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Will Fintech Change the World of Finance?

Posted By E. Alex Floate, Thursday, August 1, 2019

Alex Floate, a member of our Emerging Fellows program checks the possibility of changing the world of finance by means of fintech in his seventh blog post. The views expressed are those of the author and not necessarily those of the APF or its other members.

 

Fintech was coined as a phrase in the early 21st Century that described the internet enabled finance technology that began to appear. Later it came to describe the whole of the financial technology sector, and a buzzword analogous to ‘invest in us – we’re on the cutting edge’. Others then began to see fintech as a gateway to a post-capitalist system in which fintech will democratize finance and save the world in the process. These enthusiasts were literally banking on fintech igniting the forces of creative destruction that would bring down the old order of labor, land and capital and replace it a distributed tech model based on individuals, information and abundance.

 

Creative destruction is a concept dating back to Marx that capitalism will continually destroy the existing order to create new value and wealth. Creative destruction is caused by innovation which undermines the status quo, and de-values anyone or anything that continues following the old order, including skills, desires, function and capital. During Marx’s time this was the new industrial barons destroying the value and wealth of the landed gentry through commoditization. More recently technology entrepreneurs have unseated the established industrial conglomerates by expansive use of information.

 

Obsolescence and replacement are not confined to direct replacement of the new technology but can endanger whole systems. For example, the inefficient neighborhood grocery store within walking distance of its customers fell prey to the technology of the auto; it was now easy to drive to efficient and cheaper supermarkets. Now we see even those supermarkets and stores falling prey to the technology of the internet. Creative destruction in action. Is fintech a technological revolution causing the next evolution of capitalism?

 

That is the hope of those who see fintech as the democratizing influence on finance and capitalism. The use of fintech allows individuals around the globe access to information, platforms, cheaper capital, and stores of value without needing expensive intermediaries or even beholden to any one currency. By breaking the back of the old finance system, the new decentralized one will be distributed across the population. Fans of Austrian economics will rejoice as fintech skirts around regulations and allows individuals to choose where they access and store capital, at what interest rate they want, and in whatever electronic currency that best suits their needs.

 

But, fintech fans appear to underestimate the reaction that vested interests of governments, financial institutions and current technology leaders have in either blocking, slowing or hijacking this new round of creative destruction. Governments especially will see this new order as a threat that previous iterations of change lacked, as it will challenge their ability to regulate and exercise financial authority over their own economies. We are already hearing the mumblings about regulation of Bitcoin or attempts to thwart Facebook’s plan to create a digital currency. The fintech wars will truly be unleashed once a digital currency appears at enough scale to challenge the largest currencies. That most likely will be the Rubicon that needs to be crossed before governments fully assume a war footing.

 

Before that occurs though, the most likely scenario is an alliance of current financial powerhouses, tech companies and both groups pocketed lawmakers stepping in to create conditions that allow much of fintech’s promise to be purchased and assimilated. Until then fintech will be a race, not a war, to see how fast it can advance. The race will be to provide people the power of its promise before a behemoth financial Borg assimilates it and leaves the people as powerless as they were before.     

 

© 2019 E Alex Floate

Tags:  Economics  Finance  Technology 

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March 13, 2030

Posted By E. Alex Floate, Tuesday, July 2, 2019

Alex Floate, a member of our Emerging Fellows program travels into the future and envisions the coming finance system his sixth blog post. The views expressed are those of the author and not necessarily those of the APF or its other members.

 

Late in the last century, the movie “Wall Street” introduced us to a world of men in three-piece suits vying for domination in the world of finance. ‘Greed is good’ was their motto and Wall Street was the magnet for the unending supply of MBA’s from elite American universities. With financial knowledge and a thirst for success, they became corporate raiders and white knights keen on dismantling what was left of American industry. They spawned dramatizations in the personas of Gordon Gecko and Edward Lewis in the movies “Wall Street” and “Pretty Woman”. Just like Hollywood at the height of the silver screen, this was a place where dreams come true, even if it was at the expense of blue-collar workers or lesser investors.

