Sounds like the beginning of a bad joke, right? Perhaps, but now that FINOS has officially launched, we’ve been focusing on bridging the gaps in understanding and perspective that exist between traditional front office executives and the growing ranks of technologists within financial services firms, including in the C suite.
Why is it important that the “suits” and the “geeks” work more closely together? It’s simple. From crypto to GDPR to risk management, the financial services sector is facing an unprecedented host of challenges and opportunities—and tech is producing the lion’s share of both. The future of this industry depends on the fruitful cooperation of these distinct constituents.
The Tech Invasion
Tech can no longer be quarantined in a valley, to a few companies, or even an industry. Indeed, the line between what is and isn’t a tech company has blurred—and everyday moves closer to disappearing entirely. This intermingling between tech and everything else is redefining basic skill sets, setting an increasingly daunting par of technological fluency for everyone in a modern financial institution.
The pace of innovation and the scope of its impact is making it nearly impossible for any financial services firm to stay afloat without being deeply invested in technological progress. Foundational technologies such as the internet, mobile and cloud computing have all entered Wall Street in rapid succession, leaving little room to breathe, let alone actually adapt. Sweeping technological innovations are nothing new, of course, but today, full-scale change has become the status quo.
“The time it takes to go from breakthrough technology to mass-market application is collapsing. For example, in the United States, it took the telephone 76 years to be adopted by half the population. By contrast, the smartphone did it in under ten years. We are now watching blockchain move from a notebook sketch to an established technology in a tiny fraction of the time it took for the Internet to be accepted as a standard tool. Indeed, technology-driven change is so pervasive that no financial institution is immune.”
In finance, a whole set of such innovations such as AI/ML, alternative data, and blockchain are poised to make dramatic changes in how a modern financial services firm should operate. These changes will affect everything from how trades are cleared, customer identity is established and the methods for sharing data between organizations. Many other innovations on the horizon are likely to impact everything from how banking deals are executed to the way due diligence is performed. It’s tough to know which firms which will thrive best in this new tech-driven world order, but we think it’s safe to say that it’s those irms which fully embrace technology as a core attribute first. One data point summarizes the necessity of this approach: in the 1920, the average lifespan of a company on the S&P 500 was 70 years; today, it’s 15.
While the fact that all industries are becoming tech industries is pushing financial services firms to become increasingly tech, it’s also opening the door for tech firms to become more finance. “Having dabbled in financial services for years,” Martin Arnold reports in the Financial Times,
"Big Tech groups are deepening their activity in the sector. Amazon is providing payment services and loans to merchants on its platform, while Facebook recently secured an electronic money license in Ireland. Alibaba and Tencent have become dominant operators in China’s $5.5tn payments industry.”
This encroachment is prompting some banking executives to make ominous forecasts. BBVA’s Francisco González, for example, has cautioned that the tech giants are poised to “replace many banks” (link). While the precise severity of the threat tech companies pose to finance’s incumbents is unclear, there is no doubt that the broadening landscape of competition should have legacy institutions seriously rethinking their business strategies.
But the challenges tech presents aren’t relegated to tech’s usual suspects. The arrival of Bitcoin, and blockchain technology generally, has brought two new elements into the financial system: bankless assets and decentralized institutions. With a current market cap of well over $320 billion, cryptocurrencies are edging ever closer to mainstream adoption. While there is much that can be said of crypto, one fascinating—and perhaps under appreciated—quality of the asset class is its unusual origin: Bitcoin was not born in bank. Instead, this uncategorizable financial instrument was a child of technology, and the gradual acceptance of cryptocurrencies into the financial system should give even finance’s most hardened tech skeptics reason to pause. Indeed, the list of assets and services finance can provide that tech cannot is dwindling rapidly.
Blockchain hasn’t only changed what we thought was possible for financial instruments. It also changed what was thought possible for financial institutions. While it’s still far away, Ethereum and projects like it have pointed the way to a future where processes that were once firmly ensconced in centralized systems—like contracts—can be executed by distributed networks, making it hard not to launch into whimsical visions of a decentralized utopia. While the visions that drive many Initial Coin Offerings (ICOs) may fall prey to that whimsy, there’s little doubt that the forces propelling decentralized financial services aren’t going away anytime soon.
The Time is Right
Fortunately, our current economic strength and the friendly regulatory climate are affording financial institutions with the footing (and cash flow) they need to take on these challenges. The US economy is in its record-setting 107th month of expansion, and some experts don’t expect it to let up until late 2019. Capitol Hill, meanwhile, is coupling this prosperity with regulatory rollbacks.
But our financial tailwinds won’t last forever. Front office executives should seize the day and learn the language of the tech world. Conversely, developers and data scientists have to articulate the business-level impact of an innovation in way that doesn’t require a PhD from MIT. Each side must be fluent in the other’s language and priorities, and it is only through such integration that financial institutions will be able to take full advantage of the current opportunity window.
To that end, it is the mission of FINOS to be a forum for such dialogue, fostering trust, understanding, and innovation. And whether it’s by attending our annual Open Source Strategy Forum or our monthly meetups, we hope that you will consider bringing your voice to our growing community of people who are striving to build a better financial services industry.
And... if you're in New York, please join us for our Open Source in Fintech Event Series: