The Unforeseen Disruption of Fintech

There has been much talk about how fintech is disrupting the traditional banking sector and how digital banks are going to render traditional banks obsolete. However it should not be overlooked that the fintech sector is very much ”work in progress” and that many of its disruptive elements are actually negative for the time being. I’d like to illustrate three examples of these negative aspects including one which relates to a very unfortunate personal experience.

Lack of security

Whilst blockchain operations are meant be totally secure because of their complicated encryption, the recent example of Quadriga demonstrates that the current lack of regulation exposes users to more systemic risk. When the founder of the company died last December, and there is even uncertainty regarding the truth of this event, about C$260m of assets were unaccounted for and the majority may never be recovered.

It now appears that the company had no employees or offices and that the founder, Gerald Cotten, was working totally alone and had not even shared the decryption codes to the offline storage accounts with anyone else. It is now unclear whether 1) these accounts can ever be accessed 2) they actually contain any funds or whether the funds have been transferred elsewhere and 3) Gerald Cotten is actually dead.

In other words, whilst the technical complexity of the algorithms ensures that each individual transaction is almost totally secure, the ecosystem itself lacks such security operating as it does with limited regulation and transparency. So the good news is that no third party can divert your fintech funds but the bad news is that you may not be able to have access to them either. Furthermore, the FSCS protects clients of traditional FCA regulated banks up to an amount of GBP85.000 (similar schemes cover €100.000 in Europe and $250.000 in the US) in the event of a range of problems affecting their deposits. This does not apply to fintech companies at the moment. Clients of Quadriga can expect no compensation.

Ecological footprint

There is much talk at the moment about electric cars as though they are the perfect panacea for reducing carbon emissions. However the reality is less clear. The production of an electric car needs more energy than that of a traditional car, especially because or the battery, and also necessitates the use of rare earth metals. In addition, the battery obviously consumes electricity which is produced by burning fossil fuels. As the production of the car and the battery become more efficient, the ecological impact will decrease but it is totally wrong to believe that electric cars are carbon neutral.

If we look at the blockchain, the environmental impact is even more important to take into consideration. On the one hand, the Blockchain for Climate Foundation is positing that their technology can be used better to track and manage carbon emissions. On the other hand data mining which lies at the very core of blockchain is a major culprit in the creation of carbon emissions. The bitcoin economy is estimated to have been responsible for as much pollution as that associated with the production of 2.5 million cars and, if bitcoin were a country, it would be in 53rd position worldwide in terms of energy consumption. According to the world-renowned environmental scientist Jonathan Foley ”Altogether blockchain and cryptocurrency computations use more electricity than the entire nation of Ireland…”.

In the same way that the production of electric cars and their batteries will become more efficient, more efficient technologies will certainly be applied to the blockchain process such as ethereum based PoS (proof of stake) which uses significantly less energy than the traditional PoW (proof of work). The use of unused storage in hard drives can also facilitate this transition from mining to ”farming”. But perhaps the greatest impact will be the arrival of quantum computers. Such computers might destroy the whole principle of blockchain with their extraordinary computing power but they might also offer a more efficient way of managing the process.

Faceless Intelligence

There is an existential debate going on at the moment between mathematicians, physicists, neuroscientists, philosophers and many other groups of people as to whether AI (artificial intelligence) will eventually conquer humanity and dominate the world. Maybe I’m being naive but I believe that such a potential outcome is a long way off and what we should be more worried about in the short term is the ”facelessness” and anonymity of artificial intelligence and those technologies that use it.

For most fintech companies, the use of artificial intelligence is at the heart of their technology. Just as the ultimate objective of Uber is to create driverless cars thereby eliminating their largest cost, most fintech companies want to operate with algorithms to analyse big data and develop processes in a much more efficient way than mere mortals. In the ”click or brick” debate, the clicks are clearly winning and we are living in an increasingly automated world where human contact is non-existent or, at best, virtual.

We all know how frustrating it is to wait several days to receive funds when we make a transfer through the ”fiat” banking system. Or to wait several weeks when we apply for a loan. Consequently, when fintech applications first arrived I became an unconditional user and fan and somewhat hostile to traditional banks. However a recent experience with Revolut has made me reconsider my position, at least to a certain extent. I first began using Revolut for their debit cards which are highly efficient and competitive, especially for international travellers using several currencies. However, recently I made the mistake of making a transfer to my Revolut Euro account from a Swiss bank.

I contacted the company to make sure that the receipt of funds in Swiss Francs would not create a problem. The only way of contacting them is through the chatline in their application. After waiting quite a long time, I was told that this would definitely not be a problem and that I could choose to keep the funds in Swiss Francs or convert them to Euros. The transfer was made on 12th April for a relatively significant amount. I still have not received the funds and, in spite of wasting several hours speaking to various people on their chatline, over five weeks later Revolut is incapable of telling me where the funds have gone. They merely informed me that the transfer was rejected because of a ”technical problem” at their end without being able to explain what this problem was.

I have been unable to speak with anyone at the company in spite of my funds having disappeared or been misappropriated. I managed to identify the email addresses of the founder Nik Storonsky, his legal department and his customer service department but have received no reply to any of my messages. Even the Financial Ombudsman in the UK is unable to contact them by telephone. It should be noted that the company obtained approval recently for a European banking licence but that this licence could be revoked because of alleged links between Storonsky and the Kremlin. Whatever the outcome of this political controversy, it seems to me that an organisation that is capable of misplacing (but let us hope not misappropriating) funds for over five weeks without explanation and where it is impossible to speak directly with someone even when there is a significant problem does not necessarily deserve to obtain a banking licence.

In conclusion, I find myself actually reverting back to the use of my traditional bank. I have been waiting over three weeks to receive a new credit card and cheque book but at least I can ring my banker to tell her off (when I manage to get through to her). Digital banks might have certain advantages over their fiat counterparts and usually be more efficient, but when it comes to problems they can often be highly incompetent and dysfunctional. Indeed in this world where we have become used to downloading music with such ease over the Internet, the sale of vinyl records and old-fashioned juke boxes are soaring. So perhaps, the days of the traditional banker have not yet totally disappeared as fintech, blockchain and Revolut sort out their teething problems.

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