Governor of the Bank of England, Mark Carney, delivered the fintech industry something of a backhanded compliment last week whilst addressing an audience at a conference organised by the German central bank.
The Governor was quick to praise the fintech industry for its innovation and growth over the past few years, as well as acknowledging that increased competition could “democratise” financial services and would ultimately be better for the consumer, but followed the commendation with a warning that the stability of financial services were at risk if fintech’s rapid expansion was not policed by sufficient regulation.
"The history of financial innovation is littered with examples that led to early booms, growing unintended consequences, and eventual busts," Carney told the audience in Wiesbaden.
"The challenge for policymakers is to ensure that fintech develops in a way that maximises the opportunities and minimises the risks for society."
Carney continued that erosion of relationships between banks and customers, whilst opening the market for new entrants and in turn creating efficiencies and choice in financial services, could also prove to be a source of instability.
“If today’s universal banks have less stable retail funding and weaker, more arms-length client relationships, the volatility of their deposits and liquidity risk could increase,” Carney claimed. The Governor also sent out a warning that fintech firms would have to be treated the same as traditional banks by regulators if their activities posed a systemic risk.
"Those systemic risks associated with credit intermediation including maturity transformation, leverage and liquidity mismatch should be regulated consistently regardless of the delivery mechanism or credit algorithm," Carney added.
Carney’s comments came on the heels of similar statements made by Jens Weidmann, Head of Germany’s central bank, who also pointed the finger at the fintech industry as a potential source of financial instability. Weidmann affirmed that it was important that authorities had access to reliable data in order to be able to assess the risks.
How the industry has reacted:
Stuart Lacey, Founder and CEO, Trunomi
“Mark Carney's comments come at a time when the industry is facing landmark regulation – the General Data Protection Regulation – which fundamentally alters the way that banks interact with their customers.
"The regulation need not be a bad thing. If handled correctly, and banks embrace the need to protect the rights, title and interest each customer has over their own data, these new laws can enable banks to build deeper customer relationships. The scary thing is however, that with such a limited amount of time to go until regulations come into force, many institutions still need to implement the right measures to reach compliance. That shows that, as an industry, financial services is still way off being where it should be in terms of seeing this as an opportunity and protecting customer data.”
Danny Aranda, Managing Director Europe, Ripple
“We strongly agree with Mark Carey’s comments that innovation in fintech, especially when in collaboration with banks, can provide next generation products that go a long way to unlocking financial inclusion and better meet the needs of customers.
“However, despite continuous innovation in the FinTech industry, the risks it poses are not new. Managing these risks has always been and remains of utmost importance. As a financial industry, we have a well-founded principle-based framework for mitigating risk that is a natural starting point for this discussion. We believe it is the responsibility of the whole industry to ensure that risk is always considered in the development and refinement of new and existing products.
“We’re grateful that Mr. Carney has drawn attention to this issue once again and it is important to continuously remind the industry that it is through maintaining the highest of standards that fintech’s potential will be fully realised.”
Giovanni Daprà, CEO and Co-founder, Moneyfarm
“It’s great to hear that the Bank of England is committed to innovation. The UK regulatory environment is one of the reasons that Moneyfarm moved its head office to London, as the UK remains one of the best places in the world to build a fintech business.
“Mr Carney’s comments on robo advice draw attention to the benefit of a hybrid model in digital wealth management. It will be important for the fintech industry to remember the value of human interaction as technology develops.”