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Financial Expertise

Digital disruption: where are we headed?

Financial Expertise

Digital disruption: where are we headed?

The first waves of digitalisation had their biggest impact on industries such as music, film and media, and on the travel sector. Today, digital disruption is bringing profound changes to mobility, health care, and banking, among others. In this rapidly changing landscape, how do investors stay in the game?

Digitalisation has undoubtedly brought huge benefits, but we have also seen that it can threaten to destroy some of the things we value. In order to see where the opportunities lie, we should ask ourselves what we have learnt from the first waves of digitalisation. Have they taught us anything about how digitalisation and newer developments in areas such as artificial intelligence (AI) will affect other sectors? What lessons can we learn about what can be outsourced to algorithms and which competences should remain in human hands?
Looking back at what has happened so far it is useful to distinguish between the impact digital technologies have had on different sectors in terms of manufacturing processes and distribution and sales. The travel sector, for instance, has been tremendously impacted by digitalisation, but the changes have really only been in the distribution and sales booking process side of the value chain, not the product itself. At the end of the day, an aeroplane trip remains an aeroplane trip, a hotel stay remains a hotel stay, and if you book a couple of weeks in southern Italy, the experience you will have is the same as you would have had years ago.

In banking today, we are seeing a wave of fintech start-ups leveraging the possibilities that digital technologies afford. On the manufacturing side, digitalisation has brought changes to the market structure because it has enabled access to information that often was not available before. The ability to process that information is, arguably, making the market more efficient. On the distribution side, digitalisation can lower the cost of delivering the service as a result of electronic channels and digital opportunities. However, one thing new technologies have not changed is the cost of acquiring a customer. It is and remains much higher than many new fintech firms would have expected. Furthermore, the regulator is rapidly catching up with the fintech sector, eroding a significant amount of their potential competitive edge in the process.


In health care, as in banking, regulation plays a key role. It affects the way both sectors are able to operate. In health care, many promising new digital technologies are being developed or are already available. These could bring great advances, from the possibilities that emerge through processing big data, to new treatments and diagnostic procedures. However, some of these trigger tremendous ethical issues. For instance, we are close to having the capacity to detect a person’s propensity to get Alzheimer’s in their 30s and preventively treat it to lower the probability that they will be affected. This raises questions such as who will pay for the treatment and what are the implications for insurance policies? These ethical questions are dealt with through regulation, which, in turn, is decided by governments, and through the political process. How will this regulation evolve – will it go in the right direction or trigger unintended consequences? Today, with politicians trying to mitigate the impact of technology on citizens, the potential consequences of new regulation cannot be ignored but are hard to predict.


The value creation from new technology is unprecedented. Never before has it been possible for new businesses to create so much value in such a short amount of time. Excessive enthusiasm in the short run is a danger for the investor. This is no different today than in the 1990s or previous eras. What has changed today is that investors need to be extra cautious about the threat to established business, as this is bigger than ever before.

Investors in the 1960s followed rules of investing which they could expect would remain valid for the foreseeable future. Today, new technologies, like big data, can quickly render whole business sectors obsolete. Any industry that bases its business model on information opacity or asymmetry is vulnerable. As soon as information is readily available in the public space and demand can be matched in an efficient way by supply, it changes the market structure very profoundly. Health care is a case in point. There are a lot of health-care companies whose business case might be completely destroyed if the regulator allowed new technologies and methods to be distributed to the wider public. Many businesses in medical devices and medical testing have built their business franchise on the fact that there is no alternative available. With technology today, we have health-care alternatives that are much cheaper, provided they are approved by the regulator. This has dramatic implications for picking stocks.


To return to the fintech sector, in these uncertain times, is the investor better off following the rule-based, systematic approach suggested by a robot adviser? When people make these decisions for themselves, they run the risk of inflicting damage to their financial position by reacting emotionally to what is happening at that moment in the markets. Stock selection by algorithms has its benefits. However, algorithms cannot cope well with regime changes. In a market situation where two or three regimes are alternating, an AI algorithm that learns fast enough might be able to adapt its investment rule and detect the regime switches. However, more fundamental regime breaks in the market cause a problem. Regime changes are driven by political decisions that trigger changes in the way markets function and in the relationship between assets.

At the end of the day, our investments are made in a social ecosystem made up of a subtle combination of psychology and emotions. A machine might be able to capture an individual person’s emotional state by measuring their blood pressure or the width of the iris, but measuring the collective emotions of investors and detecting these structural breaks is something machines will struggle to do. Machines have a role to play, but they are unlikely to replace humans entirely in the investment decision process. Investing in the social ecosystem requires human experience and skills.


We are social animals and will always value the human touch. It is essential to building trust and establishing relationships. The changes technology is bringing are still only at the beginning. As societies we have to adapt to these challenges. This means considering how we educate our workforces for the future and to avoid protecting the industries that will one day be defunct. An example of this can be seen in the efforts of politicians to protect taxi drivers against the increase in ride-sharing technologies – with the prospect of driverless cars becoming a reality, this is surely short-sighted. Perhaps the right response, in terms of education, is a counter-intuitive one. It is not more teaching in mathematics and science that is required.

The most valuable skills in the future will be soft skills – social skills and emotional skills. Technology will be a given, it will be simple to use and increasingly accessible for everyone. It will be what we make with it that counts and how we use it in creative ways. We need a workforce that is as flexible and adaptive as possible to meet that challenge.

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