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5 Tech Trends That Will Shape The Future Of Finance And Investments
Tech has a way of disrupting our lives much faster than we think.
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Financial services have always been one of the earliest adopters of technology. This is because access to good, clean, structured data is easier in finance – be it share price ticks, financial statements, credit scores, etc. Therefore, you can build and test models for decades in the past.
Further, I think we would all agree, any efficiency in the business of money has an immediate and tangible impact on people’s actual personal finances and therefore there is a lot of motivation for finance to become faster, cheaper and better.
So, what’s the next wave of tech to improve finance and investing?
Using tech to make your investing decisions
Globally, there is a very clear shift away from humans to some form of rules-based investing. For example, in the US, more money is now flowing into ETFs than human-managed active mutual funds. The top five hedge funds in the world are all quant funds.
A lot of why this is happening is that humans are average investors against machines. India has the same trouble with “experts” as the West - a report by SPIVA recently found that over the past five years, the S&P BSE 100 beat 80% of all actively managed large cap funds.
Therefore, just like the US, India will increasingly use more rules-based systems to invest – be it in active or passive management.
Blockchain is essentially a database to store information in a usually chronological chain. Think of it as a ledger of transactions with timestamps. Blockchain is a very secure way of recording transactions because it is near impossible to change a record of a transaction once it is entered.
Currently, any transaction, whether to clear a cheque with your bank or to settle a trade in the stock market, is managed through a central authority. These are open during business hours, five days a week. For example, settling a trade is the stock market is a T+2 process. Similarly, transferring money internationally or cashing a cheque takes a day or two. Your cash/ stock is frozen for that period.
By using blockchain, transactions can be confirmed within minutes and this can lead to billions in savings for banks and institutions. Further, it is far more secure, less prone to manipulation and completely transparent. Banks will be the first adopters of blockchain to ease fund transfer. In fact, SBI recently announced its partnership with JP Morgan to use blockchain for international remittances. Similarly, over the next few years, our exchanges should also move to blockchain to confirm trades quicker.
Decentralized Finance (DeFi)
By now, I think we are all at least aware of what cryptocurrencies like bitcoin are. While it started to replace traditional currency, DeFi is quickly gaining traction as a great application for crypto. DeFi allows financial services to use “smart contracts”, which are automated enforceable agreements that don’t need intermediaries like a bank or lawyer and use blockchain instead.
DeFi is changing how financial products are built. For example, say you want to send money to your friend next Friday but only if it rains and the NIFTY ends the day in the green. You can write such rules in a smart contract which is then automatically executed if those conditions are met.
There are lots of very exciting applications of DeFi being built today – there are decentralized exchanges (DEXs) which are run only peer to peer with no central body, borrowing and lending in cryptocurrency directly, creating stablecoins that are linked to a particular currency, new age derivative contracts and prediction markets.
Therefore, as DeFi becomes more mainstream, the type of financial products and assets that exist will grow and change dramatically. Further, given that it is built on blockchain, its decentralized validation means those contracts are secure, transparent and enforceable without a central authority.
Quantum Computing and security
Quantum computers work in a fundamentally different way from current computing systems. In essence, computers today work with bits that hold a value of 0 or 1. A quantum bit (qubit) can exist in multiple states at once. This means that quantum computers will be able to do calculations or build algorithms that can do tasks in seconds that would take classic computer thousands of years!
In late 2019, Google achieved “quantum supremacy” when its quantum computer carried out a specific calculation that is beyond the practical capabilities of regular, ‘classical’ machines. The same calculation would take even the best classical supercomputer 10,000 years to complete, Google estimates.
The most obvious application here is security. Once quantum computers become more mainstream, existing encryption systems will become redundant as they will be able to crack current encryption systems in seconds with the computing power of just your smartphone (assuming your smartphone was run using quantum computing).
Since quantum computing going mainstream is a question of “when” and not “if”, over the next decade, this will mean a massive transition in encryption systems of our entire financial system.
AI in credit and insurance
Another important application that is already widely accepted is the use of AI in lending and insurance. Predictive algorithms can figure out the creditworthiness of borrowers, insurers can build customized insurance products for users, these companies are better equipped to study and combat fraud. This will allow better products, pricing and process for customers as well as the firms that offer them.
While a lot of what we’ve discussed sounds more like science fiction far out in the future, we should all remember that tech has a way of disrupting our lives much faster than we think. The iPhone was launched in 2007 – only 14 years ago. Amazon started in 1995 and Google in 1998. In just two decades our lives are irreversibly transformed. Just like all technology before it, these emerging tech trends will become mainstream only if they add great value to the lives of the end consumer, i.e. to us - and make our finances faster, cheaper and better.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.