streamline functions and lower processing costs will indeed cause a volume lift, the quality of the underlying business will be crucial, Mr. England said.

But remember that revolutionary technologies are only adopted by the underlying audience at a rate they are comfortable with, Mr. England explained, citing the growing comfort level with online banking, which has taken 15 years to reach this point.

Mr. England’s business is helping people exchange different currencies, and many people are indeed doing it via telephone, as apps and smartphone technology make it convenient to do that way.

But do not assume all technologies will be adopted at the same rate Mr. England advised.

“The best technology still needs to be adopted — it cannot be forced.”

A great example was Betamax, which lost the battle to VHS, even though the former was a superior option in the eyes of many.

“You cannot change someone’s comfort zone overnight,” Mr. England continued. “It is an evolving process. Look at QR codes years ago. The real audience had no clue what it was.”

The British government is taking several steps to cement its status as a fin-tech hub, Mr. England said. Mr. Osborne appointed American venture capitalist Eileen Burbridge as the British Treasury’s ‘special envoy” for fin-tech, where she will serve as a public liaison between entrepreneurs, the government, and the established business community.

Ms. Burbridge, a founding Partner at Passion Capital, is also Chair of Tech City UK, one of 19 members of the Prime Minister’s Business Advisory Group, and the Tech Ambassador to London Mayor Boris Johnson.

As the world prepares for the Fed’s initial rate hikes, Mr. England wonders if everyone learned the proper lesson from the recession.

“In our lifetimes we have never seen interest rates this low.”

“You can realistically argue that with the debt levels out there we should have taken our medicine, but we may have just kicked the can down the road instead.”

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