Fintech – a natural fit for Guernsey
22 June 2015
According to a recent seminar, Guernsey has an opportunity to establish itself as a jurisdictional leader in the rapidly growing Fintech industries, including peer-to-peer lending, crowdfunding, virtual currencies, online payments and digital banking. EnVoyage looked at the latest developments.
The first thing to remember, says Stephen Ozanne, a barrister and senior associate at leading legal practice AO Hall, is that fintech isn’t new. After all, banks and other financial institutions have been using it for years through things like credit cards and the Swift network for financial transactions that was launched in 1973.
So fintech is actually the application of the latest technology to existing operations, particularly where it can make transactions quicker, easier and cheaper. An example of that, says Mr Ozanne, an investment fund specialist but who is currently also working with local government, regulatory authorities and industry to establish a new fintech legal framework and strategy for Guernsey, is the somewhat controversial crypto currency, Bitcoin. Although the best known, Bitcoin may not have much of a future as other challenger virtual currencies emerge that process faster.
Operators such as Ripple.com, which powers instant cross-border remittance, corporate and institutional payment services, have also entered the market. With Ripple, it claims, banks reduce their liquidity and compliance costs with straight-through processing, access to retail FX rates, and end-to-end transaction traceability.
If that sounds somewhat disruptive, it is. EY in a report for UK Trade and Investment were blunt: ‘UK Fintech is currently energised by the cumulative effect of digital connectivity, customer dissatisfaction with banks, and a lack of innovation and investment by incumbent providers.’ It estimates the fintech market to be worth c. £20bn in annual revenue and growing, the majority of which is generated by what it terms ‘traditional fintech’ and in the order of 18% which is generated by ‘emergent fintech’.
According to EY, the key themes affecting the sector are the disintermediation – cutting out the middleman – of incumbent models and infrastructure, the monetisation of data, and the requirement for fraud and identity protection. The UK is a leading player in this and, as Guernsey’s largest trading partner and given the island’s specialism in financial services, there is significant interest in developing fintech locally.
Heading that for the States of Guernsey, is Commerce and Employment, whose chief officer Jason Moriarty says that the public and private sectors are committed to working in collaboration to ensure a fertile environment to allow fintech to flourish in Guernsey. The areas of opportunity include mobile money, P2P lending, payment service provision, alternative currencies and digital banks. In many respects, however, fintech is a natural evolution for a business-focused island that is also well connected to the rest of the world.
At the centre of that connectivity is Sure International, which supplies telecommunication services to Guernsey, Jersey and the Isle of Man. Since 2013, Sure has been owned by Bahrain-based Batelco Group, a leading provider of the full range of communications services across 16 jurisdictions including the Middle East and North Africa.
As Justin Bellinger, Sure’s director of business transformation and development, explains, that connectivity is based on work that was undertaken more than 30 years ago to meet the needs of the finance sector because Guernsey was growing rapidly as an international offshore hub. What was then the longest submarine fibre cable was laid to the UK and, since then, a further 11 undersea communication cables have been laid as the island ensured that it had the connectivity and resilience that its banks and, later, e-gamers required.
It’s one of the reasons Mr Ozanne sees such a future for fintech. “We have more connectivity than probably anywhere else in the world,” he says as Guernsey sits at the centre of a hub linking the UK with the Americas, Europe, the Middle East and Africa.
In part, that’s due to the success of the Bailiwick as a centre for eGaming and Alderney, which regulates this important and growing industry. The islands transmit more internet eGambling traffic than any other location on the globe and is in fact much larger than the combined activity of its three European offshore rivals.
With more than 100 licensees, there is a considerable demand for infrastructure and this is largely based in Guernsey, which acts as an international fibre optic conduit for the massive amounts of data that the gamers generate.
However, as important as connectivity is reliability and security so Sure and the island’s second telco, JT, have invested heavily in back up power supplies and physical security to ensure the data centres on the island remain running. Sure was also instrumental in introducing technology to stem distributed denial of service (DDoS) attacks on its data customers because of the damage hackers could cause.
Typically, a hacker will write a program and send it to thousands of agents or zombie hosts – creating a botnet that will, upon the command of the hacker, simultaneously attack a target system. For the eGamers, such DDoS attacks were accompanied with demands for money – perhaps as much as $45,000 – otherwise websites would be taken down at crucial times with the resulting massive disruption and loss of revenues.
Mr Bellinger adds: “Our solution recognises when a DDoS attack is happening and identifies and blocks the flow of malicious traffic while still letting legitimate data through – so your business stays up and running.”
Because of Guernsey’s compact size – its 24 square miles accommodate 63,000 individuals, 31,632 of whom are self-employed or work for one of 2,303 employing organisations – the decision to embrace fintech is island-wide. That’s particularly important in the case of the regulator, the Guernsey Financial Services Commission, which C&E’s Mr Moriarty describes as having an open-door policy and holding regular meetings with fintech entrepreneurs. Its non-regulated financial services businesses regulatory framework successfully accommodates non-traditional finance business and it is also looking to review other regulators in competitor jurisdictions and monitor the development of international standards with a view to ensuring Guernsey can compete and benefit on a global platform.
This nimbleness of approach is also being pursued by Colin Vaudin, the States of Guernsey's first chief information officer. The former Army officer who served in Afghanistan is creating a single technology infrastructure for government, and is working with other parties in Guernsey and beyond on standards and benchmarks for demonstrating trusted jurisdiction status in terms of cyber security - which Guernsey is intent on achieving, and is now working towards. He says cyber fraud is a significant issue and by establishing a clear position as a trusted jurisdiction, which would embrace government, business and individuals, it would act as an important economic differentiator for the island. There would be a training aspect to this and the island's fintech initiative recognises that skills training is a key part of developing the sector and the wider digital agenda.
“This work is being actively addressed with plans for a digital training academy as part of Guernsey’s Digital Greenhouse work as well as extensive training delivered through public and private sector providers being evolved to accommodate changing skill and training requirements for the information, digital and creative workplaces,” says Mr Moriarty.
It is this dovetailing of skills and existing infrastructure and knowledge that Mr Ozanne believes makes Guernsey so well placed for fintech. Regulatory and not tax advantages underpin it, he says, and the existing structures already in place – such as protected cell companies and access to the Channel Islands Securities Exchange – lend themselves to the fintech environment. “We are not reinventing ourselves,’ he says, ‘we are adapting the core skills we already have.” For an established international business centre such as Guernsey, it seems that fintech is simply a natural fit.
An original version of this article was first published by EnVoyage, May 2015.
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