The digital revolution the world over is in plain sight, especially via the use of digital apps on all communication devices (mobile, tablets, personal computers). Not only is technology evolving very fast, but consumer digital adoption (or digitalisation) is moving at a pace we have not seen before. All kinds of services and products are delivered digitally (and by definition, instantly), giving consumers a wider choice and on-demand marketplace anywhere and anytime.
Is there a common term we could use for this digital transformation?
‘Fintech’ is often used to describe financial services technology businesses. It is very broad and can logically include banking, and in more recent years, cryptocurrencies. It could also include insurance except that insurance businesses using digital technology (especially start-ups coming to market) have created their own term ‘Insurtech’. Digitally focused gaming companies, not to be undone, have opted for the term ‘E-gaming’. No one seems to speak about ‘E-commerce’ anymore these days! In truth, they could all be described as ‘technology companies’ because they all share the same ecosystem by putting digital technology at the heart of their business. So perhaps we can settle for “Techno”, for plain ‘technology’?
Having worked extensively over many years with technology-based businesses, both in licensing and regulation, as well as financings, M&A and flotations, the current pace of innovation across all sectors using digital technology is phenomenal.
We are seeing a technological revolution across business areas that is changing the way that businesses interact with consumers. In turn, consumers themselves are also more tech-savvy than they have ever been. Covid-19 (more specifically, lockdown and restrictions) has certainly accelerated consumer interaction with digital technology. And obviously, not just consumers. Over the last months I have often joked about travelling the world digitally (virtually) many times over from one video call to another! Just ask my IT department.
The future is clear: companies that do not enter the digital age, remain at the cutting edge of innovation and technology, and embrace regulation will struggle in highly competitive and regulated markets.
With technology sitting at its heart, the highest barrier to entry in the technology space is the initial investment in the technological infrastructure to compete in this space with traditional, larger, but less agile players. Raising capital, however, is a significantly easier sell for digital businesses than it has ever been, recognising that technology is highly scalable. Indeed, in the digital world, once a business achieves brand recognition it can grow exponentially and become a seriously disruptive player.
Great strides have already been made but I see the digital sector going into overdrive over the next year as the new and more digitally focused world emerges from the pandemic.
The commercial ecosystem of the future will be digital, highly automated, underpinned by technology, analytics and scalability. Whilst banking has been slow to catch up with other digitalised businesses, this will change as we see disruptive players entering the market (Xapo digital bank in Gibraltar being an example).
And, as I have often previously said, the next potentially big step in this technological revolution will be when traditional financial services and cryptocurrency combine their capabilities. That should happen sooner rather than later.
One of my professional interests at present is exploring the cross fertilisation of the insurance and crypto spaces. For that to succeed we need ‘use cases’ that bring together the digital-asset and insurance sectors. One such example may well involve protected cell companies (PCC), a favourite subject of mine, having authored the reference book on PCCs (a book cited by the Federal Court of Montana in PAC RE 5-AT v. AMTRUST NORTH AMERICA, INC., No. CV-14-131-BLG-CSO (D. Mont. May 13, 2015)).
There is also the prospect that in the future, Gibraltar companies might bridge the gaps between the markets for securities, sporting event risk, and insurance through the medium of the PCC. I already discussed the merging of synergies of the gaming and insurance sectors in another book 10 years ago - now watch this space!
The Gibraltar Digital Hub
Gibraltar has become a leading hub for digital based businesses including Insurance, Gaming, DLT and more recently, Banking. We have over the years compartmentalised (much in the same way as the use of the terms ‘Fintech’, ‘Insurtech’ and ‘E-gaming’) each sector. So we refer to the ‘Gibraltar Gaming Industry’, the ‘Gibraltar Insurance Industry’, and more recently, the ‘Gibraltar Crypto Industry’. We then talk about the “Gibraltar Finance Centre” but ‘financial services’ does not include gaming! Of course, whilst the underlying activity is sector-specific (gaming, insurance, crypto), digitisation cuts through all these industries. Since that is the case, I prefer to use the term “Gibraltar Digital Hub’.
In each of these sectors what we have seen is the Government of Gibraltar, Regulator and Industry working together both to regulate and grow real industries with real local jobs. Like I have said repeatedly, in Gibraltar we have embraced regulation and helped our clients navigate the regulatory landscape, not avoid it, for many years.
Further, those looking to set up in Gibraltar do so with the confidence that Gibraltar has an independent judiciary (with the Judicial Committee of the Privy Council in London being the highest court of appeal for Gibraltar) and applies English common law, a system of law that is fair, flexible enough to accommodate the changing needs of international business and based on clear precedent.
Leading by example, the Government of Gibraltar has itself fully embraced digital technology (through its e-Gov system) and is now working with the sector to integrate blockchain solutions into its own processes.
All this could well explain our success.
Here is why and how.
Insurance turned Digital
The prospect of being able to control or share in the underwriting profits while keeping existing underwriting relationships (via co-insurance) or generate underwriting capacity for what were known as “virtual” insurers, that is, brokers that did everything associated with the pricing and sale of insurance, except take the underwriting risk, was the catalyst for the growth of the Gibraltar insurance industry back in 2001.
The advent of the internet and Price Comparison Websites (a form of digital distribution platform) changed consumer shopping habits in the UK motor/personal lines space. Previously, consumers would buy their insurance directly from broker or insurers. Today around 80% of UK motor insurance is sold via PCWs (online digital). The 20% remaining would be sold via direct websites, telephone, and broker offices.
The Gibraltar motor insurance sector is at the vanguard of this ‘new world’. The business model is entirely digital. And this digital transformation is not just in distribution channels but increasingly also claims and data-enrichment.
Such is the advanced digital capability that pricing changes from a distribution channel to the ultimate consumers can, in theory, be made in less than an hour.
