Category Archives: Banking

Banking, Disruption, Fintech

We Can’t Go on Together with Suspicious Minds.

https://www.financialexpress.com/industry/banking-finance/why-traditional-banks-need-to-partner-with-fintech-firms-for-delivering-essential-banking-solutions/2138806/

Who and What?

Is it a battle?

An “industry under siege,” and there is no going back. 

Simply, FinTech’s impact on the traditional banking industry. 

Remember? The bank, you recall, where you make and receive loans, keep your money in a bank account, get credit cards, etc. Also, investment banks, such as JPMorgan, Goldman Sachs, etc.

Those.

So, FinTechs have swept into the financial sector, disrupting it by providing customers with various innovative products and services. 

Examples include mobile payments, mobile banking, e-wallets, and chatbots. FinTech companies, at their heart, are inherently consumer-centric from a technology perspective—companies using sophisticated technologies, such as blockchain, artificial intelligence, biometric sensors, and open banking. The list could go on.

The traditional banks and financial institutions meanwhile offer personal banking by allowing you to email them (or worse, meet a human being), issue checkbooks, and use ATMs which can even give you… cash? I cannot recall when I last walked into a physical bank.

Why and Where?

The reputation of traditional, brick-and-mortar banks and financial institutions isn’t just one of boredom – it is antiquated. “One size fits all.” Financial customers are now naturally looking for more accessible, flexible solutions and experiences, and complex, time-consuming banks are not meeting those needs. 

You are likely already be using some form of technology provided by a FinTech. You may not even realize it: contactless payments, having that Starbucks card in your wallet. Using PayPal. 

I recently read an article from 2021 that said, “Will FinTech last?” – that felt like reading something written a decade ago. I don’t use cash in a city like London; I don’t want to either. Like many, I prefer contactless payments; as a result, cash is used far less as a payment method in many places.

Many places – but in far more, cash is required.

https://www.markarnold.com/2019/11/racing-to-serve-the-unbanked-could-have-huge-payoffs/

Unbanked households have neither a checking nor savings account. They list their main reason for being unbanked as “not having enough money to keep in an account.”

In just the US, according to Federal Reserve data, 19% of American households making $100,000 or less are unbanked or underbanked (2019). The fact this number is so high in a country such as the United States is staggering.

In 2017, the World Bank reported 1.7 billion unbanked adults worldwide. 

By far, these people are from developing nations.

Traditional banking has never worked in these jurisdictions. FinTech offers a potential solution. Cash isn’t required, and traditional banks are therefore not required. Everything can be done using things like mobile money and FinTech banking. The increase in the use of mobile phones in many African nations is an example of FinTech’s potential. Out of those reported 1.7 billion unbanked adults, 1.1 billion now own a mobile phone. FinTech provides financial inclusion to millions of people who have forever lacked banking facilities. However, cash remains dominant, at least for now, as it is entrenched in the developing world.

When?

Now. 

The global FinTech market was valued at $6.5 trillion in 2021 and is estimated to grow at a compound annual growth rate of 13.9% between 2022 and 2028 to reach $16.65 trillion. That is an amazing statistic.

To bank the unbanked, FinTech leaders and traditional financial institutions need to work together to reduce and address the specific needs of these regions and reduce the barriers to banking.

Fortunately, there are signs the collaboration is now happening. Visa and Mastercard are an example of two traditional financial institutions now partnering with FinTechs to reach many of Latin America’s unbanked populace. AXA has partnered with MicroEnsure to extend insurance to new customer segments in emerging markets. There are several others.

By partnering with the nimble, innovative, and sophisticated FinTechs, the traditional banking world is exposed to a more extensive potential customer base than ever before. According to Benchmark International, 82% of traditional financial organizations plan to increase their collaboration with FinTech companies in the next few years.

The battle is over. There is no going back. 

Let’s don’t let a good thing die.

Chris Garrod – July 2022

Banking, Bermuda, Cryptocurrency, Digital Transformation, Disruption, Fintech, Technology

“Do you take credit cards?”

