Impact of technology on FS
The greatest challenges and opportunities for most FS businesses today stem from technology, says Tom Colraine.
The financial services sector is exposed to rising threats from people who want to steal personal data, intercept and amend communications, misappropriate assets for their own use or hold organisations to ransom.
Businesses need to continually improve their defences to stay ahead of an attack.
But for digital-savvy FS businesses, there are also opportunities.
Opportunities for banking: payments and online
Technology has probably had the biggest impact on banking so far, for example in the rise of payments and internet banking.
The UK government would like to see more competition in retail banking, but the capital requirements are high, and the expectations of regulators demanding.
This has required truly massive investments in IT. Unit costs for such transactions have been driven down, but many people lament the reductions in the number of branches and associated jobs.
Some new entrants to the banking market are avoiding branches by being entirely online, while others are employing a hybrid model.
The UK government and regulators would like to see more competition in retail banking and there are certainly a few "challenger" banks giving it a go. However, the capital requirements are high, and the expectations of regulators, media and customers very demanding and so it is difficult for a new bank to be successful.
One advantage that some challenger banks have is that they don't have legacy computer systems.
Opportunities in investment: tracker funds
In asset management and wealth management, the advent of tracker funds, with enormous scale and very low unit costs, have proved attractive to many individuals and pension funds, and have rekindled the debate as to the merits and costs of "active" versus "passive" investment strategies.
Additionally, with low interest rates having a knock-on effect to returns from other assets classes, and regulators pushing for unbundling of charges, the fees charged by traditional managers have come under closer scrutiny.
Challenges: the rise of robo-advisers
When it comes to challenges, retail banks in particular have enormous expectations to meet.
Robo-advisors can supply guidance but usually not strictly 'advice' under UK regulations.
Customers want more convenience and functionality, such as being able to access their accounts from their mobile phones 24-hours a day; they also demand complete security. And they don't want to pay anything for it.
Many people don’t like paying (or paying much) for financial advice, or their assets may be too low to allow traditional wealth mangers to service them properly.
This has led to growth in so-called “robo-advisors” which can supply guidance (but usually not strictly “advice” under UK regulations).
Such a platform might offer a good solution for one part of the market but would still require considerable scale to be viable.
It could lead to further downward fee pressure in the traditional market if significant funds were diverted to this lower-cost route.
Technology and risk
Unfortunately, many risks can never be eliminated entirely, and therefore businesses need to be realistic about their appetite for accepting particular risks.
Most organisations are at least looking into artificial intelligence (AI) – the use of "big data" and machine learning – and many expect greater practical uses of it in the future.
The most likely early uses will be in areas such as operations – to yield productivity improvements – but there are many other areas where AI could be applied to complex tasks or huge volumes of data.
Whatever its uses, companies will need to understand the impact on their end-to-end processes and consider whether there are opportunities to further educate their workforce to ensure they get the maximum benefit.
Professional risk functions need to be developed
If an organisation is going to keep up with developments on the digital front, it will need to have people with the skills to do so.
One big advance in the last 10-20 years has been the development and strengthening of highly professional risk functions.
Ten years ago, most sizeable organisations would try to anticipate trends and solve issues on their own. Today it is difficult to anticipate just how technology and AI will develop. Companies often scatter their investments across a wide range of initiatives, including tech incubators, to keep up with the latest innovations and to access talent.
FS businesses (as well as others) need to effectively monitor the potential impact of emerging as well as current risks. They can’t just focus on risks that may be high today and disregard others that may be bubbling under the surface.
One big advance in the last 10-20 years has been the development and strengthening of highly professional risk functions. Having such people keep an independent and sceptical eye on things is a great help to managements and boards.