Fintech revolution could be a source of instability

bank of england fintech

The governor of the Bank of England, Mark Carney, recently said that the revolutionary advances in the world of financial technology could be the source of economic instability going forward. 

Speaking at the G20 conference a few weeks ago, Carney highlighted technologies which can completely computerise and automate large parts of businesses’ interactions with customers.

“The opening up of the customer interface and payment services business, could, in time, signal the end of universal banking as we know it,” said Carney, as reported by City AM.

Then he got technical: “If today’s universal banks have less stable retail funding and weaker, more arms-length client relationships, the volatility of their deposits and liquidity risk could increase.”

He also mentioned so-called “robo-advisors”, algorithms which could potentially replace investment advisors and brokers, as reported in Finextra.

“Robo-advice and risk management algorithms may lead to excess volatility or increase pro-cyclicality as a result of herding, particularly if the underlying algorithms are overly sensitive to price movements or highly correlated,” said Carney in comments only financial people might understand.

Staying with things most people can understand, such as automated customer interaction technology and robo-advisors, there is something of a backlash against Carney’s warnings.

Adam French CEO of Scalable Capital apparently believes that robo-advisors are better than humans and says Carney has got his sums wrong.

Ostensibly addressing an obscure financial practice called “closet indexing”, the meaning of which probably doesn’t matter, French says: “Exposing closet indexers for which clients overpay by £1 billion in unnecessary fees every single year or hit on robo-advisors who advocate for more transparency in investment management, push for lower costs and provide a better service for their clients than traditional products?

“Who don’t pretend to offer active management while just replicating an index? This is a deep miscalculation of priorities by the Bank of England chief.”

French says Carney’s remarks could discourage the development of financial technology relating to obscure products and services no one understands and no one is interested in.

“By making throwaway remarks like this there is a danger we will be stifling innovation when it is needed the most,” says French.

“People are unable to save for their futures as inflated fees, due to legacy technology and an unwillingness to change established processes, are eating into the majority of their returns.”

Carney also addressed the current intense interest in blockchain – the distributed ledger technology behind the digital currency Bitcoin – which he also seemed wary of.

“Fintech innovations, such as distributed ledgers, will need to meet the highest standards of resilience, reliability, privacy and scalability,” said Carney, adding that fintech firms would be subject to the same rules as traditional banks if their activities posed a risk.

“Those systemic risks associated with credit intermediation including maturity transformation, leverage and liquidity mismatch should be regulated consistently regardless of the delivery mechanism or credit algorithm.”

Meanwhile, the Bank of England has contracted a company called Anomali “to monitor and mitigate efforts against cyber threats” following a successful trial of the business’ technology, according to

The Bank says the Anomali system “works to collect, integrate, hunt and investigate cyber security intelligence data in a highly automated fashion, with integrations into existing security tools”, adding that it found the technology “intuitive” and “allowed highly efficient, automated ingestion and sharing of data”.