Disruptive innovation in finance

In the last few years, disruptive innovation, in the finance industry, has become synonymous with Bitcoin and Block-chain technologies. But, over the long term, the fundamental force driving disruptive innovation in the finance industry, would be the massive inter-generation transfer of wealth that is currently underway. To be specific, it is estimated that $59 trillion of wealth would be transferred from the baby-boomer generation to the millennial generation during the 55-year period 2007 — 2062 (see white paper on family offices).

Due to the increasing concentration of wealth at the top, a phenomenon that has been steadily unfolding starting from the late 90s, the family office industry is undoubtedly going to play an extremely important role in this inter-generational transfer. But, the family office industry is still nascent. So, they would be going through a period of education, perhaps 5, 10 or even 20 year, before the concept of having their own infrastructure, for quantitative models on wealth, would catch on. In the post-crisis business environment, new family offices are indeed being created frequently. But they still rely on outside talent for financial intermediation and wealth management.

The hi-tech startup culture of Silicon Valley has been the most formidable force for innovation and disruption, in the broader American economy. So, over the next 20 years or so, Silicon Valley is going to be a major player in this game of disruption in the finance industry. However, so far, even after being severely wounded by the economic crisis of 2008-09, established financial institutions on Wall Street have barely felt disruption from Silicon Valley, in any fundamental way.

If anything, due to the post-crisis business environment, of increasing regulation and protection (bailouts), Wall Street has become even more secure, while the rest of the economy has been struggling through a prolonged jobless, anemic recovery. The main reason for this special status afforded to Wall Street is that, over the last 40 years, Wall Street has built up tremendous know-how in quantitative modeling. Across all industries in the developed world, Wall Street has the most sophisticated culture of deploying mathematical models in day-to-day business operations.

So, because of this delicate balance of power between the major players — established Wall Street financial institutions, family offices and Silicon Valley technology firms — the question, ‘who would disrupt whom?’ becomes really intriguing. Would the family offices disrupt the Wall Street institutions, after a few years? Or would the family offices themselves be disrupted from their current business model by a technologically more agile organization?

Needless to say, this dance of disruption would take several decades to play out. During this time, what should an upstart entrepreneur (with quant/tech skills) do? Should one just branch out to a wide variety of industries, taking the quant skills developed in the finance industry to other industries. This is more like technological knowledge diffusion rather than technological disruption.

But, the two phenomenon could be happening simultaneously, if one is diffusing the technological know-how and quantitative methods to lower-tech/traditional industries, and yet is always looking for an opportunistic moment of finding a project in the finance industry, where the time is ripe for a technological disruption.

These are all important questions that are open for investigation. If one would watch and learn what is happening in the family office space and more generally the Wall Street institutions, there is a good chance of being able to engineer a technological disruption.