4 CEOs and the IMF MD On The Transformation of Finance

In the post ’21 Most Popular Tweets from the World Economic Forum’ I highlight some of the most popular themes from the 2016 Davos conference. As i researched the post it revealed that one of those most talked about debates for people in the finance space was a panel discussion titled “The Transformation of Finance”. I watched the Transformation of Finance YouTube video over the weekend, and it was pretty interesting. It was the one in which the Deutsche Bank Chief said cash will no longer exist in 10 years! It was fascinating to hear what the guys, and gal, at the top of their respective organisations were thinking about. In this post i will share some of the noteworthy talking points from the Transformation of Finance discussion.

1. Transformation of Finance – The Changing Debate

Gillian Tett (Financial Times) set the scene by highlighting the contrasting fortunes of finance over the years at Davos from:

  • 2007 – when finance was booming – bankers were riding the wave of credit derivatives, financial innovation, blah blah…
  • 2008 – through to The CRASH! Enough said.
  • Post 2008  – then came, and arguably still remains, a focus on Regulation. There was questioning around what went wrong and thoughts on how to avoid another financial meltdown, Gillian described the debate as a backward and inward looking one
  • 2016 – through to the present day where the discussion is moving on from regulation and looking forwards to fintech and the changes sweeping through finance

2. Digital, the new way of doing business

Christine Lagarde (MD at International Monetary Fund, IMF) explained how and why finance is changing due to:

  • Young adults have a new way of doing banking, yet they don’t go to a bank!
    • Christine was essentially talking about the different channels, through which you can now bank and make payments
  • Virtual Currencies and the potential for blockchain technology to change the way we do things
    • Christine was keen to emphasise that the technology is in its infancy citing:
      • Virtual currency total market value is approximately US$ 7 billion, compared with US currency in circulation is about $1.4 trillion
      • Virtual currencies make up a very small component of the all currencies in circulation globally

3. Evolution, Fintech, Partnerships and Regulation

James Gorman (Chairman & CEO Morgan Stanley) shared 3 key themes:

  • Finance as an industry has always been driven by technology, demonstrating how from the ATM to the credit card there has been continued evolution and innovation in the industry
  • Explained how technology can be used to both win business and defend existing business
    • As a result incumbent financial institutions need to understand how innovation is shaping and evolving the industry
    • An interesting example that James pointed out was how his organisation was focused on things that take away human interaction – robo-advisors, electronic trading, developing expert systems were examples of how they are looking to embrace technology as a way of giving their clients more certainty around what they are doing
    • Spoke about the hysteria around fintech and recognised that fintech is here and is disruptive, but will NOT change things tomorrow
    • James believes that the technology will unfold over years, and that incumbents need to keep their options open by taking a variety of “bets” in the form of partnerships and hiring talent outside of the banking system
  • Regulation continues to dominate the industry and his inbox

4. Data, Digital Currencies and the Death of Cash

John Cryan (Co-CEO, Deutsche Bank,) made some interesting points about a variety of topics:

  • Regarding cash
    • Predicting that “Cash in 10 years probably wont [exist], there is no need for it, it is terribly inefficient and expensive
  • Over and again illustrated the importance and continued growing importance of Data
    • Describing how he was “much more interested in data than process – the rules around data, regulation on data and obligations on banks to report on data”
    • Outlined the complexity around financial institutions needing to clean, organise, store and report on data – particularly when you consider how products and regulation change over time which in turn results in changing financial institution obligations
  • On digital currencies
    • Mentioned that it “would be better if everything were traceable” but also believes that…
    • Bitcoin is “just another medium of barter, its a bit opaque… hasn’t gained too much traction and is a bit complicated, and people are put off by that complication”
  • Regulation
    • Pointed out the difference between regulators who often enforce policies, rules and regulations that may have been put together by other groups
    • Shared how banks are being drawn into “stealth regulation”, where banks and other financial institutions take on roles that go beyond finance

5. The Speed of Change, Trust and Regulation

Tom de Swaan (Chairman & CEO at Zurich Insurance Group) expressed how:

  • Life at the top of a financial institution has never been easy, and that is especially the case right now due to the unpredictability and speed of technological change
  • But at the same time recognised the importance of managing the business right now, and the resulting need for a balance whereby incumbents and disruptors need to work together to create new products, distribution systems that add value for everyone
  • In and amongst the tech, the challenge for financial institutions is that they are still rebuilding trust, and the difficulty is rebuilding this trust while at the same time trying to convince customers that the financial companies should be allowed to use their data in order to better serve them
  • On regulation, Tom talked about the complexity in finance and technology and how these posed new challenges for regulators. The regulators in this complex world now need to define what are they going to regulate!

6. Digital, Mobile, Data, Blurring Lines & Security

Dan Schulman (CEO at Paypal) was the disruptor on the panel, you could see this because he was the only one in jeans! Dan’s mantra from his American Express days was that “the biggest impediment to our future success is our past success” and revealed how this is true for most large corporations. He went on to explain the dangers around how “big companies extrapolate from what was, and don’t re-imagine what could be“.

Dan mentioned 5 key trends that are happening right now:

  • Money is being digitised
    • But there is still a long way to go, noting that 85% of all global transactions are still in cash
  • Mobile is exploding globally
    • Dan shared that the cost of materials for a smartphone is under $30, so soon everyone will have a smartphone
    • “When you have a smartphone, you have all of the power of a bank branch in the palm of your hand”
  • The amount of data is exploding everywhere, and is not going to stop!
    • Algorithms are the weapon of the digital company and the ammunition is data. The more data and quality of data you have enables you to create better value propositions, that allow you to target segments of the market and serve them in better ways”
  • Industry lines and product lines are blurring!
    • Circling around payments right now are technology companies (such as Google, Facebook, Amazon, Microsoft), mobile carriers, handset manufacturers (or OEMs – Original equipment manufacturer) and merchants. Such a diversity and cross spread of industries and players in payments is something that would have been unthinkable previously
  • Security
    • Given the cyber-security threat Dan explained that systems will be compromised but there is a need to recognise patterns, see information and data that reveals abnormal behaviour and in turn prevents the data from being taken from the system

Dan explained how fintech is in the middle of these 5 trends, and how all of these will “redefine basic financial services more in the next 5 years than has occurred in the last 30.”

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On Regulation, Dan raised a couple of points worth mentioning:

  • The need for a sandbox environment where technology can ‘experiment and play’ without hurting the consumer
  • We are moving into a new world, and a new world demands a new way of thinking about our regulatory environment“. Here Dan talked about the next crisis being something like a financial system being hacked for 1 or 2 days resulting in chaos. These are the kinds of threats and stresses that the regulators need to look at according to Dan, and not doing so is a big oversight

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