Regulation and technological innovation were high on the agenda at the World Economic Forum Annual Meeting in Davos this year. An interesting question raised was whether the current model of capital markets, divided between buy side and sell side, can survive in a world where technology no longer presents the barrier it once did. One of the more sobering comments came from a chief executive who said he didn’t need a sell-side bank anymore because he can now go directly to the buy side or lending markets.
Clearly the complexity, structure and expertise mean there is still an important role for sell-side institutions. However, technology is levelling the playing field and there is no longer room for anyone to take for granted the economic model that they enjoyed pre-2008. Sell-side institutions should be thinking about accessing the buy-side, being more comprehensive in their model and not allowing disintermediation to happen. Undoubtedly the financial services supply chain will be disrupted by these changes.
It is impossible to talk about market structure without mentioning how the lending and shadow banking arena has also changed. Many in the industry are seeing different types of lenders replace more capital-constrained banks. In fact, there has been an impressive amount of innovation in the peer-to-peer lending arena, with many new online financial lending communities sprouting up and building successful businesses, thus raising the stakes for established banks. It’s not surprising that insurance groups are looking at cyber business as a growing opportunity. However, as shadow banking organizations and lenders become larger, they too become regulated, and often regulation again becomes a barrier to competition.
A snap poll of the 50 plus executives in a working group at Davos on disruptive innovations in financial services questioned whether regulation would mean more or less competition. A resounding 80% of those polled said they thought it would mean less. They believe that anti-money laundering and “Know Your Customer” rules are halting innovation in many companies. This is why we’re focusing on this area. Clearly, the industry needs to think about the unintended consequences of regulation.
Technology is changing the face of the advisory market, as social media has proven that people are comfortable having conversations with someone they have never met. Business models will continue to change and technology will continue to have a key role to play. But we have to be careful, as the old model of using historical data to predict the future has proven time and again to be unreliable, and even with better technology, more judgement is required.
We are now seeing a financial industry using more sophisticated analytics to compete and technology is lowering the cost of these tools. Today, professionals can get the same computing power on their mobile phones that a couple of decades ago would have only been available on super computers. Financial institutions seem to fall into two main schools of thought on this – either that the big wallets can afford to make super decisions or that analytics are cheaper and generally more available. No doubt, time will tell.
One thing that is clear from all of the discussion and debate on disruptive innovations is that technology is changing access to capital, expertise and distribution.
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Author: David Craig is president of the financial and risk business at Thomson Reuters.
Image: A foreign currency dealer looks at computer monitors in a dealing room in Seoul, August 19, 2011. REUTERS/Jo Yong-Hak