Podcast 3rd July 2015
Winds of change are blowing rapidly in the financial services industry globally and in India. The financial crisis of 2008 and the wave of technological innovations have caused turbulence in the industry. Banks have borne the brunt of the change and the change is spreading like wildfire across segments of capital markets and its intermediaries. Unless firms and individuals are prepared for this change, it is going to be extremely difficult to survive and prosper in the new world of financial services.
Banks, especially Wall Street Banks, have been twisted out of shape by both regulations and technology. Banks have been forced to scale down its proprietary businesses of trading and investment banking after many of them had to be bailed out by the government’s and regulators. Banks have long made spreads on information arbitrage but with technology making sure information is passed seamlessly and real time and made available on mobiles, the spread is vanishing into thin air. The whole business model of banks is in doubt.
The shift in preference from public to private is becoming more and more apparent. The money flowing into private firms, largely in the technology space is growing rapidly given the huge success of early investors into companies such as Facebook, Twitter, Alibaba, Uber and Airbnb. Private firms are not finding it necessary to go public to raise capital, the private markets have become more efficient in price discovery leading to higher transactions.
In a world of symmetrical information flows, asset managers will find it increasingly difficult to deliver superior returns and this will force many of them to look to private markets for beta. Hence, as returns across asset managers become commoditized, the traditional distribution models will vanish as investors use technology for their investment preferences.
The likes of Facebook and Twitter with their massive user base can become exchanges on their own without transaction costs. Price of securities especially illiquid securities will be discovered through #. Transactors can then close out deals offline and then go through traditional channels of settlement. Intermediaries who only provide transaction services without value addition to clients will have no role to play going forward.
Indian financial services industry too is being affected by changes. Technology is phasing out transaction service providers. Financial services are being consumed online leaving out the need for an intermediary. Amazon and Flipkart with their penetration into tier 2 and tier 3 cities can provide reach to producers of financial products at almost zero cost, leaving out the need for physical presence and distributors.
Every financial services firm or professional needs to evaluate where they stand in the marketplace and then either transform themselves or strengthen their presence.
Attend our Knowledge Workshop on Retirement Investments in a Fast Changing Dynamic World on the 4th of September 2015 at Sofitel BKC Mumbai. Please call Neelima at +919819770641 or log in to investorsareidiots.com to register. Thank you for listening in.