The financial industry is undergoing fundamental change, to a large extent driven by technology. Regulatory scrutiny is intensifying in the aftermath of the 2008 financial crisis. Lack of understanding by the public of novel practices such as High Frequency Trading, increases suspicion toward the Industry. At the same time, technology is turning traditional retail banking into a public utility service for payments and other daily transactions obviating the need for high value relationships at the retail branch office. The disintermediation of the banking relationship is a looming threat as credit could be provided by peer-to-peer lending platforms. Investment choices for the middle class may be guided by robo-advisers, while high risk/reward options can be found in crowd funding arrangements. On the positive side, technology is helping insurance companies do a better job assessing risk by using Internet-of-Things (IoT) methods. Finally, across all of financial industry as well as many other industries we see the possibility of creating intermediary-free transactions using blockchain technology’s decentralized model of trust-less peer-to-peer transactions. Blockchain’s decentralized transaction ledger can be used to register, confirm and transfer contracts and property in general: cars, real estate, intellectual property such as music, patents and art, and also financial instruments: all instances of “smart property”. How will blockchain affect the current state of affairs in the financial industry?
“The incumbents risk becoming merely capital-providing utilities that operate in a highly regulated, less profitable environment, a situation unlikely to be tolerated by shareholders” Anthony Jenkins, former CEO of Barclays.
While the quote above refers to the banking industry, it can be used to envision the potential impact of today’s challenges on the entire financial industry. A large part of the workforce that embodies the relationship with the retail client will be made redundant. The opportunity for profit will be highly regulated. Many products and services traditionally offered by financial industry firms will become the domain of technology companies. Finally, customer behavior and the desires and needs of the average person will not be as well understood by the financial services firms, as they are today. This information will be available only to those who can combine massive amounts of data from transactions, social networks, and personal profiles in new and innovative ways thus deriving the products and services of the future.