The incumbent financial services model has traditionally relied upon largely analogue business (i.e. dependent on capital, people and specific locations). But over the past 2-3 years rivals have emerged and formed a new set of potent digital disruptors. These disruptors are using business models that have been built ground-up on big data and AI/machine learning technologies, enabled by cloud/mobile platforms and offering rich, deeply intuitive user experiences on-line. Whether it is the portfolio management process or offering individual financial advice, digital disruption has impacted across every part of the industry. For example, a digital financial services company can now provide investment recommendations while leveraging machine learning to conduct on-going portfolio performance updates sent to customers via a smartphone. The impact of this will be felt increasingly as millennials gives way to even more tech-savvy generations in future for which digital will become the norm.

Big data begets big data

Big data will feed on itself. As the level of transactions and interactions taking place online increases, the need for analysing the vast amounts of data created will become a differentiator as well as a “table stake” for being in business. For asset managers this means that cloud platforms will be an increasingly credible – and in many cases the only economically viable - model for supporting their investment operations, investors, regulators and trading counterparties. For many fund managers “sentiment analysis” is becoming as important to gauge trends as traditional economic forecasting.

Further look into the future, analytics will become pervasive across value chain and machine learning and AI will have a huge impact across the front office. Middle and back offices will begin to “robot-ize” every array of operational processes.

Market micro-structure becomes increasingly frictionless

There will be a secular shift realized by proven technologies that will increase transparency, reduce transaction costs and operational errors, streamline the trade lifecycle, and limit the power of intermediaries by connecting users of capital more directly and cost-efficiently to the providers of capital.

Many banks will attempt to remodel themselves as technology companies, ȧ la Goldman Sachs, in an attempt to conduct “capital lite” activities that are more reliant on a technological or intellectual competitive advantage and less impacted by regulatory capital and size of balance sheet. For example, UBS Prime Brokerage claims to have a return on assets twice as a high as some of its competitors by using technology to reduce its costs to serve hedge fund clients.

Market Infrastructure will become more self-aware. The combination of cloud computing and embedded AI will make intelligence baked into the platform resulting in the trade life-cycle to become increasingly friction-less, machine-driven and hidden from view. "Smart" contracts built into Blockchain-type ledgers interface with intelligent “robo” counterparties that communicate and take decisions with minimal human intervention.

Incumbents jump on/circle bandwagons out of fear of being “uber’d”

Financial Intermediaries are running “innovation labs”, experimenting with Block Chain, buying fintech startups, hiring increasing numbers of software engineers and data scientists etc. By taking such a “portfolio” approach they hope to either re-configure their traditional intermediation/middle-man role to fit the new online paradigm or transform more completely into a tech-driven entity with a finance arm attached. Time will tell whether such an approach will yield a viable long-term strategy or whether incumbent players will be held hostage to their legacy platforms and ways of doing business.

For example, “robo-advisory” is a glib term thrown around that may have serious ramifications for the wealth management industry. It is entirely plausible that a generation tethered to their “smart” phones prefer a “robo” advisor to face-to-face contact with an investment professional. Over time as their net worth grows and their needs become more complex this may morph into a relationship with a carbon-based life form. But the ongoing need to monitor, track/benchmark and potentially ‘advise’ could always fall within the purview of the robot.

Will see emergence of algorithmic trading, quant-driven strategies and more economic activity moving online combined with the above, means that more funds will be chasing fewer, more fleeting opportunities. The scope for alpha extraction from data using technology will be competed away over time as more and more funds chase similar opportunity sets.

The micro-economics of established businesses shift as a consequence of the digital disruption caused by FinTech innovators. But regulation will be the main speed bump since many newly emerging players have yet to fall under the purview of the major regulatory bodies.

As a consequence of FinTech’s impact we will see the emergence of commercially viable digital businesses that have a sustainable economic advantage. They will not need to extract economic rents due to their privileged position as market intermediaries, providers of capital or holders of an asymmetric informational advantage. In the financial markets, models reliant on financial intermediation, access to capital and a bricks-and-mortar branch network  will all need to embrace (in some cases reluctantly) a host of new technologies such as P2P, Block Chain and Big Data. In many cases there will be potential margin erosion. The hope for incumbents will be to either improve profitability by reducing servicing costs or to realize economies of scale by increasing transaction volumes on their platforms (i.e. becoming utility players). Both have the scope for translating into higher returns on capital. But the competitive pressures from interlopers will be huge and even the threat of disruption can be enough to provoke a change in business models and traditional levels of profitability.