Banking has to take tech and and Greta effect into account – Fiona Cameron

Fiona Cameron reports on future opportunities and challenges as new operators come in to disrupt the financial landscape
Fiona Cameron is a banking partner, ShoosmithsFiona Cameron is a banking partner, Shoosmiths
Fiona Cameron is a banking partner, Shoosmiths

Throughout this decade, ­technology and sustainability will continue to focus minds in the UK banking sector. For banks, corporate customers and legal advisers, tech and an awareness of the need for ‘greener’ credentials will present considerable opportunities and challenges.

Technology increasingly dictates how banking business is conducted. Innovation challenges banks to review processes while ­competition from new, tech savvy operators ­disrupts the traditional banking landscape.

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Technological advances allow new entrants to target specific parts of the banks’ business, including ­payment systems and peer-to-peer lending. Notably, fintechs are also arguably less restricted and so advantaged by the regulatory framework imposed on clearing banks.

Banks recognise the longer-term potential of investment in new ­tech; whether by partnering with fintechs or through ­in-house innovation. Industry-wide advances in payment systems should speed up transactions and could facilitate instant settlements, even in different currencies and jurisdictions. This will help improve cashflow for businesses and simplify the completion of transactions. Both banks and customers can benefit from efficiencies and cost savings.

UK regulators have led the way in facilitating the technology-driven ‘open banking’ system, allowing a ­customer to consent to banks and other FCA-registered entities securely sharing that customer’s data. Advantages for the customer include ­easier price or benefit comparisons and time savings to access certain ­services.

Finance providers may use this data access to build new products or quickly approve loans. The levelled playing field between bank and non-bank finance providers should increase competition, improving access to finance for SME and retail customers.

We may also soon see the use of ­artificial intelligence and ‘big data’ (including the use of trading data) to improve access to finance for SMEs and start-up businesses. Portable credit files may become the norm for both individuals and corporates. ‘Legal entity identifiers’, already used by financial institutions may be rolled out to all corporates, allowing a simplified and secure identification of entities participating in financial ­transactions. Such measures could be beneficial to businesses that don’t fit into a traditional bank-lending ­diligence process.

Some innovations may fail to gain traction while industry-wide there is constant scrutiny of cyber-risks associated with new technologies. However, tech is carving out a niche, offering a means to effectively and efficiently undertake fraud detection and anti-money laundering checks. By 2030, I suspect key technologies will have transformed how banks operate.and changed the lending landscape.

Yet, there are also more subtle influences afoot, including the ­‘climate emergency’. As the so-called Greta Thunberg effect spreads, I expect lenders will require evidence of the sustainability credentials of businesses, assets and projects seeking finance. Equally, customers and stakeholders will seek finance and investment opportunities, which are demonstrably sustainable. Sustainability reporting and diligence is likely to become a feature of lending relationships.

We have seen increasing demand from investors in debt funds and bonds for more transparency on sustainability and ‘green’ credentials. Banks will follow suit, driven by factors including market sentiment, reputation and increased regulatory pressure. Last month also saw legislation passed for a Scottish National Investment Bank. Transition to a zero-carbon economy will be one of its core aims.

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Climate change is now perceived to have a tangible impact on property and the ability to disrupt trade. Potentially, sectors perceived to be unsustainable won’t be palatable to lenders. We may see lending restricted against, for example, real estate assets deemed susceptible to flooding, while existing asset types may lose value. This could present a refinancing risk, motivating lenders to offload certain portfolios.

Conversely, the emergence of greener technologies may influence the bank lending appetite, with new asset types or services becoming of greater interest.

Borrowers too will have to consider changes to their businesses, not least that they fulfil sustainability criteria set by lenders or to give themselves the best opportunity for finance. Borrowers may need to demonstrate they have identified and sufficiently mitigated climate change risks in their business to the satisfaction of any potential funder.

It’s almost inevitable that by 2030 we will have seen Scottish and UK banking further evolve. Technology and sustainability will be two key influencers of change.

Fiona Cameron is a banking partner, Shoosmiths.