The Bank of England has published a report entitled, “Future of Finance: Review on the Outlook for the UK Financial System: What it means for the Bank of England.” The report is authored by Huw van Steenis.
According to the document, van Steenis’ mission was to look beyond the immediate challenge or Brexit and identify longer trends shaping the economy and the financial services sector. The report identifies how the Bank can “support this evolution for the good of the people of the United Kingdom.”
In June 2018, current Bank of England Governor Mark Carney delivered a speech that kicked off the project. Carney sought to chart a course for the Bank that guides the institution not just for the present but for the future.
Recommendations in the report include:
- What the Bank has direct responsibility for, particularly how it could change its hard and soft infrastructure to support innovation and promote resilience in finance
- Areas of interest to the Bank where it is not the primary actor, and so may wish to collaborate or contribute
- Where the private sector will lead
“Crypto assets that are not backed by currency are an unreliable store of value, inefficient medium of exchange and simply won’t cut the mustard. In light of the potential for continued innovation, the Bank with other authorities will need to keep on top of developments for tokenisation of fiat currency for payments to make sure the regulatory, legal and infrastructure implications are understood, and monetary and financial stability safeguarded. This review does not see a compelling case for a central bank digital currency given numerous uncertainties.”
Finance is going through an accelerated transformation by digitization. This can improve financial services, boosting inclusivity and reducing costs, while creating new challenges. The document says the shift to digitally enabled services is profound and appears to be accelerating.
Of note, the worlds largest financial service firm is a Fintech launched by China’s Alibaba. Today, Ant Financial has over one billion customers without a single bank branch. Think about that for a moment. Ten years ago, Citi was top dog at a mere 200 million customers.
In the US, Fintechs provide 38% of unsecured lending up from just 5% in 2013.
The Bank’s report predicts that “the shift from banks to market-based finance is likely to grow further.”
“Many UK and global banks are struggling to make their cost of capital,” representing persistent competitive pressure from the Fintech realm.
The financial services sector is critically important to the UK economy:
“It provided over £300bn of real-economy finance in the UK last year, helping 700,000 people buy homes. It represents 11% of tax revenues and over one million financial services jobs, two-thirds of which are outside Greater London. The UK’s role as a global hub and market for buyers and sellers of securities and insurance is unique and offered a trade surplus of 3% of GDP in 2017. The UK’s Fintech sector is a world-leading centre of innovation. It generates almost £7bn in revenues annually, according to Innovate Finance. Given the size and dynamism of this sector, little wonder that fieldwork underscored firms’ interest in hiring talented staff, both homegrown and from overseas: 42% of those working in Fintech are from overseas, of which two-thirds are from Europe according to WPI Economics. But there was also a passion for improving skills at UK schools and universities.”
Having the right infrastructure to manage this transition is vital.
What does all this mean for the Bank of England? The document provides a deep dive into their current perspective, including:
- As our payment habits shift, we need a joined-up strategy to improve our payments infrastructure and regulation — which doesn’t leave anyone behind.
- Embrace the cloud
- Automated decision-making based on machine learning is one of the most important trends in technology today.
- Strong international standards are vital to underpin the efficient and safe flow of capital.
- The transition to a low-carbon economy poses both risks, and opportunities, for the economy, and the financial sector.
- Each generation’s different financial needs and circumstances will have implications for the provision of finance.
The Bank of England must embrace this digital revolution, according to the report. van Steenis proclaims:
So I recommend: first, the Bank develops and consults on a new medium-term regulatory data strategy (ideally three to five years) with specific initiatives to improve how it captures, shares and uses data under a new Chief Data Officer.
An industry advisory panel will be an important leg to this. The Bank should foster its data science capabilities and deliver a medium-term roadmap for the Bank’s digital transformation. This includes a recruitment and training strategy that meets the need of a central bank of the future. It should include a pilot to retrain economists with strong probability maths to become data scientists.
When considering a new data strategy, the Bank should explicitly consider both the cost to the regulator and the efficiency of the overall system, including the costs to the private sector.
The Bank must also embrace Regtech and consider how technology can make regulation less resource intensive and data analysis more effective.
Governor Mark Carney, who will soon depart the Bank, has been a long time advocate of Fintech innovation. In a speech delivered today, where he outlined additional innovation initiatives, Carney stated:
“The new finance has the potential to unlock stronger, more sustainable and more inclusive growth. By taking the measures I outlined this evening, the Bank can enable the new economy; empower greater competition and ensure the resilience of the financial system.”
The Bank of England Report is embedded below.
Bank of England future-of-finance-report June 2019