Rev­o­lu­tion­ary Change is Upon Banking and Fi­nance

The in­dus­try of banking and fi­nance is not only en­ter­ing the age of al­go­rithms but also the age of dis­in­ter­me­di­a­tion.

Financial Nigeria Magazine - - Finance -

In this exclusive in­ter­view, Ar­shad Rab, Chief Ex­ec­u­tive Of­fi­cer, Euro­pean Or­gan­i­sa­tion for Sus­tain­able De­vel­op­ment (EOSD), spoke to Jide Ak­in­tunde, Man­ag­ing Editor, Fi­nan­cial Nigeria magazine, on the dis­rup­tion of con­ven­tional fi­nance and the fu­ture of the fi­nan­cial ser­vices in­dus­try. The EOSD, with the city of Karl­sruhe, Ger­many – and the part­ner­ship of Fi­nan­cial Nigeria – is host­ing the Global Sus­tain­able Fi­nance Con­fer­ence and Awards on July 13 14.

Jide Ak­in­tunde (JA): The dis­rup­tion of the fi­nan­cial ser­vices in­dus­try is un­der­way. Is this some­thing that will prove ul­ti­mately evo­lu­tion­ary or rev­o­lu­tion­ary in the pro­vi­sion of fi­nan­cial ser­vices?

Ar­shad Rab (AR): For cen­turies, the pro­vi­sion of fi­nan­cial ser­vices was the sole do­main of banks. But that is no longer the case. Fi­nan­cial ser­vices are now in­creas­ingly be­ing pro­vided by tech­nol­ogy com­pa­nies, herald­ing the tec­tonic shift cur­rently tak­ing place.

The in­dus­try of banking and fi­nance, as we cur­rently know it, will cease to ex­ist and this will hap­pen much faster than many of us think. So, if we look at the emerg­ing big pic­ture, we can con­clude that the change in the fi­nan­cial ser­vices in­dus­try will in­deed prove to be rev­o­lu­tion­ary.

JA: Why is this hap­pen­ing?

AR: The dis­rup­tive na­ture of tech­no­log­i­cal change is re­shap­ing ev­ery as­pect of our lives. We have en­tered the age of al­go­rithms and ar­ti­fi­cial in­tel­li­gence (AI) and com­puter ma­chines are tak­ing over much of the work hu­mans cur­rently do, sig­nif­i­cantly, in­clud­ing de­ci­sion-mak­ing. There­fore, the tech­nol­ogy com­pa­nies are in a much bet­ter po­si­tion than the banks to take full ad­van­tage of lat­est in­no­va­tions and make banking and fi­nance their busi­ness do­main.

On the de­mand side of fi­nan­cial ser­vices, we are also ex­pe­ri­enc­ing a rad­i­cal shift in the cus­tomer be­hav­iour. To­day, we all ex­pect things to be done much faster than say five years ago. For ex­am­ple, peo­ple have prob­lems in un­der­stand­ing why in this dig­i­tal age, banks need days to trans­fer money. We can of course of­fer rea­sons for the time lag such as reg­u­la­tions for clear­ing houses, but most peo­ple will not be sat­is­fied with such ex­pla­na­tions. The cus­tomers of to­day want money to be trans­ferred in­stantly; they would like loan de­ci­sions to be made quickly; and they want to be able to en­joy banking ser­vices from any de­vice, at any time and from any­where.

An­other fac­tor in­flu­enc­ing fi­nan­cial ser­vices is the grow­ing pop­u­la­tion of young peo­ple who are teth­ered to mo­bile de­vices. The ser­vices that are not avail­able on those de­vices are sim­ply non-ex­is­tent as far as the younger gen­er­a­tion are con­cerned. This gen­er­a­tion, quite of­ten re­ferred to as mil­len­ni­als – which gen­er­ally means the peo­ple born be­tween 1980 and 1997 – are be­com­ing en­trepreneurs, de­ci­sion-mak­ers and cus­tomers. They need tech­no­log­i­cal and speedy so­lu­tions much more than the older gen­er­a­tion. And the cen­ten­ni­als, those born af­ter the mil­len­ni­als, are now a big mar­ket for con­sumer elec­tron­ics and IT prod­ucts and ser­vices. In the next few years, they will be one of the largest cus­tomer groups for fi­nan­cial in­sti­tu­tions.

