The Tech Revolution in Financial Services: How Banks, Fintechs and Customers Win Together. 2020. Edited by Michael R. King, CFA, and Richard W. Nesbitt. University of Toronto Press.
The Tech Revolution in Financial Services: How Banks, Fintechs and Customers Win Togetheredited by Michael R. King, CFALansdowne Chair in Finance at the University of Victoria’s Gustavson School of Business, and Richard W. NesbittAdjunct Professor and Executive-in-Residence at the University of Toronto’s Rotman School of Management, is a valuable resource for practitioners seeking to better understand the evolution of the financial industry.
Change is a constant theme in banking and financial services. This book describes the strategic implications for financial services companies in North America, Europe and other advanced economies. The editors argue that traditional banks, asset managers and insurers (i.e. incumbents) will continue to dominate financial services. However, the most successful incumbents will partner with fintech companies to provide better and more innovative services to retail customers and small businesses at lower cost. This technological revolution will benefit customers and lead to a more open and inclusive financial system.
The book provides a roadmap for how the financial industry will evolve in response to three structural forces driving the transformation of financial services globally:
- Enhanced regulation following the global financial crisis (GFC).
- Innovation fueled by new technologies, including fintech 3.0 (from 2009), whereby start-ups and new entrants deliver financial products and services directly to retail and corporate customers.
- Demographic shifts, including the career advancement of millennials and the retirement of baby boomers.
In my view, one of the unintended consequences of regulatory responses to GFC has been that they have facilitated a wave of innovation and technological disruption, both inside and outside the financial sector. National regulations, such as the US Dodd-Frank Act (2010) and the UK Banking Reform Act (2013), have made the financial sector safer and more stable than before. However, these regulatory reforms have also made the financial sector less profitable, less liquid and more fragmented. Competition from shadow banking and other unregulated players has intensified.
An early source of disruption was industry insiders leaving incumbents to launch entrepreneurial start-ups that drained industry profit pools. Moreover, according to contributor Tiff Macklem, current dean of the Rotman School of Management at the University of Toronto, the GFC and its consequences have forced business schools and bankers to broaden the scope of financial education. This expansion includes a renewed emphasis on culture and ethics as well as consideration of “non-financial” risks, such as those related to employee behavior, technological disruption and climate change. Market players, including boards of directors and regulators, have come to recognize the importance of culture in creating social norms that influence what people do when no one is watching. As an adjunct associate professor of finance at the NYU Stern School of Business, I believe universities can also provide more simulation-based experiential learning while shifting the curriculum beyond traditional finance topics toward managing risks.
Macklem describes two mega-forces affecting economics, finance, and society, namely technological disruption and climate change. New technologies, including artificial intelligence and blockchain, are creating new opportunities, but there should also be ways to commercialize innovations and equip start-ups with the business judgment needed to succeed. A successful example is Rotman’s Creative Destruction Lab, which helps science-based seed-stage companies raise capital, scale their businesses, and resolve market failures for business judgment.
As a passionate advocate for tackling the risks of climate change, I agree with Macklem on the need for sustainable finance to move beyond its niche in financial markets to mainstream. This change is necessary because more extreme weather events related to climate change generate more frequent extreme loss events. The financial sector has a key role to play in channeling savings into more sustainable investments and helping households and businesses manage new climate-related risks.
The final section of the book outlines the steps that senior finance executives must take to succeed in fintech. One of these actions is to improve gender diversity. According to Brenda Trenowden, CFA, former global president of the Club 30%, the business case for gender balance is not only a social issue but also a performance issue. It summarizes a large body of research linking increased gender diversity to improved financial performance, as measured by accounting metrics and market returns.
In addition to listing the financial benefits, Trenowden explains how gender diversity improves talent attraction and retention, innovation, productivity and customer engagement. It then outlines six concrete actions senior leaders can take to increase gender diversity in their organizations:
- Recognize and address hidden biases.
- Diagnose the problem and set measurable goals.
- Provide gender-neutral job descriptions.
- Change hiring practices.
- Match women with senior sponsors.
- Provide female role models.
As an employee of a company where 70% of the workforce is female or minority, I completely agree with Trenowden’s sentiment on the importance of gender diversity, as evidenced by the improvement in financial performance.
In summary, this book will help guide both incumbents and new entrants through the next decade as the financial industry strives to put the customer first. The most lasting impact of the technological revolution in banking will be the improvement of the customer experience. The successful financial intermediaries of the next decade will focus on customer needs, recognizing that this industry exists to serve them first.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.
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