Mention disruption to anyone in financial services and three trends come to most professionals’ mind: Artificial Intelligence, Robo-Advisory, and Blockchain. So, will 2018 be a disruptive year?
A lot of ink has been spilled on these topics; but so far AI hasn’t fundamentally threatened white collar jobs above administration level; Robo-Advisory, although fairly successful still have to demonstrate they can sustain their business models on the long run; as for Blockchain, although Cryptocurrencies keep breaking record high and are now considered as investments by Hedge Funds, the practical application of the distributed ledger based technology to the wider banking sector is far from being evident.
What we can expect next in the future is Artificial Intelligence, and other new technologies, playing a bigger role in our daily work/investors lives: Chatbot, Personal Assistant, Robot-Advisors, Machine Learning, Cognitive Computing, you name it. But while for now, it seems that machines aren’t taking over yet, it’s safe to say change is afoot. Basic admin functions such as personal assistants or digital labour are tipped to replaced by machines, but there are concerns over regulation, privacy and trust which haven’t been overcome yet. Augmented intelligence whereby machines assist humans may prove to be the most disruptive trend in the short term. There has been tremendous effort from large Investment Banks to automate a significant bulk of the financial research process. Goldman Sachs for instance invested a few years ago 15 million into Kensho, a machine-learning start-up aimed at replacing research analysts by using algorithms. Ultimately at this stage though – quantitative investment strategy based on pricing time series aside – final human judgment is still required to analyze the qualitative data gathered by even the most advanced algorithm.
Second, Robo-Advisors have proven to be a cost-efficient solution in term of challenging high fee structures offered by the broader Asset Management industry. Although performance has been mitigated, the new DOL fiduciary rule may give Robo-Advisors a boost due to pressures on commissions.
Finally, the use of Blockchain has proved a popular trend for Internet community-based platforms seeking to use ICO’s to raise funds. Although the success of Bitcoin and Ethereum is already widely demonstrated, the application of the distributed-ledger based technology to the broader investment banking appears to be much more slowly paced, mostly for regulatory reasons.
Let’s talk about the potential benefits first, Blockchains could become a major disrupter for capital markets infrastructure addressing significant industry issues, including the reduction counter party risk minimisation, reduction of settlement times, improvement of contractual term performance and increased regulatory reporting transparency. But by solving certain problems, it could create new ones. Regulatory issues could be the same as for cryptocurrencies, only for investment banking they are potential major blockers.
There are two concerns; the first one revolves around anonymised transactions and therefore the difficult oversight of money laundering by regulators. Blockchain technology aside, there have been significant cases of money laundering in the last 10 years. Take as an example HSBC in Mexico, illegal transactions have gone unnoticed for a certain amount of time thanks to financial innovation. It is worth noting as a general comment that in the light of recent scandals, Libor, Subprime and AML, financial innovations have always been ahead of regulators. Now add anonymised transactions to the equation, money markets oversight and regulating big banks balance sheet thus becomes an issue: who owns what? Rings a bell? No doubt that the solutions around these problems can be found, but the bigger picture here is whether Blockchain can reduce costs and eliminate some intermediaries. If its oversight turns out to be more complex than anticipated, can it achieve this? The second problem is the difficulty Blockchain poses to central banks. We have seen them issuing warning notes about cryptocurrencies, the lack of control on inflows/outflows in and out an offshore currency could undermine their authority. Let’s think now about what it could be for banking: money markets need central banks intervention, in particular when they need to avoid the worst. Can Central Banks’ market intervention have the same impact in distributed ledger type of market place? Blockchain has lot of benefits, but its implications must be well understood before being put into practice.
Looking ahead to 2018, disruption maybe on the horizon but regulation and human intervention and interaction with new technology will more likely be the dominant themes.