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Mastering the 4th Industrial Revolution

UBS published a White Paper for the WEF Annual Meeting 2016 about extreme automation and connectivity: The global, regional, and investment implications of the 4th Industrial Revolution.

See the Executive Summary below and read the UBS White Paper now:

A brief history of industrial revolutions

  • Prior industrial revolutions have centered around improvements in automation and connectivity.
  • The First Industrial Revolution introduced early automation through machinery, and boosted intra-national connections through the building of bridges and railways.
  • The Second Industrial Revolution began when automation enabled mass production and fostered more efficient, productive connectivity via the division of labor.
  • The Third Industrial Revolution was propelled by the rise of the digital age, of moresophisticated automation, and of increasing connectivity between and within humanity and the natural world.
  • The Fourth Industrial Revolution is being driven by extreme automation and connectivity. A special feature of the Fourth Industrial Revolution will be the wider implementation of artificial intelligence.

 

 

What are the potential global economic consequences?

  • Polarization of the labor force as low-skill jobs continue to be automated an this trend increasingly spreads to middle-skill jobs. This implies higher potential levels of inequality in the short-run, and a need for labor market flexibility to harness Fourth Industrial Revolution benefits in the long-run.
  • Greater returns accruing to those with already-high savings rates. In the short run, this could exacerbate inequality via relatively lower borrowing costs and higher asset valuations.
  • As the issuer of the world’s reserve currency, the US’ competitive advantages, sitting at the heart of the Fourth Industrial Revolution, could tighten effective monetary conditions among US dollar-linked economies.
  • The Fourth Industrial Revolution increases the magnitude and probability of tail risks related to cybersecurity and geopolitics, but may spur regional action to invest and embrace Fourth Industrial Revolution benefits.

 

 

Who will be the regional winners and losers?

  • “Flexibility” will be key to success in the Fourth Industrial Revolution; economies with the most flexible labor markets, educational systems, infrastructure, and legal systems are likely to be relative beneficiaries.
  • Developed economies are likely to be relative winners at this stage, whereas developing economies face greater challenges as their abundance of low-skill labor ceases to be an advantage and becomes more of a headwind.
  • Emerging markets in their demographic prime may find that extreme automation displaces low-skill workers, but that their limited technology infrastructures do not allow them to reap the full benefits of extreme connectivity.

 

What are the investment consequences?

  • Given current assessments of relative competitiveness, emerging markets maybe less well placed to profit from Fourth Industrial Revolution benefits, relative to developed markets.
  • We expect further disruption to traditional industries from extreme automation and connectivity.
  • Big data beneficiaries include firms that harness big data to cut costs or target sales; firms that automate big data analysis, and firms that keep big data secure.
  • Blockchain applications could benefit firms that use them to automate processes securely, to cut out costly intermediaries, and to protect intellectual property.
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FinTech – Resistance is futile

Digitalization is set to transform most aspects of the financial industry. Far from resisting it, banks should be embracing these fundamental changes.

There is no doubt that, thanks to advances in digital technologies, the financial industry is entering a period of radical change. Transaction and settlement, savings and lending, capital raising, investment management, market provisioning: it is difficult to find any area of banking that is not being disrupted by the current wave of digitalization. With the rise of virtual banks, crowdfunding, alternative payment platforms, robo-advisors and the like, digitalization is also spawning significant new competition for incumbent institutions.

In light of these developments, some have been predicting the demise of traditional banks. This is overstating the case. Digital disruption is by no means only a threat. Quite the contrary, it is spurring industry innovation in a number of very positive ways. It is also encouraging collaboration among industry participants, driving cultural change.

Today’s banks are reaching outside their walls, working with startups, joining innovation platforms and collaborating on new ideas in ways that would have been unfathomable a decade ago. They are also collaborating more internally, for example by using social media-like tools to promote direct communication and the sharing of ideas among staff.

UBS and startups – learning from each other

Inspired by the “permission-to-fail” culture found in startups, banks are becoming much more open to experimentation as well. This is certainly the case at UBS. We have put a strong innovation process in place, one which generates lots of ideas internally and has clear gates to let in good ideas from the outside. We also work closely with the technology community in our innovation labs in Zurich, London and Singapore.

By taking our people out of the bank and immersing them in a lab environment, we give them space to think creatively. We also give them the freedom to make mistakes. In this way we can generate – and test – a far greater number of interesting ideas than would otherwise be the case. In London we have opened our lab in a FinTech accelerator, sharing space with some 150 startups engaged in researching and developing new products and services for the financial industry. This lets our experts be part of the larger conversation, staying on top of developments and helping to shape our industry’s future.

Far from being enemies, FinTechs are very much part of our conscious endeavor to embrace change. While some are looking to compete directly, in our experience the majority of FinTechs are more interested in collaborating with banks. After all, there is more to banking than just bits and bytes. Banks are a storehouse of financial and market expertise of the kind most FinTechs lack. Banking also remains very much a relationship business, and here too FinTechs have much to learn.

For these and other reasons, we are confident that banks will not be going away any time soon. In our opinion, digital disruption should not be seen as a danger, but rather a healthy challenge, driving change and opening up exciting new possibilities.

With this in mind, we also feel it is imperative for the Swiss financial center to promote a strong FinTech ecosystem. Only with close cooperation between the country’s banks, its FinTech startups and the regulator will Switzerland be able to keep pace with today’s strong global competition.

Follow me on twitter @obussmann.

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