europe and tech

The regulatory burden has forced banks to stay local, while tech platforms with global ambitions have flourished. But is this about to change?

I was in the middle of working on a bunch of stuff, when a comment stood out for me that tech is global, but banking is domestic. This really struck home, as it highlighted a critical point. Most banks are not particularly able to go outside their domestic and regional markets due to regulatory restrictions and compliance overheads, whereas most technology companies build to provide global networking reach.

It is the reason why we struggle so much when thinking about big banks versus big tech. I’ve worked with large banks all my life and wrote an in-depth report on why there were no big European banks. Sure, there’s Deutsche Bank, BNP Paribas, HSBC and more, but there hasn’t been a merger within the region to create a truly pan-European bank.

I see the same in Asia, particularly in the south-east. Likewise, several banks in Africa have a vision of a pan-African bank but, with so many national rules and restrictions in place, no one has yet achieved this. The same can be said for Latin America.

Uneven playing field

Meanwhile, juxtapose this position with the likes of Amazon, Facebook and Google, as well as China’s Ant Group and Tencent. These companies are all building ecosystems where they provide the global integration and infrastructure for many players to play — like Swift for the internet. They connect everyone. Unlike Swift, however, they’re not a collective of thousands; each is just one company providing the connectivity.

At a conference I attended, Jack Ma commented that management is for regular companies. Alibaba, on the other hand, runs an economy and it is the government — perhaps that’s why he has fallen foul of president Xi Jinping’s counsel. However, his viewpoint is key: big tech companies are not just companies; they are global economies, which is why big banks fear them.

Big tech companies are not just companies; they are global economies, which is why big banks fear them

A big bank with global ambition ends up dealing with some form of regulatory change every 12 minutes, reports Thomson Reuters. According to Bank of America, a big bank deals with five times more regulation than a big tech firm. It is not possible to innovate, spread your wings and go global if you have to deal with so much constraint and localised focus.

Thus, you can’t go global if the national regulators force you to be local. This is why banks are mainly domestic and regional, as it is far too difficult to go global. But this begs the question: how can tech firms be global when we, as banks, cannot?

Regulatory oversight

The answer is governance. And while governments have not quite caught up with the pace of change in technology, they are gradually getting there.

As mentioned, Mr Xi’s regime is clipping the wings of the country’s big tech giants. Margrethe Vestager, executive vice-president of the European Commission, has been a tireless campaigner in challenging the big tech giants. France has just beaten Google, as has Australia. And the list goes on.

In other words, the reason tech went global is that local players didn’t understand what was happening. But, after a quarter of a century, they are now realising what is at stake. Give it another 25 years and tech may look more like banking — they can try to be global, but should expect local regulations to change every 12 minutes.

The light regulations of tech firms — whether big tech or fintech — has allowed created an uneven playing field for ‘unicorns’ and mega companies to rise on, but this too shall pass. Should this give banks hope? Not really, as it’s more fear for the unicorns and big tech firms whose billion-dollar lobbying funds will try to resist this to the ends of the earth.

This battle will rage for a long time and any banks out there who believe they are losing should think again. Many banks may have lost battles but, with government support, some can still win the war.

Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.

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