A lot of innovation has been going on in the financial sector in the last few years with new business systems emerging and new modes of payments changing the way we interact with money, we transact with each other.
The recent trends that are driving this financial technology revolution at an incredible speed have been a subject of a discussion at the World Economic Forum in Davos.
Bitcoin - a speculation asset?
One of the trends that everyone has been watching incredibly closely is the rise of Bitcoin and Blockchain. The former is often viewed as a synonym of a separate kind of money which is not controlled by any central authority that can be politically motivated and might devalue it depending on a particular time.
Therefore in some people’s eyes Bitcoin is a better kind of money. We have seen price run up, and then collapse, and then a new run up.
Cecilia Skingsley, Deputy Governor of the Central Bank in Sweden, shares her view of Bitcoin:
“What is money? It is a form of payment; it is a store of value. In order to make this efficient, it has to be a stable store of value. And you can do that through pegging your currency to another currency. And this stable store of value is what Bitcoin or other cryptocurrencies do not have, they are extremely volatile, it is more like a speculation asset than actually money in the economics point of view.”
Setting up the rules of the game
Speaking of regulators, given the pace of technology innovation, we have seen that the adoption and usage of technologies run way ahead of what firms and businesses can adapt to, especially when they are struggling to comply with rules and regulations.
Therefore balancing a desire to move as fast as the technology and on the other hand not wanting to advantage innovators or disadvantage the existing firms is a huge challenge for regulators.
“It is indeed about striking the right balance,” says Skingsley. “As a central banker, I am fond of innovation because innovation means growth. In the Swedish central bank, we are trying to support innovation.”
“For instance, we have deliberately stopped subsidizing the use of notes and coins, meaning our own product,” she continues. “We incentivize the private sector, banks and shops to organize and share the costs of handling cash back and forth. And this in combination with the fact that Swedes are happy to adapt to new technology allowed us to reach a sort of a breaking point meaning that people are switching to technologies and we are actually supporting that as well.”
About Blockchain and other technologies
We still haven’t figured out the way to avoid the financial instability, so there will be times again when people don’t trust the place where they put their money and the crucial issue here is to ensure that the money is protected if the time of instability comes again.
We are trying to imagine how will the banking system look like in five, 10, 15 years from now. We have to understand how the digital world works and keep in mind the following two factors – maximum transparency and absence of the conflict of interests.
To really improve financial services industry it would be wiser to pick up the best products and services, package them and produce a specific experience for customers based on all these innovative technologies. And there are plenty of those.
David Craig, President of Financial & Risk, says:
“There is a huge amount of talents out there, working in financial institutions, developing ideas and they are able to do things quickly. And the reason why they are able to do things quickly is that compute power which used to be available only to big organizations is now available at very small incremental cost through the cloud and you can do things very quickly on platforms that exist today in a way that you could not do before – faster and cheaper.”
With all these technologies available – AI, Blockchain, biometrics, another question is what to do, how to deploy them in the most efficient way. The lesson learned from previous distortions is that the market structure changes and it is very hard to see what that change might bring.
Speaking of Blockchain technology, for example, its developments have attracted a lot of attention recently. But while they have not been widely integrated (yet), the technology itself has managed to change at least one thing - our vision of how participation in the financial industry has to be organized.
Not a single player can solve problems in the industry on their own, actors actually have to work together. And we see the increase in discussions and partnership projects between different industry players, which is a good thing already.
Blurring boundaries between online and offline
We are seeing currencies of all kinds digitizing, which is largely enabled by the explosion of mobile services and products into the market space. We, consumers, are the ones who have all the power of the bank in the palm of our hand.
It is possible to make all of the basic transactions really quickly through mobile applications and services, without a need to stand in line at the bank. These products are simple, they are easy to understand and they are way more secure.
No surprise we are witnessing an explosion in platforms that manage and move money for consumers.
Now it is 80 percent to 90 percent less expensive for banks to serve a customer through mobile apps, rather than through traditional bank branches. Retail is going through an incredible transformation due to mobile as well.
Daniel Schulman, CEO at PayPal says:
“There used to be two distinct worlds of online and offline, mobile is blurring the distinction between them at the moment. More and more retailers are now looking at the examples set by Amazon, for instance, trying to get closer to their customers through a mobile phone. Digital payments are the key driver of that. Those trends are driving growth through all regions and we are only seeing it accelerating even more.”
Financial services are getting more and more inclusive. Emerging financial services providers are focusing more on inclusiveness to serve underserved individuals.
Banks, the dinosaurs of the financial industry must be getting threatened by the newcomers revolutionizing the industry. But are they?
Keeping up with the competition
Francisco Gonzalez, Group Executive Chairman at BBVA says that banks nowadays are trying to be agile and show as much of efficiency as the newcomers.
The major difference here is that emerging financial services providers are occupying a certain niche – payments for example. BBVA, as many other traditional banks are fully universal institutions providing a wide range of services, from a deposit, mortgage, to consumer loans.
“We are trying to keep up with the competition,” Gonzales explains. “We have recently deployed our platforms into the cloud. We created the first generation platform in the banking system totally customer oriented, totally real-time and totally integrated. Switching our customers to digital banking means an increase in the level of their satisfaction with a simultaneous decrease in the operational costs.”
Gonzalez believes that the banking system is going to be completely overhauled. There are twenty thousand banks in the world at the moment and this number is going to be cut dramatically in the next years.
This process is going to be very painful for banks and regulators, and technology, in his opinion, is going to provide a solution.
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