London Summit—The Future of Finance

October 15, 2015

Keeping Up with the Digital Revolution

Anyone contemplating the future of finance should consider the changes underway in the world’s developing economies.

In the towns and villages of Africa and Asia, smartphones have given millions of low-income people access to formal financial services for the first time. In China, online commerce and social media companies, such as Alibaba and Tencent, offer credit-scoring, a service once the domain of specialist firms.

The trends, which bypass traditional infrastructure and practices that require brick-and-mortar venues and face-to-face transactions, offer a view of how technology is changing the financial world. This is according to Seth Merrin, founder and CEO of the institutional trading network Liquidnet Holdings, Inc., during a panel titled, “The Future of Finance: Strategies for a Fast-Changing Industry.” In certain respects, emerging and frontier nations are faster adopters of new financial technologies precisely because they lack the institutional framework that controls finance in advanced countries, he said.

“The lack of regulation and the lack of infrastructure can enable technology to move much faster,” Merrin said. “In Africa, the biggest money mover is the telecom companies, not banks. We have so much regulation in the western world it’s almost a hindrance. I’m worried about taking away regulation. I’m worried about too much regulation.”

Big finance in the developed world is changing, too, if at a somewhat slower pace, Merrin and other panelists noted. Equity trading for years has been conducted primarily through digital portals, and bond trading and venture capital are in the process of a similar transformations, Merrin said. In 2010 about $70 million was distributed through online lending platforms. In 2014 the figure rose to $900 million. Online lenders handled about $350 million in transactions in the first quarter of 2015, he said. The numbers suggest that, in a time when banks are required to hold larger amounts of money in reserve, new non-bank, Web-based lending is better positioned to move capital from investors to builders, said Dominic Lester, managing director and European joint head of investment banking at Jefferies LLC.

“There is so much liquidity out there, and right now it needs to be invested,” Lester said. “You can bring that capital to where is needed more efficiently. That’s what technology does, and established institutions don’t do that. They are hoarding capital, and regulators are forcing them to hoard more capital.”

Ultimately, the digital revolution will produce more profound changes than those wrought by the Industrial Revolution of the 18th and 19th centuries, said Nobel Gulati, CEO of asset manager Two Sigma Advisers, LLC. Innovation in finance and other industries are being spurred by the fact that through the use of relatively inexpensive tools—like computers and smart phones—billions of people are no longer passive consumers of information. They have the power to create new products and services and market them around the world.

“This is transforming every industry that is in front of us,” he said. “There is no reason why finance should be an exception to that. Arguably, finance is all about information so that should be the most deeply impacted by this revolution.”

That reality put tremendous pressure on regulators, who in the past have struggled to keep up with changes in the marketplace, said William White, chairman of the Economic Development and Review Committee at the Organization for Economic Cooperation and Development. Offering an example, he lamented the lack of awareness that existed prior to the banking crisis of 2008, when he was chief economist at the Bank for International Settlements. Phrases like “shadow banking” were rarely heard in the upper echelons of banking, White said. Little has changed, he said.

“Will the regulators keep up? My experience is, absolutely not,” White said. “We need a world where there is less regulation and more self-regulation, through market discipline and personal capital.”

Changing focus, White said the future of finance involves more than technology. The global economy hasn’t really recovered from the effects of the 2008 crisis, he said. Debt levels are now 20 percentage points higher, as a percentage of GDP, than they were in 2007. Much of the money has gone to borrowers in emerging markets, where slower growth will make repayment difficult for some, he said.

“I think there is going to be a lot of debt relief and debt restructuring coming down the road,” he said. “As we look forward to the future of finance, technology is very important, but there are some other issues out there, too.”