The rise of the FinTech industry
By Alison Daun, Global Currency Exchange Network (GCEN)
Risk aversion in global banking continues to send shockwaves throughout the industry, the most obvious consequence being the closure of banks. In the past year alone, we have witnessed the closure of Barclays Bank (Gibraltar) and listened to announcements by Credit Suisse to close its local branch as part of a cost-cutting exercise.
Interestingly, these closures are not the result of the banks’ inability to generate profits in Gibraltar; moreover, it’s because of their decision to ‘streamline’ operations and, in Credit Suisse’s situation, redirect their focus away from funds and trusts and to divest themselves of overseas-based money management services.
On top of this, official crackdowns on money laundering and corruption have forced banks to add more stringent controls when assessing businesses for financial crime risks; as a result, those would-be clients are faced with much greater scrutiny and paying more for services.
In parallel, banks are becoming incredibly ‘vanilla’ in their products and services to further reduce what they perceive to be as risky offerings. Clients who do not comply with the bank’s stringent rules, or are slightly alternative to the mainstream, are being refused accounts and in some cases are seeing their existing accounts being closed.
Bank accounts for investment vehicles are viewed by the banking industry as particularly high risk. Anyone receiving payments from multiple sources such as subscription payments don’t tick the right boxes given their high compliance risk. At the same time, more complex structures such as trusts are finding the computerised, and therefore less tailored, approach doesn’t allow for understanding what a trust does or how it operates. This inflexible approach of banks operating at a distance, coupled with a slow onboarding process and high overheads that get passed on to clients, has left many clients frustrated and looking for alternative money management solutions.
The rise of Financial Technology, also known as FinTech has provided some alternative solutions for individuals and small and medium enterprises (SMEs). Companies offer loans to SMEs on a peer-to-peer lending basis, providing the investor with a return (although Capital is at risk). The borrower is assessed on a case-by-case basis and the relatively small structure of the FinTech companies allows them to provide a more individualised service by adapting their technology to provide bespoke client solutions.
The use of a specialist cash custodian is a viable solution for some clients, as such companies can provide both subscription and operational bank accounts within UK banks. Of enormous benefit to the banks is that the cash custodian takes prime responsibility for due diligence of both the fund and investors. A cash custodian has the capabilities to look at each potential client on a case-by-case basis and complete the onboarding process in an efficient manner by working in parallel with current fund administrators, custodians and prime brokers.
A simple way to think of a cash custodian is as a one-stop-shop for bespoke money management services. While working in conjunction with banks, cash custodians are not part of large multinational corporations, meaning they can be more dynamic and responsive to help a client’s business grow.
They don’t insist on a full-service approach but rather provide clients with tailor-made solutions that the client cherry picks themselves, from multi-currency accounts that cover a variety of currency classes and live reporting to integrated solutions via API. They will work with clients to ensure a dual signatory process is in place for security as well as verifying clients’ documents using the latest verification software; ultimately, this removes inconvenience and expense for the client.
Time and cost savings can also be made within the areas of payments and collections via tailored pricing models that eliminate many of the fees investment firms are currently charged by banks. This all results in a multitude of services, which were previously only available by working with multiple entities, being delivered under one roof.
Economies of scale in Gibraltar have, in the past, meant that Gibraltar-based banks have never been able to compete with larger jurisdictions purely on cost. Cash custodians offering bespoke services, with banking facilities within the UK jurisdiction, now mean that Gibraltar-based funds and fund administrators are no longer discriminated against nor are their clients.
To overcome their individual challenges in regards to overseas-based money management, it goes without saying that choosing the right cash custodian for clients is key.