Panelist and mobile expert Sankar Krishnan of CapGemini sees new financial products as empowering—if imperfect—and an emerging détente with nonbank interlopers.
Global Finance: Why is the over-the-counter options market an important innovation?
Sankar Krishnan: As global trade grew over the last 30 years, transactions had to be settled using multiple currencies. The creation of derivatives, synthetic derivatives, options, swaps and other instruments have allowed companies to mitigate and manage the business risks thereof.
GF: Some say these innovations made finance riskier.
Krishnan: A lot of bad has happened, but I also think a lot of investors did not fully understand the risks associated with these securities. There is no downside other than not understanding the inherent risks associated with a derivative. Most businesses that saw increased revenues from new and emerging markets used trade finance products to grow their revenues and manage associated risks. Things like commodity-backed derivatives have made risk management easier, especially as oil prices have been going up and down. In the last 30 years, the markets have seen so much turmoil.
GF: You gave high marks for innovation to asset-backed securities, exotic derivatives and collateralized debt. Why?
Krishnan: Overall, asset-backed securities have given companies and banks the opportunity to take a nonmonetary asset sitting on their books and monetize it. It is like having a Rembrandt in the closet. It doesn't add value just sitting there, but you bring it to market and it produces millions of dollars of value. Asset-backed securities and collateralized debt obligations have enabled many people to go to market with a new way of financing.
GF: What's next?
Krishnan: The creation of exchange-traded funds has been an amazing thing. With the globalization of the economy, many people wondered how they could participate. Exchange-traded funds have been a way in for the average investor. When the market in one country is not doing well, investors can use ETFs to buy into stocks in another.
GF: What about innovations like online banking and mobile payments? For many people, these are the first things that come to mind when they hear "financial innovation."
Krishnan: When we talk about innovations in finance, it has to be something that happened in the field of finance that took life to a better place. I would not call these innovations in finance as much as innovations in technology and channels.
GF: What innovations do you think will have greater impact in the future?
Krishnan: Look at all the new things that have happened in the last five years—things like blockchain, open banking, API banking, virtual payments and robo-advisory capabilities. I think these are still works in progress.
There's also the growth in machine learning, artificial intelligence and robotics. The human element is slowly, unconsciously, giving way to a machine element. It's going to be a very big change. If you apply machine learning and artificial intelligence to evaluate risk, you're able to come up with predictive models that actually show patterns when risk makes its way into a portfolio. Because machines are not based on emotion, they're changing many risk-management techniques and predictive-analytics approaches.
GF: How is innovation impacting banks' sustainability?
Krishnan: I've been reading about banks disappearing from the face of the earth forever. None of them have disappeared. If anything, they are better capitalized, bigger, and offering more products. Yet, from a payments perspective, an alternate provider like PayPal has come in and taken out trillions of dollars that would traditionally be processed by a bank. I think we'll see a greater coexistence of the two. It's not going to be either/or.