Financial Sector is Buffeted by Various Factors in Today’s World
We are going through a transition like never before. Turbulence in financial sector during this upheaval will create considerable investment opportunities. But it’s only for those who can ride the waves.
Technology Transforming the Financial Landscape
Traditional banking is disrupted by novel financial services and monetary systems. Fall of Silicon Valley bank is an example of it. Silicon Valley Bank’s collapse was due to the sale of bonds at significant loss to address liquidity crisis.
Cryptocurrencies offer higher potential returns on investment, while neo banks offer great rewards on purchases. However, fintech and cryptocurrencies pose great risks to consumers.
Artificial Intelligence Reshaping the Financial Serices
Big Data and AI are the new fuel and power source of economy. Generative AI automates complex tasks, streamlining business and customer interactions.
AI-focused companies are thriving, buoying economy and displacing losses in other sectors. We are yet to see the benefits and drawbacks of AI in financial services.
Impacts of Climate Goals on Financial Sector
Our efforts to achieve net-zero by 2050 has driven the development of new fuels like green hydrogen and other renewable energy. This transition will make existing technologies obsolete, creating vast investment opportunities in renewable energy. However, investment in rapidly changing technology is a risky choice.
Geopolitical Uncertainty: A Threat to Financial Stability
Russia’s invasion of Ukraine has shaken global financial system. It created a need for a global currency to replace US dollar. China has long been promoting the use of Yuan. Currently, Yuan’s share in global trade is at 4.5%.
All major economies are now in a race to promote their own currency for global trade. This could lead to a chaos in the financial sector.
Initiatives like Vostro Rupee Accounts and Bilateral swap arrangements will reduce India’s dependence on US dollar. Such arrangements between different countries from around the world will help to do business without the dollar. However, one of this currency replacing US dollar is very unlikely. Thus, it could lead to more confusion, Chaos and instability.
For example, India and China are competing, where China cannot accept Indian rupee as replacement for US dollar, and India cannot accept Chinese renminbi as replacement for US dollar. But both India and China can have Bilateral swap arrangements to avoid US dollar.
Yesterday, China and Saudi Arabia have established a currency swap agreement. It enables them to conduct trade using their respective native currencies, where Chinese central bank will maintain a reserve of Saudi Riyal and Saudi’s central bank will maintain a reserve of Chinese Yuan. China already has such swap agreements with 29 other countries.
Financial Sector’s Future: Trends and Opportunities
United States has been the world’s leading economic power since World War II. 59% of foreign exchange reserves are in U.S. dollars. 7.5% of India’s GDP is from information technology/ business process management (IT-BPM). India’s IT-BPM sector depends heavily on United States. Therefore, De-dollarization will have a negative impact on global financial system.
Federal Reserve and the Securities and Exchange Commission (SEC) encouraging new financial services like crypto currencies, NFT and DeFi for international trade will be a game changer. It will promote Blockchain technology.
The recent revelation that the terrorist organization Hamas has been getting fund through cryptocurrency has sent shockwaves across the world. Intelligence and security agencies like the NSA and GCHQ should develop mechanisms to monitor cryptocurrencies, NFTs, and DeFi. Such measures are crucial to prevent the exploitation of digital assets for criminal purposes.
Lack of financial literacy that leads to bad debt is one of the major challenge of financial sector. Both customers and financial institutions want to avoid high interest rates, penalties and bad debt.
Many websites offer financial news, credit building tips, and investment options. However, too much of information can discourage people from consuming it.
The governments should require financial institutions to educate and test customer’s knowledge before approving financial services like credit cards, auto loans, mortgages, and investment products.
Credit bureaus, financial institutions, or other qualified organizations could provide this education. It could be a paid service or an additional benefit for having a privilege card or an account.
This is the only blog published on wintek.in last year, and it didn’t generate much buzz. The website was actually inactive after that. Interestingly, certain regulations in the United States were altered following its publication. Check out the video below.
