The economy over the next ten years will change under the influence of technological, demographic and environmental factors. The financial system has to change along with the economy. The new economy, to the needs of which the financial system must adapt, is being formed as a result of technological, demographic and environmental shifts. Here are 12 global trends that change the economy and could determine the future of finance.
Digitalization: An increase in the share of non-cash payments is changing the behaviour of consumers who are less likely to withdraw money from ATMs and are increasingly paying for goods and services using smartphones and cards. In 2018, according to UK Finance, 5.4 million people (that is, almost one in ten Britons) have never used cash, preferring non-cash payment methods; in Sweden, cash use has declined by 80% since 2008.
Platform Economy: Online platforms provide ongoing and growing relationships between suppliers and consumers, offering both of them comprehensive and cost-effective solutions. The largest financial services company today is the Chinese Ant Financial (includes Alipay service) with more than 1 billion users and without a single branch, just 10 years ago it was Citigroup with 200 million customers. Half of the world’s financial transactions today occur outside the banking system.
Sharing and Gig Economy: (shared economy and freelance economy) are changing the nature of employment: for example, in the USA 90% of jobs that have appeared over the past ten years are created in the gig economy; in the UK, by 2025, one out of every three workers will be self-employed – against one out of every five today.
Big Data: Only in 2017, more information was created in the world than in the previous 5000 years. More than 4 billion people using the Internet and over 40 billion digital devices leave a lot of digital fingerprints, generating 2.5 quintillion bytes of data daily.
Artificial Intelligence: AI has more and more functions, and the financial sector is no exception. The use of machine learning can reduce the cost of banking services, ensure their reliability and efficiency. According to the Boston Consulting Group, which examined China’s financial market as a case study, artificial intelligence will lead to a 38% increase in financial system productivity over a ten-year period, equivalent to a 27% reduction in working hours. Moreover, AI is largely deployed in digital fraud prevention including digital identity verification and KYC verification.
Integration of Emerging Markets: Over the past 25 years, the share of developing countries in the world economy has grown from 16.5% to 40%, and in global trade – from one fifth to one third. Meanwhile, many of these markets, such as China and India, remain fairly closed to foreign investment.
Transition to a Green (low-carbon) Economy: This transition creates both risks and opportunities for the economy and the financial sector. Investors, lenders and insurers do not yet have a clear idea of which companies and how they will adapt, lose or prosper in a changing environment, rules, technology and customer behaviour. Without this information, financial companies cannot evaluate climate-related risks and opportunities. Transitioning to a low-carbon economy will require significant investments – according to some estimates, the world will need more than $ 90 trillion in the next ten years to build the necessary infrastructure.
Demographic Changes: By 2030, approximately one in five people in the UK will be over 65, and by 2050, every fourth. People live longer – as a result, morbidity and disability increase – and give birth to fewer children, which creates pressure on the financing of pensions due to the reduction in the share of able-bodied people. At the same time, a third of adults do not have pension savings, and employment growth in the gig economy is associated with the absence of some social programs (for example, the same pension plans).
Spread of New Business Models in the Financial Market: In addition to banks, not only large technology companies but also small startups enter the payment market. The activity of the non-banking financial sector is growing: according to the Financial Stability Board, about half of all global financial assets now fall to players operating outside the banking system. On the one hand, this increases the level of competition, and on the other, it can create stability risks for all world finances.
Threat of Cyber Attacks has become constant for the financial system: according to the Boston Consulting Group, in 2017, cyber crimes cost the world $ 600 billion. However, the volume of insurance premiums – $ 3.7 billion – covered less than 1% of the damage.
New Regulation: Post-crisis regulatory reforms led to the Basel Committee on Banking Supervision for 2009–2017. Published twice as many regulatory standards as in the previous 20 years.
Improving Technological Efficiency: Using new technologies and ensuring data availability can make financial companies more dynamic, helping to create new services and products that meet customer requirements. Thus, the use of machine learning can increase the efficiency of companies by 20%.
Investing in these sectors will help boost financial services, which in turn could make financial inclusion possible on a large scale. Moreover, investments in digital transformation and technological advancements can give a boost to financial institutions.
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