Nicolas Véron, Breugel/Peterson Institute for International Economics
Please give us a bit of background on yourself, and how your organisation plays a leadership role in the financial technology space.
I work for two not-for-profit think tanks, in Washington and Brussels, that are focused on international economic policy. I split my time between the two. My role is to analyse the environment in which economic policy decisions are made and provide facts, insights and, if possible, recommendations to people that are in a position to make economic policy decisions.
Ultimately the aim is to contribute to better economic policy decision-making through research, analysis and discussion. My specific area of expertise is financial service policy which encompasses regulation, banking, capital markets and of course all of these areas are affected by fintech.
In the interests of full disclosure, I am also an independent board member of the global derivatives trade repository arm of DTCC, a financial infrastructure company that operates on a non-profit basis.
How well are financial companies adapting to the rapid pace of fintech development?
It's important to remember that technological innovation isn't unheard of in the financial sector. Credit cards were, at one time, a technological and service innovation and in many ways not unlike fintech. I mention this because previous waves of technological innovation have been, to a large extent, absorbed by the incumbent firms. Compared with other sectors, financial firms have been rather adept at surviving by being proactive or at least reasonably quick adopters of new technology. Collectively, they've got a better track record of adapting to disruptive technological change than many other industries.
It remains an open question whether it's different this time or not. There is no question that there's a lot of technological change out there, but whether the key actors in finance will be replaced by different firms remains to be seen. At this point, there's no clear macro answer to that question, even though clearly there are many promising startups out there that are encroaching in the world of finance in a way that is novel and interesting.
What challenges do you see for fintech development and disruption from a regulatory standpoint?
There are many challenges for regulators. One is that, with exceptions of course, regulators often tend to be behind the curve when it comes to knowledge of the technological innovations that are around and the use of that technology themselves. There's good reason for this: being public-sector organisations, they have constraints placed on their operations and operating choices that private sector firms don't have. Generally the consequence of this is that they're slower at keeping pace with innovation than the private sector. That gap can be closed to some extent as many regulators have very skilled and talented people, but it is a challenge.
Another thing is that fintech is a world of startups, and traditionally financial regulation is not. Regulated entities are typically well known, long-established and there is a history of a regulatory relationship with each of them. With new players coming from nowhere, that crucially you don't know how long they'll be around for, that is a challenge for regulators. At the same time, the startups don't always have the full awareness of the regulations that exist, what role regulation has and the constraints it legitimately creates. The technological aspect of fintechs is disruptive but in a way it's the startup dimension of fintech that is even more disruptive from a regulatory perspective.
As a rule of thumb, fintechs also tend to be more international compared with more traditional financial activities. Because they're technologically driven, their business models know fewer international jurisdictional boundaries than more traditional financial services. By comparison, financial regulation is very segmented along geographic lines so reconciling that is also a big challenge. This is an issue for international finance generally, but is compounded when it comes to fintech, particularly for those business models that imply very rapid scaling up across jurisdictional boundaries.
What impact do you think Brexit will have on the broader financial technology industry in the UK?
That's a difficult question because there's so much we don't yet know about the future political and regulatory landscape post-Brexit. While fintech is important and fast-growing, it remains a relatively small segment of the UK financial industry, so we do know that it will certainly not be a main driver in the choices that are made on Brexit. Fintech will be a decision-taker, not a decision-shaper.
It's pretty clear at this point that Brexit is, with some qualifications, generally bad news for the UK financial sector. I believe it's less bad news for fintechs than most other financial activities. It comes back to the point about fintech being less regulated in general. I would therefore expect the City to suffer a lot from Brexit, but the fintech sector less so.
What happens in the UK fintech sector actually depends a lot on the broader business environment that is not specifically connected to financial services; for example, the UK fintech sector is crucially dependent on access to skilled immigrants. The UK will take back control over its immigration policy and, while this may be enabled by Brexit, it is now a UK domestic political question. This question of openness will therefore largely evolve independently of the negotiations. In my view, for fintech, this is a bigger question than the outcome of the Brexit negotiation with the European Union.
Which competing financial centres might benefit?
The truth is that there is only one really powerful cluster for startups in the world, and that is Silicon Valley. The other ecosystems, even London, which is one of the more substantial among the others, pale in comparison to it. The ecosystem component remains very limited elsewhere. What this implies is that you may see successful startups popping up about anywhere. London is a great centre with talent and infrastructure, for example, but the specific competitive advantage conferred by the local fintech ecosystem is at best incremental when compared to other factors. This is equally, if not more, true for any of the other cities in Europe.
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