7 Predictions for the Future of Finance
A new 179-page report from the World Economic Forum has confirmed what many of us in FinTech already knew. Innovative technologies are disrupting financial services by putting pressure on traditional business models, and will lead to sweeping changes in the way banking, insurance and asset management industries are structured. OK, so what’s new? What’s really interesting about this Deloitte-backed report – the product of a two-year research project based on hundreds of interviews with large institutions, new market entrants and academics – is its official nature. The World Economic Forum is a key international organisation of economic decision-makers at the highest level and the research was led by UBS’s group chief information officer Oliver Bussmann, Markit chief executive and founder Lance Uggla and Barclays chief technology officer Michael Harte. In other words, this report is an admission that the role of incumbent financial institutions is weakening.
In fact, the Geneva-based organisation says that disruption in the sector will not be a “one-time event”, but more a “continuous pressure to innovate” that will change the long-term structure of the finance industry.
The report predicts that financial institutions will come under attack in areas where the “greatest sources of customer friction meet the largest profit pools” and argues that while banking is likely to be the first to feel the impact of these innovations, the insurance sector is likely to be impacted the most.
Here’s a graphic summarising the report’s findings.
One of the report’s authors, Jesse McWaters, said the last the last year had witnessed a “sea change” in the perception of technological innovation and its potential impact on the finance industry. “The risk that we see for financial institutions is less that they will have ‘Kodak moment’ and disappear but more that they will find themselves commoditised,” he said.
The study divides the sector into key areas of financial services such as payments and wealth management, and forecasts potential scenarios for each.
Here are the seven key predictions:
1) A decentralised, global future for payments
According to the report, distributed ledger systems — such as the blockchain technology that bitcoin is built on — and mobile payment systems are providing “compelling alternatives” to traditional banking. Interestingly, emerging markets are seen as hotbeds of opportunity for developing alternative payment systems. These innovations will make the future of value transfers (payments) more global, more transparent, faster and cheaper. They will also weaken the role of today’s intermediaries (established payment networks) and reduce their profit margins. Collaboration between the different industries involved is key to ensuring that these new initiatives are successful, the report says.
2) Peer-to-peer lending will reduce bank deposits
The growing popularity of alternative lending platforms is set to reduce the number of traditional deposits being made, the report suggests. This is because savers are switching to the new (peer-to-peer) platforms as a form of short and medium-term investment. Ultimately, this may cause bank balance sheets to shrink. The report indicates that traditional institutions must diversify their products to compete against the new market players while moving away from a “one-size-fits-all” approach.
3) Crowdfunding threatens today’s intermediaries
The global growth of crowdfunding platforms connecting start-ups with investors, according to the report, is enabling individuals to seek higher returns, which may eventually cause them to move their investments away from traditional wealth management.
Innovations in this sector may also put pressure on incumbent financial institutions such as venture capital funds, although it may benefit some intermediaries such as hedge funds due to the ability to make smaller investments in a much simpler way.
4) Human advisory roles diminished
As people switch to automated wealth management services, financial institutions will find it difficult to maintain their traditional “one-stop” model of sharing wealth products in their own advisory channels, the report says.
New entrants in the market will cause wealth management services to be “commoditised”, rendering many segments less profitable and intensifying competition in more specialist areas. Traditional institutions will have to leverage the customer trust in their brand in order to stay relevant and hold off competition from the new FinTech players.
5) Decline in skills
Investment firms are becoming increasingly dependent on young FinTech start-ups for processes such as risk modelling and data collection. This means that finance firms are more reliant than ever on third parties for their operations, although they will be made more efficient. The report suggests that this may eventually lead to a loss of core skills in their workforce, meaning financial institutions will no longer be able to offer a “holistic” package of services.
6) Electronic trading gets riskier
The report’s authors imagine a trading environment in which “intelligent machines will replace largely human activities”. These machines will become smarter and faster, thereby improving trading strategies and enabling humans to take a backseat.
However, this may have some negative consequences. As the role of machines grows, the potential impact of data errors will also grow exponentially. The automation of trading will also marginalise returns as trading strategies are increasingly built around data and computer technology.
7) Greater spread of financial technologyThe report notes that the wave of new platforms using technology to connect buyers and sellers in traditionally illiquid markets (such as the trading of shares in smaller, private companies) will diminish the role of intermediaries such as banks.
As more and more institutional clients choose to trade directly via these platforms instead of banks or other wealth management services, the incumbents may struggle to maintain their advantage in sectors such as investment banking. The result is that established players will try to acquire new platforms and their technologies, the report says. In the long run, the greater integration of technology in our financial products will improve their performance and usability.