What is the future of finance? What are the trends and uncertainties that are disrupting financial services, and how should we react?
Panel member Christine Lagarde recently tackled this topic on our site, Agenda. The Managing Director of the International Monetary Fund (IMF) looked ahead to what 2016 might hold for the global economy. She wrote:
“One reason that the global economy is so sluggish is that, seven years after the collapse of Lehman Brothers, financial stability is not yet assured. Financial-sector weaknesses linger in many countries – and financial risks are growing in emerging markets.”
“Putting all of this together, global growth in 2016 will be disappointing and uneven. The global economy’s medium-term growth prospects have weakened as well, because potential growth is being held back by low productivity, aging populations, and the legacies of the global financial crisis. High debt, low investment, and weak banks continue to burden some advanced economies, especially in Europe; and many emerging economies continue to face adjustments after their post-crisis credit and investment boom.
“This outlook is heavily affected by some major economic transitions that are creating global spillovers and spillbacks, particularly China’s transition to a new growth model and the normalization of US monetary policy. Both shifts are necessary and healthy. They are good for China, good for the US, and good for the world. The challenge is to manage them as efficiently and as smoothly as possible.”
And let’s not forget the role of the Fourth Industrial Revolution – the theme of this year’s Annual Meeting - in disrupting finance. Is technological change creating a new global economy? The Forum’s Chief Economist, Jennifer Blanke, writes:
“Our lives are being shaken to their very core by technological change, with the Fourth Industrial Revolution transforming economies as never before.
“The unprecedented speed of change, as well as the breadth and the depth of many radical changes unleashed by new digital, robotic and 3D technologies, is having major impacts on what we produce and do, how and where we do it and indeed how we earn a living. And while the transformation will proceed differently in advanced and developing parts of the world, no country or market will be spared from the tidal wave of change.”
The Future of the Global Financial System is also a World Economic Forum Global Challenge. The challenge – how to create a resilient, accessible financial system that people trust – is explained in more detail in this piece.
It’s an interesting time for finance, says moderator Gillian R Tett. In 2007, bankers were on top of the world, holding their heads up high.
Then, the crash, and since then many of the panels here in Davos have been dominated by what went wrong and what could be done to make things safer.
Now, the discussions are forward looking, with less focus on regulation and more attention on fintech and the changes – both positive and negative – that are happening in the world of finance.
The biggest challenge, argues Tett, isn’t a crisis in regulation, but the new players. But perhaps this is what revitalises banking?
Although regulation has moved out of the spotlight, there is still work to be done in this area, argues Christine Lagarde. There are issues between the US and Europe around over-the-counter derivatives and clearing systems which are not progressing at the speed at which they should. These areas need more regulation, says the IMF head.
Basic retail banking is changing, Lagarde goes on to say. It’s being disrupted by innovations and there are people now who have never been – never had to – go into a bank. But this is merely another way of doing business.
Virtual currencies and blockchains, on the other hand, can cause deeper disruptions. They may be relatively small (the current value of virtual currencies is around $7 billion), and may be nothing to worry about. They could also turn out to be beneficial – in reducing costs, providing better value and reaching the unbanked. But they could also a great instrument for crime. There is the potential for financing terrorism and the illicit economy, and they could disrupt monetary policy.
Want to know more? The IMF has today released a report on this topic: Virtual Currencies and Beyond, which you can download here.
What about the bankers?
Do they care about digital disruptors, or is regulation still more important?
“We care a lot [about disruption]”, says James Gorman. Bankers are in an industry that is dominated by technology. If you are not focused on regulation, then you are not doing your job, he argues. At the same time, if you are not focused on digital disruptors, then you are also not doing what you’re supposed to be doing.
Disruption is nothing new, says John Cryan. “We’ve always had to cope with new competitors,” he says. But banks have been slow to move in technology terms, he adds. But banks will always be involved – they are still protected by clearing rules and most commonly payments are still made from one bank to another.
Will cash exist in the future?
This is something, it turns out, everyone on the panel – and in the audience – spends a long time thinking about. The consensus is that, in 10 years, cash will no longer exist. Why? Because it’s inefficient, unnecessary and plays a key role in the illicit economy.
There is near hysteria about fintech, adds Gorman. Yes it’s here, yes it’s real, but it’s not going to change your life tomorrow. It will take years for the potential of these technologies to unfold, he says.
Tom de Swaan, meanwhile, believes that insurance will be the most affected of all the finance industries. Life at the top of a financial group was not, is not and will not be easy, because it is disruptive. “You have to find alliances with disruptors,” he says. “I haven’t met one who wants the insurance liability on their balance sheet.”
Dan Schulman, who heads perhaps one of the biggest disruptors in the industy – PayPal – says the biggest impediment to future success, is past success. “A lot of big companies extrapolate from what was and don’t imagine what could be. And this is a big danger.”
He highlights five key trends that are happening now, and that everyone needs to keep in mind:
- Money is definitely digitising, cheques are disappearing. But let’s not forget that 85% of global transactions are still made with cash.
- Mobile is exploding across the world. Soon everyone will have a smartphone and hold the power of a bank branch in one hand. This allows the industry to think about consumer transactions in an entirely different way, and it brings in billions of people.
- The amount of data is exploding, and it’s not going to stop. Algorithms are the weapons of the digital company, and the ammunition is data. The better the quality of this data, the more value it is to the consumer. Security and privacy are genuine concerns, but data is going to change value propositions.
- Industry lines are blurring, and product lines are blurring. Take digital payments – which involve tech companies, mobile carriers, handset manufacturers and merchants.
- Security – something Schulman thinks about every day. There is so much data, and authentication is therefore very challenging.
Are regulators ready for this transformation?
The 2008 crash was partly caused by fragmentation in the regulatory world, says Tett. Are they prepared this time round?
Tom de Swaan argues that regulators first need to define, what are they going to regulate? Privacy? The movement of data? The financial world is still rebuilding trust with consumers, and doing this while convincing them we need their data to create new products is a huge challenge. The regulatory environment also needs to be globally applicable.
Schulman agrees. What are we trying to regulate, he asks? Let’s not look back at what happened, but what is likely to happen in the future. He thinks it’s likely a major hack could happen, but innovation needs to be responsible and we need to be able to try new things without worrying about over-regulation.
Lagarde supports Schulman’s idea of a “sandbox” to try new ideas, as this would help us to deal with trust and limit any damage to consumers. She doesn’t entirely agree, however, with John Cryan’s suggestion that regulation is made by policy-makers, rather than the regulators themselves. Governments do participate, she says, but the decisions are still being made by the likes of the Financial Stability Board and the Basel Committee, and then channelled into the regulatory system. For bad or for good, the profession still has a lot to do with how supervision is defined.
Gorman believes that cyber-security issues need to be addressed. At the heart of the banking system, he says, is trust. When this goes, people want their money back, but the banks don’t have this money, they’ve given it to someone else, and this is what caused the 2008 crisis.
What about the future of blockchains? Cryan does not see this sector growing too quickly in the next 4-5 years. Banks are better prepared to manage cash flow of debt and are able to gain insights regarding the credit worthiness of debtors better than someone who can’t access this knowledge.
Good morning, and welcome to the fourth and final day of our Annual Meeting in Davos.
Among today's sessions, we have The Global Economic Outlook with IMF Managing Director Christine Lagarde and British Finance Minister George Osborne. Then a little later we're looking at the top science trends for 2016, and what we can do to preseve our humanity in an age of technology.
While you wait for today's sessions to begin, why not look back at what happened yesterday.
Gillian R. Tett
Tom de Swaan