 

By the late 1990’s however, magazines were asking ‘where have the raiders gone’, and the internet was the new kid in town. Tech stocks were the rage and most of the action had moved west to Silicon Valley. It was inevitable, but not widely acknowledged that much of Wall Street would soon be run by computers and algorithms, and the big personalities that formerly would have been leading raids would diminish in size and importance.

 

MBA mills multiplied during the early part of the 21st Century, but the real action by 2020 was with quantitative analysts, or “quants” as they were called. Blending an understanding of finance with deep knowledge of mathematics and computer science, they were the minds behind the complex models that drove most of the pricing and trading of securities. Even though the suits with MBAs still held the top jobs, the people in white collars felt them slowly tightening around their necks.

 

The new digital collar belonged to a Millennial or GenWebster (someone born after the internet became widespread) wearing a t-shirt or hoodie, but fully versed in the internet and its ever-evolving abilities and culture. They were quants, cybersecurity experts, app developers, data specialists, and refugees from the banking industry. They had connections and financial knowledge to take on the task before them; bring financial applications and products to their generations without the costs of brokers, agents or physical storefronts.

 

New words describing finance were entering the lexicon – fintech, blockchain, appification and others that this time did not originate from Wall Street. Finance technology start-ups began popping up in areas such as the Silicon Fen in the U.K., Israeli’s Silicon Wadi, Bangalore India, and Shenzhen in China. Some were being bought up by larger traditional finance and bank companies as they wanted to position themselves for the digital future everyone was predicting. Usually the business siphoned some of the best ideas but neglected to further the primary idea behind it; lower cost, easy access with speed and efficiency.

 

At first the conventional finance organizations counted on their position in finance system as storehouses of money and trust, with the emphasis on Trust. The men and women with the digital collars kept at it though and advanced the technologies of blockchain and cryptocurrency. As the GenWebsters began to gain in financial clout they embraced the new finance products and eschewed traditional banks, brokerages and insurance companies. The white collars tightened again.

 

© 2019 E Alex Floate

Tags:  banking  economics  finance 

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Can a Company with No Assets Attract Investment?

Posted By Charlotte Aguilar-Millan, Monday, June 3, 2019

Charlotte Aguilar-Millan checks the possibility of attracting investment in the Information Age through her sixth blog post for our Emerging Fellows program. The views expressed are those of the author and not necessarily those of the APF or its other members.

 

The 21st Century has long been coined The Information Age. There has been a dramatic growth in the use of information technologies. A benefit of the new technologies is that there is a lesser need for tangible assets. Companies can now be successful with only the use of a laptop and an innovative idea. However, for most companies, whether they have assets or not, funding is required at some point within their lifecycle. How has funding changed with the rise of companies with no assets? Take Facebook, Alibaba, Uber and Airbnb as an example. They each do not hold on their balance sheets the assets from which they generate revenue.

 

A small to medium company (SME) can see many routes to growth through funding, but how many of these are open to companies that do not hold assets? The quest for funding of a company with no assets is likely to contain many refusals. The most obvious route for an SME is to take out a bank loan. This, however, requires collateral which a company with no assets does not have. A bank manager cannot reclaim the loan if the SME defaults as there are no assets to sell off. This provides a risky investment for banks. In the US, for example, only 1 in 4 small business loans applied for were accepted in 2018.

 

The two ways in which a company can raise cash is through debt or equity. Therefore, the next option is to look at listing, be this on the main stock exchanges, FTSE 100 for example, or exchanges designed for smaller companies such as AIM.

 

However, in order for a company to list on an exchange, they will likely need an appointed Nominated Advisor, financial and legal assistance. All of this requires cash which is what the company with no assets is seeking to find; not what is already has.

 

An alternative to the company with no assets attracting investment is for their owners to take out personal debt to put into the company. This could be in the form of taking out a mortgage against their personal home. Not only is this route extremely risky; if the company fails then they might end up homeless. This also is only an option when the owner has a home without an existing mortgage. Within the UK, the average age of first-time buyers were 31 years old in 2017 nearly 10 years older than a generation ago. 

