Mike Bagguley began his career in insurance before joining a bank on a derivatives trading desk. He held key roles, including senior role in FI Rates, Head of FX and Commodities, and Head of Macro Products. He oversaw many projects, including the execution of Barclays’ first client physical oil deals, and integrating Rates, FX and Commodities cross EM and G10. His last role was as Chief Operating Officer of Barclays International.
Today, Mike joins us to answer questions about trends in tech, finance, crypto, and the very real dangers that unsustainable businesses pose to our economy.
With smartphone sales having plateaued, it has been said that many investors are looking past the media-tech frontier in search of the next big opportunity. What do you think it might be?
Tech is migrating into other industries at a rapid pace, creating opportunities. Behind the headlines about hardware sales stalling, there are plenty of tech firms, both listed and unlisted, making serious changes to commercial activities. In the process they are generating profits and thriving.
I expect to see both AI and data add to the momentum of significant tech led change moving into every industry. This maybe helping new firms or incumbents achieve new levels of productivity. Either through rationalization, focus or making targeted solutions that scale. In doing so this will change the shape of the enterprises that deliver the services. Financial services will be a good example of this.
In finance, you’re unlikely to see a “digital retail bank” emerge as a profitable opportunity. A significant number of the activities of a retail bank are not that profitable in the current environment when offered to an appropriately high standard.
You will see the profitable services performed by banks get stripped out, to be presented as separate standalone services. This includes enterprises like Robin Hood addressing share dealing, Revolut handling FX transactions, Stripe handling payments, Apple Pay replacing the traditional wallet, and Scalable Capital rethinking savings and investments. My view is a digital bank will not appear, but a set of digital services will.
Wholesale financial markets will also change. Trading is an area I am very familiar with. Economic performance has been modest in this business line, and there is a need to address returns via costs as margins improvements (revenue) and capital levels will not help.
I see firms like Inforlago, that manage real time trade reporting, using technology to create significant rationalization benefits for clients. The use of AI, cloud, and data management by providers like this will provide significant operating leverage through simplification of the technology stack. Processes simplification with further savings will flow from this. I see this as the route to move that business activity back to significant profitability.
Beyond finance, there are numerous examples. In the medical field, tech has the potential to bring massive changes to the industry. Expect to see targeted medication, rather than broad based drugs plans. However, more than anything else, I find myself wondering if we’ll ever see the emergence of truly preventative medicine, which is becoming increasingly critical as populations age.
What industries do you think are most prone to disruption right now, and what are the barriers to entry?
Recycling is an industry where I see huge opportunities for a change in the role the business plays. A circular and more sustainable economy is an interesting goal, and ties into much-needed renewable energy development. It is important for long-term economic security. It also ties back into the debate on globalization, which we will likely see come up often as we discuss the environment and the contention for employment at a national level. This is a huge space, and it feels like we’re simply waiting for changes in technology, IP, and processes to catch up.
I also still see major opportunities in finance. As I’ve stated, I don’t see the emergence of a full “digital retail bank” happening anytime soon, but we are continuing to see tech companies solve for services traditional performed by banks, such as handling payments across currencies.
Facebook’s cryptocurrency, Libra, has met heavy resistance from world governments, journalists, and crypto enthusiasts, with one writer calling the project a potential “contradictory mess that leaves almost everyone dissatisfied.” Do you see space for regulated projects and stable coins that utilize blockchain technology, whether created by Facebook or a major bank, and if so, what is it?
I’m not entirely certain what LIBRA means in the bigger picture, but its existence as effectively an easy to use version of the US dollar for use globally is not radical nor a big step from where we are now.
I don’t think people are panicked about LIBRA itself, as much as the project has made governments and regulators realize that they should have been much more assertive when it came to how they handled Facebook before it became this large.
They now know that letting Facebook acquire WhatsApp was perhaps not helpful but also realize reversing that acquisition will be much harder than it was to simply permit it. It appears that governments are now attempting to punish Facebook as they roll out LIBRA to relitigate the past.
I do find enterprises like IVNO (https://ivno.io)to be fascinating. Their approach of providing a strong product – in this case, “strong content” – for an existing DLT has significant potential. This is an example of the significant capacity of technology and IP to rationalize and exponentially improve an activity.
Are there any blockchain startups or initiatives that you see as having significant potential right now, and if so, what are they? Since Bitcoin’s run to $20,000 in 2017 and subsequent correction in 2018, has cryptocurrency come and gone as a speculative investment for most people?
I see huge opportunities for distributed ledger technology to revolutionize several different fields. For example, in the art market, I see DLT being used for authentication, insurance, sale, and financing of pieces, transforming the way escrow and payments are handled.
In finance, I also see R3, who are building apps on their blockchain platform, Corda, for financial services, insurance, healthcare, trade finance, and digital assets, as an interesting example. As I stated earlier, IVNO, which is a Corda-based universal settlement and balance sheet management token has huge potential to create immediate benefits.
Boston Federal Reserve Bank President Eric Rosengren has called co-working spaces a “potential financial stability risk,” with banks seeing higher default rates, runs, and vacancies because of smaller companies moving out in a recession. How do you see co-working spaces impacting the price of commercial real estate, and do you see this helping or hurting either property or small business owners?
I agree with him, and I think this is a very interesting and very quantifiable topic.
Let’s take a moment to go through this:
If I lease a building on a very long lease and lend it out by the month to some tenants and to others for longer periods of time, I look like a bank. I am managing “duration transformation”. This is much like a bank does when it uses current account deposits to support mortgage activity. A short cash in funds a long-term cash out.
We can do some math’s and estimate how much capital the company would need to hold if it were a bank, doing something similar. This is a straightforward analysis.
We can then ask does the real estate firm have that much capital? And we can then ask if the company earns enough money to service that amount of capital. Does the company make enough EBITDA to produce a ROE of 12% or 15% per annum?
If the firm does not make enough to generate the right return on the capital, or lacks the necessary capital, this reveals several potential significant issues – and shows that there could be a very significant risk here.
As an aside, there is also a significant trend right now in which large companies are leaving major cities in order to build in less expensive areas. For example, many financial institutions are reducing staff in London and New York to move their staff to lower cost locations where the employer can offer staff a better employment proposition.
This is related to the issues surrounding co-working spaces in particular, because they may be propping up, disguising, or unintentionally holding up a market that is much weaker than it actually is – and this could lead to an unwind that is many, many times more painful.