Finance Sector Transformations, 2021
Part II: Effects
In Part I the sources of Finance Sector Transformations were presented, but where it is that Covid-19, globalization, technology innovation, climate crisis and social change are impacting most? There are four distinguished areas which hereby are seen as especially relevant from the financial sector perspective.
The regulations are evolving due to the 2008 financial sector crisis and of course further innovations taking place. They need to help to manage and overseeing newly created services, which can be similar to the previously existing ones, as is the case for alternative lending, such as for instance crowdfunding.
The implementation of regulations requires generally a strong investment, provoking mergers in order to dilute the costs. Furthermore, due to imposed economic burden it raises strong entry barriers, protecting existing players from the new entrants’ competition.
The different speeds in the regulation implementation provoke further ‘balkanization’, among European countries. Regtech or regulation technology companies could also be helpful in the process of regulations implementation.
Regulatory sandboxes should accompany the innovation in order to avoid the perks and improve trust in the new products and services.
FinTechs or financial technology companies, provide the services of higher value added such as payments or personal finance services, in part allowed thanks to APIs (Application Programming Interfaces), which allow for customer information gathering from different competing financial entities, enabled by regulation advances in principle making the banking sector less compartmentalized, secretive and more open. Previously mentioned crowd-powered services are also enabled in great part by this subsector, for services such as crowdfunding, crowdlending, etc. Fintechs even if seen by some as the main banking sector's competitors are however not the most feared ones. These are big tech companies such as FAAGO — Facebook, Amazon, Apple/Alphabet, Google, Oracle. The money deposits are the remaining banking battlefield as customers still trust more financial institutions.
Blockchain is currently the innovation field per excellence for financial, banking and monetary arena. It involves the cryptocurrencies, which furthermore open the field for another alternative currencies, such as local ones. Smart contracts can also bring an inspiring transformation. In general, decentralized finance or DeFi is being promoted, with platforms enabling different currencies trading as well as Initial Coins Offering (ICO), as an alternative to Initial Public Offering (IPO). The disintermediation they promise can however have its backlashes in the form of money-laundering, energy efficiency issues, etc.
Of course, there are many other emerging technological innovations, related to the ongoing digitalization, such as Big Data, Artificial Intelligence (AI) or Internet of Things (IoT). Even if the omnichannel presence is in general secured, their interoperability needs further strengthening and legacy systems are still a strong issue pending to be solved, with some innovation touches to cover the generally perceived technological debt of financial institutions.
The innovation in the financial sector is progressing, there are many causes and effects are directed towards some fields more than the others. A way to have a perspective on them is to bear in mind the Gartner hype cycle, with its different phases, of the innovation trigger and its quick hype seeing them as the ‘Saint Grail’ for almost all the world’ issues. High expectations are followed by the disillusionment, but after reaching the trough, the slope of enlightenment comes with a more fine-tuned perception and application of the technology, which at some point will reach its plateau of productivity.
Time gives the best perspective. Aside from that, each technology brings its lights and shadows, following its pharmakon nature. Thus, environmental and social sustainability can only be reached through a proper orchestration of the collective intelligence among different stakeholders, in the process of human-machine collaboration.
To have a broader perspective, read more here.