Fintech, blockchain and regulatory changes are driving the finance sector towards a fundamental change. It is not so difficult to predict what will happen so much as when it will happen. History doesn’t repeat itself, but we can get ideas from other industries. So, let’s try to predict what will happen in the finance sector in the foreseeable future.
Before we look ahead, let’s first look back at how changes and disruptions have unfolded in some other industries:
- TCP/IP came in the 1960s, but it was only in 1990s when it really started to change the world. One factor was, of course, usability – things like World Wide Web and browsers to navigate it. But the change also needed new business models. We can say that technology enables disruption, but new business models implement it. We needed Amazon, Google and many others to disrupt industries.
- We have seen major changes in many industries during the last 25 years. Let’s look at telecom, media and retail businesses. Many companies, e.g. mid-size companies, have had trouble due to business disruption, but at least the major actors have survived, companies like TimeWarner, Orange, Vodafone, News Corp, WPP, Tesco and many others. However, these incumbent companies haven’t really gained much of a share in new business and revenues – that has gone to companies like Google, Amazon, Apple, Netflix, and Facebook. So, the old hands have saved their basic business, but the real winners have been newcomers in those industries.
- It has been said many times: “The 1849 gold rush made only few gold miners rich, but it was shovel sellers and service providers that made a fortune.” We have seen this more recently in the mobile app business, for example. A few mobile app companies have struck it rich, but companies like Apple and Google make money from the ecosystem.
When we look at the finance sector, banks obviously play a central role. When we talk about banks, we don’t talk about companies that offer one or a few products – in reality, banks are massive black boxes that offer hundreds or thousands of products, and mix them in a way that often obscures their visibility from outside.
So, when we think about the future of the banks, the thing to consider is not whether banks will survive, but rather which banking services and roles will be relevant in the future and who will offer them. For example, banks have very obsolete IT, ineffective processes and inflexible business models, and these can become obsolete rapidly. But money, assets and positions in finance instruments don’t lose their value overnight.
Based on the preceding observations, we can now make the following predictions:
- Traditional finance institutions will have a hard time to adapt to the new reality, and there will be new stars in the market – so, leading and agile banks will survive, but there will new companies that will take most of the new business.
- Distributed models (e.g. blockchain-based solutions) and tokenization will be applied to all asset classes and instruments, including truly digital instruments, smart contracts and smart contract based settlements.
- Tokenization will come into the mainstream with big traditional asset classes and new digital assets (e.g. digital right management and personal data), not with things like startup equity ICOs.
- Finance will become a plug-and-play component for many other services. Often, finance is just ‘a tool’ to do something else: buy a house, purchase something online, save for the future, etc. So, it makes sense that finance will be integrated into those services.
- We’ll see a revolution in finance IT solutions, as new technology and platforms cut IT costs to 1/100th from traditional banking IT. We already now see fast payment and money transfer solutions, full cloud-based finance back offices, e-KYC, and blockchain settlement solutions that are based on modern technology, pay per use business models and global availability.
As mentioned earlier, the hard part to predict is the timing. Change has come slower to the finance sector compared to many other industries, even though all the above-mentioned components are available.
What’s missing is new business models. Some people have compared ICOs to the Year 2000 dotcom bubble, and indeed there are similarities. It is worth remembering that many companies rose from the ashes of the dotcom bubble that now dominate the world. When the ICO bubble bursts, we will really start to see new FinTech and finance companies, and we probably see companies that will have a major role in the finance business for the next few decades.