TOPICS MONEY OVER IP ROUND TABLE INTERVIEW
In September 2015, a small group of senior CFA Charterholders met for the first time in Frankfurt to discuss the future of finance. The group plans to meet quarterly to discuss trends, share ideas and consider what best practice in the financial markets should look like in the coming years.
1. WHAT IS THE GOAL OF THIS GROUP?
Thomas Mayer: The financial sector is going through a major transformation. In the wake of the financial crisis basic elements of financial theory have come under question and government regulation is exerting an ever larger influence on the way to do business. Passive investment strategies through index and exchange traded funds are changing the asset management industry. The low interest rate environment is posing an additional challenge. Last but not least, technical progress is threatening established business models in all segments of the financial sector. In this group we want to discuss how the industry will change and what the consequences for those working in it will be.
Susan Spinner: CFA Society Germany has a broad membership base of sophisticated investment professionals, who are active in most areas of the financial markets. In addition, most CFA Charterholders are best-practice driven and highly qualified. This means that they tend to view change as a potential opportunity rather than a source of fear. In this spirit, this group is well- positioned to look more in-depth into specific market developments, consider possible outcomes and suggest ways to adapt positively in a changing environment.
2. WHAT TOPICS OR NEW TECHNOLOGIES HAS THE GROUP CONSIDERED THUS FAR IN ITS SESSIONS?
Boris Bernstein: The initial topic for the group was the Bitcoin, as well as the technology behind the Bitcoin, the blockchain. While our starting point was to which extent a virtual currency can substitute traditional fiat currencies, we quickly realized that the blockchain has many more applications. We think some of these can materially impact the business models of financial services companies.
In further sessions we have explored the use of technology in asset allocation, specifically “robo-advising”, as well as fintech software applications, many of which focus on improving the customer’s experience when dealing with traditional banking institutions.
3. HOW AWARE IS THE TRADITIONAL BANKING AND ASSET MANAGEMENT INDUSTRY OF THE NEW TECHNOLOGIES THAT COULD IMPACT BUSINESS MODELS PERMANENTLY?
Bernd Meyer: In my view it would be wrong to say that the traditional banking and asset management industry is unaware of the threats and opportunities of the new technologies. Many banks, brokers and dealers have launched digital currency and blockchain technology initiatives. Some are trying to use those technologies to raise efficiency by replacing legacy systems. Others are engaged by providing private equity to companies working on or working with such technologies for financial services/products. Also banks’ experience with the internet so far has clearly made them aware that such new technologies do not only offer opportunities such as profitable internet banking but also threats such as competition in financial services/products from non-banks. Examples are microfinancing or the decline of margins/spreads due to the rise of electronic trading platforms. Moreover, the public discussion of Bitcoin has certainly raised the awareness regarding the underlying blockchain technology. I fear however, that the general belief is that such developments are coming more an evolution than a revolution. This means that the tradition financial industry might underestimate the pace of the development.
Andreas Sauer: I sincerely believe that the awareness for the upcoming changes is very high. Further, I’m sure there is no lack in understanding the challenges fintec will provide to the traditional banking and asset management industry. The big question is, how to cope with these challenges. My impression is, that the industry tries to find a long term strategy, but most actions currently are done to “get experience“ and „understand new business models“. The resistance to change is high.
4. WHICH OF THESE DO YOU THINK WILL IMPACT THE FINANCIAL INDUSTRY OVER THE NEXT 5-10 YEARS?
Christoph Klein: I believe that especially in retail and private banking “robo advising” will gain importance. I expect investors to use web based platforms to find out their individual appropriate risk budgets and suitable asset classes.
Smart computer programs will help to find asset allocation solutions and instruments (ETFs etc).
I expect that bank (wealth management) advisors will recommend fewer single shares to private clients going forward. There is a chance that these platforms might be linked between financial institutions to reduce OTC trading.
Andreas Sauer: It is very difficult to forecast which of the many “start-up ideas" will get commercially successful and will have long lasting impact. If at all, two trends look obvious for me. First the way we transfer money today in a global world seems antiquated and the traditional banking industry will have to react quickly. Second, local presence in banking will get less important. The next generation - our kids - will not visit a banking branch for financial matters. And it will be less important, where “my bank“ is located. Personally I’m very curious to see how the competition between the traditional banking industry and the four internet giants will evolve in these two areas over the next 5-10 years.
