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Alternative Finance: Threats to and Opportunities for UK Commercial Banking

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Alternative Finance: Threats to and Opportunities for UK Commercial Banking

Introduction. The impact of Brexit on the UK banking sector

In the world, at the moment in the fight against the crisis there is a tendency, which implies the revision of strategies for the development of the banking sector. The British banking system is no exception. Given the prevailing historical and geopolitical conditions, the British financial system was originally developed as a global acting not only in the state but also in the British colonies. Because of this, banks of Foggy Albion easily adapted to current world trends of strategic development. Also, in the UK 80% of assets are concentrated in the 4-5 largest banks (Dhingra, 2016).

Today special concern is caused by the issue of stiffness of regulation of British credit institutions, which was a consequence of the credit mistakes that the banksallowed. Probably,shortlyit will be decided on the division of banking institutions on credit and deposit and investment. Such measures will allow increasing the share of long-term investment in the loan portfolio of banks with a decrease in the level of financial transactions not related to the real sector of the economy. According to experts, in the future, one of the features of banking activity will increase in the accumulation of the population, which would entail the need to invest heavily in innovation and technology to meet the new expectations of customers (Dhingra, 2016).

The new rules adopted in the UK after the global financial crisis, provide for strict separation of the actual banking operations from riskier investment banking by 2019. According to Moody’s, this reduces the chance of receiving by the banks of state supportinthe event of future crises. Moody’s expects the changes in business models, organizational structure, and funding structure of British banks and the significant costs associated with such changes in the next few years (Dhingra, 2016).

Brexit negatively impacted British banks. Experts believe that now, after the Brexit,there may be a situation where a significant portion of trade between Britain and the EU in the financial sector would be, at best, questionable from a legal point of view, and at worst – just would be illegal, as the banks will lose the resolution of regulator to provide services (Dhingra, 2016).

The Bank of England and the European Central Bank will respond to the growth of risks and decelerationof the economy by a decrease in interest rates, and possibly with new stimulus measures, as bankers predict. The Bank of England has promised to support the markets through inflow of 250 billion pounds (Dhingra, 2016). However, monetary policy can only be a “short-term cure” in the face of uncertainty faced by the British economy in the light of exit from the EU. Moreover, as it was shown by the financial crisis, the large size of the banking sector is not always a positive factor (Zhang, 2015). For example, the UK government has been forced to spend billions of pounds to rescue troubled banks in 2008-2009, and the country faced a deep recession, the consequences of which it was able to overcome only recently. In this context, it is of particular interest to consider the impact of alternative finance and technological change on the UK commercial banking.

 

Alternative finance: challenge for the traditional banking

Traditionally, banks have lined up the entire chain from production of banking product to its sales and service virtually closely. Exceptions were international and local payment systems and, lately, in part a number of service functions. This paradigm for decades was not questioned, while in the market unusual players did not appear in the form of networks terminals, electronic purses, financial services by mobile operators, internet portals with the financial component.

Increased competition in the banking market and the disintermediation of banks represent a process that means a reduction in the intermediary role of banks as a result of increasing competition with the specialized non-bank financial institutions. This is facilitated by the ongoing “marketization” of financial assets of households, diversification of methods of financial management and improving its quality, the spread of new information and communication technologies in the implementation of the settlements and payments, pension reforms and the creation of pension funds, moving the focus to the attraction of borrowed funds of enterprises on the stock market through the issuance of bonds. The factors of these transformations may be a reduction in interest income and an increase in non-interest income in the banking sector (Zhang, 2015).

In the financial sector the basis was formed for many years. The instruments in use, ranging from bank deposits and ending with currency swaps to structured debt, have long existed in digital form.However, both money and payment systems which are the basis of all financial activities, still remain traditional in at least one respect – they all mean that the operations will be guaranteed by the banks and they will also be responsible for their conduct. However, for digital currencies “guarantees” are not necessary. For them quite enough is decentralized records (allocatedregister), which allows buyers and sellers to communicate directly. For consumers, this means cheaper, commission-free payments.

The most famous example is the very Bitcoin. They are called speculative asset, there are no guarantees that they will continue to be as popular as a year ago; their situation is extremely unstable. Yet the regulators are very concerned about them. Even if bitcoins sink into oblivion, they have already managed to show that digital money can become a serious competitor to traditional banking payment transactions in the sector.

Another function of the bank – lending – also is under technology pressure. There are more and more new startups that help lenders and borrowers interact on the Internet market,and they benefit from everything – such loans are given faster and less expensively. Tomake credit scoring cheaper and more accurate, huge databases work. At the same time, banks do not hurry to use the emerging opportunities and competitive advantages, which the new technology gives to creditors.

