Don’t Bank On No Change

Speaking English can dramatically slow infrastructure projects. The results are in, and Spain and Italy do big infrastructure better than the UK, US, New Zealand, Canada, Ireland or Hong Kong. That’s according to a Transit Costs Project(TCP) report cited by Sean Keyes in an excellent piece in The Currency this week. The comparison is possible because TCP looked at 900 metro projects across the world and well, a tunnel is a tunnel. The staggering 10x variation in the cost of building 1km of metro is for another day’s discussion or a read of The Currency. However, our focus in this piece is banking. We know banks have two operational levers; a deposit rate paid to savers and lending rates charged to borrowers. But, did we know language might again separate national banking delivery for citizens?

Check out the news this week. The Italian government shocked the markets this week by announcing a ‘windfall’ tax on supra-normal Italian banking profits generated by much higher lending rates which were not shared with savers via deposit rates. The Spanish had already moved to do the same because its banks had only passed on 8% of rate gains to depositors. In Italy that proportion of gains was a measly 11%. However, in Ireland that number is just 7% versus the euro average of 20% ( Source: Financial Times and S&P Global Ratings). Dearie me. Looks like Europe’s banks have been keeping more than just the change. You might even say “plus ca change” but, as always, there is other CHANGE coming down the tracks. Perhaps the bigger news this week was in a monetary world which has been under even more fire than the dinosaur banks.

Cryptocurrencies as Trumpolini might say are “going through some things” but I’m in the camp that believes digital currencies entering mainstream usage is inevitable. Particularly, if the currency is “backed” by everyday financial assets. A cryptocurrency whose value is fixed, or pegged, to the value of a major currency like the dollar is known as a “stablecoin”. And, this week PayPal launched its very own stablecoin (PYUSD) fully backed by the US dollar. Now, think about PayPal’s 430 million users and the network effects of these digital currency flows. However, it doesn’t feel like it’s just the traditional banks who might be missing a significant shift. We actually should be paying attention to another under-pressure asset class.

The VC world has been as miserable as a Trump legal team this year but two things caught my eye this week. First, the latest VC report from CB Insights was highlighting an uptick in one part of the market for the first time in two years. Global corporate venture capital (CVC) funding of $14.6 billion in Q2 was the highest level of activity seen since Q3 2021. More intriguing, was evidence of a recovery in CVC fintech deals and funding activity with $2.1 billion across 143 deals delivering 5% and 8% growth respectively, and arresting a six quarter slide. I was thinking about the fact that it is companies not funds starting to make moves and also why fintech was reversing trend rather than deal teams sticking with the the hotter cleantech or health tech sectors? Then I read something which resonated with a previous piece we had written about London’s fintech scene and the massive activity databases owned by traditional banks.

The always thought-provoking Angular Ventures newsletter suggested “AI may not be that disruptive after all”. In this instance they are referencing the huge volumes of proprietary AI training data available to Big Tech incumbents like Microsoft, Amazon, Google and others. They are also suggesting the owners of large datasets have a very significant head start on wannabe smaller disruptors.When you consider the S&P 500 performance this year is being driven by a small number of Big Tech stocks you do wonder is the market already seeing an incumbent sustainable “edge” versus smaller disruptor competitors? Indeed, it is amazing to see just 10 stocks account for 30% of the value of the entire S&P 500 and this possibly underpins that thesis.

We shall see, but if there is one sector where the incumbent databases might be in the wrong hands, then perhaps it is the banking sector. And, that might be why corporate deal teams are revisiting the fintech space. Also, we should consider the fintech payment networks(PayPal, Stripe, MasterCard etc) and wannabe networks (X or Twitter!!) as those best placed to win the trust from bank customers who have clearly not seen their fair share of interest rate and savings returns. After all, change is almost guaranteed and trust is the universal banking language.


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