And let me also un­der­score a very key point: The com­pet­i­tive edge that the al­go­rithms and ar­ti­fi­cial in­tel­li­gencedriven tech­nolo­gies en­joy is that they are much faster and less prone to er­rors than

hu­mans – in­clud­ing in mak­ing de­ci­sions – mak­ing them very at­trac­tive for the fi­nan­cial ser­vices they of­fer.

So, one could ar­gue that what is hap­pen­ing cur­rently, par­tic­u­larly the pro­lif­er­a­tion of al­go­rithms, ar­ti­fi­cial in­tel­li­gence and blockchain, will make banking more a busi­ness of tech­nol­ogy com­pa­nies than of the banks. Re­fer­ring back to your first ques­tion, this is a rev­o­lu­tion­ary change in the his­tory of banking and fi­nance.

JA: What is the real hope of a bet­ter fu­ture of banking and fi­nance that is de­liv­er­able by the dis­rup­tion of con­ven­tional fi­nance?

AR: There are two words that im­me­di­ately come into my mind: In­clu­sive and demo­cratic. First, through the use of tech­nol­ogy, banking ser­vices are be­ing made avail­able to un­banked and un­der­banked cus­tomers at af­ford­able costs. The mas­sive and fast growth in in­clu­sive banking and fi­nance, to a large ex­tent, is be­cause of tech­no­log­i­cal ad­vances.

Se­condly, I can see the emer­gence of banking for the peo­ple, of the peo­ple and by the peo­ple. For ex­am­ple, if we look at crowd fund­ing or peer-to-peer real-time pay­ment so­lu­tions, you can clearly see that the in­dus­try of banking and fi­nance is not only en­ter­ing the age of al­go­rithms but also the age of dis­in­ter­me­di­a­tion. The role of fi­nan­cial in­ter­me­di­aries, be it com­mer­cial banks, de­vel­op­ment fi­nance in­sti­tu­tions or other in­ter­me­di­aries, will con­tinue to re­duce. And as blockchain tech­nol­ogy be­comes real, the fi­nan­cial ser­vices in­dus­try will ex­pe­ri­ence his­toric dis­in­ter­me­di­a­tion. This will make banking and fi­nance more demo­cratic than ever be­fore.

JA: We see that in e-pay­ment there is ten­sion be­tween con­ven­tional banks and the tel­cos. Also, the reg­u­la­tory and con­sumer pro­tec­tion frame­works for fin­techs are, at best, work in progress. Should the ef­forts at re­solv­ing the is­sues as­sert com­pe­ti­tion or co­op­er­a­tion?

AR: The role of reg­u­la­tors should con­tinue to be about pro­tect­ing the pub­lic in­ter­est. There can and there should be no com­pro­mise on this is­sue as we trans­form from con­ven­tional to dig­i­tal banking and fi­nance. In the emerg­ing sce­nario, there is a dire need for ac­tions that can cre­ate a level- play­ing field for both in­cum­bents and new play­ers such as the fi­nan­cial tech­nol­ogy com­pa­nies.

Since there is a real prospect that few big tech giants will dom­i­nate the fi­nan­cial ser­vices in­dus­try within the next few years, we need pol­i­cy­mak­ers and reg­u­la­tors to act fast to en­sure safe, fair and com­pet­i­tive mar­kets and to avoid mar­ket dom­i­na­tion by a hand­ful of pow­er­ful play­ers. A good reg­u­la­tory frame­work, as al­ways, will pro­mote com­pe­ti­tion. This is in the in­ter­est of the so­ci­ety and in the long-term in­ter­est of all the cur­rent and fu­ture play­ers.

Now, talk­ing about co­op­er­a­tion, this is cur­rently be­ing led more by mar­ket dy­nam­ics than by reg­u­la­tory pres­sures. A grow­ing num­ber of in­cum­bent fi­nan­cial in­sti­tu­tions are closely col­lab­o­rat­ing with small and medium-size fin­techs to over­come tech­no­log­i­cal chal­lenges. In fact, this is one of the top trends hap­pen­ing to­day and some of the banks have even started to ac­quire fin­tech star­tups. Nev­er­the­less, there will still be ex­is­ten­tial threats loom­ing over the in­cum­bents, in­clud­ing the big fi­nan­cial sec­tor play­ers.

