Kanis Saengchote, PhD Department of Banking and Finance Financial Services in the Digital Age
Money is intricately linked to trade, investment and productive activities. Let s travel back in time to see the history of finance. In the beginning, trade was conducted with exchanges of physical goods and services, not money. The invention of money made banking activities (lending) possible (as early as 1800BC!). Money-tracking enabled by the development of the legal and accounting systems made gave rise to modern banking (14 th century).
Financial services are bridges to connect different economic needs. Buyers and sellers: payment and exchange Savers and borrowers: credit provision, liquidity provision Parties with different degrees of risk aversion: risk management
Search cost Financial services exist to address customer pain points. Agreement cost Monitoring cost Transaction costs Convenience Knowledge Trust
WHAT to provide and HOW to provide?
There are six key functions of modern financial services classified by World Economic Forum. We will focus on three. Deposit & Lending Market Provision Capital Raising Payments Investment Management Insurance
Source: waitbutwhy.com We are on the edge of change comparable to the rise of human life on Earth. Vernor Vinge
Here are some of the words you frequently hear today. Let s explore how some of these trends can impact financial services provision. Big Data Machine Learning Internet of Things Blockchain Biometrics Sharing Economy
How will we pay for our goods and services?
With more online services available, customer behavior will likely shift toward the cashless world. Key trends Mobile payments Integrated billing Streamlined payments Next generation security Potential outcomes Default card (back of mind) / Amazon One-Click Multiple cards No card Business opportunity Merchants may be able to enter the payment market to gain better understanding of consumer purchase journey
How will we make investment decisions?
For rules-based investment advice or practice, computers can do a good job of replacing human. Key trends Robo-advisors Social trading Retail algorithmic trading Pain points addressed Accessibility Cost, speed, convenience Improved financial discipline Business opportunity Better access to investment classes previously available to selected few
How will we receive insurance products?
The insurance industry is constantly dealing with information asymmetry. Data availability in the digital age reduces tat problem. Key trends Telematics/wearables Internet of Things (IoT) Communication protocol Advanced analytics Pain points addressed Transparency Accurate pricing of risk Active management of risk Opportunity Partnership between insurance companies and goods and services that reduce hazard
What about Bitcoin?
Rather than Bitcoin, the focus is now on blockchain the underlying technology. Block + chain Data exists in blocks, linked together in a chain Also referred to as distributed ledger technology Record keeping and validation does not rely on a single authority (hence, decentralized) Bitcoin is run on blockchain Bitcoin was probably developed as an incentive system to run the blockchain (nobody really knows who was responsible for it!). Bitcoin the currency, I think, is going to go nowhere the blockchain is a technology which we ve been studying and yes it s real. Jamie Dimon on CNBC
The blockchain can be thought of as your monthly bank statement but this statement is kept in many places at the same time, rather than in a centralized location (i.e. distributed ledger).
Traditional Distributed Ledger
The blockchain can add value in several ways. Disintermediation and trustless exchange no middlemen; reduced need for verification Tamper proof have to go back to change all records (since inception!) on all locations at the same time!! Transparency for public blockchains, changes are viewable by all parties
The technology likely to have the greatest impact on the next few decades has arrived. And it's not social media. It's not big data. It's not robotics. It's not even AI.
The potential for blockchain is limitless, but real challenges still remain. At its core, blockchain is just a data structure with specific properties. Other stakeholders and components of the ecosystem must adapt this technology and agree on a standard. E.g. standardized contract format, legal enforceability, regulations Large energy consumption blockchain essentially requires many duplicate copies to be kept!
The Future of Banking: How will financial services be delivered?
The growth in number of bank branches has slowed down significantly as banks rationalize their branch networks.
We may see new generation of banks that are mobile-only. Berlin-based bank founded in 2013 Zero branch Offers only current account and MasterCard debit card Built on Application Programming Interfaces (APIs), i.e. partnering with other financial services providers Granted full banking license to operate in Europe in July 2016
Where will we end up? A world without bank? A world with no physical bank? A mix between man and machine a bionic bank?
Trust is the key concern for financial services, regardless of form or function. When you cross the bridge, you hope that bridge doesn t crumble down as you go over it! Financial crises often spillover into the real sector as well. Thus regulators play a very important role in the safekeeping of the financial system.
Key Takeaways We have been living in an exciting time and will continually witness fundamental changes in the way we live our lives. Nevertheless, the core economic functions of financial services have never changed in the past, and probably never will! The question is who will provide those services? As pain points are addressed, adoption will still depend on trust in service provider and ecosystem.