Regulation and technological innovation are among the key subjects being hotly debated both on and off the official agenda at the 43rd annual World Economic Forum, which kicked off in Davos last week. These topics were especially scrutinized during the WEF’s Disruptive Innovations in Financial Services working group meeting on Thursday. This group, of which I am a member, includes a small number of senior representatives from leading banks, insurers, wealth and asset management firms and financial organizations.Chatham House Rule, I am prevented from revealing specific details, but there are some high level points I can – and would like to – share. One of the more interesting questions we debated is whether the current model of capital markets, buy- 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 CEO 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 a strong role for sell-side institutions. However, technology is leveling 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 there will be disruption to the financial services supply chain as a result of these changes.
One can’t talk about market structure without mentioning how the lending and shadow banking arena has also changed in the current climate. Many in the industry are seeing lenders replace banks that are more capital constrained. 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 the 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 the WEF Disruptive Innovations in Financial Services working group questioned whether regulation would mean more or less competition. A resounding 80% of those polled believe that it would mean less. They believe that the rules on anti-money laundering (AML) and Know Your Customer (KYC) are halting innovation in many companies. This is why we’re focused 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 judgment is required.
We are now seeing a financial industry using analytics to compete and technology is lowering the cost of access to more sophisticated analytics. Today professionals can get the same computing power on their mobile phones that would have only been available on super computers a couple of decades ago. However financial institutions seem to fall into two main schools of thoughts – 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. My advice on what to do tomorrow is clearly invest in technology and ensure your business model is ready for what’s coming next.
David Craig is president of the Financial & Risk business of Thomson Reuters, a leading provider of financial information, news, technology and regulatory solutions to the global financial community.