In Safe Hands – the Future of Financial Services

Summary of Long Finance Seminar

Gresham College London 25/01/12

Iva Lazarova – Foresight Researcher – Fast Future

 

Seminar Overview

This paper presents a summary and reflections on the Long Finance seminar to launch Gill Ringland’s report, “In Safe Hands? The Future of Financial Services[i] published in association with SAMI Consulting. This seminar was part of the Long Finance initiative[ii], a project whose goal is “to improve society’s understanding and use of finance over the long-term. In contrast to the short-termism that defines today’s economic views, the Long Finance time-frame is roughly 100 years.”  The underlying question being addressed is;

“When would we know our financial system is working?”

The impact of the 2007-2008 global financial crisis on economics and society reminds us of the significance of the financial services sector. It also highlights the need for long-term thinking that will enable us to better prepare for and respond to the challenges that the future might bring. For me, the Long Finance seminar was a valuable and intellectually stimulating experience that deepened my general understanding of the topic. The session also provoked a shift in my own focus away from a concern with the reasons for and impact of the financial crisis, towards thinking about the role which the financial services (FS) sector could play in the future and how it can cater for the changing needs of society. The key messages from the seminar and report are summarized below.

 

Financial Services in 2050 – Underlying Assumptions

The scenarios presented were based on what the author considers to be the best available forecasts for 2050 in terms of population, the use of technology and the organization of society. Listed below are some of the key assumptions upon which the scenarios were built:

General Assumptions and their Implications for Financial Services

1. Demographics. By 2050 the global population is estimated by the UN to be around 9 billion (range 7.5-10 billion) with the majority in Asia and Africa. Birth rates will fall, life expectancy will increase and the average age of the global population will rise over the period.

Implications. As our national populations age, the need for financial services that cater for the elderly will grow. In addition, an older population is more likely to be risk-averse and FS need to acknowledge this in the design of products and services.

 2. Power and Influence. The balance of global power and influence is shifting from the West to the East. This is likely to cause political challenges and turbulence.

Implications. The changing balance of power will probably have an impact on the sector as a whole as well as on the role of financial centres. Will Shanghai and Hong Kong replace New York and London as the leading financial hubs? Is it possible that the rise of not only Asia, but the BRICs in general will influence the development of a new set of values on which the FS sector will be based in the future? Will a new paradigm challenge the Washington Consensus?

3. Technology.  Information and Communications Technology (ICT) will underpin much of society and commerce. The so called NBIC (nano, bio, info, cogno) convergence is playing an increasingly important role creating new materials, products and services with properties and functionality that are already changing lifestyles.

Implications. Employment in FS in mature economies is likely to continue shrinking as the impact of ICT grows. Many of the existing players could be forced to merge or be replaced by new entrants, and many aspects of insurance and retail banking will be automated. Critical question arise – firstly, how will the sector adapt to these ongoing changes, and what will the most important products and services be?

 4. Sustainability. Pressure on the environment is increasing – ecological, energy and environmental concerns will become more acute.

Implications. The environment will be a crucial factor influencing the financial sector – scarcity will increase the role of FS in trading resources.

 

The Four Global Scenarios

The report sets out four possible scenarios for the future of financial services. These are summarised below. Using the driving force model, the scenarios focus on two key aspects of the global society:

  1. The persistence or otherwise of the ‘Washington Consensus’ (i.e. ‘Western values’) e.g.:
  • Will our future economy and society be similar to today’s?
  • Will it implicitly follow the Washington Consensus? Or, Will there be a new paradigm?
  1. The organising principle of geography or virtuality. Particularly in relation to financial services, does geography matter in the new paradigm e.g.:
  • Will city states replace many functions of the nation state? Or
  • Will markets be global and virtual, replacing geography with other organising structures such as affinity groups?

 

 

1. Second Hand: This presents a scenario where democracy is still important, western values and institutions are still present, the Washington Consensus still prevails and capitalism is the dominant paradigm. Geography and the nation state still matter, but their significance is weaker than today. International structures decay as they don’t reflect the worldview of the powerful BRIC nations.

What could cause this scenario: This scenario is predicated on the assumption that the earth manages to provide enough food and water for its nine billion people without there being major shortages. It also assumes the rise of individualism and increased mobility of people who will seek better economic conditions.

 

What could prevent this scenario: A potential global crisis and/or the breakdown of the Washington Consensus.

