How financial technology may alter your relationship with banks and brokers over the next 10 years

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A decade has passed since a burst of inno­va­tion began to push fin­tech into the main­stream. Bank­ing on a smart­phone, send­ing cash via peer-to-peer pay­ment ser­vices and using auto­mat­ed port­fo­lio man­agers were once exot­ic, rel­a­tive­ly niche ser­vices then, but are com­mon­place today.

What changes are com­ing in the next 10 years? Fas­ten your seat belt as we take you on a tour of tomorrow.

Wider access to alternative investments

“Alter­na­tive” invest­ments — a broad cat­e­go­ry that includes col­lectibles like wines, cars, art, stamps, coins and even base­ball cards as well as real estate, nat­ur­al resources and infra­struc­ture projects — have grown more pop­u­lar over the last decade, although min­i­mum-invest­ment rules have kept many small investors on the sidelines.

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New fin­tech firms, by offer­ing the abil­i­ty to invest in frac­tion­al shares of alter­na­tives, can help that invest­ment class go tru­ly main­stream and ush­er in three changes in how many peo­ple invest.

First, direct access to alter­na­tive invest­ments will like­ly become more com­mon at large finan­cial ser­vice firms. Today, investors seek­ing access to alter­na­tives usu­al­ly have to open an account at a spe­cial­ized ser­vice such as an art invest­ing plat­form or a real estate crowd­fund­ing firm. Fin­tech may enable investors to buy and sell alter­na­tives under the same login as their main bro­ker­age account.

See: Should you try alter­na­tive invest­ments? Here’s what experts say, how much to put in, and what to watch for.

Stock tips from a robot

Sec­ond, robo advis­ers — online-only finan­cial advice ser­vices that man­age clients’ invest­ment port­fo­lios with lit­tle to no human inter­ac­tion — may start to incor­po­rate alter­na­tives into their robo portfolios.

The wall cur­rent­ly sep­a­rat­ing alter­na­tive and tra­di­tion­al man­aged port­fo­lios seems to be poised to col­lapse, and auto­mat­ed advis­ers will include the full invest­ment uni­verse. A sign of this trend is the robo advis­er Betterment’s recent acqui­si­tion of a cryp­to port­fo­lio manager.

At the same time, an increas­ing num­ber of juris­dic­tions are like­ly to lift at least some of the rules that deter­mine who qual­i­fies as an “accred­it­ed investor” autho­rized to access cer­tain kinds of alter­na­tive invest­ment products.

While these rules vary by coun­try, they typ­i­cal­ly require indi­vid­u­als to have a high annu­al income (in the U.S., $200,000 for an indi­vid­ual or $300,000 for a cou­ple), a sig­nif­i­cant net worth ($1 mil­lion, not includ­ing pri­ma­ry res­i­dence) or a pro­fes­sion­al cer­ti­fi­ca­tion (such as a Series 7 or Series 65 license).

Accord­ing to the most recent SEC data, about 13% of U.S. house­holds in 2016 had some­one who qual­i­fied as an accred­it­ed investor. Crit­ics con­tend that such rules inap­pro­pri­ate­ly restrict access to cer­tain types of products.

Alter­na­tive-invest­ment boost­ers expect that, over the com­ing decade, some juris­dic­tions will lift many of the restric­tions (by, for exam­ple, replac­ing the net worth require­ment with an online finan­cial lit­er­a­cy test) or to phase them out entirely.

“This com­ing decade will see alter­na­tives go main­stream and (cause) a shift away from the clas­sic 60/40 invest­ment phi­los­o­phy,” said Milind Mehere, founder and CEO of Yield­Street, an online mar­ket for alter­na­tive invest­ments. He was refer­ring to a com­mon strat­e­gy of invest­ing 60% of one’s port­fo­lio in equi­ties and 40% in bonds.

“In 2032,” Mehere added, “I see my per­son­al port­fo­lio as a blend of stocks, alts, cryp­to, com­modi­ties, cash, tax­es and trusts all deliv­ered in a seam­less expe­ri­ence via a super app. Alter­na­tives will be a part of the stan­dard investor portfolio.”

