The Future of Finance: Parallel Worlds

In many ways, the world is more connected today than it has ever been. The flow of ideas and information across the globe takes only seconds thanks to the proliferation of internet-enabled devices, while people and goods can quickly and easily traverse the world thanks to free trade and open border agreements. However, despite these contemporary trends, the CFA Institute forecasts that the near future may be characterized less by an interconnected world and more by parallel worlds as fissures open up across our society and our institutions rush to adapt.

The CFA’s Future of Finance report, which I discuss in a previous blog post, describes four possible scenarios for the financial world of tomorrow: fintech disruption, “lower for longer,” purposeful capitalism, and lastly, parallel worlds, in which different strata of our society—men and women, rich and poor, rural and urban, and so on—interact with society in different ways, prompting greater personalization and ease of access to financial services.

In the parallel worlds scenario, the growth of social media suddenly allows people and groups who previously existed on the margins of society to engage more fully in political and financial worlds. As a result, social media primarily becomes a forum to express discontent with elites and institutions by the people who did not benefit from what the CFA describes as the “golden marriage” of capitalism and democracy. This popularizes anti-establishment and anti-globalist views, which in turn fuels an ascendant authoritarian nationalism around the world.

Meanwhile, as the “haves” continue to make advances in healthcare and education relative to the “have-nots,” people begin to engage with society differently based on the social group they belong to; these social stratifications exist along lines of gender, class, political inclination, and so on.

The financial world—according to the CFA—will adapt by emphasizing personalization and simplicity in their offerings. Owing to the popularity of social media and widespread internet access, consumers will come to demand a wider range of digital financial options, which will cause financial services to become less expensive, more abundant, and significantly easier to access. Therefore, opportunities to innovate will come in the form of developing infrastructure and new channels to engage with financial services rather than actually unveiling new services.

To read the CFA’s full Future of Finance report, click here.

The Future of Finance

While many predictions about the future of the financial industry focus on the potential behavior of markets or specific investments, far fewer estimates consider the evolution of market forces and how they will shape the industry. Of course, it can be difficult to identify the specific forces that will leave a lasting impact on the financial world, but understanding those trends in advance can help investors and managers to properly prepare for the future. In fact, a recent report by the CFA Institute entitled “The Future State of the Investment Profession” seeks to do just that by predicting several possible futures for the financial ecosystem based on a series of disruptive forces.

The report outlines six megatrends, which it defines as “large scale changes in circumstances that are omnipresent in all facets of our world,” and suggests four potential outcomes based on how those megatrends may intersect. As a result, financial decision makers can use the report to identify megatrends at work and make a determination as to which scenario of the possible four that they should prepare for. The megatrends are aging demographics, tech-empowered individuals, tech-empowered organizations, government footprint, economic imbalances, and resource management.

The first scenario discussed in the report emphasizes fintech disruption. In this model, new technologies enable the development of new business models, investment strategies, and for entrant firms to compete with and outpace more established institutions. Additionally, the report predicts that the pace of innovation will continually increase as regulatory mechanisms integrate technology, allowing for financial services to become hyper-personalized and accessible to all.

In another outcome, “parallel worlds” develop as different segments of the population engage with society and with financial services differently on the basis of geography, age, and social background. Consequently, members of the various “worlds” will seek different financial products to suit their specific needs and interests, which will lead to increased financial participation and literacy across the spectrum. Although this model does anticipate improved education, healthcare, and communication around the globe, it also accounts for heightened tensions and “mass disaffection” owing to populist and nationalist attitudes.

Alternatively, in a more pessimistic prediction, the report suggests that interest rates around the world could stay low, which would lead to industry consolidation and growth challenges. At the same time, pension costs in both the public and private sectors would rise to pay for pensioners who are living longer as well as to cover diminishing returns from pension funds. Furthermore, a trifecta of geopolitical instability, social instability, and distrust with investment outcomes could combine and prompt the public to lose faith and trust in finance.

The last scenario discusses the rise of a purposeful capitalism characterized by higher ethical standards and attention on a wider range of stakeholders. Firms would more closely align their mission, values, and profit motives, and over time, markets would grow more efficient and fair.

The CFA’s full report is available here.