Technology and Innovation in Financial Services: Scenarios to 2020

Innovation has already transformed the financial services (FS) industry. Fourteen years ago, who expected the massive growth of e-banking and e-brokerage? Who envisioned the entry of new players such as retailers and telecommunications providers into financial services arena thanks to their ability to harness the power of innovative technology? Who predicted that technology would enable outsourcing and offshore contracting of core financial processes in lowcost countries such as India?

The business environment continues to change today, and the financial services sector needs to confront many issues to remain competitive. In particular, technology and innovation are board level issues; they create opportunities and pose threats.

To explore these issues, the World Economic Forum and representatives of the financial services, information technology and telecommunication communities set out to develop scenarios for the future of financial services and how they might be affected by innovation. The objective of these scenarios is to explore how innovation will transform access to, and delivery of, financial services by the year 2020.

From the many key drivers, project participants – in particular, leading industry representatives – identified two crucial groups of questions.

1. How will the globalization of financial services evolve? Will it be further supported by governments and regulators? What outcomes will we see in the next decade?
   
   
2. Will innovation be incremental or fundamental? Will it be driven by traditional or new players? What types of innovation will we see – for example, in products and services, distribution and sales channels, operations, and new business models?

Project participants worked from these questions to develop three very different but plausible scenarios of the future of financial services over the next 14 years.

Global Ivy League describes a highly concentrated financial services sector dominated by a small number of large, global players. Governments support globalization but take a very conservative approach to customer protection and regulation of the sector. At the same time, declining trust in digital media means customers favour the solidity of traditional financial service providers. In this environment, a small number of financial services institutions evolve into global powerhouses.

Next Frontier describes a world in which governments pursue deregulation and, as the title reflects, technology enables a great variety of new business models to emerge. The result is a financial services industry as an ecosystem of highly specialized providers, each focusing on creating a competitive advantage over incumbents. There are many new players, including telecommunications companies, peer-to-peer financial services providers, processing providers, retailers and Internet companies.

Innovation Islands describes a world in which globalization stalls due to geopolitical tensions and global instability. Government policies toward the financial services sector differ widely among countries. Three trends become apparent:

• "Leapfrogging": in large emerging economies such as China and India, government regulation and investment in infrastructure fosters the local financial service industry, expanding access to the poor and leading to new business models that "leapfrog" over developed markets in areas such as mobile banking and flexible, low-cost operating models.
  
• "Business as usual": in other mainly developed economies such as the US or European countries where innovation neither accelerates nor decelerates. There is only limited change to business models.
  
• "Back to the past": in the remaining countries and regions, mainly in developing economies. Governments increase control over the financial services sector but do not foster local innovation;as a result, there is little progress and sometimes even regression in the efficiency and quality of FS.

For more information or to obtain a copy of the report, please contact scenarios@weforum.org