How Do We Future-Proof Finance?

How Do We Future-Proof Finance?

Future proofing finance is necessary and this needs to be done quickly. With a range of new finance options having become available in recent years, such as bitcoin and peer to peer lending, as well as crowd financing, among others, there have been calls to make sure that policy keeps up with the innovations that have occurred. Writing for NEF in 2014, Duncan McCann explored the issues of creating a global financial system that can be sustainable for the future. In fact, NEF was commissioned by the United Nations Environment Program to explore the question:

“How can we transform the global financial system to ensure that it supports a sustainable economy?”

Focusing on the consequences of some of the innovations that have occurred such as those already mentioned, the organisation found five main trends. These were established by reviewing eighteen different examples from five continents.

1. Cutting the middle man

The first trend identified by the study was that the middle man needs to be cut out. NEF identified as a part of its research that there has been a trend towards disintermediation of transactions and capital. People are turning less frequently than before to banks and established financial entities for the key functions of finance such as getting a loan, storing value or transferring money. None of these aspects of finance now require a middle man, so NEF recommends cutting out intermediaries. New entrants into the market are instead providing forms of financing that are cheaper and more efficient in terms of facilitating the movement of money and capital.

2. News Forms of Credit Creation

A second trend identified by NEF was that there are new forms of credit creation. These are having a significant impact, especially in local economies. This is leading to them being able to tackle the challenge of financial exclusion. Examples that NEF provides are Banco Palmas in Brazil and Bangla-Pesa in Kenya, where in both cases the community is gaining advantages from being able to create credit. In addition to this, NEF sees that crypto-currencies in particular offer a chance for realistic alternatives to the current approaches to credit creation and allocation.

3. Leading with some global challenges

Another trend that NEF pulled out during its research was the concept that there are a number of global challenges that need to be dealt with and there has been insufficient evaluation of how these will impact the financial system. Particularly aspects like climate change and constraints of resources could be problematic for the financial system. NEF identified that changes of this scale will be likely to require the transformation of financial institutions.

4. Technological advances

Technological advances are another trend that are having a dramatic influence on just about everything. It is explained that technology has considerable influence over the way that we live our lives. As information becomes more automated the finance industry and regulators will need to be quick if they want to keep up with the significant changes. One example that is provided is the question of how insurance companies will deal with the complex challenges that tools like driverless cars will pose for them. This will be difficult because obviously a driverless car is not being controlled by a person.

5. Reviewing established ideas about macroeconomics and finance

Finally, NEF noted that economic questions have been raised about macroeconomics and finance theory that was always considered to be accurate in the past. This has occurred at least in part as a result of the financial crisis.

Regulators differ in their state of readiness for the type of society that is needed in the future. In the study done by NEF, these were mapped onto a graph. It is argued that mobile payments, crowd funding and peer to peer lending and peer to peer payments among others have the potential to drive system change. Work needs to be done to make sure that policy is able to support innovations that open up a wider sector of the population to the opportunities that financing can bring. The areas that need the closest attention are digital currencies and crowd funding, particularly since these fall outside of regulation frameworks at the current time. At the same time it is argued that environmental and technological change are areas that bankers and insurers particularly need to focus on. There is more work to be done to get to the point where policy and new innovations are better understood in this sector.