When did you last hear someone say that? If I had to guess, for most people, perhaps 2 or 3 years ago. Perhaps at a cafe, in a taxi?

But it is unbelievably rare now.

Taking Bermuda, where I live, as an example. Bermuda’s oldest bank, The Bank of N.T. Butterfield & Son Limited, announced a little while back that it had to take the unfortunate action of allowing 30 employees to take early retirement, making 11 employees redundant and closing retail banking services (“walk-in’s”) and drive-thru teller services at one of its branches.

Fintech is the overriding catalyst behind the job cuts. “Walk-up and drive-thru ATMs will remain in place” according to the press release, which also emphasized the Bank adopting a “more automated back office environment.”

First, the “tech” part: technology. People still bank using ATMs (a technology which will celebrate its 50th year anniversary this year) but have increasingly moved online. The growth of online banking is leading to the death of [physical] retail banking. People generally don’t use traditional retail banking services, let alone drive-thru banking any more. Those services that might, you know, involve people.

I just haven’t used a bank teller for… I can’t remember how long.

 

And the “Fin” part — a bank is like any company, and although there are examples of socially responsible companies, most simply are firmly focused on one thing: return to shareholders. As painful as it may be for staff, closures of branches and employee cuts are required to make them leaner and more profitable. In order to compete with other banks and financial institutions, their focus has shifted to creating easier, more flexible online banking services for their consumers.

The Debate

There has been a lot of debate over what can or should be done regarding those individuals who have lost their jobs or taken early retirement. One of the frequent questions: “who will be next”?

The initial statement from Bermuda’s Premier Burt: “the Government will increase our efforts to diversify our banking sector as a matter of national priority.” Diversification must in part allude to Bermuda’s development of crypto banking and digital asset businesses.

Both the Island’s new Digital Asset Business Act 2018 and the amendments to The Banks and Deposit Companies Act 1999 (which accommodates crypto banks to form on the Island) will result in the formation of new licensed entities which will have to have a physical presence in Bermuda and should provide some employment opportunities. Crypto banking and digital asset financing will also develop in Bermuda over time.

1_9mFgmLFaq0KKNMtcz6Kj-Q@2xThe Potential

It is up to the companies themselves within financial sectors to adapt to the new technological pressures that a disruptive, Fintech driven environment creates.

New skill sets can be developed. Retooling and transitioning from traditional banking to Fintech technology can happen but it won’t be easy.

Employees within the existing banks and financial institutions may be able to take advantage of the new opportunities to work in Fintech related areas which are new and exciting, so long as there is a willingness to learn and adapt. These companies can try to re-skill their existing employees, or at least give them the opportunity to work in other, more viable areas within the organization itself.

Potential jobs with “cyber”, “tech” or “data” in their titles may be attractive to those for looking for future employment opportunities, particularly in the cybersecurity sector.

Of course, in addition to the pure financial aspects of Fintech, the increase of automation, artificial intelligence and machine learning are also becoming bigger factors. So is the use of chatbots. As machine learning increases in sophistication, human financial advisors are also being replaced by robo-advisors.

 

1_uCqnn2y2q_Sb5wTiBQp47w@2xThe Reality

So what, realistically, can Bermuda’s Government do to help protect jobs in the financial sector?

Bermuda’s digital asset businesses and crypto banking are being encouraged. The amendments to Bermuda’s Insurance Act to attract new Insurtech companies forming is also helpful, as many new Fintech companies, outside of finance, are in the Insurtech sector.

So, “diversification” will occur. Everything can and will be done to speed up that process. From Bermuda’s perspective, being a leader in the digital asset business sector and a creative force in the crypto banking sector will not just create jobs; the hope is that it will make the Island an innovative, global jurisdiction.

But the reality is: when looking at the disruption Fintech may cause at this current time …. it is really just an impossible question to answer in the short term. It is an impossible question to ask anywhere.

