Banking 2018: Trends & Conclusions

The past year has witnessed great change in the landscape of the banking sector, with the decrease in deal volume and the proliferation of alternative sources of financing continuing to affect the market. Traditional lenders have also faced the challenges brought by the rise of fintech, with developments such as peer-to-peer lending, blockchain and digital currencies revolutionising the sector. As a result, the legal community too has noticed a shift in client demands, with traditional clients such as banks reassessing their current model and position in the market, and new players including fintech companies looking to establish their innovative businesses in an insufficiently regulated space.

Deal volume has decreased across the board over the past few years, with corporate financings currently in a low cycle, resulting in a market with insufficient transactions but a lot of liquidity. As a result, competition among banks for big deals and transactions has “become quite fierce”, according to sources, due to their need to find somewhere to deploy their capital. As the M&A market has been quite flat, lawyers are finding that “when there is a company up for sale, everyone is there” – not only private equity houses but banks who are also able and ready to lend.

Pricing remains extremely competitive, with banks accepting terms which a few years ago they would not have even considered. As many lawyers we spoke to emphasised, “It is clearly a borrower’s market,” in which lending terms have continually softened over recent years, and “borrowers are dictating the terms”. Furthermore, they noted that the complexity of financial products has also increased, with many now including more facilities but in the same package, thus allowing “more wiggle room” for borrowers to add more financial indebtedness to their structures. Despite this, many also expect there to be a “correction” at some point, highlighting the inherently cyclical nature of the market. As one source put it, “Everyone is saying we’re currently late in the credit cycle – something will soon jolt the market.”

The rise of fintech

Over the past few years, the rise of fintech has taken the financial sector by storm, establishing its position at the cutting edge of the market. Its development has not only forced traditional lenders to reassess and revolutionise their business models, but has also created a space for non-traditional players to flourish in the sector.

One of the most recent developments in the area has been the growth of blockchain technology. Blockchain has revolutionised the way in which businesses process financial transactions, allowing for a more efficient, secure and accurate process. The phenomenon has been used to support the function of digital currencies including bitcoin, and signals a new era in financial services. The legal implications of bitcoin and similar developments, such as initial coin offerings (ICOs), have been hotly debated within the market over the past year. Despite clear advantages including immutable data and high levels of security, many of the regulatory parameters surrounding the technology is unknown, including the use of the data as evidence in court. It is clear, therefore, that the scope for legal development in the area is great, requiring lawyers to provide ever-more innovative counsel to clients.

Asia is a particular hub for fintech activity, with both Hong Kong and Singapore looking to establish themselves as fintech centres. One lawyer noted, “Asia was quite slow to pick up on the fintech phenomenon; however, moves are now afoot.” Indeed, Singapore has seen the establishment of its Financial Sector Technology and Innovation (FSTI) scheme, as a means of promoting and encouraging technological growth in the sector. Most notably, in November, the Monetary Authority of Singapore (MAS) announced plans for a S$27million grant to promote AI and data analytics in financial institutions. Similarly the Hong Kong Stock Exchange (HKEX) recently proposed a new board, which would allow listings from technology or new-economy firms.

However, many lawyers speculate that Hong Kong is probably better placed than Singapore to achieve this goal, with growth in the fintech area particularly great in mainland China. They note that if companies from mainland China want to grow and establish themselves on the international stage, they would undoubtedly look to Hong Kong. Singapore, on the other hand, may be more influenced by developments in South Asian jurisdictions, particularly India.

As the fintech area looks to develop in Asia, lawyers in the region are noting that the work is very much focused on the regulatory and advisory side. As one lawyer noted, “The industry is still fairly embryonic,” and so litigation and disputes are yet to play a major role in the field. This is a trend also reflected on a global level as licensing, approvals and finance sourcing remain the mainstays of most fintech practices. However, many lawyers we spoke to predict a shift in the interaction between the legal community and clients; although fintech companies are currently seeking out lawyers for regulatory counsel, they anticipate that the legal market will soon begin to take the initiative, building a new environment for an area that requires much more tailored regulation than what is, for the most part, in place. Regulations are currently not as deep or developed as they should be for the fintech industry to reach its full potential, according to sources, but it is a trend that is coming.

Despite the emergence of new players in the financial market, traditional entities including banks are also ensuring that they remain ahead of the curve when it comes to technological advances. Many lawyers have noted that their banking clients want to remain constantly updated on any developments in relation to fintech. The banking industry’s inclination to embrace this recent technological innovation was most apparent in our research when sources mentioned the increase in banks’ willingness for collaboration. They highlighted that one of the biggest trends over the past six to 12 months has been banks looking to leverage off independent vendors, such as tech companies. Many fintech businesses now have their infrastructure in place and, as they look to scale up and grow, banks are ensuring that they remain strong competition through such collaborations, as well as new initiatives including in-house “tech incubators”.

The finance arena has become a much more collaborative market over the past year – a trend that lawyers expect to continue, anticipating a continued increase in partnerships and acquisitions, particularly between start-ups and more established players.

Developments in the legal market

Technology is changing not only the way in which clients work but also the landscape of the legal market. Banks and financial entities are increasingly embracing technological innovation through AI, most notably with ring-fencing schemes that over the past couple of years have been adopted by large banks, including Lloyds Banking Group and the Royal Bank of Scotland. This process of “mechanising” is revolutionising the way in which clients are going about their business; however, technological growth is not limited to clients. As one lawyer we spoke to noted, “The AI wave is coming,” and although the legal market has tended to trail the tech curve, it is an area in which many firms will find the future of their practice lies.

Many of the trends that have affected the banking sector recently have, of course, had a knock-on effect for the legal market. This is particularly apparent when it comes to financing. As companies continue to look away from traditional banks as sources of financing, many firms who have traditionally had very strong bank-side practices are finding themselves forced to diversify their offering away from just traditional lenders. It seems now that while specialisation is highly sought after by clients, diversification is also key to a successful banking practice in the current climate.

Fintech is a particularly attractive area into which law firms are looking to expand. One source highlighted that the main feedback they receive from large fintech clients is that they often struggle to find the right advisers, as the area is not yet fully established. Therefore, there is clearly plenty of scope for practitioners and firms to find their place in this developing area over the next few years, and it will be interesting to see which of those emerge as prominent specialists in the area.

November 2017

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