PwC’s John Garvey says cryptocurrencies may have a role, but they will never replace hard currency.
John Garvey is a partner in PwC’s New York office and is the company’s global financial services (FS) advisory leader. He is also the US banking and capital markets sector leader.
His experiences and skillset range from business strategy to technology, risk and operations.
‘The only thing that is driving bitcoin is what the next person will pay for the bitcoin. It reminds me of tulips in the Netherlands some centuries ago’
– JOHN GARVEY
He has had both senior industry and consulting roles over his career. From an industry perspective, he has served both as a chief risk and chief operating officer at Reuters’ Instinet business (now Nasdaq) and a portfolio CEO for several of JPMorgan Chase’s private equity businesses.
In terms of consulting and business advisory experience, Garvey has worked extensively in the banking, capital markets and wealth management sectors in each of the major regions of the world for such clients as: DTCC, NYSE/Euronext, Morgan Stanley, Bank of New York Mellon, JPMorgan Chase, RBS, State Street, Citigroup, Bank of America Merrill Lynch, Société Générale, HSBC, Barclays Capital, Swift and Euroclear.
In terms of the rise of fintechs and neobanks, what are the factors causing these shifts?
There are a number of macro-trends. The first one is that we are moving beyond the post-crisis maniacal focus on regulation, and that’s happening very quickly. The big thing people are focusing on is technology, whether it is AI, fintech, robotics, data or analytics – it all has a common technological route.
I think the other thing – and it is related to regulation – is that there is a real divergence in terms of banking, insurance, asset and wealth management. It is becoming much more regional and national and less global. The big global players have been shedding assets for the last nine years and local players enabled by digital have gotten involved, so you’ve got divergent outcomes in different markets.
When you go to China, you find that a technology company is running the biggest money fund in the country because regulation allows it. There is three times more peer-to-peer lending in China than in any other country in the world because of the regulatory environment. In the EU, a non-bank could never be the biggest money fund; they would never be allowed to run a money fund.
The same thing goes with privacy – you have social media companies that are lending people money and they are using algorithms and personal data from your social media profile, and profiling people. This is because, in certain countries, there are fewer privacy rules and this allows social media companies to lend money. That doesn’t happen in most of the rest of the world.
But where regulation is key, what factors are making fintech’s rise so irresistible?
There are a number of races going on.
The first race is how you incorporate all these fintech developments into legacy firms.
Race number two is if you look at the assets value chain. There are 40 of them, and we map thousands of disruptive companies to that chain. The common theme is that there are companies operating at the edge of regulation. Whether it is in payments or data, they are starting to take some of the more lucrative pieces away from the banks; for example, Square in the US, or even something like Apple Pay. Every time Apple has looked at wanting to become a bank, they say, ‘No way.’ That’s because they look at the regulation and what it means for the rest of their business and how the stock market would value them if they were to get into regulated businesses. I don’t see (unless the regulation changes) these technology companies wanting to become banks and insurance companies.
Race number three is that there are digital-only, fully regulated (or regulated under limited licences) groups of start-ups entering the market. A region that is very interesting is Scandinavia, for example. There are several firms that started in online brokerage that are offering wealth and mortgage services.
PSD2 has cut down the information advantage that the banks had. A number of these digital-only competitors are starting with no clients and with PSD2; they have to be given access to the payments systems that put them on much more of a level playing field. Several of the challenger organisations I met with told me that PSD2 was like the best thing that ever happened to them. There is no PSD2 in the US or Asia so again, the regulation is really shaping what is possible.
You have, increasingly, a heterogeneous situation where you are not getting definitive outcomes across the whole sector. Some of these digital-only competitors are going to be real competitors; some are going to be slicing off little pieces of the ecosystem. In some countries, you will have a fintech because of regulation. India has recently licensed a handful of payments banks because they want to improve financial inclusion. Those banks can operate under a lighter licensing regime and that may be more attractive to financially oriented tech companies.
It’s a fragmented and increasingly heterogeneous environment.
How are incumbent banks reacting or how should they react?
Ireland, like most markets in the West, is dominated by incumbents that are trying to increasingly incorporate digital and analytics into what they are doing.
In South Africa, there are a number of successful and competitive digital-only players in insurance using telematics, data and analytics, and different underwriting models to attract clients away from incumbents.
Do I see the downfall of incumbent banks? No. But maybe incumbents will have 50pc of the cost base they have now and will be much more digitally driven with higher analytical content.
Every time you apply a digital model to an industry, you get an abundance of supply because the marginal cost of sale goes down to zero. This brings competitive pricing pressure so, if you don’t bring your costs in line with revenue, margins are going to suffer.
What are your thoughts on blockchain and how we as humans view money?
I am not a believer that blockchain is going to change the world. I may be in the minority camp but that’s what I believe.
The two main elements to blockchain are that it is a distributed ledger and there are the cryptocurrency elements of it. Some applications have both and some focus on the distributed ledger.
The success of the distributed ledger is all about technology adoption. You have to look at the typical things that drive adoption; what are the incumbent players doing? I would contrast it with cloud. Every one of the software incumbents has a cloud strategy, right? But SAP and Oracle do not have a blockchain strategy and they don’t see any compelling reason to replace the ledgers they’ve had in place and adopt the technology.
What about the subsidiary ledgers that feed the general ledgers – the loans systems, the trading systems, the risk systems – what are those guys doing? Answer: not that much.
Maybe they are just older companies that don’t adopt new technology, so surely the fintechs must be all over blockchain because it’s the new, greatest thing? But, when I look at hot, young companies like Encino and InvestCloud, all of these guys – none of them have blockchain.
And then I ask, who is doing work in blockchain? Well, it is the blockchain companies who are doing work in blockchain.
In terms of distributed ledgers – I don’t get into conversations about scalability or computational power – I just stop at the adoption point.
Then you look at the cryptocurrency thing. Its value is not derived in the same way as real-world currency, which is derived from the health of the economy; who is using the money, the ability of the central bank, money supply etc.
The only thing that is driving bitcoin is what the next person will pay for the bitcoin. It reminds me of tulips in the Netherlands some centuries ago.
And then, in terms of who is using it, governments like to control their currency and have tools to control it. But if governments say they want a crypto version of the euro and a cash version? Absolutely. Could I see cryptocurrency being used to do inter-company cash transactions that get netted and eventually settled in real currency? Absolutely. But will that change the world? I don’t think so.
Cryptocurrency as a tool – and maybe as a complement to real currency – I could see a future for that, for sure. I see bitcoin being around because bad people want to move value around because governments regulate currency. I wouldn’t be in the camp that bitcoin will change anybody’s life.
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