Chit-Chat with Nasir Zubairi (LHoFT):
A mission to drive change
Talking with LHoFT CEO Nasir Zubairi always involves sharp analysis of the digital, banking and entrepreneurial ecosystems, not only in Luxembourg but worldwide. Fresh from his latest trip to Asia, he says Europe’s banking industry is approaching crisis point and that Europe risks falling further behind the US and Asia in terms of innovation. Interview.
How are financial services evolving?
The industry is still changing too slowly, and it is further affected by a recessionary environment in Europe. Regulation exists to protect customers, such as against mis-selling, and to curb financial crime including money laundering, but the problem is the speed at which new rules are implemented and the difficulty for banks to adapt fast enough, because it takes time to adjust their infrastructure.
According to official data from a 2016, 13% to 15% of European financial institutions’ overheads went on compliance – anecdotal evidence suggests it has now jumped to 30% or more. 40% of Luxembourg institutions still rely principally on manual procedures for regulatory reporting which represents a huge cost.
“Finance is a European issue that we can resolve here.”
What about return on equity?
Before the financial crisis, RoEfor banks used to be between 15% and 20, but now it is around 6% in Western Europe, 9% to 12% for US banks and 15% in Asia. A vicious circle exists. Due to degrading performance, banks want to cut costs quickly, so they reduce their technology budget, but the problem is that innovation is the only sustainable way to improve efficiency. You cannot simply reduce headcount. Failure to adopt tech is the biggest danger to the financial industry – a systemic risk. Many institutions are dangerously poor on cyber-security and they struggle to attract top tech talent. When I was speaking recently to a professor from my old college, the London School of Economics, we observed that, while at my time most graduates wanted to go to banking, now graduates all want join tech companies. The new challenger banks have a long way to go, too. Right now, we are looking for solutions to help banks survive, and I think we will see institutions in Europe going bankrupt over the next two or three years.
How fast is the current rate of innovation?
It’s already incredibly fast and continues to accelerate as innovation feeds off itself. For example, quantum computing was, a few years ago, considered pie in the sky. But artificial intelligence, specifically, machine learning, is driving very rapid testing and enhancement – effectively machines are building themselves! The technology is known and our ability to apply it is accelerating – but not in the financial services industry. I fear we are falling behind the US and Asia, especially China. It’s a matter of culture. Europe is proud of its past and the sophistication developed over centuries, but it’s history. It enabled us to learn and become what we are, but looking back is the surest way to miss out on the future. I fear that Europeans’ intellectual superiority creates the illusion that we do not have much to learn. The Chinese have become the world leader in innovation by opening the doors to the West 20 years ago, allowing people to study abroad and bring their knowledge back. Look where they are now. Japan did the same in the past. Why is it that that just 3,000 European students go to China each year, when 100,000 Chinese come to study in Europe? A growing number of people here in Luxembourg are learning Chinese, but it is still very rare – we always expect them to switch language. I have just returned from Hong Kong, Shenzhen and Singapore, and the huge scale of the offices of Tencent, Baidu and Ping An takes the breath away! Doing the innovation tour is an eye-opening experience.
Do you see quantum computing as a threat?
Quantum computing is, in the majority, a huge opportunity for the human race. However, its invention and access can also be an advantage to cyber hackers. For example, many feel that Distributed Ledger Technologies, such as Blockchain, that are gaining adoption, are unhackable, due to their consensus model and use of cryptographic security. No security medium has been brought to market knowing it can be hacked, but all have been cracked eventually. Quantum computing can enable hackers to carry out a “brute force” attacks on a Blockchain and eventually break in.
What is your vision of the future?
I love living here in Luxembourg because of its incredible agility and sense of community. Finance is a European issue that we can resolve here – I see more and more evidence of this. We have a genuine shared belief that we can bring people together and make things happen. My desire is to work further with communities and enhance, expand, explain and adapt the new technologies for the benefit of the financial industry by reducing concentration risks. This approach is similar to those in the burgeoning sectors of cyber-security and space technology. We already share best practice and innovative ideas with the broader EU fintech industry. The best ideas are coming from everywhere – we just need to adopt them. The goal of Luxembourg is to drive change, and not only here. It is sad to think that the financial services industry will only be spurred into real change in response to pain. Breaking point is coming soon in Europe, and then I hope we will see more solidarity and open arms. People will look for change, and we can drive it.