Fintech in the Channel Islands: a bright future … or nothing but hot air?

It"s hailed by some as the next big thing for the islands, but are the opportunities in fintech as dazzling as they seem, or are people getting carried away?

If you"re looking to coast along in a job where everything remains safe and familiar, and the only change you have to deal with is the stuff in your pocket that secures goodies from the office vending machine, then the world of finance may not be for you. The sector is being turned on its head, thanks to record levels of investment pouring into groundbreaking technology platforms.

According to Accenture, investment in financial technology (fintech) companies trebled last year, rising from just over $4bn globally in 2013 to more than $12bn. It marks a formidable shift, especially in a sector that has traditionally raked in those dollars and cents without worrying too much about the 1s and 0s.

The most eye-catching fintech deals in recent times have been the $3.5bn that KKR and others poured into payment processor First Data, and the $865 million raised on the New York Stock Exchange by Lending Club, a peer-to-peer lender. But the fintech buzz goes beyond these massive companies - an army of start-ups has emerged, redesigning (and redefining) everything from small business lending to how flatmates split their bills [see box on p38].

It should come as no surprise, then, that fintech is generating the sort of hype previously attached to other digital disrupters-gone-mainstream, such as AirBnB and Uber. And if there"s something to be learned from the dramatic impact that those have had (on the hospitality and taxi sectors respectively), it"s that the choice facing established finance companies isn"t whether or not they should get on board with this emerging technology, but about ensuring that the change doesn"t bite them in the back pocket.

As you might expect, the Channel Islands" finance industries have been talking up the fintech opportunity. Jersey recently hosted a conference on the subject and established a high-level working group to develop a coherent strategy for the island. Guernsey has been making similar moves, commissioning PwC to write a strategic review of fintech and how it relates to Guernsey as an offshore jurisdiction. It"s also formed the Fintech and Digital Oversight Group, again comprising figures from government, regulation and industry. Both islands, be it at the Digital Jersey "Hub" or through Startup Guernsey, are running regular fintech events and networking sessions.

Off and running

There have already been concrete successes. Elian is one company that"s taken the island"s expertise in identity management to the fintech arena. Its ID Check is an app that enables people to handle certain parts of the Know Your Client (KYC) process themselves - using their phone to take a photo and aggregating that automatically with other information, thus reducing the cost of KYC and allowing Elian to process 120,000 applications a year.

“It"s a small and safe step to be recognised as a potential fintech leader around compliance,” says Chris Clark, who, as CEO of Prosperity 24.7, worked with Elian. “If people are happy to trust data and money in Jersey from a regulatory perspective, then having KYC data outside the UK and EU could well be a compelling proposition too.”

This is one example of an approach that could prove fruitful for the Channel Islands. They have already nailed the "fin" part of the fintech equation by honing in on niche specialisms in areas such as wealth management, real estate, insurance and fund administration. The challenge now is to tackle the tech part.

Many people advocate adapting this to key segments of existing expertise, rather than aiming to lord it over the entire fintech kingdom. “We"re not looking to take on London,” says Andy Jarrett, Director of Digital Jersey.

This seems a sensible approach. The UK capital already employs more than half a million people in digital or technology businesses, and Prime Minister David Cameron himself has stated his aim for London to be the fintech capital of the world by 2020. The UK government even appointed a special envoy for fintech, Eileen Burbidge, in July last year.

Its competition is in Silicon Valley, which has dominated the tech sphere for decades. There are also smaller nimble jurisdictions such as Israel, which now has about 200 fintech companies, many specialising in data security - a handy skill picked up working with the Israeli Defence Force.

Given this competitive landscape, the opportunities for the Channel Islands may indeed lie far from creating headline-grabbing apps like Uber. “The Channel Islands have a lot of people who know an awful lot about the finance industry,” says Mark Loane, CEO of C5 Alliance. “It"s about bringing out that IP and turning it into products and solutions - whether that"s finding more efficient ways of engaging with clients; building more advanced portfolio management; risk management and the management of regulatory reporting; or the construction of financial products and solutions.”

