This week Finance Monthly hears from Simon Rodway, a solutions architect at Entersekt, on the potential and realistic impacts of Libra on the traditional banking system.
The social media giant Facebook announced in June that it has developed a cryptocurrency dubbed Libra and plans to launch it early next year. While some may dismiss it as just more hype, the sheer dominance of Facebook in people’s social lives gives it huge potential to disrupt banking and payments as we know it today.
The company claims that Libra will improve the way we send money online, making it faster and cheaper, as well as improving access to financial services – even for those without bank accounts or limited access to traditional banking. It will be based on a blockchain platform called the Libra Network and Facebook says that it will run faster than other cryptocurrencies, making it ideal for purchasing and sending money quickly. Importantly, Libra will not be managed by Facebook itself; rather, by the Libra Association – a not-for-profit organisation comprised of 28 companies (so far) from around the world such as Paypal, Lyft and Coinbase. It aims to sign up 100 companies by the time the cryptocurrency is launched.
One thing’s for sure: it’s going to be an interesting development to watch, especially in the wake of Facebook’s cryptocurrency wallet company Calibra’s David Marcus presenting his testimony to the United States Congress banking committee. The result was that Facebook would “take time to get this right” and there would be no launch until all concerns could be fully addressed.
So, even though it’s still early days, Libra has given us a lot to think about. Ill-informed speculation and click bait aside, there are legitimate concerns around fraud – with reports already of over one hundred fake domains being set up relating to Libra. There are also the money laundering and financial risk concerns.
In terms of the impact and financial risk, most of what we’re hearing is coming from within the more established financial sectors. They’re either dismissing Libra as noise or decrying it as a vehicle for potential terrorist activities – something, they say, that regulators won’t allow to happen, despite Calibra openly reporting its intention to work with said regulators and policymakers to ensure the platform is secure, auditable and resilient.
At the same time, of course, they’re defending the current system, claiming that it works well, is safe and secure, and doesn’t support terrorism. But, if we’re honest, Anti-Money Laundering (AML) systems have, to date, been largely unable to stop the vast amounts of laundered funds from moving around. In addition, our Know Your Customer (KYC) and Know Your Business (KYB) processes use data from the likes of Companies House, which has been heavily criticised for their own lack of data validation and governance.
All that aside, what’s become quite clear is that the existing system presents too many blockers for the poorer, under-banked members of our society. Those working in the UK, for example, and legitimately wanting to transfer their wages to their families in other countries, end up paying exorbitant banking fees, only to wait days for their funds to clear.
This is where Libra, with its vision for financial inclusion, could make a difference. And if Libra doesn’t make it happen this time around, the technology and conceptual design are essentially open source, so someone else will. The wheels are in motion, and financial institutions that ignore the trend do so at their peril.
The Bank of England (BoE) has released its latest data on mortgage lending this morning which reveals that new lending commitments are at their highest level since 2008 Q1.
BoE also reports that first time buyers increased their share of the market to 21.4% in Q2 2018 - a rise of 1.8% against the previous quarter. Despite the surge in lending, the mortgage market continues to be challenged by a combination of fierce competition from traditional and non-traditional players.
With the rise in the lending market, there is an ever-growing need for traditional lenders to offer innovative solutions that provide faster and more efficient end-to-end mortgage resolutions.
In the FCA’s Mortgages Market Interim Report 2018, the need for more customer-facing innovation in the mortgage market is being encouraged for traditional lenders. On average the loan procedure can take approximately 45 days and this can be exasperated if the loan requires additional underwriting.
Most of the time the lenders will underwrite applications manually, which risks inaccurate pre-approval. Traditional lenders are seeking out next generation technology solutions to compete with non-traditional players to better manage the entire mortgage lifecycle.
Across the assessment, valuation, offer and contract completion process, manual data-entry errors can be reduced using Optical Character Recognition technology (OCR) by attaining customer data from key documents automatically. These bots extract applicant’s personal details from know your customer (KYC) documents and automatically review the applicant’s credit history which will speed up the mortgage application lifecycle, thus reducing the probability of manual error.
