2023 was a year of remarkable change, in our world and across our industry. Acknowledging contingencies and uncertainties that exist in our current investment environment—including upcoming international elections and ongoing wars in Ukraine and the Middle East—a focus on heightened geopolitical risk may well be obscuring future opportunities for capital markets innovation and growth.
These opportunities are driven both by advanced technologies, including digital assets, blockchain, and generative artificial intelligence (gen AI), and new financial products and solutions that include transition finance opportunities, next-generation exchange-traded funds, and disintermediation of the existing loan market through the rise of private markets.
How might this confluence of AI and the digitization of assets unlock the next wave of capital markets growth and innovation? In ways that are already being felt across the financial services industry, blockchain is accelerating the adoption of emerging technologies, including AI, by helping to bring the essential element—trust—which will be required for businesses to fully embrace new innovations at scale. Conversely, blockchain business networks stand to benefit from the integration of these technologies into modern blockchain platforms and applications.
Businesses have the opportunity to unlock new avenues of innovation, efficiency, and automation.
In the financial services industry, AI is already delivering significant benefits in terms of data analysis, pattern recognition, machine learning, and enhanced decision-making while blockchain is emerging as a secure and decentralized ledger system. When these two technologies meet, they could bring transformational change to the industry.
In considering the convergence of blockchain and AI technologies, we lean into the following assumptions: Blockchain is becoming the transaction and data platform of choice for business networks and trusted among partners and competitors. Using AI, network participants could potentially gain insights and derive decisions they cannot achieve alone. AI-driven transactions could give rise to new business models and more significant automation opportunities.
By combining the security offered by blockchain with the analytical capabilities of AI, businesses have the opportunity to unlock new avenues of innovation, efficiency, and automation. It is crucial, however, to address challenges such as data privacy and security, regulatory compliance, and interoperability to fully realize the benefits of this synergy.
If data have become the backbone of our information economy and the resource that fuels gen AI, then sound, scrubbed, and standardized data have become the cost of entry for doing business and an important competitive advantage. It would stand to reason, therefore, that companies need to have in place strong and comprehensive data strategies. However, a recent State Street report examining the data opportunity that exists for institutional investors in the age of AI uncovered a surprising finding. While firms that have in place a holistic data strategy reported on average a 24 percent increase in customer satisfaction, a 21 percent increase in customer retention, a 19 percent increase in new client acquisition, and a 19 percent increase in revenue growth, fully two-thirds of firms lack an overall data strategy.
Considering the implications of tech innovations on the financial services industry, it is important to underscore that implementation is occurring in the context of higher-for-longer interest rates and higher cost of capital environment. Consequently, investors are seeking higher expected returns. That translates into a heightened desire for participation in asset classes that are more likely to be illiquid, such as private markets, which tend to have higher risk premiums.
State Street, in its recently published annual private markets report, notes that despite macro headwinds and a difficult private equity environment, institutional investors worldwide are committed to increasing their near- and medium-term allocations in the segment. The speed of that shift in allocations means that operations need to adapt to allow investors to smoothly access complex combinations of formerly walled-off asset classes and address traditional challenges in the private markets segment, such as poor and infrequent private markets data.
We currently are living through a period of epochal change brought about by technological innovation and the introduction of new financial products, services, and solutions. Undergirding all of it is trust. It behooves investment professionals to familiarize themselves with the tools at their disposal that might enable them with confidence to seek out the next wave of capital markets growth.