Mike Culverwell, Interim Director of Guernsey"s Digital Greenhouse, also urges the islands to “play to our strengths”.
The islands have a genuinely strong reputation for data sovereignty in financial services, he says. Add a sympathetic regulator and the access they have to key markets, and they can provide an enviable location for product development.

Another example of technology that may suit this testing model is blockchain, the database system that powers crypto-currencies such as Bitcoin. It"s causing a stir in the US as big banks work to establish standards. “Cross-bank payments are likely to be targeted by this technology and it will take out traditional players like Swift,” says Jarrett. The Channel Islands could look to become a home for companies trialling blockchain technology - they will be looking for small and agile jurisdictions with open, proactive regulators.

Such work - now known as "regtech" - could be another potentially rich vein. “Can we put legislation in place that allows people to hold data here in an innovative way using blockchain, while giving them certainty that the mechanism is recognised in the court of law?” asks Nick Vermeulen, a Partner at PwC, who worked with Guernsey on its fintech strategy report. “I see that as a way of allowing people to come here to do interesting things. After all, we"ve done it before with e-gaming.”

Supporting role

The other area of potential lies in simply supporting the booming fintech sector in the UK and EU. This is the nuts and bolts stuff the Channel Islands have always been good at. “As these players get wealthy they may need trust structures, seek private equity investment or a local listing, or a listing in London,” says Fiona Le Poidevin, CEO of the Channel Islands Securities Exchange. “If London has the aim of being the fintech centre of the world, it makes a lot of sense to support that effort.”

While the tax-neutral Channel Islands may offer some appeal as a base for fintech start-ups (Digital Jersey is talking to a number of large banks that run accelerators globally about setting up something similar on the island), it"s unlikely the islands will be concocting their own Silicon-based nicknames any time soon. Technical skills there are limited, for starters.

“We have the issue of brain-drain, specifically on the entrepreneurship side,” says Jennifer Strachan, CEO of Startup Guernsey and a member of Guernsey"s Digital Business Development Committee. “There"s such a vibrant community in London and the rest of the UK and it"s buzzing. Instead of supporting school leavers here, we say: "Go off to uni and maybe come back or don"t".”

Then there"s the business culture. The islands" long-standing success in financial services has required a deep-rooted and conservative approach - disruptive technology requires precisely the opposite. “Innovation means taking risks and being prepared to accept that not everything works,” says Jason Laity, Chairman of KPMG in the Channel Islands. “When things go wrong you share your experience, learn and move on. Is that something the Channel Islands are used to doing?”

The governments could also make the environment more welcoming. “We don"t reduce risk for angel investors,” says Strachan, an angel investor herself. “In the UK they may give investors their money back if the company fails, but here there"s no government support, no appetite or vision.”

Guernsey lacks a start-up fund, she says, and while Jersey has its Innovation Fund, it"s only for companies that already have traction. “We have a lot of building blocks,” she says, “but we need more.”

If you"re wondering how big the market could be for the Channel Islands, this may be the wrong question. It"s more a case of what could be lost if they aren"t involved.

Loane says taxi operators would never have been usurped by Uber if they"d had an easy-to-use mobile booking system and a quick and convenient way to pay. But the industry didn"t adapt to new technology and it got disrupted.

“In the Channel Islands there"s a risk of this happening,” he says. “Not in one huge disruption, more death by a thousand cuts. New players are shifting the paradigm while lots of highly-paid individuals sit apathetically in the financial sector not realising what"s going to hit them.”

The direct gains from fintech are unlikely to make billionaires of the islands" business community, but it could bring a steady but realistic growth to their GVA. It could also be a vital element in diversifying the economy and, more importantly, help secure the future of financial services.

If the change is handled right, the task needn"t be too big for the Channel Islands. “We don"t need to reinvent the wheel,” says Vermeulen. “We just need to take that wheel and strap it to our bike.”