Imagine yourself the CEO or Chairman of a prominent, success financial services firm. You’ve got decades under your belt of amazing success, boom years through to the technological advances and prestige that comes with your name. Yet you’ve had this nagging inkling for several years now and confirmed that something is eating at your margins and pushing a new market position on your company. Fintech innovators, along with their specialized products are forcing a change in the market.
Or truth be told, it’s not even the innovators themselves, it’s the entire market that’s pushing for change. What do you do? Do you let the Internet and market shift cannibalize your business? Do you cannibalize your business yourself? What can do you?
Fintech is important, don’t get me wrong, but what is going more important than fintech itself, is the global demand and significant push for more efficient and effective services and products in the financial services market. It’s bigger than any single technology or sector and its driven by a technological ripening, a new age of consumers with strict demands, demands that include an amazing push on margins on services that are expected to be delivered virtually for nothing. And right away.
In our work at Crowd Valley, we are fortunate enough to work with some of the worlds leading financial services pioneers, both in the customer base that we have as well as the integrated partners we work with. From this global position, we can identify some key dimensions of this market change, which is anything but pain-free, yet comes with the promise of a whole new sector built with the DNA of several decades of financial services competence and history.
It’s not isolated – everyone is investing in the market
From BNP Paribas, Credit Suisse, to Morgan Stanley, Deutsche Bank, ING, institutional buyers in consumer credit marketplaces, co-investors or sponsors in various primary online marketplaces, everyone is involved with their flavor of the day. And involvement may at times seem uncoordinated, but looking behind the scenes or extrapolating positions sought, there are clear strategies in place. Strategies that represent hundreds of millions of investment and billions of sought return in the long term.
From asset managers to insurers, the ripening of the market has led to various new positions and specialist operations being offered up for grabs, and the push for them is anything but isolated, its everywhere. Board decisions have been made in the recent year to pursue this market, and implementations are ongoing left and right, pilots are being erected and rolled out, markets are being tested. Execution varies, but the action is real.
Legacy unravels, new systems are erected
Like any major, centralized technology monoliths, financial services have had their share of large enterprise grade technology products that have seen in some cases several decades of expansion and use. And like any other technology, systems get obsolete.
We are on the out front of a multi year upgrade in institutional technology and tools, and the investments that financial services companies have been making and that are made today will live to see a very different financial services future.
Banks and brokers are not being attacked, the entire market is changing
It’s easy to point to the new fintech companies, with all their hype and glory and draw the plausible conclusion that they are the reason margins are shrinking. Though plausible, its only partially true. The truth is, they are part of the market shift that is to blame for the entire industry taking an upswing.
The amount of legacy systems that are being stripped from banking, asset management and wealth management at this point, how all of that is being overhauled and how today’s systems being created are likely to be around for decades to come and breed a completely new user, who's entire DNA is going to be in reverse with banking philosophies (open and social with over social media, impatient, doesn't want to see 'a person', doesn't care about the bank or broker, goes to google first, and is completely disinterested about finance in general, except for what they want to do).
Market inertia, the inner resistance
A regulated and mission critical infrastructure such as financial services possesses a high degree of inertia. Stakeholders recognize that the way to pilot new structures is often to build them outside current structures to begin with and leave them to be incubated without imposing the full scope of compliance and regulatory burdens. However, the very fabric of the financial services market and its regulation may come into question.
For a regulator, control is a important topic. When decentralized technology may offer the greatest technological advances and system integrity with the notion of being virtually uncontrollable, how does a regulator constrained by national borders and existing frameworks cope with the changes? Realizing that by imposing the same controls that exist in the sector outside of new innovation may very well cripple that security and integrity to begin with.
This may sound like a fictional scenario, but I assure you it is very practical. In dealing with user and transaction data, distributed and virtual servers are much the reality we live in. In dealing with blockchain technology, digital ledgers, digital share repositories, where is the balance between retaining a degree of confidence in the system and its accountability, all the while recognizing the systems innate DNA makes it virtually uncontrollable by any single party?
Imagine today’s situation, creating a de facto bank account using Paypal or Stripe can be done instantaneously in a virtual setting, users may even accept payment in a virtual good or currency, a commodity by definition, in a country 4,000 miles away. Estonian e-residency allows for a company to gain access to the Eurozone market and use online tools in accessing the same functions people have walked into points of sale for decades. In this mesmerizing development of interdependent yet autonomous nodes in the network, what is a national border.
What to expect
We’ve discussed the extent and scope of market shifts in financial services, as well as the investments being made into it and how those shifts may be received or viewed by various market stakeholders. The changing landscape is a fact of the market, it will not make banks obsolete and it will not eradicate the asset management business, but it will call for a fundamental review of market positions.
- Specialists will emerge from generalists, for example wealth advisors may end up focusing on a target market audience, where robo-advisors will appeal to the younger generations.
- New innovators will be subject to strict scrutiny and over time business models will need to adhere to the same requirements as the incumbent financial services sector, but business models will benefit from further emphasis on best practices, compliance and market standards.
- Existing technology will be reviewed and it will be ultimately replaced by leaner, more efficient solutions that can connect openly to modern challenges.
- Efficient technology will flow through all facets and avenues of financial services, and in this ‘second coming’ of financial services technology, it will install itself in the sector for years to come.
- The true nature of ‘social’ in an online setting will cause friction in the incumbent sector along with loosening control over existing user bases and their interaction amongst one another. The fact that no one can own a person, hence a user, will become increasingly clear.
Images of this post are taken from a report prepared by Dealindex called "Democratising Finance: Alternative Finance Demystified". The report can be downloaded here: https://dealindex.co/research.html .
Internationally awarded digital finance entrepreneur, active in pioneering new securities models worldwide. Has worked in digital finance since 2009, recruited over 100 individuals, built up a operations on six continents and been recognized as one of the top 100 thought leaders in crowdfunding. Markus has pioneered new funding models in the US and Europe, advised policy makers worldwide - including the SEC, the European Commission and Italian regulator CONSOB - for more effective markets, and worked with visionary organizations such as the World Bank and the Kauffman Foundation to improve frameworks for digital finance. Markus has studied computer science and economics (M.Sc).