The Global Treasurer sat down with Richard Nesbitt, adjunct professor at the Rotman School of Management, University of Toronto to discuss the role technology will play in the future of finance, how regulators may react to big tech’s foray in financial services and what the new administration in Washington means for regulations. Nesbitt previously served as the CEO of Global Risk Institute in Financial Services, COO of CIBC and CEO of TMX Group, operator of the Toronto Stock Exchange (TSX).
What sectors in financial services have benefited from changes brought about by the pandemic?
First and foremost, it has been the incumbent players, the traditional banks people rely on. We have also seen some growth, for example, in payment systems. In Canada, we have the Interac system, which is a cooperative payment system that is set up by industry players. However, in the United States, they don’t have that system. They have a number of private [payments] players that have seen growth in their business. Payments has been one area where we have seen an acceleration because people don’t want to make payments in person anymore. They’re looking for a low-cost way to do it online. A lot of suppliers have come up to fulfill that need.
Other traditional areas at this point anyways, have seen less movement. You have seen players in supplying securities such as, Robinhood or TD Ameritrade grow quite a bit. However, that’s not new technology that has been in place for a decade now.
There is a debate on whether fintechs/big tech will have a cooperative or competitive relationship with traditional finance, where do you sit in this debate?
We launched a new book called The Technological Revolution in Financial Services last fall. Our position in the book is that fintechs like new technology start-ups, by and large do not have the customer base and are better off to work with incumbent organisations such as the banks and bring their new product functionality into the customer base of the large traditional financial services player. That seems to be a successful model. Companies like Borrowell would be a good example of that.
However, the jury is still out on what we would call in North America, the big techs, or in Asia the tech fins, Alipay being an example. There’s different terminology, but generally they are big technology companies that have very deep customer base in another area. The question is, how deep will they penetrate into the financial services market? We’re starting to see some initial signs that they are partnering with banks to work in this market area. Ultimately, their level of penetration will all come down to regulation, quite honestly.
For those traditional financial firms who are wary of fin/big techs what would you say to them?
What I always like to remind people is, it wasn’t that long ago where we didn’t have any digital banking. It was probably only about 10 years ago, when banks introduced digital banking. It was the banks that introduced digital banking for their customers, which now everybody is seeking to utilise. Banks have to continue to invest heavily in technology. There is no question that customers want to use more technology with banks. But that doesn’t mean they don’t want trust; customers don’t want to deal with an organisation that they don’t trust.
Trust is the most important issue in the relationship with your financial services company. If you don’t know the supplier, you don’t know whether you can trust them or not. Most people probably have a multi generational relationship with their bank. For example, you probably have the same bank as your parents.
There is no question that the technology companies will look to penetrate certain areas of financial services, such as payments. But there are other areas that probably are probably better served within the traditional regulated financial institution.
What do you think about big tech’s move into the financial services market?
The big techs, whether they be Facebook or Amazon and others, have a deep customer base but in another market. At some point, they will desire to sell some financial services to their customer base. What I strongly believe as a practitioner is many those activities, such as deposit gathering, have to be done within regulated financial institutions. Big techs will have a choice to either become a regulated financial institution, which is a high bar, or they will partner with other firms who are regulated financial institutions.
The reason I say that is because we are dealing with human beings. If you undertake activities outside the regulatory infrastructure, there will be fraud and there will be losses. That is something from a public policy perspective and a trust perspective, we really shouldn’t tolerate within our financial services system. The reason the regulation is there is to protect the consumer and to give redress to the consumers when there is a problem. We cannot allow and we should not want to allow, from a public policy perspective, those activities that are currently regulated to move into an unregulated regime. If that happens, it ultimately will lead to some level of fraud.
What will future financial regulation for fin/big tech look like?
In the industrialised world, it will be the traditional regulation, it won’t be new regulation. It will be ‘if you want to accept deposits, you must become a bank’. I don’t think a new set of regulations comes about, not that they won’t modernise regulations. In Canada they review and modernise the Bank Act every five years.
There will be modernisation of the regulations, but there won’t be a wholesale change to allow a different structure for the fintechs or big tech. Going back 100 years, 200 years, we have learned a lot about what happens when you don’t regulate financial activities. It never ends well. Those will have to take place within regulated institutions.
That’s why now what you’re seeing is the partnership of some of the big tech’s with the banks because certain activities have to take place inside regulated markets but others do not. To go back to payments sector, payments have not been that well served in traditional institutions. There is lots of ways you can improve the payments system outside of the regulated activities.
What’s happening in China with Alipay is the fundamental debate. What activity should be in the regulated infrastructure institutions, and what activities don’t need to be. What we’re seeing is governments and regulators are not going to permit the disassembly of the financial services and regulatory infrastructure, certain activities will have to take place on a regulated basis.
What direction do you think the new Biden administration will take regarding regulation?
I don’t think there will be anything profound because we still have Dodd Frank in place. It still exists as the law of the land. There may be some tweaking of regulations here and there, just as there has been in the last four years.
The one thing you will see, is a move back towards a greater global approach to regulation of financial services companies. There is a significant benefit from having banks around the world being regulated with some sort of common standard. For example, capital or liquidity requirements.
Moving forward, what we will see is re-engagement of the United States and other countries, including Canada, to a more global approach to regulation. If you don’t have a global approach to regulation, then you permit the possibility of some sort of regulatory arbitrage. Where certain things can happen in one country, but not in another country. That’s important in addressing things like money laundering or anti terrorist finance. You want coordination across borders, otherwise criminals will take advantage of that lack of coordination. The biggest change the new administration will bring is greater cooperation amongst countries and the regulators.
What kind of firms do you think will come out of this pandemic stronger?
[Post-pandemic], I think that some firms will prosper and thrive in this environment. I’m seeing it now where some banks are spending heavily on technology and they’ve actually launched new products, but I’ve seen other banks that seem to be lagging.
In the next 10 years, banks that has successfully deployed good technology for their customer base, some of that might be in partnership with fintechs, those banks will survive and prosper. Those that don’t do that, will probably gradually lose customer share and ultimately may be acquired by other banks. Companies that continue to refresh their product offering and refresh the agreement they have with their customers will probably do very well and they’ll use technology to do that.
The banks and other large traditional financial players will also use technology to reduce their costs, it can have significant impact on a firm’s bottom line. We talk more about product functionality and not the cost side, but technology has the potential to significantly reduce costs as well.