The Gradual Demise of the Channel Islands

[this post originally featured in BL Magazine]

Aonghus Fraser, CEO at Atam ID Technologies, explains why Guernsey and Jersey will suffer a gradual demise if they don’t get to grips with what technology has to offer.

In the early 19th century, the unanticipated downfall of the shipbuilding industry in the Channel Islands was triggered by steam-powered vessels and the transition from wood to steel – the first industrial revolution. Not technology as we know it today, but technology nonetheless. As quickly as AirBnB disrupted the hotel industry and Uber disrupted taxis, shipbuilding in the Channel Islands was gone.

Shortly after World War II, the tourism boom barely lasted a generation, as lower-cost air travel made it more cost-effective to spend a week in Spain or Greece than a relatively expensive Jersey or Guernsey. Economies of scale coupled with supply and demand and aircraft fuel efficiency all factors in this shift.

The pivot from tourism-dependent economies to globally renowned financial centres of excellence didn’t happen overnight – there was a very deliberate collective effort.

The Channel Islands have historically re-invented themselves through the centuries. However, if we don’t pay attention and act on the threats to our current dependency on financial services we risk becoming irrelevant and obsolete in a competitive global market.

Fintech

Technology is not new in finance, but the term fintech is relatively new – not just an amalgamation of the words finance and technology, but signifying a disruptive approach in the finance industry leveraging technology.

Over one million traditional banking customers have switched to services provided by fintech startups such as Revolut and Monzo, both offering pre-paid currency cards with a richer user experience, consumer-friendly features, reduced FX costs and better service, all thanks to technology.

Fintech startups have significant advantages when competing with established traditional financial services companies, namely: no legacy estate; no difficult roadmap to plan; the ability to leverage cloud services; and no legacy (human) resource pool.

Technological advantages of fintech startups are fairly obvious. However, arguably a greater benefit for startups is their attitude and culture.  A traditional workforce that is set in its ways and resistant to change can result in institutional failure to adapt quickly enough and presents a significant risk to those organisations. An adaptive culture is as important as the correct adoption of technology; the famous Peter Drucker quote ‘Culture eats strategy for breakfast’ rings true.

The gradual demise

If we’re collectively unable to adapt to the evolving landscape, there is no doubt that business will start to trickle away; death by 1,000 cuts. This will be echoed in supporting industries and have a dramatic effect on our economies as a whole.

The finance era initially attracted experienced financiers and accountants, we have since been successfully ‘growing our own’ too. However, an unintended side-effect of the success of the finance industry is that many school leavers without a specific vocation will default to ‘just getting a job in finance’.

Lower skilled relatively manual jobs that are widespread in the finance industry present a significant risk – they’re at high risk of being replaced permanently by automation and artificial intelligence. Anything that is easy for a human to do will soon be automated. Organisations capable of reducing their dependency on the lower skilled administrative jobs by automating them will be able to scale cost-effectively and reduce their costs. Those that continue to rely on manual paper-based approaches will be left behind.

This shift in mindset needs to be mirrored between industry and education; it’s important for the default ‘just getting a job in finance’ mindset to evolve if we want to be able to adapt.

The gradual decline in the finance industry is a concern, however it’s not one that we are powerless to stop, we can start working towards a smarter future.

As small jurisdictions, there is a need to recognise that we are in permanent competition with an increasingly global market. Globalisation and advances in technology continue to make doing business for anybody even easier – with anybody, anywhere, anytime.

Whilst this presents opportunities for the Channel Islands, new markets with hungry, lean, low-cost start-ups are also presented with these opportunities. Increasing opportunity, but increasing threat.

What are our Unique Selling Points? What are the areas that are going to present the best opportunities for the Channel Islands to compete in? What is it that will continue to ‘keep the Channel Islands great’?

There are local advantages that could be leveraged to be more competitive globally and mitigate some of the risks our islands face.

Regtech & Digital ID

Trading on our reputation is a real advantage. All financial services organisations are trying to implement cost-effective Client Due Diligence (CDD) and Know Your Client (KYC) programmes, each investing separately in technology and people (some with large offshore teams). Automated reporting to regulators is another area that can be a significant cost to financial services organisations, yet will become the norm.

What if the debatable advantages in competing with each other on regulatory efficiency were sacrificed for the greater good?

A collective effort in solving some of the regulatory challenges would result in lower overall costs and all participants able to concentrate less on the regulatory issues and more on quality and level of service. Working with the regulators for standardising approaches as a jurisdiction would then be an advantage in the global marketplace. A rising tide lifts all boats.

One area that would benefit from working together that could be promoted off-island as an advantage when doing business here is Digital Identity – facilitating CDD/KYC. The quicker and easier it is for anybody to be checked to an appropriate trusted level, the better.

As more and more reporting becomes automated, making a collective and consistent effort in this area will result in reduced overall costs and competitiveness in the global marketplace.

Cutting-edge collaboration

We are also not spending enough time looking at how the latest technologies can benefit our customers and our own organisations. Machine Learning and Artificial Intelligence are becoming easier to leverage, however it can still be risky or cost-prohibitive for smaller companies to embark on programmes exploring these cutting edge technologies.

By collaborating and pooling together resources, scenarios that benefit all could be explored and evaluated with a view to being more competitive globally. In some sectors there is a shift in demographic in terms of high-net-worth clients; the younger generations will be expecting technology-led services. Retaining this clientele will be key to avoiding a gradual decline.

Technology worldwide is a growing sector, and will continue to grow.

Instead of “just getting a job in finance” there could be a significant impact on the Channel Islands if our school leavers were better equipped for careers in technology. This requires a collective effort from everybody – education, teachers, parents and industry – there are initiatives underway but there is always more than could be done.

Fostering entrepreneurship and an attitude for lifelong learning mitigates the risk of us being left with unemployed lower skilled finance workers. Just as change in large organisations can be difficult, changing the mindset of a generation and population overall is not easy, but it is essential; the risks are real.

It’s incumbent on all of us to work together for the benefit of our islands to avoid our collective demise. We need to be ‘match fit’ for the future; ready to adapt and change. Lobbying our governments and regulators where appropriate, collaborating to ensure we can continue to prosper as the technology landscape evolves at an ever-increasing pace.

 

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