Future Proof Advisory Services
The Biden White House honeymoon ended last August. But… it could have been worse. US foreign policy might be in Afghan tatters but that month started out on a better domestic footing with the passage of a $1.2 trillion US infrastructure spending bill. Money can always soothe voter angst. However, on this occasion, another type of money almost blew up the landmark legislation.
Yep, tax revenue initiatives on cryptocurrencies were buried deep within the huge building bill and threatened to derail the carefully choreographed votes on Capitol Hill. Whoodathunk! Crypto almost killed construction. One would be tempted to attribute this drama to the dysfunctional state of US politics but one would be guilty of missing a far more significant trend. Digital finance is accelerating at warp speed and could wreck the plans of traditional financial intermediary/advisory businesses just like it almost halted the US construction industry in its tracks. Sound too dramatic? Think again.
This writer continues to hear regular anecdotes of wealth advisory businesses using a mix of basic digital platforms (e-mail, website docs) and physical evidence (paper) to manage their client onboarding and regulatory obligations. This type of police work-by-policy might suffice for now but is making regulators uneasy. The European Banking Authority (EBA) is witnessing a digital “space race” and is recommending a wider use of technology. In reality, the EBA knows what is coming down the tracks and is recommending financial firms start to “future proof” their activities. The following developments give a flavor of how fast digital finance is moving:
- Research by Blockdata, a blockchain market intelligence firm, indicates 55 of the top 100 banks by assets-under-management have increased their involvement and investment in blockchain and cryptocurrency projects.
- 25% of those banks are already developing or backing start-ups in crypto custody platforms.
- A BIS 2021 survey shows that 86% of the world’s central banks are researching Central Bank Digital Currencies (CBDC). A whopping 46 of these central banks are currently actively designing or planning for the possible introduction of digital currencies.
- The cryptocurrency asset class is already worth $2 trillion and another blockchain/digital store of value, non-fungible tokens (NFTs), is witnessing market growth of 2000%. The big investment banks are making moves and can’t ignore the fact that Coinbase a crypto exchange platform is already worth more than half of Goldman Sachs market capitalisation with just 4% of the latter’s staffing levels.
The Flow of Finance will be Digital
It seems inevitable that the infrastructure and flow of finance will be digital. Forget about forecasting which digital currency or which product/platform will emerge. The only certainty is that you will be dead if your existing operational activities involve paper as customers just won’t wait. We saw an interesting note from Mario Gabriele stating that “fintech is eating itself"…. Everything wants to be everything. He flagged that Coinbase wants to be a bank, Square wants to be a broker and Robinhood wants to be a crypto company. This table illustrates the pace of “crypto creep”:
Technology is Driving Growth
The critical point is that technology is driving growth, profits, and customers. Traditional financial advisory firms need to be using technology platforms as a trial run for future product and customer additions. Financial services executives must know that they can no longer point to regulatory and compliance policy documents to literally paper over digital cracks in their operations. Start with the basics and see how one could future proof the following with technology upgrades:
- Know-Your-Customer (KYC) processes
- Anti-Money-Laundering (AML) checks
- Legal Entity Identifier (LEI) issuance
- Liveness checks
- PEPs and Sanctions screening
- Director Identity Verification
- Ultimate Beneficial Owner (UBO) checks
The good news is that with a clever regtech platform like UBO Service one can try each of these processes individually. At the very least, it is a powerful signal to the regulators that you are aware of digital trends and risks ahead. Digital complacency is now a very real potential franchise killer. Think of Joe Biden. He dodged a crypto bullet at the beginning of the month on Capitol Hill only to discover the Taliban had successfully disguised a nationwide bribery scheme (cash or digital?) which left Kabul fatally exposed. It pays to follow digital money very closely these days.
