Innovation in finance driven by technology

The financial industry has always been on the forefront of innovation. It wasn’t long after the telegraph was invented or the very first phone call was made that bankers were using the new technology to check prices, borrow & lend, settle ledgers, and look for better ways to serve clients. Finance and technology have always been interwoven to power global commerce. And as the world becomes ever smaller and more digital, there is a constant demand to make the movement of value simpler, faster, and cheaper. 

Today, the movement of value whether its assets, loans, or funds is impeded due to frictions such as layered intermediaries and legacy platforms. This reduces straight – through processing, increases manual operations overhead, creates trapped liquidity, and raises costs for clients. One major innovation is blockchain technology, which has the potential to address some of these issues.  Blockchain technology allows for a single shared immutable ledger between decentralized and untrusted parties as opposed to the need for multiple centralized ledgers that operate serially. It also provides an ability to transfer value in this decentralized ecosystem. Smart contracts add programmability and more complex data states – akin to a distributed database. One way to think about smart contracts is that they expand our vocabulary of verbs – allowing assets and funds to have hyper-personalized actions. Smart contracts are the source of a lot of the innovations such as the ability to tokenize assets – a form of a digital marker that may represent actual assets like real estate or commodities. Central banks, for example, are exploring the use of blockchain to create tokenized digital currencies (CBDCs) for cross-border wholesale payments.   

Today’s news cycles are dominated by market disruptions in crypto assets, but crypto assets represent a small part of the world of digital assets that are built using blockchain technology. As was with the dotcom experience, digital assets are going through the innovation diffusion curve from hyped exuberance to mature products that provide real value and have strong regulatory oversight frameworks. It is not fully apparent what new products and services will emerge after the exuberance and the hype ends, how entire industries will be transformed, and what new industries will emerge. The players that emerged after the dotcom era have transformed how we work, play, order food, pay our bills, and stay connected with friends and family across the world. They created marketplaces and developed platforms with capabilities such as digital payments, supply chain, and network effect, and leveraged data to power products, services, and experiences.  

The other major innovation to highlight that could transform the financial industry is the renewed focus on AI & ML that is driven by breakthroughs such as deep learning neural networks and the recent advent of Generative AI that is producing impressive results for speech, image, and text recognition. In a lot of use cases, the AI & ML models are producing results that match or exceed human experts. Today represents a perfect confluence of forces to allow companies to extract deeper value from the data they hold – AI & ML models that can produce expert-level results, big data platforms to hold and manage large data sets needed, computing power to train the models, and cloud for scale and agility. What must not be ignored is the need for responsible innovation and ethical AI as trust is the biggest asset. Some of the example opportunities are in improving fraud and risk models, reducing operational friction points such as automatic payment repair capabilities, improving resiliency and cyber posture with anomaly detection, and reducing costs – be they operational or liquidity use. 

Innovation will continue its relentless march forward – transforming, disrupting, and creating entirely new industries. There will be winners and losers. And as companies focus on their innovation and digital journeys, they should consider how they can strengthen their client partnerships and drive purposeful innovation; what the operating model should be to drive agility and engineering mindset, and finally how to scale their innovation efforts be it through talent, platforms, reuse, or partnering with startups. What is certain is that technology will continue to evolve, and finance will remain a leader in exploring and adopting new technologies to strengthen trust and deliver value to clients.