The Future of Finance:
The Catalytic Effect of Technology + Innovation
Finance is like death and taxes, it concerns us all. Regardless of one’s career, industry or lifestyle, it is an integral part of our existence. However, this broad sector is ever-evolving which means the way we live will change too. The financial sector is broad. It includes banking, insurance, lending, investing and payments.
Technological Disruption of the Financial Sector
Over the last few decades, this sector has been deeply affected by technological disruptions, for instance the internet brought about changes like online banking. But this was only the beginning, for instance the widespread use of smartphones has brought about even more significant changes. While technology impacts each sub-sector differently, we will look at a broad overview of the future of finance.
From the outset, it’s important to understand that the future of finance differs in different economic regions. In developed economies, the future of finance looks a lot more like improving the efficiencies and customer service of existing sophisticated markets and giving personalized, seamless, and convenient customer experiences across multiple channels. In developed markets, there is still massive ground to cover on providing basic financial services, so the changes are likely to be more pronounced. According to the World Bank Financial Inclusion Project, almost 80% of adults globally are either unbanked (1.5bn) or defined as under-banked (2.8bn) where they do not possess a credit card. The opportunity for growth and change in emerging markets is therefore enormous.
The growth trajectory of Fintech companies
Wherever you are in the world, the future of finance will be full of technology. Financial technology (“fintech”) companies are reshaping the financial industry. Fintechs specialize in areas such as peer-to-peer lending, robo-advisory services, mobile and digital banking, cryptocurrency, and digital wallets. However, according to Boston Consulting Group, fintechs are still only 2% of global financial services revenues, although expected to grow faster than the incumbents. As fintech continues to evolve, and revenue growth keeps outpacing that of traditional financial companies, collaboration between these companies and fintechs should become more common.
The financial sector is undergoing a massive digital transformation in their operations, the trajectory of which will likely accelerate. This includes the adoption of digital payment systems, mobile banking apps, blockchain technology, and artificial intelligence (AI) for tasks such as customer support, fraud detection, and risk assessment. As users of financial products, these changes will impact how we engage with the financial sector and the level of customer service we receive.
Or we might even change which entities we engage with entirely. Decentralized Finance (DeFi), powered by blockchain and cryptocurrency technologies, is emerging as an alternative financial system. It aims to decentralize traditional financial intermediaries and provide financial services such as lending, borrowing, and trading directly through smart contracts. DeFi has the potential to increase financial inclusivity, reduce costs, and enable greater control over personal finances.
However, regulatory frameworks and cybersecurity measures need to catch up with the rapid growth of DeFi to address potential risks. This is a theme that will run through the entire technology upheaval in the finance sector – will regulators be able to keep up? Institutions managing our money, financing our purchases, insuring our risks or investing our wealth are heavily regulated globally, and we generally take great comfort from that. The emergence of alternative payment systems, stores of wealth and ways of verifying transactions will need the right balance of enough regulation to garner trust, but not so much that it stifles innovation.
The more towards sustainable investment practices
One global theme that the financial sector cannot escape is Sustainable Finance and Environmental, Social, and Governance (ESG) Investing. ESG considerations are gaining prominence in the financial sector. Sustainable finance and responsible investing are becoming mainstream as investors increasingly focus on the long-term impacts of their financial decisions. Financial institutions are integrating ESG factors into their risk assessments and investment strategies, offering ESG-themed investment products, and disclosing ESG-related information to meet the growing demand for sustainable finance options.
Therefore the future of finance is one defined by more technology, more customer-centric convenience and choice and greater access to financial services. However, as with any change, the risks lurk. For financial institutions and fintechs, adaptability, innovation, and the ability to navigate regulatory challenges will be critical for them to thrive in the dynamic landscape of the future.