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Dramatic technological innovations continue to shape the future of financial sector both traditional and FinTech, therefore distinguished speakers representing banking, FinTech and legal services gathered at a business conference organized by Eversheds Bitāns Law Office on April 28 in Riga to share their insights and expertise on how to maintain the financial stability in this new environment of opportunities and challenges.
Global playground: traditional banking vs FinTech
Clearly the traditional financial sector – banking industry – has been shaken up. Banking partnerships are emerging and banks are forced to share their infrastructure and resources in order to reach customers. FinTech – digital revolutionists – are entering the market with innovation, knowledge and skills. Venture scanner divides FinTech into 16 subgroups – from lending platforms down to financial security banking infrastructure, and today there are 1400 large FinTech companies worldwide with 13 billion USD funding in total. Compliance though is a huge issue everywhere as regulatory changes and competition makes life for both banks and clients more challenging than before.
Where do FinTech stand from regulatory perspective? Nowadays there is a race where the regulator always takes the second place. For instance, crowd funding is already 2,3 billion industry, but regulation is yet to come. It cannot be other way round as regulator does not know what to regulate before the actual product or service is in the market. However, one cannot forget that the main responsibility of regulator is to maintain the financial stability. The level of confidentiality and data protection must remain at the highest standards in any industry.
Initial public offering
Another topic discussed was IPO’s challenges and benefits as several IPO projects are in the pipeline in Latvia. The ultimate goal of the company going public is the growth of the long-term value for the shareholders. In addition to that, increased visibility for existing and potential partners, potential acquisitions or mergers are important as well. In many circumstances after successful IPO processes more rapid development of issuing companies is seen. One of the risks for successful IPO is meeting expectations between companies and investors. The main conclusion – it is possible to execute modern IPOs under the Latvian law.
Progressive means of financing
When it comes down to mezzanine financing, one must admit that it is an innovative instrument in the Baltic region while in the global context it has already been around for a long time. Senior debt financing is definitely cheaper, yet when it is not available in volumes and amounts needed, mezzanine finance may be useful. It is a debt subordinated to senior debt finance, ranking lower than the loan from bank or security creditors, therefore in case of insolvency or bankruptcy the claims of the mezzanine lender will be lower than the bank or other senior lender. A moderate involvement of the investor, smaller dilution and improved balance sheet structure are the main benefits of mezzanine finance. The mezzanine investor’s expected rate of return is 10-22% and even though it is more expensive than senior debt finance, at the same time it is cheaper than pure equity which would be 25% and more.
Technology innovation in global context
London is one of the most developed financial centers in the world, therefore current trends in the UK financial landscape were perceived with full attention. Similarly to Latvia, online and mobile banking is catching up in the UK – all banks are looking for apps based on demand from their clients. The gap between consumer and banking requirements cause the biggest conflict usually and accordingly the huge challenge in the UK is to update old legacy IT systems to be relevant to this rapidly changing financial environment. The key challenge for any modern market is the need to have innovative products and services which at the same time meet legal compliance requirements. From this year the UK regulator is using the so called Sandbox approach to test innovative ideas and projects in the UK finance industry. It is private environment where start-ups can try their products out and in case of success to get a license from the regulator that actively looks at the development of the product and provides feedback – it saves money and other resources by not putting a non-compliant product on the market. Also it is interesting that following the development of social media platforms as sales channels the reputation management policies for clients from financial sector are drafted more and more often in order not to harm brand name due to liability issues of employees. For instance, by criticizing the competitor openly on Facebook.
Financial services march forward
Based on the Future of finance survey carried out by Transferwise, global FinTech Company – more than 90% customers believe that in 10 years’ time they will use payment transfer services provided by FinTech companies. Transferwise originated in Estonia and is one of the fastest developing FinTech companies in the world which has recently reached 1 million customers and 700 million EUR in transfers per month. The use of mobile services, change of customer expectations and growth of millennials are the main reasons for this shift. In addition, mindset of regulators has changed as well – they start encouraging innovation, new companies to come to the market and introduce new products and services. We might not know what exactly will happen in 10 years, however, clearly, customers will have a better service for sure. The goal of FinTech companies is to bring new ideas into the financial system or even bring forgotten ideas back to the system. Transferwise’s main goal is to bring back transparency to the financial system and at the beginning of this year they had a huge step forward this goal by setting partnership with LHV bank – now eligible customers can access low cost international transfers, transferring money from their internet bank or mobile devices.
What will financial services look like in 2020?
“Clearly there is a part of the market that is under attack. Banks are challenged from different angles. The problem though is that people are often jumping to black and white conclusions – some are saying that banks will disappear, that banks will not exist in 10 years. Some bankers on another hand say that this is not serious, FinTech will not eat our business which probably is not true as well. In reality it is not black or white, it is a lot of shades of grey in between.” Kārlis Danēvičs, SEB
“The organizational culture is the main factor that helps us to move fast.” Ilya Leyrikh, Transferwise
“Currently in terms of regulation, to set up a peer to peer lending platform there is no regulation in terms of tax – one has no idea how VAT rules apply to it. Very little regulation that applies to client identification – only the general one, and also the AML matters are not clearly regulated for that sector, therefore in this sense I clearly agree that banking sector suffers more comparing to newcomers. On the other hand, there is a trust issue regarding newcomers because everybody says this is an absolutely unregulated sector, therefore risks are too high for you to invest.” Māris Vainovskis, Eversheds Bitāns
“Even the sector that does not have a lot of human interaction or creative stuff involved can be disrupted at the end of the day.” Mikus Janvars, Porta Finance
“There is lots of cooperation nowadays – banks have innovation hubs, they work together with FinTech. It is not against each other, it is about collaboration. Good FinTechs are being purchased by banks. Lloyds bank in the UK spent 2 billion dollars on innovation last year – banks have money to invest in innovation. FinTechs on other hand do not have that much of resources to invest in infrastructure.” Matthew Gough, Eversheds LLP
“As far as regulation is working on substance over the form with good intentions, we are positive about it. The problem starts when they exaggerate intentions. Needless to say – regulation is costly, it is difficult – legal departments are growing, compliance departments are growing, however regulation may benefit the big ones. Banks are suffering the most, but once they adopt, they will benefit in long-term.” Kārlis Danēvičs, SEB
Future of financial sector
April 28, Grand Palace Hotel, Riga
Moderator: Ģirts Rūda, Eversheds Bitāns
Ģirts Rūda, Eversheds Bitāns
Gerda Diniūte, Eversheds Saldžius (Lithuania)
Māris Vainovskis, Eversheds Bitāns
Ivars Bergmanis, LHV Bank
Toms Puriņš, Eversheds Bitāns
Mikus Janvars, Porta Finance
Matthew Gough, Eversheds (UK)
Ilya Leyrikh, Transferwise
Kārlis Danēvičs, SEB