 

A final way in which a company with no assets can attract investment is to speaking to that long lost rich Aunt. This itself speaks of rising inequality within the economy. The Information Age has enabled entrepreneurs to discover their vision without the high purchasing costs of tangible assets. However, finance has not kept pace.

 

Finance is restricting the mobilisation of companies with no assets. If the SME owner is not already established with a pot of savings or a house which the banks are willing to re-mortgage, growth can be limited. To the question, can a company with no assets attract investment, the answer is dependent upon the Company’s socio-economic background. This inequality is limiting innovation. 

 

© Charlotte Aguilar-Millan 2019

Tags:  economics  finance  investment 

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Will governments lead or follow finance’s future?

Posted By Alex Floate, Tuesday, May 28, 2019

Alex Floate, a member of our Emerging Fellows program examines the governments’ potency in leading finance futures through his fourth blog post. The views expressed are those of the author and not necessarily those of the APF or its other members.

           

Solving big problems has never evaded the human spirit. Ferocious tigers and bears led to spears and group tactics. Episodes of famine led to granaries for storing against future hunger. Following that came the domestication of the cat to protect against rodents feasting on the stockpiled bounty. In just the last century we have overcome distance with advances in communications, heavier than air flight, and even leaving earth’s atmosphere. As problems have become bigger in scale and cost, we look to our governments to take the lead on solving them. That we can solve big problems and overcome the constraints of our environment is not in doubt; that we have the will to do so is.

 

Continued financialization may create a dystopian-tinged future of financial feudalistic lords, while nationalistic oriented systems may reverse global gains and destroy the value of national currencies. Fortunately, neither future is set in stone and the opportunity to create a different one is possible, but dependent on current governments choosing a different direction and using the tools at their disposal. The mechanisms available include monetary policy for expanding and contracting money supply, fiscal policy to set taxing and spending priorities, and regulations on financial investment and exchange.

           

How should they deploy these mechanisms, and for what end? Should the government pursue a policy of continued economic growth, or one that favors renewing the social contract to favor all citizens? Should we create rewards for sustainability and disincentivize consumption? What system best emphasizes personal initiative and innovation, while caring for the least of us? Although this is a political exercise more than a financial one, the answer will determine which mechanisms are put forward as solutions.

           

If we decide that economic growth and consumption is not as important as sustainability of resources, then systems that favor labor and saving over those that promote investment churn and profit will be needed. However, just as this will call for increased taxes on investment and capital, higher taxes on consumption, which disproportionally affect the poorest, will also be required.  Should we decide that social programs, especially in a possible future of large-scale human obsolescence, to ensure an economic floor for all citizens is vitally important, then investment and tax mechanisms will need to be balanced to provide revenue while maintaining risk incentives for growth of capital.     

           

Before we can fully and rationally answer those questions as a society, the greater challenge is confronting the myths of both capitalism and socialism. Believing that free markets and privatization are always the best method for delivery of goods and services ignores that many needs are basic for life, and costs are not always inherent in the price. Conversely, believing that governments are always honest managers that efficiently gauge the needs and wants of their citizens and deliver accordingly is also not supported by history. The answer lies somewhere in between with a need for a new folklore and heroes to provide a basis for a future that tempers the worst of these extremes while balancing the best of them. The question to be answered is whether governments will work to balance these needs and forge a new story for the future, or abjectly acquiesce to the myths of the money changers.

 

© E Alex Floate 2019

Tags:  finance  future  government 

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Will Nationalism Reverse Global Finance?

Posted By Administration, Tuesday, March 12, 2019

Alex Floate, a member of our Emerging Fellows program studies the impact of nationalism on global finance in his third blog post. The views expressed are those of the author and not necessarily those of the APF or its other members.

The recent rise of populist movements in the West have rekindled a brand of nationalism that has created an ‘us’ versus ‘them’ mentality. Nationalism in this case goes beyond simple pride in country but develops into advocacy of one’s own nation above others and sees cross-border relations as a zero-sum game of win or lose. It also tends to be anti-immigrant, isolationist and even bigoted in nature and sees global trade and exchange as detrimental to the nation. Brexit and tariffs by the U.S. get the most press, but the rise of nationalist movements and autocrats is also affecting Turkey, Hungary, Poland, Italy, India, Israel, China, Russia and others. Europe’s financial institutions are especially at risk as nationalism threatens the continuance of the union and currency, but so are all standing financial relationships and markets.