See: Clas­sic 60/40 invest­ing strat­e­gy sees worst return in 100 years. How about 40/60?

DeFi is small, but poised to grow

Out­side of the tra­di­tion­al finan­cial indus­try, advances in cryp­to tech­nol­o­gy are fos­ter­ing decen­tral­ized ver­sions of finan­cial prod­ucts (known as “DeFi” for short). DeFi pro­to­cols such as Aave, Com­pound, and Uniswap use soft­ware to offer dif­fer­ent finan­cial ser­vices — such as lend­ing, trad­ing and insur­ance — for cryp­tocur­ren­cy users.

DeFi pro­to­cols are not like tra­di­tion­al large banks or fin­tech com­pa­nies. Instead of lead­er­ship dri­ve by a board of direc­tors and the CEO, major changes to DeFi pro­to­cols gen­er­al­ly can only be made if the major­i­ty of the com­mu­ni­ty votes for a change.

DeFi cur­rent­ly is used most­ly for trans­ac­tions per­formed entire­ly on a blockchain, such as trad­ing cryp­tocur­ren­cies. Most oth­er finan­cial prod­ucts need a real-world ver­i­fi­ca­tion. Mort­gages require cred­it checks and income ver­i­fi­ca­tion, for exam­ple, while insur­ance needs a process to han­dle fraud alle­ga­tions that end up in pro­tract­ed, mul­ti­year legal battles.

Over the next decade, look for DeFi to become more com­pet­i­tive with tra­di­tion­al finan­cial ser­vices. It can go main­stream by improv­ing the over­all user expe­ri­ence and the abil­i­ty of blockchains to work with real-world assets.

Mar­ket­Watch cryp­to reporter Frances Yue inter­views Sushiswap’s Rachel Chu and Aave’s Nico­lo Stewen about decen­tral­ized finance — how it works, what the ben­e­fits and risks are.

Cen­trifuge, Etherisc, and Mak­er­DAO are three DeFi pro­to­cols work­ing on projects to bridge the gap between blockchain and the real world, but the total val­ue of assets on DeFi pro­to­cols that involve real-world inter­ac­tion remains rel­a­tive­ly small.

Innovation beyond imagination

Over the next decade, how­ev­er, DeFi’s advo­cates expect it to become more com­pet­i­tive with tra­di­tion­al finan­cial ser­vices and real-world prod­ucts — and allow whol­ly new ones.

“The real inno­va­tion that ben­e­fits con­sumers over the next decade comes not from drag­ging lega­cy busi­ness mod­els onto a blockchain, but from the growth of new cryp­to-native DeFi solu­tions that can meet your real-life finan­cial needs,” said Lex Sokolin, the glob­al fin­tech co-head at Con­sen­Sys, a blockchain soft­ware tech­nol­o­gy company.

“Just like all past tran­si­tions to new tech­nol­o­gy, there will undoubt­ed­ly be chal­lenges as we explore the fron­tier,” he added. “But decen­tral­ized finance pro­vides a nov­el, and like­ly supe­ri­or, archi­tec­ture to man­u­fac­ture finan­cial products.”

Also see: The 2022 tech wreck is not the same as the dot-com bust, but investors will still want to change their game

Key to success: simplify

To broad­en its main­stream adop­tion, DeFi will need to be eas­i­er for con­sumers to use. Inter­act­ing with it today often involves nav­i­gat­ing dense finan­cial jar­gon and a plat­form that offers few instruc­tions and lim­it­ed help and lacks fea­tures such as a detailed trade-con­fir­ma­tion screen. Learn­ing how to safe­ly use DeFi prod­ucts and how to nav­i­gate the industry’s jar­gon can be very intim­i­dat­ing to cryp­to newcomers.

