What Does Brexit Mean for the Financial Services Industry?
Yesterday’s election may have resulted in the worst possible outcome as it will extend the period of uncertainty given that all options — “hard Brexit,” “soft Brexit,” “no Brexit” — remain on the table.
Taking stock this morning, however, the UK is headed into the most difficult negotiations in decades, with a hung parliament, a damaged prime minister, no majority, and a dramatically weakened bargaining position for the Brexit negotiations. On the positive side, this general election shows highest voter turnout since 1997, particularly among the 18–24 age group.
One thing is clear: this is not the strong mandate that Prime Minister Theresa May had hoped to gain to help her strengthen the U.K.’s position in the upcoming Brexit talks. It is clear that the fear of terrorism and May’s tainted track record from her time in the Home Office, in combination with a weak campaign strategy and a series of tactical errors (pensions, healthcare), were the main reasons for the Conservatives losing their majority — more so than the question of Brexit. This is also seen in the poor results for the Scottish National Party (SNP) and the UK Independence Party (UKIP), both parties building their campaign around Brexit. On the other hand, the high turnout of younger voters, who failed to make their mark in the EU referendum a year ago and were disappointed by its outcome, speaks loudly against the hard Brexit plans of the May administration.
Who Will Lead the Government?
So, what is the bottom line after the election? Uncertainty. A number of options are on the table when it comes to who will lead the next government into the difficult divorce negotiations with the EU. The Conservatives, without question, have been hit hard, losing their majority in parliament and likely facing a heated discussion over the future leadership of the party. Likely May will step down quickly or face an extended period where her position is challenged internally and externally. However, as long as May holds on, she will remain in office as the incumbent prime minister of a hung parliament. There is also the question of who would replace her if she were to resign or be ousted. Foreign Secretary Boris Johnson and Home Secretary Amber Rudd would be the frontrunners, but there would be others.
It all boils down to a loosely formulated “confidence-and-supply” arrangement between the Conservatives and the Democratic Unionist Party (DUP). This is clearly not the most stable option, given a slim majority of three seats with one still to be determined at the time of writing this blog. The alternative of a “rainbow coalition” under Labour with the SNP and the Liberal Democrats — which would still fall short of a majority — is even less appealing. Either way, there would be a lack of stability for any future government in the immediate term.
What Impact Will This Have on the Brexit Negotiations?
It now looks increasingly unlikely that the Brexit negotiations will be concluded within the two-year timeframe set out after Article 50 was invoked on March 29, 2017 — even more so now that hardliners in all parties have gained greater bargaining power to push their agendas.
This could increase the likelihood of a soft Brexit, a no Brexit, or a delayed Brexit. The latter is probably more likely if the sides fail to come to an agreement within the two years, which would result in an extended timeline. This, however, would come at a cost, as EU leaders would not be likely to give ground here easily. However, for many, a “no deal” is not an option, as it would come at a huge cost to the economies on both sides of the Channel. The U.K. would arguably be worse off if it came to a showdown, but even under a strong Conservative government a hard Brexit was likely never more than a political move to strengthen their position in the negotiations and win over UKIP supporters.
With the Conservatives taking the majority of votes, Brexit will remain the direction forward and it will be interesting to see how the internal balance shifts when every vote counts. A Conservative/DUP coalition will likely result in a soft Brexit, given that the DUP has no interest in a hard border with Ireland, but has strongly supported the Brexit campaign. Nonetheless the majority of Northern Irelands voters opposed the Brexit in the referendum, so it’s likely the DUP will seek concessions on the border question without recognizing a special status for Northern Ireland, which was proposed by its key competitor and former enemy Sinn Fein. This highlights the complexity of Northern Ireland’s situation and the DUP’s role as king maker. Two Irish euro-sceptic parties win in a pro-European region driven by political agendas that are still rooted deeply in the past. Add a deeply split conservative party to the mix, where supporters of a hard and soft Brexit will try to leverage the narrow majority in parliament to drive their agenda and you end up in a situation that will be a very difficult balancing act for the next prime minister.g
On the other hand, Labour has also accepted that Brexit will happen and this is unlikely to change based on early comments from Jeremy Corbyn this morning. With the Labour leadership having been clear about accepting the verdict of last year’s referendum, it would be a huge surprise if Corbyn changed his basic position. That position has never extended to seeking membership of the single market, with Corbyn generally emphasizing access to the single market rather than membership. In this sense, the Labour position is not too dissimilar to the Conservative one.
This makes the “no Brexit” option unlikely, although in Continental Europe there are still hopes that the U.K. can remain in the EU. Abandoning Brexit would be the result of a coalition government failing to determine a clear course of action and a combination of fading political will, public disinterest, complexity, slow progress, and a better understanding of the cost resulting in political compromise that would allow both sides to keep face. An EU27.5 maybe.
