Three useful things to know about the future of the finance industry
Rapid advances in technology are creating new business opportunities in the finance industry, while shifts in consumer behaviour have led to an increase in ESG investments
The finance industry has faced a significant amount of market, regulatory and technological challenges in recent times. COVID-19 has buffeted the sector over the past couple of years, with banks and other organisations struggling to stay on top of unprecedented challenges. Rapid advances in digital technology and currencies are also disrupting the industry while creating new business opportunities and markets. This has been coupled with a shift towards more responsible business practices, as organisations are expected to strengthen governance and accountability across the finance sector.
A recent IBISWorld Finance in Australia industry outlook (2021-2026) report, for example, found declining interest rates have significantly contributed to falling revenue, profitability has declined due to higher capital requirements and remediation costs, and financial services organisations are projected to face more reforms and higher regulatory costs. The report noted major players have responded by streamlining their operations and refocusing on core banking businesses. And overall revenue and profitability across the sector is forecast to increase over the long term, with less pressure on net interest margins.
In the Business of Finance – the fifth episode in The Business of Leadership Podcast Season 2, hosted by UNSW Business School – Professor Nick Wailes, Deputy Dean and Director AGSM, recently interviewed Camilla Love, Managing Director at Exchange Traded Fund (ETF) firm eInvest, together with Associate Professor Elvira Sojli, School of Banking and Finance at UNSW Business School. They discussed how rapid advances in technology are creating new business opportunities while shifts in consumer behaviour are leading to an increase in ethical investments.
ESG investment trends
“ESG (environmental, social and governance) and sustainability is a big, big thing in the industry at the moment. And I dare say, it will change the industry going forward,” said Ms Love, an AGSM MBA Executive (2011) alumna who founded eInvest in 2017 after 17 years in the finance and investment industry.
ESG investing, otherwise known as ethical investing, sustainable investing or impact investing, represents a growing movement from investors who care about more than just profits. Ms Love said it is an important focus for both her firm and clients: “the footprint of ESG and sustainability is already firmly on the industry,” she said.
To illustrate, Ms Love noted moves by Bank of America to deploy US$1 trillion by 2030 as part of its environmental business initiative in order to accelerate the transition to a low-carbon, sustainable economy. This commitment will anchor a broader $1.5 trillion sustainable finance goal by both environmental transition and social inclusive development purposes across the globe.
From an eInvest perspective, Ms Love gave the example of ETFs in the small and mid-cap market focusing on sustainable companies. “They’re really interesting technologies in interesting segments. There’s lots of disruption going on and we can see it in healthcare. In education, there’s lots of EduTech in there, and it’s all about creating a better future. But what I would say is that, for those people who are out there and looking at sustainable funds, you really do need to look under the hood because they need to match what you expect sustainable and or ethical to look like.”
Changing with the technology times
The finance industry has had to adapt to change in a number of ways. While some changes have been forced on the sector, others have been shifts which the industry has taken a more proactive response to. An example of this can be found in the way products are brought to market. “Financial services are a bit old school in the way they bring product to market,” Ms Love observed.
“At eInvest we started the business as digital natives and having a digital presence, really having a retail brand that has a consumer focus in which we have a conversation ‘with’ people, rather than ‘at’ people. I think financial services does that a lot. We really make the brand much more accessible because you have to have that,” said Ms Love, who explained ETFs essentially democratise the process of investing. As such, she said brands need to adjust and fit the communication style of clients in order to successfully sell ETFs and secure customer buy-in.
The industry is also undergoing significant change on a technological front, with many of the larger organisations struggling to keep up. “There is a lot of legacy technology within the industry that needs a good shakeup, whether that’s people or organisations buying the next technology. What we’re seeing all the time within the banks, for example, is that they buy and bolt onto new technology, or they start from scratch,” said Ms Love.
“It’s very hard to move the Titanic essentially to get that technology embedded. It will take a lot of change, but it’s really good to see that there are some pioneers in the industry that are going, ‘Hey, hang on. Why does it have to be like this? Just because we did this yesterday, doesn’t mean we have to do it today. And how can we put the customer at the centre of our journey?’”
How blockchain is adding value
While cryptocurrencies such as Bitcoin have upset the finance industry apple cart in a number of ways, the digital technology on which it is based – blockchain – has facilitated a number of efficiencies and other benefits. For example, UNSW Business School’s A/Prof. Sojli said there is a collective effort underway in many places around the world to digitise shareholder registers (a list of the owners of a company’s shares) through blockchain.
Registers are updated on an ongoing basis, but A/Prof. Sojli said it’s generally very hard to do because there are so many transactions in financial markets on a daily basis. “For those who are more acquainted with financial markets, when a company issues a dividend or a company notifies shareholders about company actions, what they do is they say, ‘We will only inform shareholders, as of date T minus 30, in general, are in the shareholder register.’ And that’s because they don’t have up-to-date mechanisms to make sure that their shareholder register is updated on a regular basis.”
If such registers are digitised, this makes it possible to see much more clearly who holds which shares of each company on a regular basis. This also provides for greater transparency in who owns shares in particular companies.
Another disruptive trend that is going to add value is associated with the digitisation of real estate transactions and assets. “You can chop up a house the way that we kind of chop up firms by shares. That will allow the younger generation to participate in the real estate market without the need for them to put up the money for a whole house or for a whole flat, right?” said A/Prof. Sojli.
“Even if they have set aside $5000, they then can become market participants in the housing market and take advantage of increases in price, or sometimes leverage up to be able to eventually own their own home. I think these are very exciting types of uses of the technology that has been made possible through the pioneering work of people that introduced Bitcoin and the distributed ledger technology behind it.”