As DeFi over­comes these two chal­lenges over the next decade, how would con­sumers ben­e­fit? In the devel­op­ing world, DeFi can give bil­lions of peo­ple an inde­pen­dent alter­na­tive to insti­tu­tions run by author­i­tar­i­an gov­ern­ments (which can seize cit­i­zens’ assets with­out due process), shaky local banks and volatile currencies.

DeFi’s val­ue to peo­ple in emerg­ing economies is evi­dent in Chainal­y­sis’ glob­al rank­ing of con­sumer adop­tion of cryp­tocur­ren­cy, which is dom­i­nat­ed by devel­op­ing countries.

A change is gonna come

Devel­oped economies gen­er­al­ly do not face the same insta­bil­i­ty chal­lenges. There is a wide range of opin­ions regard­ing how (and how fast) DeFi will change the devel­oped world over the next decade, but most of the tech pio­neers and exec­u­tives inter­viewed for this arti­cle con­cur that it is like­ly to cre­ate inno­v­a­tive finan­cial prod­ucts and experiences.

“Through­out my career in finan­cial ser­vices, I have seen first­hand the lim­i­ta­tions imposed on the indus­try by lega­cy rails,” said Jar­rett Lilien, pres­i­dent and COO of Wis­domTree Invest­ments, a fund-man­age­ment com­pa­ny. “Not unlike the dis­rup­tive impact of ETFs on mutu­al funds, DeFi and blockchain tech­nol­o­gy are poised to rede­fine the foun­da­tion­al infra­struc­ture of finan­cial ser­vices — and the indus­try needs this kind of innovation.”

As an exam­ple, Lilien said blockchain could enable peo­ple use gold or U.S. Trea­sury secu­ri­ties the way they now use cash — with­out hav­ing to car­ry the assets themselves.

The growth of user-friend­ly DeFi ser­vices over the next decade could cre­ate a new kind of com­pe­ti­tion for tra­di­tion­al finance.

What is the future of fintech?

“A decade from now, if your com­pa­ny isn’t inter­act­ing with the DeFi ecosys­tem — or cryp­to and blockchain more broad­ly — then your firm won’t be con­sid­ered a fin­tech com­pa­ny,” said David Klein, founder and CEO of Com­mon­Bond, which finances solar ener­gy projects for con­sumers and solar installers.

The four trends we have dis­cussed — an advanced AI-based assis­tant, automa­tion of day-to-day finan­cial needs, alter­na­tive invest­ments going main­stream and com­pe­ti­tion from DeFi ser­vices — rep­re­sent only the biggest changes fac­ing finan­cial ser­vices. Many more are on the way.

The next decade may also see more embed­ded finance, in which retail­ers and oth­er non­bank com­pa­nies offer bank-like ser­vices such as extend­ed pay­ment plans; the issuance of dig­i­tal cur­ren­cies by cen­tral banks; and greater inte­gra­tion of gov­ern­ment ben­e­fits into your finan­cial accounts.

Your rela­tion­ship with mon­ey will evolve with each such change.

“If you con­sid­er the first decade of fin­tech to be fin­tech 1.0,” said Adam Nash, co-founder and CEO of Daffy, a ser­vice that auto­mates char­i­ta­ble giv­ing, “then fin­tech 2.0 over the com­ing decade will move beyond cre­at­ing online ver­sions of tra­di­tion­al finan­cial ser­vices and toward fun­da­men­tal­ly new ways to inter­act with your mon­ey and your finances.”

Grant East­er­brook is a long­time fin­tech con­sul­tant. His work in the indus­try has been cit­ed in the media over 150 times. East­er­brook also co-found­ed the fin­tech start­up Dream For­ward, which Expand Finan­cial, a retire­ment con­sult­ing firm, acquired in 2020. 

This is the sec­ond of two arti­cles mark­ing the 10th anniver­sary of finan­cial tech­nol­o­gy. This arti­cle is reprint­ed by per­mis­sion from NextAvenue.org, © 2022 Twin Cities Pub­lic Tele­vi­sion, Inc. All rights reserved.

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