Here is an impressive statistic. At least 1 in every 5 policies written in the UK motor market are sold by Gibraltar insurers – that’s at least 20% of the UK market but I believe the number could be as high as 30%. Post-Brexit, the sector is nearly 100% UK focused.
This is all the more impressive given the UK motor market is one of the most competitive in the world.
Digitalisation of Gaming
Improvements in international telecommunications, dedicated sports channels, greater leisure time and expenditures, widespread availability of the internet and growing acceptance of its use by consumers as a medium for transactions and not just information, together (as I noted in my tax book) with the significantly higher levels of betting duty elsewhere, were all contributing factors to the growth of offshore betting in the 1990s. Gibraltar capitalised on this quickly, with Ladbrokes and Victor Chandler being the first to establish their telephone betting operations in Gibraltar. The sector (like insurance) has faced several challenges (most recently, Brexit), but it remains hugely resilient and ‘Rock solid’. Whilst the origin of local gambling was undoubtedly in telephone betting, internet-based operations grew significantly throughout the 2000s and today’s gambling businesses are digital.
Gibraltar is home to some of the leading international gaming operators (39 licensed businesses in total), including Betfred (the largest independent bookmaker in the U.K), which I helped to set up in Gibraltar 14 years ago and Ceuta 3 years ago.
Another statistic, anecdotally, is that Gibraltar may well account for as much as 70-80% of the UK online gambling market.
I first started writing about the potential for international gambling when the internet was very much at its infancy. Some of my writings can still be read online.
DLT/Crypto – the ultimate Digital Transformation
In 2018, the Government of Gibraltar, working closely with the Gibraltar Financial Services Commission and professional service providers, established a regulatory framework for the regulation of crypto and DLT businesses. In fact, Gibraltar was the first jurisdiction in the world to do so. We have since seen an influx of crypto-related businesses setting up in Gibraltar, resulting in the jurisdiction becoming a leading digital-asset hub in its own right. Some of the larger international exchanges are already licensed locally; others will follow shortly. It is an area that has occupied a lot of my thought-leadership over the last 12 months.
The barrier to entry has been kept deliberately high with currently just 15 DLT providers being licenced, including more recently, the international exchanges Bitso, Bullish and Huobi.
This number could rise to around 25 by the end of 2022. It is not dissimilar to the high barrier to entry that has served the E-gaming sector so well over the past 20 years.
Beyond Professional Interest
My interest in these areas has not just been professional. At an early stage in my career, I took an interest in writing and in much of my writings I have been particularly interested in the concept of jurisdictional competition, its role in business development and the need for constant innovation. It is underpinned by the notion that jurisdictions are regularly competing for the same business. This was reinforced by my passion for one of the most innovative and inspirational periods of history, the Italian Renaissance (with Florence at its centre). I saw financial centres around the world not unlike Italian city states, in intense competition with one another and all vying for trade.
In my book "A Guide to Insurance: Combining Governance, Compliance and Regulation" I described it as follows:
"Many jurisdictions attempt to position themselves competitively in the global market as a policy objective. They do so mainly through their tax and licensing/regulatory regimes but also through innovation in corporate law (such as Protected Cell Company, Incorporated Cell Company and Redomiciliation laws). The latter requires jurisdictions to constantly know what their competitors are doing and where necessary copy the lead taken by others. All such jurisdictions face competitive pressures."
The technological revolution is also something I have been writing about in recent years. Here are some of the predictions I made:
“We are in the throes of the greatest technological revolution the world has ever seen. Companies that lead the way will establish dominance in their respective fields for years to come, whilst those that fail to keep abreast with new technology will face an uncertain future. In this new age, businesses that invest in technology and human capital will grow beyond anything they could have expected to achieve otherwise. Similarly, the most successful businessmen of the future might have no less entrepreneurial flair but they are more likely to put technology at the heart of strategic decision-making than at any time in the past.”
Big Data: He Who Owns The Past Controls The Future, 6 October 2014.
“The insurance industry can become the laboratory for technology that will change the way companies interact with consumers in the future. We are already seeing this but it is only the beginning. Those that crack the code will create huge shareholder value and corporate wealth. The stakes could not be higher and the equivalent of an arms race in the field of data is now on.”
Insurance - A Quiet Revolution In Digital Technology, 16 March 2015.
“Over the last few years businesses that have been willing to innovate and embrace technology have grown more rapidly than those that have not and the pace at which technology is now evolving is such that businesses that fail to keep abreast will face an uncertain future. We are witnessing a commercial arms race for technological supremacy that will determine the winners and the losers over the next 5 to 10 years.”
Commercial arms race for technological supremacy, 26 May 2016
Gibraltar has evolved into a digital hub that is the envy of many jurisdictions. Its success is based on the ‘Rock solid’ relationship between Government, Regulators and Industry, an industry which, for the reasons I have explained, I call the ‘Gibraltar Digital Hub’. The name ‘Finance Centre’ (like ‘Offshore Centre’ before it) just sounds rather outdated nowadays.
It also underpins a revolution which Patrick Young in his book, aptly entitled “Victory or Death?”, described as follows:
“The hour has come to advance the Capital Market Revolution! once more. If you’ve in day two, you must be part of legacy finance… Day one dawns as it has for many days since 1999 (and before) when the revolution was born. Day one looks even more complex now, a different digital world, one where the pace of change is, if anything, accelerating. Even those blessed with legacy regulatory privilege are feeling the heat.”
May that revolution long continue in Gibraltar! And may future generations confronted by some of the same policy choices as we faced in the past (some of us, going back many years) not forget that business innovation is a laboratory for experimentation where local professionals, lawmakers, and of course, sometimes even the judiciary, all play an important role.