Features of FS in 2050:

  • Ecology of FS: more diverse
  • Investment:  investors aligned with more than one region to shelter from volatility
  • Aging Society: pensions and security high on the agenda; a need for private insurance to augment state systems
  • Trading: commodity trading reduced, most commodities controlled by a single/ few companies. Equity trading declines as the there will only be a few major corporations, many of these privately owned
  • Asset classes: Mirrors today, but land based assets and permits for citizenship and reproduction may be the most highly valued
  • Leading financial centres: Singapore overtakes London and New York as a financial hub

2. Visible Hand: This scenario depicts an explicitly homogeneous global governance structure. The current political, social and economic regimes are still recognizable. The world will have evolved and taken advantage of new technological capability. It will be more educated with a ‘pervasive’ global culture.

What could cause this scenario: It will emerge if the world manages to satisfy the needs of 9 billion people and if it is able to deal with its ecological, environmental and energy problems. It assumes that the West has recovered from the financial crisis and will avoid future ones.

 

What could prevent this scenario: Western economies failing to recover from the financial/ economic crises and suffering further shocks.

Features of FS in 2050:

  • This scenario is not thought to be stable. A homogenised international regime is unlikely to be able to handle the volatility it creates and will suffer further financial crises. Hence this scenario is likely to evolve into either ‘Long Hand’ or ‘Many Hands’ by 2050.

3. Long Hand:  The scenario describes a world where a complete meltdown has followed the financial crisis in Western countries. Virtual connections based on ethnic and religious affinity groups will become the main global organizing structures.  Religious or ethnic communities will exercise power remotely.

 

What could cause this scenario: This scenario could follow a breakdown in world order after a crisis.

 

What could prevent this scenario: An evolution of the Washington Consensus towards more diversity in order to decrease volatility and handle potential crises.

 

Features of FS in 2050:

  • Ecology of FS: up to 50 or so loosely coupled trans-national systems with diverse regulatory regimes
  • Investment: discouraged outside the home affinity group
  • Banking: Retail FS transactional only. IFAs replaced by ‘Intelligent Financial Advisors’; traditional banking replaced by individual to individual lending
  • Trading: traders focused on bartering within trusted affinity groups
  • Asset classes:  the value of assets will vary across communities –   either IP and permits for reproduction, land based assets or gold will be most valuable depending on the type and structure of a community
  • Leading centres: London and New York

4. Many Hands: In this scenario, globalisation has failed, democracy is unwieldy and western value systems are inadequate. The concept of the ‘nation state’ has disappeared and has been replaced by numerous city-states. The city state communities will have very different strengths, weaknesses, wealth levels and brands. Mobility across states will be the norm.

What could cause this scenario: One of the main drivers for this scenario will be the progressive failure of globalisation to deliver its promised advantages and benefits beyond a restricted circle of countries.

 

What could prevent this scenario: Measures to avert a food or financial crisis could possibly prevent this scenario.

 

Features of FS in 2050:

  • Ecology of FS: very diverse, city states offer different regulatory regimes and software systems. Very loose linkages between states
  • Aging society: a major concern, prime focus on pensions and security
  • Banking: traditional banking replaced by individual to individual lending regulated by each state
  • Trade: bilateral trade and barter will increase. The supply of fundamental resources depends increasingly on financial markets. Security of supply is a valued asset and is linked to credit supply
  • Asset classes: permits to live or operate in desirable cities will be highly valuable assets – they will be traded directly between individuals or corporations and mediated by ICT
  • Additional: insurance markets are fragmented and there is no mechanism for global risk insurance. Intelligence gathering and analysis is a key source of competitiveness
  • Leading centres: 50 city states dominate financial services, one of which is Istanbul

 

Conclusions

The role of scenario planning is to help us consider a range of plausible futures that could evolve – in this case over the period to 2050. A number of key drivers could combine either to create these scenarios, or prevent them from happening. I think that perhaps the greatest value of the four scenarios outlined in the report is to help us think about what each of them tells us about our approach to planning and decision making in the world we inhabit today. They highlight the need to think about the long term consequences of current decisions and to ensure that we are defining solutions that can evolve and adapt in a rapidly changing world.

Most people who read the report could most probably imagine the Second Hand and Visible Hand Scenarios as a plausible evolution from where we stand today. However, many may find it more difficult to conceive of a Many Hands or Long Hand world.  Human nature is such that we are uncomfortable thinking about reversals in our development, but the last two scenarios suggest that these are possible. Overall, the four scenarios suggest that we need to take a longer term, open-minded and anticipatory approach to designing our financial services infrastructure if we want to understand and respond to the complexities that could shape the future and the choices that lie ahead.


[i] http://www.longfinance.net/fcf-publications.html

[ii] http://www.longfinance.net/

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