March 16th 2015

Thoughts on finance

Reflecting on the business of banking & finance and its future.

Almost ten years ago, back when the Financial Times and Time Magazine used to be delivered to my doorstep for just a few Swiss Francs per month (those student offers were just too good to ignore), I remember what went through my mind the day I saw that full page FT add with Shanghai´s shiny Pudong district in the background. The five word phrase was a striking statement:

‘We live in financial times.’




The business of banking and finance. As my father once said during my early teenage days while I was trying to decipher the contents of the salmon-colored pages (the ones focusing on topics of global economy) inside French newspaper Le Figaro:

“La finance est le sang de l’économie. C’est important d’en comprendre certains mécanismes. »

‘The financial system is the blood system of the economy. It’s important to understand some of its mechanisms.’

Later on, during my time at university, the disproportionately high amount of credit points (ECTS) given for compulsory classes on Macroeconomics, Microeconomics, Correlation and Regression analysis, Investment Theories, etc. made it very clear that graduating in Business and Management without a solid education in finance was not an option.

Kaldor, Markowitz and co. had to be befriended.

During the peak of the financial crisis, when many banks were standing in the spotlight and the terms “liquidity crisis”, “solvency crisis” or “crisis of confidence” continuously adorned newspapers, decoding and understanding what was unfolding here was made an integral part of our classes.

I still recall how a Spanish exchange student from Barcelona explained to me that:

Nowadays in Spain, everyone talks about the state of the economy and the business of finance, because everyone is affected by it.

It’s like the weather.

Ten years ago, a lot of people didn’t really care about these topics because they felt that they were mostly irrelevant for them.’

More than ever, we live in financial times.

My university days are over now and it’s been four years since I started working full-time in the Swiss financial sector. The Eurozone is still struggling and the adequate ingredients to put the economy back on track remain a subject of discussion. On a macroeconomic level, things will take some more time to adjust again.

But there is something else today that is profoundly reshaping the financial sector: Technology.

More precisely: Information and Communication Technology.

Machines are now in charge of a growing number of tasks. It started in the back office divisions with matters of Reporting and Account Statements. Technology then spread into middle office (through automated quality checks for example) and front office (real-time metrics for sell side risk management) units.

Since the late 1990s, a continuously growing number of individuals performs wealth management on its own. Online. Independently. Buying equities, bonds, structured products, ETFs and a wide range of other products and investment vehicles in a manner that is very similar to buying goods on Amazon.

Being able to manage a portfolio independently soon became “not enough” though.

Clients realized that trading not only requires a certain level of knowledge and affinity for financial instruments. It also requires time.

This may be ok for day traders and their likes. But the vast majority of private investors want something hassle-free. They want to delegate while never letting go of the possibility to jump back into the driving seat at any time, from anywhere in the world.

They want personalized financial services.

To a certain degree, they want private banking: personalized financial services that, up until recently, were the attribute of the wealthy. Private banking is a labor-intensive business built around teams of well-qualified people. It is costly and requires solid liquidity levels from customers, which is why it only makes sense above amounts of at least USD 500’000. Many establishments only accept clients with seven digits of investable assets and some particular services are only accessible to those beyond USD 10 Mio.

But what if the costs of private banking services could be reduced? What if technology could make services that can be compared to those of a private banker accessible to the masses, for a fraction of the cost?

Algorithms capable of automatically managing client portfolios appeared. Operating around the clock. Seven days a week. Capable of managing an almost endless number of investment strategies without impacting the quality and the performance of the service. For a fraction of the cost. Electronic/Digital private banking is a reality today. It doesn’t offer (yet) the entire range of services one can expect from traditional private banks, but it is continuously expanding and improving.

According to the 2014 Asia-Pacific Wealth Report by Capgemini and RBC Wealth Management“82% of high net worth individuals (HNWIs) in Asia-Pacific (excluding Japan) expect most or all of their wealth management relationship to be conducted through digital channels in five years, in contrast to 61% of HNWIs in the rest of the world.”

Around the globe, FinTech companies such as Wealthfront and Betterment opened store and started challenging established financial juggernauts.

The big players, by the way, are outsourcing a growing number of non-core operations in order to cut rising costs of regulation and complexity while remaining fully able to scale their operations.

Young bankers in Asia are moving out of banking corporations in order to join the ranks of IT-sourcing companies such as Avaloq, which is now supplying Wealth Management back office services to a growing numbers of banks. These youngsters all realized that the industrialization of the financial sector will continue to reduce human labor and replace it through automation.

A few years ago, Bill Gates claimed that “Banking is necessary – banks are not.”

Technology now allows providing high-quality services without expensive structures. An industry that has not experienced major disruptions during the majority of the 20th century is forced to reinvent itself. Information and Communication Technologies are impacting business processes, pricing schemes and client relations.

In short: the entire pipeline is being re-engineered.

It will require more IT-architects and more software engineers with the competence and know-how to build up the structures of tomorrow’s banking and financial industry. This is the “second machine age”, as described in the book by authors Erik Brynjolfsson and Andrew McAfee.

The digital revolution of banking and finance will also impact hierarchies, selection criteria for recruitment and education.

In an age in which the business of banking and finance is reshaping itself into an industry that is heavy on technology and light on labor, Swiss banks will most likely have to adapt their traditional approach if they want to remain competitive.

And although these are exciting times to live in, I still wonder about the overall impact of machines on the playing field of banking and finance.

Change is the only constant.

Pictures shot over the course of several years on a variety of devices.

This post is also available in French and German

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