We should say also about innovations in the field of mobile payments. In some cases, banks still control services like Google Wallet, allowing using bank accounts with the help of modern phones. Mobile money systems, rapidly spreading in developing countries, due to mobile telephone networks, are providing their users with all the same as that of the banks. In general, one can do without bank branches, which in some countries may not appear. Previously, their opening was impractical because of the insolvency of potential customers, and now – because of the very mobile systems.

Fin-tech is considered one of the most attractive and fastest growing industries of the new economy. Along withthe remote banking services,there is active developing of alternative formats: electronic and mobile wallets, smartcard acquiring services, P2P and PFM-applications, personal financial assistants, etc.

There are programs of club cards, which go beyond the scope of banking services and include financial and non-financial services, such as legal, tax and HR-consulting, participation in business events and training, the selection of counterparties of the customers base, and other services, which are designed to help businesses reach new levels of development (Baeck, 2014).

A new economic phenomenon is crowdfunding and, according to the world’s leading organizations in the field of economic analysis, it has great potential for development (Zhang, 2015). Thus, the World Bank predicts that the market volume of crowdfunding will reach $90 billion in 2020 (Baeck, 2014) and exceed in size the venture capital market. This means that the prospects of crowdfunding as a tool for financing start-ups are very high.

In 2014,crowdfunding sector of the UK has attracted funding of £ 850 million, i.e. 135% higher than in the previous year. In particular, in the country today, taking into account the resources of charities and non-financial rewards platforms, there are 175 active crowdfunding resources (Zhang, 2015). In total, the volume of transactions of alternative financing sector of the UK exceeded £1 billion. This fact clearly demonstrates the growing potential of the sector (Zhang, 2015).

In addition, in the modern world,there is a phenomenal interest to the Islamic banking and its products. The mechanisms of this financial system are very different from the standard and conventional capital accumulation and management principles, i.e. theyare based on Islamic ideology and must not conflict with Sharia law.

Despite the fact that the growth of Islamic finance in the UK accounted for the last 7-8 years, the transactions corresponding to the Shariahwere already in the 1980s on the London financial markets (commodity Murabahawas used on the London Metal Exchange). Besides striving to secure the financial resources of customers, the development of Islamic finance in the UK was contributed by the fact that such large international financial institutions such as Citi, Deutsche, and HSBC have offices in the Middle East and Southeast Asia, studied the experience and the need for Islamic financial services and did not see anything an extra-ordinary in their provision. However, in the current volatile environment Islamic banking is already creating significant competition to traditional banking in the UK (Belouafi, 2014).

 

Possible options for the banks

Under these conditions, some innovative banks take active position, and try to take a seat on changing market with their own services. Others stake onon the development of partnership programs embodied in API-banking concept. The organization operates as a running mechanism established by the systems of both the performance indicators of the bank as a whole, and the individual units, managers, and employees, balanced and targeted on the budget figures achieving. Any diversion of resources to non-core activities endanger the fulfillment of the main tasks, even if participation in innovation and design activity is formally discouraged and is one of the indicators of personnel evaluation. It turns out that the staff is little interested in the projects, with the aim not only the primary generation of ideas but to change the existing order of things, prescribed in the regulations and procedures. Moreover, any change is potentially dangerous for the average person or middle managers, because it can deprive his job. This is partly true because the efficiency is equal to the ability to do more with fewer resources, including the most expensive resources – personnel. It turns out that the correct configuration consists of:

  • Creation of a project office, which coordinates all the organizations’ strategic projects (both evolutionarily improving and risky pilot ones – for the future)
  • Allocation of employees in linear units – locomotives of changes, combining the current and projected activity, motivated by relevant motivational package
  • Initiating generation and discussion of the ideas by the staff, which is also a factor to stimulate involvement in the great common cause. This does not negate the need for regular review of top and middle management of the news ecosystem, in which a bank operates, attracting of consultants on specific tasks, available of internal analysts.

Innovative (risky projects with the unwarranted result) do not differ regarding organization from the evolutionary improvement of established processes, except for the fact that before taking a decision to adopt a new approach / product / technology, the result of piloting should be used primarily to improve business models and only then make a decision either to continue or to wind up.

 

 

Reference list

 

Baeck, P. 2014.Understanding Alternative Finance: The UK Alternative Finance Industry Report.PWC.

Belouafi, A. 2014. Islamic Finance in the United Kingdom: Factors Behind its Development and Growth, Islamic Economic Studies, 22(1), pp. 37-78.

Dhingra, S. 2016.The impact of Brexit on foreign investment in the UK. The London School of Economics and Political Science.

Zhang, B. 2015, Pushing Boundaries: The 2015 UK Alternative Finance Industry Report. KPMG.

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