By Daniel Lanyon on Wednesday 20 July 2016
The star economist at Oxford University is bullish on fintech, believing certain areas of the City are set for huge change.
Large scale financial services firms are still ripe for disruption, according to the economist John Kay (pictured right), who believes the City of London and other major financial centres have taken a wrong turn.
A fellow of St John’s College at Oxford University and a visiting professor at the London School of Economics, Kay has several connections to the fintech world beyond his academic interest.
He is a private investor in a rapidly expanding fintech firm and is also an independent director of the Baillie Gifford Scottish Mortgage Investment Trust which is a £3.7bn tech-heavy portfolio of stocks and unquoted equity positons in the likes of TransferWise and, until recently, marketplace lending platform Lending Club.
Speaking to Mike Baliman on the latest London Fintech Podcast (AltFi are big fans), Kay explains that he sees four main ways that fintech can be successful and help the real economy by disrupting financial services.
These are firstly; the payments system This is the system that enables the payment of wages and salaries as well as bills. Secondly; capital allocation. This how peoples’ savings become invested in the physical assets and infrastructure of a country. Risk management is third, i.e mitigating the risks of everyday life such as insurance. Lastly is wealth management in a broader sense.
“From a public policy point of view and a commercial point of view the only way we are going to provide the basic levels of advice that a mass market needs is through technology. In all other areas of retail personalised service is something that you only get at the top of the market,” Kay said.
Technology will take over a lot this spectrum and he argues wealth management "is an area of major disruption”, encompassing P2P lending/investing, robo-advice and other discretionary investment services. However, he says payments is the one that will most clearly disrupt things and change our lives. He thinks cash will “seem crazy” in 20 years’ time.
P2P and marketplace lending is a key part of the disruption of investment management as well as traditional banking as it seeks to bring together lenders and borrowers although its rapid growth has more recently given way to period of short term turmoil thanks to problems at the industry’s bellwether firm Lending Club.
Kay has a sizeable investment in online investment management firm Nutmeg, however, which is one of the dominant players seeking to disrupt the fund management and wealth management industries although they have yet to announce a P2P/market place lending function.
Kay argues that broadly finance ‘has gone wrong’ over the last 30 years since the boom in City in the 1980s, known as the Big Bang, which refers to a heady period of deregulation of financial markets.
“Finance, he says, used to be a career for "the not very bright" mostly. But, has since become one for the brightest alongside huge growth in scale and pay.If we ask ourselves whether it is delivering the services that the non-financial economy needs better and more effectively...it is very difficult to say the answer is yes,” he said.
Regulation today for financial services has however, he argues, been cumbersome and too great and ultimatley against healthy innovation.
“We do not need more regulation but a different regulatory philosophy that looks at the structure of the industry and the incentives of the people within it and stops trying to write ever more detailed rule books for what people in the industry are supposed to do,” he said.
“There are a set of ideas drawn from the industry itself that govern regulation and policy and unless we challenge some of these then we are inevitable set up for the next crisis because the underlying mechanism that caused it have not changed.”
Crowdfunding, one of the earliest areas of the growth in alternative space, is Kay's least favourite from an investment perspective.
“I am pretty sceptical. I can see equity crowdfunding as attractive where it is only a semi-commercial investment that is where people really like the product or they like the activity. But in terms of funding new businesses I am sure anyone who has been in finance for a bit knows that almost every new business has a bit in their plan that sounds great but it is only when you have seen 20 or 30 business plans that you realise that three-quarters are not actually that great. Even then most are going to fail.”
You can listen to the full podcast here.