Which financial industry is primed to be revolutionized next?
The digital revolution has shaken up every single industry it’s touched, and over the last few years, it’s beginning to do the same to the most influential industry of all: finance.
Q4 2019 hedge fund letters, conferences and more
But where in some industries, the response to advances in technology has been enthusiastic, the response from finance has been uncertain. While new technology excites some, traditional power structures and ways of doing business are keen to entrench themselves.
The finance industry is enormous. It covers your banks, credit card companies, accountancy companies, insurance companies, stockbrokers, credit unions, investment funds and many more elements of your life. All of these industries have a huge reach and deep ties not just to other industries, but to governments themselves. Just look at the bailouts of the 2008 recession. It’s said that banking is too big to fail, but the same could be said of the entire finance industry. Almost every other industry’s success is tied to the finance industry thriving.
But technology is about to start shaking things up, and (definitely) ruffling some feathers. FinTech companies have been sprouting up in all corners of the finance industry, threatening to revolutionize the way we interact with finance. Simultaneously, new forms of digital currency have emerged which threaten to change our entire system of finance from the coin up.
In short, technologies’ potential influence on finance is perhaps greater than it is in any other. But of all of the industries within the wider finance umbrella, which is looking to be shaken up the most?
The Future of Trade Finance
A once quiet segment of the financial industry, trade finance was traditionally the arena of pens, paper, fax machines, phone calls, emails, and handshakes. Some of the processes for trade finance have actually remained unchanged for decades. But Fintech is looking to change all of this.
Fintech startups and established banks are heavily investing in cutting-edge tools that will help to bring trade into the modern age. Despite being a trillion-dollar industry, trade finance is almost exclusively limited to phone and email. This may have sounded restricting to some, but to others, it was an opportunity.
One example of this would be Volton, a blockchain platform designed and tested by a group of eight banks. Developed to handle credit transaction letters, Voltron managed to decrease transaction time from almost 2 weeks to only 24 hours. What normally would have been a laborious exchange of paper and calls now happened with a few clicks of a button.
Another example would be platforms such as Trade IX, which offer rapid invoicing solutions, many of which are as simple as uploading documents like purchase orders to an intuitive central platform.
But while trade is beginning to be shaken up, and will continue to do so, it isn’t without its drawbacks. Trade finance naturally requires countless transactions to take place, but performing a transaction through blockchain platforms requires that all the relevant parties are comfortable with the platform, understand it, have access to it and agree to it. For old school traders, this may be an area where they dig their heels in and resist, and for smaller companies, the upfront cost of training around this new way of operating may be too high. Likewise, as there are many competing platforms, there is no indication that trading entities will be using the same one. An irritation that may lead them to return to traditional methods.
The result is that trade finance -because of it’s simple, unaltered for hundreds of years approach to trading- is ripe for a FinTech revolution, and will continue to find itself in the sights of ambitious entrepreneurs. However, that same reluctance to change in the past will still be an obstacle for the technology to overcome. While many new technologies, such as Voltron or komgo, will offer enormous improvements in speed over existing systems of trade, the speed at which they’re adopted might be much slower.
The Normalization of Cryptocurrency
It would be impossible to talk about revolutions within the finance industry without at least touching on cryptocurrency. The fact is, cryptocurrency is no longer your Grandad’s boogeyman. Once decried as a strange, untrustworthy, internet fad that would die just as quickly as it arrived - Cryptocurrency aka "digital gold" has made it clear that it’s here to stay, and that in many cases, it’s a system of trade makes sense.
An industry that seemingly threatens to revolutionize finance itself, a big player in the form of Facebook’s Libra poses to give cryptocurrency its big push into the global market. If Facebook is successful in its effort to make its cryptocurrency mainstream, then the effect on finance will be nothing short of enormous.
For instance, through their central banks, governments wield important power as they manage and issue currency. But, through their 3 billion users, Facebook can turn Libra into an enormous currency overnight. This would send massive ripples throughout the world economy, affecting global banks' ability to manage liquidity, to say nothing of displacing entire currencies in the third world.
The message would be clear: corporations now wield more power than ever before.
In fact, the mere announcement of Libra has caused a minor revolution already. Due to the inherent threat of Libra to their entire way of being, the Federal Reserve, the European Central Bank, and the Bank of China have all begun researching digital currencies with an eye to potentially creating their own.
That said, before Libra gets anywhere, it will have to be content with the stiff legal response it’s already begun to face. Until governments can figure out a way to counter the potential threat to their own power, it’s likely the currency will be tied down by regulations that may threaten to stifle its revolutionary potential.
Conclusion
Fintech promises to make the next decade a turning-point for the finance industry. Through currency revolutions and enhancements to trade, the way in which we interact with finance may be changed forever. The question is who will be quick to adopt these new technologies, and who will try to slow their adoption down? For now, we’ll just have to wait and see.
