The Future of Finance: Fintech Disruption

From media to retail to healthcare, new technologies have triggered a wave of disruption across dozens of established industries. Taxi operators, for example, must contend with digital upstarts like Uber and Lyft that have made it possible for passengers to call a car and driver at the push of a button, and some industries—such as travel and photography—have been rendered all but obsolete by new technologies. While finance is also being affected by technological innovations, today’s advances may be the tip of the digital iceberg: In fact, the CFA Institute predicts “fintech disruption” may define the financial industry of tomorrow.

In a previous blog post, I discussed the CFA’s recent Future of Finance report, which analyzes several global megatrends and proposes four scenarios for how they might transform the world of finance; the futures they envision are entitled “parallel worlds,” “lower for longer,” “purposeful capitalism,” and of course, fintech disruption. Fintech—which describes a range of technologies that can deliver financial services to consumers—is already a powerful force, and its influence can be seen in the rise of robo-advising, which uses algorithms and large data sets to automate many elements of financial planning.

The CFA bases its prediction for widespread fintech disruption on several existing technological megatrends, like the proliferation of IT-enabled devices that make it possible to receive constant updates about investments in real time, but it is particularly interested in big data and machine learning. Big data allows firms to upload and store massive amounts of information and access it from anywhere via cloud technology, which can be analyzed virtually instantly with the help of artificial intelligence and complex algorithms.

In the coming years, as data storage becomes more efficient and computing power increases, the CFA predicts that fintech devices and programs will be able to scan enormous quantities of data to deliver fast, accurate, and hyper-personalized insights and recommendations to investors. But identifying technological advances is only part of the picture: How does the CFA envision fintech affecting the financial industry itself?

There are several potential avenues. In one scenario, entrant firms could deploy new technology with greater speed and efficiency than more established, entrenched firms, allowing these new players to “outflank” the competition by driving down costs and winning over the tech-obsessed Millennial generation. Conversely, established firms could develop fintech fluency—perhaps by purchasing fintech firms altogether and assimilating their services—to drive down costs as well as attract and retain customers; additionally, by using fintech to offer more personalized services while enhancing customer services, firms could step into the role of concierges for clients.

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.