Exchange Group: EU Blockchain Rules Shouldn’t Disrupt Financial Order
A major #exchange industry trade #group has joined an EU-level debate on #blockchain regulation.
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Financial Services Productivity
It’s a funny thing, #productivity. Very easy to define – producing more with less &8211; but more difficult to measure. Productivity is easier to define for a given company (revenue per employee for example), somewhat easier to compare amongst like minded companies in the same industry, more difficult to use as a metric across industries, complex when applied to #services as opposed to manufacturing industries and utterly bewildering when taking into account qualitative factors.
Productivity occurs when firms “innovate”. I use quotation marks because there are so many different ways to segment and qualify innovation. At meta level, innovation is the application of better technologies to an economic process &8211; a #technology being a technique or collection of techniques invented by man.
The narrative unfolds as such: a) we invent new technologies, then b) we innovate by applying these new technologies, and as a result c) we become more productive.
Over long periods of time this cycle benefits societies as goods and services in a given industry become better and cheaper. As an example and as a result of productivity gains, there are now less individuals engaged in food production and the cost of food in our daily budgets has plummeted. In other words agriculture has become vastly more productive.
Contrary to what many may think, the #financial services industry has always been a heavy user of technology. To name but a few, advanced telecommunications applied to financial services have facilitated cross border transactions, advanced computing has helped the securitization industry, advanced data science has helped intricate trade and investment strategies. I would therefore state that financial services firms, on the aggregate, have always been innovators.
Have they become more productive though? In absolute, or relatively speaking?
Looking at revenue per employee and operating income (OI) per employee as crude productivity metrics for 2015, Bank of America delivers $ 392k in revenue and $ 104k in OI per employee vs Facebook which clocks $ 1.24m in revenue and $ 435k in OI per employee. On the face of it, Facebook is vastly more productive than Bank of America. The comparison gets more interesting when adding Goldman Sachs with $ 1m in revenue and $ 240k in OI per employee and Visa with $ 1.23m in revenue and $ 796k in OI per employees. Obviously some financial services firms are more productive than others and rival tech giants such as Facebook. These comparisons are unfair though as the business models are vastly different. Still, firms like Visa &8211; other likes MasterCard or the CME Group come to mind &8211; are more technology-intensive companies while any bank &8211; with the exception of Goldman &8211; are less technology-intensive.
From an empirical point of view, we know a majority of consumers and entreprises are dissatisfied with their financial institutions. Quality of service as well as user experience are poor, services are slow and inefficient, products and services are costly. Even if it is difficult to gauge the qualitative and quantitative impact Wikipedia has had on our productivity, it is undeniable there has been a positive impact. Even though it is difficult to gauge the qualitative impact of the financial services industry on financial wealth and health in the aggregate, it is undeniable the impact has been in certain instances negative.
From a macro-industry point of view, Thomas Philippon, a professor of finance with NYU Stern School, recently wrote that, as per his analysis and research, the unit cost of financial intermediation had remained constant at 2% from 1886 til 2015, see here. This means that any intermediated asset has cost users 2 cents for every dollar AND has remained constant for well over a century! This is actually the greatest indictment of the financial services industry one could every come up with. Arguably, during this period the costs of many products and services in other industries have dropped while quality increased. Not so for financial services.
To be clear, financial services firms have been innovators and they have become more productive as evidenced by the massive profits the industry has experienced. Shareholders and employees have benefited. (Even after the 2008 financial crisis, financial services profits have reached record highs. The banking industry alone hit a record of $ 1 trillion in profits worldwide in 2014.) The costs of financial products and services has not decreased for the end users. Further, as profits were more than adequate, the costs of delivering products and services did not decrease either.
Innovation and productivity did occur, only for the industry itself though.
When taking into account the massive scale of the financial services industry &8211; between 15% and 17% of total GDP depending the economic cycle and the exuberance of financial markets &8211; this has to result in major challenges for any economy. The primary function of financial services is to optimally allocate capital. In other words the industry needs to help us spend money, send money, receive money, invest money, save money, insure, in the best possible way. If the process whereby all these activities is essentially &8220;rigged&8221;, economic activity suffers. There are obviously high level considerations &8211; fiscal, monetary and political &8211; when analyzing the efficiency of financial services, especially from a macro point of view. I only focus on technology, innovation and the resulting business models that can emerge once &8220;real&8221; productivity takes hold, as opposed to &8220;rent-seeking&8221; productivity.
