The future of almost eve.., p.21
The Future of Almost Everything, page 21
Between 10% and 20% of all earnings across the EU are untaxed, depending on the country. Such informal cash transactions are now reflected in official estimates of the size of each nation’s economy, along with revenues from illegal drugs and prostitution. (The latter is worth at least £4.5bn a year to the UK economy alone.)
EU nations with the largest ‘shadow economies’ include Belgium, Spain, Italy and Greece. The higher the tax burden on employers and workers, the more widespread tax avoidance tends to be. India’s untaxed earnings percentage is at least 20%, if you include 85% of all workers who pay no tax. China’s is probably around 10%.
Expect rapid growth of virtual cash: untraceable, anonymous units of value such as Bitcoin, traded across the internet. Virtual cash will be hated by governments, because it underpins the dark web, and is used to trade drugs, buy arms, pay ransoms, hire assassins or fund terrorists. China has already banned Bitcoin and we can expect other nations to follow – while the rest will seek to regulate or tax its use (which will be difficult).
Future of e-payments
We will see more than 200 billion web payments a year by 2025, up from around 50 billion today. A third of all such payments today are on smartphones, but this proportion will rise to at least 70% by 2025. As we have seen, most e-commerce transactions in the UK are already on mobile devices.
Most retail payments on mobile devices take place not in Europe or America but in Africa. And for several years, most m-payments in Africa were in Kenya, where over a third of GDP is already traded each year using the M-Pesa alone. Around 25% of the entire population of Africa already has a mobile money account of some kind – compared to only 2% in Latin America. Africa has redefined retail payments, and Asia will be next. Take Singtel, for example, which has around 430 million registered SIM cards in its customer base, including partners. Of that, maybe 200 million are unbanked, with no access to financial services. I expect that up to half of these will carry out their first m-banking transactions over the next 5 years.
Free telco-banking
As we saw in Chapter 1, the cost of providing free phones, tablets, bandwidth, video calls and so on is falling rapidly towards zero. The cost of biometric ID is also falling, and it will soon be impossible to buy a smartphone without finger print recognition.
At the same time, revenues that can easily be captured by mobile payments are increasing fast, as mobile payment systems become more widely used. When you combine the two trends, it becomes clear that there will soon come a point where companies will offer free smartphones, video calls, voice calls, mobile computers, broadband, perhaps even throwing in free TV and movies – on condition that customers only use a specially set up smartphone for payments. Indeed, it is already starting to happen.
But that spells the end of telco contracts. It also means the end of traditional retail banking. The most important and urgent question for the board of every large retail bank and telco is this: When telco and banking fuse into one, who on earth will own the customer relationship?
The answer is not the bank. At least, not without partnership, or without huge gaps in understanding what the customer is actually doing.
As we have seen, one of the most important things to know about any mobile customer is where they are right now. But banks are blind to location. They may have credit card and current account statements, but this only tells them about yesterday. They desperately lack the live intelligence that only telcos own. What is more, the same telcos also see every web page, every search term, which Apps are downloaded, who the person calls and when. So we can see that hybrid companies, telcobanks, may be able to gain a huge advantage in owning the customer, combining the insights from telcos with a wide range of next-generation financial products and services.
Fight to own the new global standard
As we have seen, scale is everything in a global world, so there will be very few winners in telcobanking. The telco company Qualcomm has dominated mobile phone technologies for 2G, 3G and 4G for many years. So much so that up to 70% of its costs are legal, defending patents. In a similar way, there will only be room for maybe two or three mobile payment systems.
Expect a huge fight among consortia of banks, telcos and IT companies, seeking to impose their systems as global standards. The prize will be billions of dollars in royalty payments, from every financial institution, retailer and telco, for the following two decades.
We will see many new alliances between telcos and financial services, like Vodafone’s with Visa and Nectar, in the race to create these new global platforms. We will also see campaigns by companies like Apple and Google to promote their own payment systems as the new global standard.
A key complication, however, is that if a telco seeks to become a bank, it immediately becomes subject to all kinds of limitations on the amount of capital it uses, its reserves policy, and so on, in places like Europe and America. This may mean that most innovation in telcobanking is pioneered in emerging nations.
Why most banks are far too small
You could say that banks are primarily IT companies, trading electronic bits of data, plus a few financial experts and advisors.
A primary vulnerability of banks, therefore, will be IT failure and attack: loss of confidential data, hacking into bank accounts, total systems failure including ‘denial of service’ attacks.
The trouble is that IT complexity and vulnerability has raced far ahead of IT budgets. In many banks, most efforts by IT departments are spent trying to get old ‘legacy’ systems to talk to each other. Each merged bank brings its own IT history, usually with unresolved mess from other legacy systems.