Puneet Taneja, Head of Operation at Intelenet Global Services, comments: “Buying a property is an important chapter in anyone’s life - dragging out the process creates a great deal of stress, preventing customers from getting their dream home as quickly as possible. Rather than having to wait for days to find out whether an applicant is eligible for a mortgage, automating the checks required across the assessment, valuation, offer and contract completion process takes away the headache away from mortgage brokers so they are able to communicate to customers and give them offers in 30 minutes.
Puneet continues: “Using this AI & Automation based initiative which uses bot technology to gain business intelligence alleviates the pain of mortgage brokers getting applicants data to find out if they are eligible. Digitizing the home-buying process by intelligent reporting & dashboards reduce processing times by 40% and costs by 50%.”
(Source: Intelenet Global Services)
It is becoming clear that trade digitisation has huge potential to unlock access to world trade for small-to-medium-sized enterprises (SMEs). The move away from laborious, manual, paper-based processes will lever simpler access to trade finance, now that it is being provided by more agile, technology-friendly alternative funding providers. Here Simon Streat, VP of Product Strategy at Bolero International, discusses the new wave of digital change and the drive it’s providing for SMEs worldwide.
Regulatory burden has meant that SMEs often don’t fulfil certain criteria for banks to justify lending to. The demands of anti-money laundering (AML), Know Your Customer (KYC) rules, sanctions and other banking stipulations have been deemed too time-consuming and too costly to be worth the trouble where smaller exporters and importers are concerned. This is a significant blow, since by some estimates, more than 80% of world trade is funded by one form of credit or another. Until now, if your business was deemed too small to be worth considering for finance, there was hardly anywhere else to go.
The result has been deleterious to the prosperity of SMEs and detrimental to international trade. In 2016, the ICC Banking Commission’s report found that 58% of trade finance applications by SMEs were refused. This, as the authors pointed out, hampered growth, since as many as two out of every three jobs around the world are created by smaller businesses.
This rather depressing view was supported by a survey of more than 1000 decision-makers at UK SMEs which was conducted in February this year by international payments company WorldFirst. It found that the number of SMEs conducting international trade dropped to 26% in Q4 2017, compared with 52% at the end of 2016. Economic conditions and confidence have much to do with this, but so does access to trade finance.
There is a growing realisation, however, that if digitisation makes sense for corporates seeking big gains in speed of execution, transaction-visibility and faster access to finance and payment, it definitely will for SMEs. The ICC Banking Commission report of 2017 estimated that the elimination of paper from trade transactions could reduce compliance costs by 30%.
Over the past few years, for example a number of trade digitisation platforms have emerged offering innovative business models for supplying trade finance and liquidity, while optimising working capital, and enhancing processes for faster handling and cost savings. Progress is under way, but it requires expertise.
Fintechs in trade hubs such as Singapore, where there is huge emphasis on innovation, are taking the lead, transforming the availability and access to finance for SMEs. By making the necessary checks so much faster and easier and opening up direct contact with a greater range of banks, digital platforms enable customers to gain approval for financing of transactions that would otherwise be almost impossible. Not only that, they enjoy shorter transaction times and enhanced connectivity with their supply chain partners.
If we scan the horizon a little further we can also expect to see SMEs benefit from the influence of the open banking regulations, which require institutions to exchange data with authorised and trusted third parties in order to create new services that benefit customers.
Although the focus of these new regulations is primarily the retail banking sector, the tide of change will extend to trade finance, creating a far more sympathetic environment for the fintech companies and alternative funders. Yet the fintechs cannot do it alone, they need to be part of a network of networks that operates on the basis of established trust and digital efficiency.
No technology can work unless it is capable of satisfying the raw business need of bringing together buyers, sellers, the banks into transaction communities. That requires the building of confidence and the establishment of relationships, along with – very importantly – a real understanding of trade transactions and the processes of all involved. It also requires on-boarding and you can only achieve that once everyone knows a solution will deliver the efficiency gains it promises, as well as being totally reliable, secure and based on an enforceable legal framework. All this requires a level of expertise and insight that cannot simply be downloaded in a couple of clicks.
Nonetheless, it seems pretty obvious that thanks to digitisation, the market for SME financing in international trade is set for real expansion.