One can argue that Venture Capital is one of the enablers of sea-changing innovation with the systemic application of new technologies. Indeed, the first wave of #fintech, emanating from the Silicon Valley and focused on backing direct to consumer models bent on competing against financial services incumbents was based on the oft successful VC/Entrepreneur strategy applied to other industries. That this first wave was not as successful as it was originally thought does not mean &8220;end-user centric&8221; productivity will not finally permeate financial services. On the contrary, it was a necessary first wave that shook the industry into action.
Whether incumbent will successfully reinvent themselves, startups will win meaningful market share or partnerships between incumbents and startups is the way of the future is opened for debate. What is not open for debate, is the unavoidable imperative towards finally lowering the marginal cost of delivering financial products or services and eventually lowering the cost of products or services (within reason as one cannot lower the cost of borrowing for example).
All the narratives unfolding under our very eyes &8211; digitization, platform as a service, chatbots, roboadvisory, alternative lending, APIs, cognitive banking or insurance, #blockchain, faster payments… &8211; are emanations of this unavoidable imperative.
I recently checked US financial services payroll on the Bureau of Labor and Statistics&8217; website. Interestingly enough the US financial services industry employed approximately 8.5m people prior to the 2008 crisis. Employment stands now at around 7.9m and is expected to grow to 8.4m by 2020. I am puzzled by this forecast as I expect financial services industry payrolls to continue to decrease in developed countries (US and Europe included) as more inefficiencies are weeded out of the system. (Facebook employs 14,500, Visa employs 11,300 while BoA employs 210,000; there is still much to do.)
No discussion about financial services productivity would be complete without mentioning regulation. Indeed, regulators can be viewed as having been complicit in the building of a rent-seeking industry. The rate of change of technology has accelerated to such a degree and consumer behaviors and expectations have changed to such an extent that financial services regulators cannot afford business as usual. Thusly the novel approach to innovation the Financial Conduct Authority has taken in the UK or the Monetary Authority of Singapore. Every regulator is now actively thinking or devising new ways of engaging the eco-system they regulate and this includes how innovation impacts these eco-systems.
The lesson here is everyone is breathing fintech, from service providers to incumbents to regulators and startups, as a vector to deliver productivity gains.
I want Thomas Philippon to run the numbers in 5 and 10 years from now, and I will be crushed if the cost of intermediating an asset will not have dropped to below 1%. How low can we go?
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Bank of Japan: Blockchain Could Alter Financial Services
#Japan‘s central #bank issued remarks this week that found it forecasting that #blockchain #could come to have a fundamental impact on finance.
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[] Beyond the Future of Financial Services
I have been following the developments of the World Economic Forum’s take on the #future of #financial…
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Enriched Data Leads to a Better Breed of Personal Financial Management Tools
Context is king in #financial services today. The rich #data delivered around transactions, particularly from mobile devices, is fueling the growth of a new #breed of #personal financial #management. On Tuesday, data aggregation and analytics platform Yodlee, an Envestnet company, made a further advancement in delivering contextual information to customers while protectingRead More
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WEF: Blockchain to Form Foundation of New Financial Infrastructure
Distributed ledger tech will #form the “#foundation” of #financial services #infrastructure, according to a new report by the World Economic Forum.
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You can’t have financial inclusion without digital inclusion
#Technology alone is not the answer, but the promise of #blockchain could act as an enabler for a decentralized global identity database, where the people owned their own identity and no single government or corporation could assert sovereignty. Read More -
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Dash Financial Releases New DROP360 Addition To Order-Routing Dashboard
#Dash #Financial resets bar for buyside traders with a new app added to its Order Visualization #technology.
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31 Chinese Firms Form Financial Blockchain Consortium
A group of #technology and finance companies in Shenzhen, China, have launched a new #blockchain #consortium.
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7 Financial Firms to Build Post-Trade Blockchain for Small Businesses
Seven #financial institutions have partnered to explore how #blockchain tech could benefit #small enterprises.
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