Innovative technology is reshaping financial services by putting pressure on traditional business models, says the World Economic Forum, and is set to cause profound changes to the structure of the banking, insurance and asset management industries.
In a 179-page report on the future of financial services released today, 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.
The report is the product of a two-year research project that involved hundreds of interviews with industry participants from large institutions, new market entrants and academics. The steering committee included notable industry figures such as UBS’s group chief information officer Oliver Bussmann, Markit chief executive and founder Lance Uggla and Barclays chief technology officer Michael Harte.
Jesse McWaters, one of the authors of the report, said the last one-and-a-half years had seen a “sea change” in the awareness of technological innovation facing 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 key predictions:
A decentralised future for payments and settlement systems
Distributed ledger systems—such as the blockchain technology underlying bitcoin—and mobile payment systems provide “compelling alternatives” to traditional banking, according to the report. Global settlement infrastructure and emerging markets are seen as the most immediate opportunities for developing alternative payment systems. These innovations will make the future of value transfer and settlement systems more global, more transparent, faster and cheaper. They may also weaken the role of today’s intermediaries—such as the payment networks—and reduce margins for incumbents. Industry collaboration will be the key to ensuring that new initiatives are successful, the report says.
Peer-to-peer lending will erode deposits
The report suggests that the growing popularity of alternative lending platforms including peer-to-peer lenders—will erode traditional deposits, as savers switch to the new platforms as a form of short and medium-term investment. Ultimately, this could cause bank balance sheets to shrink. Traditional institutions need to diversify their products to compete against the new entrants, switching away from a “one-size-fits-all” approach, the report says.
Crowdfunding puts pressure on intermediaries
The growth of crowdfunding platforms, which connect start-ups with potential investors, is offering individuals the potential for higher returns, which could lead them to shift their investments from traditional wealth management, the report says.
Innovations in this sector may also put pressure on existing intermediaries such as venture capital funds looking to raise funds, although it could also work to the advantage of some incumbents such as hedge funds because it offers them smaller investments with less hassle, according to the report.
Robot advisers turn up the heat
As more customers switch to automated wealth management services, financial institutions will struggle to sustain their traditional “one-stop” model of distributing wealth products through their advisory channels, the report says.
New entrants will also force wealth management services to become more “commoditised”, making several segments less profitable and intensifying competition among traditional players in more specialist areas, according to the report. To differentiate themselves from the new entrants, the report says that the traditional institutions will have to leverage the customer trust in their brand.
Loss of skills
Investment firms are increasingly relying on services offered by young fintech companies to carry out several processes such as risk modelling, transaction monitoring or data collection. While this is more efficient, it does mean that finance firms are more dependent than ever on third parties to keep their systems running reliably, the report says. It also argues that this could lead to potential loss of core skills in their workforce, leaving finance institutions less able to offer a “holistic”, all-encompassing service.
Trading gets riskier as it becomes more electronic
The report paints a vision of a trading environment where “intelligent machines will replace largely human activities”. Machines will become smarter and faster, helping develop trading strategies and leaving humans to take a back seat in execution, the report says. But there are dangers, too. As machines take a bigger role, errors will have a large impact, with even small errors in data having large consequences. The increasing automation of trading could also marginalise returns, as strategies become more based on big data and computer technology.
New market platforms make institutional products less sticky
The report notes that the growth of the new platforms which use technology to connect buyers and sellers in traditionally illiquid markets—such as trading of shares of private companies—is diminishing the role of intermediaries, such as banks. As some of their institutional clients choose to trade directly via these platforms, the incumbents might struggle to maintain their other institutional footholds such as investment banking. The result is that established players will try to acquire new platforms, the report says.