The Future of Finance 2016
- Future of Finance
- Mar 22, 2016
- 5 min read
Updated: Nov 28
This book represents the output from the second ‘Future of Finance Conference’ run by FiNexus and its partners and associates. The aim of the conference was to discuss challenges and issues in the financial services sector in an independent and collaborative fashion involving a wide array of stakeholders: Traditional economists, ‘new’ economists, quant scientists and mathematicians, high-powered computer scientists, innovators, policy-makers, regulators, and, of course, the financial services industry. The first conference in 2013 covered structure, regulation, ethics and innovation. The Future of Finance 2016 discussed how new technologies and a more adroit use of data are on the cusp of transforming financial services and society.
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Welcome
The UK Government has been extremely pro-active in promoting new technologies for the sector. Two Blackett Reviews carried out in the past twelve months by the Government Office for Science, one on Fintech and the other on Distributed Ledger Technologies, have provided accurate analysis of these technologies and have guided regulatory, industry and government policy. I urge you to read them. In addition, there are initiatives, both public and private, that are aimed at developing applications for these technologies, including a distributed ledger laboratory in Leeds. This latter initiative is particularly interesting as it involves the full range of stakeholders relevant to the Future of Finance: Public sector, private sector, entrepreneurs and academia. As such it as the opportunity to achieve great things.
So we are at the threshold of what could be a revolution: machine learning, artificial intelligence (AI) and the emergence of quantum computing; access to new data in bewilderingly large quantities; whole new ways of extracting information from data; the ability to value, settle and clear financial products in real-time; the tools to meet the burgeoning demand for transparency and better environmental, social and governance credentials; and fresh techniques to address demographic challenges. All of these will and are impacting the way the financial services sector does business, as well as the way we transact our business with the industry. Will we be safer? Will we be wealthier? How should we regulate without restricting growth? These were just some of the questions posed during the conference, and tackled in this book.
-Chris Sier
Foreword
The Turing principle holds that it is possible for a computer to replicate any physically possible object, environment or process. This proposition ought to shock people. After all, it claims, on the basis of uncontested assumptions about mathematics, physics and biology, that a single physical system can simulate any other system in the universe. Our confidence in the possibility of artificial intelligence is no more than a logical deduction from this fundamental principle of computation.
Yet the failure of the Turing principle to astonish us is easily explained. Almost everybody alive today intuits its truth, whether they have heard of it or not. In the 21st century it is impossible to design an aircraft, or perform calculations on a spreadsheet, or play a computer game, without tapping into the power of digital simulation. It is precisely because the Turing principle is already at work in almost everything our civilisation produces or attempts that people fail to be shocked by its implications.
Complete fulfilment of the Turing principle will of course take prodigious quantities of energy and material, and of memory in particular. But our best theories of physics and engineering are already delivering exponential increases in computer processing power and memory, and equally exponential decreases in the costs of these technologies. The reduction in the ratio of price to power in digital technology is having a profound impact on the structure and evolution of every industry, and finance is no exception.
This is not surprising. Every economy, let alone every industry within it, is at bottom no more than an expression of prevailing technologies. Industries change as technologies change. Technology creates industries and it destroys them. The challenges it sets, and the problems it spawns, summon fresh technologies to solve them, including new forms of ownership and organization, which in turn make possible yet further technological innovations.
By this constant process of challenge and response, technology creates opportunities. New entrants, with nothing to lose and much to gain, are often better placed to exploit these opportunities than incumbent businesses trapped by legacy technology, clients or regulation, or by the sheer inertia of size. So it is not surprising that FinTech ventures are attracting no only billions of dollars in investment, but some of the finest minds in business and academia today.
Of course, much of this money and time will be wasted. Every modern technological revolution, from the steam age to the Dot Com era, is rich in failed ideas and experiments. In fact, the propensity of failure to outweigh success is characteristic of every evolutionary process, including the history of capitalism. But we can be confident that what will emerge from the flux will be novel combinations of technologies, methods of manufacture and distribution, and of markets and organisations.
Those novel combinations will not be mere disruptions of prevailing commercial technologies - in other words, new and better ways of producing or distributing what we are producing or distributing already - but entirely new products and services and ways of living and working and trading with each other. While it is tempting to see technology as providing nothing more profound than ever more efficient solutions to the problem of efficiency, this is to under-estimate the creative power of digitization.
Every aspect of the current structure of financial services will be replaced by new arrangements. All that remains to be decided is the pace at which established enterprises are crushed, intermediaries displaced, capital structures rearranged, asset classes abandoned, savings vehicles capsized, old asset classes supplanted, and familiar organizational forms over-turned. It is the semblance of continuity in a landscape changing imperceptibly but fundamentally which makes the contemporary sceptic seem wise.
Ironically, the ultimate governor of the speed of the reconstruction of the financial services industry is likely to be the primitive state of finance as a science. Unlike medicine, or the law, or engineering, the ideas and principles which underlie the activities of financiers forfeited, in the great financial crisis of 2007-09, the status even of hypotheses. New explanations, free of dependence on the fallacious notion that sound theories can be derived from observation, are needed before finance can become artificially intelligent.
This lack of a sound theoretical basis for modern finance means that better–equipped industries will be transformed by technology long before banking, fund management and insurance. But it also means that finance is at the starting point of a great adventure. Our second Future of Finance conference, like the first, aimed to encourage those embarking on that adventure, remind them of the value of their explorations and discoveries, and above all to reassure them that they are not alone.
-Dominic Hobson