The most likely option is a delayed Brexit given that the clock is ticking down to March 2019. This period of uncertainty will come at a cost as investments are likely to be put off and immigration into the U.K. will remain low, while a growing number of EU residents head home. Over time this clearly will hamper the growth of the U.K. economy, which at least for now is powered by the low pound and thriving exports.
What Does This Mean for the Financial Services Sector?
Likewise, decisions on if and when financial institutions will move staff out of the City and toward Frankfurt, Paris, or Dublin will remain on hold and, in the case of a soft Brexit, are unlikely to crystallize. In the meantime, it’s business as usual in the City and London will remain the center of Europe’s financial services industry. Its unique competitive positioning, progressive regulation, and a buoyant fintech sector have lost little appeal to the financial sector. We don’t expect any major changes and decisions to be made until there is clarity on where the journey is heading.
Given all this, there is still a possibility of yet another general election in the U.K. It is therefore fairly safe to predict that it will be the next election rather than yesterday’s election that shapes the eventual Brexit settlement.
If you want to learn more about financial trends, please contact Thomas Zink
2.0: What Should Telcos Do With the New Roaming Legislation?
The European roaming market is expected to look hugely different after the new regulation will come into force, leaving mobile operators with the big challenge of re-inventing and re-marketing the roaming experience.
This business environment will change to become low price and high volume in its structure and will increasingly be considered by customers as part of the value proposition. Particularly, with more subscribers using their phone abroad, operators will look for different ways to monetize data, to deliver innovative services and re-build the data experience, whether at home or abroad. Here is some advice for telecoms operators to adapt their organizations to the new roaming market:
- in times when data usage is the most important growth factor in mobile spending, telcos should focus on improving the data experience for customers using their data abroad
- matching the increased demand of data will increasingly become a challenge in a RLAH scenario, and exploring new LTE-based networks that provide better reliability and quality of experience may prove to be crucial
- operators should also focus on delivering a unique QoE for core, traditional services, as subscribers currently using alternative methods while travelling, such as buying cheap SIM cards, could rely more on their current operator to provide better voice and data services
- Telcos should implement data analytics strategies for using customer information to reduce the number of unprofitable customers and retain the most valuable ones.
You can also read: 1.0: Challenges for Telcos: The new EU Roaming Regulation
For more information, please contact Rosie Secchi (rsecchi@idc.com)
1.0: Challenges for Telcos: The new EU Roaming Regulation
From June 15th, mobile roaming charges will be abolished for EU member States, after the European Council gave final clearance to the new regulation approved by the European Parliament. The effect of the new legislation will be that as of June 2017 telecom operators cannot apply any surcharge in addition to the domestic retail price on any EU roaming customer for voice call, SMS and use of data outside the customer’s host country while periodically travelling.
IDC foresees a smooth implementation of the new rules and successful adaptation of operators’ business models, given the safeguard mechanisms put in place in the regulation and the good balance achieved in wholesale roaming caps by negotiators. In both the consumer and business segments we do not foresee any hike in mobile tariffs in the short term, as operators are already adapting their business models to the new rules, and some of them have launched “Roaming Like at Home” (RLAH) schemes. It is also increasingly common for operators to bundle roaming allowances into their tariffs for business users.
In particular, we expect that the glide path of the wholesale data cap reduction will gradually ease structural differences among the countries and allows operators to adjust their business models without any substantial revenue loss. In the long term this will lead to low price and high volume (especially data) business structures across the EU area, with the corrective measures introduced with the new roaming regulation (Fair Use Policy in particular) helping preventing the risk of abusive or anomalous usage of RLAH and of rising prices from the operators’ side. Particularly, the level of detail of FUP policy guidelines will ensure a smooth implementation of RLAH, with sufficient level of transparency and control mechanism at the retail level. Besides, RLAH will work as a stimulus to reduce fragmentation across EU and more uniformity will be reached in terms of market characteristics, such as consumption patterns and costs of running the network, also ensured by operators’ ability to monetize roaming as a new business. A more unified European telecoms market, working from a single pricing approach and similar cost base, will be better prepared to collaborate, invest and innovate.
In the case of UK, the impact of Brexit on the English mobile market will depend on UK’s impending negotiations on withdrawal from the EU membership. However, even in the case of no agreement between UK and EU as well as no EU regulation to keep the roaming prices low, it is unlikely that mobile operators will explicitly re-introduce roaming fees to their UK customers travelling in Europe: operators are already moving towards roaming free/cheap plans, and even though they may be allowed to re-apply roaming charges, the move would be quite unpopular with the risk of undermining customers’ loyalty.
