Why the Future of Financial Services Is ‘Very, Very Bright’

Step back from the doom-and-gloom forecasts, immediate risks and uncertainties, and the future of the global economy and financial services sector looks surprisingly bright. That was a central message of Trevor Williams' recent keynote address at Workday Rising Europe. Williams, the former chief economist of Lloyds Bank Commercial Banking and a lecturer and writer, detailed the good news related to two trends often seen as trouble: the end of rock-bottom interest rates and aging populations. 

Yes, overall global growth rates may be slower in the coming years - but slower isn't none. Higher interest rates will help prevent frothy asset valuations, making it easier to spot real value. And the promise of significant technological advances such as blockchain and artificial intelligence have only begun to be realized, Williams argued. "The world is not going to hell in a handbasket, and the size of the global economy will be immensely bigger - he estimates some $40 trillion in 10 years - because there's still so much scope for growth and development."

The Dawn of a New Era

Williams said we are now witnessing a "generational shift" in financial markets - and that's a good thing for a few reasons. More than a dozen years of extremely loose monetary policy had flooded markets with money and untethered the value of some financial assets from reality. 

As Williams explained, "Analogous to too much money chasing too few goods, so too much money was chasing too few assets was overpricing those assets. The wrong price signals were being sent. The rise in inflation that we're seeing and consequently higher interest rates have helped to burst that particular bubble." The upshot is that growth will slow across most geographies, and some countries will experience a recession. "We will go through some short-term pain, but there will be some long-term gain as a consequence of…the tightening of monetary policies to prevent inflation becoming embedded in the system." 

Higher interest rates will cause corporate defaults to rise especially among so-called "zombie companies" with low profitability that can't handle higher debt servicing costs. But this creates new opportunities for financial asset management companies to invest in firms that have long-term potential and need new investments, Williams noted. "The market shift we see will make it easier to spot real value, and it's making it obvious where investment opportunities are."

Higher interest rates ahead may well mean the annual global growth rate - which has hovered around 3.5% for the past few decades - slows to 3.1% through 2031, Williams said. Still, "What is the level of GDP likely to be? $40 trillion bigger than it is today." Not such a bad outcome, all things considered.

Moreover, GDP growth is particularly good for financial services because those services grow faster than the average GDP. "As people get wealthier, they need all sorts of insurance products, and that wealth allows them to de-risk their lives," Williams explained.

Digital Bright Spots

"Technology is changing more industries than ever before," Williams said. But in many ways, financial services firms are just getting started when it comes to unlocking tech's full potential, and "there is still plenty of scope for digital transformation," he argued.

Three technology areas with particular promise are:

• AI/ML, which is already heralded by future-ready financial firms for its breakthrough abilities to drive efficiencies, lower transaction costs, and bolster accuracy. But as AI/ML use becomes more ubiquitous across financial services, it's likely that "even some processes that appear to be too cognitive to be automated, eventually can be," he said.
• Quantum computing has made huge strides from theory to practical experiments and applications in recent years. Three scientists took home the 2022 Nobel Prize in Physics for their work exploring the nature of entangled quantum particles—unique particles that seem to defy everyday logic and behave as a single unit (entangled), even when they're far away from each other (superposition). "It's like magic," Williams said. "Capture that, and there's another revolution coming right down the pipe in…the financial sector." Applying such findings could eventually impact everything from ultra-secure communications to complex calculations not easily handled by regular computers.
• Blockchain has gained more ground in financial services than any other industry. Still, "that even hasn't reached its potential yet," Williams said. For that to happen, distributed ledgers would have to be embraced by more financial institutions and for a broader range of use cases—some of which may not yet be on the industry's radar.

The big picture takeaway, according to Williams: "The financial sector will benefit significantly from the technological revolution and will do so more than many other areas of the economy."

The Savings Boon

The world has seen exponential population growth over the last century. But the global population is now growing at its slowest rate since 1950, and declining fertility rates are seeding population plateaus in many parts of the world. The United Nations projects that more than half of the global population growth through 2050 will be concentrated in just eight countries, five of which are in Africa and three in Asia. 

"The world's economic geography - it's shifting," Williams said. That shift will fuel three knock-on trends: a redistribution of where workers come from, future growth markets and higher savings rates as more people move closer to retirement age.

The savings trend is already coming into view, and the financial services sector has reason to cheer. "We can measure global savings, and it's beginning to trend higher. Money held in reserve balances, foreign reserves, and global savings rates it's going up. And it's rising in populations that are ageing the fastest," Williams said.

Williams said that with more money deposited in more banks, financial institutions should have greater opportunities to redistribute savings into investments and various financial instruments, including insurance products, annuities, and pensions. "The prospect for this sector is…growth continuing into future years. The institutions around financial markets that create all of the instruments that manage, and price risks and handle data management and related technology will see continued growth

Williams emphasized that higher saving rates - and therefore greater investible funds in banks - will bolster the global fight against climate change. A "saving grace" of the structural changes beginning to unfold in the global economy is that due to higher saving rates, bigger pools of money will help address climate change by funding the technology to deal with it. Financial services firms can and should do their part to help decarbonize societies by investing in scalable new technologies.

For these reasons, Williams said that "the future of the financial services sector is very, very bright indeed."