In 2010, the BBC and the British Museum collaborated in a project called A History of the World, based on one hundred objects from the collection of the British Museum, around which you can tell the history of humanity over the past two million years. The history was also presented in a series of fifteen minute podcast about each of the objects, written and narrated by British Museum Director Neil MacGregor and broadcast over the BBC.
Money was one of the themes in the exhibit, represented by four different objects: one of the world’s first gold coins produced over 2500 years ago; a 1375 banknote from the Ming Dynasty; a silver coin minted in Bolivia in the late 16th Century; and a plastic credit card exemplifying the changing role of money in the modern world. Why include money in such an exhibit? Because, as one of the podcasts noted, money, - along with sex and war, - has been one of the great constants in human affairs.
Transaction records actually pre-dated the advent of money. By analyzing the earliest recorded transactions, researchers believe that writing evolved in ancient Mesopotamia thousands of years ago, as an innovation to keep track of financial records. Money was later invented as a store of value and a medium of exchange to make commerce more efficient. For a long time, money was embodied in precious metals like gold and silver, but with the introduction of banknotes, money started to decouple from physical objects with intrinsic value.
“Today… we remain more or less content with paper money - not to mention coins that are literally made from junk,” wrote Harvard historian Niall Ferguson in The Ascent of Money: a Financial History of the World. “[W]e are happy with money we cannot even see. Today’s electronic money can be moved from our employer, to our bank account, to our favorite retail outlets without ever physically materializing. It is this virtual money that now dominates what economists call the money supply… The intangible character of most money is perhaps the best evidence of its true nature.”
Given its intangible character, it’s not surprising that advances in information and communication technologies (ICT) have in turn led to advances in the way we deal with money and payments, as well as with identity, trust and other key attributes of a well-functioning financial system. Financial services (FS) was one of the first industries to embrace ICT, automating their back-office and branch operations and developing innovations like credit cards and ATMs. The wide adoption of the Internet in the 1990s led not only to online banking, but paved the way for e-commerce.
Smart mobile devices, broadband wireless networks, cloud-based services and big data are now ushering the next major phase in the evolution of FS. Money is continuing its centuries old transformation to being nothing more than information in our personal devices as well as out there in the cloud.
How is the FS industry likely to evolve into the into the future? This is the question addressed by ICT & the Future of Financial Services, a report published last year by Ericsson in collaboration with the Imperial College Business School and the UK’s Sustainable Society Network as part of a series looking at industrial transformation in the Networked Society.
Beyond the productivity improvements of the past several decades, digital technologies are now beginning to disrupt and fundamentally transform the FS industry. Big data is one such disruptor. Not only has money been increasingly represented by information, but information about money has itself acquired monetary value. Walter Wriston, - chairman and CEO of Citibank from 1967 to 1984, and widely regarded as one of the most influential bankers of his generation, - presciently said: Information about money has become almost as important as money itself. I think we can now update his remark to read: Information about money is money.
This point was well articulated in Personal Data: the Emergence of a New Asset Class, a 2011 report by the World Economic Forum. “As some put it, personal data will be the new oil – a valuable resource of the 21st century. It will emerge as a new asset class touching all aspects of society.” Data is now being generated by just about everything and everybody around us, including not only the growing volume of online and offline transactions, but also web searches, social media interactions, billions of smart mobile devices and 10s of billions of IoT smart sensors.
“The data begins to have monetary value when companies apply it to deepen the connection to their customers, create new advertising models and sell the data to one another in order to create new revenue streams,” notes the Ericsson report. “This, however, raises a number of important concerns, such as: Who owns and has access to the device and the data? Who owns the integrative algorithms? And who, therefore, owns the resulting value? Will a new form of currency emerge with data as its basis?”
Cryptocurrencies represent another potential disruptor of the FS industry. Bitcoin, the best known cryptocurrency, is both a digital currency and a peer-to-peer payment system. Introduced in 2009, it uses cryptography to control the creation and transfer of money. It’s not backed by central governments or banks. Having been implemented in open source software, Bitcoin’s sophisticated protocols are widely available, which has helped bring it increasing usage and prominence.
The foundation of Bitcoin is the block chain, a distributed architecture, capable of near unlimited scalability and the ability to handle trust-less transactions where no parties need to know each other nor trust each other for transactions to complete. Block chain architectures can be used to create decentralized financial systems with no central authority, In addition, they can be used to develop other complex systems where huge scalability and trust-less transactions are paramount, as is the case with many IoT solutions based on billions of devices.
Beyond technology, the evolution of FS will be influenced by a variety of economic, social and political factors. The report discusses four possible future scenarios based on different combinations of two key factors: the rate of technological innovation and the number of FS suppliers.
Rapid Change/Many Suppliers. Continuing ICT advances and a series of financial crashes cause the FS market to fragment. Many existing FS providers go out of business and are replaced by new digital entrants. “This is a world in which purchase and consumption are increasingly on-demand, provided by an ever-changing aggregation of small suppliers… Increasing uncertainty mitigates against long-term planning, saving and investing… The context of now, along with uncertainty about the future, will predominate.”
Rapid Change/Few Suppliers. Fast changing technologies and rising complexities lead to the emergence of a few major ICT-based ecosystem leaders - e.g., Apple, Amazon, Google, - while traditional financial institutions, unable to compete, gradually fade away. “Ecosystems become in effect multinational conglomerates with all previously independent financial activity (e.g. transactions and investments) kept in-house… These ecosystems apply new technologies to take care of most domestic and commercial needs… Customers prefer to remain as passive consumers,… The ecosystem owners manage security and regulation.”
Slow Change/Many Suppliers. Periods of rapid ICT and FS innovation are followed by lengthy periods of stability and consolidation. Privacy and security become key competitive advantages. “Financial services remain a distinct industry, but in a much less consolidated form… New suppliers of financial services eventually replace existing players who reinvent themselves as niche providers or owners of declining but profitable asset bases. Customers of these banks likely stay with them for some longer-term services, such as pensions, whereas new providers attract customers through innovative pricing and investment policies… No one supplier or group of suppliers achieves market dominance in financial services.”
Slow Change/Few Suppliers. This scenario is, more or less, where FS is today. While technologies continue to advance, “social factors and privacy issues constrain speed of growth. A few major suppliers emerge in technology ecosystems and financial services… The challenge for existing FS providers is to compete with the ecosystems not on technology, but on ‘trust’… By establishing trusted relationships the ecosystems develop their own long-term savings and investment policies, but outsource these to traditional firms for management and operations. FS providers become limited to back-office processors for their ecosystems, and lose their high street presence. Transactional payments are all performed by new entrants, who exploit existing schemes to maximize the value of data in context.”
More than likely, the future will not look like any one of these scenarios, but rather an amalgam of all four, as the evolution of both ICT and the FS industry take unpredictable turns. But, we can be pretty certain that the very nature of money, payments, identity and trust will continue to undergo major changes, - as they have since time immemorial. The future of financial services promises to be one of our most important and challenging journeys in the decades ahead.