We have an uncertain future full of disruption but one also full of technological efficiency, advancement and promise…. advancement and promise for those who are willing to embrace the possibilities which Fintech may bring.

But those within the traditional financial sector will be under the most pressure to adapt because this kind of disruptive change will hurt. It will hurt those entities who are slow to move and regrettably it will hurt a number of people as a result, no matter what.

This is a disruptive digital revolution which you cannot stop. But you can prepare for it.

 

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Banking, Bermuda, Blockchain, Cryptocurrency, Digital Transformation, Fintech, Internet, Technology

Bermuda’s Digital Asset Revolution

It’s called The Digital Asset Business Act 2018, which doesn’t really sound that interesting, I suppose.

But, yes, it is.

The Act introduced the concept of digital asset businesses setting up and being regulated in Bermuda. Creating a new regulatory approach, while also one which is very much founded on the Island’s existing, successful (re)insurance industry.

Basically, the Act is trying to achieve what the Island’s Insurance Act did in 1978: the establishment of an entirely new sector of Bermuda’s economy. One which is regulated by the Island’s prime regulator, the Bermuda Monetary Authority.

An industry which over time will become a new “economic pillar” for the Island. A fledgling digital asset industry which may also turn out to be an innovative example for other jurisdictions to follow.

Digital Assets and Digital Business

As a basic summary, digital assets are just assets which are digital. They cannot be used as legal tender; they are meant to be the assets of the person issuing them and they are accessible using virtual ledger technology (i.e. blockchain).

As set out in the Act, “digital asset businesses” will do the following:

  • issue, sell or redeem any kind of digital asset (anyone issuing digital assets or allow customers to redeem their digital assets into cash);
  • be a payment service provider including using digital assets to transfer funds;
  • operate an electronic exchange (Coinbase, Krakken, Bittrex, Binance are examples);
  • provide “custodial wallet services” (basically a service provider where they store and maintain “keys” for controlling your digital assets, which is then kept on servers of third party service companies who can then allow you to send, receive and otherwise monitor your digital assets); and
  • be a digital asset service vendors, i.e. someone carrying digital asset transactions for another person or those who are essentially “market makers” — traders of digital assets.

Licensing

Like insurance companies, digital asset businesses are subject to regulation. From an insurance perspective, the Bermuda Monetary Authority (BMA) will always view policyholder protection as being the most important factor when regulating insurance vehicles.

When it comes to digital asset businesses, they look at consumer protection.

This is a whole new ballgame as we are now dealing with digital assets. An entirely new industry. The BMA, like many other global regulators, issued a warning to the public generally about initial coin offerings (ICOs) and the fact that they are not subject to regulation. Bermuda’s own Initial Coin Offering legislation came into effect in May 2018, requiring ICOs to apply for their offerings to be approved by the Island’s Ministry of Finance.

The Digital Asset Business Act, which came into force in June 2018, is focused entirely on actual digital asset businesses and not ICOs. These businesses which operate in or from within Bermuda absolutely must be regulated.

There are two separate classes of license which the BMA can issue:

  • a Class M license: one which can carry on activities for a defined period. To date, one company, Omega One Bermuda Ltd., has been issued a six month Class M license to act as an exchange and a custodial wallet service provider; and
  • a Class F license: one which can carry on all of the activities as described above. To date, none have been issued such a license.

The BMA has to be cautious. Rightly so. The Act was drafted based on a mix of the Insurance Act provisions as well as existing FATF recommendations. Similar to the Insurance Act, there are head office requirements, broad intervention and disciplinary measures given to the BMA, and also provisions to notify the BMA regarding matters such as license breaches, material changes of business, etc.

The application process is also quite similar. A business plan needs to be filed with the BMA which focuses on how consumers will ultimately be protected — e.g. cyber security details, risk management functions, insolvency mitigation and more than anything else, an overview of how the applicant’s Anti-Money Laundering and Anti-Terrorism Financing policies will be implemented. AML and Know-Your-Customer requirements are absolutely key in this very nascent digital asset business world.

