Book Review: The Technological Revolution in Financial Services
The Technological 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 Technological Revolution in Financial Services: How Banks, Fintechs, and Customers Win Together, edited by Michael R. King, CFA, Lansdowne Chair in Finance at the University of Victoria’s Gustavson School of Business, and Richard W. Nesbitt, adjunct professor and executive in residence at the University of Toronto’s Rotman School of Management, constitutes a valuable resource for practitioners seeking a more thorough understanding of the evolving financial industry.
Change is a constant theme in banking and financial services. This book outlines the strategic implications for financial services firms in North America, Europe, and other advanced economies. The editors contend that traditional banks, asset managers, and insurers (i.e., incumbents) will continue to dominate financial services. However, the most successful incumbents will partner with financial technology companies to provide better and more innovative services to retail customers and small businesses at a lower cost. This technological revolution will benefit customers and lead to a more open and inclusive financial system.
The book provides a roadmap on how the financial industry will evolve in response to three structural forces that are driving the transformation of financial services globally:
- Heightened regulation in the wake of the global financial crisis (GFC).
- Innovation fueled by new technologies, including fintech 3.0 (beginning in 2009), whereby start-ups and new entrants deliver financial products and services directly to retail customers and businesses.
- Demographic changes, including the professional advancement of millennials and the retirement of baby boomers.
In my view, one of the unforeseen consequences of regulatory responses to the GFC was that they facilitated a wave of innovation and technological disruption, from both within and outside the financial industry. National regulations, such as the US Dodd–Frank Act (2010) and the UK Banking Reform Act (2013), made the financial sector safer and more stable than formerly. However, these regulatory reforms also rendered the financial sector less profitable, less liquid, and more fragmented. Competition from shadow banking and other non-regulated players intensified.
An initial source of disruption was industry insiders who left incumbent firms to launch entrepreneurial start-ups that drained the industry profit pools. In addition, according to contributor Tiff Macklem, current dean of the Rotman School of Management at the University of Toronto, the GFC and its aftermath forced business schools and bankers to broaden the scope of financial teaching. This broadening includes a renewed focus on culture and ethics as well as the consideration of “non-financial” risks, such as those from employee conduct, technological disruption, and climate change. Market participants, including boards of directors and regulators, have come to recognize the importance of culture in creating social norms that influence what people do when nobody is watching. As an adjunct associate professor of finance at the NYU Stern School of Business, I feel strongly that universities can also provide more simulation-based experiential learning while moving the curriculum beyond traditional finance topics to risk management.
Macklem describes two mega-forces affecting the economy, 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 requisite business judgment to succeed. A successful example is Rotman’s Creative Destruction Lab, which helps science-based ventures at the seed stage raise capital, scale their businesses, and resolve failures in the market for business judgment.
As a passionate advocate for addressing the risks of climate change, I agree with Macklem on the need for sustainable finance to move beyond its niche in financial markets to the mainstream. This shift is necessary because more extreme weather events linked to climate change are generating more frequent extreme-loss events. The financial sector has a critical role to play in channeling savings to more sustainable investments and helping households and businesses manage new climate-related risks.
The book’s final section outlines what actions senior leaders in the financial sector need to take to succeed in the fintech area. One of those actions is to improve gender diversity. According to Brenda Trenowden, CFA, former global chair of the 30% Club, the business case for gender balance is not just a social issue but also a performance issue. She summarizes a large body of research connecting increased gender diversity with improved financial performance, as measured by accounting metrics and market returns.
Besides listing the financial benefits, Trenowden explains how gender diversity improves talent attraction and retention, innovation, productivity, and customer engagement. She 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 targets.
- Provide gender-neutral job descriptions.
- Change hiring practices.
- Match women with senior sponsors.
- Provide female role models.
As an employee of a firm where 70% of the workforce is either female or minority, I wholeheartedly agree with Trenowden’s sentiment about the importance of gender diversity, as demonstrated by financial performance improvement.
In summary, this book will help guide both incumbents and new entrants in the coming decade as the financial industry strives to put the customer first. The longest-lasting impact of the technological revolution in banking will be the improved customer experience. Successful financial intermediaries of the next decade will focus on the needs of customers, 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, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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