When cyclists leave for work in the morning, several financial transactions can already be completed. Some are automated with the help of AI, others through payment in seconds. ChatGPT’s successor system may have alerted him that there were five new danger spots lurking at the construction site on his usual route to work. At the same time, he believes that the ETF mandate he has set will mean that savings will be reallocated to environmentally friendly investments as soon as a company is ready to use climate-friendly technology.
None of this has to happen. This is a future scenario that anyone with the forethought in banking, investment firms, insurance companies and unregulated shadow banking groups can think of. We asked representatives of think tanks in the Western world where financial markets could develop by the middle of the century. Some of their answers were less convincing than the cyclist-friendly picture.
“The pace of change is accelerating, making it increasingly difficult to get a clear picture,” said Roger Urwin, co-founder of the Thinking Ahead Institute at consulting firm Willis Towers Watson. Functioning financial markets require a healthy environment and stable social conditions. These things have not yet been achieved. “We’re taking future advantage of an environment where we didn’t invest enough,” he said. Firstly, this impacts the insurance industry, which negotiates claims contracts every year, but due to increasing natural risks, it is difficult to anticipate prices over a five-year period.
Data makes consumers more transparent
“There’s an avalanche hitting the market,” agrees Ingo Weber. He is the co-founder of a private equity fund and author of the book “Transform Yourself!” about disruptive technology and the end of classic insurance. This reassessment of risk occurs at a time when data makes it possible to respond to consumer profiles more individually. “The data is there, but personalized products haven’t been created from it,” Weber said. Loss prevention and avoidance has potential, but insurance companies have little pressure to test innovations other than natural damage.
Internationally, it is clear that insurance companies are using data more intensively – although so far this data has only been permitted at an aggregate level. For Weber, it’s clear that AI companies aren’t collecting data for fun. ChatGPT usage behavior, for example, reveals a lot about preferences. “OpenAI will monetize this someday. Customers will become more transparent,” he said. Finance functions will become more connected and can combine data from chat history. “It’s going to be more interesting because ChatGPT knows my budget and knows what I’ve asked for,” Weber said.
Aaron Klein of the Center for Regulation and Markets at the Brookings Institution think tank in Washington goes further. “Show me your Google browser history and I’ll tell you how likely you are to get divorced,” he said. Insurance companies will not be able to escape the trend of more risk-based pricing. But this has socially undesirable consequences: it will be more difficult for those who bear certain risks to obtain coverage and the pool of insured people will fragment.
Payment systems have unpredictable tipping points
Big changes could also occur in the payment system. It’s hard to predict which direction it will take. “A payment system is a network,” Klein said. They are characterized by having a critical point. Day by day, a system replaces its predecessor because suddenly there are enough users.
Cash will be replaced by cards, then by QR codes. “But they also depend on socioeconomic status,” he said. In the US, cash is a means of payment for the poor, ApplePay is used by the rich, checks are widespread, but rare in Europe. “Payment systems must be prompt and accurate. Payment systems must protect the public from fraud and fraud, be safe, fast and cheap,” said Klein. Optimists hope that identity verification in the future will be easier, pessimists hope that it will be much more complicated.
What all interviewees agreed was that the political situation will have a significant influence on the development of financial markets. It is difficult to predict where the country with the world’s largest capital markets, the United States, will go, or whether it will follow its authoritarian path in the long term. China will likely play a more important global economic role. “Europe is being torn apart on both counts,” said David Marsh, chairman of the Forum of Official Monetary and Financial Institutions and known in this country for his columns for “Handelsblatt.” “It’s all about how power is controlled by China and America.”
Market as a team for Trump’s business
He compared the current situation to the Holy Roman Empire. He recently published a book about this entitled “Can Europe Survive? The Story of a Continent in a Fractured World”. Great uncertainty awaits us. Financial markets are threatened with becoming agents of political representation. “They are currently developing into a team for Trump’s business,” said the former bank manager. What was less important in more stable times is now proven to be true: “Markets are immoral and have no values. They only chase profit.”