Not a single person who understands the code
In many of the world’s largest banks there is not a single person alive today who has a full grasp of all the IT systems, and how they inter-relate. Code may have been written in old computer languages that hardly anyone uses now. Bugs may exist that no one understands, in areas of code that nobody knows about. Interdependencies are often overlooked. These are all reasons why it can easily take over 7 years to fully sort out the mess from a single merger.
This may all seem rather shocking to someone outside the retail banking world. It can also lead to bizarre gaps in customer insight. For example, I met a senior leader of a large bank the other day who complained that no one could tell her how many retail clients they had who were over a certain age (at least, not without adding up different estimates on a spreadsheet).
It means paralysis instead of agility. It means slashed budgets for mobile Apps, tablet-based banking services or next-generation products. Indeed many banks are unable to rapidly roll out new online products on their existing platforms, because of these incompatibility issues. They are gridlocked by their past. Yet these same banks may be busy embarking on yet new mergers.
Security costs are soaring
To make matters worse, security costs have rocketed, and banks have an increased number of new compliance requirements following the recent crisis. As we have seen, large banks are seeing more attacks every month than they used to see in a year only 5 years ago. They are also having to deal with huge numbers of thefts from customers who have been tricked by phishing attacks, using rogue bank web pages.
Then along comes a highly innovative, customer-focused, software company like SalesForce, with a development budget of $3bn a year, spent mainly on cloud-based call centres, that can set up in a matter of days. Using their system, a bank can transform customer experience overnight.
One must conclude, therefore, that a bank with a total IT budget of – say – only $900m a year, of which $820m is spent on legacy systems and security, is not likely to survive the next generation of mobile banking. Their IT development budgets are just too small to keep pace with customer expectations.
Even harder for retail banks to grow
But how do banks grow much larger, to achieve the right economies of scale in IT innovation, without being completely overwhelmed by yet more legacy problems? One way forward will be to create partnerships, either with software houses or with other banks in non-competing territories. Expect all kinds of new IT innovation alliances between – say – banks in Europe and Asia.
Some banks are starting to dump entire existing IT systems for retail customers, migrating them in stages onto completely new modular platforms, where new products can be bolted on as simply as installing a new App, and where there are fewer complexities and unknown horrors for attackers to exploit.
Future of shadow banking
As we have seen above, our world needs banks, and easy flow of money between those who want to lend and those who need to borrow. If regulation screws up a vital part of the banking system, you can be certain that a more lightly regulated, unconventional way around will be found. And so it is that shadow banking has grown.
Shadow banking caused the last financial crisis, and is likely to cause another. Shadow banking is a term given to a loose collection of companies that are providing services similar in many ways to some of the things that banks do. So they may package up and sell on loans. Shadow banking may include hedge funds, private equity funds, brokers for state loans, and so on.
Because these groups are hard to define, they are hard to regulate. And governments are less anxious to do so than with banks, since there is much less risk that failure will result in failure of a bank. Losses are more likely to be limited to a set of larger investors, rather than a million retail customers.
Future of pensions and fund management
Fund management will be responsible for a new mis-selling crisis at some point over the next decade, with fines and lawsuits likely to be so large that they will break some of the world’s largest investment banks. Expect global reforms of fund management and the pensions industry.
This is an industry with awesome global power. Black Rock alone has $4.1 trillion of directly controlled assets, and oversees a further $11 trillion through their Aladdin trading platform. Over 17,000 investment managers and traders around the world are influenced by Black Rock’s analytical models to guide their decisions. That means a single error could trigger a massive cascade.
A 12-year survey of 2,846 mutual funds in America, overseen by 1,825 fund managers, showed that even managers who remained in the industry long term (presumably with the best performance) had no ability to beat the market on a risk-adjusted basis. All these fund managers use the same sources of information in most cases, and tend to focus on the largest stocks, so they find it hard to out-do each other (unless they break the law by insider trading).
Fund managers hate investing in actively managed funds
I have spoken to audiences of hundreds of fund managers over the years, with up to $1 trillion under management in a single event. Only a small minority would ever dream of recommending their own actively managed funds to their own friends and family, because they know very well that these funds usually destroy wealth, compared to ultra-efficient, low-cost computer trackers. This is a major moral issue, which calls the whole industry into question.
Yet despite all this, only 11% of global fund-manager assets are in tracker funds. Expect more legislation, enforcing transparency, capping fees, imposing additional compliance costs so that smaller funds become less viable. The number of fund managers employed globally will fall rapidly, and many smaller funds will be forced to merge.
New models of investing
We will see more boutique services allowing smaller retail investors to manage their own portfolio of investments in tax-efficient ways, right up to full pension provision, with live reporting data. Charges for such services will be low.
Younger high-net worth clients will invest less in large institutional funds and will use their own family offices more to manage their wealth.
Pension funds are likely to invest more heavily once again in hedge funds, but complexity will continue to create new risks. Pension funds will focus on hedge funds that are more easily understood. Expect a severe public backlash against hedge funds if we see failures of several more over the next few years.