The BMA has drafted a proposed Code of Practice which the regulator will expect digital asset businesses to follow (similar to the Code of Conduct which insurance companies also must meet). The requirements are detailed and include matters such as requiring all digital businesses to have IT security awareness training, monitoring key storage, data sanitation requirements…. the list is lengthy.

In short, Bermuda’s licensing requirements show that it is not moving lightly into the world of digital asset business. Bermuda wants to be at the forefront of a new industry, but it wants to do so in such a way to ensure its reputation remains intact.

Looking Forward

So what next?

Crypto banking. The gates have been opened and the Bermuda Government has also amended the Island’s banking legislation to allow both digital asset businesses as well as digital asset or security token issuers to do business in the Island, with the prospect of potential “crypto friendly” banks to form at some point in the future.

Digitised Banking / E-IDs. Although nothing has been formally implemented, there has been much talk regarding the introduction of a national electronic ID platform or e-ED. It would be hard to imagine that prior to the end of 2019, the Bermuda Government in co-operation with other private industry players does not implement such a service.

Cyber-insurance. Bearing in mind Bermuda being an existing insurance and reinsurance market leader and also taking into account the increasing threats represented by cyber criminals which must be handled by insurers, it feels inevitable that heading further into 2019 Bermuda will be at the forefront leading the way to address these concerns.

Looking Back?

A year and a half ago, in November 2017, the Bermuda Government, the Bermuda Business Development Agency, certain OECD experts and various sectors of Bermuda’s private industry came together, as stated by Premier Burt: to create a “bring new business to the Island, help boost GDP and create meaningful jobs, while helping to prepare our financial system and economy for the future.”

A lot has happened since then, with much more on the horizon. Bermuda appears certainly to be looking forward and not back.

Chris Garrod, April 2019

Banking, Bermuda, Blockchain, Cryptocurrency, Digital Transformation, Fintech, Internet of Things, Technology

The final pieces of Bermuda’s puzzle: crypto banks and digital transformation

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(C) CryptoVest

Bermuda’s Banks and Deposit Companies Act was amended in August 2018.

While the amendment legislation is less than three pages long, the amendments should be far-reaching. Its provisions permit the creation and/or licensing of a new category of Bermuda bank to be regulated by the Island’s primary regulator, the Bermuda Monetary Authority (BMA). The new bank’s target customers should be either:

(a) digital asset (token) issuers approved by its Minister of Finance pursuant to the Island’s recent legislative amendments to its companies legislation (commonly referred to as Bermuda’s new “ICO legislation”); or

(b) companies which have been issued a digital asset business license under a new regime created by the Digital Asset Business Act and therefore regulated by the BMA.

Already an established and well known offshore financial center and having recently branded itself as being “Fintech-friendly”, the purpose behind the banking amendments is the creation of crypto banking in Bermuda, allowing Fintech clients to deal with crypto; buying and selling cryptocurrencies, whether using fiat (i.e. real money) or other forms of crypto.

The Crypto Banking Sector

Several onshore financial institutions have embraced the use of distributed ledger technology in order to clear and settle cross border – but fiat – payments using that particular technology (blockchain). But the development of crypto banking has been scarce. On a worldwide basis, there are very few banks, let alone jurisdictions, which are genuinely crypto friendly.

The existing banking situation in Bermuda is no different. In October 2018, Bermuda’s Premier Burt stated that the Island was heading into the Fintech banking sector whether the existing Bermuda local banks “liked it or not”. The ambition was made very clear that this was just the beginning of a long-term project when he stated: “We understand the future we are trying to build.”

Crypto banking requires banks to venture into a nascent, volatile and perhaps, from a security standpoint, risky new territory. Cryptocurrencies have an uncertain edge to them, and banks are, by their very nature, cautious.

Bermuda’s “Fintech-friendly” position

Looking back to early July 2018, while the new “Fintech-friendly” banking legislation was being debated and then approved by the Island’s legislature, the Premier announced that “Bermuda must be nimble or we will be left behind”.