However, the final outcome does not depend on exogenous factors only, and eventually the future of the roaming business will greatly depend on the ability of operators to respond to the new challenges.
Read more here: 2.0: What Should Telcos Do With the New Roaming Legislation?
For more information, please contact Rosie Secchi (rsecchi@idc.com)
Quantum Computing: The Next Big Thing in Financial Services?
One of the questions you least like to be asked as an analyst goes something like this: "OK, so I've read all your reports and I've looked at your annual predictions. I've tuned in to your webinars and checked all your tweets. So tell me: what is it, that I don't yet know about, that will have a big impact on my industry in ten years' time?"
Good answers to this question are few and far between. But one candidate which has so far attracted little interest from the analyst community is Quantum Computing. This is surprising, as what we are talking about is the next generation of computing processors, and they promise to have far more processing power than anything we've seen before. Because of this, Quantum heralds a huge new wave of disruption for the financial industry. Some of the phenomena associated with quantum science may seem closer to science fiction, but forward-looking companies are already starting to explore its implications.
Computing 2.0
To put Quantum in context, Moore's Law holds that every two years, conventional processor speeds will double. This linear progression reflects the capacity of processor manufacturers to scale down the size of semi-conductors used in processors.
The principle that you can draw a straight line on a graph to represent increases in processing power has roughly held true in the decades since the Law was coined by Gordon Moore, of Intel, in 1965. A smartphone enthusiast can detect it in the announcements of chip makers in the mobile space. Last year's flagship Qualcomm chip, the Snapdragon 821, used a 14 nanometre manufacturing process. This year’s equivalent, the 835, is built using a 10 nanometre manufacturing process and squeezes 3 billion transistors onto a chip.
But as the scale of manufacturing processes on silicon chips drops closer to zero, the question of whether we can continue to expect predictable rises in computing power arises. Quantum Computing holds the key to averting this seemingly Malthusian crunch.
If you prick us, do they not bleed?
Rather than working at the atomic level of silicon chips, Quantum Computing technology looks to exploit the peculiar properties of particles at quantum level. Two such properties form the basis of this technology:
Entanglement - a phenomenon best thought of as pairs of particles which exist in different places, but whereby one reacts to stimulus placed on the other, instantaneously.
Superposition - whereby according to predictions of quantum mechanics, microscopic objects can be in two places at the same time. This has been demonstrated on caesium atoms already.
A machine which can harness these literally instantaneous processes will leave even existing supercomputers in the dust.
Is "Peak Digital" round the corner?
Quantum is by no means specific to the financial industry, since it is best viewed as the next generation of computers. Nevertheless, the vast capacity of quantum computers to perform analytics will make possible Artificial Intelligence (AI) solutions which surpass those that exist today. Anything (in any industry, not just finance) which uses cognitive technology or relies on complex modelling will become unrecognisably better when quantum goes mainstream. So, expect to see:
- Utterly transformed and more flexible digital assistants (although they will need to be called something else, because they will no longer run according to the zeros and ones of today's digital processors). Everyone expects that Artificial Intelligence will improve to the point that it is indistinguishable from human intelligence and indeed transcends it: Quantum is how that’s going to happen. This will equate to a hugely enhanced ability to deliver personalised customer service without human input.
- An arms race on the financial markets as quantum analytics is deployed to crunch the numbers and formulate trading strategies at lightning speed.
- The next big jump in fraud detection and anti-money laundering (AML) technology using Quantum-based intelligence.
There is also the promise of unbreakable encryption. Leave alone the question of whether it would even be legal, if two particles can communicate instantaneously through entanglement without leaving a trace in the physical world, that communication should be essentially unhackable. This could revolutionise inter-bank and intra-bank communication and bring new levels of protection from cyber threats.
Quantum upon us!
So far, IDC has covered only one announcement from IBM on quantum. But the topic is starting to gather steam. The mainstream media is starting to take more interest, evidenced by this cover story in The Economist. At least one client of IDC Financial Insights has enquired about it. There was a recent announcement by Commonwealth Bank of Australia and a vendor, QxBranch, about their intention to simulate quantum to start understanding what the benefits might be down the line. And BT has been demonstrating its pioneering work in the field of quantum cryptography, which I had a chance to witness earlier this year at its innovation centre in Suffolk.
Based on the sheer potential of Quantum Computing to bring new capabilities to many different areas of banking, and the fact that industry is already starting to wake up to the possibilities, it’s a fair bet that Quantum Computing will feature heavily in our thinking. You will see more of it in the research of IDC Financial Insights in years to come.