Bank of England Governor Mark Carney worries that technology will disrupt the banking and financial services industry in just the same way that it has torn apart newspapers, radio and the postal service. His chief concern is that governments will fail to regulate it until it's too late — "an Uber-type situation," as he put it at the World Economic Forum in Davos last week.
The news that foreign currency exchange startup TransferWise has raised $58 million in investment at a valuation of $1 billion proves that Carney is right to worry: Tech startups — or fintech startups, as they're called in Europe — are working as fast as they can to turn traditional banks into the steam-engine manufacturers of the 21st Century.
At Davos, Carney said he envisioned that tech companies might do to banks what Uber is doing to taxis: destroy their business before governments can get around to regulating them. The backstory with Uber is that in most cities, taxis are heavily regulated and licensed by local governments. This has created dozens of taxi monopolies and cartels that are able to charge high prices for low quality taxi services. Uber — which lets anyone with a car turn into a taxi driver — makes the taxi business look anathema.
At the same time, taxi companies have been lobbying hard to restrict Uber's expansion as much as possible, because Uber will obviously put many of them out of business. In many cities, particularly smaller cities, Uber service is both vastly superior and cheaper than getting a taxi.
Likewise, TransferWise is vastly superior and cheaper than going to a bank to send someone a payment in a foreign country. It works by essentially obviating the need to actually send and exchange foreign cash. Instead, it matches your outgoing payment with someone else's incoming payment, and through domestic currency accounts makes both payments locally. The money never actually leaves the country it's in — which is what makes it cheap.
And, of course, that clever matching system means you don't need to use a bank to send money abroad.
Bitcoin similarly threatens banks. Not because it is an online currency. The currency is basically a joke. Rather it is the blockchain ledger that underpins Bitcoin, which makes all transactions transparent and guaranteed, that makes banking transfers look out of date.
That situation, a tech startup that does banking without the need for banks, is what Carney was referring to last week when he said this:
In terms of financial stability policy and the change in banking that is, er, imminent, we have to get the balance of regulation right now and not come down too hard and prevent this type of disruptive technology and not be in this position where we're filling in with prudential regulation after the fact. In other words, facing an Uber-type situation in financial services, which many jurisdictions are struggling with.
Although the headline-grabbing part of this statement was his reference to Uber, it was his deliberate, theatrical stress on the word "imminent" that caught my attention most. It's unfair to read to much into it without asking Carney why he said it that way but my feeling is that he was trying to indicate that banks and bank regulators don't seem to be aware of how much danger they're in, or how fast tech is moving to destroy traditional financial services.