Today we look at a basic question – why we need banks. The answer is quite simple and goes back to the American Wild West days, when it was safer to store your hard-earned money with a bank than under your mattress or in a safe at home.
In today’s Global Digitized Wild West, the problem is the same; only the style and techniques are different. The modern version of Butch Cassidy and the Sundance Kid are getting monitor tans in some basement somewhere as they hack into systems to steal data. Stealing data might be an indirect route to stealing money (via ransomware or phishing to get codes to transfer money) or in the Cybercurrency age it might be direct (Bitcoin is simply data, so if you steal the data you steal the money).
It is a very old-fashioned concept, but the execution is complex as it involves multiple dimensions such as:
- Is data private by law? For example, Switzerland scores high on this front.
- Cybersecurity (in all its many complex forms).
- Physical server security. Safe from physical disruption (weather, terrorism) and from external breaches by thieves and with hot backup if the unexpected happens.
- Staff security. This includes issues such as vetting and processes to avoid collusion.
- Government/Taxpayer Insurance such as FDIC.
- Private Cybersecurity Insurance (see this post for more)
- How Custody works today and how it will work after Blockchain based Custody goes mainstream.
- How is the bank perceived in relation to data protection? This can change fast with a big breach.
Wealth Managers, like doctors, must “first do no harm”. They must first protect assets and keep them safe.
Then Wealth Managers, must grow that wealth. Growing assets is not a scale game, it is all about the mix of talent, insight and discipline, but protecting assets is a scale game. That list above is not something a small firm can do.
So we see a value chain forming with big players offering the data/asset protection at scale to smaller, agile firms innovating in asset/manager selection. That value chain is changing as we enter the cyber asset world with assets stored on distributed ledgers.
That value chain is also changing as a new breed of micro asset managers emerge from the Fintech marketplaces in fixed income, equities and other asset classes.