 

This new nationalism will undoubtedly continue to reverse cooperative gains made so far and endanger financial institutions, both public and private, to efficiently and cost effectively provide services and capital across borders. The institutions of all nations may be threatened, but the severest consequences may be felt in developing nations as the West sees engagement with these countries as higher risk for less return. Engaging with them may also trigger some of the more racial elements of nationalists, as most famously represented by the American president’s reference to them as “shithole countries”.

 

Nationalism also endangers the internal finance of their own countries as vested interests capture government and enact laws that benefit domestic banks and entities over foreign competitors. Restrictions on the access of foreign based institutions to sell, buy, invest or lend will create multiple problems. Higher prices for goods and credit will be born primarily by the consumers of the economy. The inability to obtain investment capital or divest businesses will ripple through the entrepreneurial community and could lead to decreased business valuations. The largest corporate interests will not only survive but thrive in this environment as large banks become larger, and small competitors in all arenas are driven out.

 

However, these actions may sow the seeds of their own destruction. Control of the monetary system enables the nation to temper the expansion and contractions of the economy and in some cases prop up the ruling party. Just as the threat of nationalism may eventually destroy the Euro, the rise of alternative currencies and methods of value creation will spawn alternative finance networks that can also destroy the nation’s currency. A future scenario imagines these alternatives as creating systems that hasten national currencies to lose relevance and fracturing financial systems. If nationalist financial systems continue to be implemented, it will hasten that scenario as apolitical financial entities seek solutions to circumvent national politics.

 

Advances in global financial systems are in danger from a continued growth of nationalism. However, it will also affect global cooperation on shared problems such as climate change, nuclear proliferation and refugee crises, as well as endangering existing global political and economic relationships. An even more fragmented system global financial system will make meeting these challenges even more difficult. Just as the battle of communism versus capitalism defined the late 20th Century, globalism versus nationalism may define the 21st Century.  The question becomes will governments lead that battle, or just follow the money?

 

 

© E Alex Floate 2019

Tags:  economics  finance  nationalism 

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Has Finance Driven Digitisation?

Posted By Administration, Friday, March 8, 2019

Charlotte Aguilar-Millan reflects her thoughts about the impact of finance on digitisation in her third blog post for our Emerging Fellows program. The views expressed are those of the author and not necessarily those of the APF or its other members.

Innovation within the finance industry has seen unprecedented development. Not only in the accessibility of data but also how households access and manage their finances. Attributes such as easy access, speed of logging in and flexibility of data are now at the core of our expectations. Finance companies have stored a mass of data on their users to enable this. But how much data are consumers unwittingly gifting to finance within this digitised world?

 

Digitisation within everyday life is significantly affected by the finance industry. Through innovation in software capabilities, we are now able to access our finances through one simple easy portal within various forms of media. The future of digitisation within finance is reliant upon further integration of the customer’s experience. With the EU’s 2007 Payments Services Directive 2, it is now legislated that banks allow customers to share their financial data if requested. This has been adopted through digitisation. Banking apps now embrace a new feature where all bank accounts with various providers can be shown within a single app.

 

Banks are in the strongest position to develop digitisation. For years they have collected and processed personal data with customer’s transactions. With social media supplying instant feedback from customers on new digital products - through the use of tweets or Facebook commenting - banks are able tailor and adapt to customers wishes. Banks are able to analyse the data they have available and partner with companies to create an experience evolved from traditional banking. Today, most bank cards offer cashback opportunities on purchases at retailers which are tailored to customer’s previous bank usage. This not only provides a customer the financial incentive to use their banking facilities but also induces loyalty to a specific bank. 

