The internet revolution and the growth in fin-tech has brought much needed information and advantages to investors. However, we should not forget the basic fundamentals and principles of traditional investing which can provide us with financial safety when we transact.
I’m a bit older than some, so I was brought up on putting my money into savings accounts and later bonds and ISA’s at the local bank. I consider myself to have ‘oldskool’ values but combined with a forward thinking and open-minded approach.
‘Oldskool’ is often thought of as outdated, stuffy, irrelevant. I like to think it stands for trust, safety, reliability. I’ve witnessed a great deal of things occur over my lifetime, and with experience comes some wisdom.
Nowadays, many people are too trusting of businesses and tech in particular and forgo the financial safety checks that were commonplace in the past. A good example of this is the recent Wirecard scandal which occurred earlier this year.
Wirecard was a financial services company listed on Germany’s DAX stock exchange that offered payment processing services and card accounts for retail customers. It’s share price crashed from €100 to zero and it became insolvent in 2020 after it declared that €1.9 Billion was missing from it’s accounts. This makes the company which was valued at €28 Billion at one stage, one of the largest cases of European fraud ever.
During the financial crisis of 2008 many U.K investors were also severely affected by the collapse of the Icelandic banking system. Savers had been taking ‘additional investment risk‘ by chasing interest rates and putting savings into ‘Icesave’, a savings account run by Icelandic bank Landsbanki. Almost 350,000 U.K and Dutch depositors lost initially €6.7 billion of their funds. When you transact outside your home country or with a foreign company, you are always taking significantly higher risk.
Fin-tech vs Oldskool
Since the birth of companies like Paypal, fin-tech has continued to grow and become even more commonplace in our lives. Banking apps like Revolut, and trading apps such as Robinhood and Coinbase have become widely adopted by millions of users. However, it only requires a quick look on forums or review sites to see a wave of complaints about many app services.
Complaints of accounts being blocked or frozen, trading buys and sells not being placed or cancelled or ‘freezing’ during volatile markets are plentiful. This is one of the downsides of fin-tech. When you transact via an app, there is an additional barrier created between you and the company in general, compared to when you deal with a ‘bricks and mortar’ business such as a high street bank or an established stock broker.
If there is a problem with a traditional bank, you have an address to go to, a person who you can speak with and they can’t avoid you. Additionally, there is financial safety legislation in place to protect you as a consumer, which is difficult for them to avoid. With an app, there is usually no physical address and any interaction is only online. This makes it very easy for them to avoid and ignore users if they so wish. Some apps can additionally evade legislation by establishing themselves in ‘light touch’ jurisdictions or tax havens.
Disruptive or deceptive?
It’s claimed that fin-tech is ‘disruptive’. While there is some truth to that argument, many of the apps are not always as innovative or the bargains that they may first appear. A banking app operating without any physical high street premises should be able to offer a far superior deal to a traditional bank. Yet Revolut offers zero interest on savings on it’s basic free account, with 0.8% offered on a linked savings account. By comparison, Nationwide offers 2% interest on it’s current account and is the largest high street building society in the U.K.
Free or fee?
Many of the other facilities that the new banking app companies offer such as automatic micro savings and stock trading are all things that you can already achieve yourself or through a traditional bank. Even the ‘no trading fees’ that are touted by banking or trading apps are not actually ‘free’. Instead of charging you a fee, they offer poor spreads (the difference between the real buy price and the price they offer you) which makes it much harder to actually make money when trading. Many of the apps also only trade derivatives, which means you do not actually own the physical stocks you are buying or trading as you would through bank or a traditional stock broker.
Don’t get me wrong, I love tech. This is not about tech bashing from an oldskool guy. It’s just about making you aware that sometimes tech is not actually offering you anything new, it’s just repackaging it and presenting it in a way that makes it appears so. A consequence of this is that your financial safety can be put at risk if you start to trust tech without question.
Just because there’s an app that does something, doesn’t mean you need or have to use it. I’ve been using computers for over 35 years. I remember when i first used them it was for games. It seemed a novelty then, and I think for a lot of people technology is still a novelty.
The original goal of computers was to make life easier for people and to provide a benefit. I discovered this when i first started to use computers for music production. When I use a computer it has to be to provide something of benefit to me, not just a means to aimlessly waste some time. If you keep that in mind you won’t go too far wrong.