The quiet fi­nan­cial revo­lu­tion be­gins

Financial Mirror (Cyprus) - - FRONT PAGE -

Steadily and in­dis­putably, the fi­nan­cial ser­vices in­dus­try – with which we all in­ter­act, whether as bor­row­ers, savers, in­vestors, or reg­u­la­tors – has em­barked on a mul­ti­year trans­for­ma­tion. This process, slow at first, has been driven by the com­bined im­pact of two sets of durable forces.

On one hand, top-down fac­tors – reg­u­la­tory change, un­usual pric­ing, and what Nouriel Roubini has clev­erly termed the “liq­uid­ity para­dox” – are at work. Then there are dis­rup­tive in­flu­ences that per­co­late up from be­low: chang­ing cus­tomer pref­er­ences and, even more im­por­tant, out­side vi­sion­ar­ies seek­ing to trans­form and mod­ernise the in­dus­try.

Be­gin­ning at the top, the reg­u­la­tory pen­du­lum is still swing­ing to­ward tighter su­per­vi­sion of tra­di­tional fi­nan­cial in­sti­tu­tions, par­tic­u­larly large banks and in­sur­ance com­pa­nies deemed “sys­tem­i­cally im­por­tant.” More­over, re­designed reg­u­la­tory frame­works, phased im­ple­men­ta­tion, and stepped-up su­per­vi­sion will grad­u­ally ex­tend to other seg­ments, in­clud­ing as­set man­age­ment. This will con­trib­ute to fur­ther gen­er­alised de-risk­ing within the reg­u­lated sec­tors, as part of a broader fi­nan­cial-sec­tor move­ment to­ward a “util­i­ties model” that em­pha­sizes larger cap­i­tal cush­ions, less lever­age, greater dis­clo­sure, stricter op­er­a­tional guide­lines, and a lot more over­sight.

The pric­ing en­vi­ron­ment com­pounds the im­pact of tighter reg­u­la­tion. Like util­i­ties, es­tab­lished fi­nan­cial in­sti­tu­tions are fac­ing ex­ter­nal con­straints on their pric­ing power, though not of the tra­di­tional form. Rather than be­ing sub­jected to ex­plicit price reg­u­la­tions and guide­lines, th­ese in­sti­tu­tions op­er­ate in a “fi­nan­cial re­pres­sion” regime in which key bench­mark in­ter­est rates have been held at lev­els be­low what would oth­er­wise pre­vail. This erodes net in­ter­est mar­gins, puts pres­sure on cer­tain fee struc­tures, and makes cer­tain providers more cau­tious about en­ter­ing into longterm fi­nan­cial re­la­tion­ships.

As a re­sult of th­ese two fac­tors, es­tab­lished in­sti­tu­tions – par­tic­u­larly the large banks – will be in­clined to do fewer things for fewer peo­ple, de­spite be­ing flush with liq­uid­ity pro­vided by cen­tral banks (the “liq­uid­ity para­dox”). And banks and bro­ker-deal­ers can be ex­pected to pro­vide only limited liq­uid­ity to their clients if a large num­ber of them sud­denly seek to re­align their fi­nan­cial po­si­tion­ing at the same time. But this is not just about them. The fact is that providers of all long-term fi­nan­cial prod­ucts, par­tic­u­larly life in­sur­ance and pen­sions, have no choice th­ese days but to stream­line their of­fer­ings, in­clud­ing a re­duc­tion of those that still pro­vide longer-term guar­an­tees to clients look­ing for greater fi­nan­cial se­cu­rity.

The im­pact on the fi­nan­cial-ser­vices in­dus­try of th­ese top­down fac­tors will grad­u­ally am­plify the im­por­tance of the bot­tom-up forces. Over time, this sec­ond set of fac­tors will fuel more di­rect and ef­fi­cient pro­vi­sion of ser­vices to a broader set of con­sumers, con­tribut­ing to a re­con­fig­u­ra­tion of the in­dus­try as a whole.

For starters, cus­tomer ex­pec­ta­tions will evolve as the mil­len­nial gen­er­a­tion in­creas­ingly ac­counts for a larger por­tion of earn­ing, spend­ing, bor­row­ing, sav­ing, and in­vest­ing. With many of th­ese newer clients fa­vor­ing “self­di­rected” lives, providers of fi­nan­cial ser­vices will be pressed to switch from a prod­uct-push mind­set to of­fer­ing more holis­tic so­lu­tions that al­low for greater in­di­vid­ual cus­tomi­sa­tion. Mar­ket-com­mu­ni­ca­tion func­tions will also be forced to mod­ernise as more clients ex­pect more cred­i­ble and sub­stan­tive “any place, any time, and any way” in­ter­ac­tions.

Then there is the in­flu­ence of out­side dis­rup­tors. Jamie Di­mon, the CEO of JPMor­gan Chase, ex­pressed it well in his 2015 share­holder let­ter, ob­serv­ing that “Sil­i­con Val­ley” is com­ing. Th­ese new en­trants want to ap­ply more ad­vanced tech­no­log­i­cal so­lu­tions and in­sights from be­havioural science to an in­dus­try that is prof­itable but has tended to un­der-serve its clients.

Airbnb and Uber have demon­strated that dis­rup­tion from an­other in­dus­try is par­tic­u­larly pow­er­ful, be­cause it in­volves en­abling ef­fi­ciency-en­hanc­ing struc­tural changes that draw on core com­pe­ten­cies and strate­gies that the in­cum­bent firms lack. Many other com­pa­nies (for ex­am­ple, Rent the Run­way, which pro­vides short-term rentals of higher-end fash­ion) are in the process of do­ing the same thing. Be it peer-to-peer plat­forms or crowd-fund­ing, out­side dis­rup­tors al­ready are hav­ing an im­pact at the mar­gin of fi­nance, par­tic­u­larly in serv­ing those who were pre­vi­ously marginalised by tra­di­tional firms or had lost trust in them.

The end re­sult will be an in­dus­try that serves peo­ple via a larger menu of cus­tomis­able so­lu­tions. Though tra­di­tional firms will seek to ad­just to main­tain their dom­i­nance, many will be chal­lenged to “self-dis­rupt” their think­ing and op­er­a­tional ap­proach. And, while emerg­ing firms will of­fer bet­ter ser­vices, they will not find it easy to over­come im­me­di­ately and de­ci­sively the in­sti­tu­tional and reg­u­la­tory in­er­tia that an­chors tra­di­tional firms’ mar­ket po­si­tion. As a re­sult, a pro­lif­er­a­tion of fi­nan­cial providers is likely, with par­tic­u­larly bright prospects for in­sti­tu­tional part­ner­ships that com­bine the more ag­ile ex­ist­ing plat­forms with ex­cit­ing new con­tent and ap­proaches.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.