 

Banks have been at the forefront of digitisation with developments in online platforms. However, this has also resulted in banks being at increased risk for lost confidence where the technology fails. Data migration between platforms saw TSB customers in May 2018 unable to access their accounts or make payments for weeks on end in what was due to be a weekend migration of 5.2 million of its customers between technology platforms. The effects of this error was a compensation bill of £116m and savings balances of customers falling by roughly £1bn as a result of 26,000 customers switching to an alternative bank.

 

This cautionary tale of reliance on data must be heeded by consumers. Whilst the TSB migration was the most publicised, banks such as RBS, NatWest and Barclays also saw glitches in customer’s usage of their online accounts in 2018. All of which has regulatory impacts on the safety of customer’s money. Finance must now take more ethical responsibility above and beyond the regulatory requirements. Customer security must not be breached in the name of innovation. Where the integration of technology and finance meet, so must accountability and security meet.

 

Finance initially lead digitisation through established banks enhancing their services with digital products. However, this has now transformed into digitisation leading finance. Fintech companies are being set up which supersede previously dominant finance providers. Companies such as Monzo, Tandem and Loot are fully digitised current account providers and adaptations such as ApplePay or Samsung Pay are making tangible finance providers redundant. The future could be that digitisation will drive finance, and that future banks are, actually, technology companies. Households now need to adapt to personal security resilience in order to protect their future finances.

 

 

© Charlotte Aguilar-Millan 2019

Tags:  Digitisation  Economics  Finance 

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Finance: servant or master?

Posted By Administration, Tuesday, January 8, 2019
Updated: Wednesday, February 27, 2019

Alex Floate, a member of our Emerging Fellows program examines the globalized face of finance in his first blog post in 2019. The views expressed are those of the author and not necessarily those of the APF or its other members. 


Finance touches anything that involves cash or credit. In public or private transactions. Whether it is to purchase individual or collective assets. For many people however, the word finance has become synonymous with the ability to get a new TV or car with a low-down payment. Although consumer lending for immediate desires is a part of finance it also includes investing, borrowing, insurance and the management of national monetary systems.

Our modern financial system began over 2,000 years ago with merchants granting credit to customers to enable them to purchase their products. Early banks in Renaissance Italy extended and aided these transactions and created innovations such as insurance. During the industrial age, finance evolved again to adapt to the capital-intensive nature of modern industry. Governments also found it possible to advance the common good by using these markets to raise money to invest in modern infrastructure and advance the public good.

Today, finance is globalized, heavily reliant on technology and intertwined with nearly every aspect of modern life. Nothing exemplifies a volatile, uncertain, complex and ambiguous environment better than modern finance. Every country with a treasury or banking system is integrated into a broader system that it can affect and be affected by events and decisions made by others a continent away. Major institutions, with stakeholders scattered across the globe look for advantages and profit in new markets and by leveraging the latest technology. Governments may seek to control their own economies for the good of their citizens but are often at the mercy of self-interest built into the system as profit seekers bid up, or crash asset prices and currency exchanges.

Recent events (global recession, Brexit, self-inflicted trade wars) will eventually be footnotes in history, but several themes from the aftermath provide insight for the future. One is that seemingly isolated events can move through global systems, even if those events are not seemingly connected. Another is that financial markets are resilient thanks to the various interests, both private and public, that will seek to revitalize the economy. However, increasingly this has been accomplished by turning private losses into public debt. The hardest lesson we learned is that even after a disaster caused largely by the financial industry itself, nothing really changes. The industry itself has eschewed any and all attempts at real reforms that would reign in practices that create greater risk in the markets.

The biggest change in the last 50 years has been the growth of finance as an industry unto itself. Separated from the purposes of providing credit for purchasers, capital for industry and risk management for all. The financial industry created a means for trading financial instruments themselves, such as derivatives of stocks, currency swaps and commodities that bear little relation to the actual hard assets. This has introduced additional complexity and volatility. Yet it has provided greater rewards to those who can access, manipulate and profit from these specialized financial markets. It is also seen as contributing to the widening wealth gap in many nations. Within this context, we must ask if finance has ceased being the servant of economic enterprise, and instead has become its’ master, and what part it will play in our mutual future.

© E Alex Floate 2019

Tags:  economics  finance  market 

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