Article
The future of money and… infrastructure investment
The future of money could have profound implications for those managing infrastructure, where investment will be both necessary and potentially costly. Rates of return, meanwhile, are uncertain, further adding to the challenge. Difficult questions will have to be asked concerning value for money, with ‘fast followers’ learning from the experiences of those brave enough to take the first steps. And, conversely, bravery will also be needed to resist calls for unnecessary expenditure as the future of money plays out.
For financial institutions, their computing and data infrastructure may need to be rethought as the wider adoption of digital assets leads to an increased demand for computational power and storage capacity. Firms will need to be able to process, validate and securely store large volumes of digital assets transaction data, as well as manage complex underlying cryptographic algorithms and blockchain-related technologies. Hence, as firms evolve, so too will the number and capabilities of the staff needed to manage this change.
Certain past investments may also need to be written off, though the extent of reform required will depend largely on the nature of financial activity and the need for interoperability, as well as the interests and demands of stakeholders, including both buyers of technology and those regulating the markets they operate in.
More firms may therefore consider partnerships with payment services providers (PSPs) and other third parties that can remove the administrative burden and cost of running multiple systems. Options that favour efficiency – both in terms of raw cost and intrinsic energy efficiency – as well those that enable rapid change with minimum practical complexity for users will be much sought after. Third party providers that can furnish the high-performance computation, analytical capabilities and scalable storage that firms will need in the future will also be in high demand.
Payment providers, including banks, may choose to manage aspects of the work needed to retool systems and solutions themselves. For example, the adoption of low-code/no-code environments to support ‘home brew’ efforts will, for some, result in enhanced efficiency and flexibility. They can also leave firms better placed to deliver differentiated services in the future. However, it will be difficult for such firms to achieve their goals sustainably without the support of partners to augment existing internal knowledge and experience. Elsewhere, through canny investment, it may also be possible for firms to manage the costs of transformation by retaining their legacy systems for longer. However, for some providers, the moment to tackle outdated legacy core architecture may already have passed. In this scenario, transformation will become a major priority area given the more demanding infrastructure needs of a financial system increasingly dominated by digital assets. Indeed, unless consumers’ expectations of slick, frictionless digital experiences can be met, a failure to adapt here could have serious consequences in the long run.
Without tangible real-world benefits to articulate to budget holders and the board, the change that is needed will only come slowly. Convincing stakeholders to embrace change sooner rather than later then will be critical for those tasked with delivering that change.
Those who do seize the opportunity to adapt could benefit in several important ways, including:
- Automation savings – smart contracts will allow firms to automate large segments of the contracting process, across facilitation, verification and enforcement.
- Transaction cost savings – blockchain-enabled payment systems may lower overall transaction costs, providing benefits for banks, insurers, asset managers, central banks, tax collection authorities, corporates and consumers.
- New revenue streams – beyond lowering costs, the characteristics of digital currencies, including their enriched data and ‘programmability’ will not only improve the provision of today’s services, but also support the creation of new future products and experiences.
In addition, the increasing global interoperability of banking systems could also benefit consumers and businesses by making cross-border payments simpler and more affordable. In this way, international cross-border trade could be smoother, cheaper and quicker in the future. The wider adoption of real-time payments would also represent a departure from the current system in which transactions in some areas are still settled on a batch basis over a number of days. Indeed, the increasing availability of real-time payments could result in greater liquidity and improved financial stability. Similarly, the cost of regulation may fall as regulators themselves become more effective, supported by enhanced data and wider standardisation.
From an infrastructure standpoint, some of what is needed is already in place in some countries – particularly in areas like real-time payments. The next step in facing the future of money will be to complete the work that has already been started, and plan for further development and deployment of parallel and/or replacement infrastructure. In addition, standards need to be agreed, customers prepared and partnerships – commercial, governmental and regulatory – forged.
Coming next: We consider the necessity of preparing for and investing in change, staying updated on innovation and regulation, developing capabilities and prioritising compliance and security. Forecasting the future is challenging, but by providing some insight and opinion on its known aspects and uncertainties, we aim to help you consider your own strategy, underlining the importance of collaboration in navigating the evolving financial landscape.
