The disruptive forces of technology and demographic change will forge a ‘new economy’ as consumers shift their lives to digitally-enabled services, according to a new report commissioned by the Bank of England.

Investment banker and Bank of England adviser Huw Van Steenis set out the challenges facing the UK’s central bank in keeping up with the speed of regulatory and technological change in the financial services industry, aiming to “look beyond the immediate challenges posed by the UK’s withdrawal from the EU to identify longer-term trends shaping the economy and finance”.

Van Steenis found that profound changes are taking place in the banking, payments and insurance industries, with the rapid shift from incumbent banks to market-based finance, such as challenger banks, likely to grow further in the coming decade.

“Finance is likely to undergo intense change over the coming decade,” he stated. “The shift to digitally-enabled services and firms is already profound and appears to be accelerating.”

Amongst the key challenges identified by the report, Van Steenis found that the risks inherent in the financial system are likely to shift, with a combination of ultra-low interest rates, new regulations and the need to invest in new technologies, meaning many banks will struggle to make their cost of capital.

As a result, he urged regulators and private sector firms to collaborate in new ways to ensure technology would break down barriers to financial and digital inclusion, especially when it comes to supporting the UK’s small and medium-sized businesses (SMEs).

A collaborative approach would also be needed to establish the payment’s systems of tomorrow, including digital currencies, as well as enabling innovation through modernised financial infrastructure.

With the banking industry racing to adapt to the ‘platform-based economy’, the report found that the UK’s businesses are driving demand for digital banking services, with 83 per cent of SMEs using a mobile banking app.

The vast volumes of data generated by the digital economy are also driving widespread changes, with the UK’s data economy set to be worth £95 billion by 2024, up from £73 billion in 2016 – while up to 30 per cent of UK jobs are estimated to be at risk of automation. However, the report did state that these job losses would likely be offset by a range of new digital jobs.

Machine learning could also increase efficiency for businesses, delivering a 20 per cent uplift in firms’ financial performance, according to the report.

The publication came as Mark Carney, governor of the Bank of England, used his final Mansion House speech to signal that the central bank was open to working with tech companies and FinTechs to enable regulation of the next generation of digital currencies, following the announcement earlier this week that Facebook’s is developing the Libra cryptocurrency.

The report called for financial services regulation to catch up with the rapid growth in the digital economy, with an increasing need for banks and regulated entities to embrace ‘digital regulation’ that reflects consumers’ changing lifestyles.

The report noted: “Technology is changing how we work, spend and live, it has major implications for the UK’s economy and, in turn, finance.”

However, Van Steenis warned that the proliferation of data “also raises numerous hazards of misuse and abuse of privacy”.

The emerging business models of mobile-based digital banks and payments providers are “disrupting industries — and allowing an unbundling of business models with profound consequences,” he found, with automation taking on more tasks across the industry.

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