5. HOW DOES THE TECHNOLOGY BEHIND THE BITCOIN – THE BLOCKCHAIN – WORK?
Markus Krall: The technology behind Bitcoin is the blockchain. It is distinguished from traditional data based transaction services by several features:
- Decentralized ledger of transactions
- Using hash encryption and public/private key encryption to enable transactions
The detailed algorithmic workings are outlined in presentations we discussed.
6. WHAT HAVE NEW STARTUPS BEEN DOING AROUND BITCOIN OR BLOCKCHAIN?
Carsten Maybach: Smaller startups that have only been around for a short period of time focus not only on blockchain for purely financial transactions. There are plenty of use cases for this technology: Digitization of contracts and proof of ownership can be realized with blockchain technology, as well as the sale and purchase of digital assets. The latter is particularly interesting for the worn out music industry, which might be able to redefine its sales strategy using blockchain technology.
7. IS THE TECHNOLOGY A THREAT OR OPPORTUNITY FOR INCUMBENTS?
Bernd Meyer: It is certainly both. It is a threat to incumbents not willing to adjust and react. If the new technologies indeed allow more efficient financial transactions and thus lower cost products and services, and the incumbents do not use them, than new competitors will likely do so. However, if the incumbents react and are able to offer the same products and services as potential new competitors at comparable prices, then the incumbents should be able to clearly win. After all, the incumbents do have their client franchise, their brand name and their customers’ trust – which are not easy to build for new competitors. The problem of each potential new competitor is the missing client base. Moreover, if the new technologies do indeed offer significant efficiency gains, than they should even provide opportunities for the incumbents.
Thomas Mayer: Technical progress in the financial industry is a threat to the incumbents and an opportunity for the newcomers. Payment, exchange, and trading systems will undergo fundamental change as a result of the blockchain technology. This creates major challenges for banks and security exchanges. "Robo advising" will threaten traditional financial advice in the retail market. Newcomers are free of technological legacies and can immediately move to the most advanced technology. Incumbents will struggle to adopt their existing systems and business models to the new technological environment.
Markus Krall: The technology is both – threat and opportunity. For incumbents the technology poses a huge opportunity to reduce cost, take out process steps, remove intermediaries serving as transactional trustees and accelerate transactions in a range of products from payments to trade finance, from securities trading to settlement, clearing and custody.
The threat comes from not utilizing a technology which creates competitive advantage for its users and from the sunk cost in IT and other infrastructure investments which now need to be written off. It also has the potential to enable innovative new entrants into transactional services at a low initial investment cost.
8. WHAT HAVE WE SEEN OUT OF PROACTIVE INCUMBENTS?
Carsten Maybach: Many major banks have invested in a startup that focusses on the development of blockchain trans-action technology. Also, the focus has shifted from cryptocurrencies as an alternative payment method towards leveraging the underlying technology, which is the blockchain itself.
Furthermore, a degree of industry consolidation can be observed, with major player Digital Asset Holding acquiring three blockchain startups in 2015. This may be a sign for an increasing level of sector maturity. Experts say that it will take some more years until blockchain technology will be ready to use in the financial services industry on a broad scope. The more established blockchain firms are currently heavily invested in R&D, and have produced fairly small outputs so far. So it remains exiting to see what comes out of this process this year.
Boris Bernstein: Certainly many traditional financial services institutions are highly aware of the potential impact of the new technologies. Large banks typically spend 3%-4% of revenue on technology. Some have been more proactive than others: Goldman Sachs spends over 7% of its revenues and has invested in dozens of startups.
Specifically regarding virtual currencies, a consortium of nine investment banks including Goldman Sachs, JP Morgan and Credit Suisse are backing R3, a startup developing Blockchain-based standards to be used for exchange, trading and settlement. A number of fund management companies have invested in robo-investing firms, including Aberdeen buying Parmenion Capital Partners and BlackRock buying FutureAdvisor.
Finally, a number of banks some banks have been funding startups to gain access to new technologies and dynamic teams. We are aware of what Commerzbank (Main Incubator and CommerzVentures), Bank Santander (InnoVentures) and Deutsche Bank (Innovation Labs) are doing. As an example, a number of banks have invested in gini, a Munich-based startup that reads paper and digital documents to help bank customer more easily carry out actions such as paying bills.