Finance Sector Transformations, 2021
Part I: Causes
While enjoying the VUCA environment defined so by its Volatility, Uncertainty, Complexity and Ambiguity, financial sector is also in a state of constant evolution.
There are different factors affecting it, but nowadays, the main of them can be defined as: Covid-19, globalization, technology innovation, climate crisis and social change. As it is a complex VUCA environment, all of them are interrelated.
The globalization supposes mainly the internationalization of the financial endeavours, even if recently somehow counter-acted by the Covid-19 impact on the global supply chains, in a sense provoking the revision of the local dimension role, crucial for resilience. The 2008 financial crises also raised the trust issues, and the contagion effect among countries in the banking sector, thus shaping the new subsidiarization policy, making the subsidiaries more independent, less supported and less relying on headquarters country. On the EU arena, Brexit is a fact. This can have a strong impact on geographic distribution of the financial sector, as traditionally the UK was used as a bridge to enter the EU market, it was and still is the strongest financial centre. After Brexit, this role can be undertaken by the willing France and probably more deserving but less inclined Germany, due to its careful approach to roughly instability generating procyclical financial sector.
Covid-19 also affected the money supply, which thanks to the ‘helicopter money’ resembling policies, had injected money and due to the real economy stand-by and the inequality deepening receivers’ nature, redirected it to the currently bustling (or proportionally exceptionally better-on) stock exchange or real estate markets. Raising inflation can also help to boost banking business, as its profits are based in great part on interest rate (Euribor in case of the EU) spreads.
Technology Innovation, including ongoing virtualization accelerated by the Covid-19, boosted emerging technologies, such as decentralized finance related blockchain, with its cryptocurrencies and smart contracts, Artificial Intelligence (AI) or Internet of Things (IoT) will further propel the innovation in the financial sector, for instance by introducing the Central Bank digital currencies or of course progressing the reporting and planning, all the data-based areas. Of course, the progress in digitalization requires strong cybersecurity improvements, it is more so as the changes can be agile, immediate (real time) and massive.
Climate crisis brings the Sustainable Finance as a relevant issue to work on. In the European Union, the positive taxonomy is being introduced to boost the environmentally friendly activities financing and thus diminish the environment damaging ones.
Climate change implies more extreme weather conditions and thus raises the possibilities of weather harshness and natural catastrophes, which of course need to be attended by strongly related insurance and finance sector. The resilience becomes an even important question, also in face of pandemics.
The society is increasingly conscientious regarding the climate but also social sustainability of the human activities, among which finance plays a central role for the economic performance. Financial services, in part due to digitalization and increasing regulations, become strongly commoditized. They are perceived as a basic service which should concentrate on cost reduction in order to allow frictionless functioning of the economy. Together with low interest rates, it strengthens the collaboration with the insurance sector, in search for profitability.
Society organization changes, evolving with the interconnectedness through social networks, and crowd-power, as demonstrated in the GameStop video game incident. This brings another type of crowd or minor contributors driven involvement in the economy and financial sector services provision.
The ways of working and corresponding lifestyles are undergoing strong shifts which will subsequently affect the foundations of economy, with measures such as Universal Basic Income or Universal Basic Services or other measures previously unthought of.
These are the main causes of transformation in the financial sector, do you agree? Do you have some others in mind? Please write them down in the comments section. This is thought to be an open discussion to stimulate the collective intelligence interplays.
Part II regarding the effects originated by these shifts is coming soon. To have a wider picture, please consult also here.