Information technology has disrupted the entertainment, media and retail businesses and, most recently, the supply of hotel rooms and taxis. Is it going to do the same to finance? My first response is: please. My second response is: yes. As Bill Gates has said, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10. Don’t let yourself be lulled into inaction.” This advice applies to people in the business itself, but also to policymakers.
Finance is an information business. Indeed it already spends a higher share of its revenues on information technology than any other. It seems ripe for disruption by information technologies. Consider its three essential functions: payment; intermediation between savings and investment; and insurance. All these activities are information-intensive. People need to know accounts have been settled. They need to understand how their wealth is being employed and to know that their risks are covered. Not least, the intermediaries need to understand what they are doing.
Today, banks and insurance companies are the core financial institutions. Banks manage payments systems, create most of the economy’s money, are responsible for a large proportion of financial intermediation, are creators of financial instruments and act as market-makers and agents. Similarly, insurance companies play the central role in assessing and managing risks.