The financial sector under pressure of change

Interview with John Garvey, partner at PwC, Global Financial Services Leader, New York

The banking sector has been under the pressure of technological challenges created by external players called fintechs for several years now. However, it is increasingly apparent that, in a way, the banks have dealt with it. Is the threat over?

It depends on how we look at it. Geographically speaking, it is China versus the rest of the world. The Beijing government sought to quickly provide its population with access to banking services and this was made possible by technological players like Alibaba and Tencent with minimum regulatory requirements. These players have penetrated almost all financial services segments and often have higher market shares. They have dominated payments and insurance and Alibaba operates the world's largest money fund.  They also obtain much more information through the social media they control. This makes the automation of financial services possible, and the Chinese have no concerns about privacy and the protection of personal data. In other markets, in Europe and in the USA, banks have assimilated fintechs into their ecosystems because the latter need an appropriate scale of operation and capital. At the same time, the number of digital banks, brought to life both by traditional players and fintechs, such as Swedish Nordnet Bank, Discover Bank, Singapore Digibank, or a number of British banks, is growing. In the United States, the digital, branchless QuickenLoans has a larger share of the mortgage market than Wells Fargo, one of the largest banks. 


So how does the idea of open banking in Europe, in the form of the EU PSD2 directive, affect banks? Is it only a risk or a real threat to them?

In my opinion both. It all depends on their approach. Increasingly, the banking sector is starting to build digital platforms on which customers will have access to many products offered by various players. The companies with strong brands running these open platforms will win. These can be banks or large technology companies. For example, the Spanish bank BBVA implemented such an open platform in the US. Royal Bank of Canada runs a platform offering various services from finance to law, and accounting for small and medium-sized companies under the Wave brand. Similar solutions focused on various customer needs can also be found in Australia.


So, where does the border in the so-called disruption, or banking revolution lie?

This border means being part of the customer's experience in many areas and even anticipating his or her needs, as well as so-called commodification, or treating financial services in the same way as energy or telephone services, where price is of primary importance. If banking becomes dominated by digital platforms, you will have to offer ultra-low prices to operate on them, and this will be possible only for really big players like Alibaba or Amazon. As part of this trend, conversational banking, which means managing your finances through voice and not clicking, will continue to develop.


These changes, however, will strongly affect the level of bank margins, and they are much lower in Europe than in the US?

Yes, this is true, therefore the survival of many players will depend on their ability to create other revenue streams, often unrelated to their core business, or to act as platform owners to get commission from third-party providers. Other suppliers of capital will also appear and banks will lose their monopoly in this area because they are only intermediaries in the trade of money.


And what is the attitude of market regulators or supervisory institutions? Some are more liberal when it comes to financial innovations than others.

This is true even in the United States, where some of the powers were transferred to the state level. Regulatory authority in New York is the most demanding one in this scope. The Federal Reserve and the Office of the Comptroller of the Currency (OCC) deal with the licensing of large financial institutions. The United Kingdom shows a very liberal approach.  Some countries approach this issue fragmentarily. For example, Switzerland did not ban the circulation of cryptocurrencies by creating a crypto valley, where companies can develop technology in this area. Perhaps this is the way to create a global advantage in this area. However, the example which probably best reconciles the development of financial technologies with security is the regulatory authority in Singapore (MAS). 


What then would be your guidelines for market regulators and governments seeking to build competitiveness in financial technologies?

I am not certain if everyone wants it. However, the best way is to try to proactively understand these phenomena and solutions, and this is what the Singaporean MAS is doing. It is about allowing you to experiment without the risk of shaking the entire financial system and acting to the detriment of your customers.


Speaking of the fintech area, it is impossible to ignore the United Kingdom, which act as the main global hub in this area. Is Brexit a threat to the financial sector?

I think that in Europe the problem for these companies consists in the fact that no other location can replace London, also in terms of fintech solutions. Some companies move to, for example Berlin or Frankfurt, but in my opinion, this will not change much. These cities do not have the appropriate infrastructure to absorb so many companies. However, the problem lies in the uncertainty as to the final conditions for the exit from the European Union, and this causes a significant halt to investments. In this sense, New York remains the biggest beneficiary of Brexit. 


Shared service centres constitute a part of the global financial sector. They are also developing dynamically in Poland. In Gdańsk alone, where we are having this conversation, such entities are already employing 18,000 specialists. Will changes in the global finance system, including automation and artificial intelligence, affect this sector?  What part of it is under threat?

The answer is not unambiguous because you need to take several aspects into account. What is certain is that the demand for these services will not disappear because they are the lifeblood of financial institutions and an important part of their infrastructure. Conversely, the pressure on margins and costs results in even greater efforts to outsource many activities because their implementation by specialised operators is simply cheaper and faster and takes place on a large scale. This affects the growth of investment and employment in shared service centres. Automation and robotisation will act against this. However, the final result should be positive.


I would add one more factor – the growing threats in the digital economy, which make it necessary to invest in cybersecurity and counteracting financial crimes, as is evidenced by the activity of this PwC unit, which already employs 500 people and will employ 300 more within two years. You are the centre of such services for numerous institutions around the world.

Yes, this is true. In order to combat these threats, many companies must acquire completely new, technological competencies in the implementation of each new product or service, and that is why they prefer to delegate them to specialists. What is more, market regulators demand access to large amounts of data and information in real time. There are, therefore, solutions that enable companies to meet these requirements, which also often make it possible to avoid sanctions or high penalties.


So, this business unit (Financial Crime Unit) is the direct beneficiary of these changes and threats? Therefore, what do you specialise in?

We develop and implement solutions to detect and prevent organised financial crime, such as money laundering, tax evasion and human and drug trafficking. We help companies to implement the ‘know your customer’ (KYC) policy.  We work with governments because we need to know the law in this area in different jurisdictions. We also support e-commerce companies which is an area of fraud, for example on the basis of false identity and hacker activities.


So now to the last question. What made you choose Gdańsk as the location for this business?

It is my first time here and I am very impressed. This is a beautiful city. Gdańsk is a larger version of Bruges where I spent many years. In economic terms, it is a place with a significant supply of talent at a reasonable price. There is adequate infrastructure and urban space which ensure a good standard of living and attract people. There are also good language skills and an open culture, which are important to us because we employ people from 21 countries speaking 34 languages. The involvement of the local government is also an important issue.


Is the expansion of your business related to entering new areas, or is it the continuation of your current activities?

Both. We would like to launch services to combat so-called market abuse, which involves crimes arising from the use of unauthorised or illegally obtained information for financial gain, as is the case, for example with stock exchanges. We develop tools that prevent or detect market abuse and manipulation.


Thank you for the interview.

By Mirosław Ciesielski,

The interview originally has been published in Polish at Read the Polish version


John Garvey, Partner at PwC

John Garvey is a partner in PwC New York office and the Global Financial Services Leader.
John's experiences and skill sets range from business strategy to technology, risk and operations.

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