Tech­nol­ogy, mar­ket con­di­tions, reg­u­la­tory frame­work and so­cio-eco­nomic and political cli­mate will con­tinue to change ex­tremely fast. How­ever, the or­ga­ni­za­tional struc­ture and busi­ness pro­cesses of the in­cum­bent fi­nan­cial sec­tor play­ers are not very re­spon­sive to the fastchang­ing en­vi­ron­ment, at least not in com­par­i­son with the fin­techs.

JA: One is­sue that has been lit­tle high­lighted is that dis­rup­tive fi­nance can be zero-sum. While the fin­techs are al­ready help­ing to drive down the cost of fi­nan­cial trans­ac­tions – es­pe­cially re­mit­tances, ag­gre­gate labour in the fi­nan­cial ser­vices in­dus­try can be eroded. Do you have con­cerns about this trade-off?

AR: There is no doubt that a lot of work done to­day by hu­mans will be done by ro­bots in all sec­tors of the econ­omy, and the fi­nan­cial ser­vices in­dus­try will not be ex­empted. But do we have a choice? Since we know that dig­i­ti­za­tion of ev­ery­thing is un­stop­pable, it is time to move for­ward and meet the chal­lenge head on. This means em­brac­ing the tech­no­log­i­cal in­no­va­tions and get­ting ready to ben­e­fit from the dig­i­tal econ­omy.

For in­stance, imag­ine if we could soon free up al­most 50 per­cent of the world’s hu­man re­sources by tak­ing them away from do­ing mo­not­o­nous tasks and de­ploy­ing them to do cre­ative work. And imag­ine if we could en­able ma­jor­ity of the world’s work­force to un­leash its true talent and po­ten­tial, all be­cause for the first time in hu­man his­tory, it is now possible to do so – thanks to tech­nol­ogy. And let there be no doubt: All mo­not­o­nous jobs can be and will be taken over by ro­bots.

None­the­less, my con­cern is not about the threat that tech­nol­ogy poses to hu­man labour. We can­not “undig­i­tize” the econ­omy or halt fur­ther de­vel­op­ments, any­way. I am earnestly con­cerned that gov­ern­ments, reg­u­la­tors, busi­nesses and so­ci­ety are not re­al­iz­ing the press­ing need to take im­me­di­ate and res­o­lute ac­tions to en­sure a smooth tran­si­tion to the age of al­go­rithms and ar­ti­fi­cial in­tel­li­gence. The dan­ger of mass un­em­ploy­ment and desta­bi­liz­ing mar­kets is real but pre­ventable, pro­vided we act fast and smart.

So, I am call­ing for ur­gent ac­tions and invit­ing the stake­hold­ers to work to­gether to cre­ate a win-win out­come and not wait till the wa­ter runs dry.

JA: The EOSD has been en­cour­ag­ing fi­nan­cial in­sti­tu­tions in the global South to em­brace Sus­tain­abil­ity. What would be your mes­sage to African banks on how they should con­tinue to po­si­tion for the fu­ture of banking and fi­nance?

AR: This is a dif­fi­cult ques­tion to an­swer in few words. How­ever, I would like to sug­gest that banks must em­brace tech­nol­ogy and use it to its full po­ten­tial. But let me has­ten to add that in­vest­ments in tech­nol­ogy alone is not enough be­cause it is very chal­leng­ing to keep up with the fast pace of tech­no­log­i­cal change. For the in­cum­bents, it will be too tough to com­pete on the ba­sis of tech­no­log­i­cal edge with the tech giants and other fin­techs en­ter­ing fi­nan­cial in­dus­try.

In my opin­ion, the fi­nan­cial in­sti­tu­tions, ir­re­spec­tive of their lo­ca­tion, size and in­fra­struc­ture – and in ad­di­tion to full-scale dig­i­ti­za­tion – need to fo­cus im­me­di­ately on true value cre­ation for all stake­hold­ers. The suc­cess­ful fi­nan­cial ser­vices providers will be those that de­liver real so­cio-eco­nomic value in their com­mu­ni­ties and to so­ci­ety at large, while fully rec­og­niz­ing the nat­u­ral en­vi­ron­ment as one of the key stake­hold­ers. This is not only the right thing to do from a moral per­spec­tive. But, at the end of the day, this is where the bat­tle for sur­vival will be won or lost.

Ar­shad Rab

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