April 29, 2015
How will digital disrupt the financial services industry over the next 10 years?
Over the past couple of days, I’ve been meeting with clients at Forrester’s Forum For Technology Leaders in Orlando. Clients mostly want to know how digital will impact their business. My approach in responding to this question is to think like the CEO of the company in question: First, understand the customer’s desires; then figure out how those desires can best be met profitably — I imagine how future technology changes might create new sources of customer value.
We’ve already seen massive change in the financial services sector: Technology is dramatically changing our customer experience and helping firms educate their customers. What more is yet to come? And what will companies need to do to win customers in the future?
While this is a complex question, it’s not hard to imagine a very different reality to the one that exists today:
Imagine yourself as the owner of an investment portfolio — if you already have investments in a 401(k), pension, or IRA, this will be easy. Whatever the amount in your own portfolio, it’s a fair bet that your desires are similar — something like “I want to maximize the growth in my portfolio while minimizing my downside risk” or, if you are nearer retirement, “I want to maximize the yield from my financial portfolio as a source of retirement income.” We desire to use our money to make money (and ultimately use the money to enable us to do the things that matter most to each of us).
The firm that best helps customers achieve these desires wins the greatest market share. Companies are already exploring complex algorithms to automate investments. Now imagine the first company that suggests to you that you only pay them on the growth in value in your portfolio — if the portfolio doesn’t grow, you don’t pay them (as opposed to the industry norm of making you pay a percentage of the assets in your portfolio, no matter how well it performs).
Now imagine this company can also build a shadow portfolio for you based on your current investments — no real money is invested, just an electronic mirror of what you have today. But you can watch the value of that shadow portfolio change over time as the funds are automatically traded according to algorithms designed personally for you. Each day you can compare the results to those of your own portfolio. Over time, you see just how much faster wealth is accumulating in your shadow portfolio. How long before you decide to switch?
Financial services firms will build “trusted machines” — systems that are more trusted than their human equivalents. And the industry will come to be defined by the firms that demonstrate the best trusted machines combined with the best customer experience — though I expect that as customers, we will put up with some pretty bad experiences if we are making money. Investors will switch from paying for assets under management to pay-for-performance, only rewarding companies that deliver investment growth.
When this happens, investment firms will need to adjust quickly to the new paradigm or go out of business — digital dinosaurs swallowed up by digital predators.
Which leaves me wondering: What happens when the only trading of stocks is done by machines?
Let me know what you think — how likely is this scenario? How far away from it are we today?
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