Death of national stock exchanges
The days of traditional stock exchanges are coming to an end, though much more slowly than I predicted 15 years ago. Companies don’t like them because their global business is greater than a single exchange, which leads them to multiple listings. Investors don’t want them – they want to trade online 24 hours a day. Technology doesn’t need them – because a single server in one building can handle all the mouse clicks.
We are likely to see many more stock exchange mergers, across national boundaries and regions, to reduce technology costs, share marketing and increase liquidity.
Over 70% of all trades on Wall Street are not ‘real’ trading decisions at all, but are made by robots owned by just 2% of 20,000 trading firms, reacting automatically to all kinds of data, sometimes with strange results. High-frequency trading also drives 30% of EU trades in fractions of seconds. The new trading kings are mathematicians who fine-tune such algorithms.
In 2014, the AP News Agency was hacked and a false tweet sent: ‘Breaking: two explosions at the White House and Barack Obama is injured’. Within milliseconds, trading computers on Wall Street detected key words and made instant sales. The Dow Jones fell 140 points, wiping out $200bn of capital. The hack was exposed within minutes and prices recovered, netting the criminals huge profits.
Speed will be everything. Robots will continue to fight against robots to get trades executed a fraction of a millisecond before each other, which will require constant upgrades of ultra-fast cabling by trading companies, and many other techno-tricks. For example, some companies are using microwaves to transmit orders faster than other traders, who are still using old fibre-optic cables.
Growth of spread-betting
We are also seeing rapid growth of 24-hour spread-betting websites, where individuals or companies bet on a share price movement taking place, without owning any shares. A million people in the UK alone have spread-betting accounts, with bets usually placed by smartphone, encouraged by full tax relief on all ‘winnings’.
Bets are being made on the future price of any share, commodity, fund or currency. Many people will win or lose huge amounts in this global casino, as gains and losses are highly leveraged. A single £10 bet could win or lose £1,000 if not capped. All these kinds of ‘derivatives’ will create strange price movements, which at times will be very violent, confusing and destabilising.
Future of insurance industry – huge growth
Insurance is as fundamental to a stable and prosperous society as banking, hospitals and schools. Yet more than 3 billion people have never heard of insurance, do not know how it works, and have no idea how to get hold of it.
Expect rapid growth, therefore, of basic insurance in emerging markets, targeted mainly at the emerging middle class. Health insurance will lead the way, after insurance types that people are forced by law to buy, such as motor insurance. Expect a boost in many nations in sales of life or health products, encouraged by tax rebates, especially where they are structured to contain an element of saving. Many who are unbanked today will gain their first insurance cover using a smartphone, or through micro-loans groups and savings associations.
EU retail insurance dominated by home and motor
Most insurance sales in the EU will continue to be cover for homes or vehicles, with travel and life insurance following behind. Expect savage online competition from so-called aggregator sites that display competing quotes for the same risks from up to 300 different companies.
These sites are already seizing over 40% of the general insurance market in countries like the UK and we can expect a similar pattern in many other developed nations by 2020. Insurers will be able to win sales without offering the lowest price, but only by persuading customers of the value of a ‘favoured’ brand, to pay out when there is trouble, to handle a claim rapidly and sensitively.
Price comparison means fines for loyalty
Aggregators will provide a very precise mathematical tool for marketers to measure their own brand value. If the cheapest quote from an unknown company is $150, but the customer selects the third one down the list, which is a well-known brand offering a price of $230, then we know that the ‘added’ value of the brand to that person is $80.
European insurance companies often offer very low prices for new customers, making their profits in the following years by increasing prices for their loyal customers. Expect growing numbers of customers to switch companies every year – to whichever insurance company is the most willing to throw money away with such unsustainably low pricing.
Why many insurers will detach from banks
Many banks experimented a decade ago with their own insurance companies, hoping to ‘cross-sell’ insurance products to existing customers, but in most cases the results were disappointing. Most insurers will remain independent of banks, with partnerships and syndicates but all held at arms’ length. This is even more likely in future with different and complex regulatory requirements for each.
Re-insurance will be a vital part of the future of all large insurers, backed by huge corporations like SwissRe and MunichRe. These companies will be taking views on every trend and Wild Card in this book (see p. 18), how they interact, what it all means for, say, business disruptions over the next decade in a particular industry, or for the risks of New Orleans being hit by another huge hurricane, or Russia invading Kazakhstan.
Future of the travel and hospitality industry
Along with manufacturing, retail and banking, the travel industry will be a fundamental engine of future globalisation. Human beings are genetically programmed to travel as hunter-gatherers, and have an irresistible urge to explore. Therefore, whatever happens to the global economy, and in other world events, we can expect the number of people travelling each day to grow dramatically as wealth increases, and as real costs of transport continue to fall.
