A lot of things have changed in the financial services over the past few decades. In part we discussed the casualization of work (flex-work) and its effect on being able to obtain credit, ranging from smaller personal loans to mortgages, and how banks have struggled to keep up with these changes, at the expense of the consumer. We also talked about the application of AI to deal with the changes in the financial structures and how neo-banks are leveraging data and AI, outperforming banks in certain sectors when doing so. In this part, part 2, we are discussing the concepts of retirement, paying and investing, and see what the future holds for these services.
Retirement is Outdated The concept of retirement as we know it, being able to fully stop working 65 (or thereabouts) and being supported by a financial scheme in your respective country and some of your own savings/investments, whilst being able to maintain the lifestyle you have grown accustomed to is going to disappear, and has been disappearing for a long time. With a life expectancy in the First World which tacks on an additional 15-20 years after retiring you might want to rethink sipping Mimosas in the Caribbean and living La Dolce Vita. I cannot imagine myself not working for 15-20 years (there are some issues with that too). I have a feeling a lot of people will be like Robert De Niro in one of my favourite films, The Intern, and just get bored and want to get back to (a form of) work. Not only is not working for 15-20 years something that is difficult to wrap your head around psychologically, it is also not possible for many financially. Debt has been on the rise, and so have inflation and the general cost of living, whereas wages remain stagnant and casualisation doesn’t come with a 401(k) or other pension benefits. The idea of having been able to accrue enough wealth in approximately 40 years to sustain that lifestyle for another 20 years without income is just incredibly unlikely. In addition to your own wealth accrual not being enough, most countries are seeing their resources dwindle as well, as the boomers are retiring and expect to be paid by the resources of a much smaller group of youngsters. This might end up solving itself as, you know, people die, but the idea of having to wait another 20 years for this side of the problem to be fixed is just moronic. And also does feel morally ambiguous… So what can we do? Well, financial services need to account for the fact that we are living long. Like we are living for ages (you can tell my age by this statement, can’t you). Beyond the financial sector, and moving into all sectors of employment, we need to let go of the idea that anyone above 55 is “too old” and has their best years behind them. I’m not saying they need to remain at top until they are 80, stopping younger generations from rising up the ladder and accruing status and wealth (I’m looking at you, academia…), but the idea that someone at that age should retire, with the wealth of knowledge and experience that they have makes very little sense. Now they might not need (or want) to remain in the position of their last job. But work can take many forms and can generate additional income in many different ways. Experience is very valuable, and can create additional value through teaching, mentoring, writing or any other form of information sharing. Online courses are a great way of generating income, consulting is also an option. It has become quite popular to become an entrepreneur doing all the above, and selling experience in different ways. And who is going to say no to being taught by someone who has been in the field for 40 years? I wouldn’t…
Investing Another important aspect of wealth accrual is investing. Investing has seen quite the development in the past 5-10 years alone, with apps such as Robinhood (not a fan, but whatever…) coming onto the scene and promoting active investing rather than passive investing. If you’re not 100% into investing and not too sure what the benefits of passive vs. active investing are, please read this article by the amazing Wim Steemers, who literally tells you everything you need to know and more. Back to the topic: investing has seen quite a change, and this change can best be described as democratization: increasingly more people can participate in the stock market. The increased accessibility of the stock market in and of itself is a great thing. The tools that are currently employed to do so are an entirely different story. Please do read my article on my many issues with “Robberhood” and the gamification of investing for more on that.
