Welcome to the era of Finance 2.0

By: William Fenick

If you look back to 2005 and compare the financial services industry then to today, you would be struck not only by the differences but also by the continuity. Despite the turmoil in the financial markets, the advances in technology and the changes to the regulatory landscape, financial services companies operate in largely the same way. Products and services have changed but the way transactions are operated and executed is remarkably similar.

However, we are now reaching a tipping point from which we will see the transformation of the financial services industry, powered by new technology capabilities. We are currently seeing the rise of Finance 2.0, an era that will be characterised by disruption and innovation led not by the largest institutions but by start-ups and companies willing to adapt to the new paradigm.

As we move into this new era, how can we define Finance 1.0? Finance 1.0 had a number of features that make it distinct from the new iteration, but above all it was the era when speed took over the finance world. Low-latency transactions became the norm for all institutions as time became money and market speed became a source of profit.

Out of this an IT sprawl emerged, with companies hiring hundreds of developers and technicians to ensure that their trading was competitive and not hindered by poor infrastructure. Financial services companies began to rival large technology companies like Microsoft and Oracle for the number of engineers they had on their staff.

When you combined this with the technology complications that occurred as a result of mergers and acquisitions, IT had become a huge part of the finance operation, often to the detriment of the business.

Finally, the era was also defined by widespread leveraged bank sheets, with companies lending more than they had previously due to liquidity in the markets. This ultimately led to the housing crash and subsequent recession and models have had to be changed significantly since then to prevent this happening again.

The Finance 2.0 era will be defined not only by the industry’s response to the previous excesses but also by changes in technology. While low latency continues to be important, the arrival of technology such as Cloud and Big Data mean that innovations are coming from a range of different areas within finance. These technologies are available as utilities, meaning that use is not restricted to the finance elite. The availability of these new technologies means that we will see change being driven by smaller, more innovative companies rather than the larger, better financed institutions. This is already being realised by FinTech players, which have emerged due to technology changes as well as another key factor, budgetary restraint.

The money is no longer available to support thousands of developers at each bank and ways to reduce costs and improve profitability are in demand regardless of who or where the technology is developed.

The Finance 2.0 era represents an opportunity for those who are willing to be more innovative in their approach to finance and more willing to collaborate. Collaboration around specialisms, whether it be in a specific incubator or even within a co-location data centre, will be key to ensuring that this era is characterised by positive disruption.

The ultimate aim is to provide customers with better services that lead to good returns for companies, and the new era will see many more companies sharing in this than the previous one, enabled by the availability of technology.