After surviving the Global Financial Crisis in 2008 and the Covid-19 pandemic, the finance industry has had to evolve rapidly. There has been a move towards technological advancements, a shift towards sustainable priorities, and a surge toward investment in innovation. However, we have experienced a weakening economic output and rising interest rates lately, which may lead to more difficult conditions for banks, insurers, and fund managers.
But what exactly do we expect in global finance? We offer some predictions and potential impact.
A New Test for Financial Stability
There has been a visible weak economic output throughout the world, which may highly impact North America and Europe before the issue is felt in the rest of the world. In totality, global financial firms will face more demanding conditions in 2023, with an environment marked by slowing economic growth, spiking prices, unevenly rising interest rates, and sharpening international political tensions.
The toxic combination of weakening economies and rising interest rates may lead to a rise in arrears and default on debts. This effect has already been felt, causing the collapse of major players in the industry, the latest being Credit Suisse.
But does this mean that the whole system will collapse? Of course not. Some trends are coming up, and others are already established as a direct replacement of traditional finance to a new global financial system. Some of the trends we are yet to see may include the inception of AI and blockchain into global finance, representing how the future may look.
What Does the Future of Global Finance Look Like?
1. Investment in Private Markets Likely to Occur
With the various challenges the finance industry has faced recently, firms increasingly seek innovative investment methods. As such, there has been a growing trend towards investing in private markets as private businesses rebound and investors look beyond traditional investment routes.
The stance to invest in private markets gives an excellent opportunity for those in need to extract more from markets.
2. AI and Machine Learning are the Future of Finance
We are in the digital age, which demands cutting-edge trends like artificial intelligence (AI) and machine learning. As such, they impact several areas of the finance industry, from banking to fintech startups.
Different inceptions of AI include fraud prevention, quantifying and assessing risks, and analyzing economic trends and data.
AI continues to merge technology, finance and economics, paving the way for companies to analyze the entire industry based on present data.
3. Impact of Regulation
The global focus within the sphere shifts to regulating sustainable practices and digitalization. The move towards greater regulation will likely continue to impact the sector differently.
If there are principled regulations, the finance sector can thrive, and clients can gain confidence, which may lead to a positive cycle.
4. Blockchain in the Future of Finance
Blockchain technology, mainly underpinning cryptocurrencies, has become a leading innovation in the financial sector. The decentralized blockchain network can potentially reduce and manage risk within the interconnected global financial system.
As such technologies within finance continue to impact the industry in unprecedented ways, staying ahead of such finance trends may be crucial for thriving in the evolving sector.
Blockchain will reduce the massive duplication of information, creating delays, conflicts, and confusion in many aspects of financial services.
5. The inception of ISO 20022 and its Impact on the Financial Industry
The most anticipated move in global finance is the introduction of ISO 20022, an international standard for exchanging electronic messages between financial institutions. The standard offers a common ground in terms of language that financial institutions can use around the world to communicate with each other. This allows for greater efficiency and accuracy when sending and receiving payments and reduces the risk of errors.
The standard is created to be flexible, as it allows for a wide range of transactions, including retail payments, corporate banking, securities trading, and cross-border payments.
ISO 20022 ensures improved efficiency, global harmonization, compliance and regulation, resilience, and enriched data.
The system, SWIFT, is outdated and no longer able to keep up with the demands of the modern world. Therefore, bringing the need for a financial service that can move quickly and efficiently.
6. Environmental, Social, and Governance (ESG) Investment Will be Crucial
Environmental and social responsibility is at the top of the global agenda, which makes the financial sector shift towards a sustainable future. By investing in ESG causes, finance firms prove their commitment to meeting vital climate goals.
Before investing in any firm in the future, people may look at firms that invest in the environment as a factor. ESG integration increases the value and returns for investors. Additionally, it is a stepping stone for early-stage businesses up for long-term sustainable success.
The application of digital technology to financial services, Fintech, is reshaping the future of finance. Digital technologies revolutionize payments, lending, investment, insurance, and other financial products and services. Such steps are helping bridge the gaps in access to financial services for households and firms. Additionally, it comes as a factor promoting economic development.
Technology acts as a factor that lowers transaction costs by overcoming geographical access barriers and increasing the speed, security, and transparency of transactions. There is still so much more to come in the global finance sector. We keep on hoping for the best out of the worldwide finance platforms.
Vincent Munene is a freelance writer and a great blockchain enthusiast. Blockchain has changed his life in terms of financial freedom and in return, he likes to educate people and keep them up to date on everything blockchain. He is a Biochemist by profession and also loves to play the piano.