More interestingly, this democratization can go a couple of ways: one, it can open up investing to a lot more people, who will now go at it on their own, even with increasingly larger amounts of money. They will become their own investors and potentially their own financial advisors. Due to a large literature on overconfidence, I am not convinced this route is without risk, nor do I think it’s really the best way to go. Amateur investors don’t tend to make a lot of profit on the longer term. The second option, which I personally find preferable is that a lot of people are now getting into the realm of finance, through investing smaller amounts first, get to know the market and the investing environment and start to get educated about finance. Now, there is a lot of false education out there. My hope is that people will find the flowers through the weeds and end up with good education and ultimately with good financial advisors once they want to “up their game” and start investing with bigger amounts. There is a third option here as well, which is the gamification of investing, where apps like Robinhood will be treated like flappy bird or a very expensive form of snake (the OGs cannot be beaten). I won’t outline this here, but please do read the Robinhood article. There is a clear preferred option amongst the three mentioned (these are not exhaustive, let me know if you can come up with something else), but that preferred option means there is work to be done. Financial institutions, especially advisors need to work in a more targeted manner, finding their prospective clients and setting themselves apart from scams and not so great advice. There is also an argument to be made for stronger legislation regarding false education and dangerous marketing tactics focused on the “get rich quick” mentality. I do not expect this democratization to be without issues and the entire financial sector needs to be wary of that.
Payment Methods Lastly, we get to my raison d’etre: payment methods. The first cryptocurrency was created about twenty years ago (bitcoin) and crypto in general has been making a lot of waves since, especially in the past decade. Prices for bitcoin have risen to unreasonable heights, but have also plummeted back down as the Ethereum project, with an improved blockchain (more efficient) and increased usefulness (dApps) is taking over. Crypto, however, is still seen as a bit of a gimmick, without any “real world” application. However, a gimmick is only a gimmick if it is perceived to be useless. It doesn’t actually have to be useless, there just needs to be a consensus on it being useless. The opposite is also true. When crypto becomes integrated in our current financial system it might remain complex, distrusted and disliked, but it will most certainly no longer be a gimmick. And it is quite likely that crypto, or rather, the application of blockchain will continue to grow. The reason for this specific expectation of mine is the fact that blockchain is a tool of democratization. It gives access to different peer-to-peer lending protocols (DEX) and cuts out the middle man, who is often a financial institution, slowing down and increasing the price of the transaction. Several financial institutions have started investing in blockchain (mostly Ethereum) as well, so that is quite interesting and needs to be watched. Of course, the applications of blockchain are much wider than peer-to-peer lending, but I have to admit that I personally find that the most interesting application (so far), as crypto is not yet a valid method of payment in the traditional marketplace. Although companies such as Tesla have indicated an interest in making that happen. It has to be mentioned though that crypto is often also approached as a value store, rather than a currency. It is often referred to as “digital gold.”
If crypto as a currency is too abstract for you, I’ve got quite the surprise: I don’t think we will be dealing with physical money much longer. There has been a run on cash, reducing its application as other payment methods become quicker and safer to use. There might be a general run on physical methods of payment as a whole, with most transactions now happening online, retailers saving your account details so you never need to grab your card again and Amazon even trialing non-payment stores. This is what I would refer to as the abstractisation of money.
This abstractisation is further emphasized by apps such as Klarna, which enable consumption-smoothing through deferred payments, much like a credit card would. Klarna can essentially be described as an online credit card, but tries very hard itself to not be associated that way (the alternative is a loan shark Klarna, you’re not fooling me). This mode of payment further separates the enjoyment of a good/service from its actual cost, which means the consumer gets separated from their money even more. From a financial services perspective the shifting of all types of money into the online sphere might not necessarily be that bad. Cash is quite messy and costly from the perspective of a bank, online is easier, although it comes with a different form of safe keeping: cyber security. However, one issue to watch out for is that of indirect effects: research on payment methods does show that spending with cash is very different from spending with other forms of money, and abstractisation often leads to increased spending, increased debt and reduced awareness. If these effects persist and do not suffer a habitualisation period, they will give rise to a whole new plethora of issues. Which the financial sector will have to (eventually) deal with. I recommend they start now.
This is part two of how I see the future of the financial services, based on the trends we have been seeing for a long time, that some institutions have been rather slow to catch onto. I hope you enjoyed the read, and if you do have a different vision of the future, please do let me know via Twitter or LinkedIn. Also, don’t forget to read part one!