The political situation is leading to a turning point in the technology industry. “Everyone in the Big Seven was now worth more than all of Dax,” Marsh recalled. This refers to large technology companies such as Apple, Alphabet, Amazon, Nvidia, Microsoft, Meta and Elon Musk’s conglomerate. Marsh sees the hype surrounding AI – a bubble that will burst someday. “Currently they are so dominant that they do not create market balance,” he said. Even in the times of capitalists like John D. Rockefeller or Eleuthère Irénée du Pont, markets were not closely tied to politics.
“The concentration of the Big Seven is unprecedented,” said Roger Urwin of the Thinking Ahead Institute. Regulators have proven that they cannot match these monopolies. After the change of power in the US, no initiative can be expected from there to resolve the contradiction that winner takes all on the Internet, thereby gradually dissolving the competitive market.
Cybersecurity already defines risk management
For him, an important driver of development is the relationship between the main economic regions and the question of how peacefully they treat each other. “Cybersecurity is an important aspect,” he said. Companies will become victims of hacker attacks. Countries are involved. “This further destabilizes other countries. The financial system is very vulnerable to attacks from China and Russia,” said Urwin.
Digitalization significantly speeds up the process of crossing national borders. At the same time, players are looking for technical solutions to make them as safe and stable as the systems of the analog era. “The scale of fraud in some countries is so large that it is critical to the economy,” said Tobias Adrian, director of the International Monetary Fund’s monetary and capital markets division and a researcher at the Center for Economic and Policy Research in Washington.
Two major trends in recent years may continue in financial markets: the increasing fragmentation of institutions and the shift of transactions to unregulated institutions, also known as non-banks or shadow banks. “Over the last 50 years, much of the dynamics of the world’s financial markets emerged from deeper integration,” said Adrian. Venture capital is becoming more important, and IPOs allow companies to expand. The real estate market is becoming more independent of banks. Now the counter movement can be observed.
Disintegration starts with trading, does it also happen in financial markets?
The current formation of political blocs indicates that the long-term trend towards integration has been interrupted. Sanctions are used in trade, bilateral trade agreements change the meaning of World Trade Organization rules. “We have never seen this in financial markets before,” said Adrian, while still asking whether this would also apply in the future.
All of these trends had direct consequences for banks, some of which were recapitalized after the global financial crisis and then reregulated. Stricter equity regulations have changed their business models. Now it is market dynamics, technical innovation, and cultural factors of the possible application of new technical data.
Philippa Sigl-Glöckner continues to look at the determining factors in setting regulations. He is the founder of the Berlin-based think tank Dezernat Zukunft – Institute for Macrofinance. It aims to develop real economic solutions that enable people to get jobs and, in addition to goods, also offer social services according to demand. “It is desirable to have financial markets funding change,” he said.
German capital financed growth abroad rather than at home
However, research shows that money often flows into financial markets and is then used in a circular manner. In Germany, the long-term surge in exports was dominated by companies with a lot of capital that did not invest in new activities, but instead took a detour abroad. The state is often the most important investor in innovation. Equity rules are designed in such a way that it is not profitable to take risks. “The balance sheet is based on a regulatory structure,” criticizes Sigl-Glöckner. But this can be turned into a positive thing: regulations can be designed in such a way that state goals can be achieved more easily.
But the move from central and regulated institutions to non-banks is also a consequence of the market, said IMF official Adrian. “This is because smaller institutions, which later develop into larger institutions, are more agile than established institutions,” he said. Innovation is often hard to find at large institutions. Thus, transactions move to decentralized platforms where business rules cannot be implemented. This doesn’t increase risk as much as limit efficiency, he said.
Whether cyclists from above will ride to work more safely in the future, have better capital allocation, and faster financial transactions depends on many unpredictable developments. But he definitely still needs lights and a helmet.