The ICO legislation quickly came into force later that same month, allowing Bermuda vehicles to offer and issue tokens to the public (similar to a company issuing shares in an initial public offering). In addition to a filing requirement with the Registrar of Companies in Bermuda, an offering document related to the offering must be vetted and approved by the Bermuda Minister of Finance prior to the commencement of the offering, but there is otherwise no ongoing regulation.

The Digital Asset Business Act came into effect in September 2018 to allow digital asset platforms, exchanges, digital wallet providers and vendors to operate in Bermuda under the supervision of the BMA. As regulated entities, there is a physical presence requirement, and therefore the Government’s hope is that these businesses will inevitably lead to new jobs being created.

The new crypto banking legislation has only recently been introduced in Bermuda, so it is not surprising that no new crypto banks have yet been approved and licensed. Very few institutions have the resources to create a new Bermuda based bank which meet all of the banking and AML/KYC requirements imposed by the BMA. The same applies to any new applicants wishing to obtain a license under the Digital Asset Business Act. The standards imposed by the Bermuda authorities in order to be regulated are very high.

Bermuda’s Crypto friendly reality

A few statements have been made recently regarding the possibility of a new bank being set up in Bermuda to start accepting crypto and blockchain companies as clients.

From a general Fintech perspective, there is no doubt that the introduction of a crypto banking sector is one of “the final pieces of the puzzle” as described by Bermuda’s Premier last year.

Bermuda has certainly begun the process and it has moved rapidly. The Island’s Government passed three pieces of legislation in 2018 (not including the ‘Insurtech’ changes to its Insurance Act), all dedicated to building a new digital platform its future; a remarkable effort for any jurisdiction.

Resolving the crypto banking sector is a lofty and well overdue worldwide issue, bearing in mind the inevitability of digital assets and cryptocurrencies becoming the norm. Switzerland is a jurisdiction which has also recognized this and is developing a new crypto banking sector (having already a well-established “Crypto Valley” in Zug).

Bermuda appears to have laid a promising foundation for new entities to do business in or from within the Island, creating jobs and digitally educating its young people. The recently formed Bermuda Fintech Business Unit is a good example of where the Island should be heading, not just from a Fintech perspective, but from the perspective of digital transformation in its entirety.

The developed world is now in the midst of a Fourth Industrial Revolution (4iR), one which is changing the way we work and live: disruptive technology and trends such as robotics, artificial intelligence, the Internet of Things (IoT), 3D printing, automation, chatbots, augmented and virtual reality, etc. Most significantly, connectivity – the 4iR is connecting our physical world with an increasingly digital one.

Of course, the inevitability of a new banking sector – what may still loosely be described as “Fintech banks” – is no different.

But when one says “Fintech banks” that shouldn’t be a category of bank which merely accepts crypto payments. “Fintech” is a far broader term. Such banks are ones which have or are embracing technologies such as chatbots, artificial intelligence, IoT, all which ultimately have one thing in common – providing a far better, more efficient customer experience than they are able to provide now. The existing banks in Bermuda are already using or investigating the use of Fintech.

If the Island wants to truly evolve and embrace a digital future, the future of job creation and its youth is not crypto, it is digital transformation and riding the wave of digital disruption. The requirement is to think outside of the box, away from just crypto, and focus on what is happening on a worldwide basis. From a financial perspective, that is a Fintech world which comprises so much more than one tends to think: digital asset issuers, digital asset exchanges, financial institutions utilizing digital platforms and new technologies.

While Bermuda must be nimble moving forward, it must ensure it takes its time to build its digital future. The creation of a crypto banking sector will hinge on the establishment of a broader Fintech sector with clients for those crypto banks to service; ensuring that all of the pieces of the puzzle which the Island is trying to put into place is done so carefully and correctly is going to be essential for the future of its proposed digital transformation.

Chris Garrod, February 2019